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Business 2 Flashcards

1
Q

Why do business need finance

A
  • business start up
    Expansion growth (. New premises , machinery
    Survival ( day to day operation )
    Pay wage
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2
Q

What are internal and external finance

A
  • internal is from within the business
  • external is capital raised outside the business
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3
Q

Sale of asset

A
  • is the money received following sale of capital items owned by business such as machinery, buildings

Advantages
- no interest charge or repayment
- free up value in unwanted assets to be invested in other area
- immediate lump sum cash injection

Disadvantage
Loss of use of assets and future value
May be expensive in the long run if need to lease assets back

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4
Q

Personal source/ owners capital ( internal finance)

A

Personal source is when entrepreneurs invest their own money into a business such as savings, inheritance , cash

Ownership capital is how much owner has invested in the business
Advantage
- cheaper then other sources- don’t involve payment or charges
- allow business to keep control- there is no third party to influence decision= financial stability= efficiency
- don’t have to go through lengthy application procedure - organize quickly

Disadvantage
Opportunity cost- lose personal investment
Can cause family tension
Stress for entrepreneurs

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5
Q

Retained profit

A
  • profit kept within a business from the year before and I help finance future activities ( to reinvest )

Advantages
- cheap (though not free) don’t associate interest
- management control how they reinvest
- internal finance usually organize very quickly, without significant paperwork

Disadvantage
- only an option if sufficient profit exist within the business
May cause shareholder dissatisfaction if this is at the expense of dividends payment

Unsuitable for start up business - unlikely to have retained profits

Reduce the security blanket of keeping retained profit for unforeseen circumstances

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6
Q

Banks ( external finance)

A

Financial institutions that are licensed to take deposit, pay interest , make loans
- have department and employers who specialist in business banking,

Receive loans
offering specialist advice

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7
Q

Peer to peer funding (external finance)

A

The practice of an individual lending to other individuals with whom there’s no relationship or contact

Borrowers given credit rating

Done online

Normally unsecured personal loan

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8
Q

Business angel

A
  • are wealthy , entrepreneurial individuals who provide capital in return for a proportion of company equity
    = make more personal investment into start up business

Advantage
- bring new skills, offer support and expertise
- may provide additional investment= positive relationship
Disadvantage
Expensive - additionally business angel will initially want a return on investment- result
They are involve in decision making
- not easy to find the right business angel

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9
Q

Other internal finance

A

Family and friends-
very cheap source of funds

Disadvantage = relationship may be damaged if there’s conflict

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10
Q

Crowd funding

A

Involves raising finance from a large number of small investors each investing different amount of money

  • they also provide loans, or buy equity in the business

Advantages
Help finance project and business - could allow large amount of money to be raised
Crowdfunding can generate lots of publicity

Disadvantage
Need to provide a Persuasive business plan to convince individuals to invest in their products
Not suitable for raising up large amount of money - as it’s not guarantee that enough finance will be raised

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11
Q

Other external finance

A
  • from other business -if they view they have a higher potential return then the business is receiving or just to support

Gov funding

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12
Q

Methods of finance- way business raise money

Loans

A

Bank loan are a fixed bumber of loan from a bank generally use to finance long term assets

Advantages
Quick and easy to secure
Retain ownership of the company
Improve cash flow ,

Disadvantage
Interest rate must be paid regardless
Expensive due to high level of interest rate
Harder to arrange

Loans are not very flexible - you could be paying interest on funds you’re not using. You could have trouble making monthly repayments if your customers don’t pay you promptly, causing cashflow problems

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13
Q

Venture capital

A

Investment from establish busies into another business in return the a percentage equity in the business
Normally look for high rates of return

Advantages
Potential large sums of money for investment
Mousiest or entrepreneur may benefit from expertise and mentoring from venture capitalists
Easier to attract other source of finance

Disadvantage
Long and complex process
Partial loss of ownership
Initially expensive for the firm such as legal and accounting fees

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14
Q

Overdraft

A

-usually short term
Banks allow business to spend more than there is it its current account to an agreed sum
Interest is charge on overdrawn amount

Advantages
Only borrowed when required allowing flexibility
Interest only paid on amount borrowed
Quick and easy to arranged

Disadvantage
Bank can call in at any time- can be withdrawn at short notice
High rates of interest
Interest charge may vary with the change in interest rates

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15
Q

Leasing

A

A contract in which a business acquire the use of resources such as property,machinery or equipment

Allows a business owner or benefit from use of an asset without owning it or buying it outright

Advantages
Avoids need to finance the asset ,- better cash flow as not paying whole asset= paying monthly
-comes with technology cal support
Many leasing agreements allow upgrades to newer equipment

Disadvantage
May be more costly in the long run- the overall cost of the lease agreement will usually be much higher than the cost of the assets leased
businesses do not have ownership or equity in the leased equipment. This can be a disadvantage for businesses seeking to build equity through asset ownership.
- termination

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16
Q

Grants

A

Are fixed amount of capital provided to business by gov or there organisation to fund specific projects

Usually to provide employment , support a good cause or reduce a negative environmentsl cause

  • lower cost
  • more employment
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17
Q

Share capital

A

Finance raised from sale of shares
Form of equity capital
Share holder becomes a part owner of business

Advantages
Possible to raise large amount of finance

No interest repayment

Only need dividends if a profit is made and the amount of dividends is not fixed

Disadvantage
Loss of ownership as shareholder part owners
Complex and costly process of issuing. Shares , especially for Plc
Only option for incorporated business

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18
Q

Factors affecting type and amount of finance required

A

Flexibility- some source are highly adaptable to meet needs of business

Cost- some sources have high interest repayment such bank loans
Risk - sources that require collateral = be high risks

Organization structure such as limited company find it easier to raise finance than sole trader

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19
Q

What is unlimited and limited liability

A

Owners of a business are responsible for the total amount of debt of the business on legal difference between owner and business
Owner may loose their personal belonging such as their home, cars , if the value needed to cover debt
Sole trader and partnership have this

Implication of unlimited liability
- if unable to pay the debt= lose personal assets
Could lead to legal issues such as court- bad publicity

Limited liability- an investor liability is limited to the total amount invested or promised in share capital
There’s a legal difference between owners and the business
- investors belonging is protected
✅ easier to raise finance through sources available

Implication
- companies are incorporated and owners are considered a separate legal entity in the business
Means if a company fails, owner would lose their investment but would not have to use their asset to meet additional debt or legal fees

Increased Investor Confidence
Put simply, investors are always going to be more interested in investing in a company with limited liability. = This can make finding investment and outside funding significantly easier

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20
Q

Unicorporated vs incorporated

A

Unincorporated- the owner is the business so there no legal difference

Incorporated
Legal difference between business and the owners
Most lot operate as a Plc
- means that if business fails= only lose their investment

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21
Q

Appropriate financial for unlimited and limited company

A

Limited - share capital, retained profit, venture capital , business angel, bank loans
Unlimited- personal saving, unsecured bank loan (. Not attach to any asset in the business), peer to peer funding , overdraft and grants

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22
Q

What is business planning

A
  • is a document produced by the owner which provided detail on each element of the business .
    Includes aim strategy, objective, marketing , financials plans
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23
Q

Purpose of a business plan

A

Help identify problem area that a business might face= able to set an appropriate source of finance

Focus to set target and check firm development = more efficient

  • reduce the risk of business failure= help avoid poor decision making

When raising finance a business plan acts as a sale document for the busiss telling potential investors how and why business will succeed= so why they are able to repay loans
So it allows lenders(bank) and other investors to analyze plan and make informed decision about providing loan= successful investment

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24
Q

What is cash flow

A

Is interested in the balance between cash inflows (money coming in the business ) and cash outflow ( money coming out)

Cash inflows is sales, owners capital invested. , bank loans
Cash outflow such as purchasing stock, paying wages, debt, bank loans interest

Is different than profit as profit is more long term

Passive cash flow = able to meet day to day expenses

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25
Q

Causes of cash flow and how to improve them

A
  • poor inaccurate planning
    Long payment terms
    Over trading

How to improve
Cut stock level
Increase sales
Reduce cost (. Cut outflows)
Increase trade credit from suppliers

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26
Q

What are trade credit

A

an arrangement to buy goods and/or services on account without making immediate cash or cheque payments.

The supplier is providing the business with finance for the period of the trade credit e. G . 30 days

The business may lose out on discount offered for immediate or quick payment increasing cost

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27
Q

What is a cash flow forecast and why uses it

A

Forward looking statements that predicts cash inflows and cash outflow in the future

  • to identify timing and significant of any potential cash flow problem in advance- then find a way to overcome such as overdraft

Help secure finance from potential investors or banks

Give confident about short term survival

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28
Q

Limitation of cash flow forecast

A
  • demand may be under / overestimated= inaccurate
  • affected by external environment which is outside the entrepreneur control such s new competitors, supplier out of business, changes in consumer spending, changes in consumer taste
  • variables constantly changing- suppliers are free to change the price charge= difficult to estimate with the payment of variable cost
  • may be more difficult for the new business = high start up cost

Only focus on cash and not other important variable like profitability and productivity

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29
Q

How to find out net cash flow, opening balance and closing balance

A
  • net cash flow= inflows- outflows
  • opening balance- is what is in the account at the start of the month. Also the previous closing balance

-closing balance = opening balance + net cash flow

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30
Q

What is sale forecasting

A

Involves a business using range of techniques and info to predict sales volume trend on past sales figures

Finance- help set a budget
- predict sale volume and revenue
- inform cash flow forecast

Marketing
- plan distribution
- identify when promotional activity is needed

Human Resources
- plan workforce needs for sale team, seasonal staff

Operations
- capacity plan
Stock management

Forecast sales important as it a vital planning activity
Useful part of regular competitor analysis, help focus on market research

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31
Q

Main methods of sale forecasting

A
  • extrapolations - used trend established from historical data to forecast the future

Advantages
Simple method of forecasting
Which and cheap

Disadvantage
- unreliable if there’s significant fluctuations in dsts
Unlikely past trends will continue in future
Ignored qualitative factors such as change in taste

Correlation-
Looked dry the strength between. 2 variables
Best of line fit indicated strength of the correlation

32
Q

Factors affecting sale forecast

A

Consumer trend
Demand in many market changes consumer taste and fashion
‘Ale it diffuser it carry accurate sale forecast
- also due to seasonal variation- sale fluctuates depending on season or shopping habit (. Technological change , online sales(

Economic. Variable
Demand is often sensitive to change in variable such as exchange rate, interest restrictions, taxation , unemployment ( disposable income )
-also economic growth, inflation
= affects the level of spending, disposable income

Actions of competitors
Business likely to adjust its sales forecast based on the action of its competitor
Such as competitors entering or exiting market , impact market share therefore sales
Sales forecast should consider short term action of competitors like sale promotion as well like long term strategies such as product expansions

33
Q

Difficulties in sale forecasting

A
  • unpredictable events

If business is new = diffuse to forecast

Rarely reflect the full range of external influences such as fashion trends

Requires skill time and accurate use of data

34
Q

Purpose

A

Avoid cash flow problems= help business manage their production,staff , financial needs more effectively

To employ more workers= if business has higher sales to a product or service = may need new employees to cope with demand

35
Q

What is sales volume and sale revenue

A

Sale volume is the amount of sales expressed in units

Sale revenue / selling price

Sales revenue is the amount of sales expressing as the total volume of sales made during a trading period. Also total name of money spent by consumers

Sale revenue- is the money coming in from sale of goods or service. Increases with the amount of units sold

Sale revenue = selling price x quantity sold

36
Q

What are fixed cost and variable cost

A

Fixed cost are those that client change with the level of output . They have to be paid regardless of output.
Such as rent , insurance , intallments

Variable cost are those that do change directly with the level of output or sales
Such as raw materials, wage
AVC x Q= TVC

Semi fixed cost are for example rent space
Can be enough for a certain period level of output until the pint at which the business needs to move somewhere bigger
In long run all cost are variable as fixed cost will eventually change

37
Q

Ways to increase revenue

A

Increase of product price

If demand is high= increase quantity

Advertising campaigns

Give product USP

Make product more available in more places such as as online , more stores

38
Q

How to find total cost and average exist

A

Cost are the amount that a business incurs in order to produce a product , drains away the profit made

Total cost= FC+ VC = TC

Average cost = Total cost/ output

Problems either estimating n cost
- could be external shocks which change cost
- product refund

39
Q

What is break even

A

Is about at which a business is not making profit or a loss

When total revenue = total cost

Before reaching break even , business is operating at a loss , after reaching break even, each additional unit sold will contribute towards profit

Formula
Fixed cost/contribution per unit

40
Q

What is contrinution and formula

A
  • it looks at the profit made on individual products

Contribution per unit= selling price- variable cost per unit

Total contribution = sale revenue- total variable cost

Total variable cost
= variable cost per unit x quantity

41
Q

What is margin of safety

A

Is the difference between actual output and brake even output

Actual output- break even output

Size of margin of safety will determine the risk of the business = should be high as possible

42
Q

Effect on break even

A

Higher selling price= higher contribution per unit= lower BE output ( price skimming)

Higher variable cost= lower contribution per unit= higher BE output

Increase fixed cost= no change = higher BE output

43
Q

Benefits and weakness of break even

A

Benefits
Is flexible - shows different levels of profit arising from various level of output

Is a useful guideline to help business make decision

Calculation quick and easy to complete = simple use

Weakness
Cost are rarely constant- break even presumes that cost stay the same over various level of output

Info may be unreliable- maybe conducted by someone with low experience

If simplifies what can be very complex process- most busies sell multiple products, which makes break even more difficult

44
Q

What is a budget and the reasons for using it

A

Is a financial plan that a business sets about cost and revenue in future

Purpose
- planning and monitoring- business setting budgets are planning ahead / problems and their solution may be consumed and solved in advance

Communication-
Budget may be communicated throughout organisation to provided framework for decision making and communication

  • able to control level of spending
45
Q

Types of budget

A

Historical figure budget
Budget can be based on info or historical data such as sales from previous years
Adjusted based on future events, estimation, inflation

Zero based budgeting
Require all spending to be justified which means that many unnecessary cost will be eliminated = efficient
It can be time consuming as evidence to support spending decisions need to be collected= requires skilled employees to make persuasive case

46
Q

Variance analysis

A
  • budget variance is the difference between figure budget and the actual figure achieved by the end

Variance analysis compared forecast data to actual figures = analysis accuracy

Favourable variance = actual figure achieved is better than the budgeted figure

In a revenue or profit budget , actual figure is higher than budget

In cost budget. , actual figure is lower than budget

Adverse variance
Actual figure achieved is worse than budget figure

47
Q

Appropriate actions for variance analysis

A

Where adverse cost variance identified=. Business may seek alternative supplier or investigate ways to improve efficiency

May review its marketing activities

Where favorable sales variances occur= business may reward client facing staff with before and based incentives

48
Q

Difficulties in budgeting

A

inaccurate data= budget useless=Data must be up to date, unbiased and accurate

Budget takes time, skill to set , monitor and review = demotivating

Unexpected changes in process such as commodity price, Impact on motivation

However budget encourages managers to focus on short term rather than long term success of business as budgets usually set year on year

49
Q

What is production and productivity

A
  • production occurs when raw materials or component are changed into products. . Factors of production are brought together

Productivity measures the rate of production over a given time periods. Is the amount of output g that can be produced within the given input period time period

Productivity =. More competitive at it enables lower cost = able to reduce price to increase demand

50
Q

What is labour productivity and its formula

A

Labour productivity measures the output per employee in a certain time period

Labour productivity = total output in a time period / numbers of employee

51
Q

Factors affecting productivity

A

Motivating workers = happy workers work harder

Education and training= improve skills of workforce

Cell production= increase labour productivity

Buying machinery= increase output = introduction to new technology

Specialization = specialize in a specific role

52
Q

Potential drawbacks of increasing labour productivity

A

Stress plus burnout= low quality
Or using machinery may be better

53
Q

What is efficiency

A

Involves maximizing output achieve from the given input
- when business is running efficiently there minimum waste
Unit cost will also be increased at their lowest

Unit cost= total cost/ total output

54
Q

Factors influencing efficiency

A
  • increasing capacity utilization - low waste

Increasing labour productivity

Lean production

Using technology

Outsourcing

Benefits of improved efficiency
- unit cost fall
Profit margin increase
Labour productivity increase
Ability to charge Lowe price= increase competitiveness

55
Q

What is labour intensive and capital intensive production

A

Labour intensive is production relies on using labour resources( workers)
Such as food processing , hotels , restaurants, coal mining

Capital intensive is production relies using capital resources
Such as car manufacturing , oil extraction

56
Q

What is productive efficiency

A

Lowest cost per unit at which production can take place
This is important as

More efficient business will produce lower cost good than competitors

May generate more profit possible at lower price

57
Q

What is capacity utilization

A

The proportion of a business capacity that is being used over a specific period if business cannot increase its output = full capacity

Capacity is a measure of how much output it can achieve in a given period
Calicut can change :
When machine is having maintenance = capacity is reduce
Working more production shift= increase in capacity

58
Q

Formula for capacity

A

Actual level of output/ maximum possible output x 100

59
Q

Importance of capacity utilization

A
  • is a useful measure of productive efficiency since it measures whether there are unused resources in business

Higher utilization can reduce unit cost = making business more competitive

Profit margin can increase

high level of CU may be required if business had a high break even output due to significant fixed cost of production

60
Q

Implication of under and over utilization of capacity

A

Benefits of working at high capacity
- unit cost lower
Gain economies of scale
Profit margin could increase

Drawback of working at high capacity
Rushed production
Workers over worked

61
Q

How to improve capacity utilization

A
  • increase in sales/ usage

More staff redundancy to lower cost

Increase demand through promotion

Have seasonal staff

62
Q

Stock control

What is buffer stock and its implications

A

Buffer stock is the quantity of good / raw material kept in case of stock shortages

Advantages
Stability of supply= ensures a stable supply of food which is able to respond to unexpected customer demand

Raw material security= business that are dependent on raw material avoid disruption to their supply

Competitive advantage- having reliable supply of good = business can gain a reputation for always being able to meet the demand of the customer
If supplier cannot deliver on time , production will not be affected

Disadvantage
Cost- can be expensive as it requires storage facilities and inventory management system

Risk of obsolescence- buffer stock can become obsolete if demand for a particular product or input declines

Opportunity cost- holding buffer stock ties up capital that could be invested in other areas of the business

63
Q

The cost of poor stock management

A

1Holding too much stock
Means using up cash that can’t be used elsewhere
Risk of shrinkage will increase = stock being stolen , damage or lost
Storage cost will be higher than necessary =. Extra cost if sales are low
Stocks can be wasted

  1. Little stock
    Orders can’t be met= leads to unhappy customers and loss of sales
    Business may run out of stock = production stoppages
64
Q

What is total quality management

A

A system of management based on quality being the priority throughout the organizations
How quality is everyone responsibility no matter the role

Principle
- quality policies— clear on expectation of employees , how to achieve
Teamwork = help solve problems
Feedback form customers taken into account

Advantages
- more satisfied customers
Enhance reputation
More involved workers

Disadvantage
Some staff may be resultant to change
Cost to train staff

65
Q

What is quality control

A

Quality specialists are employed to check standards
Refers to the traditional method of checking that the product are of a good enough quality standard

This approach to quality makes production process faster / inexpensive

As bad quality= damage brand image= less sales and rejection of finish good is significant waste of resource

66
Q

What is quality circles

A

A group of employees who meet on a regular basis to talk about quality problems that are relevant to the part of production they work on

  • makes the use of workforce knowledge to identify and solve problems = pass into management

Brings together staff and management so staff feels empower which leads to more motivation

❌ support is needed of management who must be willing to listen to the workers ideas and implement them
Meeting must be organized regularly

67
Q

Quality assurance

A

The processes that ensure production quality meets the requirements of customers

This is an approach that aims to achieve quality by organising every process to get the product ‘right first time’ and prevent mistakes ever happening. This is also known as a ‘zero defect’ approach.

Advantages of quality assurance include:

Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage

It can help improve worker motivation as workers have more ownership and recognition for their work (see Herzberg)

It can help break down ‘us and them’ barriers between workers and managers as it eliminates the feeling of being checked up on

Less waste = sustainable = business has a produce reputation

68
Q

Kaizen continuous improvement

A

Everyone in the organization needs to be fully committed to the ideas to identify areas of improvement across organizations

Elements are TQM, team working , high level of automation

69
Q

What is quality

A

Is a feature. Of a product that satisfy needs of customer

Example of poor quality

Product fails – e.g. a breakdown or unexpected wear and tear

Product does not perform as promised (or what the customer thought was promised!)

Product is delivered late

Poor instructions/directions for use make using the product difficult or frustrating

70
Q

How is there competitive advantage from quality management

A

Quality is a significant route for a business to add value to its products

Achieving high level of quality allows a business to charge premium price = ensure customer are highly satisfied

Business must continually aim to improve quality and adapt to needs of cutler did they are to maintain any competitive advantage

Unit cost likely to be low = can reduce selling price

Quality consist of good design , consistency in the method, consistent equipment

71
Q

Benefits of improved quality and negative of poor quality

A

Benefits

Improved image & reputation, which should result in
Higher demand, which may in turn mean
Greater production volumes (possibly providing better economies of scale)

Lower unit costs because of less waste and rejected output

Potentially higher selling prices (less need to discount)

Negative of poor quality

Lost customers (expensive to replace – and they may tell others about their bad experience)
Cost of reworking or remaking product
Costs of replacements or refunds
Wasted materials

72
Q

Stock control and lean production

What is just in time stock management

A

Is a process in which raw material are not store onsite. , but ordered as required and deliver by supplier’ just in time’ for production
Supply of product and raw material triggered by demand from customers

73
Q

Advantages and disadvantages of just in time stock management

A

Advantages
Stockholding cost including storage cost are minimised

Cost working relationships are developed with small number of trusted suppliers

Cash flow improved = money not tied up in stock

No wastage = only created when needed

Stock less likely to go out of date

Disadvantage
Business won’t be able to meet unpredictable surge in demand

Unreliable suppliers such as late or poor quality deliver= can quickly halt production= costly

74
Q

What is lean production and the competitive advantage from lean production

A

Lean production involves the minimization of the resource used in production

Focus on cutting waste (. Use fewer materials )

Less labour is used as lean production typically capital intensive

Space required for production is reduce as a result of JIT stock management

Competitive advantage from lean production
Lower unit cost achieve due to minimal wastage = price may be lower than those offered by competitors
Better quality of output due to supplier reliability = carefully managed production process

75
Q

Waste minimization

A

Waste considered anything that does not add value to product

Key factor that influence efficiency of business
Wastage in business can occur due to
-too much stock= perishable stock not used will need to be thrown away
Stock damage due to poor storage condition = not be suitable for use in production process

This will increase cost of production = reduce efficiency

Way to solve= store inventory appropriately like perishable food in refrigerator = protect from damage

  • have effective security (storage)

Pricing strategies = adjust price to Lean stock through sale promotion= increase purchase

Planning :Staff training, computerized stock control = reduce areas

76
Q

Methods of achieving quality

A
  • invest in technology
    Have a clear understanding of customer needs

Train employees
Work with high quality supplerys

Econ (10 decks)

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