AQA A Level Business - Unit 1: What is Business?

Unit 1: What is Business?

These revision notes cover 'What is Business', which is the first unit in AQA A Level Business.

Specification topic reference: 3.1 AQA Business.

3.1.1 Understanding the nature and purpose of business

What is a mission statement?

• A statement that sets out the overall purpose of the business + its values.

 

What’s the difference between corporate objectives and functional objectives?

• Corporate objectives = objectives of the company as a whole, e.g. grow the company by 20% in the next 2 years
• Functional objectives = objectives of each individual department, e.g.:
  • Human Resources department: improve motivation
  • Marketing department: increase brand awareness
  • Finance department: managing cash flow
  • Operations department: improve quality

 

• The functional objectives should be designed to help the company achieve the corporate objectives

  

Objectives should be SMART. What does this mean?

• SMART: specific, measurable, agreed, realistic, timebound
  • Objectives should be SMART
  • g. a company could set a SMART objective to increase sales by 10% within the next year.

 

How many examples of business objectives can you think of?

• Increase revenue
• Increase sales volume
• Increase stock
• Increase production
• Hire more workers
• Sell more shares
• Social and ethical objectives
• Growth
• Survival

 

How might short-term business objectives be different to long-term business objectives?

• Short term business objectives are likely to include survival, cash flow objectives, and profit
• Long term business objectives are likely to include growth and training

 

What is revenue? How can it be calculated?

• Revenue = selling price per unit x quantity of units sold

 

• For example:
  • If a business sells 1000 hats for £10 each, then the revenue would be 1000 x £10 = £10,000

 

What’s the difference between fixed and variable costs?

• Price of a product = how much the customer pays for the product
• Cost of the product = how much the business pays to make a product

 

• Fixed costs = costs that do not vary with output, e.g. rent, managerial salaries, marketing expenses

 

• Variable costs = costs that do vary with output, e.g. raw materials, wages of production line workers

 

• Output = the number of units the business makes
• Unit = an individual product

 

What is profit?

• Profit = total revenue – total costs

 

• For example:
  • If a business sells 1000 hats for £10 each, then the revenue would be 1000 x £10 = £10,000
  • If the variable cost per hat is £1, and the total fixed costs are £2,000, what would the profit be?
    • Total variable costs = £1 x 1000 hats = £1000
    • Total fixed costs = £2000
      • Profit = total revenue – total costs
      • Profit = £10,000 - £3,000 = £7,000

Why is it important to make a profit?

• To avoid business failure (insolvency)
• To pay the owners/shareholders a dividend
  • A dividend is a portion of the profit that is split up amongst the shareholders
• To pay the employees’ salaries
• Profit can be used to attract investors
• Retained profit is a good source of finance

 

3.1.2 Understanding different business forms

What’s the difference between the private sector and the public sector?

• Private sector = owned by private individuals, e.g. Apple, Tesco etc
• Public sector = organisation owned and run by the government, e.g. NHS, police, fire brigade

 

What aims might a non-profit business have?

• Charities: rely on donations from the public
• Social enterprises: normal businesses that make and/or sell products but are set up with a social objective, so they will use the money raised on a good cause
• Mutual organisations: these are set up to provide customers the best possible value rather than to serve shareholders

 

• Non-profits won’t have a profit objective, but they will need to make enough money to achieve their aims

 

What is the difference between unlimited liability and limited liability?

• Unlimited liability (sole traders) – the business and the owner(s) are the SAME legal entity, meaning that the owners ARE legally responsible for the debts of the business.
  • For example, if you started to sell products online and took out a £10,000 loan to buy stock, and then the business failed and you couldn’t sell the products, you still would have to pay the loan back.
• Limited liability (company) – the business and the owner(s) are separate legal entities, meaning that the owners AREN’T personally liable for the debts of the business.
  • For example, if a company that you owned took out a £10,000 loan, but then could not afford to pay off the loan, the company would fail but you personally as the owner would not have to pay the debt back.

 

What is a sole trader? What are the pros and cons of this business form?

• Sole traders = someone who sets up a business by themselves but hasn’t set up a company, but they can hire employees.
  • Benefits:
    • Full control over working hours
    • Full control over the business
    • Can keep all the profit
    • Less conflict
    • Easier to set up than a company
  • Drawbacks:
    • Have full responsibility for the business, e.g. paying employees on time
    • Unlimited liability: the owner will be personally responsible for the debts of the business
    • Lack of expertise
    • Lack of capital

 

What is the difference between a public limited company and a private limited company?

• Private limited company (LTD): can only sell shares through private agreement
  • Incorporation (setting up a private limited company):
    • To set up a company, you have to create several legal documents, including the articles of association (sets out the rules of the company) -> documents must be sent to Companies House (a government body)
  • Benefits:
    • Can keep control of the company as shares are only sold by private agreement -> original owners can maintain control over the company so will be able to stick to the original vision.
    • Limited liability
  • Drawbacks:
    • Harder to raise share capital than a PLC
  • Public limited companies (PLC): anyone over the age of 18 can buy shares through the stock exchange
    • The process of a LTD becoming a PLC is called a stock market flotation
    • Benefits:
      • Can raise more share capital
      • Limited liability
    • Drawbacks:
      • Risk of losing control over the company
      • Risk of hostile takeovers (when another company or individual buys over 50% of the shares in the company – a controlling interest)

 

• Shareholders = the owners
• Directors = the ones who run the company (appointed by the shareholders)

 

What is the difference between ordinary share capital and market capitalisation?

• Ordinary share capital = the total amount of money raised from selling shares
• Market capitalisation = number of shares issued x current share price
  • Apple’s market capitalisation = 16,000,000,000 x $150 = $2,400,000,000,000
    • This means $2.4 trillion!
      

If a public limited company sold all 100 of its shares for £1 each, the share capital raised would be £100.

But, if the share price then increased to £2 per share, then the market capitalisation would be £200 (see below). BUT: the ordinary share capital would still just be £100 as that is the money the company raised from selling the shares.

• Please note: this is a simplification! No public limited company would have only 100 shares and be worth just £200!

 

What are shareholders? Why do they invest in businesses?

• Shareholders are people who own shares in a company.
• This means that shareholders are the owners of the company.
• Reasons for investing:
  • To be paid dividends (a proportion of the profit that is split between the shareholders)
  • To make a capital gain (selling the shares for more than you bought them for)
  • Some investors have social objectives so only invest money into companies that have promised to be e.g. environmentally sustainable
  • To support a family member who has set up a company

 

What causes share prices to fluctuate?

• Demand for the shares causes the share price to fluctuate: the higher the demand, the higher the share price. But, if shareholders start selling their shares, the share price will go down.
  • Factors affecting the demand for shares:
• The performance of the company: if the company is doing better, the demand will increase and so will the share price.
• Speculation: when a company announces a new product, this creates more invest in the company and so more people may buy shares.
• Interest rates: when interest rates are low, there is less of an incentive to just save money in a bank account. Instead, people may buy shares in a company.

 

Exam Question (AQA A Level Business June 2019 Paper 2): 

WR has made a strategic decision to move into electric bicycle rentals. Analyse the possible impact of this on the market capitalisation of the company. (9 marks)

 

 

Para 1:

• Point: state if the market capitalisation would go up or down
• Application: use something from the case study to explain your point
• Analysis: further explain why the move into electric bikes would affect the market capitalisation. Think about what affects market capitalisation.

Para 2:

• Point: state if the market capitalisation would go up or down
• Application: use something from the case study to explain your point
• Analysis: further explain why the move into electric bikes would affect the market capitalisation. Think about what affects market capitalisation.

 

 

Exam Question (AQA A Level Business June 2018 Paper 2): 

Lego is a private limited company. Analyse how the decisions its managers make might be different if it was a public limited company. (9 marks)

 

Private limited company = shares can only be sold by private agreement

Public limited company = anyone can buy shares in the company

 

Para 1:

• Point and application: if Lego was a public limited company, it probably wouldn’t invest as much in building new facilities in China and Mexico because it has reduced the funds available to pay dividends to shareholders
• Analysis: this might cause shareholders to sell their shares -> share price would decrease -> reduce the share capital -> less money available to invest in new product launches which account for 60% of their sales

 

Para 2:

• Point: if Lego was a public limited company, it may invest more in product launches
• Application: as they account for 60% of sales
• Analysis: more sales -> more profit -> can pay shareholders higher dividends

 

 

3.1.3 Understanding that businesses operate within an external environment

What impact can increased competition have on a business?

• Reduce the prices
• Move location
• Promotional offers, e.g. buy one get one free

 

Which market conditions can impact businesses?

• Market conditions can affect a business’s costs, as well as the demand for its products:
  • Changes in the economy, e.g. recessions, interest rates, exchange rates, inflation.
  • Changes in the labour supply (the number of people looking for a job and their skills).
  • Changes in the competitive environment.

 

How can changing consumer incomes impact businesses?

• If consumer income increases:
  • Businesses selling luxuries would see an increase in demand
  • Demand for inferior goods may decrease, e.g. supermarket own brand products vs branded goods

 

How can changing interest rates impact businesses?

• Interest rates = cost of borrowing and the return on saving
• If interest rates increase:
  • It will be more expensive for businesses to take out bank loans, meaning it would be more difficult to raise the money to buy factories or equipment etc.
  • Consumers will have a greater incentive to save their money in the bank as they are offered a higher reward for saving. This means they may be less likely to spend money on goods and services.
  • Consumers will also have to pay back more interest on the loans they have taken out, meaning that they have less money left over to spend on goods and services.

 

Exam Question (AQA A Level Business June 2017 Paper 2): 

Analyse the likely effects of a significant increase in interest rates on the profits of car manufacturers. (9 marks)

 

Para 1:

• Point: profits may increase because
• Application: the cars are often bought on credit and the manufacturers provide the finance
• Analysis: this means that if interest rates increase, car manufacturers may charge higher interest rates on the cars that they sell, meaning that customers will have to pay back more than the original price of the car. This would result in greater revenue and therefore higher profit.

Para 2:

• Point: if interest rates increase, it will make it harder to people to buy cars
• Application: this is because the cars are bought on finance so customers would have to pay back a greater amount.
• Analysis: this means that demand for cars may decrease, resulting in lower sales revenue for car manufacturers. Therefore, profits would also decrease. As such, car manufacturers such as Daihatsu may have less retained profit to reinvest in 3D printing.

 

 

Which demographic changes are happening in the UK? How can these impact businesses?

• Demographic changes are changes in the structure of the population, e.g. age, gender, ethnicity etc.
• There is an ageing population meaning that the average age is increasing. So there may be an increase in demand for goods and services that older people want to buy. Also, older people tend to have saved up more money than younger people, so there could be a general increase in demand for products.
• There has also been an increase in immigration, resulting in an increase in the labour supply. There may also be an increase in demand for cultural products, e.g. Polish food shops.

 

 

How can being environmentally friendly affect businesses?

• A business can become more environmentally friendly by
  • Reducing the amount of packaging
  • Using less plastic
  • Producing less waste
  • Using sustainable materials
  • Reducing the emissions in the production process
  • Find local suppliers (to cut down emissions during transportation)
• Benefits of being environmentally friendly:
  • Provides good publicity
  • Can be used as a unique selling point (USP)
• Drawbacks of being environmentally friendly:
  • More costly

 

How can having ‘fair trade’ policies affect a business?

• Fair trade = ensuring the business pays fair prices for the supplies, e.g. paying farmers a fair wage to grow bananas
• Benefits of having fair trade policies:
  • Provides good publicity
  • Can be used as a unique selling point (USP)
• Drawbacks of having fair trade policies:
  • More costly

 

Exam Question (AQA A Level Business June 2018 Paper 1): 

Are demographic factors now more significant than economic factors in influencing the performance of UK businesses? Justify your view. (25 marks)

 

Para 1: demographic factors are more significant

• Point: It may be argued that demographic factors are more significant because changes such as the ageing population will result in an increase in demand for products that older people want
• Application: for example, there may be an increase in demand for health products such as back support belts and private healthcare
• Analysis: an increase in demand for these products would lead to higher sales revenue, resulting in higher tax revenue which the government is likely to reinvest into the economy. For example, the government may invest in infrastructure such as roads and railways which makes it easier to transport products, resulting in better performance for businesses.
• Evaluation: however, demographic changes are only likely to affect certain businesses as not all businesses will see in increase in demand

Para 2: economic factors are more significant

• Point: however, it may be argued that economic factors are more significant
• Application: for example, if interest rates increase, then businesses will find it harder to take out a loan
• Analysis: less able to invest in growth and expansion -> limit performance ->
• Evaluation: however, given that all businesses will be equally impacted by economic factors, it may not have much of an effect.

 

Conclusion

• Answer the question
• Justify
• It depends on