1.3 - Putting a business idea into practice Flashcards
What are some financial aims?
Survival
Maximise profit
Increase market share
Maximise sales
Achieve financial security
What are some non-financial aims?
Personal challenge
Personal satisfaction
Gaining independence and control
Doing what’s right for society
What is a business aim?
Overall goals that a business wants to achieve.
What is a business objective?
Smaller goals to help them achieve their bigger aim.
They are usually measurable and clear targets.
What does a business need to consider when deciding what its aims and objectives will be?
The business’ size, age and owners, as well as the competition it faces within the market.
What is revenue?
The income earned by a business.
Equation for revenue?
Revenue = quantity sold x price
What are costs?
The expenses paid out to run the business.
What are fixed costs?
The costs that don’t vary with the output. They have to be paid even if the firm produces nothing.
What are variable costs?
Costs that will increase as the firm expands output.
Equation for variable cost?
Variable cost = quantity sold x variable cost per unit
Equation for total cost?
Total cost = total variable costs + total fixed costs
What is interest?
The charge for borrowing money or the reward for saving money.
Equation for interest?
Interest (on loans) = (total repayment - borrowed amount) / borrowed amount x 100
How does a business break even?
If they make enough to cover costs.
What is profit (or loss)?
The difference between revenue and costs over a period of time.
What is profit?
The amount of money a company earns after costs have been taken into account.
Equation for profit?
Profit = revenue - costs
What does break-even level of output or break-even point mean?
It is the level of sales (or output) a firm needs in order to just cover its costs.
Equation for break-even point in units?
break-even point in units = fixed cost / (sales price - variable cost per unit)
Equation for break-even point for revenue (or cost)?
Break-even point for revenue (or cost) = break-even point in units x sales price
How does a business find the break-even level of output?
Completing a break-even analysis.
In a break-even diagram which two lines start at 0?
Total revenue and variable cost.
Which two lines show the break-even level of output on a break-even diagram?
Were the total cost and total revenue cross.
What is the margin of safety?
The gap between the current level of output and the break-even output.
Equation for margin of safety?
Margin of safety = actual sales (or budgeted sales) - break-even sales
What is the budgeted sales?
The sales that the firm is expected to makes.
What does cash mean?
The money that a business has available to spend immediately.
What does a business need cash for?
- employees
- suppliers
- overheads
What is cash flow?
The flow of all money into and out of the business.
Equation for net cash flow?
Net cash flow = cash inflows - cash outflows for a given period of time
What is a cash flow forcast?
It lists all the inflows and outflows of cash that appear in the budget.
How does a cash flow forecast help a business?
It helps firms to anticipate problems. And when it will need a short term source of finance to cover its costs.
What do credit terms tell you?
How long after agreeing to buy a product the customer has to pay.
What are the five reasons that firms need finance?
- Start-up capital.
- Cash to help new firms with initial cash flow and covering their costs.
- To cover if customers delay payments.
- If a business is struggling with day-to-day running costs.
- Expanding.
What are the short-term sources of finance?
- trade credit
- overdrafts
What does short-term sources of finance mean?
Lend money for a limited period of time.
What are long-term sources of finance?
Can either be paid back over a longer period of time or don’t need to be paid back at all.
What are the six examples of long-term sources of finance?
- loans
- personal savings
- share capital
- venture capital
- retained profit
- crowd funding
What is a loan?
When a business borrows money from a bank and has to pay it back with added interest in monthly installments.
What are the advantages of a loan?
They are quick and easy to take out.
What is personal savings?
A business owner may put some of their own money into the business.
What is the disadvantage of personal savings?
It is risky because the owner could end up losing their money if the business fails.
What is share capital?
When the business gains money from selling shares of their business. This means that they sell part ownership of the business.
What is venture capital?
Money raised through selling shares to individuals or businesses who specialise in giving finance to new or expanding small firms.
What is retained profit?
Profits that the owners have decided to plough back into the business after they’ve paid themselves a dividend.
What is crowd funding?
When a larger number of people contribute money towards starting up a business or funding a business idea.
