Unit 1 - What is a business? Flashcards
What is a business?
A business is an organisation that exists to provide goods and services on a commercial basis to customers.
Why do businesses exist?
Businesses exist to provide goods and services on a commercial basis to customers.
— Goods are physical products (eg. consumer electronics, industrial components, cars)
— Services are intangible products (eg. insurance, dental services, cleaning).
What are the benefits of business to society?
- Create employment & Develop Human Capital
- Drive innovation through R&D and new products.
- Pay Taxes on profits earned & collect taxes for government.
- Create wealth by providing returns on investment.
What is a start-up?
A start-up is a new business enterprise, formed by one or more entrepreneurs.
What is the role of the entrepreneur?
They spot business opportunities, takes (calculated) risks in order to gain possible future returns and acts as a catalyst for the creation & growth of new business enterprises.
What is a mission?
A qualitative statement of the business’s aims.
What are business objectives?
The specific intended outcomes of business strategy as well as anticipated end results of a programme of activities. They’re targets that the business adopts in order to achieve its primary aims.
How can objectives be used?
— Implement the mission
— Provide a clear focus for decision making
— Provide a target
— Motivate employees
— Facilitate control of actual performance
— Provide a criteria for evaluating performance
— Reduce uncertainty
— Provide a sense of unity
What does SMART stand for?
S - specific
M - measurable
A - achievable
R - relevant
T - time bound
What are strategic vs tactical objectives?
> STRATEGIC:
— Focused on long-term
— Set by the board
— Difficult to change in the short-term
— Involve higher risk & uncertainty
> TACTICAL:
— Focused on short-term
— Set by line management
— Relatively low-risk
— Limited resources invested
— Realistic & achievable
What are unincorporated vs incorporated?
> UNINCORPORATED
+ The owner is the business, there is no legal difference
+ Owner has unlimited liability for business actions (including debts)
> INCORPORATED
+ Legal difference between business (company) and the owners
+ Owners (shareholders) have limited liability
What is Unlimited Liability?
A characteristic of unincorporated business.
— Business owners/s personally responsible for the debts and liability of the business.
— If the unincorporated business fails, the owners are liable for the amounts owed.
What is a sole trader?
The most common type of business structure.
+ A sole trader can employ people but these employees don’t share in the ownership of the business
+ The sole trader owns all the business assets personally and is personally responsible for the business debts.
+ Sole traders have unlimited liability
What are the benefits and drawbacks of operating as a sole trader?
> STRENGTH:
— Quick & easy to set up
— Simple to run - owner has complete control over decision-making
— Minimal paperwork
— Easy to close / shut down
> DRAWBACKS:
— Full personal liability
— Harder to raise finance (banks are uncertain to invest)
— Can pay higher tax rate than a company
What is the importance of limited liability?
+ An important protection for shareholders in a company.
+ Shareholders can only lose the value of their investment
— HOWEVER, limited liability does not protect against wrongful or fraudulent trading or when personal guarantees have been given by directors.
An incorporated business is a company. What is a company?
A company is a legal entity. The owners of a company are shareholders.
What are limited companies?
Limited companies are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued.
Companies are ownered by their shareholders and run by directors. The shareholders appoint the directors (often the same people) who run the company in the interests of the shareholders.
Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company.
— This is known as limited liability.
The company owns the assets and pays the debts. If the company becomes insolvent (i.e. it cannot pay its debts), then the company is closed.
+ The most common form is a private limited company.
— Private means that the shares of the company are not traded publicly on a stock exchange
— By contrast, a public limited company (plc) tends to have a larger value of share capital invested and its shares may be traded publicly.
What are the benefits and drawbacks of operating as a limited company?
> STRENGTH:
— Limited liability protects the shareholders
— Easier to raise finance (both through the sale of shares and also easier to raise debt)
— Stable form of structure
> DRAWBACKS:
— Greater admin costs
— Public disclosure of company information
