Topic 1.3- Putting a Business Idea Into Practice Flashcards
what is the definition a business aim?
A general goal that a business sets out to achieve
what is the definition of a business objective
A specific step or action that can be taken to help reach an aim.
State 3 financial aims and briefly explain what they are
- survival ( focusing on keeping the business operating and to survive their first year)
- profit
- sales ( increase their output)
State 3 non-financial aims and briefly explain what they are.
- social objectives ( doing things in an ethical or friendly manner)
- Independence ( making their own business decisions)
- Challenge
Why do aims and objectives differ between businesses?
Different sectors ( dependent on the goods or services being offered) - Business size and scale ( an established business may have different aims than a start up business)
Give the definition for revenue
The total income a firm receives
What is the formula for calculating revenue?
number of sales x price
what are fixed costs and give an example.
Costs that do not vary depending on the level of output .
example: rent, wages, tax
what are variable costs and give an example.
Costs that vary depending on the level of output
examples: utilities, raw materials
formula for total variable cost
Total variable cost = quantity sold x variable cost per unit
Give the formula for total costs
Total costs = fixed costs + variable cost
TC = FC + VC
what is profit?
When a business’ revenue is higher then its total costs.
what is loss?
When a business’ revenue is lower than its costs
Give the formula for calculating profit?
Revenue- Costs = Profit
what is interest?
Interest is the reward for saving money or the cost of borrowing money
Give the formula for percentage change
new-original /Original x 100
Give the formula for interest
total repayment - borrowed amount / borrowed amount x 100
What does it mean to ‘break-even’
Break-even is the point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss.
What does the break even level of output inform a business?
how many products it needs to sell to reach the break-even point (BEP).
Give the formula for break-even.
Break-even = fixed costs ÷ (selling price − variable costs)
Where is the break-even point on a break-even graph?
The break-even point is where the line for total costs and revenue meet.
How can you lower the break even point?
- Increase selling price
- Lower variable costs
- Decrease fixed costs
What does ‘ margin of safety mean’
The difference between the actual level of output and the breakeven output.
Give the formula for margin of safety
Margin of safety = actual sales − break-even sales
Give the formula for Break Even Point in revenue
= break-even point in units x sales price
How is profit shown in a break even graph?
Profit is displayed as the shaded area between the revenue and total cost lines. ( anything above the BEP)
How is loss shown in a break even graph?
- as anything below the break-even point.
- Loss is displayed as the shaded area between the revenue and total cost lines, below the BEP.
Give 3 reasons why cash is important to a business
- to pay suppliers
- to pay overheads and employees
- to prevent insolvency
what is positive cash flow?
When there is more money coming into the business then out
what is negative cash flow?
when there is more business going out of the business then into it
When can businesses experience cash flow problems and why ?
- at start up - large amounts of money need to be invested to get the business started
- During rapid growth-the business is not able to keep up with cash outflows
Give 3 forms of cash inflow ( money coming in )
- loans
- grants
- revenue
Give 3 forms of cash outflow ( money going out)
- wages
- rent
- raw materials
What is a cash flow forecast?
The prediction of the future flow of cash in and out of a business’ bank accounts.
Give the formula for net cash flow
net cash flow = cash inflows – cash outflows
What is the definition of opening balance?
amount of money a business starts with at the beginning of the reporting period
Give the formula for opening balance
opening balance = closing balance of the previous period
What is closing balance?
The closing balance is the amount of money the business has at the end of the reporting period,
Give the formula for closing balance
closing balance = net cash flow + opening balance
Give two reasons why a business could benefit from a cash flow forecast
- assists the business in making important decisions, such as:
employing more staff
opening a new branch
Give 2 ways a business could improve cash flow?
- increase revenue
- reduce costs
Give 2 examples of a short-term source of finance.
- Overdrafts
- Trade-credit
Define the term ‘overdraft’
These let a firm take out more money out of its bank account than it has paid into it.
Give two advantages of using an overdraft
- allows a business to make payments on time
- interest is only paid on what you use
Give two disadvantages of using an overdraft
- higher interest rates( may need to pay back more later)
- the business can demand full payment at any time
What is trade credit?
The arrangement of the delay or rescheduling of payments to a later date.
Give two advantages of using trade credit.
- gives a small business time to earn the money needed
- no interest charges if terms are met - costs are lower
Give two disadvantages of using trade credit.
- can accumulate interest charges if terms are not met
- can damage relationships with supplier if not paid back on time
List the 6 long term sources of finance
- loans
- personal savings
- retained profit
- share capital
- venture capital
- crowd funding
What is personal savings?
Personal savings is money that has been saved up by an entrepreneur.
What is venture capital?
Money raised through investors willing to take a risk on small businesses
What is share capital?
Share capital is money raised by shareholders through the sale of ordinary shares
Name 2 advantages of share capital.
- Share capital is a source of permanent capital (refunds are not allowed).
- There are no dividends to be paid if the business has a poor year
Name 2 disadvantages of share capital
- the business’ founders will slowly lose control
- business is vulnerable to takeover
What is a bank loan?
money lent to an individual or business that is paid off with interest over an agreed period of time.
What is retained profit?
A portion of the companies’ profit that is kept in the business rather than being paid off to the shareholder
What is crowd funding?
when a large number of people contribute to funding a business idea.
Give 2 advantages to crowdfunding
- It acts as a form of market research
- Provides opportunities for individuals to start a business
Give 2 disadvantages of crowd funding
- It is difficult to reach the funding target
- The business must interest people and make them want to invest.
Give 2 pros and cons of venture capital
pros:
- gain money quickly and of large amounts
- they may offer advice and help
cons:
-dilutes ownership- loses independence
- they may have a different vision for the business than the owner does
Give 2 pros and cons of retained profit
- quick and convenient
- does not incur interest charges
cons: - once used, it is not available for any future unforeseen problems the business may face
give 2 pros and 2 cons of personal savings
- quick and convenient
- no interest payments to make
cons: - might not have enough savings to fund it all
- may need the cash for personal use
give the 2 cons and 2 pros for bank loan
- easy and quick to access
- can get a significant amount of money at one time
cons: - have to pay high interest
- difficult for a new business to access
