Business Analysis and Strategy Practice Flashcards

Flashcards based on lecture notes covering business analysis, quantitative sales forecasting, financial ratios, strategy models, and investment appraisal.

What is the purpose of index numbers in data analysis?

An index number enables easier data analysis by setting a particular year as the base year with an index of 100, allowing other years to be compared to it as a percentage.

What is the impact of an income increase on 'inferior goods'?

As expressed by Income Elasticity of Demand (YED), when consumer incomes rise, the demand for inferior goods falls as customers swap to higher quality or more luxury versions.

What is the formula for calculating Price Elasticity of Demand (PED)?

$\text{Price elasticity of demand} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$. Note: Answers for PED will always be negative due to the inverse relationship between price and demand.

What are the characteristics of an 'elastic' demand response?

A change in price leads to a much greater change in demand; this is common for luxuries, expensive goods, and products in markets with high competition or no brand loyalty.

How is Income Elasticity of Demand (YED) calculated?

$$\text{Income elasticity of demand (YED)} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}$$

What is a 'favourable variance' in terms of budget analysis?

A favourable variance occurs when actual sales income is higher than budgeted or actual costs are lower than budgeted.

What is the distinction between Gross Profit and Net (Operating) Profit?

Gross Profit is revenue minus cost of sales (direct variable costs like raw materials), while Net Profit is Gross Profit minus expenses (indirect fixed costs like rent and equipment).

What is the formula for Capital Employed in a balance sheet?

$$\text{Capital employed} = \text{Total shareholder capital} + \text{Non-current liabilities}$$

How is annual depreciation calculated using the straight-line method?

$$\text{Annual depreciation cost} = \frac{\text{Original cost of the fixed asset} - \text{Residual value}}{\text{Useful life of the asset}}$$

What are the ideal ranges for the Current Ratio and the Acid-test Ratio?

The ideal Current Ratio is between $1.5:1$ and $2:1$, while the ideal Acid-test Ratio (which excludes stock) is $1:1$.

What does a 'highly geared' business signify?

A business is highly geared if its gearing ratio is above $50\%$, meaning at least half of its capital is financed by long-term loans, which suggests it may struggle to secure further external finance.

What are the components of a SMART objective?

SMART objectives must be Specific, Measurable, Agreed, Realistic, and Time framed.

What is the difference between Strategy and Tactics?

Strategy refers to the broad, long-term direction taken to achieve goals, while Tactics are short-term, specific actions taken to deal with immediate situations in support of the strategy.

What are the four components of a SWOT analysis?

SWOT analysis evaluates internal Strengths and Weaknesses and external Opportunities and Threats.

What are Porter's Five Forces?

The five forces are: Threat of entry to the industry, Power of suppliers, Power of buyers (customers), Threat of substitute products, and Intensity of competitive rivalry.

What is the Ansoff Matrix used for?

The Ansoff Matrix categorises potential growth strategies by risk level based on whether they involve current or new products and current or new markets: Market Penetration, Product Development, Market Development, and Diversification.

What is the difference between Horizontal and Vertical integration?

Horizontal integration occurs when businesses in the same industry join together. Vertical integration occurs when businesses at different stages of the supply chain join, either backward (to suppliers) or forward (to sales centres).

What is 'Rationalisation' in a business context?

Rationalisation is the process of reorganisating a business to increase efficiency and productivity, often involving cutting costs, closing stores, or reducing capacity to meet falling demand.

What identifies the 'critical path' in Critical Path Analysis (CPA)?

The critical path is the sequence of activities that takes the longest total time to complete, which determines the shortest possible duration for the entire project.

How is the Average Rate of Return (ARR) calculated?

$$\text{ARR} = \frac{\text{Average annual profit}}{\text{Initial investment}} \times 100$$

What does Net Present Value (NPV) account for that other appraisal techniques do not?

NPV accounts for the time value of money by using a discount factor to calculate the true value of future cash flows in today's terms.