1.3 Flashcards
What is a business AIM?
the broad targets that a business wishes to achieve, for example ‘to make a profit’
What is a business OBJECTIVE?
Specific targets that the businesses can create to help achieve their aims, for example ‘launch three new products within the next 18 months’
What does SMART objective stand for?
Specific
Measurable
Achievable
Realistic
Time-bound (has a time scale)
What are examples of financial?
Profit – making enough money to cover costs
Market share – claiming as many loyal customers as possible
Sales – gaining as many customer purchases as possible
Survival – to keep the business going
What are examples of non- financial?
Control – Wanting control over your business, not wanting other people to tell you what to do or let other people or businesses dictate what your business does
Social objectives – aiming to help a particular area of the community or group of people
Independence – Wanting to be your own boss and ‘go it alone’
Personal satisfaction – wanting to feel a sense of achievement through what your business does
Challenge – being motivated by being stretched and pushed by the challenges that your business faces
What are variable costs?
These are costs that change with the quantity or the product made and sold.
Examples:
Raw materials, e.g. potatoes to make crisps
Bought-in components e.g. crisp bags
Energy used in the production process e.g. electricity to cook the crisps
What are fixed costs?
Fixed costs do not change when the quantity of the product changes.
Examples include:
Salaries/wage bills
Rent and council tax
Interest paid on loans
What is REVENUE?
Total value of sales made within a set period of time, e.g. a month
How to calculate revenue:
Revenue = Selling Price x Quantity
What is PROFIT?
The difference between revenue and total costs
How to calculate Profit:
PROFIT = Total Revenue – Total
Costs
What is break-even
The level of sales at which total costs are equal to total revenue, at which point the business is making neither a profit nor a loss
How to work out break even?
Break-even = fixed costs
(price – variable costs per unit)
What is the margin of safety
The amount by which demand can fall before the business starts making losses
How to work out the margin of safety?
Margin of safety = sales (in units) – breakeven point
Why is cash important?
To pay suppliers, overheads and employees and to prevent the busniess from faliure.
What is cash-flow?
Cash-flow is the process of cash flowing in and out of a business i.e. cash inflows and outflows
Examples of Cash inflow?
Customers buying your product
Examples of Cash outflow?
Paying staff wages
Paying for raw materials
What is Net cash flow?
Net cash flow is the difference between cash inflows and cash outflows over a trading period
What is the Formula for net cash flow?
Net cash flow = inflow - outflow
What is Insolvency?
When a business doesn’t have the cash to pay its debts
What are types of Cash inflow?
Cash sales
Receipts from trade customers
Sale of spare assets
Investment of share capital
Personal funds invested
Receipt of bank loan
Government grants
What are types of Cash outlfows?
Payment of overheads, wages and salaries
Payment of suppliers, for example raw materials, inventories
Buying equipment
Interest on bank loan / overdraft
Payment of dividends
Repayment of loans
What is Opening and closing balances?
The opening balance is the value of cash at the start of a trading period.
The closing balance is the value of cash at the end of a trading period.
What are the formulas for Opening and closing balances?
Opening balance = closing balance of the previous month
Closing balance = opening balance + net cash flow
What are some Limitations of cashflow forecasts?
Accuracy of Data: Cash flow forecasts depend on the accuracy of the data used. Inaccurate or outdated information can lead to unreliable forecasts.
Unexpected Events: Unforeseen circumstances, such as sudden market changes, can disrupt cash flow predictions.
Assumptions and Estimates: Forecasts often rely on
assumptions and estimates about future income and expenses,
which may not always correct.
Time Constraints: Creating and updating cash flow forecasts can be time-consuming, especially for businesses with complex operations.
Short-term Focus: Cash flow forecasting often emphasises short-term financial health, potentially overlooking long-term financial sustainability and strategic planning.
What are Factors affecting the choice of finance?
the amount needed
the reason why the finance is required
the circumstances of the business
the legal status the business has
What is short-term?
Short-term financing refers to the capital (money) borrowed or obtained for a shorter period, typically less than one year
What is Long-term?
Long-term means financing or borrowing capital (money) for more than one year
