Understanding Business

Question 1

Why do businesses exist?

Answer 1

Businesses exist for a variety of reasons;

¨ To provide a good or service to customers.

¨ To make a profit.

¨ To develop an idea.

¨ To fill a gap in the market.

Question 2

There are two types of goods, what are they called and what are they?

Answer 2

Durable goods- We can use durable goods again and again – like computers, CD players, etc.

Non-durable goods- We can normally only use non-durable goods once – like, food, drinks, newspapers, etc.

Also, goods are tangible as they are things we can see and touch.

Question 3

What are Services?

Answer 3

Services are done for us (intangible). Some of the main service industries are banking, insurance, travel, education and health.

Question 4

What are the Factors of Production and explain them?

Answer 4

Land- the natural resources such as oil, water, and the land itself.

Labour- human resources, including all the people who work for the organisation.

Capital- man-made resources such as machines, tools and factories.

Enterprise- the business ideas that an entrepreneur has which uses land, labour, capital and enterprise.

Question 5

What is a Entrepreneur?

Answer 5

· The entrepreneur is the person who brings together the workers, the natural and the man-made resources to produce goods and services.

· The entrepreneur will see an opportunity or have a new business idea which will provide new goods or services. Or they may find a way to provide existing goods or services cheaper or in a better way.

· Entrepreneurs use their own money or borrow money to

put all the necessary resources together

i.e. the factors of production, land, labour and capital.

· Entrepreneurs are ‘risk takers’ – they can stand to lose everything if the idea doesn’t work.

Question 6

What are Skills and qualities the entrepreneur should have?

Answer 6

· problem solving

· motivation,

· confidence

· people skills

· determination

Question 7

Explain Wealth Creation

Answer 7

When a product goes through the production process value is added to the product. For example producing carrot batons means cutting them up and placing them in a bag this adds value to the carrots and ASDA can charge more money for them.

Question 8

Describe the 3 Sectors of Industry

Answer 8

• Primary sector

Businesses that are involved in exploiting natural resources. (e.g. farming, mining, fishing).

• Secondary sector

Businesses that are involved in manufacturing and construction by taking the natural resources produced in the primary sector and changing them into things we can use, (e.g. car manufacture, building firms).

• Tertiary sector

Businesses that are involved in providing services (rather than goods) such as banking and tourism

Question 9

What are the Sectors of the Economy?

Answer 9

Private sector

Public Sector

Third Sector

Question 10

What are the main business in the Private Sector?

Answer 10

Sole Trader

Partnership

Private limited company (PLC)

Question 11

Describe a Sole Trader (Also name some Advantages/disadvantages)

Answer 11

Sole Trader

A business which is owned and managed by one person (e.g. small shops, hairdressers, joiner, plumbers.

Owned by: one person
Run by: one person
Objectives: growth, survival, make a profit

Advantages

• It is easy and cheap to set up – there are no legal formalities.
• The owner makes all the decisions.
• The owner keeps all the profits.

Disadvantages

• It can be difficult to raise finance to start the business.
• The sole trader has unlimited liability, – this means that if the business is not successful the owner could not only lose the business but also his/her home, car and possessions to pay off the business debts
• The sole trader has to manage the business themselves, working long hours with few holidays, and may have problems if they fall ill even for a short time.

· Economies of scale can be difficult to achieve eg discounts for buying in bulk.

Question 12

Describe a Partnership (Also name some Advantages/disadvantages)

Answer 12

This type of business is owned and controlled by 2 or more people, but less than 20 (except for solicitor and accountancy firms, who are allowed more).

It is the type of organisation preferred by the professions, e.g. accountants, lawyers, etc.

Owned by: partners
Run by: partners
Objectives: Be enterprising, socially responsible

Advantages

· The work involved in running the business can be shared.

· Partners can specialise in certain areas of the business (e.g. one partner makes something while another partner sells it).

· More money can be invested in the business because there are more owners.

· A partnership agreement must be created this sets out hoe profits are split amongst the partners.

Disadvantages

· Like sole traders they have unlimited liability and could lose everything (except for certain types of ‘sleeping’ partners).

· There may be arguments between the partners on how to run the business.

· Partners can leave or new partners can be taken on, which can upset the

· running of the business.

Question 13

Describe a PLC (Also name some Advantages/disadvantages)

Answer 13

Private Limited Companies (Ltd)

This type of company has shares which are only available privately and cannot be purchased by the general public. There must be a minimum of one shareholder and one director. Shareholders receive a dividend this is a share of the profits based on the money they have invested in the business.

Owned by: private shareholders.
Run by: director or board of directors
Objectives: Increase market share, attract more shareholders

Advantages

• Shareholders have limited liability. If the business fails, they only lose the amount of money they have invested and no more.
• Large amounts of capital can be raised by issuing shares which means growth can be financed, new machinery, new products etc
• Shareholders may have experience and expertise they bring to the business which may be why they are invited to invest in the business.

Disadvantages

• Profits paid out as dividends are shared between the shareholders means less money per person.
• There are financial costs involved in setting up a limited company.
• All companies must be registered with the Registrar of Companies.

Question 14

What are the organisations in the public sector?

Answer 14

1. UK Government
2. Devolved Government
3. Local authorities

Question 15

Describe the UK Government

Answer 15

UK Government

Has overall responsibility for areas such a defence and taxes such as income tax and VAT.

Question 16

Describe the Devolved Government

Answer 16

Devolved Government

Scotland has a devolved government meaning that the Scottish Government looks after some of its own affairs (Devolved Matters) eg education, health and transport. For example in Scotland medical prescriptions are free, a decision the Scottish government made.

Question 17

Describe the Local authorities

Answer 17

Local Authorities

They provide us with services such as education, housing, leisure and recreation, and street lighting they are managed by councillors who are elected by the public. Local Authorities get their money from council tax, government grants and fees for facilities such as sports centres

Question 18

What/who are the Public sector:

Owned by

Run by

Objectives

Answer 18

Owned by: The Public

Run by: Elected MPs and councillors

Objectives: Provide a service, make good use of taxes, keep to a budget.

Question 19

What are the organisations in the Third Sector?

Answer 19

Charities

Social Enterprise

Question 20

What are the the objectives of private sector?

Answer 20

Make a Profit:

The aim is to make as much money as possible out of the business. This is the most obvious objective, but it is not always possible to achieve along with the other objectives.

Market Share:

To grow and increase market share, the business may have to accept lower profits as its costs will be higher and it may be selling at reduced prices.

Survival:

For some small businesses this is the most important objective – they want to avoid having to close, or being taken over by bigger firms. For sole traders, increasing profits may mean working harder and longer than they really want to.

Customer Satisfaction:

Ensure customers are satisfied and are willing to buy the product repeatedly.

Question 21

What are the the objectives of public sector?

Answer 21

Social responsibility:

Some businesses may wish to improve their public image by showing they are socially responsible. They may give money to good causes or spend money to avoid damaging the environment. This costs the firm profits, but may make them more successful in the long term.

Provision of a service:

Most publicly funded organisations such as hospitals and schools aim to provide services that people require. e.g. providing a high quality service, providing a service in different ways to meet the needs of different people.

To keep to a budget:

The public sector is allocated a certain amount of money by the government. This must be spent in a way which gives good value for taxpayers.

Question 22

What are the the objectives of third sector?

Answer 22

Support a cause:

Charities support a wide variety of causes such as medical conditions, people caught up in wars or famines or poorly treated or sick animals.

Increase donations:

Donations are how many charities are able to support their causes.

Increase volunteers:

Volunteers are needed to raise money and to work in the areas they are needed.

Question 23

What is the importance of good customer service?

Answer 23

· Customers will return and thereby not take their custom to a competitor this will result in higher sales and profit being made.

· The business will receive a good reputation which may attract new customers. This could result in a larger market share for the organisation.

· Profits may increase due to the increase in trade/customers. This may make shareholders happy as they gain higher dividends (return on their investment).

Question 24

What can business do to make sure customers are satisfied?

Answer 24

· Produce a high quality product that is reliable and does what the customer wants.

· Ensure that staff are trained to know the products well and can deal with customer queries and give advice.

· Provide a procedure for dealing with customer complaints. A clear procedure will mean customers are confident that their problem is being dealt with in an efficient manner.

· After sales –service allows customers access to advice and support once they have bought their product.

Question 25

What are the External Factors?

Clue- PESTEC

Answer 25

Political

Economic

Social

Technological

Environmental

Competitive

Question 26

What is the Political factor and how dose it have a Impact on the Business

Answer 26

Political

Laws made by the government in the UK and European Union can affect businesses.

Impact on the Business:

The business has to take account of changes in the law for example the smoking ban or changes in VAT affect many businesses which can mean losing customers or a loss in profits.

Question 27

What is the Economic factor and how dose it have a Impact on the Business

Answer 27

Economic

Factors such as inflation, unemployment interest rate rises or growth in the economy can affect a business.

Impact on the Business:

Unemployment means people have less money to spend so prices may have to be lowered, Interest exchange rates mean goods can be more expensive to sell abroad and so people in other countries may not want to by UK goods.

Remember also that unemployment can decrease, interest rates can go down and people may have more money to spend so the business must also be ready to increase production.

Question 28

What is the Social factor and how dose it have a Impact on the Business

Answer 28

Social

This factor concerns people who are the customers and how their tastes and circumstances can change eg

· People are more aware of the environment and how products are made
· Many people choose to live on their own
· People are living longer
· Fashion tastes change quickly

Impact on the Business:

Business must make sure they change their products or introduce new ones as customers tastes change. Otherwise they will lose business.

Question 29

What is the Technological factor and how dose it have a Impact on the Business

Answer 29

Technological

A business must keep up to date with new technology such as wireless technology, advertising on mobile phones and websites such as Twitter and Facebook as well as new equipment such as tablets will mean an increase in efficiency and quality of the products they make.

Impact on the Business:

The business must invest in new technology and equipment and advertise in areas such as social media.

Question 30

What is the Environmental factor and how dose it have a Impact on the Business

Answer 30

Environmental

Businesses have no control over this factor. Earthquakes, volcanic ash and flooding can have a massive impact on businesses.

Impact on the Business:

Businesses may lose production or be unable to deliver or receive goods due to weather eg heavy snow company.

Question 31

What is the Competitive factor and how dose it have a Impact on the Business

Answer 31

Competitive

Most businesses face competition from other companies doing the same thing.

Impact on Businesses:

Businesses must keep an eye on the prices, quality or new products competitors are producing and make sure that they keep up. Otherwise they could lose customers.

Question 32

What are some Internal factors?

Answer 32

Finance

Current technology

Human Resources

Question 33

How dose Finance have an Impact on a Business

Answer 33

Finance

Impact on a Business:

How much money a business has will affect its ability to expand, make new products or buy machinery. Lack of finance can mean losing staff, delaying new product introduction

Question 34

How dose Current technology have an Impact on a Business

Answer 34

Current technology

Impact on a Business:

The current technology will influence what the business can do. Machinery or computer systems may be out of date. The development of new products will require new machinery which may mean new skills for the workforce.

Question 35

How dose Human Resources have an Impact on a Business

Answer 35

Human Resources

Impact on a Business:

Staff need to have the skills and expertise to ensure the business can produce goods to a high standard. Training will ensure good customer service and so customers will return and the business will have a good reputation.

Question 36

Name 3 Stakeholders and their interest in a business

Answer 36

Owners:

They are interested in the profits made in the business

Shareholders:

They are interested in the profit and the value of their shares

Managers:

Interested in good pay, bonuses and their job security.

Employees:

Interested in job security and working conditions.

Suppliers:

will want more orders from the business, and to be paid on time.

Customers:

will want low prices, high quality and good after-sales service.

Local Government:

will want employment opportunities to be available in the local area.

National government:

will want the business to keep within the law, pay their taxes, and provide employment.

Local Community:

will want the business to treat the environment properly, to treat workers fairly, and not to exploit customers.

Pressure Groups:

Will support a specific cause eg no phone masts near schools.

Banks:

Will want loans to be repaid including mortgages. Will want businesses to open accounts.

Question 37

What are the influence of stakeholders on a business (name at least 3)

Answer 37

Shareholders can vote at the Annual General Meetings to remove, or appoint Directors, and can vote on major issues like whether or not the business should be taken over.

Owners such as sole traders or partners can influence a business by deciding on the overall objectives of the firm. They will also make all the major decisions about the running of the business.

Managers make most of the decisions in the business and therefore have widespread influence.

Employees can take or threaten industrial action such as striking or working to rule, to try and get the business to do as they want. The success of the business depends on their working efficiently.

Suppliers can change the periods of credit or discounts they offer and the price of their supplies.

Banks can charge higher rates of interest on loans to high risk businesses. They may withdraw lending facilities if loan repayments are not made on time.

Customers can stop buying the business’s products if they don’t like them, or if they feel the business is not being socially responsible.

National Government can introduce laws which affect the way the business is run eg banning cigarette displays in shops.

Local community can put pressure on firms through pressure groups (e.g. Greenpeace), or by highlighting what they think is wrong (e.g. writing to Watchdog).

Local government Can refuse permission to build houses or businesses. Enforce payment of council tax.

Pressure groups Demonstrate, hold rallies to protest and raise awareness of the issues.

Question 38

What are The impact of stakeholders on a business. (name at least 3)

Answer 38

Shareholders:

Shareholders selling their shares can result in a fall in share price. The appointment of new directors could make the business more successful.

Managers:

Managers’ decisions can have an impact on the success of the business. Good decisions might increase profits but bad decisions such as changing the packaging or recipe of as product may cause a fall in demand.

Employees:

If employees are producing quality products or services then customers will be happy and continue buying products and services meaning steady sales and profits.

Suppliers:

Prices, discounts or credit terms can impact on the amount of finance the business has available and also on the prices that can be charged for products.

Banks:

A banks willingness to lend money can impact on a business’s plans for growth for example to buy new premises or machinery.

Customers:

The impact of customers deciding not to buy products or services could result in the business closing.

Local community:

Bad publicity in the local community may lead to fewer customers and so impact on sales, profits and survival.

Pressure groups:

Groups protesting can impact on the image of the business and sales and share value of a business may fall.