theme 2 Flashcards
2.1
3 sources of longterm finance
bank loan
retained profit
share capital
2.1
3 sources of short term finance
overdraft
trade credit
debt factoring
2.1
3 current assets
stock
cash
receivables
2.1
3 non current assets
machinery
land
vehicle
2.1
what are benefits and drawback of share capital
benefit: able to raise substantial capital while liabilities are spread out
drawback: dilutes ownership
2.1
formula for profit, total revenue , total costs
p= total revenue- total costs
tr= selling price x quantity
tc= fixed costs + variable costs
2.1
what are venture capitalists?
benefits and drawbacks?
venture capitalists are companies that provide specialist investor knowledge and bring capital to a business
b: raises substantial capital and management
b: capital raised may allow expansion
d: require high rates of return and may take majority share
d: loss of control as they can make decisions
2.1
what is the importance of planning in a business
- demonstrates management to investors
- analyses competitive position and market attractiveness
- helps determine source of finance required
2.1
why is cash flow crucial?
- it’s unpredictable (especially for start ups)
- the main reason for business failure (insolvency)
- forecasting can address problems
2.1
examples of cash inflows and outflows of a business
Inflows: interest on retained profits, sales, selling non current assets
outflows: payments to suppliers, wages, interest on loans
2.1
how would a business make an effective cash flow forecast
- allow for unexpected changes
- update regularly
- make sensible assumptions
2.1
3 examples of cash flow problems
- sales prove lower than expected
- costs are higher than expected
- customers don’t pay on time
2.1
formula for net cash flow
cash inflows - cash outflows
2.2
what are factors that effect demand?
- income
- seasonability
- demographic
-competition
-trends & fashion
2.2
how would a business increase its revenue?
- increasing selling price by adding value
- increase quantity sold by volume related incentives
2.2
3 drawbacks of costs
- drain profit
- difference between good/bad profit margin
- main cause of cashflow problems
2.2
3 examples of variable costs
- raw materials
-packaging
-piece rate (wages per hour)
2.2
examples of fixed costs
- insurance
- utilities & wages
- advertising
2.2
define profit
the reward or return for making a risk or investment
2.2
what is the importance of profit?
- reward for making an investment
- source of finance
- measures business success
2.2
what are the 2 ways to measure profit
absolute terms- the £ value
relative terms- profit earned as a proportion of sales/investment
2.2
formula for margin of safety
maximum output - breakeven
output
2.2
what is demand?
demand is the amount of a product a customer is willing to buy
2.2
what does contribution show?
formula for contribution
the difference between sales and variable costs
selling price - variable costs per
unit
2.2
what does breakeven show?
shows the output needed to neither make profit or loss
fixed costs / contribution per unit
2.2
2 strengths of breakeven analysis
2 limitations of breakeven analysis
strengths: illustrates what Level of output is needed to reach profitability, shows importance of keeping fixed costs to a minimum
limitations: variable costs do not always stay the same (affects contribution) , most businesses sell more than one product
2.2
what is involved in budgeting?
what are some uses for budgets?
budgets for revenues and costs are prepared and compared to actual performance to establish any variances
controlling income & expenditure
allocate resources
2.2
describe the 2 types of budgeting
historical: use past data as a basis for the budget - used by established businesses
zero-based: budgets and costs are set to zero - used by start ups with no previous data
2.2
what are some difficulties in accurate budgeting?
- markets experience rapid change
- start up businesses can’t estimate likely sales and costs
- competitor actions are difficult to predict
2.2
what is variance analysis?
what are two variences?
the difference between budgets and actual results
favourable
adverse
2.2
what are 2 causes of favourable variances
- stronger market demand (higher revenue)
- competitor weakness (higher sales)
2.2 what are 2 causes of adverse variances
-unexpected events lead to unbudgeted costs
- lower selling prices (low profit margin)
2.3
profit can be broken down into gross profit, operating profit and net profit
how do you calculate gross and operating profit and net profit
revenue
- variable costs
= GROSS PROFIT
-fixed costs & overheads
= OPERATING PROFIT
- tax/interest
= NET PROFIT ( for the year )
2.3
what is the statement of comprehensive income
document that shows profits and losses
2.3
what do profitability ratios tell a business
- is profit enough to justify an investment
- how does profit compare to the industry
- how efficiently does a business turn revenues into profits
2.3
3 ways and reasons how a business can increase profit
-increase quantity sold = higher sales revenue and higher market share
-reducing variable costs per unit- higher profit margin on each product sold
-reducing fixed costs- reduces breakeven output
2.3
what is return on capital employed?
ratio that measures profitability
2.3
formula for return on capital employed
operating profit
———————- x 100
capital employed
2.3
what do liquidity ratios show?
assess whether a business has sufficient cash or cash equivalents (stock&recieveables) to be able to cover liabilities
2.3
formula for current ratio
current assets / current liabilities
2.3
what are 3 end of year financial accounts?
- statement of comprehensive income - measures profit and losses
- statement of financial position- snapshot of assets owned or owed and liabilities
- cash flow statement - generating and disposing cash
2.3
formula for acid test ratio
current liabilities
2.3
what are examples of causes of cash flow problems
- allowing cusotmers too much credit
- overspending on non-current assets
- seasonal demands
- overtrading - expanding too quickly
2.3
what are 3 ways to manage cash flow problems
- making reliable cash flow forecasts
- managing credit owed by customers
- manage cash payed to suppliers
2.3
formula for gross profit margin
formula for operating profit margin
gross profit / revenues x 100
operating profit / revenues x 100
2.4
what is job production?
advantages and disadvantages
one off/ small number of items produces normally made to custom specifications
a: high quality, flexible production method
d: high individual cost per unit, high labour costs, low output
2.4
what is batch production?
advantages and disadvantages
similar items produced. each batch goes through a stage of production before moving onto the next
a: buying in bulk saves costs, specialist staff at each stage
d: tasks become repetitive= reduces staff motivation, higher stocks of raw materials
2.4
what is flow production?
advantages and disadvantages
production moves continuously through production process- once one task is finished the next starts
a: suitable for large quantities, capital intensive= constant work
d: reliant on high quality machinery, production is shut down if flow stops
2.4
what is cell production?
what is an advantage
where production is organised into teams
leads to improved productivity due to improved worker motivation and worker specialisation
2.4
what 4 things should a business consider before choosing method of production?
- TARGET MARKET - does a customer want product option?
- TECHNOLOGY - can production be automated?
- RESOURCES - does a firm have finance and staff?
- STANDARDS - what quality is required?
2.4
define productivity
how much input turns into products
eg. output per worker
2.4
formula for unit costs
total costs / no. of units produced
2.4
define efficiency
why is efficiency important?
lowest cost per unit at which production can take place
-business can produce lower cost goods than competitors
-generate more profit at lower prices
2.4
how can a business improve productivity
- training
- improve motivation - performance related pay
- better equipment
2.4
how does a business gain an economy of scale
arise when a business’s unit costs fall and output increases
2.4
what is the difference between Labour intensive and capital intensive
labour intensive production relies on labour resources
capital intensive production relies on capital resources
2.4
2 benefits and drawbacks of capital intensity
- significant productivity
- lower labour costs
x significant investment
x loss of competitiveness
2.4
2 benefits and drawbacks of labour intensity
- unit costs can be low in low-wage countries
- flexible resources - training & skill
x continuous investment in training
x high costs of recruitment
2.4
what are the 5 economies of scale?
- buying - bulk buying
- technical - specialist equipment boosts productivity
- marketing - fixed marketing expenditure
- network - adding customers to a network
- financial - large firms benefit from cheaper finance
2.4
3 reasons to hold stock
- satisfy customer demand
- allows for seasonal changes
- precaution against supply delays
2.4
what influences amount of stock held
- risk of stock losing value
- need to manage working capital eg opportunity cost of storage
2.4
2 advantages of holding high and low stock
high - able to handle changes in demand, lower unit costs due to buying in bulk
low- low stock holding costs, low risk of obsolescence
2.4
what is JIT stock?
advantages and disadvantages
(just in time) stock required for production arrives just as its needed
a: minimal capital tied up in stocks
d:requires highly reliable suppliers
2.4
examples of quality expectations
- customer service
- performance
- value for money
- appearance
2.4
what are the benefits of having good quality
- repeat purchases
- lower marketing costs
- high customer loyalty
2.4
what are 3 costs of poor quality
- costs of refunds/replacements
- wasted materials
- competitive disadvantage
2.4
what is quality control
process of inspecting products to ensure they meet quality standards
2.4
what are some problems with quality inspection
- costly
- inconsistent
2.4
what is quality assurance
`
process that ensure production quality meets the requirements of customers
2.4
what is kaizen
culture of continuous improvement
2.4
what are some challenges of quality improvement
- culture of a workplace may need to change
- potential high costs of training and new processes
2.5
What are 5 economic influences
- political
- economical
- social
- technological
- environmental
what are the 4 stages of the business cycle
boom- high levels of consumer spending, profit & investment
recession- falling levels of consumer spending, lower profits, cut back on investment
depression- weak consumer spending, failure, unemployment
recovery- increasing consumer spending, start to invest again
what is real income
measure the amount of disposable income (cash left after tax+costs) available to consumers
what factors affect real income
- price inflation
- interest rates
- wage growth
what are interest rates
a reward for saving or the cost of borrowing expressed as a percentage of the capital saved or borrowed
what are consequences of interest rates falling
- cost of borrowing is reduced (increased spending power)
- business investment boosted (prospect for higher demand)
what are consequences of rising interest rates
- cost of borrowing increases
-higher mortgage payments reduce household income
effects of a strong £ on UK businesses
stronger pound makes it cheaper to pay imports , but exports seem more expensive to overseas customers
why does the government tax
-raises finance for spending
- changing distribution of income & wealth
what are the main areas of gov. spending
- welfare payments
- benefits
- education & healthcare
- building e.g roads, hospitals, motorways
what are economists view of market competition
perfect competition
> monopolistic competition
> oligopoly
> monopoly (25% market share)
