Theme 2- managing business activities Flashcards
What is the formula for contribution per unit?
Selling price per unit - variable cost per unit
What is the formula for total contribution?
Contribution per unit x quantity sold
What is the definition of contribution?
The difference between the variable cost per unit and selling price per unit
What is break-even?
It compares a firms revenue with its fixed and variable costs to identify the minimum level of sales needed to cover costs
What is the break-even point?
When total fixed costs + total variable costs = total revenue
What is the formula for the break-even output?
Fixed costs / selling price per unit - variable cost per unit
fixed costs / contribution per unit
What is the formula needed to use contribution in order to find profit?
Total contribution - fixed costs = profit
How can one increase the total contribution?
Either sell more units or boost contribution per unit by increasing prices or cutting variable costs
What is a break-even chart?
It is a graph showing the revenue and costs for a business at all possible levels of output. The horizontal axis represents costs for the business and the vertical axis represents costs and sales in pounds.
What is the margin of safety?
The amount by which demand can fall before the firm starts making losses, it is the difference between the actual and the break-even point
How do you calculate the margin of safety?
Sales - break-even point
What are the effects of a price rise on a break-even chart?
- it’s revenue line will rise more steeply than before
- it will lower the break-even output
- it will increase the profit potential at each level of output
What is the effect of a rise in variable costs on a break-even chart?
- the variable costs line rise more steeply and this will affect the total costs and so will the break-even profit, you will have to sell more to achieve the break-even output
What are the advantages of break-even analysis?
- estimate the future level of output they will need to produce and sell in order to meet given profit objectives
- it’s easy and quick to do, managers can see the break-even output and margin of safety immediately so they can take quick actions to cut costs or increase sales if they need to increase their margin of safety
- business can use break-even analysis to help persuade the bank to give them a loan
What are the limitations of break-even analysis?
- the model is too simple. It assumes that variable costs increase constantly, which ignores the benefits of economies of scale
- it assumes that all output is sold, in times of low demand, a firm may have difficulty in selling all that it produces
- break-even analysis assumes that the firm sells all of its output at a single price
What is the purpose of budgets?
- to ensure that no department or individual spends more than the company expects, preventing unpleasant surprises
- to provide a yardstick against which a manager’s success or failure can be measured
- the motivate the staff in a department, budget figures can be used for assessing staff performance, then staff know what they must achieve
What is budgeting?
It is the process of setting targets, covering all aspects of costs and revenues. It is a method for turning a firm’s strategy into reality.
What is a budgeting system?
It shows how much can be spent over a time period and gives managers a way to check whether they are in track.
How do you construct a budget?
- make a judgement of the likely sales revenue for the coming year
- set a cost ceiling that allows for an acceptable level of profit
- budget for the whole company’s costs to then be broken down into each division, this can be then broken down further for each manager
What are the three types of budgeting?
1) revenue budget- sets out expected sales revenue from selling products, includes levels of sales, a start-up would have a lower revenue
2) profit budget- combining revenue and expenditure budgets to get profit/loss, new business only have a profit later
3) expenditure budget- also known as cost/production budget, sets out expected expenditure on monthly basis, plan of costs required for operation of business
What are the two methods for budgeting?
Historical budget
Zero-based budget
What is a historical budget and what are the pros and cons?
This is treating last year’s budget figures as the main determinant of this year’s budget. Minor adjustments will be made for inflation or other foreseeable changes.
Pros: it is quicker, increased efficiency
Cons: may not be very accurate, cannot predict economic changes and so can be risky
What is a zero-based budget and what are the pros and cons?
This sets departments budget as zero and works it way up, it demands that budget holders, in setting their budget, justify every pound they ask for. This helps to common phenomenon of budgets creeping upwards each year.
pros:
- encourages improvement to the business, each department are able to innovate and improve productivity through investing
cons:
- the only serious drawback is that it takes a long time to find good reasons to justify why you need a budget if £150,000 instead of £100,000
- because it is so time-consuming, it is sensible to use it every few years, rather than every year
What is the best criteria for setting budgets?
- relate the budget directly to the business objective, if a business wants to increase sales and market share then the best method may be to increase the advertising budget
- to involve as many people as possible in the process, people will be more committed to reaching the targets
How is a simple budget statement is set out by?
Income Variable costs Fixed costs Total expenditure Profit
What is variance analysis?
The difference between the budget and actual values
Variance is the amount by which the actual result differs from the budgeted figure, it is usually measured each month.
Variances are referred to as adverse or favourable, not positive or negative.
These regular variance statements provide an early warning. If the sales are slipping then the manager might respond by increasing marketing support.
What is favourable variance?
Is one that leads to higher than expected profit (revenue up, costs down)
What is adverse variance?
Is one that reduces profits (costs being higher than budgeted level)
Why do budgets?
- to provide direction, efficiency
- to control income and expenditure, establish priorities
- to monitor performance, motivation
- to enable spending power to be delegated to local managers, local managers know what is best for the individual firms, allows for motivation and speeds up decision making
What are the difficulties of budgeting?
- determining sales is outside the control of the managers in some cases, e.g. Chessington’s sales are weather dependant
- businesses need to decide whether designing and implementing a budgeting system will cost more in terms of time and money that it could save, assess the opportunity costs
- budgets need to be changed as circumstances change, economic cycle
- department rivalry results possibly in short term decisions rather than the right long term decisions
What is profit?
it is the financial gain of a business through trading and can be found by deducting expenditure from revenue
What is the formula for gross profit?
Revenue - cost of sales
What is operating profit?
Gross profit - fixed overheads
What is formula for the profit for the year(net profit)?
Operating profit - net financing and costs
How is a statement of comprehensive income structured?
1) revenue (sppu x q)
2) costs of sales
3) gross profit (revenue - COS)
4) fixed overheads
5) operating profit (gross profit- fixed overheads)
6) corporation tax
7) net profit (operating profit - financing and tax)
How can profitability be measured?
Using gross profit margin, operating profit margin and profit of the year (net profit) margin
Profitability- states profit as a % of sales
How do you calculate gross profit margin?
Gross profit / sales revenue x 100
How do you calculate operating profit margin?
Operating profit / sales revenue x 100
How do you calculate net profit margin?
Net profit / sales revenue x 100
What are the two ways of increasing profits?
Increase revenue
Decrease costs
How can we decrease costs in order to improve profits?
- cutting the costs without damaging the quality in any way
this can be done by: - better bargaining with suppliers
- better ways of producing may lead to higher profits per sale, automation?
- restructuring, delayering and redundancies
- when decreasing the costs the company needs to be careful to ensure that reducing costs does not lead to a deterioration of the service or quality of the product
How can we increase the price in order to improve profitability?
- this would increase the profit by sale, but the danger is that the sales overall may fall so much that the overall business profits are reduced
- the impact of your increase in price depends on the price elasticity of demand, the more price elastic it is, the greater the fall in demand will be
What is the difference between cash and profit?
Cash is the money available, the money circulating round a business at any time, this would not include part of a loan
Profit is the money generated by selling products, revenue - costs
- profit is recorded straight away but cash will not be recorded until it is paid out or received which could be in a different trading year
- a business can trade for many years without a profit but a profitable business may go bust if it runs out of cash to pay a supplier or staff
- to improve profitability a business must either increase revenue or reduce costs but if owner introduce cash via savings or a loan this will not affect the profit figure
How do we distinguish between revenue and cash inflow?
- revenue is not the same as money in. Revenue is the value of sales made over a specific period
- whereas revenue comes from just one source (customers), cash inflow can come from many sources and is not limited to trading (could be from loans)
- taking out a bank loan could not be classed as revenue but it does put cash into your bank account
- so cash inflows can be a part of the revenue, but they don’t have to be
How do we distinguish costs from cash outflow?
costs are the sums of money that are paid out in the whole product life cycle.
there are lots of reasons for cash outflow. Paying for the business costs is only one of them. It also includes dividends or paying out a bank loan.
What is profit utilisation?
The way in which profit is used, I.e, spent between how much is distributed to shareholders and how much is reinvested back into the business, known as retained profits
What is profit quality?
Measure of whether profit is sustainable in the long run. High quality is one that continues and low quality arises from exception circumstances
What is liquidity?
It measures the ability for a firm to find the cash to pay its bills. The cash needs to be available in a current bank account I’d close to being available, such as a payment promised for next week.
How do you measure a business’ liquidity?
The first thing he to identify the bills, these are the liabilities. Then you must measure the assets. If the amount of assets is higher than liabilities then their liquidity is sound.
What is current ratio?
This looks at the relationship between current assets and current liabilities. it shows the liquidity of the business. The desired ratio is 1.5:1. A low current ratio means that they may struggle to repay their debts.
What is the formula for current ratio?
Current assets / current liabilities
What is acid test ratio?
This examines the business’ liquidity position by comparing the current assets and liabilities but omits the stock from the total current assets. The ideal result is 1:1
What is the formula for acid test ratio
(Current assets - inventories) / current liabilities
What are the ways of improving liquidity?
- selling under-used fixed assets
- raising more share capital
- increasing long-term borrowings
- postponing planned investments
- improving the management of working capital
What is working capital and explain its management
it is the finance available for the day-to-day running of the business. They need money in order to buy equipment and to pay staff’s wages.
Managing working capital is about ensuring that cash is sufficient to meet the cash requirements at any one time. If bills cannot be paid on time then they have serious problems.
define the working capital cycle
Managing working capital is a continuous process. When a business starts up, it takes time to generate income. As the business cycle gets going, income from customers will be available to pay for expenditure. the business needs to make sure that there is always sufficient cash to meet daily requirements.
explain the process of the working capital cycle
Whilst capital is being injected into the business:
Sell to customers in credit, customers pay up, buy materials and produce goods
This process is then repeated
Why is working capital important?
- dividend payment
- shows the business’ liquidity
- important short term and long term as it means business’ can survive and grow
- for manufacturing companies, they can incur costs many years before receiving payments, e.g. 2012 olympics
What are the causes of working capital problems?
- poor control of inventories/stock
- unexpected events
- overtrading = a business expanding too quickly without financial reluctancies to support it
- too many short-term loans and overdrafts
What are ways of improving working capital?
- negotiate prices and terms with suppliers
- sell long term assets for cash
- manage stock levels well, e.g. have enough materials for uninterrupted production and minimise re-ordering costs
- cash flow forecasting to plan ahead to know how much cash is needed in the future
What is business failure?
The inability to keep the business going, either because of inability to keep up with the bills/liabilities or because the profits being made are too meagre to be worth continuing
What are forbes’ reasons why new businesses fail?
1) not really in touch with customers through deep dialogue
2) no real differentiation (lacking a unique value proposition)
3) failure to communicate your unique proposition in a concise and compelling way
4) leadership breakdown at the tip (a dysfunctional leader)
5) inability to nail a profitable business model with sufficient revenue streams
What are the 3 internal causes of business failure
1) a marketing failure- businesses must foresee threats and find a marketing solution, finding new products or services to meet the needs of today’s customers, failure to adapt to a new trend
2) a financial failure- this could be done by over-expanding too much in new machinery at a time of declining sales, businesses collapse due to bad management of finances.
3) a systems failure- if a new IT system causes confusion, the result can be disastrous. Stock ordering may go wrong, leaving some empty whilst others overflow.
What are the 4 external causes of business failure?
1) a fundamental change in technology- a rival gets a competitive advantage that is too great to be matched
2) the arrival of a competitor- these competitors may be offering something that you are not and so sales may plummet as they steal all your customers
3) economic change- in 2009 during the recession, the production of cars plummeted, this threatened the future of major car companies due to the lack of sales
4) the behaviour of banks- some banks have been accused of making a profit from client companies in financial difficulties. There are cases of forced closure so that the banks can sell their assets to make a profit.
What are the financial causes of business failure?
There are two triggers to financial failure: the one is the inability to pay bills and the other is the result of a big investment going spectacularly wrong.
Most financial collapses, though, are due to running out of cash, this can be because of:
1) the business may have been running below break-even for some period. If the business cannot be returned to profit, cash will run out at some point.
2) a cash flow crisis may occurs, perhaps unexpectedly. If a company manages to get distributed by a big company and then they decide to stop selling their products then the company may have to turn for finance but if the banks are insisting that an overdraft needs to be payed within 24 hours then they may be forced to close down
3) overtrading- if a rise in demand encourages a business to pursue rapid sales growth, the strain on cash flow can prove too great, causing the company to collapse
What are the non-financial causes of business failure?
The two main causes are a suffer lurch in sales towards competitors or a steady loss of sales as the business loses its long-term competitiveness
1) poor management of people or operations as this can lead to IT failures and poor customer service from unhappy employees
2) thriving competitors and steady sales decline
How is a statement of financial position/balance sheet structured?
1) Non current assets
2) Current assets
3) Current liabilities
4) Working capital (CA-CL)
5) Non current liabilities
6) Net assets (NCA+WC-NCL)
7) Financed by
8) Total equity (should balance with net assets)
What is a statement of comprehensive income?
- it sets out the revenues generation in the year together with all the costs incurred
- PLCs and LTDs need to publish their accounts every year by law
- as part of those financial accounts they need to show their profit and loss and this appears in their SOCI
What is a current asset?
Own for a short period
- assets that are quickly and easily turned into cash
e.g. cash and stock
What is a current liability?
Owe within a year
Short term loan, customer deposits
What is a NCA/fixed asset?
own for more than a year
Machinery
Property
What is a NCL
owe for more than a year
Long term loans
mortgages
what part of an income statement are employees interested in and why
net profit
- see if their wages go up
what part of an income statement are the government interested in and why
profit before tax
- see how much the business should pay in tax
what part of an income statement are shareholders interested in and why
net profit
- see their dividends
what part of an income statement are managers interested in and why
operating profit/net profit
- see if high costs are limiting the business, see how much they will have to spend
what part of an income statement are suppliers interested in and why
net profit
- see if the business has the funds
what part of an income statement are potential shareholders interested in and why
net profit
- see if theres a steady stream of money coming in
what is return on capital employed (ROCE)
operating proft / capital employed (total equity + NCL)
- the higher the better
- measure firms efficiency
- investors can look at likely returns
it is improved by:
- increasing operating profit
- reducing capital employed
what are the two aspects of finance?
it can provide the numbers that help managers to make better decisions, and it can count what is happening and what has happened.
what is working capital?
the money that is left for the day-to-day running of the business
what are the 3 key financial concerns for new business start-ups?
1) How much will it cost to get a business idea to opening the doors on the first day
2) How much the running costs will be, they need a solid understanding of the fixed and variable costs
3) How much revenue can you expect from the customers you serve?
what are two methods of raising finance for the short term?
bank overdraft
trade credit
what are two methods of raising finance for the medium term?
bank loan
leasing
what are four methods of raising finance for the long term?
owners’ savings
sales of shares
reinvested profits
venture capital loans
how does a venture capital company make its money?
By investing in many businesses with great potential, some may disappoint but as along as successes have a big upside, they can be sold off for profits big enough to cover the disappointment.
identify three situation when a business might want/need to raise finance
- purchase materials
- pay staff
- R and D
- innovate
what is internal finance and what are the 3 ways?
this is money that comes from inside the business
retained profit
sales of assets
owners capital: personal savings
explain the internal source of finance of retained profit
- any profit left in the business after the cost of sales, fixed costs, tax and financing costs have been paid. It is often used to re-invest in the business.
- this is the profit made by the business in earlier years. It is the money kept in the business rather than paying it out as dividends.
- it is the best way to finance investment into a firm’s future
- logically then, the higher the profit the more likely it is that it can finance its expansion from within
explain the internal source of finance of sales of assets
- This is using a business’ assets and selling them off. They may say buildings, land, vehicles and machinery that is no longer needed
- It is a way of upgrading and is a quick way to earn cash at 0% interest
- This may cause future problems if you need it later
explain the internal source of finance of owners capital: personal savings
- This is the money put into a business by its owner or owners. This is often used when a business is first set up
- This is limited as not many will have the sufficient fundings in order to successfully rely solely on this
what are the 6 sources of external finance?
family and friends banks peer-to-peer funding business angels crowd funding other businesses
what are the 7 methods of external finance?
loans share capital venture capital overdrafts leasing trade credit grants
explain the external source of finance of family and friends and what are the pros and cons
- they can provide share capital (through the selling of shares) or can lend money
- a sole trader or partnership may find that their family want to contribute to the business. this may be for interest, a share of the profits or maybe even an interest free loan amongst family
- the majority of businesses start with a combination of owners’ capital and family and friends
pros:
- loans from family and friends will probably be offered without the need for security and at lower rates and over longer terms
- they are unlikely to need a business plan and so can save the time of not wiring one
cons:
- You may feel pressure on the relationship, what happens to the friend or member of family will affect them
- they may demand their money back at short notice
explain the external source of finance of banks and their pros and cons
- banks may lend a loan to a business to start-up or when a business wants to grow and expand
- borrowing a large sum of money to pay interest on the money you owe
- banks may also provide a business with an overdraft to help hen they have cash flow problems
pros:
- repayment plans available to suit the business
- banks will allow the business to continue running in their own way, not interfere, owners retain control of the business (unlike business angels)
cons:
- if it is a start-up business then the owner may need to use their own assets as security for the loan (e.g. their house)
- loans can be very expensive compared to other sources, interest must be paid back on time
explain the external source of finance of peer-to-peer funding
- matches businesses that need funding with investors who are looking for a good return on their investment
- this was very popular after the 2009 recession when banks were reluctant to lend money
- lending marketplaces such as funding circle have gained the trust of consumers by offering lower rates than banks to business owners who want to borrow money
pros:
- businesses can’t access to funding within a week once approved
- investors can expect returns of 6-7% whereas a savings account might only give them 3%
cons:
- if there are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount that the business needs
- the money for the loan comes from several investors, it is classified as a private business loan so you are tied up with several companies
explain the external source of finance of business angels
- Individuals who invest in the early stages of a riskier business and take an equity share in return for providing finance, advice and guidance
- an angel investor offers to lend their personal disposable income, normally in exchange for shares in the business
- angel investors take huge risks in the hope of an occasional blockbuster success
- usually smaller loan amounts than a venture capitalist
pros:
- the owner gets access to angels’ mentoring and management skills
- the owner will have no repayments or interest on the money lent
cons:
- owner needs to give a share fo the business
- not suitable for investments below £10,000 or above £500,000
explain the external source of finance of crowd funding
- a way of getting small investors to put money into a new product over the internet
- the three ways to fund are through:
1) donate- no money back but rewards like tickets or free samples
2) lend- gets money back with interest and satisfaction of contributing to success of a small business
3) invest- invest tin the business in exchange for equity or shares which may go up in value - it is more successful when the sponsors use social media to promote their firm
pros:
- the business can generate funds and also promote the business at the same time
- good alternative to loans for small business owners
cons:
- the firm will need to showcase their idea to investors and may need to put together a video and other promotional material, cost
- takes much longer to happen than a loan, is not always successful
explain the external source of finance of other businesses
- some large MNC’s are willing to invest in innovative start-ups, the companies hope to get the occasional winner among a number of duds
- In Silicon Valley, USA, this type of investment is common, but not in the UK
what is an external source of finance?
if the business is unable to generate sufficient funds from internal sources then it may need to look to external sources. there are two sources of external capital: loan capital (debt) and share capital (equity).
- loan capital carries interest rates and must be repaid in a specific time schedule
- share capital is usually rewarded by annual dividend payments, but the directors have the flexibility to cut or scrap those payments in a difficult year
explain the method of external finance of loans and its positives and negatives
- loaning money from a bank is like ‘renting’ money
- banks will lend to small businesses but may not lend when they first start-up as there is no track record or history of them making money
- The loan is set for a period of time, either being short, medium or long term. It can be paid in instalments or at the end of the period. The bank will ask for collateral to provide security if the loan cannot be repaid.
- loans are affected by interest rates- if they go up then the cost of borrowing will go up too
Positives:
- Easy to do and repayment plans available to suit the business
- as the loan is fixed for a certain length of time, the firm can produce a successful cash flow forecast, they know when and how much money will go out the business
Negatives:
- They may ask for collateral- an asset belonging to the business so is risky
- if interest rates go up then it can become an expensive source of finance
explain the method of external finance of share capital and what are the pros and cons?
- this is when a PLC makes money from the selling of shares
- If the business is a limited company, it may look for additional share capital, it can come from private investors or venture capital funds.
- Once it has become a public limited company, the firm may consider floating on the stock exchange.
Positives:
- investors are often prepared to provide extra funding as the business grows
- it can bring wise heads into boardroom
Negatives:
- the more shares sold, the more the profits have to be divided up and paid out to investors as dividends
- potential investors may require a great deal of background information before the buy the shares
explain the method of external finance of venture capital and what are the pros and cons?
- Venture capitalists invest in smaller, riskier companies with a large sum of money but in return they demand a substantial part of the ownership of the company.
- they will look for a high rate of return in a specific time period
- it is good for any start-up or early stage business that is unable to raise finance through the stock markets or from banks
- they will invest at least £50k but this can rise into millions of pounds
Pros:
- useful if the business is looking to raise a large amount of money in a short space of time, banks would not offer this
- Venture capitalists can provide advice, expertise and contacts
Cons:
- venture capital firms typically want a 20-30% stake in the business
- venture capital firms look for a strong business plan and a proven track record, making it difficult for start-up firms
explain the method of external finance of trade credit and what are the pros and cons
- When a business obtains goods and services from another business but does not pay for these immediately
- Suitable for businesses buying raw materials and stock, the buyer will have time to sell their goods in their own shop before they have to pay for them
- the wholesaler may give the buyer a discount when they use cash instead
Pros:
- no interest has to be paid on trade credit
- businesses that pay regularly on time build relationships with their supplier and secure better deals
Cons:
- if the business doesn’t pay on time then they risk being refused further credit by the supplier in the future
- not all stock is available to buy on trade credit, only applies to certain industries
explain the method of external finance of grants and what are the pros and cons?
- they are hand-outs to small firms who are making a positive difference in the community, they are given to encourage a start-up or a relocation that is considered as valuable
- they are only available to businesses that qualify, e.g. if they are providing jobs in an area of high unemployment or helping people develop skills
Pros:
- the business will not have to pay back the grant, no interest
- can be used to aid growth and increase revenue
- they will get funds without any loss of control of the business
Cons:
- there’s a lot of competition for grants, difficult to obtain one, need a successful proposal
- Often just a one-off payment, short-term
explain the method of external finance of leasing and what are the pros and cons?
- Leasing an asset means agreeing to pay a fixed monthly rental for a fixed period, such as three years, an asset is rented rather than purchased
- You end up paying more than what the product is worth but at least you have kept the cash in your bank account at the start of the period
- In the long term, leasing is more sensible than buying the asset in terms of your cash flow
pros:
- improves cash flow as it comes out in small amounts, not a shock for the business
- allows you to buy more expensive equipment due to the repayment plans
negatives:
- pricey, in the long term it is more expensive
- needs to hope that they continue earning enough to repay
explain the method of external finance of overdrafts
- An overdraft is a very short-term loan, where depositors can go into a negative balance in the bank account, it is ‘extra cash available’
- it may be organised by the bank which is short term lending of smaller amounts of money
- once it is arranged, it is an account business can dip Inyo or pay it back as they see fit
Positives:
- seen as a quick fix method to help a business over a difficult month of trading, very flexible, suited to the difficult cash flow position of start-ups
- the business will only pay interest on the amount of money that they are overdrawn, easily pay back the overdraft
Negatives:
- very risky, banks can cancel them at any time, often leading to the business not being able to repay the negative balance, leading to administration
- very expensive source of finance, higher interest rates than loans, high charges
what is unlimited liability?
When a business and its owner are the same legal entity. In this case the debts of the business are the debts of the owners, and personal property can be sold to pay the debts of the business
- If the business goes into a lot of debt and they cannot repay, the owner may be forced to sell their houses, cars, etc.
- If the owners cannot pay, they can be made personally bankrupt
- The two types of business organisation with unlimited liability are sole traders and partnerships
what are the four methods of finance appropriate for businesses with unlimited liability?
1) Owners’ capital- in the case of a partnership, an agreement may be drawn up basing the proportionate ownership of the business on the amount of capital invested by each partner
2) Bank finance, either loan or overdraft- it is easier for them to obtain bank finance because even if the business fails, the bank can recoup its cash form the personal assets of the owners
3) Leasing- signing an agreement to rent a specific asset for a specific period, therefore avoiding the cash drain caused by purchase
4) Trade credit- supplier companies wold often prefer a deal with a sole trader or partnership as they know they can recoup any debts from the individual owners if the business fails
what is limited lability?
When a business is a separate legal identity to its owners, which means that if the business goes bankrupt the owners only lose what they originally put into the business, and not their personal belongings
if the company has lots of debt the courts can force them to sell all their assets (computers, cars) and if there is still not enough money, the company is closed down but the owner/shareholders have no personal liability for the remaining debts
what does limited liability do?
- Limited liability can give owners the confidence to push their business to the next level, financed by bank loans to give security
- However these are a huge scope to fraud. They can start a business, take customers’ money, enjoy a fantastic lifestyle and then go into liquidation before the customers receive the services they paid for
what are the 5 sources of finance for limited liability businesses?
1) Share capital- part of it may be under the control of the founder and part sold onto family and friends or more publicly to the general public
2) Bank finance through bank loans and overdrafts- will have to be backed by specific collateral, especially for small companies. It is highly likely that a bank would demand a personal guarantee by the founder shareholder
3) Angel or venture capital investment- the founder suffers dilution of control over the business and they will find that loan capital is at a much higher interest rate than a regular bank loan
4) Peer-to-peer or crowdfunding- both these sources tend to keep control more effectively in the hands of the founder
5) Leasing and trade credit
explain the relevance of a business plan in obtaining finance
- The business plan helps the entrepreneur to focus on what she or he is trying to achieve.
- The plan will help the outsider understand the risks and rewards involved in the proposal
- The financier will want to see a carefully prepared plan with a well-considered proposal for the sums of money needed. Without a business plan the financier won’t trust the business’ objectives as they cannot see evidence that shows that it is likely to succeed, after all you are borrowing money from them to then eventually be able to repay
what should the business plan be based around and what are the main sections?
it should be based on competitive advantage which means identifying the features of your product that will make it succeed against competitors
It includes:
1) Executive summary: short and compelling to make the busy banker read on, needs to tell what you want and how you will ‘relieve’ it
2) The product/service: explain it from the customers’ point of view, what is different about your idea compared to competitors
3) The market: analysis of competitors, focus on market trends rather than market size
4) Marketing plan: who your market is, how you will advertise, the cost
5) Operational plan: how will the product be produced and delivered
6) Financial plan: CASH FLOW FORECAST, projections on revenue, costs and profits
7) Conclusion: ideas of the longer-term plans for the business
what is a cash flow forecast and how is it structured?
A cash flow forecast is carried out by estimating all the money coming into and out of the business.
- it shows where the business will have a shortfall of cash
1) Opening balance
2) Cash inflow
3) Cash outflow
4) Net cash flow (inflows - outflows)
5) Closing balance
what is cash inflow?
these are the sums expected to arrive each month
- this is normally the sales revenue
- it appears on the top of the cash flow forecast
what is cash outflow?
the planned payments each month, this includes both fixed and variable costs
- this is known as expenditure
- this will be bills such as wages, insurance and advertising
what is opening and closing balance?
the closing balance is the opening balance plus the net cash flow, the closing balance shows the overall state of the bank account at the end of the month
The opening balance is how much money a business has in the bank at the start of the time period
what are the 4 ways of improving your cash flow forecast?
- Production and distribution should be as efficient as possible to get the goods to the market in the shortest amount of time
- Get paid more quickly, early payment should be encouraged by offering incentives
- Keeping stocks of raw materials to a minimum, use just-in-time stock management
- Find new sources of cash inflows to generate money
what are the uses of cash-flow forecasts?
- Managers can identify times the business may be short of cash, arrange suitable finance, e.g. an overdraft
- Managers can take suitable actions to avoid cash shortages becoming a major problem, cut costs
- A way of measuring performance at the end of the year, comparisons between predicted inflows and outflows with what actually happened
- it may help the owner to secure a better deal on their finance, e.g. lower rate loan
what are the 4 limitations of cash-flow forecasts?
- only a 12 month snapshot which is very short-term to make any concrete decisions about the business, they may need longer term finance
- it is only a forecast, they are only as good as the raw data put in, entrepreneurs need to be optimistic by nature and so they may overestimate sales and underestimate operational difficulties (and therefore cash outflows)
- they risk giving the impression of certainty where none exists, as a start-up you can’t predict how long business customers will take to pay, can be risky for an investor to make decisions about the business on just the cash flow forecast alone, need a balance sheet
- it is vital to allow for contingencies- things that can go wrong. A clever cash flow forecast includes a planned overstatement of costs, to allow for unexpected problems
what is the purpose of sales forecasts?
1) avoid cash flow problems- accurately forecasting the sales can help a business to manage their production, staff and financing, avoid unforeseen cash flow problems
2) start promotional activity- if they are forecasted to have low sales then they may decide to try and increase sales through promotional activity if they are not in the decline phase of the product lifecycle
3) production capacity- use their sales forecast to decide whether to increase or decrease production, plan for changes in the industry, see if they have enough production capacity to meet demand (may need to buy or rent new premises), run more efficiently by selling excess inventory
4) frees up management time- by having a well-constructed sales forecast they can spend more time developing their business rather than responding to developments in sales, focus on other sectors of the business, increase customer service and therefore profits
what are the 3 factors that affect sales forecasts?
consumer trends
economic variables
actions of competitors
explain the factor that affects sales forecasts: consumer trends
- Consumer tastes and habits change over time and these changes can be quite dramatic
- A natural way for a forecaster to deal with this is to plot the past trends and then consider what the likely future pattern will look like
- The factors that affect medium-to-long term consumer trends include: the changing tastes and habits, demographics, globalisation and the affluence of a population
- documents like intel can help a business to identify an upcoming trend
- trade fairs are also ways that a business can research what might be new popular products
explain the factor that affects sales forecasts: economic variables
- Some products are highly sensitive because their income elasticity is high, their sales are heavily dependent on changes in consumers’ real incomes
- Variable that can affect a sales forecast include: interest rates, inflation, unemployment and GDP
- some sales contracts may not be renewed due to inflation and the rising costs of the products for the business
- if the UK economy is in the recovery phase then low cost retailers like poundland may need to forecast lower sales
explain the factor that affects sales forecasts: actions of competitors
- It is very difficult to predict the actions of competitors and so this is a barrier to making successful sales forecasting
- The arrival of competitors can majorly alter the sales of a business
- hard to predict but often significant reason why sales forecasts prove over-optimistic
- if a business has products with declining sales perhaps due to a competitor’s superior product then they might decide to produce less of those products
what is extrapolation in sales forecasting?
assuming that the pattern of future sales will continue to follow recent trends
what are the 3 difficulties of sales forecasting?
1) no guarantees
- just because a sales forecast has been written by a business, there are no guarantees that sales will meet these levels
- this could be down to a number of uncertain factors: the economic climate, the impact of terroism on tourism in some countries
2) dynamic markets
- most markets are constantly changing (technology) and so it is difficult to produce an accurate sales forecast
- the arrival of a new competitor or a change in consumer trends would majorly impact sales, cannot predict
3) sales of products may change depending on weather and seasons and we cannot predict what the weather will be like and so it is hard to forecast sales, e.g. chessington
what is revenue?
the value for total sales made by business within a period, usually a year
what are costs?
the expenses incurred by a firm in producing and selling is products, such as wages and raw materials
what are the two ways of measuring sales?
by volume and value
- Sales volume is simply the number of units sold.
- Sales revenue is what those units were sold for, volume x price
- It is hard to calculate sales revenue as many products are sold on credit, scope for uncertainty
explain business revenue
The revenue received by a firm as a result of trading activities is a critical factor in its success. Entrepreneurs start their financial planning by assessing the revenue they are likely to receive.
- Those seeking to increase their revenue can plan to sell more or aim to sell at a higher price.
- Another way to boost revenue is to charge a low price in attempt to sell as many units as possible, this may lead to high revenues and profits. This is often done when there are lots of competitors selling very similar products.
- Online purchasing makes variable pricing more common by being able to raise and lower prices depending on supply and demand conditions. This is a way to maximise revenue.
explain the costs of production
- They need to know the cost of production to assess whether it is profitable to supply the market at the current price
- They need to know actual costs to allow comparisons with their forecasted figures
what are fixed costs?
any costs that do not vary directly with the level of output.
- They are linked to time rather than to level of business activity and exist even if a business is not producing any goods or services.
- Fixed terms can alter over time, expansion may lead to an increased need of factory space and so rent would go up
- examples include: rent, utility, management salaries
what are variable costs?
those costs which vary directly with the level of output.
- They represent payments made for the use of inputs such as raw materials, fuel and labour
- A doubling of the sales would of led to the doubling of the raw materials used
- It is not always the case that variable costs rise in proportion to the output. This could be due to the use of economies of scale.
how do you calculate total costs?
fixed costs + variable costs
what is job production?
when the complete task is handled by a single worker or group of workers. This is a bespoke service and is tailor-made to suit the specific requirements of the customers.
what are the characteristics of jobs production?
- e.g. designer products
- unique
- labour-intensive
- high-skilled
- high value
what is batch production?
this requires that the work for any task is divided into parts or operations and produces a set of identical items. it usually involves division of labour whereby tasks are divided between employees.
what are the characteristics of bath production?
- used in the production of electronics
- concentrate skills (specialisation)
- e.g. food industry
- better use of equipment
what is flow production?
It is the continuous production of a single standardised product
method where the task is worked on continuously or where the processing of material is continuous and progressive. it is the most efficient way to produce an idea with predictable, high-volume sales
what are the characteristics of flow production?
- very quick and efficient
- e.g. car industry
- highly automated
- economies of scale
- identical products
what is cell production?
this is flow production but split into a number of self-contained units. each team or ‘cell’ is responsible for a significant part of the finished article leading to flexibility. They can product a range of different products more quickly than job production allows. team members are skilled at a number of roles. the teamwork often leads to higher productivity and higher output levels.
what are the characteristics of cell production?
- team work
- communication-based
- specialisation
- high productivity
- division of labour
what is labour productivity?
measures the amount a worker produces over a given time.
output per period/no. of employees
what is the formula for productivity?
outputs / inputs per time period
what are the benefits of high productivity?
- a firm can improve its competitiveness by either selling their products at a lower price or keep the price as it was and enjoy a high profit margin
however they need to make sure that with increased productivity that they are maintaining the same quality
what are the factors to consider before deciding their method of production?
- nature of the product
- volume needed
- degree of competitive rivalry
- expectation of consumers/quality
what are the factors affecting productivity?
- the level of investment in modern equipment
- the ability level of those at work (training)
- improve employee motivation
- labour shift organisation of workers (having right number on peak times will improve productivity, stretched staff are demotivated by being overloaded
explain the factor affecting productivity of the level of investment in modern equipment
by investing in modern and sophisticated machines then it would be easy to improve output per worker.
- make it more efficient and produce more goods per hour, boosting productivity
- machinery/capital investment is expensive and may take years to recoup the costs so is a very long-term strategy to improve productivity
explain the factor affecting productivity of the ability level of those at work
a skilled and well-trained workforce is likely to produce more and make fewer mistakes. employees should be ablate complete tasks faster and will not need as much supervision or advice.
however training isn’t liked by all companies as there is great risk that once they are trained they leave for another business and so it will be costly or that the training will not provide the sufficient gains to justify the initial investment. there is also a loss in productivity whilst they are being trained.
explain the factor affecting productivity of improving employee motivation
Professor Herzberg beliebe that it was important to design jobs that contained motivators to help improve their productivity.
a motivated sales force may achieve many more sales than one that is unmotivated. overall business performance swill be boosted if they are motivated.
what are the difficulties of increasing productivity?
the role of management
- productivity has never been a central focus for directors, they are more focused on profits
- perhaps the key management role is to identify productivity as a main objective.
- it is harder by far to re-organise the workforce in order to make production more effective. managers whose main focus is on the short term will focus on production not on productivity
what is the link between productivity and competitiveness?
as productivity gets lower it causes higher costs per output which makes UK producers less competitive.
an increase in productivity means that they can become more competitive due to the fact they will producing more goods and so can compete by price.
the business will enjoy E.O.S and can therefore charge a competitive price.
they can gain a competitive advantage through lower prices. they can become market leader through lower prices or enjoy high profits due to lower production costs.
fortunately, competitiveness is not just about costs. it can be determined by the demand in a certain product. if the price elasticity goes down it means that people are more likely to buy more expensive products.
are efficient and productivity the same?
No. productivity is output per worker per time period. this ignores other features of efficiency, notably waste. one fast worker may produce a lot of output but in a wasteful manner. a decorator may paint quickly but messily, wasting 20% of the point. so productivity may be high but overall efficiency no better than average. products emitting pollution are also not efficient.
what is the most efficient production level?
the level at which total production levels are as low as possible.
what are the factors affecting efficiency?
- level of wastage in the production process
- the quality and age of the machinery
- level of employee motivation
- skills and experience of workers
what are the pros and cons of using training to improve productivity?
positives:
- motivation up
- make them feel more valued
- share new skills with others
negatives:
- takes a lot of time and money for the business
- may not be specific to the job
- risk of them living after
what are the pros and cons of improving motivation to improve productivity?
positives:
- better productivity leading to lower costs per uni
- Lower levels of staff turnover
- if they have the will to work then will be faster and do it at a higher quality
negatives:
- you must always review your incentives, see if they are working
- short term, hard to motivate everyone
- not only sustainable, they get used to it
what are the pros and cons of using better capital equipment to improve productivity?
positives:
- perhaps offer a better quality
- may provide quicker service, more productive
- creates greater value of assets
negatives:
- very costly
- more training, they need to be trained up on the new equipment
- dynamic market, they may need to constantly change their machines to keep with technology
what is labour-intensive production?
- When production mainly uses labour, rather than machines or automation
- means that labour costs form a high percentage of total costs
- china and India have access to cheap labour so favour these production methods
- has low financial barriers to entry because it is cheap to start up production
- has the avantage for being highly flexible, making it possible for a small firm to operate successfully without direct competition from a large one.
- makes it necessary for management to focus on the cost of labour
what is capital-intensive production?
- This is when production is mainly focused around machinery and automation
- the UK have high labour costs so favour these production methods
- has a large percentage of its total costs tied up in the fixed costs of purchasing and operating machinery
- has high financial barriers to entry
- can be inflexible, both in terms of switching from one product to another and in the ability to tailor a product to an individual customer
- may be able to keep producing in a high-cost country because labour costs are such a small proportion of the total costs
- allows the business to produce goods at the minimum average cost
what is the importance of productivity dependant on?
it depends primarily on the level of value added.
- top-price products have a very high profit margin and so an increase in productivity of 10% might only have a marginal effect on profits and virtually none on the competitiveness.
- in competitive markets, high productivity is very likely to be essential for survival.
what are the three methods of E.O.S?
purchasing economies of scale
technical economies of scale
specialisation economies of scale
what are purchasing economies of scale?
- negotiating
- as output rises, costs per unit decreases
- when large businesses often receive a discount because they are buying in bulk
- this is often done for large shops rather than small corner shops
what are technical economies of scale?
- large-scale businesses can afford to invest in expensive machinery
- it will improve stock control but may not be cost-efficiency for small corner shops
what are specialisation economies of scale?
- larger companies split complex production methods into smaller, separate tasks. boost productivity
- by specialising they are able to produce more in the same amount of time
what are three ways of diseconomies of scale?
communication
co-ordination
motivation/managerial
explain communication diseconomies of scale
- it is difficult to maintain good communications flow between departments, becomes slower to get the key message
- the timeless in the flow of info creates problems in the speed of response to changing market conditions, this would increase costs
explain co-ordiantion diseconomies of scale
- find it harder to co-ordiante its operations than a smaller firm
- it is easier to co-ordinate small amounts of staff/activities than a large firm with thousands of employees
- this means costs will go up as it is harder to control the business and so mistakes can occur which can be very costly
- larger supply chain
explain motivation/managerial diseconomies of scale
- senior managers become more remote (not engaging with staff)
- as the business becomes bigger it is harde to give attention to all staff members
what are ways of avoiding diseconomies of scale?
- having a mission statement
- manage by objectives
- use appraisals to review progress and increase individual’s involvement (one on one meetings)
- communicate regularly
what is the capacity of a business?
The maximum output it can achieve in a period
e.g. if the stadium is full, we can host 50,000 people
the concept of capacity is to use their RESOURCES
what is capacity utilisation?
it measures a firms’s output level as a percentage of the firm’s maximum output level.
maximum capacity is when the firm is making full use of all the buildings, machinery and labour available. this is 100% capacity utilisation.
what is the formula for capacity utilisation?
actual level of output/maximum possible output
why and how does a business change capacity?
- in growth markets, capacity may need to be increased regularly. if a firm decides against increasing their own capacity, it will lose its market share if it cannot bee the demand.
- clever businesses make sure that they anticipate changes in demand, so that capacity issues are managed
what is under-utilisation of capacity and its implications?
when the business is producing significantly below what they are capable of.
during this time the fixed costs remain the same. if utilisation is low then fixed costs per unit are high.
- fixed costs per unit are high
- profits down, not full potential
what is over-utilisation of capacity?
when demand is greater than what you are capable of producing.
- this means that if demand was to rise further you will gave to turn it away, enabling your competitors to benefit
- it is possible to have a capacity utilisation rate of 110% in the service sector. if the business was a hotel then it would be overbooked, leading to problems
what is the ideal rate of capacity utilisation?
90%
what are the benefits and costs of working at 120% capacity utilisation?
positives:
- allows you to meet additional demand
- take on additional orders
- limited costs
negatives:
- distribution costs
- risk to reputation
- trust
- risk of change in demand
what are the negatives of working at 100% capacity utilisation?
- link capacity to demand (seasonality)
- impact on staff
- impact on machinery (repair and manufacturing)
- quality control
what are the 2 ways of improving capacity utilisation?
increase demand
cut capacity
explain the increasing of demand to improve capacity utilisation
- demand can be boosted by extra promotional spending, price cutting or devising a new strategy to reposition the products in the growth sector
- another approach is to innovate new products which can be highly effective but implies long-term planning and investment
explain the cutting of capacity for improving capacity utilisation
- if your factory is capable of producing more than is needed then the company may cut their capacity by removing a night shift. this would remove the disruption caused by the alternative that being moving to a smaller premises
why is a small amount of extra spare capacity needed?
- sudden surges of demand cab. encoded with in the short run by increasing output, or downtime can be used for maintenance.
what is downtime?
any period when machinery si not being used in production, some downtime is necessary for maintenance bur too much may suggest incompetence
what is rationalisation?
reorganising in order to increase efficiency. this often implies cutting capacity to increase the percentage utilisation.
what are the 3 types of stock?
raw materials and components
work in progress
finished goods
explain the type of stock: raw materials and components
these are the stocks the business has purchased from outside suppliers, they will be held by the firm until it is ready to process them into its finished output
explain the type of stock: work in progress
at any moment, a manufacturing firm will have some items it has started to to process, but that are incomplete. this may be because they are presently moving through the production process, it may be because the firm stores some unfinished goods to give it some flexibility to meet consumer demand
explain the type of stock: finished goods
once a product is complete, the firm may keep possession. of it for some time, this could be because it sells goods in large batches or no buyer has yet come in for the product. this is the case for producers of seasonal goods, pre-christmas
which businesses will have high stock levels?
- supermarkets
- retailers
- wholesalers
which businesses will have low levels of stock?
- food
- expensive cars/luxury products
what are factors that will influence the levels stock that are held in a firm?
- demand
- nature of the product
- finance available
- seasonality
how can a business control its stock control?
using a stock control chart. the 4 parts of a stock control chart are the stock levels, maximum stock level, re-roder level and the minimum stock level
what is the maximum stock level?
this shows the largest amount that the firm is either willing or able to hold in stock
what is the re-order level?
this is a ‘trigger’ quantity. when stocks fall to this level, a new order will be sent to the supplier. the re-order level is reached some time before the delivery and is because the supplier will need some ‘lead time’ to process the order and make the delivery
what is the minimum stock level?
this is also known as the buffer stock. the firm will want to keep a certain minimum level of stock so that it will have something to fall back on if supplies fail to arrive on time or if there is a side increase in demand.
what is a buffer stock?
an amount of stock held as a contingency in case of unexpected orders so that such orders can be met and in case of ant delays from suppliers
what are the costs of holding too much stock?
- opportunity cost: holding the firm’s wealth in the form of stock prevents it from using its capital for things like innovation and investing in new machinery, this may dent its competitiveness
- cash flow problems: holding the firm’s wealth as stock may cause problems if it proves slow moving, there may be insufficient cash to pay suppliers
- increased storage costs: the higher the stock value, the higher the cost of insurance against fire and theft
- increased wastage: the more stock that is held, the greater the risk of it going out of date
what are the risks of holding too little stock?
- lost orders, if urgent customer orders cannot be met because there is too little finished goods
- worker downtime, if essential components have been delayed in arriving from suppliers
- the loss of the firm’s reputation and any good will it has been able to build up with its customers
what is the point of using stock control charts?
the overall objective is to maintain stock levels so that the total costs of holding stock is minimised
What is JIT stock control?
A Japanese system whereby no buffer stocks are held, and stocks are ordered as and when they are needed
what are the benefits of JIT?
- less storage costs
- minimise wastage
- better liquidity
what are the limitations of JIT?
- surge in demand
- risky if it doesn’t go well
- no economies of scale
- put pressure on managers to provide much higher quality standards and increased efficiency, demands a good relationship with suppliers
what is JIC?
holding stock just in case there is a delay from suppliers or an unexpected surge in demand. they order less often but in larger quantities
what are the benefits of JIC?
- economies of scale
- can meet sudden increases in demand so an increased reputation
what are the drawbacks of JIC?
- high storage costs
- could lead to wastage, increases costs
what is lean production?
an approach to production to minimise waste, whilst ensuring quality. It is a collective term for a range of techniques designed to eliminate waste, such as JIT, Kaisen, TQM and cell production
what is lean production a process of? / what are 4 ways lean production can give a business a competitive advantage?
- maximises the input from staff
- focuses attention upon the quality of supplies and production
- minimises wasted resources in stock through JIT
- focuses upon the competitive advantage represented by speed
what are the benefits of lean production?
- creates higher levels of productivity therefore uses less labour
- requires less stock, less factory space and less equipment so has substantial cost benefits
- creates substantial marketing advantages: about to meet to growth in demand, develop new product quickly
- increased efficiency, waste less, unit costs down, price down, more customers
what are the drawbacks of lean production?
- equipment or labour failure, you have little margin for error, if equipment breaks down you my fall behind and lose your optimised efficiency
- missed deliveries: this can harm your primary customer relationships
- unlikely to benefit from EOS
What is cost of sales and what are two examples?
It is the collective name given to the costs directly associated to making a product/service
e.g. Raw materials, cost of fixing machinery
What is a fixed overhead and give two examples
Costs that have to be paid no matter how well the business is doing, such as rent and cost of cleaning
(Same as fixed costs)
What are net financing costs?
Interest received from deposits in the bank, interest on loans and overdrafts
Used in formula for net profit
What is meant by a statement of comprehensive income?
A document produced by plcs that show revenue, gross profit , net profit and operating profit
what are the pros and cons of using retained profit for re-invesmtent?
pros:
- no interest, cheap
cons:
- may not be possible if you are a start up, not enough funding
what are the pros and cons of using business angels as a source of income
pros:
- no need for collateral
- no interest
cons:
- can be hard to find a business angel
- very risky for the business angel
what are the pros and cons of using crowdfunding
pros:
- fast way to raise finance without any upfront fees
- pitching a project on an online platform can be a valuable form of marketing and can produce media awareness
cons:
- it is hard to obtain crowdfunding, hard to get the sufficient amount
- takes a lot of time
what is a business plan
a document setting out a business idea, how it will be financed, marketed and put into place
- it is how a business owner will explain how they will turn their idea into a successful business
- the owner may then show the plan to a bank to ask for finance to help the business grow
what forms the heart of the financial plan within a business plan?
a cash flow forecast
- this will give an idea of the bank balances over the start-up period, and therefore the financing needs
what is a trend?
the general path that a variable takes over a period of time
what are the 4 factors that affect medium-to-long term consumer trends?
the changing tastes and habits
demographics
globalisation
affluence of a population
what is meant by demographics and how does it affect consumer trends and therefore sales forecasts?
Demographics are the characteristics of the population in an area. This could be by age, gender or income.
- The ageing population that is expecting to see a double in the amount of over 80s in Britain by 2025 create huge new business opportunities. This can lead to sales forecasts rising considerably.
what is meant by globalisation and how does it affect consumer trends and therefore sales forecasts?
Globalisation is the increased interconnectivity between different countries, allowing for the increased ease of flow of people.
- As globalisation increases, it leads to a change in forecasts through the increased sales from to the influx in foreign markets appearing, thus benefiting forecasts.
what is meant by affluence and how does it affect consumer trends and therefore sales forecasting?
Affluence is the state of having a great amount of money. The increasing affluence seen throughout the world has led to the thriving of several markets. The idea of buying water was unthinkable in the past but is now a £750 million market
what is meant by income elasticity and how can this determine the impact of economic growth on a sales forecast?
Income elasticity refers to the extent to which demand is affected by a change in consumers’ real incomes. If the income elasticity is high and the economy faces growth then sales will begin to boom due to the higher incomes as they are luxury goods. If the income elasticity is low then they will be largely proof against changes in the economy. These are goods such as toothpaste and chocolate and are not affected much.
what are the impacts of inaccurate sales forecasts?
- incorrect choices in recruitment, they may be recruiting at one point and firing at the next, demoralises staff, overestimating demand
- the impact on shareholders, they will invest based on the sales forecasts of the business, inaccurate forecasting can lead to your stock price plummeting
- the impact on stock, if you over estimate your sales and you have excess stock then this can lead to wastage within the business, reducing efficiency
what are 3 reasons for variances to exist?
- increased competition
- economic factors
- over optimistic managers
why does acid test ratio exclude stock?
because stock is the most illiquid current asset (the hardest to turn into cash without a loss in its value). it can take a long time to convert stock into cash.
why is liquidity important?
because if a company is unable to repay its bills then it can be at risk of business failure
what are the pros and cons of job production?
advantages:
- product usually high quality, premium price
- greater job satisfaction, involved in all stages of production
- meets individual customer needs, loyalty
disadvantages:
- cost per unit is high
- labour intensive, may need motivational incentives
- requires investment in skills and training
what are the pros and cons of batch production?
advantages:
- producing in batches reduces unit costs, higher profits
- use of specialist machinery and skills can increase output and productivity
- companies only focus on a small group of products, leading to greater quality control and product expertise
disadvantages:
- time lost between batches, machinery may need to be reset
- potentially de-motivating for staff due to the lack of variety
- each batch must be tested for quality and uniformity before future batches, loss of time
what are the pros and cons of flow production?
advantages:
- very low costs per unit due to economies of scale
- output can be produced very quickly, high efficiency and productivity
- production speed can vary according to demand as it is capital intensive
disadvantages:
- very high set up costs due to the large amount of machinery
- workers motivation can be very low due to repetitive tasks
- lacks differentiation, all the same, often lower quality
what are the pros and cons of cell production?
advantages:
- workers become multi-skilled and more adaptable to the future needs of a business
- greater work motivation, arising from a variety of work, team working and more responsibility
- quality improvements as each cell has ‘ownership’ for quality on its area
disadvantages:
- the culture needs to encourage trust and participation as otherwise they can feel that they are being constantly pushed for more
- may not allow firms to use their machinery as intensively and so output will be lower
- there may be rivalry between different cells and conflict may arise if one cell is let to wait for output from another
what is meant by automation?
Using machines or computers to complete tasks instead of humans
what is productivity?
Output per unit of input over a time period (labour productivity is output per unit of labour over a time period, or output per worker hour). It is a measure of efficiency
how is productivity and production different?
If you hire more employees then output will rise however productivity may not. Similarly, it is possible to have lower production but higher productivity because of a fall in employees
what is efficiency?
The extent to which production resources generate output without wastage, resulting in producing at the lowest unit cost.
efficiency is maximised when goods are produced at the minimum unit or average production cost.
what is meant by stock or inventory?
Raw materials, semi-finished good, and finished goods
what is the re-order quantity?
The amount of stock that is ordered when the re-order level is reached
what is the lead time?
The amount of time between when the stock is ordered and when it is received
give 2 reasons why a business would keep a buffer stock of raw materials
- if the suppliers don’t deliver on time
- surge in demand
give 2 reasons why a business would keep a buffer stock of finished goods
- surge in demand
- in the case that machinery breaks they need spare stock
what is meant by waste minimisation?
An aspect of lean production that focuses on reducing waste in production e.g. wasted time, labour or stock/raw materials
explain 2 ways that JIT helps to reduce wastage
- no buffer stock means that there is no risk of wastage of goods, from overproduction
- no wastage of time, producing too much
what 5 Japanese production techniques link to lean production?
Management and workers on minimising the use of the key business resources: materials, manpower, capital, floor space and time
what is quality?
when a product meets the specifications that the firm has set out, they meet the customer requirements, ‘fit for purpose’
what is quality assurance?
a system to prevent quality problems from arising, quality is checked after each stage of production, emphasis on ‘self-checking’
used in the food industry to check for contamination, chocolate
what is quality control?
checking output to remove any faulty goods at the end of the production process
used in the food industry, checking kit Kats every 200
what is total quality management?
it is a philosophy, considers quality in every part of the business process- from design right through to sales, an attitude to quality are the aims are zero defects and total custom satisfaction
what are the pros and cons of quality control?
pros:
- inspection is intended to prevent faulty items from reaching the customer
- inspectors may be better placed to find widespread problems across a firm
- they have specially trained inspectors meaning time isn’t lost among workers
cons:
- individuals are not necessarily encouraged to tea responsibility for the quality of their work
- rejected products are expensive to a firm, only at the end is it changed
- if defect levels are high then costs are very high, efficiency down and a loss of resources
what are the pros and cons of quality assurance?
pros:
- costs are reduced as theres less waste, efficiency up
- can help to improve motivation as workers have more ownership and recognition for their work (Herzberg)
- help firm gain marketing advantages from its consistent level of quality
cons:
- takes time to check quality at every stage, efficiency
- costs of training staff
what are the pros and cons of total quality management?
pros:
- leads to better products manufactured at lower cost, reduces wastage
- leads to increased employee involvement, greater motivation
cons:
- requires deep commitment
- very expensive
- hard to follow, not concrete programme of QC and QA
what is meant by a quality circle?
a group of employees who meet regularly for the purpose of identifying problems and recommending changes to the working processes in order to improve quality standards
used in big corporations with high production, Toyota
what are the pros and cons of quality circles?
pros:
- it improves staff morale through employee involvement
- allows the firm to identify changes to improve quality, long term benefits
- it takes advantage of the knowledge of operators, labour productivity
cons:
- time consuming
- conflict of opinions, time for decision making increases
- who is part of the quality cycle? demotivate others?
how do you meet quality?
- find out what the customer wants
- specify what the product does
- make sure the specifications are achieved
why is quality so important?
- brand/customer loyalty, satisfaction
- charge premium prices
- reduces the amount of returns, increased sales and a decrease in defective products
- staff retention, increased motivation, association of high quality brand
what is kaizen?
a continuous improvement that aims to constantly introduce small changes in a business in order to improve quality and/or efficiency
- a firm that uses this has to have a culture that encourages and rewards employees for their contribution to the process
what are the pros and cons of kaizen?
pros:
- improved teamwork, tool driven by teamwork
- waste reduction
- builds leadership skills, there will need to be a team leader
- improves employee satisfaction, retention up, it involves the employees when implementing changes giving them a sense of worth
cons:
- change is disruptive, altering current management systems so dependant on efficient communication
- training requirement, they must adopt the philosophy and may need to take out for training
- difficult to do, takes time and money, some may be reluctant to change, management may be reluctant to implementing as they feel it is expensive
what is inflation?
a rise in the aggregate price level over time which causes a lower purchasing power, calculated as a percentage
what are 3 impacts of high inflation on a business
- less investment due to uncertainty
2) cost of borrowing- leads to an increase in borrowing costs for businesses with loans, less investment
3) falling real incomes- millions encounter a cut in their wages or a pay freeze leading to a fall in incomes, means businesses will see a fall in profits
how does inflation reflect the business cycle?
inflation would mirror the economic cycle however not directly due to the time lag
what is the economy?
refers to the state of production and consumption of goods and services in a country
how is inflation measured?
it is measured by consumer price index (CPI)
it is measured by monthly but is given as a year-on-year figure.
- it is measured by looking at the price of the things in the basket of goods (650-700 goods) in different stores and then is translated into the index in order to be easily understandable
what is in the basket of goods?
financial services, staple items (bread), property, utilities, vehicles
what is the benefit of using an index to measure inflation?
- helps you understand trends more easily
- they enable direct comparisons to be made between different data series
what is done to help times of inflation?
interest rates. during high inflation if they put interest rates then inflation will go down. less spending takes place and so inflation goes down
what is the difference between inflation and deflation?
inflation- too much money in the economy
deflation- too little money in the economy
if there is a prediction that inflation will occur then they will adjust interest rates higher so they save more and things become more expensive and if there is a previewed deflation then they will put interest rates lower (this increases sales, less people are saving)
what is the target rate for inflation?
2%
what are 3 impacts of low inflation?
- businesses are able to make long term plans, the cost of loans will go down and so the amount of innovation can increase
- increased disposable incomes meaning revenue will be higher for a firm
- improved return for assets, those are rewarded for saving, increased spending, high profits
strategy: focus on innovation, take risky decisions
what is meant by an exchange rate?
the cost of a currency in terms of another
what is the difference in appreciation and depreciation
Appreciation is when the when the currency becomes stronger, means one unit is capable of buying more foreign currency than before.
Depreciation is when the currency becomes weaker, it can buy less
what is the acronym for exchange rates
strong pound imports cheap exports dear
what are the impact on imports with a strong pound
- cheaper for imports through the strong pound, increased profit margins
- they may look to change suppliers to ones in foreign countries, impact on suppliers
- can lead to problems with customer service as they are relying on the fast delivery of the suppliers
e. g. outsourcing in foreign markets, bigger cooperations
- car businesses importing
what are the impact on exports with a strong pound
- exports become more expensive, decreasing profit margins
- it is more expensive to access foreign markets, harder for growth
- they may have to raise the price of their products which could negatively affect sales figures
- America is an important export market for morgan cars
what are the impacts of a weak pound on imports
- if they have suppliers abroad then it will be more expensive to import them in, greater costs of production
- harder for connectivity within businesses due to the lack of foreign market
- may have to put the price up on goods which could decrease their sales revenue
- Sports direct has faced higher prices which has led to lower profits
- Car businesses will face higher costs from importing their materials
what are the impacts of a weak pound on exports
- beneficial as it is cheaper to export goods abroad, access foreign market, higher sales
- if there is a thriving foreign market in your services then you can locate there
- profits will be overall higher and will facilitate growth for the business
what is the link between interest rates, unemployment, disposable income and consumer spending
high interest rates leads to low disposable income and lower consumer spending
high unemployment, low disposable incomes and therefore low consumer spending
what is disposable income?
the amount if money you have to spend after buying essentials (homes, cars)
what are interest rates?
the cost of borrowing and the reward for saving
what are the impacts of high interest rates on businesses
- risk of falling demand for high-price products, people would rather save and so revenue will decrease
- the higher the interest rate, the higher the cost of running an overdraft, reducing the profit for the business
- bank loans cost more and so innovation may become lower, reducing competitiveness
strategy: to reduce costs to the maximum as loans are expensive and production is more expensive
what are the impacts of low interest rates on businesses
- bank loans are not as expensive, fund business growth and increased profitability
- sales will go up as people will be spending instead of saving
strategy: do lots of innovation through cheaper loans
how much of total spending is done by the government?
£821 billion
what is monetary policy?
control demand by increasing/decreasing interest rates (now controlled by the bank of England) INTEREST RATES
what is fiscal policy?
control demand by increasing/decreasing taxes or increasing/decreasing government spending TAXATION
why would the gov spend more money
- improve healthcare
- reduce poverty
- become more globalised
what is direct taxation
tax on income/profits
national insurance, corporation tax, income tax
what is indirect taxation
tax on goods and services
VAT, business rates, excise duties
what are excise duties?
tax on individual products such as cigarettes
what is corporation tax?
it is a tax on the profits made by companies. in the UK the main rate is 19% and is mean to fall to 17% by 2020.
- if corporation tax increases then it means that retained profit will be lower, leading to lower profit margins
- if corporation tax decreases then retained profit will be higher
- businesses who pay this include a limited company, any foreign company with a UK branch or office or a club, co-operative or other unincorporated association, e.g. a community
what is the business cycle?
The pattern of economic growth, followed by a boom, recession, recovery and back to growth an economy follows
what is a recession?
tow consecutive quarters of negative growth
what happens during a boom, what are the business strategies
- low unemployment
- high inflation and GDP
- high re-investment
- high confidence
business strategies:
- expansion
- high innovation and differentiation
- increased prices + eages
- high inflation
what happens during a recession, what are the business strategies, depends on
- falling inflation rates
- rise in unemployment
- lower consumer spending
- cut back on investment
business strategies:
- discounting
- minimise costs
- low recruitment
- less innovation
depends on:
- demand for inferior goods increase
- necessities see sustained demand
what happens during a slump, what are the business strategies, depends on
- high unemployment
- very low consumer spending
- low profits
- many business failures
business strategies:
- focus on core product
- costs to a minimum
- low levels of stock
- very low recruitment
depends on:
- PED
- nature of the product
what happens during a recovery, what are the business strategies, depends on
- growing consumer spending
- higher profits
- growing interest rates
business strategies:
- marketing posiitioning
- increase recruitment
- looking into innovation
what is meant by income elasticity of demand?
Measures the sensitivity of demand to a change in income – negative income elasticity means that as incomes rise, demand falls, and positive income elasticity means that as incomes rise, demand rises
explain the different parts of the business cycle
boom- When economic growth is high, employment is high, and inflation may also be high
recession- When economy growth is negative, unemployment is high and inflation is usually low
recovery- The period immediately after a recession, when there is positive growth, but this is slow
What is happening to prices when the rate of inflation falls from 2% to 1%
loans become cheaper, higher spending
What impact does uncertainty, (over Brexit for example), have on businesses?
- lower innovation, the risk of business failure
- costs kept to the minimum
- less amount of risk taking
what is the employment rate in the UK
3.8%
what are the pros and cons of high unemployment
pros:
- lower wage growth
- lower staff turnover
- demand for inferior goods rise
- large ‘pool’ of labour to choose from
cons:
- people have lower disposable income, falling sales
- low morale and uncertainty in workforce
- social problems such as shoplifting will occur
what are the pros and cons of low unemployment
pros:
- higher sales through increased disposable income
- people will be more skilled/variety of skills and so the workforce will be more efficient
cons:
- wages have to be increased due to the decreased availability
- harder to recruit
- high staff turnover
what are the 5 different types of legislation
- consumer protection
- employee protection
- environmental protection
- competition policy
- health and safety
explain the different types of consumer protection
supply of goods and services act- entitled to work done with reasonable skill, in a reasonable time and at a reasonable price
trade description act- goods and services must perform in the way advertised, avoid misleading info
consumer credit act- this protects the consumer when borrowing money or buying on credit, must be TRANSPARENT
distance selling regulation- same rights online/on phone than in store, same protection
sale of goods act- fit for purpose, as described, if they are not they can be rejected
weights and measures act- must be the weight they say it is
what are the impacts on the business of consumer protection laws?
- imposes additional costs as they need to comply with the laws
- if they don’t obey them then they risk a fine, loss of customers
- means the business cannot gain an unfair competitive advantages by taking short-cuts, create a ‘level playing field’
what are the 5 areas covered by employee protection laws
- minimum wage
- right to a contract of employment
- increased right to sick, maternity and paternity leave
- redundancy
- trade union rights
what are the effects of minimum wage laws on businesses?
Positives:
- employees may be more motivated by a fair wage satisfying basic needs
Negatives:
- increased labour costs
- increase automation in the longer term and increased unemployment
what are the effects of employee contract laws on businesses?
positives:
- meets employees’ security needs
negatives:
- can reduce flexibility for the employer in how they use their staff
what are the effects of increased sick pay, maternity and paternity leave on businesses
positives:
- they may feel more valued as they feel well treated
- lower staff turnover levels which saves the costs of recruiting new staff
negatives:
- increased cost of paying for cover for these staff
what are the effects of redundancy on businesses
negatives:
- reducing capacity becomes expensive due to statutory payments to staff made redundant
- negative impact on cash flow in the short-term as they can close factories
what are the effects of trade union laws on businesses?
employers can be forced to deal with a trade union if enough staff are members, this does bring benefits as well as drawbacks
explain different laws in employee protection
equal pay act- the right to for men and women to be paid the same
national minimum wage+living wage- aged 25 or over for living wage
redundancy law- must be given a certain amount of time and money depending on how long you’ve worked there for
trade union and labour relations act- right to start a trade union
race relations act- it is unlawful to discriminate on race, religion, colour, ethnicity
what are the two different laws for the environment
environmental protection act 1990
environment act 1995 (which established the environmental agency)
what are the main areas concerning environmental protection laws?
- emissions
- discharge of waste
- use of substances
- packaging
- discharges of wastewater
explain environmental protection act 1990
- sets out the structure of waste management and emissions control
- requirement for risk assessments
- focuses on the manufacturing and secondary sector
- has helped in the significant reduction of river pollution in the UK
- emissions, use of substances, waste discharge
explain environment act 1995
- introduced the agencies: environment agency, Scottish environment protection agency (SEPA), the national parks authorities
- businesses are assessed by these organisations, this takes lots of time and money
what are the positives and negatives of environment laws for businesses
positives:
- means that firms can’t get away with wrong-doings, they should be acting for the greater good of society
- equal playing ground, no discrimination
negatives:
- may need to adapt their production methods, very expensive
- take lots of time and money to make sure that they are abiding to the laws
what is gearing?
the amount of funding in a business which is lean from a bank, versus funding which has been acquired from shareholders
what are sale forecasts?
an estimate of the volume or value of future sales using market research or past sales data
why do businesses write a business plan?
1) to attract potential investors to the business
- the better the financial info in the business plan, the more confident they will be in investing, reduce the risk
- a BP may help the business to negotiate a lower rate of interest on a bank loan
- a BP should include a cash flow forecast and sales forecasts, show they can make a profit
2) to give owners some direction, once a plan is written down it is more likely to be followed
3) to set targets (smart) and objectives that can be followed
- it can show how a business aims to achieve its goals
- it should show investors what amount of sales and profit the business aims to achieve
- may show how they aim to grow and develop in the future
4) to assess performance, check progress
5) to identify early on any problem areas that the business may face
how can a business improve their profits by increasing revenue?
this can be done by:
- having a sale, reduce the prices
- advertise more
- promote the products more
- improve distribution channels
however they need to make sure this isn’t accompanied by rising costs.
what are the two ways of increasing profitability? what is the difference between profits and profitability?
profitability (as opposed to ‘profits’) is a relative term. it is mainly measured using the operating profit margin. to increase profits in relation to sales they could:
- increase the price
- decrease costs
explain the two parts of competition policy
1) price fixing and rigging not allowed, e.g. collusion on pricing
- you cannot agree prices with competitors
- you cannot cut prices below cost in order to force a smaller or weaker competitor out of the market
- you cannot share markets or limit production, markets, technical development or investment to raise prices
- you cannot impose minimum prices on different distributions such as shops
2) abuse of a dominant position (50% market share or more)
- predatory/discriminatory pricing
- making customers but products they don’t want
- treat customer differently, e.g. higher prices to competitors
- imposing unfair trading terms such as exclusivity
- refusing to supply or provide access to essential facilities
what do the competition and markets authority do? (CMA)
they try to avoid monopolistic activity, ensure that prices are kept fair and that there are no price fixing
they are responsible for:
- investigating proposed mergers and takeovers
- investigating allegations of anti-competitive practises
- taking legal action against those who collude to maintain high prices within a market, such as cartels
what are the main roles of business legislation?
- regulate the rights and duties of people carrying out business in order to ensure fairness
- ensure the treatment of employees is fair and undiscriminatory
- ensure a level playing field for competing businesses
- protect people dealing with businesses from harm caused by defective sources
what are the effects of competition policy on business?
- when businesses compete with one another, they tend keep prices at a sensibly low level, provide a good service and generate new innovative products and services
- with no competition, prices can be pushed up high, service standards can slip and innovation can dry up
what is a cartel?
a group of companies operating in the same market who make agreements to control supply and thus prices
what are the aims of competition policy for customers?
- wider consumer choice in markets for goods and services
- technological innovation which promotes gains in dynamic efficiency
- effective price competition between suppliers
- investigating allegations of anti-competitive behaviour within markets which might have a negative effect on consumers
what are the penalties for getting caught for breaking competition policy?
- up to 10% of annual turnover
- criminal prosecution
- disqualification as directors
- civil action by those affected
what is health and safety law and what are the main areas?
it is about preventing people from being harmed at work or becoming ill, by taking the right precautions and providing a satisfactory working environment
1) the physical conditions in which staff are required to work
2) precautions that firms are required to take when planning their work
3) how hazardous substances should be treated in the workplace
who do health and safety laws apply to?
- employees working at the business premises, from home, or at another site
- visitors to premises such as customers or subcontractors
- people at other premises where the business is working, e.g. construction site
- members of the public- even if they’re outside the business premises
- anyone affected by products or services the business designs, produces or supplies
what is the health and safety at work act 1974?
It places the major burden on employers. they have to provide a safe working environment for their staff.
the job of the health and safety executive is to identify and prosecute any breaching of the laws by companies
what are examples of H+ S issues at food processing, hotels, chemical production, air travel and tour operators
food processing- hygiene hotels- hygiene, guest and safety chemical production- dangerous processes, waste disposal air travel- passenger safety tour operators- holidaymaker safety
what is a monopoly and why is it bad for customers?
it is when a market is dominated by a single business called a monopoly. it is bad because:
- consumers have little choice
- prices tend to be high
- there is little incentive for the dominant firm to innovate or provide great customer service
government regulates gains monopolies and near monopolies that exploit consumers by abusing their dominant market position
how can you become an effective monopoly?
it is when businesses build barriers to entry that prevent new firms entering the market. these include:
- technical innovations
- incredibly strong brands and high advertising budgets
- heavy spending on infrastructure
this is often seen for water and gas where there is often a single supplier
what is a competitive market?
it features intense rivalry between producers of a similar good or service. firms operating in a competitive market try hard to minimise competition, perhaps by creating a USP or using predatory pricing
explain what an oligopoly is
it is the name given to a market dominated by just a few major suppliers, e.g. banking, chocolate bars
- here rivalries are intense as it is clear that in most causes one firm can only gain market share by directly taking it from just a handful of rivals
- they rarely compete on price due to fears of a price war, leading to lower PM, competitors would respond by lowering prices also, creating a costly price war in which no firm winds
- they tend to focus on non-price competition through focusing on branding, advertising, product features and innovation
explain what happens in a fiercely competitive market?
where many small businesses are competing with one another, often on the basis of price
- many of these markets tend to be for commodity products where it is hard to differentiate
- the main strategy here is to keep prices as low as possible to try and undercut rivals’ prices and still make profits
- a business that is able to find an effective method of differentiation within this market will stand a far better chance of success
what happens to the size of the competitive market?
markets tend to grow or shrink in size over time. this will affect competition.
growing markets will attract new entrants seeking the higher profits on offer. e.g. wizz air came in after the high success of easyjet.
to enter a big market you must form a niche
shrinking markets see established firms exiting as profitability tends to be low and thus unattractive as there is less competition
to enter a small market there often quite a few barriers to entry.
what is the four market structure?
1) perfect competition
- many firms producing or selling homogenous goods
2) monopolistic competition
- competition between many firms producing differentiated goods, e.g. restaurants
3) oligopoly
- competition between a small number of suppliers, e.g. banking
4) monopoly
- single supplier, e.g. water or gas
explain porter’s strategist view to determine the intensity of rivalry
there are four sections of the gird. power of customers, power of suppliers, threat of market entry and threat from substitutes. these strategies could be used to gain a competitive advantage.
what are the 3 ways of responding to a tougher competitive environment
1) price cutting
- if the competition can be under-cut then consumers will hopefully stay loyal
- unless it is accompanied by a fall in costs of production then they will see LPM. it is not a long-term solution.
- if PM are tight and costs have been cut then this would not be a feasible option
2) increased product differentiation
- an increase in PD means consumers are less likely to switch, helps a firm insulate from competitive pressure
- cutting prices may hinder their brand image
- methods include: branding, product features, product design, advertising, technical innovation
3) collusion
- this is when two or more rival businesses agree to fix supply or prices in their market. this is ILLEGAL.
- they get in touch to fix prices, cut promotional activity expenditures or find any other way to boost profitability
- the strength of anti-pollution legislation in UK means its difficult to work this in the long term. there are strong incentives to ‘rat’ on the others. the one to whistle blow gets 100% immunity of fines and any form of punishment
what is product differentiation?
it is the degree to which consumers perceive a brand to be different from, and in some way superior to, other brands of the same type of product.
this can be done by:
- branding
- product features (must-have technology, e.g. hybrid)
- product design (good looking design may be its USP)
- advertising
- technical innovations
what is a competitive advantage?
- the ability of a business to add more value for its customers that its rivals and attain a position of relative advantage
- a situation where a business has an advantage over its competitors by being able to offer better value, quality and/or service
what is the importance of a USP in being competitive
- a way to differentiate
- dont have to compete on price
- higher profitability
it is something that sets a product apart from its competitors in the eyes of customers, both new and existing
what are the threats of new market entrants?
- the possibility of newcomers entering the market is an important aspect competition within a market
- high profits will tempt newcomers to enter a market, driving down prices
- therefore, the maintenance of market power depends upon erecting and maintaining barriers to market entry
what is competitiveness?
the ability of business to deliver better value to customers than competitors
what are the 3 ways of measuring productivity?
- labour productivity
- labour turnover
- capacity utilisation
what are the ways to improve labour productivity?
- measure performance and set targets
- streamline production process
- invest in capital equipment
- invest in employee training
- improve working conditions
what are the problems when improving labour productivity?
- potential trade off with quality. higher output must still be of the right quality
- potential for employee resistance, depending on the methods used (e.g. introduction of new technology)
- employees may demand higher pay for their improved productivity
how can you achieve a competitive advantage from quality management?
Philip Crosby believed that ‘quality is free; and that getting things right can save a huge amount of time and money.
- selling high quality products can lead to added value and a competitive advantage as people are willing to pay the price as they associate the brand with high quality
- when the consumer has choice, quality is vital. a reputation for good quality brings competitive advantages.
a good quality product will:
- generate a high level of repeat purchase and therefore a longer product life cycle
- allow brand building and marketing benefits that can spread from one brand to others. e.g. Cadbury twin benefiting from the rep of Cadbury dairy milk
quality leads to brand loyalty and a very good reputation, charge premium prices
2 positives of health and safety laws on businesses
- ensures the protection of staff, higher productivity, less time lost due to their healthy and safe workforce, reduces absence and sick periods
- it improves reputation with clients and staff, this results in good public relation which would help to increase sales and generate more leads
2 negatives of health and safety laws on businesses
- takes a lot of time and money to update and implement
- if they do not abide to the correct laws then they can see very high costs for the business, affect their reputation
What is the name of the organisation responsible for enforcing health and safety law?
the health and safety executive
