What Is a Business?

Question 1

Adding Value

Answer 1

Practice of producing good/service worth more than the cost of resources used in production process.

Question 2

Business

Answer 2

Organisations involved in production of goods/provision of services

Question 3

Consumers

Answer 3

People/organisations that buy the product

Question 4

Entrepreneurs

Answer 4

People who manage/organise/plan resources sources needed for business activity in pursuit of organisational objectives
Risk takers exploiting business opportunities in return for profits.

Question 5

Entrepreneurship

Answer 5

Management/organisation/planning of other 3 factors of production. Success of failure of a business rests on talents and decisions of the entrepreneur.

Question 6

Goods

Answer 6

Phsyical/tangible products produced/sold to customers, e.g. laptops, books.

Question 7

Needs

Answer 7

Basic necessities that person must have to survive, e.g. food, water, clothes

Question 8

Factors of Production

Answer 8

Resources that are building blocks of economy, are what people use to produce goods/services.
Economists divide factors of production into 4 categories; land, labour, capital, and entrepreneurship.

Question 9

Finance and accounts

Answer 9

Department responsible for managing organisation’s money, ensuring compliance with legal requirements, (such as filing of corporate taxes) and informing those interested in financial position of business (e.g. shareholders and potential investors).

Question 10

Human Resources (HR)

Answer 10

Responsible for managing personnel of organisation, including roles such as HR planning, organisational structures, management and leadership, motivation and demotivation, dealing with industrial/employee relations.

Question 11

Marketing

Answer 11

Responsible for identitfying/satisfying needs/wants of

Question 12

Marketing

Answer 12

Responsible for identifying/satisfying customer’s needs/wants. In charge of ensuring firm’s product sell, done through series of activities such as market research, promotion, pricing, branding and distribution.

Question 13

Operations Management

Answer 13

responsible for process of converting raw materials/components into finished goods. Ready for sale and delivery to customers, e.g. extraction of crude oil, car manufacturing, provision of travel and tourism services.

Question 14

Primary Sector

Answer 14

Businesses involved in cultivation/extraction of natural resources, e.g. farming, mining, fishing.

Question 15

Production

Answer 15

Process of creating goods/services and adding value in the process

Question 16

Quaternary Sector

Answer 16

Sub-category of tertiary sector, where businesses are involved in intellectual/knowledge based activities, generating and sharing information, e.g. Research organisations.

Question 17

Secondary Sector

Answer 17

Refers to business concerned with construction/manufacturing of products.

Question 18

Services

Answer 18

Intangible products sold to customers, e.g. Services provided by airlines, restaurants, cinemas, banks, health and beauty spas, schools and hospitals.

Question 19

Tertiary Sector

Answer 19

Businesses involved with provision of services to customers.

Question 20

Value added

Answer 20

FINISH

Question 21

Wants

Answer 21

People’s desires, i.e. Things they would like to have such as new clothes, phone, holidays, jewellery.

Question 22

Types of Products: Consumer goods

Answer 22

Consumer goods - products sold to general public, rather than other businesses. Can be further categorised as consumer durables (products that last long time/can be used repeatedly, e.g. electronic devices, clothes and home furniture), or non durables (those needing to be consumed shortly after their purchase as they don’t last or can’t be reused, (e.g. fresh food items, beverages, medicines)

Question 23

Types of Products: Capital goods/producer goods

Answer 23

Physical products bought by businesses to produce other goods and/or services. E.g. Buildings (premises), computers, machinery, tools and specialist equipment.

Question 24

Types of Products: Services

Answer 24

Intangible products provided by businesses. Service is not tangible, but results or experiences are, such as healthcare, transportation, dining, sports (recreation), legal advice, financial guidance and education

Question 25

Entrepreneur Characteristics

Answer 25

• Visionaries
• Owners and/or operators of business organisations
• Takes calculated risks
• Rewarded with profit
• Takes responsibility for the workforce (labour)
• Failure incurs personal costs
• Distinctive in temperament

Question 26

Challenges for starting new business

Answer 26

• Lack of finance -> small business owners/start-up firms don’t have credentials to secure sufficient funding without challenges, to purchase fixed assets, e.g. premises/machinery. Even if entrepreneurs are able to borrow money, funds may be insufficient/have relatively high interest charges, seriously affecting cash flow position of business. As such, new sole traders often must remortgage their homes, to raise finance needed, offering their lender more collateral (financial security) if they fail to repay the loan.
• Unestablished customer base -> won’t have broad/loyal customer base, intensified through competitors already operating in the market. Loyalty built over long period of time, may require knowledge in marketing and large amounts of money.
• Cash flow problems -> financing working capital (day to day operations) is a challenge for start ups, as they may have lot of stock such as raw materials, semi finished outputs or finished goods that it can’t easily turn into cash. Customers may demand a lengthy credit period (typically 30-60 days), enabling them to buy and pay later, so business doesn’t receive cash until credit period ends. During this period, business must still pay for on going costs such as wages, rent, utility bills, taxes and loans.
• Marketing problems -> arise when business fails to meet customer needs, resulting in poor sales and lack of profitability. Supplying right products to right customers at right price is crucial for new business. However, small and new businesses might lack expertise to do this, as quite often the key to success to identify a niche (gap in market) and fill it. E.g. Amazon identified need for using internet as channel of book distribution.
• People management problems -> starts ups may lack experience in hiring right staff with all necessary skills, leading to poor level of labour productivity, and need to retain staff or rehire people, which is expensive and time consuming. Moreover, new business may not know ideal organisational structure, practical methods, or staff motivation best suiting organisational needs.
• Production problems -> can be challenging for business start ups to accurately forecast levels of demand so they are more likely to over/under produce. Overproduction leads to stockpiling, wastage and increased costs. Under leads to dissatisfied customers, loss of potential sales.
• Legalities -> necessary for business to comply with all necessary legislation, including business registration procedures, insurance cover for staff and buildings, consumer protection laws and rules about intellectual property such as copyright/patents/trademarks. Paperwork/legal requirements can be time consuming, expensive, confusing, and oversights can result in business having to pay compensation or financial penalties, damaging already vulnerable cash flow position of business start ups.
• High production costs -> new businesses likely to have high set up costs, running costs due to large amount of money needed to purchase/pay for cap equipment, machinery, stocks, rent. Small bus will be at cost disadvantage, cannot benefit from economies of scale - which would allow for more established bus to benefit from lower average costs of production due to size of operations, getting discounts from suppliers for bulk orders, borrowing money at low interest because of larger size and financial collateral.
• Poor location -> busy areas = high potential no. Of customers, but premises cost more. Fixed cost, e.g. rent and mortgage account for large % of total costs for many bus. Aim for new bus, is to reach BE ASAP, keeping fixed costs down. One reason why many entrepreneurs set up small bus operating initially from their own homes, plus provides tax advantage. E.g. Bezos set up Amazon bus in garage, may not be suitable for businesses in which location is survival factor
• External influences -> irrespective of size/length of operation, bus prone to exogenous shocks, creating challenging trading environment, such as global financial crisis, pandemic. Larger/more established tend to be better resourced to handle influences, hence new bus face challenge being more vulnerable to external shocks, meaning potential for business failure is greater.

Question 27

Example startup costs for new business

Answer 27

• Buildings - alterations, fixtures, fittings, insurance
• Capital equipment - office furniture, telephones, computers, wifi, machinery, tools, motor vehicles
• HR - recruitment, induction, training costs
• Legal/professional fees -> costs of solicitors, licences and permits
• Marketing costs - market research, advertising, promotional campaigns
• Premises - purchase costs, mortgage, deposit payment, rental deposit costs

Question 28

Opportunities for a start up

Answer 28

• Growth (capital) through appreciation of business, especially property (common for capital growth of business to be worth more than value of owners salaries).
• Financial Security to children - Earnings as returns may outweigh costs, transfer such as passing on/inheritance of company
• Challenge - driving them to satisfaction.
• Autonomy, creating freedom and flexibility.
• Security as they can accumulate personal wealth (financial security) and be able to secure retirement funds earlier than others.
• Hobbies can be turned into their businesses, allowing for their work to be related to their personal interests, allowing for them to have passion in the work that they do