Topic 1: Business Fundamentals Flashcards
What are the reasons for starting/purpose of a business?
- Producing goods
- Supplying a service
- Distributing products
- Fulfilling a business opportunity
- Providing a good or service to help others
What are the basic functions of a business?
- 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)
What is an Enterprise?
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
What is an Entrepreneur?
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.
What is a Primary Sector?
Extraction, harvesting and conversion of land (natural resources) as a factor of production.
What is a Secondary Sector?
Using raw materials from the primary sector for the manufacture/construction of finished and useable products.
What is a Tertiary Sector?
Provides service to their private and corporate customers.
What is a Quaternary Sector?
Creation/sharing of knowledge or information.
What is Opportunity cost?
The best alternative/second best option that is given up when making a decision.
What is a Business Plan?
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).
What are the measurements of a Business?
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.
What do we measure a Business through?
- 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.
What are the reasons to expand a Business?
- Increased profit
- Higher market share
- Lower unit costs
- Improved repuatation
- Reduced competition
- Spreading risks
How to Expand a Business?
- 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.
What is a Merger?
Two businesses agree to join together and operate as one; this benefits both in which the managers make decisions together.
What is a Takeover?
One business buys another, often hostile; benefits the main one in which the main business manager will be in control.
What are the three main Business integration types? (merging/takeovers)
- Horizontal Integration
- Vertical Integration
- Diversification
What is Horizontal Integration?
When both firms are at the same stage of the production process e.g. 2 banks.
What is Vertical Integration?
When the firms are at different stages of the production process e.g. fashion manufacturer opens a fashion store (early stage with late stage):
What is Diversification?
When firms are in different industries e.g. car manufacturer integrates with a stationary retailer.
What are the benefits of Business integration?
Gain market share, reduce the amount of competition, bigger and more powerful, stronger negotiating powers with suppliers.
What are the problems of Business integration? and What are the solutions?
- 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.
What is a Sole trader and what are the pros/cons?
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.
What is a Partnerships and what are the pros/cons?
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
What is a Private limited company (ltd.) and what are the pros/cons?
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
What is a Public Limited Company (plc) and what are the pros/cons?
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
What is franchising and what are the pros/cons?
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)
What are Joint Ventures and what are the pros/cons?
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
What is a Business objective?
Short, medium, long term - goals for the company to achieve. For example, a new business may want to survive in the first year.
What are the three main types of Business objectives?
- 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).
