Flashcards · 1BS0 · Topic 1.3

Putting a business idea into practice flashcards

23 cards on Topic 1.3, subtopics 1.3.1 to 1.3.4. Pick a subtopic or study them all.

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1.3.1 Business aims and objectives

Business aim versus business objective: An aim is a long-term, general goal. An objective is a specific, usually measurable target that moves the business towards its aim.
The financial objectives named in the specification: Survival, profit, sales, market share and financial security.
The non-financial objectives named in the specification: Social objectives, personal satisfaction, challenge, and independence and control.
Why do aims and objectives differ between businesses?: Stage (new businesses often aim for survival), the owner's motives, size and ownership (investors press for profit), type of business (social objectives for community projects), and market conditions (tough competition shifts the focus to survival).
Survival versus financial security; sales versus profit: Survival is staying open; financial security is a stable income and a cash cushion. Sales can rise while profit falls, for example after a price cut.

1.3.2 Business revenues, costs and profits

Fixed costs and variable costs, with examples: Fixed: do not change with output in the period (rent, insurance, a software subscription). Variable: change as output changes (raw materials, packaging, parts).
Interest on loans (%): the Appendix 3 formula and an example: (total repayment − borrowed amount) ÷ borrowed amount × 100. Borrow £4,000, repay £4,360: 360 ÷ 4,000 × 100 = 9%.
Break-even point in units, break-even revenue and margin of safety: formulas: Break-even (units) = fixed costs ÷ (sales price − variable cost). Break-even revenue = break-even units × sales price. Margin of safety = actual or budgeted sales − break-even sales.
Price £40, variable cost £15, fixed costs £5,000. Find break-even output, break-even revenue and the margin of safety at 260 units.: Break-even = 5,000 ÷ (40 − 15) = 200 units. Break-even revenue = 200 × £40 = £8,000. Margin of safety = 260 − 200 = 60 units.
Same business (price £40, variable cost £15, fixed costs £5,000). Find the profit at 260 units.: Revenue 260 × £40 = £10,400. Total costs £5,000 + (260 × £15) = £8,900. Profit = £1,500.
On a break-even diagram, what happens when price rises, fixed costs rise, or variable costs change?: A higher price makes the revenue line steeper, so break-even output falls. Higher fixed costs lift the start of the total costs line, so break-even rises. A change in variable cost changes the slope of the total costs line.

1.3.3 Cash and cash-flow

Why is cash important to a business?: To pay suppliers, overheads (rent, utilities, insurance) and employees, and to prevent business failure. Running out of cash can lead to insolvency.
Insolvency: A business cannot pay its debts when they are due. A profitable business can still become insolvent if cash arrives too late.
Cash versus profit: Cash is money actually received or paid, counted when money changes hands. Profit is sales revenue minus costs, counted when the sale is made or the cost incurred. A business can be profitable but cash-poor, or cash-rich but loss-making.
Cash-flow terms: net cash flow, opening balance and closing balance: Net cash flow = cash inflows − cash outflows. Opening balance = closing balance of the previous period. Closing balance = opening balance + net cash flow.
Opening balance £1,000, inflows £8,200, outflows £9,050. Find net cash flow and the closing balance.: Net cash flow = 8,200 − 9,050 = −£850. Closing balance = 1,000 + (−850) = £150.
Exam trap: is a cash inflow the same as revenue?: No. A loan received is a cash inflow but not revenue. A negative net cash flow is also not the same as a loss.

1.3.4 Sources of business finance

Short-term and long-term sources of finance in the specification: Short-term: overdraft, trade credit. Long-term: personal savings, venture capital, share capital, loans, retained profit, crowd funding.
Overdraft and trade credit: advantage and disadvantage of each: Overdraft: flexible, borrow only what is needed; but interest can be high and the limit may be cut. Trade credit: usually no interest, stock sold before it is paid for; but may not be offered to new businesses and early-payment discounts are lost.
Venture capital versus share capital: Venture capital: an investor funds the business for a stake and often a say; large sums, no monthly repayments, but the owner gives up some ownership, control and profit. Share capital: a company sells shares; no repayment, but ownership is shared and dividends paid.
Loans, personal savings, retained profit and crowd funding: Loans: a certain amount, ownership kept, but repayments must be met. Personal savings: no interest, but a limited sum. Retained profit: no interest, but only if profitable. Crowd funding: many small contributions online; tests demand but needs enough backers.
A business borrows £7,500 and repays £9,000 in total. What is the interest as a percentage?: Interest = 9,000 − 7,500 = £1,500. 1,500 ÷ 7,500 × 100 = 20%.
Why is finance harder for a start-up than an established small business?: A start-up has no trading history and no retained profit, and trade credit may be hard to get. An established business can use retained profit, and its record helps with lenders and suppliers.