1.3 Putting a business idea into practice Flashcards
what is the difference between AIM and OBJECTIVES
AIM are long term goals for a business
OBJECTIVES are small steps to measure your aim
what is the acronym for how to make good objectives
Specific
Measurable
Achievable
Relevant
Time bound / target
what are the 5 financial objectives
- survival
- sales
- profit
- market share
- financial security
what are the 3 non-financial objectives
- personal satisfaction
- challenge
- independence / control
what is the equation for working out sales revenue
Sales revenue = selling price X number of units sold
whats the difference between fixed and variable costs
fixed stays the same no matter how much money the business makes
variable change each month dependent on business activity
what is the equation for working out total variable costs
total variable costs = variable costs X quantity sold
what is the equation for working out Total costs
Total costs = fixed costs + variable costs
what are the two types of profit
gross profit
net profit
what is the equation for working out gross profit
gross profit = revenue - total costs
what is the equation for working out net profit
net profit = gross profit - (operating expenses / interest )
what is the equation for working out gross profit margin
gross profit margin = gross profit / sales revenue X 100
what is the equation for working out net profit margin
net profit margin = net profit / sales revenue X 100
what is the equation for working out break-even point
break-even point = fixed costs / (selling price - variable cost )
what is the equation for working out margin of safety
margin of safety = actual sales - break-even sales
what is the equation for working out net cash flow
net cash flow = inflow - outflow
what is the equation for working out closing balance
closing balance = opening balance + net cash flow
what is a cash forecast
prediction of the anticipated cash inflows and outflows typically a 3-6-12 month period
what is cash used for in a business
paying suppliers
paying wages
operating expenses
what happens if a business doesn’t have sufficient cash in their business
can’t play employees
insolvency
what are the 2 short term sources of finance
- overdraft
- trade credit
what are the 5 long term sources of finance
- share capital
- bank loans
- crowd funding
- retained profit
- venture capital
what is share capital
money taken from the shares in a limited company
what is crowd funding
business access money from a large number of small investors
what is venture capital
peoples investments into the business
Explain the impact on profit if a business’s costs increase while revenue remains constant.
If costs increase while revenue remains constant, the profit will decrease (1) because profit is calculated as total revenue minus total costs (1). Higher costs reduce the margin between revenue and profit (1).
Define the term ‘break-even point’.
The break-even point is the level of output at which total revenue equals total costs, resulting in neither profit nor loss.
Explain why understanding the break-even point is important for a business.
Understanding the break-even point helps a business determine the minimum sales needed to cover costs (1). This aids in pricing strategies and financial planning (1) and helps assess the viability of business ventures (1).
Identify two internal sources of finance for a business.
1.Retained profit
2. Sale of assets
Discuss the advantages and disadvantages of using retained profit as a source of finance.
- Advantages:
No repayment required (1)
No interest charges (1) - Disadvantages:
May not be sufficient for large investments (1)
Analyse why a small business might choose to focus on survival rather than growth in its first year.
A new business faces uncertainty, limited cash flow, and low brand awareness. Focusing on survival ensures it can cover its costs and build a customer base.
However, this may limit early opportunities for growth and investment.
Define the term ‘revenue’.
Revenue is the total income a business receives from selling goods or services.
