Flashcards · 8132 · Topic 1

Business in the real world flashcards

73 cards on Topic 1, subtopics 3.1.1 to 3.1.7. Pick a subtopic or study them all.

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3.1.1 The purpose and nature of businesses

The five reasons the specification gives for businesses starting up: Producing goods; supplying services; distributing products; fulfilling a business opportunity; providing a good or service to benefit others.
Goods and services: Goods are physical products (they can be touched). Services are activities done for customers.
Needs and wants: Needs: what people must have to live. Wants: what people would like but could live without.
Opportunity cost: The next best alternative given up when a choice is made.
A builder can earn £4,800 profit from job A, £3,900 from job B or £2,100 from job C, and takes job A. What is the opportunity cost?: £3,900, the value of the next best option (job B). It is not the total of all the other options (£6,000).
The four factors of production: Land: natural resources and sites. Labour: people. Capital: man-made resources such as machines and vehicles. Enterprise: organising the other factors and taking the risk.
The three sectors of business activity, with an example of each: Primary: extracting or growing natural resources (farming, fishing, mining). Secondary: manufacturing and building (furniture making, construction). Tertiary: services (retail, banking, hairdressing).
Enterprise and entrepreneur: what is the difference?: Enterprise is the activity: spotting an opportunity, taking a risk and organising resources. The entrepreneur is the person who does this.
Characteristics and objectives (motives) of entrepreneurs: Characteristics: hard working, innovative, organised, willing to take a risk. Objectives: be their own boss, flexible working hours, pursue an interest, earn more money, fill a gap in the market, dissatisfaction with a current job.
The four named causes of a changing business environment: Technology, the economic situation, legislation and environmental expectations. Each can affect the four functional areas: operations, human resources, marketing and finance.
Capital or finance: which is which?: Capital (as a factor of production) is man-made equipment such as machines and vehicles. Finance is money.

3.1.2 Business ownership

Unlimited liability: The owner is personally responsible for all the business's debts, so personal assets such as a house can be used to pay them.
Limited liability: Owners can lose only the money they invested in the business, not their personal assets.
Which ownership structures have unlimited liability, and which have limited liability?: Unlimited: sole trader and partnership. Limited: private limited company (ltd) and public limited company (plc).
Sole trader: main benefits and drawbacks: Benefits: easy to set up, full control, the owner keeps all the profit. Drawbacks: unlimited liability, limited capital, all the risk and workload on one person.
Partnership: main benefits and drawbacks: Benefits: more capital than one person, shared skills and workload. Drawbacks: profit is shared, partners may disagree, unlimited liability.
Private limited company (ltd): main benefits and drawbacks: Benefits: limited liability, a separate legal identity, easier to raise capital by selling shares privately. Drawbacks: more paperwork and formation costs, accounts must be filed, shares cannot be sold freely to the public.
Public limited company (plc): main benefits and drawbacks: Benefits: large amounts of capital from selling shares to the public, limited liability. Drawbacks: expensive to set up, public scrutiny of accounts, risk of takeover, owners (shareholders) are separated from the directors who run it.
The key difference between a ltd and a plc: A plc can offer its shares to the public; a ltd cannot. Both have limited liability. A ltd owner can usually decide who buys shares, so is less exposed to a takeover.
Exam trap: is a plc part of the public sector?: No. A plc is in the private sector, owned by shareholders. 'Public' means the public may buy its shares, not that the government owns it.
Not-for-profit organisation: how is it run and financed, and what happens to any surplus?: Run by trustees or volunteers guided by a cause. Financed by donations, grants and trading income. A surplus is normally reinvested in the organisation's purpose, not shared out among owners.
Two partners share £40,000 profit in the ratio 5:3. What does each receive?: 5/8 × £40,000 = £25,000 and 3/8 × £40,000 = £15,000.
A business owes £41,000 and its assets sell for £17,500. Who pays the shortfall if it is a partnership, and if it is a ltd?: Shortfall = £41,000 − £17,500 = £23,500. In a partnership the partners are personally liable for it. In a ltd, shareholders lose only what they invested.

3.1.3 Setting business aims and objectives

Aim and objective: what is the difference?: An aim is the long-term goal or direction of a business. An objective is a specific target that moves the business towards its aim.
The seven objectives named in the specification: Survival, profit maximisation, growth (domestic and international), market share, customer satisfaction, social and ethical objectives, shareholder value.
Survival versus profit maximisation: Survival: cover costs and stay open, the main concern for a start-up. Profit maximisation: make the highest possible profit.
Market share: formula and example: Market share (%) = business sales ÷ total market sales × 100. Example: sales of £360,000 in a £4.5m market: 360,000 ÷ 4,500,000 × 100 = 8%.
Shareholder value: The worth of a business to its shareholders, seen in its share price and dividends.
A company pays £90,000 in dividends on 300,000 shares. Find the dividend per share and the amount paid on 60,000 shares.: Dividend per share = £90,000 ÷ 300,000 = £0.30 (30p). 60,000 shares × £0.30 = £18,000.
Why do businesses set objectives?: To give direction and a shared target, help managers test decisions, motivate staff with clear targets, allow success to be judged against the target, and show lenders and investors what the business is trying to do.
Why objectives differ between businesses: Size (small: survival, steady income; large: dominance, international expansion), level of competition (high: customer satisfaction and market share) and type of business (not-for-profit: social objectives first).
How do objectives typically change as a business grows?: Start-up: survival, building customers, covering costs. Growing: profit, growth, market share. Large and established: market dominance, international expansion, shareholder value, ethical and environmental aims.
How do you judge whether a business has been successful?: Compare the result with its objective (for example 8% market share against a 10% target), then bring in other measures such as profit, customer satisfaction or number of customers. Success depends on which objective the owners care about most.

3.1.4 Stakeholders

Stakeholder: An individual or group with a stake in what the business does, whether affected by it or able to affect it.
Main objectives of owners and employees as stakeholders: Owners: high dividend payments and growth in the value of the business. Employees: maximising pay, job security and good conditions.
Main objectives of customers, the local community and suppliers: Customers: quality, a fair price, good service. Local community: minimal environmental impact, local jobs. Suppliers: regular orders, prompt payment, fair prices.
How can owners influence a business?: They set aims, appoint managers and can sell the business.
How can employees influence a business?: Through their effort and quality of work, industrial action, or leaving.
How can customers influence a business?: They choose whether to buy, complain, or switch to rivals.
How can the local community influence a business?: By objecting to plans, boycotting it, or supporting or opposing it.
How can suppliers influence a business?: By raising prices, delaying deliveries or offering credit.
Impact on stakeholders versus influence of stakeholders: Impact: the business affects them (for example noise from a new factory). Influence: they affect the business. A stakeholder's influence is stronger when it has alternatives or the business depends on it.
Give an example of stakeholder conflict and why it arises: Owners want higher dividends while employees want higher pay. Both draw on the same profit, so one decision cannot fully satisfy both. A judgement says which group has more influence and what the business should do.

3.1.5 Business location

The five location factors named in the specification: Proximity to the market, availability of raw materials, labour, competition and costs.
Location factor: proximity to the market: Being close to customers brings more passing trade and sales, and quicker, cheaper delivery of fresh or fragile goods. Most important for businesses customers walk into.
Location factor: availability of raw materials: Being near suppliers lowers transport costs for bulky or perishable inputs, such as a bakery near a flour mill.
Location factor: labour: The business needs enough staff with the right skills, at a wage it can afford.
Location factor: competition: Near rivals: the area draws more customers, but they are shared. Away from rivals: customers have fewer alternatives, but demand may be low.
Location factor: costs: Rent, rates, utilities, transport and wages. They must be weighed against the income the site brings in.
How does selling online change location decisions?: It weakens the pull of being near the market, but the business still needs good delivery links.
A shop on a busy street costs £1,900 a month in rent; an out-of-town unit costs £800. How do you decide?: The busy site costs £1,100 a month more. It is worth it only if the extra sales it brings earn more than £1,100 a month. The cheapest site is not always the best.

3.1.6 Business planning

Business plan: A written document setting out what the business intends to do and how it will do it.
The specification's four purposes of a business plan: Its importance in setting up a new business; raising finance; setting objectives; detailing how the functions of the business will be organised.
The usual main sections of a business plan: Executive summary, business idea and objectives, target market and research, marketing plan, operations, people, and financial forecasts (start-up costs, sales, costs, profit, cash flow).
Benefits of business planning: Tests the idea on paper before money is spent; helps raise finance because lenders can judge the risk; sets targets to measure progress; shows who does what in each function.
Drawbacks of business planning: Takes time to research and write; based on forecasts that may be wrong; can go out of date when the market changes; a rigid plan can slow a reaction to new opportunities.
Fixed costs and variable costs, with examples: Fixed costs do not change with output (rent, insurance). Variable costs change with output (materials, packaging). Test: if output doubles and the cost doubles, it is variable.
Formulas: revenue, total costs and profit: Revenue = price × quantity sold. Total variable costs = variable cost per unit × quantity. Total costs = fixed costs + total variable costs. Profit = revenue − total costs (a negative answer is a loss).
Price £40, variable cost £12 per unit, fixed costs £3,000 a month. Find the profit at 150 units.: Revenue 150 × £40 = £6,000. Variable costs 150 × £12 = £1,800. Total costs £1,800 + £3,000 = £4,800. Profit £6,000 − £4,800 = £1,200.
Same business (price £40, variable cost £12, fixed costs £3,000). Find the result at 80 units.: Revenue £3,200. Variable costs £960. Total costs £3,960. £3,200 − £3,960 = −£760, a loss of £760.
Is a business plan useful to an owner who is not borrowing any money?: Yes. It makes the owner think through the practical detail and risks before committing their own money, and judge whether the idea is financially viable.

3.1.7 Expanding a business

Methods of expansion named in the specification: Franchising, opening new stores, e-commerce, outsourcing, mergers and takeovers.
Organic (internal) growth versus external growth: Organic: growing from the business's own activity, such as new stores. Usually slower but keeps control. External: a merger or takeover. Faster, but costs more and carries the risk of a clash of cultures.
Franchising: benefit and drawback for the franchisor: Benefit: fast growth using the franchisee's capital, plus fees and a share of revenue. Drawback: less control and profit is shared; one badly run outlet can damage the brand.
Opening new stores: benefit and drawback: Benefit: the owners keep control and the same brand and methods while reaching new customers. Drawback: premises and staff are costly, and a bad location may lose money.
E-commerce as a method of expansion: benefit and drawback: Benefit: a wider market, open at all times, no extra shop needed. Drawback: website, delivery and returns costs, and many online rivals.
Outsourcing: benefit and drawback: Benefit: a specialist may do the task cheaper or better, so the business can focus on its core activity. Drawback: less control of quality and timing, and reliance on the supplier.
Merger versus takeover: Merger: two businesses agree to join as one. Takeover: one business gains control of another, which may not want it. Takeovers give quick growth but are often expensive and may meet resistance.
Economies of scale, and the two types named in the specification: Average unit cost falls as output rises. Purchasing: bulk orders earn a lower price per unit from suppliers. Technical: larger or specialised machinery whose cost is spread over more units.
Diseconomies of scale and the three causes named in the specification: Average unit cost rises because the business has grown too large. Causes: poor communication, coordination issues and reduced staff motivation. The risk grows with size, but they are not inevitable.
Average unit cost: formula and example: Average unit cost = total cost ÷ output. Example: £90,000 ÷ 12,000 tiles = £7.50 per tile.
Total cost £48,000 at 8,000 meals and £63,000 at 9,000 meals. What does the change suggest?: £48,000 ÷ 8,000 = £6.00; £63,000 ÷ 9,000 = £7.00. Average unit cost rose as output grew, which suggests diseconomies of scale.
Exam trap: do economies of scale reduce total costs?: No. Total cost still rises with output; it is the average (unit) cost that falls.