Theme 2 Flashcards
What are the three reasons for why you need finance?
1- starting up the business
2- growing the business
3- other problems (e.g. cash flow or large orders)
Who / what are business Angels?
Wealthy individuals who invest their personal capital into start-up companies.
(THINK OF DRAGONS DEN)
Is a loan from a bank short term, medium term or long term?
All three
Is an overdraft short or long term?
Short term
What does unlimited liability mean?
The finances of the business are treated as inseparable from finances of the business owner
There are 2 types of businesses that have unlimited liability, what are they?
1- sole traders
2- partnerships
How are unlimited liability businesses financed?
Hint= 3
1- owners capital
2- bank finance (e.g. a loan or an overdraft)
3- leasing (renting equipment rather than buying it)
How are limited liability businesses financed?
Hint= 5
1- share capital 2- bank finance 3- venture or Angel capital investment 4- peer-to-peer or crowdfunding 5- leasing and trade credit
What should the heart of a business plan be about?
Competitive advantage
What does forecasting mean?
Estimating future sales or costs with accuracy
What is the equation for sales revenue?
Sales volume x Price
How do you work out sales volume?
Number of units sold in a time period
What are fixed costs?
Costs which DON’T vary directly with the level of output (e.g. Rent, Equipment..)
What are variable costs?
Costs which vary DIRECTLY with level of output (e.g. Wages, Raw Materials)
What is the equation for total costs?
Fixed costs + Variable costs
What does break-even compare?
A firms revenue with its fixed and variable costs to identify the minimum level of sales needed to cover costs
How do you work out contribution per unit?
Selling price - Variable costs per unit
How do you work out total contribution?
Contribution per unit x Quantity sold
What is the equation for break-even output?
Fixed costs ➗ (Selling price per unit - Variable cost per unit)
What are the limitations of break even graphs?
Hint= 4
1- model is a simplification (assumes v costs increase constantly)
2- assumes firm sells output at a single price
3- assumes all output is sold
4- it is a static model (sales trends not taken into account)
Can you name the definition for budgets?
A target for costs or revenue that a department or a firm must reach in a given time
What do income budgets and expenditure budgets do?
IB- sets a floor (minimum target)
EB- sets a ceiling (maximum target)
What is a zero-based budget and what is a drawback to them?
- means budget is 0 and budget holders must justify each pound they need
- time consuming as can take a while to justify why you need £150,000 rather than £110,000
Can you say the calculation for net profit?
Operating profit - Financing and Tax
What does net profit mean?
Profit for the year
What is the calculation for Gross Profit?
Revenue - Costa of sales
How do you work out Operating Profit?
Gross profit - Fixed overheads
Do you know what liquidity measures?
It measures the ability of a firm to find cash to pay its bills
What does current ratio do?
Examines liquidity position of the firm
How do you work out current ratio?
Current assets ➗ Current liabilities
How is current ratio and acid test ratio expressed?
As a ratio, e.g. 2:1
What does acid ratio examine?
Businesses liquidity position but excludes stock from total of current assets
How do you work out acid ratio test?
(Current assets - Inventories) ➗ Current liabilities
How can you improve liquidity?
Hint= 4
1- sell under-used fixed assets
2- raise more capital share
3- increase long term borrowings
4- postpone planned investments
What are the three factors influencing efficiency?
1- level of wastage in production process
2- if you have the right technology
3- if managers have achieved the right balance between the variable factors that affect efficiency
What does the definition productivity mean?
Output per worker in a time period
Can you explain what job production means?
Producing a one-off item for a customer
Do you know what batch production means?
Producing a set number of identical items
How would you explain the definition flow production?
Continuous production of a single item
What does cell production mean?
Small production line (group working process)
Does capital intensive production have high or low financial barriers to entry?
High
Does labour intensive production have high or low financial barriers to entry?
Low
What is the equation for capacity utilisation?
Current output ➗ maximum possible output x 100%
What does capacity utilisation measure?
Firms output level as a % of the firms maximum output level
A football stadium is at its full capacity when all the seats are full
What is buffer stock?
A minimum stock level held in case of emergency stock needed
Can you name 2 implications of having too much stock?
1- prevents firms from re-investing
2- increased storage costs
3- increased stock wastage if product goes out of date / style
4- increased finance costs
Can you name 2 implications of having too little stock?
1- can’t manage last minute orders
2- worker downtime if components have been delayed
What does JIT management of stock mean?
The attempt to operate with a zero buffer stock
What does lean production aim to do?
Produce more whilst using less
What kind of firm benefits from inflation and why?
- firms with large loans
- because inflation erodes the real value of money owed
What are interest rates?
Prices charged by a bank per year for lending money or providing credit
What do exchange rates measure?
Quantity of foreign currency that can be bought in one unit of domestic currency
Can you explain the term appreciation?
A fall in the value of the pound
What are the four effects on business of changes in the economy?
1- the business cycle
2- inflation
3- interest rates
4- exchange rates
What does retained profit mean?
Profit kept in the company rather than payed to shareholders as a dividend
Can you name the 3 sources of internal finance?
1- owners capital
2- retained profit
3- sale of assets
What does the term legislation mean?
Laws passed by parliament that relate to business operations
What does the sale of goods act say?
- that good must be fit for purpose which they are sold
- they can get refunded if product is of bad quality
What does the trade descriptions act say?
- forces companies to ensure that every statement about the product is true
Can you name the 5 key areas of the employment law?
1- minimum wage 2- right to a contract of employment 3- increased right to sick, maternity and paternity leave 4- redundancy 5- trade union rights
What is a disadvantage to having a minimum wage?
Business pays more as wages increase so they could fire some employees which leads to unemployment
What is an advantage to trade union rights?
Can make working environment better so you have happy and motivated staff
What are the two environmental laws?
1- landfill tax
2- environmental protection act
What does the health and safety at work state and do?
1- states you have to provide a safe working environment
2- identifies and prosecutes any serious errors by companies
What strategies could firms use to be more competitive in the market?
- USP
- predatory pricing
What firms might be forced to do in a competitive market?
1- price cut
2- increase product differentiation
3- collusion (managers from diff firms assemble to discuss ways to work together to restrict supply and or raise prices)
