1.3 Putting a Business Idea into Practice Flashcards
What is an Aim?
A broad goal or achievement for the business that can be financial or non financial
What is an Objective?
More specific and quantifiable aims
What are types of Financial Aims?
Survival
Increase Market Share
Maximise Sales
Achieve Financial Security
Maximise Profit
How can Financial aims be measured?
In terms of money
How is Survival an aim?
- Important short term aim of all new businesses to not fail
- Needs to make enough money to stay open (buy stock, pay staff etc)
How is Maximise Profit an aim?
- Aim of many businesses
- May take a few years for a business to make any profit at all
How is Increase Market Share an aim?
- aim to capture a part of the market and establish itself
- then aim to increase its market share by taking sales away from the competition, or persuading new customers to enter the market and buy its products
What is Market share?
A percentage of a market’s total sales a certain product or company has made
How is Maximising Sales an aim?
- Good way to increase market share: the business can monitor sales in terms of how much of a product it sells, or how much it makes from selling certain products
- could reduce prices to increase sales
How is Achieving Financial Security an aim?
- businesses can depend on external sources of finance (ie loans) or personal savings of the owner when initially starting
- aims to depend on its own revenue to fund activities (break even)
What are Non Financial aims for a business?
- Personal Challenge
- Personal Satisfaction
- Gaining Independence and Control
- Doing what is right for society
How is Personal Challenge an aim?
- people want the challenge of setting up and running a new business
- If the risks pay off, there are rewards
How is Personal satisfaction an aim?
- people want the satisfaction of owning their own business, particularly if it allows them to follow an interest
- (ie history interest, gives tours of historical sites)
- high job satisfaction
How is Gaining Independence and Control an aim?
- Independent, so can be their own boss
- Control over what they do, can decide how the business is run
- flexible hours, can fit work around other commitments (ie childcare)
How is doing what is right for society an aim?
- acting in a way that is best for society, and socially seen as morally right
- ie against animal testing
What are examples of objectives?
- Survival
- Providing a good product
- Earning a profit
- Customer satisfaction
- Market share
- Ethical targets
- Environmental targets
What are objectives used for?
- set to act as clear targets for firms to work towards
- can later be used to measure how successful the firm has been
What factors affect the aims and objectives of a business?
- Size and Age of the business
- Owner
- Level of competition the business faces
How does the size and age of a business affect its aims and objectives?
- smaller businesses are more likely to focus on survival and growth
- growing businesses that are more established may focus on financial security, increasing sales and market share
- larger businesses get more public attention, so may set social aims and objectives to avoid bad publicity
How does the owner of a business affect its aims and objectives?
- smaller businesses may feel non financial aims (ie personal satisfaction) are more important than growing sales or market share
- Larger companies with many shareholders (ie Ltd) may have more pressure to have financial aims (ie maximising profit) so shareholders benefit more
How does the level of competition a business faces affect its aims and objectives?
- Highly competitive market, focus on survival or maximising sales
- Less competition, focus on increasing market share and maximising profit
What is Revenue?
Income earned by a business
R= price x quantity
What are Costs?
Expenses paid by the business
TC= VC + FC
TC= VC per unit x quantity
What is the Break Even output/ Break Even point?
Level of sales/output a firm needs in order to cover its costs
What is the Margin of Safety?
The gap between the current level of output and the break even output
What is Cash?
Physical money or money in the bank that a business can spend immediately
What does a business use cash for?
- Pay employees
- Pay suppliers
- Pay Overheads (ongoing expenses, bills, rent etc)
What can a Cash Flow Forecast be used for?
- can show when a firm may face a lack of cash (which could lead to the firm failing as it is unable to pay debts unless it sells assets)
- can be used to determine when it will need a short term source of finance to cover costs
What is Credit?
The business lets customers buy from them and pay up to 30 or 60 days later
- can affect business cash flow
Why do firms need finance?
- start up capital
- cover costs (from poor initial cash flow)
- cover delayed payments of customers
- cover day to day running costs
- to expand, ie buy larger premises
What are sources of short term finance?
Trade credit
Overdrafts
What is trade credit?
businesses may give firms one or two months to cover costs for certain purchases
What is overdraft?
bank lets firms take out more money out of their bank accounts than is actually in the bank balance.
What are long term sources of finance?
- loans
- personal savings
- share capital
- venture capital
- retained profit
- crown funding
What is share capital?
individuals can buy shares in a business, business raises money through issuing shares
What is venture capital?
selling shares to individuals or business who specialise in giving finance or expanding small firms
What is crowd funding?
a large number of people contribute money towards starting up a business or funding a business idea
What is Start up capital?
The money or assets needed to start up a business
What are the Pros and Cons of Trade Credit?
Pro- the firm has time to earn the money needed to repay the debt
Con- if the payment is made too late, they could get a large fee-> increasing firms costs, so they need to make sure they can cover these costs
What are the Pros and Cons of Overdraft?
Pro- allow businesses to make payments on time, even when they don’t have the cash
Con- usually have higher interest rate than other loans + the bank can cancel it at any time. If it isn’t paid back, the bank can take some of the businesses assets
What are Loans?
Easy to take out, paid with interest
What are the Pros and Cons of Loans?
Pro- Interest rate is usually lower than overdrafts
Con- if they aren’t paid in time, the bank can repossess the firm’s assets. Pay in monthly instalments, increase fixed costs-> should check they can still break even with the increased costs
What are the Cons of using Personal Savings?
Con- the owner may have to put some of their own money into the business when starting, or if it has cash flow issues, if the business fails, they could end up losing money
What are the Pros and Cons of Venture Capital?
Pro- they usually buy shares in businesses that are risky but have potential to grow
Con- they take a stake in the business, and may expect returns more quickly than other shareholders would.
