Chapter 1 - What is Business?
Business Objectives
Why do businesses exist
1. Survival - a priority for a business (⅓ of businesses fail after 3
years)
2. Profit optimisation
Profit maximisation
3. Growth - raising their customer base
4. Cash Flow - keep in the black not the red
5. Social and ethical objectives - only if a business sacrifices profit or share
Business objectives - targets that a business wants to achieve within a given time period
The measurement and importance of profit
Fixed costs - costs that don’t vary with output e.g rent or salaries
Variable costs - costs that vary with levels of output e.g raw materials
Profit = total revenue - total costs
Sales revenue = quantity sold x selling price
Total costs = fixed costs + total variable costs
Importance of profit
- One of the main incentives of running a business
- Source of finance
- Measure of success
- Can be reinvested to help business grow
- Attracts stakeholders
Profit - what is left after all costs have been deducted from the revenue
Revenue - the value of sales made during a trading period.
Cash flow
Cash flow - the movement of money in and out of a business in terms of expenditure and
income.
,Missions and objectives
Mission statement - sets out the business’s overall purpose to direct and stimulate the entire
organisation
Different forms of business
Sole trader - when a business has only 1 owner
PROS CONS
● Autonomy in decisions ● Unlimited liability
● Can keep all of profits + chose what ● Harder to make decisions
they do with them ● Potential lack of capital
● Flexibility + control ● Limited chance of growth in
● Easier to set up/ run comparison to other forms
Public limited company - when a business offers shares to the public
PROS CONS
● Limited liability ● More regulations
● Better access to capital ● Not easy to set up
● Can take over other businesses ● Potential loss of control of the business
● Shareholders only lose what they invest ● Pressure to pay dividends to s.h
, Private limited company ‘ltd’ - a business owned by shareholders and run by directors
PROS CONS
● Limited liability ● Slows the decision making process
● Can raise finances through the sale of ● Disclosure of financial information
shares to friends/family ● More regulations
● Separate legal entity from owners
Mutual businesses - no shareholders or owners, exist solely to benefit their members
Charities - non for profit organisations which are exempt from tax
The role of shareholders
Shareholder - owns a share in the company to make a profit (return) on their investment, can
influence decision making in companies/invited to AGM’s and able to vote on policies.
There are 2 main financial rewards :
1. Annual dividend payments
2. A rise in the value of shares
Influences on share prices and significance
Share prices are affected by performance and the business environment that it trades within.
Influences include:
- Job losses
- Increased profits
- Economic downturn (boom/ recession)
Rise in share prices Fall in share prices
- Managers get bonuses - Company vulnerable to takeover
- Easier to gain capital - Indication of weak performance
- Boosts shareholders confidence - Difficult to generate capital
- Businesses may receive publicity - Shareholders less confident to spend
Factors influencing costs and demand
- Competition + Market conditions
- Income + Interest rates
- Demographic + Environmental factors
- Fair trade - trade between companies in developing countries, were fair prices are paid to the
producers
Business Objectives
Why do businesses exist
1. Survival - a priority for a business (⅓ of businesses fail after 3
years)
2. Profit optimisation
Profit maximisation
3. Growth - raising their customer base
4. Cash Flow - keep in the black not the red
5. Social and ethical objectives - only if a business sacrifices profit or share
Business objectives - targets that a business wants to achieve within a given time period
The measurement and importance of profit
Fixed costs - costs that don’t vary with output e.g rent or salaries
Variable costs - costs that vary with levels of output e.g raw materials
Profit = total revenue - total costs
Sales revenue = quantity sold x selling price
Total costs = fixed costs + total variable costs
Importance of profit
- One of the main incentives of running a business
- Source of finance
- Measure of success
- Can be reinvested to help business grow
- Attracts stakeholders
Profit - what is left after all costs have been deducted from the revenue
Revenue - the value of sales made during a trading period.
Cash flow
Cash flow - the movement of money in and out of a business in terms of expenditure and
income.
,Missions and objectives
Mission statement - sets out the business’s overall purpose to direct and stimulate the entire
organisation
Different forms of business
Sole trader - when a business has only 1 owner
PROS CONS
● Autonomy in decisions ● Unlimited liability
● Can keep all of profits + chose what ● Harder to make decisions
they do with them ● Potential lack of capital
● Flexibility + control ● Limited chance of growth in
● Easier to set up/ run comparison to other forms
Public limited company - when a business offers shares to the public
PROS CONS
● Limited liability ● More regulations
● Better access to capital ● Not easy to set up
● Can take over other businesses ● Potential loss of control of the business
● Shareholders only lose what they invest ● Pressure to pay dividends to s.h
, Private limited company ‘ltd’ - a business owned by shareholders and run by directors
PROS CONS
● Limited liability ● Slows the decision making process
● Can raise finances through the sale of ● Disclosure of financial information
shares to friends/family ● More regulations
● Separate legal entity from owners
Mutual businesses - no shareholders or owners, exist solely to benefit their members
Charities - non for profit organisations which are exempt from tax
The role of shareholders
Shareholder - owns a share in the company to make a profit (return) on their investment, can
influence decision making in companies/invited to AGM’s and able to vote on policies.
There are 2 main financial rewards :
1. Annual dividend payments
2. A rise in the value of shares
Influences on share prices and significance
Share prices are affected by performance and the business environment that it trades within.
Influences include:
- Job losses
- Increased profits
- Economic downturn (boom/ recession)
Rise in share prices Fall in share prices
- Managers get bonuses - Company vulnerable to takeover
- Easier to gain capital - Indication of weak performance
- Boosts shareholders confidence - Difficult to generate capital
- Businesses may receive publicity - Shareholders less confident to spend
Factors influencing costs and demand
- Competition + Market conditions
- Income + Interest rates
- Demographic + Environmental factors
- Fair trade - trade between companies in developing countries, were fair prices are paid to the
producers
