1.3 Putting a Business Idea into Practice

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  • Putting a Business Idea into Practice
    • Cash Flow
      • credit terms
        • tell you how long after agreeing to buy a product the customer has to pay
        • can affect timings of a businesses cash flows
      • cash flow is the flow of all money into and out of the business
      • a business needs cash to pay its employees, suppliers and overheads(ongoing expenses)
      • net cash flow = cash inflows - cash outflows for a given period of time
      • cash flow forecast
        • help businesses anticipate problems
        • lists all the inflows and outflows of cash that appear in the budget
        • the firm can use the forecast to determine when it will need a short term source of finance to cover costs
      • if a company has +cash flow there is more cash inflow than outflow for a particular time period
      • +cash flow means that a company has no problem making payments
        • but it may mean that the company is losing opportunities to invest in ways that might improve it
    • Break-Even
      • break even point in units = fixed cost / sales price - variable cost (per unit)
      • break even point for revenue (or costs) = break even point in units x sales price
      • break-even level of output or break-even point is the level of sales a firm needs in order to cover its costs
      • if a firm sells more than the break even point it will make a profit
      • a low break-even point is good for a business as it wont have to sell much to make a profit
      • break-even diagram*
        • margin of safety
          • margin of safety is the gap between the current level of output and the break-even output
          • margin of safety = actual sales - break-even sales
          • the business will use budgeted sales if its trying to forecast its future margin of safety
            • the budgeted sales will be the sales that it expects to make
        • break-even diargrans can be useful for seeing how changes in revenue and costs may affect the break-even output
    • Sources of Finance for Small Businesses
      • why businesses need finance
        • in order to expand
        • additional finance
          • new businesses often have poor cash flow so need extra money to cover costs
        • start up capital
        • finance to cover  lack of cash due to customers delayed payments
        • if struggling a business may need additional finance to cover day to day costs
      • short term sources
        • trade credit
          • where businesses  give firms one or two months to pay for certain purchases
          • if not paid they could end up with a large fee
        • overdrafts
          • these let the firm take more money out of its bank account than it has paid into it
          • can allow businesses to make payments on time even if they dont have enough cash
          • usually have a higher rate than other loans and banks can cancel them anytime
          • if not paid then the bank can take some of the businesses assets
        • loans for limited amounts of time
      • long term sources
        • loans
          • quick and easy to take out
          • repaid with interest and if aren't repaid the bank can repose the firms assets
          • the business may have to pay the loan back in monthly installments
            • will increase fixed costs
          • before taking out a loan they must make sure that they can still break-even
        • personal savings
          • when a business owner puts their own money into a business
          • risky as the owner could end up losing their money if the business fails
        • share capital
          • when individuals can buy shares in a business
            • means they have part ownership in the business
          • businesses can use the money gained through issuing shares
        • venture capital
          • money raised through selling shares to individuals or businesses who specialise in giving finance to new/expanding firms
          • venture capitalists usually buy shares in businesses that are risky but have potential to grow quickly
        • retained profit
          • profits that the owners have decided to put back into the business after paying themselves a dividend
        • crowd funding
          • when a large number of people contribute money towards starting up a business or funding a business idea
    • Revenue, Cost and Profit
      • Revenue
        • revenue = price x quantity sold
        • revenue is the income earned by a business
      • costs
        • fixed costs
          • don't vary with output
          • have to be paid even if the firm produces nothing
          • fixed over a short period of time
        • variable costs
          • costs that will increase as the business expands
          • total variable costs = quantity sold x variable cost per unit
        • total costs
          • total costs = total variable costs + total fixed costs
      • Profit
        • profit = revenue - costs
        • businesses make profit if they earn more than they spend
      • Intrest
        • interest (or loans) = (total repayment - borrowed amount / borrowed amount) x100
        • when a business borrows money it will usually have to be paid back with interest - charge for borrowing money
        • interest is added on to savings, so a business can also earn money through interest on savings
    • Aims and Objectives
      • Financial Aims can be Measured in Terms of Money
        • Survival
          • surviving is the most important short-term aim of all new businesses
          • means the business has to earn enough money to stay open
          • around 60% of new businesses close within 5 years of starting
        • Maximise Profit
          • it may take a few years for the business to make any profit
        • Increase Market Share
          • Market share tells you the % of a markets total sales a particular product or company ahs made
          • when a business first sets up it has 0 market share
            • so one of its firdt aims is to capture a part of the market and establish itself
          • done by taking sales away from competition, or persuading new customers to enter the market and buy their products
        • Maximise Sales
          • increasing sales is a good way to grow market share
          • the business can monitor sales in terms of how many of a particular product it sells or by how much money it takes in from selling its products
        • Achieve Financial Security
          • most businesses depend on external sources of finance (loans or personal savings) when they first start
          • an aim for businesses is to achieve a point where it can depend on its own revenue to fund activities (go past break-even point)
      • Non-Financial Aims
        • accomplishing a personal challenge
          • some people want the challenge of setting up and running a business
          • if risks pay off there could be a big reward
        • achieving personal satisfaction
          • being interested in what they do can give a person a lot of job satisfaction
        • gaining independence and control
          • people like being in control over what they do everyday and make business decisions
          • they can have flexible working hours
        • doing whats right for society
          • some businesses want to make sure that they are acting morally right
      • Objectives
        • once the business aims are sorted the business objectives have to be set
        • objectives are more specific than aims
          • meaurable steps on the way to aims
        • there are different types of aims related to survival, profit, market share, sales, financial security, personal reasons or social issues
        • act as clear targets for the business to work towards
        • can be used later to see if the business has been successful or not
      • different factors that affect the aims and objectives of a business
        • size and age of business
          • most new businesses will be focused on survival and growth
          • as businesses grow they may concentrate on achieving financial security and increasing sales and market share
          • larger businesses get more attention from the public
            • might get social aims and objectives to try avoid bad publicity
        • level of competition
          • if a business is in a highly competitive market then it might focus more on survival and maximising sales
          • if a business doesn't face much competition its aims and objectives may be focused more on increasing market share and maximising profits
        • who owns the business
          • if a business is owned by a small number of people non-financial aims and objectives may be more important
          • for companies owned by many shareholders there may be a pressure to have aims and objectives focused om maximising profit so shareholders get more money

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