Chapter 1

Question 1

Definition of cooperatives

Answer 1

a business where all members contribute to running it and every member has a vote at meetings

Question 2

advantages of cooperatives

Answer 2

• buy in bulk (economies of scale)
• work together to solve problems and make decisions
• more motivated to work together sinc e everyone gets a share of profit

Question 3

disadvantages of cooperatives

Answer 3

• members may have poor management skills
• takes a long time to make decisions
• capital shortages from lack of shares offered to public

Question 4

what is opportunity cost

Answer 4

the benefit of the next most desired item that hasn’t been chosen

Question 5

causes of opportunity cost

Answer 5

unlimited wants and limited resources

Question 6

Reasons for failure of businesses

Answer 6

• lack of record keeping: difficult to keep track of what is going on within the business
• lack of cash/working capital: not enough day to day money on hand
• poor management skills
• changes in the business environment which cannot be controlled

Question 7

What is working capital

Answer 7

the amount of cash available on hand for day -to day use, calculated by current assets - current liabilities

Question 8

Importance of working capital

Answer 8

unable to allow trade credit to customers and suppliers if there is no working capital

Question 9

How to avoid lack of working capital

Answer 9

• monthly cashflow forecast
• inject sufficient capital at start up
• establish good relations with bank
• use effective credit control - ensure trade credit is paid on time

Question 10

Advantages of sole trader

Answer 10

• easy to set up
• owner has complete control
• flexible working conditions
• employees feel involved
• based on entrepreneur’s interests and skills

Question 11

Disadvantages of a sole trader

Answer 11

• unlimited liablity
• lack of capital because shares cannot be offered
• competition from larger more established businesses
• one person responsible for all management
• long hours
• no continuity

Question 12

Advantages of a private limited company

Answer 12

• shares can be offered to family and friends to raise capital
• limited liability
• continuity
• legal personality
• original owner also still remains in control (NOT SHAREHOLDERS)
• greater status than unincorporated businesses such as sole trader

Question 13

Disadvantages of private limited company

Answer 13

• legal formalities
• can’t offer shares to public
• difficult for shareholders to offer shares (must be unanimously decided)
• less privacy over financial affairs (report must be reviewed by the public annually)

Question 14

Ways of increasing market share

Answer 14

• innovation
• reducing prices
• strengthening customer relationships
• advertising
• increasing quality
• external growth through acquisition

Question 15

Disadvantages of public limited company

Answer 15

• original owner loses control to shareholders and board of directors
• finances shared publicly
• greater risk of takeover
• high cost for business consultants and financial advisors
• share prices are subject to change on the stock market, sometimes out of company’s control

Question 16

Advantages of public limited company

Answer 16

• limited liability
  -separate legal identity
• continuity
  -capital can be raised through offerign shares to the public via stock exchange
  encourages investment because of ease of offering/buying shares (no need to discuss with other shareholders)