1.3 Putting a Business Idea into Practice

What is a business aim?

A long-term goal or ambition a business wants to achieve. E.g. 'to become the market leader in the UK'.

What is a business objective?

A specific, measurable target that helps a business achieve its aims. Objectives should be SMART.

What does SMART stand for?

Specific, Measurable, Achievable, Realistic (or Relevant), Time-bound.

Give three financial business aims/objectives.

Survival, making a profit, increasing sales/revenue, growing market share, achieving financial security.

Give three non-financial business aims/objectives.

Social objectives (helping the community), personal satisfaction, independence and control, enjoying a challenge.

Why do business aims and objectives differ between businesses?

Different businesses have different sizes, ownership types, sectors, ages, and owner motivations — e.g. a new business focuses on survival, while an established one focuses on growth.

What is revenue?

The total income received from selling goods or services. Formula: Revenue = Selling price × Quantity sold.

What are fixed costs?

Costs that do NOT change with the level of output. E.g. rent, salaries, insurance, loan repayments.

What are variable costs?

Costs that CHANGE directly with the level of output. E.g. raw materials, packaging, piece-rate wages.

What is the formula for total costs?

Total Costs = Fixed Costs + Variable Costs.

What is profit?

Profit = Revenue − Total Costs. It is the financial surplus after all costs have been paid.

What is a loss?

When total costs exceed revenue — the business is spending more than it is earning.

What is interest (on a loan)?

The extra money charged by a lender for borrowing money. It is an additional cost to the business.

What is the break-even point?

The level of output where total revenue exactly equals total costs — the business makes neither a profit nor a loss.

What is the formula for contribution per unit?

Contribution per unit = Selling price per unit − Variable cost per unit.

What is the formula for break-even output?

Break-even output = Fixed Costs ÷ Contribution per unit.

What is the margin of safety?

The difference between actual output/sales and the break-even output. Formula: Actual output − Break-even output.

How does a rise in fixed costs affect the break-even point?

It increases the break-even output — the business needs to sell more units to cover the higher costs.

How does a rise in selling price affect the break-even point?

It reduces the break-even output — each unit generates more contribution, so fewer units are needed to cover fixed costs.

What is a break-even diagram?

A graph showing total revenue, total costs, and fixed costs plotted against output. The point where TR and TC cross is the break-even point.

What is cash flow?

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

What is a cash inflow?

Money coming INTO the business. E.g. revenue from sales, loans received, investment.

What is a cash outflow?

Money going OUT of the business. E.g. paying wages, buying materials, rent, loan repayments.

What is net cash flow?

Net cash flow = Cash inflows − Cash outflows. It shows whether more money came in or went out in a given period.

What is a closing balance?

The amount of cash a business has at the end of a period. Formula: Opening balance + Net cash flow = Closing balance.

What is the difference between cash and profit?

Profit is the surplus of revenue over costs (on paper). Cash is actual money available to spend. A profitable business can still run out of cash.

Why is cash important to a business?

To pay suppliers, employees, and overheads. Without cash, a business faces insolvency (bankruptcy) even if it is profitable.

What is a cash-flow forecast?

A prediction of future cash inflows and outflows, used to identify potential shortfalls and plan accordingly.

What are short-term sources of finance?

Overdraft and trade credit — used to deal with short-term cash shortages.

What is an overdraft?

A short-term borrowing arrangement that allows a business to spend more than it has in its bank account. Interest is charged on the amount overdrawn.

What is trade credit?

An agreement to buy goods now and pay for them later (e.g. 30 or 60 days). Helps manage short-term cash flow.

What are long-term sources of finance?

Personal savings, bank loans, venture capital, share capital, retained profit, and crowdfunding.

What is venture capital?

Investment provided by specialist firms to high-risk start-up businesses in exchange for a share of ownership (equity).

What is crowdfunding?

Raising small amounts of money from a large number of people, usually via an internet platform like Kickstarter.

What is retained profit as a source of finance?

Profit kept in the business after paying tax and dividends, reinvested to fund future growth. Only available to established businesses.

What are personal savings as a source of finance?

Money saved by the entrepreneur and used to fund the start-up. No interest or repayments, but puts personal money at risk.

What is share capital?

Money raised by selling shares (part-ownership) in a private limited company. Investors become shareholders and share in profits.