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Flashcards · 7132 · Topic 1

What is business? flashcards

30 cards on Topic 1, subtopics 3.1.1 to 3.1.3. Pick a subtopic or study them all.

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3.1.1 Understanding the nature and purpose of business

Mission vs objective
Mission: the overall purpose of the business, why it exists; broad, long-term and not usually numerical. Objective: a specific, measurable, time-limited target that moves the business towards its mission.
The objectives named in the specification
Profit, growth, survival, cash flow, and social and ethical objectives.
Why businesses set objectives
Common direction for all departments; motivation; performance can be measured against targets; options can be ranked; managers become accountable to owners.
Revenue, total costs and profit
Revenue = selling price × quantity sold. Total costs = fixed costs + variable costs. Profit = revenue − total costs.
Fixed vs variable costs
Fixed costs stay the same however much is produced in the short run (e.g. rent). Variable costs change with output (e.g. materials). A cost is fixed or variable by whether it changes with output, not by its size.
Sell 500 items at £20; variable cost £8 each; fixed costs £4,000. Profit?
Revenue £10,000; total costs (500 × 8) + 4,000 = £8,000; profit £2,000. If fixed costs rise by £500, profit falls to £1,500 (a 25% fall).
Why is profit important?
A reward for the owners' risk; retained profit is a cheap source of finance; it attracts lenders and investors; it builds a cushion for survival; it pays dividends.
Profit vs cash flow
Profit is revenue minus total costs over a period. Cash flow is money actually moving in and out. A profitable firm can still run out of cash.
Give two examples of objectives that conflict
Growth can use up cash (growth vs cash flow). Ethical sourcing can cut short-run profit (ethics vs profit).

3.1.2 Understanding different business forms

Unlimited vs limited liability
Unlimited: the owner's personal assets can be used to pay business debts (sole traders). Limited: a shareholder can lose only the amount invested (Ltd and plc). Trap: it is the shareholder's liability that is limited, not the company's debts.
Private limited company (Ltd) vs public limited company (plc)
Ltd: shares not offered to the public; finance from owners and selected investors; shares hard to sell. plc: shares traded on a stock exchange; large capital, but takeover risk, short-term pressure and heavy reporting.
Mutual
An organisation owned by its members (its customers or savers), whose surplus is used for their benefit. Drawback: narrower sources of capital.
Private sector vs public sector
Private: owned by individuals or shareholders; usually aims for profit; funded by sales and investors. Public: owned and funded by the state; provides a service within a budget; judged on service quality and value for money.
Reasons to choose or change business form
Protect personal assets; raise more capital; keep or give up control; match a social aim; cost of reporting; privacy; continuity if an owner leaves; planned growth.
Market capitalisation: formula and example
Share price × number of shares in issue. 600,000 shares at £2.00 = £1,200,000. It is not cash in the company's bank.
Total dividend: formula and example
Dividend per share × shares in issue. 600,000 shares at 5p = £30,000.
Why do shareholders invest?
Dividends, capital growth (a rising share price), voting rights, and spreading risk.
Influences on a company's share price
Profit results and forecasts, dividend news, takeovers and scandals, competitors, interest rates and the economy, and market confidence.
When one investor sells shares to another, does the company get the money?
No. The money passes between the investors. The company gains cash only when it issues new shares.
Significance of a change in share price
A rise makes new share issues cheaper and a takeover costlier. A fall raises takeover risk and pressure on directors.

3.1.3 Understanding that businesses operate within an external environment

What two things does the external environment affect, per the specification?
Costs and demand. External factors are outside the business's control: it can respond but cannot decide them.
The external factors the specification names
Competition; market conditions; incomes; interest rates; demographic factors; environmental issues and fair trade.
Effects of a new competitor on costs and demand
Costs: more marketing spend; rivals bid for staff and suppliers. Demand: lost volume or pressure to cut price. Size depends on how similar the products are and how loyal customers are.
Normal vs inferior goods when incomes rise
Normal good: demand rises when incomes rise. Inferior good: demand falls when incomes rise, because buyers trade up.
Effects of a rise in interest rates
Higher finance costs on variable-rate debt; less customer spending on credit-financed items; saving becomes more attractive. Fixed-rate debt delays the cost effect.
Interest rate rises from 4% to 5% on a £200,000 variable-rate loan. Effect?
Interest rises from £8,000 to £10,000: £2,000 more, a 25% rise. A one percentage point change became a 25% change in the bill.
Demographic factors: what they are and an example effect
The size, age structure, location and movement of the population. An ageing population raises demand for care, health and mobility products and makes younger workers harder to recruit.
Fair trade, and its effect on costs and demand
Buying on terms that give producers a fair, stable price. It usually raises input costs, but ethical customers may buy more or accept a higher price, so profit can still rise.
An input is 35% of a £20 unit cost and its price rises 10%. New unit cost?
Input £7.00 → £7.70; new unit cost £13.00 + £7.70 = £20.70, a 3.5% rise. Unit cost rises by less than the input unless the input is all of the cost.
Market conditions: how they affect a business
A growing market lifts demand for all firms; a mature or declining one means fighting for share; seasonal markets bring idle capacity and cash pressure in quiet months; input shortages push input prices up.

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