3.1 What Is Business

Question 1

What are the 6 key Objectives of a business?

Answer 1

Profit
Growth
Survival
Social
Ethical

Question 2

What is profit?

Answer 2

The profit is what is leftover after total costs is deducted from sales revenue.

Question 3

What is growth?

Answer 3

To increase in size either by value of sales or volume of sales.

Question 4

What is survival?

Answer 4

To continue to exist as a business.

Question 5

What is cash flow?

Answer 5

To ensure sufficient cash is available to meet day to day expenses.

Cash flow is the flow of cash into and out of a business over a period of time.

Question 6

What is a Social objective?

Answer 6

To behave in a way which benefits society.

Such as creating employment, supporting the local community, or improving educational standards.

Question 7

What are ethical objectives?

Answer 7

To behave in a way which is considered to be morally correct.

Could include treating key stakeholders including suppliers and employees in a fair manner or reducing negative impacts on the environment.

Question 8

Why might objectives of growth and profit be complementary objectives?

Answer 8

A business focusing on growth will also allow more sales which will lead to higher profit levels.

Question 9

Why might objectives of survival and cashflow be complementary?

Answer 9

The survival of a business is based off of the ability to have enough cashflow to keep the business running.

Question 10

Objectives should be SMART.
What does SMART stand for?

Answer 10

Specific
Measurable
Achievable
Realistic
Timely

Question 11

What is a mission statement?

Answer 11

A mission statement is a brief written statement of the purpose of a company or organisation. Ideally a mission statement guides the actions of the organisation, spells out its overall goal, provides a sense of direction, and guides decision making for all levels of management.

Question 12

What are?
Mission statement
Corporate aims
Corporate objectives
Corporate strategy
Business tactics

Answer 12

Mission statement- The overall reason for the business’ existence

Corporate aims- The long term targets and plans to fulfil the mission statement

Corporate objectives- The medium to long term quantifiable targets to fulfil the mission statement

Corporate strategy- The actions to be taken by the business to achieve the objectives

Business tactics- Actions taken on a day to day basis to support the strategy

Question 13

Why a business sets objectives?

Answer 13

Common sense of purpose
Motivate employees
Create reward systems
Measure and review performance
Inform decisions to improve performance.

Question 14

What are the four different business forms?

Answer 14

Sole traders

Private limited companies

Public limited companies

Non profit organisations

Question 15

What is a Sole Trader?

Answer 15

A sole trader is an individual who owns and runs their own business.

Profits made by the sole trader are classed as income and are taxed through income tax.

A sole trader has unlimited liability meaning any debts run up by the business must be paid by the individual or the assess personal assets may be sold to pay the debt.

Question 16

Benefits of being a sole trader?

Answer 16

Cheap and easy to set up

All profits go to the sole trader

Autonomy in decision making

Financial records remain private

Motivation is high as the success of the individual and the business are one and the same

Question 17

Disadvantages of being a sole trader?

Answer 17

Unlimited liability

Limited capital for investment

Little specialist skills as the owner is a “jack of all trades” or will have to buy in specialists

Difficult to find cover when Ill although sole traders often do employ people

Question 18

What is a limited company?

Answer 18

Limited companies exist in their own right
The owners and the company are seperate legal entities.
Therefore the company’s finances are seperate from the owner’s personal finances.

Question 19

What are shareholders?

Answer 19

Owners of a limited company.

This can be part ownership or full ownerships dependent on the numbers of shares of the company are owned.

Question 20

Difference between private limited companies and public limited company.

Answer 20

Private limited companies are have an ltd after the name. Where as Public liability companies have plc at the end of name.

Private limited companies are owned by shareholders who are known to the company, often family and friends.

Private limited companies are only able to sell shares to other share holders( cannot sell shares openly on a stock exchange). Whereas Public limited companies are able to sell shares to the public via the stock exchange.

Question 21

Advantages of Private limited companies?

Answer 21

Limited liability

Seperate legal identity

More flexible than a plc

Financial records remain relatively private

More capital can be raised through sale of shares

Question 22

Disadvantages of Private limited companies?

Answer 22

More complex to set up due to increased legal requirements

Some loss of control as shareholders have voting rights

Unable to sell shares to the public

Question 23

Advantages of Public limited companies?

Answer 23

Limited liability

Seperate legal identity

Financial records remain relatively private

More capital can be raised through the sale of shares

Question 24

Disadvantages of Public limited company ?

Answer 24

Lack of privacy as finnancial performance is available for all to view

More complex to set up due to increased legal requirements and ongoing administrative and ongoing administrative costs

Some loss of control as shareholders have voting rights

Risk of hostile takeovers

Question 25

What is private sector organisations?

Answer 25

-The private sector is the sector of the economy that is owned and controlled by individuals or groups of individuals rather than by the government.

-Sole traders

-Private limited companies

-Public limited companies

Question 26

What is public sector organisations?

Answer 26

-The public sector is that sector of economy that is owned and controlled by the government rather than individuals or groups of individuals.

-State education

-National Health Service

-Other services such as police, army, navy and air force.

Question 27

The issues Keith different forms of business?

Answer 27

-Unlimited and limited Liability

-Ordinary share capital
-An external source of finance
available to companies
-Investment given to a business in
return for a share of the profit and a
voting right
-The dividend is not fixed and
therefore does not have to be paid

-Market capitalisation
-The value of all of the shares issued
by a plc
-Gives an indication to the market,
including potential investors, of the
size of the business

-Dividends
-A percentage of profit paid to
shareholders as a reward for their
investment.

Question 28

What is the role of shareholders and why do they invest?

Answer 28

-Shareholders are:
-Investors who are part owners of a
company
-Their liability is limited to the
amount invested or promised
-The receive dividends in return for
their investment
-Invited to an AGM where they have
proportional voting right

-Why invest?
-Short term gains I.e receipt of
dividends
-Long term gains I.e increase in share
price

Question 29

Influences on share price?

Answer 29

-Global economy

-Investor confidence

-Political stability

-Company performance

-National economy

Question 30

What is the significance of a change in share price?

Answer 30

-Indication of managers’ performance

-Influences stakeholders, including consumers, suppliers and employees, perceptions of business performance.

-Can effect ability to raise finance from other sources

-Will be watched carefully by competitors and other businesses
-May flag opportunity of hostile
takeover

-Affects consumer confidence in the economy as a whole

Question 31

The effects of ownership on Mission and objectives?

Answer 31

-The prime aim or objective will vary depending upon business form.
-A sole trader might be willing to
profit sacrifice to achieve a work
life balance where as a plc. May
have pressure to maximise
shareholders returns
-A non-profit organisation will be
focused on achieving social goals
over financial ones

Question 32

The effects of ownership on decisions?

Answer 32

-Who makes key decisions and the speed with which these can be made.
-A sole trader does not have to
consult with others and can hence
make decisions quickly and
autonomously.
-A ltd may be able to quickly consult
with shareholders as they are
known to the business whereas a
plc may have to call a meeting and
go through more stages before a
decision can be reached.
-A non-profit organisation may have
to consult members who may be
and difficult to coordinate e.g all
consumers.

Question 33

The effects of ownership on Performance?

Answer 33

-Performance can be measured in a number of ways including financial, employee engagement, environmental record, quality etc,
-A sole trader will judge themselves
on performance but will not be
scrutinised by the public in the
same way as a plc may be
-Ownership will affect the ability to
employ specialist staff, access to
finance, ability to maintain a
competitive advantage and
embrace new technology. All of
these will influence business
performance.

Question 34

What are the external environments effects on cost?

Answer 34

-Costs are the value paid or to be paid for the acquisition of goods and services by businesses

-Competition
-If there are many competitors in the
market this will increase the selling
power of the supplier as they will
have a range of firms wanting to buy
their goods or services this can push
costs up.
-Competition may attract new
suppliers into a market increasing
availability and therefore driving
costs down

-Market Conditions
-Market conditions will affect the
demand for supplies and therefore
directly impact on costs. If the
market is in decline, costs may be
lowered as firms try to maintain
sales.
-If there is a high level of demand
then supplies may be in short
supply allowing suppliers to
increase costs

-Incomes
-Rising incomes may be as a result of
higher wages which are a cost to a
business. This may be due to the
government increasing the national
minimum wage.

-Interest rates
-Interest rates will affect the cost of
borrowing by businesses. If interest
rates go up so will the interest
section of repayments on bank
loans or overdrafts. This will
increase the fixed costs of a
business.
-Businesses may also find that
suppliers try to pass on their own
higher costs in the form of higher
prices further increasing costs.

-Demographic factors
-Rising net migration has increased
the size of the workforce in the uk,
this has driven average wage costs
down lowering the costs of
production
-Changes in UK demographics,
including migration and the size
and age of the population has
increased costs to the public sector
e.g health care and educations

-Environmental issues and fair trade
-Fair trade may increase costs as a
business is making a commitment
to pay suppliers a fair price, hence
increasing the cost of raw materials.
-Concern for environmental issues
may also increase costs of
production in terms of safe disposal
of waste or upgrading of equipment
to reduce emissions
-Concern for environmental issues
may also lower costs in terms of
lower energy usage or avoidance to
fines.

Question 35

What are the external environments effects on demand?

Answer 35

-Demand is the amount of customers that are willing and able to buy at a set price at any given point in time.

-Competition
-Competition can encourage firms to
compete on price therefore lowering
the overall and increasing demand in
the market
-A number of firms competing may
see a spread in demand between
firms, reducing the market share of
each firm if the market size remains
unchanged.

-Market conditions
-The level of demand will be a clear
indicator of market conditions. if the
market is growing demand will be
increasing and vice versa. Buoyant
market conditions may act as a
signal for new businesses to enter
the market in anticipation of a
further increase in demand

-Incomes
-Incomes directly affect consumers’
spending power. If Incomes are
rising this could lead to a rise in
demand as consumers have higher
discretionary incomes.

-Interest rates
-If interest rates increase this
encourages consumers to save and
discourages spending. A fall in
interest rates will have the opposite
effect.
-High interest rates may therefore
lead to a fall in demand, especially
for items where consumers spend
on credit. This will also be true of
luxury goods where consumers may
use savings to make a purchase.

-Demographic factors
-Migration has seen an increase in
demand for a wide range of goods
and services e.g. housing, public
transport and healthcare.
-Demographics also influences the
types of products demanded e.g
changing taste of a more diverse
nation and different demands from
an ageing population.

-Environmental issues and fair trade
-Businesses can use environmental
issues and fair trade as a USP or a
recognisable feature of a brand
leading to an increase in demand
-If increased costs are passed on to
the consumer in the form of higher
prices this may lead to a fall in
demand.