Welcome To
What Is Business?
Why Businesses Exist and Their Objectives
Reasons for Business Existence:
Profit: One of the primary reasons businesses exist is to make a profit. Profit is the difference between a business's revenue (the money it earns from selling goods or services) and its costs (the expenses incurred to produce and sell those goods or services). Profit provides the financial resources for a business to grow and invest in its future.
Growth: Many businesses aim to expand and grow over time. Growth can take various forms, such as increasing market share, expanding into new markets, or launching new products or services. It's about increasing the size and scope of the business.
Survival: In a competitive market, survival is a fundamental objective. Businesses need to cover their costs, generate income, and adapt to changing conditions to remain viable.
Cash Flow: Maintaining healthy cash flow is crucial. It ensures that a business has enough cash on hand to cover its day-to-day expenses, invest in growth opportunities, and meet financial obligations.
Social and Ethical Objectives: Beyond profit, some businesses have social and ethical objectives. They may aim to make a positive impact on society or operate in an environmentally responsible manner. These objectives align with principles of corporate social responsibility (CSR).
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The Relationship between Mission and Objectives:
A business's mission statement articulates its core purpose and values. Objectives, on the other hand, are specific, measurable targets that help a business achieve its mission. For example, if a business's mission is to "provide affordable and high-quality healthcare," one of its objectives might be to "reduce healthcare costs by 10% in the next fiscal year."
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Common Business Objectives:
Profit Maximisation: Increasing profits is a common objective. It involves either increasing revenue, reducing costs, or both, to boost the bottom line.
Growth and Expansion: Businesses often set objectives to grow their market share, expand into new geographic regions, or diversify their product offerings.
Survival: Particularly important for startups and businesses facing economic challenges, survival objectives aim to ensure the business's continued existence.
Cash Flow Management: Objectives related to cash flow focus on maintaining sufficient liquidity to meet short-term obligations and invest in opportunities.
Social Responsibility: Some businesses commit to social objectives, such as reducing their environmental impact, supporting local communities, or promoting ethical sourcing and production practices.
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Why Businesses Set Objectives:
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Setting objectives provides direction and focus for a business. It helps management and employees understand what they are working toward and how their efforts contribute to the company's success.
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Objectives serve as benchmarks for measuring performance and progress. They provide a basis for evaluation and adjustment of strategies and tactics.
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Objectives can motivate employees and align their efforts with the company's goals. Clear objectives provide a sense of purpose and direction.
The Measurement and Importance of Profit:
Profit is a key financial indicator that reflects a business's success in generating more revenue than it incurs in costs. It's calculated by subtracting total costs (fixed and variable) from total revenue. The importance of profit cannot be overstated. It allows businesses to reinvest in growth, attract investors, pay dividends to shareholders, and weather economic downturns.
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To measure profit accurately, businesses must consider revenue (also known as turnover or sales) and break down costs into fixed costs (unchanging expenses like rent) and variable costs (costs that vary with production or sales, like materials and labor).
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Understanding Different Forms of Business
Reasons for Choosing Different Forms of Business and Changing Business Forms:
​​Sole Traders: Individuals often choose to operate as sole traders for simplicity and full control over the business. Changing to another form may be driven by a desire for limited liability or expansion beyond individual capacity.
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Private Limited Companies: Businesses opt for this form to limit personal liability and attract external investment. Changing to a public limited company might be motivated by a need for greater capital or a desire to go public.
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Public Limited Companies: Companies go public to raise substantial capital from a wide range of investors. Reasons for changing to a private limited company could include a desire for more privacy or to reduce regulatory requirements.
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Private Sector and Public Sector Organisations: These differ in terms of ownership and objectives. Reasons for changing sectors could be influenced by government policy, market dynamics, or strategic goals.
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Non-Profit Organisations (e.g., Charities and Mutuals): Non-profits operate for a social or community benefit. Changes in their form may be driven by shifts in funding sources or legal requirements.
Issues with Different Forms of Business:
Unlimited and Limited Liability: Sole traders and partnerships have unlimited liability, meaning personal assets are at risk. Limited companies offer shareholders limited liability, protecting personal assets.
Ordinary Share Capital: Companies raise capital by issuing ordinary shares. Shareholders own a portion of the company based on their shareholding.
​Market Capitalisation: Market capitalisation is the total value of a company's outstanding shares. It's a crucial indicator for public companies.
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Dividends: Companies may distribute profits to shareholders as dividends. The dividend policy influences the attractiveness of shares to investors.
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The Role of Shareholders and Why They Invest:
​Shareholders are individuals or entities who own shares in a company. They invest for various reasons, including earning dividends, capital appreciation, and influence over company decisions.
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Shareholders have rights, such as voting on key company matters and receiving financial information.
Influences on Share Price and Significance of Share Price Changes:
​Share prices are influenced by factors like company performance, economic conditions, industry trends, and investor sentiment.
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Share price changes can impact a company's market capitalisation, making it more or less attractive to investors.
The Effects of Ownership on Mission, Objectives, Decisions, and Performance:
Ownership structure can influence a company's mission and objectives. For example, a publicly traded company may prioritize shareholder value, while a non-profit focuses on a social mission.
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Ownership can affect decision-making processes, as shareholders may have differing interests and priorities.
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Ownership also plays a role in a company's financial performance, as it impacts access to capital, risk management, and dividend policies.
Understanding That Businesses Operate Within an External Environment
How the External Environment Can Affect Costs and Demand:
The external environment refers to the conditions and factors outside a business that can significantly impact its operations, costs, and customer demand.
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Factors Influencing Costs and Demand:
Competition: The level of competition in the market can influence both costs and demand. In a highly competitive market, businesses may need to lower prices to attract customers, potentially impacting profit margins. On the flip side, reduced competition may allow businesses to charge higher prices.
Market Conditions: Economic conditions, such as recessions or economic booms, can have a profound effect on costs and demand. During economic downturns, consumers may reduce spending, leading to decreased demand. Inflation can also increase production costs.
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Incomes: The income levels of consumers are a key driver of demand. When incomes rise, people may have more disposable income, leading to increased demand for various goods and services.
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​Interest Rates: Changes in interest rates can affect both business costs and consumer spending. Higher interest rates can increase the cost of borrowing for businesses and individuals, potentially reducing spending and demand.
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Demographic Factors: The age, gender, and lifestyle of a population can impact demand for specific products. For example, an aging population may create increased demand for healthcare services and retirement products.
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Environmental Issues: Growing environmental concerns can affect both costs and demand. Businesses may need to invest in environmentally friendly practices, impacting costs. Additionally, consumer preferences for eco-friendly products can influence demand.
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Fair Trade: The concept of fair trade involves ethical and sustainable sourcing and production practices. Businesses that adhere to fair trade principles may incur higher costs but may also attract socially conscious consumers willing to pay a premium for ethically produced goods.