September exams Flashcards
what is finance?
the management of the investment needed to open, run and grow a business
what are 3 reasons for raising finance?
- to help a business over a slowing trading period
- to expand
- to start-up
what are two methods of raising finance for the short term?
bank overdraft
trade credit
what are two methods for raising finance for the medium term?
bank loan
leasing
what are four methods of raising finance for the long term?
owners’ savings
sales of shares
reinvested profits
venture capital loans
what is internal finance and what are the 4 ways?
this is money that comes from inside the business
retained profit
sales of assets
owners capital: personal savings
Improved management of working capital
explain the internal finance method of owners capital and its pros and cons
- This is the money put into a business by its owner or owners. This is often used when a business is first set up
- it is sometimes called the owners’ equity
- it represents the net assets of the company and the stake the owner has in the business, if all debts were paid off it is how much which would be owed to the owner
- This is limited as not many will have the sufficient fundings in order to successfully rely solely on this
pros:
- no repayment required, allowing for more spending flexibility
- lower risk
cons:
- not available for all businesses, relies on a stable economic stance
- could put a strain on your family and personal life
appropriateness:
- sole traders and partnerships
explain the internal method of retained profits and the pros and cons
- this is the profit made by the business in earlier years. It is the money kept in the business rather than paying it out as dividends.
- it is the best way to finance investment into a firm’s future
- logically then, the higher the profit the more likely it is that it can finance its expansion from within
positives:
- no interest to pay
- they are very flexible, they have complete control over what proportion is kept rather given as dividends
negatives:
- once it is used it cannot be used elsewhere in the business, it is gone
- danger of hoarding cash rather than investing
appropriateness:
- if a business is in its first year of trading it will not have any retained profit
- if a business has not been profitable then there will not be any retained profit to spend
explain the internal method of sales of assets and its pros and cons
- This is using a business’ assets and selling them off. They may say buildings, land, vehicles and machinery that is no longer needed
- the business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company, meaning the business will look less attractive to investors
pros:
- it is a quick way of upgrading and making cash, 0% interest
- assets (like a van) can be sold quickly for cash
cons:
- risky may be needed later on, cause future problems
- reduce the number of assets belonging to a business, lower value
- it may not raise enough money for growth or expansion
appropriateness:
- all types of business can sell their assets
- it may not raise enough money for growth or expansion
- depends on how well run is the business if they need to sell their assets
what are the 6 sources of external finance?
family and friends banks peer-to-peer funding business angels crowd funding other businesses
wha tare the 7 methods of external finance?
loans share capital venture capital overdrafts leasing trade credit government grants
explain the external source of finance of family and friends and what are the pros and cons
- they can provide share capital (through the selling of shares) or can lend money
- a sole trader or partnership may find that their family want to contribute to the business. this may be for interest, a share of the profits or maybe even an interest free loan amongst family
- the majority of businesses start with a combination of owners’ capital and family and friends
pros:
- loans from family and friends will probably be offered without the need for security and at lower rates and over longer terms
- they are unlikely to need a business plan and so can save the time of not wiring one
cons:
- You may feel pressure on the relationship, what happens to the friend or member of family will affect them
- they may demand their money back at short notice
explain the external source of finance of banks and their pros and cons
- banks may lend a loan to a business to start-up or when a business wants to grow and expand
- borrowing a large sum of money to pay interest on the money you owe
- banks may also provide a business with an overdraft to help hen they have cash flow problems
pros:
- repayment plans available to suit the business
- banks will allow the business to continue running in their own way, not interfere, owners retain control of the business (unlike business angels)
cons:
- if it is a start-up business then the owner may need to use their own assets as security for the loan (e.g. their house)
- loans can be very expensive compared to other sources, interest must be paid back on time
explain the external source of finance of peer-to-peer funding
- matches businesses that need funding with investors who are looking for a good return on their investment
- this was very popular after the 2009 recession when banks were reluctant to lend money
- lending marketplaces such as funding circle have gained the trust of consumers by offering lower rates than banks to business owners who want to borrow money
pros:
- investors can expect returns of 6-7% whereas a savings account might only give them 3%
- it is unsecured and so borrowers do not need to give collateral as security
cons:
- if there are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount that the business needs
- the money for the loan comes from several investors, it is classified as a private business loan so you are tied up with several companies
- businesses can’t access to funding within a week once approved
explain the external source of finance of business angels and its pros and cons
- Individuals who invest in the early stages of a riskier business and take an equity share in return for providing finance, advice and guidance, normally established
- an angel investor offers to lend their personal disposable income, normally in exchange for shares in the business
- angel investors take huge risks in the hope of an occasional blockbuster success, DRAGONS DEN
- usually smaller loan amounts than a venture capitalist
pros:
- the owner gets access to angels’ mentoring and management skills
- the owner will have no repayments or interest on the money lent
cons:
- owner needs to give a share fo the business
- not suitable for investments below £10,000 or above £500,000
explain the external source of finance of crowd funding
- a way of getting small investors to put money into a new product over the internet, go fund me page
- the three ways to fund are through:
1) donate- no money back but rewards like tickets or free samples
2) lend- gets money back with interest and satisfaction of contributing to success of a small business
3) invest- invest tin the business in exchange for equity or shares which may go up in value - it is more successful when the sponsors use social media to promote their firm
pros:
- the business can generate funds and also promote the business at the same time
- good alternative to loans for small business owners
cons:
- the firm will need to showcase their idea to investors and may need to put together a video and other promotional material, cost
- takes much longer to happen than a loan, is not always successful, often doesn’t raise enough
explain the external source of finance of other businesses
- some large MNC’s are willing to invest in innovative start-ups, the companies hope to get the occasional winner among a number of duds
- In Silicon Valley, USA, this type of investment is common, but not in the UK
what is an external source of finance
if the business is unable to generate sufficient funds from internal sources then it may need to look to external sources. there are two sources of external capital: loan capital (debt) and share capital (equity).
- loan capital carries interest rates and must be repaid in a specific time schedule
- share capital is usually rewarded by annual dividend payments, but the directors have the flexibility to cut or scrap those payments in a difficult year
explain the method of external finance of loans and its positives and negatives
- loaning money from a bank is like ‘renting’ money
- banks will lend to small businesses but may not lend when they first start-up as there is no track record or history of them making money
- The loan is set for a period of time, either being short, medium or long term. It can be paid in instalments or at the end of the period. The bank will ask for collateral to provide security if the loan cannot be repaid.
- loans are affected by interest rates- if they go up then the cost of borrowing will go up too
Positives:
- Easy to do and repayment plans available to suit the business
- as the loan is fixed for a certain length of time, the firm can produce a successful cash flow forecast, they know when and how much money will go out the business
Negatives:
- They may ask for collateral- an asset belonging to the business so is risky
- if interest rates go up then it can become an expensive source of finance
- can face high interest rates if not paid back on time and so can become an expensive source of finance
explain the method of external finance of share capital and what are the pros and cons?
- this is when a PLC makes money from the selling of shares
- If the business is a limited company, it may look for additional share capital, it can come from private investors or venture capital funds.
- Once it has become a public limited company, the firm may consider floating on the stock exchange.
Positives:
- investors are often prepared to provide extra funding as the business grows
- it can bring wise heads into boardroom
Negatives:
- the more shares sold, the more the profits have to be divided up and paid out to investors as dividends
- potential investors may require a great deal of background information before the buy the shares
explain the method of external finance of venture capital and what are the pros and cons?
- Venture capitalists invest in smaller, riskier companies with a large sum of money but in return they demand a substantial part of the ownership of the company.
- they will look for a high rate of return in a specific time period
- it is good for any start-up or early stage business that is unable to raise finance through the stock markets or from banks
- they will invest at least £50k but this can rise into millions of pounds
Pros:
- useful if the business is looking to raise a large amount of money in a short space of time, banks would not offer this
- Venture capitalists can provide advice, expertise and contacts
Cons:
- venture capital firms typically want a 20-30% stake in the business
- venture capital firms look for a strong business plan and a proven track record, making it difficult for start-up firms
explain the method of external finance of overdrafts and its pros and cons
- An overdraft is a very short-term loan. it is a facility that allows a company to spend up to an agreed negative balance on its current account, it is ‘extra cash available’
- it may be organised by the bank which is short term lending of smaller amounts of money
- once it is arranged, it is an account business can dip Inyo or pay it back as they see fit
Positives:
- seen as a quick fix method to help a business over a difficult month of trading, very flexible, suited to the difficult cash flow position of start-ups
- the business will only pay interest on the amount of money that they are overdrawn, easily pay back the overdraft
Negatives:
- very risky, banks can cancel them at any time, often leading to the business not being able to repay the negative balance, leading to administration
- very expensive source of finance, higher interest rates than loans, high charges
explain the method of external finance of leasing and what are the pros and cons?
- Leasing an asset means agreeing to pay a fixed monthly rental for a fixed period, such as three years
- You end up paying more than what the product is worth but at least you have kept the cash in your bank account at the start of the period
- In the long term, leasing is more sensible than buying the asset in terms of your cash flow
pros:
- improves cash flow as it comes out in small amounts, not a shock for the business
- allows you to buy more expensive equipment due to the repayment plans
negatives:
- pricey, in the long term it is more expensive
- needs to hope that they continue earning enough to repay
explain the method of external finance of trade credit and what are the pros and cons?
- When a business obtains goods and services from another business but does not pay for these immediately
- Suitable for businesses buying raw materials and stock, the buyer will have time to sell their goods in their own shop before they have to pay for them
- the wholesaler may give the buyer a discount when they use cash instead
Pros:
- no interest has to be paid on trade credit
- businesses that pay regularly on time build relationships with their supplier and secure better deals
Cons:
- if the business doesn’t pay on time then they risk being refused further credit by the supplier in the future
- not all stock is available to buy on trade credit, only applies to certain industries
explain the method of external finance of government grants and what are the pros and cons?
- they are hand-outs to small firms, often in areas of high unemployment. they are given to encourage a start-up or a relocation that is considered as valuable
- they are only available to businesses that qualify, e.g. if they are providing jobs in an area of high unemployment or helping people develop skills
Pros:
- the business will not have to pay back the grant, no interest
- can be used to aid growth and increase revenue
- they will get funds without any loss of control of the business
Cons:
- there’s a lot of competition for grants, difficult to obtain one, need a successful proposal
- Often just a one-off payment, short-term
what are the 4 methods of production?
job
batch
flow
cell
what is job production?
when the complete task is handled by a single worker or group of workers. This is a bespoke service and is tailor-made to suit the specific requirements of the customers.
what are the characteristics of job production?
- e.g. designer products
- unique
- labour-intensive
- high-skilled
- high value
examples:
- architects
- plumbers
what are the pros and cons of job production?
advantages:
- product usually high quality, premium price
- greater job satisfaction, involved in all stages of production, more motivated
- customer requirements and changes can be handled, USP, specialisation, loyalty
disadvantages:
- often labour intensive so high labour costs
- labour intensive, may need motivational incentives
- requires investment in skills and training
- requires close consultation with client, a lot of time
what is batch production?
this requires that the work for any task is divided into parts or operations and produces a set of identical items. it usually involves division of labour whereby tasks are divided between employees. they concentrate skills on each part of product process through specialisation.
what are the characteristics of batch production?
- used in the production of electronics
- concentrate skills (specialisation)
- e.g. food industry
- better use of equipment, produce more economically than manufacturing individually
what are the pros and cons of batch production?
advantages:
- producing in batches reduces unit costs, higher profits, benefit from E.O.S
- use of specialist machinery and skills can increase output and productivity
- companies only focus on a small group of products, leading to greater quality control and product expertise
disadvantages:
- requires the business to maintain higher stocks of raw materials and work in progress
- potentially de-motivating for staff due to the lack of variety, very repetitive, lower productivity
- each batch must be tested for quality and uniformity before future batches, loss of time, machinery may need to be reset
what is flow production?
a method where the task is worked on continuously or where the processing of material is continuous and progressive. it is the most efficient way to produce an idea with predictable, high-volume sales. it is highly automated and capital intensive, when one task is finished the next task must start immediately.
what are the characteristics of flow production?
- very quick and efficient
- e.g. car industry
- highly automated, capital intensive
- economies of scale
- identical products
what are the pros and cons of flow production?
advantages:
- very low costs per unit due to economies of scale
- output can be produced very quickly, high efficiency and productivity
- production speed can vary according to demand as it is capital intensive
disadvantages:
- very high set up costs due to the large amount of machinery
- workers motivation can be very low due to repetitive tasks
- lacks differentiation, all the same, often lower quality
- production is shut down if flow is stopped
what is cell production?
this is flow production but split into a number of self-contained units. each team or ‘cell’ is responsible for a significant part of the finished article leading to flexibility, division of labour. team members are skilled at a number of roles. the teamwork often leads to higher productivity and higher output levels. it is communication based, involves team work, specialisation and motivation
what are the characteristics of cell production?
- team work
- communication-based
- specialisation
- high productivity
- division of labour
what are the pros and cons of cell production?
advantages:
- workers become multi-skilled and more adaptable to the future needs of a business
- greater work motivation, arising from a variety of work, team working and more responsibility
- quality improvements as each cell has ‘ownership’ for quality on its area
disadvantages:
- the culture needs to encourage trust and participation as otherwise they can feel that they are being constantly pushed for more
- may not allow firms to use their machinery as intensively and so output will be lower
- there may be rivalry between different cells and conflict may arise if one cell is let to wait for output from another
what is labour productivity?
measures the amount a worker produces over a given time.
what is the formula for productivity?
outputs / inputs per time period
what are the benefits of high productivity?
- a firm can improve its competitiveness by either selling their products at a lower price or keep the price as it was and enjoy a high profit margin
however they need to make sure that with increased productivity that they are maintaining the same quality
what are the factors to consider before deciding their method of production?
- nature of the product
- volume needed
- degree of competitive rivalry
- expectation of consumers/quality
what are the factor affecting productivity?
- the level of investment in modern equipment (robots can work 24/7 without rest)
- the ability level of those at work (training)
- improve employee motivation
- labour shift organisation of workers (having right number on peak times will improve productivity, stretched staff are demotivated by being overloaded
explain the factor affecting productivity of the level of investment in modern equipment
by investing in modern and sophisticated machines then it would be easy to improve output per worker.
- make it more efficient and produce more goods per hour, boosting productivity
- machinery/capital investment is expensive and may take years to recoup the costs so is a very long-term strategy to improve productivity
explain the factor affecting productivity of the ability level of those at work (training)
a skilled and well-trained workforce is likely to produce more and make fewer mistakes. employees should be able to complete tasks faster and will not need as much supervision or advice.
however training isn’t liked by all companies as there is great risk that once they are trained they leave for another business and so it will be costly or that the training will not provide the sufficient gains to justify the initial investment. there is also a loss in productivity whilst they are being trained.
explain the factor affecting productivity of improving employee motivation
Professor Herzberg believed that it was important to design jobs that contained motivators to help improve their productivity.
a motivated sales force may achieve many more sales than one that is unmotivated. overall business performance swill be boosted if they are motivated.
what are the difficulties of increasing productivity?
the role of management
- productivity has never been a central focus for directors, they are more focused on profits
- perhaps the key management role is to identify productivity as a main objective.
- it is harder by far to re-organise the workforce in order to make production more effective. managers whose main focus is on the short term will focus on production not on productivity
what is the link between productivity and competitiveness?
as productivity gets lower it causes higher costs per output which makes UK producers less competitive.
an increase in productivity means that they can become more competitive due to the fact they will producing more goods and so can compete by price.
the business will enjoy E.O.S and can therefore charge a competitive price.
they can gain a competitive advantage through lower prices. they can become market leader through lower prices or enjoy high profits due to lower production costs.
fortunately, competitiveness is not just about costs. it can be determined by the demand in a certain product. if the price elasticity goes down it means that people are more likely to buy more expensive products.
are efficiency and productivity the same?
No. productivity is output per worker per time period. this ignores other features of efficiency, notably waste. one fast worker may produce a lot of output but in a wasteful manner. a decorator may paint quickly but messily, wasting 20% of the point. so productivity may be high but overall efficiency no better than average. products emitting pollution are also not efficient.
what is the most efficient production level?
the level at which total unit costs are as low as possible.
what are the factors affecting efficiency?
- level of wastage in the production process
- the quality and age of the machinery
- level of employee motivation
- skills and experience of workers
what are the pros and cons of using training to improving productivity?
positives:
- motivation up
- make them feel more valued
- share new skills with others
negatives:
- takes a lot of time and money for the business
- may not be specific to the job
- risk of them leaving after
what are the pros and cons of improving motivation to improve productivity?
positives:
- better productivity leading to lower costs per unit
- Lower levels of staff turnover
- if they have the will to work then will be faster and do it at a higher quality
negatives:
- you must always review your incentives, see if they are working
- short term, hard to motivate everyone
- not only sustainable, they get used to it
what are the pros and cons of using better capital equipment to improve productivity?
positives:
- perhaps offer a better quality
- may provide quicker service, more productive
- creates greater value of assets
negatives:
- very costly
- more training, they need to be trained up on the new equipment
- dynamic market, they may need to constantly change their machines to keep with technology
what is labour intensive production?
- When production mainly uses labour, rather than machines or automation
- means that labour costs form a high percentage of total costs
- china and India have access to cheap labour so favour these production methods
- has low financial barriers to entry because it is cheap to start up production
- has the avantage for being highly flexible, making it possible for a small firm to operate successfully without direct competition from a large one.
- makes it necessary for management to focus on the cost of labour
what is capital intensive production?
- This is when production is mainly focused around machinery and automation
- the UK have high labour costs so favour these production methods
- has a large percentage of its total costs tied up in the fixed costs of purchasing and operating machinery
- has high financial barriers to entry
- can be inflexible, both in terms of switching from one product to another and in the ability to tailor a product to an individual customer
- machines can break
- may be able to keep producing in a high-cost country because labour costs are such a small proportion of the total costs
- allows the business to produce goods at the minimum average cost
what is the importance of productivity dependant on?
it depends primarily on the level of value added.
- top-price products have a very high profit margin and so an increase in productivity of 10% might only have a marginal effect on profits and virtually none on the competitiveness.
- in competitive markets, high productivity is very likely to be essential for survival.
what is productivity
Output per unit of input over a time period (labour productivity is output per unit of labour over a time period, or output per worker hour). It is a measure of efficiency
what is efficiency?
The extent to which production resources generate output without wastage, resulting in producing at the lowest unit cost
what is quality?
when a product meets the specifications that the firm has set out, they meet the customer requirements, ‘fit for purpose’
what is quality control?
checking output to remove any faulty goods at the end of the production process
used in the food industry, checking kit Kats every 200
what are the pros and cons of quality control?
pros:
- inspection is intended to prevent faulty items from reaching the customer
- inspectors may be better placed to find widespread problems across a firm
- they have specially trained inspectors meaning time isn’t lost among workers
- requires little staff training
cons:
- individuals are not necessarily encouraged to tea responsibility for the quality of their work
- rejected products are expensive to a firm, only at the end is it changed
- if defect levels are high then costs are very high, efficiency down and a loss of resources
what is quality assurance?
a system to prevent quality problems from arising, quality is checked after each stage of production, emphasis on ‘self-checking’
used in the food industry to check for contamination, chocolate
what are the pros and cons of quality assurance?
pros:
- costs are reduced as theres less waste, efficiency up
- can help to improve motivation as workers have more ownership and recognition for their work (Herzberg)
- help firm gain marketing advantages from its consistent level of quality
cons:
- takes time to check quality at every stage, efficiency
- costs of training staff
what is total quality management?
it is a philosophy, considers quality in every part of the business process- from design right through to sales, an attitude to quality are the aims are zero defects and total custom satisfaction
what are the pros and cons of total quality management?
pros:
- leads to better products manufactured at lower cost, reduces wastage
- leads to increased employee involvement, greater motivation
cons:
- requires deep commitment
- very expensive
- hard to follow, not concrete programme of QC and QA
what is a quality circle?
a group of employees who meet regularly for the purpose of identifying problems and recommending changes to the working processes in order to improve quality standards
used in big corporations with high production, Toyota
what are the pros and cons of quality circles?
pros:
- it improves staff morale through employee involvement
- allows the firm to identify changes to improve quality, long term benefits
- it takes advantage of the knowledge of operators, labour productivity
cons:
- time consuming
- conflict of opinions, time for decision making increases
- who is part of the quality cycle? demotivate others?
what is the average cost formula?
TC/output
what are the 3 ways of measuring productivity?
- labour productivity
- labour turnover
- capacity utilisation
what is the formula for labour turnover and what are the factors affecting this?
no. of staff leaving in a year/average no. of staff employed x 100
- leadership style
- pay and policies
- age of workforce
- nature of job
what are the ways to improve labour productivity?
- measure performance and set targets
- streamline production process
- invest in capital equipment
- invest in employee training
- improve working conditions
what are the problems when improving labour productivity?
- potential trade off with quality. higher output must still be of the right quality
- potential for employee resistance, depending on the methods used (e.g. introduction of new technology)
- employees may demand higher pay for their improved productivity
what is kaizen?
a continuous improvement that aims to constantly introduce small changes in a business in order to improve quality and/or efficiency
- a firm that uses this has to have a culture that encourages and rewards employees for their contribution to the process
what are the pros and cons of kaizen?
pros:
- improved teamwork, tool driven by teamwork
- waste reduction
- builds leadership skills, there will need to be a team leader
- improves employee satisfaction, retention up, it involves the employees when implementing changes giving them a sense of worth
cons:
- change is disruptive, altering current management systems so dependant on efficient communication
- training requirement, they must adopt the philosophy and may need to take out for training
- difficult to do, takes time and money, some may be reluctant to change, management may be reluctant to implementing as they feel it is expensive
how can you achieve a competitive advantage from quality management?
Philip Crosby believed that ‘quality is free; and that getting things right can save a huge amount of time and money.
- selling high quality products can lead to added value and a competitive advantage as people are willing to pay the price as they associate the brand with high quality
- when the consumer has choice, quality is vital. a reputation for good quality brings competitive advantages.
a good quality product will:
- generate a high level of repeat purchase and therefore a longer product life cycle
- allow brand building and marketing benefits that can spread from one brand to others. e.g. Cadbury twin benefiting from the rep of Cadbury dairy milk
quality leads to brand loyalty and a very good reputation, charge premium prices
what are corporative objectives?
targets set for the whole firm to reach in a given time period to realise the stated aim. they are derived from the goals set in advance of strategy. they are SMART.
corporate to functional to team to individual objectives
what are corporate aims?
aims are the generalised statement of where a business is heading, it is a long term plan from which business objectives are derived. typical corporate aims include: growth, profit maximisation, entering new markets, becoming more ethical
what is the purpose of setting aims? (3 points)
- a sense of purpose and drive to everyday business
- the basis for setting objectives
- measure success
what are 3 typical business objectives explained
profit maximisation
- common for those looking to grow, when subject to takeover bid
- do this to ensure share price is high
Corporate social responsibility
- sustainable and ethical operations, ensure they are operating in an environmentally sustainable way
cost efficiency
- common target to make profit as quick as possible
- finding the most cost-effective way of delivering goods and services
what is the difference between strategic objectives and tactical objectives
strategic- long term plans, difficult to reverse
tactical- short term plans, require few resources, easily reversed
what are 3 internal and 3 external factors that influence business objectives
internal
- age of the business
- ownership
- views of owners and managers
external
- market conditions
- state of the economy
- competitors
what is a mission statement?
it is a qualitative statement of the business’ aims and is the underpinning purpose behind the existence of a business. it also says its vision for the future.
why is a mission statement important?
- provides a focus for employees, motivation, guides employees
- it gives staff a genuine sense of purpose
- unites staff and customers behind the business, motivates
- differentiates business from competitors
what are the 4 influences on a business’ mission?
purpose
- likely to be rooted in the founder’s beliefs
values
- the values of the business are are a key part of its culture, what they believe in doing
standards and behaviours
- behaviours of managers are likely to have a very strong influence over the behaviours exhibited by their staff
strategy
- what the business aims to achieve, their goals
what are 6 limitations of mission statements/aims?
- they change a lot over time
- they may be a substitute for the real thing, provide a sense of purpose in a business that has none, treated with derision by the staff
- if their MS is too ambitious it can harm its employees’ ability to meet stated goals, negatively affect employees’ morale, diminishes credibility
- can create confusion if they lack specificity and provide no direction for employees to follow, those that are too broad will not define a company’s ethos
- often too vague and general
- not always supported by the actions of the business
what do SMART objectives mean?
Specific- should state exactly what is to be achieved
Measurable- capable of measurement
Achievable- be realistic given the circumstances
Relevant- relevant to the people deposable for achieving them
Timebound- should be set within a time frame, deadlines to be realistic
what is the process from mission statement to objectives? (they are all linked)
mission statement
corporate aims
corporate objectives
functional, team and individual objectives
what is the difference between a mission and a mission statement?
a mission is an aim expressed in a particularly inspiring way
a mission statement is a short passage of text that sums up an organisation’s mission
what is globalisation?
the process in which the world economy becomes increasingly interdependent, the economies are more interlinked, the flow of money and goods on an international scale
what are the factors contributing to international trade called (explain them)?
push factors
- where businesses feel they have to expand internationally because of domestic/home market issues, e.g. market saturation, poor economy, tax rates
pull factors
- where businesses are attracted by compelling opportunities to grow by expanding internationally, e.g. opportunities to exploit the market
what are 4 examples of push factors to international trade
- saturated domestic markets, diversification and new opportunities
- intense competition
- outsourcing (but capacity utilisation may be at full capacity)
- product life cycle (in decline)
what are 6 examples of pull factors to international trade
- economies of scale, costs will go down, high profit margins
- offshoring, cheaper CPU, labour costs lower in China, producing elsewhere
- risk spreading/diversification, spreading risk through products on different parts of the lifecycle
- outsourcing, regulations lower, expanding, giving them responsibility
- intense competition, growing market
- product life cycle (if they were at introduction, you have larger chance and presence)
what is a saturated market?
when there are many competition, growth is much slow, less opportunities. it is when the volume for a product or service is maxed out in a given market.
what are the 6 economies of scale explained
purchasing economies- when purchasing goods, the more you buy the lower the CPU
technical economies- large-scale businesses can afford to invest in expensive and specialisation capital machinery, e.g. Tesco could invest in technology that improves stock control
marketing economies- a large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discount prices if it has sufficient negotiation power in the market, e.g. Coca Cola dont need to do separate advertisement, one done for all stores in the world
managerial economies- this is a form of division of labour, large-scale manufacturers employ specialists to supervise production systems, manage marketing systems and oversee Human Resources
financial economies- larger firms are usually rated by the financial markets to be more ‘credit worthy’ and have access to credit facilities with favourable rates of borrowing, smaller firms often have access to higher rates of interest
risk-bearing economies- the ability of large firms to spread risks over a large number of investors, can result in the diversification of location or production plant-specific risks, spread risks through backup products
what is an emerging economy?
used to describe an economy that is going through rapid industrialisation (secondary , manufacturing) and growth
what are 5 characteristics of an emerging economy
1) market volatility- political instability, more vulnerable to risk of fluctuations in exchange rates and market performance, their economy is not stable enough
2) high rates of economic growth- they tend to implement policies that favour industrialisation and rapid economic growth
3) rising disposable income- rise in the middle class, simulating demand for products from businesses in the developed world
- economies making a transition, restructuring their economy
- faster long-term economic growth than most developed countries
- many inhabitants still in poverty, though many are coming out
why do we do a sales forecast?
it forms the basis for other business planning:
- human resource plan (how many people we need linked with expected output, do they need to hire more staff)
- production/capacity plans (how will they need to adapt operations to meet demand)
- cash flow forecasts (if they need to adopt costs, see how they will do for the year, retained profits)
- profit forecasts and budgets (see retained profits, dividends)
what are moving averages?
this looks at several periods at a time and averages out the data.
by doing so, this helps to iron out all peaks and troughs in demand and gives a more accurate figure of whether sales have risen or fallen in a market over time.
they are useful to calculate when there are strong seasonal influences on sales or when sales are erratic for no obvious reason, wild ups and downs may make it hard to see the underling situation
what is time-series analysis?
it refers to the use of past data and trends to forecast and predict future trends. it allows businesses to use moving average calculations to forecast future sales based on historical data
explain the moving average calculation
- three period moving averages allow a business to use three sets of data to calculate an average for future predictions, the use of these three period moving averages reduces the impact of a single anomaly on future predictions as an average from three years is calculated
- four quarter moving averages allow a business to use data from four quarters (three month periods) to calculate an average sales figure. this increases calculation accuracy because they minimise the impact of unusual or seasonal sales figures
explain correlations
they can be used by marketing departments to examine the relationship between two variables. scatter graphs can be used to show correlation and allow businesses to extrapolate data
the types are:
positive correlation- when an increase in one variable results in an increase in the other variable
negative correlation- when an increase in one variable results in a decrease in the other variable
what are the limitations of using quantitative sales forecasting techniques?
- changes in the external environment (political, economic, social, environmental, legal and technological) can impact the business’ future performance, e.g. sudden wave of viral, social media support or criticism of your product from a celebrity using it, new entrants in the market, changes in weather conditions
- changes in the internal environment (culture, leadership, financial performance) can impact the business’ future performance, e.g. changing the amount of money spent on promotion
- quantitative sales forecasting can be time-consuming an complex, if it doesnt go to plan then its relevance may be argued
- it is very retrospective, only considers the past, often completely wrong
what are the 3 main methods to provide a quantitative sales forecast?
- moving averages
- extrapolation
- correlation
what is extrapolation and what are the pros and cons
extrapolation is a method used by businesses to predict future levels such as sales, through analysing trends in past data
pros:
- a simple method of forecasting
- not much data required
- quick and cheap
cons:
- unreliable if there are significant fluctuations in historical data
- assumes past data trends will continue into the future- unlikely in many competitive business environments
- ignores qualitative factors (e.g. change in tastes and fashions)
what makes quantitative techniques more effective in forecasting sales?
- if the business is mature, lots of past data to identify trends
- industry is more mature, rapid change is less likely, external factors many not disrupt as much
- stable external environment, the economy, technology, legislation and competition are less likely to change
what is investment?
spending now the expectation of a return in the future e.g. buying commodities and investing in businesses
what are the two types of investment?
capital investment- machinery and equipment that has a long-term benefit, e.g. buildings, computer, projectors for a school
revenue investment- spending on stock, wages/training that have a short-term benefit, e.g. exercise books, pens and hand sanitiser
what is investment appraisal?
a series of techniques designed to assist businesses in judging the desirability of investment in particular products. done by payback, ARR or net present value (NPV)
it could include decisions on:
- introducing new products
- expansion
- new technology
- advertising campaigns
it assesses the returns received, compared to the cost of the investment
what is payback and what is the formula used to calculate the payback period
it is the length of time that it takes for an investment to pay for itself from the net returns provided by that particular investment
no. of full years + what you need/what you get x 12
what are 3 pros and cons of the payback period?
Strengths
- takes into account the timing of cash flows, identify times when short of cash
- easy to calculate and understand
- especially important for a business with weak cash flow, it may be willing to invest only in projects with a quick payback
Weaknesses
- costs and sales are likely to change from your predictions
- ignores a project’s profitability, just because it may have a short pay-back period doesn’t mean it is profitable
- may encourage a short-termist attitude
what is the average rate of return and how do you calculate it?
it is a method of investment appraisal which measures the net return per annum as a percentage of the initial spending
1) calculate total profit over lifetime (total net cash flow - the investment appraisal)
2) divide by the number of the years of the investment project to give the average annual payment
3) find ARR
what is the formula for average profit and average rate of return?
average profit: total profit or returns / no. of years
ARR: average profit / initial cost x 100
what are the pros and cons of ARR?
positives:
- measures profitability
- easy to compare % returns against other investments
- considers total profit made
negatives:
- ignores the timings of cash flows
- ignore the time value of money, may not be worth as much later
- ignores the risk that projections of future sales may be more inaccurate the further into the future they are
what should you consider if the payback option is favourable for one option and the ARR is favourable for the other?
you must consider:
- how long the investment continues to pay for
- volatility/dynamic nature of the market
- attitudes/objective of shareholders
- cash flow
explain what NPV is
it is the present value of future income from an investment appraisal, take away the cost
It is understanding the value of money today in the future
- it takes into account time and value of money, changes worth due to inflation rates, interest rates and opportunity costs
- a discount factor is given to reduce the present value of a future income- the discount factor takes into account the interest or return the investment could have had if it has been put in the bank or spent on something else
what are the three steps of calculating NPV
1) multiply net cash flow x discount factor
2) add up all the present values
3) subtract the initial outlay
What are the factors that affect the choice of finance used?
- whether it had limited or unlimited liability, unlimited liability companies are sole traders and partnerships they can’t sell shares
- depends on the time scale at which you need finance, short medium or long term
- how much you need
- the age of the business
Explain the improved management of working capital as an internal method of finance
When the business may be able to negotiate to pay its bills later or work at getting cash in earlier from customers.
Pros:
-
What are the sources of finance for a limited liability company?
- share capital
- peer to peer funding (tend to keep control more effectively in the hands of the founder)
- business angels
- venture capitalists
(Ba and vc) - combination of share and loan capital generally, founder suffers dilution of control over the business and the company will probably find that the loan capital is at a much higher interest than an ordinary bank loan
What are the sources of finance for a business with unlimited liability?
Owners capital
Bank loan (easier to get one if UL, bank knows if the business fails the bank can recoup the cash from the personal assets if the individual owners)
Leasing
Trade credit (more likely to happen, they know they can just take their assets in times of failure)
Retained profit (no risk)
What are the 4 formulas for measuring productivity?
output/no. of workers
Output/time
Output/machines
Output/capital invested
What are the pros and cons of doing NPV?
pros
- use of discounting reduces the impact of long-term less likely cash flows
- has a decision-making mechanism- reject projects with negative NPV
cons
- cannot automatically compare projects with different initial costs
- complex to calculate
- rate of discount is critical, if it is high then fewer projects will be profitable
What are the different ways of growth including the varying risk associated with them?
Safest = market penetration (existing product in existing markets = promotion, pricing and distribution strategies)
Medium risk= product development (new products in exiting markets =R&D and product launch)
Medium risk = market development (existing products to new markets = expanding abroad, rebranding an existing product)
High risk = diversification (new products in new markets)
What are the concepts to include when analysing and evaluating spa water launch
- market share
- brand recognition
- quantitative (market growth)and qualitative (dynamic market) information
- Boston market
- product development
What are the pros and cons of using social responsibility as an objective?
Pros
- promotional strategy = improve demand and loyalty through enhanced reputation
- attracts ethical investors = long term source of finance
- helps employee recruitment and retention = improves productivity and competitive advantage
Cons
- trade off between ethics and profits, unit costs higher
- impact depends on PED, and external factors, are consumers willing to pay premium price
- could cause issues if the brand over promises and in the end disappoints
How can quality management give a business a competitive advantage?
- Reduces cost of dealing with defects can be more price competitive
- improves reputation and customer perception, improves loyalty and therefore word of mouth promotion and ability to compete with other
