C1/H1 - Introduction to Business Flashcards
What is a business?
Defined as any organisation that works to fulfil a common purpose.
What is SME?
Small to medium sized enterprise.
- In the UK a company is defined as being an SME if it meets two out of three criteria:
- has a turnover of less than £25m
- has fewer than 250 employees
- has gross assets of less than £12.5m.
In the UK 99.3% of UK businesses are defined as SME’s.
What 4 key areas can Business activity be separated into?
- Business resources (the four factors of production)
- Business functions (the different departments within a business)
- External influences
- Output (the good, services and waste produced by the business)
- Business resources (the four factors of production)
All business will need to use the four factors of production in their business operations.
These factors are the inputs of a business and are combined to produce goods and services, or in other words the business outputs.
The 4 factors of production are:
- Land
- Labour
- Capital
- Enterprise
LAND (4 factors of production)
Described as the free gifts of nature, includes physical land and other natural resources e.g. oil, minerals, coal ⚫️, forests 🌳 , and fish 🎣 .
Business activity uses both renewable (resource can be used then replaced) and non-renewable resources (limited supply and can’t be replaced once extracted).
Providers of land receive RENT 🏠
LAND (4 factors of production)
Described as the free gifts of nature, includes physical land and other natural resources e.g. oil, minerals, coal ⚫️, forests 🌳 , and fish 🎣 .
Business activity uses both renewable (resource can be used then replaced) and non-renewable resources (limited supply and can’t be replaced once extracted).
Providers of land receive RENT 🏠
LABOUR (4 factors of production)
Refers to physical 💪🏼 and mental 🤔💭 effort involved in the production of goods 🛒 and services 💇🏻.
It is the workforce of the business.
Manual workers, skilled workers and management are all members of the workforce.
Includes skills of those who work as well as the quantity of people who work or who are available for work.
Quality of human resource can be improved through training 🏃🏻♀️and education 📚🎓.
Payment for labour is WAGES 💰
CAPITAL (4 factors of production)
This exists at two levels:
- Financial capital: money invested into a business which can be used to purchase physical capital.
- Physical capital: consists of machinery, computers 💻 , equipment 🏗, tools 🛠, etc.
Providers of capital receive INTEREST 💳
ENTERPRISE (4 factors of production)
The ability to combine the other factors of production and to then use them to provide, profitably, goods and services is known as enterprise.
Entrepreneurs 🕵🏼♀️ are the risk takers that set up and run business enterprises.
Return on enterprise is PROFIT 💵💸
LABOUR (4 factors of production)
Refers to physical 💪🏼 and mental 🤔💭 effort involved in the production of goods 🛒 and services 💇🏻.
It is the workforce of the business.
Manual workers, skilled workers and management are all members of the workforce.
Includes skills of those who work as well as the quantity of people who work or who are available for work.
Quality of human resource can be improved through training 🏃🏻♀️and education 📚🎓.
Payment for labour is WAGES 💰
CAPITAL (4 factors of production)
This exists at two levels:
- Financial capital: money invested into a business which can be used to purchase physical capital.
- Physical capital: consists of machinery, computers 💻 , equipment 🏗, tools 🛠, etc.
Providers of capital receive INTEREST 💳
ENTERPRISE (4 factors of production)
The ability to combine the other factors of production and to then use them to provide, profitably, goods and services is known as enterprise.
Entrepreneurs 🕵🏼♀️ are the risk takers that set up and run business enterprises.
Return on enterprise is PROFIT 💵💸
Business functions
Many firms are organised into different departments based on what they do, or in other words their function. Separating a business into these functional areas helps with communication and sets out the roles and responsibilities of each department. Functional areas are all separate but their roles are all connected.
The main functional areas are: • Purchasing • Production (Operations) • Marketing and sales • Personnel (Human resources) • Finance/accounts
Business output
There are a number of different forms of business outputs which include goods and services. Goods are physical items that the business produces to sell. Services are intangible products that can be sold.
• CONSUMER GOODS
- produced for general use by the public.
- Can be durable (used repeatedly for a long time, e.g. TVs.)
- Non-durable goods are used soon after they are purchased, e.g. food.
• CAPITAL GOODS
- purchased by businesses and used to produce other goods i.e. tools, equipment and machinery. aka producer goods.
• INTERMEDIATE GOODS
- Work in progress, goods purchased by producers and include materials and components for short term usage.
• SERVICES
- Business activities that people are prepared to pay for e.g. hairdressing, banking, and leisure services.
External influences
Businesses are affected by a number of outside influences which will have an impact on how the business is run and needs to operate. These include the following factors:
- Political e.g. government objectives and activity, international political issues, level of involvement
- Environmental e.g. regulators, sustainability, environmentally friendly
- Social e.g. tastes and trends, demographics, lifestyle changes
- Technological e.g. research, innovations, ICT
- Economic conditions e.g. business cycle, exchange rates, interest rates, inflation
- Ethical: what is morally right or wrong e.g. animal rights, treatment of suppliers
- Legal e.g. health and safety, competition, environmental, consumer and employment laws
Fulfilling needs and wants
Business combine the four factors of production to produce goods and services in order to meet customers’ needs and wants.
Needs
human requirements that must be met for survival.
Needs are limited.
e.g. food, warmth, shelter, clothing, education, healthcare and a good quality infrastructure.
Wants
- human desires that are unlimited.
- not essential to survival.
People’s wants are unlimited but there are limited resources and money to provide for these wants.
This creates the basic economic problem of scarcity. All individuals, households, business firms, communities, nations - rich and poor alike - confront scarcity. The problem is the appropriate use of limited resources to produce the goods and services that we value most.
The basic economic problem of scarcity =unlimited wants + limited resources.
Scarcity
Scarcity means not everyone can have everything they want and therefore choices have to be made.
For individuals this may be the choice of whether to buy a new car or to go on holiday.
For governments this may be the choice between building new schools/hospitals or spending more on pensions.
The name for the outcomes of these decisions is called opportunity cost.
Opportunity Cost
Opportunity cost is the benefits sacrificed from the next best alternative forgone when making a choice between alternatives.
- cost of not choosing the next best alternative or what is given up to make that choice.
- action is the highest valued alternative forgone.
- opportunity cost of buying the new car would be the enjoyment of going on a holiday which now cannot be afforded.
Enterprise
Enterprise represents one part of the four factors of production.
SME stands for small and medium sized enterprises and many of these organisations are set up by entrepreneurs.
What is an Entrepreneur?
An entrepreneur is someone who starts and runs a business. Perhaps he or she makes a product and then sells that product, or perhaps they provide a service.
They quite possibly employ people and, of course, try to make a profit, he/she:
- Takes the initiative in trying to exploit a business opportunity
- Takes time to understand and calculate the risks involved
- Makes an investment to set up the business
- Goes ahead, despite the risk that the business venture might fail
Identify business opportunities
Entrepreneurs are often successful because they identify a need or want in the market that is not currently being exploited by businesses already in the market.
Alternatively an entrepreneur may find an innovative way of providing a product or service that is different to what current businesses are offering.
Explain the role of the entrepreneur in creating, setting up, running and developing a business
In creating a business the entrepreneur takes a risk on a business idea by investing their own money or by taking out debt to finance an idea that is not guaranteed to be successful.
In creating a business the entrepreneur may also construct a business plan which will allow them to fully think through their proposed venture.
In setting up the business the role of entrepreneur is often to use their passion/knowledge of the product/ market to inspire others to commit to the business which is why entrepreneurs require strong leadership skills.
Once the business is running the role of the entrepreneur will be to provide innovative ideas to develop existing products or introduce new ones that will ensure the future success of the business.
Entrepreneurs have a number of motives for starting a business
Financial Motives of Entrepreneurs
>Financial Reward – They may earn more owning their business and receiving all profit generated than they would receiving a wage or salary
> Lack of employment opportunities – If recently made redundant or unable to find work they may have more incentive to explore owning their own business to receive a source of income
> Government incentives – The government may sometimes offer incentives to encourage small business start ups
Non-Financial Motives of Entrepreneurs
>Independence – some people want the flexibility to dictate their own working hours and to decide what type of work they do or do not undertake
> Personal Satisfaction – some people may wish to pursue a given interest or passion and therefore pursue work they enjoy as well as giving them the satisfaction of building their own business
> Some may prefer to work by themselves as opposed to being part of an organisation where they have to work with others or as part of a team. Some entrepreneurs may feel this stifles their creativity.
Characteristics and skills of entrepreneurs
- Being a risk taker – entrepreneurs are not always about new products or new ideas. They are often just doing things better than they were done before. However, they are all risk takers – they risk capital and their own time to try to create profits. They may remortgage the house, borrow from friends and family, or give up well-paid jobs to try to make a success out of their business idea.
- Taking the initiative and being proactive – successful entrepreneurs are able to take the initiative when required. They do not panic and allow events to overwhelm them – they are proactive and able to change as needed.
- Being an effective organiser– an ability to organise effectively is central to running a business effectively. The entrepreneur may need to undertake a wide range of activities; from hiring labour and buying inputs, such as raw materials, to producing the finished product for sale.
- Having creativity and being innovative – creativity in business means the ability to come up with innovative concepts and ideas, or developing a better way of doing things.
- Being hard working – successful entrepreneurs are, generally, hard working. It is estimated that entrepreneurs in the UK work for around an average of 52 hours a week, plus another 40 hours thinking or worrying about their business venture. Compare this to the average working week of 38 hours for an employed person.
- Being determined and having perseverance– entrepreneurs also need to be determined, as new businesses have low success rates. Entrepreneurs must also have considerable perseverance, and be willing to keep trying if initial ideas fail.
Enterprise and employment sectors
Business activities have a major impact on our lives – both as consumers and employees. Business is in every sector of the economy:
> Primary sector: Involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector.
In the primary sector, providing the food we need, farming, supplying the power we use through mining or extracting oil from the North Sea
> Secondary sector: Involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector.
In the secondary sector private enterprises provide us with a massive amount of consumer goods; manufacturing cars, processing food, making clothes, designing and producing consumer electronics – in fact all the goods that surround us in the shops we visit, that help satisfy our every want
> Tertiary sector: Involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector.
In the tertiary (service) sector private companies provide gyms, offering financial advice, operating fleets of buses and trucks, prepare marketing campaigns and so much more
The importance of entrepreneurs to the UK economy
- Innovators - entrepreneurs bring new ideas to the market and drive forward new technologies.
- Wealth creators – enterprise is vital to boosting economic growth by providing new products which can be sold thereby boosting demand and spending in the economy.
- Job creators – as an entrepreneur builds his or her business they will need employees so therefore jobs are created which means higher levels of employment in the UK economy.
- Society builders – often entrepreneurs will give something back to society. This may be through charitable giving or through work with the local community e.g. schools or hospitals.
- Exports – if an entrepreneur’s products or services are sold abroad then this brings revenue into the UK economy
- Taxes – all business will pay some form of taxation. Sole traders and partners will be liable for income tax and limited companies will pay corporation tax.
Evaluate the impact of entrepreneurs and SME’s on businesses and the economy.
Impact for businesses:
> Entrepreneurs identify opportunities in the market which allows for new businesses to be developed.
> Entrepreneurs have the vision and the willingness to take risks which drive business forward.
> Entrepreneurs are important because they are innovative, they can provide better ways of doing things and can also lead to new business, thus increasing profit for businesses and their stakeholders
Impact for the economy:
> Entrepreneurs help the economy by creating new jobs. Government will also benefit from taxation both on the profits of the business and the income of the employees.
> Help to boost the economy by providing new products. Without entrepreneurs, our economy would not benefit from the boost they give from added business and ideas and wealth creation.
> Increasing exports - helps balance of payments.
Survival of small firms
.
