AQA AS Business studies notes

Business studies notes Rewards of setting up business: - Money - Own boss- make decisions - Job you're interested in - Gain respect - Be a role model - Self satisfaction - Change consumer habits - Helping others Risks of setting up business: - Could make mistakes and lose business - Invest your own money - Lose independence - Lose house - Lose respect - Health could deteriorate- stress - Strained relationships Business plan: A statement showing how a business sorts out to achieve its aims and objectives. In the most efficient, cost-saving and profitable way. Having a plan assists a business to identify its cost, organise its resources, calculate its turnover, and anticipate any risks Executive summary: This is when the entrepreneur explains what their business is about and how they plan to set it up. It also includes their investment options. Overall description Mission statement: It explains what they want to achieve with their business Percentage change= difference/ original x 100 Private and public sector Private sector: - Businesses owned by private individuals or share holders. They usually aim to make a profit Public sector: - They are owned and controlled by the government. They aim to provide public services, often free at the point of delivery. They have particular goods called merit goods and public goods Privatisation: - When the government sells public sector businesses to the private sector - Government haven't got the time to look after all the public sector businesses - Can't afford and they make money Nationalism: - When the government buys private sector businesses and they become public - Occurs if it is going to benefit the public Sole trader: - A business that is owned by one person Advantages: - Variety of jobs - You get all the profits - Your in control/ make all the decisions - Cheap/quick to set up - Offer better personal service - Decisions made quickly - You can develop new skills - Financial information kept private - Controls the hours of work Disadvantages: - Everything is down to you - Hard work - Have to come up with your own ideas - Pay all your bills - Unlimited liability- if it goes bust you have to sell everything if you owe money - May not have the correct skill set - Banks less likely to lend to you/ difficult to raise extra finance - Death and illness will affect the business Partnership: - Owned by 2-20 people. Not all partners need to have a equal share Advantages: - Gain more capital more sources of capital - More people to come up with ideas - Can use other people's skills and expertise - Can recruit new partners if need more capital - Work load can be shared - Few procedures to follow in order to set up Disadvantages: - Profit have to shared - Unlimited liability - More disagreements as everyone has to agree - Decision making can take a long time - Partners legally bound to honour decisions of others - Partnership ends on the death or resignation of a partner - Max of 20 people can join a partnership, limiting the size of business and funds Sleeping partner: - Someone who puts capital into a business, but doesn't get involved in day to day running of the business. Only interested in making money Limited liability partnership: - A new form of business partnership which trades as a partnership but with limited liability- you lose the money that you put into the business Deed of partnership: - If there is no deed of partnership the law states: That each partners standing equal-even if they did not invest the same amount of capital or did the same amount of work - It is a legally binding document. Sets out who partners are, what their roles, responsibilities and profit share will be as well as recording investment they made Incorporated business: - Must apply to become a limited company- time consuming and expensive - Has limited liability - Can sell ashes in business to raise capital - Shareholders own business and can take a vote and share the profits (dividends) - Shareholders appoint a board of directors to run the company on their behalf. The board is headed by a chairperson How to become an incorporated company: - Must submit the following documents to companies house: memorandum of association and articles of association - Receive a certificate of incorporation Private limited company (LTD): - Businesses with one or more shareholders - Shares are sold privately cannot be sold on stock exchange (not to public) - Shareholders benefit from limited liability - The ownership of the business is determined by the proportion of the total shares each person holds Advantages: - Limited liability - Shares sold privately- can choose who buys them - Capital can be raised from sale of shares - Control of the company cannot be lost to outsiders as shares can only be sold to new members if all shareholders agree - Higher status of business structure of a sole trader - Pay corporation tax on profit- usually lower than income tax, which sole traders and partnerships pay - Incorporation means business exists and continues even if shareholder dies or resigns Disadvantages: - Profits to be shared (dividends) - Costly and time consuming to set up - Not allowed to sell shares to general public- this limits how much capital can be raised - Some financial information has to be submitted to the registrar of companies- can be seen by public including your competition - More complicated to set up process than unincorporated structures - Limited liability might be a benefit for shareholders, but lenders may see it as a risk Financial terms: Sales revenue: the amount of money you bring in through sales Price x amount sold Profit: the amount of money left over attire paying costs Sales revenue – costs Public limited company (PLC): The shares are sold and brought publicly Advantages of PLC: - Can get capital by selling shares to public (stock exchange) - Firm is bigger - Shareholders have limited liability - Will employ specialists - Death and illness won't affect the running of the company - Share can be given to workers to motivate them - Feature funds can be raised because banks and lenders see it as a very stable and secure business Disadvantages of PLC: - Firm can be taken over - Accounts not private - Incorporated- separate legal identity - More expensive to set up - Have to share profits (dividends) want to keep share holders happy - Not all decisions are made by owners - Flotation is very expensive, documents have to be produced to advertise the company. There are also legal fees - Separation of ownership. It is owned by shareholders but run by managers could cause conflict in decision making Type LTD PLC Shares issued Private Public Accounts Available to authorities Available to anyone Size Usually small Usually large Sector Private Private No of owners Minimum of 2 Minimum of 2 Profits go to Shareholders Shareholders Why do share prices change? - Upturn or downturn in profits - Announcements by companies - Opinion of commentators - Economic change - Trend or fashion - World events Franchises Advantages of franchises: (for franchisee) - Don’t have to advertise (brand already known) - Less of a risk - Prices already set - Product research done already - It is quick to set up - Support/training provided Disadvantages of franchises: (for franchisee) - Don’t have your name on the business - Losses paid by franchisee - Have to pay royalties - No choice in what to sell - Little creative input Advantages of franchise: (for franchisor) - Inexpensive - Quick to get themselves to market - Everything's done for them - Easy way to grow - Improves brand recognition - Regular income Disadvantages of franchise: (for franchisor) - Difficult to monitor quality of franchisee - Franchisee could damage your recognition - Don't get as much profit from franchise as you would by running the store yourself Social enterprise: Enterprises that are operated for the benefit of the community where any profits made from the enterprise will be put back into community profits. It does not have profits as its main aim. Advantages: - Entrepreneurs can earn a living doing something valuable, can be motivating - More successful social enterprise the more social benefits - Customers may be more willing to buy from a social enterprise - It might be easier to recruit, motivate and retain employees - Grants or other forms of finance might be available Disadvantages: - Profits and social aims may conflict, leading to difficult choices - will have to accept a lower return than in a profit-making business because the profits will go towards the social aims Charity: - These businesses do not exist to make a profit - Their main purpose is to provide benefits to various groups in society - They aim to make a surplus which is reinvested to improve their service and further their aims - Charities employ paid managers and workers unlike voluntary organisations which rely on good will Legal factors: - To become a charity in the UK an organisation must meet tight requirements set out by law - It must register with the charity commission and present a set of accounts each year - The management of a charity is overseen by a group of trustees - Those who fund a charity will not be liable for any debts that are created Workers cooperative: - Workers have stake in the company - Each worker is equal - Equal decision making - Call themselves members Advantages of cooperatives: - Paid the same - Makes people happier (motivated) and more productive - Fell they are important and part of a team Disadvantages of cooperatives: - Disagree over decision making, conflict due to different ideas. Can't progress until collective decision is made - Can't make a lot of money Cooperatives are businesses jointly owned by people who want to work together Worker coops: - Workers invest equal amounts of money - Decision making shared - Profits shared Features of a coop: - A company owned by at least two people - Shares sold privately to members - Members have limited liability - Each member has one vote - Profits belong to members and are shared equally - The value of shares does not change Advantages: - job security - Members have limited liability - Members are likely to work hard as they own the business and share the profit Disadvantages: - it can take a long time to make decisions if lost of members - More members means less profits for each member - Finance must be provided by members- so expansion difficult - Bank reluctant to lend to cooperatives - Members have a equal say possible disagreements Multinational: business in more than one nation A multinational organisation is a very large company which may have a head office in one country but manufacturing or service facilities in another. Advantages of being a multinational: - Cost: may be cheaper to manufacture in another country. Put only into other things - Risk: can spread the risk, because people in some countries may not want the product but other people will, so it spreads the risk. Not relying on success in one country - Economies of (savings of size): have to buy in bulk so you will save money as the product will be cheaper, so the business will be making cost savings Disadvantages of being a multinational: - Coordination: may be harder to keep in charge/manage. Hard to keep story's the same which could ruin reputation - Communication: difficult to communicate if there is distance. Could be a language barrier - Laws: there could be different laws in different countries- could get fined Conglomerate: it is a combination of two or more corporations engaged in entirely different business that fall under one corporate group. Usually a conglomerate I'd a large multinational company Enterprise: the willingness and ability to think of a new business idea and to take risks in starting up anew business Opportunity cost: a cost of an activity expressed in terms of the next best alternative, which has to be given up when making a choice Mission statement: it is a long term goal. The announcement of the objectives. Formal, unlikely to change, shared with public, usually broad Objectives: the targets which a business sets itself e.g. Increase profit - They can change - Short term - Keep updating - Focused Main objectives: Profit- to increase by 10% Image- improve image/ reputation Growth- to open new stores/ new countries Survival- to survive through difficult times Sales- to increase sales of product/ services What can affect a businesses objectives? - External factors: law, economy - Current progress - How long it's been going - Competition - How many locations - Finance/ budget - Demand - Product/ service provided - Type of business ownership Ways to measure size of business: Number of employees - 1-5 is micro - 6-99 is small - 100-249 is medium - 250+ is large Is it a good measure? - Many factories are highly automated and capitals intensive, they produce a lot of output bout do not employ a large number of people How would you count part time staff? Geographic area - local - Regional - National - Global/ multinational Is it a good measure? Advantages: - If they are global it indicates they have a lot of capital - Get more access to customers - Popular in other countries, good reputation Disadvantages: - online companies. How to measure? Difficult to organise into geographic areas Market share - it describes the proportion of a particular market that is held by a business, product or brand Calculated in two ways: - By value of sales compared to competition - By volume (units) do sales compared to competition Value of sales of business/ value of sales in market x 100 Is it good? Advantages: - It compares businesses against competitors - Easy to make comparisons between business - If only a few businesses easy to see in pie chart Disadvantages: - May not have a big market share, hard to include but it will look as if a small business is not going well - Hard to define what should go into market share - Difficult to obtain data Other ways to measure size Number of factories, shops or offices Disadvantage: hard to measure online stores Turnover (revenue) - Is value of businesses sales - Less than £2 million is small - Over £8 million is large Disadvantage: business with low prices won't make as much turnover Does not tell you how much they spend (costs) Profit - Is money left over after taking away costs of production from revenue Disadvantage: if spent a lot on a new factory or training workers it makes profits look bad Capital employed - The total value of a business assets e.g. Factories, machinery, offices Disadvantage: some businesses look better than others e.g. Car production and online Stock market value - The value of a PLC can be calculated by multiplying the current share by the number of shares issued Disadvantage: only used for a PLC. A scandal could lower share price, it does stay stable as the value changes everyday. So it will affect how big the business is seen to be Market size: Total sales of all business in market: - Value: total amount spent by consumers - Volume: physical quantity of products which are produced and sold Measure used depends on market being analysed but often both used - Consumer markets tend to be measured by value - Industrial markets tend to be measured by units Niche vs mass markets: Niche markets: - Small specialised market - Often only one product being sold - Original products Mass markets: - Very large markets with high volume of sales - Often low price - Characterised by high level of promotion Market growth Factors which influence Economic change: - An increase in income - Recession may make customers change their shopping habits Social change: - Changes in society: marriage rates, single parents, working mothers, immigration Technological change: - DVDs, iPods, less CDs Demographic changes: - changes ini the age structure of the population Changes in legislation: - seat belts and car seats for kids Market share Percentage of all sales within a market held by a business, product, a brand or a number of products or businesses What does market share tell us: - How well a business is doing - How much power a business has - Trends over time Why is market share important: - They test success of the company's marketing activities - Measures ability to win or lose against competitors - Link between profit and relative market share Advantages of having a brand that is a market leader: - High distribution levels - Can offer lower discount forms to relatives which result in higher revenue - Strength of brand names make it easier to secure distribution Problems with analysing market share: - different measure meant unit vs volume - Market definition: which products should be included - Time period: morrisons take over safeway - Type of product Market segmentation: Breaking down a large market into sub groups or sections that are likely to respond to products in different ways Market segmentation allows firms to offer their products or service in a specific formal that differentiates it from other versions of the same product or service Four main types of segmentation: - Geographical - Demographical (age, gender, social class, religion) - ally (lifestyle or personality) - Behaviourally (how and what they buy) Geographical segmentation considers where people live and the nature and tastes of the people that live in that region It can be done at different levels: - Locally - Regionally within a country - Internationally - Globally Within each, it can look at: - the nature of region e.g. Rural, semi-rural, urban, suburban - Type of house, road or area of a city Disadvantages of geographically: - Customers tastes are becoming more uniform across geographical boundaries - Regional and geographical boundaries are less important in deterring taste Social class: There are many different measures of social class. 2 of the most common classifications are: - A, B, C1, C2, D, E (IPA classification) - Class 1,2,3,4,5,6,7,8 (registrar general classification) - these classifications are used to decide which groups to target for products or services, or for promoting a product - They are revised regularly as lay and status of occupants change - They are sometimes grouped together Age: Many businesses segment according to age Holidays: - Saga =50+ - 18-30 Music: - hip hop - Sounds of the 60s Sports club: - 50+ programmes - Pump classes/ spinning Gender: Targeting either men or women Cars: - Small hatchbacks for women - Sports models for men Perfumes: - Men grooming products - Men's and women's fragrances Mobile phones: - accessories - Gadgets Income: Income groups can differ from social class so it sometimes useful to segment by income Religion: Dividing markets by religious groups e.g. Kosher food Ethnic: Segments by country or origin Disadvantages of demographically: Consumers try to defy consumptions patterns associated with their social class (stereotypes) Psychographic segmentation: Psychographic segmentation groups people according to their attitudes, lifestyles and opinion: - Extreme sports - Business travellers - Families Disadvantage: - Difficulty in collection of data about beliefs and lifestyle Behavioural segmentation: Segments market on the basis of people's spending patterns Usage rate: - Quantity and frequency of purchase Loyalty: - Rewarding loyalty targeting promotions to loyal customers Time and date of purchase: - If there are particular patterns of purchase, businesses can target their offers to capitalise on such patterns Disadvantage: - may fail to capture a target market Market segmentation and strategy: Main aim of market segmentation is to enhance the development of specific marketing strategies Niche marketing strategy - focus on just one market segmentation Differentiated strategy - targeting different section with different strategies Mass/ undifferentiated strategy - targeting the whole market Market research Primary market research: first hand collection of data Advantage: find out exact and current information Disadvantage: time consuming, costly and easy to do it wrong Secondary market research: using existing data collected by someone else Advantage: cheap and easy to do Disadvantage: may not answer the questions, out of date information Primary research Observations: - watching what your customers do - E.g. Supermarkets you would watch how people move around store and what they buy Advantages: - See real responses (won't lie) - Straight forward to do Disadvantages: - Difficult to analyse - You can misinterpret body language Written questionnaire: - Asking a sample of consumers for their opinions through a questionnaire Advantages: - it can be anonymous so get true information - Less time consuming, easier - Easy to analyse information Disadvantages: - Questions could be interpreted differently (misunderstood) - Can't see the person, so won't get any verbal clues to help interpret data Product testing: - A small group of consumers are shown or given the product to test and give feedback Advantages: - Information comes from people who have tried the product - Good for new products and new flavours Disadvantages: - Expensive - Time consuming - Consumers pressured into positive response Telephone and online survey: - asking consumers for their opinion via a survey online or over the phone Online: Advantages: - 24 hours, so easy to access and do - Don't get pressure like you would face-to-face - Got a large market so lots of responses - Cheap and free Disadvantages: - Annoying/ can be ignored by blocking pop ups - May not take it seriously. May complete it too quickly - No verbal or visual clues Market research: the process of gathering, analysing and interpreting data about a market Random sample: one in which each potential member of a group has an equal chance of being in the sample Advantages: - Equal chance, not biased - It's easier and quicker - You can get opinions from your target audience Disadvantages: - some people may not be able to do it (product it not for them e.g. Age group) Quota sample: the sample of a certain number of people is taken from one specific group of the population, for example 100 females or 50 people aged between 18-30 Advantages: - easier to select people - Can use target audience - More specific to your business, saves time and money - Smaller group of people, less time Disadvantages: - There is not an equal chance, could be biased - Product may be broad so less reliable - Group is small, larger group may have good opinions Stratified sample: the population is divided into groups with common characteristics, for example, people earning over £100,000, and a sample is randomly selected from this group. Usually selected by using a computer Advantages: - Small group which saves time and money - Specific to your business though the use of target market - People have equal chance of being selected, less bias - Product may not be sold in area Disadvantages: - May not be suitable for the person that has been selected - Selection of group was difficult and time consuming, if not done correctly then results are not reliable Factors that affect choice of sample: - A finance - Nature of the product - The level of risk - The target market Demand: Demand refers to the quantity that people in a particular market actually can and will purchase at a particular price Factors affecting demand: - Price - Income - Wealth - Promotion - Seasonal factors - Tastes and fashion - Social and demographic - Government action - Competitor actions - Substitutes Sources of finance: Mortgage: long term loan provided by a bank in order to buy a property Advantages: - Only method available to buy property - Structured repayments over a long time (25 years) Disadvantages: - Large sums of interest charged - Can take a long time to repay debt Government grants: money given to the business by the government. Used to help finance new projects- new jobs Advantages: - No need to repay grant Disadvantages: - Limited funds available - May be restrictions on what the money can be used for Hire purchase: an item is brought on finance, business repays some amount each month until the final payment. The business owns them Advantages: - it's flexible because business can give back item if they don't need it- don't have to repay Disadvantages: - it's high interest - Doesn't belong to them until they have repaid it Selling assets: the items owned by business, money gained is used to finance business Advantages: - Business already has enough money- no need for loan Disadvantages: - Business has to have something worth selling - Business may sell something they need at. Later date Retained profits: money kept in the business by owners. Known as retained profit on balance sheet Advantages: - No interest paid Disadvantages: - Money could be invested elsewhere earning a higher profit - it may not have enough retained profit to meet its needs - Shareholders may be unhappy as lower dividend payments Venture capital: venture capitalists invest in small and risky businesses Advantages: - Can raise money from them even when banks refuse to lend Disadvantages: - risky for venue cap - The cv may want to have some control over business Issuing shares: a share in the business is sold to an individual or another business. This money is then used to purchase new assets Advantages: - No need to repay money invested - Shearer than a loan - Some businesses can raise large sums of money this way Disadvantages: - Need to pay share holders a share of the profits - Ownership means some influence- original owner may lose control Leasing: used to obtain new equipment e.g. Cars. The business rents the items from its owner Advantages: - Cost of the asset is spread over its life - No need to find a lump sum of money to purchase it Disadvantages: - May be more expensive than buying the asset - The business does not own the asset Bank loan: a set amount borrowed and can be paid back as a short, medium or long term Advantages: - Use money for any purpose and pay it back over time Disadvantages: - have to pay interest, lower rate than overdraft - Risky ventures will struggle Over draft: the bank allows the business to draw more money from the bank than they have Advantages: - Quick to arrange - Good short term solution to a cash flow problem Disadvantages: - only sustainable for smaller amounts - Has to be repaid within a certain amount of time - Have to repay interest Trade credit: items are brought form suppliers on a buy now pay later Factors influencing finance: - Legal identity - Stage of development - Initial cost - Continuing cost - Time period - Current debt - Amount - Risk - Control - State of economy Location Main factors affecting location: - Government incentives. E.g. Grants are usually available to business which set up in areas where levels of high unemployment. A reduction in business rates are offered - Closeness to customers - Nearness to suppliers and raw materials - Transport costs- how far away are customers - of land- it there enough space to build or expand in the future - Cost of land/ premises- more expensive in prime locations - Availability of labour with the right skills - Access to transport links- motorways, ports and airports for distribution - Distance from competitors- near to competitors or far away Costs Fixed costs are… These are costs you have to lay regardless of how much you make or sell. Costs that don't vary with output Variable costs are… Costs that vary with output Total costs are… Fixed costs + variable costs = total costs Average total costs are… Cost per unit produced Total costs/ output Average variable costs are… The variable costs per unit produced Variable costs/ output Profit and loss account - It is a way of calculating how well your organisation is doing by looking at how much profit or loss you have made - It looks back over a period of time Trading account highlights the revenue earned from selling profits Break even - This is when your total costs are the same as total revenue - At break even a business has not made a profit or a loss Total cost= fixed costs + variable costs Formulas for making a break even chart Margin of safety= difference between current sales and break even sales Current – break even Selling price= revenue divided by number of sales Revenue/ number of sales Variable cost= total cost take away fixed costs divided by the number of sales Total costs- fixed costs/ number of sales Contribution Contribution= sales revenue – variable costs - It represents the amount of money which is available to contribute towards covering fixed costs - Once these are covered, it represents the amount of money which will contribute towards profit Contribution- fixed costs= profits - Contribution per unit- how much each unit of production is contributing to overheads Contribution per unit (CPU)= sales price per unit- variable costs per unit OR Total contribution/ total sales - total contribution- how much in total sales are contributing to overheads total contribution= CPU x sales OR Total sales revenue – total variable costs Profit= total contribution – fixed costs Contribution and break even Break even= fixed costs/ contribution per unit Budget - An estimate or forecast of the income and expenditure of a business for a given period of time - Keep control of a businesses finances - Planning tool to help firms meet objectives Constructing a budget is BUSS 1 Analysing a budget is BUSS 2 BUSS 1 - So you and go into debt - Shown to bank to help get a loan - All staff are aware of spending goal BUSS 2 - Identify areas to decrease spending - Improve at budgeting, reduces risk of getting it wrong Cash flow - The money coming in and out of a business Cash flows in: - Cash sales - Payments from debtors - Owners capital invested - Sales of assists - Bank loan Cash flows out: - Purchasing stock - Paying wages - Paying debts, bank loans, creditors - Purchasing assists Cash flow is interested in the balance between these cash inflows and cash outflows in terms if their relative size and timings Net cash flows: difference between money coming into a business and money coming out Money in – money out - Cash flow is important to a business as it needs to ensure a positive cash balance in order to be able to meet day to day expenses. A profitable business may fail because of cash flow problems Factors affecting the nature of cash flow: Transaction types… - Sales – cash vs credit - Purchases – cash vs credit - Payment terms Timings of cash flow… - Seasonal sales (strawberries) - Timings of payments in and out (package holiday) Nature of business… - Start up capital costs - Time taken from input to output - Stock holdings The nature of cash flow: - A cash flow forecast is a forward looking statement that tries to predict cash inflows and outflows in the future - Cash flow forecasts are an important part of a business plan Why businesses forecast cash flow: - To identify timings and significance of potential short falls - To identify possible corrective action - To help secure finance from potential investors or the bank - To give confidence about short term survival - To provide a guide against which to measure against actual cash flow Example of balance sheet showing inflow and outflows June August September October November Opening balance 80 100 110 90 100 90 Cash in 60 70 80 100 80 100 Cash out 40 60 100 90 70 70 Net cash flow 20 10 (20) 10 10 30 Closing balance 100 110 90 100 90 120 Net cash flow= cash in- cash out Closing balance= opening +/- net cash flow Different types of workers Advantages working part time for the worker: - work around other commitments - More free time, spend with family ( save on childcare costs) - Can gain experience - get to choose hours Disadvantages working part time for the worker: - Not as much money - Don't feel part of the workforce as not there all the time - May be looked down on by others in the company Advantages of part time workers for the business: - Cheaper - Workers are fully utilised - Fill in for others - Workers happy so more motivated to work hard as they can choose hours Disadvantages of part time workers for the business: - Training costs are not as cost effective - Less affiliated with organisation Flexi worker - Day to day hours change. Will work same amount of hours as a full time worker but can work them when they wish Advantages: - Flexible opening/ flexible to customers - Motivated workforce Disadvantages: - Not suitable for all businesses who need someone there all the time - Can have problems getting staff when they are needed (staff may not want to work certain hours) Revision: Added value: how a business makes raw materials worth more to sell on to their consumers E.g. Buys a plain cupcake for 30p adds icing and decorations and sells for £1.50. There has been an added value of £1.20 Added value = selling price- cost of product