PAPER 1 Flashcards
Why new business ideas come about
● changes in technology
● changes in what consumers want
● products and services becoming obsolete.
How new business ideas come about:
● original ideas
● adapting existing products/services/ideas.
The impact of risk on business activity?
business failure, financial loss, lack of security
The impact of reward on business activity?
business success, profit, independence
what is the role of business enterprise and the purpose of business activity
● to produce goods or services
● to meet customer needs
● to add value
how to add value?
convenience, branding, quality, design, unique selling points.
what is the role of an entrepreneur
organises resources, makes business decisions, takes risks
what customer needs are:
price, quality, choice,
convenience
what is the importance of identifying and understanding
customers
generating sales, business survival
what is the purpose of market research
● to identify and understand customer needs
● to identify gaps in the market
● to reduce risk
● to inform business decisions.
what are 2 methods of market research
primary and secondary
methods of primary research?
survey, questionnaire, focus group,
observation
methods of secondary research?
internet, market reports, government reports
what are 2 types of data?
qualitative and quantitative data
what is quantitative data
numerical data that can be put on graphs
what is qualitative data
data that isn’t quantifiable like opinions
How businesses use market segmentation to target
customers
● identifying market segments
● market mapping to identify a gap in the market and the
competition
5 market segments
location, demographics,
lifestyle, income, age
what are the strengths and weaknesses of competitors based on
price, quality, location, product range and customer service
what is a calculated risk?
taking a chance of exposure to loss after having carefully assessed the advantages and disadvantages
what is added value
difference between cost of supplies involved in the production of a product and the price it is sold for, making the product more valuable to customer
what is an aim
an ultimate goal
what is an objective
smaller goals in order to achieve an aim
what are financial aims and objectives
survival, profit, sales,
market share, financial security
what are non-financial aims and objectives
social objectives,
personal satisfaction, challenge, independence and control
formula for revenue
revenue = quantity sold x sales price
formula for fixed and variable costs
variable cost = cost per unit x units made
formula for total cost
total cost = variable cost + fixed costs
formula for profit
profit = revenue - total cost
formula for break even level of output
break even level = fixed cost / (revenue - variable cost)
formula for margin of safety
margin of safety = actual output - break even level
draw a break even diagram
check to textbook
what is the importance of cash to a business
● to pay suppliers, overheads and employees
● to prevent business failure (insolvency)
● the difference between cash and profit
formula for net cash flow?
inflow - outflow
short-term sources of finance
overdraft and trade credit
long-term sources of finance
personal savings, venture capital,
share capital, loans, retained profit and crowd funding.
what is limited liability?
identity of business and owner are separate legally and owner doesn’t have to give up personal belongings if business is in debt
what is unlimited liability
the identity of business and owner is the same so if business is in debt the owner has to give up personal belongings
what are the types of business ownership
sole trader, partnership, private limited company
what is a sole trader
a business that is owned and controlled by one person
what is a partnership
a business owned and controlled by 2-20 people
what are the advantages of a sole trader?
- keep all profits
- gets to be own boss
- easy to set up
- easy to change legal structure
what are the disadvantage of a sole trader?
- unlimited liability
- hard to raise finance, looks riskier
- harder to retain good employees
what are the advantages of a partnership?
- more experience as mix of specialities
- easy to retain employees
- easier to raise finance
- minimal paperwork once partnership agreement is set up
what are the disadvantages of a partnership?
- profits are shared
- shared control so more conflict
- unlimited liability
- longer decision making
what are the advantages of private limited (LTD)
- limited liability
- owners give permission to buy shares
- easy to set up
what are the disadvantages of private limited (LTD)
- records are public, can be seen by competitors
- long time to make decision
what is a franchisor
the original owner who allows other people to use their brand
what is a franchisee
the person setting up the business using someone else’s brand
what are the advantages of being a franchisee
- low business risk of failure
- given training, support and advice
- low risk of start up
- easier to build customer base as franchisor will be established
what are the disadvantages of being a franchisee
- restrictions on market activities
- share profits with franchisor
- buy goods from franchisor at a mark-up cost
- needs to earn enough profit to pay both franchisee and franchisor
Factors influencing business location
proximity to market, labour, materials and competitors
what is marketing mix
price, product, promotion, place
what is the role and importance of a business plan
- to identify the business idea
- business aims and
objectives - target market (market research
- forecast revenue, cost and profit
- cash-flow forecast
- sources of finance
- location
- marketing mix
what is the purpose of planning business activity
minimising risk and obtaining finance
Who are business stakeholders
shareholders (owners), employees, customers, managers,
suppliers, local community, pressure groups, the
government.
Different types of technology used by business
● e-commerce
● social media
● digital communication
● payment systems.
How technology influences business activity
● sales
● costs
● marketing mix.
what are principles of consumer law
quality and consumer rights
what are principles of employment law
recruitment, pay,
discrimination and health and safety
what is the impact of legislation on businesses
● cost
● consequences of meeting and not meeting these
obligations
how can the economic climate impact the businesses
unemployment, changing levels of consumer income,
inflation, changes in interest rates, government taxation,
changes in exchange rates.
Why aims and objectives differ between businesses.
because of different motives for starting the business
what is the formula for interest on loans?
(total repayment - borrowed amount)/borrowed amount x100
what is trade credit
a firm’s supplies will allow it to have the goods and pay them at a later date
what is an advantage of trade credit
gives time for the business to use the goods and sell its products before it pays suppliers which improves cash flow position
what are disadvantages of trade credit
- if bills are not paid on time then business gets bad reputation and loses further credit arrangements
- difficult for start up businesses to negotiate trade credit with supplier as there is risk business will fail so supplier doesn’t get paid
what is the advantage of overdraft
flexibility, if shortage of cash then overdraft can used
what are the disadvantages of overdraft
- repayable to bank at any time and bank can withdraw facility at any time
- usually have high levels of interest attached
what are the advantages of personal savings?
- readily available
- keeps control over business
- no interest
what is the disadvantage of personal savings?
amount may be limited resulting in other sources of finance being used
what are advantages of bank loan
- guaranteed money for a period
- no control is lost
- repayments can be made in instalments
what are the disadvantages of a bank loan?
- time consuming as business plan is needed
- interest must be payed
- some assets need to be given to the bank which the bank can have control over if the business fails
what are the advantages of venture capital?
- venture capitalists make their skills, experience and contacts available as well
- access to large amounts of funds
what are the disadvantages of venture capitalists
usually wants a share in the business and profits so loss of control
what are the advantages of share capital?
- large sums of funds can be raised
- capital does not have to be repaid
- no interests, dividend payments can be missed if profits are low
what are the disadvantages of share capital?
- possible loss of control if owners share more than 50% of shares
- needs to satisfy shareholders expectations of dividends and share price growth
what are the advantages of retained profit
- cheap as no interest
- very flexible as complete control over what and how is reinvested
- dont dilute ownership
what are the disadvantages of retained profit?
- if business needs temporary finance then its unlikely if it would be available
- growth maybe slow if dependant on this as funds may not be high enough
what are the advantages of crowdfunding??
- cheap investment
- if project is interesting then may attract good publicity making business successful
what are the disadvantages of crowdfunding?
- investors need a return e.g. free use of product, share in profits
- risk as there will be limit to amount of funds investors are willing to use
