business Flashcards
internal sources
Retained profit-retaining profit for later investment
adv-no interest
dis-shareholders may want in dividends
Owners capital-money owner invests into business
adv-does not need paying back
dis-limited deedning on perosnal wealth of owner
Selling assets-old machinery is sold to generrlise capital
adv-no interest
dis-no longer own asset
may be time consuing to sell asset and get the cash
external cources of finance
banks
freinds and family
other businesses
peer to peer lending
crowd funding
freinds and family
adv-no interest
dis-limited and may put strain on relationship if not paid back in time
banks
offer loans, overdrafts and mortages
adv-recognised finanical instititon
terms and conditions are clear
can advice business
dis-strict lending criteria
peer to peer lenders
operate online
alow individuals to lend money to businesses
lender says how mich willing to lend and borrowers say how much wanting to borrow
assess how risky by lending compay and then match them with appropriate lenders
business angels
wealthy indiivuals who invest in business they see as potentially being successful
adv-may have buisness contacts and lots of business knowledge
dis-have a share of business, so they may gain some control of business and its decisions
crowd funding
done on webstie
put details onto webiste
company put up business idea and people invest money if like idea
people then get discounts,upon releaset etc
adv-raises aawareness, increases sales
dis-reputation may be damaged if business idea fails
risk of idea being copied
short term methods of finance
Grants-fixed sum paid by government
adv-no need to pay back
no interst
no share of business given up
dis-applicatio process can be time consuming and difficult to get
Loans-
Overdrafts-where bank allows business to have negative amount in bank account
Trade credit
business plan
outline what a business wants to achive and how
good plan contains a business overview, aims and objectives, marketing and sales stregy, finanical forecasts, cash flow forecasts,
adv of business plan
helps convice potential investors that everything has been well thought through and low risks of business failing
shows how profitable business expects to be and whe si investors know when they could start getting returns on their investment
what are cash flow ofrecasts
show cash inflows(sums of money recived by business)
cash outflows(paid out by business)
what is working capital
amount a business has for day to day spending
adv of cash flow forecasts
show amount of money that managers expect to flow into busienss adn flow out over period of time
makes sure enough cash around to pay suppliers and employees
can preict when will run out of cash adn can provide loan in time
makes banks and venture capitalist see they done their resratch and idea of where business going to be in future
dis of cash flow forecasts
needs lots of experience and research
if dyanmic makret, hard to make accurate cash flow forecast as costs can constnatly go up and down
net cash flow
cash inflows-cash outflows
closing balance
opening balance plus net cash flow
sales forecasts
predict future sales volume and revenue based on past sales data
what are the 3 things sales forecasting helps a business make decsions about
finance-important to generate accurate cash flow forecasts
what are the 3 factors affecting sales forecasting
consumer trends-sometimes fairly predictbale e.g more fairy lights in christmas but sometimes more uncertain
economic variables-e.g interest rates, inflation rates, unemployment leveles
people have less money then less liekly to spend as much
actions of comeptitors-e.g coemptior decides to decrease their prices or launch a new product, oredicted sales may decrease
(also hard for dynamic markets as external factors affecting sales are constantly changing
what is sales volume
number f untis sold in period of time
sales revenue
value of sales in given time period
sales revenue calcualtion
selling price times sales volume
what are fixed costs
DONT chnage with output e.g rent, business rates, basic salaries
what are variable costs
costs that do change with output e.g e.g packaging costs, wages, raw material costs
what is profit
total reveue-total costs
what 9s break even
level of sales a business needs to cover its overall costs
at breakeven point total variable costs+total variable costs=total revenue
break even point calcualtion
total fixed costs divided by distribution
sales and break even point relationship
when sales are below break even point, then business makes a loss
when sales are above break even point, business makes profit
what is a break even analysis
it tells them how much they need to sell to break even
adv of break even analysis
easy to do. if can plot figures on graph accurately, do break even analysis
quick, managers can quickly take action to reduce costs or increase sales if tehy need to increase their margin of safety
help persuade sources of finance to give them money
margin of safety
acutak ouput-break even ouput
dis of break even anlaysis
simple for single product but most businesses sell lots of different products, so looking at business as whole can be more complicated
if data ia inaccurate, results will be wrong
doesnt take into account wastage
assimes business sells all products without any wastage
what are budgets
finanical plan for future
what are the 3 types of budgets
product budgeting-ues income budget minus expenditure budget to calcuate expected profit by end o year
income budgeting-amount of money that will come into business as reveue
ecpendirture budgeting-predict what businesses total costs will be by end of year
acroyn-PIE
what does business do to set what expenditure and income budgets are going to be
income budget-research and predict how sales are going to be
expendiure-research on labour costs, raw materials etc
adv of budgeting
can be motivating-give employees tagets to work towards
help control income and expendiure
help managers review their activites and make decisions
dis of budgeting
inflation is hard to predict
can be time consuming making owner lose what should be focused on/the real issues taking place
can cause resentment and rivalry if departments have to compete for money
historical budgeting
updated each year
based on percnetage increases and decreases from last years budget
adv of historical budegting
quick adn simple
dis of historical budgeting
dis-assumes that business conditions stay unchanged
zero based budgting
starting from scratch each year
adv and dis of zero based budgeting
adv-more accurate then historical
dis-time consuming
what is fixed budgeting
means budget holderst stcik to their budget plans throughout the year
adv-provides discipline and certainity
dis-prevent a firm reacting to new business opportunities
what us flexible budgting
allows budgets to be altered in reposnse to significant changes in makret or economy
gross profit margin
gross profit divided by revenue times 100
gross profit
total revenue-cost of sales
operating profit
gross profit-other operating expenses
net profit
operating profit-interest
formula for measuring percentage change in profit
current years profit-previous years profit divided by preveious years profit times 100
gross profit margin
gross profit divided by revenue times 100
what does a statement of finanical postion show
shows how much money is coming into a business and how much is coming out of a business
can be used to assess businesses finical performance
what is the difference betweeen profit and cash
cash is what business has now to pay its bills
wheras, may not get profit straight away
busienss could be making lots of profit, but still run out of cash
statments of finical postion
lists of assets and libaiities
can also be called balance sheets
snapshot o firms fianances at a fixed point in time
show business assets (things that belong to business)
business liabilties (things business owes)
what are non-current assets
assets kept for longer tehn a year
current assets
assests likely to be exchanged for cash within an accounting year
curent liabilties
debts which need to be paid off within a year
non-current liabilties
debts which will be payed off over several ears
what are bad debts
where dont pay up
liquidity
how easily an asset can be turned into cash and used for buying things
cash is very liquid
non-current asstes e.g machinery are not very liquid
current ratio
cuurent assets divided by current liabiltiies
acid test ratio
current assets minus inventory divided by current liabilties
working capital
current asstes-current liabilties
liquidy
shows how easily an asset can turn into cash used for buying things
insolvent defintition
where business doesnt have enough current assets to pay its liabilties
what ways can liquidity be improved
decreasing stock levels, speeding up collection of debts owed to the business
current ratio
current assets divided by current liabitlies
acid test ratio
current assets-inventory divided by current liabilties
working capital
amount of cash that business has to pay day to day debts
cant survive if dont have enoih working capital to pay debts when due
what is the working capital cycle
length of time between buying raw materrials and getting cash from sales of finished product
when does a business fail
when it cant cover its expenses
internal finanical factos of business failure
bad management of working capital can result in not having enough cash for day to day running of business
poor efficiency-where has costs not as low as could be meaning need to charge higher prices than their competitors
bad decisions about how firm is financed e.g relying on overdrafts in long term meaning costs are high
non finaical internal factors of business failure
poor communciation e.g different departments of business arent working well together, reducing the efficiency of the business
poor market research meaning cannot moitor changes in makret that could affect it
finanical external influnces of business failure
economic recession can result in consumers having less money to spend, causing falls in sales
change in exchange rates
e.g
non-finanical external factors of business failure
acronym: CCC
actions of competitors-if they are able to offer simialr products at cheaper prices
or develop new products more desirbale to consumers
chnage in consumer trends-if consumers suddenly stop wanting product you sell
poor communciation outside of the business e.g suppliers
lack of technology can cause dynmaic business to fail
job prodcution
selling one of items
produced by skilled workers
adv-can charge higher prices as person more wiling to pay higher prices for something handmade, unique
dis-cannot reach EOS as products are unique and cannot be made in bulk making unit costs high
dis-have to charge high prices to staff
dis-producivity is lower as takes long time to make few products
dis-may not feel very valued beacuse of being replaced by machiens/demotivated/priodcution lower
flow production
uses an assembly line to produce lots of identical products
adv-can operate 24/7
adv-achieve EOS as products identifical so materials can be brought in bulk, reducing unit costs and allowing business to charge lower prices
dis-boring/demotivating for workers
dis-if one bit of machinery breaks down, stop the hwole production
dis-if one bit breaks down, whole flow of production is delayed
dis-if change in demand for product, then whole system has to be changed e.g new machines need to be updated
batch production
making small batches of different products
same products are in each batch
when one batch made, equipment is cleaned and next bacth is made
adv-producivity higher then job prodcution but lower then flow production
dis-having to stop and clean equipment inbetweewn can be time consuming and delay production
adv-EOS
dis-cost and inconveience of having to store lots of raw materials
cell production
flow is divided into sets of tasks
each task being completed by a work group
adv-working with others, happeier in work, increases motivation, therefore production levels
adv-not having to carry out repeteive tasks
adv-involved in alreg chunk of work, increase pride in work, improving quality of work
dis-because product is removed from flow at each cell,prodcuivity can be lower
adv of use of machines
-easier to mange then humans (have no emotions)
can operate 24/7
no chance for human error/everything made in same quality level
dis-if stops, can stop whole production process
dis-high initial cost
dis-may make workers feel less valued
dis-any chnage neds to be completed installed and updated, humans are multiskilled
reprogrammed
human workforce adv and dis
adv-can multitask
increased motivation
dis-initial frop in producivity while workforce takes time training
what is efficiency
where production happens at an overall minimum average cost
ways to imporve efficiency
cutting csts
could adopt a lean production approach
labour intensive firms
mostly workers rather then machinery
adv-multiskilled so if any alter in prodctuion, can quickly chnage what they are doing
can be retrined wheras mahcines will have to be replaced
for small firm may not make much sense to buy expensive machines to do jobs that humans could do
can solve any problems which arise
dis-harder to mange people then machines
people can be unreliable e.g can get sick
need rest breaks
capital intensive firms
firms which mainly use machines rather then human workforce
adv-operate 24/7
easy to mange dont have human emotions
no chance for human error/tend to produce everythig at consitnely high quality
dis-initial cost is expensive
can make workers feel replaced/less valued
if break down, can stop whole production process, missing out on sales, reputation being damaged
if alter production, needs to be reprogrammed adn del
capaicty utlisation
how much capacity a businesss is acutally using
current output divided by max possible output times 100
dis of over utlisation
may turn awy potential customers as cant increase output any more
no downtime-machines on all the time
no margin of error-eveything has to be perfect first time, putting stress on workers, might make them work flat out and make mistakes
capacity
max am
what does under capciaty mean
business has resources its not using e.f factor space
consewunces of uner utlisation
increases unit costs meaning less likely to achieve EOS, may also mean they have to increase their prices, therefore less comeptitive
can create bad image eg empty shelves therefore reputation is damaged
reduce employee motivationa as not enough work to do
ways to increase caiaty utlisation
use different makreting stregies e.g promotions to increase demand for product, to increase sales
changing ways to distibute goods and services they sell
rationalsation-downsizing organisation to reduce capacity, increasing capaity utlisation to reduce costs
e.g removing to smaller facilty
sellign asstes that are underultisated
making staff redundant
wyas to deal with over capicty utlisation
outsourcing-outsourcing some of its work to other businesses
hire other firms to complete work on their behalf
reduce demand for product by increasing prices
waitlisting-makes it more luxurious
stretegies for over utlsaiton
expand organisation
grow bsuiness
move to move sigth
invest in greater technology
take on new staff
what is stock
raw materials needed for making a product
businesses try to minimise stock just to its costs
flow prodcution-high levels of stock
what is the minimum stock level called
buffer stock
what is the lead time
time it takes for goods to arrive after ordering them from the supplier
adv of holding buffer stock
needed to avoid running out of stock. good for mass markets whcih need to constantly be reaching demadn
may be good to hold large buffe stocks as can offer discounts for bulk buying stock
purachasing EOS
dis of holding buffer stock
storage costs
wastage costs espcially if its perishable where could go out of date
what happens if business doesnt control stock properly
high stick in costs costs associated with holding too much stock
what is lean production
efficient form of prodcution thag focuses on waste minimisation (using as few resources as possible)
JIT production
type of lean production
aims to reduce waste of materilas
having as little stock as possible
products avaliable just in time for when customers need them
adv-storage costs are reeduced so cash flow imporved as money isnt tied up in stock
less waste as less damaged or out of date stock lying around
more flexibale so can deal with changes in demand
reduced costs means can charge lower prices then comeptitors, comeptitive advantage
dis-having little stock means rely on frequent deliveries from suppliers
can be hard to organise adn difficult for staff
need to make sure supplier is reliable, or else firm may run out of stock and have to stop production
having smaller more freuwnt deliverieis means cant acheve EOS
what is quality control
where product is checked at end by inspectors
adv-done by professionals
doesnt delay production/stop and start
dis-may mean more waste
qulaity assurance
where qulaity is checked throughout production process by workers
adv-motivating/feel valued
dis-need t be trained/expensive
total quality management
quality is the centre of everything a business does
adv of total quality management
help them bond as team as everyone is involved in improving quality
boosts companys repuation having high quality products
reduces waste as less faulty products are produced
dis of total quality management
may take long time to introduce
can demotivate staff-having to focus on quality at everrypart of firm can seem like lot of effor
expensive-often means investign in traning for all employees
quality circles
workers come together to discuss quality control issues
use knowledge from various different departments
adv-get staff involved/make there opions feel valued
dis-suggestions can be unrelaistic adn may not listen to floor workers
kaizen approach
type of lean prodcution
employees should be improving their work a little all the time
employees are constnatly evaluating work they have done
interest rates
are the cost of borrowing or return of savings
a fall interst rates means a decrease in cost of borrowing
an increase interest rates means an increase in cost of borrowing
bank of england influences changes in interest rates
high interest rates can affect consumer spending, high interest rates means less money to spend
have to pay more money back in interest so less disposable income
products that tend to be borrowed e,g cars are more affected by changes in interest rates
inflation
an overall increase in goods and services within an economy
two types demand pull inflation-when there is too much demand, too much disposbale incomee and business cant supply goods quickly enough so increase the price of their goods
cost push inflation-rising costs push up prices e.g employee wages rise
deflation
reduction in prices of goods and services within an economy
causes a fall in producivity