Making The Business Effective

Question 1

What does the term liability refer to?

Answer 1

The legal responsibility of a business towards its debts

Question 2

What is unlimited liability?

Answer 2

Sole traders are businesses owned by one person. The owner has unlimited liability. The owner is legally responsible for any debts of the business. Therefore there is potential for the owner to lose his or her personal belongings to pay off any debts.

Question 3

What is limited liability?

Answer 3

Private limited companies (Ltd) have limited liability. The owners and the business are separate legal entities. Any debts incurred by the business belong to the business and the owners can only lose money up to the amount that they have invested. Their personal belongings are not liable.

Question 4

What are the differences between limited and unlimited liability ownership?

Answer 4

Unlimited liability- more risk, the owner has 100% control of decisions, the owner keeps 100% of the profits, accounts do not have to be made public
Limited liability- reduces the risk for the owner, the amount of control held by the main owner depends on the proportion of the business sold as shares to their shareholders, profits are shared between shareholders in proportion to the number of shares they hold, accounts are filed with Companies House and can be viewed by anyone on payment of a small fee

Question 5

What are the advantages of a sole trader?

Answer 5

Makes all of the decisions
Keeps all of the profits
Quick and easy to set up
Financial information is kept private

Question 6

What are the disadvantages of a sole trader?

Answer 6

Unlimited liability
Harder to raise money to start or grow the business
A lot of pressure on one person
No one to cover when sole trader is ill or takes time off

Question 7

What are the advantages of a partnership?

Answer 7

Owners may have wider expertise and can share ideas and decision-making
Owners share the risk
Could be easier to raise finance to establish or grow the business

Question 8

What are the disadvantages of a partnership?

Answer 8

Decisions made by one partner affect all partners
No longer exists of one partner leaves
Profits are shared
Partners may disagree

Question 9

What are the disadvantages of a private limited company?

Answer 9

More complex to set up than a sole trader or partnership
Shareholders may disagree
Financial information is published as can be accessed by others
More information must be reported to the government

Question 10

What are the advantages of a private limited company?

Answer 10

Owners have limited liability
Customers may trust a ‘Ltd’ more than other businesses
Continues to trade even if the shareholders change
Could be easier to raise finance to establish or growth the business

Question 11

What is a franchise?

Answer 11

The right given by one business to other businesses to sell goods or services using its name. The businesses that buy into a franchise remain independent businesses.

Question 12

What’s a franchisor?

Answer 12

The business that gives franchisees the right to sell its product or service

Question 13

What’s a franchisee?

Answer 13

A business that agrees to manufacture, distribute or provide a branded product under licence from a franchisor

Question 14

What is the principle of franchising?

Answer 14

Franchising is the expansion of an established business by licensing the right for entrepreneurs to set up their own business using the name, equipment and products of the franchise. In return, the franchisee pays the franchisor a fee or share of the sales revenue

Question 15

What does the franchisee get when they buy a franchise?

Answer 15

An established brand name 
Training 
Equipment 
Ongoing support 
Access to goods and services 
Advertising and promotion 
Operate in an exclusive area

Question 16

What are the benefits of running a franchise?

Answer 16

Brand image and reputation is already established
Expensive marketing costs are covered by the franchise
Access to tried-and-tested products
May have an established customer base
Higher chance of survival
Specific support and training provided

Question 17

What are the drawbacks of running a franchise?

Answer 17

The cost of the initial investment can be high
The owner has little freedom to make decisions
Franchisee will have to pay a fee or royalty (percentage of sales revenue) to the franchisor
Restrictions on where the franchise can be set up

Question 18

What is investment?

Answer 18

Putting money into a business with the intention of making a profit

Question 19

What do businesses have to consider when they choose their location?

Answer 19

Market (e.g. where the customers are) 
Transport (e.g. docks) 
Competitors 
Labour (e.g. workers) 
Materials (e.g. resources)

Question 20

How does manufacturing determine where the business’ location is?

Answer 20

May require specialist resources to be transported to their site and specialist facilities for removal of waste, e.g. away from local residents

Question 21

How does exporting determine where the business’ location is?

Answer 21

May need access to docks, rail or airports in order to distribute goods abroad

Question 22

How does retailing determine where the business’ location is?

Answer 22

May need to be situated on a busy high street to gain the benefits from passing trade and being located in an area where customers tend to shop

Question 23

How does tourism determine where the business’ location is?

Answer 23

May need to be near popular tourist attractions such as beaches and famous landmarks

Question 24

What is retailing?

Answer 24

Selling products or services to customers in a physical shop

Question 25

What is e-commerce?

Answer 25

Using the internet to carry out business transactions

Question 26

How is trading on the internet useful?

Answer 26

Removes the significance of location for many businesses because the place where they trade is virtual. For some businesses, this allows them to save costs, because the business’ premises do not need to be in busy city centres or close to the market they serve

Question 27

What does the marketing mix identify?

Answer 27

Customers’ needs and wants. Use the marketing mix in order to provide products and services that meet these needs while generating a profit for the business

Question 28

What is the marketing mix?

Answer 28

The 4 Ps of marketing, which are product, price, promotion and place

Question 29

Why is product important in the marketing mix?

Answer 29

The product itself has to meet the needs of customers and have the correct attributes and fractures that the customer wants. A successful business will differentiate their products from their competitors’ products.

Question 30

Why is place important in the marketing mix?

Answer 30

Place is the way in which a product is distributed (how it gets from the producer to the consumer). Businesses have to consider the channel (e.g. online or through retail stores). For example, a luxury suit might be sold in an upmarket boutique on Bond Street in London

Question 31

Why is promotion important in the marketing mix?

Answer 31

Promotion is communication between the business and customer that makes the customer aware of the business’s products including: 
Advertising 
Sales promotion 
Sponsorship 
Public relations

Question 32

Why is price important in the marketing mix?

Answer 32

The price of a product must reflect the value customers place on the product. High-quality products have a high price. Customers are also willing to pay more for special features. Price is very subjective because it depends on many factors

Question 33

Why might a business adapt its marketing mix?

Answer 33

So that it continues to meet the changing needs of customers and the competitive environment

Question 34

How might a business adapt its marketing mix to meet the needs of customers and the competitive environment?

Answer 34

Changing the features of a product to incorporate new trends and technology
Adjusting the price of its products in response to competitors pricing
Launching a new advertising campaign to boost interest in response to falling sales
Selling its products through popular retailers
Allowing customers to return online products free of charge

Question 35

What is the impact of technology on product?

Answer 35

New technology demands that products are constantly innovated, especially in tech industries that produce items such as computers and smartphones

Question 36

What is the impact of technology on price?

Answer 36

Customers can easily compare prices online- businesses have to monitor rivals to remain competitive

Question 37

What is the impact of technology on promotion?

Answer 37

Many businesses are switching their focus from traditional advertising mediums to forms of digital communication such as social media sites.

Question 38

What is the impact of technology on place?

Answer 38

E-commerce not only provides an effective channel for selling, but also the ability to customise products and services. Businesses must balance ‘clicks’ with ‘bricks’

Question 39

What is a business plan?

Answer 39

A plan for the development of a business, giving forecasts of items such as sales, costs and cash flow

Question 40

What is the purpose of a business plan?

Answer 40

A business owner might write a business plan to:
Convince a bank to loan the business money
Forecast financial projections
Identify the needs of customers
Formulate market research into important information, e.g. about competitors
Provide information, e.g. about competitors
Provide the owner with a ‘plan of action’ that will minimise risk

Question 41

What are the contents of a business plan?

Answer 41

The business plan links together topics covered in different parts of the specification. For example, a business plan will include a cash-flow forecast and business objectives. It will also help an entrepreneur to answer important questions about their business, such as ‘what if?’ questions, which will help to reduce the risk of starting a business.

Question 42

Who uses a business plan?

Answer 42

Owners-as a guide and working document
Partners and employees- anyone wanting to work with/for the business
Investors- to assess the risk and reward of investing in the business (e.g. Ltd or Plc)
Lenders- e.g. banks will want to investigate the likely success and risk of lending to a new business.

Question 43

Why does a business plan need to include a business idea?

Answer 43

An outline of the business idea and concept so that all stakeholders can understand the owners’ intentions

Question 44

Why does a business plan need to include aims and objectives?

Answer 44

Aims and objectives that are SMART (specific, measurable, achievable, realistic and time-bound). This means that the business can measure its success against these targets.

Question 45

Why does a business plan need to include market research?

Answer 45

Market research that identifies the business’s target market as well as market conditions and any other competitors

Question 46

Why does a business plan need to contain financial forecasts?

Answer 46

Forecasts of the business’s costs, revenue, profit, cash flow, budgets and break-even point.

Question 47

Why does a business plan need to contain sources of finance?

Answer 47

How the business will be financed and how many borrowings will be repaid.

Question 48

Why does a business plan need to contain location?

Answer 48

The location of the business and the reasons for that choice of location

Question 49

Why does a business plan need to contain the marketing mix?

Answer 49

How the business will use the marketing mix to develop a successful product or service

Question 50

Why does a business plan need to contain production?

Answer 50

How the product will be produced, including suppliers

Question 51

What does detailed business planning reduce the risk of?

Answer 51

Reduces the risk associated with unforeseen problems and poor decision-making, and increases the likelihood of success.