papaer 2 Flashcards
internal finance
finance from insiode the business
external finance
finance from outside the business
pros of internal finance
no loss of control
no interest paid
pros of external finance
usually greater sums of finance can be generated b
cons of internal finance
oppurtunity cost
cons of external finance
loss of control
pay interest
personal savings
when an entreprenuer uses personal finances to finance the business
what is personal savings used for
long term finance
internal finance
new/start up business
pros of personal finance
no financial cost
easiest and quickest source of finance
cons of personal finance
likely to be limited
if business does not immedialey make profits there will be pressure
retained profits
when a business uses historical profits from previous years to invest
why use retained profit
long term finance
internal finance
usually established business
pros of retained profirs
no financial cost
no control given up
safe low risk approach
cons of retained profit
may create conflict
usualyy finite profit
no “expertise added”
selling fixed assets
raising cash via the sale of surplus of fixed assets
cons of selling fixed assets
only a finite amounts of times you can do it
risk in not being able to find the buyer or a fair value
pros of fixed assets
not a form of debt
no control given up
quick form of cash
why use bank loans
external finance
commonly used for new businesses
bank loan
when a business borrows a sum of money and pays it back with interest over an agreed period of time
pros for loans
no shares in business given up
interest rates lower than overdraft
may improve credit score
cons of a bank loan
assets will be taken if you fail to repay
no flexibility
fail to pay will worsen credit score
how to calculate interest
total payment - borrowed amount divided by borrowed amount x 100
pros of crowd funding
no payments need to be made
excellent exposure
good feedback
crowdfunding
raising finance from a large amount of people all receiving a small amount of shares
cons of crowd funding
if profits are made they will be shared
risk of reputation if failure
investors may have limited expertsise
new share issues
when a plc issues shares in exchange for a payment
pros of new share issue
no interest
stock exchange
cons of selling shares
give up share of business
expected to pay shareholders dividends
vanture capital
a type of finance offered by a vc fund to high risk high reward firms in exchange for shares in business
pros of venture capital
makes expansion possible
no repayment
reduce personal risk
cons of venture capital
given up share of business
may lose control if more than 50% is given up
overdrafts
when a business withdraws more cash than it holds (gone negative)
pros of overdarfts
quick and simple to organise
can be tailored to the business
cons of overdrafts
banks could cancel overdarft at any time
higher interest rates than loans
trade credit
when you buy raw materials from suppliers today but pay later
pros of trade credit
simple to arrange and maintain if credit terms are met
cons of trade credit
risk of spoiling relationship
large fine if you pay late
grants
financial award given by the government. local council or charity
pros of grants
non repayable
no control given up
cons of grants
time consuming process
grant tied to certain conditions
unlimited liability
owner and business is the same legal entity, therefore the owner is responsible for all debts the business incures
limited liability
owner and business are different legal entities therefore assets are not at risk in the event of the business incurring debts
budgeting
compare against actual figures, showing an adverse or favourable situation
pros of budgeting
gives seniors spending guidance
helps increase chance of finance
cons of budegeting
who set the budget? - no expertise]over ambitious targets
historical budgets are based on previous years
how frequently are they reviewed
adverse
profits are lower than expected
revenues are lower than expected
costs are higher than expected
favourable
profits are higher than expected
revenues are higher than expected
costs are lower than expected
business plans
a document explaining what a business intends to do
what does the business plan include
summary
aims and objectives
operations
finances
pros of business planning
helps understand finances
increases chances of loans
allows closer inspection of business areas
cons of business plan
only a plan, reality is different
who did the plan and do they have expertise
cash flow forecasts
helps predict when you may have a liquidity problem
pros of cash flow forecasts
useful to see if you do or don’t have a good amount of cash
anticipate cash flow issues
manage cash flow issues
why poor cash flow happens
poor sales
over trading
poor business management
why poor cash flow is an issues
not enough cash for 2 day expenses
cannot pay wages
indicates need for finance
solutions to cash flow problems
rescheduling payments
increase cash inflows
decrease cash inflows
sources of finance (overdraft)
break even output calculation
fixed costs divided by sales price- variable cost per unit
revenue at break even point caluclation
break even output x sales price
pros of break even analysis
useful tool for management
highlights the importance of fixed costs
data generated can be used in a business plan
cons of break even analysis
based on predicted data not actual data
many unrealistic assumptions-
.one price used
.no waste
.all units produced are sold
gross profit margin calc
gross profit divided by revenue x 100
statement of finacial position
a snapshot of a companys equity, assets and liabilities at a single point
pros of a positive cash flow
able to pay suppliers on time
employees on time
handle unforseen events
expansion
consequences of a poor cash flow
cant pay on time
cant handle externalities
less growth
gross profit
revenue - direct costs
operating profit
gross profit - indirect costs
net profit =
operating profit - interest and taxes
current ratio
current assets divided by current liabilities
types of current assets
cash
stock
operational objectives
reducing unit costs
increase quality
response speed + flexibility
dependability
environmental
created added value
job production
one off production to meet the customers needs
examples of job production
ship building
personal tainer
tailored suit
pros of job production
higher quality
unique to customer
workers aren’t bored so motivation high
cons of job production
cost per unit is high
need high% of labour
batch production
batch production into groups- limited quantities of identical products
pros of batch production
productivity up
economies of scale up
flexibility up
risk down
flow production
continuous production to produce many identical products. usually on an assembly line for mass market
pros of flow production
produce more to meet demand
workers can specialise in one activity
eos
cons of flow production
need to buy capital
workers bored of repetitive work
not as flexible
average unit costs calc
totals costs divided by units sold
labour productivity
amount of output produced per unit of labour output
labour productivity calculation
output over a time period divided by number of employees
how to increase labour productivity
new capital
train employees
motivational theories
adapt management style
importance of higher labour productivity
efficicny up
cpu down
prices down
competetivness up
barriers to labour productivity
resistance from employees
cost of training
motivation impacts
quality impacts
buffer stock level
stocks the business intends to hold
pros of buffer stocks
manage uncertainty
negotiate a better deal with suppliers
cons of buffer stock
high storage costs
wastage ?
lean production
about reducing waste which increases efficiency and productivity
types of waste
too much stock held
high defects
high fluctuation
too large a factory
just in time
exact , stock arrives when needed
kaizen continuous improvement
keep improving bit by bit in production process
cell production
teams of workers completing whole tasks in close proximity
quality control
a system to ensure a final good or service meets a certain level of quality
pros of quality control
avoids selling defect goods
checks occur after production process
cons of quality control
increases costs
doesnt help prevent waste
quality assurance
when systems are used to prevent defects from occurring
pros of quality assurance
decreased defects and wastage
lower defects means better reputation
cons of quality assurance
costs higher
may slow down production
demotivating potentially
tqm
improving the product quality by being customer focused
pros of tqm
improve quality of end product
increase cutomer loyalty
increase employee motivation
con of tqm
takes time to see real impact
resistance
inflation
sustained increase in prices in an economy
impact of inflation on finance
real value of debt eroded
assets appreciate in value
inflation effect on marketing
higher revenues
brand down
inflation on operations
cost of raw materials likely to inncrease
suppliers may increase
increase prices= qd down
inflation on human resouces
workers real wage may fall
pros of just in time
reduce waste
greater productivity
cons of just in time
higher average unit cost
very reliant on supplier
risk of failing to meet unexpected demand
capacity utilisation
actual output diivded by max output x 100
mission statement
written description about the organisation so stakeholders know intent
examples of mission statements
aims, corporate aims, values, mission
corporate objectives
define overqall objectives of the business eg. prof max sales max break even
functional objectives
define objectives of each department
why have heirarchy of objectives
measure of sucess
coordination in layers
4 parts of ansoffs matrix
market penetration
product development
market development
diversification
market penetration
ezisting product
existing products
product development
new prodct
existing market
market development
new market
existing product
diversification
new product
new market
external enviroment
influences on cost and demand
external influences
competition
market conditions
interest rates
demographic factors
enviromental issues
swot analysis
a strategic planning tool used before a business uses a strategy
what does swot stand for
strengths
weaknesses
opportunities
weaknesses
threats
key points of swot
unique to each business
constantly changing
regular updates
not a grantee of success
pestle analysis
help recall the external factors that may impact a business
porters 5 forces
threat of entry
buyer bargaining power
threat of substitutes
supplier bargaining power
rivalry
porters generic strategies
tool to help managers to strategically position themselves within the market
what are porters generic strategies
low cost - differentiation
broad- narrow competition
avaerage unit costs calculation
total costs divided by units sold
economies of scale
as output increases average costs decreases
diseconomies of scale
once a business gets pasta certain point, output increases causes average cost to increase
reasons for diseconomies of scale
laziness and wastage
correlation
understanding the strentgh of a relationship
extrapolation
using historical trends to predict future trends
pros of extrapolation
usefull ton predict future
aids decision making
cons of extrapolation
external factors may change
confidence intervals
a range of values that data suggests something is likely to occur within
external growth
growth from outside the business
mergeres
consolidstion of two entities
takeovers
one business takes control of another
why do a merger or takeover
gain economies of scale
increase market share
secure supplies
reduce risk
acquire knowledge
access to more consumers
backward vertical intergration
expanding operations by moving closer to its suppliers or sources of raw materials
why backwards integration
more control of supply chain
reduce dependency on external suppliers
forward vertical intergration
expanding operations by moving closer to the consumer
pros of forward vi
more control of outlets
more control off distribution
horizontal intergration
expanding by merging in same industry with same product
pros of horizontal v
increase market share
achieve economies of scale
conglomerate intergrationn
expanding into unrelated industries
internal growth
growth from within the business
decision trees
tools helping business to make a decision
dividends
a distribution of the profits to shareholders
corporate social responsibility
the responsibilities of an organisation to put initiatives in place to benefit society
reasons for corporate social responsibility
improved brand image
incrased sales
improved economic performance
reasons against csr
costs are high
less profitable for smaller orgaisations
stakeholder
aytone with an interest in the business
shareholders
anyone who owns a share of the company
consumer spending
the total amount of household expenditure on goods and services in the economy
liquidity ratio
measures the ability of a business to pay off its current liabilities without using its inventory
gearing ratio
how much of a firms capital employed is made up of non-current liabilities
profitablity ratio
how efficiently finance is being used
Power culture
decisions made by a select few people
role culture
formalised roles, jobs and procedures
task culture
focus on specific tasks
person culture
workers have freedom to act independently
