Theme 1.3

Question 1

What is a business aim?

Answer 1

A business aim is what a business wats to achieve

Question 2

What is a business objective?

Answer 2

A business objective is how the business will achieve its aims. They should be a set of measurable targets which a business can set and revisit to find out how well they are doing.

Question 3

What are the two types of aims and objectives?

Answer 3

Financial and Non-Financial

Question 4

Give examples of Financial Aims

Answer 4

Survival (Especially at start-up), Maximise Profit (difficult at first), Increase Market Share (control the market with your product), Maximise Sales (increases market share) and Financial Security (pay off debt in loans and go beyond break even).

Question 5

Give some examples of Non-Financial Aims

Answer 5

Accomplishing a personal challenge (some people want the challenge of setting up and running a business), Achieving Personal Satisfaction (satisfaction that comes with owning a business, especially if it allows them to pursue an interest), Gaining Independence and Control (Being your own boss, control over decisions and how to work, flexible working hours) and Doing what is right for society (moral, environmental, eco-friendly, helpful to elderly).

Question 6

What are the different factors that affect the aims and objectives of a business?

Answer 6

The size and age of the business (Many small and new businesses may focus on survival and growth. Larger firms may focus on increased profit and market share), Who owns the business (for small businesses owned by only one or a small number of people, non-financial aims such as personal satisfaction may be more important than increasing market share but for larger businesses with many shareholders, there may be aims and objectives on how to maximise profit so shareholders get more money), The level of competition (If competition is high, a business may focus on survival or maximising sales but if there is low competition, then increasing market share may be the main aim).

Question 7

What is revenue?

Answer 7

Revenue is the income earned by the business.

Question 8

What are fixed costs?

Answer 8

Fixed costs don’t vary with output. They have to be paid even if the business produces nothing. Eg. Rent, salary, insurance. These fixed costs are only fixed over a short period of time as an expanding business’s fixed costs will go up.

Question 9

What are variable costs?

Answer 9

Variable costs increase as the firm expands output. Eg. raw materials, factory labour, running machinery.

Question 10

What is the formula for total variable cost?

Answer 10

Quantity sold x variable cost per unit

Question 11

What is the formula for total costs?

Answer 11

Total Costs = Total variable costs + Total fixed costs

Question 12

What is interest?

Answer 12

Interest is a charge which is incurred for borrowing money.

Question 13

What is the formula for interest?

Answer 13

Interest = (Total repayment - Borrowed Amount) / Borrowed Amount x 100

Question 14

What is profit?

Answer 14

Profit is the difference between revenue and costs over a period of time. Profit = Revenue - Costs.

Question 15

What is the break-even point (break-even level of output)?

Answer 15

The level of sales a firm needs in order to just cover the costs.

Question 16

What are the two ways break-even point can be measured?

Answer 16

The number of units a firm needs to sell to break even or the revenue the firm needs to cover its costs.

Question 17

What is the formula for break-even point in units?

Answer 17

Fixed Cost / (Sales Price per unit - Variable Cost per unit)

Question 18

Break-even point for revenue

Answer 18

Break-even point for revenue (or costs) = Break-even point in units x Sales price

Question 19

What is the margin of safety?

Answer 19

The gap between the current level of output and the break-even output.

Question 20

What is the equation for margin of safety?

Answer 20

Margin of safety = actual sales (or budgeted sales) - break-even sales

Question 21

What does a break-even diagram show?

Answer 21

It has the number of sales or output on the x-axis and costs and revenue on the y-axis. It is also useful for seeing how changes in revenue and cost may affect the break-even output

Question 22

What is the impact when revenue increases?

Answer 22

It is likely to have a positive impact on the business as long as costs remain the same. Increased revenue can lead to increased profit however if the costs rise at the same time as revenue rises, this could reduce any profit made from the increased revenue.

Question 23

What is the impact if revenue decreases?

Answer 23

When revenue decreases, it is likely to have a negative impact on the business, unless costs also decrease at the same time. A business must try to do everything to reduce costs.

Question 24

What is cash?

Answer 24

The amount of money a business has in its bank account that it can spend immediately.

Question 25

Why is cash important to a business?

Answer 25

A business must have enough money in its bank to pay its regular bills and any money it owes. A business without cash or reliable cash flow will fail, even if it is making a profit.

Question 26

Why can managing cash flow sometimes be difficult?

Answer 26

Not all customers pay at the point at which they receive the products or services. They may be sent an invoice which they are expected to pay once they receive it. They may also have a credit arrangement allowing them to pay for a product or service within a certain time limit.

Question 27

Why is it important to pay suppliers?

Answer 27

A supplier is responsible for ensuring that raw material or products arrive on time and in perfect condition to be used or sold. The supplier will do this only if they are paid on time.

Question 28

What are Overheads?

Answer 28

Fixed costs that come from running an office, factory or shop, which are not affected by the number of specific products or services that are sold.

Question 29

Why is it important to pay overheads?

Answer 29

Failure of paying overheads such as electricity and rent could lead to these things being withdrawn which could lead to business failure.

Question 30

Why is it important to pay employees?

Answer 30

As per the law, Employees must be paid a minimum hourly rate depending on their age. Money acts as a motivation for many employees and they tend to work more efficiently.

Question 31

What does insolvent mean?

Answer 31

A business that is unable to pay its debts and/or owes more money than it is owed.

Question 32

How can a business avoid insolvency?

Answer 32

Arrange sensible credit agreements with customers and suppliers. It could agree on credit arrangements with suppliers for a longer term than the term it offers for customers. A business could also limit the number of customers who pay for products or services when they receive them than customers who pay later as a part of a credit agreement.

Question 33

What is the difference between cash and profit?

Answer 33

Not all of the cash paid into the business is profit. A portion of any cash will need to be paid out to meet the costs. Once all costs have been deducted from the revenue, you are left with the profit. If a business spends this profit on other assets then it could run out of cash despite making a profit.

Question 34

What is a cash flow forecast?

Answer 34

An estimate of cash inflows and outflows over the course of a year. This is important as it can be used to show when the firm may have a lack of cash so that they can prepare in advance. It also lets them make decisions on whether they can take on new staff, open a new branch, etc.

Question 35

What is the formula for Net Cash Flow?

Answer 35

Net Cash Flow = Cash Inflows - Cash Outflows

Question 36

Define the term opening balance

Answer 36

The amount of money in the business’s bank account at the start of any period. Opening Balance = Closing Balance of the previous period

Question 37

Define the term closing balance

Answer 37

The closing balance is the amount of money in the bank at the end of each month.

Question 38

Short-term sources of finance are designed to…

Answer 38

help a business maintain a positive cash flow

Question 39

Explain two reasons why a business might take out a short-term loan

Answer 39

Some businesses may use it as emergency access to finance when their cash flow is struggling. Other businesses may use credit and overdraft if they know that customers will pay their invoices.

Question 40

What are the two short-time sources of finance?

Answer 40

Overdraft and Trade Credit

Question 41

What is an Overdraft?

Answer 41

A facility offered by a bank that allows an account holder to borrow money at short notice. This lets the firm take more money out of its bank account than it has paid into it. Overdrafts allow businesses to make payments on time even if they don’t have enough cash. They should be used with care though because they usually have higher interest rates than other loans and the bank can cancel it at any time. Also if it is not paid off the bank can take the business’s assets.

Question 42

Why might a firm need finance?

Answer 42

New firms need start-up capital (money or assets to set up a business)
New firms often have poor initial cash flow which means they find it hard to cover their costs so they need additional finance to do this.
Sometimes customers delay payments, so finance is needed to cover the shortfall in cash.
If a business is struggling it might need additional finance to meet its day-to-day running costs.
Firms might need finance in order to expand.

Question 43

What is trade credit?

Answer 43

A credit arrangement that is offered only to businesses by suppliers. Businesses may give firms one or two months to pay for certain purchases. This is useful for a small firm as they have time to earn the money needed to pay the debt. Paying off debt will increase costs, especially if there’s a fee, so a business needs to make sure that it can cover these costs.

Question 44

What are the terms and conditions of a credit agreement likely to include?

Answer 44

Credit Limit - The maximum amount of credit that a business has with a financial institution or supplier.
Credit period - The maximum amount of time that a business can take to pay what is owed for a specific month. (30,60 or 90 days)
Frequency of Payment - The frequency with which the business will pay a supplier
Method of Payment - A bank transfer is most likely or cheque but cash or credit card (a small percentage is charged with credit payment) is unlikely.
Retrospective Discount - a discount applied when a business purchases a certain number of goods or spends a certain amount of money.

Question 45

List some long-term sources of finance

Answer 45

Personal Savings, Loans, Venture Capital, Share Capital, Crowdfunding, Retained Profit

Question 46

What are personal savings?

Answer 46

This refers to any money that the entrepreneur has saved up either before starting the business or while they are running it. This is risky as the owner may end up losing the money if the business fails.

Question 47

What is Venture Capital?

Answer 47

This is money raised through selling shares to individuals who specialise in giving finance to new or expanding businesses. Venture Capitalists will usually buy shares in businesses that are risky but have the potential to grow quickly. They will usually take a stake in the business, wanting to control some operations and will also expect returns more quickly than other shareholders would.

Question 48

What is Share Capital?

Answer 48

Individuals can buy shares in the business. These people are called shareholders. The amount of money invested in a business by shareholders is called share capital. However, this does mean that the opinions of shareholders need to be considered and decisions can’t be made quickly.

Question 49

What are loans?

Answer 49

A loan is an amount of money lent to an individual or a business that will be paid off with interest over an agreed period. A bank may carry out credit checks to make sure that there are no withstanding loans that have been taken out. The bank may also require collateral (eg. car) which can be taken if the loan isn’t repaid.

Question 50

What is Retained Profit?

Answer 50

This is when profit is reinvested back into the business by the owner. This is a very cost-effective way to finance the business as you are less likely to end up in debt to anyone. However, some or all the profit may have to be paid as dividends to shareholders.

Question 51

What is Crowd Funding?

Answer 51

This is when a large number of people contribute sall sums of money each towards starting up a business or funding a business idea.