EDEXCEL A LEVEL BUSINESS

EDEXCEL A LEVEL BUSINESS
THEME 2: MANAGING BUSINESS ACTIVITIES V2. In no way endorsed by Pearson Edexcel. Bear © Edexcel Lee Murphy © 2015, adapted for new 2016 Specification © Via TES. Illustrations and other materials of which have not been designed or written by myself, are sources at the bottom of each page. Please reference. Information and statistics correct at the time published. Revision guide only. This is in no way endorsed by Pearson nor Edexcel.

Topic 1 © L Murphy 2015 Raising Finance

Internal & External Finance
Chapter 1 Internal & External Finance

Key Words Start-up Costs – the one-off costs involved when starting up a new business Fixed Costs – Costs that don’t change on level of output (E.g. Utility Bills, Rent) Variable Costs – Costs that change on level of output (E.g. Raw materials, Delivery) Investment – Spending money now to generate income in the future Capital Spending – When a business invests into fixed assets or something long term in the business Assets – Something the business owns (E.g. machinery)

Reasons for Finance There are 4 main reasons why finance is required within a business: Start-up - When a business starts up, they will have to purchase everything they need to launch Cash flow – general monthly payments Renewal – replacement machinery etc Expansion – refurbish the premise, enter new markets, rebranding etc.

Sources of finance – (where to get money from)
Internal Personal Savings Business Savings External Family and Friends Banks Peer to peer funding Business Angels Crowd funding Other Businesses

Methods of finance – (type of funding)
Internal Owners Capital Retained Profits Sale of Assets External Loans (bank loans, mortgages, debentures) Share Capital (ordinary shares, preference shares, deferred shares) Venture Capital Overdrafts Leasing Trade Credit Grants

Who provides what? Internal Sources External Sources and methods
Retained Profit Sale of Assets Owner’s Capital Friends & Family - Share Capital (x3), Investment, Personal Loans Loans - Bank Loans, Mortgages and Overdrafts Peer to Peer Funding - Loans Business Angels – Investment, Share Capital Crowd Funding – Loans Venture Capitalist - Venture Capital Other Businesses Trade Credit Grants Debenture

Internal sources Retained Profit – Profit that can be invested into the business rather than being given to the owner. It doesn’t incur interest payments or dilute ownership. Long Term. Sale of Assets – Physical assets such as machinery or property, or intangible assets such as a patent can be all be sold to use as finance. Long Term. Owner’s Capital – Personal savings/ money invested into the business by the owner.

External sources Loans – A fixed amount of money borrowed from a Loan organisation or the bank. Paid back with interest in agreed instalments. Medium - Long Term. Overdraft – Using more money that you own in the bank that is paid back with interest. Short term. Trade Credit – Where suppliers allow a time period before payment is made. The period will vary. Medium - Long term. Grants – A grant is given to a business by the government, it doesn’t have to be paid back. Long Term. Venture Capital – Money invested into the business who also offer support and finance in exchange for a share in profits (Equity). Long Term. Mortgage – Like a loan; paying for your property over a period of time. Long Term. Debenture – Selling your debts in the same way as shares with a fixed interest rate. They don’t have ownership in the business but is less risky for the investor. Long Term. Share Capital – Money raised by selling shares in the business (Incorporated businesses only). Long Term Investment – Investing in new technologies or products can generate finance in the long term. Friends & Family – Money can be borrowed by friends and family. Long Term Peer to Peer funding – Long term source leant by other businesses to the firm. The lender will have no prior knowledge of the firm that it is lending to. It is all done via the internet. Crowd Funding – Where a group of people or business donate money via the internet to another business.

Which is best? Bank overdrafts, grants and trade credit tend to be used for working capital/ operating costs like salaries, bills etc. Venture capital, loans, leasing, owners capital, retained profit, shareholders funds are used to finance assets and long term developments.

Choosing a Source and Type of Finance
Note - The importance of different sources varies depending on specific factors; Legal status of the business e.g. PLC / LTD sell shares, Sole Traders & Partnerships rely on personal finance Use of the finance – what is the finance being used for? Equipment, to cover a hold up in a payment? In the long term or short term. The amount required – the larger the sum the less likely that the owner can generate it thus external chosen The firms profit levels/ financial position of the firm – firms with large collateral will be able to raise large amounts internally The level of risk/ cost to the business – if deemed risky will find it harder to attract loans/ how will it impact on costs. Views of Owners – may be reluctant to lose control e.g. family business

Chapter 2 Liability & Planning

Keywords Forecasts – Estimating future cash flow, sales revenues, costs and profits. Cash-Flow Forecast – A prediction of cash going in and out of a business during a period of time. The closing balance highlights the cash flow to the firm. It can be negative or positive. Negative Cash Flow – Means that cash is flowing out of the business faster than coming into the business. Positive Cash Flow – Means that inflows are higher than outflows during a period of time. Capital – The money that is invested into the business. Cash Flow Statement – Shows the exact inflow and outflow figure during that period of time. It is used to predict the cash flow forecast. Net Cash Flow = Cash Inflows – Cash outflows Opening Balance = Last month’s closing balance Closing Balance = Opening Balance + Net cash flow

Limited or unlimited liability?
Sole traders & Partnerships have unlimited liability which means that both their personal assets and business assets are at risk of being taken to pay off debts. Private Limited & Public Limited companies have limited liability which means that their personal and business assets are separate and personal assets cannot be taken to pay off debts.

Forecasting Sales and Cash Flow
Businesses need to plan ahead and be conscious of payments vs revenue. We know that if costs are higher than revenue then the business will have negative cash flow and could eventually start making a loss A cash flow forecast is a prediction of the flow of cash in and out, usually forecast for 6 or 12 months – it doesn’t have to start at January remember! It can help a business to identify how they can make profit as there are many factors which can effect cash flow from the economy to the production process Outflows could be: Purchases Rent & Utilities Inflows could be: Sales Revenue Capital Loans & Grants

Cash flow forecasts and statements
A cash flow forecast is a financial document that predicts what the firms inflows and outflows will be over a period of time. A cash flow statement is a financial document that shows the exact amounts of a firms inflows and outflows over a period of time.

Cash Flow Forecasts Jan. £ Feb. £ Mar. £
Add up the inflows to give you the total amount expected to be ‘coming into’ the business = TOTAL INFLOWS Cash Flow Forecasts Jan. £ Feb. £ Mar. £ Inflows Loan Sales revenue Total inflows 500 1000 400 Outflows Wages Transport Loan repayment Marketing Total outflows 200 75 50 325 175 100 Opening balance Net cashflow Closing balance Add up the outflows to give you the total amount likely to be spent = TOTAL OUTFLOWS Total inflows minus total outflows = NET CASH FLOW Opening balance + net cash flow = CLOSING BALANCE Closing balance = OPENING BALANCE for the next month

Golden Rules of Cashflow Forecasting
Money is only recorded when cash changes hands i.e. either actually comes into or goes out of the business. It tells us nothing about profit. A profitable business can have positive cash Flow and still go bankrupt! The closing balance from one month is the opening balance for the next month. A negative closing balance doesn't mean that they’ve made a loss and is doesn’t mean that they have gone bankrupt! Its just a negative cash flow situation!

How can cash flow be improved?
Keep costs low Look for cheaper premises/ suppliers – but consider the consequences Aim for high sales/ inflows But at what cost? Advertising and promotion will cost!

Analysis of cash flow forecasting
Benefits Help a business anticipate the timings and amounts of any cash shortages – i.e. make changes or apply for an overdraft etc. Review timings and amounts of receipts and payments If they have l/t problems they can apply for loans NOTE- The cff will be requested at the bank to secure a loan Limitations The figures are predictions! They are based on estimates! External factors can occur that are beyond the firms control – this can not be predicted! Time will be spent gathering resources to complete the cff – too much time at the expense of meeting customer needs A cff is a one dimensional tool and cannot be used on its own to evaluate the firm’s performance as profit, profit margins and productivity also needs to be considered!

Analysis of cash flow forecasting
Benefits Gives an indication of how the business is likely to perform in the future. Allows managers to identify when they might need additional funding so they have time to arrange an overdraft for example. Inconsistencies in performance can be identified, predicted and analysed. Changes in inflows and outflows resulting from new investment can be estimated. Drawbacks Time taken to prepare the cash flow forecast. Cash flow forecasts need to be accurate to have any value, forecasting anything is not an exact science. The longer the time scale the less accurate the forecast is likely to be. It doesn’t show profit or loss for the business (P&L Account does this). Cash flow forecast needs to be regularly monitored to have on-going usefulness.

Evaluation Figures are a starting point
Used as an analysis tool to make business decisions Think – are the figures biased, how reliable are they? Analyse month by month, what do the figures show? Consider all circumstances of the business i.e. do they operate abroad, how may this effect cash flow, currency and exchange rate – pound could be weaker thus lower than forecasted! Difference between cash flow and profitability Consider type of ownership and market share – what control do they have? Can they demand payments to be made? Think what is causing the problem and think of a solution how long may it go on for? Is it poor payments and poor sales?

Cash Flow Forecast in Practice
January February March Receipts Cash Sales 200 300 500 Credit Sales 2400 Owners Capital 5000 Payments Suppliers 1050 1280 1400 Advertising 30 Utilities 100 Net Cash Flow 4,020 (1,110) 1370 Opening Balance 2,910 Closing Balance 4,280 What do these terms mean? Receipts section is cash inflow Cash Sales is revenue Credit Sales is where customers are given trade credit Payments section is outflow Net Cash flow is the difference inflows-outflows If you are stuck, break it up and go through it slowly Notice which are fixed and which are variable costs Why do you think there is only Owners Capital in January?

Topic 2 © L Murphy 2015 Financial Planning

Chapter 3 Sales, Revenue & Costs

Keywords Profit/Net Profit – The money remaining from sales revenue after all costs have been paid off. Gross Profit – Sales revenue minus the immediate costs of producing goods. Revenue/Turnover – The money earned by the business. Fixed Costs/Overheads – Costs that remains the same regardless of the level of output or sales. Margin of Safety – The amount by which sales can fall before breaking even (e.g. if the break even point is £100 and the current level of output is £150… the M.O.S is £50) Contribution – That part of sales which can be put towards paying the fixed costs of a business. Contribution = Selling price – variable cost per unit.

Increase Profits A business can increase profits by:
Seek to increase sales volume by motivating staff Raise selling price Cut costs It is vital that you are clear about the elements that make up profit: Profit is effected by changes in either costs or sales revenue Sales revenue is directly effected only by changes in sales volume or selling price NOT costs Increasing sales volume will increase costs because each unit is sold incurs additional variable costs A price cut may or may not increase sales volume. Market research may be needed to determine whether it will increase sales by enough to cover a price cut and increase sales revenue – link to the PED of the product

Using Break-even A business can use break-even analysis to:
To decide on pricing – An entrepreneur may calculate the break-even level of sales at a range of different prices as a way of helping decide how much to charge for the product or service. To predict profit – If a business is using competitor-based pricing, they will not have much choice about price they charge. The owner may want to use break-even analysis as a tool to predict how much profit they are likely to make based on different volumes of sales. To seek finance – Investors and leaders will only commit money to a business idea if they are confident that the venture will be profitable. Break even analysis can help promote a business to investors. To conduct ‘What-If’ analysis – Entrepreneurs may want to model the impact of changes in a business, such as changing prices or reducing costs. Break-even can help to see whether the changes will be sufficient enough for the business to remain profitable.

Using Break-even New firms need to estimate how much they must produce/sell before they can start making a profit May be required as part of a business plan Existing firms may wish to know: Profit/Loss at any level of output The output needed to produce a certain level of profit It’s relatively easy to use and provides a quick estimate to assist with decision making

Reaching Break-even A business producing zero units of output will still have to pay fixed costs but will obtain no revenue. It will therefore be making a loss because costs are greater than revenue. As more units are produced, these will start to contribute towards paying off the fixed costs, and eventually when the total revenue equals the total costs the business will break-even. Any more revenue made after the break-even point is profit. Contribution is what is put towards paying off fixed costs, this is worked out as: Fixed Costs / Contribution (Selling Price – Variable Cost per unit) Image: Courtesy of Business Studies Online

Key Terms - Margin Of Safety
Margin of safety is the quantity sold which is greater than the breakeven level of output. E.g. If a company has a BEP of 260 units and actually make and sell 310 units they have a margin of safety of 50 Actual sales – breakeven point = MOS

Assumptions of simple break-even analysis
Too simplistic as assumptions are unrealistic The selling price remains the same, regardless of the number of units sold Fixed costs remain the same regardless of the number of units of output. Fixed costs do vary when output changes Assumes that all output is sold Information used may be unreliable as it is based on forecasts and predictions Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too Does not consider offers and promotions between supplier and buyer

Assumptions of simple break-even analysis
Variable costs vary in direct proportion to output. Variable costs do not always stay the same. For example, as output rises, the business may benefit from being able to buy inputs at lower prices (buying power), which would reduce variable cost per unit. Presumes conditions are unchanged Most businesses sell more than one product, so break-even for the business becomes harder to calculate Break-even analysis should be seen as a planning aid rather than a decision-making tool Presumes that fixed costs are unaffected. For instance that no new building is required to hold more stock.

Task 5 - Breakeven Quiz QUIZ

Chapter 4 Sales Forecasting

What is ‘Sales Forecasting’?
Its all about making future sales predictions! What staff and stock will be required to make these sales? What sales are expected? How many staff are required!? What stock does it currently hold? What needs to be ordered to produce the goods to sell? Is finance available for a marketing strategy to achieve these sales? What marketing strategy is best? Market Research, managers, past figures within the business It can be unreliable, external factors could have influenced them back then, consider all limitations to MR and general running of the business, example market trends, consumer tastes

Time Series Analysis ‘Time series analysis’ is the most popular method used within business to forecast sales. Using past data to predict the future. This data is called ‘time series data’. A set of figures arranged in order, based on the time they occurred. For example, a firm may predict future sales based on the sales from the past year, per month. TSA does not try to explain data only to describe what is happening to it or predict what will happen to it.

Time Series Analysis A variety of ways can be used to predict future trends. The most popular is Time Series analysis They are four components that a business wants to identify in the Time Series data; The trend – is there a trend in sales figures Seasonal fluctuations – seasonal product? Cyclical fluctuations - business cycle, highs and lows Random fluctuations – an increase in figures due to a trend taking place. Bad weather leading to an increase in an umbrella for instance

Calculating a change in sales
Forecasting sales involves using statistics. It can be useful to show percentage changes in business statistics data; What is the percentage change in sales in this example? 2014 Sales = £400,000 2013 Sales = £450,000 Change in sales/ Original X 100% ANSWER- 50,000/450,000 x 100% = 12.5% decrease in sales from 2013 to 2014

Benefits of Sales Forecasting
Plan ahead and avoid surprises Managing finance better as the firm will have knowledge of cash inflows To order accurate materials and correct number of staff thus building suppliers relationships This also means that costs will be lower as potential a firm could benefit from economies of scale That the firm has capacity to meet orders, higher orders.

Factors affecting Sales Forecasting
Consumer trends Seasonal variations Fashion Long term trends Economic growth Interest rates Inflation Unemployment Exchange rates Actions of competitors

Difficulties of sales forecasting
Predictions are difficult There are only so many models, research, BEA etc. that can be done to help with these predictions Extrapolation – Using past figures to predict future ones BUT consumer trends can change! Look at Crocs! Can all government data be used and understood? This is used as well as business data. Are the experts too subjective and incorrect? How much is biased opinion?

Chapter 5 Budgeting

Keywords Budget – A financial plan which forecasts costs and revenues and maps projected changes. It can be used by the management to keep control of the business. Extrapolation – Using historical data from the recent past and assuming that any trend can be seen will continue into the future. Zero-based budgeting – Starting with no budget and requiring each department to justify each cost. Favourable Variance –A Variance where the actual figures are better than the budgeted ones Adverse Variance – A Variance where the actual figures are worse than the budgeted ones

Using Budgets Budgets are used in businesses to ensure that each department sticks to a set amount of money to spend, business can monitor expenditure, which can help identify unnecessary costs. (Its similar to a phone contract; you have a number of minutes, texts and data to use per month. Don’t explain it like this in the exam) Its not always about spending – it can be targets for sales revenue Different factors effect how much budget a department has: The size of the department in terms of staff and responsibility The amount of resources needed e.g. Production upgrades vs Office equipment The amount of products produced or clients served

How budgets are set There are different budget techniques:
A business can base it on previous years expenditure Market research can be used to identify competitor budgets An extrapolation of figures is when businesses see a trend and assume it will continue (E.g = £1,000, = £2,000, 2013 = £3,000… assume 2014 will be £4,000) Zero-budgeting technique where managers set the budget at £0 and therefore each department has to justify every cost Positive – Managers can stop unnecessary costs, improves efficiency Negative – Staff may feel demotivated because they managers aren't giving them the responsibility or trust, time consuming compered to using historical figures There are different types of budget: Expenditure Budget – Set spending targets (E.g. £3000 for 1 calendar month) Capital Budget – A target for investment into the business Income Budget – Target of sales revenue they want to achieve Profit Budget – A combination of the above to set a profit target

What is the purpose of a budget?
Budgets are an effective way of ensuring a business does not spend more than it should If every employee ensured they didn’t go over budget – costs shouldn’t get out of control Forces managers to be more efficient and plan ahead They provide direction and coordination for the future They motivate staff They improve efficiency Can assess forecasting ability and make comparisons of plans with actual results

What is the data based on? - Historical Budgeting
Using past sales figures etc. to make future plans Must consider inflation, consumer preferences, rivals, future events and other factors that effect demand and trends that could impact on costs, prices and consumer spending

How to decide on a budget!?
Budgeting according to company/ department objectives Budgeting according to department/ competitors spending Setting the budgets as a percentage of sales revenue Zero-based budgeting based on expected outcomes Budgeting according to last years budget allocation/ sales forecasting/ Historical Budgets Based on opinions of as many staff as possible Budgets should be challenging but realistic (SMART) Budgets should be monitored regularly, allowing for changes in the business and its environment Budgets should be flexible and motivating

What is the data based on? - Zero Based Budgeting
Where no budget is set as one cannot be justified. For example certain marketing or admin. No money is allocated. Managers are to spend with caution and be as efficient as possible. Managers must show that the spending of this money generates an adequate amount of benefit in relation to the business objectives in order for the money to be allocated. It encourages the evaluation of costs and helps to minimise unnecessary purchases. When choices are made businesses try to minimise the opportunity cost.

Zero Based Budgeting Advantages of ZBB Disadvantages of ZBB
Allocation of resources could be improved A questioning attitude is developed which will encourage efficiency and reduce costs Staff motivation may be improved as evaluation skills are practised and greater knowledge of the firms operations might develop It encourages managers to look for alternatives Disadvantages of ZBB Very time consuming as research is to be thorough looking at different costs and analysis must be detailed Decisions may be influenced by subjective (individual) opinions as such evaluative skills may not be available in the organisation May adversely affect motivation as such budgeting may effect the status quo Managers may not be prepared to make such decisions which means opportunities may go a miss

Budgetary Control Budgetary control is a system that involves making future plans, comparing actual to budgeted figures and then investigating the cause of any differences. The step by step process of budgetary control; Preparation of plans – targets are set Comparisons of plans with actual results – actual results and targets compared weekly, monthly, quarterly. Analysis of variance –finding reasons why the differences have occurred. The business may need to change plan and adjust the next budget.

Variance Analysis Budgets are reviewed through variance analysis. (The difference between the actual figure and the budget figure are calculated thus is the variance figure.) These are known as VARIANCES: Variance = budget figure – actual figure Budgets and variance analysis are useful because it helps managers to identify problems which can then be investigated and hopefully resolved. It helps identify if the business is performing better or worse than expected.

Task - Mental Arithmetic…
Revenue/ Cost Budget Figure (£) Actual Figure (£) Variance Sales Revenue 37 44 Fuel Costs 108 172 Raw Materials Costs 53 39 Labour Costs 5426 4426

Task Answers - Mental Arithmetic…
Revenue/ Cost Budget Figure (£) Actual Figure (£) Variance Sales Revenue 37 44 -7 Fuel Costs 108 172 -64 Raw Materials Costs 53 39 +14 Labour Costs 5426 4426 +1000

Variance Analysis Variance – the difference between planned values and actual values Favourable variance – actual figures less than planned or better than planned Adverse variance – actual figures above planned or received less revenue than expected

Examples of Variances Favourable Variances Adverse Variances
Exists when the difference between the actual and budgeted figures result in a business enjoying higher profits When the difference between actual and budgeted figures results in a company’s profits being lower Examples: Actual wages less than budgeted Sales revenue below actual budgeted figure Budgeted sales revenue lower than actual Actual raw material costs higher than budgeted Expenditure on fuel is less than budgeted Actual overheads higher than budgeted

What are the causes of Variances?!
Favourable Variances Adverse Variances Examples: Wage rises lower than expected Competitors release new products winning extra sales Economic boom leads to higher sales than expected Government increases business rates by unexpected amount Rising value of the pound makes imported raw materials cheaper Fuel prices increase as price of oil rises

How are variances caused
External Factors – Competitor behaviour effects demand Change in economy i.e. minimum wage increase The cost of raw materials increase – Bad Harvest/ Summer Internal Factors – Improving efficiency causes favourable variances Overestimating how much money can be saved - A Underestimating the cost of making a change in its organisation - A Change in price – Creates variance after the budget has been set Internal cause are a serious concern. They suggest that communication needs to be improved

How is variance analysis used?
To plan ahead – Change budgets, be more ambitious or more cautious Re-motivate staff Change marketing mix Change product Lower sales price Find cheaper suppliers

How is variance analysis used?
Informs the business of how efficient (favourable) the budget is. Good communication within the business Monitored well Precise and thorough budgets (each department considered in depth) Is expansion possible Is there teamwork Budgets can be reviewed in order to improve efficiency: Different budgets are required Improve expertise/ motivation Identify inappropriate use of budget Reward/ punishment for a department sticking/ exceeding their budget

Difficulties of budgeting
Problems may arise because figures in budgets are not actual figures. If sales data is inaccurate budgets will be inexact. May cause stakeholder conflict between managers and departments. Time consuming – opportunity cost Often over ambitious objectives are set. Unrealistic budgets may demotivate staff. Manipulation – budgets can be set by managers to make a department look good. But it may not help the firm achieve the objectives. Some managers may disagree on how money should be spent and this can result in customer dissatisfaction and a loss of orders etc. Some managers may only consider the short term and not the long term. It may save costs now but could cause customer dissatisfaction in the future.

Benefits of budgets Benefits Help to control income and expenditure
Provides clear targets for managers Can be motivating Helps focus on costs Helps managers to constantly monitor their budget and remain efficient Help to reveal areas that need corrective action

Limitations of budgets
Can cause resentment or rivalry between departments If the budget is too inflexible then opportunities may be missed when the market changes Can be demotivating if budgets are restrictive Time consuming and expensive process If the actual results are different then the value of the budget is diminished

Overview - Analysing the budget
Budgets can be Adverse or Favourable If the budget is adverse it means that they have spent more or made less sales revenue than planned If the budget is favourable it means that they have spent less or equal, or made more or equal sales revenue than planned Benefits Drawbacks Business can monitor performance Businesses can only analyse results at the end of the budget period They can locate unnecessary costs It costs time and money to budget & collect results – may even require a department They can make future budgets more reliable by analysing trends & performance It can demotivate staff if they have adverse results

Topic 3 © L Murphy 2015 Managing Finance

Chapter 6 Profit

Profit/Loss Calculations
Businesses use a Statement of Comprehensive Income because: It’s a legal requirement for Private & Public Limited Companies It summarises the years transactions It can be used to analyse the performance of the business (E.g. Are Costs too high? How did we compare to competitors?)

Total Revenue – Total costs = Profit
What is profit? Total Revenue – Total costs = Profit Accountants calculate and define profit in 3 ways; Gross Profit Operating Profit Net Profit 71

Gross Profit Gross Profit = Revenue/ Sales Turnover – Variable costs (costs of sales) (Revenue = Sale Price x Quantity sold COS = the cost to make the product) Gross profit refers to the profit made after direct costs have been met. 72

Operating Profit = Gross Profit – operating expenses/ overheads
(overheads = e.g. admin expenses etc.) 73

Net Profit Net Profit (profit for the year) = Operating Profit – Interest and exceptional costs (tax, interest etc.) Net profit may be calculated before or after the subtraction of taxation

What is a Profit and Loss Account?
Also know as a ‘Statement of comprehensive income’. Another document that shows the financial performance of a business during a 12 month period. Seen in a business plan. SoCI shows the income and expenditure of a business during a financial year. The statement always shows the current and previous year’s financial figures. This allows a comparison to be made. The difference between this document and a CFF is simply the detail in the document for instance tax is often considered in this account and profits are calculated.

Task 2 - Statement of comprehensive income
2014 (£) 2013 Revenue/ Sales Turnover Cost of sales Gross Profit 561,000 331,000 498,200 322,100 Selling expenses Admin expenses Operating Profit 45,300 122,500 38,200 102,800 Interest Net Profit (profit for the year) 22,100 21,000 Taxation Profit for the year after tax (net profit) 8,000 2,800 Task - Calculate Gross Profit, Operating Profit and Net Profit

Task Answers - Statement of comprehensive income
2014 (£) 2013 Revenue/ Sales Turnover Cost of sales Gross Profit 561,000 331,000 230,000 498,200 322,100 176,100 Selling expenses Admin expenses Operating Profit 45,300 122,500 62,200 38,200 102,800 35,100 Interest Net Profit (profit for the year) 22,100 40,100 21,000 14,100 Taxation Profit for the year after tax (net profit) 8,000 32,100 2,800 11,300

Why is it a good idea for a business to calculate their profit/loss?
A business produces a SoCI to calculate their profit/loss for a period of time, usually a year. It is a record of the revenues (income) and costs of the business over a period of time, usually a year. It shows the financial ‘health’ of the business It can be used to compare trade this year with trade last year i.e. to highlight progress. It is studied by managers, shareholders, banks, financiers and other relevant groups of people. Shareholders in particular are interested in trends in profits. To avoid failure. Businesses will always want to increase profits Develop ways of becoming successful

Why is it a good idea for a business to calculate their profit/loss?
Businesses will always want to increase their profit! Business can look at how to increase profits – e.g. increase prices and lower costs or even lower prices if there is high demand! If profits decrease it is bad news! It is a legal requirement. Tax is paid on the profit. Different businesses pay the tax differently: - Sole traders and partners pay income tax - Limited companies pay corporation tax Public Limited companies are required to publish their profit and loss accounts. The reasons for producing a profit and loss account should be understand. Students could be asked what a fall in profit would indicate – or a loss – to interested parties. Public limited companies will have their results covered by the press and even on the national news if they suddenly face serious problems.

How can Profit & Loss be assessed?
Businesses work out a percentage increase or decrease on the profits within a year to measure against previous years. They use the below formula: Percentage change in profit = If profits are decreasing then they need to understand why. 50% rise in that year Current Years profit – Previous Years Profit X 100% Previous Years Profit

Profit Margins 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛= 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑥100
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛= 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑥100 Operating Profit Margin = Operating Profit x 100 Sales Revenue 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑀𝑎𝑟𝑔𝑖𝑛= 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑥100 Businesses that buy and sell have smaller gross profit margins Good examples being Supermarkets and Discount Chain Stores. Businesses that make and sell have higher gross profit margins I.e. The main cost is producing the product. Margin means difference between, like a gap. The percentage shows what pence per pound is gross/ operating/ net profit. E.g. GPM of 89.03% means that p of every £1 is gross profit! The higher the better!

Profit Margins To help a business understand how and why it earned the profit it did, it can look at its SoCI more closely. This will show managers and investors what types of costs the business has had to pay and how much profit was left over from sales revenue. Profit margins measure the size of the profit in relation to revenue/ sales turnover. Gross profit margin Operating profit margin Net profit margin

Gross Profit Margin Gross Profit X 100 Sales Revenue
This shows the gross profit as a percentage of sales revenue. Formula: The gross profit margin is usually a good indicator because it shows how much of the money received from sales is actual gross profit. For example, a percentage of 28.8% means that 28.8p out of every £1 of sales revenue is gross profit. Gross Profit X 100 Sales Revenue

Example Iceland has a gross profit of £96,745 and sales turnover of £1,037,277 x = % Means that 9.33p out of every £1 of sales revenue is gross profit.

Interpreting Gross Profit Margin
The higher the gross profit margin the better Companies may wish to sustain or improve their gross profit margin. They can do this by: Increasing sales revenue and keeping cost of sales the same By reducing cost of goods sold and keeping sales revenue the same Depends on the stock turnover and industry for example a supermarket vs a car dealership. A supermarket can be successful and have a low GPM.

Interpreting Gross Profit Margin
Possible reasons for a falling gross profit margin are: Inflation Change of suppliers Recession Bad summer thus rise in costs of raw materials What use is calculating the gross profit margin to a business? How much profit they are making per product, thus a price increase? any changes that need to be made to the product/ supplier and generally plan ahead. Fall in sales – recession, inflation Supplier costs increasing – a bad season e.g. Summer 2012 Packaging increase Electricity costs increase thus passed onto us the business thus makes it more expensive to make our product i.e. variable costs increase. Change of suppliers due to existing on going out of business

Operating Profit Margin
Operating Profit X 100 Sales Revenue Used to measure a firms pricing strategy and operating efficiency. It gives a firm an idea of how much profit is made before tax and interest, on each pound of sales. Operating profit margin =

Example Nike has a operating profit of £45,000 and sales turnover of £250,000 x = % 250000 Means that 18p out of every £1 of sales revenue is operating profit.

Interpreting Operating Profit Margin
The higher the operating profit margin the better This is because the more money is made on each £1. If the OPM is increasing it means that the firm is more pounds per sale. OPM shows the profitability of sales resulting from regular business. It excludes other losses for instance interest and tax. This margin can be increased by lowering indirect costs.

Interpreting Operating Profit Margin
As a pair discuss ways to increase the operating profit margin. Reduce costs Utilities Rent Loan repayments (balance transfer) Admin costs Improve efficiency – Zero based budgeting Decrease costs of goods sold.

Net Profit Margin Gross profit is important but it doesn’t include operating expenses (overheads, interest and tax). Net profit can be a more important guide for the owners of a business because it takes all costs into account.

Net Profit Margin Net Profit X 100 Sales Revenue This shows the net profit as a percentage of sales revenue Formula: This shows how much of the income from sales is net profit e.g. if a company has a net profit margin of 5.3%, then for every pound that it receives from selling products, it will earn 5.3p of net profit.

Net Profit Margin NPM’s show how profitable a business is.
They measure the relationship between the net profits made and the volume of sales. Business can calculate margins for individual products or the business as a whole and use the figures to compare with ‘competitors. For example, when I compare this NPM of 25% with competitors, we can see that they are getting only 15%. This tells me that I’m doing well. I can also look back and see how profitable my business was last year. Then, we only made 10% and so this year we have done much better. This tells me that I’m doing well.

Interpreting the Net Profit Margin
REMEMBER - Like with Gross Profit Margins, the higher the better The net profit ratio can be improved by: Raising sales revenue whilst keeping expenses low (reducing fixed costs); or Reducing expenses (fixed costs) whilst maintaining the same level of sales revenue.

Question? 1. Use the information in the table to work out the Net profit margin for the Fish & Chip shop for both 2016 & 2016 2017 Sales revenue Net profit 13 500 9 000

ANSWERS Use the information in the table to work out the Net profit margin for the Fish & Chip shop for both 2009 & 2010. 2016 2017 Sales revenue Net profit 13 500 9 000 Profits are decreasing and something needs to be done- lower costs and increase inflows. 9% 5.45%

Question? What does this mean? Worse than last year
Prices need to be raised Costs of making the product need to be lowered, however this could effect sales as quality may be effected! Fixed costs need to be lowered Raising prices may decrease demand for the product thus increasing the NPM too much can have negative effects on a product i.e. the demand for the product The overall NPM can be improved by the business no longer selling the products with a low NPM

Ways to Increase Profitability
Raising prices Lowering costs Cheaper raw materials Using existing resources more efficiently Use random generator and write answers on the board

Ratio Analysis- Evaluation
Ratio analysis compares profit margins to previous years to understand the profitability/ performance of a firm. It is a powerful tool in the interpretation of financial documents. It can allow for financial documents to be monitored, compared and changed. Trends are easily identified. Used to therefore make decisions. Some times they are not as accurate as one would hope. Other ratios exist. Added value is now used by shareholders to identify a good investment – financial figures baffle some people. Ratio analysis is very useful but its usefulness is limited as other factors exist that effect a stakeholders decision such as ethical and social stance.

Profit margins in practice
Lets compare financial years 2013 and 2012 in terms of profit margins… GPM 2013 = £130,651 £151,467 𝑥100=86.25% GPM 2012 = £106,485 £127,499 𝑥100=83.51% NPM 2013 = £11, ,467 𝑥100=7.45% NPM 2012 = £28,367 £127,499 𝑥100=22.25% With a case study related to these figures, we could suggest possible reasons for the Increase in Gross Profit Margin in 2013, and a decrease in Net Profit Margin in 2013 April 2013 (£) April 2012 (£) Sales Revenue 151,467 127,499 Cost of Sales 20,816 21,014 Gross Profit 130,651 106,485 Expenses 119,366 78,118 Net Profit 11,285 28,367

Profit margins continued
Benefits of using them Drawbacks of using them They are simple to calculate They summarise the area of most costs They can be monitored overtime to spot trends They can help benchmark against competitors They do not explain how costs were incurred They do not directly help businesses set strategies They require further analysis to help identify saving costs

Cash vs Profit Cash Profit
The money that a business has immediate access to on a day to day basis Used to pay for costs of manufacture Analysed using a Cash-Flow Forecast The money a business has left over after total costs are taken from revenue Sales Revenue – Total Costs To improve profit businesses can cut costs or increase sales Analysed using Statement of Comprehensive Income

Can a Business survive with no cash?
Keith’s Coffee LTD Can a Business survive with no cash? January 2014 Mon Tues Wed Thu Fri Sat Sun - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 ❷ £1000 Spent on Coffee Beans (Cash = £1000) ❶ Month Started with £2000 cash ❸ Batch of Coffee Sold to Tesco for £3000 Given 14 days to pay ❹ Machinery Lease Bill of £1000 (Cash = £0) ❺ Bank Loan repayment of £1500 (NO CASH TO PAY) ❻ Tesco Pay for Order (Cash = 3000) Despite selling products, Keith didn’t have enough cash to pay for the Bank Loan payment. If Keith negotiated a shorter credit period with Tesco or later date with his Bank, this would fix the problem.

Chapter 7 Liquidity

Definition – A Statement of Financial Position is…
A snapshot of the financial position of a business at that moment in time. It provides a summary of a firm’s assets, liabilities and capital. It shows what the firm owned from the previous year, and how this has changed this year. i.e. if there have been any new assets purchased, and where this money has come from in terms of loans, share capital etc. to make the purchase. Equity is the total of what is owed to the shareholders.

Key Terms to learn Assets – used to make products or provide services. Something that is owned by the business – vehicles, stock, cash, buildings etc. Liabilities – short term or long term source of funds for a business. These are what the business owes to others, a source of debt – bank loan repayments. Capital – used to buy assets, money put into the business – owners capital, working capital (i.e. retained earnings), share capital. Shareholders Equity – What is owed to the shareholders, retained profit and share capital. This comes from the capital. Shareholders own the capital.

Balance sheets – what are they?
The same as a statement of financial position. A balance sheet should always ‘balance out figures’. The value of assets (what the business owns) will equal the value of liabilities plus total equity/ capital (what the business owes as well mas owns). This is because all resources purchased by the business have to be financed by either capital or liabilities. So if a business has capital of £5million and liabilities of £2million the value of assets must be £7 million. It justifies the expenditure of a firm and helps them make future business decisions, such as if they can afford to spend more or take on more debt. Additionally several stakeholders are interested in this document. For instance, shareholders use it to calculate ratios that help them decide if the firm is worth investing in or not compared to other investments.

Balance sheets – what are they?
They have a relationship with a the statement of comprehensive income. Like statement of comprehensive income, balance sheets are usually produced on an annual basis at the end of each financial year. However, whereas a statement of comprehensive income summarizes a company’s activities over a period of time. The information on a balance sheet refers only to the day on which it is produced. Both the balance sheet and the profit and loss account show the ‘health’ of the business. Shareholders, customers, suppliers, employees and other stakeholders like the government and Office for National Statistics will be interested in both types of account – but for different reasons! They will want to see where the business is getting its money from (for example, whether it is borrowing large amounts of money or whether it is using profits) and how well and on what purchases it is using this money. Video from 40 seconds

£ m Non Current Assets Property and Equipment 176.5 189.3 Intangible Assets 45.2 41.6 221.7 230.9 Current Assets Inventories 32.1 28.3 Trade and other receivables 7.3 6.8 Cash and cash equivalents 3.1 6.2 42.5 41.3 Total Assets 264.2 272.2 Current Liabilities Trade and other payables 25.6 24.9 Current tax liabilities 11.1 10.5 36.7 35.4 Non-Current Liabilities Loans 24.5 26.1 Pensions 7.8 6.7 32.3 32.8 Total Liabilities 69.0 68.2 Net Assets 195.2 204.0 Shareholders’ Equity Share Capital 25.0 Retained Earnings (retained profit) 170.2 179.0 Total Equity Non Current Assets are long term resources used repeatedly by the firm. E.g. land, property etc. intangible (non physical assets e.g. customer databases etc.) are also listed here. These are not expected to be sold within 12 months. Current Assets are items owned by the firm that can be turned into cash within 12 months. They re liquid assets. Liquidity of an asset is how easily it can be converted into cash. E.g. stock, money owed to the business, cash etc. Current Liabilities is money owed by the firm and must be repaid within 12 months. E.g. trade credit, overdrafts, income tax etc. Non Current Liabilities relate to long term loans and other money owned by the firm e.g. mortgages. That have to be repaid for at least a year.

£ m Non Current Assets Property and Equipment 176.5 189.3 Intangible Assets 45.2 41.6 221.7 230.9 Current Assets Inventories 32.1 28.3 Trade and other receivables 7.3 6.8 Cash and cash equivalents 3.1 6.2 42.5 41.3 Total Assets 264.2 272.2 Current Liabilities Trade and other payables 25.6 24.9 Current tax liabilities 11.1 10.5 36.7 35.4 Non-Current Liabilities Loans 24.5 26.1 Pensions 7.8 6.7 32.3 32.8 Total Liabilities 69.0 68.2 Net Assets 195.2 204.0 Shareholders’ Equity Share Capital 25.0 Retained Earnings (retained profit) 170.2 179.0 Total Equity Net Assets are calculated by subtracting the value of total liabilities from total assets. This will ‘balance’ i.e. be equal to the shareholders equity found at the bottom of the statement. Shareholders equity is the final section of the statement. This provides a summary of the capital that is owed to the owners of the business. E.g. share capital, and retained profits. (This pays for the remaining assets after net assets).

Equals total non current assets plus current assets
£ m Non Current Assets Property and Equipment 176.5 189.3 Intangible Assets 45.2 41.6 221.7 230.9 Current Assets Inventories 32.1 28.3 Trade and other receivables 7.3 6.8 Cash and cash equivalents 3.1 6.2 42.5 41.3 Total Assets 264.2 272.2 Current Liabilities Trade and other payables 25.6 24.9 Current tax liabilities 11.1 10.5 36.7 35.4 Non-Current Liabilities Loans 24.5 26.1 Pensions 7.8 6.7 32.3 32.8 Total Liabilities 69.0 68.2 Net Assets 195.2 204.0 Shareholders’ Equity Share Capital 25.0 Retained Earnings (retained profit) 170.2 179.0 Total Equity Equals total non current assets plus current assets Equals Current Liabilities plus non current liabilities Net Assets equals Total Assets minus Total Liabilities

Total Equity equals share capital plus retained profit
£ m Non Current Assets Property and Equipment 176.5 189.3 Intangible Assets 45.2 41.6 221.7 230.9 Current Assets Inventories 32.1 28.3 Trade and other receivables 7.3 6.8 Cash and cash equivalents 3.1 6.2 42.5 41.3 Total Assets 264.2 272.2 Current Liabilities Trade and other payables 25.6 24.9 Current tax liabilities 11.1 10.5 36.7 35.4 Non-Current Liabilities Loans 24.5 26.1 Pensions 7.8 6.7 32.3 32.8 Total Liabilities 69.0 68.2 Net Assets 195.2 204.0 Shareholders’ Equity Share Capital 25.0 Retained Earnings (retained profit) 170.2 179.0 Total Equity The net assets figure and total equity figure balance as this shows, after debt where the rest of the money has come from .i.e. share capital. This means that all expenditure is accounted for through identifying how money is being spent All money and expenditure within the firm is accounted for! Total Equity (money from shareholders) + Total liabilities (borrowed money) = total assets (everything that the firm owns). This shows how all money given to the firm has been spent. Total Equity equals share capital plus retained profit

Answer the following questions
Define the term ‘Statement of Financial Position’? (use the words ‘health’ and ‘snapshot’ in your answer) Explain what a statement of financial position shows? State which two areas of the balance sheet ‘balance’? State where we would find a firm’s balance sheet? Explain the difference between liabilities and assets. State how is working capital calculated?

Answer the following questions
Define the term ’Balance sheet’? (use the words ‘health’ and ‘snapshot’ in your answer)A summary at a particular point in time of the value of a firms assets, liabilities and capital. It shows the ‘health’ of a business at that moment in time. Explain what a statement of financial position shows and why? It shows what a business owns and what it owes. It shows how the money injected into the firm has been spent. Whether its borrowed money or given to the firm through shareholders. State which two areas of the balance sheet ‘balance’? Explain why? Net assets and total equity (shareholder funds) – this shows that all expenditure is accounted for. State where we would find a firm’s balance sheet? In their business plan Explain the difference between liabilities and assets. Liabilities are what a business owes, assets are what they own. State how is working capital calculated? Current assets – current liabilities

‘Liquidity is the ease at which assets can be converted into cash.
What is liquidity? ‘Liquidity is the ease at which assets can be converted into cash. It is important that a firm is able to meet its short term debts as failure to do so may result in closure of the business.’

Liquidity Ratios Like all financial documents, the balance sheet needs to be compared in order to be of real use. We use ratios to make these comparisons easier. The ratios that we use at AS are; Current ratio Acid test ratio These ratios measure the liquidity of a firm. You will need to know the following; Interpretation what the ratio shows. What’s the ideal number What can a business do to improve the ratio What is the limitation of using ratio analysis How these ratios can influence the levels of borrowing permitted

Liquidity Ratios Liquidity Ratios assess the firms ability to pay their day-to-day running costs A firm can be making a profit but still run out of money to pay their bills as they may be too high If a firm has too little money available the business is illiquid Ratios relates one number to another to show the relative position. The value of this is to give a warning about when the current liabilities Are getting too high in relation to the current assets. There are two liquidity ratios; Current Ratio and Acid Test Ratio.

Current Ratio Current Ratio = Current Assets Current Liabilities
This ratio shows how many £ of current assets a firm has to every £1 of current liabilities It shows whether a firm will be able to pay its bills. Can it afford to pay off its Current Liabilities; creditors, overdraft etc. The ratio assesses whether the firm has enough current assets (money assets) to pay the current liabilities; cash, stock, debtors etc. Ideal ratio is between 1.5 – 2:1 (between 1 and 3 = healthy business) A ratio of 3 : 1 would imply the firm has £3 of assets to cover every £1 in liabilities – very good!! A ratio of 0.75 : 1 would suggest the firm has only 75p in assets available to cover every £1 it owes - The firm could be in a weak financial position! Bad! Any lower means that the business is in danger of running out of cash as it doesn’t have enough working capital to pay off its debt like trade credit. This might meant that the business is over borrowing or over trading. (some firms like retailers have fast selling products so have a ratio of 1.1 and are equally as successful generating cash from their sales) Any higher and the business is unproductive and maybe has too much cash tied up in stock and it isn’t selling. Cash should be invested elsewhere or given back to shareholders.

Current Ratio Calculation
CA : CL ( ) : ( ) 2250 : (/) 1000 2.25 : 1 Meaning for every £1 of current liabilities, I have £2.25 to be able to pay them off via my current assets Do I have anything to worry about? It is a comfortable position to be in BUT its too high and that means that the firm has too much cash tied up in unproductive assets and must reinvest back into fixed assets, or passed back to shareholders

Acid Test Ratio Acid Test Ratio = Current Assets – Stock
Current Liabilities Stock is the most difficult of a firm’s current assets to turn into cash without a loss in it’s value; as the product may not sell as expected The acid test ratio, a tougher measure of a firm’s liquidity is like the current ratio but does not include stock as a current asset Ideally the figure should be above 1 . (perfect figure = 1:1) This shows that the firm has £1 of highly liquid assets for very £1 of short term debt. If the ratio is below 1 it means that a firm doesn’t have enough current assets minus stock to cover current liabilities. This = a problem! Too much money is tied up in stock, they ant pay off current debt, overdrafts etc. In general, low or decreasing acid- test ratios generally suggest that a company is over-leveraged, struggling to maintain or grow sales, paying bills too quickly, or collecting receivables too slowly. Any higher - then the firm can meet their current debt no problem! But they have many current assets; what are costs like and are they required? A good investment into non current assets may be required for security. A high or increasing acid-test ratio generally indicates that a company is experiencing solid top-line growth, quickly converting receivables into cash, and easily able to cover its financial obligations. Such companies often have faster inventory turnover and cash conversion cycles. BUT like the current ratio there is a considerable variation between the typical ratio and the industry that the firm operates in. (retailers with strong cash flow may operate comfortably with an acid test ratio of less than 1).

Acid Test Ratio Calculation
CA – Stock : CL ( ) : ( ) 2:1 For every £1 of current liabilities I have £2 of current assets (- stock) to pay them with. Stock relies on custom and isn’t as liquid as the others Do I have anything to worry about? No! They are in a comfortable position, with strong liquidity – they can pay their debt!

Ways to improve liquidity
Use of overdraft facilities Negotiate additional short term and long term loans Encourage cash sales Sell off stock Sell assets and lease back Make only essential purchases Extend credit with current suppliers Reduce personal drawings from the bank Introduce fresh capital i.e. personal cash and loans by the owner. A limited company could use share capital BUT if the firm is struggling this is hard so it is up to the owner to fund

Keywords Capital Investment – Using a source of finance to purchase or hire equipment in a business Capital Employed – The total long-term finance in a business e.g. Share Capital, Loans & Reserves (Retained Profit). Return on Capital Employed – Measures the amount of money that may be earned after a capital investment. Liquidity – The ease and speed in which assets can be turned into cash. Working Capital – Cash in the business required for the day-to-day running. Also used to cover short-term debts. Inventories – The stock of goods in which a business can sell to make revenue

Assets vs. liabilities Assets are things within a business with value, i.e. things they own Tangible Assets are things like premises and equipment, things that can be used in production Intangible Assets are things like Brands, Patents and awards that the business has developed Current Assets are things like debtors, cash and stocks that can be immediately used Liabilities are things that the business owes, i.e. debts Non Current Liabilities are loans that have to be paid back over a long period of time, generally more than a year Current Liabilities are short term debts that must be paid within 12 months, usually less than a year, e.g. Trade Credit Shareholders’ Funds represent money owed to shareholders in form of share capital and retained profits (reserves). THIS IS NOT DIVIDEND PAYMENTS IT IS SHARE CAPITAL. Money given to the firm by the share holders to raise capital. It is simply another source and method of finance for the firm.

Statement of Financial Position
Assets and Liabilities can be shown in a ‘balance sheet’: If a business had negative net assets, they would be in serious financial problems. Sometimes balance sheets are broken down into more detail, e.g. showing each asset before total. April 2013 April 2012 April 2011 Non Current Assets 189,626 99,971 91,396 Current Assets 149,102 112,747 83,153 Non Current Liabilities 50,839 8,457 13,793 Current Liabilities 96,497 26,874 17,686 Net Assets 191,392 177,387 143,070 Total Assets Total Liabilities

Chapter 8 Working Capital

What is working capital?
‘Working capital is the term used to describe the money used for day to day activities within a business. It is used to pay for expenses, electricity and raw materials. The working capital is the money left over after all current debts have been paid’. Working Capital = Current assets – current liabilities Working capital is very important as it can reflect how well a firm is performing. For example a firm that is struggling and threatened with closure will have low levels or WC. If the balance sheets shows this then it is a sign that the firm may be in trouble!

What is Working Capital?
Working capital is the money a business needs to pay its short term expenses. These include: Expenditure such as staff training Raw materials or stocks of input Bills such as Utilities Wages for staff The amount of working capital held will vary depending on the type of business, credit terms with suppliers and credit terms with customers. A new business may not be able to negotiate credit terms with suppliers as they may see them as a risk, therefore the new business may not be able to give customers credit without raising capital. A business with too little working capital may end up with a negative cash flow, but a business that holds too much can be costly and wasteful. Working Capital is the most liquid asset in a business! It is immediately accessible to pay debts.

Managing working capital?
Different businesses have different working capital needs. Size of the business Stock levels Debtors and creditors Maintaining adequate levels of working capital

Managing working capital?
Different businesses have different working capital needs. Size of the business The larger the business the larger the amount of WC. Stock levels Firms that adapt a JIT approach will have lower WC figures. The more stock the higher the WC for example a window cleaner versus Greencore. Debtors and creditors – The time between buying stock on trade credit and selling the finished product can influence the levels of WC. For example a builder. Projects take months and so will payment from the client. Supermarkets may have negative WC (current assets and less than current liabilities) as they buy in from suppliers and sell the product to the customer before paying the trade credit to the wholesalers. Some firms work with negative working capital. Textbook says a firm requires twice as many current assets as current liabilities to operate safely. This means current ratio should be between 1.5 and 2. this is how a stakeholder can see if a firm is working effectively.

Managing is working capital?
Different businesses have different working capital needs. Maintaining adequate levels of working capital Firms need to ensure that current assets are not too low and current liabilities not too high as they will encounter trading issues. A firm maybe unable to finish a product or fulfil orders on time due to low numbers of stock/ raw materials. Also, a firm may not be able to pay bills and invoices on time. However firms may want low WC as stock is expensive to keep. Money can be tied up in stock. So why is cash so important?

Working Capital in the Accounts
An accountant may suggest that the ratio of current assets to current liabilities should be 2:1, i.e. that firms should hold twice the amount of assets to liabilities. The concept ‘current’ refers to a short period of time. WC is calculated as: Working Capital = Current Assets – Current Liabilities Current Assets are things that a business owns and change value on a day to day basis. These include: Stock Cash Debtors Current Liabilities are things that a business owes that must be paid within a year or less. These include: Bank Overdraft Supplier Trade Credit Short-Term Loans

Working Capital in Practice
The ‘Silly Sausages’ Fast Food Van Current Assets Stock 1,000 Debtors 10,000 Bank Current Liabilities Trade Credit Bank Overdraft 250 £19,750 Current Assets Things the business own Current Liabilities Things the business owes Working Capital (Assets – Liabilities)

(Remember Labour can be Manual or Capital)
Working Capital Cycle Keith’s Coffee LTD Cash Cash Raw Materials There should always be more cash at the end then at the start, this can be used to pay overheads and the rest is profit. Sales Labour (Remember Labour can be Manual or Capital) Finished Product

Improving Working Capital
There are 2 ways to Improve working capital: Increase Money Coming In Decrease Money Going Out Get customers to pay more quickly Sell stocks to avoid holding too much Obtain external finance Increase Sales Negotiate later payments with suppliers* Spread costs out Sell off unused assets Lease rather than buy assets *Sometimes there may be a payment due at a bad time. Think about a household situation – If work pays you on the 20th of each month and your Phone bill is due on the 18th of each month, you may want to negotiate to pay after you receive your wages i.e. After the 20th … Similar problems occur in Business.

Chapter 9 Business Failure

Why do Businesses fail? Market Conditions – Characteristics such as competitors, market growth rate, legislation, level of innovation and level of demand. Sometimes businesses have the right product but at the wrong time. E.g. Selling Electronic Vapour Pens at the start of the smoking ban – Right product at the right time? Recession – When the economy slows down consumers spend less and therefore demand decreases. Consumers may even get a wage cut. This means that the level of luxury goods and services will decrease. E.g. Decrease in the demand for expensive Television packages. Weak Management – Bad cash-flow control can cause a disaster for a business. Also bad management of staff may mean quality and productivity decrease. Click here to download my companion flyer for easy revision & more detailed information and points about why businesses fail!

Why do some businesses fail?
Internal causes Lack of planning Cash Flow issues Over trading Investing too much into fixed assets Allowing too much credit to customers Over borrowing Seasonal factors Unforeseen expenditure External factors Poor financial management Lack of funds Relying on a narrow customer base Marketing problems Failure to innovate Lack of business skills Poor leadership

Why do some businesses fail?
External causes Competition Changes in legislation Changes in customer tastes Economic conditions Change in market prices

Financial and Non Financial causes of business failure
The reasons for failure can be classified as being financial and non financial. Financial – shortage of cash resulting in closure or bankruptcy. The importance of cash flow management can not be overemphasised! Non financial – all issues must be addressed! Failure to meet customer needs, compete effectively and or adapt to economic demands may result in cash flow issues and thus closure (as stated above)

Production & Efficiency
Chapter 10 Production & Efficiency

Keywords Efficiency – using available resources in the most economical way possible. This means keeping costs to a minimum and not wasting staff or capital equipment time. Productivity – A way of measuring efficiency by calculating Output per person employed Capital Intensive – Using high proportion of capital equipment and relatively low labour Labour Intensive – Using high proportion of labour and relatively low capital equipment Capacity Utilisation – Actual output as a percentage of maximum output, per period of time (Current output / Maximum Output x 100)

Keywords Time-Based Management – focuses on flexibility because this is the best way to avoid wasting time, either through employees having nothing to do or idle machinery. Lean Management – encompasses a whole range of techniques for reducing waste and cutting the cost of production processes. Kanban – A Japanese JIT system which uses cards to track stocks of inputs automatically, so that components are delivered to the right place at the right time. Competitive Advantage – The advantage a firm gets over its competitors by offering customers greater value in a specific way.

Operations Management
Operations management is an umbrella term for all of the processes that take the product from conception to sale: Design – where all aspects of the product are defined so that it can be carefully positioned. The more closely it fits to the consumer requirements, the better it will sell. Planning Production – finding the most efficient and cost-effective way of creating the product. This will involve all the necessary inputs such as the people required, capital equipment and technology. Suppliers – deciding on suppliers that might provide raw materials, components, distribution or advertising services. Some business have their own ‘in-house’ departments for this depending on the size, efficiency and costs of the business and product. Getting raw materials or components from external suppliers is called outsourcing

Productivity Businesses strive to market products that will cost less. Lower prices can mean higher sales, a larger market share or loyal customers. Increasing efficiency and cutting costs go together, and can be achieved when ways are found to produce with fewer resources. In order to stay competitive, all business have to stay competitive. One way of measuring efficiency is by looking at productivity which is output per person employed. The main ways of increasing productivity are by Employing new technologies, Investing in more capital equipment or Training and organising staff efficiently. Increase productivity  Means using fewer resources  so Production costs fall  Meaning prices can be cut and sales rise  so Market share and profits increase  The Business gains competitiveness

The Manufacturing Production Process
Examples of waste in the production process are: Time spent waiting for parts to arrive Unsold stock having to be stored Layout of the workplace isn't efficient Money wasted when machinery is brought for a one off job Staff trained in a single skill Businesses also need to consider whether they need their own transport fleets or whether money can be save by hiring logistic firms Having your own logistics is good because drivers can go out anytime when required but lorries and drivers can often be lying idle. Flexibility is also important in Lean Management. This can be applied to staff – if they are multi-skilled they can be kept busy in different ways. This can also be applied to Capital where machinery can have multiple uses. This is called Flexible Specialisation

Economic Manufacture Economic manufacture is making something that stays within budget, that is not wasteful and that would be competitive in its costing. Achieving this is easiest often easiest when it is possible to mass manufacture. If very high output is unrealistic, it may help, it may help to use batch production.

Lean Management Lean management, or Lean production, at its simplest means minimizing waste of time and resources. The point of adopting this is to increase efficiency and develop competitive advantage. As a strategy, Lean management includes: Careful control of stocks using JIT where suitable Attention to quality issues & reducing defects Continuous Improvement of ideas from all staff Reducing development times to meet a change in customer needs quickly Attention to training and developing staff skills As well as a reduction in cost and improvement in productivity arising from reduced waste, lean production provides the competitive advantage of better reputation, better quality and better customer service. Exam Tip: Quality issues is in Chapter 10. Stock Control and JIT were in Chapter 8.

Why Lean Production? Eliminate waste Maintain quality Produce more
Traditional production methods such as job, batch and flow often result in high levels of waste and inefficient use of resources Complete the boxes with ways lean production achieves these aims: The aims of lean production are: Eliminate waste Maintain quality Answers could include: Production method CAD and CAM Changing machine setups frequently TQM Low Stock Level JIT Frequent deliveries Flexible multi skilled workforce Consultative leadership Produce more Use less

Continuous Improvement
Developed by the Japanese and known as ‘kaizen’. The idea is that improvement should not happen as ‘one offs’ for a long period, but rather a continuous improvement by adapting and changing production techniques gradually in order to eliminate waste at all levels I’ve worked overtime every day this week, I am going to be sick next week What is waste? It’s a waste of time having that specialist machine. We only use it occasionally! Why do I have to walk over there to get the tools I need? I’ve been waiting for an hour for the materials I need!! ‘No day should pass without some kind of improvement being made somewhere in the business.’

Think about the advantages/ disadvantages:
J I T Manufacturing J I T manufacturing is ‘pulled’ by the market and ‘made to order’ rather than by using the idea of ‘just in case’ production In this way stocks can be kept to a minimum. The Kanban system is the key. It is a card that goes with the product and generates more parts to be delivered to each workstation What are the main advantages to the business of this system? Reduction of stock levels Increase in working capital. Why? No unsold goods Matches demand Should lead to higher quality Think about the advantages/ disadvantages: to the business to the customer to the employees

J I T Manufacturing Remember: JIT manufacturing is not an appropriate method for all manufactured goods or workforces. Think about the factors which have to be in place for it to be successful Will the workforce and managers accept the cultural change? What if there is a sudden change in demand? Can we afford not to buy in bulk? Can we rely on our suppliers to make regular deliveries? Can we afford the investment in technology? Exit

Cell Production START END
This method of production reorganises the work area into separate ‘cells’ or areas where similar types of work take place before the ‘product family’ is moved to the next ‘cell’ A ‘product family’ is a group of products which requires a sequence of similar operations e.g kitchen cabinets Each cell decides and controls the work schedule. Using the diagram devise a cell system for the making of kitchen cabinets START WS1 WS2 WS3 WS4 WS7 WS6 WS5 END

Time Based Management ‘TIME IS MONEY’ Make ‘families of products’
The aim of this type of management is to eliminate a certain type of waste i.e. TIME How do businesses achieve this? Make ‘families of products’ Work study J I T Cell Production Cut lead times ‘TIME IS MONEY’ TQM Shorten production runs Up to Date Technology Lean Design Lean design is an approach which attempts to carry out a number of design tasks simultaneously in order to save time. This done using project teams of specialists who can identify potential problems and solve them before time is wasted

How does Lean Production work?
The company examines everything it produces and every process and finds ways of improving it (Kaizen) Makes maximum use of new technology (capital intensive) The company attempts to keep everything to a minimum (stock – JIT) (waste – TQM) (time – time based management)

NO BUSINESS CAN STAND STILL!!
Evaluation Any evaluation must be made in the context of the business describe in a case study or exam question Remember no new strategy such as lean production, lean design, J I T or time based management suits all businesses Any evaluation must look at to what extent a new strategy such as lean production can contribute to the overall success in the business and the stakeholders Any evaluation must look at the relative importance of factors in the decision. A business has to prioritise in order to make a strategic decision A business must continually review its production, stock and quality systems if it is to maintain its competitive edge in the market NO BUSINESS CAN STAND STILL!! Exit

𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑈𝑡𝑖𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑝𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑜𝑢𝑡𝑝𝑢𝑡 x 100
Capacity Utilisation Capacity utilisation looks at how much of the production capacity of the business is being used. It is a measure of efficiency and a key factor is a business wants to expand. 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑈𝑡𝑖𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛= 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑀𝑎𝑥𝑖𝑚𝑢𝑚 𝑝𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑜𝑢𝑡𝑝𝑢𝑡 x 100 This formula compares actual output with the potential output at full capacity. You can increase capacity by: Changing shift patterns Use overtime or employ temporary staff Expand the business Invest in more capital equipment

Kanban Kanban is where products are finished in response to customer orders. This is a system of cards where each box of components has a Kanban card which will carry out instructions to move within the production process. In many businesses Kanban is part of a sophisticated electronic system which needs to be carefully organised with suppliers

Chapter 11 Stock Control

Keywords Stock Control – The process in which the business ensures that stocks of inputs are adequate to meet production requirements, and that the stocks of the finished product are readily available to meet customer demand. Buffer Stocks – Stock that is kept as a back-up to ensure the business never runs out completely of inputs or finished stock. Just-in-time (JIT) – Keeps the cost of holding stocks to a minimum by planning production so that raw materials, components and work in progress are delivered just as they are required.

What is Stock? Stock has different meanings in business it could be:
Raw materials – Used in the production process Work-in-progress – Products in the process of being made Spares – Kept incase of capital machinery breaks down Finished products – Final goods ready to be sold or delivered A business must get the stock right - if they hold too much they risk higher storage and insurance costs, cash flow problems and increased obsolescence (waste). However, If they don’t hold enough stock then they may not be able to meet the demand of customers so they will go to a competitor who has the good in stock (E.g. A kettle in Currys is out of stock, customers buys at Argos instead).

Managing Stock EPOS Waste Management Stock Control Charts
There are a number of ways that a business can use to manage their stock more efficiently: EPOS Waste Management Stock Control Charts Electronic Point of Sale A database that is kept up-to-date by using barcodes and scanners It is common in retail and generally straight forward Selling old stock on offer, its better to get less profit on an item then let it go to waste Put new stock at the back (E.g. In a supermarket put bottles of milk at the back so customers by the sooner BBD. Traditional method that can be integrated from an EPOS system However it is based upon assumptions that Deliveries are on-time and stock is at a constant rate

Stock Control Chart Stock Level (Units) Time (Weeks)
Maximum Stock – The most stock the business can hold Reorder Level – The level at which the business should reorder Minimum Stock – The point at which more stock is delivered Buffer Stock – Backup stock in case lead time is longer or demand is higher than expected Lead Time – The time it takes for stock to arrive from ordering Maximum Stock Reorder Level Stock Level (Units) Minimum Stock Lead Time Buffer Stock Time (Weeks)

Just-in-time (JIT) JIT stock control provides material, components and accessories immediately prior to when they are needed. The system doesn’t use buffer stocks at all, or if it does reduces them. This system allows businesses to have smaller storage areas meaning cheaper to hold and the chance of stock being stolen or going obsolete is reduced. Also fewer people would be needed to manage the stock. To make JIT effective the business needs a good supplier relationship to ensure stock arrives on time and is correct and the IT system, if used, needs to be closely adapted to work with the system. If they order in smaller quantities more frequently, then they wont get bulk discounts.

Economies of Scale This is when each unit made is cheaper the more that is produced For example, in a printing company the prices may look like this: 100 Prints = £200 (I.e. £2.00 per print) 200 Prints = £300 (I.e. £1.50 per print) 300 Prints = £400 (I.e. £1.30 per print) The more prints ordered, the cheaper it is per print The business wont loose out because the initial cost of the print design and plate only has to be paid off once, then they can still make a profit but pay off the variables for ink and material per print

Chapter 12 Quality Control

Keywords Quality Control – ways of ensuring that quality is maintained, traditionally by checking for defects after the product has been made. Quality Assurance – Takes into account customer needs and involves examining every aspect of design, development, production and marketing. Total Quality Management (TQM) – Where each member of staff is responsible for quality. Quality Circle – A small group of employees in the same department who meet regularly to discuss production problems. Kaizen – A Japanese term for continuous improvement overtime. ISO-9000 – A worldwide recognised quality certificate.

Quality Quality can be defined as the minimum standard that a product or service can be There is generally a trade-off between Quality and Price because the better quality materials and capital used, the more expensive it is to make therefore the Price would have to be increased Quality can be monitored by Quality Circles. This is when a group of staff who have good insight and perspective into the production process meet up and discuss production After the meeting, the feedback is given to the management team who can improve the production process and set targets The disadvantage is that it costs time and money to implement When the management want to implement improvements to quality or productivity, they can use the Kaizen method which is when they introduce production slowly over time to make it less overwhelming to staff

Thornton's sell mis-shapen chocolates in cheap bags
Quality Control Quality Control is where the product or service is checked for defects at the end of production – It could be a chocolate bar checked by staff to ensure it aesthetically correct and scanned to ensure it doesn’t contain foreign bodies It could be where the customer is asked to complete a survey about the service of a Satellite Dish being installed There are disadvantages such as – The source of a problem may be difficult to find Once the product has a defect the whole unit, possibly batch, will have to be restarted A Unit from each batch have to be taken away to sample by other staff Thornton's sell mis-shapen chocolates in cheap bags

Quality Assurance Quality assurance involves having a well publicised system that documents the processes to ensure quality is achieved The quality is collaborated by all departments, from the design process to the final product They will work together to achieve reliability and quality ISO 9000 is an international procedure providing certificates that are designed to ensure that a quality assurance system is in place

Total Quality Management (TQM)
TQM is a form of Quality Assurance where every employee is responsible for quality to minimise waste This culture has to come from the top levels of the hierarchy so that staff feel its necessary, the management team will have to trust staff and give them the responsibility This isn't appropriate for small or service businesses Positives Negatives Generates better quality products and the business can adapt a zero-defect attitude There are costs of implementing it – E.g. Training Customers will be more satisfied and make repeat purchases which will increase revenue If 1 person fails to stick to TQM, it can put everyone else out of place It will reduce waste which reduces costs Expectations of staff may be too high

Chapter 13 Economic Influences

Key Terms Economic Cycle – is the sequence of depression, recovery, boom and recession which creates fluctuations in demand for products. Gross Domestic Product (GDP) – is a measure in the size of economy and gives the money value of all output. Its used as a measure of national income and total expenditure. Economic Growth – means an increase in the total output of the economy. If it is rising, the standard of living should improve & business will see rising demand. Unemployment – occurs when there are people who want to work but cannot find a job. Inflation – is a sustained rise in the general level of prices of goods and services. It can be measured using the Consumer price index or Retail price index. Government Expenditure – is the amount of money that the government spend on public services such as the NHS and Benefits. Exchange Rates – is comparing one currency in exchange for another.

Economic Cycle & Recessions
Recessions can be caused by many factors, such as in 1974 and 1980 there were hugs oil price increases so people had to pay more for fuel so had less to spend on luxuries, and businesses that use oil as a raw material found it difficult and would have had to increase the price to match their new costs. Economic Cycle effects: Depression Recovery Boom Recession Unemployment High Falling Low Rising Inflation Stable Confidence Very Low Investment

Inflation In a booming economy, demand is growing fast but business can still put their prices up to sell their products In a recession, businesses are competing so they are more likely to keep prices the same or cut them Inflation automatically increases in a boom and slows in a recession. When commodity, oil and VAT prices increase this can also effect inflation Effects on a business Effects on a consumer Makes the future more uncertain for a business which is a risk Can make the consumer less confident so they spend less Its harder to estimate the likely future demand for a product Buy less luxuries and stick to essentials like Bread, Milk etc. Costs will increase Wages will decrease

Globalisation, Imports & Exports
Globalisation is the way in which all the worlds economies have become more closely integrated. There is more foreign investment and trade. Imports are products or materials brought in from other countries. Exports are products or materials sold to other countries. When import prices rise, inflation rises because many of the products we buy are imported.

Exchange Rates Exchange rates is the price of one currency expressed in terms of another (such as £/$) If the value of the £ Appreciates (increases)  Imports will be cheaper If the value of the £ Appreciates (increases)  Exports will be more expensive If the value of the £ Depreciates (decreases)  Imports will be more expensive If the value of the £ Depreciates (decreases)  Exports will be cheaper Putting it into practice: Converting Currency = The amount you want to exchange x The Exchange rate E.g. £100 into $Dollars = £ x 1.64 = $164.00 E.g. £185 into €uros = £ x 1.20 = €222.00 You'll be given the exchange rate in the question!

Strong Pound Imports Cheap Exports Dear

Select from the list below which would benefit from a strong pound and which it would be detrimental to; a) Toyota wanting to set up a factory in the UK b) British Airways wishing to takeover Qantas c) Land Rover selling cars in the UK d) Jaguar’s exports to the USA e) A French water company wishing to buy shares in Severn Trent f) Raleigh bikes who imports its components from abroad Detrimental Benefit

Unemployment Unemployment is when people are willing and able to work but haven't got a job. This can be caused by changes in the economic cycle, redundancy, transition between jobs or season. Positives & Negatives on a business: Positives Negatives More people looking for work People have less money to spend More choice in recruitment Demand and Confidence will fall May be able to pay lower wages Retained profits may be lost is the business makes posses

Public Spending The public sector are the governments own employees, civil servants, council office staff, NHS employees, teachers, the armed forces etc. Government Expenditure is the amount of money that the government spend on public services such as the NHS and Benefits. When government cuts their expenditure, there is normally job losses and redundancies so they will spend less so many businesses will see falling sales revenue putting their profits at risk. When businesses make a loss and close, there are even more job losses which means more unemployment and everyone will feel less confident about the future.

Tax Tax revenue is vital to pay for services. When unemployment is low and incomes are growing, tax revenue will be growing too. Borrowing money can fund investments and expansion into public services such as the NHS. When the economy grows more slowly and recession is looming, any past surplus and borrowing can make it possible to keep employment and incomes from falling. When taxes are increased to pay for higher spending, the economy changes but doesn’t shrink unless they are increased to reduce government losses.

VAT Value added tax is the tax added to the price of goods and services. In 2011 VAT increased from 17.5% to 20.0% No VAT is paid on food, public transport or children's clothing and there is a reduced rate to 5.0% for utilities like gas & electricity (Exemptions)

VAT Continued If VAT increases, businesses will increase prices to cover the tax except a few who will keep the prices the same to stay competitive

Interest Rates Interest rates are the cost of borrowing money
The bank of England tries to keep inflation under control by changing interest rates. When the BOE adjusts their interest rates, banks adjust theirs by a similar rate. If the rate goes up, business loans, mortgages and personal loans become more expensive (You will pay more interest).

Chapter 14 Legislation

Keywords Consumer Protection – A set of laws that ,make businesses accountable to their customers. Regulators – Independent bodies set up by the government for industries that have previously been nationalised and had some monopoly power. Office of Fair Trading (OFT) – An organisation that investigates complaints made by consumers about unfair competition, consumer protection & trade description.

Consumer Protection Acts
Sale of goods Act 1994 – The law requires that products must be of satisfactory quality, fir for purpose and as described. The Trade Descriptions Act 1968 – The law requires that products are correctly descripted and not portrayed that it does things it cant. The Companies Act 1998 – This law requires that businesses must not fix prices, bid for contracts, Limit production to reduce competition, charge different prices for different customers. Sometimes this doesn’t apply – E.g. Child Ticket half the price of an Adult ticket. Click here to download the companion flyer for easy revision & more detailed examples of each Act plus information about the OFT!

Regulators Regulators are independent bodies that are set-up by the government for industries that have considerable market power. There is a regulation body for every industry that cant easily be replaced by another organisation: OFGEM—The office of Gas & Electricity Markets OFCOM—The office of Communication Markets OFWAT—The office of Water Suppliers.

The Office of Fair raiding (OFT)
The Office of Fair Trading oversees UK policies and investigate claims regarding Consumer Protection & Trade Description. Any consumer who feels that they have a genuine claim against a business can go to the OFT where they will investigate into the claim and come to a conclusion, sometimes suing them for money. The OFT can take an investigation further that a business complaints department as they can be bias towards the company. Click here to download the companion flyer for easy revision & more detailed examples of each Act plus information about the OFT!

There are predictions that the economy may be heading in to a recession.
Cut back on investment Particularly affect luxury goods manufacturers/retailers Scale back production

Exchange rates are fluctuating
Fluctuating exchange rates causes the price of imported and exported goods to fluctuate – this makes predicting demand and signing long term contracts vey difficult. Firms will not know how much to invest as they can not predicted sales. This may deter investment. Firms who export price elastic goods will find the most difficulties.

There are rumours that interest rates will rise
Firms will expect a recessionary effect Cut back on investment Particularly affect luxury goods manufacturers/retailers Scale back production Take out less loans – the loans they do take out the might fix Discourage new businesses starting up.

Uncertainty over Inflation
Inflation causes uncertainty. Rising prices will cause a businesses’ costs to rise. Firms may find it difficult to forecast their future prices and hence future sales They may expect the Bank of England to respond with an increase in interest rates that will have a recessionary affect – firms may therefore be reluctant to invest. It will be difficult to sign long term contracts.

EDEXCEL A LEVEL BUSINESS

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