1 what is business? Flashcards
how does a business idea first come into place?
an entrepreneur has an idea/mission, which can be broken down into smaller (SMART) objectives. to carry out these objectives one needs a strategy, which include the four main business functions (operations, people, finance, marketing)
what is the difference between an aim, mission, objective and strategy?
aim: a stated goal for the future
mission: a business aim expressed to seem especially purposeful and motivating, used to excite customers/staff and make them feel part of the project
objectives: smaller targets set by a business to achieve their long term aim. need to be specific, measurable, attainable, realistic and time bound
strategy: medium-long term plan to meet your objectives
why do businesses set objectives?
- to delegate tasks to more junior staff and give them some authority. this is motivating for staff to have a clear objective to work towards (that is achievable)
- clear for investors like shareholders or venture capitalists to see the direction the business is headed in. the objective develops the strategy
corporate objectives
goals set for the whole business, not just one function OMGCSE
- profit optimisation, profit maximisation, growth, cash flow, survival, ethical and social considerations
profit optimisation
more revenue than costs should be just right:
+ balance gives the business a competitive edge eg. low enough prices that consumers dodon’tnt use competitors, but ethically so
- too high in the short term = risk of exploiting customers
- too low to finance the business in the long term
profit maximisation
making as much profit as possible in a given time period. maybe when floating shares on the stock market to get the highest value for money
+ everyone’s share of the profit goes up (shareholders, employees, managers)
+ lowering consumer prices to try to sell as many units as possible, more demand
- small businesses may increase product prices to try to maximise profit, can lead to less demand and sales
- high profit may lead to competitors entering the market
- can become overly focused on maximising profits and lose sight of the social / ethical / environmental aspect
growth
+ decisions can focus on rising customer numbers rather than rising profit, meaning growth is also about consumer loyalty (esp. online businesses)
- business might not be ready for growth yet, and need to focus on survival. too ambitious, dangerous.
cash flow
the difference between cash coming in and cash going out of a business, usually important for smaller firms.
+ cash flow can be analysed from the income statement to find the weaknesses in a business and amend them
- bad cash flow can be devastating eg. not enough money to pay debts
- smaller firms may struggle, suppliers want immediate payment (cash outflows) whilst consumers want generous, delayed credit periods (cash inflows)
survival
+ usually a priority for start up businesses - 1/3 of businesses fail to survive three years, and survival may be a key objective to avoid failure
- cannot focus on expansion, business growth and may result in little starting profit/business confidence
ethical/social considerations
can include: treating workers ethically (eg. fair wage, good conditions, flexible working), treating suppliers ethically (eg. paying fairly, reasonable expectations), treating customers ethically (eg. customer service or accurate product information), ethical repercussions of production (eg. animal testing for cosmetics, sourcing materials)
+ can actually improve efficiency - if businesses find a way to reduce waste they may find they reduce costs and are ethical too
- unethical behaviour can reduce the reputation of the company and undo any marketing they have spent money on
- bosses may be more concerned with more profits rather than ethics, and give out bonuses to those who do so (which affects morale to care about ethics)
unlimited liability
the finances of the business are the responsibility of the business owners. their assets can get seized and owners can be made personally bankrupt if the business goes into liquidation.
UNINCORPORATED businesses like sole traders and partnerships have unlimited liability.
sole traders
business owned and operated by one person. eg. plumbers, electricians, hairdressers
+ collects all profits
+ no administrative costs to set up
+ accounts are not published, confidential
+ high control, decision making is all yours
- unlimited liability, personal assets can be seized by creditors to pay debts
- long working hours and difficulty running the business when sick
- fewer sources of finance, growth + expansion is slower
- high responsibility, need to be multi-skilled (knowledge on marketing as well as finance, eg.)
partnerships
businesses with two or more owners set up through a deed of partnership eg. medicine, law
- unlimited liability
- conflict amongst owners can occur
- shared profits
+ easy administration
+ shared decision-making/expertise by the owners
+ shared responsibility for debt by the owners
limited liability
financial responsibility of business owners only for what they invested in a business. business has to go through the process of incorporation to get a separate legal identity for the company. has to get registered at the registrar of companies.
PLC (public limited companies)
large companies owned by shareholders that have a minimum of £50,000 share capital. chief executive officer (CEO) + board of directors manage the business. ‘plc’ after company name.
+ can raise share capital by ‘floating on the stock exchange’.
+ limited liability
+ economies of scale, more negotiation for larger businesses
- expensive to set up, requiring a minimum of £50,000
- more complex accounts/reports to fill out
- greater risk of a hostile takeover by a rival company
ltd (private limited companies)
small-medium businesses owned by shareholders and managed by a director. they cannot sell shares to the public/stock market. often family or friends run and focused on profit. must say ‘ltd’ after the name.
+ limited liability
+ be their own boss
+ new shareholders need to be invited, preventing outside influence
+ shares can be sold to raise finance
- paperwork/administrative costs
- public financial information
- business may require outside professional help to manage its finances
- no access to the stock exchange, needs to go through flotation to become a plc
should a business convert from a sole trader to a PLC?
PLUMS
profit - NO, 100% profits go to the owner in a sole trader, BUT the overall profits might be higher in a PLC so 100% might be less money.
limited/unlimited liability - YES, sole traders have unlimited liability, which is dangerous for assets BUT, is incorporation a priority/worth it for the business
management and control - DEPENDS if the individual values control over decisions (sole trader) vs shareholder input (PLC)
sources of finance - YES, sole traders have a harder time obtaining profits BUT confidence levels could be swayed in publishing of records
plc also pays corporation tax rather than income tax (sole trader). more profits you make, overall tax bill is smaller with corporation tax
should a business convert from a ltd to a PLC?
PLUMS
profit - YES, finance will be higher due to access to the stock exchange (share capital from investment banks, pension funds, high value individuals rather than retained profits)
limited liability - for both, doesnt change
management and control - NO, ltd controls shareholders, no issues with divorce and control unlike plc. BUT PLC has higher prestige (media coverage, reputation, profits and sales)
sources of finance - YES, ltd doesn’t have access to the stock exchange unlike plc
+ stable business ownership structure - investors will sell shares to other investors
+ growth, market share becoming larger means benefits of economies of scale BUT diseconomies of scale
- flotation is expensive, paying the investment bank to underwrite the flotation and start the process
- increased legal requirements (stock exchange)
- shareholders are myopic/short sighted and motivated by dividends not long term investment
public sector
organisations owned and controlled by the government
+ faces little competition
+ provides services that could be unprofitable if provided by firms in the private sector
- considered bureaucratic
- no profit motive = lack of innovation
- change of government could mean changes in funding and spending
eg. nhs, schools
