Unit 1 - What Is Business? Flashcards
What is a good?
A physical product
What is a service?
An intangible item
What is a product?
The general term including goods and services
What are the benefits of business?
-
creates employment
- employed workers pay income tax, claim less benefits, are able to purchase more goods and services to stimulate economic growth
-
creates wealth
- pay workers, pay corporation tax which is used by government to pay for public services)
-
creates new products and services
- e.g. pharmaceuticals
-
can enhance a country’s reputation
- e.g. UK’s music and film industry
How many people do large businesses employ?
More than 250 people
How many people do small businesses employ?
Less than 50 people
What sort of businesses is the UK mainly made up of?
Small businesses
What do businesses do?
Production (resources converted into a product)
Transformation (conversion of inputs into outputs) - adds value
Inputs > Transformation Process (adds value) > Outputs (may be a service or good)
What is adding value?
Process of increasing the worth of resources by modifying them
What is the formula for adding value?
Adding value = selling price - cost of bought in materials, components and services
How is value added?
Through
- manufacturing the goods
- providing the service
- customer service
- branding
- after sale service
- USP
What is USP?
- Unique selling point
- feature of a product or service that allows it to be differentiated from other products
What are the Four Factors of Production?
The resources needed to turn inputs into outputs and adding value
CELL
- capital
- goods made in order to produce other goods and services e.g. machinery
- enterprise
- act of bringing all other factors of production together to create goods and services e.g. making decisions and providing finance
- land
- all the natural resources that can be used for production e.g. coal, oil, livestock
- labour
- physical and mental effort involved in production e.g. manual effort producing finished goods, individuals providing a service
What are the two types of business?
-
Business to consumer (B2C)
- sell directly to the consumer
-
Business to business (B2B)
- sell to other businesses
What are the three business sectors?
-
Primary
- extraction of raw materials from the earth
-
Secondary
- transforming/refining raw materials
-
Tertiary
- the service industry
What is an entrepreneur?
- Takes initiative
- Takes time to understand and calculate risks involved
- Make an investment to set up the business (often their own money)
- Persevere despite risks of failure
What is a mission statement?
- A qualitative statement of an organisations’ aims, describing the general purpose of the organisation
- A means of communication to key stakeholders
What is a stakeholder?
- An individual or group with a direct interest in the activities of the organisation
- Shareholders
- Employees
- Suppliers
- Customers
What is a corporate vision?
What the company aspires to be
What are aims?
- Long term plans from which a business’ objectives are derived
- Often referred to as corporate aims
- Relate to the whole business
What are objectives?
- Medium to long term goals established to coordinate the business
- Turns the mission statement into something that is more quantifiable
- Goals set to achieve overall mission
- Should be SMART
What are SMART objectives?
-
Specific
- clear and easily defined
-
Measurable
- quantifiable (able to know when completed)
-
Achievable
- must be within capabilities of business
-
Realistic
- must not conflict with other objectives
- must be achievable
-
Time bound
- based on an explicit timescale
What are the consequences of not having SMART objectives?
- May stop achieving aims, making the mission unachievable
- May demotivate workforce
- May upset stakeholders, especially shareholders
What is the relationship between mission and objectives?
- Mission statement
- Corporate aims
- Corporate objectives
- Functional objectives
What are common business objectives?
- Profit maximisation
- profits are maximised when the difference between sales revenue and total costs is greatest
- Growth
- increasing market share, sales turnover, number of outlets/business areas
- Survival
- especially in times of uncertainty
- Cash flow
- must ensure there is sufficient cash flowing in the business in order to cover expenses at any time
What are some other business objectives?
- Social and ethical objectives
- clearly evident in non-profit organisations
- often enhance reputation of the business, therefore helping to increase sales and profits
- Diversification
- spread risk by reducing dependence on a single market
- Market standing
- e.g. being seen as a leader in technology
- Meeting needs of other stakeholders
- such as customers, employees, local community
- will in turn enhance the reputation of the business
Why should businesses set objectives?
- Can be used to evaluate performance (as they are measurable and time bound)
- Provide motivation for workers
- Emphasise business priorities (what money should be spent on)
- Coordinates business activity
- Ensures the business remains focused on its mission
What is profit?
The amount of money remaining once all costs have been deducted from total revenue
What is revenue?
- The money received from sales
- Total revenue, income, sales turnover, sales revenue, turnover
What is the formula for sales revenue?
Sales revenue = selling price x output
What is the formula for total revenue?
Total revenue = price x quantity sold
What are fixed costs?
- Costs that do not change directly with output
- Will increase as the firm grows
- Examples
- rent
- loan repayment
- insurance
- salaries
- utilities
- advertising
- business rates
What are variable costs?
- Costs that change directly with output
- Examples
- raw materials
- components
- wages
- packaging
- stock
- power for production
What is the formula for variable costs?
Variable costs = cost of 1 unit x output
What are total costs?
What is the formula for total costs?
- The fixed costs and variable costs added
- Represent the total costs of production
Total costs = total fixed costs + total variable costs
What is the formula for average costs?
Average costs = total costs / output
What is the formula for profit?
Profit = total revenue - total costs
How to increase profit?
- Increase sales revenue
- Decrease costs
What is the formula for unit costs?
Unit costs = total costs / output
What is the break even point?
When ‘profit or loss’ = 0
What is the importance of profit?
- Reward
- Motivator
- Measure of success
- Guide for future investment
- Source of finance
- Attractive to all stakeholders
A business sells 1230 units for £37 each. It costs them £12 to make each unit and they have fixed costs of £990. What is the profit or loss?
Draw the table
Table:
Output: 1230
FC: 990
VC: 14,760
TC: 15,750
TR: 45,510
PorL: 29,760
What are the 3 sectors?
- Private sector
- Public sector
- Non-profit organisations
What are the 2 types of liability?
- Unlimited liability
- Limited liability
What is unlimited liability?
- Unincorporated businesses
- no distinction in law between individual owner and business itself
- Owner responsible for all debts
- Must pay off debts using their own money if the business cannot afford them
- may have to sell their house/car to do so
What is limited liability?
- Incorporated businesses
- legal identity is separate from owners
- Restricts financial responsibility of shareholders
- aren’t responsible for company debts
- may only lose the money they invested as it is used to pay off debts/liabilities
What is the private sector?
- Any business owned and run by private individuals
Includes: - Sole traders
- Partnerships
- Private limited companies (LTD)
- Public limited companies (PLC)
What is a sole trader?
- Business owned by a single individual
- Unincorporated
- Unlimited liability
- May have employees
- Common in retailing and services
What are the advantages of being a sole trader?
- Simple and cheap to establish
- few legal formalities
- Owner receives all profits
- Quick response to changes
- Confidentiality maintained
What are the disadvantages of being a sole trader?
- Owner is likely short of capital for investment
- Have few assets to act as collateral
- Difficult for owner to take holidays
What is a partnership?
- 2 to 20 people operating a firm as joint owners
- Unincorporated
- Unlimited liability
- Common in the professions
- ‘Sleeping partners’
- contribute capital but take no active part in the business
What are the advantages of being a partnership?
- Wide range of skills and knowledge
- Able to raise greater capital
- Pressure on owners is reduced due to more support
What are the disadvantages of being a partnership?
- Control is shared
- Arguments are common
- Still a shortage of capital
What is a private limited company (LTD)?
- Normally relatively small
- Incorporated
- Limited liability
- Often a family business
- Share capital must not exceed £50,000
- Shares cannot be bought and sold without the agreement of other shareholders
- Shares cannot be sold on the Stock Exchange
What are the advantages of being an LTD?
- Access to greater capital
- Have a separate legal identity
- Only required to divulge some financial information
What are the disadvantages of being an LTD?
- Have to conform to expensive admin formalities
- Limited potential for flexibility and growth due to needing agreement of shareholders
What is a public limited company (PLC)?
- Incorporated
- Limited liability
- Must have a minimum capital of £50,000
- this is usually much higher in reality
- Shares can be traded on the Stock Exchange
What are the advantages of being a PLC?
- Can gain positive publicity as a result of trading on the Stock Exchange
- Access to lots of capital
- Suppliers are more willing to offer credit to PLCs
What are the disadvantages of being a PLC?
- Required to share lots of financial information
- Significant admin expenses
- Vulnerable to takeover
- Focus is on the short term growth not long term
How does a business become incorporated (become an LTD or PLC)?
- Memorandum of Association
- sets out company details and trading objectives
- Articles of Association
- details internal arrangements of the business
- Once these documents have been approved the company receives a Certificate of Incorporation
What is the public sector?
- Any business owned and run by the government
- Central government
- navy
- army
- NHS
- Bank of England
- Local government
- schools
- police
- fire service
- housing
- refuse collection
- libraries
- public parks
- leisure and recreation facilities
What are non-profit organisations?
- Established for a particular social, welfare, cultural, community or environmental aim
- Not for financial gain
- Also known as the ‘third sector’
Give examples of non-profit organisations
- Voluntary/Community organisations
- primary purpose to create social impact
- Charities
- not-for-profit organisation
- main aim to raise money for a specific purpose
- Social enterprises
- not-for-profit organisation
- business objectives other than making profit
- reinvest the majority of their profits
- autonomous of the state
- controlled in the interests of social mission
- accountable and transparent
- Pressure groups (‘lobby groups’)
- organised group
- doesn’t hold candidates for election but seeks to influence/change government policy or legislation
- Trade unions
- organised association of workers to protect and further their rights
- Trusts
- structure where a trustee carries out the business on behalf of trust members
- not a separate legal entity
- trustee is legally liable for debts of the trust
What are the reasons for choosing different forms of business?
- Difference between unincorporated and incorporated
- Formalities and expenses
- sole traders and partnerships
- easy to set up and have few formalities
- deal for small businesses (e.g. joiner, electrician, corner shop)
- easy to set up and have few formalities
- sole traders and partnerships
- Size and risk
- Objectives of owners
- if involve growth, then form incorporated
- as limited liability limits risk
- if involve growth, then form incorporated
What are the reasons for changing business form?
- Circumstances
- such as growth
- therefore become incorporated
- such as growth
- Capital
- may be easier to raise capital by becoming incorporated or a PLC
- Acquisition or takeover
- may cause a change in structure
- e.g LTD taken over by PLC
- may cause a change in structure
What is a shareholder?
- Owner of a limited company (LTD or PLC)
- Any person/company/institution that owns at least one share in a company
Why do shareholders invest?
- To provide financial support
- To be involved in running of the business
- To gain control of the business
- by buying 51% of shares
- To receive dividends
- from annual retained profit
- To make capital gain
- profit from price at which they bought the share and the price at which they sell it later
What is ordinary share capital?
- Money given to a company by shareholders in return for a share certificate, giving them part ownership
- there is no guaranteed level of dividend
- If 100,000 ordinary shares are issued at £2 each, the company’s ordinary share capital will be £200,000
- the value of shares issued at the start
What is the formula for market capitalisation?
Market capitalisation = current share price x number of shares issued
What is market capitalisation?
The total value of the issued ordinary shares of a PLC currently
What factors influence share price?
- State of the economy
- Performance of the company
- Competition in the market
- Proposed takeover
- Investors’ expectations and response to rumours
What is the significance of share price changes?
- demand greater than supply, price increase
- demand lower than supply, price decrease
- Shareholders want to buy shares at lowest, and sell when are high, in order to profit
What is the effect of a sole trader on mission?
unlikely to have one, but owner provides a sense of direction
What is the effect of a sole trader on objectives?
may centre around meeting personal goals
What is the effect of a sole trader on decisions?
potentially rapid and responsive, but lack support and possibly info
What is the effect of a sole trader on performance?
ownership allows business to be responsive to customer needs, but may not be price competitive
What is the effect of an LTD on mission?
may centre on maintaining family run business or on reputation
What is the effect of an LTD on objectives?
could relate to satisfactory profits or financial stability to ensure survival
What is the effect of an LTD on decisions?
- more complex as more people involved
- may have more info available and some specialist input
What is the effect of an LTD on performance?
- scale varies hugely
- could be based on meeting personal needs
- could be benefits of being large scale
What is the effect of a PLC on mission?
- important in projecting company’s image
- provide focus for consistent decision making
What is the effect of a PLC on objectives?
- likely to relate to costs, prices, business image and market share
- link to financial performance in the long term
What is the effect of a PLC on decisions?
- can be very complex
- can have long term implications
- some require specialist input and need to be based on extensive info
- many routine decisions need to be made
What is the effect of a PLC on performance?
access to capital and pressure from shareholders is likely to place emphasis on being competitive in terms of price, customer service or desirable products
What is the effect of a not-for-profit on mission?
can be important in establishing the ethos of the business and underpinning all decision making
What is the effect of a not-for-profit on objectives?
- likely to be non-financial
- can be harder to measure
What is the effect of a not-for-profit on decisions?
- may lack specialist input
- desire to meet social or other objectives may cloud judgements
What is the effect of a not-for-profit on performance?
- possibly measured in non-financial terms
- need to perform well enough to financially meet other goals
What are the external factors that affect cost and demand?
(PESTLE or PESTLE C)
- Political factors
- Economic factors
- Social factors
- Technological factors
- Legal factors
- Environmental factors
- Competition
What are the political factors?
- government economic and social policy
- extent of government intervention
What are the economic factors?
- income levels
- interest rates
- exchange rates
- level of inflation
- level of unemployment
- EU membership
What are the social factors?
- demographic factors
- ethical issues
- impact of pressure groups
- influence of different stakeholders
- changing lifestyles
What are the technological factors?
- new products
- new processes
- impact and cost of change
What are the legal factors?
- legislation
What are the environmental factors?
- environmental issues
- fair trade
What are the factors that influence costs and demand?
- Competition
- Market conditions
- Incomes
- Interest rates
- Demographic factors
- Environmental issues and fair trade
How does competition impact costs and demand?
Costs
- businesses often compete on price
- leads to pressure on costs
Demand
- discount retailers may result in reduced demand for other businesses
What are the advantages of competition?
- Prices will be kept low
- Quality is high
What are the disadvantages of competition?
- Pursuit of low prices may have ethical implications
- Resources may be used on marketing rather than improving the product
- Intense competition can lead to businesses being forced out of the market
- human and economic consequences
- A successful business may takeover an unsuccessful business
How do market conditions impact costs and demand?
Market conditions include its size, growth rate, barriers to entry, seasonal factors and amount and intensity of competition
Costs
- if there are barriers to enter the market, it is beneficial to those already in the market
- don’t have to compete as much on costs
Demand
- if there is high market growth and low intensity of competitiveness, there is more likely to be higher demand
How do interest rates impact costs and demand?
Costs
- if has a high level of borrowing, will be faced with higher costs
Demand
- an increase in interest rates can result in lower demand
- less disposable income available
(disposable income = wage - tax)
How do incomes impact demand?
Demand
- if there is a fall in income, there will be a fall in demand
- the demand for necessities will be less affected than the demand for luxuries
How do demographics impact costs and demand?
Demographic factors include birth rates, death rates, trends in migration, trends in age, ethnicity, gender, education level, marital status, size of family
Costs
- determine what can be afforded and therefore what a product can be sold for and the profit made
Demand
- aging population = increased demand for healthcare/end of life care
- size of household = increase demand for food, utilities, necessities, etc
- geographical shifts
- increased demand for housing in SE England
How do environmental factors impact costs and demand?
Costs
- increased costs due to using more environmentally friendly resources which are more expensive
- low cost production vs environmentally responsible production
Demand
- can impact a business’ reputation and therefore demand for their product
- can increase brand loyalty
- can charge a higher price
How does fair trade impact costs and demand?
Fair trade is about better prices, decent working conditions and fair terms of trade for farmers and workers.
- ethical and helps firms be socially responsible
Costs
- can help add value to products, increasing costs, meaning higher prices must be charged
Demand
- higher prices may be difficult for some consumers to afford, therefore reducing demand
