1.3 Putting a business idea into practice

Question 1

Aims:

Answer 1

a general statement of where you’re heading, for example ‘to get to university’.

Question 2

Market share:

Answer 2

the percentage of a market held by one company or brand.

Question 3

Objectives:

Answer 3

a clear, measurable goal, so success or failure is clear to see.

Question 4

SMART objectives:

Answer 4

targets that are specific, measurable, achievable, realistic and time-bound.

Question 5

Survival:

Answer 5

keeping the business going, which ultimately depends on determination and cash.

Question 6

Fixed costs:

Answer 6

costs that don’t vary just because
output varies, for example rent.

Question 7

Interest:

Answer 7

the charges made by banks for the cash they have lent to a business, for example six per cent per year.

Question 8

Profit:

Answer 8

the difference between revenue and total costs; if the figure is negative the business is making a loss.

Question 9

Revenue:

Answer 9

the total value of the sales made within
a set period of time, such as a month.

Question 10

Total costs:

Answer 10

all the costs for a set period of time, such as a month.

Question 11

Variable costs:

Answer 11

costs that vary as output varies, such as raw materials.

Question 12

Formulas:

Answer 12

Sales revenue = price × quantity sold
Total costs = variable costs + fixed costs
Profit = total revenue – total costs

Question 13

Break even:

Answer 13

the level of sales at which total costs are equal to total revenue. At this point the business is making neither a profit nor a loss.

Question 14

Margin of safety:

Answer 14

a graph showing a company’s revenue and total costs at all possible levels of output.

Question 15

Break even chart:

Answer 15

the amount by which demand can fall before the business starts making losses.

Question 16

Formulas:

Answer 16

Break-even output = fixed costs / price – variable costs per unit
Margin of safety = sales – break-even output

Question 17

Cash:

Answer 17

the money the fi rm holds in notes and coins, and in its bank accounts.

Question 18

Cashflow:

Answer 18

the movement of money into and out of the firm’s bank account.

Question 19

Insolvency:

Answer 19

when a business lacks the cash to pay its debts.

Question 20

Overdraft:

Answer 20

the amount of the agreed overdraft facility that the business uses.

Question 21

Overdraft facility:

Answer 21

an agreed maximum level of overdraft.

Question 22

Closing balance:

Answer 22

the amount of cash left in the bank at the end of the month.

Question 22

Cash flow forecast:

Answer 22

estimating the likely flows of cash over the coming months and, therefore, the overall state of one’s bank balance.

Question 23

Negative cash fl ow:

Answer 23

when cash outflows are greater than cash inflows.

Question 24

Net cash flow:

Answer 24

cash in minus cash out over the course of a month.

Question 25

Opening balance:

Answer 25

the amount of cash in the bank at the start of the month.

Question 26

Crowdfunding:

Answer 26

raising capital online from many small investors (but not through the stock market)

Question 27

Dividends:

Answer 27

payments made to shareholders from the company’s yearly profits. The directors of the company decide how large a dividend payment to make; in a bad year they can decide on zero.

Question 28

Retained profit:

Answer 28

profit kept within the business (not paid out in dividends); this is the best source of finance for expansion.

Question 29

Share capital:

Answer 29

raising finance by selling part- ownership in the business. Shareholders have the right to question the directors and to receive part of the yearly profits.

Question 30

Trade credit:

Answer 30

when a supplier provides goods but is willing to wait to be paid – for perhaps up to three months. This helps with cash flow.

Question 31

Venture capital:

Answer 31

a combination of share capital and loan capital, provided by an investor willing to take a chance on the success of a small to medium-sized business.