Page 5: Funding and the importance of profit
New businesses need money to:
- get started: e.g. buy fixtures and fittings, machinery and equipment, often referred to as 'initial one-off costs'
- pay the costs of operating the business e.g. wages, rent, rates, heating and lighting.
Start up finance includes:
- the owner's (or owners') own funds (including share capital in the case of a private company)
- bank loans, or loans from individuals
- a bank overdraft
- a mortgageto buy property
- trade credit, where suppliers offer a set period (usually between one and three months) to pay for supplies
- hire purchaseand leasing agreements, under which firms rent items such as photocopiers and vehicles.
Sources of finance need to be matched to the time period of the finance e.g. mortgages can be for up to 25 years whereas overdrafts and trade credit are for much shorter periods. Entrepreneurs must always make sure that they have enough cash coming into the business to pay back money they have borrowed both in the short and long term.
An effective marketingplan usually covers 4 key elements known as the 4 Ps:
- Place and
Making a profit is always important in running a business. Without profits, a business is not able to expand, and cannot take on more employees, or make contributions to the community. Eventually it will cease to exist. Michael Marks made a profit from selling small items at a penny each, therefore he was able to expand. He would have worked out what is called gross profit by deducting the overall cost of all of the stock he bought from the income he generated from sales.
So his gross profit was: Gross Profit = Sales - Cost of Sales
However, the gross profit is not the final profit. It is simply the profit from trading before all the operating costs of running the business have been taken away. To get a figure for net profit we must deduct these operating costs from gross profit. Examples of operating costs would include the cost of lighting, heating, salaries, advertising, rents and business rates.
Promoting a business
New businesses have to be promoted. Promotion is a cost to the business, but without promotion most people will not know of its existence. The best form of promotion is recommendation from a satisfied customer. Other forms include local newspaper and cinema advertising, flyers through people's doors and signs in a shop window. To promote your business effectively you need to be continually aware of your customers' needs, your market place and your competitors' activities. These factors are all important in maintaining, developing and expanding your business.