Flashcards · 4BS1 · Topic 1

Business activity and influences on business flashcards

44 cards on Topic 1, subtopics 1.1 to 1.8. Pick a subtopic or study them all.

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1.1 Business objectives

Financial objectives named in the specification: Survival, profit, sales, market share and financial security.
Non-financial objectives named in the specification: Social objectives, personal satisfaction, challenge, and independence and control.
Aim and objective: the difference: An aim is a general direction. An objective is a specific, measurable target.
Why might a business change its objectives?: Market conditions (for example falling demand), technology, performance (missing or beating a target), legislation, and internal reasons such as a new owner or manager.
A firm sells 18,000 in a market of 240,000. What is its market share, and what sales would give 10%?: Share = 18,000 ÷ 240,000 × 100 = 7.5%. 10% needs 0.10 × 240,000 = 24,000 of sales, which is 6,000 more.

1.2 Types of organisations

Unlimited and limited liability: Unlimited liability: the owner’s personal assets can be used to pay business debts. Limited liability: the loss is capped at the money invested.
Sole trader and partnership: Sole trader: one owner with unlimited liability, who keeps all the profit. Partnership: two or more owners, usually with unlimited liability, sharing finance and profit.
Private and public limited company: Both are owned by shareholders with limited liability. Private (Ltd): shares are not sold to the public. Public (plc): shares are open to the public.
Public corporation: what it is, for and against: A business owned by the state. For: essential services even if unprofitable, public interest before profit, prices held down. Against: less pressure to be efficient, taxpayers may cover losses, decisions may be political.
Ownership and control: Ownership is who holds the business; control is who makes the decisions. They are the same person in a sole trader and often different people in a large company.
Franchise and social enterprise: Franchise: the franchisee pays to use the franchisor’s brand and methods; a known name and support, but fees and rules. Social enterprise: trades to achieve a social or environmental purpose.
Dividend and retained profit: Dividend: the part of profit paid to shareholders. Retained profit: the part kept to finance the business. More of one means less of the other.

1.3 Classification of businesses

Primary sector: Extracting raw materials from the earth: farming, fishing, forestry, mining.
Secondary sector: Converting raw materials into finished or semi-finished goods: manufacturing, construction, food processing.
Tertiary sector: Provision of a wide variety of services: retail, banking, transport, teaching, repairs.
Classify: growing tomatoes, making tomato sauce, selling the sauce: Growing: primary. Making sauce: secondary. Selling: tertiary. One business can work in several sectors, so classify each activity.
Is a semi-finished good such as steel sheet or flour primary or secondary output?: Secondary. It has been processed from raw materials, and becomes an input for another business.

1.4 Decisions on location

Factors that influence location: Proximity to the market, to labour, to materials and to competitors; the nature of the business activity; the internet and e-commerce; legal controls; and trade blocs.
Legal controls (on location): Rules that limit where or how a business may operate, such as use of land, noise, pollution and safety. A site may be unavailable, costs may rise, or a firm may be pushed away from housing.
Trade bloc: A group of countries that agree to reduce trade barriers between themselves. Trade inside the bloc is easier; outsiders may pay a tariff (a tax on imports).
How has the internet changed location decisions?: Selling online allows cheaper premises, a wider market and longer opening hours, but adds delivery, returns and website costs. Fixed premises still matter where customers want to see goods or receive personal service.
Which location factor often leads for a business with heavy, bulky or perishable inputs, and for one selling to walk-in customers?: Heavy, bulky or perishable inputs: proximity to materials. Walk-in customers: proximity to the market. These are tendencies, not rules.
How do you judge a relocation on cost?: Years to recover = one-off cost of the move ÷ annual net saving. Then weigh staff, customers and risk.

1.5 Business and the international economy

Globalisation: opportunities and threats: Opportunities: larger markets, cheaper materials or labour, economies of scale, risk spread. Threats: more overseas competition, dependence on overseas suppliers, exchange rate risk, differences in culture and rules.
Why does a business become a multinational?: New markets and higher revenue, lower costs abroad, avoiding tariffs by producing inside a market, economies of scale, spreading risk, and using a global brand.
Multinationals: benefits and drawbacks for the host country: Benefits: jobs, tax, investment, skills and technology, choice, work for local suppliers. Drawbacks: profits sent abroad, local firms may close, jobs insecure if production moves, environmental damage.
Exchange rate conversion, with £1 = USD 1.60: Home to foreign: multiply. £35 × 1.60 = USD 56. Foreign to home: divide. USD 840 ÷ 1.60 = £525.
Effects of a stronger home currency: Exports are dearer abroad, so competitiveness falls. Imports are cheaper in the home currency, so importers’ costs fall. A weaker currency has the reverse effects.
A £50 product: the pound falls from USD 1.30 to USD 1.10. What happens to its US price?: 50 × 1.30 = USD 65 before; 50 × 1.10 = USD 55 after. The USD 10 fall makes it easier to sell in the US.

1.6 Government objectives and policies

Effects of taxes on business: Tax on profits: less profit kept for growth or owners. Tax on incomes: people have less to spend, so demand weakens. Tax on spending: higher customer prices, so possibly lower sales.
Constraints on public spending: Tax revenue is limited, borrowing must be repaid with interest, spending has an opportunity cost, and a weak economy lowers tax receipts.
Infrastructure and its effect on business: Roads, rail, ports, power and communications. Better infrastructure lowers transport costs and improves reliability and access to markets and workers.
A 15% tariff on an import costing 40. What is the new cost, and does a home product at 44 compete?: Tariff = 40 × 0.15 = 6, so the import costs 46.00. The home product at 44 is now cheaper.
Effects of higher interest rates on businesses and consumers: Businesses: higher interest on loans and overdrafts, lower profit, investment delayed. Consumers: credit dearer and saving more attractive, so spending falls, especially on big-ticket goods such as cars and furniture.
A loan of 120,000: interest rate rises from 5% to 8%. Change in interest?: 6,000 rises to 9,600. That is a rise of 3 percentage points but a 60% rise in the bill.

1.7 External factors

The four external factors in the specification: Social, technological, environmental and political. The business cannot control them but must respond to them.
Social factors: examples and effects: An ageing population, changing tastes, ethical attitudes. They affect the product range, advertising and staffing.
Technological factors: examples and effects: Automation, online selling, new software. They affect costs, sales channels and the need for retraining.
Environmental and political factors: examples: Environmental: pollution, waste, resource use, climate concern (affecting packaging, energy use, reputation). Political: government policy, elections, stability (affecting planning, tax, trade and laws).

1.8 What makes a business successful?

Ways of measuring business success named in the specification: Revenue, market share, customer satisfaction, profit, growth, owner/shareholder satisfaction, and employee satisfaction.
Reasons for business failure named in the specification: Cash flow problems or lack of finance, not being competitive, and failure to adapt to changes in the market.
Sales rise from 1,000,000 to 1,150,000. Calculate growth.: 150,000 ÷ 1,000,000 × 100 = 15%
Why is success different for different businesses?: Success means achieving the business’s own objectives. A new business aiming to survive looks first at cash; a company owned by shareholders looks at profit; an owner who values independence may count a smaller profit as success.
Not competitive and failure to adapt: the difference: Not competitive: weaker than rivals now on price, quality or service. Failure to adapt: not responding as tastes, technology or rivals change.