Theme 2 Flashcards
Internal sources of finance (3)
- Owners capital
- Selling assets
- Retained profit
External sources of finance (6)
- 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
Methods of finance (Short term - 4 )
- 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
Methods of finance (long term - 3)
- Loans = Fixed amount borrowed and pad over a fixed amount with interest
- Share capital = Limited companies
- Venture capital = Provided by business angles
Unlimited liability
Business debts become personal debts , and business owners may be forced to sell personal assets
eg. sole trader , partnerships
Limited liability
Owners aren’t personally responsible for business debts
eg shareholders in PLCs and LTDs
Business plan
- Helpful to getting external finance
- Not essential
Working capital
Cash business has available for day-to-day spending
Sales forecast look at … (3)
- Finace
- Marketing
- Resources
Factors affecting sales forecasting (3)
- Consumer trends
- Economic variables (inflation , unemployment rate, interest)
- Competitor actions
Sales revenue calculation
Selling price x sale volume
Total Variable costs calculation
average variable cost x quantity produced
Total costs calculation
fixed costs + variable costs
Profit calculation
Total revenue - total costs
Break even point
Business is not making a profit or at a loss
Contribution per unit calculation
Selling price - variable cost per unit
Break - even calculation
Total fixed costs
————————
Contribution per unit
Margin of safety calculation
actual output - break-even output
Break even analysis Pros and cons
- Influences a business descion wether to launch a new product or not
- Assumes variable cost is steady
- Assumes all product will be sold
Income budgets
Forecast of the amount of money ENTERING a business as revenue
(typically based off of previous years and market research )
Expenditure budgets
Predicts TOTAL business costs for year
(typically broken down into departments)
Profit budgets
Income budget - Expenditure budget to calculate either profit or loss
Benefits of budgeting
- Motivating
- Control income and expenditure
- Departments can coordinate their spending
- Helps investors believe in thee success of the business
Drawbacks of budgeting
- Can make departments rival for money
- Restrictive
- Time -consuming
- Inflation is hard to predict
- Inaccuracy
Historical Budgets
- Based off previous years budgets
- Quick and simple
- Assumes conditions don’t change
Zero-based budgeting
Budget starts with $0 and needs approval to spend money
Takes long
More accurate
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
External variance factors (4)
- Change in disposable income
- Cost of raw materials
- Consumer trends can reduce demand
- Competetive behaviour can reduce demand
Internal variance factors (5)
- Improving efficiency = Favourable
- Overestimation of money it can save
- Underestimation of changing orientation method
- Change in selling price
- Bad communication
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
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
Calculation for percentage change in profit
Current year profit - previous year profit
——————————————————— x 100
previous years profit
Calculation for Gross profit
Gross profit = Total revenue - Cost of sales
Calculation for Operating profit
Operating profit = Gross profit - other operating expenses
Calculation for Net profit (Profit of the year)
Net profit = Operating profit - Intrest
Different names for “Total revenue”
Turnover , revenue , sale revenue , sales
Calculations for profit margins
Type of profit
—————— x 100
Revenue
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
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
Cash flow definition
Money that moves in and out of business over a set period of time
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
Non current assets
likely to keep assets for over a year
- property
- production equipment
- desk /computers
Often loose their value over time (deprication)
Current assets
Will be exchanged for cash before the next statement of financial income
ie inventory , receivables (money owed to the business by others)
Net assets calculation
(current + non current assets) - liabilities
Current liabilities
Debt that needs to be payed off within a year
- overdraft
- taxes
- dividends
Non-current liabilities
Debts businesses will pay off over several years
- Mortgages
- Loans
Liquidity
How easily an asset can be turned into cash
Examples of very liquid , in between an non liquid items
Very liquid = cash
In Between = inventory and receivables
Not liquid = non current assets (factories)
Insolvent
A business doesn’t have enough current assets to pay its liabilities when they’re due
How can liquidity be improved
- Decreasing stock levels
- Speeding up collection of debts owed to business
- Slow down supplier payments
Current ratio calculation
Current assets
———————-
current liabilities
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
Acid test ratio calculation
current assets - inventory
————————————-
current liabilities
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
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 )
Working capital calculation
current assets - current liabilities
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
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
Internal non-financial factors that cause business failure
- Poor communication
- Inadequate market research
- Poor marketing
- Failure to innovate or tailor to customer preferences
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 )
External non-financial factors that cause business failure
- Competitor actions
- Change in consumer trends
- Poor outside communication (suppliers / customers )
Four types of production
- Job Production
- Flow production
- Batch production
- Cell production
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
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
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
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
Productivity
Output per unit of input , per unit of time
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
Ways to increase efficiency (3)
- Increase productivity
- Cut costs involved
- Reconsider design mix (make it easier and cheaper to produce )
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
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
Capacity utilisation (%) equation
Current output
————————————— x100
maximum possible output
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
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 )
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
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
What is included in business stock
raw materials
work in progress
finished goods
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)
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
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
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
Quality
Meeting or exceeding consumer expectations
Quality control
Performed by quality inspectors
Checking good after they’ve been made or delivered by suppliers
Detects a error and corrects it
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
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 )
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
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
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
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
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
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
Stages of a business cycle
Boom
Recession
Slump
Recovery
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
Microeconomic uncertainty (individual market )
- New competitor leads to uncertainty over numbers of customers
- Shortage of raw materials may lead to supplier changing the cost
Macroeconomic uncertainty’s (whole market)
- Change in government
- Country’s trade agreements
- Change in legislation
Perfect competition
Products are identical and charge a similar price
Keep cost low to keep prices low
Need high quality to ensure demand
Oligopoly
Large firms domainate a market and charge a similar price
Focus on brand image and marketing
Improve customer service and product quality
Monopoly
One business has complete control of the market
No competition
Keep marketing cost low , product prices high
