AQA A Level Business: What is Business — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: What is Business revision notes

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Section A

1. Explain the difference between profit and cash flow. [3]

2. State three common business objectives other than profit. [3]

Section B

3. Explain the difference between the private sector and the public sector, giving an example of each and one difference in objectives. [5]

4. Explain how the following affect the choice of legal structure: liability, access to finance, and the desire to retain control. [6]

5. Explain three advantages and two disadvantages of a business becoming a plc. [10]

6. Evaluate whether a business should base decisions primarily on quantitative data. [12]

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Section C

7. Explain one example of conflict between stakeholder groups in a business, and explain why their interests oppose. [4]

8. Using the PESTLE framework, explain two external factors that could affect a business’s decision making. [6]

9. A business exports most of its output. Using the SPICED mnemonic, explain the effect on the business if the pound strengthens against other currencies. [3]

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Answers

1. Profit is revenue minus total costs over a period — an accounting measure [1]. Cash flow is the actual movement of money into and out of the business [1]. A business can be profitable but run out of cash if customers pay late or it holds too much stock, and it can be loss-making yet cash-rich in the short term [1].

2. Any three: survival, growth or increased market share, social or ethical objectives, increasing shareholder value, diversification, improving quality or customer satisfaction [1] [1] [1].

3. The private sector is owned by individuals or shareholders and is run primarily to make a profit, e.g. a supermarket chain [1] [1]. The public sector is owned and funded by the state and is run to provide a service to the population, e.g. the NHS or state schools [1] [1]. The key difference is that public sector organisations are judged on service delivery and value for money rather than profit [1].

4. Liability — a sole trader or partnership has unlimited liability, so an owner who wants to protect personal assets will incorporate [1] [1]. Access to finance — a limited company can issue shares and generally borrows more easily because lenders see it as lower risk with audited accounts, so a capital-intensive business will incorporate [1] [1]. Control — issuing shares dilutes ownership and voting power, so a founder who wants to keep full control may remain a sole trader or a private limited company rather than floating [1] [1].

5. Advantages: it can raise very large amounts of capital by selling shares on the stock exchange, funding major expansion [1] [1]. It gains status and public profile, which helps with credibility among customers, suppliers and lenders [1] [1]. Shares are freely transferable, making the company more attractive to investors because they can exit easily, which lowers its cost of capital [1] [1]. Disadvantages: the original owners lose control — anyone can buy shares, so the company becomes vulnerable to hostile takeover and to pressure from institutional investors [1] [1]. It faces greater regulation and disclosure: accounts are public, so competitors can study them, and the cost of compliance and of the flotation itself is high [1] [1].

6. For quantitative data: it is objective and measurable, so decisions can be compared and justified to shareholders [1]; it allows techniques such as investment appraisal, break-even and decision trees that give a clear numerical answer [1]; it can be tracked over time to see whether a decision worked [1]. Against: numbers can be based on unreliable forecasts — a payback calculation is only as good as the sales projection behind it [1]; important factors such as staff morale, brand reputation, customer loyalty and ethics cannot be quantified but may determine success [1]; data describes the past, and in a fast-changing market past patterns may not hold [1]; over-reliance on numbers can produce decisions that are defensible but wrong, and discourages innovation, which by definition has no data behind it [1]. Judgement: quantitative data should inform but not determine decisions [1]. Its value depends on the reliability of the data, the time available, and the type of decision [1] — an operational decision such as reorder quantity can be made numerically, while a strategic decision on brand positioning requires qualitative judgement alongside the figures [1] [1].

7. Any valid conflict, e.g. shareholders want costs cut to raise profit and dividends [1], while employees want higher pay and job security [1]. The interests oppose because cutting costs — through redundancies or pay freezes — directly reduces what is available for wages [1]; judging which should take priority depends on the specific circumstances of the business, such as whether it is fighting for survival or generating strong profits [1].

8. Any two, 3 marks each, e.g. Economic — rising interest rates raise the cost of borrowing [1] and reduce consumer spending [1], so a business may delay investment decisions [1]. Political/Legal — new regulation [1] can raise compliance costs [1], affecting pricing or investment decisions [1].

9. SPICED: Strong Pound, Imports Cheap, Exports Dear [1]. If the pound strengthens, this business’s exports become more expensive for foreign buyers in their own currency [1], which is likely to reduce overseas demand and sales revenue [1].

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Where marks are usually lost

• Treating profit and cash flow as the same thing.
• Saying the public sector “has no objectives”.
• Listing plc advantages without the corresponding loss of control.
• Not distinguishing operational from strategic decisions in the evaluation.
• Identifying a stakeholder conflict without explaining why the two groups’ interests oppose.
• Naming a PESTLE letter without linking it to a specific effect on the business’s decision making.