Unit 1 Flashcards
What is a business?
What is a business?
A business is any organisation that makes goods or provides services to satisfy customer needs (must have to live, e.g. food) and wants (aspirations, e.g. holidays).
What are goods and services?
Goods = physical or tangible products, e.g. mobile phones, cars.
Services = non-physical or intangible products, e.g. insurance, hairdressing.
What is profit and how is it calculated?
Profit is the surplus left from revenue after paying all costs.
PROFIT = Revenue - total costs
What is revenue and how is it calculated?
Revenue is the money received from sales (from customers).
REVENUE = no. of units sold x unit price
E.g. If a business sells 1,000 units for £100 each the revenue would be…
1,000 x £1000 = £100,000
What is an index number?
An index number is a figure reflecting a change compared with a base value. The base value always has an index number of 100.
E.g. Actual average price last year is £3.00, index number = 100. If the index number is 105 for this year then the actual average price will be 3 x 1.05 = £3.15
Why do businesses exist?
The main reason is to earn a return (profit) for the owners. Other reasons are:
- to provide goods and services to customers and other businesses; this includes public services such as the NHS, police and fire services
- to develop a good idea (enterprise)
- to provide help and support for others, most notably charities that raise funds in various ways to help and support the lives of others.
- to create employment
What are the two categories of businesses in relation to customers?
Business-to-consumer (B2C) = one business selling products/services for consumers, e.g. retailing, family tourism, personal banking, house building, (McDonalds, Netflix).
Business-to-business (B2B) = one business selling products/services for another business, e.g. wholesaling, business travel, business banking, commercial property, (Alibaba, Shopify).
What is the transformation process?
The transformation process is the transformation of inputs into outputs. This process ADDS VALUE to inputs.
Inputs = e.g. raw materials.
Outputs = e.g. t-shirt.
What is added value and why is it important for businesses? How is it calculated?
Added value is an amount added to the value of inputs or to a product or service.
The more added value or benefit to the customer a business creates, the higher the price it can charge for its product. Therefore the more profit it can make.
ADDED VALUE = selling price - cost of inputs
What are the 4 main factors of production?
- Land: natural resources, e.g. coal, wood, fish, etc.
- Labour: physical or mental effort required, from people.
- Capital: machinery, equipment, vehicles and any other physical assets used to produce.
- Enterprise: ideas, talents, ability to find finance.
What are the 3 industry sectors that businesses can be classified as?
The type of transformation process determines the industry sector the business is in:
PRIMARY > Raw materials
- Extracts or develops natural resources such as timber, agriculture, oil, or mineral.
SECONDARY > Manufacturing
- Makes use of extracted primary materials to build, manufacture, or develop finished goods.
TERTIARY > Distribution
TERTIARY > Retailer
- Provides the services needed to meet the needs of the end users, e.g. through retailing, distribution, insurance, and customer services.
> Consumer
What is a mission statement and what is the purpose of a business having one?
A mission statement, sometimes called a ‘vision statement’, is a written declaration of a company’s core purpose and focus and defines the reason for its existence. It is a qualitative statement that needs to be translated into corporate and functional or department goals.
Purpose:
- Helps to bring focus and meaning.
- Can act as a guide when making critical decisions that may affect direction of business.
- Provides a vision for the future.
What does an effective mission statement do?
- Differentiates the business from its competitors.
- Defines the markets or business in which the business wants to operate.
- Is relevant to all major stakeholders, not just shareholders and managers.
- Excites, inspires, motivates and guides, particularly important for employees.
What are aims?
Aims are long-term plans from which business objectives are derived.
An aim is:
- Where the business wants to go in the future (its goals).
- A statement of purpose.
- How the mission statement will be achieved.
- Set by senior employees, not normally numeric but qualitative and strategic.
What are corporate objectives?
Corporate objectives are targets or goals for the entire business that are set to achieve its mission.
Examples of key corporate objectives
- To make a profit.
- To survive.
- To grow.
- To improve cash flow.
- To behave in a particular ethical, environmental and/or socially focused manner.
What is profit maximisation?
Profit maximisation is to try and make the most profit possible to reward the owners, investors or shareholders. It can be a common corporate business objective in relation to profit.
What is profit satisficing?
Profit satisficing is to try and make enough profit to keep the owners comfortable. It will probably be a common corporate objective of smaller businesses (sole trader) whose owners do not want to work longer hours.
What is short-termism?
Short-termism is making decisions that will prioritise delivering profit in the short-term without considering the long-term consequences. It can be a common corporate objective in relation to profit.
What is cash flow?
Cash flow is the amount of money moving into and out of the business in the form of physical cash or bank balances.
Cash flow as a corporate objective will mean having sufficient reserves of money immediately available to pay day-to-day debts, e.g. suppliers, staff salaries, utility bills or overdraft.
Businesses with seasonal demand (e.g. theme parks or festival organisers) or offering long term credit to their customers (e.g. building companies) may set this objective.
Hierarchy of all types of objectives in a business in relation to how specific and important they are for a business
Objectives are set at various levels in a business, from the top (corporate) and through the layers underneath.
1) Mission
2) Corporate aims + objectives
3) Functional (i.e. departmental) objectives
4) Team targets
5) Individual staff member target
The top (mission, aims) are the most vague and relate to the entire business, whereas the bottom (functional, team targets, individual) are most specific and detailed.
What is is the acronym which all objectives need to conform to? (a set criteria)
SMART:
Specific - clear, easily defined and precise.
Measurable - quantifiable, should be expressed as measures so that it is possible to determine whether (or how far) they have been achieved, e.g. % market share.
Achievable - within capabilities and sufficient resources and agreed with staff responsible for achieving it.
Realistic - challenging but possible to achieve given the capabilities of staff, not conflicting with other objectives.
Time bound - deadline, based on explicit timescales, e.g. over 3 years.
Benefits of business setting objectives
- As they are measurable and time bound, they can be used to evaluate performance and measure progress.
- If they are realistic and achievable, they can provide motivation for employees.
- Provides focus for managers and staff as they are specific.
- Can be used to reward staff when targets are met.
- Provides an idea of what a business is aiming for.
- Can support an application for funding.
- Can help with decision making.
What other terms can be used for ‘revenue’?
- Turnover
- Sales
- Income
- Takings
- Earnings
