Theme 2 Summary

What is owner’s capital?

Personal saving

What is an advantage of owner’s capital?

Motivational as it is your money on the line

What is a disadvantage of owner’s capital?

Risky

What is retained profit?

Excess money made by the business

What is an advantage of retained profit?

No repayment

What is a disadvantage of retained profit?

Reduces security blanket/dividend

What is an advantage of selling an asset to raise finance?

Immediate lump sum injection

What is a disadvantage of selling an asset to raise finance?

One off

What is an advantage of raising finance through family and friends?

Flexible repayment

What is a disadvantage of raising finance through family and friends?

May want to be involved in the business

What is an advantage of using banks to raise finance?

Fixed value

What is a disadvantage of raising finance through banks?

Hard to obtain

What is peer-to-peer funding?

Investments from individuals on a website

What is an advantage of peer-to-peer funding?

Less interest

What is a disadvantage of peer-to-peer funding?

Restricted to small businesses

What are business angels?

Wealthy people who invest in start-ups for a share

What is an advantage of business angels?

Expertise

What is a disadvantage of business angels?

Dilutes control

What is crowdfunding?

Many individuals invest in small amounts to reach goal

What is an advantage of crowdfunding?

Millions can be reached

What is a disadvantage of crowdfunding?

Not guaranteed to reach goal

What are loans?

Money that is borrowed and is expected to be repaid with interest

What is an advantage of loans?

Fixed value

What is a disadvantage of loans?

Not flexible

What is share capital?

Raising finance through the sale of shares

What is an advantage of share capital?

Can raise large sums

What is a disadvantage of share capital?

Risk of hostile takeover

What is venture capital?

Investors invest in start-ups with potential

What is an advantage of venture capital?

Expertise

What is a disadvantage of venture capital?

Aim to sell within 5-7 years

What is an overdraft?

Facility to overspend on a current account

What is an advantage of an overdraft?

Take what’s needed

What is a disadvantage of an overdraft?

Bank can call it in at any time

What is leasing assets?

Someone grants permission to use an asset in exchange for money

What is an advantage of leasing?

Leasing company takes care of repairs

What is a disadvantage?

Expensive in long run

What is trade credit?

Paying suppliers after receiving goods

What is an advantage of trade credit?

Improved cash flow management

What is a disadvantage of trade credit?

Strain on relationship

What is a grant?

Money given without repayment

What is an advantage of grants?

No repayment

What is a disadvantage of grants?

Time consuming

What is limited liability?

When the business and owner are a separate legal entity

What is unlimited liability?

When business and owner are same legal entity

What sources of finance are best for limited liability?

Retained profit, share capital, loan

What sources of finance are best for unlimited liability?

Owner’s capital, crowdfunding, peer-to-peer funding

What is a disadvantage of using a cash flow forecast?

Bias - overestimate

What is the main disadvantage with sales forecasting?

Just because something happened before doesn’t mean it will happen again

What is break even output?

How much needed to sell to not make a profit or loss

What is the margin of safety?

Difference between actual sales and break even point

What is contribution?

How much is left to cover fixed costs

Why are variable costs paid off first?

They pay for production

What are the limitations of break even analysis?

• Inaccurate

• Bias

• Assumes production and sales are same

What is variance analysis?

Calculating differences between the results and budget

What is positive variance?

Business did better than expected

What is adverse variance?

Business did worse than expected

What are the reasons for adverse variance?

• External shock

• Consumer trends

• Competitors

• Inefficiency

• Suppliers

What is a historical budget?

Based on past spending

What is an advantage of using a historical budget?

Conflicts avoided

What is a disadvantage of using a historical budget?

Prevents change

What is a zero based budget?

Set as 0 and then managers must justify why their department needs it

What is an advantage of using a zero based budget?

Encourages careful planning

What is a disadvantage of using a zero based budget?

Forceful managers may receive money that others deserve

What is the formula to work out gross profit?

Revenue - costs

What is the formula to work out operating profit?

Gross profit - overheads

What is the formula to work out net profit?

Operating profit - interest - tax - exceptional items

What is the formula to work out profit margins?

Profit/revenue x 100

What is profitability?

Percentage profit generated from sales

What is a way to improve profitability?

Increase price

What is cash?

Money used in the daily expenses of the business

What is total equity?

Value of shareholder’s funds

What is liquidity?

Ability to turn assets into cash

What can cash also be known as?

Working capital

What is the most liquid asset in a business?

Cash

What is one of the least liquid assets in a business?

Buildings

What is the formula to work out the current ratio?

Current assets/current liabilities

If the current ratio is equal to 2, how many times can the business pay of current liabilities?

Twice

What happens if the current ratio is less than 1?

Unable to cover short term liabilities

What happens if the current ratio is above 4?

Business has too much money tied up in stock

What time frame does the current ratio measure?

12 months

What is the formula to work out acid test (quick ratio)?

Current assets - inventories (stock)/current liabilities

What time frame does the acid test (quick ratio) measure?

3 months

What is an internal, financial reason for business failure?

Poor liquidity

What is an internal, non-financial reason for business failure?

Poor communication

What is an external, financial reason for business failure?

Recession

What is an external, non-financial reason for business failure?

Supplier problems

What is the formula to work out working capital?

Current assets - current liabilities

What is job production?

One off items

What is an advantage of job production?

Motivated employees

What is a disadvantage of job production?

Individual cost of one item high

What is batch production?

Items are produced in groups

What is an advantage of batch production?

Can buy in bulk

What is a disadvantage of batch production?

Required to maintain higher stocks

What is flow production?

Goods are produced in large quantities on an assembly line

What is an advantage of flow production?

Capital intensive

What is a disadvantage of flow production?

Reliant on machinery

What is cell production?

Production split into multiple line which make one unit

What is an advantage of cell production?

Teamwork

What is a disadvantage of cell production?

Specialist skills usually needed

What is productivity?

Output per input over a period