1.4 Making the business effective

Question 1

Define limited liability

Answer 1

The business owner/s are only responsible for the business’s debts up to the value of their financial investment in the business

Question 2

Define unlimited liability

Answer 2

Business owners are fully responsible for debt and may lose their personal possessions in order to pay off debt

Question 3

What are the four different types of business?

Answer 3

1. sole trader
2. partnership
3. private limited company
4. franchise

Question 4

What is a sole trader?

Answer 4

A business that has a single owner

Question 5

What are the advantages of being a sole trader?

Answer 5

• easy and inexpensive to set up
• owner has complete control over the business
• all profits belong to the owner
• simple tax arrangements

Question 6

What are the disadvantages of being a sole trader?

Answer 6

• unlimited liability
• limited access to finance and capital
• limited skill set of entrepreneur/owner

Question 7

What is a partnership?

Answer 7

Two or more people join together to become owners of a business

Question 8

What are the advantages of being in a partnership?

Answer 8

• easy and inexpensive to set up
• shared responsibility and decision making
• more skills and knowledge are available
• increased access to finance and capital

Question 9

What are the disadvantages of being in a partnership?

Answer 9

• unlimited liability
• potential disputes between partners
• profits often shared equally, regardless of the contribution
• difficult to transfer ownership

Question 10

What is a private limited company?

Answer 10

• the ownership of the company is broken down into the number of shares owned
• these shares can be sold by the owner to their family or friends or to venture capitalists
• decision making lies with the managing director/ CEO

Question 11

What are the advantages of a private limited company?

Answer 11

• limited liability
• access to greater finance and capital
• easier to transfer ownership
• can have a professional image and rep

Question 12

What are the disadvantages of a private limited company?

Answer 12

• more expensive and time consuming to set up
• more complex legal requirements and regulations as compared to sole traders and partnerships
• annual financial reporting and auditing are required
• shareholders have little control over the company as the founder usually imposes their agenda

Question 13

What is franchising?

Answer 13

A business model where an individual buys the rights to operate a business model, use its branding and software tools and receive support from a larger company in exchange for an initial lump sum plus ongoing fees

Question 14

What are the advantages of owning a franchise?

Answer 14

• central advertising, which saves the francisee’s costs
• the franchisor offers training to ensure the quality and consistency of the brand is maintained
• supplies are provided so that the product remains consistent
• franchisor offers an exclusive location to the franchisee, so no other same stores are established there
• support services provided by the franchisor

Question 15

What is a franchisor?

Answer 15

The larger company that lends their name to the buyer

Question 16

What is a franchisee?

Answer 16

The individual that buys the rights to operate a store for a large company

Question 17

What are the disadvantages of owning a franchise?

Answer 17

• overheads and start-up prices have to be paid
• royalty costs have to be paid to the business
• cost of supplies whilst buying from the franchisor might be inflated
• quality control management means that if the franchisee is not up to the franchisor’s standards, then their rights could be removed

Question 18

What are the factors affecting business location?

Answer 18

• the nature of the business
• impact of the internet
• proximity to many things

Question 19

Factos that influence business location include Proximity to…

Answer 19

• market
• labour
• materials
• competitors

Question 20

Define the marketing mix

Answer 20

Provides a framework for businesses to create and implement successful marketing strategies

Question 21

What are the 4 ps?

Answer 21

• price
• place
• promotion
• product

Question 22

What is promotion?

Answer 22

• making the customer aware that the product exists
• helps build brand awareness and loyalty, which can lead to repeat purchases and referrals

Question 23

How can promotion be carried out?

Answer 23

• sales promotion
• advertising
• public relations
• direct marketing

Question 24

What does product include?

Answer 24

• features
• quality
• branding
• packaging
• services
• waranties

Question 25

What does place include?

Answer 25

• channels
• market coverage
• assortment
• location
• inventory
• transport

Question 26

What does price include?

Answer 26

• price strategy
• allowances
• discounts
• payment terms

Question 27

How has changes in technology affected the marketing mix?

Answer 27

• changed the way businesses create and distribute products
• changed ways that they can communicate with customers

Question 28

Why do businesses create business plans?

Answer 28

• helps in reducing the risk of starting a new business
• helps the business gain finance
• as a plan provides a clear direction for the business

Question 29

What is the role and importance of a business plan?

Answer 29

Used to identify:
- the business idea
- business aims and objectives
- target market
- forecast revenue
- cost and profit
- cash-flow forecast
- sources of finance
- location
- marketing mix