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Summary A level business notes
This document is a summary of A level business which includes all the notes from year 1 and year 2.
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A Level Business Studies3.1 What is business?
3.1.1 Understanding the nature and purpose of business
Why businesses exist
Key business objectives:
- To make money
- To provide a service
- Provide employment opportunities
- Fill a gap in the market
- Help the community (social enterprise)
- Be environmentally friendly
- Improve existing products
- Survive
The relationship between mission and objectives
Mission Statement = this provides the overriding goal of a business and the reason for its existence; and a strategic
perspective for the business and a vision for the future
Benefits of a good mission statement:
- Clarifies purpose and focus
- Motivates staff and those interested in the business
- Attracts people (such as investors) and resources
- A good public relations tool
Characteristics of a good mission statement:
- Contains a formulation of objectives that enables progress towards them to be measured
- Differentiates the business from its competitors
- Defines the markets or business in which the firm wants to operate
- Is relevant to all major stakeholders – not just shareholders and managers
- Excites, inspires, motivates, and guides – particularly important for employees
Criticisms of mission statements:
- Not always supported by actions of the business
- Often too vague and general
- Views as a public relations exercise
- Sometimes regarded cynically by employees
- Not supported wholeheartedly by senior management
Corporate aims and objectives:
- Mission statement – the overall reason for the business’ existence
- Corporate aims – the long term targets and plans to fulfil the mission statement
- Corporate objectives – the medium to long term quantifiable targets to fulfil the mission statement
- Corporate strategy – the actions to be taken by the business to achieve its objectives
Common business objectives
Types of business objectives:
- Ethical – (e.g. completely cruelty free; change packaging to cut down on plastic use; no harmful chemicals
used throughout production; reduce waste; environmentally friendly)
- Profit (e.g. increase profit margins; maximise profit)
- Growth (e.g. number of shares (quantifiable) – volume; gain market share; increase number of outlets)
- Survival (e.g. achieve minimum level of sales and sales revenue to ensure costs are met and market share is
retained; maintain levels of stock)
- Cash flow (e.g. reduce outflows; increase inflows)
- Social (e.g. support and solutions; enhance brand images and reputation)
,Why businesses set objectives
Main functions of objectives:
- A clear statement of what needs to be achieved
- Focus’ on all activities of the business (marketing, operations, finance, human resources)
- Provides targets for individual and group achievements
- A means of measuring performance (business, departments, individual employees)
- Provides a clear focus for decision making and a target to aim for
- Provides criteria for evaluating performance
The measurement and importance of profit
Profit = revenue – total costs
Total Costs = fixed costs (stay the same regardless of output eg rent) + variable costs (change in relation to the
number of items produced)
Importance of profit:
- Motivator
▪ Sole traders can keep all the profit
▪ Ltds owned by people running the business
▪ Profit sharing schemes in which staff are given incentives to work effectively
- Further investment
▪ Guide to see where it is easier to make profits
▪ Where profits are high and low
- Stakeholders
▪ Reliable customers
▪ Purchase goods
▪ Easier to establish links and work with others businesses
- Finance
▪ Avoiding paying interest
▪ Fund expansion plans and capital investment
- Success
▪ Compare profits to competitors
▪ Before this though, have to look at competitor business objectives
- Reward
▪ Many business owners take risks with money
▪ Every 6 months, plcs pay dividends to shareholders
▪ Retain profit to buy more resources to make more profit in the future
3.1.2 Understanding different business forms
Reasons for choosing different forms of business and for changing business form
Private = part of the economy that is not state controlled, and is run by individuals and companies, usually for profit
Public = this refers to all the businesses and organisations which are owned and run by the government
,Factors affecting choosing business forms:
- Finances (including sources of)
- Size
- Taxes
- Profit (who shared with)
- Risks
- Ownership and control
- Registrations and payment
- Liability (limited and unlimited)
Unlimited Liability = owners are personally responsible for the debts of the business. This means their personal
possessions such as their cars etc would pay for debts should the business go bankrupt
Limited Liability = the business has its own legal identity
Strengths of a sole trader Weaknesses of a sole trader
Don’t need to register anywhere (only have to tell Unlimited liability – can take personal possessions if the
HMRC) business goes into debt
Owner keeps all of the profits Completely control (no other option)
Can’t sell shares so have complete control Can’t sell shares so so extra money
Are their own boss – no arguments Little start up capital to being with
Strengths of a private limited company Weaknesses of a private limited company
Limited liability – can only take assets that belong to Profits must be shared with the shareholders in the
the business to pay off debts form of dividends
Own legal structure Corporation tax
Can use lots of ways to raise finance Have to pay to register the business
Strengths of a public limited company Weaknesses of a public limited company
Limited liability – can only take assets that belong to Profit must be shared with the shareholders in the form
the business to pay off debts of dividends
Own legal structure £50,000 raised money to register with the Companies’
House
Can use all types to raise finance Corporation tax
ADD IN TABLE ON THE DIFFERENT BUSINESS FORMS
, The role of shareholders and why they invest
Shareholders = they are the owners of a limited company and they gain their financial reward from share ownership
in two ways:
- A share of the profits earned by the company – paid out as a dividend
- Growth in the value of their shareholding (compared with the cost of buying the shares) – which is "realised"
when the shareholder sells the shares to someone else
- Shareholders play an important role in the financing, operations, governance, and control aspects of a
business
Shareholders in public companies whose shares are traded on the Stock Exchange have a daily insight into the
returns their investment is making:
- The share price indicates the market value of the business (share price x number of shares in issue)
- The latest share price can be shown as a multiple of the most recent annual earnings (or profits) per share,
to show a valuation ratio known as the Price/Earnings ratio
- The latest annual dividend can be compared with the share price to indicate an annual return ("dividend
yield")
Influences on share price and the significance of share price changes
Market Capitalisation = this represents the total market value of the issued share capital of the company.
- = the current share value x the number of shares issued
- When demand for shares increases, the share prices increase too
Factors that affect share price:
- Number of shares available – the more shares that are available, the more people will want to invest in them
- Business expansion – shareholders will receive more dividends due to an increase in profit margins
- Investment – if investment decisions work, then share value will increase and so more people will want to
buy them (however in the short term, most of the profit made will be reinvested back into the business so
dividends will decades significantly
- Publicity
- E-commerce
- A recession – this will devalue shares significantly
The effects of ownership on mission, objectives, decisions, and performance
A variety of factors affect the choice of business form which influences the ownership. This influences the firm’s
mission & objectives and it’s decision making which impacts on performance
Mission and Objectives – depending on business form:
- Sole trader – achieve a work life balance
- PLC – pressure to maximise shareholder’ return
- NGO – focused on achieving social actions
Decision – who makes the decisions the speed these are made at:
- Sole Trader – make decisions quickly and autonomously
- LTD – quickly consults shareholders
- PLC – go through more steps e.g. call a meeting
- NGO – consult members, difficult to co-ordinate
Performance
- Measure success – financial, employee engagement, environmental record
- Sole trader – judge themselves on performance, criticised same as PLC
- Ownership affect – ability to employ specialist staff, access to finance, ability to maintain competitive
advantage and embrace new tech
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