- Created by: Cam Ward
- Created on: 03-04-11 11:16
What is a business?
New businesses are set up by entrpreneurs.
All businesses have INPUTS and OUTPUTS and must ADD VALUE during production.
A business MAKES GOODS or PROVIDES SERVICES.
SUPPLIERS > CUSTOMER > CONSUMER.
VALUE IS ADDED when the SELLING PRICE is HIGHER THAN COST of all the RESOURCES used to make it.
Why? - PROFIT, SATISFACTION, MAKING A DIFFERENCE.
Factors of competition - PRICE, PRODUCT RANGE, CUSTOMER SERVICE.
Product Differentiation - STRONG BRAND IMAGE, UNIQUE SELLING POINT.
4 P's - PRICE, PRODUCT, PLACE, PROMOTION.
Aims and objectives.
Businesses have different aims and objectives that can change over time.
An aim or objective is a statement of what a business is trying to achieve over the next 12 months.
Some typical objectives would be:
- increased profit.
- increasing market share.
Aims and objectives are useful in helping a business stay on track and keeping staff focused.
Aims and objectives 2.
A start up objective for most businesses is likely to be to survive. As the businesses grows it may change its objective to expand and/or increase profit.
Objectives should be SMART:
- Specific - clearly state what is to be achieved.
- Measurable - the desired outcome is a number value that can be measured.
- Agreed - all staff are involved in discussing and agreeing an aim.
- Realistic - the target is possible given the staff and financial resources available.
- Timed - the target will be met within a given period of time.
STAKEHOLDERS are any group of people interested in the activities of the business. Stakeholders could be the government, local community, employees, pressure groups and suppliers.
Business objectives change over time, this can be a response to internal factors such as business growth, or external factors such as an economic recession.
Business structure - sole traders and partnerships
Owners must decide on the best legal structure for their business.
Sole traders - A business owned and controlled by one person, sole traders have unlimited liability which is a risk because the owner is personally liable for the firms debts and may have to pay for losses made by the business with their own personal possesions. Starting as a sole trader is easy to set up, generally only a small investment is needed and as the only owner decisions can be made quickly and easily. However sole traders have to work long hours, must make decisions on their own no support and has unlimited liability.
Partnerships - A busines owned and controlled by two or more people. The size of the business is normally small-medium. An advantage of partnerships is shared expertise and shared responsibility. A disadvantage of partnerships is that disputes can arise over decisions that have to be made. Like sole traders, partners also have unlimited liability.
Business structure - limited companies and franchi
Limited companies - These types of companies are incorporated. They are owned by shareholders, there is no limit on how many owners there are but it mainly depends on the size of the business, which is generally medium to large. The main advantage of this type of business is that shareholders have limited liability. The legal responsibility of the business lies with the directors.
There are two main types of limited company:
- A private limited company (ltd) - often a small business, shares do not trade on the stock exchange.
- A public limited company (plc) - usually a large, well-known business, shares trade on the stock exchange.
Franchising - An entrepenuer can buy into an existing business and aquire the right to use an existing business idea. A franchisee buys the right from a franchisor to copy a business format. A franchisor sells the right to use a business idea in a particular location. Opening a franchise is considered to be less risky however owners cannot create promotions, change prices or create new products, owners must also pay a loyalty fee to the franchisor.
Expanding a business.
Business expansion has potential benefits and drawbacks. Some owners are reluctant to take the risk of growing the business and opt to stay small.
Large firms also often enjoy economies of scale. This means that a business has lower unit costs because of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing campaigns and overheads across larger sales.
Economies of scale are a major source of competitive advantage for large firms.
Methods of expansion:
- Internal growth: the business grows by hiring more staff and equipment to increase its output.
- External growth: where a business merges with or takes over another organisation, Combining two firms increases the scale of operation.
- Franchising: where a business leases its idea to franchisees. This allows new branches to open across the country and internationally.
Expanding a business 2.
Expansion is risky. There's always the chance that any expansion plans can fail and result in losses rather than profit.
There is potentially a major drawback to avoiding growth. Small businesses can be at a cost disadvantage compared to their larger rivals enjoying economies of scale. As small firms cannot compete with the low prices set by their larger rivals, they have to compete on service or quality.
Marketing is about responding to consumers' needs. It is important to find out what these needs are before launching a new product.
A business conducts market research to help identify gaps in the market and business opportunities.
Marketing is about identifying and satisfying customer needs. It involves gathering data about customers, competitors and market trends.
Trial purchases are done to try a new product to see if it sells well.
Primary research (field research) involves gathering new data that has not been collected before. For example, surveys using questionnaires or interviews with groups of people in a focus group.
Secondary research (desk research) involves gathering existing data that has already been produced. For example, researching the internet, newspapers and company reports.
A competitive market has many businesses trying to win the same customers. Amonopoly exists when one firm has 25% or more of the market, so reducing the competition.
The Marketing Mix.
A company needs to consider the marketing mix in order to meet their consumers' needs effectively.
Fair trading regulations, the consumer has basic legal rights if the product is:
- Given a misleading description.
- Of an unsatisfactory quality.
- Not fit for its intended purpose.
Sale and supply of goods act 1994.
This acts says that all products have to be of a 'satisfactory quality'. This means they have to:
- Be safe.
- Last for a reasonable amount of time.
- Be fit for their intended purpose.
- Have nothing wrong with them (unless the defect was noted at the time of sale.).
A business can adjust features, appearance and packaging of a product to create competitive advantage.
Customers buy a product to meet a need.
Product differentiation is created by:
- Establishing a strong BRAND IMAGE for a good or service.
- Making clear the UNIQUE SELLING POINT (USP) of a good or service.
- Offering better location, features, functions, design, appearance or selling price than rivals.
The four parts of a product life cycle are:
Extension strategies can extend the life cycle of a product, it can include updating packaging, adding extra features or lowering price.
A business must take many factors into account before deciding on the price of a product.
Customers- Lowering the price of a product increases the demand, however if the price is too low the customers may think you are selling a low quality product.
Competitors - Prices must be adjusted accordingly to avoid customers going to competitors for the same products your business offers but at a cheaper price.
Cost - The business wants to make the product at as low a price as possible and make set the price much higher than the cost to make it.
Pricing new products:Penetration pricing means setting a relatively low price to boost sales. It is often used when a new product is launched, or if the firm’s main objective is growth.
Price skimming means setting a relatively high price to boost profits. It is often used by well-known businesses launching new, high quality, premium products.
There is much more to promotion than advertising. Businesses use various methods to gain publicity.
- Advertising, where a business pays for messages about itself in mass media such as television or newspapers. Advertising is non-personal and is also called above-the-line promotion.
- Sales promotions, which encourage customers to buy now rather than later. For example, free gifts, samples, coupons or competitions.
- Personal selling using face-to-face communication.
- Direct marketing takes place when firms make contact with individual consumers using tactics such as ‘junk’ mail shots and weekly ‘special offer’ emails.
There is no one right promotional mix for all firms. The combination of promotional elements selected takes into account the size of the market and available resources. Large businesses have the resources to use national advertising. Small firms with limited resources and a local market may instead opt for leaflet drops to promote their activities.
As part of its marketing strategy, a company needs to decide where best to distribute a product.
- Retailers. Persuading shops to stock products means customers can buy items locally.
- Producers can opt to distribute using a wholesaler who buys in bulk and resells smaller quantities to retailers or consumers. This again means lower profit margins for the manufacturer.
- Telesales and mail order. Direct communication allows a business to get products to customers without using a high street retailer. This is an example of direct selling.
- Internet selling - Online selling is an increasingly popular method of distribution and allows small firms a low cost method of marketing their products overseas. A business website can be both a method of distribution and promotion.
Developing new or improved channels of distribution can increase sales and allow a firm to grow.
Sources of finance.
All businesses need finance. There are a number of funding sources used by organisations.
Firms need finance to:
- Start up a business, e.g. pay for premises, new equipment and advertising.
- Run the business, e.g. having enough cash to pay staff wages and suppliers on time.
- Expand the business, e.g. having funds to pay for a new branch in a different city or country,
New businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money.
Sources of finance 2.
Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.
Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sellassets (items it owns) that are no longer really needed to free up cash.
External sources of finance are found outside the business, eg from creditorsor banks.
Sources of finance 3.
Sources of external finance to cover the short term include:
An overdrafts, where a bank allows a firm to take out more money than it has in its bank account.
Trade credits, where suppliers deliver goods now and are willing to wait for a number of days before payment.
Factoring, where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount.
Sources of finance 4.
Sources of external finance to cover the long term include:
Owners who invest money in the business. For sole traders and partners this can be their savings. For companies, the funding invested by shareholders is called share capital.
Loans from a bank or from family and friends.
Debentures are loans made to a company.
A mortgage, which is a special type of loan for buying property where monthly payments are spread over a number of years.
Hire purchase or leasing, where monthly payments are made for use of equipment such as a car. Leased equipment is rented and not owned by the firm. Hired equipment is owned by the firm after the final payment.
Grants from charities or the government to help businesses get started, especially in areas of high unemployment.
Creditors and debtors.
A creditor is an individual or business that has lent funds to a business and is owed money. A debtor is an individual or business who has borrowed funds from a business and so owes it money.
Money borrowed from creditors is paid back over time, usually with an additional payment of interest.
Revenue, costs and profit.
All businesses should keep proper accounts. This involves the calculation of revenue, costs and profit.
Revenue is the income earned by a business over a period of time, eg one month. The amount of revenue earned depends on two things - the number of items sold and their selling price. In short, revenue = price x quantity.
Revenue is sometimes called sales, sales revenue, total revenue or turnover.
Costs are the expenses involved in making a product.
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 a fixed cost which remains the same each month even if output rises.
Revenue, costs and profit 2.
Revenue, costs and profit 3.
Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.
The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs and variable costs.
Revenue, costs and profit 4.
Profit and loss.
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.
Profit is the reward for risk-taking. A business can use profit to either:
- Reward owners.
- Invest in growth.
- Save for the future, in case there is a downturn in revenue.
Trading does not guarantee profit. A loss is made when the revenue from sales is not enough to cover all the costs of production.
Losses can be reduced or turned into profit by:
Cutting costs, eg by letting staff go and asking those who remain to accept lower wages.
Increasing revenue, eg by cutting prices and selling more items - if demand is elastic.
Companies need to budget and be aware of cash flow in order to stay solvent.
Cash flow is the movement of money in and out of the business.
- Cash flows into the business as receipts, eg from cash received from selling products or from loans.
- Cash flows out of the business as payments, eg to pay wages, supplies and interest on loans.
- Net cash flow is the difference between money in and money out.
Insolvency - If a business runs out of cash and cannot pay its suppliers or workers it is insolvent. The owners must raise extra finance or cease trading. This is why planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft.
A business can improve its cash flow by:
Reducing cash outflows, eg by delaying the payment of bills, securing better trade credit terms or factoring.
Increasing cash inflows, eg by chasing debtors, selling assets or securing an overdraft.
Calculating profitability involves first working out the minimum level of sales required to cover all costs.
At low levels of sales, a business is not selling enough units for revenue to cover costs. Aloss is made. As more items are sold, the total revenue increases and covers more of the costs. The breakeven point is reached when the total revenue exactly matches the total costs and the business is not making a profit or a loss. If the firm can sell at production levels above this point, it will be making a profit.
Establishing the breakeven point helps a firm to plan the levels of production it needs to be profitable.
Many organisations add on a margin of safety to the breakeven level of output when deciding on their minimum sales target.
The breakeven point can be calculated by drawing a graph showing how fixed costs, variable costs, total costs and total revenue change with the level of output.
A business keeps various types of financial record to monitor its performance and ensure that taxes are paid. These include cash flow statements, profit and loss accounts and a balance sheet.
A trading, profit and loss account shows the business's financial performance over a given time period, eg one year.
A balance sheet shows the value of a business on a particular date. A balance sheet shows what the business owns and owes (its assets and its liabilities).
working capital = current assets - current liabilities
A business is solvent if it can meet its short-term debts when they are due for payment. To do this it needs adequate working capital. There are three main reasons why a business needs adequate working capital. It must:
- Pay staff wages and salaries.
- Settle debts and therefore avoid legal action by creditors.
- Benefit from cash discounts offered in return for prompt payment.
When hiring large numbers of staff, organisation is important. Everyone within the company needs to understand their role. Organisation is the way a business is structured.
Organisation charts are diagrams that show the internal structure of the business. They make it easy to identify the specific roles and responsibilitiesof staff.
Hierarchy refers to the management levels within an organisation.
Line managers are responsible for overseeing the work of other staff.
Subordinates report to other staff higher up the hierarchy. Subordinates are accountable to their line manager for their actions.
The span of control measures the number of subordinates reporting directly to a manager.
- The chain of command is the path of authority along which instructions are passed, from the CEO downwards.
Lines of communication are the routes messages travel along.
Types of organisation.
Tall organisations have many levels of hierarchy. The span of control isnarrow and there are opportunities for promotion. Lines of communication arelong, making the firm unresponsive to change.
Flat organisations have few levels of hierarchy. Lines of communication areshort, making the firm responsive to change. A wide span of control means that tasks must be delegated and managers can feel overstretched.
In centralised organisations, the majority of decisions are taken by senior managers and then passed down the organisational hierarchy.
Decentralised organisations delegate authority down the chain of command, thus reducing the speed of decision making.
One method of reducing costs is to remove a layer of management in a hierarchy while expecting staff to produce the same level of output. This is calleddelayering.
Firms recruit, select and train staff in different ways with varying degrees of success.
Recruitment is the process by which a business seeks to hire the right person for a vacancy. The firm writes a job description and person specification for the post and then advertises the vacancy in an appropriate place.
Job descriptions explain the work to be done and typically set out the job title, location of work and main tasks of the employee.
Person specifications list individual qualities of the person required, eg qualifications, experience and skills.
Firms can recruit from inside or outside the organisation.
- Internal recruitment involves appointing existing staff. A known person is recruited.
- External recruitment involves hiring staff from outside the organisation.
Recruiting staff 2.
Managers must decide on the best method to assess and select applicants for a job:
Application forms, CVs, references, interviews, presentations, role-play and tests can be used to show if an individual is suitable for the specific job on offer.
Induction is the training given to new workers so that they understand their role and responsibilities and can do their job.
Training improves technical, personal or management skills and will increase staff efficiency. There are two main training methods:
- On-the-job training where experienced members of staff explain a job or a skill.
Off the job training where outside experts are paid to explain a job or a skill.
Appraisal and training helps motivate staff and so improves staff retention.
Companies can motivate employees to do a better job than they otherwise would. Incentives that can be offered to staff include increased pay or improved working conditions. Motivational theories suggest ways to encourage employees to work harder.
Motivation is about the ways a business can encourage staff to give their best. A motivated workforce results in:
- Increased output caused by extra effort from workers.
- Improved quality as staff take a greater pride in their work.
- A higher level of staff retention. Workers are keen to stay with the firm and also reluctant to take unnecessary days off work.
Managers can influence employee motivation in a variety of ways:
- Monetary factors: some staff work harder if offered higher pay.
- Non monetary factors: other staff respond to incentives that have nothing to do with pay, e.g. improved working conditions or the chance to win promotion.
Payment methods of motivation,
Managers can motivate staff by paying a fair wage. Payment methods include:
- Time rate: staff are paid for the number of hours worked.
- Overtime: staff are paid extra for working beyond normal hours.
- Piece rate: staff are paid for the number of items produced.
- Commission: staff are paid for the number of items they sell.
- Performance related pay: staff get a bonus for meeting a target set by their manager.
- Profit sharing: staff receive a part of any profits made by the business.
- Salary: staff are paid monthly no matter how many hours they work.
- Fringe benefits: are payments in kind, eg a company car or staff discounts.
Non-pay methods of motivation.
Managers can motivate staff using factors other than pay through:
- Job rotation: staff are switched between different tasks to reduce monotony.
- Job enlargement: staff are given more tasks to do of similar difficulty.
- Job enrichment: staff are given more interesting and challenging tasks.
- Empowerment: staff are given the authority to make decisions about how they do their job.
Employers need to follow certain laws and procedures in order to protect their staff and customers.
Workers are guaranteed a minimum hourly wage rate of £5.80 per hour in 2009.
Race, sex, age or disability discrimination is illegal. Businesses must be careful to treat all workers fairly. They must offer equal pay and promotion opportunities for women and ethnic minorities.
The EU Working Time Directive sets a limit on the number of hours staff can work in a week.
Parents are entitled to paid leave from work soon after their children are born. The firms must keep their post open for when they return from maternity or paternity leave.
Businesses operate in a dynamic and competitive market. Workers can lose their job through redundancy if the business suffers a fall in sales. Falling salesmeans that a business needs fewer staff and some posts are no longer required. Also, low revenues may lead a company to try to cut staffing costs.
Redundancy procedures must be fair, for example firms can use a last-in-first-out method to shed staff. Redundant workers receive compensation according to the number of years with the firm.
Health and safety.
Health and safety procedures are put in place to prevent staff from being harmed or becoming ill due to work.
The Health and Safety at Work Act 1974 is the primary piece of legislation covering occupational health and safety in the United Kingdom.
- Display a health and safety poster.
- Carry out a risk assessment to identify workplace risks, and then put sensible measures in place to control them. Potential risks include trip hazards and asbestos. The extra paper work increases the total costs of the business.
Businesses are also responsible for ensuring the health and safety of their customers.
All businesses are required by law to:
Effective communication is important both within an organisation and externally. Effective communication improves business efficiency.
- Internal communications happen within the business.
- External communications take place between the business and outside individuals or organisations.
- Vertical communications are messages sent between staff belonging to different levels of the organisation hierarchy.
- Horizontal communications are messages sent between staff on the same level of the organisation hierarchy.
- Formal communications are official messages sent by an organisation, eg a company memo, fax or report.
- Informal communications are unofficial messages not formally approved by the business, e.g. everyday conversation or gossip between staff.
- A channel of communication is the path taken by a message.
Communication makes a big impact on business efficiency. Effective communication means:
Customers enjoy a good relationship with the business, eg complaints are dealt with quickly and effectively.
Staff understand their roles and responsibilities, eg tasks and deadlines are understood and met.
Staff motivation improves when, for instance, managers listen and respond to suggestions.
Barriers to effective communication.
A balance needs to be struck in communication between management and staff. Insufficient communication leaves staff 'in the dark' and is demotivating. Excessive communication leads to information overload, eg when staff find hundreds of messages arriving in their intray each day.
Communications fail - Messages may never be received if they are sent at the wrong time or to a junk email folder.
The result is inefficiency and higher costs, as more resources are needed to achieve the same result.
Training staff to select an appropriate medium and send clear, accurate, thorough messages will improve the quality of communications, especially if there is an opportunity for feedback.
Impact of ICT.
Home working and inexpensive call centres located overseas.
Automated stock ordering where items are reordered to ensure shelves are always full. Less paper work reduces administration costs.
E-commerce where products are traded and paid for on the internet.
E-commerce opens up international markets to firms as overseas customers can view products for sale online.
A business can develop links with customers throughemail newsletters.
Entrepreneurs need to decide which production method is best for them. Good customer service is valuable and can lead to increased sales.
Production is about creating goods and services. Managers have to decide on the most efficient way of organising production for their particular product.
There are three main types of production to choose from:
- Job production where items are madeindividually and each item is finished before the next one is started. Designer dresses are made using the job production method.
- Batch production where groups of items are made together. Each batch is finished before starting the next block of goods.
Flow production where identical, standardised items are produced on an assembly line.
Choosing a production method.
Job production can be used to meet individual customers needs.
Batch production is used to meet group orders.
Economies of scale lead to lower unit costs and prices.
Customer service is the experience a customer gets when using products made by the business. Satisfied customers make repeat purchases and recommend the product to friends, leading to additional word-of-mouth sales.
- Training so that staff understand their role and responsibilities. For instance, asking every customer if they are happy with their meal.
- Innovation or introducing new ideas and methods.
- Listening to customers helps a business adjust its products to better match consumer needs and respond to any problems.
Efficiency, productivity and competitiveness are linked. Better productivity means increased efficiency which results in a higher level of competitiveness.
Efficiency is about making the best possible use of resources. Efficient firms maximise outputs from given inputs, and so minimise their costs. By improving efficiency a business can reduce its costs and improve its competitiveness.
Production is the total amount made by a business in a given time period. Productivity measures how much each employee makes over a period of time.
Staff productivity depends on their skill, the quality of machines available andeffective management. Productivity can be improved through training,investment in equipment and better management of staff. Training andinvestment cost money in the short term, but can raise long-term productivity.
Other methods of cutting costs.
As well as improving productivity, a business can cut costs by:
Relocation to countries where staff with appropriate skills can be hired at lower wages.
Improving management so staff are motivated to work harder, or are better used.
Redesigning the product so an item is easier and cheaper to make.
Lean production is a set of measures that aim to reduce waste during production. Waste reduction methods, such as just in time ordering of stock, will increase efficiency.
Economies of scale.
There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as disecomonies of scale.
Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of:
Purchasing economies when large businesses often receive a discount because they are buying in bulk.
Marketing economies from spreading the fixed cost of promotion over a larger level of output.
Administrative economies from spreading the fixed cost of management staff and IT systems over a larger level of output.
Research and development economies from spreading the fixed costs of developing new or improved products over a larger level of output.
A business can become so large that its unit costs begin to rise. Expanding firms can experience diseconomies of scale. Causes include:
- Ineffective communication.
- Reduced motivation.
Ensuring quality means making sure that products are made to a minimum standard or better. The cost of doing this should be covered by extra sales.
Quality is about meeting the minimum standard required to satisfy customer needs.
Producing faulty goods incurs repair costs and damages the reputation of the firm. There are two main approaches to achieving quality:
Quality control where finished products are checked by inspectors to see if they meet the set standard.
Quality assurance where quality is built into the production process. For example, all staff check all items at all stages of the production process for faults.
Managing and storing stock effectively is important for a business in order to maintain production and sales.
Stock is any item stored by a business for use in production or sales. Stock can be:
- Raw materials and componentswaiting to be used in the manufacturing process, eg tyres stored by a car factory.
- Finished goodsheld in store so that a customer order can quickly be met from stock.
Stock control aims to hold sufficient items on site to enable production while minimising stock holding costs.
Businesses have different types of internal and external stakeholders, with different interests and priorities. Sometimes these interests can conflict.
A stakeholder is anyone with an interest in a business. Stakeholders areindividuals, groups or organisations that are affected by the activity of the business. They include:
Owners who are interested in how much profit the business makes.
Managers who are concerned about their salary.
Workers who want to earn high wages and keep their jobs.
Customers who want the business to produce quality products at reasonable prices.
Suppliers who want the business to continue to buy their products.
Lenders who want to be repaid on time and in full.
The community which has a stake in the business as employers of local people. Business activity also affects the local environment.
Internal stakeholders are groups within a business - eg owners and workers.
External stakeholders are groups outside a business - eg the community.
Market prices depend on levels of supply and demand. These levels rise and fall according to a number of factors, and can have a big impact on the success of a business.
The market price is the amount customers are charged for items and depends ondemand and supply.
Demand is the amount of a product customers are prepared to buy at different prices. Supply is the amount of a product businesses are prepared to sell at different prices.
An increase in demand following a successful advertising campaign usually causes an increase in price.
An increase in supply when a new business opens usually causes a fall in price.
Changing market prices affect a firm's costs. When the price of commodities such as oil and electricity increases, a business finds its own costs of production rise. Higher costs are either:
Passed on to the consumer in the form of higher prices.
Absorbed by the firm. This leaves prices unchanged but means lower profit margins for the company.
Credit is borrowed money.
An increase in interest rates can affect a business in two ways:
Customers with debts have less income to spend because they are paying more interest to lenders. Sales fall as a result.
Firms with overdrafts will have higher costs because they must now pay more interest.
Role of government.
Government economic objectives include:
Low unemployment, that is, as many workers in jobs as possible.
Lower prices. Continually rising prices is called inflation. Low inflation is an aim of government.
Economic growth. The aim is to produce more goods and services each year so that individuals have a higher standard of living.
The business cycle.
In a downturn or slump output falls and many businesses shed staff because sales are falling. The economy experiences a recession.
In an upturn or boom, businesses increase output and hire more staff to keep up with extra demand. The economy experiences economic growth.
Businesses can choose to work in a way that profits only the owners or in ways that benefit the community. Working ethically means acting in ways that are both fair and honest.
thics is about doing the right thing. Ethical behaviour requires firms to act in ways that stakeholders consider to be both fair and honest. Managers making ethical decisions take into account:
- Impact: who does my decision affect or harm?
- Fairness: will my decision be considered fair by those affected?
Stakeholders can influence the business.Pressure groups are organisations set up to try to influence what we think about the business and its environment.
A pressure group can challenge and even change the behaviour of a business by:
- contacting the press
- organising marches
- running campaigns
Business and the environment.
Businesses affect the local environment - both natural and social. Ethical businesses try to keep the impact of their operations on the environment to a minimum.
The unintended negative effects of business activity on people and places are called social costs and include:
- visual blight
A business's location can make an important difference to its success. Choosing the right location means taking into account a number of factors.
Location is the place where a firm decides to site its operations. Location decisions can have a big impact on costs and revenues.
A business needs to decide on the best location taking into account factors such as:
- Customers - is the location convenient for customers?
- Staff - are there sufficient numbers of local staff with the right skills willing to work at the right wage?
- Support services - are there services offering specialist advice, training and support?
- Cost - how much will the premises cost?
An efficient transport network enables staff to get to work easily. It also allows supplies to be brought in from far afield and permits finished products to be moved to market cheaply and quickly.
Government and location.
The government offers grants and assistance to businesses that locate in areas with high unemployment. Incentives include:
- Grants to help with the cost of setting up a business. Grant money does not need to be repaid.
- Loans, which are repayable over many years at low rates of interest.
- Tax breaks, for example firms may be made exempt from paying business rates.
Setting up a business overseas involves a number of challenges including:
- Cultural and language barriers where managers are unfamiliar with local customs.
- Legal issues where local laws are different.
- Exchange rate issues. Unexpected changes in the value of sterling can have an impact on prices, costs and profits.