1 - Business In The Real World Flashcards
Reasons for starting a business (4)
- Making a good or providing a service that they think customers will want
- Some people start businesses that distribute goods
- Some businesses are set up to benefit other people
- Some people will start a business because they see a business opportunity that they want to fulfill
What is a business?
A businesses sells products to customers who are willing to pay for them
Goods
Are physical items e.g books or furniture
Services
Are actions performed by other people to aid the customer e.g barbers and plumbers
Needs
Things that you can’t live without e.g food and water
Wants
Things you would like to have, but can survive without e.g holidays and jewellery
What are the 4 factors of production
- Land
- Labour
- Capital
- Enterprise
Factor of production - Land (6)
Land includes all the Earth’s natural resources:
• Non-renewable resources e.g natural has, oil and coal
• Renewable resources like wind or tidal power
• Materials extracted by mining (e.g diamonds and gold)
• Water
• Animals
Factor of production - labour (2)
- Is the work done by the people who contribute to the production process
- Different people have different levels of education, experience or training - these factors can make some people more valuable or productive in the workplace than others
Factor of production - capital (2)
- Is the equipment, factories and schools that help to produce goods or services
- Capital is different from land because capital has to be made first
Factor of production - Enterprise
Enterprise refers to the people (entrepreneurs) who take risks and create things from the other three factors of production
Opportunity cost
Is the sacrifice we make whenever we decide to do anything
Primary sector (2)
- Is made up of organisations that are at the first stage of production and use raw materials
- e.g Farms, oil exploration companies and fishing fleets
Secondary sector (2)
- are made up of organisations in the second stage of production
- They are involved in using primary resources and converting them into products
- e.g manufacturers and printers
Tertiary sector (3)
- Is in the final stage of production
- Made up of organisations that provide services
- e.g fast food stores, estate agents and delivery companies
Define enterprise (2)
- Is another word for a business
- Also refers to the skills of people involved in the business to identify business opportunities and bring together resources to meet these opportunities
Define entrepreneur
Is someone who is willing to take the risks involved in starting a business
Characteristics of an entrepreneur (4)
- Innovative - good at spotting an opportunity
- Risk takers -
- Hard working
- Organised
Entrepreneur objectives (4)
- Be their own boss and make their own decisions
- Keep all the profits
- Change their hobby/interest into a business
- Prove themselves
- Flexible working hours
- Identify a gap in the market
Changes in the business environment (4)
- Technological change
- Economic change
- Legal change
- Environmental expectations
Business environment - technological change (2)
- Technology is changing at a rapid rate
* This creates new markets and products
Business environment - Economic change
Involves a range of factors outside the business e.g interest rates, inflation, GDP
Business environment - legal change (2)
- These are new laws and regulations
* This may impact costs e.g minimum wage or preventing tobacco companies to advertise their product
Business environment - Environmental expectations (2)
- Customers and consumers are constantly interested in the impact of a business in the environment e.g materials used, transport uses etc
- This can influence whether a customer would by from a business
Different legal structures (business ownership)m that businesses adopt (5)
- Sole trader
- Partnership
- Private limited company (ltd)
- Public limited companies (plc)
- Not-for-profit organisations
What is a sole trader
Is someone who sets up their own business
What is a partnership
Occurs when two or more people join together in a business enterprise to pursue profit
Advantages of being a sole trader (3)
- Quick and easy to set up
- You make all the decisions for yourself - decision making can be fast
- You keep all the profits
Disadvantages of being a sole trader (5)
- Lots of pressure as you have to make all the decisions
- A sole trader may struggle to handle all the aspects of the business
- unlimited liability - risk of losing everything you own
- tremendous amount of work to do so harder to have a holiday and small breaks
- If the sole trader dies the business dies as well
Advantages of partnerships (4)
- More funds are available as each partner contributes
- Better decisions made with more people involved
- Shared workload as each partner can specialise in one particular area of the business
- Share skills
Disadvantages of partnerships (4)
- May disagree with other partners
- Unlimited liability
- Liable for the actions of other partners
- Shared profits
Advantages of a private limited company (ltd) (4)
- limited liability
- Companies seem to have more status than a sole trader - good marketing move
- If business founder dies the business carries on
- Managers can be employed to run the day-to-day business whilst the owners retain control and the profits are distributed to shareholders
Disadvantages of being a private limited company (ltd) (4)
- Various legal procedures need to be completed - time consuming
- Business loses privacy because financial accounts must be available to the general public
- Accounts must be checked by an auditor - additional costs
- Corporation tax
Advantages of public limited company (plc) (3)
- Can advertise its shares to the general public - greater number of potential investors so can raise very large sums of money by selling shares
- Attract more media coverage - provides a good form of cheap publicity
- Have more statues compared to ltd - can impress and attract customers
Disadvantages of a public limited company (plc) (3)
- Media coverage could be bad - if a plc makes a mistake the media are more likely to cover the story than if the business was a ltd
- A plc cannot control who buys its shares - so managers may find a competitor buys control and takes over
- A plc is more regulated than a limited company - has to do more things according to the law which can be expensive as well as give information away to potential competitors and the media
Not-for-profit organisations (3)
- are set up to achieve objectives other than profit e.g a charity may be set up to help the homeless
- Raise funds and invest just like companies
- set social objectives
Unlimited liability (2)
- Means that the personal possessions of the owners of a business are at risk if there are any problems
- There is no limit to the amount of money the owners may have to pay out
Limited liability
Shareholders only lose what they have put in
Aim
Is a general goal of all businesses
Objective
Is a specific target that is set for a business to achieve
What are the main aims and objectives for businesses (7)
- Survival
- Profit maximisation
- Growth
- Market share
- Customer satisfaction
- Social and ethical objectives
- Shareholder value
What is the purpose of setting objectives (4)
- Helps with decision-making and with establishing priorities
- Helps investors to understand the direction in which the business is heading
- Provides a target so that everyone can compare the actual results with the planned results to decide how successful the business has been
- Can motivate everyone connected with the business because they know what they are trying to do and how they can measure their success
How can a business measure success other than looking at profit (2)
- A business could count the number of employees it has to see if its met its growth objectives
- A business could look at the value of its shares on the stock market to see if it meets shareholder value objectives
How and why do objectives differ between business - size of business (2)
- many small, local businesses depend on word of mouth to survive so a major objective for them might be customer satisfaction. They may be more concerned with survival and growth rather than increasing market share
- Larger businesses get more attention from the public, so they might set objectives about acting ethically and protecting the environment to avoid bad publicity
How and why do objectives differ between business - level of competition (2)
- If a business is in a highly competitive market, it might focus on customers satisfaction so that it can attract customers
- If a business does not face much competition, its objectives may focus on growth and maximising profits
How and why do objectives differ between business - type of business
Not-for-profit organisations are more likely to focus on social or ethical objectives, rather than growth or profit
How and why do a businesses objectives evolve over time (2)
- When it starts up it will focus on survival - once its stable, objectives might be centred around growth and maximising profits - if it becomes a large/established business it might aim to have a larger market share or to expand into other countries
- Business need to keep up with changes in legislation, economy, technology and environmental expectations
How can new legislation impact a business’ objectives
E.g 2016, a new living wage was introduced - this affected many companies’ profit objectives, as they had to pay higher wages
How can changes in economy impact a business’ objectives
E.g if there was a recession, a company’s growth might be put on hold while concentrates on survival
How can changes in technology impact a business’ objectives (2)
- Businesses need to keep up to date with new technology, especially if their competitors are using it
- They might need to alter their objectives so they spend more money on getting new equipment and training staff rather than investing in growth
How can environmental expectations impact a business’ objectives
Objectives related to environmental impact have become more important for many companies to avoid losing customers
Stakeholder
Is an individual or organisation that affects an is affected by the activities of a organisation
Who are the main stakeholders of a business (6)
- Employees
- Shareholders
- Customers
- Community
- Suppliers
- The Government
Stakeholders’ main objectives (4)
- Owners - may want to maximise their returns e.g high dividends
- Employees - may want earn more as a reward for their efforts and may also want the business to grow so they can have promotion opportunities
- Community - may want the business to behave responsibly - therefore set a target in areas such as recycling, noise, waste reduction and even try to employ local people
- Customers - affect what constitutes a realistic objective for a business in terms of the likely sales and profit
How stakeholders can influence a business (4)
- Negotiation - employees may negotiate for better pay or suppliers may demand better terms and conditions
- Direct action - Customers can stop buying products if they are unhappy or employees can go on strike
- Refusal to co-operate - local councils can refuse to co-operate with a business if they don’t like its behaviour
- Voting - The owners of a business can make their views clear and can vote on what the organisation should do next
Factors that influence the location of a business (8)
- Type of business
- The proximity to the market
- Competitors
- Availability of raw materials
- Availability and cost of labour
- Transport links
- Technology
- Costs
The purpose of business planning (4)
- help set up a business successfully - by anticipating problems
- raise finance - a business plan is useful to show possible investors
- Set objectives - a plan will set out what a business wants to achieve helps provide a clear target
- Co-ordinate actions - a plan should set out how an objective is going to be achieved
Main sections of a business plan (6)
- Background information on the founders and investors and their previous experience
- An analysis of the market and the firm’s position expected within it - includes a detailed analysis of the customers targeted
- Firm’s objectives
- Details of the price it will set and expected sales
- An explanation of how the business will compete against its rivals
- An analysis of the financial position of the business
Drawbacks of business planning (3)
- Uncertainty - plans might not be totally accurate
- Lack of experience - people starting up their own business may not have the necessary skills to plan ahead effectively
- Change - need to be changed regularly as the conditions are always changing e,g laws
Variable costs
Are the costs that vary directly with the business’s level of output
Fixed costs
Are those costs that do not change when a business changes its output
Total costs
Are fixed costs plus variable costs
Revenue
Is the income that a firm receives from selling its goods or services
Costs
The spending that is necessary to set up and run a business
Loss
The amount by which a business’s costs are larger than its revenue from all sales
Profit
Measures the difference between the values of a business’s revenue and its total costs
Advantages of franchise - internal growth (3)
- Can grow quickly
- Franchisee provides some of the finance
- Franchisees motivated as they are running their own businesses
Disadvantages of selling a franchise - internal growth (3)
- Lose some control
- Dangers of problems with one franchisee affecting the whole brand
- Have to share profits
Methods of expansion (2)
- Internal growth (also called organic growth) occurs when a business gets bigger by selling more of its products
- External growth (also know as integration) occurs when a business gets bigger by joining or buying other businesses
E-commerce - internal growth (3)
- E-commerce can allow a business to access customers across the globe 24 hours a day
- However, customers may stop buying in stores
- E.g Asos have been very successful at generating sales without physical stores
Outsourcing - internal growth (2)
- Occurs when a business uses other organisations to produce its product for it - enabling a business to grow quickly because it does not have to invest in expanding its own facilities
- However, it does mean it has to be careful to control the quality and it may cost more than producing the items themselves
Mergers - external growth
Occurs when two or more firms join together and create another joint business
Takeover - external growth
Occurs when one business buys control of another one
Advantages of business expansion (4)
- It can lead to economies of scale, which are benefits that come with a larger size
- It can lead to more power in the market e.g retailers to be more willing to stock the products of a well-known brand
- Big firms have more status and the people in charge will feel more important - easier to launch future products
- Big firms reduce the risk of a takeover as they are more expensive to do so
Disadvantages of business expansion (3)
- Decision-making becomes slower because there are so many people to consult in a big business - communication becomes difficult due to increased levels of hierarchy
- Employees may feel isolated because there are so many of them and they no longer feel special and an important part of the business - this can mean they become demotivated
- Controlling and co-ordinating a business that has many clients or products and that is possibly based in many different places can be difficult and less efficient
Economies of scale
Occur when a business’s unit costs of production fall as its output rises and the business expands
Diseconomies of scale
Occur when the cost per unit increases as a business expands
Equation to calculate unit costs
Unit cost = total costs/output
Example of purchasing economies of scale (2)
Bulk buying:
• Allows a business to negotiate better prices with suppliers - keeping unit costs down
Example of technical economies of scale
• Occurs when large-scale production enables a business to make efficient use of technology e.g a production line
