1.3 Putting a business idea into practice

Question 1

What are business aims and objectives?

Answer 1

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.

Question 2

What are the financial objectives for a start up business?

Answer 2

• Sales and revenue
• profit
• market share
• survival
• financial security

Question 3

What are the non financial objectives for a start up business?

Answer 3

• Personal satisfaction
• Independence
• Control
• Social benefits

Question 4

How do the aims of a start up business differ to those of a successful nationwide company?

Answer 4

Start up:

• survive -independence and control -financial security
• sales targets

Successful business:

• become market leaders
• donating to charity
• achieving higher sales revenues

Question 5

Define the term ‘market share’?

Answer 5

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.

Question 6

What is ‘revenue’?

Answer 6

Amount of income received from selling goods over a period of time.

Question 7

What are the two equations for revenue?

Answer 7

Revenue= Price x quantity(sales)
Revenue= profit-costs

Question 8

What is the difference between fixed and variable costs?

Answer 8

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.

Question 9

Equation for variable costs.

Answer 9

VARIABLE COSTS= cost of one unit x quantity produced

Question 10

What is ‘profit’?

Answer 10

The amount of revenue left over one costs have been deducted.
Profit=revenue-costs

Question 11

How can the profit of a business be used as an objective?

Answer 11

• essential for survival
• profits can be reinvested for expansion
• provides financial security
• can be used to reward employees
• an incentive to generate wealth.

Question 12

What is meant by ‘interest’?

Answer 12

Interest is a % of the amount of money borrowed from a back that must be repaid in addition to the money borrowed.

Question 13

What is the calculation for interest?

Answer 13

interest= total repayment- borrowed amount
—————————————————- x 100
borrowed amount

Question 14

When does a business hit a break-even point?

Answer 14

Level of output at which total revenue covers the total costs - neither loss nor profit at this point.

Question 15

What is the margin of safety?

Answer 15

Amount of output between Actual level of output – breakeven output.

Question 16

Breakeven calculation

Answer 16

BE in units = Fixed costs
—————–
Sales price- Variable costs

Question 17

Discuss reasons why a business might use a breakeven chart? (6marks)

Answer 17

• 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.

Question 18

Explain one action that a business can take when revenue decreases?

Answer 18

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.

Question 19

What is cash flow and cash flow forecast?

Answer 19

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.

Question 20

What is the equation for net cash flow?

How can you calculate opening and closing balance?

Answer 20

Inflows - outflows
Opening: previous month’s closing balance.
Closing balance: net cash flow + opening balance.

Question 21

Discuss the importance of cash to a business?

Answer 21

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.

Question 22

How can a business avoid insolvency or negative cash flow?

Answer 22

• Arranging credit agreements with suppliers and customers

- Limiting the number of customers who are allowed to pay in creditt

Question 23

The difference between cash and profit.

Answer 23

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.

Question 24

What factors influence cash flow?

Answer 24

• Changes in demand
• Change in credit terms
• Changes in costs
• Stock levels
• Business expansion
• Seasonality in sales.

Question 25

What can a cash flow forecast be used for?

Answer 25

• Making important decisions e.g
• taking on staff
• expanding the business
• identifying points in the future where the business might need loans etc.

Question 26

Explain one reason why a business might take a short term loan?

Answer 26

• for emergency purposes, for example to deal with sudden costs
• to invest in new products

Question 27

Examples of short term sources of finance?

Answer 27

-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

Question 28

Examples of long term sources of finance?

Answer 28

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.