TOPIC 1 - What is a business?

• 3.1.1 understanding the nature and purpose of business
• what is needed in order to start a business?

  - you need CAPITAL to start a business + this must increase in order to establish a successful business
• what are the main six business objectives?

  1) profit

  2) growth

  3) survival

  4) cash flow

  5) social

  6) ethical
• what is profit?


  - to achieve sales revenue that is higher than total costs

  - profit = sales revenue - total costs
• what is loss?


  when total costs are greater than sales revenue
• what is growth?


  - to increase in size either by value of sales of volume of sales

  - organically e.g. expansion, launching new products

  - externally e.g. joining other businesses, taking them over
• what does growth need to be and why?

  - growth needs to be sustainable otherwise it may conflict other objectives e.g. profit
• what is survival?


  - to continue to exist as a business + avoid bankruptcy

  - may be the primary objective of a start up business or one that is experiencing difficult trading conditions
• what is cash flow?

  - the flow of cash into and out of a business over a period of time

  - to ensure sufficient amount of cash is available to meet day to day expenses
• what are the expenses within a business?

  wages

  employees

  rent

  logistics

  sales

  marketing
• what are social and ethical objectives?

  intangible or immaterial objectives
• what is the social aspect in relation to business?

  - to behave in a way which benefits society

  - e.g. create employment, support local community or improve educational standards
• what is the ethical aspect in relation to business?

  - to behave in way which is considered morally correct

  - e.g. treating stakeholders, suppliers and employees in a fair manner or reducing negative impacts on the environment
• what is a mission statement?


  a brief written statement of the purpose of a company or organisation

  overall reason for the business' existence
• corporate aims?


  long term targets and plans to fulfil the mission statements
• corporate objectives?


  medium to long term quantifiable targets to fulfil the mission statement
• corporate stratergy


  the actions to be taken by the business to achieve the objectives
• business tactics?


  actions taken on a day to day basis to support the strategy
• why businesses set objectives?

  - motivate employees

  - measure and review performance

  - create reward systems when achieved
• what is revenue?


  money coming in from the sale of goods + services
• what is total costs?

  the money going out to provide for
• equation for revenue?


  revenue = selling price x quantity sold
• what are fixed costs?

  costs that stay the same regardless of the output e.g. rent + managerial salaries
• how do fixed costs look on a graph?

  shown as a straight horizontal line on the graphs
• What are variable costs?

  costs that change in relation to the number of items produced e.g. raw materials
• how do variable costs look on a graph?

  variable costs start at zero and slope upwards when shown on a graph
• what are total costs?

  fixed costs + variable costs
• how do total costs look on a graph?

  start at the fixed costs point on the y axis and slope upwards parallel to the variable cost line
• 3.1.2 understanding different forms of business
• unincorporated business?


  - no legal difference between owner + business e.g. if the company is bankrupt you are also bankrupt

  - owner has unlimited liability

  - most unincorporated businesses operate as sole traders
• incorporated business?


  - legal difference between the business + the owners

  - owners (shareholders have limited liability)

  - usually private limited companies
• unlimited liability?


  - crucially important characteristic of unincorporated businesses

  - business owner(s) personally responsible for the debts + liability of the business
• sole traders (unincorporated)?


  - a business that is owned and operated by one person

  - can employ people but these employees don't share the ownership
• advantages of operating as a sole trader?


  - control all profits

  - quick + easy to set up

  - simple to run

  - minimal paperwork

  - easy to close/shut down
• disadvantages of operating as a sole trader?

  - unlimited liability

  - harder to raise finance

  - can pay a higher tax rate than a company
• why is incorporation and limited liability important?

  - protects shareholders

  - shareholders only lose the value of their investment in the share capital of the company
• what does limited liability not protect against?

  - wrongful or fraudulent trading
• What are the main features of a Limited company?

  - Have separate legal entities to the founders

  - owned by shareholders and run by directors (who run the company in the interests of the shareholders)

  - SH's own a share of the company but do not own assets of the company + are not personally responsible for company debts
• What can legal entities do?


  - Own things itself (assets)

  - can sue or be sued
• Insolvent?


  - Cannot pay its debts

  - company closes if it becomes insolvent