OxfordAQA A-Level Business: Analysis the existing internal position of a business (9725) – Revision Notes

Use these pages for last-weeks recall of section 3.3.2, Analysis the existing internal position of a business, in the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, whose first International AS exams are in May/June 2027 and first International A-level exams in May/June 2028. The whole section is International A-level only; Unit 3: Business analysis assesses it. Still taking 9625? Work from that specification. The study guide has the full teaching and worked examples.

Also on this topic: practice questions · course hub · course checklist · free diagnostics · previous section: mission, objectives and SWOT revision notes

1. Product portfolio: the Boston Matrix

Product portfolio = all the products a business sells. Portfolio analysis shows whether the range is balanced and where marketing spending should go.

Category	Market growth	Market share	Cash position	Usual marketing plan
Star	High	High	Earns a lot, spends a lot	Hold: keep investing
Cash cow	Low	High	Generates surplus cash	Harvest: minimal spending
Question mark	High	Low	Uses cash, earns little	Build or drop
Dog	Low	Low	Earns little	Divest, or keep if it supports other lines

Method in steps: using the matrix in an answer

1. Place each product using the growth and share data given.
2. Say what each position means for cash.
3. Link to a marketing decision (build, hold, harvest, divest).
4. Judge: is the portfolio balanced? What does it not tell you (profit, the market definition, future change)?

2. The financial statements

Income statement (a period): revenue − cost of sales = gross profit; − operating expenses = operating profit; − interest − taxes = net profit.

Statement of financial position (one date): total assets (non-current plus current) less total liabilities (current plus non-current) gives net assets, which equal total equity (share capital + retained earnings).

Capital employed = non-current liabilities + total equity.

Amending the statements: what moves together

Event	Statement of financial position	Income statement
Long-term loan used to buy machinery	Non-current assets up; non-current liabilities up	No change until interest is paid
Inventory written off	Inventory down; retained earnings down	Cost of sales up; profits down
Customer debt will not be paid	Trade receivables down; retained earnings down	Expenses up; operating profit down
New shares issued for cash	Cash up; share capital up	No change
Dividend paid	Cash down; retained earnings down	No change (paid out of net profit)

3. Ratio formulas

Group	Ratio	Formula	Unit
Profitability	Gross profit margin	100 × gross profit ÷ revenue	%
	Operating profit margin	100 × operating profit ÷ revenue	%
	Net profit margin	100 × net profit ÷ revenue	%
	ROCE	100 × operating profit ÷ capital employed	%
Liquidity	Current ratio	current assets ÷ current liabilities	ratio (e.g. 1.5)
	Acid test ratio	(current assets − inventory) ÷ current liabilities	ratio
Gearing	Gearing	non-current liabilities ÷ capital employed × 100	%
Efficiency	Payables days	trade payables ÷ cost of sales × 365	days
	Receivables days	trade receivables ÷ revenue × 365	days
	Inventory turnover	cost of sales ÷ average inventory	times a year
Shareholder	Dividend per share	total dividends ÷ number of shares	pence or £
	Dividend yield	dividend per share ÷ market share price × 100	%

Average inventory = (opening inventory + closing inventory) ÷ 2.

Reading the direction

• Higher margins and ROCE: better use of revenue and capital.
• Liquidity too low: risk of not paying short-term debts. Too high: idle cash or excess inventory.
• Gearing above about 50% is often called high, but it depends on interest rates and the stability of profits.
• Lower receivables days and higher inventory turnover usually help cash flow.
• Higher payables days help cash but can annoy suppliers.
• A rising dividend yield can mean a bigger dividend or a falling share price.

4. Using ratios well

Value: quick comparison over time and between firms; shows strengths and weaknesses; useful to managers, lenders and investors.

Three tests before you judge a ratio

1. Trend: how has it moved over several years?
2. Benchmark: how does it compare with rivals or the industry average?
3. Context: what explains it? The business environment (recession, interest rates, competition) and the firm’s objectives and strategy (a growth push may cut ROCE for a while).

Limitations of financial reporting

• Historic: shows the past, not the future.
• 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.

5. Profit centres

Profit centre: a section (branch, product range, division) whose revenue and costs are both recorded, so its profit can be measured.

Value	Problems
Shows which sections perform well or badly	Shared overheads must be split, often arbitrarily
Motivates managers judged on results	Centres may compete rather than cooperate
Supports decisions to invest, cut or close	Short-term profit may be chased at the cost of long-term aims
Aids delegation	Extra cost of recording and monitoring

Must-know: a centre showing a loss after overheads may still make a positive contribution. Closing it loses that contribution unless the overheads also go.

6. Business culture

Culture: the shared values, attitudes and behaviour in a business.

Influences (spec list): leadership and employee values; leadership style; mission; reward systems; organisational structure; customer expectations; business size.

Must-know distinctions

Pair	Meaning	Impact
Positive vs negative	Trust, openness, customer focus vs blame, fear, corner-cutting	Engagement, productivity and retention vs turnover, mistakes, ethical risk
Strong vs weak	Values widely shared vs values differ between groups	Consistency and less supervision, but resistance to change vs inconsistency, but flexibility

Changing culture

• Reasons: new leader or owner, merger or takeover, poor performance, scandal, new customer expectations, a new strategy the old culture blocks.
• Problems: slow; resistance (strongest in strong cultures); key staff may leave; fails unless rewards, structure and leaders’ behaviour change too.

Quick self-test

1. A product has 12% market growth and a relative market share of 0.3. Which Boston Matrix category is it?
2. Revenue £450,000; cost of sales £279,000. Calculate the gross profit margin.
3. Operating profit £96,000; non-current liabilities £150,000; total equity £450,000. Calculate ROCE.
4. Using question 3’s data, calculate gearing.
5. Current assets £84,000 (including inventory £35,000); current liabilities £56,000. Calculate the current and acid test ratios.
6. Trade receivables £27,000; revenue £450,000. Calculate receivables days.
7. Cost of sales £279,000; opening inventory £30,000; closing inventory £32,000. Calculate inventory turnover.
8. Total dividends £2.52 million; 36 million shares; share price £1.75. Calculate dividend per share and dividend yield.
9. In question 3, the business takes a further £50,000 long-term loan to buy equipment. Calculate the new gearing.
10. State two non-financial factors that financial statements leave out.
11. Give one reason a strong culture might hinder a business.
12. A business with an autocratic leader and individual sales bonuses is likely to have what kind of culture?

Answers

1. Question mark (high growth, low share).
2. Gross profit = 450,000 − 279,000 = £171,000; margin = 171,000 ÷ 450,000 × 100 = 38%.
3. Capital employed = 150,000 + 450,000 = £600,000; ROCE = 96,000 ÷ 600,000 × 100 = 16%.
4. Gearing = 150,000 ÷ 600,000 × 100 = 25%.
5. Current ratio = 84,000 ÷ 56,000 = 1.5; acid test = (84,000 − 35,000) ÷ 56,000 = 0.875, about 0.88.
6. 27,000 ÷ 450,000 × 365 = 21.9 days.
7. Average inventory = (30,000 + 32,000) ÷ 2 = £31,000; turnover = 279,000 ÷ 31,000 = 9 times.
8. Dividend per share = 2,520,000 ÷ 36,000,000 = £0.07 (7p); yield = 0.07 ÷ 1.75 × 100 = 4%.
9. Non-current liabilities = £200,000; capital employed = £650,000; gearing = 200,000 ÷ 650,000 × 100 = 30.77%.
10. Any two: staff morale, brand reputation, environmental impact.
11. Shared values make staff resist new ways of working when the market changes.
12. A controlled, competitive culture: staff follow instructions and compete with each other rather than share ideas, because leadership style and reward systems both push that way.

Where marks are usually lost

• Using total assets, or equity alone, in place of capital employed for ROCE or gearing.
• Including inventory in the acid test ratio.
• Using cost of sales for receivables days or revenue for payables days.
• Using closing inventory when opening and closing figures are both given.
• Giving a percentage answer with no % sign, or a ratio in days with no unit.
• Stating “ROCE fell” without explaining why or what it means for the business in the case.
• Judging a single year’s ratio without a trend, benchmark or link to strategy.
• Recommending the closure of a loss-making profit centre without checking its contribution to overheads.
• Placing products in the Boston Matrix but not linking the result to a marketing decision.
• Listing culture factors without showing how each one shapes behaviour in the case business.

Official syllabus

OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards. Published by OxfordAQA.