theme 2 business

What is meant by internal finance ?

Money generated by the business or its current owners

Explain one method of internal finance that might be used to raise initial capital to start a business

personal savings or sale of assets

What is meant by sale and lease back ?

the practice of selling assets, such as property or machinery, and leasing the back from the buyer.

State two disadvantages of using internal finance ?

1. internal finance can be limited

2.internal finance are non tax deductible

3.internal finance can be inflexible to other external finance methods

4.opportunity cost can be high when using internal finance

State one advantage of using retained profit as a source of finance ?

cheapest source of finance due to no interest and more.

What is meant by capital ?

the money provided by the owners in a business

State two advantages of using internal finance as a source of finance ?

1\.capital available immediately

2\.internal finance is very cheap

What is meant by a unsecured bank loan ?

where the lender has no protection if the borrower fails to repay the money owed.

What is meant by external finance ?

money raised from outside the business.

Bank overdrafts are flexible. What does this mean ?

the amount by which a business goes overdrawn depends on the time it is needed, this is why bank overdrafts are flexible.

What is meant by capital gain ?

the profit made from selling a share for more than it was bought.

What is the difference between limited and unlimited liability ?

limited liability means shareholders can only lose the original amount they invested in a business, whereas unlimited liability means that the business owners are liable for all business debts.

State two implications of limited liability for a business ?

1. courts may decide that individuals are liable if a crime has been committed or if the company has failed to keep adequate records and accounts.
2. owners of small limited companies, who are frequently also shareholders, are required to give personal guarantees of the companies debts to those lending to the company.

Why may a business with unlimited liability find it easier to raise finance than those with limited liability ?

Unlimited liability start up companies can take advantage of finance methods such as crowd funding and government grants. even though limited liability companies can use these too they are less likely to get backing as they already have funding of some kind.

How is limited liability company most likely to raise finances ?

share capital, this is the major source of finance for limited companies as they can sell shares off to get a great amount of funding quickly.

What is a rights issue ?

rights issues is issuing new shares to existing shareholders at a discount.

What is undercapitalisation ?

undercapitalisation is a business not raising enough capital when setting up.

State five pieces of information that are likely to appear in a business plan ?

buying and production, financial forecasts, the business and its objectives, the market, personnel, premises and equipment, finance and more.

Give two examples of cash inflows in a cash flow forecast ?

Sales, Interest, sales of assets, loans and more.

Give two examples of cash outflows in a cash flow forecast ?

Wages, Materials, insurance, stock, rent and more.

How is net cash flow calculated in cash flow forecast ?

the difference between the cash flowing in and the cash flowing out of a business in a given time.

Why might a business want to predict future sales ?

1. clear idea of cash inflows
2. allows business to pre-order supplies
3. enables the business to know if they are able to take on orders.

What is a time series data ?

a method that allows a business to predict future levels from past figures.

State three economic variables that might affect the sales forecasts of a business ?

1. fashion
2. consumer trends
3. long-term trends
4. inflation
5. unemployment
6. exchange rates

What is meant by 'trend' ?

a general direction in which something is developing or changing.

What is the difference between sales volume and sales revenue ?

sales revenue is the value of output sold in a particular time period ( calculated by price X quantity of output ). whereas sales revenue is the quantity of output sold in a particular time period.

What is the difference between the short run and the long run in business ?

short run is the time period where at least one factor of production is fixed and long run is the time period where all factors of production are available.

Give two examples of fixed costs for a taxi driver ?

insurance, car payments, license fee and more.

What is meant by a semi-variable cost ?

a cost that consists of both fixed and variable elements.

How is profit calculated ?

profit \= total revenue - total costs

A product sells for £10 and the variable costs are £8.50. What is the contribution per unit ?

( £10 - £8.50 ) \= £2.50

If the total variable costs are £450,000 and the contribution is £225,000, what is the total revenue ?

( £225,000 + £450,000 ) \= £675,000

What are some limitations of break-even analysis ?

1. it assumes all output and stock are sold
2. cannot cop with a sudden change as wage rises
3. the data if not accurate will not give an accurate break even analysis
4. doesnt work for multi-product business

What is margin of safety ?

the range of output between break-even level and the current level of output, over which a profit is made.

What is a budget ?

a budget is a quantitate economic plan prepared and agreed in advance.

Why is a sales budget such an important budget ?

1. allows for efficiency
2. motivation
3. communication

State three benefits of a budget ?

1. good for preparation of plans
2. allows for comparison of actual budget at the end of the month/year
3. analysis of variances

How is gross profit calculated ?

Gross profit \= revenue - cost of sales

What is meant by the 'bottom line' ?

the bottom line is the final total of an account or balance sheet.

What does a statement comprehensive income show ?

this is a financial document showing a company's income income and expenditure over a particular time period, usually one year.

What does a statement of financial position ( balance sheet ) show ?

a balance sheet shows a summary at a particular point in time of the value of a firms assets, liabilities and capital.

What is the difference between current assets and current liabilities ?

current assets is a liquid asset for example those assets that can be turned into cash within a year, whereas current liabilities is money owed by the business that be repaid within one year.

Give two examples of non-current assets ?

cars and trucks, buildings, etc.

How is working capital calculated ?

working capital \= current assets - current liabilities

what is the 'ideal' value for an acid test ratio ?

1:1 or higher.

What sort of business may operate with a low acid test ratio ?

Retailers with strong cash flow like a Sainsburys or Tesco.

Explain the internal and external factors that cause business failure ?

financial: they may become bankrupt, shortage of cash to pay debts

non-financial: lack of planning, lack of efficiency, failure to meet customer needs.

why has the business failure rate in the UK risen since 2008 ?

because business start ups often fail after 5 years.

What is overtrading ?

overtrading is the situation where a business does not have enough cash to support its production and sales, usually because it is growing too quick.

give 4 possible reasons of cash flow problems for a business ?

1. overtrading


2. investing too much
3. allowing too much credit
4. over borrowing
5. seasonal factors
6. unforeseen expenditure
7. external factors
8. poor financial management

state 2 non-financial reasons a business may fail ?

1. lack of planning
2. lack of leadership
3. unsatisfied customers

What is job production ?

job production is a method of production that involves employing all factors to complete one unit of output at a time.

what are some advantages of job production >

1. quality is high because workers are skilled
2. workers are well motivated because work is varied
3. products can be custom made
4. production is easy to organise

what are some disadvantages of job production?

1. high abut costs due to skilled workers
2. production may be slow-long lead time
3. a wide range of specificity may be needed
4. generally an expensive method of production

What is batch production ?

batch production is a method that involves completing one operation at a time on all units before performing the next.

What are the advantages of batch production ?

1. workers are likely to specialise in one process
2. unit costs are lower because output is higher
3. production is flexible since differnt orders can be met
4. more use out of machinery

what are the disadvantages of batch production?

1. more complex machinery may be needed
2. careful planning and co-ordination is needed
3. less motivation because workers specialise
4. small. batches will still cost more
5. monet may be tied up in work in process
6. \

What is flow production ?

flow production is large scale production of a standard product, where each operation on a unit is performed continuously one after another, usually on a production line.

What are the advantages and disadvantages of flow production ?

ADVANATAGES:

1. very low unit costs due to economies of scale.

2. output can be produced very quickly.

3. modern plant and machines can allow some flexibility.

4. production speed can vary according to demand.

DISADVANTAGES:

1. products may be too standardised

2. huge set up costs before production can begin again.

3. worker motivation can be very low repetitive tasks.

4. breaks in production can be very expensive.

What is downsizing ?

downsizing is the process of reducing capacity, usually by laying off staff.

what is capital intensive production ?

capital intensive production is a production method that make more use of machinery relative to labour.

what is 'Kaizen' in terms of production ?

Kaizen is a Japanese term that means continuous improvement.

What is cell production ?

cell production involves producing a family of products in a small self contained unit ( a cell ) within a factory.

What is lean production ?

lean production is an approach to operations that focuses on the reduction of resources use.

What is out-sourcing ?

out-sourcing is giving work to sub-contractors to reduce costs.

What is meant by capacity utilisation ?

capacity utilisation is the use that a business makes of its resources.

What is meant by spare capacity ?

spare capacity is a situation in which actual production is less than what is achievable or optimal for a firm. This often means that the demand for the product is below what the business could potentially supply to the market.

If a train carries an average of 340 passengers between London and Glasgow, what is the capacity utilisation if the train's capacity is 500.

Capacity utilisation \= (current output / maximum possible output X 100 )

340 / 500 X 100 \= 68%

State two drawbacks of operating well below full capacity ?

1. they wont be making the most of its resources.

2. may also affect the morale of the workers.

State two drawbacks of operating at full capacity ?

1. the pressures of working at full capacity can cause stress.

2. increases risk of accidents.

3. could be very expensive.

What is mothballing ?

mothballing is leaving machines, equipment or building space unused, but maintained, so they could be brought back into use if necessary.

Why do businesses prefer to minimize stock holdings ?

1. to keep up with demand

2. it may cost them more to keep.

3. the type of stock, such as flowers which wont last long.

4. external factors.

What is meant by work-in-progress ?

work-in-progress is partly finished goods.

State four costs of holding stocks ?

1. storage costs

2. opportunity costs

3. spoilage costs

4. administrative and financial costs.

Why are buffer stocks held by firms ?

1. emergency stock

2. to keep up with sudden demand.

3. to protect themselves from a break in supply.

What type of stocks are most likely to be wasted ?

items which expire quickly, such as flowers, etc.