Theme 2 Flashcards
Working capital
- businesses day to day finance (net current assets)
Key financial concerns for new business start ups
- start up costs
- running costs
- how much customers spend
Raising finance short term
- bank overdraft
- trade credit
Raising finance medium term
- bank loan
- leasing
Raising finance long term
- owners savings
- sales of shares
- reinvested profits
- venture capital loans
Financial management for an established business
- budgeting
- cash flow forecasting
Need for finance
- starting up
- growing
- cashflow problems
Internal finance
- retained profit
- sales of assets
- improved management of working capital
External sources of finance
- family and friends
- banks
- peer to peer funding
- business angels
- crowd funding
- other businesses
External methods of finance
- Loans
- share capital
- venture capital
- overdrafts
- leasing
- trade credit
- grants
Finance appropriate for unlimited liability businesses
- owners capital
- bank finance
- leasing
- trade credits
Finance appropriate for limited liability businesses
- share capital
- bank finance
- angel or venture capital
- peer-to-peer or crowdfunding
- leasing and trade credit
Relevance of business plan in obtaining finance
- executive summary
- product/service
- market
- marketing plan
- operational plan
- financial plan
- conclusion
Analysis of cash flow forecast
- difference between opening + closing balance
- monthly closing balance to assess trends
- analyse timings of inflows/outflows
Uses and limitations of cash flow forecast
- keep stock of raw materials to minimum
- helps budgeting
- uncertain (external factors)
- raw data inaccurate
Purpose of sales forecasts
- determines: Human resource plan (staff) Cash flow forecast Profit forecast Production scheduling
Factors affecting sales forecasts
- consumer trends
- economic variables (income elasticity, exchange rates, tax)
- competitors
Difficulties of sales forecasting
- changing economy
- dynamic market
2 ways to measure sales
- volume
- value
Ways to boost revenue
- higher price
- lower price higher volume
Why managers need to be aware of costs of production
- assess profitability
- compare with forecasted or budgeted figures
Fixed costs examples
- rent
- salaries
Variable costs examples
- raw materials
- commission
Break even calculation
FC/(sppu - vcpu)
Break even charts
- total costs
- fixed costs
- total revenue
Margin of safety
- the amount by which demand can fall before the firm starts to make a loss
- current output - break even output
Factors influencing break even
- fall in demand
- competitors
- changing production (labour/capital)
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
The purpose of budgets
- prevent overspending
- measure success
- enable spending power to be delegated
- motivate staff in a department
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
Types of budget
- historical (based on previous)
- zero based budget (all spending must be justified)
Best criteria for setting budgets
- relate to business objective
- involve managers in process
Variance analysis
- favourable variance (higher profit than expected)
- adverse variance (lower profit than expected)
Difficulties of budgeting
- seasonal businesses (doesn’t work)
- budgeting system could cost more in terms of time and money (opportunity costs)
Gross profit
Revenue - cost of sales
Operating profit
Gross profit - fixed overheads
Net profit
Operating profit - tax
Statement of comprehensive income (profit and loss account)
- plc required to state annual profits
- shows gross, operating, net profits
Measuring profitability
(Type of profit/sales revenues)x100
Value of measuring profit margins
- shows growth
- profitability
- areas needed to be improved
Ways to improve profits
- increase revenue (promotion, price strategy)
- decrease costs (switch suppliers, reduce staff, wastage)
- combination of above
Ways to improve profitability
- increase price
- cut costs
Liquidity
- the ability of a firm to find the ash to pay its day to day bills
Measuring liquidity
- current ratio
- acid test
Current ratio
- current assets/current liabilities
- ideal 1.5:1
Acid test
- (current assets-inventories)/current liabilities
- ideal 1:1
Ways to improve liquidity
- selling under used assets
- raising share capital
- increasing long term borrowings
- postponing investments
Working capital
- finance available for the day to day running of the business
Working capital cycle
- how long it takes for a complete cycle from to cash out (buying stock) to cash back (payment from customer)
Factors influencing working capital
- customer financial difficulties
- inflation of costs (raw materials)
Contingency finance
- planning for the unexpected by either keeping a cash cushion in the firms current account or keeping an overdraft facility little used
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
The importance of cash
- day to day bills
- buy supplies in bulk
- fund long term development
Internal causes of business failure
- marketing failure
- financial failure
- system failure
External causes of business failure
- rival usp
- arrival of competitor
- economic climate
- behaviour of banks
Financial causes of business failure
- running below break even
- cash flow crisis
- overtrading
Non financial causes of business failure
- lurch in sales for competition
- declining sales for business
What is resource management steps
- design
- establishing the supply chain
- working with suppliers
- managing quality
- achieving high levels of efficiency
What is resource management
- the central business function of creating the product or service and delivering it to the customer
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)
Productivity
- amount a worker produces over given time
Importance of productivity
- measure performance
- impacts costs per unit
- competitiveness
Factors influencing productivity
- level of investment in modern equipment
- skill level
- improve employee motivation
Difficulties of increasing productivity
- directors focus on profits
- not often a direct target
- production focused (ensures customer orders are fulfilled)
Link between productivity and competitiveness
- lower productivity causes higher labour costs per unit
- less competitive wth rivals
Labour intensive production
- labour costs high % of total costs
Capital intensive production
- large % of total costs used purchasing and operating machinery
Importance of capacity
- vital to cope with changes in demand
How to change capacity
- increase production space
- increase storage space
How capacity utilisation is measured
- (current output/max possible output) x 100
Implications of under utilisation of capacity
- low efficiency
- fixed costs per unit increase
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)
Ways of improving capacity utilisation
- increase demand
- cut capacity
Types of stock
- raw materials and components
- work in progress
- finished goods
Stock control charts features
- stock levels
- max stock level
- reorder level
- min stock level (buffer stock)
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
Costs of holding too few stocks
- lost orders (urgent orders cannot be met)
- worker downtime (delayed orders)
- loss of reputation
- stockholding costs
Just in time
- attempt to operate with zero buffer stock
Waste minimisation method
- just in time
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
Advantages of lean production
- higher labour productivity
- requires less stock
- marketing advantages (less defects)
Importance of quality
- min level expected by customers
- competitiveness
- reputation
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)
Other quality initiatives
- quality circles (employees meet together to identify problems)
- zero defects (aim to produce goods with no faults)
Continuous improvement (kaizen)
- improvements based on ideas rather than investment in tech
- small changes (cumulative effects are substantial)
Goal of kaizen programme
- convince employees they have 2 jobs
Doing their job
Looking for ways to improve it
Competitive advantage from quality management
- more repeat purchase
- brand building
- premium price
- products easier to place
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
Inflation
- measures % annual rise in the average price level
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
Interest rates
- price charged by a bank per year for lending money or providing credit
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
Exchange rates
- quantity of foreign currency that can be bought with one unit of domestic currency
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)
Impact of exchange rates on firms that import most of raw materials or stock
- strong pound benefits
- reduces cost of buying goods abroad
How taxation and govt spending affect business
- if inflation increases, govt could increase income tax
- cutting demand for products and services produced by businesses
Effect of economic uncertainty on the business environment
- unable to forecast demand
- due to factors (exchange rates, economic growth, value of product)
GDP
- value of all goods and services produced in a country in a year
Discretionary income
- income after deducting taxes and fixed payments
Economic climate
- atmosphere surrounding economy
Legislation
- laws initiated by govt but passed by parliament that relate to business operations and therefore employers, general public and environment
5 ways law affects businesses
- consumer protection
- employee protection
- environmental protection
- competition policy
- health and safety
Consumer protection
- sale of goods act (must be fit for purpose)
- trade descriptions act (every claim is true)
Employee protetcion
- min wage
- right to contract of employment (job security)
- right to sick, maternity, paternity leave
- redundancy (payments)
- trad union rights
Environmental protection
- landfill tax
- environmental protection act (waste management and emissions control)
Competition policy
- investigating takeovers and mergers
- investigating possible anti-competitive practices
- bring criminal proceedings against those committing cartel offences
Health and safety
- health & safety at work act (provide safe working environment)
Degree of competition within a market
- one dominant business (monopoly)
- competition among few giants (oligopolies)
- fiercely competitive market
Competition and market size
- big markets
- small markets
- changes in the competitive environment
Responses of businesses to a changing competitive environment
- price cutting
- increase product differentiation (design, usp)
- collusion (dealing with competitors)
