1.3 Putting a Business Idea into Practice Flashcards

All 40 cards in this deck

What is a business aim?

A long-term goal that a business wants to achieve.

What is a business objective?

A specific, measurable target set to help the business achieve its aim.

Name the five financial aims and objectives a start-up might have.

Survival, profit, sales, market share and financial security.

Name four non-financial aims and objectives a start-up might have.

Social objectives, personal satisfaction, challenge, and independence and control.

True or false? All small businesses have the same aims and objectives.

False. Aims and objectives differ with the size and type of business, the owner's personal motives, the market and how long the business has been trading.

What does 'independence and control' mean as a non-financial objective?

The owner wants to be their own boss and make all the decisions.
e.g. it may lead them to use personal savings rather than take on outside investors.

What is the formula for sales revenue?

Revenue = selling price $\times$ quantity sold.

What is a fixed cost?

A cost that does not change with the level of output.
e.g. rent, insurance, salaries.

What is a variable cost?

A cost that changes directly with the level of output.
e.g. raw materials, packaging.

What is the formula for total costs?

Total costs = fixed costs + total variable costs.

What are the steps to calculate total costs?
e.g. fixed costs £200, variable cost £3 per unit, 50 units made

1. Total variable cost = variable cost per unit $\times$ output: $3 \times 50 = £150$
2. Add fixed costs: $200 + 150 = £350$

True or false? Rent on a shop is a variable cost.

False. Rent is a fixed cost because it stays the same however much the business produces or sells.

What is the formula for profit?

Profit = total revenue $-$ total costs.

When does a business make a loss?

When total costs are greater than total revenue.

What is interest?

The cost of borrowing money, charged as a percentage of the amount borrowed.

What are the steps to work out the total repayment on a loan?
e.g. a £1,000 loan with 10% interest

1. Find the interest: $10\%$ of $1{,}000 = £100$
2. Add the interest to the amount borrowed: $1{,}000 + 100 = £1{,}100$

True or false? A business with high sales revenue must be making a profit.

False. If total costs are higher than the revenue, the business makes a loss.

What is the break-even level of output?

The level of output where total revenue equals total costs, so the business makes neither a profit nor a loss.

What is contribution per unit and how is it found?

The amount each unit sold contributes to fixed costs: selling price per unit $-$ variable cost per unit.

What are the steps to calculate the break-even level of output?
e.g. fixed costs £400, selling price £10, variable cost £6 per unit

1. Contribution per unit = $10 - 6 = £4$
2. Break-even = fixed costs $\div$ contribution: $400 \div 4 = 100$ units

What is the margin of safety, and how is it calculated?

How far current output is above break-even: actual level of output $-$ break-even level of output.

True or false? On a break-even diagram, the break-even point is where the total revenue line crosses the total cost line.

True. Reading down from that point to the output axis gives the break-even level of output.

What happens to the break-even level of output if fixed costs increase?

It rises — more units must be sold to cover the higher fixed costs, so the margin of safety falls.

On a break-even diagram, what does the gap between the total revenue and total cost lines to the left of the break-even point show?

Loss.

What is a cash-flow forecast?

A prediction of the cash flowing into and out of a business over a future period, usually month by month.

What are the steps to complete a month in a cash-flow forecast?
e.g. opening balance £500, inflows £2,000, outflows £1,800

1. Net cash flow = inflows $-$ outflows: $2{,}000 - 1{,}800 = £200$
2. Closing balance = opening balance + net cash flow: $500 + 200 = £700$
3. The closing balance becomes next month's opening balance: £700

Name three things a business needs cash to pay for day to day.

Suppliers, overheads (such as rent) and employees' wages.

What is insolvency?

Business failure due to unpaid debts — the business cannot pay what it owes.

True or false? A business that is making a profit cannot run out of cash.

False. Profit and cash are not the same — customers may pay late or cash may be tied up in stock, so a profitable business can still be short of cash.

Give two actions a business could take if its cash-flow forecast shows a negative closing balance.

Arrange an overdraft, ask suppliers for trade credit or longer to pay, chase customers for payment, or cut/delay spending.

What is an overdraft?

A short-term source of finance letting a business spend more than is in its bank account, up to an agreed limit.

What is trade credit?

Credit offered by suppliers, allowing a business to receive goods now and pay for them later (e.g. in 30 days).

True or false? Trade credit is a long-term source of finance.

False. Trade credit is short-term, usually repaid within 30–90 days.

What are personal savings as a source of finance?

Money the owner puts into the business from their own funds — a long-term source with no interest to pay.

What is venture capital?

Finance from an investor who puts money into a business, usually in return for a share of the ownership and a say in how it is run.

What is share capital?

Money raised by selling shares in the business to investors, who then own part of it.

What is a bank loan as a source of finance?

A sum borrowed from a bank and repaid in instalments over an agreed period, with interest.

What is retained profit?

Profit kept in the business after costs and taxes, rather than taken by the owners, and reinvested.

What is crowd funding?

Raising small amounts of money from a large number of people, usually through an online platform.

Name three factors a business should consider when choosing a source of finance.

The amount needed, the cost (e.g. interest), how long the money is needed for, and whether the owner wants to keep full control.