Theme 2 Managing Business Activities Flashcards
What are the 3 sources of internal finance?
Owners Capital
Selling Assets
Retained Profits
What is owners capital?
Money the owner invest in the business
What type of businesses are likely to use owners capital when starting up?
Sole Trader
Partnership
Advantage of using owners capital?
Easy to access
Does not need paying back
Disadvantage of owners capital?
May be limited as it depends on owners personal wealth
What is selling assets?
Business can sell some of their assets to generate capital
What businesses is selling assets not useful for?
New business
Efficient business
Advantage of selling assets?
Don’t need to pay interest
Cheap source of finance
Disadvantage of selling assets?
Long time to sell assets
What is retained profit?
Profit can be retained and built up over the years for later investment
Advantage of retained profit?
No interest payed needed
Disadvantage of retained profit?
Miss out on business opportunities
Not often built high enough
What are 6 external sources of finance?
Family and Friends
Banks
Peer-to-Peer Lenders
Business angels
Crowd Funding
Other Businesses
Advantage of using family and friends as external finance?
May other flexible repayment and little interest
Disadvantage of using family and friends as external sources of finance?
Amount of money available may be small
Strain relationship
What methods of finance can banks provide?
Loans
Overdrafts
Mortgages
Advantage of using banks as a source of finance?
Recognised financial institutions
Terms and Conditions are clear
Disadvantage of using the bank as an external source of finance?
Strict lending criteria
Difficult for start-ups to get
What is peer-to-peer lending?
Operates online
Allows individuals to lend money to other individuals of businesses
Lenders say how much money they are willing to lend and indicate what internal rate they want
Why can a peer-to-peer lender be seen as attractive?
Low interest rate then a bank loan and attractive option if a bank has refused to provide a loan
What are business angels?
Are wealthy individuals who invest money into new or innovative businesses that they think have the potential to be successful
Give advice and guidance and return asks for shares in the business
Advantage of business angels?
Business knowledge
Useful contacts
Disadvantage of using business angels?
Difficult and time consuming to find a business angel
Gain some control of the business
What is crowd funding?
Raising money from a large number of people
Crowd funding must do?
Business states new idea
Details are made public
What can crowd funders offer in return?
Early access to product
Discounted price
Advantage of crowd funding?
Raise awareness of product and may be able to increase sales
Disadvantage of crowd funding?
Details made public can be risked being copied
If idea fail lost of people will know - ruin reputation
What are short methods of external finance?
Overdrafts
Leasing
Grants
Trade Credit
What is an overdraft?
Are where a bank lets a business have a negative amount of money in its bank account
Advantage of an overdraft?
Easy to arrange and flexible
Disadvantage of overdrafts?
May have high interest rates
Unsuitable for using in the long-term
What is leasing?
Paying to use another firms assets
Advantages of leasing?
Does not have to pay a large up front sum of money to buy assets
Assets normally up to date
Repairs cost can also be included in the agreement
Disadvantage of leasing?
More costly
What are grants?
Fixed sum of money given to a business
How do you receive a grant?
Apply
Advantages of a grant?
Does not need to be paid back
No interest
No shares have to be given up
Disadvantages of a grant?
Time consuming process
Risk of not getting one
Can be retracted
What is trade credit?
When a business buys a good or service and does not have to pay straight away
Advantages of trade credit?
Help a business with cash flow
Disadvantages of trade credit?
There is a set time and must be paid up-front
What happens if you fail to pay trade credit on time?
Business will be charged interest
Bad credit rating
What are the long-term methods of finance?
Loans
Share Capital
Venture Capital
What are loans?
A fixed amount of money is borrowed and paid back over a fixed period of time with interest
Where can loans come from?
Banks
Family
Friends
Peer-to-Peer Lenders
Advantages of a loan?
Loan provider will not own any part of the business
Share of the profit does not need to be given
Disadvantage of a loan?
Difficult to arrange
Loan providers will only offer to businesses who think they will pay it back
What is share capital?
Money raised by selling shares in the business
Advantages of share capital?
Does not need to be repaid
New shareholders can bring additional expertise
Disadvantage of share capital?
Owner no longer owns the whole business
Some of the profit has to be given to the shareholders
Have a say how the business is ran
What is venture capital?
Money that can be used as a method of finance for a business that is high risk
Who can provide venture capital?
Business Angels
Venture Capitalists working on behalf of venture capitalist firms
Would venture capitalist firms rather invest in a start up business or an established business?
Established business
Advantage of venture capital?
Does not have to be repaid
Expert advice
Disadvantage of venture capital?
Want shares in the business
What does it mean if a business has unlimited liability?
The business and owner are seen as one under the law
What does it mean if a business has limited liability?
Owners aren’t personal responsible for the debts of the business
Who has unlimited liability?
Sole Traders
Partnerships
Who has limited liability?
Private limited companies
Public limited companies
What is a business plan?
A document that outlines what a business plans to achieve and how it plans to achieve it
What can a business plan include?
Business overview
Products business will sell
Location
Aims and objectives
Marketing and sales strategy
Financial Forecasts
What are financial forecasts?
Includes:
Cashflow forecast
Sales forecast
Break-even analysis
Expenditure budget
What does cash forecast show?
Cash inflows
Cash outflows
What is cash inflow?
Sums of money received by a business
What is cash outflows?
Sums of money paid out by the business
What is a cash flow forecast?
Amount of money that managers expect to flow into the business and flow out of the business over a period of time in the future
Why are cash flow forecasts not always accurate?
Business is in a dynamic market
Need experience and research
Must be updated a lot
Calculation for net cash flow?
Cash inflows - Cash outflows
What is the opening balance on a cash flow forecast?
Closing balance of the previous period
Calculation for closing balance?
Opening balance + Net cash flow
What are sales forecasts?
Predicting future sales volume and sales revenue based on past sales and market research
What does sales forecasting allow the business to make a decision on?
Finance
Marketing
Resources
What factors affect sales forecasting?
Consumer Trends
Economic Variables (inflation, interest rate)
Actions of Competitors
What is sales volume?
The number of units sold in a given time period
What is sales revenue?
Amount of money generated by sales of a product, before any deductions are made
Sales volume calculation?
sales revenue
_______________
selling price
Sales revenue calculation?
selling price x sales volume
What is fixed costs?
Cost that does not change with output
Examples of fixed costs?
Rent
Basic salaries
New machinery
Bank loan
Annual interest
What is variable costs?
Rise and fall as output changes
Examples of variable costs?
Wages
Raw material costs
Packaging costs
Total variable costs calculation?
average variable cost x quantity produced
Total costs calculations?
fixed costs + variable costs
Profit calculation?
total revenue - variable costs
What is break-even point?
Level of sales a business needs to cover its total costs
Total revenue calculations?
total fixed costs + total variable costs
What is contribution?
Used to work out break-even point
What is contribution per unit?
The difference between the selling price of a product and the variable cost that takes to produce it
Contribution per unit calculation?
selling price - variable cost per unit
What is total contribution?
Is used to pay fixed costs and the amount left over is profit
Break-even point calculation?
total fixed costs
_____________________
contribution per unit
What does the break-even chart show?
Output (horizontal axis)
Costs and Revenue (vertical axis)
Fixed costs, Total costs, Revenue are plotted on the chart
How does the break-even point look like on the chart?
When the revenue line crosses the total costs line
What is margin of safety between on the break-even chart?
Actual output and break-even
Margin of safety calculation?
actual output - break even output
Break-even analysis advantages?
Easy to do
Quick
Persuade sources of finance to give them money
Influence decisions on whether new products are launched
Break-even analysis disadvantages?
Assumes variable costs
More products can make it more complicated
Data inaccurate, results wrong
Only tells you how many units you need to sell to break-even not how many you will
What is a budget?
A financial plan for the future
What does a budget forecast contain?
Future earnings
Future spendings
What are the three types of budgets?
Income budgets
Expenditure budgets
Profit budget
Income budgets definition?
Forecast the amount of money that will come into the business as revenue
Expenditure budgets definition?
Predict what the business’s total costs will be for the year, taking into account both fixed and variable costs
Profit budget definition?
Income budget minus the expenditure budget to calculate what the expected profit or loss will be for the year
Benefits of budgeting?
Motivating - gives employees a target to work towards
Help control income and expenditure
Hep managers review their activities and make decisions
Helps focus on priorities
Can be used as a communication tool
Helps persuade investors
Drawbacks of budgeting?
Budgeting can cause resentment and rivalry in departments
Budgets can be restrictive
Time - consuming
Inflation is hard to predict
Budget may be inaccurate if correct data is not used
What is a historical budget?
A budget that is updated each year
Quick and simple
What is zero- based budgeting?
Starting from scratch each year
What is fixed budgeting?
Budget holders have to stick to their budget plans throughout the year - even if market conditions change
What is flexible budgeting?
Allows budget to be altered in response to significant changes in the market or economy
What is a variance?
The business is preforming either worse or better then expected
What are the types of variances?
Favorable variance
Adverse variance
What is a favorable variances?
Occurs when a firm is preforming better then expected- revenue and profit is more than budget says
What is an adverse variance?
When a business is preforming worse then expected - selling fewer items or spending more
Variance calculation?
actual figure - budgeted figure
External factors that affect variances?
Competition behavior
Changes in the economy
Cost of raw materials going up
Internal factors that affect variances?
Improving efficiency
Changing selling price changes revenue
States communication needs improving
Overestimate the amount of money they can save
What is variance analysis?
Spotting variances and figure out why they have happened, so action can be taken to fix them
Difference between small and large variances?
Small variances can be motivating
Large variances can be demotivating
Decisions based on adverse variances?
Marketing mix - cutting prices to increase sales
Updating product to make it more attractive
Streamlining production, increases efficiency
Try to motivate employees
Ask suppliers for better deals
Additional market research
Decisions based on favorable variances?
Set more ambitious targets
Increase production
Take on more staff
Percentage Change in Profit calculation?
current years profit - previous years profit
______________________ x 100
previous years profit
Gross profit calculation?
total revenue - cost of sales
Operating profit calculation?
gross profit - other operating expenses
Profit for the year (Net Profit) calculation?
operating profit - interest
What is a Statement of Comprehensive Income?
Also known as a profit and loss account
Shows how much money has been coming into the business and how much has been going out over a period of time
Retained profit calculation?
profit for the year after tax - dividends
What does the profit margin show?
How profitable a business is
Gross profit margin calculation?
gross profit
____________ x 100
revenue
Operating profit margin calculation?
operating profit
__________________ x 100
revenue
Profit for the year margin (Net Profit) calculation?
profit for the year
___________________ x 100
revenue
Methods for increasing profit margin?
Increasing revenue
Reducing cost of sales
Methods for increasing operating profit margin and profit for the year margin?
Reduce operating expenses
-cutting out unnecessary tasks
-finding cheaper premises to rent
Definition of cash?
What a business has now to pay its bills
Cash is constantly flowing in out out of a business
What is a Statement of financial position (balance sheet)?
Snapshot of a firms finances at a fixed point in time
What are some things a balance sheet shows?
Assets
Liabilities
Capital
Source of Capital
Net current assets calculation?
current assets - current liabilities
Net assets calculation?
net current assets + non current assets - non current liabilities
Non-current assets meaning?
Assets that the business is likely to keep for more than a year
e.g. land, computers, desk
Current assets meaning?
Assets that the business is likely to exchange for cash
Current liabilities meaning?
Debts which need to be paid off within a year
e.g. overdraft, taxes, dividends
Total current liabilities meaning?
Deducted from total non-current and current assets to give the value of ‘assets employed’
Non-current liabilities meaning?
Debts that a business will pay off over several years
What are bad debts?
Debts that Debtor wont ever pay
What does liquidity of an asset mean?
How easily it can be turned into cash and used to buy things
Current ratio calculation?
current assets
_________________
current liabilities
Acid Test Ratio calculation?
current assets - inventory
___________________________
current liabilities
What is working capital?
Finance available for day-to-day spending
Working capital calculation?
current assets - current liabilities
When does a business fail?
When it cannot cover its expenses
What are the internal financial factors that cause business failure?
Bad management of working capital
Poor efficiency
Using expensive financing methods
What are the internal non-financial factors that cause business failure?
Poor communication
Insufficient market research and analysis
Bad marketing
Failure to keep up with consumer preferences
What are the external financial factors that cause business failure?
Economic recession - consumers have less money to spend
Change in exchange rates can affect demand
What are the external non-financial factors that cause business failure?
Actions of competitors
Change in consumer trends
Poor communication outside the business (e.g. suppliers)
