Business Awareness Flashcards
Understanding Businesses (CH1)
6 Types of Business Organisations
• Sole trader
• Partnership
• Limited Liability Partnership (LLP) and Limited Partnership
• Private Limited Company
• Public Limited Company
• Not-for-Profit Organisations
Understanding Businesses (CH1)
What is a sole trader?
- A person who runs their own business.
- Generally a small business.
- Owners have limited amounts of capital.
Understanding Businesses (CH1)
Sole Trader Benefits
- Owner has independence.
- Fewer, if any, employees.
- Can provide a personal service.
- Supervision by the owner available at all times.
- Easy to establish legally.
- No definitive format for financial statements.
Understanding Businesses (CH1)
Sole Trader Drawbacks
- Owner has unlimited liability for the debts of the business.
- Expansion is limited because it can only be achieved by the owner reinvesting profits, or by borrowing from a lender (e.g. bank).
- Working long hours, lack of holidays
- If the owner should become ill the work of the business will either slow down or stop altogether.
Understanding Businesses (CH1)
Traits of a Partnership (Unlimited Liability)
- Normally consist of between 2 and 20 partners.
- It can be set-up a new business or a logical growth of a sole trader.
- Financial Statements of a Partnership: SoPL and SoFP
- Rules are either set out in the Partnership Act 1890 or in a partnership agreement (oral or written) between the partners.
Understanding Businesses (CH1)
What does the Partnership Agreement include?
Partnership Agreement usually covers:
- Division of profits / losses between partners.
- Salaries / Commission.
- Interest allowed on partners’ capital and at what rate.
- Interest to be charged on partners’ drawings and at what rate.
Understanding Businesses (CH1)
What is Goodwill?
Goodwill is the difference between the value of a business as a whole, and the net value of Its separate assets and liabilities.
Understanding Businesses (CH1)
Factors that contribute to Goodwill
- Loyal customer base
- Positive reputation
- Highly Skilled workforce
- Successful / Unique product
Understanding Businesses (CH1)
Benefits of Partnership (Unlimited Liability)
- Partnerships are cheap and easy to set up.
- Possibility of increased capital.
- Individual partners may be able to specialise in particular areas of the business.
- With more people running the business, there is cover for illness and holidays.
- Similar type of financial statements as a sole trader.
Understanding Businesses (CH1)
Drawback of Partnership (Unlimited Liability)
- Decisions may take longer because other partners may need to be consulted.
- Disagreements among the partners.
- Each partner is liable in law for the dealings and business debts of the whole business (unless it is a ‘limited liability partnership’ set up under the Limited Liability Partnerships Act 2000).
- The retirement or death of one partner may adversely affect the running of the business.
Understanding Businesses (CH1)
What does incorporated mean?
A company formed in a legal corporation separated from its owners.
It has 2 main types: Limited Liability Partnerships / Limited Partnerships and Ltd Companies.
Understanding Businesses (CH1)
Two main types of incorporated company
- Limited Liability Partnerships / Limited Partnerships.
- Ltd Companies.
Understanding Businesses (CH1)
Benefits of incorporated status
- Limited liability for owners (members - LLP & shareholders - limited company) - limit to the amount they have invested.
- Continuing existence of the business as a separate legal entity from its owners
- Access to finance/capital easier
- Transfer of ownership generally easier e.g. sale of shares
Understanding Businesses (CH1)
Drawbacks of incorporated status
- More complex requirements for setting up the business and higher costs for compliance (record keeping, annual returns etc.)
- Statutory financial statements required and compliance with accounting standards.
- Annual Accounts and Confirmation Statement must be submitted to Companies House where they can be viewed by the public.
Understanding Businesses (CH1)
Traits of Limited Liability Partnerships
- Formed under the Limited Liability Partnership Act 2000.
- Separate legal entity.
- Created and incorporated by registration at Companies House.
- Must be at least 2 members but no upper limit.
- At least two of the members must be named as ‘designated members’, who accept responsibility for compliance purposes, such as sending information to Companies House.
- Advisable but not legally required for LLPs to have a Members Agreement.
- Similar requirements as a limited company such as registration, financial statements (FRS 102) and auditing of its accounts.
- Confirmation Statement and Annual Accounts must be filed at Companies House by the designated members of the LLP, where it is available for public inspection.
Understanding Businesses (CH1)
Limited Partnerships
Limited Partnership has at least one general partner and one limiled partner.
Limited Partners:
- Have limited liability.
- Do not take part in mangerial decisions.
General Partners:
- Have unlimited liability.
- Responsible for the day-to-day running.
- Formed for short-term projects e.g. a building project.
Understanding Businesses (CH1)
Limited Companies
- A limited company is incorporated as a separate legal entity from its owners (shareholders).
- Therefore registered under the Companies Act 2006 by submitting certain documents to Companies House.
- The Articles of Association sets out the written rules about running the company by its shareholders, directors and Secretary.
- Limited companies are run by directors on behalf of shareholders.
Understanding Businesses (CH1)
Limited Companies - Directors Responsibilities.
- Keep adequate accounting records
- Submit annual Confirmation Statement
-
Prepare and submit Annual Accounts which comprises of:
1. SoPL and SoFP
2. Supporting Notes to the SoPL and SoFP
3. Directors’ report (past performance and likely future development)
4. Auditors Reports (Small companies may be exempted) - Report annually to the company’s shareholders.
Understanding Businesses (CH1)
What is a Public Limited Company?
Company limited by shares with a certificate of incorporation that states it is a public company.
Understanding Businesses (CH1)
What are the traits of a Public Limited Company?
- Has issued share capital of over £50,000.
- At least 2 members (shareholders) and at least 2 directors.
- Shares can be traded on the Stock Exchange and therefore bought and sold by the public.
Understanding Businesses (CH1)
What is a Private Limited Company?
Any company that has not been registered as a public company.
Cannot offer its shares to the public.
Understanding Businesses (CH1)
Traits of a Private Limited Company
- No minimum requirement for issued share capital
- At least 1 member (shareholder)
- At least 1 director who may be the sole shareholder.
- Shares are not traded publicly but are transferable between individuals.
- However, valuation of shares may be more difficult.
Understanding Businesses (CH1)
What is a Non-for-profit Organisation?
- Not-for-profit organisations (NFPO) are organisations that exists with the motive of not to make profit.
- Their activities are not for the financial benefit of any individual or board of directors.
- NFPO includes public sector organisations and charities.
Understanding Businesses (CH1)
What are Public Sector Organisations?
Public sector organisations provide all public services in the UK.
It is ‘owned’ by the government and is funded by taxes.
The amount they can spend on their services is allocated to them in a budget.
Understanding Businesses (CH1)
Where are the main rules governing charities set out?
- Charities Act 2011
- By Charity Commission (regulator) - all charities must be registered with this body.
- In the Statement of Recommended Practice (SORP) Accounting & Reporting by Charities or FRS 102.
Understanding Businesses (CH1)
Financial statements required for Charities
- Statement of financial activities
- Statement of financial position
- Supporting notes to financial statements
- Trustees’ Annual Report
- Auditor’s Report (large charities) or independent Examiners Report (medium-sized), Smaller entities exempt).
- Cash flow statement (required for certain charities)
Understanding Businesses (CH1)
What are Trustees and Trust Deeds?
- Charities are governed by a trust deed and run by trustees for the public benefit
- Trust deed is a legal document that sets out the name of the charity, its objects, powers and appointment of trustees.
- The trust document appoints the trustees and states the terms of the trust, including who the beneficiaries are and the trust property that will be subject to the trust.
- Annual Return must be filed by the trustees with the Charity Commission (available for public inspection)
Understanding Businesses (CH1)
4 Common features of Business Organisations
- Structure.
- Common Objectives and team working.
- Cooperation (Goal congruence).
- Responsibility, Authority and Division of Work.
Understanding Businesses (CH1)
What is a Manufacturing Business?
Manufacturing Businesses are those organisations that actually make and sell products.
E.g. Apple, Volvic, Myprotein, Nike etc.
Understanding Businesses (CH1)
What is a Service Business?
Service Organisations are those that provide a service to individual customers or clients, or another business.
E.g. Consultants, Accountants, Lawyers etc.
Understanding Businesses (CH1)
4 main differences between a Service and a Manufacturing Business.
- Intangibility - a service does not provide a physical product, i.e. it cannot be seen, touched, tasted, or smelled.
- Inseparable - a service cannot be separated from its consumption by customer, i.e. it is usually consumed at the same time as it is provided.
- Perishability - any unused service cannot be stored for future use.
- Variability - a service will be tailored to the needs of an individual customer.
Understanding Businesses (CH1)
Funding Sources - Borrowing
- Additional funds raised through the bank - expected to payback with interest.
- Borrowing is for longer-term investments.
- Repayment term should be matched to the life of the asset.
Understanding Businesses (CH1)
Funding Sources - New Capital through issuing Shares
- New capital can be introduced to a business by issuing further share capital.
- Capital is a long-term source of finance and is normally used to invest in business growth.
- The key advantage is that is does not require interest payments.
- The key disadvantage is that it will dilute the ownership of the existing shareholders.
Understanding Businesses (CH1)
Funding Sources - Retained Profit (Earnings)
- These are the profits retained in the business.
- Can be a less expensive way of investing in business growth.
- As long as the business continues to be profitable, shareholders will be rewarded by future growth in the value of their Investment, and, potentially, higher dividends in the future.
Understanding Businesses (CH1)
Funding Sources - Working Capital
- Working capital is the difference between a business’s current assets and current liabilities, i.e. cash + inventories + receivables — payables.
- Working capital circulates round the business as things are bought and sold, and payment is made and received, so the amount of working capital changes on a daily basis.
- The important thing for a business is that the working capital cycle ensures that the business has sufficient funds to pay its payables (suppliers) on time.
- Working capital may be a suitable method of short-term funding.
- Working capital should not be used as a longer-term source of funding.
Understanding Businesses (CH1)
What is a Stakeholder?
A stakeholder is a person or organisation that has an “interest” in another organisation.
Understanding Businesses (CH1)
Stakeholders’ Attitude to Risk
This means the level of risk they are prepared to accept and what they will do if they feel that the level of risk is unacceptably high.
Understanding Businesses (CH1)
Types of Risk
- Some stakeholders will try’ to avoid risk at all costs and will accept a lower return or pay higher prices if this will minimise the risk (risk averse).
- Other stakeholders will actively seek out riskier options if this will increase the likelihood of a higher return (risk seeking).
- There are also some that fall somewhere in the middle and are prepared to accept some risk, and this will not be a prime factor in their decision-making process (risk neutral).
Understanding Businesses (CH1)
What is Risk Appetite?
The level of risk you are prepared to accept to achieve your objectives.
Understanding Businesses (CH1)
What is Risk Tolerance?
This is how much risk you are able to withstand (i.e. tolerate).
Understanding Businesses (CH1)
What is Risk Threshold?
The level up to which risk is acceptable, this could be quantitied as an amount of money that could be lost if a project fails.
Organisational Structure (CH2)
Three types of Organisational Structure
- Functional
- Divisional
- Matrix
Organisational Structure (CH2)
Functional Structure
- A functional structure divides the business into specialised functions or skills such as production, sales and marketing, finance, and IT.
- It groups individuals with similar knowledge and expertise together. Work can be carried out quickly and efficiently.
Organisational Structure (CH2)
What is Divisional Structure?
- A number of different teams that each focus on an individual product or service, or geographical area.
Organisational Structure (CH2)
Matrix Structure
- Individuals will work in their own departments as well as working across teams and projects.
- A business that is developing a new product may set up a project team that includes members from product design, production, marketing, finance, and human resources
- This team will work together on the project until it is completed before returning to their functional team.
Organisational Structure (CH2)
What is Span of Control?
The span of control of the managers within an organisation refers to the number of individuals that they are responsible for.
Organisational Structure (CH2)
Factors affecting Span of Control
- The size of the organisation.
- The type of work that the individuals do (level of complexity of tasks).
- The location of the staff.
Organisational Structure (CH2)
Tall Organisational Structure
- A tall organisational structure will typically be organised by function.
- Long Chain of Command (several layers of management).
- Clear reporting lines.
- Narrow span of control.
- Decision-making often takes longer.
Organisational Structure (CH2)
Flat Organisational Structure
- Fewer levels of management.
- Wider span of control.
- Decisions can be made more efficiently as information can pass up and down the chain of command quickly.
- Less opportunity for promotion and progression.
Organisational Structure (CH2)
Define Governance
- A system that provides a framework for managing organisations.
- It identifies who can make decisions, who has the authority to act on behalf of the organisation and who is accountable for how an organisation and its people behave and perform.
Organisational Structure (CH2)
What is Corporate Governance?
- Systems put in place by directors to direct and control the way in which the business is operated.
- This will include setting the business’s strategic aims and objectives and providing the necessary leadership to put them into effect.
Organisational Structure (CH2)
What is Financial Governance?
- This is how the business collects, manages, and controls financial information.
- It allows the business to monitor the operation of the business and promptly identify where there may be a financial risk.
- In extreme cases this could be fraud or money laundering.
- However, it may simply relate to the systems and structures in place that ensure amounts that are owed to the business are collected on time and that amounts owed to suppliers are paid when they are due.
Organisational Structure (CH2)
What is Legal Governance?
- A business must ensure that it complies with the necessary legislation and regulation.
- Legal governance ensures that this happens by implementing appropriate levels of authorisation together with internal documented processes that individuals must follow to ensure compliance.
Organisational Structure (CH2)
Centralised Control (Top-Down Approach)
- Decision-making rests with the higher tiers of management in the business.
- Decisions are imposed on staff who will be expected to implement them rather than contribute to the decision-making process.
- The higher up in the hierarchy someone is, the more influence they have.
- Higher ups distanced from the ‘coal face’ i.e. they will not have much involvement in the actual activities of the business.
- Less flexible than a decentralised approach.
Organisational Structure (CH2)
Features of Decentralised Control (Bottom-Up Approach)
- Authority for making decisions is given to lower levels of management.
- Leads to a more collaborative working atmosphere.
- Senior management can focus on the key decisions of the business, and its strategy, and leave the day- to-day to departmental managers.
- However, lower level managers may not have the necessary experience to make ‘good’ decisions or may make decisions that are good for their team rather than for the business as a whole.
- Could lead to a loss of control.
Organisational Structure (CH2)
Levels of Management - Corporate / Strategic level
- Starting at the top of the organisation, this is where strategic decisions are made that affect the whole organisation; these decisions tend to be long-term.
- Should the business open another branch? Should it develop a new product? Should it start trading overseas?
Organisational Structure (CH2)
Levels of Management - Managerial level
- This is the middle level of an organisation’s management. Here the decisions relate to the way that the business should go about achieving its goals.
- Which product should it produce? Should it reduce the price of a product to remain competitive?
Organisational Structure (CH2)
Levels of Management - Operational level
- Operational level decisions made at this level tend to be shorter-term and relate to thepractical day-to-day operation of the business.
- Do staff need to work overtime? When should raw materials be requested from stores? How many items do we need delivered from a supplier this week?
Organisational Structure (CH2)
The 6 Functions of Business
1. Finance
2. Operations / Production: (Setting up credit accounts with suppliers, Inventory control, budgeting).
3. Sales and Marketing: (Pricing, setting rates for services, budgeting, performance indicators).
4. Human Resources (HR): (recruitment costs, staff training and development, pay and benefits).
5. Information Technology (IT): (Investment in IT, data security, performance indicators).
6. Distribution and Logistics: (Inventory management, exporting and importing, performance indicators).
Organisational Structure (CH2)
What is Risk?
The possibility of something bad happening.
Organisational Structure (CH2)
What is the difference between Risk and Uncertainty?
- Risk is the possibility of something happening that has not been planned. The decision-maker in a risky situation will know that there is more than one potential outcome of their decision and will have assessed each possible outcome before deciding to take the risk.
- Uncertainty refers to situations where the decision-maker either does not know the possible outcomes and/or the probability that they will occur.
Organisational Structure (CH2)
What is Business Risk?
A business ‘s vulnerability to factors that could decrease its profits’ or cause the business to fail.
Organisational Structure (CH2)
What is Strategic Risk?
Strategic risks are those that arise from the fundamental decisions the directors of the business make about the business’s objectives, or strategies.
-An example of a strategic risk would be for a car manufacturing business to move production of one of its models overseas. This may be a positive move for the business but could result in risks associate with exchange rates, working conditions in different country or changes in the duties on imports and exports.
Organisational Structure (CH2)
What is Financial Risk?
Financial risk for a business comes from a change in the financial conditions in which it operates.
- This might be a change in interest rates that increases the cost of borrowings. If a business heavily relies on loans (i.e. debt) it is referred to as being highly geared. An increase in interest rates will increase the repayments that need to be made by a highly geared business.
Organisational Structure (CH2)
What is Operational Risk?
Operational risk is a risk that arises from the way in which an organisation operates its business functions.
- It focuses on risks arising from the people, systems and processes and the ethical attitude of the organisation.
Organisational Structure (CH2)
What are the three Operational risks?
1. Process risk: there will be risks of loss inherent to the processes of a business.
2. People risk: this is the risk from issues caused by the people who work for an organisation.
3. Systems Risk: most organisations are heavily dependent on computer systems in all aspects of their operations. Unless these systems have strong controls built in, there are increased risks that the systems could be used to process fraudulent transactions.
Organisational Structure (CH2)
What is Legal / Regulatory Risk?
This is the risk of loss resulting from an organisation failing to comply with legislation and/or regulations.
- This could be risks relating to health and safety regulations, or breaches of regulations relevant to the industry that the business operates in, resulting in the risk of fines.
Organisational Structure (CH2)
What is Event Risk?
Risks which may be present due to an external factor or event that affects the business.
Organisational Structure (CH2)
What are 4 types of Event Risk?
1. Physical event risks - the risk of fire or flood which could damage documents or assets, or could interrupt business, are examples of physical risks.
2. Social event risks - using inexpensive labour in certain parts of the world could be exposed to a social event risk if this was reported in a negative fashion as ‘slave labour”.
3. Political event risks - when governments make political decisions such as increasing rates of taxation or introducing environmental legislation, this will have an effect on organisations.
4. Economic event risks - if the Bank of England raises interest rates, this has an impact on the interest rates charged by lenders. This would be an example of an economic event risk for a business that has to pay interest on loans.
Organisational Structure (CH2)
What is Cyber Risk?
Any risk associated with financial loss, disruption or damage to the reputation of an organisation from unauthorized use of its systems.
Organisational Structure (CH2)
What are the 8 types of Cyber Risk?
- Phishing
- Malware
- Ransomware
- Distributed Denial-of-service Attack (DDOS)
- Spyware
- Keylogging
- Password Attack
- Browser Hijacking
Organisational Structure (CH2)
What is Reputational Risk?
Reputational Risk is something that threatens the good name of a business, or its reputation.
Organisational Structure (CH2)
What can cause Reputational Risk?
- Can result from the direct actions of the business, the actions of one or more of its employees, or the actions of third parties linked to the business.
- Can cause loss of sales and profit, employees to resign and reluctance on the part of suppliers, customers, and investors to be associated with the business.
Organisational Structure (CH2)
What can Reputational Risk lead to?
- Can lead to loss of sales and profit, employees to resign and reluctance from suppliers, customers, and investors to be associated with the business.
Organisational Structure (CH2)
How can a business avoid Reputational Risk?
- To avoid reputational risk damage, organisations must have good codes of conduct, strong governance and be transparent in their dealings with customers, suppliers, and employees.
- In addition to this, the organisation needs to be socially responsible and environmentally conscious.
Organisational Structure (CH2)
What does Risk Management involve?
This involves evaluating each risk by deciding the likelihood of the risk actually happening, and the impact on the business if it does.
Organisational Structure (CH2)
How can businesses asses Risk?
- Many organisations will use a risk map, or risk matrix, to assess risk. This is simply a table or chart which plots the impact of the risk on one axis and the likelihood of it materialising on the other.
- Risks can then be grade by multiplying impact and likelihood.
Organisational Structure (CH2)
Managing Risk - What does TARA stand for?
- Transfer
- Avoid
- Reduce
- Accept
Organisational Structure (CH2)
Explain Transfer (TARA)
Transfer - if there is a high potential consequence and a low likelihood, the business should transfer part or all of the risk to a third party e.g. insurance.
Organisational Structure (CH2)
Explain Avoid (TARA)
If a risk is highly likely and would have a significant adverse impact, the business should look to avoid the risk completely.
Organisational Structure (CH2)
Explain Reduce (TARA)
If a risk has a high likelihood and low impact, the business should look to reduce the possibility of it happening and its impact of it if it does.
Organisational Structure (CH2)
Explain Accept (TARA)
A business may choose to simply accept that a risk may happen and deal with it when if and when it does.
This would likely only be the case for risks that a both unlikely to happen and not have a significant impact on the business.
The Internal and External Environment (CH3)
What does Internal Environment mean?
Internal Environment: refers to all the inlying forces and conditions within the company, which can affect the company’s operations.
The Internal and External Environment (CH3)
What does External Environment mean?
External Environment: Major forces outside the organization with that have the potential to affect the organization’s performance, profitability, and functionality.
The Internal and External Environment (CH3)
What is PESTLE?
An analysis technique used to understand the impact of external factors on a businesses operations.
The Internal and External Environment (CH3)
What does PESTLE stand for?
Political
Economic
Social
Technological
Environmental
Legal
The Internal and External Environment (CH3)
What are Political factors? (PESTLE)
Political factors relate to the extent to which the government influences the economy.
For example:
- Government Policies.
- Taxation.
- Imports and Exports.
- Public spending - expenditure in the public sector by the government.
The Internal and External Environment (CH3)
What are Economic factors? (PESTLE)
Economic factors refer to the financial state of the economy
The Internal and External Environment (CH3)
What are Economic factors affected by? (PESTLE)
- Interest Rates
- Exchange Rates
- Changes in Disposable Income
- Business Cycle (boom,doom,recession,recovery)
- Inflation
The Internal and External Environment (CH3)
Explain the two types of Inflation
1. Demand-pull inflation - when demand for products and services increases, and businesses cannot meet this demand, this drives the price up.
2. Cost-push inflation - when the supply of goods and services decreases because of an increase in production costs.
The Internal and External Environment (CH3)
What are Social factors? (PESTLE)
Social factors relate to demographic, cultural and trend changes in society.
These can include:
* Income levels
* Language and culture
* Religion
* Education
* Family structure
* Age occupations
The Internal and External Environment (CH3)
What are the positive effects of changes in Technology? (PESTLE)
- Easier access to market through website sales and internet marketing.
- Computer aided design (CAD) reducing the time it takes between the idea for a new product and its production.
- Automated production lines which reduce labour costs and increase productivity.
- Improved safety due to automation of processes.
