Unit 1: Business Structure Flashcards
What is a business?
A business is an organisation that produces a good or supplies a service.
What are goods?
Goods are tangible items.
e.g. books or furniture.
What are services?
Services are actions performed by other people to aid the customers.
e.g. Hairdressers and window cleaners.
What is a need?
A need is an essential to our daily lives. (these are also referred to as necessities)
e.g. Food and housing
What is a want?
A want is something we desire. (these are also referred to as luxuries)
e.g. Mobile phones
Why do people own a business?
- People may set up a business to make a profit.
- People may set up a business if they expect to make more income than they could earn working as an employee.
- People may set up their own business so that they can be independent and make their own decisions.
- Setting up a business allows people to do a job they are really interested in.
What is the private enterprise (sector)?
Private enterprise is businesses owned and controlled by private individuals.
e.g. Nike
What is the public enterprise (sector)?
Public enterprise is businesses owned and controlled by the Government.
These products are free at the point of use.
e.g. NHS
What are social or non-profit businesses?
These refer to charities.
What are some aims for a private enterprise business?
Profit, excellent product/service, to develop a new product, sense of achievement, being environmentally friendly.
What is an aim for a public enterprise business?
Provision of excellent service
What are possible aims of a business?
- To make a profit
- Provide excellent customer service
- To have a great image and reputation
- To develop new products
- To offer a diverse range of goods and services
- To become fully sustainable or minimize environmental impact
- To invest in the local community or social projects.
What is a mission statement?
A mission statement describes the purpose of the business and incudes other information such as: its values, its strategies, who the customers are and what makes the business unique.
Do businesses have to prove whether their mission statement is accurate?
Businesses don’t have to prove what they say on their mission statement is accurate. However if it is shown to someone and it is inaccurate it could damage a businesses reputation.
What are objectives?
Objectives are specific measurable targets that work towards and aim.
What are corporate objectives?
Goals for the whole business. These objectives are dependant on the size of the business.
What are functional objectives?
Objectives of each department. These objectives help achieve their corporate objectives.
What is the purpose of an objective?
The purpose is to enable managers to compare the current businesses performance with their objectives to measure the success of the business and review their decisions.
What do objectives need to be?
Specific – Vague objectives don’t tell staff what they are supposed to be aiming for
Measurable – if the objective isn’t measurable the business will not know if it has achieved it or not
Agreed – everyone working towards the objective needs to know about it and agree to it
Realistic – impossible objectives demotivate staff
Timely – Specific timeframe for the objective to be completed in
Describe Profit as an objective
Businesses that are currently making a loss might aim to become profitable. A functional objective of minimizing costs may be set to help achieve this.
Describe Growth as an objective
Many businesses aim to grow as the larger a business grows, the more it is able to use its position in the market to earn higher profits.
What is survival?
Survival refers to a business being able to continue trading, rather than making a loss and being forced to exit the market for another reason.
Describe survival as an objective
Survival is often the main objective for a new business, and it becomes a key objective during periods of strong competition from other companies or when the economy is declining or in recessions.
What is market share?
The businesses sales as a proportion of the industry sales
State the formula for market share
(Businesses sales/industry sales) x 100
What can growth be measured in?
Output, products available.
How can growth be set as an objective?
It is usually set based on revenue.
What can market share for a business depend on?
The sales of the business and the sales of other businesses competing in the same market.
Describe cash flow as an objective
Businesses set cash flow objectives in order to improve their cash flow, so the business can make sure it always has enough money to make the payments that are due.
What is cash flow?
The money that moves in and out of a business over a set period of time.
Describe social as an objective
These objectives relate to benefiting society or the people in need. Ethical objectives are based on moral principles about how businesses treat people and the environment.
Describe long term as an objective
Long term objectives tend to set the direction of the business
Describe short term as an objective
Objectives focusing on a short period of time
What are semi variable costs?
Costs that may change over time. These costs include both fixed costs and variable costs elements.
Describe Profit as an objective
Profit is seen as the most important objective for many businesses.
State the formula for working out profit
Profit = Total Revenue - Total costs
What is revenue?
The amount of money generated by the sales of a product, before any deductions are made.
What can revenue be called as?
Turnover, sales revenue
State the formula for working out revenue
Revenue = Selling price per unit x quantity of units sold
What is revenue affected by?
Sales volume and price
What is fixed cost?
A cost that does not change with output
What is a variable cost?
A cost that changes with output
State the formula for variable costs
Total variable cost = Variable cost per unit x number of units sold
State the formula for average costs
Average costs = total cost/output
What is average costs?
The cost per good.
Why is profit important?
Profit can motivate people
Profit is a good source of finance
Profit can be used to attract investors
What is a mixed economy?
Markets with both the public sector and private sector.
What is the social enterprise?
A business that uses its funds given from others to pay workers, pay for supplies or pay for buildings.
What is a public limited company?
A business owned by any member of the public
What is a private limited company?
A business owned by private individuals and not any member of the public.
What are LTD’s and PLC’s?
Legal identities
Why might someone not start their own business?
Because there is a risk of unlimited liability
In order to start a business, what must a person have?
Capital
What is a sole trader?
A business owned and controlled by one person. They are self-employed and they have full responsibility for the financial control of the business.
What types of businesses are in the private enterprise?
Sole trader, Partnership, LTD, PLC
What are some examples of businesses in the public enterprise?
E.g. NHS, Police, Education, Armed forces, Social care
What are the advantages of being a sole trader?
Freedom – The sole trader is independent and has complete control over decisions
Profit – The sole trader receives all profits the business makes. Therefore there is an incentive to work hard.
Simplicity – There is less form filling than for a limited company Savings on fees – There are no legal costs for drawing up an ownership agreement
What are the disadvantages of being a sole trader?
Unlimited liability – Sole trader is responsible for all the debts of the business
Risk – There is no one to share the responsibilities of running the business with
Time – Sole traders often need to work long hours to meet the tight deadlines
Expertise – The sole trader may have limited skills in areas of the business
Finance – Finance is limited to the money the owner has or can borrow
Vulnerability – there is no cover if the trader gets ill and cannot work
What do shareholders have the responsibility to do?
Elect the board of directors at the annual meeting
What do private and public limited companies share in common?
Owners having limited liability
What are shares?
The capital value of the company that is divided for someone to buy (different type of shares for a public and private company)
What is another name for capital value?
Momentary value
Describe what a Private limited company is
Small family business; Not able to shares publicly; Shareholders possibly not being able to sell their shares without the agreement of other shareholders; No minimum share capital requirement, End the businesses name with ‘limited’ or ‘ltd’
Describe what a Public limited company is
Large national business; Being able to sell shares publicly; Share prices can be quoted on stock exchanges; Shares are freely transferable and can be bought and sold through stockbrokers, banks and share shops; Usually starting as an LTD then later on flotation occurs to raise more capital; Need over £50,000 of share capital. At lease 25% of this must be publicly available. People in the company can own the rest of the shares.
How are shares issued to the public?
Current shareholder issues a prospectus to inform people about the company before they are bought by someone.
What is the Companies Act (2006)?
It states several important documents must be drawn up before a company can start trading, including the memorandum of association and the articles of association.
Who controls a private limited company?
Usually the shareholders
Who controls a public limited company?
Board of directors who are elected by the shareholders
What is divorce of ownership and control?
This refers to the people who won the company not necessarily controlling the company but the company being controlled by the directors.
What is ordinary share capital?
Money raised by selling shares. This is usually used for long term investment.
What do shareholders receive?
A dividend
Are dividends a must?
No, loans must be repaid first and a company may choose to reinvest their profits into the business for retained profit
What is market capitalisation?
The total value of all the ordinary shares issued by a company.
State the formula for market capitalisation
Market capitalisation = number of issued shares x current share price
What is flotation?
A company changing from an LTD to a PLC
What is collateral?
An asset that a lender accepts as security for giving a loan.
Why may loans not be given out?
Because a business may not have enough collateral
What is the advantage of flotation?
Gaining capital quickly to grow the company more quicker
What are the disadvantages of flotation?
Original owners possibly losing ownership and control of the business as there might be new board of directors. Existing shareholders may not be as happy due to receiving a lower dividend.
How can an existing shareholder from a LTD be satisfied when the company changes to a PLC?
Being offered to buy shares before any member of the public.
What must an entrepreneur do?
Set up a legal structure. The structure has to decide which legal structure is most suitable for their needs. The structures can also change
If a new business needs to invest heavily in equipment what might it set up as?
An LTD as shares can be distributed.
How can a PLC change to an LTD?
If the PLC is taken over by an LTD or if the managers buy out the shareholders.
What types of objectives would a private sector organisation often have?
Objectives that focus on maximising profits.
What type of objectives do public sector organisations have?
Objectives that are aimed towards benefitting society. Therefore social benefits are put before costs when making decisions.
What are shareholders?
Anyone who owns at least one share in a company. Shareholders have limited liability
Why do companies sell shares?
For people to buy shares so they can provide funds.
What is a majority shareholder?
A shareholder owning more than 50% of the shares.
What is the risk of being a shareholder?
Losing the money they have invested
What is a preference share?
A share where the shareholder receives the profit at a fixed price before anyone else.
What are the qualities of being a preference shareholder?
Get profit first at fixed price, Less risk, Get no control, No vote at the Annual general meeting, Mainly bought by institutions as they not bothered about the board of directors and only want a profit
What is an ordinary share?
A share where the dividend is given after the dividend for preference shares are handed out.
What are the qualities for an ordinary share?
Receive dividend at a non-fixed price, Risky
What is controlling interest?
When a business has enough shares to control another company
What is a hostile takeover?
When a company is not wanting to be taken over by another company
What is a takeover?
When one company buys a controlling share in another company
What is underwriting?
A business that guarantees a company that if their shares would not be bought by someone, they will buy the shares at a lower price
When a business releases new shares what must be done?
The shares must be underwritten
How can a business avoid being taken over?
Keep share value really high, or the board of directors telling current shareholders not to sell their shares
Why do people invest in currencies?
In order to make a profit
What is insider trading?
Selling shares at a certain price
Why would someone buy shares?
Capital gain, Receive income in dividends, Have control, Belief in the company, Speculation (Possible chance of share prices rising or decreasing), Help the company survive
What are venture capitalists?
People who invest in a company that they think will be successful
What happens to share prices in a LTD?
The current shareholders can decide what price they are, but they have to be relatively real to the current performance of the business
What happens to share prices in a PLC?
They constantly change due to a change in demand and supply
What factors affect demand & supply
Performance of the company – Better performance should mean bigger dividend payments
Speculation – New product launches or cost saving initiatives might generate investor interest
Current share price – If share price is low, investors may think they can get a bargain if they buy now, hoping that the price will increase in the future. Opposite for high
Interest rates – Low interest rates = reward for saving money in the bank is reduced
The economy – economy is strong, people have more money to invest and confidence that they will get a good return.
Why might a company be taken over?
Due to share prices being low and shareholders wanting to sell the shares
What is asset stripping?
When someone buys all of a company and sells the assets to make a profit for themselves
How can a business maintain a high share price?
Giving good dividends – leads to shareholders wanting to keep their shares
Increasing profits
What is capital gain?
Selling shares at a higher price than when the shareholder first bought them
How does changing share prices affect shareholders who want to buy and sell shares for short-term capital gain?
If the share price increases the shareholder will make money when they sell the shares. Decreasing share prices may mean a stakeholder makes a loss when selling shares or they may decide to hold onto the shares and hope the prices increases.
How does a changing share price affect shareholders who buy shares as a long term investment?
They are less affected by short term price changes. However, price changes may reflect an increase or decrease in company profits, which could mean higher or lower dividend payments which could deter investors.
How can a decrease in share price affect a business?
A decrease in share price can reduce the overall value of a company, but in the short term, this may not cause too many problems as the business already has the share capital. However, if the share price continues to decrease in the long term, this is likely to reduce confidence in the company, making it more difficult to attract new investors. If share prices continue to fall a company could be taken over.
State 3 impacts of share price
Share price impacts the demand for shares - If demand for share price is too low it may be hard to raise future capital in the long-term
Share price impacts the ability to borrow - The bank is more likely to let you borrow with a higher/improved share price.
Share price impacts the likeliness of a business being taken over - If share price is low then it would be much easier for other businesses to takeover.
What are the key objectives businesses may have in terms of shares and shareholders?
Businesses will want to keep share price high
Businesses will also want to give out good dividends
Explain the conflict between growth for a business and satisfying shareholders,
Businesses will want to grow for Long-term benefits, to do so they will need to use retained profits which will mean shareholders get little or no dividends which will make them unhappy, and may cause them to sell their shares. Shareholders will want consistent high dividends so that they can benefit in the short-term, to do so the business will need to distribute profits meaning that they can’t retain them and use them for growth creating a conflict between shareholder objectives and growth objectives.
