What is a business?

Question 1

What is a business?

Answer 1

organisation to provide goods and services on a commercial basis to customers

Question 2

What are goods?

Answer 2

physical or tangible products: e.g. electronics, cars

Question 3

What are services?

Answer 3

intangible products: e.g , cleaning

Question 4

Why do businesses exist?

Answer 4

to earn a return for the business owners, and the potential for profit is a key motive for entrepreneurial activity.

Question 5

Businesses play a key role in wider society. In particular they:

Answer 5

-Create + sustain employment & develop the skills of people

-Contribute to the infrastructure of the country + benefits economy

Question 6

Entrepreneurs key role in the formation + development of businesses:

Answer 6

Spot business opportunities
Take (calculated) risks in order to gain possible future returns
Act a catalyst for the creation & growth of new business enterprises

Question 7

What is a business objective?

Answer 7

“Objectives are statements of specific outcomes that are to be achieved”

Question 8

Objectives are often set in financial terms. That means that the objective is expressed in terms of a financial outcome that is to be achieved. Those could include:

Answer 8

Desired sales or profit levels
Rates of growth
Amount of cash generated
Value of the business or dividends paid to shareholders

Question 9

Some objectives are hard to measure, but are often important. For example, an objective to be:

Answer 9

An innovative player in the market

A leading in the quality of customer service

Question 10

What is a mission?

Answer 10

overriding goal of the business and the reason for its existence + provides a strategic perspective for the business and a vision for the future.

Question 11

An effective mission statement:

Answer 11

Differentiates the business from its competitors

Defines the markets or business in which the business wants to operate

Is relevant to all major stakeholders - not just shareholders and managers

Excites, inspires, motivates & guides – particularly important for employees

Question 12

Mission statements are often criticised because they are:

Answer 12

Not always supported by actions of the business

Often too vague and general or merely statements of the obvious

Question 13

mission objectives should be SMART

Answer 13

Specific
Measurable
Achievable
Relevant
Time-bound

Question 14

What are corporate objectives?

Answer 14

that relate to the business as a whole. They are usually set by the top management of the business and they provide the focus for setting more detailed objectives for the main functional activities of the business.

Corporate objectives tend to focus on the desired performance and results of the business.

cover a range of key areas where the business wants to achieve results rather than focusing on a single objective

Question 15

What are functional objectives?

Answer 15

those that relate to the specific functions of a business (e.g. marketing, operations, HRM, finance) and which are designed to support the achievement of corporate objectives.

Question 16

Examples of functional objectives:

Answer 16

We aim to build customer database of at least 250,000 households within the next 12 months
We aim to achieve a market share of 10%

Question 17

Examples of corporate objectives:

Answer 17

to increase sales by 5% in the next 4 months

Question 18

What is profit?

Answer 18

“the reward or return for taking risks & making investments”.

A return on investment
A reward for taking risks
A key source of finance
A measure of business success
A motivating factor & incentive

Question 19

What is revenue?

Answer 19

Revenue is the amount (value) of a product that customers actually buy from a business

Question 20

What is demand?

Answer 20

Demand is the amount of a product that customers are prepared to buy.

Demand can be measured in terms of volume (quantity bought) and/or value (£ value of sales)

Question 21

Various factors will affect the level of demand:

Answer 21

Prices & Incomes (you look at this in more detail when considering elasticity of demand)
Tastes & fashions
Competitor actions
Social & demographic change
Seasonal changes
Changing technology
Government decisions

Question 22

Other names for revenue?

Answer 22

There are various different names for the same thing – the value of what a business sells!

Sales
Revenues
Income
Turnover
Takings

Question 23

How to increase revenue?

Answer 23

Increase the quantity (amount) sold

cutting the price or offering volume-related incentives (e.g. 2 for price of 1)
Key issue - is demand sensitive to price? Will volumes demanded rise if the price is reduced and, if so, by enough to increase revenue? This is determined by the price elasticity of demand.

Achieve a higher selling price
(adding value)

Question 24

What are costs?

Answer 24

the amounts that a business incurs in order to make goods and/or provide services.

Question 25

Costs are important to business because they:

Answer 25

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

Question 26

What are variable costs?

Answer 26

Variable costs are costs which change as output varies. Examples include: Raw materials Bought-in stocks Wages based on hours worked or amount produced Marketing costs based on sales (e.g. % commission)

Question 27

What are fixed costs?

Answer 27

Fixed costs do not change in relation to output. They do change - but not as a consequence of output changing. Examples include: Rent & rates Salaries Advertising Insurance, banking & legal fees Software Research and development

Question 28

The costs incurred by a business are often relatively easy to estimate. You know how much salary someone is paid or what price your supplier is charging. However, this is not always the case – some costs are uncertain:

Answer 28

Raw materials – affected by wastage Product returns or refunds – affected by quality Where a business or entrepreneur does not have detailed experience of a market

Question 29

Businesses in the private sector can be categorised in two main ways: (1) incorporated and (2) unincorporated businesses.

Question 30

Unincorporated:

Answer 30

The owner is the business - no legal difference Owner has unlimited liability for business actions (including debts) Most unincorporated businesses operate as sole traders A small number operate as partnerships

Question 31

Incorporated:

Answer 31

There is a legal difference between the business (company) and the owners The company has a separate legal identity Owners (shareholders) have limited liability Most incorporated businesses operate as private limited companies A smaller number operate as public limited companies

Question 32

The most important difference between incorporated and unincorporated businesses is who is liable for the debts of the business if it fails? The answer to this question lies in the essential difference between an incorporated and unincorporated business which is this:

Answer 32

An incorporated business is a separate legal entity. It exists separate from its owners (shareholders). An unincorporated business is inseparable from the business owners

Question 33

The concept of limited liability is an important protection for shareholders in a company.

Answer 33

What this means is that shareholders can only lose (are therefore liable for) the value of their investment in the share capital of the company. However, limited liability does not protect against wrongful or fraudulent trading or when directors give personal guarantees. The reason why limited liability arises for shareholders is because the company has a separate legal identity. The shareholders are not the same as the business.

Question 34

The most important drawback of operating as an unincorporated business (e.g. sole trader or partnership) is that the owner is liable for the debts of the business.

Answer 34

If the business fails and is left owing money to suppliers, the bank or the tax authorities, these debts can be recovered from the business owners regardless of how much they are. You might ask, therefore, why would any sane person set up as a sole trader or partnership when setting up a private company is so quick and cheap?

Question 35

1. Private Limited Company Key points to remember:

Answer 35

Most popular form of incorporated business Company is privately-owned Shares cannot be traded publicly Usually just 1 or a few shareholders Quick & cheap to set up and administer

Question 36

Public Limited Company Key points to remember:

Answer 36

Minimum share capital £50,000 Shares may be traded on a public stock market (but don't have to be) Usually many shareholders More detailed disclosure of information required More costly to administer

Question 37

Shareholders in both private and public limited companies earn their rewards from two aspects of their business ownership: dividends and capital growth

Question 38

What are dividends?

Answer 38

Dividends are 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

Question 39

What is capital growth (gain)?

Answer 39

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 – business value can change both ways

Question 40

The most common type of unincorporated business is the sole trader. What is that?

Answer 40

A sole trader is just an individual owning the business on his/her own. The sole trader owns all the business assets personally and is personally responsible for the business debts. Crucially - a sole trader has unlimited liability.

Question 42

+ of being a sole trader?

Answer 42

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 Easy to close / shut down

Question 43

- of being a sole trader?

Answer 43

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. Can pay a higher tax rate than a company

Question 44

What is share ownership?

Answer 44

The most important point to understand about share ownership is that an “incorporated” business (i.e. a company) is a separate legal entity. The owners of a company are the shareholders - those who own the share capital

Question 45

What is a public limited company?

Answer 45

• Most popular form of incorporated business • Privately-owned • Shares cannot be traded publicly • Usually just 1 or a few shareholders • Quick & cheap to set up and administer

Question 46

What is a private limited company?

Answer 46

Continue later

Question 47

What is demography concerned with?

Answer 47

The size and composition of a population

Question 48

How do changes in population dynamics occur?

Answer 48

Slowly but can be significant for businesses

Question 49

What is one key demographic change in the UK that impacts businesses?

Answer 49

Ageing Population

Question 50

What is a possible business implication of an ageing population?

Answer 50

Greater demand for services to support older people (e.g. healthcare)

Question 51

What is another possible business implication of an ageing population?

Answer 51

Increasing disposable incomes of older people reflected in higher demand for goods and services (e.g. holidays)

Question 52

What is the second key demographic change in the UK that impacts businesses?

Answer 52

High levels of net immigration

Question 53

What is a possible business implication of high levels of net immigration?

Answer 53

Higher costs of (but greater demand for) public services (e.g. education, health, housing)

Question 54

What is another possible business implication of high levels of net immigration?

Answer 54

Increase in size of labour force – potentially keeping wage rates low

Question 55

How can businesses benefit from a larger supply of labour?

Answer 55

Businesses able to grow faster, particularly in the agricultural and service sectors

Question 56

What is an interest rate?

Answer 56

The reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed.

Question 57

What are some types of interest rates operating in the external environment?

Answer 57

* Interest rates on savings in bank and other accounts * Borrowing interest rates * Mortgage interest rates (housing loans) * Credit card interest rates and payday loans * Interest rates on government and corporate bonds

Question 58

What role does the Bank of England play regarding interest rates?

Answer 58

Uses policy interest rates to help regulate the economy and meet economic policy objectives.

Question 59

What has been the trend of the Bank of England Base Rate in recent years?

Answer 59

Very low and stable.

Question 60

What is one possible effect of rising interest rates on the cost of servicing loans?

Answer 60

Cost of servicing loans/debt is reduced.

Question 61

How might rising interest rates affect consumer confidence?

Answer 61

Consumer confidence should increase, leading to more spending.

Question 62

What effect do rising interest rates have on effective disposable income?

Answer 62

Effective disposable income rises due to lower mortgage costs.

Question 63

What impact could rising interest rates have on business investment?

Answer 63

Business investment should be boosted due to the prospect of rising demand.

Question 64

How might rising interest rates influence the housing market?

Answer 64

More demand and higher property prices.

Question 65

What effect do rising interest rates have on exchange rates and exports?

Answer 65

Cheaper currency will increase exports.