Topic 1.3 - Putting a business idea into practice Flashcards
1.3.1
Give 5 financial aims and objectives of a company when starting up
- survival
- profit
- sales
- market share
- financial security
1.3.1
Give 5 non-financial aims and objectives of a company when starting up
- social objectives
- personal satisfaction
- challenge
- independence
- control
1.3.1
What is a business aim?
An overall long-term target or goal of the business.
1.3.1
What is a business objective?
A short-term step a business needs to take to meet its overall aims.
1.3.2
What is revenue? (and formula)
The total income of the business
Revenue = quantity x price
1.3.2
What are fixed costs?
Costs which do not vary with the amount that the business outputs
1.3.2
What are variable costs? (and formula)
Costs which change as output changes. It increases when output increases and decreases when output decreases.
Total Variable Costs = Cost Per Unit x Total Number of Units
Output
A quantity of goods or services produced in a specific time period
1.3.2
What is the Total Cost? (and formula)
The sum of all the costs of a business.
Total Cost = Fixed Cost + Variable Cost
1.3.2
What does it mean if a company has profit? (and formula)
When a company has more revenue than total costs
Profit = Revenue - Total Cost
1.3.3
What does it mean if a company has loss?
The revenue of the company is less than the total cost.
1.3.3
What is an interest rate? (and formula)
An interest rate is the cost of borrowing money.
Interest Rate = (total repayment - borrowed amount)/borrowed amount
1.3.2
What is the break even level of output? (and formula)
The point where the revenue of the business is equal to the total cost.
Breakeven = total fixed cost/(selling price - cost per unit(CPU))
1.3.2
What is the margin of safety? (formula)
the amount sales can fall from the actual output before the output required at the break-even point (BEP) is reached and the business makes no profit
margin fo safety = goal (last number in x axis usually) - breakeven
1.3.3
Why is cash important to a business? (2 points)
● to pay suppliers, overheads and employees
● to prevent business failure (insolvency)
Cash
The asset that the business hold which allows it to buy supplies and pay wages
1.3.3
What is net cash flow? (and formula)
The difference between the cash coming into the business and the cash flowing out of the business
Net Cash Flow = Receipts - Payments
1.3.3
What is a business’s opening balance?
The opening balance is the amount of money a business starts with at the beginning of the reporting period.
1.3.3
What is a closing balance?
The closing balance is the amount of money a business has at the end of the reporting period
1.3.4
Give 2 short-term sources of finance for a small business.
- overdrafts
- trade credits
1.3.4
What are overdrafts?
When your business bank account gives you more short-term cash flow then there actually is in your bank account
if you don’t get it watch this video
1.3.4
What is a trade credit?
A source of finance which allows a business to obtain raw materials and stock but pay for them at a later date.
1.3.4
Give 5 long-term sources of finance for a small business.
- personal savings
- venture capital
- share capital
- loans
- retained profit
- crowd funding
1.3.4
What is venture capital?
The financing and experience that is provided by venture capitalists to companies and entrepreneurs.
1.3.4
What is share capital
The money a company receives by selling common or preferred stock to shareholders
1.3.4
What is crowd funding?
the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount,
Salary
How much you get paid a month/year
Wage
How much you get paid for hours/days etc…
Overhead
How much it costs to own a business
Solvency
The position of assets in excess to liabilities (positive net cash flow)
Insolvent
A company not being able to pay off their debt
Liquidation
When a company sells all its assets in order to pay off debt
Commission
Being paid for how well you do your job (Like an estate agent getting paid for selling more houses)
Cash flow statement
A record of the cash inflows and outflows to a business in the past
Receipts
Total money inflowing to a business
Payments
Total money outflowing from the business
Private limited company
A limited company where there is restricted ownership. Shares in the company can only be sold if all the shareholders agree to it.
Dividend
Being paid for owning shares
market leader
a business with the largest share of sales in a market
pros of overdraft (2)
- A limit is agreed and interest is charged only when a business ‘goes overdrawn’
- quick to arrange
- Offers significant flexibility and aids cash flow
cons of overdraft (2)
- An overdraft may be ‘called in’ early if the bank is concerned about a business’s ability to repay what it owes
- Interest on overdrafts tends to be higher than on other loans
pros of trade credit (2)
- Trade credit is usually interest-free
- A business can increase its stock without having to immediately pay for it which can significantly enable a positive cash flow if the stock is sold before payment becomes due
cons of trade credit (1)
- Cash needs to be carefully managed to ensure the business has the money available to pay its suppliers on the agreed date
give 5 long-term sources of finance (5)
- share capital
- bank loan
- crowdfunding
- retained profit
- venture capital
pros of share capital (2)
Large amounts of money can be quickly raised from wealthy investors
Shareholders who buy a large number of shares may also bring and share expertise which can be beneficial to the business
cons of share capital (2)
- Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared
position of the Board of Directors - founder has less control over the business (dilution of their stocks)
pros of bank loans (2)
Bank loans are usually unsecured and are typically repaid over two to ten years
Interest rates are fixed for the term of the loan so repayments are made in equal instalments - which helps with business planning
unsecured loan
No asset or collateral is required in order to gain access to the loan
cons of bank loan (1)
- the business assets are at risk if the business does not make repayments as planned
pros of crowdfunding (2)
-It 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.
cons of crowdfunding (2)
- idea has to be interesting to get investments
- may be difficult to reach funding target
