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edexcel alevel business > theme 2 (in papers 2 & 3) > Flashcards

theme 2 (in papers 2 & 3) Flashcards

managing business activity

1
Q

what are some internal sources of finance?

A
  • owners capital
  • retained profit
  • sale of assets
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2
Q

What are the benefits to using internal sources of finance?

A
  • Internal finance is often free (e.g. it does not involve the payment of interest or charges)
  • It does not involve third parties who may want to influence business decisions
  • Internal finance can usually be organised very quickly and without significant paperwork
  • Businesses that may fail credit checks (necessary for a bank loan) can access internal finance sources more easily
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3
Q

what are the drawbacks of using an internal source of finance?

A
  • opportunity cost, once retained profit has been used, it is not available for other purposes
  • may not be sufficient to meet the needs of the business
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4
Q

what are some external sources of finance?

A
  • loans
  • share capital
  • venture capital
  • overdrafts
  • leasing
  • trade credit
  • grants
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5
Q

what is limited liability?

A
  • Limited liability means that the business owner or owners are only responsible for business debts up to the value of their financial investment in the business.
  • This means that a creditor can only take assets or finances belonging to the company.
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6
Q

what is unlimited liability?

A
  • is when an owners personal assets are at risk.
  • This means that if the business were to fail and go bankrupt, the owner’s personal assets would be sold in order to try and recover the debt.
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7
Q

what are the implications of unlimited liability?

A
  • There is no legal distinction between owners with unlimited liability and the business
  • As a result, these business owners may have to use their own personal assets to pay debts or legal fees
  • E.g. a sole proprietor may need to sell their home to pay creditors if their business fails.
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8
Q

what are the implications of limited liability?

A
  • Companies are incorporated and owners are considered a separate legal entity to the business.
  • This means that if a company fails, the owners would lose their investment but would not have to use their assets to meet additional debts or legal fees.
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9
Q

what does a business plan do?

A
  • helps finance providers assess te business model.
  • provides structure assesment of the opportunities and risks.
  • encourages analysis of the competitive position of the business and the market.
  • helps determine the amount of finance required.
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10
Q

why is cash flow forecasting important?

A
  • cash flow problems are why most businesses fail.
  • cash is king, its the lifeblood of a business.
  • cash is limited so it needs to be managed carefully.
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11
Q

what are the benefits of cash flow forecasting?

A
  • advanced warning of cash shortages.
  • makes sure that the business can afford to pay suppliers and employees.
  • spot problems with customer payments.
  • provide reassurance to investors and lenders that the business is being managed properly.
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12
Q

how do you work out net cash flow?

A

cash inflow - cash outflow

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13
Q

how do you work out closing and opening balance?

A

opening = amount business starts with each month.
closing = opening balance + net cash flow
- a negative closing balance suggests business needs bank overdraft or additional financing.

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14
Q

define cash flow forecast.

A
  • an analysis of estimated cash inflows and cash outflows over a future period and the resulting impact on cash balance.
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15
Q

what are the limitations of a cash flow forecast?

A
  • theres some uncertainty.
  • sales could prove lower than expected.
  • customers pay not pay on time.
  • costs pay proof higher than expected.
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16
Q

what does sales forecasting help with?

A
  • human resource plan
  • production / capacity plans
  • cash flow forecasts
  • profit forecasts and budgets
  • a very useful part of competitve analysis and helps to focus market research.
17
Q

what are the key factors that affect sales forecasts?

A
  • consumer trends
    . demand in markets change as consumer tastes do.
  • economic variables
    . intrest rates, GDP, tax, exchange rates
  • competitor actions
18
Q

when is sales likely to be inaccurate?

A
  • business is new
  • market subject to significant distruption from tech change.
  • demand is highly sensitive to changes in price and income (elasity)
  • product is a fashion item.
  • significant changes in market share
  • business has demonstrated poor forecasting abilities in the past.
19
Q

how do you calculate sales revenue?

A

selling price x no. of units sold

20
Q

how do you work out average total costs?

A

total costs
–.————–
quantity

21
Q

what is economies of scale?

A

occurs when production rises at a rate faster than costs, with costs then being spread over a larger amount of goods.

22
Q

what is diseconomies of scale?

A

occurs when a business grows so large that the costs per unit increase.

23
Q

how do you calculate contribution?

A

selling price - variable costs

24
Q

what is contribution?

A

the amount contributes towards paying off the fixed costs of the business.

Once the fixed costs have been paid off, then the contribution starts to contribute to the profits of the business.

25
Q

define break-even.

A

The Point where a total revenue earned for a product is exactly equal to its total costs and where the business is making neither a profit nor a loss.

26
Q

how do you calculate the break-even point using contribution?

A

fixed costs / contribution

27
Q

what is the margin of saftey?

A

the difference between the actual level of output of a business and its break even level of output.

28
Q

how do you calculate the margin of saftey?

A

actual level of output - break-even level of output

29
Q

what are the limitations of break-even analysis?

A
  • less useful if the business sells more than 1 product.
  • the accuracy depends on the quality of the data.
  • it assumes all output is sold.
30
Q

what is a budget?

A
  • A financial plan that a business sets about costs and revenue.
  • The budget is usually closely aligned with the business objective.
31
Q

why do business’ have budgets?

A
  • planning and monitorting
  • control
  • coordination and communication
  • motivation and efficiency
32
Q

what ae the different types of budgets?

A
  • historical budgeting
  • zero budgeting
33
Q

what is historical budgeting?

A
  • uses last years figures as the basis of the budgets.
  • realistic in that its based on actual results.
  • however circumstances might have changed i.e. new products, lost customers.
  • doesnt encourage efficiency.
34
Q

what is zero budgeting?

A
  • budgeted costs and revenue are set to 0.
  • its based on new proposals for sales and costs.
  • makes budgeting more complicated and time consuming, but potentiallymore realistic.
35
Q

what is variance analysis?

A
  • the difference between a figure budgeted and the actual figure achieved by the end of the budgetary period.
  • Variance analysis seeks to determine the reasons for the differences in the actual figures and budgeted figures.
36
Q

what is adeverse variance?

A

where the actual figure achieved is worse than the budgeted figure.
An adverse variance in a revenue or profit budget is where the actual figure is lower than the budgeted figure.
An adverse variance in a costs budget is where the actual figure is higher than the budgeted figure.

37
Q

what are the 3 types of budgets?

A
  • revenue
  • costs
  • profit
38
Q

what is favorable variance?

A
  • where the actual figure achieved is better than the budgeted figure.
  • A favourable variance in a revenue or profit budget is where the actual figure is higher than the budgeted figure.
  • A favourable variance in a costs budget is where the actual figure is lower than the budgeted figure.
39
Q

what are the limitations of budgeting?

A
  • Budgeting requires significant expertise to be of genuine use to a business and there are several difficulties associated with their construction.
  • can lead to conflict and competition.
  • encourages the focus on the short term rather than long term.
  • can have a negative impact on motivation.
  • depends on the data.

edexcel alevel business (2 decks)

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