1.3 Putting a business idea into practice Flashcards
What are business aims?
This is the overall target or goal of the business
What are business objectives?
These are the steps a business needs to take to meet their overall aim.
What are the purposes of aims and objectives?
- to produce goods and services appropriate to the businesses’ customers
- to provide a direction for the business
What are the financial objectives?
5 things
- Business survival - keep operating
- Profit
- Sales
- Market share
- Financial security
Define financial security?
relates to a business being able to afford to pay off all its costs and have enough cash left to survive
What are the non-financial objectives of a business?
- Social objectives - doing something good for society
- Personal satisfaction - feeling satisfied by own accomplishments
- Challenge
- Control
- Independence
Why do business aims and objectives differ between businesses?
- different sectors that they operate in - depends on the type of goods/services that they offer
- business size and scale - a new business may aim for survival and an already established business may aim for profit
What are the two main types of objectives?
- financial
- non-financial
Revenue
This is the total amount of money that comes into the business from selling its goods/services
selling price x n.o of units sold
Fixed costs
These are costs that don’t change with output
Variable costs
These are costs that change with output
Total costs
These are all the fixed and variable costs of a business
Fixed + Variable costs
Profit and loss
Profit - when the business sells more units than the break even umber of units
Revenue - total costs
Loss - when they sell less than that
Interest
The price you pay to borrow money or the return earned on savings and investments
Break even level of output
Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss. The break-even level of output informs a business of how many products it needs to sell to reach the break-even point (BEP).
fixed costs/(selling price - variable cost per unit)
Margin of safety
The margin of safety is the amount sales can fall before the
break-even
point (BEP) is reached and the business makes no profit.
actual sales - break even sales
How does an increase in revenue impact the business?
Beneficial for the business only when the costs are the same, or decreasing
How does a decrease in revenue impact the business?
Can be disadvantageous for a business as it can lead to lower profits or even loss, but this is assuming that costs are increasing or staying the same.
How to find the break even level of output from the break even chart?
This is the point where the line representing the revenue and total costs cross, where the business doesn’t make a profit or a loss
How to find the margin of safety?
Find the difference between the actual revenue, the end point of the revenue line and the break even level of output.
Profit and loss from a break even chart?
Profit - above the break even level of output
Loss - below the break even level of output
What is cash in financial terms?
- The money available to a business within its accounts.
Why is cash important?
- to pay suppliers, overheads and employees
- to prevent business failure = by being able to pay for bills to keep the business operating.
What is the difference between cash and profit?
Cash flow only refers to the money that flows in and out of your business within a specific time frame, whereas profit is what is left from your revenue once you’ve deducted your varying levels of costs (operational, taxes etc).
What is:
- cash inflow
- cash outflow
- net cash flow
- opening and closing balances
- cash that comes into a business
- cash that flows out a business to cover costs
- the is the difference between the cash inflow and outflow
- opening balance - the amount of money at the end of the last period
- closing balance - the amount of money left after all the cash inflows and outflows.
How can the business’ cash flow be in a vulnerable position?
few large customers and they fail to pay on time, the business’
cash flow
position is badly affected because the business does not have money it was expecting to have
How can a business get out of negative cash flow?
- negotiating an overdraft faculty
- keeping costs under control
- keeping cash coming into the business by arranging sensible credit arrangements.
What is cash-flow forecasting?
predicting future cash flows into and out of the business
Which types of businesses is cash flow forecasting important for?
- new businesses
- fast-growing businesses
- businesses with unpredictable sales patterns, e.g: a business with seasonal demand.
What are the different types of short term sources of finance for small established businesses
- overdraft - An agreement with the bank to overspend on an account.
- trade credit - The ability to buy stock now and pay for it at a later date.
What can short term finance be used for?
- for helping a business get positive cash flow
- bridging the gap when a large payment is delayed
- getting through seasons when cash flow is low
- paying extra cash to meet sudden or unexpected customer orders
Common features of an overdraft.
- variable interest rates
- flexibility of paying back the interest
- the bank can demand full payment of an overdraft within 24 h
What are different types of long-term finance?
personal savings, venture
capital, share capital, loans, retained profit and
crowd funding
Venture capital?
Venture capital is money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits.
Share capital?
Share capital
is money raised by
shareholders
through the sale of
ordinary shares. Buying shares gives the buyer part ownership of the business
Advantages + Dis for share capital?
Ad:
- no need of repayment
- no dividends for shareholders if there is a bad year
Dis:
- dilutes control for founders
- business is vulnerable to takeover
Crowdfunding?
Crowdfunding involves a large number of people investing small amounts of money in a business, usually online.
Ads and Diss of crowdfunding?
Ad:
- form of market research
- provides opportunities for individuals to start a business
Dis:
- the business must be interesting
- difficult to reach funding target - less than 33% of businesses achieve funding target.
