Business PDF

business Business activity: process of producing goods and services that meets our needs and wants to satisfy consumer demand Entrepreneur: a person who sets up a business or businesses, taking on financial risks in the hope of profit Consumers: purchase and consume goods and services Demand: th...

business Business activity: process of producing goods and services that meets our needs and wants to satisfy consumer demand Entrepreneur: a person who sets up a business or businesses, taking on financial risks in the hope of profit Consumers: purchase and consume goods and services Demand: the quantity of a good/service that consumers/firms are willing and able to buy at a given time Economic problem: unlimited wants cannot be met because there are limited factors of production->creates scarcity Scarcity: the lack of resources and products to meet the wants and needs of the total population Limited liability: a form of legal protection for shareholders and owners that prevents individuals from being held personally responsible for their company's debts or financial losses, only lose what you invested in CELL Capital, Enterprise, Labour, Land Opportunity cost: next best alternative given up by choosing another item Specialisation: people and businesses concentrate on what they are best at Division of labour: production is divided into separate tasks and each worker does just one of those tasks Specialisation Pros and Cons Pros: Increased efficiency->better output Less time wasted Cons: Hard to find replacement->production affected Boredom Business: combine factors of production to make products (goods+services) which satisfy customers needs Tangible Products: durable (long time: house) goods and non durable (once:food) consumer goods Intangible service: services sold for direct consumption (drivers) Capital goods: products used by businesses to help produce other goods+services Added Value: Difference between the selling prices of a product and the cost of bought-in materials and components All businesses attempt to add value (if value not added to the materials and components that a business buys in-> no profit made, other costs cannot be paid for) Name of Sector Primary Sector Secondary Sector Tertiary Sector Main Activity Extract Make Sell Chain of production: all three sectors are linked together. So if there is a problem with one of the sectors in the industry, consumers won’t get their goods and services Business has changed: 1. Industrialisation The growing importance of secondary sector and the reduced importance of the primary sector 2. De-industrialisation The growing importance of the tertiary sector and the reduced importance of the secondary sector Enterprise and Entrepreneurship An individual who has an idea for a business and takes the financial risk of starting and managing a new business (Jeff Bezos-Amazon) Business Plan: A detailed written document outlining the purpose and aims of a business which is often used to persuade lenders or investors to finance a business proposal Contents of a Business plan: The business Business opportunity Target market  Financial forecast Business objectives/aims How business plans assists entrepreneurs Plays an important role to new and existing businesses Information it contains can be used to persuade lenders and investors to provide finance to the business Plan gives the business a sense of direction and purpose Sets out the resources required by the business (eg number of workers) Start-Up: A company or a project undertaken by an entrepreneur to seek, develop and validate a scalable business model Why does the Government support start-ups? create new ideas/technology/innovation increase competition boosting economy growth proving jobs help society Government Support grants and subsidies lower interest loans lower taxation rates research free+subsidised workers Who is Interested in Comparing the Size of Businesses and Why? Measuring Business Size 1. Number employed large businesses need to produce more goods and servies to a larger market than small businesses hiring a lot of employees e.g a supermarket compared to small local general stores Disadvantages some businesses are capital intensive (use lots of machines) part time workers some firms look large if they have more labour (labour intensive) 2. Capital Employed total amount of capital invested into the business (things used to produce goods and services) e.g business premises, machinery,inventory (assets) Disadvantage: similar problems to that “number of employees” 3. Value of Output and Sales amount businesses earn from selling their products is often used to compare the size of businesses in the same industry e.g car manufacturing industry or clothing businesses Disadvantages: some small businesses can have high sales revenue (luxury market) e.g watches (designer brands) 4. Market Share the portion of a market controlled by a particular company in a specific industry Activity Company Data Company A Company B Company C Revenue $280,000 $380,000 $410,000 Capital Employed $200,000 $500,000 $350,000 No. of Employees 60 35 50 1. Company A: largest number of employees Company B: largest capital employed Company C: highest revenue 2. It could be a capital-intensive business 3. C is the largest, because they have the highest revenue and a large amount of employees, creating a good ratio between the 3 categories Why do Businesses Fail? bad market research (e.g unable to identify target market) lack of communication poor financial planning/management overly competition lack of objectives/resources/promotion economic recession economic downturn lack of management skills changed in the business environment liquidity problem poor choice of location Business liquidation: the direct conversion of assets to cash or cash equivalents by selling them to a user or consumer, is typically an option if your business is insolvent and can't pay its bill or debts Activity (Misaki’s coquette wedding dress) a) unemployment and higher taxes b) more competition, economic downturn c) Yes, if she doesn’t change the prices of her wedding dresses, then more people will buy the dresses through another business, which is cheaper and affordable since the economic conditions are not good. This will result in Misaki making a higher loss and eventually have no choice but to close down the business since she will be losing money. Why do owners want their businesses to remain small create a relationship with customers don’t need to work that much avoid political controversy lack of knowledge or experience too risky Why do owners want their businesses to grow? status, power and influence gain/increase profit increase sales/market share attract more customers protection from the risk of the takeover expand market merger Different ways a business can grow: 1. Internal Growth increasing number of goods it can produce, for example buying more or better machinery developing new products finding new markets for their products (often quite slow, avoids some of the problems of external growth-> expensive/costly) 2. External Growth (vertical=forward and backward) horizontal integration: a company merges with another company in the same industry that is operating at the same level in the value chain vertical integration: when a company merges with another company which has different levels of production forward integration: expanding a company's activities to include the direct distribution of its products (cocoa bean farm->chocolate factory) backward integration: a company expands its role to fulfil tasks formerly completed by businesses up the supply chain (chocolate factory->cocoa bean farm) conglomerate integration: a company merges with another company in different industries or markets Problems linked to business growth internal growth is usually slow working together diseconomies of scale interaction can cause conflict integration and control Sole Trader: a business owned by one person common form of organisation (due to fewer business requirements to set up) The Legal regulations sole traders have to follow: the owner must register with, and send annual accounts to the government tax office the name of the business is significant in some countries, the name must be registered with the Registrar of Business Names in other countries, such as the UK, it is sufficient for the owner to put the business name on all of the firm’s documents and to put a notice in the main office stating who owns the business in some industries, the sole trader must observe laws which apply to all firms in that industry include health and safety laws and obtaining a licence  Advantages Disadvantage there are only a few legal regulations to worry no one to discuss business matters with about owner has complete control over business and do not have the benefit of limited liability as no need to consult others for business business is not a separate entity decisions freedom to choose own holidays, hours of owners have unlimited liability so if business work->prices to be charged and whom to cannot pay debt->are force to sell assets employ close relationships with customers and ability sources of finance are limited to the owners to respond quickly to their needs and savings->profits made and small bank loans demands incentive to work hard as owner is able to business is likely to remain small due to small keep all of the profits for themselves after capital->unlikely to benefit from economies of paying tax scale not necessary to share business with anyone if owner is ill->no one can take full control of except for tax office->can enjoy completely the business and cannot be passed on if scenery owner dies Partnership: a form of business in which two or more people agree to jointly own a business some countries like india has a legal limit of 20 people partners contribute to the capital of the business, owners usually have a say in the running of the business->will share profits Partnership Agreement the written and legal agreement between business partners not essential for partners to have such an agreement but it is always recommended can be set up easily->verbal agreement, written agreement Advantages Disadvantages more capital can now be invested into the partners have unlimited liability so if a business from other partner(s) business fails, creditors will force partners to sell their own debt the responsibilities of running the business the business still does not have the benefit of are now shared by partners limited liability as business is not a separate entity  business partners specialise in different roles if one partner dies, then the partnership and can benefit the company by offering new would end->both sole traders and products and service partnerships are said to be unincorporated businesses because they are not separate legal entities partners re motivated to work hard because partners can disagree on business decisions they both benefit from the profit but owners and consulting all partners can take time share losses too one partner can be dishonest or inefficient causing other owner to suffer most countries limit total number of partners to 20 Private Limited Companies and Public Limited Company there is one main difference between an unincorporated business (such as a sole trader and partnership) and an incorporated business (such as a private limited company and public limited company Incorporated business is a separate legal entity, which means: a company exists separately from the owners and will continue to exists if one of the owners should die a company can make contracts or legal agreements company accounts are kept separate from the accounts of the owners Unincorporated companies are owned by shareholders who are people who have invested into these businesses unlimited liability people buy shares in these companies in order to become shareholders they appoint directors to run these businesses profits are allocated to shareholders as dividends in a private limited company, the directors are usually the most important r the majority shareholders, which is not the case in PLCs Private Limited Company Advantages Disadvantages raise capital from sale of shares not easy to transfer shares continuity accounts must be available to the public  limited liability for shareholder legal formalities separate legal identity cannot sell shares to public Public Limited Company a large business listed on the stock exchange most well-known businesses are PLCs profits are allocated to shareholders as dividends Advantages Disadvantages can sell shares to the general public legal formalities limited liability expensive to become a PLC rapid expansion possible disclosure of accounts and other information continuity divorce between ownership and control selling shares expensive for firms public limited companies are not in the public sector Franchises: a successful business (franchisor) with a brand name, promotional logos and trading methods bought by someone (franchisee) franchisor grants licence to operate the business franchisee uses franchisor’s idea or product Franchisor (owner or brand) Advantages Disadvantages franchisee buys a licence from the franchisor poor management of one franchised outlet to use the brand name could lead to a bad reputation for the whole business all products must be obtained by the the franchisee keeps profits from the outlet franchisor expansion of the franchise is much faster than if the franchisor had to finance all new outlets the management of the outlets is the responsibility of the franchisee Franchisee (holder of franchise) Advantages Disadvantage the chances of business failure are much less independence than with operating a reduced because a well-known product is non-franchised business being sold the franchisor pays for advertising training for staff and management is provided by franchisor all supplies are obtained from the franchisor licence fee must be paid to the franchisor and possibly a percentage of annual turnover there are fewer decisions to be made than with an independent business (such as prices, store layout and range of products) training for staff and management is provided by franchisor banks are often willing to lend franchisees loads due to relatively low risks Joint Ventures: When 2 or more businesses make an agreement to start a new business (sharing capital, the risks and the profits e.g. a car company might work with another car company to make production costs cheaper or to increase output Advantage Disadvantage sharing of cost disagreements over important divisions might occur risks are shared profits have to be shared local knowledge different cultures The Public Sector: public corporations that offer public services and are fully owned by the state and local government a lot of businesses have been nationalised-once owned by private individuals and purchased by the government such as railway services governments don’t directly operate these businesses-they appoint a Board of Directors to manage them  the government sets the objectives of the businesses and the directors are expected to run them according to the objects Examples: fire departments post office police public library Advantages Disadvantages some industries owned by the government are subsidies leads to inefficiencies as managers seen as essential such as the water and gas think that governments will help them even if companies of Hong Kong the business makes a loss monopolies that don’t need competitors such governments can use businesses for political as 2 sets of railway lines to a city-ensures reasons such as elections-prevents profit consumers aren’t taken advantage of no close competition there isn’t much competition-lack of incentive to increase efficiency and consumer choice a failing business might be nationalised-saves jobs and keeps businesses open important public services are available to the public Choosing the Type of Business Organisation much easier to set up and unincorporated business in comparison with setting up an incorporated business that’s why sole traders and partnerships are the most popular form of business private limited companies (ltds) and public limited companies (plc) are more complex to set up and have many legal requirements most businesses start off small and as the business grows, owners may device to incorporate it Factors when considering different business organisations the owners’ role (management) number of owners attitude towards financial risk how quickly the business needs to be set up size of business cost of start-up Business Objectives: the aims or targets that a business works towards bring success to a business whether small or large although they do not guarantee success clear target to work towards goals->motivate business measurable->unites whole business to achieve goal leads to better business decisions helps a business see how they have performed earn profit attract customers (improve service/good) growth (expansion) attract investors Market Share-Increased Market Share Gives: good publicity-claim that they are ‘the most popular’ increased influence over suppliers-suppliers would rather work with a larger, well know company increased influence over customers-setting prices Paper 1 Test 25 minutes (20 marks) 2 case studies (questions or each case study) identify=knowledge (k) identify+explain (if owner/business is mentioned) identify+explain (analysis and application) evaluation+justify (1 K-disadvantage 1K-advantage) ○ if there are 2 options 1 D and 1A for each ○ eval: why? why not? Clear objectives to follow to help owners/employees stay motivated to achieve those goals. However, business plans can get out of date as the business environment changes such as during a recession. A business plan would benefit Raul and Alex because they can present toa bank manager to apply for a loan, which could be used to help their business expand despite it taking a lot of time to produce a business plan. Evaluation Question 6 marks Pro (K+An Ltd) Con (K+An Ltd)