Business GCSE topic 1.3 - Putting a business idea into practice

S

M

A

R

T

Specific

Measurable

Achievable

Realistic

Timeable

Aim

Ultimate goal/general direction

Long term

Might not be SMART

Example of an aim

To become the most well known enterprise in the market

Objectives

Specific steps on path to aim

Short term

SMART

Example of an objective

Sell 5000 units by the end of February

Cash inflow

Money coming into the business

Cash outflow

Money coming out of the business

Inflow example

Outflow example

Revenue

Costs

Revenue

Money generated from sales. Is a cash inflow

Formula for revenue

P x Q

Costs

Amount of money it takes to make/buy something. Cash outflow

Types of costs

Variable

Fixed

Variable costs

Change with level of output

Example of VC

Ingredients

Packaging

Wages per …

Total variable costs formula

VC x Q

Fixed costs

Don’t change with level of output

Example of Fixed costs

Marketing

Salary

Machinery

Rent

Utilities

Total costs formula

FC + VC

Profit/loss

Amount of money a business has after deducting costs from revenue

Formula for P/L

Total revenue - Total costs

Interest (Cost)

Cost of borrowing money in the form of an overdraft/loan/other SoF.

Interest paid is outflow

Interest (Reward)

Interest earnt on savings. Source of income but isn’t classified as revenue

% interest on loan formula

(Amount to be repaid - Amount borrowed)

÷ × 100

Amount borrowed

Impact of increasing interest rates

Costs go up and profit goes down if business is net borrower

Costs go down and profit goes up if business is net saver as they receive more in interest

Impact of increasing revenue

Price per unit increased as long demand doesn’t fall

More units selled , more revenue earned

Impacts of decreasing costs

Price of product increases

Opening hours extended

Size of unit reduced

Break even point

Point at which TR and TC are equal

Finding BEP on table

If TR and TC have the same value

BEP formula

Fixed costs

÷

Selling price - VC

BEP formula (In revenue/costs)

BEP in units x Selling price

BEP on a graph

The point which the TR and TC cross eachother

Margin of safety

Cushion between what you actually sell and BEP

Margin of safety formula

Actual/Budgeted units - BEP

(Quantity)

Positive Margin of safety

Business is profitable.

Contribution per unit

Difference between sales price and VC

Contribution per unit formula

Sales price - VC

Short term

Pay back within 12 months

Long term

Pay back after 12 months

Example of Long term source of finance

Personal savings

Loan from family and friends

Bank loans

Share capital

Venture capital

Crowdfunding

Retained profit

Example of Short term source of finance

Overdraft

Trade credit

Overdraft

Emergency SoF when business doesn’t have enough funds

Advantages of overdraft

Quick to arrange

Offers flexibility

Interest paid on amount used

Disadvantages of overdraft

Not suitable for large amounts

Usually high interest rates

Bank may lower/withdraw overdraft

Trade credit

Receive now/Pay later (By suppliers)

Advantages of trade credit

Allows business to use/sell goods before paying suppliers putting business in good cash flow position

Disadvantages of trade credit

If not paid in time, business gets bad reputation and difficulty to find suppliers

Personal savings

Using own capital/selling personal assets

Advantages of personal savings

Interest free

Provides strong signal to potential investors because of commitment

Available and maximises control

Disadvantages of personal savings

May be limited so owner might venture to other SoF

Money wasted if business fails#

Foregoes other uses for capital

Loan from family and friends

Loans from family and friends

Advantages of family and friends loan

Quick/cheap to arrange

More flexible interest and repayment terms

Disadvantages of family and friends loans

Increased pressure on entrepreneur to succeed

Loan may be insufficient if amount is limited

Bank loans

Borrow for set period and repayment schedule

Advantages of bank loans

Guarantees money for a certain period

Increased reputation

Disadvantages of bank loans

Lack of flexibility

Time consuming as business plan required to get bank loan

Share capital

Selling shares in a company (Coorporations)

Advantages of share capital

Large amount of money raised

Capital doesn’t need to be repaid

Disadvantages of share capital

Loss of control if owner sells +50% more shares

Satisfy shareholders expectations of dividends and share price growth

Venture capital

Setting up/selling business to make money. Capital gained from professional investors

Advantages of venture capital

Access to large amount of funds

Often make their skills/experience available to firm

Disadvantages of venture capital

Loss of control as venture cap. company demands for some shares of business

Unlikely to be of interest to venture capital firm unless business offer vital turnover growth within 5 years

Crowdfunding

Platforms to attract large numbers of investors

Advantages of crowdfunding

Cheap SoF

Attracts good publicity, if marketed properly

Social media good for keeping investors updated

Disadvantages of crowdfunding

Investors expect something in return

Limit to how much investors can invest

If investors not interested, less finance acquired

Retained profit

Entrepreneur decisions to keep or reinvest extra profit

Advantages of retained profit

No interest to be paid

Cheap form of finance

Flexible as owner has full control

No risk as it doesn’t reduce ownership of organisation

Disadvantages of retained profit

Slowed growth if dependent on retained profit

Using too much profit may upset shareholders due to dividend payments being low