1. Understanding business activity Flashcards
What are needs and wants?
- Needs: goods or services that are essential to living
- Wants: good or services which people would like, but not essential for living
What are needs and wants?
When there are not enough goods and services to meet the wants of the population
What is opportunity cost?
The benefit that could have been gained from an alternative use of the same resource
What is specialisation and why is it important? Examples?
Specialisation: the focus on specific tasks and activities. It can lead to increased production levels, and result as over-concentration on particular activities and products.
- It is important because this means that the business is efficient and it reduces costs of production.
Types of specialisation:
* Specialisation by region / country
* Specialisation by factors of production
* Specialisation by businesses
Name the advantages and disadvantages of specialisation
Ads:
* Resources can be focused on their most productive lines.
* Focusing on a set task enables an individual, company, region or country to become more productive in that task.
* Larger outputs can be produced at lower
unit costs
* Concentration of specialists enables the sharing knowledge and skills between specialists
Disads:
* Over-reliance on a set task or product -> specialists become redundant
* Specialists spend all their time doing the same or similar things with little opportunity for variety
* Lack flexibility
* Delays or holdups in one area can slow down the whole process
What is added value and how can it be increased?
Added value: when a business tries to add value at every stage of the production process so that they can sell the product or service to customers at a greater price.
How to add value?
* Branding
* Adding special features
* Provide excellent service
* Conveniency
What is the purpose of business activity?
To create products and services
What are the three sectors in which business activity is broken down into?
- Primary industry: concerned with using natural resources. They include farming, mining and oil drilling; sometimes produce raw materials like iron ore and oil.
- Secondary industry: concerned with making and assembling products;
manufacturers use raw materials and parts from other industries. - Tertiary sector: give something of value to people, but are not physical goods like cinema, or a lesson. Other examples include banks keeping your money safe, public transport carrying people around etc.
What is a mixed economy?
What is a mixed economy?
What is a private enterprise?
- Private sector: the part of the economy where the resources are owned and controlled by both the private and public sectors.
- Involves risk -> entrepreneur
- If the business succeeds, the entrepreneur makes a profit.
- If it fails, he or she will be responsible for the losses (sell personal possessions to meet business’ debts)
What is a public enterprise?
- Public sectors: the part of the economy that is owned and controlled by the state or government.
- In many countries, the government is a major employer. Governments employ public sector workers to carry out work on their behalf, such as providing a police force, education and health service.
- Goal: provide an essential economic service for the nation.
- Often funded by taxpayers’ money, so they need to look after the taxpayers’ interests by providing the best possible value for money.
What are the reasons for changing importance of business classification?
The size of a country’s different sectors of business activity often indicates if it has a developing or developed economy.
What are the characteristics of a successful entrepreneur?
- Innovative
- Self motivated and determined
- Self confident
- Multi-skilled
- Leadership qualities
- Initiative
- Results driven
- Risk taker
- Good communicator
- Hard-working, committed, determined
- Tough
What is a business plan? What does it contain? How does it assist entrepreneurs?
- Business plan: a complete description of a business and its plans for the next one to three years; explains what the business does, who will buy the product or service and why; provides financial forecasts demonstrating overall viability; indicates the finance available and explains the financial requirements.
Contents:
* Executive summary - brief summary of the key features of the business and the business plan.
* The owner - educational background and what they have done.
* The business - name and address of the business and detailed description of the product or service being offered; how and where it will be produced, who is likely to buy it, and in what quantities.
* The market - describe the market research that has been carried out, what it has revealed and details of prospective customers and competitors.
* Advertising and promotion - how the business will be publicised to potential customers and details of likely costs.
* Premises and equipment - details of planning regulations, costs of premises and the need for equipment.
* Business organisation - whether the enterprise will take the form of sole trader, partnership, company or cooperative.
* Costings - indication of the cost of producing the product or service, the prices it proposes to charge.
* Finance - how much will come from savings? How much will come from borrowed?
* Cash flow - income and outgoings over the first year.
* Expansion - indication of future plans
Why does the government support business start-ups?
- Employ large numbers of people
- Account for a large component of employment growth in countries
- Account for a substantial component of the production of goods and services in economies
- Enable equitable growth - provide good opportunities often for the poorer members of society
- Exports
- Encourage new ideas and technologies
How does the government support start-up enterprises?
- By providing support with the startup process
- By providing direct financial (grants and loans) and other forms of help (research and product development centres)
- Removing obstacles (lower taxes, simplification of laws to increase the ease of doing business)
- Provide free or subsidised training for workers
- Rent free premises for a certain period of time
What are the methods of measuring business size? What are the limitations of these methods?
- Number of people employed
- Value of output
- Capital employed
- Market share
Limitations:
Many methods are not as straightforward as it seems, this is because the methods can produce different results so more than one method should be used in measuring the size of the business.
Why is business growth beneficial? What are some methods of business growth?
- Business growth: able to cut costs and win a greater share of the market; develop new products or sell to new markets; can be external or internal.
- Internal growth: investing in new products or selling more of existing products.
- External growth: involves the takeover of another business or merger with another business.
- > sell shares
- > merge - when two business combine to form a single company
- > acquisition - when one business gains control of part of another business
What are the problems concerned with business growth?
- More difficult to control staff
- Lack of funds
- Lack of expertise
- Diseconomies of scale
Why do some businesses remain small?
- Flexibility, quick decisions made
- Greater control
- Direct interface with customers
- Understand the market more fully
- Reduced level of stress
Why do some businesses fail?
- Not having enough cash to pay outstanding bills
- Low profit margins
- Failure to meet requirements of customers
- Changes in the external environment
- > The level of competition
- > Changes in laws and regulations
- > Changes in consumer preferences and tastes
- Poor selling of products
- Relying too much on a single customer
- Poor management
- Lack of planning
- Trying to grow too quickly
Why are new businesses are at a greater risk of failing?
- Less experience
- New to the market
- Not a lot of sales yet
- Don’t have a lot of money to support the business vet
What is a ‘sole trader’?
A business that is owned and controlled by just one person who takes all of the risks and receives all of the profits.
Name the advantages and disadvantages of a sole trader.
Ads:
* Quick and easy to set up
* Makes all the decisions
* Has complete control
* Keeps the profit
Disads:
* Unlimited liability
* May not be able to raise funds to expand the business
* Maybe have to work long hours
* Difficult to compete with larger rival firms
* May not have the business skills to run a business
What is a ‘partnership’?
A business formed by two or more people who will usually share responsibility for the day-to-day running of the business
Name the advantages and disadvantages of a partnership.
Ads:
* Easy to set up a deed of partnership
* Partners invest in the business so greater access to funds
* Shared decision making
* Shared management and workload
Disads:
* Unlimited liability
* Share the profits
* Business ceases to exist if one partner leaves
* Decisions binding on all partners
* Difficult to raise finance
What are private limited companies?
Often a small to medium-sized company, owned by shareholders who have limited liability. The company cannot sell its shares to the general public
What are the features of private limited companies?
- Usually a very small number of shareholders
- Fairly small
- Can only be sold privately
- Often difficult to raise finance
- Limited liability
- Profit belongs to shareholders
- Legal documents must be completed when setting up the business
- Continues even if one or more shareholders die
- Vote on major decisions
What are public limited companies?
Often a large company; owned by shareholders who have limited liability. They can sell its shares to the general public.
What are the features of public limited companies?
- Usually a large number of shareholders
- Most common form of organisation for very large companies
- Shares can be offered to the public and other organisations
- Ownership and control are separated
- Setting up is very costly
- At risk of takeovers
- Legal requirements are stricter than for private limited companies
- Often successful in rising capital
What is a franchise?
A business system where entrepreneurs buy the right to use to the name, logo and product of an existing business
Name the advantages and disadvantages of franchises.
Ads:
* Less chance of failure
* Franchises often provides advice and training to the franchisee
* Franchisors finance the promotion of the brand through national advertising
* The franchisor would have already checked the quality of suppliers
Disads:
* Initial cost of buying into a franchise can be very expensive
* The franchisor will take a percentage of the revenue of profits made by the franchisee each year
* There are very strict controls over what the franchisee is allowed to do with the product pricing and store layout
* The franchisee doesn’t gain any personal recognition, they only gain recognition because of the existing brand
What is a joint venture?
Two or more businesses agree to work together on a project and set up a separate business for this purpose
Name the advantages and disadvantages of joint ventures
Ads:
* Reduces risks for each business and cuts
COsts
* Each business brings different expertise to the joint venture
* Market and product knowledge can be shared
Disads:
* Any mistakes made may damage the reputation of all firms in the joint venture
* The businesses may have different business cultures of styles of leadership, making decision-making difficult
What is the difference between unincorporated businesses and limited companies?
An unincorporated business does not have a separate legal identity from its owners, whereas an incorporated business does.
What is the difference in risks, and ownership between types of business organisations?
Unincorporated business have a greater legal and financial risk than incorporated business because:
* Owners and the business have the same legal identity
* Owners have unlimited liability for business debts
What is limited liability?
When the owner is not personally responsible for the business’ debts
What is unlimited liability?
When the owner is personally responsible for the business’ debts.
What are the types of organisations in the public sector?
Public corporations
What are the main features of public corporations?
- Are owned and controlled by the state
- Are financed mainly through taxation
- Most of the times, their objectives are social rather profit
- The services provided are often free or at a very low price
What is a need?
A need is a good or service essential for living.
What is a want?
A want is a good or service which people would like to have, but which is not essential for living.
People’s wants are unlimited.
What is an economic problem?
There exist unlimited wants but limited resources to produce the goods and services to satisfy those wants. This creates scarcity.
The government decides to try to ‘solve’ problems by printing more bank notes, doubling everyone’s incomes. Why is this not good?
Printing more money does not produce more goods and services, it will just lead to inflation so more goods cannot be afforded.
Define factors of production.
Factors of production are those resources needed to produce goods or services.
There are four factors of production and they are in limited supply: Name them?
There are four factors of production and they are in limited supply: Land, labour, capital and enterprise.
There are four factors of production: Define land.
This term is used to cover all of the natural resources provided by nature.
Give some examples to natural resources provided by nature?
Fields and forests, oil, gas, metals and other mineral resources.
There are four factors of production: Define labour.
This is the number of people available to make products.
There are four factors of production: Define labour.
This is the number of people available to make products.
There are four factors of production: Define capital.
This is the finance, machinery and equipment needed for the manufacture of goods.
There are four factors of production: Define enterprise.
This is the skill and risk-taking ability of the person who brings the other resources or factors of production together to produce a good or service.
What is an entrepreneur?
An entrepreneur is an owner of a business.
State the word diagram for the real cause of the economic problem.
Unlimited wants + limited resources = scarcity.
Define opportunity cost.
Opportunity cost is the next best alternative given up by choosing another item.
For example, I have to choose between a holiday or a car and I choose the holiday, what is the opportunity cost?
If I choose the holiday, the car becomes the opportunity cost.
For example, I have to choose between machine a or a machine b and I choose machine a, what is the opportunity cost?
If I choose machine a, machine b becomes the opportunity cost.
State the economic problem revision summary equation.
Land + Labour + Capital + Enterprise = Limited resources = ECONOMIC PROBLEM = unlimited wants = scarcity = choice is necessary = leads to opportunity cost.
Define specialisation.
Specialisation occurs when people and businesses concentrate on what they are best at.
Specialisation is now very common because:
Specialisation is now very common because:
Specialised machinery and technologies are now widely available.
Increasing competition means that businesses have to keep costs low.
Most people recognise that higher living standards can result from being specialised.
Define division of labour (it is a form of specialisation).
Division of labour is when the production process is split up into different tasks and each worker preforms one of these tasks.
List the three advantages of division of labour:
Increases efficiency and output.
Less time is wasted moving from one workbench to another.
Quicker and cheaper to train workers.
List the two disadvantages of division of labour:
Workers can become bored doing just one job - efficiency might fall.
If one worker is absent and no one else can do the job, production might be stopped.
Fill in the missing spaces:
- People have ______ ______.
- The four factors of production - ___ _________ ______ __ ____ _____ - are in _______ supply.
- Scarcity results from _______ ________ and _________ _____.
- ______ is necessary when resources are scarce. This leads to ___________ ____.
- ______________ improves the _________ use of resources.
People have unlimited wants.
The four factors of production - the resources needed to make goods - are in limited supply.
Scarcity results from limited resources and unlimited wants.
Choice is necessary when resources are scarce. This leads to opportunity cost.
Specialisation improves the efficient use of resources.
What is the purpose of businesses?
The purpose of all businesses is to combine the factors of production to make products which will satisfy people’s wants.
Businesses produce products; these products can either be two things. Name them.
These products can either be goods, such as cars and shoes, or they can be services, such as insurance, tourism or banking.
Business activity does three things for people lives: Name them.
Combines scares factors of production to produce goods or services.
Produces goods or services which are needed to satisfy the needs and wants.
Employs people as workers and pays them wages.
What is added value?
Added value is the difference between the selling price of a product and the cost of bought in materials and components.
Why is added value important?
Added value is important because sales revenue is greater than the cost of materials bought in by the business.
All businesses attempt to add value. If value is not added to the materials and components that a business buys in, then:
All businesses attempt to add value. If value is not added to the materials and components that a business buys in, then:
- Other costs cannot be paid for.
- No profit will be made.
Added value is important because sales revenue is greater than the cost of materials bought in by the business. This means the business:
This means the business:
- Can pay other costs such as labour costs, management expenses, advertising and power.
- May be able to make a profit if these other costs come to a total that is less than the added value.
How could a business increase added value?
a) Increase selling price but keep the costs of materials the same.
b) Reduce the cost of materials but keep the price the same.
Increase selling price but keep the costs of materials the same. How can this be possible?
This might be possible if the business tries to create a higher-quality image for its product or service.
Increase selling price but keep the costs of materials the same. This might be possible if the business tries to create a higher-quality image for its product or service. What happens if consumers are convinced by this?
If consumers are convinced by this then they might be prepared to pay higher prices and buy the same quantity as before the price rise.
Reduce the cost of materials but keep the price the same. How can a higher added value be possible?
If the price charged to customers stays the same but the cost of materials is reduced then a higher added value will be made.
Name the three Stages of economic activity.
Primary Sector.
Secondary Sector.
Tertiary Sector.
What is the primary sector?
The primary sector of industry extracts and uses the natural resources of Earth to produce raw materials used by other businesses.
Give three examples of the primary sector of industry.
Activities in the primary sector of industry include:
Farming, fishing, forestry and the extraction of natural materials, such as oil and copper ore.
What is the secondary sector?
The secondary sector of industry manufactures goods using the raw materials provided by the primary sector.
Give three examples of the secondary sector of industry.
Activities in the secondary sector of industry include building and construction, aircraft and car manufacturing, computer assembly, bread baking.
What is the tertiary sector?
The tertiary sector of industry provides services to consumers and the other sectors of industry.
What is the tertiary sector?
The tertiary sector of industry provides services to consumers and the other sectors of industry.
Give three examples of the tertiary sector.
Activities in the tertiary sector of industry include transport, banking, retail, insurance, hotels, and hairdressing.
Which sector of industry do you think the following fall under:
Insurance.
Forestry.
Computer assembly.
Insurance = tertiary sector of industry.
Forestry = primary sector of industry.
Computer assembly = secondary sector of industry.
Usually, the three sectors of the economy are compared by: Name them.
Percentage of the country’s total number of workers employed in each sector
OR
Value of output of goods and services and the proportion this is of total national output.
What is de-industrialization?
De- industrialization occurs when there is a decline in the importance of the secondary, manufacturing sector of industry in a country.
There are several reasons for changes in the relative importance of the three sectors over time: Name regarding primary products.
Sources of some primary products, such as timber, oil and gas, become depleted.
There are several reasons for changes in the relative importance of the three sectors over time: Regarding newly industrialized countries?
Most developed economies are losing competitiveness in manufacturing to newly industrialized countries such as Brazil, India and China.
There are several reasons for changes in the relative importance of the three sectors over time: Regarding consumer’s incomes?
As a country’s total wealth increases and living standards rise, consumers tend to spend a higher proportion of their incomes on services such as travel than on manufactured products produced from primary products.
What is a mixed economy?
A mixed economy has both a private sector and a public sector.
What are private sector businesses?
Private sector businesses are businesses not owned by the government.
Private sector businesses are businesses not owned by the government. What type of decisions do private sector businesses make?
These businesses will make their own decisions about what to produce, how it should be produced, and what price should be charged for it.
What do most businesses in the private sector aim to make?
Most businesses in the private sector will aim to make a profit.
What are public sector businesses?
Public sector businesses are businesses that are government (or state) owned and controlled businesses and organizations.
What type of decisions do public sector businesses make?
The government, or other public sector authority, makes decisions about what to produce and how much to charge consumers.
Some goods and services are provided free of charge to the consumer, such as_____.
Some goods and services are provided free of charge to the consumer, such as state health and education services.
The free-of-charge services and goods that the public sector businesses provide are paid for by?
The money for these free goods or services some not from the user but from the taxpayer.
Which business activities are usually in the public sector? Name 6.
Health.
Education.
Defense.
Public transport.
Water supply.
Electricity supply.
What is privatisation?
Privatization describes the process by which a business goes from being owned by the government to being privately owned by being sold.
Why have governments privatised businesses?
Private sector businesses are more efficient than public sector businesses because their main objective is to make a profit and therefore costs must be controlled.
Give another reason as to why a government might privatise a business?
Private-sector owners might invest more capital in business than the government can afford and competition between private sector businesses can help to improve product quality.
Define capital.
Capital is the money invested into a business by the owners.
Name two disadvantages of private sector businesses.
A business in the private sector might make more workers unemployed than a public sector business in order to cut costs.
Private sector business is also less likely to focus on social objectives.
What is an entrepreneur?
Entrepreneur is a person who organises, operates and takes the risk for a new business venture.
Name 5 benefits of being an entrepreneur.
- Independence.
- Able to put own ideas into practice.
- May become famous and successful.
- Able to make use of personal interests and skills.
- May be profitable and income might be higher.
Name the 4 disadvantages of being an entrepreneur.
- Risk; many new entrepreneurs businesses fail, especially with poor planning.
- Capital; entrepreneurs have to put their own money into the business.
- Lack of knowledge and experience in starting and operating a business.
- Opportunity cost; lost income from not being an employee of another business.
Name 2 Zimabwean entrepreneurs.
Use the names of these entrepreneurs in essays
- Strive Masiyiwa (Zimbabwean) - Econet
(Telecommunications services). - Divine Ndhlukula (Zimbabwean) - Securico
(Security service).
Name the 10 characteristics of successful entrepreneurs.
Hard worker.
Risk-taker.
Creative.
Optimistic.
Self-confident.
Innovative.
Independent.
Effective communicator.
Adaptable.
Motivated.
What is a business plan?
A business plan is a document containing the business objectives and important detail about the operations, finance, and owners of the new business.
What are the contents of a business plan?
- Description of the business.
- Products and services.
- The market.
- Business location and how products will reach customers.
- Organization structure and management.
- Financial information.
- Business strategy.
What will happen if you do not have a detailed business plan (bank)?
Without a detailed business plan, the bank will be reluctant to lend money to the business.
Why do governments support business start-ups?
- To reduce unemployment.
- To increase competition.
- To benefit society.
- To increase output.
What do business start-ups need?
- Business idea and help.
- Premises.
- Finance.
- Labor.
- Research.
Who would find it useful to compare the size of a business?
Investors.
Governments.
Competitors.
Workers.
Banks.
What is capital employed?
Capital employed is the total value of capital used in the business.
How can business size be measured?
- Number of people employed.
- Value of output.
- Value of sales.
- Value of capital employed.
What are the limitations of the number of people employed (business size measurement)?
Some firms use production methods that employ very few people but produce high output levels.
What are the limitations of the value of output (business size measurement)?
A high level of output does not mean that a business is large when using other methods of measurement.
What are the limitations of the value of sales (business size measurement)?
It could be misleading to use this measure when comparing the size of a business that sells very different products.
Why would business owners want to expand the business (4 ways)?
- Possibility of higher profits.
- More status and prestige for the owners and managers.
- Lower average costs.
- Larger share of its market.
How can a business grow (5 ways)?
- Internal growth.
- External growth.
- Horizontal merger or horizontal intergration.
- Vertical merger or vertical intergration.
- Conglomerate merger or conglomerate integration or diversification.
What is internal growth?
occurs when a business expands its existing operations.
What is external growth?
When a business takes over or merges with another business.
What is a takeover or acquisition?
A takeover is when a business buys out the owners of another business.
What is a merger?
A merger is when the owners of two businesses agree to join their businesses together to make one business.
What is a merger?
A merger is when the owners of two businesses agree to join their businesses together to make one business.
What is horizontal integration?
Horizontal integration is when one business merges with or takes over another one in the same industry at the same stage of production.
What is vertical integration?
Vertical integration is when one business merges with or takes over another one in the same industry at a different stage of production.
What is backward vertical integration?
When a business integrates with another business at an earlier stage of production.
What is forward vertical integration?
When a business integrates with another business at a later stage of production.
What is conglomerate integration?
Conglomerate integration is when one business merges with or takes over a business in a completely different industry.
Name 3 benefits of horizontal integration.
The merger reduces the number of competitors in the industry.
There are opportunities for economies of scale.
The combined business will have a bigger share of the total market than either business before the integration.
Name 3 benefits of forward vertical integration.
The merger gives an assured outlet for its product.
The profit margin made by the retailer is absorbed by the expanded business.
Information about consumer needs and preferences can now be obtained directly by the manufacturer.
Name 4 benefits of backward vertical integration.
The merger gives an assured supply of important components.
The profit margin of the supplier is absorbed by the expanded business.
The supplier could be prevented from supplying other manufacturers.
Costs of components and supplies for the manufacturer could be controlled.
Name 2 benefits of conglomerate integration.
The business now has activities in more than one industry.
There might be a transfer of ideas between the different sections of the business even though they operate in different industries.
Give one example of each of the following:
Horizontal Intergration.
Forward Vertical Integration.
Backward Vertical Integration.
Conglomerate Interagration.
Horizontal Intergration = Coca-Cola and Pepsi.
Forward Vertical Integration = a copper wire maker merges with a copper mine and with an electrical product manufacturer.
Backward Vertical Integration = A copper wire maker merges with a copper mine.
Conglomerate Integration = Microsoft Corporation and Toyota Motors.
List problems that can result from business growth or expansion.
Larger business is difficult to control.
Larger business leads to poor communication.
Expansion costs so much that business is short of finance.
Integrating with another business is more difficult than expected.
How do you overcome the following problems linked with business growth or expansion:
- Larger business is difficult to control.
Operate the business in small units - this is a form of decentralisation.
How do you overcome the following problems linked with business growth or expansion:
- Larger business leads to poor communication.
Operate the business in smaller units or use latest IT equipment and telecommunications.
How do you overcome the following problems linked with business growth or expansion:
- Expansion costs so much that business is short of finance.
Expand more slowly to allow the use of profits from slowly expanding business to pay for further growth.
Ensure sufficient long-term finance is available.
How do you overcome the following problems linked with business growth or expansion:
- Integrating with another business is more difficult than expected.
Introducing a different style of management requires good communication with the workforce- they will need to understand the reasons for the change.
Why is integrating with another business more difficult than expected? Give some examples of this statement.
For example:
Pay rates for employees differ.
Carrying over liabilities.
Choice of suppliers.
Leadership styles.
Quality control.
Fair share of say.
Protocols differ.
Operations differ.
Give 3 reasons as to why some businesses remain small.
The type of industry they operate in.
The market size.
The owners’ objectives.
Name some industries where most businesses remain small.
Here are some examples of industries where most businesses remain small:
Hairdressing.
Car repairs.
Window cleaning.
Convenience stores.
Plumbers.
Catering.
Why do you think a hairdressing business would remain small?
Business in these industries offer personal services or specialised products, if they were to grow too large they would find it difficult to offer close and personal service demanded by customers.
Explain why a business would remain small using the market size reason.
If the market - that is, the total number of customers - is small, the businesses are likely to remain small.
If the market - that is, the total number of customers - is small, the businesses are likely to remain small. Who is this true for?
This is true for businesses, such as shops, which operate in rural areas far away from cities, and for businesses that appeal to only a limited number of consumers like very luxurious cars or expensive fashion clothing.
Explain why a business would remain small using the owners’ objectives reason.
Some business owners perfer to keep their business small to avoid stress and worry, perhaps they could be more interested in keeping control of a small business, knowing all their staff and customers, than running a much larger business.
What are the main reasons as to why some businesses fail include the following:
The main reasons why some businesses fail include the following:
Lack of management skills.
Changes in the business environment.
Liquidity problems or poor financial management.
Over-expansion.
How can family businesses fail?
Family business can fail becuase the sons and daughters of the founders of a business do not necessarily make good managers and they might be reluctant to recruit professional managers.
How can a lack of management skills cause a business to fail?
Lack of experience can lead to bad decisions.
What are some factors that can lead to business failures if they are not responded to effectively?
New technology, powerful new competitors and major economic changes are just some factors that can lead to business failures if they are not responded to effectively.
How can changes in the business environment cause a business to fail?
Failure to plan for a change adds to the risk and uncertainty of operating a business.
How can liquidity problems cause a business to fail?
Shortage of cash or liquidity means that workers, suppliers, landlords and government cannot be paid what they are owed.
How can poor financial management lead to a business failing?
Failure to plan or forecast cash flows can lead to this problem and is a major cause of businesses of all sizes failing.
Explain why a business could fail because of over-expansion?
When a business expands too quickly it can lead to big problems of management and finance.
Why are new businesses at a greater risk of failing?
Many new businesses fail due to lack of finance and other resources, poor planning, inadequate research, lack of experience and decision making skills.
There are six main forms of business organisation of the private sector. These are:
There are several main forms of business organisation of the private sector. These are:
* Sole traders.
* Partnerships.
* Private limited companies.
* Public limited companies.
* Franchises.
* Joint ventures.
What is a sole trader?
Sole trader is a business owned by one person.
Why is a sole trader business a common form of organization?
One of the reasons it is such a common form of organisation is because there are so few legal requirements to set it up.
There are only a few legal regulations which must be followed for sole trader business: Name them
There are only a few legal regulations that must be followed for sole trader business:
* The owner must register with, and send annual accounts to, the Government Tax Office.
* The name of the business is significant and must be registered with the Registrar of Business Names.
* The sole trader must observe laws that apply to all businesses in that industry.
Name the 6 benefits of being a sole trader.
- There are few legal regulations to worry about when the business is set up.
- You can be your own boss.
- You have the freedom to choose your own holidays, hours of work, prices to be charged, and whom to employ.
- Close contact with your own customers.
- You have an incentive to work hard because you are able to keep all of the profits.
- You do not have to give information about your business to anyone else.
Define limited liability.
Limited liability means that the liability of shareholders in a company is limited to only the amount they invested.
Define unlimited liability.
Unlimited liability means that the owners of a business can be held responsible for the debts of the business they own.
Name the 6 disadvantages of being a sole trader.
- You have no one to discuss business matters with.
- You are fully responsible for any debts that the business may have.
- The sources of finance for a sole trader are limited to the owner’s savings, profits made by the business, and small bank loans.
- The business will not benefit from economies of scale.
- The business is likely to remain small because capital for expansion is so restricted.
- If you are ill there is no one who will take control of the business for you and there is no continuity of the business after the death of the owner.
Who do you recommend a sole trader structure to (3)?
- Someone setting up a new business.
- Do not need much capital to get the business going.
- Will be dealing mainly with the public, for example, hairdressing - personal and direct contact between the customer and the owner is often very important for the success of these businesses.
What is a partnership?
Partnership is a form of business in which two or more people agree to jointly own a business.
What is a partnership agreement?
A partnership agreement is a written and legal agreement between business partners.
Why is it recommended to have a partnership agreement or a deed of partnership?
Without this document, partners may disagree on who put most capital into the business or who is entitled to more of the profits. A written agreement will settle these matters.
Partnerships can be set up very easily. Name one way you can set a partnership.
You could ask someone you know to become your partner in your business and this is called verbal agreement.
What 5 things does a partnership agreement contain?
- The amount of capital invested in the business by each partner.
- The tasks to be undertaken by each partner.
- The way in which the profits would be shared out.
- How long the partnership would last.
- Arrangements for absence, retirement, and how new partners could be admitted.
What are the 4 advantages of partnership?
- More capital could now be invested into the business.
- The responsibilities of running the business were now shared.
- Both partners were motivated to work hard because they would both benefit from the profits.
- Any losses made by the business would now be shared by the partners.
What is an unincorporated business?
An unincorporated business is one that does not have a separate legal identity. Sole traders are partnerships are unincorporated businesses.
What are the 5 disadvantages of a partnership?
- The partners did not have limited liability.
- The business did not have a separate legal identity.
- Partners can disagree on business decisions and consulting all partners takes
time. - If one of the partners is very inefficient or actually dishonest, then the other partners could suffer by losing money in the business.
- Most countries limit the number of partners meaning that the business growth would be limited by the amount of capital people could invest.
Partnerships are very suitable in certain situations, such as:
Partnerships are very suitable in certain situations, such as:
* When people wished to form a business with others but wanted to avoid legal complications.
* Where the professional body, only allowed professional people to form a partnership, not a company.
* Where the partners are well known to each other, possibly in the same family, and want a simple means of involving several of them in the running of the business.
What is a Limited Liability Partnership (LLP)?
It offers partners limited liability but shares in such businesses cannot be bought and sold.
This type of partnership is a separate legal unit that still exists after a partner’s death.
Define Incorporated businesses.
Incorporated businesses are companies that have separate legal status from their owners.
Define shareholders.
Shareholders are the owners of a limited company. They buy shares which represent part-ownership of the company.
Define private limited companies.
Private limited companies are businesses owned by shareholders but they cannot sell shares to the public.
A company is a separate legal unit from its owners - it is an incorporated business. This means 3 things:
A company is a separate legal unit from its owners - it is an incorporated business. This means that:
* A company exists separately from the owners and will continue to exist if one of the owners should die.
* A company can make contacts or legal agreements.
* Company accounts are kept separate from the accounts of the owners.
What are the 4 advantages of private limited companies?
- Shares can be sold to a large number of people (friends and relatives).
- Limited liability for shareholders.
- Separate legal identity.
- The people who started the company are able to keep control of it as long as they do not sell too many shares to other people.
Shares of a private limited company can be sold to large numbers of people. Why would this be a benefit?
The sale of shares could lead to much larger sums of capital to invest in the business than the two original partners could manage to raise themselves meaning the business could therefore expand more rapidly.
Limited liability for shareholders of private limited companies. Why would this be considered a benefit?
It means that if the company failed with debts owing to creditors, the shareholders could not be forced to sell their possessions to pay the debts, the shareholders could only lose their original investment in the shares.
Why does limited liability encourage people to buy shares?
Limited liability encourages people to buy shares, knowing that the amount they pay is the maximum they could lose if the business is unsuccessful.
What are the 4 disadvantages of private limited companies?
Not easy to transfer shares.
Legal formalities.
Accounts are available for the public to see.
Cannot sell shares to the public.
There are significant legal matters which have to be dealt with before the company can be formed. In particular, two important forms or documents have to be sent to the Registrar of Companies: Name them.
The Articles of Association - this contains the rules under which the company will be managed.
The Memorandum of Association - This contains very important information about the company and the directors.
What are the documents from Private Limited Companies intended for?
Companies are correctly run.
Purpose and structure of the company.
The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of the other shareholders. What is the disadvantage of this rule?
This rule can make some people reluctant to invest in such a company because they may not be able to sell their shares quickly if they require their investment back.
Most importantly for rapidly expanding businesses, the company cannot offer its shares to the general public. What is the disadvantage of this?
Therefore it will not be possible to raise really large sums of capital to invest back into the business.
Private Limited Companies were very suitable in certain situations, such as:
Private Limited Companies were very suitable in certain situations, such as:
Define public limited companies.
Public limited companies are businesses owned by shareholders but they can sell shares to the public and their shares are tradeable on the Stock Exchange.
What is one thing you should remember for public limited companies?
Public limited companies are not in the public sector of industry. They are not owned by the government but by private individuals and as a result, they are in the private sector.
What are the five advantages of public limited companies?
- This form of business organization still offers limited liability to shareholders.
- It is an incorporated business and has a separate legal identity to the owners or shareholders.
- There is now the opportunity to raise very large capital sums to invest in the business.
- There is no restriction on the buying, selling, or transfer of shares.
- A business trading as a public limited company usually has high status and should find it easier to attract suppliers prepared to sell goods on credit and banks willing to lend to it than other types of businesses.
It is an incorporated business and has a separate legal identity to the owners or shareholders. Expand further on this point.
Its accounts are kept separate from those of the owners and there is no continuity should one of the shareholders die.
There is now the opportunity to raise very large capital sums to invest in the business. Why?
There is no limit to the number of shareholders a public limited company can have.
What are the four disadvantages of a public limited company?
- The legal formalities of forming such a company are quite complicated and time-consuming.
- There are many more regulations and controls over public limited companies in order to try to protect the interest of the shareholders.
- Selling shares to the public is expensive.
- There is the very real danger that although the original owners of the business might become rich by selling shares in their business, they may lose control over it when it ‘goes public’.
There are many more regulations and controls over public limited companies in order to try to protect the interest of the shareholders. Give an example.
These include the publication of accounts, which anyone can ask to see.
What is an Annual General Meeting (AGM)?
An Annual General Meeting is a legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.
State the ‘equation’ for an AGM regarding ownership and control.
shareholders (Ownership) ➡ may attend the AGM (few do).
↓
Vote for Board of Directors who take all important decisions (control).
↓
appoint managers for day-to-day business decisions (control).
What is called the divorce between ownership and control?
The shareholders own, but the directors and managers control.
Define dividends.
Dividends are payments made to shareholders from the profits (after tax) of a company. They are the return to shareholders for investing in the company.
Two types of private sector business organisations exist: Name them.
A franchise and a joint venture.
What is a franchise?
A franchise is a business based up the use of brand names, promotional logos and trading methods of an existing successful business.
What is a franchisor and what does a franchisee do?
The franchisor is a business with a product or service that it does not want to sell to consumers directly. Instead, it appoints franchisees to use the idea or product and to sell it to consumers.
What are the four advantages to the franchisor.
The franchisee buys a license from the franchisor to use the brand name.
The management of the outlets is the responsibility of the franchisees.
All products sold must be obtained from the franchisor.
Expansion of the franchised business is much faster than if the franchisor had to finance all new outlets.
What are three disadvantages to the franchisor?
Poor management of one franchised outlet could lead to a bad reputation for the whole business.
The franchisee keeps profits from the outlet.
What are the three disadvantages to the franchisee?
Less independence than with operating a non-franchised business.
Licence fee must be paid to the franchisor and possibly a percentage of the annual turnover.
May be unable to make decisions that would suit the local area.
What are the six advantages to the franchisee?
The franchisor pays for advertising.
All supplies are obtained from the franchisor.
Training for staff and management is provided by the franchisor.
Banks are often willing to lend to franchisees due to relatively low risk.
The chances of business failure are much reduced because a well-known product is being sold.
There are fewer decisions to make than with an independent business - prices, store layout, range of products will have been decided by the franchisor.
What is a joint venture?
A joint venture is where two or more businesses start a new project together sharing capital, risks and profits.
What are the three advantages of a joint venture?
Sharing of costs.
Risks are shared.
Local knowledge when joint venture company is already based in the country.
What are the three disadvantages of a joint venture?
Disagreements over important decisions might occur.
If the new project is successful, then the profits have to be shared with the joint venture partner.
The two joint venture partners might have different ways of running a business - different cultures.
Define the public sector.
The public sector includes all businesses owned by the government/state and local government and public services such as hospitals, fire services, and government departments.
What is a public corporation?
A public corporation is a business in the public sector that is owned and controlled by the state/government.
What is nationalization?
This means that the businesses were once owned by private individuals, but were purchased by the government (for examples water supply and rail services).
What are the four advantages of public corporations?
- Some industries are considered so important that government ownership is thought to be essential (water supply and electricity generation).
- If industries are controlled by monopolies because it would be wasteful to have competitors then these natural monopolies are often owned by the government.
- If an important business is failing and likely to collapse, the government can step in to nationalize it, keeping the business open and securing jobs.
- Important public services, such as TV and radio broadcasting, are often in the public sector. Non-profitable but important programs can still be made available to the public.
What are the four disadvantages of public corporations?
- There are no private shareholders to insist on high profits and efficiency.
- Governments can use these businesses for political reasons and this prevents the public corporations from being operated like other profit-making businesses.
- Often there is no close competition to the public corporations.
- Governments’ subsidies can lead to inefficiency as managers will always think that the government will help them if the business makes a loss.
Often there is no close competition to the public corporations. There is therefore _.
There is therefore a lack of incentive to increase consumer choice, increase efficiency or even improve customer service.
Local governments and municipalities usually operate some trading activities. Who are these paid by and give two examples?
Some of these services are free to the user and paid for out of local taxes, such as street lighting and school.
Other services are chared for and expected to break even at least.
These might include street markets, swimming pools, and theatres.
What purpose do businesses serve
Goods, physical product
Services, non physical actions
What are “Needs”
What a person requires to survive such as water, and clothes
What are “Wants”
Products that will make us happy, a desire for it, would not need these to survive, e.g jewellery, cars, electronic devices
Why do businesses set up?
When business see a gap in the market and earn a profit, have a passion for the market
What are Opportunity costs
The next best alternative given up by choosing another item
What is scarcity
The lack of sufficient products to fulfil the total wants of the population
Factors of production definition
These are those resources needed to produce goods or services
* labour
* capital
* enterprise
* land
Added value and examples
an improvement or addition to something that makes a product worth more
New Packaging
Sustainable packaging
New colour
New features
What is specialisation
When someone is good at a specific task, concentrating on and becoming an expert in a particular subject or skill.
Division of labour
Dividing the workforce to specific individuals to specific tasks, Division of labour is a form of specialisation
Advantages of specialisation
Better productivity
reduced mistakes, less wastage
Less supervision as they are good at there job
Better quality
Disadvantages of specialisation
Cost more because of training or paying more workers
No back up if someone is sick (lack of flexibility)
Increase boredom, unmotivated
Primary sector
Produces raw materials by extracting and using natural resources , eg:oil
Secondary sectors
Manufacturing the goods turning raw materials into finished goods
Tertiary sector
Provides services to consumers and other sectors of the industry
Public sector
When a business is formed by the government and share their shares to the public
Private sector
When the business is driven by profit maximisation and cant sell shares to the public
What is an Enterprise
A business or organisation that makes money
What is an Entrepreneur
A person who sets up a business or businesses, taking on financial risks in the hope of profit.
Risks of starting a business
Financial loss
Lack of security
Risk of failure
Managing cash flow
Rewards of starting a business (if its successful)
Pursue an interest
Financial reward/gain
Get to be there own boss
Flexible hours
Features of entrepreneur
Hard working
Organised
Being able to adapted
Willing to take risks
Innovative
Why do governments support business start ups
To reduce unemployment
To increase competition, this reduces prices and adds more variety
To benefit society, business may create social enterprises
Can grow further, this can make business grow larger and more important
In the future
Capital employed
The total value of capital used in a business
Why are new business are at a greater risk of failing
Due to the lack of finance
Poor planning
Lack of experience/ decision making skills
Inadequate research
Social enterprise
Social enterprises seek to maximise benefits to society and the environment, and the profits are principally used to fund social programs
the main objective is to have a social impact rather than make a profit for their owners or shareholders.
How to measure business size
Number of people employed
Value of output
Value of sales
Value of capital employed
Limitations to measuring business size
Using automation (less workers)
Firms selling more expensive items
May not sell the same amount of goods each year
