Unit 1 - What is a business?

Question 1

What is a mission statement?

Answer 1

A mission statement is a declaration of a business’s core purpose and focus.

Question 2

What is a business objective?

Answer 2

An objective is a goal to help a business achieve it’s mission.

Question 3

List three reasons why businesses exist.

Answer 3

• To provide goods and services
• To develop a good idea (enterprise)
• To provide help and support to others

Question 4

Outline how a mission statement differs from objectives.

Answer 4

A mission statement paints the broad picture.
The objectives of a business are more specific (they are targets or goals that will enable a business to achieve its overall mission).

Question 5

List five business objectives.

Answer 5

• Growth
• Survival
• Profit
• Customer service
• Corporate social responsibility

Question 6

Draw up a table to illustrate the likely objectives of the following: a public limited company; a public sector organisation; a charity.

Answer 6

TYPE OF ORGANISATION OBJECTIVES
Public limited company Profit, growth

Public sector organisation Service, social and
economic benefits for
community

Charity Fundraising and support
for charity

Question 7

Explain briefly why a business would write a mission statement.

Answer 7

The mission statement sets out the vision of the business and its core purpose and focus. Overall corporate and strategic planning can then be set and measured against the core purpose.

Question 8

Outline why it is necessary for any business objective to be SMART.

Answer 8

S - Specific
M - Measurable
A - Achievable
R - Realistic
T - Time

By having SMART objectives it is possible to evaluate the success in achieving them.

Question 9

From the figures below, calculate the expected profit of ABC Ltd.
Output: 10,000 units
Price: £5 per unit
Fixed costs: £5,000
Variable costs: £3 per unit

Answer 9

Profit = total revenue - total costs

£50,000 - £5,000 - £30,000

Profit = £15,000

Question 10

Identify three differences between a corporate business and a non-corporate business.

Answer 10

• Corporate businesses have limited liability, unlike non-corporate businesses.
• Corporate businesses can sell shares and have shareholders.
• Corporate businesses (especially PLCs) are generally much larger

Question 11

Using examples, define the public sector.

Answer 11

The public sector is that part of the economy owned and controlled by the government or local authorities, e.g. NHS, fire service and rubbish collection.

Question 12

List and explain three objectives that a not-for-profit business may have.

Answer 12

• To help the local community, possibly by providing essential services.
• To help people to acquire job-related skills to assist them into employment.
• To buy products from overseas under fair-trading schemes offering benefits to producers in less developed countries.

Question 13

How does a mutual organisation differ from other incorporated business organisations

Answer 13

Mutuals are owned collectively by a business’s clients or members, whereas incorporated businesses are owned by their shareholders.

Question 14

Why are most new businesses set up as sole traders?

Answer 14

Most new businesses are set up as sole traders because they are usually small, mostly local businesses, and a sole trader is the simplest and easiest business to form.

Question 15

List three reasons for changing the legal form of a business.

Answer 15

• Changing circumstances such as growth of the business.
• Capital - it may be easier to raise capital as a plc.
• Takeover may cause a change of legal structure.

Question 16

Briefly give two reasons why people invest in shares.

Answer 16

• To earn income resulting from a share of the profit of the business in the form of a dividend.
• For capital growth - if the business does well, the share price is likely to increase, resulting in an increase in an increase in the value of an investment.

Question 17

List four reasons why share prices may fluctuate.

Answer 17

• Increased profit
• Expectancy of increased profit
• Changes in the market.
• World uncertainty

Question 18

XYZ plc has a share price of 57p and 2,100 million shares. What is its market capitalisation?

Answer 18

Market capitalisation = Share price x Number of shares issued
= 57p x 2,100m
= £1,197m

Question 19

Briefly explain why it is important for a business to differentiate its product or service in a competitive market.

Answer 19

If sales are to be achieved in a competitive market, a business less must make its product or service stand out from the rest. It must make it different, i.e. differentiate it from the rest. If it can do this successfully it is likely to gain a competitive advantage and therefore increased sales and potentially profit.

Question 20

How might a manufacturer of luxury products be affected by a rise in interest rates?

Answer 20

A rise in interest rates is likely to result in lower disposable income for consumers. This is due to the fact that many will be making higher interest payments on loans and overdrafts, whilst others may be inclined to save more. If spending is reduced, manufacturers of luxury products are likely to be the ones that suffer most.

Question 21

List three reasons why a study of demographics might be important to a business.

Answer 21

A study of demographics is important as:

• Population affects the level of demand.
• The make-up of the population, age, income, occupation etc. affects the nature of goods bought.;
• An understanding of the structure of the working population will have implications for employment.

Question 22

What do you understand by the term ‘fair trade’?

Answer 22

Fair trade is a movement that strives for fair treatment of farmers in less developed countries.

Question 23

What is Profit?

Answer 23

Profit is the amount of money remaining once all costs have been deducted from the revenue.

Question 24

What is Revenue?

Answer 24

Revenue is money received from sales.

Question 25

What is Variable costs?

Answer 25

Variable costs are costs that vary as a direct result of changes in the level of output.

Question 26

What is Fixed costs?

Answer 26

Fixed costs are costs that do not change as a result of changes in the level of output.

Question 27

What is the Private Sector?

Answer 27

The private sector is part of the economy made up of private enterprises - businesses that are owned and controlled by individuals or groups of individuals.

Question 28

What are Corporate businesses?

Answer 28

Corporate businesses are businesses which have a legal identity that is separate from that of their owners.

Question 29

What is Limited Liability?

Answer 29

Limited liability restricts the financial responsibility of shareholders for a company’s debts to the amount they have individually invested.

Question 30

What is a not-for-profit business?

Answer 30

A not-for-profit business is an organisation that has business objectives other than making a profit.

Question 31

What is the Public Sector?

Answer 31

The public sector is part of the economy that is owned and controlled by the government or local authorities.

Question 32

What is Privatisation?

Answer 32

Privatisation is the process of converting government owned and controlled industries/businesses to the private sector.

Question 33

What are shareholders?

Answer 33

Shareholders are the owners of a limited company and include any person, company or other institution that owns at least one share.

Question 34

What is a dividend?

Answer 34

A dividend is a share of the after-tax profit of a company distributed to its shareholders according to the number of shares held.

Question 35

How is Market capitalisation calculated?

Answer 35

Market capitalisation is calculated as follows:

Share price x Number of shares issues