Putting a Business Idea Into Practice Flashcards
Define Aims and Objectives
All businesses have aims and objectives. These give a business direction and provide a purpose for what the business does each day.
-A business aim is the overall target or goal of the business, whereas business objectives are the steps a business needs to take to meet its overall aims.
-A business may have several different objectives that will help it to meet its aim.
Why Businesses Set Aims and Objectives
-Setting aims and objectives gives specific targets by which business performance can be measured.
-Setting aims and objectives can be used to motivate workers to achieve.
-Setting aims and objectives clarifies business direction and aids decision making.
Financial Aims and Objectives: Business Survival
-Business survival is a very common objective for a small businesses and the most important short term aim.
-Business survival refers to keeping the business operating for a certain amount of time. Most businesses initially aim to survive their first year.
-This means the business might focus on managing finances to have enough money to stay open.
Financial Aims and Objectives: Maximise Profit
-Profit refers to any money left over after all costs have been taken away from any revenue made by a business.
-The vast majority of firms will aim to maximise profit.
-However, it may take a few years for a new business to make any profit at all so they will usually aim to make a profit within the first two years.
-This means the business might focus on minimising their costs and spending.
Financial Aims and Objectives: Maximise Sales
-Sales refer to an amount of a product or service sold by a business. A business will set a target for how much it wants to sell each month and year.
-This gives the business a target to aim for and a purpose to what its employees do each day.
-This means a business might focus on attracting consumers and building loyalty to increase sales.
Financial Aims and Objectives: Increase Market Share
-Market share refers to the percentage of the market that a business occupies. The market is the industry that a business operates in.
-When a business first starts up, it has zero market share so one of its first aims is to capture part of the market and establish itself.
-Increasing sales is a good way to grow market share so a business might focus on taking sales from competition
-This means the business can then aim to increase its market share by persuading customers to enter the market and buy its products.
Financial Aims and Objectives: Achieve Financial Security
-Financial security relates to a business being able to afford to pay off all its costs and have enough cash left to survive.
-It also relates to an entrepreneur achieving a level of income that will allow them to keep the business operating.
-Therefore, an aim for a new business is likely to be to achieve a point where it can depend on its own revenue to fund its activities.
Non-financial Aims and Objectives: Social Objectives
-Social objectives are linked to doing things in an ethical or environmentally friendly manner, or having a business whose sole purpose is to meet a social need.
-These businesses want to make sure that they are acting in ways that are best for society and that society believes are morally right.
Non-financial Aims and Objectives: Personal Satisfaction
-Personal satisfaction relates to an entrepreneur feeling satisfaction that they have created a successful business.
-It may be that an entrepreneur is able to make a business out of a hobby or personal interest.
Non-financial Aims and Objectives: Challenge
-Challenge relates to an entrepreneur setting up a business with the intention that making it successful will challenge them or take them out of their comfort zone.
-Some people want the challenge of setting up and running a new business. This may be because if the risks pay off, there could be big rewards.
-Perhaps the idea of a regular ‘9-5’ job does not suit or appeal their personality.
Non-financial Aims and Objectives: Independence
-Independence relates to an entrepreneur working for themselves and running their own business. It is also to do with them making their own key business decisions.
-A desire for independence is a common reason for an entrepreneur to set up a business as they are free to do what they want.
Non-financial Aims and Objectives: Control
-Control relates to an entrepreneur’s goal of being able to control the business and make decisions about how it is run.
-These aims and objectives may relate to decisions around what the business sells, where it buys raw materials from, and how much its product is sold for.
-Control of a business also gives more flexibility in terms of days off and working hours.
Why Aims and Objectives Differ Between Businesses: Size and Age
-Many small and new businesses are likely to focus on survival and growth.
-As firms grow and become more established, they may concentrate more on achieving financial security, and increasing sales and market share.
-Large businesses get more attention from the public so they might set social aims and objectives to try to avoid bad publicity.
Why Aims and Objectives Differ Between Businesses: Who Owns the Business
For small businesses owned by one or a small number of people, non financial aims an objectives may be more important than financial ones.
-Especially when the business is still young, achieving personal satisfaction may be more important than growing sales and market share.
-For companies owned by many shareholders, there may be pressure to focus on maximising profit so shareholders receive larger dividends.
Why Aims and Objectives Differ Between Businesses: The Level of Competition
-If a business is in a highly competitive market, it might focus on survival or maximising sales.
-If a firm doesn’t face much competition, its aims and objectives might be focused in increasing market share and maximising profit.
What is Sales Revenue
Sales revenue is the income that a business receives from sales.
Revenue = Quantity Sold x Price
What are Business Costs
-Fixed costs don’t vary with a business’ level of output. They have to be paid even if the firm produces nothing. For example, rent, insurance, fixed salaries.
-Variable costs are costs that will increase as the firm expands output. For example, raw materials and running machinery.
-Total Variable Costs = Quantity Sold x Variable Cost per Unit
-Total Costs = Total Variable Costs + Total Fixed Costs
What is Interest
Interest is a charge for borrowing money so the business will pay back more than it borrowed.
Interest on Loans = (Total Repayment - Borrowed Amount) ÷ Borrowed Amount
For a percentage, multiply the answer by 100
What is Profit
Profit is all the money left over once costs have been deducted.
Profit = Revenue - Costs
What is the Break Even Level of Output
The break even level of output is the level of sales a firm needs in order to just cover its costs.
Break Even Point in Units = fixed costs ÷ (selling price − variable costs)
Break Even Point for Revenue = Break Even Point in Units x Sales Price
What is the Margin of Safety
The margin of safety is the amount of sales a business can lose before it reaches its break even point.
Margin of Safety = Actual Sales − Break Even Sales
What is Cash
-Cash is the money a business can spend immediately. It is used to pay employees, suppliers and overheads.
-Cash flow is the flow of money moving in and out of the business.
-When a firm sells its products, money flows in (cash inflow). When it buys materials and pays wages, cash flow out Cash outflow)
-Net cash Flow = Cash Inflows - Cash Outflows
Importance of Cash to a Business
-Having access to cash will allow the business to pay its suppliers on time.
-If a business fails to pay its suppliers on time then they will lose trust and will not allow the business to purchase goods using credit
-Having a positive net cash flow will prevent insolvency (can’t pay debts) in a small business.
-Without cash a business will struggle to pay running costs such as wages and rent. This could cause the business to close down.
The Use of Cash Flow Forecasts
-Cash flow forecasts are important to businesses as they can help a business to know how much cash it expects to take in a year and how much it expects to spend.
-This helps a business to make important decisions and get ready for the future such as preparing for periods expected to have lower cash inflows.
-However, a cash flow forecast is just an estimation so may not be completely accurate.
-A business should still compare their cash flow with their forecast to adjust their activities if it does not match up.
What are Opening and Closing Balances
-The opening balance is is the amount of money a business has at the start of a given period.
Opening Balance = Closing Balance of Previous Period
-The closing balance is the amount of money a business has at the end of a given period.
Closing Balance = Opening Balance + Net Cash Flow
Advantages of Overdrafts
-Security is not usually required
-Interest is only paid on the amount of the overdraft being used rather than the maximum level allowed.
-They are extremely flexible and can be used for a single day of the business has a temporary cash flow problem.
Disadvantages of Overdrafts
-The interest rate charged is much higher than a loan
-Banks can demand immediate payment
-A bank may refuse to give the business an overdraft until the business is established
Advantages of Trade Credit
-The business has time to earn the money needed to pay the debt
-The business can sell the products first then pay the supplier meaning they won’t have to raise finance for the goods
Disadvantages of Trade Credit
-If the business makes the payment too late, they could be given a large fee
-A supplier may refuse to give a business trade credit if it is their first year applying for it
Advantages of Loans
-Quick and easy to take out
-The longer the term of the loan, the lower the monthly payments
-The interest is likely to be fixed
-This means that the business knows in advance what the cost of borrowing will be and what monthly repayments will be required. This allows the business to plan ahead.
Disadvantages of Loans
-A bank may demand security in the form of assets before lending
-The business has to pay interest which increases their fixed costs
-Money has to be paid back monthly, even if the business has had a bad month
Advantages of Venture Capital
-Take on high risk businesses
-They can also help by providing the business with growth capital and strategies
-Venture Capitalists can bring knowledge to the business to help it expand
Disadvantages of Venture Capital
-Owners may lose some of the control of the business
-Owners may have to give up a large share of the profits to the venture capitalist
-Venture capitalists may expect return more quickly than other shareholders would
Advantages of Share Capital
-Don’t have to pay the money back or pay interest to the investors
-There are no dividends to be paid if the business has a poor year as dividends are only paid if the business has made sufficient money to pay all of its costs
-There is no need to make regular payments unlike the use of debts such as loans
Disadvantages of Share Capital
-The more shares that are issued, the more shareholders there are who own part of the business. This results in the founders having less control.
-As a business grows and sells more shares, it becomes vulnerable to the threat of a takeover.
-This is because the shares are sold publicly so an individual or group can buy enough shares to persuade other shareholders to vote for a new management team.
Advantages of Personal Savings
-No interest to pay on the money
-Easy to access through the owner’s bank account and no complicated paperwork
Disadvantages of Personal Savings
-Once the money has been used, it can’t be used again so the owner will not be able to spend the money on something else (opportunity cost)
-This is risky as the owner could end up losing all their money if the business fails
Advantages of Retained Profit
-There is no interest to pay on the money
-Access to this can be quick and easy
Disadvantages of Retained Profit
-Uses money earned by the business
-If spent, it can not be used for any other purpose
-Not applicable in the first year of training
Advantages of Crowdfunding
-Also acts an an advert for the business
-May attract advice and help as well as funds
-Acts as a form of market research. If people don’t invest, it means the business idea is not attractive or distinctive enough, indicating that the business is likely to fail.
-It provides opportunities for individuals to start up a business even if they don’t have access to other sources of funding
Disadvantages of Crowdfunding
-The business must be interesting so may not attract investors
-It can be difficult to reach the funding target as people only invest small amounts
-Alerts the competition to the business’ need for funds
