3.1 What Is A Business

Question 1

Definition of a mission

Answer 1

MISSION means a broad description of why a business exists. It summarises the long-term aims of the business.
Mission or aims are not usually expressed in specific numerical terms.

Question 2

Definition of a objective

Answer 2

OBJECTIVES are measurable targets to be achieved within a specific time-scale.
Examples of objectives include:
E.g specific levels of profits
Specific levels of cash flow

Question 4

Reasons for setting objectives

Answer 4

● They are specific targets to achieve the mission of a business
● They can be used to motivate employees
● They can be used to measure progress and evaluate how successful an organisation has been.

Question 5

Definition of revenue

Answer 5

REVENUE is the value of products sold during a particular period.

Question 6

Two other names for revenue

Answer 6

Turnover or sales

Question 7

Formula for revenue

Answer 7

Revenue=selling price x number of units sold

Question 8

Definition of a fixed costs with examples

Answer 8

FIXED COSTS are not immediately affected by a change in the number of products sold (e.g. rent & rates, salaries, insurance, advertising, electricity & gas).

Question 9

Definition of a variable cost with examples

Answer 9

VARIABLE COSTS are immediately affected by a change in the number of products sold (e.g. purchases of goods or materials, packaging, overtime & bonuses).

Question 10

Formula for variable costs

Answer 10

Variable cost per unit x number of units sold

Question 11

Formula for total costs

Answer 11

Fixed costs+variable costs

Question 12

Formula for profit

Answer 12

Revenue-total costs

Question 13

What is a sole trader

Answer 13

a business that is owned and controlled by one person
finance (i.e. “CAPITAL”) is provided by the owner
the owner is entitled to all of the profits

Question 14

Definition of unlimited liability

Answer 14

UNLIMITED LIABILITY: the owner is liable for any debts that the organisation is unable to pay, even if that means selling private possessions to pay the debts

Question 15

Advantages of being a sole trader

Answer 15

The owner keeps all of the profits, instead of having to share them with shareholders

The owner has unlimited liability

The owner has complete control of the business

The owner is the only source of capital

Quicker, easier and cheaper to let up than a limited company

Question 16

Disadvantages of being a sole trader

Answer 16

The owner has unlimited liability

The owner is the only source of capital

Massive workload

Question 17

Who owns private limited companies and how to identify them

Answer 17

PRIVATE LIMITED COMPANY (ends with “Ltd”)
owned by at least two SHAREHOLDERS, who provide the CAPITAL

Question 18

Who runs and controls private limited companies

Answer 18

Owned by shareholders controlled by DIRECTORS, who are appointed by the shareholders & paid salaries

Question 19

Definition of dividends

Answer 19

the profits are payable to the shareholders in the form of DIVIDENDS

Question 20

Definition of limited liability

Answer 20

the shareholders can only lose what they have already paid for their shares: they do not have to provide any more money to pay the company’s debts

Question 21

Advantages of being a private limited company

Answer 21

Additional capital can be raised by issuing shares

The owners have limited liability

Question 22

Disadvantages of being a private limited company

Answer 22

Profits have to be shared with all of the shareholders

The original owners can lose control if they own less than 50% of the shares

Slower and more expensive to set up and run than a sole trader

Question 23

Who own public limited companies

Answer 23

owned by a large number of SHAREHOLDERS, who provide the CAPITAL.

Question 24

How are shares sold in a public limited company

Answer 24

SHARES ARE SOLD TO THE PUBLIC ON THE STOCK MARKET

Question 25

Who controls public limited companies

Answer 25

Directors

Question 26

Advantages of being a public limited company

Answer 26

Large amounts of capital raised by issuing shares through the Stock Market The extra capital can be used to expand the business Expansion leads to higher levels of profits

Question 27

Disadvantages of being a public limited company

Answer 27

Profits have to be shared with large numbers of new shareholders Original owners probably lose control as they own less than 50% of the shares Higher annual costs and more paperwork for auditing and submitting the accounts.

Question 28

What is market capitalisation

Answer 28

This is the value placed on a company by the Stock Market.

Question 30

Formula of market capitalisation

Answer 30

Number of shares issued x the market price per share

Question 31

What is the public sector

Answer 31

The PUBLIC SECTOR contains organisations that are owned by the State and run by national or local Government. Many of the public sector organisations are called PUBLIC CORPORATIONS.

Question 32

What is the private sector

Answer 32

The PRIVATE SECTOR contains all organisations that are not owned by the State. This includes sole traders, private & public limited companies and non-profit organisations such as social enterprises

Question 33

Privatisation definition

Answer 33

PRIVATISATION means selling an organisation from the public sector to the private sector by creating a public limited company and inviting the public to buy shares in it.

Question 34

What is the meaning of competition how it affects demand and costs

Answer 34

The number of rival businesses, how big they are, how successful they are and their strengths & weaknesses. New or stronger competitors will decrease demand for your products. A competitor going out of business or performing badly will increase demand for your products. You may have to spend more to improve products and advertise your products effectively.

Question 35

What is the meaning of market conditions and how it affects demand and cost

Answer 35

Level of sales in the market, rate of growth in the market and price changes in the market A growing market should increase demand for your products. A declining market should decrease demand for your products. You will need to buy more goods or materials if demand is increasing, which increases your variable costs. Increasing global demand for resources may push up their prices.

Question 36

What is the meaning of income and how it affects demand and cost

Answer 36

How much people are earning, economic growth or recession, tax rated and whether wages keep up with prices Increasing levels of income will increase demand for ‘normal’ products. Decreasing levels of income will increase demand for ‘inferior’(cheaper) products. Wages not keeping up with inflation will decrease demand. Higher income probably means paying high salaries & wages, which increases your costs. Rising inflation certainly increases your costs.

Question 37

What is the making for interest rates and how does it affect demand and cost

Answer 37

The cost of borrowing and the reward for saving. Low rates of interest mean cheaper borrowing and more disposable income for people with mortgages. Low interest rates will increase demand for most products. High interest rates will decrease demand for most products. Higher interest directly increases your fixed costs.

Question 38

What is the meaning of demographic factor and how does it affect demand and cost

Answer 38

Population trends. Increasing size of the UK, the population, the aging UK population and seasonal changes: tourists in the summer, university students during term time, etc. A growing population will increase demand for many products. A declining population will decrease demand for many products If the size of the available workforce is increasing, you can get away with offering lower wages to attract employees. And vice versa.

Question 39

What is the meaning of environmental issues and how does it affect demand and cost

Answer 39

Pollution and emissions, use of renewable and non-renewable resources, contribution to global warming and sustainable production Bad publicity about environmental issues might decrease demand for your products. Good publicity about environmental issues might increase demand for your products. But how much do consumers actually care? Being environmentally friendly generally increases costs (apart from using fewer resources, which decreases costs).

Question 40

Meaning of fair trade and how it affects demand and cost

Answer 40

Fair prices for resources and products from less-developed countries Fair wages for farmers and other workers in those countries Fair trade products will attract some customers and create some demand for your products. But the higher prices will put off other customers. It’s hard to judge the overall effect on demand. It must increase costs if you are paying higher prices for your goods.

Question 41

The definition of legal and political factors and how it affects demand and cost

Answer 41

Lots of laws affecting businesses: employees, environmental, consumer protection & changing tax rates. Political factors include whether the UK stays in the EU or ‘BREXIT’. It depends! This section covers a vast number of issues that can either increase or decrease demand.