Topic 1: What is Business Flashcards
What is a business ?
An organisation that seeks to provide goods and services on a commercial basis to customers
Why do businesses exist ?
Because they are formed by entrepreneurs and are subsequently developed if they manage to get beyond the survival stage
What are the external factors of a business
Technology
Competition
Economy
Government
Society
Environment
Legislation
What are the functional areas of business ?
Operations management
Financial Management
Marketing
People (HR)
HR
Managing people that work in a business.
Activities include: recruiting employees, organising training, managing communication with staff
Marketing
Responsible for understanding the needs and wants of customers
Activities include: market research, setting prices, obtaining customer feedback
Finance
Manages financial resources of the business and reports on financial performance
Activities include: reporting on performance, ensuring there is enough cash to pay liabilities
Operations
organises transformation process that turns inputs into finished goods and services.
Activities include: managing quality of output, organising suitable method of production
What is a mission statement
A qualitative description of what the business intends todo so that stakeholders understand its intent
Mission statement are usually….
SMART
Why set objectives?
Allows everyone to work towards overall goal
Motivates managers and staff
Allows for review
Why is profit important ?
Reward for risk taken
Survival
Shows success
Characteristics of an unincorporated business ?
The owner is the business
Owner has unlimited liability
Characteristics of an incorporated business ?
Business has a separate legal identity to the owner
owners have a limited liability
Sole Traders
A business owned by one person.
Advantages: owner keeps profits, owner makes all the decisions, easy start up
Disadvantages: Unlimited liability, heavy workload, limited skillset
Partnerships
Owned by 2 or more people.
Advantages: shared workload, varied skillset
Disadvantages: unlimited liability, shared profits, conflict over decisions
Public Limited Companies
Owned by shareholders and shares can be sold on the stock exchange
Advantages: access to large amounts of capital, limited liability
Disadvantages: AGM, lots of paperwork, minimum £50,000 share capital
Private Limited Companies
Owned by shareholders (family and friends only)
Advantages: business has a separate legal identity,
Disadvantages: AGM every year, publish finances
What is a non-profit organisation
Organisations that trade in order to benefit the community
What is a mutual business
- They have no shareholders and no owners
- exist solely for the best interest of its customers
EXAMPLE: national building society
What is a charity?
People who fund the business are not liable for any debts
Advantages of being a sole trader
- Owner keeps all the profits
- easy to set up + run
- easy to close/ shut down
Disadvantages of being a sole trader
- unlimited liability
- difficult to raise finance (typically only have their own funds)
- limited skillset
Advantages of a partnership
- shared workload
- potential for more finance
- specialisation/expertise in different business functions
- additional partners may have industry contacts
Disadvantages of a partnership
- unlimited liability
- shared profits
- shared decision-making (may lead to conflict)
What is a deed of partnership
A document between partnership businesses that legally sets out how profits are distributed + how control is distributed
How to approach a question about moving from a sole trader to a partnership
PLUMS
Profit distribution: 100% as ST but as P only 50% but more in long term as raising finance is easier
Limited/ unlimited liability
Management and control: as a stare you happy to share out control
Sources of finance: is there a need for finance
What is unlimited liability?
- Applies to unincorporated business e.g sole traders+ partnerships
- owner is responsible for all debts the business incurs
- personal assets may be at risk
What is limited liability?
- applies to incorporated businesses
- shareholders personal assets are not at risk in the event of the business incurring debts
- shareholders losses are limited to how much they invested into the business
What is flotation?
The process of a Ltd selling shares on the stock market to therefore become a plc
Benefits of floatation
- raise external finance ( have potential investors - can use this obtained share capital rather than retained profits
- high prestige (more media coverage higher sales and higher profit)
- shareholders will retain limited liability
- business will grow larger (lead to inc market shareand brand loyalty inc rev)
Drawbacks of floatation?
- expensive process (bank leading the process and underwrite flotation) ‘
- anyone can buy shares ( inc risk of takeovers + conflict between owners and managers
- inc legal requirements such as releasing more financial information
What is the market capitalisation formula ?
No. Of ordinary issues shared x CURRENT share price
What is the ordinary share capital formula?
No. Of ordinary issued shares x share price at FIRST ISSUE (THE DAY IT WENT ONTO THE STOCK EXCHANGE)
What are dividends?
A distribution of a y of the profits by a company to the shareholders
- management decides size of dividends
What are the dividend time frames
1) Decclaration date
2) In-Dividend date
3) Ex - Dividend date
4) Dividend pay date
What is the declaration date?
When managers announce the day they will pay out the dividends
What is the in-dividend date?
The date by which the shareholder must own the share so that they qualify for the dividend to be paid
What is the ex-dividend date ?
The date when you buy shares that you do not qualify to receive dividends
What is the dividend pay date
The date that the dividends are issued out to shareholders
Where to apply dividend time frames in answers
- when discussing influences on share prices
- eg on ex-dividend date might see a sell off as you don’t see dividend the next day and share prices may fall
What are the issues with dividends?
1) opportunity cost
- if you choose to pay out a high % of dividends where else in the business could that money have been spent eg invest in research development or new machinery
2) Short Termism/ Myopic
- not focusing on other stakeholders and too much focus on shareholders
- not considering the long-term sustainability of your company
What is a shareholder?
Anyone that has a share in a public or private limited company
What are the features of a shareholder?
- vote at AGM
- have limited liability
- have accesstodividends
Reasons to become a shareholder?
- capital gain (buy the share with hopes that value of share increases to make capital gain)
- earn dividends
- more control by being a majority shareholder above 50% threshold
- wider beliefs investing for ethical environmental reasons
Influences on share price in a private limited company
Only defined by the agreement between the owner of the share and the buyer
- what they agree is the price of the share
Influences on share price of a plc
Dependant on supply and demand
- an increase in the supply of shares will result in share price falling .
- a decrease in supply will increase share price
- if demand for share falls so will share price
- it demand for share rises so will the snare price
Other 5 influences on share prices
1) Business Performance
2) Interet rates - if they go down, looking to put money outside of a bank, demand increase and so do price
3) Economy - if performing well, demand increase for shares due to better income inc share price vice versa sell off in shares inc supply reducing price
4) Rivals performance - if doing well, may lead to a sell off in your shares, inc supply reducing price
5) share buybacks -
6) Takeovers/ Mergers - if the market doesn’t think it is a good idea may lead to sell of
Significance of changes in share prices
If share prices fall below level you paid you have lost money vice versa
- will effect the market capitalisation will change
External environment influences
Competition
Market conditions
Incomes
Interest rates
Demographic factors
Environmental issues
Pestle analysis
Political
Economic
Social
Technological
Legislation
Environmental
