Understanding the nature and purpose of business

• Human spirit and adventure lead people to ‘show what they can do’ to find a family income that doesn’t depend on a specific outside force: a company or boss.

• Can be the ‘path to riches’.

• Can be your own boss, loss of job, spotted a gap in the market etc.

• Mission is the aim for the business set by the boss (small business) or board of directors (large business).

• An aim is a general statement of where the business is heading; mission takes this statement and makes it sound more evangelical or motivational.

• Example: Rolls Royce’s aim could be ‘to be No.1 in the market for advanced engines’. When a mission it’s ‘to provide the finest, most technologically advanced power systems’.

• They do this to excite customers and staff.

• Dull aims are jazzed up as mission statements that mean little or nothing.  

• From aims and missions objectives come objectives. These will generally be SMART (specific, measurable, achievable, realistic and timebound).

• If you’re a large business they help more junior staff have the authority to  make the right decisions eg. to focus more on staff absenteeism.

• Motivating for managers and staff to have a clear goal to work towards.

• The objectives are the basis for devising the strategy: the medium- long term plan for meeting the objectives.

• Profit optimisation in the medium-long term.

  • Profit is vital to the long-term health of a company; provides the capital to fund growth; provides safety blankets for when businesses take risks so that if it fails they won’t go under.

  • Optimisation is to get the right balance between two probabilities: too much profit (could exploit customers) and too little profit otherwise the business's viability will be threatened. → Good companies know that their long-term position will be helped if customers think they’re getting value for money.

• Profit maximisation is the attempt by a business to make as much money as possible and usually as fast as possible.

  • Big companies may do this if they think they’re going to be bought out by a competitor. → Company will be more expensive to buy. They will also do this if they are about to ‘float’ their shares on the stock market.

  • Small firms may also try to get as much profit asap but with less no concern for their long-term future → could damage reputation/ brand image.

Growth. The importance of online business has placed growth as one of the most common objectives. Logic says ‘there can only be one giant in this market, so we must make sure it’s us’. Decisions are made to focus on rising customer/user numbers instead of rising profits.

• Cash flow. Rarely a consideration for large firms, but is important for small ones, especially start-ups. If objective is to make a positive cash flow everyone in the business will practice the same approach. No one should risk creating negative cash flow.

Survival. Relates strongly to cash flow. If times are tough, survival may be the key objective which will rely on cash flow staying high enough. This will be a priority for start-up businesses.

• Social and ethical objectives are easy to find on company websites, whether they have any influence on a business is unclear.Ultimately, social and ethical objectives only mean something if the business is willing to sacrifice some profit or market share. Social and ethical objectives are ever more about brand image add-ons.  Financial objectives remain the overwhelming priority for some businesses.

Profit is measured by deducting all business costs from the revenue generated within a trading period eg. 6 months.

• Profits are important because:

  • They provide a measure of success for the organisation.

  • They’re the best source for capital investment for growth of the business eg. to pay for new R&D.

  • Act as a magnet to attract further funds from investors enticed by high returns on their investment.

• Measuring profit:

• They provide a measure of success for the organisation.
• Best source of capital for investment in the growth of the business.
• They act as a magnet to attract further funds from investors enticed by the possibility of high returns on their investment.

Not-profit-profit organisations

• Still important for them too.
• 2009 recession charity donations fell by 11% in the UK. Oxfam had to dip to reserves to cover the fall in their income. 

Sales revenue = volume of goods sold x average selling price

Also referred to as 'turnover' and 'sales'

If a firm wants to improve their sales revenue they may aim to sell more or to sell at a higher price. They could also charge a low price to attempt to sell as much as possible and use dynamic pricing. 

Dynamic pricing allows prices to rise and fall depending on supply and demand conditions. The business will use dynamic pricing when demand is high so they charge a high price and when demand is low they'll change a lower, more modest price. 

Fixed costs are costs that do not change with output.

• Linked to time rather than to a level of business activity.
• An example is rent. 
• Given that fixed costs are inevitable, it's vital that managers work hard at bringing in customers to keeps the fixed costs covered. 
• They can change over time . For example, if they had to rent more warehousing space then this will factor into the fixed costs. 

Variable costs are costs that vary with output. 

• Represent payments made for the use of inputs such as labout, fuel, raw materials etc. 
• As output increases so does the variable costs.
• It is not always the case that variable costs and output rise proportionally. A reason for this is that as a business becomes larger it is better able to negotiate better prices with suppliers. 

Variable costs + Fixed costs = Total costs 

• If a business has relatively high fixed costs as a proportion of total costs, then it is likely to seek to maximise its sales to ensure that the fixed costs are spread across as many units of output as possible.