3.1 What Is Business

Question 1

What are the 6 key Objectives of a business?

Answer 1

Profit
Growth
Survival
Social
Ethical

Question 2

What is profit?

Answer 2

The profit is what is leftover after total costs is deducted from sales revenue.

Question 3

What is growth?

Answer 3

To increase in size either by value of sales or volume of sales.

Question 4

What is survival?

Answer 4

To continue to exist as a business.

Question 5

What is cash flow?

Answer 5

To ensure sufficient cash is available to meet day to day expenses.

Cash flow is the flow of cash into and out of a business over a period of time.

Question 6

What is a Social objective?

Answer 6

To behave in a way which benefits society.

Such as creating employment, supporting the local community, or improving educational standards.

Question 7

What are ethical objectives?

Answer 7

To behave in a way which is considered to be morally correct.

Could include treating key stakeholders including suppliers and employees in a fair manner or reducing negative impacts on the environment.

Question 8

Why might objectives of growth and profit be complementary objectives?

Answer 8

A business focusing on growth will also allow more sales which will lead to higher profit levels.

Question 9

Why might objectives of survival and cashflow be complementary?

Answer 9

The survival of a business is based off of the ability to have enough cashflow to keep the business running.

Question 10

Objectives should be SMART.
What does SMART stand for?

Answer 10

Specific
Measurable
Achievable
Realistic
Timely

Question 11

What is a mission statement?

Answer 11

A mission statement is a brief written statement of the purpose of a company or organisation. Ideally a mission statement guides the actions of the organisation, spells out its overall goal, provides a sense of direction, and guides decision making for all levels of management.

Question 12

What are?
Mission statement
Corporate aims
Corporate objectives
Corporate strategy
Business tactics

Answer 12

Mission statement- The overall reason for the business’ existence

Corporate aims- The long term targets and plans to fulfil the mission statement

Corporate objectives- The medium to long term quantifiable targets to fulfil the mission statement

Corporate strategy- The actions to be taken by the business to achieve the objectives

Business tactics- Actions taken on a day to day basis to support the strategy

Question 13

Why a business sets objectives?

Answer 13

Common sense of purpose
Motivate employees
Create reward systems
Measure and review performance
Inform decisions to improve performance.

Question 14

What are the four different business forms?

Answer 14

Sole traders

Private limited companies

Public limited companies

Non profit organisations

Question 15

What is a Sole Trader?

Answer 15

A sole trader is an individual who owns and runs their own business.

Profits made by the sole trader are classed as income and are taxed through income tax.

A sole trader has unlimited liability meaning any debts run up by the business must be paid by the individual or the assess personal assets may be sold to pay the debt.

Question 16

Benefits of being a sole trader?

Answer 16

Cheap and easy to set up

All profits go to the sole trader

Autonomy in decision making

Financial records remain private

Motivation is high as the success of the individual and the business are one and the same

Question 17

Disadvantages of being a sole trader?

Answer 17

Unlimited liability

Limited capital for investment

Little specialist skills as the owner is a “jack of all trades” or will have to buy in specialists

Difficult to find cover when Ill although sole traders often do employ people

Question 18

What is a limited company?

Answer 18

Limited companies exist in their own right
The owners and the company are seperate legal entities.
Therefore the company’s finances are seperate from the owner’s personal finances.

Question 19

What are shareholders?

Answer 19

Owners of a limited company.

This can be part ownership or full ownerships dependent on the numbers of shares of the company are owned.

Question 20

Difference between private limited companies and public limited company.

Answer 20

Private limited companies are have an ltd after the name. Where as Public liability companies have plc at the end of name.

Private limited companies are owned by shareholders who are known to the company, often family and friends.

Private limited companies are only able to sell shares to other share holders( cannot sell shares openly on a stock exchange). Whereas Public limited companies are able to sell shares to the public via the stock exchange.

Question 21

Advantages of Private limited companies?

Answer 21

Limited liability

Seperate legal identity

More flexible than a plc

Financial records remain relatively private

More capital can be raised through sale of shares

Question 22

Disadvantages of Private limited companies?

Answer 22

More complex to set up due to increased legal requirements

Some loss of control as shareholders have voting rights

Unable to sell shares to the public

Question 23

Advantages of Public limited companies?

Answer 23

Limited liability

Seperate legal identity

Financial records remain relatively private

More capital can be raised through the sale of shares

Question 24

Disadvantages of Public limited company ?

Answer 24

Lack of privacy as finnancial performance is available for all to view

More complex to set up due to increased legal requirements and ongoing administrative and ongoing administrative costs

Some loss of control as shareholders have voting rights

Risk of hostile takeovers

Question 25

What is private sector organisations?

Answer 25

-The private sector is the sector of the economy that is owned and controlled by individuals or groups of individuals rather than by the government. -Sole traders -Private limited companies -Public limited companies

Question 26

What is public sector organisations?

Answer 26

-The public sector is that sector of economy that is owned and controlled by the government rather than individuals or groups of individuals. -State education -National Health Service -Other services such as police, army, navy and air force.

Question 27

The issues Keith different forms of business?

Answer 27

-Unlimited and limited Liability -Ordinary share capital -An external source of finance available to companies -Investment given to a business in return for a share of the profit and a voting right -The dividend is not fixed and therefore does not have to be paid -Market capitalisation -The value of all of the shares issued by a plc -Gives an indication to the market, including potential investors, of the size of the business -Dividends -A percentage of profit paid to shareholders as a reward for their investment.

Question 28

What is the role of shareholders and why do they invest?

Answer 28

-Shareholders are: -Investors who are part owners of a company -Their liability is limited to the amount invested or promised -The receive dividends in return for their investment -Invited to an AGM where they have proportional voting right -Why invest? -Short term gains I.e receipt of dividends -Long term gains I.e increase in share price

Question 29

Influences on share price?

Answer 29

-Global economy -Investor confidence -Political stability -Company performance -National economy

Question 30

What is the significance of a change in share price?

Answer 30

-Indication of managers’ performance -Influences stakeholders, including consumers, suppliers and employees, perceptions of business performance. -Can effect ability to raise finance from other sources -Will be watched carefully by competitors and other businesses -May flag opportunity of hostile takeover -Affects consumer confidence in the economy as a whole

Question 31

The effects of ownership on Mission and objectives?

Answer 31

-The prime aim or objective will vary depending upon business form. -A sole trader might be willing to profit sacrifice to achieve a work life balance where as a plc. May have pressure to maximise shareholders returns -A non-profit organisation will be focused on achieving social goals over financial ones

Question 32

The effects of ownership on decisions?

Answer 32

-Who makes key decisions and the speed with which these can be made. -A sole trader does not have to consult with others and can hence make decisions quickly and autonomously. -A ltd may be able to quickly consult with shareholders as they are known to the business whereas a plc may have to call a meeting and go through more stages before a decision can be reached. -A non-profit organisation may have to consult members who may be and difficult to coordinate e.g all consumers.

Question 33

The effects of ownership on Performance?

Answer 33

-Performance can be measured in a number of ways including financial, employee engagement, environmental record, quality etc, -A sole trader will judge themselves on performance but will not be scrutinised by the public in the same way as a plc may be -Ownership will affect the ability to employ specialist staff, access to finance, ability to maintain a competitive advantage and embrace new technology. All of these will influence business performance.

Question 34

What are the external environments effects on cost?

Answer 34

-Costs are the value paid or to be paid for the acquisition of goods and services by businesses -Competition -If there are many competitors in the market this will increase the selling power of the supplier as they will have a range of firms wanting to buy their goods or services this can push costs up. -Competition may attract new suppliers into a market increasing availability and therefore driving costs down -Market Conditions -Market conditions will affect the demand for supplies and therefore directly impact on costs. If the market is in decline, costs may be lowered as firms try to maintain sales. -If there is a high level of demand then supplies may be in short supply allowing suppliers to increase costs -Incomes -Rising incomes may be as a result of higher wages which are a cost to a business. This may be due to the government increasing the national minimum wage. -Interest rates -Interest rates will affect the cost of borrowing by businesses. If interest rates go up so will the interest section of repayments on bank loans or overdrafts. This will increase the fixed costs of a business. -Businesses may also find that suppliers try to pass on their own higher costs in the form of higher prices further increasing costs. -Demographic factors -Rising net migration has increased the size of the workforce in the uk, this has driven average wage costs down lowering the costs of production -Changes in UK demographics, including migration and the size and age of the population has increased costs to the public sector e.g health care and educations -Environmental issues and fair trade -Fair trade may increase costs as a business is making a commitment to pay suppliers a fair price, hence increasing the cost of raw materials. -Concern for environmental issues may also increase costs of production in terms of safe disposal of waste or upgrading of equipment to reduce emissions -Concern for environmental issues may also lower costs in terms of lower energy usage or avoidance to fines.

Question 35

What are the external environments effects on demand?

Answer 35

-Demand is the amount of customers that are willing and able to buy at a set price at any given point in time. -Competition -Competition can encourage firms to compete on price therefore lowering the overall and increasing demand in the market -A number of firms competing may see a spread in demand between firms, reducing the market share of each firm if the market size remains unchanged. -Market conditions -The level of demand will be a clear indicator of market conditions. if the market is growing demand will be increasing and vice versa. Buoyant market conditions may act as a signal for new businesses to enter the market in anticipation of a further increase in demand -Incomes -Incomes directly affect consumers’ spending power. If Incomes are rising this could lead to a rise in demand as consumers have higher discretionary incomes. -Interest rates -If interest rates increase this encourages consumers to save and discourages spending. A fall in interest rates will have the opposite effect. -High interest rates may therefore lead to a fall in demand, especially for items where consumers spend on credit. This will also be true of luxury goods where consumers may use savings to make a purchase. -Demographic factors -Migration has seen an increase in demand for a wide range of goods and services e.g. housing, public transport and healthcare. -Demographics also influences the types of products demanded e.g changing taste of a more diverse nation and different demands from an ageing population. -Environmental issues and fair trade -Businesses can use environmental issues and fair trade as a USP or a recognisable feature of a brand leading to an increase in demand -If increased costs are passed on to the consumer in the form of higher prices this may lead to a fall in demand.