1.3 Putting a business idea into practice Flashcards
What are business aims and objectives?
Aims are general goals that a business sets for long term whereas objectives are more specific, they are time bound, and helps a business achieve their aims.
What are the financial objectives for a start up business?
- Sales and revenue
- profit
- market share
- survival
- financial security
What are the non financial objectives for a start up business?
- Personal satisfaction
- Independence
- Control
- Social benefits
How do the aims of a start up business differ to those of a successful nationwide company?
Start up:
- survive -independence and control -financial security
- sales targets
Successful business:
- become market leaders
- donating to charity
- achieving higher sales revenues
Define the term ‘market share’?
The portion or percentage of an industry/market that is control by a specific company or the percentage of a market’s total sales that are earned by that company.
What is ‘revenue’?
Amount of income received from selling goods over a period of time.
What are the two equations for revenue?
Revenue= Price x quantity(sales) Revenue= profit-costs
What is the difference between fixed and variable costs?
Fixed: do not vary with the output produced by a business e.g insurance, rent, tax, business rates.
Variable: Change depending on the number of products sold by the business e.g electric bills,wages, raw materials.
Equation for variable costs.
VARIABLE COSTS= cost of one unit x quantity produced
What is ‘profit’?
The amount of revenue left over one costs have been deducted.
Profit=revenue-costs
How can the profit of a business be used as an objective?
- essential for survival
- profits can be reinvested for expansion
- provides financial security
- can be used to reward employees
- an incentive to generate wealth.
What is meant by ‘interest’?
Interest is a % of the amount of money borrowed from a back that must be repaid in addition to the money borrowed.
What is the calculation for interest?
interest= total repayment- borrowed amount
—————————————————- x 100
borrowed amount
When does a business hit a break-even point?
Level of output at which total revenue covers the total costs - neither loss nor profit at this point.
What is the margin of safety?
Amount of output between Actual level of output – breakeven output.
Breakeven calculation
BE in units = Fixed costs
—————–
Sales price- Variable costs
Discuss reasons why a business might use a breakeven chart? (6marks)
- helps them identify how many sales are needed to cover the cost.
- helps make decisions
- used to identify strategies for lowering breakeven point and increasing profit.
- can be used for predicting the effect on profit if sales prices change.
Explain one action that a business can take when revenue decreases?
They can reduce costs, for example saving on costs by reducing electricity and gas usage, this will maximise the profit.
They can also motivate staff to increase sales.
What is cash flow and cash flow forecast?
Cash flow is the way in which money comes in and goes out of a business.
A cash flow forecast predicts how cash will flow through a business over time.
What is the equation for net cash flow?
How can you calculate opening and closing balance?
Inflows - outflows
Opening: previous month’s closing balance.
Closing balance: net cash flow + opening balance.
Discuss the importance of cash to a business?
Without cash, a business will be insolvent i.e it will not be able to :
- Pay suppliers and employees
- repay bank loans
- manufacture and sell products
- promoting the business.
Cash is used to prevent business failure.
How can a business avoid insolvency or negative cash flow?
- Arranging credit agreements with suppliers and customers
- Limiting the number of customers who are allowed to pay in creditt
The difference between cash and profit.
Cash is the amount of money that is available for a business to use pay off its costs and debts.
Profit is the amount of money left once all the cost have been deducted from the revenue.
What factors influence cash flow?
- Changes in demand
- Change in credit terms
- Changes in costs
- Stock levels
- Business expansion
- Seasonality in sales.
What can a cash flow forecast be used for?
- Making important decisions e.g
- taking on staff
- expanding the business
- identifying points in the future where the business might need loans etc.
Explain one reason why a business might take a short term loan?
- for emergency purposes, for example to deal with sudden costs
- to invest in new products
Examples of short term sources of finance?
-Trade Credit
- offered by suppliers, so business can buy large amount of stock.
- credits have credit periods (fixed time) and credit limits.
Overdraft: bank allows money to be borrowed short notice
-Short term loan
-Selling assets
Examples of long term sources of finance?
Personal savings- no bank charges, no repayments.
Venture Capital- investment into startups by other successful entrpreneurs.
-Venture capitalists would want a return on the investment and some control over how business operates.
-Venture capitalist will help the business through contacts.
Share capital- Investors buy shares in the business
-dividends need to be paid.
Loan- timebound, banks demand security.
Retained profit.
Crowdfunding- lots of people invest small amounts.
