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A Level Notes > Business Spencely > Flashcards

Business Spencely Flashcards

1
Q

What are the 4 functional areas of a business?

A

Finance,Marketing, Human Resoruces, Operations

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2
Q

What are different words for revenue?

A

Turnover, sales, sales revenue

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3
Q

What are fixed costs?

A

Fixed costs stay the same regardless of output

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4
Q

What are some examples of fixed costs?

A

Rent, salaries, heating and lighting, tax returns

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5
Q

What are variable costs?

A

Variable costs change in relation to the number of items produced (change with output)

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6
Q

What are examples of variable costs?

A

Ingredients/business supplies, wages, delivery costs (petrol)

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7
Q

How can profit be increased?

A

Increasing revenue or decreasing costs

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8
Q

How does cash flow into a business?

A

Cash sales, payments from debtors, owner ‘s capital (money) invested, sale of assets (things owned), bank loans

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9
Q

How does cash flow out of a business?

A

Purchasing stock, paying wages, paying debts (bank loans or creditors- people who lend money), purchasing assets

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10
Q

Which industries have particularly long cash cycles?

A

Seasonal businesses, house building, oil companies, pharmaceutical, growing businesses

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11
Q

Why is cash flow particularly important to banks?

A

Banks rely on depositors (inflows) in order to be able to lend money

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12
Q

What is the definition of cash flow?

A

Cash flow refers to the money flowing into and out of a business over a period of time calculated at the exact time it leaves and enters the account

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13
Q

What does profit include?

A

Profit includes transactions that will lead to cash in and cash out now or in the future

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14
Q

Why might a profitable business be short of cash?

A

Businesses are holding lots of stock that they are unable to sell at the moment

dividends (rewards to shareholders)

goods are sold on credit (they are not receiving the money immediately)

purchase of fixed assets (big costly items)

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15
Q

What are direct costs?

A

Direct costs are costs which can be identified directly with the production of a good or service (e.g. raw materials- similar to variable costs)

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16
Q

What are indirect costs?

A

Indirect costs are costs which cannot be matched against each product because they need to be paid whether or not the production of goods or services takes place (e.g. rent-similar to fixed costs)

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17
Q

What are shareholders?

A

Owners of a company

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18
Q

What are dividends?

A

May be paid to shareholders if company makes a profit (profit for the year figure)

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19
Q

What is a budget?

A

A financial plan for the future concerning the revenues and costs of a business

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20
Q

What is variance?

A

The difference between a budgeted figure and the actual figure achieved (adverse if worse than expected, favourable if better than expected)

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21
Q

What are the three types of budgets?

A

Income budget (revenue budget)
Expenditure budget (cost budget)
Profit

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22
Q

What are some purposes of using budgets?

A

To gain financial support
They motivate staff
To assign responsibility
They improve efficiency
To avoid overspending
To establish priorities

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23
Q

What are the problems of setting budgets?

A

Managers do not know enough about the division or department
Problems in gathering information
Unforeseen changes
Level of inflation is not easy to predict
Limits may Mabel imposed
Time consuming
Conflicts between departments

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24
Q

What is inflation?

A

A rise in the price level

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25
Q

Examples of causes of variances (internal)- within a businesses control

A

Overestimating/underestimating
Changing the selling price
Improving efficiency
Poor communication

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26
Q

Examples of causes of variances (external)-outside of a businesses control

A

Competitor behaviour
Cost of raw materials
Changes in the economy

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27
Q

What are some possible causes of adverse variances?

A

Competitors offering lower prices
Staff become less motivated and efficient at work
Increase in energy prices
Higher than expected rental cost

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28
Q

What are some possible causes of favourable variances?

A

Lower interest rates
Bad publicity for a competitor

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29
Q

Analysis of variances

A

Small variances aren’t a problem as they can actually motivate
Large variances both adverse and favourable can demotivate (favourable because staff don’t see the need to work hard anymore and become complacent e.g. Nokia went from #1 to almost off the market due to complacency)

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30
Q

How should businesses respond to an adverse profit variance?

A

Cut prices
Update products
Enter new markets
Promotional strategies
Streamlining production
Motivating employees
Cut supplier costs
Conduct additional market research

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31
Q

How should businesses respond to a favourable profit variance?

A

More ambitious targets next time
Spread what’s going right throughout the organisation
Increase production/staff to meet demand

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32
Q

What is the break even point?

A

The point at which the business is not making a profit or a loss

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33
Q

What is the margin of safety?

A

The difference between actual output and break even output (a business operating with a positive margin of safety is profitable. a negative margin of safety means the business is making losses)

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34
Q

Contribution can be increased by raising and reducing what?

A
  • raising selling price per unit
    -reducing variable costs per unit
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35
Q

What are debtors?

A

People who owe the businesses money (receivables) e.g. customers

36
Q

What are creditors?

A

People or organisations that are owed money by a business (payables) e.g. suppliers

37
Q

What is trade credit?

A

It is the period of time given by suppliers before customers have to pay for goods and services e.g. 30 days, 60 days, 90 days

38
Q

What is cash flow forecasting?

A

Predicting the future flows of cash into and out of the firm’s bank over a specific period of time

39
Q

Why is cashflow so important?

A

-If a business runs out of cash it will almost certainly fail even if it is profitable
-Cash is the lifeblood of a business
-Needed to support loan applications
-Forecasting helps to avoid unexpected cash flow crisis
-Cash flow is dynamic and unpredictable
-Particularly important for start-ups and small businesses and those with seasonal demand

40
Q

What are main cash inflows?

A

-Cash sales
-Sale of fixed assets
-Grants (money that the government gives to a business but doesn’t get it back e.g. social or ethical businesses)
-Loans from banks
-Share capital invested
-Interest on bank balances
-Receipts from debtors

41
Q

What are main cash outflows?

A

-Payment to suppliers
-Interest on loans and overdrafts
-Wages and salaries
-Payments for fixed assets e.g. machinery
-Dividends paid to shareholders
-Repayment of loans
-Tax on profits
-Payment to creditors

42
Q

What is the key to avoiding a cash flow problem?

A

The key is to get your debtors to pay you before you have to pay your creditors

43
Q

Expenditure falls into two categories:

A

Capital expenditure- spending on assets that might be used again and again e.g. machinery
Revenue expenditure- spending on the day to day running of the business e.g. wages, raw materials

44
Q

Internal and external sources of finance

A

Internal: retained profits , share capital (if you own 100% of shares), raising money from selling an asset, entrepreneur’s savings
External: loans, venture capital, overdraft, crowd funding, debt factoring, share capital

45
Q

What are internal and external sources?

A

Internal sources- already exist within the business
External sources- are funds injected from outside the business

46
Q

What is long term finance?

A

Finance needed over a longer period usually over a year. Businesses need long term finance to:
-Purchase long term assets
-Finance long term plans e.g. expansion

47
Q

What is short term finance?

A

Finance needed for a limited time period normally less than one year. Businesses need short term finance to:
-Pay outstanding bills
-Overcome cash flow shortages

48
Q

Long and short term sources of finance

A

Long term- venture capital, share capital, loans, retained profit, crowd funding
Short term- overdraft, debt factoring, retained profit

49
Q

What is retained profit?

A

A businesses own profit they can use to pay off short term expenses or long term loans

50
Q

What do you need to consider when considering what source of finance to use?

A

-the legal structure of the business
-the cost of the source of finance
-flexibility
-control
-the purpose for which the finance is needed

51
Q

Which has more sources of finance available PLC’s or LTD’s?

A

PLC’s as they have access to the London stock exchange

52
Q

What are receivables?

A

Money owed to the business that the business is expecting to be paid

53
Q

What factors contribute to cash flow problems?

A

lack of planning by managers
overtrading
allowing too much credit e.g. 90 days instead of 30
poor credit control (not chasing up people who owe them money)
inaccurate cash flow forecasting

54
Q

what is overtrading?

A

overtrading happens when a business expands too quickly without having the financial resources to support such a quick expansion. If suitable sources of finance are not obtained, overtrading can lead to business failure e.g. small bakery asked to provide all of tescos baked goods, say yes, but don’t have the staff or machines to do so, so will run out of stock soon

55
Q

what is working capital?

A

It is the finance available to the business for its day to day trading activities. Working capital is available to a business when a customer pays for the goods or service they have received. Working capital is used to pay wages, fuel and raw materials. It revolves around cash flow not profit

56
Q

What are some methods of improving cash flow/working capital? and what are their difficulties?

A

Bank Overdraft- expensive
Debt factoring- reduce profit margin
Sale and Leaseback- may not receive a good price for the asset, committed to paying a rental which can reduce profits
Offer less trade credit- customers move to other business with better terms, prices may have to be lowered to compensate
Leasing of non current assets- could impact on profitability
Improved control of working capital- additional staff to oversee control will increase cost
Negotiate improved terms for trade credit- difficult for a firm with a poor payment record, discount for prompt payment lost affect profit margins

57
Q

How can profits be improved? and what are some associated difficulties

A

reducing production cost- the quality may be worse
increase prices- lose customers to competitors offering lower prices
improving the business effiency
use capacity more fully
reduce the number of substandard products- increased costs because staff will need to be hired so higher total number of salaries
improve production methods
eliminate unprofitable aspects- loss of jobs, reduces morale of people still working there

58
Q

authority

A

the power or ability to carry through an action

59
Q

subordinates

A

a person under the authority or control of another within an organisation (employee)

60
Q

delegation

A

passing authority down the organisation (decision making)

61
Q

empowerment

A

provides subordinates with the means to excercise power and control over their working lives

62
Q

leadership

A

deciding on the direction for a business inspiring and motivating staff to achieve these objectives

63
Q

management

A

planning and organising and co-ordinating people and resources

64
Q

leaders

A

risk seeking
having a vision
having followers

65
Q

managers

A

risk adverse
implementing a vision
having subordinates

66
Q

autocratic

A

the leader or manager makes decisions on their own e.g. Donald Trump

67
Q

paternalistic

A

employees are consulted but decision making remains firmly at the top-like being a father e.g. Jack Ma

68
Q

democratic leadership

A

employees are fully involved in the decision-making process. Leaders discuss issues, delegate responsibility and listen to advice e.g. Barack Obama

69
Q

laissez-faire

A

leader has minimal input; decisions are left to those lower down in the hierarchy e.g. Warren Buffet

70
Q

the right leadership style will depend on several factors:

A

The organisation’s cultures and traditions- e.g. John Lewis have a history of involving staff in decisions ‘partner’
The nature of the tasks and time scales- e.g. urgent, short term VS highly creative, long term
The personality skills of the manager/leaders e.g. good communicators may lend to democratic, strong vision & decisive may lend to autocratic
The group size e.g. small- democratic, large- autocratic
The employees themselves, their skills and abilities e.g. highly skilled employees- Laissez-Faire/democratic, unskilled- autocratic

71
Q

autonomy

A

refers to a state of independence e.g. i have the autonomy to decide, i don’t have any autonomy in that

72
Q

Influences on leadership style

A

The level of confidence the manager has in his team
The time frame e.g. urgent
Personalities, skills of managers/ leaders
The group size
Employees skills & abilities
Nature of the task involved e.g. creative/urgent
Culture & traditions e.g John Lewis shares
The particular situation
The company structure, especially the span of control (how many people you are supervising)

73
Q

What comparisons must be made to assess the performance of a business?

A

Competitors
Comparisons over time
Comparisons to a standard (called an industry average)

74
Q

Management decision making: Scientific

A

Scientific decision making- A logical and research based approach to decision making

75
Q

Benefits and drawbacks of scientific decision making

A

Benefits-
A decision is made in an objective manner
Risk is reduced as decisions are made on the basis of researched data and facts
Drawbacks-
Does not mean decisions will always be right
Can slow the decision-making process down (gathering data takes time)
Data may not be accurate
Sole use of data when making decisions may lack creativity and therefore innovation

76
Q

Stages in decision making:

A

Set objectives- SMART, ensure these fit in with the businesses mission statement, what it wants to achieve and where it wants to be within the given time frame
Gather data- e.g. cost, demand, location, available workforce, market research
Analyse data- to provide a recommendation, can use various quantitative techniques such as decision trees
Select the strategy- decision on which strategy will be used will be based on recommendations that come from data analysis
Review the decision- Implementation itself will result in tactical and operational decisions being made. Review to see how well the outcome has succeeded in achieving initial objectives.

77
Q

Management decision making: Intuition

A

The ability to understand something without the need for conscious reasoning, similar to a ‘hunch’; a gut feeling not based on scientific decision making

77
Q

Benefits and drawbacks of intuitive decision making:

A

Benefits-
(Hunches are used bc of problems involved in scientific decision making)
Can lead to more creative or innovative decisions making
Much cheaper and quicker as it is expensive to continually gather market research data
Scientific model is time consuming due to constant checking and monitoring so decisions are delayed, so intuitive decision making is much quicker
Scientific decisions are based on past information- may be better if they use intuitive decision making as they rely on the instincts of the manager who has a qualitative understanding of the market
In scientific decision making, the customers may have changed their minds so data might be flawed, this won’t happen in intuitive decision making
Drawbacks-
They are uninformed decisions so lead to bias and subjectivity, leading to poor decisions being made
High risk

78
Q

What is an opportunity cost?

A

The next best thing/ alternative

78
Q

Benefits and drawbacks of using decision trees

A

Benefits-
Choices are set out in a logical way, less rushed process based on evidence rather than gut feeling
Potential options & choices are considered at the same time
Use of probabilities enables the “risk” of the options to be addressed
Likely costs are considered as well as potential benefits
Easy to understand
Drawbacks-
Probabilities are just estimates so are always prone to error
Uses quantitive data only so it ignores qualitative aspects of decisions
Assignment of probabilities and expected values are prone to bias
Using decision- making techniques don’t necessarily reduce the amount of risk, also using a decision tree doesn’t guarantee success

78
Q

What is a decision tree?

A

A mathematical model used to help managers make decisions when faced with choices. A decision tree is one scientific approach to decision making

78
Q

What are stakeholders?

A

Groups or individuals that are affected by and/or have an interest in the operations and objectives of the business e.g shareholders, customers, employees, government, creditors, pressure groups, local community

79
Q

Is stakeholder mapping useful?

A

Yes bc it allows managers to select and use the means of engagement that are appropriate for the degree of power and interest held by the relevant stakeholder
No bc things can change very quickly leg, media suddenly showing huge interest in something, therefore stakeholder mapping needs to be dynamic

80
Q

Possible approaches to stakeholder management:

A

High level of stakeholder power and high level of stakeholder interest = Key players, Take notice of them, Engage directly with them
High level of stakeholder power and low level of stakeholder interest = Keep them satisfied
High level of stakeholder interest and low level of stakeholder power = Communicate regularly with them
Low level of stakeholder interest and low level of stakeholder power = Communicate only when necessary

81
Q

What is social responsibility?

A

Describes the duties that a business has towards groups, e.g. employees, customers, government
Not just about following the law but about how business should behave as good citizens. They should avoid pollution, reckless use of limited resources and mistreatment of employees or customers

82
Q
A
83
Q
A

A Level Notes (8 decks)

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