Putting a Business Idea into Practice-Objectives when starting up

- The qualities shown by entrepreneurs-Estimating revenues, costs and profits- Forecasting cash flows- Obtaining finance

Objectives When Starting Up

Objectives

Financial Non-Financial

Survival Profit

maximisation

Sales maximisatio

n

Being your own boss

Something to be proud

of

To help others

Qualities Shown by Entrepreneurs

Determined Initiative Risk Taking

Decision making Planning Persuasive

Leader Lucky

Revenue

• Any money received by a business [from selling goods or services]

• The total amount of revenue is calculated by:Total Revenue = Price x Quantity

• A business can forecast its revenue by:> Estimating the quantity it will sell by looking at its market research> Deciding what price they will charge for each unit

Costs

• The costs of a business is the total amount of money it spends on making its goods or services

• It is calculated using the following formulaTotal Cost = Fixed costs + Variable costs

Fixed Costs – Indirect costs/ Over heads • Rent• Salaries

Variable costs – Direct costs • Raw materials• Hourly wages

Profits and Loss

• Businesses receive money from selling goods and services

• They also have to pay costs in order to make the goods or provide their services

• Profit can be calculated using the formula:Profit = Sales revenue – Total cost

Profit • when sales revenue is greater than

costs

Loss• When sales revenue is less than

costs

The Cash Flow Forecast

• A cash flow forecast helps a business estimate:- How much fixed costs will be- How much it will sell- How much it will cost to make what is sold

• A cash flow forecast is a very important document and tries to predict when cash is expected to come into and leave a business over a period of time

Inflows

• Money that a business receives

• Sales revenue• Grants• Loans• Capital

Outflows

• Money that a business spends

• Wages and salaries• Raw materials• Utilities• Rent and business

rates• Interest• Tax• equipment

A Cash Flow Forecast

Receipts

Payments

Net In/outflow

What Affects Cash Flow

Speed of cash flowing in and out

Stock Levels:Materials a business

must buy to make their product

Credit Terms:The time between

receiving goods and paying for them

Uses of Cash Flow

It can be used to obtain loans since lenders can see how much cash is flowing

into the business

Businesses can spot problems before they

happen and make changes

Businesses can decide what they want to do with excess

cash

Golden Rules About Cash Flow

• Money is only recorded when cash changes hands

• It does not record profit • The closing balance of one month is the

opening balance of another month• A negative closing balance does not mean that

the firm is bankrupt

Why Do Firms Need Finance

• To expand the business• To buy new equipment• To buy new premises• To buy stocks • To pay bills• To cover a fall in demand• To pay workers• To start a new business

Different Types of Finance

Types of Finance

Internal- Money obtained within a business- Using this type of finance is cheaper but it means the money cant be used for anything else

External - Money obtained from outside the business (eg. Loan)- This usually requires interest to be paid on the money obtained

Source of FinanceExternal • Long Term• share/ venture capital• mortgage• Government grants• Short term• Bank overdraft• Hire Purchase• Leasing • Bank loan

Internal• Retained profit• Owners funds• Sales of assets• Changing stock levels• Changing credit terms