Unit 1: Nature and Purpose of a Business Flashcards
Why do businesses exist?
To satisfy our wants and needs for a range of goods and services
define a want
something you can survive without, but would like to satisfy a need
define a need
something that you need in order to live
give and example of a want and need (beverages)
I need water to survive but I want orange juice to satisfy that need
why would we be unable to provide what businesses provide, for ourselves?
- we do not have the skills/time to source them
- costs of supplying them ourselves would be prohibitive
define a good
a physical product e.g. a house or designer suit.
define a service
an intangible item such as insurance or decorating
define a product
a more general term which includes goods and services
what 4 reasons are businesses so important for a country
- create employment
- creates wealth
- creates new products
- enhances a country’s reputation
what are the 4 functional areas of a business?
HR, operations, finance, marketing
what do businesses do?
businesses transform resources into goods and services that are in demand from individuals and other businesses
what process do inputs (resources) need to undergo to form outputs (products)
the transformation process
what is the transformation process?
adds value by turning inputs into outputs
list 6 inputs
- people
- finance
- capital / equipment
- land
- natural resources
- materials
list 3 outputs
- goods
- services
- waste products
what are the three types of business
- business to business
- business to consumer
- consumer to consumer
give an example for each type of business
B2B - Samsung
B2C - Tesco
C2C - Ebay
what are the 3 sectors in which businesses can operate in? define each
Primary : obtaining raw materials
Secondary : manufacturing raw materials to create something
Tertiary : supplying a service (selling the products)
give at least one example for each sector of businesses
Primary - Farming, collecting wood to create furniture
Secondary - BMW mini plant, IKEA factory
Tertiary - IKEA store, hairdressers, ASDA
why are outputs worth more than inputs
The transformation process adds value to inputs creating outputs.
list the order of downward communication (top to bottom)
mission statement, corporate aims, corporate objectives, functional objectives.
define mission statement
sets out a businesses overall purpose to direct and stimulate the entire organisation
defines aims
long term plans of the business from which its corporate objectives are derived
define objectives
medium to long term goals established to coordinate the business
SMART objectives: what does SMART stand for?
Specific
Measurable
Agreed
Realistic
Time Specific
how must an objective be Specific?
they must outline clearly what is being measured, such as sales or profits
how must an objective be Measurable?
must include a quantifiable target, such as a 20% increase
how must an objective be Agreed?
must be inclusive of everyone to encourage commitment to the target, not just imposed
how must an objective be Time Specific?
Employees must know how long they have to achieve the target
what are profit business objectives?
making as much profit as possible but also considering reputation and not exploiting the customer.
what are diversification business objectives?
producing an increased range of unrelated goods and services?
what are growth business objectives?
focus on increasing customer numbers as opposed to profit; secure the growth today and the profits will follow
what are cash flow business objectives?
making sure they stay in positive cash figures, being able to pay debts on time - can be more important for small businesses
what are survival business objectives?
the business to continue to trade over a defined period of commercial pressure (new startup, COVID)
when are times when survival objectives can become key?
- periods of recession
- intense competition times of crisis such as during a hostile takeover bid
what are social and ethical business objectives?
ethical - based on moral principles
social - related to the interactions of individuals
what are the 5 benefits of setting objectives
- gives everyone a common goal
- motivates employees
- provides analysis which can help track progress
- can compare themselves to competitors
- see what is going wrong and make adjustments
What would a business maximising profit in the short run lead to in the future?
In the long run, it would leave themselves vulnerable to being in a weaker position.
How will investing in long run objectives effect the business in the short run?
It’ll affect the profit in the short run when investing in things such as training employees or other expenses
define fixed costs
costs that stay the same regardless of output
define variable costs
costs that fluctuate with output
define business costs
any expenditure that a business has due to trading
list 3 examples of fixed costs
rent
salaries
maintenance costs
list 3 examples of variable costs
ingredients
raw materials
fuel
define semi-variable costs
characteristics of both fixed and variable costs, increases with output but at a slower rate.
give an example of a semi-variable cost
electricity - the more units you make… may exceed base rate or need new premises
what is the equation for total costs
total costs = fixed costs + variable costs
what does total costs assume however?
that all costs faced by a business are either fixed or variable
define average costs
cost of producing one single unit
equation for average cost per unit
average cost per unit = total cost / level of production
what will knowing the costs help a business do?
it’ll help them set the price in order to get the desired level of profit
why is finding average costs in real life hard?
some equipment may be used for a range of products
define revenue
the income a business receives over a period of time
what are the three other terms that revenue is also known as?
sales income
turnover
sales revenue
what is the equation for revenue
revenue = quantity sold x selling price
what is the equation for profit?
profit = total revenue - total costs
what two factors does profit depend upon?
profit margin
quantity/volume of sales
define profit margin
the amount or percentage of the final selling price that is profit
what 4 reasons are profits important?
Attractive for investment
Attractive to customers
Easier to make agreements
Confidence from suppliers, longer trade credit
what is the equation for variable costs?
variable costs = variable cost per unit x quantity produced
