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Business Studies A-level > Unit 3.5 > Flashcards

Unit 3.5 Flashcards

1
Q

Finance

A

the management of the investment needed to open, run and grow a business

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2
Q

External finance

A

investment for the business that is obtained from banks, investors and lender OUTSIDE of the business.

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3
Q

Internal finance

A

money gained from INSIDE the business, e.g. owners personal savings

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4
Q

Receivables

A

customers that owe money to the business

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5
Q

cash-flow management

A

important to a business to ensure it has enough cash to pay off it’s day-to-day expenses

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6
Q

Deb factoring

A

selling debts to other companies who will collect it on behalf of the business, quickly eliminating receivables and replacing them with cash.

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7
Q

Debt Factoring - Pros

A
  • improves cash flow
  • frees up finance department
  • good for small businesses who don’t have the resources to case debts
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8
Q

Debt factoring - Cons

A
  • lower profit figure as full amount is never achieved
  • damage the reputation of the business who is seen as taking desperate measures to secure short-term finance.
  • company accounts less attractive to potential investors
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9
Q

Overdrafts

A

short term lending of capital by a bank to a business

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10
Q

Overdraft - Pros

A
  • quick fix method during a difficult month of sales etc.
  • can be arranged quickly
  • can be easily payed back
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11
Q

Overdraft cons

A
  • very expensive source of finance - high interest rates
  • not suitable for large amounts over a long period of time
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12
Q

Retained profits

A

profits that a business can use to reinvest back into the company.

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13
Q

Retained profits - Pros

A
  • no interest
  • no loss of shares or control for the owner
  • business doesn’t see a rise in their levels of debt
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14
Q

Retained profits - Cons

A
  • New businesses wont have access to this form of finance.
  • Businesses may not have large amounts of retained profit
  • opportunity cost of not being able to use the cash on other projects.
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15
Q

Share capital

A

finance raised from issuing shares in the business - external and long term method of finance

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16
Q

Share capital - Pros

A
  • investors often willing to provide extra investment to help the business grow
  • cost effective than a loan etc as no interest to pay back
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17
Q

Share capital - Cons

A
  • investors may require lost of background info. before buying the shares
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18
Q

Loans

A

renting money from a bank

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19
Q

Loans - Pros

A
  • fixed for certain length of time which will mean allow companies to plan ahead and know exactly when payments will leave their bank account.
  • Don’t lose control or power within the business
  • straightforward process
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20
Q

Loans - Cons

A
  • Bank will charge interest on the loan
  • not very flexible
  • bank will ask for security on a loan which may be a house etc
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21
Q

Venture capital

A

Issuing shares to a small number of investors in return for capital to invest into the business

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22
Q

Venture capital - Pros

A
  • business can gain skills of the venture capital investors and can gain links to good suppliers etc
  • good for owner who have been refused a bank loan
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23
Q

Venture capital - Cons

A
  • the investors look for strong business plans which can be difficult for some start-ups to produce
  • typically want large % stakes in the business - the owner will lose a lot of power within the business.
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24
Q

Cash flow

A

incoming’s and outgoings of cash, representing the trading activities of the firm

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25
Q

cash flow forecast

A

prediction of he timing and amounts of cash inflows and outflow over a specific period
shows if a firm needs to borrow cash and how much they may need to borrow.

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26
Q

Cash inflows

A

Loans
Shares
Revenue from sales
Investments
Receivables

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27
Q

Cash outflows

A

Salary’s
manufacturing costs
rents
tax
loan repayments
payable’s

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28
Q

Opening balance

A

this is the amount a business has at the start of each month

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29
Q

Closing balance

A

this is the money a business has at the end of each month

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30
Q

Inflows

A

all the money coming into a business

31
Q

Outflows

A

all the money going out of the business

32
Q

Importance of cash flow

A

cash flow problems are the main reason businesses fail

33
Q

Why create cash flow

A
  • creates an advanced warning of cash shortages
  • ensures business can pay employees and suppliers
  • reassurance to investors that the business is being managed properly
34
Q

Why do businesses suffer from cash flow problems?

A
  • suppliers may have very short credit periods as new businesses don’t have a good track record for paying bills on time
  • new businesses will not have cash reserves built up
35
Q

Cash flow problems

A
  • sales lower than expected
  • easy to be over-optimistic about sales
  • market research may have gaps
    -customers not paying on time
36
Q

Credit periods

A

affect the ability of the business to gain credit from its suppliers - the longer the credit period the later the cash flows out

37
Q

Solutions to cash flow problems

A
  • overdraft arrangements
  • negotiating terms with creditors
  • reviewing and rescheduling capital expenditure
38
Q

Limitations of cashflow forecasting

A
  • based on forecasts and may be inaccurate
  • cannot plan for unexpected events
  • Time consuming to create
39
Q

Difficulties in budgeting accurately - Sales forecasting

A
  • harder when the market experiences rapid change
  • start-up firms find it hard to estimate sales and revenues
40
Q

Difficulties in budgeting accurately - Costs

A
  • unexpected costs
  • depending on sales budget
  • changes in external environment will impact costs (exchange rates)
41
Q

Variation analysis

A

calculating and investing the difference between actual results and the budget
Variables can be adverse or favourable

42
Q

What is a budget

A

A financial plan for the future concerning the revenues and costs of a business

43
Q

Budgeting is a process

A
  • process by which financial control is exercised in a business
  • budgeting for revenues and costs are prepared in advance then compared with actual results to show any variances
44
Q

Budgeting uses in management

A
  • establish priorities and set targets
  • Assign responsibilities
  • motivate staff
  • forecast outcomes
  • delegate without loss of control
45
Q

Principles of good budgeting

A
  • managerial responsibilities are clearly defined
  • performance is monitored against the budget
  • unaccounted for variances are investigated
46
Q

Favourable variances

A

actual figures are better than the budgeted figures

47
Q

Adverse variances

A

Actual figures are worse than budgeted figure

48
Q

Causes of Favourable variances

A
  • stronger market demand than expected
  • cautious sales and cost assumptions
  • competitor weaknesses
  • higher productivity or efficiency than expected
49
Q

Causes of Adverse variances

A
  • Unexpected events lead to unbudgeted costs
  • over-spends by budget holders
  • sales forecasts prove over-optimistic
  • Market conditions mean selling prices are lower than budget
50
Q

Break-even point

A

where total revenue from sales is exactly the same as total costs

Level of output where total costs and total revenue are the same = break-even output

51
Q

Contribution

A

amount of money left over after variable costs are subtracted from the selling price of each output

52
Q

Effect of break-even on changes in costs and prices - fixed costs

A

fixed costs increase, business will have to produce more to break even

53
Q

Effect of break-even on changes in costs and prices - Variable costs

A

variable costs increase, total costs will rise with level of output meaning the business will have to produce more to break-even

54
Q

Effect of break-even on changes in costs and prices - changes in price

A

price increases then total revenue function will be steeper as revenue will be higher at every level of output meaning the businesses break-even will be at a lower output.

55
Q

Margin of safety

A

How much output or sales level can fall before a business reaches it’s breakeven output

56
Q

Operational objectives

A

short-term goals of the business

57
Q

Operational objectives - Costs

A

mass market goods = aim to produce goods and services at the lowest possible costs = lower prices for consumers

58
Q

Operational objectives - quality

A

business aims to create a product or service which fulfills the customers needs - good quality goods and services will give the business a competitive advantage

59
Q

Operational objectives - Speed of response

A

could be lead time ( time from customer order to the moment they receive the goods - quick responses mean customer satisfaction and reduced costs from returns and complaints

60
Q

Operational objectives - Flexibility

A

business needs to be able to change the products or services it offers to meet consumer trends.
Product flexibility = ability to change products
Volume flexibility = ability to change number of products produced

61
Q

Operational objectives - dependability

A

business needs to produce goods and services that meet consumer laws ( below )
- be able to make deliveries on time
- dependability is linked to reputation and customer loyalty

62
Q

Operational objectives - Environmental objectives

A

Businesses now have CSR and environmental policies which will help them to reduce costs - some may also use environmental objectives as a USP
May involve…
- Energy use
- Water consumption
- Noise polloution

63
Q

Operational objectives - Added value

A

any process that gives more perceived value to the customer

64
Q

Internal influences on operational objectives

A
  • Human resources - availability of skilled workforce
  • Production - capacity to meet changes in demand
  • Finances - size of operational budgets
  • Marketing - promotional activity may increase demand
  • Mission statement - feeds into the corporate objectives
65
Q

Income statement

A

shows the trading position of the business which is used to calculate gross profit

Balance sheet = snapshot of a business’s net worth at that particular moment - AKA the statement of financial position

66
Q

Cost of goods sold

A

Opening inventory = value of the inventory within a business at the start of a financial year

Closing inventory - value of inventory at the end of a financial year

67
Q

Two approaches of measuring profit

A

Profit in ABSLOOUTE terms - the value of profits earned - e.g. £50,000 profit made in the year

Profit in RELATIVE terms - profit earned as a proportion of sales achieved or investment made - e.g. £50,000 profit made from £500,000 of sales equalling a 10% profit margin

68
Q

Ratio analysis

A

analysing relationships between financial data to assess the performance of a business

69
Q

what do profitability ratios provide?

A
  • Is the business making a profit
  • how efficient is the business at turning revenues into profit
  • is the profit enough to justify investment in the business?
  • How does the profit achieved compare with the rest of the industry
70
Q

Operating profit

A

what is left after all the costs of a business have been taken from it’s revenues

71
Q

What does operating profit margin tell us?

A
  • how effectively a business turns its sales into profit
  • How efficiently a business is run
  • whether a business can ‘add value’ during the production process
72
Q

Internal influences on finance

A
  • availability of resources
  • mission statement
  • corporate objectives
  • owners personal objectives
73
Q

External

A
  • actions of competitors
  • economic climate
  • availability of external sources of finance
  • market conditions

Business Studies A-level (7 decks)

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