3.1 What Is Business? Flashcards
What are the 4 main functional areas of a business?
Finance
Operations
Marketing
Human Resources
What is the role of Finance?
Manages a businesses’ finances (money, sales, budget and they help aid financial decision making)
Funding money for projects and commercial purposes
What is the role of Operations?
Find way to refine day-to-day workflows so teams can save time and cut down on costs
What is the role of Marketing?
integrates with various business functions to ensure cohesive operations
Product development - offers insights into products on the market and customer preferences and effectively converts marketing leads into sales.
What is the role of Human Resources?
Manages employee/recruitment processess and legaliyies. Also manages employee training and extermination.
/What are the external factors of a business
Tech
Competition
Economy
Govt
Society
Environment
Legislation
Why does a business exist?
To provide goods and services
To make profit
To help the community
To help the environment
What is a mission?
A vision for the business
What are the key aims / missions of a business?
Profit
Increase market share
Growth
Survival
Social/ethical
Cash flow
What does SMART stand for?
Specific
Measurable
Achievable
Realistic
Timely
What is the public sector of business?
Government run businesses on behalf of public
What is the private sector of business?
Businesses ran by private individuals, for their own personal means or for the shareholders
What are the types of ownership in a private sector business?
Sole Trader
Partnership
LTD
PLC
Non profit organisations:
Social enterprise
What types of businesses are usually unincorporated?
Sole Trader
Partnership
What types of businesses are usually incorporated?
PLC
LTD
What are the features of Sole Trader?
A business owned by 1 person but can employ workers
(small/local)
It is set up by by registering yourself as employed then pay income tax
The profits either go back to the owner or back into the business (the owner chooses what to do with it)
They have unlimited liability and therefore are and unincorporated business.
The common objectives are profit and survivial
Its cheap and easy to set up however you dont get holiday pay
What is a Partnership and list some key features?
A business set up by 2 or more people
It is owned by partners and is set up by a Deed of Partnership
The profits are divided amongst partners or put back into business
The partners run it and they make collective decisions for the business
They have unlimited liability (but sometimes can be limited) so they are usually unincorporated
Their common objectives are profit and survival
The pros are that it’s easy to set up but the cons are that there may be disputes over joint decisions
Common example would be a law firm
What is an LTD and list some key features ?
A company that operates privately, only people that are invited to the business can join
The shareholders own the company and it’s set up either by a
Memorandum of association
Articles of association
Register of members
What direction the profits go in depends on the directors or it can be put back into the business or given out as dividends
The directors run it and manage day to day decisions
An LTD usually has limited liability so it’s incorporated
Their common objectives are generating profit and ensuring long term sustainability
The pros are that it has limited liability and additional legal protection as it is a separate legal entity but the cons are that you have less total control over ownership as it’s shared between directors
What is a PLC and what are the key features of it?
A business ran by directors with shareholders in the business (anyone can be shareholders as long as u buy a share off public stock market)
The shareholders and directors own it and it needs atleast 2 directors to be set up and minimum of 50k capital and atleast 25% of shares have to be sold to the public , then they can register
The directors run it and they run it day it day to day and hold AGMs (anual meetings between shareholders to decide potential decisions)
They are incorporated so they have limited liability
The pros are it has limited liability and can get loans quite easily however the cons are it’s time consuming and there’s risk of hostile takeover and shares need to be bought
Common examples would be Rolls Royce and Sainsbury’s
What are the 3 other types of business forms?
Co-operative
Not-for-profit=
(Mutual/charity)
Social enterprise
What is a non profit organisation?
A business that trade in order to benefit the community
Why do these organisations exist (non profit or social enterprises )?
For social and ethical and as well as trying to make financial return. Examples of social and ethical aims include creating employment opportunities and providing community services.
There are many different type of social enterprises such as community development trusts and housing associations or cooperatives
What is a Mutual?
Mutual business have no shareholders and no owners. They exist solely for the best interest of its members - its customers.
Building societies and life assurance businesses are common examples
What is a charity?
Having a status that means you find the businesses that aren’t liable for any debts
There are significant tax benefits
For example:
Greenpeace, friends of earth
What is flotation ?
Converting ur structure to a PLC and floating on the market (selling your shares publicly)
What is an ordinary share?
Dividends are not guaranteed and are only paid after preference shareholders receive their fixed dividends
What are preference shares?
Shareholders are entitled to fixed dividends, they are typically paid before ordinary shareholders
Fixed dividends may not be a good decision tho as if the business starts making more profit ordinary shareholders may receive more dividends than preference shareholders
What is an institutional shareholder?
An organisation that invests a large amount of capital into a company by purchasing its shares
Why do shareholders invest/exist?
Provide capital to survive and grow
Influence (vote at AGM)
Rewards (dividends, increase in share prices)
How much influence do shareholders have?
Depends on % ownership
In theory- raise issues with board of directors
So they even attend AGM or vote by proxy?
They don’t really have much control if shares are divided between so many ppl in Ltd or rly popular PLC
What influences share price?
Profit/loss
Launch of a new product
Confidence in a business
Takeover
Economic conditions
Current market share
Significance of share price changes?
Short term - little impact, shareholders buy and sell through stock market, company not involved as they already have their money from flotation
Long term - high prices, rights issue, shareholders able to buy more shares at discounted sale (easier for company to obtain more share capital)
Long term - low prices, unlikely to raise more share capital, possible takeover in extreme cases, as shareholders start to sell
What are the issues in understanding business forms?
Limited liability:
The company is now a separate legal entity and can be sued in its own right
Shareholders are not protected and can only lose the value of what they have invested, not their personal possessions
As a supplier you may not receive payment if supplying on credit and the business fails
Issues in understanding business forms:
Ordinary share capital
Businesses issue shares in exchange for investors’ capital
Annual dividend is expected but dividend may not be paid if performance isn’t good or if the business wishes to retain profits for future investment
This may be a better source of finance than a bank loan where repayments and interest would have to be paid regardless of performance. Shareholders capital is never paid back, as shares are sold on to another member of the public
However it does dilute control of owner
Issues in understanding business forms:
Market capitalisation
Is the market value of a company’s issued share capital - in other words, the number of shares multiplied by the current share of price of those shares on the stock market.
Number of shares X market value per share = market cap
Issues in understanding business forms:
Dividends
Annual rewards to shareholders from profits.
As most companies grow over time, dividends also tend to grow, so can be a valuable return for shareholders who hold on to shares for a number of years.
Issues - the higher the dividend agreed by the directors, the lower the amount of profit retained for reinvestment into the business
Issues in understanding business forms:
Dividend cover
If cover is 1: all profits have been paid out to shareholders
If cover is 2: half the profits have been paid out to shareholders (dividends can be covered twice by profits)
If cover is 3: one third of profits have been paid out (dividends can be covered 3 times by profits)
It is reccomended that companies should pay out no more then half of their profits
Low dividend cover could indicate short terminism. Paying high dividends now at the cost of future growth prospects (or even survival)
What is privatisation?
Selling state owned assets to the private sector. This is often achieved through listing the new private company on the stock exchange.
Examples of companies who went thru privatisation are
BP
BT
BRITISH AIRWAYS
ROYAL MAIL
ELECTRICITY COMPANIES
GAS COMPANIES
Pros of privatisation?
Improved efficiency:
Allows company to cut costs and be more effective. This has been shown in companies such as British airways and BT
Lack of political interference:
Instead of political decisions influencing the business, it’s now instead business influential decisions for the business, meaning more chance of survival and growth
Allows you to make long term decisions:
Short term decisions r usually made in state owned businesses as they usually make political decisions such as who’s in party ect
What are the cons of privatisation?
Exploits consumers as a private firm, they may have less competition so they set higher prices
Less value for public interest:
Less ethics and values for doing everything for interest for consumers and now its heavily profit driven = maybe worse service / quality
Govt loses out on dividends as privatised organisations are quite profitable and now there’s gaps or fragments in the public sector industry
What is demand?
Amount of goods/services consumers are willing and able to buy at a given price
This translates into revenue for businesses
Market and Market conditions
All businesses operate within a market
The conditions of the market are very much connected to the state of the economy - the economic climate
The economic conditions are measured by Gross domestic product (GDP)
GDP- the value of all services and goods sold in an economy in a given period of time (quarterly/annually)
What is a recession?
Two consecutive declines in GDP
What happens when GDP rises or falls?
When GDP rises, employment rises and income rises, therefore so does spending.
When GDP falls, employment falls and income falls too, therefore so does spending.
Economic growth?
If economic growth is positive, the general expectation that underlying market conditions will he positive, with the size of the markets expanding.
Why?
Consumer confidence or job security
Higher employment
Real incomes rise
These all mean they go spend more, which leads to higher GDP
Not all markets may see an increase tho (inferior/normal goods)
What is a Normal good?
A normal good is one who’s demand increases as people’s incomes or economy rise
Eg
Branded items
TV’s
Holidays
What is an Inferior good?
A type of food for which demand declines as the level of income or real GDP in the economy increases. This occurs when a food has more costly substitutes that see an increase in demand as the society’s economy improves.
Eg
Less branded items
Cheaper quality cosmetics
Cheaper quality food
What is real income?
Your salary/wage/pay rise compared to inflation percentage
People may save money if their real income doesn’t match inflation (is lower than it) in fear or redundancy, therefore GDP falls
3 other factors affecting the market conditions?
Consumer tastes and fashions - free from food? Carried bag manufacturing?
Disruptive change - radical innovation or technological change can mean old established producers struggle to remain competitive in very different market conditions ( whole market moves on without you)
Competitive structure - market share of firms, barriers to entry (things that make it harder to join)
Eg, if track bought out Aldi, the structure changes, market conditions change - perhaps even making it harder for a new small firm to enter the market
In competitive markets, what can businesses do to stay ahead?
Price cutting
Uniqueness/ differentiation
R & D : Drive the business forward
How could/did supermarkets respond to the economic downturn?
Promotions
Loyalty schemes
Differentiation
Value goods
Advertising
Cost cutting
Diversification
Expansion
What is disposable income?
Income after taxes have been deducted
What is discretionary income?
Income after taxes and necessities have been paid
What is real income?
Income compared to inflation, if your % increase of wages is higher than inflation, your real income HAS increased, if your % increase of wages is lower than inflation, your real income HAS decreased
What is Fair trade and why is it important ?
Selling goods at a higher prices to donate some profits to developing countries.
It’s important as it’s sustainable/eco friendly, reduces global warming and it’s fair and equal with its pay (pays suppliers on credit fair and equally = less chance of legal misconduct)
What does demographics of a population look at?
Size
Age
Gender
Ethnicity
What is happening to demographics in the UK and why is it a problem?
It’s rapidly changing, more immigration means wider ranges or heavier percentages of certain ethnicities, due to more migration too there’s less birth rates, this means there’s an unproportional amount of older people to younger people.
How does change in demographics affect /influence costs and demands?
More population may mean more people are buying your goods and services which means your costs increase as your selling to a bigger audience hence you need to make more products, more so, if there’s a disproportionate ratio of adults to younger children, products for adults might sell more therefore demands will increase rapidly for some businesses and therefore costs will too.
