7.1 Mission, corporate objectives & strategies
Mission statements and objectives
Definition of mission statements: vision of the business
Advantages
– helps decision making because everyone understands the focus and
direction
– can be motivational
– provides a measure of success for the business
Disadvantages
– can be meaningless unless thoroughly understood or clearly
expressed
**MISSION STATEMENTS —> CORPORATE OBJECTIVES —> STRATEGIES —
> FUNCTIONAL STRATEGIES —> DAY-TO-DAY TACTICS**
Mission statement / Aims / Values / Visions / Mission vision /
Corporate aims
– qualitative description about the organisation
○ so stakeholders understand its intent
Corporate objectives / Business objectives
– define overall objectives of the business
○ e.g. profit maximisation, revenue maximisation, growth, survival,
market share, cash flow, corporate image… etc.
– driven by mission statement and drives functional objectives
– leads to strategies that need to be SMART (specific, measurable,
achievable, realistic, timely)
Functional objectives / Departmental objectives
– define objectives of each department (marketing, operations,
marketing, finance)
– driven by corporate objectives
7.2 Assessing internal performance: financial ratios
Income statements
Definition:
, – a financial document that shows an overview of how much profit is
earned
Components of an income statement:
– Sales Revenue: money made from sales
– Cost of sales: direct costs / variable costs (e.g. inventory)
– Gross Profit = Sales Revenue - Cost of sales
– Operating expenses: Indirect costs / fixed costs (e.g. rent, wages)
– Operating profit = Gross Profit - Operating expenses
– Financing costs: interest on loans
– Profit before tax = Operating profit - Financing costs
– Tax: corporation tax
– Profit after tax = Profit before tax - tax
– Dividends: payment towards shareholders
– Profit for the year / retained profit = Profit after tax - Dividends
Income Statement £m
Sales Revenue 18
Cost of sales 5
Gross profit** 13
Operating expenses 4
Operating profit** 9
Financing costs 2
Profit before tax 7
Tax 1
Profit after tax 6
Dividends 1
Profit for the year / retained 5
**more likely to appear in exam questions
Balance sheet
Definition:
– a financial statement that shows a business’s financial position at a
specific point in time
Components of a balance sheet:
– Assets: things a business owns
○ Non-current assets: owns for a long period, i.e. longer than a year
(e.g. buildings, machinery..)
○ Current assets: owns for a short period of time, i.e. less than a
year (e.g. inventory, cash, receivables)
, – Liability: things a business owes
○ Non-current liabilities: long-term liabilities, i.e. longer than a year
(e.g. loans)
○ Current liabilities: short-term liabilities, i.e. shorter than a year
(e.g. payables, overdrafts)
– Net assets = Total Assets - Total Liabilities
– Equity: money to finance the business (typically from share capital),
net worth of a business
Balance sheet £m
Non-current assets £100m
Current assets £50m
Non-current liabilities £20m
Current liabilities £10m
Net Assets £120m
Equity £120m
Ratio analysis
Current ratio
– shows the liquidity of a business: the ability to cover its current
liabilities
– a good ratio: above 1, ideally above 1.5
– refers to balance sheet
Formulae: Current Assets / Current Liabilities
Acid Test Ratio (out of spec)
-shows liquidity
-refers to balance sheet
-could be argued more realistic than current ratio
Formulae: Cash / Current Liabilities
Return on Capital Employed (ROCE)
– shows profitability of a business
– a good rate: anything above the interest rate
– refers to income statement and balance sheet
Formulae: { Operating profit / (Equity + Non-current liabilities) } x100%
= (Operating profit / capital employed) x100%
Gearing
– shows where the business gets its money from, and how dependent is
Mission statements and objectives
Definition of mission statements: vision of the business
Advantages
– helps decision making because everyone understands the focus and
direction
– can be motivational
– provides a measure of success for the business
Disadvantages
– can be meaningless unless thoroughly understood or clearly
expressed
**MISSION STATEMENTS —> CORPORATE OBJECTIVES —> STRATEGIES —
> FUNCTIONAL STRATEGIES —> DAY-TO-DAY TACTICS**
Mission statement / Aims / Values / Visions / Mission vision /
Corporate aims
– qualitative description about the organisation
○ so stakeholders understand its intent
Corporate objectives / Business objectives
– define overall objectives of the business
○ e.g. profit maximisation, revenue maximisation, growth, survival,
market share, cash flow, corporate image… etc.
– driven by mission statement and drives functional objectives
– leads to strategies that need to be SMART (specific, measurable,
achievable, realistic, timely)
Functional objectives / Departmental objectives
– define objectives of each department (marketing, operations,
marketing, finance)
– driven by corporate objectives
7.2 Assessing internal performance: financial ratios
Income statements
Definition:
, – a financial document that shows an overview of how much profit is
earned
Components of an income statement:
– Sales Revenue: money made from sales
– Cost of sales: direct costs / variable costs (e.g. inventory)
– Gross Profit = Sales Revenue - Cost of sales
– Operating expenses: Indirect costs / fixed costs (e.g. rent, wages)
– Operating profit = Gross Profit - Operating expenses
– Financing costs: interest on loans
– Profit before tax = Operating profit - Financing costs
– Tax: corporation tax
– Profit after tax = Profit before tax - tax
– Dividends: payment towards shareholders
– Profit for the year / retained profit = Profit after tax - Dividends
Income Statement £m
Sales Revenue 18
Cost of sales 5
Gross profit** 13
Operating expenses 4
Operating profit** 9
Financing costs 2
Profit before tax 7
Tax 1
Profit after tax 6
Dividends 1
Profit for the year / retained 5
**more likely to appear in exam questions
Balance sheet
Definition:
– a financial statement that shows a business’s financial position at a
specific point in time
Components of a balance sheet:
– Assets: things a business owns
○ Non-current assets: owns for a long period, i.e. longer than a year
(e.g. buildings, machinery..)
○ Current assets: owns for a short period of time, i.e. less than a
year (e.g. inventory, cash, receivables)
, – Liability: things a business owes
○ Non-current liabilities: long-term liabilities, i.e. longer than a year
(e.g. loans)
○ Current liabilities: short-term liabilities, i.e. shorter than a year
(e.g. payables, overdrafts)
– Net assets = Total Assets - Total Liabilities
– Equity: money to finance the business (typically from share capital),
net worth of a business
Balance sheet £m
Non-current assets £100m
Current assets £50m
Non-current liabilities £20m
Current liabilities £10m
Net Assets £120m
Equity £120m
Ratio analysis
Current ratio
– shows the liquidity of a business: the ability to cover its current
liabilities
– a good ratio: above 1, ideally above 1.5
– refers to balance sheet
Formulae: Current Assets / Current Liabilities
Acid Test Ratio (out of spec)
-shows liquidity
-refers to balance sheet
-could be argued more realistic than current ratio
Formulae: Cash / Current Liabilities
Return on Capital Employed (ROCE)
– shows profitability of a business
– a good rate: anything above the interest rate
– refers to income statement and balance sheet
Formulae: { Operating profit / (Equity + Non-current liabilities) } x100%
= (Operating profit / capital employed) x100%
Gearing
– shows where the business gets its money from, and how dependent is
