The use of accounting data to enable strategic decision-making flashcards

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Strategic vs operational decisions?

Strategic: long-term direction (market entry, merger). Operational: day-to-day (scheduling, ordering).

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Accounting data for expansion?

Retained profit, cash, borrowing capacity, ROCE trends show if growth is affordable.

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Accounting data for divestment?

Loss-making segments, falling margins, negative contribution guide closure/sale.

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Segment analysis?

Split revenue and profit by product/region to see where to invest or cut.

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Limitation: historic?

Past results may not predict future — market disruption, new competitors.

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Limitation: non-financial?

Brand, culture, innovation not fully in accounts.

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Link to 6.2 strategy?

SWOT/Ansoff choices should be supported by financial feasibility.

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Link to 10.3 investment?

Capital projects need NPV plus strategic fit assessment.

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What is the strategic importance of the gearing ratio?

It measures the proportion of a company's capital that comes from debt. Strategically, high gearing indicates high financial risk, which may limit the ability to raise further debt for expansion or acquisitions. A low gearing ratio suggests financial stability and capacity for debt-funded growth.

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How does Return on Capital Employed (ROCE) inform corporate strategy?

ROCE shows how efficiently a business is generating profits from its long-term capital. A high or rising ROCE supports strategies of growth and reinvestment. A low ROCE may trigger strategic reviews, such as divesting underperforming assets or restructuring operations to improve efficiency.

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Link the Statement of Financial Position to strategic decision-making.

It provides a snapshot of assets, liabilities, and equity. Strategically, it's used to assess liquidity (for short-term survival), gearing (for long-term risk), and the value/age of non-current assets (informing investment needs). It is crucial for assessing financial health before major decisions like mergers.

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What is 'window dressing' and why is it a limitation for strategic analysis?

Window dressing is the legal manipulation of financial statements to present a more favourable picture of performance and position. It can mislead strategists by, for example, overstating liquidity or understating liabilities, leading to poor decisions based on inaccurate data.

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How can variance analysis be used for strategic control?

Variance analysis compares budgeted figures with actual results. For strategy, significant variances can signal that a strategic objective (e.g., cost leadership) is not being met. This allows management to take corrective action or even reconsider the viability of the strategy itself.