Paper 2 Flashcards
(90 cards)
1
Q
What is external finance and why does everyone not have it
A
Finances from sources outside the business. Business start ups have no trading records and therefore present too much risk for the lenders. Once they survive the initial ‘uncertain’ stages of business development, external sources of finance become a realistic option
2
Q
Sources of finance (6)
A
- Family and friends; particularly in small business, interest will be little to none
- Banks; loans, drafts and mortgages. They need a bank account to facilitate financial transactions with customers and suppliers. May also offer advisory services
- Peer-to-peer lending (P2PL); people lending money to unrelated individuals or ‘peers’ and therefore avoiding the use of a bank. Unsecure so no protection for lenders, no previous relationship between lenders needed, interest rates are better than the bank
- Business angels; invest between £10,000 and £100,000+ in exchange for a stake in the business. Usually for business start ups or early stages of expansion
- Crowd funding; people in business or groups who are involved in a particular venture. Online so business can publish details of their project/idea, how much cash they need, how they will use it and how investors stand to profit from it
- Other businesses; Some set up joint ventures, where the businesses share the finance, costs and profits of a specific venture. Some PLCs buy shares into other companies to earn an income if they have a surplus of cash or build a controlling stake with intentions of taking over in the future
3
Q
loans (methods of finance)
A
- Loans; arrangement where the amount borrowed must be repaid over a clearly stated period of time
- Bank loans;unsecured loans, lender has no protection if borrower fails to repay money owed
- Mortgages; secured loans where the borrower has to provide some assets as collateral to support the loan. Lender is entitled to sell the assets and use the proceeds to repay the outstanding amount.
- Debentures; specialised method of loan finance. Holder of debenture is creditor of a company not an owner. Entitled to fixed rate of return but have no voting rights and have to be repaid by certain date
4
Q
Share capital (methods of finance)
A
-Share capital; also referred to as permanent capital as isn’t usually redeemed issued SC is the money raised from the sale of shares. Authorised SC is the maximum amount shareholders want to raise. Shareholders can make a capital gain by selling the share at a higher price than what it was originally bought for. Doesn’t usually get bought back by the business
5
Q
3 types of shares (methods of finance)
A
Ordinary shares; (equities) riskiest type of share since there is no guaranteed dividend. Size of dividend depends on how much profit is made and how much directors want to retain
- Preference shares; Owners of these shares receive a fixed rate of return when a dividend is declared. Less risky since shareholders are entitled to their dividend before the holders of original shares.
- Deferred shares; Not used often. Usually held by the founders of thee company. Receive a dividend after original shareholders have been paid a minimum amount
6
Q
Venture capital (methods of finance)
A
Invest in businesses after the initial start-up and often prefer technology companies with high growth potential. Prefer stake so have some control and are entitled to a share in the profit. Likely to exit after about 5 years
7
Q
Bank overdraft (methods of finance)
A
Business can spend more money than it has in its account. Bank and business agree on an overdraft limit and interest is only charged when account is overdrawn.
8
Q
Leasing A+D (methods of finance)
A
A contract which a business acquires the use of resources such as property, machinery or equipment in return for regular payments. After end of period they are given option of then buying the resource
+no large sums of money are needed to buy the use of equipment
+not responsible for maintenance and repair costs
+Hire companies can offer the most up to date equipment
+easier to obtain than any other forms of loan finance
-long period of time leasing is expensive than the outright purchase of plant and machinery
9
Q
Trade credit (methods of finance)
A
arrangement to buy goods and/or services on account without making immediate cash or cheque payments.
10
Q
Grants (methods of finance)
A
A sum of money provided by the government to a business that does not have to be repaid
11
Q
Unlimited liability
A
No legal difference between the owners and the business.
If owner doesn’t have the money to pay off debts they can be forced to sell private assets to raise necessary cash
Easier to raise finance as lenders will be reimbursed if a business defaults.
Seen as more credible as owners personal assets are at risk
12
Q
Limited liability
A
Legal identity separate from its owners. Business can be liquidated but owner’s possessions are safe
+Limited to the amount of money they put into the business
13
Q
financial position (choosing appropriate finance)
A
lenders are more reluctant to offer finance to a business in a poor financial position.
14
Q
types of expenditure for which the money is needed (choosing appropriate finance)
A
heavy capital-long term eg building new factory may be financed by mortgage
Revenue expenditure- short term eg purchase of raw materials funded by trade credit or bank overdraft
15
Q
cost (choosing appropriate finance)
A
Prefer sources and methods that are less expensive in terms of interest payments and administration costs
16
Q
finance appropriate for unlimited liability business
A
- personal savings
- retained profits
- mortgage
- unsecured bank loans
- peer-to-peer lending
- crowd funding
- bank overdraft
- grants
accessible to small businesses. have fewer sources as they have fewer assets to be used as collateral. have no trading record which may discourage lenders
17
Q
finance appropriate for limited liability businesses
A
- share capital;the money raised from the sale of shares
- debentures; long term loan- no control over the business
- retained profit
- venture capitalists; buy shares into business to have some control over key decisions. invest in small & medium sized businesses-invest more than business angels
- business angels; buy shares into the business early stages. difficult to find.
legal status allows them raise finance from a more range of sources
18
Q
relevance of a business plan
A
more likely to succeed if you have a plan.
lenders and other investors are not likely to put money into a business unless they can show a clear plan(how much money needed and what they can get out of it)
- owners will take an objective view
- provides a road map shows direction
- identifies key tasks needed to be undertaken
- flags up potential problems so solutions can be found
- shows investors owner is responsible
19
Q
contents of a business plan
A
- executive summary; overview of the business start up, sales strategy
- business opportunity; description of the product or range of products, quantity sold and price
- buying and production; where to buy supplies, production method and cost
- financial forecasts; variety of forecasts needed: sales, cash flow, profit&loss, break-even analysis
- business and its objectives; name, address, legal structure, aims&objectives
- the market; size of potential market, description of potential customers, nature of competition, marketing priorities
- personnel;who will run the business, how many employees, skills qualifications and experience needed
- premises and equipment; what stuffs needed
- finance; where will the finance come from
20
Q
cash flow forecasts
A
lists inflows and outflows over a period of time
21
Q
the use of cash flow forecasts
A
identifying the timing of cash shortages and surpluses; particularly helpful if you have seasonal demand
- supporting applications for finance; lenders would want to see this to show if they are able to pay back loan and when
- enhancing the planning process; key part of business plan. helps to clarify aims and improve performance
- monitoring cash flow; compare predicted cash flow forecast and what happened to see how you can address any problems that may’ve occurred
22
Q
limitations of cash flow forecasts
A
- based off estimates; may not be accurate
- external forces beyond owners control may affect cash flow
- uses resources and time to make forecast and needs to be updated regularly; may spend too much time on it rather than meeting customer needs eg
- only focuses on cash; not productivity profit margins etc
23
Q
Business aims
A
intentions to do in the long term- its purpose or reason for being. less specific than objectives
24
Q
mission statements and why it is made
A
declares business’s overriding purpose but may also reflect its goals and values.
- describes in general terms company’s core activities
- what market it will operate in
- key commercial objectives
- clarifies direction to remind owners why the business exists
- forms a promise to customers what they can expect the business to strive for
- bring a company’s workforce together with a shared purpose
25
corporate objectives
objectives set by senior managers and directors for a company(SMART)
```
Specific
Measurable
Agreed
Realistic
Time specific
```
26
departmental and functional objectives
day-to-day goals. should align with corporate objectives
27
difference between small and large firms (objectives)
small have a wide variety of objectives eg breaking even by the end of the tax year, reduce energu consumption, hire new staff
large tend to focus on the financial aspect as they have many stakeholders to satisfy. financial objectives are more quantifiable and objective making it easier to communicate
28
critical appraisal of mission statements and corporate aims
need to constantly assessed to ensure they have continued relevance for the business.
what is the purpose?
who is its intended audience?
how does the strategy followed by the business fit with its stated mission?
are the aims and objectives realistic and achievable?
29
business strategy
in order to fulfil their plan, they may use SWOT analysis. successful strategy will give them an advantage in the competitive market place and fulfil stakeholder expectations
30
Ansoffs matrix (development of corporate strategy)
- market penetration (existing market, existing product); increase brand loyalty, encourage consumers to use product more
- product development (existing market, new product); risky, 1 in 5 succeed. product innovation
- market development (new market, existing product); moving country- customers may have different tastes and preferences
- diversification (new market, new product); high risk, performance may be poor
31
Porters strategic matrix (development of corporate strategy)
triangle
cost leadership; lowest cost provider in the market. needs large market share to achieve the lowest costs
differentiation; adding value in a unique way (USP). difficult to know if people would be willing to spend premium prices
focus; focusing on a narrow range of customers
- cost focus; cost minimisation in focused market eg aldi
- differentiation focus; different strategies in focused market
32
achieving competitive advantage through distinctive capabilities
- achieved through superior quality or design, reputation or ethical stance
- distinctive capability; form of competitive advantage, cant be easily reproduced.
>architecture; refers to contracts and relationships within and around an organisation. eg suppliers,partners,customers
>innovation; developing a new product or process
>reputation; brand image- takes time to build
33
portfolio analysis
- categorising products to see where each fits within the strategic plan
>stars(high market share, high market growth)
>cash cows(high market share, low market growth)
>question marks(low market share, high market growth)
>dogs(low market share, low market growth)
34
internal audit
analysis of the busienss itself and how it operates, identifies S+W
35
external audit
```
analysis of the environment in which the business operates (little to no control). analyse their competitors.
Political
Economic
Social
Technological
Legal
Environmental
```
36
SWOT analysis
Looks at internal strengths and weaknesses and external opportunities and threats
37
structure of markets
competitive; large number of buyers and sellers.
| uncompetitive; single producer or just a few large businesses
38
impact on business of a changing competitive environment
- new entrants;when competition gets stronger because of new entrants, existing businesses have to keep up
- new products; business may be forced to make changes to their own
- consolidation; number of businesses in market falls but existing businesses get bigger- they pose more of a threat than others
39
Porters Five Forces
- bargaining power of suppliers; powerful suppliers over customers can charge higher prices
- bargaining power of buyers; buyers want to buy for lowest prices from suppliers. high market can achieve this
- threat of new entrants; hard for existing businesses to charge high prices to achieve more profit as new entrants can come in and undercut prices
- substitutes; more substitutes there are for a product, the more fierce the competition
- rivalry among existing firms
40
economies of scale
increased levels of production means business' cost per unit can decrease by buying in bulk
41
internal economies of scale
benefits of growth that arise within the firm eg buying bulk
42
external economies of scale
reductions in cost which any business in an industry may enjoy. likely to arise if industry is concentrated in a particular region
eg training costs reduced if they come from the same industry
43
increased market power
customers; dominant business may be able to charge higher prices if competition is limited. customers forced to pay higher prices
suppliers; business can dominate its suppliers. suppliers have to accept prices
44
increased market share
as business grows, market share grows and will have more power. Builds brand image
45
increased profitability
more profit means they have more money for investment and innovation allows them to develop and launch new products
46
diseconomies of scale (problems arising from growth)
(average cost rises as output rises) if a business expands the scale of its operations beyond the minimum efficient scale
internal- caused by the problem of managing large businesses
external- may occur from overcrowding in industrial areas. congestion may lead to inefficiency as travelling workers and deliveries are delayed
47
Internal communication
the exchange of messages and the flow of information inside a business. sometimes resources might be wasted due to a lack of effective communication eg duplication of resources
48
overtrading- what is it and how does it occur
if a business grows too fast there is a danger that it might suffer from overtrading. occurs when a business tries to fund a large volume of new business without sufficient resources
- does not have enough capital; trading with insufficient capital, not enough cash to buy the resources needed to meet growing orders
- offers too much trade credit to customers; during the time customers have trade credit the business is short on cash to buy resources needed to meet new orders
- operating with slim profit margins; to make an impact on the market a new business might offer its products at lower prices- may not generate enough profit to fund the growing volume of business
49
reasons for mergers and takeovers
- exploit synergies; two businesses merging together is more powerful and efficient than two companies operating on their own
- quick and easy way of expanding the business
- buying a business is often cheaper than growing internally
- businesses have cash available that they want to use
- defensive reason; consolidate their position in the market and can also increase its size through merging
- method to gain entry into foreign markets
- gain economies of scale
- growth may be a business' main objective
50
difference between mergers & takeovers
a merger is where two or businesses join together and operate as one. usually conducted with the agreement of both businesses. tend to be friendly
Takeover is when one business buys another. can occur in plc since their shares are traded openly and anyone can buy them.
51
ingration definition
ingration when businesses join together to form one. It can be classified in a number of ways, although not all mergers and acquisitions fit neatly into these categories
52
horizontal integration definition
horizontal integration occurs when two firms that are in exactly the same line of business and the same stage of production join together.
advantages
- common knowledge of the markets
- less likelihood of failure than merging in two different areas of the business
- similar skills of employees
- less disruption
53
vertical integration definition
occurs when firms in different stages of production join together.
forward VI is where a business joins with another that is in the next stage of production
backward VI is where a business joins with another in the previous stage of production
54
resistance from employees (financial risks and rewards of mergers and take overs)
can cause job losses as when they join certain resources are likely to be duplicated therefore some will not be needed resulting in job loss; large scale job loss may lead to employees reacting eg strike
55
integration costs (financial risks and rewards of mergers and take overs)
can be complex, expensive and time consuming process. business may underestimate these costs
56
speedy growth (financial risks and rewards of mergers and take overs)
business grows much quicker than internally; larger market share, lower costs due to EOS, more market power and higher profitability enjoyed immediately
57
Problems of rapid growth
- draining resources; costs a lot of money which may impair other aspects of the business
- coping with change; difficult to impose a new culture on a business causing resistance
- alienation of customers; growing too fast might lose touch with customers since they focus too much on growth and customer needs may be over looked
- loss of control
- shortages of resources; growth=high demand for resources, thus may drive prices up
58
difference between inorganic and organic growth
inorganic growth involves businesses joining together so that theoretically they might double in size overnight. much faster. higher risk
organic growth occurs when a business grows naturally by selling more of its output using its own resources. much slower. safer growing at a steady speed
59
methods of growing organically
new customers; driving sales from existing activities. find new customers through exploiting new distribution channels
- new products; developing new products and being innovative
- new markets; geographic expansion. risky since they are unfamiliar with markets abroad
- franchising
60
advantages of organic growth
- less risky as they are extending practices that are well known and understood preventing errors
- relatively cheaper. inorganic methods may need to borrow money
- retain more control since no outsiders with any controlling interest
- less strain on financial resources as its a gradual process
- less likely to encounter diseconomies of scale
61
disadvantages of organic growth
- pace of organic growth may be too slow for some stakeholders
- prevents business from tapping into the resources owned by other businesses (may miss out on profitable developments)
- growing slowly may lead to the business being left behind in the market
- takes time before economies of scale can be exploited
62
reasons for staying small
- personal service; people prefer to do business with the owner of the company directly and are prepared to pay higher prices for the privilege
- owners preference; want to avoid the added responsibilities that growth brings
- flexibility and efficiency; able to react more quickly to changes in market conditions or technology. can make decisions quickly without lengthy process
- lower costs
- low barriers to entry; set up costs are relatively low. Little to stop competitors setting up in business
- small firms can be monopolists; supply service to members of the local community that no other business does (local shop)
63
product differentiation and USP's (staying small)
if a small business can differentiate the product or develop a USP offering customers something their larger rivals do not, survival is possible
64
flexibility in responding to customer needs (staying small)
small businesses can often respond to changes in external factors such as shifts in customer needs, exchange rates or legislation more quickly than rivals
65
customer service (staying small)
- easier to offer customers a personal service
- geographical advantage; local businesses can get to know their customers being local is more convenient for customers
- communication is much more effective, issues can be addressed and resolved immediately, maintains customer satisfaction
66
e commerce
developments in technology mean that it is not difficult to set up an online business which can help smaller firms to compete more easily with larger firms. If a website is attractive and professionally presented it may not be distinguishable whether or not the trader is large or small. barriers to entry are small with it being possible to set up a site for little cost.
- online shops
- social media consultants
- information and advice sites
- tutoring, training or mentoring
67
the four main components that a business wants to identify in time series data are...
- trend
- seasonal fluctuations
- cyclical fluctuations
- random fluctuations
68
identifying the trend
allows the business to predict what is likely to happen in the future
69
calculating a trend
using a moving average. eg ma of 3 yrs =x+y+z/3
| then y+z+a/3 etc
70
8 year moving average
calculate 2, 4 year moving averages add them together to make 8 year moving average then divide by 8 to find the trend
71
variations from trend
actual sales-trend
72
advantages of quantitative sales forecasts
likely to be reliable
- only for short periods of time in the future
- market is slowly changing
- market research is available
- those preparing the forecast have a good understanding of how to use data to produce a forecast
- those preparing the forecast have a good 'feel' for the market and can adjust the forecast to take account of their hunches and guesses about the future
73
casual modelling and line of best fit
tries explaining data usually by finding a link between one set of data and another
74
correlation coefficient
+1 means there is an absolute positive relationship between the two variables.
0 means there is no relationship between the two variables
-1 means that there is an absolute negative relationship between the two variables
75
qualitative forecasting
uses people's opinions or judgement rather than numerical data.
76
investment definition
refers to the the purchase of capital goods which is what is used in the production of other goods
may also refer to the expenditure by a business that is likely to yield a return in the future
77
investment appraisal
describes how a business might objectively evaluate an investment project to determine whether or not it is likely to be profitable. Also allows businesses to make comparisons between different investment projects which include comparing the capital cost of the project with the net cash flow
- capital cost is the amount of money spent when setting up a new venture
- net cash flow is cash inflows minus cash outflows
78
simple payback
the payback period refers to the amount of time it takes for a project to recover or pay back the initial outlay. Found by calculating the cumulative net cash flow. net cash flow of each year taking into account the initial cost
79
advantages of the payback method
useful when technology changes rapidly as it is important to recover the cost of investment before a new model or equipment is designed
- simple to use
- firms might adopt this method if they have cash flow problems because the project chosen will payback the investment quicker than the others
80
average rate of return (AAR)
net return(profit) per annum/capital outlay (cost) x100
81
advantages of ARR
shows clearly the profitability of an investment project to be compared so can compare ARR of investments before hand to see which is the best decision.
82
discounted cash flow (net present value NPV)
when making an investment decision a business might take into account what cash flow or profit earned in the future is worth at the present value. money now is more valuable than in the future due to people being able to invest and earn interest. Use discount tables to show by how much a future value must be multiplied to calculate its present value
The higher the rate of discount, the less the present value of cash flow in the future.
The further into the future the cash flow or earnings from an investment project, the less is their present value
83
Advantages of the discounted cash flow method
correctly accounts for the value of future earnings by calculating present values
discount rates used can be changed as risk and conditions in financial markets change
84
limitations of appraisal methods
simple payback; cash earned after the payback period is ignored, the profitability of the method is overlooked
ARR; effects of time on the value of money is ignored
discounted cash flow; calculations are more complex than the other methods, rate of discount is critical- if it is high, fewer projects will be profitable
85
decision trees
method of tracing the alternative outcomes of any decision so business can find the most profitable alternative.
decision points (place of decision), outcomes (different possible outcomes eg success or failure), probability or chance (likelihood of possible outcomes happening), expected monetary value (the financial outcome of a decision the predicted profit or loss of any decision.
EMV=(probability x expected profit)+(probability x expected loss)
86
advantages and disadvantages of decision trees
- shows possible courses of action not previously considered
- numerical values on decisions improve results
- take into account risks
- probabilities are often estimated
- time lags often occur in decision making
- time consuming
- does not take into account the dynamic nature of business eg sudden changes in economic climates
87
critical pathway analysis
makes use of a network diagram to calculate the minimum time needed to complete a project. can also identify possible delays which could have a crucial effect on its completion date.
efficiency; they will have good time management be able to produce everything on time
decision making is better allowing them to meet deadlines as implications of delays can be assessed identified and prevented
time based management; identify tasks that have to be done in a certain order to take the least amount of time
working capital control; allows them to identify exactly what materials and equipment is needed for the project
88
identifying the critical pathway
the earliest start time and the latest finishing time. take away biggest number on the way back
89
calculating the float
total float is the amount of time by which a task can be delayed without affecting the project. =LFT of activity-EST of activity-duration
free float is the amount of time by which a task can be delayed without affecting the following task= EST of next task- EST of this task- duration
90
limitations of critical pathway analysis
- estimates of time may be wrong
- changes sometimes occur during the life of the project
- resources may be inflexible so times may not be accurate
