State the formula for calculating gearing.

Gearing = (Non-current Liabilities ÷ (Total Equity + Non-current Liabilities)) × 100.

Calculate the gearing when non-current liabilities = £700,000, total equity = £2,000,000.

Gearing = (700 ÷ (2000 + 700)) × 100 = 25.9 %.

Why does high gearing increase financial risk during economic downturns?

Because the company has higher fixed interest obligations that must be paid regardless of trading conditions, increasing the risk of financial distress when profits fall.

CCEA A-Level Business 3210

Enterprise and Entrepreneurship

Topic overview Business enterprise and the four factors of production The entrepreneur: motives and characteristics

The Central Purpose of Business Activity

Topic overview Adding value, and cost versus differentiation advantage How value is added, and how competitive advantage is achieved

Forms of Business Ownership

Topic overview Sole traders, partnerships and limited companies Franchises, the third sector, and the divorce of ownership from control Sole traders and partnerships Limited companies and franchises Social enterprise, liability, and business use of social media

Stakeholder Groups

Topic overview The stakeholder groups and what each wants Internal and external stakeholders, and managing conflict between them Stakeholders and social media

Markets and Market Forces

Topic overview Types of market, and mass versus niche Demand in each market, and the effect of market features on business Types of market and market share reviewed Demand and supply curves, and what shifts demand What shifts supply, and shifts versus movements Demand and supply

Quality Management

Topic overview What is quality?Total quality management, quality assurance and quality control defined The advantages and disadvantages of TQM The advantages and disadvantages of quality assurance and quality control ISO 9000 certification and the quality policy Quality control and quality assurance reviewed TQM, control and assurance compared The approaches to quality, and the case for and against TQM Quality control and quality assurance weighed ISO 9000 certification, and how quality is measured Quality as a dimension of competitiveness

Productivity and Investment

Topic overview The methods of production, and what determines productivity Innovation, research and development, and the need for investment Production methods, and what determines productivity Innovation, research and development, and organisational design

Organisational Design

Topic overview Hierarchy, span of control, chain of command and delegation Centralised, decentralised, tall, flat and matrix structures Centralisation versus decentralisation, delayering, and the effects of design Centralisation and decentralisation weighed Tall and flat structures weighed Outsourcing Centralisation, structure and outsourcing

Investing in People

Topic overview Succession planning, skills audits and the factors behind people investment The benefits and drawbacks of investing in people Methods of recruitment and selection Training and appraisal methods Online recruitment and selection Online training and appraisal Induction training: content, benefits and drawbacks On-the-job training: methods, advantages and drawbacks Off-the-job training: methods, advantages and drawbacks Continuing professional development Choosing a training method Internal and external methods of recruitment Internal versus external recruitment weighed The stages of selection, and the methods used Psychometric testing: what it measures and what it misses Psychometric testing The purpose of appraisal, and its benefits and drawbacks Technology in the appraisal process Online recruitment and selection technology Online training and appraisal technology The benefits and drawbacks of online HR processes

Motivation

Topic overview Taylor's scientific management and Maslow's hierarchy Herzberg's two-factor theory, and the limits of each theory Taylor and Maslow reviewed Herzberg's hygiene factors and motivators in detail Monetary and non-monetary methods of motivation Leadership styles, and choosing a method of motivation The monetary methods of payment The monetary methods weighed, and calculating commission Job design, empowerment, team working and flexible working Recognition and development, and how non-monetary methods link to theory

Principles of Management and Leadership

Topic overview The four leadership styles described How each style affects motivation Management versus leadership, and choosing a style The styles and their motivational effects reviewed Management, leadership and style selection reviewed

Market Size, Share and Growth

Topic overview Measuring market share, market growth and market size What a high share brings, and what each formula term means

The Degree of Competition in a Market

Topic overview The four market structures What determines the degree of competition

Market Research

Topic overview Reasons for market research The primary research methods, and primary versus secondary data Questionnaires, interviews and observation weighed Focus groups and consumer panels weighed Test markets, loyalty cards and the survey methods Sampling Qualitative and quantitative research

The Marketing Mix

Topic overview The seven elements, product, and the pricing strategies Promotion and place People, processes, physical environment, and aligning the mix

Elasticity of Demand

Topic overview Price and income elasticity defined, and the effect on revenue Calculating and interpreting price elasticity, and what determines it Income elasticity, cross elasticity, and the limits of elasticity values

The Product Life Cycle

Topic overview The four stages of the product life cycle Extension strategies, portfolio balance, and the limits of the model

Market Planning and Strategy

Topic overview SWOT analysis in the marketing plan Marketing plan Demographic and geographic segmentation Psychographic and behavioural segmentation The benefits and limits of segmentation, and what makes a segment usable

E-Business and E-Commerce

Topic overview E-business, digital advertising, market research and sales channels Social media, mobile marketing, and the benefits and limits of e-business E-business channels and mobile marketing reviewed The benefits and limitations of e-business, and social media marketing

Sources of Finance

Topic overview Internal and external finance, and debt versus equity The individual sources of finance, and their advantages and limits

Break-Even Analysis

Topic overview The break-even chart, contribution and the margin of safety How cost and price changes move break-even, and target profit The uses and limitations of break-even analysis

Cash Flow

Topic overview Difference between cash and profit Cash flow problems, the working capital cycle and credit control Improving cash flow, and the long-term cost of each method

Cash Flow Forecasts

Topic overview The cash inflows and outflows of a forecast Net cash flow, closing balance, and the uses and limits of a forecast

Budgeting

Topic overview What a budget does, and fixed versus flexible budgets Favourable and adverse variances calculated Investigating variances and management by exception Preparing and using a flexed budget

Financial Statements

Topic overview The income statement and the statement of financial position Calculating and interpreting the ratios, and the limits of final accounts Current and non-current assets and liabilities

Business Objectives

Topic overview Mission statements, and the influences on business objectives Conflicting objectives and how they are managed Factors influencing business objectives Short-term and long-term objectives Conflict

Organisational Culture

Topic overview What organisational culture is, and what it influences Strong and weak cultures, what shapes them, and their effect on performance Handy's four types of organisational culture Hofstede's Multi-Focus Model and its six dimensions Comparing Handy and Hofstede Handy's culture types reviewed Hofstede's dimensions reviewed, and the strengths of each model The factors that shape organisational culture Why culture resists change, and how it is changed Mergers, crises, leadership and structure as cultural forces Size, workforce and external pressures on culture Changing organisational culture reviewed Why culture is changed, and the methods used Resistance to cultural change and how it is overcome Barriers to change, measuring success, and the pace of change Reasons for change and resistance reviewed Methods, barriers and the pace of change reviewed

Stakeholder Objectives

Topic overview Stakeholder groups and their objectives Conflicting objectives and stakeholder influence Managing conflict, and the shareholder versus stakeholder approach Stakeholder objectives reviewed What gives a stakeholder power Compromise, prioritisation and corporate social responsibility Power, legitimacy and urgency Consultation, incentives and stakeholder mapping

Communication

Topic overview How technology has changed business communication Digital channels and their drawbacks Barriers to effective communication Choosing a communication channel The positive and negative impacts of technology Barriers and channel choice reviewed The impact of technology reviewed The types of barrier to effective communication How technology helps and hinders communication Physical, semantic, psychological and organisational barriers in detail The drawbacks of electronic communication

Economies and Diseconomies of Scale

Topic overview Internal and external economies of scale distinguished The types of internal economy of scale Diseconomies of scale and minimum efficient scale Growth, competitive advantage and its problems Internal and external economies reviewed Diseconomies and minimum efficient scale reviewed Sources of economies and diseconomies, and the risks of growth

Business Strategy and Planning

Topic overview Business plan Analyse the current position: SWOT analysis The six PESTEL categories How PESTEL is used, and its limitations The Ansoff matrix: penetration, market development and product development Diversification, choosing a strategy, and the limits of the matrix The Boston matrix axes, stars and cash cows Question marks, dogs, portfolio balance and the limits of the matrix Porter's generic strategies and their risks Porter reviewed, and Bowman's Strategy Clock The Balanced Scorecard, the Triple Bottom Line and KPIs Decision trees, expected value, and their limitations Bowman's Strategy Clock Kaplan and Norton's Balanced Scorecard model Elkington's Triple Bottom Line Key Performance Indicators (KPIs)

Decision Tree Analysis

Topic overview Drawing a decision tree and calculating expected value The uses and limitations of decision tree analysis

Risk and Uncertainty

Topic overview Risk, uncertainty, the risk management process and the four strategies Contingency planning: purpose, benefits and drawbacks Types of risk, and the balance in managing them The four risk strategies applied The risk management process and the sources of risk reviewed Contingency planning reviewed

Company Accounts

Topic overview Cash versus profit, and how accounts are compared Return on capital employed, and the limits of published accounts Profitability and liquidity ratios from published accounts Gearing, earnings per share, and the limits of ratio analysis Cash, profit and the ratio formulas reviewed Classifying the ratios, and what published accounts cannot show

Ratio Analysis

Topic overview Profitability and liquidity ratios calculated Gearing, earnings per share and return on equity calculated The three families of ratio, and how ratios are compared The strengths and limitations of ratio analysis The ratio formulas and what each term means

Investment Appraisal

Topic overview The payback period: method, advantages and limitations Net present value: method, advantages and limitations Qualitative factors and the cost of capital Calculating the payback period in practice Discounting and net present value in practice Qualitative factors in investment decisions Payback and net present value compared Qualitative judgement and the appraisal formulae Financing strategic decisions

The Macroeconomic Framework

Topic overview Role of enterprise in resource allocation Mixed economy The four phases of the business cycle Defining recession, and the role of business confidence Importance of business confidence

Government Policies

Topic overview Government policy objectives and the conflicts between them Types of policy and how businesses respond Direct and indirect taxation as policy instruments Government expenditure and interest rates The exchange rate as a policy instrument, and the limits of policy The effects of fiscal, monetary, exchange rate and supply-side policy Employment, environmental and trade policy, and why the impact varies How government policy affects a business, and the counter-strategies available Relocation, lobbying, diversification and pricing, and choosing between them

Globalisation

Topic overview What makes a business global, and the drivers of globalisation Global business strategies and the Bartlett and Ghoshal model Entering global markets, and why businesses trade globally The opportunities and threats of globalisation Global marketing and the factors to consider Trade regulations and export assistance Analysing global business data Transport, communication and the liberalisation of trade and capital Why multinationals expand, and where they locate Foreign direct investment, and its effect on the host country The benefits and risks of FDI to the investing firm, and the global strategies Foreign direct investment Franchising and joint ventures as entry methods Licensing and direct investment as entry methods Reasons for trading globally Impact of trading globally The opportunities of global trade, and what e-business adds The threats of global trade, and judging whether to enter a market Standardisation versus adaptation, and the differences that force adaptation Global branding, glocalisation, distribution, pricing and ethics Tariffs, quotas, embargoes, subsidies and non-tariff barriers Exchange rates, customs rules, and the bodies that liberalise trade Trade promotion organisations and export finance Anti-dumping duties, compliance costs, and judging trade support Global business data Globalisation and global business strategies Methods of entering global markets Why businesses trade globally, and the effects Global marketing, and what varies between markets Trade regulation, assistance and analysing global data

Business Ethics and Organisational Culture

Topic overview Business ethics and ethical responsibility Ethical codes and ethics as competitive advantage Sustainable business activity and greenwashing Ethics, culture and sustainability reviewed Carroll's CSR pyramid

Sustainability

Topic overview Sustainable business activity: what it is, and its benefits and costs Why businesses become sustainable, and how government encourages it The triple bottom line, and stakeholder pressure for sustainability The positive and negative impacts of sustainability reviewed Sustainable development, greenwashing, and judging a sustainability claim

Corporate Social Responsibility

Topic overview Carroll's CSR pyramid and its four levels Applying and evaluating Carroll's pyramid

The Influence of Stakeholder Groups

Topic overview Stakeholder groups and conflicting outcomes How decisions affect employees and shareholders How decisions affect customers, suppliers and local communities Stakeholder mapping, trade-offs and ethical considerations Pressure group tactics, and internal versus external stakeholders Stakeholder priorities and where they conflict One decision, many stakeholders Stakeholder groups and organisational structure

Organisational Structures

Topic overview Chain of command and span of control De-layering, and tall versus flat structures Chain of command Narrow and wide spans of control weighed De-layering, and what determines the ideal span De-layering Chain of command, span of control and de-layering

Monopolies, Mergers, Takeovers and Restrictive Practices

Topic overview Monopoly power: causes, advantages and disadvantages Mergers, integration and takeovers Restrictive practices and the regulators Market structure and business strategy Monopoly and integration reviewed The regulators reviewed Market structure and its effect on consumers

Change Management

Topic overview Types of change and information as a strategic resource Lewin's force field analysis Pressure groups and legislation as causes of change Market growth, decline, diversification and modernisation Resistance to change and why it arises Kotter and Schlesinger's six strategies Choosing a strategy, and why businesses must change Types of change, Lewin's model and information management reviewed Causes of change and resistance to change reviewed Kotter and Schlesinger's strategies reviewed

Ratio Analysis

Gearing, earnings per share and return on equity calculated

3 things to know
Unit A2 1

Overview

What gearing measures and how it is calculated, why a highly geared firm is exposed in a downturn and rewarded in a boom, and what earnings per share and return on equity tell a shareholder.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

What does gearing measure?

Key term

What happens to interest payments when a highly geared company makes a loss?

Key term

How can high gearing benefit shareholders when trading conditions are favourable?

Questions from this subtopic

Each one with the model answer underneath.

1
What does gearing measure?
Model answer
Gearing measures the proportion of a company's capital that is financed through long-term debt compared to equity.
2
State the formula for calculating gearing.
Model answer
Gearing = (Non-current Liabilities ÷ (Total Equity + Non-current Liabilities)) × 100.
3
Calculate the gearing when non-current liabilities = £700,000, total equity = £2,000,000.
Model answer
Gearing = (700 ÷ (2000 + 700)) × 100 = 25.9 %.
4
Why does high gearing increase financial risk during economic downturns?
Model answer
Because the company has higher fixed interest obligations that must be paid regardless of trading conditions, increasing the risk of financial distress when profits fall.
5
What happens to interest payments when a highly geared company makes a loss?
Model answer
Interest payments must still be made regardless of profit levels, as they are fixed contractual obligations.
6
How can high gearing benefit shareholders when trading conditions are favourable?
Model answer
Gearing can amplify returns to shareholders because profits above the fixed interest cost all flow to equity holders.

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Enterprise and Entrepreneurship

The Central Purpose of Business Activity

Forms of Business Ownership

Stakeholder Groups

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AMarket growth = ((1950 − 1450) ÷ 1450) × 100 = 34.5 %.

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