Tips

Explain:
- Define the term
- Apply it to the context
Topic 1
Entrepreneur - a person who takes the risk of running a business

3 purposes of enterprise:
- Spotting an opportunity
- Developing an idea
- Satisfying customer needs

4 characteristics of an entrepreneur:
- Creativity
- Confidence
- Determination
- Risk-taking

Risks of entrepreneurship:
- Losing savings
- Mental & physical strain

Rewards of entrepreneurship:
- Potential to make a lot of money
- Independence
- Self satisfaction
- Making a difference

5 steps in business planning:

- Idea
- People
- Market research
- Finance
- Competitors

Markets - where a business sells its goods and services

Business plan - explains how a business intends to achieve its objectives and how it will be
financed, marketed

Sole trader - business owned by one person

Partnership - business owned by 2-20 people

Private limited company - can sell shares only to invited people

Public limited company - can sell shares to anybody

Share - part ownership of a business

4 objectives of a business plan:
- Identify the market
- Identify the resources
- Identify the finance needed
- Achieve the business’ aims and objectives

Features of a sole trader:

- Easy to setup
- Owner has full control
- Business stops when owner dies
- No information about profits shared
- Limited finance
- Unlimited liability
- Owner does all the work

Features of a partnership:
- Easy to setup
- Partners may disagree, profits must be shared
- New deed of partnership when an owner leaves or joins
- No information about profits shared
- Few partners, limited finance
- Unlimited liability
- Work is shared between owners

Features of a private limited company:

- Takes time to setup, legal documents needed
- Shareholders restrict who buys shares
- Business continues even if shareholders sell or die
- Financial information must be published
- New shareholders can invest, finance is available
- Limited liability
- Managers take decisions

Features of a public limited company:

- Takes time to setup, legal documents needed
- Anybody can buy shares
- Business continues even if shareholders sell or die
- Financial information must be published
- New shareholders can invest, finance is plentiful
- Limited liability
- Managers take decisions

Unlimited liability - the owner is responsible for paying all the debt if a business fails

Limited liability - the owners of a business can only lost the money they invested if the
business fails

Assets - items owned by the business

4 business objectives:
- Survival
- Growth
- Profit
- Providing a service

Stakeholders - groups or individuals that have an interest in a business

Internal stakeholders:
- Owners
- Employees

External stakeholders:
- Customers
- Suppliers
- Government
- Local community

Owners provide finance and manage and run the business

Owners want to make a profit

Employees produce goods and services

Employees want the satisfaction of having a job, earn an income and be treated fairly

Customers buy goods and services

Customers want to enjoy the benefits of goods and services and pay affordable prices

Suppliers sell goods for resale or sell components/materials needed to manufacture goods
Suppliers want to make sales and profit

Government helps businesses, workers and communities

Government wants to encourage businesses to increase employment and to pay tax

Local community provides workers and influences business activity

Local community wants to have a prosperous local area

Benefits of business activity:

- Profits
- Jobs
- Income
- Goods & services
- Sales
- Taxes
- Prosperity

Problems with business activity:

- Financial losses
 - Redundancy
- Poor goods & services
- Late or missed payments
- Bad publicity
- Negative impacts on the environment

Business success is measured in profits, jobs, income, goods and services, sales, taxes and
prosperity

Business failure is indicated by losses, low sales, poor quality goods and services, negative
impact on the community

Organic growth - the internal growth of a business

Capacity - how much output a business can produce/sell

4 types of organic growth:

- Increasing output
- By being more efficient, using up spare capacity, increasing capacity
- Gaining new customers
- By reducing prices, expanding to different locations, better marketing
- Developing new products
- Through research and development
- Increasing market share
- Increasing sales, taking business from other firms

2 ways of growing externally:

- Merger - two or more businesses agree to join
- Takeover - business takes control over another business

4 types of external growth:

- Horizontal growth, business is in the same operation
- Diversification, business has no connection
- Backwards vertical growth, takeover/merge with a supplier
- Forwards vertical growth, takeover/merge with a business you supply to
Topic 2
Marketing - finding out the needs of consumers and demonstrating how a business fulfils
those needs to increase sales

3 purposes of marketing:
- Identifying and understanding customers
- Informing customers
- Increasing sales

4 p’s of marketing:
- Price
- Product
- Place
- Promotion

Market research - collection of data on customer habits to help decision making in marketing

5 aims of market research:

- Age
- Economic status
- Culture
- Location
- What they want in a product

Primary research - data that is collected first hand

4 types of primary research:

- Questionnaire
- Questions are sent out to people online
- Advantages: cheap, easy to target customers
- Disadvantages: may not understand questions, may answer dishonestly
- Interview
- A group is asked questions
- Advantages: questions can be explained, easy to target customers
- Disadvantages: expensive, not everyone likes being interviewed
- Trialling
- A product is sold for a short period
 - Advantages: can see if people want the product, reduces risk of producing
large quantities
- Disadvantages: people tested must represent the total market
- Focus group
- People are asked for their opinion
- Advantages: people chosen will represent potential customers
- Disadvantages: small group, expensive

Secondary research - collection of data using research and information gathered by others

4 types of secondary research:

- National census
- Information about number of people in households, incomes, locations
- Advantages: information about people in the whole country
- Disadvantages: not specific to the business, needs to be interpreted correctly
- Magazines
- Articles describe people’s interests and fashions
- Advantages: cheap, up to date, good source of ideas
- Disadvantages: information is general and not specific to the business
- Websites
- Information about other businesses can be found
- Advantages: cheap, readily available
- Disadvantages: needs top be interpreted correctly
- Internal data
- Data about the business
- Advantages: cheap, readily available, specific to business
- Disadvantages: data is about the past, not the future

The decision to use certain types of research depends on:

- How much money the business can afford to spend
- What information is needed
- The location of customers
- How fast the information is needed

Qualitative data - the opinions of those being asked

Qualitative data:
- Advantage: business can understand what the customer wants
- Disadvantage: gathered from limited amount of people

Quantitative data - data collected based on numbers or facts

Quantitative data:
- Advantage: easy to interpret, can be gathered from many people
- Disadvantages: limits how much people can say about what they like or dislike

Market segmentation - splitting the market into different parts or segments

5 ways of segmenting a market:
- Age
- Location
- Gender
- Income
- Lifestyle

Innovation - improvement of an original idea

Invention - creating a totally new product

4 stages in the product life cycle:

- Introduction, product/service is first on sale
- Growth, sales growing strongly
- Maturity, sales at their highest level
- Decline, sales are falling, product is seen as old and outdated

What should be considered when pricing a product:

- How new the product is
- The quality of the product
- Number and the nature of competitors
- How well the customers know the product already
- How much it costs to produce the product

5 pricing methods:
- Price skimming high price charged for a high-end product
- Competitor pricing price is based on how much competitors are charging
- Promotional pricing prices are reduced to get rid of old stock
- Cost-plus pricing cost of product is calculated, profit is added to find the price
- Penetration pricing low price charged to persuade customers, price increased
once sales increase

2 types of promotion:
- Point of sale promotion, a benefit is received once they buy the product
- Advertising, information is given and the customer is persuaded to buy

4 types of point of sale promotion:

- Price reductions, sell off old stock
- Competitions, customer that buys product is entered in a competition
- Loss leaders, goods are sold at a loss to encourage customers to buy other goods
- Free samples, tempts people to buy the product

5 types of advertising:
 - Social media, cheap, reaches lots of people, not everyone uses it
- Websites, lots of information can be given, costs money to maintain website
- Television, reaches a wide audience, expensive, can target potential customers
- Newspapers, can target potential customers, not everyone reads newspapers
- Radio, cheap, product can’t be seen

3 channels of distribution:
- Channel 1, directly from producer to consumer, producer, makes more profit
- Channel 2, producer to retailer to consumer, producer is confident the retailer will be
able to market the goods to consumers
- Channel 3, producer to wholesaler to retailer to consumer, wholesaler can break up
bulk stock and sell to retailers at affordable prices, so more retailers are willing to sell

Advantages of digital distribution:

- Product can be bought anytime of day
- No costs of physical transport or shops
Disadvantages of digital distribution:
- Physical goods can’t be distributed
- Customers that don’t own a computer can’t buy
- Some customers do not like sharing their bank details online

Changes in demand tell us whether we should

- change the price, advertising, promotional offers, introduce a new product.

The target market helps us decide:

- the design of the product, what to charge, how to advertise, which retailers to use,
which promotional offers to use

Market share helps us decide whether or not to change the current marketing mix.

Changes in the product tells us whether or not the business needs to introduce a new
product to match consumer needs or competitor products

The effect of promotion tells us the effectiveness of promotion and whether changes are
needed.
Topic 3
Personnel plan - a plan detailing:
● the employees a business needs
● How many they need
● Full-time or part-time
● The skills required and when they will work

Factors influencing HR needs:

- What a business makes
- How much a business produces
- What methods of production
- When production takes place
 - What functions are to be completed
- The budget available

Advantages of tall organisational structure:

- Clear lines of communication
- Managers have few people to manage
- Potential to be promoted, which is motivating

Disadvantages of tall organisational structure:

- Subordinates may feel controlled by their manager, which is demotivating

Advantages of flat organisational structure:

- Workers have their own roles and responsibilities, which is motivating
- Workers will talk to a wider range of colleagues, which is good for ideas

Disadvantages of flat organisational structure:

- Not always clear lines of communication
- Managers have a large number of workers to manage
- Not many promotion opportunities

3 reasons why businesses choose different organisation charts:

- For effective communication
- For different job roles and responsibilities
- For different ways of working

Full-time working - a person works more than 35 hours a week

Part-time working - a person works for less than 35 hours a week

Flexible working - a person works partly at their workplace and partly elsewhere

Temporary working - a person works for a short period of time for an employer

Working from home - a person completes work for a business in their home

Working while mobile - a person works while they are on the move

Self-employment - a person works in their own business, selling their work to consumers or
other businesses

For businesses:
- Full-time working means the worker is always available to work, but the business
may have to pay the worker when no work needs to be done

- Part-time working means the worker can be asked to work at specific times needed,
but the business may have to train more workers than if it employed full-time workers
 - Flexible working means the business benefits from motivated workers but the worker
may not be available when work is needed by the business

- Temporary working means the the business only needs to employ workers for as long
as they need them, but it is hard to recruit enough workers when they are needed

- Working from home means the business saves costs by not providing office space,
but workers won’t communicate as well, reducing efficiency

- Working while mobile means the business benefits from increased productivity of the
worker, but the business won’t be able to monitor the worker is working as much as
they should

- Self-employment means businesses don't have to pay national insurance or pension

contributions, but the self-employed person may not work in the way that the
employees are trained to

For workers:
- Full-time working means the worker is paid for a full working week but the worker
must work a full working week throughout the year

- Part-time working means the worker can work when it suits them, but the worker will
only get paid for the hours they work

- Flexible working means the worker can work at times that suits them, but the worker
may not be offered as much work as they want

- Temporary working means the worker can work and earn for a period and then do
other things they want to do, but the worker may have times when there is no work
for them

- Working from home means the worker saves time and money by not travelling to
work, but the worker may have distractions at home

- Working while mobile means the worker can make full use of their time but feel under
pressure to work a lot

- Self-employment means workers may like being in control and may be highly
motivated, but there is less job security as they may have times with no work and no
income

3 types of verbal communication:

- Phone
- Advantage: good for discussion, it is immediate communication
- Disadvantage: no record of the discussion
- Meeting
- Advantage: way to exchange ideas and check understanding
- Disadvantage: can be expensive and take time to arrange
 - Presentation
- Advantage: speaker can prepare what they will say, questions can be asked
- Disadvantage: take time to arrange and may be expensive

5 types of written communication:

- Letter
- Advantage: there is a record of communication
- Disadvantage: takes time for letters to be sent
- Email
- Advantage: fast way of communicating
- Disadvantage: person may not check emails regularly, and emails can be lost
in spam or deleted
- Text
- Advantage: fast way of communicating, text can be saved
- Disadvantage: limited information can be given, can’t discuss ideas
- Social media
- Advantage: message can be sent to large numbers or to groups, pictures can
be added to the message
- Disadvantage: somebody in the business needs to manage the
communications, and can’t judge how successful the message has been
- Website
- Advantage: saves money as information doesn’t need to be printed,
customers can order online so no shop needed
- Disadvantage: customers can’t ask for information and they can’t view the
goods

Advantages of methods of communication:

- Is it cheap?
- Is it fast?
- Can ideas be exchanged?
- Is it clear?
- Is it recorded?
- Can lots of information be given?
- Can the message be sent to lots of people?

5 divisions of communication:
- Marketing communication
- Finance communication
- Business operations communication
- Communication with the government
- Communication about human resources

4 reasons why businesses recruit:

- To start up a business
- When a business grows
- To replace employees who leave
- To fill a skills gap
Job description - a list of the main duties, tasks and responsibilities of a worker

Person specification - a list of the qualities, qualifications and knowledge a person should
have to do a particular job

Internal methods of recruitment:

- Notice boards
- Word of mouth
- Company website
- Emails to staff

External methods of recruitment:

- Websites
- Newspapers
- Social media
- Specialist magazines
- Job centres

Advantages of internal recruitment:

- Cheap
- Faster recruitment
- Managers know the worker already
- Worker knows the business and can settle in easily
- Can motivate other workers to see a colleague being promoted

Advantages of external recruitment:

- Fills a skills gap if no-one else can do the job
- Can bring new ideas
- Necessary when additional workers needed
- Saves having to recruit a worker to replace a promoted worker

Job advertisements include:

- Contact information
- Details about the job
- Details about the person needed
- Pay and conditions

Selection - process of choosing between applicants for a job

7 methods of selection:
- Letter of application
- CV
- Application form
- Tests and presentations
 - Interview
- Reference
- Group activities

4 ways of financial motivation:

- Pay, the money earned by workers as a reward for what they do
- Bonus, additional payment to workers for achieving a target
- Profit sharing, when workers receive some of the profits made by a business
- Fringe benefits, additional benefits that workers receive in addition to pay e.g. free
health insurance

3 ways of non-financial motivation:

- Praise, workers are praised for the work they do
- Advantage: no cost
- Disadvantage: if there is no financial reward for a long time, worker feels
undervalued
- Award scheme, workers are given rewards for their work e.g. vouchers holidays of
certificates
- Advantage: most rewards are inexpensive
- Disadvantage: they cost money, need to be given fairly
- Working environment, improving the workplace so that it is a pleasant place to work
- Advantage: workers will have a positive attitude to work
- Disadvantage: costs money

Retention - when workers choose to stay employed in a business

Labour turnover - the number of staff who leave the business each year and therefore need
to be replaced

4 benefits of motivation:
- High productivity, more goods or improved services reducing production costs
- Reduced worker supervision, workers will want to do their job well
- Low worker absences, workers will be happy about coming to work
- Improved quality, workers will take pride in doing their work well

Benefits of employee retention:

- Business doesn’t need to recruit workers as often, saving time and costs
- Training costs will be lower as there is no need to train as many new workers
- It will be easier to recruit new workers as they have a reputation for treating workers
well

Advantages of on the job training:

- Specific to the business
- Saves cost of travel
- Worker produces something as they train
- Business can teach worker exactly how to do their job

Disadvantages of on the job training:

 - Work done by the learner may be bad quality
- Trainer may be bad at teaching
- Difficult to train a group of learners

Advantages of off the job training:

- Training given by experts
- Leaner motivated by a day off of work
- Worker feels valued by being paid as they train

Disadvantages of off the job training:

- Can be expensive
- Business loses output while the worker is away
- Improving their skills gives them the opportunity to work at another place

Reasons why business train their workers:

- Teaches worker new skills
- Teachers worker to be in a team
- Informs of health and safety procedures
- Introduces new recruits to the business
- Informs of employment law

Productivity - a measure of output per worker

Staff development - includes apprenticeships and professional development programs

Apprenticeship - a long-term development programme for workers to learn job skills while
they work

Professional development - involves developing the long-term potential of workers

3 benefits of staff development to employees:

- Staff develop skills and gain qualifications
- Staff are paid while they develop new skills
- Staff may receive promotion or other benefits

4 benefits of staff development to businesses:

- Can improve staff retention
- Motivates workers, increasing productivity
- Helps the business meet future staffing needs
- Helps overcome skills shortages

Skills shortage - when there are no workers available with the skills a business needs

Employment law - regulations and rules put in place to protect workers from employers who
treat them unfairly

A business cannot:
- Pay workers differently for the same work
 - Favour certain types of people when recruiting workers
- Discriminate when promoting or training workers
- Allow workers to be mistreated by other workers

A business that does discriminate can find:

- Staff are less motivated
- Workers decide to leave
- A poor reputation
- Can be fined and pay compensation to the employees

A business that takes action to stop discrimination can find:

- Increased costs
- Need to rewrite recruitment and training policies to prevent discrimination
- It needs to monitor what goes on in the business to prevent discrimination

Equality act 2010 - a person cannot be treated differently on the grounds of their gender,
race, ethnicity, disability, sexual orientation, religion or beliefs

Contract of employment - a legal agreement between an employer and an employee about

pay, holidays etc

Statement of employment particulars - part of a contract of employment, it gives details of

the terms of employment
Topic 4
Job production - a method of production where products are made individually

Advantages of job production:

- Item is high quality and meets the individual needs of the customer
- The business can charge a high price

Disadvantages of job production:

- Can be high cost
- Production may be slow

Batch production - a method of production where one type of product is made and then
production is switched ot make a different product

Advantages of batch production:

- Batches can be varied to meet different needs of customers
- No storage costs if goods are made to order
- Cheaper than job production

Disadvantages of batch production:

- Machines need resetting each time a batch is switched, which costs money
- Stocks of raw materials may be needed, extra costs
- Tasks may be repetitive and boring, which is demotivating and reduces staff retention

Flow production - production of one product that takes place continuously using a production
assembly line

Advantages of flow production:

- Large quantities are produced
- Production economies of scale reduces cost per unit
- Use of machinery and automation reduces costs
- Use of computer controlled machinery allows some variation in products

Disadvantages of flow production:

- May not be high quality goods
- May need to store large stocks of materials for the production line
- Production line can be disrupted
- Tasks may be repetitive and boring, which is demotivating and reduces staff retention

Automation - a production process involving machinery that is controlled by a computer

rather than a person

Robotics - the use of robotics in the production process

3 uses of technology in production:
- Computers
- Automation
- Robotics

Advantages of using technology in production:

- Machines can replace workers, reducing costs
- Computers aid worker productivity, reducing costs
- Waste is reduced as machines are more accurate than humans
- Technology can operate 24/7, reducing costs
- Production is flexible as machines can be programmed to change what is produced

Disadvantages of using technology in production:

- Business may need to recruit skilled labour to program the computers
- Workers may need to be retrained to work with technology
- New technology may be expensive to buy
- Machines can break down, disrupting production

Quality - refers to a product being fit for purpose, does what the customer expects and
complies with legal requirements

2 benefits of quality goods and services:

- Waste is reduced, less recalls and returns
- Business gains a good reputation, retains customers, they recommend the business
to others

Recalls - when a fault occurs with a product and the business asks for the product to be
brought back so it can be repaired or replaced

Returns - goods which customers take back to the shop because they are unsuitable or
faulty

2 ways of ensuring quality:

- Quality control, a system for inspecting quality of goods produced and ensuring they
are of the required standard
- Quality assurance, a system involving the whole business focusing on quality aiming
to prevent quality problems from arising

Advantages of quality control:

- Stops poor quality goods/ services from being sold
- Production can continue while inspection takes place, output is not affected
- Quality goods/services improve business reputation

Disadvantages of quality control:

- Doesn’t prevent waste
- Inspection can be expensive
- Doesn’t encourage workers to be responsible for quality
Advantages of quality assurance:
- Reduces waste and costs
- Motivates workers to be responsible for quality
- Quality goods/services improve business reputation

Disadvantages of quality assurance:

- Workers may be stressed by the responsibility of having to check the quality of their
own work

3 methods of selling:
- Face to face, involves direct contact between buyer and seller
- Telesales, sales completed over the phone
- E-commerce, bringing the buyer to the seller electronically

Advantages of telesales:
- Increases sales as customers can ask questions about products
- Costs less than running a shop

Disadvantages of telesales:
- Costs of storing goods in warehouses and paying telesales workers
- Sellers may call at the wrong time which can be a nuisance to customers

Advantages of face-to-face selling:

- Increases sales
- Customer can bargain over prices
- Useful when customers like advice and personal assistance

Disadvantages of face-to-face selling:

- May be inconvenient for customers
- Profits reduced if customer bargains

Advantages of ecommerce to businesses:

- Easier to sell worldwide
- Possible to sell 24/7
- Costs are lower as less workers needed, less premises rented
- Web designers can make businesses attractive at little cost

Disadvantages of ecommerce to businesses:

- Large amount of competition
- Delivery systems need to be organised, need to deal with increase in returned goods
- Cost of cyber security measures
- As technology develops the business needs to change its operation and the workers
it needs

Advantages of ecommerce to customers:

- Easier to compare prices
- Can buy 24/7
- Increased choice as you can buy from sellers around the world
Disadvantages of ecommerce to customers:
- Unable to ask questions
- Goods may be not as described on the website
- Not everyone has access to a computer
- If computer systems weren’t secure, their payment details are at risk

Customer service - business gives help to customers and deals with their enquiries

Customer service increases sales, encourages customers to return, but involves costs of
training workers for customer service.

After sales service - service provided to customers after they have bought the product

After sales service increases future sales, but costs money to train workers to deal with
customers, and returned goods may have to be sold at a loss as clearance goods.

Product knowledge - sales assistants know about the goods and services they sell and can
provide customers with information and advice

Product knowledge increases sales as customers are given information that helps them
make good decisions, but there are costs of training staff

Customer engagement - refers to communication between the buyer and the seller, and
providing a welcoming and respectful service

Customer engagement increases sales as customers feel comfortable with the buying
experience, but it costs money to train staff

Consumer law - area of law which protects the customers of a business

Consumer rights act 2015 - goods and services must be of satisfactory quality, fit for purpose
and as described

Fit for purpose - the good or service must do what it is meant to do

Satisfactory quality of goods - goods should reflect the price charged for them

As described - goods must be as the business has described them

Consumer law involves:

- Goods and services produced must be of a good standard. Business does this by
using quality control or assurance.
- Goods and services must be as described. Businesses achieve this by being legal,
decent, honest and truthful in its advertising.
 - Goods and services must be safe to use and not lead to a risk of injury or death.
Business achieves this by making sure the design of the product is safe and services
are provided safely.

Breaking the law results in:

- Needing to replace or repair faulty goods
- Refunds
- Bad reputation
- Returned goods
- Pay compensation
- Being forced to close down

Location - refers to where a business is sited

4 factors influencing business location:

- Costs
- Locating where cost of land, premises or labour is low saves on costs of rent
and wages
- Locating near good road links will keep transport costs low
- Proximity to the market
- Service businesses must locate near their customers
- Locating near customers reduces cost of transporting products to them
- Proximity to labour
- Business needs a supply of skilled workers may locate near universities
- Business that needs supply of unskilled labour may locate in high
population/unemployment areas
- Proximity to materials
- Locating near a source of raw materials reduces transportation costs
- Shorter transport journeys minimise carbon emissions

Procurement - the management of purchasing within a business

4 stages of procurement:
- Identifying goods and services to buy
- Which season the business is buying for
- Changes in technology
- Changes in fashion and lifestyle
- Choosing suppliers
- Dependent on quality of goods/services consumers want
- Reputation and reliability of suppliers
- Ordering goods/services
- Business completes an order form stating what it wants and sends it to the
supplier
- Receiving deliveries from suppliers
- Business will arrange for workers to receive the goods and have an area
where they can be stored

Logistics - the process of organising the transport of goods from the seller to the buyer
Supply chain - the chain of business involved in the production of a product and its delivery
to the user

5 logistical issues:
- Time
- Supplier must be able to deliver the goods on time
- Reliability
- Supplier must be able to supply the quantity and quality of goods needed by
the customer
- Length of the supply chain
- A long supply chain has an increased risk of problems occurring along the
way
- Costs
- The customer will want delivery costs as low as possible
- Customer service
- A supplier will need to provide customer service to deal with enquiries from its
customers
Topic 5
Finance function - refers to the finance department

Finance - money raised and used by a business

Financial information - includes details about profit, loss, cash flow, break-even, profit margin
and average rate of return

7 roles of the finance department:

- Calculating sales revenues and production costs
- Calculating average rate of return to measure how well the business is doing
- Calculating break-even output needed to avoid a loss
- Arranging finance (from loans or shares etc)
- Forecasting cash flow to decide if finance is needed
- Managing payments and receipts of money

5 reasons why businesses need finance:

- Establishing a new business
- New businesses need to buy items before it can produce or sell anything
- Funding expansion
- When increasing the scale of a business, it needs to pay for a larger factory,
shop or office, furniture, machinery
- Recruitment
- Workers are recruited when a business starts up, when it expands and when
workers leave. It costs money to advertise jobs
- Marketing
- Marketing campaigns need to be funded
- Running the business
- Need finance for day-to-day costs such as buying materials, paying expenses

Short term sources of finance:

- Owner’s savings
- Sale of assets
- Overdraft
- Trade credit

Long term sources of finance:

- Owner’s savings
- Sale of assets
- Retained profit
- Bank loan
- Crowdfunding
- Taking on a new partner
- Share issue

Sources of finance:
- Owner’s savings
 - ADV: No need to repay, doesn’t affect ownership or control, no interest
- DIS: risks savings, may not have enough savings
- Retained profit
- ADV: No need to repay, no interest
- DIS: Business may not have made profits, owners won’t get profit as income
- Sale of assets
- ADV: No need to repay, no interest, good if selling off old equipment/stock
- DIS: may be difficult to sell, may take time to sell
- Overdraft:
- ADV: Solves short term cash flow problems
- DIS: Heavy interest rates are charged each day
- Trade credit:
- ADV: No interest, helps with a cash flow problem
- DIS: Goods must be paid for even if they don’t sell, interest is charged if
payment is late
- Taking on a new partner:
- ADV: Partner may bring new skills, no need to repay, no interest to repay
- DIS: Profits will be shared with the new partner, partner has part control of the
business
- Loan:
- ADV: Repayment is made over a period of time, money is available
immediately
- DIS: Interest must be paid
- Share issue:
- ADV: New investors can contribute a lot of money, no need to repay, no
interest
- DIS: Shareholders must be given a share of the profits, shares can only be
sold by limited companies
- Crowdfunding:
- ADV: New supporters can contribute a lot of money, no need to repay, no
interest
- DIS: May take long to raise money

Considering a source of finance:

- Is external finance needed
- How long is the finance needed short or long term
- Should control of the business be kept
- Is the source of finance available for the type of business

Internal finance - finance raised from within the business, owners savings, retained profit,
sale of assets

External finance - finance raised from outside sources, overdraft, trade credit, loan, crowd
funding and share issues

Revenue - the money received from sales

Cost of sales - the cost of buying in the goods or producing the goods
Revenue is raised by:
- Increasing price to increase profit
- Reducing price to increase sales
- Increasing sales by advertising/producing more/selling a wider range of products

Variable costs - costs that change as output changes

Fixed costs - costs that stay the same regardless of output

Total costs - fixed costs plus variable costs

Minimising costs leads to:

- Increased profit
- Reduced prices to become more competitive
- Saves money to expand

Costs are reduced by:

- Replacing workers with technology
- Finding cheaper supplies of materials or goods
- Asking supplier to reduce their prices

Loss - when costs of a business are greater than the revenue it makes

𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑠𝑎𝑙𝑒𝑠

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 − 𝑒𝑥𝑝𝑒𝑛𝑠𝑒𝑠

Cost of sales - the cost to the business of producing goods to sell

Expenses - the costs of operating the business

𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 (%) = 𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 / 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 (%) = 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 / 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

Average rate of return (ARR) - measuring and comparing the profitability of an investment
over the lifetime of the investment
To calculate the ARR:
1) Calculate total profit from the investment over the life of the investment
- 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 (𝑓𝑟𝑜𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡) − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑣𝑒𝑟 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
2) Calculate annual average profit per year
𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
- 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 (𝑦𝑒𝑎𝑟𝑠)
= 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
3) Calculate the ARR
𝑎𝑛𝑛𝑢𝑎𝑙 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑜𝑓𝑖𝑡
- 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
× 100 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛

ARR is used to:

- Decide between investments
- Decide between investing or saving

Break even quantity - the output at which revenue is equal to costs, and neither a profit or
loss is made

Break even occurs when revenue = costs

Break even forecast - a prediction about the break even quantity based on estimates of
future sales

Problems with break even forecast:

- It is only a prediction, things may change in the future
- The business may not be able to sell at the price planned
- If prices of materials rise costs may rise higher than predicted

2 uses of break even forecasts:

- Planning how much to produce
- Planning the price to charge

Cash - money the business holds in physical coins and notes and in bank accounts

Profit - the total revenue a business receives minus the total costs of production

Liquidity - the ability of a business to pay its short-term debts

Cash flow forecast - statement showing the expected flow of money into and out of a
business over time

In a business, cash provides liquidity and enables a business to meet short-term

debts/expenses.

Positive cash flow - a forecast that more cash will enter the business than leave it

Negative cash flow - a forecast that more cash will leave the business than enter it

Cash flow forecasts are used for:

 - Planning
- Helps a business know if it has liquidity
- Banks are more likely to give loans if businesses have positive cash flow
- Anticipating cash shortages
- Predicting times when the business will have a cash shortage allows it to plan
how to deal with it
- Dealing with cash flow shortage during negative cash flow
- A shortage of cash is dealt with:
- Overdrafts
- Reducing spending or increasing revenue
- Providing targets
- Sets targets for amount of cash to hold for it to pay its bills during negative
cash flow

𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 = 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑓𝑙𝑜𝑤 𝑜𝑓 𝑐𝑎𝑠ℎ − 𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑓𝑙𝑜𝑤 𝑜𝑓 𝑐𝑎𝑠ℎ

Opening balance - the amount of cash available at the beginning of the month

Closing balance - the amount of cash left at the end of the month