Category: Featured

What is the Role of the Entrepreneur? Advantages and Disadvantages of Corporate Think Tanks

May 8th, 2016
What is an Entrepreneur?

An Entrepreneur is someone who sets up a business, who is willing to take risks, in the hope of reward. An Entrepreneur may either succeed or fail at their own personal objectives, or may find that through divorce of ownership, they loose control of a business they started. Essentially an entrepreneur is someone who is willing to take risks. The type of business an entrepreneur sets up may depend on the goals that they want to achieve.

Not everyone wants to make money, some people may have other goals, such as individuals who want to make people feel better. Examples would be medical apparatus, some people invest lots of money into medial apparatus, cancer research or rehabilitation centres to help people who need it.

Some businesses have insider entrepreneurs, who work within a business as though they were on their own, with the resources of the business they are able to accomplish more than they would alone, and therefore they and the business profit from that. Examples would be Eduardo Saverin, although he is an entrepreneur, he briefly worked with Facebook in order to accelerate their growth. He is an example of an Insider Entrepreneur.

Insiders allow a business to setup a corporate think tank, that allows them to come up with ideas through blue sky thinking and creative thinking.

Advantages and Disadvantages of a Corporate ‘Think Tank’
- An objectivised think tank may not actually produce any good ideas, although they may seem good, they may not be possible due to financial or time constraints. Examples would be features on software development, it may be good to have a certain feature, but it may not be possible to implement. (See SMART)
  - This may also lead to income constraints, as time is invested in producing these ideas, it can take lots of their time to do research and development.
  - It also means the entrepreneurial roles they should be doing are put aside. Examples would be excessive meetings or wasting employee time waiting for information.
- They may be all over the world, and may have never worked together before, so the ideas could vary and the results could be poor.
- A think tank relies on a good reputation or ideas may never take off from the ground. Research into pointless topics could be expensive.
- Having a think tank requires experts who may cost a lot of money. CTO’s and CFO’s could have a good reputation and cost a lot of money to get a project off the ground for start-ups.
- It also requires trust, as some employees may not be willing to bare the blame for a failed project.
- Employees may not be motivated to do blue sky thinking or may not want to help the business earn profits that they do not get a part of, salary can de-motivate employees.
- A gap in the market may be hard to find. Especially Saturated Markets.
- Think Tanks can also be Cheap.
- Loyal Customers may be able to contribute to Think Tanks, examples would be the hospitality industry. Surveys and Questionnaires could shed light on what customers really want.
- There can be high financial risk.
Be SMART

There is an acronym that can help when dealing with think tank blue sky thinking. SMART!
- Specific. Vague. Broad topics can not make much sense. Making a website ‘pop’ isn’t a good way of asking a web designer to improve a website.
- Measurable. It can be useful to collect statistics or data before taking a calculated risk.
- Achievable. Some goals may not be possible because they are not what a company is about.
- Realistic. Some goals may not be possible because they are too optimistic.
- Time-frame. Some goals may not be possible because of the manpower a business has.
Liquidity Ratios

May 6th, 2016

There are different ratios that are used in business. A current ratio is a formula that shows the relationship between what the business has payable, and what they have as liquidity. It may be easier to think of current liability as current payables.

Formulas for Liquidity Ratios

The formula for the current ratio is

Current assets / current liabilities = current ratio

The current ratio shows if the company has enough potential cash to pay any debts that they owe. The current ratio is usually based off of a year and should be above or between 1-1.25, below this number would indicate that the business does not have enough cash to pay off its debts.

The acid test ratio is a stripped down version of the current ratio. It uses the most liquid assets. Why does it use the most liquid assets? The acid test ratio uses liquid assets, such as cash, receivables and short term investments, as they can be turned into cash instantly to pay off debts.

Cash + Short Term Investments + Receivables / Current liabilities

Working capital is the money used in a business for day-to-day processes, The formula is

Current assets - Current liabilies

Liquidity Ratios are another planning tool that a company can use to ensure that they are liquid, this is particularly useful for companies such as a bank, where their main asset is money, they can be sure to maintain a constant positive ratio. A company that deals with large amounts of stock, such as a supermarket or online shop, may be able to have a poor acid ratio as they have plenty of assets that are liquid, and can usually sell as soon as they need to.

The current and acid tests may be stored on a business balance sheet, which is a statement of the assets, liabilities and capital of a business at a particular point in time, It will detail the balance of income and expenditure over a given period and is sometimes presented in large business annual reports.
Lean Production Techniques

May 6th, 2016
Lean production methods such as Kaizen and Kanban allow a business to motivate staff to use less waste and treat resources as a finite resource.

Lean Production for Expansion

Most businesses that are doing well consider expanding, when they do they need to use more effective methods of production in order to survive, this means cutting cost on waste and optimising lead times and output. Lean production is about continuously checking that the business processes are as fast as possible.
- Just In Time – Just In Time (JIT) requires a good relationship with suppliers who are going to deliver when you need them, this saves on storage cost. This also means that a business will have better cash flow if they can tie this together with trade credit.
- Total Quality Management – In TQM, Each Item is checked for consistency and to meet standards, although it may be expensive and time consuming, it could mean that the business has less waste.
Businesses may want to consider increasing machinery capacity or staff work overtime during expansion. Walking, waiting time and bad quality are eliminated or minimised in a lean production.

Lean Production Techniques

Pull (Kanban)
- Products are made to order, when they are ordered.
- Businesses only order new stock when it is needed.
- Items are only bought when they are needed or in demand.
- Essentially Pull is JIT (Just In Time).
- There is a reduced amount of leftover resources as products are made to order.
One-piece flow
- One item is produced at a time, so there is not confusion in manufacture.
- The flow of production becomes highly predictable and focused.
- One product is made at a time, so production could be slow.
- Large objects may only be made one at a time.
- Batch ordering may not be possible, so businesses cannot take advantage of economy of scale.
- Standardise manufactured components.
Takt
- Takt is how fast a product is manufactured to meet demand.
- It allows a business to balance work to achieve a continuous flow.
- Continuous Improvement > Kaizen says ‘Continuous Improvement’ through self reflection.
No Defects
- Products with defects must be fixed before being allowed to go on to the next stage of production.
- Rate of production is improved, as the rate off success is near optimal.
- Products with defects may still have been able to sell. It means waste could be higher than before.
- Products could also be higher quality.
Lead time is the time it takes for a customer to receive a product after ordering it.

Zero based budgets are are when budgets are reviewed without reference to the previous budget. Normally this does not happen, however it is growing in popularity, as it usually results in lower costs.
Business Failure

May 5th, 2016
Businesses just starting out have a generally low rate of success, 50% of businesses fail within the first two years. Some of the common causes of business failure are avoidable, however there are some examples that businesses may not predict.

Could Leadership Cause Business Failure?

Leadership in a business is vital to its survival, but failure to identify where they need to straighten up and fly right again could mean that a business is left behind, unable to correct it’s course.
- Loss of Control, Just short of divorce of ownership, an owner unable to make effective and authoritative decisions could mean that a business could start to lack innovation or a competitiveness that every business needs to get an advantage over competition. At the same time, an owner making too little decisions could also mean a business effectively has no leader, which in small business could be the difference between growth and decline.
- Overtrading could see a business go into liquidation, it is important that a business can fulfil its promise and deliver too customers and HMRC, if a business does not identify when it needs to have some liquid assets or a financial cushion, it could loose out on future repeat purchases. Bad leadership could be the root cause of overtrading, however poor management and/or communication could also make overtrading the determinate factor. Machinery breaking may also mean that overtrading orders that they can no longer fulfil could cause massive cash flow problems for a business
- Ineffective Expenditure could mean that a business could go quick. Inability to manage finance and good investments could see even the largest business fail. Even if a business does not invest in merit-less research and development, a lack of innovation or diversification in their products could also see them fail as a result.
  - Poor cash flow could lead to insolvency.
  - No profit made
  - Margins are too high, not enough return.
  - No Inflows, Product is not developed effectively.
  - Pressure groups prevent business from making enough money or attract too much of a negative stigma.
  - Interest rates mean business cannot afford premises.
  - Business unable to move product as price is too high because ingredients are too expensive.
Business can also fail if they do not have enough profit,companies that can’t expand due to financial and logistical restraint, greed and overheads being too high could mean that a business is unable to continue trading.

Key Terms
- Business Administration – A management firm (usually accountants) come into a business in order to improve spending and save a business from collapse.
- Liquidation – Selling assets to cover costs. Usually as a last resort to pay debtors.
Common Business Failure

Financial
- Minimum wage has increased (living wage)
- Economy is bad (or not favourable)
- Inadiquate Finance
- Majour Bad Debt
- Inadiquate shareholder capital
- Employees are not getting paid, so stop working
- Greed or Theft
- Dominant sales from a now dead source
Non-Financial
- Legal and Social Change
- Consumer Protection Laws
- Poor Management
- No Interest in Business
- Poor Idea
- Poor Execution
- Poor Tourism/Footfall
The Working Capital Cycle

May 5th, 2016

The working capital cycle is a proportion of a businesses working capital that is used to allow a business to operate normally, it is the funds required by a business in order to continue trading efficiently. Without a business being able to calculate how much working capital it needs in order to operate, then it may find it hard to continue to function, the working capital cycle involves anything from inventory and supplies, to production and storage. Without proper working capital, it could lead to business failure.

The Working Capital Cycle

The working cycle has limited use as a single planning tool, however when combined with multiple tools, it can provide a very powerful overview of what a business works with month, to month. Just because a business has inflows of $1m each month, it does not mean that they make $1m profit. The working capital cycle will also allow a company to identify any ways of keeping a positive cash flow through better trade terms as well.

Each ‘stage’ of the capital cycle has multiple costs associated with it. Just because a product needs to be stored, does not mean it has not cost, there may be refrigeration cost, it could be perishable, it may need a security guard to look after the facility, the lights and electricity around the building all need to be paid for. It is important that a customer receives the product as soon as it is made, as it means that overall there is less cost associated with the product, additionally for products like clothing and fashion accessories or technology, the longer it is stored could also mean that its value is decreased as it goes out of fashion.

Over trading could also mean that a company may not be able to pay for the process to be completed using its normal working capital and may have to secure new funds for the time being until the debt is paid after they have sold the product.

How Long Will my Phone Battery Last Before it Dies?

May 5th, 2016

phone battery last before it dies Defined obsolescence has gotten a hold of me again, I will have to purchase a new phone, as my old one is about to expire! I have had my phone for about 2 Years, I recieved it in the summer and It was fairly new at the time, being released in August 2014, My little HTC Desire 610 has been through a lot. It’s had 2 screen protectors, 2 cases and been across 3 networks. Now that It is aged, I have since rooted it and install android Lollipop it has had a new breath of life, However It’s quite slow as a daily driver and I think I will need a new one soon. The battery cover on the back cannot be removed and only the SIM card and External Memory can be replaced. How Unfortunate. But It got me wondering, How long will my phone battery last before it dies.

Some people wonder how long their phone battery will last before it dies, before it basically doesn’t hold a charge and it’s battery life is no longer able to last a day.I however know that answer, my phone will die on approximately Saturday, December 24th 2016 at 8:20 am, as at this point it will no longer hold a charge. How do I know this? Let me explain…

Data Collection

Firstly, I needed to collect data to predict when my phone was degrading in battery life, I decided that the easiest measurable metric would be when my phone was plugged in. Because I would usually do this when I got in from home, It did not require me collecting any data as it could all be done automatically. I know this isn’t the most precise method for multiple reasons, such as I may not always plug my phone in at the same time, the phone may not always record the results (as you will see) and the percentage when i plug it in is not an accurate assumption of health. However my findings did show a trend that shows the battery is degrading at about 0.000109% every minute, which gives me 7 and a half months to buy a new one.

Recording the Results

To record the results I used Google Drive and IFTTT to note down the percentage charge at the times the phone was disconnected and reconnected from power. It also recorded the charge type, such as USB,AC or an external Battery. This could potentially also alter my results as the percentage increase would vary over different mediums of charge, so I eliminated all but AC power, as this was always from the same plug and USB lead. So, How did I calculate how long will my phone battery last before it dies?

The recipe I used is nearly identical to this one, I made one for it being plugged in and one for it being unplugged. the data ended up looking like this.

Date and Time	Status	Battery Percentage	Power Source
March 11, 2016 at 04:19PM	Unplugged	41
March 11, 2016 at 04:19PM	Charging	41	AC
March 11, 2016 at 04:33PM	Unplugged	50
March 11, 2016 at 04:34PM	Charging	49	AC
March 11, 2016 at 04:37PM	Unplugged	52
March 11, 2016 at 04:39PM	Charging	52	AC
March 11, 2016 at 04:44PM	Unplugged	56
March 11, 2016 at 04:45PM	Charging	56	AC

As you can see at this time I unplugged the device multiple times over 25 minutes to read emails and texts or whatever showed up on my phone. I was interested in this, so charted the occurrences of a date and time, and found that I had unplugged and plugged in again my phone four times in 1 minute at maximum, and had unplugged and plugged in my phone over 249 times. Here are the occurrences, excluding dates where I did not plug in my phone as although it would contribute to how long will my phone battery last before it dies, it did not trigger the app.

phone unplug replug showing Battery Last before It Dies

This also got me wondering how many times a day I unplugged my phone, If you look at the data, It shows that, for example, on the 20th of February, a Saturday, I unplugged my phone 16 times.

times phone was unplugged on a given day showing Battery Last before It Dies

It seems that for about a week during march I was unplugging my phone a lot, and I can’t really see a connection, I was at school on the 11th, I guess I must have been heavily using my phone over that period. The more perceptive of you will have noticed that the entire month of April is omitted, that is because the data was not recorded as I had been logged out of the IFTTT app, I did not realise until later when I re-enabled it, Having the empty months would alter the data so I have removed them from the results. Perhaps I shouldn’t worry how long will my phone battery last before it dies and instead how long the connector will last.

So How Long Will My Phone Battery Last Before It Dies?

phone plug in showing Battery Last before It Dies

This graph shows every event recorded, including when I was not recording the phone being plugged in, It clearly shows, using a linear trendline, that there is a decline in the battery percentage. Which shows my phone’s average battery percentage when being plugged in, when it reaches 0%, which I have decided is to be a dead battery, in 336101 Minutes, or 5602 hours. Coincidentally, It dies on Christmas Eve, the perfect time to be gifted a new phone ;).

Factors Affecting Sales Forecasts

May 4th, 2016
Sales Forecasts are charts and graphs, equations and educated predictions that allow businesses to predict future sales with a degree of accuracy.
- Consumer Trends – People being proud of bargains and discounts. sales forecasts become harder to predict when consumerism changes.
- Economic Variables – Recessions, Booms and Recovery.
- Competitors Actions – loss leaders and pricing strategy may try to undercut you.
- Digital Music for example, as become harder to predict as people have found new ways to obtain it illegally.
- Fashion Items have an unpredictable life span.
Businesses use a range of forecasting tools to make forecasts

No single technique is reliable, but having multiple will allow you to better predict the future

Using sales forecasts may be useful but having data that is unreliable could mean that the forecast is not accurate. Making forecasts that are too long into the future could be considered extrapolation.

Extrapolation is cheap, although inefficient it gives a fixed perspective of what to expect which is better than nothing.

Planning for the worst allows companies to expect and anticipate failure. Very successful stable products cannot predict when sales will fall as their product is likely very price inelastic and customers are used to the product’s taste or function that changing it could make customers unhappy with the product. ‘Many financial measurements which are useful and valid in static situations are strategic traps in growth situations.’

Failing to predict sales forecasts correctly

Failing to accurately predict sales forecasts may mean that a business could fail. Working capital is cash that is spent on the business, liquidity is not. Having a lot of working capital does not necessarily mean you are liquid. You may also have;
- Contingency Finance (A financial Cushion)
- Credit Periods yet to expire
- An active Working Capital Cycle
That must be paid before you consider any additional finance as liquid that you can spend on anything. Additionally when a business is in liquidation whereby they have had to cease trading there is still things that have to be paid off, and unfortunately for some employees, this may be unfair as it could mean a business cannot afford to pay them because they do not have the funds.
1. The Tax Office must be paid, to cover the business from litigation.
2. Shareholders must be paid dividends and the value of their shares.
3. Employees must be paid their wages.
Some Key Terms
- An Income Statement – Measures the business performance over a period of time, and may allow them to determine where forecasting was over-optimistic. It shows a companys revenue and total spending over a given period of time.
- A Statement of Financial position is a snapshot of the business assets.
- A Cash flow statement shows cash flow sources over a given period of time. It shows exactly how much a business has received and spent.
What is Break-even analysis useful for anyway?

May 2nd, 2016
What does Break-even calculate?

Here is a Break-even chart. It represents a 24 day period.

y = cash x = days

Break-even is when a business is not making any losses or profit, seen in the chart above at 11 days. It can be seen that the yellow total costs line, is the same angle as the variable costs line, plus fixed costs. It also can be determined, that the blue shaded are represents the magin of safety as after that all costs are paid.

What is Margin of Safety?

The margin of safety is how much additional units you have sold in a given period. For example, in the graph below, we are on our 18th day.

On this day we have spent approximately $680 since day 1, and by day 18, we have made $1040 revenue, so our margin of safety is $1040-$680= $360, however margin of safety does not work in money so we need to convert it back to units, so if each unit sells for $10, then our margin of safety is 36 units.

What is Break-even useful for? (Advantages and Disadvantages)
- The point at which you aren’t making any losses or profit.
- It allows you to identify problems you may face with cash flow on new investments, for example;
  - Investing in a more expensive warehouse may not be financially viable, as the investment would create a small margin of safety.
  - Increasing variable cost may make break-even harder to achieve.
- It allows a business to ‘relax’ it’s workload after it has reached it’s margin of safety, as it no longer needs to cover costs. Everything made past the break-even point is profit.
- It may allow an entrepreneur identify where they may want to take risks.
- It also allows an entrepreneur to identify when a theorised project is not financially viable.
- It focuses on what output is required before a business reaches profitability
- Helps management and Finance providers better understand the viability of a risk or business idea.
- It does not cater for potential changes in the moment
- Unrealistic assumptions that everything stays the same.
- It is more of a planning aid, than a decision tool.
However there are limitations of the chart, as it does not allow you to anticipate economy of scale, changes in fixed cost or demand. The most important factor that it allows you to calculate is the point that you aren’t making any losses or profit.

How is Break-even calculated?
```
Break-even Output = Fixed Costs / Contribution per unit
```
```
Contribution per unit = Selling price per unit - Variable cost per unit

or

Contribution per unit = Contribution per unit x Number of units sold
```
Common AS-Level Business Studies Equations

May 2nd, 2016
Here is a list of routinely forgotten equations for Business Studies, make sure to memorise them.

Equations

Total Contribution =

Total revenue - Total variable cost

Contribution per unit =

Selling price per unit - Variable cost per unit

or (for total contribution)

Contribution per unit x Number of units sold

Profit =

Total contribution - Fixed cost

Break-even Output =

Fixed cost / Contribution per unit

What do they mean?
- Contribution is useful for a business to be responsible for a range of products, it allows them to calculate how much money they make on a sale.
- The Break-even charts (and equation) is a tool that allows you to show total costs at all possible levels of output or demand from zero to maximum capacity. Break-even is not given in money, and should be the amount of units sold.
- Profit is money made, not taking anything into account other than fixed and variable cost.
- Contribution per unit, is just total contribution per unit. So to get it, divide by the amount you sell of a product (or use the other formula). Don’t confuse this with break-even.
When calculating using these equations it is important to consider external factors. Such as extrapolation or economic variables that could be changing the data. However you may not get questions like this in the exam.

Sometimes four mark questions may ask about productivity. For example, these questions do not want you to describe the formula, they may want you to state it. But make sure to stick to the ‘because, leading to, therefore and such as’ structure. Otherwise you may not be answering the question correctly.

Break-even output is easier to consider it as the fixed costs divided by the contribution per unit, like so. If it costs $500 in rent, and you get $1 for every candy bar you sell, you need to sell 500 candy bars. Because $500 / $1 is 500 not $500.

Remember that break-even output is never given as money. Remember also to consider confidence intervals may mean that the data given is not accurate, as well as the accuracy of the data you have received.

Remember that the information you have may be hear-say and not 100% accurate, things may change. The variable cost of items may raise, or lower. Total contribution may not be accurate if the business sells multiple products at different prices. Make sure to base your equations off all of the information available, don’t take short-cuts.

"Revenue is vanity, Profit is sanity, Cash is King!"

Remember, its not percentages or ratios that businesses put in the bank, it’s dollars. credit. So think about how valuable the data you have actually is. Make sure you understand the numbers! cash flow shortages can be negated with better trade terms. Having predictable cash flow is preferable, so make sure that you mention it.
Trade-offs and Opportunity Cost

May 2nd, 2016

What is Trade-offs and Opportunity Cost?

Trade-offs are choosing one thing over another, if you choose to invest in paint over pencils, your opportunity cost, is that you can no longer colour with pencils. This is a poor example, so lets look at some real data so we can get a good understanding of what opportunity cost is really about, and for that we need an example.

Nails and Hammers LTD.

A company, called Nails and Hammers LTD, produces hammers and nails, they have a good reputation, but are not really known, they also manufacture their hammers cheaply and therefore some of them are not exactly to the highest quality. in their first year, they only sell 100 units, this is barely enough sales to keep the business going, so they decide to invest in one of two strategies. Investing in Machinery, in order to produce better quality hammers, or Invest in Advertising, to get the word out about their Hammers and Nails. They decide that they will spend $300 dollars in the second year and see how it goes. They do their market research and come up with these two graphs.

It can be seen from these graphs, that investment in advertisements will produce more sales than investment in machinery, therefore investment in Advertising is the way forward for Nails and Hammers LTD. This is called a trade-off, without the graph, it wouldn’t be known which is better for sales until the second year had ended. The same investment of $300 produced more sales. Lets, look at more data.

Opportunity Cost

Opportunity cost is essentially what you could have won if you had invested in something else, if you can only learn piano or tennis, and you choose piano, the opportunity cost is that you could have learnt tennis.

Let’s take our previous example, and pretend that we invested in the lesser option, Machinery, we can see that we didn’t make as much as we would have if we had invested in Advertising. The opportunity cost in the third year would have been 200, because the investment in advertising, produced 700 sales, minus our 500 sales.