1.3 Putting a business idea into practice

Question 1

Aims

Answer 1

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

Question 2

Market share

Answer 2

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

Question 3

Objectives:

Answer 3

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

Question 4

Smart objectives

Answer 4

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

Question 5

Survival

Answer 5

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

Question 6

Fixed costs

Answer 6

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

Question 7

Variable costs

Answer 7

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

Question 8

Total costs

Answer 8

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

Question 9

Profit

Answer 9

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

Question 10

Interest

Answer 10

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

Question 11

Revenue

Answer 11

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

Question 12

Break-even

Answer 12

Break-even: 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 13

Break-even chart

Answer 13

Break-even chart: a graph showing a company’s
revenue and total costs at all possible levels of
output.

Question 14

Margin of safety

Answer 14

Margin of safety: the amount by which demand
can fall before the business starts making losses.

Question 15

Formula for margin of safety and break even output

Answer 15

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

Question 16

Cash

Answer 16

Cash: the money the firm holds in notes and
coins, and in its bank accounts.

Question 17

Cash flow

Answer 17

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

Question 18

Insolvency

Answer 18

Insolvency: when a business lacks the cash to
pay its debts.

Question 19

Overdraft

Answer 19

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

Question 20

Overdraft Facility

Answer 20

Overdraft facility: an agreed maximum level of
overdraft.

Question 21

Cash flow forecast

Answer 21

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

Question 22

Closing balance

Answer 22

Closing balance: the amount of cash left in the
bank at the end of the month.

Question 23

Negative cash flow

Answer 23

Negative cash fl ow: when cash outflows are
greater than cash inflows.

Question 24

Net cash flow

Answer 24

Net cash flow: cash in minus cash out over the course of a month.

Question 25

Opening balance

Answer 25

Opening balance: the amount of cash in the
bank at the start of the month.

Question 26

Crowdfunding

Answer 26

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

Question 27

Dividends

Answer 27

Dividends: 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

Retained profit : 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

Share capital: 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

Trade credit: when a supplier provides goods but is willing to wait to be paid – for perhaps up to three months. This helps with
cash fl ow.

Question 31

Venture capital

Answer 31

Venture capital: 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.