1 What is business Flashcards
What are the 4 reasons businesses exist
- Make a profit
- Provide goods and services
- Develop a good idea
- Provide help and support for others e.g. charities
Define a mission statement
A written declaration of a company’s core purpose and focus and defines the reason for it’s existence
What is the purpose of a mission statement
to help bring focus and meaning to a business and act as a guide when making critical decisions that may affect the direction of the business.
Define an objective
A goal to help a business achieve its mission
What are 3 key objectives of business
- Survival
- Profit
- Growth
What are the 2 additional important objectives of business
- Customer service
- Corporate social responsibility (CSR)
Define what CSR is
The commitment of a business to behave ethically towards its workforce, local community and society at large
Why does each functional area set objectives in a business
In order to contribute to the business achieving its overall objectives
What are objectives, that the mission is not
Actionable and measurable
Put these in order of achievement:
- Corporate aims
- Functional/department objectives Mission statement
- Corporate objectives
- Mission statement
Functional/department objectives ]
Corporate objectives
Corporate aims
Mission statement
What characteristics should objectives follow
SMART characteristics
What does the S in SMART characteristics mean
Specific: objectives must be clear, precise and well-defined
What does the M in SMART characteristics mean
Measurable: must be possible to know when an objective has been completed
What does the A in SMART characteristics mean
Achievable: objectives must be within capabilities and have sufficient resources
What does the R in SMART characteristics mean
Realistic: an objective must be challenging but possible to achieve given the capabilities and resources
What does the T in SMART characteristics mean
Time-based: there must be a deadline to work towards
List the 3 reasons businesses set objectives
- Performance can be evaluated as objectives are measurable and time-based
- Provide motivation for those who are responsible as they are realistic and achievable
- They give meaning to planning and ensures a business remains focused on its mission as they are specific
Define profit
The amount of money remaining once all costs have been deducted from the revenue
What a reward to owners/shareholders of a business for taking a risk of investing in the business
Profit
What is an incentive for setting up in business
Profit
Define revenue
Money receives from sales
How is revenue calculated
Units x price per unit
Define variable costs
Costs that vary as a direct result of changes in the level of output
Examples of variable costs
direct labour and raw materials
Define fixed costs
Costs that do not change as a result of changes in the level of output
- Doesn’t change in the short term
Examples of fixed costs
Rent, rates and director salaries
How is total costs calculated
Fixed costs + Variable costs
How is profit calculated
Total revenue - total costs
What is the private sector
The part of the economy that is made up by private enterprises
- businesses owned and controlled by individuals/groups of individuals
What are the 2 categories that the private sector falls under
- Corporate businesses
- Non-corporate businesses
Corporate businesses consist of
- Private limited companies
- Pubic limited companies
Non-corporate businesses consist of
- Sole traders/ sale proprietors
- Partnerships
What are corporate businesses
Businesses which have a legal identity that is separate from that of their owners
What do corporate businesses owner’s benefit from
Limited liability
Define limited liability
the restriction of financial responsibility of shareholders for a company’s debts to the amount they have individually invested
Limited liability means company can
- Sue
- Be sued
- Enter into contracts
In the event of a corporate business failing, what does this entail for shareholders
Their private possessions are safe
By what 2 methods can liability of shareholders be limited
- Shares
- Guarantee
Limited liability by shares
A shareholders liability is limited to the value of the shares that have been purchased
- no further call on the shareholder’s wealth
Limited liability by guarantee
Each member’s liability is restricted to the amount they have agreed to pay in the event of the business being wound up
- Most common with not-for profit businesses
Features of a private limited company
- Smaller than public limited companies
- Share capital must not exceed £50 000
- “Ltd” must be included after the company’s name
- Shares cannot be bought/sold without agreement of other shareholders
- Shares can’t be sold on the Stock Exchange
- Relatively small and family businesses
Features of a public limited company
- Share can be sold on the Stock Exchange and can be bought by any business/individual
- “plc” must be included after the company’s name
- Must have a minimum capital of £500 000 by law
- Publish more details of financial affairs than private limited companies
What 2 documents are given to the Registrar of companies when forming a company
- Memorandum of Association
- Articles of Association
Who receives the Memorandum of Association and Articles of Association
The Registrar of companies
What does the Memorandum of Association include
sets out the details of the company’s name, address and it’s objectives of trading
What does the Articles of Association include
details the internal arrangements of the company, including the frequency of shareholders’ meetings
Once the Registrar of companies approves documents, what does this mean for the business
- They receive a Certificate of Incorporation
- Can commence trading
What are non-corporate businesses
Businesses where their owners are not treated like separate elements
What is the risk of owners in non-corporate businesses
They can lose their private possessions in the event of failure of the business so they are known to have unlimited liability
Features of a sole trader business
- Owned by a single person
- May have multiple employees
Features of Partnerships
- Between 2-20 people who contribute capital and expertise to a business
- Usually based on a Deed of Partnership
What does the Deed of Partnership state
How much each partner has contributed, the share of profits each shall receive and the rules of electing new partners
Examples of sole traders
Plumbing and hairdressing
Examples of partnerships
Dentists and accountants
Define “ sleeping partners”
a partner that contributes capital but takes no active part in the business
What are the advantages of being a sole trader
- simple and cheap to establish with few legal formalities
- Owner receives all the profits
- Able to respond quickly to changes in market
- Confidentiality maintained as financial details aren’t published
What are the advantages of a Partnership
- Partners may have a wide range of skills and knowledge
- Great amounts of capital raised than sole traders
- Pressure reduced on owners as cover available for holidays
What are the advantages of private limited companies (Ltd)
- Limited liability
- Access to greater amounts of capital
- Limited financial information shared
- Companies have separate legal identity
What are the advantages of public limited companies (plc)
- Can gain positive publicity by trading on the Stock Exchange
- Stock exchange quotation offers access to large amounts of capital
- Suppliers more likely to offer credit
- Stock exchange has strict rules so encourages investors to part with their money
What are the disadvantages for sole traders
- Owner likely to be short of capital for investment and expansion
- Few assets for collateral to support applications for loans
- Unlimited liability
- Difficult to take holidays
What are the disadvantages of Partnerships
- Control shared
- Arguments common
- Shortage of capital
- Unlimited liability
What are the disadvantages of private limited companies (Ltd)
- Can’t sell stocks on the Stock Exchange
- Permission required to sell shares limits potential for flexibility and growth
- Have to conform to a number of expensive administrative formalities
What are the disadvantages of public limited companies(plc)
- Stock Exchange listing means short-term financial results not long-term performance
- Have to public a lot of financial information
- Significant administrative expenses
What is a not-for profit business
an organisation that has business objectives other than making a profit e.g. charities
What are objectives for not-for profit businesses
- Provide services to local communities
- Give people job-related skills
- Fair-trading activities
Example of how not-for profit businesses can provide services to local communities
Removing graffiti or clean up beaches
Example of how not-for profit businesses can give people job-related skills
Chef running chain of restaurants in order to provide training in a variety of catering skills for young people from disadvantaged backgrounds
Example of how not-for profit businesses can complete fair-trading activities
Importing products from less developed countries but pay above the market price for the products or may invest in facilities like education and healthcare
Define Mutuals
Private business whose ownership base is made up of their clients and policy holders which are run for the benefit of their members e.g. cooperatives, insurance companies and building societies
What is the public sector
The part of the economy that is owned and controlled by the government/local authorities
e.g. police, fire service, BBC, NHS , rubbish collection
What is privatisation
The process of converting government owned and government-controlled industries/businesses to the private sector
e.g. coal, steel, water, telecommunications
What are the factors that are considered when choosing a business form
- Formalities and expenses: sole traders and partnerships relatively easy to set up with a few formalities which is ideal for small businesses
- Size and risk: if business intend to stay small and carries little in the way of risk becoming a sole trader/partnership is the most appropriate
- Objectives of the owner: if the objectives involve growth, then forming an incorporated business is more appropriate as it gives more accessibility to capital and limited liability which reduces risks
What are the possible reasons of a business changing its business form
- Circumstances: growth of business
- Capital: easier to raise capital by becoming incorporated or Ltd becoming an plc
- Acquisition/takeover: may cause change of structure e.g. Ltd taken over by plc
Why might a plc change to a Ltd
- Escape scrutiny of the city
- Escape pressure from short-term shareholder objectives
Define share capital
money invested in a company by shareholders giving them part-ownership of the company
What are shareholders
owners of a limited company and include any person, company or other institutions that owns at least one share
What are the rights and roles of shareholders
- Take part in decision making at general meetings held by directors
- Attend meetings
What is something only shareholders can action
The removal of directors or changing the company name
Define dividends
- A share after-tax profit of a company distributed to its shareholders according to the number of shares held
shareholders entitled to it
What is capital growth
The value of shares increasing over time
What causes share prices to increase
Demand of shares > supply
What causes share prices to decrease
Sellers > Buyers
What does the prices of a share depend on
The market
What are the 4 reasons shares and dividends may fluctuate in value
- Performance
- Changes within market/competitive environment
- World uncertainty
How does changes within market/competitive environment affect the fluctuation in value of shares and dividend
e.g. customers move from mainstream supermarket (Tesco) to discounters (Lidl and Aldi)
- Tesco’s shares adversely affected
How does performance affect the fluctuation in value of shares and dividends
- Profits worse than expected = value of shares fall
- Profits higher than expected = share value rises
How does world uncertainty affect the fluctuation in value of shares and dividends
e.g. conflict in the Middle East, a pandemic (COVID-19) or an economic downturn will cause share prices to full
What is market capitalisation
A valuation of a company
How is market capitalisation calculated
share price x number of shares issued
Changes in 1………….. affect the 2…………… of a company
- share price
- valuation
A 1……. share price may provide 2………….. for investment/takeover or indicate that a business is in 3…………..
- fall
- opportunity
- decline
Define external environment
Things that are out of the business’s control
What are the 5 types of external environment factors
- Competition
- Market conditions
- Economic factors
- Social and environmental issues
- Demographic factors
What do the external environment affect
- Demand of goods/services
- Cost of operating a business
- Impacts ability to achieve strategic goals and objectives
Competition: a business must try to 1…………… its own producrs/services in order to 2…………. consumers to purchase them
Costs impacted
Define Market conditions
the characteristics of a particular market
e.g. size, growth rate, any barriers to entry, seasonal factors, amount and intensity of competition
Impacts demand and costs
What do economic factors consist of
- Interest rates
- Inflation
- Exchange rates
What do interest rates have a huge impact on
Demand and costs
High interest equals
Explain why
Lower demand
consumers have less disposable income due to higher borrowing costs for loans and mortgages which may encourage them o save more
Give an example of a business that aren’t negatively impacted by the raise in interest rates
Discount retailers
Business with a high 1…………… have …………. costs when 3……………. increase
- borrowing
- higher
- interest rates
Low interest equals
High demand and costs
1………. interests lead to new capital investments being 2………….
- High
- postponed
1………… interests more 2………….. capital investment
- Low
- conductive
If a business has large 1……………., they will benefit to 2…………….., as higher interest rates 3…………….
- cash reserves
- rise in interest rates
- received
Falling income equals
lower demand
Rise in income equals
higher demand
Demand for 1………… will be 2………. affected by the changes in 3………… than the demand for luxuries
- necessities
- less
- income
Define demography
The study of human populations based on factors such as:
-age
- gender
- income
- occupation
- birth rates
- death rates
- level of public health
-immigration
Demographic factors that are important in the UK
What do these factors affect
- population growth which immigration is the most common contributor
- ageing population
They affect the demand and the nature of goods and services purchased
They also affect the structure of the working population e.g. workers working longer before they receive their state pension
Environmental issues and fair trade:
1……………. and 2…………….. quickly brings to light any 3……………. in terms of 4…………….. and exploitation of people in 5…………………
What may this impact
- Media
- social media
- Impacts the business’s reputation, sales and costs
Why have successive governments in the UK introduced legislation
To help protect the environment from pollution
Business need to spend large amounts of measure to ensure 1……….., 2…………. and the surrounding 3…………….. are clear from 4………………..
- Due to legislation put in place
- water
- air
- countryside
- pollution
What are businesses that have located themselves where legislation is less stringent not always free from
The public gaze
Concern of the environment driven by factors such as
Global warming - Businesses need to cut emissions
What is fair trade about and what does it lead to
achieving better prices, decent working conditions and fair terms of trade for farmers and workers in less developed countries
- Higher costs for businesses but can lead to greater demand and better reputation and could act as a selling point
Businesses should 1………and 2……….. for some changes in 3…………..
- anticipate
- plan
- external factors
What is a way to remember external factors which affect business
PESTLE
What does the P in PESTLE stand for
Political
- government type and policy
- Funding, grants and initiatives
What does the E in PESTLE stand for
Economic
- Inflation and interest rates
- Labour and energy costs
What does the S in PESTLE stand for
Social
- Population, education, media
- Lifestyle, fashion, culture
What does the T in PESTLE stand for
Technological
- Emerging technologies, web
- Information and communications
What does the L in PESTLE stand for
Legal
- Regulations and standards
- Employment law
What does the E in PESTLE stand for
Environmental
- Weather, green and ethical issues
- Pollution, waste, recycling
