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a level Edexcel business > theme 2 > Flashcards

theme 2 Flashcards

1
Q

2.1
3 sources of longterm finance

A

bank loan
retained profit
share capital

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2
Q

2.1
3 sources of short term finance

A

overdraft
trade credit
debt factoring

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3
Q

2.1
3 current assets

A

stock
cash
receivables

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4
Q

2.1
3 non current assets

A

machinery
land
vehicle

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5
Q

2.1
what are benefits and drawback of share capital

A

benefit: able to raise substantial capital while liabilities are spread out

drawback: dilutes ownership

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6
Q

2.1
formula for profit, total revenue , total costs

A

p= total revenue- total costs
tr= selling price x quantity
tc= fixed costs + variable costs

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7
Q

2.1
what are venture capitalists?
benefits and drawbacks?

A

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

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8
Q

2.1
what is the importance of planning in a business

A
  • demonstrates management to investors
  • analyses competitive position and market attractiveness
  • helps determine source of finance required
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9
Q

2.1
why is cash flow crucial?

A
  • it’s unpredictable (especially for start ups)
  • the main reason for business failure (insolvency)
  • forecasting can address problems
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10
Q

2.1
examples of cash inflows and outflows of a business

A

Inflows: interest on retained profits, sales, selling non current assets

outflows: payments to suppliers, wages, interest on loans

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11
Q

2.1
how would a business make an effective cash flow forecast

A
  • allow for unexpected changes
  • update regularly
  • make sensible assumptions
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12
Q

2.1
3 examples of cash flow problems

A
  • sales prove lower than expected
  • costs are higher than expected
  • customers don’t pay on time
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13
Q

2.1
formula for net cash flow

A

cash inflows - cash outflows

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14
Q

2.2
what are factors that effect demand?

A
  • income
  • seasonability
  • demographic
    -competition
    -trends & fashion
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15
Q

2.2
how would a business increase its revenue?

A
  • increasing selling price by adding value
  • increase quantity sold by volume related incentives
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16
Q

2.2
3 drawbacks of costs

A
  • drain profit
  • difference between good/bad profit margin
  • main cause of cashflow problems
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17
Q

2.2
3 examples of variable costs

A
  • raw materials
    -packaging
    -piece rate (wages per hour)
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18
Q

2.2
examples of fixed costs

A
  • insurance
  • utilities & wages
  • advertising
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19
Q

2.2
define profit

A

the reward or return for making a risk or investment

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20
Q

2.2
what is the importance of profit?

A
  • reward for making an investment
  • source of finance
  • measures business success
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21
Q

2.2
what are the 2 ways to measure profit

A

absolute terms- the £ value

relative terms- profit earned as a proportion of sales/investment

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22
Q

2.2
formula for margin of safety

A

maximum output - breakeven
output

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23
Q

2.2
what is demand?

A

demand is the amount of a product a customer is willing to buy

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24
Q

2.2
what does contribution show?
formula for contribution

A

the difference between sales and variable costs

selling price - variable costs per
unit

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25
Q

2.2
what does breakeven show?

A

shows the output needed to neither make profit or loss

fixed costs / contribution per unit

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26
Q

2.2
2 strengths of breakeven analysis

2 limitations of breakeven analysis

A

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

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27
Q

2.2
what is involved in budgeting?
what are some uses for budgets?

A

budgets for revenues and costs are prepared and compared to actual performance to establish any variances

controlling income & expenditure
allocate resources

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28
Q

2.2
describe the 2 types of budgeting

A

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

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29
Q

2.2
what are some difficulties in accurate budgeting?

A
  • markets experience rapid change
  • start up businesses can’t estimate likely sales and costs
  • competitor actions are difficult to predict
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30
Q

2.2
what is variance analysis?
what are two variences?

A

the difference between budgets and actual results

favourable
adverse

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31
Q

2.2
what are 2 causes of favourable variances

A
  • stronger market demand (higher revenue)
  • competitor weakness (higher sales)
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32
Q

2.2 what are 2 causes of adverse variances

A

-unexpected events lead to unbudgeted costs
- lower selling prices (low profit margin)

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33
Q

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

A

revenue
- variable costs
= GROSS PROFIT
-fixed costs & overheads
= OPERATING PROFIT
- tax/interest
= NET PROFIT ( for the year )

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34
Q

2.3
what is the statement of comprehensive income

A

document that shows profits and losses

35
Q

2.3
what do profitability ratios tell a business

A
  • is profit enough to justify an investment
  • how does profit compare to the industry
  • how efficiently does a business turn revenues into profits
36
Q

2.3
3 ways and reasons how a business can increase profit

A

-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

37
Q

2.3
what is return on capital employed?

A

ratio that measures profitability

38
Q

2.3
formula for return on capital employed

A

operating profit
———————- x 100
capital employed

39
Q

2.3
what do liquidity ratios show?

A

assess whether a business has sufficient cash or cash equivalents (stock&recieveables) to be able to cover liabilities

40
Q

2.3
formula for current ratio

A

current assets / current liabilities

41
Q

2.3
what are 3 end of year financial accounts?

A
  • 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
42
Q

2.3
formula for acid test ratio

A

current liabilities

43
Q

2.3
what are examples of causes of cash flow problems

A
  • allowing cusotmers too much credit
  • overspending on non-current assets
  • seasonal demands
  • overtrading - expanding too quickly
44
Q

2.3
what are 3 ways to manage cash flow problems

A
  • making reliable cash flow forecasts
  • managing credit owed by customers
  • manage cash payed to suppliers
45
Q

2.3
formula for gross profit margin

formula for operating profit margin

A

gross profit / revenues x 100

operating profit / revenues x 100

46
Q

2.4
what is job production?
advantages and disadvantages

A

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

47
Q

2.4
what is batch production?
advantages and disadvantages

A

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

48
Q

2.4
what is flow production?
advantages and disadvantages

A

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

49
Q

2.4
what is cell production?
what is an advantage

A

where production is organised into teams

leads to improved productivity due to improved worker motivation and worker specialisation

50
Q

2.4
what 4 things should a business consider before choosing method of production?

A
  • 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?
51
Q

2.4
define productivity

A

how much input turns into products
eg. output per worker

52
Q

2.4
formula for unit costs

A

total costs / no. of units produced

53
Q

2.4
define efficiency

why is efficiency important?

A

lowest cost per unit at which production can take place

-business can produce lower cost goods than competitors
-generate more profit at lower prices

54
Q

2.4
how can a business improve productivity

A
  • training
  • improve motivation - performance related pay
  • better equipment
55
Q

2.4
how does a business gain an economy of scale

A

arise when a business’s unit costs fall and output increases

56
Q

2.4
what is the difference between Labour intensive and capital intensive

A

labour intensive production relies on labour resources
capital intensive production relies on capital resources

57
Q

2.4
2 benefits and drawbacks of capital intensity

A
  • significant productivity
  • lower labour costs
    x significant investment
    x loss of competitiveness
58
Q

2.4
2 benefits and drawbacks of labour intensity

A
  • unit costs can be low in low-wage countries
  • flexible resources - training & skill
    x continuous investment in training
    x high costs of recruitment
59
Q

2.4
what are the 5 economies of scale?

A
  • 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
60
Q

2.4
3 reasons to hold stock

A
  • satisfy customer demand
  • allows for seasonal changes
  • precaution against supply delays
61
Q

2.4
what influences amount of stock held

A
  • risk of stock losing value
  • need to manage working capital eg opportunity cost of storage
62
Q

2.4
2 advantages of holding high and low stock

A

high - able to handle changes in demand, lower unit costs due to buying in bulk

low- low stock holding costs, low risk of obsolescence

63
Q

2.4
what is JIT stock?
advantages and disadvantages

A

(just in time) stock required for production arrives just as its needed

a: minimal capital tied up in stocks
d:requires highly reliable suppliers

64
Q

2.4
examples of quality expectations

A
  • customer service
  • performance
  • value for money
  • appearance
65
Q

2.4
what are the benefits of having good quality

A
  • repeat purchases
  • lower marketing costs
  • high customer loyalty
66
Q

2.4
what are 3 costs of poor quality

A
  • costs of refunds/replacements
  • wasted materials
  • competitive disadvantage
67
Q

2.4
what is quality control

A

process of inspecting products to ensure they meet quality standards

68
Q

2.4
what are some problems with quality inspection

A
  • costly
  • inconsistent
69
Q

2.4
what is quality assurance

`

A

process that ensure production quality meets the requirements of customers

70
Q

2.4
what is kaizen

A

culture of continuous improvement

71
Q

2.4
what are some challenges of quality improvement

A
  • culture of a workplace may need to change
  • potential high costs of training and new processes
72
Q

2.5
What are 5 economic influences

A
  • political
  • economical
  • social
  • technological
  • environmental
73
Q

what are the 4 stages of the business cycle

A

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

74
Q

what is real income

A

measure the amount of disposable income (cash left after tax+costs) available to consumers

75
Q

what factors affect real income

A
  • price inflation
  • interest rates
  • wage growth
76
Q

what are interest rates

A

a reward for saving or the cost of borrowing expressed as a percentage of the capital saved or borrowed

77
Q

what are consequences of interest rates falling

A
  • cost of borrowing is reduced (increased spending power)
  • business investment boosted (prospect for higher demand)
78
Q

what are consequences of rising interest rates

A
  • cost of borrowing increases
    -higher mortgage payments reduce household income
79
Q

effects of a strong £ on UK businesses

A

stronger pound makes it cheaper to pay imports , but exports seem more expensive to overseas customers

80
Q

why does the government tax

A

-raises finance for spending
- changing distribution of income & wealth

81
Q

what are the main areas of gov. spending

A
  • welfare payments
  • benefits
  • education & healthcare
  • building e.g roads, hospitals, motorways
82
Q

what are economists view of market competition

A

perfect competition
> monopolistic competition
> oligopoly
> monopoly (25% market share)

83
Q
A

a level Edexcel business (5 decks)

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