Unit 1 - Business activity Flashcards
Business
An organization that provides goods and services
Goods
Physical products
Services
Non-physical products e.g. banking
Consumer goods and services
Goods and services sold to ordinary people
Producer goods and services
Goods and services produced by one business to another
Needs
Basic requirements for human survival
Wants
People’s desires for goods and services
Private enterprise
Businesses owned privately by individuals or groups
Social enterprise
Business that aims to improve human or environmental wellbeing
Public enterprise
Goods and services provided by the government
Stakeholder
An individual or group with an interest in the operation of a business
Types of stakeholders
- Owners - want the business to do well
- Customers - want good quality products at fair prices
- Employees - want good working conditions, fair pay and benefits
- Managers - solve problems, lead teams, make decisions, settle disputes and motivate workers
- Financiers - lend money to the business and want it to do well
- Suppliers - provide raw materials, want prompt payment and regular orders
- The local community - employs people in the local community
- The government - wants businesses to generate wealth to generate taxes
Entrepreneur
A person who takes risks and sets up a business
Need for objectives in a business
- Employees need to work towards something
- Owners might not have motivation needed without objectives
- Objectives help decide where to take a business
- Easier to assess performance with objectives
Financial objectives
- Survival
- Profit
- Sales
- Increased market share
- Financial security
Non-financial objectives
- Social objectives - solve problems
- Personal satisfaction
- Challenge
- Independence and control
Reasons for changing objectives in a business
- Market conditions - change with competition or customers
- Technology - change in technology used
- Performance - change in performance
- Legislation - change in law
- Internal reasons - change in ownership
Unincorporated
Business where there is no legal difference between the owner and the business
Incorporated
Business that has a separate legal identity from its owners
Sole trader
A business owned by a single person
Unlimited liability
Owner of a business is personally liable for all the business’ debts
Advantages of a sole trader
- Owner keeps all the profit
- Are independent - complete control
- Simple to set up - no legal requirements
- Flexibility - can adapt to change quickly
- Can offer a personal service
- May qualify for government help
Disadvantages of a sole trader
- Unlimited liability
- Struggle to raise finance - risky to lend
- Independence may be too much responsibility
- Long hours of very hard work
- Usually too small to exploit economies of scale
- No continuity - business dies with owner
Partnership
A business owned by between 2 to 20 people
Deed of partnership
Binding legal document that states the formal rights of partners
Advantages of a partnership
- Easy to set up - no legal formalities
- Partners can specialize in their area of expertise
- Job of running a business is shared
- More capital can be raised
- Financial information is not published
Disadvantages of a partnership
- Unlimited liability
- Profit is shared
- Partners may disagree and fall out
- Any decision Is legally binding on all
- Tend to be small
Limited liability
Business owner is only liable for the original amount of money invested in the business
Limited partnership
Partnership where some partners contribute capital and enjoy a share of profit but don’t take part in the running of the business
Franchise
Structure in which a business allows another operator to trade under their name
What a franchisor offers a franchisee
- License to trade under brand name
- Start up package to help
- Training
- Material and equipment
- Marketing support
- Exclusive geographical area to operate
Fees of the franchisee
- One-off start-up fee
- Ongoing fee based on sales
- Contribution to marketing costs
- Franchisor makes profit off materials, equipment and merchandise
Advantages of a franchisee
- Less risk - tries and testes idea
- Back-up support given
- Set tip costs are predictable
- National marketing may be organized
Disadvantages of a franchisee
- Profit is shared with franchisor
- Strict contracts have to be signed
- Lack of independence - strict operating rules
- Can be expensive to start
Advantages of a franchisor
- Fast method of growth
- Cheaper method of growth
- Franchisees takes some risk
- Franchisees more motivated than employees
Disadvantages of a franchisor
- Potential profit shared with franchisee
- Poor franchisees can damage reputation
- Franchisees may get merchandise from elsewhere
- Costs to support franchisees may be high
Cooperative
Organization that all people working have an equal share
Consumer cooperative
Cooperative owned by the customers
Retail cooperative
Cooperative of retail members
Worker cooperative
Cooperative owned by employees
Charity
Organization that gives money, goods or help to people who are poor, sick or in need
Limited company
Organization that has a separate legal identity from the owners
Features of limited companies
- Limited liability
- Sell shares to raise capital
- Shareholders elect directors to run the company
- Corporation tax on profits
Certificate of incorporation
Document needed before a new company can start doing business
Memorandum of association
- Name of company
- Name and address of company’s registered office
- Objectives of the company and nature of its activities
- Amount of capital to be raised and number of shares to be issued
Articles of association
- Rights of shareholders depending on type of share held
- Procedures for appointing directors
- Length of time directors serve before re-election
- Timing and frequency of company meetings
- Arrangements for auditing company accounts
Features of private limited companies
- Business name ends in limited or Ltd.
- Shares can only be transferred privately and all shareholders must agree on transfer
- Often family businesses
- Directors tend to be shareholders and are involved in running the business
Advantages of private limited companies
- Shareholders have limited liability
- More capital can be raised
- Cannot lose control to outsiders
- Business continues if shareholder dies
- Has more status
Disadvantages of private limited companies
- Financial information has to be made public
- Costs money and takes time to set up
- Profits are shared between more members
- Takes time to transfer shared to new owners
- Cannot raise huge amounts of money like PLCs
Public limited companies
Larger than private limited companies and shares can be bought and solid publicly on the stock market - must have £50,000 to start up
Advantages of public limited companies
- Large amounts of capital can be raised
- Shareholders have limited liability
- Can exploit economies of scale
- May be able to dominate the market
- Shares can be bought and sold very easily
- May have a very high profile in the market
Disadvantages of public limited companies
- Setting up costs are expensive
- Outsiders can take control by buying shares
- More financial information has to be made public
- May be more remote from customers
- More regulatory control owing to Company Acts
- Managers may take control rather than owners
Multinational company
Large business with significant production or service operations in at least two different countries
Features of multinationals
- Huge assets
- Highly qualified and experienced professional executives and managers
- Powerful advertising and marketing capability
- Highly advanced and up-to-date technology
- Highly influential both economically and politically
-Very efficient due to huge economies of scale - Ownership and control is centered in host country
Public corporation
Business organization owned and controlled by the government
Features of public corporations
- State owned - government owns and appoints board of directors
- Created by law - created by act of parliament that specified powers and duties
- Incorporation - separate legal identity - can sue and be sued
- State-funded - government provides capital needed from tax or borrowing or re-using
- Provide public service - most do not aim for profit but providing a service for all
- Public accountability - Annual reports have to be submitted for taxpayers to see use of money, profits can be reinvested or handed to the government
Reasons for public ownership
- Avoid wasteful duplication - more efficient for industries with a natural monopoly to have one business
- Maintain control of strategic industries - better for industries to be public for national security and so outsiders don’t exploit a nation
- Save jobs - save failing private businesses with many employed by going public
- Fill the gaps left by the private sector - some markets’ needs may not be met
- Serve unprofitable regions - private sector usually doesn’t serve unprofitable regions
Reasons against public ownership
- Cost to government - many public corporations report losses
- Inefficiency - many are inefficient due to lack of competition or profit as an objective
- Political interference - public corporations can be interfered by government or be subject to government changes
- Difficult to control - Can be very large and employ many across various regions with many assets - hard to control and coordinate
Privatization
The transition of a public corporation to the private sector
Forms of privatization
- Sale of public corporation - shares sold
- Deregulation - lifting legal restrictions that prevented private competition
- Contracting out - contractors can bid for services provided by public sector
- Sale of land and property - public owned land is sold
Reasons for privatization
- To generate income - sale of state assets generates income for the government
- Reduce inefficiency from the public sector - improved services when profit is an objective
- As a result of deregulation - legal barriers lifted
- To reduce political interference
Factors that affect the appropriateness/form of ownership
- Growth - the bigger the business the easier to find sources of funding
- Size - small businesses are likely to be sole traders partnerships
- Need for finance - finance can change the ownership of a business
- Control - some like complete control
- Limited liability - owners can protect their finances in limited companies
- Legal status - personal services are usually sole traders but professional are usually partnerships
Interdependence
Businesses that rely on each other
De-industrialization
Decline in manufacturing
Factors that affect the location of a business
- Proximity to market - Businesses that make large or heavy products may be located near customers to lower transport costs - Manufacturers locate close to customers - services locate close to markets because they sell directly to customers
- Proximity to labor - Location can depend on labor/wage costs & can depend on particularly skilled workers and where they are
- Proximity to materials - Businesses with many raw materials want to be close to source & cheap source - some need large premises and availability e.g. parking lots - may want cheap premise with low tax rates and land allocated for business development e.g. brownfield or Greenfield sites
- Proximity to competitors - most services want to be away from competitors - some might want opposite and be close to important industries with comparison shopping or to catch excess demand from existing businesses
Where a service would locate
- Location with less delays/traffic congestion
- Locate in specialist shopping areas e.g. retail parks, centers or malls - easy access, large number of outlets, attract many thousands of visitors per day
Where office-based business would locate
- Need sufficient facilities e.g. restaurants nearby for employees
- Usually large popular cities - can also improve image
- Some might want areas of lower cost
Where a manufacturing and processing business would locate
- Labor intensive manufacturers will need to be close to skilled & cheap labor
- Can be close to sources to reduce transport costs
- May need cheap, large land
Where an agricultural business would locate
- Large areas of land
- Can be close to source e.g. sea food by the coast
Impact of internet on business location
- Flexibility in location
- Don’t need to have a fixed premises - can be run from anywhere
Influence of legal controls on business location
- Governments may want to avoid congestion in areas with too much development to reduce strain on infrastructure
- Minimize the impact that a business could have on local communities e.g. people objecting
- Encourage manufacturers to locate where unemployment is high to improve job distribution
- Use financial incentives to influences business location - can offer low rates, tax breaks and low rents
- Attract foreign manufacturers into the country
Influence of trade blocs on location
- Trade barriers to control level of imports into the country
- Businesses might want to locate inside a trade bloc to avoid tariffs (import taxes) - group of countries situated in the same region that join together and enjoy trade free of barriers
Globalization
The growing integration of the world’s economies
Key features of globalization
- Goods and services traded freely across international borders
- People are free to live and work in any country they choose
- High level of interdependence between nations
- Capital can flow freely between different countries
- Free exchange of technology and intellectual property across borders
Reasons that made globalization
- Development of technology and the internet
- Improvement of international transport networks
- A lot of deregulation alongside removing trade barriers
- Increase in tourism
- Many firms want to sell abroad if domestic markets are saturated
Opportunities of globalization for businesses
- Access to larger markets - growth opportunities
- Lower costs - growth leads to economies of scale
- Access to labor - can recruit from anywhere at a lower cost and can find people with specific skills
- Reduced taxation - can reduce tax by choosing a cheap location
Threats of globalization to businesses
- Competition - increased competition
- International takeovers - a business in one country can take over another business in another country due to free movement of capital
- Increased risk of external shocks - Interdependence poses a threat since economies affect each other
Benefits of multinationals
- Increase in income and employment
- Increase in tax revenue - host nation taxes the multinational unless in a tax haven
- Increase in exports - output of a multination is recorded for the country - increases currency reserves
- Transfer of technology - Multinationals provide foreign suppliers with technical help & training - can help with resources and modernization
- Improvement in the quality of human capital - provide training & work experience
- Enterprise development - multinationals encourage people to set up businesses in less developed countries
Drawbacks of multinationals on a country and its economy
- Environmental damage - usually involved in extraction industries
- Exploitation of less developed countries - some can cause developing countries to rely on producing primary products - risky due to price changes - often pay low wages - employ child labor & bad working conditions - taxes paid are minimal - as little as possible is put back into host nation
- Repatriation of profits - profits are repatriated/returned to the country where the multinational is based - host country loses out
- Lack of accountability - Can evade law where government is weak or corrupt and also keen to operate where regulation is insufficient or non-existent
Features of international trade
- Allows countries to obtain goods that cannot be produced domestically
- Allows countries to obtain goods that can be bought more cheaply from overseas
- Helps to improve consumer choice
- Provides opportunities for countries to sell off surplus commodities
Visible trade
Trade in physical goods
Invisible trade
Trade in services
Balance of trade / visible balance
Difference between visible exports and visible imports
Exchange rate
The value of one currency in terms of another
Benefits of appreciating currency
- Price of imports decreases for consumers in country - buy more products
Drawbacks of appreciating currency
- Exports are more expensive for abroad countries - local/smaller businesses may not be able to compete with cheaper imports
Benefits of depreciating currency
- Exports will be cheaper for abroad countries - local businesses will be able to compete better against expensive imports
Drawbacks of depreciating currency
- Prices of imports increase for consumers & importing higher prices might cancel out cheap exports
Direct tax
Tax on income e.g. income tax, corporate tax
Indirect tax
Tax on spendings e.g. VAT
Fiscal policy
Using changes in taxation and government expenditure to manage the economy
How businesses would react to taxation
- Lower taxes - more spending in economy causes business to increase production and expand
- Higher taxes - cutting investment or reducing dividends
How governments affect businesses
- Infrastructure provision - government is responsible for nation’s infrastructure - jobs are usually carried out by private companies
- Legislation - provides a legal framework in which businesses can operate to ensure that vulnerable groups are protected
Legislation that affects businesses
- Consumer production - prevent exploitation of consumers e.g. overly high prices, price fixing, restricting consumer choice and raising barriers to entry
- Competition policy - prevents anti-competitive practices & consumer exploitation by encouraging growth of small firms, lowering barriers to entry, introduce anti-competitive legislation
- Environmental legislation - minimizing damage done by businesses to the environment
- Trade policy - used to protect jobs if foreign competitors threaten survival of domestic producers, protect infant industries, prevent dumping & raise revenue from tariffs
Types of trade barriers
- Tariffs - tax on imports
- Quotas - physical limits on quantity of imports into a country
- Subsidy - giving of financial support such as grant or tax breaks to exporters or domestic producers that face competition from imports
- Administrative barriers - use os strict health and safety or environmental regulations to make importing more awkward
Protectionism
The use of trade barriers to protect domestic producers
Infant industries
Industries yet to be established
Dumping
When foreign producers sell goods below cost in a domestic market
Benefits of trade blocs
- Opportunity to specialize in production of goods and services which can be produced more expertly or at lower cost
- Access to wider markets
- Lower costs - economies of scale can be exploited when sales & output rise
- Protection from large predatory multinationals from outside the bloc
Monetary policy
Using changes in interest rates and the money supply to manage the economy
Interest
Price of borrowed money
How high interest rates negatively affect businesses
- Cost increases for any business that has already taken out a loan - reduces profits - reduces growth and funds for new investments
- Purchase of capital goods funded by borrowing is discouraged - reluctant to invest
- Demand in the economy will fall - consumers are less willing to borrow money to fund spending
Effects of high interest rates on consumer spending
- Mortgage payments will rise - less disposable income
- Demand for goods bought with borrowed money will fall
- Savings will earn less interest - consumers rely on income
Four categories of external factors
- Social
- Technology
- Environment
- Political
Social external factors
- Increased consumer awareness - higher expectations
- Changing demand patterns - change in society changes demand for products
- Increased numbers of women at work - increased supply of labor & businesses
- More part-time workers - helps improve flexibility in businesses
- Urbanization - more labor and additional markets
Technological external factors
- Lowered cost in agriculture due to machines + better crop yields
- Robots on production lines reduces cost in secondary sector - automation
- Reduces cost in service industries
- IT reduces administration and communication costs in business
Opportunities for businesses with technology
- Shorten time products can be marketed for
- Can replace labor with capital - lowers unit costs
- Improved communications between businesses and customers via social media
Environmental external factors
- Global warming
- Habitat destruction
- Resource depletion - loss of non-renewable resources, falling fish stock, loss in fertile soil
- Sustainable development -
How businesses can react to environmental issues
- Design reusable or recyclable packaging
- Use more energy-efficient equipment or renewable energy sources
- Explore ways of selling waste to other businesses as a by-product
- Reduce business travel & use video conferencing
Political external factors
- Issue of national security - e.g. restriction on movement of goods, people and capital
- New government elected - could be pro-business or anti-business
Measures of success in a business
- Revenue - amount of money generated
- Market share - Can dominate and charge higher prices
- Customer satisfaction - How well the wants and needs of customers are met
- Profit - profit is a large aim
- Growth - Size of a business can be measured e.g. employees, revenue, market share or capital employed
- Owner/shareholder satisfaction - how shareholders judge the success of the business
- Employee satisfaction - Wants and needs of employees
Reasons for business failure
- Cash flow problems
- Not being competitive
- Lack of finance
- Failure to innovate
Cash flow problems - business failure
- Overtrading - funding a large volume of production with insufficient cash
- Investing too much in fixed assets - spending large amounts initially quickly uses up resources
- Allowing too much credit - goods are sold and customers pay at a later date
- Over-borrowing - loans taken out to finance growth - interest costs rise
- Seasonal factors - trades can vary by season
- Unexpected expenditure - e.g. equipment breakdown, tax demands
- External factors - e.g. change in consumer taste - outside of control of business
- Poor financial management - inexperience in managing cash
Lack of finance - business failure
Businesses that don’t have enough money/ are undercapitalized are more likely to fail
Not competitive - business failure
- New entrants - new rival can enter and take away their trade
- Ineffective cost control - if cost cannot be reduced prices have to rise - loss of customers to competitors
- Ineffective marketing - businesses may struggle if their marketing is weak
- Lack of business skills - owners are not sufficiently skilled - business falls
- Poor leadership - senior managers 7 business leaders bring down business
Failure to innovate - business failure
Businesses fail by not adapting to changes with time and lose to rivals who innovate
