Topic 1.3 Putting A Business Idea Into Practice Flashcards
Business aim
The overall target or gaol of the business
Objectives
The step a business needs to take to meet its overall aims
Business object is are often created using SMART what does it stand for
S-pecific
M-easurable
A-chievable
R-ealistic
T-ime bound
Examples of financial aims and objectives
Survival, profit, sales, market share, financial security
Examples of non-financial aims and objectives
Social objectives, personal satisfaction, challenge, independence, control
Why aims and objectives differ between businesses
Different sectors
Business size and scale
Break-even
The point at which revenue and total costs are the same
The business makes neither a profit or a loss
What does the break-even level of output tell a business
How many product it needs to sell to reach the break-even point\
Bellow - loss
Above - profit
Break-even point calculation
Fixed costs / (selling price - variable costs)
What is a break-even graph
Shows the break-even point visually
Shows: revenue, costs, number of products sold and break-even point
What is the margin of safety
The amount sales can fall before the break-even point is reached and the business makes no profit
Margin of safety calculation
Actual sales - break-even point
What is revenue and calculation
The total value of the sales made within a set period of time
Revenue = quantity x price
What is fixed costs and variable costs
Fixed costs - cost that does not vary with output e.g. rent
Variable costs - cost that varies with output e.g. raw materials
Total costs calculation
Fixed costs + variable costs = total costs
Profit calculation
Total revenue - total costs = profit
(If the figure is negative the business is making a loss)
Examples of fixed and variable costs
Fixed : rent, appliances, electricity, salary
Variable : ingredients, boxes, fuel, wages
Interest
The charges made by banks for the cash they have lent to a business e.g. 6% per year
Interest rates
The annual cost of a loan to the borrower
Cash
The money the business hold is notes, coins and in it’s bank accounts
Cash in
Cash entering the business
Cash out
Cash exiting the buisness
Examples of cash in
Sales income
Loans received
Investors
Debtors payments
Government funding
Examples of cash out
Taxes
Loan payments
Dividends to shareholders
Staff salaries
Raw materials
Why is cash important to a business
To pay suppliers, overheads and employees
To prevent business failure (insolvency)
To make a profit
Cash flow
The difference between the flows of cash into and out of the business over a period of time
Cash flow forecasting
Predicting the future flows of cash into and out of the business bank account
Net cash flow calculation
Cash in - cash out = net cash floe
Closing balance
Net cash flow + opening balance = closing balance
(The closing balance of one month is always the same number as the opening balance of the next month
When is cash flow espiecally important
New firms
Fast growing firms
Erratic sales
How can you improve negative cash floe
Cut stock levels
Increase credit from suppliers
Reduce credit to customers
What can long term finance be used for
Provide start-up capital to a business
Finance the purchase of assets e.g. buildings
Provide money for expansion
What can short term finance be used for
Get through periods of poor cash flow
Bridge gaps when waiting for customers to pay
Provide extra cash when more bookings come in and you need to produce more
Sources of long term finance
Personal savings
Share capital
Loans
Venture capital
Retained profit
Crowdfunding
Sources of short term finance
Bank overdraft: seasonal, repay when cash inflows are high, repayment
Trade credit: delay cash flow, interest may be charged, business may not be established enough for supplier to offer credit
