1.3 - Putting a business idea into practice Flashcards
What is a business aim?
A business aim is what a business wants to achieve, like its growth or ambition
What is a business objective?
A business objective is how the business will achieve its aim / aims.
Financial aims and objectives (5)
Survival, profit, sales, market share and financial security
Non-financial aims and objectives (5)
Social objectives, personal satisfaction, challenge, independence and control
How are financial aims and objectives linked? (multiplier effect)
All start-up businesses will have the initial objective of survival, and this is linked with financial security. A business may focus on getting a certain a certain amount of sales, securing a certain market share or making a profit in some way.
Market share
the proportion of sales in a market that are taken by one business
Profit
the amount of revenue left over once costs have been deducted
Social objective
likely to be non-financial, such as reduce carbon emissions of a business
Personal satisfaction
when an entrepreneur creates a thriving business that people like to use
Challenge
when an entrepreneur wants to make a business work
Independence
when an entrepreneur likes it that they can make their own business decisions
Control
when an entrepreneur likes setting the aims and objectives and can decide the direction to take the business
Why do business aims and objectives differ between businesses?
As the industry for each business may be different, and this will influence its aims and objectives
Revenue
What does a business need to survive?
Revenue is the income a business receives from sales. A business needs a steady revenue stream so it can survive and succeed
How do you calculate for revenue?
revenue = price (of product) x quantity (amount of units sold)
Income stream
the source of regular income a business receives. This could be through the money it receives from customers, or other areas such as investment income
Viable
capable of working or succeeding
Fixed costs (rent, tax)
Fixed costs are ones that do not change, no matter how many products and services a business sells
Variable costs (electricity bills, raw materials)
Variable costs are ones that change depending on how many products or services a business sells
How do you calculate for total costs?
TC (total cost) = TFC (total fixed costs) + TVC (total variable costs)
Profit and Loss
Profit is the amount of revenue left over once costs have been deducted. If this number is negative, the business will be said to have made a loss.
Income statement
a financial statement showing the amount of money earned and spent in a particular period and the resulting profit and loss
How are losses shown on an income statement?
Losses are shown in brackets ()
Gross profit
the amount of profit that a business makes on a product or service before the costs of producing and selling that product or service are deducted
How do you calculate for gross profit?
gross profit = sales revenue - cost of sales
Net profit
the amount of profit that a business makes on a product or service after the costs of producing and selling that product or service are deducted
How do you calculate for net profit?
net profit = gross profit - other operating expenses and interest
Interest
a percentage of the amount of money borrowed from a bank that must be repaid in addition to the additional amount borrowed. It is a fixed cost to the business
How do you calculate interest?
interest (%) = total repayment - borrowed amount / borrowed amount x 100
Break-even point
the point where revenue received meets all of the costs of a business. a business’s revenue exactly matches its total costs
Break-even point in units
tells the business how many units it needs to sell in order to meet its break-even point
How do you calculate for break-even point in units?
break-even point in units = fixed costs / sales price - variable
Break-even point in currency
tells the business how much more money needs to be taken to meet the break-even point
How do you calculate for break-even point in currency?
break-even point in currency = break-even point in units x sales price
Margin of safety
how much sales can fall before the business’s break-even point is reached again
How do you calculate for margin of safety/
margin of safety = actual or budgeted sales - break even sales
What is a break-even diagram?
A break-even diagram is a way of showing a business’s break-even point
What is shown on a break-even diagram?
Fixed costs, Total costs (TFC + TVC), Revenue
What is the impact of revenue increasing?
When revenue increases, it is likely to have a positive impact as long as the costs stay the same. increased revenues lead to increased profit
What is the impact of revenue decreasing?
When revenue decreases, it is likely to have a negative impact on the business unless costs decrease at the same time
What is the impact of costs increasing?
When costs increase it can have a negative impact because the business has to pay more money
What is the impact of costs decreasing?
When costs decrease it can be an immediate benefit to the business because they’ll make more money per unit sold.
How do you identify the break-even level of output on a break-even diagram?
It is the point at which the revenue hits the total costs
How do you identify margin of safety on a break-even diagram?
You do the number of sales - the number of sales to break-even
How do you identify profit or loss on a break-even diagram?
If revenue is above total costs then a profit is made, but if revenue is below then a loss is made.
What is cash?
Cash is the amount of money a business has in its bank account
Why is cash so important to a business?
As it is needed to pay suppliers, overheads and employees, as well as preventing business failure
Credit
the amount of money that a financial institution or supplier will allow a business to use, which it must pay back in the future at an agreed time
Overheads
fixed costs that come from running an office, shop or factory, which aren’t affected by the number of specific products or services that are sold
Why is a good relationship with suppliers important?
As suppliers are responsible for ensuring that raw materials or products arrive on time and in perfect condition to be used. A supplier will only do this if the business pays them within their time limit
What overheads does a business need to pay for, and what can failure of these payments mean?
Rent, maintenance of company vehicles, electricity bills
Failure to pay could lead to services being withdraw from the suppliers
How often do employees need to be paid?
Every month or week. The business has to pay the additional costs of having employees e.g. National Insurance contributions and tax deductions made on employees’ wages
Preventing business failure
If a business doesn’t manage cash or cash flow it can fail.
Cash flow
The way in which money comes into the business from customers and goes out of the business to pay suppliers
customers —> business —> suppliers
Positive cash flow
more money coming in than going out
Negative cash flow
less money coming in than going out
Insolvent
a business that is unable to pay its debts and/or owes more money than it is owed
What is the best way a business can prevent becoming insolvent? (2)
Arrange sensible credit agreements with suppliers and customers
Limit the number of customers to which it gives credit
The difference between cash and profit
Not all cash paid into the business is profit, as some of it needs to be used to meet the business’s costs
Once all costs have been deducted from all revenue, the amount left over is profit
What is a cash-flow forecast?
A cash flow forecast is an estimate of how much cash will come into the business and how much will leave the business over the course of a year.
What can a cash flow forecast help with?
A cash flow forecast can help a business to know how much cash it expects to take in a year and how much the business is likely to spend in costs.
What is a cash flow forecast made up of? (5)
A cash flow forecast is made up of : cash inflows cash outflows net cashflow opening balance closing balance
What are cash inflows and what do they include?
cash inflows are all of the money that comes into the business. They include things like sales - used equipment sales - consumables hire repairs
What are cash outflows?
Cash outflows are all of the money that’ll leave a business in order to pay the fixed and variable costs.
Why should a business be cautious when estimating costs?
As it is better to estimate that costs will be higher than expected and have a plan incase money needs to be paid sooner than expected
Net cash flow
The net cash flow is the difference between the cash inflows and the cash outflows. The business can use this figure to see if there is sufficient money to cover its costs
How do you calculate for net cash flow?
Net cash flow = cash inflows - cash outflows in a given period
Consumables
items that get ‘used up’ like pens, paper, staples and other items a business has to replace regularly
Opening balance
The opening balance is the amount of money in the business’s bank account at the start of any given period:
opening balance = closing balance of previous period
Closing balance
The closing balance is the amount of money in the bank at the end of each month.
How do you calculate the closing balance?
closing balance = opening balance + net cash flow
Short term sources of finance include …
trade credit and overdraft
Trade credit
a credit arrangement that is offered only to businesses by suppliers.
Overdraft
a facility offered by a bank that allows an account holder to borrow money at short notice e.g. if a business needs to pay a supplier fast
What terms and conditions may be in a trade credit agreement?
Credit limit, credit period, frequency of payment, method of payment, retrospective discount
Credit limit
The maximum amount of credit that a business has with a financial institution or supplier
e.g. if a business owes £1300 and has a credit limit of £1500, it can only purchase £200 more before they need to pay off the money owed to order more supplies
Credit period
the maximum amount of time a business can take to pay what is owed. Credit periods are agreed in advance and can be 30, 60 or 90 days
Frequency of payment
the frequency with which a business will pay a supplier
Method of payment
the way in which a business sends the money owed to a supplier. A bank transfer is most likely to be the preferred method, but some businesses may want to pay by cheque
Cheque
a written order to a bank to pay an amount of money from an account holder’s account to a specific person
Retrospective discount
a discount applied when a business has purchased a certain number of goods or spent a certain amount of money with a supplier
Long term sources of finance include …
personal savings, venture capital, share capital, loans, retained profit, crowdfunding
Personal savings
any money the entrepreneur has saved up themselves, either before starting the business or while the business is running - can be risky, but entrepreneur avoids incurring bank charges
Venture capital
Money to invest in a business is sourced from individuals or groups of people (successful entrepreneurs) who may wish to invest their own money into new businesses
Return on investment
the amount of money that an investor gets back in return for investing in business. A venture capitalist may want this and is also likely to want to make decisions on how the business operates
Shareholders
Investors who are part-owners of a company
Share capital
Money to invest in a business is raised by the business issuing shares that it then sells to those who wish to invest in the company - the amount of money invested by shareholders for a business
Loan
A loan is an amount of money lent to an individual or a business that will be paid off with interest (usually fixed) over an agreed period of time
What may the bank check in a business when agreeing a loan with them?
A bank will undertake credit checks
They may also demand security from the business in the form of the business’ assets
If the business is new, the bank may ask for a guarantor
Credit check
a check on the financial status of a business to ensure that the business has reliable credit history and doesn’t have any existing outstanding debts
Security
when the lender asks the borrower to put up an asset like a house, or a valuable item owned by the business
Asset
any item of value that a business owns, such as its machinery or premises
Guarantor
a named person who guarantees to pay for the repayments on a loan should the person who has taken out the loan not be able to make the payments
Retained profit
Money that a business keeps, rather than paying it out to its shareholders
Crowdfunding
A business obtains funding from a large number of people who each pay a small amount into the business , which can raise a lot of investment for the business.
Define ‘credit’
the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
