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AQA AS Business

UNIT 1
REVISION
WORKSHOP

www.tutor2u.net
Today
Session Topic
1 A Viable Business Idea
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
Business Idea

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Some Important
Concepts
ENTERPRIS
RISK
E
OPPORTU
RETURN NITY
COST

Can you define


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
Why this is
important
Over to You!
Great
businesse
s usually
start with
a good
idea
No point creating a
product or service unless
people want it
Found a But is
gap in the there a
Market? market in
the Gap?
Assessing a New
Business Idea
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
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
Contribution – Have
a Go!
Contribution

4
8,000
11,000
1,250
Breakeven chart
Total sales
100
90
80
Sales and costs

70 Total costs
(£’000)

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?
Higher or lower?
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
NET CASH FLOW -2,500 -2,000 3,000 -1,500
Negative closing balance
suggests business needs
Opening balance 0 -2,500 -4,500 bank overdraft or additional
Closing balance -2,500 -4,500 -1,500 financing
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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Q Which of these is a
1 short-term source
of finance?
A Bank
overdra C Bank
loan
ft
B Share
capital D Fixed
assets
Q A bank loan will NOT
2 usually involve which
of the following?

A C
Repaymen Interest on
ts of the the
loan over outstandin
its term g amount

B D
Payment Security
of provided
dividends to the
out of bank
profits
Q The typical investment
3 by a business angel
into a startup is...

A £10k C
£5k to £500k
to
£3.5m
B g above D
Anythin £10k
to
£1m £750k
Q A startup needs finance
to buy fixed assets such
4 as computers. What is
this known as?
A C
Capital Workin
expendit g
ure capital

B D
Revenue Start-
expendit up
ure losses
Q A startup will need to
5 finance...
Dividen
A C
Cash
sales to ds paid
customer to the
Interest bank
B D
s Pre-
on cash
trading
held at
losses
the bank
Key Issues for Start-up
Finance
• How much? Finance needed
– Enough v not too for…
much Business Set-
– Safety buffer up
• When? Day-to-day
– All at once trading
– Drip feed / as
needed Growth
• Challenges
– Keeping control
– Staying afloat
Main sources of start-
up
Internal
finance
External
Sources Sources
Founder finance Credit cards
(personal sources Bank loan
of the
entrepreneur) Bank overdraft

Retained profits Friends & family


Business angels
Loans & grants
+ Don’t forget
“Sweat”
Start-up
entrepreneur
s usually save
cash and
costs by
working long
hours for
nothing
Choosing suitable
Recommend finance
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
Market
Demand
share

Elasticity Niche
of demand segment

Write a short definition


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

B Segm
ent
D
Segmen
t
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

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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
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 ItsAWrap
Chips

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
hand-fried 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 full-scale
production facilities
Existing farm staff to be
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 ItsAWrap
Chips

Which one do you want to


invest in?
Mucky ItsAWrap
Chips

Which one succeeded


Which one failed?
Tyrrells Wrapit
AQA AS Business

UNIT 1
REVISION
WORKSHOP

www.tutor2u.net