1.3 Putting a Business Idea into Practice
- Created by: abbienoice
- Created on: 09-11-20 12:23
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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
- credit terms
- 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
- margin of safety
- 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
- trade credit
- 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
- when individuals can buy shares in a business
- 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
- loans
- why businesses need finance
- 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
- 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
- Revenue
- 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)
- Survival
- 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
- accomplishing a personal challenge
- 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
- size and age of business
- Financial Aims can be Measured in Terms of Money
- Cash Flow
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