What is a business 3.1 Flashcards
(32 cards)
Why a Business exits
To provide goods and services that meet customers needs and wants. It creates value by transforming inputs into desirable outputs with its main aim to generate profit for its owners or shareholders
Primary Business Sector
Involves businesses that extract or harvest natural resources directly from the earth E.G. Farming, Mining farms, Oil and gas extraction, Fishing companies
Secondary Business Sector
Includes businesses involved in manufacturing and construction, where raw materials from the primary sector are transformed into finished or semi-finished products E.G. Car manufacturers, Food processing companies, construction firms, clothing factories
Tertiary Business Sector
Includes businesses that provide services rather than goods, supporting consumers and other businesses E.G. Retail stores, Banks and financial services, Restaurants and hotels, Transport, Health care and education
Business Objectives Definition
Specific, measurable targets that a business sets to help achieve its overall aims or mission E.G. of objectives = Increase profit by 10% in one year, Grow market share, Improve customer satisfaction, Reduce costs, Expand into new markets
Why a Business sets objectives
Gives direction to provide clear focus for employees and management, measures performance and evaluate success rate, motivates employees through setting clear goals, Aid decision-making process, Attract investors
Corporate Objective
Specific long term goals set by a business at the organisational level to help achieve its overall mission
Functional Objectives
Specific goals set for individual departments within a business, designed to support the achievement of the overall corporate objective E.G. of departments are Marketing, Finance, Operations, HR
Main Objectives
Key goals a business aims to achieve to ensure its success, growth, and long-term survival
Types of Objectives
Profit maximization, growth, survival, cash-flow, social, ethical
Mission Statement Definition
Brief written statement that defines a business’s core purpose, values, and overall aim, explaining why it exists and why it seeks to achieve
Factors impacting objectives
size of business, sector, how competitive the market is
Calculations
Profit formula - Profit is the financial gain a business makes after subtracting all its costa from its total revenue
Profit = Total Revenue - Total costs
Total Revenue = Price per unit X Quantity sold
Total costs = Fixed costs + Variable Costs
Fixed cost formula - Fixed costs are business expenses that remain constant regardless of the level of production of sales
Fixed costs = Total Costs - Variable Costs
Variable cost formula - Costs that change directly with the level of output or sales
Variable Costs = Cost per unit X Number of units Produced (or Sold)
Revenue definition - Revenue is the total amount of money a business earns from selling its goods or services before any costs are deducted
Revenue = Price per unit X Quantity sold
Public Limited company
Business that legally allowed to sell its share to the general public on the stock exchange, and is owned by shareholders
Pro - Access to capital - Raise large amounts by selling shares to public, Limited liability - Shareholder’s personal assets are protected, Increased status - Being listed on stock exchange can improve reputation, Growth potential - Easier to expand due to better access to finance, Shares transferable - Easier for investors to buy and sell
Con - Expensive to set up and run, Loss of control to external shareholders, Public scrutiny from publishing detailed financial accounts, Vulnerable to takeovers, Pressure from shareholders
Examples - Tesco and Rolls-Royce
Private Limited company
Is a business owned by shareholders whose shares are not available to the general public and are usually sold privately to family, friends, or investors
Pro - Limited liability - shareholders’ personal assets are protected, Control is retained - shares are usually kept within a small group, Easier to raise capital, Separate legal identities - the company can own assets, sue, and be sued in its own name, Less public scrutiny - Financial information is more private
Con - Limited ability to raise capital as they cannot sell shares to the general public, restricting their ability to raise large amounts of capital quickly, restricted share transfer making it harder for owners to attract new investors
Examples - IKEA and Dyson
Sole Trader
Is a business owned and operated by one individual, who has full control and keeps all the profits but is personally responsible for all debts
Pro - Easy and cheap to set up, full control, Keep all profits, Simple task process, Close relationships with customers
Con - Unlimited liability - Personal assets are at risk, Harder to raise finance, Heavy workload, No continuity, Limited skills
Example - Local Plumbers or Hairdressers
Partnership
Business owned and operated by two or more people who share responsibility, profits, and liabilities
Pro - Shared workload responsibility, More capital available, Range of skills and expertise, Simple to set up, Better decision-making
Con - Unlimited liability - personal assets can be at risk, Profits must be shared, Disagreements between partners can occur, lack of continuity, limited access to large-scale finance
Example - Innocent smoothies founded by Richard Reed, Adam Balon and Jon Wright
Why Businesses may change their type of structure
Tax benefits - Owners may want to reduce their tax burden by switching to a limited company, which may offer more tax deductible expenses and lower tax rates on profits
Businesses may want to take advantage of corporate tax rates, which might be lower than personal tax rates for higher earners
Business growth - Handle larger scale operations effectively
Professionalism and credibility
Limited liability
Shareholders are only responsible for the company’s debts up to the amount they invested. Their personal assets are protected if the business fails
Unlimited liability
The business owner is personally responsible for all of the business’s debts and obligations, even if it means using their own personal assets to cover them
Non-profit organisations
Businesses that exist to achieve a social, charitable, or community-focused goal rather than to make a profit for owners or shareholders
Any surplus profit is reinvested into the organisation and not
distributed to the owners
Examples - British Red Cross
Social enterprise
Business that aims to make a profit, but reinvests most or all of it into solving social or environmental issues
Examples - The Big Issue - magazine supporting homeless people
Issues with different forms of businesses
Ordinary Share capital , market capitalisation, dividends
Shareholder role
An individual or organisation that owns shares in a company and therefore has a partial ownership stake
They provide capital, receive dividends (Share of the profit the business receives), Influence the business’s strategy, Monitor performance
Why they invest - They believe in the business’s mission and product, To earn a return in capital gain, Tax relief or allowances for investing into certain companies
