Business Studies Assessment Guide: Section 1 & 2

Chapter 1
❖ A need is a good ro service essential for living.
❖ A want is a good or service which people would like to have but
which is not essential for living. People’s wants are unlimited.
❖ The economic problem - there exists unlimited wants but limited
resources to produce goods and services to satisfy those wants.
This creates scarcity,
❖ Factors of production are those resources needed to produce
goods or services. There are four factors of product]ion and they
are in limited supply:
➢ Land - natural resources
➢ Labour - no. of people available to make products
➢ Capital - finance, machinery and equipment required to
manufacturer goods and services
➢ Enterprise - skill and risk-taking ability of the person who
combines all the other factors of production to produce a
good or service.
❖ Opportunity cost - best next alternative given up by choosing
another item.
❖ Specialisation - occurs when people and businesses concentrate on
what they are best at. It is very common now because:
➢ Specialised machinery and technologies are now widely
available
➢ Increasing competitions means that businesses must keep
their costs low
➢ Most people recognise that higher living standards can result
from being specialised
❖ Business activity
➢ Combines scarce factors of production to produce goods and
services
➢ Produces goods and services which are needed to satisfy the
needs and wants of the population
➢ Employs people as workers and pays them wages to allow
them to consume products made by other people
❖ Added value is the difference between the selling price of a product
and the cost of brought-in materials and components. Without it:
 ➢ Other costs cannot be paid for such as labour costs,
management expenses and cost including advertising and
power
➢ No profit will be made
❖ Increasing added value:
➢ Increase selling price but keep the cost of materials the same.
Businesses could try creating a high-quality image for its
product or service. Other costs may increase while creating
this image.
➢ Reduce cost of materials but keep the price the same. Buy
lower priced materials however this may reduce the quality of
the product and deter the customer from purchasing that
product at the same price.

Chapter 2
❖ The primary sector of industry extracts and uses the natural
resources of Earth to produce raw materials utilised by other
businesses.
❖ The secondary sector of industry manufactures goods using the
raw materials provided by the primary sector.
❖ The tertiary sector of industry provides services to consumers and
the other sectors of industry.
❖ Usually the three sectors of the economy are compared by:
➢ Percentage if the country’s total number of workers
employed in each sector
➢ Or
➢ Value of output of goods and services and the proportion this
is of total national output
❖ Developing countries - where manufacturing industries have only
recently been established. As most people live in rural areas with low
incomes, there is little demand for services such as transport, hotels
and insurance. Levels of both employment and output are likely to
be higher in this sector than in the two other sectors.
❖ Level of output in the primary sector is considerably lower in
economically developed countries. The output of the tertiary sector
is often higher than the two other sectors combined. Such countries
are often called the most developed.
❖ Deindustrialization - occurs when there is a decline in the
importance of the secondary. Manufacturing sector of industry in a
country. This is because
 ➢ Sources of primary products become depleted
➢ Mostly developed economies are losing competitiveness in
manufacturing to newly industrialised countries.
➢ As a country’s total wealth increases, living standards rise as
well and thus the consumer tends to spend a higher
proportion of their incomes on services (ex. Travel,
restaurants) than in manufactured goods produced from
primary products.
❖ A mixed economy has both a private and a public (state) sector.
❖ Private sector - businesses are not owned by the government, make
their own decisions on what and how to produce and the charges
paid for it. Goal is profit maximisation.
❖ Public Sector - government (or state) owned and controlled
businesses and organisations, they decide on what to produce and
how much to charge for it.
❖ Business activities in the public sector:
➢ Health
➢ Education
➢ Defence
➢ Public Transport
➢ Water supply
➢ Electricity supply
❖ Privatisation - selling public sector businesses - owned and
controlled by the government - to private sector businesses.
Chapter 3
❖ An entrepreneur is a person who organises, operates and takes risk for a
new business venture.
❖
Benefits Disadvantages

Independence - able to choose Risk - many new entrepreneurs’

how to use time and money businesses fail, especially if there is
poor planning

Able to put own ideas into practice Capital - entrepreneurs have to out
their own money into the business
and, possibly, find other sources of
capital

May become famous and Lack of knowledge and experience

successful if the business grows in starting and operating a
business
 May be profitable and the income Opportunity cost - lost income
might be higher that working as an from not being an employee of
employee for another business smother business

Able to make use of personal

interests and skills
❖ Characteristics of successful entrepreneurs:
➢ Hard-working
➢ Risk taker
➢ Creative
➢ Optimistic
➢ Self-confident
➢ Innovative
➢ Independent
➢ Effective communicator
❖ A business plan is a document containing the business objectives and
important details about the operations, finance and owners of the new
business.
❖ Banks require an entrepreneur for a business plan before agreeing to a
loan or an overdraft to help finance the new business.
❖ They will consider the following
➢ What products or services do I intend to provide and which
consumers am I aiming for?
➢ What will be my main costs and will enough products be sold to pay
for them?
➢ Where will the firm be losctex?
➢ What machinery and how many people will be required in the
business?
❖ Contents of a business Plan:
Description of the Business Provides a brief history and
summary of the business, and the
objectives of the business

Products and services Describes what the business

sells/delivers and strategy for
continuing or developing
products/services in the future to
remain competitive. May also
include full details of the product
and how it is to be manufactured
and distributed.
 The market ● Total market size
● Predicted market growth
● Target market
● Analysis of competitors
● Predicted changes in the
market in the future
● Forecast sales revenue from
the product
● Market research data
● Marketing strategy

Business location and how Physical location, internet sales or

products will reach customers mail order + how the firm delivers
products/services to its customers

Organisation structure and Organisational structure ,

management management and details of the
employees. Include no. and level of
skills required for the employees

Financial Information ● Projected future financial

accounting statements for
several years or more in the
future (income statements +
statements of financial
position)
● Sources of capital
● Predicted costs
● Forecast cash flow and
working capital
● Projections of profitability
and liquidity ratios

Business Strategy How the business intends to satisfy

customer needs and gain brand
loyalty.
❖ Why governments support business start-ups:
➢ To reduce unemployment
➢ To increase competition
➢ To increase output
➢ To benefit society
➢ Can grow larger

Needs Support provided by the state

 Business idea and help Organising training for
entrepreneurs that gives advice
etc.

Premises Enterprise zones - low-cost

premises to start-up companies

Finance Loans for small businesses at

low interest rates
Grants if if business start up in
depressed areas of high
unemployment

Labour Grants to train employees and

increase their productivity

Research Encouraging universities to

make their research facilities
available to new business
entrepreneurs

❖ Capital employed - total value of capital used in the business

❖ Who would find it useful to compare the size of businesses:
➢ Investors - before deciding which business to put their savings into.
➢ Government-often there are different tax rates for small and large
businesses
➢ Competitors - to compare their size and importance with other firms
➢ Workers - to have some idea of how many people they might be
working with
➢ Banks - to see how important a loan to the business is compared to
it overall size
❖ Ways to measure a business:
➢ No. of people employed - easy to calculate and compare with other
businesses ( does not work for capital-intensive firms)
■ Some firms use production methods which employ very few
people but produce high output levels.
■ A company with high output levels could employ fewer
people in a business which has produced less output.
■ Should two part-time workers be counted as one employee
or two?
➢ Value of output - calculating the value of output is a common way
of comparing business size in the same industry - especially
manufacturing industries.
 ■ A high level of output does not mean a business is large when
using other methods of measurement.
■ The value if output ein any time period might not be the same
as the value if sakes if some goods are not sold.
➢ Value of Sales - this is often used when comparing the size of
retailing businesses - especially retailers selling similar products.
■ It could be misleading to use this measure when comparing
the size of businesses which sell very different products.
➢ Value of capital employed - the total value or capital invested init
the business
■ A company employing many workers may use
labour-intensive methods of production. These give low
output levels and use little capital equipment.
❖ Benefits of expansion
➢ Possibility of higher profits for the owners
➢ More status and prestige for the owners and managers
➢ Lower average costs
➢ Larger share of its market - the proportion of total market sales it
makes is higher.
❖ Internal growth - occurs when a business expands its existing operations. It
is often paid for by profits from the existing business.
❖ External growth - when a business takes over or merges with another
business. Often it is called integration.
❖ Takeover- one business buys out the owners of another business, which
then becomes part of the ‘predator’ business.
❖ Merger - when the owners of two businesses agree to join their businesses
together to make one business.
❖ Horizontal integration - when one firm merges with or takes over one in
the same industry at the same stage of production.
➢ Reduces no. of competitors in the industry
➢ Opportunities for economies of scale
➢ A bigger share of the total market
❖ Vertical integration - when one business merges with or takes over
another one in the same industry but at a different stage of production (
can be forward or backward).
➢ Forward
■ Assured outlet for its product
■ Profit margin maid by retailer is absorbed by the business
■ Retailer can be prevented from selling competing products
 ■ Information about consumer needs and preferences can now
be easily obtained
➢ Backward
■ Assured supply of important components
■ Profit margin of the supplier is absorbed by the business
■ Supplier can be prevented from supplying to competitors
■ Cost of components and supplies for the manufacturer can
be controlled
❖ Conglomerate integration - when a business merges or takes over another
business in a completely different industry. Also known as diversification.
➢ Spread risks
➢ Transfer of ideas
❖
Problems from expansion Solutions

Larger business is difficult to Operating the business in small

control units (decentralisation)

Larger business leads to poor Decentralisation + latest IT

communication equipment and
telecommunications

Expansion costs so much that the Expand slowly and ensure

business is out of finance long-term finance

More difficult than expected A different style of management

❖ Why some businesses remain small:
➢ Type of industry
■ Businesses offering personal services or specialised products.
If they were to grow too large, they would find it difficult to
offer the close and personal service demanded by
consumers.
➢ Market Size
■ If the total no. of customers is small then the business is likely
to remain small as well.
➢ Owner’s objectives
■ Preference for a smaller business
❖ Causes of business failure
➢ Lack of management skills - a common cause, lack of experience
➢ Changes in business environment - failure to plan for change. Adds
to the risk and uncertainty of operating a business. New technology,
 economic changes and powerful new competition can lead to
business failure if not responded to effectively.
➢ Liquidity problems or poor financial management - shortage of
cash caused commonly by failure to plan or forecast cash flows
➢ Over-expansion - lack of finance, lack of research, lack of
experience to control a larger business
Chapter 4
❖ Sole trader is a business owned by one person and is the most common
form of business organisation

Advantages Disadvantages

Few legal regulations No one to discuss business matter

with

Own boss, complete control over Unlimited liability

decisions

Freedom to choose their own Sources if finance are limited to

holidays, prices to be changed, owner’s savings, profits and small
hours to work for and whom to bank loans
employ

Close contact with customers Likely to remain small

privacy Unincorporated

No one to take care of the

business in poor health

❖ Partnerships - a group or association of at least two people who agree to

run and own a business together

Advantages Disadvantages

More capital invested Unlimited liability

Responsibilities are now shared Unincorporated business

Both partners motivated to work Conflict

as both benefit from the profit
 Easy to set up Shared profits

❖ Private Limited Companies - businesses owned by shareholders but

they cannot sell shares to the public
➢ Incorporated business
■ Exists separately even if an owner dies
■ Can make contract/legal agreements
■ Company accounts are separate from owner’s
accounts

Advantages Disadvantages

Shares can be sold to a Cannot sell shares to the

large number of people public

Limited Liability Legal formalities

Separate legal No privacy of accounts

identity/Continuity

Raise capital from the Not easy to transfer

sale of shares shares

❖ Public Limited Companies - Businesses by shareholders but they can sell

shares to the public and their shares are tradable on stock exchange.

Advantages Disadvantages

Limited Liability Legal formalities

Incorporated Business More regulations and controls to

protect the interests of
shareholders (loss of privacy)

Very large capital sums Selling shares to the public is

expensive

No restriction over buying, selling Owners could lose control over

or transfer of shares their company
 Easier to attract banks and
suppliers

❖ Annual General Meeting - a legal formality for all companies.

Shareholders may attend and vote on who they want to be on the board
of directors for the coming year.

❖ Dividends - payments made to shareholders from the profits (after tax) of

a company. They are the return to shareholders for investing in the
company.

❖ Franchise - a business based upon the use of brand names, promotional

logos and trading methods of an existing successful business. The
franchisee buys the licence to operate the business from the franchiser.
❖ For franchisor

Advantages Disadvantages

A licence is bought from the Poor management could lead to

franchisor and a portion of the bad reputation
revenue is given to the franchisor

Expansion of the franchised Franchisee keeps profits from the

business is much faster outlet

Management of the outlet is the

franchisee’s responsibility

All products sold must be obtained

from the franchisor

❖ To the franchisee

Advantages Disadvantages

Chances of business failure is Less independence

reduced

Franchisor pays for advertising Unable to make decisions that

would cater to the local tastes

All supplies are procure from the Licence fee must be paid and a
franchisor percentage of the annual turnover
 Fewer decisions to make

Training for staff and management

is provided by the franchisor

Banks are often willing to lend to

franchisees due to low risk

❖ Joint venture - where two or more businesses start a new project

together - sharing capital, risks and profits.
Advantages Disadvantages

Sharing of costs Sharing of profits

Local knowledge Disagreements and conflicts

Risks are shared Differences in cultures

❖ Public corporation - a business in the public sector that is owned and

controlled by the state(government)

Advantages Disadvantages

Government ownership is Profit motive might not be as

essential for some industries powerful

Wasteful to have competitors as Unfairness due to government

not a pc subsidies

Can keep businesses open and Lack of incentive to increase

secure jobs consumer choice, efficiency and
improve customer service.

Non-profitable but important

programmes

Chapter 5
❖ Why set business objectives:
➢ They give workers and managers a clear target to work
towards thus motivating people
 ➢ Taking decisions will be focused on the business objective
➢ Business managers can compare how the business has
performed with their objectives
❖ Objectives of businesses:
➢ Survival
➢ Profit - a total income of a business less total costs
■ Pay a return to the owners of the business for the capital
invested and the risk taken
■ Provide finance for further investment in the business
➢ Returns to shareholders
■ Increasing profit
■ Increasing share price
➢ Growth
■ Make jobs more secure
■ Increase salaries and status of managers as the business
expands
■ Open up new possibilities and help spread risks
■ Obtain a higher market share from growth in sales
■ Abstain cost advantages (economies of scale)
❖ Market share is the percentage of the total market sales held by one
brand or business.
➢ Market Share = Company Sales/Total Market Sales x 100
➢ Good publicity
➢ Increased influence over suppliers and customers
❖ A social enterprise has social objectives as well as an aim to make a
profit to reinvest into the business.
➢ Social - to provide jobs and support disadvantaged groups in
society
➢ Environmental - to protect the environment
➢ Financial - to make a profit to invest back into the social
enterprise to expand the social work that it performs
❖ Why business objectives change
➢ A business set up recently has survived for 3 years and the
owner now aims to work towards higher profit
➢ A business has achieved higher market share and now has the
objective of earning high returns to shareholders
 ➢ A profit-making business operates in a country facing a
serious economic recession has the short-term objective of
survival .
❖ Stakeholder - any group or person with the direct interest in the
performance or activities of a business.
❖
Owners ● Share of profits so that
they gain a rate of return
● Growth so the value of
their investment increases

Workers ● Regular payment for their

work
● Contract of employment
● Job security
● Job satisfaction

Managers ● High salaries

● Job security
● Higher status and power

Customers ● Safe and reliable products

● Value-for-,oney
● Well-designed products of
good quality
● Reliability of service and
maintenance

Government ● Successful businesses

● Expects all firms to stay
within law

The Whole community ● Jobs for the working

population
● Production That doesn’t
damage the environment
● Safe products which are
socially responsible

Banks ❖ businesses must remain

liquid
❖ Objectives of public sector businesses:
➢ Financial - meet profit targets set by the government
 ➢ Service - provide a service to the public and meet quality
targets set by the government
➢ Social - protect or create employment in certain area

Chapter 22
❖ Start-up capital - the finance needed by a new business to pay for
essentia; non-current (fixed) assets before it can begin trading.
❖ Working capital - finance needed by a business to pay its
day-to-day expenses.
❖ Revenue expenditure - money spent on day-to-today expenses
which do not involve the purchase of a long-term asset - for
example, wages and rent.
❖ Capital Expenditure - the money spent on non-current (fixed) asset
which will last for more than 1 year.
❖ Sources of Finance
➢ Internal - obtained from within the business
■ Retained profits: profit after owners shares
■ Permanent - not interest to pay but takes time to
accumulate and could reduce payment to owners
■ Sale of existing assets
■ permanent , no interest, quickly obtained but takes time
to sell these assets and not available for new businesses.
■ Sale of existing inventories
■ Reduces opportunity cost and storage costs of high
inventory levels but must be done carefully to have a
sufficient amount of inventory remaining.
■ Owner’s savings
■ Permanent and no interest, quickly obtained but saving
could be insufficient and increases risk taken by the
owner
➢ External
■ Issue of shares
■ Permanent, no interest but dividends are paid after tax
ownership of the company could change
■ Bank loans
 ■ Quick to obtain for varying length of time and larger
companies get low interest rates but has to be repaid
and security/collateral is required
■ Selling debentures
■ Used to raise long-term finance
■ Must be repaid and interest must be paid too
■ Factoring of debts - immediate cash, risk of collecting
debt becomes the factor’s and not the businesses
■ Business doesn’t receive 100 percent value of its debts
■ Grants and subsidies
■ Don’t have to be repaid but often come with conditions
■ Microfinance
■ Loaning required is miniscule and no assets to provide as
collateral
■ Crowdfunding
■ No initial fees only a percentage fee charged by the
platform
■ Allows public reaction to the new business
■ Quick and used when traditional sources are unavailable
■ Platforms could reject an entrepreneur’s proposal
■ Total amount not raise -> finance will have to be repaid
■ Media interest and publicity needs to be generated
■ Competitors could steal the idea
➢ Short-term finance
■ Overdrafts
■ Spend more than currently possessed, could pay wages
and suppliers, flexible form of borrowing, interest paid
only on amount overdrawn and cheaper than short-term
loans
■ Interest rates are variable and bank could ask the
overdraft to be compensated on short notice.
■ Trade credit
■ Business delays paying its suppliers however supplier
may refuse to provide discounts or supply if not paid on
time
➢ Long-term finance
■ Bank loans
 ■ Leasing
■ Care and maintenance is carried out by the leasing
company
■ Total cost will be higher than purchasing the asset itself
■ Issue of shares’
❖ Factors to consider:
➢ Purpose and time-period
➢ Amount required
➢ Legal form and size
➢ Control
➢ Risk and gearing

Chapter 23
❖ Cash flow - cash inflows and outflows over a period of time
❖ Cash in flows - amount of money received by a business during a
period of time
❖ Cash outflows - amount of money paid out by a business during a
period of time
❖ Importance of cash
➢ Unable to pay workers, suppliers, government
➢ Production of good and services will stop
➢ Liquidation - selling everything it owns to pay its debts
❖ Cash inflows
➢ Sale of products
➢ Payments made by debtors
➢ Borrowing money from external sources
➢ Sale of assets
➢ Investor/shareholder putting in more money
❖ Cash outflows
➢ Purchasing goods and materials for cash
➢ Paying wages, salaries and other expenses in cash
➢ Purchasing non-current (fixed) assets
➢ Repaying loans
➢ Paying creditors of the business
❖ Cash flow cycle - the stages between paying out cash for labour,
materials etc, and receiving cash from the sale of goods.
❖ Profit - surplus after total costs has been subtracted from revenue
❖ Insolvency - when a profitable business runs out of cash
➢ Allowing customers too long a credito period
➢ Purchasing too many fixed assets at once
➢ Expanding too quickly and keeping high inventory levels
❖ Cash flow forecast - an estimate of the future outflows and inflows
of cash of a business usually in a 1 month time period.
➢ How much cash is available for paying
➢ How much cash the bank amy need to lend to avoid
insolvency
➢ If the business is holding too much cash which could be put to
w more profitable place
❖ Uses of cash flow forecast
➢ Starting a business
■ Expensive time for businesses
■ Many New businesses fail because of this
➢ Managing cash flow
■ Too much cash - could be better utilised in other areas
➢ Keeping bank manager informed
■ How big a loan or overdraft is needed, when it is needed
how long the finance is required for and when it might be
repaid
■ Banks don’t lend without a cash flow forecast
➢ Managing and existing business
■ Low rates of interest could be arranged
■ Business exceeding overdraft limit causing it to close
❖ Net Cash Flow - difference each month between cash inflows and
outflows
❖ Closing bank nbalance - amount held by a business at the end of the
month
❖ Opening bank balance - amount held by the business at the start of
the month
❖ Solutions to cash flow problems
➢ To slow down money flowing out - negotiate credit terms with
suppliers however no discount
➢ To reduce amount of money flowing out - reduce costa,
cheaper suppliers however lower quality
 ➢ Speed up money flowing in - customers to psy quicker in
advance however customers may then look at other options
➢ Increase money flowing in
■ Taking out w loan and attract customer however
interests and spending more on advertisement and
production
Chapter 24
❖ Accounts - financial records of a firm's transactions
❖ Accountants - professionally qualified people who have the
responsibility of keeping accurate accounts and for producing final
accounts
❖ Final accounts - produced at the end of the financial year and gives
details of the profit and loss made over the year and the worth of
the business
❖ Profit can be increased by
➢ Increasing revenue more than costs
➢ Reducing costs of making products

❖ Why profit is important

➢ Reward for the entrepreneur
➢ Reward of r risk taking - incentives
➢ Source of finance
➢ Indicator of success
❖ Income statement - a financial statement that records the income of
a business and all the costs incurred to earn that income over a
period of time. Also known as profit and loss accounts.
❖ Revenue - income to a business during a period of time from sale of
goods and services
❖ Cost of sales - cost of producing or buying in the goods actually
sold by the business during a period of time
❖ Gross profit - revenue -cost of sales
❖ Trading account - shows how the gross profit of a business is
calculated
❖ Net profit - profit made after all the costs have been deducted from
the revenue.
❖ Depreciation - fall in the value of s fixed asset over time
 ❖ Retained profit - net profit reinvested back into a company after
deducting tax and payments such as dividends
❖ Managers can use the structure of income statements to help them
make decisions based on profit calculations.
❖ Statement of financial position - shows the value of a business;s
assets and liabilities at a particular time
❖ Assets - those items of value which are owned by the business.
❖ Liabilities - debts owed by the business.
❖ Non-current assets - owned by the business for <1
❖ Current asset - owned by a business and used within 1 year
❖ Non-current liabilities - long-term debts <1
❖ Current liabilities - short-term debts owed by the business
❖ Total assets - total liabilities = shareholder’s equity
❖ Total sum of money invested into the business by the wonders of
company
❖ Money is invested in two ways
➢ Share capital
➢ Profit and loss reserves
❖ Shareholders cans ee if their stake in the business has increased or
fallen in value
❖ How expansion can be paid for
➢ Increasing non-current liabilities
➢ Retained profits
➢ Increasing share capital
❖ Working capital (net current assets)
❖ Capital employed = shareholder;s fund + non current liabilities
❖ Total long term and permanent capital of the business which as been
used to pay for the assets of a business

Chapter 26
Liquidity - the ability of a business to pay back it;d short term debts
Profitability - measurement if the profit made relative to either the value of
sales achieved or the capital invested in the business
It is important to
Investors deciding which business to unvest in
Directors snd managers of the business to assess if it is becoming more or
less successful over time
❖ ROCE = net profit/capital employed x 100
❖ Gross profit margin = gross profit/revenue x 100
❖ Net profit margin = net profit/revenue x 100
❖ Illiquid - assets are not easily convertible to cash
❖ Current ratio = current assets/current liabilities <1 cash flow problems
 >2 - too much working capital tied up in the business

❖ Acid test ratio = current assets - inventories/current liabilities