business activity pt 2 Flashcards
what are the advantages of being a soletrader
a sole trader is the easiest and cheapest form of business ownership to set up. this is most popular for starting businesses
a sole trader can be set up with very little capital
the sole trader is in complete control of the business
because the business is owned only by the sole trader all profits will go to the sole trader
all financial information about a sole trader is private.
what are the disadvantages of being a soletrader
unlimited liability- the sole trader is liable for all of the debts of the business. this may mean that the sole trader may have to sell personal possesions to pay off any business debts
illness- if the owner is ill then there may be a problem with keeping the business operating
shortage of capital- a sole trader may find it difficult to find enough money to even start a business because there is only one owner to raise the capital
hours of work- a sole trader could have to work long hours, especially when the business is starting and the sole trader wants to get the business established
skills shortage- they may not have all the skills necessary to run the business
continuity- if the sole trader dies then the business does
what are the advantages of partnerships
capital- as there is more than one owner it is easier to raise capital
easy to set up- partnerships are easy to set up because you work with other people although a deed of partnership should be completed
more skills in the business- with more than one owner there are often a number of different skills
the workload is shared- the partners can share out work if necessary reducing possible stress. If a partner is ill there are others to cover the necessary work
what are the disadvantages of partnerships
profit is shared- this can cause problems if one partner feels they are the only person doing work
unlimited liability- each partner is liable for the debts of the business
shortage of capital- if there are only a few partners there may be a shortage of the capital
slower decision making- there may be disagreements when more partners are involved
continuity- if more than one partner dies the business can fail
what are the advantages of private limited companies
limited liability- liability for debts is limited to the amount of money a shareholder invests in the business
continuity- if an owner dies the business can operate
can raise money more easily- banks are often more prepared to lend money to limited companies.
control over share sale- shares can only be sold with agreement from the existing shareholders, there is no chance of the business being taken over by another business without shareholder agreement
what are the disadvantages to private limited companies
financial information is available to the public. this means that financial information can be seen by competitors
administration- private limited companies are more complex and can be expensive to start up. There are many forms to complete particularly financial information , which must be sent to the registrar of companies
sale of shares is restricted- a private limited company is unable to sell shares which restricts the amount of capital it can raise
Dividends- the amounts of money paid to shareholders from the profits of a business. a shareholder who has put money into the business may expect a profit each year, when the directors may have wanted to expand instead
what are the advantages of public limited companies
ability to raise large amounts of capital. this is because shares can be sold to the general public. much more capital can be raised. share buyers may also be other organizations.
easier to borrow money- banks will see plcs as low risk and so lend money as needed
limited liability for share holders- share holders are only liable for the amount that they have invested into the business
what are the disadvantages of public limited companies
possibility of takeover-as shares is sold to the general public through the stock exchange. a plc has no control over who buys its shares. if any person buys 51% of the shares, the overall ownership of the business will change
cost of setting up and operating- it is more complex to set up
problems of size- large businesses often have complex management structures
financial information available to the public- competitors can now see how well the business is performing
unlimited vs limited companies ( changing legal structure)
As businesses grow, their legal structure often changes. This is because businesses often need more capital (money) to grow.
Most private limited companies become public limited companies because selling the shares on the stock exchange allows them to raise finance to fund their company’s expansion
unlimited vs limited (access to finance)
It is normally easier for limited companies to get bank loans than sole traders or partnerships.
This will help them raise more capital to grow. Because of this, sole traders and partnerships often decide to incorporate the business.
what are the benefits of maximizing shareholder value objectives
For limited companies (both private and public), maximising value for their shareholders is a key objective.
Shareholders get value from a share of a company’s profits, but also by selling the shares in the future.
The overall value of a business (how much they could sell it for) increases depending on how well the business is doing. So, maximising profits or growing the business can maximise shareholder value.
what is organic growth
when a business grows by expanding its own operations
how is opening new stores organic growth
Opening a new store is a common way for a company to expand as it allows them to be closer to customers in another location. It can be low risk if the business model is already proven to work.
how does launching new products help with organic growth
Launching new products can help businesses to expand their customer base as well as potentially selling more products to people who are already customers.
This can be risky due to the large investment required and the fact the business owner may not be as knowledge
how does increasing production capacity help with organic growth
investing in new capital and technology can allow a business to produce more goods.
If for example, a firm’s products are consistently selling out and they are unable to produce more, then the production capacity is restricting their expansion.
what is an external expansion
External expansion is the growth achieved by acquiring another business. Mergers happen when 2 businesses combine to make 1 larger business
what is diversify
A firm can merge or take over a firm in a different industry. This makes the company less reliant on its existing products/services and can diversify (or spread) a company’s risk.
how can a business reduce competition
a firm can merge with or take over a competitor.
This can reduce the amount of competition that a business faces. It can also increase market share and let the company benefit from economies of scale
disadvantages of mergers and takeovers (demotivated employees)
Employees may be demotivated due to different management style and culture.
different business aims and objectives
achieving profit
business growth
market share growth
business survival
providing a service
how and why business objectives might change as businesses starts
the business will need to survive as it will probably face competition from other established businesses, who might lower their prices in order to beat them
it will need to establish its name
How might a Business change their objectives as they grow
ambitions will drive a business to make a greater profit
more profits will allow the business to pay for new premisses which allows the business to grow more
a sole trader or a partnership may wish to become a limited company as they grow
a business may grow so much that it may not want to grow anymore, so the aim may be to keep profits at certain levels
new aims may be to provide good services to avoid losing customers
how might business aims and objectives change when they are in difficulty
objectives may be to keep losses at a certain level or to survive
they may have to close down operations to reduce costs and raise profits
internal stakeholders in business
owners
employees
local communities
external stakeholders in business
customers
suppliers
government
the effect that business activity has on stakeholders as it grows
it may need more employees these may come from the local community as more people are employed because spending in local shops may increase
suppliers will benefit from having increased orders and the government will be happy to see more people employed who can pay taxes
customers may have a greater range of products and services
owners will have higher profits
effect that business activity has on stakeholders if a business is having difficulties
employees might lose jobs
suppliers may be put out of business- no one to supply goods to
governments may see a rise in unemployment- fewer taxes are being paid
the local community suffers from more people out of work
owners will have less profit
customers may have less choice of goods
two main methods of business growth
organic
external
how can a business organically grow
increasing output- by producing more products
gaining new customers by reducing the prices of its products or services
opening shops in new places
better marketing
developing new products
increasing market share
