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A-Level Business > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

Why do firms need money

A

To purchase equipment,raw materials,obtain premises and hire workers

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2
Q

2 categories of expenditure

A

Capital Expenditure
Revenue Expenditure

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3
Q

Capital Expenditure

A

Is the spending on items that may be used over and over again eg company vehicle,machinery,new factory

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4
Q

Revenue Expenditure

A

Refers to payments for goods and services that have either been consumed or will be used up soon eg raw materials and fuel

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5
Q

Capital

A

refers to money used to run a business

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6
Q

Internal Finance

A

Is money generated by the business or current owners

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7
Q

Retained Profits

A

Are profits generated by a business and put aside by the owners and saved for later in case of an emergency

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8
Q

Why are retained profits the cheapest source of finance

A

Because it is not charged interest and administration cost

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9
Q

Consequences of retained profits on small businesses

A

It means owners and their families may have less money to fund their lifestyle

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10
Q

Consequences of retained profits on larger companies

A

It means shareholders of the company will receive less dividend payments

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11
Q

Why are retained profits flexible

A

They do not need to be used immediately and can be accumulated and placed in a bank where it will gain interest

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12
Q

Advantages of internal finance

A

The capital is available immediately

Internal finance is cheap as there are no interest payments

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13
Q

Disadvantages of internal finance

A

Can be limited and may end up having to sell unwanted assets

There are no inflationary benefits

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14
Q

Factors of Production

A

Land
Labour
Capital
Enterprise

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15
Q

Owner’s Capital

A

Capital is the money provided by the owners in a business

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16
Q

The Methods of Internal Finance

A

Owner’s Capital
Retained Profits
Sales Of Assets

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17
Q

What might a business have to do if it is struggling to pay costs

A

May downsize/retrench. This means that the business makes its premises smaller to be more affordable

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18
Q

External Sources of Finance

A

Family and friends
Banks
Peer to peer lending
Business angels
Crowd-Funding

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19
Q

Family and friends

A

Used mainly by small businesses which consists of coming into agreement with mutual relations regarding a sum of money which you will pay back usually with little to no interest.

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20
Q

Banks

A

Commercial banks such as Barclays,NatWest and Metro. They offer a range of finance sources for businesses such as loans,overdrafts and mortgages

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21
Q

Peer to Peer lending

A

Involves people who have no relation lending lending another person a sum of money to avoid using a bank

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22
Q

What happens in peer to peer lending

A

.All loans are unsecured means there is no protection for lenders
.All transactions are placed online
.No previous relation between lenders is required

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23
Q

Business Angels

A

Are individuals who typically invest between £10k-£100k in exchange for a stake in the business

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24
Q

Reasons business angels invest

A

Some angels do this for the rush of risk,may be attracted by tax relief or saw an opportunity in investment for unused income.

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25
Q

Crowd Funding

A

This is a type of fundraiser where businesses or groups give a business. These people are usually involved in a particular centre such as staging the production,building a school or setting up a community project. Transactions are conducted online

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26
Q

Methods of finance

A

Internal
External

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27
Q

Loans

A

Is the process by which a business borrows a sum of money from a bank which has to be repayed with interest

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28
Q

Advantages of loans

A

Banks will not ask for a % of the business or get involved in the running of the business

Getting into a high street bank to apply for a business loan is a straightforward process

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29
Q

Disadvantages of loans

A

A bank will charge interest on the loan

Not very flexible, the business may incur a penalty if they decide to settle the loan early

A bank will ask for security or collateral on a loan this may be a house or another asset that can be seized if the loan is not paid back

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30
Q

Share Capital

A

Raising finance by issuing shares of the company in the stock market

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31
Q

Advantages of share capital

A

Investors are often prepared to provide extra funding as the business grows

More cost effective way to raise finance than a loan – no interest to pay back

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32
Q

Disadvatanges of share capital

A

The more shares that are sold, the more the profits have to be divided up and paid out to investors as dividends

Can be expensive and slow process to organise

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33
Q

Venture Capital

A

individuals which invest large sums of money into people’s business in return for shares in the company

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34
Q

Advantages of venture capital

A

The business gets all the skills of the venture capital business, their network and links may increase revenue streams

Great for owners who have been refused a loan from a bank

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35
Q

Disadvantages of venture capital

A

Venture capital firms look for a strong business plan, sound management and a proven track record, making it difficult for start-up firms

Venture capital firms typically want 20-30% stake in the business

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36
Q

Overdrafts

A

allows a business to go over the amount they have in the bank. Has to be repayed later on

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37
Q

Advantages of overdrafts

A

For a business owner this would idea as a quick fix method to tide the business over a difficult month of trading

Can be quick to arrange by phone or online with an instant decision

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38
Q

Disadvantages of overdrafts

A

If the business goes over this amount the overdraft will be “unauthorised” and the business will be charged heavily

Very expensive source of finance, very high charges and interest rates

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39
Q

Leasing

A

Is the process by which allows a business to spread costs of something over a period of time to make it easier to pay back. However the business will never own the asset.

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40
Q

Advantages of leasing

A

This is a lower monthly costs for a business owner than a loan

The leasing firm maintain the equipment, vans, cars etc. so the business will always have reliable working equipment

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41
Q

Disadvantages of leasing

A

Leasing is often over a fixed term, if the business changes its mind and wants to lease from a different company, contracts may be difficult to get out of

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42
Q

Trade credit

A

Where the seller gives a business a longer period of time to pay in installments rather than all in one go

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43
Q

Advantages of trade credit

A

No interest has to be paid on trade credit

Businesses that pay regularly on time can build relationships with their suppliers and secure better deals

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44
Q

Disadvantages of trade credit

A

Not all stock is available to buy using the trade credit method, so only applies to certain industries

If the business does not pay in time they risk being refused further credit by the supplier in the future

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45
Q

Grants

A

Where the UK pays businesses to set up in certain areas to help the spread of economy. These do not need to be repaid

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46
Q

Advantages of grants

A

The business usually will not have to pay the grant back

Unlike a loan there will be no interest to pay

The business owner will get funds without any loss of control of the business

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47
Q

Disadvantages of grants

A

A business will have to find a grant that suits their specific project, which can be difficult

There’s a lot of competition for grants

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48
Q

Limited Liability

A

The owner has a separate legal identity from their business

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49
Q

Unlimited Liability

A

The owner and business are legally bound. They are responsible for any torubles the business falls into

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50
Q

Which 2 business formats have unlimited liability

A

Sole Traders and Partnerships

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51
Q

Implications of unlimited liability

A

If a business gets into financial trouble or is sued a sole trader or partnership businesses may have to sell their own assets (like a family car) to pay the debts of the business

The business and the owner are seen as one legal entity, so are equally liable (responsible) for the debts

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52
Q

Which 2 business formats have limited liability

A

Private Limited Company (ltd)
Public Limited Comoany (Plc)

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53
Q

Implications of limited liability

A

The owner and the business have separate legal identities so can sue or be sued separately

The owner and the business can own separate assets

The business can now sell parts of the business called shares to shareholders

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54
Q

Suitable methods of finance for an unlimited liability business

A

Business loans from a bank

Private investors e.g. angels

Credit cards from a bank

Crowd funding from websites

Trade credit from suppliers

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55
Q

Suitable methods of finance for limited liability business

A

Retained profit from the business

Sale of assets from the business

Ordinary and preference share issues

Government grants

Venture capital – as they may be borrowing larger amounts than unlimited liability businesses

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56
Q

Business Plan

A

A document which sets out the future plans for a business

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57
Q

Why does a business write a business plan

A

To give the owners some direction – once a plan is written down it is more likely to be followed

To set targets (smart) and objectives that can be followed

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58
Q

Whats included on a business plan

A

Cash Flow Forecast

Name of the business

Product or service and the market it is aimed at

4 Ps of marketing; product, price, place and promotion

Human resources; who will be working there, managers, owners etc.

Production costs and potential suppliers of materials
Premises and how it will be financed; rent, mortgage, bought outright, leased from council

Financial information; projections on revenue, costs and profits

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59
Q

Purpose of a business plan

A

To help set up a new business

To help the business raise finance

To help the business to set objectives

To outline how functions of the business will be organised

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60
Q

What is a cash flow forecast

A

A cash flow forecast is the day-to-day running of a business budget

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61
Q

What does a cash flow forecast show

A

A cash flow forecast will show where the business will have a shortfall of cash

62
Q

Cash inflow (income)

A

Appears at the top of the document. Most likely to be the sales revenue

63
Q

Cash outflow (expenditure)

A

Is the cash that is being spent. This will be on bills such as wages,insurance,advertising etc

64
Q

Opening and closing balance

A

The amount of cash a business has at the start and end of each month

65
Q

Uses of cash flow forecast

A

To help monitor the cash coming in and out of a business

A good cash flow will help a business secure a better deal on their finance

66
Q

Limitations of cash flow forecasts

A

It is merely an estimate

Owner may have overstated or understated income and other factors

67
Q

Sales forecast

A

A sales forecast estimates the volume or value of future sales using market research or past sales data.

68
Q

Purpose of sales forecast

A

Avoid cash flow problems

Frees up managment time

Production capacity

Employ more workers

69
Q

Factors affecting sales forecast

A

Consumer Trends
Economic Variables (inflation,unemployment,GDP)
Actions of competitors

70
Q

Difficulties of sales forecast

A

No guarantees
Dynamic markets

71
Q

Sales Volume Formula

A

SV=Sales Revenue/Selling Price

72
Q

Sales Revenue Formula

A

SR=Selling Price x Sales Volume

73
Q

Fixed Costs

A

Costs that do not change with the level of output

74
Q

Examples of fixed costs

A

Rent
Mortgage
Loan
Insurance
Leasing

75
Q

Variable Costs

A

Costs that vary with the level of output

76
Q

Examples of variable costs

A

Cost of stock
Raw Materials
Fuel
Wages

77
Q

Total Variable Cost Formula

A

TVC=Average Variable Cost x Quantity

78
Q

Total Costs Formula

A

TC=Variable Cost + Fixed Costs

79
Q

Break Even

A

Is the point where a business makes neither a profit nor a loss

80
Q

Contribution

A

Is the amount that each unit produced contributes towards the fixed costs

81
Q

Contribution Formula

A

C=Selling Price - Variable Cost per item

82
Q

Break Even Formula

A

FC/Contribution

83
Q

How to draw a break even chart

A

Draw Axis
Plot Fixed Costs
Plot Total Costs
Plot Total Revenue Line
Plot the B/E point

84
Q

Margin Of Safety

A

Shows the number of sales that could be lost before a business makes a loss

85
Q

Margin Of Safety Formula

A

Actual Sales - B/E level of sales

86
Q

Uses of Break Even

A

To write a business plan
To calculate when they wil make a loss

87
Q

Limitations of break even

A

Assumes everything made is sold
Does not take into account discounts

88
Q

Budget

A

Is an estimate of income or expenditure for a set period of time

89
Q

Purpose of Budgets

A

Planning
Forecasting
Communication
Motivation

90
Q

Types of Budget

A

Historical Budget
Zero Based Budget

91
Q

Historical Budget

A

Uses previous years of the businesses statements to calculate budget

92
Q

Zero Based Budget

A

Based on potential performance such as the number of customers they anticipate to serve

93
Q

Favourable Variance

A

where actual income is more than budget, or actual expenditure is less than budget

94
Q

Adverse Variance

A

where actual income is less than budget, or actual expenditure is more than budget

95
Q

Difficulties of budgeting

A

Time consuming to prepare, monitor and control

Unrealistic budgets can be demotivating

96
Q

Limitations of budgeting

A

Budgets can cause inter- department rivalry as some departments get more money than others

Can make managers short-term and short-sighted, they become budget driven rather than customer driven

97
Q

Profit

A

The sum of money left after all costs are paid

98
Q

Statement of comprehensive income

A

a historical record of the trading of a business over a specific period

99
Q

Gross Profit Formula

A

Revenue - Cost of Sales

100
Q

Operating Profit Formula

A

Gross Profit - Operating Costs

101
Q

Net Profit Formula

A

Total Revenue - Total Costs

102
Q

Gross Profit Margin Formula

A

Gross Profit Margin = (Revenue – COGS) / Revenue x 100

103
Q

Operating Profit Margin Formula

A

OPM= Operaring Profit / Revenue x 100

104
Q

Net Profit Margin Formula

A

NPM= Net profit / sales x 100

105
Q

Ways to improve profitability

A

Increase Revenue
Reduced Costs

106
Q

What is the difference between profit and cash

A

Profit is the sum of money remaning after all costs are paid however cash is the liquid asset used to keep the business afloat

107
Q

Liquidity

A

The ability of a business to turn its assets into cash

108
Q

Statement of financial position

A

the firm’s assets, liabilities and owners’ equity (net worth)

109
Q

Measuring Liquidity

A

Current Ratio
Acid Ratio

110
Q

Current Ratio Formula

A

Current Assets / Current Liabilities

111
Q

Acid Ratio Test Formula

A

Current Assets - Inventory / Current Liabilities

112
Q

Ways that liquidity can be improved

A

A business could reduce the amount of stocks that it holds

A business could reduce the credit period offered to customers

113
Q

Working Capital

A

The day to day finance needed in a business

114
Q

Working Capital Formula

A

Current Assets - Current Liabilities

115
Q

Business Failure

A

when a business ceases to trade or when a business does not trade in a profitable way or when a business makes a terrible decision

116
Q

Internal courses of business failure

A

Poor efficiency
Poor marketing
Failure to innovate
Bad management of working capital

117
Q

Poor efficiency

A

When a business is unable to use all of its facilities and assets in a profitable and productive manner

118
Q

Poor marketing

A

When a business fails to reach and please the target audience through inappropriate marketing startegiesn

119
Q

Failure to innovate

A

When a business fails to move forward with time and adapt to developments in technology

120
Q

Poor management of working capital

A

When a business puts money into the wrong places which do no develop a business’ efficiency, productivity and profitability

121
Q

External causes of business failure

A

Economic Recession
Strong Pound- reduced export demand

122
Q

Economic recession

A

A time period where customers will save rather than buy due to the increase cost of living. Customers will spend money on necessities and alternatives rather than luxury and normal goods

123
Q

Productivity

A

Measures the relationship between inputs into the production process and the resultant outputs

124
Q

Production

A

The process of making or manufacturing goods and products from raw materials

125
Q

Methods of production

A

Job Production
Batch Production
Flow Production
Cell Production

126
Q

Job production

A

Where the products are made one at a time tailored to the demands of the client or customers. Products made are of a high quality and premium prices can be charged

127
Q

Pros of Job production

A

Quality is high because workers are skilled
Easy to organise
Custom made

128
Q

Cons of Job production

A

High labour costs
Production may be slow

129
Q

Batch production

A

Where a specific quantity of a product is made at a time eg Doughnuts, Sofas, Armchairs

130
Q

Pros of batch production

A

Workers are likely to specialise in one process
Production is flexible

131
Q

Cons of batch production

A

More complex machinery needed
Requires planning and co-ordination

132
Q

Flow production

A

Involves a continuous movement of items through the production process

133
Q

Pros of flow production

A

Low unit cost due to economies of scale
Output can be produced very quickly

134
Q

Cons of flow production

A

Products may be too standardised
Huge setup cost

135
Q

Cell production

A

A form of team working and helps ensure worker commitment

136
Q

Pros of cell production

A

Closeness of cell members should improve communication
Avoiding confusion arising from miscommunication

137
Q

Ways to improve productivity

A

Productivity Bonus
Productivity Deal
Staff Training
Investment in new machinery and equipment

138
Q

Productivity Bonus

A

Extra money workers reactive if they produce more of something than usual

139
Q

Productivity Deal

A

An agreement where the employees of an organisation agree to improve productivity in return for an increase in pay or benefits

140
Q

Staff Training

A

Is a programme which teaches employees the etiquette and methods of a job to improve their productivity

141
Q

Investment in new machinery and equipment

A

Where a business chooses to put money into newer technology which produces at a faster rate increasing productivity

142
Q

Factors influencing efficiency

A

Lean Production
Kaizen
JIT

143
Q

Lean Production

A

An approach to operations that focuses on reducing the amount of resource needed

144
Q

Kaizen

A

An approach to creating continuous improvement based on the idea that small, ongoing positive changes can reap significant improvements

145
Q

Just In Time

A

Where products go straight from manufacture to customer to reduce storage space

146
Q

Labour Intensive

A

Productions methods that make more use of labour

147
Q

Pros of labour intensive

A

More flexible
Cheaper for small scale production
People more creative than machine

148
Q

Cons of labour intensive

A

People are unreliable
People cannot work without breaks and holidays
People need to be motivated

149
Q

Capital Intensive

A

Production methods that make more use of machinery relative to labour

150
Q

Pros of capital intensive

A

Machinery can operate 24/7
Machinery is precise and consistent

151
Q

Cons of capital intensive

A

Huge setup costs
Large delays if machinery breaks down

A-Level Business (4 decks)

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