What is Business 3.1

Created by: Eliza-Robyn1
Created on: 13-12-21 10:41

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What is Business?
- Nature and Purpose of Business
  - Why Businesses Exist
    - Labour, capital and land gets inputted into the transformational process which outputs goods/ services
      - The transformational process adds value
    - The role of business
      - Business creates goods and services
      - Meets the needs of customers
      - Sells products to generate revenue
      - Reinvests profit for business growth
    - Why businesses are important
      - Create wealth
      - Create jobs
      - Develop new products to benefit society
      - Support other businesses
      - Provide tax to the government
  - Missions and Objectives
    - Mission statement
      - The organizations values
      - Non-financial goals
      - Benefits of the business to stakeholders
      - Consumer satisfaction
      - Sets out a businesses overall purpose
      - Directors
        Sees the bigger picture and thinks strategically
        
        Helps align business strategy
      - Customers
        Promise to customers
        
        Lays down what they can expect
      - Investors
        Shareholders want assurance of investment
        
        Communicate the ambition of the business
      - Employees
        Acts as a set of guiding principles
        
        Communicates values underpinning the business
        
        Can influence 'corporate culture'
    - Objectives Hierarchy
      - Shows the relationship between aims, mission and objectives
      - Aims, mission statement, corporate objectives, functional objectives
  - Common Business Objectives
    - Business set objectives to:
      - Provide quantifiable steps to achieve aims
      - Clarify direction of the business
      - Measure success against targets
      - Provide targets to motivate employees
      - Influence potential investors
    - SMART
      - Specific
      - Realistic
      - Agreed
      - Realistic
      - Time-related
    - Financial Objectives
      - Survival
      - Profitability
      - Growth
      - Market Share
      - Shareholder value
    - Non-financial Objectives
      - Brand recognition
      - Personal satisfaction
      - Sustainability
      - Customer satisfaction
    - Factors influencing business objectives
      - Size
      - Sector
      - Market
      - Ownership
      - Owner
      - Consumer satisfaction
  - Importance of Profit
    - Revenue
      - The value of sales made during a trading period
      - Includes products sold on credit as well as those sold for cash
      - Revenue can increase by businesses increasing products price and more demand
    - Costs
      - Variable costs change directly with the level of output/sales
      - Fixed costs do not change with the level of output
      - A business can improve its profit by reducing costs
        Revenue can increase by businesses increasing products price and more demand
      - Calculating costs can help make decisions about profit margins
    - Calculating Profit
      - Price X Quantity Sold = Total Revenue
      - Total Variable Costs + Total Fixed Costs = Total Costs
      - Total Revenue - Total Costs = Profit
- Different Business Forms
  - Size and Form of Business
    - Private Sector
      - Owned by shareholders and private individuals
      - Most businesses in the UK
      - Most are driven by profit motive
      - Determined by market forces
    - Public Sector
      - Owned and funded by national or local government
      - Account for 19% of UK employment
      - Driven by public interest
      - Made up of public corporations, public services and municipal services
    - Incorporation
      - Involves registry of a business with Companies House
        Need documents such as Memorandum of Association and Articles of Association
    - Liability
      - Limited liability is where the liability of the owners is detached from the company
        Can loose all of the investment but personal belongings are safe
      - Unlimited liability is when there is no distinction in law between the individual and the business
        Can loose all of the investment and personal belongings are at risk
    - Business Forms
      - Sole Traders
        Easy to start up
        
        Requires a wide range of skills and flexibility
        
        Own boss but long hours
        
        Keep all profits
        
        Unlimited liability
        
        Objectives likely to focus on survival, establishing loyal customer bases or building reputation
      - Private Limited Company
        Must go through incorporation process
        
        Limited liability
        
        Customers may trust a limited company more than sole trader
        
        Wider access to capital
        
        May have ambitions to become a PLC
        Objectives to include growth and expansion
      - Public Limited Company
        Can raise capital by selling shares publicly
        
        Size measured by market capitalization
        
        Ability to take over other businesses
        
        Can loose control of the business
        
        Pressure to pay dividends to its shareholders
        
        External shareholders due to stock market flotation
        
        Objectives likely to please external shareholders
      - Non-profit Organisation
        May be exempt from tax if a charity
        
        Run for the benefit of the members if its a mutual
        
        Measures success on the number of donors
  - The Role of Shareholders
    - Shareholders
      - Individual or institution that owns a percentage of a company
      - Invest in companies to make a return on their investment
      - Can influence the decision making in companies
      - Can vote on key company policy
    - Percentage Stakes
      - If a shareholder has a 10% state in the company, they are entitled to 10% of any profits
        These are paid via dividends
      - Gives right to vote in the Annual General Meeting
      - Majority shareholder controls the company with over 51% can can decide company policy
      - Gaining shares
        Through profits returned in dividends
        
        Through value appreciation when selling shares
    - Share price Changes
      - Share prices are affected by the company's performance and the business environment it is in
      - Share value can plummet even when the company is performing well
      - Factors affecting share price
        Increase of profits
        
        Dividend value
        
        Takeover bid
        
        Economic downturn
        
        Job loss announcements
      - When share prices rise
        Managers may receive a bonus
        
        Company finds it easier to raise capital
        
        Consumers with shares feel more confident to spend
        
        May receive positive publicity
      - When share prices fall
        Company becomes vulnerable to takeover
        
        Price fall gives an indication of poor performance
        
        Company finds it harder to raise capital
        
        Consumers with shares feel less confident to spend
- External Environment
  - Factors
    - Economic Factors
      - Income of consumers
      - Incomes are determined by Gross Domestic Product (GDP)
      - GDP is a measure of the output of an economy
      - High GDP will increase consumer incomes
        Leads to increased spending
      - Low GDP may result in unemployment and falling incomes
        Spending will most likely fall
    - Interest Rates
      - Cost of borrowing money or the reward for saving
      - Interest rates are closely linked to the level of inflation and the exchange rate
      - High interest rates
        Cost of existing loans may increase
        
        Consumers may have less disposable income
        
        Demand for products bought on credit may fall
        
        Consumers more likely to save money
      - Low interest rates
        Cost of existing loans may fall
        
        Demand for products bought on credit may rise
        
        Consumers more likely to spend
        
        Disposable income rises
        
        Savers lose out on earnings from investments
    - Demographic Factors
      - UK population is growing
        Increased demand for most goods and services
      - Migration to the UK from Eastern Europe is growing
        Fueling growth in the labour market
      - UK population is getting older
        Change in demand for different products and services
    - Environmental Factors
      - Government tries to ensure businesses pay for the total cost of production
        Includes external costs such as pollution
      - Benefits of environmental business practices
        Avoids negative publicity
        
        Opportunity for differentiation
        
        Avoids fines or penalties from environmental legislation
        
        Opportunities for government incentives
        E.g. Tax releif
        
        Creates a sustainable business
      - Drawbacks of environmental business practices
        Increased cost of raw matirials
        
        Increased cost of waste disposal
        
        Lower profit margin on fair trade goods
      - UK Environmental Legislation
        Environmental Protection Act 1990
        
        Environment Act 1995
        
        Climate Change Act 2008
  - External Market Conditions
    - External Forces
      - Competition
      - Market conditions
      - Demographic factors
      - Environmental issues
      - Economic factors
    - Market Conditions and Competition
      - These factors may determine how responsive and flexible a business will need to be
      - Growth rate of the market
      - Typical profit margin generated
      - Number and size of competition in the market
      - Pace of innovation and product development
      - Bargaining power of suppliers and customers
      - Level of differentiation between competitors
      - Seasonality of the product
      - Volatility of costs

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What is Business 3.1

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