Unit 2- Managing Business Activities Flashcards
This covers Unit 2 content
What is a business plan?
A formal document that outlines a business’s objectives, strategies, financial forecasts, and market analysis.
Why is a business plan important?
Helps secure funding
Provides a roadmap for business success
Assists in decision-making
Identifies potential risks
What are the key components of a business plan?
Executive summary
Business description
Market analysis
Marketing strategy
Operations plan
Financial projections
What are the common sources of internal finance?
Retained profits
Owner’s capital (personal savings)
Sale of assets
How does a business plan attract investors?
Demonstrates profitability potential
Shows financial stability and planning
Highlights competitive advantage
What are the two main types of finance?
Internal finance
External finance
What are the common sources of external finance?
Bank loans
Overdrafts
Trade credit
Venture capital
Crowdfunding
Business angels
Grants
What is the difference between debt finance and equity finance?
Debt finance: Borrowed money that must be repaid (e.g., loans).
Equity finance: Raising money by selling shares in the business.
What are the advantages of using retained profit as a source of finance?
No interest payments
No loss of ownership
Readily available
What are the disadvantages of using retained profit?
Limited availability
Reduces funds for reinvestment
What is the difference between short-term and long-term finance?
Short-term finance: Used to cover immediate expenses (e.g., overdrafts, trade credit).
Long-term finance: Used for expansion and growth (e.g., bank loans, equity finance).
What are the advantages of using bank loans?
Fixed repayment schedule
Can borrow large amounts
Interest rates may be lower than overdrafts
What are the disadvantages of using bank loans?
Interest payments increase costs
Requires collateral
Can be difficult to obtain for new businesses
What are the advantages of using venture capital?
Provides large amounts of finance
Investors bring expertise and connections
No immediate repayment required
What is cash flow?
The movement of money in and out of a business over a period of time.
Why is cash flow important?
Ensures the business can meet short-term expenses
Helps prevent insolvency
Allows planning for future growth
What is a cash flow forecast?
A prediction of future cash inflows and outflows to help manage liquidity.
What are the main causes of cash flow problems?
Late customer payments
High overhead costs
Seasonal demand fluctuations
How can a business improve cash flow?
Offering discounts for early payments
Negotiating better payment terms with suppliers
Reducing unnecessary expenses
What is break-even analysis?
A financial tool that calculates the point where total revenue equals total costs, meaning no profit or loss is made.
Why is break-even analysis useful?
Helps set sales targets
Assists in pricing decisions
Identifies financial risks
What is the formula for break-even output?
break even output= fixed costs / selling price per unit - variable cost per unit
What are the limitations of break-even analysis?
Assumes all products are sold at the same price
Does not account for unpredictable changes in costs
Fixed costs may change over time
Why do businesses need finance for growth?
To expand production capacity
To enter new markets
To invest in research and development
What are the main challenges of financing business growth?
Increased financial risk
Loss of control with external investors
Higher costs associated with borrowing
How can a growing business ensure financial stability?
Effective budgeting and financial management
Diversifying income sources
Controlling costs
What is financial planning?
The process of estimating the capital required and determining how a business will allocate its financial resources to achieve its objectives.
Why is financial planning important for businesses?
Ensures sufficient funding for operations
Helps manage cash flow effectively
Reduces financial risks
Aids in strategic decision-making
What is sales forecasting?
Predicting future sales revenue based on past data, market trends, and external factors.
Why is sales forecasting important?
Helps in planning production levels
Assists in budgeting and cash flow management
Identifies potential market opportunities and risks
What factors can affect sales forecasting accuracy?
Consumer trends
Economic conditions
Competitor actions
Seasonal demand changes
What are the limitations of sales forecasting?
Based on historical data, which may not reflect future conditions
Cannot predict unexpected events (e.g., economic downturns)
Assumes constant external factors, which is unrealistic
What is a budget?
A financial plan that outlines expected income and expenditures over a specific period.
What are the three main types of budgets?
Income budget: Forecasts expected revenue.
Expenditure budget: Estimates expected costs.
Profit budget: Predicts expected profit based on revenue and costs.
What are the benefits of budgeting?
Improves financial control
Helps set business objectives
Enables performance
evaluation
Identifies potential cost-saving areas
What are the drawbacks of budgeting?
Can be time-consuming to prepare
May be inaccurate due to external changes
Can lead to inflexibility if not updated regularly
What is variance analysis?
The process of comparing actual financial performance with budgeted figures to identify differences.
What are the two types of variances?
Favorable variance: Actual results are better than expected
Adverse variance: Actual results are worse than expected
What is a cash flow forecast?
A financial tool that estimates the inflows and outflows of cash over a specific period.
What are the key components of a cash flow forecast?
Cash inflows (e.g., sales revenue, loans, investments)
Cash outflows (e.g., rent, wages, raw materials)
Net cash flow (difference between inflows and outflows)
Closing balance (amount of cash available at the end of a period)
Why is cash flow forecasting important?
Helps prevent liquidity problems
Allows better decision-making
Assists in securing finance from investors and banks
What factors can affect cash flow?
Seasonal fluctuations in demand
Late payments from customers
Unexpected expenses (e.g., equipment breakdowns)
What strategies can a business use to improve cash flow?
Offering discounts for early payments
Delaying supplier payments
Reducing unnecessary expenditures
What is a profit and loss forecast?
A financial statement that estimates future revenue, costs, and profit over a given period.
Why is a profit and loss forecast important?
Helps assess financial viability
Assists in decision-making and strategy development
Supports applications for external finance
What are the key components of a profit and loss forecast?
Revenue (total sales income)
Cost of sales (direct costs)
Gross profit (Revenue - Cost of Sales)
Operating expenses (e.g., rent, wages)
Net profit (Gross Profit - Operating Expenses)
What are common financial objectives?
Profit maximization
Cost minimization
Cash flow improvement
Return on investment (ROI) growth
What are financial key performance indicators (KPIs)?
Gross profit margin = (Gross Profit / Revenue) × 100
Net profit margin = (Net Profit / Revenue) × 100
Return on capital employed = (Operating Profit / Capital Employed) × 100
Why are financial objectives important?
Help businesses measure success
Provide direction for decision-making
Assist in securing investment
What are the two main financial statements used in business finance management?
Income Statement (Profit and Loss Statement)
Statement of Financial Position (Balance Sheet)
What is the purpose of an income statement?
It shows a business’s revenues, costs, and profits over a specific period.
What is the purpose of a statement of financial position?
It shows a business’s financial position at a specific point in time, including assets, liabilities, and equity.
What is the difference between profit and cash flow?
Profit is the financial gain when revenue exceeds costs.
Cash flow is the movement of money in and out of a business.
Why can a profitable business still face cash flow problems?
Delayed customer payments
High fixed costs consuming available cash
Inventory being held without being sold
How can a business improve its cash flow?
Speeding up customer payments
Negotiating longer payment terms with suppliers
Cutting unnecessary expenses
What is gross profit?
Revenue minus the cost of goods sold.
What is the formula for gross profit margin?
gross profit margin= gross profit/revenue x100
What is operating profit?
Gross profit minus operating expenses.
What is the formula for operating profit margin?
operating profit margin= operating profit/revenue x 100
What is net profit?
The final profit after all expenses, including taxes and interest, have been deducted.
What is the formula for net profit margin?
net profit margin = net profit/revenue x 100
What is liquidity in business finance?
The ability of a business to meet short-term financial obligations.
Why are profit margins important for a business?
They indicate how efficiently a business converts revenue into profit.
Higher margins mean better profitability.
What is the current ratio, and how is it calculated?
current ratio = current assets / current liabilities
What does a current ratio above 1 indicate?
The business has more short-term assets than liabilities and is financially stable.
What is the acid-test ratio, and how is it calculated?
acid-test ratio = current assets - inventory / current liabilities
Why is the acid-test ratio more reliable than the current ratio?
It excludes inventory, which may not be easily converted into cash.
What happens if a business has a very low liquidity ratio?
It may struggle to pay short-term debts, leading to financial difficulties or insolvency.
How can a business reduce costs without negatively affecting operations?
Negotiating better deals with suppliers
Reducing waste and inefficiencies
Using technology to improve productivity
What are the two main types of business costs?
Fixed costs: Do not change with output (e.g., rent, salaries).
Variable costs: Change with output (e.g., raw materials, electricity).
Why is cost control important in managing finance?
Helps maximize profit margins
Improves financial sustainability
Prevents unnecessary financial strain
Why is break-even analysis useful in finance management?
Helps businesses determine the minimum sales needed to cover costs.
Assists in setting pricing strategies.
Helps businesses assess financial risk before making investments.
What is the margin of safety in break-even analysis?
The difference between actual sales and break-even sales.
How can a business lower its break-even point?
Reducing fixed costs
Increasing selling price per unit
Improving efficiency in production
What are the key financial decisions businesses must make?
Investment decisions (e.g., purchasing new equipment)
Financing decisions (e.g., taking out loans or issuing shares)
Dividend decisions (how much profit to reinvest vs. distribute to shareholders)
Why is financial data important for decision-making?
Helps businesses assess profitability and sustainability
Reduces the risk of poor investments
Aids in long-term strategic planning
What are financial key performance indicators (KPIs) used for?
Measuring profitability, efficiency, and liquidity
Comparing financial performance over time
Identifying areas for improvement
What is resource management in business?
The process of efficiently using a business’s resources (materials, labor, and capital) to maximize productivity and profitability.
What are the four key areas of resource management?
Operations management
Inventory management
Supply chain management
Capacity utilization
What is operational efficiency?
The ability to produce goods and services using the least amount of resources while maintaining quality.
How can a business improve productivity?
Using automation and technology
Training employees to improve skills
Reducing waste in production
Why is productivity important for businesses?
Higher productivity reduces costs and increases profitability.
It allows businesses to offer competitive prices.
What is labor productivity, and how is it calculated?
labor productivity = total output / number of employees
What are the three main types of inventory?
Raw materials (used in production)
Work-in-progress (partially completed goods)
Finished goods (ready for sale)
What is Just-In-Time inventory management?
A system where stock is ordered only when needed, reducing storage costs.
What is Just-In-Case inventory management?
A system where businesses hold extra stock to prevent shortages.
What are the advantages of JIT?
Reduces storage costs
Minimizes waste
Improves cash flow
What are the risks of JIT?
Stock shortages if suppliers delay
High dependency on reliable suppliers
What is buffer stock?
Extra stock held to deal with unexpected demand or supply delays.
What is a supply chain?
The network of suppliers, manufacturers, and distributors involved in producing and delivering a product.
Why is supply chain management important?
Ensures a smooth flow of materials and products.
Reduces costs and improves efficiency.
Helps businesses respond to market demand quickly.
How can businesses improve supply chain efficiency?
Using technology to track stock levels.
Building strong relationships with reliable suppliers.
Streamlining transportation and logistics.
What is outsourcing in supply chain management?
Hiring external companies to handle business functions like manufacturing or logistics.
What are the benefits of outsourcing?
Reduces costs.
Allows businesses to focus on core activities.
Provides access to specialized expertise.
What are the risks of outsourcing?
Loss of control over quality.
Dependence on external suppliers.
What is capacity utilization?
The percentage of total production capacity that is actually being used.
How is capacity utilization calculated?
capital utilization = actual output / maximum possible output x 100
Why is high capacity utilization beneficial?
Lowers fixed costs per unit.
Improves profitability.
Increases efficiency.
What are the risks of running at full capacity?
Increased risk of breakdowns and inefficiencies.
Less flexibility to meet sudden demand changes.
What strategies can businesses use if capacity utilization is too low?
Increase marketing efforts to boost demand.
Reduce capacity by downsizing production.
Find alternative uses for production facilities.
What is quality control?
A process where finished products are inspected to ensure they meet standards.
What is quality assurance?
A system that ensures quality is built into every stage of production rather than just checking at the end.
What is Total Quality Management?
A company-wide approach where all employees focus on continuous quality improvement.
What are the benefits of TQM?
Improves customer satisfaction.
Reduces waste and defects.
Enhances reputation.
What is Kaizen?
A Japanese term meaning “continuous improvement,” where employees regularly suggest small improvements to processes.
What is lean production?
A strategy focused on minimizing waste while maximizing efficiency.
What are common types of waste in production?
Overproduction (making too much stock).
Defects (faulty products needing rework).
Waiting time (delays in production).
How can businesses reduce waste?
Using automation to minimize errors.
Implementing JIT inventory management.
Training employees in quality control.
What are the three main production methods?
Job production: Custom-made, one-off items (e.g., handmade furniture).
Batch production: Groups of similar items produced together (e.g., bakery goods).
Flow production: Continuous production of identical items (e.g., cars, bottled drinks).
What are the advantages of flow production?
High efficiency and output.
Lower costs per unit.
What are the disadvantages of flow production?
High initial costs for machinery.
Less flexibility in customization.
How can government policies affect businesses?
Changes in taxation, regulations, and spending can impact costs, demand, and profitability.
What type of businesses benefit most from job production?
Businesses offering highly customized products (e.g., bespoke clothing, luxury watches).
What are the main categories of external influences?
Political
Economic
Social
Technological
Legal
Environmental
What are external influences in business?
Factors outside a business’s control that can impact its operations, decision-making, and performance.
What are examples of government policies that influence businesses?
Minimum wage laws
Environmental regulations
Health and safety laws
What is the impact of competition policy on businesses?
Prevents monopolies and encourages fair competition, ensuring lower prices and better quality for consumers.
How does employment law affect businesses?
Ensures fair wages, protects workers’ rights, and regulates working conditions.
What are the consequences of non-compliance with legal regulations?
Fines, lawsuits, reputational damage, and possible business closure.
How do interest rates affect businesses?
Higher interest rates → Increased borrowing costs, lower consumer spending.
Lower interest rates → Cheaper loans, higher consumer demand.
What is the impact of inflation on businesses?
Increased costs of raw materials and wages.
Uncertainty in pricing and planning.
How do interest rates affect businesses?
Higher interest rates → Increased borrowing costs, lower consumer spending.
Lower interest rates → Cheaper loans, higher consumer demand.
What is the impact of inflation on businesses?
Increased costs of raw materials and wages.
Uncertainty in pricing and planning.
How does exchange rate fluctuation affect businesses?
A strong currency makes exports more expensive and imports cheaper.
A weak currency makes exports cheaper and imports more expensive.
What is the effect of economic growth on businesses?
Boom periods: Higher demand, increased sales, and expansion opportunities.
Recession periods: Lower demand, cost-cutting, and possible downsizing.
How does an aging population affect businesses?
Increased demand for healthcare and leisure services.
Reduced workforce availability.
How does unemployment affect businesses?
High unemployment → Larger labor pool, lower wages, reduced consumer spending.
Low unemployment → Skills shortages, higher wages, stronger consumer demand.
How do changing consumer lifestyles impact businesses?
More demand for convenience products (e.g., online shopping, fast food).
Greater focus on health and sustainability.
How does urbanization influence businesses?
Higher demand for housing, transportation, and infrastructure.
What is the impact of cultural diversity on businesses?
Opportunities to cater to diverse markets.
Need for inclusive marketing and HR policies.
What are the effects of automation on businesses?
Increased efficiency and productivity.
Reduced labor costs but potential job losses.
How has e-commerce changed business operations?
Expanded market reach, lower overhead costs, and increased competition.
What is the impact of digital marketing on businesses?
Cost-effective advertising, personalized promotions, and improved customer engagement.
What role does artificial intelligence (AI) play in business?
Enhances decision-making, automates customer service, and improves efficiency.
How does cybersecurity affect businesses?
Protects customer data, builds trust, and prevents financial losses.
What is corporate social responsibility (CSR)?
A business’s commitment to ethical practices and sustainable development.
How do environmental regulations affect businesses?
Increases compliance costs but promotes sustainability.
Why is sustainability important for businesses?
Enhances brand reputation, attracts eco-conscious consumers, and reduces long-term costs.
What are examples of ethical business practices?
Fair trade sourcing, reducing carbon footprint, and ensuring worker rights.
How does competition influence business decisions?
Encourages innovation, pricing strategies, and customer service improvements.
What are the effects of monopolies on markets?
Higher prices, lower consumer choice, and reduced innovation.
How does globalization impact businesses?
Expands markets but increases competition from international firms.
What strategies can businesses use to remain competitive?
Differentiation, cost leadership, and market segmentation.
