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Summary AQA Year 1 AS/ A-level business. What is Business 3.1
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This covers the first topic in a level business AQA. What is business. Essentially, this is a revision guide which covers everything
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What Is Business 3.1Why do businesses exist?
Businesses have other aims:
§ Businesses supply goods and services
§ They supply products to customers who are willing to pay for them § Offer the highest quality goods
§ Some businesses sell necessities – goods and services that you need and services
§ Others provide luxury goods § Excellent customer service
§ Great brand image and
Advantages to owning a business reputation
§ Become fully sustainable or
§ To make a profit. There are big financial rewards
minimise environmental
§ Expect to make more money than they could as an employee
impact
§ To be their own boss, total control
§ Invest in local community or
§ Opportunity to do a job you’re interested in
social projects
Most businesses need to make a profit
§ Profit= survive
§ Private sector- if businesses don’t make money they go bankrupt and have to close down
§ Public sector- goal is to provide a service to the community
§ Non- profit businesses have social or ethical objectives
What does a business do?
Production: the process whereby resources (factors of production) are converted into product that is
intended to satisfy the requirements of potential customers.
Inputs------------- transformation-------------- products
Inputs- factors of production
Capital- goods that are made in order to produce other goals and services
Enterprise- the act of bringing the other factors of production together to create goods and services
Land- natural resources that can be used for production
Labour- workers
Primary- extraction of raw materials from the Earth e.g. farming, fishing and mining
Secondary- transforming or refining the raw materials e.g. manufacturing
Tertiary- service industry e.g. retail, banking, accounting, healthcare
,Mission, Aims and Objectives:
Mission
§ an overall long term aim of a business to maximise profit
Mission statement
§ Outlines what the business in intending to do, a qualitative statement to key stakeholders.
Business objectives
§ Specific intended outcomes of a business strategy and Targets which a business sets to help achieve its aims
Corporate Objectives- Goals of the whole business dictated by the mission
§ Sales revenue
§ Profit
§ Return on investment
§ Growth
§ Market share
§ Cash flow
§ Value of the business
§ Corporate image and reputation
Functional Objectives- objectives of each department, these are specific to each department and will help them achieve
their corporate objectives. E.g. HR, marketing, finance
Hierarchy of Objectives:
Objectives are set at various levels in a business - from the top (corporate) and through the layers underneath
(functional and unit). You get a more co-ordinated and coherent workforce with a hierarchy of objectives as they
understand the long term aims. Objectives are useful in decision making and can be motivating for employees
§ Managers can compare performance with their objectives to measure the success of the business and review
their decisions
Objectives are often set in financial terms. That means that the objective is expressed in terms of a financial outcome
that is to be achieved. Those could include:
§ Desired sales or profit levels Rates of growth
§ Amount of cash generated
§ Value of the business or dividends paid to shareholders
Business objectives should be
“smart”
§ Specific
§ Measurable
§ Achievable
§ Realistic/ relevant
§ Time Bound
,Common Business Objectives
Profit:
§ Important for Public Limited Companies as they need to appease the shareholders. The shareholders want to
make a profit as they want a heavy return on their investment (dividends). Source of finance and investment
§ Good functional objectives to make profit. Profits can be reinvested- increase productivity more units produced=
sales, revenue growth and higher profits
§ The most important objective
Growth:
§ Small businesses aren’t focused on growth as they want to remain independent and keep control of the business
§ Larger businesses like PLC’s are more focused on growth, expansion- increasing market share, sales turnover,
investments
Survival:
§ Small and new businesses are a focus as they have limited resources, don’t want to take risks as they might fail
(risk averse)
§ External Environment – recession, survival becomes a clear objective
Functional objectives that will assist a business survival might include:
§ Achieving minimum levels of sales and sales revenue to ensure costs are met and market share is retained
Diversification: Good way of spreading your risk e.g. if a product collapses in demand
Social and ethical objectives:
§ Stops dependency on a single market
§ Helps achieve growth and profit § Social objectives relate to benefitting society or
people in need
Market Standing
§ Ethical objectives are based on moral principles,
§ Innovative and most progressive organisation environment and people
§ Link to your corporate image § Non-profit organisations are key focus for this
§ Achieve growth, sales, profit § Improves brand image, increases sales
Meeting the needs of other Stakeholders: Cash flow:
§ Appease local communities § Is cash in circulation which is vital
§ Improves brand image and reputation. § Make sure you can pay out in any period
Corporate Objective Example Functional Objective
Increase market share Successfully launch five new products in existing markets over the
next two years (marketing)
Reduce unit costs Increase factory productivity by 10% within 2 years (operations)
Increase cash flow Reduce the average time taken by customers to pay invoices from 75
to 60 days (finance)
Improve customer satisfaction Achieve a 95% level high customer service (HR)
, Measurement and importance of profit:
In most businesses profit is the reward that the owners of the business want to achieve from taking
risks and making investments.
Two ways of increasing profit:
§ Increasing sales revenue
§ Decreasing costs involved in making the product
Profit is:
§ A return on investment, attractive to shareholders
§ A reward for taking risks, reward for shareholder
§ A key source of finance e.g. expansion, investments
§ A measure of business success and value
§ A motivating factor & incentive, profit sharing scheme
for Profit will fund capital investment e.g. machinery
§ No need to borrow money (loans)
§ Sense of safety, for UK businesses it is the main source finance
For most businesses, making a profit is a key business objective.
§ The most important source of cash flow & finance for a business
§ Difference between income and total costs
Profit= Total Revenue – Total Costs Effect of changes in sales volume on total
revenue:
Revenue= selling price per unit X quantity of units sold
When asked to look at the effect of a change in
Total variable costs= variable cost per unit X number of units sales volume on total revenue you should assume
sold that selling price remains unchanged regardless of
sales volume.
Fixed costs- costs that don’t change with the levels of output
Variable costs- costs that do change with the levels of output
§ If sales volume doubles total revenue will
double
Semi variable costs- combine elements of both fixed and § Falls by 10% so will revenue
variable costs e.g. a worker being paid a fixed salary plus a Fixed costs examples:
bonus for each item produced
§ Rent
If there is a % rise in output it’s assumed that: § Salaries
§ Marketing
§ Variable costs increase by the same %v with change in
output Examples of variable costs:
§ Fixed costs don’t change with output
§ Wages
Output doubles so will variable costs output falls so will variable § Power
costs § Raw materials
§ sales commissions
Fixed costs do not change in the short run but in the long run if
§ Utility costs.
large increases in output are required e.g. if the increase in
Businesses can exploit economies of scale
output was so significant that new machinery (fixed costs) was
if they lower their costs of production
required. Variable costs change as output changes
, Business Organisation
Unincorporated Businesses:
§ The owner is the business - no legal difference
§ Owner has unlimited liability for business alone (including debts)
§ Most unincorporated businesses operate as sole traders
§ Declared bankrupt
Unincorporated businesses have unlimited liability
§ Business owner/s personally responsible for the debts and liability of the business
§ If the unincorporated business fails, the owners are liable for the amounts owed
Sole Trader:
§ The most common type of business structure
§ A sole trader is just an individual owning the business on his/her own
§ Remember that a sole trader can also employ people – but those employees don’t share in
the ownership of the business
§ The sole trader owns all the business assets personally and is personally responsible for the
business debts.
§ A sole trader has unlimited liability
Advantages Disadvantages
Quick & easy to set up – business can always be Full personal liability – “unlimited liability”
transferred to a limited company once launched
Simple to run – owner has complete control over decision Harder to raise finance – sole traders often have limited
making. Able to retain all profits funds of their own and security against which to raise
loans
Risk- no one to share the responsibilities of running the
business with
Minimal paperwork, no pressure as they don’t have to Can pay a higher tax rate than a company
release statements
Easy to close/ shut down Vulnerability- no cover if the trader gets ill
Partnership: An association of two or more people formed for the purpose of carrying on a business.
Partnerships are governed by the Partnership Act (1890). Liable for any debts (unincorporated – UL)
§ Private sector organisation- Owned by private individuals
§ Public sector organisation- Owned by the government to provide a service to the public rather than make a profit.
They are funded through tax
Non- profit businesses – aims to help or benefit the community
Charities make money from donation and business activities. Charities get tax reduction due to the nature of their business
Social enterprises are normal businesses with a social objective. The business trades and makes profits like any other
business. However their profits are used to pay for social activities such as funding clean water projects
Mutual organisations like building societies aim to offer their customers- best possible value on products and services.
Profits are reinvested into the business in order to reduce prices, higher saving rates and lower bank rates as they don’t
pay any profits to shareholders
,Incorporated Businesses:
§ Legal difference between the business (company) and the owners
§ Owners (shareholders) have limited liability
§ Most incorporated businesses operate as private limited companies
Incorporated business is a ‘company’
§ A company is a legal entity. The owners of a company are shareholders
§ Profits and losses are the company's and it has its own debts and obligations. The company continues despite
the resignation, death or bankruptcy of management or shareholders. A company also offers the best vehicle
for expansion and the provision of outside investors.
Limited Company:
§ Limited companies are separate legal entities to the founders.
§ A legal entity can own things itself (assets), can sue and be sued
§ Companies are owned by their shareholders and run by directors.
§ The shareholders appoint the directors (often the same people) who run the company in the interests of the
shareholders
§ Shareholders own a share of the company, but they do not own the assets of the company and they are not
liable for the debts of the company
§ The company owns the assets and pays the debts. If the company becomes insolvent (i.e. it cannot pay its
debts), then the company is closed.
§ Shareholders are not liable for any debts owed by the company that cannot be settled. That is the importance
of limited liability
§ By far the most common form is a private limited company. Private means that the shares of the company are
not traded publicly on a stock exchange
Benefits and drawbacks of operating as a limited company:
Advantages Disadvantages
§ Limited liability – protects the shareholders (the big § Greater admin costs
advantage)
§ Public disclosure of company, can add pressure
§ Easier to raise finance – both through the sale of
shares and also easier to raise debt § information Directors’ legal duties
§ Stable form of structure – business continues to
exist even when shareholders change
, Private Limited Company Public limited company
Can’t sell shares to the public. People in the company Can sell shares to the public
own all the shares
Don’t have share prices quoted on the stock exchange Share prices quoted on the stock exchange
Shareholders may not be able to sell their shares Shares are freely transferable
without the agreement of the shareholders
No minimum share capital required They need over 50,000 of share capital and if they’re
listed on a stock exchange at least 25% of this must be
publicly available. People in the company can own the
rest of the shares
End their names with LTD End their names with PLC
The directors are usually shareholders of the business Directors are elected by the shareholders- shares can
be owned by anyone. They don’t necessarily control
the business ‘divorce of ownership’
Earnings aren’t publicised annually so less external Can be vulnerable to a hostile takeover
pressure compared to a PLC
Public Limited Companies
§ A more specialist type of limited company
§ Shares may be quoted and traded on a public stock market (but don’t have to be)
§ When traded on a stock market, public companies have substantially more shareholders
§ Subject to greater regulation in terms of public disclosure of financial and other information
Public sector organisations:
Public Sector Companies / Businesses:
§ A relatively small number of companies are owned or controlled by the Government
§ E.g. RBS (nationalised), Network Rail Public Sector Organisations
Public sector organisations:
§ There are many more organisations that provide goods and services which are owned and
operated by public bodies
§ These are funded by central & local government, but may still levy charges for some services
§ E.g. NHS, Highways Agency, TeachFirst
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