Business & Its Environment

Enterprise & Adding Value

Every business exists to turn inputs (Factors of Production) into outputs that satisfy customer needs

Enterprise & Adding Value: Factors of Production (FOP)

The four resources needed to produce goods or services.

Factors of Production: LAND

Natural resources use in production (plots of land, minerals, water)

Factors of Production: LABOUR

Human mental and physical efforts.

Factors of Production: CAPITAL

Man-made physical assets used in production (EG: Machinery, factories, IT systems)

Factors of Production: ENTERPRISE

The skill and risk-taking involved in combining land, labour, and capital to create a product.

Adding Value

Difference between the cost of raw materials and purchasing inputs and the final selling price of the finished product.

It is NOT profit. Profits subtracts all expenses (labour, rent, marketing). Added value only considers the cost of bought-in materials compared to the final selling price. You add value via branding, excellent customer service, unique product features, or convenient packaging.

Formula of Added Value

ADDED VALUE = SELLING PRICE — COST OF BOUGHT-IN INPUTS

Sectors of Economy

Businesses operate across all three distinct stages of production

Stage 1: PRIMARY SECTOR

Business that extracts or harvests natural resources from the earth

(EG: Coal mining, fishing, wheat farming)

Stage 2: SECONDARY SECTOR

Businesses that manufactures, assembles, or processes raw materials into finished or semi-finished goods.

(EG: Car assembly plants, food processing factories, construction)

Stage 3: TERTIARY SECTOR

Businesses that provide services to consumers or other businesses.

(EG: Banking, Insurance, Retail stores, Hotels)

Deindustrialisation

The decline in the importance of the secondary sector and in a growth in the tertiary sector within a country overtime.

Legal Structures & Business Ownership: UNLIMITED LIABILITY

The legal obligation of a business owner to pay off all business debts using their personal assets (like their car, house, or/and savings) if their business goes bankrupt.

Legal Structures & Business Ownership: LIMITED LIABILITY

The liability of stockholders is strictly restriced to the amount they invested in buying shares. Their personal assets are also legally protected.

Legal Structures & Business Ownership: A) Sole Trader

An unincorporateed business owned and operated by one person (though they can emply others)

-Legal Status: Unincorporated (owner and the business are legally the same entity)

-Liability: Unlimited

Key Advantages:

-Owner keeps 100% ownership

-Complete control over business decisions

-Easy and inexpensive to set up (there is minimal legal formalities)

Key Disadvantages:

-Unlimited Liability (High personal risk)

-Difficult to raise capital (relies on personal savings or small business loans)

-Lack of continuity (if the owner dies, the business legally ceases to exist).

Legal Structures & Business Ownerships: B) Partnerships

A business owned by 2-20 partners who shares decision-making and profits.

-Legal Status: Usually Unincorporated (Unless formed as an Llp)

-Liability: Unlimited (Partners are all jointly liable for all debts)

Key Advantages:

-Decision-making and workload are all shared

-More capital can be raised compared to a sole trader

-Specialisation (EG: one partner handles marketing, another handles finances)

Key Disadvantages:

-Unlimited Liability for all general partners

-Potential for conflict/disagreements between partners

-profits must be shared according to the partnership agreement

Legal Structures & Business Ownership: C) Private Limited Company (Ltc)

An incorporated business owned by shareholders, where shares cannot be sold to the general public without agreements from other shareholders.

-Legal Structures: Incorporated )The business is a separate legal entity from its owners)

-Liability: Limited Liability

Key Advantages:

-Limited liability protects shareholder’s personal assets

-Easier to raise finance by selling shares privately to friends, family, or venture capitalists.

-Continuity of existence (the company continues even if a shareholders dies)

Key Disadvantages:

-Legal Formalities and set up costs are higher than unincorporated businesses.

-Financial statements must be submitted to regulatory authorities (less privacy)

-Shares cannot be traded publicly, limiting maximum capital potential

Legal Structures & Business Ownerships: D) Public Limited Company (Plc)

A large incorporated business wth limited liability, whose shares cannot be sold publicly to anyone on the stock market exchange.

-Legal Status: Incorporated

-Liability: Limited

Key Advantages:

-Huge capital-raising potential through public share issues.

-High public profile and prestige can improve supplier trust and credit terms.

Key Disadvantages:

-Risk of hostile takeover (Because, anyone can buy a controlling percentage of shares on the open market)

-Strict legal requirements and full disclosure of financial accounts to the public.

-Potential separations of ownership and control (Because, even when shareholders own the firm, they hired directors to run it, leading to conflicts of interest)