1.4 Making the Business Effective Flashcards
All 56 cards in this deck
What is limited liability?
The owner or owners are only responsible for business debts up to the value of their financial investment in the business.
What is unlimited liability?
The owner or owners are personally responsible for all debts of the business, no matter what the value.
Give one implication for an owner of having unlimited liability.
Their personal possessions (e.g. house, car, savings) can be sold to pay the debts of the business.
Give one implication for an owner of having limited liability.
Any debts are the responsibility of the business, so the owners' personal possessions will not have to be sold to pay them.
What is a sole trader?
A business owned and run by one person, who may employ others but has unlimited liability for all business debts.
What is a partnership?
A business owned by two or more people who agree terms in a deed of partnership and typically have unlimited liability.
What is a private limited company (Ltd)?
A business with limited liability whose owners are shareholders who must be invited to buy shares; it registers with Companies House and files annual reports.
What is a deed of partnership?
A document signed by all partners setting out the terms, obligations, profit allocation, ownership percentages and responsibility for debts.
True or false? A sole trader can sell shares to raise finance.
False. Only limited companies can sell shares; a sole trader cannot.
Give one advantage of being a sole trader.
Any one of: quick and easy to set up; low set-up costs; the owner keeps all the profit and makes all decisions.
Give one disadvantage of starting a business as a partnership.
Any one of: there may be disagreements between partners, making decisions difficult; decisions made by one partner affect all partners; all partners are liable for the debts.
Give one advantage of starting a business as a private limited company.
Any one of: the owners have limited liability; the business can sell shares to raise finance for investment.
Give one disadvantage of a private limited company.
Any one of: more paperwork and time to set up; accounts must be filed at Companies House; shareholders may not agree.
Which tax is paid on the profits of a private limited company, and which on a sole trader's earnings?
Corporation tax for the private limited company; income tax for the sole trader.
Give one advantage to an entrepreneur of buying a franchise.
Any one of: support and training from the franchisor; an established, successful brand; national advertising campaigns — all reducing the chance of business failure.
Give one disadvantage to an entrepreneur of buying a franchise.
Any one of: start-up and royalty fees must be paid to the franchisor; ongoing monthly fees raise costs; little freedom to change products or branding.
True or false? A franchisee is free to run the business exactly how they wish.
False. The franchisee must follow the franchisor's rules on branding, products and operations.
Name the four 'proximity' factors that influence where a business locates.
Proximity to the market, to labour, to materials and to competitors.
Why might a business choose to locate close to its market?
So it can attract enough customers, e.g. a gym needs to be where people will join it.
Why might proximity to competitors influence a location decision?
A business may choose an area with little or no competition so it can win more customers.
Why might a business locate close to its labour supply?
So it can recruit enough workers with the right skills, and staff can get to work easily.
What is a bulk-reducing product, and where should its manufacturer locate?
A product smaller than the raw materials used to make it; the manufacturer should locate near the raw materials.
What is a bulk-gaining product, and where should its manufacturer locate?
A product larger than the raw materials used to make it; the manufacturer should locate near the market.
Where do retail businesses generally want to be located?
In busy areas close to their customers — except internet-only retailers.
What is infrastructure?
The facilities that support everyday economic activities, such as roads, phone lines and gas pipes.
How can the internet allow a small business to choose a cheaper location?
It can sell through e-commerce, so it does not need a physical retail outlet in an expensive area.
Give one location requirement that the internet creates for a business.
It needs a location with a good internet connection, as a weak signal would create barriers to communicating with stakeholders.
How does avoiding fixed premises affect a business's break-even point?
Fixed costs fall, so fewer sales are needed to break even.
True or false? All service businesses must be located close to their customers.
False. Some, such as taxi firms, must be near customers, but contact centres and web designers can locate anywhere.
What are the four elements of the marketing mix?
Price, product, promotion and place.
In the marketing mix, what does 'place' mean?
How and where the product or service is distributed to customers, e.g. in a shop, online or at the customer's home.
In the marketing mix, what does 'promotion' mean?
The methods used to make customers aware of the product and persuade them to buy, e.g. advertising or social media.
Give one benefit to a small business of having a unique selling point (USP).
Any one of: it gives a competitive advantage so customers buy from it rather than rivals, raising market share; it allows the business to add value and operate profitably.
What does it mean to 'balance' the marketing mix?
Adjusting price, product, promotion and place so they work together and suit the competitive environment the business is in.
In a highly competitive market, what is one risk of competing by lowering prices?
Rivals can match the price cut, removing any competitive advantage.
How might changing consumer lifestyles affect the 'product' part of the marketing mix?
The design may need to change, or extra features be added, so the product still meets consumer needs.
How might consumers having less money to spend affect the marketing mix?
The business may change its prices (e.g. lower them) so customers still feel they are getting value for money.
Give one impact of e-commerce on a business's marketing mix.
Any one of: place — it can sell to a much wider market online; price — it may have to lower prices to stay competitive online.
Give one drawback of using e-commerce to sell products such as clothing.
Customers cannot try the product on or check its quality first, so they may be reluctant to buy.
How can digital communication such as social media improve a small business's promotion?
It makes it easy to communicate advice and prices to customers, and customers can leave positive reviews that spread word-of-mouth recommendation.
True or false? A business can decide its price without considering the other elements of the marketing mix.
False. The elements must work together — a low price can conflict with a high-quality product or brand image.
What is a business plan?
A document setting out the business idea and how it will be run, including aims, target market, finances, location and marketing mix.
Name four things a business plan identifies.
Any four of: the business idea; aims and objectives; target market (market research); forecast revenue, cost and profit; cash-flow forecast; sources of finance; location; marketing mix.
Which financial forecasts are included in a business plan?
Forecast revenue, cost and profit, and a cash-flow forecast.
How does including a cash-flow forecast in a business plan help minimise risk?
It identifies potential cash problems in advance, so the business can plan for them.
How does a business plan help a business obtain finance?
A bank can review the figures and judge whether the business will be able to repay a loan.
Give one benefit to an entrepreneur of producing a business plan, other than obtaining finance.
Any one of: it allows them to think through each step before starting; it provides information for external parties such as suppliers (e.g. to get trade credit).
True or false? A business plan guarantees that a start-up will succeed.
False. It reduces risk by making the entrepreneur plan ahead, but it is only a forecast and may be wrong.
True or false? A business plan is only useful for people outside the business, such as banks.
False. It is also used internally to set aims and objectives and to plan each step of the business.
Give one disadvantage of being a sole trader.
Any one of: unlimited liability, so personal possessions are at risk; it is harder to raise finance; the owner carries all the workload and decisions alone.
Give one advantage of starting a business as a partnership.
Any one of: partners bring extra skills and experience; risk, workload and decisions are shared; more capital can be put in than by one owner.
What is a franchise?
An arrangement in which one business lets others trade under its brand name and sell its products or services, in return for a fee or a share of their revenue.
What is the difference between a franchisor and a franchisee?
The franchisor owns the brand and sells the right to use it; the franchisee buys that right and runs an outlet under the brand.
What does it mean that a private limited company is a separate legal entity?
In law the company exists apart from its owners, so its debts belong to the company, not to the shareholders personally.
In the marketing mix, what does 'product' mean?
The good or service itself, with the features and qualities that customers need and want.
In the marketing mix, what does 'price' mean?
The amount customers are charged, which should match the value they believe the product gives them.