Business Exam Flashcards
Business Plan
A document for the development of the business giving details such as the product, resources and costs
3 reasons why a business plan is important
1.To show potential lenders or financiers
2.A business plan reduces risk because it forces the entrepreneur to consider all factors that could cause the business idea to succeed/fail
3.to check that the aims are being met
Briefly list the 5 key elements of a business plan
1.Executive summary
2.The businesses and its objectives
3.Owner’s background
4.The market
5.Financial forecasts
Why a business plan may not be important…
- The level of risk can be assessed using elements of the business plan e.g. cash flow forecast. Therefore a full business plan may not be necessary.
- Not all sources of finance require a business plan
- Business planning is subject to external constraints and influences which may make predictions invalid
Internal finance
Money generated by the business or from its current owners. The raising of capital /cash from within the business.
What is ‘Owner’s Capital’ ?
Owner’s Capital refers to money invested by the owner of a business.This often comes from their personal savings.This source of finance does not cost the business, as there are no interest charges applied.
What are ‘Personal Savings’ ?
Money that has been saved up by an entrepreneur which she/he invests in the business
What are financial forecasts?
Financial forecast may be the important content because if the entrepreneur is needs to obtain a bank loan when setting up the bank would most likely have been more willing to loan the money having seen financial forecasts in the business plan
Sale of assets
An asset sale is an internal finance that happens when you sell or transfer the assets of your company, rather than shares or stock. These assets can be tangible such as machinery and inventory or intangible (intellectual property). In an asset sale, you can typically choose what you want to sell.
Retained Profit
The amount of a business net income thats kept within its account rather than paid out to the share holders
External finance
External finance is capital / funding obtained from a source outside the business
Sources of finance
- family and friends
- banks
- peer-to-peer funding
4.business angels
5.crowd funding
6.other businesses
Methods of finance
- Loans (bank loan, mortgage, debenture)
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
What may the type of finance depend on?
Whether the financial need is long or short term
The financial position of the business
Cost
Type of expenditure for which the money is needed
Legal status of the business
Peer to peer lending (P2P lending)
lending money to individuals or businesses through online services that match lenders with borrowers.
Crowd funding
Crowd funding is where large numbers of individuals can provide direct funding for a business or project which is administered by a website such as www.crowdfunder.co.uk
Venture capital
Venture capital involves issuing shares to a small number of investor(s) in return for a capital injection into the company
Sole Trader
The simplest form of business set up and owned by one person/with only one owner .
Partnership
A type of business ownership owned by two or more people
Private limited company
A type of business ownership owned by shareholders where their liability for company debts is limited which means that shareholders can only lose the money they have invested
Franchising
Franchising is a method of business ownership that involves a business selling the rights to another business to operate under its name and use its products / a business model that allows an individual or business to acquire a licence to use another firm’s branding, product knowledge and systems for a prescribed period of time.
Social enterprise
A business with mainly welfare or environmental objectives rather than maximising profit
Lifestyle businesses
A business set up with the aim of making no more than a set level of income from which to enjoy a particular lifestyle
Public limited company (plc)
Public limited company (plc) can offer shares on a stock market to the general public and shareholders are only limited to potentially lose the value of the amount paid for the shares.
Benefits of having a Plc
Huge amounts of money can be raised
Plc tend to grow and therefore benefit from economies of scale
Banks may be more willing to lend to plcs
Drawbacks of having a plc
Setting up costs of a plc can be expensive
Anyone can buy shares – so risk of hostile takeover
Members of the public can access and inspect financial records and accounts of the firm
Due to growth in size they may experience diseconomies of scale
Liability
Limited liability
the business has a separate legal identity from its owners. The most a shareholder/investor can lose of the original amount they invested in the business
Unlimited liability
these are businesses where there are no legal difference between the owners and the business. They are sometimes called unincorporated businesses.
Sales volume
the number of units sold by a business
Sales revenue
total income earned by a business from the sales of its products. It is the total value of sales income generated from sale of goods or services.
g
Fixed costs
costs that do not vary with output. The costs that do not change when output/sales changes
Variable costs
costs to a business that change with output. The costs will change when output/sales changes
Total costs
the entire cost of producing a given level of output. Fixed costs + variable costs
Average costs
the cost of producing one unit, calculated by dividing the total costs by the output
Fixed (examples)
Rent
Salaries
Interest payments
Insurance
Variable (examples)
Raw materials
Packaging
Piece rate wages
Bank Loan
It is a fixed amount of money given to a business, “borrowed” by the bank and has to be repaid over time with interest
Sales forecasting
An estimate of the value or volume of future sales for a business/product/market for a period of time, based on market research/past data
consumer trends
Habits or behaviour (1) of those involved in the use of goods and services (1)
costumer trends (ex)
Seasonal variations: easier to predict as some goods are seasonal such as Ski equipment or ice cream. Consumption of gas and electricity increases during winter months in some countries.
Fashion: may be more difficult to predict, markets such as clothing change constantly, with little notice.
Long-term trends: examples include consumers watching TV on demand using devices, this has led to a growth in firms such as Netflix and Amazon Prime and a fall in firms such as Blockbuster.
economic variables
Economic growth – this is measured using GDP, this shows the total output of the economy. In general during times of economic growth sales rise due to rising in consumer incomes, although this depends on the YED.
Interest rates – if these are high then it is expensive to borrow and better to save, a result of this may be a fall in demand.
Inflation – this is a general increase in the price of goods, during times of high inflation consumers may slow down their spending and sales fall.
Unemployment – during a recession this may be high, if people are out of work then spending will fall, therefore sales will be lower.
Exchange rates – these reflect the value of one currency in terms of another. A stronger £ will mean imports coming into the UK are cheaper and exports will appear more expensive. Business may have to adjust their sales forecasts to compensate for this.
Breakeven formula
Fixed costs=Contribution
Breakeven
When a business generates just enough revenue to cover its costs, it is the point at which the number of sales generate enough revenue to cover the costs.
Difficulties of sales forecasting
businesses operating in dynamic markets will find it significantly more difficult to forecast accurately beyond a very short period of time in the future
Contribution
selling price − variable cost per unit
Cash flow
Cash flow is the money that is moving in and out of a business
Cash flow forecasting
It is a prediction of the cash moving in and out of a business over a period of time
Budgets
A financial plan (1) which includes an estimate of income and expenditure for a set period of time, prepared and agreed in advance (1)
Types of budgets/historical budgets
historical budgets are forecasts for revenue and costs that are based on previous figures/years.
Quicker than zero-based as money is allocated to departments so there is no need for managers to seek approval
Firm knows how much is going to be spent and once it’s gone it’s gone
However, it is limiting as once it’s gone it’s gone! Some departments may require more budget
Types of budgets/zero based
A method of budgeting which does not use previous data. The budget will be set as zero at the start of the year and the budget holder will need to justify / ask for money.
Help to reduce unnecessary spending as they will carefully consider why they need money
But could prevent spending on certain items which could be beneficial for the business
Employees may feel uncomfortable about being challenged on spending
Purpose budget
plans, control and prevents the business
from overspending
Variance analysis
Trying to find reasons for the differences between actual and expected figures
Variance = actual – budget
Difficulties of budgeting
Figures are plans based on historical data, forecasts or human judgements
Setting budgets can cause conflict between departments
It takes time to set budgets, this creates an opportunity cost
Budgets may be unrealistic and this can create demotivated managers / workers
Leasing & Grant
Profit
the surplus (extra) remaining after total costs (1) are deducted from revenue (1)
Gross profit
total revenue - the cost of sales(variable costs)
Operating profit
Gross profit – operating costs (fixed costs)
OR
Revenue – total costs (fixed + variable)
Profit for the year (net profit)
Operating profit – finance costs (interest)
ways to increase profit, revenue
charging higher prices which might help increase revenue
Invest in advertising to create more awareness, attract more customer and increase sales volume
Find new markets, could be an overseas market (Apple entering China)
Diversify product range, Google offering Google drive
Mergers and takeovers
ways to increase profit, cutting down costs
cutting down on variable expenses by purchasing materials from a cheaper supplier (help gross profit and operating profit)
Reducing fixed costs, cheaper rent (help operating profit)
Statement of comprehensive income
A document to show income and expenditure of a business (1) over a financial year (1)
measuring profitability
gross profit margin
operating profit margin
profit for the year (net profit) margin
Statement of comprehensive income (profit and loss account)
A document to show income and expenditure of a business (1) over a financial year (1)
Gross profit margin (GPM)
The higher the better
Shows how much gross profit is being made per £1 of sales
Increasing price can help increase GPM
Cutting cost of sales (variable) can help increase GPM
Good GPM % differs from industry to industry
Operating profit margin (OPM)
The higher the better
Shows how much operating profit is being made per £1 of sales
Cutting fixed costs can help increase OPM
Profit for the year (net profit) margin
The higher the better
Shows how much profit for the year (net profit) is being made per £1 of sales
Distinction between profit and cash
unlikely for a business to have the value of profit they have made at the end of a trading year in the same value as cash in their account.
ways to improve profitability
Raising prices will allow more revenue for every unit sold, assuming costs remain the same, the profitability will increase
Depend on PED
Lowering costs and keep the price the same
Cheaper materials will help reduce cost of sales, gross profit margin will increase
Finding ways to reduce fixed costs will help increase operating profit margin
Liquidity
It shows how quickly a business can access cash in order to meet its short term debts.
It shows how easily a business can turn their current assets into cash to cover their short term debts.
Working capital
The amount of money needed to pay for the day to day trading of a business, or, current assets – current liabilities.
Internal causes of business failure
poor management of cash flow
overestimation of sales
overtrading
poor inventory control
poor marketing
poor quality
External causes of business failure
market conditions
competition
economic
exchange rates
interest rates
government regulations
supplier problems
natural phenomena
Methods of production
Job : a method of manufacturing where the production of a single good/service is carried out one at a time that involves producing the good/service to the specific requirements of the customer
Batch : a method of manufacturing where a quantity of one product is made, then a quantity of another item will be produced
Flow : a method of manufacturing where identical and standardised items are made on a continuously in mass
Cell : a method of manufacturing where employees are organised into multi-skilled teams with each team responsible for a particular product
CELL
benefits
Teamwork may encourage motivation
More efficiency as workers specialise on a task
Drawbacks
Slower than flow production
As workers are multi skilled then wages may be higher compared to batch and flow procduction
FLOW
benefits
Lower unit costs
Quick method of production
Consistent quality
drawbacks
FLOW
benefits
Lower unit costs
Quick method of production
Consistent quality
drawbacks
Less flexible
Less chance to add value
Potential high start up costs due to use of machinery
BATCH
Benefits
Lower unit costs compared to job
Flexible compared to flow as different customer orders can be met
Drawbcaks
If batches are small unit costs will be more compared to flow
Time taken to switch between batches creates downtime– slower compared to flow
Workers may be less motivated compared to job as they are only involved in part of the production process
Risk of contamination / waste which may cause a damage to the reputation
Productivity
A measure of output of a person, machine or process (1) over a period of time (1)
Efficiency
Making the best possible use of all the business’s resources (1) by minimising average costs (1)
Capital intensive production
methods are those that require a relatively high level of capital investment/cost compared to labour
Labour intensive production
would involve production to be carried out by more labour compared to capital / when production relies more on labour than capital
lead-in times
are the length of time between the first emergence of the product concept/design and its launch into the market.
Capacity utilisation
The amount of actual output expressed as a percentage of the maximum possible output
Inventory control
The optimum quantity of goods/components a business holds (1) for the purpose of resale/production (1)
Inventory control diagram.
Shows details of inventory movements (1) such as minimum and maximum inventory levels, re order levels and quantity lead times (1)
Buffer inventory
An amount of stock held as a contingency in case of unexpected orders (1) so that such orders can be met (1)
Waste minimisation.
Competitive advantage from lean production
Waste minimisation means producing goods and services at a given quality using as few resources as possible.
Lean production is an approach to management that focuses on cutting out waste, whilst ensuring quality.
Quality management
The process of a business maintaining a desired level of excellence in a product/service (1) by paying attention to each stage of the process (1)
Control
products are checked at the end of the production process to ensure that they are suitable for consumption. Faults are detected and corrected if possible. It is reactive
Assurance
ommitment to quality by a business whereby it will aim to ensure problems are prevented at all stages of the production process. It focussed on preventing faults with products during production. It is proactive.
Circles
small groups of workers will meet regularly to solve problems in the production process.
Total Quality Management (TQM)
is a management philosophy that insists quality is the responsibility of everyone in the business
Kaizen
A Japanese philosophy which places emphasis on making small improvements in all business processes as it tries to achieve a culture of continuous improvement, good processes bring good results.
Economic influences
the rate of inflation
exchange rates (appreciation, depreciation)
interest rates
taxation & government spending
the business cycle
Inflation
a general increase in the price level (1) over a period of time (1)
Exchange rate
the price of one currency expressed in terms of another currency
Interest rates
are the amount of interest due per period of time as a proportion of the amount saved, lent or borrowed.
Taxation
how the government raises money (1) to finance its expenditure (1)
The business cycle
measures economic activity over time and shows stages such as boom, downturn (when there is rising unemployment), recession and recovery.
government spending
Cuts on government spending could lead to falls in demand
Boom
existing firms will expand and new firms will enter the market, demand will be rising, employment is high, jobs are created, wages are increasing, profits will be rising.
Downturn
demand will flatten out or begin to fall, unemployment will start to rise, wage increases will slow down, firms may stop expanding, profits may fall, some firms may leave the market, prices will rise more slowly.
Recession
demand will start to fall, unemployment rises sharply, business confidence is low, bankruptcies may occur.
Recovery
business and consumers regain confidence, demand starts to rise, unemployment begins to fall, prices start to rise again.
Legislation
legislation is the making of laws for people to follow
The effects on businesses of
consumer protection
employee protection
environmental protection
competition policy
health and safety
intellectual property rights (copyright, patents and trademarks).
Consumer protection
legislation put in place to ensure businesses produce goods and services which are fit for purpose and safe for consumers to use
employee protection
laws and procedures that a business must follow (1) in the treatment of its workers
environmental protection
is designed to reduce the impact of businesses and protect the environment
competition policy
Prevent anti-competitive behaviour such as
Preventing mergers
Limit growth
health and safety
Measure put in place by a business (1) to prevent accident or injury (1)
Intellectual property rights legislation
Patent: is a legal document that guarantees the holder exclusive rights to use or licence inventions and/or innovations.
Trademark: is a name, symbol or other device (logo. Strapline) used to identify and promote a product or service that is protected against use from others.
Copyright: is a law that gives the owner of a creative work (for example, a book, movie, picture, song or website) the right to say how other people can use it. Lasts for a given period of time.
