Theme 2 - Managing Business Activities Flashcards
1
Q
Types of internal finance
A
- Owner’s capital
- Retained profit
- Sale of assets
2
Q
Owner’s capital
A
Money invested into a business by its owner. This can come from personal savings or other personal financial sources
3
Q
Advantages and disadvantages of owner’s capital
A
- Reduces reliance on external finance
- However carries risk of personal financial loss
4
Q
Retained profit
A
A business’s net profit that is kept within the company instead of being distributed to shareholders as dividends. It is reinvested in the business for purposes such as expansion, research and development, debt repayment, or improving operational efficiency
5
Q
Advantages and disadvantages of retained profit
A
- Doesn’t have to be paid back with interest
- However once it is used its gone also not available for recent startups
- Danger of hoarding cash
6
Q
Sale of assets
A
A business selling off its non-essential or underutilised assets,such as machinery, buildings, land, or vehicles to generate cash
7
Q
External sources of finance
A
- Family and friends
- Banks
- Peer to peer funding
- Business angels
8
Q
Business angels
A
Wealthy individuals who invest their own money into start-ups or early-stage businesses in exchange for equity (ownership shares). They provide not only funding but often mentorship, industry expertise, and valuable business connections
9
Q
External methods of finance
A
- Bank loan
- Share capital
- Venture capital
- Overdraft
- Leasing
- Trade credit
- Crowd funding
10
Q
Bank loan
A
Fixed amount of money borrowed from a bank that must be repaid over a set period, usually with interest
11
Q
Advantages and disadvantages of a bank loan
A
- Can provide a large sum of money for business investment
- Interest payments increase overall costs
12
Q
Share capital
A
Money raised by a business through the sale of shares to investors
13
Q
Advantages and disadvantages of share capital
A
- No repayment required, unlike loans
- Ownership is diluted as new shareholders gain control
- Shareholders expect dividends, reducing retained profit
14
Q
Venture capital
A
Funding provided by venture capital firms or investors to startups and high-growth businesses in exchange for equity (ownership shares). It is typically used by businesses with strong potential but high risk
15
Q
Advantages and disadvantages of venture capital
A
- Investors bring expertise, networking opportunities, and strategic guidance
- Loss of ownership and control as investors gain equity
- Pressure to deliver strong returns may influence decision-making
16
Q
Overdraft
A
Short-term borrowing facility that allows a business to withdraw more money than it has in its bank account, up to an agreed limit
17
Q
Advantages and disadvantages of an overdraft
A
- Quick and easy access to funds
- Helps businesses handle short-term cash flow problems
- High-interest rates compared to loans
18
Q
Leasing
A
Method of acquiring assets (such as equipment, vehicles, or machinery) without purchasing them outright. Instead, a business pays a regular fee to use the asset for an agreed period
19
Q
Advantages and disadvantages of leasing
A
- No large upfront cost, improving cash flow
- Businesses can upgrade to newer equipment without purchasing
- Can be more expensive in the long run compared to buying outright
20
Q
Trade credit
A
Arrangement where a business buys goods or services from a supplier and agrees to pay for them at a later date
21
Q
Advantages and disadvantages of trade credit
A
- Helps businesses manage cash flow and avoid needing immediate cash for purchases
- Late payments may incur interest charges or penalties
- Over-reliance on trade credit can lead to debt buildup
22
Q
Crowdfunding
A
Method of raising finance by collecting small amounts of money from a large number of people, typically via online platforms. It is often used by startups, entrepreneurs, and creative projects to secure funding without relying on traditional investors or banks
23
Q
Advantages and disadvantages of crowdfunding
A
- Provides exposure to a large audience, acting as a marketing tool that helps businesses gain visibility and attract future customers or investors
- Businesses do not have to repay backers or offer equity
- Requires significant time and effort, including creating promotional materials, engaging with backers, and managing the platform
- No guarantee that the campaign will meet its funding goal
24
Q
Short term methods of finance
A
- Overdraft
- Trade credit
25
Long term methods of finance
1. Share capital
2. Bank loans
3. Retained profits
4. Mortgages
5. Venture capital
26
Working capital
Represents the funds available for day-to-day operations and is a key indicator of a business's financial health and its ability to cover short-term expenses
27
Limited liability
Legal structure in which the financial responsibility of the owners or shareholders of a business is limited to the amount of money they have invested in the business. In the event of the company facing financial difficulties or legal claims, the personal assets of the owners or shareholders are protected and cannot be used to settle business debts or liabilities
28
Unlimited liability
Situation in which the owners or partners of a business are personally responsible for the debts and obligations of the business. If the business is unable to pay its debts, the personal assets of the owners, such as their homes, savings, and other personal property can be used to cover business liabilities
29
Business plan
Formal document that outlines the goals of a business, the strategy for achieving those goals, and the financial forecast for the business's success. It serves as a roadmap for the business’s operations, growth, and future success, and it is often used to secure funding or attract investors
30
Elements in a business plan
1. Cash flow forecast
2. Company description
3. Sales forecast
4. Competitors
5. Market research
31
Advantages of a business plan
1. Clarifies business goals and strategy
2. Can help secure funding from investors or financial institutions
3. By conducting market research and financial forecasting, a business plan identifies potential risks and challenges
32
Disadvantages of a business plan
1. Time-consuming
2. May be overly optimistic
3. Costs for professional help
33
Cash inflows
Money that comes into a business from various sources. It represents the incoming funds that a business receives, which can be used for operations, investment, or growth
34
Cash outflows
Money that flows out of a business to pay for its expenses, liabilities, or investments. These are the payments a company makes to cover operational costs, service debts, and fund capital expenditures
35
Net cash flow
Difference between the total cash inflows (money coming into the business) and total cash outflows (money going out of the business) over a specific period. It indicates whether a company has more cash coming in than going out (positive net cash flow) or vice versa (negative net cash flow)
36
Cash flow forecast
Financial tool that predicts a business's future cash inflows and outflows over a specific period
37
Advantages of a cash flow forecast
1. Improves financial planning
2. Helps with budgeting
3. Prevents cash shortages
38
Disadvantages of a cash flow forecast
1. Accuracy is dependent on assumptions
2. Time-consuming to prepare
3. Difficult to predict uncertain events
39
Sales Forecast
Estimate of a business’s future sales revenue over a specific period, based on historical data, market trends, and other relevant factors
40
Purpose of a sales forecast
1. Financial planning and budgeting
2. Inventory management
3. Cash flow management
4. Setting sales targets
5. Investors and stakeholder confidence
41
Factors affecting a sales forecast
1. Economic factors
2. Competition
3. Industry trends
4. Seasonality
5. External shocks
42
Advantages of a sales forecast
1. Improved financial planning
2. Informed decision-making
3. Risk management
43
Disadvantages of a sales forecast
1. Inaccuracy:
2. External factors
3. Complexity and time-consuming
44
Extrapolation
Statistical method used to estimate or predict future values based on historical data
45
Sales revenue
Total amount of money a business generates from selling goods or services during a specific period
46
Formula for sales revenue
Price * Quantity
47
Fixed costs
Business expenses that do not change with the level of goods or services produced by the business. These costs remain constant regardless of the company's production output or sales volume within a certain period
48
Variable costs
Expenses that change in direct proportion to the level of production or sales in a business. Unlike fixed costs, which remain constant regardless of activity, variable costs increase as production increases and decrease as production decreases
49
Profit
Reward for taking risks and making investments
50
Formula for profit
Total revenue - Total costs
51
Break even point
Level of sales or revenue at which a business's total revenues exactly equal its total costs (fixed and variable). At this point, the business is neither making a profit nor incurring a loss
52
Contribution
Amount of money from each unit sold that contributes towards covering a company’s fixed costs and generating profit.
53
Formula for contribution per unit
Price - Variable cost per unit
54
Margin of safety
Difference between actual output and break even output
55
Advantages of a break even analysis
1. Helps determine minimum sales needed
2. Guides pricing decisions
3. Profitability forecasting
56
Disadvantages of a break even analysis
1. Assumes constant prices and costs
2. Ignores external factors
3. Assumes constant sales volume
57
Types of budgeting
1. Historical
2. Zero based
58
Historical budgeting
Method of budgeting in which an organisation’s budget is based on past financial performance and trends
59
Zero based budgeting
Budgeting method where every expense must be justified for each new period, starting from a "zero base." Unlike traditional budgeting methods that only adjust previous budgets, ZBB requires that all costs, regardless of past budgets, be re-evaluated and approved before being included in the budget
60
Advantages and disadvantages of historical budgeting
1. Provides a benchmark for performance comparison
2. Time-saving
3. Ignores changing business conditions
4. Lack of flexibility and adaptability
61
Advantages and disadvantages of zero based budgeting
1. Eliminates wasteful spending
2. Encourages innovation and efficiency
3. Risk of bias in decision-making
4. Time-consuming and complex
62
Purpose of budgets
1. Financial control
2. Planning and decision-making
3. Motivation and goal setting
63
Difficulties in budgeting accurately
1. Unpredictable market conditions
2. Reliance on estimates and assumptions
3. Employee and departmental bias
64
Favourable variance
When a business’s actual financial performance is better than expected in a budget, meaning revenue is higher or costs are lower than expected
65
Adverse variance
When a business’s actual financial performance is worse than expected in a budget, meaning revenue is lower or costs are higher than expected
66
Gross profit
Difference between a business' sales revenue and cost of sales (variable costs)
67
Operating profit
Difference between a business' sales revenue and total costs
68
Net profit
Difference between a business' sales revenue and total costs plus interest and taxes
69
Formula for Gross Profit Margin
(Gross profit / Sales revenue) * 100
70
Formula for Operating Profit Margin
(Operating profit / Sales revenue) * 100
71
Formula for Net Profit Margin
(Net profit / Sales revenue) * 100
72
Ways to increase profitability
1. Increase price
2. Increase quantity sold
3. Decrease costs
73
Liquidity
How easily a business can convert its assets into cash to meet short-term obligations or expenses
74
Balance sheet
Snapshot of the business' assets and liabilities on a particular day
75
Formula for current ratio
Current assets / Current liabilities
76
Formula for acid test ratio
Current assets - Stocks / Current liabilities
77
Evaluating current ratio values
A ratio of 1.5 to 2 would suggest efficient management of working capital, but a low ratio of below 1 indicates cash problems
78
Evaluating acid test ratio values
Significantly less than 1 is often bad news
79
Main causes of cash flow problems
1. Low profits or losses
2. Excess inventories
3. Allowing too much credit
4. Overtrading
5. Seasonal demand
80
Overtrading
When a business expands too quickly putting pressure on short term finance
81
Methods to improve liquidity
1. Reduce amount of stock held
2. Reduce credit period offered
3. Pay suppliers later on agreed terms
82
Debt factoring
Financial transaction where a business sells its accounts receivable (outstanding invoices) to a third party, called a factor, at a discount in exchange for immediate cash. This allows the business to receive funds quickly instead of waiting for customers to pay their invoices
83
Financial reasons for business failure
1. Poor cash flow management
2. Lack of profitability
3. High debt levels
4. Inadequate financing
84
Non-financial reasons for business failure
1. Lack of management control
2. Significant external shocks
3. Poor marketing
4. Intense competition
85
External shocks
Unforeseen events or changes in the external environment that can disrupt the normal functioning of an economy or business operations. These shocks are typically beyond a business's control and can have significant and sudden effects on performance, profitability and even survival
86
Methods of production
1. Job
2. Batch
3. Flow
4. Cell
87
Job production
When a one off or small number of items are produced
88
Advantages of job production
1. Customer requirements and changes can be handled
2. Associated with higher quality
3. Employees can have more job satisfaction making them more motivated
89
Disadvantages of job production
1. Unit costs may be high
2. Labour intensive so high labour costs
3. Usually requires highly skilled workers
90
Batch production
When similar items are produced together offering standard products with some options
91
Advantages of batch production
1. Cost savings can be achieved by buying in bulk
2. Still allows customers some choice
3. Allows a firm to handle unexpected orders
92
Disadvantages of batch production
1. Takes time to switch production of one batch to another
2. Requires business to maintain higher stocks of raw materials and work in progress
3. Tasks may become repetitive and boring
93
Flow production
When a product moves continuously through the production process so as one task is finished the next one starts immediately
94
Advantages of flow production
1. Unit costs are lower due to higher outputs produced and improved work flow
2. Suitable for manufacture of large quantities
3. Less need for training and skills
95
Disadvantages of flow production
1. Very long set up time and reliant on high quality machinery
2. High raw materials and finished stocks unless lean production is used
3. Goods are mass produced so less differentiation for the consumer
96
Cell production
When work is organised into teams giving each team responsibility of doing part of the production process as a product moves through the assembly line
97
Advantages of cell production
1. Motivating for workers to see completed product and work in teams
2. Less time moving from place to place
98
Disadvantages of cell production
1. Could create tension in or between cells if work gets competitive
2. Huge investment in machinery for each cell
99
Labour productivity
The amount a worker produces
100
Formula for labour productivity
Output / Number of employees
101
Ways to improve productivity
1. Training
2. Improved employee motivation
3. More capital equipment
4. Improved organisation of production
102
Efficiency
Ability of a business to maximise output while minimising input, such as time, cost, and resources
103
Factors affecting efficiency
1. Level of wastage in production
2. Achieving the right balance between variable factors that affect efficiency, such as equipment and staff
104
Formula for unit costs
Total production costs / Total output
105
Economies of scale
When unit costs fall as output increases
106
Types of economies of scale
1. Purchasing
2. Technical
3. Marketing
4. Network
5. Financial
107
Purchasing economies of scale
When firms buy in larger quantities which results in lower unit costs
108
Technical economies of scale
When firms use specialist equipment or processes to boost productivity
109
Marketing economies of scale
When a firm spreads a fixed marketing spend over a larger range of products, markets and customers
110
Network economies of scale
When a firm adds extra customers or users to a network that is already established
111
Financial economies of scale
When larger firms benefit from access to more and cheaper finance
112
Examples of external economies of scale
1. Having many specialist suppliers close by
2. Access to research and development facilities
3. Pool of skilled labour to choose from
113
Labour intensive
When production relies on using labour resources
114
Capital intensive
When production relies on using capital resources
115
Advantages of capital intensive production
1. Greater opportunities for economies of scale
2. Potential for significantly better productivity
3. Better quality and speed
4. Lower labour costs
116
Disadvantages of capital intensive production
1. Significant investment required
2. Potential for loss competitiveness due to obsolesence
3. May generate resistance to change from labour force
117
Advantages of labour intensive production
1. Unit costs may still be low in low wage locations
2. Labour is a flexible resource through multiskilling and training
3. Labour being at the heart of the production process can help continuous improvement
118
Disadvantages of labour intensive production
1. Greater risk of problems with employee and employer relationships
2. Potentially high costs of labour turnover
3. Need for continuous investment in training
119
Capacity
Measure of how much output a business can achieve in a given period of time
120
Capacity utilisation
Percentage of a business' capacity that is actually being used over a specific period
121
Formula for capacity utilisation
(Actual level of output / Maximum potential output) * 100
122
Implications of under utilisation of capacity
1. Higher unit costs will impact competitiveness
2. Capital tied up in under utilised assets
3. Negative brand image, such as empty seats in a restaurant
123
Benefits of under utilsation of capacity
1. Sufficient space to meet extra orders
2. Maintenance of machines is easier
124
Implications of over utilisation of capacity
1. Production may be rushed and less time for quality control worsening quality
2. Decreases in employee motivation due to added workloads and stress
3. Less able to meet sudden or unexpected increases in demand causing a loss of sales
125
Three main types of stock
1. Raw materials and components
2. Work in progress
3. Finished goods
126
Factors influencing the amount of stock held
1. Need to satisfy demand
2. Need to manage working capital
3. Risk of stock losing value
127
The costs of holding stock
1. Cost of storage
2. Obsolescence risk
3. Stock out costs
128
Stock out costs
When a business runs out of stock they may have lost sales and need to pay extra to fulfil urgent replacement orders
129
Lead time
Amount of time between placing the order and receiving the stock
130
Buffer stock
Amount of stock held as a contingency in case of unexpected orders
131
Advantages of low stock levels
1. Lower stock holding costs
2. Lower risk of stock obsolescence
3. Less capital tied up in working capital
132
Advantages of high stock levels
1. Production fully supplied so no delays
2. Potential for lower unit costs by ordering in bulk
3. Better ability to handle unexpected changes in demand
133
Just In Time stock control
Where businesses only order and receive stock when it is needed for production or sales, rather than holding large amounts of inventory
134
Just In Case stock control
Where businesses keep large amounts of stock on hand to prevent shortages and meet unexpected demand
135
Advantages if Just In Time stock control
1. Reduced storage costs
2. Improved cash flow
3. Greater flexibility
136
Disadvantages if Just In Time stock control
1. High dependence on suppliers
2. Risk of stock shortages
3. No bulk discounts
137
Advantages of Just In Case stock control
1. Prevents stock shortages
2. Bulk buying discounts
3. Less supplier dependence
138
Disadvantages of Just In Case stock control
1. Higher storage costs
2. Risk of waste
3. Tied-up capital
139
Lean production
Business approach focused on minimising waste while maximising efficiency and productivity. It aims to use fewer resources (time, materials, and labour) while still meeting customer demand and maintaining high-quality standards
140
Quality control
Process of inspecting products to ensure they meet the required standards, which is done at the end of the production process
141
Quality assurance
Process that ensures production quality meets the requirements of customers, which builds quality into the production process
142
Advantages of quality control
1. Reduces defects
2. Improves customer satisfaction
143
Disadvantages of quality control
1. High costs
2. Time consuming
3. Only detects defects rather than preventing them
144
Advantages of quality assurance
1. Prevents defects
2. Reduces waste and costs
3. Boosts efficiency
145
Disadvantages of quality assurance
1. Higher training costs
2. Difficult to implement
3. Not always foolproof
146
Total Quality Management
Management philosophy committed to a focus on continuous improvements of products and services with the involvement of the entire workforce
147
Advantages of Total Quality Management
1. Puts customer at the heart of the production process
2. Motivational as workers feel more involved
3. Eliminates costs of inspection
148
Disadvantages of Total Quality Management
1. Requires strong leadership
2. Substantial investment in training and support
3. Disruptions and costs may outweigh the benefits
149
Kaizen
Management philosophy focused on making small, incremental improvements across all areas of a business, engaging every employee in the process
150
Quality circles
Small groups of employees who voluntarily meet on a regular basis to identify, analyse, and solve work-related problems, with the aim of improving product quality, operational efficiency, and overall workplace performance. These circles focus on continuous improvement through collaborative problem-solving and open communication
151
Advantages of quality circles
1. Motivates workers
2. Infuses team spirit amongst workers and improves communication
3. Improves productivity
152
Disadvantages of quality circles
1. Time consuming
2. Resistance to change
3. Expensive due to regular meetings
153
Inflation
A sustained increase in the general price level
154
Factors in PESTLE analysis
1. Political
2. Economic
3. Social
4. Technological
5. Legal
6. Environmental
155
Examples of political factors in PESTLE
1. Competition policy
2. Industry regulation
3. Business policy and incentives
4. Government spending and polcies
156
Examples of economic factors in PESTLE
1. Interest rates
2. Consumer spending and income
3. Exchange rates
4. Business cycle
157
Examples of social factors in PESTLE
1. Demographic change
2. Impact of pressure groups
3. Consumer tastes and fashions
4. Changing lifestyles
158
Examples of technological factors in PESTLE
1. Disruptive technologies
2. Adoption of mobile technology
3. New production processes
4. Big data and dynamic pricing
159
Examples of legal factors in PESTLE
1. Employment law
2. Minimum wage
3. Health and safety laws
4. Environmental legislation
160
Examples of ethical factors in PESTLE
1. Sustainability
2. Tax practices
3. Ethical sourcing
4. Pollution and carbon emissions
161
Business cycle
Natural fluctuations in economic activity over time, which reflects changes in output, employment, investment, and consumer spending
162
Phases of the business cycle
1. Boom
2. Recession
3. Slump
4. Recovery
163
Characteristics of a boom
1. High levels of consumer spending and business investment
2. Low unemployment rates
3. Rising inflation due to strong demand
164
Characteristics of a recession
1. Falling consumer spending and business investment
2. Rising unemployment
3. Declining confidence in the economy
165
Characteristics of a slump
1. Economic activity at its lowest point
2. High unemployment rates
3. Very little investment and spending
166
Characteristics of a recovery
1. Increasing consumer spending and business investment
2. Improving confidence in the economy
3. Falling unemployment rates
167
Real income
Measure the amount of disposable income available to consumers
168
Factors affecting real incomes
1. Inflation
2. Wage growth
3. Employment levels
4. Interest rates
5. Tax policies
169
Interest rates
Reward for saving and cost of borrowing expressed as a percentage of the money saved or borrowed
170
Exchange rates
Price of one currency expressed in terms of another currency
171
Impacts of a decreased interest rate
1. Cost of loans and debt is reduced, boosting consumer spending
2. Consumer confidence likely to rise
3. Business investment should be boosted
172
Effect of a stronger pound
Stronger Pound makes Imports Cheaper and Exports Dearer
173
Demand pull inflation
When aggregate demand (total spending in an economy) exceeds aggregate supply (the economy's ability to produce goods and services), leading to rising prices
174
Causes of demand pull inflation
1. Depreciation of the exchange rate
2. Reduction in direct or indirect taxation
3. Rising consumer confidence
4. Faster rates of economic growth in other countries
175
Cost push inflation
When rising production costs (e.g., wages, raw materials, energy) force businesses to increase prices, leading to overall inflation in the economy
176
Consequences of inflation
1. Reduced purchasing power
2. Uncertainty and reduced investment
3. Loss of international competitiveness
4. Higher interest rates
177
Fiscal policy
Use of government spending, taxation and borrowing to influence the level and growth of aggregate demand, output and jobs
178
Direct tax
Tax that is paid directly to the government by individuals or businesses on income, wealth, or property rather than being passed on to another party
179
Indirect tax
Tax levied on goods and services rather than directly on income or profits. It is collected by businesses and passed on to the government. Consumers pay the tax when they purchase a product or service
180
Transfer payments
Payments made by the government to individuals or groups without receiving any goods or services in return, such as state pension and job seeker's allowance
181
Current spending
Day-to-day expenses of the government on public services and the running of the economy. These are short-term, recurring costs that ensure essential services function properly, such as education and health
182
Capital spending
Government investment in long-term assets and infrastructure that helps improve economic growth and public services over time, such as new roads or hospitals
183
Key areas of employment legislation
1. Minimum wage
2. Anti discrimination
3. Health and safety requirements
4. Maternity and paternity leave
5. Fair working hours and breaks
184
Advantages of employment legislation
1. Protects workers' rights
2. Improves workplace safety
3. Encourages fair pay
4. Boosts employee morale and productivity
185
Disadvantages of employment legislation
1. Increases business costs
2. Reduces flexibility for employers
3. Can discourage business investment
186
Key areas of consumer protection legislation
1. Consumer rights
2. Product safety
3. Fair trading and advertising
187
Advantages of consumer protection legislation
1. Prevents exploitation
2. Improves consumer confidence
3. Ensures product safety
188
Disadvantages of consumer protection legislation
1. Increases business costs
2. Strict regulations can limit innovation
3. Legal disputes
189
Key areas of environmental legislation
1. Waste management and recycling
2. Pollution control
3. Carbon emissions and climate change regulations
4. Sustainable resource use
5. Protection of natural habitats and biodiversity
190
Advantages of environmental legislation
1. Reduces pollution and protects nature
2. Encourages sustainable business practices
3. Improves brand image and customer loyalty
191
Disadvantages of environmental legislation
1. Potential fines and legal issues
2. Competitiveness issues
3. Increases business costs
192
Key areas of competition policy legislation
1. Preventing anti-competitive agreements
2. Preventing abuse of market power
3. Regulating mergers and takeovers
4. Promoting consumer choice and fair pricing
5. Encouraging market entry and innovation
193
Advantages of competition policy legislation
1. Prevents exploitation
2. Encourages innovation
3. Protects consumer choice
194
Disadvantages of competition policy legislation
1. Can slow business growth
2. Difficult to enforce
3. Increased regulation costs
195
Key areas of health and safety legislation
1. Employer responsibilities
2. Employee responsibilities
3. Risk assessments and hazard control
4. Workplace conditions and safety equipment
5. Training and emergency procedures
196
Advantages of health and safety legislation
1. Reduces workplace accidents
2. Improves productivity
3. Avoids legal fines and lawsuits
4. Enhances business reputation
197
Disadvantages of health and safety legislation
1. Increases business costs
2. Time-consuming compliance
3. Can limit business flexibility
