Section 1 - What is Business? Flashcards
Define mission
- purpose a business exists for
- generalised statement with overall aim
- clear goal, sense of direction, communicates to stakeholders
Define objectives
- more specifc goals
State 4 reasons why businesses exist
- there is a gap in the market
- create a living for an entrepeneur
- a passion of the entrepeneur (must be a need)
- social/ethical aim – 1 item sold = 1 item donated to those in need
State 6 aims of businesses
- profit maximisation – allows expansion, growth, machines replacement, shareholder payment
- survival – get through first year, build customer base, reliable re-achievable goal
- cash flow
- to make profit (total revenue > total costs)
- social and ethical objectives
- growth – expanding to new markets, new geographical markets
Describe the 2 types of growth
- organic = more staff, more stores, more goods
- inorganic = merging or taking over another company
Define profit
a financial gain
- total revenue - total costs
Define total costs
all the costs incurred in producing something
- variable costs + fixed costs
Define fixed costs
costs that do not change with output
- rent, mortgage, loans, insurance, lease of machinery, salaries
Define variable costs
costs that vary with output
- raw materials, fuel, packaging, wages, cost of stock
Define revenue
the amount of money coming into a business
- quantity x price
Define gross profit
amount that business has made from sales (normal trade) minus cost of goods sold
- sales revenue - cost of sales
Define LTD and PLC
LTD = private limited company
PLC = public limited company
Give 4 examples of a public sector company (gov owned)
- NHS
- fire services
- schools
- charities
Give 4 examples of private-sector companies (private owned)
- sole trader
- PLC
- LTD
- partnerships
Define limited liability
- owner has no personal liability for debt
- separate legal identity
- not liable for debt payment from personal accounts
Define unlimited liability
- if business goes bust – owner must pay
- only in sole trader/partnership
- eg. re-mortgage, sell cars, use own savings to pay
Describe sole trader
- owned by one person (unless you become a partnership
- full control of business – own boss
- profit is own
Describe advantages of being a sole trader
- easy to set up
- quick decisions
- less finance
- personal customer attention
Describe disadvantages of being a sole trader
- unlimited liability
- risk – hard to expand financially
- no economies of scale
- no one to take over if ill (unless staff employed)
Describe advantages of being a private limited company
- limited Liability
- can raise sell shares (fam + friends)
- employ a manager
- separate legal status
Describe disadvantages of being a private limited company
- accounts not private
- harder to set up – expensive, requires admin
- cannot sell shares on the stock market
Describe advantages of being a public limited company
- limited liability
- shares can be sold to the public
- shares can be traded on stock market
- banks + investors more likely to invest
Describe disadvantages of being a public limited company
- lawyers needed
- expenses must be published
- advertising and admin
- must have $50,000 in share capital
Describe a non-profit organisation (charity)
- has a social objective
- all profits go to helping cause (doesn’t distribute dividends)
- run by volunteers, community and donors
- not driven by profit
Describe a non-profit organisation (mutual)
- benefits a select group of people
- aim is to help members
- revenue comes from memberships
- eg. unions, trade groups, property management, chambers of commerce
What factors influence choice of business form
- objectives of the business
- how the business is financed
- what products and services are offered
State 4 reasons a business may want to change business forms
- may need more finance as it grows and expands
- sole trader may want to sell shares (+ limited liability benefit)
- LTD may want to expand and float on stock market
- become a PLC to attract public and governmental investment
Define ordinary share capital
- allows investors to vote (one share = one vote)
- represents proportionate ownership of company
- ordinary shareholder receives fluctuating dividends (depending on company preference)
- ordinary shareholders receive dividend payment after preferred shareholder
Define market capitalisation
- total value of company or total shares value
- current share prices x number of issued shares
- can fluctuate depending on performance
Define dividends
- if investors own a share – paid dividends (if company profits)
- paid 3x a year (or once)
- reward for continued investment
- if shares sold – no longer eligible for payment
Describe the role of shareholders
- owners of a company
- provide financial backing (in returns for dividends)
- make decisions – approve company accounts for publication
- decisions made at AGM (annual general meeting)
State 3 reasons why shareholders invest
- hope of return in capital investment (better than bank savings)
- paid dividends
- may benefit if share value rises (capital gain)
What 4 factors affect share prices?
- supply and demand in market
- interest rates
- political climate
- management of company
Define external environment
anything outside business that could impact the way it operates
- (eg. Customers, investors, politics)
State the 6 PESTLE factors and an example for each
- political – protectionist policies
- economic – interest rates
- social – demographic change
- technological – automated production
- legal
- environmental – pollution
Describe political impacts on costs
- any governmental decisions that affect business
- corporation tax raised or lowered
- VAT can be raised or lowered
- high taxation = more money for government, lower business profit
Describe political impacts on demand
- inc. protectionist policies (protecting domestic industries for foreign competition)
- impose tariffs (tax charged based on value) and quotas (restrict quantity of a good important) to deter company exports
- less likely to demand foreign goods
Describe economic impacts on costs
- if economic growth ↑, consumer growth ↑ = spending
- business can employ more staff
- in recession, staff made redundant (no longer needed) = save costs
Describe economic impacts on demand
- GDP – gross domestic product
- inflation
- interest rates
- exchange rates
- income ↑, demand less inferior goods, more necessity
Strong Pound Imports Cheaper, Exports Dearer
Weak Imports Dearer, Exports Cheaper
Describe social impacts on cost
- migrant worker ↑ - producers have staff willing to work on minimum wage (costs lower)
