Business revenue and finance

Question 1

What does a business consider before picking a source of finance?

Answer 1

How much? Used for? Repayments? IS the entrepreneur willing to give up ownership?

Question 2

What is finance needed for?

Answer 2

start up costs, expenditure (machinery, vehicles), working capital (day to day), investment.

Question 3

What are the short term sources?

Answer 3

Selling assets, retained profits, overdrafts, venture capital, leasing, grants, trade credit.

Question 4

What are the medium term sources?

Answer 4

retained profits, bank loans, crowdfunding, venture capital, leasing, grants.

Question 5

What are the long term sources?

Answer 5

owner’s capital, loans debentures, peer-to-peer, crowdfunding, share capital.

Question 6

Owner’s capital:

Answer 6

money invested in the business from the owner’s personal savings
-Internal.
-No repayment/interest.
-May be limited.

Question 7

Retained profits:

Answer 7

Profits made in earlier years and kept by the business and used for a variety of reasons including paying for growth.
-no interest/repayment.
-Flexibility.
-Might be limited.
-Internal.

Question 8

Sales of assets:

Answer 8

when a business sells off its unwanted or unused assets to raise funds
-Internal.
-Frees up space.
-Immediate.
-May take time to sell, may not sell at all.

Question 9

Overdrafts:

Answer 9

When a lending institution allows a firm to withdraw more money than it currently has in its account
-Good solution to short term cash flow problem.
-External.
-For emergencies.
-High interest.

Question 10

Trade credit:

Answer 10

the practice of buying goods and services now and paying for them later
-Can make revenue before paying.
-High interest if missed payment.
-External

Question 11

Debt factoring:

Answer 11

A bank sells their invoices to a bank to gain immediate access to cash.
-Improves cash flow.
-External.
-Do nor receive the full value of the invoice.

Question 12

Hire purhcase:

Answer 12

an asset is sold to a company that agrees to pay fixed repayments over an agreed time period - the asset belongs to the company
-no large upfront cost.
-interest.
-External.

Question 13

Leasing:

Answer 13

Renting a product while ownership title remains with the lease grantor.
-Cheaper in short term.
-Can easily switch to new technology.
-Easy regular payments.
-Interest and is more expensive in the long term.
-External.

Question 14

Share capital:

Answer 14

Selling shares to raise finances.
-External.
-Dividends and slower decisions making.

Question 15

Venture capital:

Answer 15

Money that is invested in new or emerging companies that are perceived as having great profit potential.
-External.
-Will want input and profits.

Question 16

Business angels:

Answer 16

individuals who invest their personal capital directly in start-ups
-Offer knowledge and skills.
-Loss on control and profits.
-External

Question 17

Friends and family:

Answer 17

Quicker and cheaper than a loan.
Can add stress and may not be enough
-External.

Question 18

Taking on a new partner:

Answer 18

Partnerships can obtain additional finance by selling off part of the business to a new finance.
-More skills
-Loss of control and profits.
-External

Question 19

Loans:

Answer 19

money borrowed that must be repaid with interest
-External.
-Regular repayments and instant money.
-Interest.
-Not provided to start ups because of lack of security.

Question 20

What is revenue?

Answer 20

selling price x quantity sold

Question 21

What is simple profit?

Answer 21

Revenue-costs.

Question 22

What is gross profit?

Answer 22

Revenue- cost of sales.

Question 23

What is operating profit?

Answer 23

Gross profit- operating expenses.

Question 24

What is net profit?

Answer 24

Operating profits- interest and taxes.

Question 25

What are fixed costs?

Answer 25

Costs that do not vary with the quantity of output produced.
-Rent/mortgage, business rates, insurance.

Question 26

What are variables?

Answer 26

costs that vary with the quantity of output produced.
-Raw materials, advertising, energy costs.
Not a constant relationship because of economies of scale.

Question 27

What are semi-variables?

Answer 27

A cost which is a mix of fixed and variable e.g Labour. (fixed hours and overtime).

Question 28

What are direct costs?

Answer 28

Expenses that directly relate to making a product.

Question 29

What are overhead costs?

Answer 29

Costs that can’t be directly related to making a product. Adverts, etc.

Question 30

What is the impact of revenue on managers and employees?

Answer 30

-Concerned with efficiency and productivity.
-Impact how many sales are made.

Question 31

What is the impact of revenue on suppliers?

Answer 31

Businesses will push for lower costs.

Question 32

What is the impact of revenue on government?

Answer 32

Want corporation tax, and high economic growth.

Question 33

What is the impact of revenue on owners?

Answer 33

Want to keep net profit high.

Question 34

What is break even point?

Answer 34

the quantity at which total revenue and total cost are equal

Question 35

What is contribution?

Answer 35

The surplus made on each product.
Selling price-variable costs.

Question 36

How to calculate break even output?

Answer 36

fixed costs/contribution

Question 37

How to work out profit from break even?

Answer 37

Difference between current sales and break even output, multiplied by contribution.

Question 38

How to construct a break even chart?

Answer 38

-Y axis is level of revenue/costs.
-X axis is quantity sold.
-Fixed costs is always a horizontal line.
-Break even is the point of intersection between the revenue and total cost lines.
-Profit is bounded by the total cost and revenue line.

Question 39

What is the margin of safety?

Answer 39

Margin of Safety= Excess of Sales over Breakeven Sales.
-Shows the amount that demand can fall before making losses.
-Aim to have a high margin of safety/

Question 40

What effect would these things have on break even?:
1. Rise in demand.
2. Rise in variable costs.
3. Raising the selling price.
4. Rise in fixed costs.

Answer 40

1. No effect.
2. increases break even output.
3. Decreases but may lose customers.
4. Increases break even output.

Question 41

Benefits of break even?

Answer 41

-Simple calculations.
-Can perform visually “what if” analysis.
-Useful in a business plan.
-Shows how much you need to sell to survive.

Question 42

Limitations of break even?

Answer 42

-Not all items are sold at the same price, so more complicated.
-Doesn’t take into account economies of scale.
-Just a prediction.