Business theme 3 Flashcards
What are two key reasons for growth?
- Increasing profits
- Achieve economies of scale
What is Internal Economies of Scale?
When the output of a business decreases their costs
What is External Economies of Scale?
Occurs within an industry i.e. all competitors benefit
What are three internal economies of scale?
- Technical
- Managerial
- Marketing
What is extrapolation?
Uses trends established from historical data to forecast the future
What is a moving average?
Takes a data series and smooths the fluctuations in data to show an average. The aim is to take out the extremes of data from period to period
What are three evaluation points of Payback Period?
- Simple and easy to calculate
- Emphasises speed of return (good for businesses in Dynamic Markets)
- May encourage short-term thinking
What are three evaluation point of ARR?
- Easy to compare ARR to other key target rates of return
- Uses all the returns generated by a project
- Ignores the timing of return
What are the evaluation points of NPV?
- considers all future cash flows
- reflects the risks that future cash flows will not be as expected
- The most complicated method compared with payback & ARR
What are the evaluation point of Decision trees?
- Using probabilities enables the ‘risk’ of of the options to be addressed
- Easy to understand and tangible results
- Probablilties are just estimates - always prone to error
What are 3 evaluation point of Organic Growth?
- Less risk than external growth
- Can be financed through internal funds
- Slow growth - investors want to see quick growth
What are two key reasons for staying small?
- Product differentiation and USP
- Flexibility in meeting customer needs
Who are interested in a businesses income statement?
- Shareholders
- Employees
- Competitors
What are two possible things that could lead to Diseconomy of Scales?
- control - problems with managing productivity and work quality
- co-operation - workers in large firms may feel unappreciated
What is overtrading?
When a business expands too quickly without having the financial recourses to support such a quick expansion
