business unit 2 exam Flashcards
1
Q
current ration
A
- gives an idea whether the business would be able to repay its liabilities with its assets
- current assets/current liabilities
- ideal is 1,5 to 2
2
Q
acid test ration
A
- current assets-inventory/current liabilities
- if its low, the business may be too reliant on its inventory
- ideal 1
3
Q
However, liquidity
A
- acid test and current ratio only provide a rough estimate of the businesses financial health
- some businesses are still healthy even if they have low liquidity rations
- its always useful to compare with other businesses to have a better understanding
- having rations above 1 could mean cash is not being used which could upset shareholders who would prefer it paid out to them or re invested.
- could be better to compare these rations with those from previous years in order to know if the business is in better or worse position.
4
Q
liquidity definition
A
- it shows how quickly a business can access cash in order to meet its short term debts.
5
Q
ways to improve liquidity
A
- sale of assets, increase current assets by an injection of cash
- asking for a longer time to pay, delaying cash going out of the business
- only ordering stock when its needed,
- factoring, selling their debts which creates an instant injection of cash
- removing the option of credit, instant cash
6
Q
working capital
A
the amount of money needed to pay for the day to day trading of a business, or current assets/liabilities.
7
Q
productivity definition
A
is a measure of output of a person, machine or process over a period of time
8
Q
ways to improve productivity
A
as the business becomes more productive average costs are lowered and profit increases
- education/training
- motivating workers
- introducing new machinery or technology
9
Q
ways to improve productivity
A
as the business becomes more productive average costs are lowered and profit increases
1. labour - increased specilisation, motivation/education, training, flexibility
2. capital - increase service, maintance of machinery, replace and update of technology
10
Q
benefits of productivity
A
- new production line may produce more items with fewer workers, fewer workers per day would increase amount produced per worker
- new production line may produce more items per day, more output per day would increase the amount produced per machine.
- new production line may not break as often, increased output every day.
11
Q
potential drawbacks productivity
A
- high start up costs
- existing staff may fear being replaced by machines,
- machines can break
- education and training may be expensive if business pays them also time consuming
12
Q
sales forecast definition
A
- an estimate of the value or volume of future sales for a business, based on market research/past data for a period of time.
13
Q
benefit of sales forecast
A
- finances can be managed, it gives idea of what cash inflows might be.
- meet production needs, to plan orders of supplies and ensure that they have the capacity to meet the predicted orders. (may need to buy equipment or rent)
- correct staffing levels for the predicted level of demand or new project they are about to do
-many sales forecasts are based on historical sales data which can be useful to identify trends and patterns.
14
Q
factors affecting sales forecast
A
- consumer trends (seasonal, fashion, long term)
habits or behaviour of those involved in the use of goods and services - economic variables (income. inflation, employment)
- actions of competitors.
15
Q
drawbacks of sales forecast
A
- they are based on assumptions and estimates about future market conditions and consumer behaviour (limited accuracy)
- relying on past data can be problematic as consumer behaviour changes and now the data might be inaccurate
- lack of flexibility - if actual sales are different from predicted sales, it can be difficult for businesses to adjust there decisions quickly.
16
Q
sales volume definition
A
the number of units sold by a business
sales revenue/sales price
17
Q
ways to improve sales volume
A
- reducing the price (however it may affect the revenue of the business negatively)
- advertising (however depends on the market, if its a big one, ads might not help)
- improved targeting
- extend product range
- promotion
18
Q
revenue definition
A
- total income earned by a business from the sales of its products
price x quantity sold (sales volume)
19
Q
ways to improve sales revenue
A
- changing price higher/lower
- adding additional services or products ( shoe retailer selling shoe products)
- increase the sales volume
20
Q
loan definition
A
a sum of money issued to a business owner exclusively for use in their business and is repaid with interest over an agreed term.
21
Q
loan benefits
A
- more easily available to large businesses at a lower interest rate because they might seem less risky than a small business.
- provides access to a large amount of funds that can be used to finance variety of needs.
- ## some loans such as mortgages, offer tax benefits that can reduce the amount of taxes owed each year.
22
Q
loan drawbacks
A
- process of obtaining finance via loan may take a long time, and delay introduction of a certain product on to the market.
- you have to pay it back with interest rates which increases the total cost of borrowing
- some banks may not give out the loan if the business is new and small
- limited flexibility, once the loan is taken out the repayment terms are fixed, borrowers are not able to delay the payment or change conditions on it.
23
Q
leasing definition
A
leasing is when the business pays to use assets owned by a lessor.
24
Q
leasing benefits
A
- quicker access to equipment needed to expand and develop products without having to raise additional finance
- access to a higher standard equipment maybe possible through the use of leasing than the businesses may otherwise have been able to pay for.
25
leasing drawbacks
- expensive as payments are being made without actually owning the equipment
- leasing agreements often come with restrictions on how the leased asset can be used.
- in short term leasing is cheaper but on the long term leasing can be more expensive then buying the machine.
26
venture capital definition
a source of finance to fund a business where the risk is greater for the investor
27
business plan definition
a document for the develoopment of a business giving details such as the product, resources and costs.
28
business plan benefits
- gain finance, bank is more likely to lend you the money if u have business plan and they can see your overall state of finance
- potential problems can be found and resolved by producing a business plan and it helps business be successful.
- reduces the risk of fail because it forces the owner to consider all the factors that could cause business to fail.
29
business plan drawbacks
- time consuming to make one, it can delay the product being introduced to the market.
- not all sources of finance require a business plan therefore business can try and find other ways to raise the money
- business plan is subject to external influences which might make the predictions invalid.
30
limited liability definition
means that the owners of the business are only liable for the money they have invested in the business
31
limited liability benefits
- owners are able to make more risks as they dont have to worry about losing their personal possessions if venture failed.
- personal assets are protected so owners may feel less stressed and pressured
32
limited liability drawbacks
- banks may be less likely to lend money as there is a risk that the debt will not be met
- time consuming, as there are legal requirments that has to be met, setting up more complicated then sole trader or partnership
- not being able to repay debts to creditors
33
unlimited liability definition
- businesses where there are no legal difference between the owners and the business.
34
unlimited liability benefits
- may find it easier to borrow money as the lender will be repaid.
- easy process to set up
- owners may be more cautious when it comes to running up debt, which can help them manage cash and debts better in the future.
35
unlimited liabilities drawbacks
- have to pay debts from personal resources, they are willing to take less risk
- they might be financially liable if business is sued.
36
efficiency definition
- making the best possible use of all the businesses resources by minimizing average costs.
37
ways to improve efficiency
- investing in new technology, flow production therefore increased output
- relocating the business where rent is reduced and therefore costs are lowered
- downsizing, reduced capacity of the business, closing down not profitable parts of business therefore costs are decreased
- lean production, cutting out waste, kaizen, JIT, lower costs and higher output.
38
capital intensive production definition
- those that require a relatively high level of capital investment/cost compared to labour
39
capital intensive production benefits
- more cost effective if larger quantities are produced
- machinery more precise and reliable and can operate 24/7
- machinery is easier to manage than people
40
capital intensive production drawbacks
- huge set up costs
- huge delays and costs if machinery breaks down
- often causes a threat to the workforce and could reduce motivation
41
labour intensive production definition
- would involve production to be carried out by more labour compared to capital
42
labour intensive production benefits
- more flexible, can be retrained
- cheaper for small scale production but for the large scale one as well (China and India)
- people are creative, can solve problems and make improvements
43
labour intensive production drawbacks
- people are more difficult to manage
- unreliable because people can get sick and leave
- people need to be motivated, they cannot work without breaks and holidays.
44
lead in times definition
- length of time between the start of the product concept/design and its launch into the market
45
lead in times benefits
- if firms manage to reduce time it takes to develop and launch new product, increase productivity, they may gain competitive advantage
- brand recognisition, lasting impression
- premium prices, brand loyalty
46
lead in times drawbacks
- copy cats, take ideas from first movers
- they learn from mistakes of the first movers and create better versions
- first movers can launch too soon, just to be the first one on the market, while the product is not ready.
47
profit definiton
the extra remaining after total costs are deducted from the revenue
48
gross profit and GPM
gross profit: total revenue - cost of sales (v.costs)
GPM: gross profit/revenue x 100%
higher - better, increase in price - increase in GPM, variable costs decrease - increase in GPM
- may depend on industry to industry
49
operating profit and OPM
operating profit: gross profit - fixed costs or revenue - total costs
OPM: operating profit/revenue x 100%
higher - better, fixed costs decreased - increase in OPM
50
profit of the year or net profit (margin)
profit of the year: operating profit - finance cost (interest)
net profit margin: net profit/revenue x 100%
higher - better, shows how much profit is made per 1$ for the year.
51
ways to increase profit
1. increase revenue
- increase price
- invest into ads to create more awarness
- attract customers and increase sales volume
2. cutting costs
- purchasing material from cheaper supplier (v.costs, increase in GPM)
- reducing fixed costs, moving in order to pay cheaper rent (increase in OPM)
52
profitability definition
Profitability is the degree to which a business makes a profit from its activities.
GPM/OPM/net profit / revenue x 100%
53
ways to improve profitability
- increasing prices will allow more revenue for every unit sold, assuming costs are staying the same, therefore profitability will increase.
- decreasing costs and keeping the price same would increase profitability
54
profitability drawbacks
- it may depend on price elasticity of demand (PED) whether a
price increase would bring in more revenue from diners or reduce the number of customers.
- if cutting down costs by changing to the cheaper supplier, the product quality may be reduced which can lead to less customers and sales which affects profitability negatively.
55
inventory control definition
the optimum quantity of goods a business holds for the purpose of resale or production.
56
inventory definition
the raw materials or work in progress held by the business
57
inventory control diagram definitino
shows details of inventory movements such as minimum and maximum inventory levels, re order levels and quantity lead times.
58
inventory control diagram benefits
- it can show minimum inventory level, (usually more then 0) therefore they know they will never ran out of their product.
- it shows how many items to re-order in order to be able to meet customers demand for the next (duration of time they get new products)
59
lead time definition
amount of time between placing the order and receiving the stock
60
re order quantity definition
the amount of stock that is ordered each time
61
buffer inventory definition
an amount of stock held as an emergency in case of unexpected orders so that such orders can be met
62
buffer inventory benefits
- able to keep up with demand,, which could lead to higher brand image
- problems in supply chain, for example delieveries of stock being delayed, the firm will still be able to manufacture
- larger orders of stock will have to be place, therefore increased benefits of buying in bulk
63
buffer inventory drawbacks
- higher storage costs and fixed costs
- if business is operating in dynamic market there are higher chances of being left with out dated goods which can quickly go out of fashion.
64
poor inventory control
1. holding too much inventory
- unsold inventory with which is cash tied up
- storage costs, opportunity cost
2. holding too little inventory
- not being able to meet high or increased demand
- missed sales opportunities
- if delayed the production has to stop as there is no product in inventory
65
just in time definition
a manufacturing system where materials are delievered just before they are needed in order to minimise costs. (no buffer stocks)
66
JIT benefits
- reduces the need for storage of larger amounts of inventory, therefore fixed costs are reduces and profitability increased or the space can be used for other things
- less chance the stock would go out of date (expired)
67
JIT drawbacks
- loss of economies of scale as smaller quanitities are purchased, therefore average costs can increase and profit margins may fall.
- difficult to deal with high demand, if not able to brand image might fall and the business may lose loyal customers.
68
waste minimisation definition
producing goods/services at given quality using as few resources as possible
- performance of the goods may exceed customers expectations therefore the business will get higher bran image and customers are not going to switch to other competitors which also gives the business competitive advantage
69
lean production definition
approach of management that focuses on cutting out waste, while ensuring quality.
- reduce waste which helps reduce costs which could mean lower prices to attract customers OR more profit to invest into the business as profit margins are getting higher
- but also it could help with the business image. if they reduce waste they can be seen as more ethical and gain competitive advantage
70
competitive advantage definition
conditions that puts a company in a superior position against its competitors.
71
cash flow definition
money that is moving in and out of a business
72
cash flow forecasting definition
it is a prediction of the cash moving in and out of a business over a period of time.
73
cash flow forecast benefits
- helps to identify the timing of cash shortages, and arrange for the overdraft if needed or delay payments.
- supporting applications for finance if needed external sources, for example a bank loan
- allows a business to compare their forecast to what actually happened, if there is any difference the business can try to improve there so the forecast is better in the future.
- use to help identify times when the business has a lot of cash
74
cash flow forecast drawbacks
- data may be based on estimations so may not be accurate, as those usually make managers so it can be subjective.
- external factors may affect the forecast, unpredictable
75
ways to improve cash flow
1. more cash in
- reduce customers credit terms
- increase sales to gain more demand or increase price to gain more cash in (does depend on PED)
2. less cash out
- rent reduction, change of location
- cheaper materials
- trade credit
76
stock market flotation definition
Stock market flotation is the process of converting a business into a public limited company by issuing shares to the public
77
stock market flotation benefits
- It allows businesses to obtain large amounts of finance externally instead of using retained profits or other forms of finance to fund new projects or growth
- It is likely that business could find borrowing from banks
and other financial institutions cheaper and easier because banks are more likely to take a risk on plcs as they already have the backing of public shareholders, therefore the additional finance would allow further growth and the purchase of the necessary
- Becoming a public limited company would allow the opportunity for wider marketing and operational skills, therefore it could lead to an enhanced reputation as the business would be more recognized with plc status.
78
stock market flotation drawbacks
- requires a great deal of administration and costs to set up
- Changing from a private to a public limited company would mean losing control over who owns the shares, therefore there could be greater potential for takeover once the flotation has taken place.
- Shareholders may have conflicting interests from the original
directors and may wish to move away from the core values which business is based on.
79
quality management definition
the process of a business maintaining a desired level of excellence in a product or service by paying atteintion to each stage of the process
80
quality control definition
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 (reactive)
81
quality control benefits
- does not interrupt the production process
- cheaper as no need to spend money on training staff/quality assurance
- faster than TQM and can meet demand in dynamic market better
82
quality assurance definition
commitment to quality by a business whereby it will aim to ensure problems are prevented at all stages of the production process
- focused on preventing faults with products during production (proactive)
83
quality assurance benefits
- waste is reduced as faults are spotted early and can be corrected
84
quality assurance drawbacks
- need to train employees which can be expensive
- employees may feel overwhelmed or demand higher wages if they have responsibility of checking quality, may be more likely to leave...
85
quality circles definitiion
small groups of workers will meet regularly to solve problems in the production process
86
quality circles benefits
- motivate workers as its team work, and they can see that their opinion is valued
- workers may know the best as they are invloved in production
87
quality circles drawbacks
- production time is lost when asking employees to be involved in these meetings
- workers may feel overwhelmed.
88
TQM definition
management philosophy that insists quality is the responsibility of everyone in the business
89
TQM benefits
- maintain higher quality, lead to customer satisfaction when using the product, therefore result in repeat purchase/brand loyalty
- minimise costs and reduce waste, can be seen as more ethical and have better reputation
- motivates workers as they do many different jobs and they know that their role is important and that they have responsibility
90
TQM drawbacks
- increase in training costs
- could slow down production if the mistake is found
91
Kaizen definition
a Japanese philosophy which places emphasis on making small improvements in all business processes as it tries to achieve a culture of continous improvements, good processes bring good results.
92
Kaizen benefits
- encourages team work and motivation
- workers feel valued as they are involved in decision making
93
Kaizen drawbacks
- workers may feel overwhelmed with the amount of work they have to do and therefore might not do the job good
- may require training which is expensive
94
break even definition
where total cost is equal to total revenue
95
health and safety definition
Measures put in place by businesses to prevent accident or
injury in the workplace
96
margin of safety definition
the range of output between the breakeven level and the current level of output, over which profit is made
- businesses prefer to operate with larger margin of safety, meaning that if sales drop they might still make profit.
97
break even benefits
- gives a business a target to work towards, know how many items they need to sell to cover their costs, therefore they cn wok towards it avoiding a loss.
- to analyse to see what happens if the price went up or costs change and if the new breakeven level is achievble.
- it can be included in a business plan to help with obtaining external finance
98
break even drawbacks
- it is the most suitable for a business that makes only one product.
- it assumes that fixed costs, selling price and variable costs stay the same, therefore the breakeven output may be incorrect, meaning a business may be using this as a target to work towards to and fail
99
business failure definition
A business can fail due to internal causes which may be controllable and external causes which are not controllable.
100
business failure internal causes
- poor management of cash flow
- overestimation of sales
- overtrading
- poor inventory control
- poor marketing
- poor quality
101
business failure external causes
- competition
- economic
- exchange rates
- interest rates
- supplier problems
- government regulations
- natural disasters
- market conditions
characteristics such as consumer trends of the place where buyers and sellers meet.
102
sole trader definition
sole trader is the simplest form of business set up and owned by one person/has only one owner.
103
sole trader benefits
- owner keeps all the profit
- owner has complete control over the company
- simple to set up and not expensive as no legal requirements are needed
- flexible and can adapt to change quickly
104
sole trader drawbacks
- they have unlimited liability
- owner may struggle to raise finance (someone may find the business to risky)
- likely to work hard with long hours
105
parthership definition
partnership is a type of business ownership that is owned by two or more people.
106
partnership benefits
- easy to set up, no legal requirements are needed
- less stress as members share the burden of running the business
- partners can specialise in their area of expertise
- more owners can raise more capital
107
partnership drawbacks
- unlimited liability
- partners have to share profit and control over the company
- one partner decision creates legal obligations for all
- can easily come to an conflict.
108
private limited company definition
is 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 into the business.
109
LTD benefits
- shareholders have limited liability
- more capital can be raised by issuing shares
- control over the business cannot be lost to outsiders
- ltd have higher status then sole trader
110
LTD drawbacks
- ltd have to publish their financial information
- setting up costs have to be met and they may be expensive
- profits are shared between the members
- ltd cannot raise large amounts of money like plc's can
111
public limited company definition
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
112
plc benefits
- huge amount of money can be raised
- they tend to grow and benefits from economies of scale
- banks may be more willing to lend money to plc's
113
plc drawbacks
- setting up costs can be expensive
- anyone can buy shares, so risk of losing control
- everyone can see financial records and accounts
114
lifestyle business definition
a business set up with the aim of making no more than a set level of income from which to enjoy a particular lifestyle
115
lifestyle benefits
flexibility, working hours
work/life balance
they do what they like and enjoy their job
116
social enterprise definition
is a business with mainly welfare or environmental objectives rather then maximising profits
117
budget definition
a financial plan which includes an estimate of income and expenditure for a set period of time, prepared and agreed in advance.
118
budget benefits
- to set targets for spending which helps to prevent cash flow problems.
- it forces management to think ahead when setting budget, making plans for future and considering more factors
- lower level managers maybe given the responsibility of setting or monitoring budgets, which acts as a form of motivation.
119
budget drawbacks
- figures are plans based on historical data, forecasts or human judgements and if data used to set the budget is wrong then the budget might not be relevant.
- setting budgets may cause conflicts between departments.
120
historical budget definition
forecasts for revenue and costs that are based on previous figures
121
historical budget benefits
- it can be compared with actual figures , therefore it may be planed more accurately
- quicker than zero based budget as money is allocated to departments, so there is no need for managers to seek approval.
- businesses know how much they are going to spend, and once the money is gone its gone.
122
historical budget limitations
- its limitating as some departments may need more budget than they have
123
zero based budget definition
the budget will be set as 0 at the start of the year and the budget holder will need to ask for money.
124
zero based budget benefits
- helps reduce unnecessary spending as they will carefully consider why they need the money
- business has greater control over its costs
125
zero based budget limitations
- opportunity costs, could prevent spending on certain items which could be beneficial for the business
- there might be conflicts on who got more budget
- takes time and money to set up and maintain
126
ways to avoid business failure
- -aim to make sure they maintain high levels of quality as well as focus attention on keeping customers happy so they receive positive reviews and benefit from new and returning customers
- positive attitudes and are prepared to work hard
127
variance analysis definition
trying to find reasons for the difference between actual and expected figures
- F, favourable, when the actual figures are better than the budget (find reason why and keep on using that method)
- A, adverse, when the actual figures are worse than the budget (avoid happening in the future)
128
internal finance definition
is money generated by the business or from its current owners
(limited source of finance and funding)
(capital available immedietly, cheap, no interest, no loss of control/ownership)
129
personal savings definition
money that has been saved up by an entrepreneur
130
personal savings benefits
- no debt is created
- no ownership is lost
- easy and quick source of finance
131
personal savings drawbacks
- risky, loss of savings and no backup plan
- limited fund is available, maybe external financce is more suitable depending on the business
132
retained profit definition
the amount of a business net income that is kept within its accounts
133
retained profit benefits
- no debt
- no ownership is lost
134
retained profit drawbacks
- not suitable for a new business
- requires a lot of money and business to be profitable
(depends if business is profitable or not)
135
sales of assets definition
established business may be able to sell some unwanted assets
136
sales of assets benefits
- no debt is created
- quick cash for the business
- new business is responsible for the asset
137
sales of assets drawbacks
- business may need assets later on
- time consuming
- not suitable for new businesses
138
job production definition
involves a business producing items that meet the specific requirements of the customer. It involves production of a single product at a time.
- production tends to be labour intensive, using high skilled workers
- used by a start up businesses as they produce an smaller scale and also do not have funds to invest in expensive production machinery.
139
job production benefits
- quality is high because workers are skilled
- production can be custome made which adds value to the product and therefore price can be set higher, leading to higher profit margin, as price is greater than the cost.
- production is easy to organize
140
job production drawbacks
- high labour costs due to skilled workers, wide range of specialist tools needed (generally expensive)
- production may be slow
141
batch production definition
involves the manufacture of a limited number of identical products in groups.
142
batch production benefits
- workers are likely to specialitze in one process
- unit costs are lower because the output is higher, compared to job. They have benefit from economies of scale bulk buying, therefore business can offer lower price and gain competitive advantage and as a results have higher demand and bigger market share.
. production is flexible since different orders can be met
- use of machinery is made, which is more efficient. faster and more products are being made
143
batch production drawbacks
- more complex machinery may be needed which is expensive
- careful planning and co-ordination
- less motivation as workers specialize and machines are used
- if batches are small cost will be higher
- if machine breaks, production might stop or get slower and therefore the business wont have a way to keep up with the demand.
144
flow production definition
- involves mass producing a standard product. All items produced are identical and usually on a large scale production.
145
flow production benefits
- very low unit costs due to economies of scale, able to achieve profit maximasation, able to have higher retained profit and therefore invest in expanding and avoid the need for external sources of finance
- output can be produces very quickly
- production speed can vary according to demand
146
flow production drawbacks
- huge set up costs before production can begin
- workers motivation is very low as they have repetitive tasks
- breaks in production can be very expensive
147
cell production definition
has the flow production line split into a number of self contained units.
- product family, group of products that require a sequence of similar production/operations.
- team working, skilled at number of roles, job rotation (furniture)
148
cell production benefits
- floor space is release because cells use less space than a flow production line
- there may be a safer working environment and more efficient maintenance, meaning accidents are less likely to happen and therefore avoiding spending money on fixing accidents or compensation which leads to being able to maintain low costs which could reduce price, helping the business to gain competitive advantage
- closeness of cell should improve communication, avoiding confusion and misunderstandings.
- greater worker motivation, variety of work, team working
149
cell production drawbacks
- the company may have to invest in new materials handling and ordering systems suitable for cell production.
- the allocation of work to cells has to be efficient so that they have enough work, but not so much that they are unable to cope.
150
inflation definition
a general increase in the price level over a period of time
- acceptable inflation is until 2%
151
exchange rate definition
the price of one currency expressed in terms of another currency
152
interest rates definition
are the amount of interest due per period of time as a proportion of the amount saves, lent or borrowed
153
taxation definition
how the government raises money to finance its expenditure
154
the business cycle
measures economic activity over time and shows stages such as boom, downturn (when there is rising unemployment) , recession and recovery.
155
impact of rise in inflation
- could increase the costs of material for a business
- could reduce the purchasing power f consumers, resulting falling sales.
- could increase uncertainty and make a firm reconsider its investment in the future
156
inflation depends on:
- the increase (if it still has limtied effects on the costs)
- if the firm is able to pass on any increase in costs to consumers by increase its prices but does depend on PED and YED
- if wages are increase in line with inflation if not consumer purchasing power will fall
157
exchange rates strengthening
- when pound is strong UK businesses that import from abroad will have cheaper costs, fall in cost may lead to an increase in profit-
- when pound is strong businesses will find it harder to export UK made goods abroad as they will appear more expensive, less demand for goods which are exported out of the country.
- tourist will get less for their currency, fall in tourism numbers into the country.
158
exchange rates depend on
- the proportion of the total costs which imported goods account for as the impacts on profit may be small.
- the extent of the appreciation, a small change may not affect importation of costs at all
- if the firm import or exports their goods
- the PED as an increase in price may not have a significant impact on the demand.
159
interest rates expl.
- if interest rates on a loan are low then consumers may borrow money to buy a car, sofa, holiday..
meaning there is more spending which leads to more demand and its easier for businesses to borrow money which means there is more growth
160
increase/fall in interest rates
- could cause a reduction in disposable incomes due to higher repayments on loans or mortgages, may cause a reduction in demand for some goods
- if businesses have existing loans they may see an increase in fixed costs due to higher loan repayments
- business may be less inclined to take out external finance and therefore struggle to expand
- however, the changes in interest rates may not affect all customers, especially if they do not need to borrow to buy products in which case demand may not decline if interest rates increase.
161
taxation affecting a business
- lower taxes can result in more demand in the economy and lead to higher output and employment. This is because consumers may have higher disposable income.
- If taxes are high then businesses will have higher costs and this makes them less competitive if they increase their prices. also less retained profit and less disposable income.
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government spending
- taxes that the government collects goes into a central pot, and its then spent on various things for the benefit of the UK society
Cuts on government spending could lead to falls in demand, for example if they cut the numebr of public sector workers there will be an increase in unemployment and less income will be spend which will impact businesses which supply goods or services to public organisations.
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business cycle stages
- boom, existing firms will expand and new firms will enter the market, demand will be rising, employment is high, jobs are created and wages are increasing (high consumer spending)
- downturn, demand will flatten out or begin to fall, unemployment will start to rise, wage increases will slow down and firms may stop expanding and profits may fall, prices will rise slowly
- recession, demand will start to fall, unemployment rises sharply, business confidence is low, and bankruptcies may occur (customers tend to save rather then spend)
- recovery, business and consumers regain confidence, demand starts to rise, prices start to rise again and unemployment begins to fall.
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legislation definition
legislation is the making of laws for people to follow
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consumer protection definition
- legislation put in place to ensure businesses produce goods and services which are fit for purpose and safe for consumers to use.
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impact of consumer protection on a business
increase in costs, fines, having to make changes
reputation, poor if they are seen to break this legislation, and positive if they are seen to act above and beyond this
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employee protection definition
laws and procedures that a business must follow in the treatment of its workes.
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impact of employee protection on businesses
- costs to meet the requirements
- higher labour costs
- charge working practises
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environmental protection definition
is designed to reduce the impact of businesses and protect the environment
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impact of protecting environment on businesses
- can be used as a form of marketing
Can help reduce costs (energy saving in long term) or increase due to having to change methods
- May impact how products are made
- may slow production during innovation to find new materials.
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competition policy
- prevent anti competitive behaviour such as preventing mergers and limit growth
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intellectual property rights legislation
- patent is a legal document that guarantees the holder exclusive rights to use or licence inventions or innovations
- trademark is a name, symbol or other device used to identify and promote a product or service that is protected against use from others
- copyright is a law that gives the owner or a creative work the right to say how other people can use it. Lasts for a given period of time.
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how does legislation impact business
- It can cause business to have to make changes, and this can lead to increase in costs.
Businesses can be fined for not following legislation, bad reputation and increase in costs
- Some businesses may be following legislation and therefore no changes have to be made, and there is no increase in costs and they can gain a good reputation and attract customers
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legislation depends on
- how often the lay changes
- the consequences for breaking the law
- if the business is already well within the law
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external finance definition
is capital obtained from a source outside the business
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peer to peer lending definition
lending money to individuals or businesses through online services that match lenders with borrowers.
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business angels definition
invest between 10 000- 100 000 in exchange for a stake in a business.
- may offer help and advice to the business as well as source of finance
- share profits with them and also decision making and control of the business
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crowd funding definition
crowd funding is where large numbers of individuals can provide direct funding for a business or project is administered by a website such as www.crowdfunder.co.uk
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crowd funding benefits
- can raise capital from potentially very large pool of investors
- the investors may require a lower level of reward than a bank or venture capitalist
- could generate interest in the business and this may then allow them to access more cheaper capital compared to bank loan
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crowd funding drawbacks
- the amount of money raised may not be enough to fund the project
- will need to satisfy expectations of potentially lots of crowd funders who may still want a return
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venture capital definition
venture capital involves issuing shares to a small number of investors in return for a capital injection into the company
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venture capital benefits
- the ventrue capitalist could be a valuable source of advice to a new start up company especially if the owner lacks experience
- this will provide the capital for a small, risky start up when other sources of finance are not available (loan)
- involves no payment of interest, because it is not a loan, therefore the fixed costs of the business will be lower which would enable a small start up business to surviive
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venture capital drawbacks
- may have to give up significant % of the onwership of his business due to inexperience and the risk faced by the venture capitalist.
- the venture capitalist may get involved in the day to day running of the company
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share capital definition
funding raised by a company in exchange for a share in the business
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share capital benefit
does not need to be repaied back
Its use is also flexible as there are no restrictions to its use
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share capital drawbacks
receiving share capital means the main shareholders lose some of the control of the business for each share sold
* Share capital could be an expensive way to fund the plan to grow because shareholders would expect a higher return than they would get by putting money in a bank, due to the higher risk
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competitive market definition
A large number of producers compete with one another to meet the needs and wants of consumers.
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the effects on business of competition
1. numbers of competitiors
may affect: price (lower to attract customers),
- if similar businesses are close together than customers start to associate the area with particular product/service and this may attract customers
- with no competitiors business can charge whatever they want as customers keep on demanding the product.
2. size of the business
- innovation may be easier for larger firms as they have the resources and funds to invest in R&D.
- highly competitive market, a business will have little control over price it charges.
- big businesses benefit from economies of scale and can set lower prices therefore smaller businesses will find it hard to compete on price.
- niche market: able to charge premium price, can lead to loyal customer base and lots of repeat purchase.
3. competitive behaviour
- advertising campaigns, marketing strategies, social media, recruitment programmes, strategic direction
- product development, businesses will try to release improved versions of older products, this may help them to gain first mover advantage.
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ways for a small business to compete in a competitive market
1. great customer service
- a small business can take advantage of the fact that they can give great customer service to achieve competitive advantage over the larger companies. (great customer service will ensure loyalty and therefore customers will repeat the purchase)
2. innovation
- a small business can compete if it continues to innovate
- it will have the advantage of a smaller size being more flexible and therefore able to change products to suit changing consumer tastes
3. niche markets
- small businesses can also compete against larger companies by targeting niche markets. (pet cloths)
- niche markets can be reached with social media which keeps costs down and profits high
