What is a business? Flashcards

Question

What are variable costs?

Answer 1

2) Variable costs rise and fall as output changes. Hourly wages, raw material costs and the packaging costs for each product are all variable costs.

Answer 2

Total variable costs = variable cost per unit × number of units sold

Answer 3

Total costs = fixed costs + variable costs

Answer 4

Semi-variable costs have fixed and variable parts. Telephone bills are a good example of semi-variable costs. Businesses have to pay a fixed amount for their phone line plus a variable amount depending on the phone calls they've made.

Answer 5

Profit = total revenue - total costs

Answer 6

Businesses can do different things with profit. Most businesses give it to the shareholders as dividend payments or re-invest the profit in new activities. But they could also pay staff bonuses, invest it in a bank, give it to charity, or use it to fund projects in the local community.

Answer 7

The more a business produces, the lower the cost per unit produced. This is because the fixed costs are shared out between more items. eg 1) MicroDave make microwave ovens. The fixed costs of running MicroDave are £200 000 per year. The variable costs of materials and labour are £15 per microwave. 2) If MicroDave make 5000 microwaves a year, the total production costs are... £200 000 + (£15 × 5000) = £275 000. The cost per microwave is £275 000 ÷ 5000 = £55. • If MicroDave make 20 000 microwaves a year, the total production costs are... £200 000 + (£15 × 20 000) = £500000. The cost per microwave is £500 000 ÷ 20000 = £25.

Answer 8

Businesses use costs information to set the selling price of their products and services. They set the price to make sure they'll make a profit. (Number of sales × price) - costs = profit. 2) If a business is a "price taker" in a very competitive market, it doesn't have control of the selling price of its products - it takes whatever price the market will pay. Businesses in this situation need accurate costing information to work out if it's profitable to make and sell a product at all. E.g. farmers have to sell milk, carrots, potatoes, etc. to supermarkets for whatever price the supermarkets are willing to pay if they try to put their prices up, supermarkets will just buy from other farmers instead. 3) Businesses set budgets (see p.74-77) which forecast how much costs are going to be over a year. Managers need to monitor costs so that they know whether they're meeting the budget.

Answer 9

1) Profit can motivate people - People in the business who own shares will receive a portion of the profit as a dividend payment (see p.10). Some businesses offer a profit-sharing scheme, where employees are given bonuses from a share of the total profits. 2) Profit is a good source of finance - Profit can be retained in the business and used for investments. This can help the business grow and increase profits. Businesses do not need to pay interest on retained profit, like they do with loans, nor does it need to be paid back in the future. 3) Profit can be used to attract investors - Potential investors look at profit levels when deciding whether to buy shares in a company. People are more likely to invest if a business is making a large profit, as they'll expect a good dividend payment.

Answer 10

Public sector organisations are owned and run by the Government. They aim to provide services to the public, rather than make a profit. NHS hospitals are one example - their aim is to provide health care that's available to everyone. Organisations like the NHS, UK police forces and the fire service are run in a similar way to other businesses, but they don't charge for their services so don't make a profit - they are funded by the UK tax system.

Answer 11

Private sector organisations are owned and run by private individuals. They range from small sole traders to huge organisations such as John Lewis and ASDA. Most private sector businesses aim to make a profit, however this is not always the case - non-profit organisations such as charities are also part of the private sector

Answer 12

1) As their name suggests, non-profit businesses are not set up to make a profit. Instead, they have other aims, often to help people in need or benefit the community. Like other businesses, they usually have money coming into and going out of the business - the main difference is that the money generated by the business doesn't go to the owners or shareholders as profit. 2) Charities like the British Red Cross, Oxfam and Amnesty International make money from donations and business activities (like charity shops). This money is used to fund charitable activities, e.g. setting up hospitals in developing countries. Charities get tax reductions because of their non-profit structure. 3) Social enterprises are normal businesses with a social objective. The business trades and makes profit like any other business, but its profits are used to pay for its social activities. E.g. the profits from sales of One® Water bottled water are used to fund clean water projects in villages in Africa. 4) Mutual organisations like building societies aim to offer their customers the best possible value on products and services. Profits are reinvested into the business in order to reduce prices - that means that building societies can often offer higher savings rates and lower loan rates than banks, because they don't have to pay any of their profits to shareholders.

Answer 13

If a business has unlimited liability, the business and the owner are seen as one under the law. This is the case for sole traders (see p.9). 2) This means business debts become the personal debts of the owner. Sole traders can be forced to sell personal assets like their house to pay off business debts. 3) Unlimited liability is a huge financial risk - it's an important factor to consider when deciding on the type of ownership for a new business.

Answer 14

1) Limited liability means that the owners aren't personally responsible for the debts of the business. 2) The shareholders (owners) of both private and public limited companies (see p.10) have limited liability, because a limited company has a separate legal identity from its owners. The most the shareholders in a limited company can lose is the money they have invested in the company.

Answer 15

1) A sole trader is an individual trading in his or her own name, or under a suitable trading name. Sole traders are self-employed, for example as shopkeepers, plumbers, electricians, hairdressers or consultants 2) The essential feature of this type of business is that the sole trader has full responsibility for the financial control of his or her own business and for meeting running costs and capital requirements. business and for running costs and capital requirements Having full responsibility for all the debts of the business is called unlimited liability (see p.8). 3) There are minimal legal formalities - the trader simply has to start trading. However, if the business isn't run under the proprietor's (owner's) name, the trader has to comply with certain rules under the Business Names Act (1985).

Answer 16

requirements. 'Capital requirement' is money invested to set up a business or fund growth

Answer 17

Freedom - the sole trader is his or her own boss and has complete control over decisions. Profit - the sole trader is entitled to all the profit made by the business. Simplicity - there's less form-filling than for a limited company. Bookkeeping is less complex. Savings on fees - there aren't any legal costs for drawing up an ownership agreement.

Answer 18

Risk - there's no one to share the responsibilities of running the business with. 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. Finance - finance is limited to the money that the owner has, or can borrow. Vulnerability - there's no cover if the trader gets ill and can't work. Unlimited liability - the sole trader is responsible for all the debts of the business.

Answer 19

There are private limited companies (Ltds) and public limited companies (PLCs). 2) Public and private limited companies have limited liability (see p.8). 3) They're owned by shareholders and run by directors. 4) The capital value (or the monetary value) of the company is divided into shares - these can be bought and sold by shareholders. Shareholders have part ownership of a company.

Answer 20

Can't sell shares to the public. People in the company own all the shares. Don't have share prices quoted on stock exchanges. Shareholders may not be able to sell their shares without the agreement of the other shareholders. They're often small family businesses. There's no minimum share capital requirement. They end their name with the word limited" or lid.

Answer 21

Can sell shares to the public. They usually issue a prospectus to inform people about the company before they buy. Their share prices can be quoted on stock exchanges. Shares are freely transferable and can be bought and sold through stockbrokers, banks and share shops. They usually start as private companies and then go public later to raise more capital. They need over £50 000 of share capital, and if they're listed on a stock exchange, at least 25% of this must be publicly available. People in the company can own the rest of the shares. They always end their name with the initials PLC.

Answer 22

1) In a small private limited company, the directors are usually the shareholders (owners) of the business. 2) In larger private limited companies, directors are elected to the board by shareholders. The board makes the important decisions. 3) Shares in a PLC can be owned by anyone. The people who own the company don't necessarily control the company - it's controlled by the directors. This is called the "divorce of ownership and control".

Answer 23

Shares are sold by companies to raise money. Money raised in this way is called ordinary share capital. Ordinary share capital is usually used for long-term investment. 2) In return for their investment, shareholders are paid a dividend. Dividends are a proportion of the profits earned by the company which are split and paid out to the shareholders. Dividends are given as a fixed amount per share - the more shares an individual holds, the larger the payout. 3) Dividends aren't always paid out. Loans must be repaid first and a company may choose to re-invest their profits into the business. 4) Market capitalisation is the total value of all of the ordinary shares issued by a company. It is found by multiplying the number of shares issued by the current market price of one share.

Answer 24

When someone sets up a business, they have to decide what legal structure to set up as. Each structure has advantages and disadvantages - the entrepreneur has to decide which is most suitable for their needs. 2) Setting up a sole trader business gives the owner control over the business, but unlimited liability is a drawback. It's a simple way to set up a small business, but there's a lot of risk involved for the owner. 3) A private limited company has limited liability and the shareholders keep control over who the other shares are sold to, but it's much more complicated to set up than a sole trader business. A new business that needs to invest heavily in equipment, land etc. might need to set up as a Ltd to raise finance. 4) Public limited companies aren't usually a suitable option for new businesses because they need at least £50 000 of share capital to start with, and most new businesses can't raise that much money. 5) Businesses can change their structure - sole traders can become a private limited company if the business is successful and they want to expand. This will bring more money and ideas into the business. Lots of private limited companies become PLCs when they want to raise more money to expand the business. It's much less common, but PLCs can also become private limited companies if they are taken over by a private limited company or if the managers buy out the shareholders. For example, in 2002, Arcadia Group PLC was taken over by Philip Green's private limited company Taveta Investments Ltd. and is now Arcadia Group Ltd. PLCs can be changed into Ltds if the original owners want to take more control, or to run things more privately.

Answer 25

1) The missions and objectives of non-profit organisations are usually to help people or communities in need. They will set objectives to generate enough profit to achieve these aims. 2) Private sector for-profit organisations often have objectives which focus on maximising profits, although they will also pursue other objectives (see p.3-5). Public sector organisations tend to have missions aimed towards benefiting society. This can mean that social benefits are put before costs when making decisions. 3) Sole traders and owners of small private limited companies have control over objectives and decision making. They may change ownership if the business is expanding. For sole traders in particular, changing the business to a Ltd company may mean gaining expertise from shareholders, however they may not share the same values as the original owner, leading to different objectives and difficulties when making decisions. Shareholders may also buy a large proportion of the shares, meaning the original owner(s) may lose control of the business, which may lead to a change in the mission or objectives. 4) For public limited companies, the majority of shareholders are not involved in the management of the business. This can lead to a conflict of interests. E.g. management may wish to pursue objectives designed to achieve long-term gains, but which may cause short-term reductions in profits. However, they may need to take into account shareholders' wishes for short-term boosts to profits.

Answer 26

1) A shareholder is anyone who owns at least one share in a company. Shares in a public limited company can be bought by individuals, companies or institutions (such as pension funds). Shares in private limited companies are usually bought by family and friends of the original owners. 2) For companies, the main role of shareholders is to provide funds. In small Ltds, the shareholders are often also the directors of the company - the shareholders with the most shares have the most power. In PLCs, most shareholders are not involved in running the business, but they have certain rights. 3) Companies hold an Annual General Meeting (AGM). Ordinary shareholders have the right to vote on key decisions and the performance of the company. Each share that a person holds entitles them to one vote. If a shareholder owns more than 50% of the shares, they're called the majority shareholder. The majority shareholder has the most power in decision-making. 4) Shareholders have the right to receive a dividend (a portion of the business's profit), if the profit is being used in this way. 5) Shareholders have limited liability. If the company can't repay its debts, a shareholder can only lose the money they invested - the amount they spent on shares.

Answer 27

1) Some shareholders invest in businesses in order to achieve a capital gain. They may buy shares in a business when the share price is low and sell them if the share price rises to make a profit. E.g. an investor purchases 100 shares at £3 each. The share price then rises to £5 each, so the investor sells them at a profit of £2 per share - they gain £2 × 100 = £200. 2) Shareholders may be paid a dividend in return for their investment. Dividends are paid on a per-share basis, so the more shares a shareholder owns, the bigger the dividend. 3) Some people become shareholders because they want to be involved in the running of a business. People may invest in a small private limited company for this reason. A shareholder could influence decision-making in a PLC by buying enough shares to make them the majority shareholder. 'The TV show "Dragons' Den" is a good 4) Some shareholders will invest in a company because they believe in the aims and objectives of the company and want to see it succeed, e.g. companies with social, ethical or environmental objectives.

Answer 28

1) Private limited companies have control over their share price because shares are privately traded between friends and family. A price per share will be agreed between the current owner and the potential investor, based on the current performance of the business. 2) Shares in public limited companies are sold on the stock market. The price of a company's shares will be determined by demand and supply. If more people want to buy a share than sell it (demand is higher than supply), the share price goes up. If more people want to sell a share than buy it (supply is higher than demand), the share price goes down. 1) The performance of the company - better performance should mean bigger dividend payments. This leads to an increase in demand for the company's shares, increasing the share price. If a company reports low profits, shareholders may sell their shares, increasing supply and reducing share price. |2) Speculation and rumour of new product launches or cost saving initiatives might generate and demand investor interest. If the rumoured activity is likely to increase the company's profits, this will encourage people to buy shares in the company. As a result, the share price is likely to increase. 3) Current share price - if the share price is low, investors might think they can get a bargain if they buy now, hoping that the price will increase in the future. If the share price is high, shareholders may decide to sell their shares to make a capital gain. influen Factors 4) Interest rates - when interest rates are low, the reward for saving money in a bank is reduced. This can increase the demand for shares because the financial rewards are likely to be greater than the interest that would be earned on a bank account. 5) The economy has a strong influence on demand and supply - when the economy is strong, people have more money to invest, and confidence that they will get a good return. This increases demand and share price. In a weak economy, people are less likely to risk their money on an investment, decreasing demand and share price. Businesses may offer more shares in order to try and raise share capital, increasing supply.

Answer 29

Market capitalisation = Number. ofissued shares ;x Current share price

Answer 30

The performance of the company - better performance should mean bigger dividend payments. This leads to an increase in demand for the company's shares, increasing the share price. If a company reports low profits, shareholders may sell their shares, increasing supply and reducing share price. 2) Speculation and rumour of new product launches or cost saving initiatives might generate demand and investor interest. If the rumoured activity is likely to increase the company's profits, this will encourage people to buy shares in the company. As a result, the share price is likely to increase. [3) Current share price - if the share price is low, investors might think they can get a bargain if they buy now, hoping that the price will increase in the future. If the share price is high, influencing shareholders may decide to sell their shares to make a capital gain. 4) Interest rates - when interest rates are low, the reward for saving money in a bank is reduced. This can increase the demand for shares because the financial rewards are likely to be greater than the interest that would be earned on a bank account. Factors 5) The economy has a strong influence on demand and supply - when the economy is strong, people have more money to invest, and confidence that they will get a good return. This increases demand and share price. In a weak economy, people are less likely to risk their money on an investment, decreasing demand and share price. Businesses may offer more shares in order to try and raise share capital, increasing supply.

Answer 31

Changing share prices can have a big effect on shareholders who want to buy and sell shares for short-term capital gain. If the share price increases, the shareholder will make money when they sell the shares. Decreasing share prices may mean a shareholder makes a loss when selling shares, or they may decide to hold onto the shares and hope the price increases again.

Answer 32

2) Shareholders who buy shares as a long-term investment are less affected by short-term price changes. However, price changes may reflect an increase or decrease in company profits, which could mean higher or lower dividend payments.

Answer 33

Market conditions is a term that describes a wide range of factors affecting the market. These factors influence the costs faced by businesses and the demand for their products.

Answer 34

1) If demand in the economy is too low, governments try to increase it. They cut taxes so people have more to spend, and increase their spending in the economy, for example by raising benefits. Central banks (e.g. the Bank of England) reduce interest rates to cut mortgage payments and increase disposable income. Governments try to reduce demand if it's too high. They raise taxes so people have less money to spend, and cut government spending. Central banks increase interest rates to raise the cost of borrowing, reduce disposable income and reduce demand. the govemment can also influence demand for particular products b using taxes. for example. to reduce carbon emissions, road tas on low-emission and fuel-efficient cars has been reduced. and road tas on hish-emission vehicles has been increased. Increased taxes on products leads to reduced demand. as people will in to find cheaper alternatives.

Answer 35

The state of the economy affects demand and costs. In a recession, businesses need to reduce costs e.g with wage cuts or redundancies to decrease labour costs Lower incomes = less money to spend on products so demand decreases FINISH THIS

Answer 36

Labour supply has an effect on business costs. 2) Athen unemplos ment rates are high. there's a good suppls of labour. Businesses can hire staff easils and wont have to pay high wages. which means costs can be kept low. People in work will be extra productive to protect their job. 31 A low rate of unemplos ment could mean that there is a shortage of labour. The people nailable tor emploument might not have the skills needed for the role so will need training. This can increase costs for a business.

Answer 37

When a competitor enters the market or launches a new product, the demand fora rival business's product islikely to decrease as people will buy the competitor’s product. The rival business islikely to increase itsmarketing costs or spend more on improving or diversifying itsproducts in response to the competition. Alternatively, the rival might try to cut its costs to keep the price of its product lower than the competitor’s to increase demand.

Answer 38

iswhere allfirms compete on an equal basis — their products are pretty much identical, and they all charge a similar price. Businesses need to keep costs low to keep prices low, otherwise demand will be taken by the competition. However, they also need to keep a high quality of product to keep a good level of demand.

Answer 39

small number of large firms dominate the market and charge similar prices. For a business to get ahead, they will focus on marketing and brand image to increase demand, so marketing costs will be high.

Answer 40

iswhere one business has complete control over itsmarket. There’s no competition. Abusinesswithamonopolycanincreaseitspriceswithoutmuchconcernofthedemanddecreasing, | and they are able to keep marketing costs low. oe