Topic 1.3 - Putting a Business Idea Into Practice Flashcards
What is an aim?
The overall goal a business wants to achieve
What is an objective?
The practical step of a particular goal the business wants to achieve
Give some examples of financial aims and objectives for a business
- Survival
- Profit
- Wealth
- Income
- Financial Security
Give some examples of non-financial aims and objectives for a business
- Personal satisfaction
- Challenge
- Independence
- Control
What is profit maximisation?
Trying to make the most profit possible
What Is profit satisfaction?
Trying to make enough profit to keep the owners comfortable
What is revenue?
The income that a business receives form it’s sales
How do you calculate revenue?
Revenue = Price x Quantity
What does the term ‘Income Stream’ mean?
The source of regular income that a business receives
What is a fixed cost?
Costs that do not vary no matter how many products or services a business sells E.g rent
What is a Variable Cost?
These costs change as output changes. If a business sells more items It will need more raw materials therefore VC will increase
How do you calculate total costs?
Total cost = Total fixed costs + Total variable costs
What is footfall?
The amount of people in a certain area
What does it mean when a business has monopoly?
They have control and dominate other shops
What is a profit?
The amount of revenue left over once costs have been deducted
What is an income statement?
A financial statement showing the amount of money earned and spent in a particular period of time
How do you calculate Gross profit?
Gross profit= Sales revenue - Cost of sales
How do you calculate net profit?
Net profit = Gross profit - other operating expenses and interest
What is interest?
When a business borrows money from a bank they will charged an interest which is a percentage of the original amount borrowed
How do you calculate interest?
Interest in % = (Total repayment - borrowed money) divided by borrowed amount x 100
What does the ‘break even point’ mean?
- The point where revenue received meets all the costs of a business
- The point where a business starts to make profits
How do you calculate the break even point in units?
Break-even point in units= Total fixed cost divided by(Sales price - variable)
How do you calculate the break even point in currency?
Break even point = break even points in units x sales price
What is the margin of safety?
How much sales can fall before the business break- even point is reached again
How do you calculate margin of safety?
Margin of safety = actual or budgeted sales - break even sales
How would you draw a break even diagram?
- Products and services on the x axis
- Costs and revenue on the Y axis
- Fixed cost is drawn as a horizontal straight line
- Revenue line
- Variable Cost line
What is the impact on a business if revenue increases?
- Increased profit ( when costs are kept the same)
- If costs also rises as revenue rises then profit may stay the same
What is the impact on a business if revenue decreases?
- Business failure
- Business has to reduce their costs
- Save as much money as possible ( turning of light etc.)
What is the impact on a business if costs increase?
Profits will be affected
What is the impact on a business if costs are decrease?
Benefits business as they will make more money per unit sold
What is a commodity market?
The physical or virtual marketplace for buying, selling and trading raw or primary products
What happens when a business becomes insolvent?
- Business is unable to pay debts owed
- Banks are allowed to seize assets
- Company becomes redundant
Define cash
The asset that the business holds which allows it to bu supplies and pay wages
What important decisions does cash flow allow?
- taking on more staff
- opening a new branch
- identifying risk (run out of cash and need to borrow more money)
- taking money out of business to invest/use as reward
What is a receipt?
Written acknowledgement that a person has received money in payment following a sale or other transfer of goods/provision of a service
What is a cash flow statement?
Record of the cash inflows and outflows to a business in the past
How can you use cash flow statements?
- monitor performance of business
- compare performance from month-month/year-year
- past cash flow can be compared with predicted cash flow
What is net cash flow?
The difference between cash coming in and the cash flowing out over a period of time
What is negative cash flow?
More money is going out than it is coming in
What is positive cash flow?
More money is coming in than going out
Why do businesses use cash flow forecasts?
- plan future strategies
- if they want to borrow money
- any agency will need a cash flow forecast (part of business plan)
How do you improve cash flow?
- seek more equity capital (for a company - issuing new shares)
- borrow money
- delay paying bills as long as possible
- reduce stock levels
- sell assets like buildings
What is liquidation?
When a business doesn’t have enough cash
What is the margin of safety?
The amount of sales that a business needs to generate above break-even point
What is the net cash flow equation?
Net cash flow = cash inflows - cash outflows in a given period
What are some types of short term finance?
- trade credit
- overdrafts
- credit limit
- credit period
- frequency of payment
- cheque
- retrospective discount
Define trade credit
A credit arrangement that is offered only to businesses by suppliers
Define overdraft
A facility offered by a bank that allows an account holder borrow money at a short notice
Define credit limit
The max amount of credit that a business has with a financial institution
Define credit period
The max time that a business can take to pay what is owed per month
Define frequency payment
The frequency with which a business will pay a supplier
What is method of payment?
The way in which the business sends the money owed to the supplier
Define retrospective discount
A discount applied when the business has purchased a certain number of goods/spent a certain amount of money with a supplier
What are the different types of long term finance?
- personal savings
- venture capital
- share capital
- loans
- retained profit
- crowdfunding
What is venture capital?
Money lent by a large business or successful entrepreneur to a small start up business
What is share capital?
The amount of money invested in a. Business by shareholders
Define loan
Amount of money lent to an individual that will be paid off with interest over an agreed period of time
What is retained profit?
Profit that is reinvested into the business
What is crowdfunding?
A business obtains funding from a large number of people who pay a small amount of money to the business
