U1: Understanding the Nature and Purpose of Business Flashcards
Definition of a business
An organised effort of individuals to produce, buy or sell products (goods) and services
Definition of business objectives
Goals that must be achieved in order to realise the stated aims of an organisation, department or team. Business objectives tend to be medium to long term.
Definition of corporate objectives
Goals (targets) for the whole business such as profits to rise by 20% a year for the next three years.
Definition of entrepreneur
A person with the initiative and drive to make a business idea happen.
Definition of mission
Business aims) or long-term intentions (ultimate purpose). Should be purposeful and motivating.
Definition of mission statement
A short powerfully-expressed, sentence or two that explains the business aims clearly yet motivationally.
Definition of functions
Common areas of a business such as Human Resources (HR), Finance and Operations.
Definition of Functional Objectives
Goals of each function (marketing, Finance, HR) Designed to ensure that the business achieves its corporate objectives and thus its overall aims or mission.
What are SMART goals?
Specific: clear & easily defined
Measurable: quantifiable
Agreed: managers + subordinates are involved in targets
Realistic: achievable & non-conflict with other objectives
Time- Based
What are the common objectives of a business?
Profit
Growth
Survival
Cash flow
Diversification
Social and ethical objectives
Definition of social issues
Problems or matters which have an influence over a large population.
Definition of ethical issues
Problems that have been caused by individuals themselves and these have a negative influence over the individual him/herself as well as over the society. (difference between what is morally right or wrong)
Definition of profit
The reward or return for taking risks and making investments
Calculation of profit
Profit = Selling Price - Cost of making product or providing a service
Profit = Revenue - Cost
Calculation of revenue
Total Revenue (TR) = Selling Price (p) X Quantity Sold (q)
TR = pxq
What are Total Sales also known as
Income (Total Income)
Revenues (Total Revenue)
Sales Revenue
Sales Turnover
Turnover
Why is profit so important to business
A motivating factor & incentive
A return on investment
A measure of business success
A reward for taking risks
A key source of finance
Definition of profit in absolute terms
Way of measuring profit:
The £ value of profits earned
E.g. £50,000 profit made in the year
Definition of profit in relative terms
Way of measuring profit:
The profit earned as a proportion of sales achieved or investment made
E.g. £50,000 profit from £500,000 of sales is a profit margin of 10%
E.g. £50,000 profit from an investment of £1 million = a 5% return on investment
Definition of costs
Costs are amounts that a business incurs in order to make goods and/or provide services
Calculation of Total Costs
Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)
What costs are easy to estimate and control?
Rent, salaries, advertising campaigns
What costs are harder to estimate and control?
Raw materials - affected by wastage
Products returns or refunds - affected by quality
Where the entrepreneur doesn’t have detailed experience of a market
Why are costs important?
because they:
are the thing that drains away the profits made by a business
are the difference between making a good and a poor profit margin
are the main cause of cash flow problems in business
change as the output or activity of a business changes
Different type of costs
What are fixed costs?
Fixed costs (FC) - do not alter when the business alters its level of output e.g. rent, rates, salaries, advertising, insurance, banking & legal fees, software, consultant and adviser costs, design and development
What are variable costs?
Variable costs (VC) - alter directly with the business’s level of output e.g. fuel costs, raw materials, bought-in stocks, wages based on hours worked or amount produced, marketing costs based on sales (e.g. % commission)
What are semi variable costs?
Semi variable costs - have fixed a variable components .
Telephone bills are a good example. Fixed amount for the phone line and variable amount for the number of calls made.
What are total costs?
What are average costs?
Total costs (TC)- Fixed and variable costs added together
Average costs - - total costs of production divided by the level of production or output to give the cost of producing a single unit of output
Why are costs important?
- inform decision making
- set a price to make a profit
- competitive market
- no control of the selling price
- takes price market will pay
- need accurate cost information to ensure covering costs and selling
at a profit - businesses operating in a ‘price taker’ market tend to sell
commodities e.g. farmers selling milk and potatoes. They can’t add
value to their products. - improve efficiency: increase output to share fixed costs across more
units - they drain away the profits made by a business
- difference between making a good and a poor profit margin
- main cause of cash flow problems in business
- change as the output/ sales or activity a business changes
Total costs formula/ calculation
Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)
What are some costs easy to estimate and control?
Some costs easy to estimate and control rent, salaries, advertising, campaign.
Some costs are harder to estimate and control?
Raw materials are affected by wastage product returns or refunds - affected by quality where the entrepreneur doesn’t have detailed experience of a market.
What are average costs?
The total costs of production divided by the level of production or output to give the cost of producing a single unit of output
What is profit in absolute terms?
An example?
the £ value of profits earned
e.g. £50,000 profit made in the year
What is profit in relative terms?
An example?
the profit earned as a proportion of sales achieved or investment made
e.g.£50,000 profit from £500,000 of sales is a profit margin of 10%
e.g. £50,000 profit from an investment of £1 million = a 5% return on investment
Why is profit important?
Profit is a reward: Business owners take a RISK when investing in a business. Profit is their compensation for that risk. Public limited companies usually pay dividends to their shareholders (people who own part of the business i.e. have bought a ‘share/s’) this represents their part of the profit which has been made.
Why is profit important?
Profit is a measure of success: Profits can allow a point of comparison between businesses, however remember that not all businesses have profit as their main objective.
Why is profit important?
Profit is a source of finance: not all profit is shared out to owners or shareholders sometimes it is used to be reinvested in the business or saved as a reserve.
Why is profit important?
• Profit is a motivator
• Profit is a guide for future investment
• Profit is attractive to stakeholders
