3.1.1 - Understanding the nature and purpose of business

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Why businesses exist

Because human spirit + sense of adventure -> people wanting to 'show what they can do'

Create family income not dependent on specific outside force eg company/boss

Lure of 'being your own boss'

Business objectives - 
 - Profit optimisation - medium-long term. Profit provides capital to fund business growth, + safety blanket allows business to take risks. Optimisation getting right balance between two or more possibilities - not too much to risk exploiting customer, but not too little that would threaten firms viabilities
 - Profit maximisation - make as much profit as possible, usually as fast as possible. Big companies do this when they suspect a rival is about to try to buy them out
- Growth - can only be one giant in the market, make sure it's them. Focus on rising customer/user numbers - success
 - Cash flow - more important for small firms, to ensure it remains positive so business will be success
 - Survival - relies on keeping cash flow high enough
 - Social + ethical - only mean something if business willing to sacrifice some profit/market share

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The relationship between mission and objectives

Mission - aim for the business settled upon by boss (small firm) or board of directors (large firm). Takes aim (general statement of where business is heading) and makes it appear more motivational to attempt to excite customers and staff - make them feel part of project. Often, dull aims turned to mission statements that mean little/nothing

Objectives - come from mission/aim. Usually SMART (specific, measurable, achievavle, realistic and timebound). Smaller targets with shorter deadline. 

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Why businesses set objectives

Because if the boss of a large amount of staff, can't make every decision - delegate some decisions oto more junior staff + give them authority to make middle-ranking decisions. 

Motivating to have a clear goal to aim towards - for managers and staff

Basis for devising the strategy: medium-long term plan for meeting the objectives

If managers clear on overall objectives, can feel confident in making these decisions to contribute towards achieving those goals

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The measurement and importance of profit

Measured by deducting all business costs from the revenues generated w/in a trading period. 

Calculation: profit = revenue - total costs
                    total costs = fixed costs + variable costs

Important because: 
 - provide measure of success of the organisation 
 - best source of capital investment in the growth of the business eg to finance new store
   openings
 - act as a magnet to attract further funds from investors entived bu the possibility of high
   returns on their invesement

Not uncommon for new business to fail to make profit in first few months/years. Business ultimately needs oto make profits to reward owners for putting money into enterprise.

Also important for not-for-profit organisations 

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The measurement and importance of profit - revenue

Revenue: sales revenue = volume of goods sold x average selling price

Also referred to as 'turnover' or 'sales'

If firm wants to boost revenue, can plan to sell more/aim to sell at higher price.

Can also boost revenue bu charging a low price to sell as many products as possible. Firms following this approach likely to be operating im markets where goods are fairly similar and customers don't exhibit strong brand preference - price competition massive

Demand rises and falls depending on external conditions, therefore companies tend to allow prices to rise and fall depending on supply conditions and demand in order to maximise revenue. When demand high, high prices, low demand, low prices. 

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The measurement and importance of profit - costs

Fixed costs: any costs that do not vary directly with level of output: eg rent, utilties etc. Linked to time rather than level of business activity, and exist whether business is producing any goods/services or not. Will remain the same over time period eg a year. Do not alter short term, but can alter long term. Eg, manufacturer may decide to increase output, therefore needing to rent an additional factory space - therefore more rent to pay, and fixed costs increase. 

Variable costs - vary directly with the level of output eg labour, fuel, raw materials. If manufacturer doubled output, then more wages would need to be paid, more fuel would be used and that would need to be paid for as well - these costs would also double. Not always case that variable costs rise in proportion to output - small businesses may discover that as they expand, variable costs do not rise as quickly as output eg because may be able to negotiate better prices w/ supplier (larger companies).

Total costs - fixed costs and variable costs added together. if businessed high fixed costs as proportion of total costs, likely to seek to maximise sales to ensure fixed costs spread across as many units of output as possible

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