AS BUSINESS | Unit 1 exam revision
What is an SME?
A business with fewer than 250 employees and an annual turnover of less than £50 million
What is enterprise?
The action taken by individuals to start a business
What is an entrepreneur?
An individual who starts a new business and takes financial risks in hope of profit
What are the motives of an entrepreneur?
Financial: to increase revenue and profit, to provide for the family
Non-financial: to be your own boss, to create something to be proud of, to help others (social enterprise)
What are the key characteristics of being an entrepreneur?
Being a risk taker, taking the initiative, being an effective organiser, having creativity/innovation, being hard working, being determined/persevering
EXAM HINT: How do business opportunities occur?
Based on existing skills and experiences, to fill a gap in the market, based on market research, to adapt an existing product
What are the positive impacts of SMEs?
They employ people (improve the economy), they pay taxes (which the government reinvests), introduce new products and services into the market, fill market gaps, provide for local needs
What are the negative impacts of SMEs?
they're small scale so more likely to fail in times of recession, in Wales public sector organisations have a greater impact on the economy, larger businesses have a greater impact and influence
What is the primary industry?
Involves acquiring raw materials (e.g. coal, oil). It's very important to Wales.
What is the secondary industry?
the manufacturing and assembly process (e.g. assembling cars)
What is the tertiary industry?
The services which support the production and distribution process (e.g. insurance, transport). It's the UK's biggest sector.
What are stakeholders?
People or groups who have an interest in the activities of a business.
What is a business plan?
A document which gives information about different aspects of the business idea.
What are the components of a business plan?
The executive statement (strategic overview), the financial forecast (cash flow, budgets etc), the marketing plan (including market research), the personnel statement (HR - how many employees will be needed?), the operational plan (how the product will be produced and distributed)
What are the benefits of having a business plan?
A good plan brings focus to all issues/aspects (reduces risk), helps small businesses obtain start-up finance (from banks), gives a sense of direction (allows the entrepreneur to monitor their progress)
What are the issues with business plans?
External influences can throw even best-prepared plans into disarray, the plan will be of limited value if it has not been properly researched, the plan can encourage businesses to become too rigid in their thinking (may miss opportunities or threats)
Define 'Public sector'
The part of a country's economy which is made up of organisations that are owned and run by the government.
What are the strengths of the public sector?
It provides goods and services available and important to all community members, even those who cannot afford them.
What are the weaknesses of the public sector?
It often involves funding through taxation.
Public sector organisations are often bureaucratic (have lots of rules and regulations that cause delay) - inefficient.
What are the strengths of the private sector?
Consumers have a great choice of products.
Private sector businesses tend to be more efficient (helped by competition).
What are the weaknesses of the private sector?
Many attempt to cut costs to make profit so they don't always do what's good for society (e.g. poor working conditions)
Produce goods which are often overconsumed/problems to society (e.g. alcohol, porn).
What are the typical aims of the private sector?
Survival
To break even
Growth
Customer satisfaction
Profit maximisation
To achieve a certain market share
Benefit the environment
Ethical/local community
What is a sole trader?
A person who owns and runs their own business
What are the advantages of being a sole trader?
You keep all profits
Low start-up costs
Control
Easy to set up (no legal documents)
More personal service
What are the disadvantages of being a sole trader?
You are responsible for all business decisions
Hard to raise finance
Limited capacity to raise capital
Long working hours alone
Unlimited liability
What is a partnership?
An agreement between two or more people to take joint responsibility for the running of a business.
What are the advantages of a partnership?
Shared responsibility + workload
More skills between partners
Easy access to capital (invest)
What are the disadvantages of a partnership?
Shared profits
Slower decision making
Potential conflict
Unlimited liability
What does a 'deed of partnership' typically include?
A process of settling disputes (e.g. vote)
Clarity of duties
Profit distribution
What is an LTD?
A business which has a seperate legal identity from the entrepreneur and has limited liability.
What are the main advantages of LTDs?
The owners have limited liability
Additional funds can easily be raised by selling shares
The company can keep trading if a shareholder dies.
What are the disadvantages of LTDs?
Complex to set up and greater administration costs.
Must publish accounts every year.
Decision making will be slower.
Profits are usually shared amongst shareholders.
Shares cannot be sold to the public, reducing the potential for growth.
EXAM HINT: What is a PLC?
A company that is able to offer its shares to the public.
EXAM HINT: What is a flotation?
When a business offers its shares for sale to the general public for the first time on the stock exchange.
EXAM HINT: What is a dividend?
A payment from the profits of a company which is paid to shareholders.
EXAM HINT: What are the advantages of being a PLC?
Can sell shares to the general public.
Are well-known organisations with a good reputation so it is easier to raise finance.
Can take advantage of economies of scale.
Limited liability for owners
EXAM HINT: What are the disadvantages of being a PLC?
It may not be an attractive investment on the stock market for investors
The owners lose some control and risk a rival takeover
Take a long time to prepare and are costly/complicated to set up
All accounts are in the public domain.
EXAM HINT: What is a co-operative?
A business owned and controlled by its members.
EXAM HINT: What are the advantages of a co-operative?
Profits are shared fairly amongst members
Power and control are shared equally
Motivates people
EXAM HINT: What are the disadvantages of a co-operative?
Disagreements and difficult decision making (e.g. when cutting jobs)
Decision making can be slow as everyone has a say in running the business which can be frustrating when they need to be made fast.
What is a social enterprise?
A business that has specific social objectives as its primary purpose
EXAM HINT: What is a charity?
An organisation that aims to promote and raise funds for a specific cause.
EXAM HINT: How does a charity differ from an LTD?
companies focus on maximising profits for shareholders but any money charities receive must be used to help meet the specified charitable aims.
companies pay increased taxes, charities pay reduced taxes.
company employees are paid a wage or salary, but in charities, many staff work as volunteers so costs are minimised.
What are the three internal sources of finance?
Owner's capital (finance put into the business by the owner)
Retained profit (profit kept and reinvested by the business)
Selling assets (selling off things owned by the business)
What is a bank overdraft?
The bank allows the business to draw more money than it actually has
What are the advantages of an overdraft?
It can be quick to arrange and is a good short term solution to a cash flow problem
What are the disadvantages of an overdraft?
Interest repaid can be very high and very expensive if the overdraft limit is exceeded
What is a loan?
An amount of money that is borrowed and repaid with interest over a set period of time
What are the advantages of a loan?
Large amounts of money can be borrowed
The goods become business property immediately
Interest rates are often fixed for the loan duration and can be paid in regular instalments
What are the disadvantages of a loan?
The business has to pay back the original money AND interest, increasing overall fixed costs
Banks may want collateral/security for the loan so if repayments are not kept up with the entrepreneur could lose their possessions
What is a trade credit?
An arrangement where a business can pay for its goods at a later date
What is an advantage of a trade credit?
It gives the business more cash to use in the immediate future with no interest paid
What is a disadvantage of a trade credit?
It is very short term but bills usually have to be settled within 30 days.
What is a Grant?
A sum of money provided (by the governement) to a business that does not have to be repaid
What is an advantage of a grant?
It's not repayable and often comes with helpful advice on developing the business
What is a disadvantage of a grant?
Grants are not available for all businesses and sometimes only in regions where unemployment is high
The government will expect lots of completed forms (and probably a business plan)
What is Venture capital?
Finance that comes from wealthy people or organisations who invest in small, risky business who are often fast growing
What are the advantages of venture capital?
They can provide ongoing expert advice
Venture capitalists can be a good option if banks have refused to allow loans
The finance comes with no interest payments
What are the disadvantages of venture capital?
The business owner may lose control to the venture capitalist
What is share capital?
The finance raised from selling new shares in the business
EXAM HINT: What is hire purchase?
A method of buying goods - a business pays in regular instalments while having use of it
What are the advantages of share capital?
No need to pay interest on the finance
Some businesses can raise large sums of finance (such as PLCs)
Some shareholders can offer help and support in running the business
What are the disadvantages of share capital?
It can take a long time to prepare and there are often many legal costs.
It is a source of finance only available to companies.
It is costly as it gives away some of the company and its profits to investors
For PLCs it could mean a rival takeover
EXAM HINT: What are the advantages of hire purchase?
The cost is split into small, manageable amounts that are usually paid every month (no large upfront payment)
The business owns the asset at the end of the HP term
EXAM HINT: What are the disadvantages of hire purchase?
Often very expensive (high interest)
You will only own the item at the end, after it is fully paid for (can be repossessed if the business falls behind in repayments)
EXAM HINT: What is leasing?
When a business pays for the use of an asset but will never own the asset.
EXAM HINT: What are the advantages of leasing?
The business can lease new equipment after the leasing period ends without worrying about the disposal of old equipment
The cost is split into small, manageable amounts so improves short-term cash flow
The maintenance and repair bills are sometimes covered by the leasing company
EXAM HINT: What are the disadvantages of leasing?
The business does not own the asset
Can be very expensive over a long period and well in excess of the purchase price.
EXAM HINT: What is factoring?
Where businesses sell their invoices to an organisation such as a bank
EXAM HINT: What are the advantages of factoring?
It is a good way of improving cash flow in the short term
It removes the hassle of chasing payments
EXAM HINT: What are the disadvantages of factoring?
Not so good for profits as there is a fee charged for the service.
Customers may prefer to deal with the business directly and may be upset by an aggressive factoring company
EXAM HINT: What is revenue?
The amount of money a business receives
What are fixed costs?
Costs that do not change with output
What are variable costs?
Costs that change with output
EXAM HINT: What are semi-variable costs?
Costs with components that are both fixed and variable, e.g. a fixed worker salary, + overtime
EXAM HINT: What are direct costs?
Costs that can be identified with a particular product or process, e.g., pizza base
EXAM HINT: What are indirect costs?
Expenses that are not directly involved with making a particular product, e.g. rent/insurance
How do you work out contribution?
Revenue - total variable costs
EXAM HINT: How do you work out contribution per unit?
Selling price per unit - variable costs per unit
How do you calculate profit?
Revenue - variable costs = contribution
Contribution - fixed costs = profit
What is the break even point?
The point at which total costs equal total revenue
What is the margin of safety?
The quantity sold above the break-even point
EXAM HINT: What is the break even formula?
fixed costs / (selling price per unit - variable costs per unit)
What is the margin of sales formula?
expected sales - break even point
What are tangible goods?
You can physically touch the product
What are durable goods?
multiple use (last a time)
What are non-durable goods?
single-use products e.g. food
What are finished goods?
goods ready to be sold and instantly used
What are components?
goods that need to be used with others e.g. IKEA furniture
Why has globalisation occurred? (MNCs)
Improved communication (internet), Improved/cheaper transport (flights), Trade liberalisation (countries becoming more welcoming to foreign businesses e.g. China)
What is a seasonal market?
Products only sold during a particular season or time, e.g. umbrellas, Christmas decorations
What is mass marketing?
When a business offers almost the same products to all consumers and promotes them in almost the same way.
EXAM HINT: What are the advantages of mass marketing?
Maximises income, allows a reduction in costs through economies of scale
EXAM HINT: What are the disadvantages of mass marketing?
Competition is often fierce, extensive distribution channels are required
What is a niche market?
A specialised market segment catering to the demand for products/services not supplied by main suppliers
EXAM HINT: What are the advantages of a niche market?
Less competition, more loyal customers
EXAM HINT: What are the disadvantages of a niche market?
Lack of economies of scale, vulnerable to market changes
What are economies of scale?
When costs per unit fall as output increases (bulk buying)
What is the market growth formula?
(new market size - old market size) / old market size x100
What is the formula for calculating market share?
sales of the business / total sales in the market x100