1.3

• 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
• Example business aim and objective

  • Aim: To become the market leader in a particular industry

  Objective: Increase sales by 25% over the next three years, improve customer satisfaction by 15%, and expand into new geographic markets
• 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
• Calculating gross profit


  Gross Profit = Revenue - cost of sales
• Calculating net profit


  Net Profit = gross profit - (operating expenses + interest)
• 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 Diagram


  • Shows fixed costs, total costs, total revenue and the breakeven point
  • Identifies the margin of safety as the difference between actual output and breakeven point
  • Identifies the profit made at a specific level of output as the space between the 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 to pay suppliers, employees and expenses
• 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
• Lifestyle retailer Joules announced plans to liquidate in December 2022


  • As a result of cash flow difficulties despite making a profit of £2.6 million during the previous year
• 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 3 month cash flow forecast

  1. Inflows: Cash received from sales

  2. Outflows: Inventory/stock, Wages, Utilities

  3. Net cash flow

  4. Opening balance

  5. Closing balance
• This cash flow forecast supports a decision for the business to arrange an overdraft facility with their bank
• As sales increase in January and February, inflows are greater than outflows and the business has a positive cash flow
• In March, the level of sales falls and the net cash flow turns negative
• An overdraft facility will help them survive if their closing balance drops below zero in the next month or two
• Completing a cash flow forecast

  1. Calculate cash outflow for April

  2. Calculate net cash flow for May

  3. Calculate closing balance for June