Unit 1 Flashcards
Why do businesses exist?
Creates employment
Creates wealth
Create new products and services
can enhance a country’s reputation
What is production?
The process whereby resources (factors of production) are converted into product that is intended to satisfy the requirements of potential customers. e.g. a haircut a toy
Define adding value and its calculation
The process of increasing the worth of resources by modifying them.
It can be calculated by the following formula:
Added value = selling price – the cost of bought in materials, components and services
How can a firm add value?
Custmer service (providing teh service)
after-sale service
USP
What is USP (Unique selling point)
USP: A feature of a product or service that allows it to be differentiated from other products.
The factors of production(CELL)
Capital - Goods that are made in order to produce other goods and services, e.g. machinery, lorries, computer systems, shops
Enterprise - The act of bringing the other factors of production together to create goods and services; making decisions and providing the finance.
Land - All the natural resources that can be used for production, e.g. coal, oil, livestock
Labour - Describes the physical and mental effort involved in production, e.g. manual effort in producing finished goods or individuals providing a service i.e. accountant
Types of business
Primary-the extraction of raw materials from the earth, e.g. farming
Secondary -transforming or refining the raw materials e.g. construction
Tertiary -e.g. restaurants hotels
Define mission statement
Mission statement: a qualitative statement of an organisation’s aims which describes the general purpose of the organisation.
Define Corporate vision
Corporate vision: What the company aspires to be.
Difference between corporate aims and objectives
Corporate aims: the long-term statement of what the business intends to achieve.
Objectives: More precise and detailed goals or targets that must be achieved in order to achieve the corporate aims and mission.
SMART Objectives
Specific – They should be clear and easily defined
Measurable – Objectives must be quantifiable, e.g. 15-20 per cent in 2 years
Agreed – Managers and subordinates involved in setting should agree on objectives, where possible, to ensure all are motivated to work towards them.
Realistic – Achievable and not conflicting with other objectives. Unrealistic targets do not motivate workers.
Time bound – Based on explicit timescales, e.g. over 3 years
Common business objectives
Survival – During the early years of trading or during difficult economic or market conditions.
Break even – Ensuring all costs are covered by the firm’s revenue.
Sales growth and maximisation
Profit growth and/or maximisation
Growth and expansion – Nationally through increases in store numbers, product lines, workforce, etc. or internationally by operating in more countries.
Reducing risk – By releasing more products or operating in more countries.
Diversification – Establishing a USP, launching new products in new markets.
Why set objectives?
A clear set of guidelines sense of direction co -ordinate business activity motivate workers emphasis what is important influence the action of workers
What is revenue and calculation?
Revenue (also known as turnover and sales) is the money received from sales of goods or services
Total revenue = selling price x number of items sold
Define fixed costs
Fixed costs: Costs that do not change directly with the level of output.
Define variable costs
.
Variable costs: Costs that change directly with output. They will increase by a set amount each time a new unit is made
Calculation for total cost
Total costs = total fixed costs + total variable costs
Profit calculation
Profit = total revenue – total costs
Why is profit important?
To be reinvested into the firm
To keep owners/shareholders happy
To help attract new shareholders to invest
To help obtain investment and bank loans
To pay taxes
To avoid share prices drops and potential hostile takeovers
What is a sole trader
A sole trader is a business owned and run by one individual.
The business is unincorporated as it has not gone through the legal incorporation process and will have unlimited liability.
What is unlimited liability
Unlimited liability: the owners of a business are liable for all the debts that the business may incur (sole trader and partnerships).
If the business incurs debts that cannot be repaid then the owner’s personal assets are at risk as there is no limit to their liability.
Disadvantages and advantages of sole trader
ADV:
easy and cheap to set up
few legal formalaties
independence
able to respond quickly to changes in circumstances
more privacy than other legal strucures
DIS:
unlimited liability
limited colaterral support applications for loans
imited capital for investment and expansion
diffcult when owner is ill or wants to go on holiday
limited skills
What is a private limited company?
A private limited company is a small to medium-sized business, often run by the family or the small group of individuals who own it.
Its shares cannot be sold without the agreement of the other shareholders and are not sold on the stock exchange e.g. Poundland , iceland
What is a public limited company ?
A public limited company is a business with limited liability.
It must have share capital of over £50,000, at least two shareholders, two directors and a qualified company secretary, and usually has a large number of shareholders.
The company will have ‘plc’ after its name.
Public and private sector organisations
Public sector organisations are those owned and run by the government.
Their main objectives will be to provide a service for the general public.
Example: NHS
Private sector organisations are those owned and run by any private individuals
These types of firms will generally set as their main objectives to maximise sales and profit.
Example: Tesco
What are non-profit organisations?
Non-profit organisations: are organisations established for particular social, community, environmental, welfare or cultural aims and objectives and not for financial gain. e.g. charities
Role of shareholders
A shareholder owns a share in the organisation in which they have invested.
Shareholders purchase shares so they may receive dividends and to potentially sell the shares at a profit later on, if the company is successful and the shares increase in value.
Some investors will buy shares to gain overall control of a business,
What is a share price?
A share price is the price of a single share in a company listed on the stock exchange.
Share prices are affected by two main factors which are :
The performance of the company that has issued the shares
the external factors
Disadvantages and advantages of private limited company
Limited liability
acces to more capital the uninicorporated busniess
moer privacy then plc only limted anoutnt of financial info
more flexible than plc
DIS:shares are less sattractive
less flexible if expansion needs finance
more legal formalaties
Disadvantages and advantages of public limited company
limited liability
easier to raise finance as a result of its stock exchange
greater scope for new investment
must publish a great deal of info about its performance
greater scrutiny of activities
significant administrative expenses
Factors influencing costs and demand include the effect of:
Market conditions and competition Incomes Interest rates Demographic factors Environmental issues and fair trade.
Market condition and Demand
Market conditions are the features of a market, such as the level of sales, sales growth, price levels, the number and strength of rivals, their market position and market share, etc.
Demand is the amount of a particular good or service that consumers or organisations want and are able to afford to purchase. It is a good determinant of how desirable a market is for firms
what are interest rates
Interest rates: the cost of borrowing money and the return for lending it.
Different demographic factors
The UK population is increasing The population is ageing Ethnic diversity Smaller households Higher proportion of women working
What is fair trade?
Fairtrade is about better prices, decent working conditions and fair terms of trade for farmers and workers
How will income effect cost and demand
Income levels in the market will clearly have an impact on the demand for all goods.
Some products such as normal and luxury goods will see sales rise as income levels rise.
How will interest rates be effected if they are high?
Consumers with mortgages, loans and credit cards have less discretionary income available so will spend less.
Sales of consumer products on credit (cars, electrical goods, furniture, holidays, etc.) may fall as it becomes more expensive to borrow.
Saving becomes more attractive than spending because of the interest earned.
The increased cost of borrowing may encourage businesses to delay any investment in growth as the benefit of saving is greater than that of the project. Therefore, the demand for capital goods (machinery, etc.) will fall.
The cost of borrowing is a fixed cost, therefore a rise will increase unit costs and the break-even point and lower profit margins.
Why might fair trade be a good thing?
This is ethical and helps a firm to be socially responsible.
It can help to add value to products, but will push unit costs up often meaning higher prices must be charged.
Arguments for being environmentally responsible
Improved financial performance of the firm and reduced operating costs, for example reduced waste disposal costs, income from selling recycled materials, etc.
Enhanced brand image and reputation resulting in improved sales and customer loyalty
It will be attractive to some investors and easier to raise finance
Arguments against being environmentally responsible
Companies’ ultimate aim is to make a profit and the only social responsibility of business is to create shareholder wealth.
Extra costs will be incurred which will be passed on to consumers.
It may reduce firms international competitiveness if others are not doing it.
