What is a Business? Flashcards
what are the main functions of business objectives
-state what needs to be achieved
-a focus for all activity
-targets for individual and group achievement
-a way to measure performance
what are some corporate objectives
-sales revenue
-profit
-return on investment
-growth
-market share
-cash flow
-value of a business
-corporate image and reputation
what should business objectives be
SMART
Specific- must state exactly what needs to be achieved
Measurable- must be possible to determine how far its been achieved
Achievable- should be realistic
Relevant- must be relevant to the people responsible
Time Bound- must be set with a time frame/deadline
describe the hierarchy of objectives
(increasingly strategic) Mission, Corporate, Functional, Team, Individual (increasingly detailed)
what would an example of a functional objective be if the corporate objective is to increase market share
successfully launch 5 new products in existing markets over the net two years
what would an example of a functional objective be if the corporate objective is to reduce unit costs
increase factory productivity by 10% within 2 years
what would an example of a functional objective be if the corporate objective is to increase cash flow
reduce the average time taken by customers to pay invoices from 75 to 60 days
what would an example of a functional objective be if the corporate objective is to increase customer satisfaction
achieve 95% level of high customer service
what is a mission statement
-the purpose of a business
-the reason for its existence
-supports the stated vision for the future
what is a mission statement NOT
-not a statement of goals
-not a statement of core values
-not a statement of how the business intends to compete
who are the key audiences for a mission statement
-employees
-customers
-investors
what makes a good mission statement
-provides clear sense of business purpose and unites stakeholders
-easy to understand
-differentiates from competition
-for all stakeholders, not just internal members of business
what are common criticisms of mission statements
-not always supported by actions of business
-often too vague/ statements of the obvious
-could just be PR
-to be effective, must have everyone in the business “buy in” to it
what are costs
amounts that a business incurs in order to make goods/provide services
why are costs important
-drains away the profits made
-are the difference between making a good and poor profit margin
-are the main cause of cash flow problems
-they can change as the output or activity of a business changes
what are variable costs
costs that change as output changes e.g. raw materials, bought-in stocks, wages based on hrs/amount produced, marketing costs based on sales (commission)
what are fixed costs
costs that dont change as output changes e.g. rent and rates, salaries, advertising, insurance and legal fees, software
what is total costs
total costs=fixed costs+variable costs
what is revenue
revenue=amount sold x selling price per unit
what is demand
the quantity that consumers are willing and able to purchase at various prices during a given period of time
how much people would buy at different prices
what are examples of unincorporated business
sole trader, partnership
what are examples of incorporated business
private limited company (LTD), public limited company (PLC)
what does unincorporated mean
-unlimited liability
-the owner is the business (no legal difference)
-usually operate as sole traders
what does incorporated mean
-limited liability
-legal difference between the business and the owners (owners only responsible for debt to the value of their investment)
-usually operate as LTDs
what are sole traders
-is an individual owning the business alone
-can employ people
-owns all the business assets personally and is personally responsible for business debts (unlimited liability)
what are advantages of being a sole trader
-quick and easy to set up, can always become a limited company once launched
-simple to run, owner has complete control over decision making
-minimal paperwork
-easy to shut down
what are disadvantages of being a sole trader
-full personal liability
-harder to raise finance, owner has limited funds and security
-business is the owner so business suffers if the owner becomes ill/ loses interest
-can pay higher tax rate than a company
what is a partnership
-where a business is owned by more than one person
-the legal partnership sets how the business is run including how profits are shared, who will invest, how decisions made, what happens when a partner leaves
-the partners own all the business assets between them and owe all business liabilities
-unlimited liability
what are advantages of being a partnership
-simple and easy
-minimal paperwork once partnership agreement made
-business benefits from efforts of both owners
-partners can provide specialist skills
-greater potential to raise finance, they can each provide investments
what are disadvantages of being a partnership
-unlimited liability
-a poor decision by one damages the interest to the other partners
-harder to raise finance than a company
-complicated to sell or close
what is a company
is a seperate legal identity, incorporated
owners of the company known as shareholders (own shares not the whole business)
what are limited companies
-seperate legal entities to the founders
-a legal entity can own things itself, can sue and be sued
-companies are owned by shareholders and run by directors, shareholders appoint directors who run in the interests of shareholders
-shareholders own a share/part of a company, dont own the assets so arent liable for debts
what are advantages of being a limited company
-limited liability, protects the shareholders
-easier to raise finance as it has the sales of shares, easier to raise debt also
-stable, business will continue to exist even when shareholders change
what are disadvantages of being a limited company
-greater admin costs
-public disclosure of company information
-directors’ legal duties
what is unlimited liability
-a characteristic of unincorporated businesses
-business owners are personally responsible for the debts of a business
-if the unincorporated business fails, owners are liable for the debt
-adds to the risk of operating as a sole trader/partnership
what is limited liability
-a protection for shareholders in a company
-shareholders only lose/are responsible for the value of their investment
-not liable for the debts of the company
what are businesses in the private sector
-businesses are operated and owned by private individuals and companies
-usually run for profit to earn returns for the business owners/shareholders
what are businesses in the public sector
-business are owned and run on behalf by the public/ government/organisations who are funded by government
-not usually run for profit, exist to provide goods and services to the public using public funds
what are examples of public sector companies/businesses
Network Rail
owned and controlled by the government
what are examples of public sector organisations
NHS
provides goods and services and owned by public bodies, are funded by government but may need charges for some services
what are the types of company
private limited companies, public limited companies
what are private limited companies
-privately owned
-shares not sold publicly, shares only given to close family/ friends
-usually just a few shareholders
-quick and cheap to set up and run
what are public limited companies
-minimum share capital £50,000
-shares sold on public stock market
-usually many shareholders
-more detailed disclosure of info required
-costly to run
what is a share
-an individual part of the issued share capital of a company
-most shares are “ordinary shares” (equal voting rights based on number of shares held, shareholders have right to dividends/return)
what rewards can you receive for being a shareholder
dividends, capital gain
what are dividends
-payments made to shareholders by the company from earned profits
-amount paid is per share
-not usually a requirement to pay dividends but most companies do
what is capital gain/growth
-arises from an increase in the value of the business
-reflected in an increase in share price
-only gain from this if shareholder sells their share for more than what they paid for it
-no guarantee that a shareholding will increase in value
what is a share price
-is determined by the demand for the shares
-if demand for a share is bigger than the supply, share price rises as its value is higher
-a falling share price shows that there is excess supply (more sellers than buyers) so the value is lower
what are share prices like in a public company
-displayed publicly
-all trades disclosed (how many were bought/sold and what price)
-share prices widely published
what factors affect share price
Factors within company’s control:
-financial performance (profit growth)
-dividend policy
-relationship with shareholders
-management reputation
Factors outside company’s control:
-state of economy
-general market sentiment
-industry developments
-alternative investments in the company’s sector
what is a profit warning
-share price of a public company is influenced by market expectations
-profit warnings are warnings stating that market expectations will not be met and usually results in a fall of share price as people sell their shares
what is market capitalisation
represents the total market value of the issued share capital of the company
market cap=share price x number of shares sold
what is PESTLE analysis
is a framework for assessing the key features of the external environment facing a business
what does PESTLE stand for
Political- competition policy, industry regulation, govt. spending, business policy
Economic- interest rates, consumer spending/income, exchange rates, business cycle
Social- demographic change, impact of pressure groups, consumer tastes, changing lifestyles
Technological- disruptive technologies, adoption of mobile technology, new production process
Legal- employment law, minimum/living wage, health and safety laws, environmental legislation
Ethical/environmental- sustainability, tax practices, ethical sourcing, pollution and carbon emissions
what are examples of “not for profit” organisations
-mutual businesses
-social enterprises
-charities
what are mutual businesses
-dont have shareholders or other owners
-exist only to serve their members
what are social enterprises
-have primarily social objectives where profit is reinvested in the business/community rather than to maximize profit for shareholders
-makes money in a socially responsible way
-exists to benefit others
what are charities
-undertake business activities e.g. charity shops, fundraising events
-ensures that the money earned from these activities are spent for achieving the aims of the charity
-activities are regulated by the charity commission
what are real incomes
measure the amount of disposable income available to consumers
what factors affect real income
-price inflation
-wage growth
-employment levels
-interest rates
-govt. tax policy
what factors affect market demand/conditions
Real income- how much money households have available to spend
Employment and job security- when job market is improving, consumer confidence and income improves
Household wealth- a rise in wealth increase consumer demand as they have more available to spend
Expectations and sentiment- economic uncertainty causes spending to fall, weakens demand
Market interest rates- interest rates affect the incentive to save and cost of borrowing
what is interest rate
is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed
what is share capital
AKA equity finance
is the finance that is provided by those who share ownership/equity of a company
what is the main alternative to equity finance
debt finance-finance provided by external funders who receive a return but dont own a share in the company
what are features of equity finance
-returns (dividends/capital growth)
-part of the ownership of the company
-long term source of finance
-returns are higher given higher risk
-can be repaid
what are features of debt finance
-most commonly in the form of loans/overdrafts
-return (interest on amount loaned and outstanding)
-repaid over an agreed period
-can be short or longterm
-no participation in the ownership of the company
-often secured against the assets of a company
how do public companies issue new shares
flotation or rights issue
why do companies issue new shares
because shareholders will buy more shares and therefore the company gains more cash and more shareholders
what is flotation
the admission of the shares of a public company to a stock exchange for the first time
what are advantages of raising finance through the issue of new shares
-able to raise substantial funds if the business has good prospects
-broader base of shareholders
-equity rather than debt=lower risk
what are disadvantages of raising finance through the issue of new shares
-can be costly and time consuming
-existing shareholders’ holdings may be diluted
-equity has a cost of capital that is higher than debt
true or false
a PLC doesnt have to offer its shares on a stock exchange
true
not for profit organisations are also known as:
social enterprises
true or false
will profits that are better than market expectations result in higher share price
true
what happens to demand when prices are high
demand decreases
what is revenue
overall income made by a business from giving services or selling goods
what is the quarternary sector
provides information and IT e.g. software development, financial services, data processing
what is the tranformation process
when a company adds value to resources to make products to sell to consumers to gain profi
what is cash flow
the movement of cash into and out of a business over time
what are objectives
medium to long term targets to coordinate the business
what is diversification
an objective where a business produces a larger range of unrelated goods and services
what is average costs
total cost of production / level of production = cost of producing one unit of output
what is gross profit
the difference between money received from sales and the cost of making them
what is operating profit
the company’s earnings after deducting operating expenses and costs
what is a takeover
when a company gains control of other companies by buying more than 50% of its share capital
what is privatisation
process when a state sells business previously owned to private individuals
what is incorporation
the process of establishing a business as a separate legal identity so it can benefit from limited liability
whats the formula for variable costs
variable costs=cost per unit x number of units produced
what is the formula for profit
profit= revenue - total costs
what are inputs into the transformation process
people, resources, time
what is profit satisficing
-businesses may seek to earn greatest possible profits to satisy shareholder’s desire for high dividends
-could provide acceptable amounts of dividends but also growth in value of business
what is profit maximisation
when difference between sales revenue and total costs is greatest
why do businesses want to grow
-as managers may feel that the business may not survive otherwise
-benefits shareholders as it provides them with higher dividends and job security
when do businesses have an objective to survive
-periods of recession or competition
-times of crisis e.g. hostile takeover
-business may have to take actions such as lowering prices
what is a cash cycle
the time between the outflow of cash to pay for resources needed and reciept of cash following the sale of a product
what are examples of businesses with long cash cycles
pharmaceuticals and construction as theres large outflows over long time before products sold
why is cash flow important
-needed to be able to pay debt in time
-could have dire consequences if cant pay debt
what are social objectives
-include targets e.g. providing employment for ppl or improving facilities for ppl
what are ethical objectives
-based on moral principles e.g. protecting the environment throught sustainable production, ensuring suppliers recieve fair payment
why are social and ethical objectives important
-some investors may only invest in businesses that trade with ethical objectives
-alot of customers ay only purchase from sustainable businesses
-creates a distinctive image
why do businesses diversify
allows businesses to spread its risk by selling a range of products therefore if a market becomes competitive alternative products will still provide income
