EDEXCEL BUSINESS for GCSE
Section 3
Putting a business idea
into practice
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
From idea to practice
• Starting a successful business requires
more than a great idea.
• It needs a clear plan, enthusiastic
leadership, effective organisation and …
a bit of luck!
• A good understanding of finance is also
required to keep sales above costs and
make a profit.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Estimating revenue
• (Sales) revenue comes from the number
of items a business sells within a given
time period multiplied by the price it
charges.
• Revenue = price x quantity sold.
• Estimating future sales revenue is useful
for a business but difficult to do.
• Why do you think this might be the case?
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Estimating costs
• Businesses need to be aware of two
types of cost:
– fixed costs do not change as output and
sales change (although they can increase
or decrease over time)
– variable costs do change as output and
sales change.
• Total costs = fixed costs + variable costs
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Fixed costs and variable costs
Fixed costs
Variable costs
– rent and rates
– machinery and
equipment
– staff salaries
– marketing
expenditure
– raw materials
– bought-in
components
– energy
– piece-rate
labour
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Profit
• Profit = revenue – costs.
• If costs are greater than revenue, a loss
is made.
• Profit forecasts are based on estimates
of revenues and costs.
• Sensible businesses will over-estimate
costs and under-estimate revenues.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Using profit
Typical uses of profit include:
• investing in extra property or machinery, to
help the business grow
• investing in more efficient systems or
technology, to cut costs
• funding the purchase of extra stocks of
materials or finished goods
• paying out dividends to shareholders, to give
them an annual return on their investment.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Dealing with losses
To return to profit, a business could:
• try to boost revenues without increasing
costs, e.g. by increasing prices
• try to reduce variable costs per unit, e.g. by
reducing the amount of waste
• try to reduce fixed costs, e.g. by moving to
cheaper premises.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
The importance of cash
• Cash refers to the money the firm holds
in notes and coin, as well as in its bank
account.
• Cash and profit are not the same!
• Without sufficient cash, a business
would not be able to pay its bills, could
get taken to court and be forced to close.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
How should cash be managed?
Some of the reasons why cash can be
hard to manage include:
• huge start-up costs
• low initial or seasonal sales
• late-paying customers.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
How should cash be managed?
A business should therefore:
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negotiate a generous overdraft facility
keep costs under control
try to keep cash flowing into the business
draw up regular cash flow forecasts.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Forecasting cash flow
• Cash flow forecasting means predicting
future flows of cash into and out of a firm’s
bank account.
• This gives an idea of the state of the firm’s
monthly bank balance (cumulative cash)
and predicts any negative cash flow.
• Cash flow forecasts are central to any
firm’s business plan.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Dealing with negative cash flow
• Improving cash flow can involve:
– cutting stock levels
– increasing credit from suppliers
– reducing credit given to customers.
• Failing to deal with negative cash flow
can lead to insolvency!
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Raising finance
• Three questions need asking:
– How secure is the source of finance?
– How expensive is the source of finance?
– Is enough finance being raised?
• Why do you think these questions are
important?
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Sources of finance
• Long term, e.g. shares, loans, venture
capital, profit.
• Medium term, e.g. loans, leasing.
• Short term, e.g. overdrafts, trade credit.
• The type of finance used will depend on
why the finance is needed!
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Start-up objectives
Starting a new business is usually based
on one of the following:
• a financial objective, e.g. to get rich
• a business mission, e.g. to prove that an
idea works
• a social mission, aimed at helping the wider
community.
© 2009 Ian Marcousé and Naomi Birchall
EDEXCEL BUSINESS for GCSE
Now make sure you understand…
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billion
business plan
cash
cash flow
cash flow forecast
cumulative cash
dividends
fixed costs
insolvency
liquidation
mission
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negative cash flow
net monthly cash
patent
profit
sales forecasts
sales revenue
share capital
total costs
variable costs
venture capital
© 2009 Ian Marcousé and Naomi Birchall