Introduction To Business Flashcards
Risks of being an entrepreneur (x4)
Making large losses
Not having a regular source of income
Slow to set up
Mental issues
Rewards of being an entrepreneur (x8)
Being your own boss
Choosing when and where you work
Create a positive impact
Satisfaction
Company control
Enjoying your job
New skills
Possibly making more money
The 4 factors of production
Land - Natural resources that make production possible
Labour - The nation’s workforce
Capital - The manufactured goods used to make other goods and services
Enterprise - Entrepreneurs are individuals who organise all the other factors of production
Adding value
Additions or improvements to something that make it worth more the cost of doing it.
Why is branding so important to a business? (x3)
Customers have more trust in the business
Products seem higher quality
Easier for people to recognise your products
How can value be added? (x6)
High quality
Craftsmanship
Prestige design
Unique and different
Convenience
Branding
Why is adding value important? (x4)
It allows the entrepreneur to make a profit.
This gives the entrepreneur the incentive to be creative.
It allows the business to charge a higher price.
It makes you different and better than the competition.
Primary sector
Involves natural resources or raw materials.
Secondary activity
Involved in the manufacturing of raw materials into finished products.
Tertiary activity
Involves providing a service. It includes selling and distributing the finished product.
Stakeholders
Anyone with an interest in the business.
Internal stakeholders
Anyone within the business (employees).
External stakeholders
Anyone outside the business (customers).
Sole trader
An individual owning the business on his / her own.
Advantages of being a sole trader (x4)
Quick and easy to set up
Simple to run
Minimal paperwork
Easy to close / shut down
Disadvantages of being a sole trader (x4)
Unlimited liability
Harder to raise finance
The business is the owner (the business suffers if the owner becomes ill, loses interest etc)
Can pay a higher tax rate than a company
Partnership
2 or more owners of the enterprise (between 2 and 20 members).
Normally set up using a Deed of Partnership.
Advantages of a partnership (x4)
Spreads the risk across more people
Partner may bring money and resources to the business
Partner may bring other skills and ideas to the business
Increased credibility with potential customers and suppliers (who may see dealing with the business as less risky than trading with just a sole trader).
Disadvantages of a partnership (x4)
Have to share the profits
Less control of the business for the individual
Disputes over workload
Problems if partners disagree over the direction of the business
Private sector
The part of the national economy that is not under direct state control (run by individuals and companies, rather than a government entity).
Public sector
Portion of the economy composed of all levels of government and government-controlled enterprises (it does not include private companies, voluntary organisations and households).
Examples of third sector organisations (x4)
Voluntary and community groups
Charities
Social enterprises
Co-operatives
Features of a private limited company (x3)
Limited liability - Separate legal entity
Only sell shares to family and friends
Controlled by Board of Directors
Feature of a public limited company (x2)
Limited liability - Separate legal entity
Anyone from the public who want to buy shares
Advantages of operating as a limited company (x4)
Limited liability
Separate entity
Continuity
The current level of corporation tax is lower than income rates
Disadvantages of operating as a limited company (x3)
Costs money to set up a limited company (may need to employ a solicitor to set up the paper work).
Company accounts are filed so the public can view them (and competitors).
May need to spend money on an auditor to check the accounts before they are filed.
Franchise
A business with a well known brand name (franchisor) lets a person or group of people (franchisee) set up using that brand.
Why do businesses offer a franchise? (x2)
Allows them to build brand awareness.
It is a quick and easy way of expanding the business.
Advantages for a franchisee to buy a franchise (x6)
Ongoing training and support
Advertising
Loyal customers (well known name)
Lower risk
Business plan
Advice
Advantages for a franchisor (x2)
The business can grow without having to do all the work themselves.
They can gain investment from marketing and growth.
What costs are involved in buying a franchise? (x5)
Initial costs
Royalty fees
Marketing funds
Total investment
Building
Co-operatives (x3)
Owned by its members
Run by its members
Profits are shared among members (not a charity or not-for-profit organisation)
Advantages of co-operatives (x4)
Legally straight forward
Cheap to set up
All involved are working towards a common goal (and so have motivation)
Limited liability for members
Disadvantages of co-operatives (x4)
Capital can be small (members)
Lenders may be reluctant to lend
Weak management is possible (too many ‘friends’)
Large amount of decision makers (members)
What are the 4 function areas?
Marketing
Production / operations
Human Resources
Finance
What does the marketing function do?
It serves as the face of the company, coordinating and producing all materials representing the business. They reach out to prospects, customers, investors and / or the community.
Market research
An organised effort to gather information about target markets and customers.
Market segmentation
The process of dividing a broad consumer or business market, normally consisting of existing and potential customers, into sub-groups of consumers based on some type of shared characteristics.
What might affect how much a business charges for their products? (x5)
The state of the market for the product
The state of the economy
Competitors
Costs
The bargaining power of customers in the target market
What does the human resources function do? (x4)
Training
Firing employees
Administering employee benefits
Health and safety
Retention
The ability to prevent employee turnover.
Recruitment
Finding, screening, hiring and eventually onboarding qualified job candidates.
Wages
Hourly or daily payments for work done during the working day.
Salary
A fixed amount payable at regular intervals (an agreed sum).
What does the finance function do? (x7)
Estimate capital requirements
Manage cash flow
Analyse business performance
Managing operations systems
Preparing budgets
Accounting
Paying employee wages
Cost
The amount a business pays in order to make goods and / or services.
Revenue
The money generated from business operations. The average sales price times the number of units sold.
Profit
The money earned by a business when its revenue exceeds it costs.
Cash flow
The movement of money in and out of a business over a period of time.
Profit =
Revenue - costs
Revenue =
Price x quantity
What does the production / operations function do? (x3)
Ensuring good quality
Managing logistics
Managing stock
Quality
Consistent, excellent products.
Logistics
Receiving deliveries and sending out finished goods.
Why is it important for a business to ensure that the quality is up to the correct standards? (x2)
Helps to improve the products’ reliability, durability and performance.
Customers receive what they expect.
Manufacturing
Involves choosing the most appropriate method of production and creating the most efficient and cost-effective method.
Warehousing
The process of storing physical inventory (all stock or equipment) for sale or distribution.
Delivery
Sending the finished products to retailers or to the customer.
What is stock control and why is it important for businesses?
Stock control - Maintaining stock levels and ensuring that the cost of holding the stock is minimised.
Damaged products, missing products
How to define size (x7)
Number of employees
Amount of capital invested
Sales turnover
Market share
Brand name and history
Assets
Profits
Benefits of being a small business (x8)
Small shop - cheap rent
Less wages to pay
Easier to control
Set own schedule
Can take time off
Lower costs
Predictable costs
No hiring hassles / easier recruitment
Disadvantages of being a small business (x5)
Less profits than large businesses
Brand name is not well-known
Harder to get loans
Less product choice for customers / harder to diversify
Smaller customer base
Horizontal integration
When firms in the same industry and at the same stage of production combine.
Forward vertical integration
When you integrate with a business in front of you.
Backward vertical integration
When you integrate with a business behind you.
Vertical integration
When a firm expands by combining with an existing business in the same industry but at a different stage of production.
Advantages of vertical integration (x3)
Reducing your own costs
Controls the quality and delivery of raw materials
More powerful against competitors
Disadvantages of vertical integration (x2)
Increase in costs (e.g may need to appoint new staff to run the business)
Inexperience in the new business
Diversification
Integration with a totally unrelated industry (also called conglomerate).
Why diversify? (x3)
To spread the risk
To obtain other sources of revenue
To increase the range of products they make or sell
Joint venture
A commercial arrangement between 2 or more participants who agree to co-operate to achieve a particular objective.
Two or more parties agree to pool their resources for the purpose of accomplishing a specific task.
Advantages of joint ventures (x5)
Shared investment
Shared expenses
New market penetration
New revenue streams
Improved economies of scale
Disadvantages of joint ventures (x5)
Risk of disagreements
The objective of each joint venture partner may change - leading to conflict
There is likely to be an imbalance in levels of expertise, investment or assets
The mutual benefit is minimal
Legal problems when the venture comes to a conclusion (who owns what)
Strategic alliance
Where 2 or more businesses work together, but it’s not a legally enforceable contract (similar to a friendship agreement).
Advantages of a strategic alliance (x6)
Reach a broader audience
Reduced costs
Provide a distribution system
Enter new markets
Share expertise and resources
Both grow market share
Business aims
The overall long term goals of the business.
Business objectives
The specific and measurable results the business is trying to achieve.
Strategic objectives
The longer term specific objectives.
Tactical objectives
The short term specific objectives.
Operational objectives
The objectives of each functional area.
Why set objectives (x4)
Gives the business direction
Helps set targets
Helps with decision making
Helps write the business plan and seek investment
SMART objectives
Specific
Measurable
Achievable
Realistic
Time related
Job production
Making a unique and specific product to the customer’s order.
Batch production
Making a specific quantity of a product.
Mass / flow production
Making very large quantities of the same product on the one machine.
Advantages of job production (x4)
Can charge high prices
Can meet specific customer needs
Motivated staff (end product)
Interesting work for staff
Disadvantages of job production (x7)
May take a long time to receive a full payment
Time consuming
Need to break customer loyalty to other businesses
Expensive (staff, resources etc) - high cost of production
Training staff
Only specific customers
Cash flow issues
Advantages of batch production (x6)
Can make a wide variety of products
More interesting for workers - variety
Greater quality control
Producing smaller quantities can reduce waste
Useful for seasonal items
Machinery isn’t continually active - reduced running costs
Disadvantages of batch production (x5)
Time consuming to change batches
Possible high cost of errors
Periods of downtime where the specialist machinery must be altered
Increased storage costs for large quantities of produced products
High training costs
Advantages of flow production (x8)
No downtime
Efficient
Consistent
Reduced labour costs - low skilled employees
Produce a high number of products at a low cost
Production can happen 24/7
Can benefit from economies of scale
Fewer human mistakes
Disadvantages of flow production (x7)
Repetitive and boring for workers - lack motivation
Difficult to alter the production process
High cost of machinery
All products have to be very similar or standardised
High storage costs
High maintenance costs
Low retention
Cell production
The flow production line is split into a number of sections.
Each team (or ‘cell’) is responsible for several parts of the finished product (multi-roles).
Specialisation
Focus on one type of product.
Division of labour
Specialisation of labour into separate tasks.
This ensures higher productivity per worker.
Productivity
The ability to maximise the use of your inputs (workers and machines).
Advantages of specialisation (x7)
Jobs are done more efficiently (fewer mistakes)
Jobs are done to a higher standard
Work is done more quickly
Organised workplace
Higher productivity
People get very skilful
Less waste
Disadvantages of specialisation (x4)
Have to train staff
Boring and repetitive work
Hard to employ and replace staff with a good skill set
Difficult to replace staff on sick days
What is a mission statement?
The overriding goal of the business and the reason for its existence.
Provides a strategic perspective for the business and a vision for the future.
An effective mission statement… (x4)
Differentiates the business from its competitors
Defines the markets or business in which the business wants to operate
Is relevant to all major stakeholders - not just shareholders and managers
Excites, inspires, motivates and guides - particularly important for employees
Why are mission statements criticised? (x5)
Not always supported by actions of the business
Often too vague and general
Viewed as a public relation exercise
Sometimes regarded cynically by employees
Not supported wholeheartedly by senior management
Why innovate (and invent)? (x11)
Grow your business
Adapt to change
Make customers buy again from you
Stay ahead of the competition
Take advantage of new technologies
Achieve more success
Dominate the market
Charge a higher price
Improve / meet customer wants and needs
To be the first with no competitors
Improve brand name
Problems with innovation (and invention) (x6)
Very costly
Time consuming
Can end up wasting resources by developing something that doesn’t sell
Risk of failure
Resistance to change to new ways of thinking
Employees may not be motivated to innovate
Critical path analysis
The sequence of project activities which add up to the longest overall duration.
The critical path determines the shortest time possible to complete the project.
Advantages of critical path analysis (x3)
Reduces the risk and costs
Helps spot which activities have some slack (“float”)
Links well with other aspects of business planning (such as cash flow)
Disadvantages of critical path analysis (x3)
Reliability is based on accurate estimates
Does not guarantee the success of a project
Resources may not actually be as flexible
Free float
The amount of time that an activity can be delayed without delaying the start of the next task.
Free float calculation
Next task’s EST - this task’s EST - duration
Total float
The amount of time that an activity can be delayed without impacting on the completion date of the whole project.
Total float calculation
This task’s LFT - this task’s EST - duration
Dummy run
A task that needs completing, but its delay has no impact anywhere (e.g printing off the marketing brochures).
Dummy run = 0 (shown by a broken line).
PERT
Program evaluation review technique
Estimated duration of a project is calculated by:
((optimistic time)+(4 x likely time)+(pessimistic time)) / 6
Disadvantages of a Gantt chart (x5)
Difficult to prepare and manage
Time consuming to update
All tasks are not visible in a single view
They don’t designate priorities
They don’t offer much detail regarding task dependencies
Measuring productivity (output per worker)
Number of products / average number of employees
Measuring productivity (output per machine)
Number of products (output) / capital
Measuring productivity (sales revenue)
Sales revenue / staff
Ways to improve productivity (x8)
Motivation techniques
Targets
Monitoring staff
Better machinery
Training
“Marginal gains” (improve everything by a small amount)
Factory layout
Work your staff harder
Capacity utilisation
What percentage of your potential capacity you are currently using.
Capacity utilisation calculation
(Actual output / potential output) x 100
Benefits of working at full capacity (x2)
More output
Justifies wages and equipment
Disadvantages of working at full capacity (x2)
Breakages
Staff illness / stress
Outsourcing
A company hires a third-party to perform tasks, handle operations or provide services for the company.
Economies of scale
The more you produce, the cheaper each one is to make.
Internal economies of scale - purchasing
Getting a discount for buying in bulk.
Internal economies of scale - production / technology
Spreading the cost of production over more output.
Internal economies of scale - marketing
Promoting the brand name.
Internal economies of scale - managerial
Employing the best specialist managers.
Internal economies of scale - financial
Borrowing at cheaper rates of interest
Internal economies of scale - risk bearing
Spreading the risk over a range of products.
Benefits of economies of scale (x3)
Allows you to make a better profit margin per product
You can reduce your price
It means the business is more efficient
What are external economies of scale?
When average costs fall for the entire industry together.
What are diseconomies of scale?
When becoming a very large business makes your average costs go up.
Examples of diseconomies of scale (x6)
Staff morale
Staff working poorly in a big team
Communication problems
Poor cooperating between departments
Office politics
Impersonal relationship with customers
Lean production
Ensuring everything is done to the best quality and produced as efficiently as possible.
(No wasted resources and maximum output)
Quality control - benchmarking
Identifying the best and trying to match them.
Quality control - Continuous improvement (kaizan)
Looking at what you do and constantly seeking improvements.
Marginal gains
Improving everything by a small amount so that, over a period of time, overall performance is improved.
Total quality management (TQM)
Everybody is involved in checking quality where they work.
The product will only move down the line once it passes your quality checks.
Jidoka
Technology which automatically stops production if a fault is spotted.
Ergonomics
Laying out the factory so workers, machines and tools are efficiently close and in the best place.
Just in time stock control
Involves keeping stock to an absolute minimum, and the raw materials are ordered only when they are needed.
It means you only buy your supplies when you need them.
Advantages of just in time stock control (x3)
Less warehousing
Less time consuming
Cash flow
Disadvantages of just in time stock control (x4)
Could run out
What if the delivery is late?
New order / mistake
Carbon footprint
Problems with having too much stock
Could get stolen / damaged / spoiled
Expensive to store
Pay for extra insurance
Reduces available cash flow
Takes up a lot of room
Stock can get lost
Average levels of stock calculation
(Maximum level + minimum level) / 2
Stock control - LIFO
Last in first out
Stock control - FIFO
First in first out
Stock control - EPOS
Electronic point of sale
Stock control - Kanban
Automatic re-ordering of minimum stock needed
Factors which may affect stock level (x5)
The type of products you sell
Demand
Bulk-buying discounts
The amount of space you have
The cost of storing it
If sales increase, stock levels…
Decrease (inverse relationship)
‘Out of stock’ costs (where the business ran out of stock) (x4)
Compensating customers
Cost of replacing stock
Losing customers (losing sales revenue)
Damaged reputation
Automation
The use of robotic equipment in a manufacturing process.
Benefits of firms using technology (being automated) (x8)
Fewer human errors - better quality products
Having to employ fewer workers - reduce costs
Higher productivity - machines can work 24/7
Reliability
More efficient use of materials
Time saving
Reduced training costs
Improved safety
Disadvantages of firms using technology (being automated) (x8)
Having to train staff to use the technology / employ specialist staff
High initial costs
Any errors would be time consuming
Expensive to replace / update / maintenance
Lose human interaction
May become dependent on technology
Inability to tailor / customise the product
Redundancy costs
Customer service
Providing services before, during and after purchase, to standards that meet customers’ expectations.
Benefits of good customer service (x8)
Attract repeat customers (customer loyalty)
Build a strong reputation
Can charge a higher price
Improve employee happiness (improves employee retention)
Customer recommendations
Gives you a competitive advantage
Increases customer lifetime
Increase sales
Examples of good customer service (x6)
Knowing your customers
Well trained staff
Warranty
Opening hours
Selling online and in store
Car parking
External quality awards
When a recognised awarding body give you a formal award for reaching set measurable standards.
