Theme 2 Flashcards
Historical budget
Set current financial figures based on historical performance
Zero based budget
Set by using figures based on potential performance
Current assets
Stock (least liquid)
Debtors
Bank
Cash (most liquid)
Non-current assets
Machinery
Buildings
Current liabilities
Trade payables
Bank overdraft
Non-current liabilities
Mortgages
Bank loans
Job production
Custom made products for each customer
Batch production
Producing a set number of identical products at a time
Flow production
Continuous production on an assembly line
Cell production
Self-contained units for specific product production
Consumer protection law
- customers have legal rights if the item bought is damaged, unusable or not what was advertised.
- businesses must not give false or misleading info about products
Internal sources of finance
- Owner’s capital
- Retained profit
- Sales of assets
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
Source of finance
This is where the finance has come from e.g., a bank.
Method of finance
This is the use of a finance - or what use it would be suitable for e.g., loan to buy computer equipment for the business.
Business Plan
- A document which sets out the future plans for a business.
- USES: To help the business raise finance and set objectives.
Cash flow forecast
- The day-to-day running of a business budget.
- USE: Shows where the likely cash surplus and shortfalls are so a business can arrange suitable finance.
- LIMITATION: Risky for an investor to make decisions about the business on just the cash flow forecast alone.
Sales forecasts
- estimates the volume or value of future sales using the market research or past sales data.
Factors effecting sales forecasts
- Consumer trends
- Economic variables
- Actions of competitors
Difficulties of sales forecasting
- No guarantees
- Dynamic markets
- Short term thinking
Examples of fixed costs
- Rent
- Mortgage payments
- Loan payments
- Insurances
- Lease of machinery/van
- Salaries of managers
Examples of variable costs
- Costs that DO vary with level of output
- Cost of stock sold
- Raw materials
- Fuel
- Packaging
- Wages of staff
Variance Analysis
Favourable = underspending or more sales than predicted
Adverse = overspending or less sales than predicted.
Pro and con of budgeting
Pro: it ensures resource availibility.
Con: inter-department rivalry as some departments get more money than others.
Distinction between profit and cash
Profit - recorded straight away and a business can trade for years without profit.
Cash - will not be recorded until it is paid out or received which could be in a different trading year.
- A profitable business may go bust if it runs out of cash to pay suppliers or staff wages.
Liquidity
The ability of the business to turn its assets into cash to pay its current liabilities.
Acid test ratio conclusions
- less than 1:1 then its current assets (-stock) do not cover its current liabilities
- However, some retailers with strong cash flow and fast-moving stocks may have an acid test ratio of 0.4:1 and be fine, depends on the industry.
Working capital
The day-to-day finance needed in a business.
Internal causes of business failure
- Poor efficiency
- Poor marketing
- Failure to innovate
- Bad management of working capital (most common if inability to measure cashflow)
External causes of business failure
- Economic recession
- Strong pound (SPICED)
- Weak pound (WPIDEC)
Labour intensive production
Makes products using mostly human effort (or labour)
Capital intensive production
Goods are produced using mainly machinery or equipment.
Capacity utilisation : Under-utilisation
- higher fixed costs per unit
- unmotivated staff
- impact on brand image
Capacity utilisation: Over-utilisation
- Damage reputation of the business.
- In manufacturing can put strain on resources.
- Staff do too much overtime + have accidents when tired.
- No time to maintain machinery or train staff
- Quality suffers
Just-in-time delivery
means that a business does not keep stocks of parts in a warehouse - they order parts and get them the same day from the supplier = close links with supplier.
Quality control
detecting faulty output (inspection, testing, sampling)
Quality assurance
Quality built/designed in
Total quality management (TQM)
- reducing waste
- improves process and profits of a business
- PRO: Not paying for inspectors.
- CON: will cost to train staff
Exchange rate
the price of one currency in exchange of another
Appreciation
- there is a rise in the £ against other currencies so the £ can buy more foreign currency
- Strong pound (SPICED)
Depreciation
- there is a fall in the £ against other currencies - Uk tourist’s money will be worth less abroad.
- Weak pound (WPIDEC)
Competition
- Nature of business ownership e.g., PLC
- Nature of products or services provided.
- Nature of the product range e.g., ‘free from’ range to meet demand.
- Pricing strategies used.
- Marketing methods used.
