1
Q
Define External Finance
A
involves finance raised from outside the business, likely to become more of an option after a business has established itself
2
Q
Define Capital Gain
A
is the profit made from selling a share for more than it was orginally bought
3
Q
Explain the sources of external finance (5)
A
Family and Friends- a common source for small businesses. Likely to be cheaper as interest rates charged are either low or zero and less likely to demand a stake in the business
- Banks - includes loans, overdrafts and mortgages given by banks to be paid back with interest. Banks will usually demand a business plan.
- Peer to peer lending - involves people lending money to unrelated individuals or peers, avoiding the use of a bank. Transactions are completed online with a lack of protection, conducted to make a profit.
- Business angels - individuals who may invest between £10,000 to £100,000+ in exchange for a share of the business. Most investments are in businesses that are start ups or in early stages of expansion.
- Crowdfunding - involves finance from people with no previous knowledge of the business, usually given to a business involved in a particular venture like building a school or setting up a community project
4
Q
Explain the methods of finance (6)
A
- Loans- involves money which needs to be paid back in regular payments with interest added. Involves bank loans and mortgages.
- Overdrafts- allows a business to spend more than it has in its account. Is paid back over time with interest.
- Share Capital - where a firm sells shares of ownership in order to raise large amounts of money.
- Venture Capital- is the provision of finance for risky start ups in return for either a share of the business or to be paid back with high interest rates.
- Trade Credit- occurs where a business buys a material or component from a supplier and pays for them at a later date, without interest.
- Grants- finance given by the government to certain businesses to locate in a certain area, in order to boost its local economy. Business usually has to follow strict guidelines
5
Q
Define Unlimited Liability
A
occurs for a soletrader or partnership, where the owners personal assets are put at risk if the business fails to pay its debts.
6
Q
Define Limited Liability
A
occurs for a PLC or LTD, where a separate legal identity is created between the shareholders and the business, meaning only the businesses assets are at risky if they fail to pay its debts
7
Q
Explain the factors for a business to take in to account when choosing appropriate finance (5)
A
- Whether short or long term finance is needed- if a business needs to borrow money for a lengthy period of time, certain types of finance will be suitable. More suitable to use mortgages rather than a overdraft
- Financial position of the business- businesses in a poor financial position will not be able to access some methods of finance and the cost of borrowing rises.
- Type of expenditure finance is needed for- if a business needs finance for heavy capital they are more likely to use leasing or loans rather than trade credit.
- Cost- firms will prefer finance that is less expensive, in terms of interest rates and administration costs.
- Legal status of business- whether the business has limited or unlimited liability
8
Q
Explain the finance appropriate for a unlimited liability business (5)
A
- Personal savings- most small firms will use their own money
- Retained Profit- used if a firm has survived and become established.
- Mortgages- common for owners to use their house as collateral on a business loan
- Bank loan- given to most small businesses who provide a business plan
- Peer to peer lending- small firms can raise finance from people interested in lending money to the enterprise.
9
Q
Explain the finance appropriate for a limited liability business
A
- Share Capital- sale of shares of ownership to raise large sums of capital.
- Retained Profit- some large limited liability firms have large cash reserves to be used in the future.
- Venture Capital- take a share of the business for large amounts of money
10
Q
Define a Business Plan
A
Is a financial document setting out a business idea, how it will be financed, marketed and put into practice.
11
Q
Explain the use of a business plan (5)
A
- Helps a business to consider potential future risks.
- Maintain a clear sense of direction
- Helps have objectives to aim for
- Needed to support applications for finance
- Will give potential investors confidence that the business will be a success.
12
Q
Explain the contents of a business plan (8)
A
- An executive summary - describes the opportunity the business hopes to exploit
- The business opportunity- a description of the products to be produced and sold.
- Buying and production- where the firm will buy its supplies and the production methods to be used.
- Financial forecasts- sales forecasts, cash flow forecasts, income statement and break even analysis should be included
- Businesses objectives
- The market- size of the potential market and competitors.
- Personnel- who will run the firm and employees
- Finance- where finance will come from.
13
Q
Define a Cash flow forecast
A
is a financial document of a projection of the likely cash inflows and outflows in a business.
14
Q
Define Cash Inflows
Define Cash Outflows
A
Explains the cash coming into the business, through sales and investment.
Explains the cash going out of the business, through fixed and variable costs.
15
Q
Define Opening Balance
Define Closing Balance
A
explains the cash a business has available at the start of the month.
explains the cash a business has available at the end of the month
16
Q
Explain the Use of cash flow forecasts (3)
A
- Identifying times of cash shortages - helps a firm to identify in advance when they will suffer cash flow shortages and therefore need to raise finance.
- Supporting applications for finance - when trying to raise finance lenders often insist that the firm support their applications with documents of cash flow.
- Enhancing the planning process - helps to clarify aims and improve performance by being a part of a business plan.
17
Q
Explain the limitations of cash flow forecasts (3)
A
- Is an extrapolation of future predicted results meaning it cannot be entirely accurate.
- Assumes that a business will sell all of its output
- Business activity is subject to uncertainties which can have a substantial effect on cash levels
18
Q
Define Business Aims
A
Are things the business intends to do in the long term and wants to achieve.
19
Q
Define a Mission Statement
A
Is a formal statement which explains the overriding purpose and values of a business. Done to make a commitment to consumers and bring employees together.
20
Q
Define Corporate Objectives
What should they be
A
are objectives set by senior managers and directors for a business. They should be specific to the business and focus mainly on business performance.
They should be: Specific Measurable Achievable Realistic Time related
21
Q
Define Departmental and Functional Objectives
A
Are objectives of a department within a business, day to day goals to back up the corporate objectives set.
22
Q
Define Ansoff’s Matrix
A
Is a marketing model that can be used to help a business decide its strategic direction in terms of growth.
23
Q
What does the Ansoff’s Matrix include (4)
Advantages and Disadvantages
A
- Market Penetration- is a growth strategy where the business focuses on selling existing products to existing markets. A: Already good knowledge of customers and competitors, profit levels are predictable. D: Lack of ambition may demotivate employees.
- Market Development - is a growth strategy aimed at expanding the market through new users. A: potential economies of scale, risk spreading across markets. D: requires new distribution channels
- Product Development - is a growth strategy involved in bringing a new product to the market. A: Can attract new customers, avoids decline stage. D: Higher risk level
- Diversification- is a growth strategy aimed at developing new products in new markets. A: motivates employees, can lead to exponential growth. D: very high risk, may effect performance of existing products.
24
Q
Define Porters Strategic Matrix
What does it include (3)
A
Identifies the sources of competitive advantage for a business.
Includes:
- Cost Leadership- striving to be the lowest cost provider in the market to increase profits.
- Differentiation- involves a business adopting a unique position through quality, design and customer service to charge a premium price.
- Focus- involves a focus on costs and differentiation
25
# Define Kay’s theory of distinctive capabilities
What does it include (3)
is that a business has a valuable capability that it possesses but other firms have difficulty replicating.
Types include:
- Architecture- contracts and relationships within a organisation
- Reputation- positive associations a business builds, linking to brand image
- Innovation - new products or processes
26
Define Portfolio Analysis
Is a method of categorising all the products of a firm to decide where each fits within the strategic plans
27
Define SWOT analysis
is an analysis of the internal strengths and weaknesses of a business and the opportunities and threats presented by its external environment.
28
# Define the Internal Audit
Define the External audit
Is an analysis of the business itself and how it operates, identifying its strengths and weaknesses. Includes their costs and quantity, finances, production and human resources
Is an analysis of the environment in which the business operates. Includes growth potential of market, characteristics of consumers in the market and size of competitors
29
Define a Contingency Plan
is a plan for the future to help mitigate threats to the firm.
30
Explain the features of SWOT analysis
- Strengths- positive aspects of a business identified which make it successful. For example, motivated and loyal workforce, product with a USP or a loyal customer base.
- Weaknesses- negative aspects of a business identified which undermine its performance. For example, poor finances, outdated capital and poorly motivated workforce.
- Opportunities- options that a business may be able to exploit that could result in improvements. For example, new overseas markets, fall in cost of raw materials or fall in exchange rate.
- Weaknesses- possible hazards that have the potential to damage the performance of the firm. For example, new entrant in to the market, a looming recession and new legislation
31
Explain the arguments for and against SWOT Analysis
For
- Source of information for strategic planning
- Helps set objectives
- Maximises response to opportunities and minimises level of threats.
Arguments against SWOT Analysis
- Time Consuming
- Can be expensive
32
# Define a Competitive market
Define a Uncompetitive market
Is where there is a large number of buyers and sellers, where products are close substitutes.
Is where a market is dominated by a single or a small number of producers.
33
Explain the PESTLE factors
- Political- members leaving or joining a trade union, pressure groups who aim to reduce consumption of a good.
- Economic- falling unemployment increasing demand for a good, lower interest rates encouraging investment
- Social- People going university increasing the quality of human resources, increased migration.
- Technological- increased quality of capital and development of social media.
- Legal- advertising banned on certain goods and legislation effecting tax laws.
- Environment- people buying more ethical and environmental objectives
34
# Define Porters Five Forces Model
Explain the forces (5)
Porters Five Forces Model is a
framework for analysing the nature of competition within an industry.
Includes:
- Bargaining power of suppliers- describes the power suppliers have other a business, a firm limiting that power will improve the competitive nature of the business.
- Bargaining power of buyers- describes the power a firm has over suppliers, allowing them to reduce the prices offered by suppliers.
- Threat of new entrants and barriers to entry- how easy it is for new firms to enter the market, patents can be developed to deter new entrants.
- Substitutes- amount of similar products being sold by competitors. Can be reduced by R&D and predatory pricing to drive substitutes out of the market.
- Rivalry amongst existing firms- the degree of rivalry determining prices and profits for a firm. Can be reduced by collusion, mergers or bringing out new products.
35
Explain the advantages of staying small (4)
- Personal Service- many consumers prefer to do business with the owner directly and are prepared higher prices to do so.
- Owners preference- a owner may not want the added responsibility and heavier workload that comes with business growth.
- Flexibility and efficiency- smaller firms can often identify new opportunities to meet customer needs quicker than larger firms
- Lower barriers to entry- low set up costs make it easier for small businesses to compete in a market.
36
Define a Merger
Is a legal deal between two businesses of similar size bringing both firms together under one board of directors. E.g. T-mobile and Orange formed EE.
37
# Define a Takeover
Define a Friendly Takeover
Define a Hostile Takeover
Is a legal deal where one business acquires another business, can be a friendly takeover ,where the deal was wanted, or a hostile takeover, where the deal is unwanted.
A Friendly Takeover occurs because the business may have cash flow problems and invite a takeover from a stronger business, known as a white knight.
A Hostile Takeover occurs when the board of directors will try to resist a takeover, but if 51% of shares are brought ownership changes.
38
# Define Integration
Define Horizontal Integration
Define Vertical Integration
Integration occurs when businesses join together to form one.
Horizontal Integration occurs when two firms in the same stage of production join together, both have knowledge of the market and it has a less likelihood of failure.
Vertical Integration occurs when two firms in different stages of production join together, to lead to cheaper costs and guaranteed output.
39
Explain the reasons for mergers and takeovers (6)
- Attempt to increase market share
- Access to technology, employees or
patents
- Access to new markets
- Improved distribution networks
- Improved brand awareness
- Economies of Scale
40
Explain the risks and disadvantages of mergers and takeovers (4)
- Regulatory Intervention- the CMA has the power to block a deal if they feel it acts against the interests of consumers.
- Resistance from employees- Due to likely job losses from the duplication of job roles, employees will try to disrupt proceedings.
- Integration Costs- Is a complex, expensive and time consuming process to physically integrate two firms.
- Bidding Wars- if more than one firm wants to acquire a business the price will rise
41
Explain the problems of rapid growth (3)
- Drain on resources- stretch financial resources
- Coping with change - conflict and resistance in merging the two cultures of the business.
- Alienation of customers- can lose relationship with customers, damaging brand image.
42
Define Growth
Is a stage where a business reaches the point for expansion and seeks additional options to generate more profit.
43
State the objectives of growth (4)
Economies of scale
Increased Market Power
Increased Market share
Increased Profitability
44
Explain Economies of scale as a objective of growth
Economies of Scale are reductions in average costs arising from growth of the firm.
Internal Economies of scale:
> Financial - will have easier access to finance as they have more assets to offer as collateral
> Purchasing- can buy large quantities of stock, for lower average costs
> Technical- can invest in large scale technology which decrease average costs
> Marketing - large marketing budgets can be spread out over large output
> Managerial- can employ specialist managers responsible for each function
External Economies of Scale are reductions in average costs arising from the growth of the industry it operates in.
45
Explain Increased Market Power as a objective of growth
Allows a large firm to have control over customers (through higher prices) and suppliers (through decreased costs of materials).
46
Explain Increased Market Share as a objective of growth
Allows a firm to have controlling sales levels within a market
47
Explain Problems arising from growth (3)
- Diseconomies of scale- occurs where a large business expands production beyond the minimum efficient scale and therefore average costs increase. Occurs due to:
> Control- larger business has less control, less productivity from employees
> Communication- harder to communicate to everyone, time is wasted
> Coordination- ensuring all functions work similarly is difficult
> Motivation- in a larger firm employees feel less valued
- Internal Communication- communication becomes more difficult as a firm grows.
- Overtrading- occurs where a business tries to fund a large volume of new business without sufficient resources, leading to insufficient cash and therefore failure.
48
Explain the methods of growing organically (5)
- New Customers- gradually increasing production to supply to more customers.
- New Products- a firm may be innovative to be able to develop new products and stand out from competitors and grow.
- New Markets- selling products in new markets, to increase its consumer base.
- New Business Model- developments in technology may change the way a business operates and grows.
- Franchising- where the firm sells the naming rights and business model to another entrepreneur to sell.
49
Explain the Advantages (5) and Disadvantages (5) of Organic Growth
Advantages
- Less risk than other growth strategies- avoids the complications of integration with another firm.
- Cheaper than other growth strategies- has no financial cost compared to inorganic methods which usually require external methods of finance.
- Maintain control- have complete control over the growth process
- Better protected financial position- growth is gradual so there is less of a strain on financial resources
- Less likely to have diseconomies of scale- sharp increases in average costs are less likely.
Disadvantages
- Pace of organic growth may be too slow for shareholders
- May prevent a firm accessing patents
- Slow growth may leave a business behind in the market
- Takes longer to achieve economies of scale
- Not appropriate in a rapidly growing market
50
Define Organic Growth
Organic growth is a business growth strategy that involves a business growing gradually using its own resources.
