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

Section 3.3.2, Analysis the existing internal position of a business, is taught here as set out 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. Every outcome below is International A-level only. Students still completing the older 9625 specification should revise from that document instead.

Shorter version: revision notes · Questions with answers: practice questions · Hub: OxfordAQA A-level Business · Progress tracker: course checklist · Spot weak areas: free diagnostics

Coverage of 3.3.2

Content heading	Skills expected	Stage
Analysing product portfolio	Use the Boston Matrix (dogs, cash cows, question marks, stars) and explain its significance for marketing planning	International A-level only
Assessing the performance of a business or parts of a business	Interpret and amend statements of financial position and income statements; calculate and interpret profitability, liquidity, gearing, efficiency and shareholder ratios; judge the value of ratio analysis; explain profit centres; use trends, benchmarks and context; explain the limits of financial reporting	International A-level only
Analysing business culture	Explain why culture matters, what shapes it, the impact of positive or negative and strong or weak cultures, and why changing it is attempted and difficult	International A-level only

Unit 3: Business analysis examines section 3.3 in a paper lasting 1 hour 45 minutes, carrying 80 marks and worth 30% of the International A-level. The paper uses two case studies, and the specification says the first question on each is a 4-mark calculation. The previous section, mission, objectives and SWOT, uses these ratios to spot strengths and weaknesses; this section goes deeper into reading the accounts themselves.

1. Analysing the product portfolio: the Boston Matrix

A product portfolio is the full range of products a business sells. The Boston Matrix places each product on two axes: market growth (how fast the whole market is expanding) and market share (usually measured relative to the largest rival, so a figure above 1 means the product leads its market).

	High market share	Low market share
High market growth	Star: earns well but needs heavy spending to keep up with the market	Question mark: uncertain future; needs cash to build share or should be dropped
Low market growth	Cash cow: strong, steady earnings with little investment needed	Dog: weak earnings in a static market

Significance for marketing planning. The matrix helps managers decide where marketing money goes:

• Build a promising question mark with promotion or price cuts, funded by cash cows.
• Hold stars so they become the next cash cows when their market slows.
• Harvest cash cows: keep spending low and take the cash.
• Divest dogs that drain management time, unless they support other products.

A balanced portfolio has enough cash cows to fund the stars and question marks that will earn the future profits.

Worked example: Wyndle Snacks

Product	Market growth (% a year)	Relative market share	Category
Salted Twists	1.5	2.2	Cash cow
Lentil Puffs	11	1.6	Star
Seaweed Crisps	14	0.5	Question mark
Crunch Rods	2.0	0.4	Dog

Using 5% growth and a relative share of 1 as the dividing lines, Wyndle has one product in each box. A sensible plan: use the cash from Salted Twists to fund promotion of Seaweed Crisps, keep investing in Lentil Puffs, and review whether Crunch Rods still earns a positive contribution.

Limitations. Defining “the market” changes the result; high share does not guarantee high profit; the matrix is a snapshot; and a dog may be worth keeping if customers buy it alongside other lines.

2. Assessing performance from the accounts

Reading and amending the statements

An income statement shows performance over a period. A statement of financial position shows what the business owns and owes at one date.

Worked example: Selsworth Kitchenware plc (£000)

Income statement	Year 1	Year 2
Revenue	6,000	7,200
Cost of sales	(3,600)	(4,680)
Gross profit	2,400	2,520
Operating expenses	(1,500)	(1,656)
Operating profit	900	864
Interest	(100)	(180)
Taxes	(160)	(124)
Net profit	640	560

Statement of financial position (year end)	Year 1	Year 2
Non-current assets	4,200	5,340
Inventory	500	800
Trade receivables	540	846
Cash	360	154
Current assets	1,400	1,800
Trade payables	(396)	(702)
Short-term borrowing	(304)	(298)
Current liabilities	(700)	(1,000)
Non-current liabilities	(1,000)	(2,000)
Net assets	3,900	4,140
Share capital	1,000	1,000
Retained earnings	2,900	3,140
Total equity	3,900	4,140

Net assets always equal total equity. Retained earnings rose by 240: net profit of 560 less dividends of 320. Selsworth has 4 million shares; the opening inventory for Year 1 was 400.

Amending a statement. Suppose an audit finds £120,000 of Year 2 inventory is obsolete and must be written off (ignore tax). Inventory falls to 680 and current assets to 1,680. The loss is charged to cost of sales, so gross profit falls to 2,400 and operating profit to 744. Retained earnings and total equity fall by 120 to 4,020, so capital employed falls to 6,020. Recalculate every ratio that uses these lines.

Ratio analysis

Capital employed = non-current liabilities + total equity: 4,900 in Year 1 and 6,140 in Year 2.

Ratio	Formula	Year 1	Year 2
Gross profit margin	100 × gross profit ÷ revenue	40%	35%
Operating profit margin	100 × operating profit ÷ revenue	15%	12%
Net profit margin	100 × net profit ÷ revenue	10.67%	7.78%
ROCE	operating profit ÷ capital employed × 100	18.37%	14.07%
Current ratio	current assets ÷ current liabilities	2.0	1.8
Acid test ratio	(current assets − inventory) ÷ current liabilities	1.29	1.0
Gearing	non-current liabilities ÷ capital employed × 100	20.41%	32.57%
Receivables days	trade receivables ÷ revenue × 365	32.9	42.9
Payables days	trade payables ÷ cost of sales × 365	40.2	54.8
Inventory turnover	cost of sales ÷ average inventory	8.0 times	7.2 times
Dividend per share	total dividends ÷ number of shares	7.5p	8p
Dividend yield	dividend per share ÷ share price × 100	3% (price £2.50)	5% (price £1.60)

Year 2 ROCE in full: 864 ÷ (2,000 + 4,140) × 100 = 864 ÷ 6,140 × 100 = 14.07%. Average inventory for Year 2 is (500 + 800) ÷ 2 = 650, so inventory turnover is 4,680 ÷ 650 = 7.2 times.

Interpretation. Revenue grew 20% but cost of sales grew 30%, so every margin fell. ROCE fell because capital employed rose by a quarter, mostly through new long-term borrowing, while operating profit did not rise. Gearing rose from about a fifth to about a third. Liquidity is weaker but still adequate. Customers now take ten days longer to pay; Selsworth is taking longer to pay suppliers, which supports cash but may strain relationships. The higher yield partly reflects a falling share price, which suggests investors are less confident.

After the inventory write-off, ROCE falls further to 744 ÷ 6,020 × 100 = 12.36% and the current ratio to 1.68, but the acid test ratio stays at 1.0 because inventory is excluded from it.

The value of ratio analysis

Ratios turn raw figures into comparable measures, show trends and help owners, lenders and investors judge performance and risk. But a ratio describes rather than explains, and one-off events can distort it.

Trends, benchmarking and context

• Trends: one year’s ratio means little; three to five years show direction.
• Benchmarking: compare with competitors or the industry average. A current ratio below 1 can be acceptable for a retailer that is paid in cash at once but buys from suppliers on credit.
• Business environment: a recession, rising interest rates or a new competitor can explain a fall.
• Objectives and strategy: Selsworth’s lower ROCE may be the expected first stage of an expansion strategy, with a new factory not yet at full output. A business chasing growth will accept lower margins for a while; one seeking returns for shareholders will not.

Profit centres

A profit centre is a part of a business (a branch, product line or division) for which both revenue and costs are measured, so its profit can be calculated.

Selsworth’s Year 2 revenue of 7,200 came from three profit centres:

£000	Shops	Online	Trade
Revenue	3,100	2,600	1,500
Direct costs	2,010	1,586	1,300
Contribution to overheads	1,090	1,014	200
Central overheads (20% of revenue)	620	520	300
Profit	470	494	(100)

Purpose and value: shows which parts perform well; motivates managers judged on their own results; guides decisions on where to invest or close.

Problems: overheads must be shared out and the method is arbitrary. The trade division “loses” 100 only after overheads; it still contributes 200, so closing it would cut Selsworth’s total profit unless those overheads also disappear. Centres may compete rather than cooperate.

Limitations of financial reporting

• Historic: the accounts show what has happened, not what will happen.
• No non-financial factors: they miss staff morale, brand reputation and environmental impact, all of which affect future performance.
• A statement of financial position shows one date and may not be typical of the year.

3. Analysing business culture

Business culture is the shared values, attitudes and ways of behaving in an organisation: “the way we do things here”.

Why it matters: culture shapes how staff treat customers, how quickly decisions are made, whether people take risks and whether they stay. It can help or block any strategy.

Factors influencing culture:

• leadership and employee values: what founders and staff believe matters
• leadership style: autocratic leaders encourage obedience; democratic leaders encourage involvement
• mission: a clear purpose that managers follow
• reward systems: bonuses for individual sales encourage competition; team rewards encourage cooperation
• organisational structure: tall structures tend to be cautious; flat ones more flexible
• customer expectations: customers who expect speed or safety push the culture that way
• business size: small firms are often informal; large firms more rule-based

Positive versus negative culture. A positive culture (trust, openness, customer focus) raises engagement, productivity and retention. A negative culture (blame, fear, cutting corners) raises labour turnover and the risk of unethical behaviour.

Strong versus weak culture. In a strong culture most staff share the same values, so behaviour is consistent and little supervision is needed; but a strong culture can resist necessary change. In a weak culture values differ across teams, giving inconsistent service but more openness to change.

Example. Quillmarsh Software grew from 12 to 300 staff. Its informal, risk-taking culture helped it launch products fast, but large clients now expect tight security and testing, a reason to change.

Reasons for changing culture: a new leader or owner, a merger, poor performance, new customer expectations, a scandal, or a new strategy that the old culture blocks.

Problems of changing culture: it takes years; staff resist, especially in strong cultures; key people may leave; new values must be backed by changed rewards, structure and leaders’ behaviour or nothing changes.

Common errors

• Using total assets instead of capital employed in ROCE.
• Leaving inventory in the acid test.
• Using closing inventory when the question gives opening and closing figures.
• Judging a ratio without a trend, benchmark or link to strategy.
• Recommending closure of a profit centre that still makes a positive contribution.

When you have worked through this, shorten it into recall with the revision notes, and check yourself on the practice questions. Profit margins, payables and receivables were introduced at AS in the finance study guide; AS marketing content sits in the AS marketing guide.

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.