Question 1

What is the break-even formula and how do I use it?

Accepted Answer

The break-even formula is: Break-even output = Fixed Costs ÷ (Selling Price – Variable Cost per Unit). The denominator (Selling Price – Variable Cost per Unit) is called the contribution per unit. For example, if fixed costs are £10,000, selling price is £20, and variable cost per unit is £10, then break-even = 10,000 ÷ (20-10) = 1,000 units. This means you need to sell 1,000 units to cover all costs.

Question 2

Why is cash flow more important than profit for a start-up?

Accepted Answer

Cash flow is vital for a start-up because bills must be paid with cash, not profit. A business can be profitable on paper (e.g., it has made sales on credit) but if customers don't pay on time, the business may not have enough cash to pay suppliers, rent, or wages. This can lead to insolvency – running out of cash and being forced to close. Profit is important for long-term success, but cash flow keeps the business running day-to-day.

Question 3

What is the difference between fixed and variable costs?

Accepted Answer

Fixed costs do not change with the level of output – they stay the same whether you produce 0 units or 1,000 units. Examples include rent, insurance, and salaries. Variable costs change directly with output – they increase as you produce more. Examples include raw materials, packaging, and piece-rate labour. Total cost = fixed costs + (variable cost per unit × quantity).

Question 4

How do I calculate profit?

Accepted Answer

Profit is calculated as Total Revenue minus Total Costs. Total Revenue = Selling Price × Quantity Sold. Total Costs = Fixed Costs + (Variable Cost per Unit × Quantity). So Profit = (Selling Price × Quantity) – [Fixed Costs + (Variable Cost per Unit × Quantity)]. For example, if you sell 500 units at £10 each, with fixed costs of £2,000 and variable cost per unit of £4, then profit = (500×10) – (2000 + 500×4) = 5000 – 4000 = £1,000.

Question 5

What sources of finance are available for a start-up?

Accepted Answer

Start-ups can use personal savings (own money), loans from friends or family (often low interest), bank loans (require a business plan and may charge interest), crowdfunding (raising small amounts from many people online), government grants (free money but competitive), and business angels (wealthy individuals who invest in exchange for equity). Each source has pros and cons – for example, savings don't incur debt but limit the amount available, while equity finance gives away ownership.

Question 6

How can I improve a negative cash flow forecast?

Accepted Answer

To improve a negative cash flow forecast, you can increase inflows (e.g., raise prices, offer discounts for early payment, take out a loan) or reduce outflows (e.g., negotiate longer payment terms with suppliers, delay non-essential purchases, reduce inventory levels). You could also arrange an overdraft facility with the bank as a safety net. The key is to ensure that cash inflows arrive before cash outflows are due.

Topic 1.3 Putting a business idea into practice

Topic Overview

Key Concepts

What You Need to Demonstrate

Marking Points

Examiner Tips

Common Mistakes

Frequently Asked Questions

Before You Start

Study Guide Available

Key Terminology

Likely Command Words

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Related Topics in EDEXCEL GCSE Business

E2E stub topic

Topic 1.1 Enterprise and entrepreneurship

Topic 1.2 Spotting a business opportunity

Topic 1.4 Making the business effective