3.1 Flashcards
Business definition
An organization that exists to provide goods and services on a commercial basis to customer
Benefits of business to society
- Employment
- Innovation
- Taxes
- Create wealth
Roll of entrepreneur
- Sports business opportunities
- Takes risks in order to gain possible future returns
- Acts a catalyst for the creation and growth of new businesses enterprise
Start-up
- A start up is new business enterprise, formed by one or more entrepreneurs
Business sectors
- Primary
- Secondary
- Tertiary
- Quaternary
Primary
Extraction of natural rescources
Secondary
Production of finished goods and componets
Tertiary
Providing services to consumers and businesses
Quaternary
Providing information and ICT
Business objective
Specific outcomes which a business adopts as targets in order to achieve its primary aim
Functions of objective
- A clear statement of what needs to be achieved
- Focus for all activity
- Targets for individual and group achievement
- A means of measuring employees
- Motivate employees
- Reduce uncertainty
- Provide a sense of unity
Corporate objectives
- Profit
- Return on investment (ROCE)
- Growth
- Market share
- Cash flow
- Sales revenue
- Shareholder value
- Corporate image & reputation
Common business objectives
- Profit optimization
- Profit maximation
- Sales growth
- Cash flow
- Survival
- Social and ethical objectives
SMART
- S - Smart
- M - Measurable
- A - Achievable
- R - Relevant
- T - Timebound
Unlimited liability
- A characteristics of unincorporated businesses
- Business owner is personally responsible for the debts and liability of the business
- If the unincorporated businesses fails, the owner are liable for the amounts owed
Sole trader
- The most common type of business structure
- A sole trader is just an individual owning the business
- A sole trader is just an individual owning the business
- A sole trader can also employ people - but those employees do not share in the ownership of the business
- A sole trader has unlimited liability
Advantages of sole trader
- Quick and easy to set up
- Simple to run - owner has complete control over decision making
- Minimal paperwork
- Easy to close
Disadvantages of sole trader
- Full personal liability - “unlimited liability”
- Harder to raise finance
- Can pay a higher tax rate than a company
- The business is the owner- the business suffers if the owner is not working
Dividends
- Payments made to shareholders by the company from earned profits
- Amount paid is “per share”
What is a share
- An individual part of the issued share capital of the economy
- Most shares are “ordinary shares”
Capital growth
- Arises from an increase in the value of the business
- Reflected in an increase in a share price
- Only realized when a share is sold
- No guarantee that a shareholding will increase in value
Private limited company
- Most popular forms of business
- Privately known
- Shares cannot be traded publicly
- Usually just 1 or few shareholders
Public limited companies
- Minimum share capacity £50,000
- Shares may be traded on a public stock market
- Usually many shareholders
- More detailed disclosure of information required
- Costly to administer
Share price of a private company
- Initially set when shareholders “subscribe” for their shares
- There after only determined when shares of a private company - so hard to judge current value
Share price of a public company
- High transparent
- All trades are disclosed
- Share prices widely published and tracked
Share price
- A share price is determined by the interaction of supply and demand
- If demand for a share > supply then the share price should rise
- A falling share price indicates excess supply
Market capitalization
- The total market value of the issued share capital of the company
- Calculated by
Share price (per share) X Number of shares in issue
Factors within the companies control influences PLCs share price
- Financial performance
- Dividend policy
- Management reputation
- Relationship with key investors
Factors outside of the companies control influences PLCs share price
- State of the economy
- General market sentiment
- Whether the company is a takeover target
- Alternative investments in the company’s sector
Share capital
- Known as equity finance
- Returns: dividends and capital growth
- Part of the ownership of a company
- Long-term source of finance
- Returns tend to be higher given higher risk
- Can be repaid but unusual
Debt
- Can be short or long term
- Repaid over an agreed period
- Most commonly in the form of loans or overdrafts
- Return: interest on amount loaned and outstanding
- No participation in the ownership of the company
- Often secured against the assets of the company
Methods of issuing shares for a public company
- Flotation
- Rights issue
Flotation
- Share issued on the stock exchange for the first time
- Costly + time consuming process
- Opportunity for existing shareholders to realise profits on there investment
Rights issue
- Fresh issue of new shares to existing shareholders
- Shareholders have the right to subscribe for the new shares usually at a significant discount to the existing share price
Share issues benefits
- Broader base of shareholders
- Able to raise substantial funds if the business has good prosects
- Equity rather than debt = lower risk finance structure
Share issues drawbacks
- Can be costly and time consuming
- Existing shareholder holding may be diluted
- Equity has a cost of capital that is higher than debt
External environment
- Business must take into account the external environment in which they operate, in order to make effective decisions.
- Most business are unlikely to have much control over this environment
- Business need to monitor their environment constantly, in order to react to any changes that occur
- The most competitive businesses will anticipate change rather than react to it
ESCELP
E - Economic
S - Social
C - Competition
E - Ethical and Environmental
L - Legal
P - Political
Examples of E (Economic) in ESCELP
- Interest rates
- Market demand
- Exchange rates
- Economic growth (GDP)
GDP
- Measure of the value of output in the economy
- Value used to assess changes in economic growth
Demand
- How much of a good or service a consumer wants and is able to pay for
- For a business demands turns into revenue
Factors affecting consumer demand
- Real disposable income - How much households have available to spend
- Job security - When the jobs market is improving, consumer confidence and incomes will improve
-Wealth - A rise in wealth can increase consumer demand - Expectations and sentiment - Economic uncertainty causes spending to fall, weakening demand
Factors that affect real incomes
- Price inflation
- Wage growth
- Employment levels
- Interest rates
- Govt. tax policy
Interest rates
- An interest rate is the reward for savings and the cost of borrowing expressed as a percentage of the money saver or borrowed
Types of interest rates
- Interest rates on savings in bank and other accounts
- Borrowing interest rates:
> Mortgages interest rates (housing loans
> Credit card interest rates and pay-day loans
> Interest rates on government and corporate bonds - The BoE uses policy interest rates to help regulate the economy and meet economic policy objectives
What happens when interest rates fall
- Cost of servicing loans/ debt is reduced - boosting spending power
- Consumer confidence should increase leading to more spending
- Business investments should be boosted e.g. prospect of rising demand
- Effective disposable income rises - lower mortgage costs
- Housing markets effects - more demand and high property prices
- Exchange rate and exports - cheaper currency will increase exports
What happen if interest rates rises
BoE raises interest rates –> Cost of borrowing rises –> Main effect will be through via mortgages –> Repayments on other debts –> Possible slowdown in housing market –> Contraction in retail credit –> Higher rates might also cause currency to get stronger –> Makes UK exports more expensive in overseas markets
Examples of S (social) in ESCELP
- Demographic change
- Impact of pressure groups
- Consumer tastes and fashion
- Changing lifestyle
Examples of C (competition) in ESCELP
- Competitive structure
- Pricing
- Mobile technology
- Disruptive technologies
Competition issues which makes the external environment tougher
- Competitors with significant market share or faster growth than the market
- Consolidation of a market which creates more powerful competitors
- Spare or surplus capacity in the market/ industry which reduces industry profits and make price wars more likely
- Investment in innovation & new product development by close competitors
Examples of E (ethical and environment) in ESCELP
- Sustainability
- Tax practises
- Ethical sourcing (fairtrade)
- Pollution & carbon emissions
Environmental issues for businesses
- Sustainability
- A “green” supply chain
- Minimizing packaging
- Promoting environmental policies
- Complying with environmental laws
- Carbon emissions
- Waste disposal
Examples of L (legal) in ESCELP
- Employment law
- Minimum/ living wage
- Health & safety laws
- Environmental legislation
Examples of P (political) in ESCELP
- Competition policy
- Industry regulation
- Govt spending and tax policies
- Business policy and incentives
