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```					    AQA AS Business

UNIT 1
REVISION WORKSHOP

www.tutor2u.net
Today
Session   Topic
2      Crunching the Numbers
Break
3       Financing the Start-up
4       Understanding the Market
Lunch (back for 2.00 p.m.)
Quick quiz
5       Why Start-ups Fail
6       Evaluating the Start-up
Session 1

A Viable

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Some Important Concepts

ENTERPRISE      RISK

OPPORTUNITY
RETURN
COST

Can you define them?
Have a Go!

One sentence for each
More on Risk
Imagine you decide to
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
always an alternative that
was not chosen
This alternative is called
the opportunity cost
Why this is important

Particularly new or small
ones!
Over to You!
Great
usually start
with a good
idea
No point creating a product or
service unless people want it

Found a gap       But is there a
in the               market in
Market?               the Gap?
Rapstrap Now
Session 2

Crunching the
Numbers

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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    = Profit
Total costs > total sales    = Loss
Total sales = total costs    = Break-even
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
90
80
Sales and costs (£’000)

70                                      Total costs
60
50
Fixed costs
40
30
Variable costs
20
10
0
1    2   3   4   5   6     7     8     9      10
Units of Output (‘000)
Higher or lower?
Change                             Effect on        Effect on
Contribution per   Break-even
Unit           Output

Higher selling price

Higher variable cost per unit

Increase in fixed costs
Higher or lower?
Change                             Effect on        Effect on
Contribution per   Break-even
Unit           Output

Higher selling price                Higher           Lower

Higher variable cost per unit        Lower           Higher

Increase in fixed costs           No change          Higher
Cash flow forecast - example
Jan      Feb      Mar     Total      Forecast is normally
CASH INFLOWS                                              produced by month
Investment         10,000                     10,000
Sales               2,500   10,000   15,000   27,500      Net cash flow is the
difference each month
Total inflows      12,500   10,000   15,000   37,500   between cash inflows and
cash outflows
CASH OUTFLOWS
Raw materials       4,000    5,000    5,000   14,000
Wages & salaries    3,500    4,000    4,000   11,500    Opening balance is the
Marketing           2,500    1,000    2,000    5,500   amount the business starts
Set-up costs        3,000    1,000       0     4,000       with each month
Other costs         2,000    1,000    1,000    4,000
Closing balance = opening
Total outflows     15,000   12,000   12,000   39,000     balance + net cash flow
Negative closing balance
NET CASH FLOW      -2,500   -2,000    3,000   -1,500    suggests business needs
Opening balance        0    -2,500   -4,500
financing
Closing balance    -2,500   -4,500   -1,500
Complete the missing numbers
How did you get on?

43
30
6
-5    1
1    8
Session 3

Financing the
Start-up

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Which of these is a short-
Q1
term source of finance?
Bank             Bank
A    overdraft   C    loan
Share            Fixed
B    capital     D    assets
A bank loan will NOT usually
Q2 involve which of the following?

Repayments of       Interest on the
A   the loan over
its term
C   outstanding
amount
Payment of          Security
B   dividends out
of profits
D   provided to
the bank
The typical investment by a
Q3   business angel into a startup is...

£5k to               £500k to
A     £10k           C     £3.5m
Anything             £10k to
B     above £1m      D     £750k
A startup needs finance to buy
Q4   fixed assets such as computers.
What is this known as?
Capital              Working
A     expenditure    C     capital

Revenue              Start-up
B     expenditure    D     losses
A startup will need to
Q5 finance...

Cash sales to       Dividends
A   customers       C   paid to the
bank
Interest on
B   cash held at
the bank
losses
Key Issues for Start-up Finance
• How much?                  Finance needed for…
– Enough v not too much
– Safety buffer
• When?
– All at once             Day-to-day trading
– Drip feed / as needed
• Challenges                      Growth
– Keeping control
– Staying afloat
Main sources of start-up finance
Internal Sources      External Sources
Founder finance        Credit cards
(personal sources of   Bank loan
the entrepreneur)
Bank overdraft
Retained profits
Friends & family
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
Niche segment
demand

Write a short definition for each
Types of market
Local
markets
A market is
anywhere where       National
sellers come
together to      Physical
transact with each   markets
other
Electronic
markets
Factors that affect demand
Factors that affect demand
•   Prices
•   Incomes
•   Tastes & fashions
•   Competitor actions
•   Social & demographic
•   Seasonal
•   Government action
Market segmentation

Segment
C
Segment
B
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
two questions
Session 5

Why Start-ups
Fail

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What we’ll cover
• Motives for starting a business
• Aims and objectives of start-ups
• 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                Lifestyle

Part-time                           Ambitious
&
Objectives
• Two main purposes:
• A detailed plan for success
• A tool to raise finance
So what can go wrong
Over to you!
• 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
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

www.tutor2u.net
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
Mucky Chips - Introduction
farmer Bob Mucky
bankrupt and his existing
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 hand-
fried chip makers
Investment needed - £1m
Mucky Chips – The plan
Small batch production using a own
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 full-
scale 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
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
Personal selling via high street
showrooms full of stock so customers
Target customers – 30+ professionals
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

UNIT 1
REVISION WORKSHOP

www.tutor2u.net

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