Understanding the nature and purpose of business
Learning Objectives:
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Guidance:
Business objectives such as profit, growth, survival, cash flow, social and ethical objectives The measurement of profit should include:
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Why do businesses exist and common business objectives
Learning Objectives:
- To understand why businesses exist (AO1)
- To examine common business objectives (AO1)
- To analyse why businesses have different objectives (AO2)
- To evaluate the impact that objectives can have on business success (AO3)
why_do_businesses_exist_and_common_business_objectives_2.docx.pptx | |
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Businesses exist to provide goods and services for their customers. This could be individual people, other businesses or government departments.
Entrepreneurs are the people who take a risk in order to reap the rewards that running a business can bring.
There are several reasons why businesses exist, and these businesses can all have different goals.
Entrepreneurs are the people who take a risk in order to reap the rewards that running a business can bring.
There are several reasons why businesses exist, and these businesses can all have different goals.
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Profit
Apple's value is bigger than all but 19 countries in the world. Who do you think they are?
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Maximising profit is important but securing the right amount of profit to satisfy the owners (and sometimes shareholders) is the most important thing.
To achieve profit (make more than you spend) businesses must do a few things:
Profitability can be influenced by:
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Growth
Question: Why do you think Subway have been so successful, and what do you think has lead to them becoming one of the fastest growing businesses in the world?
Growth may relate to:
Growth can be achieved organically (growing the business from within) or through external actions such as mergers or takeovers. Growth is less likely to be an objective of smaller businesses. Question: Why might growth not be an objective for smaller businesses? |
To achieve growth, businesses will have functional objectives of increasing market share, retaining to profit, increasing capacity (ability to produce more) and recruiting and training more staff.
The ability to grow will depend upon:
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Survival
Question: Have a look at UK Business survival rates from November 2014. What stands out and why do you think this is?
Survival is a key objective for new or small businesses, especially in competitive markets. Survival is very important during periods of uncertainty and difficult economic conditions. (Question - What had happened in the 5 years during the above diagram? What impact did this have on businesses?)
When income is falling and demand is weak, businesses will look to survive until there are more favourable trading conditions.
Objectives leading to survival are:
When income is falling and demand is weak, businesses will look to survive until there are more favourable trading conditions.
Objectives leading to survival are:
- Maximising sales to meet costs and maintain market share
- Maintaining appropriate levels of stock (so demand can be met but cash flow is not reduced)
- Maintaining the required level of well-trained staff
Cash Flow
Key term: CASH FLOW - The amounts of money flowing into and out of a business over a period of time.
A business must ensure it has money coming in to cover the cost going out. Maintaining a healthy cash flow is important for all businesses.
Even large businesses can be vulnerable. Question: What do a lot of sofa retailers state in their adverts? What are the problems with this? |
Question: What is a supply chain and why is maintaining a good relationship with your suppliers so important in the objective of having a healthy cash flow?
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Social and Ethical
Question: What are the objectives of Jamie Oliver's '15' initiative? How do they differ from other restaurants?
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Question: How do The Body Shop benefit from being an 'ethical' business? What does ethical mean?
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Social objectives are focussed on helping a particular area of society and human well-being. Ethical objectives are moral principles that underpin business behaviour.
Social and ethical objectives are clearly evident in non-profit organisations such as charities. Commercial or 'for-profit' organisations are also likely to have these objectives. Question: Why do you think this is?
Other objectives may include diversification, market standing and meeting the needs of other stakeholders.
Social and ethical objectives are clearly evident in non-profit organisations such as charities. Commercial or 'for-profit' organisations are also likely to have these objectives. Question: Why do you think this is?
Other objectives may include diversification, market standing and meeting the needs of other stakeholders.
why_do_businesses_exist_and_common_business_objectives.docx | |
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The Relationship Between Mission and Objectives and why Businesses set Objectives
Learning Objectives:
- To understand the relationship between mission and objectives
- To understand why businesses set objectives
the_relationship_between_mission_and_objectives_and_why_businesses_set_objectives.pptx | |
File Size: | 66 kb |
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Starter activity: What typical business objectives have we looked at? Why do businesses have different objectives?
Key term: MISSION STATEMENT - A qualitative statement of an organisation's aims that uses language intended to motivate employees and convince customers, suppliers and those outside the firm of its sincerity and commitment.
Key term: MISSION - An organisation's aims or long-term intentions, its ultimate purpose; a business mission is sometimes the same as its corporate aims. |
The mission of a business is its essential purpose or intentions, and the mission statement is the means of communicating this to key stakeholders.
Question: What is a stakeholder? Business objectives are goals that must be achieved to realise the stated aims of an organisation. They tend to be medium to long term and can be corporate or functional objectives. Key term: CORPORATE OBJECTIVES - Goals of the whole organisation rather than of different parts. They are set in order to coordinate the activities of, give a sense of direction to, and guide the actions of the whole organisation. They are dictated by the mission or corporate aims.
Key term: FUNCTIONAL OBJECTIVES - Goals of each of the functional areas of a business (marketing, finance, ops, HR). They are designed to ensure that the business achieves its corporate objectives and thus its overall aims/mission. Question: What other functional areas/departments are there within a business?
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In a nutshell, objectives are the shorter term targets set for departments or individuals to complete in order to achieve the business's overall aims.
Larger businesses are likely to formally identify their objectives so that all staff, no matter what area of the businesses they are in, can understand an identify with it.
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Setting objectives gives a sense of direction to the business and helps coordinate business activity. They set a focus for decision making and effort but also act as a measurement of success or failure.
Appropriate business objectives can lead to:
Question: Why do you think this is?
Question: If your aim was to become rich and famous, how would you go about doing this?
Effective corporate objectives need to be translated into objectives that can be used as clear targets to achieve, especially in relation to functional objectives to ensure that all areas are working towards the same goals so that the corporate objectives and essentially the mission can be achieved.
The use of SMART business objectives assists this process:
Specific: Clearly and easily defined
Measurable: Quantifiable (you can track through figures or measurements)
Agreed - Managers and subordinates are involved in setting targets
Realistic - Achievable and not in conflict with other objectives
Time bound - Achievable within a particular time frame
Being specific, measurable and timed enables the business to assess the extent to which objectives have been achieved. This ensures staff are clear on what they have to do. Being realistic will motivate staff and provide suitable challenge, and being agreed by the whole workforce means they are not being forced upon the staff (and are thus demotivating).
Key term: STRATEGY - The medium - to long-term plans through which an organisation intends to achieve its objectives.
Business objectives form the basis for decisions on strategy. Strategies will include details about what is to be done and the financial, production and personnel resources required to implement the plans.
Appropriate business objectives can lead to:
- Better team spirit
- Improved efficiency
- Higher productivity
- Higher motivation
Question: Why do you think this is?
Question: If your aim was to become rich and famous, how would you go about doing this?
Effective corporate objectives need to be translated into objectives that can be used as clear targets to achieve, especially in relation to functional objectives to ensure that all areas are working towards the same goals so that the corporate objectives and essentially the mission can be achieved.
The use of SMART business objectives assists this process:
Specific: Clearly and easily defined
Measurable: Quantifiable (you can track through figures or measurements)
Agreed - Managers and subordinates are involved in setting targets
Realistic - Achievable and not in conflict with other objectives
Time bound - Achievable within a particular time frame
Being specific, measurable and timed enables the business to assess the extent to which objectives have been achieved. This ensures staff are clear on what they have to do. Being realistic will motivate staff and provide suitable challenge, and being agreed by the whole workforce means they are not being forced upon the staff (and are thus demotivating).
Key term: STRATEGY - The medium - to long-term plans through which an organisation intends to achieve its objectives.
Business objectives form the basis for decisions on strategy. Strategies will include details about what is to be done and the financial, production and personnel resources required to implement the plans.
business_objectives.docx | |
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The Measurement and Importance of Profit
Learning Objectives:
- To understand the measurement and importance of profit
- To be able to calculate revenue, costs and profit
- To be able to analyse the relationship between costs and price and the importance of profit
the_measurement_and_importance_of_profit.pptx | |
File Size: | 66 kb |
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Starter: Write down 3 reasons why you a think a business will want to make a profit.
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Price:
This is the amount a business asks customers to pay for a single product.
This can be guided by competitor's prices or the cost of making the good. The business must find the ideal selling price - the one that makes the most profit.
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If a product is popular, businesses may increase prices (WHAT ECONOMICAL TERM IS THIS?)
If a business has goods left over, they may lower prices (WHAT ECONOMICAL TERM IS THIS?)
This is the amount a business asks customers to pay for a single product.
This can be guided by competitor's prices or the cost of making the good. The business must find the ideal selling price - the one that makes the most profit.
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If a product is popular, businesses may increase prices (WHAT ECONOMICAL TERM IS THIS?)
If a business has goods left over, they may lower prices (WHAT ECONOMICAL TERM IS THIS?)
Sales:
This is the number of products sold by a business over a time period (days/months/years).
Sales are given as the number sold, not in terms of the money made.
This is the number of products sold by a business over a time period (days/months/years).
Sales are given as the number sold, not in terms of the money made.
Revenue (Income/Turnover/Sales revenue):
This is the income received from selling the good or service.
Revenue is worked out by using the following calculation:
REVENUE = AVERAGE SELLING PRICE x QUANTITY SOLD
This is the income received from selling the good or service.
Revenue is worked out by using the following calculation:
REVENUE = AVERAGE SELLING PRICE x QUANTITY SOLD
Question:
If a business sells 25 products at a price of £20 each, what is their revenue?
If a business's revenue is £520 and they have sold 13 products, what is the price per product?
If a business has a product costing £19.50 and revenue is £1560, how many have the sold?
If sales double, what happens to revenue?
If sales fall by 10%, what happens to revenue?
If a business sells 25 products at a price of £20 each, what is their revenue?
If a business's revenue is £520 and they have sold 13 products, what is the price per product?
If a business has a product costing £19.50 and revenue is £1560, how many have the sold?
If sales double, what happens to revenue?
If sales fall by 10%, what happens to revenue?
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What are fixed and variable costs?
What different fixed and variable costs can you think of? Now apply this to a nightclub. What do you think total costs are? |
It is important for a business to clarify costs as it can help them assess the impact of changes in output on the costs of production. Explain.
It also helps the business calculate the costs of making a particular product in a multi-product company. Explain.
Cots are also important because if you can cut them (reduce wastage, cut stuff) you can help improve profit.
It also helps the business calculate the costs of making a particular product in a multi-product company. Explain.
Cots are also important because if you can cut them (reduce wastage, cut stuff) you can help improve profit.
COsts and output
A business will look at the link between costs and output to calculate the financial implications of changing its level of output.
If there is an 'x%' rise in output, it is assumed that:
Although small changes in output will not affect fixed costs, be aware that if new machinery is needed to assist with this increase, there will be an increase in fixed costs.
Key term: VARIABLE COST PER UNIT - Divide the total variable costs by the number of products made.
Question:
Output is 1000 units
Fixed costs are £5000
Total variable costs are £6000.
What are the total costs and variable cost per unit?
What happens to total costs if output doubles to 2000 units?
What happens to total costs if output falls by 10%?
S+C: Why are sales so important in relation to costs and production?
If there is an 'x%' rise in output, it is assumed that:
- Fixed costs will not change
- Variable costs will change by the same percentage as the change in output (a rise of 'x%')
Although small changes in output will not affect fixed costs, be aware that if new machinery is needed to assist with this increase, there will be an increase in fixed costs.
Key term: VARIABLE COST PER UNIT - Divide the total variable costs by the number of products made.
Question:
Output is 1000 units
Fixed costs are £5000
Total variable costs are £6000.
What are the total costs and variable cost per unit?
What happens to total costs if output doubles to 2000 units?
What happens to total costs if output falls by 10%?
S+C: Why are sales so important in relation to costs and production?
Profit
Key term: PROFIT - the difference between the income of a business and its total costs
Profit = total revenue - total costs
(if the number if negative, then the business is making a loss)
Profit can be improved by:
A business will want to choose the most profitable level of output and also assess how changes in output and sales might affect profit.
(if the number if negative, then the business is making a loss)
Profit can be improved by:
- increasing sales revenue
- decreasing costs
A business will want to choose the most profitable level of output and also assess how changes in output and sales might affect profit.
Question: Which business is profitable?
A)
Revenue = £1m Fixed costs = £750,000 Variable costs = £300,000 |
B)
Revenue = £180,000 Fixed costs = £70,000 Variable costs = £90,000 |
Profit is important for a number of reasons:
Question: Explain the above
- Profit is a reward (owner and dividends)
- Profit is a motivator (e.g. John Lewis)
- Profit is a measure of success
- Profit is a guide for future investment
- Profit is a source of finance
- Profit is attractive to stakeholders
Question: Explain the above
costs-revenue-and-profit---calculations.docx | |
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profit_16_mark_question.docx | |
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