What is a cost?
An amount a business pays for a good or service
What is a fixed cost?
Costs that do not change with the output (amount business sells/produces) that must always be paid
What are some examples of fixed costs?
- Rent
- Salary
- Utility bills
- Business rates
- Insurance
- Taxes
What is a variable cost?
Costs that change depending on what the business produces
What are some examples of variable costs?
- Wages
- Stock/raw materials
- Gas bills/electricity
- Marketing (e.g. increase at Xmas as more demand)
What is the formula to work out total costs?
total costs = fixed costs + variable costs
What is price?
How much you sell a product for to your customers
What is revenue?
All the money that comes into a business
What is the formula to work out revenue?
Revenue = SPPU (selling price per unit) x output
What is the formula to work out profit?
Profit = sales - total costs
Why is revenue important to a business?
- Main source of income for business
- Helps business break even/make a profit
- Helps cover fixed costs
- Business needs to decide whether rely on sales by value (number sold) or value (monetary worth of sales, e.g. higher quality) when deciding on price
Why is profit important to a business?
- Main aim of most businesses
- Provides return on investments (can decide if worth it)
- Indication of performance
- Can be used to reward shareholders/staff
- Can show if right decisions being made for business
- See how they’re managing costs
What is retained profit?
- Profit not given to the owner of the business, but kept back to be spent within the business. Aka undistributed profit
- No interest/dividends
What is overdraft?
Borrowing money from a bank by withdrawing more money than is actually in a current account. Interest is charged on the amount overdrawn
What is equity/equity capital?
The monetary value of a business which belongs to the business owners. In a company this would be the value of their shares
What is a loan?
Borrowing a sum of money which then has to be repaid with interest over a period of time, typically in fixed monthly instalments
What is a mortgage?
A loan where property is used as security
What is security/collateral?
Assets owned by a business which are used to guarantee repayment of a loan. If the business fails to pay off the loan, the lender can sell what has been offered as security to get the repayment
What are the main sources of finance?
- Bank loan
- Overdraft
- Owner’s savings (equity capital)
- Friends + family
- Inviting shareholders
- Re-mortgage house
- Government grants
What are the advantages of using an overdraft as a source of finance?
- Guaranteed to get it, can’t get refused
- Easy + quick
- No fixed repayments, can pay whenever
What are the disadvantages of using an overdraft as a source of finance?
- Very high fees
- Very high interest
What are the advantages of using a bank loan as a source of finance?
- Told upfront how much to repay + when, plan ahead
- Reliable, not going to need the money back any sooner than agreed
What are the disadvantages of using a bank loan as a source of finance?
- High interest rates
- Not flexible, can’t carry over if can’t afford one month
What are the advantages of using friends and family as a source of finance?
- Usually more flexible on repayments
- No interest
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Unit 146
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Marketing Mix 1140
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Section 9 - People in Business101
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Section 1 - Starting a Business59
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Section 2 - Marketing47
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Section 3 - Finance55
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Section 4 - People in Business15
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Section 5 - Operations Management20
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Section 6 - The Business Organisation28
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Section 7 - Marketing52
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Section 8 - Finance29
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Section 10 - Organisational Structure34
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Unit 1 - Keywords67
