business theme 2

• Sources of finance

  . Overdraft

  . Retained profit

  . Share capital

  . Bank loans

  . Venture capital
• Overdraft - allows a firm to spend even when they're out of money. Bank allows you to spend more money up to an agreed amount.

  - high overdraft fees due to high interest.
• Retained profit - profit can be distributed between shareholders or a proportion can be retained in the business to spend on growth and expansion.

  + no interest

  - taking money away from shareholders by investing back into the business. short term shareholders will not favour this.
• Share capital - bringing new owners into the business in return for a share of ownership.

  + large sums of money for expansion and growth

  + new owners can bring expertise, industry knowledge and experience

  - less control of organisation
• Bank loans

  + significant amount of money

  - repaid with interest
• Venture capital - involving business angels to invest in the business

  + bring a lot of expertise

  + venture capitalist loans

  - can be in return for ownership and a say in the business
• Capacity utilisation - actual output produced by a business in relation to its maximum possible output.

  Problems of under-capacity:

  . business is not utilising all its resources like labour, machinery and warehouse space. Inefficient.

  . increases unit cost of production as the firm is not producing enough to maximise capacity, profit is split over fixed costs.

  problems of close to capacity:

  . No flexibility - so if a new well established brand came with and order. The business would have to turn it down as they do not have enough capacity.
• How to increase capacity utilisation:

  . Marketing to generate demand and sales such as price reductions, promotions/offers and new distribution methods.

  . Rationalisation to downsize the business and bring down total capacity. Can be done by selling unused assets.

  
  

  How to cope with high capacity utilisation:

  . Outsource operations. This results in increased costs to pay firms but the firm can operate on a larger production level.

  . Reduce demand through higher prices, results in increased profit margins

  . long term expansion to increase maximum capacity
• Business failure is the failure of a business to achieve its objectives.
• Internal causes of business failure:

  . Liquidity problem - no longer has sufficient cash reserves so maybe cant pay suppliers or wages, cant purchase raw materials.

  . Lack of planning

  . insufficient start up capital - may not have enough funds to be a competitive business.

  . Poor leadership
• External causes of business failure:

  . Economic conditions - recessions where consumers disposable incomes drop or increase in interest rates.

  . Competitive factors - cant compete with large firms on price, quality or customer service.

  . Trends and fashions

  . Technology advancements
• Financial reasons for business failure:

  . poor cash flow management

  . Bankruptcy - assets become seized to cover debt

  
  

  Non-financial reasons:

  . poor planning

  . lack of skills
• quality management

  Importance of quality:

  . legal requirements

  . ethics

  . costs/efficiency

  . prices

  . Competitiveness

  . Branding and customer reputation

  Techniques to ensure quality:

  . Quality assurance - prevent defects

  . Quality control - identify defects

  . TQM - zero defects
• Current ratio = Current assets / Current liabilities x 100

  Assets:

  . cash

  . debtors

  . stock

  . receivables

  
  

  liabilities:

  . overdraft

  .payables

  . creditors
• Acid test ratio = (Current assets - stocks) / Current liabilities
• Job production

  + meet customer needs exactly

  + high quality

  + higher prices

  + motivational

  - very labour intensive

  - high cost due to skilled labour required
• Batch Production

  + potential for division of labour

  + greater output

  - less motivational

  - greater potential for defects

  - no longer bespoke products
• Mass production

  + high output/low cost

  + products are standardised

  + division of labour

  - standardised products may achieve a lower price

  - investment in production line

  - motivational issues
• Kaizen approach


  • The business is constantly continuously encouraging those within the organization to suggest their ideas about how the organization could be improved
  • Change and improvement is suggested by everybody in the organization, not just those at the top
• Benefits of Kaizen


  • Small frequent ongoing improvements to the organization might be easier to implement rather than making change annually
  • Improvements to the organisation end up being cheaper as the costs of changes are spread over the course of a year
  • Less resistance to change from employees as they become accustomed to changing how they work in small ways
  • Kaizen might be quite motivational as employees are empowered to suggest improvements
• Business plan

  + helps the owner clarify their business idea and the tasks that require completion

  + identifies potential problems

  + can be shown to investors and lenders

  - uncertainty

  - Lack of experience

  Key sections:

  . concept

  . objectives

  . finance

  . the market

  . forecasts

  . resources