business theme 2 Flashcards
name the internal sources of finance
retained profit, sale of assets, owners capital (personal savings)
name the external sources of finance
overdraft, trade credit, grants, leasing, bank loans, venture capital, share capital, crowd funding
benefits and disadvantages of the internal sources of finance
retained profit and perosnal savings are free and do not incur interest !
however shareholders may want some of the profit (dividens and the owner may lose personal investment)
sale of assests frees up the business so they can invest in other things but the business will lose the benefit of the asset
pros and cons of external sources of finance
bank loans and overdraft have high interest rates and may need collateral.
share capital and bank loans can raise large amount of finance and sc is only available to ltd and plc
trade credit allows a business to generate revenue before paying suplliers but delays in payments may ruin relationship w suppliers
venture capital can bring expertise into the business but they may try to take control
reasons to start a business
enjoy a challenge
be creative
be your own boss
ethical/moral
make profit
advantages of franchising
recieve a lump sum of income after the sale,
more promotion with every sale,
economies of sale,
garanteed customers
dont have to be creative
Business objectives
profit/sales maxim.
market share
survival
employee welfare
customer satisfaction
social objectives(ethical)
what is an entrepreneur
a person who takes the risk to set up a business in hopes of profit and reward.
disadvantages of a partnership
share profits,
slow decision making,
conflict
whats the difference between limited liability and unlimited liability?
limited liability is when the company and owner are separate legal entities, so they can lose their investment but their personal belongings are safe
unlimited liability can lose personal assets if they dont pay the debts of the business
cash flow forecast calculations
inflow - outflow = net cash flow +opening balance = closing balance
e.g february opening balance is januarys closing balance
how do your improve cash flow ? (speed up inflow and slow down outflow)
incentivise early repayment e.g give discounts
reduce customer trade credit
sell off stock at low price to free up cash
delay payments to suppliers
increase trade credit with suppliers
cut costs: cheaper supllier alternatives or postpone spending
why do businesses need to follow consumer legislation?
faulty products could lead to a fall in customers, negative reviews/word of mouth, fines which increase costs, customers lost to competitors
following legislation impacts
fewer returns and refunds(decrease costs), better brand reputation, higher costs because of high quality raw materials that meets requirements
Why might it be difficult to forecast sales?
- New competitor enters the market - Competitor changes their price
- Changing consumer incomes
- Changing fashion and trends
May over or underestimate sales which could lead to expenses being incorrectly forecasted - Suppliers may increase their price which could lead to increased costs
- The exchange rate may fall which could lead to increased costs of imports
Benefits of cash flow forecast
Support an application for lending
Support budgeting process
Identify potential cash flow crisis
limitations of budgeting
only as accurate as the data its based on
past doesnt equal the future
unexpected changes in processes
budget cuts can decrease motivation
margin of saftey
determines the risk of the business
margin of saftey = current level of output - breakeven point
difference between current assets and non current assets
ca = assets the business expects to sell or use withing a year
nca = fixed assets used to operate the business
difference between current liabilities and non current liabilities
cl = payments due within a year
ncl = debts the business doesn’t expect to pay with in a year
ways to improve liquidity
delay payments
sell off stock
encourage cash sales
gain extra short term finance
take out credit agreements with suppliers
reasons for business failure
internal : poor planning
cash flow
marketing
lack of skills
external: competition
legislation
market conditions
economic factors
what does spicee stand for
strong
pound
expensive
exports
cheap
imports
methods of production
job production - one off single units (requests) that require a highly skilled workforce e.g painting
Batch production - standardized components made in batches/small groups
flow production - continuous automated standardized production to achieve economies of scale
cell production - teams of workers work together to produce an entire product
factors affecting productivity
amount of capital
working practices
specialisation
education and training
motivating workers
how can a business benefit from improved efficiency
unit costs fall
increase profit margins
improved flexibility
charge lower prices - competitive
implications of of under capacity utilisation
idle resources costing money and not being used
unit costs rise
flexible to changes in demand
implications of over capacity utilisation
employees overworked and unhappy
mistakes are more likely
unit costs will fall but may rise again due to mistakes from stress
what is capacity utilisation?
CU is about the use a business makes of its resources
what is efficiency ?
making the best use of all the resources of a business
an efficient business has minimal waste
what is productivity?
is the amount of output that can be produced in a given input of resources in a period of time
what are the costs of poor stock management
tying up cash that cant be used elsewhere
risk of damaged stolen stock
storage costs are high
too little stock means loss of sales and unhappy customers
goods will expire or stop being trendy
can respond to changes in demand
what is lean production?
lean production involves processes that reduce waste in the operational processes
focused on reducing defects, time wasted and inventory levels
ways a business can minimise waste
store inventory appropriately e.g perishable goods in the freezer
rotate stock so old stock gets used first
sell off more stock through sales
what is the lead time
the time taken from when the order was placed to it arriving
what is the difference between quality control and quality assurance
quality control is about the product whereas quality assurance is about the process
outline quality control
quality checked at the end
focus on identifying faults
quality control is a specific role
about the product
outline quality assurance
about the process
all employees are involved
quality is considered at all steps of production
focus is on continual improvement of quality
what are the limitations of poor quality
if products need recalling this can be expensive
poor quality = bad brain rep
could get sued
quality costs
what is total quality management
quality is the priority throughout the organisation and is everyone’s responsibility.
outline the 4 stages of the business cycle
boom - high rates of economic growth and production
recession - output starts to fall and growth declines
slump - prolonged period of economic decline
recovery - economy starts to pic up after a period of decline
features of a boom
high profits
low unemployment
high inflation
shortages in supply
features of a recession
production declines as demand falls
governments use policies to stimulate growth - subsidies
consumer certainty starts to fall
features of a slump
high unemployment
low interest rates
low spending and investing
business failures and closures
features of recovery
increasing consumer confidence
business are investing and hiring
spare capacity is used up
impacts of deflation on a business
businesses may struggle to pay debts because they remain the same whilst their prices decrease
low demand
(people dont purchase as they expect things to get cheaper) may lead to redundancies and less supply
impact of competition on business
fall in prices leading to lower profit margins
increased costs of promotion
improved efficiency to reduce average costs
increased innovation
benefits and limitation of a large market
wider consumer base
less volatility than small markets
more regulation and scrutiny
potential international competition
pros and cons of a small market
less competition opportunities for expansion
easier to build loyal relationships
threat of new entrants
few economies of scale
How may exchange rates impact decision making
businesses may try to avoid uncertainty when exchange rates are volatile
businesses may set an agreed rate for future transactions
what are the impacts of competition in a market
cons:
a fall in prices
increase costs of promotion
businesses may act unethically
pros:
improved efficiency to reduce average costs
wider product ranges
what is the interest rate
this is the cost of borrowing money and the reward for saving money
what are the impacts of high interest rate on business activity
consumer and business spending falls as theres incentive to save and invest
inflation falls - as theres a reduced demand for goods and services
stronger pound - high interest attracts foreign investors
difficulties in improving quality
quality is subjective and dynamic
business may let quality slip if theres no incentive from rivals
it can add more work so it may be rejected by the workforce
measuring quality is difficult and expensive
what is a balance sheet
a financial document that records the assets and liabilities of a business
gives a snapshot of the value and financial strength of the business
what can we find out from a balance sheet
the value of a business (equity)
assets the business holds and liabilities they need to pay
the long term debts of a business
how a business has been financed
what is the difference between net assets and net current assets
net assets tells us the value of a business
net current assets tells us the working capital that a business has
what does current ratio assess
whether a business has sufficient working capital to pay its short term debts
current assets over current liabilities
what does a current ratio of 2:1 mean
The business has £2 of current assets for every £1 of current liabilities
how does acid test ratio differ from current ratio
its a more severe measure of liquidity because it doesnt take into account stock
this is because or many businesses theres no guarantee that inventories can be quickly turned into cash
current assets - inventory
over
current liabilities
what is working capital and how is it calculated
this is the money in a business that is used to finance day to day running costs. this includes paying bills, wages and buying stock
working capital includes stock
wc = current assets - current liabilities
what is the statement of comprehensive income
this tells us the revenue generated by a business and its profit at various levels following a series of expenses
what can we find out from a statement of comprehensive income
changes in sales revenue
how well a business is managing its operating costs
changes in the direct cost of sales
the profitability of a business
What should be included in the contents of a business plan
business idea
aims and objectives
market research
sources of finance
personnel
buying and production
premises and equipment
financial forecasts
