3.1.1 - Understanding the nature and purpose of business Flashcards
What is the purpose of businesses?
Businesses exist to provide goods and services by converting raw materials (inputs) into products and services (outputs).
What is a B2B business?
A business that sells goods/services to other businesses.
What is a B2C business?
A business that sells goods/services to consumers (the general public).
What is a goods and services business?
A business that sells physical products, such as a house or t-shirt, and businesses that sell intangible items, such as insurance and decorating.
What is the primary sector?
A sector of business concerned with the extraction of raw materials.
What is the secondary sector?
A sector of business concerned with transforming raw materials into finished goods.
What is the tertiary sector?
A sector of business concerned with providing services such as retailing, transport and banking.
What is a business objective?
A quantifiable statement of a business’s goals (the specific intended outcomes of a business strategy).
What are some business objectives?
Cash flow, profit, survival, growth, social and ethical objectives, diversification.
What are profits and why are they an objective?
Companies aim to maximise profits as maximum profit is the point at which the difference between revenue and total costs is at its greatest so the business earns money. This is beneficial as profits can be used to provide shareholders with a return on their dividends and to grow the value of the business which increases the share price
What is growth and why is it an objective?
Growth is the process of making a business bigger and more successful over time. When a firm grows, it can exploit its market position and earn higher profits by increasing the price of its products or services. Consequently, shareholders gain greater dividends and employees have higher wages with more job security.
What is survival and why is it an objective?
Survival is the ability of a business to trade over a defined period of time (e.g. periods of recession or intense competition, times of crisis such as a hostile takeover bid) and this allows a business to avoid failure. This is especially important in a sole trader business as they have unlimited liability for any losses or liabilities of the business.
What is cash flow and why is it an objective?
Cash flow is the movement of cash into and out of a business. Businesses aim for short cash cycles so a short time elapses between the outflow of cash (due to resources purchased) and the money received following the product/ service sale. This is beneficial as businesses are able to pay debts on time so are more likely to be offered cheaper prices by suppliers.
What are social and ethical objectives and why are they objectives?
Social objectives are targets which aim to improve the lives of people. Ethical objectives are those that are based on moral principles. These are important as customers seek to purchase products from businesses with good social and ethical objectives - improved reputation. Also, some investors will only invest in ethically stable businesses.
What is diversification and why is it an objective? what
Diversification is where a business producea an increased range of unrelated goods and services. This is beneficial to a business as it spreads the risk by selling a diverse range of products so if a market becomes very competitive or a product is in extreme low demand, the business will still generate revenue.
What are the functions of business objectives?
- To state what needs to be achieved by the business
- To provide a focus for all activity
- To provide targets for individual and group achievement which motivates employees
- To measure the performance of the company (how much has been achieved compared to the target that was set)
What do business objectives need to be?
S - Specific (states exactly what is to be achieved)
M - Measurable (success towards the business objective must be possible to see)
A - Achievable
R - Relevant (relevant to the people responsible for achieving the objective)
T - Time Bound (a time frame is required)
What is a mission?
An aim a business hopes to achieve usually expressed in a mission statement.
Place the following stages of a business plan in order from largest to smallest:
- Corporate objectives
- Mission statement
- Aims
- Corporate strategies
- Aims
- Mission statement
- Corporate objectives
- Corporate strategies
What are mission statements?
Short passages of text that tell all the stakeholders the purpose of the business and why it exists.
What does a mission statement not involve?
- A statement of goals or objectives
- A statement of core values
- A statement of how the business intends to compete in the market
What makes a good mission statement?
- Easy to understand and remember
- Differentiates business from their competitors
- Intended for all stakeholders (local community as well as shareholders and managers
What are some common criticisms of mission statements?
- There is a disconnect between the mission statement and the actions of the business
- Too vague and general
- To be effective, all key stakeholders must buy in, if not the business will struggle
What is revenue?
The income a business recieves in return for the sale of goods or services.
How is revenue calculated?
Selling price x number of units sold
What is profit?
The reward to the owners of the business measured through the difference between costs and revenues.
How is profit calculated?
Total revenue (TR) - Total costs (TC)
Why is profit very important to a business?
- It can be used as a measure of success by the owners of the business and a reward to them for investing their capital.
- Banks and other lenders are unlikely to loan money to a business which does not generate a profit.
- It can be used to help the business expand.
What are fixed costs?
Costs which do not vary with the level of output.
What are some examples of fixed costs?
- Insurance
- Loan repayments
- Salaries
- Rent
- Utilities
What are variable costs?
Costs which do vary with the level of output
What are some examples of variable costs?
- Raw materials
- Sales commissions
- Packaging
- Credit card fees
How do you calculate gross profit?
Total revenue (TR) - variable costs (VC)
