1.3 Putting a Business Idea into Practice Flashcards
All 82 cards in this deck
What is a business aim?
The overall target or goal that a business works towards.
What is a business objective?
A specific step or target a business needs to achieve in order to meet its overall aim.
What does the acronym SMART stand for in SMART objectives?
Specific, Measurable, Achievable, Realistic and Time-bound.
What are financial aims and objectives?
Goals linked to money — either keeping the business able to run or helping it make a profit.
Name three financial aims or objectives a business may have when starting up.
Any three of: survival, profit, sales, market share, financial security.
Why is survival usually the main financial aim of a new business?
A new business has start-up costs and few regular customers at first, so it must cover its costs and keep a positive cash flow before it can aim for profit.
What are non-financial aims and objectives?
Goals linked to something other than making money, usually the personal reasons for setting up the business.
Name three non-financial aims or objectives of an entrepreneur starting up.
Any three of: social objectives, personal satisfaction, challenge, independence, control.
What is meant by independence as a non-financial aim?
The entrepreneur can be their own boss and make their own decisions instead of being told what to do as an employee.
Give two reasons why aims and objectives differ between businesses.
Any two of: the sector they operate in; their size and scale (e.g. a new business aims to survive, an established one aims for profit); the level of competition; the owner's personal reasons for running the business.
True or false? Personal satisfaction is a financial objective.
False. It is a non-financial objective.
What is revenue?
The income earned by a business over a period of time from selling its goods or services.
What is the formula for revenue?
Revenue = selling price per unit quantity sold.
What are fixed costs?
Expenses a business must pay that do not change with output, e.g. rent.
What are variable costs?
Expenses that change directly with output, e.g. raw materials.
Give two examples of a variable cost.
Raw materials and packaging.
Give three examples of a fixed cost.
Rent, insurance, advertising (salaries are also accepted).
What is the formula for total costs?
Total costs = fixed costs + variable costs.
Give one way a small business could reduce its variable costs.
Find a cheaper supplier, or buy raw materials in bulk to get a discount.
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 (or the reward for saving it), charged as a percentage of the amount.
What is the formula for the interest rate as a percentage?
Interest on a loan (%) = (total repayment − amount borrowed) ÷ amount borrowed × 100.
What is the break-even point?
The number of products a business must sell so that revenue and total costs are equal — neither profit nor loss is made.
What is the formula for the break-even level of output?
Break-even output = fixed costs ÷ (selling price per unit − variable cost per unit).
What should a business do if the break-even calculation gives a decimal answer?
Round up — it must sell an additional whole unit to break even.
What is the margin of safety?
The amount by which sales can fall before the break-even point is reached.
What is the formula for margin of safety?
Margin of safety = actual sales − break-even level of output.
On a break-even diagram, where is the break-even point found?
Where the revenue line crosses the total costs line.
Why is the fixed costs line on a break-even diagram horizontal?
Because fixed costs do not change as output changes.
On a break-even diagram, how are profit and loss shown?
Profit is the area between the revenue and total cost lines to the right of break-even; loss is that area to the left.
What happens to the break-even level of output if costs increase?
It rises — the business must sell more units to cover its costs, and profit falls.
What effect does reducing costs have on break-even and on profit per unit?
Fewer units need to be sold to break even, and profit per unit rises if the selling price stays the same.
Which two of these can be read from a break-even diagram: insolvency, margin of safety, market share, net cash flow, profit?
Margin of safety and profit.
True or false? Revenue and profit mean the same thing.
False. Revenue is all income from sales; profit is what is left after total costs are deducted.
What is cash?
Physical money in notes and coins, or money available in the business's bank accounts.
What is cash flow?
The movement of money into and out of a business's bank accounts.
Why does a business need cash to pay its suppliers?
Paying on time keeps suppliers' trust — otherwise they may refuse to supply goods on credit.
Why does a business need cash to pay its employees?
Without the correct pay, employees may leave, increasing labour turnover.
Why does a business need cash to pay its overheads?
It must meet running costs such as rent; if it cannot, the business could close down.
What is insolvency?
Business failure due to unpaid debts — the business runs out of cash and can no longer pay its bills.
Why can a business be profitable but still run out of cash?
Customers may not have paid yet while bills are due now, so cash leaves faster than it comes in.
Name two ways a business can get out of negative cash flow.
Any two of: arrange an overdraft; cut or control costs; agree better credit terms with customers or suppliers.
What is a cash flow forecast?
A prediction of the future flow of cash in and out of a business's bank accounts, usually for a 12-month period.
Give two examples of a cash inflow.
Receipts from sales and a bank loan (also capital from an owner).
Give three examples of a cash outflow.
Raw materials, wages and insurance (also rent).
What is the formula for net cash flow?
Net cash flow = cash inflows − cash outflows.
What is the formula for the closing balance?
Closing balance = opening balance + net cash flow.
How is the opening balance of a month found in a cash flow forecast?
It is the closing balance of the previous month.
True or false? A business with many customers can still have negative cash flow.
True. If customers do not pay on time, more cash may go out than comes in.
What is an overdraft?
An agreement with the bank allowing a business to overspend on its account, up to a limit.
What is trade credit?
An agreement allowing a business to buy goods from a supplier now and pay for them at a later agreed date.
Name the two short-term sources of finance for a small business.
Overdraft and trade credit.
Give one advantage of trade credit.
The business can sell the goods before paying the supplier, improving cash flow; no interest is charged if credit terms are met.
Give one disadvantage of trade credit.
Suppliers may not offer it to a small business placing small orders.
Give one advantage of an overdraft.
It provides cash in months when demand is low, supporting the business until demand increases.
Give one drawback of an overdraft.
It can be expensive as the bank may charge a high rate of interest, increasing costs.
Name three long-term sources of finance for a start-up or small business.
Any three of: personal savings, venture capital, share capital, loans, retained profit, crowd funding.
What is venture capital?
Finance invested in a business by an investor in return for a share of the ownership, usually in high-risk businesses.
What is crowd funding?
Raising finance from a large number of people, usually online, each contributing a small amount.
What is retained profit?
Profit kept in the business after costs and tax, reinvested rather than paid out to owners.
What is share capital?
Money raised by selling shares in the business to investors, who become part-owners.
Give one advantage of using retained profit.
It is cheap — no interest is paid and ownership is not diluted, so owners keep full control.
Give one disadvantage of using retained profit.
It may not be large enough to fund expansion, and once used it cannot be used again for other purposes.
Give one disadvantage of a bank loan.
Interest must be paid, increasing fixed costs; repayments mean larger cash outflows and greater risk of cash-flow problems.
Give one disadvantage of raising finance through issuing shares.
Issuing a large number of shares reduces the percentage ownership of existing shareholders.
Give one advantage of crowd funding compared with a bank loan.
No interest has to be paid, keeping costs low and reducing financial risk.
Give one disadvantage of crowd funding.
If not enough money is raised, the business cannot cover the costs it needs to fund.
True or false? Trade credit is a long-term source of finance.
False. Trade credit is a short-term source of finance.
True or false? Net cash flow for a month can be a negative figure.
True. If cash outflows are greater than cash inflows, net cash flow is negative.
What is the formula for the break-even point in revenue (or costs)?
Break-even point in costs/revenue = break-even point in units × sales price.
What is the formula for total variable costs?
Total variable costs = variable cost per unit × quantity produced.
What is the difference between cash and profit?
Cash is the money a business has available right now to pay its bills. Profit is what is left when total costs are taken away from total revenue over a period, whether or not that money has been received yet.
On a break-even diagram, how is the margin of safety shown?
As the distance along the output axis between the break-even output and the actual (or planned) level of output.
What happens to the break-even level of output if the selling price is increased?
It falls, because each unit sold covers more of the fixed costs. However, a higher price may put customers off, so sales could fall.
Give one limitation of break-even analysis.
Any one of: it assumes every unit produced is sold; it assumes price and costs stay the same; it is only as accurate as the forecast figures used.
On a break-even diagram, where does the total costs line start, and why?
At the level of fixed costs on the vertical axis, because fixed costs must be paid even when nothing is produced.
What is the difference between short-term and long-term finance?
Short-term finance is usually repaid within a year and pays for day-to-day costs such as stock or bills. Long-term finance covers a longer period, often several years, and pays for starting up or expanding the business.
What is a bank loan?
A fixed sum borrowed from a bank and repaid, with interest, in regular instalments over an agreed number of years.
What are personal savings as a source of finance?
The owner's own money, put into the business. It has no interest and no repayments, but the owner loses it if the business fails.
What is meant by a social objective?
An aim to benefit other people or the community rather than to make money, e.g. creating local jobs or helping a good cause.
What is meant by financial security as an aim?
The owner wants the business to earn enough to give them a reliable income and money to fall back on.