3.1.1 - Understanding the nature and purpose of business

Question 1

What is the purpose of businesses?

Answer 1

Businesses exist to provide goods and services by converting raw materials (inputs) into products and services (outputs).

Question 2

What is a B2B business?

Answer 2

A business that sells goods/services to other businesses.

Question 3

What is a B2C business?

Answer 3

A business that sells goods/services to consumers (the general public).

Question 4

What is a goods and services business?

Answer 4

A business that sells physical products, such as a house or t-shirt, and businesses that sell intangible items, such as insurance and decorating.

Question 5

What is the primary sector?

Answer 5

A sector of business concerned with the extraction of raw materials.

Question 6

What is the secondary sector?

Answer 6

A sector of business concerned with transforming raw materials into finished goods.

Question 7

What is the tertiary sector?

Answer 7

A sector of business concerned with providing services such as retailing, transport and banking.

Question 8

What is a business objective?

Answer 8

A quantifiable statement of a business’s goals (the specific intended outcomes of a business strategy).

Question 9

What are some business objectives?

Answer 9

Cash flow, profit, survival, growth, social and ethical objectives, diversification.

Question 10

What are profits and why are they an objective?

Answer 10

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

Question 11

What is growth and why is it an objective?

Answer 11

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.

Question 12

What is survival and why is it an objective?

Answer 12

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.

Question 13

What is cash flow and why is it an objective?

Answer 13

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.

Question 14

What are social and ethical objectives and why are they objectives?

Answer 14

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.

Question 15

What is diversification and why is it an objective? what

Answer 15

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.

Question 16

What are the functions of business objectives?

Answer 16

• 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)

Question 17

What do business objectives need to be?

Answer 17

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)

Question 18

What is a mission?

Answer 18

An aim a business hopes to achieve usually expressed in a mission statement.

Question 19

Place the following stages of a business plan in order from largest to smallest:
- Corporate objectives
- Mission statement
- Aims
- Corporate strategies

Answer 19

1. Aims
2. Mission statement
3. Corporate objectives
4. Corporate strategies

Question 20

What are mission statements?

Answer 20

Short passages of text that tell all the stakeholders the purpose of the business and why it exists.

Question 21

What does a mission statement not involve?

Answer 21

• A statement of goals or objectives
• A statement of core values
• A statement of how the business intends to compete in the market

Question 22

What makes a good mission statement?

Answer 22

• Easy to understand and remember
• Differentiates business from their competitors
• Intended for all stakeholders (local community as well as shareholders and managers

Question 23

What are some common criticisms of mission statements?

Answer 23

• 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

Question 24

What is revenue?

Answer 24

The income a business recieves in return for the sale of goods or services.

Question 25

How is revenue calculated?

Answer 25

Selling price x number of units sold

Question 26

What is profit?

Answer 26

The reward to the owners of the business measured through the difference between costs and revenues.

Question 27

How is profit calculated?

Answer 27

Total revenue (TR) - Total costs (TC)

Question 28

Why is profit very important to a business?

Answer 28

1. It can be used as a measure of success by the owners of the business and a reward to them for investing their capital.
2. Banks and other lenders are unlikely to loan money to a business which does not generate a profit.
3. It can be used to help the business expand.

Question 29

What are fixed costs?

Answer 29

Costs which do not vary with the level of output.

Question 30

What are some examples of fixed costs?

Answer 30

• Insurance
• Loan repayments
• Salaries
• Rent
• Utilities

Question 31

What are variable costs?

Answer 31

Costs which do vary with the level of output

Question 32

What are some examples of variable costs?

Answer 32

• Raw materials
• Sales commissions
• Packaging
• Credit card fees

Question 33

How do you calculate gross profit?

Answer 33

Total revenue (TR) - variable costs (VC)