7.2 Assessing the Internal Position of a Business (AQA A Level Business): Flashcards

One-off gains, accounting adjustments, or non-cash/volatile items such as exchange-rate gains.

Extraordinary items are one-off and outside normal trading (e.g. relocating HQ); exceptional items are unusual one-offs but part of normal trading (e.g. a very large order).

The trading account deducts cost of sales from sales revenue to give gross profit.

False.

A one-off gain is poor-quality profit, because it cannot be repeated in future years.

False.

That is the balance sheet; the income statement covers a period of time (usually a year).

The balance sheet is a snapshot of a business's financial position at a point in time, showing what it owns, owes and how it is funded.

Non-current assets are items owned by a business for the long term, such as machinery and buildings.

Current assets can be converted to cash quickly (within 12 months) — inventory, trade receivables and cash.

Total assets = non-current assets + current assets.

Current liabilities are money owed due within 12 months — e.g. trade payables and overdrafts.

Non-current liabilities are money owed not due for at least 12 months — e.g. a loan or mortgage.

Current assets − current liabilities.

(Non-current assets + current assets) − (current liabilities + non-current liabilities).

The business can cover its short-term bills from its short-term assets.

A capital-intensive business, common in primary and secondary sector firms.

Pay dividends, fund projects without borrowing, and absorb unexpected losses.

Window dressing is using short-term techniques to make financial statements look stronger than they really are.

Timing of transactions, reclassifying items, off-balance-sheet financing, or one-off gains/asset revaluations.

They focus on liquidity to judge whether the business can pay invoices on time.

The balance sheet provides a snapshot of a business's financial position at a given point in time.

False.

Those are current liabilities; non-current liabilities are due after at least 12 months.

Ratio analysis involves extracting information from financial accounts to assess business performance.

RoCE measures how effectively a business uses the capital invested in it to generate profit.

RoCE = (operating profit ÷ capital employed) × 100.

(2.2 ÷ 13.9) × 100 = 16%.

Total assets − current liabilities.

The higher the better — a RoCE of at least 20% usually signals a good financial position.

The current ratio is a liquidity measure showing how many £s of current assets cover each £1 of short-term debt.

Current ratio = current assets ÷ current liabilities (expressed as ?:1).

£15,545 ÷ £5,060 = 3.07:1.

The gearing ratio shows the proportion of capital employed funded by non-current liabilities (long-term borrowing), as a %.

Gearing = (non-current liabilities ÷ capital employed) × 100.

(9.6 ÷ 43.3) × 100 = 22%.

One where more than 50% of capital employed is made up of long-term loans.

High interest payments reduce dividends and retained profit, and the business is seen as risky for further investment or loans.

Issue more shares, retain more profit, or repay loans.

RoCE is also known as the primary ratio.

True.

A higher RoCE shows the business is profitable and using its capital efficiently.

False.

A highly-geared business does; low-geared means less than 50% of capital employed is long-term loans.

How well a business manages its resources and operations — helping to improve performance and cash flow.

Payables days, receivables days and inventory turnover.

Payables days measures the average number of days a business takes to pay invoices owed to suppliers.

Payables days = (payables × 365) ÷ cost of sales.

(28,500 × 365) ÷ 112,400 = 92.55 days.

High/increasing — it shows extended credit from suppliers and improves cash flow (but paying late risks supplier relationships).

Receivables days measures the average number of days a business takes to collect money from its debtors.

Receivables days = (receivables × 365) ÷ sales revenue.

(31,200 × 365) ÷ 241,200 = 47.21 days.

Low/reducing — it shows efficient debt collection and improves cash flow.

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

Inventory turnover = cost of sales ÷ average inventory.

£112,400 ÷ £36,800 = 3.05 times.

Inventory turnover (days) = (average inventory × 365) ÷ cost of sales.

It varies by business — jewellers sell few high-price items (low turnover); supermarkets sell high volumes (high turnover).

Advantage: simple and easy to compare; disadvantage: it ignores qualitative factors and uses historical data.

If receivables days are greater than payables days, the business waits longer to collect cash than to pay its suppliers.

False.

Taking longer than agreed to pay can damage supplier relationships and the business's creditworthiness.

To assess how well a business is performing — analysed over time and compared with similar firms.

It lowers unit costs (fixed costs spread over more units), letting the business lower prices to compete.

That training, motivation techniques or new technology is working — encouraging further investment.

The defect rate is the proportion of output judged to be substandard in a period, shown as a %.

Defect rate = (number of defective items ÷ total output) × 100.

(213 ÷ 14,220) × 100 = 1.50%.

Returns rate = (number of returned items ÷ total sales) × 100.

Wastage rate = (cost of wasted materials ÷ total cost of sales) × 100.

To avoid lost revenue and protect reputation (also to avoid legal issues and refund/processing costs).

Capacity utilisation measures how effectively a business uses its assets — comparing current output to maximum possible output.

It spreads fixed costs over more units, lowering the unit cost and raising profit margins.

Equipment breakdowns and defects can increase if machinery is pushed too hard.

Low capacity utilisation may reflect weak demand, not poor operations; it can also overlook staff burnout and depends on data accuracy.

By the volume of repeat sales, e.g. through loyalty schemes like Tesco's Clubcard.

The defect rate is the proportion of output judged to be substandard in a given period.

False.

It may be due to weak customer demand rather than poor operations, risking misplaced blame.

Labour turnover, absenteeism and labour cost per unit (also labour retention, average wage and accident rate).

(Number of staff leaving ÷ total number of staff) × 100.

(Number of staff remaining ÷ total number of staff) × 100.

(Number of staff absent ÷ total number of employees) × 100.

Total labour costs ÷ total output.

Total labour costs ÷ total number of employees.

(Number of workplace accidents ÷ total output) × 100.

Absenteeism is the proportion of staff absent from work during a specific period of time.

A committed, experienced team — often linked to high productivity and morale.

It reveals workforce stability, helps manage costs, and highlights health and safety performance.

It masks root causes (why people leave), can ignore output quality, and suffers time lags.

By the time absenteeism or accident figures rise, morale or safety may already be poor.

Labour retention measures the proportion of employees remaining with a business during a period.

False.

It could mean underinvestment in skilled staff, risking defects or poor service quality.

True.

People's opinions, attitudes and motivations are difficult to capture in quantitative terms.

The strengths and weaknesses of a business — analysed over time and compared with similar firms.

Sales/revenue data, web/digital analytics and market research surveys (also customer purchase data, competitor benchmarking and social-media listening).

Website traffic, click rates, bounce rates, conversion rates and email metrics.

Poor usability — visitors leaving before browsing, possibly due to slow load times or poor design.

Competitor benchmarking compares a business against competitors' pricing, promotions, product ranges and positioning.

Tracking public opinion and emerging trends through online mentions, particularly on social media.

It provides data-driven insights, identifies strengths/weaknesses, and enables benchmarking and trend-spotting.

Data quality issues, it lacks context (doesn't explain motivations), and it is resource intensive/expensive.

Data alone don't explain customer motivations, brand perception or the wider market forces behind the numbers.

Marketing data can be compared over time or against competitors to spot emerging opportunities or threats.

False.

It lacks context — it does not explain customer motivations or brand perception.

True.

Marketing data is resource intensive and insights can be outdated by the time they're ready, especially in fast-moving markets.

Core competencies are the capabilities critical for a business to achieve competitive advantage by delivering real value to customers.

Collective learning (knowledge, patents, know-how) and technical skills (production skills, unique processes and technology).

It must provide broad market access, create customer value and be difficult to imitate.

The competency applies across a range of products, services or markets, not just one niche.

It directly improves something customers care about — performance, reliability, prestige or cost savings.

If rivals can copy it quickly or cheaply, the business loses its advantage.

Sustainable differentiation (also cost efficiency/scale, easier market expansion and continuous innovation).

Loss of skills through outsourcing (also becoming outdated, high initial cost and inflexibility).

Paying others for key tasks can mean losing in-house know-how — e.g. Boeing struggled with 787 Dreamliner quality issues.

To be a core competency, a strength must be difficult for rivals to imitate.

False.

It must provide broad market access, create customer value and be difficult to imitate.

Focusing on a few key figures each quarter or year to keep investors happy, often at the expense of long-term goals.

Earnings per share, quarterly revenue growth and dividend payout.

How much profit each share earns in a period — a quick gauge of profitability.

The % increase or decrease in sales compared with the same quarter last year.

The share of profits returned to shareholders as dividends.

Sustainability, customer satisfaction and R&D investment (also reputation, employee engagement and profit quality).

A company's environmental and social performance — emissions, renewable energy use and responsible sourcing.

Engaged workforces are more productive and innovative, and more likely to stay with the business.

How much a business is preparing new products, services or processes for the future.

It can divert resources away from long-term innovation, sustainability or growing market share.

Earnings per share shows how much profit each share earns in a given period.

False.

Dividend payout is a short-term performance measure.

True.

R&D investment and sustainability are both long-term performance measures.

A model measuring business performance across three areas — people, profit and planet.

People (social), profit (financial) and planet (environmental).

Only measuring people, profit and planet considers the full costs of a business's activities, improving sustainability.

It is hard to measure fairly (also conflicting goals, greenwashing risk, complexity/cost, and it is not fully integrated).

Highlighting small eco-projects (e.g. tree-planting) while continuing harmful practices such as high emissions.

A tool measuring performance across four perspectives so profit does not dominate decision-making.

Financial, customer, internal processes and learning and growth.

Five elements: stakeholder satisfaction, strategies, processes, capabilities and stakeholder contributions.

Guidelines for reporting economic, environmental and social impacts — creating transparent, comparable sustainability reports.

Improving social/environmental outcomes (e.g. paying farmers more) can cut into profits, with no guidance on which wins.

Elkington's Triple Bottom Line measures people, planet and profit.

False.

It uses four perspectives — financial, customer, internal processes, and learning and growth — so profit doesn't dominate.

True.

There is no standard way to count 'people' or 'planet' metrics, making comparisons unfair.