Unit 7

• Can you list and explain 6 business objectives
• Profitability: Generating financial gains and maximizing revenue
• Profitability is about making money and increasing the financial resources of the business
• Growth: Expanding the business through increasing market share, customer base, or product offerings
• Growth involves increasing the size and scope of the business to reach more customers and markets
• Customer Satisfaction: Meeting or exceeding customer expectations to build loyalty and maintain a positive reputation
• Customer satisfaction focuses on ensuring that customers are happy with the products or services provided by the business
• Operational Efficiency: Optimizing processes and resources to reduce costs, improve productivity, and enhance overall performance
• Operational efficiency aims to streamline operations and make the best use of resources to achieve better results with fewer inputs
• Innovation: Developing new products, services, or processes to stay competitive and meet evolving customer needs
• Innovation involves creating and implementing new ideas to keep the business relevant and ahead of the competition
• Sustainability: Conducting business in an environmentally and socially responsible manner to ensure long-term viability
• Sustainability focuses on balancing economic growth with social and environmental responsibility to ensure the business can continue operating in the long term
• Strategies are: 

   

  • Medium to long term plans made by a business to meet its corporate objectives 

   

  • Made by senior managers 

   

  • Require an investment of resources e.g. time and money 

   

  • Once made are difficult to reverse, due to the level of resource investment (time, money & manpower) 

   
• Mission 

   

  • A mission is the overall reason for the business’ existence.  
  • It is the main purpose of a business and therefore determines the business’ strategic position.  
  • A mission statement is a written statement that states the purpose of an organisation.  
  • A mission statement provides a common focus for everyone within an organisation and hence a common sense of direction. 
• Influences on the mission of a business 

   

   

  • Personal beliefs, values and objectives of the leaders/founders 
  • Business ownership e.g. sole trader or company 
  • Values and relative power of stakeholders 
  • Nature of the industry  
  • Degree of competition 
• Influences on corporate objectives and decisions 

   

  Short termism 

  • Pressure on a business to perform in the short term e.g. maximise profits and shareholder returns 
  • May be at the cost of long term growth e.g. if profits are used to issue dividends rather than reinvested in the business to fund growth 

  Business ownership 

   

  • Objectives of a company will be heavily influenced by the objectives of the shareholders 
  • However this may vary depending upon whether it is a Plc or Ltd 
  • A sole traders’ objectives will be predominantly influenced by the individuals’ objectives  
• Functional decision making: 

  • Decisions made within a business by managers of a specific functional area i.e. a department responsible for one aspect of the running of the business 

   
•  

  SWOT Analysis 

   

  • A diagnostic tool used to identify the internal strengths and weaknesses and the external opportunities and threats to a business 

   

  • SWOT helps inform decision making. The value includes: 
  • Structured approach to analysing a business 
  • Considers both internal and external issues 
  • Includes both qualitative and quantitative factors 
  • Can look to:  
  • maximise strengths 
  • minimise weaknesses 
  • take advantage of opportunities 
  • avoid threats 
•  

  Income statement 

  • A formal financial document that summarises a business’ trading activities and expenses to show whether the business has made a profit or a loss over a specified period of time 
• Capital employed = total equity + non-current liabilities i.e. all the money invested in the business from: 

   

  • Share capital 

   

  • Reserves 

   

  • Long term loans 
• Operating profit    x 100 

  Total equity + non-current liabilities 
• Types of ratios can be classified into four main categories:
• Profitability ratios assess the amount of profit made by the business in relation to the capital available or other figures such as revenue
• Liquidity ratios, also known as solvency ratios, measure the ability of the business to settle its debts in the short term
• Gearing examines the relationship between internal and external sources of finance, focusing on the long-term financial position of the company
• Efficiency ratios measure how effectively an enterprise uses its available resources and are also known as internal control ratios
• Profitability ratios 

   

  A business’s profits are the surplus of revenue over total costs for a trading period. Profitability has a subtly different meaning: it compares a business’s level of profits to some other factor such as the amount of capital used within the business or its sales revenue. These ratios compare the profits earned by a business with other key variables, such as the level of sales achieved or the capital available to the managers of the business. 

   

  •  gross profit margin  

   

  •  operating profit margin  

   

  •  profit for the year margin. 
• ROCE = (Operating Profit / Total Assets) x 100
• Liquidity 

   

  • A measure of a businesses’ ability to survive in the short term i.e. its ability to meet short term debts and day to day expenses 

   

  • If a business can not meet current liabilities from current assets then it is at risk of failure if creditors demand immediate payment of debts 
• • A business with low liquidity is in danger if short term creditors demand payment quickly e.g. the bank recalls an overdraft 
  • Business may therefore seek to improve liquidity: 
  • Increase current assets and/or reduce current liabilities 
  • Sell assets that are no longer being used i.e. turn them from a non-current asset to a current asset (cash) 
  • Move cash balances from current accounts to high interest bearing accounts so its value increases more rapidly 
  • Switch to long term sources of finance 
  • Monitor debtors to avoid bad debts 
• Current Ratio = Current Assets / Current Liabilities
• The current ratio measures the ability of the business to cover its debts over the next year or so
• Payables days = (Average accounts payable / Average sales) x 365
• Payable days are how long it takes for a business to pay for goods that it has purchased
• Inventory turnover= cost of sales/ average inventory held
• Gearing = non-current liabilities / total equity + non-current liabilities x 100
• A highly geared business has more than 50% of its capital in the form of loans.  

   
• A low-geared business has less long-term borrowing and a gearing figure below 50% 
• Value of financial ratios when assessing performance : 1. Comparative analysis 2. Management accounting 3. Internal control