Business In Real World-school Flshac4ds

Question 1

What is enterprise?

Answer 1

An enterprise is simply another name for a
business
OR
perhaps more importantly, enterprise describes
the actions of someone who takes a risk by
setting up, investing in and running a business

Question 2

What is an entrepreneur?

Answer 2

“someone who takes a
calculated risk through
starting a business.”

Question 3

Roles of an entreupreneur

Answer 3

takes the initiative in trying to exploit a
business opportunity.
• takes time to understand and calculate
the risks involved.
• makes an investment, often of their own
money, to set up the business.
• goes ahead, despite the risk that the
business venture might fail.

Question 4

Characteristic of an entreupreneur

Answer 4

Innovative
Risk-takers
Hard working
Organised
Persuasive
Leadership skills
Lucky

Question 5

Objectives of an entrepreneur

Answer 5

Be their own boss – independence
and having total control
• Flexible working hours – work life
balance
• Pursue an interest – turn a hobby
into a business
• Earn more money – profit made by
the business
• Identify a gap in the market
• Dissatisfaction with current job -
can build something successful
• Self-esteem through business
success
• Personal development

Question 6

What is a business?

Answer 6

An organisation that
exists to produce goods
or supply services to
customers.

Question 7

What are goods and services?

Answer 7

Good:
• Goods are actual
objects.
• They can be
touched, felt and
held.
• They are produced
and consumed.

Services:
• Services are
activities.
• They are
intangible.
• They are provided
by other people or
businesses.

Question 8

What are needs and wants?

Answer 8

Needs:
• Needs are those goods and
services that we must
consume if we are to live.
• These include food, shelter
and warmth.

Wants:
• Wants are goods and services
that we would like, but do
not have to consume to
survive.
• These include holidays,
smartphones, entertainment
and other luxuries that we
may like, but do not need.

Question 9

Opportunity cost

Answer 9

Opportunity cost is the cost of what has
been given up, sacrificed or forfeited when another
option has been chosen.
For example: going to a concert means you now
cannot afford to buy the shoes you want. The shoes
are the opportunity cost of making this decision.

Question 10

Reasons for starting a business

Answer 10

Producing goods
Supplying services
Distributing products
Fulfilling a business opportunity
Providing a good or service to benefit others (social enterprise)

Question 11

Mot-for-profit organisations: social enterprises

Answer 11

An organisation set up to provide
a good or service to help others.
Any surplus money made is used to
meet the social aims and
objectives of the organisation.

Question 12

Business sectors

Answer 12

Primary- Producing raw materials
which are extracted from
nature.
Secondary-Manufacturing goods which
are made from raw
materials and turned into
finished goods. This sector
also includes firms involved
in construction.
Tertiary-Providing services. This
sector will also include
businesses involved in the
distribution process.

Question 13

Factors of production

Answer 13

Land - the land where the business is based, but also includes the natural
resources on, or under, that land.
 Labour - The people working in the business that are involved in the
manufacturing of the product.
 Capital - The machinery / buildings needed by the business to produce the
product.
 Enterprise - The entrepreneur who set up the business, organises the factors
of production and takes the risks involved in running the business.

Question 14

Dynamic nature of business

Answer 14

Businesses are constantly faced with change. Some of
these changes will be outside the control of the
organisation.
• Successful businesses will be able to meet these
changes and demonstrate flexibility in the way they
operate.

external changes that businesses face
include new legislation, changes in the economy,
new technology, environmental expectations,
political events

Question 15

Changes in business environment

Answer 15

Legislation
Technological
Economic
Environmental
Social

Question 16

What is a sole trader

Answer 16

A sole trader is an individual who has sole
ownership of a business
• Most businesses in the UK are small
businesses. These businesses normally
operate as a sole trader e.g. hairdressers,
gardeners, plumbers and electricians.
• A sole trader can also employ people –
but those employees do not share in the
ownership of the business.

Question 17

Drawbacks of sole trader

Answer 17

Unlimited liability
May not have all the skills needed to handle all areas of the business
Making all the decisions can be stressful
Can be difficult to raise finance
Heavy workload

Question 18

Partnership

Answer 18

A partnership is formed where a business
is started and owned by more than one
person.
• Common examples of partnerships are
doctors, solicitors or vets.
• A legal document, called a Partnership
Agreement, is always recommended and
sets out how the partnership is run and
how profits are divided.

Question 19

Benefits and drawbacks of partnership

Answer 19

Benefits:
-• Simple to form a business
together
• Minimal paperwork once
Partnership Agreement is set up
• Partners can provide specialist
knowledge and skills
• Jobs can be shared
• Greater potential to raise
finance
• Any losses will be shared

Drawbacks:
• Unlimited liability
• Partners have to live with
decisions of others
• Decision-making can take
longer
• Harder to raise finance than a
company
• Short life, as if one partner
leaves or dies the partnership
ends
• Profits have to be shared

Question 20

Unlimited liability defention

Answer 20

When it comes to money owed by a business, the
owners may have to use their own personal
funds to pay for any debts, possibly through the
sale of their homes or other assets, if there is not
enough money in the business to pay these debts
fully.

Question 21

Limited companies

Answer 21

A company is formed when a business is set up to have a
separate legal identity from its owners.
• The company’s finances are separate from the personal
finances of its owners. The owners are now known as
shareholders, who will each own shares in the company.
Shareholders receive a share of the profits, known as a
dividend, as a reward for being a shareholder.
• The business will be run by a Board of Directors, appointed
by the shareholders. The shareholders may also act as the
directors. The Board of Directors run the company on a day-
to-day basis and will make all the important decisions.

Question 22

Limited liability defenition

Answer 22

Within limited companies, shareholders are
not responsible for the company’s debts.
Shareholders may only lose the money they
have invested in the company to help pay off
any outstanding debts or liabilities.

Question 23

Privated limited companies

Answer 23

• Private limited companies (ltd)
can raise funds from investors,
such as friends and family, but
not from the general public, as
its shares are not listed on the
stock exchange

Question 24

Benefits and drawbacks of private limited company

Answer 24

Benefits:
Limited liability - protects
the personal wealth of the
shareholders
• Easier to raise finance as the
company can sell shares
• Stable form of structure –
the company continues to
exist even when the
shareholders change
• Original owners are likely to
retain control

Drawbacks:
• Shareholders have to agree about
how profits are distributed
• Greater administrative costs
than setting up as a sole trader or
partnership
• Shareholders must be invited
which limits the amount of
finance that can be raised
through share capital
• Less privacy - public disclosure
of company information, but not
as extreme as for a plc
• Directors’ legal duties are
stricter

Question 25

Public limited companies

Answer 25

• Most of the largest businesses in a country will be public limited companies (plc). Public limited companies (plcs) are complicated and expensive to set up, but this type of company can raise large sums of money through listing its shares on the stock exchange. • The trading of shares this way can make the company vulnerable to a possible takeover. This could mean that the original owners / shareholders of the company lose control, if they end up holding less than 50% of the shares.

Question 26

Choosing the most suitable legal structure for business

Answer 26

Size of business – start-up businesses often start as sole traders or partnerships, as they are easier and quicker to set up compared to a Ltd. Type of business – if specific expertise is involved, such as with doctors or lawyers, the legal structure chosen is more likely to be a partnership rather than a sole trader. If significant risk is involved, an Ltd is more likely. Lender requirements – the bank may prefer the business to be set up as a sole trader or partnership, as it will have more of a guarantee that the business owners will pay back any loan if it fails. Investment protection – a limited company may be chosen so investors can be protected by limited liability. Control – the owner, as a sole trader, or a shareholder, holding the majority of shares in a company, has total control of the business. Growth – becoming a plc allows a large amount of finance to be raised.

Question 27

Not-for-profit organisations

Answer 27

These include community and other voluntary organisations, as well as social enterprises and charities. • Not-for-profit organisations are set up to achieve objectives other than profit. Whilst funds will need to be raised, any surplus money made will be used to help meet the organisation’s aims and objectives.

Question 28

Business objectives

Answer 28

Survival – Often entrepreneurs discover their idea was not as good as they originally thought or the external business environment makes it hard to trade, which means the business finds it difficult to run profitably. Profit maximisation – profit is the main objective for most businesses. This is the reward to the entrepreneur for their hard work and the risks that they have undertaken. Market share / sales maximisation – some businesses will be more concerned with increasing market share or becoming the market leader. Growth – not all businesses want to grow, but most do. This means that they can increase their profits and the value of the business, through expanding within the home market or internationally. Social / ethical responsibilities – increasingly businesses are aware of their responsibilities to the society in which they operate. These may be related to the environment or having correct “ethical” behaviour i.e. doing the right thing regardless of cost / profit! Customer satisfaction – some businesses pride themselves on providing a quality service or selling quality products to ensure customers are fully satisfied and will return Shareholder value - shareholders in a company will be interested in how much their dividend payment will be or the value of the share price.

Question 29

Role of objectives in running a business

Answer 29

Direction - Clear objectives will allow a business to decide on the direction it should take, for example whether it should expand or not. • Focus for employees - It is important that all employees follow the business’s objectives to help increase efficiency. • Allows planning - The business plan will be designed so that business objectives can be met. Clear objectives allow for consistent planning. • Measurement of success - Having business objectives allows a business to measure its success. The business can then correct or change its business strategy or plans if it is not working.

Question 30

Why objectives set will differ between businesses

Answer 30

• The size of a business – over half of new businesses fail within five years and many new businesses do not survive much beyond their launch. Customer satisfaction or being ethical could be an objective to help them compete effectively against rivals. • Level of competition faced – if a business doesn’t have much competition, it may focus on profit maximisation whereas if there is a lot of competition, a focus on customer satisfaction or maintaining market share will be important. • Type of business – not-for-profit organisations will focus on social or ethical objectives. A sole trader may focus on survival rather than growth; growth may be more important to a plc, as well as maximising shareholder value.

Question 31

What is stakeholder

Answer 31

A stakeholder is any individual or organisation who has a vested interest in the activities and decision- making of a business.

Question 32

Stekholders and shareholders

Answer 32

Stakeholders: • Have an interest in the business – but do not own it • May work for, or otherwise transact, with the business Shareholder: • Own the business • May also work in the business • Mainly interested in growing the value of their shareholding • A shareholder is an example of a stakeholder

Question 33

Objectives of shareholders/owners

Answer 33

Return on investment + profits and high dividend payments Success and growth of the business Proper running of the business

Question 34

Objectives of managers and eomployees

Answer 34

Rewards, including maximising pay & other financial incentives Job security & working conditions Promotion opportunities + job satisfaction & status – motivation, roles and responsibilities

Question 35

Customer objectives

Answer 35

Value for money Product quality & customer service

Question 36

Supplier objectives

Answer 36

Continued, profitable trade with the business Financial stability – can the business pay its bills?

Question 37

Banks and other finance providers objectives

Answer 37

Can the business repay amounts loaned or invested? Profitability and cash flows of the business Growth in profits and value of the business

Question 38

Government objectives

Answer 38

The correct collection and payment of taxes (e.g. corporation tax) Helping the business to grow – creating jobs Compliance with business legislation

Question 39

Local community objectives

Answer 39

Success of the business – particularly creating and retaining jobs Minimising environmental impact on the local community Compliance with local laws and regulations (e.g. noise, pollution)

Question 40

List alternative ways stakeholders can influence business activity

Answer 40

Direct Action – customers can boycott the business / employees can go on strike Negotiation – employees may try and gain extra pay / suppliers may want higher payment for their products Refuse to cooperate - employees may work to rule or work slowly if they are unhappy about a business decision Vote - shareholders may be invited to vote on business decisions

Question 41

Location-availability of raw materials

Answer 41

The business may depend on supplies of a particular raw material. Costs will therefore be lower if the business is located near the supplier, for example where the raw material is grown or where a

Question 42

Location-proximity to market

Answer 42

Businesses may need to be located near particular centres of population e.g. surfing instructors need to be located, not only by their raw materials – the sea - but they also need holiday makers to survive! • This can be very important for businesses that provide a service. • This is less important for online businesses, as customer access is via their website.

Question 43

Location-competition

Answer 43

If a new business sees a “gap in the market,” where there is no competitor, this might be a good reason to locate there. • However, this might mean it is not a profitable location for any business of a particular nature to set up there. • In some cases, it may be of benefit to be near a competitor, as customers may come to the competitor, but then see another business that is nearby.

Question 44

Location-costs

Answer 44

• A start-up business is likely to have limited finance. Existing business are likely to have competitors and will want to keep costs low. • Having fixed premises will mean that a business will have to pay rates, insurance and many other ongoing costs, as well as the rental or purchase costs.

Question 45

Labour

Answer 45

• When a start-up business needs to hire employees, then access to a reliable supply of skilled staff will be important. • Labour intensive businesses often look to locate in areas of traditionally low wages or higher unemployment. • Some businesses will need specific skills and therefore will need to be located near a pool of this type of worker.

Question 46

What is a business plan

Answer 46

A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts.

Question 47

The purpose of business planning

Answer 47

Provides a focus on the business idea It helps test the financial viability of the idea It encourages the entrepreneur to set appropriate objectives that are in line with the business activities Producing a document helps clarify thoughts and identify gaps in information It is essential in order to raise finance from outside providers, such as investors and banks The plan helps an entrepreneur become more organised and allows the planning process to have a logical structure The plan provides something which can be used to measure actual performance

Question 48

Information that should be included in business plan

Answer 48

The idea - a simple description of the proposed business; where the idea came from and why it is a good one • Objectives and key targets for the business - sales, profit, growth - ideally for the next 3-4 years; this will give the business a sense of direction • Finance required - how much from the owners, how much to be loaned over how long and from whom • Market overview – results of market research, main segments, market size (value, volume), growth, market shares of main competitors (if known) • How the business will operate i.e. location, premises, staff, distribution methods • Marketing – details of the target market and the marketing mix • Cash-flow forecast – very important to ensure the business does not run out of cash • Forecast revenue, costs and profits – this will show if the business is viable

Question 49

Advanatges and disadvanatages of business plan

Answer 49

Advanatges: • Allows business owners the opportunity to review their ideas and to see whether they will provide a profitable future • Reduces risk by providing a guide for the business as to what needs doing by when Disadvantages: • The plan may be poor quality, due to a lack of research and a general lack of experience by the people who wrote it; sales may be overestimated and costs underestimated • Any plan will require constantly updating, as internal and external circumstances change • Producing and reviewing a plan on a regular basis requires time and effort which may be expensive, especially for small businesses • Can cause new opportunities to be missed, if they are not in the plan • The plan must be put into action if it is to be worthwhile

Question 50

Economies of scale defenition

Answer 50

Economies of scale are achieved when the average cost per unit falls as the scale of production increases.

Question 51

Types of economies of scales

Answer 51

• Purchasing economies of scale are achieved when big businesses are able to negotiate discounts for buying large quantities / bulk-buying supplies of materials. This reduces the unit cost of each item purchased. • Technical economies of scale are gained by large-scale businesses, as they can afford to invest in expensive and specialist high output machinery for production, which would not be cost-efficient for a small business to purchase. This allow bigger businesses to produce far greater quantities from the machinery, resulting in the average unit cost of production decreasing. This is because the fixed costs of the business will be spread across more units of output.

Question 52

Diseconomies of scale defenition

Answer 52

Diseconomies of scale occur when the average cost per unit increases as the scale of production increases.

Question 53

Examples of diseconomies of scale

Answer 53

• Control – larger businesses can experience problems monitoring productivity and work quality, as more staff are employed or a business operates from different sites; this may result in a duplication of work • Motivation might decrease in a growing business, as workers feel that managers and owners of the business are too remote and therefore do not value them as individuals; they may believe that their role is unimportant leading to low morale, resulting in a possible decrease in productivity and a lack of co-operation Communication – communication is more difficult in a big business compared to a smaller firm. This is because the organisational structure becomes more complex and messages take longer to travel from the people at the top of the organisation to the bottom; this can result in missed communication and inefficiencies as work is not completed or completed with errors

Question 55

Formula for average cost per unit

Answer 55

Total costs (£)/ Output (units )

Question 56

Factors affecting the method of growth

Answer 56

Size of business Nature of product Position in the market Financial position of the business Regulation

Question 57

Pros and cons of external growth

Answer 57

Pros: • Tends to be quicker than organic growth • Increased market share and market power, as competition may be reduced • Risk is spread if products are different to the core products Cons: • Can be expensive • Managers may not be experienced enough to run the larger business efficiently • International expansion may result in a clash of culture, language barriers and different laws / buyer behaviour, which may prove challenging for the newly formed business to deal with

Question 58

Advnatages of growth

Answer 58

Economies of scale Access to more retailers / outlets Greater brand awareness Less vulnerable to takeover Easier to raise finance Diversify / spread the risk Can employ specialists

Question 59

Disadvantages of growth

Answer 59

Diseconomies of scale Slower decision-making Communication more difficult Employees may become de-motivated Co-ordination can be more difficult Increased costs Personal relationships with customers may be lost