Topic 1.3 Flashcards
(30 cards)
Definitions: Business objectives and aims
Business objectives - the steps a business needs to take to meet its overall aims
Business aims - the overall target or goal of the business
Business objectives are created by using the SMART acronym
Specific
Measurable
Agreed
Realistic
Time
Financial aims and objectives are…
- Sales/profit
- Financial security
- Survival
Non-financial aims and objectives are…
- Independence
- Social objectives
- Personal satisfaction
Why business aims may change and differ
- Form of ownership
- Size
- Different sectors/markets
Difference between fixed and variable cost?
Fixed costs are not linked with the output but variable costs are
Revenue formula
Quantity sold x price = revenue
Total costs
Total variable costs + total fixed costs = total costs
Interest on loans formula
total repayment - borrowed amount ______________________________________
borrowed amount
x 100
Definition: Break - even
The point at which revenue and total costs are the same
Break - even formula
Break-even = fixed costs ÷ (selling price − variable costs)
BREAK EVEN GRAPH CHECK BOOK
Definition: Margin of safety
Is the amount sales can fall before the break-even point is reached
Margin of safety formula
Margin of safety = actual sales − break-even sales
Why should we calculate break - even ?
Businesses should know how many units to sell to cover costs and make a profit
Problems while calculating break - even ?
Doesn’t take in external factors: competition, change in economy
Definition: Cash flow
the money going in and out of a business
Difference between positive and negative cash flow?
Positive cash flow is when the cash inflow is greater than the cash out flow, negative is when cash inflow is less than outflow
Net cash flow formula
Cash inflow - cash outflow
What is the importance of cash flow ?
- To pay suppliers, overheads, employees
- Prevent business failure
Opening and closing balance
Opening balance = closing balance for the previous month
Closing balance = opening balance + net cash flow
How do credit terms affect cash flow?
Credit terms tell you how long after buying a product the customer has time to pay, it affects the timing of cash flow
SHORT-TERM SOURCES OF FINANCE
Trade credit
Business to get raw materials/ stock but pay for them at a later date usually 30, 60 or 90 days
PRO: time to earn money to pay debt
CON: large fee if payment is delayed
SHORT-TERM SOURCES OF FINANCE
Overdrafts
More money out of the bank account than there is in it
PRO: allows the business to make payments on time even if they don’t have the money
CON: higher interest rate than other loans and the bank can cancel it anytime
or take some assets if it hasn’t been paid off
