business theme 2 content

Internal Sources of Finance

Capital raised from inside the business (e.g., Retained Profit, Rationalization/Sale of Assets).

External Sources of Finance (Long-Term)

Long-term capital from outside sources (e.g., Share Capital, Venture Capital, Bank Loans, Mortgages).

External Sources of Finance (Short-Term)

Short-term capital from outside sources (e.g., Bank Overdrafts, Trade Credit, Debt Factoring).

Liability (Limited vs. Unlimited)

Unlimited: Owners are personally responsible for all business debts; personal assets can be seized. Limited: Shareholders only lose what they invested; separate legal identity.

Business Plan

A formal document detailing a business's objectives, strategies, financial forecasts, and target market, used to secure funding.

Cash Flow Forecast

A forward-looking statement projecting a business's expected cash inflows and outflows over a future time period

Working Capital

The cash available for day-to-day trading operations (paying bills, buying inventory).

Overtrading

When a business expands too rapidly without securing enough working capital, leading to severe cash-flow failure.

Revenue vs. Profit

Total income generated from sales. Profit: The amount left over from revenue once all costs are subtracted

Fixed vs. Variable Costs

Costs that do not change with the level of output (e.g., rent). Variable: Costs that change directly in line with output (e.g., raw materials).

Contribution per Unit

The money each individual unit sold generates toward covering the business's fixed costs.

Break-Even Point

The level of output where total revenue exactly equals total costs; no profit or loss is made.

Margin of Safety

The difference between your actual (or budgeted) output level and the break-even level of output

Budget vs. Variance

Budget: A formal financial plan for future income and expenditure. Variance: The numerical difference between budgeted figures and actual figures.

Favourable vs. Adverse Variance

Favourable: Actual performance makes more profit than expected. Adverse: Actual performance reduces expected profit (e.g., higher costs or lower sales).

Gross Profit vs. Operating Profit

Gross: Profit made after accounting only for the direct costs of making a product. Operating: Profit after subtracting overhead expenses (e.g., rent, salaries).

Profit for the Year (Net Profit)

The final surplus profit left over after subtracting all operating expenses, taxes, and interest costs

Liquidity

The ease and speed with which a business can convert its assets into cash to settle immediate short-term bills

Statement of Comprehensive Income

A financial document recording a business's trading revenues, costs, and profits over a specific past time period

Job vs. Batch Production

Job: Producing unique, one-off items tailored precisely to customer specifications. Batch: Making a set number of identical items at the same time before moving to a new run

Flow Production

Continuous, uninterrupted manufacturing of identical products along an automated assembly line.

Labour Productivity

A measure of operational efficiency showing the average output produced per worker over a set timeframe

Capacity Utilisation

The percentage of a business’s maximum possible production capacity that is actually being used

Buffer Stock

Minimum reserve stock held continuously to protect operations against delayed deliveries or sudden spikes in demand

Lean Production

An operational management approach focused purely on eliminating waste while maintaining quality.

Just-In-Time (JIT) Management

A lean manufacturing system where stock arrivals are timed perfectly to coincide with when they are needed on the production line.

Quality Control vs. Quality Assurance

Control: Inspecting items at the very end of production to catch defects. Assurance: Designing quality into every single stage of production to prevent defects.

Total Quality Management (TQM)

An ongoing culture where every single employee takes personal responsibility for maintaining high quality

Inflation

A sustained increase in the general price level of goods and services within an economy, lowering purchasing power

Interest Rates

The cost of borrowing money or the financial reward for saving money, set as a percentage

Exchange Rates (SPICED rule)

The price of one currency expressed in terms of another currency. (Strong Pound: Imports Cheap, Exports Dear)

The Business Cycle Stages

Boom ➡ Recession ➡ Slump ➡ Recovery