Business Yellow Booklet (Production & Finance)

Definitions

• Automation - machines, controlled by computer, are introduced into the production process in place of employees
• Mechanisation - machines, controlled by workers, are introduced into the production process
• Economies of scale - fall in average cost of production that results from increasing the quantity
• Diseconomies of scale - average cost of production rises because the quantity produces has exceeded certain level (employ more staff, pay for nightshifts, etc)
• Just-in-time - supplies aren't stored but instead are used immediately after arrival
• Total Quality Management - process where all workers are responsible for quality through production process (check the person before you's work

Types of production

• JOB PRODUCTION - products are made individually as "one-offs" to suit a a person's needs or for a particular purpose, e.g. suits tailored to measure
• BATCH PRODUCTION - goods produced in lots/batches and are similar, differing in only one aspect such as size or colour, e.g baked good or clothes
• FLOW PRODUCTION - involves an assembly line where one type of product is made continuously; different workers complete different tasks/ add things as the product moves along, e.g. cars (Toyota)
• PROCESS PRODUCTION - a series of automated processes which when applied to a variety of raw materials gives a large quantity of the finished product, e.g. cement

Job Production

• ADVANTAGES
• products are typically high quality
• products are made to meet the individual need of the customer
• workers are more satisfied when working start to finish on something so are more motivated which results in higher productivity
• products are made when there is an order for them not before so storage costs will be low
• DISADVANTAGES
• high costs of production
• often requires skilled labour so cost of wages will be high
• customers may be put off by long waiting times
• typically high order goods so sales are infrequent as only a select few can afford them

Batch Production

• ADVANTAGES
• the need of different customers can be met by making a variety of the same goods
• batches are made to meet specific orders from customers (retailers) which mat reduce costs as there is less need for storage
• it may be possible to automate or mechanise so costs are reduced (pay less wages)
• DISADVANTAGES
• it takes time to switch machinery from one type of production to another which adds to the costs
• it may be necessary to keep stocks of materials in order to switch production when required which costs money
• tasks may become repetitive and boring for workers which would decrease productivity

Flow Production

• ADVANTAGES
• large quantities can be made
• costs of production are low due to economies of scale (using existing machinery more for maximum efficiency)
• using machinery keeps costs low (initial expensive but better than regularly paying wages to multiple employees for the same task)
• variations in product design can be incorporated electronically into computer controlled machines
• DISADVANTAGES
• goods are mass produced so may not be of good quality
• initially expensive to set up production line
• large stocks have to be stored which is expensive
• if the production stops at any time (due to mechanical failure) everything on the production line may be useless, e.g. ice cream - melts

Process Production

• ADVANTAGES
• large quantities can be made
• most processes can be automated to keep production costs low
• ideal for products that have to be consistent and very exact in quality
• DISADVANTAGES
• very expensive to set up
• starting and stopping production can take a long time
• if one part of production stops or is slow it affects the entire process

Technology in production

• ADVANTAGES
• large quantities can be made which can lead to economies of scale (production costs fall)
• productivity of workers improves; output per worker increases and so labour costs fall for each product made
• quality of production can be improved as mistakes are less likely to be made, this reduces wastage and saves money
• dangerous jobs can be done by machines instead of workers so accidents are less likely and there is less risk of the business being sued
• DISADVANTAGES
• workers may need to be made redundant which could cause protest from trade unions, it is also costly
• may need to recruit employees with the skills to operate the machinery, such workers are in high demand so wages will be high
• existing employees may need retraining to operate the new technology which can be expensive
• initially expensive; there is a risk that the machinery won't improve sales

Types of economies of scale

• Purchasing economies - given a discount by suppliers for buying in large quantities
• Managerial economies - employ specialists to improve efficiency of labour
• Financial economies - doesn't have to pay out as much money to raise finance
• Technical economies - saves on production costs by using better methods and equipment
• Risk-bearing economies - produces a range of products so not to be dependent on one
• Marketing economies - saves on advertising and transport costs

Choosing scale of production

• Size of market - large market = produce on a large scale (e.g. food canning) - small market (e.g. local) = provide friendly, convenient, attentive service (e.g. hair dressers)
• Amount of capital needed - depending on what the business hopes to produce or what service to provide; expensive = typically large firms
• Motives of owners - if the owner genuinely enjoys running a business they may not wish to grow as this may entail taking on a partner and losing some control
• Co-operation by firms - small firms often work together to compete against the larger firms
• Doing sub-contract work - a large firm may prefer to contract a smaller firm to carry out some work for them so they don't need to employ as many people (advantage = don't have to pay anyone wages when there isn't any work)

Factors affecting sales

• Number of competitors - raising the price of a product is unlikely to affect the quantity sold if there are no competitors offering similar products or services for cheaper
• What competitors do - if competitors also raise prices the amount of products sold is unlikely to change
• Whether the product is a necessity or not - if people need the product for daily living they will have to buy it anyway even if it is expensive
• How much people spend on the product - if the product was already very cheap people may not mind paying a little extra for it

Why do businesses need finance?

• Start up
• Grow / Expand
• Buy new machinery / materials
• Help with the day-to-day running of the business
• Overcome cash flow problems

Types of Finance

• INTERNAL
• Reserves generated from trading
• Sale of unwanted asset
• Further investment (sole traders, partnerships)
• EXTERNAL
• (short term)
• Overdraft - bank allows firm to take out more money than they have in their account
• Trade credit - suppliers deliver goods but are willing to wait for payment
• (long term)
• Hire purchase - monthly made to use equipment until said equipment has been paid for and belongs to company
• Grant - money to start up a business given by the government or a charity and doesn't have to be paid back
• Loan - authorised money borrowed from a bank that has to be paid over a set period of time with regular payments
• Sell more shares (PLC, Ltd)

Cash flow

• A cash flow forecast predicts what could happen to a business' economic state in the future months by calculating fixed costs and expected income and expenditures
• Negative cash flow may only be temporary and not necessarily cause problems for a business, however it could require the business to to obtain additional finance (e.g. an overdraft) to overcome shortage of cash, or some payments could be delayed until the finance is available but this could mean some equipment cannot be bought until the situation improves
• Negative cash flow does not mean a business is necessarily making a loss, just that its expenditure were greater than its incomes for that month
• Why forecast cash flow?
• to identify when the business is likely to be short on cash so that plans can be put into place to overcome the problem beforehand
• to help the business plan for the future
• to provide achievable targets for employees regarding sales
• Limitations of cash flow - cash flow is on;y accurate for the first few months, anything longer is unreliable for reassign such as:
• prices of product / cost of supplies may change
• new competitors int he market may take away sales from a business
• customer's wants and needs may change
• new technology may allow for better products to be developed

Equations

• Sales revenue: price x quantity sold
• Total costs: fixed cost + total variable cost
• Gross profit: sales revenue - cost of sales
• Net profit: gross profit - total costs
• Gross profit margin: (gross profit / revenue) x100
• Net profit margin: (net profit / revenue) x 100
• Break even quantity (how much needs to be sold in order to cover expenditures): fixed costs / contribution
• Margin of safety: actual quantity sold - break even quantity