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BUSINESS > Topic 1.3 Putting a business idea into practice > Flashcards

Topic 1.3 Putting a business idea into practice Flashcards

1
Q

What is a business aim?

A

A business aim is the overall target or goal of the business

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2
Q

What is a business objective?

A

A business objective are the steps a business needs to take to meet its overall aims

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3
Q

Examples of financial objectives-linked to money

A
  • survival
  • sales and sales revenue
  • profit
  • market share
  • financial security
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4
Q

Examples of non-financial objectives

A
  • social benefits
  • personal satisfaction
  • challenge
  • independence
  • control
    -customer satisfaction
    -business recognition
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5
Q

How are business objectives made

A

S – Specific
M – Measurable
A – Agreed
R - Realistic
T – Time-bound

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6
Q

Why aims and objectives may differ between businesses

A

Different sectors-The term ‘sector’ relates to whether a business provides goods or a service and the type of goods or service it offers e.g a restaurant called Rachel’s Pizzas might aim to sell 10 varieties of pizza, but this aim would not be applicable to a florist or a website designer.

Business size and scale-e.g For example, a new business will most likely be aiming for survival, whereas an already established business may aim for profit

Geographic location

Ownership structure e.g might be a PLC

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7
Q

Define revenue, sales revenue or turnover

A

Revenue, sales revenue or turnover is the amount of income received from selling goods or services over a period of time

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8
Q

Formula for revenue

A

REVENUE= SELLING PRICE X NUMBER OF UNITS SOLD
(revenue= price x quantity)

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9
Q

What are fixed costs

A

Costs that do not vary with the quantity of output produced

EG rent, salaries, insurance, advertising, bank loan repayment, business rates

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10
Q

What are variable costs

A

Costs that vary with the quantity of output produced, change directly with the number of products made

EG raw materials, packaging, wages

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11
Q

Formula for calculating total variable costs

A

TOTAL VARIABLE COSTS= COST OF ONE UNIT X QUANTITY PRODUCED

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12
Q

What are total costs?

A

Total costs are all the costs of a business

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13
Q

Formula for calculating total costs

A

TOTAL COSTS(TC)= TOTAL FIXED COSTS(TFC) + TOTAL VARIABLE COSTS(TVC)

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14
Q

Define profit

A

Profit occurs when revenues of a business are greater than its total costs.
If the costs are greater than the sales revenue, then the firm is making a loss

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15
Q

Why is profit an objective for most businesses?

A

Profit allows a business to:
-survive
-reinvest profits for expansion
-provide security and savings

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16
Q

how to improve profit

A
  • reducing costs, either fixed or variable costs can be reduced

fixed costs can be reduced by relocating to cheaper premises, reducing salaries, spending less on promotional activities

variable costs can be reduced by sourcing cheaper materials, buying raw materials in bulk

HOWEVER

paying lower salaries to staff may mean that employees have fewer customer service skills or experience

cheaper raw materials may lead to worsening quality

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17
Q

Formula for profit

A

Profit=Sales revenue-Cost of sales

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18
Q

Define interest

A

The cost of borrowing money, reward for saving

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19
Q

formula for calculating interest in %

A

INTEREST=
(TOTAL REPAYMENT-BORROWED AMOUNT) ÷ BORROWED AMOUNT X 100

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20
Q

define break-even point

A

the number of units that need to be sold for total costs to equal the sales revenue

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21
Q

formula for calculating break-even point

A

BEP IN UNITS=FIXED COST/(SELLING PRICE-VARIABLE COST)

BEP IN COSTS=BEP IN UNITS X SALES PRICE

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22
Q

BREAK EVEN CHART

A

A break-even graph shows a break-even point (BEP) visually.
Look in book at chart!!

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23
Q

Define margin of safety

A

The margin of safety is the amount sales can fall before the break-even
point (BEP) is reached and the business makes no profit.

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24
Q

Formula for margin of safety

A

Margin of safety = actual sales − break-even sales

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25
Q

what are short term sources of finance?

A

Repaid immediately(usually within a year) and are used for costs such as buying stocks of paying a utility bill

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26
Q

What are long term sources of finance?

A

Usually repaid over a longer time period (even up to 25 years).Long term sources would be used to finance a new business or to expand a business

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27
Q

examples of short term sources of finance

A

overdraft

trade credit

28
Q

what are the long term sources of finance

A

personal savings

venture capital

share capital

loans

retained profit

crowd funding

29
Q

What is an overdraft?

A

-A deficit in a bank account caused by drawing more money than the account holds, allows you to borrow money through your current account by taking out more money than you have.
-Most common form of finance
-Good for covering short term expenses that can be repaid quickly

30
Q

benefit and drawback of an overdraft

A

BENEFITS:
-gives you immediate access to extra funds when you don’t have any left
-You’re in control
-No monthly costs
-Only pay what you use

DRAWBACKS:
-Variable interest rates- can be expensive as a high rate of daily interest rate is charged
-Bank has the right to ask for repayment of your overdraft at any time
-Bank could charge you if you exceed your overdraft limit without authorisation

31
Q

what is a trade credit

A

-the ability to buy stock now and pay for it at a later date , when the goods have been sold(e.g after 30 or 60 days)

32
Q

benefits and drawbacks of a trade credit

A

benefits:
-easy to obtain and set up
-fuels growth
-Can help finance start-ups
-Low operating costs

drawbacks:
-short term
-must be paid off quickly because expensive if payment date is missed
-May affect credit worthiness

33
Q

Why might a business need a new source of finance?

A

-Paying for expenses e.g wages
-expanding the business
-investing in new products and services
-starting a new business
-paying for any unexpected costs

34
Q

why a business may want to use a short-term source of finance

A

helps a business maintain a positive cash flow,

helps get through periods when cash flow is poor

provide extra cash to pay for the manufacturing required to meet sudden or unexpected changes in customer orders

35
Q

What are personal savings

A

Money that has been saved up by an entrepreneur

36
Q

benefits and drawbacks of personal savings

A

benefit:
-easy to access
-enables you to expand your business whenever
-no interest
-Provides safety net during economical downturns

drawback:
-entrepreneur might not have enough savings or may need the cash for personal use, once the money is spent it’s gone so business could fail and you could lose your home/possessions

37
Q

What is venture capital

A

Money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits

38
Q

benefits and drawbacks of venture capital

A

benefit:
-can provide start up
-venture capitalists may offer advice and help, networking opportunities and experienced leadership
-gain money quickly

drawback:
-Founder ownership stakes are reduced
-Funds are released on a performance schedule
-venture capitalists may have a different vision for the business than the owner does

39
Q

What is share capital?

A

Money raised by shareholders through the sale of ordinary shares

40
Q

benefits and drawbacks of share capital

A

benefit:
-source of permanent capital(shareholders cannot have a refund on their shares)
-shareholders may offer advice and help, networking opportunities and experienced leadership
-high levels of financial flexibility-when company is doing well, they can choose to distribute dividends to shareholders as a reward but when company goes through a tough time, they have the freedom to withhold dividends without getting into legal trouble

drawback:
-dilutes control for the owners
-business is vulnerable to takeover(A takeover occurs when an existing business expands by buying more than half the shares of another business)

41
Q

What is a bank loan?

A

Money lent to an individual or business that is paid off with interest over an agreed period of time

42
Q

benefit and drawbacks of loans

A

benefit:
-can get a significant amount of money at one time
-allows you to grow business
-can maintain control e.g 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.

drawback:
-have to pay interest
-strict eligibility criteria
-difficult for a new business to access as they may not be financially secure yet and reliable
-secured loans carry risk of losing assets e. g if the business is unable to repay the loan, the bank can demand the sale of the assets to raise money to pay back the loan

43
Q

What is retained profit?

A

When a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand

44
Q

benefit and drawbacks of retained profit

A

benefit:
-invest in expansion
-creates a safety net
-doesn’t dilute ownership of company

drawback:
- once the money is gone, it is not available for any future unforeseen problems the business might face
- sharehold disatisfaction because it doesn’t allow them to enjoy full benefits of earning

45
Q

What is crowd funding?

A

Involves a large number of people investing small amounts of money in a business, usually online

46
Q

benefit and drawbacks of crowdfunding

A

benefit:
-acts as a form of market research (if people don’t invest it means the business idea isn’t attractive or distinctive enough, and therefore is likely to fail)
-provides opportunities for individuals to start up a business even if they dont have access to other sources of funding
-not risky,accessible

drawback:
-business must be interesting,
-can be difficult to reach the funding target
-crowdfunding websites have fees

47
Q

define cash flow

A

the money flowing into and out of a business on a day to day basis

48
Q

Why is cash important to a business?

A
  • to pay suppliers, overheads e.g rent and employees
  • to prevent business failure (insolvency)
    -repay bank loans
    -promote the business
    -buy raw materials and products to sell
    -difference between cash and profits to plan whether business is able to achieve its profit targets
49
Q

difference between cash and profit

A

cash is the money a business can spend immediately for day-to-day expenses
once all costs have been deducted from all revenue, the amount that is left is the business’ profit.

50
Q

Why can cash flow problems cause business failure?

A

e.g during rapid growth, when the business needs to grow quickly but cannot keep up with the cash being paid out, for example, if the business needs to find larger premises and invest in making them ready to move into

51
Q

How to get out of negative cash flow?

A

Businesses need positive cash flow to reduce the risk of failure and insolvency. Three possible steps to get out of negative cash flow are:

-negotiate an overdraft facility
-keep costs under control
-keep cash coming into the business by arranging sensible credit arrangements with suppliers and customers, and having fewer customers who pay for products and services on
credit

52
Q

What impacts on cash flow?

A

-Change in costs e.g commodity prices(raw materials)
-Seasonality in sales e.g sun cream
-Business expansion or contraction
-Change in stock levels
-Credit terms can change e.g amount needed to pay a bill
-Change in sales revenue/demand

53
Q

What is a cash-flow forecast

A

Cash flow forecasting involves predicting the future flow of cash in and out of a business’ bank accounts over time. A cash flow forecast will usually be for a 12-month period.

54
Q

Forecasting cash inflows and outflows is important, especially for three types of business:

A

-new businesses
-fast-growing businesses
-businesses with unpredictable sales patterns, for example seasonal businesses (eg an ice cream van)

55
Q

importance to a business of preparing a cash flow forecast

A
  • allows a business to plan for the future, therefore it can aid business decisions such as employing more staff, opening a new branch, investing in a new business, rewarding the owners for their success
  • helps a business identify the risks of negative cash flow
56
Q

what is cash inflow/receipts

A

all of the money coming into the business, which can be separated into different categories, for example cash fromsales, rent received and loans

57
Q

what is cash outflow/payments

A

all of the money moving out of the business to pay for its costs, for example suppliers, employees and overheads, raw materials

58
Q

what is net cash flow

A

the difference between all cash inflows and all cash outflows of a business(can be negative or positive)

net cash flow=cash inflows(receipts)-cash outflows(payments) in a given period

59
Q

formula for calculating the opening balance

A

opening balance= closing balance of the previous period

60
Q

formula for calculating the closing balance

A

closing balance= net clash flow + opening balance

61
Q

What is a negative cash flow?

A

A negative cash flow means that cash outflows are greater that cash inflows for that moth.This means the business will have cash flow problems if it does not have enough cash in the bank(its opening balance) to cover its payments.A business must make financial arrangements to resolve cash flow problems if it forecasts a negative closing balance.

62
Q

What type of finance will help resolve cash flow problems?

A

Negative cash flow is an immediate issue, so it requires a short term source of finance to resolve the problem e.g bank overdraft or trade credit

63
Q

impacts on a business of an increase (or a decrease) in revenue

A

an increase in revenue means that profits are likely to increase. Increasing revenue allows a business to get past its break-even point (BEP) and increase its margin of safety by selling more products. However, this only applies if costs stay the same or decrease. If costs increase, the increase in revenue may have no impact.

a decrease in revenue means that the business is at risk of not breaking even or having very low margins of safety and levels of profit.

64
Q

impacts on a business of an increase (or a decrease) in costs

A

an increase in costs have a negative impact on businesses. It is likely to increase the BEP or reduce the business’ profit. With increasing costs a business will have to sell more products in order to break even or make a profit. When costs increase, businesses often have to make the choice of absorbing increased costs or passing them on to customers by increasing prices. As a result, the business will be more likely to make a loss.

a decrease in costs have a positive impact on businesses. Decreased costs are likely to lower the BEP and give a business access to more profit, as it will need to sell fewer products to break even. A business may decide to keep the savings as profit or pass them on to customers as a price decrease.

65
Q

Break-even analysis

A

It can identify strategies for lowering the break-even point and increasing profit-lowering the break even point means the business can start generating profits sooner as it requires less sales to cover revenue.It sold reduces risk of loss providing greater financial stability so more money can be reinvested into business

However a business can only lower the BEP successfully so long as productivity, quality and demand is not compromised E.g increasing prices may put customers off so they could buy from a competitor instead

66
Q

How can a business lower break even point

A

-reduce fixed costs e.g cut overhead expenses
-increase sales revenue e .g advertising campaigns

BUSINESS (15 decks)

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