AY Honors/Business/Answer Key

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1. Define the following terms:

a. Break Even

b. Business

c. Business Plan

d. Capital

e. Distribution

f. Interest

g. Micro business

h. Price

i. Product

j. Production

k. Profit

l. Promotion

m. Service

n. Target market

2. Describe three ways in which a business may be conceived

The best business ideas are found at the intersection of 6 considerations, which we can remember as the 6 C's.

1. Customers

Your business will need customers and you must determine who the customers are and discover what the customers really want. The bankruptcy rolls are filled with former businesses which were based on what the business person THINKS the potential customers want. Do not assume that other people want what you want. You must do market research with real potential customers. Do not assume that your friends and family will tell you the truth about your idea because few people are willing to give honest negative feedback to someone close to them.

Also, a business with only one customer is more like a subcontractor or type of employee. If you rely on only one customer that customer controls you and can easily put you out of business. Figure out how you will diversify your customer base.

2. Compelling

A great business idea has to be something you care about. You will be spending a lot of time on your business, selling others on your business and its products and investing your money in the business. If you don't have a passion for the business your chance of failure is very high, even if all the other C's are covered. Equally important, your product must be compelling to the potential customers. Unless you offer something they absolutely have to buy (basic utilities for example) customers who think the product is just interesting are useless - you need people who will make the purchase.

3. Competency

If the business does not fit your skills and abilities you should not do the business until you acquire the appropriate skills. There might be a great potential business for a dentist in your town but if you have not graduated dental school it is not the business for you. Other cases might not be so obvious. Think about the technical, legal, sales, and other aspects of the business. If you can't do everything, and most of us can't, you will need to hire other people. Can you afford and competently supervise these specialists?

4. Capital

The business must be financially feasible. Every business has setup costs, equipment costs, cost of space. You will need enough capital to get your business set up, and to expand it over time.

5. Cashflow

Beyond the required capital, most business lose money during start up. You will need working capital (money to cover short term differences between cash inflows and outflows). Many businesses fail by running out of money because the management misjudged the cashflow situation. This problem plagues businesses that grow slower than anticipated and those that grow faster than planned for. Fast growth requires investment in people, equipment, receivables, inventory etc and this can run even an otherwise highly successful business out of money.

6. Competition

Every business has direct and indirect competition. You must evaluate your competition carefully to understand if and how you can differentiate your business from the competition successfully.

A Pathfinder Club as a Business Idea

Discuss with your Pathfinders a business they are familiar with - which could be large or small, then consider stretching their minds by analysing their Pathfinder Club as a business.

In many ways, your Pathfinder Club is a (non-profit) business. The club needs customers (children between the ages of 10-15). The most obvious potential customers are children and teens within your local church, but children in the wider community are also welcome to participate, as are children from nearby churches. If the Pathfinder Club is the business, the Pathfinders are the customers.

We know that many kids like Pathfinders, but do they really want it? There would be no demand for Pathfinders at 9 AM Tuesday morning because the kids are in school. We also need to craft the Pathfinder program to be exciting and appealing to potential customers. Too much book work without enough hands on activities will not make happy customers.

If you were thinking about leading a Pathfinder Club you'd better find it compelling because you are signing up for a big job. You also need to be able to make it compelling to your customers and their parents.

Obviously a potential leader needs to have leadership skills, and be willing and able to acquire lots of skills, just like in a business.

A new Pathfinder Club needs capital for uniforms, flags, tents, gear, and so on. It also needs cashflow from the sponsoring church, dues, fundraising etc. Without capital and cashflow your club will not have the things it needs to run, or deliver the product (club experience and fun) to the customers.

Just like any business, a Pathfinder Club has direct and indirect competition. Nearby Pathfinder Clubs (within driving distance) are direct competition because a Pathfinder might move over to a bigger/most successful/better lead/more fun Pathfinder Club. Scouts/Girl Guides are also direct competitors offering similar (though not spiritual) programs. Indirect competitors include competitive sports teams, non-competitive recreational activities, or anything else that can use up a Pathfinder's free time, even video games.

There are far more ways you should NOT come up with a business idea.

5. Show how you determine

b. Break-even point

The break-even point (BEP) in economics, business, and specifically cost accounting, is the point at which total cost and total revenue are equal: there is no net loss or gain, and one has "broken even." A profit or a loss has not been made, although opportunity costs have been "paid", and capital has received the risk-adjusted, expected return. In short, all costs that needs to be paid are paid by the firm but the profit is equal to 0.

For planning, you will need to figure out three numbers and then graph or spreadsheet them. These are:

• Expected average revenue per unit
• Fixed costs - those costs that stay the same regardless of how many or few units you sell. Rent, basic staff, and utilities are usually fixed costs.
• Variable costs, expressed per unit at various sales levels.

There are actually two break even points. The first is a theoretical calculation of what level of sales in an accounting period (like a month or quarter) that results in the business no longer losing money. The second to occur is where the business has enough cumulative sales over time to offset all the expenses to date. It is also called getting out of the red and into the black because negative numbers in accounting reports are often printed in red ink while positive numbers are printed in black ink.

6. Discuss ways in which the profits of a company can be used?

Profits are used in one or a combination of these ways depending on the objectives of the company:

• dividends to shareholders
• to increase the working capital (cash on hand)
• to buy assets or otherwise invest in growing the business, including increases in receivables
• to retire debt

8. Develop a business plan for at least one of your ideas from #7 above. Include the following in the plan:

a. Description of business

b. Capital needed and the source of the capital

c. Price of the product/service

d. Target market

e. Promotional method

f. Sales location

g. Expected gains

h. Dissemination of profit