1.3 putting a business idea into practice Flashcards
what are ways to compete with other businesses?
- wider product range
- lower prices
- better design
- higher quality
- more convenient location
- stronger brand image
- better customer service
what is product differentiation?
making products different from others
why do businesses differentiate their products?
- to target different market segments
- to gain an advantage over rivals when faced with competition
what is a competitive market?
when there is a large number of businesses compared to customers
what may businesses do in a competitive market?
- improve efficiency
- find ways to improve competitiveness
- differentiate its products/services
- lowering its prices
- giving customers special offers
- cutting costs
what are the drawbacks of a highly competitive market?
- lower prices in order to compete
- accept lower profit margins
- cut back on expenditure
- be careful about how and when it expands
- monitor its competitors
what are aims?
general goals a business sets
what are objectives?
they are more specific than aims but contributes to achieving the overall aim. they will be financial or non financial
what are examples of financial objectives?
- profit
- market share
what are examples of non financial objectives?
- independence
- customer satisfaction
why may aims and objectives differ between businesses?
due to different stages of development
what is the formula for revenue?
REVENUE = PRICE X QUALITY
what are fixed costs?
costs that do not change
what are variable costs?
costs that change directly with the number of products made
what is the formula for variable costs?
VARIABLE COSTS = COST OF ONE UNIT X QUANTITY PRODUCED
what is total costs?
the total costs for a business
what is the formula for total costs?
TOTAL COSTS = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
a business sells 100 products
the products cost £5 per unit produced
the total fixed cost is £400
what is the total cost for the business?
100x5 (variable costs)=500
500(variable costs)+400(fixed costs)=£900(total costs)
what is profit?
when a business is making money
what is the formula for profit?
PROFIT = REVENUE - COSTS
what does profit allow businesses to do?
- survive
- expand
- provide security/savings
- reward employees
- generate wealth
what is the formula for interest?
INTEREST (ON LOANS) = TOTAL REPAYMENT - BORROWED AMOUNT/BORROWED AMOUNT X100
what is break even?
when revenue = total costs
what is total revenue?
the total money generated from sales in a business
what are the total costs?
the sum of all the costs
what are fixed costs?
costs that dont change is a business
what is margin of safety?
the amount of output between the actual level of output where profit is being made and the the break even level of output
how can you tell break even level from a graph?
it is where total costs and total revenue meets
what is the formula for break even points in units?
BREAK EVEN = FIXED COSTS/(SALES PRICE-VARIABLE COSTS)
what can break even analysis do?
it can identify strategies for lowering break even point and increasing profit
what is the formula for margin of safety?
MARGIN OF SAFETY = SALES - BREAK EVEN SALES
what is cash flow?
the money going in and out of a business on a day to day basis
what is a cash flow forecast?
predicts how cash will flow through a business over time
what is cash inflow?
money going into the business
what is cash outflow?
money going out of the business
what is net cash flow?
cash inflow-cash outflow
what is opening balance?
the money in a business at the start of the month
what is closing balance?
the money in a business at the end of the month
what is the importance of cash?
without cash a business would not be able to:
- pay suppliers and debts
- repay bank loans
- pay wages to employees
- buy raw materials
- promote the business
what impacts on cash flow?
- change in sales revenue/demand
- change in costs
- seasonality in sales
- business expansion or contraction
- change in stock levels
- credit terms can change
what is a negative cash flow?
when the cash outflows are greater than the cash inflows
why would a business need finance?
- paying for expenses
- expanding the business
- investing in new products and services
- starting a new business
- paying unforeseen costs
what is a short term source of finance?
finance that is paid immediately or quite quickly and are usually used to buy stock or pay the utility bill
what are long term sources of finance?
finance paid back over a long period of time and are usually used too finance a new business or to expand q business
what are two sources of short term finance?
1) Bank overdraft- covering short term expenses that can be paid quickly
2) trade credit- paying for stocks later
what are 6 long term sources of finance?
1) Personal savings- covering short term expenses
2) Venture capital- raising capital from investors
3) Loan- covering large expenses that will be paid back over a period of time
4) Retained profit- investing in a successful business
5) crowd finding- raising money from people for potentiall reward
why do businesses set aims/objectives?
- gives them a target to be measured
- can motivate workers
- aids decision making
fixed costs: 12,000
variable costs:120
selling price 180
what is the break even?
12,000/180-120=200
actual sales: 470
break even; 420
what is the margin of safety?
470-420=50
what are the advantages/disadvantages of an overdraft and definition?
a deficit in a bank account caused by drawing more money than the account holds advantages: -flexible -interest is only payed on the amount used disadvantages: -high interest -banks can ask for immediate repayment -banks can refuse an overdraft
what are the advantages/disadvantages of trade credit and definition?
Trade credit is the credit extended to you by suppliers who let you buy now and pay later
advantages:
-never run out of products to sell
-can sell products before paying the supplier
disadvantages:
-the supplier may charge higher costs
-supplier may say no
what are the advantages/disadvantages of personal savings and definition?
money owned by the entrepreneur that is put into a business advantages: -no interest -flexible -freedom disadvantages: -it is your own money
what are the advantages/disadvantages of venture capital and definition?
money put into a small business with high potential by a venture capitalist
advantages:
-can give starting money and strategies
disadvantages:
-lose control
-you have to give a large share to the VC
what are the advantages/disadvantages of share capital and definition?
when someone puts money into a business in exchange for a share in the business advantages: -do not need to pay back money -no interest -attracts new finance -raises business profile disadvantages: -potential conflicts -loss of ownership
what are the advantages/disadvantages of loans and definition?
advantages: -negotiate terms -large amounts of money disadvantages: -deadlines -interest
what are the advantages/disadvantages of retained profit and definition?
retained profit is profit kept by a business to be used to pay costs
advantages:
-quick and easy to access
-flexible
disadvantages:
-less likely to be available for start up businesses
-might need for something else
what are the advantages/disadvantages of crowd funding and definition?
when a lot of people donate money to a business
advantages:
-promotes the business
disadvantages:
-lets your competitors know you need funds
-may not attract other investors
-may be a waste of time
advantages of break even analysis?
- helps understanding on who will invest in a business
- you can calculate margin of safety
- shows advantages of keeping fixed costs down
- calculations are quick and easy
disadvantages of break even analysis?
- unrealistic assumptions
- fixed costs vary when output changes
- can only show one product at a time
- can only be used as a planning aid
- dose not take into account unforseen circumstances
how could a business cover negative cash flow?
- cut costs
- arrange an overdraft
- use a cheaper supplier
- discount and promote
- reduce waste
- organize trade credit
