1.3 - putting a business idea into practice

define a business aim

a goal to be achieved over time

define a business objective

the plan of action needed to achieve the aims

state 5 types of financial aims and objectives a business can have

survival/profit/sales/market share/financial security

state 4 types of non - financial aims and objectives a business can have

social objectives, personal satisfaction, creating a challenge, independence

define fixed costs

costs that remain the same when the level of production/output changes

give an example of a fixed cost

rent/insurance/salary/mortgage

define variable costs

costs which vary directly with the level of output

give an example of a variable cost

raw materials, distribution costs, wages

what does APR mean

amount of interest that needs to be paid per year

what is the formula for interest

Total repayment - borrowed amount / borrowed amount x 100

define break even output

when the sales revenue is equal to the total costs

define break even point

the minimum number of units needed to be sold to cover the total costs

define margin of safety

the different between actual sales and break even sales

define contribution

the amount of earnings remaining after all variable costs have been subtracted from revenue

the formula for contribution (per unit)

selling price - variable costs per unit

formula for break even (in units) using contribution

fixed costs/ contribution (per unit)

why is cash important to a business

To pay suppliers, employees and other costs/To prevent business failure/to stay solvent

define solvent

have enough cash readily available to pay bills

name two cash inflows

loans, revenue, investments, interest on savings, share capital (or any other source of finance)

name two cash outflows

loans, rent, bills, salaries, purchase of raw materials

what are the two forms of short-term finance

overdraft, trade credit

define overdraft

money is withdrawn from a bank account and the available balance goes below zero

define trade credit

the ability to buy stock now and pay at a later date

what are the six forms of long term finance

personal savings, share capital, venture capital, crowd funding, loan, retained profit

advantages of a bank loan

paid off over set period of time/can borrow large amounts

disadvantages of a bank loan

have to pay interest/reduces future profits/no flexibility

advantages of personal savings

May help avoid excess spending/Retaining full control of the business/reliable income

disadvantages of personal savings

uses up contingency fund/loss of potential interest/less money available compared to a loan

advantages of retained profit

free (no interest)/Doesn't have to be repaid/ Flexible as business can select how to use/owner(s) retain full control

disadvantages of retained profit

amount available may be limited/reduces payments to shareholders which may cause dissatisfaction

advantages of share capital

no repayments or interest/large sums can be raised/permanent form of finance

disadvantages of share capital

reduces control/dividends may need to be paid

advantages of venture capital

large amounts of investments can be gained/money can be saved/venture capitalists are willing to take on more risky investments than banks/no monthly pays

disadvantages of venture capital

partial loss of ownership and control/conflict can arise between the entrepreneur and venture capitalist

advantages of crowd funding

fast way/no upfront fees/no share of the business

disadvantages of crowd funding

hard to find investors/no guarantee of sufficient money to be raised