Business In The Real World (Business Aims and Objectives (Survival -…
Business In The Real World
Why Businesses Exist
Businesses supply goods or services
Businesses sell products to customers who are willing to pay for them.
Products can be goods or services.
Some businesses provide goods or services that are needs, things that you can't live without, such as water and food.
Others provide goods or services that are wants, things you would like to have, but can survive without, like holidays and jewellery.
Businesses are set up for various reasons
Some businesses are set up when someone starts making a good or providing a service that they think customers will want to pay for.
Some people start businesses that distribute goods. Eg. they buy products from a manufacturer and then sell them on to other businesses or to individual customers.
Some businesses are specifically set up to benefit other people. They could make goods or provide a service. For example, there are businesses that organise volunteers to go into schools and help children learn how to read. Many of these businesses are not-for-profit organisations.
The primary sector produces raw materials, any natural resources which are used to make goods or services.
The secondary sector manufacture goods. They turn raw materials into finished goods. For example, a chocolate factory turns raw materials, such as milk and cocoa into chocolate.
The tertiary sector provides a service.
Entrepreneurs take advanatge of business opportunities
Enterprise involves identifying new business opportunities, and then taking advantage of them. There's always a risk o failure, but the reward for a successful enterprise activity is usually profit.
Enterprise can involve starting up a new business, or helping an existing one to expand by coming up with new ideas.
An entrepreneur is someone who takes on the risks of enterprise activity.
Entrepreneurs have different objectives
There might be financial reasons, if the business is successful and makes a profit, the entrepreneur could earn more money than they did before. This could give them a better quality of life.
Some people start a business when they identify a gap j the market, they think of a useful good or service that no other business is providing.
Some people might want the independence of being their own boss. This means they can decide what they do each day, and make the decisions about how the business will be run. They might also enjoy more flexible working hours, meaning it's easier to fit work around other commitments, like childcare.
Some people want to follow an interest, eg. a history lover might want to set up a tour company for a historical site. Being interested in what they do can give a person a lot more job satisfaction.
Some people are simply dissatisfied with their current job. Starting up a new business can help them to feel happier and more motivated to go to work.
Entrepreneurs need particular qualities
Hardworking - It takes a lot of hard work to turn ideas into practice. Entrepreneurs often work long hours. To begin with, they may be working alone, so they have to do all the different tasks involved in running a business, such as accounting, business planning and sales and marketing.
Organised - Entrepreneurs have to have good organisational skills to keep on top of all the day-to-day tasks of running the business as well as planning for the future. Eg. they have to make sure they're properly prepared for meetings and that they're in control of their finances.
Innovative - To come up with new ideas and think of solutions to problems that come up.
A willingness to take a calculated risk - There are lots of unknowns involved in running a business. The entrepreneur will probably give up their current job and invest money that they could lose if the business fails. They can write a business plan to work out if the business is a good idea, but they can't know exactly what's going to happen before they start.
Factors of Production
Non-renewable resources, such as natural gas, oil and coal.
Renewable resources like wind or tidal power, or wood from trees.
Materials extracted by mining.
Animals found in the area.
Labour is the work done by the people who contribute to the production process.
Different people have different levels of education, experience or training. These factors can make some people more "valuable" or productive in the workplace than others.
Capital is the equipment, factories and schools that help to produce goods or services.
Capital is different from land because capital has to be made first.
Enterprise refers to the people who take risks and create things from the other three factors of production.
Opportunity costs help people choose how to use resources
Most factors of production are limited. To work out the best way to use them, managers will often look at the opportunity cost of a decision.
Opportunity cost is the benefit that's given up in order to do something else, it's the cost of the choice that's made. It's the idea that money or time spent doing one thing is likely to mean missing out on doing something else.
So it puts a value on the product or business decision in terms of what the business had to give up to make it.
Businesses must choose where to use their limited resources. Mangers compare opportunity costs when making a decision.
Business Ownership Structures
They're easy to set up, which means they're great for start-up businesses.
You get to be your own boss.
You alone decide what happens to nay profit.
You might have to work long hours and may not get many holidays.
You have unlimited liability. This means that if the business goes bust owing £10 million, you are liable for paying back all of the debt, which might mean you have to sell everything you own.
You're unincorporated. This means the business doesn't have its own legal identity. So if anyone sues the business, they'll sue you personally.
It can be hard to raise money. Banks see sole traders as risky, so it may be hard to get a loan. You often have to rely on your own savings, or family and friends.
More owners means more ideas, and a greater range of skills and expertise, eg. one partner might be great at sales, while another is good at planning.
It also means more people to share the work.
More owners means more capital can be put into the business, so it can grow faster.
Each partner is legally responsible for what all the other partners do.
Like sole traders, most partnerships have unlimited liability.
More owners means more disagreements. You're not the only boss. If the partners disagree about which direction the business should go in and how much time to put in, it can get unpleasant.
The profits are shared between the partners. So if a sole trader decides to go into partnership with another person, they could end up with less money for themselves.
Private Limited Companies
The big advantage overs ole traders and partnerships is limited liability, you can't lose more money than you invest.
Being incorporated, the company can continue trading after a shareholder dies, unlike partnership.
It's easier for a Ltd. company to get a loan or mortgage than it is for a sole trader or partnership.
For someone to buy shares, all the other shareholders have to agree. So the owners keep a lot of control over how the business is managed and how many people get to share the profits.
They're more expensive to set up than partnerships because of all the legal paperwork you have to do.
Unlike sole traders or partnerships, the company is legally obliged to publish its accounts every year.
Public Limited Companies
Much more capital can be raised by a PLC than by any other kind of business.
That helps the company to expand and diversify.
Like private limited companies, they also have the benefits of having limited liability, and being incorporated.
It can be hard to get lots of shareholders to agree on how the business is run. Each shareholder has very little say.
It's easy for someone to buy enough shares to take over the company, if they can convince shareholders to sell.
The accounts have to be made public, so everyone can see if a business is struggling.
More shareholders means there's more people wanting a share of the profits.
Business Aims and Objectives
Survival - Around 60% of new businesses close within five years of starting, so just surviving is the main and most important short-term aim of all new businesses.
Maximise Profit - The vast majority of businesses will aim to maximise profits. However, it may take a few years for a new firm to make any profit at all.
Growth - Many firms will aim to grow, but growth can mean different things. Eg. it might mean increasing the number of employees, increasing the number of products sold, or increasing income from sales. Some firms want to grow domestically, whereas, others want to grow internationally.
Increase shareholder value - Limited companies have shareholders. Shareholders get a share of the firm's profits and can sell their shares to make money. Many firms aim to increase shareholder value by increasing the value of the firm, eg. by making more profit or by growing.
Increase Market Share - Market share tells you what percentage of a market's total sales a particular product or company has made. When a business first starts up it has zero market share, so one of its first aims is to capture a part of the market and establish itself. It can then aim to increase its market share by taking sales away from competition, or by persuading new customers to enter the market and buy its products.
Achieve customer satisfaction - Customer satisfaction measures how happy consumers are with the products provided by the firm. The firm can measure this by carrying out customer opinion surveys, a type of market research.
Do what's right socially and ethically - Some firms want to make sure they are acting in ways that are best for society and that society believes are morally right. They may also ant to make sure their activities don't cause unnecessary harm to the environment.
The owners are the most important stakeholders. They make a profit if the business is successful and decide what happens to the business. In a limited company, the shareholders are the owners. shareholders usually want high dividends, and a high share price.
Employees are interested in their job security and promotion prospects. These are improved if the firm is profitable and growing. Employees also want a decent wage and good working conditions. So they may benefit most when objectives are based on profitability, growth and ethics.
A firm buys its raw materials from suppliers. If the firm is profitable and grows they'll need more materials and the supplier will get more business and therefore its income will increase. So suppliers benefit most when the firm sets objectives based on profitability and growth.
The local community where the business is based will suffer if the firm causes noise and pollution. They may gain if the firm provides good jobs and sponsors local activities. If the business employs local people, these employees will then have money to spend in local shops, which is good for the local economy. So the local community may benefit when objectives are based on minimising environmental impacts, ethical considerations, profitability and growth.
The government will receive taxes if the firm makes a profit. They may benefit most when objectives are based on profitability, growth or job creation.
Customers want high quality products at low prices. They benefit when objectives are based on customer satisfaction.
Revenue, Costs and Profit
Revenue Is The Income Earned By A Business
Businesses earn most of their income from selling their products to customers.
Revenue can be calculated by multiplying sales by the price.
Costs are the expenses paid out to run the business.
Fixed costs don't vary with output. They have to be paid even if the firm produces nothing. Eg. rent, insurance and fixed salaries for employees such as mangers.
Variable costs are costs that will increase as the firm expands output. Eg. the costs of factory labour, raw materials and running machinery.
Fixed costs are only fixed over a short period of time, an expanding firm's fixed costs will go up.
Average unit cost is how much each product costs to make.
To find the average unit cost, divide the total cost by output.
To make a profit the firm must charge a higher price than this.
Average unit costs usually fall as the firm grows, due to economies of scale. kk
Businesses make profit if they earn more than they spend
Profit is the difference between revenue and costs over a period of time.
If costs are higher than revenue, the business will make a loss instead of a profit, and the answer to the calculation above will be negative.
Revenue, Cost & Profit
Profit is the surplus left from revenue after paying all costs. profit is found by deducting total costs from revenue. Profit = Total Revenue - Total Costs
For example, if a firm has a total revenue of £100,000 and a total cost of £80,000, then they are left with £20,000 profit.
Profit is the reward for risk-taking. A business can use profit to: Reward owners, Invest in growth, Save for the future, in case there is a downturn in revenue.
Costs are the expenses involved in making a product. Firms incur costs by trading.
Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made.
Other costs, called fixed costs, stay the same even if more is produced. Office rent is an example of fixed cost which remains the same each month even if output rises.
Trading does not guarantee profit. A loss is made when the revenue from sales is not enough to cover all the costs of production. For example, if a company has a total revenue of £60,000 and a total cost of £90,000, then they have lost £30,000 from trading.
Losses can be reduced or turned into profit by,
Cutting costs -
Letting staff go and asking those who remain to accept lower wages,
Increasing Revenue -
Cutting prices and selling more items, if demand is elastic.
The income earned by a business over a period of time. The amount of revenue earned depends on two things - the number of items sold and their selling price. Revenue = Price x Quantity
For example, the total revenue raised by selling 2,000 times priced £30 is 2,000 x £30 = £60,000.
Revenue is sometimes called sales, sales revenue, total revenue or turnover.
Location of Raw Materials
If Raw Materials are located nearby, this will lower transport costs. This is important for a firm which use bulky raw materials to produce smaller finished products.
The location is close to an area of high unemployment, this will help keep wages low.
It also means there'll be a good selection of people to choose from, and the firm should be able to find enough workers.
Built up areas may have access to local colleges, where training can be done.
Being near competitors can be an advantage. For example, it should be easy to find skilled labour as there are already local suppliers, and customers will know where to go.
Other businesses might prefer to stay away from competitors so they don't lose sales.
Location of the market
Some firms pay more to transport their finished products than their raw materials. These types of firms find it cheapest to locate near to their customers:
Some services locate where people can easily get to them.
Firms that sell products cross the world may set up production sites in the countries where they have a large market. This reduces transport costs and means they won't have to pay import taxes in these countries.
The cost of labour varies in different countries. Many large firms have call centres and factories in places such as India or China where wages are lower.
How much the firm can afford to spend on renting or buying will affect where it is, some areas are much more expensive than others. Eg. it costs a lot more to rent a shop on the high street than it does in a quieter area of town.
Sometimes the government gives grants or tax breaks for firms who locate in areas of high unemployment, which lowers their total expenditure.
Expanding a Business
Economies of Scale
Larger firms generally make more products and have more money than smaller firms.
Being larger means that the average unit cost of each product falls, these reductions in cost are called economies of scale.
Economies of scale can happen for different reasons.
Purchasing - These happen when a large firm buys its supplies in bulk and so gets them at a cheaper unit price than a small firm.
Technical - These occur because a large firm can afford to buy and operate more advanced machinery than smaller firms. Also, the law of increased dimensions means that, for example, a factory that's ten times as big will be less than ten times expensive.
As the average unit cost of making each product is lower., firms can make more profit on each item they sell.
Also, lower average unit costs men larger firms can afford to charge their customers less for products than smaller firms can. This may make customers more likely to buy their products, leading to increased sales and more profit.
The profits can be reinvested into the business so it can expand even more.
Diseconomies of Scale
The bigger the firm, the harder and more expensive it is to manage it properly.
Bigger firms have more people, so it can be harder to communicate within the company. Decisions take time to reach the whole workforce, and worker at the bottom of the hierarchy feel insignificant. Workers can get demotivated, which may cause productivity to go down.
The production process may become more complex and more difficult to coordinate. For example, different departments may end up working on very similar project without knowing.
Internal expansion is when a business grows by expanding its own activities.
Internal expansion is good as it's relatively inexpensive. Also, it generally means the firm expands by doing more of what it's already good at, making its existing products. So it's less likely to go wrong.
he firm grows slowly, so it's easier to make sure quality doesn't suffer and new staff are trained well.
The problem is that it can take a long time to achieve growth, some owners don't want to wait this long to start making more money.
This is where a firm sells products via the internet.
Lots of people can buy products from the firm, even if they're not near a shop. So the business has access to a much larger market.
It's cheaper than setting up and running a new store, the firm doesn't have to pay for rent and won't have to hire as many staff.
But technology has to be regularly updated. And any technical problems can cause customers to become unsatisfied.
Opening new store
this is fairly low risk. If the new store operates in a similar way to the existing stores, it should be a success, and so the business can increase its sales.
However, opening a store means lots of extra costs. Eg. rent and staff pay. The company needs to make sure it can afford these new costs.
A business could pay another firm to carry out tasks it could do itself.
The outsourcing firm might be able to do tasks more quickly, cheaply or to a higher standard than the business can do itself.
But outsourcing means the business loses some control over parts of its operations. And the firm they've outsourced to might not prioritise their work if they've also got other customers.
The business could also get a bad reputation if the firm it outsources to has poor standards.
Franchising is where a company expands by giving other firms the right to sell its products in return for a fee or a percentage of the profits. Franchising is slightly different to the methods of growth, as it involves new businesses being set up.
The product manufactures are known as franchisors and the firms selling their products are franchisees.
some franchises trade under the name of the franchisee but advertise that they sell a particular manufacturer's products. Car dealerships are an example of this type of franchise.
Branded franchises go one stage further. The franchisee buys the right to trade under the name of the franchisor. Most of the big firms in the fast-food industry are this type of franchise.
Franchising has many advantages. It increases a franchisor's income, and it increases the market share and brand awareness of products. It also means the firm doesn't have the usual risks and costs of running a new outlet, the franchisee is responsible for these.
However, if a franchisee has poor standards the franchisor's brand could get a bad reputation.
Merger / Takeovers
A merger is when two firms join together to form a new firm.
A takeover is when an existing firm expands by buying more than half the shares in another firm.
External expansion means that the business grows much more quickly than with internal expansion.
Less than half of all takeovers and mergers are successful. It's very hard to make two different businesses work as one. management styles often differ between firms, the employees of one firm may be used to one company culture and not be motivated by the style used in the other.
Mergers and takeovers can also create bad feeling. Often a firm agrees to be taken over, but sometimes the takeover bid is hostile and unpopular.
Mergers and takeovers often lead to cost-cutting. This may mean making lots of people redundant, so they can lead to tension and uncertainty among workers.
A firm joins with a supplier, this allows a firm to control the supply, cost and quality of its raw materials.
A firm takes over a customer, this gives the firm greater access to customers. Owning its own retail outlets will make it easier to sell its products.
A firm joins with one of its competitors, this creates a firm with more economies of scale and a bigger market share. It will be more able to compete than before.
Two unrelated firms join together, this means the firm will expand by diversifying into new markets. This reduces the risks that come from relying on just a few products.