HL Unit 3 Flashcards
(21 cards)
Insolvency
When a business can’t pay its debt when they are due to be paid
No longer able to meet financial obligations
E.g. employees can’t be paid
Bankruptcy
When a court of law decides that the business is unable to pay its debts .
Often the assets will be liquidated in order to pay creditors.
Debtor Days
(AO4) (formula sheet)
How to improve?
Average time it takes to collect money from debtors
Business want the number to be as low as possible
How to improve?
- Only accept cash payments - no trade credit
- Reduce trade credit from 90 to 60 days
Creditor Days
(AO4) (formula sheet)
How to improve?
Average time it takes to pay supplier
Business wants the number to be as high as possible
How to improve?
- Delay payments to suppliers
- Change supplier who offer more trade credit
Stock (Inventory) Turnover
(AO4) (formula sheet)
How many times stock is bought in per year
(Cost of sales/Average stock)
Want to be high
E.g. Stock = $25m, COS = $125m
Stock Turnover =125/25 = 5
or
How many days it takes to get through the stocks
(Average stock/cost of sales) x 365
Want to be low
E.g. 25/125 x 365 = 73 days
Gearing Ratio
(AO4) (formula sheet)
What happens when it increases?
Strategies to improve
How reliant the business is on long term liabilities, (loans)
Capital employed = Non-current Liabilities + Equity
= Non-current Liabilities + Share Capital + Retained earnings
Range is 0% - 100%
As gearing increases
- Relatively higher debt levels
- Higher interest payments
- Higher risk
Strategies to improve
- Sell assets and repay loans
- Sell shares and repay loans
Budget
What is it?
Can help what?
A plan for future finances including the income received and the planned spending
- List all predicted income source
- List all predicted expenses
- For the next week/month etc
Can help
- Identify any possible problems in the future
- See targets
- Make money decision over what to spend money on
Variance
When there is a difference between the budget number and the actual number
- There usually will be a difference
If we are talking about income (getting money)
Actual > Budget = Favourable
Actual < Budget = Adverse
If we are talking about expenditure (giving money)
Actual > Budget = Adverse
Actual < Budget = Favourable
Benefits and Limitations of Budgeting
Benefits:
Planning future
Effective allocation of resources
Controlling spending
Assessing performance
Limitations:
Lack of flexibility
Short-term focus
Cost Centre
A section of the business to which costs can be allocated
E.g. Hotel - Cleaning, reception Desk
Profit centre, why are they important
A section of the business for which revenue and costs can be allocated
E.g. Hotel restaurant, bar → people will come eat and spend money but there will also be employees (cost)
Centres are important because:
- Responsibility may improve motivation
- Can identify poor performing areas
- Used to reward strong performers
But
Managers may focus too much on their part of the business rather than the business as a whole
Some costs can’t be allocated anywhere (e.g. lighting for hotel sign)
International marketing
The marketing of a business’s products outside of their domestic market
- Selling goods and services overseas
This has been aided by globalization
- Free trade, lower tariffs
International marketing, when is it suitable, what benefits
Domestic market is saturated
- Access to new customers
Higher sales revenue
Economies of scale
- Lower unit costs
Spreading risks between multiple markets
- Less dependent on one country’s market
Potentially lower costs
- Labor costs for example
International brand recognition
Threats for International marketing
Initial costs of entering market
Ex. marketing, hiring labor
Governments may favor local businesses
Ex. subsidize local businesses
Cultural issues
Cost of adapting products → lower sales if not adapted?
Legal differences
Exchange rate fluctuations
Could reduce profit
Some methods of entering international markets
Exporting
- Direct to consumers, or through export agents
Direct investment
- Set up a factory, retail outlet in a foreign country
- Or merge/acquire a local business
International franchising
- Allow a business in the target country to use the name of a brand/its services, in return for a license fee and share of profits
Joint venture with local partner
- An external growth method that involves 2 or more organizations agreeing to create a new business entity
Pan-global marketing
Selling the same good in every market
Global localization
Adapting the marketing mix to each country
Product - ex. Religion, local tastes
Pricing - ex. To reflect average income levels
Force Field Analysis
(BM Toolkit 9)
A visual tool that shows the driving forces and restraining forces for a proposed change
Each force has weights
Add up the total, make a decision
Pros and Cons of Force Field Analysis
Pros
- Enables users to see all information visually
- Gives a final number to help make a decision
Cons
- Weights are approximately and may be incorrect
- There may be numerous forces on one side, possibly leading to bias (or not all forces can be added)
Porter’s Generic Strategies
(BM Toolkit 12)
Ways in which a business can gain a competitive advantage over other businesses
Business must follow one of the 4 strategies, otherwise they will be “stuck in the middle” (Not known for anything)
- Cost leadership
- Differentiation
- Focus
or
Stuck in the middle
Matrix with
- Mass vs niche
- Low cost vs differentiation
Describing Porter’s Generic Strategies
1) Cost Leadership
(Mass market - Low cost)
- Attempting to be the business with the lowest cost in the whole market
- Link to Economies of Scale
- Lowest cost might not mean lowest
E.g. McDonalds, price (RyanAir)
2) Differentiation
(Mass market - Differentiation)
- Attempting to sell products which are different than those of the competition in order to charge a higher price
- USP
This could be be based on
- Luxurious
- Environmentally friendly
- Technology etc.
3) Cost Focus
(Niche Market - Low cost)
- Attempting to be the business with the lowest cost in a specific market
E.g. Diapers.com
4) Differentiation focus
(Niche market - Differentiation)
- Attempting to sell products which are different than those of the competition in a specific market
E.g. Aesop (luxury + natural ingredients)
