Unit 1 → Business activity

flashcards

1.1- What is business activity

Goods are physical products made by a business, while services are activities offered for the
sale of goods.
- Output is the amount of goods/work produced.

Needs are essential for survival, like water and food. Wants are infinite desires for goods and
services, exceeding current possessions.

● The private sector includes businesses owned by individuals

● The public sector includes those owned by the government.

Enterprise- activity of starting and running businesses.

Three types of enterprises:-

1) Private (owned by individuals for profit)
2) Public (government-owned, providing public services)
3) Social (addressing social or environmental challenges).

● Shareholders invest in large businesses and receive dividends.

● Stakeholders are individuals or groups affected by a business, relying on its success.

Types of stakeholders include owners, customers, employees, managers, financiers,

suppliers, the local community, and the government.
Internal External

Managers Customers

Employees Local community

Owners Suppliers

Shareholders Banks

Governments

1.2- Business Objectives

Dividends:- a share of profit shareholders get when they invest money and stock in a
business
Profit satisficing:- making enough profit to satisfy the needs of the business owner(s)

Aims are a business's overall goals, while objectives are the steps to achieve those aims.

Businesses have objectives to motivate employees, satisfy owners, and guide the business.

Financial objectives focus on profits, sales, and long-term success

● Survival → the first aim of a business is to survive
● Sales → increase sales of new and existing products. This will help lower costs, gain
market share and develop their brand
 ● Increase market share → win consumers from competitors, allowing them to charge
higher prices
● Financial security → make enough profit to give them financial security

Social objectives aim to improve social responsibility and human well-being.

● Personal satisfaction → will be happier in work environment by owning a business due
to satisfaction from working for themselves
● Challenge → individuals can be motivated by feeling challenged and the risk of
opening a business
● Independence and control → people want to work for themselves and have the control

Aims and objectives change due to:-

➔ Market conditions
➔ Technological advancements
➔ Performance levels
➔ Legislation
➔ Internal factors
➔ External factors-PESTEC influences.

Revenue-money earned from selling goods and services.

1.3- Sole traders, partnerships, social enterprises and franchises

Sole trader → is a business owned by one person.
Advantages Disadvantages
1. Owner keeps all profit 1. Unlimited liability
2. Owner has full control 2. May struggle to raise finance - risky to
3. Simple to set up with no legal invest or lend them money
requirements 3. May be too much responsibility
4. Flexibility 4. Long hours and hardwork
5. Can offer a personal service 5. Too small to exploit economies of scale
6. May qualify for government help 6. No continuity - business dies with owner

Partnerships → is a business owned by between 2-20 people.

- Partnerships have a deed of partnership that is a legally binding document that
states the formal rights of the partners.
Advantages Disadvantages
1. Easy to set up and run 1. Unlimited liability
2. Partners specialise in their area of 2. Profit has to be shared
expertise 3. Partners may disagree
3. Responsibility of running the business is 4. Any partners decision regarding the
shared business is legally binding on everyone else
4. More capital can be raised
5. Financial info is not published

Franchise → is a business in which the operator, the franchisor, allows another

operator, the franchisee, to run the business under their name
Franchisor Advantages Franchisor Disadvantages
1. Fast method of growth 1. Potential profit shared with franchisee
2. Cheap method of growth 2. Inefficient franchisees may damage
3. Franchisees give part of profit reputation
 4. Franchisees more motivated than 3. Cost of support for franchisees may be
employees high

Franchisee Advantages Franchisee Disadvantages

1. Less risk - tried and tested
2. Franchisor provides lots of resources such
as training, materials, equipment, start-up
package, etc
3. Set up costs are predictable
4. National marketing may be available
1. Portion of profit is paid to franchisor
2. Strict contracts have to be signed
3. Lack of independence - agreements and
strict operating rules
4. May be an expensive way to start up a
business - expensive start-up fee

Private limited companies (LTD) → Business organisations that have a separate legal
identity from their owner.
- They have limited liability which means owners aren't responsible to pay any
debt from their own money, rather the shareholders are.
- Shares in private limited companies can only be transferred privately. Their
business name ends in Limited or Ltd.
Advantages Disadvantages
1. Limited liability 1. Financial information has to be made
2. More capital can be raised public
3. Control cannot be lost to outsiders 2. Expensive and takes time to set up
4. There is continuity 3. Profit is shared between shareholders
5. Has higher status 4. Takes time to transfer shares

1.4- Limited companies and multinationals

Public limited companies (PLC) → The same as private limited companies except
shares are sold to the public through stock markets.
Advantages Disadvantages
1. Limited liability 1. Setting costs may be expensive
2. Large amounts of capitals raised 2. Outsiders can take control
3. Can exploit economies of scale 3. Financial info has to be made public
4. May dominate their market 4. Managers may take control rather than
5. Shares bought and sold easily owners
6. Have very high profile

Multinationals → A large business with significant production or services in at least

two countries.

Features of multinationals include:

1. Huge assets and turnover
2. Highly qualified professional executives and managers
3. Powerful advertising and marketing
4. Highly advanced and up to date technology
5. Highly influential economically and politically
6. Very efficient as they can exploit economies of scale

1.5- Public Corporations

Public corporation → business organisations owned and controlled by the state/government
Subsidies → when a government offers to provide part of the costs
 Deregulation → removing or reducing laws and regulations
Natural monopoly → market where it is more efficient to have just one organisation
meeting total market demand

Public corporations are government-owned entities with elected leaders, policies, and
separate legal identities, funded by the state, primarily providing public services with
secondary profit objectives.

Advantages- avoiding duplication, maintaining control of strategic industries, saving jobs,

filling gaps left by the private sector, and serving unprofitable regions.

Disadvantages- costs to the government, potential taxpayer objections to losses, inefficiency

due to low productivity and competition issues, and political interference leading to policy
changes.

Privatisation involves moving public resources to the private sector.

How privatisation occurs:-

➔ Selling public corporations' shares to individuals.
➔ Removing legal restrictions for more market competition (deregulation).
➔ Outsourcing goods/services to other businesses.
➔ Selling property and land.

Reasons for privatisation:-

➔ Generate government income by selling business assets.
➔ Reduce inefficiency in public sector corporations.
➔ Reduce political interference and keep organizations free from political motives

1.6- Appropriateness of different forms of ownership

Factors influencing ownership types (sole traders/partnerships):-
1. Growth: Businesses may alter legal status to raise more capital as they expand. For
instance, sole traders facing difficulty in securing additional finance might benefit from
taking on a partner or becoming a limited company.
2. Size: Small businesses often opt for sole traderships or partnerships, while larger
ones, like public limited companies, with substantial turnovers and numerous
employees, may be more effective.
3. Finance Needs: Changing the organizational type becomes necessary for sole traders
or partnerships to increase capital and finance.
4. Control: Some owners prefer independence and maintain sole trader status to retain
complete control. Limited company control can be upheld by holding a majority of
shares, but the wishes of the minority shareholders can't be ignored.
5. Limited Liability: Owners can safeguard personal finances and position through
limited liability when the business is a limited company.

1.7- Classification of businesses

● Primary Sector - Manufacturing:
- Manufacturers prioritize cost-effective locations over proximity to customers as
they transport products around the country or further. Proximity consideration
arises for bulk-gaining products based on cost.

● Secondary Sector - Retail

 - Retailers aim to be near customers, often in busy areas or alongside other
retail outlets. The exception is for internet-only businesses.

● Tertiary Sector - Services

- Service firms require proximity to customers, except for those like contact
centers and web designers that can operate from anywhere. Examples
needing local presence include train operators and taxi companies.

1.8- Decisions on Location

Proximity → how close a supplier is to a business
Brownfield sites → areas of land that were once used for urban development
Greenfield sites → previously underdeveloped areas of land, usually on the outskirts of
towns and cities

● Market→ The market is a business's customers. Proximity is crucial for businesses with
large or heavy products and for services like hairdressers, clothes shops, and
takeaways.

● Labour → Refers to a business's employees. Proximity to high-quality labor is essential,

and businesses must be in areas with relevant skills. For highly skilled roles, proximity
to cities, university towns, or skilled workforce areas is important.

● Competitors → Businesses prefer distance from competitors to access more

customers without competition. Some, especially in comparison shopping industries,
choose proximity to catch excess demand.

● Material → Businesses working with raw materials may locate close to suppliers to
reduce transportation costs. Manufacturers consider areas with cheap energy, while
supermarkets may set up where rent and business rates are low.

Bulk-gaining products → where the product is larger than the raw materials used to
produce it, it makes sense for a business to be located near its market so that it
doesn't have to transport the finished product very far.
Bulk-reducing products → where the product is smaller than the raw materials used to
produce it, it makes sense for a business to be located close to the raw materials

Government Influence on Location → Government aims to avoid congestion, minimize

business impact on communities, encourage job distribution, and attract foreign
manufacturers. Assisted areas offer incentives for preferred locations.

Internet's Impact on Location → Entrepreneurs have flexibility, allowing retailers to serve

national markets remotely. Businesses can operate without fixed premises, requiring only
internet connectivity.

Trade blocks- groups of countries in the same region that trade freely. Countries use trade
barriers to control imports

1.9- Globalisation
Globalisation → is the process by which the world is becoming increasingly interconnected as
a result of increased communication
Features of globalistation:-
➔ Free trade of goods and services across borders.
➔ People can live and work anywhere, leading to multicultural societies.
➔ High interdependence between nations, impacting economies globally.
➔ Capital flows freely between countries.
➔ Technology and intellectual property exchange across borders.

Advantages:-
➔ Technology advancements aid communication and remote work.
➔ The internet facilitates global business operations.
➔ Improved international transport reduces costs.
➔ Deregulation removes trade barriers, fostering open economies.
➔ Simplified monetary and legal systems ease international trade.
➔ Increased tourism influences consumer preferences.

Governments play a crucial role by easing laws and regulations hindering trade and business.

Opportunities of Globalization for Businesses:-

➔ Access to larger markets leads to increased sales and profits.
➔ Lower costs through economies of scale and enhanced competitiveness.
➔ Global access to labor provides a larger talent pool

Threats of Globalization to Businesses:-

➔ Increased global competition poses survival challenges.
➔ International takeovers make businesses vulnerable.
➔ Higher risk of external shocks due to global interdependence.

Hostile takeover → takeover that the company being taken over disagrees to or is
against its will

1.10- The importance and growth of multinational companies

How multinationals develop:
● Economies of Scale: Multinationals benefit from scale advantages, lowering costs with
global access to cheap resources.
● Marketing: Effective marketing and brand protection contribute to multinational
growth.
● Patents: Legal rights grant the freedom to make or sell new inventions or products.
● Technical and Financial Superiority: Large multinationals invest in technology,
knowledge, and research, allowing them to diversify and take risks

Patents → legal documents that give a person/company the right to make/sell a new
invention/product & stating that no other person or company is allowed to do this
Ventures → business activities that involves taking risks

Benefits to Businesses of Becoming Multinationals:

● Larger Customer Base: Multinationals access wider markets, boosting sales, profits,
and market share.
● Lower Costs: Economies of scale reduce costs, providing a competitive edge.
● Higher Profile: Strong brands make multinationals recognizable and attract
customers.
 ● Avoiding Trade Barriers: Operations in countries with barriers help bypass
restrictions.
● Lower Taxes: Locating in lower-tax countries reduces taxes, benefiting shareholders.

Benefits of Multinationals to a Country/Economy:

● Income and Employment: Multinationals create jobs, boost output, and improve living
standards.
● Increase in Exports: Output sold abroad contributes to foreign currency reserves.
● Transfer of Technology: Multinationals share technical knowledge and support local
suppliers.
● Quality of Human Capital: Training and education improve human capital in less
developed countries.
● Enterprise Development: Arrival of multinationals encourages entrepreneurship.

Human capital → people and their skills

Enterprise → the activity of starting and running businesses

Possible Drawbacks of multinationals to a Country/Economy:-

● Environmental Damage: Involvement in extraction industries can harm the
environment.
● Exploitation: Multinationals may exploit developing nations through low wages and
poor conditions.
● Repatriation of Profits: Profits may be repatriated to headquarters, benefiting
developed countries more.
● Lack of Accountability: Powerful multinationals may evade laws in weak/corrupt
countries, but pressure groups can enhance accountability.

Exploitation → situation in which you treat someone unfairly by asking them to do

things for you but give them very little in return
Repatriation (of profit) → where a multinational returns the profits made from an
overseas country to the country where it is based
- Typically from a developing country to a developed country

1.11- International trade and exchange rates

International Trade- Exchange of goods or services between different countries.

Benefits-
➔ Allows countries to obtain goods not produced domestically.
➔ Allows access to cheaper goods from overseas.
➔ Improves consumer choice.
➔ Provides opportunities to sell surplus commodities.

- Goods and services sold overseas are called exports

- And these bought from other countries are called imports

Visible trade → trade in physical goods.

- E.g- India sells texture leather goods and jewellry overseas. These are visible exports.

Visible balance formula → value of exports - value of imports

Invisible trade → trade in services

 Exchange rate → is the value of one currency expressed in terms of another currency
- Example: £1 = USD $1.20.
Transactions → business deals or actions such as buying or selling something

Impact of Exchange Rate Changes:-

● Depreciation → fall in the exchange rate, making it weaker

- Increased import prices, raising costs for consumers and businesses.
● Appreciation → rise in the exchange rate, making it stronger.
- Allows exporters to sell goods more cheaply abroad, positively impacting the
economy.

Exchange rate Price of exports Demand for Price of imports Demand for
exports imports

Falls Falls Rises Rises Falls

Rises Rises Falls Falls Rises

1.12- Government objectives & policies

Public service → when a business provides goods and services to the people in a local
community

One of the roles of most governments is to provide a range of public services. These might
includes healthcare and education

Protectionism → use of trade barriers to protect domestic producers

Trade bloc → where a group of countries in the same geographical region sign a trade
agreement to reduce/remove trade barriers. Governments can influence businesses
by forming a trade bloc

Government Influence on businesses:-

● Government Spending Impact-
- Higher spending is welcomed by businesses.
- The impact depends on where and what the money is spent on.
- For example, building a new motorway benefits the construction industry

● Taxation-
- Money raised from taxes funds public services.
- Direct taxes: Income tax, corporation tax.
- Indirect taxes: Value Added Tax (VAT)

● Constraints on Public Spending- Governments may limit public spending to manage

debts from the 2008 financial crisis.

● Effects on Businesses of Spending Constraints-

- Public sector organizations may face funding cuts.
- Layoffs in the public sector lead to lower incomes, decreased demand, and
reduced production.
- Private sector businesses relying on public contracts may suffer
Government's Impact on business activities:-
● Ways Government Can Affect Business- Change laws, influence interest rates, adjust
levels of expenditure and taxation, introduce policies.

● Specific Approaches-
➔ Infrastructure provision benefits businesses.
➔ Legislation, including consumer protection laws.
➔ Competition policy to prevent anti-competitive practices.
➔ Environmental legislation to minimize business impact on the environment.

Examples of UK consumer legislation-

● Sale of Goods Act 1979 → states that products sold by businesses must be of
appropriate quality and fit for the purpose
● Food Safety Act 1990 → means that food should be fit for human consumption and
comply with safety standards

Interest → is the cost of borrowing money and the reward to savers

Interest rate → how high the cost of borrowing is, or high the rewards are for saving.

● Interest Rates and Business-

➔ Higher interest rates increase costs for businesses with loans.
➔ Discourages the purchase of capital goods funded by borrowing.
➔ Impacts businesses with high debt more.
➔ Lower interest rates encourage increased investment and growth

● Effects of Interest Rates on Consumer Spending-

➔ House-owners with mortgages are negatively affected by rising interest rates.
➔ Demand for goods bought with borrowed money falls with rising interest rates.
➔ Savers are impacted if interest rates are low, earning less interest on savings.

Mortgage → a specific type of loan that is used to buy real estate

Budget → an official statement that a government makes about how much it intents to
spend and what the rates of taxes will be for the next year or six months

1.13- External Factors

External factors are factors outside a business's control, impacting operations unexpectedly.
- Businesses must react and make decisions to stay successful.

These factors can be positive or negative and fall into categories represented by the acronym
PESTEC

P- Political
➔ Political factors influence businesses in stable and unstable countries.
➔ E.g, pressure groups like ASH impact businesses by promoting smoke-free policies.

Pressure groups → any group of individuals who work together to exert an influence
upon the decision-making of a company to achieve some specific outcome.
- The activities of pressure groups can also play a role in influencing business
activity
E- Environmental
➔ Growing economies contribute to environmental damage.
➔ Issues include global warming, habitat destruction, and resource depletion.
➔ Sustainable development aims to meet needs without compromising the future.

Urbanisation → process of constructing more and more buildings on rural land

S- Social
➔ Increased consumer awareness and changing demand patterns affect businesses.
➔ More women in the workforce and a rise in part-time work impact labor markets.

T- Technological
➔ New technology leads to product innovation, capital-intensive production, and cost
reduction.
➔ Technology impacts agriculture, manufacturing, service industries, and the rise of
online retail.

Capital-intensive → use of relatively more machinery than labour in production

Advantage Disadvantage

Products purchased more often Expensive to research and develop new

Competitive advantage products
Increase productivity Old firms will lose sales and market share
Lower average costs Expensive production methods
Fewer workers required Retraining required
Flexibility Fall in motivation of labour
Internet provides a larger market Reduce personal contact with customers

E- Economic →Inflation and unemployment can impact local communities.

C- Competitive → Rival firms and competition influence businesses through product similarity
or price reductions.
1.14-Measuring success in business
Approaches to business success-
1) Revenue
➔ Business success depends on annual revenue growth.
➔ Exceeding revenue growth objectives signifies success.

2) Market share
➔ Larger market share enhances business success.
➔ Dominating the market can lead to higher prices.
3) Customer satisfaction
➔ Meeting consumer needs and maintaining good customer service indicate
success.
➔ Customer-focused businesses gather feedback for improvement.

4) Profit
➔ Rising profits signal improving success.
➔ Profit can only measure success for business if the objective of the business is
to maximise profit
 ➔ Factors like competition and business size affect profit measurement.
- For example, a large multinational company is likely to make more
profit than a sole trader. It is possible to take into account the size of a
business when measuring profit.

5) Growth
➔ Business size, measured by turnover, employees, market share, or capital
employed, determines success.
➔ Sustained growth over time signifies success. However, occasionally
businesses try to grow too quickly and suffer as a result. They may get caught
out overtrading

Overtrading → taking on more work than a business can afford to fund effectively

6) Owner/Shareholder Satisfaction
➔ Shareholders focus on dividend payments and share prices for success.
➔ Regular dividend growth indicates a successful business.

7) Employee Satisfaction
➔ Employee needs include fair treatment, proper training, good working
conditions, and opportunities for growth.
➔ Business profitability alone may not indicate success from an employee's
perspective.

Importance of Targets- Targets measure success, motivate staff, and adapt to business
circumstances. Meeting or exceeding targets may result in staff bonuses.
1.15- Reasons for business failure
Cash flow → is a measurement of the amount of cash that comes into and out of the
business in a particular period of time

Reasons why business can fail:-

● Overtrading
➔ Occurs when a business expands rapidly without adequate resources.
➔ Common among young, growing businesses and those seeking rapid
expansion.

● Investing in Fixed Assets

➔ Limited initial funds may lead to resource depletion when investing in
equipment.
➔ Limited initial funds may lead to resource depletion when investing in
equipment.

Lease → a legal agreement that allows you to use an asset such as a building, vehicle
or machine, for a period of time, in return for rent

● Allowing Excessive Credit

➔ Heavy reliance on credit can pose risks if customers delay payments.
➔ Prolonged payment periods may force businesses to borrow.

● Over-borrowing
➔ Borrowing for growth increases interest costs.
 ➔ Raising capital through share sales can be an alternative.

● Seasonal factors
➔ Trade fluctuations due to seasonal factors require careful management.
➔ Predicting changes and planning accordingly is essential.

● Unexpected expenditure
➔ Unforeseen expenses, like equipment breakdowns or tax demands, must be
anticipated.
➔ Early-stage challenges often stem from inexperience or poor planning.

● External factors
➔ Events beyond a business's control, like changes in consumer tastes or
economic downturns, can impact cash flow.

● Poor Financial Management:

➔ Inexperience or poor understanding of cash flow management can lead to
problems.
➔ Spending without guaranteed cash inflows, such as large customer credit, can
be risky.