Business Sears Flashcards
Why do businesses exist?
A business is an organisation that exists to provide goods and services on a commercial basis to customers
Different types of businesses
B2B - business to business e.g. canon
B2C - business to consumer e.g. screwfix
D2C - direct to consumer (middle man is cut out)
Manufacturing sector - where products are made
Service sector - businesses that offer a service e.g. hairdressers, schools
Key business objectives
Profit
Growth
Survival
Cash flow
Social
Ethical
Business objectives should be SMART
Specific
Measurable
Achievable
Realistic
Time bound
What is a mission statement?
The overriding goal of the business
The reason for it’s existence
A strategic perspective
A vision for the future
What makes a good mission statement?
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
What is a stakeholder?
Any person or group interested in the actions of a business
What are criticisms of a mission statement?
Not always supported by actions of the business
Often too vague and general
Often merely statements of the obvious
Often seen as a PR (public relations) exercise
Sometimes regarded cynically by staff
Sometimes not a true reflection of reality
Why do businesses set objectives?
Implement the mission
Provide a clear focus for decision making
Provide a target
Motivate employees
Provide a sense of unity
Reduce uncertainty
Provide a criteria for evaluation performance
Facilitate control of actual performance
What are some uses of profit?
Re-invest
Save it
Give to shareholders (dividend payment)
Why is profit important?
Growing the business (get more sales in future, be more competitive to competitors)
Profit can be a reward for the entrepreneur
Encourage investors (investors are more likely to buy shares if they see profit being made ( this makes the business more valuable +allows for growth)
Unincorporated businesses, what are they?
- The owner is the business- no legal difference
- Owner has unlimited liability for business actions (including debts)
- Most unincorporated businesses operate as sole traders
Difference between private and public sector?
Public sector = owned or ran by the government
Private sector = owned by individuals
Incorporated businesses, what are they?
- Legal difference between the business (company) and the owners
- Owners (shareholders) have limited liability
- Most incorporated businesses operate as private limited companies
What is unlimited liability?
Business owner/s are personally responsible for the debts and liability of the business. If the unincorporated business fails, the owners are liable for the mounts owed
What is limited liability?
Limited liability is a form of protection for shareholders and owners that prevents individuals from being held personally responsible for their company’s debts or financial losses. Only the amount invested is lost, to do with any company
Types of businesses that have unlimited liability
Sole trader, partnership
What is a sole trader?
A business owned by one person who has unlimited liability
Benefits of being a sole trader
- Keep all the profit because you are not allowed shareholders
- You get to be your own boss and make all the decisions
- Very quick and easy to set up as a sole trader
- Easy to shut down
Drawbacks of being a sole trader
- Have unlimited liability which is a big risk
- No shareholders so is much harder to raise finance to grow or expand
- Long hours
- The business is the owner, the business struggles if the owner becomes ill etc.
Why is limited liability important?
- An important protection for shareholders in a company
- Shareholders can only lose the value of their investment
However what does limited liability does not protect against?
- Wrongful or fraudulent trading
- When personal guarantees have been given by directors
How do
private limited companies operate?
Private means that the shares of the company are not traded publicly on the stock exchange (sold to friends/ family/ who owner chooses). They also must publish their financial statements
How do public limited companies operate?
A public limited company can sell its shares publicly on the stock exchange and have a larger value of share capital invested. They have to publish their financial statements.
Benefits of starting a limited company
- Limited liability so only money invested can be lost which protects the shareholders
- Easier to raise finance through the sale of shares and also easier to raise debt
- Stable form of structure, the business continues to exist even when shareholders change
Drawbacks of starting a limited company
- Longer to establish and set up the business
- Great admin costs
- Public disclosure of company information
- Directors have level duties (documents and statistics must be produced yearly)
Factors to consider when deciding if you want to be a sole trader or a limited company
Risk- what could go wrong and what are you prepared to loose
How many people- partnership must be more than one
Tax- different tax rules for companies (LTD)
Finance- might want to raise money by selling shares
Hassle- solve trader is easier to set up
What are your future plans- exit strategy, much easier to sell a company
Legal obligations- LTDs need to produce documents of yearly statistics
What are public sector companies?
-e.g. Royal bank of Scotland (nationalised), Network rail. Only a relatively small number of companies are owned or controlled by the government
What are public sector organisations?
-There are many more organisations that provide goods and services which are owned and operated by public bodies
-These are funded by central and local government, but still have charges for some services
-e.g. NHS, Highways Agency, Teachfirst
What are non-profit organisations?
-Businesses that trade in order to benefit the community
-These businesses have social and ethical aims as well as trying to make a financial return
-e.g. providing community services, reducing pollution, producing more sustainable products and creating employment opportunities
What are social enterprises?
-Businesses that put the interests and the planet ahead of shareholder gain
-These businesses are driven by an environmental/ social mission and re-invest profits into creating positive social change
-e.g. housing associations, community development trusts
What is ordinary share capital?
-Ordinary share capital is the money raised by a business through the sale of new shares to shareholders
What is market capitalisation?
Market capitalisation represents the total market value of the issues shared capital of a company. It is a measure of the size and value of a company, and it can be used to compare companies within the same industry as well as assessing the company’s potential for growth
What are unicorns?
Private owned businesses valued over $1billion
What are dividends?
Dividends are payments made by a company to its shareholders from the profits made by the company. Dividends are therefore, one part of the return on investment received by shareholders
What is the role of shareholders?
-They are responsible for appointing the board of directions (the people who are responsible for the day to day running of the business)
-In a LTD, the shareholders and board of directors may be the same people
-In a PLC, there are likely to be more shareholders and so the board of directors may be separated from the owners (divorce of ownership or control)
Why do shareholders invest in businesses?
-Shareholders invest in limited companies to earn returns
-There are two parts of the return: dividends, and any increase in the share price
-The level of dividends is decided by the business, but higher dividends may increase the attractiveness of investment to potential shareholders
-Shareholders can also earn a return if the share price increases above the price that they paid for them
What is share price indicative of?
-A share price is determined by the interaction of supply and demand
-If demand for a share is greater than supply (more buyers than sellers) then the share price should rise
-A falling share price indicates excess supply (more sellers than buyers)
Internal factors influencing share price
-Financial performance (e.g. profit growth)
-Dividend policy
-Relationship with key investors (including communication)
-Management reputation
External factors influencing share price
-State of the economy
-General market sentiment (attitude of investors)
-Whether the company is a takeover target
-Alternative investments in the company’s sector
Why is share price significant?
Share price is significant because :
-it affects the market capitalisation of the company
-is an indicator of the company’s financial performance, its growth prospects, and the overall state of the economy
Effect of ownership on mission and objectives for sole traders
-Sole traders are often small organisations and the owner is heavily involved in the day to day running of the business
-The objectives of a sole trader are likely to focus on survival, given that a large proportion of start ups fall within the first few years
-They can make all their own decisions as they do not have shareholders to consider
-Sole traders can set their mission and objectives
Effect of ownership on mission and objectives for limited companies
-Shareholders in an LTD are likely to be involved in the running of a business
-This may allow for a longer-term view, so will likely focus on market share, customer satisfaction or revenue growth instead of profit maximisation
-In a PLC, shareholders are often interested in higher dividends and rising share prices to maximise returns on their investments
-Therefore, objectives may be more ambitious relating to profit maximisation
What changes must be made when taking the external environment into account and what does pestle stand for?
Political e.g. Britain leaving the eu limited trade
Economic e.g. rise in minimum wage
Social e.g. vegan or plant based foods
Technological e.g. dynamic pricing, threat of AI
Legal e.g. employment law’s
Ethical/environmental e.g. tax, sustainability
What are market conditions?
Refers to a number of features of a market such as the level of sales, the rate at which they are changing and the number and strength of competitors
What does demand mean?
Is a term used to indicate the amount of a particular good or service that consumers or organisations want, and can afford, to buy at given prices. Shows the level of sales that businesses can expect
What are two indicators of market conditions?
Economic growth and GDP
How do businesses benefit from a growing economy?
- Increase in jobs, increase in spending and increase in profits mean that a business can grow
- A growing economy can give businesses an increase in confidence
What is market demand and what are the different types?
It is the size and growth rate of market and an indicator to market conditions:
1) fast growing market- can encourage new entrants as well as benefit existing competitors
2) slow growing market- market conditions are much tougher, competitors are fighting for their share of weak demand
How does competition make the external environment tougher?
- creates competitors with significant market share or faster growth than the market
- influence of disruptive technologies increases the risk of new competitors
- consolidation of a market with creates more powerful competitors e.g. takeovers
- spare or surplus capacity in the market/industry which reduces industry profits and makes price wars more likely
- investment in innovation and new product developments by close competitors
What is a real income?
- Real incomes measure the amount of disposable income available to consumers (e.g. households and individuals) take into consideration inflation
What is the Bank of England’s base rate of interest?
5%
What is inflation?
It is a general increase in prices and a fall in spending power and the value of money,
3 years ago inflation was at 11%
What factors affect real incomes?
- price inflation
- wage growth
- employment levels (lots of unemployed people would decrease wage growth creating smaller real incomes)
- interest rates
- government tax policy (increase in tax decreases disposable incomes with lower real incomes)
What are some examples of products for which demand is strongly influenced by income levels
- luxury electrical items
- restaurant meals
- long haul holidays
- household furniture
- jewellery
What are some examples of products for which income has little influence on demand
- bread, milk and other basic foods
- water
- lottery tickets
- cigarettes and tobacco
- petrol
Incomes and costs:
Income levels rise, wages also rise, businesses face sharp increase in costs, difficulties in maintaining competitiveness in terms of prices
What are interest rates?
An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed
What are different types of interest rates?
- Interest rates in savings in the bank and other accounts
- Borrowing interest rates e.g. mortgage interest (housing loans) or credit card interest rates
- The Bank of England uses policy interest rates to help regulate the economy and meet economic policy objectives (to control inflation)
What can interest influence the amount of?
- actual and expected demand
- expected profits and business taxes
- interest rates and availability of business finance
- business confidence
What happens when interest rates fall?
Costs of loans or debts is reduced- boosting spending power
Consumer confidence increases- leading to more spending
Effective disposable incomes rises- lower mortgage costs
Business investment should be boosted e.g. prospect (for the possibility) of rising demand
Housing market effects- more demand and higher property prices
Exchange rate and exports- cheaper currency will increase exports
