Finance and Accounting Strategy

Question 1

Business cannot develop/decide a new strategy unless:

Answer 1

• current profitability and financial performance of the business are analysed.
• availability of sources of finance is assessed
• relative success of the company’s current strategies can be compared with those of other similar businesses.

Question 2

The contents of an annual report :

Answer 2

• Financial statements.
• Chairman’s statement
• Chief executive’s report
• Auditors’ report
• Notes to the accounts

Question 3

Annual reports are useful to…

Answer 3

All stakeholder groups
- Local community
- Employees
- managers
- banks
- suppliers
-customers
- govt and tax authorities
- shareholders & potential shareholders

Question 4

Managers

Answer 4

• help take strategic decisions
• control and monitor the operation of each department and division

Question 5

Banks

Answer 5

• assess whether to allow an increase in overdraft facilities
• decide whether to continue an overdraft facility

Question 6

Suppliers

Answer 6

• see if the business is liquid enough to pay off its debts
• assess whether the business is a good credit risk

Question 7

Customers

Answer 7

• assess whether the business is secure
• determine whether they will be assured of future supplies of the goods they are
  purchasing

Question 8

Government and tax authorities

Answer 8

• calculate how much tax is due from the business
• assess whether the business is in danger of closing down, creating economic problems

Question 9

Shareholders and potential shareholders

Answer 9

• assess the value of the business and their investment in it
• establish whether the business is becoming more or less profitable

Question 10

Employees

Answer 10

• determine whether jobs are secure
• find out whether a wage increase can be afforded

Question 11

Local community

Answer 11

• assess whether the business is profitable and likely to expand, which could be good for the local economy.
• determine whether the business is making losses and whether this could lead to closure.

Question 12

Ratios give a much clearer picture of relative business performance when they are compared with:

Answer 12

• Ratios for previous time periods. (trend analysis) allows to assess - Is liquidity more of a problem now than last year?
• Ratios from other companies in a similar industry (inter-firm comparison) allows to assess - Is this company’s profitability better or worse than its competitors?

Question 13

Further business strategies and possible impact on ratios

Answer 13

Rationalisation: Reductions in operating expenses should increase the operating profit margin & RoCE.
New product development: Returns to shareholders might fall in the short term.
Market development: Cash outflows for developing the new market could reduce liquidity.
Low price strategy: reduces gross profit and operating profit margins unless higher output reduces fixed costs per unit and leads to greater economies of scale.