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1.3 Putting a business idea into practice, Gross profit/sales revenue x…
1.3 Putting a business idea into practice
1.3.1 Business Aims & Objectives
An introduction to business aims and objectives
Business Objectives align with the efforts of all employees
They are critical for the businesses for long term success
Common business aims and objectives for start-ups
Financial Objectives
Survival - This is the most crucial objective
Sales - A business must get customers who will buy its products to earn an income
Profit - This the sales revenue - the total costs
Market share - It is the percentage of total market revenue a single company has
Financial security - Where a business can sustain itself and also have some reserve to pay for unexpected situations
Non-Financial Objectives
Social entrepreneurship - Aim to assist people with issues such as poverty
Personal satisfaction - Gained from doing well
Challenge - Doing something that is hard to do
Independence - Entrepreneurs want to control their schedule
Why aims and objectives vary between businesses
Reasons for different business objectives
Industry - Businesses operating in different industries may have varying objectives
Size - Different businesses of different sizes will have different ambitions when it comes to things like market share
Culture - The businesses have different values, beliefs and visions which affect their actions
Ownership Structure - A family owned business may target stability over profitability
Geographical location - Business location can change how businesses perform operations if the economy is more or less developed
1.3.2 Sales Revenue & Costs
Sales Revenue
It is the value of sales
Sales revenue = Selling Price x Number of units sold
Costs
Fixed
Costs that do not change dependent of the level of output
Examples - Rent, Insurance and bank loan repayments
Variable
Costs that do change dependent on the level of output
Examples - Raw materials, and wages of workers who are involved with production
Total Costs
It is the sum of fixed costs and variable costs
Fixed Costs + Variable Costs
1.3.3 Profits and Profit Margins
Types of profit
Gross Profit
Difference between sales revenue and costs, directly related to production
Gross Profit = Revenue - Costs of sales
Net Profit
Difference between the gross profit and other operating expenses
Net profit = Gross profit - (Operating expenses + Interest)
Profit Margins
It is the amount of sales revenue which exceeds the costs
Net Profit margin - Proportion of sales revenue that is expressed as a percentage
Net profit/sales revenue x 100
1.3.4 Breakeven Point
Helps a business understand how many units it needs to sell to match its casts
Calculated - fixed costs/ selling price - variable cost per unit
Margin of safety
How many units over the breakeven point the sales are
Margin of safety = actual or budgeted sales - breakeven sales
1.3.5 Cash and Cash Flow Forecast
The importance of cash to the business
Profit it the difference of sales revenue generated and business costs
Cash is the full range of money flowing in and out of the business
Possible outflows
Rent
Wages
Raw Materials
Possible Inflows
Sales
Investment
Bank Loans
Calculation and interpretation of cash-flow forecasts
Net Cash flow = Total Outflows - Total Inflows
Opening balance is the pervious months closing balance carried forward
Closing balance is net cash flow plus the opening balance
1.3.6 Sources of Business Finance
Introduction to sources of finance
Sources of finance
Short term
Overdrafts
Explanation - An arrangement with the bank to spend more money then actually in their account
Pros - Very flexible, no interest in overdraft amount
Cons - Can be asked back for if the bank is concerned about the loan being repaid
Trade Credit
Explanation - Agreement is made to buy items which are paid for at a later date
Pros - Interest free - Can enable a positive cash flow
Cash must be managed to ensure the business can pay for its supplier
Long term
Share capital
Gotten by selling shares of the business
Cons - Entitled to a percent of the profit called dividends
Pros - Can raise large amounts of money quickly and shareholders can bring expertise which can be beneficial
Bank Loans
A sum of money that is borrowed from the bank to be repaid with interest
Pros - Are unsecured and they are repaid over two to ten years
Cons - Assets are at risk if the business does not repay its debts
Retained Profit
Profit that has been generated in previous years and is reinvested into the business
Pros - Cheap source of finance that does not involve borrowing
Shareholders do not receive more money
Crowd funding
Allows businesses to access finance provided by a large number of small investors online platforms
Pros - Investors attracted by incentives such as early access to a product
Cons - Businesses need a persuasive plan to convince individuals. Will compete with many other online projects
1.3.7 Options for start up and small businesses
Limited and Unlimited Liability
Unlimited liability is when the business and the owner are the same legal entity so the businesses debts are their debts
Limited liability is when the business and the owner are two separate legal entities
Types of business ownerships
Sole Trader
A business only has one owner
Pros - Easy to set up and all profit goes to the owners
Cons - Owner is personally responsible for all the debts
Partnership
Pros - Easy to set up and more skills are available
Two or more people join together to from a business
Cons - Unlimited liability and profits are shared equally
Private Limited Company
Ownership of the business is broken down into a specific number of shares that are sold by the owner
Pros - Limited liability and access to greater finance
Cons - More time consuming and more complex requirements rather than a sole trader
Franchising
Gives and individual the rights to start a company in their companies image
Pros - Training and supplies are provided to the company
Startup costs are very high and overall costs are quite high
1.3.8 Factors influencing business location
Proximity to work
Proximity to materials
Proximity to competitors
Proximity to the market
Impact of the internet
Nature of the business
Gross profit/sales revenue x 100
Gross profit margin - the proportion of revenue that is turned into gross profit