Understanding Business Activity

IGCSE CIA flashcards chapter 1

Needs

Needs

Things that are essential for humans

Wants

Things that humans desire

Why do businesses want their product to be a need?

Because if it is a need, people will have to buy it for survival.

Example of want to need

An example is a phone, it is a want but it is seen as a need because of the times we live in

4 factors of production

land(natural resources), labour, capital (resources man-made), enterprise (cooperation)

Opportunity cost

the loss of other alternatives when one alternative is chosen

Define specialization

focusing on one product or a limited scope of products so as to become more efficient

Advantages of specialization (2)

1. More efficient

2. Better quality

What is division of labour

when a task is broken up and given to different people, making the task easier to complete

Unique selling point

what makes the product better than its competitors

What is profit

total revenue > total cost

5 ways to add value to a product

• design

• unique selling point

• branding

• convenience

• quality

What are the 3 business sectors

1. primary sector

2. secondary sector

3. tertiary sector

What is the primary sector?

extraction of raw materials from land, sea or air

What is the secondary sector?

processing of raw materials and the manufacture of goods

What is the tertiary sector?

services for consumers and other businesses

What is the chain of production?

steps taken to turn raw materials into finished products that can be marketed and sold

In regards to business sectors, what sector do less developed countries have most?

the primary sector

Emerging economies

people start moving their jobs from the primary sector towards the secondary and tertiary sector

Public sector

Businesses owned by the government, that have the main goal to provide services

Private sector

Businesses owned by individuals, that have the main goal of profit

What is an entrepreneur?

An entrepreneur is a person who is willing and able to create a new business idea or invention and takes risks in pursuing success

What do Entrepreneurs do? (3)

1. They organise resources

2. They make business decisions

3. They take risks

Why should an owner of a business have a plan before they start?

to reduce the risk of failure

What is the target market

who the business is aimed at e.g. age, gender, income, etc

Forecast revenue

how much income the business plans to make through sales

Forecast revenue equation

Sales Revenue = Price x Quantity Sold

Forecast costs

manage spending of things needed

Profit forecasts

to see whether the business will have the ability to pay back loaned funds

Cash-flow forecast

managing the money in and out of the business per monthly basis

Why is a business plan good in terms of finance?

can help a business obtain finance from investors and banks

3 reasons for providing government support

1. economic growth

2. reduce the level of unemployment

3. competition for existing businesses

3 ways the government supports new businesses:

1. Training and support sessions

2. Enterprise zones (less tax in particular zones)

3. Low-interest start-up loans and grants

4 ways to measure business size:

1. Number of employees

2. Number of locations

3. Number of sales

4. Number of business output

Why are banks interested in business size?

to know if there is a risk that they won’t get their money back since small businesses tend to fail

Why are workers interested in business size?

to know how secure their job is

Why is the government interested in business size?

they apply different tax rates for small and large businesses

What is Organic (Internal) growth

Growing from the inside (not buying other businesses)

What is Inorganic (External) growth

expanding by integrating (merge or takeover) with other businesses

What is a merger?

A merger occurs when two or more companies combine to form a new company

What is vertical integration?

Vertical integration refers to the merger or takeover of another firm in the supply chain or different stage of the production process

What is external forward vertical integration?

merger with or takeover of a firm further forward in the supply chain

What is backwards vertical integration?

a merger with or takeover of a firm further backwards in the supply chain

What is horizontal integration?

Horizontal integration is the merger or takeover of a firm at the same stage of the production

Issues with having a big company (4)

1. Hard to communicate

2. Harder to control

3. High costs

4. Hard to merge

The 4 types of ownership

1. Sole trader

2. Partnership

3. Private Limited Company

4. Public Limited Company

2 advantages for sole traders and partnerships

• information does not have to be disclosed to anyone outside of the business

• easy to set up

What is the main disadvantage for sole traders and partnerships

unlimited liability

What does unlimited liability mean?

If a business goes bankrupt, the owner will have to pay it out of their own pocket, risking losing all their private possessions

2 main disadvantages for Private and Public limited companies

• Setting up a company is a legal process that takes time to arrange

• Information about financial performance needs to be shared with the public

Main advantage of Private and Public limited companies

They have limited liability, meaning they only lose their business and no private possessions

Sole trader

This is a business that has a single owner, who may choose to hire employees or operate alone

4 advantages of being a sole trader

• Easy and inexpensive to set up

• The owner has complete control over the business

• All profits belong to the owner

• Simple tax arrangements

4 disadvantages of being a sole trader

• Unlimited liability

• Limited access to finance and capital

• Limited skill set of the entrepreneur

• If the owner gets sick, no one can step in and help

Partnership

A partnership is a formal arrangement by two or more entrepreneurs to manage and operate a business and share its profits

4 advantages of having a partnership

• Partnerships are easy and inexpensive to set up

• Partners share responsibilities, decision-making and liability for debts

• More skills and knowledge are available

• Increased access to finance and capital

4 disadvantages of having a partnership

• Partners have unlimited liability

• Potential for disputes between partners

• Profits are often shared equally, regardless of the contribution

• It is often difficult to transfer ownership to new owners

Private Limited Company

The ownership of the private limited company is broken down into a specified number of shares

Who usually buys shares in a private limited company?

Friends, family or investors

4 advantages of having a Private Limited Company

• Limited liability means owners are not personally responsible for the company's debts

• Access to greater finance and capital

• Easier to transfer ownership to new shareholders

• Can provide a professional image and reputation

4 disadvantages of having a Private Limited Company

• They are expensive and time-consuming to set up

• More complex legal requirements and regulations than sole traders

• Annual financial reporting and auditing are required

• Shareholders have little control over the company as the founder usually imposes their agenda

Public Limited Company

Public limited companies sell their shares to the public on the stock exchange, meaning they can have a large number of owners

4 advantages of having a Public Limited Company

• Significant amounts of capital can be raised very quickly

• Limited liability

• The risks associated with ownership are spread among a larger group of shareholders

• Becoming a PLC raises a company's profile and increases its visibility with customers, suppliers, and potential investors

3 disadvantages of having a Public Limited Company

• The business is required to adhere to a range of legal and financial regulations, which can be costly and time consuming to comply with

• Selling shares to the public creates many shareholders, who have a say in how the company is run

• PLCs are expected to deliver consistent growth and profits to their shareholders

What is franchising

Franchising involves a business (franchisee) buying the rights to operate an existing successful business model(franchisor)

What is a joint venture?

A joint venture is a medium- to long-term agreement for two or more separate businesses to join together to achieve a defined business outcome, such as entry into a new market

What is an unincorporated business?

An unincorporated business does not have a separate legal identity from its owner(s)

What is an incorporated business?

An incorporated business is called a company and has a separate legal identity from its owner(s)

What are internal stakeholders?

individuals or groups within an organization that have a direct interest in its operations and outcomes.

What are external stakeholders?

individuals or groups outside of an organization that have an interest or stake in its activities and outcomes.