Unit 1 Flashcards
1
Q
What are Business
Objectives?
A
Business objectives are the stated, measurable targets of how to achieve business aims.
2
Q
Main Functions of Business Objectives
A
-State what needs to be achieved
-A focus for all activity
-Targets for individual and group achievement
-A way to measure performance
3
Q
Typical Corporate
Objectives
A
• Sales Revenue
• Profit
• Return on investment
• Growth
• Market share
• Cash flow
• Value of the business
• Corporate image & reputation
4
Q
Business Objectives should be “SMART”
A
Specific
Measurable
Achievable
Relevant
Time bound
5
Q
Specific
A
The objective should state exactly what is to be achieved
6
Q
Measurable
A
An objective should be capable of measurement - so that it is possible to determine whether (or how far) it has been achieved
7
Q
Achievable
A
The objective should be realistic given the circumstances in which it is set and the resources available to the business
8
Q
Relevant
A
Objectives should be relevant to the people responsible for achieving them
9
Q
Time Bound
A
Objectives should be set with a time-frame in mind.
These deadlines also need to be realistic
10
Q
The Hierarchy of Objectives in Business
A
11
Q
Mission Statement
A
A mission statement is a written description of the main corporate aims. Mission statements tell you the purpose of the business and include information such as its values, standards, strategy, who the customers are and what makes the business unique.
12
Q
A Mission Statement is NOT intended to be:
A
• Statement of goals or objectives
• Statement of core values
• A statement of how the business intends to compete or position itself in the market
13
Q
Key Audiences for a Mission Statement
A
-employees
-investors
-society
-customers
14
Q
What Makes a Good Mission?
A
-A clear sense of business purpose
-Excites, inspires, motivates & guides
-Easy to understand and remember
-Differentiates business from competitors
-For all stakeholders - not just shareholders and managers
15
Q
Common Criticisms of Mission Statements
A
• Not always supported by actions of the business
• Often too vague and general
• Often merely statements of the obvious
• Are they just PR?
• Sometimes regarded cynically by staff
• To be effective, everyone in the business has to “buy-in”
16
Q
What are Costs?
A
Costs are amounts that a business incurs in order to make goods and/or provide services
17
Q
Costs are important because they…
A
• Are the thing that drains away the profits made by a business
• Are the difference between making a good and a poor profit margin
• Are the main cause of cash flow problems in business
• Change as the output or activity of a business changes
18
Q
Variable costs
A
Variable costs
Costs which change as output varies
19
Q
Fixed costs
A
Fixed costs
Costs which do not change when output varies
20
Q
Examples of Variable Costs
A
• Raw materials
• Bought-in stocks
• Wages based on hours worked or amount produced
• Marketing costs based on sales (e.g. % commission)
21
Q
Examples of Fixed Costs
A
• Rent & rates
• Salaries
• Advertising
• Insurance, banking & legal fees
• Software & IT services
22
Q
Calculating Total Costs
A
TC = FC + TVC
23
Q
Two different Forms of Business
A
-unincorporated
-incorporated
24
Q
Unincorporated
A
• The owner is the business - no legal difference
• Owner has unlimited liability for business actions (including debts)
• Most unincorporated businesses operate as sole traders
25
Incorporated
• Legal difference between the business (company) and the owners
• Owners (shareholders) have limited liability
• Most incorporated businesses operate as private limited companies
26
What is Unlimited Liability?
• A characteristic of unincorporated businesses
• Business owner/s are personally responsible for the debts and liabilities of the business
• If the unincorporated business fails, the owners are liable for the amounts owed
• Unlimited liability adds to the risk of operating as a sole trader or partnership
27
Importance of Limited Liability
• An important protection for shareholders in a company
• Shareholders can only lose the value of their investment
• They are not liable for the debts of the company
28
Sole Traders
A sole trader is an individual trading in his or her own name, or under a suitable trading name. The owner is personally responsible for all the business debts because they have unlimited liability.
* The most common type of business form
* A sole trader can also employ people - but these people are not business owners
29
Benefits SOLE TRADER
-Quick & easy to set up
(business can always be transferred to a limited company once launched)
-Simple to run - owner has complete control over decision-making
-Minimal paperwork
-all profit entitled to owner
-Easy to close / shut down
30
Drawbacks SOLE TRADER
-Full personal liability - "unlimited liability"
-Harder to raise finance - sole traders often have limited funds of their own and security against which to raise loans
-The business is the owner - the business suffers if the owner becomes ill, loses interest etc.
-limited expertise
-long hours
-Can pay a higher tax rate than a company
31
Partnerships
• Where a business is started and owned by more than one person
• The legal partnership agreement sets out how the partnership is run, covering areas such as:
- How profits are to be shared
- What the partners have to invest into the business
- How decisions are taken
- What happens if a partner wants to leave or dies
• The partners between them own all the business assets and owe all business liabilities
• Partners, therefore, also have unlimited liability
32
Benefits PARTNERSHIP
-Quite simple - certainly the simplest way for two or more people to form a business together
-Business benefits from the expertise and efforts of more than one owner
-Partners can provide specialist skills
-Greater potential to raise finance - partners each provide the investment
33
Drawbacks PARTNERSHIP
-Full personal liability - "unlimited liability"
-A poor decision by one partner damages the interests of the other partners
-Harder to raise finance than a company
-Complicated to sell or close
34
Limited Companies
-Limited companies are separate legal entities to the founders.
A legal entity can own things itself (assets), can sue and be
- limited Companies are owned by their shareholders and run by directors. The shareholders appoint the directors.
-Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company
35
Benefits LIMITED Company
-Limited liability - protects the shareholders (the big advantage)
-Easier to raise finance - sale of shares and also easier to raise debt
-Stable form of structure - business continues to exist even when shareholders change
-less tax
36
Drawbacks LIMITED company
-Greater admin costs
-Public disclosure of company information
-Directors' legal duties
37
Private Sector
• In the private sector, businesses are operated and owned by private individuals and companies.
• Private sector businesses are generally run "for profit" - to earn returns for the business owners (e.g. shareholders)
38
Public sector
-In the public sector, businesses and other organisations are owned and run on behalf of the public, either by the Government itself, or by organisations who are funded by and report to Government
-Public sector business are not generally run "for profit", but exist to provide goods and services to the public using public funds
39
Public Sector Organisations
Many organisations that provide goods and services which are owned and operated by public bodies
Funded by central & local government, but may still levy charges for some services E.g. NHS
40
What is a Share?
• An individual part of the issued share capital of a company
• Most shares are "ordinary shares"
- Equal voting rights based on number of shares held (shareholding)
- Shareholding % represented by the number of shares held compared with the total number of shares issues
- Qualify for a dividend - if one is paid
41
The Rewards from Being a Shareholder
-Dividends
-capital growth (capital gain)
42
Dividends
• Payments made to shareholders by the company from earned profits
• Amount paid is "per share" - e.g. £1 per share held
• Normally no requirement to pay dividends, but most quoted companies do
43
Capital Growth (aka Capital Gain)
• Arises from an increase in the value of the business
• Reflected in an increase in a share price
•Only realised when a share is sold (the price paid)
• No guarantee that a shareholding will increase in value
44
What is a "Share Price"?
• Like any other price, a share price is determined by the interaction of supply and demand
• If demand for a share › supply (more buyers than sellers) then the share price should rise
• A falling share price indicates excess supply (more sellers than buyers)
45
Share price of a private company
• Initially set when shareholders "subscribe" for their shares
• Thereafter only determined when shares are bought or sold
• No active market in the shares of a private company - so hard to judge current value
46
Share price of a (quoted) public company
• Highly transparent - displayed publicly, in real-time
• All trades are disclosed (how many bought/sold and for what price
• Share prices widely published and tracked
47
Factors that Influence a PLC's Share Price
-Factors Within the Company's Control
-Factors Outside the Company's Control
48
Factors Within the Company's Control
• Financial performance (e.g. profit growth)
• Dividend policy
• Relationship with key investors (incl. communication)
• Management reputation
49
Factors Outside the Company's Control
• State of the economy
• General market sentiment
• Industry developments
Potential for takeover
• Alternative investments in the company's sector
50
Share Prices & Profits Warnings
• The share price of a quoted public company is significantly influences by market expectations of business performance
• Unexpected warnings indicating that market expectations will not be met almost always result in a significant fall in share price
• Such bad news is known as a "profits warning"
51
Market Capitalisation
•Market capitalisation is the current total value of all the ordinary shares issued by a company
52
Market capitalisation calculations
Share price(per share) X number of shares in issue
53
REVENUE calc
Volume Sold (units)
X Selling Price per Unit
54
REVENUE
The sales value of what a business actually sells
55
DEMAND
The quantity that customers will buy at different prices
56
Define semi-variable costs
Costs that have fixed and variable parts, for example, telephone bills
57
What are the two kinds of limited liability companies?
There are private limited companies (LTDs) and public limited companies (PLCs)
58
Who own limited liability companies and how are they run?
Limited liability companies are owned by shareholders and run by directors.
Shareholders have part ownership of a company.
59
Give 6 characteristics of a private limited company
- Can't sell shares to the general public
- Don't have share prices quoted on stock exchanges
- shareholders may not be able to sell their shares without the agreement of other state shareholders
- they are often small family businesses
- there is no minimum share capital requirement
- they end their name with the word "limited" or LTD
60
Give 6 characteristics of a public limited company
- Can sell shares to the general public
- 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 are listed on the stock exchange, at least 25% of this must be publicly available.
- They always in their name with the initials
PLC
61
What is ordinary share capital?
Ordinary share capital is the original value of shares sold
62
What is a not-for-profit organisation?
A not for profit organisation runs for the benefit of the community and have social aims.
Examples include charities, housing associations and community development trust
63
What is a shareholder?
A shareholder is anyone who owns at least one share in the
company
64
Who usually buys shares in a public limited company?
- Individuals
- companies
- institutions (such as pension funds)
65
Who usually buys shares in private limited companies?
Family and friends of the original owner/s
66
Give 6 reasons why a shareholder would invest in a company
- Some shareholders invest in businesses in order to achieve a capital gain
- shareholders may be paid a dividend in return for their investment
- shareholders want to be involved in the running of the business
- Shareholders will invest because they believe in the aims and objectives of the company and want it to succeed
- A shareholder might invest in a private limited company in order to help the company grow or survive
- they may be a venture capitalist, they will take a big financial risk but to lead to a large financial reward
67
Give 5 reasons why share prices fluctuate
- Performance of the company
- speculation of rumours of new product launches and cost saving initiatives
- current share prices
- interest rates, if the bank is offering low interest rate it could increase demand for shares
- state of the economy/external factors
68
Define business environment
Business environment incorporates all of the internal and external factors that affect how the company functions including employees, customers, management, supply and demand and business regulations
69
What are 6 external factors that influence costs and demand?
- competition
- market conditions
- incomes
- interest rates
- demographic factors
- environmental issues and fair trade
70
What are the 4 market conditions that affect costs and demand?
- Political factors
- labour supply
- incomes and economic factors
- seasonal demand and supply
71
How do political factors affect costs and demand?
• 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.
• Government try to reduce demand if it's too high by raising taxes so people have less money to spend and cut to
government spending.
• The government can also influence demand for particular product by using taxes, for example sugar tax
72
How does labour supply affect costs and demand?
• When unemployment rates are high, there is a good supply of labour. Businesses can hire staff easily and won't have to pay high wages and people in work will be extra productive to protect their job.
• A low rate of an unemployment could mean that there is a shortage of labour and the people available for employment might not have the skills needed for the role so will need training.
73
How do incomes and economic factors affect costs and demand?
• In a recession, businesses need to reduce costs and lower incomes mean people have less money to spend on products, so demand decreases.
• In an economic boom, wages rise and more people are employed. This may lead to greater costs due to increased wages.
However, higher incomes mean that people have more money to spend increasing demand for products.
• Changing incomes affect demand for some products more than others (income elasticity of demand)
74
How does seasonal demand and supply affect costs and demand?
• There are variations in demand and supply throughout the year, this is called seasonality.
• Businesses must have strategies to deal with it for example; after Christmas, demand for retail goods drops, so shops cut prices to boost demand and get rid of stock
75
How does competition affect costs and demand?
Competition can reduce demand and increase costs.
76
How do interest rates affect costs and demand?
• Interest rates determine the cost of borrowing money and the return on savings.
• High interest rates mean most customers have less money to spend - people with existing borrowing have to pay back more money in interest, so they have less disposable income and so market demand goes down.
• Low interest rates means customers have more disposable income and there is less reward for saving, so demand goes up.
77
How do businesses respond to demographic changes?
• The structure of a population changes over time in terms of age, sex and race - this is demographic change.
• Demographic change is important to businesses because it has an impact on demand for products.
• Different demographics of consumers tend to buy different things, so businesses need to adapt the amount and type of products they are producing.
• Demographic changes can mean that certain types of business are more in demand, this might allow existing businesses to expand or new businesses to be set up.
78
How do environmental and ethical factors increase business costs?
Consumers are becoming increasingly concerned with the effect that their purchasing has on the environment and the ethical and unethical behaviour of firms.
This is forcing businesses to consider the impact on the environment and how ethical they are being.
Most of the time this increases costs
79
Public Sector Companies / Businesses
A relatively small number of companies are owned or controlled by the Government
E.g. RBS (nationalised), Network Rail
