Pearson Edexcel GCSE Business (Theme 1)

Unlimited liability

The owner is responsible for the businesses debts

3 disadvantages of a partnership

1. unlimited liability

2. profits are shared

3. there may be disagreements

4. 20 people max.

5. partnership ends when one partner leaves

6. decisions made by one partner can affect all partners

3 disadvantages of a franchise

1. unlimited liability

2. franchisees need to pay an initial fee as well as ongoing fees (royalties) and/or shares of their profits

3. less control for the franchisee as they will have to run the promotions currently being advertised

4. cannot make independent decisions

5. brand reputation can be damaged by other franchisees

3 advantages of a franchise

1. lower risk as business model is already successful

2. support and training provided by the franchisor

3. franchisees benefit from national marketing campaigns

4. market research done at head office level, the business will get the benefit of the promotional activity and signage all done on a national level

5. less competition as territories are divided up

3 advantages of a partnership

1. very few procedures to set up

2. partners may have a wider expertise and can share ideas

3. decision making is shared

4. financial information is kept private

5. more sources of finance

6. risk is shared

7. easier to raise finance to establish or grow a business

Partnership

A business owned by 2-20 people who share the financial risk, decision making, and the profits

Franchisor

The person or business who offers to franchise other businesses its trading methods, products, and business logos

Royalty

A payment made to the franchisor based on the sales turnover of the franchise

Sole trader/proprietor

A business owned by one person who has unlimited liability

Franchisee

A person or business buying the franchise

3 advantages of sole proprietorship

1. they make all decisions

2. no disagreements and quick decisions

3. they keep all the profit

4. quick and easy to set up

5. all financial information kept private

3 disadvantages of sole proprietorship

1. unlimited liability

2. may be difficult to raise money to start or grow a business

3. a lot of pressure on just one person

4. difficult to run if the sole trader is sick or needs time off

Franchise

One business gives another business permission to trade using its name and products in return for a fee and a share of its sales

Private Limited Company (Ltd)

A company made up of people who know each other and with limited liability

Limited liability

Risk is limited to the amount of money invested into the business. Personal assets are not at risk.

3 advantages of a private limited company

1. limited liability

2. term 'ltd' makes the business seem bigger or a more long-established business

3. can be easier to raise finance to establish or grow the business

4. business continues to trade even if the shareholders change

3 disadvantages of a private limited company

1. more complex to set up than a sole proprietorship or partnership

2. disagreements between share holders

3. financial information is published

4. more requirements to report information to organisations such as HMRC and Companies House

Business Risk

The possibility that an enterprise may have lower profits than expected or experience a loss

A business could create a new product by...

1. mix and match

2. new version of an old product/service

3. cheaper version of an old product/service

Service

An act that a business person carries out for you in exchange for money

Product

Anything capable of satisfying customer needs

What is the key reason for business failure?

Poor cash flow

- inflows are lower than expected or outflows are higher than expected

3 main risks are...

1. business failure

2. financial loss

3. lack of security (entrepreneur)

Name 3 changes in technology and why new business ideas have developed

1. The invention of the internet. Businesses have found a new cheaper way to reach the consumer - online

2. New tech in VR means there are lots of new products on the market.

3. Advancements in new products (e.g robotics)

Explain how changes in what consumers want can develop new ideas. (3)

POINT

- Consumers want organic, free range, sustainable, eco-friendly products

LINK 1

- Therefore, there is a gap in the market for these products

LINK 2

- As a result, businesses will spot this and come up with new ideas to fill this new gap

E-commerce

Purchasing and selling goods through a laptop, iPad, etc.

M-commerce

Purchasing and selling goods through a mobile device.

Why do original ideas come about?

1. To solve problems

2. An entrepreneur has a passion or interest

3. A business carried out research into the wants and needs of shoppers and created products to meet those ends

4. A gap in the market may have been spotted

Business reward

A business reward is a benefit that it brings to the owner. For example, better working conditions.

3 aspects of business reward

1. Business success

2. Profit

3. Independence

Profit

Total revenue - total cost

3 purposes of business activity

1. Produce goods and service

2. Meet customer needs

3. Add value

4 things needed to produce goods/services

1. Land - somewhere to produce the goods

2. Labour - people to work in the business

3. Capital - money to start the business

4. Enterprise - drive/motivation by the owner

Added value

The difference between what a business pays its suppliers and the price it is able to charge for its product/service

5 ways to add value

1. Branding

2. Design

3. Unique selling point

4. Quality

5. Convenience

3 roles of an entrepreneur

1. To organise resources

2. To make business decisions

3. To take risks

4 customer needs

1. Price

2. Quality

3. Choices

4. Convenience

4 ways to generate sales

1. Lower prices

2. Promote the product through advertisement

3. Run a competition or other promotional activity

4. Improve the product

2 step plan for business survival

1. Find out what the customers want and need from a product and service

2. Provide that product or service

The purpose of market research

1. To identify and understand customer needs

2. To identify gaps in the market

3. To reduce risk and make informed business decisions

Primary research

Original data gathered by the researcher

4 main primary research methods

1. Survey

2. Questionnaire

3. Focus groups

4. Observation

Secondary research

The information already exists in some format, someone has already collected the data

2 main secondary research methods

1. Internally sourced information

2. Externally sourced information

Internally sourced information

the data, statistics, and research that a business has accumulated in the past

Externally sourced information

1. The internet

2. Market reports

3. Government reports

Segmentation

Dividing a target market into smaller categories by grouping customers/consumers with a particular characteristic

5 main ways to segment a market

1. Location

2. Demographics

3. Lifestyle

4. Income

5. Age

Market mapping

Measuring where existing brands sit on a 2 factor grid

For example, low price/high price and low quality/high quality

2 benefits of market mapping

1. Can spot a gap in the market where there are no competitors

2. Identify competitors so they can try to gain competitive advantage

3 limitations of market mapping

1. Just because there is a gap in the market does not mean there is a market in the gap

2. It is subjective, so therefore may not be accurate

3. Has to be updated regularly as new customers are always entering the market

Competitive environment

the dynamic external system in which a business competes and functions

2 types of competitors

1. Businesses that sell the same type of products (Direct competitors)

2. Businesses that do not sell the same product but are still in competition with each other (Indirect competitors)

4 things a business can do when operating in a competitive environment

1. Extra advertising and branding

2. Lowering the price

3. Adding value

4. Creating a unique selling point (USP)

Aims

Strategic goals of a business (very general)

Objectives

Specific steps to achieve your aim

Why does a business set aims and objectives?

1. To set specific targets by which business performance can be measured

2. To motivate workers to achieve

3. To clarify business direction and decision making

5 financial objectives

1. Survival

2. Profit

3. Sales

4. Market share

5. Financial security

5 Non-financial objectives

1. Social objectives

2. Personal satisfaction

3. Challenge

4. Independence

5. Control

Sales revenue equation

revenue = selling price x quantity sold

Fixed costs

Costs which don't vary with the level of output or sales. They need to be paid even if the business produces no products

3 examples of fixed costs

1. Rent

2. Advertising

3. Insurance

Variable costs

Costs which vary with the level of output or sales

3 examples of variable costs

1. Raw materials

2. Distribution costs

3. Temporary staff wages

Total cost equation

Total cost = total fixed cost + total variable cost

Profit

The amount of money left after all business costs have been paid

Gross profit equation

Gross Profit = Sales Revenue - Cost of Goods Sold

Net profit equation

Net Profit = Gross Profit - Expenses

Interest equation

Interest % = (total repayment - borrowed amount)/borrowed amount

- then x100

Break-even equation

BE = fixed costs/(selling price-variable cost)

Margin of safety equation

Total Sales - Break Even Sales

What 4 things do businesses need cash for?

1. To pay suppliers

2. To pay overheads

3. To pay employees

4. To prevent business failures (insolvency)

Cash

Money available in the business to pay the bills, cash may not come in the same month as it goes out

Cash flow forecast is a...

prediction

Cash flow

The relationship between the money flowing into a business and the money flowing out

Opening balance (cash-flow forecast)

If the business has been trading then it will be whatever cash is available at the start of the month

Closing balance (cash-flow forecast)

This is how much cash is available at the end of the month to be carried over to the next month as an opening balance

Why would a business need finance? (4)

1. Everyday bill repayments

2. Internal growth

3. Fixed costs

4. Expansion

Internal sources of finance

Finance which is remained internally, it does not increase the debts of the business. (Personal savings, retained profit)

External sources of finance

Finance provided by people or institutions outside the business, creates a debt that will require a payment.

Short-term finance

Needed for day-to-day running of a business and is usually up to a period of three years.

3 inflows for a business

1. Sales revenue

2. Loans

3. Grants

Overdraft

A facility offered by a bank that allows an account holder to borrow money at short notice.

3 benefits of overdraft

1. They are extremely flexible and can even be used for a single day if the business has a temporary cash-flow problem

2. Interest is only paid on the amount of the overdraft being used rather than the maximum level allowed

3. Security is not usually required

3 limitations of an overdraft

1. The interest rate charged is usually higher than for a loan

2. Banks can demand immediate repayment (this is rare)

3. Banks may refuse to give an overdraft until the business is established

Trade credit

the practice of buying goods and services now and paying for them later

2 benefits of trade credit

1. The business will never run out of products to sell

2. The business can sell the products first THEN pay the supplier so they won't have to raise finance for the goods

2 limitations of trade credit

1. The supplier may charge a higher cost for the products because of the credit arrangement

2. If this is the first year that the business has asked for trade credit, the supplier may say no

Personal savings

The owner may have personal savings which they can dip into to help finance the business further

3 benefits of personal savings

1. Easy access to the money through the owner's bank accounts

2. No complicated paperwork

3. No interest to pay on the money, so much cheaper than the loan

1 limitation of personal savings

The owner will not be able to spend it on something else like a car or holiday - this is opportunity cost

Venture capital

Venture capital businesses are ones that specialise in financing high-risk start-ups where there is lots of potential for a big return on their investment

3 benefits of venture capital

1. Venture capitalists can bring knowledge to businesses to help them expand

2. They take on high-risk businesses

3. They can help by providing the businesses with growth capital and strategies

2 limitations of venture capital

1. Owners may lose some of the control over the business

2. Owners may have to give up a large share of the profits to the venture capitalists

Share capital

Limited companies can issues shares in return for money, to raise funds, to grow, or to expand.

- Private limited companies can only issue shares to friends and family of the owner

- Public limited companies can float the share issue on the stock market and sell to anyone

3 benefits of share capital

1. You don't have to pay the money back or pay interest to the investors

2. Attracts new finance

3. Acts as an incentive for staff using shares or share options as a motivation tool

4. A way to raise your business' profile

3 limitations of share capital

1. Shares represent ownership of a business

2. When an individual buys shares in a business, they become one of its owners

3. Shareholders choose who runs a company and are involved in making key decisions, such as whether a business should be sold

Loans

An amount of money provide by one party to another with the understanding that the money will be returned, in full, often with interest.

2 benefits of loans

1. A medium to long-term business loan can help with all the costs of setting up a business, from cash flow to expenses and paying staff

2. The longer the term of the loan, the lower the monthly payments will be, as they are spreading the cost over a long period of time

2 limitations of loans

1. The amount of interest you pay on a business loan will depend on your individual circumstances, including how much you want to borrow and over what period of time

2. Each month the business will have to pay back some of the loan and some interest too, they will have to do this even if they have a bad month