Edexcel IGCSE Business activity Questions and Answers correct

Edexcel IGCSE Business activity Questions and Answers correct Chapter 1: What is business activity? -Business activity produces output - a good/service -Goods + services consumed -Resources used -Number business functions carried out -External factors affect business -Businesses aim to make profit Consumer goods -smartphone -magazine -crisps -handbag -computer game Consumer services: -health care -banking -air travel -education -garden design Private enterprise Most businesses owned privately by individuals/groups individuals. Private sector businesses. Objective make money. Social enterprise Some organisations in private sector non-profit making ie. charities. Public enterprise Some goods + services provided by organisations owned by central/local government. Provide health care, education, policing etc. Stakeholder Has interest in operation business. Stakeholders: -Owners - sets up + runs business. -Customers - buy goods/services. -Employees - work for business. Depend on salary. -Managers - help run most businesses. Run different departments. -Financiers - lend money to business. Have financial interest. Keen for it to do well. -Suppliers - provide raw materials, parts, commercial services + utilities to other businesses suppliers. Rely on each other. -Local community - most businesses impact on local community. May provide local employment -Government - has interest in businesses. Provide employment, generate wealth + collect taxes. Chapter 2: Business objectives Successful with clear objectives as: -Employees need something to work towards -Owners have motivation to keep business going -Help decide direction + steps needed to get there -Easier to assess performance if clear objectives set Financial objectives Important in private sector. Main financial aims: -Survival -Profit Sales - growing sales means: -lower costs -larger market share -higher public profile -more wealth for owners. -Increase market share - to dominate market -Financial security - Some owners only want enough profit to provide financial security (profit satisficing). Non financial objectives Social objectives: -In public sector, government owns businesses, social objectives important. -Some businesses social enterprises; charities + cooperatives improve human + environmental well- being. -Personal satisfaction - Many businesses set up as they may be happier + more satisfied working for themselves. -Challenge - Motivation for some. Starting business very challenging. Business people must be committed, hardworking + multi-skilled. -Independence and control - desire to be own boss. SMART objectives Specific - stating aims clearly Measurable - measurable in numbers Achievable - using people involved Realistic - achievable with resources available Time specific - stating period time to achieve it Why might objectives change as businesses evolve? -Market conditions - Operate in dynamic markets - must deal with regular changes. -Technology - Constant tech dev means businesses must adjust objectives. -Performance - performance not constant. Ups and downs alternate. -Legislation - adjusts to new legislation -Internal reasons - may change objectives for internal reasons ie. change ownership/senior management. Chapter 3: Sole traders, partnerships, social enterprises and franchises. Entrepreneurs Without entrepreneurs business would not exist in private sector. Role of entrepreneurs: -Innovators make money out of business idea. -Responsible for organising factors production. -Make key decisions. -Risk takers. Risk losing money put into business. Unincorporated and incorporated businesses Unincorporated - No legal distinction between owner + business. Everything carried out in name owner. Often small + owned by one person/small group. Incorporated - Separate legal identity from owners. Can sue, be sued, taken over or liquidated - limited companies. Owners shareholders. Features of sole trader One owner. Can employ many. Varied roles. Advantages sole trader: -Owner keeps profit -Independent - has total control -Simple to set up. No legal requirements -Flexibility - can adapt quickly -Can offer personal service as they are small -May qualify for government help Disadvantages of sole trader: -Unlimited liability -struggle to raise finance - too risky for lenders. -Independence may be too much responsibility -Long hours. Very hard work -Often too small to exploit economies of scale -No continuity - business dies with owner Features of a partnership Between 2 - 20 people own business together. No legal formalities to complete when formed. May produce deed of partnership. Legal document stating partner's rights in event of dispute. It states: -How much capital each partner contributes -How profits (and losses) shared among partners -Procedure for ending partnership -How much control each partner has -Rules for taking on new partners Advantages and disadvantages of partnerships Advantages of partnerships -Easy to set up + run - no legal formalities -Partners may specialise in area of expertise -Running business shared -More capital can be raised with more owners -Financial information not published Disadvantages of partnerships -Partners have unlimited liability -Profit shared -May disagree and fall out -Any partners' decision legally binding on all -Tend to be small Limited partnerships May provide capital but take no part in management. They have limited liability - sleeping partner. Must be at least one partner with unlimited liability. Features of franchises Franchise suits someone who wants to run business but does not have idea. Owners of franchises - franchisors. Developed successful business name + prepared for others to trade under it. What does franchisor offer franchisee? -License to trade under brand name -Start-up package - help, advice, essential equipment + branding materials -Business training. -Materials, equipment + support services needed. -Marketing support for all franchisees. -Exclusive geographical area to operate. ie. no competition from other franchisees in same group. Franchisee must pay certain fees: -One-off start-up fee -Ongoing fee (often based on sales) -Contribution to marketing costs -Franchisors may make profit on some materials, equipment + merchandises supplied to franchisee. Advantages to franchisee: -Less risk; tried, tested idea used -Back-up support given -Set-up costs predictable -National marketing organised Disadvantages to franchisee: -Profit shared with franchisor -Strict contracts signed -Lack independence - strict operating rules -Expensive way to start business Advantages to franchisor: -Fast method growth -Cheaper method growth -Franchisees take some risk -Franchisees more motivated than employees Disadvantages to franchisor: -Profit shared with franchisee -Poor franchisees damage brand's reputation -Franchisees may get merchandise from elsewhere -Cost support for franchisees high Features of social enterprises: May operate as social enterprises + Improve human + environmental well-being rather than make a profit. Social enterprises: -Have clear social/environmental mission -Generate income through trade or donations -Reinvest most profit -Majority controlled in interests of social mission -Accountable and transparent Social enterprises take variety of forms: Cooperatives: consumer/retail cooperatives owned + controlled by members. They buy shares letting them elect directors to make key decisions. Any profit given to members. Worker cooperatives employees share ownership. Workers contribute to production + decision making + take share in profit + provide capital when buying share. Charities Raise money for 'good' cause. Highlight needs of disadvantaged groups. Often hold fundraisers. Chapter 4: Limited companies and multinationals Limited companies Features of limited companies: -Incorporated -Owners have limited liability. -Raise capital by selling shares. -Shareholders elect directors to run company. -Sole traders + partnerships pay income tax but limited companies pay corporation tax on profits -To form limited company, must follow legal procedure. Forming a limited company: Must have minimum two members, but no upper limit. Important documents sent to Registrar of Companies before formation. Especially Memorandum of Association + Articles of Association. Once documents acceptable, company gets certificate of incorporation allowing it to trade as ltd. Shareholders have legal right to attend AGM + must be told date + venue in writing. Memorandum of association Memorandum of association sets out CONSTITUTION + gives DETAILS about company. Ie: -company name -name + address registered office -objectives + nature of its activities -amount capital to be raised + number shares issued Articles of association Articles of association deals with INTERNAL RUNNING of company. Ie: -shareholder's rights depending share type -procedures for appointing directors -Time directors serve before re-election -timing + frequency company meetings -arrangements for auditing accounts Private limited companies Features: -Business name ends in Limited or Ltd -Shares transferred 'privately'. All shareholders must agree on transfer. They cannot be advertised for sale. Shares cannot be traded on stock market. -Often family-run -Directors often shareholders. Involved in management. Advantages and disadvantages of private limited companies Advantages of Ltd: -Shareholders have limited liability -More capital can be raised -Control not lost to outsiders -Business continues if shareholder dies -More status? - ie. than sole trader. Disadvantages of Ltd: -Financial information made public -Costs money + takes time to set up -Profits shared between more members -Takes time to transfer shares to new owner -Cannot raise huge amounts of money, like PLCs Public limited companies PLCs larger than Ltd. Shares traded by public on stock exchange. Anyone can buy. Prospectus - When 'going public' must publish prospectus which advertises company to potential investors. Must be examined by lawyers to ensure it is presenting true information about business. Invites investors to buy shares before a flotation. 'Going public' is expensive as -Lawyers must ensure prospectus 'legally' correct -Prospectus must be printed + circulated -Bank may be paid to process share applications -Must insure against possibility shares remaining unsold. Fee paid to underwriter who buys unsold shares. -Advertising + admin expenses -PLC must have minimum of £50,000 share capital Advantages and disadvantages of PLCs Advantages of PLCs: -Large amounts capital can be raised -Shareholders have limited liability -Can exploit economies of scale -Can dominate market -Shares can be traded easily -May have high profile Disadvantages of PLCs: -Very high setting up costs -Outsiders can take control by buying up shares -More financial information made public -More remote from customers -More regulatory control owing to Company Acts -Managers may take control rather than owners Features of multinationals Large business with significant production/service operations in at least two different countries. Key features: -Huge assets + turnover - Well-resourced. -Highly qualified + experienced executives + managers -Powerful advertising and marketing capability -Highly advanced and up-to-date technology -Highly influential economically and politically -Very efficient. Can exploit huge economies of scale -Ownership + control centred in host country Chapter 5: Public corporations Features of public corporations -Gov runs + manages them. -Created by act parliament. -Public corporations incorporated. -Government provides capital needed -Often not for profit but to provide public service. -Public accountability - Must produce annual reports submitted to gov minister in charge. Some public corporations aim for profit. In UAE, gov owns large businesses aiming for profit - Emirates Airline etc. Reasons for public ownership of businesses Avoid wasteful duplication - Can be natural monopoly. More efficient one business for whole market. Keep control strategic industries - Better for industries vital to nation's security ie. energy + water owned by gov. Save jobs - businesses taken into public ownership can save jobs. Gov may take control failing private sector business if big employer. Fill in gaps left by private sector - private sector may not meet market's needs. Serve unprofitable regions - private sector may not deliver important services to unprofitable regions. Reasons against public ownership of businesses Cost to gov - Some public corporations make losses. Losses must be met by taxpayer. Inefficiency - public corporations criticised for low productivity + inefficiency. Political interference - public corporations suffer owing to government interference. Difficult to control - public corporations large. Many thousands workers spread across vast areas making them difficult to run effectively ie. NHS. Privatisation Number public corporations been reduced. transferring public sector to private sector -privatisation. Privatisation takes number forms: Sale of public corporations - popular way of transferring from public sector to private. Deregulation - lifting legal restrictions that prevented private sector competition. Contracting out - many govs + local authority services 'contracted out' to private sector. Sale of land and property - ie sale of council-owned properties to tenants UK. Why does privatisation take place Generates income - sale state assets raises capital for government. To reduce inefficiency in public sector - public corporations lacked incentive to make profit + often made losses. Argument that private sector must cut costs, improve services, return profits for shareholders + be more accountable. Through deregulation - legal barriers removed allowing new business, ie. bus + coach services. To reduce political interference - in private sector, gov could not use these organisations for political aims. Chapter 6: Appropriateness of different forms of ownership Growth - many businesses start small, gradually get bigger. Most change legal status as they grow - need to raise more capital. Size - many sole traders/partnerships small. PLCs much larger with thousands employees + huge turnovers Need for finance - main reasons owners change legal status. Often only way to get more money is to change type of organisation. Control - some owners like independence and to have complete control. Why many remain as sole traders. Limited liability - owners can protect their own financial position if business is a Ltd. Sole traders + partnerships have unlimited liability. Other factors affecting appropriateness of different kinds of business Type of business activity may influence choice of legal status. See p.46 Way in which business plans to use its profits may be important. See p.46 Different stakeholders ie. employees and shareholders can influence choice of organisation. See p.46