index numbers
Indicator if changes in prices and quantities. Its a speiclaised avg designed to measure a group of related variable overs X amount of
... [Show More] time.
Features of index numbers
Measures relative change over time
Quantitative expression- Offer a precise measurement of the quantitative change in the concerned variable.
Average- show changes in terms of average
Advantages of Index numbers
1.Measurement of change in the price level/ value for money.- Know the impact of the change in the value of money on different sections of society
2. Knowledge of change in standard of living- Helps to ascertain the living standards of people. Money income may be increased, increasing S.O.L (vice versa)
3. Adjustment in salaries and allowances- Cost of living index useful guide to the government and private enterprises to make adjustments in salaries of workers
4. Useful for foreign trade- imports and exports
5. Useful for business community
Disadvantages of index numbers
1. Not fully true- only indicate temporal changes in the variable
2. Cant compare internationally as diff countries have diff base index no.
3. Comparisons of variable changes over long periods of time make it more unreliable
Index numbers formula
Value in period
_______________________ x 100
Value in base period
the usefulness index no.s
Used for economic analysis RPI/CPI
RPI see if need to make any adjustments to wages
Compare changes over time w/ inflation
Makes value of changes clear
Market Analysis
the process of locating and describing potential customers so that business adopt a relevant marketing strategy to fulfill needs and wants
price elasticity of demand
a measure of the sensitivity of demand to changes in price
Formula PED
% change in quantity demanded / % change in price
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income
Formula for YED
% change in quantity demanded / % change in income
>1
elastic- change in price has a significant effect on demand
<1
inelastic- change in price has little effect on demand
Factors influencing elasticity of demand
The closeness of substitutes
The proportion of income spent on the good
The time elapsed since a price change
Knowing the price elasticity of demand is important in business because:
reduces risk and uncertainty
Knowledge of PED helps businesses forecast its sales and set prices
Knowing YED of a product helps a business respond to changing economic situations, allows to plan ahead
Helps develop a strategy and product portfolio
Sales Forecasting
A quantitative technique that attempts to estimate the level of sales a business expects to achieve, over a given time period.
Sales Forecasting Techniques
1. Judgments of the decision maker
2. Surveys of knowledgeable groups
3. Statistical methods
sales forecasting advantages
-Allows to predict sales
-Allows to estimate quantity and cost of the purchase of raw materials to determine production levels
-Predict finance needed
-Predict HRM needed
Disadvantages
-May predict wrong
-Only a prediction
extrapolation
the act of estimation by projecting known information.
Using past experience/ business data to predict future sales
Quantitative Sales Forecasting-Seasonal
• Based on analysis of historical data to predict future sales
• Seasonal Adjustments
o What appears to be a good forecast may turn out to be a poor one because of the failure to consider seasonal factors
o Collect sales figures for the past several years
o Next, sales for months of quarters are averaged across years to build a seasonal index
o The quarterly averages are then divided by mean sales for all quarters to give seasonal index number
o Once seasonal index numbers are developed for each time period, it is easy to adjust a set of sales data seasonally
o Actual sales, are simply divided by the appropriate index numbers to give a set of deseasonalized data then prepared using the deseasonalized figures
o Two truths to remember
• Seasonal adjustments are widely used in business
• Seasonal adjustments reduce forecasting errors
Quantitative sales forecasting-Time Series analysis
o Seasonal analysis
o Trend analysis- Data collected over no. years to determine a trend in sales
o Cycle analysis- Long term figures to examine the relationship b/e diff levels of demand and economic activity.
o Random factor analysis- Attempts to explain how unusual or extreme sales figures occur. Increase in sales caused by weather....
Advantages of Time series Analysis
+Helps plan ahead
+Helps financial plan w/ cash flow forecast
+Production planning, determine right level of labor, suppliers to meet higher/lower level of demand
+HR planning, right no. of staff to meet demand
+Identifies seasonal adjustments
+Reduces risk of unexpected surprises that may affect business' performance
Disadvantages of Time series Analysis
-Not easy to predict future sales
-Historical data is not a good indication of what may happen in the future
-Complicated sales forecasting methods can even get it wrong
-No forecast is 100%
-Less useful for long term forecasts
-Success isn't guaranteed
Quantitative sales forecasting-Market research data
o Surveys of consumer responses to make predictions on their responses
o Direct sales info- Sales team w/ business interact closely w/ customers. They may notice developing trends and spot market change, shifts in attitudes/preferences
o Test marketing- Testing consumer responses to products before full release of the product
+Allows negative responses to be changed
Qualitative research methods
Aim to understand the nature or meaning of experiences, which cannot be quantified into numbers
o Delphi Method
o Brainstorming
o Intuition
o Expert opinion
Delphi Method
forecasts developed by asking a panel of experts to individually and repeatedly respond to a series of questions
1. Develop a questionnaire tailored to the question
send to a panel of experts
2. Gather responses from the questionnaire and create a new questionnaire based on responses and send new questionnaire back to the panel of experts
3. Members of the panel independently rate and priorities ideas. Enables group of experts to arrive at a consensus forecast on a subject being discussed
Advantages of Delphi Method
+Flexible enough to be used in a variety of situations, can be applied to a range of problems
+Is a structured way formed by a group of experts
+Creates a record of the expert group's responses and ideal to be used when needed
+Participants have time to think ideas through leading to better quality responses
Disadvantages of Delphi Method
-Time consuming to coordinate and manage
-Assumes experts are willing to come to a consensus and allow their opinions to be altered by the views of other experts
-Monetary payments to the expert may be biased in result of the study (tailor the results to be positive)
3 point moving average
3 period found by-
Adding up every 3 pieces of Data, and dividing it by 3 to find the moving average
Find the top middle point
times Y y 3
minus (X+Z)
= M
Brainstorming
the process of getting a group to think of unlimited ways to vary a product or solve a problem
+cheap
+Fast
+No data gathering
-Gut feeling, need other forecasting techniques
expert opinion
recommendations of individuals who have expertise in a particular area that are sometimes the basis of a group's decision-making process
+Useful for gathering specialist insights into likely future patterns and trends
-Shouldn't be used as a standalone basis, make mistakes, wrongly forecast future demand
External factors affecting quantitative and qualitative sales forecasting
Economic factors- Unemployment levels
- Inflation affecting consumer spending
- Interest Rates
- Exchange Rates
Consumer factors- Change in taste and fashion
- Change w/market research
- Change in consumer spending
Competition factors- Can't control actions of competitors
Analysing financial performance
Financial accounts required analyse performance and include balance sheet, trading profit and loss (income statement) Businesses use ratio analysis to calculate and interpret performance indicators
Balance Sheet
a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.
Components of Balance Sheet
o Current assets- Own (stock, debtors, cash)
o Current Liabilities- Owe (Trade creditors bank overdrafts, suppliers trade credit= Pay later)
o Debtors- Owes you
o Creditors- Owe them
o Long term non current liabilities- Bank loans, mortgages, repaid over a year)
o Fixed, non current assets,- Buildings, machinery, retained profit- Used to produce output
Net assets formula
Assets - Liabilities
Difference b/e CA-CL
Balance sheet
FA
Ca
Cl
NCA
NA
Current ratio (measures liquidity)
ability of company to pay short-term debt-paying
CA/CL x 100 :1
Every £X a business owes in CA it owes £1 in CL
Higher than 1.5:1
+Meet demand
+Managing working capital effectively
Below 1.5:
-Meet one, but less only have half to pay next period
-Over borrowing
2:1
Too much money not being used productively
Acid Test Ratio (measures liquidity)
Measures a business' ability to meet short-term demands for cash more reliability than the current ratio
Current Assets - Stock / Current Liabilities :1
Ideal 1:1
Less than 1:1
-Not enough CA (-stock) to cover liabilities
Working Capital Management
Management of a firm's current balance of assets and liabilities; involves accounts payable and receivable, inventory and cash.
CA-CL
High working capital (WC)
+Business meets demand from creditors
+Positive WC enables a business to pay wages, salaries, overheads
Negative working capital
- Current liabilities (owe_ grater than current assets (own)
Liquidity
the ease with which an asset can be converted into cash
Liquidity Ratios
a group of ratios that reveal the ability of an establishment to meet its short-term obligations
Bad liquidity
- Unable to pay creditors
- Supplies/stock stopped
Gearing Ratio (measures liquidity
measures the extent to which the capital employed by a firm is financed from loan capital
Calculates the portion (%) of capital employed that is financed by long term liabilities
Long-term liabilities
----------------------- X 100 =%
Capital employed.
(LTL+SHF)
If gearing ratio exceeds 50%- Highly geared
-Funded mainly by loan capital
- Interest paid on debts reduces profits available to shareholders
-If interest rates increase will reduce profits to be reinvested/ paid to shareholders
Capital employed
The total value of capital used in the business
Return on capital employed (ROCE)
The profit of a business as a percentage of the total amount of money used to generate it.
Net profit before tax
---------------------- x100
LTL+ SHF
straight line depreciation
Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.
Depreciation formula
(cost - salvage value) / useful life
Window dressing
Action taken by the client shortly before the balance sheet date to improve the financial picture presented in the financial statements.
Why window dress?
o Improve share prices. If a business increases their prices to increase revenue and then profit. Investors would buy more shares
o Delaying payments intil after the balance sheet is sent of to make accounts look stronger.
o Selling off fixed assets will be lightly depreciated making the corporation look as if it was using only new equipment.
o Look more valuable to takeovers, increasing the price they get. Or deter takeovers
o Reduce tax bills
o Improve credit rating
o Fooling the bankers- To adhere to the loan criteria standards', institutions to match the high current ratio criteria (indicates the company has enough cash to and short term assets to pay interest charges
-Might cause cash crunch increasing risk of defaulting, bankruptcy and liquidation
Can go to jail- defrauding investors
White lies could corrode on ethical standards of a company's executives and spiral down into illegal practices eg. fraud--> prison
Non-financial performance measures
Statistics and data that are not financial in nature but can be used to assess an organizations performance such as the non-financial measures used in a balanced scorecard
non financial performance
Market share Total sales a firm has in the market
Sales target- sales important to businesses, generating profits, setting targets for future. Targeting increased use of existing customers
Productivity- Measure output against fixed input
Labor productivity- employees 10
----------------
make 30
in an hour each employee makes 3
Environmental impact- Business becomes more aware of the impact on the environment and try to minimise the impact by recycling, giving suppliers good deal, paying workers above minimum wage adopting CSR policy
Customer satisfaction measuring
Returning customers/ no. of complaints
Employee attitude surveys
Aims
Long-term plans of the business from which its corporate objectives are derived
objectives
Specific, short-term statements detailing how to achieve the organisation's goals.
Vision Statement
expresses what the organization should become, where it wants to go strategically in the medium to long-term
Should be a clear guide to senior management
Give a direction of where the business is going so staff can work towards getting there
Clear vision statement
Gives business clear identity and ethos
Helps setting of objectives and support business strategies
Commits resources to achieving the vision
Communicates to employees how they can contribute and improve employees engagement
Mission Statement
a statement of the organisation's purpose - what it wants to accomplish in the larger environment- Guides everyday operations and decision making of the business
clear mission statement
Gives clear view what the business is about
Helps customers understand ethics of the business
Helps ensure stakeholder are clear on the purpose so everyone is focused on the same goal
Some transparency for investors. Understand how their capital will be used
Helps w/ strategic planning
Main purpose
- Gives an organisation cohesiveness so all organisation from the chief executive office (CEO) to workers on the shop floor have a set of common aims. They know what the business stands for and is trying to achieve
Mission statement drawbacks
Tends to be quite vague
Express aspirations rather than reality
Some argue they're unrealistic, never achieved
Business Aims and Objectives
Aims are the goals a business wants to achieve. The objective are the practical steps to achieve the goals - usually SMART.
Business objectives
the stated, measurable targets of how to achieve business aims
Business objectives
the stated, measurable targets of how to achieve business goals
Corporate Strategy
The set of businesses, markets, or industries in which an organization competes and the distribution of resources among those entities.
Strategic Strategy
carefully planned in order to achieve a particular goal [Show Less]