1.4 - Making the Business effective

Question 1

1.4.1 - What is the difference bewteen limited and unlimited liability?

Answer 1

• In unlimited liability, there is no distinction between the business and the owner and so any debts that the business owes have to be payed off by the owner’s personal assets.
• In limited liability, the business and the shareholders that own it are distinct and so any debts cna only only be taken form the business.

Question 2

1.4.1 - What does it mean for a business if it is owned by its shareholders?

Answer 2

It is either a PLC or LTD, has limited liability and have to publish their accounts publicly.
+ They have limited liability
+ Reduced risk
+ Increased capital
+ Increased status means they’re more likely to be approved for loans etc.
- Desicions can be limited as company ia owned by many people
- Profit may be the only goal
- Other people can buy more shares and take over

Question 3

1.4.1 - What is franchising?

Answer 3

The right given by one business to another to

sell goods or services using its name.

Question 4

1.4.1 - What is a franchisor

Answer 4

The business that gives franchisees the right to sell its product, in return for a fixed sum of money or a royalty payment:

Question 5

1.4.1 - What is a franchisee

Answer 5

A person or company that is granted a license to do business under the franchisor’s trademark. The franchisee purchases a franchise from the franchisor:

Question 6

1.4.2 - The proximity to what four factors affect business location and why?

Answer 6

• Target market and demographics ( so that there will be sufficient people interested in your business)
• Labour (So that you have workers who are able to commute and won’t loose out on your workforce)
• Materials (Your product needs be easily manufacturable)
• Competitors (You may want to be close as it means a similar target market will be nearby. You may want to be far away as they can steal your customers)

Question 7

1.4.2 - Why might the nature of a business’ activity effect its location?

Answer 7

Businesses in the tertairy sector will require to be in city centres as they provide services that may require to be in locations convenient for customers. In the primary sectro, you location may be in rural area as land is cheap and you don’t need to be close to your customers.

Question 8

1.4.2 - What are the benefits and limitations of e-commerce over fixed premises?

Answer 8

+ Reach a larger market of customers
+ Less overhead fees (electricity rent etc.)
+ Less workers to pay
- Customers may be wary of paying online
- Tecnological failures can limit businesses
- Technology may not always be user-friendly

Question 9

1.4.3 - What does the marketing mix consist of?

Answer 9

• Price
• Place
• Product
• Promotion

Question 10

1.4.3 - How does technology affect the marketing mix? (What does it introduce)

Answer 10

• E-commerce: Being able to use the internet as a place for selling items
• Digital communication: Promoting you product to potential customers online

Question 11

1.4.4 - What is a business plan?

Answer 11

A plan for the development of a business identifying things such as:

• Business idea
• Business aims/objectives
• Market research
• Forecast revenue
• Costs and profits
• Cash flow forcast
• Sources of finance
• The marketing mix

Question 12

1.4.4 - What are the purposes of a business plan?

Answer 12

• To think about all aspects of the business.
• To reduce risk of failure
• To interest potential investors and bank loans

Question 13

Advantages of setting up a franchise

Answer 13

• The franchisor still owns the business and will receive royalties from the franchisee
• Tested and developed format & brand; the franchisee is more likely to succeed in the new business
• Advice, support, training is available to the franchisee
• Easier to raise finance, as the brand is recognised
• No industry expertise is required
• The franchisee can benefit from the buying power of the franchisor
• Lower risk method for the franchisee and lower failure rate; the franchisor is able to expand without the risk

Question 14

Disadvantages of setting up a franchise

Answer 14

• Not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up, making them more expensive
• There are restrictions on marketing activities, for example not being allowed to undercut nearby franchises, and on selling the business
• There is a risk that the franchisor will go out of business
• The franchise needs to earn enough profit to satisfy both the franchisee and the franchisor

Question 15

Advantages of setting up a Sole Trader

Answer 15

• quick and easy to set up.
• get to make all the decisions.
• keeps all the profits.
• minimal paperwork.

Question 16

Disadvantages of setting up a Sole Trader

Answer 16

• Unlimited liability
• May not have all the skills needed to handle all areas of the business
• Making all the decisions can be stressful
• Can be difficult to raise finance
• Heavy workload

Question 17

Advantages of setting up a Private Limited Company

Answer 17

• Limited liability - protects the personal wealth of the shareholders
• Easier to raise finance as the company can sell shares
• Stable form of structure - the company continues to exist even when the shareholders change
• Original owners are likely to retain control

Question 18

Disadvantages of setting up a Private Limited Company

Answer 18

• Shareholders have to agree about how profits are distributed
• Greater administrative costs than setting up as a sole trader or partnership
• Finance limited to “friends and family”
• Less privacy - public disclosure of company information, but not as extreme as for a plc
• Directors’ legal duties are stricter

Question 19

Advantages of setting up a Partnership

Answer 19

Simple to form a business together
* Minimal paperwork once Partnership Agreement is set up
* Partners can provide specialist knowledge and skills
Jobs can be shared
* Greater potential to raise finance
* Any losses will be shared

Question 20

Disadvantages of setting up a Partnership

Answer 20

• Unlimited liability
• Partners have to live with decisions of others
• Decision-making can take longer
• Harder to raise finance than a company
• Short life, as if one partner leaves or dies the partnership ends
• Profits have to be shared