Topic 1.4 - Making the business effective

Question 1

1.4.1
What is limited liability?

Answer 1

Limited liability means that the business owner or owners are only responsible for business debts up to the value of their financial investment in the business.

(They only have to pay what they put in)

Question 2

1.4.2
What is unlimited liability?

Answer 2

Unlimited liability means that the business owner or owners are personally responsible for all of the debts of the business, no matter what the value.

Question 3

1.4.1
If Callum invested £10,000 into a business and the business went £50,000 in debt, how much does he have to pay if he has limited liability compared to unlimited liability?

Answer 3

limited liability: £10,000
unlimited liability: £50,000

Question 4

1.4.1
What is a sole trader/proprietor?

Answer 4

A business that is owned and run by one person.

Question 5

1.4.1
What is a partnership?

Answer 5

Between 2 and 20 people sharing ownership of a business

Question 6

1.4.1
What is a private limited company?

Answer 6

A limited company (limited liability) where there is restricted ownership. Shares in the company can only be sold is all the shareholders agree to it.

Question 7

1.4.1
Give 3 advantages of being a sole trader + expand on them as if it were a 3 mark question

Answer 7

• Quick and easy to set up
• complete control over business + make all business decisions
• Keep all the profit

Question 8

1.4.1
Give 4 disadvantages of being a sole trader + expand on them as if it were a 3 mark question

Answer 8

• Risk of unlimited liability (having to sell all assets if in debt)
• long hours and stressful conditions
• high level of responsibility for the owner
• limited access to finance + capital (in PLC, you can generate capital by selling shares)

Question 9

1.4.1
Give 3 advantages of partnerships + expand on them as if it were a 3 mark question

Answer 9

• they are usually quick and easy to set up
• there is shared decision-making by the owners
• there is shared responsibility for debt by the owners
• more skills and knowledge available than a proprietorship

Question 10

1.4.1
Give 3 disadvantages of partnerships + expand on them as if it were a 3 mark question

Answer 10

• they can involve long work hours
• conflict amongst owners can occur
• there is the risk of unlimited liability

Question 11

1.4.1
Give 3 advantages of a private limited company + expand on them as if it were a 3 mark question

Answer 11

• the owners have limited liability
• any new shareholders need to be invited, which protects the business from outside influence
• shares in the business can be sold to raise money
• easy to transfer ownership

Question 12

1.4.1
Give 3 disadvantages of a private limited company + expand on them as if it were a 3 mark question

Answer 12

• there is often more paperwork (annual financial reporting and auditing is required)
• in some instances, other people are able to view the business’s financial information
• more complex legal requirements and regulations than sole traders
• it can be very time consuming to set up
• the business may require outside professional help to manage its finances
• shareholders have little control over the company as the founder usually imposes their agenda

Question 13

1.4.1
What is a franchise?

Answer 13

When one business gives another business permission to use its name and products in return for a fee and share of its profits.

Question 14

1.4.1
What is a franchisee?

Answer 14

a business that agrees to manufacture, distribute or sell branded products under the licence of a franchisor (after paying a fee)

Question 15

1.4.1
What is a franchisor?

Answer 15

An established business that gives permission to another business/entrepreneur (franchisees) to trade using its name and products in return for a fee and share of profit

Question 16

1.4.1
Give 3 advantages of joining a franchise + expand on them as if it were a 3 mark question

Answer 16

• the franchisee gets access to free training and marketing
• the franchisee is part of an established business -> easier to obtain loans from the bank + easy to generate sales from a recognisable brand
• it is lower risk for a new entrepreneur than setting up a new business
• supplies + equipment are provided by the franchisor

Question 17

1.4.1
Give 3 disadvantages of joining a franchise

Answer 17

• the franchisee has to pay a percentage of its profits to the franchisor. This is known as royalties
• it can be expensive to set up (compared to being a sole trader or part of a partnership) since the franchisee has to pay a startup cost for the right to use the business name and resources
• the franchisee cannot make individual business decisions without consulting the franchisor
• of the franchisee does not produce high-quality goods/services, the franchise rights can be removed from them

Question 18

1.4.2
What 4 factors influence a business’ location? (the proximity to… one)

Answer 18

• proximity to target market (customers)
• proximity to labour (employees)
• proximity to materials
• proximity to competitors

Question 19

1.4.2
How do companies position their stores if they are in retail? (and expand)

Answer 19

• as close to customers as possible, so in busy areas
• since there is a higher footfall in these areas
• which will lead to more sales + profit
• because this location is very convenient for customers

Question 20

1.4.2
How would a service company set up its location?

Answer 20

Service companies sometimes need to be located near their customers but sometimes they can be located anywhere. Some examples of service companies that need to be near their customers are train operators and taxi companies. Some examples of service companies that can be located anywhere are contact centres and web designers.

Question 21

1.4.2
How would a manufacturing company set up its location?

Answer 21

• usually a location with cheaper rent rather than close proximity to customers
• location is generally decided by which location has lower cost
• transport of products is less costly than rent (usually)

Question 22

1.4.2
What are the benefits of the internet on location? (5)

Answer 22

• lower costs
• flexible working hours
• access to a much larger market of potential customers (geographical area)
• ability to be open 24 hours a day, seven days a week
• relatively low-price marketing and promotion
• convenient for customers to buy products online -> higher customer satisfaction -> repeat customers

Question 23

1.4.3
What are the 4 elements of the marketing mix?

Answer 23

• price
• place
• promotion
• product

Question 24

1.4.4
What is a business plan?

Answer 24

A business plan is a document created by a business or entrepreneur that provides details about each element of the business in the future.

Question 25

1.4.4
What is a target market?

Answer 25

A group of people or area of a market that a business aims to sell its products to.

Question 26

1.4.4
What is a revenue forecast?

Answer 26

A revenue forecast is a prediction a business makes about the amount of revenue it will have in the future. This is either a judgement or based on past sales.

Question 27

1.4.4
What is a cash flow forecast?

Answer 27

A prediction of the money flowing in and out of a business.

Question 28

1.4.4
What is finance?

Answer 28

Any form of money used by a business.

Question 29

What are the purposes of planning business activity? (2)

Answer 29

• to minimise risk
  (accomplished by carrying out research, probability of success calculated)
• to obtain finance
  (research into the most appropriate source of finance) -> banks + investors will use a business plan to explore whether there is an opportunity to increase investment value
• provides direction for the business -> gives investors confidence in business operations

Question 30

personal assets

Answer 30

resources (e.g. cash, property) owned by individuals

Question 31

creditors

Answer 31

businesses or individuals to whom a business owes money

Question 32

liquidation

Answer 32

The legal process of dissolving a company (by selling all the companies assets)

Question 33

footloose

Answer 33

when a business can be located anywhere, without effect from factors of production such as resources, land, labour, and capital

Question 34

value proposition

Answer 34

A simple statement that summarises why a customer would choose your product or service. It communicates the clearest benefit that customers receive by giving you their business

Question 35

public relations

Answer 35

The management of a favourable public image by a company often by gaining positive media coverage

Question 36

why is promotion important?

Answer 36

• helps to build brand awareness
• will lead to more purchases
• may lead to repeat purchases + referrals to friends (the business is always in the back of the consumers mind)

Question 37

what are the three elements of the design mix?

Answer 37

• function
• aesthetics
• cost

Question 38

function

Answer 38

the purpose of the product or service

Question 39

aesthetics

Answer 39

This refers to how the product looks and feels

Question 40

added value

Answer 40

The difference between the price paid for the factors of production & the selling price of the good/service

Question 41

discuss the impact of a recession on the pricing strategy of a business (6)

Answer 41

indicative content:

Businesses may reduce prices or offer discounts to remain competitive since consumers would have less disposable income, and would most probably be buying products with a budget.

businesses may offer buy 1 get 1 free-type deals. this may encourage customers to continue buying the products of the business since they believe they are getting good value for their money. Although, the break-even point will be higher, the business may be able to generate enough sales to ensure survival in such a trying time.

Question 42

Market segments

Answer 42

Groups of consumers who share similar characteristics.

Question 43

how does new technology impact price?

Answer 43

• Businesses can use data analytics to analyse their competitors’ pricing strategies and set their prices accordingly
• Technology can also help companies reduce costs in several ways which gives them the option of lowering their prices
• Technology can enable dynamic pricing strategies, where prices can be adjusted in real-time based on supply and demand

Question 44

how does new technology impact product?

Answer 44

Businesses can now easily gather feedback from their customers (e.g: online surveys, star ratings, comments)

This information can help businesses create and refine products that meet customers’ needs

Question 45

how does new technology impact promotion?

Answer 45

Businesses can now easily reach their target audiences with highly targeted marketing messages

Businesses can use digital channels to create two-way communication with customers, allowing them to provide feedback and ask questions

Question 46

how does new technology impact place?

Answer 46

E-commerce has made it possible for businesses to reach customers in any location, at any time, and through any device

Businesses can expand their reach beyond their physical location and offer a wider selection of products

Question 47

what does a business plan feature? (8)

Answer 47

• The business idea (sub-topic 1.1.1)
• The business aims and objectives (sub-topic 1.3.1)
• The target market (sub-topic 1.2.2)
• The forecast revenues, costs and profits (sub-topic 1.3.2)
• The cash-flow forecast (sub-topic 1.3.5)
• The sources of finance (sub-topic 1.3.6)
• The business location (sub-topic 1.4.2)
• The planned marketing mix (sub-topic 1.4.3)