Theme 2 - Managing Business Activities Flashcards
What is finance
The management of the investment needed to open, run and grow a business
Give 3 reasons why businesses raise finance
- To pay debts
- To expand
- To start-up
Give the 3 sources of internal finance
- Owner’s capital (personal savings)
- Retained profit
- Sale of assets
Give an advantage & disadvantage of retained profit
+ no interest
- no replenishment guarantees
Give an advantage & disadvantage of sale of assets
+ Quick cash
- may not raise enough/ may not sell
What is external finance
Investment for the business that is obtained from banks, investors and lenders outside of the business
What is a source of finance
Where the finance comes from
What is a method of finance
The use of finance or what it would be suitable for
What are the 6 sources of external finance
- Friends & family
- Banks
- Peer to peer funding
- Business Angels
- Crowd funding
- Other businesses (parent companies/ conglomerates)
Give an advantage & disadvantage of using other businesses as a source of finance
+ allows conglomerates to support smaller subsidiaries
- may result in a loss of capital if investing in a business that might be unsuccessful
Give an advantage & disadvantage of using Crowd Funding as a source of finance
+ business can generate funds & promote business at same time
- may not raise enough
Give an advantage & disadvantage of using Business Angels as a source of finance
+ investors have experience & expertise
- have to give up a share of business
Give an advantage & disadvantage of using Peer to Peer funding as a source of finance
+ Businesses get lower interest rates than with banks
- not enough investors want to invest / not enough raised
Give an advantage & disadvantage of using Banks as a source of finance
+ don’t interfere with business operations
- Interest & business plan needed
Give an advantage & disadvantage of using Friends & Family as a source of finance
+ offered without the need for security, at lower interest rates & over longer periods
- may cause tension between F&F
What are the 7 methods of finance
- Loans
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
What is a sales forecast
A forecast that estimates the volume or value of future sales using market research or past sales data
What are the 5 purposes of making a sales forecast
- Avoid cash flow problems
- Frees up management time
- Production capacity
- See if workers need to be employed
- Start promotional activity
Give 4 factors that affect sales forecasts
- Consumer trends
- Economic variables
- Actions of competitors
- Difficulties of sales forecasting
What is liquidity
The business’ ability to turn its assets into cash to pay its current liabilities
Where are the most liquid and least liquid assets listed on a balance sheet (statement if financial position)
Least liquid
Down to
Most liquid
Why is liquidity of a business measured
Used to measure how healthy/ successful the business is (e.g. for investors)
What are current assets and liabilities
Current assets = assets that can be converted into cash within the year
Current liabilities = liabilities that can be converted into cash within the year
What is the equation for non-current ratio
Non current assets / non current liabilities
What is the ideal current ratio and why
1.5 : 1
Any lower and it’s too risky as it’s assuming all stock can be sold
Any higher and it’s too much money tied in stock
What is the Acid ratio (quick ratio) + equation
(Current assets - inventory ) / current liabilities
Acid test is current ratio but without stock (more realistic measure of liquidity)
Name 2 ways liquidity can be improved
• Reduce amount of stock held (quicker dispatch)
• reduce credit periods offered to customers
• pay suppliers later on trade credit
• increase borrowing LT & clear ST debts
What is working capital & current + equation
The day to day finance needed in a business
Current assets - current liabilities
What is production definition
The total amount of output that is produced in a certain time period
Name 4 types of methods of production & describe them
Job
Batch
Flow
Cell
(If stuck on description check notes)
What is productivity
The output per hour of input (labour or capital)
Name 2 ways to improve productivity
• productivity bonus
• productivity deal
• staff training
• investment in new machinery and equipment
What are 3 things that influence factors of productivity
- Quality of inputs in the production process
- Labour shifts
- Investment in new technology
Why is high productivity good
More productive = more likely to meet demand = in a position to charge more competitively = first mover advantage
What is the equation for Average Costs (AC)
Total costs (TC) / output
Name 2 ways to increase efficiency
• cutting costs
• increase productivity
• reconsider design mix so it’s easier & cheaper
• adopt a lean production approach
Give 2 advantages & disadvantages of Labour intensive production
+ humans can be retrained to perform new tasks
+ problem solve
- have to pay wages
- harder to manage
- unreliable
Give 2 advantages & disadvantages of Capital intensive production
+ investment cheaper overtime
+ works 24/7 without breaks
- high initial costs
- not flexible
What is the formula for current ratio
Current assets/current liabilities
What is the definition of capacity utilisation
The extent to which the max output capacity is being utilised
What is the calculation of capacity utilisation
= current output / maximum output X100
(Expressed as a %)
Name 2 ways to increase capacity
• reducing prices which increased demand
• reduce what is offered
• advertising which increases demand
Give 3 implications of capacity under-utilisation
- higher fixed costs per unit
- unmotivated staff (not busy)
- impact on brand image
- business may need to rationalise
Give 3 implications of capacity over-utilisation
- can damage reputation
- can put too much strain on resources (mainly in manufacturing)
- staff may do too much overtime causing accidents
- no time to maintain machinery or train staff
- quality suffers due to mistakes
What is the calculation for contribution
= selling price - variable cost (per unit)
What is the calculation for break-even
= TFC / contribution
What is the calculation for Margin of Safety
= actual sales - break-even sales
Name 3 strengths of break-even analysis
+ shows how long it will take for a start-up to be profitable
+ help entrepreneur/investors understand viability of a business
+ illustrates importance of keeping FC low
+ calculations are quick and easy, great for quick estimates
Name 3 limitations of break-even analysis
- unrealistic assumptions, not sold at same price for different output/ FC vary
- sales are unlikely to be same as output (can’t sell all product)
- VC don’t stay same (EofS/ bargaining power)
- most businesses sell more than 1 product - harder to calculate BE
- BE analysis should be seen as planing aid rather than a decision-making tool
What is a budget (definition)
A financial plan that a business (or department) sets about costs and revenue
They are used to monitor the financial performance of any aspect of the business
Name 2 purposes of budgeting
• Planning & monitoring
• Control
• Coordination & communication
• Motivation & Efficiency
What are the 2 types of budgeting
Historical figures (based on historical data)
Zero based
What is zero based budgeting
Involves not setting budgets but rather having all spending justified
Useful when business needs to control costs closely
- Time consuming
What is a budget variance (definition)
= a difference between a figure budgeted and actual figure achieved at the end of the budgetary period
(Seeks the reasons for differences)
What is the calculation for budgetary variance
= actual sales/profit/costs - budgeted sales/profit/costs
What is a favourable variance
Where the actual figure achieved is better than the budgeted figure
What is an adverse variance
Where the actual figure achieved is worse than the budgeted figure
Name 3 difficulties of budgeting
- budgeting can lead to competition & conflict between departments
- unachievable or unambitious budgets can demoralise = low motivation
- can encourage short-termism
- budgets take time & skill to set, monitor & review
- budget only as good as data used to construct it
What is profit (definition)
= the financial gain of a business through trading and can be found by deducting expenditure from revenue
What is profit (calculation)
= Total revenue (TR) - Total costs (TC)
What is the formula for gross profit
= sales revenue - cost of sales (VC)
What is the formula of operating profit
= gross profit - other expenses (operating costs (FC & some VC))
What is the formula for net profit
= operating profit - interest
Name 2 ways of improving profitability through increasing revenue
• have a sale (reduce prices)
• advertise more
• promote the products
• increase price (if inelastic)
Name 2 ways of improving profitability through reducing costs
• restructuring (cheaper suppliers/ moving premises)
• delayering & redundancies
• automating production
Name 2 differences between profit & cash
- Profit is recorded straight away & cash isn’t recorded until paid out or received
- Business can trade without profit but will go bust without cash
What are the 3 types of stock
- Raw materials
- Finished goods
- Work in progress
What can businesses use to show their stock level
Bar Gate stock graph
What is a lead time
The time between point of order & delivery
Give 2 types of stock management
JIT
JIC
What is Kanban
A highly effective Japanese term developed by Toyota that is a sign based scheduling system triggering the logistical chain of production
Give 3 ways to reduce waste
• suitable stock rotation method
• use computers to monitor stock levels
• transport perishable goods quickly
• find create methods of disposing waste
What is Lean production
Cutting waste in the production process
Give 2 advantages of lean production
+ increases productivity
+ reduces costs & cuts lead time
What is buffer stock
The minimum stock level that is kept
What is a re-order level
When stock is re-ordered (can be automatic)
Give an advantage and disadvantage of buffer stock
+ can meet spikes in consumer demand quickly (flexibility)
- money tied up in holding stock (worse liquidity) & risk of that being wasted
What are 6 economic influences
- Inflation
- Interest rates
- Tax & gov spending
- Exchange rates
- Business cycles
- Economic uncertainty
What is inflation
The sustained increase of prices overtime in an economy (aim is 2%)
How is inflation measured
Consumer price index (CPI) & “ The basket of goods”
Give 2 effects of inflation on businesses
• increased cost of supplies
• workers claim higher pay
• uncertainty & loss of confidence
• less exports & investments
What is the calculation for total repayment
Borrowed amount x interest rate
What is the calculation for interest rate
(Total repayment - borrowed amount) / borrowed amount
X100
What are interest rates
The reward for saving or the cost of borrowing
What is a tax
A financial charge made by the government on individuals, consumers & businesses
Give 3 taxes
• corporation tax
• income tax
• VAT
What are exchange rates
The price of one currency in exchange for another (values change due to supply and demand change for a currency)
What is an appreciation of currency
Rise in the currency (e.g. pound) against other currencies
What is a depreciation in the currency
Decrease in the currency (e.g. pound) against other currencies
What is the acronym used to show exchange rate changes effects
S trong
P ound
I mports
C heap
E xports
D ear
What diagram show cases booms, downturns, depression, recession, trough, recovery
The business cycle diagram
What is economic uncertainty
Results from behaviour of different economic influences that are outside of the business’ control and can’t be predicted accurately
Give 2 disadvantages of economic uncertainty
- makes decision making difficult
- reduces business confidence
What tool is used to analyse the internal AND external environment
SWOT
What tool is used to analyse the external environment
PESTLE
What does SWOT stand for
(Internal)
Strengths
Weaknesses
(External)
Opportunities
Threats
What does PESTLE stand for
Political
Economic
Social
Technological
Legislative
Environmental
What is legislation
Laws set by the gov that businesses must abide by
Give 2 examples of legislation in relation to businesses
Health and Safety at Work Act (HASAWA)
The consumer rights act 2015
Give 2 advantages of businesses following laws
+ good brand publicity
+ better relationship & trust with stakeholders
Give 2 disadvantages of following laws for businesses
- costly as can be sued, fined or face legal sanctions
- bad PR
What is a competitive environment
The immediate environment surrounding a firm; includes suppliers, customers, rivals
Give one determinant of a competitive environment
Market structure
(Not all market structures are the same. Different features & characteristics)
Give 3 features & characteristics of markets
• no. Of businesses in the market
• size of market
• barriers to entry & exit
• the knowledge that buyers & sellers possess
• degree of interrelationship ( how related products are in market & businesses working together to do research)
Give 2 ways a competitive environment can impact a business
• price
• profit
• marketing
• innovation
What are the 4 ways the market can be measured
International
National
Regional
Local
How is the size of a market measured
The no. Of customers + businesses that buy & sell a particular good
What issues may businesses face when operating a large market
Lots of competitors
What issues may businesses face when operating in a small market
Less competitive
Big start up costs
What is unlimited liability
When business owners are liable for the business debts
What does unincorporated mean
Where owner and business are legally seen as the same
What is limited liability
Where owners / shareholders only lose the investment in business when it goes into debt
What does incorporated mean
Where business and owners are seen as two separate legal entities
What is a business plan
A plan for the development of the business that gives details on products, resources and forecasts
Give 3 things that might be found in a business plan
Buying & production plans
Business objectives
Financial forecasts
Personnel record
Finance records (sources etc)
What is a cash flow forecast
The prediction of all expected receipt & expenses of a business
(20 % of businesses will fail because of poor cash flow)
How do you calculate net cash flow
Cash Inflow - cash outflow
What is the opening balance
How much a business has at the start of a month
How do you calculate the closing balance
Opening balance + net cash flow
Give 2 uses of cash flow forecasting
• identifying timings of cash shortages & surpluses
•Supporting application for finance (solvency)
•Enhancing the planning process
•Monitoring cash flow
Give 2 drawbacks of cash flow forecasting
- based on estimates & difficult to predict sales revenue
- subject to uncontrollable external shocks
- managers can spend too much time & resources creating them
When in the UK did business failures peak
2009 at around 26,000
Give 3 internal causes of business failure
Lack of planning
Cash flow issues
Lack of funds
Failure to innovate
Poor leadership
Give 3 external causes of business failure
Competition
Changes in legislation
Change in consumer taste
Economic conditions
Changes in market prices
Give 2 financial causes for business failure
Inability to pay debts
Cant fulfil orders
Cant pay suppliers
Give 2 non financial causes for business failure
Lack of skills
Poor leadership or management
Failure to innovate and adapt
What is quality
Features of a product that allow it to satisfy customers’ needs
What is Quality assurance
A method of working for businesses that Involves checking quality throughout the production process.
What is quality control
A production process that involves a final check to make sure the quality of the g/s meets specified quality performance criteria
What is total quality management (TQM)
A managerial approach that focuses on quality & aims to improve the effectiveness, flexibility & competitiveness of the business
