Theme 2

Retained profit

Reinvesting past earnings.

Owner's capital

Personal savings.

Sale of assets

Selling machinery, property, etc.

Bank loans

Borrowing with interest.

Overdrafts

Short-term flexible borrowing.

Trade credit

Delaying payments to suppliers.

Venture capital

Investment from external investors.

Share capital

Selling shares (only for Ltd & Plc).

Crowdfunding

Raising money from many small investors.

Limited Liability

Owners' personal assets are protected (Ltd & Plc).

Unlimited Liability

Owners are personally responsible for business debts (Sole Traders & Partnerships).

Business Plan

A document outlining business objectives, strategies, financial forecasts.

Sales Forecasting

Predicting future sales based on past trends.

Total Revenue

Total Revenue = Price × Quantity Sold.

Fixed Costs

Do not change with output (e.g., rent, salaries).

Variable Costs

Change with output (e.g., raw materials).

Break-even Point

Where total revenue = total costs.

Break-even Output

Fixed Costs / Contribution per Unit.

Contribution per Unit

Selling Price - Variable Cost per Unit.

Margin of Safety

Actual output - Break-even output.

Historical Budgets

Based on past data.

Zero-Based Budgets

Start from scratch each period.

Favourable Variance

Revenue higher/costs lower than expected.

Adverse Variance

Revenue lower/costs higher than expected.

Gross Profit

Gross Profit = Revenue - Cost of Sales.

Operating Profit

Gross Profit - Operating Expenses

Net Profit

Operating Profit - Taxes & Interest.

Statement of Financial Position

Shows a business's financial position at a point in time.

Assets

Liabilities + Equity.

Current Assets

Short-term (cash, stock, receivables).

Non-Current Assets

Long-term (property, machinery).

Current Liabilities

Short-term debts (overdrafts, trade payables).

Non-Current Liabilities

Long-term debts (bank loans).

Gross Profit Margin (%)

Gross Profit / Revenue × 100

Operating Profit Margin (%)

Operating Profit / Revenue × 100

Net Profit Margin (%)

Net Profit / Revenue × 100

Current Ratio

Current Assets ÷ Current Liabilities

Ideal Current Ratio

Between 1.5:1 and 2:1

Acid Test Ratio

(Current Assets - Inventory) ÷ Current Liabilities

Ideal Acid Test Ratio

At least 1:1

Internal Causes of Business Failure

Poor management, Lack of cash flow, Overtrading

External Causes of Business Failure

Economic downturns, Competition, Legislation changes

Job Production

One-off, custom-made (e.g., wedding dresses)

Batch Production

Groups of identical products (e.g., bakery)

Flow Production

Continuous, assembly-line (e.g., cars)

Cell Production

Teams working on sections of production

Labour Productivity

Output / Number of Employees

Ways to Improve Productivity

Automation, Training, Lean production

Efficiency

Maximising output from given inputs

Lean Production

Reducing waste (e.g., JIT, Kaizen)

Just-in-Time (JIT)

Holding minimal stock, ordering as needed

Stock Management Strategies

Just-in-Time (JIT) and Just-in-Case (JIC)

Lead Time

Time between ordering and receiving stock

Reorder Level

When new stock is ordered

Buffer Stock

Minimum stock kept as a backup

Quality Control

Checking final products for defects

Quality Assurance

Preventing defects during production

TQM (Total Quality Management)

Involving all employees in quality

Interest Rates

Cost of borrowing/lending money

Exchange Rates

Value of currency affecting imports/exports

Inflation

General rise in prices affecting purchasing power

Unemployment

High unemployment reduces consumer spending

Economic Growth (GDP)

Higher growth leads to higher demand

Consumer Protection

Ensuring products are safe and high quality

Employment Law

Minimum wage, working conditions, discrimination

Health & Safety Law

Safe working environment

Competition Law

Preventing monopolies and unfair pricing

Direct Competition

Businesses selling the same product

Indirect Competition

Businesses competing for the same consumer spending

Impact of Competition

Price wars, Innovation, Advertising spending

External Shocks

Political instability, Natural disasters, Pandemics (e.g., COVID-19), Technology changes