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Business A-level > Theme 2 > Flashcards

Theme 2 Flashcards

All key theme 2 definitions and analysis points

1
Q

What are 3 types of internal sources of finance?

A
  • Retained profit
  • Sale of assets
  • Owner’s capital (personal savings)
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2
Q

What are 8 possible external sources of finance?

A

Overdrafts (spend more than you have- expensive interest), trade credit (delay supplier payment), grants (gov scheme), leasing (borrowing assets), bank loans, venture capital/ business angels, share capital, crowdfunding

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3
Q

What is limited liability?

A

Business has separate legal entity and personal assets of shareholders are protected.

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4
Q

What should be included in a business plan?

A
  • Executive summary, business idea and opportunity, aims and objectives, market research, financial forecasts, sources of finance, premises and equipment, personnel, buying and production.
  • Used for investors, bank loans and partner and employees.
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5
Q

How to speed to cash inflow?

A
  • Incentivise early repayment by giving customers discounts.
  • Reduce trade credit given to customers.
  • Sell off stock a reduced price.
  • Inject fresh capital into business.
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6
Q

How to slow down outflows?

A
  • Delay payments to suppliers.
  • Increase trade credit agreements with suppliers.
  • Cut costs or postpone spending in areas such as training.
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7
Q

Cash-flow forecasting- ✓ and X

A

✓- supports an application for lending
✓- supports the budgeting process
✓- helps identify any potential cash flow crisis.
X- some figures based on estimates
X- needs to be updated regularly for it to be valid
X- only focuses on one variable, cash and does not consider profitability or production.

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8
Q

What are factors affecting sales forecasts?
Hint: ECC

A
  • Economic variables (interest rates, exchange rates…)
  • Consumer trends (seasonal variations, long-term trends like solar power..)
  • Competition (closure of comp can lead to increase in sales from switching customers..)
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9
Q

How to calculate break even point?

A

(Fixed cost) / (Contribution per unit)

Contribution per unit = Selling price - Variable cost per unit

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9
Q

What are limitation of sales forecasting?

A
  • Volatile customer tastes and markets
  • Subjective manager opinions
  • Dependent on quality of data used
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10
Q

What is the margin of safety?

A

The difference between break even and actual sales.
- the bigger, the better

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11
Q

Break even analysis- ✓ and X?

A

✓- simple and easy to use
✓- can be used to analyse impact of varying customers, prices and cost on profit
✓- useful guideline to help make business decisions.
X- many businesses sells multiple product which makes BEP more difficult
X- assumes cost stays the same over various levels of output
X- presumes business will sell all of its output at the same price.

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11
Q

What are the two types of budgets?

A
  • Historical budgeting- based on data from past year and adjusted accordingly for following year.
  • Zero-based budget- opportunity cost of spending decisions is considered. All spending is justified to ensure value for money o good for minimising unnecessary cost but also time consuming.
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12
Q

Drawbacks of budgets?

A

X- Budget only accurate as data it is based on.
X- Past trends are a poor indicator of future sales/ costs.
X- Gov decisions can affect budgets, e.g interest rates.
X- If budget is unrealistic, it loses all value.

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13
Q

What are ways to increase profit?

A
  • Increase prices
  • Reduce process (dependent of elasticity of demand)
  • Better marketing
  • Add value to product which increases benefits and features
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14
Q

What are the three types of profit?

A

Gross profit = Sales revenue - Cost of sales
Operating profit = Gross profit - Operating cost
Net profit = Operating profit - Interest

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14
Q

What is variance analysis?

A

It compares forecasted data to the actual figures.

V.A = Actual - budgeted figure.
- Favourable and Adverse based on context

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15
Q

What is liquidity?

A

Liquidity refers to the ability of a business to pay off its debts and liabilities in cash when they fall short.

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15
Q

What are ways to reduce costs?

A
  • Reduce production costs
  • Improve efficiency
  • Use capacity more fully
  • Eliminate unprofitable processes (e.g products)
  • Reduce variable costs (e.g negotiate with suppliers)
  • Lower overheads (e.g move to cheaper location)
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16
Q

What is current ratio?

A
  • It assesses whether a business had sufficient working capital to pay it’s short term debts.

(Currents assets) / (Current liabilities)

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17
Q

What is Acid test ratio?

A
  • Doesn’t account for stock as there’s no guarantee that it can be quickly turned to cash.

(Current assets - inventory) / (Current liabilities)

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17
Q

What is working capital and how can you improve liquidity?

A
  • Working capital is the money within a business that is needed to pay day-to-day running costs.
  • Working capital = Current assets - Current liabilities
  • Improving liquidity: use overdraft, delay payments, sell currents assets (stock), increase sales, short-term loans.
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18
Q

Factors of business failure?

A

Internal:
- Poor planning, Cash flow, Marketing, Lack of skills.
External:
- Market conditions, Legislation, Economy, Competition

19
Q

What is job production- ✓ and X?

A
  • Production of single, typically bespoke units that require highly skilled workforce.
    ✓- high flexible and bespoke
    ✓- high profit margins
    X- high unit costs
    X- high labour cost
20
Q

What is batch production- ✓?

A
  • Standardised components made in large quantities that are modified to adjust specification.
    ✓- flexibility and economies of scale with automation and standardisation.
21
Q

What is flow production- ✓ and X?

A
  • Highly automated production process where production is standardised and continuous to achieve economies of scale.
    ✓- low unit costs
    ✓- high levels of productivity
    X- huge set up cost
    X- low motivation of workers
    X- breaks in production can be expensive
22
Q

What is cell production- ✓?

A
  • Teams of workers work together to produce an entire product or part of a product.
    ✓- teamwork means employee motivation
    ✓- production is more flexible
    ✓- waste minimisation
23
Q

What is labour productivity?

A
  • Measures output per employee in a certain time period and is a measure of how productive the workforce is.

(total output in given time period) / (number of employees)

24
Q

What are factors affecting productivity (positively)?

A
  • Specialisation where an employee becomes a specialist in a specific way
  • Training to improve skills of workforce
  • Happy workers are more motivated to work harder and faster
  • Working practices including production layout and quality management
  • Increasing automation (capital intensity) to increase output
25
Q

What is efficiency?

A

Efficiency is about making the best use of all the resources of a business. When a business is efficient, there is minimal waste and average costs will be lower.

26
Q

What are the benefits of improved efficiency?

A

✓- labour productivity increases
✓- unit costs fall
✓- resources such as labour can be reallocated
✓- profit margins increase
✓- opportunity to explore new ventures, e.g new product lines
✓- ability to charge lower prices and improve competitiveness

27
Q

What is capacity utilisation?

A

Capacity utilisation is the maximum a business can produce over a period of time given the resources it has available. (%)

(Existing output) / (Maximum possible output) x 100

28
Q

Under-capacity utilisation (e.g 60%) - ✓ and X?

A

X- idle resources costing money but not being used
X- unit costs rise
✓- opportunity to increase capacity utilisation

28
Q

Over-capacity utilisation (e.g 115%) - ✓ and X?

A

X- employees over-worked and unhappy
X- mistakes are more likely
X- unit costs rise due to the above
✓- opportunity for growth

29
Q

What are some methods to increase and decrease capacity utilisation?

A

Increase:
- sub-contract out production to another business
- offer overtime pay to workforce
- employ workers on temp contracts.

Decrease:
- rationalisation (redundancies or sale of assets)
- sub-contract in work from another business

30
Q

What is the cost of poor stock management?

A

X- opportunity cost- over-stocking means tying up cash that can’t be used anywhere else
X- shrinkage- stock being stolen, damaged or lost
X- financial costs- storing stock and managing it can be time-consuming and costly
X- having too little stock means orders can’t be met, which leads to unhappy customers and loss of sales

31
Q

How can a business minimise waste with stock?

A
  • Stock inventory appropriately
  • Rotate stock so old stock gets used first
  • Adjust prices to clear stock through sales promotions
  • Computerised stock management systems to track inventory (lead time)
32
Q

What is JIT?

A
  • Stock levels are kept to a minimum and resources and capital is freed up.
  • Relies on effective communication and systems for order processing and delivery.
  • Helps working capital as it frees up illiquid stocks so trade debtors are decreased, as excessive stock is a waste.
33
Q

What is lean production?

A
  • Lean production involves practices that reduce waste during operations and are mainly focused on reducing defects, time wasted and inventory levels.
  • Effective lean prod. is a competitive advantage as they also improve flexibility and reduce lead times, leading to greater customer satisfaction.
  • Lean businesses are more able to survive in times of difficulty and make a profit.
34
Q

What is quality control?

A

I————I-Q
- Quality control is about the product as quality is checked at the end of the production process.
- Focus on identifying faults.
- Quality control is a specific role- maybe one person.

35
Q

What are quality circles?

A
  • Q.C are small teams (6-12) who voluntarily form to wok on specific issues when quality is a concern/ opportunity to improve.
  • Q.C should have representation from across the organisation and all parties have equal voice in the development process and cover all aspects of the supply chain.
35
Q

What is quality assurance?

A

I—Q—-Q—-Q—I
- Quality is about the process and all employees are involved.
- Quality considered at every step of production process.
- Focus in continual improvement of quality.

36
Q

What is Total Quality Management (TQM)?

A
  • TQM is a system of management based on quality at it’s core and it is everyone’s responsibility to ensure quality is maintained.
  • This is maintained through: quality chains (concept of internal customer), quality policies (rules to ensure quality), team work (works in teams to solve problems, identify opportunities), controls (guarantee quality), customer views (feedback to improve).
37
Q

What is Kaizen?

A
  • Continuous improvement.
  • Affects lean production and quality management and includes TQM and quality circles.
  • Will look to identify areas to improve across organisation and not settling for ‘good enough’.
38
Q

What are the stages in the business cycle?

A
  • Business cycle based on GDP for whole economy:
    1. Boom- high rates of economic growth and production.
    2. Recession- output starts to fall, growth declines.
    3. Slump- prolonged periods of economic decline.
    4. Recovery- economy starts to pick up after a period of decline.
39
Q

What is the effect of interest rates when businesses change?

A

High interest rates:
- consumer and business spending falls
- inflation falls
- stronger £

Low interest rates:
- consumer and business spending rises
- inflation may rise
- weaker £

39
Q

What is the effect of exchange rates on importers and exporters?

A

The exchange rate is the price of one currency expressed in terms of another.

Importers:
✓- may switch international suppliers when the exchange rate is less favourable.
✓- stockpile raw materials and products when currency is strong.

Exporters:
✓- lower prices to lower the impact of a strong currency.
✓- increase promotion in foreign markets when currency is weak.

40
Q

What is inflation and what is its effect on business changes?

A
  • Inflation is the general rise in prices over time.
  • High inflation- businesses may increase prices to pass costs to consumers, reduce internal costs, though price rises may fuel further inflation.
  • Low inflation- businesses feel confident in a stable economy, businesses may look to invest and grow.
  • Deflation- businesses may struggle to lay debt and assets may need to be sold to pay off debts, low demand may lead to redundancies and rationalisation.
41
Q

How does government spending and taxation affect businesses?

A
  • Gov. spending and taxation is a means of controlling activity.
  • Expansionary policy- reduces tax to increase disposable income so increases spending in health and education so stimulates demand for businesses, which creates jobs. Budget deficit may rise.
  • Contractionary policy- increases tax to slow down growth and reduce budget deficit. It reduces spending in areas such as health and education but there is pressure on inflation. Budget deficit may fall or reach a surplus.
41
Q

What are consumer protection laws?

A
  • Makes sure businesses don’t deceive customers and that product are safe and of approved quality.
    Trades Description Act- labels on food products in particular must be accurate to what is being sold.
    Sale of Goods Act- product must be fit purpose as described.
42
Q

What are competition policy laws?

A
  • Aims to restrict anti-competitive practices such as abuse of market power and anti-competitive mergers and acquisitions.
  • Competition policy ensures that markets are fair places where responsible businesses can flourish.
  • Competition Act 1998
43
Q

What is employee legislation?

A
  • Labour laws aim to prevent exploitation of workers. - They legislate for issues such as pay, working conditions and grievances.
  • Legislation also governs the powers of trade unions.
  • National Minimum Wage 1998, Equality Act 2010, Trade Union Act 2016.
44
Q

What are environment protection laws?

A
  • Make businesses pay for full costs of cleaning up or repairing any damage to the environment caused by their production process.
  • Governs factors such as pollution, destruction of wildlife, traffic congestion, resource depletion.
  • The Environmental Protection Act 1990, The Environment Act 1995.
45
Q

What is HAWSA?

A
  • HASWA stands for Health and Safety at Work Act, by which employees are protected so they are provided a safe work environment as well as safe environment for customers.
46
Q

What is the impact of competition on businesses?

A

X- a fall in prices (leading to lower profit margins).
X- increased costs of promotion
✓- improved efficiency (reduce average costs)
✓- increased innovation
✓- wider product ranges.

  • High levels of competition may lead businesses to act unethically.

Business A-level (4 decks)

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