Flashcards · 7137 · Topic 3.1

What is business? Managing marketing and finance flashcards

53 cards on Topic 3.1, subtopics 3.1.1 to 3.1.4. Pick a subtopic or study them all.

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3.1.1 Business and objectives

Reasons for setting up in business: Financial (profit, income) and non-financial (independence, turning a passion into a career, filling a gap noticed in the market).
Characteristics of entrepreneurs named in the specification: Risk taker, resilient, focused, passionate, innovative, adaptable.
Challenges of setting up in business: Funding, competition, uncertainty, limited track record.
How does an entrepreneur's role change as the business grows?: From doing everything personally to delegating and managing others.
Purpose and value of a business plan: Raising finance, setting direction, and testing an idea before committing resources.
Competitiveness: How attractive a business's offer is to customers compared with rivals (price, quality, service, brand). A new business must be competitive to win customers from established firms.
The seven influences on business decisions in the specification: Objectives, risk, reward, resources, market conditions, ethics, opportunity costs.
Why must risk and reward be judged together?: A higher possible reward usually brings higher risk, so a decision is rarely judged on potential reward alone; the business must be able to survive the downside.
Opportunity cost: The value of the next best alternative given up when a choice is made.
Ethical dilemma: profit versus ethics: A choice where the most profitable option conflicts with acting morally, for example using a cheaper supplier with poor labour practices. Ethical choices may cost profit now but protect reputation.
SMART objectives in the 7137 specification: Specific, Measurable, Accountable, Realistic, Time specific. Trap: the specification uses "Accountable", not "Achievable".
Turn "we want to grow" into a SMART objective: For example: "increase market share by 5% within two years", with a named manager accountable. A general aim cannot be judged; a SMART one can.
Purpose and value of setting business objectives: They give direction and a target, let performance be measured against results, guide decisions and other functions, and make managers accountable.

3.1.2 Forms of business and stakeholders

Sole trader vs private limited company (Ltd): liability, finance and control: Sole trader: unlimited liability, limited access to finance, full control. Ltd: limited liability, more access to finance, reduced control and must publish accounts.
Public limited company (plc): A company whose shares can be sold to the public on stock markets: limited liability and the most access to finance, but the most diluted control.
Co-operatives: the three types and their features: Worker, consumer and producer co-operatives. Owned and controlled by members, usually with limited liability; finance is limited and member-based.
Social enterprise: A business that trades to meet a social or environmental mission, not just profit. Liability depends on the legal form chosen; access to finance is often limited.
Unlimited vs limited liability: Unlimited: the owner's personal assets can be used to pay business debts. Limited: a shareholder can lose only the amount invested.
Issues to consider when comparing forms of business: Control, objectives, sources of finance, distribution of profits, and unlimited or limited liability.
Market capitalisation, dividend per share and dividend yield: Market capitalisation = number of issued shares × share price. Dividend per share = total dividend ÷ number of ordinary shares. Dividend yield (%) = dividend per share ÷ share price × 100.
2,000,000 shares at 150p; total dividend £160,000. Dividend per share, yield and market capitalisation?: Dividend per share = £160,000 ÷ 2,000,000 = 8p. Yield = 8 ÷ 150 × 100 = 5.33%. Market capitalisation = 2,000,000 × £1.50 = £3,000,000.
Exam trap: dividend per share vs dividend yield: Dividend per share is an absolute amount (in pence). Dividend yield is a percentage of the share price.
Reasons to buy shares, and influences on share price: Reasons: dividends, capital growth, a say through voting. Influences: trading performance and forecasts, market sentiment, the wider economy and interest rates, news such as takeovers.
Internal stakeholders: Employees, owners/shareholders.
External stakeholders: Customers, suppliers, other creditors, community, government.
Ethical responsibilities to stakeholders: examples: Fair pay and safe conditions for employees; honest products and pricing for customers; paying suppliers and creditors on time; limiting harm to the community and environment; paying tax.

3.1.3 Marketing management

Purpose of market research: To reduce risk and to understand and anticipate customer needs. Influences on how it is done: risk, cost, time and the need for reliability.
Confidence interval vs confidence level: Confidence interval: the range likely to hold the true figure; narrower means more precise (a larger sample usually narrows it). Confidence level: how sure we are the range holds it, for example 95%.
B2B, B2C and C2C markets: B2B: few, large business buyers; account managers. B2C: many consumer buyers; branding. C2C: individuals trading with each other, often online.
Market share, market growth and sales growth: Market share = firm's sales ÷ total market sales × 100. Market growth = change in market size ÷ original size × 100. Sales growth = change in sales ÷ original sales × 100. A firm can grow sales yet lose share if the market grows faster.
Return on marketing spend and index numbers: Return on marketing spend = profit from marketing activities ÷ marketing spend × 100 (£10,000 ÷ £8,000 = 125%). Index number = value ÷ base value × 100 (92 ÷ 80 × 100 = 115).
Price up 5%, quantity down 2%. PED and revenue effect?: PED = −2 ÷ 5 = −0.4: inelastic, so revenue rises (1.05 × 0.98 = 1.029 of the original).
YED: normal and inferior goods: YED = % change in quantity ÷ % change in income. Positive: normal good (above 1, demand grows faster than income). Negative: inferior good, demand falls as income rises.
The four segmentation bases in 7137: Demographic, geographic, psychographic, behavioural.
Marketing objectives listed in 7137: Lead generation, sales, market share, brand awareness, customer retention, engagement and conversion.
Boston Matrix: categories and actions: Stars (high share, high growth): invest. Cash cows (high share, low growth): fund others. Question marks (low share, high growth): invest or withdraw. Dogs (low share, low growth): consider dropping.
Product life cycle and extension strategies: Stages: development, introduction, growth, maturity, decline. Extension strategies: advertising, rebranding, lowering the price, adapting the product.
Pricing methods in 7137: Cost-based. Demand-based: penetration, price skimming, dynamic pricing. Competition-based: premium, going rate, discount.
Direct distribution vs intermediaries: Direct (including e-commerce): control, customer data and the full margin, but the firm pays its own delivery costs. Intermediaries (wholesalers, retailers): reach and storage, but they take a margin and the firm has less control.
Click-through rate and conversion rate: 50,000 views, 1,000 clicks, 50 sales: Click-through rate = clicks ÷ views × 100 = 2%. Conversion rate (on clicks) = buyers ÷ clicks × 100 = 5%.

3.1.4 Financial management

Financial objectives named in 7137: Profit, profitability, cash flow, liquidity and levels of borrowing. Influences include owners and their attitude to risk, available cash, interest rates, competitors and the economy.
Cash flow vs profit: Profit is revenue minus costs over a period, counted when earned, even on credit. Cash flow records only money actually moving. Cash can arrive from a loan with no profit; profit can be earned long before cash arrives.
Return on investment and gearing: ROI = profit from the investment ÷ cost of the investment × 100 (£8,400 ÷ £60,000 = 14%). Gearing = non-current liabilities ÷ (total equity + non-current liabilities) × 100 (£80,000 ÷ £320,000 = 25%).
Gross profit, operating profit and profit for the year: Gross profit = revenue − cost of sales. Operating profit = gross profit − operating expenses. Profit for the year = operating profit + profit from other activities − net finance costs − tax.
Revenue £90,000; cost of sales £54,000; operating expenses £25,200. Margins?: Gross profit £36,000: gross margin 40%. Operating profit £10,800: operating margin 12%.
Reading profit margins: what does a fall in each margin point to?: A fall in gross margin points to higher cost of sales or lower prices. A fall in operating margin with a steady gross margin points to rising operating expenses. A widening gap down to profit for the year points to finance costs and tax.
Budget variance: formula and how to label it: Budget variance = budgeted figure − actual figure, labelled by its effect on profit: higher revenue or lower cost is favourable; lower revenue or higher cost is adverse. Example: materials budget £18,000, actual £16,200 → £1,800 favourable.
Value and limits of budgeting: Value: sets targets, controls spending, gives responsibility, coordinates departments, flags problems early. Limits: forecasts may be wrong; rigid budgets discourage flexibility; variances show what changed, not why.
Cash-flow forecast: method: Cash in − cash out = net cash flow. Closing balance = opening balance + net cash flow, carried forward as next month's opening balance. Credit sales count only when paid.
Price £40, variable cost £24, fixed costs £56,000, planned 4,200 units. Break-even and profit?: Contribution £16. Break-even = 56,000 ÷ 16 = 3,500 units. Margin of safety 700 units (16.7%). Profit = 16 × 4,200 − 56,000 = £11,200.
Effect on break-even output of a price rise, a variable cost rise and a fixed cost rise: Price rises: break-even falls (revenue line steeper). Variable cost rises: break-even rises (total cost line steeper). Fixed costs rise: break-even rises (total cost line starts higher).
Internal and external sources of finance in 7137: Internal: owners' investment, retained profits, sale of assets, sale and leaseback, working capital. External: trade credit, share capital, overdraft, loans, business angels, private equity, crowd funding.
Ways of improving cash flow named in 7137: Debt factoring, shortening payment time from customers, early payment incentives, credit checks, increasing payment time to suppliers, reducing outgoings, better invoice management. Risks: fees, lost income or customers, strained supplier relations.