1.3 Putting a Business Idea to Practice Flashcards
Finance
What is the difference between an aim and objective?
An aim states the overall purpose for the business, the long-term goal and the objectives are used to break the aim down into short-term manageable goals.
Give four financial aims/objectives.
Survival, Profit, Market share, Sales, Financial security
Give four non-financial aims/objectives.
Social objectives, Personal satisfaction, Challenge, Independence and control
What is meant by the term revenue?
Revenue is the income gained by a business from selling goods and services.
How is revenue calculated?
Selling price per unit x quantity sold to customers
What does total revenue look like on a chart?
Total revenue rises in direct proportion to the quantity.
What is meant by the term cost?
Costs are the expenses incurred when running a business.
What is the difference between fixed costs and variable costs?
Fixed costs do not change in relation to output whereas variable costs change as a result of changes in output.
How do you calculate the total cost?
TOTAL COSTS = Total fixed costs + Total variable costs
What is meant by the term profit?
Profit is the reward for risks taken by entrepreneurs.
How is profit calculated?
Profit = Total Revenue - Total Costs
When does a business make a loss?
A business will make a loss if total costs are greater than the revenue generated, this may be because of a seasonal market, or due to a rise in costs.
What goes on the X axis and the Y axis?
X-axis: Output (Units)
Y-axis: Costs/Revenues
Which three lines appear on a breakeven chart?
Fixed costs (horizontal), Total Revenue (Diagonal), Total Costs (lower incline diagonal from fixed cost line)
What should you do once you have found the breakeven point?
In dotted lines, mark on the breakeven point in units of output (BEO), mark on the breakeven point in costs/revenue (BE£) and then write a sentence stating the BEO and the BE£ and what this means in terms of loss/profit.
How do we calculate the Contribution per Unit?
Selling price per unit - variable cost per unit = Contribution per Unit
How do we calculate the breakeven point in output?
Fixed costs/contribution per unit = breakeven point (units) Output - BEO
How do we calculate the breakeven point in costs/revenues?
Breakeven point (units) Output x selling price per unit = Breakeven point costs/revenues (BE£)
How do you work out the variable costs in the breakeven table?
Variable cost per unit x output
How do you work out the total costs in the breakeven table?
Fixed costs + variable costs
How do you work out the total revenue in the breakeven table?
Selling price per unit x output
What is the margin of safety?
Actual Output - Breakeven Output
How is the margin of safety used to calculate profit?
Margin of Safety (units) x Contribution per Unit(£)
What is the difference between a short-term source of finance and a long-term source of finance?
A short-term source of finance is usually for a maximum of 3 months, whereas a long-term source of finance is for generally repayment over 12 months or more.
What are the short-term sources of finance?
There are two main sources of short-term finance, an overdraft (a safety net - high interest) or trade credit (buy now pay later with suppliers - between 60-90 days repayment terms).
What are the long-term sources of finance?
The most common long-term finance is a loan, and the longer the period of repayment, the lower the interest rate. There is also owner’s fund, shareholder funds, venture capitalists etc.
What is interest?
The price of ‘giving’ money. If you save money, the bank pays interest as a ‘thank you’, whereas if you take out a loan, you have to pay the bank interest.
What is the annual percentage rate (APR)?
The APR is the interest paid each year, e.g. a loan of £10,000 with an APR of 5% over 5 years would mean that the actual amount repaid was £500 per year, and thus over 5 years would be £2,500.
Define the term ‘cash inflow’
The cash coming into the business, e.g. from sales revenues, owners funds etc.
Define the term ‘cash outflow’
The cash going out of the business, e.g. to pay bills.
Define the term solvent.
The business has more cash coming in than going out so it will be readily able to pay bills.
Define the term ‘insolvent’
The business has more cash going out than coming in and thus it will struggle to pay bills.
What is a cash surplus?
Cash Surplus: If cash inflow is higher than cash outflow - Cash surplus (continuing to be solvent).
What is a cash deficit?
Cash Deficit: If cash outflow is higher than cash inflow - Cash deficit (leading to insolvency).
If a business forecasts a cash deficit, which source of short term finance could they use?
Overdraft
