1.3: Putting a business idea into practice Flashcards
What are aims?
general long-term goals set by a business
What are objectives?
short-term steps a business takes to achieve its aims
What are some examples of financial objectives?
survival
sales
profit
market share
financial security
What are some examples of non-financial objectives?
personal satisfaction
independence
challenge
social benefits/goals
customer satisfaction
recognition
Equation for revenue
revenue=price x quantity
What is revenue?
the amount of income received from selling goods or services over a period of time
What are fixed costs?
costs that don’t vary
What are variable costs?
costs that change directly with the number of products made
Equation for variable costs
variable costs=cost of one unit x quantity produced
Equation for total costs
total costs=total fixed costs + total variable costs
Equation for profit (or loss)
profit=sales revenue- cost of sales
Why is profit often an objective of businesses?
allows a business to:
survive
reinvest into expansion
provide security and savings
reward employees
generate wealth for owner
Equation for total interest on loans
interest (%)= total (repayment-borrowed amount)/borrowed amount (x100)
What is interest?
the reward for saving or the cost of borrowing
What is break even?
the level of output at which a business’s revenue covers its total costs
Is a business making a loss or a profit at break even?
neither
Why is break even important?
allows a business to make decisions about prices, sales, volumes and costs
What is the margin of safety?
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
Equation for break even point (in units)
fixed cost/(sales price-variable cost)
Equation for break even point (in revenue/costs)
break even point in units x sales price
Why can break even be unreliable?
it assumes a business will sell all the products it makes. in reality, increasing price might deter customers from buying
Equation for closing balance
closing balance=net cash flow + opening balance
Without cash, what would happen to a business?
unable to:
pay its suppliers
pay debts and bank loans
pay wages to employees
buy raw materials and products to sell
promote the business
What impacts cash flow?
change in demand
change in costs
seasonality in sales
business expansion
change in stock levels
change in credit terms
What are the reasons why a business might need a new source of finance?
paying for expenses
expanding the business
investing in new products and services
starting a new business
paying for any unforeseen costs
What are short-term sources of finance?
repaid within a year. used to buy stock or pay bills
What are long-term sources of finance?
repaid over a longer period. used to finance expansions or new businesses
What are some short-term sources of finance?
bank overdraft
trade credit
What are some long-term sources of finance?
personal savings
venture capital
share capital
loan
retained profit
crowdfunding
What is a share?
a part-ownership in a business
What are shareholders?
investors that buy a limited company’s shares (sold to raise capital)
Why would a shareholder invest?
they are entitled to a share of any profits generated
