Jan Mock: Paper 2 Flashcards
1
Q
What are External Sources of Finance?
A
Money that comes from outside of the business
2
Q
What are influences on External SOF?
A
- Type of business e.g. sole trader
- Stage of development of the business
- Control
- State of Economy
- Long / Short term
- Risks involved
3
Q
External SOF examples?
A
- Family and Friends
- Bank Loan
- Overdrafts
- Business Angels / Venture capitalists
- Leasing Hire Purchase
4
Q
Family and Friends Pros / Cons
A
PROS- Low Interest
- Might not need to pay back
CONS- Lose money if business fails
- Family conflict may result
5
Q
Bank Loan Pros / Cons
A
PROS - Easy and quick access
- Can get significant amount
CONS - Pay interest over time
- Difficult for new business to access
6
Q
what is an Overdraft and what are pros and cons of using one?
A
Minus balance in bank account - used in emergencies
PROS- Quick access
- Allows emergency purchases
CONS- High Interest rates
- Short Term solution
7
Q
what is a Venture Capitalists?
Pros / Cons?
A
Group / Individual invests in business (new or growing) in exchange for share of business / profits - return on investment required
PROS - Gain money quickly
- Potential to raise huge amounts of money
- Advice and support from VC
CONS - Give away % of business
- May have different vision
8
Q
what is Leasing ?
Pros / Cons?
A
Rent asset(s) business requires. Monthly payments to leasing company that supplies and maintains the leased item
- No large upfront payments
- Leasing company maintains
- Can be more expensive over time
- Assets not owned by business
9
Q
what is Hire Purchase ?
Pros / Cons?
A
Used to purchase an asset e.g. Vans / equipment. Deposit paid and remaining paid in monthly instalments - business doesn’t own until all payments made
PROS - Expensive assets can be purchased and paid for over time
-help I’m,prove cash flow
CONS - Interest is charged
- Equipment not owned until all paid for
10
Q
Break Even - What is Contribution?
A
the difference between selling price per unit and variable cost
Selling Price - Variable cost per unit (sppu-vcpu)
11
Q
What is Break Even Point?
A
Point business is making neither a profit or a loss
Total Costs = Total Revenue
12
Q
How do you use Contribution to calculate Break even point?
A
Break Even = Total Fixed Costs / Contribution
13
Q
What is the Margin of Safety?
A
Difference between actual level of output and the output level required to break even.
E.g. BEP is 100 units and Actual Output if 150 then MOS is 50
14
Q
What does Break Even Analysis enable and organisation to do?
A
- Measure Profit and Loss at different levels of production / sales
- Predict impact of changing sales prices
- Analyse relationship between fixed and variable costs
- Predict effect of costs and efficiency changes on profitability.
15
Q
What are the limitations of Break Even Analysis?
A
- Assumes all output is sold
- Assumes prices are the same
- Changing Variable costs
16
Q
What is Liquidity?
A
Ease of which assets can be converted into cash and used immediately as means of exchange.
17
Q
How do you measure Liquidity?
A
Current Ratio - Allows business to explore liquidity by comparing current assets with current liabilities
Current Assets / Current Liabilities (ideally 1.5-2:1)
Acid Ratio Test - Adjusts Current Ratio to also eliminate some current assets that are not already in cash (or near cash) form e.g. stock
current assets-stock/current liabilities (ideally 1:1)
18
Q
Current Ratio Strengths and Weaknesses?
A
- Gauge short term financial strength i.e. Higher ratio more stable
- Helps understand how efficient company is in selling off its products i.e convert inventory to cash
- Shows managements efficiency in meeting creditor demands
- On own not sufficient to analyse liquidity - relies on amount of current assets instead of Quality
- Includes inventory in calculation which could lead overestimation of liquidity position
- Where sales are seasonal might see reduced Current Ratio in some months and increased in others
19
Q
Acid Test Strengths (and vs Current Ratio) and Weaknesses?
A
- Removes inventory from calculation as not always considered liquid
- Inventory may be seasonal and may vary over time ie. if considered it may deflate or inflate liquidity position
- Due to large inventory base, company short term financial strength may be overstated using Current ratio. Acid test my prevent unnecessary decisions to e.g. source a loan
- Using standalone might not be enough to analysis liquidity - May need comparative analysis with peers and industry standard
- Not good indicator for all business models for showing short term solvency e.g. supermarkets with higher inventory levels
- Ignores level and timing of the cash flows - major parameter determining ability to pay liabilities when due
20
Q
What is Production?
A
Transformation of resources into goods or services.
21
Q
What are the Production Techniques?
A
- Job
- Batch
- Flow (Mass)
- Cell
22
Q
What is Job Production and Pros / Cons?
A
Single worker or group handle task - specific to meet customer reqs - one off, unique, bespoke e.g. tailors, construction, specialist cakes
PROS- high quality / price
- Increased motivation
- Flexible
- Specialised Labour
CONS- Slower production
- Labour intensive - more costly
- Reliant in high skills
- training cost
23
Q
What is Batch Production and Pros / Cons?
A
Products made in groups / batches - series of tasks performed on each group / batch simultaneously - produce different products on same equipment e.g. supermarket bakery, electrical goods etc
PROS- Specialisation of labour
- Reduced unit costs
- Specialist machinery - inc output
- High equipment utilisation
CONS- Stock build up (WIP batches waiting for next operation)
- Takes time to switch from one batch to another
- Tasks boring and repetitive
24
Q
What is Flow / Mass Production and Pros / Cons?
A
Continuous production of identical products in high volume and high automation e.g. toys, medication
PROS- Low unit cost / prices
- Economies of scale
- Less training / skills - lower wages
PROS- capital intensive
- Not very flexible
- Not motivating
- Relies on high quality machinery
- High levels of stock
- Less differentiation
25
What is Cell Production and Pros / Cons?
Workers in multi skilled groups - cell responsible for specific part of production process e.g. car manufacture
- Improved comms / less mistakes
- Adaptable workforce
- Greater motivation
- Better quality - sense of ownership
- Company culture - encourage trust and participation
- Doesn’t allow for intense use of machinery
- Recruitment and training must be selective
- Training
26
What is Productivity?
output per unit of input over a period of time
27
Factors impacting staff productivity?
- Skill
- Equipment quality
- Management
- Motivation
- Investment
28
How do you improve productivity?
- Training
- Equipment investment
- Better Management / staff
29
What is Capacity Utilisation? *
Current Output / Maximum Possible Output x 100
- How much firm is producing vs what it could be
- Perfect level if 91% i.e. high but still has flex to increase if needed - being at 100% doesn’t give flexibility
30
What is Labour Productivity?
Output/ number of employees
- Labour costs significant part of total costs
- Need to keep Cost per Unit (CPU) down to be competitive
31
What are factors that influence Labour Productivity?
- Extent and Quality of fixed assets e.g. equipment and IT S/w
- Skills and ability to motivate
- External factors e.g. suppliers
32
How can you improve Labour Productivity?
- Measure performance and set targets
- Invest in capital equipment
- Employee training
- motivation
- incentives (financial and non financial)
33
What is Efficiency?
Production at lowest possible cost
How well company transforms material, labour and capital into services and products that produce revenue i.e. best use of resources
Maximise outputs from given inputs to minimise costs
34
How is Efficiency measured - What is Return On Investment (ROI)?*
- Return on Investment (ROI) - Investment is current cost that can help make money in the future - ROI or NPV (Net Present Value)
Investment may diminish current efficiency but boost efficiency in future
35
How is Efficiency measured - What is Process Efficiency?*
- Measure business processes to ensure effective and efficient
36
How is Efficiency measured - What is Operational Efficiency?*
- Business Operations processes integral to overall business model
- Typically account for majority of company costs, therefore, most effort on efforts to improve efficiency
37
How is Efficiency measured - What is Eco-efficiency?*
- Calculate comprehensive impact has on environment e.g. as % of company’s income
38
How is Efficiency measured?*
- ROI
- Process Efficiency
- Operational Efficiency
- Eco Efficiency
39
What Economic Influences on a business?
- Inflation (Rate of Interest, CPI)
- Exchange Rates (Appreciation, Depreciation)
- Interest Rates
- Taxation and Government spending
- Business Cycle
40
What are the types of Inflation?
- Cost Push
| - Demand Pull
41
What is Cost Push Inflation?
- Raw material price increase
- Wages increase to compensate for higher prices
- Firms have to increase prices
- Inflationary cycle started again
42
What is Demand Pull Inflation?
- Strong Consumer spending
- Businesses cannot keep up with demand
- Businesses increase prices
43
What is the Consumer Price Index (CPI)?
- Annual % change in the level of prices - CPI
- Main measure of inflation in UK
- Govt set target for Bank of England of 2% - target for low and stable inflation
- Low inflation - known as Price Stability
44
What impact does high inflation have on businesses - Pros and Cons?
- Industry wide prices rises - revenue growth + constant GM = Higher gross profit
- Debt as source of finance cheaper in real terms
- If caused by high consumer demand - increased GM for a period before costs start to rise
- Raw material costs rise - could lead to price rises
- Long contracts with fixed prices - if raw material cost increase then reduced GM
- Rising inflation associated with higher interest rates - reduces economic growth and can lead to recession
45
What is Currency Appreciation?
- Occurs within floating exchange rate system
| - Increase in external value of one currency vs another
46
What is impact of Appreciation?
- Make imported goods cheaper increasing volume - domestic companies impacted negatively
- Makes exported goods more expensive impacting sales and profits
47
What is Currency Depreciation?
- Fall in external value of currency inside floating exchange rate system
48
Wha is impact of Depreciation?
- Makes imported goods more expensive - decreased volume of imports - Domestic companies impacted positively - sales and profits
- Makes exports cheaper - sell more and higher profit
49
What is SPICED?
- Strong
- Pound
- Imports
- Cheaper
- Exports
- Dearer
50
What are Interest Rates?
- Reward for saving and the cost of borrowing as % of money saved or borrowed
- Controlled by Bank of England Monetary Policy Committee (MPC)
51
What are impacts of Interest Rate changes?
UP - Businesses disadvantaged:
- Consumer pay more on loans
- Interest on savings goes up - consumers spend less
- Business cost of debt increases
DOWN - Businesses advantaged:
- Consumers pay less on loans
- Interest on savings goes down - consumers save less and spend more
- Business cost of debt decreases
52
What is Fiscal Policy and type of Taxes?*
- Direct Taxation - on income or profits - NI, Business Rates, Corporation Tax, Income Tas
- Indirect Taxation - on products / services - VAT, Excise Duties
53
What are affects of Taxation?
- Inc in Income Tax means workers pay more on income - have less money to spend on good and services
- Inc in VAT means consumers pay higher prices, reducing purchasing power leading to inflation therefore impacting business costs
54
What are affects of Government Spending?
- Inc spending may mean higher taxes
| - Higher taxes reduce ability of customers to purchase goods and services
55
What are the stages of economic cycle?
- Boom
- Recession
- Slump / Depression
- Recovery
56
What is a Boom?
- High consumer spending, bus confidence, profits and investment
- Prices and costs rise faster
- Low unemployment
57
What is Recession?
- Falling levels of consumer spending and confidence - lower profiles for businesses
- Cut back on investment
- Increased spare capacity
- Rising unemployment
58
What is Slump / Depression?
- Very weak consumer spending and business investment
- Businesses fail
- Unemployment
- Falling prices
59
What is Recovery?
- Things getting better
- Consumers increase spending as confidence grows
- Business confidence grows and investment rises
- Still takes time for unemployment rate to stop growing
60
What are examples of economic uncertainties?
- Exchange rate - £ strong or weak?
- Inflation - how much have costs increased by?
- Interest Rates - High or Low?
- Taxation - How much increasing / decreasing?
- Gov’t spending - impact on taxes
- Household incomes - falling / rising?
- Business Cycle - what stage are businesses currently at?
61
What are objectives of ANSOFF’S Matrix of Corporate Strategy?
Used to analyse and plan strategies of growth while analysing associated risk.
- Aim of portfolio analysis
- Competitive advantage via distinctive capabilities
- Effect of strategic and tactical decisions on human, physical and financial resources
62
What are the key considerations of ANSOFF’S Matrix?
- Existing Market
- New Market
- Existing Products
- New Products
63
What are example Corporate Strategies In ansoff matrix?
- Market Penetration
- Product Development
- Market Development
- Diversificaton
64
What is Market Penetration?
- focus on selling more of existing product in existing market
- Increase loyalty of existing customers
- Advertising
- Sales Promotion
- Expand Distribution Channels
65
Market Penetration - Positives / Negatives?
- Less investment
- Less risk
- Drives out competitors
- Established knowledge used to exploit
- Opp cost of entering new mkt/product
- Low opp for growth
- Threat of market forces - e.g. substitutes
66
What is Product Development?
- Adapt / modify products
- Innovation
- Extension strategy (product life cycle)
- Umbrella brand (sub-brands)
67
Product Development - Positives / Negatives?
- Existing Brand loyalty
- Establish infrastructure
- Reduced R&D costs
- Competition - risk of failure
- May reflect badly on product range
68
What is Market Development?
- Market Research
- Brand awareness / promo
- Distribution channel
- Demographic / geo changes
69
Market Development - Positives / Negatives?
- Inc Global awareness
- Develop brand
- Escape mkt saturation push / pull factors
- Extensive Mkt Research of competition, trends etc
- Barriers to entry
70
What is Diversification?
- R&D investment
- Integration
- Take over / merger (acq other business)
71
Diversification - Positives / Negatives?
- Exposes more opps for return
- Safeguard vs adverse Mkt cycles - spreads risk
- Revenue streams
- Most risk
- Impact on Brand image
- Challenge to co-ord aims and objectives
72
What is PORTER’S Strategic Matrix?
Suggests the state that businesses pursue that create high quality goods to sell at high prices in the market
73
What are the key considerations of PORTER’s Matrix?
- Target Market - Broad / Narrow
- Lower Costs
- Differentiation
74
What is Cost Leadership?
- Low cost producer - economies of scale, tech, efficiency of supplier control
- Supports profitability
- Market size grow - products value
- Competitive advantage - low cost, high GM
75
What is Cost Focus?
- Solely focusing on business costs - indicates high costs
- Drives higher profit margins
- Enables offering employees incentives - higher efficiency
- Limits growth and focus on one objective
- Doesn’t eliminate competitive threat
76
What is Differentiation?
- Bespoke within an industry - value for customers to gain competitive advantage
- Premium prices
- Creates additional value
- Brand loyalty
- Perceived value could decline over time
- High R&D
77
What is Differentiation Focus?
- Diversify and out perform rivals with superior product
- Premium prices
- Creates a USP
- Stronger Brand Image
- Customers demand on differentiated products - i elastic by products from competitors - barrier for market entry
78
What is Investment?
Spending now expecting a return in the future
E.g. in capital invested in machinery - longer term benefit; or in stock to generate more revenue or wages ‘ training for more of a short term benefit
79
What are 3 methods of Investment appraisal?
- Payback
- Average Rate of Return
- Net Present Value
80
What is Payback?
How long investment money is at risk before ‘break even’ on initial investment
Shorter period is better
(Amount Needed / Net Value) x 12
If decimal point round up
81
Payback - Advantages and Disadvantage?
- Easy to calculate
- Considers cost of initial investment
- Allows focus on short term cash flow
- Useful when weak cash flow - to ID fast payback
- Ignores overall longer term return of the of the project - i.e. what happens after payback
- Ignores time value of money
- Can lead to short termism
82
What is Average Rate of Return?
- ARR measure of net return / annum as % of initial spending
- Compare projects for best return - decision making
(Average Annual Profit / Initial Cost) x 100
83
What are 3 steps of ARR calculation?
total revenue- investment= profit
profit/number of years= annual average profit
substitute into the formula :
average annual profit/initial investment x100
84
ARR - Advantages and Disadvantages?
- Measures profitability
- Easy to compare % returns
- Considers total profit of the project
- Ignores timing of when cash enters the business
- Ignores time value of money
- More inaccurate further into future
85
What is Discounted Cash Flow / Net Present Value?
- NPV considers time value over money as it changes over time - by assigning a discount value which reduces the present value of future money
- Because it is better to have money immediately, than same amount in the future
- Considers the interest money could make
- If NPV is positive then investment is feasible
86
NPV - Advantages and Disadvantages?
- Take Opp cost of money into account
- Single measure and considers timing of cash flow
- Can consider different scenarios
- Complex to calculate and communicate
- Meaning of result often misunderstood
- Only comparable between projects if initial investment is the same
87
What is Critical Path Analysis (CPA)?
Shows managers / workers what they should be doing when, what and how
Network Analysis - shows how a complex project can be completed in the shortest possible time
88
What are the 2 components of CPA?
- Activity - part of project that requires time and / or resources
- Node - start or finish of activity - represented as a circle
89
What are rules for drawing CPA network?
- Start and finish on single node
- No lines cross each other
- Drawing activity - don’t add end node straight away - wait to check following activity
- No lines that are not activities
- As have to write figures in nodes - draw network with large circles and short lines
90
What is Float Time?
Amount of flexible time in an activity or over course of project
91
What is Earliest Start Time?
Earliest activity can start when the previous activity has completed
92
What is Latest Finishing Time?
By which the previous activity must be completed
93
How do you determine the Critical Path?
Following path where EST and LFTs are the same
94
How do you calculate Float Time?
LFT at end of task - duration of task - EST at start of task
95
CPA - Advantages and Disadvantages?
- Helps reduce risk and costs of complex projects
- Encourages careful assessment of all activities
- ID activities that have some slack (float) to help with resource planning
- Decision making and planning tool
- Useful overview of complex project
- Links well with business planning process e.g. cash flow forecasting and budgeting
- Reliability based on accurate estimates and assumptions
- Doesn’t guarantee project success - still needs to be managed properly
- Resources might not be as flexible as needed when managing float
- Too May activities makes diagram complex - Might have to break activities into mini-projects
96
what is crowdfunding?
when small investors fund a project usually through a website
97
what is a business angel?
- people that invest in early stages of a project that are more risky
in return they take equity
98
what is a grant?
money given by government/ local council to businesses that are making a positive difference/ impact on society
99
what are some ways to improve liquidity?
- chase up debtors (people that owe you money)
| - generate more cash
100
what is a statement of financial position/ balance sheet?
a snapshot of a businesses financial position at any point of the year
consists of assets and liabilities
101
what is working capital?
the cash needed for day to day business trading
102
what is the link between. productivity and competitiveness?
- not enough production can lead to decreased sales/ market share
- if high cost per unit to produce, may have to increase product prices which decreases competiveness
103
what is labour intensive production?
when production mainly involves people rather than machinery and automation
104
what is capital intensive production?
when production mainly uses machinery rather than people
