3.1 - What Is Business? - Understanding Forms

Question 1

What do the Government Departments deal with? Give 3 examples

PUBLIC SECTOR
ORGANISATION RUN AND CONTROLLED BY GOVERNMENT

Answer 1

Deals with national issues including:

Education

The police

Defence

Question 2

Which organisations are run and controlled by the government in the public sector? Outline what 2 do

Answer 2

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)

Question 3

Give details about the public sector

Who owns it, makes the decisions, manages it and gets the profit?

Answer 3

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

Question 4

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?

Answer 4

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

Question 5

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

Answer 5

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

Question 6

Give information about partnerships, include 3 advantages and 3 disadvantages

• who owns it, how do they set up etc

Answer 6

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

Question 7

Give information about Private Limited Company, include 2 advantages and 3 disadvantges

• who owns it, how do they set up etc

Answer 7

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

Question 8

Give information about Public Limited Company, include 2 advantages and 4 disadvantages

• who owns it, how do they set up etc

Answer 8

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

Question 9

What is a co-operative business?

Answer 9

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

Question 10

What is a not-for-profit mutual business? Include common examples

Answer 10

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

Question 11

What is a not-for-profit charity business?

Answer 11

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

Question 12

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

Answer 12

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

Question 13

Give two reasons why a company should only issue shares to raise capital for long term growth strategies

Answer 13

Big profits - people are with you for a long time

Small projects - better to take a loan and pay it back yourself

Question 14

Give two reasons why a

someone might list their company on the stock exchange

Answer 14

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

Question 15

Give two examples management may face as a result of flotation

Answer 15

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)

Question 16

What is privatisation? Give example of UK privatised state-owned industries

What 3 things does privatisation depend on?

Answer 16

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

Question 17

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

Answer 17

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

Question 18

Describe 2 reasons why privatisation is bad for you

Answer 18

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)

Question 19

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

Answer 19

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

Question 20

What is meant if a shareholder is institutional?

Answer 20

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

Question 21

What is an ordinary share and what is it also referred to?

Answer 21

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)

Question 22

What is a preference share?

Answer 22

Holders have NO voting power
Receive dividends BEFORE ordinary shareholders

Holders can claim company’s assets BEFORE ordinary shareholders if company goes into liquidation

Question 23

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?

Answer 23

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

Question 24

What shareholder rewards are available?

Answer 24

Annual dividends (decided by directors based on profits)

Rise in share value

Question 25

What 6 things influence share price?

Answer 25

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)

Question 26

What is the significance of share price changes short term?

Answer 26

SHORT TERM

• Little impact
• Shareholders buy and sell through stock market, company not involved, already has it’s money from flotation

Question 27

What is the significance of share price changes long term if prices are HIGHER or LOWER

Answer 27

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

Question 28

What is limited liability?

Answer 28

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

Question 29

What is annual share capital? Give an advantage and disadvantage

Answer 29

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

Question 30

What is market capitalisation?

Answer 30

Market value of a company’s issued share capital

Number of shares/sold x current share price of those shares on stock market

Question 31

What happens to dividends as companies grow overtime?

Answer 31

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

Question 32

What are the intentions of short term vs long term shareholders?

Answer 32

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

Question 33

What is recommend to companies by accounts of how much dividend should be paid? What is the issue with paying dividends?

Answer 33

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

Question 34

What is dividend cover and what are the 3 types of cover? What could dividend cover indicate?

Answer 34

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