The nature and purpose of business

Question 1

<p>Why do Businesses exist?</p>

Answer 1

<p>To satisfy wants and needs, where a need is something essential for survival and a want is something desired to improve life.

A business is an organisation that is set up to provide goods or services to customers such as the public, government or other businesses.</p>

Question 2

<p>1) What is a good

2) What is a service
3) What is a product</p>

Answer 2

<p>A good is a physical product such as a house or designer suit.
A service is an intangible item such as insurance or decorating.
A product is a more general term which includes goods and services</p>

Question 3

<p>Why are businesses so important for a country?</p>

Answer 3

<p>Create employment
Create wealth
Create new products
Enhance a country’s reputation</p>

Question 4

<p>What do Businesses do?</p>

Answer 4

<p>Businesses transform inputs or resources into goods and services that are in demand from individuals and other businesses.</p>

Question 5

<p>Types of Businesses</p>

Answer 5

<p>Businesses can be split into 3 categories:
B2B, B2C and C2C
Example of B2B is Tata steel
Example of B2C is Sony
Example of C2C is Ebay</p>

Question 6

<p>Types of sectors</p>

Answer 6

<p>Businesses can be split into 3 types:
Primary - obtains raw materials
Secondary - uses the raw materials to produce something; also known as the manufacturing sector
Tertiary - concerned with the supply of services</p>

Question 7

<p>Aims are ...</p>

Answer 7

<p>Aims are long term plans of the business from which its corporate objectives are derived.
Example - ‘Tesco’s aim is to broaden the scope of the business to enable it to deliver strong, sustainable long term growth.’</p>

Question 8

<p>Objectives are ...</p>

Answer 8

<p>An objective sets out clearly what has to be achieved.</p>

Question 9

<p>Aims and objectives must be ...</p>

Answer 9

<p>SMART
Specific - they must define exactly what the firm is measuring, such as sales or profits.
Measurable - they must include a quantifiable target, such as a 20% increase.
Agreed - if targets are simply imposed on people they are likely to resent them; if however the targets are discussed and mutually agreed, people are more likely to be committed to them.
Realistic - if the objectives are unrealistic people may not even bother to try and achieve them. To motivate people the targets must be seen as attainable.
Time Specific - Employees need to know how long they have to achieve the target.</p>

Question 10

<p>Common Business Objectives are ...</p>

Answer 10

<p>Profit and profit maximisation - some firms objectives are centred around a minimum level of profit.
Other firms may seek to earn the greatest profits possible to satisfy shareholders.
Growth - Some owners/managers believe this is the key to survival. If a firm grows it should be able to exploit its market position and earn higher profit.
Can lead to the firm having better job security and offering higher salaries.
Survival - For the business to continue to trade over a period of time.
Times, when survival can become key, are:
periods of recession or intense competition
times of crisis such as during a hostile takeover bid
Cash Flow - seen by many businesses as a vital component of success being able to pay debts on time is essential.
A cash cycle is the time that elapses between the outflow of cash to pay for the resources needed to produce a product and the receipt of cash following a sale of the product.
Social and Ethical - Social objectives could include providing employment for people or improving facilities for local people.
Ethical objectives are based on moral principle such as protecting the environment.
Diversification - where a firm produces an increased range of unrelated goods.</p>

Question 11

<p>True or false business objectives can be short or long term?</p>

Answer 11

<p>TRUE

A business could look to maximise profit in the short run and leave themselves vulnerable to being in a weaker position in the future.
OR
Businesses can invest in long-run objectives which may mean training employees or other expenses which will affect the profit in the short run.</p>

Question 12

<p>Why do businesses set objectives?</p>

Answer 12

<p>Gives everyone connected to the business a goal to work towards.
Can provide employees with motivation as they now exactly want the firm wants them to achieve.
A business will look to analyse these objectives to track the progress of the business. This analysis can be individual or compared to their competitors, will also give them an opportunity to see what is going well or badly and make adjustments.</p>

Question 13

<p>What is a variable cost</p>

Answer 13

<p>It is simply the expenditure a firm makes as part of its trading.
SUCH AS
raw materials
fuel and components
labour</p>

Question 14

<p>What is a business cost</p>

Answer 14

<p>It is simply the expenditure a firm makes as part of its trading.
SUCH AS
raw materials
fuel and components
labour</p>

Question 15

<p>What is a fixed cost?</p>

Answer 15

<p>Fixed costs do not change with output.
SUCH AS
Rent
Salaries
Maintenance costs</p>

Question 16

<p>What is a variable cost?</p>

Answer 16

<p>Variable costs change with the output of a firm.
SUCH AS
Fuel
Raw materials
Components</p>

Question 17

<p>What are semi-variable costs?</p>

Answer 17

<p>Some costs have characteristics which are both fixed and variable and are known semi-variable costs.
Transport costs have fixed costs for renting vehicles or insurance but have variable costs such as fuel or wages of the driver.</p>

Question 18

<p>What are total costs?</p>

Answer 18

<p>Total costs assume that all the costs faced by a business are variable or fixed. The total cost is the combination of the two.
TOTAL COSTS = FIXED COSTS + VARIABLE COSTS</p>

Question 19

<p>What is the average cost?</p>

Answer 19

<p>The average cost is the cost of producing a single unit.

| So it’s the total cost/level of production.</p>

Question 20

<p>Why is it important for a business to know it's costs?</p>

Answer 20

<p>Knowing the costs of a business helps a business to set the price for the good or service or the level of output that needs to be sold.
There are occasions when businesses are unable to control the price of their products. If they know the costs of making the product they can decide whether it is possible to sell products at a profit.</p>

Question 21

<p>What is business revenue?</p>

Answer 21

<p>This is the income the business received over a period of time. Also known as Sales Revenue, Sales Income or Turnover.
REVENUE = QUANTITY SOLD x AVERAGE SELLING PRICE</p>

Question 22

<p>What is profit?</p>

Answer 22

<p>A business makes a profit when over a period of time its revenue is greater than its costs.
PROFIT = TOTAL REVENUE - TOTAL COSTS
Profit depends on two factors:
Profit Margin - the amount or percentage of the final selling price that is profit.
Quantity/Volume of sales - if a business sells a greater quantity of products it will make more profit.</p>

Question 23

<p>Why are profits important?</p>

Answer 23

<p>A profitable business may be attractive to customers, as media outlets report the financial performance of the UK’s better-known businesses. This may lead to customers believing that these businesses sell desirable products.
Will be able to persuade individuals and/or institutions such as banks to invest in them.
A profitable business may be bought by a larger company which may earn the original owners vast amounts of money.
If a business is profitable it gives suppliers greater confidence when dealing with them.</p>