Theme 2 Knowledge to date Flashcards
1
Q
Name 5 sources of finance?
A
Overdraft, Trade Credit, Retained profit in the form of cash reserves, Mortgage, Bank Loan, Selling Shares
2
Q
What is meant by unlimited liability?
A
If the business goes Bankrupt then any money awed to suppliers or the bank can be recovered through repossession of owners personal assets. This will only happen if the company does not have enough assets to cover the amounts owing
3
Q
Explain why a loan might not be appropriate for a business with unlimited liability
A
This will add further risk to the owners as it places pressure on the business to make regular payments which reduces cash reserves meaning that they may lack sufficient current assets to pay current liabilities risking liquidation which might then risk personal possessions.
4
Q
Explain how having unlimited liability impacts a business’ ability to gain credit from suppliers
A
If a business has unlimited liability it could work in their favour for getting credit from suppliers as the supplier will have the added security of collateral if the credit is not repaid. The supplier will know that they can recover any debt from the owners personal assets
5
Q
Why might banks be reluctant to provide a loan to a business with limited liability?
A
As if the business lacks sufficient assets to cover the cost of the loan then the bank will lose that capital as they can’t recover it from the owner’s personal possessions
6
Q
Explain the difference between an overdraft and a bank loan
A
An overdraft has a higher interest rate but is more flexible as the business can choose when they pay it off and by how much they pay off. However the bank can remove the overdraft at any time and ask the business for the amount owing. With a loan the repayments are fixed and the business must make regular monthly payments.
7
Q
What is the difference when a business uses share capital as a source of finance compared to using a venture capitalist?
A
A business needs to be a limited company to sell shares and will usually sell a small proportion of the business in one issue compared with raising money through a VC which involves giving up a significant part of the business (sometimes as much as 50%) in exchange for capital and advice/ experience. When a business issues shares the shareholders (particularly for a PLC) will probably have limited involvement in the business
8
Q
Explain why using retained profit as a source of finance may not be a favourable option for a PLC
A
If the business uses retained profit as a source of finance then the businesses share price may fall as it may mean that they reduce dividend payments which makes investing in the business (buying shares) less popular reducing demand for the shares and therefore reducing share price
9
Q
Explain how a business’ legal structure can have an impact on the source of finance a business chooses to use
A
If a business is a limited company they can issue shares and will attract more investors than a partnership and sole trader due to the reduced risk gained through limited liability status. Where as Partnerships and sole traders cannot sell shares and will struggle to attract investment due the unlimited liability status. Therefore they are more reliant on venture capitalists and loans.
10
Q
Identify three short term sources of finance
A
Overdraft, Trade Credit, Retained profit in the form of cash reserves
11
Q
Identify three long term sources of finance
A
Mortgage, Bank Loan, Selling Shares
12
Q
What is meant by working capital and why is it important when choosing a source of finance?
A
Working capital is the value of current assets that are left over after the current liabilities have been paid. If a business has high working capital it shows that it is at low risk of having cash flow problems and is therefore able to safely take out a loan as it is likely to keep up with loan repayments as it is likely to have sufficient cash in reserves. This reduced risk is recognised by banks and shareholders meaning they are willing to provide the capital. A low risk business will usually get a lower rate of interest on loans and be able to sell shares at a higher price.
13
Q
Why might a bank be more reluctant to lend money to a new restaurant than they are to other new businesses?
A
A restaurant is likely to provide luxury goods meaning that they are income elastic which means that sales could significantly fall if incomes fall due to changes in the economy. Therefore they are venerable to economic changes adding to the risk for the bank. If the country goes into a recession the business may struggle to pay the loan back.
14
Q
Why might an overdraft be an appropriate source of finance for a new business?
A
A new business will not have past sales data and will have limited experience in the market. Therefore it will be difficult to predict sales. Therefore it will be difficult to predict cash outflows like wages and cost of raw materials. Therefore they need flexible finance that they can use as and when required rather than committing to regular monthly repayments
15
Q
Why may a sales boom lead to the business going bankrupt?
A
To gain the sales boom the business may have overinvested into fixed assets such as vehicles and equipment causing significant cash outflows resulting in negative net cash flow making it difficult to keep up with payments to suppliers and banks. This may lead to the business being forced to sell fixed assets to the point that it can no longer function.
16
Q
Why might it be argued that a business should not keep large sums of cash?
A
There is an opportunity cost of keeping large sums of cash as this means the business it not fully utilising their capital as it could be making a greater return if invested in fixed assets. As the fixed assets such as a store or equipment could be increasing sales due to increased capacity. Or the capital could be invested in advertising or training of staff which would also increase sales - explain how
17
Q
Where can a new business go for capital if the bank says no and they don’t have any friends, family or savings?
A
venture capitalist - but the VA will know the high risk nature of a business like this and will want high returns so will request a large share of the business
18
Q
Why might a business be reluctant to take out an overdraft?
A
As there are significantly high interest payments. It can also be taken off them at a short notice which may mean the business will have to sell fixed assets in order to repay it
19
Q
Why might a business choose to buy equipment rather than lease it?
A
This will be better for long term cash flow as there will be will not be regular cash outflows
20
Q
Why might a business source finance using debt rather than equity?
A
So the business doesn’t have to give up shares so they can maintain complete control over the objectives of the organisation rather than having to consider potentially short term goals of shareholders
21
Q
What is meant by collateral and why is it important to a business?
A
Collateral is when a business places a fixed asset down as security for a loan. This says to the bank that if the loan is not paid they have legal ownership of the asset
22
Q
Why might suppliers refuse to give credit to a small company?
A
A small organisation might have few fixed assets therefore if they struggle to pay the supplier there is a risk that the supplier will not receive payment for the goods as there will be limited fixed assets that the business can sell to repay the debt
23
Q
Why do some companies pay dividend rather than keeping large amounts of retained profits?
A
When a business pays dividend it makes investments in the company more attractive to shareholders as they will gain an increased return on their investment. This will increase the demand for shares leading to an increase in share price. This will benefit the business as it will mean they can generate more capital from selling shares if they issue new shares leading to further expansion.
24
Q
I have a high interest rate and can be reduced or taken away with very little notice. What source of finance am I?
A
Overdraft
25
Using this source of finance may have an opportunity cost
Cash reserves or retained profit
26
I have to be secured against an asset
Mortgage
27
I give up a percentage of ownership in return for investment and advice.
venture capitalist
28
Using the internet I can attract a significant number of investors for small businesses
Crowed funding
29
Explain why a business plan might be needed to secure finance for a new business
The business plan, if backed up by effective and reliable research (e.g. with large sample sizes and not prone to bias) the business plan can show the bank how the loan will be invested and how the business plans to repay the loan. The key section is the finance section that will show the cash flow forecast and if the closing balance can remain largely positive when paying off the loan then it is likely that the bank will view the lender as a lower risk. The business plan could be so convincing (especially if based on creditable research) that the bank may reduce the interest on the loan.
30
Why might a business plan not be enough to secure finance from a bank?
Just because the business produces a business plan it does not guarantee them a loan as the plan might be based on inaccurate research or demonstrate poor cash flow. It could also illustrate that the business has a significant amount of competition with ineffective ways of dealing with the situation
31
The shares of a private limited company cannot be bought and sold without the agreement of the other directors. Explain the benefit of this
This means that anyone who buys shares and becomes an owner is likely to share the same goals as the existing owners/directors. This could be a passion for the long term prospects for the business or a commitment to social and ethical objectives rather than a pursuit of short term goals and profit for dividends.
32
“Without the legal protections of limited liability, economies would struggle to grow.” Explain why someone may agree with this statement.
The limited liability status means that investors are attracted to buying shares in businesses due to the reduced risk (there will be no chance that they could lose their personal possessions). This therefore increases the demand for shares leading to increased investment. Due to the increased investment businesses have more capital available to expand capacity which means they can produce more leading to an increase in GDP - economic growth
33
Which part of a business plan is important to obtaining a bank loan and why?
The cash flow forecast as it shows the projected sales a business expects as well as a clear plan on how the loan repayments will affect their cash balance (closing balance) month to month
34
What is a cash flow forecast and what are the main headings in one?
A cash flow forecasts shows projected inflows and outflows of a business over time (usually a year) and has the following headings: Inflows, Outflows, Net Cash Flow, Opening balance, Closing balance. Do you know how to work out net cash flow, opening balance and closing balance?
35
How can cash flow forecasts be used to help a seasonal business?
The cash flow forecast, if based on accurate sales forecasts, will show the business when sales are expected to be low and identify when there may be a negative net cash flow. If a business knows this in advance they can possibly arrange an overdraft to ensure they can continue trading (pay day to day expenses). It may also alert the business to the fact that they may need to arrange trade credit with their supplier to help stockpile goods before the peak season. Showing the forecast and how the credit will be paid could help convince the supplier to give credit
36
What should cash flow forecasts be supported by?
detailed market research so if that is primary research there needs to be a large sample size and the results need to be unbiased. Secondary research needs to also be reliable and relevant so must be based on the market or relate to a similar business
37
How can cash flow forecasts be used to improve stock management?
The cash flow forecasts can show the business when sales should increase so they can order sufficient stock. It can also illustrate the implications of having too much stock as it will demonstrate the costs associated with storing stock such as insurance, rent and utilities
38
Identify the key terms you should include in an answer to a question which requires you to assess the impact that a decision has on finance.
Cash, Liquidity, Profit, Profitability, costs, capital, equity, share price, assets, liabilities, dividends. NOT "INCREASE IN FINANCE"
39
What is sales forecasting?
A sales forecast is an attempt by management to estimate the likely sales of a product, business unit or market over a future period.
40
identify three factors that could cause inaccurate sales forecasting
New business with a lack of market knowledge of previous sales to extrapolate. Business that sells luxury goods (income elastic) a highly dynamic market. Market research that is based on a small sample size.
41
Why are sales forecasts important to planning human resources?
If a business knows the sales that it could possibly achieve then it needs to means to achieve them. Therefore it needs the capacity, therefore it needs to recruit the right number of people. Or if sales are expected to fall then the business will need to reduce capacity so they will therefore need to plan redundancies. If there is expected to be a significant rise in sales in a new market then they may need to plan training or recruitment of employees so they have the capability of meeting needs in the new market
42
What is meant by a trend and how is this useful to a business?
A trend is a pattern in sales data and it can be used to predict sales for the future by extrapolating the trend. Make sure you know why it is important for a business to know what sales are likely to do.
43
State three economic variables that might affect the sales forecasts of a business
Inflation (having an impact on demand and costs), interest rates and exchange rates
44
Why might it be easy for Heinz to forecast sales for its ketchup?
As the company has many years worth of sales data that it can analyse and identify a clear stable trend (sales generally remain the same from year to year) therefore they can carry out effective extrapolation resulting in reliable predictions
45
What is meant by time series data?
A method that allows a business to predict future sales using past data
46
What is meant by extrapolation?
Forecasting future trends based on past data
47
What is meant by seasonal fluctuations?
This is when demand is determined by the time of year for example smaller quantities may be purchased in winter than summer
48
What is meant by cyclical fluctuations?
This is when sales change as a result of changes in the economy (the business cycle).Recession, Recovery, Boom, Downturn (must know these to get this answer correct)
49
What is a long term trend?
When a habit or behaviour shows little change over time. For example consumers like to watch TV on demand
50
What is meant by a data range and how can it affect sales forecasting?
This is the amount of data that is available for analysis. If there is significant amount
51
Identify 2 ways that sales can be measured
Value and Volume
52
Give an example of a variable cost
Raw materials
53
Give an example of a fixed cost
Rent, business rates (tax on buildings), Salaries, Utilities, advertising expenses
54
Explain the difference between fixed and variable costs
Fixed costs don't change when output changes and variable costs do change when output changes
55
How do you work out average costs or unit costs?
All costs divided by the number of units
56
What is the difference between sales volume and sales revenue?
Sales volume is the amount of units sold and revenue is the amount of money generated from these sales
57
State three limitations of break-even analysis
Might be based on inaccurate data, does not account for economies of scale (see rest of text), only looks at data from one product. The costs could change which will change the break-even point meaning the decision to chose a particular product to produce may be based on inaccurate data. Costs may change due to change in the price of raw materials (variable costs) or change in the cost of rent (fixed cost). Also it does not account for purchasing economies of scale where variable costs should fall per unit as output increases.
58
State three uses of break-even
Decision making tool: can help decide on which product to produce (the one with the lowest break-even point or the one that has the largest margin of safety when compared to sales forecasts). Can see the impact of a price change. Can see impact of a change in supplier. Can see impact of a change in production location
59
What is the difference between a plan and a forecast?
A plan is based on what the business aims to achieve where as a forecast in based on what past and current data predicts will happen. A budget is a plan not a forecast
60
How can budgets be used to motivate employees? What motivational theory could this be related to?
A budget can set targets for employees such as sales targets or cost targets (keep costs to a minimum) and of these are achieved then the employees can be given performance related pay which Taylor would argue is motivational. Could also be seen as a sense of achievement being felt when the targets are met which would meet esteem needs in Maslow's theory.
61
What is the equation for contribution per unit?
Selling price - variable cost
62
What is meant by the term contribution?
It is the amount that is left over from sales once the variable costs have been covered. It is call contribution as the amount is used to contribute to the fixed costs until they are covered - broke even
63
What is the equation for total contribution?
total sales revenue - total variable costs
64
What is the equation for margin of safety?
total output - break-even point
65
How can Break-Even be used to assess the impact of a price change?
A business can then calculate the new contribution per unit which can be used to calculate a new break-even point which will then change the margin of safety and show how likely the business is to avoid making or loss of how much profit they are likely to make by looking at the money generated between the break-even and the total output.
66
How can a business reduce the break-even point?
Change premises (reduce fixed cost), make production more automated (reduced wages and therefore fixed costs), reduce waste relating to utilities (reduce fixed costs), change supplier or negotiate lower prices (reduce variable costs), change raw materials used in production (reduce variable costs), increase the selling price (increase CPU)
67
How can businesses increase the margin of safety?
increase capacity to increase total output
68
Why might a business have a high break- even point?
Low selling price, high fixed costs ( maybe paying high wages or located on the high street causing high rent) quality raw materials leading to high variable costs
69
What impact can break-even point have on business objectives
If the business has a high break-even point and low sales forecast then they may set objectives relating to survival
70
How might banks assess a businesses break even point?
A bank might look at the businesses break-even point and compare it to predicted sales to get an idea of the margin of safety and profit to see if the business is a high risk. If the business has a big margin of safety this might suggest low risk so the business may be more willing to loan money or reduce the interest rate
71
What impact would a price increase have on the margin of safety?
Increase the margin of safety as contribution per unit would increase which would reduce the break-even point. However the expected output (sales) may have to reduce as a high price will lead to lower demand
72
Why does a sales forecast need to be done before a business can know their margin of safety?
There is no point in basing the margin of safety on maximum capacity as the business might not have demand for that volume. This would result in over production and potentially wasted stock. Therefore the margin of safety should be based on predicted sales
73
Explain how a collective bargaining approach can improve a business’ liquidity
If a business uses collective bargaining by consulting with trade unions relating to issues such as pay and working conditions then they are more likely to come to an agreement before strike action is taking which avoids down time in production. By avoiding downtime the business can ensure they maintain sales and therefore cash inflows avoiding liquidity issues
74
What is meant by current liabilities
Money owed by the business in less than one year: overdraft, payables (amount owing to suppliers)
75
Give two examples of non current liabilities
Mortgage and loans
76
Explain how poor management of its working capital might affect a business
Management of working capital is related to managing credit predict periods given to customers and to suppliers. A business must ensure that the credit time they give customers is less or equal to when they receive from their suppliers. This ensures that they have regular and manageable inflows and outflows avoiding potential situations where they have a negative closing balance
77
What is the difference between gross and operating profit?
Gross profit is sales revenue - cost of sales (just variable costs) where as operating profit is sales revenue - all operating expenses including fixed costs (fixed and variable)
78
Which profit is directly affected by purchasing economies of scale?
Gross profit
79
Which profit is directly affected by marketing economies of scale?
Operating profit
80
Which type of profit considers everything?
Net profit - this takes account of sales of assets and one off purchases of assets
81
Which type of profit is directly affected by variable costs?
Gross profit
82
Which type of profit is directly affected by fixed costs?
Operating profit
83
Identify three ways a business can improve profitability
Reduce costs without reducing sales revenue, increase selling price ( if price inelastic), increase sales volumes so average costs fall - economies of scale
84
What is the difference between profit and profitability?
Profit is the total amount of money left from sales revenue after all costs haver been taken away. Profitability relates to how efficient the business is - it is not about having the highest profit it is about reducing costs to make the most of sales revenue. To increase profitability profit must rise by a greater proportion than sales revenue
85
What is the difference between cash and profit?
Cash is money that is available to spend usually what is available in a business' bank account. Where as profit is not necessarily available in the business it could have been given to shareholders as dividends or invested into fixed assets and is therefore not available to spend.
86
Identify the key terms you should include in an answer to a question which requires you to assess the impact that a decision has on finance.
Cash, profit, assets, Break-even, contribution per unit, unit costs…NEVER SAY 'AN INCREASE OR DECREASE IN FINANCE'
87
Explain how inflation can have an impact on a business’ cost of sales
Inflation is the general rise in prices which suggests that the cost of raw materials will rise leading to an increase in the cost of sales
88
What ratios can be calculated from the balance sheet?
Acid test, current ratio, gearing NOT profit ratios!!
89
What ratios can be calculated from the income statement?
Gross profit margin, operating profit margin, Net profit margin
90
How do you calculate gross profit margin?
Gross profit/ Sales revenue x100
91
How might a business increase sales revenue by more than cost of sales?
by increasing the price
92
Why might a high sales volume mean a business can have a low gross profit margin?
As although there may be small margins on each unit sold, if the business sells in large volumes they can significantly multiply that margin leading to a significant increase in gross profit
93
Which marketing approach can have a low gross margin and why? Mass or Niche marketing
Mass as they sell in large volumes meaning that can have a low margin but high gross profit
94
Why might a business have a lower gross margin than competitors?
They may have a lower selling price or higher raw material costs due to uncompetitive rates from their supplier
95
What is meant by an exceptional items and which profit figure does it have an impact on?
A one off cost, purchase or sale that is not part of every day trading with their customers and suppliers. This may include the purchase or sale of a non-current asset
96
What two equations can you use to assess a business' liquidity and how do you calculate these equations?
Acid Test and Current Ratio and that is it
97
Why is a business' liquidity important? What is the line of analysis
If a business doesn't have enough cash (poor liquidity) then they will not be able to pay suppliers or keep up with repayments on bank loans which may result in them having to sell fixed assets leading to major disruption to their business operations causing a fall in sales. If a business has lots of cash reserves and strong liquidity then they are able to demonstrate they are a low risk business as there is little chance they will be forced to liquidate fixed assets. Therefore they will be able to secure bank loans at lower rates of interest and will be able to sell shares at a higher price as due to the low risk their shares will be in high demand.
98
Why might a business need to reduce capacity even if they have high capacity utilisation?
The business may be unable to pay suppliers or pay bank a bank loan so will need to sell fixed assets thus reducing capacity.
99
What is meant by shareholders equity?
This is the amount of money that has been invested in the business from shareholders
100
How can shareholder's equity be utilised in a business?
usually kept as cash reserves or spent on non-current assets
101
What is classed as good liquidity when looking at the results of liquidity ratios?
Current ratio needs to be between 1.5 and 2, acid test needs to be around 1
102
Why might shareholders be unhappy if a business has above the ideal for liquidity ratios?
It may indicate that the business is not fulling utilising their equity as it is not invested in a productive asset such as machinery that could be making a return for shareholders. It may also suggest that the business is retaining too much of their net profits rather than paying dividends to shareholders resulting in a lower shareholder return
103
Why might a high current ratio (above the ideal of 2) but a below ideal acid test ratio indicate ineffective financial management?
This may suggest that too much cash is tied up in stock which is an issue as that cash could be utilised more effectively such as investment in R&D or non current assets.
104
What costs are associated with keeping high levels of stock and what profit does it have an impact on?
Insurance, rent, utilities (all for storage) leading to an increase in expenses and a fall in operating profit reducing ROCE
105
What is meant by working capital?
The amount of current assets left over after all current liabilities have been paid
106
What is the difference between a current asset and a non current asset?
Non-current assets is expected to be within the business for over a year and a current asset is expected be utilised in some form within the year. E.g. to pay off debts ( current liabilities for example)
107
How can a business manage working capital effectively? Think about payables and receivables
A business can negotiate with suppliers so they have a longer credit period this giving them more time to cover current liabilities. If they manage to achieve this while reducing the credit period they give to their customers then they will have effective working capital management maximising cash reserves at a given time.
108
How can a loan improve liquidity in the short term but damage it in the long term?
A loan will lead to a significant increase in cash in one go. This will increase current assets without increasing current liabilities. However over time the business will need to make repayments that will include interest. Loan repayments need to be made in cash which will reduce cash reserves over the long term
109
How can sale and lease back improve liquidity
This will mean that the business gains an inflow of cash from the sale of equipment but it still able to use the asset
110
What is meant by an intangible asset?
non-physical asset such as brand names and patents - is of value buy you can't touch it
111
Where will retained earnings appear on a balance sheet?
in the financed by section
112
When can a business operate with a low current ratio and why?
Supplier power, cash sales
113
A business purchases new machinery, funded entirely by a bank loan. Explain the impact that this will have on the balance sheet
There would be an increase in the value of fixed assets and an increase in the value of non current liabilities
114
Explain the purpose of PESTLE analysis
To determine the external influences that may impact on a business. It considers a wide range of factors which businesses need to consider in their decision making
115
Give 2 examples of political factors that might affect the food industry
Changes in taxation (eg. Sugar tax), government healthy eating initiatives (eg. '5 a day'), barriers to trade (eg. Increased difficulty of importing food from other countries due to potectionist policies)
116
Give 2 examples of economic factors that might affect the holiday industry
Exchange rates (cheaper/more expensive to holiday abroad), interest rates (high interest rates means that customers have more incentive to save rather than sp[end their money), Unemployment (high unemployment may mean that people have less disposable income therefore spend less on holidays), inflation (high inflation may mean that customers have less disposable income if their wages have not increased at the same rate as prices for everyday goods. Costs for the holiday industry, such as jet fuel, may also have increased in price).
117
Give 2 examples of technological factors that might affect the motor industry
New technology may mean that cars can be produced more cheaply/efficiently/quicker. Changes in technology have led to the production of more electric cars. New technology has enabled additional features eg. Keyless entry, to be added to cars
118
Explain why a traditional distribution channel might not be used for job production
As the business needs direct contact with the customers so they can adapt the product to the customers requirements. If they used a traditional distribution channel then there would be too many intermediaries limiting the contact with customers.
119
Explain the link between finance and the Boston Matrix
The Boston matrix is about managing a businesses product portfolio to ensure that they have different products at different stages of the matrix. This means that they can use the profits from the cash cows to fund the development of new products and or question marks to ensure that the business is proactive to changes in the market. New products coming through the ranks for when technology or social trends change .
120
Explain the link between capacity utilisation and outsourcing
If all of a business' resources are fully utilised then they can outsource production for additional orders to increase sales without increasing capacity
121
Why might a high price lead to a surplus supply and low capacity utilisation for an individual business or industry?
A high price in an industry will encourage businesses to produce more as the profit margins will be high leading to an increased incentive to produce. This may lead to supply exceeding demand
122
Which production method is used when demand is more regular than a one off such as a furniture factory where a set of chairs are made to a particular design
Batch production
123
Which type of production is used for unique products where every good is different and to specific customer specifications?
Job production
124
What type of production method is the most highly automated?
Flow production
125
With reference to one motivational theorist, explain why a TQM system could increase motivation
TQM empowers employees to take responsibility for ensuring that each product is sufficient quality which will meet esteem needs (Maslow)
126
Explain one reason why trains may suffer from poor capacity utilisation and one method they use to try and improve it
Low demand for the capacity they have to offer. Could reduce the number of carriages (this would reduce capacity and therefore improve capacity utilisation) or reduce the price or provide better customer service.
127
Give one advantage and one disadvantage of operating at very high levels of capacity utilisation
This will mean that the business can spread the fixed costs associated with the capacity over more units leading to lower unit costs. However if the capacity relates to a customer facing business like a retailer or a gym it could have a negative impact on customer experience due to over crowding. If you are discussion a factory there is a risk that over utilisation will mean the business is overworking staff through additional hours or excessively pushing productivity resulting in poor relationships with managers and a poor work environment. This means hygiene factors are not met according to Herzberg resulting in demotivation
128
Explain which motivational theorist would support the use of cell production and why
Mayo as cell production encourages workers to work as part of a team as team targets are set. Mayo argued that staff were more motivated if human relations and social needs were met and cell production encourages interaction between team members
129
Explain how job production can lead to a product being more price inelastic
As job production usually involves the good being made to specific customer requirements therefore making a unique product with limited direct substitutes therefore mean consumers are less price sensitive
130
Explain how flow production can lead to a business being able to lower their selling price
Flow production focuses on producing identical goods in mass quantitates 24/7. This means that they are able to invest in highly efficient technology that produces these goods. As a result of this productivity increases as the technology is more advanced leading to fixed costs associated with the factory and the technology being spread over more units leading to lower unit costs. As a result of lower unit costs the business can set a lower selling price. Combined with this, as flow production is able to produce in such large volumes or identical goods there will be an increase in orders to suppliers of the same raw materials leading to the business benefiting from purchasing economies of scale as they will receive a bulk buy discount
131
Explain how outsourcing could impact on a product's quality (one positive, one negative)
Depends on the outsourcing company. It could have a negative impact as the business cannot recruit the employees that work for the outsourcing company therefore they cannot ensure a TQM culture is instilled into the workforce which could mean that products are produced with a lack of care for quality. However the outsourcing company may specialise in a specific production process such as manufacturing tires meaning their workforce are very able and can therefore produce high quality specialist goods due to their experience
132
Without mentioning piece-rate, explain the link between capacity utilisation in a factory and Taylor’s scientific management theory
Through Taylor's Scientific Management there is a process of finding the best way to do a job (R&D for manufacturing) and then training the employees to work in that specific way. This means that employees become more able at their job through clear instruction leading to increase output per employee (productivity) this increasing capacity utilisation and leading to fixed costs being spread over more units reducing unit costs
133
Explain why high capacity utilisation might be a problem for a gym
The gym may become too full causing customers to wait for gym equipment or miss out on classes leading to a poor customer experience. This could damage the brand and make it more price elastic….
134
Explain the link between Mayo’s theory on motivation and one of the methods of production
Mayo - cell production encourages workers to work as part of a team as team targets are set. Mayo argued that staff were more motivated if human relations and social needs were met and cell production encourages interaction between team members
135
Which type of leadership style is most likely to be adopted within a Kaizen culture?
Democratic leader that aims to consult with workers and listen to their ideas on how to improve the production process
136
What is the difference between lean production and Kaizen
Lean production is about reducing waste where as a mangement tool where workers make suggestions on how the production process can be imporved. This COULD lead to lean production but coud also involve suggestions on how to improve quality
137
Which method of production is most likely to be used by a sole trader? Explain your answer
Job production as they are likely to have little capital investment as they cannot sell shares which means they will struggle to invest in technology so will need labour intensive production methods. Also they are likely to be a small business due to lack of capital invest in capacity which means they cannot produce in large volumes so will need to make more on each unit sold to gain a good profit. Therefore if they use job production they can make the product more unique as they can adapt to customer specifications leading to differentiation resulting in lower PED which will enable them to charge a higher price
138
Which type of organisational structure is most suitable to a Kaizen culture? Explain your answer
Flat or matrix structure as these structures encourage communication between different teams and within departments as there are less rigid forms of authority and divisions. This collaberation encourages workers to discuss ways the business can be improved and this can then be fed back to directors due to reduced layers in the organisatinal chart
139
Which production method would benefit most from low labour costs?
Job production as it is the most labour intensive production
140
Using the term ‘division of labour’ explain how batch production is different to job production
Job production involves workers working on a product and being responsible for every aspect of that product and each product may be different meaning they cannot repeat the same porcesses. Bath production can involve division of labour where the workers are divided into different batches and they can specialise in the specific area or batch
141
What is meant by standardisation?
This is using uniform resources (consistent) to produce a narrow range of goods
142
How can product standardisation improve business efficiency?
IF all the products are very simialr the business may be able to invest in more capital intensive production due to the lack of flexibility required. This will increase productivity….If a labour intensive process is used then the standardisation may improve their productivity as they will repeat the same processess as the goods are the same therefore they will become more able and quicker increasing output per worker
143
How can reducing capacity improve efficiency?
If a business reduces capacity that is not being used then they are reducing their fixed costs. For example if they sell fixed assets such as a factory or a machine or IT equipment then they will not have the insurance and maintance costs associated with these.
144
What is the difference between labour and capital intensive production?
Labour intensive production is when a business production process is dominated by employees rather than technology or machines. Capital intensive is when the production process (over 50%) is dominated by technology or machines e.g. robots
145
What is JIT and how can this improve business efficiency?
This is when a business does not keep any stock in the form of raw materials. Instead they make orders to suppliers when the materials are needed. They arrive and are used to manufactuer the good right away rather than sitting in storage. This reduces costs associated with storage such as - rent, insurance and utilities
146
What is meant by efficiency
Aiming for the lowest unit cost
147
What is the equation for capacity utilisation?
actual output/maximum possible output x 100
148
What are the different parts of a stock control diagram?
Lead times, maximum stock level, buffer stock level, reorder level
149
What are the implications of poor stock control?
Too much stock - increased costs due to storage. Too little - loose out on sales or increase lead times for customers causing them to be unhappy with the service - bad brand image - increase PED
150
Why might a stock control diagram show stock levels go below the buffer stock but the gradient remain the same? What could have caused this - give 3 reasons
Error in the stock reorder system meaning that stock is not ordered at the reorder level, Supplier issues ( they have workers on strike, the have faulting machinery, they have distribution issues), national shortage of specific raw materials meaning that suppliers cannot supply
151
What is meant by lean production and how can it be achieved (TIM WOOD)
reduce time in the production process by giving clear instructions to workers a , Inventory - keep less stock to reduce wasted expenditure on storage, Motion - arrange the workplace to reduce unnecessary movement from workers so they can be more productive. Waiting - reduce waiting time between batches making the production process more continuous like flow production Over Production - removing unnecessary stages in the production process Defects - make sure that every product meets the required standard to avoid wasted materials and labour on defective goods
152
What is the difference between quality control and quality assurance
Quality control involves checking products at the end of the production process to remove defective goods. Quality assurance is when everyone is trained to produce the product right first time so there should be no defective goods.
153
What type of leadership style might use quality circles?
Democratic leader that aims to consult with workers and listen to their ideas on how to improve the production process
154
Explain how consumer protection legislation can have an impact on a business
The business will need to ensure that their goods are of satisfactory quality so will need to set up quality management systems. They will also need to ensure that product packaging and adverts describe the product accurately. Legislation creates paperwork and processes as a business needs to communicate to employees what is required of the legislation and then they need to check that the legislation is being followed. This means there are additional costs for example there may be new positions created to monitor the implementation of the legislation. Furthermore there may be increased costs due to the legislation imposing a fine (explain impact of this). The legislation also improves customer awareness of their rights and therefore if the legislation is not followed it can create bad publicity - explain impact of this and link to PED.
155
Explain how employment legislation can have an impact on a business
The business will need to ensure that staff are effectively trained so employee rights are respected in relation to race, sex, redundancies and pay (equal pay act and national minimum wage), employment contract that must be given in the first 2 months of employment. This will be particually important in the recruitment and dismissal process. Legislation creates paperwork and processes as a business needs to communicate to employees what is required of the legislation and then they need to check that the legislation is being followed. This means there are additional costs for example there may be new positions created to monitor the implimentation of the legilation. Furthermore there may be increased costs due to the legislation imposing a fine (explain impact of this). The legislation also improves public awareness of employee rights and therefore if the legislation is not followed it can create bad publicity - explain impact of this and link to PED.
156
Explain how environmental protection can have an impact on a business
This relates to the following - pollution, protection of wildlife, traffic congestion and resource depletion. Legislation creates paperwork and processes as a business needs to communicate to employees what is required of the legislation and then they need to check that the legislation is being followed. This means there are additional costs for example there may be new positions created to monitor the implimentation of the legilation. Furthermore there may be increased costs due to the legislation imposing a fine (explain impact of this). The legislation also improves public awareness of employee rights and therefore if the legislation is not followed it can create bad publicity - explain impact of this and link to PED.
157
Identify 4 different types of economic variables
Inflation, Interest rates, Unemployment and exchange rates
158
What is demand pull inflation
This is when costs rise leading to an increase in demand in the economy leading to businesses increasing prices to take advantage of the increased demand
159
What is cost plus inflation
This is when costs rise leading to an increase in prices as businesses try to maintain profit margins despite the rise in costs .
160
How can exchange rates have an impact on inflation?
If the value of the currency falls then this will increase the cost of imports leading to cost push inflation
161
Explain why the Competition and Markets Authority (CMA) tries to prevent monopolies
They do this by preventing certain organisations being taken over to create a larger organisation as this would mean that consumers have reduced choice leading to less innovation. It may also mean that as consumers have less choice there is reduced buyer power which can make the industry less price elastic meaning businesses can take advantage of consumers with higher prices
162
What is meant by the appreciation of the pound?
This is when the pound increases in value meaning Imports become cheaper as the pound can buy more foreign currency therefore less pounds are needed to buy the goods
163
What is meant by the depreciation of the pound?
This is when the pound reduces in value. Imports become more expensive as the pound buys less foreign currency therefore if a business sources raw material from other countries then the costs will increase reducing gross profit margin. However there will be less demand for foreign goods from domestic consumers therefore potential increase in demand for the business' goods from domestic consumers
164
What are the stages in the business cycle?
Boom, Downturn, Recession, Slump, Recovery
165
How does a high interest rate have an impact on businesses?
"High
Increased cost of consumer loans and mortgages to individuals
Leads to lower spending on luxury and normal goods
Due to reduced income left over after loans have paid
Will this affect the company in the case? What does it depend on?
"
166
how might an increase in fiscal spending have an impact on businesses?
This may involve increased spending on education and training within the economy - explain how this could improve productivity. It could also involve increased spending on benefits such as child care which could increase average incomes leading to increased demand for luxury and normal goods
167
What impact does a low interest rate have on a business?
"
Cheaper to borrow money
Increased demand for high priced goods e.g. as a loan is now more affordable making the product more affordable
Increasing the incentive to spend with a reduced incentive to save
Higher spending on luxury and normal goods
OR
Spending less on mortgage payments
Higher deposable income
increased spending on luxury and normal goods
"
