Section 3.1 - What is Business?

Question 1

Advantages of setting up a businesses

Answer 1

• set up to make profit
• may expect to make more than if they were employed elsewhere
• own decisions
• own boss
• interested

Question 2

Private sector focus

Answer 2

Has to make profit in order to break even and survive

Question 3

Public sectors focus

Answer 3

Don’t have to break even as they aren’t made to make money

Question 4

Non-profit businesses focus

Answer 4

Main focus is social and ethical aims

Question 5

Possible other aims of a business

Answer 5

• 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

Question 6

Mission definition

Answer 6

overall purpose or main corporate aims of a business

Question 7

Mission statement definition

Answer 7

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

Question 8

What does the mission statement do?

Answer 8

• 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

Question 9

Negative about mission statements

Answer 9

Don’t have to prove that their mission statement is accurate; can say what they want consumers to hear

Question 10

Objectives definition

Answer 10

turn the overall aims of a business into specific goals that must be met

Question 11

Corporate objectives definition

Answer 11

goals of the business as a whole
(can only be solves by setting functional)

Question 12

Functional objectives definition

Answer 12

goals and objectives of each department
(must be set to solve corporate)

Question 13

Advantages of objectives

Answer 13

• 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

Question 14

SMART Objectives

Answer 14

S - specific - more likely to achieve
M - measurable - helps to see if achieved
A - agreed
R - realistic
T - timely - creates urgency

Question 15

Types of objectives

Answer 15

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

Question 16

Social and ethical objectives

Answer 16

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.

Question 17

Short-term and long-term objectives

Answer 17

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

Question 18

Revenue definition and calculation

Answer 18

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

Question 19

Fixed and variable costs

Answer 19

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

Question 20

Semi-variable costs

Answer 20

fixed and variable parts (e.g. telephone bills; fixed phone line costs plus variable amount on number of calls).

Question 21

Profit

Answer 21

Profit is when total revenue is greater than total costs

Profit = total revenue - total costs

Question 22

Advantages of profit

Answer 22

• 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

Question 23

Sole Traders

Answer 23

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

Question 24

Partnerships

Answer 24

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

Question 25

LTDs and PLCs

Answer 25

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

Question 26

Public sector businesses

Answer 26

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

Question 27

Privatisation

Answer 27

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).

Question 28

Mutual businesses

Answer 28

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

Question 29

Liability

Answer 29

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

Question 30

Ordinary share capital

Answer 30

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

Question 31

Market capitalisation

Answer 31

The total value of all the ordinary shares issued by a company

Market capitalisation = number of issued shares x current share price

Question 32

Shareholders

Answer 32

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

Question 33

Reasons for shareholder investment

Answer 33

• 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

Question 34

Share prices

Answer 34

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

Question 35

Share prices: short-term and long-term effects

Answer 35

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