1.3 business

• Aims


  General goals for a business
• Objectives


  Short term steps needed to achieve aims
• Aims are general but objectives are specific
• Objectives allow a business to

  • Give a clear sense of purpose to employees
  • Motivate staff
  • Work in one direction
  • Measure its performance
• Financial objectives


  • Survival
  • Profit
  • Sales
  • Market Share
  • Financial security
• Non-financial objectives


  • Social objectives
  • Personal satisfaction
  • Challenge
  • Independence
  • Control
• Revenue


  Price x Quantity sold
• Fixed costs


  Costs that do not vary with output
• Variable costs


  Costs that change directly with the number of products produced
• Total costs


  All of the costs of a business
• Profit


  When revenues of a business are greater than its total costs
• Profit can be used as an objective to

  • Survive
  • Reinvest profits for expansion
  • Provide security and savings
  • Reward employees
  • Generate wealth for the owner
• Break even point


  The level of output at which a business's revenue covers its total costs
• Margin of safety


  Actual sales - Break even point
• Changes in the business

  Effect on break-even diagram
• Strengths of using break even


  • Allows business to see output needed for profit
  • Helps entrepreneur to understand potential investment
  • Helps entrepreneur understand the risks
  • Shows importance of keeping fixed costs down
  • Calculations are quick
• Drawbacks of using break even


  • Unrealistic assumptions
  • Variable costs do not always stay the same
  • Most businesses sell more than one product, so break-even for the business becomes harder to calculate
• Cash


  The money the firm holds in notes and coins, and in its bank accounts
• Cash flow


  The movement of money into and out of the firm's bank account
• Insolvency


  When a business lacks the cash to pay its debts
• Cash flow


  Cash only appears when it is paid in and out of the business, so if customers are late paying there could be no cash inflow
• Profit and revenue


  Profit appears as soon as a sale is made, so profit instantly increases when something is sold
• Cash flow forecasting


  Predicting the future flows of cash into and out of the business bank account
• Ways a firm can act to improve its cash position

  • Cut stock levels
  • Increase credit from suppliers
  • Reduce credit to customers
• Short term sources of finance

  • Bank overdraft
  • Trade credit
• Long term sources of finance


  • Personal savings
  • Loan
  • Venture capital
  • Share capital
  • Retained profit
  • Crowdfunding