3.5

Question 1

What is a financial statement?

Two most important financial statements?

Answer 1

A general term for a key document based on financial info generated by the business

The two most important financial statements are statement of comprehensive income (profit and loss) and the statement of financial position (balance sheet).

Question 2

What does the statement of comprehensive income show?

Answer 2

A company’s profit or loss over a period of time. It details the revenues and costs of the business. Also know as the income statement.

Question 3

Key info for a statement of comprehensive income?

Answer 3

Cost of sales
Expenses
Operating or net profit
Net profit

Question 4

What does the statement of financial position show?

Answer 4

It shows the assets, liabilities and net worth of a business on a given date. Also known as the balance sheet.

Question 5

Assets employed = capital employed

Answer 5

Capital employed shows where the money has come from and assets employed shows where the money has gone

Question 6

What is liquidity?

Answer 6

Refers to the ease and speed with which assets can be turned into cash. The more easily an asset can be sold, the more liquid the business is.

Question 7

What is capital employed?

Answer 7

The total figure for all long-term finance that a business has. It includes share capital, retained profits and loans.

Question 8

What is ratio analysis?

Answer 8

It uses the info from the financial statements to relate to one measure of performance to another. Ratios highlight key features of the financial results.

Question 9

What is a profit margin?

Answer 9

A financial ratio taken from the statement of comprehensive income, showing what percentage of a businesses turnover is actually profit. It is the ratio of profit to turnover expressed as a %.

Question 10

What is the gearing ratio?

Answer 10

The proportion of the money used in the business which is interest-bearing debt. Below 50% is low, over 50% is high.

Question 11

Gearing ratio formula?

Answer 11

Gearing = long-term liabilities (loans)/capital employed x100

Answer will be a %

Question 12

What can high gearing show?

Answer 12

That a business is willing to take risks.
However if profits fall, will cause difficulty in keeping up with loan repayments
Can show that a business is willing to expand by borrowing funds and seizing growth opportunities
High gearing can lead to higher profits and increased dividends for shareholders
High gearing is less risky when economy is growing

Question 13

What can low gearing show?

Answer 13

Can show that the business is less risky
If profits fall, they should be able to keep up with loan repayments
Without borrowing funds to expand, may miss opportunities in dynamic markets
Low gearing can therefore lead to long run lower profits and decreased dividends for shareholders
Low gearing is less risky when economy is slowing down

Question 14

What is return on capital employed (ROCE)?

Answer 14

Tells managers how much money is being made by the business compared to the sum of money that has been put into the business. It can show how much of each pound invested has generated by way of profit.

Question 15

ROCE formula?

Answer 15

Operating profit x 100/capital employed

Higher the % the better. 20-30% is good.

Question 16

Limitations of ratios?

Answer 16

Ratios are numbers - don’t take into account qualitative info.
Internal factors such as the culture of the business, managerial abilities and skills of the staff can all affect the way a business performs.
External factors can have an impact. E.g. In a recession some ratios will look worse.
Ratios can only tell what has happened not what will happen
Cannot account for changes in tech or the market
Ratios are only as good as the accounts

Question 17

What is labour productivity?

Answer 17

Measures the output per person employed.

Question 18

Labour productivity formula?

Answer 18

Output per time period / number of employees

Question 19

What is labour turnover?

Answer 19

Measures the proportion of employees who leave over a certain time period.

Question 20

Labour turnover formula?

Answer 20

Number of staff leaving / number of staff employed x 100

Answer will be a %

Question 21

High labour turnover? (Negative)

Answer 21

Can indicate weak motivation and/or low pay
Shortage of loyal and experienced staff
Weak or unhappy corporate culture
As new staff arrive, they need training > high costs and time
Recruiting new staff can be expensive

Question 22

High labour turnover? (Positive)

Answer 22

New staff bring new ideas which can increase productivity
New staff can be enthusiastic and refresh corporate culture
May have been trained by rivals > already qualified
Wars are kept low due to starting rates
If sales fall, it is easier to reduce the workforce because redundancies will be less costly
Some people intentionally work for short periods of time e.g. tourists

Question 23

What is labour retention about?

How can it be calculated?

Answer 23

It’s about reducing the frequency with which employees leave the business.

Number of employees in post for more than one year / number of staff in post one year ago x100

Question 24

How to measure absents rates %?

2 ways

Answer 24

Number of employees absent / total number of employees x100

Or

Number of working days lost per time period / total possible number of working days per time period x 100

Next cards are about how to stop absences.

Question 25

Financial incentives

What is piecework?

Answer 25

Payment according to the amount produced by the individual.

Question 26

Financial incentives

What is performance-related pay?

Answer 26

Pay which works where performance is measurable.

Question 27

Financial incentives

What is profit sharing?

Answer 27

Bonuses which vary according to the level of profit

Question 28

Financial incentives

What is employee share ownership?

Answer 28

Rewarding employees with company shares

Question 29

How to improve employee motivation (non financial)?

Answer 29

Job rotation
Job enrichment 
Flexible working practices 
Consultation
Empowerment
Teamwork
Delegation
Responsibility for quality