1.3 Putting a Business Idea into Practice (Edexcel GCSE Business): Flashcards

A family-owned business may prioritise long-term stability and legacy over short-term profit.

A small business may focus on survival and growth, whereas a large business may prioritise diversification and market dominance.

Sales revenue is the value of the units sold by a business.

Sales revenue = selling price × number of units sold.

Sales revenue = selling price × number of units sold.

Percentage change = ((new value − old value) ÷ old value) × 100.

Fixed costs are costs that do not change as output changes, such as rent or insurance.

Variable costs are costs that change directly with output, such as raw materials.

Fixed costs include rent, management salaries, insurance and bank loan repayments.

Total costs = total fixed costs + total variable costs.

Total variable cost = variable cost per unit × the quantity produced.

False.

Fixed costs stay the same regardless of output; it is variable costs that rise as output increases.

False.

Total costs cannot be zero, because all firms have fixed costs to pay even at zero output.

By sourcing cheaper materials, buying in bulk, or outsourcing distribution and packaging.

Cheaper materials may lower quality, and lower staff pay may worsen customer service.

Profit is the money left over after all costs have been accounted for.

The two types are gross profit and net profit.

Gross profit = revenue − cost of sales.

Net profit = gross profit − (operating expenses + interest).

If a business's costs are greater than its sales revenue, it is making a loss.

False.

Gross profit is larger; net profit is what remains after operating expenses and interest are taken from gross profit.

A profit margin is the amount by which sales revenue exceeds costs, expressed as a percentage.

Gross profit margin = (gross profit ÷ sales revenue) × 100.

Net profit margin = (net profit ÷ sales revenue) × 100.

True.

Higher and increasing margins are preferable, as more revenue is converted to profit.

Gross profit margin shows the proportion of revenue that is turned into gross profit.

The breakeven point is the number of units a business must sell for total costs to equal sales revenue.

Breakeven point = fixed costs ÷ (selling price − variable cost per unit).

False.

At breakeven, total costs equal total revenue, so the business makes neither a profit nor a loss.

The breakeven point should always be rounded up to the nearest whole unit.

The point where the total costs line and the revenue line cross.

Because fixed costs do not change as output increases.

True.

At 0 units the revenue is £0, so the revenue line starts at the origin and slopes upwards.

It is the gap between the revenue line and the total costs line.

The margin of safety is the amount by which the number of units sold is greater than the breakeven point.

Margin of safety = actual (or budgeted) sales − breakeven sales.

Businesses prefer their margin of safety to be as large as possible.

So that if demand drops unexpectedly, the business will still make a profit.

Profit is the difference between sales revenue and costs, whereas cash is the money actually flowing in and out of the business.

Insolvency is when a business does not have enough cash to pay its suppliers, employees and operating expenses.

False.

A profitable business can still fail without enough cash — e.g. Joules announced plans to liquidate in 2022 despite making a profit the previous year.

A supplier offering trade credit lets a business receive stock now and pay for it in 30 or 60 days.

A cash-flow forecast is a prediction of a business's expected cash inflows and outflows, usually over 3, 6 or 12 months.

Net cash flow = total inflows − total outflows.

Closing balance = opening balance + net cash flow.

A month's opening balance is the previous month's closing balance carried forward.

Cash inflows include receipts from sales, money from a bank loan, and money from the sale of an asset.

Cash outflows include payments for raw materials, wages and salaries, and bills such as electricity.

True.

When outflows exceed inflows, the net cash flow is negative.

Capital expenditure is spending on fixed assets such as equipment, buildings, IT equipment and vehicles.

Operating expenditure is spending on raw materials and day-to-day expenses such as wages and utilities.

The two short-term sources are overdrafts and trade credit.

An overdraft is an arrangement that lets a business spend more money than it has in its account, up to an agreed limit.

Trade credit is usually interest-free and aids cash flow, as the business buys stock now and pays later.

False.

Trade credit lets a business pay suppliers later — typically 30 to 90 days after receiving the goods.

An overdraft can be called in by the bank if it doubts the business's ability to repay.

Long-term sources include share capital, bank loans, crowdfunding, retained profit and venture capital.

Share capital is finance raised from the sale of shares in a limited company.

Retained profit is profit from previous years that is kept and reinvested in the business rather than paid to owners.

Crowdfunding raises finance from a large number of small investors on online platforms such as Kickstarter.

A bank loan is usually repaid, with interest, over two to ten years.

False.

Most venture capitalists demand a stake in the business and expect a say in how it is run.