Theme 2 Flashcards
(200 cards)
1
Q
Define internal finance
A
Internal finance comes from the owner’s capital, retained profit, or sale of assets
2
Q
What is owner’s capital
A
Personal savings
3
Q
Why might an owner use their personal savings?
A
If there is a short term cash flow problem
4
Q
3 sources of internal finance
A
- Owner’s capital (Personal savings)
- Retained profit
- Sale of assets
5
Q
Define retained profit
A
Retained profit is the profit that has been generated in previous years which has been not distributed to owners and is reinvested back into the business
6
Q
Benefit of retained profit
A
Retained profit is a cheap source of finance, as it doesn’t involve borrowing and interest payments
7
Q
Drawback of retained profit
A
There is an opportunity cost that shareholders do not receive as much dividends
8
Q
Define sale of assets
A
Sale of assets includes selling business assets which are no longer required
9
Q
What is a sale and leaseback arrangement
A
- When a business wants to continue to use an asset but needs cash.
- rents the premises from new owners
10
Q
4 benefits of internal finance
A
- Often free
- Maintain control over business
- Can get quickly without bureaucracy
- No need for background checks that are needed for loans
11
Q
3 drawbacks of internal finance
A
- Profit is not available for other uses (opportunity cost)
- May not be sufficient
- Not as tax-effiecent as loans as loan are classed as a business cost and no tax is paid on them
12
Q
Define unlimited liability
A
Unlimited liability is when owners are fully responsible for all debts owed by the business
13
Q
Define limited liability
A
Limited liability is when owners are not responsible for business debts as they are considered a separate legal entity to the business
14
Q
Define cash flow forecast
A
A cash flow forecast is a prediction of the cash inflows and cash outflows usually for a six to twelve month period
15
Q
Define net cash flow
A
Net cash flow is calculated by subtracting the total outflows from total inflows
16
Q
Define opening balance
A
The opening balance is the previous month’s closing balance carried forward
17
Q
Define closing balance
A
The closing balance is calculated by adding the net cash flow to the opening balance
18
Q
2 benefits of using cash flow forecasts
A
- Can support an application for a loan
- Can help identify when finance is needed like an overdraft
19
Q
2 drawbacks of using cash flow forecasts
A
- Forecasts are based on estimates and reality may differ
- External factors can impact cashflows and this may not be accounted for in the forecast
20
Q
Define sales forecasts
A
Sales forecasts predict future revenues based on past sales figures
21
Q
What 3 factors affect sales forecasts?
A
- Consumer trends
- Economic factors
- Actions of competitors
22
Q
3 difficulties of sales forecasting
A
- External factors
- Bias to the past
- Complexity of data selection
23
Q
Define sales volume
A
Sales volume is the number of units sold by a business
24
Q
Define sales revenue
A
Sales revenue is the value of units sold by a business
25
Define Fixed Costs (FC)
Fixed costs are costs which don't change as the level of output changes.
26
Define Variable Costs (VC)
Variable costs are costs which vary with output
27
Define Total costs (TC)
Total costs are the sum of the fixed and variable costs
28
How to calculate total costs?
Total fixed costs + Total variable costs
29
How to calculate total variable cost?
Variable costs x QTY
30
How to calculate average total cost?
Total cost / QTY
31
How to calculate variable cost per unit? (AVC)
Total variable costs / QTY
32
What does average total cost represent?
ATC represents cost per unit
33
How to calculate contribution
Contribution = Selling price per unit - variable cost per unit
34
Define break-even point
The break-even point is where the total revenue is equal to total costs
35
How to calculate the break-even point
Break even point (Units) = (Fixed costs / Contribution)
36
Define Margin of safety
The margin of safety is the difference between the actual level of output and its break even level of output
37
How to calculate margin of safety
Margin of safety = Actual level of output - Break even level of output
38
2 Limitations of break even analysis
1. Less useful for businesses which produce more than one product
2. Have to be remade when costs and prices change
39
Benefit of break even analysis
Can be used to gain external finance
40
Define budget
A budget is a financial plan that a business sets about costs and revenue, which are usually set annually
41
4 reasons for using a budget
1. To plan ahead and solve problems in advance
2. Help managers control their resources and help achieve their objectives
3. Helps coordination within the business
4. Spreads decision making throughout the business, motivating managers who control the budgets
42
2 methods of budgeting
1. Historical data budgets
2. Zero-based budgeting
43
Define historical data budgets
Historical data budgets are based on historical data and allow for factors like inflation and exchange rate changes
44
Define zero-based budgeting
Zero based budgeting is when all spending needs to be justified from scratch for each period, with nothing based on previous budgets
45
2 limitations of zero-based budgets
1. Can be time-consuming as evidence to support spending decisions need to be collected
2. Requires skilled employees to convince those who make purchasing decisions
46
What is a budget variance?
A budget variance is a difference between a figure budgeted and the actual figure achieved by the end of the budgetary period
47
What is variance analysis
Variance analysis aims to determine the reasons for the differences in the actual figures and budgeted figures
48
What is a favourable variance?
A favourable variance is where the actual figure achieved is better than the budgeted figure
49
What is an adverse variance?
An adverse variance is where the actual figure achieved is worse than the budgeted figure
50
How to calculate variance analysis?
Variance = Budgeted - actual
51
3 Difficulties of budgeting
1. Data must be up-to-date, accurate and free of bias. This may mean training or specialist staff is needed
2. Unrealistic budgets can lead to a lack of motivation
3. Conflict between budget holders, reducing productivity
52
Define gross profit
Gross profit is the difference between revenue and costs of sales
53
How to calculate gross profit?
GP = Revenue - cost of sales
54
Define operating profit
Operating profit is the difference between the gross profit and operating expenses
55
How to calculate operating profit
OP = Gross profit - operating expenses
56
Define Net profit
Net profit is the difference between the operating profit and interest payments or one off costs
57
How to calculate net profit
NP = Operating profit - (Net interest + Exceptoinal costs)
58
Define statement of comprehensive income
The statement of comprehensive income is an end of year financial statement that shows all of a businesses income and expenses over the previous year
59
Define profit margin
A profit margin is the amount by which the unit sales revenue exceeds the unit costs
60
How to calculate gross profit margin?
(Gross profit / revenue) x 100
61
4 ways to improve profitability
1. Raising prices
2. Reducing variable costs
3. Reducing staffing costs
4. Reducing one-off costs and interest charges
62
How would a business reduce its variable costs?
Find cheaper suppliers or purchase in bulk
63
What are the impact on staff morale if the business reduces staffing costs?
Reduced staff morale and reduced productivity
64
What does reducing one-off costs and interest charges include?
Lease instead of buying capital
65
Define cash
Cash is measured by the range of money flowing into and out of a business
66
What may cash-poor businesses struggle to do?
May struggle to pay suppliers
67
What does the statement of financial position have information to draw conclusions about?
The STOFP has the financial information required to draw conclusions about the liquidity of a business
68
Define liquidity
Liquidity is the ability of a business to meet its short term commitments with its available assets
69
Why is managing liquidity important?
To manage risk and help prepare for the unexpected
70
Define assets
An asset is a resource owned by a business used to generate output
71
Define liability
Liability is a debt that has to be repaid
72
Define non-current asset
A non-current asset are assets which are owned by a business for the long-term
73
Define current asset
A current asset are assets that are converted into cash quickly, usually within 1 year
74
Define current liability
A current liability is money a business owes and needs to be repaid within 1 year
75
Define non-current liability
A non-current liability is money a business owes and that does not need to be paid pack for at least 12 months
76
How to calculate net assets?
NA = Assets - Liabilities
77
What does capital employed represent?
The total funding of assets
78
What is capital employed equal to?
Capital employed = Net assets
79
What 2 ratios can be used to measure the liquidity of a business
1. Current ratio
2. Acid test ratio
80
Define current ratio
The current ratio is a quick way to measure liquidity and the outcome is expressed as a ratio
81
What businesses is the current ratio best for?
Businesses which hold little stock
82
What does the current ratio represent?
The result indicates how many £'s of current assets it has available to cover each £ of short term debt
83
How to calculate current ratio?
Current assets / current liabilities
= ?:1
84
Define acid test ratio
The acid test ratio is a precise measure of liquidity as it excludes inventory, which is the least liquid form of current assets
85
How to calculate acid test ratio?
(current assets - inventory) / current liabilities
= ? : 1
86
5 methods to improve liquidity
1. Reduce the credit period offered to customers
2. Ask suppliers for an extended repayment period
3. Use overdrafts
4. Sell of excess stock
5. Sell assets and lease them instead
87
What impact does reducing the credit period offered to customers have on liquidity
This will increase the level of current assets in the business, however, customers may move to competitors who offer better credit terms
88
What impact does the sale of assets and leasing them instead have on liquidity?
Increase in both current assets and current liabilities
89
Define working capital
Working capital is the money that a business has to fund its day to day activities
90
What else is working capital referred to as?
Net current assets
91
How to calculate working capital
WC = Current assets - current liabilities
92
Why is working capital important?
A lack of working capital can lead to business failure as the business cannot meet its immediate financial obligations
93
Why is cash the most liquid current asset?
Cash is the most liquid current asset because it can be used to settle debts immediately
94
What is the opportunity cost of having too much cash?
The opportunity cost is missing out on the benefits of investing the money
95
What is a drawback of a business holding large amounts of stock?
Higher storage costs
96
5 internal reasons why businesses fail
1. Poor planning
2. Lack of leadership
3. Ineffective marketing
4. Cash flow problems
5. Lack of funds
97
What does lack of leadership which leads to business failure include?
Leaders may lack the skills or experience to run a business, especially in times of crisis
98
What does cash flow problems which leads to business failure include?
Business becomes difficult to operate on a day to day basis
99
5 external causes of business failure
1. Economic challenges
2. Changes in consumer tastes
3. Legal factors
4. New competition
5. Technological change
100
As an external cause of business failure, what does legal factors include?
A change in legislation may mean that products or processes may need changing
101
How does economic challenges lead to external business failure?
Business that rely on borrowing or sell normal goods may not survive recessions, due to the lack of consumer income and high interest rates
102
How does new competition lead to external business failure?
Businesses may need to cut prices or spend more on promotion to maintain market share.
103
Define production
Production is the transformation of resources into finished goods or services
104
Define goods
Goods are physical products
105
Define services
Services are non-physical items
106
List the 4 methods of production
1. Job production
2. Batch production
3. Flow production
4. Cell production
107
Define job production
Job production is when a business produces one item at a time, as ordered by the customer
108
3 benefits of job production
1. Higher quality
2. Highly skilled workers
3. Customised products
109
2 drawbacks of job production
1. Slow production
2. High labour costs
110
Define batch production
Batch production is when groups of the same product are produced
111
2 benefits of batch production
1. Workers can specialise
2. Can produce next batch as soon as previous batch starts to run out
112
2 drawbacks of batch production
1. Requires careful coordination to avoid shortages
2. Completed products need to be stored
113
Define flow production
Flow production is the continuous manufacturing of standardised products on the production line
114
3 benefits of flow production
1. Low unit costs due to economies of scale
2. Faster production
3. Highly automated
115
2 drawbacks of flow production
1. Lack of customisation
2. Capital is expensive to buy
116
Define Cell production
Cell production involves workers being organised into multi-skilled teams, with each team being responsible for one part of the production process
117
2 benefits of cell production
1. Specialisation
2. High motivation as workers work in a team
118
1 drawback of cell production
1. Team efficiency may be reduced by weaker workers
119
Define labour productivity
Labour productivity is a measure of the output per worker in a period of time
120
How to calculate labour productivity
Output / Number of workers
121
Define capital productivity
Capital productivity is a measure of the output of capital employed during a period of time
122
How to calculate capital productivity
Output / Number of machines
123
What 2 things can a business do when it has lower cost per unit?
1. Lower prices
2. Enjoy increased profit margins
124
What 4 things influence productivity?
1. Employee motivation
2. Skills and training
3. Level of flexible workforce
4. Investment in capital goods
125
Define competitiveness
Competitiveness refers to the ability of a business to maintain or grow its market share given the presence of rivals
126
What is the link between productivity and competitiveness?
Businesses that are competitive are likely to have the financial resources to invest into improvements in their productivity
127
Define efficiency
Efficiency is the ability of a business to use its production resources as cost-effectively as possible
128
What is efficiency also reffered to as?
Average cost per unit
129
How to calculate average cost per unit (Efficiency)
ACPU = Total costs / Number of untis
130
When does maximum efficiency occur?
Maximum efficiency occurs at the point where the costs are at their lowest
131
6 factors which influence efficiency
1. Standardisation of the production process
2. Downsizing
3. Investment in capital equipment
4. Reducing staff and delayering
5. Outsourcing
6. Lean production techniques
132
What is outsourcing?
When tasks may be given to other specialist businesses that can complete it at a lower cost
133
Define labour intensive production
Labour intensive production uses physical labour in the production of goods/services
134
Define Capital intensive production
Capital intensive production uses machinery in the production of goods and services
135
3 benefits of capital intensive production
1. Low cost production
2. Consistent with high quality
3. Can operate without breaks
136
3 drawbacks of capital intensive production
1. High set-up and maintenance costs
2. Breakdowns can delay production
3. No flexibility in production
137
3 benefits of labour intensive production
1. Low cost production where labour costs are low
2. Workers can be creative
3. Workers are flexible
138
3 drawbacks of labour intensive production
1. Workers may be unreliable and need breaks
2. Incentives needed to motivate staff
3. High training costs
139
Define capacity utilisation
Capacity utilisation compares current output to maximum possible output a business can produce using all assets
140
How to calculate capacity utilisation
CU % =
(Current output / Max possible output) x 100
141
3 Implications of capacity under-utilisation
1. Higher unit costs as fixed costs are spread over fewer units
2. Workers may be underemployed
3. Flexibility to respond to an increase in demand
142
3 drawbacks of capacity over-utilisation
1. Lack of flexibility to respond to an increase in demand
2. Staff turnover
3. Breakdowns in capital
143
2 benefits of capacity over-utilisation
1. Busy workers feel job security
2. Minimise average total costs
144
3 ways to increase capacity utilisation
1. Increase demand
2. Reduce capacity by selling capital or reducing staff
3. Outsourcing
145
Define stock control diagram
A stock control diagram shows the flow of stock into and out of a business over time
146
What is the maximum stock level on the stock control diagram?
The maximum amount of stock a business is able to hold in normal circumstances
147
What is the reorder level on the stock control diagram?
The level at which a business places a new order with its supplier
148
What is the minimum stock level on the stock control diagram?
The minimum stock level is also known as the buffer stock level and is the lowest level the business is willing to allow stock levels to fall
149
What is the lead time on the stock control diagram?
The lead time is the length of time from the point of stock being ordered from the supplier to it being delivered
150
Define buffer stock
The buffer stock is a quantity of stock kept in case of shortages
151
Why do businesses keep buffer stock?
Can provide competitive advantage over rivals who are unable to meet demand
152
Benefit of buffer stock
Can give business a good reputation of being able to meet the needs of its customers
153
3 drawbacks of buffer stock
1. Storage costs
2. Can become obsolete if demand declines
3. Opportunity cost as capital can be spent on other areas of the business
154
2 implications of holding too much stock
1. High storage costs
2. Goods could be perishable
155
2 implications of holding too little stock
1. May run out of stock
2. Sudden increase in demand may not be able to be met
156
Define Just in Time (JIT) stock management
Just in time stock management is a process where stock is ordered and delivered exactly when needed
157
2 benefits of JIT stock management
1. Reduced storage costs
2. Improved cash flow
158
3 drawbacks of JIT stock management
1. Purchasing economies of scale not possible
2. Less flexible to increases in demand
3. Poor suppliers can delay production
159
3 ways to minimise waste
1. Improved storage
2. Staff training
3. Effective sales forecasting
160
Define lean production
Lean production is the minimisation of the resources used in the production process
161
2 benefits of lean production
1. Reduced storage needed due to JIT Stock control.
2. Lower unit costs due to minimal wastage
162
Define quality
Quality is the features of a product that satisfy customer needs
163
List the 4 methods of quality management
1. Quality control
2. Quality assurance
3. Quality circles
4. Total quality management (TQM)
164
What is quality control?
Quality control is inspecting the quality of output at the end of the production process
165
2 benefits of quality control
1. Standards are maintained
2. Inexpensive
166
2 drawbacks of quality control
1. Waste of resources as goods need to be removed
2. Cause of defects still unknown
167
Define quality assurance
Inspecting the quality of production throughout the production process
168
2 benefits of quality assurance
1. Products can be reworked instead of rejected
2. Cause of defects can be found, reducing future issues
169
2 drawbacks to quality assurance
1. Staff training needed
2. Reworking may lengthen the production process
170
Define quality circles
Quality circles are groups of workers who meet regularly to solve quality problems found in the production process
171
2 benefits of quality circles
1. Motivated workers as they are involved in decision making
2. Relevant solutions are likely as workers are familiar with processes
172
1 drawback of quality circles
1. Meetings must be organised regularly
173
Define Total quality management
Total quality management is when the business has quality at its core and every worker is responsible for quality
174
2 benefits of TQM (Total quality management)
1. Improved efficiency
2. A culture of constant improvement
175
2 drawbacks of TQM (Total quality management)
1. All workers need training
2. Monitoring is needed
176
What is Kaizen
Kaizen is when a business takes continuous steps to improve productivity by making small and ongoing steps
177
What management does kaizen need?
A long-term management commitment
178
What is the competitive advantage gained from quality management? (3)
1. Lower unit costs
2. Increased finance available
3. Improved brand reputation
179
Define inflation
Inflation is the general rise in prices in an economy over time
180
4 impacts of inflation
1. Increased costs
2. Higher loan repayments
3. Less demand
4. Loss of international competitiveness
181
Define exchange rate
The exchange rate is the value of one currency expressed in terms of another
182
Define interest rate
The interest rate is the reward for saving and the cost of borrowing
183
Define the business cycle
The business cycle describes the upturns and downturns in the level of a country's gdp over time
184
What is an economic boom?
A boom is a period of time where an economy expierences high rates of economic growth
185
3 Impacts of a recession on businesses
1. Less demand
2. Easier recruitment
3. Reduced production levels
186
When does economic uncertainty occur
Economic uncertainty occurs when it is difficult to forecast the level of supply and demand in an economy
187
3 reasons economic uncertainty may occur
1. Changing exchange rates
2. Economic growth uncertainty
3. Price rise in commodities
188
2 ways businesses can prepare for economic uncertainty
1. Building up cash reserves in economic booms
2. Keeping informed of the economic climate
189
Define legislation
Legislation is the laws and regulations passed by governments
190
5 areas of legislation:
1. Consumer protection
2. Employee protection
3. Environmental protection
4. Competition policy
5. Health and safety
191
Define consumer protection legislation
Consumer protection means that consumers are treated fairly in the areas of safety, standard of quality, and no false claims
192
Define employee protection
Employee legislation aims to prevent the exploitation of workers in the areas of pay, working conditions, equality, and trade unions
193
4 impacts of employee protection on businesses
1. Penalties if laws are broken
2. Higher labour costs
3. More training needed
4. Motivated staff if laws are met
194
Define environmental protection laws
Environmental legislation aims to hold businesses responsible for their environmental impact
195
Impact on businesses of environmental protection laws
Businesses may be fined or forced to stop all activity until they meet the regulations
196
Define competition policy
Competition policy aims to protect the interests of both consumers and businesses by stopping anti-competitive practices
197
Define health and safety legislation
Health and safety legislation requires businesses to operate in a way that protects the physical and mental wellbeing of its workers and customers
198
3 areas of health and safety regulation
1. Provision of breaks
2. Provision of safety equipment
3. Hygienic working conditions
199
Define competition
Competition refers to the rivalry between firms in the same industry who aim to increase their market share
200
Define market size
Market size the number of customers and sellers in a market
