Business Spencely Flashcards
What are the 4 functional areas of a business?
Finance,Marketing, Human Resoruces, Operations
What are different words for revenue?
Turnover, sales, sales revenue
What are fixed costs?
Fixed costs stay the same regardless of output
What are some examples of fixed costs?
Rent, salaries, heating and lighting, tax returns
What are variable costs?
Variable costs change in relation to the number of items produced (change with output)
What are examples of variable costs?
Ingredients/business supplies, wages, delivery costs (petrol)
How can profit be increased?
Increasing revenue or decreasing costs
How does cash flow into a business?
Cash sales, payments from debtors, owner ‘s capital (money) invested, sale of assets (things owned), bank loans
How does cash flow out of a business?
Purchasing stock, paying wages, paying debts (bank loans or creditors- people who lend money), purchasing assets
Which industries have particularly long cash cycles?
Seasonal businesses, house building, oil companies, pharmaceutical, growing businesses
Why is cash flow particularly important to banks?
Banks rely on depositors (inflows) in order to be able to lend money
What is the definition of cash flow?
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
What does profit include?
Profit includes transactions that will lead to cash in and cash out now or in the future
Why might a profitable business be short of cash?
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)
What are direct costs?
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)
What are indirect costs?
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)
What are shareholders?
Owners of a company
What are dividends?
May be paid to shareholders if company makes a profit (profit for the year figure)
What is a budget?
A financial plan for the future concerning the revenues and costs of a business
What is variance?
The difference between a budgeted figure and the actual figure achieved (adverse if worse than expected, favourable if better than expected)
What are the three types of budgets?
Income budget (revenue budget)
Expenditure budget (cost budget)
Profit
What are some purposes of using budgets?
To gain financial support
They motivate staff
To assign responsibility
They improve efficiency
To avoid overspending
To establish priorities
What are the problems of setting budgets?
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 maybe imposed
Time consuming
Conflicts between departments
What is inflation?
A rise in the price level
Examples of causes of variances (internal)- within a businesses control
Overestimating/underestimating
Changing the selling price
Improving efficiency
Poor communication
Examples of causes of variances (external)-outside of a businesses control
Competitor behaviour
Cost of raw materials
Changes in the economy
What are some possible causes of adverse variances?
Competitors offering lower prices
Staff become less motivated and efficient at work
Increase in energy prices
Higher than expected rental cost
What are some possible causes of favourable variances?
Lower interest rates
Bad publicity for a competitor
Analysis of variances
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)
How should businesses respond to an adverse profit variance?
Cut prices
Update products
Enter new markets
Promotional strategies
Streamlining production
Motivating employees
Cut supplier costs
Conduct additional market research
How should businesses respond to a favourable profit variance?
More ambitious targets next time
Spread what’s going right throughout the organisation
Increase production/staff to meet demand
What is the break even point?
The point at which the business is not making a profit or a loss
What is the margin of safety?
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)
Contribution can be increased by raising and reducing what?
- raising selling price per unit
-reducing variable costs per unit
What are debtors?
People who owe the businesses money (receivables) e.g. customers
What are creditors?
People or organisations that are owed money by a business (payables) e.g. suppliers
What is trade credit?
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
What is cash flow forecasting?
Predicting the future flows of cash into and out of the firm’s bank over a specific period of time
Why is cashflow so important?
-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
What are main cash inflows?
-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
What are main cash outflows?
-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
What is the key to avoiding a cash flow problem?
The key is to get your debtors to pay you before you have to pay your creditors
Expenditure falls into two categories:
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
Internal and external sources of finance
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
What are internal and external sources?
Internal sources- already exist within the business
External sources- are funds injected from outside the business
What is long term finance?
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
What is short term finance?
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
Long and short term sources of finance
Long term- venture capital, share capital, loans, retained profit, crowd funding
Short term- overdraft, debt factoring, retained profit
What is retained profit?
A businesses own profit they can use to pay off short term expenses or long term loans
What do you need to consider when considering what source of finance to use?
-the legal structure of the business
-the cost of the source of finance
-flexibility
-control
-the purpose for which the finance is needed
Which has more sources of finance available PLC’s or LTD’s?
PLC’s as they have access to the London stock exchange
What are receivables?
Money owed to the business that the business is expecting to be paid
What factors contribute to cash flow problems?
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
what is overtrading?
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
what is working capital?
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
What are some methods of improving cash flow/working capital? and what are their difficulties?
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
How can profits be improved? and what are some associated difficulties
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
authority
the power or ability to carry through an action
subordinates
a person under the authority or control of another within an organisation (employee)
delegation
passing authority down the organisation (decision making)
empowerment
provides subordinates with the means to excercise power and control over their working lives
leadership
deciding on the direction for a business inspiring and motivating staff to achieve these objectives
management
planning and organising and co-ordinating people and resources
leaders
risk seeking
having a vision
having followers
managers
risk adverse
implementing a vision
having subordinates
autocratic
the leader or manager makes decisions on their own e.g. Donald Trump
paternalistic
employees are consulted but decision making remains firmly at the top-like being a father e.g. Jack Ma
democratic leadership
employees are fully involved in the decision-making process. Leaders discuss issues, delegate responsibility and listen to advice e.g. Barack Obama
laissez-faire
leader has minimal input; decisions are left to those lower down in the hierarchy e.g. Warren Buffet
the right leadership style will depend on several factors:
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
autonomy
refers to a state of independence e.g. i have the autonomy to decide, i don’t have any autonomy in that
Influences on leadership style
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)
What comparisons must be made to assess the performance of a business?
Competitors
Comparisons over time
Comparisons to a standard (called an industry average)
Management decision making: Scientific
Scientific decision making- A logical and research based approach to decision making
Benefits and drawbacks of scientific decision making
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
Stages in decision making:
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.
Management decision making: Intuition
The ability to understand something without the need for conscious reasoning, similar to a ‘hunch’; a gut feeling not based on scientific decision making
Benefits and drawbacks of intuitive decision making:
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
What is an opportunity cost?
The next best thing/ alternative
Benefits and drawbacks of using decision trees
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
What is a decision tree?
A mathematical model used to help managers make decisions when faced with choices. A decision tree is one scientific approach to decision making
What are stakeholders?
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
Is stakeholder mapping useful?
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
Possible approaches to stakeholder management:
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
What is social responsibility?
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
What is Human Resources?
The management of people at work in order to assist the firm in achieving its objectives
Human Resources objectives:
Diversity
Employee engagement
Training
Number, skills and location of employees
Talent development
Alignment of values
Why has HRM become more important?
Because most businesses now provide services rather than produce goods (people are the critical resources in the quality and customer service level).
Competitiveness requires a business to be efficient and productive (which is difficult unless the workforce is well motivated, has the right skills and is effectively organised).
The move towards fewer layers of management hierarchy has placed greater emphasis on delegation and communication.
What is employee engagement and its benefits?
Employees feeling positively about doing a good job
Benefits:
-Lower absenteeism (days off)
-Increases motivation
-Increases productivity
-Staff stay longer at the business which reduces labour turnover which lowers training and recruitment cost
-Can help your business grow
What is the bottom line?
Refers to whether the business makes a profit or a loss
What is the difference between production and productivity?
Production- more units
Productivity- reduced cost (per unit)
What is training?
Training is improving work related skills and knowledge:
Training and development programmes ensure that a business has the capabilities to achieve its objectives and to meet the changing skills needed to compete effectively
Also develops individual skills and experience to enable them to move up into roles of more responsibility
A business needs to identify its training needs, set training objectives, and decide strategies to achieve these
The overall objective of training is to fill the gap between existing and the desired knowledge, skills and aptitudes of employees
Benefits of training:
-Improved employee performance
-Can help the business attract the most talented and motivated employees (particularly important for the service sector)
-May result in a USP
-Lower absenteeism and turnover
Talent development VS training
Talent development- Refers to the development and guidance of outstanding or star employees or those in key business roles who have potential to make major contributions to the organisation’s performance
Training- A process whereby an employee gains job related skills
What is diversity and its benefits?
Diversity recognises that though people have things in common, they are also different in many ways, and employers need to have an understanding of the benefits of a diverse workforce such as the wider range of skills and ideas they bring
Benefits:
-Diversity of thought (people all bring their thought and since they are all from different backgrounds they have more diverse ideas)
-Offers best opportunity to employ/promote the most talented which leads to improved business performance
-Diverse workforce allows the business to understand & meet the needs of a market which may be comprised of diverse customers
-Can gain a reputation as an attractive employer- can attract highly talented and skilled employees
Diversity and the law:
UK EQUALITIES ACT 2010 offers protection to employees against a number of protected characteristics:
Age
Disability
Gender reassignment
Marriage
Civil partnership
Pregnancy and maternity
Race
Religion or belief
Gender
Sexual orientation
Alignment of values:
Alignment of HR objectives with corporate objectives:
Involves recognising that all aspects of a business are working towards the same objectives
Therefore, HR managers must assess every action in their department in terms of how they contribute to corporate objectives and whether or not they add value
Alignment of employee values with business values:
To ensure that the values of a business are communicated and understood by employees at all levels is essential to its success
Therefore, the values of employees (of all levels) in dealing with customers, suppliers or other stakeholders are aligned with the values of the business
This can enhance the reputation and performance of the business
What are the benefits of alignment of values?
They assist the business in ensuring its vision is pursued
Stakeholders will see how the businesses values are reflected in the decision making and lead to the maintenance of customer loyalty
Helps the business to attract suitable staff with similar values
Number, skills and locations of employees:
-Matching these to the requirements of the business is an important HR objective
-If a new store is opened or new technology is introduced, the HR function will need to ensure that sufficient employees are recruited or trained to meet the new needs of the business
Why do businesses set HRM objectives?
They provide a focus for decision making and effort
Helps to measure and benchmark (a measure to compare against others) against the success or failure of the department
Improves co-ordination of activities
Motivated staff
Internal influences on HR objectives:
Available finance
Overall business aims
Business’ culture
External influences on HR objectives:
Laws and legislation
Economic factors
Social factors
Trade unions
Technology
Soft HRM:
Staff are viewed as an asset to the business and valued and fundamental to the firm’s success. They are viewed as a competitive advantage and this HRM focuses on the needs of employees such as their roles, rewards and motivation
Hard HRM:
Staff are viewed as a cost, therefore cost on employees is minimised. They are simply treated like a resource of the business and the focus of this HRM is to identify the workforce needs of the business and recruit & manage accordingly (hiring, firing, moving)
Corporate vs functional objectives
Corporate objectives comes from top of the business and applies to all functions. Functional objectives apply to a separate function like HR or marketing, and they should line up with corporate objectives.
Features of Hard HRM:
Short-term changes in employee numbers
Minimal communication from the top down
Pay- enough to recruit and retain staff e.g. minimum wage
Little empowerment or delegation
Taller organisational structures
Suits autocratic leadership style
Appraisal systems focused on making judgements ( good and bad) about staff
Features of Soft HRM:
Suits democratic leadership style
Competitive pay structure, with suitable performance-related rewards e.g. share options, profit share
Employees are empowered and encouraged to seek delegation and take responsibility
Appraisal systems focused on identifying and addressing training and other
Flatter organisational structures
Strong and regular two-way communication
Strategic focus on longer-term workforce planning
Is hard or soft HRM best?
It very much depends on the situation, soft could be more motivating for employees whereas hard allows for quicker decision making
What is an appraisal system?
Where management works with employees to check their performance
