Business Studies Notes

What is Business?

• Starter Activity: Post-it notes to brainstorm "What is business?" and "Why do businesses exist?"
• Key concepts: Knowledge, Application, Analysis, Evaluation.

Why Businesses Exist

• Businesses exist to:
  • Create employment.
  • Create wealth.
  • Enhance a country’s reputation.
  • Create new products.
  • Generate sales/profit.

3.1 What is Business? - Specification

• 3.1.1 Understanding the nature and purpose of business.
  • Content:
    • Why businesses exist.
    • The relationship between mission and objectives.
    • Why businesses set objectives.
    • The measurement and importance of profit.
  • Additional information:
    • Business objectives such as profit, growth, survival, cash flow, social, and ethical objectives.
    • The measurement of profit should include revenue (also turnover and sales), fixed costs, variable costs, and total costs.

Lesson Objectives

• To understand why businesses exist.
• To know common business objectives that exist, why businesses set objectives, and the relationship between mission and objectives.
• To be able to analyze the relationships between mission and objectives.

3.1.1 - Understanding the Nature and Purpose of Business

• Businesses exist to provide goods & services by converting raw materials (inputs) into products & services (outputs).

Types of Business

• Many different businesses exist in the business world:
  • B2B and B2C:
    • Business to business: businesses sell goods/services to other businesses.
    • Business to consumer: businesses sell goods/services to the general public.
  • Goods and services:
    • Businesses that sell goods sell physical products such as a house or t-shirt.
    • Businesses that sell services sell intangible items e.g., insurance and decorating.
  • Primary, secondary, and tertiary:
    • The primary sector is concerned with the extraction of raw materials.
    • The secondary sector (sometimes referred to as the manufacturing sector) is concerned with transforming raw materials into finished goods.
    • The tertiary sector (sometimes referred to as the service sector) is concerned with providing services such as retailing, transport, and banking.

Transforming Resources into Goods and Services

• Examples of businesses in different sectors: NatWest (banking - tertiary), various companies (primary, secondary, and tertiary sectors represented visually), Hays Travel (tertiary), Richard Kendall Estate Agent (tertiary), Morrisons (retail - tertiary), Warburtons (manufacturing - secondary), Art Gallery (tertiary).

Mission and Objectives

• A mission is an aim a business hopes to achieve.
• An objective is a measurable target which can be used to help achieve the mission.
• An objective can also be used to assess progress towards achieving the long-term goals of the business.

Common Business Objectives

• Profit.
• Social and ethical.
• Survival.
• Growth.
• Cash flow.
• Diversification.

Effective Objectives

• Effective business objectives meet the following criteria:
  • Specific
  • Measurable
  • Realistic
  • Agreed
  • Time-specific

Examples of Common Business Objectives

• John Lewis plan to double its sales revenue in the next 10 years (Growth).
• Apple is aiming to make every product carbon neutral by 2030 (Social/Ethical).
• NHS aims to deliver high-quality patient experience and customer service.
• M&S aims to become the world’s most sustainable major retailer by 2025 (Social/Ethical).
• Oxfam is aiming to help people claim their right to a better life (Social/Ethical).
• Tesco aims to expand retail services in all areas (Growth).

SMART Objectives - Examples

• Aldi's and Morrisons' situation is discussed, noting Aldi's growth in market share due to shoppers seeking better value amid the cost of living crisis; Tesco, Sainsbury's, Asda, Aldi, Morrisons, Lidl supermarket comparison.
• Meta (Facebook) fined €1.2bn for mishandling data (example for setting SMART objectives).
• Wetherspoons to sell off 32 pubs amid rising bills and inflation (example for setting SMART objectives).

Why Set Business Objectives?

• By agreeing on objectives with other people within the business, managers can ensure that everyone is working towards the same overall goal.
• Without any clear objectives people are much more likely to do their own thing.
• Objectives can also be very motivating for employees because they set out exactly what the firm wants them to achieve.
• Objectives are also used to review the success of a business’s plans. Managers can measure how much has been achieved compared to the target that was set.

The Relationship Between Mission and Objectives

• A mission is an aim a business hopes to achieve, usually expressed in a mission statement.
• Mission statements are usually short passages of text that tell all stakeholders the aims of the business and why it exists.
• The relationship between aims, mission statement, corporate objectives, and corporate strategies.

Examples of Mission Statements and Objectives

• Google: “…to organize the world's information and make it universally accessible and useful.”
• The Body Shop PLC: "…to dedicate our business to the pursuit of social and environmental change…“
• Ford Motor Company PLC: "…is a worldwide leader in automotive products and services, as well as in newer industries such as aerospace and communications. Our mission is to improve continually and meet our customers' needs, allowing us to prosper as a business and to provide a reasonable return for our shareholders.“
• Innocent: “…make natural, delicious food and drink that helps people live well and die old.”

Plenary – Review Activity

• Fill in the gaps: With such a varied amount of firms in the UK comes a variety of business objectives. Many large plcs who are owned by shareholders demand profit in order to be able to pay dividends to shareholders. This also allows for investment i.e., expansion into new markets or new products. Innocent Smoothies were taken over by Coca-Cola, which allowed them to use the distribution channels of Coca-Cola and rapidly expand to become a much larger brand. Innocent Smoothies donate 10% of profits to charity and therefore has social and ethical objectives as well as profit goals. However, a firm that is struggling may just focus on survival as its key objective, trying to boost cash flow to help pay its bills.

Starter Activity Questions

1. How do successful businesses satisfy customers’ wants and needs?
2. What are the 3 business sectors called and can you give an example for each?
3. What is an objective and can you give an example?
4. What is a SMART objective?

Specification 3.1 What is Business?

• 3.1.1 Understanding the nature and purpose of business
  • Content
    • Why businesses exist
    • The relationship between mission and objectives
    • Why businesses set objectives
    • The measurement and importance of profit
  • Additional information
    • Business objectives such as profit, growth, survival, cash flow, social and ethical objectives
    • The measurement of profit should include:
      • revenue (also turnover and sales)
      • fixed costs
      • variable costs
      • total costs

Lesson Objectives (Costs, Revenue, and Profit)

• To understand what variable, fixed, and total costs are and how to calculate them.
• To understand what revenue and profit are and how to calculate them.
• To be able to analyze the relationship between costs, revenue, and profit.

Costs, Revenue, and Profit – Group Tasks

• Group A: Find out the different types of costs that exist and how they can be calculated using the sheet given.
• Group B: Find out about revenue and profit and how they can be calculated using the sheet given. Can you identify the link between costs, revenue, and profit?

Formulas

• Revenue = selling price \times no. of units sold
• Fixed costs (FC) are also known as overheads or indirect costs. They must be paid even if the business makes no sales.
• Variable costs (VC) are also known as direct costs as they vary directly in line with sales.
• Total costs (TC) = fixed costs (FC) + variable costs (VC)
• Profit = total revenue (TR) - total costs (TC)
• Profit = total contributions - fixed costs (FC)
• Gross profit = TR – variable costs (VC)
• Net profit = TR – TC

Costs

• Fixed Costs
• Variable Costs

Fixed Costs

• Fixed costs are costs that do not vary directly with the level of output.
• Fixed costs still exist even if the business is not producing any goods or services.

Examples of Fixed Costs

• Rent
• Business rates
• Salaries
• Interest charges on loans
• Heating and lighting

Variable Costs

• Variable costs are costs which vary directly with the level of output.
• So if a firm increased production by 50%, variable costs would increase by 50%.

Examples of Variable Costs

• Piece rate labor
• Fuel costs
• Raw materials
• Packaging

Total Costs

• Total costs are calculated by adding together fixed and variable costs.
• The formula is: TC = FC + VC
• Examples:
  • Raw materials: 1400
  • Business Rates: 600
  • Power: 200
  • Heating & lighting: 170
  • Rent: 700
  • Wages (piece rate): 300

Revenue (Turnover/Sales)

• Revenue is the income a business receives in return for the sale of goods or services
• Businesses calculate sales revenue using the following formula: Sales revenue = selling price \times quantity sold

Examples of Revenue Calculation

• Firm A sells 500 sandwiches at a selling price of £3. Revenue = £1500
• Firm B sells 3000 books at a selling price of £8. Revenue = £24000
• Firm C sells 600 TV’s at a selling price of £150 and 400 MP3 players at a selling price of £90. Revenue = (600 * 150) + (400 * 90) = £90,000 + £36,000 = £126,000

Profit

• Profit is a comparison between costs and revenues.
• If total revenue exceeds total costs, then the business is making a profit.
• If total revenue is less than total costs, then the business is making a loss.

Calculating Profit

• Profit = Total Revenue (TR) – Total Costs (TC)
• Example: John’s Pasta bar charges £10 for three courses and has an average of 800 customers per week. The variable costs are £4 and the fixed costs are £3,400 per week.
  • Calculate revenue: £10 \times 800 = £8000
  • Calculate total costs: £3400 + (800 \times £4) = £3400 + £3200 = £6600
  • Calculate profit: £8000 - £6600 = £1400 per week profit

Calculating Costs, Revenue & Profit - Activities

• Complete activities in the exercise booklet (moderately difficult/challenging).

Exam Calculation Practise - Shelly's Ice Cream

• 2.1 Calculate the total revenue for Shelly's Ice Cream from the following day's sales:
  • SOLD 260 ice creams at £1.50, 140 lollies at £1.20 and 270 drinks at £1.10
• 2.2 Calculate the overall daily profit for Shelly's Ice Cream using the above and the extra information below:
  • Variable costs are half the selling price used by Shelly.
  • Fixed costs are £140 per day

Answers Q2 Calculations

• 2.1 £390 +£168 + £297 = £855
• 2.2 £855/2 =£427.50 variable cost. £855 - £427.50 - £140 = £287.50

Briefly Explain Why

• 3.1 Profit is more important to an established company than a small sole trader starting up
• 3.2 Firms find it difficult to cut costs and keep their stakeholders happy
• 3.3 Achieving revenue may not instantly bring cash into the business

Answers Q4

• 4.1 An established company would be owned by shareholders who demand high dividends to give them a return on their investment. Sole traders setting up a new firm may be more concerned with building up a customer base and covering their costs to survive.
• 4.2 By cutting wage costs or laying off workers staff would suffer from low morale. Customers could also become unhappy if the quality of material used in the product worsens in order to cut costs.
• 4.3 Revenue is another term for sales achieved. Just because a sale is made it doesn’t mean the cash will arrive yet – for example furniture is often sold on a “buy now, pay next year” basis. Similarly car firms sell on finance deals so the car sale does not result in an immediate cash injection.

Exam Calculation Practise

• The following data applies to a business:
  • Fixed costs: £1.5 million
  • Total costs: £6 million
  • Output: 2 million units
  • Profit: £3 million$$
  • Calculate the selling price per unit. [3 marks]

Lesson Summary:

• On a piece of paper, summarise the key parts of 3.1.1 – Understanding the nature and purpose of business. Be prepared to share your ideas if asked.