Topic 1: Business Fundamentals

Question 1

What are the reasons for starting/purpose of a business?

Answer 1

• Producing goods
• Supplying a service
• Distributing products
• Fulfilling a business opportunity
• Providing a good or service to help others

Question 2

What are the basic functions of a business?

Answer 2

• Goods: Physical product (e.g. car)
• Services: Non-physical item (e.g.taxi)
• Needs: Good/service that is needed to survive
• Wants: Good/service that is desired (not essential)

Question 3

What is an Enterprise?

Answer 3

Definition: The development of a new business or good/service to be introduced into the market.

Description: A Systematic Activity that shows an entrepreneur’s initiative/risk taking

Question 4

What is an Entrepreneur?

Answer 4

Definition: A person who generates a new business idea and therefore develops it by setting it up. Viewed as a person who takes risks but can be their own boss, have flexible hours, etc.

Description: Generates Ideas, Setup/runs a business, manages resources, etc.

Question 5

What is a Primary Sector?

Answer 5

Extraction, harvesting and conversion of land (natural resources) as a factor of production.

Question 6

What is a Secondary Sector?

Answer 6

Using raw materials from the primary sector for the manufacture/construction of finished and useable products.

Question 7

What is a Tertiary Sector?

Answer 7

Provides service to their private and corporate customers.

Question 8

What is a Quaternary Sector?

Answer 8

Creation/sharing of knowledge or information.

Question 9

What is Opportunity cost?

Answer 9

The best alternative/second best option that is given up when making a decision.

Question 10

What is a Business Plan?

Answer 10

Definition: A written document describing business objectives, strategies, aims, the market it is in, and a financial forecast; Used both by company management yet also banks/investors.

Purpose: How to finance the business, estimates of costs and revenue, potential barriers, what can the firm realistically achieve (SMART).

Question 11

What are the measurements of a Business?

Answer 11

Small to Medium Sized:
- Small = turnover less than £10m annually and less than 50 employees.
- Medium = turnover less than £25m annually and less than 250 employees.

Mid-sized to Large sized:
- Mid-sized = turnover less than £25m to £50m and half have less than 250 employees (MSBs).
- Large = Turnover more than £50m.

Question 12

What do we measure a Business through?

Answer 12

• Capital: Amount of finance invested into a business e.g. through a mixture of both equity, loans and etc.
• Problems with measuring; different definitions of size in each country.

NOTE: Profit IS NOT USED as a large business could have a profit of £1000 however a small one could have a profit of £200,000.

Question 13

What are the reasons to expand a Business?

Answer 13

• Increased profit
• Higher market share
• Lower unit costs
• Improved repuatation
• Reduced competition
• Spreading risks

Question 14

How to Expand a Business?

Answer 14

• Internal Growth: Opening new stores, increasing product range, moving to new markets, internet sales. This is easy to manage due to familiarity; low risk can be financed through retained profit however growth is slow but steady yet limited/opportunities.
• External Growth: Growth via integrating with another business.

Question 15

What is a Merger?

Answer 15

Two businesses agree to join together and operate as one; this benefits both in which the managers make decisions together.

Question 16

What is a Takeover?

Answer 16

One business buys another, often hostile; benefits the main one in which the main business manager will be in control.

Question 17

What are the three main Business integration types? (merging/takeovers)

Answer 17

• Horizontal Integration
• Vertical Integration
• Diversification

Question 18

What is Horizontal Integration?

Answer 18

When both firms are at the same stage of the production process e.g. 2 banks.

Question 19

What is Vertical Integration?

Answer 19

When the firms are at different stages of the production process e.g. fashion manufacturer opens a fashion store (early stage with late stage):

Question 20

What is Diversification?

Answer 20

When firms are in different industries e.g. car manufacturer integrates with a stationary retailer.

Question 21

What are the benefits of Business integration?

Answer 21

Gain market share, reduce the amount of competition, bigger and more powerful, stronger negotiating powers with suppliers.

Question 22

What are the problems of Business integration? and What are the solutions?

Answer 22

• Takeovers are expensive: can be financed through shares/loans.
• Opposition from stakeholders/attract negative publicity + lose jobs: promote benefits of takeovers/public relations included in takeover plan.
• Difficult to control due to size/structure and practise together - Management systems need to adapt and be put in place.

Question 23

What is a Sole trader and what are the pros/cons?

Answer 23

An individual who runs a business - the simplest form of business.

Pros:
- Cheap/easy to set up
- All profits go to you
- Competitors can’t see your accounts
- Highly motivated
- You are your own boss!

Cons:
- Unlimited liability: All on you! Business goes bankrupt and so do you
- Limited finance: Harder to loan from the bank
- Difficult to find cover when ill
- Small range of expertise: the owner has to do everything or buy expertise.

Question 24

What is a Partnerships and what are the pros/cons?

Answer 24

Two or more people run a business. each partner takes share of the profit, share decision making yet sleeping partners can exist (ie. invest but don’t run).

Pros:
- Responsibilities are shared
- More expertise
- Simple and flexible
- Competitors can’t see your accounts
- Easier to raise finance than sole trader

Cons:
- Unlimited liability
- Arguments between partners
- If a partner dies/resigns/goes bankrupt the partnership fails
- Trust is a key element

Question 25

What is a Private limited company (ltd.) and what are the pros/cons?

Answer 25

Consists of one or more members (shareholders) - shaves can be only sold to family or friends - Incorporated - owners, and company are separate legal entities (if the business goes bankrupt, the owner won’t).

Pros:
- Limited Liability: separate from business loans
- Increased sources of finance
- Wide range of expertise
- Difficult for hostile takeovers to occur

Cons:
- Competitors CAN see financial information
- Difficult for individuals to sell shares; other shareholders must agree
- Greater Legal constraints
- Can’t sell shares to the public

Question 26

What is a Public Limited Company (plc) and what are the pros/cons?

Answer 26

Shares can be sold on the stock exchange (public). Otherwise defined similarly to Ltd - flotation: Ltd to Plc (conversion).

Pros:
- Limited liability
- Increased sources of finance
- Wide range of expertise
- Can sell shares to the general public
- Can list themselves on Stock Exchange

Cons:
- Expensive process: not guaranteed success, at least £50k worth of shares in which at least 25% needs to be paid up
- Open to takeover: General public can buy shares
- Financial information is available for anyone to see including competitors
- Stricter rules and regulations

Question 27

What is franchising and what are the pros/cons?

Answer 27

When a business (franchisor) gives another person or business (the franchisee) the right to trade using its name to sell its products/provide its service; the franchisee usually pays a license fee/percentage of profit to the franchisor.

Pros:
- Low risk (Tried and Tested)
- Already Established (recognised brand)
- Help and support
- National advertisement/promotion

Cons:
- Costly to Setup (license fee)
- Share profit
- Reliant on others (less independence/decision making)

Question 28

What are Joint Ventures and what are the pros/cons?

Answer 28

Two or more businesses agree to set up a new business together; all parties contribute equity to fund set up/purchase assets.

Pros:
- Combined expertise
- Local knowledge
- Shared risk and control
- Access to established markets and distribution channels
- Possibly financed through equity not debt
- Greater potential capacity
- Secure a supplier or outlet

Cons:
- Share revenue/profits
- Potential for conflict between stakeholders
- Cultural differences
- May be difficult to work together
- Local partners might learn from the partnership and become global competition

Question 29

What is a Business objective?

Answer 29

Short, medium, long term - goals for the company to achieve. For example, a new business may want to survive in the first year.

Question 30

What are the three main types of Business objectives?

Answer 30

• Survival: Ability for business to continue to exist; enough money to pay expenses.
• Profits: Recieve more money in sales than costs.
• Growth: Expand e.g. through more customers, more sales, and more brands (market share).