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Theme 2 Flashcards

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1
Q

why may a firm need finance

A

capital expenditure

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2
Q

how is internal finace generated (what are the types)

A

owner’s capital, retained profit or the sale of assets

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3
Q

what is owners capital

why may it be used

A

owners own savings, may be used as a start up or if the firm gets into cashflow difficulty

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4
Q

what is retained profit

A

The profit that has been generated in previous years and not distributed to owners is reinvested into the business,

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5
Q

what is the sale of assets

A

Selling business assets that are no longer required (e.g. machinery, land, buildings) generates a source of finance

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6
Q

what is a sale lease back agreement

A

A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash
The business sells an asset (most likely a building) for which it receives cash
The business then rents the premises from the new owners

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7
Q

what are the advantages of internal finance

A
  • no intrest repayments
  • doesnt invlove third party stakeholders
  • quick and easy
  • relativly low risk
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8
Q

what are the disadvantages of internal finance

A
  • significant opportunity cost when selling assets
  • Internal finance may not be sufficient to meet the needs of the business
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9
Q

what is external finance

A

External finance is money sourced from outside of the business

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10
Q

what are the different types of external finance

A
  • crowdfunding
  • family and friends
  • peer to peer funding
  • business angles
  • banks
  • other firms
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11
Q

what is family and friends and what are the advantages and disadvantages

A

mall business owners approach close acquaintances to invest in or lend money to a business

advantages:
- usually a very cheap source of funds
- May have no strings attached

disadvantages:
- relationships impacted

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12
Q

what are banks and what are the advantages and disadvantages of using them for external finance

A
  • loans
  • mortgages
  • overdrafts

advantages:
- can be good for short term and long term help
- provide guidance

disadvantages:
- business plan required
- high IR set on small firms
- if no loan repaid credit score damaged

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13
Q

what is peer to peer funding and what are the advantages and disadvantages

A

Individuals with available savings can pool their savings with others’ in a peer investment scheme, such as Funding Circle

advantages:
- quick, easy, cheap

disadvantages:
- borowers charged small fee

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14
Q

what are business angles and what are the advantages and disadvantages of using them for raising external finance

A

individals who invest in your business for a % of the ownership

advantages:
- expert knowlegde
- large sums pf money
- networking

disadvantages:
- loss of control
- pay high dividens

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15
Q

what is crowdfunding and what are the advantages and disadvantages

A

Crowdfunding is a way of raising finance by asking a large number of people to each contribute a small amount of money

advantages:
- Creates an organic customer base, and the platform provides a form of free marketing
A good credit rating is not required, so new businesses that lack a trading record can attract funding

disadvantages:
- Businesses need to provide a persuasive business plan to convince individuals to invest in their product, as these businesses will be competing with many other projects online

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16
Q

what are the differnet methods of finance

A
  • loans
  • venture capital
  • share capital
  • leasing
  • trade credit
  • grants
  • overdrafts
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17
Q

what is unlimmited liability

A
  • The owners of a business are personally responsible for all the debts of the business.
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18
Q

what are the implications of unlimitted liability

A
  • High personal financial risk
  • cautious deciison making
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19
Q

what is limmited liability

A

Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

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20
Q

what are the implications of limmited liability

A
  • Owners only lose the amount they invested in the business.
  • Personal assets (e.g. house, savings) are protected if the business fails.
  • Investors are more willing to buy shares because the risk is lower.
  • The business can raise more finance by issuing shares.
  • Greater access to finance can support expansion and growth.
  • Owners may be more willing to take calculated risks.
  • Original owners may lose some control if more shareholders are involved.
  • The business must follow stricter legal and reporting requirements.
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21
Q

what is a business plan

A

A business plan is a document produced by the owner at start-up, which provides forecasts of items such as sales, costs and cash flow

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22
Q

what are the things found on a business plan

A

Business idea
Business objectives
Target market
Market research
Marketing plan (price, promotion, place)
Operations plan (location, suppliers, production)
Staffing plan
Start-up costs
Cash flow forecast
Profit forecast
Break-even analysis
Sources of finance

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23
Q

what is a cashflow forecast

A

A cash flow forecast is a prediction of the cash inflows and cash outflows of a business over a period of time.

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24
Q

what are the advantages of using cashflow forecasts

A

Identifies potential cash shortages early
Helps plan for loans or overdrafts
Improves financial planning
Helps control spending
Supports better decision-making
Useful for securing finance from banks
Reduces risk of insolvency

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25
what are the disadvantages of using a cashflow forecast
Based on estimates, so may be inaccurate Unexpected changes (e.g. lower sales) can make it unreliable Time-consuming to prepare May give a false sense of security Does not guarantee profit Only focuses on cash, not overall profitability
26
what is sales forecasting
Sales forecasts predict future revenues based on past sales figures
27
what do sales forecasts focus on what will happen in the future
- The volume and value of sales The size of the market Sales as a result of promotional activity Sales as a result of cyclical factors
28
what types of resouces will sales forecasts use to calculate
- How many staff will be needed? How much stock will be required? Does capacity need to be expanded (or reduced)? Does the equipment need to be upgraded, replaced or increased (or reduced)? How much and what type of finance will be required? Is promotional activity (e.g. advertising) required — and when?
29
what are the factors that affect sales forecasts
- consumer trends - economic varibales - actions of competitiors
30
what are the difficulties in sales forecasts
- past data - short term - time consuming to construct - expensive - wrong quantities can be calculated
31
what is a budget
a budget is a financial plan that a business sets for costs and revenue. the budget is usually closley aligned with the business objective.
32
what are the reasons for using budgets
- planning and monitoring - identify problems - control over operations - cordination and communication - movivation and effeciency
33
what are the two types of budgets
- zero based - historical
34
what are historical budgets
budget based on previous financial data and allow for inflation and other relevant economic indicators and changes
35
what is zero based budgeting
Zero-based budgeting is a method of budgeting where each expense must be justified from zero for each new period.
36
what is variance analysis
Variance analysis seeks to determine the reasons for the differences between the actual figures and the budgeted figures
37
what is favourable variance
- when actual figure is better than budgeted figure
38
what is adverse variance
when acutual figure is worse than budgeted figure
39
what are some of the actions firms may take to prevent some of the variance that has occoured
- alternative suppliers - client meetings - review marketing strategy
40
what are the difficulties of budgeting
- requires very skilled and expert workers to calculate - can lead to internal conflict of departments if one is given larger budget or one overspends - takes time - can be inacurate - human error - motivatrion can fall if unachieved
41
what is a profit margin
the amount by which sales revenue exceeds costs and can be compared to previous years higher profit margins are better
42
what are ways to improve profitability
- increase prices - reduce one off costs - reduce specific expenses e,g cut staff, lower wages - reduce variable costs, seek new suppliers
43
what is the definition of liquidity
Liquidity is a firm’s ability to meet its short-term debts as they fall due.
44
2 ways of measuring liquidity
- acid test ratio - current ratio
45
anaysis of the current ratio
- quicky way and outcome is easily expressed - all forms of current assets are considered in this ratio
46
analysis of acid test ratio
- very precise - liquid capital - least liquid form of CA is deducted so is proved more relative
47
what are ways to improve liquidity
- reduce credit peroid offered to customers - ask suppliers for extended repayment - use overdraft facilities - sell excess stock - leasing
48
what are the internal causes of business faliure
- poor planning - lack of leadership - ineffective marketing - cash flow problems - lack of funding
49
how may poor planning cause business faliure
- lack of business planning - poor budgeting - incorrect promotion - lack of innovation
50
how may a lack of leaderhsip cause business faliure
- poor decision making - lack of motivation for wokrers - no feedback on performance - faluire to delegate
51
how may ineffective marketing cause business faliure
- poor understanding of customer needs - incorrect pricing strategies - incorrect PL set
52
how may cashflow problems cause business faluire
- overtrading - overborrowing - poor credit managment - poor spending - having a product that significantly fluctuates in demand
53
how may a lack of funding cause business faliure
- lack of investment - difficulties in borrowing - limmited owners capital
54
what are the external causes of business faliure
- economic changes - consumer tastes and trends - legal factors - market challanges - technological change
55
how may economic changes cause business faliure
- recessions - changes in tax, echange rate and intrest rates
56
how can changes in consumer tates cause business faliure
- increased cost on market research - dates stock may be unsellable
57
how can legal factors cause business faliure
- ledgeslation on min wage and typesn of promotion may become banned - impact on specific operations
58
how can market challenges cause business faliure
- comptitors undercut market prices to gain high levels of market share
59
how can technological change cause business faliure
- significant spending required to keep up to date - product innovation leads to disapearance of a business market
60
what are the 4 methods of production
- job - flow - batch - cell
61
how is the method of production chosen by the firm
- level of output required - nature of the product - standardised or personalised - level of automation needed
62
what is job production and what are the advantages and disadvantages of it
Producing one item at a time, as ordered by the customer Advantages: - High-quality product - Motivated and highly skilled workers - Customised products can be produced Disadvantages: - Production is slow - Labour costs are high
63
what is batch production and what are the advantages and disadvantages of it
Groups of the same product are produced before moving on to a group of different products Advantages: - Workers can specialise - Production can take place as the previous batch starts running out Disadvantages: - Requires careful coordination to avoid shortages - Money is tied up in stock, as completed products need to be stored
64
what is flow production and what are the advantages and disadvantages of it
Continuous manufacturing of standardised products, usually on a production line Advantages: - Low unit costs due to economies of scale - Rapid production - Usually highly automated (capital-intensive) Disadvantages: - Customisation is difficult - Capital equipment can be expensive to purchase
65
what is cell production and what are the advantages and disadvantages of it
This involves workers being organised into multi-skilled teams, with each team responsible for a particular part of the production process Advantages: - Cell production is often more efficient than other methods, as workers share their skills and expertise - Motivation is usually high, as employees work as a team Disadvantages: - Requires extensive reorganisation of production processes - Teams' efficiency may be reduced by weaker workers
66
what are the factors that influence productivity
- employee motivation - level of traning and education of staff - investment in tech - business organisation
67
what are the factors that influcence efficency
- standardisation of the production process - organisational struture - investment in techbnology - outsourceing - relocation or downsizeing
68
what is capital intensive production
predominantly uses machinery and technology in the production of goods and services Large-scale production of standardised products is likely to be capital-intensive Manufacturing in developed countries, where labour costs are relatively high, is likely to be capital-intensive
69
what is labour intensive production
predominantly uses physical labour in the production of goods/services The delivery of services is usually more labour-intensive than manufacturing In countries where labour costs are low (e.g. Bangladesh), labour-intensive production is common Small-scale production is likely to be labour-intensive
70
what are the advantages of labour intensive production
- low cost - chance for innovation - flexible working
71
what are the disadvantages of labour intensive production
- human error - unreliabe workers - incentives may be required to motivate workers - increased costs via training
72
what are the advantages of capital intensive production
- low cost - high output - eos - no training costs - no breaks - no motivation
73
what are the disadvantages of capital intensive production
- maintanance costs - breakdowns can cause huge issues - no flexibility in production
74
what is the definition of capacity utilisation
- Capacity utilisation is a measure of the level to which a business's assets are being used to produce output
75
what are the implications of operating undercapacity
- bad brand image - costs are spread across fewer units so total fixed costs rise - causing a need to make employees redundant - however they can deal with spikes in demand
76
what are the implications of operating overcapacity
- lack of flexibility to spikes in demand - increased staff turnover - minimised AC as spread over more units - employees feel secure in job
77
what are the ways to improve capacity utilisation
- increase sales - increase usage - outsourcing - reduced capapcity - redeployment
78
what is buffer stock
Buffer stock is a quantity of goods/raw materials kept in case of stock shortages
79
what are the advantages of holding buffer stock
- supply stability - can respond to shocks - price stability - materials security - competative advantage
80
what are the disadvantages of holding buffer stock
- exess cost in storage - risk of obselecance - opportnity cost
81
what is just in time stock managment
Just-in-time stock management is a process in which raw materials are not stored on-site Stock is ordered as required and delivered by suppliers "just in time" for production
82
what is waste minimisation
Reducing the amount of waste produced in a business’s operations in order to improve efficiency and lower costs
82
why may a firm choose to minimise waste
- Stock becomes obsolete - Perishable stock - Stock may be damaged as a result of poor storage conditions and may not be suitable for use in the production process
83
what are the 3 ways to minimise waste
- storage - planning - sales tactics
84
what is lean production
A production method that aims to reduce waste and improve efficiency by only using resources that add value to the final product.
85
posotives of lean production
- less time required - fewer materials used - less labour needed - rent costs reduce - small number of trusted suppliers work
86
how is lean production going to give a firm a competative advantage
Lower unit costs are achieved due to minimal wastage, so prices may be lower than those offered by competitors
87
what is the definition of quality
The degree to which a product or service meets customer expectations.
88
what are the methods of quality management
- quality control - quality assurance - quality circles - total quality management
89
what is quality control and what are the advantages and disadvantages
Inspecting the quality of output at the end of the production process advantages: - speclists - simple disadvantages: - waste of resources if product not sellable
90
what is quality assurance and what are the advantages and disadvantages
Inspecting the quality of production throughout the production process advantages: - issues identified early, good for minimising waste - can identify potenital cause of defects. disadvatages: - skilled workforce required - remaking can be timley
91
what are quality circles and what are the advantages and disadvantages
Groups of workers meet regularly to solve quality problems identified in the production process advantages: - increased motivation - more people involved disadvantages: - Meetings must be organised regularly
92
how can firms gain a competative advantage from quality management
Unit costs are likely to be low if a business takes a preventative approach through the use of quality assurance or total quality management Low costs may allow a business to reduce its selling price to better compete with or undercut its rivals
93
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