1.3: Putting a business idea into practice

Question 1

What are aims?

Answer 1

general long-term goals set by a business

Question 2

What are objectives?

Answer 2

short-term steps a business takes to achieve its aims

Question 3

What are some examples of financial objectives?

Answer 3

survival
sales
profit
market share
financial security

Question 4

What are some examples of non-financial objectives?

Answer 4

personal satisfaction
independence
challenge
social benefits/goals
customer satisfaction
recognition

Question 5

Equation for revenue

Answer 5

revenue=price x quantity

Question 6

What is revenue?

Answer 6

the amount of income received from selling goods or services over a period of time

Question 7

What are fixed costs?

Answer 7

costs that don’t vary

Question 8

What are variable costs?

Answer 8

costs that change directly with the number of products made

Question 9

Equation for variable costs

Answer 9

variable costs=cost of one unit x quantity produced

Question 10

Equation for total costs

Answer 10

total costs=total fixed costs + total variable costs

Question 11

Equation for profit (or loss)

Answer 11

profit=sales revenue- cost of sales

Question 12

Why is profit often an objective of businesses?

Answer 12

allows a business to:
survive
reinvest into expansion
provide security and savings
reward employees
generate wealth for owner

Question 13

Equation for total interest on loans

Answer 13

interest (%)= total (repayment-borrowed amount)/borrowed amount (x100)

Question 14

What is interest?

Answer 14

the reward for saving or the cost of borrowing

Question 15

What is break even?

Answer 15

the level of output at which a business’s revenue covers its total costs

Question 16

Is a business making a loss or a profit at break even?

Answer 16

neither

Question 17

Why is break even important?

Answer 17

allows a business to make decisions about prices, sales, volumes and costs

Question 18

What is the margin of safety?

Answer 18

the amount of output between the actual level and the break even point. this is how much production is allowed to fall before the business makes a loss

Question 19

Equation for break even point (in units)

Answer 19

fixed cost/(sales price-variable cost)

Question 20

Equation for break even point (in revenue/costs)

Answer 20

break even point in units x sales price

Question 21

Why can break even be unreliable?

Answer 21

it assumes a business will sell all the products it makes. in reality, increasing price might deter customers from buying

Question 22

Equation for closing balance

Answer 22

closing balance=net cash flow + opening balance

Question 23

Without cash, what would happen to a business?

Answer 23

unable to:
pay its suppliers
pay debts and bank loans
pay wages to employees
buy raw materials and products to sell
promote the business

Question 24

What impacts cash flow?

Answer 24

change in demand
change in costs
seasonality in sales
business expansion
change in stock levels
change in credit terms

Question 25

What are the reasons why a business might need a new source of finance?

Answer 25

paying for expenses
expanding the business
investing in new products and services
starting a new business
paying for any unforeseen costs

Question 26

What are short-term sources of finance?

Answer 26

repaid within a year. used to buy stock or pay bills

Question 27

What are long-term sources of finance?

Answer 27

repaid over a longer period. used to finance expansions or new businesses

Question 28

What are some short-term sources of finance?

Answer 28

bank overdraft
trade credit

Question 29

What are some long-term sources of finance?

Answer 29

personal savings
venture capital
share capital
loan
retained profit
crowdfunding

Question 30

What is a share?

Answer 30

a part-ownership in a business

Question 31

What are shareholders?

Answer 31

investors that buy a limited company’s shares (sold to raise capital)

Question 32

Why would a shareholder invest?

Answer 32

they are entitled to a share of any profits generated