1.3 Business

Aim

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

Mission statement​

General description of the overall aims of the business​

Objectives​

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

financial objectives

Survival​
Profit.​
Market Share​
Sales ​
Financial Security

Non financial objectives

Social objectives. ​

Personal satisfaction​

Independence and control

Survival​

A short term objective, typical for start up businesses, or when a new firm enters the market or at a time of crisis​

Profit

To make the most profit possible. Other objectives businesses may have which are linked to this are increasing revenue or decreasing costs​

Sales

To maximise sales to enable survival or further growth

Market Share​

To increase the volume or value of sales, measured as a percentage of the entire market. ​

Customer Satisfaction​

An objective to keep customers happy through good service or better products than the competition.​

Social objectives​

To help society as a whole and make sure the business has ​a positive effect on others​

Personal achievement

To successfully set up, control and run a new business independently​

Purpose of setting objectives

Direction,Focus for employees,Allows planning and Measurement of success

Role of objectives in running a business

The size of a business,Level of competition and Type of business

Mission Statement

A mission statement is a formal, short, written statement of the purpose of a company or organisation.The mission statement should guide the actions of the organisation, spell out its overall goal, provide a sense of direction, and guide decision-making​

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Purpose of Mission statement

Released to press to help market business​
Issued to employees to inform them of firm’s aims and objectives linked to their roles​
Shows the plans for the future and how customers will be affected​

What is revenue ?

Revenue is the income gained by a business from selling goods and services. It is a form of cash inflow.

How is revenue generated ?

Both new and established businesses will generate revenue from trading, e.g., selling goods and services.

Revenue Formula

What are Costs?

The spending that occurs to set up and run a business

Fixed Costs

Costs which do not change in relation to output.eg, Rent & rates for premises, Wages and salaries not linked to output

Variable Costs

Costs which change as a result of changes in output.Eg Raw materials, Other bought in supplies, Wages linked to output

Total cost

TOTAL COSTS =Total fixed costs + Total variable costs

What is Profit?

The difference between total revenue and total costs. The reward for risks taken by entrepreneurs

Profit Formula

Total Sales –Total Costs

What is interest?​

Interest is the cost of borrowing and reward for saving​

Cost

Interest is the cost of borrowing money. A business might borrow in the form of an overdraft, loan or mortgage. Interest paid will be a cash outflow.​

Reward

Interest on savings will be a cash inflow. It is a form of income but is not classed as revenue, as revenue comes from selling goods and services.

Interest on Loans Formula

total repayment –borrowed amount/borrowed amount​ x 100

Why is cash important to a business?​

Cash is the lifeblood of a business​
If a business runs out of cash it will almost certainly fail​
Few small businesses have unlimited finance – cash is limited, so it needs to be managed carefully​

Why is cash important​

To pay suppliers, overheads and employees.,to prevent business failure.

Difference between Cash and Profit​

Profits are the main source of funds for an established business.Renevues eventually turn into cashinflows.Cost entually turned into cash outflows.

What is cash-flow?

Cash-flow is the process of cash flowing in and out of a business. Cash inflows and outflows​

Net cash-flow​

Net cash-flow is the difference between cash inflows and cash outflows over a trading period.

Cash inflow

Cash sales​
Receipts from trade customers​
Sale of spare assets​
Investment of share capital​
Personal funds invested​
Receipt of bank loan​
Government grants​

Cash outflows

Payment of overheads, wages and salaries​
Payment of suppliers, for example raw materials, inventories​
Buying equipment​
Interest on bank loan or overdraft​
Payment of dividends​
Repayment of loans​
Income tax, VAT and corporation tax​

Why is it important to forecast cash-flow?

Cash is the lifeblood of a business. If a business runs out of cash it will be unable to pay suppliers, overheads and employees and may become insolvent, leading to business failure.​

Reasons why it is important forecast cash-flow?

Identifies potential shortfalls in cash balances in advance​

Ensures the business can afford to pay suppliers and employees​

Spot problems with customer payments​

Important part of financial planning​

External stakeholders such as banks may require a regular forecast

A cash-flow forecast​

A cash-flow forecast is a table showing predicted opening balances, cash inflows, cash outflows, net cash flows and closing balances over a trading period.

Opening and closing balances​

The opening balance is the value of cash at the start of a trading period.​

The closing balance is the value of cash at the end of a trading period.​

Cash Flow formulae​

Net cash-flow = cash inflows – cash outflows in a given period​
Opening balance = closing balance of the previous period​
Closing balance = opening balance + net cash-flow​

Common problems with cash flow forecasts​

Sales prove lower than expected​,Customers do not pay up on time,the cost of production proves higher than expected and Certain costs are not included​

Why does a business need finance ?​

A start-up or existing small business will need finance. They will need it to fund start-up, running and expansion. There are short-term and long-term sources of finance available. ​

Factors affecting the choice of finance​

The source chosen by a business will depend on the amount needed, the reason why the finance is required, the circumstances of the business and the legal status that the business has.

Key decisions for an entrepreneur​

How much finance is required? ​
When is finance is needed? ​
How long is the finance needed for ?​
What security (if any) can be provided? ​
Is the entrepreneur prepared to give up any ownership and control

Long-term

Personal savings​
Loans – friends/family, banks​
Share capital​
Venture capital​
Crowd funding​
Retained profits​

short-term

Bank overdraft​
Trade credit​