Mr Kidman's Classroom
Revise the key ideas
1.3.1 · Business aims and objectives
- An aim is a broad intention; an objective is a more specific target used to guide decisions and judge progress. “Increase monthly sales by 10% within six months” is more measurable than “do well”.
- Financial objectives include survival, profit, sales, market share and financial security. A new business may prioritise paying bills before attempting rapid growth.
- Market share (%) = × 100. Use comparable sales measures and the same period for the business and the whole market.
- Non-financial objectives include social benefit, personal satisfaction, challenge, independence and control. A social enterprise may use profits to support its purpose rather than maximise owners' income.
- Objectives differ with the owner's priorities, size, resources and market conditions. A start-up with scarce cash may choose survival; an established profitable business may choose expansion.
- Objectives can conflict: improving quality may raise costs, while expanding quickly can put independence at risk if investors gain influence.
- Worked example: a business sells £24,000 in a market worth £300,000. Market share = × 100 = 8%. A rising sales figure does not ensure rising share if the market grows faster.
1.3.2 · Revenue, costs, profit and interest
- Revenue is income from sales. Revenue = selling price × quantity sold. Use the actual price after discounts; revenue is not profit.
- Fixed costs do not change with output within the relevant period and range, such as monthly rent. Fixed does not mean the amount can never change.
- Variable costs change as output changes, such as ingredients or packaging. Total variable cost = variable cost per unit × quantity produced.
- Total costs = total fixed costs + total variable costs. Compare revenue and costs for the same time period and state any assumption about output and sales.
- Profit = revenue − total costs. A negative result is a loss. Higher revenue can coincide with lower profit if costs increase faster.
- Worked example: a stall sells 400 meals at £8 each. Variable cost is £3 per meal and fixed costs are £1,000. Revenue = £3,200; variable costs = £1,200; total costs = £2,200; profit = £1,000.
Revenue = 400 × £8 = £3,200. Variable costs = 400 × £3 = £1,200. Total costs = £1,000 + £1,200 = £2,200, so profit = £3,200 − £2,200 = £1,000.
- Interest is the cost of borrowing. For the stated repayment period, interest (%) = × 100. Do not call a multi-year total percentage an annual rate.
- Worked example: borrowing £2,000 and repaying £2,160 after one year means £160 interest. Interest percentage = × 100 = 8%, assuming these repayments contain no separate fees.
1.3.2 · Break-even and margin of safety
- Break-even is the output at which total revenue equals total costs: there is neither profit nor loss. Contribution per unit = selling price − variable cost per unit.
Each unit’s contribution is the money left from its selling price after paying its variable cost. This helps pay fixed costs; once those are covered, it contributes to profit.
- Break-even output in units = . If contribution is zero or negative, extra sales do not cover fixed costs under this model.
- For indivisible units (items that cannot be sold in parts), round a fractional result up to find the first whole-unit output that covers all costs. State the unit: products, tickets or another quantity, not pounds.
- Break-even sales revenue = break-even units × selling price. Margin of safety = actual or budgeted sales units − break-even sales units.
- Worked example: using the meal stall's £1,000 fixed costs and £5 contribution, break-even = 1,000 ÷ 5 = 200 meals. At 400 meals, margin of safety = 400 − 200 = 200 meals.
- A break-even chart has output on the horizontal axis and money on the vertical axis. The revenue and total-cost lines intersect at break-even; below that output the business makes a loss.
Meal stall break-even chart - With other values unchanged, higher fixed costs or variable cost per unit raise break-even output. A higher selling price lowers it, but the price rise may reduce demand.
- The chart assumes constant price and variable cost per unit, fixed costs within a range and sales of the output shown. Bulk discounts, unsold stock or limited capacity make actual results less predictable.
1.3.3 · Cash and cash-flow forecasts
- Cash is money available to make payments. Suppliers, rent and employees must be paid when due; insufficient cash can cause insolvency (here, being unable to pay debts when they fall due) even when the business reports a profit.
- Profit and cash differ. A credit sale may create revenue before the customer pays; a loan brings cash into the business but is not sales revenue or profit.
- Cash inflows include receipts from customers, finance received and asset sales. Cash outflows include payments to suppliers, wages, equipment and loan repayments.
- Net cash flow = cash inflows − cash outflows in the period. Closing balance = opening balance + net cash flow. The next period's opening balance is the previous closing balance.
- Worked example: opening cash £1,200, inflows £3,000 and outflows £3,500 give net cash flow −£500 and closing cash £700. Negative net flow does not automatically mean a negative closing balance.
From opening to closing cash - A cash-flow forecast estimates future receipts and payments, helping identify when finance is needed. It is a prediction, not a record of certain future outcomes.
- Seasonal demand, late customer payments or unexpected repairs can change the forecast. Compare actual cash with the forecast and investigate significant differences.
- Possible responses include chasing overdue payments, negotiating later supplier payments, delaying non-essential spending or arranging suitable finance. Each has consequences, such as damaged supplier trust or borrowing costs.
1.3.4 · Sources of finance
- Choose finance by amount, purpose, repayment period, cost, risk and effect on ownership. A source suited to covering a temporary cash gap may be unsuitable for buying long-lived equipment.
- An overdraft allows a bank balance to fall below zero up to an agreed limit. It is flexible for short-term gaps but can involve interest, fees and withdrawal or review by the bank.
- Trade credit lets the business receive supplies and pay later. It helps cash timing but is not free cash; late payment can harm relationships or lose credit facilities.
- Personal savings avoid interest and outside control but put the owner's money at risk and may be insufficient. They are not available equally to every entrepreneur.
- A loan provides borrowed capital with agreed repayments and interest. Ownership is retained, but repayments create cash outflows even when sales disappoint.
- Venture capital involves investment, often in exchange for ownership. Investors can bring expertise but may seek strong growth and influence over decisions.
- Share capital is money raised by selling ownership shares in a company. It does not require loan repayments, but ownership and potential profits are shared.
- Retained profit is profit kept in the business. It avoids new borrowing or dilution (a reduction in an existing owner’s percentage share when new shares are issued), but a new business may have none and an established business may have other uses for it.
- Crowdfunding raises contributions from many people through a platform. It can test interest, but success is uncertain and fees or obligations depend on whether funding involves rewards, loans or equity.
- Fictional decision: a seasonal shop needs £2,000 for a one-month cash gap. An agreed overdraft may fit better than selling shares permanently, provided later receipts can repay it and fees are affordable.
