edexcel business for gcse © 2009 ian marcousé and naomi birchall section 3 putting a business idea...

© 2009 Ian Marcousé and Naomi Birchall

EDEXCEL BUSINESS for GCSE

Section 3Putting a business idea

into practice



• Starting a successful business requires more than a great idea.

• It needs a clear plan, enthusiastic leadership, effective organisation and … a bit of luck!

• A good understanding of finance is also required to keep sales above costs and make a profit.

From idea to practice



• (Sales) revenue comes from the number of items a business sells within a given time period multiplied by the price it charges.

• Revenue = price x quantity sold.• Estimating future sales revenue is useful

for a business but difficult to do.• Why do you think this might be the case?

Estimating revenue



• Businesses need to be aware of two types of cost:– fixed costs do not change as output and

sales change (although they can increase or decrease over time)

– variable costs do change as output and sales change.

• Total costs = fixed costs + variable costs

Estimating costs



Fixed costs– rent and rates– machinery and

equipment– staff salaries– marketing

expenditure

Variable costs– raw materials– bought-in

components– energy– piece-rate

labour

Fixed costs and variable costs



• Profit = revenue – costs.

• If costs are greater than revenue, a loss is made.

• Profit forecasts are based on estimates of revenues and costs.

• Sensible businesses will over-estimate costs and under-estimate revenues.

Profit



Typical uses of profit include:• investing in extra property or machinery, to

help the business grow• investing in more efficient systems or

technology, to cut costs• funding the purchase of extra stocks of

materials or finished goods• paying out dividends to shareholders, to give

them an annual return on their investment.

Using profit



To return to profit, a business could:• try to boost revenues without increasing

costs, e.g. by increasing prices• try to reduce variable costs per unit, e.g. by

reducing the amount of waste• try to reduce fixed costs, e.g. by moving to

cheaper premises.

Dealing with losses



• Cash refers to the money the firm holds in notes and coin, as well as in its bank account.

• Cash and profit are not the same!

• Without sufficient cash, a business would not be able to pay its bills, could get taken to court and be forced to close.

The importance of cash



Some of the reasons why cash can be hard to manage include:• huge start-up costs• low initial or seasonal sales• late-paying customers.

How should cash be managed?



A business should therefore:• negotiate a generous overdraft facility• keep costs under control• try to keep cash flowing into the business• draw up regular cash flow forecasts.

How should cash be managed?



• Cash flow forecasting means predicting future flows of cash into and out of a firm’s bank account.

• This gives an idea of the state of the firm’s monthly bank balance (cumulative cash) and predicts any negative cash flow.

• Cash flow forecasts are central to any firm’s business plan.

Forecasting cash flow



• Improving cash flow can involve:– cutting stock levels– increasing credit from suppliers– reducing credit given to customers.

• Failing to deal with negative cash flow can lead to insolvency!

Dealing with negative cash flow



Raising finance

• Three questions need asking:– How secure is the source of finance?– How expensive is the source of finance?– Is enough finance being raised?

• Why do you think these questions are important?



Sources of finance

• Long term, e.g. shares, loans, venture capital, profit.

• Medium term, e.g. loans, leasing.

• Short term, e.g. overdrafts, trade credit.

• The type of finance used will depend on why the finance is needed!



Start-up objectives

Starting a new business is usually based on one of the following:• a financial objective, e.g. to get rich• a business mission, e.g. to prove that an

idea works• a social mission, aimed at helping the wider

community.



Now make sure you understand…• billion• business plan• cash• cash flow• cash flow forecast• cumulative cash• dividends• fixed costs• insolvency• liquidation• mission

• negative cash flow• net monthly cash• patent• profit• sales forecasts• sales revenue• share capital• total costs• variable costs• venture capital

edexcel business for gcse © 2009 ian marcousé and naomi birchall section 3 putting a business idea...

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