3.1.1 Understanding the nature and purpose of business

Question 1

Why do businesses exist?
In other words, what are key business objectives?

Answer 1

• To make money
• To provide a service
• Provide employment opportunities
• Fill a gap in the market
• Help the community (social enterprise)
• Be environmentally friendly
• Improve existing products
• Survive

Question 2

What is a mission statement?

Answer 2

This provides the overriding goal of a business and the reason for its existence; and a strategic perspective for the business and a vision for the future

Question 3

What are the benefits of a good mission statement?

Answer 3

• Clarifies purpose and focus
• Motivates staff and those interested in the business
• Attracts people (such as investors) and resources
• A good public relations tool

Question 4

What are the characteristics of a good mission statement?

Answer 4

• Contains a formulation of objectives that enables progress towards them to be measured
• Differentiates the business from its competitors
• Defines the markets or business in which the firm wants to operate
• Is relevant to all major stakeholders – not just shareholders and managers
• Excites, inspires, motivates, and guides – particularly important for employees

Question 5

What are criticisms of mission statements?

Answer 5

• Not always supported by actions of the business
• Often too vague and general
• Views as a public relations exercise
• Sometimes regarded cynically by employees
• Not supported wholeheartedly by senior management

Question 6

What are corporate aims?

Answer 6

Corporate aims – the long term targets and plans to fulfil the mission statement

Question 7

What are corporate objectives?

Answer 7

The medium to long term quantifiable targets to fulfil the mission statement

Question 8

What is corporate strategy?

Answer 8

The actions to be taken by the business to achieve its objectives

Question 9

What are types of business objectives?

Answer 9

• Ethical
• Profit
• Growth
• Survival
• Cash flow
• Social

Question 10

Examples of ethical objectives

Answer 10

(e.g. completely cruelty free; change packaging to cut down on plastic use; no harmful chemicals used throughout production; reduce waste; environmentally friendly)

Question 11

Examples of profit objectives

Answer 11

(e.g. increase profit margins; maximise profit)

Question 12

Examples of growth objectives

Answer 12

(e.g gain market share; increase number of outlets)

Question 13

Examples of survival objectives

Answer 13

(e.g. achieve minimum level of sales and sales revenue to ensure costs are met and market share is retained; maintain levels of stock)

Question 14

Examples of cash flow objectives

Answer 14

(e.g. reduce outflows; increase inflows)

Question 15

Examples of social objectives

Answer 15

(e.g. support and solutions; enhance brand images and reputation)

Question 16

Why do businesses set objectives?

Answer 16

• A clear statement of what needs to be achieved
• Focus’ on all activities of the business (marketing, operations, finance, human resources)
• Provides targets for individual and group achievements
• A means of measuring performance (business, departments, individual employees)
• Provides a clear focus for decision making and a target to aim for
• Provides criteria for evaluating performance

Question 17

How do you measure profit and total costs?

Answer 17

Profit = revenue – total costs
Total Costs = fixed costs + variable costs

Question 18

State the reasons for profit being important

Answer 18

• Motivator
• Further investment
• Stakeholders
• Finance
• Success
• Reward

Question 19

Why is profit important as a motivator to different business forms?

Answer 19

• Sole traders can keep all the profit
• Ltds owned by people running the business
• Profit sharing schemes in which staff are given incentives to work effectively

Question 20

Why is profit important for further investment?

Answer 20

• Guide to see where it is easier to make profits
• Where profits are high and low

Question 21

Why is profit important for shareholders?

Answer 21

Shareholders become happier as they receive more dividends

Question 22

Why is profit important for finance?

Answer 22

• Avoiding paying interest (through retained profit)
• Fund expansion plans and capital investment

Question 23

Why is profit important to success?

Answer 23

• Compare profits to competitors
• Before this though, have to look at competitor business objectives

Question 24

Why is profit important as a reward?

Answer 24

• Many business owners take risks with money
• Every 6 months, plcs pay dividends to shareholders
• Retain profit to buy more resources to make more profit in the future