3.1 What is business Flashcards
Why do businesses exist?
- To sell a product or provide a service for customers willing to pay for them (may be a necessity or a luxury for customers)
- To make a profit or big financial rewards
- People may want be their own boss and make their own decisions
- To make more money than if they were an employee for a another company
What is a mission statement?
A formal statement which explains the overriding purpose and values of a business, it also gives clues about a company’s beliefs.
A mission statement gives staff shared purpose, encouraged to work towards common goal if this happens business may be more likely to achieve it aims.
If a mission statement isn’t accurate it may damage business’s reputation if customers find out it’s actions don’t reflect stated values.
What are objectives? What is the relationship between mission statement and objectives?
Objectives turn overall aims of a business into specific goals that must be met, Businesses set objectives to enable them to achieve their mission.
What are corporate and functional objectives?
Corporate objectives are goals of business as a whole, depending on size of the business.
Functional objectives are objectives of each department and more detailed than corporate objectives as they are specific to a department. Businesses need to set functional objectives to help them achieve corporate objectives as managers need to see how their department can help achieve the objective thus set functional objectives.
What should functional objectives be?
** S M A R T**
Specific, tailored towards business so business is more likely to achieve them and have clear direction to their aim.
Measurable, business can put value in their objective.
Agreed, by all those concerned in the objective.
Realistic, the objective should be challenging, but it should also be able to be achieved by the resources available.
Time specific, time frame when the objective has to be achieved.
Examples of common business objectives and why do businesses set them?
Profit objectives business may aim to be profitable if they have suffered a loss, an established business may wish to increase profits. To achieve an overall profit objective, business may set functional objectives to minimise costs or increase sales.
Growth objectives many businesses may aim to grow, the larger a business grows the more it able to use its position in market to earn higher profits. E.g increasing revenue, market share or expanding business.
Survival objectives so business can continue to trade rather then running out of money, survival often a main objective for new businesses and becomes key objective during periods of high competition or when economy is declining.
Cash flow money flowing into and out of business over set period of time, business may set cash flow objectives to improve their cashflow, increasing cashflow gives better chance at survival.
Social and ethical objectives relating to benefitting society or people in need or ethical objectives based on moral principles about how businesses treat ppl and the environment (non profit organisations or for profit businesses)
Businesses may set objectives to help measure performance, give sense of direction, motivate employees, etc
What is the importance of profit?
- Can motivate people, people who own shares receive profit as dividend payment and some businesses offer a profit sharing scheme where employees given bonuses from share of total profits
- Good source of finance, profit can be retained in the business and used for investments which. an help business grow and increase profits (retained profit do not interest)
- Profit can be used to attract investors, potential investors look at profit levels when deciding whether to buy shares in a company, people are more likely to invest into business if its making a large profit as they expect to receive good dividend payment.
Revenue, costs and profit. What are they and how to calculate?
Revenue is the value of sales (also known as sales or turnover), amount of money generated by sales of production prior to any deductions. Calculated as revenue= selling price per unit x quantity of units sold
Costs can be fixed or variable, fixed costs don’t change with output (e.g rent, salaries, cost of new machinery). Variable costs rise and fall as output changes (e.g hourly wages, raw material costs and packaging costs). Total VC calculated as TCV= variable costs per unit x number of units sold. Total costs calculated as fixed costs + variable costs.
Profit when you deduct total costs from total revenue that equals profit, profit= total revenue - total costs. If total revenue is larger than costs business makes a profit, if lower business makes a loss.
What is the public and private sector organisations?
Public sector organisations are owned and run by government, they provide services to public (e.g NHS) they don’t make a profit but rather funded by UK tax system.
Private sector organisations are owned and run by private individuals, ranging from small sole traders to huge organisations (e.g John Lewis) private sector businesses aim to profit, non profit organisations are also apart of private sector.
What is a non profit organisation? What is a social enterprise?
A non profit organisation are set up not to make a profit, often to help people in need or benefit the community. Main difference is money generated by business doesn’t go to the owners or shareholders as profit.
Social enterprises are normal businesses with a social or environmental objective, the business trades and makes a profit like any other business, but it’s profits are used to pay for social activities that benefit society in some way.
What is a sole trader? Advantages and disadvantages of being ST?
A sole trader is an individual owning a business on his or her own (business and owner seen as one under the law). Sole trader has full responsibility for the financial control of business and for running costs and capital requirements. Having full responsibility for the all the debts is called unlimited liability.
Advantages
- freedom (ST is their own boss and complete control over decisions)
- profit (ST entitled to all profit made by business)
- simplicity (less form-filling than for a limited company, bookkeeping less complex)
Disadvantages
- risk (no one to share responsibilities of running business with)
- time (ST need to work long hours to meet deadlines)
- finance (limited to money owner has or can borrow)
- unlimited liability (personal assets can be seized)
What are private limited companies and public limited companies?
Private limited companies (Ltds) and Public limited companies (PLCs) both have limited liability and owned by shareholders and run by directors.
Private limited companies (Ltds)
Cannot sell shares to the public (people in company own all shares), shares aren’t quoted on stock exchange, shareholders can’t sell their shares without agreement from other shareholders, often small family businesses, no minimum share capital required, end their name with limited or Ltd.
Public limited companies (PLCs)
Can sell shares to public (usually issue a prospectus to inform ppl before they buy), shares quoted on stock exchange, shares are freely transferable and can be bought and sold, usually start as private limited then go public to raise more capital, need over £50,000 of share capital if listed on stock exchange and at least 25% of this needs to be publicly available, must end their name with PLC.
What is unlimited and limited liability?
Unlimited liability is when business and owner are seen as one under the law (sole traders), means business debts become personal debts of the owner this can be a huge financial risk as owners can be forced to sell personal assets to pay off the debt.
Limited liability means that owners aren’t personally responsible for debts of business (private and public limited companies) has separate legal identity from owners, most they can loose is the money invested into the company.
What is ordinary share capital? What is market capitalization? What is a dividend?
Ordinary share capital is money raised via shares being bought (shares sold to raise money), form of long term investment.
Market capitalization is the total value of all ordinary shares issued by company (Market capitalization= numbers of shares issued x current share price).
Dividend is proportion of profits earned by company split out to shareholders, dividends given as fixed amount per share, more share individual holds larger the payout.
What is a shareholder? And why do shareholders invest?