Topic 1-Business In The Real World Flashcards
What are human needs
Water,shelter,food
What are human wants
Goods we want as consumers
Eg:watch
What is a business
A business is an organisation
which trades to make money,
these come in all shapes and sizes
What is a product
A product is anything that is
capable of satisfying
customer needs, it is
tangible and can be
touched
What is a service
A service is an act that a business person carries
out for you in exchange for money
4 factors of production
Land,labour,capital,enterprise
What is land
somewhere to produce the goods e.g. a farm
What is labour
people to work in the business e.g. farm
workers
What is capital
money to get the business started
What is enterprise
This is the drive or motivation from
the owners to start a business
What is an opportunity cost
When making
important
decisions in
business, the
cost of not
selecting an
alternative is
an opportunity
cost
Reasons for starting a business
To produce goods/products,to supply/provide a service,to distribute products,to fulfill a business opportunity
How can social enterprises help people
Aim to tackle the effects of poverty
• Provide jobs and tackle unemployment
• Help children with a social need
• Tackle the issue of an aging population
• Help the homeless
• Education and training initiatives
How can social enterprises help the planet
• To reduce pollution
• To tackle deforestation
• To halt climate change
What is the primary sector
The primary sector is the extraction of raw materials from the planet
What is the secondary sector
In the secondary
sector goods are
manufactured from raw
materials into finished
goods
What is the tertiary sector
The tertiary sector is all the support services
for business.The tertiary sector also includes
shops, retail, banking and insurance
What is a enterprise
A company or
business. It also can mean a complex project.
What is a entrepreneur
A person who starts a business and takes on financial risk in the hope of making a profit
Characterisrics of entrepreneurs
Hard working,initiative,organised,risk taker
Why are entrepreneurs objective
To be there own boss,flexible hours,to pursue an interest,to earn money,to identify a gap in the market,dissatisfaction with current job
How can a dynamic business environment change
– Changes in technology
– Changes in the economic situation
– Changes in legislation (laws)
– Changes in environmental expectations
What is inflation
The rate of increase in prices for goods and services
What are exchange rates
Exchange rates are: the cost of one currency expressed in
terms of another e.g. $ to £
What is a sole trader
A sole trader is a business which has only one owner
Examples of sole trader businesses
Small shop,plumbers,electrician,cleaner
Advantages of being a sole trader
Easy to set up – no
complicated forms
2. Make decisions quickly –
no agreement needed
from other people
3. Less capital needed
All profits kept by the owner and do not need
to be shared
5. Can offer personal
attention to customers
Don’t have to make any information about the
company public
They are their own boss
Disadvantages of being a sole trader
- Unlimited liability
Difficult to raise money – seen as a risk
Don’t have economies of scale (buying in bulk)
No one to take over for ill-health or holidays
No one to share ideas with
Only one set of skills (the owners)
Can feel isolated from others
What is unlimited liability
This means that the
business and the owner are
ONE legal entity.
What does unlimited liability apply to
Sole traders,partnerships
What are partnerships
Partners are all joint
owners of the business
Examples of partnerships
Doctors,dentists,accountants,vets
Advantages of partnerships
• Easy to set up
• Capital needed is small
• Easier to raise extra capital than a sole trader as there are more partners to invest
• Profits go to partners which means motivated
workers
• Smaller which means good working relationships
• No need to make public information about the
business, it can all be kept private
• Partners contribute with range of skills
• Partners can share problems and decisions
Disadvantages of partnerships
• Partnerships have unlimited liability
• Trust and reliability can be an issue
• Partners can have disagreements;
– Control of business
– Sharing of profits
– Withdrawal from the partnership
– Inviting new partners into the business
What is limited liability
Limited liability protects a business owner’s personal
funds from being used to pay business debts.
What does limited liability apply to
Ltd,PLC
What is a private limited company
A company in which Shares cannot be bought by the public, the share issue is limited (hence the ltd) to friends and family who can buy shares in the business
Advantages of private limited companys
Protection of limited liability for investors, they
cannot lose their own assets on the value of the
investment
• Easy to raise capital – issue more shares to
friends and family
• Banks more willing to lend money to a ltd
company than a sole trader
• Easier to grow and expand as there is more
capital to complete the process e.g. to buy a new
shop or factory
Disadvantages of private limited companys
• Business has to issue more information about
itself which can be expensive to produce
• Business has to prepare Annual Accounts and
have these printed and sent to all
shareholders
• Also has to make annual accounts available for
general public and competitors to see.
What is a public limited company
A company in which Shares can be bought and sold by anyone on the Stock Exchange
Examples of PLCs
Tesco,barclays,Bt
Advantages of PLC
Protection of limited liability for owners and
investors
• Easy to raise capital – issue more shares
• Banks more willing to lend money to a large
well-established company – less risk
• Easier to grow and expand
• Shareholders will appoint specialists to
manage and run the company for them
Disadvantages of PLC
Expensive to produce accounts every year
• Has to publish annual accounts which means
the public and competitors can see all their
financial information
• Expensive process to become a plc
• Original owners can lose control of the
business if some shareholders get a majority
share 51%
What is a non for profit
A not-for-profit organisation is one that has
the objective of something other than making
a profit (but it still might make a profit)
Examples of non for profits
Make a wish,unicef,cafod
What is survival as an objective in business
The objective is to reach
a sustainable level of
sales that allows the
business to reach its
break-even point
• This may not mean
much profit in the first
instance, but when the
business starts to grow
it will able to
comfortably raise prices
to the best level
What is profit maximisation
rofit is total revenue (revenue into a
business) minus total costs (costs out of a
business)
• A business will aim to maximise profit,
they must do this therefore in only two
ways:
– Increase revenue into the business
– Reduce costs out of the business
Business object-growth
As businesses trade and develop
over time, the objectives may
change and they owners may wish
to grow the business
Business objectives-domestic growth
The business may wish
to increase the number
of shops or outlets that
they have in the UK
(this is the domestic or
home market)
Business objectives-international
The business may wish
to expand into other
countries, for example
Europe (this is the
international market)
Business objective-market share
• A business may aim to increase their market
share. This is the percentage of sales held by
a business in a market.
• They will have to take sales away from
competitors to achieve this aim
How can a business increase marker share
Promotion,discounts,making products seem more appealing
Business objective-customer satisfaction
Some businesses will
need to set customer
satisfaction objectives
to meet a quality
standard
What are social enterprises
Social enterprises are
businesses trading for social
or environmental purposes
Business objectives-ethical
Ethics is the principal of
knowing right decisions
from wrong ones in
business
Business objectives-shareholder value
Shareholder value is; where shareholders, in a
business, earn a return from their investment
which is greater than their required rate of
return
• This means the business may make decisions
to buy or sell goods just to maximise the
amount of money they can give back to their
shareholders
What is a business aim
Aims are the strategic
goals of a business; for
example, to grow
What is a business objective
Objectives are more
specific steps; for
example, to increase
sales by 5% over the
next year
Purpose of setting business objectives
(a) Setting business objectives gives specific
targets by which business performance can be
measured
(b) Setting objectives can be used to motivate
workers to be more productive
(c) Setting objectives clarifies business direction
and aids decision making
Why dont all businesses have the same objectives
A. Business size will have an impact on objectives
B. Level of competition faced will also change the
objectives
C. Type of business; sole trader, partnership, ltd or
plc
What is a stakeholdee
A stakeholder is defined as anyone who has an
interest in a business and is affected by the
actions of the business
Role of an owner
Role; to start and run a
business to make a
profit
Role of employees
Role; to work in a
business in return for
wages
Objectives for employees
Objectives; To have job
satisfaction, to have job
security so they can pay
their bills, to get
promoted
Role of customers
Role; to buy goods or
services from the
business
Role of local community
For those who live
near a business who may be
affected by its operations
Role of suppliers
to provide the
business with goods or
services that they might
need
how can employees impact business activity
can influence the success of an organisation by their productivity and efficiency in the tasks they do everyday.
They can also resort to industrial action (strike) if they disagree with working conditions, pay or company policies
How can suppliers impact business activity
can decide whether to raise prices for orders which can obviously affect a firm’s profits. Also a supplier’s reliability could affect production.
How can the government impact business activity
can influence a firm by introducing new laws that can affect operations such as the National Minimum Wage, or they can raise Corporation Tax which would eat into a firm’s profits
How can customers impact business activitys
can influence a business by deciding to continue to purchase goods and services from the organisation. They can choose to take their custom elsewhere.
How can the local community impact business
activity’s
can influence a business by protesting against the building of premises
Possible conflicts between shareholder groups for employees
Employees want
higher wages but
owners and
shareholders don’t
want to pay higher
wages, as this will
raise costs and
therefore impact
profit
Possible conflicts between stakeholder groups for managers
Mangers want big
bonuses but owners
and shareholders
don’t want to pay
them as this will
impact costs and
lower profits
Possible conlficts between stakeholder groups for customers
Customers want
low prices and high
quality, but owners
and shareholders
want high profit so
want to charge high
prices and quality
costs so may also
have an impact on
profit
Possible conflicts between stakeholder groups-local communities
Local communities
want lower
pollution levels, but
owners and
shareholders want
high profits and
reducing pollution
will raises costs and
so may lower profit
Possible conflicts between stakeholder groups for suppliers
Suppliers want to
get good prices for
their goods and
services, owners
and shareholders
want high profits
and want to keep
their costs low
How does cost influence the location of a business
Cost of rent for shops in
town centres and
shopping centres will be
higher than elsewhere
• Premises are often the
second largest cost after
wages
• Small businesses that can
start from home can
make a huge cost saving
How does goverment grants influence location for a business
Some businesses may
decide to open in a
certain location because
they have been given a
government grant
• Government grants do
not need to be paid back
How does proximity to market influence business location
bulky or perishable goods manufacturers need to be close to their customers as the goods cannot be transported long distances e.g. abroad.
Location close to customer traffic is important
as it is good for the customers (convenience)
and good for the business as it may need
more sales
How does proximity to competitors influence location of a business
Some businesses choose to locate
in a certain area which is well
known for their products
How does labour influence the location of a business
Adequate supply of
cheap and skilled labour
is necessary for
businesses
• Some businesses may
move to areas of high
unemployment so there
is a large pool of
applicants for any jobs
they advertise
How does labour also influence location of a business
Some businesses may
decide to set up near a
cluster of other similar
businesses or close to
very skilled staff
What is a business plan
A document which sets
out the future plans for a
business and what they
want to achieve.
List purpose of a business plan
To help set up a new business
• To help the business raise finance
• To help the business to set objectives
• To outline how functions of the business will be
organised
How does a business plan help to set up a new business
A business plan will help an
entrepreneur to decide what
resources they need to start
their business:
Eg:company van,raw materials
How does a business plan help the business raise finance
A business plan may help
to persuade lenders that
the business will make
enough profit to be able
to pay back interest and
loan capital on any
finance taken out
How does a business plan help to identify sources of finance
A business plan may help to obtain finance
from; from venture capitalists, banks, angel
investors, or even family members
✓The lenders are going to want to see numbers
that say the business will grow and that they
can make a profit
How does a business plan help the business to set objectives
A business plan can show
how a business aims to
achieve its goals
✓ For example it may show
any planned activities of
the business e.g. a launch
night for a new restaurant
How does a business plan outline how functions of the business will be organises
The business plan may
show how many staff
and location of the
following departments;
• Production
• Marketing
• Purchasing
• Human Resources
• Accounting and Finance
Problems with business planning
Uncertainty- It is not always easy to predict
what will happen in a market or future sales.
Market conditions can change very quickly.
• Lack of Experience- People starting out a
business may not have the necessary skills to
produce a business plan.
• Change- A business plan must not be created
once and used forever. It needs to be regularly
updated.
How does section 1 of a business plan contain
Goals
What does section 2 of a business plan contain
Pricing
What does section 3 confain
Knowing the market and what market to be in
What does section 4 of a business plan contain
Who are the ideal customers and the service they expect.
What does section 5 of a business plan contain
Competitors
What does section 6 of a business plan contain
Location
What does section 7 of a business plan conraim
Promotion
What does section 8 of a business plan entail
Finance
Benefirs of business planning
A business plan will
help the business
owner to define their
business idea
• It will help them to plan
for the future
• It will also help to show
if the idea is realistic
and workable
Negatives of business planning
Businesses are in dynamic
markets, and demand and
supply can change on a
daily basis, a business plan
is a rigid and fixed
document which may not
take these changes into
account
Plans are only good if they
are put into motion
correctly
What are fixed costs
Costs that do not vary with the level of business.All the running costs of the business
What are variable costa
Variable costs are costs that DO vary
with the level of output.
• These are the direct costs associated
with the production of the
goods/services which will be sold
What are total costs
The fixed and variable costs added
What is sales revenue
Money into your business through sales
Formula to calculate sales revenue
Price x quantity
What is gross profit
Gross profit (GP) is sales revenue
(SR) minus variable costs (VC)
What is net profit
Net profit (NP) is sales revenue (SR)
minus fixed (FC) AND variable costs
(VC)
What is a loss
This is when the COSTS of the business are
larger than the REVENUE that it makes
How to calculate gross profit
Sales revenue-variable cost
Two main types of business growth
Organic,inorganic
What is organic growth
the business has
grown from within
• The business has grown by itself without
needing a merger or takeover with another
business
How can organic growth happen through
Franchising
– Opening more stores
– Expanding through e-commerce
– Outsourcing
How can franchising lead to organic growth
A business may decide it wants to grow – but
it does not want to open lots of new stores or
restaurants itself.Instead it lets others buy rights and open new stores
How can they get organic growth by opening a new store
A business may decide to grow by opening
more stores
• This is a low risk strategy as the business
model is known to work
• It is slow and steady and carries little risk of
failure
How can e commerce lead to organic frowtj
A business may decide to grow through e-
commerce;
– By adding a website
– By adding an online shop
– By selling on online auction sites
– By adding an online booking feature to the
website
How does outsourcing lead to organic growth
A business could decide it needs to grow, but
does not have the ability to perform some of the
functions of a larger business.This makes third party companies do functions and jobs to help makework easier.
• For example; with growth comes lots of new
customers, who may need to speak to an advisor
on the phone
Outsourcing example-Production
Some motor manufacturers
now outsource assembly of engines and
other car parts
Outsourcing example-payroll
most common task that
companies outsource, this makes sure
everyone in the business gets paid
Outsourcing example-How does purchasing and maintaining information systems
hiring and evaluating IT staff and training
users can all be very difficult. By outsourcing the
information systems function, the business can obtain
the latest technology and suitably skilled personnel
Outsourcing example-delivery
Larger businesses might prefer to contract
a major delivery firm rather than maintain their own
fleet. Either way, the business can hire the expertise to
keep delivery problems and decisions off their desk
Advantages of organic growth
a) A business that grows from within can retain
their own company culture
b) Higher production means the business can
benefit from economies of scale and lower
average costs
c) Much cheaper than a merger
d) Less risk, slower growth, known business
model
Disadvantages of organic growth
This is a very high risk strategy, opening lots
of stores or taking on new staff is very risky
b) Long period between investment and return
on investment
c) Growth may be limited and is dependent on
reliability of sales forecasts
What is inorganic growth
A business may decide to grow quicker and so it
will decide to merge or takeover another
business:
What is a merger
two businesses merge to become one
new one
What is a takeover
One business will takeover a another
business (by buying more than 50% of the
shares), sometimes this can be hostile if the
shareholders don’t agree
Advanatges of merging
Economies of scale; Better deals because of
increased order size, bulk-buying discounts etc
Increased revenue and market share; Increased
size of the combined company increases market
power and ability to set higher prices
Buying technology; Sometimes it’s simply
impossible for a company to create the technology
it needs to sustain its growth, it can be a lot simpler
to just buy it
International Expansion; Buying a business in
another country helps with culture issues, foreign
laws etc.
Disadvantages of mergers
Clash of cultures; All businesses have a slightly
different culture and they may not work well together
Possible communication problems; as the business
gets bigger, or if there are now too many employees
Unreliable merger partners; A good merger will
depend on trust between the businesses
Diseconomies of scale; As a business gats larger costs
will go up with problems of motivation,
communication and co-ordination
80% of all mergers fail*
Benefits to businesses of takeovers
Buying a competitor eliminates the threat of
that competitor
• Takeover is an excellent way to gain valuable
assets e.g. sites in London
• Less expensive to buy than to open a new site,
cheaper to rebrand
• Gain economies of scale through bulk buying
• Increases the market share of the business
and gives it synergy
Drawbacks to business takeovers
This is a very expensive and risky way to grow a
business
• The takeover deal may have additional legal costs
• The deal may need outside investment which
may result in a loss of control for the owners
• Lots of resources may be needed to rebrand the
new sites, retrain the staff and integrate the
takeover
What is economies of scale
Economies of scale (we say EOS for short)
occur when unit costs or average costs fall as
a result as an increase in the level of output of
the busines
How does production/technical economies of scale work
Large scale producers can employ
techniques that cannot be used by a small
scale producer
⚫ A large firm could use computers and
technology to replace employees on a
production line
⚫ Able to transport bulk materials
⚫ Mass production means that unit costs
are lower
How does purchasing/bulk buying economies work
⚫Bulk buying – being able to buy goods in
bulk lowers the average unit price
What is diseconomies of scale
As the level of output of a business increases,
eventually the average costs increase, this is
called diseconomies of scale (DEOS)
.
Problems which happen which lead to diseconomies of scale
Lack of communication,Lack of co-ordination,lack of motivation
How does lack of communication lead to diseconomies of scale
As the size of the workforce
increases there will be less
face-to-face communication
• Takes a long time for messages
to get through as there are
many layers of management
How does a lack of co-ordination leads to a diseconomies of scale
As a business grows and takes
on new staff, makes new
products buys new premises all
of this needs to be coordinated
• All resources need to be
controlled so that operations
can run smoothly
How does a lack of motivation lead to diseconomies of scale
Workers in large companies
may feel demotivated – with
little say in their working life
• This can lead to powerlessness
and alienation
• Means increased absenteeism
and lateness
