Edexcel Business A Level Revision

Investment Appraisal -  The use of numerical techniques to predict the financial outcomes of potential capital investments. Average Rate of Return (ARR) -   looks at the  total accounting return for a project  to see if it meets the target return Business investment projects need to earn a satisfactory rate of return if they are to justify their allocation of scarce capital. FORMULA  - AVERAGE RATE OF RETURN (TOTAL NET CASH FLOW / NUMBER OF YEARS) / INITIAL INVESTMENT X 100 = ARR% Interpretation of ARR revolves around comparison with other projects and should take into account the level of risk and the period of time over which the return is forecast to take place. If the investment was funded by outside investments they would compare the ARR with potential returns on other investments as well as the potential risks. For example the least risky investment may be to place the money in a bank deposit account, but the ARR on such an investment might only be 2%. A

Investment Appraisal - The use of numerical techniques to predict the financial outcomes of potential capital investments. Payback - The length of time (payback period) required to recover the cost of an investment in a project. FORMULA  - PAYBACK NET CASH FLOW IN YEAR THE INITIAL INVESTMENT IS REPAID / 12 MONTHS = £?  REMAINING CASH TO BE PAID IN FINAL YEAR TO REACH THE REPAYMENT TOTAL / £? = DECIMAL = MONTHS A BUSINESS WANTS THE LOWEST PAYBACK TIME IN ORDER TO BECOME PROFITABLE QUICKER. Interpretarion of payback gives a prediction of when the investment will be paid back and more importantly the point at which it will start to  make a profit for the business. Businesses can use payback to consider a number of potential options and then choose the investment with the fastest payback. Alternatively, businesses may allow investment only if payback is within a maximum period of time, for example 24 months. Advantages Disadvantages Simple and

Organisations often need to adapt to their culture for reasons including takeovers or mergers, growth and changes in the market. Difficulties with changing the culture include staff loyalty to exisiting relationships, the failure to accept the need for change, insecurity, loss of power, loss of skills, break-up of work groups and different individual views of how the change should be managed.  Furthermore, there can be an alienation of suppliers, customers and other stakeholders.

The factors that influence the formation of corporate culture include: The founder of the business - For example the "Bill Gates way" or the "Alan Sugar way" may influence things years after the founder has left Size and development stage of the business - small businesses or start-ups may have a far more entrepreneurial culture than large multinationals. Leadership and management style Employee and management reward structures - For example, at John Lewis staff ('partners') all share in the business's profits The external environment, such as legal, economic or social factors - for example, at British Nuclear Fuels, which disposes of nuclear waste, the culture is based firmly on the very tight legal framework which governs how, where and when the company disposes of highly dangerous materials.

Role culture - A business where power depends on the person's status or role in within the business; normally businesses with a high level of detailed rules on how people should interact. Clear rules and procedures result in a clear hierarchy (Bureaucratic relationship) where the organisation functions based on each individuals role within a clearly defined structure. The organisation has a tall structure with long chains of command. Personal power is frowned upon, with allocation of work and responsibility more important than individuals personalities. Benefits include offering employees security and the opportunity to acquire specialist skills, and good employee performance yields appropriate pay and promotion rewards. Drawbacks include the culture being frustrating for ambitious employees and it is overly bureaucratic, which leads to slow-decision making. Power culture - Usually a strong culture in a business that comes from the center and concentrates power among a small nu

A strong culture - is one which is deeply embedded into the ways a business or organisation does things. With a strong culture, employees and management understand what is required of them and they will try to act in accordance with the core values. A weak culture - can arise when the core values are not clearly defined, communicated or widely accepted by those working for the organisation.  It can also occur if there is little alignment between the way things are done and the espoused values. This can lead to inconsistent behaviour of people in the organisation which in turn results in inconsistent customer experiences! Strong Culture Weak Culture Staff respond positively to culture values Little alignment with culture values Shared sense of responsibility towards vision, mission and objectives Employees have to be forced to perform duties Motivated and loyal workforce Greater management control and

Corporate culture - The values, beliefs and standards shared by people and groups within an organisation. These will impact on the way that people within the organisation interact with each other and with other stakeholders. "The way we do things around here" - Charles Handy The culture of a business is reflected in many ways, e.g; How employees are recruited - the cultural factors that make one applicant more suitable than another  The way that visitors and guests are looked after How the working space is organised The degree of delegation and individual responsibility (effects decision making) How long new employees stay in a business (retention) How contracts are negotiated and agreed The personality and style of the sales force The responsiveness of communication (impacts staff motivation) The methods used for communication (impacts staff motivation) How staff address each other (first name, last name etc) The speed in which decisions are made (effects de

Evidence-based (scientific-based) decision making - where a business makes strategic decisions after analysing and evaluating relevant evidence. Businesses will make full use of quantitative sales forecasting, decision trees, investment appraisals and other methods that help quantify any decision being made. Subjective decision making - is less structured and more about the experience and intuition of the business's owners and managers. Decisions from this perspective may require a more entrepreneurial, risk-taking managerial approach. Subjective Evidence-Based Based on intuition, hunch, gut feeling and experience Based on evidence and data Quicker decisions can be made Outcomes can be simulated or tested in advance May be necessary in a fast moving environment or to avoid missing opportunities Decisions are objective Dominant leaders may push decisions forward, leading to a

Short-termism - where a business prioritises its short term reward rather than long term rewards such as investment in research and development, staff or technology. Long-termism -  where a business is focused on sustained growth through building long term relationships with suppliers and other external stakeholders, significant investment in research and development, perhaps at the expense of shareholder returns/dividends in the short term, and meeting customer needs despite short term needs. SHORT-TERMISM Management who can be described as "SHORT-TERMIST" tend to emphasise certain performance measures, such as: Share price Revenue growth Gross & operating profit Unit costs & productivity Return on capital employed As a possible consequence, other more longer-term measures of business performance might become less important, such as: Market share Quality Innovation Brand reputation Development of employee skills & experience Social responsi