3.1 What Is Buisness?

Question 1

What is a mission statement? And what do they tell you?

Answer 1

A mission statement is a written description of the main corporate aims. Mission statements tell you the purpose of the business and include information such as its values, standards, strategy, who the customers are and what makes the business unique.

Question 2

What are business objectives?

Answer 2

Business objectives are the stated, measurable targets of how to achieve business aims.

Question 3

What are corporate objectives?

Answer 3

Corporate objectives are the goals of the business as a whole.

Question 4

What are departmental objectives?

Answer 4

The objectives of each department. They’re more detailed than corporate objectives and they are specific to each department.

Question 5

What does SMART stand for?

Answer 5

S - specific
M - measurable 
A - achievable
R - realistic
T - time-bound

Question 6

Give examples of business objectives

Answer 6

1) Profit maximisation
2) Growth objective e.g. Increase market share
3) Societal objective e.g. decrease CO2 emissions
4) Cash flow objectives etc../

Question 7

Formula for revenue

Answer 7

Revenue = selling price per unit X quantity sold

Question 8

Formula for total variable costs

Answer 8

Total variable costs = variable cost per unit X number of units sold

Question 9

Define semi-variable costs

Answer 9

Costs that have fixed and variable parts, for example, telephone bills

Question 10

Formula for Total Costs

Answer 10

Total costs = fixed costs + variable costs

Question 11

Formula for profit

Answer 11

Profit = total revenue – total costs

Question 12

Give 3 reasons why profit is important

Answer 12

1) profit can motivate people
2) profit is a good source of finance
3) profit can be used to attract investors

Question 13

What does the term public sector organisations mean?

Answer 13

Public sector organisations are owned and run by the government. They aim to provide services to the public, rather than making a profit.

Question 14

What does the term private sector organisations mean?

Answer 14

Private sector organisations are owned and run by private individuals. They range from small sole traders to huge organisations. Most private sector organisations aim to make profit but non-profit organisations are also part of the private sector.

Question 15

What is unlimited liability?

Answer 15

Unlimited liability means that the business and the owner are seen as one under the law. This means that business debts become the personal debts of the owner. Sole traders can be forced to sell personal assets to pay off business debts

Question 16

What does limited liability mean?

Answer 16

Limited liability means that the owners aren’t personally responsible for the debts of the business

Question 17

What is a sole trader business?

Answer 17

A sole trader is an individual trading in his or her own name, or under a suitable trading name. The owner is responsible for all business debts because they have unlimited liability

Question 18

Give 4 advantages of being a sole trader

Answer 18

1. Freedom (The sole trader is his/her own boss & has complete control over decisions)
2. Profit - Sole trader is entitled to all profits
3. simplicity - Bookkeeping is less complex
4. Savings on fees - As there is no legal costs for drawing up ownership agreements

Question 19

Give 5 disadvantages of being a sole trader

Answer 19

– Unlimited liability
– harder to raise finance
– vulnerability - business suffers if the owner becomes ill
– limited expertise
– long hours

Question 20

What is a partnership?

Answer 20

Partnerships are started and owned by more than one person. There is a legal partnership agreement which covers areas such as: how profits are shared, how decisions are taken and what happens if a partner wants to leave. Partnerships still have unlimited liability.

Question 21

Give 4 advantages of a partnership

Answer 21

– Simple to run
– Less vunerability - As if one person is ill the other partner could work 
– Expertise - Partners can provide specialist skills like one could be good with finances the other with marketing
– greater potential to raise finance

Question 22

Give 3 disadvantages of a partnership

Answer 22

– Unlimited liability
– Shared profits
– Shared control therefore could be complicated to sell or close business

Question 23

What are the two kinds of limited liability companies?

Answer 23

There are private limited companies (LTDs) and public limited companies (PLCs)

Question 24

Who own limited liability companies and how are they run?

Answer 24

Limited liability companies are owned by shareholders and run by directors.
Shareholders have part ownership of a company.

Question 25

Give 6 characteristics of a private limited company

Answer 25

– Can’t sell shares to the general public
– Don’t have share prices quoted on stock exchanges
– shareholders may not be able to sell their shares without the agreement of other state shareholders
– they are often small family businesses
– there is no minimum share capital requirement
– they end their name with the word “limited” or LTD

Question 26

Give 5 characteristics of a public limited company

Answer 26

– Can sell shares to the general public
– Their share prices can be quoted on stock exchanges
– shares are freely transferable and can be bought and sold through stockbrokers, banks and share shops
– they usually start as private companies and then go public later to raise more capital
– they need over £50,000 of share capital, and if they are listed on the stock exchange, at least 25% of this must be publicly available.

Question 27

What is ordinary share capital?

Answer 27

Ordinary share capital is the original value of shares sold

Question 28

What is market capitalisation?

Answer 28

Market capitalisation is the current total value of all the ordinary shares issued by a company

Question 29

Formula for market capitalisation

Answer 29

Market capitalisation = number of issued shares X current share price

Question 30

Give 4 advantages of being a limited company

Answer 30

– Limited liability
– easier to raise finance
– stable form of structure – business continues to exist even when shareholders change
– less tax

Question 31

Give three disadvantages of being a limited company

Answer 31

– Shared control
– public disclosure of company information
– legal duties to follow

Question 32

What is a not-for-profit organisation?

Answer 32

A not for profit organisation runs for the benefit of the community and have social aims. Examples include charities, housing associations and community development trust

Question 33

What is a shareholder?

Answer 33

A shareholder is anyone who owns at least one share in the company

Question 34

Who usually buys shares in a public limited company?

Answer 34

– Individuals
– companies
– institutions (such as pension funds)

Question 35

Who usually buys shares in private limited companies?

Answer 35

Family and friends of the original owner/s

Question 36

Give 6 reasons why a shareholder would invest in a company

Answer 36

– Some shareholders invest in businesses in order to achieve a capital gain
– shareholders may be paid a dividend in return for their investment
– shareholders want to be involved in the running of the business
– Shareholders will invest because they believe in the aims and objectives of the company and want it to succeed
– A shareholder might invest in a private limited company in order to help the company grow or survive
– they may be a venture capitalist, they will take a big financial risk but to lead to a large financial reward

Question 37

Give 5 reasons why share prices fluctuate

Answer 37

– Performance of the company
– speculation of rumours of new product launches and cost saving initiatives
– current share prices
– interest rates, if the bank is offering low interest rate it could increase demand for shares
– state of the economy/external factors

Question 38

What does “rights issued” mean?

Answer 38

• where existing shareholders are given the opportunity to buy a set number of new shares in the company they own
  – if not wanted, they will sell using the stock market as ordinary shares

Question 39

Define business environment

Answer 39

Business environment incorporates all of the internal and external factors that affect how the company functions including employees, customers, management, supply and demand and business regulations

Question 40

What are 6 external factors that influence costs and demand?

Answer 40

• competition
  – market conditions
  – incomes
  – interest rates
  – demographic factors
  – environmental issues and fair trade

Question 41

What are the 4 market conditions that affect costs and demand?

Answer 41

– Political factors
– labour supply
– incomes and economic factors
– seasonal demand and supply

Question 42

How do political factors affect costs and demand?

Answer 42

• If demand in the economy is too low, governments try to increase it. They cut taxes so people have more to spend and increase their spending in the economy.
• Government try to reduce demand if it’s too high by raising taxes so people have less money to spend and cut to government spending.
• The government can also influence demand for particular product by using taxes, for example sugar tax

Question 43

How does labour supply affect costs and demand?

Answer 43

• When unemployment rates are high, there is a good supply of labour. Businesses can hire staff easily and won’t have to pay high wages and people in work will be extra productive to protect their job.
• A low rate of an unemployment could mean that there is a shortage of labour and the people available for employment might not have the skills needed for the role so will need training.

Question 44

How do incomes and economic factors affect costs and demand?

Answer 44

• In a recession, businesses need to reduce costs and lower incomes mean people have less money to spend on products, so demand decreases.
• In an economic boom, wages rise and more people are employed. This may lead to greater costs due to increased wages. However, higher incomes mean that people have more money to spend increasing demand for products.
• Changing incomes affect demand for some products more than others (income elasticity of demand)

Question 45

How does seasonal demand and supply affect costs and demand?

Answer 45

• There are variations in demand and supply throughout the year, this is called seasonality.
• Businesses must have strategies to deal with it for example; after Christmas, demand for retail goods drops, so shops cut prices to boost demand and get rid of stock

Question 46

How does competition affect costs and demand?

Answer 46

Competition can reduce demand and increase costs.

Question 47

How do interest rates affect costs and demand?

Answer 47

• Interest rates determine the cost of borrowing money and the return on savings.
• High interest rates mean most customers have less money to spend – people with existing borrowing have to pay back more money in interest, so they have less disposable income and so market demand goes down.
• Low interest rates means customers have more disposable income and there is less reward for saving, so demand goes up.

Question 48

How do businesses respond to demographic changes?

Answer 48

• The structure of a population changes over time in terms of age, sex and race – this is demographic change.
• Demographic change is important to businesses because it has an impact on demand for products.
• Different demographics of consumers tend to buy different things, so businesses need to adapt the amount and type of products they are producing.
• Demographic changes can mean that certain types of business are more in demand, this might allow existing businesses to expand or new businesses to be set up.

Question 49

How do environmental and ethical factors increase business costs?

Answer 49

Consumers are becoming increasingly concerned with the effect that their purchasing has on the environment and the ethical and unethical behaviour of firms. This is forcing businesses to consider the impact on the environment and how ethical they are being. Most of the time this increases costs