Putting a business idea into practice

Why do businesses have aims and objectives?

To give direction and provide a purpose for daily activities

What is a business aim?

The overall target or goal of the business

What are business objectives?

The steps a business takes to meet its overall aims

What acronym is often used to create business objectives?

SMART

What does the S in SMART stand for?

Specific

What does the M in SMART stand for?

Measurable

What does the A in SMART stand for?

Agreed

What does the R in SMART stand for?

Realistic

What does the T in SMART stand for?

Time-bound

What is the goal of financial aims and objectives?

To keep the business running or help it make a profit

What do financial aims and objectives cover?

Business survival, profit, sales, market share, financial security

What are non-financial aims and objectives linked to?

Anything other than making money for the business

What are social objectives linked to?

Doing things ethically or in an environmentally friendly way

What are some examples of non-financial aims and objectives?

Personal satisfaction, challenge, control, independence

Why are aims and objectives tailored to each business?

Because businesses operate in different sectors and vary in size and scale

What does the term ‘sector’ relate to?

Whether a business provides goods or a service and the type it offers

What is break-even?

The point at which revenue and total costs are the same, meaning the business is making neither a profit nor a loss

What does the break-even level of output inform a business?

How many products it needs to sell to reach the break-even point

What is the formula for break-even?

Break-even = fixed costs ÷ (selling price − variable costs)

What does a break-even graph show?

The break-even point visually

What are the components of a break-even graph?

The fixed cost line, total costs starting from the fixed cost line, and the revenue line from the origin

What does profit represent on a break-even graph?

Anything above the break-even point

What does loss represent on a break-even graph?

Anything below the break-even point, displayed as the area between the revenue and total cost lines

What is the margin of safety?

The amount sales can fall before the break-even point is reached and the business makes no profit

How is the margin of safety calculated?

Margin of safety = actual sales − break-even sales

What happens when revenue increases for a business?

Profits are likely to increase and the margin of safety is increased if costs stay the same or decrease

What happens when revenue decreases for a business?

The business is at risk of not breaking even or having very low margins of safety and levels of profit

What impact do increasing costs usually have on a business?

They are likely to increase the BEP or reduce the business' profit

What impact do decreasing costs have on a business?

They are likely to lower the BEP and give a business access to more profit, as it will need to sell fewer products to break even

What does cash mean for a business?

Money that is available in the business’ bank accounts

Why is the management of cash important for a business?

Because cash allows a business to pay its bills

What are the main cash payments a business makes?

Payments to suppliers, payments to employees, and overheads such as rent

What can a business arrange with its suppliers?

Credit terms to pay for raw materials or stock at a later date

How can credit arrangements benefit customers?

By allowing them to pay for products or services within 30, 60, or 90 days

What can failing to manage cash and cash flow lead to?

Business failure

When can a business suffer cash flow problems?

At start-up, when large amounts of money need to be invested, and during rapid growth, when the business cannot keep up with the cash being paid out

What is insolvency?

When a business runs out of cash and can no longer pay its bills

What are three possible steps to get out of negative cash flow?

Negotiate an overdraft facility, keep costs under control, and keep cash coming into the business by arranging sensible credit arrangements

Is all cash paid into a business profit?

No, a business must pay its costs from the money that comes into it

What is cash flow?

The movement of money in and out of a business over a period of time

What is cash flow forecasting?

Predicting the future flow of cash in and out of a business’ bank accounts

What is the typical period for a cash flow forecast?

A 12-month period

Why is forecasting cash inflows and outflows important?

Especially for new businesses, fast-growing businesses, and businesses with unpredictable sales patterns

What can a cash flow forecast help a business decide?

Employing more staff, opening a new branch, investing in a new business, or rewarding the owners for their success

What can an established business do with its cash flow forecast?

Compare its actual cash flow with the forecast to monitor whether it is achieving its targets and make changes if necessary

What is involved in calculating cash flow?

Finding or estimating cash inflows, cash outflows, and calculating net cash flow

What is net cash flow?

Cash inflows minus cash outflows

What is the opening balance?

The amount of money a business starts with at the beginning of the reporting period

What is the closing balance?

The amount of money the business has at the end of the reporting period

What is short-term finance used for?

To help a business maintain a positive cash flow during poor cash flow periods, bridge the gap when a large payment is delayed, and provide extra cash for manufacturing

What is one of the most common forms of finance?

Overdrafts

What are some common features of a bank overdraft?

Variable interest rates, flexibility, and the bank can demand full payment

What is trade credit?

A credit agreement with a supplier that allows a business to obtain raw materials and stock but pay for them at a later date

What are common terms and conditions of a credit agreement?

Credit limit, credit period, frequency of payment, and method of payment

What is personal savings?

Money saved up by an entrepreneur

What is an advantage of personal savings as a source of finance?

There are no interest charges applied

What is venture capital?

Money invested by an individual or group willing to take the risk of funding a new business in exchange for an agreed share of profits

What does a venture capitalist want?

A return on their investment and input into how the business is run

What is share capital?

Money raised by shareholders through the sale of ordinary shares

What does buying shares give the buyer?

Part ownership of the business and certain rights

What is an advantage of share capital?

It is a source of permanent capital

What is a disadvantage of share capital?

It dilutes control for the founders and makes the business vulnerable to takeover

What is a bank loan?

Money lent to an individual or business that is paid off with interest over an agreed period of time

What is usually fixed in a bank loan?

The rate of interest

What may a bank require to secure a bank loan?

The business to secure its assets against the loan

What does reinvesting profits allow a business to do?

Expand without incurring interest charges or requiring the payment of dividends

What is crowdfunding?

A form of finance where a large number of people invest small amounts of money in a business, usually online

What is a challenge of crowdfunding?

It can be difficult to reach the funding target