Unit 7 Flashcards
(223 cards)
1
Q
what is a mission statement?
A
sets out a business’ overall purpose and focus or its reason for existence and is normally set out in a written statement.
2
Q
why is a mission statement important?
A
- communicates values and purpose to stakeholders
- informs the strategy adopted by an organisation
- enables measurable goals and objectives to be identified.
3
Q
what factors influence a businesses mission?
A
- values of founder
- strengths of the business
- extent of of social responsibility
- industry they operate in
4
Q
what are corporate objectives ?
A
medium to long term goals
5
Q
what are the internal factors influencing corporate objectives?
A
- business ownership = sole trader, Ltd, Plc
- business culture = stems from the entrepreneur = way things are done there
- business performance = easier to achieve with strong performance = finance
6
Q
what are the external factors influencing corporate objectives?
A
- short-termism
- changes in economy
- changes in gov policies
- competitors actions
- social changes in tech
7
Q
why would a business feel concern more for short term performance?
A
- shareholder pressure = profit maximisation for high dividend and raise share price = benefit from capital gain
- HR strategy and reward = performance related pay
- new leadership = different priorities
8
Q
what are strategic decisions?
A
judgements made by senior management that are long term and involve major commitment of resources
9
Q
what is short- termism?
A
the pressure to deliver quick results to the potential detriment of the longer term development of a company
10
Q
what is culture?
A
encompasses the value , attitudes and beliefs of those who work for a business
11
Q
what is the order of objectives heirarchy?
A
1-Mission- most strategic
2- corporate
3- functional
4- team
5- individual- most detailed
12
Q
what are is the objective of survival?
A
a short term objective for a small business entering the market or at a time of crisis. prioritising breakeven and getting into profit
13
Q
what is profit maximisation objective?
A
trying to make the most profit possible, most likely to be the aim of the owners and shareholders.
14
Q
what is profit satisfaction objective?
A
trying to make enough profit to keep owners comfortable, probably the aim of smaller businesses whose owners don’t want to work longer hours
15
Q
what is the growth objective?
A
a business tries to make as many sales as they can, to become a large business that ca benefit from economies of scale.
16
Q
what is the cash flow objective?
A
having sufficient money to pay day-to-day debts / cost.
17
Q
what is the ethics objective?
A
organisations such as Co-op and lush have objectives which are based around beliefs on environmental sustainability and charitable aid
18
Q
what is the social objective?
A
run for profit and to provide a service to the public and will need to meet the needs of wealth demographics throughout society.
19
Q
what is a strategy?
A
a long term plan to achieve the business vision through attaining its corporate objectives
20
Q
what are tactics?
A
short-term decisions usually involving few resources, made to complement a strategy
21
Q
what is a function?
A
an area or department of a business. the usual 4 key functional areas are: marketing, finance, HR and operations
22
Q
what must functional decisions all work towards?
A
the same strategic goal which requires communication and coordination.
23
Q
for example if a firm decides to expand into a foreign market, how would functional areas play into that?
A
- Marketing = carry out research, plan and execute an effective promotion campaign
- Finance = need to budget the expansion = raise finance and manage cash flow
- HR = design workforce plan and recruit in new area
24
Q
What is SWOT analysis used for?
A
a management tool that allows a business to assess its internal strengths and weaknesses and external opportunities and threats
25
what is the value of using SWOT analysis?
provide managers with a clearer view of what the business is good at, what its weaknesses are, what it could be doing to improve and against what it should protect itself.
26
what are the limitations of SWOT analysis?
- don't prioritise issues
- doesn't provide solutions
- can generate too many ideas
- produce un useful information
- may not be accurate
27
what are the benefits of SWOT analysis?
- unique to the business = primary research
- dynamic data = constantly changing
- regular updates
28
what is an income statement?
shows the business's revenues and costs and therefore its profits or loss over a period of time.
29
define revenue
the amount of money receive from the sale of good and services during trading period
30
define cost of sales
costs involved directly in supplying the good or services = raw materials and direct labour
31
define gross profit
difference between revenue and cost of sales
32
define expenses
costs that are not directly related to production = fixed cost = rent, salaries, marketing...
33
define operating profit
profit that takes into account cost of sales and expenses
= expenses - gross profit
34
define tax
corporation tax paid to the government
35
define net profit
profit from deducting the tax from operating profit = a measure of the performance of a business as it includes all costs paid by the business
36
how can business' interpret their income statement?
judge performance of the business
- managers= can inform future decisions and likely expansion
- shareholders= use to decide on buying more shares or sell shares depending on profits
- tax authorities = calculate amount of tax owed by business
37
what is a balance sheet?
represents a snapshot of a business' financial position at a given time. it shows the assets and the liabilities of the business. including the shareholder equity.
38
what are assets?
anything a business owns
39
what are liabilities?
anything a business owes
40
what is working capital?
the cash available to a business for its day to day operations
= current liabilities - current assets
41
what is capital employed?
the total amount of money invested into the business.
= total equity + non current liabilities
42
what are non current assets ?
assets normally kept by a business for more than a year
43
what are current assets?
usually kept for less than a year
- cash
- stock
- receivables
44
-what are receivables?
money owed to the business by customers who haven't yet paid for goods or services.
45
what are current liabilities?
debts that will need to be repaid by the business
- payables
= the business uses current assets to pay for = needs sufficient working capital
46
what are non current liabilities?
debts that will take longer than one year to repay
47
what is net assets?
the value or worth of the business
= assets - liabilities
48
what is total equity / shareholders equity ?
money belonging to shareholders
= share capital + reserves (profit retained in business not distributed as dividends )
49
how can a business interpret a balance sheet?
businesses, mostly Plc s will want to present financial performance as good so they can process window dressing
50
what is involved in window dressing?
- inflating the value of non current assets
- borrowing money for a short time to improve current assets = enhance business' working capital
51
what is ratio analysis?
involves the comparison of financial data to gain insights into business performance
52
how can ratio analysis elevate understanding?
insight into the performance by comparing figures against each other
53
what ratios fall under what catagory?
* Liquidity = Current ratio
* Gearing = Gearing ratio
* Profitability=RoCE (return on capital employed), profit margin
* Efficiency = inventory turnover ratio, receivables days ratio, payables days ratio
54
What is liquidity?
represents a business' ability to pay day to day debts = to pay its liabilities such as salaries, suppliers and taxes
55
what does a liquidity ratio assess?
whether a business has sufficient cash or equivalent to be able to pay short term debts.
56
what is the equation for Current ratio?
Current ratio= Current assets / Current liabilities
57
how is the current ratio written?
x:1 = which means the business has x in cash or equivalent for every £1 of debts it has to pay in the short term
58
what is the ideal current ratio?
2:1
- however it depend on the business
59
what is capital structure?
shows the business' source of finance
60
what is a mortgage loan?
a loan secured against an asset of similar value ( collateral) = a building
61
what is share capital?
represents the money raised from the sale of shares
62
what is total equity?
share capital + reserves (profit kept within the business)
63
what is capital employed?
represents all the money borrowed by the business for long term funding
= total equity (shareholder money) + non current liabilities
64
what does gearing show?
the capital structure of the business: where the business borrowed its money from.
= the proportion of finance that is non current liabilities (bank loans) relative to the finance provided by total equity.
65
what does gearing assess?
whether the business is at risk from having too much debts. debts represent money that must be repaid with interest.
66
what is the risk of having high debts with interest rates?
- at risk of an increase in interest rates
- at risk of liquidation if they can't repay debts
67
what is the calculation for the Gearing ratio?
Gearing ratio= (non current liabilities / capital employed) x 100h
68
how do you calculate capital employed?
capital employed= total equity + non current liabilities
69
how can a business interpret gearing ratio?
- ideally figure should be below 50%
- over 50% = business is highly geared and at risk of not being able to repay debts = risk of interest rates
- high gearing may mean banks will be reluctant to lending more money = reducing financial sources
70
what does Profit margin show?
financial ratio that measures the percentage of profit earned by a company in relation to its revenue
71
What is the calculation for Gross Profit Margin?
( Gross profit / sales revenue) x 100
72
what is the calculation for operating profit margin?
( Operating profit / sales revenue) x 100
73
what is the calculation for net Profit margin?
( Net profit / sales revenue) x 100
74
What does RoCE (Return on capital employed) ratio show?
method of measuring profitability of the business. showing the % of profit generated from each pound borrowed by the business
75
what is the calculation for RoCE ratio?
(Operating profit / Capital employed) x 100
76
how do you calculate Capital employed?
Total equity + non current liabilities
77
how can a business interpret the RoCE ratio?
- the higher percentage, the better
- needs to be compared to the figure from the previous years to see a pattern falling or rising
- compare to similar businesses
78
what does inventory turnover ratio show?
measures how often each year a business sells and replaces its inventory
79
what is the calculation for inventory turnover ratio?
inventory turnover ratio ( measured number of times per year = cost of sales / inventory
80
how can a business interpret inventory turnover ratio?
- want to be quick and efficient
= especially in businesses selling perishables
81
what does receivables days ratio show?
measures the average length of time taken by customers to pay amounts owed to them
82
what is the calculation for receivables days ratio?
(trade receivables / revenue) x 365 days = number of days
83
what does payables days ratio show?
measures the average length of time taken by a business to pay amounts it owes
84
what is the calculation for payables days ratio?
(trade payables / cost of sales) x 365= number of days
85
how can a business interpret receivables days ratio and payables days ratio?
must be compared to each other. ideally wants receivables days ratio shorter than payables. to protect the business' cash flow before they have to pay of their debts.
86
alongside analysing the ratios they need to look at what factors?
- industry trends
- tech changes
- changes within company
- consumer tastes
- economic factors
87
what comparisons should they make with the ratios?
- previous year ratios
- other businesses in industry
- historical data for accuracy = figures may be inaccurate if window dressing techniques used
-external environment = econ, competitors, gov policies
88
what are core competencies?
the combination of knowledge and technical capacities that allow a business to differentiate from its competitors. these provide a business with a USP and a competitive advantage.
89
core competencies are strengths that...
- provide benefits to customers = why customers choose a business and stay loyal
- are difficult for competitors to replicate = barrier to entry
- provide opportunities to introduce new products and new markets = economies of scope.
90
what are the benefits of identifying core competencies?
- should focus on core competencies to develop key efficiencies
- non- core competencies should be outsourced so the business can focus on strengths
91
what are the criticisms of core competencies?
may mean business looses control of some areas which may affect overall performance
92
what is outsourcing?
the subcontracting of non-core activities in order to free up cash, time, staff and facilities to allow a business to concentrate on areas where it excels and in which it has a competitive advantage.
93
what measure help a business' long term performance?
- R&D = develop future success for products or processes
- profit quality = ensure sustainable profit
- employee engagement = motivating staff for successful performance
94
what measures help a business' short term performance?
- profit maximisation = focus on profit regardless of quality of profit made
- sales growth = focus on growth and increase revenue
- cost saving = cutting costs across areas regardless of quality
95
what is sustainability?
doing business without negatively impacting the environment, community, or society as a whole. focuses on meeting the needs of the present stakeholders without compromising their future or the business' future.
96
what does Kaplan and Norton's balanced scorecard model show?
planning and management tool to match strategies to its mission and corporate objectives. providing balanced perspective to stakeholders by assessing non financial measures alongside financial.
97
1. Financial -Kaplan and Norton's balanced scorecard model
look from perspectives of shareholders?
- revenue
- expenses
- net income
- cash flow
- asset value
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2. customers- Kaplan and Norton's balanced scorecard model
perspectives of customers
- customer satisfaction
- customer retention
- market share
- brand strength
99
3. internal process perspective- Kaplan and Norton's balanced scorecard model
- inventory
- orders
- resource allocation
- cycle time
- quality control
100
4. learning/ growth perspective
- employee satisfaction
- employee turnover
- employee skills
- employee education
101
what are the key drawbacks of Kaplan and Norton's balanced scorecard model?
-its complex and some area can be difficult to quantify
- achieving the right balance between the different perspectives may be difficult = some targets may conflict with each other
- may lead to too many targets
102
what does Elkington's triple bottom line show?
way of measuring a business' performance from three perspectives: Profit, People and Plant to ensure sustainability
103
1. Profit-Elkington's triple bottom line
monitoring the financial performance of the business over time. it is important for businesses to make profit for society as a whole (stakeholders). using financial accounts and ratios.
104
2. People - Elkington's triple bottom line
degree in which the business behaves in socially responsible manner to key stakeholders. involves measures such as fair pay, health and safety, customer satisfaction or fair trade.
105
3. Planet- Elkington's triple bottom line
reduction of the impact of the business' activities on the environment, including reducing co2 emissions, waste and use of renewable energy
106
what does PESTEL stand for?
Political
Economic
Social
Technological
Legal
Ethical/environmental
107
what is a cartel?
where businesses act together as a single producer in order to influence the prices, production or marketing of goods or services
108
which laws set out, influence a business?
- competition law
- Labour laws
- Environmental laws
109
what is competition law?
legislation put in place to protect the interest of consumers and businesses.
110
what does competition law control?
- abuse of the market power
- anti = competitive practices = mergers and acquisitions
- Cartel = working together to manipulate the market
111
what are examples of UK competition legislation?
- The competition Act 1989
- The Enterprise Act 2002
112
who is responsible for the enforcement of competition laws?
The Competition and Markets Authority (CMA)
- part of its role is to investigate mergers and takeovers. when a merged business gains control of 25% or more of the market
113
who is responsible for overseeing competitive law in the finance industry?
The Financial Conduct Authority (FCA)
114
what does Labour law control?
aim to protect exploitation of employees by businesses. including pay, working conditions and conflicts (grievances) and prevent discrimination.
115
what are examples of UK Labour legislation?
- The Equality Act 2010 - preventing discrimination
- Minimum wage
- The Health and Safety at Work Act
- The Trade Union Act 1984 -collective bargaining rights
116
what does Environmental Law control?
to minimise negative impact on the environment. focussing on climate change and pollution. businesses are made to pay full cost of production including clean up or repair pollution caused
117
what are examples of UK Environmental legislation?
- Environmental Protection Act 1991
- Climate change Act 2008
-The Energy Act 2013
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what threats to businesses does environmental law cause?
- increase costs
- increase in bureaucracy (paperwork)
119
what opportunities to businesses does environmental law cause?
- demand for new products or processes - recycling or biodegradable products
- create level playing field to comply to laws
- competitive advantage by operating above standards set
120
what is enterprise?
the willingness to set up a business venture
121
what is infrastructure?
the basic physical and organisational structures needed for a business to function
- transport
- communication
- utilities ...
122
what is a regulator?
an organisation appointed by a government to regulate an industry such as banking or energy
123
how does political environment influence?
designed to maximise economic activity whilst protecting businesses, individuals and the environment
124
what factors are influence by the political environment?
- regulated markets
- enterprise
- environmental issues
- infrastructure
- international trade
125
what is 'encouraging enterprise'?
the government encourages individuals starting a business and existing businesses to grow as it will lead to a stronger economy .
126
in what ways can the government encourage enterprise?
- making finance accessible with Enterprise allowance and Enterprise finance
- funding for R&D
- advice on new businesses
- reducing tax
127
what do regulators focus most on?
- promoting free competition
- regulate authorities such as FCA
- regulate monopolies like ofwat, ofgem, ofcom
- self regulation where businesses agree to operate according to code of conduct
128
how do government spending on infrastructure benefit businesses?
- speed up communication
- fast and cheap transportation
- access to new markets
- attract new business to UK
129
what economic factors influence business?
- inflation and interest rates
- GDP
- exchange rates
- trade policy
- globalisation
- fiscal and monetary policy
130
What is GDP?
gross domestic product is a measure of the value of all goods and services produced within a country over a specific period of time and as such provides an indicator of the country's economic health
131
what is a boom in the economy?
GPD figure is increasing rapidly and showing high rates of economic growth
132
what is a recession in the economy?
the GDP figure is reducing, growth is slowing down
133
what is a slump in the economy?
The GDP is at its lowest and can be a negative figure meaning that fewer goods and services are being produced
134
what is a recovery in the economy?
following a period of decline the GDP figure is increasing again
135
what is the business cycle?
shows the fluctuations in economic activity, as measured by GDP, over time. It directly affects demand of products. depending on the type of product: luxury goods, necessity goods or inferior goods.
136
what is an exchange rate?
the price of one country's currency in terms of another. the UK value of pound is determined by the supply and demand.
e.g. £1 = $1.57
137
what does an appreciating currency mean?
it is getting stronger than the other currency and going up in value
138
wat does a depreciating currency mean?
it is getting weaker than the other currency and going down in value
139
how do exchange rates affect a business?
- can increase or lower the price of a product sold abroad = affecting revenue
- price of raw materials = cost of importing
- price of foreign competitors in market
140
what does importing mean?
buying goods from a foreign country
141
what impacts of exchanges rates are dependent on importers?
- prefer the pound to be strong
- may switch international suppliers in less favourable exchange rates
- may stockpile raw materials
- may agree with suppliers on a set exchange rate
142
what does exporting mean?
selling goods or services in a foreign country
143
what impacts of exchanges rates are dependent on exporters?
- prefer pound to be weak
- may lower prices to limit impact of strong pound
- may increase promotion when weak
- may set up operations where countries are to avoid exchange rate fluctuations
144
what does inflation mean?
an increase in the general level of prices of goods and services within an economy, which results in a fall in the purchasing power of money
145
how is the rate of inflation measured?
by the annual percentage changes in the level of prices . Measured by the consumer price index (CPI) which each month measures the change in price of a basket of goods.
146
what would the impact of inflation, cost pressure cause to a business?
- increase cost of supplies
- increase wages from demand after cost of living rise
- increase in costs may lead to business to increase prices or reduce costs to maintain profit margin
147
what would the impact of inflation, reduced sales cause to a business?
- disposable incomes decreased, decreasing demand for goods and services
- as prices increase, UK businesses are less competitive so foreign companies may appear cheaper
148
what is fiscal policy?
the way the government adjusts its spending and tax rates to control the economy.
149
what are direct taxes in fiscal policy?
taxes taken directly from a persons income or a firms profit
- National insurance
- Income tax
- Corporation tax
150
what are indirect taxes in fiscal policy?
taxes on purchases
- VAT
-road tax
- stamp duty
- fuel tax
151
what are the key areas of government expenditure from tax revenue?
* transfer payments - welfare spending
* recurring spending - public services
* investment projects - state investment
152
what is monetary policy?
is the adjustment of interest rate to control the level of inflation
153
what would a decrease in interest rates do?
- cost of credit and reward for saving decrease = more spending and sales
- higher revenue and lower financial costs = higher profits
154
what is the impact on business revenue from interest rates?
- when high, credit is more expensive and saving money more attractive
= customers less likely to spend
= businesses are to experience fall in demand for products
155
what is the impact on business financial costs from interest rates?
when high, credit is expensive meaning businesses increase costs if they have loans or overdrafts
156
what is The Monetary Policy Committee of the Bank of England (MPC) ?
The group of economists in the bank of england who meet once a month to set the base rate
157
what is the base rate?
the rate of interest set by the bank of England. this rate is used as a benchmark by commercial banks to set their own rates of interest.
158
what is an interest rate?
the cost of borrowing money and the return for lending (reward for saving)
159
what is Economic policy?
the actions taken by the governmenr to stimulate or slow down the level of economic activity in the country. government wants ideal GDP growing steadily at 2% and inflation to stay at 2%
160
what is the impact on customers from rising interest rates?
- cost of credit increases = less affordable for large purchases
- reward for saving
161
what is the impact on businesses from rising interest rates?
- fall in demand
- debts on variable rates
- lower revenue and higher costs
162
what is open trade/ free trade?
the unrestricted purchase or sale of goods and services between countries
163
what is protectionism?
actions by the government to restrict international trade. to protect domestic businesses and home industries against foreign competition and limiting number of imports in a country
164
what protectionist methods affect imports?
- tariffs
- quotas
- technical barriers
165
what are quotas?
physical limit set on the number of units that can be imported into a country
165
what are tariffs?
tax on imports that increases price of imported goods. making domestic businesses more competitive.
166
what protectionist method affects exports?
subsides
167
what are technical barriers?
rules and regulations or standards and specifications applied to products entering the country
168
what protectionist methods affect exports?
subsidies
169
what are subsidies?
grants given to support exporting so they can lower their prices in order to compete internationally
170
what is globalisation?
the integration of international markets enabling international commerce: imports and exports across borders
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what is a multinational company?
a business that has facilities and other assets in more than one country
172
what are emerging markets?
low income countries that are experiencing high rates of economic and population growth
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what are the reasons for globalisation?
- more open trade
- easier transfer of money
- improved transportation
- multinational companies
- technology
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what are the opportunities with globalisation?
- new markets
- cheaper resources
- labour
- expertise and experience
- economies of scale
- trade barriers or protectionism avoidance
175
what are the threats with globalisation?
- competition
- downward pressure on prices
- threat of takeovers
- economic risks
- political risks
176
what is the importance of emerging economies for business?
offer opportunities
- large growing markets
- growth of middle class
- low cost locations
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what is demographic change?
the changes in the UK population
178
what are key demographic changes
- age
- growth
- migration
- urbanisation
179
what is social change?
the changes in society like consumer lifestyle and buying behaviour
180
what are key social changes?
- health and well-being
- drive towards ethical and sustainability
- holidays
- on demand culture =instant access
- ready meals and eating out
- luxury
- single occupancy
181
what is urbanisation?
the movement of people from rural areas to live in cities
182
what is migration?
the movement of population between countries or regions
183
what are the key impacts of online business?
- opportunities for small businesses
- access to global market
- reducing business overheads
- cutting out retail
- growth of direct delivery
184
what is social responsibility?
the duty and obligation of a business to other stakeholders
185
what is CSR (corporate social responsibility)?
belief that business should act responsibly and protect the interest of all its stakeholders. shaping ethics that guide modern day businesses.
186
what is shareholder concept?
belief that businesses prime function should be to satisfy shareholders by maximising profits. which support the long term success of the business and the economy prosperity .
187
what is stakeholder concept?
belief that a business cant thrive on its own and needs support of all its stakeholders. for long term prosperity and sustainability
188
what is enlightened shareholder value (ESV)?
a compromising approach to shareholder and stakeholder concepts.
189
what does Carroll's social responsibility pyramid show?
model sets out four responsibilities that are hierarchical. without meet economic responsibility on the bottoms the business will fail and not meet other responsibilities.
190
1. economic responsibility
- responsibility to survive and become profitable
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2. legal responsibilities
- operational efficiency
- consumer laws
- employment law
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3. ethical responsibilities `
-impact on environment
- Fairtrade
- price gauging
193
4. philanthropic responsibilities
help society
-education
- health
- volunteer work
194
what are the reasons for CSR?
- cost savings
- brand differentiation
- customer and employee engagement
- prevent gov intervention
- sustainability
- customer perception in order to charge more premium prices
195
what are the reasons against CSR?
- reduced profit due to higher cost
- stakeholder views may conflict eachother
196
what are the business benefits of CSR?
- good reputation
- easy to comply with law
- better staff with aligned views
- higher productivity
- new ideas
- reduced costs
- good public relations
- employees retention
197
what is automation?
replacing labour with technology in the manufacturing process
198
what is computer aided design (CAD)?
using computer generated images to design and test new products
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what is computer aided manufacture (CAM)?
using computer technology to plan and control the manufacturing process
200
what is electronic point of sale (EPOS)?
laser scanning barcode technology that can update database automatically. help plan sales records and stock levels
201
what emerging technologies pose as opportunities to businesses?
- 3D printing
- wearable technology
- smartphone and mobile technology
- renewable energy
- VR
- cloud computing
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what is 3D printing?
material joined or solidified under computer control to create 3D project
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what is cloud computing?
involves centralised storage of data in remote servers and online access by users worldwide on internet connected devices
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what is data analytics?
the process of investigating raw data with the intention of drawing conclusions from the information
205
What is a substitute?
a product or service that can replace or be used instead of another
206
what does Porter's Five Forces Model show?
provides a tool for understanding where power lies in an industry, enabling a business to understand more clearly its own competitive strengths .
207
1. Threat of entry- Porter's Five Forces Model
how easy it is for a new business to enter?
*Make it more difficult:
- using patents/copyrights
- using size = econ of scale
- loyalty
- exclusive rights to distribution channels
- lobbyist = control regulators
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2. Buyer power- Porter's Five Forces Model
control consumers have bargaining through fewer sales with more similar products in market
*Overcoming buyer power:
- differentiate products
- new customers
- increase marketing
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3. Supplier power- Porter's Five Forces Model
can suppliers increase their prices?
* Overcoming supplier power
- locking longer contracts
- max econ of sales
- offer to merge with suppliers
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4. substitute power- Porter's Five Forces Model
are there alternatives?
* Overcoming substitute power
- brand loyalty
- better meet needs
- build a moat
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5. rivalry power- Porter's Five Forces Model
how much competition
* Overcoming rivalry power:
- cost leader/ differentiation
- increase marketing
212
what is investment appraisal?
techniques designed to help businesses assess the desirability of investment and to compare different investment options.
213
what are the 3 investment appraisal methods?
- Payback
- Average rate of return (ARR)
- net present value (NPV)
214
what does Payback show/ assess?
focuses on the time taken to recoup the initial investment and considers the cash inflows over a number of years. it is useful for businesses who need quick return and may be facing liquidity problems
215
what is the calculation for Payback?
(Amount left to repay / cash inflow expected the following year) x 12 months
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what answer are businesses looking for?
want a short payback period
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what does Average rate of return (ARR) show / assess?
measures the average annual profit achieved on an investment over time, which can the be compared to othere investments or the zero risk strategy of leaving money in a bank account.
218
how do you calculate ARR?
1. work out total profit = cash inflows-initial investment
2. calc avg annual profit = total profit / no. years
3. calc avg annual profit as a % of initial investment
(Avg annual profit / initial investment) x100
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what are businesses looking for in ARR?
want a high ARR to look at how to invest and be able to set targets for the business
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what does Net present value (NVP) show/ assess?
takes into account the future value of money by discounting cash flows. considers time in an investment and follows principle that the value of money depreciates over time .
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how do you calculate NPV?
1. multiply each cash inflow with discount factor figure
2. add up all net present values of the cash inflows
3. subtract the cost of the initial investment
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what are businesses looking for in NPV answers?
- positive figure means the investment makes profit and go ahead
- negative figure means makes a loss and be rejected
