Unit 3 (3.3, 3.7, 4.2) Flashcards
Revenue
- The income received from the sale of a good and service
- Total revenue = price x quantity sold (or P x Q)
E.g. Johnson Java sells coffee for €3 a cup aand sell 600 cups a week
Revenue = 3 x 600 = €1,800 a week
Revenues Streams
- The income a business gets from different business activities
Pros and Cons Revenue Streams:
- Allow the business to generate extra revenue and profit
- Don’t have to rely on one source of revenue as much
- May distract the business from its core purpose
Fixed Costs
Costs that do not vary with output in the short run
Variable costs
Costs that increase as output increases
Total Costs and Profit Calculations
Total Costs = Fixed Costs + Variable Costs
Profit = Revenue - Total Costs
Profit = Revenue - Fixed Costs - Variable Costs
Cashflow Forecast
A statement that shows the expected cash a business expects to receive and pay out over a period of time
Examples of Cash Inflows
- Sales revenue
- Owner’s capital
- Loans
- Sale of Fixed Assets
Example of Outflows
- Rent
- Wages
- Purchase of inputs and materials
- Utility payments (water, electrical bills…)
Cashflow Forecast Structure
A. Opening Balance
B. Cash inflows
C. Cash outflows
D. Net monthly cash flow (B - C)
E. Closing balance (A + D)
Difference between profit and cash flow
Profit = Revenue - Total Costs
Cash Flow = Cash Inflows - Cash Outflows
The main difference between profit and cashflow is timing
Cash might be collected from customers at the end
Direct Costs
- Costs that can be clearly identified with production of each unit of production or a project
- Costs of meat in hamburgers
- Costs of Business teacher in Business education
Indirect/Overheads
Costs that don’t contribute to production but keep the company going
- Promotional expenditure in a supermarket
- Cost of cleaning a school or business
Capital Expenditure
Spending to purchase fixed assets:
- Factories
- Machinery
- Vehicles - e.g delivery trucks
- Furniture
Usually, will last more than 1 year
The main purpose is to drive growth in the business
Revenue Expenditure
Spending on the day-to-day costs of running the business:
- Utility bills, e.g. electricity and water
- Employee salaries
- Office supplies
- Rent
- Insurance
Paid daily, weekly or monthly
Not being to pay these is bankruptcy
Working capital
Funds/money available for the day - to - day running of the business
Liquidity
How quickly assets can be turned into cash
Working capital cycle
- The period of time from buying inputs to receiving cash from sale
- The longer this time period is, the longer it takes it collect cash from selling goods/services
Examples of Business Investment
E.g. Spending on fixed assets (capital expenditure)
E.g. new factory, Research and development
The relationship between investment, profit and cash flow
Investment:
- Large amount needed - buying assets, advertising, production
Profit:
- Investment should lead to higher future profits
Cash:
- Large outflow at the beginning to pay for investments
- Followed by regular small cash inflows as profits increase
- Business needs to manage cash flow in the short run
Strategies for dealing with cash flow problems
Improving cash inflows:
- Sell assets (e.g. machinery, patents)
- Short term promotion (e.g. discount)
- Improve credit terms - e.g. reduce trade credit to customers from 60 days to 30 days - collect cash from sales quicker
- Any Sources of Finance - e.g. bank loan, share capital, crowdfunding
Reduce cash outflows:
- Finding cheaper suppliers
- Delay payments to creditors - e.g. ask to increase trade credit ot suppliers from 30 to 60 days
- Delay spending on capital equipment (or lease)
- Cut unnecessary overheads
- Reduce stock (inventory of inputs and finished goods)
Marketing Planning
The process of identifying the marketing goals of a business and what strategies they will use to achieve those goals
Marketing Plan
Marketing Objectives
- E.g. increase market share
Marketing Strategies
- E.g. target new customers
Target Market
- Might be expanded
Market Research
- Are we going to do market research ourselves?
- E.g. main competitors, customers needs
Marketing Budget
Mass Marketing
- When a business aims to sell a product to all consumers in the market
An undifferentiated strategy - i.e. does not target anyone in particular
- Education market - targets all students, appeal to everyone
Niche Marketing
- When a business focuses on a specific and well-defined target market or part of the market
A differentiated strategy - i.e. is aimed at certain consumers
- Produce pencil for art students or architecture students
Product Differentiation
Ways in which your business’s product are different to the competitors
USP
Any aspect of the business that makes it appear different to the competitors in the mind of the consumers
- The best/cheapest
- Well-known slogan/advert
- Only business in the area
- The first/original
- The shopping experience (IKEA)
- Home delivery
Market Segmentation
Breaking a market into different parts (segment), where consumers in each segment have similar characteristics
Demographic Segmentation
- Age
- Gender
- Race
- Religion
- Martial Status
- Education
- Income
- Language
Geographic Segmentation
- Local tastes
- Local culture
- Climate
- Urban/rural
- Population density
Psychographic Segmentation
- Lifestyle
- Hobbies and interests
- Values
- Motivations
Product Position Maxtrix (PPM)
- Shows customer perceptions of product or brand compared to competitors
Identify 2 key characteristics important to consumers
- Often price and quality
- But could be anything that makes sense
Reasons to do PPM
Gain information on the market
Finding gaps in the market
- Discovering a gap in the market
- Less competition when we enter the market segment
Repositioning
- When a business try to change the perception that customers have of their product
- From Premium to Luxury: An Evaluation of the Repositioning of Rimowa
Creating a product portfolio
- Have a range of products that target different segments of the market
- Then your products don’t compete for the same customer
Pros of Product Differentiation
- Better brand image
- Increased brand loyalty
- Can charge higher prices
- More resistant to changes in the market
Cons of Product Differentiation
- Higher marketing costs
- Can be copied by competitors
- Might limit the potential audience
Pros of Mass Marketing
- More potential customers and higher sales
- Higher brand recognition
- Lower costs as higher production leads to economies of scale
Pros of Niche Marketing
- Product is design for its customers so brand loyalty
- Less competition so can charge higher prices for specialized products
- Can specialize and focus on your target customers
- In general, small/new firms will use niche marketing
- With success they may move more into the mass market
Causes of cash flow problems
- Unprofitable business
- Giving too much trade credit to customers
- Expanding too quickly
- Spending too much on expansion
- Having too much stock
- Cash is tied up in stock and it takes time to sell
- Seasonal demand problems
Economy products (PPM)
Low price, Low quality
Bargain products (PPM)
Low price, High quality
Cowboy Products (PPM)
High price, Low quality
Premium Products (PPM)
High price, High quality
