BUSINESS 3.7 - Analysing the strategic position of a business

What is a mission statement?

a brief statement highlighting the values of a business and the reason for its existence

What is a vision statement?

What the business aspires to be in future (long-term goals)

What are the influences on the mission of the business?

owners values, founders values, employee influence, industry norms, social norms, political influence

What are founders values?

The original founder sets out values that leaders will follow, these values are hard to change

What are owners values?

owners not following founders values (e.g. shareholders may want to focus more on profit)

What is an industry norm?

How firms in a specific industry usually behave

What is employee influence?

how labour or capital intensive a business is, and how many blue/white colour workers are employees

What are blue collar workers?

(e.g.) labour jobs

What are white colour workers?

(e.g.) office jobs

What is political influence?

what type of government is in power and how stable the political environment is

What are corporate objectives?

strategic, medium to long term goals that are specific and quantifiable

What are internal influences on corporate objectives?

Business ownership, pressures for short-termism, poor performance, change in leadership, business culture

What is short-termism?

prioritising short term over long term goals

What are external influences on corporate objectives?

economic factors, prices on global markets, technology changes, patterns of migration

What is the difference between strategy and tactics?

Strategies are long term plans and involve high uncertainty levels, tactics are short term and involve lower uncertainty levels

What is the link between mission, corporate objectives and strategy?

The business mission influence corporate objectives as corporate objectives are designed to meet the business mission. Businesses then use strategies to work towards their overall corporate objectives.

What is functional decision making?

decisions relating to the four business functions: marketing, finance, operations, HR.

How do strategic decisions impact functional decision making?

Once strategic decisions are taken, functional decisions support these

What is a SWOT analysis?

a planning tool used to help a business assess its competitive strength and the nature of its external environment

Are strengths and weaknesses internal or external?

internal

Are opportunities and threats internal or external?

external

What are examples of strengths and weaknesses?

market share, profitability, reputation

What are examples of opportunities and threats?

PESTLE factors

Why should a SWOT analysis be constantly monitored?

Changes in the internal and external environment

What are advantages of SWOT analysis?

low cost, helps assess risk, can help develop business strategy

What are disadvantages of SWOT analysis?

Can be difficult to put factors under one category, can provide facts but not solutions, may have subjective or outdated data

What are financial statements?

formal records of the financial activities of a business

What are the two types of financial statements?

income statement, balance sheet

What is an income statement?

Shows how much profit/loss a business makes

What is a balance sheet?

Shows how much the business owns and how much is owed to other business, showing the value of the business

Who uses financial statements?

internal users, external users (people inside and out the business)

What are examples of internal users?

managers, shareholders, employees

What are examples of external users

creditors, government, competitors

What is a creditor?

Someone the business owes money to

Why do managers need financial statements?

Can be used to monitor strategy and objectives

Why do employees need financial statements?

To see if their jobs are secure/ if their pay is fair

Why do shareholders need financial statements?

To see if the business is worth investing in

Why do creditors need financial statements?

to see if the business can pay back the money they owe

Why does the government need financial statements?

To see if the business is paying the right amount of tax

Why do competitors need financial statements?

To see how well the business is performing

What is the top half of a balance sheet?

Where the money is currently being used in the business (net assets)

What is the bottom half of a balance sheet?

where they money has come from (capital/equity)

What are current assets?

items that take less than a year to turn to cash (e.g. prepaid liabilities)

What are non-current assets?

items that take more than a year to turn into cash (like machinery)

What is the formula for total assets?

non-current assets + current assets

What is a current liability?

money owed that has to be paid within a year

What is a non-current liability?

money owed that can be paid over a year (like loans)

What is the formula for net current assets?

total assets - total liabilities

What is a liability?

a business’ debts. Liability must always be a negative figure

What is equity?

money invested in the business

What are assets?

money that the business owns

What is working capital?

the ability to pay short term liabilities

What is the formula for working capital/ net current assets?

current assets - current liabilities

What are influences on working capital?

revenue, trade credit, growth, lead times, inflation, liquidity of assets

Why is working capital important?

to prevent bankruptcy, to pay day-to-day bills

What is an income statement?

shows a firm’s turnover (revenue), costs and profit made in the last accounting period

What are the types of profit?

Gross profit, operating profit, net profit before/after tax, profit for the year

What is net profit before tax?

profit after all costs have been paid, not including tax

What are the types of costs?

cost of sales, administration/overheads, exceptional costs, finance costs, taxation

What are exceptional costs?

one off/ unusual costs (e.g. paying off debt)

What is profit quality?

whether a firm’s profit is sustainable into the future, or if it is a one off profit instead

What is an appropriation account?

where the company profits have been distributed (e.g. among shareholders)

What is the Companies Act 2006?

income statements must be produced annually

What is window dressing?

a short-term strategy used by companies to make their financial reports look more appealing

How do firms window dress?

short term borrowing, sale and leaseback, overvaluing intangible assets (e.g. brands), bringing forward income, deferring payments

What is ratio analysis?

analysing pieces of financial information in financial statements

What are the different types of ratio?

profitability, liquidity, gearing, efficiency

What should be considered when analysing ratios?

historical trends, industry norms, industry trends, general economic trends

What are the four types of profitability ratios?

gross profit margin, operating profit margin, profit for the year margin, return on capital employed (ROCE)

What is the formula for ROCE?

operating profit / (total equity + non-current liabilities) x 100

How can ROCE be improved?

increase operating profit, reducing capital employed (invested)

What are liquidity ratios?

how easily a firm can pay its debts

What are the two types of liquidity ratios?

current ratio, acid test ratio

What is the formula for current ratio?

current assets/ current liabilities

What does a low current ratio indicate?

problems paying debt

What does a high current ratio indicate?

inefficient use of cash

What is the formula for acid test margin?

(current assets - stock) / current liabilities

Why is stock the least liquid current asset?

It can take months to convert into cash

How can businesses improve their liquidity ratios?

get more cash (by selling inventories)

What is the formula for gearing?

non-current liabilities / (total equity + non- current liabilities) x 100

What does a higher gearing percentage indicate?

more vulnerable to changes in interest rates

What are the three types of efficiency ratios?

inventory turnover, receivable days, payable days

What is the formula for inventory turnover?

cost of goods sold / average inventories

What is the formula for receivable days?

receivables / revenue x 365

How can receivable days be improved?

offering shorter credit terms to customers, making more cash sales

What is the formula for payable days?

payables / cost of sales x 365

How can payable days be improved?

negotiate longer payment terms with suppliers