business theme 1.3

What is revenue? How do you calculate it?

Total amount of income a business makes from selling a certain quantity of goods/services at a given price. Revenue=number of units sold x price of unit

What is a fixed cost?

A cost for business that stays consistent regardless of the level of goods or services produced.

What is a variable cost?

A business expense that changes in direct proportion to the volume of goods or services produced.

Give examples of fixed costs.

Rent, salaries, insurance, interest on loan payments.

Give examples of variable costs.

Raw materials, direct labor, packaging, commissions, shipping costs.

How do you calculate fixed costs?

Fixed cost= total costs- (variable cost per unit x number of units produced)

How to calculate variable costs?

Variable costs= cost per unit x total number of units produced

What is profit and how do you calculate it?

The financial gain a business makes when the amount earned from an activity is greater than the total costs associated with it. Profit= revenue - total costs

How do you calculate percentage change?

change/original x 100

How to calculate break even level of output?

Fixed costs / cpu (selling price-variable costs)

How to calculate margin of safety?

Actual output - break even level of output

How to calculate net cash flow?

Cash inflows - cash outflows

List financial aims and objectives of a business

Survival, profit, sales, market share, financial security

List non-financial aims and objectives of a business

Social objectives, personal satisfaction, challenge, independence and control

List short term sources of finance

Bank overdraft

Trade credit

List long term sources of finance

Personal savings

Venture capital

Share capital

Loans

Retained profit

Crowd funding

List advantages and disadvantages of bank overdrafts

Advantages - offers flexibility, interest is paid only on amount used

Disadvantage - usually have high levels of interest

List advantages and disadvantages of trade credit

Advantages - allows businesses to pay costs after making revenue, improves cash flow position

Disadvantages - danger of losing future credit arrangements

List advantages and disadvantages of personal savings

Advantage - no interest

Disadvantage - may not be sufficient funds for where the finance is needed

List advantages and disadvantages of venture capital

Advantages - business expertise, additional resources, connections

Disadvantages - loss of control, minority ownership status

List advantages and disadvantages of share capital

Advantages - source of permanent capital, no dividends

Disadvantages - dilutes control for the owners, the business becomes vulnerable to takeover

List advantages and disadvantages of loans

Advantages - retain full ownership and control, improving credit profiles through timely repayments

Disadvantages - interest is applied

List advantages and disadvantages of retained profit

Advantages - cheap, accessible and flexible internal finance, avoids interest fees

Disadvantages - may take a long time for profits to build up, opportunities may be missed because of this

List advantages and disadvantages of crowd funding

Advantages - acts as a form of market research, provided opportunities

Disadvantages - the business idea must be interesting, can be difficult and time consuming to reach the target

What does a business do with cash?

To pay suppliers, overheads and employees

To prevent business failure (insolvency)