AQA AS Business
UNIT 1
REVISION WORKSHOP
www.tutor2u.net
Today
Session
1
2
3
4
5
6
Topic
A Viable Business Idea
Crunching the Numbers
Break
Financing the Start-up
Understanding the Market
Lunch (back for 2.00 p.m.)
Quick quiz
Why Start-ups Fail
Evaluating the Start-up
Session 1
A Viable
Business Idea
www.tutor2u.net
Some Important Concepts
ENTERPRISE
RISK
RETURN
OPPORTUNITY
COST
Can you define them?
Have a Go!
One sentence for each
More on Risk
Imagine you decide to
invest your life savings
of £30,000 in setting
up a new Subway
franchise outlet
List 3 risks you are taking
Over to You!
More on Opportunity Cost
Whenever a decision is
made in business , there is
always an alternative that
was not chosen
This alternative is called
the opportunity cost
Why this is important
All businesses have
Particularly new or small
ones!
Over to You!
Great
businesses
usually start
with a good
idea
No point creating a product or
service unless people want it
Found a gap
in the
Market?
But is there a
market in
the Gap?
Assessing a New Business Idea
Rapstrap Now
Session 2
Crunching the
Numbers
www.tutor2u.net
What You Need to Calculate
•
•
•
•
•
•
Revenues (sales)
Costs – fixed and variable
Profit
Contribution & Break-even
Cash flow forecasts
Market share, size & growth (later)
Classifying Costs
• Variable costs
– Costs which change as output
varies
– Lower risk for a start-up: no
sales = no variable costs
• Fixed costs
– Costs which do not change when
output varies
– Fixed costs increase the risk of a
start-up
Fixed or Variable?
Fixed or Variable?
Calculating Profit or Loss
PROFIT =
TOTAL SALES
less
TOTAL COSTS
An Example
Sales
Costs
Profit or Loss?
£100,000
£75,000
£25,000 (profit)
£100,000
£125,000
£25,000 (loss)
Total sales > total costs
Total costs > total sales
Total sales = total costs
= Profit
= Loss
= Break-even
Your Turn!
Calculating Profit or Loss
£10,000
£6,500
£3,500
Contribution
• Contribution looks at the profit made on
individual products
• It is used in calculating how many items need to
be sold to cover all the business' total costs
(variable + fixed)
• Contribution is the difference between sales
and variable costs
Contribution - Formulas
Contribution = total sales less total variable
costs
Contribution per unit = selling price per unit
less variable costs per unit
Total contribution can also be calculated as:
Contribution per unit x number of units sold
Profit = Contribution less Fixed Costs
Contribution – Have a Go!
Contribution
4
8,000
11,000
1,250
Breakeven chart
Total sales
100
Sales and costs (£’000)
90
80
Total costs
70
60
50
Fixed costs
40
30
Variable costs
20
10
0
1
2
3
4
5
6
7
8
9
Units of Output (‘000)
10
Higher or lower?
Change
Higher selling price
Higher variable cost per unit
Increase in fixed costs
Effect on
Contribution per
Unit
Effect on
Break-even
Output
Higher or lower?
Effect on
Contribution per
Unit
Effect on
Break-even
Output
Higher selling price
Higher
Lower
Higher variable cost per unit
Lower
Higher
No change
Higher
Change
Increase in fixed costs
Cash flow forecast - example
Jan
Feb
Mar
Total
CASH INFLOWS
Investment
Sales
10,000
10,000
2,500
10,000
15,000
27,500
12,500
10,000
15,000
37,500
Raw materials
4,000
5,000
5,000
14,000
Wages & salaries
3,500
4,000
4,000
11,500
Marketing
2,500
1,000
2,000
5,500
Set-up costs
3,000
1,000
0
4,000
Other costs
2,000
1,000
1,000
4,000
Total inflows
CASH OUTFLOWS
Total outflows
15,000
12,000
12,000
39,000
NET CASH FLOW
-2,500
-2,000
3,000
-1,500
0
-2,500
-4,500
-2,500
-4,500
-1,500
Opening balance
Closing balance
Forecast is normally
produced by month
Net cash flow is the
difference each month
between cash inflows and
cash outflows
Opening balance is the
amount the business starts
with each month
Closing balance = opening
balance + net cash flow
Negative closing balance
suggests business needs
bank overdraft or additional
financing
Complete the missing numbers
How did you get on?
43
30
6
-5
1
1
8
Session 3
Financing the
Start-up
www.tutor2u.net
Which of these is a shortQ1
term source of finance?
A
B
Bank
overdraft
Share
capital
C
D
Bank
loan
Fixed
assets
A bank loan will NOT usually
Q2 involve which of the following?
A
B
Repayments of
the loan over
its term
Payment of
dividends out
of profits
C
D
Interest on the
outstanding
amount
Security
provided to
the bank
Q3
A
B
The typical investment by a
business angel into a startup is...
£5k to
£10k
Anything
above £1m
C
D
£500k to
£3.5m
£10k to
£750k
Q4
A
B
A startup needs finance to buy
fixed assets such as computers.
What is this known as?
Capital
expenditure
Revenue
expenditure
C
D
Working
capital
Start-up
losses
A startup will need to
Q5 finance...
A
B
Cash sales to
customers
Interest on
cash held at
the bank
C
D
Dividends
paid to the
bank
Pre-trading
losses
Key Issues for Start-up Finance
• How much?
– Enough v not too much
– Safety buffer
• When?
– All at once
– Drip feed / as needed
• Challenges
– Keeping control
– Staying afloat
Finance needed for…
Business Set-up
Day-to-day trading
Growth
Main sources of start-up finance
Internal Sources
Founder finance
(personal sources of
the entrepreneur)
Retained profits
External Sources
Credit cards
Bank loan
Bank overdraft
Friends & family
Business angels
Loans & grants
+ Don’t forget “Sweat”
Start-up
entrepreneurs
usually save cash
and costs by
working long hours
for nothing
Choosing suitable finance
Recommend two sources of finance for each business
Be prepared to justify your choices
Session 4
Understanding the
Market
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Some key terms
Demand
Market share
Elasticity of
demand
Niche segment
Write a short definition for each
Types of market
A market is
anywhere where
buyers and
sellers come
together to
transact with each
other
Local
markets
National
markets
Physical
markets
Electronic
markets
Factors that affect demand
Factors that affect demand
•
•
•
•
•
•
•
Prices
Incomes
Tastes & fashions
Competitor actions
Social & demographic
Seasonal
Government action
Market segmentation
Segment
B
Segment
C
Segment
D
Segment
A
Attractions of niche for a startup
• Smaller & fewer big competitors
• Chance to add value = better
profit margin
• Easier to reach customers
• Often higher growth of market
Analysing the market
There are three calculations you need to be able to
complete in order to analyse market data in Unit 1
• Market size (volume and value)
• Market growth (percentage growth)
• Market share (percentage of the
market owned by each product or
competitor)
Have a go!
Dannii & Cheryl are launching a new
fitness club in Chelsea. In the first
year, they expect to sell 500
memberships at £2,000 each. Next
year, the local luxury fitness market
is expected to grow to 2,500
memberships (this year – 2,250)
Evaluating the market opportunity
Watch the
video and then
plan your
answer to the
two questions
Session 5
Why Start-ups
Fail
www.tutor2u.net
What we’ll cover
• Motives for starting a business
• Aims and objectives of start-ups
• Business planning
• What can go wrong
Over to you!
Motives for being an entrepreneur
• Financial
– Capital gains
– Making a living
• Personal
– Proving people wrong
– Gaining control
– Building something
• Social
– Giving something back
Different Types of Start-up
Social
enterprises
Part-time
businesses
Lifestyle
businesses
Aims
&
Objectives
Ambitious
businesses
Business planning
• Two main purposes:
• A detailed plan for success
• A tool to raise finance
So what can go wrong
with a business plan?
Over to you!
Why Business Plans go wrong
• No market in the gap
– Poor market research & unrealistic plan
– Competitor response
• Good idea, poor execution
– Wrong people; poor management
– Growth is too quick (overtrading) or too slow
– Failure to manage cash flow
• External shocks
– Economic change (credit crunch, oil prices)
– Legal & social change
Building a good example answer
Silverjet
Founded: 2006
Product: Low-cost,
executive flights to
New York & Dubai
Price – from £999
Watch the video - then plan an answer
Session 6
Evaluating the
Start-up
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Putting it all together
• A tale of two start-ups
• Which would you invest in?
• Which one succeeded?
• Which one failed?
• Top tips for Unit 1 evaluation
A Tale of Two Start-ups
• Here are two reali-life start-up
stories
• Imagine you are a potential
investor
• What would you want to know?
Mucky Chips
ItsAWrap
What information would be useful to
help you decide whether to invest?
Mucky Chips - Introduction
A new business for potato
farmer Bob Mucky
His previous business went
bankrupt and his existing
business is performing poorly supplying potatoes to
supermarkets
The plan - use their own
potatoes to make hand-fried
potato chips
Mucky Chips – The Market
Market size - £4bn; 10
billion packets per year
Dominated by Pepsico
(Walkers) who have a 50%
market share
Many other small handfried chip makers
Investment needed - £1m
Mucky Chips – The plan
Small batch production using a own
secret, refined traditional recipe
Sell direct to independent retailers
(e.g. local delis)
Packaging - transparent packets so
customers can see what is inside
Will start small and test samples with
customers before investing in fullscale production facilities
Existing farm staff to be trained in all
aspects of chip production
ItsaWrap - Introduction
The ultimate wedding service
Idea of fashion expert Suzi Bianchi
who has obtained backing from a
variety of business angels
Product - manage wedding gift lists
on behalf of couples
Focus on high standards of
customer service
ItsaWrap – The Market
Market size £200m and
growing fast
But number of weddings in
decline
Main competitors are mass
market department stores –
e.g. John Lewis, M&S
ItsaWrap – The Plan
Strong cash flows – wedding guests pay
in advance for their gifts
Personal selling via high street
showrooms full of stock so customers
can browse potential gifts
Target customers – 30+ professionals
looking for special wedding gifts
Expect to manage 2,000 wedding lists p.a
- £3,000 each
Mucky Chips
ItsAWrap
Which one do you want to invest in?
Mucky Chips
ItsAWrap
Which one succeeded
Which one failed?
Tyrrells
Wrapit
AQA AS Business
UNIT 1
REVISION WORKSHOP
www.tutor2u.net