Section 1: What Is Business?

• People set up businesses mainly to make a profit. This means the business makes more money than it spends. Starting a business is risky, but many people take the risk because of the possibility of big financial rewards. 

• Businesses have to make a profit or break even to survive. This is especially true in the private sector - if a business doesn't make enough money to survive it could go bankrupt or have to close down. In the public sector, it's not as clear cut. Organisations like the army, the police, hospitals and state schools aren't there to make money - they proivde a service to the community. 

• Non - profit businesses, e.g. charities, have social or ethical aims, rather than financial ones. 

• As well as making a profit, businesses may have other aims, such as: 
• To offer the highest quality goods and services possible
• To excellent customer service 
• To have a great image and reputation 
• To develop products ahead of competitors 
• To become fully sustainable or minimise environmental impact 
• To offer a diverse range of goods or services 
• To invest in the local community or social projects

• The mission of a business is its overall purpose or main corporate aims. The mission statement is a written description of these aims. Mission statements are intended to make all stakeholders aware of what the business does and why, and to encourage all employees to work towards its aims. 
• Mission statements tell you the purpose of the business and include other information, such  as its values, its standards, its strategy, who the customers are and what makes the business unique. 
• Mission statements give clues about the company's beliefs. 
• Mission statements can give staff a sense of shared purpose, and encourage them to work towards common goals - having the cooperation of all the staff makes it more likely that a business will achieve it's aims. 
• On the other hand, companies don't have to prove that what they say in their mission statement is accurate, so they can say what they think consumers want to hear, without having to do anything about it. However, this is bad practice, and a business's reputation will be damaged if customers find that its actions don't reflect its stated values. 

Businesses set objectives to enable them to achieve their mission. Objectives turn the overall aims of a business into specific goals that must be met. 

Corporate objectives - The goals of the business as a whole. The corporate objectives will depend on the size of the business. 

Functional objectives - Functional objectives are the objectives of each department. They're more detailed than corporate objectives and they are specific to each department. Businesses need to set functional objectives that will help them achieve their corporate objectives. 

Businesses set objectives for lots of reasons. If an objective is agreed upon, managers can make sure that everyone is working towards a goal, and coordination between departments should improve. Working towards an objective can also be motivating for employees. Objectives are really useful in decision-making, as they make it easier to see what the business is trying to achieve. 

Managers can compare performance with their objectives to measure the success of the business and review their decisions.

Specific - Vague objectives don't tell staff what they're supposed to be aiming for. Making them more specific, means that the business is more likely to achieve them. 

Measurable - If the objective isn't measurable, the business won;t know if it's achieved it or not. 

Agreed - Everyone who's going to be involved in achieving the objective needs to know about it and agree to it.

Realistic - There's no point setting objectives that are too ambitious as impossible objectives just demotivate staff. 

Time-based - There should be a specific timeframe that the objective has to be achieved in. If there's no time limit, staff won't see the objective as urgent. 

Profit objectives - Business that are currently making a loss might aim to become profitable. Established businesses that are already profitable might want to increase their profits. To achieve its overall profit objective, a business may set functional objectives to minimise costs or to increase sales. 

Growth objectives - Many businesses aim to grow. The larger a business grows, the more it is able to use its position in the market to earn higher profits. Growth objectives can be based on increasing revenue, market share, or expanding a business. 

Survival objectives - Survival just means that a business can continue to trade, rather than running out of money or being forced to exit the market for another reason. Survival is often the main objective for new businesses, and it becomes a key objective during periods of strong competition from other companies, or when the economy is declining or in a recession. 

Cash flow objectives - Cash flow is the money that moves in and out of a business over a set period of time. Increasing cash flow gives the company a greater chance of survival. 

Social and ethical objectives - Social objectives relate to benefiting society or people in need. Ethical objectives are based on moral principles about how businesses treat people and the environment. 

Revenue is value of sales - It's sometimes just called sales and can also be called turnover. It's the amount of money generated by sales of a product, before any deductions are made. 

Revenue = selling price per unit X quantity of units sold 

Revenue is affected by both sales volume and price. If sales volume increases by 50%, revenue will increase by 50%. Increasing the selling price may increase the revenue, but it depends on what effect the higher price will have on the number of sales. 

Fixed costs don't change with output. Rent on a factory, business rates, senior manager's basic salaries and the cost of new machinery are fixed costs. When output increases, a business makes more use of the facilities it's already got. The cost of those facilities doesn't change. 

Variable costs rise and fall as output changes. Hourly wages, raw material costs and the packaging costs for each product are all variable costs. 

Total variable costs = variable cost per unit X number of units sold

The total costs are just the fixed costs plus the variable costs: 

Total costs = fixed costs + variable costs

The more a business produced, the lower the cost per unit produced. This is because the fixed costs are shared out between more items. 

Profit is the difference betwen revenue and costs. 

Profit = total revenue - total costs 

If a business's total revenue is greater than it's total costs, then it will make a profit. If the total costs are greater than the total revenue, then the business will be making a loss. 

Businesses can do different things with profit. Most businesses give it to the shareholders as dividend payments or re-invest the profit in new activities. But they could also pay staff bonuses, invest it in a bank, give it to charity, or use it to fund projects in the local community. 

Shareholders often want a short-term reward for supporting the business. In the long term, it is often better for the business to hold on to the profit and re-invest it in future projects. 

Profit can motivate people - Shareholders will recieve dividends and some businesses offer a profit-sharing scheme, where employees are given bonuses from a share of the total profits. 

Profit is a good source of finance - Profit can be retained in the business and used for investments. Businesses do not need to pay interest on retained profit. 

Profit can be used to attract investors. 

Public sector organisations are owned and run by the government. They aim to provide services to the public rather than make a profit. E.g. NHS, UK police forces and the fire service don't charge for their services and therefore don't make a profit. They are funded by the UK tax system. 

Private sector organisations are owned and run by private individuals. Most private sector businesses aim to make a profit. However, non-profit organisations such as charities are also part of the private sector. 

Unlimited liability - If a business has unlimited liability, the business and the owner are seen as one under the law. This is the case for sole traders. This means business debts become the personal debts of the owner. Sole traders can be forced to sell personal assets like their house to pay off business debts. Unlimited liability is a huge financial risk. 

Limited liability - Limited liability means that the owners aren't personally responsible for te debts of the business. The shareholders of both private and public limited companies have limited liability, because a limited company has a seperate legal identity from its owners. The most the shareholders can lose is the money they have invested in the company. 

A sole trader is an individual trading in his or her own name, or under a suitable-trading name. Sole traders are self-employed. 

The essential feature of this type of business is that the sole trader has full responsibility for the financial control of his or her own business and for meeting running costs and capital requirements. (Unlimited liability). 

Advantages of being a sole trader 

• Freedom - the sold trader is his or her own boss and has complete control over decisions. 
• Profit - the sole trader is entitled to all the profit made by the business 
• Simplicity - There's less form-filling than for a limited company. bookkeeping is less complex. 
• Savings on fees - There aren't any legal costs for drawing up an ownership agreement. 

Disadvantages of being a sole trader 

• Risk - Theres no one to share the responsibilities of running a business with 
• Time - Sole traders often need to work long hours to meet tight deadlines 
• Expertise - The sole trader may have limited skills in areas such as finance
• Vulnerability - there's no cover if the trader gets ill and can't work. 

 Private Limited Companies 

Public Limited Companies  

 Can't sell shares to the public. People in the company own all the shares. 

 Can sell shares to the public. They usually issue a prospectus to inform people about the company before they buy 

Don't have share prices quoted on stock exchanges 

Their share prices can be quoted on stock exchanges 

 Shareholders may not be able to sell their shares without the agreement of the other shareholders

Shares are freely transferable and can be bought and sold through stockbrokers, banks and share shops. 

 They're often small family businesses

They usually start as private companies and then go public later to raise more capital  

 There's no mimimum share capital requirement 

They need over £50,000 of share capital, and if they're listed on a stock exchange, at least 25% of this must be publicly available. People in the company can own the rest of the shares  

 They end their name with the word "Limited" or LTD.

 They always end their name with the initals PLC. 

• In a small private limited company, the directors are usually the owners of the business. In larger private limited companies, directors are elected to the board by shareholders. 
• Shares in a PLC can be owned by anyone. The people who own the company don't necessarily control the company - it's controlled by the directors. this is called the "divorce of ownership and control". 

Shares are sold by companies to raise money. Money raised in this way is called ordinary share capital. Ordinary share capital is usually used for long-term investment. 

In return for their investment, shareholders are paid a dividend. Dividends are a proportion of the profits earned by the company which are split and paid out to the shareholders. Dividends are given as a fixed amount per share. 

Dividends aren't always paid out. Loans must be repaid first and a company may choose to re-invest their profits into the business. 

Market capitalisation is the total value of all of the ordinary shares issued by a company. 

Market capitalisation = number of issued shares X current share price 

When someone sets up a business, they have to decide what legal structure to set up as. Each structure has advantages and disadvantages. 

Setting up a sole trader business gives the owner control over the business, but unlimited liability is a drawback. It's a simple way to set up a small business, but there's a lot of risk involved for the owner. 

A private limited company has limited liability and the shareholders keep control over who the other shares are sold to, but it's much more complicated to set up than a sole trader business. 

Public limited companies aren't usually a suitable option for new businesses because they need at least £50,000 of share capital to start with. 

Businesses can change their structure. Sole traders can become a private limited company if the business is successful and they want to expand. This will bring more money and ideas into the business. Lots of private limited companies become PLC's when they want to raise more money to expand the business. It's much less common, but PLC's can also become private limited companies if they are taken over by a private limited company or if the managers buy out the shareholders. Also the original owners can take more control and run things more privately.

The missions and objectives of non-profit organisations are usually to help people or communities in need. They will set objectives to generate enough profit to achieve these aims. 

Private sector for-profit organisations often have objectives which focus on maximising profits, although they will also pursue other objectives. Public sector organisations tend to have missions aimed towards benefitting society. 

Sole traders and owners of small private limited companies have control over objectives and decision making. They may change ownership if the business is expanding. For sole traders in particular, changing the business to a LTD company might mean gaining expertise from shareholders, however they might not share the same values as the original owner, leading to different objectives and difficulties when making decisions. Shareholders may also buy a large proportion of the shares, meaning the original owner(s) may lose control of the business, which may lead to a change in the mission or objectives. 

For public limited companies, the majority of shaeholders are not involved in the management of the business. This can lead to a conflict of interests. 

A shareholder is anyone who owns at least one share in a company. 

For companies, the main role of shareholders is to provide funds. In small Ltd's the shareholders are often also the directors of the company - the shareholders with the most shares have the most power. In PLC's, most shareholders are not involved in running the business, but they have certain rights. 

Companies hold an annual general meeting (AGM). Ordinary shareholders have the right to vote on key decisions and the performance of the company. Each share that a person holds entitles them to one vote. If a shareholder owns more than 50% of the shares, they're called the majority shareholder. The majority shareholder has the most power in decision-making. 

Shareholders have the right to recieve a dividend, if the profit is being used in this way. 

Shareholders have limited liability. If the company can't repay it's debts, a shareholder can only lose the money they invested - the amount they spent on shares. 

• Some shareholders invest in businesses in order to achieve capital gain. They may buy shares in a business when the share price is low and sell them if the share price rises to make a profit. 
• Shareholders may be paid a dividend in return for their investment. Dividends are paid on a per-share basis, so the more shares a shareholder owns, the bigger the dividend. 
• Some people become shareholders because they want to be involved in the running of a business. People may invest in a small private limited company for this reason. A shareholder could influence decision making in a PLC by buying enough shares to make them the majority shareholder. 
• Some shareholders will invest in a company because they believe in the aims and objectives of the company and want to see it succeed.
• A shareholder might invest in a private limited company in order to help the company survive, or grow, e.g. to support a family or friend's company. 
• Venture capitalists are a particular type of shareholder. They will invest in businesses that they think have the potential to be successful. This can be a big financial risk but can lead to large financial rewards. 

Private limited companies have control over their share price because their shares are privately traded between friends and family. A price per share will be agreed with the current owner and the potential investor, based on the current performance of the business. 

Shares in public limited companies are sold on the stock market. The price of a company's shares will be determined by demand and supply. If more people want to buy a share than sell it, the share price goes up. If more people want to sell a share than buy it, the share price goes down. 

Changing share prices can have a big effect on shareholders who want to buy and sell shares for short-term capital gain. If the share price increases, the shareholder will make money when they sell the shares. Decreasing share prices may mean a shareholder makes a loss when selling shares, or they may decide to hold onto the shares and hope the price increases again. 

Shareholders who buy shares as a long term investment are less affected by short-term price changes. However, price changes may reflect an increase or decrease in company profits, which could mean higher or lower dividend payments. 

A decrease in share price can reduce the overall value of a company. 

• Performance of the company - better performance should mean bigger dividend payments. This leads to an increase in demand for the company's shares, increasing the share price. If a company reports low profits, shareholders may sell their shares, increasing supply and reducing share price. 
• Speculation and rumour of new product launches might generate investor interest. If the rumoured activity is likely to increase the company's profits, this will encourage people to buy shares in the company. As a result, the share price is likely to increase. 
• Current share price - If the share price is low, investors might think they can get a bargain if they buy now, hoping that the price will increase in the future. If the share price is high, shareholders may decide to sell their shares to make a capital gain. 
• Interest rates - when interest rates are low, the reward for saving money in the bank is reduced. This can increase the demand for shares because the financial rewards are likely to be greater than the interest that would be earned on a bank account. 
• The economy - when the economy is strong, people have more money to invest, and confidence that they will get a good return. This increases demand and share price. In a weak economy, people are less likely to risk their money on an investment, decreasing demand and share price. Businesses may offer more shares in order to try to and raise share capital, increasing supply. 

Political factors 

• If demand in the economy is too low, governments try to increase it. They cut taxes so people have more to spend, and increase their spending in the economy , for example by raising benefits. Central banks reduce interest rates to cut mortgage payments and increase disposable income. 

• Governments try to reduce demand if it's too high. They raise taxes so people have less money to spend, and cut government spending. Central banks increase interest rates to raise the cost of borrowing, reduce disposable income and reduce demand. 

• The government can also influence demand for particular products by using taxes. For example, to reduce carbon emissions, road tax on low-emission and fuel-efficient cars has been reduced, and road tax on high-emission vehicles has been increased. Increased taxes on products leads to reduced demand, as people will try to find cheaper alternatives. 

Labour supply

• Labour supply has an effect on business costs 
• When unemployment rates are high, there's a good supply of labour. Businesses can hire staff easily and won't have to pay high wages, whcih means costs can be kept low. People in work will be extra productive to protect their job.
• A low rate of unemployment could mean that there is a shortage of labour. The people available for employment might not have the skills needed for the role, so will need training. This can increase costs for a business. 

Incomes and Economic Factors 

• The state of the economy affects demand and costs. In a recession, businesses need to reduce costs, e.g. with wage cuts or redundnacies to decrease labour costs. Lower incomes mean people have less money to spend on products, so demand decreases. 
• In an economic boom, wages rise and more people are employed. This may lead to greater costs due to the increased ages. On the other hand, higher incomes mean that people have more money to spend, increasing demand for products. The increased demand leads to increased production costs in supplying more products.

Seasonal demand and supply 

• There are variations in demand and supply throughout the year. This is called seasonality. 
• Weather and holidays such as christmas produce variations in demand. E.g. Christmas creates high demand for toys. Hot weather creates demand for ice lollies, paddling pools and air conditioning units. 
• They can also cause variations in supply - for example, more strawberries are available in summer, which would reduce costs for a shop selling stawberries. 
• It's impossible to avoid seasonality. Businesses must have strategies to deal with it. After christmas, demand for retail goods drops, so shops cut prices to boost demand, and get rid of stock.. 
• Food producers can cope with seasonality in supply by preserving food - e.g. by canning or freeze-drying. This meets demand even when the food is not in season. 

When a competitor enters the market or launches a new product, demand for a rival business's product is likely to decrease as people will buy the competitor's product. The rival business is likely to increase its marketing costs or spend more on improving or diversifying its products in response to the competiton. Alternatively, the rival might try to cut its costs to keep the price of its product lower than the competitor's to increase demand. 

Perfect competition is where all firms compete on an equal basis - their products are pretty much identical, and they all charge a similar price. Businesses need to keep costs low to keep prices low, otherwise demand will be taken by the competiton. However, they also need to keep a high quality of product to keep a good level of demand. 

In an oligopoly, a small number of large firms dominate the market and charge similar prices. For a business to get ahead, they will focus on marketing and brand image to increase demand, so marketing costs will be high. 

A monopoly is where one business has complete control over its market. There's no competition. A business with a monopoly can increase its prices without much concern of the demand decreasing, and they are able to keep marketing costs low. 

Interest rates affect the cost of borrowing and the return on savings. The interest rate is the fee paid for borrowing. A fall in interest rates means a decrease in the cost of borrowing for businesses. A rise in interest rates leads to an increase in the cost of borrowing. 

Interest rates affect consumer spending. High interest rates mean most consumers have less money to spend - people with existing borrowing (like mortgages) have to pay more money back in interest, so they have less disposable income, and so market demand goes down. People might also decide to save more to take advantage of the interest earned on their savings , reducing demand. Low interest rates mean consumers have more disposable income and there is less reward for saving, so demand goes up. 

The effect of interest rates on demand depends on the product. Products that require borrowing (e.g. cars and houses) are more sensitive to interest rate changes. When interest rates go up significantly, firms change strategy to diversify away from these goods into cheaper ones. 

Demographics 

• The structure of the population changes over time in terms of age, sex and race - this is demographic change. 
• Demographic change is important to businesses because it has an impact on the demand for products. Different demographics of consumers tend to buy different things, so businesses need to adapt the amount and type of products they are producing. 
• Demographic changes can mean that certain types of businesses are more in demand. This might allow existing businesses to expand, or new businesses to be set up. 

• The UK has an ageing population so business have started to target the growing elderly market in order to increase demand for their products. 
• The ageing population in the UK had also led to an increased demand for doctors and nurses which has increased the costs of the NHS. 
• The number of working parents is increasing which creates a greater demand for childcare services. 
• THe UK's population is also becoming more ethically diverse which has led to an increase in demand for "international" products 

Ethical

Consumers are becoming increasingly concerned with the ethical and unethical behaviour of firms. Not everyone agrees on what's ethical and what's not. 

Some businesses have started to implement fair trade policies when purchasing from suppliers. This means that the business pays higher and fairer prices for products with the aim of improving the living standards of their supplier's employees. Obviously this will increase the costs of the business, however it also gives them a unique selling point, which can increase demand, allowing them to still be profitable. e.g. The body shop. 

Consumers also care about how a company treats its workers - if a company is seen to treat its workers poorly, demand can drop. e.g. The use of sweatshops

A company that is seen to be ethical will have a great reputation with customers, so demand for the products can be high even if they're more expensive than rival products. 

Technological

• Companies aim to increase demand for their products by using technology to imrpove their marketing. 
• Many companies now use technology to gather information about the lifestyles of their customers and the products that they buy or are likely to buy. This helps them to make sure that promotions are targeting the right people and stand the best chance of increasing demand for products. 
• Social networking websites are another way that businesses can use technology to find out more about customer likes and dislikes. People who use these sites often list information about themselves and so companies can target their adveritising specificialy at the people who are likely to buy their product.
• New technology can also improve efficiency, which can reduce business costs in the long-term. However, new technology is expensive to set up in the first place. It can also take the jobs of workers, leading to redundancies - this is an ethical issue that could impact negatively on the reputation of the company, which may affect demand.