1.3 Putting a business idea into practice

What is the equation for total cost

Total Fixed Costs + Total Variable Costs

What is the equation for revenue

Selling Price × Quantity Sold

What is the equation for profit

Total Revenue - Total Costs

What is the equation for break even

fixed cost/(price-variable cost)

What is the equation for variable cost

costs per unit × quantity sold

What is the equation for total interest

((amount borrowed × annual percentage rate) × number of years) + amount borrowed

What is the equation for contribution

selling price - variable cost per unit

What is the equation for break even point in revenue

break-even point in units × sales price

What is the equation for margin of safety

actual level of sales - break even level of output

What is the opening balance

Opening balance = previous month’s closing balance

What is the equation for net cash flow

cash in - cash out

What is the equation for closing balance

opening balance + net cash flow

What are the business SMART objectives

S – Specific

M – Measurable

A – Achievable

R – Realistic

T – Time-bound

What are the financial aims and objectives

• survival

• profit

• sales

• market share

• financial security

What are the non financial aims and objectives

• social objectives

• personal satisfaction

• challenge

• independence and control.

Why do business aims and objectives differ

• size

• age

• level of competition

• avoiding bad publicity

• ownership (shareholders)

• sole traders

• partenrships

What is the importance of cash

• Essential for paying suppliers, employees, and overheads.

• Prevents business failure due to insolvency.

What is the difference between profit and cash

Cash is available for immediate use; profit is revenue after costs

What impacts cash flow

• changes in demand

• changes in prices

• changes in stock levels

• business expansion or extraction

• changes in credit terms

• seasonality changes in sales

Why is short term sources of finance important

• get through periods when cash flow is poor for seasonal reasons, eg during a rainy summer for an ice cream seller

• bridge the gap when a large payment is delayed, leaving the business without enough money to pay its bills

• provide extra cash to pay for the manufacturing required to meet sudden or unexpected changes in customer orders

What are the short term sources of finance

• overdraft- allow businesses to make payments on time even if they don’t have enough cash

• trade credit- allows a business to obtain raw materials and stock but pay for them at a later date

When are long term sources of finance used

used to finance a new business or to expand a business due to it being able to be rapid after a long period of time

What are the long term sources of finance

• personal savings

• venture capital

• share capital

• loans

• retained profit

• crowd funding.

What are the advantages of share capital

• source of permanent capital

• Shareholders cannot have a refund on their shares. Instead, if they want to sell their shares, they must find someone else to sell them to.

• There are no dividends to be paid if the business has a poor year

• Shareholders are not promised dividends every year, as dividends are only paid if the business has made sufficient money to pay all of its costs.

What are the disadvantages of share capital

• It dilutes control for the founders This results in the founders having less control. In order to have a majority stake in the business, the founders must hold more than 50 per cent of the shares.

• The business is vulnerable to takeover This is because the shares are sold publicly and if an individual or group buys enough shares, they can persuade other shareholders to vote for a new management team

What are the advantages of crowd funding

• It acts as a form of market research. If people don’t invest, it means the business idea is not attractive or distinctive enough, indicating that the business is likely to fail.

• It provides opportunities for individuals to start up a business even if they don’t have access to other sources of funding.

What are the disadvantages of crowd funding

• The business idea must be interesting and innovative.

• It can be difficult to reach the funding target.