1 Understanding Business Activity Flashcards
What is a need?
a good or service essential for living.
What is a want?
a good or service which that people would like to have but is not essential for living.
What is the economic problem?
there are unlimited wants but limited resources to produce the goods or services to satisfy those wants.
What are the factors of production?
the resources needed to produce goods or services.
- Land: the natural resources provided by nature.
- Labour: the number of people available to make products / services.
- Capital: the finance, machinery and equipment needed to manufacture the goods.
- Enterprise: the skill and risk-taking ability of a person who brings the other factors of production together to produce a good/ service.
What is opportunity cost?
the next best option that’s lost by choosing another option.
What is specialisation?
when people and businesses focus on what they’re best at.
What is the division of labour?
when the production process is split up into different tasks and workers do one of these tasks.
What’re the advantages to division of labour?
- workers are trained in one task and specialise in it which increases efficiency and output
- less time wasted
- quicker and cheaper to train workers as less skills need to be taught
What’re the disadvantages to division of labour?
- workers can become bored, lose motivation and lower efficiency
- if one worker is absent and no one else can do their job, production may fall
What are businesses?
Businesses combine factors of production to make goods/services which satisfy people’s wants.
What is added value?
Selling Price - Cost of Bought-in Materials and Components = Added Value
Why is added value important?
Without added value, no other costs can be paid for and no profit will be made.
How can you increase added value?
a. Increase selling price but keep cost of materials the same.
b. Reduce cost of materials but keep the price the same.
What is the primary sector?
it extracts and uses natural resources to produce raw materials used by other businesses.
What are examples of the primary sector?
Wood cutting, Coal mining, Farming, Fishing
What is the secondary sector?
it manufactures goods using raw materials.
What are examples of the secondary sector?
Baking, Car manufacturing, Computer assembly, Aircraft manufacturing
What is the tertiary sector?
it provides services to consumers and other sectors of the industry.
What are examples of the tertiary sector?
Transport, Banking, Retail. Insurance, Hotel, Hairdressing
When does de-industrialisation occur?
when there is a decline in the importance of the secondary sector of the industry in a country.
What is a mixed economy?
it has both a private and public sector.
What is capital?
the money invested into the business by the owners.
What is an entrepreneur?
a person who organises, operates and takes the risk for a new business venture.
What are the benefits to being an entrepreneur?
- independence of being able to choose how to use your time and money
- able to put own ideas into practice
may become famous and successful if business grows - may be profitable an income may be higher than working for another business
- able to make use of personal interests and skills
What are the disadvantages of being an entrepreneur?
- risk of business failing
- having to invest capital and find other sources of it
- lacking knowledge and experience
- opportunity cost lost from not being an employee of another business
What are the characteristics of a successful entrepreneur?
- Hard working: long hours and short holidays are typical for many entrepreneurs to make their business successful.
- Risk taker: making decisions to produce goods/services that people might buy is risky.
- Creative: a new business needs new ideas about products, services, ways of attracting customers to make it different from existing firms.
- Optimistic: looking forward to a better future is essential because if you think of only failure, you will fail.
- Self-confident: necessary to convince other people of your skills and to convince banks, other lenders and customers that your business will be successful.
- Innovative: being able to put new ideas into practice in interesting and different ways.
- Independent: they’ll often have to work on their own before they can employ others thus need to be well-motivated and able to work without help.
- Effective communicator: talking clearly and confidently to banks, other lenders, customers and government agencies about the new business will raise their profile.
What is a business plan?
a document containing the business objectives and important details about the operations, finance, and owners of the new business.
Why do governments support start-ups?
- reduce unemployment
- increase competition (more consumer choices)
- increase output (economic benefit from increase good and service output)
- benefit society
- business could grow further and become important in the future
How does the government help start-ups?
- organise training for entrepreneurs that gives advice and support sessions offered by experienced business people.
- building ‘enterprise zones’ that provide low-cost premises to start-ups
- loans at low interest rates
- grants
- encouraging universities to make their facilities available to entrepreneurs
What is capital employed?
the total value of capital used in the business.
What are the methods of measuring business size?
- Number of people employed
- Value of output
- Value of sales
- Value of capital employed
What are the limitations to measure business size?
- Number of people employed: some firms use production method which employ few people but produce high outputs (capital intensive firm) & should part time workers be counted as one?
- Value of output: high output doesn’t mean the business is large.
- Value of sales: it could be misleading when comparing businesses that sell very different products.
- Value of capital employed: a company employing many workers may use labour-intensive methods of production.
Why would owners want to expand a business?
- higher profits
- more status and prestige
- lower average cost (economies of scale)
- more market share
What is internal growth?
when a business expands its existing operations.
What is an example of internal growth?
a restaurant owner opening other restaurants in town.
What is external growth?
when a business takes over or merges with another business; also known as integration.
What are examples of external growth?
- horizontal integration: where one firm merges/takes over another in the same industry at the same stage of production
- Vertical integration: when one business merges/takes over another in the same industry but in a different stage of production
- Conglomerate integration: when one business merges/takes over another business in a completely different industry; also known as diversification.
What is a takeover?
when a business buys out the owners of another business.
What is a merger?
when the owners of two businesses agree to join their businesses together to make one business.
What are some problems linked to business growth and how can you solve them?
- Larger businesses are difficult to control: operate the business in smaller units (a form of decentralisation)
- Larger businesses lead to poor communication: operate the business in smaller units, use latest IT equipment
- Expansion costs lead to shortage of finance: expand more slowly
- Integrating is harder than expected: introduce different styles of manage, communicate well
Why do some businesses remain small?
- type of industry the business operates in
- market size
- owner’s objectives
What are the causes of business failure?
- lack of management skills
- changes in business environment
- Liquidity problems/ poor financial management
- over-expansion
What is a sole trader?
a business owned and operated by only one person.
What are the advantages of being a sole trader?
- fewer legal regulations
- complete control over the business
- freedom to decide holidays
- able to choose who to employ
- close contact with customers
- keep all profits after tax
- secrecy in business matters
What are the advantages of a partnership?
- more capital
- shared responsibilities
- both partners are motivated to work
What is limited liability?
the liability of shareholders in a company is only limited to the amount they invested.
What is unlimited liability?
the owners of a business can be held responsible for the debts of the business they own.
What are the disadvantages to being a sole trader?
- unlimited liability
- no one to discuss business matters with
- not enough capital to invest
- banks are reluctant to lend larger amounts
- likely to remain small
- unable to benefit from economies of scale
- unable to pass the business on
- no one to take care of the business when owner is ill
What is a partnership agreement?
the written and legal agreement between business partners (not essential but recommended)
What are the disadvantages of a partnership?
- unlimited liability
- unincorporated business
- partner disagreement
- a bad partner makes the other suffer
- most countries limit the number of partners to 20 which limits capital to invest
What is a partnership?
a form of business in which 2 or more people agree to jointly own a business.
When is a partnership suitable?
- when people want to form a business with others but avoid legal complications
- where the professional body only allow professionals to form partnerships, not a company
- where partners are well known to each other
What is an unincorporated business?
one that does not have a separate legal identity (sole traders and partnerships)
What are shareholders?
the owners of a limited company (they buy shares that represent part-ownership of the company)
What is an incorporated business?
companies that have separate legal status from their owners.
What are private limited companies?
businesses owned by shareholders but they can’t sell shareholders to the public.
What are the advantages of a private limited company?
- shares can be sold to a large number of people
- limited liability
- less risk
- able to keep in control (as long as not too many shares are sold)
What are the disadvantages of a private limited company?
- significant legal matters
- shares can’t be sold/transferred to anyone else without the agreement of other shareholders
- company accounts are less secret
- can’t offer shares to the general public
What are the two important forms/documents to be able to form a Limited Company?
- The Articles of Association
- The Memorandum Association
When is becoming a private limited company suitable?
- when owners wish to expand further and reduce capital risk
- allows more capital to be raised which is good for larger businesses
What is a public limited company?
businesses owned by shareholders that can sell shares to the public and are tradable on Stock Exchange.
What are the advantages of a public limited company?
- limited liability
- incorporated business
- able to raise large sums of capital
- no restriction to buying, selling or share transfer
- high status
- easier to attract suppliers and banks willing to lend
What are the disadvantages of a public limited company?
- legal formalities are time consuming
- more regulations and control
- selling shares is expensive
- can lose control over the business
What is an Annual General Meeting (AGM)?
a legal requirement for all companies in which shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.
What are dividends?
payments made to shareholders from profit (after tax) of a company which are the return to the shareholders for investing in the company.
What is a franchise?
a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the licence to operate this business from the franchisor.
What are the disadvantages to being a franchisor?
- poor management of a franchised outlet could lead to bad reputation for the whole business
- franchisee keeps profit from the outlet
What are the advantages to being a franchisor?
- franchisee buys licence from the franchisor
- expansion of the franchised business is faster
- franchisee is responsible for the management of the outlet
- all products sold must be obtained from franchisor
What is a public corporation?
a business in the public sector that is owned and controlled by the state (government)
What are the advantages to being a franchisee?
- reduced business failure
- franchisor pays for advertising
- supplies obtained from the franchisor
- fewer decisions to make
- training for staff and management is provided
- banks are often willing to lend
What are the advantages to being a franchisee?
- less independence
- unable to make many decisions
- licence must be paid to franchisor
- percentage of annual turnover given to franchisor
What is a join venture?
where two or more businesses start a new project together, sharing capital, risks and profits.
What are the advantages of a joint venture?
- sharing costs
- local knowledge
- shared risk
What are the disadvantages of a joint venture?
- sharing profits
- disagreements may occur
- partners may have different ways of running the business
What are the advantages of public corporations?
- government ownership
- no competition
- nationalisation of a failing business
- non-profitable
What are the disadvantages of public corporations?
- no high profits or efficiency
- inefficient management
- less consumer choice
- using business for political reasons
What are the benefits of setting a business objective?
- give workers a clear goal to work towards (motivation)
- decision making focuses on achieving objectives
- unites the whole business towards the same goal
- managers can compare how well the business has performed to their objectives
What is a business objective?
the aims/targets that a business works towards.
What are the business objectives?
- Survival: often when a business has recently set up / during an economic recession which leads to lower prices to survive
- Profit: needed to pay a return to the owners of the business and provide finance
- Returns to Shareholders: achieved by increasing profit or increasing share price
- Growth: to make jobs, increase salary and status, open up new possibilities, spread risks, higher market share. economies of scale. Will only happen when customers are satisfied with the product/service of the business
- Market Share: increased market share leads to good publicity, increased supplier influence and increased customer influence
- Service to the Community:
> social - provide jobs and support for disadvantaged groups in society
> environmental - protect the environment
> financial - make a profit to invest back into social enterprise and expend social work
What is profit?
the total income of a business (revenue) - total costs.
What is market share?
the percentage of total market sales held by one brand / business.
( Company Sales / Total Market Sales ) x100 = Market Share
What is a social enterprise?
has social objectives as well as an aim to make a profit to reinvest back into the business.
Why do business objectives change?
- business has survived for years and the owner aims to make more profit
- business has high market share and now aims to give higher returns to shareholders
- a profit-making business is facing economic recession which now focuses on survivng
What is a stakeholder?
any person / group with direct interest in the performance and activities of a business.
What are examples of stakeholders?
- Owners (internal)
- Workers / Employees (internal)
- Managers (internal)
- Consumers (external)
- Government (external)
- The Whole Community (external)
- Banks (external)
- Suppliers (external)
- Competitors (external)
Describe Owners as a stakeholder group.
Features:
- invest capital
- take share of profits
- risk takers
Objectives:
-share profits
- growth
Describe Workers / Employees as a stakeholder group.
Features:
- employed by the business
- follow manager’s instructions
- needs training
- full or part time / temporary or permanent basis
- if there is not enough work, some may be made redundant
Objectives:
- regular payment (salary/wages)
- contract of employment
- job security
- job satisfaction
Describe Managers as a stakeholder group.
Features:
- employees of the business
- controls other employees
- make important decisions
- success is determined by the business
- poor decisions could lead to business failure
Objectives:
- high salary
- job security
- business growth
Describe Customers as a stakeholder group.
Features:
- buys goods/services of the business
- without enough customers, business makes loss
- market research to find consumer wants
Objectives:
- safe and reliable products
- value for money
- well-designed products of good quality
- reliability of service and maintainance
Describe Governments as a stakeholder group.
Features:
- responsible for the economy of the country
- passes laws to protect workers and consumers
Objectives:
- wants businesses to succeed
- decrease unemployment
- pay taxes
- increase economic activity / output
- stay within laws
Describe the Whole Community as a stakeholder group.
Features:
- the whole community is affected by business activity
Objectives:
-jobs
- environmentally friendly production
- safe and socially responsible products
Describe Banks as a stakeholder group.
Features:
- provide finance for business’s operations
Objectives:
- pay back interest
- repay capital lent
Describe Suppliers as a stakeholder group.
Features:
- supplies business with materials and components to produce goods/ services
Objectives:
- receive payment on time
Describe Competitors as a stakeholder group.
Features:
- businesses offering similar goods/ services within the same market
Objectives:
- gain a competitive advantage over other businesses
- increase market share and customer base.
- outperform rivals.
- profit
What’re the objectives of public sector businesses?
- Financial: meet profit targets set by government
- Service: provide a service to the public and meet quality targets set by government
- Social: protect / create employment in certain areas
