1.3 - Putting a business idea into practice

Question 1

1.3.1 - What are financial objectives and some examples of this?

Answer 1

Targets expressed in money terms such as making a profit, earning income or building wealth:

• Survival
• Profit
• Market Share
• Sales
• Financial Security

Question 2

1.3.1 - What are non-financial (social) objectives and some examples of this?

Answer 2

Targets that are not expressed in money terms:

• Personal Satisfaction
• Challenge
• Independence
• Control
• Helping Others

Question 3

1.3.2 - What is the formula for profit?

Answer 3

Revenue – Cost

Question 4

1.3.2 - What is the formula for sales revenue?

Answer 4

Selling Price x Quantity (number of units)

Question 5

1.3.2 - What is the formula for total costs

Answer 5

Fixed Cost + Variable Cost

Question 6

1.3.2 - What is the formula for variable cost?

Answer 6

Variable cost per Unit x Quantity (number of units)

Question 7

1.3.2 - How do you calculate interest?

Answer 7

Total Repayment – Borrowed Amount = Interest paid
Interest paid/ Borrowed Amount x 100 = Interest %

Question 8

1.3.2 - What is the break-even point and how do you calculate it?

Answer 8

The level of output where total revenues are equal to total costs; this is where neither a profit or loss is being made:
Fixed costs/ (Sales price - Variable cost per unit)

Question 9

1.3.2 - What is a margin of safety?

Answer 9

The amount of output between the actual level of output where profit is being made and the break even level of output.

Actual output - breakeven output

Question 10

1. 3.2 - What happens to the break even point if:
   a) Costs go up
   b) Your sale price goes up

Answer 10

a) The breakeven point is later
b) It the breakeven point is sooner

Question 11

1.3.3 - What is cash flow?

Answer 11

The movement of money into and out of the business. Cash is used to pay the day-to-day expenses of a business.

Cash inflow - cash outflow = net cash flow

Question 12

1.3.3 - Why is cash flow important to a business?

Answer 12

• To pay its expenses (Suppliers, overheads, employess etc.)
• The prevent business failure (insolvency)

Question 13

1.3.3 - How is net cash flow calculated?

Answer 13

Total cash inflow - Total cash outflow

Question 14

1.3.4 - What is the difference between long and short - term sources of finance?

Answer 14

LT: Sources of money for businesses that are borrowed or invested typically for more than a year.
ST: Sources of money for businesses that may have to be repaid either immediately or fairly quickly, such as an overdraft and trade credit.

Question 15

1.3.4 - What is Overdraft Facility?

Answer 15

• Borrowing money from a bank by drawing
• More money than is actually in your account. Interest is charged on the amount overdrawn.

Question 16

1.3.4 - What is Trade credit?

Answer 16

Negotiating with suppliers a period of time before goods and services that have been purchased have to be paid for. This is usually 60-90 days credit.

Question 17

1.3.4 - What is Factoring?

Answer 17

A factor (financial company) buys a debt from a business and pays the business typically 90% of the value of this debt. Therefore the business gets paid immediately. The factor charges a fee for this.

Question 18

1.3.4 - What are some Long term sources of finance?

Answer 18

• Personal savings
• Venture capital
• Share capital
• Loans
• Retained profit
• Crowdfunding

Question 19

1.3.4 - What is venture and share capital?

Answer 19

SC: The monetary value of a company which belongs to its shareholders.
VC: An individual or company which buys shares in what they hope will be a fast growing company with a long-term view of selling the shares at a profit.

Question 20

1.3.4 - What is crowdfunding?

Answer 20

Obtaining external finance from many individual, small investments, usually through a web-based appeal.