Edexcel Business A Level Revision

High failure rate of new business The highest rate of business failure is amongst new businesses (start-ups). It should be pretty obvious why this is the case: Difficult to test a business model without trading  Easy to be over-optimistic in the business plan Competitor response is often aggressive Management may lack experience Among the most common reasons why new businesses fail so frequently are: 1. No demand for the business idea Poor market research and unrealistic plan Competitor response Just a bad idea - was doomed to fail 2. Good idea, but poorly executed Wrong people; poor management Growth is too quick (over trading) or too slow Failure to manage cash flow A competitor grabs the good idea and does it better 3. External shocks Economic change e.g. sudden decline in market decline due to recession Legal and social change e.g. change in legislation impacting demand or increasing costs Why do Established Businesses fail? Internal re

Whilst budgets are widely used to in business, you should appreciate that they have some important limitations. In particular: Budgets are only as good as the data being used to create them . Inaccurate or unreasonable assumptions can quickly make a budget unrealistic Budgets can lead to inflexibility in decision-making Budgets need to be changed as circumstances change , for example sales figures can be affected by many variables in demand such as changes in tastes, the actions of a competitor and so on. Budgeting is a time consuming process – in large businesses, whole departments are sometimes dedicated to budget setting and control. This has an associated OPPORTUNITY COST Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers Costs covere

Variance analysis - Calculating and investigating the difference between actual results and the budget. Variance - arises when there is a difference between actual and budget figures. Management by exception - the process of focusing on activities that require attention and ignoring those that appear to be running smoothly Variances can be either: Positive/favourable (better than expected) Adverse/unfavourable ( worse than expected) A favourable variance might mean that: Expenditure was lower than expected in the budget Profits were higher than expected Income was higher than expected By contrast, an adverse variance might arise because: Expenditure was higher than expected in the budget Profits were lower than expected Income was lower than expected Looking at the sales revenue section, you can see that actual sales of standard product were £15k higher than budget – this is a positive (favourable) variance. Turning to the costs section, act

Zero based budgeting - means no budget is set and no money is allocated to cover costs. Managers must be prepared to bid for and justify spending on their departments. This forces them to examine all their costs. Advantages of Zero based budgets Disadvantages of Zero based budgeting Resources should be allocated more efficiently Can be more expensive Easier to adapt as circumstances change Can be more time consuming Gives more flexibility in response to changes in the market or economy Forceful managers may be more successful in attracting funds than others who may have more worthwhile projects Forces managers to think and plan more carefully Because of the expense, some businesses use zero-based budgeting every few years, or use a mixture of zero and historical e.g. departments receive a base budget and have to negotiate the rest.

Historical figures - budget initially based on the figures from previous period (year) Extrapolation - means assuring that past trends will continue into the future. It must be used with care because changes in business conditions may require adjustments to be made. For an existing business it may be best to produce a budget based on previous figures, such as last year's sales and costs. This approach uses extrapolation to model the next year's targets As the product moves through its life cycle, it places different demands on budgets, for example less adverting may be needed. Allowances need to be made for inflation, to ensure estimates are correct Sales figures can be unpredictable  Costs may not be the same Economic variables such as the business cycle can affect budget figures Unforeseen events such as the euro crisis can affect budgets.  A historical budget is realistic in that it is based on actual results, HOWEVER, circumstances may have changed (e.g. new p

Debtors - is a person or business that owes money to a creditor. Unlimited liability should mean that credit is easier to obtain as suppliers have a greater chance of getting their money back if things go wrong. 1) Credit control Policies on how much credit to give and repayment terms and conditions Measures to control doubtful debtors Credit checking 2) Selling off debts to debt factors 3) Cash discounts for prompt payments 4) Improved record keeping - e.g. accurate and timely invoicing. 5) DEBT FACTORING ( the selling of debtors to a third party) This generates cash It guarantees the firm a percentage of money owed to it but will reduce income and profit margin made on sales. COSTS INVOLVED IN FACTORING CAN BE HIGH 6) Credit control Establishing credit limits for new customers, credit checking new and existing customers, setting realistic credit limits, monitoring the age of debts and chasing up and chasing up bad debts, determine appropriate terms and condition

Taxation - Charges on individuals and organisations by governments. Direct Taxation - This includes income tax, National insurance and corporation tax - direct taxes are charged on earnings. Indirect Taxation - This includes VAT, excise duties (e.g. on petrol and alcohol), car tax, insurance tax and others. In 2015, the government raised a total of £647 billion from taxation. 94% came from central sources such as income tax, corporation tax and indirect taxes , just 6% came from local taxation (council tax) Direct taxation is levied on earnings and will affect the level of a consumers' disposable income. For example, an increase in income tax will reduce sales of many products and services, with some expectations. Indirect taxation such as VAT will have a similar effect; an increase in the rate of VAT will increase prices (although food eaten at home and a few other products such as housing, books and children's clothes carry no VAT). This will reduce consum