THEME 2 Flashcards
2.1, 2.2, 2.3, 2.4, 2.5 (180 cards)
1
Q
What is internal finance?
A
Money generated by the business or its current owners.
2
Q
What is external finance?
A
Money raised from outside the business.
3
Q
What are sources of internal finance? (List 3)
A
- Owners capital (personal savings)
- Retained profit (profit after tax that is reinvested into the business)
- Sale of assets (e.g., house)
4
Q
What are sources of external finance? (List 7)
A
- Family and friends
- Banks
- Peer-to-peer lending
- Business angels
- Crowdfunding
- Other businesses
5
Q
What is finance?
A
The funding required to set up and expand a business.
6
Q
What is owner’s capital?
A
The money provided by the owners of the business.
7
Q
What is a business angel?
A
Individuals who invest in the very early stages of a business, taking a significant equity stake.
8
Q
What are some advantages of business angels?
A
- Have lots of business knowledge
- Useful contacts alongside finance
- May not need to be repaid
9
Q
What are some disadvantages of business angels?
A
- Owners will have to share their profit with the investors.
10
Q
What are other businesses in external finance?
A
Seeking out investment in other businesses to drive growth.
11
Q
What are some advantages of seeking investment from other businesses?
A
- Businesses can share resources with another business.
12
Q
What are some disadvantages of seeking investment from other businesses?
A
- The other business will gain some control and have influence over decision making.
13
Q
What is retained profit?
A
Profit (from the sales) after tax that is reinvested in the business.
14
Q
What are some advantages of retained profit?
A
- Fewer dividends distributed to shareholders
- Easy to access
15
Q
What are some disadvantages of retained profit?
A
- Some businesses may not have made enough profit
- Amount of money available may only be small
16
Q
What is crowdfunding?
A
Where a large number of individuals invest in a business or project on the internet, avoiding the use of a bank.
17
Q
What are some advantages of crowdfunding?
A
- Business raises awareness of product to people using the internet.
18
Q
What are some disadvantages of crowdfunding?
A
- Smaller investors are more likely to take risks
- Business risks having ideas copied by someone else who can see the product online.
19
Q
What is peer-to-peer funding?
A
Where individuals lend to other individuals without prior knowledge of them, on the internet.
20
Q
What are some advantages of peer-to-peer funding?
A
- Lower rate of interest than banks.
21
Q
What are some disadvantages of peer-to-peer funding?
A
- Money has to be repaid with interest
- Lenders are particular about who they provide finance to.
22
Q
What are methods of external finance? (List 7)
A
- Loans
- Share capital
- Venture capital
- Overdrafts
- Leasing
- Trade credit
- Grants
23
Q
What are the two types of finance?
A
Internal and external.
24
Q
What is a loan?
A
An arrangement where the amount borrowed must be repaid over a clearly stated period of time in regular instalments.
25
What is a grant?
A sum of money given by a government or other organization for a particular purpose.
26
What is an overdraft?
Where a bank allows a firm to take out more money than it has in its bank account (below 0).
27
What is share capital?
Money introduced into the business through the sales of shares.
28
What is leasing?
A contract to acquire the use of resources such as property or equipment.
29
What is trade credit?
When goods or services provided by a supplier are not paid for immediately.
30
What is venture capital?
Money invested in a business where there is a substantial element of risk.
31
What is business liability?
The legal responsibility to pay money owed by a business.
32
What is an unincorporated business?
A business model in which there is no legal difference between the owner(s) and the business.
33
What is an incorporated business?
A business model in which the business and the owner(s) have separate legal identities.
34
What is unlimited liability?
A legal status which means that business owners are liable for all business debts.
35
What are some characteristics of unlimited liability?
* Risky
* Small
* Sole trader
* Personal assets
* Partnership
36
What is limited liability?
A legal status that means shareholders can only lose the original amount they invested in a business.
37
What are some characteristics of limited liability?
* Less risky
* Big
* Shareholder
* Business assets
* Public/private limited company
38
What is cash flow?
The movement of money in and out of a business.
39
What is the closing balance?
The cash position at the end of the month.
40
What is cash inflow?
The flow of money into the business.
41
What is cash outflow?
The flow of money out of the business.
42
What is net cash flow?
The difference between cash inflow and cash outflow of a business over a period of time.
43
What is opening balance?
The cash the business has at the beginning of the month.
44
What is a cash flow forecast?
A future prediction of a business's cash inflows and outflows.
45
What are the uses of a cash flow forecast? (List 3)
* Shows the owner has a good understanding of their market
* Is a forward planning tool
* Used to compare costs and revenue
46
What are the limitations of a cash flow forecast? (List 2)
* Based on estimates, or even guesses
* Can be subject to external influences beyond the business's control.
47
What is a business plan?
A document setting out a business idea and showing how it is to be financed, marketed, and put into practice.
48
What is an executive summary?
A short, compelling one-page overview of the business outlining its purpose and the opportunity.
49
What is a business idea & opportunity?
The concept of the business, including the quantity to be sold and the estimated price.
50
What are the aims & objectives?
These should be SMART (Specific, Measurable, Achievable, Realistic and Time-Related).
51
What is market research?
Investigating the target market and other competitors.
52
What is a financial forecast?
e.g., Cash flow forecast, projected statement of comprehensive income, projected statement of financial position.
53
What are sources of finance?
A plan on how the business will be financed and how any borrowings will be repaid.
54
What are premises & equipment?
Facilities, machinery, etc. that needs to be obtained and financed.
55
What is personnel?
An organization chart outlining the people involved in the business, their areas of responsibility, skills, and qualifications.
56
What is buying & production?
Details of the production methods to be used to produce the product, and where the business will buy its supplies.
57
What are the reasons for writing a business plan? (List 3)
* To obtain finance
* To provide a clear target
* To show how the business intends to develop.
58
What are the reasons against writing a business plan? (List 2)
* Takes time to put together
* Does not guarantee success.
59
What is sale forecasting?
Projecting future sales revenue, often based on previous sales data.
60
What are the factors affecting sale forecasts? (List 3)
* Consumer Trends
* Economic Variables
* Actions of Competitors
61
What is sales volume and what is the calculation?
The quantity of output in a particular time period. Calculation: Sales revenue/selling price.
62
What is sales revenue and what is the calculation?
The value of output sold in a particular time period. Calculation: Sales volume x selling price.
63
What is variable costs and what is the calculation?
A cost that rises as output rises. Calculation: Variable cost per unit x output.
64
What is fixed costs?
A cost that does not change as a result of a change in output.
65
What is total costs and what is the calculation?
The entire cost of producing a given level of output. Calculation: Fixed costs + variable costs.
66
What is profit and what is the calculation?
The difference between total costs and total revenue. Calculation: Total revenue - total costs.
67
What is break even?
When a business generates just enough revenue to cover its total costs.
68
What is break even-output and what is the calculation?
The output a business needs to produce so that its total revenue and total costs are the same. Calculation: Fixed cost / (selling price - variable cost per unit).
69
What is contribution?
The amount of money left over after variable costs have been subtracted from revenue.
70
What is margin of safety?
The range of output between the break-even level and the current level of output, over which a profit is made.
71
What is the formula for contribution per unit?
Selling price - variable cost per unit.
72
What is the formula for total contribution?
Total revenue - total variable costs.
73
What is the formula for break-even using contribution?
Fixed costs/contribution per unit.
74
What is the formula for profit using contribution?
Total contribution - fixed costs.
75
What is the formula for margin of safety?
Actual output (sales) - break even output.
76
What are the uses of a break-even analysis? (List 3)
* Models 'what if' scenarios
* Measures profit and losses
* Supports loan applications.
77
What are the limitations of a break-even analysis? (List 2)
* No costs are truly fixed
* Based on a business selling one product at a single price.
78
What are the purposes of setting budgets? (List 3)
* Communication
* Planning
* Motivation.
79
What are the 3 types of budget types?
* Production cost budget
* Sales budget
* Zero-based budget.
80
What is a production cost budget?
This budget calculates the total cost required to produce a planned number of units, including materials, labor, and overheads.
81
What is a sales budget?
This budget forecasts the expected revenue of a product or service sales over a specific period.
82
What is zero-based budgeting?
This budgeting approach requires every expense to be justified from scratch, without reference to previous budgets.
83
What are the difficulties of budgeting? (List 2)
* Demotivating
* Lack of Communication.
84
What is variance in budgeting?
The difference between the figure that the business has budgeted for and the actual figure.
85
What is a favorable variance?
When the actual sales or profits are higher than budgeted sales or profits.
86
What is an adverse variance?
When the actual sales or profits are lower than budgeted sales or profits.
87
How do you calculate gross profit?
Sales revenue - costs of sales.
88
How do you calculate operating profit?
Gross profit - other operating expenses.
89
How do you calculate profit for the year?
Operating profit - interest.
90
What is liquidity?
A business's ability to pay its debts and liabilities in cash when they fall due.
91
What is a statement of financial position?
A report that summarizes an organization's assets, liabilities, and capital at a given point in time.
92
What are non-current assets?
Items of value owned by the business that are likely going to be kept for more than one year.
93
What are current assets?
Items owned by the business whose value varies as a result of daily business activities.
94
What are current liabilities?
Debts that the business has less than one year to repay.
95
What are net current assets?
Current assets - current liabilities.
96
What are non-current liabilities?
Debts that the business has more than one year to repay.
97
What are net assets?
Total assets - total liabilities.
98
What is total equity?
Share capital + Retained profit OR owners capital + retained profit less drawings.
99
What is the calculation for current ratio?
Current Assets / Current Liabilities.
100
What is the calculation for acid test ratio?
(Total current assets - inventory) / Current Liabilities.
101
What is the calculation for gross profit margin?
(Gross profit/sales revenue) x 100.
102
What is the calculation for operating profit margin?
(Operating profit/sales revenue) x 100.
103
What is the calculation for profit for the year / net profit margin?
(Profit for the year/sales revenue) x 100.
104
What are methods to improve profitability - increase sales revenue? (List 3)
* Increase prices
* Reduce prices
* Improve product quality.
105
What are methods to improve profitability - decrease costs? (List 3)
* Find a cheaper supplier of raw materials
* Reduce labor costs
* Improve efficiency by upgrading machinery.
106
What are the ways to improve liquidity? (List 3)
* Selling underused fixed (non-current) assets
* Speed up collection of debts
* Encourage cash sales.
107
What is the definition for working capital?
The funds left over to meet day-to-day expenses after current debts have been paid.
108
What is the impact on a business if suppliers of raw materials are paid on time?
Business may receive a discount.
109
What is the impact on a business if they cannot afford to pay suppliers for raw materials?
Could harm relationships and supply chain.
110
What is the impact on a business if rent and electricity for premises is not paid for?
Could lead to eviction or service interruption.
111
What is the impact on a business if their employees are not paid on time?
Could lead to low morale and high turnover.
112
What is the impact on a business if employees are paid on time and in full?
Increased employee satisfaction and retention.
113
What is the impact on a business if it is declared insolvent (bankrupt)?
Legal consequences and loss of business operations.
114
What impact does paying suppliers of raw materials on time have on a business?
Business may receive a discount from the supplier or might be able to delay future payments.
115
What happens if a business cannot afford to pay suppliers for raw materials?
Suppliers may be unprepared to provide materials to the business.
116
What is the consequence of not paying rent and electricity for premises?
Business could be evicted from the premises.
117
What occurs if employees are not paid on time?
The employees will leave.
118
What is the outcome if employees are paid on time and in full?
The employees will stay.
119
What happens when a business is declared insolvent?
Business is forced to close down.
120
What are the external causes of business failure?
* Economic conditions (COVID etc.)
* A change in consumer trends
* Competition
* A change in legislation (law- minimum wage etc.)
* A change in exchange rates
121
What are the internal causes of business failure?
* Poor management of working capital
* Lack of business skills
* Poor efficiency
* Failure to innovate
* Relying on a narrow customer base
* Poor financial management
* Lack of planning
122
What is labour intensive production?
Production methods that make more use of labour relative to machinery.
123
What are the advantages of labour intensive production?
* Humans can be retrained to carry out new tasks.
* Humans can solve production problems.
* Humans can suggest ways to improve quality.
124
What are the disadvantages of labour intensive production?
* People can be unreliable and can't work without breaks or holidays.
* Wages increases means that the cost of production will rise over time.
* Skills may need to be learned over a period of time.
* People sometimes need to be motivated to improve performance.
* The implementation of machinery can lead to job losses.
* May be difficult to replace staff who leave.
* Products can be tailored to suit customer's needs thus adding value and allowing a higher selling price.
* It can be harder to manage people over machines.
125
What is capital intensive production?
Production methods that make more use of machinery relative to labour.
126
What are the advantages of capital intensive production?
* Machinery is able to work 24/7.
* Production in large quantities = low unit costs.
* Machines can be highly accurate, therefore creating little waste.
* The running cost of machinery can be fairly low.
127
What are the disadvantages of capital intensive production?
* Machinery is expensive to purchase.
* Machines can be inflexible as they are usually only suited to one task.
* If machinery breaks down production pauses, leading to missed sales.
128
What are the methods of production?
* Job
* Batch
* Cell
* Flow
129
What is the definition of flow production?
A method of production that involves continuous production of a single, standardised product.
130
What are the advantages of flow production?
* Cost efficient
* Time efficient
* High production volume
* Ability to charge a low price
* Small training requirements
131
What are the disadvantages of flow production?
* Not flexible
* No product variation
* Low product quality (not handmade)
* Low job satisfaction
132
What is the definition of job production?
A method of production that involves making one-off items to suit each customer's individual requirements.
133
What are the advantages of job production?
* Flexible
* Ability to charge high price
* Product variation
* Product quality
* High job satisfaction
134
What are the disadvantages of job production?
* Not cost efficient
* Not time efficient
* Low production volume
* High training requirements
135
What is the definition of batch production?
A method of production that involves making a group of products to one specification at a time, allowing some variation, yet some specialisation.
136
What is the definition of cell production?
When the production line is reorganised into small teams, with each cell developing responsibility for a significant part of the finished product.
137
What is productivity?
The output per unit of input per time period.
138
What is labour productivity?
Total output per time period / number of employees
139
What are the advantages of technology on productivity?
* Help produce products quicker
* Productivity is higher
140
What are the disadvantages of technology on productivity?
* Expensive
141
What are the advantages of staff training on productivity?
* Staff will be multi-skilled
* Staff are more competent = increase in output
142
What are the disadvantages of staff training on productivity?
* Expensive
* Time consuming
* Staff may not improve
143
What is specialisation in productivity?
In business, the production of a limited range of goods.
144
What is division of labour in productivity?
Where production is broken down into many separate tasks.
145
What are the advantages of specialisation and division of labour?
* Productivity increase because staff will be better at their role.
146
What are the disadvantages of specialisation and division of labour?
* Focusing on a limited range of products.
147
What are the advantages of motivating employees on productivity?
* Increase in productivity.
148
What are the disadvantages of motivating employees on productivity?
* Main motivation = money = expensive - it does not always guarantee motivation.
149
What is the most productive method of production?
Flow
150
What is the least productive method of production?
Job
151
What is efficiency?
The extent to which the resources used in a process generate output without wastage.
152
What is the formula for capacity utilisation?
CU = The use that a business makes of its resources.
153
What is under utilisation?
The position where a business is producing at less than full capacity.
154
What is over utilisation?
The position where a business is running at full capacity and 'straining' resources.
155
What is excess capacity?
When a business has too many resources, such as labour and capital, to produce its desired level of output.
156
What is full capacity?
The point where a business cannot produce any more output.
157
What are implications of under utilisation?
* Inefficiency may occur
* Workers may feel insecure in their job
* Ability to cope with sudden increase in demand
* Less work related stress and absenteeism
* Workers may resent working order if orders rise
158
What are implications of over utilisation?
* Fixed costs will be spread across more output
* Higher risk of accidents and absenteeism
* Insufficient time for training and maintenance work
* Opportunities for staff to increase earnings by doing overtime
* A busy business can improve the company's image
* Greater chance of machines breaking down
159
What are ways of improving excess capacity?
* Change the marketing mix
* Launch new products
* Find alternatives uses for plant (machinery)
* Stop overtime or reduce the length of the working week
* Allocate staff to other work in the business
* In the long term, do not replace staff as they will retire, or make staff redundant
* Move to a smaller premises, reducing costs
160
What are ways of improving full capacity?
* Use facilities for more of the working week
* Employ temporary/part-time staff in the short term, or get staff to work overtime
* Increase staff levels in the long term by recruiting new permanent staff
* Increase productivity
* Outsource work to other businesses in busy periods
* Reduce demand - increase price
161
What is a stock control diagram?
A diagram that shows lead time, buffer stock, re-order quantity, maximum stock level, re-order level, and minimum stock level.
162
What is lead time in stock control?
Time it takes for a delivery of stock to arrive.
163
What is buffer stock in stock control?
Stocks held as a precaution to cope with unforeseen demand.
164
What is just in time?
Where inputs into the production process arrive only when they are needed.
165
What is waste minimisation?
Methods designed to reduce anything that does not add value to a product, such as time, resources and materials.
166
What are potential methods of waste minimisation?
* Appropriate storage of inventory
* Order perishable stock carefully
* Use computerized stock management systems to track all inventory
* Adjust prices to clear through stock
* Sales promotions
* Dispose of goods creatively, e.g. pass on products to charities.
167
What is the competitive advantage from lean production?
A philosophy which aims to minimize costs and enhance quality by using a range of waste-saving measures.
168
What is quality control?
Inspecting products to ensure they meet quality standards.
169
What is quality assurance?
Ensuring quality is maintained throughout the production process.
170
What is total quality management (TQM)?
A holistic approach to long-term success through customer satisfaction, involving all members of an organization.
171
What is Kaizen?
A philosophy of continuous improvement involving all employees.
172
What is inflation?
The rate at which the general level of prices for goods and services is rising.
173
What is interest rate?
The cost of borrowing money or the return for saving money.
174
What is exchange rate?
The value of one currency for the purpose of conversion to another.
175
What is taxation?
Compulsory financial charges imposed by a government to fund public services.
176
What is consumer protection?
Laws and regulations that safeguard buyers of goods and services against unfair practices.
177
What is environmental legislation?
Laws aimed at protecting the environment from harmful business activities.
178
What is competition policy?
Government policies to promote competition and prevent monopolies.
179
What is economic growth?
An increase in the production of goods and services in an economy over time.
180
What is the business cycle?
The fluctuations in economic activity over time, including periods of expansion and contraction.
