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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
what are marketing economies?
costs for marketing are spread over more products
26
what are financial economies?
large business have more assets so are lower risk = cheaper loans
27
what are diseconomies of scale?
when business get too big and it leads to an increase in average costs
28
3 reasons for diseconomies of scale?
motivation, communication and organisation problems
29
why can no motivation be a cause of diseconomies of scale?
demotivated employees leads to a fall in productivity
30
why can organisation problems lead to diseconomies of scale?
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
31
why can communication problems lead to diseconomies of scale?
could be due to language/cultural barriers or if the business is too large and it has too many departments/managers etc
32
economies of scale and GG toys
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
profit as a reward for risk taking
the higher the risk, the greater the potential financial reward
34
what are the four lines to include on a break even graph?
total revenue total cost fixed costs total variable costs
35
what is the y axis on a BE graph?
cost/revenue
36
what is the x axis on a BE graph?
quantity
37
what is the margin of safety?
the difference between break even quantity and target sales
38
what is cash in bank
the money business has invested in a bamk
39
what is retained profit?
built up profits to finance projects
40
what is sales of assets?
a company sells equipment/sales etc to raise money
41
what is owners investment?
when the owners invests money to finance a project
42
what is share capital?
money invested by share holders
43
how to work out a product's contribution?
unit selling price - unit variable cost
44
5 examples of internal sources of finance:
``` owners investment cash in bank sale of assets retained profit share capital ```
45
9 sources of external finance
``` overdraft mortgage bank loan new partner trade credit sale of assets grants hire purchase lease ```
46
what is an overdraft?
a business takes out more money than available and repays in instalments
47
what is trade credit?
suppliers deliver goods but are willing to wait for payment
48
what is a bank loan?
bank gives a business an agreed sum and it is paid back over time
49
what is leasing?
regular payments made for the use of a warehouse etc
50
what is a mortgage?
used for buying property, payments spread over agreed time period
51
what is hire purchase?
regular payments made for the use of equipment/machinery
52
what is a grant?
money given to a business by the government to get started
53
what is a new partner as a source of finance?
when a new partner joins, they will often invest money into the business
54
what is selling shares a a source of finance?
a plc/ltd sells shares in exchange for money
55
what is gg toys proposing to do in their new warehouse?
automate it
56
benefits of automation 3
``` no holiday/sick pay more efficient - times down by 1 hour - and reliable cost effective (no wages) ```
57
disadvantages of automation 3
expensive initial cost any break will lead to drop in productivity skilled workers needed to operate machinery
58
what is a cash flow forecast?
predicting money flowing into/out of a business
59
what should you never mention with cash flow?
profit
60
what is liquidity?
the ability to have access to cash to pay bills
61
cash inflows for tom's toys 2
sales revenue | grants
62
cash outflows for tom's toys
wages | expenses
63
what is net cash flow?
difference between inflows and outflows
64
benefits of retained profit 3
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
disadvantages of retained profit 3
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
advantages of a grant 3
no added cost for the business normally large sums of money increases jobs in the area
67
disadvantages of a grant 3
fierce competition normally short term normally terms and conditions
68
advantages of leasing 3
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
disadvantages of leasing 3
no control threat of eviction short term
70
advantages of a bank loan 3
negotiable time to repay money money is guaranteed instantaneous
71
disadvantages of a bank loan 3
interest must be paid often difficult to obtain - strict requirements harder for small businesses
72
2 ways to resolve cash flow problems
increase profit | decrease expenditure
73
advantages to doing a BE analysis? 2
illustrates how long until a profit is made | helps GG Toys see how risky the proposition is
74
disadvantages to doing a break even analysis? 2
it is only an estimate | variable costs often change
75
why would you do a cash flow forecast? 3
identifies potential problems in advance pleases stakeholders ensures business can afford payments
76
Problems with a cash flow forecast? 4
Doesn't take into account activity of competitors Time consuming Based on predicted figures Doesn't take changes in economy into account
77
How can the UK government influence the toy market? 3
Income tax rates Business taxes Safety standards

Business Studies (6 decks)

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