1.3 Putting a business idea into practice

Question 1

1.3.1 Financial aims and objectives of a business

Answer 1

Survival, profit, sales, financial security, market share

Question 2

1.3.1 Non-financial aims and objectives of a business

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 + and –

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 + and –

Answer 12

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

Question 13

Venture capital + and –

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 + and –

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 + and –

Answer 15

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

Question 16

Crowdfunding + and –

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 + and –

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 + and –

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