3.1 What Is Business? Flashcards
1
Q
Define a corporation
A
A business which has a legal identity separate from that of its owner. The owners have limited liability
2
Q
Define the features of a corporate business
A
- legal difference between the business and the owners
- owners have limited liability
- corporations operate as PLC’s
3
Q
Define the features of a non-corporate organisation
A
- owner is the business (no legal difference)
- owner has unlimited liability for business actions
- operate as sole traders/partnership
4
Q
What is unlimited liability ?
A
When the owners of the business are liable for all the debts that the business may incur
Could result in them loosing their personal possessions
5
Q
What is limited liability ?
A
When the owners of the business can only lose up to the value of the money they have invested in the business
6
Q
Who falls under the category of the private sector ?
A
- sole traders
- partnerships
- private limited companies
- public limited companies
- non-profit organisations
Owned by private individuals
7
Q
Who falls under the public sector ?
A
- central government services e.g hospitals
- local government e.g libraries
- public corporations e.g BBC
Any business owned, controlled and financed by local or national government
8
Q
Who falls under the public sector ?
A
- central government services e.g hospitals
- local government e.g libraries
- public corporations e.g BBC
Any business owned, controlled and financed by local or national government
9
Q
What is a sole trader ?
A
A business owned, controlled and financed by one person
The owner is responsible for setting up the business but can employ other people
10
Q
Advantages of sole trader?
A
- easier to setup as few legal formalities
- able to respond quickly to change
- owner gets to keep all the profit
- makes all decisions
11
Q
Disadvantages of sole trader?
A
- unincorporated = unlimited liability
- limited skills and resources
- limited capital for investment and expansion
12
Q
What is a partnership ?
A
A type of business organisation owned by two or more people (no maximum)
13
Q
Advantages of partnership ?
A
- spreads risk across more people
- partner may bring money and resources
- partner may bring other skills + ideas to the business
14
Q
Disadvantages of partnership ?
A
- profit will have to be shared
- less control of the business for the individual
- unlimited liability
15
Q
Define features of private limited companies ?
A
- small to medium sized business
- shares can only be sold to friends, family or employees
- shares cannot be bought or sold without the agreement of other directors
16
Q
Advantages of private limited companies ?
A
- business has a separate legal identity = limited liability
- can raise money through share capital = access to more money
- more privacy than plc as only limited financial records published
17
Q
Disadvantages of private limited companies ?
A
- more legal formalities than an unincorporated business
- not as easy to raise capital as quickly in relation to plc
- shares cannot be traded on the stock exchange
18
Q
Define a public limited company
A
- must have share capital of at least £50,000
- PLC is owned by shareholders and anyone can buy shares on the stock exchange
- have limited liability
19
Q
Advantages of PublicLC?
A
- business has a separate legal identity = limited liability
- easier to raise money through its stock exchange listing
20
Q
Disadvantages of PublicLC?
A
- must publish a great deal of their financial info
- more pressure from investors and potential for short- termism
- have to pay shareholders dividends
- can lose control of the business (hostile takeover)
21
Q
what are not-for-profit organisations?
A
business organisations that do not exist to maximise profits, but instead focus on social or ethical objectives
22
Q
define share issue
A
act of selling new shares to the public
23
Q
define share
A
an individual part of the issued share capital of a company
24
Q
define share capital
A
the money invested in a company by the shareholders
25
what is flotation?
where a share is issued on stock exchange for the first time
opportunity for existing shareholders to realise profits on their investment
costly + timely process
26
define rights issue
fresh issue of new shares to existing shareholders
27
how can shareholders get their rewards?
dividends or capital growth
28
what are dividends?
payments made to shareholders by the company from earned profits
29
what is capital growth?
- arises from an increase in the value of the business
- reflected in an increase in a share price
30
benefits of share issues?
- able to raise substantial funds if the business has good prospects
- broader base of shareholders
- equity rather than debt = lower risk of financial structure
31
drawbacks of share issues?
- can be costly and time-consuming
- existing shareholders' holdings may be diluted
- need to pay dividends
32
define market capitalisation
represents the total market value of the issued share capital of the company
33
formula for market capitalisation?
current share price x number of shares in issue
34
what factors are key influences on share price?
- the economic climate
- company performance
- future expectations
35
how does the economic climate influence share price?
positive economic news generates confidence and investment pushing up share prices
36
how does company performance influence share price?
strong profits generate investor confidence and push up share prices
37
how do future expectations influence share price?
chances of a takeover/rumours of a new strategic direction or change of CEO can all have impacts upon the share price of a company
38
what are financial objectives?
they refer to the monetary goals/targets a business will set itself during a certain period of time
provide a target to work towards as well as a mechanism to measure performance
39
what is the value of setting financial objectives?
- act as a measure of performance
- provide targets that can motivate
- potential investors/creditors may be able to asses the viability of the business
40
define cost minimisation
the process by which businesses attempt to maximise profits by keeping costs low
41
define cash flow targets
a financial objective focused on maintaining a healthy cash flow position.
May form part of an overall corporate objective of survival in tough economic times.
42
define revenue targets
this involves setting minimum levels of revenue
any objective set would have to be co-ordinated with other functional areas
43
define profit targets
involves setting a satisfactory level of profit that the company would be happy achieving. profit maximisation can be used but difficult to judge if not a specific target.
44
define return on investment
a business might set itself an objective in terms of the return on an investment
45
how to calculate return on investment?
return on investment (profit) / capital invested x 100
46
what is capital structure?
refers to the long term finance of the business made up of equity (share capital) and borrowing (loan capital)
47
internal influences on capital structure?
- owners + their motives
- industry sector + current financial position of the business
48
external influences on capital structure?
- economic factors
- political/government policy
- competition
- technological change
49
why do businesses need finance?
1. start-up funds
2. running costs e.g marketing
3. growth + expansion
50
internal sources of finance?
1. owners savings
2. retained profit
3. reducing levels of stock
4. sale of existing assets
51
external sources of finance?
(short term)
- overdraft
- trade credit
- debt factoring
52
external sources of finance?
(long term)
- share capital
- government grants
- loans
- crowdfunding
53
what is an overdraft?
a service that lets you have money even if there is none available in your current account
for an agreed amount of money and an agreed period of time
54
what is trade credit?
where a business will allow customers a period of time to pay for their goods or services
buy now pay later
55
what is debt factoring?
where a business sells its customers outstanding debts in return for a short term payment from a third party company
56
what is a bank loan?
a loan for an agreed period of time at a fixed rate of interest to be repaid in monthly instalments
57
what is venture capitalist?
a business that invests in new start-up companies in return for some ownership of the company
they can provide advice in addition to funding
58
define equity (share capital)
raised when a business sells shares in return for a % of the business
the business will need to pay dividends to shareholders
59
what is crowdfunding?
alternative method of raising equity finance for a business, project or idea
entrepreneur/business can attract a 'crowd' of investors - each of whom takes a small stake by contributing towards an online fundraising target
60
advantage & disadvantage:
bank loan
adv = can spread large amounts over smaller more manageable payments
disadv:
- interest
- often a number of terms & conditions to follow
- fees for late payments
61
advantage & disadvantage:
overdraft
adv:
- flexible
- no interest if paid on time
disadvantage:
- interest
- high charges if you miss payment deadlines
62
advantage & disadvantage:
venture capitalist
adv:
- large amounts
- no debt repayments
- no interest
disadvantage:
- can lose control of ownership
- dividends
63
advantage & disadvantage:
share capital
adv:
- large amounts
- no debt repayments
- no interest
disadvantage:
- can lose control of ownership
- dividends
64
advantage & disadvantage:
trade credit
advantage:
- flexible
- no interest if paid on time
disadvantage:
- high costs if not paid on time
- fees attached
65
advantage & disadvantage:
debt factoring
adv:
- large amounts upfront
- all the money can be accessed straight away
disadvantage:
- high discounts expected
- could potentially have a negative image on the business if 3rd party not ethical in collecting debt
66
advantage & disadvantage:
crowdfunding
adv:
- no debt repayments
- good PR for the business
disadvantage:
- can lose some equity depending on terms of deal
- might be limited
67
advantage & disadvantage:
government grants
adv:
- does not need to be repaid
- no interest or repayment
disadvantage:
- limited availability
68
what factors will influence the choice of finance?
- time; short term/long term
- finance available in the business
- cost of debt + amount of money required
69
define budgets
a forward financial plan that covers all the aspects of a businesses costs and revenues
70
why prepare a budget?
- to exercise financial control
- it can provide direction + co-ordination
- to ensure that no department has an overspend
- sets targets which can motivate workers
71
define variances
the variance is the difference between actual and the budget
72
what is favourable variance?
better than expected:
- costs = lower than expected
- revenue = higher than expected
73
what is adverse variance?
worse than expected:
- costs = higher than expected
- revenue = lower than expected
74
budget allocation:
what does the level of expenditure depend on?
- amount available
- inflation
- external factors
- customer/revenue figures
75
what are the two types of budgets?
zero budgeting and historical budgeting
76
define zero budgeting
- budgeted costs + revenues are set to zero
- budget is based on new proposals for cost + sales
time consuming but starting from scratch can ensure that funds are allocated in the right way
77
define historical budgeting
- use last years figures and add a little for inflation
- much quicker + simpler but may not focus on problem areas of the business
does not encourage efficiency
78
what is a business objective?
a goal/target to help the business achieve its mission
79
types of objectives?
- profit
- image
- growth
- cash flow
- ethical
80
what does the SMART acronym stand for?
Specific
Measurable
Agreed
Realistic
Time limited
81
why does a business set objectives?
- gives specific targets by which business performance can be measured
- can be used to motivate workers to achieve
- clarifies business direction and aids decision making
82
define corporate objectives
a target that is set for a business to help meet its goals - covers the whole business
83
define functional objectives
sets targets for the department to help the business achieve the overall corporate objective
84
internal influences on business objectives?
- amount of finance available
- skills of workforce
- target audience
85
external influences on business objectives?
- political
- environmental/ethical
- social
- technology
- legal
- economy
- competition
PESTLE - C
86
why do businesses exist?
to fulfil the needs + wants of customers
sell their products and services to customers/ other businesses for a profit
- create wealth
- create employment
- pay taxes
- drive innovation and develop ideas
87
what is a mission statement?
a broad statement of the business' aims and values. focuses on what the business wants to achieve at present and guides everyday operations
defines the core values and direction of the business + helps to direct strategic decision-making across the business
88
benefits of mission statements
- give the business a clear identity + ethos
- helps set objectives and support business strategy
- focus senior mangers on tasks to achieve the vision
- communicates to employees how they can contribute = may improve employee engagement
