3.1 What is business? Flashcards
Why do businesses exist?
Most businesses exist in order to earn a return for the business owners, and gain profit
Create and sustain employment —> develop skills of employees
Business Objectives
Long-term measurable goals of a business
Include profit, growth, survival, cash flow, social and ethical objectives
Mission Statements
The overall goal and purpose of the business which provides strategic perspective
Advantages of a Mission Statement
Differentiates the business from its competitors
Motivational because everyone understands the direction
Disadvantages of a Mission Statement
Often too vague, general, or obvious
Viewed as a PR
Sometimes regarded cynically by employees
SMART objectives
Specific - clear
Measurable - quantifiable
Agreed - all stakeholders agree in setting targets
Realistic - achievable?
Time-bound - achievable in a time frame?
Corporate Objectives
relate to the business as a whole
usually set by top management
focus on desired performance and results of the business
Functional Objectives
relate to specific functions of a business e.g. finance, HR, marketing or operations
designed to ensure corporate objectives are achieved
Why do businesses set objectives?
The business can check its overall performance
Motivational because there’s something to aim at
Importance and caluculation of profit
Profit = Revenue - Total Costs
Profit is an incentive and rewards to take risks and make investments
Revenue
Revenue = Price x Quantity
Factors affecting Demand
PED & YED
Changes in tastes & fashions
Seasonal changes
Changing Technology
Competitor’s actions
Fixed Costs
They stay the same
E.g. Rent and salaries
Variable Costs
They change as output varies
E.g. Raw materials
Total Costs
TC = FC + VC
Sole Trader
Individual owning their own business
Has full ownership of the business
Unlimited Liability
Advantages of being a sole trader
Quick & easy to set up – can become a limited company whenever
Simple to run – owner has complete control over decision-making
Minimal paperwork
Easy to close / shut down
Disadvantages of a sole trader
Unlimited liability
They have limited funds so its harder to raise finance
Business suffers if the owner becomes ill, loses interest
Advantages of Partnerships
Risk is spread amongst more people
Partner may bring in more resources
Increased credibility
Disadvantages of partnerships
Have to share the profits.
Less control of the business for the individual.
Disputes over workload.
Problems if partners disagree over of direction of business.
Private Limited Companies
Incorporated –> legal difference between company & owners
Limited liability - shareholders are only responsible for the money invested in the company
Can raise money by selling shares
Advantages of private limited companies
Owned by one or more shareholders who are often supportive family members.
Profits are only shared between shareholders (dividends)
Able to raise money through selling shares
Limited liability.
Disadvantages of private limited company
High set-up costs
Shares can’t be traded publicly
Public Limited Company
Incorporated –> legal difference between company & owners
Shares are bought and sold in open market
Advantages of public limited company
Limited liability
Greater access to finance
Disadvantages of public limited company
Vulnerable to takeovers
Risk of losing control
Private sector organisations
Owned by individuals –> driven by profit.
Profit benefits the owners, shareholders and investors.
Financed by private money from shareholders and by bank loans.
Public sector organisations
Owned and run by the government
They provide goods and services for the benefit of the community.
Operate with money raised from taxes
Not-for-profit organisations
Mutual Businesses –> exist to server their ‘members
Charities
Unlimited Liability
Liable for all debts of the business
Unincorporated business like sole traders or partnerships
Limited Liability
Only liable for what they have invested in the company
Incorporated businesses like public and private limited companies
Market Capitalisation
Market Capitalisation = Share price x Number of shares
Dividends
Payments made to shareholders by the company from earned profits
Shareholders
Provides financial security for the company & expertise advice
Has control over how the directors manage the company
Receives a percentage of any profits generated by the company.
Share prices
Share price is determined by supply and demand
If there are more buyers than sellers then share price will rise
If there are more sellers than buyers then share price will fall
The effects of ownership on mission, objectives, decisions and performance
Sole traders make all their own decisions without pressure from shareholders.
Public limited companies - Shareholders are interested in the growth in value of their own shares so they will want to generate short-term profits to see a return on their investments
Private limited companies - shareholders have a longer term view because they are likely to be more closely related to the business
External Environment - MARKET CONDITIONS
Economic Growth (GDP)
Market Demand
- faster growing markets encourages new entrants
- slow growing markets creates tougher conditions, competitors fighting for their share of weak demand
External Environment - INCOMES
Inflation, interest rates, taxes all affect disposable income
Increase in disposable incomes leads to increase in luxury goods
External Environment - INTEREST RATES
Increase in interest rates leads to:
- reduced consumer spending because borrowing is expensive
- consumers more likely to save rather than spend
- lower GDP & inflation
Decrease in interest rates leads to:
- lower cost of borrowing
- consumers more like to spend instead of save
External Environment - DEMOGRAPHIC FACTORS
Age
Income
Geographic location
External Environment - ENVIRONMENTAL ISSUES & FAIR TRADE
Businesses may change their purchasing and operating policies to be environmentally friendly –> leads to increase in costs as they move to more expensive materials or methods of production.
Fair Trade exists where businesses in more developed countries pay a fair price for goods from less developed countries.
