assessing competitiveness

• profit and loss account

  shows a firm's revenue for a time period along with all the costs associated with generating that revenue
• balance sheet

  a financial document showing a business's assets and liabilities at a point in time
• asset

  any item owned by a business
• liquidity

  the term used to describe a firm's ability to pay its bills and to finance short-term spending
• types of assets

  long term (non current) assets used over and over again to generate profit:

  • land and buildings
  • machinery and equipment
  • vehicles
  • patents or copyright

  current assets:

  • stock
  • receivables (money owed)
  • cash
• assessing financial performance using a balance sheet

  longer-term performance can be assessed using balance sheet by seeing movements in reserves over time. reserves build up over time (for a successful firm) because any profit firm makes after tax that is not paid out in dividends is retained in business. this annual retained profit is added to the reserves figure on the balance sheet. if the firm makes a loss for the year,this figure is deducted from reserves on the bs. this means that is the reserves figure is consistently rising over time, the firm has been consistently profitable
• stakeholder interest in balance sheet

  published accounts exist in order to ensure that stakeholders have access to the information that helps them make informed dealings with a business.

  bankers: understanding of firm's reliance for long-term finance

  suppliers: short-term financial health of the business, want to see relationship between company's available cash and its existing short-term debt

  staff: see if the 'wealth' of the business has gone up over time
• overheads/expenses

  payments for something that is of immediate use to the business, other than the actual products they sell
• gross profit

  raw measure of basic trading profit. revenue-cost of sales
• operating profit

  gross profit-expenses
• profit before and after tax

  an entry is made for net financing costs: interest earned on money held by the business-interest on money borrowed by the business. a negative figure is typical as many businesses borrow greater sums than they keep at any time in the bank (and interest rates on loans will be higher). this figure is deducted from operating profit to calculate the profit before tax is deducted
• assessing financial performance using P&L account

  • company law does not require companies to publish a lot of detail in the profit and less account
  • however, assessment of financial performance can be made by checking which direction profits are headed. increasing profits suggest improving financial performance. however, before making a financial decision, ratios should be calculated.
  • shareholders will be particularly interested in levels of net profit
• liquidity ratios

  calculated in order to understand the balance between the company's short-term debt and the assets it can use to meet that debt

  • current ratio
  • acid test ratio
• current ratio

  • current ratio= current assets/current liabilities. the ideal current ratio is 1.5 meaning £1.50 of current assets for every £1 of short-term debt. which is deemed enough to be able to cover debts comfortably without without holding too many resources in unproductive forms. if ratio falls to low, this may indicate the firms suffering from liquidity crisis, unable to find enough cash to settle debts as they become due
• acid test ratio

  a stiffer test of liquidity than current ratio, discounts inventories as something c=that can be quickly converted into cash

  acid test ratio= current assets-stock/current liabilities

  ideal value is 1. this would mean that a company has £1 of cash or receivables to cover every £1 of short-term debt
• gearing ratio

  measuring long-term financial debt of a business,GR expresses long-term liabilities as a % of total amount of long-term capital(capital employed) in the business.

  gearing ratio=long-term liabilities/capital employed x100

  if a business is financed by £50m of loans+50m of equity, gearing ratio would be 50%.-considered as the danger level.

  problem with a high GR is cash drain it represents: with interest payments to make,as well as loan repayments, high levels of debt can suck lifeblood from business rapidly

  to help:

  • issue more shares
  • retain more profits
  • repay some loans
• profitability ratios

  assessing how profitable a business has been using the actual figures for profit over several years

  however, more powerfully, profitability can be assessed by calculating profit margins. these show profit as a percentage of revenue.

  the most profitable firms are able to ensure that a greater proportion of every £1 in revenue is left over as profit once costs have been deducted

  summary on other card

  ROCE
• summary of profit margins and profitability

  • gross PM= net profit/SR x 100. shows GP per £ of sales. improve by price up+unit variable costs down, if too low may not be enough GP to cover overhead expenses
  • operating PM=OP/SRx100. shows OPper £ of sales. to improve: boost GPM, cut overheads, increase sales. if too low may not be enough OP to reinvest into business and so get growth
  • net PM=profit after tax/SRx 100. shows net profit per £ of sales. to improve boost OP margins, cut corporation tax bill. if to low may not be able to provide shareholders with acceptable annual dividends.
• return of capital employed (ROCE)

  measure of profitability. expresses operating profit as a % of the capital that has been invested into the business. therefore it shows a return on that capital that is comparable with other potential uses of capital, such as simply leaving money in the bank to earn interest.

  ROCE=operating profit/capital employed x 100

  • higher the better, since a higher return means the money invested in the business is generating higher return on that investment
  • to improve:increase OP, reduce capital employed without damaging OP
• limitations of ratio analysis pt1

  lack of detail provided within financial accounts often the true story of a firm's receivables or stock cannot be seen. if money owed by customers is mainly owed by reliable, regular customers, this should turn into cash, which will be received on time. however, if much of the receivables figure on the balance sheet consists of bad debts from failing customers, acid test and current ratio will paint a misleading healthy picture.
• limitations of ratio analysis pt2

  if stock is about to go out of fashion and become virtually worthless, the current ratio will again present a misleading picture of health. on the profit+loss account, net profit can be affected by one-off transactions such as selling a piece of property at a profit

  boosting net profit, this will improve the net margin for this year, but this will simply be a blip, perhaps misleading those who do not investigate further than a ratio result.
• managing people

  HR department have a major role to play in boosting the competitiveness of a business

  • designing jobs: poor job deign can lead to demotivation, poor performance and high labour turnover
  • designing and implementing reward systems: choose how to pay people, ensure staff are content with the way they are treated by their employer
  • developing communication systems at work
• labour retention

  a measurement of the number of staff that stay at a business during a year

  number of staff that had stayed with a business during the year/number of staff employed in the year
• monitoring the effectiveness of human resources

  • labour productivity
  • labout turnover
  • absenteeism
• labour productivity

  output per period/number of employees per period

  a business that is able to boost labour productivity without increasing pay will enjoy lower labour costs per unit. this should boost their competitiveness, allowing prices to be cut if needed, or a higher profit margin
• labour turnover

  measuring the percentage of the workforce that have left during the year, this indicator can indicate staff discontent with how they are treated if it increases

  number of staff leaving the firm in a year/ average number of staff during the year
• causes of increasing labour turnover

  internal

  • poor recruitment and selection, resulting in the wrong people being appointed
  • poor motivation or leadership
  • wages rates below the local norms

  external

  • more local vacancies arising, tempting staff to look for better opportunities
  • better transport links allowing staff to look for alternative jobs further away
• implications of high labour turnover

  negatives:

  • extra recruitment costs to find replacements
  • extra training costs for replacements
  • time taken for replacements to settle in and become productive
  • loss of productivity while replacements are found, trained and finding their feet

  positives

  • new workers with new idea and enthusiasm
  • new way of looking at problems
  • new workers with appropriate skills may be brought in to prevent the need to re-train existing staff where skill requirements have changed
• absenteeism

  total days (or hours) of absence in a period/ possible total days (or hours) that could have been worked x 100

  measuring the amount of time missed by workers who do not come to work when they are supposed to can indicate discontent in workplace. however, weakness is it fails to distinguish between avoidable and unavoidable absences

  high levels causes extra costs and lost productivity that damages a firm's competitiveness
• HR strategies to improve employee performance

  • financial rewards: eg performance related bonuses. Herzberg says trying to use hygiene factor such as pay to motivate staff will only create a temporary improvement. problem in deciding how performance is measured
  • employee share ownership: aligning the goals of the business with those of staff
  • consultation strategies: show employees are being genuinely considered, boost employee engagmenst+performance
  • empowerment strategies