| production | provision of a product or a service to satisfy consumer wants and need |
| factors of production | land, labour, capital, enterprise |
| production process | production process |
| typical manufacturing business has | factory manager, purchasing manager, research and development manager |
| factory manager responsibilities | quantity and quality of products coming off a production line, includes maintenance of the production line and other necessary repairs |
| purchasing manager responsibilities | providing materials, components and equipment required for the production |
| research and development manager responsibilities | the design and testing of new production processes and products |
| productivity | output measured against the inputs used to create it |
| productivity equation | productivity = output/quantity of input |
| labour productivity equation | labour productivity = output (over a given period of time)/number of employees |
| how to increase productivity and efficiency | introduce new technology, use more automation, motivate employees more effectively, improve training |
| benefits of increasing productivity and efficiency | reduced inputs needed for the same output level, lower cost per unit (average cost), fewer workers needed potentially leading to lower wage costs, higher wages might be paid to workers which increases motivation |
| buffer inventory level | inventory held to deal with uncertainty in customer demand and deliveries of supplies |
| seven types of waste that can occur in production | overproduction, waiting, transportation, unnecessary inventory, motion, over processing, defects |
| lean production | used by businesses to cut down on waste and increase efficiency, by reducing the time it takes for a product to be developed and become available for sale |
| advantages of lean production | less storage of raw materials or components, improved health and safety leading to less time off work due to injuries, cutting out some processes which speeds up production |
| lean production methods | kaizen, JIT, cell production |
| kaizen | continuous improvement through the elimination of waste (making things easy to access and in order to improve flow) |
| advantages of kaizen | increased productivity, reduced amount of space needed for production process, work-in-progress is reduced |
| JIT | involves reducing or virtually eliminating the need to hold inventories or raw materials or unsold inventories of the finished product |
| advantages of JIT | reduces inventory costs, warehouse space is not needed, finished product is sold quickly increasing cash flow |
| cell production | the production line is divided into separate self contained units (cells). each making an identifiable part of the finished product instead of having a flow production line |
| cell production advantages | improves workers morale which improved efficiency, feel more valued so are less likely to strike or cause disruption |
| methods of production | job, batch, flow |
| job production | a single product is made at a time |
| advantages of job production | suitable for one off products, meets exact customer requirements, workers often have more varied jobs which can increase employee motivation and give greater job satisfaction |
| disadvantages of job production | skilled labour is often used and raises costs, takes a long time, materials have to be specially purchased, any errors can be expensive to correct |
| batch production | a quantity of one product is made then a quantity of another item will be produced |
| advantages of batch production | still gives some variety to workers jobs, allows more variety to products, production may not be affected to a great extent if machinery breaks down |
| disadvantages of batch production | warehouse space is needed for inventories of raw materials, machines have to be reset between production batches leading to a delay in production, semi-finished products need to be moved to the next production stage which can be expensive |
| flow production | large quantities of a product are produced in a continuous process (flowing down a production line) |
| advantages of flow production | high output of a standardized product, can benefit from economies of scale in purchasing, automated production lines can operate 24 hours a day |
| disadvantages of flow production | boring system for workers so lack job satisfaction so lack of motivation, significant storage requirements, capital costs of setting up the production line can be high, one machine breaks the whole production line has to stop |
| production in action | a business may use a combination of all three types of production at different times depending on product or customer needs |
| factors affecting which method of production to use | size of the market, size of the business, nature of demand, nature of the product |
| size of market | if demand is higher and more products will be sold in smaller quantities then batch production is used, businesses in niche markets will use job or batch production whereas international markets will use flow |
| size of the business | if the business is small and doesnt have access to a large amount of capital then its more likely to use job or batch production. Larger business will operate on a larger scale and use flow production |
| nature of demand | if there is a large and steady demand for a product its economical to use flow production. if demand is less then its more likely to be produced using batch or job production |
| nature of the product | if a unique product then job production will be used, if the product is mass produced then flow production will be used |
| automation | where the equipment used in the factory is controlled by a
computer to carry out mechanical processes |
| mechanization | is where the production is done by machines but operated by
people, like a robot which is a machine that is programmed
to do tasks |
| CAD | (computer-aided design) is computer software that draws items being designed more quickly and allows them to be rotated to see the item from all sides instead of having to draw it several times. (theater) |
| CAM | (computer-aided manufacture) is where computers monitor the production process and control machines or robots on the factory floor. |
| CIM | (computer-integrated manufacturing) is the total integration of computer aided design (CAD) and computer-aided manufacturing (CAM) |
| EPOS | (electronic point of sale). This is used at checkouts where the operator scans the barcode of each item individually |
| EFTPOS | (electronic funds transfer at point of sale). This is where the electronic cash register is connected to the retailer’s main computer and also to banks over a wide area computer network. |
| contactless payment | It is a fast, easy and secure way to pay for purchases that are less than a small amount, for example, in the UK this is £30 or less |
| advantages of new technology | productivity is greater because better production methods are used, boring jobs are now done by machines leading to greater job satisfaction, better quality products are produced because of more accurate production methods |
| disadvantages of new technology | unemployment rises because machines replace people, expensive to buy new tech and machinery, technology can become outdated quickly leading it too need to be replaced frequently |
| why businesses hold inventories (stock) | allows a business to maintain production and satisfy customer demand quickly, to know when a business gets to its re-order point, economies of scale |
| why businesses hold inventories (stock) can be bad | costs a lot to store, reduces cash flow as money is tied up in inventory |
| fixed costs | costs which do not vary in the short run with the number of items sold or produced. They have to be paid whether the business is making sales or not |
| variable costs | costs which vary directly with the number of items sold or produced |
| why costs are important | compare revenue from one business to another, calculate profit and loss, helps managers make decisions, determine selling price |
| total costs | fixed costs and variable costs combined |
| average cost per unit | total cost of production/total output |
| use of cost data | setting prices, decide weather to stop production or continue, decide on the best location |
| economies of scale | factors that lead to a reduction in average costs as a business increases in size |
| 5 types of economies of scale | purchasing, marketing, financial, managerial, technical |
| purchasing economies of scale | business is able to buy large number of components and get it cheaper, reduces unit cost |
| marketing economies of scale | transport costs are reduced by using larger vehicles, might be able to afford it's own vehicles to distribute goods |
| financial economies of scale | larger businesses can often raise capital cheaper than smaller ones, bank managers often consider that lending to larger businesses as they are less risky |
| managerial economies of scale | small businesses can't usually afford to pay for a specialist manager (marketing manager), tends to reduce their efficiency, larger companies can afford this which increases efficiency |
| technical economies of scale | small businesses cant afford the equipment that large businesses can, the use of flow production and latest equipment will reduce average costs |
| dis-economies of scale | factors that lead to an increase in average costs as a business grows beyond a certain size |
| 3 types of dis-economies of scale | poor communication, lack of commitment from employees, weak coordination |
| poor communication dis-economies of scale | can become more difficult to send and receive messages, mistakes can occur if there is slow/inaccurate communication leading to lower efficiency and higher average costs |
| lack of commitment | workers may feel not important leading to lack of commitment and low efficiency |
| weak coordination | takes longer for decisions to be expressed leading to different worker objectives |
| break even level of output/point | quantity that must be produced/sold for total revenue to equal total costs |
| break even charts | graphs which show how costs and revenues of a business change with sales. They show the level of sales the business must make in order to break even. |
| revenue | income during period of time from the sale of goods or services |
| total revenue formula | quantity sold x price |
| break even point | level of sales at which total costs = total revenue |
| advantages of break even charts | managers can figure out expected profit or loss, impact on profit or loss decisions can be shown by redrawing the graph, used to show the margin of safety |
| limitations of break even graphs | doesn't show possibility of inventories not being sold, only concentrates on break-even point, fixed costs only remain constant if the scale of product doesn't change |
| margin of safety | amount by which sales exceed the break-even point |
| contribution formula | selling price - variable costs |
| quality | produce a good or service which meets customer expectations |
| importance of quality | establish brand image, build brand loyalty, increase sales |
| if quality isn't maintained | lose customers to other brands, replace faulty products raising costs, creates a bad reputation through word of mouth |
| quality control | using quality inspectors to check for faults and for quality at the end of the process weather its the production of a product or a service, |
| advantages of quality control | tries to eliminate faults or errors before the customer receives the product, less training required as inspectors are employed to check quality |
| disadvantages of quality control | expensive to pay for inspectors, doesnt find why the fault occurred, higher costs if the products has to be scrapped |
| quality assurance | checking for quality standards throughout the production process by employees |
| advantages of quality assurance | fewer customer complaints, tries to eliminate errors before passing onto next production stage, reduced costs if products don't need to be re made |
| disadvantages of quality assurance | expensive to train employees, relies of employees being committed to maintaining the standards set |
| total quality management | continuous improvement of products and processes by focusing on quality at each and every stage of production |
| advantages of total quality management | waste is removed and efficiency increases, reduced costs as products don't have to be reworked, no customer complaints so brand image is improved |
| disadvantages of total quality management | expensive to train employees, relies of employees following TQM ideology and accepting responsibility for quality |
| factors affecting location of manufacturing business | production methods, markets, raw materials, external economies of scale, availability of labour, government influence, transport and communications, climate |
| factors affecting location of a service sector business | customers, personal preference of the owners, technology, availability of labour, climate, near to other businesses, rent/taxes |
| factors affecting location of a retailing business | shoppers, nearby shops, customer parking, availability of suitable vacant premises, rent/taxes, access for delivery vehicles, security, legislation |
| factors that a business should consider when deciding in which country to locate operations | new markets overseas, cheaper or new sources of materials, difficulties with the labour force and wage costs, rent/taxes, availability of government grants, trade and tariff barriers |
| what do finance departments do | record all financial transactions, preparing final accounts, forecasting cash flows |
| main reasons reasons businesses need finance | starting up a business, expansion of an existing business, additional working capital |
| start up capital | finance needed by a new business to pay for essential fixed and current assets before it can begin trading |
| working capital | finance needed by a business to pay its day-to-day costs |
| capital expenditure | money spent on fixed assets which will last more than one year |
| revenue expenditure | money spent on day-to-day expenses which do not involve the purchase of a long-term asset like wages |
| 2 different groups of sources of finance | internal/external, short term/long term |
| internal finance | obtained from within the business itself |
| external finance | obtained from sources outside of and separate from the business |
| retained profit - internal | profit kept in the business after the owners have taken their share of the profits |
| retained profits advantages | doesnt have to be repaid, no interest needs to be paid |
| retained profits disadvantages | new businesses will not have this, small businesses might be too low to finance the expansion, keeping more profits might turn away shareholders |
| sale of existing assets - internal | assets that could be sold which have value but not required by the business |
| sale of existing assets advantages | better use of capital tied up in the business, does not increase the debts of the business |
| sale of existing assets disadvantages | might take a while to sell, not available to new businesses as they have no surplus assets to sell |
| sale of inventories to reduce inventory levels advantages - internal | reduces the opportunity cost and storage cost of high inventory levels |
| sale of inventories to reduce inventory levels disadvantages - internal | must be done carefully to avoid disappointing customers if not enough goods are kept as inventory |
| owners savings - internal | a sole trader or members of a partnership can put more of their savings into their unincorporated business |
| owners savings advantages | should be available to the firm quickly, no interest is paid |
| owners savings disadvantages | savings may be low, increases the risk taken by the owners as they have unlimited liability |
| issue of shares advantages - external | permanent source of capital, doesn't have to be repaid to shareholders, no interest has to be paid |
| issue of shares disadvantages - external | dividends will be expected from shareholders, ownership of the company would change which the owners might not like |
| bank loans advantages - external | usually quick to arrange, can be for varying lengths of time |
| bank loans disadvantages - external | will have to be repaid eventually and interest has to be paid, collateral is required |
| selling debentures - external | long-term, loan certificates issued by limited companies |
| selling debentures advantages | can be used to raise very long term finance |
| selling debentures disadvantages | must be repaid with interest |
| factoring of debts - external | debt factors and specialist agencies that "buy" the claims on debtors of a business for immediate cash |
| factoring of debts advantages | immediate cash is made available to the business, risk of collecting debt is not the businesses problem any longer |
| factoring of debts disadvantages | business doesnt receive all of its debts |
| grants and subsidies advantages - external | usually don't have to be repaid |
| grants and subsidies disadvantages - external | often have "strings attached" like the firm must locate in a specific area |
| micro-finance - alternative | in developing countries banks are unwilling to lend to poor people even if they wanted the finance to set up an enterprise |
| micro-finance | providing financial services including small loans to poor people not served by traditional banks |
| crowdfunding advantages - alternative | can be a fast way to raise money, no initial fees paid to the crowdfunding platform, often used by investors when other methods arent available |
| crowdfunding disadvantages - alternative | media interest needs to be generates, crowdfunding platforms might reject the proposal |
| short-term finance | provides the working capital needed by businesses from day-to-day operations |
| overdrafts advantages - short-term | can be cheaper than short term loans, interest is only paid on the amount overdrawn |
| overdrafts disadvantages - short-term | the bank can ask for the overdraft to be paid at a very short notice, interest rates are variable unlike loans which have a fixed interest rate |
| trade credit - short-term | when a business delays paying its suppliers which leaves the business in a better cash position |
| trade credit advantages - short-term | almost an interest free loan to the business for the length of time that payment is delayed for |
| trade credit disadvantages - short-term | the supplier may refuse to give discounts or refuse to supply more goods |
| long-term finance | usually available for more than a year and sometimes many years usually to buy fixed assets |
| bank loans - long-term (same as external finance ones) | same as external finance |
| hire purchase - long-term | allows a business to buy a fixed asset over a long period of time with monthly repayments |
| hire purchase advantages - long-term | the business does not have to find a large cash sum to buy the next asset |
| hire purchase disadvantages - long-term | a cash deposit us paid at the start of the period, interest payments can be quite high |
| leasing - long-term | allows the business to use the asset without having to purchase it |
| leasing advantages - long-term | the care and maintenance of the asset are carried out by the leasing company, the business doesnt have to find a large cash sum to buy the asset with |
| leasing disadvantages - long-term | the total cost of the leasing charges will be higher than purchasing the asset |
| issue of shares - long-term (same as external) | same as external finance |
| loans difference from money from shares/shareholders | loans must be repaid, loans are often secured against particular assets |
| factors that affect which source of finance to choose | purpose and time period, amount needed, legal form and size, control, risk and gearing |
| purpose and time period | if the use is long term like a fixed asset then the source should be long term, if the use is short term like the purchase of inventory for a busy period then the loan should be short time |
| amount needed | different sources will be used depending on the amount of money needed |
| legal form and size | public limited companies have a greater choice of sources of finance |
| control | owners of a business might lose control if they ask other people to invest |
| a business is more likely to get a loan if | a cash flow forecast shows why the finance is needed and how it will be used, an income statement for the last time period and forecast one for the next, details of existing loans and sources of finance being used, evidence that collateral is available to reduce the banks risk if it lends, a business plan to explain clearly what the business hopes too achieve in the future and why the finance is important to these plans |
| shareholders and most likely to buy additional shares when | the companies share price is increasing, dividends are high or profits are rising so they might increase in the future, other companies don't have a good investment, the company has a good reputation and plans for the future |
| if a business runs out of cash it will face problems like | being unable to pay workers , production will stop, business might be forced into liquidation |
| cash flow | is the cash inflows and outflows of a period of time |
| cash inflows | sums of money received by a business during a period of time |
| how cash can flow into the business | sale of products, sale of assets, payments made by debtors, investors investing more, borrowing money from an external source |
| cash outflows | sums of money paid out by a business during a period of time |
| how cash flows out of the business | purchasing good or materials for cash, paying wages salaries and other expenses in cash, purchasing fixed assets, repaying loans, paying creditors of the business |
| cash flow cycle definition | shows the stages between paying out cash for labour, materials and so on and receiving cash from the sale of goods |
| cash flow cycle diagram | 1 - cash needed to pay for, 2 - materials, wages, rent etc, 3 - goods produced, 4 - goods sold, 5 - cash payment received for goods sold |
| profit | surplus after total costs have been subtracted from the revenue |
| how can profitable businesses lose money | allowing customers too long of a credit period, purchasing too many fixed assets at once, expanding too quickly |
| cash flow forecast | estimate of future cash inflows and outflows of a business |
| a cash flow forecast can be used to show a manager | how much cash is available for paying bills repaying loans or for buying fixed assets, weather the business is holding too much money that could be put towards a profitable cause |
| uses of cash flow forecasts | starting up a business, running an existing business, keeping the bank manager informed, managing cash flow |
| starting up a business | owner needs to know how much cash is needed in the first few months |
| keeping the bank manager informed | bank will have to see the cash flow forecast before giving a loan. they will need to see how big of a loan is needed and how long it will be needed for |
| managing an existing business | any business can run out cash due to expensive assets being bought or fall in sales, borrowing money needs to be planned to avoid high interest rates, if the business is not well planned for loans the bank can deny it or charge high interest rates. |
| managing cash flow | too much cash held in the business means capital could be used in other areas, could pay creditors quickly to take advantages of discounts |
| net cash flow | difference between inflows and outflows |
| closing cash balance | amount of cash held by the business at the end of each month |
| 4 methods for overcoming cash flow problems short term | increasing bank loans, delaying payments to suppliers, asking debtors to pay more quickly or insisting on only cash sales, delay or cancel purchases of capital equipment |
| how increasing bank loans works to overcome short term cash flow problems and limitation | bank loans will inject more money into the business, interest must be paid reducing profits |
| how delaying payments to suppliers works to overcome short term cash flow problems and limitation | cash outflows decrease in the short term, suppliers could refuse supply |
| how asking debtors to pay more quickly or insisting on only cash sales works to overcome short term cash flow problems and limitation | cash inflows will increase in the short term, customers may purchase from another business that still offers them credit |
| how delaying or cancelling purchase of capital equipment works to overcome short term cash flow problems and limitation | cash outflows for purchase of equipment will decrease, the long term efficiency of the business could decrease without up to date equipment |
| 3 methods for overcoming cash flow problems long term and limitations | attracting new investors by selling more company shares - but will this affect the ownership of the business, cutting costs and increasing efficiency - but could product quality be affected, developing new products that will attract more customers - this could take a long time |
| working capital | is the capital available to a business in the short term to pay for day to day expenses, working capital = current assets - current liabilities |
| forms that working capital can be held in | cash is needed to pay day-to-day costs and buy inventories, value of a firms debtors is related to the volume of production and sales, not having enough inventories may cause production to stop but a very high inventory levels could result in high opportunity costs |
| accounts | are the financial records of a firms transactions |
| accountants | are the professionally qualified people who have responsibility for keeping accurate accounts and for producing the final accounts |
| final accounts | are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business |
| how can surplus be increased | increasing revenue more than costs, reducing the cost of making products, both one and two |
| 4 reasons why profit is important to private sector businesses | reward for enterprise, reward for risk taking, source of finance, indictor of success |
| reward for enterprise | successful entrepreneurs have many important qualities and characteristics and profit gives them a reward for this |
| reward for risk taking | entrepreneurs and other investors take risks when providing capital to a business and profit rewards them for taking these risks like dividends to shareholders, these payments provide incentives to business owners to make their business more profitable, to investors to put more capital into profitable businesses |
| source of finance | profits after payments to the owners (retained profits) are a very important source of finance for businesses as it allows for expansion |
| indicator of success | when some businesses are very profitable other businesses or new entrepreneurs are given a signal that investment into producing similar goods are profitable. if all businesses in an industry and making losses it wouldn't be a good signal to set up in that industry |
| income statement | a financial statement that records the income of a business and all costs incurred to earn that income over a period of time (like a year). |
| revenue | income to a business during a period of time from the sale of goods or services |
| if the business is making a profit managers will ask themselves | is it higher than last year, if it is lower why is profit falling, is it higher or lower than similar businesses, if lower what can we do to become as profitable as other businesses |
| if the business is making a loss managers will ask themselves | is this a short term or long term problem, are other similar businesses also making losses, what decisions can we take to turn losses into profits |
| cost of sales | is the cost of producing or buying in the goods actually sold by the business during the time |
| gross profit | is made when revenue is greater than the cost of sales, gross profit = revenue - cost of sales |
| trading account | shows how the gross profit of a business is calculated |
| net profit | profit made by the business by a business after all costs have been deducted from revenue, net profit = overhead costs - gross profit |
| depreciation | is the fall in the value of a fixed asset over time like each year a truck falls in value, this is recorded on the income statement |
| retained profit | is the net profit reinvested back into a company after deducting tax and payments to owners such as dividends |
| the income statement for limited companies will also contain | corporation tax paid on the companies net profits, the dividends paid out to shareholders (in some years, dividends might be zero), the retained profits left after these two deductions, results from the previous year to allow for easy comparison |
