1.3 - Putting A Business Idea Into Practice

Question 1

What are non-financial objectives of a business?

Answer 1

> Social objectives - charity work 
> Personal satisfaction 
> Challenge
> Independence
> Control

Question 2

List Short-term sources of finance.

Answer 2

> Overdraft

> Trade credit

Question 3

When does a firm have positive cash flow?

Answer 3

When there is cash inflow than outflow for a particular time period.

Question 4

What are Personal savings?

Answer 4

Owner can put some of their savings into the business. But this is risky as the owner could lose money if the business fails.

Question 5

What are dividends?

Answer 5

Payments that the shareholders get if the company makes a profit. The more shares a shareholder owns, the higher their dividend will be.

Question 6

What is Trade credit?

Answer 6

Businesses may give one or two months to pay for certain purchases. Useful for small firms as it gives them time to earn money before paying them. However, the firm could end up with a large if the payment is late. Paying off the debt will increase the firm’s costs so it will need to make sure it can cover its costs

Question 7

What is share capital?

Answer 7

Individuals could buy shares in a business. They will have part ownership and businesses can gain money through issuing shares.

Question 8

What is venture capital?

Answer 8

Money raised through selling shares to individuals or businesses who specialise in giving finance to new or expanding firms. Venture capitalists put money is risky businesses but have potential.

Question 9

Which line is flat on a break-even graph?

Answer 9

Fixed cost doesn’t change

Question 10

What is crowd funding?

Answer 10

When a large number of people contribute money towards starting up a business or funding a business idea. It’s often used for creative and innovative businesses usually takes place online. Normally each person contributes small amounts of money. Sometimes the people who contribute get rewards.

Question 11

How do you work out interest?

Answer 11

( (Total payed back - borrowed amount) ÷ borrowed amount ) x 100

Question 12

Why is cash important?

Answer 12

• to pay suppliers, employees and overheads (ongoing expenses - rent)
• to prevent business failure (insolvency)

Question 13

What happens when a firm sells below the break-even output?

Answer 13

They are making a loss

Question 14

What is the break-even point?

Answer 14

The level of sales or output required a firm needs to cover its costs.

Question 15

What is retained profit?

Answer 15

These are profits that the owners have decided to plough back into the business after they have paid themselves a dividend

Question 16

Why do different firms have different objectives?

Answer 16

Different organisations have different objectives. Depends on the size and age of the business; who owns the business; the level of competition.

Question 17

What happens when a firms is selling more than their break-even output?

Answer 17

They are making a profit

Question 18

What is an overdraft?

Answer 18

Allows firms to take out more money out of its bank account than it has paid into. Allows firm to make payments on time. However, they do have high interest rates and the bank can cancel at any time. If it isn’t paid off the bank can take some of the business’s assets.

Question 19

How do you find the break-even point on a break-even graph?

Answer 19

Where the total costs line crosses the total revenue line

Question 20

What is cash?

Answer 20

The money a company can spend immediately

Question 21

What is an insolvency?

Answer 21

When a firm cannot pay its debts if it has a lack of cash.

Question 22

What are Loans?

Answer 22

They are quick and easy. Repaid with interest and if it is not paid then the bank can take the firm’s assets. They could pay back the debt in instalments, which will increase the firm’s fixed costs. Before taking out a loan, the firm should make sure the they can still break-even with this increase in costs.

Question 23

What the financial objectives of businesses?

Answer 23

> Survival - for startup businesses; they need to make enough money to stay open.
Maximise profit - may take a firm a few years before making profit
Maximise sales
Achieve financial security - so a firms can support its own costs with its own revenue
Increase market share

Question 24

Which lines start at 0 on a break-even graph?

Answer 24

Variable and total revenue as if no products are sold/made then it won’t cost anything and you won’t get payed for it.

Question 25

List Long-term sources of finance

Answer 25

> Loans 
> Personal savings 
> Share capital 
> Venture capital 
> Retained profit 
> Crowd Funding

Question 26

What is the difference between profit and cash?

Answer 26

Profit is the amount of money a company earns after cost have been taken into account. So a business can make a profit if it earns more than it spends but still run out of cash if it uses its cash to invest in other assets for the business.