SHAFIQ FAKIR

EDEXCEL 9-1 BUSINESS GCSE

1.3.1

Business Aims and Objectives

 A business aim is different from a business objective

 All businesses need both but a business objective is a short term target which is usually
expressed numerically and has a short term time period attached to it e.g. an objective may be
to increase sales by 2% in the next 12 months

 A business aim is a longer term goal which does not necessarily have a numerical target
attached to it and is usually to be achieved over a longer period of time e.g. increasing brand
awareness

 Short term objectives should be framed in a way that allows long term aims to be achieved .
Thus, in the example above, if a business succeeds in increasing its sales by 2% in the next
twelve months, then it may also be able to increase its brand awareness over a longer period of
time as more and more customers buy the products of the business and are exposed to the
brand

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 The objectives and aims of a business may change as the business matures

 As a startup business, the aim may be survival and the objective may be to break-even over
the first 12 months of the life of the business

 As the business matures, the aims may change and so will the objectives:

AIMS OBJECTIVES
a) Launch new products a) Increase sales by 5% every year
b) Build a brand b) Increase brand awareness by 10% every year
c) Expand geographical presence c) Open at least 12 new branches every year
d) Improve employee engagement d) Keep labour turnover below 10% every year
e) Become the market leader e) Increase market share by 15% every year

 Breaking even means not making a profit or a loss over a period of one year

 Break-even is achieved when the total revenue of a business is equal to its total costs (variable
costs plus fixed costs) over one year

 Break even can also be defined by the statement that total contribution is equal to fixed costs
over the period of one year (see break even notes below)

 Labour turnover is defined as the proportion of staff who leave the business every year

 Labour turnover is calculated as:

Number of staff leaving during the year / average number of staff employed during the year

e.g. if a business has 46 staff at the start of the year and 12 leave and 14 new staff join then, at
the end of the year, the business will have 48 staff

The average number of staff during the year will be (46 + 48)/2 = 47

The labour turnover will be 12/47 = 25.5%

 Market share is defined as the percentage of a total sales in a market in one year that is
accounted for by the sales of one company

e.g. if the total sales of new cars in the USA is worth $4.7 billion and the sales of BMW in the
USA is $270 million, then the market share of BMW in the USA is 0.27bn / 4.7bn = 5.7%

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 The financial aims of a business include:

1. Breaking even
2. Making a certain level of total sales over one year
3. Making a certain level of total profit over one year
4. Achieving a certain level of market share

 For the individual entrepreneur, the goal may be financial security which means reducing the
volatility of his or her income (this means that the entrepreneur would like the business to
achieve profits which rise steadily year after year and do not go up and down dramatically). Of
course, this is not easy to achieve for any business

 There are many reasons why the aims and objectives of businesses may vary and some are
listed below:

1. The level of competition in the market --- some businesses operate in more
competitive markets than others and so their aims and objectives may have to be more
modest e.g. it may be impossible to increase market share by 10% a year because there
is just too much competition and a business may have to settle for an objective of
increasing sales by 2% a year or even less

2. The age of the business --- older businesses tend to have a more loyal customer base
and so can set more ambitious aims and objectives such as building a well-recognised
brand and increasing brand awareness by 10% a year. Startup businesses probably
would not have the resources to build a brand and may opt for aims like survival and
objectives like breaking even

3. The state of the economy --- when the economy suffers a negative shock such as
COVID, many businesses have to downgrade their aims and objectives. Similarly, when
the economy goes through a boom, businesses may increase their expectations and
change their aim from survival to expanding their geographical presence

4. The personality of the entrepreneur --- some entrepreneurs are generally more
ambitious and driven than others and may set higher aims and objectives for their
businesses but entrepreneurs should always be realistic and analyse the circumstances
of their business in a way which allows them to set achievable aims and objectives

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1.3.2

Business Revenues Costs and Profits

 Revenue defined as the income generated by a business from selling goods.

 Revenue is price multiplied by quantity e.g. if a business sells a product for $5 and sells 200
units a week, its revenue is $5 x 200 = $1000 per week

 Businesses also have costs and these are classified as FIXED and VARIABLE costs

 Fixed costs are those which do not vary with output over a period of time

e.g. a fixed cost may be the cost of renting a factory which will stay the same regardless of
whether the output of the factory is 2000 units a week or 3600 units a week

 Fixed costs can be graphed as below. No matter what the output per period, the fixed cost does
not change

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 Variable costs increase in total as output increases

e.g. raw materials used to manufacture goods are examples of variable costs. As a business
produces more goods, its total variable costs increase as shown in the graph below:

 The graph above also shows that the GRADIENT or SLOPE of the total variable cost line is the
VARIABLE COST per UNIT

 By adding together the fixed and variable costs of a business, we arrive at the total costs of
production as shown below:

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 Finally, we must add the TOTAL REVENUE line whose gradient will be steeper than the
total cost line because the business will always set the selling price of a good at a level
which is higher than its variable cost per unit

 If we graph the total revenue and total cost curves on the same axes, we can easily see
the break-even output of the business which is the level of output where the business
is making neither a profit nor a loss (total cost = total revenue)

 The business would normally expect to sell more than the break-even output and the
difference between break-even output and the expected level of sales is called the
MARGIN of SAFETY

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 The expected profit at the expected level of sales is given by the vertical distance
between the total cost and total revenue lines at the expected level of sales

 If a business borrows money, it must pay annual interest on the loan and this is a fixed
cost because the amount of interest paid depends on the amount borrowed and not
on the output of the business

 There are three factors which can change the break-even point of a business:

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1. A change in the selling price of the good (this will change the gradient of the
total revenue line)
2. A change in the variable cost per unit (this will change the gradient of the
variable cost line)
3. A change in the level of fixed costs (this will change the vertical level at which
the total cost line begins)

 All of the changes above will affect the level of output at which the total cost line
crosses the total revenue line (break-even output)

 The break-even level of output can also be calculated

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 The first step in the calculation is to find the CONTRIBUTION PER UNIT which is
defined as the difference between the selling price of a good and its variable cost per
unit

e.g. if a good costs $5 per unit to produce and is sold for $7 then the contribution per
unit is $7 - $5 = $2
If the total contribution generated from producing and selling goods over a period of
time is equal to the fixed costs over the same period, the business will break-even
Therefore, to find the break-even level of output, we simply divide the fixed costs by
the contribution per unit
e.g. if the business has fixed costs of $156,000 a year then its break-even level of
output is given by fixed costs / contribution per unit = $156,000 / $2 = 78,000 units a
year
If the business sells 78,000 units a year, it will avoid making a loss but also not make a
profit
If it sells less than 78,000 units a year, it will make a loss and if it sells more than
78,000 units a year, it will make a profit

 The key to all break-even calculations is the contribution per unit

 By comparing the total contribution with the level of fixed costs, the profit or loss over
a certain time period may be found

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1.3.3

Cash and Cash Flow

 Cash is how ultimately all businesses have to pay their day to day expenses (operating
expenses like rent which are also called overheads) as well their purchases of non-current
assets which do not happen every day but which are important to the growth of businesses

 Cash flow refers to an inflow or outflow of cash into or out of a business

 A cash inflow may happen for example when a business receives cash from a customer

 A cash outflow may happen for example when a business pays its landlord the rent for its office
or pays for a machine for its factory

 The difference between a cash inflow and a cash outflow is called the NET CASH FLOW of the
business over a period of time e.g. a year

 The net cash flow of a business does not have to be the same as the net profit of a business
and usually, these two numbers are not the same at all over the course of any particular year

 This is because businesses do not always receive cash from customers at the same time as they
make sales to them and they also do not always pay cash to suppliers at the same time as they
buy materials or assets from them

 If a business sells goods to a customer but receives the cash later it is called a CREDIT SALE

 If a business buys something from a supplier and pays for it later it is called a CREDIT
PURCHASE

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 The opposite of a credit sale is a cash sale and the opposite of a credit purchase is a cash
purchase

 The fact that businesses may sell goods for cash OR on credit and may also buy from suppliers
for cash OR on credit leads to the difference between net cash flows over a period of time and
net profit over that same period of time

 A revenue is recognised when a customer of the business agrees to buy a product and takes
delivery of it. The business may be selling to the customer on credit which means that the
customer gives no cash to the business when taking delivery of the product but it is still
recognised as a revenue even though there is no immediate cash inflow

 Similarly, a business may buy goods on credit from a supplier and the expense is recognised
when the goods are delivered to the business even though there is no immediate cash
outflow

 The profit of a business is the difference between the revenue and expenses of a business
over a period of time like a year but the possibility of credit sales and credit purchases means
that there is no necessary relationship between the profit of the business and its net cash
flow over the same period of time

 The net profit of a business may be the same as, more than or less than its net cash flow over
the same period of time

 To see this very clearly, imagine two businesses which have the same revenues and expenses
over a period of time as shown below:

BUSINESS 1 in year 1 BUSINESS 2 in year 1

Revenue $500,000 $500,000

Expenses $340,000 $340,000

PROFIT $160,000 $160,000

 The profits of the two businesses are identical as they have the same revenues and expenses
BUT suppose that business 1 sells all its products on credit giving customers two years to pay but
pays all its expenses in cash while business 2 sell all its products for cash but receives two years’
credit from its suppliers

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Business 1 will have no cash inflows in year 1 as all its sales are made on credit but it will have
cash outflows of $340,000 giving it a net cash flow of NEGATIVE $340,000

 Business 2 will have no cash outflows in year 1 because its suppliers give it two years to pay
while all goods sold to customers are sold for cash leading to a cash inflow of $500,000 and an
overall net cash flow of POSITIVE $500,000

 Thus, two businesses with the same net profit will have completely different net cash flows

 This shows that there is no necessary relationship between the net profit of a business and its
net cash flow over the same period of time

 Both profits and net cash flows of a business are important for its prospects and future

 Without profits, a business cannot grow in the long term because it will not have sufficient
profits to reinvest in buying more assets

 However, without a positive net cash flow in the short term, a business may run out of cash and
not be able to pay its day to day expenses including interest payments on a loan

 If this happens, the business is INSOLVENT and may be forced to sell assets by its lenders to pay
off not only the interest but the entire loan and this may prevent the business from continuing
to trade

 Because it is so important to the survival of a business to maintain a positive net cash flow,
businesses are constantly preparing and updating CASH FLOW FORECASTS which are estimated
predictions of cash inflows and outflows over a short term future period like the next six to
twelve months

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 The table below shows a cash flow forecast for a business split into four quarters ( a quarter of a
year is three months). It shows estimated cash inflows, cash outflow, the net cash flow and the
opening and closing balances in the bank account of the business at the start and end of each
quarter:

QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4

$’000 $’000 $’000 $’000
CASH INFLOWS
Cash sales 40 45 55 35
Cash from credit 7 20 23 16
sales
CASH OUTFLOWS
Rent (33) (33) (33) (33)
Wages (16) (17) (19) (19)
Electricity (2) (3) (4) (4)
NET CASH FLOW (4) 12 22 (5)
OPENING 10 6 18 40
BALANCE
CLOSING BALANCE 6 18 40 35

 This business is forecast to have negative net cash flows in quarters 1 and 4 and positive
net cash flows in quarters 2 and 3

 It is assumed that the business will begin the year with $10,000 in its bank account

Given the predictions of cash inflows and outflows, this cash flow forecast predicts that
the business will end the year with $35,000 in its bank account

 If a business draws up a cash flow forecast and is not satisfy with what its cash position
may be at the end of the future period, it can try to improve matters by increasing the
speed of cash inflows or reducing the speed of cash outflows

 Cash inflows may be speeded up by:

1. Finding ways to increase sales

2. Encouraging credit customers to pay faster for example by offering the
discounts if the pay within 30 days of buying the product

 Cash outflows may be reduced or pushed back in time by:

1. Negotiating discounts with suppliers

2. Negotiating longer credit periods with suppliers perhaps in return for buying
more from them

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1.3.4

Sources of Business Finance

All businesses need both short and long term finance

 Short-term finance is available to the business for less than one year

 Short-term finance is used to help the business overcome short-term cash flow
problems

 For example, if a business predicts that it may have difficulty in the near future paying all
its predicted cash outflows, it may apply for an overdraft from its bank

 An overdraft is a permission from the bank which allows the business to pay more
cash from its bank account than it actually has in the account

e.g. if a business has a balance of $3000 in its bank account buy expects to have to pay
an expense of $8000 very soon, it may apply for a $10,000 overdraft from its bank so
that the bank will allow the business to pay the $8000 and go $5000 overdrawn
temporarily until the next cash inflow comes in and restores the bank balance to a
positive number

 Overdrafts may be cancelled by the bank at any time and so should not be relied upon
for long periods of time

 Another type of short-term finance is trade credit

 This involves buying goods or raw materials from suppliers now and promising to pay
later (usually within one month)

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 This is effectively the same as borrowing money from the supplier for a short time and,
by delaying the cash outflow to the supplier, the business can improve its cash flow
position in the short term

 Long-term finance is called CAPITAL

 This means finance, which is available to a business for more than one year (long term)

 There are two basic types of finance available to a business --- DEBT CAPITAL and
EQUITY CAPITAL

DEBT CAPITAL

 Debt capital is capital that has to be repaid after a period of time with interest being
paid in the interim period (annually)

 Equity capital is the name given to capital which is provided by the OWNERS of a
business

 For a limited liability company, the owners are the SHAREHOLDERS

 Within DEBT CAPITAL, there are two forms: LOANS and BONDS

 Loans are given to a business by a bank

 A loan is a contract between a bank and a business and cannot be transferred to

another party. If the business fails to repay the loan or pay interest on the loan on time,
it is said to have DEFAULTED on the loan. If the business has defaulted because it lacks
the CASH, then it is said to be INSOLVENT (not BANKRUPT)

 A bond is a piece of paper which can be issued by large companies only

 Usually, a company has to have its shares listed on the STOCK MARKET in order to issue
bonds.

 Therefore, it is usually only PUBLIC LIMITED COMPANIES which can issue bonds, and
bonds are issued on the same stock market as the shares of the company

 A bond is also a contract between the company and the buyer of the bond but it is a
contract that be bought and sold between bondholders

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 A bond carries several pieces of information:

1. The FACE VALUE of the bond is how much is being borrowed by the firm for each bond
e.g. if the bond has a face value of $1000 then, for each bond issued, the company
borrows $1000 from the bondholders

2. The MATURITY DATE of the bond is when the company promises to pay back the bond’s
face value to whoever is holding the bond at maturity. Bonds can mature any number of
years after they are issued e.g. 5 years, 10 years all the way up to 30 years or longer
depending on how long the company feels it needs to borrow the money

3. The INTEREST RATE is also given on the bond and the longer the maturity of the bond,
the higher the interest rate

 Bonds are bought and sold between bondholders on the STOCK MARKET

 If a bondholder wants his or her money back earlier than the maturity date of the bond, he or
she must sell the bond on the stock market because the company has only promised to repay
the face value on the maturity date and not before

 Bonds usually carry a lower interest rate than loans because bondholders have the option of
recovering their money by selling the bond on the stock market and so are taking less of a risk in
buying a company bond than a bank is taking by issuing a loan

 In summary, there are two types of DEBT CAPITAL: bonds and loans

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 Any business, large or small, can apply for a loan but only large public limited companies can
issue bonds

EQUITY CAPITAL

 There are two forms of equity capital: SHARE CAPITAL and RETAINED PROFIT

 Retained profit is profit after tax which is reinvested by the managers of the business with the
permission of the shareholders

 The PROFIT AFTER TAX of a business belongs to the shareholders but, instead of taking it from
the business as a DIVIDEND, the shareholders often agree to allow the managers of a company
to reinvest the profit

 Using retained profit is an alternative to asking the shareholders to buy new shares in the
company.

 Both EQUITY CAPITAL and DEBT CAPITAL have advantages and disadvantages for a company

 Debt capital is usually cheaper for a company to issue than equity capital because shareholders
are taking more risk in buying shares than banks or bondholders and so they demand a greater
percentage return in their investment

 Dividends are not guaranteed every year

 Companies like MICROSOFT and APPLE often do not pay a dividend

 Also, the company is not promising to repay the shareholders their share capital unlike with
bonds and loans

 However, the great advantage of share capital is its FLEXIBILITY

 Because the company does not have to pay a dividend every year it is better able to control its
cash outflows

 But interest on loans and bonds has to be paid every year at the same time and the company
has no choice about it and so this puts pressure on the company’s cash flow

 DEBT CAPITAL: cheaper but less flexible than equity capital

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 EQUITY CAPITAL: more expensive for the company to use than debt capital but also more
flexible

 Therefore, businesses usually use a COMBINATION of DEBT and EQUITY CAPITAL

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