Unit 1 Continued
- Created by: MattHoward
- Created on: 28-01-15 16:51
Location
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
Employment
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
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
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
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
Advantages:
- 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
Disadvantages:
- 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
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
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
Budgets
Advantages:
- Help control income and expenditure
- Forces managers to review activities
- Allows departments to coordinate spending
Disadvantages:
- Can cause rivalry if departments have to compete for money
- Can be restrictive
- Time consuming as managers may get too occupied
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
Variances
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
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
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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