Studied by 9 people
business growth, economies and diseconomies of scale, internal and external growth, integration, capital and revenue expenditure, internal external sources of finance, short term and long term finance, fixed and variable costs, profit and loss account, cash flow statement, and balance she
3 reasons for business growth
greater chance of survival against competition
greater market share
spread risks by diversifying into new markets
how is growth measured?
sales turnover (revenue)
market share (% of industry’s sales)
employees (number of)
define economies of scale
a reduction in the average costs of production due to an increase in productive efficiency
define diseconomies of scale
an increase in the average costs of production due to a decrease in production efficiency
give an example of how growing companies start to experience inefficiency
e.g: customers trying to phone call centres but get stuck talking to staff that cannot help
define internal diseconomies of scale and give examples
inefficiencies that the business itself can make
technical
organisational
financial
define external diseconomies of scale and give examples
inefficiencies that the business achieves because someone else has expanded
higher location costs
traffic congestion
need for labour
how can firms tackle diseconomies of scale?
outsourcing / relate pay to performance
motivating the staff
define the 6 internal economies of scale
technical (bigger units of production can reduce costs)
managerial (bigger businesses can have specialised managers)
financial (less risk)
marketing (more effective marketing campaigns due to larger sums of $$)
purchasing (bulk buying discounts)
risk bearing (large firms are able to produce a wider range of products to spread the risk)
define the 2 external economies of scale
consumers (e.g., a shopping centre compared to an individual store)
employees (labour concentrations)
define efficiency
making the best possible use of resources (maximising output from input)
costs of production formula
total costs = fixed costs + variable costs
TC = FC + VC
average costs formula
average costs = (total costs) / (quantity produced)
AC = TC / Q
state 3 benefits of large organisations
cheaper to produce a bigger range of products
brand recognition and customer loyalty
customer convenience and discounts
state 3 benefits of small organisations
personalised service
flexibility
greater exclusiveness - can charge more on products
define internal (organic) growth
when the business uses its own resources to increase the scale of its operations through advertising, producing better quality products, and selling in different locations
state 3 benefits and 3 limitations of organic growth
better control
inexpensive
no new personnel
change in hierarchal structure
need to restructure
takes time
define external growth
a merger between two companies with the aim of improving performance
state 3 benefits of external growth
fast way to grow
quick way to reduce competition by taking over your rival
spreading risk
explain the methods for external growth
joint ventures - two or more businesses get together (share costs, risks, rewards)
strategic alliance - affiliated businesses remain independent
management buy-out - to prevent take-over the management buys shares and becomes owners
merger - two or more businesses agree to form one company
takeover - one party takes a controlling interest in the other company
explain the different types of integration
forward vertical - when a larger business merges with a smaller business in the same industry to reduce cost of production
horizontal integration - when a larger business takes over a company in the same industry to increase market share (in different locations)
backward vertical - when a business merges with a supplying business to reduce cost of production (e.g. kfc and potato farm)
conglomeration - when two businesses in unrelated lines of business integrate to diversify risk (if a business does not do well there is another one)
list 3 mergers benefits and limitations
greater market share
diversification
survival
loss of control
conflict
culture clash
define franchises*
a form of business ownership where a business buys a license to trade another firm’s name
define a multinational company
a company that has business operations in at least one country other than its home country
define capital expenditure
money spent on fixed assets (land, buildings, machinery, etc)
define revenue expenditure
money spent on daily operation (wages, rent, insurance, raw materials, electricity)
define and list internal sources of finance
*know advantages and disadvantages
money obtained from within the business
personal funds
family and friends
working capital (sale of goods and services)
retained profits
selling assets (e.g. equipment)
investing extra money
define and list external sources of finance
*know advantages and disadvantages
money obtained from sources outside the business (financial institutions or individuals)
selling shares (preference shares and ordinary shares)**
loan capital / debt capital (money sourced from financial institutions like banks with interest charged)
overdrafts (when a lending institution allows a firm to withdraw more money than it currently has in its account short-term)
trade credit (an agreement between businesses that allows the buyer of goods or services to pay the seller at a later rate)
crowdfunding (when a business venture or project is funded by a large number of people each contributing a small amount of money)
leasing (a source of finance that allows a firm to use an asset without having to purchase it with cash)
venture capital (given to higher risk, high potential start-up / small businesses)
business angels (rich individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their business
define short term finance (<12 months)
money needed for the day-to-day running of a business
define long term finance (>12 months)
funding obtained for purchasing long-term fixed assets of a business (long term bank loans, share capital)
list the factors influencing the choice of finance
purpose - use of funds
cost - interest payments, administration costs, opportunity cost (the loss of other alternatives when one alternative is chosen)
status and size - public ltd’s have more options in obtaining finance than sole traders because of their status and size
amount required - for small amounts, firms may consider short term sources of finance, and vice versa
flexibility - the ease with which a business can switch from requiring one source of finance to another
state of the external environment - factors that the business has no control over (e.g. increases in interest rates or inflation)
gearing - the relationship between share capital and loan capital. if a company has a large proportion of loan capital to share capital it is said to be high geared (high risk) and if a company has a smaller proportion of loan capital to share capital is low geared
define cost
expenditure to produce or sell a good or service, including the acquisition of business resources
define and list fixed costs
costs that do not change with the amount of goods or services produced
rent
insurance
salaries
interest payments
define and list variable costs
costs that change with the number of goods or services produced (paid per quantity produced)
raw material costs
sales commissions
packaging
energy usage costs
define direct costs and give an example
costs that can be identified with the production of specific goods or services
e.g. the cost of flour used in making bread in a bakery
define indirect costs / overheads and give an example
costs that are not clearly identified with the production of specific goods or services
e.g. rent
define revenue
income earned from the sale of goods or services
total revenue (TR) equation
price per unit (P) x quantity sold (Q) = total revenue (TR)
profit equation
total revenue (TR) - total costs (TC) = profit
the purpose of accounts to different stakeholders
shareholders - value of business
managers - business performance
employees - profitability of business
customers - will there be a constant supply of products?
suppliers - can negotiate better cash or credit terms with firms
the government - is the business abiding by the law?
competitors - business competition
financiers (e.g. banks) - check business creditworthiness to establish how much money they can lend it
the local community - job opportunities
what is the profit and loss account (P&L) / income statement used for?
shows the records of income and expenditure flows of a business over a given time period and establishes whether a business has made profit or a loss
P&L account equation
revenue - expenses = profit/loss
examples of revenue in a P&L account
product sales
services rendered
examples of expenses in a P&L account
direct costs
COGS
indirect costs
overhead expenses (rent, salaries, insurance, admin, legal, accounting, marketing, depreciation)
variable indirect costs (advertising, commissions, utilities)
P&L account format
sales revenue | |
|---|---|
COGS | |
gross profit | sales revenue - COGS |
overhead expenses | |
net profit before interest tax | gross profit - overhead expenses |
interest | |
net profit before tax | net profit before interest tax - interest |
tax | |
net profit after interest and tax | net profit before tax - tax |
dividends | |
retained profit | net profit after interest tax - dividends |
what is the balance sheet used for?
a financial statement that outlines the assets, liabilities, and equity of a firm at a specific point in time
balance sheet simple equation
what the business owns = what the business owes
or
assets = liabilities (for 3rd parties) + equity (for owners)
list the types of non-current and current assets
non-current assets / fixed assets (long-term)
machinery (tangible)
goodwill - customer loyalty, brand reputation, public trust (intangible)
shares (investments)
current assets
cash or any other asset that it likely to be turned into cash within 12 months (stocks)
list the types of long-term and current liabilities
long-term liabilities
borrowings / debts
current liabilities
bank overdraft
trade creditors
other short-term loans
list the types of equity
share capital (money from sales of stocks)
retained earnings
define depreciation
the decrease in the value of a fixed asset over time (due to repeated use, new technology, or new trends)
balance sheet format
“statement of financial position for (company name) as at (date)
$m | $m | |
non-current assets | ||
property, plant, equipment | _ | |
accumulated depreciation | (_) | |
non-current assets | _ | |
current assets | ||
cash | _ | |
debtors | _ | |
stock | _ | |
current assets | _ | |
total assets | = non-current assets + current assets | |
current liabilities | ||
bank overdraft | _ | |
trade creditors | _ | |
other short term loans | _ | |
current liabilities | _ | |
non-current liabilities | ||
borrowings (long term) | _ | |
non-current liabilities | _ | |
total liabilities | = current liabilities + non-current liabilities | |
net assets | = total assets - total liabilities | |
equity | ||
share capital (not available for a non-profit entity) | _ | |
retained earnings | _ | |
total equity | _ = net assets |
define patents
the granting of a property right by a sovereign authority to an inventor
what is a cash flow statement used for?
a summary of the business’s cash inflows and outflows over a period of time
how is a cash flow statement different to an income statement?
a cash flow statement shows where the money is coming from, where it’s going, and how much cash a company has at a given point in time, while the income statement measures the profitability of the business
Note
Flashcard