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Terms in this set (285)
Advantages of a PARTNERSHIP:
-Not full responsibility
Disadvantages of a PARTNERSHIP:
-Could owe your partner's debt
Advantages of being a SOLE TRADER:
-Earn all profits
Disadvantages of being a SOLE TRADER:
-(Not on the stock market)
-Banks don't like to lend them money
Advantage of being a FRANCHISE:
-Easier to grow this way
Disadvantage of being a FRANCHISE:
-Possibility of having bad franchisees
Advantages of being a LIMITED LIABILITY COMPANY:
-Available to put yourself on the stock market
-Owned by shareholders
-Legal tax differences
Disadvantages of being a LIMITED LIABILITY COMPANY:
-Possible role confusion
What is the difference between a PLC and an Ltd?
PLC: publicly shares stocks;
has to post annual reports
Ltd: privately shares stocks
does something for you // non-physical products
it is something for you (e.g. Merchandise) // physical products
supplies inventories to someone/ a company
relying on a supplier
a company run by the government to provide a quality service or because they government will help reduce the company's costs
a company run by private individuals or groups
production; involves acquiring raw materials
production; this is the manufacturing and assembly process (oil to plastic, raw materials to components)
production; refers to commercial services (insurance, transport, advertising, warehousing, teaching, health...)
where buyers and sellers meet to trader products
a new firm operating in a market for the first time
the person who buy it (parent)
the person who uses/d the product (student)
When does a business add value?
when their revenue is greater than their production costs
The production process:
Input (raw materials) --> Production --> Output
money going into a business
the skill involved in wanting to start a business
the individual who sets up their own business
Satisfaction comes from...
setting up a successful business and being independent
How to earn profits:
by selling items at a price that covers more than the price of production
What is 'making a difference':
by offering a service a service to community such as a charity, shop or hospital
-a report by a new or existing business that contains all of its research findings and explain why the firm hopes to succeed
-includes the results of market research and competitor analysis
Look out for competition:
-Most small businesses have very limited resources; research seems like a poor use of time. Some entrepreneurs ignore planning and analysis and instead rely on their gut instincts.
-If losses are being made/ too great, a business may close.
-They launch products they believe customers want and competitors cannot match.
-Poor planning is a major cause in business failure.
anyone who has an interest in business or is affected by a business
initial public offer (first shares/ time on the stock market)
the process of a company 'going public'.
-Vague outline of objectives
-Defines a company
-Outlines their reputation
Time - oriented
Aims and Objectives:
-More short term
-Goals and targets they want to achieve
E.g. Profit, growth, survival, marketshare
-The way in which aims and objective will be met.
Factor of production: Land
-Location and why?
-Close to necessary raw materials
-Close to target market
Factor of production: Labour
-Highly skilled or low skilled workers preferred?
-What type of workers?
-Good human resources
Factor of production: Capital
-Tools, machinery, and equipment which a business uses
-Capital intensive means it a business uses/ relies on a lot of capital
-The money owners use to set up a business
Factor of production: Enterprise
-Develops a business idea
-Organizes the other three factors
-Take financial risks
Business LOCATION FACTORS:
-Skilled labour force
----are there sufficient numbers of local staff?
----are there people willing to accept your wages?
----needs access to a staff with relevant skills
----are you labour intensive companies prefer to look to areas of traditionally low wages
-----support serials (are there services offering specialist advice training and support?)
----does the company sell using a sales force? rent equipment? how far away from the equipment?
----how close does the business need to be to transport facilities if the business delivers?
----how far from ports if relies on importation and exportation? how much will the transport be to the port?
----information technology: languages geared forwards a market on website? ; most start-ups that can quickly establish a reliable broadband
----where is factory land and machinery cheaper? (manufacturers especially)
----where tech is located (internet)? (especially online companies)
(encourages growth and start-ups)
----regional development agencies (focus government investments in target regions and industries)
----assisted areas (benefit from grants? benefit from low cost loans?)
----raw materials (costs will be lower if closer to needed resources // more important generally for manufacturing businesses vs. service businesses)
----easy access for transport?
----where are people located/ living?
----where is your main market is?
----where is you competition?
----is your location convenient?
Quantitive factors: (numbers)
FIXED costs: fixed
-cost of location and utility bills
-availability of government grants
-costs of employing managerial staff
NOT FIXED costs: variable costs
-costs of local materials
-wage levels in the area
Qualitative factors: (not numbers)
-working environment of the area
-ease of access for staff
-quality of infrastructure
-quality of labour available
-planning laws rules and restrictions
-nearness of competition
involves the changing of the levels of taxation and government spending to adjust the level of demand in the economy.
increase ---- increase in taxes for the government but general fall in spending
involves the government adjusting the money supply to control the demand in the economy, often meaning the interest rates are changed.
increase ---- consumers and firms will borrow less so the demand in the economy will fall
Government benefits of fiscal policies:
-to help achieve their aims
--creating more jobs
Business benefits of fiscal policies:
--there would be more demand from more people who now have more money to spend
High interest rates are bad for businesses because...
-costs rise ---> reducing profits
-discourages the purchase of capital goods ---> funded by borrowing
-people have less to spend due to mortgage/ interest rates increasing
-demand for goods decrease because it is dearer
--lowering entrance barriers
--stop restricting consumer choices
--stop rising prices
--stop firms colluding
--introduce anti-competitive legislation
--lower barriers to entry
--encourage the growth of small firms
-health and safety
--provide a safe and healthy workplace
--protect people's rights at work
--healthy and safe workplace
--stop wasting resources
--stop traffic congestion
--stop the destruction of wildlife habitats
The business cycle
It is easier to judge success:
owners setting objectives/ targets is the easiest (easy) way to judge success because when a company achieves their objectives/ targets, we can judge them to be successful (depending on what they achieve though).
Judging success in a public sector:
-examination results in schools
-the punctuality and reliability of public transport systems
-the response time of emergency services
-the amount of waste sent to recycling units
Businesses fail because...
--the people running the business may not have the necessary skills
--run out of cash
--a sharp fall in sales
(a business goes into) Administration:
an independent group of specialists is appointed to try an run a failing business to try and save it.
a sale, generally, to try and sell off remaining products; if the/ a business cannot be saved it might go into liquidation meaning the business will be closed down and all of its assets are sold off. Any cash raised from the sale of assets is then distributed among the firm's creditors.
requirements for human survival
Non-profit (making) organizations try to...
-need to raise money
-try to minimize costs
-meet the need and wants of their members, or those which they aim to support.
making as much profit in a given time period
the amount of resources available is limited
where two or more companies share the cost, responsibility and profits from a business venture.
a business organization which has a separate legal identity from that of its owners.
a market for shares (in PLCs).
advertises the company to potential investors
invites ^^them to buy shares before a flotation.
the growing integration of the world's economies
a large business with markets and production facilities in several different countries.
Repatriation (of profit):
where a multinational returns the profits from an overseas venture to the country where it is based.
"an undertaking involving uncertainty as to the outcome, especially a risky or dangerous one: a mountain-climbing venture.
2. a business enterprise or speculation in which something is risked in the hope of profit; a commercial or other speculation: Their newest venture allows you to order their products online."
areas that are designated by the UK or EU as having economic problems and are eligible for support in a variety of terms.
areas of land, usually in the outskirts of towns and cities, where businesses develop for the first time.
areas of land which were once used for urban development.
measures used by the government to attract businesses to 'depressed' areas.
when people are out of work and cannot find a job.
an increase in income, output and expenditure over a period of time.
a rise in the general price level.
ideas, in business, about what is morally right or wrong.
groups of people without political power who seek to influence decision makers in politics, society and businesses.
the idea that people should satisfy their basic needs and enjoy improved living standards without compromising the quality of life of future generations.
Anti-competitive practices or restrictive trade practices:
an attempt by firms to prevent or restrict competition.
Barriers to entry:
obstacles that make it difficult for new firms to enter a market.
where ones business dominates the whole market.
Functions of a Business
- Finance Department
- Marketing Department
- Production Department
Directors (Chief Officers : CEO, CFO, CMO)
- appointed by the chairperson (owner)
- have authority over everyone in their department
- shareholders who invest in the company can affect who is appointed
- responsible for planning, controlling, and organizing in their department
- role is to achieve the objectives (made clear in the mission statement by the directors) of the owners
- lead teams and are directly accountable to their department director
- monitor work of a particular area (production lines)
- are responsible for operatives and general workers
- sometimes do some managerial duties
- skilled workers (with machinery)
- involved in the production process
- directly accountable to supervisors; accountable to managers
- have more/higher status than general workers
- unskilled workers
- trained to preform a specific job role
- have no authority (at the bottom of the heirarchy)
- skilled and highly trained
- usually lawyers, accountants, doctors, etc.
- they may be on different levels of the organizational chart depending on the company
The levels of organization
shows the number of levels in management and supervision within a business
The span of control
is the number of subordinates that a manager or supervisor are in control of
Wide span of control
if a manager has many subordinates
Narrow span of control
if a manager has few subordinates
Chain of command
route which orders are passed; a long chain of command-route would follow a narrow span of control
- internal structure of a business
- shows how employees communicate through subordinates
- small businesses don't need a formal structure; the don't have as many employees, they already know everyone's role
show us :
- the levels of hierarchy and the span of control
- the routes of communication within a business
- who has authority/power over who
- the roles and job titles of employees
- who people are responsible and accountable for
who they are below and take orders from
who they are above and enforce orders to
How large is the managing director's span of control?
answer with : The ... director has 2 direct subordinates who are : ... and ... .
Departmental functions of the HR department: (9)
~Conditions and terms of service
What does an organization chart show us?
~routes of communication in a business
~chain of command
~who has authority/ power
~the roles and titles within a business
~who is accountable/ responsible for who
What is a formal organization?
~internal structure of a business
~shows chain of command
~shows how employees communicate with each other
~because bigger businesses (might) need to split into functions, departments of global entities
Why don't small organizations have a formal organizational structure?
because in a small business everyone will know who's job is who's as there are not as many employees.
-->to pass messages from higher up
-->enforcing new objectives
-->subordinates look to managers for leadership
-->decisions made by management carried out by employees
-->managers command, control and organize
-->helps managers understand the needs and views of the subordinates
-->alert managers to problems
-->staff feel valued
-->helps managers make decisions
-->used in a professional setting
-->words correctly pronounced
-->usually used with friends and family
-->could contain shortened versions of words
-->could contain slang words
-->communication between members of staff from within the business
-->communication between a member of staff and someone from outside the business
Types of COMMUNICATION BARRIERS: (6)
-->Poor communication skills
-->Chain of command
-->Different countries and cultures
how are UNCLEAR MESSAGES communication barriers?
messages might be misinterpreted
how is TECHNOLOGY a communication barrier?
-->faulty technology can disrupt you (e.g. no wifi)
-->some people might not be able use technology
how POOR COMMUNICATION SKILLS communication barriers?
sometimes people 'switch off' / don't listen; people have (maybe) poor grammar and spelling meaning there are possible communication barriers
how is JARGON a communication barrier?
terminology might not be understood by the receiver (e.g. discussing IGCSE to an American).
how might CHAIN OF COMMAND be a communication barrier?
-->the longer, the slower
-->messages might be lost
how are DIFFERENT COUNTRIES AND CULTURES communication barriers?
language and culture barriers
Communicating through writing
Recruiting employees from within the business.
Recruiting employees from outside of the business.
Communicating with people on the same level of hierarchy as you.
Examples of face-to-face communication:
-->talking to a coworker about an assignment as a form of horizontal communication
-->meeting with a client
-->meeting with coworkers
-->to give feedback
Examples of written communication:
-->letter to complain
-->a letter to inform workers formally
-->a letter to a client/ from a client
-->to give reviews
Examples of electronic communication:
-->(in)formal email to a coworker
-->email to a client/ from a client
-->to give reviews
Job Offers should include:
1. Identify the Vacancy
2. Write the Job Description and the Person Specification
4. Evaluate applicants + short list
5. Interview applicants short listed
6. Select candidate(s) + offer contract
7. Give feedback to unsuccessful candidates
wrongfully favoring one person or group over another. For example, an employer might discriminate against a person's disabilities, race, religion etc.
Why TRAIN employees? (8)
-introduce new employees to the firm
-to use, maintain, repair new technology
-to upgrade out-of-date skills
-to improve health and safety
-to help staff development
-to help workers change jobs by retraining
-to improve the efficiency of the firm.
an introduction for new employees explaining the firm's activities and procedures. It introduces new employees to the firm, the workplace, fellow employees and the job.
Induction Training Advantages:
---> They are given information on:
->Health and Safety rules and regulations
->Layout and facilities of a workplace
->Key personnel, bosses and colleagues
->The company, its products and its operations
--->It allows the firm to find out more about its new employees
Induction Training Disadvantages:
--->expensive if external trainers are hired e.g. health and safety training with an external medic or doctor
--->no actual 'doing the job' involved
being shown what to do by a more experienced worker. It takes place within the firm and a trainee learns by doing. An experienced worker shows the trainee what to do and checks progress; like an apprenticeship.
Mostly smaller businesses rely on this but bigger businesses use it too.
On-the-job Training Advantages:
->slight increase of the 'output'/ production
->cheapest form of training
On-the-job Training Disadvantages:
->the trainees (can) produce a lot of waste
->expensive specialist trainers might be used to improve instruction
being trained away from the workplace, usually by specialist trainers. Training centers or specialist providers (colleges) may be provided.
Off-the-job Training Advantages:
->training can gain external awards or qualifications
->trainees will return with new skills and/or knowledge
Off-the-job Training Disadvantages:
->better qualifications to lead to employees leaving for new external promotion opportunities
->no 'output' is gained
->trainer might not know the trainee's company's culture
->can be very expensive
Benefits of Highly Motivated Workers: (8)
->more output/ higher production
->higher quality products
->better/ more pleasant work environment with happier workers
->more efficient workers
->lowers staff/ labour turnover
MASLOW's hierarchy of needs:
HERZBERG's two factor theory:
Why do people work?
Physiological reasons (especially money...)
Financial Motivators: (6)
Wages + Salaries
Performance Related Pay
Payment based on the sales each worker produces
-->can make employees more pushy which could decrease customer satisfaction
e.g. car sales/ relators
the giving, or selling at a cheap rate, of shares to employees; mostly for employees higher on the levels of hierarchy, like directors
-->can lead to short-termism
-->'fat cat' pay when the workers deserve more
-->share options offered to senior management to ensure they perform
provides staff with a share of the firm's annual profits
-->can be substantial additional to a basic salary
-->not linked to individual performance
-->motivates employees to want the company to do well, therefore, they will work harder
-->puts staff in same position as share holders
Performance Related Pay:
a bonus or salary increase usually awarded for above average employee performance.
-->link between pay + effort
-->less supervision needed
-->reduced labour turnover
-->can lead to conflict
-->how can you measure performance?
workers who are paid a weekly wage get a set rate of so many pounds/ dollars per hours
-->workers normally work a fixed working week of 40 hours
-->typically lower skilled workers
-->wages based off input (hours) not output (productivity)
these are paid monthly and workers get so many thousands of pounds a years
-->isn't directly related to the number of hours worked
-->typically higher skilled workers
payment based on the number of items each workers produces
-->difficult to implement change that may slow production and affect piece rate
-->can incentivize workers
-->could lead to rushing/ lower qualities
Non-Financial Motivators: (6)
Job enlargement/ job rotation
benefits that the company gives its employees
e.g.s--> use of company's facilities like a gym
-->free counseling service
-->discount when buying the employer's product
-->free or subsidized accommodations
-->free private health insurance
-->employee pension contributions
-->many benefits help provide protection and security for workers and their families. This might improve worker/ job satisfaction.
-->productivity may improve like: less staff absence and workers may be healthier at a gym
-->some benefits help to attract and retain better qualified employees for a business.
-->some fringe benefits are performance related which will help motivate staff
Job enlargement/ job rotation:
allow workers to change jobs from time to time.
gives workers more variety and help to avoid boredom.
broadens skill set.
amplifying the difficulty or responsibility of tasks an employee is given.
-->developing such skills and challenges should make work more interesting
-->employees may be given more opportunities to develop skills
e.g. given important/ big clients
This involves diving the workforce into smaller groups. Each team will focus on a focus on a particular area of production and ten members will have the same common aims.
This can be rewarding for workers because they can form bonds and develop friends more easily.
If someone has done a good job, it is important to show appreciation and praise them. If said sincerely, this can be uplifting for an employee.
A business can reward workers if there is a clear route to the top. The chance of promotion at work will help to motivate workers. Many people want to develop a career at work. This means they want to improve their skills, learn new ones and try to get a promotion.
Legislations for Employees' Protection: (5)
Contract of Employment
Health and Safety at work
Contract of Employment:
A legally binding written agreement between the employer and the employe entitling each's obligations.
Contains details like:
-Terms of employment
-Job title and duties
-Place + hours of work
-Pay + holiday entitlement
-Pension + sickness absence
-Dismissal + grievance procedures
Choosing one person over another based on prejudices such as, race, religion, sexual orientation etc.
How can businesses offer if they discriminate?
-be involved in expensive legal battle
-fail to recruit or promote the best staff for the post/ promotion
-demotivate certain sections of the workforce
-create unnecessary tension or conflict between employees
when workers are dismissed unfairly from the workplace.
e.g. if: -->workers join a trade union
-->try to exercise their legal rights
If an EMPLOYEE TRIBUNAL find out that a worker has been unfairly
Health and Safety at Work:
In many occupations, the workplace can be a dangerous environment. Because of the danger to employees in all businesses, government aim to protect works by passing legislations to provide a safe and healthy workplace.
Examples of Health and Safety at Work:
~providing and maintaining adequate safety equipment and protective clothing like fire extinguishers, protective overalls, hard hats, ear plugs and safety googles.
~ensuring workers have enough space to their jobs
~guaranteeing a hygienic environment with adequate toilet and washing facilities
~maintaining workplace temperatures and reasonable noise levels
~providing protection from hazardous substances
a range of employment legislation gives workers other rights.
e.g. ~maternity and paternity leave
~sickness pay during illness
~a legal minimum wage
~the right to join a legal trade union
~an explanation of the rules of conduct and what will happen if they are broken
~a limit to the number of hours worked during a work week
Why do companies need finance? (4)
For startup capital: new businesses need to buy capital
Working capital: petty cash/ day to day running of the business
take money from someone and pay it back with interest
Short term finances:
Short-term bank loans
a portion of the profits that the company keeps after paying out corporate tax (government) and dividends (shareholders). Profits kept are reinvested into the business. (means fewer dividends paid?)
Sale of Assets:
may sell unused assets or assets a business doesn't need.
Managing working capital more efficiently/ effectively:
like reducing assets or reducing credit sales
Internal Sources of Finance Advantages:
this capital has no direct cost to the business; however, there may be an opportunity costs.
Acquiring finance for a short time from an outside source.
As and when a company needs it, they can overdraw its account on a day-to-day basis at a bank. This is a flexible short-term way for a business to borrow money up to an agreed amount.
the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit.
suppliers provide goods/ services or provide credit to the purchaser. The company will lose quick-payment discounts, supplier confidence if the company takes too long to pay. Companies are given/ provided goods/ services and the company pays the provider later. This depends on the relationship with a supplier.
selling off what someone owes you (a debt) to a company for less than you are owed. This means you are selling debt someone owes you to another company so you get the money at that point.
Medium-term bank loans
acquiring finance medium-term (1-5 years typically) from an outside source. This is not cheap but it is good for short-term cash.
when an asset is sold to a company which agrees to pay fixed payments over an agreed-upon time (assets belong to the company).
is using equipment/ vehicles and paying a rental/ leasing charge over a fixed period. There is no need to raise long-term capital to buy the asset (the asset belongs to the leasing company).
Medium-term bank loans:
acquiring medium-term bank loans (1-5 years)
Long-term bank loans
acquiring finance long-term finance (5+ years)
Long-term bank loans:
repaid in at least a year, either a fixed or variable interest rate. Fixed allows financial planning but it may be expensive. Collateral (for security) probably required. Harder to get a loan if the business is relatively new meaning they may have to pay a higher interest rate.
Loans that a business can give to stakeholders. They are long term bonds (approximately 25 years) issued to raise finances, usually with a fixed interest rate. May be sold to get original back. Usually not "secure" if attached to an asset. Business may turn the debenture into stock; this would eliminate ever repaying the loan (offer in shares rather).
Short-term bank loans:
acquiring short-term bank loans (1 year)
selling shares to one big investor
Sale of Shares:
private and public companies may sell shares of stock, up to an agreed-upon amount. Only repay the capital if the company dissolves. Private limited companies can sell shares to existing shareholders (rights issue). By not "going public, "money is saved on advertising/promotion. Also, short-term effect is often reduction of existing share price... Possible loss of shareholder confidence. The risk of selling shares publicly is an outsider take over.
date today expenditures/money to keep the business going.
The amount of capital raise from loans in relation to the sale of shares.
more reliant on equity for their capital.
more reliant on loans for their capital.
Deed of Partnership:
A document containing an agreement that details the rights and obligations of each partner participating in a venture. For example, a deed of partnership could specify how proceeds from the partnership's business are to be divided among the partners.
What is cash flow used for?
it is used to predict how cash will flow through a business over a period of time in the future.
a business mush always make sure there is cash available.
money received from customers and other sources
e.g. sale of products
capital from the owners
Cash flow diagram:
Inflows --> Business --> Outflows
money paid to suppliers
e.g. payment to suppliers
wages and salaries
rent and rates
Causes of Cash-Flow problems: (3)
--> amount of cash (start up needs cash to tie them over until revenue comes in)
--> time delay converting inputs into outputs (bakers will do this in a day (they have liquid assets) but house builders may take 6+ months)
--> Credit payments (if favorable from suppliers, this will ease problems, unless you need to give customer credit incentives (lowering interest e.g.))
Cash flow forecast:
forecast of inflows and outflows of cash in a business
Closing balance of Jan.=
Opening balance of Feb.
Net cash flow=
inflows - outflows
opening balance + net cash flow
Advantages of Cash Flow Forecasts:
--> help when planning the business
--> monitoring cash flow
--> identifying cash shortages
--> supporting applications for funding
Disadvantages of Cash Flow Forecasts:
--> unexpected costs are not planned; only a forecast so sales may not turn out
--> takes time and labor to do
the flow of money into and out of a business.
an asset which is easily changed into cash.
Net cash flow:
the difference between cash flowing in and the cash flowing out of a business in a given time period.
Profit and loss accounts:
calculates the profits and losses made by a business in the last 12 months.
sales revenue - cost of sales = gross profit
gross profit - expenses = net profit
sales revenue - cost of sales
sales revenue - cost of sales = gross profit
gross profit - expenses
profit after tax
Cost of goods sold=
opening stock + purchases - closing stock
a record of a business' assets and liabilities over one day.
anything the company/ business owns
anything the company/ business owes
top half of the balance sheet:
--> shows what the business has done with its money // the net assets
bottom half of the balance sheet:
--> shows where all the money of the business has come from
(typically from shareholders, retained profits etc. which is called capital employed (or closed capital))
Fixed assets (non-current assets):
assets owned by a business which is used over a long period of time; they cannot be turned into cash in under one year.
e.g. buildings and machinery
assets owned by a business which is used over a short period of time; they can be turned into cash in under one year.
e.g. stock/ inventory and debtors
this is the money that a business owes in a short term period; they have to pay them back within a year.
e.g. creditors and overdraft
Fixed/ Long term liabilities:
this is the money that a business owes over a long term period; they to pay them back after a year.
e.g. long term liabilities
all assets - all liabilities
Net current assets=
current assets - current liabilities
tell us how healthy the business is in the short term and if the working capital is sufficient enough to fund the business
current assets / current liabilities =
x : 1
What is a good current ratio?
1.5 to 2 : 1
How to improve the current ratio/ get more cash into the business:
--> sell under used non current assets
--> raising more share capital
--> increase long term borrowing
--> postpone planned investments
Acid test ratio (quick ratio):
the ratio looks at comparing assets with liabilities with removing stocks.
Acid test ratio (quick ratio)=
current assets - inventories / current liabilities
x : 1
What is a good acid test ratio?
1 to 1.5 : 1
Why do we use acid test ratio?
--> Stock is the least liquid asset of the business. It can take a long time to convert inventories (stock) into cash.
--> It can 'depreciate' if sold as a second hand product rather than 'produced' into a final product.
If you are more liquid compared to another company, you have...?
an overall higher current ratio and acid test ratio
ROCE (return on capital employed) % =
net profit or sometimes profit before interest and tax / long-term capital employed
assesses the firm's liquidity by dividing current assets by current liabilities.
Gross-profit margin/ mark-up % =
gross profit / turnover
Net-profit margin % =
net profit / turnover
a numerical approach to investigating accounts by comparing two related figures.
Return on capital employed (ROCE):
the profit of a business as a percentage of the total amount of money used to generate it.
a portion of the profits are kept by the company after paying out corporate tax (government) and dividends (shareholders). Profits are kept to reinvest in the business.
Sale of assets:
may sell unused assets/ assets the don't need for more sources of finance.
Managing working capital more efficiently and effectively:
reduce assets or reduce credit sales.
Sources of finance- internal advantages:
this capital has no direct cost to the business, however, there may be opportunity costs.
acquiring finance for a short time from an outside source
as and when a company needs it, they can overdraw its account on a day-to-day basis at a bank.
It's a flexible short-term way for a business to borrow money up to an agreed amount.
credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit.
selling off what someone owes you (a debt) to a company for less than you are owed. The company selling the debt, will get you the finance at that point.
acquiring finance for a medium amount of time from an outside source. Not cheap; good for short-term cash flow (1-5 years).
when an asset is sold to a company which agrees to pay fixed repayments over an agreed-upon time (assets belong to the company).
Using equipment/ vehicles and paying a rental/ leasing charge over a fixed period (assets belong to leasing company).
Debt finance increases company's liability (5+ years)
long term bonds (approximately 25 years) issued to raise finance, usually with fixed interest rate. It's a loan that a business can give to stakeholders. They may turn the debenture into stock.
Selling shares to one big investor
Sale of shares:
Public and private companies may sell shares of stock, up to agreed-upon amounts. Only repay the capital if the company dissolves.
costs that have to payed regardless of how many products are made. Costs are fixed. E.g. Utilities, rent/ mortgage, salaries, taxes, insurance.
Costs that are payed based off of how many products are made; costs rely on different variables. E.g. Ingredients, wages p/h, raw materials.
revenue/income - costs
margin of safety x contribution
selling price x quantity sold
variable costs + fixed costs
Average cost p/u=
total costs / amount produced
Economies of scale:
as companies increase their quantity produced, they are spreading their fixed costs over more units, therefore making their average costs p/u less.
The contribution (per unit):
how much each product contributes to paying off the fixed costs
The contribution (per unit)=
selling price p/u - variable cost p/u
fixed costs / contribution
how many need to be produced to break even
Margin of safety=
maximum output - break-even point
Margin of safety:
the amount of output available to be sold above the break-even point where the business makes a profit.
a plan that shows how much money a business expects to spend or receive in a specified period.
What are the 4 advantages of a budget?
Control + monitoring
Advantages of budgets: efficiency
Budgets often mean that budget holders have to justify expenditure.
Advantages of budgets: reducing fraud
Budgets can help reduce fraud in a business. No one can spend money without budget holder's permission.
Advantages of budgets: control + monitoring
Managers can keep control of a business by setting objectives and targets. They are represented by budgets
Advantages of budgets: motivation
It provides workers with targets and standards which are motivators.
Can show the quantities of output a business plans to sell.
Controls costs allocated to the marketing department. The budget could show how the marketing department for a business plans to spend money on staff advertising, the company website and other marketing examples.
Used to plan production levels for a specified future period and budgets how much money can be spent on production.
The funds left over to meet day-to-day expenses after current debts have been paid. It is calculated by assets minus current liabilities.
The working capital cycle:
The flow of liquid resources into and out of a business.
difference between budgeted and actual