understanding the business environment

Sole Trader - One person employs people, quick decisions, keeps the profit

Limited Liability - If they go bankrupt, the max sum they can lose is what they put in

Partnership - between 2 and 20 partners, Deed of partnership has to be written.

 ADV - Share skills and work loads

DISADV - Does not have limited liability

Companies - set up to run a business, owners are the shareholders

Private Limited Company - Family run, at least 2 shareholders

Public limited Company - Brought and sold on the stock exchange

Co-operatives - people join together to make decisions and share profits

Producer Co-op - "limited by gaurentee." each member undertakes any losses to up a certain amount

Marketing Co-op - Found in farming areas. Set up by farmers.

Retail Co-op - buy items for resale

Not-for-profit or charity - provide a service rather than make a profit

Lawful charity -

• The advancement of education
• " " " Health
• " " " Religion
• The prevention of education

Franchise - The 'hiring out' or licensing of the use of 'good ideas and business systems to other companies'

• McDonalds
• Boots
• Pizza Hut

Internal Sources of Finance -

Dividends = portion of profits given back to shareholders

Working Capital = 'liquid' capital required to run a business

Creditors =

Debtors = an individual or business that owes you money

External Sources of Finance -

• Individuals
• organisations providing venture capital
• banks and other financial institutions
• suppliers
• government

Concider -

• the lenght of time money is needed for
• the cost of raising the money in one way rather than another

Owner's Capital - raised from individual owners, e.g. partners or shareholders. Raised when starting a business.

ADV - raising finances from shareholders means the business doesnt have to pay a set return each year

DISADV - asking sharholders for more funds may make then loose confidence in the company

Venture Capital - companies that provide finance in return for equity (element of control)

ADV - Quick and reletively cheap

        - Don't have anything to repay 

DISADV - May not want to lose some control of the business

Borrowing - the charge made for borrowing money from the bank or other finaicial source

• Bank loans
• Debentures
• Bank overdrafts
• Hire Purchace
• Leasing
• Morgages
• Suppliers
• Factoring
• Government loans  

Bank Loans - taken out for a fixed period of time. repaid either in instalments or in full at the end of the term. Normally short-to-medium term basis.

Mortgages - loan secured on land and buildings. Used to either pay for the property or provide security. Long term financial agreement - 10 to 30 years. High interest rate.

Short Term vs Long Term finances

Long-term e.g. to purchace other businesses, or buildings

Medium-term e.g. to update machinery, equiptment and fittings, motor vehicals

Short-term e.g. to buy new stocks, to pay wages etc

A business needs to match the sort of finance they need with the time period they require it for.

A budget is a financial plan developed for the future

Financial planning is defining objectives and then developing ways to achieve them

Benefits of Budgeting -

• helps to predict what the organisation thinks will happen
• creates opportunities to appraise alternative courses of action
• sets targets
• helps to monitor and control performance
• provide a series of quantitive guidelines
• source of motivation
• form of communication

The Process of Budget Setting -

Spread sheets are an effective 'what if' tool.

Responsible accounting is where each individual manager is responsible for managing their budgets

Budget reports reflect the assigned responsibility at each level of the organisation

Budget Plan  - predicts changes within the business.

Zero Budgeting  - the budget is initially set at zero and then each department has to justify their spending

Top Down Approach - managers specify what the best performance indicators are for the business

Bottom Up Approach - builds up the organisational budget on the basis of the submissions of individual line managers

Budget setting should be based on?

- realistic predictions of future sales and costs

ADV - Based on actual data

DISADV - future conditions might change

Dangers of budgeting

• actual results might be different to the budgeting ones
• process could lose its credability as a means of control
• following it to rigidly may restrist the business's activities

Variance Analysis - The process of measuring the different between budgeting (intended) and actual outcomes.

Adverse - exceeding the budgeted expenditure. i.e, spending £20,000 when only £15,000 was budgeted for.

Favourable - actual expenditure is less than budgeted for. i.e. spending £15,000 when £20,000 was budgeted for.

HOW TO WORK IT OUT

Actual - Budgetted = Variance 

Adverse - Favourable = Overall Variance 

Why does Varience arise?

• Random deviations which are uncontrollable - outside of the managers control.
• an incorrectly-set budget - may require further research and management action
• Failure to meet an agreed budget -  manager has failed to meet the appropriate figures and deadlines

Historic Budgeting - when the years targets for costs and revenues are based upon last years budget.

Budgeting Contexts - the different forms of budget -

• raw materials
• labour budgets
• overhead budgets
• cash budgets

Budgeting context - Sales budget

 - Used to forecast sales and sales turnover for a forecast period.

Direct Labour Budget

- employed directly by the business e.g. a teacher working in a school.

Capital Budget

- states the required budget needed to run the business

Problems with Budgeting

• reliance upon budgeting and its processes is no substitute for good management
• Should be used along side other management tools.
• the process may create unnessary pressure upon managers

Fixed Costs 

 - Do not increase as total output increases 

Variable Costs 

- Increase as total output increases... more input needs to be employed 

Marginal Costing 

 - A technique that uses costs to forecast profits from the production and sales levels expected

 - Useful for making short term decisions 

Contribution = selling price per unit - variable costs per unit 

Break-Even Point

Breaking even is when the business neither makes a profit or loss.

If sales go beyond the break-even point, profit is made.

If sales go below the break-even point, a loss is made  

HOW TO CALCULATE:

Selling price - Variable Cost per unit = Unit Contribution

£14 - £7 = £7

Fixed costs / Unit Contribution = BREAK-EVEN POINT.

£4,000 / £7 = 572 (572 units need to be made to break-even.)

Sales Value at Break-even point -

Number of units X selling price per unit.

572 x £14 = £8,000

All costs have been covered and they have broke even. Anything in excess to this will make them a profit

Profit Target

Break-even Analysis can be sued to calculate the number of units that need to be sold and the value of sales needed to break-even 

Margin Of Safety

the difference between the break-even point and the selected level of activity to achieve the profit target. 

any profit made after the break-even point is achieveing the profit target 

MOS = Target sales - BEP

Break-Even Charts 

Used to show the changes in the relationship between:

• costs 
• production volumes 
• levels of sales activity

Procedure to be followed:

• label the horizontial axis for units of production and sales
• label the vertical axis for the values of sales and costs
• plot fixed costs - fixed costs remain the same no matter what - plot in a straight line parallel to the horizontal axis 
• plot the total costs (variable and fixed costs) - this should rise as the fixed costs line touches the vertical axis. - plotted by calculating the total costs at two or three random levels 

Break-even is where the total costs and the sales line cross 

Break-even Analysis limitations 

• Can be argued that fixed costs vary with different levels of sales
• many businesses fail to break-even 
• variable costs and sales lines are unlikely to be straight - discounts, special offers - more likely to be curved. 
• take in to account short-term relationships, therefore long-term forecasts may be wrong
• depends of the accuracy of the forecasts (like all other methods) 

Cash-flow forecasts 

used to predict the net cash flow for the business over a furture period 

Purposes:

• used to highlight the timing consequences of different expenditures 
• helps to show whether a business is capable of achieving the objectives it sets 
• provide them with reassurance of the future
• help monitor the businesses performace

to prepare a cash-flow forecast you need to know what receipts and payments are likely to take place in the future and exactly when it will occur. 

How to do a cash-flow forecast: 

Opening Balance = Last months closing balance 

Closing Balance = Opening balance + money in - money out 

In flow = all sales 

Out flow = wages, materials, variable expenses 

Net cash flow = Cash In - Cash Out 

Monitoring Business Performance 

• Identifying - capturing all the financial data within a business related to how it is performing.
• Measuring - pounds and pence is used as a form of measurement. 
• Recording - accouting data and information must be recorded in handwritten accounting books or a computer spreadsheet. 
• Communicating - financial information is reported.

Information has to be:

• reliable - no errors 
• comparable - with other organisations 
• relevant - should relate to many of the decisions that have to be made about the business
• understandable - capable of being understood 

Decision-Making 

The business environment changes fast. Managers and employees need information that will help with decision-making. 

Accounting information provides help when knowing what to order and the requirements within the business. 

Credit Control 

Involves managing transactions within a business. this will help credit controllers to understand who the business owes money to and the period they have to pay it over. 

Financial position 

Has to meet internal and external report requirements to show financial health and to meet legal etc requirements. 

Stakeholders need information about the business:

• internal users - groups within the organisation, such as managers 
• external users - groups outside the organisation, such as shareholders and creditors. 

If a business does well, there are many rewards for individuals and the business as a whole. 

If a business does bad, there has to be a range of consequences for individuals and the business as a whole. 

Meeting Legal Requirements 

business need to keep accounts in order to meet a range of legal requirements form Companies Act and others.

They have to provide information for tax authorites e.g. Inland Revenue 

Financial and management accounting 

this is devided into two broad areas:

• Financial accounting - recording of financial transactions and the preparation of financial reports to communicate past financial performances when asked for.

- provides reports/statements that follow a standard approach

- provides inforamtion to a particular date

• Management accounting - looking to the future using the knowledge of past performances where relavent, to aid management. Reports are only for internal use. 

- produces reports with a specific decision in mind 

- provides extracted information which relates to parts of the organisation where it is used to help 

Profitability and Liquidity (solvency)

Profitability 

Making sure that the business is making a profit and the key newsworthy areas are being publicised by the press

Liquidity / Solvency 

"to be able to meet financial obligations" 

'technically insolvent' when it has sufficient assets to meet financial needs, not not enough time to convert in tot cash

'legally insolvent' if it is in a situation of permanent cash shortage. 

Use of modern technology 

A business depends on the efficient and accurate production of goods or services. Nowadays businesses depend on new technology, this is because:

• large organisations cant attend every meeting face-to-face 
• geographically spread out and require communication links 
• modern business decision-making frequently requires up-to-date information 
• fierce competition 
• pace of industrial development has increased 

There are many Advantages and Disadvantages to tecnhology.... 

Advantages of using technology:

• increased productivity - producing good or providing services at lower costs
• although expensive, the costs of technology can be recvovered over a period of time
• ability to compete more efficiently - production line will run quicker
• speed and accuracy of operations - fewer problems and mistakes 
• less employees - releaves them of 'boring jobs'
• increases the variety of tasks staff can undertake 
• better presentation of materials - better finish on products
• improved forms of communication 
• more modern feel 

Disadvantages of using technology:

• the need to constantly invest in new technologies to retain their market position 
• staff have to adapt and gain experiance of different technologies - cost of training staff
• could lead to redundancies as less staff are needed. 
• staff must work in a way that increases the investment in such technologies 
• can lead to system fails 
• constant security risk - someone could enter the system 

Software applications 

It is expected for employees to be able to use many different softwares e.g.

Spreadsheets,

Account packages,

Databases 

Spreadsheets 

A table with numbers which can be organised and altered on the computer. 

Spreadsheets are useful for forecasting and financial modelling as they show the effects of a decision. 

An organisation can make a forecast of all the money coming in and going out over a 12 month period. - can be altered to calculate the effects. 

very quick and easy to read. 

Accounts Packages 

Advantages 

• computers help to improve the control of funds coming into and going out of an organisation 
• improve accuracy - lots of data that needs to be analysed 
• can supply reports and account balances much more quickly.
• helkp to provide managers with a readily accessible view of how the business is functioning. 

An accounting package would:

• update customer accounts in the sales ledger 
• record bank receipts and payments 
• print out invoices 
• make payments to suppliers and for expenses 
• adjust records automatically 

Databases 

• an organisation can store information only once and assess information from several files 
• files can be linked together so that it is possible to update a whole range of files at once.
• rapid access to information 
• little likelihood of the data becoming lost 

if a computer breaks, it may be hard to fix and therefore all the information is lot. 

Unauthorised access to the records may also occur if it is protected by only a password. 

SWOT Analysis 

Strengths Weaknesses Opportunities Threats 

A SWOT analysis can help to:

• indentify strengths relative to competitors and then to build on these strengths 
• indentify internal weaknesses and to seek to eliminate the weaknesses. 
• identify opportunities - new products and new markets that are developing 
• identify threats - such as the development of a new product coming onto the market by a competitor 

SWOT analysis for 'Andrews Farm'

PEST and SLEPT 

Political Economic Social Technology 

Social Legal Economic Political Technology 

Used to analysis the environment in what the business operates 

Linking SWOT and SLEPT analysis 

SLEPT analyses changes in the external environment - focuses on the opportunities and threat facing a business 

Strengths relate to having the right type of resources to do in the market:

• having managers who can make change happen and who understands the market
• having good human resources 
• having a good financial resources base - healthy profit 
• marketing department that understands what the customers want 

There is a number of external influences that affect businesses and these factors can have a big impact on day-to-day business decision-making.

These influences relate to:

• changes in economic indicators such as interest rates 
• changes in the competitive structure of the market the organisation operates in 
• unpredictable changes 

Changes in economic indicators 

• When the economy is booming this leads to a general increase in demand for products and increases in business costs 
• when the economy is depressed this leads to a general slump in demand for products and costs fall. 

Inflation 

This is a sustianted increase in the general price level which leads to a fall in the value of money. 

The rate of inflation is measured by the annual percentage change in the level of concumer prices - tried to be kept at 2% 

This is a problem for businesses because it adds to business costs - the price of essential raw materials and goods increase meaning the business has a bigger outflow 

Interest rates 

Set by the Bank of Englands Monetary Ploicy Committee. 

May be raised to discourage people from taking out a loan 

More money has to be paid back - loan + the interest rate 

Exchange rates 

Measures the external value of a currency. e.g. pounds in exchange for euros 

The value is determined by the demand and supply - If pounds is in high demand, the value will rise 

The pound has fallen in value against the euro - meaning to buy goods from the euro zone, we have to pay more in pounds. 

When the sterling exchange rate is high, it is cheaper to import raw materials, components and machinery and equiptment 

Unemployment 

This is important for an organisation as they may need to compete for the scarse resource of labour. 

There are two main ways of counting the unemployed:

• The Claimant Count covers those people who are eligible to claim the Job Seakers Allowance 
• The Labour Force Survey covers those who have looked for work in the past month and are able to start work in the next two weeks 

The level of unemployment is very important to business particularly in:

• Determining costs - the lower the employment, the higher the wages is likely to be 
• Determining the investment required in the labour force - when unemployment is low employers will need to invest more in training, developing and motivating their existing employees 

Changes in the competitive structure of the market 

Businesses have to be continually aware of the competitveness of the markets in which they operate. e.g. supermarkets are always competiting to be the biggest and offer the lowest but good quality products 

Large firms are able to:

• invest in the best assets
• spend more that their rivals on advertising and marketing 
• get the best tersm from suppliers 
• invest heavily in mnarket research to find out what customers want.  

Changes in the competitive structure of the market 

The competive position is always changing - new firms enter the market, new technologies and other opportunites present themselves for the development of competition.

Being able to buy goods online has threatened businesses such as:

• wine merchants 
• book sellers 
• travel agents 

Developments can also reduce competition:

• Supermarkets chains face reduction competition from small gorcers and retail shops 
• small sellers cant compete with supermarket prices 

Unpredictable external influences 

Although businesses are able to think ahead and anticipate many changes in the market e.g. interest rates and new competitions. There is also changes that are too unpredictable to be anticipated. 

Coping with changing economic and market conditions