| disadvantages of a joint venture | profits have to be shared, may have arguments, the owners may have different ways of running the business |
| how profit is made | increasing revenue by more than costs, reducing the cost of making products, a combination of 1 and 2 |
| 4 reasons profit is important | reward for enterprise - successful entrepreneurs have many important qualities, and profit gives them a reward for this
reward for risk taking - entrepreneurs and investors take risks when providing capital, also provides an incentive to be more profitable
source of finance - retained profits can help with expansion
indicator of success - shows others what goods and services are profitable |
| income statement | a financial statement that records the income of a business and all costs incurred to earn that income over a period of time |
| revenue | the income to a business during a period of time from the sale of goods or services |
| cost of sales | cost of producing or buying in the goods actually sold by the business during a period of time |
| gross profit | made when revenue is greater than the cost of sales |
| gross profit calculation | revenue - cost of sales |
| trading account | shows how the gross profit of a business is calculated |
| net profit | the profit made by a business after all costs have been deducted from revenue |
| net profit calculation | gross profit - overhead costs |
| depreciation | is the fall in the value of a fixed asset over time |
| retained profit | the net profit re-invested back into a company after deducting tax and payments to owners such as dividends |
| retained profit calculation | net profit - tax and dividends |
| income statements | shows profit/loss not cash flow, used by managers to compare business performance, important part of a company published accounts |
| statement of financial position | shows the value of a businesses assets and liabilities at a particular time |
| assets | items of value which are owned by the business, they may be current or fixed assets |
| liabilities | debts owned by the business, may be non-current or current liabilities |
| non-current assets | items owned by the business for more than one year |
| current assets | are owned by a business and used within one year |
| non-current liabilities | long-term debts owed by the business, repaid over more than one year |
| current liabilities | short-term debts owed by the business, repaid in less than one year |
| working capital calculation | current assets - current liabilities |
| capital employed | is the total long-term and permanent capital invested in a business |
| capital employed calculation | shareholders funds + long-term liabilities |
| liquidity | the ability of a business to pay back its short-term debts |
| profitability | the measurement of the profit made relative to either the value of sales achieved or the capital invested in the business |
| profitability ratio - return on capital employed calculation | net profit/capital employed x 100 |
| profitability ratio - gross profit margin calculation | gross profit/revenue x 100 |
| profitability ratio - net profit margin calculation | net profit/revenue x 100 |
| illiquid | means that assets are not easily convertible into cash |
| liquidity ratio - current ratio | current assets/current liabilities |
| liquidity ratio - acid test ratio | current assets - inventories/current liabilities |
| public limited company | business owned & controlled by the shareholder, they sell shares to the public, & the shares are tradable on the stock exchange |
| advantages of a public limited company | can sell shares to the public, limited liability, fast expansion is possible |
| disadvantages of a public limited company | legal formalities, expensive to go public, disclosure of accounts & other information |
| franchise | an agreement of a business based upon an existing business |
| franchisee | the company that received permission to conduct business using the company’s name |
| advantages of franchising to the franchisee | lower chance of the business failing, fewer decisions to be made, the franchisor provides the training, banks often lend money |
| disadvantages of franchising to the franchisee | less independence, unable to make decisions to better suit the local area, the franchisor can withdraw the agreement & can prevent the use of the premises |
| the franchisor | the company that allows another company to conduct business using the company name |
| advantages of franchising to the franchisor | another source of finance, expansion is faster, management is responsible to the franchisee |
| disadvantages of franchising to the franchisor | a bad reputation for the brand if one branch is bad, the franchisor doesn't get all the profit, training is paid for by the franchisor |
| joint venture | when two or more businesses join together to make a new business |
| advantages of a joint venture | sharing costs, knowledge & experience are shared, risk shared |
| disadvantages of a joint venture | profits have to be shared, may have arguments, the owners may have different ways of running the business |
| public corporation | a business in the public sector owned & controlled by the government |
| advantages of public corporations | ensure consumers aren't taken advantage of, reduces wasteful competitors, can help stabilize failing businesses to create job opportunities |
| disadvantages of public corporations | the main objective is not to make a profit, inefficiency as they are too reliant on the government, lack of close competition can decrease activities |
| market share calculation | comapny sales/total market share x 100 |
| motivation | factors that influence the worker's behaviour towards achieving business goals |
| maslows heirachy of needs | maslows heirachy of needs |
| job analysis | it identifies and records the responsibilities and tasks relating to a job |
| job description | a document that outlines the tasks and responsibilities that will need to be done |
| job specification | outlines the responsibilities and duties that have to be done |
| wage | payment for work, usually paid weekly |
| advantages of wages | worker is paid on a regular basis, workers can be paid overtime |
| disadvantages of wages | calculating the wages takes time and money |
| time rate | is the amount paid to an employee for one hour of work |
| advantages of time rate | make it easier to calculate the worker's wages, worker know how much money to get paid |
| disadvantages of time rate | good and bad workers get paid the same amount of money, clocking in system is needed |
| piece rate | an amount paid for each unit of output |
| advantages of piece rate | encourages the workers to work faster and produce more goods |
| disadvantages of piece rate | poor quality, employees will earn less money is machinery breaks down |
| salary | payment for work, usually paid monthy |
| advantages of salary | only calculated once a month, easy to calculate salary costs |
| disadvantages of salary | workers may prefer to be paid weekly, no payment for extra time |
| bonus | is an additional amount of payment above basic pay as a reward for good work |
| advantages of a bonus | don't have to be paid, can be motivating |
| disadvantages of a bonus | can be expected, can create competition between workers |
| commission | payment relating to the number of sales made |
| advantages of commission | more sales made, the more money received, encourages sales staff to sell more |
| disadvantages of commission | can be stressful if they have a bad sales month, if sales staff are persuasive and encourage people to buy goods they don't want the business might see an increase only in the short term and fall again as it gets a bad reputation |
| profit sharing | a system where a proportion of the companies profits are given out to the employees |
| advantages of profit sharing | should be motivating to the workers as they all benefit from the profits |
| disadvantages of profit sharing | if the business makes low profits then no profit share will be given out leading to employee disappointment, usually calculated based on an additional percentage of a worker's existing wage so lower paid workers don't get as much |
| examples of fringe benefits | company vehicle, free healthcare, free trips abroad |
| job rotation | involves workers swapping around and doing each specific task for only a limited amount of time and then changing around again |
| job enrichment | involves looking at jobs and adding tasks that require more skill or responsibility |
| promotion | advancement of an employee in an organisation for example to a higher job/managerial level |
| gross domestic product | the total value of outputs of goods and services in a country in one year |
| growth | GDP is rising, unemployment is generally falling, and the country is enjoying higher living standards, most businesses do well |
| boom | caused by too much spending, prices start to rise quickly and there's a shortage of skilled workers, business costs are rising |
| recession | often caused by too little spending, period when GDP falls, most businesses experience falling demands, workers may lose their jobs |
| slump | a serious and long-drawn-out recession, unemployment reaches very high levels and prices may fall |
| recession definition | there is a period of falling GDP |
| government economic objectives | low inflation, low unemployment, economic growth, balance of payments between imports and exports |
| inflation | the increase in the average price level of goods and services over time |
| unemployment | exists when people who are willing and able to work cannot find a job |
| economic growth | a country's GDP increases, more goods and services are produced than in the previous year |
| balance of payments | records the difference between a country's exports and imports |
| problems for a country when there is rapid inflation | businesses will be unlikely to want to expand, prices of goods in the country will be higher than elsewhere, leading to more foreign purchasing so jobs can be lost |
| real income | value of income and it falls when prices rise faster than money income |
| problems with rapid inflation | workers' wages will buy fewer goods leading to lower real incomes, prices of goods produced in the country will be higher than those in other countries may drive consumers to buy foreign goods causing job losses so businesses are unlikely to expand limiting job growth and lowering living standards |
| problems with unemployment | total level of the output of the country will be lower than it could be, government pays unemployment benefit to those without jobs |
| problems with a falling GDP | as output is falling, fewer workers are needed and unemployment will occur, average standard of living of the population will decline, business owners will not expand as people will have less money to spend on the products they make |
| exports | goods and services sold from one country to other countries |
| imports | are goods and services bought in by one country from other countries |
| exchange rate | is the price of one currency in terms of another |
| exchange rate depreciation | is the fall in the value of a currency compared with other currencies |
| problems with a balance of payments deficit | country could 'run out' of foreign currencies and it may have to borrow from abroad, exchange rate depreciation, countries currency will now buy less abroad than it did before depreciation |
| fiscal policy | any change by the government in tax rates or public sector spending |
| ways government can influence the economy | fiscal policy - taxes and government spending
monetary policy - interest rates
supply side policies |
| direct taxes | paid directly from incomes, for example income tax or profit tax |
| indirect taxes | are added to the price of goods and taxpayers pay the tax as they purchase the goods, for example value added tax (VAT) |
| disposable income | is the level of income a taxpayer has after paying income tax |
| effects of an increase of income tax on a business | individual taxpayers would have a lower disposable income they would have less money after tax to spend and save so businesses would be likely to see a fall in sales managers may decide to produce fewer goods as sales are lower some workers could lose their jobs |
| income tax flowchart | income tax flowchart |
| effects of an increase of corporation tax on a business | businesses will have lower profits after tax, leaving managers with less money to reinvest this can make expansion harder and may lead to the cancellation of new projects like opening factories or shops, there will be less money to return to investors, discouraging people from starting businesses if the government takes a large share of profits this could also lead to a drop in company share prices |
| effects of an increase of indirect tax on a business | prices of goods in the shops would rise consumers may buy fewer items as a result and this will reduce the demand for products made by businesses however some products are necessities and won't impact the business, workers notice that their wages buy less in the shops so real incomes have declined, so businesses may be under pressure to raise wages which will force up the costs of making products |
| import tariff | is a tax on an imported product |
| import quota | is a physical limit on the quantity of a product that can be imported |
| effects of an increase in import tariffs on a business | will benefit if they are competing with imported goods, these will now become more expensive leading to an increase in sales of home-produced goods, higher costs if they have to import raw materials or components for their own factories, other countries may now introduce import tariffs too called retaliation a business trying to export to these countries will probably sell fewer goods than before |
| government spends most of their money on | education, health, defence, law and order, transport – roads and railways |
| monetary policy | is a change in interest rates by the government or central bank, for example, the European Central Bank |
| effects of high interest rates | firms with variable interest loans may pay more in interest, reducing profits and leaving less for owners and business expansion, managers may delay borrowing for expansion, reducing new investments and resulting in fewer factories and offices being built, higher interest payments on loans like mortgages will reduce consumers' income leading to lower demand for goods and services |
| exchange rate appreciation | is the rise in the value of a currency compared with other currencies |
| supply side policies | try to increase the competitiveness of industries in an economy against those from other countries. Policies to make the economy more efficient |
| examples of supply side policies | privatisation, improve training and education, increase competitions in all industries |
| privatisation | is now very common, the aim is to use the profit motive to improve business efficiency |
| improve training and education | governments plan to improve the skills of the country’s workers, this is particularly important in those industries such as computer software which are often very short of skilled staff |
| increase competition in all industries | this may be done by reducing government controls over industry or by acting against monopolies |
| increasing income tax (this reduces the amount consumers have to spend) effects on possible business decision and problems with these decisions | lower prices on existing products to increase demand - less profit will be made on each item sold which reduces the gross profit margin
producer 'cheaper' products to increase demand - the brand image of a product might be damaged by using cheaper versions of it |
| increasing tariffs on imports effects on possible business decision and problems with these decisions | focus more on the domestic market as locally produced goods now seem cheaper - it might still be more profitable to export
switch from buying imported materials and components to locally produced ones - foreign materials and components might be of
higher quality |
| increasing interest rates effects on possible business decision and problems with these decisions | reduce investment so future growth will be less - other companies might still grow so market share will be lost
develop cheaper products that consumers will be better able to afford - depends on the product but could consumers start
to think that the quality and brand image are lower
sell assets for cash to reduce existing loans - the assets might be needed for future expansion |
| increasing government spending effects on possible business decision and problems with these decisions | switch marketing strategy to gain more public-sector contracts, e.g. building or equipping schools and hospitals - may be great competition if other businesses take same action |
| overall impact of decisions may depend on | how big the changes are in government policy, what actions competitors take in response to these policies |
| social responsibility | is when a business decision benefits stakeholders other than shareholders, for example, a decision to protect the environment by reducing pollution by using the latest and ‘greenest’ production equipment |
| environment | is our natural world including, for example, pure air, clean water and undeveloped countryside |
| global warming | is a gradual increase in the overall temperature of the Earth’s atmosphere, generally thought to be caused by increased levels of carbon dioxide, CFCs, and other pollutants in the atmosphere |
| examples of how business activity impacts on the environment | aircraft jet engine emissions damage the atmosphere, pollution from factory chimneys reduces air quality, waste disposal can pollute rivers and seas, transport of goods by ship and trucks burns fossil fuels such as oil which create carbon emissions and may be linked to global warming and climate change |
| why businesses should not worry about the environment | consumers will buy less if they have to pay higher prices, some business owners claim there is not enough proof that business activity is doing permanent damage to the environment, if pollution is a problem, then governments should pay to clean it up |
| why businesses should worry about the environment | global warming affect us all and businesses have a social responsibility to reduce these problems, if a business damages the environment, then pressure groups could take action to harm the business’s reputation and sales, consumers are becoming more socially aware and prefer products from environmentally friendly businesses which can serve as a marketing advantage |
| pressure group | is made up of people who want to change business (or government) decisions by taking action, such as organising consumer boycotts |
| private costs | paid for by a business or the consumer of the product |
| external costs | are costs paid for by the rest of society, other than the business, as a result of business activity |
| private benefits | of an activity are the gains to a business or the consumer of the product |
| external benefits | are the gains to the rest of society, other than the business, as a result of business activity |
| social cost calculation | external costs + private costs |
| social benefit calculation | external benefits + private benefits |
| sustainable development | is development which does not put at risk the living standards of future generations |
| what businesses can do to be more sustainable | use renewable energy, recycle waste, use fewer resources, develop new ‘environmentally friendly’ products and production methods |
| how to use renewable energy | by fitting solar panels or buying energy that uses
renewable sources such as wind or tidal power |
| how to recycle waste | by re-using water and other products that would otherwise be wasted or disposed of, total use of resources is reduced |
| how to use fewer resources | lean production methods is about managing production so efficiently that the minimum quantity of resources is used |
| how to develop new ‘environmentally friendly’ products and production methods | for example, replacing drink cans and bottles with biodegradable packaging that will not damage the environment |
| how to make businesses care about the environment | consumers, pressure groups, government through legal controls |
| consumers | consumers might stop buying products if they have been damaging the environment as an increasing proportion of consumers are becoming concerned about the environment |
| pressure groups | can organise consumer boycotts as they are becoming increasingly powerful, e.g. greenpeace and earth first |
| pressure groups are likely to change business actions when | it has popular public support and receives much media coverage, consumer boycotts result in much reduced sales for the business, the group is well-organised and financed. |
| pressure groups are unlikely to change business actions when | what the firm is doing is unpopular but not illegal such as testing drugs on an animal, the cost to the business of changing its methods is more than the possible cost of poor image and lost sales, the business sells to other businesses rather than to consumers |
| role of legal controls over business activity affecting the environment | can make business activities illegal like locating in environmentally sensitive areas such as national parks, dumping waste products into rivers or the sea – though it is sometimes difficult to prove which business is responsible for this, making products that cannot easily be recycled |
| pressure groups | are groups of people who act together to try to force businesses or governments to adopt certain policies |
| consumer boycott | is when consumers decide not to buy products from businesses that do not act in a socially responsible way |
| ethical decisions | are based on a moral code, sometimes referred to as ‘doing the right thing’ |
| examples of ethical decisions for a business | agree to ‘fix high prices’ with competitors, employ child workers, even though it might not be illegal in some countries, buy in supplies that have led to damage to the environment |
| potential benefits of ethical decisions | long-term profits could increase, less risk of legal action being taken against them, good publicity can provide free promotion |
| potential limitations of ethical decisions | short term profits might fall, prices might be higher than businesses that are unethical, consumers might only be interested in low prices instead of how it's made |
| globalisation | is the term now widely used to describe increases in worldwide trade and movement of people and capital between countries |
| free trade agreements | exist when countries agree to trade imports/exports with no barriers, such as tariffs and quotas |
| reasons for globalisation | the rise of free trade agreements and economic unions, transport improvements makes it easier to transport products, internet allows easy price comparisons between country and e-commerce means they can order from anywhere |
| potential globalisation opportunities for businesses | selling exports to other countries – opening up foreign markets, opening factories/operations in other countries, importing products from other countries to sell to customers in ‘home’ country, importing materials and components from other countries – but still produce final goods in ‘home’ country |
| selling exports to other countries – opening up foreign markets impact on business and disadvantage | increases potential sales as online selling allows orders for goods to be sent in from abroad, but it can be expensive to sell abroad and foreign consumers might not buy the product |
| opening factories/operations in other countries impact on business and disadvantage | could be cheaper to make some goods overseas, but the quality might not be as good and can be expensive to set up |
| importing products from other countries to sell to customers in ‘home’ country impact on business and disadvantage | with no trade restrictions it could be profitable, but the products will need maintenance and repairs, but the parts might not be available from the producer |
| importing materials and components from other countries – but still produce final goods in ‘home’ country impact on business and disadvantage | could be cheaper to purchase these supplies from other countries which will help to reduce costs, but suppliers might not be reliable and transports can make it less profitable |
| potential globalisation threats for businesses | increasing imports into home market from foreign competitors, increasing investment from multinationals to set up operations in home country, employees may leave businesses that cannot pay the same or more than international competitors |
| increasing imports into home market from foreign competitors impact on business and disadvantage | if these competitors offer cheaper products (or of higher quality) sales of local business might fall, but the increased competition could force the local businesses to become more efficient |
| increasing investment from multinationals to set up operations in home country impact on business and disadvantage | this will create further competition – and the multinational may have economies of scale and be able to afford the best employees, but some local firms could become suppliers to these multinationals and their sales could increase |
| employees may leave businesses that cannot pay the same or more than international competitors impact on business and disadvantage | employees may now have more choice about where they work and for which business so they will have to make efforts to keep their best employees, but this might encourage local businesses to use a range of motivational methods to keep their workers |
| import tariff | a tax placed on imported goods when they arrive into the country |
| import quota | restriction on the quantity of a product that can be imported |
| protectionism | is when a government protects domestic businesses from foreign competition using tariffs and quotas |
| use of import tariffs | usually lead to the price of imported goods being increased making them less competitive than locally produced groups |
| use of an import quota | reduces the amount of goods that can be imported and often leads to an increase in price of imported goods as they become less available leading to domestically produced goods having increasing sales |
| multinational business | are those with factories, production or service operations in more than one country, sometimes known as transitional businesses |
| examples of multinational businesses | oil companies (BP, shell), tobacco companies (british american tobacco, phillip morris), car manufactures (toyota, general motors) |
| benefits of becoming multinational | gain government grants given to set up operations in a particular company, remain competitive with rival businesses which may be expanding abroad, produce goods closer to the market (producer) to reduce transport costs |
| impact on stakeholders of a business becoming multinational | shareholders are likely to receive increased dividends from higher profit, employees may have more promotional opportunities, suppliers may have increased or decreased sales, government may gain or lose tax revenue |
| advantages to a country’s economy where a multinational operates | jobs are created which reduces unemployment, taxes are paid which increases government funds, increased consumer choice and competition |
| disadvantages to a country economy where a multinational operates | reduces sales for local businesses as multinationals often have lower costs than local businesses, profits are often sent back to host country, often use scarce and non renewable resources in host country |
| exchange rate | is the price of one currency in terms of another currency |
| effect of depreciation of exchange rate | makes exports cheaper - for example euro depreciates, exports from Europe sell for a lower price in America as it takes more dollars to buy each euro. People in America have to spend more dollars buying Euro's to buy the same amount of exports from Europe.
Imports are now more expensive and do the opposite - for example imports into Europe now cost more to buy from America as more Euro's have to be given to buy the dollars needed for the same amount of imports. |
| effect of appreciation of exchange rate | Raises the price of exports when the euro appreciates - for example, exports from Europe sell for a higher price in America as it takes more dollars to buy each euro. People in America have to spend more dollars buying Euro to buy the same amount of exports from Europe.
Import prices fall and demand for them might rise, - for example imports into Europe now cost less to buy from America as fewer Euro have to be given to buy the dollars needed for the same amount of imports. |
| currency appreciation | occurs when the value of a currency rises - it buys more of another currency than before |
| currency depreciation | occurs when the value of a currency falls - it buys less of another currency |
