Edexcel Business A Level Paper 2 (Theme 2 & 3) ALL SOLUTION LATEST EDITION 100% CORRECT SPRING FALL-2023/24 EDITION GUARANTEED GRADE A+

Retained profits profits that the owners have reinvested into the business after paying costs and taxes Owners' funds money put in by the owners themselves Sale of assets a one-off way to raise money, generally used during financial struggles Benefits of owners funds Avoids interest on loans Owners keep complete control Disadvantages of owners funds If it fails after remortgaging, they could lose their house Limit to amount raised Short term finance examples overdrafts for daily expenses Medium term finance examples loans, hire purchase, trade credit, debt factoring used to pay for repairs, paid back after 1-5 years Long term finance examples issuing shares, debentures, mortgages, grants used to pay for major expenditure, paid back over many years Selling assets Can sell machines, buildings, land Limited buyers Advertising costs Sold cheaply Loans High interest rates Usually requires security in the form of assets which will be taken away if they don't make the repayments Needs regular updates Grants No repayment May be recalled if conditions aren't met May not cover full amount Hire purchase / leasing Must pay deposit and monthly Own assets at the end Leasing does not lead to ownership Must pay interest Will be re-claimed if not paid for Issuing shares Only for a limited company (ltd, plc) No risk but must pay yearly dividends Shareholders at risk as shares fluctuate Shareholders have influence Venture capital Large businesses lend to smaller (not plc) businesses Lender becomes shareholder Aim to grow business so share price increases Lenders play active role Revenues the amount of product that a customer actually buys Total revenue equation volume sold x average selling price Profit as an objective Profit is the most important source of cash flow and finance Can be other reasons for running a business than profit Why profit is important A return on investment A reward for taking risks A key source of finance A measure of business success A motivating factor Profit equation total sales - total costs Costs amounts that a business incurs in order to make goods/services Costs are important because They drain away profit Change profit margins Main causes of cash flow problems Changes with output Variable costs Change as output varies Lower risk for startups Variable cost examples Raw materials Brought in stocks Wages based on hours Marketing costs based on sales Fixed costs Don't change with output Higher risk for startups Fixed cost examples Rent & rates Salaries Advertising Insurance, banking, legal fees Software Advisers Total costs equation fixed costs + variable costs Problems estimating costs Some are easier than others Rent, salaries, advertising Others are harder Raw materials Returns or refunds Budget a financial plan for the future concerning the revenues and costs of a business Managerial accountability Budgets on the objectives Managers are required to think ahead Budget uses for management Set targets Motivate staffs Improve efficiency Forecast outcomes Monitor performances Assign responsibilities Allocate resources Budget as a motivator Provide specific targets and standards Attaining or surpassing these targets Fear of not achieving can act as an incentive Historical budgets Use last years figures as basis Realistic Circumstances may have changed Does not encourage efficiency Zero based budgets Cost / revenues set to 0 Based on new proposals for sales and costs Makes budgeting more complicated Revenue / income budget Expected revenue and sales Broken down into more detail Cost / expenditure budget Expected costs based on sales budget Overheads and other fixed costs Profit budget Based on the combined sales and costs budgets Of great interest to stakeholders May form basis for performance bonuses How a profit budget is constructed Analyse market (Market size, growth, share, prospects) Draw up sales budget (Sales forecast, New products, Pricing changes) Draw up cost budget (Based on sales budget, Allow for known changes in supplier prices, Include contingencies) Key sources of information for budgets Financial performance in previous periods Market research Difficulties in budgeting accurately (Sales forecasting) Harder when market experiences rapid change Startups find it hard to estimate sales Competitor actions difficult to predict Difficulties in budgeting accurately (Costs) Always likely to have unexpected costs Will vary depending on sales budget Changes in external environment will impact costs (taxes, exchange rate) Stages in budgetary control Preparation of plans Comparison with results Analysis of variance Variance analysis calculating and investigating the difference between actual results and budget Variances A variance arises when there is a difference between actual and budget figures Positive/favourable (better than expected) Adverse/unfavourable (worse than expected) Favourable variances Actual is better than budget Costs lower than expected Profit higher than expected Adverse variances Actual worse than budget Costs higher than expected Profit lower than expected Possible causes of favourable variances Stronger market demand Increased selling prices Cautious sales and cost assumptions Competitor weakness leading to higher sales Better than expected productivity or efficiency Possible causes of adverse variances Unexpected costs Overspends Over optimistic sales forecast Market conditions change (competitor actions) mean selling prices are lower than budget Do variances matter? Was it predicted Size Cause Temporary or long term Profit reward/return for taking risks Ratio analysis analysing relationships between financial data to assess the performance of a business Gross profit margin % gross profit / revenues x100 Gross profit equation revenue - cost of sales Operating profit what is left after all the costs of a business have been taken from it's revenues Net profit equation sales - variable costs - fixed costs Cash flow equation cash inflows - cash outflows = net cash flow Balance sheet a snapshot of the business' assets and it's liabilities on a particular day, usually the last day of the financial period Liquidity ratios asses whether a business has sufficient cash or equivalent current assets to be able to pay its debts as they fall due Current ratio equation current assets/current liabilities Current ratio A ratio of 1.5-2 would suggest efficient management of capital Low ratio (below 1) indicates cash problems High ratio (+2) too much capital Acid test ratio equation current assets - stocks / current liabilities Acid test ratio adjusts the current ratio to eliminate certain current assets that are not already in cash, less than 1 is bad Main causes of cash flow problems Low profits / losses Too much production capacity Excess inventory Allowing too much credit Overtrading Unexpected changes Seasonal demand Main causes of cash flow problems (too much spending on capacity) Spending too much on fixed assets Made worse by using short term finance Fixed assets are hard to turn back into short term Main causes of cash flow problems (too much stock) Excess stock ties up cash Increased risk of stock becoming obsolete Needs to have enough stock to meet demand Bulk buying may make it cheaper Main causes of cash flow problems (allowing customers too much credit) 'Trade debtors' Good way of building sales Late payments Debt may go 'bad' Overtrading Business expands too quickly Example: retail chains Ways of managing amounts owed by customers Credit control Credit checks Debt factors Discount for prompt payment Improved record keeping Debt factoring Selling of debtors to a third party Generates cash Guarantees the firm a percentage Will reduce profit margin May involve high costs Not quick Credit control Credit limits for new customers Checking credit Setting realistic credit limits Monitoring debts Determine appropriate terms Chasing debtors Ways of managing cash paid to suppliers Trade credit Delayed payment Careful not to damage reputation Managing stocks Just in time stock Computerised ordering for efficiency Improve stock control Mission statements Overriding purpose of the business Reason for existence A strategic perspective Is not intended to be: Statement of goals/objectives Statement of core values Hierarchy of objectives Aim Mission Corporate objectives Functional objectives Individual targets What makes a good mission statement A clear sense of business purpose Excites, inspires, motivates Easy to understand/remember Differentiates business Common criticisms of mission statements Not supported by actions Often too vague Often too obvious Regarded cynically by staff Time Series Analysis (Moving Averages) Working out moving total (add each quarter/third of the year together) Work out average of moving total Work out cyclical variation Plot trend Line of best fit Predict year Average variation for period Prediction - average variation Why forecast sales Human resources plan: How many people are needed to cope with output Production capacity Cash flow forecast Profit forecast and budget Extrapolation uses trends established from historical data to forecast the future Advantages of extrapolation A simple method Not much data required quick / cheap Disadvantages of extrapolation Unreliable with significant fluctuations Assumes past trends will continue Ignores qualitative factors When sales forecasts can be inaccurate New businesses Technological change price/income elasticity Fashion items Significant changes in market share Poor forecasting Investment appraisal the process of analysing whether investments are worthwhile Average rate of return Looks at the total accounting return for a project to see if it meets target return How to calculate ARR Calculate the average annual profit from the investment project Divide the average annual profit by the initial investment Compare with target percentage return Benefits of ARR Simple to understand / easy to calculate Focuses on the overall profitability Easy to compare with other targets Uses all returns generated by the projects Drawbacks of ARR Ignores the timings of returns Focuses on profit rather than cash flow Doesn't adjust for the time value of money Discounted cash flow (NPV) Net present value calculates the monetary value now of the projects future cash flow If the NPV is positive at the end, the project should go ahead NPV equation cash flow x discount factor Benefits of NPV Considers all future cash flows Reflects the risk that money loses value Different levels of risk can be shown by adjusting the discount rate Creates a straightforward decision, positive or not Drawbacks of NPV More complicated Choosing discount rate gets harder with each year Results can be manipulated via discount rate Income statement measures the business' performance (income and costs) over a given period of time (usually a year) Who is interested in the income statement Shareholders - how much profit is being made to pay dividends Competitors - what is the margins, is it efficient Government - how much tax Employees - security of the business, chance of bonuses Gearing % long term liabilities / capital employed x 100 Gearing measures the proportion of a business' capital provided by debt Measures the financial health of a business High gearing can mean high business risk (not always) Evaluating the gearing % 50%+ is high 20%- is low Level of acceptance depends on the business Benefits of high gearing Less capital required to be invested Debt relatively cheap vs dividends Easy to pay interest with good cash flow Change management involves the process that ensures a business responds to the environment in which it operates Step change Dramatic or radical change in one fell swoop Often required when a business has suffered from strategic drift Often involves significant alteration in the business Gets it over quickly / decisively May require some coercion to overcome resistance Incremental change Many changes which take place as a business develops and responds to subtle changes in the external environment Usually involves little resistance Arises as strategy develops Internal causes of change Arise from factors within the control of the business Ie the decisions taken by management External causes of change Arise from factors outside the control of the business Ie as a result of changes in the external environment Examples of causes of internal change New leadership New ownership Change in strategic direction and corporate objectives Significant investment decisions Examples of causes of external changes Significant competitor actions Political and legal changes Significant changes in economic environment (post brexit) Technological change Causes of disruptive change A form of step change that arises from changes in the external environment Disruptive change impacts the market as a whole, challenging the established 'business model' Rapid improvements in technology are the main driver of disruptive change Examples of industries impacted by disruptive change through technology Media streaming (Netflix, Youtube, Spotify) Groceries (Ocado, Amazon pantry) Fashion (Asos, Boohoo) Effects of a business embracing change Helps sustain a competitive advantage Aligns business strategy with evolving nature of customer needs and wants Business can take advantage of developing technologies Stakeholders gain from improved productivity and work environment Being perceived as a business that leads changes rather than follows it may bring market benefits Why change organisational culture (Improve business performance) Declining profits and sales Inadequate returns on investment Low quality or standards of customer service Why change organisational culture (Respond to significant change) Market changes Political and legal environment Change in societal views Change of ownership Change of management or leadership Economic conditions Signs that organisational culture may need changing Internal fighting High levels of voluntary staff turnover and hard to retain top talent Greater absenteeism Evidence of declining customer service Leadership show double standards or decision making becomes inconsistent Communication becomes more closed and restricted Resistance to change (Self interest) Self interest is a powerful motivator Arises from a perceived threat of job security, status and financial position Individuals often place their own interests ahead of those of their organisation, particularly if they don't feel a strong loyalty to it Resistance to change (Misinformation & misunderstanding) People don't understand why change is needed, perhaps because they are misinformed about the real strategic position of the business Perception may be widespread that there is no compelling reason for change Perhaps even an element of people fooling themselves that things are better than they really are Resistance to change (Different assessment of the situation) Here there is a disagreement about the need for change or what that change needs to be Some people may simply disagree with the change proposed, or they may feel they have a better solution This is different from self interest - the resistance here is based on disagreement about what is best for the business Resistance to change (Low tolerance and inertia) Many people suffer from inertia or reluctance to change, preferring things to stay the way they are Many people need security, predictability and stability at work If there is low tolerance of change then resistance to change may grow Overcoming resistance to change - Education & communication Honest communication about the issues and the proposed action helps people to see the logic of change Effective education helps address misconceptions about the change, including misinformation or inaccuracies Education and communication are unlikely to achieve very short term effects, they need to be delivered consistently and over a long period of time Overcoming resistance to change - Participation & involvement Involvement in a change programme can be an effective way of bringing on board people who would otherwise resist Participation often leads to commitment, not just compliance A common issue in any change programme is just how much involvement should be permitted, delays and obstacles need to be avoided Overcoming resistance to change - Facilitation & support Most people (though not all) will need support to help them cope with change Key elements of facilitation and support might include additional training, counselling and mentoring as well as simply listening to the concerns of people affected Overcoming resistance to change - Manipulation and co-option Co-option involves bringing specific individuals into roles that are part of change management (perhaps managers who are likely to otherwise be resistant to change) Manipulation involves the selective use of information to encourage people to behave in a particular way Whilst the use of manipulation might be seen as unethical, it might be the only option if other methods of overcoming resistance to change prove ineffective Overcoming resistance to change - Negotiation & bargaining The idea here is to give people who resist an incentive to change - or leave The negotiation and bargaining might involve offering better financial rewards for those who accept the requirements of the change programme Alternatively, enhanced rewards for leaving might also be offered This approach is commonly used when a business needs to restructure the organisation Overcoming resistance to change - Explicit & implicit coercion This approach is very much the last resort if other methods fail Explicit coercion involves people being told exactly what the implications of resisting change will be Implicit coercion involves suggesting the likely negative consequences for the business of failing o change, without making explicit threats The big issue with coercion is that it almost inevitably damages trust between people in a business and can lead to damaged morale (in the short term) Incorporated business is a separate legal entity to its shareholders Unincorporated business is legally inseparable from its shareholders Protection provided by limited liability shareholders can only lose/are only liable for the value of their investment in the share capital of the business does not protect against wrongful/fraudulent trading Net cash flow the difference between the total cash inflows and total cash outflows Limitations of cash flow forecasts limited information makes them estimates results may be inaccurate - events aren't guaranteed to happen doesn't account for external shocks Uses for sales forecasting HR plan - how many people are needed production/capacity plans cash flow forecasts budgets Key factors affecting the accuracy/reliability of sales forecasts changing consumer trends economic variables (exchange rates, interest rates) competitor actions When sales forecasts are likely to be inaccurate CONTINUED..