3.1 WHAT IS BUISNESS? Flashcards
Define a Mission Statement
Overall reason for a business’ existence
A long term goal (10+ years)
Advantages of Mission Statements
- May improve motivation
- Teamwork: common focus for everyone in organisation
- Can help determine a business’ strategic position
Why is it important to share a mission statement with employees?
Gives:
- Sense of direction - follow same path
- Sense of motivation - makes them more productive
Why is it important for leaders to think back to mission statements?
- Keeps them on focus
- Stay ethical to the task, ward off pressure groups
Define corporate/strategic objectives
Goals for the whole organisation, purpose of showing direction to staff and the whole organisation
What dictates the corporate objectives?
Mission statement
Give an example of a mission statement
‘to accelerate the world’s transition to sustainable energy’
- Tesla
Internal influences on corporate objectives
- Business ownership / leadership
- Power of stakeholders (employees)
- Ethical actions
Disadvantages of corporate objectives
Shareholders may be bias to shareholder maximisation so many corporate objectives may be necessary to avoid this
May be too vague for each department
Define shareholder maximisation
A maximum return to shareholders is and ought to be the objective of all corporate activity
During a recession, a business may need to change its objectives. What to?
Survival
Define functional objectives
Objectives for each department
Advantage of using functional objectives
Being more specific means more motivating for each employee, feel like they are more of a contributing factor.
Define strategy and tactics
Strategy: how we do things, medium/long term plan of action, put in place to achieve a business objective.
Tactics: short term that helps to achieve a strategy- daily activities such as sending emails
Suggest the tiers associated with missions, aims and objectives
- Mission / Corporate Aim
- Corporate Objective
- Functional Objective
- Strategies
- Tactics
What makes an effective mission statement?
- Unique (to competitors)
- Defines the market of operation
- Relevant to all major stakeholders
- Excites, inspires, motivates and guides
What is profit?
- A return on investment
- Reward for taking risks
- A measure of business success
- Motivating factor
- Helps to create positive cash flow
Define Revenue
Amount/value of a product that customers actually buy from a business
Define Demand
Amount of a product that customers are prepared to buy
Factors that affect level of demand
- Price
- Competitors
- Government/laws
- Tastes/trends
- Changes in technology
- Demographic changes
- Ethics
Ways to increase revenue
- Increase amount sold
- Achieve higher selling price
Give examples of business objectives
- Maintain / increase market share
- Develop new products
- Increase quality
- Enter a new market
- Build a competitive advantage
Define sole-traders
An individual owning a business on their own
Can employ people, but they don’t share any ownership
UNLIMITED LIABILITY
Define UNLIMITED LIABILITY
Full legal responsibility for any debts
Personal assets can be taken
Disadvantages of UNLIMITED LIABILITY
- Personal assets can be taken
- Bigger risk than limited, meaning taking out a loan may be more difficult
Define LIMITED LIABILITY
Business has separate legal responsibility for any debts
Advantages of LIMITED LIABILITY
- Personal assets cannot be taken to pay the debt, separate legal identity - STABILITY
- More flexible with debts
- Easier to raise finance
- Less tax
Disadvantages of LIMITED LIABILITY
- Shareholders could lose the value of their investment
- Greater admin costs
Advantages of Sole-traders
- Quick + easy to set up
- Simple operational structure
- Minimal paperwork
- Easy to close/shut-down
- Owner gets full control
Disadvantages of Sole-traders
- UNLIMITED LIABILITY
- Harder to raise finance
- Business relies 100% on the owner
Define Public Limited Company (PLC)
A business that trades shares on the stock market
Owned by shareholders and run by directors (do not own assets and not liable for debts)
Large value of share capital invested
Why may a public limited company close? (PLC)
If it becomes insolvent (cannot pay debt)
Define ‘insolvent’
Cannot pay debt
Define Private Limited Company
Shares traded privately, friends and family
NOT ON STOCK EXCHANGE
Give two types of limited companies
Private limited companies
Public limited companies
Advantages of Public Limited Companies
- LIMITED LIABILITY
- Easier to raise finance
- Stable form of structure
- Able to pay less tax
Disadvantage of Public Limited Companies
- Greater admin costs
- Public disclosure of business information
- Loss of ownership for original owners
Define market capitalisation
How much a company is worth as determined by the stock market
How much share capital must a business have, if it wishes to become a PLC?
£50,000
Equation for market capitalisation
Number issued shares x Current share price
Define capital growth
Arises from an increase in value of a business
How can you judge capital growth?
An increase in share price
Explain what the ‘simple demand curve’ suggests
- Higher price leads to a reduction of quantity demanded
- Lower price leads to an increase in quantity demanded
Axis on ‘the simple demand curve’
Y = Price
X = Quantity demanded
Axis on ‘the simple demand curve’
Y = Price
X = Quantity demanded
Define ‘variable costs’
Change as output varies
Define ‘fixed costs’
DOESN’T change in relation to output varying
Give examples of variable costs
- Raw materials
- Bought-in stocks
- Marketing costs (based on sales)
Give examples of fixed costs
- Rent
- Salaries
- Advertising costs
- Wages
- Insurance fees
- Software / IT systems
Why does cost per unit fall when as output increases?
Fixed costs are spread over larger number of units
(e.g.) only pay rent once, doesn’t increase with output
What does the customer expect when thinking about a service?
- High quality
- Honesty
- Warranty
- A good relationship
What are variable costs dependent on?
Output
Define ‘satisficing’
Try to make enough profit to keep the owner comfortable and secure
What are ‘SMART’ targets?
Specific
Measurable
Achievable
Realistic
Time
Why is profit important?
- Survival
- Operation
- Business owner can be satisfied financially
- Improves cash flow of business
Define ‘return for risk’
Probability of something going wrong leading to loss
Define ‘partnership’
Started and owned by more than one person
Legal partnership agreement covering:
- How profits are shared
- How decisions are taken
- What happens if partner was to leave
- Unlimited liability
Advantages of a ‘partnership’
- Simple
- Expertise and efforts of more than one owner
- Partners can provide specialist skills
Disadvantages of a ‘partnership’
- Unlimited liability
- Poor decision by one partner can damage interest of other
- Complicated to sell / close
Define ‘Not For Profit’ organisations
- Benefit community
- Social aims
- e.g. Charities
What are all of the different forms of a business?
- Sole trader
- Partnership
- Not for Profit
- PLC
- LTD
Define ‘dividends’
Payment from accumulated profits earned by a company to shareholders who qualify for such as payments
What will impact share price? (external)
- Good publicity
- Rumours
- Virus /pandemic (external factors)
- Fake news
- Ethical issues
- Financial crash (Wall Street Crash - 1929)
- Economic boom
- Inflation
- Increase / decrease in sales
What makes share prices move up and down?
- Performance of the company
- Speculation and rumours of new product launches and cost saving initiatives
- Current share price
- Interest rates, if bank offering low interest, could increase demand for shares
- State of the economy / external factors
Define ‘right issued’
SHAREHOLDERS GET PRIORITY
When a company issues existing shareholders a right to buy additional shares in the business
Will offer shareholder a specific number at a specific price
Company will set a time limit for purchase
If not wanted, they will sell using the stock market as ordinary shares.
AT DISCOUNTED PRICE
Define ‘privatisation’
When government sells a public service privately
e.g. Royal Mail
Define ‘privatisation’
When government sells a public service privately
e.g. Royal Mail
