Theme 2 2025 Flashcards
1
Q
Will a business use one or multiple sources of finance?
A
Multiple
2
Q
What might a business use finance for?
A
Start up
Growth
3
Q
What are the benefits and drawbacks of retained profit?
A
Free and doesn’t occur interest
Shareholders may wish to receive it back in the form of a dividend
4
Q
What are the benefits and drawbacks of sale of assets?
A
Frees up value in unwanted assets to be spent in other areas of the business
The business loses the benefit of the asset
5
Q
What are the benefits and drawbacks of owners capital?
A
A free source of finance with no interest
Owned could lose their personal investment
6
Q
What are the benefits and drawbacks of overdrafts?
A
Flexible way to fund working capital, acting as a buffer for day to day expenses
Bank can ask for repayments at any time and interest rates are high
7
Q
What are the benefits and drawbacks of trade credit?
A
Suitable for buying raw materials from suppliers as it gives the business opportunity to generate revenue before having to pay
Delays in payment can damage a businesses relationship with suppliers
8
Q
What are the benefits and drawbacks of grants?
A
Government schemes might be available for some small businesses
Generally given for social, economic or environmental benefits
9
Q
What are the benefits and drawbacks of leasing?
A
Assets can be aquired without large capital spending to acquire them
In the long term a leased asset is more expensive than purchasing it outright
10
Q
What are the benefits and drawbacks of bank loans?
A
Can be negotiated to meet business requirements
Business has to pay interest and may have to offer collateral to secure it
11
Q
What are the benefits and drawbacks of venture capital?
A
Can bring expertise into the business
Owner may not want input from elsewhere into the running of the business
12
Q
What are the benefits and drawbacks of share capital?
A
It can access large amounts of capital with no interest
Only availible to LTD and PLC
13
Q
What are the benefits and drawbacks of crowdfunding?
A
Cheap and easy to set up
Not suitable for raising large amounts of money
You don’t get the money if you don’t reach your target
14
Q
What factors should a business consider when deciding what source of finance to use?
A
Legal structure
Cost
Risk
Flexibility
15
Q
What is limited liability?
A
Where the liability of a company’s shareholder is detached from the company. Shareholders can lose their investment in the event of financial difficulty but their personal belongings are safe
16
Q
What’s unlimited liability?
A
There is no distinction in the law between the owner and the business
17
Q
What types of business have unlimited liability?
A
Sole trader
Partnership
18
Q
What types of business have limited liability?
A
PLC
LTD
19
Q
What are the implications of unlimited liability?
A
Owners of unlimited businesses are exposed to the financial obligations of the business
If they are unable to pay business debts to banks and suppliers they could lose their personal assets
Some obligations apply to any unlawful acts commited by the business owner or employees
Unlimited liability companies sometimes find it easier to raise finances from lenders as the lenders can seek to regain any borrowings directly from the owners of the business
20
Q
What are the implications of limited liability?
A
Owned by shareholders
Personal assets of shareholders are protected
Limited liability companies may find it easier to raise other amounts of capital through the source available to them
21
Q
How do shareholders gain from owning shares?
A
Dividends paid to them and the value of their shares rising
22
Q
What do shareholders do?
A
Take a dividend of the profits made by a business
Help make decisions (especially if they are a majority shareholder with over 50%)
23
Q
What source of finance might an unlimited liability business use?
A
Personal savings
Retained profit
Mortgages
Unsecured bank loans
Peer to peer lending
Crowdfunding
Grants
Bank overdrafts
24
Q
What sources of finance might a limited liability business use?
A
Share capital
Retained profit
Venture capital
Business angels
Bank loans
25
What’s an unsecured vs a secured loan?
A secured loan is when business asset are used as security for the bank should the business fail to repay the debt. An unsecured loan is not attatched to any asset in the business
26
What is a business plan?
A document dictating what a business aims to do with research to back it up and prove why they are likely to be successful
> should also detail things like assets
27
What is an executive summary as part of a business plan?
A one pay overview of the business outlining its purpose and the opportunity
28
What is the business idea and opportunity as part of a business plan?
An outline of the business idea and concept so that all stakeholders can understand the owners intentions
29
What are the aims and objectives as part of a business plan?
SMART targets that the owner will measure their success against
30
What is market research as part of a business plan?
Research into the target market, the market and other competitors
31
What is financial forecasts as part of a business plan?
Forecasts on costs, revenue, profit, and cash flow (budgets and breakeven analysis)
32
What is sources of finance as part of a business plan?
A plan on how the business will be financed and how any borrowing will be repaid
33
What is premises and equipment as part of a business plan?
The location of the business and its rationale
How this will be financed and any other equipment the business is likely to need
34
What is personnel as part of a business plan?
An organisational chart outlining the personnel that the business will need as well as their areas of responsibility, skills and qualifications
35
What is buying and production as part of a business plan?
Details of how the product will be produced as well as details of suppliers
36
What are the 9 key components of a business plan?
Executive summary
Business idea and opportunity
Aims and objectives
Market research
Financial forecasts
Sources of finance
Premises and equipment
Personnel
Buying and production
37
Who uses a business plan?
The owner as a guide and working document
Lenders to investigate the business and decide risks of lending
investors to assets wether this would be a profitable investment
Partners and employees to decide wether to work for or with the business
38
How does a business plan reduce risk?
The depth and detail of a plan reduces risks associated with unforeseen problems and poor decision making and increases the likelihood of success
39
What’s a cash flow forecast?
Predicts the inflows (receipts) for a business and the outflows (expenditures). Should then determine the cash funds that a business has at any one time
> helpful to measure if there is enough finance available
40
What are receipts?
Cash inflows
41
What is expenditure?
Cash outflows
42
What 3 sections is a cash flow forecast made up of?
Cash in, cash out and net cash flow
43
What is net cash flow?
The difference between monthly outflows and inflows
44
What is closing balance?
Net cash flow + opening balance
> the available cash a business is forecast to have during that period
45
What is opening balance?
The closing balance of the month prior
46
What might fall into cash in?
Cash sales
Credit sales
Investments
Total inflows
47
What might fall into cash out?
Raw materials
Salaries
Other costs
Total outflows
Project materials
Sub contracted labour
Marketing
Legal and accounting
Equipment
Other misc costs
48
What falls into net cash flow?
Net cash flow
Opening and closing balance
49
What questions may a business ask when interpreting a cash flow forecast?
Are our monthly inflows greater than outflows?
What are the forecasted periods of high expenditure?
Are inflows increasing over time?
Is there a seasonal trend?
Do we have enough cash reserves to cover unexpected costs?
50
What are some of the key causes of cash flow problems?
Over trading
Allowing too much trade credit
Poor credit control
Innacurate cash flow management
Unforeseen costs
51
How can you speed up inflows?
Incentivise early repayments by giving customers a discount for paying early
Reduce trade credit given to customers
Sell off stock at a discounted price to free up cash
Inject fresh capital into the business
52
How can outflows be slowed down?
Delay payments to suppliers
Increase trade credit agreements with suppliers
Cut costs such as finding cheaper alternatives or postponing spending in areas like training or agriculture
53
What are the benefits of cash flow forecasting?
To support an application for lending
To support budgeting
To identify any potential cash flow crisis
54
What are the limitations of cash flow forecasting
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, and do not considering other things like profitability or productivity
55
What are payables?
The amount of time in days taken for the business to pay creditors
56
What are receivables
Amount of time for debtors to pay the business
57
58
What’s sales forecasting?
Predicting future sales value and volume
59
Why is sales forecasting important?
Helps to make key decisions like purchasing raw materials, staffing, marketing and financing the business
60
What data might a business use to construct a sales forecast?
Market research
Back data
Economic forecasts
61
62
Why can economic variables affect a sales forecast?
They can combine to influence the level of demand and therefore sales within a markets
GDP and growth
Interest rates
Inflation
Unemployment
Exchange rates
63
What are consumer trends?
Trends of when people buy certain products
64
Why is analysing consumer trends beneficial for a business?
They can adjust their products and operations accordingly to meet needs
Seasonal variations
Fashions
Long term trends (eg solar powered energy)
65
Why may actions of competitors affect sales forecasts?
If a big competitor were to launch a sales promotion, introduce a new product or improved product line or open a new branch nearby, a business could rightly expect sales to fall. Similarly, the closure of a large competitor may lead to an increase in sales as the business picks up trade from customers switching
66
What are the problems with sales forecasting?
Volatile customer tastes and preferences
Subjectives expert opinions
Fluctuations in economic variables
The data used
Volatile markets
67
Why might it be more difficult for one business to decide the volume of sales?
A restaurant would have to count the number of meals sold whereas a car dealership could just count cars
68
How can a business increase revenue?
Put up prices or increase demand
69
What are variable costs?
Those that change directly with the level of output eg materials
70
What are fixed costs?
Those that do not change with levels of output or sales eg rent
71
Why are technically all costs variable in the long run?
Fixed costs will eventually change over time as some may increase like salary costs or utility costs
72
How can a business measure success?
Revenue but Profit is a better measure, specifically profit margins
73
What is the average cost of unit cost?
The avg cost per unit of production
> the unit cost will determine the profit margin and the larger the output the lower the unit cost due to economies of scale
74
What is profit and loss and why is this important?
Total revenue - total costs = profit
Important to understand revenue and see if a business is successful
75
What is breakeven?
The point at which a businesses revenue generated through the sales of its products will cover the total costs
> at breakeven the business is making neither a profit nor a loss
76
Why is breakeven important?
It can be used to help a business make important decisions about costs, prices and expected profits
77
What is breakeven analysis used for?
Decide wether a business idea is profitable and viable
Identify the level of output and sales necessary to generate a profit
Assess the changes in the level of production
Asses the effects of costing and pricing decisions
78
What is contribution?
The difference between the variable costs of one unit and its selling price
79
What’s the equation for contribution?
Contribution = selling price - variable cost per unit
80
What’s the equation for break even point?
Breakeven = fixed costs / contribution per unit
81
What’s the equation for average cost
Average cost = total cost / output
82
What’s the equation for sales revenue?
Sales revenue = price x quantity sold
83
What’s the equation for total contribution?
Total output x contribution
84
Describe a break even diagram (draw a generic one if possible)
Y axis represents both costs and revenues
X axis represents output
Fixed costs is a horizontal line from which total costs comes off going diagonally up
Total revenue goes diagonally up from the bottom left corner
Where total revenue and total costs intersects is the breakeven point: anything before is loss anything after is profit
85
What are the steps to drawing a breakeven chart?
Plot a total revenue line at each level of output. You only need two points on a graph to draw the line - the revenue will always start at 0 so you only need to calculate what the revenue is at the other level of output at the furthest point of the x axis to calculate the line
Plot the fixed costs line - this will always be horizontal as it never changes
Plot the total costs line by adding variable costs at each level of output to the fixed costs
> draw this off the fixed costs line
Where total costs meets revenue is breakeven - label this
If the current level of output is below breakeven the business will make a loss, if it is above the business will make a profit
86
How does analysing breakeven charts help a business?
Make decisions on wether to accept prices on orders different from those normally charged or the impact on profitability of a change in costs and output levels
For example:
Raising prices by £2 will increase revenue at each level of output and lower the breakeven point
Using a cheaper supplier may lower costs by £1 but this would move the total costs line down and lower the breakeven
87
What’s the margin of safety?
The difference between break even and the current level of output. The size of the margin of safety will determine the risk of the business - the margin of safety should be as high as possible
88
What’s the equation for the margin of safety?
Current level of output - breakeven point
89
If a business has a high break even point what do they have to do before they can turn a profit?
Sell a lot
90
What are the benefits of breakeven analysis?
Can be used to analyse the impact of varying customers, prices and costs on a businesses profit
It is simple and easy to use
The breakeven point is a useful guideline to help a business make decisions
91
What are the limitations of breakeven analysis?
Simplifies what can be a very complex process
> most business sell multiple products which makes this even more complicated
Costs are rarely constant - breakeven analysis presumes that costs stay the same over various levels of output
Breakeven focuses on output - it presumes that the business will sell all of its output at the same price
92
What is a budget?
A financial plan for the future: should drive many of the decisions taken across functional areas of a business for example the number of products to be made, how to promote the product and how mant workers to employ
93
94
How can budgets be used as a motivational tool?
Motivate the workforce when used in target setting
95
Why are budgets useful?
Help a business to achieve its financial and wider objectives
A business looking to grow will increase its revenue budget which will inform the expenditure budget which will then determine the businesses budgeted profits
96
What is the purpose of budgeting?
To ensure efficiency in spending
> allows large businesses to be coordinated and can be a way of motivating employees who are allocated a budget
97
What is historical budgeting?
Using prior data and adjusting based on future events, estimations and professional judgement
98
What is zero base budgeting?
Usually used when no historical data is available
The opportunity cost of all spending is considered and any spending has to be justified by the budget holder to ensure all spending is good value for money. Zero base budgeting can be efficient at minimising unnecessary costs but it is also time consuming and can become a barrier to decision making
99
What are the problems with budgets?
A budget is only as accurate as the data it is based on
Past trends can be a poor indicator of what is likely to happen in the future
> therefore it can be very difficult to forecast sales
New decisions taken by governments and public bodies can affect budgets
> interest rates change and employment legislation
Unexpected changes in process
> commodity prices can impact budgets
When a budget is unrealistic it looses all value as a motivational tool
100
What is a commodity?
A commodity is a basic good or raw material that is interchangeable with other goods of the same type. Commodities are typically used in the production of other goods or services. Common examples include:
• Agricultural products: wheat, coffee, cotton
• Energy sources: oil, natural gas
• Metals: gold, silver, copper
Commodities are usually traded on global markets, and their prices are determined by supply and demand. Because they are standardized, one unit of a commodity is considered essentially the same as another unit of the same grade.
101
What is variance analysis?
Compares the force at data to the actual figures. It can be used to analyse the accuracy of the budgeting process and to help make decisions about budget adjustments
102
What is gross profit?
The difference between revenue and the cost of sales. It shows the profit made on the trading activity before any other costs are taken into account
103
What’s the equation for gross profit?
Revenue - cost of sales
104
What’s operating profit?
Takes into account other operating expenses on top of gross profit
105
What’s the equation for operating profit
Gross profit - other operating expenses
106
What’s profit for the year?
The actual profit the business has made taking into account interest
107
What’s the equation for profit for the year?
Operating profit +/- interest
108
What are profit margins?
The ratio of profit as a percentage which compares the profit figure to sales revenue
> the proportion of sales revenue that has been converted into profit
109
What is gross profit margin?
Helps businesses answer the question have our products been successful
> does not take into account indirect costs
110
What is the formula for gross profit margin?
(Gross profit/sales rev) x 100
111
What is operating profit margin
Takes into account the performance of a business more fully as the calculation takes into account direct and indirect costs
> useful tool when used alongside gross profit margin
112
What’s the equation for operating profit margin?
(Operating profit / revenue) x 100
113
What’s profit for the year?
Takes into account all revenues and costs incurred by the business. It is a good measure of how effectively the business has performed over the financial year. May be used to identify the potential to pay a dividend to shareholders
114
What’s the equation for profit for the year margin?
(Profit for the year / revenue) x 100
115
What is a statement of comprehensive income?
Communicates the revenue generated by a business and then its profit at various levels following a series of expenses and exceptional incomes
116
What is cost of sales?
The direct cost associated with the production and sale of the product or service
117
What can be found out from a statement of comprehensive income?
Changes in sales revenue
Changes in the direct cost of sales
How well a business is managing its operating costs
The profitability of a business
Unusual incomes/expenses during the year
118
What profitability ratios can be calculated from the statement of comprehensive income?
Gross profit margin
Operating profit margin
ROCE
119
How can a business increase their revenue?
Increase prices
Reduce process (dependent of PED)
Create awareness and desire through marketing
Add value to the products by increasing benefits and features
120
How can a business improve profit?
Increase revenue or decrease costs
121
Why might 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 availible for return to shareholders)
122
How can a business reduce costs?
Reduce production costs
Improve efficiency
Use capacity more fully
Eliminate unprofitable processes such as unprofitable product lines
Reduce variable costs by negotiating better deals with suppliers
Lower overheads (eg move to a cheaper location)
123
Why may a business struggle to manage cash flow?
Business expenses are often incurred better revenue is generated or received. A business cannot be profitable unless it can effectively manage its cash flow.
> this is often a question of timing and can be crucial to business success
124
What is a balance sheet?
A financial document that record the assets and liabilities of a business. A balance sheet gives a snapshot of the value and financial strength of the business.
125
What are non current assets?
Are used to operate the business and include land and machinery and brands and patents
126
What are current assets?
Assets that the business expects to sell or use within the year. These can be converted to cash to pay off liabilities
127
What are net current assets!
Current assets - current liabilities
> essentially the working capital a business has
128
What are current liabilities?
Payment due within 1 year
129
What are non current liabilities
Debts that the business does not expect to pay within a year
130
What is total equity
Will always balance with key assets - represents how a business has been financed
131
What can be found out from a balance sheet?
The value of the business (equity)
The current assets a business holds
Short term liabilities the business will need to pay within the year
The liquidity of a businsss
The long term debts of a business
How a business has been financed
132
What financial ratios can be calculated using the balance sheet?
Liquidity rations, gearing and efficiency ratios
133
What is liquidity?
The ability of a business to pay its debts and liabilities in cash when they fall due
134
What is the most liquid asset?
Cash
135
What does current ratio show?
Compares current assets with current liabilities. In doing so it added wether a business has sufficient working capital to pay its short term debts
136
What is the equation for current ratio?
Current assets/current liabilities
137
What is acid test ratio
A more severe measure of liquidity because it does not take into account the inventories or stock of a business
> this is because for many businesses there is no guarentee that inventories can be turned quickly into cash
138
What is the equation for acid test ratio?
Current assets - inventories / current liabilities
139
What is working capital?
The money within a business that is needed to pay for the day to day running costs. This includes paying bills, wages and purchasing stock. Working capital can be calculated from the info contained in a balance sheet. Working capital is different from cash as it takes into account other currents assets.
> other current assets such as stock and debtors can not easily be used to pay expenses
140
What’s the equation for working capital?
Current assets - current liabilities
141
What are some ways to improve liquidity?
Use an overdraft
Negotiate additional short term loans
Encouraged cash sales
Delay payments
Take out credit agreements with suppliers
Sell off current assets (stock basically)
Encourage early settlements out of debt
142
What are some internal causes of business failure?
Poor planning
Cash flow
Marketing
Lack of skills
143
What are some external causes of business failure?
Competition
Legislation
Market conditions
Economic conditions
144
Why may poor planning be a cause of business failure?
Can lead to important factors not being addressed. Poor planning may be the root cause of other issues like cash flow problems or poor marketing through lack of understanding of consumer needs
145
Why may lack of skills be a cause of business failure?
May include technical skills such as financial management or leadership capacity
146
Why may a pack of understanding of customers be a cause of business failure?
They are unlikely to develop products and services that will be successful or they can fail to target customers through the right marketing strategies (getting the marketing mix wrong)
147
What are some causes of cash flow problems?
Over trading
Allowing too much trade credit
Poor credit control
Ensuring customers pay on time
Innacurate cash flow management due to a lack of research
Unforeseen costs
148
What are some extenders causes of failure? Why are these hard to predict?
They are often out of the control of the business
Competition
Legislation
Market conditions
Economic factors
149
What is production?
Piccata when raw material or components are changed into products.
150
What is job production?
Production of single units. Often bespoke and requiring a highly skilled workforce.
151
What are the advantages and disadvantages of job production?
Highly flexible and bespoke
High profit margins
High unit costs
Labour intensive
152
What is batch production?
Standardised components are made in relatively large quantities but the system can be modified to adjust the specification
> eg changing the size, colour or features
153
What are the advantages and disadvantages of batch production?
Flexible
Able to deliver economies of scale
Only produces in relatively small quantities
154
What is flow production?
A dedicated and highly automated process. Production is standardised and continuous to achieve economies of scale.
155
What are the advantages and disadvantages of flow production?
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 can be expensive
156
What is cell production?
Traditional flow production involves a production line whereby a single product will go through a number of stages. An alternative approach is to use cell production whereby teams or workers work together to produce an entire product or part of a product
This helps to eliminate some of the drawbacks of flow production.
157
What are the advantages of cell production?
This helps to eliminate some of the drawbacks of flow production.
Workers are more motivated when operating as a team
Production is more flexible
Movement of resources (waste) is minimised
158
What is labour intensive production?
High levels of human input in the production process
> highly specialist, personal, service industry, high levels of skill required
159
What is capital intensive production?
High level of monetary investment
> mass production, standardisation, efficiency
160
What is productivity?
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 the business
161
What is labour productivity?
Measures the output per employee in a certain time period.
162
What is the equation for labour productivity?
Total output (in a time period) / no. of employees
163
What factors affect productivity?
Education and training
Motivating workers
Working practices
Capital intensity
Specialisation
164
What are the difficulties in increasing labour productivity?
There can be a trade off
Increasing productivity can improve the competitiveness of a business as the cost per unit is reduced
> this can allow the business to increase its profit margin or reduce prices
Increasing the output of a workers may increase productivity and unit costs in the short term but high levels of output can cause stress and burnout. It is also true that focusing on output can compromise quality, customer service and creativity. Costly mistakes and faults are also more likely to occur.
165
What’s the difference between a trade off and an opportunity cost?
Trade-off
A trade-off is when you have to give up one thing to gain something else. It’s about the choices you face. For example, if a business decides to spend money on marketing instead of upgrading equipment, that’s a trade-off.
Opportunity cost
Opportunity cost is the value of the next best alternative that you give up when you make a decision. It’s what you sacrifice. In the example above, the opportunity cost of spending money on marketing is the benefits the business would have gained from upgrading equipment.
In short:
• Trade-off = all the options you’re giving up
• Opportunity cost = the next best one you didn’t choose
166
What is efficiency?
Making the best use of all the resources in a business. When a business is running efficiently there is minimal waste. Average costs will be at their lowest when a business is operating efficiently
167
What are unit costs?
The average costs takes into account the total costs of a business and divides this by the level of output
168
What is the equation for unit costs
Unit cost = total costs / total output
169
How are productivity and efficiency connected?
Greater productivity means the workforce is more efficient and efficiency a less the business allows more resources we to be devoted to production. Where efficiency falls, wastage and unit costs tend to rise.
170
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 lower prices and therefore improve competitiveness
171
What can efficiency be influenced by
The level of employee skills, management decision making and effective systems for production and communication
172
How can a business reduce waste and add value?
Reduce unnecessary transport for the product or materials
Reduce unnecessary stock
Reduce defects in production
Reduce waiting
Stop over processing (adding features that don’t improve value)
Stop overproduction (making products that cannot be sold easily)
Stop unnecessary movement of people
173
What is capacity utilisation?
The maximum a business can produce over a period of time given the resources it has available
174
What’s the equation for capacity utilisation?
(Existing output / maximum possible output) x 100
175
What is under capacity utilisation and what are the pros and cons of this?
Not producing at a high enough level
Idle resources cost money and aren’t being used
Unit costs rise
Opportunity to increase capacity utilisation by taking on new orders (easier to grow)
176
What is and what are the pros and cons of over capacity utilisation?
Producing too much (more than your employees and facilities can handle)
Employees are overworked and unhappy
Mistakes are more likely
Unit costs rise due to the above
Opportunity for growth
177
What happens as capacity utilisation rises?
Unit costs will fall as the business experiences economies of scale
178
How can a business increase capacity?
Sub contract out production to another business
Offer overtime pay to the workforce
Employ workers on temporary contracts
179
How can a business decrease capacity?
Rationalisation (redundancies or sale of assets)
Sub contract in work from another business
180
What are stock control charts?
Charts to show the:
Quantity the business will order of stock at a given time
How long it will take from the order being placed for stock to arrive
The reorder quantity
The max stock level
The reorder levels
The minimum stock level
The level at which new stock will be ordered
The minimum amount of inventory a business wants to hold (buffer stock)
181
What is the cost of poor stock management?
Opportunity cost (cash tied up in stock can’t be used elsewhere)
Shrinkage (stock being stolen, damaged or lost)
Financial cost (storing stock and managing it can be time consuming and costly)
Too little stock (unable to meet customer orders)
182
What is waste minimisation and how does it work?
Storing stock appropriately
Rotation so old stock gets used first
Pricing strategies
Computerised management to track all inventory
183
What is lean production?
Practices that reduce waste on the operational process. The main forms of lead production are focused on reducing defects, time wasted and inventory levels.
Lean management should remove anything that is not necessary.
184
What aspects of the organisation could be redesigned in lean production to make the organisation more efficient?
Meetings
Processes
Organisational structure
185
What is just in time stock control?
Supply of products an raw materials being triggered by demand from customers
186
How can lean production be a competitive advantage?
They help to minimise wastage as well as reducing average costs and can also help improve flexibility and reduce lead times which leads to greater customer satisfaction.
> lean organisations are often better able to survive in times of difficulty
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Why can JIT be beneficial?
Stock levels are kept to a minimum to capital is freed up. However this relies on effective communication and other systems for order processing and delivery. JIT can help to improve working capital by freeing up illiquid worked so trade debtors are decreased as excessive stock is one form of waste
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What is quality?
The extent to which a product or operation meets its customer requirements
> fit for purpose
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Why is quality important?
It’s key in meeting customer needs
> a high quality product is one that meets customer expectations
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Why is quality important for businesses to compete?
Products must have high quality to be able to compete at the right price point
> some businesses will differentiate themselves on having a premium quality
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How can a business achieve higher quality?
Invest in technology
Sport pressures that assure quality
Work with high quality suppliers
Train employees in quality procedures
Have a clear understanding of customer needs
Achieve a quality award or mark
Involve all employees in managing quality
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How does having high quality products benefit a business?
Improves customer satisfaction helping the business to differentiate its product from competitors and add value allowing a premium price to be charged
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What is quality control?
About the product
Quality is checked at the end of the production process
Focus on identifying faults
Quality control is a specific - role maybe one person
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What is quality assurance?
Quality assurance is about the process
All employees are involved
Quality is consisted at every step of the production process
Focus on continual improvement of quality
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What are some difficulties in improving quality?
Customers perceptions of quality is constantly changing
A sucessful business could let quality slip if there is no incentive to out perform rivals
improving quality can add more work so may be naturally opposed by the workforce
Measuring quality can be difficult and expensive
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What are some consequences of poor quality
If products need recalling this can be extremely expensive
Poor quality can damage brand reputation
There are many legal costs if customers sue the company
Correcting poor quality can be very expensive
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What is TQM?
Total quality management
> makes quality the priority though out the organisation
> quality is everyone’s responsibility no matter what their role is
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What principles is quality underpinned by?
Quality chains
Quality policies
Controls
Team work (people work in teams to solve problems and identify opportunities)
Customer views (feedback)
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What are quality chains?
The concept of the internal customer
> each person in the production chain is a customer of the preceding link (process)
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What are quality policies?
Clear policies are established on the expectations of all employees and how they should achieve the highest quality
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What are controls?
Things put in place to guarentee quality is achieved
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What are quality circles?
A small team who voluntarily form to work on a specific issue or problem where quality is a concern or an opportunity for improvement has been identified
> there should be representation from across the organisation and all parties have an equal voice in the development process
> quality circles ensure all aspects of the supply chain are considered and give people an opportunity to work closely as a team
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How is quality a competitive advantage that allows a business to add value?
Quality is a significant route for a business to add value to its products
> achieving a high level of quality will allow a business to charge a premium price and ensure customers are highly satisfied
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Why is quality subjective
It is unique to any one customer
> businesses most continually improve quality and adapt to the needs of customers if they are to maintain any competitive advantage
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What is kaizen
Continuous improvement
> key concept in lean production
The business uses techniques such as TQM and quality circles to identify areas of improvement throughout the organisation instead of settling for good enough
Small teams work together to identify small changes that can build to large scale improvements over time
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What is GDP?
Gross domestic product
> a measures of a countries total output of goods and services over a period time
> GDP changes over time are represented by the business cycle
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What are the 4 stages of the business cycle?
Boom
Recession
Slump
Recovery
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What does boom mean?
High rates of economic growth and production
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What does recession mean?
Output starts to fall and growth declines
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What does slump mean?
Prolonged period of economic decline
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What does recovery mean?
Economy starts to pickup after a period of decline
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What are the features of a boom economy?
High profits
Low unemployment
High inflation
Shortages in supply
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What are the features of a recession economy?
Production declines as demand falls
Governments use policies to stimulate growth
Consumer and business confidence starts to fall
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What are the features of a slump economy?
High levels of unemployment
High rates of business failure and closure
Low interest rates
Low levels of spending and investment
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What are the features of a recovery economy?
Increasing consumer confidence
Businesses start to take on new investment and employees
Share capacity is used up
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How might an economic boom impact strategic and functional business decisions?
Firms make strategic decisions to expand into new markets via market development
Functional decisions of expand workforce and increase recruitment
Businesses seek opportunities for efficiencies and cost reductions as a result of economies of scale
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What does exchange rate mean?
The price of one currency expressed in another
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Why might a UK business purchase the currency of another country?
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How might an economic recession impact strategic and functional business decisions?
Expansion plans are shelved
Market penetration strategies become more attractive as they are low risk
Businesses stockpile products
Functions try to increase efficiency and cut costs
> strategies such as flexible working are implemented
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How might an economic slump impact strategic and functional business decisions?
Businesses adopt a strategy of rationalisation
Functional decisions may include redundancies, scale down of production and reduction in capacity
Businesses reduce prices and focus on their most profitable product lines
Businesses may decide to cease trading or leave certain markets
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How might economic recovery impact strategic and functional business decisions?
New business start ups emerge
Businesses investment rises
> product development strategy
Businesses take on new employees and increase contracts to meet growth in demand
Functional decisions focus on ways to increase productivity
> training, growth in production, increased marketing activity
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What does it mean if a currency (using the £ as an example) strengthens?
If the pound increases in value against other currencies it is said to strengthen: this is because it can buy more of another country for example more euros or fewer pounds are needed to buy one euro
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What does it mean if a currency weakens?
If the pound decreases in value against other currencies it is said to weaken thus means it will buy fewer euros or more pounds are needed to buy euros
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What will a business try and avoid when exchange rates are volatile?
Uncertainty - businesses may set an agreed rate for future transactions
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What may a business try and do when the exchange rates are favourable?
Target a specific international market
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What might importers do when their currency is strong giving them a favourable exchange rate?
Stock pile raw materials and products
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What might importers do when their currency is weak giving them a poor exchange rate?
May switch to international suppliers
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What might exporters do when their currency is weak giving them a poor exchange rate?
Increase promotion in foreign markets
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What might exporters do when their currency is strong giving them a favourable exchange rate?
Lower prices to limit the impact of a strong currency
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What is inflation?
The general rise in prices over time
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How is inflation measured?
The consumer prices index (CPI)
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What will high and low rates of inflation do to a business?
A low rate of inflation can be managed by a business but a high rate will increase costs and reduce demand
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What might a business do in times of high inflation?
Businesses may increase prices to pass on costs to consumers or may decide to absorb rises in costs
Businesses will look to device internal costs to protect profits
Price rises may fuel further inflation
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What might a business do in times of low inflation?
Businesses feel confident in a stable economic environment
Businesses may look to invest and grow
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What might a business do in times of deflation?
Businesses may struggle to pay debts and assets may have to be sold to pay off debts if deflation persists
Low demand may lead to redundancies and rationalisation
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What counts as deflation?
Below 0% inflation
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What’s a high inflation rate?
4-10%
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What’s a low inflation rate?
1-3%
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What’s hyperinflation?
Above 10%
> severe impact on wages, savings and business planning
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How can governments use policies to try and influence economic activity?
They can try and maintain growth and limit negative factors such as high levels of inflation, unemployment and the negative externalities of growth
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How can governments use policies to manipulate interest rates and what impacts does this have?
Interest rates are set by the Bank of England
Manipulating interest rates is a policy to adjust the amount of money in circulation and therefore influence spending and economic activity.
The interest rate is the cost of borrowing money and the reward for saving.
Increasing or decreasing interest rates can also be a strategy to influence the value of a country’s currency.
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What does interest rates actually mean?
The interest rate is the cost of borrowing money and the reward for saving.
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What is the impact of high interest rates on business activity?
High interest rates means:
consumer and business spending falls
Inflation falls
Stronger £
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What’s the impact of low interest rates on business activity?
Low interest rates means:
Consumer and business spending rises
Inflation may rise
Weaker £
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What is the budget balance?
The difference between government income and expenditure in the fiscal year
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What are some different taxes?
Income tax
NI payments
VAT
Corporation tax
Customs and excise duty
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What are some examples of government expenditure?
Infrastructure
Human capital
Physical capital
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What are do expansionary policies do?
Reduces direct and indirect taxes to increase disposable income
Increases borrowing
Increases spending in areas like health and education
Spending stimulates demand for businesses and creates jobs
> budget deficit may rise
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What do contractionary policies do?
Increase direct and indirect taxes to slow down growth and reduce the budget deficit
Reduce spending in areas such as health and education
Pressure on inflation slows
Budget deficit may fall or reach a surplus
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What are consumer protection laws?
Consumers want to have clear information about what they are buying and they want to buy goods at a fair price and of good quality. Consumer protection laws are in place to ensure that businesses do not exploit customers.
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What do consumer protection laws ensure?
Products are safe
Products are of an approved standard and quality
Customers are treated fairly if they are unhappy
Product information is readily available
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What is an example of an item of consumer protection legislation?
The sale of goods act 1979
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What is competition policy?
Legislation put in place to protect the interests of consumers and businesses
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What does competition policy aim to prevent?
Cartel activity - businesses working together to manipulate the market and limit competition
Abuse of market power and imposing unfair conditions on small suppliers
Anti competitive practices like mergers and acquisitions
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What’s an example of competition policy?
Competition act 1998, enterprise act 2002, and enterprise regulatory reform act 2013
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What is employee legislation?
Labour laws that aim to prevent workers from being exploited. They legislate on issues such as pay, working conditions and grievances. Legislation also governs on the powers of trade unions
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What are some examples of labour laws?
The working time regulations act 1998
National minimum wage act 1998
Equality act 2010
Collective labour laws include
Trade union act 2016
Employment relations act 2004
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What are environmental protection laws?
Legislation that aims to internalise any negative externalities associated with business activity, therefore making businesses may for the full cost of cleaning up or repairing any damages to the environment caused by their production process.
> much of this comes from EU directives
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What does environmental protection cover?
Pollution
Destruction of wildlife
Traffic congestion
Resource depletion
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What are some specific examples of environmental legislation?
The environmental protection act 1990
The environment act 1995
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What is health and safety legislation?
Ensures that businesses have to provide a safe and healthy workplace and facilities that are similarly safe for customers
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What does health and safety legislation cover?
Maintaining temp and noise levels
Providing adequate breaks and rests
Providing facilities for disabilities
Guaranteeing hygiene levels
Preventing social and emotional stress
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What is an example of a health and safety legislative body?
The health and safety executive is an organisation that investigates health and safety in dividends within industry
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What is the impact of legislation on a business?
Legal change imposes costs
Not implementing necessary changes could limit competitiveness, damage to the businesses reputation or worse
Legal changes can also create new opportunities for some businesses and encourage innovation
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What is one of the biggest threats to a business chances of success?
The threat of competitors
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What are some determinants of competitiveness?
The typical profit margin that businesses can generate
The growth rate of the market
The level of regulation within the industry
The volatile costs incurred by businesses
The seasonality of the product
The level of differentiation between competitors
The bargaining power of suppliers and customers
The pace of innovation and new product development
The number and size of competitors in the market
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How can competition be good and bad for a business?
Competition can lead to:
A fall in prices leading to lower profit margins
Increased costs of promotion
Improved efficiency
Increased innovation
Wider product ranges
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What can high levels of competition lead to?
Some businesses acting unethically
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How does size of a market impact competition?
The level of competition is likely to be less in smaller markets but this is not always the case. Small markets may have a limited population; therefore any two businesses can have significant rivalry. Small businesses can also access global markets owing to online sales.
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What are the biggest to smallest markets?
Global markets
National markets
Regional markets
Local markets
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What’s good about operating in a big market in terms of competition?
Wider customer base
Less volatility than small markets
More regulations and scrutiny
Potential for international competition
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What’s good and bad about operating in a small market?
Less competition
Opportunities for expansion come regularly
Easier to build loyal customer relationships
Threat of new entrants
Fewer economies of scale
