3.1 What is business?

Question 1

Why do businesses exist?

Answer 1

Most businesses exist in order to earn a return for the business owners, and gain profit

Create and sustain employment —> develop skills of employees

Question 2

Business Objectives

Answer 2

Long-term measurable goals of a business

Include profit, growth, survival, cash flow, social and ethical objectives

Question 3

Mission Statements

Answer 3

The overall goal and purpose of the business which provides strategic perspective

Question 4

Advantages of a Mission Statement

Answer 4

Differentiates the business from its competitors

Motivational because everyone understands the direction

Question 5

Disadvantages of a Mission Statement

Answer 5

Often too vague, general, or obvious

Viewed as a PR

Sometimes regarded cynically by employees

Question 6

SMART objectives

Answer 6

Specific - clear
Measurable - quantifiable
Agreed - all stakeholders agree in setting targets
Realistic - achievable?
Time-bound - achievable in a time frame?

Question 7

Corporate Objectives

Answer 7

relate to the business as a whole

usually set by top management

focus on desired performance and results of the business

Question 8

Functional Objectives

Answer 8

relate to specific functions of a business e.g. finance, HR, marketing or operations

designed to ensure corporate objectives are achieved

Question 9

Why do businesses set objectives?

Answer 9

The business can check its overall performance

Motivational because there’s something to aim at

Question 10

Importance and caluculation of profit

Answer 10

Profit = Revenue - Total Costs

Profit is an incentive and rewards to take risks and make investments

Question 11

Revenue

Answer 11

Revenue = Price x Quantity

Question 12

Factors affecting Demand

Answer 12

PED & YED

Changes in tastes & fashions

Seasonal changes

Changing Technology

Competitor’s actions

Question 13

Fixed Costs

Answer 13

They stay the same

E.g. Rent and salaries

Question 14

Variable Costs

Answer 14

They change as output varies

E.g. Raw materials

Question 15

Total Costs

Answer 15

TC = FC + VC

Question 16

Sole Trader

Answer 16

Individual owning their own business

Has full ownership of the business

Unlimited Liability

Question 17

Advantages of being a sole trader

Answer 17

Quick & easy to set up – can become a limited company whenever

Simple to run – owner has complete control over decision-making

Minimal paperwork

Easy to close / shut down

Question 18

Disadvantages of a sole trader

Answer 18

Unlimited liability

They have limited funds so its harder to raise finance

Business suffers if the owner becomes ill, loses interest

Question 19

Advantages of Partnerships

Answer 19

Risk is spread amongst more people

Partner may bring in more resources

Increased credibility

Question 20

Disadvantages of partnerships

Answer 20

Have to share the profits.

Less control of the business for the individual.

Disputes over workload.

Problems if partners disagree over of direction of business.

Question 21

Private Limited Companies

Answer 21

Incorporated –> legal difference between company & owners

Limited liability - shareholders are only responsible for the money invested in the company

Can raise money by selling shares

Question 22

Advantages of private limited companies

Answer 22

Owned by one or more shareholders who are often supportive family members.

Profits are only shared between shareholders (dividends)

Able to raise money through selling shares

Limited liability.

Question 23

Disadvantages of private limited company

Answer 23

High set-up costs

Shares can’t be traded publicly

Question 24

Public Limited Company

Answer 24

Incorporated –> legal difference between company & owners

Shares are bought and sold in open market

Question 25

Advantages of public limited company

Answer 25

Limited liability Greater access to finance

Question 26

Disadvantages of public limited company

Answer 26

Vulnerable to takeovers Risk of losing control

Question 27

Private sector organisations

Answer 27

Owned by individuals --> driven by profit. Profit benefits the owners, shareholders and investors. Financed by private money from shareholders and by bank loans.

Question 28

Public sector organisations

Answer 28

Owned and run by the government They provide goods and services for the benefit of the community. Operate with money raised from taxes

Question 29

Not-for-profit organisations

Answer 29

Mutual Businesses --> exist to server their 'members Charities

Question 30

Unlimited Liability

Answer 30

Liable for all debts of the business Unincorporated business like sole traders or partnerships

Question 31

Limited Liability

Answer 31

Only liable for what they have invested in the company Incorporated businesses like public and private limited companies

Question 32

Market Capitalisation

Answer 32

Market Capitalisation = Share price x Number of shares

Question 33

Dividends

Answer 33

Payments made to shareholders by the company from earned profits

Question 34

Shareholders

Answer 34

Provides financial security for the company & expertise advice Has control over how the directors manage the company Receives a percentage of any profits generated by the company.

Question 35

Share prices

Answer 35

Share price is determined by supply and demand If there are more buyers than sellers then share price will rise If there are more sellers than buyers then share price will fall

Question 36

The effects of ownership on mission, objectives, decisions and performance

Answer 36

Sole traders make all their own decisions without pressure from shareholders. Public limited companies - Shareholders are interested in the growth in value of their own shares so they will want to generate short-term profits to see a return on their investments Private limited companies - shareholders have a longer term view because they are likely to be more closely related to the business

Question 37

External Environment - MARKET CONDITIONS

Answer 37

Economic Growth (GDP) Market Demand - faster growing markets encourages new entrants - slow growing markets creates tougher conditions, competitors fighting for their share of weak demand

Question 38

External Environment - INCOMES

Answer 38

Inflation, interest rates, taxes all affect disposable income Increase in disposable incomes leads to increase in luxury goods

Question 39

External Environment - INTEREST RATES

Answer 39

Increase in interest rates leads to: - reduced consumer spending because borrowing is expensive - consumers more likely to save rather than spend - lower GDP & inflation Decrease in interest rates leads to: - lower cost of borrowing - consumers more like to spend instead of save

Question 40

External Environment - DEMOGRAPHIC FACTORS

Answer 40

Age Income Geographic location

Question 41

External Environment - ENVIRONMENTAL ISSUES & FAIR TRADE

Answer 41

Businesses may change their purchasing and operating policies to be environmentally friendly --> leads to increase in costs as they move to more expensive materials or methods of production. Fair Trade exists where businesses in more developed countries pay a fair price for goods from less developed countries.