Business

• Business aims

  Long-term aspirations of an organization
• Business objectives

  Specific, measurable, achievable, relevant, and time-bound targets (SMART targets) that must be achieved to realise business aims
• Aims and objectives align the efforts of all employees towards a common vision and ensure that everyone is working towards the same goals
• Aims and objectives are critical for businesses to function effectively and achieve long-term success
• Financial and non-financial objectives for start-ups

  • Financial: Survival, Sales, Profit, Market share, Financial security

  Non-financial: Social entrepreneurship, Personal satisfaction, Challenge, Independence and control
• Sales revenue

  The value of the units sold by a business
• Calculating sales revenue

  Sales revenue = Selling price x number of units sold
• Fixed costs


  Costs that do not change as the level of output changes
• Variable costs


  Costs that change directly with the output
• Total costs


  The sum of the variable & fixed costs
• Calculating total costs

  Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)

  Total variable cost (TVC) = variable cost (VC) × quantity (Q)
• Reducing costs is an important way to improve profit
• Gross profit


  The difference between sales revenue and the costs directly related to production
• Net profit


  The difference between the gross profit and other operating expenses and any Interest
• If the costs are greater than the sales revenue, then the firm is making a loss
• Gross Profit (GP)


  The difference between sales revenue and the costs directly related to production
• Net Profit (NP)


  The difference between the gross profit and other operating expenses and any Interest
• Profit Margin


  The amount by which the sales revenue exceeds the costs
• Breakeven Point


  The number of units that need to be sold for total costs to equal the sales revenue
• Breakeven point is the point where total revenue = total costs
• Breakeven Diagram

  • Fixed costs do not change as output increases
  • Total costs are made up of fixed and variable costs
  • Revenue line slopes upwards and crosses total costs line at breakeven point
  • Margin of safety is the difference between actual output and breakeven point
  • Profit is the space between revenue and total costs lines
• Cash vs Profit

  • Profit is the difference between sales revenue and costs, cash is the money flowing in and out of the business
  • A profitable business can fail if it doesn't have sufficient cash
• Cash Flow Forecast

  A prediction of the anticipated cash inflows and cash outflows, typically for a 3, 6 or 12 month period
• A profitable business is likely to fail if it does not have sufficient cash
• Cash-poor businesses will struggle to pay suppliers, employees and operating expenses
• Insolvency


  When a business cannot pay its debts as they fall due
• Cash flow forecast

  A prediction of the anticipated cash inflows and cash outflows, typically for a three, six or twelve month period
• Typical cash outflows

  • Payments on raw materials
  • Paying staff wages and salaries
  • Paying bills such as electricity
• Typical cash inflows


  • Receipts from sales
  • Money received from a new bank loan
  • Money from the sale of an asset
• Net cash flow

  Calculated by subtracting total outflows from total inflows
• Opening balance

  The previous month's closing balance carried forward
• Closing balance

  Calculated by adding the net cash flow to the opening balance
• Calculating a cash flow forecast

  1. Calculate net cash flow

  2. Add net cash flow to opening balance to get closing balance
• An overdraft facility will help a business survive if their closing balance drops below zero in the next month or two
• When calculating opening and closing balances, work through each month in turn
• Always double-check your calculations in cash flow forecasts as one mistake will have a knock-on effect elsewhere and, in some cases, lead you to make inaccurate judgements
• Capital expenditure


  Spending on fixed assets such as equipment, buildings, IT equipment and vehicles
• Operating expenditure


  Spending on raw materials or day to day expenses such as wages or utilities
• Short-term sources of finance

  • Overdrafts
  • Trade credit
• Overdraft

  An arrangement with the bank for business current account holders to spend more money than it has in their account