Understanding the Nature and Purpose of Business

Question 1

Definition of a business

Answer 1

An organised effort of individuals to produce, buy or sell products (goods) and services

Question 2

Definition of business objectives

Answer 2

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.

Question 3

Definition of corporate objectives

Answer 3

Goals (targets) for the whole business such as profits to rise by 20% a year for the next three years.

Question 4

Definition of entrepreneur

Answer 4

A person with the initiative and drive to make a business idea happen.

Question 5

Definition of mission

Answer 5

Business aims) or long-term intentions (ultimate purpose). Should be purposeful and motivating.

Question 6

Definition of mission statement

Answer 6

A short powerfully-expressed, sentence or two that explains the business aims clearly yet motivationally.

Question 7

Definition of functions

Answer 7

Common areas of a business such as Human Resources (HR), Finance and Operations.

Question 8

Definition of Functional Objectives

Answer 8

Goals of each function (marketing, Finance, HR) Designed to ensure that the business achieves its corporate objectives and thus its overall aims or mission.

Question 9

What are SMART goals?

Answer 9

Specific: clear & easily defined
Measurable: quantifiable
Agreed: managers + subordinates are involved in targets
Realistic: achievable & non-conflict with other objectives
Time- Based

Question 10

What are the common objectives of a business?

Answer 10

Profit
Growth
Survival
Cash flow
Diversification
Social and ethical objectives

Question 11

Definition of social issues

Answer 11

Problems or matters which have an influence over a large population.

Question 12

Definition of ethical issues

Answer 12

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)

Question 13

Definition of profit

Answer 13

The reward or return for taking risks and making investments

Question 14

Calculation of profit

Answer 14

Profit = Selling Price - Cost of making product or providing a service
Profit = Revenue - Cost

Question 15

Calculation of revenue

Answer 15

Total Revenue (TR) = Selling Price (p) X Quantity Sold (q)
TR = pxq

Question 16

What are Total Sales also known as

Answer 16

Income (Total Income)
Revenues (Total Revenue)
Sales Revenue
Sales Turnover
Turnover

Question 17

Why is profit so important to business

Answer 17

A motivating factor & incentive
A return on investment
A measure of business success
A reward for taking risks
A key source of finance

Question 18

Definition of profit in absolute terms

Answer 18

Way of measuring profit:
The £ value of profits earned
E.g. £50,000 profit made in the year

Question 19

Definition of profit in relative terms

Answer 19

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

Question 20

Definition of costs

Answer 20

Costs are amounts that a business incurs in order to make goods and/or provide services

Question 21

Definition of costs

Answer 21

Costs are amounts that a business incurs in order to make goods and/or provide services

Question 22

Calculation of Total Costs

Answer 22

Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)

Question 23

What costs are easy to estimate and control?

Answer 23

Rent, salaries, advertising campaigns

Question 24

What costs are harder to estimate and control?

Answer 24

Raw materials - affected by wastage
Products returns or refunds - affected by quality
Where the entrepreneur doesn’t have detailed experience of a market

Question 25

Why are costs important?

Answer 25

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

Question 26

Different type of costs

What are fixed costs?

Answer 26

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

Question 27

What are variable costs?

Answer 27

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)

Question 28

What are semi variable costs?

Answer 28

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.

Question 29

What are total costs?

What are average costs?

Answer 29

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

Question 30

Why are costs important?

Answer 30

• 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

Question 31

Total costs formula/ calculation

Answer 31

Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)

Question 32

What are some costs easy to estimate and control?

Answer 32

Some costs easy to estimate and control rent, salaries, advertising, campaign.

Question 33

Some costs are harder to estimate and control?

Answer 33

Raw materials are affected by wastage product returns or refunds - affected by quality where the entrepreneur doesn’t have detailed experience of a market.

Question 34

What are average costs?

Answer 34

The total costs of production divided by the level of production or output to give the cost of producing a single unit of output

Question 35

What is profit in absolute terms?

An example?

Answer 35

the £ value of profits earned

e.g. £50,000 profit made in the year

Question 36

What is profit in relative terms?

An example?

Answer 36

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

Question 37

Why is profit important?

Answer 37

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.

Question 38

Why is profit important?

Answer 38

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.

Question 39

Why is profit important?

Answer 39

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.

Question 40

Why is profit important?

Answer 40

• Profit is a motivator
• Profit is a guide for future investment
• Profit is attractive to stakeholders