Theme 2 Flashcards

1
Q

Working capital

A
  • businesses day to day finance (net current assets)
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2
Q

Key financial concerns for new business start ups

A
  • start up costs
  • running costs
  • how much customers spend
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3
Q

Raising finance short term

A
  • bank overdraft

- trade credit

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4
Q

Raising finance medium term

A
  • bank loan

- leasing

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5
Q

Raising finance long term

A
  • owners savings
  • sales of shares
  • reinvested profits
  • venture capital loans
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6
Q

Financial management for an established business

A
  • budgeting

- cash flow forecasting

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7
Q

Need for finance

A
  • starting up
  • growing
  • cashflow problems
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8
Q

Internal finance

A
  • retained profit
  • sales of assets
  • improved management of working capital
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9
Q

External sources of finance

A
  • family and friends
  • banks
  • peer to peer funding
  • business angels
  • crowd funding
  • other businesses
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10
Q

External methods of finance

A
  • Loans
  • share capital
  • venture capital
  • overdrafts
  • leasing
  • trade credit
  • grants
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11
Q

Finance appropriate for unlimited liability businesses

A
  • owners capital
  • bank finance
  • leasing
  • trade credits
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12
Q

Finance appropriate for limited liability businesses

A
  • share capital
  • bank finance
  • angel or venture capital
  • peer-to-peer or crowdfunding
  • leasing and trade credit
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13
Q

Relevance of business plan in obtaining finance

A
  • executive summary
  • product/service
  • market
  • marketing plan
  • operational plan
  • financial plan
  • conclusion
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14
Q

Analysis of cash flow forecast

A
  • difference between opening + closing balance
  • monthly closing balance to assess trends
  • analyse timings of inflows/outflows
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15
Q

Uses and limitations of cash flow forecast

A
  • keep stock of raw materials to minimum
  • helps budgeting
  • uncertain (external factors)
  • raw data inaccurate
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16
Q

Purpose of sales forecasts

A
- determines:
Human resource plan (staff)
Cash flow forecast
Profit forecast
Production scheduling
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17
Q

Factors affecting sales forecasts

A
  • consumer trends
  • economic variables (income elasticity, exchange rates, tax)
  • competitors
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18
Q

Difficulties of sales forecasting

A
  • changing economy

- dynamic market

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19
Q

2 ways to measure sales

A
  • volume

- value

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20
Q

Ways to boost revenue

A
  • higher price

- lower price higher volume

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21
Q

Why managers need to be aware of costs of production

A
  • assess profitability

- compare with forecasted or budgeted figures

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22
Q

Fixed costs examples

A
  • rent

- salaries

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23
Q

Variable costs examples

A
  • raw materials

- commission

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24
Q

Break even calculation

A

FC/(sppu - vcpu)

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25
Break even charts
- total costs - fixed costs - total revenue
26
Margin of safety
- the amount by which demand can fall before the firm starts to make a loss - current output - break even output
27
Factors influencing break even
- fall in demand - competitors - changing production (labour/capital)
28
Interpretation of break even graphs
- estimate break even point - assess impacts of planned price changes - take decision on whether to produce own products or purchase externally
29
The purpose of budgets
- prevent overspending - measure success - enable spending power to be delegated - motivate staff in a department
30
How to construct a budget
- make judgement of likely future sales revenues - set cost ceiling which allows for profit - break down budget into departments/managers
31
Types of budget
- historical (based on previous) | - zero based budget (all spending must be justified)
32
Best criteria for setting budgets
- relate to business objective | - involve managers in process
33
Variance analysis
- favourable variance (higher profit than expected) | - adverse variance (lower profit than expected)
34
Difficulties of budgeting
- seasonal businesses (doesn't work) | - budgeting system could cost more in terms of time and money (opportunity costs)
35
Gross profit
Revenue - cost of sales
36
Operating profit
Gross profit - fixed overheads
37
Net profit
Operating profit - tax
38
Statement of comprehensive income (profit and loss account)
- plc required to state annual profits | - shows gross, operating, net profits
39
Measuring profitability
(Type of profit/sales revenues)x100
40
Value of measuring profit margins
- shows growth - profitability - areas needed to be improved
41
Ways to improve profits
- increase revenue (promotion, price strategy) - decrease costs (switch suppliers, reduce staff, wastage) - combination of above
42
Ways to improve profitability
- increase price | - cut costs
43
Liquidity
- the ability of a firm to find the ash to pay its day to day bills
44
Measuring liquidity
- current ratio | - acid test
45
Current ratio
- current assets/current liabilities | - ideal 1.5:1
46
Acid test
- (current assets-inventories)/current liabilities | - ideal 1:1
47
Ways to improve liquidity
- selling under used assets - raising share capital - increasing long term borrowings - postponing investments
48
Working capital
- finance available for the day to day running of the business
49
Working capital cycle
- how long it takes for a complete cycle from to cash out (buying stock) to cash back (payment from customer)
50
Factors influencing working capital
- customer financial difficulties | - inflation of costs (raw materials)
51
Contingency finance
- planning for the unexpected by either keeping a cash cushion in the firms current account or keeping an overdraft facility little used
52
How should a business manage its working capital
- control cash used (minimising stock, low customer credit) - minimise spending on fixed assets - plan ahead by estimating cash needed
53
The importance of cash
- day to day bills - buy supplies in bulk - fund long term development
54
Internal causes of business failure
- marketing failure - financial failure - system failure
55
External causes of business failure
- rival usp - arrival of competitor - economic climate - behaviour of banks
56
Financial causes of business failure
- running below break even - cash flow crisis - overtrading
57
Non financial causes of business failure
- lurch in sales for competition | - declining sales for business
58
What is resource management steps
- design - establishing the supply chain - working with suppliers - managing quality - achieving high levels of efficiency
59
What is resource management
- the central business function of creating the product or service and delivering it to the customer
60
Methods of production
- job production (one-off) - batch production (number of identical items) - flow production (continuous production of single item) - cell production (small production group working, flexible)
61
Productivity
- amount a worker produces over given time
62
Importance of productivity
- measure performance - impacts costs per unit - competitiveness
63
Factors influencing productivity
- level of investment in modern equipment - skill level - improve employee motivation
64
Difficulties of increasing productivity
- directors focus on profits - not often a direct target - production focused (ensures customer orders are fulfilled)
65
Link between productivity and competitiveness
- lower productivity causes higher labour costs per unit | - less competitive wth rivals
66
Labour intensive production
- labour costs high % of total costs
67
Capital intensive production
- large % of total costs used purchasing and operating machinery
68
Importance of capacity
- vital to cope with changes in demand
69
How to change capacity
- increase production space | - increase storage space
70
How capacity utilisation is measured
- (current output/max possible output) x 100
71
Implications of under utilisation of capacity
- low efficiency | - fixed costs per unit increase
72
Implications of over utilisation of capacity
- if demand rises you have to turn it away (competitors benefit) - struggle to service machinery and train staff - demotivation (stress)
73
Ways of improving capacity utilisation
- increase demand | - cut capacity
74
Types of stock
- raw materials and components - work in progress - finished goods
75
Stock control charts features
- stock levels - max stock level - reorder level - min stock level (buffer stock)
76
Implications of poor stock control
- opportunity costs (stock prevents use of capital in other ways) - cash flow problems - increased storage costs - increased finance costs - increased stock wastage
77
Costs of holding too few stocks
- lost orders (urgent orders cannot be met) - worker downtime (delayed orders) - loss of reputation - stockholding costs
78
Just in time
- attempt to operate with zero buffer stock
79
Waste minimisation method
- just in time
80
Competitive advantage from lean production
- lean production aims to produce more using less, eliminating waste - max input from staff - focuses upon quality of supplies and production
81
Advantages of lean production
- higher labour productivity - requires less stock - marketing advantages (less defects)
82
Importance of quality
- min level expected by customers - competitiveness - reputation
83
Methods of improving quality
- quality control (inspection that output meets min requirements) - quality assurance (govern quality at every stage in production) - total quality management (embedded philosophy across workforce to max quality)
84
Other quality initiatives
- quality circles (employees meet together to identify problems) - zero defects (aim to produce goods with no faults)
85
Continuous improvement (kaizen)
- improvements based on ideas rather than investment in tech | - small changes (cumulative effects are substantial)
86
Goal of kaizen programme
- convince employees they have 2 jobs Doing their job Looking for ways to improve it
87
Competitive advantage from quality management
- more repeat purchase - brand building - premium price - products easier to place
88
Factors that create current economic climate
- business cycle - changes in inflation - changes in interest rates - changes in exchange rates - changes in tax and govt spend
89
Inflation
- measures % annual rise in the average price level
90
Effects of inflation on businesses
- firms with large loans benefit (reduces value of money owed) - can damage profitability (higher costs if increase) - if costs rising faster than other countries, firms find it hard to be competitive with firms abroad
91
Interest rates
- price charged by a bank per year for lending money or providing credit
92
Why are interest rates important for firms
- affects consumer demand - affect total operating costs (higher costs of running overdraft) - less attractive for firm to invest into future
93
Exchange rates
- quantity of foreign currency that can be bought with one unit of domestic currency
94
Impact of high exchange rate on firms with large export markets
- low exchange rate (weak pound) benefits company exporting | - if pound appreciates company will have to charge higher price abroad (lower demand)
95
Impact of exchange rates on firms that import most of raw materials or stock
- strong pound benefits | - reduces cost of buying goods abroad
96
How taxation and govt spending affect business
- if inflation increases, govt could increase income tax | - cutting demand for products and services produced by businesses
97
Effect of economic uncertainty on the business environment
- unable to forecast demand | - due to factors (exchange rates, economic growth, value of product)
98
GDP
- value of all goods and services produced in a country in a year
99
Discretionary income
- income after deducting taxes and fixed payments
100
Economic climate
- atmosphere surrounding economy
101
Legislation
- laws initiated by govt but passed by parliament that relate to business operations and therefore employers, general public and environment
102
5 ways law affects businesses
- consumer protection - employee protection - environmental protection - competition policy - health and safety
103
Consumer protection
- sale of goods act (must be fit for purpose) | - trade descriptions act (every claim is true)
104
Employee protetcion
- min wage - right to contract of employment (job security) - right to sick, maternity, paternity leave - redundancy (payments) - trad union rights
105
Environmental protection
- landfill tax | - environmental protection act (waste management and emissions control)
106
Competition policy
- investigating takeovers and mergers - investigating possible anti-competitive practices - bring criminal proceedings against those committing cartel offences
107
Health and safety
- health & safety at work act (provide safe working environment)
108
Degree of competition within a market
- one dominant business (monopoly) - competition among few giants (oligopolies) - fiercely competitive market
109
Competition and market size
- big markets - small markets - changes in the competitive environment
110
Responses of businesses to a changing competitive environment
- price cutting - increase product differentiation (design, usp) - collusion (dealing with competitors)