1.3 PUTTING A BUSINESS IDEA INTO PRACTICE

Question 1

Financial aims? 1m

Answer 1

goals of the amount of money or number of sales wanted to be made by a business

Question 2

specific financial aims? 5m

Answer 2

• survival = have enough money to stay open and pay for stock and pay the staff etc
• maximise profit = many have this aim but it could take years to reach
• increase market share = market share tells you what percentage of a market’s total sales has a certain company/ business made
• maximise sales = increasing sales is a good way for the business to grow
• achieve financial security = instead of relying on external sources of finances, loans or owners personal savings be at a point of being able to use businesses own revenue to fund its activities

Question 3

non financial aims? 4m

Answer 3

specific to each business
- accomplishing a new personal challenge as an owner
- achieving own personal satisfaction as an owner
- gaining independence and control as a owner
- doing what’s right for society as a company e.g. not testing products on animals

Question 4

business objectives? 2m

Answer 4

more specific than business aims and are measurable e.g. if a firms aim is to maximise sales then the objective may be to increase income form sales by 30% over 2 years so it helps to achieve business aims as well

Question 5

factors affecting aims and objectives of a business 6m

Answer 5

• the size and age of the business = a small businesses aims and objectives are different than that to a more known and big business
• who owns the business = for small businesses that are owned by one or small number of people, non financial aims such as achieving personal satisfaction may be more important than growing sales compared to big businesses who’s aims are maximise sales and make large profit
• the level of competition the business faces - if a business faces much competition it might focus on survival and maximising sales while businesses with less competition its aims and objectives may be more based on increasing market share and maximising profits

Question 6

revenue? 1m

Answer 6

• the income earned by a business
• revenue = quantity sold x price of product

Question 7

costs? 1m

Answer 7

• the expenses paid out by a business
• total variable cost = quantity sold x variable cost per unit
• total cost = total variable costs + total fixed costs

Question 8

interest? 1m

Answer 8

when a business borrows money they must pay it back with a charge, paying back more than what was given

interest (on loans) = (total repayment - borrowed amount / borrowed amount) x100

Question 9

profit? 1m

Answer 9

• businesses make a profit if they earn more than they spend
• profit = revenue - costs

Question 10

breaking even? 3m

Answer 10

• breaking even means covering your costs
  1. the break even level of output or break event point is the level of sales (or output) a firm needs in order to be able to just cover its costs
• break even point in units = fixed costs / (sales price - variable cost per unit)
• break even point for revenue = break even point in units x sales price

if a firm sells more than the break even point it’ll make a profit - if it sells less it’ll make a loss

Question 11

cash flow? 1m

Answer 11

the flow of all money into and out of a business

Question 12

cash inflow? 1m

Answer 12

the flow of money into the business

Question 13

cash outflow 1m

Answer 13

the flow of money out of the business

Question 14

net cash flow? 1m

Answer 14

net cash flow = cash outflows - cash inflows for a given period of time

Question 15

positive and negative cash flows? 2m

Answer 15

positive cash flow = more cash inflow
negative cash flow = more cash outflow

Question 16

closing balance? 1m

Answer 16

closing balance = opening balance + net cashflow

Question 17

credit? 1m

Answer 17

an agreement that a customer will pay for something at a later rate

Question 18

credit - cash flows? 2m

Answer 18

credit terms can affect the cash flow due to payments being made later causing receipts to made a certain time period after the sale is already made

Question 19

5 reasons why firms need finance? 5m

Answer 19

1. new firms need start up capital (the money or assets to start a business)
2. new firms often have poor initial cash flow - so they find it hard to cover costs -> causing additional finances to cover this
3. sometimes customers delay payment so finance is need to cover this shortfall in lack of cash
4. if a business is struggling, it may need additional finance to meet its day to day running costs
5. firms may need finance in order to expand - e.g. to buy larger premises

Question 20

short-term sources of finance? 2m

Answer 20

1. TRADE CREDIT = when a business gives firms time to pay for certain purchases
   - useful as firms have time to earn the money needed to pay the debt back, however if paid back to late, the fir could end up with a large fee
2. OVERDRAFTS = when more money is taken out of a bank account than has been paid into it
   - this allows businesses to make payments on time even if they do not have enough cash but usually they have a higher interest rate than loans - and the bank can cancel an overdraft at any time, if it isn’t paid off then the bank can take some of the businesses assets

Question 21

long-term sources of finance? 6M

Answer 21

• can be paid back over a long period of time or do not need to be paid back at all
  1. LOANS - a long-term source of money that must be paid back to the lender
  2. PERSONAL SAVINGS - a business owner may put some of their own money into the business to get it started or if the business is having cash flow problems, however this is risky as the owner could end up losing money if the business fails
  3. SHARE CAPITAL - the business gains money through issuing shares in the company
  4. VENTURE CAPITAL - money raised through selling shares to individuals or businesses who specialise in giving finance to new or expanding small firms
  5. RETAINED PROFIT - profit that is put back into the business by the owners divined
  6. CROWD FUNDING - when a large number of people each contribute money towards funding a new business or business idea