1.3 putting a business idea into practice

what are variable costs?

a cost that changes depending on how much you use/need

What are some examples of variable costs?

Raw materials
Utility bills
Commission based payment

What are some examples of ixed costs?

Costs that don't change for a period of time

What are some examples of fixed costs?

Rent
Insurance
Interest repayments

What is a business aim?

Something the business wants to achieve long term

What is a business objective?

Short term goals to meet long term objectives

What is a financial aim/objective?

Survival
Profit
Sales

What is a non-financial aim/objective?

Independence
Personal satisfaction
Challenge

Why do aims and objectives differ between businesses?

Big businesses will have different objectives in comparison with small businesses

Provide examples of aims and objectives of small businesses.

- To survive
- To create awareness/break even quicker

Provide examples of aims and objectives of big businesses.

- Enter new market
- Create a new product

What is revenue?

Money coming in from sales

How do you calculate revenue? (TR)

Price per unit x quantity of units sold

What is total costs?

Everything that is costing you to run the business.

How do you calculate total costs?

TFC (total fixed costs) + TVC (total variable costs)

What is profit/loss?

Money left over after all your business expenses

How do you calculate profit/loss?

total revenue - total costs

What is interest (on loans)?

Percentage of money paid on top of the money borrowed

How do you calculate interest on loans?

Total repayment - borrowed amount / borrowed amount x 100

What is the break even point in units?

Point where you are not making a profit or loss.

How do you calculate the break even point in units?

Fixed costs/(sales price - variable costs)

What is the margin of safety?

Number of units you can afford to loose before you hit break even again.

How do you calculate the margin of safety?

Actual or budgeted sales - break even sales

How can changes in revenue can impact on break-even diagrams?

Increasing the selling price means less to sell to break even.
Decreasing selling price will mean more to sell to break even.

How can changes in costs impact break-even diagrams?

Increasing the total cost means more items needing to be sold to break even
Decreasing the total cost means less items to sell to break even

Why is cash important to a business?

To pay suppliers
To pay employees

What are cash inflows?

Represent money coming into the business eg. from the sale of a product

What are cash outflows?

Represent payments
eg. to suppliers

What are opening balances?

The amount of cash available at the start of the period eg. month

What are closing balances?

The amount of cash left at the end of the period
eg. month

What is a net-cashflow?

cash inflow - cash outflows in a given period

What can you use as an opening balance?

Closing balance of the previous period

How is closing balance calculated?

Closing balance + net cash-flow

What is overdraft?

Lets you borrow money through your current account by taking out more money than you have in the account.

What are the advantages of overdrafting?

Flexibility - can change the amount borrowed within limits, interest is only paid on amounts borrowed.

What are the disadvantages of overdrafting?

Rates of interest higher than loans
Cannot be used for large borrowing.

What is trade credit

Customer is allowed to purchase goods or services and pay the supplier at a later date

What are advantages of trade credit?

Access to supplies without immediate payment
No interest

What are the disadvantages of trade credit?

Short term, must be paid off quickly in usually small amounts.

What are personal savings?

Money you have in your own bank account.

What are advantagesof personal savings?

Quick and convenient
Doesn't require borrowing money
No interest payments to make

What are the disadvantages of personal savings?

The owner might not have enough savings or may need the cash for personal use.
Once the money is gone, its gone.

What is venture capital?

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.

What is an advantage of venture capital?

Advantage -
gain money quickly
potential to raise huge amount of money
they may offer advice and help

What is the disadvantage of venture capital?

owner must give away part of business
they may have a different vision for the business than the owner does

What is share capital?

Selling part of your company in exchange for shares

What are the advantages of share capital?

Can gain lots of money quickly
No interest payable

What are the disadvantages of share capital?

give away part of business
leaves a business open to takeovers
shareholders receive dividends

What are loans?

Borrowing off the bank with added interest over an agreed period of time

What are the advantages of loans?

Easy + quick to access
Can get a significant amount of money at one time

What are the disadvantages of loans?

Have to pay interest
Difficult for a new business to access

What is retained profit?

Using your business profits and reinvesting back into the business

What is the advantage of retained profit?

Quick + convenient
Easy access to the money
No interest payments to make

What are the disadvantages of retained profit?

Once the money is gone, it is not available for any future unforseen problems the business might face.

What is crowd funding?

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

What is the advantage of crowd funding?

Creates awareness

What are the disadvantages of crowd funding?

Can be difficult to reach funding target.