1.3 - Putting a business idea into practice

1.3.1 What are business aims

States the overall purpose for the business, the long term goal.

1.3.1 What are business objectives?

Specific, measurable targets to help meet the aims of the business

1.3.1 What is the purpose of setting objectives?

1. It gives a target to aim to, therefore all efforts will be focused on attaining the objective instead of being inefficiently used
2. Gives participants a sense of direction, a glimpse of where they're going to
3. Motivates the staff, a reward could be given once the team successfully completed a project
4. You can measure whether the objective has been a success.

1.3.1 What are the financial aims and objectives?

1) Survival ( small businesses only)
2) Profit
3) Sales
4) Market share
5) Financial security ( small businesses only)

1.3.1 What are the non-financial aims and objectives?

1) Social objectives- to do the morally correct thing
2) Personal satisfaction
3) Challenge
4) Independence and control- complete control of their decision making

1.3.1 What do objectives need to be?

SMART
Specific to the business
Measurable
Achievable
Realistic
Timely

1.3.1 How is survival a financial objective

It is usually the first objective a new business sets before any any long term financial objectives. This is because if the business doesn't survive then they can achieve any other objectives as there is no business

1.3.1 How is profit a financial objective

Profit is the main goal of the business so therefore after a business has survived for a while, they set the object to maximise profit

1.3.1 What are 4 reasons for having Profit maximisation as an objective

1) higher income leading to financial security
2) higher levels of retained profit
3) can afford better quality products with more retained profit
4) better lifestyle for the entrepreneur

1.3.1 Explain one reason a business would have profit maximisation as an objective

One reason is that it could lead to higher levels of retained profit. This is because the increase in profit gained could be much greater than the costs. This could lead to the business investing the money into market research therefore the business may be able to produce products that better meet the customer needs.

1.3.1 What is sales maximisation?

when a firm wants to have the maximum amount of sales possible as long as they are covering the costs

1.3.1 Why might a business have sales maximisation as an objective

1) to increase their market share
2) help them obtain loyal customers
3) allow them to compete against larger customers
4) help them grow in their chosen market

1.3.1 What is market share

Percentage of sales in a market that a company holds

1.3.1 How do calculate market share

Market share (%) = Sales value of BUSINESS/ Sales value of Market x 100
Market share (%) = Sales volume of BUSINESS/ Sales volume of MARKET x 100

1.3.1 How can you increase your market share

1) increase your product range
2) Develop a USP for your product
3) By adding value
4) by reducing prices

1.3.1 Explain one way a business could increase their market share

One way is to reduce prices, this is because it will allow customers to afford to buy from the business. This could lead to the business taking away sales from competitors therefore increasing their market share

1.3.1 Why might a business want to be financial secure

As a the entrepreneur may have given up another regular job so their source of income has been lost. This mean the entrepreneur needs to earn money to pay bills and support their living.

1.3.2 What is sales revenue?

money coming into the business through sales

1.3.2 What is the equation for sales revenue

sales revenue = (price) x (quantity sold)

1.3.2 What is a variable cost?

a cost that varies with the level of output.

1.3.2 What are 3 examples of a variable cost

Raw materials
Wages
Packaging for Products

1.3.2 What are fixed costs?

Costs that do not vary with the quantity of output produced

1.3.2 What are 3 examples of fixed costs

Rent on premises
Salaries
Interest on bank Loans

1.3.2 What are total costs?

the sum of the fixed and variable costs for any given level of production

1.3.2 What is the equation for total costs

fixed costs + variable costs

1.3.2 What is profit?

the amount of money left over after all the costs of production have been paid

1.3.2 What is the equation for profit

total revenue - total cost

1.3.2 What is the equation for gross profit?

Revenue - cost of good (variable costs)

1.3.2 What is the equation for net profit

Gross Profit - Expenses (fixed costs)

1.3.2 What is the equation for Interest

Interest (on loans) = Total repayment - borrowed amount / borrowed amount x 100

1.3.2 What is the break-even point?

A break-even point (BEP) is the quantity at which total revenue and total cost are equal.

1.3.2 Why is break-even point important?

It gives the firm a picture of risk - how many do I have to sell before I actually earn a profit?

1.3.2 Why is Break Even Analysis important?

1. Determines output required to cover all costs
2. Determines output level required to achieve profit targets
3. Determines the margin of safety (risk)

1.3.2 What is break-even analysis?

Break-even analysis is the process used to determine profitability at various levels of sales.

The break-even point is the point where revenues from sales equal all costs.

1.3.2 What are the pros of break even analysis

1) sets an objective for new business
2) helps with budgeting and predictions of profit
3) helps a business make decisions on prices and costs
4) helps business owners to see if their idea is viable

1.3.2 What are the cons of break even analysis

1) new business owners might find it hard to interpret it
2) doesn't give a solution just a number
3) assumes fixed costs stay the same
4) doesn't tale into account external factors like competitors

1.3.2 What is the equation for break even

Fixed costs / contribution

1.3.2 What is the equation for contribution

Selling price - variable costs PER UNIT

1.3.2 What is the margin of safety?

The difference between the actual level of output and the break even output

1.3.2 What is the equation for margin of safety

Actual output - break even output

1.3.2 Explain one way in which a business can reduce the amount needed to be sold to break even

One way is to reduce fixed cost e.g Rent. This is because this will result in the total costs being lower. This could lead to the business not having to sell as much product to cover costs. Therefore allowing them to reach break even quicker.

1.3.2 Explain one impact on the business's break even level of output if fixed costs increase

One impact is that the break even levels will also increase. This is because the amount of revenue needed to cover the fixed costs will increase, therefore making the business to sell more product. This will lead to the business then reaching break even at a slower rate.

1.3.3 What are receipts?

money received by a business (cash inflows)

1.3.3 What are examples of receipts

Loans received
sales revenue
payment by debtors
sales of assets

1.3.3 What are expenditures?

money paid out (cash outflows)

1.3.3 What are examples of expenditures

purchase of assets
payment to suppliers
raw materials
rent payment
loan repayments

1.3.3 What is cash

An asset that is readily avaliable to a business to a business. Can be kept as coins or notes or can be kept in a bank

1.3.3 What is the difference between cash and profit

You need cash all of the time but you can survive for a while without profit

1.3.3 What is cash used for

Paying SUPPLIERS: paying on time builds relationships. Failure to do this means supplies won't be delivered on time
Paying OVERHEADS: includes bills such as rent, telephone and electricity. Failure to do this can lead to losing these services
Paying EMPLOYEES: Failure to pay them, could make them leave or make unmotivated to work

1.3.3 What is cash flow

the movement of money in (income) and out (expenses) of a business

1.3.3 What is the equation for cash flow

Cash flow = cash inflows - cash outflows

1.3.3 What are cash flow problems

When money going out is more than the money coming in.

1.3.3 What causes cash flow problems

1) employee wages are high
2) overtrading
3) holding too much stock
4) investment in expensive fixed assets

1.3.3 What are some solutions to cash flow problems

1) Manage payments- asking for credit from supplier
2) Using the business' overdraft (short term)
3) Look for a cheaper supplier
4) increase the cash inflows e.g taking out a loan
5) make customers use a deposit

1.3.3 What is a cash flow forecast?

It is an estimate of future inflows & outflows of the business usually on a monthly basis.
It shows the expected cash balance at the end of each month

1.3.3 What do you need to know in a cash flow forecast

Total income
Total expenses
Net cash flow
Opening balance
Closing balance

1.3.3 What is the equation for total income

Total income = the addition of all cash inflows

1.3.3 What is the equation for total expenses

Total expenses = the addition of all cash outflows

1.3.3 What is the equation for net cash flow

Net cash flow = cash inflows - cash outflows

1.3.3 What is the equation for opening balance

Opening balance = the previous months closing balance

1.3.3 What is the equation for closing balance

Closing balance = opening balance + net cash flow

1.3.4 What is overdraft

An external short term source of finance where a business is able to withdraw more money than than they actually have in their bank account

1.3.4 What are the pros and cons of overdraft

Pros: only pay interest on the money borrowed
quick and easy to do
no charge for clearing charge early
Cons: difficult to predict the cost of borrowing
Bank may collect business' assets for the debt

1.3.4 What is trade credit?

An external short term source of finance where a business can ask suppliers to give them good and services now but pay for them later.

1.3.4 What are the pros and cons of trade credit

Pros: very easy to set up and is low cost
allows business to potentially sell the product and earn a profit
Cons: can lose suppliers if they don't pay on time
Depends on the business' relationship with the suppliers

1.3.4 What is owners capital?

An internal long term source of finance where the owner invest their own savings into the busines

1.3.4 What are the pros and cons of owner's capital

Pros: low risk option as no interest
Shows the owner's commitment to potential investors
Cons: owner could lose their money if business fails

1.3.4 What is venture capital?

An external long term source of finance where an investment is given in exchange for an agreed share in the business

1.3.4 What are pros and cons of venture capital

Pros: available for businesses deemed to risky for bank loans
Cons: more equity is given away to secure investment

1.3.4 What is share capital?

An external long term source of finance where money is raised by selling shares

1.3.4 What are the pros and cons of share capital

Pros: does not cost the business anything
business controls fully who invests and how much
Cons: future businesses profits are shared between shareholders
owner's share reduce with every new investment

1.3.4 What is a bank loan

An External long term source of finance where a business applies to borrow a certain amount of money from a bank

1.3.4 What are the pros and cons of bank loans

Pros: helps with cash flow planning
no additional fees
the bank and the business enter an agreement with both parties know the details
Cons: assets at risk if there is an unlimited liability
early repayment fees
It is takes time to arrange a bank loan

1.3.4 What is retained profits

An internal long term source of finance where a business makes a net profit and then reinvests it into the business

1.3.4 What are the pros and cons of retained profit

Pros: no restriction on how to spend the profits
does not have to be repaid
Cons: can cause disagreement with shareholders
cannot rely on it as it is only available when the business makes a surplus of revenue over the costs

1.3.4 What is crowd funding

An external long term source of finance where people contribute money into a business idea without shares

1.3.4 What are the pros and cons of crowd funding

Pros: simple, assessible and quick to set up
business owner retains full control
Cons: contributions are not guaranteed
very competitive and ideas can get stolen