Unit 1. Chapters 1 - 5

types of goods consumer vs capital

consumer good - tangible goods that are sold to public.

capital goods - goods sold to other businesses to help them in production.

Free vs economic goods

Free - takes no resources to make it

economic - goods that require resources to make it

Production definition

the process of converting inputs such as the factors of production into outputs : finished goods, services and components

Added value

difference between selling price and cost of input materials

Not the same as profit

(profit = difference between selling price and cost of production)

(example:Let’s say a business buys cloth, thread, zippers and buttons for $80, pays $10 for labour to produce a shirt and sells it for $100.

Cost of materials $80

Cost of Labour $10

Sales Price $100

Value Added = $100 -$80 = $20

Profit = $100 - ( $80 + $10 ) = $10)

How can a business increase added value

• Add more product features

• provide excellent / personalised services (tailored clothes)

• convenience (7/11 at metro exits charge more than at a supermarket)

• Branding

specialization

people and businesses concentrate at what they are best at (e.g starbucks and coffee)

specialization at a work place = division of labour

specialization advantages + disadvantages

Advantages - resources not wasted, more goods and services made at lower price for consumers, more sales + profit for business

Disadvantages - workers can get bored doing the same thing over and over again.

How can sectors indicate how developed a country is

less developed countries - primary sector

medium developed - secondary sector

developed - tertiary

Public sector

part of the economy that is owned and controlled by the government

What? goods that people need

How? good quality - expensive - profit not the goal

For whom? for everyone - some free some at lower prices

Private sector

part of the company that is owned and controlled by individuals and companies for profit

What? what consumers want to buy

How? lowest cost + best quality to maximise profit

For whom? Only for those who have enough money to buy the product

Mixed economy

economy where the resources are owned and controlled by both private and public sectors.

examples of organisations in a mixed economy

Private - Sole trader, partnerships, private limited company, public limited company, franchises

Public - government department, public corporation, nationalized industries

entrepreneur definition

a person who organises, operates and takes the risk for a new business venture./ a person who puts the factors of production to create a business and takes the risks for the business.

entrepreneur advantages and disadvantages

advantages - chance of high income, independence, use own skills/interest

disadvantages - capital needed, financial risk,lack of business experience

characteristics of a successful entrepreneur

innovative, risk taker, motivated + self confident, decision maker, multi skilled, leadership skilled, good at networking

business plan definition

a detailed document containing the purpose and aim of a business which is often used to persuade investors and leaders to finance a business proposal.

what does a business plan contains

• Financial forcasts ( sales, revenue, costs)

• entrepeneuers ( who are the founders? what skills/experience do they have?)

• mission objectives

• business oportunities/ market reaserch ( what is the product? resources needed? where to sell it?)

Main business departments

Marketing

Human resources

Finance

operations

role of marketing department

manages customers ( choose the product, price, where to sell,etc.

role of human resources

manages workers (hires + trains + motivates workers )

role of operations department

manages production process (ensures resources are available, ensures production is efficent + high quality)

role of finance department

manages money ( records payments in/out, creates cash flow statements)

measuring business size + their limitations

value of capital employed - value of all assets ( factory machines, tools) Limitations - (different amounts of long term capital needed for different companies) (e.g car vs IT company) - hard to compare size of business across industries.

value of output - revenue of the goods/services sold. Limitations - can. contradict with other measures. (revenues can change quickly so a business with small revenue can still have higher value of capital employed, market share, number of employes)

Market share - Larger market share = larger business. Limitation - does not consider market value ( a business with a 50% market share in a market of 10,000$ is worth 5,000$ but businesses with a 10% market share in a market valued 100,000$ is worth 10,000$)

Number of employees - limitations - business can use more machinery + less workers. Workers can be hired part time - output lower than with full time employees.does not consider human capital.

why and how does government help start ups

why -creates more jobs, increases competition = lowers prices, wider consumer choice.

How - business rent free for some time, trains employees, lower taxes in first years

Reasons to grow

Economies of scale - reduction in average costs as a result of increased output. (Higher output = lower ATC = lower price = more competitive + higher sales + market share)

Increase in profit - (higher output = higher sales = higher profit (if costs are controlled)

Increase in market share - (growth = higher market share = brand known better = easier to sell)

lower risk of takeover - ( bigger company = harder + more expensive to buy)

more power to control market - big company = more power to set prices or influence government policies in their favor)

external growth

expansion by merging or taking over another business in the same or different industry.

acquisition

buying over 51% of a company with its consent.

Internal growth

when a company uses its own tools and resources to expand.

e.g opening more branches./ increasing number of goods produced after buying more capital/developing new product/finding new market

advantages - no risk of cultural clash, less money needed, more manageable process

disadvantages - slow

different types of mergers

conglomorate - different industry.

Horizontal

Vertical

disadvantages of business growth

internal growth is slow - larger businesses using the external growth strategy might take over the market not giving other businesses a chance

Poor decision making - manager don’t have enough experience to manage a big company

diseconomies of scale- increased in average costs as a result of increase in output

original owners loosing control - sole trader turns to partnership or when too many shares are sold from a public limited company.

clashes of business cultures - when two businesses merge they might have different ways of doing things, objectives etc. which can lead to conflict between employees and a higher risk of employees and managers loosing their jobs.

why do some businesses remain small?

owners choice -

more personalised services

small market size

hard access to financial capital

able to adapt quickly to changes in consumer preferences

why do some businesses fail

• poor planning/lack of objectives,

• poor management,

• poor choice of location,

• poor marketing,

• lack of finance,

• not investing into new technologies,

• lot of competition,

• negative economic influences

types of business organizations unincorporated and incorporated

unlimited/unincorporated businesses- sole trader, partnership

limited/ incorporated businesses - public limited company, private limited company

sole trader definition

business that is owned and controlled by one person who takes all the risks and recives all the profits.

sole trader advantages + disadvantages

advantages- has complete control, keeps all the profit, easy to set up,limited start up capital necessary.

disadvantages- unlimited liability, difficult to raise funds, difficult to compete, work very long hours to make a living, can lack skills in business management - higher risk of failing

partner ship definition

business formed by two or more people who share responsibility and profit.

partner ship advantages + disadvantages

advantages- easier to raise funds,less workload on each partner, decision making is shared= often better decisions, quick and easy set up.

disadvantages- unlimited liability, hard to raise funds to expand business, difficult to compete with a large business, share profits, decisions made by one partner are binding, if one partner retires/dies the business needs to stop/be reorganised.

unincorporated vs incorporated business

incorporated business - businesses that have a separate legal identity from its owners. owners have limited liability

unincorporated business - businesses that dont have a separate legal identity from its owners. owners have unlimited liability.

Private vs public limited companies

private - small to medium sized company that is owned by shareholders who have limited liability. The company cannot sell sahres to the public. Relativly cheap to set up, legal requirements for financial statements are less strict.

public - large company owned by shareholders who have limited liability. The company can sell its shares to the general public.Very expensive to set up. Legal requirements for financial statements are expensive.

Legal documents + financial statements definition

documents that must be completed when setting up a business. Financial statements must be submitted anually to authorities and public

shareholder

a person or organisation that owns shares in a limited company

divident

payment out of profit to shareholders as a reward for their investment

public vs private limited companies owners and control

both - ordinary shareholders are the owners with limited liability, profit belongs to ordinary shareholders through the payment of dividends, shareholders vote on major decisions made by the company, seperate legal identity ( business continues if one of the shareholders die)

Private - small number of shareholders, often one share holder owns >50% → has most control, control and ownership is separated but still in hands of original shareholders.

Public - usually a large number of shareholders, board of directors made up of shareholders make great decisions, control and ownership are spearated

private vs public limited company sale of shares

both - shareholders invest their money in a business by buying shares. Business can raise funds by selling additional shares.

Private - shares can only be sold privately (usually to friends,employees or family) reselling issued shares can only be done with the agreement of other shareholders and only privately. Harder to raise additional funds

Public - shares can be sold to the general public + other organisations. Quick and easy to resell already issued shares. Easy to raise a lot of money. Always in risk of takeover.(someone buys >50% of business)

private vs public limited company when borrowing finance

both - easier to raise funds than in an unincorporated business.

private - relatively hard because business is small and has low value assets that can serve as collateral to banks

public - easy to borrow a lot of money at good rates because of high value assets and reputation

Franchises features + definition

businesses where entrepreneurs buy the right to use the name, logo and product of an existing business.

• a franchisor allows a franchisee to use its names, logo and products for a fee

• Franchisee runs the business on their own

Franchises advantages for franchisee

• Brand + product are known → lower chance of business failure

• Training + advice provided by franchisor

• national promotion financed by franchisor

• suppliers checked for quality by franchisor

franchises disadvantages for franchisee

• cost of buying franchises is often high

• % of revenue/profit is taken by franchisor

• limited chance to make decisions about product + layout of the business

Franchises advantages for franchisor

• franchisee needs to buy a license from the franchisor in order to be able to use the brand name

• expansion of business is much faster than if the franchisor would have to finance all the new outlets

• the franchisee is responsible for the management of the outlets

• all products sold must be obtained from the franchisor

Franchises disadvantages for franchisor

• poor management of one of the outlets could lead to bad reputation for the whole business

• the franchisee keeps profit from the outlets

joint ventures definition

two or more businesses work together on a project and set up a seperate temporary business for this purpose (share capital, risk + profit)

joint ventures advantages

• reduces risk + cuts costs

• sharing expertise for mutual benefit

• sharing product and market knowledge can be useful

joint ventures disadvantages

• bad reputation for both businesses if only one business does a bad decision

• disagreement over important decisions might occur

• different business cultures can mean different ways of running a business - can lead to conflicts in leadership + decision making

• profit has to be shared

How to pick the right business organisation

• number of owners - ( e.g 1 → soletrader, more → partnership/private limited company, Many → public limited company)

• does owner want to manage? ( yes → unincorporated business, no → incorporated business)

• How quickly to set up ( quickly → unincorporated business, can be done slower → incorporated business due to legal requirements)

• Size of business ( small business - unincorporated, big business - incorporated)

• Attitude towards financial risk ( willing to risk → unincorporated business, not willing to risk → incorporated)

Public corporations definition

a business in the public sector that is owned and controlled by the government

what kind of businesses are normally start ups?

• most businesses start as unincorporated businesses due to it being easier + cheaper to set up as well as fewer legal controls (no need to publish financial statements)

• As businesses grow they tend to turn into incorporated businesses as there is lower financial risk + legal risk, opportunity to sell shares to raise more funds

Business objectives definition

short- or medium-term goals, usually SMART, which must be achieved in order to attain its overall corporate aim

corporate aim definition

• long term goals which a business hopes to achieve

• plan needs to be made + reviewed regularly to achieve the objectives

why are business objectives needed

• give workers + management a clear target to work towards which helps motivate people

• can help measure success

• can help with planning + setting a budget

• to have direction → know what to do

types of business objectives

• profit ( goal to achieve highest difference between revenues and costs)

• growth in order to benefit from economies of scale which can lead to higher competitiveness, revenue and profit

• market share - bigger market share → stronger brand image + easier to sell products

• survival - important for start up’s (after 1-2 years goal is changed)

• corporate + social responsibility - ignoring impacts of business → bad publicity → risk of legal costs/ less revenue/profit.

corporate social responsibility definition

business taking responsibility for the impact their activities might have on environment + society

Rising importance because of pressure groups, public awareness of these issues, trade unions, laws

market share definition + formula

• revenue of a business expressed as a % of total market revenue

• formula = (company sales/total market sales) x 100

social enterprise definition

businesses with social objectives that reinvest most of its profits back into the business or into benefitting society at large

objectives of social enterprises

• social : to provide jobs + support disadvantaged groups in society such as the disabled or homeless

• environmental : to protect the environment

• financial : to make a profit to invest back into the business to expand the social work that it performs

stakeholders definition

an individual or group which has an interest in a business because they are affected by its activities + decisions

internal vs external stakeholders

• internal - stakeholders coming from within the business (e.g. managers,employees, owners + shareholders)

• external - stakeholders coming from outside the business (e.g customers, lenders, suppliers, local community, government)

Internal stakeholders owners/shareholders + their objectives

• higher profit → higher returns + dividends.

• Higher profit → market value of business + its shares rises → more wealth

Internal stakeholders managers + their objectives

• managers - responsible for running business. growth of business

• objectives :

• high salaries due to their important work

• growth of the business so that they can work for bigger + better businesses which gives them more status + power

Internal stakeholders employees + their objectives

• regular payment for their work

• contract of employment

• job security

• job satisfaction

• business can expand → higher chance of promotion

external stakeholders (customers) and their objectives

• safe + reliable products

• value for money

• well designed products of good quality

• reliability of service + maintenance

external stakeholders (government) and their objectives

• wants businesses in their country to succeed as their create more jobs, create more tax revenue, increase a countries output

• expects all firms to stay within the law

external stakeholders (the whole community) and their objectives

• jobs for the working population

• production that does not damage the environment

• safe products that are socially responsible

external stakeholders (banks) and their objectives

• expects the business to be able to pay interest and repay capital rent - business must be liquid