Business OCR literally everything at once

Difference between short term, medium term, and long term finance

Short term is finance for the day-to-day running of the business, usually for a period of up to 3 years

Medium term finance is between 3-10 years, normally to replace expensive equipment, expand, or to convert a persistent overdraft into a loan

Long term finance is 10+ years - for securing resources for long-term growth

2 types of bank accounts - what are they

Deposit (savings account) - money deposited earns interest - period of notice before money is withdrawn

Current accounts - used to make and receive payments, often used with a debit card - funds can be taken out whenever

Overdraft - what is it

The business can run the current account down to 0, and then a further pre-arranged amount can be withdrawn - may be charged an arrangement fee when setting one up, bank permits a certain level of overdraft and the business has to negotiate for a larger one if needs be, interest is only paid on the amount which is withdrawn

Trade credit

Making use of an opportunity offered to defer payments to a supplier

Hire purchase

Pay for product or item in installments over years

Factoring

A business sells its debts in order to raise finance - firm which needs finance sells debt to a factoring company (a company specialising in factoring), factoring company buys a certain % of debt, legally owns it, and the business will pay the debt back to the factoring company instead of to the original creditor

Debentures

Special long term loan only available to a public limited company - company sells debentures to investors at interest - like a bond

Retained profit

Profit retained after operating profitably for a few years - money in bank

Materiality

The big picture when accounting

Prudence accounting

Firms must not overstate asset value etc, better to understate

Stepped fixed costs

Fixed costs remain fixed, until a certain threshold in output is reached

Standard costing

Cost that the business would normally expect for the production of a singular product

+good idea of target cost to aim for

+gives employees a target

-need to keep repeating the process due to e.g inflation etc to get an accurate value of cost

• Sometimes quality might be sacrificed to keep production costs down

Cost centres

Separating costs by e.g department

Overheads

Recurring costs a business incurs to operate, indirect cost e.g utilities such as gas

Total contribution equation

Sales x cost per unit

Contribution equation

Sales price - variable cost

Where is break even

When total revenue = total cost

Formula = fixed costs / contribution per unit

Non current costs

Fixed costs or overheads

Non current costs are long term costs expected to be for longer than a financial year

Benefits and limitations of break even analysis

+easy to view, comprehend and interpret

+little time to calculate

+shows given level of profit at output levels, and can consequently set output targets

+establish margin of safety

-based on predicted figures - variable costs, overheads may not be constant

Doesn’t take into account economies of scale

More than one product makes it difficult to allocate the fixed costs

Payback

How quickly the cost of the investment can be paid back

Accounting (average) rate of return (per year) %

Measures profitability per year

Make sure to put it into a percentage of what % of the cost is returned each year

Advantages and disadvantages of ARR

Takes into account all cash flows

Measures profitability

Simple comparison

Life of investment needs to be known

Ignores the value of money over time

No indication of when the cash flows occur

Net present value

Considers value of money over time

All cash flows are accounted for

Difficult to figure out discount rate

Inflation, interest rates likely to change - time taken to figure out discount rate

Internal rate of return

Discount rate which makes the net present value = 0, this is the break even rate, shows profitability.

Zero budgeting

Sets budgets at 0, making managers ask for funds, and explain why they are needed

However it takes time for decisions on spending money to be made

Positives of cash flow

+allows business to put into place any strategies to deal with forecasting negative cash flows, such as forecasting a loan

+helps the business sets its prices

+cash flow forecasts are looked at by potential investors

+suppliers want to see it

Limitations to cash flow forecast

Cash flow measures the movement of money in and out of the business

negatives are: changes to interest rate - loans might have variable interest rates

Forecasts are estimates

Seasonal demand

Competitors behaviour might affect sales revenue etc

Changes in technology

Income statement

Reports the level of profit or loss a business makes

Gross profit

Sales revenue- cost of sales - only takes into account cost of goods sold - doesn’t take into account factors not directly related to selling the goods

Profit before tax

Operating profit - finance costs (interest paid) interest on loans are treated differently because they are not related to the actual costs incurred in the production of the goods

Profit for the year

Net profit - tax and dividends

Divisions of income statement

Trading account - sales revenue and cost of sales

Income statement - calculation of operating profit

Appropriation account - what happens if profits are made e.g tax and dividends

Usefulness of income statement

Seeing amount of profit affects further business describe

Monitor the progress of the business compared to targets

Formulate objectives

Show shareholders, investors, bank

employees can see whether business can increase salaries

Statement of financial position

Shows value of the business - what it owns and what it owes

Non-current asset (fixed assets)

E.g building, only includes what it owns, not rents, assets necessary for business function

Tangible and intangible assets

Assets which can be seen, and invisible assets, such as patents - very difficult value to put accurate value - depends on length of patent - value is mainly cost of r&d, or the level of income innovation will generate

Current asset

Everything a business owns that is not non-current - the difference between current and non-current is that current assets expect to be sold, used up or converted into cash within a year, they consist of consist of inventory, trade and other receivables (money that is owned for business, it it’s due for payment within a year), cash

Goodwill

Goodwill is the value of a business is sold

Bad debt

Not all trade receivables will be paid - business should make allowances for bad debts

Liabilities

What a business owes

Current liabilities are liabilities due within a year

Net assets

Net current assets + non- current assets - current liabilities - non current liabilities

Liquidity

Ability to turn assets into cash

Acid test

(Current assets - inventory) / current liabilities due within

It is a test of liquidity - a business cannot ascertain whether it can sell all of its stock so takes it out

Current ratio

Current assets / current liabilities

Amount you have vs how much you owe - higher the better as that equals more assets

Positives of ratios

Year on year comparisons

Stakeholders use it to see if a business is worth trading with

Measure of performance

Suppliers want to know whether to trade

Shareholders

Negatives of ratios

Inflation may distort figures

State of economy could mean that fall in ratios is not businesses fault, strong economy might show improved performance, when business hasn’t improved

It’s down to the business to judge sufficient liquidity

Gearing

Gearing is the percentage of long term finance which is made up of loans

Non current liabilities / capital employed (total equity) x 100

Or Non current liabilities (debt) shareholders funds (equity)

Debt to equity ratio

Debt/equity x 100

Capital employed

Total assets - current liabilities

Interest cover

Used to determine if business can afford to pay a loan

Formula - operating profit/interest payable (finance costs)

Efficiency ratios

ability of business to manage its assets and current liabilities efficiently

assets turnover

Non current assets turnover = Revenue (turnover) / non-current assets

Measured how efficiently a business can use its non current assets to generate sales revenue

Stock turnover

Measures how quickly the stock is sold

Cost of stock (or sales) /average inventory stock

Average stock inventory is (opening stock+closing stock) / 2

Of stock cost £10, and the average stock is £2, then that means stock was sold 5x in 1 year, 365/5 =73 meaning. That stock took 73 days to sell on average

Delphi technique

When a panel of experts is hired and asked for questions on how to make business decisions

Debtor days and creditor days

Debtor days = trade receivables/revenue x 365

Creditor days = trade payables / purchases x 365

Net profit margin

Operating profit / sales x 100

Gross profit margin

Gross profit / sales x 100

Return on capital employed

Operating profit/capital employed x 100

Return on equity

Profit for the year/ shareholders equity

dividend yield

Dividend per share / market price per share x 100

Leadership styles

Democratic : more delegation

Paternalistic : leader makes decisions but prioritises employee welfare

Laissez affair - employees do all

Autocratic : control

Mission statement

Qualitative statement which outlines basic purpose and aims, can be used as a form of marketing

Strategic objectives

In order to achieve its main aims, a business creates a plan that contains several strategic objectives, e.g 10% growth 3 years

Tactical objectives

Short term, day to day activities

Aims

More specific than a mission statement, it’s main goal

SMART objectives

Specific, measurable, agreeable, realistic, time bound

Workforce planning, Human Resources objectives and strategy

Way in which a business plans how best to use its workforce

Person spec

After job description, ideal characteristics of someone to take the job

Job description sets out requirements

On the job training

Training at the place or employment or diff location

Off the job training

More costly, learning outside of day to day work

Apprenticeship is a mix of college and on the job

Appraisal

A formal assessment of an employees performance

mcgregor theory x and theory Y

a theory x manager views employees as lazy, disliking works motivated by money

Theory Y thinks that employees enjoy their work, not just motivated by money, can work un monitored, creative and willing to contribute and willing to accept responsibility and challenges

Centralisation

The amount of control exerted by those in senior positions over session making

Blake and Morton’s leadership grid

Impoverished, country club, team leader, authoritarian

Grid with task needs at the bottom, people needs on the right

Country club - manager is concerned about wellbeing of employees, people needs high, task needs low, as he prefers morale over tasks being completed

Carlyle and Galton

Trait theory - concentrated on traits exhibited by successful leaders

Leaders are motivational

Integrity - ethical approach

Self confidence - they are assured

Creative - new ideas

Intelligent

Zaccaro uses 15 traits instead of 5, more recent approach in last couple decades

Tannebaum and Schmidt

They concentrate on the style of leadership, and suggest that the style of leadership highlighted the degree of trade off between the control exerted by the leader and how this affected the interaction between the leader and employees

1. Tell - just informs employees of decisions 2. Sell - makes a decision but attempts to ‘sell’ the idea to employees 3. Consult - asks the employees before decision for a collaborative approach 4. Participate - leader tells employee to make the decision, but usually within limits

Adair

Action centered leadership - achievement of task, team or group involved, individual members, and leader has to balance out needs of all 3

Fredrick Taylor

1911 theorist - old af

Jobs would be observed to see what tasks were being performed, then broken down for divisions of labour, those who were best suited to each job were recruited, money a key motivator

This guy Taylor was an engineer so he wanted productive efficiency above all else

Mayo

1920s old af

Undertook his famous work at Hawthorne plant Chicago

Employees respond to changes in working environment

Sense of recognition and. Consultation is important. Communication boosts productivity

Workplace is a social system - employees like to work in groups

Several variables were changed at same time so identifying cause is difficult

One plant in one area

McClelland 3 needs theory

People have 3 needs, achievement, affiliation and power, these 3 drive a persons motivation

Achievement - needs challenging goals, likes to work individually, likes feedback

Affiliation - someone with this sort needs to be in a team, people orientated, adheres to culture of the workplace

Power - likes to influence, order, places a high value on hierarchy, likes to win, enjoys status

Limitations are that an employee could exhibit more than 1 need

Employees will not always be motivated by that need - extent

Herzberg 2 factor theory

Hygiene - absence of good working conditions demotivate, but good working conditions do not necessarily motivate

Motivating factors - reduction in job satisfaction itself is not enough to motivate other factors which actually motivate relate to the job itself, such as responsibility

Only done on white collar employees - such as engineers people have different personality traits

Not always easy to enrich jobs

In practise it is very time consuming

Maslow

Hierarchy of needs - physiological needs - fair wage

Safety - health and safety

Social - culture way work, teamwork

Esteem - leadership and promotion

Self-actualisation - help to guide employees to appropriate goals and challenges - achieving one’s full potential as a human

Limitations - not designed for business world

Generalisation

Argue that social needs are just as important as health and safety, not necessarily like going up levels in a game

No strike deal

When a union gives up the right to strike, expecting benefits in return such as more communication.

Quality circles - regular short meetings of employees during working hours - discuss and resolve work related problems - greater awareness

Health and safety act 1974

Safe building, provide training to hazards, temperatures in rooms at certain limits

1999 min wage act

Min wage

2015 paternal and maternity leave

Parents will be able to share 12 months of leave after a child

Pros and cons of setting objectives

Identify what business hopes to achieve, so a business does not waste money spending in the wrong areas

Motivate workers to hit targets

Business to assess performance against expectations

Objectives need to be clear and specific

DAGMAR

define, advertise, goals, measuring, advertising, results

Make decisions about what is to be achieved through the promotion in terms of e.g brand awareness, then measure the success against previously agreed criteria

Measurable success

AIDA

Attention - grab attention

Interest - retain attention to deliver information about product

Desire - consumer wants to buy product - demand

Action - consumer buys the product

Marketing mix 4 Ps

Product

Price

Place

Promotion

Product life cycle

Intro/development - what consumer needs will be researched

Growth - consumers are aware of product - word of mouth - modifications may be made after initial feedback

Maturity - profitable product - maintaining stage is crucial, consumers who want to purchase product have done already

Decline - consumers lost interest as better alternatives entered the market

Extension strategies used to maintain sales e.g special editions

Boston matrix

Rising star, problem child, cash cow, dog

Value analysis - when researchers design a product - 3 key aspects

Function - it’s task, how well it does this

Cost - keep costs as low as possible

Aesthetics - whether looks is important

Job production

Producing a single item or specialised product

Lower costs as materials only need to be bought in for particular job. But it is more labour intensive, meets customer needs, high quality, little stock tied up

Slower, difficult to gauge costs for specific job if it hadn’t been done before

Batch production

Identical products made in batches together. Different batches can therefore be different products. In specific quantities.

More flexibility than flow production

May be a time delay between batches where nothing is produced

Tasks may not be as motivating as job production

Flow production

Continuous conveyor belt process

Big numbers of products

However initial set up costs are high - automated systems

Lacks flexibility to produce large range of products

If 1 part of line stops, everything fails

Repetitive

Large amounts of stock

Cell production

Employees working in teams

Motivation as employees responsible for particular cell

Opportunities for job rotation

Employees set their own pace of work

Critical path analysis

Latest finish time is bottom right

Earliest start time is top right

Critical paths is where EST AND LFT are the same

Benefits is that it is simple, allows business to plan for when finance is needed

Accuracy of activity times

May encourage a reduction in quality in order for a good to be complete on time

Jidoka

Building into a production process the ability to reject faulty goods at the earliest time possible to now have to stop the process

Kaizen

Small incremental improvements

However employees may lose their own jobs if the process is improved so much