3.1 - What Is Business? - Understanding Forms Flashcards
What do the Government Departments deal with? Give 3 examples
PUBLIC SECTOR
ORGANISATION RUN AND CONTROLLED BY GOVERNMENT
Deals with national issues including:
Education
The police
Defence
Which organisations are run and controlled by the government in the public sector? Outline what 2 do
Government departments
Public corporations
Health trusts
- Deliver care in a particular area
Local authorities
- Provide services for the local area (Eg/ Schools, Refuse collection,Libraries)
Give details about the public sector
Who owns it, makes the decisions, manages it and gets the profit?
Owned by government on behalf of the people
Relevant Government Minister makes long term decisions
Managers make the day to day decisions
The government gets the profit
Give details about the private sector
Who owns it-what are the 4 different types of ownership, makes the decisions, manages it and gets the profit?
Owned by shareholders/owners 1 Sole trader 2 Partnership 3 Private limited company 4 Public limited company
Board of directors make long term decisions
Profit goes to shareholders/owners
Give information about sole traders, include 2 advantages and 3 disadvantages
- who owns it, how do they set up, who makes decisions and what happens to profit etc
Owned by 1 person (who puts money in business) but can employ workers
Small and local business with simple procedure to start (register as self employed and pay income tax)
Decisions made by owner only
Business and owner exist together
Owner keeps profit after paying all costs and tax
\+ Complete control \+ Keep profits themselves - Long hours and lack of holidays - Low level of capital - Unlimited liability
Give information about partnerships, include 3 advantages and 3 disadvantages
- who owns it, how do they set up etc
Owned by at least 2 people
People usually draw up “Deed of Partnership”
+ Access to more skills, knowledge and capital (share expertise) and share burdens
+ Access to more capital
+ Owners (partners) share responsibilities, profits and decisions
- Owners are personally responsible for any debts
- Disagreements
- Unlimited liability
Give information about Private Limited Company, include 2 advantages and 3 disadvantges
- who owns it, how do they set up etc
Owned by shareholders (people who’ve invested in company-only friends & family)who get dividends if business makes profit
Usually have LTD at end of name
Need to be registered with Companies House
Paperwork needed to set up ltd
Must hold AGM and publish accounts every year
+ Access to more capital
+ Limited liability (separate legal identity to owners)
+ Retain control
- High set up costs
- Bc profits only shared with shareholders its harder to motivate and control workers who don’t hold shares
Give information about Public Limited Company, include 2 advantages and 4 disadvantages
- who owns it, how do they set up etc
Owned by shareholders (people who’ve invested in company) but directors run business on their behalf (divorce of ownership and control)
Have PLC at end of name
Similar to Ltd but plc can trade shares publicly on stock exchange (flotation so anyone can buy shares and is way of external finance)
+ shareholders have limited liability
+ increased negotiation opportunities with suppliers in terms of prices bc larger businesses can achieve economies of scale
- lot of paperwork and legalities to get started
- expensive to become plc
- publish very detailed accounts (competitors can see sales) and must hold AGM (meeting with shareholders)
- minimum £50,000 share capital
- access to large amounts of capital
- limited liability
What is a co-operative business?
Group of people acting together to meet the common needs and aspirations of its members, sharing ownership and making decisions
Work for benefit of the owners not just profit
What is a not-for-profit mutual business? Include common examples
Have no shareholders and no owners
Exist solely for best interest of its members - its customers
Building societies and life assurance businesses are common examples of mutual
Eg/ nationwide building society
What is a not-for-profit charity business?
Greenpeace, Friends of the earth
Having charitable status means those who fund business aren’t liable for any debts
There’s significant tax benefits
Eg/ gov.uk setting up a charity
Is there always dividends given? Give two reasons why people invest in shares
Give two reasons why a company might not issue dividends to its shareholders
No, only if directors decide it
1 Hope to receive a return through dividends or appreciation
2 Try to have an influence
Want to reinvest it back into business
Might have a loss
Give two reasons why a company should only issue shares to raise capital for long term growth strategies
Big profits - people are with you for a long time
Small projects - better to take a loan and pay it back yourself
Give two reasons why a
someone might list their company on the stock exchange
To attract more shareholders to invest
To improve software, staff (could motivate staff by giving them shares), better training, get more dividends back - share price and profit go up
Give two examples management may face as a result of flotation
Anyone can buy the shares - risk of takeover
Risk they could lose the business as they sell to many shares
Pressure to make good profit to pay dividends (might lose sight of original objectives)
What is privatisation? Give example of UK privatised state-owned industries
What 3 things does privatisation depend on?
Involves selling state-owned assets to private sector
Often achieved through listing the new private company on the stock exchange
Eg/ BT, British Airways, Electrical companies
1 Depends on industry in question - industry like telecoms is typical industry where incentive of profit can help increase efficiency, however if you apply it to industries like health care profit motive is less important
2 Depends on quality of regulation - do regulators make privatised firms meet certain standards of services and keep prices low?
3 Is the market contestable and competitive - creating a private monopoly can harm consumer interests but if market is highly competitive there’s greater scope for efficiency savings
Privatisation involves selling state-owned assets to private sector, often achieved through listing the new private company on the stock exchange
Describe two potential benefits of privatisation
Lack of political interference
- argued governments make poor economic managers (motivated by political pressures rather than sound economic and business sense)
Eg/ state enterprise may employ surplus workers which is inefficient, government may be reluctant to get rid of workers bc negative publicity involved in job losses, therefore state owned enterprises often employ too many workers increasing inefficiency
Short term view
- may only think in terms of next election therefore may be unwilling to reinvest in infrastructure improvements which will benefit firm in long term-more concerned about projects that give benefit before election
Describe 2 reasons why privatisation is bad for you
Services get worse
Private companies have legal duty to reward shareholders so have to prioritise making profit, this means they end up cutting corners or under investigating in public services
Eg/ Water companies ignore leaks instead of investigating infrastructure
Private companies also have “commercially confidential” contracts so don’t share info with others, makes it harder for them to work in partnership to make services better
Costs go up
- pay more both as a taxpayer and directly when you pay for public services
- value for money goes down bc private companies must make profit for shareholders and pay top executives more money, meaning either the people or the government end up paying more (eg/ fares on our privatised railways and buses are most expensive in Europe)
Privatisation involves selling state-owned assets to private sector, often achieved through listing the new private company on the stock exchange
Describe two disadvantages of privatisation
Natural monopoly
Occurs when most efficient number of firms in an industry is one, eg/ tap water has very significant FC therefore theres no scope for having competition amongst several firms therefore in this case privatisation would just create a private monopoly which might seek to set higher prices which exploit customers
So its better to have a public monopoly rather than private monopoly which can exploit consumer
Public interests
- many industries which perform important public service like NHS, profit motive shouldn’t be primary objective of firms and the industry
Eg/ in case of healthcare its feared privatising health care would mean greater priority is given to profit rather than patient care, also in this industry arguably we don’t need a profit motive to improve standards, when doctors treat patients they’re unlikely to try harder if they get a bonus
What is meant if a shareholder is institutional?
A business such as a mutual fund, bank or insurance that holds shares in a publicly traded company
Institutional shareholders are important to placing new issues of stocks and bonds as they can afford to buy more of an issue than individual investors
What is an ordinary share and what is it also referred to?
Holders HAVE voting power
AKA equity shares
Holders returns come from appreciation (increase/goes up) in market value of shares and receiving company dividends
Holders FACE higher risk (no dividend-might have to sell for less than bought in the first place)
What is a preference share?
Holders have NO voting power
Receive dividends BEFORE ordinary shareholders
Holders can claim company’s assets BEFORE ordinary shareholders if company goes into liquidation
What is the role of the shareholder? Why do they invest? How much influence do shareholders have?
What effect does the sale of shares by shareholders have on a business?
Provide capital (by investing) to survive and grow
- For influence (vote at AGM x have a say)
- For rewards (dividends, increase in share price-higher price when they sell their shares in comparison to when they bought it)
- Depends on % ownership (51% needed to have winning vote)
- In theory raise issues with board of business directors
- Don’t attend AGM in person, can have postal vote
Lots of shares available and not higher demand, so low cost
Could buy lots of shares, turn business around and make lots of money
What shareholder rewards are available?
Annual dividends (decided by directors based on profits)
Rise in share value
What 6 things influence share price?
1 Profit/loss (if a loss might want to sell your shares)
2 Launch of new product
3 Confidence in a business
4 Takeover
5 Economic conditions (employment and unemployment)
6 Current market trends (is there a trend for this industry eg/paper straws)
What is the significance of share price changes short term?
SHORT TERM
- Little impact
- Shareholders buy and sell through stock market, company not involved, already has it’s money from flotation
What is the significance of share price changes long term if prices are HIGHER or LOWER
HIGHER
- High prices
- Rights issue (can sell more shares)
- Shareholders able to buy more shares at discounted rate (easier for company to obtain more share capital)
LOWER
- Low prices (warning signal-business selling low so possible takeover in extreme cases as shareholders start to sell)
- Unlikely to raise more share capital
What is limited liability?
Company has separate legal identity and can be sued in its own right
Shareholders are protected and can only lose value of what they have invested, not personal possessions
As supplier you may not receive payment if supplying on credit and business fails
What is annual share capital? Give an advantage and disadvantage
Businesses issue shares in exchange for investors capital
Is expected but dividend may not be paid if performance isn’t good or if business wishes to retain profits for future investment
Shareholder capital is never paid back as shares are sold on to another member of public
+ May be better source of income than bank loan where repayments and interest would have to be paid regardless of performance
- However does dilute control of owner
What is market capitalisation?
Market value of a company’s issued share capital
Number of shares/sold x current share price of those shares on stock market
What happens to dividends as companies grow overtime?
As most companies grow overtime dividends also tend to grow so can be valuable return for shareholders who hold onto shares for number of years
What are the intentions of short term vs long term shareholders?
Short term shareholders tend to want something back quick
Long term shareholders are prepared to wait until they pay you back and make more money and some may even invest to have a say within the business
What is recommend to companies by accounts of how much dividend should be paid? What is the issue with paying dividends?
Recommended companies should pay out no more than half of their profits
Higher the dividend agreed by directors, lower the amount of profit retained from investment into business
What is dividend cover and what are the 3 types of cover? What could dividend cover indicate?
How well dividends are covered by profits
Cover 1 - all profits have been paid out to shareholders
Cover 2 - half of profits have been paid out to shareholders (dividends can be covered twice by profits)
Cover 3 - 1/3 of profits have been paid out (dividends can be covered 3 times by profits)
Could indicate short-termism
