1.3

Question 1

What is a business aim?

Answer 1

A long-term aspiration of a business, e.g. to become the market leader.

Question 2

What is a business objective?

Answer 2

A specific, measurable, achievable, relevant, and time-bound target (SMART target) to achieve an aim.

Question 3

Give an example of a business aim and an associated objective.

Answer 3

Aim: become market leader. Objective: increase sales by 25% in 3 years.

Question 4

What is sales revenue?

Answer 4

The value of sales made by a business, calculated as: Selling price × Number of units sold.

Question 5

Formula for total costs?

Answer 5

Total costs = Fixed costs + Variable costs.

Question 6

Formula for total variable costs?

Answer 6

TVC = Variable cost per unit × Quantity.

Question 7

What are fixed costs?

Answer 7

Costs that do not change with output, e.g. rent, insurance.

Question 8

What are variable costs?

Answer 8

Costs that change with output, e.g. raw materials, wages of production workers.

Question 9

Give an example of a business with a social entrepreneurship objective.

Answer 9

TOMS Shoes donates one pair of shoes for every one sold.

Question 10

Give an example of market share as an objective.

Answer 10

Costa Coffee had 8% of UK out-of-home coffee market in 2020.

Question 11

Give an example of sales revenue.

Answer 11

Apple Music’s revenue from selling downloads is sales revenue.

Question 12

Why is survival often the most important aim for start-ups?

Answer 12

60% of UK start-ups fail within 3 years; survival is crucial before profit.

Question 13

Evaluate one advantage of businesses setting clear aims and objectives.

Answer 13

They align employee efforts and guide business growth, but may be too rigid in dynamic markets.

Question 14

Why might a family-owned business have different aims to a corporation?

Answer 14

They may prioritise long-term stability and legacy over short-term profit.

Question 15

Why might reducing costs negatively affect a business?

Answer 15

Cheaper raw materials may reduce quality; cutting wages may harm customer service.

Question 16

Calculate sales revenue: 200 units sold at £15 each.

Answer 16

£3,000

Question 17

Fixed costs = £200. Variable cost per unit = £60. Output = 3. Calculate total costs.

Answer 17

FC + VC×Q = 200 + (60×3) = £380

Question 18

If sales revenue = £10,000 and total costs = £8,000, what is profit?

Answer 18

£2,000

Question 19

A firm relocates to reduce rent by £500/month. How will this affect fixed costs?

Answer 19

Fixed costs decrease by £500/month, improving profitability if revenue stays constant.

Question 20

What is profit?

Answer 20

Profit is the money left after all costs are subtracted from revenue.

Question 21

What happens if costs exceed sales revenue?

Answer 21

The business makes a loss.

Question 22

What is gross profit?

Answer 22

The difference between sales revenue and cost of sales (direct production costs).

Question 23

Formula for gross profit?

Answer 23

Gross Profit = Revenue - Cost of Sales

Question 24

What is net profit?

Answer 24

Gross profit minus operating expenses and interest.

Question 25

Formula for net profit?

Answer 25

Net Profit = Gross Profit - (Operating Expenses + Interest)

Question 26

What is a profit margin?

Answer 26

The percentage of revenue that is profit after costs are deducted.

Question 27

Why are profit margins useful?

Answer 27

They allow performance comparison across years and between businesses.

Question 28

What does a higher profit margin indicate?

Answer 28

That a larger share of revenue is being converted into profit.

Question 29

Formula for Gross Profit Margin?

Answer 29

(Gross Profit ÷ Sales Revenue) × 100

Question 30

Formula for Net Profit Margin?

Answer 30

(Net Profit ÷ Sales Revenue) × 100

Question 31

What is the breakeven point?

Answer 31

The number of units a business must sell so total revenue = total costs.

Question 32

Formula for breakeven point?

Answer 32

BEP = Fixed Costs ÷ (Selling Price - Variable Cost per unit)

Question 33

How is breakeven shown on a chart?

Answer 33

The point where the total revenue line crosses the total cost line.

Question 34

In the A2B example, what was the breakeven point?

Answer 34

324 units.

Question 35

What does the margin of safety represent?

Answer 35

The number of units sold above the breakeven point.

Question 36

Formula for margin of safety?

Answer 36

Margin of Safety = Actual Sales - Breakeven Sales

Question 37

On a breakeven diagram, why are fixed costs shown as horizontal?

Answer 37

They do not change with output.

Question 38

On a breakeven diagram, why does the total cost line slope upwards?

Answer 38

Because variable costs increase with output.

Question 39

On a breakeven diagram, how do you identify profit at a given output?

Answer 39

It is the vertical difference between total revenue and total costs.

Question 40

Why is a large margin of safety preferable?

Answer 40

It means the business can withstand a fall in demand and still make profit.

Question 41

Calculate Gross Profit: Revenue = £50,000, Cost of Sales = £30,000

Answer 41

Gross Profit = £20,000

Question 42

Calculate Net Profit: Gross Profit = £20,000, Expenses + Interest = £5,000

Answer 42

Net Profit = £15,000

Question 43

Calculate Gross Profit Margin: Gross Profit = £20,000, Revenue = £50,000

Answer 43

(20,000 ÷ 50,000) × 100 = 40%

Question 44

Calculate Net Profit Margin: Net Profit = £15,000, Revenue = £50,000

Answer 44

(15,000 ÷ 50,000) × 100 = 30%

Question 45

Breakeven calculation: Fixed Costs = £8,000, Selling Price = £40, VC/unit = £15

Answer 45

BEP = 8000 ÷ (40-15) = 320 units

Question 46

Margin of Safety calculation: Actual Sales = 450 units, BEP = 324 units

Answer 46

Margin of Safety = 126 units

Question 47

Why is cash important to a business?

Answer 47

Without cash, a business cannot pay suppliers, employees, or bills, even if it is profitable.

Question 48

What is insolvency?

Answer 48

When a business cannot pay its debts because it has run out of cash.

Question 49

Exam Q: Why can a profitable business fail?

Answer 49

Because it may lack cash to cover day-to-day expenses (cash flow problems).

Question 50

What is a cash-flow forecast?

Answer 50

A prediction of inflows and outflows over a period of time.

Question 51

What is net cash flow and how is it calculated?

Answer 51

Net cash flow = Total inflows - Total outflows.

Question 52

What is an opening balance?

Answer 52

The amount of cash available at the start of a period (last month’s closing balance).

Question 53

What is a closing balance?

Answer 53

Opening balance + Net cash flow.

Question 54

Numerical: If inflows = £4600 and outflows = £4540, what is net cash flow?

Answer 54

£60 (positive net cash flow).

Question 55

Numerical: If opening balance = £500 and net cash flow = £60, what is closing balance?

Answer 55

£560.

Question 56

Numerical: In March, inflows = £3100, outflows = £3940. Calculate net cash flow.

Answer 56

-£840 (negative cash flow).

Question 57

What are two short-term sources of finance?

Answer 57

Overdrafts and trade credit.

Question 58

What is an overdraft?

Answer 58

Borrowing from a bank account beyond available funds, interest charged only on amount used.

Question 59

One advantage of overdrafts?

Answer 59

Flexibility and quick access to cash.

Question 60

One disadvantage of overdrafts?

Answer 60

High interest, may be recalled anytime.

Question 61

What is trade credit?

Answer 61

Agreement to buy goods now and pay later, usually 30–90 days.

Question 62

One advantage of trade credit?

Answer 62

Improves cash flow as payment is delayed.

Question 63

One disadvantage of trade credit?

Answer 63

Suppliers may prioritise quicker-paying customers.

Question 64

Name three long-term sources of finance.

Answer 64

Share capital, bank loans, retained profit, crowdfunding, venture capital.

Question 65

What is share capital?

Answer 65

Money raised by selling shares in a company.

Question 66

One advantage of share capital?

Answer 66

Large amounts can be raised quickly.

Question 67

One disadvantage of share capital?

Answer 67

Shareholders expect dividends and voting rights.

Question 68

What is a bank loan?

Answer 68

Borrowed money repaid with interest over time.

Question 69

One advantage of bank loans?

Answer 69

Fixed interest rates help planning.

Question 70

One disadvantage of bank loans?

Answer 70

Assets at risk if repayments missed.

Question 71

What is crowdfunding?

Answer 71

Finance from many small investors online, often with rewards.

Question 72

One advantage of crowdfunding?

Answer 72

Access to funds and marketing at the same time.

Question 73

One disadvantage of crowdfunding?

Answer 73

Must hit target or receive nothing.

Question 74

What is retained profit?

Answer 74

Profit kept in the business instead of paid out to owners.

Question 75

One advantage of retained profit?

Answer 75

No repayment or interest required.

Question 76

One disadvantage of retained profit?

Answer 76

Shareholders don’t receive dividends.

Question 77

What is venture capital?

Answer 77

Investment from individuals/companies in exchange for a stake in the business.

Question 78

One advantage of venture capital?

Answer 78

Access to finance and business expertise.

Question 79

One disadvantage of venture capital?

Answer 79

Loss of control as investors demand influence.