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Business Studies Notes For IGCSE

External constraints and constraints on business activity

Businesses cannot survive by neglecting the "real world", which includes influences that forces a business to
make certain decisions or constraints that limits or controls actions. External constraints are things that
businesses cannot control, these are:

Technological change: New products.

Technological change: New production processes.
Increased competition.
Environmental issues.

Business costs

All business activity involves some kind of cost. Managers need to think about the because:

Whether costs are lower than revenues or not. Whether a business will make a profit or not.
To compare costs at different locations.
To help set prices.

There are two main types of costs, fixed and variable costs. Here are some types of costs:

Fixed costs = stay the same regardless of the amount of output. They are there regardless of whether a
business has made a profit or not. Also known as overheads.
Variable costs = varies with the amount of goods produced. They can be classified as direct costs
(directly related to a product).
Total costs = fixed + variable costs

What are accounts an why are they necessary?

Accounts are financial records of a firm's transactions that is kept up to date by the accountants, who are
qualified professionals responsible for keeping accurate accounts and producing the final accounts.

Every end of the year, a final accounts must be produced which gives details of:

Profits and losses made.

Current value of the business.
Other financial results.

Limited companies are bound by law to publish these accounts, but not other businesses.

What is meant by cash flow?

Cash is a liquid asset, meaning that i can be spent on goods and services any time. Many business experience
cash flow problems, meaning that they do not have enough cash to do what they want to do. Cash flow means
"the flow of money in and out of a business". These are ways cash flow can occur:

Cash inflows:

Sale of goods for cash.

Payment from debtors.
Borrowing from a source (but will inevitably lead to cash outflow in the future).
Sale of unwanted assets.
Investment from investors: shareholders and owners

Cash outflows:

Purchasing goods for cash.

Payment of wages, salaries and others in cash.
Purchasing fixed assets.
Repaying loans.
Repaying creditors.

Why do businesses need finance?

Businesses need finance, or money, to pay for their overhead costs as well as their day to day and variable
expenses. Here are three situations when businesses need finance the most:

Starting a business: Huge amounts of finance is needed to start a business which requires buying fixed
assets, paying rent and other overheads as well as producing or buying the first products to sell. The
finance required to start up a business is called start-up capital.
Expanding a business: When expanding, a lot of capital is needed in order to buy more fixed assets or
fund a takeover. Internal growth by developing new products also requires a notable amount of finance for
R&D.
A business in difficulties: For example, for loss making businesses money is needed to buy more
efficient machinery, or money is needed to cover negative cash flow. However, it is usually difficult for these
firms to get loans.