Classification of business

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Classification of business

List the 4 ways businesses are classified

Economic sector

  • Primary
  • Secondary
  • Tertiary

Private or public sector 

Size

  • Small
  • Medium
  • Large

Legal identity

  • Sole traders
  • Partnerships
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Economic sector

Explain specialisation

Specialisation is when workers, firms, regions or countries concentrate on a particular product or task

Define primary sector and give 3 examples

Primary sector involves extracting raw materials:

  • Agriculture
  • Forestry
  • Fishing 

Define secondary sector and give 3 examples

Secondary sector involves the production of goods

  • Energy
  • Manufacturing 
  • Construction
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Economic sector

Define tertiary sector and given 3 examples

Tertiary sector involves services

  • Banking
  • Retail
  • Education

What is the quarternary sector of the economy?

Intellectual services e.g resarch and development, data gathering and education 

What is the chain of production?

The chain of production is the different stages of making, distributing and selling a product

What is interdependence?

Firms that rely on other busineses are interdependent

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Economic sector

How are sectors related?

  • Sectors are interdependent
  • The primary sector supplies raw materials for processing into products to be sold by the tertiary sector

Define deindustrialisation

Deindustrialisation is a decline in the size of the secondary sector

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Size

List 5 ways business size can be measured

  • Turnover: large firms generate millions of £s worth of sales revenue in a year
  • Number of employees: large firms employ many workers
  • Profit: large firms make large profits or large losses
  • Capital employed: large firms use of millions of £s worth of plant and equipment
  • Market share: the larger the percentage share of the market, the larger the business

Define turnover

Turnover is total sales made in a given period of time- large firms have a large turnover

How does the law define size?

  • Small: Less than £1.4 million
  • Medium: 1.4-5.75 million
  • Large: More than 5.75 million
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Size

Is the number of employees a useful indicator of business size?

  • Staff numbers is a useful indicator of size for firms in the same market but unreliable if comparing different industries
  • An oil refinery has few employes (small) but large capital employed
  • Personal service industries are often labour intensive but employ limited capital

Define capital employed

The total amount of money invested in the business by owners

Is capital employed a useful indicator of business size?

Labour intensive firms operating in the service sector with little capital are large using the employee indicator of size but small using the capital employed measure

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Market size and share

Define market size

Market size is the total sales of all the firms in a given market expressed by value or by volume

What is market share?

Market share is the proportion of total market sales held by a firm or one of its products, expressed as a percentage. 

What is the formula for calculating market share?

Market share = product sales/market size

Does market share indicate absolute or relative size?

Market share only tells you the size of firsm compared to others in its market. 

How can business size be best measured/

Turnover is the best single indicator of the relative size of firms operating in different industries

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Market size and share

What is downsizing?

Downsizing is the reduction in an organisation's workforce

Why do firms downsize?

Reducing the total headcount in an organisation reduces costs and can increase productviity if total output is maintained

List 3 ways how firms can grow in size

  • Organic growth: over time the business invest in more staff and equipment
  • Takeover: one business buys ownership and control of another firm
  • Merger: where two businesses combine to form one new organisation 

Why do firms grow?

Firms grow because owners want larger profits and the benefits of economies of scale. 

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Economies and diseconomies of scale

Define economies of scale

Economies of scale are the benefits, in the form of lower unit costs, from increasing the size of operation

How can firms benefit from economies of scale?

Large organisations can often produce at lower unit cost than their smaller rivals

How is unit cost calculated?

Unit cost= total cost/level of output produced

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Economies and diseconomies of scale

List the 6 sources of internal economies of scale

  • Techincal economies- made in production- large firms can use expensive machinery, efficiently and fully
  • Managerial economies- made in administration- employ specialists 
  • Financial economies- made by borrowing at lower rates of interest
  • Marketing economies- spreading the high cost of advertising more thinly across a larger level of output
  • Purchasing economies- negotiating discounts on bulk orders- the unit cost of raw materials and components falls
  • Research and development (R & D)- spreading the high fixed cost of developing new/improved products more thinly over a larger amount of output

Explain mass production

Firms produce large amounts of standardised products often using flow production and conveyor belts. High levels of production offer opportunities for economies of scale, hence lower unit cost. 

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Economies and diseconomies of scale

Define the two types of economies of scale

  • Internal economies of scale- are the benefits to the firm, in the form of lower unit costs from increasing the size of operation
  • External economies of scale- lower a firms unit costs, because the industry is growing

Define diseconomies of scale

Disadvantages to the firm, in the form of higher unit costs, from increase their size of operation

Can firms grow too large?

Diseconomies of scale occur when the firm has become too large and inefficient resulting in increasing unit costs

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Economies and diseconomies of scale

Why can internal diseconomies of scale occur?

  • Command and control becomes increasingly difficult- extra tiers of managers are needed to coordinate departments
  • Communication- becomes problematic with staff increasingly unsure about tasks and responsibiliies
  • Industrial relations- motivation and productvitiy deteriorate if workers feel increasingly isolated in large companies
  • Large firms can be slow to respond to changing market conditions and customer needs

How can firms use economies of scale?

  • Be passed onto the customers in the form of lower prices which encourages sales
  • Used to raise profit margins to finance investments in R&D, new equipment or staff etc...

What advantage do large firms enjoy over small firms?

Large firms can exploit economies of scale and enjoy lower unit costs. This means they maintain higher profit margins or charge lower prices than small firms producing identical products. 

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Economies and diseconomies of scale

How can small firms compete with large firms in the same industry?

Economies of scale means small firms cannot compete with large firms on costs. Many small firms opt for product differentiation and sell a premium good or a service whose high quality and exclusivity justifies its high price. 

Define a niche market

A small, specialist segment of the market

How can small firms survive?

  • Industries requiring little capital and limited opportunities for economies of scale (hairdressing and plumbing)
  • Targeting a niche or local market, too small to interest a large firm (high priced products for high income consumers)
  • Differentiated product whos quality justifies its high price
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Economies and diseconomies of scale

List 3 problems small businesses face in the early years

  • Gaining customers- few customers to generate revenue and cover costs
  • Raising finance
  • Owners may find the responsibility and uncertainty of ownership and management too stressful

List 9 reasons why small firms fail in the first year

  • Inadequate market research- fails to identify customer needs
  • Insufficient demand- to sell a quantity that covers costs and makes a profit
  • Inadequate financial planning- overtrading/cash flow problems
  • Overtrading- where firms expand without having secured funds to finance growth
  • Bad management- failure to keep records or a mistake in the desing of a product
  • Market share- takes time to build market share
  • Changes in external factors- unexpected economic downturn
  • Competition- larger firsms use market power and economies of scale to set low prices
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Legal structure

Define the term legal identity

Refers to the status of a person, or business in the eyes of the law

What is an unincorporatd business?

Has no separate, independent legal identity. The law sees the owner and the business as the same entity (sole trader or partnership)

What is an incorporated business?

Has its own legal status- can own property, sign contracts and take legal action in its own name (Ltd private limited companies, PLCs public limited companies and LLPs, limited liability partnerships

Define liquidation

Is the process by which a company is ended. All assets are sold and debts paid. Any remaining funds are returned to the shareholders

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Legal structure

What happens if after liquidation, some creditors remain unpaid?

Final responsibility for paying off any outstanding debts of a business depends upon its legal status. Owners of unincorporated businesses have unlimited liability and may have to sell personal posessions. Shareholders are not responsible for any company debts- their personal assets are safe

Define liability

The legal obligation to pay a debt

Define liabilities

Total amount of all outstanding debts owed to creditors

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Unincorporated businesses

What is a sole trader?

A sole trader is a personal business owned by one person

How are sole traders established in law?

No legal formalities needed to set up as a sole trader- sole traders must inform tax authorities they are trading

List 3 advantages of being a sole trader

  • Easy to set up
  • Owner has complete control- makes their own decisions
  • All profits are kepy by the sole trader

List 3 disadvantages of being a sole trader

  • Owner is personally responsible for any debts incurred in trading
  • Hard to take time off work
  • Hard to raise finance
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Unincorporated businesses

Can sole traders issue shares?

No, only comapnies can issue shares

What is an ordinary partnership?

  • Business jointly owned
  • Run by 2-20 people

How are partnerships established in law?

No legal formalities need to set up- tax authorities must be informed

What is a deed of partnership?

A deed of partnership is a legal document setting out in writing how partners are to share future profits, responsibilities and working hours

Why do sole traders take partners?

To share responsibility and introduce expertise and capital

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Unincorporated businesses

Give 3 disadvantages of partnerships

  • Each partner is personally part responsible for any debts incurred
  • May disagree with decision making
  • Each partner is liable for each others actions

Explain unlimited liability

Owners have unlimited liability when they are personally responsible for debts of a business, even if they must sell their own personal possessions (sole traders and partnerships)

Explain limited liability

Owners have limited liability when responsiblity of the debts of a business is restricted to the amount of their investment in the firm. Owners are not required to sell their personal possessions. Shareholders in limited compaies have limited liability

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Incorporated businesses

List the 3 main types of incorporated busines

  • Limitied liability partnership: partners have limited liability and provide capital
  • A private limited company: shares do not trade on public exchanges and cannot be advertised for sale
  • A public limited company: is a company with at least £50,000 of share capital- shares can be advertised for sale to the general public and trade on public exchanges 

Define a company

A company is with its own legal identity and owned by shareholders. Sole traders and partnerships are not companies

What are limited liability partnerships?

A limited liability partnership has its own legal identity, general partners who manage the business and limited partners who are typically passive investors. All partners have limited liability and provide capital

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Incorporated businesses

What are shares?

A share is a certificate that represents a part ownership of the company. Each share gives the right to one vote at any shareholder meeting and part of any profits distributed to shareholders called a dividend (profit payment)

Explain share capital

Share capital is the total amount of money invested in a company by its owners. The funds raised from selling shares helps finance the business. 

Give 2 risk involved in a share ownership

  • Performs badly- dividends may not be paid
  • Goes into liquidation- shareholders lose money invested in company shares

Who controls a company?

Each share allows one vote and pays one dividend. Each year the shareholders elect a chairman and a board of directors who control everyday running of the firm. 

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Incorporated businesses

Who controls a business?

Control refers to responsibility for day to day running of a firm. Sole traders and partnerships are controlled by owners who usually act as managers. Limited companies are controlled by a chairman and board of directors elected every year by the shareholders at an annual general meeting (AGM)

What is a controlling interest?

One person or organisation has absolute control of a company if they own more than 50% of shares

Why choose to be a limited company and not partnership?

Shareholders have limited liability in a company and are only risking the amount invested in the company and not their personal assets. Partners with unlimited liability risk personal assets. 

Define a public limited company (PLC)

Owned by shareholders who shares can be bought and sold on the stock exchange. It has legal personality, is able to own property and to sue and be sued in its own na,e

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Incorporated businesses

List 5 characteristics of a private limited company

  • Name: Ltd
  • Cannot advertise shares for general sale
  • Share transfers may be restricted
  • Share capital: no minimum
  • Simple account requirements

List 5 characteristics of a public limited company

  • Name: Plc
  • Can advertise its shares for sale to anyone
  • Shares can be sold to anyone
  • Share capital: at least £50,000
  • More detail required by law (accounts)

Can Ltd's keep their accounts secret?

No. By law, companies, both Ltd and Plc must send their annual accounts to Companies House

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Incorporated businesses

What is a floatation?

Is the process of offering new shares in a new plc to members of the general public. The cost of floatations are high but significant funds can be raised. 

What 5 factors do owners take into account before become a Plc?

  • Loss of control: floatation involves giving up part ownership of the company
  • Cost of floatation: issuing a prospectus and offering shares for sales is expensive
  • Is the price for offered shares, sufficient to justify loss of ownership and control?
  • Owners' objectives- do they want to expand?
  • Alternative source of finances- how much is needed?

Give 4 reasons for converting from private to public limited company status

  • Offer shares to general public means more capital can be raised
  • More capital allows the firm to expand
  • Expansion allows access to economies of scale
  • This leads to improved competitiveness
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Incorporated businesses

What is a floatation?

Is the process of offering new shares in a new plc to members of the general public. The cost of floatations are high but significant funds can be raised. 

What 5 factors do owners take into account before become a Plc?

  • Loss of control: floatation involves giving up part ownership of the company
  • Cost of floatation: issuing a prospectus and offering shares for sales is expensive
  • Is the price for offered shares, sufficient to justify loss of ownership and control?
  • Owners' objectives- do they want to expand?
  • Alternative source of finances- how much is needed?

Give 4 reasons for converting from private to public limited company status

  • Offer shares to general public means more capital can be raised
  • More capital allows the firm to expand
  • Expansion allows access to economies of scale
  • This leads to improved competitiveness
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Incorporated businesses

What is a rights issue?

A rights issue is an issue of new shares for cash to existing shareholders in proportion to their existing holdings and is a way of raising new finance from existing shareholders- an important source of new equity funding for plcs

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Franchising

What is a franchise?

The licence to sell a branded product created by another business

Who is a franchisee?

A franchisee is the entrepreneur buying the right to use a franchise and sell products supplied by the franchisor. The franchisee manages the business

Who is a franchisor?

A franchisor is the business selling the licence to use its name and products to other firms. The franchisor is inviting another business to set up a new branch

Give 3 reasons as to why you would become a franchisee

  • 'Tried and tested' brand- reduces risk
  • National advertising
  • Training and advice given by franchisor
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Franchising

How can a franchise reduce risk?

A tried and tested brand- increases the chance of early sales as customers are familiar with the brand

List 3 drawbacks of a franchise to the franchisee

  • Franchisee pays a fee for the franchise
  • Cost of fitting out the shop
  • % of future sales called royalty

Why sell franchises?

Firms can rollout a string of high street shops without having to find the capital for shop premises, fixtures, fittings and staff. Each branch is managed by motivated individuals who have invested in the franchise. Franchises pay a royalty on sales and there are opportunities for economies of scale. 

What are royalties?

A royalty payment made for the use of property, e.g a business name and is percentage of profit or turnover. Franchisees pay franchisors royalties. 

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Ownership

What is the private sector?

Made up of households and firms controlled by private individuals

What is the public sector?

Made up of the central government in London, local government and firms controlled by the state

What is a mixed economy?

Has a private and public sector

What are the objectives of firms in the public service?

Aim to offer the best possible service to society. They do not act to maximise business profits

Explain privatisation

Is the sale of state-owned firms to the private sector

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Ownership

List 2 advantages of privatisation

  • Firms operate more efficiently
  • Profit motive and competition, force firms to make best use of resources and provide customers  with products that match their requirements

List a disadvantage of privatisation

  • Unprofitable servies may no longer be provided e.g late night bus services

What is nationalisation?

The sale of state-owned firms to the private sector

List 4 ways the government support business activity

  • Providing public services
  • Passing laws and regulations
  • Offering subsidies and grants
  • Providing advice, information, suport and training opportunities for business
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