theme 2 Flashcards
1
Q
what is capital?
A
money provided by the owners in a business
2
Q
what is capital expenditure?
A
spending on business resources that can be used repeatedly over a period of time
e.g.,
company vehicle, cutting machine, new factory
3
Q
what is revenue expenditure?
A
spending on business resources that have already been consumed or will be very shortly
e.g.,
wages, raw materials, fuel
4
Q
what is internal finance?
A
money generated by the business or its current owners
5
Q
what is retained profit?
A
profit after tax that is put back into the business and not returned to the owners
6
Q
advs & dis of retained profit?
A
adv:
- cheapest source of finance no interest or admin costs
dis:
- opportunity cost. cannot be returned to owners, less money to fund their lifestyle.
- limited companies, shareholders receive lower dividends
- plcs, shareholders may not be impressed, conflict
7
Q
what are sales of assets?
A
when an established business sells unwanted assets to raise finance
e.g.,
machines, land, buildings
8
Q
what are sale and leaseback agreements?
A
selling an asset such as property or machinery that the business still needs
9
Q
advantages of internal finance?
A
- capital is available immediately
- cheap
- not subject to credit checks
- no need to involve 3rd parties
10
Q
disadvantages of internal finance?
A
- can be limited
- not tax deductible
- inflexible
- inflation can ruin value
- opp cost can be high
11
Q
what is external finance?
A
money raised from outside the business
12
Q
sources of finance?
A
- fam and friends
- banks
- peer to peer lending
- business angels
- crowd funding
- other businesses
13
Q
what is peer to peer lending?
A
people lending money to unrelated individuals and therefore avoid using the bank
14
Q
implications of unlimited liability?
A
- if the business collapses and money is owed, their personal resources will be sold (private funds)
- no separation of legal identity between business and owners so could be sued by customers, employees, stakeholders or suppliers
15
Q
advantages of unlimited liability?
A
- easier to raise finance as lenders will be reimbursed
- businesses seen as more credible as owners are encouraged to be more cautious as personal assets are at risk
16
Q
advantages of limited liability + however?
A
- shareholders financial liability is limited to amount invested in business, private assets are protected
- protection from legal claims on business as business and owners have separate legal identities
however, courts may decide that individuals are liable if a crime has been committed
- may find it easier to raise larger amounts of finance, investors are more willing to buy shares as they know the extent of their investment
however, sometimes the owners of small limited companies are required to give personal guarantees of company’s debts to those lending which makes them liable for those debts
17
Q
factors when choosing the appropriate finance?
A
- short term or long term required
- financial position of business
- type of expenditure needed
- cost
- legal status of business
18
Q
finance appropriate for unlimited liability businesses?
A
- personal savings
- retained profit
- mortgage
- unsecured bank loans
- peer to peer lending
- crowd funding
- bank overdraft
- grants
19
Q
finance appropriate for limited liability businesses?
A
- share capital
- debentures
- retained profit
- venture capitalists
- business angels
20
Q
relevancy of a business plan?
A
provides a clear, concise vision of the future progress and profitability for potential investors and lenders
21
Q
what does a well written business plan show?
A
- forces owner to take an objective and critical look at the whole business idea
- provides road map that shows clear direction for development of business
- provide an action plan and identifies key tasks that must be undertaken to meet goals
- flag up potential problems in advance so investors are aware and solutions can be found
- shows lenders and investors that owner is cautious, responsible, serious and credible
22
Q
contents of a business plan?
A
- executive summary
- business opp
- buying and production
- financial forecasts
- business and objectives
- market
- personnel
- premises and equip
- finance
23
Q
use of cash flow forecasts?
A
- identifying timing of cash shortages and surpluses
- supporting applications for finance
- enhancing planning process
- monitoring cash flow
24
Q
limitations of cash flow corecasts?
A
- estimates, difficult to predict sales revenue for a future time period
- business activity is subject to external forces that are beyond control of owners e.g., interest rates, state of economy. legislations, exchange rates
- time consuming, must be updated regularly, could lack customer needs if focused on forecast
25
purpose of sales forecast?
- can reduce uncertainty and enable it to plan more effectively
26
what may a business want to predict accurately?
- future sales of product
- effect of promo on sales
- possible changes in size of market in future
- way sales fluctuate at diff times of year
27
what is a time series analysis?
a variety of techniques that can be used to predict future times. this involves predicting future levels from past data which is known as time series data
28
components that a business wants to identify in time series data?
- the trend
- seasonal fluctuations
- cyclical fluctuations
- random fluctatations
29
benefits of sales forecasting
- informs cash flow forecast and gives business a clear idea of what cash inflows will be so finances can be managed
- allows business to plan orders of supplies and components
- enable the business to ensure it has the correct staffing levels for the projected sales
- enable the business to ensure that it has the capacity to meet the projected orders
30
factors affecting sales forecasting?
- consumer trends
- seasonal variations
- fashion
- long term trends
- economic growth
- interest rates
- inflation
- unemployment
- exchange rates
- actions of competitors
31
difficulties of sales forecasting?
- volatiles consumer tastes and preferences
- range of data
- subjective expert opinion
32
contribution per unit?
total contribution?
selling price - variable cost
total revenue - total variable cost
alternative:
unit contribution x no. units sold
33
how can contribution be used to calculate profit?
total contribution - fixed costs
34
what is the break even point?
- when total costs (fixed costs + variable costs) is exactly the same as total revenue.
- neither profit or loss.
35
break even output formula?
fixed costs / contribution
36
what does a break even chart show?
- value of total cost over a range of output
- value of total rev over range of output
- level of output needed to break even
- profit at particular level of output
- levels of output below break even output, a profit is made
- rs between fixed costs and variable costs as output rises
37
what does the margin of safety show?
shows how much sales could fall before a loss is made
38
limitations of break even analysis?
- output & stock: assumes all output is sold so output = sales and no stocks are held
- unchanging conditions: cannot cope w a sudden increase in wages and prices or changes in tech
-accuracy of data: if data is inaccurate, conclusions on basis of data is flawed
-non linear rs: assumes that total rev and cost lines are linear and straight.
-multi product businesses: within diff products, businesses will have diff variable costs and diff prices
- stepped fixed costs: some fixed costs are stepped e.g., in order to increase output a manufacturer may need to acquire more capacity
39
what purposes do budgets fulfil?
- control and monitoring: sets objectives and targets
- planning: plans for the future and forces management to think ahead
- co ordination: allows managers to control activities of many areas of business
- communication: allows objectives to be communicated w workforce
- efficiency: allows management to empower staff by delegating decision making
- motivation: provides workers w targets and standards
40
types of budgets?
- sales budget
- production cost budget
- zero based budget
41
advantages of zero based budgeting?
- allocation of resources should be improved
- questioning attitude is developed which will help to reduce unnecessary costs and eliminate inefficient practises
- staff motivation might improve as evaluation skills are practised and a greater knowledge of the firm's operations may develop
- encourages managers to look for alternatives
42
disadvantages of zero based budgeting?
- time consuming as it involves collecting and analysing detailed info
- skilful decision making is required which may not available in the organisation
- threatens status quo, which may affect motivation
- managers may not be prepared to justify spending on certain costs
43
what includes in budgetary control?
- preparation of plans
- comparisons of plans w actual results
- analysis of variances
44
difficulties of budgeting?
- setting budgets:
not actual figures as historical data is used
if sales data are inaccurate, many budgets will be inexact
may lead to conflict w diff staff departments
time consuming
- motivation
- manipulation
- rigidity
- short termism
45
how to work out:
- gross profit
- op profit
- net profit
gross: revenue - cost of sales
op: gross - operating expenses
net: op- interest
46
how to work out each profit margin?
profit / revenue x 100
47
ways to improve profitability?
- raising prices
- lowering costs (cheaper resources, using existing resources more efficiently)
48
what does a balance sheet provide a summary of?
- assets (resources owned by a business)
- liabilities (debts of the business e.g., overdraft or mortgage)
- capital (money put into business by owners)
assets = capital + liabilities
49
how can current ratio be calculated?
current assets / current liabilities
50
how to work out acid test ratio?
current assets - inventories / liabilities
51
what do the results of an acid test ratio show?
less than 1: current assets - stocks do not cover current liabilities
higher than 1: cash can just be sitting rather than being invested. returned to shareholders or being used efficiently
a typical business needs around twice the amount of current assets as current liabilities to perform safely1.5:1 and 2:1
52
how to work out working capital?
current assets - current liabilities
53
how does managing work capital vary?
- size of business: larger the business. larger amount of working capital there is likely to be
- stock levels: businesses in diff industries have diff needs for stocks. the more stocks a business needs, the higher will be its working capital
- debtors: the time between buying stock financed by trade credit and selling finished products can influence levels of working capital
54
why maintaining adequate levels of working capital is important?
too low (assets are too low, liabilities are too high):
- if a business doesn't carry enough stock of raw materials, production could pause, it also may not be able to fulfil orders on time
- if there is not enough cash, bills may not be paid on time
- may be unable to pay invoices for trade credit if borrowed
too high (assets are too high. liabilities are too low):
- stocks are costly to keep, the more stock, the higher the cost of physically storing and handling it.
- too much cash is unlikely to be earning high rates of interest and could be used to pay back debts or invest
55
ways to improve liquidity?
- use of overdraft facilities
- negotiate additional short term / long term loans
- encourage cash sales and sell off stock
- sale and leaseback
- only make essential purchases
- extend credit w selected suppliers
- reduce personal drawings from business
- introduce fresh capital
56
internal courses of business failure?
- lack of planning
- cash flow problems (running out of cash) due to:
- overtrading
- investing too much in fixed assets
- allowing too much credit
- over borrowing
- seasonal factors
- unforeseen expenditure
- external factors
- poor financial management
- lack of funds
- relying on a narrow customer base
- marketing problems
- failure to innovate
- lack of business skills
- poor leadership
57
external causes of business failure>
- competition
- changes in legislation
- changes in consumer tastes
- economic conditions
- changes in market prices
58
financial and non financial causes of business failure?
financial: can become bankrupt or insolvent. most common reason is due to shortage of cash, the inability to pay immediate debts
non financial: failure due to lack of planning, business skills, failure to meet customer needs, etc.
59
advantages / dis of job production?
adv:
- quality is high as workers are skilled
- workers are well motivated as work is varied
- products can be custom made
- production is easy to organise
dis:
- high labour costs due to skilled workers
- production may be slow
- wide range of specification tools required
- expensive method
60
adv / dis of batch production?
adv:
- workers likely to specialise in one process
- unit costs are lower as output is higher
- production is flexible since diff orders can be met
- more use of machinery is made
dis:
- more complex machinery needed
- careful planning and co-ordination needed
- less motivation as workers specialise
- if batches are small, costs will still be high
- money be tied up in work in progress
61
adv / dis of flow production?
adv:
- v low unit costs due to eos
- output can be produced quickly
- modern plant and machines allow some flexibility
- production speed can vary according to demand
dis:
- products may be too standardised
- huge set up costs before production can begin
- worker motivation can be v low, repetitive tasks
- breaks in production can be v expensive
62
adv / dis of cell production?
adv:
- product flexibility is improved
- lead times are cut
- less work in progress
- teamwork is encouraged
- safer working environment
dis:
- conflict
- requires trust and participation
- allocation of work has be efficient so they have enough to work but not too much that they are unable to cope
- recruitment and training must support this approach
63
how to measure labour productivity?
output per worker per period of time
64
factors influencing productivity?
- specialisation and division of labour
- education and training
- motivation of workers
- working practises
- labour flexibility
- capital productivity
65
why is productivity important within competitiveness?
- if productivity raises, more output will be produced w same level of resources
- costs will be lower and can charge lower prices than rivals
- makes businesses more competitive in market place and are likely to win more customers, increase market share and threaten survival or rivals
66
factors influencing efficiency?
- introducing standardisation (uniform resources)
- outsourcing
- relocating
- downsizing
- delayering
- investing in new tech
- lean production
- kaizen (continuous improvement)
- JIT minimising/ eliminating amount of stock held by business
67
factors when deciding between capital or labour intensive production?
- nature of product
- relative prices of each factor
- size of firm
68
adv / dis of capital intensive strats?
adv:
- more cost effective if large amounts produced
- machinery is more precise and consistent
- machinery can operate 24/7
- machinery easier to manage
dis:
- huge set up costs
- huge delays and costs if machinery breaks down
- can be inflexible as machinery is specialised
- threat to workforce and can reduce morale
69
adv / dis of labour intensive strats?
adv:
- more flexible
- cheaper for small scale production
- cheaper for larger scale productions in countries such as china and india
- people are creative and solve problems / improvements
dis:
- people more difficult to deal w than machines
- can be unreliable, sick or leave
- breaks and holidays
- need to be motivated to improve performance
70
how to measure capacity utilisation?
current output / max possible output x 100
71
implications of under utilisation?
dis:
- it will not be making the most of its resources and may not be operating efficiently as unit costs are not minimised
adv:
- business will be able to cope more easily w sudden increase in demand
- less work related stress, reduces sickness and absenteeism
72
implications of over utilisation?
dis:
- working at full capacity can cause stress and tiredness, accidents, absence, machines may also be overworked and at breaking point
- break downs can be v expensive as production will stop
- may not be able to meet increase in demand
- insufficient time for staff training and important maintenance work
adv:
- average costs will be lower as fixed costs will eb spread across more units of output, which will improve competitiveness and raise profits
- staff motivation may be good if workers feel secure
- employees may feel happy w more workload w opportunities to increase their earnings by doing overtime
- busy operation can improve brand rep
73
ways of improving capacity utilisation?
- reduce capacity ( reduce staff, sell unused fixed assets, review leasing capacity, move to smaller premises)
- increase sales
- increase usage
- outsourcing
- redeployment
74
reasons for why stock is held?
- raw materials and components
- work in progress
- finished goods
75
factors that can influence stock levels?
- demand
- stockpile goods
- costs of stock holding
- amount of working capital available
- type of stock
- lead time
- external factors
76
use of buffer stocks?
a business may hold buffer stocks of finished goods in case there is a sudden increase in demand, if this is not met they will miss out on sales opportunity and fear of losing regular customers
they may hold it of raw materials to protect themselves from a break in supply which can lead to a halt in production
77
implications of poor stock control?
holding too much stock:
- storage
- opportunity cost
- spoilage costs
- administrative and financial costs
- unsold stock
- shrinkage
too little stock:
- unable to cope w increase in demand
- if stock deliveries are delayed, firm may run out of stock and have to pause production
- less able to cope w shortages of materials
- have to place more orders, raises total ordering costs and could miss on discounts from bulk buying
78
advantages of JIT?
- improves cash flow as money is not tied up in stocks
- system reduces waste, obsolete and damaged stock
- more factory space is made available for productive use
- costs of stockholding are reduced significantly
- links w and control of suppliers are improved
- supplier base is reduced significantly
- motivation of workers are improved, as more responsibility given
79
disadvantages of JIT?
- trust placed in reliability and flexibility
- increased ordering and admin costs
- advantages of bulk buying may be lost
- vulnerable to break in supply and machinery breakdowns
- difficult to cope w sharp increases in demand
- loss of rep if late deliveries occur
80
how can waste be minimised?
- if goods are perishable, they must be stored in refrigerated units
- businesses must be diligent when forecasting demand patterns for perishable goods
- a suitable stock rotation should be adopted
- can use computers to manage stock control
- can use adjustable pricing strats to reduce waste
- perishable goods must be transported rapidly
81
what are the advantages of lean production?
- raised productivity
- reduces costs and cuts lead times (time between placing order and delivery of goods)
- lowers number of defective products
- improves reliability and speeds up design time
thus gain comp advantage
can charge lower prices, offer better quality and reliability and fight off rivals
82
what factors does lean production cause?
-less time
less stock
fewer materials
less labour
less space
fewer suppliers
83
what objectives include of quality control?
- satisfying consumers needs
- worked under conditions they were likely to face
- operated in the way they should
- could be produced cost effectively
- could be repaired easily
84
what is the difference between quality control and assurance?
assurance: aims to prevent defects w a focus on processes used to make product, proactive quality task
control: aims to identify defects in finished product, reactive task
85
what are the features of total quality management?
- quality chains
- company policy, accountability and empowerment
- control
- monitoring the process
- teamwork
- consumer views
- zero defects
- quality circles
86
what are does TQM allow companies to do?
- focus on needs of customers and rs between suppliers and customers
- achieve quality in all aspects of business
- critically analyse all processes to remove waste and inefficiencies
- find improvements and develop measures of performance
- develop a team approach to problem solving
- develop effective procedures for communication of work
- constantly review the processes to develop a strategy of constant improvement
87
what are the problems of TQM?
- training and development costs of the new system
- only works if there's commitment from entire business
- lots of documents involved and regular audits will be needed
- stress is placed on the process and not the product
88
comp advantage from quality management?
supplying high quality goods allows for:
-product quality should improve, increase sales
-business costs may cut if faults detected prior
- can be used as a USP, differentiation and stand out from rivals, charge higher price
89
what are external influences?
- gov
- world events
- consumer tastes
- economic climate
- pressure groups
- changes in population
- social factors
- environmental factors
- legislation and regulation
90
how is inflation measured?
a common approach is to calculate changes in the consumer price index which involves gathering info about the prices of goods and services in the economy
91
how does inflation affect businesses?
- increased costs:
- raising price costs money (brochures, updating
websites)
- suppliers price raising, research required for best deals
- uncertainty: don't know what prices will be in months time or decisions to make
- borrowing & lending: value of money in debt can decrease however may be in an inflationary environment or index linked
- consumer reactions: increased saving, less spending, businesses will sell less
- international competitiveness: impact on import and exports of goods and services
- deflation: (consumers may delay spending as they think they can purchase in future for lower prices) businesses may need to lower prices which reduces profit or benefit from a fall in UK import prices
- exchange rates: countries use different currencies transactions between people and businesses can be affected
92
summary of effects of changing exhchange rates?
exchange rate: falls
price of exports: falls
demand for exports: rises
price of imports: rises
demand for imports: falls
opposite for a rise in exchange rate
93
impact of appreciation and depreciation in exchange rate on imports & exports?
An appreciation means an increase in the value of a currency against other foreign currency.
An appreciation makes exports more expensive and imports cheaper.
A depreciation increases the cost of imports so there will be an increase in cost-push inflation.
A depreciation makes exports more competitive – without any effort. In the long-term, this may reduce incentives for firms to cut costs, and could lead to declining productivity and rising prices.
94
how are businesses affected by exchange rates?
- sometimes this may benefit a business
e.g., if the value of a rupee falls, indian exporters will benefit as price of exports falls and demand should increase.
however, indian importers will lose out as their purchases will be more expensive
- causes uncertainty and difficult to predict demand for exports and costs of imports, planning more difficult
- costs money to switch from one currency to another
95
effect of interest rates on costs and investment?
cost: affects overhead costs
investment: affects the amount the businesses invest due to:
- cost of loans
- attractiveness of saving
- paying of existing loans
- fall in demand
96
how can changes in interest rates lead to changes in sales of businesses?
- domestic consumption: consumers will be hit by a rise in interest rates
- domestic investment: businesses likely to cut back plans for new investment, fall in demand
- stocks: increases cost of keeping stock
- exports & imports: rise in value of 1 currency against other
97
effect on businesses of changes in taxation?
- consumer spending: increases in income tax is likely to leave consumers w less income and reduce spending however reduction increases spending
- prices: increase in VAT raises costs of the business, increase in customs duty, increases price of goods imported
- business costs, rev and profits: increases in some taxes may raise costs of a business
- business spending and investment: increases in cost and reduced profits mean businesses have less retained profit (struggle to pay debts, meet expenses, investments)
- shares: increase in capital gains tax may deter shareholders or delay sales of shares
- importing & exporting: if custom duties increases on imported products UK businesses may benefit as imports against it would have higher price
- business operations & employees: increases in national insurance contributions of employers may deter employers from recruiting extra workers
- tax avoidance
98
what is the business cycle?
- boom: GDP is growing fast as economy is performing well. existing firms will expand and new firms will enter market.
demand will rise, jobs creates, wages rise, profits rise.
however, prices may also rise
- downturn: economy is still growing but at a slower rate. demand for goods & services will flatten out or begin to fall, unemployment will start to rise and wage increase will slow down.
firms will stop expanding, profits may fall and some firms leave market. prices will rise slowly.
- recession: GDP may be flat, demand will start to fall for many goods/services esp non essentials.
unemployment rises sharply, business confidence is low, bankruptcies rise and prices become flat. prices of some things may even fall.
- recovery: businesses & consumers regain their confidence and economic activity is on the increase.
demand starts to rise, unemployment begins to fall and prices start to rise again
99
the impact of the business cycle on business?
- output: during boom, businesses increase output to meet rising demand, some capacity.
during recession, output will fall, thus businesses reduce output and cut capacity
- profit: during boom, profit rises as demand is rising and easier to raise prices. when national income declines it is harder to make a profit. businesses may cut cists to maintain profit levels, many will have to tolerate lower profits and some losses.
- business confidence & investment: recovery and boom, confidence is high. more inclined to launch new products, enter new markets and expand.
during recession, confidence is low and owners are cautious, less likely to take risks, investment falls.
- employment: during boom, unemployment falls as businesses take more workers to keep w demand. during recession the opposite happens
- business start-ups & closures: in boom, more people prepared to set up business as demand is rising and easier to make a profit, high confidence. recession is not a good time to start business, business closures will be rising and those w cash flow problems are at risk.
100
effect of economic uncertainty on business environment?
- decision making
- unexpected events
- business confidence
101
consumer issues influenced by legislation?
- product safety
- prices and payment methods
- consumer rights
- promo and advertising
- trading and age restrictions
- product quality
102
how does consumer legislation affect businesses?
- increases in costs
- quality control
- dealing w customer complaints
- changes in business practise
103
factors of employee protection?
- employment contract
- discrimination
- unfair dismissal
- equal pay
104
how does employment legislation affect businesses?
- compliance costs: expenses incurred by a business meeting the requirements of employment and related legislation can be significant
- high labour costs
- changing working practises
- loss of flexibility
- penalties
105
factors of environmental protection?
- pollution
- destruction of wildlife habits
- traffic congestion
- resource depletion
106
how does environmental legislation affect businesses?
- marketing
- finance: saves costs long term e.g., energy saving measures. though most cases leads to higher costs
- operations management: pollution controls and other environmental measures could have impact on how product is made
- HR: staff will need to be recruited and trained to deal w ever increasing gov regulations concerning environment
107
what is competition policy and practises used?
need to monitor the activities of monopolies and markets that are dominated by a small number of large businesses.
- increasing prices
- restricting consumer choice
- raise barriers to entry
- market sharing
