Business In Real World Flashcards
What is a business
A business is an organisation
which trades to make money,
these come in all shapes and sizes
What is a product
A product is anything that is
capable of satisfying
customer needs, it is
tangible and can be
touched
What is a service
A service is an act that a business person carries
out for you in exchange for money
Factors of production
• To produce goods and services 4 things are needed:
• Land– somewhere to produce the goods e.g. a farm
• Labour– people to work in the business e.g. farm
workers
• Capital– money to get the business started
• Enterprise– This is the drive or motivation from
the owners to start a business
Opportunity cost
• The problem:
• Land, labour, capital and
enterprise are limited
resources
• However our wants are
unlimited
• This causes scarcity
• As business people we
need to decide how best to
use those scarce resources,
we make choices
Reasons for starting a business
-produce good
-to supply a service
-distribute products
-fulfill a business opportunity
-providing a good or service to benefit others
-
What is primary sector
The primary sector
extracts raw materials
from the planet
What is secondary sector
In the secondary
sector goods are
manufactured from raw
materials into finished
goods
What is tertiary sector
In the secondary
sector goods are
manufactured from raw
materials into finished
goods
What is a enterpirse
This can be defined as: A company or
business. It also can mean a complex project.
What is a entrepreneur
An entrepreneur can be defined as: A person
who starts a business and takes on financial
risk in the hope of making a profit
Characteristics of entrepreneurs and objectives
-initiative
-organised
-risk taker
-to be own boss
-flexible hours
-to pursue interest
-earn more money
-identify gap in market
-dissatisfaction with current jobs
Inflatian rates
Inflation is: The rate
of increase in prices
for goods and services
– If these go up in the
UK then raw materials
required to make
goods may increase
– This will increase the
costs of the business
– This will have an
impact on profit
Interest rates
Interest rates are the cost of borrowing
rise interest rates will impact a business because if they
have loans or overdrafts these will now cost them more
Also their customers may now have less money as the
cost of their borrowing has increased, so sales may suffer
Unemployment rates
• The rate of unemployment in
the UK is those people without
a job who have been actively
seeking work in the past 4
weeks and are available to
start work in the next 2 weeks.
Exchange rates
Exchange rates are the cost of one currency expressed in terms of another
Employment laws
The National Living Wage is
higher than the National
Minimum Wage - workers
get it if they’re over 25.
Health and safety laws
• Health and Safety at work Act
1974
• All workers have a right to work in
places where risks to their health
and safety are properly controlled
• Health and safety is about
stopping you getting hurt at work
or ill through work
• The employer is responsible for
health and safety, but the
employees must help
Consumer laws
Goods must be; as
described, fit for purpose
and satisfactory quality
This will have an impact on
costs for a business as they
need to make sure the goods
are “satisfactory quality”
What is a sole trader
A sole trader is a business
which has only one owner
▪ Also known as a sole
proprietor
▪ Can employ people but
they will not be involved in
control of business
▪ Sole traders must pay tax
on their profits
▪ Has unlimited liability
(more on this later)
Advanatges of sole traders
. Easy to set up – no
complicated forms
2. Make decisions quickly –
no agreement needed
from other people
3. Less capital needed
Disadvanatges of sole trader
- Unlimited liability
- Difficult to raise money – seen as a risk
Don’t have economies of scale (buying in bulk)
- Difficult to raise money – seen as a risk
Unlimited liability
This means that the
business and the owner are
ONE legal entity.
In short if a customer sues
the business, they will in
fact sue the owner
• If the business gets into
financial trouble, and
needs to pay off debts,
then the owner could lose
their:
– House
– Car
– Personal possessions
If the business gets into
debt, the owner gets into
debt
Partnerships
• Partners are all joint
owners of the business
• The partners of the
business may do decision
making themselves or they
may employ manager
Advanatges of partnerships
• Easy to set up
• Capital needed is small
• Easier to raise extra capital than a sole trader as there are more partners to invest
• Profits go to partners which means motivated
workers
Disadavantges of parternships
• Partnerships have unlimited liability
• Trust and reliability can be an issue
• Partners can have disagreements;
Private limited company
Shares cannot be bought by the public, the share
issue is limited (hence the ltd) to friends and
family who can buy shares in the business
• Owners control who buys the shares
• Minimum 2 people – no maximum
• Expand by selling more shares, giving the
business more capital
• Limited liability, t
Advanatges of LTD
• Protection of limited liability for investors, they
cannot lose their own assets on the value of the
investment
• Easy to raise capital – issue more shares to
friends and family
• Banks more willing to lend money to a ltd
company than a sole trader
Ltd-disadvanatges
• Business has to issue more information about
itself which can be expensive to produce
• Business has to prepare Annual Accounts and
have these printed and sent to all
shareholders
Plc
• Shares can be bought and sold by
anyone on the Stock Exchange
• Can expand by selling more shares
• Limited liability
• Company has its own legal status
• Normally start as LTD then become
PLC
• Normally very large businesses
Plc-advanatges
• Protection of limited liability for owners and
investors
• Easy to raise capital – issue more shares
• Banks more willing to lend money to a large
well-established company – less risk
Plc-disadvanatges
• Expensive to produce accounts every year
• Has to publish annual accounts which means
the public and competitors can see all their
financial information
• Expensive process to become a plc
Non-for-profit
• A not-for-profit organisation is one that has
the objective of something other than making
a profit (but it still might make a profit)
• They are dedicated to a social cause
-limited liability
Survival objective
The objective is to reach
a sustainable level of
sales that allows the
business to reach its
break-even point
Profit maximisation
Profit is total revenue (revenue into a
business) minus total costs (costs out of a
business)
• A business will aim to maximise profit,
they must do this therefore in only two
ways:
– Increase revenue into the business
– Reduce costs out of the business
Growth
The business may wish
to increase the number
of shops or outlets that
they have in the UK
(this is the domestic or
home market)
• The business may wish
to expand into other
countries, for example
Europe (this is the
international market)
Market share
A business may aim to increase their market
share. This is the percentage of sales held by
a business in a market.
• They will have to take sales away from
competitors to achieve this aim
Social objectives
• Social enterprises are
businesses trading for social
or environmental purposes
Ethical objectives
• Ethics is the principal of
knowing right decisions
from wrong ones in
business
• Having ethical
objectives is expensive
and will cost the
business money
Shareholder value
• Shareholder value is; where shareholders, in a
business, earn a return from their investment
which is greater than their required rate of
return
What is a stakeholder
• A stakeholder is defined as anyone who has an
interest in a business and is affected by the
actions of the business
Stakeholder-owners
Role; to start and run a
business to make a
profit
• Objectives; to get a
good return on any
money they have
invested in the business
• To make a profit
• To survive
Stakeholder-employees
• Role; to work in a
business in return for
wages
• Objectives; To have job
satisfaction, to have job
security so they can pay
their bills, to get
promoted
Stakeholder-customers
• Role; to buy goods or
services from the
business
• Objectives; to get a
good choice of goods or
services, to get value for
money, to get quality
products at low prices,
to have the opportunity
to buy innovative
products
Stakeholder-local community
• Role; For those who live
near a business who may be
affected by its operations
• Objectives; They want the
business to provide jobs,
they want the business to
operate in an ethical way,
they may also want them to
buy from local suppliers and
to not pollute the local
atmosphere
Stakeholder-suppliers
Role; to provide the
business with goods or
services that they might
need
• Objectives; they want to
charge high prices to
make a profit, they want
customer loyalty with
repeat orders, they also
want payment on time,
they may also want larger
orders
Why do companies not have all same objectives
The size of business- smaller business are focused on survival and growth rather than increasing market share. Larger businesses get greater attention from public so may want to act ethically by protecting environment for a good reputation.
The level pf competition a business faces- if business is highly competitive it may want to win customer satisfaction so can win customers. If firm dosen’t have much competition it objective may be growth and maximisation of profits.
The type of business- not for profit businesses may focus on social or ethical objectives rather than growth
Stakeholders influence objectives to varying degrees
-owners make Descisions in a firm,so there most influential stakeholders
- however they need to consider interest of other stake holders when setting objectives.
- often stakeholders will have conflicting opinion about objectives
- firm may want to ignore the opinions but will need to take account of other stakeholders if want to survive such as:
No business can ignore its customers. If it cant sell products it wont survive.
If business dosen’t have happy workers it will be unproductive
What is the formula for revenue
Revenue = sales x price
What are fixed and variable costs and formula
- fixed costs don’t vary with output. They have to be paid even if firm produces nothing. E.g rent,insurance
-variable costs are that will increase as the firm expands output. E.g factory labour, raw materials
Total costs= variable costs + fixed costs
What is average unit cost and formula
-average unit costs is how much each product costs to make
-to make profit a firm must charge a higher price
Average unit cost= total cost/output
What is the formula for profit
Profit=revenue-costs
Purpose of a business plan
-to help set up a new business- will help an entrepreneur decides what resource they need to start there business such as human resources,equipment,raw materials and technology
To help the business raise finance
Help the business to set objective-aims to achieve it goals. Should set targets and objectives that can be followed for the business
To outline how functions of the business will be organised.
Main sections within business plan
Section1-goals (short term and long term and Unique selling point)
Section 2-pricing
Section 3-knowing your market
Section 4-customers
Section5-competitors ( need to know how to be better than competitors such as pricing,product and availability)
Section 6-location
Section 7- promotion
Section 8- finance
Benefits of a business plan
• A business plan will
help the business
owner to define their
business idea
• It will help them to plan
for the future
• It will also help to show
if the idea is realistic
and workable
Drawbacks of a business plan
It is key to attract
funding, and will be
needed when applying
for lending (from a
bank)
• Businesses are in dynamic
markets, and demand and
supply can change on a
daily basis, a business plan
is a rigid and fixed
document which may not
take these changes into
account
Formula for gross profit and net profit
1) Gross profit
Gross profit (GP) is sales revenue
(SR) minus variable costs (VC)
2) Net profit
Net profit (NP) is sales revenue (SR)
minus fixed (FC) AND variable costs
(VC)
What is a grant
• Some businesses may
decide to open in a
certain location because
they have been given a
government grant
• Government grants do
not need to be paid back,
they are given to
businesses to encourage
them to set up in areas
which have high
unemployment
Location factors
-labour factors-adequate supply of cheap and skilled labour is necessary for businesses. Some businesses may move to areas of high unemployment so there is a large pool of applicants for job.
Also may decide to set up near a cluster of other similar businesses or closed to skilled staff.
Proximity to market-– bulky or perishable goods manufacturers need to
be close to their customers as the goods cannot
be transported long distances.
Location close to customer traffic is important
as it is good for the customers (convenience)
and good for the business as it may need
more sales.
Proximity to competitors- will draw customer to a certain area if they don’t find the product they are looking for.
Organic growth
Franchising- is where a company expands by giving other firms the rights to sell it products in return for a fee or a percentage of the profits. Product manufacturers are known as franchisors selling product to franchisees.
Opening new stores
E-commerce- lots of people can buy products from the firm even if not near shop so can access greater market. It’s cheaper than setting up and running a new store-no rent or hiring staff.
Outsourcing- business could pay another firm to carry out tasks for the. Outsourcing firm may be able to do tasks more quickly,cheaply or to higher standard.
Advanatges or organic growth
a) A business that grows from within can retain
their own company culture
b) Higher production means the business can
benefit from economies of scale and lower
average costs
c) Much cheaper than a merger
d) Less risk, slower growth, known business
model
Disadvantages of organic growth
a) This is a very high risk strategy, opening lots
of stores or taking on new staff is very risky
b) Long period between investment and return
on investment
c) Growth may be limited and is dependent on
reliability of sales forecasts
Inorganic growth
Merger-two businesses merge to become one new one
Takeover-One business will takeover a another
business (by buying more than 50% of the
shares), sometimes this can be hostile if the
shareholders don’t agree
Advanatges of merging
-economies of scales
-increased revenue and market share
-buying technology
-international expansion
Disadvantages of merging
-clash of cultures
-possible communication problems
-diseconomies of scales
Economies of scale
-being larger means than an average unit cost of each product falls and reduction in cost.
Purchasing economies of scale- when a large firm buys its supplies in bulk and so gets them at a cheaper price than a small firm.
Technical economies of scale- these occur because a large firm can afford to buy and operate more advanced machinery than smaller firms
-as average unit cost of making each product is lower firms can make more profit on each item they sell.
Diseconomies of scale
-bigger the firm, the harder and more expensive is to manage properly
- big firms have more people so can be harder to communicate with company. Decision take time to reach bottom of hierarchy leading to demotivation and lack of productivity.
