Theme 2 Flashcards

1
Q

Internal sources of finance (3)

A
  • Owners capital
  • Selling assets
  • Retained profit
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2
Q

External sources of finance (6)

A
  • Family and friends
  • Banks
  • Peer to Peer lenders = typically low interest
  • Business Angles = give up a share but gain advice
  • Crowd funding = small funding from many people eg gofundme
  • Other businesses
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3
Q

Methods of finance (Short term - 4 )

A
  • Overdrafts = allowing a negative amount in the bank account
  • Leasing = Using another’s firms asset
  • Grant = Government given , doesn’t need to be paid back
  • Trade credit = Business buys a good and has a set time to pay for it
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4
Q

Methods of finance (long term - 3)

A
  • Loans = Fixed amount borrowed and pad over a fixed amount with interest
  • Share capital = Limited companies
  • Venture capital = Provided by business angles
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5
Q

Unlimited liability

A

Business debts become personal debts , and business owners may be forced to sell personal assets

eg. sole trader , partnerships

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6
Q

Limited liability

A

Owners aren’t personally responsible for business debts

eg shareholders in PLCs and LTDs

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7
Q

Business plan

A
  • Helpful to getting external finance
  • Not essential
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8
Q

Working capital

A

Cash business has available for day-to-day spending

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9
Q

Sales forecast look at … (3)

A
  • Finace
  • Marketing
  • Resources
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10
Q

Factors affecting sales forecasting (3)

A
  • Consumer trends
  • Economic variables (inflation , unemployment rate, interest)
  • Competitor actions
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11
Q

Sales revenue calculation

A

Selling price x sale volume

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12
Q

Total Variable costs calculation

A

average variable cost x quantity produced

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13
Q

Total costs calculation

A

fixed costs + variable costs

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14
Q

Profit calculation

A

Total revenue - total costs

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15
Q

Break even point

A

Business is not making a profit or at a loss

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16
Q

Contribution per unit calculation

A

Selling price - variable cost per unit

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17
Q

Break - even calculation

A

Total fixed costs
————————
Contribution per unit

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18
Q

Margin of safety calculation

A

actual output - break-even output

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19
Q

Break even analysis Pros and cons

A
  • Influences a business descion wether to launch a new product or not
  • Assumes variable cost is steady
  • Assumes all product will be sold
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20
Q

Income budgets

A

Forecast of the amount of money ENTERING a business as revenue
(typically based off of previous years and market research )

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21
Q

Expenditure budgets

A

Predicts TOTAL business costs for year
(typically broken down into departments)

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22
Q

Profit budgets

A

Income budget - Expenditure budget to calculate either profit or loss

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23
Q

Benefits of budgeting

A
  • Motivating
  • Control income and expenditure
  • Departments can coordinate their spending
  • Helps investors believe in thee success of the business
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24
Q

Drawbacks of budgeting

A
  • Can make departments rival for money
  • Restrictive
  • Time -consuming
  • Inflation is hard to predict
  • Inaccuracy
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25
Historical Budgets
- Based off previous years budgets - Quick and simple - Assumes conditions don’t change
26
Zero-based budgeting
Budget starts with $0 and needs approval to spend money Takes long More accurate
27
What is variance and name the two types
Variance is th differnce between actual and budgeted figures - Adverse = performing worse than expected - Favourable = performing better than expected
28
External variance factors (4)
- Change in disposable income - Cost of raw materials - Consumer trends can reduce demand - Competetive behaviour can reduce demand
29
Internal variance factors (5)
- Improving efficiency = Favourable - Overestimation of money it can save - Underestimation of changing orientation method - Change in selling price - Bad communication
30
Descions based on *adverse* variances (5)
- Change marketing mix to attract more sales - Streamlining production to reduce costs - Motivate employees to work harder -Ask suppliers for a better deal - Do more market research
31
Descions based on *favourable* variances
- Set more ambitious targets - If their was increased productivity set them a specific target - If there was a increase in sales then take on additional staff to increase the production
32
Calculation for percentage change in profit
Current year profit - previous year profit ——————————————————— x 100 previous years profit
33
Calculation for Gross profit
Gross profit = Total revenue - Cost of sales
34
Calculation for Operating profit
Operating profit = Gross profit - other operating expenses
35
Calculation for Net profit (Profit of the year)
Net profit = Operating profit - Intrest
36
Different names for “Total revenue”
Turnover , revenue , sale revenue , sales
37
Calculations for profit margins
Type of profit —————— x 100 Revenue
38
Methods to increase profit margins (3)
- Increase revenue by : Increasing prices for inelastic products Decreasing price for elastic products , raising demand Improve Product quality - Reduce cost of sales Cheaper supplier - Reduce Operating expenses Cheaper premise to rent Make cuts
39
Interpreting profit margins
A higher GPM is good IF the GPM rises but OPM falls it is likely that NPT margin decreases which can make investors wary of the business descions
40
Cash flow definition
Money that moves in and out of business over a set period of time
41
Profit v cash(flow)
- Cash is used to pay bills - Negative cash flow can still lead to high profits - Positive cash flow could lead to not making a profit
42
Non current assets
likely to keep assets for over a year - property - production equipment - desk /computers Often loose their value over time (deprication)
43
Current assets
Will be exchanged for cash before the next statement of financial income ie inventory , receivables (money owed to the business by others)
44
Net assets calculation
(current + non current assets) - liabilities
45
Current liabilities
Debt that needs to be payed off within a year - overdraft - taxes - dividends
46
Non-current liabilities
Debts businesses will pay off over several years - Mortgages - Loans
47
Liquidity
How easily an asset can be turned into cash
48
Examples of very liquid , in between an non liquid items
Very liquid = cash In Between = inventory and receivables Not liquid = non current assets (factories)
49
Insolvent
A business doesn’t have enough current assets to pay its liabilities when they’re due
50
How can liquidity be improved
- Decreasing stock levels - Speeding up collection of debts owed to business - Slow down supplier payments
51
Current ratio calculation
Current assets ———————- current liabilities
52
Explanation of current ratio
- current ratio should be HIGHER than 1 to low inventory to be replaces - Value lower than 1.5 suggest a liquidity problem - Value higher than 2 suggest the business has too many current assets and could reinvest into the business to make more profit - Ideal ratio is in between 1.5-2
53
Acid test ratio calculation
current assets - inventory ————————————- current liabilities
54
Acid test ratio explanation
- More accurate measure whether a business can pay back its current liabilities - High acid test ratio suggest cash is lying idle with stock and should be reinvested to make profits
55
Working capital
Amount of a cash a business has to pay off its day-to-day debts (more working capital the more liquid a business is )
56
Working capital calculation
current assets - current liabilities
57
When is high amount of cash needed
- When a business has a long working capital cycle - Inflation - When a business expands to prevent overtrading 33
58
Internal financial factors that cause business failure
- Bad management of working capital (not enough cash) - Poor efficiency leading to high costs - May rely on too many forms of finance - Might take up too much debt
59
Internal non-financial factors that cause business failure
- Poor communication - Inadequate market research - Poor marketing - Failure to innovate or tailor to customer preferences
60
External financial factors that cause business failure
- Economic recession - Change in exchange rate ( ie . If the pound strengthened then ; increase in imports , decrease in exports , less domestic product being bought )
61
External non-financial factors that cause business failure
- Competitor actions - Change in consumer trends - Poor outside communication (suppliers / customers )
62
Four types of production
- Job Production - Flow production - Batch production - Cell production
63
Job production
One-off product being made by skilled workers Time consuming so less products are being made Higher wages (skilled) No EOS Can charge higher prices
64
Flow production
Assembly line producing identical products Typically run 24 hrs either through shiftwork or by machines EOS from buying bulk raw materials Used in mass market
65
Batch production
Same equipment is used to make small batches of different products Used in a small production mix business Takes time to adjust machinery for the new product Benefit from EOS but have to store many raw material
66
Cell production
Tasks are divided between different people and is all assembled at the end Increased productivity and happiness level as job is not repetitive Higher quality products Easier to alter one group to fit consumer trends or needs
67
Productivity
Output per unit of input , per unit of time
68
Ways to increase productivity (5)
- Use machines (quicker and operate 24hrs) - Staff training - Set targets and goals - Piecework (paid for every unit produced) - Hire a key worker
69
Ways to increase efficiency (3)
- Increase productivity - Cut costs involved - Reconsider design mix (make it easier and cheaper to produce )
70
Advantages and disadvantages of Labour intensive firms
Used in a small scale producing firm Humans can be retrained Solve a problem noticed in production to improve the quality Harder to manage people May be unreliable (sick days) and require breaks Wage will increase so will costs
71
Advantages and disadvantages of Capital intensive firms
Long term machines can be cheaper More precise than human = consistent quality Work 24/7 Easy to manage Very expensive to maintain Function to do one task Might take a while to replace if broken Motivation can decrease with the threat of being replaced by a machine
72
Capacity utilisation (%) equation
Current output ————————————— x100 maximum possible output
73
Why over-utilisation is bad (100% capacity utilisation )
- Business might have to turn potential customers away - Can’t temporarily increase output - There’s no downtime if machines are constantly on - If a machine brekas down it will cause severe delays - If output exceeds demand there can be a surplus of stock which is a waste of working capital
74
How can firms with over-utilisation increase their capacity
- Use their facilities more over the week by doing shift work - Buy more machinery - Hire either permanent or temporary staff - Increase productivy by motivating staff - Temporary demand can result in a business outsourcing (sm else does half the task for you )
75
Drawbacks of Under utilisation (low capacity utilisation)
- Unit cost will increase so the price of product will increase , making the product less competitive - Negative brand image - Reduce employee motivation since they’re not being given constant tasks
76
How a business deals with under-utilisation
- Stimulate demand by changing the marketing mix which also steers away a competitor - Outsource work for other firms - If demand can’t be increased then a company should downsize - Not replace staff when they leave - Sell factories or equipment
77
What is included in business stock
raw materials work in progress finished goods
78
Buffer stock and what it depends on
Minimum stock so raw materials don’t run out - Storage space - Type of product (is it perishable) - Rate of stock used - Lead time (time it takes for good to arrive to consumer)
79
Benefits and drawbacks of HOLDING buffer stock
- Prvents business running out of stock - If supply by manufactures is reduced the can keeep loyal customers happy - Cost of storage - Wastage of stock ie perishable foods - Unproductive
80
Lean production
Focus on waste minimisation by using as few resources possible Less waste = more efficient = lower costs Low cost production can lower prices for customers
81
Jut-in -time management
Type of lean production VERY low stock Low storage costs and improved cash flow Flexible business which can cope with changes in demand Can offer products at a lower price gaining competitive advantage Relies on frequent supplier deliveries Can’t benefit of EOS s they don’t buy bulk
82
Quality
Meeting or exceeding consumer expectations
83
Quality control
Performed by quality inspectors Checking good after they’ve been made or delivered by suppliers Detects a error and corrects it
84
Quality assurance
Assumes errors can be prevented Product is tested at each stage of the production process Employees check their own work Motivates employees to produce product up to standard he first time
85
Total Quality management (Advantages and disadvantages )
Quality must satisfy everyone (customers and coworkers who receive the product) -Team bonding - High company reputation - Less fault products produced - Long time to introduce the new method - May demotivate staff - Expensive (at of training )
86
Quality circles
Group who meets regularly to discuss how to solve specific quality issues that arise - Staff can get involved and feel motivate - Some suggestions could be unrealistic and low level workers may be overlooked
87
Kaizen approach (continues improvement )
Type of lean production method Employees should improve slightly at a time Needs to be a appointed person who listens to people and tells them how to improve Cheap to introduce
88
Deflation
Decrease in the price of good due to low demand Causes a fall in productive and leads to rise in unemployment Demand will drop eve further with less produced
89
When exchange rate increases … (relating to UK exports)
UK exports will loose competitiveness UK exporters need to reduce their price UK exporters have to change marketing mix to suit UK customers
90
When the exchange rate decreases …..
UK exports become cheaper for other countries Products are more competitively priced so may appear cheaper to other Imports become more expensive , so suppliers may have to be changed to domestic ones
91
How can government spending affect business
New infrastructure - Better supply routes for raw materials - Better access for the customer Welfare business - Customers have more money to spend so business should see a increase in demand
92
Stages of a business cycle
Boom Recession Slump Recovery
93
Change in business at different stages in the business lifecycle
Booms = Raise prices to increase profitability and slow down demand Long lasting booms = Invest in production facilities Recession = make a worker redundant , an increase capacity utilisation Long slump/ resection = relocate business abroad
94
Microeconomic uncertainty (individual market )
- New competitor leads to uncertainty over numbers of customers - Shortage of raw materials may lead to supplier changing the cost
95
Macroeconomic uncertainty’s (whole market)
- Change in government - Country’s trade agreements - Change in legislation
96
Perfect competition
Products are identical and charge a similar price Keep cost low to keep prices low Need high quality to ensure demand
97
Oligopoly
Large firms domainate a market and charge a similar price Focus on brand image and marketing Improve customer service and product quality
98
Monopoly
One business has complete control of the market No competition Keep marketing cost low , product prices high