Unit 1

Why do businesses exist?

• Profit - generating a surplus

• Growth - expanding sales, market share and entering new markets

• Survival - staying in business rather than making high profits

• Cash flow - ensures survival and growth

• Social - benefit society

• Ethical - goals based on moral principles

What is the relationship between mission and objectives?

Mission - outlines the overall purpose and values of a business

Objectives - specific, measurable targets that helps the business achieve its mission

What is the difference between mission, corporate, functional objectives?

Mission - overall purpose of the business

Corporate objectives - main goals for the entire business

• Help achieve the mission

Functional objectives - specific goals for each department

• they support the corporate objectives

Why do businesses set objectives?

• Motivate employees - clear, achievable objectives can help morivate staff. Employees are most likely to work effectively when they know what they are working towards

• Measure performance - can compare actual results with targets to assess how well they are performing, if not successful or meeting targets they can evaluate what is going wrong and fix it

• Provide direction and focus - provides a sense of focus and purpose to the employees activities to make sure they are all working towards the same goal

What are internal influences on objective?

• Corporate culture - The shared values, beliefs, and norms within the business

• Leadership and management - style of vision of leaders can heavily impact objectives

• Resources available - financial, human and physical resources

What are the external influences on business objectives?

• Economic environment - growth, recession, inflation, interest rates. In a booming economy objectives may focus on growth and profit however in a recession objectives may focus on survival, cost cutting and cash flow

• Competition - may affect profits or objectives such as focusing on customer service

• Technology - may affect profits as technology allows for cost cutting and may also help the business grow by being able to open up to new markets

• Environmental - increasing emphasis on environmental issues may encourage the business to become more sustainable and this could effect profits and costs but increase ethical value

What is profit?

Revenue / turnover - sales price x quantity sold

Total costs - fixed costs + variable costs (change with output)

Profit - total revenue - total costs

What is the importance of profit?

• Used as a motivator for employees through profit sharing or bonuses

• Used to attract investors

• Used for source of finance for growth and reinvestment or towards production for new products

• Measure of success, business often compare profit with budgets or competitors to evaluate performance

What is a sole trader ?

Business that is owned and controlled by one individual

What are the advantages of being a sole trader?

• keep 100% of the profits

• Make all the decisions so avoids conflict

• Cheap and easy to set up

What are the disadvantages of being a sole trader?

• unlimited liability

• Limited finance

• Huge workload and little expertise

What is unlimited and limited liability?

Limited - the business and business owner is seen as its own separate legal entity. The owners personal assets are protected and the owners are only responsible for up to their investment

Unlimited - the business owners are responsible for all the debts of the business there is no legal distinction between the owner and the business

What is a private limited company?

This is a limited company which means it’s a separate legal entity from its owners. The business is owned and controlled by a small group of private individuals, shares cannot be sold on the stock exchange

What are the advantages of a Ltd?

• limited liability

• Ability to raise extra finance

• Credibility - often seen as more professional and offer a better reputation

• Usually less pressure for short term returns from shareholders, can focus more on long term growth

What are the disadvantages of a Ltd?

• Ability to raise finance is less than a plc

• Limited exit strategy and sales options

• Legal and admin requirements which increase costs and complexity

• Less financial privacy as finance can be seen by competitors and investors

• Loss of control

What is a public limited company?

A limited company that is its own legal separate entity. It is owned by shareholders and allowed to sell shares to the general public via the stock exchange

What are the advantages of a plc?

• huge access to finance

• Enhance prestige

• Limited liability

• Shares are easily bought and sold at providing liquidity for investors

What are the disadvantages of a plc?

• loss of control and risk of takeover

• High costs due to admin, complexity and regulatory costs

• Post financial accounts which can put off investors if performance has dropped

• Pressure to deliver short term results such as dividends to shareholders

What is a private sector business?

• ownership - private individuals, entrepreneurs or shareholders

• Purpose - generate a profit

• Funding - private investment, sales revenue and loans

• examples - Tesco, Apple, Dyson

What is a public sector business?

• ownership - government

• Purpose - provide an essential good or service rather than make a profit

• Funding - taxes on individuals and businesses

• examples - state schools, NHS, BBC

What is a share?

A share represents a portion of ownership in a company. When someone buys a share, they become a shareholder, which means they own part of the business

• Have a voting right (voting right dependent on number of shares owned)

• Qualify for a dividend (percentage of the company’s profits)

What is ordinary share capital?

total value of money raised by a company from selling ordinary shares to shareholders

• Shows amount raised by shareholders

• Changes with new share issues

• important on financial balance sheet

Calc - number of shares issued x price per share at issue

What is market capitalization?

Total value of a company’s shares based on the current share price.

• This shows how much the stock market thinks the business is worth

• Changes with fluctuating daily share price

• Used by investors to assess business value

Calc - Current share price × Number of issued shares

What is the role of shareholders?

Why do shareholders invest?