Business 2 Flashcards
Why do business need finance
- business start up
Expansion growth (. New premises , machinery
Survival ( day to day operation )
Pay wage
What are internal and external finance
- internal is from within the business
- external is capital raised outside the business
Sale of asset
- 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
Personal source/ owners capital ( internal finance)
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
Retained profit
- 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
Banks ( external finance)
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
Peer to peer funding (external finance)
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
Business angel
- 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
Other internal finance
Family and friends-
very cheap source of funds
Disadvantage = relationship may be damaged if there’s conflict
Crowd funding
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
Other external finance
- from other business -if they view they have a higher potential return then the business is receiving or just to support
Gov funding
Methods of finance- way business raise money
Loans
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
Venture capital
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
Overdraft
-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
Leasing
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
Grants
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
Share capital
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
Factors affecting type and amount of finance required
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
What is unlimited and limited liability
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
Unicorporated vs incorporated
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
Appropriate financial for unlimited and limited company
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
What is business planning
- is a document produced by the owner which provided detail on each element of the business .
Includes aim strategy, objective, marketing , financials plans
Purpose of a business plan
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
What is cash flow
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
Causes of cash flow and how to improve them
- 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
What are trade credit
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
What is a cash flow forecast and why uses it
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
Limitation of cash flow forecast
- 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
How to find out net cash flow, opening balance and closing balance
- 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
What is sale forecasting
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
Main methods of sale forecasting
- 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
Factors affecting sale forecast
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
Difficulties in sale forecasting
- 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
Purpose
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
What is sales volume and sale revenue
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
What are fixed cost and variable cost
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
Ways to increase revenue
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
How to find total cost and average exist
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
What is break even
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
What is contrinution and formula
- 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
What is margin of safety
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
Effect on break even
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
Benefits and weakness of break even
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
What is a budget and the reasons for using it
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
Types of budget
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
Variance analysis
- 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
Appropriate actions for variance analysis
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
Difficulties in budgeting
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
What is production and productivity
- 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
What is labour productivity and its formula
Labour productivity measures the output per employee in a certain time period
Labour productivity = total output in a time period / numbers of employee
Factors affecting productivity
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
Potential drawbacks of increasing labour productivity
Stress plus burnout= low quality
Or using machinery may be better
What is efficiency
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
Factors influencing efficiency
- 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
What is labour intensive and capital intensive production
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
What is productive efficiency
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
What is capacity utilization
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
Formula for capacity
Actual level of output/ maximum possible output x 100
Importance of capacity utilization
- 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
Implication of under and over utilization of capacity
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
How to improve capacity utilization
- increase in sales/ usage
More staff redundancy to lower cost
Increase demand through promotion
Have seasonal staff
Stock control
What is buffer stock and its implications
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
The cost of poor stock management
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
- Little stock
Orders can’t be met= leads to unhappy customers and loss of sales
Business may run out of stock = production stoppages
What is total quality management
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
What is quality control
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
What is quality circles
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
Quality assurance
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
Kaizen continuous improvement
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
What is quality
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
How is there competitive advantage from quality management
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
Benefits of improved quality and negative of poor quality
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
Stock control and lean production
What is just in time stock management
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
Advantages and disadvantages of just in time stock management
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
What is lean production and the competitive advantage from lean production
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
Waste minimization
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
Methods of achieving quality
- invest in technology
Have a clear understanding of customer needs
Train employees
Work with high quality supplerys
