Section 3.1 - What is Business? Flashcards
Advantages of setting up a businesses
- set up to make profit
- may expect to make more than if they were employed elsewhere
- own decisions
- own boss
- interested
Private sector focus
Has to make profit in order to break even and survive
Public sectors focus
Don’t have to break even as they aren’t made to make money
Non-profit businesses focus
Main focus is social and ethical aims
Possible other aims of a business
- offer highest quality goods and services possible
- excellent customer service
- good reputation/image
- innovation ahead of competition
- diverse range of goods and services
- sustainability and environmental impact
- invest in the local community
Mission definition
overall purpose or main corporate aims of a business
Mission statement definition
written description of main corporate ams - to make all stakeholders aware of what the business dos and why and to encourage all employees to work towards these aims
What does the mission statement do?
- tells you the purpose of the business and other info
- clues about company beliefs
- give staff a sense of shared purpose and encourage to work towards a common goal
Negative about mission statements
Don’t have to prove that their mission statement is accurate; can say what they want consumers to hear
Objectives definition
turn the overall aims of a business into specific goals that must be met
Corporate objectives definition
goals of the business as a whole
(can only be solves by setting functional)
Functional objectives definition
goals and objectives of each department
(must be set to solve corporate)
Advantages of objectives
- managers can make sure everyone is working towards a goal meaning coordination between departments should improve
- motivating for employees
- useful in decision making
- can compare performance with objectives to measure success
SMART Objectives
S - specific - more likely to achieve
M - measurable - helps to see if achieved
A - agreed
R - realistic
T - timely - creates urgency
Types of objectives
Profit objectives - business may want to become profitable or increase profits
Growth objectives - potentially expanding a business or can be based on increasing revenue market share
Survival objectives - common in new businesses, during periods of strong competition, or recession in the economy
Cash flow objectives - increasing cash flow = greater chance of survival
Social and ethical objectives
social - benefiting society of people in need
ethical - moral principle about how the business treats and impacts people and the environment
Non-profit organisations are set up to achieve social or ethical objectives
For profit-organisations are beginning to focus on social and ethical objectives more as there is an increase on importance of this info as it is now widely available.
Short-term and long-term objectives
Short-term - survival and making short-term profit
Long-term profit - set the direction of the business, and affect the big decisions made by senior managers (e.g. long-term growth)
needs to be a good balance between short and long term objectives
Revenue definition and calculation
Revenue is the money generated by the sales of a product, before any deductions are made
Revenue = selling price per unit x quantity of units sold
Fixed and variable costs
Fixed costs - don’t change with output (e.g. rent, business rates, salaries, etc.)
Variable costs - rise and fall as output changes (e.g. hourly wages, raw material costs, packaging costs, etc.)
Total variable costs = variable cost per unit x number of units sold
Total costs = fixed costs = variable costs
Semi-variable costs
fixed and variable parts (e.g. telephone bills; fixed phone line costs plus variable amount on number of calls).
Profit
Profit is when total revenue is greater than total costs
Profit = total revenue - total costs
Advantages of profit
- motivate people
- good source of finance (can be rationed and used for investments and don’t need to pay interest on retained profit)
- can be used to attract investors
Sole Traders
single owner of a business who owns the business themselves.
- unincorporated business (business and owner considered to be the same)
*unlimited liability (liable for all debts incurred by the business
Partnerships
usually owned by 2-20 people who set up a business together
*unlimited liability
*deed of partnership - a document that sets put the ‘rules’ that all partners must follow
LTDs and PLCs
Both owned by shareholders and company has its own legal entity
LTD - private limited company
- can sell shared to people invited (friends and family)
- have to make finances public
PLCs - public limited company
- sell shares on stock market
- all info is made public
Advantages:
> limited liability
> money is raised through selling shares
> continuity
> more status
Disadvantages:
> lots of legal procedures/paperwork
> accounts must be available to the public and checked by an accountant
> must pay incorporation tax
> shareholders have a say in how the business is run
Public sector businesses
Owned by the government.
Provide valuable services to the public and are often something that needs to be done on a large scale to be effective.
Types:
- Public corporations
- public services
- Municipal servies
Privatisation
Privatisation is where public sector businesses are taken over by private sector business in order to raise quick finance for the government.
Private business can run business more efficiently (incentivised to make profit).
Mutual businesses
Run for the benefit of the members.
There are separate legal structures called ‘industrial and provident society’ that some mutual businesses use which offers limited liability
Liability
Unlimited liability - business and owner are seen as one under the law
negatives:
> business debts become personal debts; forced to sell personal assets in order to pay off business debts
> huge financial risk
Limited liability - owners aren’t personally responsible for debts of the business
positives;
> the most they can lose as shareholders is money invested
Ordinary share capital
Ordinary share capital is the money raised by selling shares by companies; usually used for long-term investment
Dividends - proportion of the profits earned which are split and paid out to a shareholder, and are given as a fixed amount per share.
> loans must be paid first
> company may choose to use profits to reinvest
Market capitalisation
The total value of all the ordinary shares issued by a company
Market capitalisation = number of issued shares x current share price
Shareholders
anyone who owns at leat one share in a company (they have limited liability)
> in small LTDs, shareholders are often directors; shareholders with the most shares have the most power
PLCs, most shareholders not involved but have certain rights
Annual General Meeting - (PLCs have these meetings by law) shareholders have the right to vote on decisions and performance of the company
A majority shareholder = more than 50% of shares
Reasons for shareholder investment
- to achieve capital gain
- may be paid a dividend
- want to be involved in the running of the business
- believe in the aims and objectives of the company and want to see it succeed
- might invest in an LTD in order to help it survive or grow
- venture capitalists invest in businesses they think have potential to be successful
Share prices
LTDs = control over share price (traded between friends and family); will be agreed based on current performance of the business.
PLCs = sold on the stock market (determined by demand and supply)
Factors influencing demand and supply:
- performance of the company
- speculation and rumour of new product launches or cost saving initiatives (generate investor interest)
- current share price
- interest rates
- the economy
Share prices: short-term and long-term effects
Short-term:
changing share prices can have a big impact on shareholders who want to buy and sell shares for short-term capital gain
Long-term:
less impacted by short-term price changes
- price changes may reflect an increase or decrease in company profits
- could mean higher or lower dividend payments
