1. Raising finance: Start-up capital

Before you start your business you will need a sum of money to set things up. This money is called start-up capital.

Start-up capital is used to purchase fixed assets (called capital expenditure). Working capital is also needed. This is used to fund the trading activity of the business eg buying materials and/or stocks (called revenue expenditure).

How do businesses raise this initial start-up capital?

There are several possible sources, but we will use a bank loan

• A fixed sum is borrowed for a fixed period of time.
• An interest rate is applied (the cost of borrowing the money).
• The borrower repays the amount borrowed, with interest, at an agreed future date.

2. Costs, revenues & profit

When businesses spend money it is called a cost. Fixed costs are those that do not change with a change in the number of products (e.g. shop rental). Variable costs do change when the number of products changes (e.g. ingredients). When businesses receive money from selling products it is called revenue.

Profit = Total Revenue – Total Costs.

3. Calculating the break-even point

It is important for you to know how many products your business must sell in order to pay off the fixed costs and start making profits. This can be achieved through a break-even chart, or by calculation.

Break-even is the quantity of product sold where total revenue = total cost, ie where zero profit is made.

Contribution = price – unit variable cost. It is money that comes from selling products that contributes towards paying the fixed costs (hence its name). Once the fixed costs are covered further contribution becomes profit.