1.3 Putting a business idea into practice

Question 1

1.3.1 Financial aims and objectives

Answer 1

Survival, profit, sales, financial security, market share

Question 2

1.3.1 Non-financial aims and objectives

Answer 2

Social objectives, personal satisfication, challenge, independance and control

Question 3

1.3.2 Variable cost

Answer 3

The cost to produce each item

Question 4

1.3.2 Break even formula

Answer 4

Fixed costs/(Selling price - Variable costs)
Selling price - variable costs is also known as contribution per unit or value added

Question 5

1.3.2 Margin of safety formula

Answer 5

Actual sales - break even sales

Question 6

1.3.3 What is the importance of cash to a business

Answer 6

1. To pay suppliers, overheads, employees
2. To prevent insolvency

Question 7

1.3.3 Net cash flow

Answer 7

Total inflows - total outflows

Question 8

1.3.3 Closing balance

Answer 8

Opening balance + net cash flow

Question 9

1.3.4 Short term sources of business finances

Answer 9

Overdraft, Trade credit

Question 10

1.3.4 Long term sources of business finances

Answer 10

Personal savings, venture capital, share capital, crowdfunding, bank loan, retained profit

Question 11

Overdraft

Answer 11

External
Advantages - Can be arranged quickly, provides instant access to pay short term debts
Disadvantages - High interest rates will be charged, bank can cancel overdraft at any time

Question 12

Trade credit

Answer 12

External
Advantages - Improves cash flow, interest free
Disadvantages - Late payments could damage the relationship with the supplier

Question 13

Venture capital

Answer 13

External
Advantages - Benefit experience from venture capitalist
Disadvantages - Venture capitalist will expect part ownership of the business from investing in it

Question 14

Share capital

Answer 14

External
Advantages - Can raise large sums of finance that doesn’t need to get repaid
Disadvantages - Shareholders can influence the decision the business makes

Question 15

Bank loan

Answer 15

External
Advantages - Quick access to large sums of money
Disadvantages - Needs to be repaid with interest

Question 16

Crowdfunding

Answer 16

External
Advantages - Can raise large sums of money which helps fund growth of businesses at an early stage
Disadvantages - The business must be interesting and unique, it can be difficult to reach the funding target

Question 17

Retained profit

Answer 17

Internal
Advantages - Doesn’t create any debt for the business, could attract further investment
Disadvantages - They might not be large enough to fund big, long term projects

Question 18

Personal savings

Answer 18

Internal
Advantages - Doesn’t create any debt for the business, the funds are yours, they will get shareholders as they prove that they can risk their own money
Disadvantages - May not cover all of the things the business needs