Analysis the existing internal position of a business (A Level) flashcards

Topic 7: Analysis the existing internal position of a business

Boston Matrix: categories and the usual marketing plan for each

Star (high growth, high share): hold, keep investing. Cash cow (low growth, high share): harvest. Question mark (high growth, low share): build or drop. Dog (low growth, low share): divest, or keep if it supports other lines.

Statement of financial position: net assets and capital employed

Net assets = total assets − total liabilities, which equals total equity (share capital + retained earnings). Capital employed = non-current liabilities + total equity.

ROCE and gearing (operating profit £96,000, non-current liabilities £150,000, total equity £450,000)

Capital employed = 150,000 + 450,000 = £600,000. ROCE = 96,000 ÷ 600,000 × 100 = 16%. Gearing = 150,000 ÷ 600,000 × 100 = 25%.

Current ratio and acid test ratio (current assets £84,000 including inventory £35,000; current liabilities £56,000)

Current ratio = 84,000 ÷ 56,000 = 1.5. Acid test = (84,000 − 35,000) ÷ 56,000 = 0.875, about 0.88.

Inventory turnover (cost of sales £279,000, opening inventory £30,000, closing £32,000)

Inventory turnover = cost of sales ÷ average inventory. Average = (30,000 + 32,000) ÷ 2 = £31,000. 279,000 ÷ 31,000 = 9 times a year.

Three tests before judging a ratio

Trend (how it has moved over several years), benchmark (rivals or the industry average) and context (the business environment and the firm’s objectives and strategy).

Limitations of financial reporting

It is historic; it leaves out non-financial factors such as staff morale, brand reputation and environmental impact; a year-end statement may not be typical; one-off items distort ratios.

Profit centre: meaning, value and problems

A section whose revenue and costs are both recorded, so its profit can be measured. Value: shows performance, motivates managers, supports decisions. Problems: shared overheads split arbitrarily, centres compete, short-term focus, recording cost.

Should a profit centre that makes a loss after overheads be closed?

Not automatically. It may still make a positive contribution; closing it loses that contribution unless the shared overheads also go.

Strong vs weak culture

Strong: values widely shared, giving consistency and less need for supervision, but resistance to change. Weak: values differ between groups, giving inconsistency but flexibility.

Influences on business culture (specification list), and problems of changing it

Influences: leadership and employee values, leadership style, mission, reward systems, organisational structure, customer expectations, business size. Problems of change: slow, resistance, key staff may leave; fails unless rewards, structure and leaders’ behaviour change too.