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Business Studies > Unit 3: Sources of finance > Flashcards

Unit 3: Sources of finance Flashcards

1
Q

what is break even point?

A

when the business isn’t making a profit or a loss

total sales = total revenue

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2
Q

how to work out total revenue?

A

revenue (selling price) x quantity sold

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3
Q

formula for break even

A

break even = fixed costs/contribution

break even = fixed costs/(selling cost per unit - variable costs per unit)

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4
Q

total costs

A

fixed costs + total variable costs

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5
Q

how to work out profit or loss?

A

total revenue - total cost

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6
Q

what do we need to know to do a break even analysis?

A

fixed costs
total variable costs
unit price
estimated sales

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7
Q

what is break even analysis?

A

it is used to look at costs and revenue to see when the business becomes financially liable

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8
Q

what is a products contribution?

A

unit selling price - unit variable cost

the amount each sale contributes towards fixed costs

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9
Q

what is an internal source of finance?

A

money coming from within the business

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10
Q

what is an external source of finance?

A

money coming from outside the business

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11
Q

3 reasons why a business may require finance?

A

taking over another company
relocating to bigger premises
cash-flow problems

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12
Q

what are business costs?

A

the costs a business must pay in order to function

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13
Q

what is break even point?

A

where total costs = total revenue

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14
Q

what are fixed costs?

A

costs which don’t change depending on output

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15
Q

what are variable costs?

A

costs which do change depending on output

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16
Q

2 examples of fixed costs

A

salary

rent

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17
Q

2 examples of variable costs

A

postage and packaging

raw materials

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18
Q

what is total variable cost?

A

the total amount of variable charges

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19
Q

how to work out total variable cost?

A

quantity sold x variable cost per unit

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20
Q

what is the total cost of a business?

A

the total sum of its fixed and variable costs

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21
Q

what are average costs?

A

the cost for each unit a business sells

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22
Q

how to find average cost?

A

total cost/amount sold

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23
Q

what are economies of scale?

A

an increase in output leads to a decrease in average costs

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24
Q

what are purchasing economies?

A

buying in bulk is cheaper

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25
Q

what are marketing economies?

A

costs for marketing are spread over more products

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26
Q

what are financial economies?

A

large business have more assets so are lower risk = cheaper loans

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27
Q

what are diseconomies of scale?

A

when business get too big and it leads to an increase in average costs

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28
Q

3 reasons for diseconomies of scale?

A

motivation, communication and organisation problems

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29
Q

why can no motivation be a cause of diseconomies of scale?

A

demotivated employees leads to a fall in productivity

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30
Q

why can organisation problems lead to diseconomies of scale?

A

if a business is too large and lacks a clear organisational structure, this can lead to jobs not being done and the business can’t operate successfully

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31
Q

why can communication problems lead to diseconomies of scale?

A

could be due to language/cultural barriers or if the business is too large and it has too many departments/managers etc

32
Q

economies of scale and GG toys

A

If GG Toys plc reduces the range of toys they produce this would lead to them increasing the number of toys in the smaller range – E.G Stop producing train set and double the number of Georgie Girl dolls. This would result in them requiring double the number of raw materials to produce the dolls. Purchasing double the amount of materials like plastic pellets would result in GG Toys benefiting from purchasing economies (buying in bulk) which would reduce the average cost of production and therefore increasing their profit.

33
Q

profit as a reward for risk taking

A

the higher the risk, the greater the potential financial reward

34
Q

what are the four lines to include on a break even graph?

A

total revenue
total cost
fixed costs
total variable costs

35
Q

what is the y axis on a BE graph?

A

cost/revenue

36
Q

what is the x axis on a BE graph?

A

quantity

37
Q

what is the margin of safety?

A

the difference between break even quantity and target sales

38
Q

what is cash in bank

A

the money business has invested in a bamk

39
Q

what is retained profit?

A

built up profits to finance projects

40
Q

what is sales of assets?

A

a company sells equipment/sales etc to raise money

41
Q

what is owners investment?

A

when the owners invests money to finance a project

42
Q

what is share capital?

A

money invested by share holders

43
Q

how to work out a product’s contribution?

A

unit selling price - unit variable cost

44
Q

5 examples of internal sources of finance:

A 
owners investment 
cash in bank
sale of assets
retained profit 
share capital
45
Q

9 sources of external finance

A 
overdraft 
mortgage
bank loan 
new partner 
trade credit
sale of assets 
grants 
hire purchase 
lease
46
Q

what is an overdraft?

A

a business takes out more money than available and repays in instalments

47
Q

what is trade credit?

A

suppliers deliver goods but are willing to wait for payment

48
Q

what is a bank loan?

A

bank gives a business an agreed sum and it is paid back over time

49
Q

what is leasing?

A

regular payments made for the use of a warehouse etc

50
Q

what is a mortgage?

A

used for buying property, payments spread over agreed time period

51
Q

what is hire purchase?

A

regular payments made for the use of equipment/machinery

52
Q

what is a grant?

A

money given to a business by the government to get started

53
Q

what is a new partner as a source of finance?

A

when a new partner joins, they will often invest money into the business

54
Q

what is selling shares a a source of finance?

A

a plc/ltd sells shares in exchange for money

55
Q

what is gg toys proposing to do in their new warehouse?

A

automate it

56
Q

benefits of automation 3

A 
no holiday/sick pay 
more efficient - times down by 1 hour - and reliable 
cost effective (no wages)
57
Q

disadvantages of automation 3

A

expensive initial cost
any break will lead to drop in productivity
skilled workers needed to operate machinery

58
Q

what is a cash flow forecast?

A

predicting money flowing into/out of a business

59
Q

what should you never mention with cash flow?

A

profit

60
Q

what is liquidity?

A

the ability to have access to cash to pay bills

61
Q

cash inflows for tom’s toys 2

A

sales revenue

grants

62
Q

cash outflows for tom’s toys

A

wages

expenses

63
Q

what is net cash flow?

A

difference between inflows and outflows

64
Q

benefits of retained profit 3

A

flexible - owners have complete control over when it is to be repaid
another person doesn’t need a share of the company
money is often already there

65
Q

disadvantages of retained profit 3

A

slow
hard for smaller businesses to create enough profit to finance it
other projects may have to be sacrificed to pay for this one

66
Q

advantages of a grant 3

A

no added cost for the business
normally large sums of money
increases jobs in the area

67
Q

disadvantages of a grant 3

A

fierce competition
normally short term
normally terms and conditions

68
Q

advantages of leasing 3

A

no huge upfront cost
if online selling isn’t a success, it doesn’t have to be permanent
less threat of going into debt

69
Q

disadvantages of leasing 3

A

no control
threat of eviction
short term

70
Q

advantages of a bank loan 3

A

negotiable time to repay money
money is guaranteed
instantaneous

71
Q

disadvantages of a bank loan 3

A

interest must be paid
often difficult to obtain - strict requirements
harder for small businesses

72
Q

2 ways to resolve cash flow problems

A

increase profit

decrease expenditure

73
Q

advantages to doing a BE analysis? 2

A

illustrates how long until a profit is made

helps GG Toys see how risky the proposition is

74
Q

disadvantages to doing a break even analysis? 2

A

it is only an estimate

variable costs often change

75
Q

why would you do a cash flow forecast? 3

A

identifies potential problems in advance
pleases stakeholders
ensures business can afford payments

76
Q

Problems with a cash flow forecast? 4

A

Doesn’t take into account activity of competitors
Time consuming
Based on predicted figures
Doesn’t take changes in economy into account

77
Q

How can the UK government influence the toy market? 3

A

Income tax rates
Business taxes
Safety standards

Business Studies (6 decks)

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