Flashcards · 1BS0 · Topic 1.4

Making the business effective flashcards

20 cards on Topic 1.4, subtopics 1.4.1 to 1.4.4. Pick a subtopic or study them all.

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1.4.1 Options for start-up and small businesses

Unlimited liability and limited liability: Unlimited: the owner is personally responsible for every business debt (sole traders and ordinary partnerships). Limited: the owner can lose only the amount invested (shareholders in a private limited company).
Sole trader, partnership and private limited company: one strength and one weakness of each: Sole trader: full control and keeps all profit; personal risk and little capital. Partnership: pooled money and skills; disagreements, shared profit, personal risk. Ltd: owner protection, can sell shares; more paperwork, shares not sold to the public.
A sole trader's business owes £35,000 and its assets raise £22,500. How much must the owner fund personally?: Shortfall = 35,000 − 22,500 = £12,500. With unlimited liability, the owner must pay it from personal assets.
Franchisor and franchisee: who pays what?: The franchisor owns the brand and method and provides support; it usually receives an initial fee and a royalty. The franchisee runs the outlet, pays the fee, royalty and running costs, and keeps the profit left.
Advantages and disadvantages of franchising for the franchisee: Gains: a recognised brand, a tested system, less risk, support. Losses: fees and royalties, little freedom over products and prices, a reputation shared with other outlets.
Initial fee £15,000 plus a 4% royalty on sales revenue of £225,000. What does the franchisee pay in the first year?: Royalty = 0.04 × 225,000 = £9,000. First-year payments = 15,000 + 9,000 = £24,000.

1.4.2 Business location

The four proximity factors for location named in the specification: Proximity to the market, labour, materials and competitors.
Which location factor matters most for each type of business activity?: Retail and personal services: the market (passing customers). Manufacturing with heavy or bulky inputs: materials. Skill-based work: labour. Perishable goods: speed to the market or the source.
Being near competitors: gain and risk: Gain: shared footfall. Risk: shared customers. Being away from rivals can give a local monopoly, but low passing trade.
How does the internet affect location decisions?: With e-commerce customers can be anywhere, so being near the market matters less and cheaper premises become possible. Premises still matter for storage, dispatch, trying goods and services delivered in person.
Exam trap: does the internet make premises unnecessary?: No. Delivery, storage and click-and-collect bring new costs, and many firms mix an online presence with a shop or depot.

1.4.3 The marketing mix

The marketing mix: The set of decisions a business makes about product, price, promotion and place.
Why each element of the mix matters: Product must meet a need of the target market. Price affects demand and profit and must cover costs. Promotion: customers cannot buy what they do not know about. Place: customers must be able to get the product easily.
How do the competitive environment and changing consumer needs affect the mix?: Rivals' prices, products and promotion may lead the business to adjust price, find a different feature or promote its strengths. Changing tastes, incomes and lifestyles may mean reviewing all four elements.
How do e-commerce and digital communication affect the mix?: E-commerce mainly changes place (wider reach), but also price (easy comparison) and product (wider range). Digital communication changes promotion first: targeted, quick, low cost, but poor reviews spread fast.
What does balancing the marketing mix mean?: Making the four choices consistent with each other and the target market. It does not mean spending equally on each.

1.4.4 Business plans

What a business plan should identify (specification list): The business idea, aims and objectives, target market (market research), forecast revenue, cost and profit, cash-flow forecast, sources of finance, location and the marketing mix.
The two purposes of planning: Minimising risk (tests the idea against research; forecasts show whether profit is possible and warn of cash shortages) and obtaining finance (gives lenders and investors evidence, so the business looks a lower risk).
Does a business plan remove risk?: No. It reduces risk but cannot remove it, because forecasts are estimates.
Price £8, 650 customers, fixed costs £1,900, variable cost £3.20 per customer. Find the forecast profit.: Revenue = 8 × 650 = £5,200. Total variable costs = 3.20 × 650 = £2,080. Total cost = 1,900 + 2,080 = £3,980. Profit = £1,220.