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THEME 2 Flashcards

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1
Q

Internal Finance

A

Funds within a business (e.g. owner’s retained capital, retained profit, sale of assets)

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2
Q

(Internal finance) Owner’s personal savings

A

When entrepreneur invests their own money into the business - shows confidence in their business as they’re willing to take risks
(+)
- No interest charges
- Not having to repay
- Owners maintain control
(-)
- Limited
- Threat to personal finances
- Opportunity cost of investment

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3
Q

(Internal finance) Retained profit

A

Profit kept within a business from profit after tax to finance future activity - profit is either returned, becomes part of total equity or is distributed as dividends
(+)
- Does not have to repay
- No interest charges
- Doesn’t dilute ownership
(-)
- Only an option if sufficient retained profit exists
- May cause dissatisfaction if it is at the expense of dividends

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4
Q

(Internal finance) Sale of assets

A

Disposing of an asset in return for cash - improves short-term cash flow but may negatively impact long-term profitability
(+)
- No interest charges
- Turns obsolete asset into finance
- Immediate cash injection
(-)
- May be expensive if the business needs to lease asset back
- Loss of use of asset
- One-off option

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5
Q

External finance

A

Funds raised from investors ( A source of finance is where the finance is coming from, a method is how the finance is produced)

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6
Q

(Sources of finance) Family & Friends

A

Amount available may be limited + repayment terms can cause strains on relationships

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7
Q

(Sources of finance) Banks

A

Acts as an intermediary in financial transactions

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8
Q

(Sources of finance) Peer-to-Peer

A

Individuals who lend to others, there is no previous contact/ relationship - they’re motive is profit

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9
Q

(Sources of finance) Business Angels

A

Wealthy individuals who invest in start-ups in return for shares - offer support/ expertise (high-risk as business is no established)

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10
Q

(Source of finance) Crowd funding

A

Raising finance from large groups of people who often only contribute small amounts of money - investor is only tied to their promised contribution

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11
Q

(Method of finance) Loans

A

When a loaner provides capital with interest - may be secured against an asset, interest can vary depending on the risk assessment (suitable for long-term projects)
(+)
- No loss of ownership
- Fixed interest allows for budgeting
- Improved cash-flow, cost is spread over a long period of time
(-)
- Interest must be paid
- highly geared
- Can be charged penalties for early payment

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12
Q

(Method of finance) Share capital

A

Money raised from the sales of shares, used to fund future business activities - shareholders will be rewarded with dividends, only an option if the business is incorporated
(+)
- Only need to pay dividends if profit is being made
- Possible to raise large amounts
- No interest payments
(-)
- Possible loss of ownership
- Threat of hostile takeovers
- complex & costly

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13
Q

(Method of finance) Venture capital

A

Investment from an established business person/business for percentage equity - may also benefit from expertise and mentoring, high-risk but potentially rewarding
(+)
- Potential for large sums of money
- Expertise
- Easier to attract other sources of finance
(-)
- Expert financial projections are likely required
- Initially expensive
- Partial loss of ownership

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14
Q

(Methods of finance) Overdraft

A

Facility to overspend on a current account to an agreed sum - interest is charged on the overdrawn account
(+)
- Only borrowed when required (Flexibility)
- improves cash-flow
- Only pay money borrowed
(-)
- Loaner can call it in at any time
- Only available from current bank account
- Interest payments tend to be variable

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15
Q

(Method of finance) Leasing

A

Allows the renting of assets from another party - allowed to benefit from the use of an asset

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16
Q

(Method of finance) Trade credit

A

An arrangement by a supplier to produce goods and services - supplier is paid at a pre-agreed time after goods/services have been received

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17
Q

(Method of finance) Grants

A

Fixed amounts of capital provided by the government or other organisations to fund specific projects - lengthy application process, # of grants is often limited

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18
Q

Liability

A

The extent to which an investor is legally responsible for the debts of a business

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19
Q

Unlimited liability

A

Owners of a business are responsible for the total debts of a business
- Unlimited liability may be off putting for investors
- But, suppliers are more willing to offer trade credit with unlimited liability

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20
Q

Limited liability

A

Investor’s liability is limited to the total amount invested

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21
Q

Business plan

A

How the entrepreneur proposes to set up a new business - it shows the entrepreneur is organised & logically worked through issues, clear objectives, evidence to support sales & financial forecasts

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22
Q

Purpose of business plan

A
  • To secure financial funding
  • To ensure firm develops a healthy financial structure
  • Helps identify any problem areas
  • Sets targets
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23
Q

Cash-Flow forecast

A

Process of estimating the size and timing of cash inflows and outflows

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24
Q

Factors affecting cash inflow

A

Transaction types
- sales (cash vs credit)
- purchases
- payment terms
Timings of cash flows
- seasonal
- timings of payments
Nature of business

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25
Limitations/ Strengths of Cash inflow
STRENGTHS; - Identifies the timing/ significance of any shortfalls - Identifies any possible correction - Helps secure finance from any potential investors/ bank LIMITATIONS; - Based on predictions, therefore may be inaccurate - Informed by market research, may be biased and flawed information - Demand may be over/under estimated
26
Sales forecasting
The process of predicting future sales volumes and values (based on market research/ past sales data) (-) - Future is unknown and therefore uncertain - Time frame; the longer the time frame, the more unpredictable - Past is not a clear representation of the future
27
Purpose of sales forecasting
FINANCE; - informs cash-flow forecasts - predicts sale volume/ revenue - Assesses ability to break-even MARKETING; - identifies when promotional activity is needed - Plans distribution RESOURCE MANAGEMENT; - Required levels of output - Stock management - Can suppliers match demand PEOPLE; - Plan workforce needs - Operatives to ensure supply meets demand
28
Factors affecting sales forecasts
Consumer trends Actions of competitors Economic variables - Interest rates - Employment - Consumer confidence - Stage in the business cycle
29
Sales volume
Amount of sales expressed as a number of units sold in a specified period of time
30
Sales revenue
The total amount of money coming into a business from the sales of a good/service in a specified amount of time
31
Total costs
All costs associated with the provisions of a good/service
32
Break-even
The level of output at which the business is neither making a profit or loss
33
Contribution
For each item a business sells, it must first cover variable costs - what is left contributes towards fixed costs and then profit
34
Contribution per unit
The amount of money each unit sold contributes towards fixed costs and once those are paid for, profit
35
Break-even analysis
A technique used to identify the number of units necessary to achieve an equilibrium where total costs is equal to total revenue
36
Margin of safety
The difference between the actual number of units produced and the number required to break-even
37
Strengths/ Limitations of Break-even
STRENGTHS; - Allows business to calculate the minimum number of sales needed before profit to see if venture is viable - Can calculate level of profit/ loss at different levels - Can predict the outcome of changing variables - Aids in decision making LIMITATIONS; - Based on predictions - Fixed costs can vary in the long run - Ignores changes in variable cost or selling price - Only indicates number of sales needed, doesn't guarantee they'll materialise
38
Budgets
A target amount of money set by a business to be achieved or adhered to
39
Income budget
Target amount of revenue to be achieved in a specific amount of time - split by department, function or product - individual sales targets for staff - informed by market research/ sales forecasts - informs predicted cash flows
40
Expenditure budgets
Limit on the amount to be spent in a given period of time - Split by department, function and product - Responsibility passed onto individual managers - Set for running/ start-up costs - Informs predicted cash outflows - Allows for monitoring of over/underspending
41
Profit budget
Target set for the surplus between income & expenditure in a given period of time - Calculated based on the income/ expenditure budget - Informs decisions e.g. where cuts need to be made
42
Purposes of budgets
- Provides quantifiable target - can be communicated to interested parties - Helps with planning/ forecasting - Motivates budget holders due to increased responsibility
43
Strengths/ Limitations of Budgets
STRENGTHS; - Improves financial control (reduces overspending, better forecasting, efficient allocation of money) - Delegating spending power - Sets targets & goals LIMITATIONS; - Potential for conflict (lack of transparency, short-term savings) - May be detrimental for long-term objectives (may be to hard/easy to achieve) - May be restrictive
44
(Types of budgets) Historical budgets
Setting budgets based on previous years budgets and actual figures - Can be adjusted with actual outcomes - Can lead to inefficiencies if previous budgets have been unnecessarily high
45
(Types of budgets) Zero-based budgets
Each department is set a budget of 0 - all departments have to justify expenditure - Cuts costs - Time consuming, has to be authorised
46
Variance analysis
Process of calculating/ interpreting differences between budgeted ad actual figures
47
Factors affecting variance analysis
Actions of competitors - Lower prices/ new products/ closing stores Actions of suppliers - Changing prices/ offering discounts Changes in the economy Internal inefficiency - Poor budget management/ demonstrated team Internal decision making - change of suppliers
48
Limitations of variance analysis
- Dependent on predictions - Costs are subject to change - Actions of competitors are unknown - Managers my lack experience
49
Profit
The surplus of money when total revenue exceeds total costs
50
Gross profit
Profit after cost of sales has been deducted and before expenses - Doesn't take into account indirect costs - Can be raised by increasing sales revenue/ reducing cost of sales - Low gross profit = high cost of sales/ low sales revenue
51
Cost of sales
Direct cost of raw materials or stock purchased in a given period of time
52
Operating profit
Profit after all other expenses have been deducted - takes into account indirect costs created in sales process - raised by increasing sales revenue/ reducing overheads
53
Profit of the year (Net profit)
Profit after tax and interest have been deducted & allowances for exceptional items but before the payment of dividends
54
Gross profit margin
A measure of a firm's profitability by looking at the relationship between gross profit and sales revenue - if the gross profit margin is low or falling, the firm may not be managing cost of sales effectively
55
Operating profit margin
Measure of a firm's profitability by looking at the relationship between operating profit and sales revenue - Low or falling, firm may not be managing expenses effectively
56
Net profit margin
Measure of a firm's profitability by looking at the relationship between net profit and sales revenue - Low or falling, may indicate gross profit or operating profit are in decline
57
Profit/ profitability can be improved
- Selling the same quantity but at a higher price - Sell more at the current price - Sell the same at the same price but reducing costs
58
Liquidity
A measure of the business' ability to meet day-to-day expenses and short-term debts, hence its ability to survive
59
Statement of financial position
Summarises the net worth of a business at a given point in time
60
Working capital
Business' ability to meet day-to-day expenses
61
Ways to improve liquidity
- Sell assets that are no longer used - Move cash balances rom current accounts to high interest bearing accounts - Monitor debtors
62
Business failure
The inability of a business to continue to operate
63
Internal causes
Within the business, points responsibility towards owners/leaders
64
External causes
Outside a business, therefore outside the control of owners/leaders
65
Financial factors
based around raising finance, financial planning, managing finance - poor financial management
66
Non-financial factors
based around resource management, whether the business uses resources efficiently to achieve productive efficiency
67
Resource management
Aspects of a business which are directly linked to the fulfilment of customer order (there are 4 methods of production)
68
(Method of production) Job production
Production of one-off items to meet the specific needs of each individual customer (+) - Cheap & easy - Specialist service (often) = premium prices (-) - Production might be time-consuming
69
(Method of production) Batch production
Identical items produced in batches - each item uses the same resources and passes through the production process at the same time (+) - Cheap & easy - Uniform products, should be identical - Variation can be achieved in different batches = flexibility
70
(Method of production) Flow production
Capital intensive production, items flow along production line in a continuous process (+) - Suitable for mass production - Cost is spread against a high level of output - Workers are responsible for a small step along the process
71
(Method of production) Cell production
When the production line is split into self-contained cells, workers are organised into teams - each group is responsible for production, from start to finish
72
Productivity
A measure of output per unit of input in a given period of time
73
Factors affecting productivity
- Age of machinery/ maintenance - Skills & motivation of employees - Machine hours vs downtime - Complexity of product
74
Efficiency
Maximising the output achieved from given inputs including machinery, materials and people in a given period of time
75
Methods of improving efficiency
- increasing capacity utilisation - increasing labour productivity - lean production techniques - using technology
76
Ways labour productivity can be increased
- training - increasing motivation (incentives) - Implement new technology - Better working practices
77
Labour productivity may have negative impacts;
May negatively impact quality and customer satisfaction - Damage to long-term reputation - Increasing waste affecting until cost Employees may feel exploited - working harder for the same pay - increased workload = stress + demotivation
78
Capital intensive
Uses relatively high proportion of capital, such as machinery - requires high investment
79
Labour intensive
Uses a high proportion of workers - labour costs will be high - dependent on skilled workers & motivated workforce
80
Capacity utilisation
Measure of the percentage of potential output that is being achieved - can be increased/ decreased in the long run by acquiring downsizing resources
81
Strengths/ Limitations of capacity utilisation
STRENGTHS - lower unit costs - sense of job security - improved profitability - Funding for expansion LIMITATIONS - lack of flexibility - potential loss of an opportunity or non-standard order - pressure on assets, lack of time for maintenance - pressure on staff
82
Under-utilisation
Firm's resources are not being used at or close to full capacity - higher unit costs, paying for assets not being used IF OPERATING UNDERCAPACITY; - increase demand through promotional activates, changing marketing mix, improving quality - Downsize - Lease off spare capacity
83
Over-utilisation
A firm operating above full capacity - Lack of downtime, quality issues, staff demotivation = may affect quality IF OPERATING AT OVERCAPACITY; - Reduce demand e.g. rising price - Outsource parts of the business' operations - Increase capacity by investing in more resources
84
Amount of stock held will depend upon
- Business' attitude to risk - Importance of speed of response as an operational objective - Speed of change within the market - Nature of product
85
Stock control
Mechanism used to maintain its level of stock - will try to ensure sufficient stock to meet demand
86
Strength/ Limitations of stock control
STRENGTH - Can meet customer demand - Quickly responds to increases in demand - Continue with production even if a problem with stock deliveries LIMITATIONS - Money tied up in holding stock - Cost associated with stock holding - Risk of waste
87
Implications of poor stock control
- waste of resources - unable to meet customer needs - damaged reputation, failing to meet customer needs - under utilisation
88
Lean production
Focus on cutting waste whilst maintaining/ improving quality - leads to greater efficiencies & lower unit costs
89
Just In Time (JIT)
technique used to minimise stock holdings at each stage of the production process -helping minimise costs BENEFITS - less costs in holding inventory - Less working capital required - Less obsolete/ ruined inventory - Avoids unsold stock LIMITATIONS - Little room for error - Very reliant on suppliers - Unexpected orders are harder to meet - Delays in deliveries can cause production to halt
90
Lean production techniques can lead to a competitive advantage
- Less obsolete/ damaged stock - Lower costs of holding stocks allowing cost savings, may be passed as a form of lower prices - Better environmental records - Increased speed of response to changing customer needs
91
Quality
The ability of a good/service to meet customers' expectations Interpretations of quality may be influenced by; - Price - Brand - Customer's personal experiences - Nature of product
92
Quality management
When business' meet the customers' expectations in relation to quality Methods of improving quality; - Training/ motivating employees - understanding customer's expectations - working closely with suppliers - quality systems
93
Quality control
checking of a good/ service before its delivered) STRENGTHs - quality can be monitored - Stops faulty products - Meets customer expectations - Common problems can be identifies LIMITATIONS - takes responsibility away from operators - Requires specialist - Problems only identified at the end - High waste levels
94
Quality assurance
Checking of a product/ service at each stage of the production STRENGTHS - Stops faults early, saves resources - Motivates workers to ensure quality is met - Aims to achieve zero defects - Enhances reputation LIMITATION - High levels of commitment - Can slow down production & labour productivity - Demotivate workers who feel under pressure - Opportunity cost of managers
95
Quality circles
Informal groups of workers who volunteer to meet on a regular basis to discuss issues relating the workplace STRENGTHS - Workers involved in production best understand quality issues - Recommendations are fed back
96
Total Quality Management (TQM)
Employee is a link in a chain and they treat the next link as if they were an external employee - relies on trained & motivated workforce who are commitment on achieving quality standards
97
Kaizen
Concentrates on small, but frequent, improvements in every aspect of production - All members are involved as it recognises that improvements can take place at any stage of the hierarchy
98
Quality management can achieve competitive advantage
- lower unit costs due to less waste - enhanced image/ reputation - USP - Motivated workforce in decision making
99
Inflation
Rise in prices over a period of time or a fall in the purchasing power of money
100
Retail price index
A measurement of a "basket of goods"/ services which serves as a representative of what people buy in the UK
101
Consumer price index
Similar to RPI but excluding household costs
102
Effects of inflation
- Higher prices for consumers due to increased costs - Absorb increased costs through lower profit margins - Reduced supply due to increased costs - Difficult to maintain competitiveness especially against foreign businesses
103
Exchange rates
Value of one currency in terms of another currency
104
Effects of interest rates
- If interest rates are high, saving is more attractive and spending is less attractive - Affects willingness to spend on credit - Consumers will have less disposable income - Foreign investors will invest in UK banks for higher returns, increases demand in £
105
Taxation
Process of imposing financial charges on business and individuals by the government - Direct taxes applies to income earned/ capital gained, indirect taxes apply to expenditure on products
106
Effects business of taxation
- A cut in income tax, may give consumers more disposable income thus raising consumption - A cut in corporation tax, more available profit for firms - Changes to VAT affects price to consumers + costs to a business
107
Government spending
Annual expenditure by government on supplying goods & services to achieve economic and political objectives
108
Effects of government spending
- Budgets allocated to public sector organisations will affect demand for suppliers - Spending on infrastructure - Benefits paid will affect disposable income - Pay rates to public sector workers, affects levels of disposable income
109
Booms
High levels of economic activity - struggle to find skilled workers - Capacity utilisation is at full growth - Demand is more price inelastic - Quality is more attractive
110
Recession
Economic growth starts to fall due to downturn (Recession is officially two quarters of negative economic growth) - Firms will rationalise - Cost minimisation is a key factor - Demand is price elastic - Staff fear for their jobs, affecting motivation
111
Stump
Serious economic decline - Firms go out of business - Less competition, monopolies/ oligopolies
112
Recovery
Economic growth is starting to rise - Firms take on more workers - Capacity utilisation increases - Investment increases - Price becomes a less important factor
113
Economic uncertainty
Inability to predict exactly what will happen in economic environment in the future/ place quantifiable probability on what is going to happen
114
Competitive environment
The degree of competition in the market and the buying and selling power of customers and suppliers within that market
115
Dominant business
The one with the largest market share within a market (can exert influence over customers/ suppliers)
116
Monopoly
Zero or very little competition - At least 25% market share - Exploit customers by having high prices - Enjoys high prices
117
Oligopoly
Zero or very little competition - Exploit consumers through high prices - Barriers to entry exist particularly through advertising - Compete on non-price competition - Takes into account reaction of competitors when designing the marketing mix
118
Monopolistic competition
- Differentiates products to enjoy a degree of monopoly power - Barriers of entry are low, easy for firms to get in creates strong competition - Will try to brand product, may be through building reputation
119
Perfect competition
- Sell homogenous products - Firms have no influence on price & are therefore price takers - No barriers of entry - Firms will not raise prices
120
Many businesses employ tactics to compete
- New product development - Changing/ improving existing products - Promotions - Changing prices

BUSINESS (3 decks)

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