Unit 1- What is business? Flashcards
why do business exist?
- businesses provide goods and services for the market (consumers and businesses)
- Businesses provide employment which allows individuals to earn an income and purchase goods and services.
- Businesses create new goods and services which can enhance the lives of consumers.
- Businesses can allow a country to improve and develop the country’s reputation.
what is the transformation process?
- Businesses convert inputs (for example, raw materials) into outputs (finished goods) to satisfy the needs, and wants of other consumers and businesses.
- This is called the transformation process and businesses will add value to their goods and services throughout this process.
what are meant by B2B?
Other businesses sell their goods and services to other businesses and these are known as business to business (or B2B) organisations.
what are the 3 sectors that businesses are divided into and why are they divided in this way?
- based on the type of product they supply
- primary sector
- secondary sector
- tertiary sector
what is the difference between the primary, secondary and tertiary sectors?
- Primary sector businesses extract or grow raw materials including fishing, mining, and forestry.
- Secondary businesses manufacture goods using raw materials such as clothing and mobile phones.
- Tertiary businesses provide services such as hotels and cinemas.
what is the difference between products and services?
Goods:
These are tangible products which can be physically held.
Services:
These are intangible products.
what is meant by a mission statement?
Businesses have a mission statement which sets out the business’s beliefs and values.
what does a business use mission statements for?
A business will use its mission statement to create corporate aims which are the long-term goals of the entire business.
what do corporate aims allow a business to do?
These corporate aims will allow the business to work towards its overall mission.
how do corporate aims link to corporate objectives link?
- Corporate aims are stated. Then, corporate objectives that contain the specific tasks and activities a business must accomplish in order to satisfy its corporate aims are written down.
- Corporate objectives can be broken down further into functional (departmental), team and individual objectives.
draw out the 4 stage hierarchy with mission statement at the top
1 mission statement
2 corporate aims
3 corporate objectives
4 functional, team and individual objectives
what is meant by smart objectives?
S- Specific so that employees know exactly what they are working towards.
M- Measurable so that employees can actually work out whether they have met their objective.
A- Attainable or achievable so that employees are committed to achieving them.
R- Realistic otherwise employees may feel demotivated and overwhelmed.
T- Timely so that employees know when they must achieve them by.
name 6 business objectives
1- profit maximisation 2-growth 3- survival 4- cash flow 5- social 6- ethical objectives
describe the objective: profit maximisation
- Profit maximisation is a business objective that requires a business (and its management) to achieve the highest amount of profit for shareholders.
- Satisficing would mean making enough or some minimum required level of profits.
describe the objective: survival
Survival is a business objective which requires a business to continue trading despite challenges in the external environment.
describe the objective: growth
Growth is a business objective which requires the growth of stores or locations, sales value, sales volume or product range.
describe the objective: social/ ethical objectives
Social, ethical and environmental objectives require a business to focus on supporting society through initiatives including sustainability and fair trade.
what are the benefits of setting objectives?
- Business objectives provide direction and can support planning and operations.
- Business objectives allow a business to co-ordinate resources and ensure that all employees are working towards the same overall aim.
define revenue
Revenue is the income earned by a business from the sale of its goods and services.
what’s the formula for revenue?
Revenue = number of sales x sales price.
what are some other terms revenue?
turnover and sales
what is meant by costs?
Costs are all of the expenses that a business incurs (pays). This involves everything from wages paid to employees to the electricity bills at the business’ premises.
how do you calculate total costs?
The total costs are calculated as the sum of the fixed costs and the variable costs.
what is meant by fixed costs and how do they increase?
-Fixed costs don’t vary as the business changes its output.
e.g- rent
fixed costs can increase as the business grows
what is meant by variable cost + give examples?
- Variable costs are the costs that change directly with output (they change as a business changes output).
- Examples include the wages paid for factory labour, raw materials and transport costs.
how do you compete with costs?
As well as being able to generate more revenue than costs, cost leadership is a way to compete against other businesses.
what did Michael porter argue?
Michael Porter, the man who came up with the 5 Forces analysis also wrote a paper in 1980.
He argued that a business cannot be a cost leader (the business in the industry with the lowest costs), whilst also having a differentiated (or innovative product).
+
He argued that a ‘sustainable competitive advantage’ over other people in the industry came from focusing on 1 thing.
how does Ryanair get cost leadership? (4)
1- It buys new planes
New planes are more fuel-efficient so Ryanair’s fuel costs on each flight are lower than competitors with older planes.
2- It flies to cheaper airports
Ryanair often flies to the second airport in a city (usually the airport further from the city centre).
This means that Ryanair’s landing fees and airport costs are lower than others.
3- Its planes take off straight away
Some airlines’ planes spend 3 hours on the ground at the airport before their next flight. Ryanair’s planes take off as quickly after landing as possible.
This means they can do more flights per day using the same number of aircraft.
4- Ryanair backloads its prices
Ryanair has the lowest airfares on price comparison websites so it looks the cheapest.
Then it tries to charge you to choose a seat, or to take a carry on bag, or to avoid them putting your bag in the hold.
So it might not be that cheap!
what is meant by profit?
Profit is the amount of money that the business makes when taking into account costs. It is in effect, a surplus.
what’s the formula for profit?
Profit = total revenue – total costs.
what’s the formula for average unit cost?
Average unit cost = total cost ÷ output (total number of units produced).
what does average unit cost tell us?
- This gives a business an idea of what price they need to charge.
- In order to make a profit on each item, they need to charge a price that is more than the average unit cost.
what is meant by interest?
- When you borrow money, you usually pay back more than you borrowed.
- This extra amount is known as the interest on the loan and it is the percentage of the loan that is charged as extra.
how do we calculate interest?
Interest = interest rate x the size of the loan.
4 features of an effective mission statement
- Differentiates the business from its competitors
- Defines the markets or business in which the business wants to operate
- Irrelevant to all major stakeholders - not just shareholders and managers
- Excites, inspires, motivates & guides – particularly important for employees
what are 5 reasons why mission statements are often criticized?
- Not always supported by actions of the business
- Often too vague and general or merely statements of the obvious
- Viewed as a public relations exercise
- Sometimes regarded cynically by employees
- Not supported wholeheartedly by senior management
what is meant by sole trader?
- A sole trader is a single person who is the exclusive owner of a business.
- They can still have employees and the owner is entitled to keep all of the profits after tax but is also personally liable for the business’ debts.
what are some advantages of being a sole trader?
- They are the easiest type of business to set up.
- The sole trader gets to be their own boss.
- The sole trader decides what to do with the profit.
- It is easy to change the legal structure if circumstances change.
- SIMPLICITY - there’s LESS FORM-FILLING than for a limited company. Bookkeeping is less complex.
- SAVING ON FEES - there aren’t any legal costs for drawing up an ownership agreement.
what are some disadvantages of being a sole trader?
- Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
- It can be hard to raise finance. Banks often see sole traders as riskier.
- All the responsibility for making business decisions is yours. Having someone to share decision making with, can improve performance.
- It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.
- TIME - sole traders often need to WORK LONG HOURS to meet tight deadlines
- EXPERTISE - the sole trader may have LIMITED SKILLS in areas such as finance
- VULNERABILITY - there’s NO COVER if the trader GETS ILL and can’t work
what is meant by private limited companies (Ltds)?
Private limited companies (Ltds) are companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them. These companies have Ltd. after their name.
what are some advantages of private limited companies?
- The key advantage over sole traders and partnerships is that shareholders have limited liability.
- The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.
- It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
what are some disadvantages of private limited companies?
- Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).
- Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
what is meant by public limited companies?
- Public limited companies sell shares on the stock exchange.
- This means that anybody over 18 can buy shares (often through brokers).
- Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment.
what are some advantages of public limited companies?
- Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
- It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
- Shareholders have limited liability because the company is incorporated.
