Theme 2 Flashcards
1
Q
what may you need finance for as a business in different stages of its life and how would it be used?
A
2
Q
what are some internal sources of finance? what are the benefits and drawbacks of these?
A
3
Q
what are some external sources of finance? what are the benefits and drawbacks of these?
A
4
Q
what factors should be considered when deciding what source of finance is best?
A
– Legal structure (capital would only be available to companies for example)
– cost
– risk
– flexibility (some sources are highly adaptable to meet the businesses precise needs)
5
Q
what are the implications of unlimited liability?
A
– If they are unable to pay business debts to bank and supplies they could lose personal assets.
– may find it easier to raise finance from lenders as the lenders can seek to regain any borrowing directly from the owners of the business
6
Q
what are the implications of limited liability?
A
– A limited liability company is a separate legal entity and the personal assets of shareholders are protected.
– limited liability companies may also find it easier to raise large amounts of capital through the sources available to them
7
Q
what finance wouldn’t be appropriate for limited and unlimited liability businesses?
A
8
Q
what are the contents of a good business plan
A
9
Q
who uses a business plan?
A
10
Q
what is a cash flow forecast and what does it predict?
A
Akash flow forecast will predict the cash inflows (receipts) for a business and the cash outflows (expenditure). A casually forecast should then determine the cash funds a business has at one time.
If a business knows what cash funds it needs, it can take measures to ensure that enough finance is available.
11
Q
how do you construct a cash flow forecast?
A
12
Q
how can you interpret cash flow forecasts?
A
13
Q
what causes cash flow problems?
A
– Overtrading
– allowing too much trade credit to customers.
– poor credit control
– inaccurate cash flow management
– unforeseen costs
14
Q
how can a business speed up cash inflows?
A
– Incentivise early repayment by giving a discount
– reduce trade credit given to customers
– sell off stock at a discounted prize to free up cash
– inject fresh capital into the business
15
Q
how can you slow down outflows?
A
– Delay payment to suppliers
– increase trade credit agreements with suppliers.
– cut costs, such as finding cheap alternatives or postponing spending in areas such as training or advertising
16
Q
what are the benefits of cash-flow forecasting?
A
– To support an application for lending
– to support the budgeting process.
– to identify any potential cash flow crisis
17
Q
what are the limitations of cash flow forecasting?
A
– Some figures will be based on estimates.
– variables are constantly changing and cash flow forecasts should be updated for them to be valid.
– cash flow forecasts focus on one variable (cash), they do not consider other important variables such as profitability or productivity
18
Q
what info may be used to successfully create a sales forecast?
A
- market research
- past data
19
Q
what are economic variables that may affect a sales forecast?
A
– Economic growth (GDP)
– interest rates
– inflation
– unemployment rates
– exchange rates
20
Q
what are consumer trends and what are some variables that affect them?
A
Successful businesses will anticipate the needs of customers and adjust their products and operations accordingly to meet these needs.
– Seasonal variations
– fashions
– long-term trends
21
Q
what can actions of competitors do to a business?
A
A business is likely to adjust its sales forecasts based on the actions of its combustor.
For example if a big competitor were to launch a sales promotion, introducing new and improved product line or open a branch nearby, business could write expect sales to fall.
22
Q
what are some problems associated with sales forecasting?
A
23
Q
what are fixed costs?
A
costs that do not change with level of output eg rent
24
Q
what are variable costs?
A
Cost that changed directly with the level of output or sales, e.g. materials
25
what is breakeven?
The point at which a business is revenue generated through the sale of its product will cover the total costs. At the breakeven the business is making neither a profit nor a loss.
26
what is breakeven analysis and why is it useful?
Brighthaven analysis can be used to help a business making important decisions about costs, prices and expected profit.
– Decide whether a business idea is profitable or viable
– identify the level of output and sales necessary to generate a profit.
– the scale of a business
– assess changes in the level of production.
– assess the effects of costing and pricing decisions
27
what is contribution?
Contribution is the difference between the variable costs of one unit and its selling price
28
how do you draw a breakeven graph?
29
what is the margin of safety?
This is the difference between the breakeven point and the current level of output
30
what are the benefits and limitations of breakeven analysis?
– Can be used to analyse the impact of various customers, prices and costs on a businesses profits.
– it is simple and easy to use.
– the breakeven point is a useful guideline to help businesses make decisions.
– Breakeven analysis simplifies what can be a very complex process, most businesses sell multiple products, which makes BE even more difficult
– costs are rarely constant, BE analysis presumes that cost stay the same over various levels of output.
– breakeven focuses on output, presumes that the business will sell all of its output at the same price
31
what is a budget?
a financial plan for spending and saving for the future.
32
what are the types of budgets?
– revenue and earning budgets
– expenditure budgets
33
what is a historical budget?
This is where prior data is used and adjusted based on future events, estimations and professional judgement
34
what is a zero-based budget?
with zero based budgeting, the opportunity cost of all spending decisions is considered. Any spending has to be justified by the budget holder to ensure all spending is good value for money. Zero budgeting can be efficient at minimising unnecessary costs but is also time-consuming and can become a barrier to decision-making.
35
What are the problems with budgets?
– A budget is only as accurate as the data on which is based
– past trends can be a poor indicator of what is likely to happen in the future.
– new decisions taken by governments can affect budgets.
– unexpected changes in processes can impact budgets
– when a budget is unrealistic it loses all value as a motivational tool
36
what is variance analysis?
37
what are the 3 types of profit?
gross profit
operating profit
profit for the year
38
what is gross profit?
the difference between the revenue and cost of sales - shows the profit made before other costs are taken into account
39
what is operating profit?
takes into account the other operating expenses on top of gross profit
40
what is profit for the year?
the actual profit the business has made taking into account interest
41
what is a profit margin and what does it measure?
the value of profit alone is limited in determining the performance of a business - profit margins compare the profit figure to sales revenue or in other words the proportion of sales revenue that has been converted into profit
42
what is a gross profit margin and what does it measure?
helps business see if a product has been successful
has limitations as it does not take into account indirect costs
43
what is operating profit margin?
takes into account direct and indirect costs
44
what is profit for the year margin?
takes into account all revenues and costs incurred by the business - it is a good measure of how effectively the business performed over the financial year
45
what is the statement of comprehensive income?
communicates the revenue generated by a business and then its profit at various levels following a series of expenses and incomes
46
what does a statement of comprehensive income look like?
47
what can you find out from a statement of comprehensive income?
- changes in sales revenue
- changes in the direct costs of a business
- how well a business is managing its operating costs
- the profitability of a business
- unusual incomes/expenses during the year
48
how can you improve profitability?
- increase prices
- create awareness and desire through marketing
- add value to the product and increase benefits and features
49
why may a business be unprofitable?
- no demand for the product
- selling at the wrong price
- low contribution per unit
- poor management of costs
- expansion of the business - profit retained and not available for return to shareholders
50
how can a business reduce costs?
- reduce production costs
- improve efficiency
- use capacity more fully
- eliminate unprofitable products
- reduce variable costs - negotiate better deals with suppliers
- lower overheads - move to a cheaper location
51
what is a balance sheet?
a balance sheet is a financial document that records the assets and liabilities of business. A balance sheet gives a snapshot of the value and financial strength of a business from the exact point in time it was produced.
52
what does a balance sheet look like?
53
what can you find out from a balance sheet?
- the value of a business (equity)
- the current assets a business holds
- short term liabilities the business will need to pay within a year
- the liquidity of a business
- the long term debts of a business
- how a business has been financed
54
what does liquidity mean?
the ability of a business to pay its debts and liabilities in cash when they’re due - this is closely linked to cash flow management. cash is the most liquid asset (current asset), a business may fail if it runs out of cash.
55
what is current ratio and what does it compare?
- a key liquidity ratio
- compares current assets with current liabilities
- asses wether a business has sufficient working capital to pay short term debts
56
what is acid test ratio and what does it measure?
- a more severe measure of liquidity
- does not take into account the inventories (stock) of a business
- this is because for many businesses there is no guarantee that inventories can be quickly turned into cash
57
what is working capital?
- the money within a business that is needed to pay for the day to day running costs (paying bills, wages and purchasing stock)
- working capital is slightly different from cash as it takes into account other current assets
- other current assets such as stocks and shares can not easily be used to pay debtors
58
what are some ways to improve liquidity?
59
what are some internal and external factors of business failure?
60
what are some causes of cash flow problems?
61
what are some external factors for business failure?
- competition - a new competitor or an overcrowded market can lead to a shortage of demand and falling sales
- legislation - new legislation can often mean increased costs as a business adjusts its products and processes to comply
- market conditions - changes in commodity prices or consumer tastes
- economic factors
62
what is job production and what are the pros and cons?
production of single unique units - this could be bespoke for the customer and will require a highly skilled workforce
- highly flexible and bespoke
- high profit margins
- high unit costs (premium price)
- labour intensive
63
what is batch production and what are the pros and cons?
standardised products are made in relatively large quantities but the system can be modified to adjust the specification
eg changing the size, colour, and features
- flexible
- while still being able to deliver some economies of scale through automation and standardisation
64
what is flow production and what are the pros and cons?
flow production is a dedicated and highly automated production process. production is standardised and continuous to achieve economies of scale.
- very low unit costs
- high levels of productivity
- modern production plants offer some flexibility
- huge set up costs
- low motivation of workers
- breaks in production are costly
65
what is cell production and what are the pros?
cell production is when teams of workers work together to produce an entire product or part of a product. this eliminates some of the drawbacks of flow production because:
- workers are more motivated when working as a team
- production is more flexible
- waste is minimised
66
what does labour intensive mean?
high levels of human input into the production process
- highly specialist
- personal
- service industry
- high levels of skill required
67
what does capital intensive mean?
high levels of capital investment
- mass production
- standardisation
- efficient production
68
what does capital intensive mean?
high levels of capital investment (eg machinery)
- mass production
- standardisation
- efficient production
69
what does productivity mean?
productivity is the amount of output that can be produced with a given input of resources in a specified time period. maximising productivity means getting the most out of the resources available to a business.
70
what is labour productivity?
this measures the output per employee in a certain time period
71
what factors affect productivity?
72
what are the difficulties in increasing labour productivity?
there is sometimes a trade off when increasing labour productivity
- can make a business more competitive as cost per unit is reduced
- allows a business to increase its profit margin
- increase output of workers can cause stress and burnout
- a focus on output can compromise quality, customer service and creativity
73
what is efficiency?
Efficiency is about making the best use of all the resources in a business. when a business is running efficiently there is a minimal waste and average unit costs are low.
74
what are the benefits of improved efficiency?
- labour productivity increases
- unit costs fall
- resources such as labour expertise and time can be reallocated
- profit margins increase
- improved flexibility across the business
- opportunity to explore new ventures
- ability to charge power prices and therefore improve competitiveness
75
how can a business reduce waste and add value?
76
what is capacity utilisation?
the use that a business makes of its resources - when a business physically cannot increase output then it is at 100% CU
77
what is under and over capacity utilisation problematic or opportunistic?
under capacity
- idle resources cost money to store but aren’t used
- unit costs rise
- opportunity to increase capacity utilisation by taking on new orders
over capacity
- employees overworked
- mistakes more likely
- unit costs rise due to the above
- opportunity for growth
78
what does a diagram of capacity utilisation look like?
79
how can a business increase or decrease capacity utilisation?
increase capacity
- subcontract production to another business
- offer overtime pay to the workforce
- employ workers on temporary contracts
decrease capacity
- rationalise (redundancies or sale of assets)
- sub contract in work from another business
80
what does a stock control graph depict?
81
what is the cost of poor stock management?
- over stocking means cash is tied up that can’t be used elsewhere
- stock may be stolen lost or damaged
- financial costs of storing stock and managing it can be time consuming and costly
- having too little stock may mean orders cannot be met leading to unhappy customers and losses of sales
82
how can waste be minimised?
- store inventory appropriately for example, refrigerated
- rotate stick so old stock gets used or sold first
- adjust prices to clear stock through sales promotions
- computerised inventory to keep track
83
what is lean production?
involved practices that reduce waste on the operational process
focuses on reducing defects, time wasted and inventory levels
removes anything that is not necessary
84
what is just in time?
a method of stock control whereby stock is delivered right before it is needed: supply of products is triggered by demand from customers
this helps working capital be freed up from illiquid stocks and reduces storage costs
85
what is quality?
the extent to which a product or service needs its customers requires and is fit for purpose. quality is subjective: a product may be high quality for one person and low for another
86
how can a business achieve quality products?
87
what is quality control?
- about the final product
- quality is checked at the end of the production process
- focuses on identifying faults
- quality control is a specific role, maybe one person
88
what is quality assurance?
- all about the process
- all employees are involved
- quality is considered at every step
- focuses on continual improvement
89
what are some difficulties on improving quality?
- customers perception of quality is constantly changing
- a successful business could let quality slip if there is no incentive to outperform rivals
- improvising quality can add more work so might be naturally opposed by the workforce
- measuring quality is difficult and can be expensive
90
what are some consequences of poor quality?
- if a product needs recalling this can be expensive
- poor quality management can damage a brands reputation
- there may be legal costs for lawsuits
- correcting poor quality can be very expensive
91
what is total quality management (TQM)?
a system of quality management where quality is the priority throughout the whole organisation.
92
what are quality circles?
A small team of about 6 to 12 people who voluntarily formed to work on a specific quality problem. Quality circles insure all aspects of the supply chain are considered.
93
why is good quality a competitive advantage?
Quality is a significant route for a business to add value to its products. Achieving high levels of quality will allow business to charge a premium price and ensure customers are highly satisfied. Businesses must continually aim to improve quality and adapt to the needs of customers if they are to maintain any competitive advantage .
94
what is kaizen?
- japanese for continuous improvement
- uses TQM and quality circles to identify areas of improvement across an organisation instead of settling for good enough
- groups of employees come together and are paid to suggest what could be done to make the production process better to improve quality
95
what is the business cycle?
the ups and downs and fluctuations in an economy
96
what are the 4 stages of the business cycle?
97
what is an exchange rate?
the value of one currency expressed in another
98
when is it said that a currency has strengthened?
when it has increased in value against another currency and vice versa for weakened
99
what effects can exchange rates have on business decisions?
- businesses will try to avoid uncertainty when exchange rates of volatile.
- businesses may set an agreed rate for future transactions.
- A business may choose to target a specific international market when the exchange rate is favourable
100
how do importers and exporters react to changes in interest rates?
importers:
- may switch to international suppliers when the exchange rate is less favourable
- stockpile raw materials and products when the currency is strong
exporters:
- may lower prices to limit the impact of a strong currency
- increase promotion in foreign markets when the currency is weak
101
what is inflation?
102
how does high and low inflation and deflation effect businesses?
103
what is the impact of interest rates on business activity?
104
what effect does government spending and taxation have on businesses?
105
what are some different forms of government legislation set out to protect employees, consumers and the environment?
106
what factors affect competitiveness in a market?
107
what is the impact of competition on businesses?
– A fallen prices (leading to lower profit margins)
– increased costs of advertising
– improved efficiency (to reduce costs)
– increased innovation
– wider product ranges
108
how does the size of a market effect levels of competition?
The level of competition is likely to be less and smaller markets. small markets may have a limited population; therefore any two businesses can have significant rivalry. Small businesses can also access global market owing to online sales.
109
what are the advantages and disadvantages to a business of operating in a large market?
– wider customer base
– less volatility than small markets
– more regulation and scrutiny
– potential for international competition
110
what are the advantages and disadvantages to a business of operating in a small market?
– Less competition
– opportunities for expansion
– easier to build loyal customer relationships
– threat of new entrants
– view economies of scale
