2. Flashcards
what is limited liability?
where a business owner is only liable for their initial investment should they fall into debt
LTD+PLC
what is unlimited liability?
if a business falls into debt, the owner must pay even if it includes selling personal possessions
sole traders + partnerships
what is a business plan?
a document which sets out the future plans for a business
give 3 purposes of a business plan
- helps obtain bank loans
- sets business objectives
- outlines organisation (efficiency)
what does a cash flow forecast display?
where the business may have a shortfall of cash
can help arrange where short term loans are required
what is break even?
the point at which total revenue = total costs
what is contribution?
how much each unit produced contributes to the fixed costs
what is the formula for break even?
total fixed costs/ contribution per u
what is margin of safety?
the number of sales that could be lost before the business makes a loss
what is the formula for margin of safety?
actual sales - break even sales
what is a budget?
an estimate of income or outflow of a set period of time
what is a variance?
a change to a budget
what are the 4 purposes of a budget?
planning
communication
forecasting
motivation
what is a historical budget?
a budget based off of current and past financial performance
what is a zero-based budget?
a budget set based off of potential performance
what is favourable variance?
a department has underspent, increasing profit
what is adverse variance?
a department has overspent based off of a variety of reasons
name 3 difficulties of budgets
- inflexible and difficult in dynamic markets
- can be demotivating
- managers often increase spendature to reach the budget
what is the formula for gross profit margin?
gross profit/ revenue x 100
what is operating profit?
gross profit - expenses ( other costs to a business aside from stock)
what is the formula for Net profit margin?
net profit/ revenue x 100
what are the 3 types of profit?
gross profit
net profit
operating profit
what is liquidity?
the ability of a business to turn its assetys into cash to pay liabilities
what are the 2 ways to measure liquidity?
- current ratio
- acid test ratio
give 3 ways on how to improve liquidity
- increase long term borrowing
- reduce stocks held
- reduce the credit period offered to customers
what is working capital?
the day to day fincances required to run a business
give 3 internal causes of business failiure
- poor efficiency
- insufficient capital
- poor marketing
give 3 external causes of business failiure
- changes in markets
- shocks
- poor planning
what are the 4 methods of production?
- job
- batch
- flow
- cell
what is cell production?
workers are organised into different teams responsible for different parts of the product
what is job production?
high quality products are made one at a time specialised for the customer
what is batch production?
goods are made in batches and can be switched out for another good on the production line
what does productivity measure?
how hard an employee or machine is working
give 2 ways productivity can be improved
- productivity bonus
- investment into new machinery
give 2 factors which influence productivity
- quality of inputs in production process
- organisation of workers
what is economies of scale?
the higher the productivity, the costs fall for each unit
allows to charge competitive pricing
what is labour intensive production?
making products with mainly human efforts
what is capital intensive production?
making products with mainly machinery and equipment
what is capacity utilisation?
the extent to which the max capacity for output is used
what is over-utilisation?
where a business cannot match the number of orders they sold
what does low capacity utilisation lead to?
increase in costs due to E.O.S
what is a current asset?
assets expected to be converted to cash within a year
what is a current liability?
liabilities due to be payed within a year
what is a balance sheet?
a fincancial statement which reports a firms assets, liabilitys and shareholder equity at a point in time
what are the 2 types of budgets?
- favourable
- adverse
what are 3 internal sources of finance?
- personal savings
- share capital
- retained profit
what are 3 external sources of finance?
- bank loans
- venture capital
- crowd funding
what is crowd funding?
a campaign to raise finances, typically a small amount of money from a large number of people.
what do people get in return for crowd funding?
- products
- equity
- interest on repayments
what is trade credit?
a period where a business does not have to pay their suppliers, allowing for stock to sell before payment.
give 2 pros and cons of internal finance
- no dividends or equity payed
- not in debt to anyone
- personal finances at risk
- may restrict business growth with limited funds
give 2 pros and cons of external finance
- personal finance is not at risk
- large funding is more accessible for growth
- equity and shares are often required
- the business has another liability
what is seed capital?
the initial funding needed to start a business and cover operational costs until revenue is made
what is a debenture?
a long term debt instrument used to raise capital e.g an investor at an interest rate
what are 3 crowd funding cons?
- failiure to meet expectations damages brand image
- loss of control may occur resulting in conflicts over business direction
- resources may be wasted if the campaign is unsuccessful
what are 3 pros of cash flow forecasts?
- anticipates required cash in periods, allowing for planning
- identifies seasonal trends, allowing the business to manage cash accordingly
- boosts investor confidence by showing the business is financially responsible
what are 3 cons of cash flow forecasts?
- forecasts are based on estimates and are less reliable due to unforseen circumstances.
- overconfidence based off of cash flow forecasts may lead to risky decisions
- regular updates may be time consuming.
give 5 contents of a business plan
- cash flow forecast
- organization and management
- marketing strategy
- operation plan
- required funding
what is a clsoing balance?
the net cash flow at the end of a period
what is liquidity?
the ability of a business to pay off its liabilities based off of assets.
