3.1- Nature of Business Flashcards
What do Businesses do?
Businesses sell products (goods/services) to customers who are willing to pay for them- some businesses sell necessities (needs) and some sell luxury goods.
Why do people start their own businesses?
- Make a profit
- Prospect to make more money than being employed somewhere else.
- Be their own boss.
- Do a job you are interested in.
Briefly state some aims that a business owner can have?
- Offer the highest quality goods/services possible
- Excellent customer service
- Great image and reputation
- Develop new products ahead of competitors
- Diversity in range of goods/services
- Fully sustainable/minimise environmental impact.
- Invest in local community/social projects.
What is a mission statement?
Mission Statement- a written description of overall purpose or main corporate aims of business.
Mission statements allow all stakeholders to be aware of what the business does + why, and encourages employees to work towards this. Mission statement tells you purpose of business, its values, its standards, its strategy and outlines who the customers are and what makes the business unique.
Gives staff sense of shared purpose, work towards common goal. This means that business more likely to achieve its aims.
BUT- businesses don’t have to prove what they say in mission statement is accurate, so can say what they think consumers want to hear = possibly deception. Bad practise and could destroy company’s reputation if customers find out.
What is the difference between corporate objectives and functional objectives?
Corporate- goals of business as whole, depends on size of business.
Functional- objectives of each department, more detailed and specific to each dep.
Functional obj. needed to help achieve corporate obj.
What do objectives need to be?
S - specific
M - measurable
A - agreed
R - realistic
T - timely
What are some different types of objectives?
- Profit Objectives: more profitable/increase profits,
- Growth Objectives: the larger a business grows, the more it is able to use position in market to earn higher profits. Increase revenue, market share and expand business
- Survival: ensuring business is able to continue to trade (often for new businesses, during declining economy/recession)
- Cash Flow: ensuring there is constant flow of money moving in and out over period of time. Increasing cash flow allows better chance of survival.
Profit + growth = directly proportional
Survival and cash flow = directly proportional.
Social + ethical too:
- Social Objectives: benefitting society/people in need.
- Ethical Objectives: moral principles about how business treats people/environment.
Difference between short term vs long term objectives?
LT objectives- often about LT growth, set direction of business, affect big decisions that senior managers make.
ST objectives- often survival, profit, periods of objectives are in shorter increments of time than LT.
What is revenue?
Revenue is the value of sales, also called turnover. The amount of money generated by sales of product, before deductions are made.
Revenue = selling price per unit x quantity of units sold.
Difference between fixed costs and variable costs:
FC- don’t change with output, e.g. rent.
VC- rise and fall as output changes, e.g. raw material costs.
Total VC = VC per unit x no. units sold.
There is also semi-variable, both fixed and variable parts, for example telephone bills.
TC = FC + VC.
What is profit?
Profit = TR - TC
if TR > TC, business makes profit
if TR < TC, business makes loss.
Profit is important as…:
it can motivate people, good source of finance, can be used to attract investors.
What is the difference between public sector and private sector?
Public Sector organisations are owned by government. Aim to provide services to public, rather than make profit. Often funded by tax system, e.g. NHS.
Private Sector organisations are owned and run by private individuals, range from small sole traders to huge organisations, aim to make profit. But charities (non-profit), are also part of private sector.
What is the difference between limited liability and unlimited liability?
Unlimited liability:
- business and owner are seen as one under the law.
- (sole traders).
- Business debts become personal debts of the owner
- sole traders may be forced to sell personal assets (their house) to pay off business debts.
- It is a huge financial risk.
Limited liability:
- owners aren’t personally responsible for debts of business
- shareholders of both Ltds and PLCs have limited liability
- company has separate legal identity from owners
- The most shareholders can lose is the money they invested in the business.
What is a sole trader?
Sole traders:
- an individual trading in his/her name.
- Self-employed
- sole trader has full responsibility for financial control of his/her own business and meeting running costs and capital requirements (money invested to set up business/fund growth)
- Has unlimited liability
- minimal legal formalities
- However, if business isn’t run under proprietor’s name, trader has to comply with Companies Act 2006.
What are the advantages and disadvantages of being a sole trader?
ADVANTAGES:
- freedom - own boss, complete control over decisions.
- profit- entitled to all the profit
- simplicity- less form-filling, less bookkeeping
- savings on fees- no legal costs for drawing up ownership agreement.
DISADVANTAGES:
- risk- no one to share responsibilities with
- time- work long hours to meet tight deadlines
- expertise- limited skills, e.g. no experience in finance.
- finance- finance limited to money that owner has/can borrow
- vulnerability- no cover if trader gets ill + can’t work
- unlimited liability- sole trader responsible for all debts of business.
