Intro to Business Lines Of Analysis Flashcards
Primary research benefit
-involves collecting new data
-which is specific to business and up to date
-e.g. questionnaires and focus groups
-allows business to effectively identify customer wants and needs
-create a product which meets needs effectively
-build customer loyalty
-Price inelastic
-able to increase price without a significant fall in demand
-increase in revenue
-increase in gp and op
-more retained profit to reinvest
Primary research drawback
-can be expensive
-may need to hire specialist researchers
-e.g. questionnaires and focus groups using a large sample size
-in order to find out customer wants and needs
-leads to increased cash outflows on wages
-lower net cash flow
-reduced cash reserves
-poor liquidity(acid test ratio)
-may be unable to pay day-to-day bills
-forced to sell non-current assets in order to cover payments
-business unable to operate
Secondary research benefit
-data has already been collected and exists
-therefore does not require specialist researchers
-e.g. no need for focus groups
-this significantly reduces cash outflows
-improving net cash flow
-leading to increased current assets
-ability to pay debt and avoid failure
Secondary research drawback
-research was completed for another reason so may not be time or business relevant
-therefore may make invalid suggestions on how the business can improve
-leading to an inappropriate product portfolio
-lower sales and revenue
-lower gross profit
-risking an operating loss
-forcing the business to use cash reserves to pay expenses
-lower liquidity
-less attractive to banks or investors as it suggests business may struggle to pay bills
-struggle to raise capital for future expansion
Quantitative data benefit
-data collected in statistical form
-using closed questions
-these can be completed independently
-and easily analysed
-therefore specialist researchers are unlikely to be needed
-reducing costs of wages
-cash can instead be invested into using a larger sample size
-leading to more reliable data conducted
-more likely to produce a product which meets customer needs
-increased revenue
-increased gross and operating profit
Quantitative data drawback
-data is presented in statistical form
-resulting in limited depth
-respondents can explain why they made certain choices
-making it difficult to develop new ideas
-limiting innovation
-less likely to develop unique and competitive products
Qualitative data benefit
-it invites the participant to give a more detailed response
-this can lead to a deeper understanding of customer needs and wants
-resulting in business being able to produce a product that more effectively meets their needs
-increasing customer loyalty
-more price inelastic
-able to increase prices without a significant fall in demand
-increased revenue
-increased gp and op
-more retained profit to reinvest
Qualitative data drawback
-Gathering a large volume of detailed responses will require a significant number of researchers
-this will significantly increase fixed costs
-may mean a lower volume of data is collected as a business may not have the cash to pay for the researchers
-resulting in unreliable results as less people are asked
-resulting in the wrong product being produced or wrong price being charged
Product orientation benefit
-product orientation focuses on developing the product
-lots of investment into R&D of the function of the product
-improved innovation by having unique features
-differentiate from competitors
-customers willing to pay higher prices
-more price inelastic
-increased prices without a significant fall in demand
-increased revenue
-higher gross profit and operating profit margins
-increased retained profits to invest further into R&D to continue innovating
Product orientation drawback
-can be expensive
-lots of investment needed into R&D in order to innovate
-increased fixed costs
-e.g. paying high wages of scientists/engineers
-leads to lower operating profit margins
-reducing retained profit
less capital to re-invest into further R&D
-may be unable to effectively differentiate
-unable to pursue Porter’s differentiation focus/leadership strategy
Market orientation benefit
-involves focusing on customer wants and needs
-allow businesses to create products based on customer trends
-and use market research to quantify demand
-allowing them to produce products which are likely to have high sales volume
-benefit from marketing economies of scale
-fixed cost of market research can be spread across more units
-Lower fixed costs per unit
-increased operating profit margins
-able to reinvest in conducting further market research
Market orientation drawback
-market research is needed to find out customer wants and needs
-high amount of investment into market research needed
-e.g. questionnaires and focus groups using a large sample size
-in order to find out customer wants and needs
-leads to increased cash outflows on wages for specialist researchers
-lower net cash flow
-reduced cash reserves
-poor liquidity(acid test ratio)
-may be unable to pay day-to-day bills
-forced to sell non-current assets in order to cover payments
-business unable to operate
Benefit of using a market map
-help identify gaps in the market
-once identified businesses conduct R&D
-And design a product that matches the characteristics of
-product is likely to be unique
-lack of substitutes means product will be price inelastic
-businesses can increase selling prices and not experience significant fall in demand
-increased sales revenue and gp
Drawback of using a market map
Market maps are based on consumer opinions.
To ensure decisions based on consumer opinions are valid
Business needs to collect data from a large sample.
This may require a large number of researchers.
To collect and analyse data and display it in a market map
If businesses recruit researchers, it will significantly increase cash outflows.
If cash outflows are greater than cash inflows
It may lead to a negative net cash flow.
Benefit of segmentation
Through segmentation, a business can target market research at a specific group.
Rather than trying to create a product for all customers
This can help a business understand their customer needs more effectively.
Meaning they can adapt their design mix to better meet their needs.
Ensuring the business product is more differentiated.
And more price inelastic
So they can increase their prices without a significant decrease in demand.
Increasing their sales revenue.
Drawback of segmentation
Need to create multiple products
To meet the needs of different segments
E.g. using geographical segmentation to create different products for customers in different countries
Therefore unable to benefit from marketing economies of scale
As each product will be targeted at a smaller group of customers
This mean that the fixed costs of R&D to produce the product
Is spread over less units
Leading to higher unit fixed costs
Lower operating profit margins
Importance of aesthetic/function
If a business improves aesthetics/function of products design mix
Through R&D into improved functionality or market research to identify consumer trends
Product is likely to become differentiated compared to rivals
Gain a competitive advantage according to Porter
Price inelastic
Can increase selling price without significant fall in demand
Increase sales revenue and gross profit margin
Drawback of prioritising aesthetic/function
To improve aesthetics or function it will require significant investment into R&D or market research
Increasing cash outflows
If cash outflows exceed cash inflows
Result in a negative net cash flow
Placing a strain on a businesses cash reserves
Business has difficulty making payments to suppliers
May have to sell non-current asset
Disruption in business operations
Importance of economic manufacture
If a business designs a product with economic manufacture as priority
E.g. - Through using less robust raw materials – adapt this to business in extract
Reduce their cost of sales
Can pursue cost leadership according to Porter
Gain competitive advantage
Can reduce selling price
Significat increase in demand of product is price elastic
Increasing sales
Drawback of prioritising economic manufacture
If a business designs a product with economic manufacture as priority
E.g. - Through using less robust raw materials – adapt this to business in extract
It may mean that the product they design becomes less robust
Damage the businesses reputation (now associated with being less robust)
Consumers may switch to alternatives
Decrease demand
Decrease in sales and gross profit
Less profit to retain and reinvest
Benefit of changing design mix to reflect social trends
Changing design mix to reflect social trends (choose social trend and element of design mix relevant to business in question)
Product now aligned with social trends
Better meets customer needs
Consumers more loyal to business
Can increase selling price without significant fall in demand
Increase sales revenue and gross profit margin
Drawback of changing design mix to reflect social trends
To identify relevant social trends
Requires significant investment into market research
To ensure data is valid, must be collected from a large sample
Business needs to recruit specialist research to collect and analyse data
Increasing cash outflows
Placing strain on cash reserves
Less cash to pay for day-to-day operations
Benefit of adapting design mix over concern of resource depletion
Business may (adapt to business in extract) e.g. - stop using rare wood when making product
Swap to more sustainable wood
Changing aesthetic of product due to concern over resource depletion
Aligning with consumers values
Better meeting consumer needs
Product becomes more differentiated
Can increase selling price without significant fall in demand
Increase revenue
Drawback of adapting design mix over resource depletion concerns
Adapting design due to concern over resource depletion (be specific to business in question)
Meaning the business needs to find alternative supplier for raw materials
Charge higher price for new material
Increasing cost of sales
Reducing gross profit margin
Reducing operating profit margin
Less profit to retain
Less profit to reinvest (be specific to business in extract)
Benefit of business plan
Business plan involves carrying out market research
Such as a questionnaire
Which, if based on a large sample size
improves the validity of the results
Develop reliable sales predictions
Create a cash flow forecast
Convince the bank that they can make loan repayments
Drawback of business plan
A Business plan can quickly become out of date
For example, there may be an unexpected change in social trends (relate to the case study)
Causing an unexpected change in demand of (relate to case study)
Making the market research in the plan invalid
Resulting in unreliable sales forecasts
Inaccurate cash flow forecasts
Therefore, any financial predictions will be unreliable making the loan, or investment, application unreliable
Sales forecasting benefit
Accurate forecast will appropriately predict sales volume
This will ensure the business can order the correct amount of stock
This will reduce waste as the business will avoid over ordering
Reduced waste will decrease outflows
This will improve net cash flow
Ensuring the business can pay suppliers OR invest in research and development (choose the one that is most relevant for the business)
Explain the impact
Sales forecasting drawback
Accurately compiling a sales forecast requires significant investment into market research
To accurately quantify demand for products
To ensure data is valid, it must be collected from a large sample
This may require recruiting specialist researchers to collect and analyse data
Their wages will increase the business’s cash outflows
Placing a strain on their cash reserves
Less cash available to pay current liabilities
May be pressured to sell non-current assets
Cash flow forecast benefit
The business may experience fluctuations in sales (why – relate to the case)
This may mean that they experience a reduction in cash inflows at certain times (relate to the case study)
So if they can accurately forecast cash flow, the business may be able to plan accurately
Such as reducing their staff numbers if they forecast lower cash inflows during these periods (or pick an outflow significant to the business in the case)
Allowing them to reduce their wages and subsequent cash outflows
Improving net cash flow during off-peak seasons and ensuring they have sufficient levels of cash to keep up with essential payments such as wages.
Cash flow forecast drawback
A cash flow forecast can quickly become out of date
For example, there may be an unexpected change in social trends (relate to the case study)
Causing an unexpected change in demand of (relate to case study)
Making the market research in the plan invalid
Resulting in unreliable sales forecasts
Inaccurate cash flow forecasts
This could result in the business being over or understaffed or over or under stocked. Choose one and explain the impact
Break even benefit
By calculating their break-even point
A business can identify the number of units they need to sell in order to cover their costs.
They can compare this with sales forecasts
And identify whether they are likely to make a loss.
They can therefore take action to reduce their break-even point
Eg. Switching to a cheaper supplier or increasing the selling price
In order to increase their contribution per unit
And prevent losses from occurring.
Break even drawback
Break-even assumes prices and costs remain constant.
For example, inflation may significantly increase prices of raw materials
Decreasing contribution per unit
Break-even ignores this so may become inaccurate
Inappropriate decisions
For example, prices too low causing the business to make a loss on each item sold
Operating loss
Sole trader benefit
Sole traders are the only owners of a business.
Therefore, they can maintain full control over day-to-day running.
Able to establish a strong power culture
Maintain consistency throughout the business.
Build a strong brand image.
Differentiate from competitors.
Price Inelastic
Increase prices without a significant fall in demand.
Increase in revenue.
Increase in gross profit margin.
Increase in retained profit to reinvest in…
Sole trader drawback
Unlimited liability
Increased risk of investment
If business debt exceeds business assets
May need to sell personal possessions
This increased risk will make investment less attractive
Leading to reduced investment
Less capital
Reduced assets
Partnership Benefit
Knowledge and experience from the partners
Look in case study and input knowledge and experience here
Improved innovation
Differentiation(specify how)
Increase price
Without a significant fall in demand
Increased gross profit
Increased operating profit
Partnership Drawback
Unlimited liability
Increased risk of investment
If business debt exceeds business assets
May need to sell personal possessions
This increased risk will make investment less attractive
Leading to reduced investment
Less capital
Reduced assets
Ltd benefit
Can choose their own shareholders
Choose people who match their objectives e.g. passion for innovation
Might mean less focus on short term results as they share goals on R&D and long term investment
Can reinvest more capital into R&D/growth rather than being pressured to pay dividends
Able to innovate and pursue objectives
Differentiate from competitors in the long-term
Ltd drawback
Unable to sell shares on stock market
This can make it more difficult to raise large amounts of capital
So the business may find it difficult to build scale
Limits amount of R&D
Less innovation
Less differentiated products
Plc benefit
Have gone through stock market flotation
therefore their shares are advertised to, and accessible to, the public
Due to this they can sell a large volume of shares leading to significant amount of capital being generated
increased cash available to invest in non current assets so the business can build scale
Plc drawback
Shares are sold to the public
therefore, there is more pressure from shareholders for short term profits
so the business may neglect long term objectives for short term returns
to satisfy shareholders by using profit to pay regular dividends
neglecting investment into R&D to develop innovative products
product becomes less differentiated in the long term
Limited liability benefit
If business has any debt or owes a supplier due to trade credit(find and example)
And is unable to pay that debt through the sale of assets(name something relevant in case study)
Then, the debt does not need to be paid by the shareholders/owners
This means that investment in a limited company is low risk as the owners are not risking their personal possessions
Making the product or service price inelastic
Opportunity to increase price
Without a significant fall in demand
increased gross profit
increased operating profit
limited liability drawback
The owners are not risking their personal possessions
so if the business is unable to pay(through sale of assets)
then the supplier or bank lose the amount owed
this increases the risk of lending cash to the business
or increases the risk of offering trade credit
making banks and suppliers less likely to lend
struggle to get trade credit or a loan
limited expansion
Can’t benefit from EOS…
Franchisor benefit
means allowing independent businesses to use your brand name
this means that the franchisee provides the capital to open new branches/stores
therefore reducing the capital required for expansion
leading to the franchisor being able to expand quicker
Able to benefit from marketing economies of scale
Fixed costs of advertising spread over more units
Lower fixed costs per unit, making advertising more affordable
able to increase marketing budget and advertise more
able to build a stronger brand
Franchisor drawback
risk damaging their reputation
as the franchisor is not responsible for the day to day running of the outlet
the franchise may fail to uphold high levels of customer service
due to lack of supervision from franchisor
poor customer service in one outlet could then affect the reputation of others
meaning customers switch to a rival business
reducing sales revenue
reducing gross profit
Franchisee benefit
Means paying to use another businesses brand name
this means they already have access to a well-known brand
therefore there are already customers who have brand loyalty
Making business more price inelastic
the franchisee can charge higher prices than independent businesses, as customers will be willing to pay them
leading to increased revenue and profit margins
more retained profit to reinvest in opening further franchises
Franchisee drawback
means paying to use another businesses brand name
this will lead to higher costs, as fees and royalties will be need to be paid
therefore leading to increased cash outflows
lower net cash flow
possibly reducing cash reserves
Lower liquidity(acid test ratio)
unable to pay day-to-day bills such as rent/suppliers
forced to sell non-current assets in order to pay bills
unable to operate
Internal finance benefit
If owner uses their own capital,retained profit, or sells non current assets as a source of finance
Business will not incur any debt
Will not need to make any capital repayments or loan repayments
Reduced cash outflow
If cash outflows are less than cash inflows
Business will have a positive net cash flow
Able to keep up with payments to suppliers
Won’t have to sell non-current assets to generate cash inflow
Internal finance drawback
If owner uses their own capital,retained profit as a source of finance
They are more likely to be limited in the amount that they can raise
This will limit the business’s potential expansion
Reducing their scale
Limiting their ability to achieve economies of scale
Fixed costs will be spread over less units
Increased fixed cost per unit
Reduced operating profit margin
Family and friends benefit
If business uses family and friends as a source of finance
They are likely able to negotiate longer repayment times
Or lower interest rates
Due to existing relationships
Reducing cash outflows
If cash outflows are lower than cash inflows
Positive net cash flow
Will not have to sell non-current assets to generate cash inflow
Family and friends drawback
If business uses family and friends as source of finance
They are likely to be limited in the amount that they can raise
This will limit the business’s potential expansion
Reducing their scale
Limiting their ability to achieve economies of scale
Fixed costs will be spread over less units
Increased fixed costs per unit
Reduced operating profit margin
Peer-to-peer funding benefit
Peer-to-peer funding allows businesses to source finance without having to give up equity in the business
Meaning owner has full control over decision making
Can continue investment into activities such as R&D
To focus on long term
Ensuring can develop differentiated product
Without pressure to keep costs low so shareholders can receive dividends
Differentiated product allows business to gain competitive advantage(Porter)
Price inelastic
Charge higher prices without significant fall in demand
Peer-to-peer funding drawback
Peer-to-peer funding is a form of debt financing
Meaning the business will need to repay the capital borrowed
With interest
Increasing business’s cash outflows
If cash outflows exceed cash inflows
Business will have a negative net cash flow
Placing strain on their cash reserves
May have difficulties meeting current liabilities
Business angels and venture capitalists benefit
They will likely have experience(look in case study)
Meaning they can provide support with the finance
This can give them a competitive advantage because(look in case study)
Porter differentiation strategy
Increase sales revenue
Increase orders to suppliers
For raw materials such as…
Lower unit variable costs
Opportunity to lower selling price to increase sales further to increase market share
Business angels and venture capitalists drawback
Need to give up a high percentage of the business
High share of profits
Less profit can be retained
Lack of capital to reinvest in the business
Such as R&D
Cannot fund wages and equipment of researchers and scientists
Struggle to create a differentiated product
E.g. product will be less durable
Price elastic
Pressure to keep prices low to avoid significant fall in demand
Lower revenue
Lower gross profit
Lower operating profit
Crowd funding benefit
Does not require interest and capital to be paid back
This will lead to reduced outflows
This will increase net cash flow in the future
Ensuring a business can pay suppliers
Avoiding the forced sale of non-current assets such as a store
Avoiding disruptions in their operations
Can effectively meet customer needs
Keeping sales high and avoiding losses
Crowd funding drawback
The business will have to give rewards to the investor
In return for their investment(link to case study to give example)
This will lead to an increase in cash outlflows
Lower net cash flow
Reduced cash reserves
May struggle to pay day-to-day bills
May have to sell non-current assets in order to cover payments
Business unable to operate
Loans benefit
The business does not need to give up a share of the business
Therefore, they can retain more of the profit
As they will not be required to pay dividends to shareholders/owners
This mean they will have more capital available in the long term to invest(choose something from case study)
Explain the impact of this investment(link to EOS or PED)
Loans drawback
Requires regular repayments
Of interest and capital
This will lead to increased cash outflows
Potentially causing a negative net cash flow
The business may then lack cash to pay suppliers
Potentially forcing them to sell non current assets
Disruption to business operations
Lower sales volume, therefore unable to benefit from economies of scale
Share capital benefit
Does not require interest and capital to be paid
This will lead to reduced outflows
This will increase net cash flow in the future
Ensuring business can pay suppliers
Avoiding the forced sale of non current assets such as a store
Avoiding disruptions to their operations
Can effectively meet customer needs
Keeping sales high and Avoiding losses
Share capital drawback
Shareholders may request dividends to be paid
Reduced retained profit
Less investment into non current assets such as…
Reduced scale of business operations
Lower sales volume
Fixed costs of marketing e.g. advertising will be spread over less units
High unit fixed costs of marketing
Making the advertising less affordable
Less advertising, reducing brand awareness in comparison to competitors such as…
Overdrafts benefit
Does not require monthly payments
Can be paid off when the business chooses
This means they can reduce payments, and therefore outflows,when there are low inflows
Avoiding negative net cash flow
This will ensure that they can pay suppliers
Avoiding the forced sale of noncurrent assets such as a store
Avoiding disruptions to their operations
Can effectively meet customer needs
Keeping sales high and Avoiding losses
Overdraft drawback
Interest is much higher on overdrafts compared to a loan
Therefore, it will have increased cost
For the time that the capital is borrowed
This will increase expenses
Reducing operating profit
Leading to less profit that can be retained
Leading to reduce long-term cash to invest into r&d of…
Making it harder for business to differentiate
Leasing benefit
Have use of non current assets without requiring high initial cash outflow
Lower cash outflows in the short term
Higher net cash flow in the short term
Higher current assets
Improved liquidity
More attractive investment to banks and shareholders
Raise more capital to build scale
Link to EOS
Leasing drawback
Regular leasing payments
Increase in expenses as the leasing payments may cost more than the non-current asset in the long term
Reducing operating profit in the long term
Lower retained profit
Link to case study and say what business could have done with this retained profit
Explain impact
Trade credit benefit
Can receive raw materials without an immediate cash outflow
The opportunity to sell them(link to case study)
Inflows of cash from the sale
Without the outflow for the goods
Increased net cash flow in the short term
Trade credit drawback
Available for a limited amount of time
Potential cash flow problems in future
When payment is due
If the business is unable to make this payment
Then, the supplier will have penalties
Such as fines
Leading to increased expenses
Lower operating profit in the longer term
Grants benefit
Does not require interest or capital to be paid
This will lead to reduced outflows
This will increase net cash flow in the future
Ensuring that the business can pay suppliers
Avoiding the forced sale of non current assets such as a store
Avoiding disruption to their operations
Can effectively meet customer needs
Keeping sales high and avoiding losses
Grants drawback
This must be adapted to extract- what will grant be used for?
Business will only have access to grant if they use for a specific purpose
E.g.(adapt to extract)
Meaning business is limited in what it can use capital for
Therfore(chose a path)
1.
Maybe unable to invest into activities such as R&D
Product less differentiated
Price elastic
2.
Cannot invest into non-current assets to increase capacity
Cannot achieve EOS
Increase unit cost
Sale of assets benefit
If business sells non current assets as a source of finance
Business will not incur any debt
Will not need to make any capital or interest repayments
Reduced cash outflows
If cash outflows are less than cash inflows
Business will have a positive net cash flow
Able to keep up with payments to suppliers
Won’t have to sell non-current assets to generate cash inflows
Sale of assets drawback
If business sells non current assets as a source of finance
Business will not have use of assets,such as factory or machine
Limiting the business’s scale
Reducing their ability to achieve economies of scale
Fixed costs will be spread over less units
Increased fixed costs per unit
Reducing operating profit margin
