Component 1

0.0(0)
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/645

flashcard set

Earn XP

Description and Tags

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

646 Terms

1
New cards

budget

a financial plan for the future that sets out targets for sales revenue and targets for expenditure (to cover costs)

2
New cards

5 purposes of budgets

- control of costs - avoid departments overspending
- monitoring of expenditure - expenditure can be monitored against budget
- motivation - can set clear sales/spending targets
- communication - can support the objectives of the business which is communicated to staff
- co-ordination - helps managers develop a view of the whole business and its projected profit/loss at the end of the year

3
New cards

5 limitations of budgets

- planned figures can be accurate - future is unpredictable
- costly and time consuming - opportunity costs
- conflict between managers - may feel that their budget is too low
- over-ambiguous targets - may occur which could be demotivating
- can be restrictive - opportunities cannot be acted on due to insufficient funds

4
New cards

3 factors that determine importance of budgets

- experience/skill of workers drawing up budget
- flexibility to take advantage of opportunities and deal with emergencies
- frequency of reviewal/updates to keep up with dynamic economy/market- experience/skill of workers drawing up budget
- flexibility to take advantage of opportunities and deal with emergencies
- frequency of reviewal/updates to keep up with dynamic economy/market

5
New cards

cash flow

the flow of money into and out of a business

6
New cards

3 sources of cash inflow

bank loans, cash sales, credit sales

7
New cards

3 examples of cash outflows

suppliers, bills, wages

8
New cards

cash flow forecast

a prediction of all expected cash flowing in and out of a business on a month-by-month basis for a period of time and the expected cash balance at the end of every month

9
New cards

cash flow deficit

cash outflows exceed inflows = negative cash flow

10
New cards

cash flow surplus

cash inflows exceed outflows = positive cash flow

11
New cards

net cash flow

total cash inflows minus total cash outflows

12
New cards

closing balance

opening balance + net cash flow

13
New cards

opening balance

the closing balance of the previous month ( or money invested into business for a new business)

14
New cards

3 causes of cash flow problems

- unexpected fall in demand - e.g. recession (decreases cash inflow)
- unforseen expenditure - e.g. unexpected machine breakdowns (increases cash outflow)
- overtrading - e.g. expanding too quickly with large outgoings with a delay before sales income (increases cash outflow)

15
New cards

3 methods of improving cash flow + evaluation of each

- improve revenue by increasing marketing to boost sales
pro: increases customer awareness
HIDO: finance available
- cutting costs to save money
pro: more finance available
HIDO: negative effects e.g. fall in quality
- finance the shortfall through borrowing e.g. arrange or extend overdraft
pro: short capital boost
HIDO: must be able to pay it back

16
New cards

3 advantages of cash flow forecasts

- give advance warning of cash flow shortages
- help to ensure there is always cash to pay expenses e.g. wages, suppliers
- help managers control the finance of business - prevents overspending

17
New cards

3 disadvantages of cash flow forecasts

- sales figures are often optimistic - demotivation if not reached
- costs are often underestimated, especially by new businesses
- events can occur that change the projected cash flow figures

18
New cards

how does cash flow differ from profit

cash flow is not the same as profit due to the timings of cash receipts/expenditure. eg a business may sell goods on credit - this immediately increases the profit figure for that financial period as a sale has been made but the cash will not flow into the business until later. Hence a profitable business may become bankrupt/insolvent due to cash flow problems

19
New cards

sources of finance

the options available to a business when seeking to raise funds to support future actions

20
New cards

one reason why a start-up business requires finance

raising sufficient capital to establish the business

21
New cards

one reason why an established business requires finance

to fund growth or implement a new stratergy eg relocation

22
New cards

internal sources of finance

from within the business

23
New cards

external sources of finance

from outside the business

24
New cards

bank loan

external. A banks lends money to a business on the provision that they make regular repayments over the agreed term, with a charge for interest.

25
New cards

advantage of bank loans

loans can be repaid over time making monthly repayments more manageable

26
New cards

disadvantage of bank loans

interest is charged which increases business costs

27
New cards

what is a bank loan used for

short term expenses (eg paying suppliers) and long term expenses (eg expansion)

28
New cards

type of business a bank loan is suitable for

all businesses, although new businesses, high-risk businesses and businesses that already have a lot of loans may struggle

29
New cards

share capital

external. Limited companies can sell shares to raise finance

30
New cards

advantage of share capital

large amounts of finance can be raised

31
New cards

disadvantage of share capital

selling of shares dilutes control of business

32
New cards

what is share capital used for

large expenditure eg expansion

33
New cards

type of business share capital is suitable for

limited companies - ltd/plc

34
New cards

venture capital

external. A cash rich investor provides a business with finance for an agreed share in the business

35
New cards

advantage of venture capital

venture capitalists often provide advice as well as finance as they are usually highly experienced

36
New cards

disadvantage of venture capital

some venture capitalists may demand a high share of ownership, reducing ownership share for the entrepreneur

37
New cards

what is venture capital used for

start-up, as well as expansion

38
New cards

type of business venture capital is suitable for

new entrepreneur, SMEs that are expanding

39
New cards

leasing

external. A business pays a monthly fee in return for the use of an asset

40
New cards

advantage of leasing

affordable option for businesses who cannot afford to buy the assets in one purchase

41
New cards

disadvantage of leasing

more expensive than buying in one purchase as the leasing company charge for spreading the cost overtime

42
New cards

what is leasing used for

renting fixed assets eg machinery, computers, vehicles

43
New cards

type of business leasing is suitable for

all, but established businesses find it easier to obtain

44
New cards

overdraft

external. Businesses can spend more money than they have in their current accounts

45
New cards

advantage of overdraft

enables a business to continue operating and paying bills

46
New cards

disadvantage of overdraft

high interest rate charges have to be paid and this increases costs (higher on overdrafts as unsecured borrowing)

47
New cards

what are overdrafts used for

day to day expenses eg paying suppliers, wages, energy suppliers

48
New cards

type of business overdraft is suitable for

all businesses, but established usinesses will be able to access larger overdrafts and arrange lower interest charges as lower risk

49
New cards

trade credit

external. A business receives goods from a supplier but pays for them later

50
New cards

advantage of trade credit

eases cash flow as a business has the chance to sell the goods before paying for them

51
New cards

disadvantage of trade credit

late payment incurs a penalty, increasing business costs

52
New cards

what is trade credit used for

buying stock eg raw materials

53
New cards

type of business trade credit is suitable for

all, but new firms may find it difficult to obtain as they are seen as too high risk

54
New cards

debt factoring

external. A business sells the debt that is owing to them to a factoring company, often owned by the main banks

55
New cards

advantage of debt factoring

cash immediately comes into the business from the sale of the debts thereby increasing any cash flow problems, the chasing of the debt then falls to the factoring company thereby removing this job from the business

56
New cards

disadvantage of debt factoring

a debt factoring company charges a fee for this service eg 20% of the debt so a business does not gain all of the debt owed to them

57
New cards

what is debt factoring used for

day to day expenditure eg paying bills/suppliers/wages

58
New cards

type of business debt factoring is suitable for

businesses struggling to pay their immediate bills (cash flow crisis) who have lots of debt owed to them. Often medium sized businesses

59
New cards

owner's capital

internal. Savings from owners' are invested into the business to use as finance

60
New cards

advantage of owner's capital

there is no charge involved in using these funds (no interest to pay)

61
New cards

disadvantage of owner's capital

likely to be a restricted amount

62
New cards

what is owner's capital used for

to pay for start up expenses, growth

63
New cards

type of business owner's capital is suitable for

sole trader

64
New cards

retained profit

internal. Business profit is saved over time and then is invested in the business

65
New cards

advantage of retained profit

there is no charge involved in using these funds (no interest to pay)

66
New cards

disadvantage of retained profit

once used, there is less left for emergency funds or to tide a copany over if there is a recession

67
New cards

what is retained profit used for

investment into R+D, expansion, new tecnology (long term)

68
New cards

type of business retained profit is suitable for

all types except new businesses, more likely for large, established businesses who are very profitable

69
New cards

sale of assets

internal. Business sell assets for cash, increasing finance for their own use. They typically sell assets that they are no longer using

70
New cards

advantage of selling assets

there is no charge involved in using these funds (no interest to pay)

71
New cards

disadvantage of selling assets

the business may have to accept a lower valuation of the asset if they need cash urgently

72
New cards

what is sale of assets used for

any purpose eg buying new, upgraded assets, settling debts

73
New cards

type of business sale of assets is suitable for

larger businesses that have valued assets to sell

74
New cards

income statement

a formal financial document that summarises a business's trading activities and expenses to show whether it has made a profit or a loss

75
New cards

high profit quality

source of profits from normal trading ie sales of core goods/services, therefore likely to be repeated next year

76
New cards

low profit quality

source of profits from other activities than sales eg selling of an asset, therefore unlikely to be repeated next year

77
New cards

3 ways of improving profit

increase price, improve quality, increase promotion

78
New cards

2 ways of reducing costs

- reducing cost of sales - source cheaper materials/components/stock, replace workers (involved directly in production/selling) with new machinery to reduce direct wages, relocate production to take advantage of cheaper direct labour
2. reducing expenses - move to cheaper premises (lower rent), source cheaper fuel/energy provider, offer lower salaries, lower marketing costs by finding cheaper alternative stratergies

79
New cards

owners' interest in profit and loss statement

to see how much return they are getting on their investment - drawings

80
New cards

emoloyees' interest in profit and loss statement

if the business has a long term future this will determine job security/wage negotiation (in larger firms)

81
New cards

suppleirs' interest in profit and loss statement

to see if the business is likely to continue being a customer

82
New cards

competitors' interest in profit and loss statement

for corporated businesses, competitors will be able to see financial accounts to get an understanding of trending activities

83
New cards

investors/shareholders' interest in profit and loss statement

indication of profitability of the firm and whether they will receive dividend payments and increase the value of their shares

84
New cards

government's interest in profit and loss statement

to calculate the tax liability of the firm

85
New cards

gross profit margin (GPM)

a type of profitability ratio that calculates gross profit as a proportion of sales revenue

86
New cards

formula for calculating GPM

gross profit / sales revenue x100

87
New cards

net profit margin (NPM)

a type of profitability ratio that calculates net profit as a proportion of sales revenue

88
New cards

formula for calculating NPM

net profit / sales revenue x100

89
New cards

profitability ratios are useful but on what 4 conditions

- they are compared over time to see trend emerging
- they are compared to competitors to see if a business's performance is as good as, if not better, than competitors
- data must be acted upon
- data must be accurate and reliable

90
New cards

managers' interest in profitability ratios

to see if the business is meeting targets to improve profitability, to see areas to focus on improving

91
New cards

stakeholders' interst in profitability ratios

to judge how profitable the business is and whether they should continue to hold shares/buy more

92
New cards

workers/trade union's interest in profitability ratios

to judge whether jobs are secure/whether pay rise could be demanded

93
New cards

operations management

the aspects of the business which are directly linked to the fulfilment of customer orfers. Takes inputs, processes them to form an output and distributes to the customer.

94
New cards

chain of production

the various stages, from raw materials to finished product, that the goods pass through before they are sold to a consumer. Links all three sectors together and relies on their interdependence.

95
New cards

primary sector

involves extraction of raw materials

96
New cards

secondary sector

involves the manufacturing of goods

97
New cards

tertiary sector

involves the selling of finished goods/provision of services

98
New cards

added value

the difference between the cost of inputs and the price consumers are willing to pay for the finished goods

99
New cards

2 reasons why added value may be important

- to pay wages
- can allow a business to charge a premium price and hence increase their profit margin

100
New cards

added value formula

final price - cost of materials