Business Notes
Chapter 1: Business Activity
Businesses are built on the principle of needs and wants. Needs are essential products, resources,
services, that humans must acquire. While wants are desires that are non-essential.
The economic problem is the issue of scarcity which arises from factors of productions, due to them
being limited, and human wants and needs being unlimited. This forces producers, consumers, workers
and governments to make choices on how to allocate their limited resources to satisfy as many needs
and wants as possible.
Factors Of Production:
Land: This covers all of the natural resources provided by nature and includes fields and forests, oil, gas,
metals, mineral resources, etc.
Labor: This refers to the human effort that is used in the production process.
Capital: This is the finance, machinery and equipment needed for the manufacture of goods.
Enterprise: This is the skill and risk-taking ability to bring the other 3 factors of production together to
create goods and services. Entrepreneurs take risks by initiating and managing businesses, innovating,
and driving economic growth.
As we have limited resources and many wants, we must decide which wants will satisfy and which will
not. All choices involve giving something up, this leads to opportunity cost. Opportunity cost is the value
of the next best alternative that you give up when you make a decision.
Specialization refers to focusing on a specific task, skill, or area of production to become more efficient
and effective in that particular area. By concentrating tasks based on skills and individuals they can
improve their productivity and expertise. Specialization is common due to specialized machinery and
technologies being widely available. And due to increasing profits that force companies to keep costs
low. People recognize that higher living standards can result from things being specialized.
Specialization occurs on several different levels:




On an individual level: This involves a person focusing on a specific task, profession, or skill set.
This allows the individual to gain expertise and improve efficiency (e.g. A doctor who specializes
in cardiology).
On a business level: This refers to companies concentrating on producing a limited range of
products or services. This allows businesses to optimize production processes, reduce costs, and
increase quality of their offerings. (e.g. A baker that specialize in making only artisan bread).
On a regional level: This occurs when specific geographic areas focus on particular industries or
economic activities. This can be due to natural resources, skilled labor, or regional developments
(e.g. Silicon Valley specializes in technology and innovation).
On a global level: Countries specialize in producing goods depending on their resources where
they have a comparative advantage (e.g. Sudan specializes in producing sesame oil).
Division of labor is when the production is split up into different tasks and each worker performs on of
these tasks. It is a form of specialization
Advantages Include:



Workers are trained in one task and specialize in this. This increases the efficiency and output.
Time is reduced, by not wasting it when workers move form one workbench to another.
It is quicker and cheaper to train workers as fewer skills need to be taught.
Disadvantages Include:


Workers aren’t motivated or satisfied when doing repetitive tasks, therefore reducing efficiency.
There is not much flexibility as if one person is absent then production might be halted or
affected.
The purpose of business activities is to engage in producing goods or services that meet customer needs
while adding value. They must address the issues that people have unlimited wants, and that the factors
of production are in limited supplies. They must combine the factors of production and make satisfactory
products for customers.
(Sales Revenue = Price x Quantity) + Costs Incurred (e.g. direct cost,
such as raw materials and indirect cost, such as rent) = Total Revenue
Total Revenue > Total Costs = Profit
Total Revenue < Total Costs = Profit
Purposes of Businesses:
1. Producing Goods and Services: The primary purpose of business activities is to produce goods or
services that satisfy a need or demand in the market.
2. Meeting Customer Needs: For customers, they must have a reason why to buy your product or
service. You must create a products/service that meet the needs and preferences of customers
and provide value for them. By meeting their needs, businesses can build customer loyalty,
increase brand awareness, and generate revenue.
3. Add Value: Value added features can differentiate products from competitors, creating a unique
selling point, and increasing customer satisfaction. (e.g. making products accessible, or better
designs, or higher quality).
4. Combine Scarce Factors: They must be able to allocate their limited resources, and exploit them
to get the best results.
5. Employment: Businesses employ people as workers and pay them to allow them to contribute
and produce their products.
Added value is the difference between what a business spends to produce its goods and services,
and the selling price. It refers to the enhancement that a company gives its product/service before
offering it to customers. (e.g. customers purchase more for potatoes when they as fries that they
would for a bag of potatoes). If value is not added then businesses cannot profit.
Added Value can be:


Improvement: It is achieved when businesses transform raw materials into finished products or
enhanced services. This makes the product more attractive to customers and justifies a higher
price.
Uniqueness: By adding unique features improving the quality and providing superior services,
businesses can differentiate their products from competitors.
How businesses can increase added value:
1. By increasing the selling price, but keeping the cost of materials the same. This might be
effective if the business is able to create a higher quality image for its product/service, and
convince customers to pay higher prices for the same quantity.
2. Reduce the cost of material but keep the selling price the same. This can result in higher profits
and be beneficial for business. But this is risky as it lowers the quality of the product, and
customers might not want to pay the same price for a product they believe is of lower quality.
How businesses can add value:




Convenience: Products which offer more convenient options for customers, can sell their
products at a higher price (e.g. chopped meat sells for more than a whole animal)
Quality: Customers are willing to pay premium prices for products that are of high quality
because they offer greater value and satisfaction (e.g. 4g internet is purchased more than 3g).
Design: Design adds value by enhancing the aesthetics and functionality of a product/service.
(e.g. stylish bags sell more than basic ones).
Branding: Creating a unique identity that distinguishes it from competitors, and make it stand
out, and be recognizable. Which increases customer loyalty, trust, and faith. Which increase
sales. (e.g. people are more likely to buy from McDonalds than they are to a local restaurant).
Added value is important because they pay for other costs (e.g. labor, advertisement, etc.). And they may
result in profits.
The process of adding value is through taking raw materials and using them in a way that the end
product that is created is worth more than the cost of the raw materials used to create it. Therefore,
value has been added.
Chapter 2: Classification of Businesses:
Businesses can be classified according to the type of business sector in which they operate.
1. Primary Sector Industries: It extracts and uses the natural resources of Earth to produce raw
materials used by other businesses. (e.g. farming, fishing, mining, forestry, etc.)
2. Secondary Sector Industries: It is the manufacturing of goods using raw materials provided by
the primary sector. (e.g. bread making, car manufacturing, building, construction, etc.)
3. Tertiary Sector Industries: It the providing of services to consumers and the other sectors. (e.g.
internet, banking, insurance, retailing. Etc.)
As economies grow and develop, many of the businesses within that economy will change their sector of
operation. The higher the sector, the higher the profit. The reason is that for each sector it adds more
value than the previous sector, therefore increasing profits.
The three sectors of the economy are compared by the percentage of country’s total number of workers
employed in each sector or, the value of output of goods and services and the proportion this is of total
national output. This is a result of lower participation rates in education and lack of infrastructure to
support manufacturing or service provision.
Less Developed countries contain more people in primary sectors such as farming and mining. This due
to the manufacturing industry being relatively new and just established. Most people live in rural areas
with low incomes, there is little demand for services such as transport and hotels.
Developing countries are establishing a growth in the secondary and tertiary sectors, due to the
innovating technology, and manufacturing industries rising. Many businesses take advantage of the
lower average rates in these economies by relocating their factories and employing them.
Developed countries have a very high employment rate at tertiary sector. There workforce is higher than
primary and secondary, as most people are employed in the provision of services. They use their wealth
to advance education and higher-level skills training, thus supporting the growth of these industries.
The decline in the manufacturing or secondary sector of industry is called de-industrialization. This
benefits the economy as there is a shift in the workforce from the secondary sector of industry to the
tertiary sector. This is due to their primary products or natural resources, depleting. Or due to
competition against newly industrialized countries. The countries total wealth increases as well as the
living standards. Consumers tend to spend a higher proportion of their income on services than on
manufactured products.
A mixed economy is a mix of businesses in the private sector and a public sector.


Public Sectors: They are government/state owned and controlled businesses and organizations.
The government, or other public authority, makes decision about the organization and business,
deciding what to produce and its price. Some goods/services are provided free of charge to the
consumer. The financial capital is provided by taxpayers.
Private Sectors: They are businesses that aren’t owned by governments. They are owned by
individuals who control and own the business/organization and decide what to produce, and
how to produce as well as the price. Their main objective is profit
Characteristics Of Public and Private Sector Firms:
1.


2.


Public Sector Firms:
Their main objective is to provide a service to the public.
They can operate on a local, regional, or national government level.
Private Sector Firms:
Their main objective is to maximize profit.
They are more efficient and more productive than public sectors, so that they could gain more
profit.
 The business ownership may vary from sole traders, to partnerships, to company shareholders.
Public firms are often referred to as SOEs (State-Owned Enterprises) or government corporations. They
exist to ensure public service provision, protecting strategic industries and providing national security, as
well as creating jobs, all while increasing the economy’s growth. They provide essential public services
such as transportation, healthcare, education, and electrical/water supply. They may prioritize social
welfare over profit maximization.
They may own firms operating in strategic industries, such as defence, energy, telecommunications, and
natural resources. This provides them with more control over sector that are pivotal to national security,
economy stabilization as well as long-term development.
Privatization occurs when government-affiliated firms are sold to the private sector. Most government
owned firms have been partially privatized.
Chapter 3: Enterprise, Business Growth, and Size
Entrepreneurs are individuals who identifies a business opportunity, taking financial risks, and initiating a
business venture with the aim of making profit. They take risks in the pursuit of success, creating value
for customers, and building thriving businesses.
Entrepreneurs require a unique set of characteristics and skills. They must be effective communicators,
team players/team workers, think outside the box, solve problems, and skills in numeracy as well as IT.
They must be proactive and have a vision.
Advantages of entrepreneurs:





Through independence they are able to control and decide how to allocate resources and use
time and money.
They are able to implement and make practical ideas.
Their business may survive and thrive, possibly making them famous, and successful.
The business may prosper and be profitable. This profit may be higher than being a normal
employee at other businesses.
They are able to use their personal interests and skills into the business.
Disadvantages of entrepreneurs:




They are vulnerable to risk, due to several factors, like poor planning. They will be the only liable
party.
They must put their own money and other sources of capital into the businesses. They will start
at a loss.
Lack of knowledge and depth in businesses and the market, can result in many issues.
He opportunity cost of income from having a safe job at other businesses.
Characteristics of successful entrepreneurs:




Risk Taking and Decision Making: They must be able to make difficult decisions that might be
potentially risky, or genius. They take financial, personal, or professional risks. They may also
lead to risks by venturing into new markets. These risks may reward by leading to profit, or may
lead to losses.
Creativity and Innovation: This is the ability to create and implement new ideas improving or
transforming businesses and markets. They must be able to develop new and unique ideas to
attract customers and make them stand out. This could help them in making them the only
business to develop said idea, differentiating them from other businesses.
Self Confidence and Effective Communication: They must be confidante to a send message,
convincing people of their skills and their persistence of making a successful business, as well as
motivation. Entrepreneurs are often charismatic as this helps to convey a message of their
dedication and commitment. This will help with convincing banks, investors, and customers to
support their business, thus achieving financial success.
Independency: Starting a business is risky, as the responsibility and liability is on the sole
entrepreneur, who must work with limited support, and resources. Entrepreneurs must be
motivated and must bear the weight of starting a business.
A business plan is a document containing the business objectives and important details about the
operations, finance, and owners of the new business. They are critical as at they reduce the risks
associated with starting a new business to help the owners raise finance. Thus, the business will be wellinformed about the potential problems and chance of success and can help it with selecting the
appropriate sources of finance based on the information.
Business plans help obtain finance, from lenders as they will be able to study the plan and make an
informed decision about whether the business is credible and worth the financial risk. Investors will
study the plan and explore it, to search an opportunity to increase the value of their investment and
make a worthwhile profit. Without a business plan, investors/lenders/bankers will be reluctant to lend
the money to the business, as it will be very risky to invest on a business with no clear vision.
A Business Plan Structure:







Description of the business: This provides a brief history and summary of the business, as well
as the objectives of that business.
Products/Services: It describes the products/services that a business provides, and its strategy in
developing these products/services in the future to remain competitive and grow the business.
This can include full details of the product and how it will be manufactured and distributed.
The Market: This describes the market the business is targeting as well as a marketing strategy,
and provides information about the market that include:
 The total market size
 Predicted market growth T
 Targeted market
 Analysis of the competition
 Prediction of changes and anomalies in the market in the future
 Forecast sales revenue from the product
Business location and how products/services will reach customers: This gives a description of
the physical location, internet sales, or mail order. It describes how the firm plans to deliver
these products/services to customers
Organizational Structure: It provides information about the organizational structure,
management, and details of employees required. It goes into depth of the skills and number of
employees required.
Financial Information: This is the set of information that includes:
 Sources of capital, it may include the owner’s capital, revenue, bank loans, and other
financial sources.
 Forecast costs, including fixed and variable costs,
 Forecast cash flow and working capital
 Forecast revenue
 Forecasts of profitability and liquidity ratios
Business Strategy: This explains how the business is going to operate, and how it intends to
satisfy customer needs and gain brand loyalty. It could be a summary that demonstrate how the
business will succeed.
Governments provide support to entrepreneurs, encouraging them to step up and set up new business
or take more initiative and grow their business.
Governments support entrepreneurs to:



Reduce the rate of unemployment, as new or growing businesses create jobs, resulting in a
lower rate of unemployment.
To help grow social enterprises, which may support disadvantage groups and help improve
communities, and have a positive effect on societies.
By creating new businesses, it stimulates competitiveness, which result in higher quality and a
variety of produced goods, and services. The increase of output benefits the economy., achieving
economic growth.
How governments support business start-ups:



Training: Governments host support sessions offered by experienced businessmen, who offer
advice regarding finance, operations, and marketing.
Enterprise Zones: These are geographic areas which provide tax breaks and provide low-cost
premises and incentives such as reduced business rates.
Finance: They provide businesses loans with low interest rates. As well as grants for businesses
that are creating jobs or investing in workers.
Businesses size is measured by people, to compare and asses the business through its size. Businesses
can be run by single individuals or by large firms that employ hundreds of employees. Businesses
valuation differ from one another, depending on their size
Investors and bankers would find it vital to measure and compare the size of businesses to decide where
to invest and evaluate the risk, and see how a loan might impact a business relative to its overall size.
Governments asses the size of businesses to apply different tax rates, depending on the company’s size.
Competitors measure businesses size to evaluate and compare themselves with other businesses, and
research to find out how they could improve their own business and compete with them.
Business sales are calculated using the formula (Price x Quantity)
Business output is calculated using the formula (Total Costs x Quantity)
SME’s Businesses employ less than 250 employees. While large businesses employ over 250.
Business size can be measured by a couple of ways. The common ways are, finding the number of people
employed, the value of output, value of sales, and value of capital employed. Researching on these
points to find out the size of a business, have advantages as well as limitations.
Businesses can be measured by:




Number of People Employed: This is a measure of the workers and employees in a business.
Limitation: Some businesses use production methods that employ a relatively low number of
workers, but produce high output levels. Capital-Intensive-Firms are companies that use a great
deal of capital equipment to produce their output. So, a capital-intensive-firm may employ fewer
people than labor intensive businesses, that have more employees but generates a smaller
volume of output.
Value of Output: The value of output is the financial worth of goods produced, even if they
aren’t sold. It is a common way of comparing business size in the same industry.
Limitations: High value output can be produced by business with few employees or with limited
capital employed. The value of unsold products is included, so that doesn’t clearly state their
success.
used in retailing business to compare the sales achieved.
Limitations: This could be misinterpreted when comparing the size of businesses that sells
different products The selling prices vary between markets and must cover the cost of the
product produced.
Value of Capital Employed: This the total capital invested into a business.
Limitations: This is not accurate when comparing labor-intensive and capital-intensive
production methods.
Reasons why businesses growth is beneficial:




Businesses are pursuing higher levels of market share and profit.
Owners/Shareholders/Managers continuously desire to run a larger business as it results in
higher salaries and more status and prestige.
Businesses grow to find more opportunities of economies of scale. Which results in lower
average costs, and increases the profit margins of businesses.
Business growth provides opportunities for product diversification.
Businesses are grown with the desire of having stronger market power, and becoming a
monopoly.
Businesses can expand in 2 ways:
1. Internal (Organic) Growth: It occurs when a business expands its existing operations using
reinvested profits or loans. It includes franchising, product innovation, product diversification,
and international expansion. Internal growth has its advantages. The pace of growth is
manageable, and it is less risky as the existing business already has expertise in the industry. But
there are also drawbacks. As the pace of growth can be frustratingly slow, and the business
finance may become tight and limited, as a result of the investments made.
2. External (Inorganic) Growth: It occurs when businesses are in a financial position to integrate
with other businesses. The integration is the form of merging or takeovers, it results in rapid
growth of the businesses A takeover is an acquisition of another business when the existing
business buys out the owners or buys shares to become the largest shareholders, and then
control the operations of the business. A merger is when 2 or more businesses combine to form
a new one. The assets and liabilities of both businesses are transferred to the new business.
Types of integrations and their advantages and disadvantages:
1. Horizontal Integration: It occurs when a merger or takeover is executed with a business at the
same industry, at the same stage of production.
Advantages:
 Rapid increase of the market share.
 Lower average costs due to economies of scale.
 Reducing the competition.
 Existing knowledges and experiences give an advantage, and more likelihood to succeed.
Disadvantages:
 Diseconomies of scale may occur as costs increase.
 A culture clash (a conflict between workers about value systems and organization, and working
norms), between 2 firms that have merged.
2. Vertical Integration: It occurs when a merger or takeover is executed with a business in the same
industry but at a different stage of production. Backwards vertical integration is when a business
integrates with another business at an earlier stage of production. Forward vertical integration is
when a business integrates with another business at a later stage of production
Advantages:
 The integration can increase the brand visibility.
 It adds additional profit as the profit margin made by the retailer is absorbed. Or by reducing the
cost of production as the middle man or supplier profits are eliminated.
 The quality and cost of raw material, components, and supplies, can be controlled (in backwards
integration).
 The supplier or retailer can be prevented from working with the competition.
 The integration assures the business of the quality of the products/raw materials or services of
the other business, and it can adjust it as it has control of it reducing the overall risk of bad
product.

Information and feedback from consumers is easily obtained (in forward vertical integration).
Disadvantages:
 Diseconomies of scale may occur as costs increase.
 There can be a culture clash between 2 firms that have merged.
 The difference in knowledge or lack of expertise may lead to inefficiencies.
3. Conglomerate Integration; It occurs when a merger or takeover is executed with a business that
is in a different industry (diversification).
Advantages:
 The business has activities in more than one industry, meaning the business has been diversified
and has spread its risk and allow entry into new growth markets.
 There are benefits from 2 different industries, as ideas are shared and ventures are carried out.
Disadvantages:
 Since the businesses are unrelated, there are limited opportunities for cost savings and
economies of scale.
 Managing unrelated business requires expertise between both businesses and can be complex,
and ineffective.
 There can be a culture clash between 2 businesses that have merged.
Not all business expansion leads to success. For instance, the growth of a business can fail to improve its
profitability and lead to cash flow problems as well as poor coordination.
Problems and their solutions of business growth:




Larger businesses are more difficult to control, and they might experience diseconomies of
scale, such as poor co-ordination of resources.
Solution: Businesses can operate in small units allowing for local areas managers to have
more control. Increasing the delegation in order to provide authority over workers, and get
jobs done more quickly.
Longer chains of command and spans of control lead to slower decision-making times and
inefficiency.
Solution: Using the latest innovative telecommunications and IT equipment may provide
more efficient communication.
Expansion costs may be higher than expected and lead to short finance and cash flow
problems.
Solution: The business may grow at a steady rate and use profits rather than loans, and
grow the business gradually with less risk when expanding. Ensure sufficient long-term is
available.
Difficulties when integrating with other businesses arise. Culture clash may occur as a result
of 2 different management styles, or the new implemented rules.
Solution: Introducing a different style of management with good communication with the
workforce, so they are less resistant to the changes.
Not all business growl. Some stay small, employing few people and using relatively low capital, this may
be intentional. There are several factors affecting the reasons why business stay small.
They include:



Industry: Some industries are mostly made of small businesses (such as hairdressing, car
repairs, and catering). Businesses at these industries offer personalized services and focus on
building good relationships with customers. By remaining small these businesses are able to
respond quickly to changing customer needs/preferences. In these industries it is easy for
business to set up.
Market Size: If the market (number of customers) is small, then it might be more convenient
to have more control, by keeping the business small. They’re mostly products that are in
niche markets, which have a relatively small market size but high potential for high profits.
Owners Objectives: Owners might prefer keeping their businesses small, and achieve
satisfaction and social acceptance rather than profit maximization. Some owners are unable
to access external finance for expansion, or don not want to take the risk of expansion and
fail, as it may lead to diseconomies of scale which can be avoided by remaining small.
Advantages:

Small businesses provide more specialized and customized products which are sold profitability
in small quantities at high prices.


Personal relationships are developed with loyal customers which help generate word-of-mouth
advertising.
Smaller businesses can respond quickly to market changes such as changes in fashion/trends.
Disadvantages:




Small businesses are not able to benefit from economies of scale.
Access to finance is limited due to their size.
Recruiting and retaining high quality staff is challenging as wage and benefits are relatively less
to those offered by bigger firms.
Business often struggles when they are not functioning for a short period (e.g. holidays), and rely
on constant work
All businesses are at risk of failure, both new and established businesses. New businesses are at more
risk of failure than a well-established business due to several factors.
Factors contributing to the risk of new businesses failing:





New businesses are not always financially stable or financially backed.
The lack of expertise and management skills can lead to several issues and ineffectiveness and
lead to well-established businesses to outpace them.
Poor co-ordination and inadequate market research due to lack of skills and misinterpretations
may lead to ineffective decisions.
Some entrepreneurs (especially young), might be overwhelmed by the amount and variety of
tasks needed to carry out in a new business, and may fold and turn to opportunity costs (stable
jobs).
Limited access to finance such as finance and trade credit is problematic for start-ups.
Factors contributing to business failure:




Financial Factors: A business might be unable to generate enough revenue The lack of liquidity
means that creditors cannot be paid what they’re owed. Costs mat rise sharply and eliminate the
profit margin. This can be a result of poor cashflow forecasting, or mismanaging finance.
Lack of Management Skills: Lack of experience may lead to ineffective decisions regarding
product range, price, or promotional activity, as well as handling the manufacturing process and
workforce. Entrepreneurs may be impatient, and decide based on hunches rather than market
research. Ineffective co-ordination and planning arise from lack of expertise.
External Factors: Failure to plan increases the risk of consequences of uncertainty in operating a
business. Ineffective or delayed responses to new technology, or new competitors, or economic
changes, may lead to other businesses thriving and, while the business struggles. Changes in
laws or taxation affect businesses and forces them to make difficult decisions.
Overexpansion: When a business expands quickly it may lead to issues such as diseconomies of
scale.
Chapter 4: Types of Business Organizations
Business organizations on the private sector include:
1. Sole Trader: Sole trader is a form of business organization, which is operated and owned by a
single individual. It is the most common type of organization as there are very few law
requirements to set it up. Some common examples are plumber, electricians, and taxi drivers.
There is no legal distinction between the business and the owner. People such as those who are
setting up a new business, or do not require much capital, or dealing directly with the public are
often going to become sole traders.
Legal requirements include:



The owner must register with, and send annual accounts to, the government tax office.
The name of the business is crucial, and in most countries is registered with the registrar of
business names.
In some industries, the sole trader must observe laws and gain permits to apply his business in
that industry. This includes health and safety laws and obtaining licenses (e.g. operating heavy
machinery, selling alcohol).
Advantages of sole traders:





Easy and inexpensive to set up, as there are few law regulations and simple tax arrangements.
The owner has complete control over the business, and is able to charge what they want, and go
on leave whenever as well as employ who they please.
Incentive as the entirety of the profit belongs to the owner.
Privacy is available as the business owner isn’t required to share any financial or other
information about their business.
Communication and feedback with customers is available as the business is provided directly.
The owner is able to respond directly to the customers wants and needs and requests.
Disadvantages of sole traders:



Sole traders do not have the benefit of limited liability. They are responsible for all debts owed
by the business and have unlimited liability. They are also legally responsible for any illegal acts
committed by those connected to the business. This is due to sole trader’s businesses being
unincorporated businesses. The owner may have to use their own personal assets to pay debts
and legal fees.
Limited access to finance and capital, as the business is small and banks are reluctant to lend
large amount of money to these types of businesses. The business may not be able to expand as
a result to limited capital.
If the sole proprietor is unavailable as in ill, the operations of the business are halted. The
business cannot be passed down as it has no continuity after the death of the owner.
2. Partnerships: A partnership is a group or association of at least 2 or more individuals who agree
to own and run a business together. Some common examples are law firms, accountancy
businesses, and small-scale construction businesses. When partnerships are formed, a legal
written agreement is created as to settle matters, and reduce personal risk. It is called a
partnership agreement or a deed of partnership. People such as those who wish to form a
business with other with minimal complications, or in specific professional bodies (such as
medicine and law in which some countries allow only partnerships and not companies), or
where the partners are well known, usually set up a business in the form of partnerships, as it is
the most suitable.
Deed of Partnership/Partnership Agreement contains:





The amount of capital invested in the business by each partner.
The task to be undertaken by each partner.
The distribution of profit.
The length of the partnership.
Arrangements for absence, retirements, policies, how partners could be admitted, etc.…
Advantages of Partnerships:



Easier to set up and inexpensive, as more capital is injected to the business as a result of the
number of partners. There’s more access to finance and capital.
The responsibilities and decisions are now shared, and can be assigned to the department in
which each person has the most knowledge or skill in.
Motivation occurs for the of incentive for profit, they work harder to gain profit. In addition, any
losses made by the business would now be shared by the partners.
Disadvantages of Partnerships:




There is unlimited liability, and the creditors may force the partners to sell their assets, in order
to pay business debts.
Since partnerships are unincorporated businesses, they will cease to exist if a partner dies.
Potential disputes and disagreements occur between partners. And if partners are dishonest or
have their own agendas, they might cost the other partners and themselves money.
Capital is proportional to the amount of partners present.
Incorporated business are companies that have a separate legal status from their owners, unlike
unincorporated businesses which don’t have a legal distinction from the owner and the business. An
incorporated business exists separately from the owner and continue should one of the owners die.
Incorporated companies are jointly owned by the people who have invested in the business, they buy
shares which represent part-ownership of the company. Those people are called shareholders. There are
public limited companies, and private limited companies.
3. Private Limited Companies (LTD): A private limited company is a type of business that is owned
by shareholders who buys shares, but the company cannot sell shares to the public. These
shares can be sold by the owner, usually to friends, family, or to venture capitalists. The decision
making in a private limited company lies on the person appointed to run the company, often
called the Managing Director or CEO. These businesses are suitable for people who have a family
business or partnership organizations, and wish to expand them further and reduce the risk of
their own capital.
Advantages of Private Limited Companies:




Shares can be sold to a large amount of people (they cannot be sold to the public or advertised).
The sale of shares could lead to larger sums of capital invested in the business and may result in
rapid growth of the company (if the shares are sold).
All shareholders have limited liability, meaning the shareholders cannot be forced to sell their
possessions to pay for business debts. Their liability is limited to the amount of shares or
investments they made to a business. Limited liability encourages people to purchase shares.
The owners are able to keep control of the business as long as they are the majority
shareholders. And transferring of ownership is quite easy, as they can just buy shares to become
the new majority shareholders.
A private limited company provides a more professional image and better reputation, which can
help improve their branding and help with investors and lenders.
Disadvantages of Private Limited Companies:

It is more expensive and time-consuming to set up a private limited company. As there a
significant number of legal matters that must be disputed and registered. There are 2 important
forms or documents that must be sent to the registrar of companies. These documents are
intended to make sure that the company is ran correctly ad reassure the shareholders about the
purpose and structure of the company. Once these documents are sent, they will be issues a
Certificate of Incorporation allowing the company to start trading.
 The Article of Association: This contains the rules and policies under which the company will be
managed. It includes the rights and duties of all the directors, the rules of electing directors, and
of holding official meetings, as well as the procedures to be followed when issuing shares.
 The Memorandum of Association: This contains crucial information about the company and the
directors. The official name and the address of the registered offices of the company must be
stated. The objectives of the company as well must be stated, as well as the numbers of shares
to be purchased by each director.
 For the shares to be sold or transferred, it must be approved by the rest of the shareholders. This
may make people reluctant to buy shares, as they might not be able to sell them quickly.
 The latest accounts must be sent to the registrar of companies annually, meaning members of
the public can inspect it.
 It cannot sell its shares to the public, meaning it will not be able to raise larger sums of capital
from shares, and will rely on profits.
4. Public Limited Companies: These are businesses owned by shareholders, and are able to sell
shares to the public, and trade them on the Stock Exchange. These types of businesses are most
suitable for very large businesses
Advantages of Public Limited Companies:



Significant amount of capital can be raised very quickly through selling shares. There is no
restriction or limit to the number of shareholders, as well no restriction on the buying, selling, or
transfer of shares.
This business offers even more limited liability to shareholders, as the risks are spread among
the large group of shareholders.
It raises the company’s profile and brand, increasing its visibility with customers, and potential
investors. As well as being the type of business most banks are willing to lend money to.
Disadvantages of Public Limited Companies:





The business is adhered to follow many legal formalities and financial regulations. Which can be
costly, as it requires specialist (lawyers, accountants), and is time consuming.
There are more regulations and controls over public limited companies in order to try to protect
the interests of shareholders. This includes the publication of accounts, which the public can
view.
Selling shares to the public is costly. The directors might a appoint a specialist merchant bank to
help, which will charge a commission for its services, as well as the cost of printing and
publication of prospectus.
The possibility of the original owners losing control, if there is a bigger shareholder.
Pressure from the public shareholders who will now have a say on how the business is run. As
they are expected to deliver consistent growth and profits to their shareholders.
Public limited companies host an Annual General Meeting, in which shareholders attend and vote on
electing the board of directors for the upcoming year. The directors ate given the responsibility of
running the business and taking decisions. The directors will appoint other managers, to take day-to-day
decisions. The shareholders are the owners, while the directors and managers are the ones who control
the business. The directors might run the business on their objective like, increasing status, or reducing
dividends to shareholders to pay for expansion plans. The shareholders do not have a say on these
decisions, other than by replacing the directors at the next AGM. This might give bad publicity and cause
the business to be unstable as the new directors may be inexperienced.
5. Franchising is a business in which a business/franchisee purchases the rights and license to
operate this business from a successful existing business/franchisor. The right includes the use of
branding, promotional logos, and trading methods from a franchisor in exchange for an initial
lump sum plus ongoing royalty. A franchise is not a form of business ownership, but an
alternative to starting up a brand-new business from scratch. In most cases franchisors require
businesses to operate as limited companies as this ownership is considered to have more
stability than sole traders or partnerships
Advantages to the franchisee:





The chances of the business failing are low as the franchise buys a license from the franchisor to
use a ready-made, recognized brand name, which is promoted centrally by the franchisor.
All supplies and products are provided by the franchisor.
There are fewer decisions to make than with an independent business, as the prices, store
layout, ad range of the products are decided by the franchisor.
Training for staff and management is provided by the franchisor, to ensure quality and
consistency.
Banks are more willing to lend to franchisees due to relatively low risk.
Disadvantages to the franchisee:



Royalties as well as license fees, must be paid regularly regardless of profit.
If the franchisee doesn’t follow the strict franchise rules or fails to meet quality expectations,
their franchise rights can be revoked.
Less independence as the core decisions are made by the franchisor, reducing the business
owner’s autonomy.
Advantages to the franchisors:




The franchisor receives money from license being bought, as well as royalties.
Expansion of the business is much faster than if the franchisor had to finance all the outlets.
The management of the outlets is the responsibility of the franchisee.
Supplies, required materials, or equipment are bought from the franchisor.
Disadvantages to the franchisors:

Poor management of one of the franchised outlet could lead to a bad reputation for the whole
business.
 The franchise keeps profits from the outlet.
6. Joint Ventures: It is a medium-to long-term agreement for 2 or more businesses to join and start
a new project together. A new combined business entity is formed. As risks and returns are
shared by the parties involved in the joint venture. Businesses in a joint venture are looking to
benefit from complementary strengths and resources brought to the venture.
Advantages of Joint Ventures:



Costs and risks are shared between joint venture companies, which is important for expensive
projects such as a new aircraft.
Joint ventures are less risky when entering a new market or diversification. As local knowledge
can be accesses when one of the joint venture partner companies is based in the country.
Each partner in joint ventures benefits from sharing expertise and resources.
Disadvantages of Joint Ventures:

If the new project is successful, then the profits will have to be shared with the joint venture
partner.


Disagreement may occur regarding important decisions.
The objectives of each business may change over time, or they might have different ways of
running a business, leading to a conflict of objective.
Business organizations in the public sector are a crucial part of the economy. Public sector
businesses are owned and controlled by the government and are funded through taxation. They are
usually businesses which have been nationalized. Their main goal is to provide public services such
as education, healthcare, or emergency services.
1. Public Corporation: They are businesses owned by the government, but operated by individuals
who government ministers appointed, to form a board of directors whom are given the
responsibility of managing the business
Advantages of public corporations:




Government ownership is essential for some crucial or sensitive industries, such as water, power,
and communications.
Important public services, such as TV and radio broadcasting are provided by the government.
If the industries are controlled by monopolies, then the government stepping in can ensure that
consumers are not taken advantage by privately owned monopolists.
The government can choose to nationalize industries that may be in financial trouble. This will
result in keeping the business open and securing jobs.
Disadvantages of public corporations:




Due to there not being pressure from the shareholders or competitions, there is no profit motive
which might lead to the corporations becoming inefficient and no incentive to improve.
Government can take advantage of these businesses for political agendas, such as creating jobs
just before an election.
Funding can be cut as a result of political decisions or changes of government policies, which
cause significant disruptions to corporation missions and operations.
Government subsidies can lead to inefficiencies as managers will gain a sense of protection if
they make losses, making them less motivated and work less efficiently.
In some case’s profit-making companies are partially owned or controlled by governments. They sell
shares publicly listed on stock exchanges so they are a mix of the private and public sector. Other
businesses are funded by central and local governments but may still charge small fees for services, such
as, swimming pools, street makers, and theaters. If they do not cover costs, a local government subsidy
is provided. To cut costs and reduce taxes, and increasing range of services are now being privatized,
reducing the government role in providing goods and services.
Chapter 5 Business Objectives and Stakeholder
Objectives:
Business objectives are targets that are specific, measurable, achievable-short-term targets that a
business strives to achieve. Accomplishing objectives can lead businesses to reach their aims (business
aims are long term aspirations of organizations). There are many benefits of setting objectives. Such as
giving workers and managers a clear target to work toward, helping motivate and unite people. Taking
decisions upon the fact if they are going to help them achieve the objectives or not. It helps compare the
business on how it performed and whether or not they are on the track to achieve their objectives or
not.
Business Objectives:
1. Business Survival: This is a common objective in the early stages of trading. As a business is
setting up, or the economy is moving into recession, the main objective of a business is to
survive. Competition threats the business’s very existence, making them lower prices in order to
survive (even if this lowers the profit margin).
2. Profit: Businesses in the private sector aim to ensure that the sales revenue received is greater
that business costs, therefore maximizing profit. Profit is used to overheads and returns to the
owners for the capital invested, as well as the risks taken. And it’s used to provide finance for
further investments in the business. Maximizing profit is dangerous, cause if businesses charge a
lot, then customers might not purchase from them, and it might encourage new competition to
set up.
3. Returns to Shareholders: Managers set this objective to return the investments made by
shareholders, to discourage them from selling their shares and thus protecting their jobs. As
profit increases, a share of it is paid as dividends to shareholders. Increasing the share price and
setting up ambitious aims, can encourage people to purchase more shares.
4. Growth: The owners and managers of a business may aim for growth in the size of the business
(usually measured by value of sales or input) in order to: make jobs more secure, increase the
salaries and status of mangers as the business expands, open up new possibilities helping spread
the risks of a business by venturing into new markets and new products, obtaining a higher
market share from increase in sales, and gain opportunities of economies of scale as a result of
business expansion.
5. Market Share: Market share is the percentage of total market sales held by one brand or
𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑠𝑎𝑙𝑒𝑠
business (Market Share % = 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑎𝑙𝑒𝑠 𝑥 100). Increased market share gives a business
good publicity, increases influence over suppliers, as they will be keen to sell to a business that is
becoming relatively larger than others in the industry, and it increases the influence over
customers.
6. Service to the Community: Social enterprises are run by private individuals, who have social
objectives and aim to achieve social objectives rather than maximize profit. The profit that is
gained is reinvested back into the business. These are common objectives for social enterprises:
 Social: They strive to provide jobs and support for disadvantaged groups in society, such as the
disabled or homeless.


Environmental: To protect the environment, ecosystem, and wildlife, as well as marine life.
Financial: To gain profit to reinvest it back into social enterprises to expand the social work that
is performed (e.g. charity football matches).
Businesses change objective as they grow. Once a business has survived it may aim to achieve higher
profits. Once a business has achieved higher market share, it may strive to earn higher returns for
shareholders. A profitable business, may operate in a country in which serious economic recession is
occurring, so it has the objective of survival.
Stakeholders are individuals or groups who are involved with direct interests with the performance and
activities of a business. There are internal stakeholders, who work for the business. And external
stakeholders who don’t work for the business. They are affected by the business, and affect the business.
For businesses to operate safely, they must take into account the needs and interest of its stakeholders.
Features and Objectives of Stakeholders:
1. Owners (Shareholders): Owners put their own capital to set up and expand a business. They
own entities or a portion of the company’s stock. They will receive a share of the profit from the
business. They are risk takers. They are liable for their investments.
Objectives:


Their primary objective is to maximize profits and gain a higher rate of return from their
investments.
To grow the business so that the value of their investment increases.
2. Employees: They are employed by the business. They follow the commands and instruction of
their managers, and may be provided with training to improve their efficiency. They may work
full-time, part-time, or on a temporary or permanent basis. They may be made redundant, due
to factors affecting the business.
Objectives:


To be compensated fairly and paid for their work.
To have a secure job, often looking for contracts of employment (it depends on their
performances)
3. Managers: They are employed by the business, and their job is to control their subordinates, and
the day-to-day operations of the business. They make important decisions, which could either
positively affect the business, or affect it negatively.
Objectives:




Their objective is to secure a high paying job.
They aim to have stable and secure jobs, which depend on their performances and results.
Their objective is to meet the company’s goals and objectives, to grow the business, and gain
more status.
They usually strive to maximize profit and cut costs, to ensure the company operates efficiently.
4. Suppliers: They are individuals or businesses who provide goods or services to a business.
Objectives:


Their objective is to make profit, and sell their products/services to businesses.
Their objective is to promote deals and agreements between them and businesses to ensure
their products are bought, creating long-term relationships with businesses. They can do this by
lowering the average costs, to large businesses.
5. Customers: They are the people who buy goods or services that are produced by a business.
Without enough customers a business will experience losses, and may become bankrupt. They
are studied by businesses, to find out their interests and needs (market research).
Objectives:


To acquire safe and reliable products/services of good quality.
To get value from the products they paid for.
6. Pressure Groups: They are organizations that seek to influence the policies and actions of
businesses or governments, in order to impose their agendas.
Objectives:


Their primary objective is to achieve their cause or agenda, that they want to impose on a
business. This can be done through several ways such as boycotting and protests.
They want the business to support their causes or take action on an issue.
7. Government: They are responsible for creating and enforcing rules and regulations that affect
businesses, to protect workers and consumers. They are responsible for the economy of a
country.
Objectives:



Their primary object is to promote the public good and protect the interests of citizens.
They help businesses succeed, as they create jobs, and pay taxes, which increases the countries
output, creating a stronger economy.
They impose regulations and sanctions, so businesses stay within the law.
8. Community: They are the local community who live or operate in an area in which a business
operates, or influences, and they’re affected by the business’s activities. They overall want to
create positive impacts for their people and environment.
Objectives:



To create jobs for the working population.
To protect their environment, and ensure that businesses do not harm them.
To ensure products made by businesses, are safe and reliable.
9. Banks: They are financial institution who provide loans (with interest rates) to businesses.
Objectives:


To promote their banks, in order for more customers and businesses deal with them. They can
do this by making low interest rates.
To receive interest and capital lent, from businesses.
Objectives of Public Sector Businesses:



Financial: They aim to meet profit targets set by governments. Sometimes the profit is
reinvested back in the business or it is handed back to the government as the owner of the
organization.
Service: They aim to provide public services that meet quality targets set by governments.
Social: They are set out to protect and create jobs in certain areas.
How stakeholders are affected by business activities:





If a business experiences financial difficulties, then shareholders might lose values in their
investments, and employees may lose jobs or pay cuts.
If a business is profitable, shareholders gain by receiving increased dividends and employees
may receive bonuses or promotions.
Customers can be affected by business activities, if the businesses situation is adequate it may
result in better products and pricing, if not it may result in low-quality products or higher prices
The community can be impacted socially and environmentally, by business activities and
operations.
The government can be affected by business activities in terms of tax revenue and regulatory
compliance, as well as the state of the economy.
How stakeholders affect business activities are affected by stakeholders:





Customers are crucial, as they can influence product development and pricing through their
purchasing decision and feedback.
Employees can impact business activities positively through their productivity, and skills. They
can affect it negatively through inefficiency, neglect, and mistakes.
Shareholders can impact business activities and pressure them through their investments
decisions and demands for returns.
The local community can impact businesses through regulation, permits, and social pressure.
They may form pressure groups, which can lobby for changes in policies or boycotting.
The government can impact businesses through taxes, regulations, subsidies, or penalties.
Stakeholder’s groups can have conflicting interests and objectives, which can lead to tensions and
conflicts. Managers have to compromise when deciding on the best course of action for the business, as
it may affect some stakeholders.