Why Businesses Exist and Profit Measurement

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Questions and Answers

What is the primary reason for opening a business?

To make money (correct)

To expand social infrastructure

To create job opportunities for others

To provide goods and services

Which of the following best defines an entrepreneur?

A person who takes financial risks to start a business (correct)

Someone who manages a non-profit organization

A stakeholder in a public sector organization

An employee in a large corporation

What does the acronym SMART stand for in relation to objectives?

Simple, Measurable, Acceptable, Reliable, Time-sensitive

Specific, Measurable, Agreed, Realistic, Time Bound (correct)

Sustainable, Measurable, Achievable, Relevant, Time-efficient

Specific, Manageable, Achievable, Relevant, Timely

How is profit calculated?

Total Revenue - Total Costs Signup and view all the answers

Which of the following is an example of a variable cost?

Raw materials for production Signup and view all the answers

What is the main purpose of social and ethical objectives in non-profit organizations?

To achieve specific social and ethical goals Signup and view all the answers

Which of the following statements about public sector organizations is true?

They are owned and run by government entities Signup and view all the answers

What is NOT a characteristic of a successful business?

Eliminating all risks associated with operations Signup and view all the answers

What is a characteristic of an unincorporated business?

There is no legal distinction between the owner and the business. Signup and view all the answers

Which of the following describes limited liability?

Protects personal assets from being used to settle business debts. Signup and view all the answers

Private Limited Companies are typically owned and run by which of the following?

A family or small group of individuals. Signup and view all the answers

What distinguishes private sector organizations from public sector organizations?

Public sector organizations are owned by the government. Signup and view all the answers

What is an example of unlimited liability?

Business owners must pay off their business debts from personal assets. Signup and view all the answers

Which statement is true about sole traders?

They face unlimited liability for their business's debts. Signup and view all the answers

In the context of business ownership, what does the term 'incorporated' mean?

A structure that allows owners to limit personal financial risk. Signup and view all the answers

Which example best illustrates the concept of limited liability?

An investor forfeiting their initial investment only. Signup and view all the answers

What is the correct calculation for market capitalization of a public limited company?

Number of issued shares multiplied by current market price per share Signup and view all the answers

Who are considered internal stakeholders within an organization?

Owners, shareholders, and employees Signup and view all the answers

What is a key disadvantage of a public limited company?

Disclosures related to financial performance are required Signup and view all the answers

What role do external stakeholders play in an organization's operations?

They hold a contractual relationship with the organization. Signup and view all the answers

How is a dividend defined in the context of public limited companies?

A payment made by a company to its shareholders out of profits earned. Signup and view all the answers

What is the primary factor influencing the needs of shareholders?

The company’s stock price increases Signup and view all the answers

What does a conflict between stakeholders typically arise from?

Varying levels of influence and diverse needs Signup and view all the answers

What is an example of an external stakeholder group?

Suppliers and customers Signup and view all the answers

What characterizes stakeholder interest in relation to organizational strategies?

Stakeholders with high interest may influence strategic choices by taking action. Signup and view all the answers

What factor determines stakeholder power within an organization?

Their social, economic, or political status and authority. Signup and view all the answers

How does the shareholder approach prioritize organizational objectives?

By maximizing shareholder value through short-term profits. Signup and view all the answers

What is a primary difference between the shareholder approach and the stakeholder approach?

The stakeholder approach emphasizes meeting the needs of various groups. Signup and view all the answers

In managing relationships with stakeholders, one of the benefits includes:

Fostering cooperation and improving organizational decision-making. Signup and view all the answers

Which statement is true regarding the traditional shareholder approach?

It solely focuses on the direct interests of shareholders. Signup and view all the answers

What is one key influence on a business's relationship with its stakeholders?

The status and power of stakeholders within or outside the organization. Signup and view all the answers

What is a primary goal of the stakeholder approach in business?

To incorporate the needs of all stakeholders in the decision-making process. Signup and view all the answers

Study Notes

Why Business Exist

Businesses exist to generate profit and expand to meet customer needs by providing goods and services.
Successful businesses meet customer needs in terms of cost and quality.
Entrepreneurs take risks to establish and grow businesses.
Mission statements define long-term intentions and ultimate purpose.
Mission statements might evolve over time.
Objectives are specific, measurable, agreed, realistic, and time-bound (SMART).
Cash flow represents the movement of money in and out of a business.
Social and ethical objectives are evident in non-profit organizations like charities.
Other business objectives include diversification, market standing, and meeting stakeholder needs.

Measurement and Importance of Profit

Revenue is the price of a unit multiplied by the average quantity sold.
Average over value (AOV) is a common business metric.
Fixed cost remains constant (e.g., university tuition).
Variable cost fluctuates based on factors like raw materials.
Profit is calculated as Total Revenue minus Total Costs.
Quantitative data refers to measurable facts and figures.
Qualitative data focuses on subjective perceptions and insights.

Understanding Different Forms of Business

Public Sector Organizations: Owned, financed, and run by the government at national, regional, or local levels.
Private Sector Organizations: Owned and operated by private individuals, ranging from sole traders to multinational corporations.
Unincorporated businesses: No legal distinction between the owner and the business.
- Sole trader: Single individual owns and runs the business.
- Partnership: Multiple individuals jointly own and operate the business.
Incorporated businesses: Separate legal entity from the owners.
- Private Limited Company (Ltd): Small to medium-sized, usually managed by family or a small group of individuals.
- Public Limited Company (PLC): Large companies listed on stock exchanges, open to public investment.

Limited and Unlimited Liability

Unlimited liability: Owners are personally liable for all business debts, even if they exceed investment.
Limited liability: Owner's liability is restricted to the value of their investment in the company.

Characteristics of Business Structures

Sole Trader:
- One owner
- Unlimited liability
- Simple to set up
- Complete control
- Harder to raise capital
Partnership:
- Agreement between two or more people
- Shared ownership
- Unlimited liability for all partners
- Can combine individual skills and capital
- Potential for disagreements
Private Limited Company:
- Separate legal entity
- Limited liability
- Shares typically held privately
- More complex to set up
- More secure for investors
Public Limited Company:
- Separate legal entity
- Limited liability
- Shares sold publicly
- Greater access to capital
- Subject to more regulations

Share capital: Money invested by shareholders in exchange for part ownership.
Market capitalization: Total value of a public limited company's issued shares.
Dividend: Payment to shareholders from company profits.
Market capitalism: The number of outstanding shares multiplied by the market value per share.

Stakeholder Relationships

Stakeholder: Individuals or groups with an interest in an organization's activities and performance.
Internal stakeholders: Closely connected to the organization, such as owners, shareholders, employees, and managers.
External stakeholders: Have varying levels of influence and diverse needs, like customers, suppliers, investors, and the community.

Stakeholder Needs

Stakeholders have diverse needs and expectations.
Different stakeholders may have conflicting interests.
Recognizing and addressing stakeholder needs is crucial for long-term organizational success.

Conflict and Overlap of Stakeholders' Needs

Stakeholder needs often overlap and can lead to conflicts.
Effective stakeholder management involves balancing competing interests.

Managing Relationships with Stakeholders

Benefits of strong stakeholder relationships:
- Increased trust and cooperation
- Improved communication
- Enhanced reputation
- Improved decision-making

Stakeholder Mapping

Stakeholder interest: The extent to which stakeholders are interested in influencing an organization's decisions.
Stakeholder power: The ability of stakeholders to exert their influence on an organization.

The Traditional Shareholder Approach vs. the Stakeholder Approach

Shareholder Approach: Focuses primarily on maximizing shareholder value and profits.
Stakeholder Approach: Recognizes the importance of considering and meeting the needs of all stakeholders, not just shareholders.

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Description

This quiz explores the fundamental reasons behind the existence of businesses, focusing on profit generation and customer needs. It examines important concepts such as mission statements, SMART objectives, and cash flow. Additionally, it delves into the measurement of profit and key business metrics.