Unit 1 Flashcards
Entrepreneur
An entrepreneur is a person who has ideas and makes them happen. It is also someone who has the ability to take risks.
Characteristic
A characteristic is a personal quality which an entrepreneur possesses.
Profit
Profit is the financial reward to the owner of the business. It is the difference between revenue and costs.
Entrepreneurial characteristics
- Initiative: the quality of taking action without needing some is else to tell you to do so or to give you direction
- Hardworking
- Resilience: the ability to withstand or recover from difficult situations
- Creative: having original ideas
- Self Confidence: believing in yourself
- Taking Calculated Risks: the entrepreneur has estimated the probability of success or failure
What motivates entrepreneurs?
- Profit
- Control over working hours or location
- Continuing a family business
- Self-fulfilment
- Control over your work
- Creativity
- Making money from a hobby
- Ethical motives
Motives
Motives are the factors that encourage an entrepreneur to go into business and to take particular decisions.
Ethical motives
Ethical motives are reason linked to doing ‘something right’. For example, setting up a business or organisation which benefits a section of the community, or which is committed to ethical employment and sourcing activities.
Non-profit motives
Non-profit motives are reasons for setting up in business which are not linked to making profit.
Leadership
The process of influencing others to work willingly towards an organisation’s goals.
The leader’s role
- to motivate employees to work effectively.
- the leader has to work out where encouragement is needed and where penalties may be required.
Motivation
Motivation means using the right strategy to help employees work more effectively. By meeting the needs of the business situation and the employees, leaders can increase commitment and so encourage hard work.
Autocratic/Authoritarian leaders
Autocratic leaders impose their decisions of the group. Commands are tightly specified with little or no allowance for discussion or individual choice. There may be little delegation of specific responsibilities. Rewards are unpredictable, and the leader’s place mag remain obscure. Socially they tend to keep their distance from their employees. Their primary concern will be the level of profit that they can make.
Democratic leaders
Democratic leaders encourage the group to participate in discussion and to feel that they have contributed to a final decision. The leader mixes informally with the group and is usually well-knows at the personal level. Methods of work are left to individual choice, while rewards are open and fair in their distribution.
Paternalistic leaders
Paternalistic leaders will consult employees early on and explain their reasons for their subsequent decisions. They will look for ways to develop employees’ skills and capability through training. They behave how a parent may act when making family decisions.
Theory X managers
Theory X managers assume that their employees are lazy and prefer to be given firm direction with strict controls. Managers will adopt a stick and carrot approach to make them work hard. This may involve targets with heavy penalties if they are not met. They are also only motivated by pay.
Theory Y managers
Theory Y managers assume that human beings want to work and will commit themselves to work effectively without strict controls. They will engage with the objectives of the organisation, accept responsibility and use their initiative to help solve problems.
Markets
Markets exist wherever there are buyers and sellers who can communicate with each other and agree to buy or sell at a price that makes the transactions worthwhile.
Exchange
Exchange means selling what we have or can produce using the money to buy what we want for ourselves.
Specialisation
Specialisation means concentrating on creating the products we can make and sell most efficiently.
The effects of competition on a business
They may:
- try hard to develop new of innovative products ( like the iPad )
- improve the design of existing products
- look for new technologies or better management strategies that will help to cut costs
Competition
The process by which businesses strive against one another to attract more customers by keeping prices down and making the product more appealing.
How businesses cover costs
- a retailer may price a popular product below cost, and advertise the fact, just to get a few new customers to come through the door and look around
Costs
Costs are all the payments that have to be made in order to get a product into the market place.
Sales revenue equation
Price X quantity sold
Profit equation
Sales revenue - cost of production
Investment
Investment means spending now in order to generate income in the future
Scarcity
Scarcity refers to a situation in which people want to buy more of a product than is current being produced
Incentives
Incentives are financial and other rewards that can induce people to behave in a certain way.
Supply
Supply is one element in the market system. Market forces create incentives to supply particular types of product that customers want. The more scarce a product is, the higher the price and the profit will be when supplying it.
Demand
Demand refers to the other element in the market system, the amount of a product that customers want to buy.
Factors that affect supply
- prices: a good price is an incentive to businesses to supply more.
- cost of production: the prices may change yo produce the product due to government policies (a change in VAT) or new technologies
- a change in size of industry
- imposition of tax: affects the costs of producer
Choice
Because resources are scarce, everyone has to choose what they want most, in light of the price they will have to pay for it. Choice will be constrained by the level of income - the amount that the consumer can spend
Factors that affect demand
PGTIPED
POPULATION/PRICE OF PRODUCT GOVERNMENT TASTE INCOME PRICE OF OTHER PRODUCT EXPECTED PRICE CHANGE
Substitutes
Substitutes are goods that can be consumed in place of another
Complementary goods
Complementary are goods that are normally consumed together
Equilibrium point
Is when the quality demanded is the same as the quantity supplied
Market Orientation
Market orientation is achieved when a business focuses its activities, products and services around the wants and needs of the customer
Benefits of market orientation
- by focusing the wants and needs of the customer the business is much more likely to produce a product or service that the customer wants and will therefore buy.
- this will give that business a competitive advantage over rival businesses, which may not be so closely focused on the customer
- if the customer is kept satisfied by the business then brand loyalty may be created and the customer is more likely to recommend the business to friends and family
- increasing brand loyalty means that it may be easier for the business to charge a higher price for its products and services
Market research
Market research is any kind of activity that gives a business information about its product or service, its customers, it competitors or the market it operates in
Business need this to :
- identify what’s happening in the market now
- to predict what might happen in the market in the future
- to explore new possibilities in the market
Market research…
- gives info that can be used to make better informed decisions about the business and its future
- allows businesses to understand customer behaviour, to make decisions that make them more responsive to customer needs and to increase profits
- helps to give a business a competitive advantage by improving its products and/or services and successfully marketing them
- is crucial for any business start up, to reduce the risks involved.
Primary research
The gathering of information first hand from an original source
Secondary research
Finding and using information that has already been gathered by somebody else. Second hand
Primary research advantages
- can be designed specifically to suit the purpose of the business
- information will be up to date and directly relevant
- information gathered is not available to competitors.
Primary research disadvantages
- can be expensive to collect, particularly if employing an agency
- can take a long time
- can give misleading information if questions not worded correctly or there are errors in sampling
Secondary research advantages
- can be done very quickly, particularly online
- can be much cheaper than primary research
Secondary research disadvantages
- may not be exactly specific to researcher’s needs
- can be dated
- may not be accurate, particularly if an online source
Quantitative research
Based on numerical data, measures things and producers statistical information
Qualitative research
Based on consumers attitudes and opinions.
Sampling
Samples are chosen as representative of the whole
Random sample
A group of people selected so as to be red presentation of a population as a whole.
Adv: can be effective and accurate
D’adv: - hard to be truly random in practice
- needs large sample sizes to be accurate
- can be expensive
Stratified sampling
This involves targeting one particular segment of the market that you want to find out about
Adv: targets market effectively.
D’adv: - difficulty in identifying appropriate strata
- more complex to organise and analyse results
Quote sampling
This means segmenting the market in groups that share specific characterisers
Adv: cheap and effective way of sampling
D’adv: need to be careful in drawing up quotas to avoid bias
Market size
Is normally measured by the total sales of all the businesses in that market added together
Market share
Market share of an individual business can be expressed by total sales as a percentage of the overall market
Market growth
Market growth in an increase in demand for a product
Mass market
A very large market with a high value of sales by volume
Niche market
Is a small party of an overall market that has certain special characteristics, have very little competition and therefore are able to charge a higher price
Market segmentation
Dividing the market into groups of consumers with similar characteristics
E.g
- socio-economic grouping
- income, age and gender
- size and composition of customer households
- geographical location
- ethnicity and/or religion
- educational background of customers
- hobbies and interests
Advantages of segmentation
- the more precisely a segment can be identified and provided for, the more Laila it is that a sale can be made
- segmenting the market reduces direct competition
- a premium price may be charged if market segments get exactly what they want
- encourages the development of brand loyalty
Disadvantages of segmentation
- can be expensive to research and identify different segments
- more costly to develop and market different products for different segments rather than just on standardised product
- targeting one particular segment may mean ignoring others
- even if segments are identified, reaching them may be another problem
Market positioning
Is how individual products or brands are seen in relation to their competition by the consumers
Product differentiation
Occurs when businesses make their product a little different from competing products
Repositioning products
This may occurs with long existing products to make them appear more attractive to the consumer
Market mapping
Market mapping is the use of a grid showing two features of a market.
Advantages and disadvantages of market mapping
Advantages:
- enables a business to spot gaps in the market
- can help a business to differentiate its product from the competition
Disadvantages:
- can be hard to categorise some products and services
- identifying a gap does not mean there is a need for a product to fill it. More research need to be done
Competitive advantage
Any feature of a business that enables it to compete effectively with rival products
Adding value
Altering a product so as to increase its value to be customer
Effects:
- can potentially increase price
- sell more
- brand image increases
Product trail or test marketing (&adv+d’adv)
Launching a product on a limited scale in a representative segment of the market to measure initial reactions
Adv
- this will show weather the product is viable before putting it into the market
- this avoids the costs of full scale launch as well as providing useful market date which may then be used
D’adv
- it is expensive
Opportunity cost
Is the cost of the best best alternative that has been sacrificed.
Trade off
A situation where having more of one thing leads to having less of another
Stakeholders
Individuals or groups with an interest in the actions of a business.
- shareholders
- owners
- consumers
- suppliers
Aim is to meet the needs of these people as they ensure the long term success of the business
Unemployment
Can be defined as the number of people able and willing to work but are not able to find a paying job
How is unemployment measures measured?
- the claimant count: the official measure based on the number of people claiming unemployment related benefit
- the international labour organisation (ILO) measured through the labour force survey and covers those people who are looking for work and are available for workers
The claimant count is significantly lower than ILO
Impact of increased unemployment on businesses
- less income which means less disposable income. Demand for luxury or non essential items may fall
- business that sell substitute products may benefit
- wages are less likely to increase as there is more competition for the remaining jobs
- it could be easier to recruit employees as there are more unemployed people to choose from
- it should be easier to find people with skills that are normally scarce
Impact of falling unemployment on the business
- increased disposable income. Luxury products and non essential items will have increased demand
- businesses that sell substitutes may experience a fall in sales
- wages are more likely to increase as employers compete to attract the best people available
- it may be harder to recruit employees as there are fewer unemployed people to choose from
- it may be harder to find people with the right skills
Inflation
Is a sustained increase in the average price level of a country; this is a fall in the value of money
Measures of inflation
- Consumer price index
- retail price index
Impact of increased unemployment on businesses
- less income which means less disposable income. Demand for luxury or non essential items may fall
- business that sell substitute products may benefit
- wages are less likely to increase as there is more competition for the remaining jobs
- it could be easier to recruit employees as there are more unemployed people to choose from
- it should be easier to find people with skills that are normally scarce
Impact of falling unemployment on the business
- increased disposable income. Luxury products and non essential items will have increased demand
- businesses that sell substitutes may experience a fall in sales
- wages are more likely to increase as employers compete to attract the best people available
- it may be harder to recruit employees as there are fewer unemployed people to choose from
- it may be harder to find people with the right skills
Inflation
Is a sustained increase in the average price level of a country; this is a fall in the value of money
Measures of inflation
- Consumer price index
- retail price index
Monetary policy
The Bank of England through the monetary policy committee has the responsibility of controlling the rate of inflation.
Effect of inflation
- it is hard to plan for the further when there is uncertainty regarding future costs.
- inflation may mean that the costs of supplies and wages are rising. This can reduce profitability unless the business can put its prices up.
- consumers of fixed incomes lose out because their real incomes fall.
- if UK businesses are experiencing a higher rate of inflation than their foreign competitors, it may mean that UK costs are rising faster. In order to maintain profit levels UK firms may put their prices up and lose competitiveness and face falling export sales
Interest rate
The price of burrowing money
Impact of increased interest rate of a business
- They are less likely to burrow money to expand.
- higher costs of running an overdraft
- less attractive to invest money into future businesses
- attracts savings
- lower demand for loans
- supplies demand lower price for product
Effect of decreased interest rate on businesses
- Investment may increase and existing business may expand.
- business more likely to start up … Economy grows
- increase in demand for a loan
Exchange rates
The price of one currency expressed in terms of another
Effect of stronger pound
Exports become more expensive as foreign countries have to give up more of their money for the same number of pounds.
Our imports become cheaper as we have to give up fewer pounds to buy the same amount of foreign currency
The pound becomes weaker
- exported become cheaper as foreign countries have to give up less of their money for the same number of pounds
- our imports become more expensive as we have to give up more pounds to buy the same amount of foreign currency
SPICED
Strong pound imports cheap exports dead
Government policy tools
- monetary policy: using interest rate to influence economic changes
- fiscal policy: using taxation and government spending to achieve government objectives
Government spending is used to:
- provide essential public services
- regulate demand in the economy
- remove social issues such a poverty
Types of taxation
Direct - this includes income tax, national insurance and cooperation tax - charged on earnings
Indirect - this includes VAT, car tax, insurance tax and others
Affect of tax on businesses
- increase costs
- consumers have less disposable income as products more expensive which would affect demand
Start up costs
One off costs needed to start a business
Running costs
Costs needed to keep the business successful and able to function
Internal and external costs
Internal costs within the business
External costs outside the business
Internal and external sources of finance
Internal:
Owner equity
Retained profits
Sales of assets
Eternal: Trade credit Overdraft Hire purchase/ leasing Loans Venture capital Share capital Debenture
Owner’s equity defintion
the money that the owners have available to put into the business
Retained profit defintion
It is all the money that is left after all deductions have been taken away from total sales revenue etc. it can be reinvested into the business
Sale of assets defintion
The business sells assets in order to raise money
Trade credit defintion
The period of time allowed by a business after supplying another business with goods or services before payment is due
Overdraft definition
A facility from the bank that allows a business to spend more than it has in its account
Leasing definition
A long term rental agreement that allows businesses to use assets without having to lag for them
Hire purchase defintion
Similar to leasing except that at he end of the agreement the asset becomes your own property
Loan defintion
The use of someone else’s money for a period of time
Venture capital defintion
Funding provided by specialist firms or individuals in return for a proportion of the company’s shares
Share capital definition
Finance raised by selling shares in the company
Debenture definition
A form of external finance for a business that takes the form of a long term loan often secured on the company’s property
Owner’s equity adv and d’adv
Adv
Does not have to be repaid
No interest
D’adv
Starting a business is risky therefore owner may lose all their savings/wealth
Best for starting a business
Retained profit adv and d’adv
Adv
Does not have to be repaid
No interest
D’adv
Can be limited, particularly in the early years
Not available for a new business
Best for expansion
Sale of assets adv and d’adv
Adv
Does not have to be repaid
No interest can be good to dispose of unused assets
D’adv
Once sold assets are gone, they may be useful in the future
Not available for a new business
Useful for raising money quickly
Trade credit adv and d’adv
Adv
No interest
D’adv
Limited amounts and only a short term solution
If payment delayed for too long supplier may cut it off
Good for short term cash flow problems and buying stock
Overdraft adv and d’adv
Adv
Flexible - you only pay interest on amount burrowed as long as overdraft is needed
D’adv
Interest charges usually higher than loans
Not suitable for long term or large amounts
Best for short term cash flow problems
Leasing adv and d’adv
Adv
Assets obtained without large expenditure
Often with maintenance included
New models regularly updated
D’adv
More expensive than buying outright in long term
Asset never yours
Interest paid, regular monthly repayments
Best for items such as vehicles, photocopiers - medium term finance
Hire purchase adv and d’adv
Adv
Assets obtained without large expenditure
Often with maintenance included
new models regularly updated
D’adv
More expensive than buying outright in long term
Asset never yours
Interest paid, regular monthly repayments
Best for items such as vehicles, machinery - medium term finance
Loan adv and d’adv
Adv
Fixed sum available
Easy to plan for fixed repayments
D’adv
Interest paid, regular payments must be made regardless of cash flow
Usually need security in case of defaulting on loan
Best for medium term finance and expansion
Venture capital adv and d’adv
Adv
Immediate cash injection
If given in exchange for share of business this does not need repayment
D’adv
Venture capitalist may want share of the business in return (loss of control for owner) or charge higher interest rates to comped stone for increased risk
Best for businesses deemed too risky for other sources of finance
Share capital adv and d’adv
Adv
Immediate cash injection
Does not need repayment
D’adv
Loss of control as more people own a share of the business
Need to share profits or make dividends
Best for long term or large expansions
Debenture adv and d’adv
Adv
Immediate sum available
Repayments spread over a long time
Interest rates can be lower
D’adv
Secured against property
Interest paid
Regular payments must be made regardless of cash flow
Liability + definition for sole, partnership and limited companies
Means responsibility for the financial debts of the business
Sole traders and partnerships have unlimited liability
Limited companies have limited liability
Sole trader: an individual who runs his or her own business
Partnership: when two or more people start a business together
Limited company: a business has to go through a legal process called incorporation to turn itself into one and has to be registered with companies house
Difference between Plc and ltd
Private limited Ltd
Can’t sell shares to the public, only family and friends
Shares not listed on the stock exchange
Have to publish accounts and dispose some info
Public limited Plc Can sell shares to the public Shares listed on the stock exchange Shares can be freely bought and sold Have to publish and make available all accounts
Sole trader adv and d’adv
Adv
Total control, keeps all the profit, simple and easy to set up
D’adv
No one to share the work or responsibility
difficult to take holidays or sick leave
High levels of risk due to unlimited liability
Partnership adv and d’adv
Adv
A partner may bring more start up capital and extra skills and liability share workload
Can take holidays etc
D’adv
A partnership still has unlimited liability and each partner is liable for each other
Disagreements
Profits have to be shared
Private limited company adv and d’adv
Adv
A company has limited liability and so owners are not personally liable for debts
D’adv
More complex to set up
Limited liability can mean that sources of finance require personal guarantees from the owners so there is still a risk of personal loss
Homes may be used as collateral for bank loans
Public limited company adv and d’adv
Adv
Limited liability and access to share capital
D'adv Most complex of all to set up Full accounts must be published Shareholders will want dividends Loss of control for original owners
A pricing strategy defintion
is way in which a business decides upon the price of its product or service
Competitive pricing
This means looking at the prices that your competitions are chargin and making yours similar or slightly less than theirs
Cost plus pricing
This is decided by calculating how much percentage profit the business wants to make. This is then added on to the total costs of that product
Penetration pricing
A Lower price than the competition is set by a new competitor to persuade customers of other products to give their own product a try
Premium pricing
A higher price is charged than the competition because the product is seen as being more desirable and/or of better quality
Price skimming
Skimming the market means charging a very high initial price for the product. This only works for innovative new products
Predatory pricing
This means setting the price below the cost of production in an attempt to drive rivals out the market. It is illegal
Total revenue/turnover
Price times quantity
It is the value of the sales of the business
Total costs
Fixed costs plus variable costs
Break even point
It is the level of output at which the total revenue is exactly the same as the total costs
Fixed costs devided by contribution (selling price minus variable costs)
Margin of safety
The margin of safety is the different between the actual level of output and the break even level of output
Strengths and weaknesses of break even analysis
Strengths
Helps to assess the strength of a business idea and whether it is worthwhile or not
Helps to assess the levels of output that need to be reaches to make a profit
Shows the impact of changes in price and or cots on the bep and any profit levels
Enables the calculation of profit/loss over different levels of output
Helps support an application for finance
Weaknesses
The models assumes that costs rise steadily but they make not; bulk buying can reduce costs for unit
The model assumes that all output is sold, in reality his may not happen
It is only a forecast and estimated of cost and price levels may be wrong or inaccurate
Knowing what the BEP is does not mean that you will actually be able to sell that amount of products
Markers are dynamic- constantly changing sit hat even if your estimates are accurate, things can spoil it eg new competition or economic climate
Gross profit
Turnover minus variable costs
Operating profits
Gross profit minus fixed costs
Profit margin
Profit devided by turnover x 100
A profit margin tells the business just why percentage of its turnover is actually profit
Business plan and what it contains
It is a documents that sets out what the business is, what it does and what it wants to achieve
Executive summary Your business and its products/services Yours markets and competitors The marketing plan Organisational details The production plan Financial forecasts Existing sources of finance
(See book for details)
Business plan adv and d’adv
Adv
U think carefully when u make it so u can identity the problems
Can be crucial in convicting investors
D’adv
Just because the plan says it will happen does not mean it will
Just a forecast
Income statements
An income statements is just a record of how much profit or loss a business has made over a period of time
Cash flow forecast
A cash flow forecast is an attempt to look at the flowed of cash in and out of the business
