Theme Two Flashcards
1
Q
What is internal finance?
A
Capital raised from within the business
2
Q
Name 3 types of internal finance.
A
- sale of assets
- retained profit
- owner’s capital/personal savings
3
Q
Advantages of internal finance?
A
- available immediately
- no credit checks
- no interest repayments
- no legal obligations attached
- retain control and ownership
4
Q
Disadvantages of internal finance?
A
- might not be enough
- not as flexible as external finance
- not sustainable in the long term
5
Q
What is external finance?
A
Capital sourced from outside the business or via a third party (etc a bank)
6
Q
Name 3 types of external finance.
A
- family and friends
- bank loan
- bank overdraft
- share capital
- venture capital
- trade credit
- grant
- p2p lending
- crowd funding
7
Q
Advantages and disadvantages: family and friends.
A
+ no interest
+ flexible
+ could agree to a longer repayment period
- limited funds
- could damage personal relationships if not repaid
8
Q
Advantages and disadvantages: bank loan.
A
+ can get sufficient amounts of capital
+ retain control of the company and its profits
- interest rates
- thorough business plan required to be considered
- if revenue is low the business may struggle to make the repayments leading to cashflow problems
- risky if you have unlimited liability
- higher gearing ratio
9
Q
What is P2P lending?
A
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers.
10
Q
Advantages and disadvantages: P2P lending.
A
+ higher returns than savings account
- high risk as you are not covered up to a certain amount the way you are with banks
11
Q
Advantages and disadvantages: share capital.
A
+ no interest repayments
+ can raise substantial level of funds
+ more flexible than other forms of finance
- finances have to be public in order to float on the stock market
- investors may require dividend payments
- can slow down decision making
- diminished control
12
Q
What is venture capital? Another name for a venture capitalist?
A
A form of financing where an established entrepreneur invests knowledge and capital into a business in exchange for shares. Venture capitalists are sometimes referred to as share angles
13
Q
Advantages and disadvantages: venture capital.
A
+ brings expertise
+ can raise a substantial sum of money
+ good for start-ups
- loss of some control of the business
- may slow down decision making if advice provided contradicts the owner’s intuition
- may require high returns on investments
- not entirely suitable for established businesses
14
Q
Advantages and disadvantages: overdraft.
A
+ instant so could improve short term finance
+ easier to arrange than an overdraft
- high interest rates
- not sustainable in the long term
15
Q
Advantages and disadvantages: crowdfunding.
A
+ potential to raise substantial amounts
+ relatively low risk as no repayments are required
+ don’t have to prove creditworthiness
+ retain full ownership
- slim chance of obtaining level of funds required
- time consuming
- donors may expect perks
16
Q
Advantages and disadvantages: trade credit.
A
+ improves cash flow
+ typically without interest
+ fuels business growth
+ if payments are made promptly, it can improve a business’s reputation with suppliers
- not suitable for large amounts
- negative impact on credit rating
- could lead to supply chain complications
- start-ups may be rejected
17
Q
How long do you have to pay off trade credit?
A
typically 30 days however this can be extended to 60 or 90.
18
Q
What is a grant?
A
money gifted by the government or charities to eligible businesses in order to boost the economy
19
Q
Advantages and disadvantages: grants.
A
+ doesn’t have to be repaid
+ retain control of the business
- need to meet qualifying requirements
- often contractually bound (especially with government grants)
20
Q
Factors to consider when choosing finance.
A
- amount of money required
- the cheapest option available
- how quickly is the money needed
21
Q
Limited liability
A
When the business and the owner have separate legal identities so the owner is therefore only able to lose however much they invested in.
22
Q
Advantages and disadvantages: limited liability.
A
+ won’t lose personal assets
+ can float shares on the stock market if a PLC
- have to publicly disclose financial details in order to qualify
- need to pay a fee and register with companies house in order to gain limited liability
- usually unavailable for sole traders or partnerships
23
Q
Unlimited liability
A
The business and the owner are considered one. If the business goes falls into bankruptcy, the owner could lose their personal savings and assets.
24
Q
Advantages and disadvantages: unlimited liability
A
+ financial reports can remain private
+ lower taxes
- not protected the same way you are with limited liability
- can’t float shares on the stock market
25
Which types of businesses typically have unlimited liability?
Sole traders and partnerships.
26
Which types of businesses typically have unlimited liability?
Sole traders and partnerships.
27
What does a business plan contain?
- overview
- objectives
- market research
- employees
- finances
- production
28
What is the purpose of a business plan?
- to give focus and direction to a business
- to gain finance (primarily through banks)
- to reduce the risk of failure
29
Contents of a finance plan?
- cash flow forecast
- balance sheet
- start up costs
- profit forecast
- sources of finance
30
Contents of a marketing plan?
- pricings
- promotion
- market research
- distribution
- competition
31
Workforce plan?
- number of staff required
- hours worked by employees
- types of contracts (full time, part time etc)
- recruitment methods
- training required
32
Production plan?
- materials
- production methods
- machinery used
- quality assurance
- stock control methods
33
What is cash flow?
The total amount of money being transferred into and out of a business, especially as affecting liquidity.
34
What does it mean if a business is insolvent?
When a business has no cash and therefore cannot pay its staff wages or debts.
35
Net cashflow
total inflows - total outflows
36
How can you improve cashflow (speeding up inflows)?
- discount for early payments
- reduce length of trade credit
- destock
- loan or overdraft
37
How can you improve cashflow (slowing down outflows)
- delay paying creditors
- reduce costs
38
What is a cash flow forecast?
As estimation of the levels inflows and outflows a business will have over a given period of time.
39
Advantages and disadvantages: cashflow forecast.
+ helps to inform budgets
+ can see what money is being spent on and whether or not it should be cut out or not
- doesn't take into account external shocks
- can create a false sense of security if it predicts positive cashflow for a prolonged period of time
- may not be an accurate prediction
40
What is sales forecasting?
involves predicting future sales volumes and values to inform decisions
41
Name 3 factors that can affect a sales forecast and explain how.
- consumer trends (seasonality, basket of goods etc)
- actions of competitors (if one business fails another might experience an increase in sales)
- economic variables (higher interest rates = lower inflation, lower interest rates = more spending and higher inflation etc)
42
Advantages and disadvantages: sales forecasting.
+ helps make key decisions (staffing, promotions etc)
+ informs budgets
- may not be accurate
- doesn't take into account outflows
- consumer trends and economic variables can be volatile
- harder in dynamic markets
- harder for startups to estimate likely sales
- difficult to predict consumer actions
43
total revenue - total costs
profit
44
price x quantity
total revenue
45
What are fixed costs? Name 2 some examples.
set outflows that aren't influenced by the output/number of customers - rent, fixed salaries, insurance, machinery etc
46
What are variable costs? Name 2 some examples.
outflows that are dependent on the output produced or the level of sales - raw materials, wages, packaging, delivery costs (like fuel) etc
47
What is break even and what is the formula?
When total revenue equals total costs so therefore the business is making neither a loss or a profit.
fixed costs/contribution
48
contribution formula
selling price - variable costs
49
What is the margin of safety and how is it calculated?
The buffer between break even and the actual level of sales.
actual sales - break even point
50
Advantages and disadvantages: calculating break even.
+ allows a business to plan how many products need to be sold in order to generate a profit
+ helps inform budgets
+ can inform decisions about prices and costs as well as resource management (whether they want to keep buffer stock etc)
+ support applications for loans
- assumes all products are sold at a single price
- doesn't take into account that firms may benefit from bulk buying
51
What are the three types of profit?
- operating profit - the amount left after expenses have been deducted from gross profit
- gross profit - after the cost of sales has been deducted from the revenue
- profit for the year - the cash left after all costs (inc. interest etc) have been taken away
52
What are the two main methods through which you can improve profit?
- increasing revenue (through higher prices, increased marketing, increase sales volume etc)
- lowering costs (use cheaper raw materials and reduce vc per unit, increase capacity utilisation, relocating to a cheaper premises etc)
53
What are other ways a business can increase profit?
- reduce product range
- outsource non-essential functions
54
What is liquidity?
The ability of a business to pay their debts and liabilities in cash when they are due.
55
What is a balance sheet?
Shows what the business has spent money on and where the money invested has come from - snapshot of the value of the business.
56
Non current vs current assets
- non current assets are owned for more than a year and the value typically depreciates
- current assets are owned for less than one year (e.g. stock)
57
Non current vs current liabilities
- debts that must be repaid within one year are current (e.g. overdraft)
- non current liabilities take over a year to pay (e.g. bank loan)
58
Equity formula
assets - liabilities
59
What can be inferred from a balance sheet?
- value of a business (equity)
- current assets
- liabilities
- liquidity of a business
- long term debts of a business
- how a business has been financed
60
Current ratio
current assets/current liabilities
61
Acid test ratio
(current assets - inventory)/current assets
62
What is the ideal current ratio?
2.0
63
What could a current ratio value below 1:1 suggest? What about above 2:1?
- below 1:1 may suggest a liquidity problem
- above 2:1 may indicate a poor management of resources with capital tied up in stock, debtors, or lying idle in the bank
64
What is the least liquid current asset and why?
Stock because it has to be sold first, turned into debtors, and then eventually cash.
65
What's the ideal acid test ratio?
Between 1-1.5:1
66
What is working capital? Its formula?
Refers to the money a business has to pay for its day to day running costs e.g. electricity, rent
current assets - current liabilities
67
Name 3 ways in which a business can improve liquidity
- reduce debt
- reduce overhead expenses
- sell unnecessary assets (e.g. unused machinery)
- implement JIT system of stock management
- switch to long term methods of finance (e.g. overdraft to loan)
- sell surplus inventory
68
Name 3 internal reasons why a business may fail.
- lack of planning
- cash flow problems
- lack of funds
- marketing problems
- poor leadership
69
Name 3 external reasons why a business may fail.
- changes in legislation (e.g. ban on smoking indoors in public resulted in a pubs losing a lot of business)
- competition
- changes in market prices
70
Name and explain the three main production methods. Give an example.
- job: bespoke, one off production, requires skilled workers e.g. a bespoke painting
- batch: products are made in small groups and can be altered individually if desired, could require semi-skilled workers e.g. cupcakes all the same flavour but all with different.
- flow: continuous production typically in a factory using automated machinery and production lines, can use non-skilled workers e.g. laptops
71
What is cell production?
Teams of workers work together to create part or all of a product. They might work in a U or I shaped line, for example.
72
What is productivity and its formula?
The output per worker over a period of time.
total output/number of employees
73
How can you improve productivity?
- specialisation
- motivation
- training
74
Advantages and disadvantages: improving productivity
+ increased output
- may lead to stress or burnout
- quality may actually go down if employees are overworked
75
Efficiency
Refers to making the best use of the resources a business has. The more efficient a business is the lower the unit costs.
76
Unit costs formula
total costs/total output
77
Name 3 ways to improve efficiency.
- outsourcing
- relocating
- investing in new tech
- lean production
78
What is lean production?
refers to using as few resources as possible in production (e.g. less storage and materials)
79
What is capacity utilization? What is the formula?
percentage of a business' available space that is actually in use.
(actual output/maximum output) x100
80
Ideal capacity utilization percentage
90%
81
Advantages and disadvantages: working at a high capacity
+ lower unit costs and therefore more competitive
- can't meet sudden surges in demand
- strain on resources (machinery could break, workers could be tired and stressed etc)
- production may be rushed
82
What are the 3 types of stock?
- raw materials
- work-in-progress
- finished goods
83
What is buffer stock and lead time?
- buffer stock is the minimum stock level that is kept
- lead time refers to the time it takes for stock to arrive
84
Problems with high stock?
- stock can perish or go to waste
- higher costs as it needs to be stores
- cost to the business if it remains unsold
85
Problems if stock is too low?
- difficult to meet demand
- loss of repeat purchases
- losing customers to competitors
- can't respond to external shocks as easily
86
Just in time vs just in case
- JIT is when stock is ordered as and when it is needed
- JIC when backup reserves of stock are kept
87
Advantages and disadvantages: JIT
+ improved cash flow as cash isn't tied up in stock
+ stock will be fresh and less likely to perish
- possibilities of late deliveries
- initial teething problems
- can't respond to surges in demand as easily
88
Advantages and disadvantages: JIC
+ can meet surges in demand
+ won't run out of stock
- cash is tied up in stock
- higher storage costs
- stock can perish
89
Define good quality
when a product or service meets the standards set by customers
90
Benefits of having high quality?
- strengthens brand and reputation
- can charge higher prices
- USP or competitive advantage
91
Quality control vs quality assurance
- quality control refers to checking the product at the end of the process
- quality assurance refers to it being checked throughout the production process, typically after each step and then again at the end
92
Advantages and disadvantages: quality control
- too late to correct faults
- financial loss as products have to be destroyed
+ focuses on the product rather than the manufacturing process
+ quicker than quality assurance
93
Advantages and disadvantages: quality assurance
+ defects are discovered before its too late
+ quality assurance check encourages customer loyalty and repeat purchases
+ cheaper in the long run as there is no need to hire a separate quality team
- time consuming to carry out
- time consuming to train staff
- high initial costs
94
Total quality management
A continuous process of detecting and eliminating manufacturing errors, streamlining supply chains, improving customer experience and ensuring employees are fully trained - essentially puts quality at the heart of everything in the business
95
Advantages and disadvantages: TQM
+ not paying for inspectors
+ empowered employees are motivated
+ zero defects
- takes time to introduce
- costly to train staff
- employees may not welcome extra responsibility
96
What is a kaizen approach to quality?
Coined by the Japanese, kaizen essentially means continuous improvement and involves constantly improving manufacturing methods
97
What is a quality circle?
A group of workers who do the same or similar work and meet regularly to identify, analyse and resolve problems in the business.
98
Name two economic influences and explain what they mean.
- interest rates - the cost of borrowing money - a levy added to loan repayments etc, also money added to savings by the bank
- fiscal policy - government policies concerning the economy e.g. taxation
- inflation - the fall in the value of money and therefore a sustained increase in prices
- exchange rates - the value of one currency in terms of another
99
How would an increase in interest rates affect businesses?
Increased interest rates would encourage people to save rather then spend, leading to businesses receiving fewer sales.
100
How would inflation affect a business?
Steeper inflation rates would make goods dearer and hence make consumers less likely to purchase.
101
How would exchange rates affect a business?
A strong pound would make exports dearer and therefore make it more expensive for a business to sell globally.
102
SPICED
Strong Pound Imports Cheap Exports Dear
(opposite for weak pound: imports dear, exports cheap)
103
Define legislation
a set of laws suggested by the government and made official by parliament that govern the nation.
104
What are the 5 categories that legislation falls under?
- consumer protection
- employee protection
- competitive policy
- environmental protection
- health and safety
105
Consumer Rights Act 2015
Protects consumer rights when purchasing goods and services. Customers have legal rights if:
- the product is unusable ('not fit for purpose')
- broken or damages ('not of satisfactory quality')
- not what was advertised or doesn't match the seller's
description
106
What is the effect of consumer protection laws on businesses?
A business must not give false or misleading information. Unhappy customers can claim a refund, repair, replacement or price reduction however this would have an adverse effect in the business, making potential consumers doubt their credibility and quality. It will also reduce the likelihood of them building customer loyalty through repeat purchases.
107
Employee Rights Act 1996
- states duties and rights of the employee and employer, including their right to maternity/paternity leave
- details regarding termination of employment including explaining and protecting employees against unfair dismissal and stating exemptions for unfair dismissal (e.g. when the employee has worked there for less than a given period of time) and the right to redundancy pay
- right to a written contract of employment within 60 days of starting work
108
National Minimum Wage Act 1998
- every worker has to be paid at least a baseline wage
- raises the costs of a business and may have an impact on their profit margin
- failure to pay minimum wage could result in fines or prosecution
- the current minimum wage for over 23s is £9.50 (£10.42 as of April 2023)
109
Working Time Regulations 1998
- ensures the working week is limited to 48 hours
- the right to 11 hours rest a day
- workers are entitled to an in work rest break if working for more than 4 or 6 hours
110
Pensions Act 2008
- every employer has to auto enrol their eligible employees into a pension scheme
- staff have the option to withdraw
- a contribution must be made to the scheme every month, this is monitored by a Pensions Regulator and if a month is missed then a fine has to be paid
- this adds to a business's costs, reducing their profit margin
111
Equality Act 2010
- protects against discrimination in the workplaces
- replacing existing sex discrimination, race relations and disability discrimination acts
112
Environmental Protection Act 1990
- makes provision for the improved control of pollution to the air, water and land by regulating the management of waste and the control of emissions.
113
Competition Policy
- legislation set out to prevent collusion (businesses meeting and agreeing to trade at a fixed price)
- regulated by the CMA who aim to 'promote competition for the benefit of consumers'
- if a merger seems like it will have too much market share, it is within the CMA's rights to stop it e.g. asda and sainsburys wasn't allowed to move forward with their merger
114
What does CMA stand for?
Competition and Markets Authority
115
Health and Safety at Work Act 1974
- lays down duties for employers regarding the welfare of employees in the workplace
- these include:
- managing the workplace so work related accidents and illnesses are
avoided
- provide adequate training so that employees are adequate to do their
work
- implement emergency procedures such as a fire escape plan etc
- if a business does not adhere to health and safety legislation it could risk fines, closure or imprisonment and it will have a negative impact on the brand image
116
Impact of legislation on a business's costs
- additional costs with regards to training staff, protection equipment such as helmet and setting pay at or above the minimum wage
- this would reduce the business's profit margin
- and raise their break even point
117
Impact of legislation on a business's training needs
- need to ensure that all their employees are fully trained
- training needs to be up to date and in compliance with the latest legislation
118
Impact of legislation on a business's training needs
- need to ensure that all their employees are fully trained
- training needs to be up to date and in compliance with the latest legislation
119
Impact of legislation on a business's training needs
- need to ensure that all their employees are fully trained
- training needs to be up to date and in compliance with the latest legislation
120
Impact of legislation on a business's recruitment
- cannot discriminate on the basis of sex, race or disability
- equal pay should be in place
- opportunities for promotion should be provided to everyone regardless of gender, race etc
121
Name 3 external factors that impact a business's competitiveness.
- number/size of competitors
- bargaining power of suppliers
- extent to which a product can be differentiated
- knowledge of buyers and sellers
- amount of regulation
122
Advantages and disadvantages: competitive environment.
+ increased innovation/efficiency
+ wider product ranges
+ force increased quality
- increased promotional costs
- lower prices meaning lower profit margin
- unethical behaviour
123
Advantages and disadvantages: operating in a small market.
+ less competition
+ fewer trade restrictions
+ easier to build relationships
- fewer barriers to entry meaning more businesses can enter easily
- less economies of scale
124
Advantages and disadvantages: operating in a large market
+ more potential customers
+ economies of scale
- more regulation
- international competition
125
Name 3 uses of budgets.
- establish priorities and set targets
- turn objectives into reality
- provide direction and coordination
- assign responsibilities
- allocate resources
- communicate targets
- delegate without losing control
- motivate staff
- improve efficiency
- forecast outcomes
- monitor performance
- control income and expenditure
126
Name a principle of effective budgeting.
- managerial responsibilities are clearly defined
- corrective action can be taken if results differ significantly from budget
- variances are investigated
- managers have a responsibility to adhere to budgets
127
What are the two methods of budgeting?
- historical : based on previous years figures, realistic in that it is based on actual figures but doesn't encourage efficiency
- zero-based : based on new proposals for sales and costs, more complicated and time consuming but may be more realistic
128
What are the 3 types of budgets?
- revenue/income
- cost
- profit
129
Variance Analysis
Calculating the difference between budgets and the actual results
130
Why might there be a positive variance?
- surge in demand so there are more sales than expected
- selling prices increased
- competitor weaknesses
- better productivity or efficiency
- a cautious sales budget
131
Why might there be an adverse variance?
- unexpected events
- overspending
- sales forecasts over optimistic
- market conditions meaning market conditions mean selling price is lower than expected
132
What does the importance of variances depend on?
- if it was unforeseen
- size of variance in money and percentage terms
- cause of variance
- whether it was temporary or the result of a long term trend
133
Name two implications of business.
- may be demotivating if they are imposed rather than negotiated
- unrealistic targets lead to demotivation (etc if meeting financial targets is a prerequisite performance related pay)
- can lead to departmental rivalry
- can result in a 'use it or lose it' mentality
