Chapter 3 putting a business idea into practice


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Chapter 3 putting a business idea into practice

  1. 1. Putting a BusinessIdea into Practice-Objectives when starting up- The qualities shown by entrepreneurs-Estimating revenues, costs and profits- Forecasting cash flows- Obtaining finance
  2. 2. Objectives When Starting Up Objectives Non- Financial Financial Profit Sales Something Being your To helpSurvival maximisatio maximisatio to be proud own boss others n n of
  3. 3. Qualities Shown by Entrepreneurs Determined Initiative Risk Taking Decision Planning Persuasive making Leader Lucky
  4. 4. Revenue• Any money received by a business [from selling goods or services]• The total amount of revenue is calculated by: Total Revenue = Price x Quantity• A business can forecast its revenue by: > Estimating the quantity it will sell by looking at its market research > Deciding what price they will charge for each unit
  5. 5. Costs• The costs of a business is the total amount of money it spends on making its goods or servicesFixed Costs – Indirect costs/ Over heads • Rent • SalariesVariable costs – Direct costs • Raw materials • Hourly wages• It is calculated using the following formula Total Cost = Fixed costs + Variable costs
  6. 6. Profits and Loss• Businesses receive money from selling goods and services• They also have to pay costs in order to make the goods or provide their services• Profit can be calculated using the formula: Profit = Sales revenue – Total cost
  7. 7. Profit• when sales revenue is greater than costsLoss•When sales revenue is less than costs
  8. 8. The Cash Flow Forecast• A cash flow forecast helps a business estimate: - How much fixed costs will be - How much it will sell - How much it will cost to make what is sold• A cash flow forecast is a very important document and tries to predict when cash is expected to come into and leave a business over a period of time
  9. 9. Inflows Outflows• Money that a • Money that a business receives business spends• Sales revenue • Wages and salaries• Grants • Raw materials• Loans • Utilities• Capital • Rent and business rates • Interest • Tax • equipment
  10. 10. A Cash Flow ForecastReceiptsPayments NetIn/outflow
  11. 11. What Affects Cash Flow Speed of cash flowing in and out Stock Levels: Credit Terms: Materials a business The time betweenmust buy to make their receiving goods and product paying for them
  12. 12. It can be used to obtain Businesses can spotloans since lenders can see problems before they how much cash is flowing happen and make into the business changes Uses of Cash Flow Businesses can decide what they want to do with excess cash
  13. 13. Golden Rules About Cash Flow• Money is only recorded when cash changes hands• It does not record profit• The closing balance of one month is the opening balance of another month• A negative closing balance does not mean that the firm is bankrupt
  14. 14. Why Do Firms Need Finance• To expand the business• To buy new equipment• To buy new premises• To buy stocks• To pay bills• To cover a fall in demand• To pay workers• To start a new business
  15. 15. Different Types of Finance Types of FinanceInternal External- Money obtained within a business - Money obtained from outside the- Using this type of finance is business (eg. Loan)cheaper but it means the money - This usually requires interest to becant be used for anything else paid on the money obtained
  16. 16. Source of Finance External • Long Term • share/ venture capital • mortgage • Government grants • Short term • Bank overdraft • Hire Purchase • Leasing • Bank loan Internal • Retained profit • Owners funds • Sales of assets • Changing stock levels • Changing credit terms