Core Activity D Flashcards
What is the TARA framework in risk management?
TARA stands for Transfer, Accept, Reduce, and Avoid. It is a risk response tool used to decide how to manage specific risks after identification and analysis.
- Transfer: Shift risk to a third party (e.g., insurance)
- Accept: Acknowledge and monitor the risk
- Reduce: Implement controls to reduce likelihood or impact
- Avoid: Change plans to eliminate the risk entirely
What does ‘risk attitude’ mean in decision-making?
It refers to an individual’s or organisation’s willingness to accept risk. It affects how decisions are made:
- Risk-averse: Prefer safer options
- Risk-neutral: Focus only on expected outcomes
- Risk-seeking: Willing to take more risk for higher rewards
What are common business risks in the medium term?
These include:
- Strategic: Poor strategy or failure to respond to changes
- Product: Declining demand, obsolescence
- Commodity price: Volatility in raw material costs
- Operational: Supply chain failure, IT breakdown
- Reputational: Negative media, poor customer reviews
- Fraud: Internal or external criminal activity
- Contractual inadequacy: Unclear terms leading to disputes
What external risks affect organisations?
These risks arise outside the organisation:
- Political: Policy changes, instability
- Legal/Regulatory: New laws, compliance risks
- Economic: Inflation, recession
- Technological: Disruption, cybersecurity
- Environmental: Climate change, natural disasters
- International: Geopolitical tensions, tariffs
How can changing business models create risk?
Transitioning to new models (e.g., digital-first) can introduce:
- System incompatibility
- Culture resistance
- Investment risk
- Loss of market position if transition fails
What is digital disruption?
It is the transformation caused by emerging digital technologies and business models, altering how industries operate, often displacing established products or services.
What are the 4 key elements of a business model?
- Define value: Identify customer needs and value offered
- Create value: Use resources and capabilities to develop products/services
- Deliver value: Channels and logistics to reach customers
- Capture residual value: Generate profits after costs
What is a digital ecosystem?
A network of digitally connected partners, platforms, and technologies that collaboratively create and deliver value. Example: Amazon, where sellers, logistics, payments, and users form an ecosystem.
What does Gross Profit Margin show?
It shows profitability before overheads. A high margin indicates good control of production and pricing. Formula: (Gross Profit ÷ Revenue) × 100
What does Operating Profit Margin indicate?
It measures profit from operations. High values show efficient operations. Formula: (Operating Profit ÷ Revenue) × 100
What does Net Profit Margin measure?
It reflects the net profitability. Indicates how much of each £1 of revenue becomes final profit. Formula: (Net Profit ÷ Revenue) × 100
What does ROCE indicate?
Return on Capital Employed shows how well capital generates profit. High ROCE means capital is being used productively. Formula: (Operating Profit ÷ Capital Employed) × 100
What does the Current Ratio measure?
It tests the ability to meet short-term obligations. A ratio <1 may indicate liquidity issues. Formula: Current Assets ÷ Current Liabilities
What is the Quick Ratio (Acid Test)?
Similar to current ratio but excludes inventory. Indicates stricter liquidity. Formula: (Current Assets – Inventory) ÷ Current Liabilities
What do Receivables Days indicate?
Measures how long customers take to pay. Longer periods can lead to cash flow problems. Formula: (Receivables ÷ Credit Sales) × 365
What do Payables Days tell us?
Indicates how long the company takes to pay suppliers. High days improve cash flow but may upset suppliers. Formula: (Payables ÷ Purchases) × 365
What do Inventory Days measure?
Measures average days stock is held. Long inventory days may suggest overstocking. Formula: (Inventory ÷ COGS) × 365
What does Asset Turnover measure?
Assesses how efficiently assets generate revenue. Formula: Revenue ÷ Capital Employed. Higher = better efficiency.
What does Gearing show?
Indicates how much finance comes from debt. High gearing = high financial risk. Formula: (Debt ÷ (Debt + Equity)) × 100
What is Interest Cover?
Ability to pay interest costs from profits. A low ratio signals higher default risk. Formula: Operating Profit ÷ Interest Payable
What is Earnings Per Share (EPS)?
Shows profit earned per share. Important for investors. Formula: Profit after Tax ÷ Number of Shares
What are the limitations of ratio analysis?
Historic focus, ignores non-financial info, depends on consistent policies, may distort comparisons across firms.
What is IFRS 9?
Covers recognition, classification, and impairment of financial instruments. Introduced forward-looking Expected Credit Loss (ECL) model.
What are the three IFRS 9 classification categories?
- Amortised Cost: If held to collect contractual cash flows
- Fair Value Through Profit or Loss (FVTPL)
- Fair Value Through Other Comprehensive Income (FVOCI)
