Unit 1 Continued

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Choosing a location:

- Transport costs, e.g located near customers to cut distribution costs

- Good infrastructure

- Good land and labour resources e.g labour with special skills\

- Qualitative factors e.g good image

Assisted areas - Economically less developed parts of UK

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Part-time staff

Advantages for the business:

- Saves the business money

- More flexibility to manage workloads (part-time workers can cover when needed)

- Happier staff as a better work/life balance (less stress)

Disadvantages for the business:

- Difficult to find part-time staff as they're looking for full-time work

- Staff may be less dedicated and loyal

- Less experience than full-time staff

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Business Plans

Business Plan - A document statuing what the owners want to do and how they plan on doing it.

Sections of a business plan:

- Executive summary: A general overview with key points

- Business summary:Legal structure, and the future of the business

- Production plan: How many products the business intend to produce 

- Marketing plan: Main competitors and unique selling point 

- Human resources plan: Qualifications and employment of employees

- Operations plan: Location of the business

- Financial plan: All the financial forecasts

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Costs, Revenues, and Profits

Revenue= Selling price per unit x Units sold

Profit= Revenue - Total costs

Fixed costs - Costs that do not change with the level of output e.g rent

Variable costs - Costs that do change with the level of output e.g raw material costs

Opportunity costs - The costs of a decision where the benefits outweigh the next alternative

Calculated risk - Where the positives and negatives are weighed up to make an educated decision

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Break Even

Break Even= Fixed costs ÷ Contribution per unit

Contribution per unit = Selling price per unit - Variable costs per unit

Margin of safety - The amount between the current output and break even

Break even analysis 


- Easy to do as it's plotting figures on a graph

- It is quick to complete

- A method to persuade banksto provide them with a loan


- If the data is wrong, the results will be wrong

- Says how many units must be sold to break even

- Assumes variable costs remain the same

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Cash Flow Forecasting

Cash Flow - Money flowing in and out of a firm

Cash Flow Cycle - The gap between money going out and coming in

Net Cash Flow = Cash inflows - Total costs

Closing Balance = Opening balance + Net cash flow

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Setting Budgets

Budget - A financial plan estimating a businesses future earnings and spendings

Income Budget - Forecasts the businesses revenue

Expenditure Budget - Forecasts the businesses total costs of fixed and variable costs

Profit Budget - Forecasts the expected profits from the income and expenditure budgets



- Help control income and expenditure

- Forces managers to review activities

- Allows departments to coordinate spending


- Can cause rivalry if departments have to compete for money

- Can be restrictive

- Time consuming as managers may get too occupied 

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Historical and Zero Budgeting

Historical budgets are updated each year, and they're quick and simple, assuming business conditions stay unchanged each year

Zero budgeting is starting from scratch after each year. Starting with £0, the budget holders must get approval to spend money on activities over the next year. It may take longer than historical budgeting however it's more accurate if it is done properly.

Fixed budgeting - Budget hokders must stick to their budget plans throughout the year

Flexible budgeting - Allows budgets to be altered to signficant changes in the market/economy

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Variance - The difference between the actual figures and budget figures

Favourable Variance - Revenue is more than the budget says

Adverse Variance - Less inflows than the budget says

External Factors Causing Variance:

- Competitors behaviour

- Economical changes 

- Raw materials cost increase

Internal Factors Causing Variance:

- Improving efficiency

- Businesses overestimating money saved by streamlining its production methods

- Businesses underestimating costs of making organisational changes

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Fixing Variances

Variance Analysis - Identifying and expiaining variances

Fixing Adverse Variances:

- Change the marketing mix

- Cutting prices, increasing sales

- Streamlining production

- Motivate employees to work harder

Fixing Favourable Variances:

- Set more ambitious targets next time

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Measuring and Increasing Profit

Percentage Change in Profit= Current Year's Profit - Previous Year's Profit ÷ Previous Year's Profit x 100

Two types of profit: Gross and Net profit

Gross Profit= Revenue - Variable Costs

Net Profit= Revenue - (Fixed+Variable Costs)

Net Profit Margin(%)= Net Profit ÷ Revenue x 100

Return on Capital Employed(%)= Net Profit ÷ Capital Employed x 100

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