Understanding business

Topics to be covered: Role of business in society Sectors of industry Types of business organisations Objectives of business organisations External Factors Internal Factors Business Structures Stakeholders

Why do businesses exist? To survive To make a profit To provide a product/service To compete against other firms To gain a market share To provide jobs To fill a gap in the market

Why are businesses important? They provide us with goods and services to help improve our lives. They also provide jobs which creates wealth in an economy. Wealth Creation – the more business activity there is, the more goods and services produced, the wealthier the country is.

The Business Cycle Business activity is any activity which uses resources to provide goods and services to satisfy our wants. It can be affected by external factors (think PEST). Businesses also provide jobs that give earnings to enable the purchase of goods and services – this is the Circular flow of income.

Business activity does not follow a constant pattern – different industries grow and decline over time. The Business/Trade Cycle indicates wealth levels in the economy. Output BOOM SLUMP RECOVERY RECESSION Time

BOOM RECESSION SLUMP RECOVERY higher incomes, spending and investment levels rising profits, wages and tax revenues and employment levels BOOM falling incomes, employment levels and profits reduced spending and investment levels RECESSION SLUMP large scale unemployment - redundancies low spending and investment levels rising incomes/falling unemployment upturn in spending and investment RECOVERY

SECTORS of industry

Primary sector Secondary sector Tertiary sector Quaternary sector Pupil Task: Write a definition and give business examples for each sector

Sectors of the Economy PRIVATE SECTOR PUBLIC SECTOR THIRD SECTOR Sector run by individuals and groups Sector run by local and central government Sector run by non-profit and non-governmental organisations

Organisations owned by individuals THE PRIVATE SECTOR Organisations owned by individuals

THE PRIVATE SECTOR Profit making Incorporated Unincorporated LIMITED liability UNLIMITED liability Private Limited Companies (Ltd) Public Limited Companies (plc) Sole traders Partnerships Separate legal entity No separate legal entity Incorporated – united into one organisation. Can combine many parts or people into one. Limited Liability – if the business goes bankrupt you will only lose the money invested Separate legal entity - detached from another business or individual with respect to accountability Unincorporated – a business that is privately owned by one or more individuals Unlimited Liability – individual are responsible for all debts, may result in the lose of personal assets No separate legal entity – each individual is accountable for the actions of the organisation Find out what the terms in blue mean

Businesses may be “incorporated” - they are a separate “person” from their owners in the eyes of the law THE FIRM THE OWNERS Liability refers to the responsibility of the owner for the debts of the business. Unlimited liability means that personal assets could be used in situations of bankruptcy to pay debts. Case Study

“the key points – summary of Nat 5” Types of Business “the key points – summary of Nat 5” Task: Complete a mind map listing the basic features of: Sole Trader Partnership Private Limited Company (Ltd) 30 minutes

SOLE TRADER Owned by ONE person Financed by own savings and borrowing Decisions made by owner Simple to set up Unlimited liability All profit (after tax) kept by the owner Hard work

PARTNERSHIP Owned by 2-20 people Financed by own savings and borrowing (more capital) Decisions made by partners – arguments? Unlimited liability All profit split between partners – need a Partnership Agreement Shared responsibility and workload

LIMITED COMPANIES Owned by SHAREHOLDERS Financed through share issue Ltd LIMITED COMPANIES plc Owned by SHAREHOLDERS Financed through share issue Decisions made by Board of Directors elected by shareholders Limited liability Must be registered with the Registrar of Companies Must complete a Memorandum of Association and Articles of Association

Ltd and Plc - The difference … Ltd – can only sell shares to individuals with the full agreement of the existing shareholders Ltd – does not need to publish their accounts Plc – can sell shares to anyone who wants to buy them on the stock exchange Plc – accounts need to be published

Essential Differences Sole Trader Partnership Limited Company Owners Decisions Taken By: Who Provides the Funds? Financial Risk How are the rewards shared? Compare the 3 types of business (HINT use the headings as structure to your answer)

COMPARISON ANSWER Sole Trader Partnership Limited Company Owners One owner 2-20 owners min of 2 shareholders Decisions Taken By: Owner Partners Board of Directors (elected by shareholders) Who Provides the Funds? Each partner Shareholders Financial Risk Unlimited Liability Limited Liability How are the rewards shared? Owner keeps all profits Partners share profits Dividend paid to shareholders WHEREAS ON THE OTHER HAND YET BUT HOWEVER

FRANCHISES This is a “business marriage” between an existing and proven business (franchiser) and a newcomer (franchisee). The franchisee buys a licence to copy the franchiser’s business system. In return a percentage of the sales revenue is paid to the franchiser.

TASK The UK Franchise Directory lists and describes all established franchise opportunities in the UK. Log on to www.franchisedirect.co.uk or www.franchisedirect.co.uk Select a franchise and write brief notes on: an investment level <£10,000 an investment level >£100,000

ADVANTAGES FOR THE FRANCHISER They receive a share of the profits or a percentage of the sales Relatively inexpensive and easy method of expansion Corporate image becomes recognisable to the general public

ADVANTAGES FOR THE FRANCHISEE Established reputation therefore less likely to fail (a well-known brand) Training given by the franchiser Benefit from ideas of other franchisees Benefit from promotions which affect all outlets New businesses will have the support of the parent company

PROBLEMS ASSOCIATED WITH FRANCHISING Bad publicity in one area could affect the whole company Franchiser can tell the franchisee exactly what to do (limited creativity) A percentage of profit has to be paid to the franchiser

MULTINATIONAL COMPANIES A business that has branches/factories in more than one country. Benefits: Cheaper labour and premises abroad Increased market share Tax avoidance Government grants Transportation costs are cut Trade barriers can be avoided

The host country benefits from: job creation - improved standard of living increase in the country’s GDP (wealth) Introduction of new technology (technology transfer) but: can cause unemployment - put local firms out of business host resistance may not be socially responsible small governments cannot control them

Can you name six multinationals? Examples: Can you name six multinationals? Ford Sony Volkswagen Exxon General Motors Unilever

Now write out your own answer! Now lets test your knowledge so far …. Numerous football clubs have become public limited companies. Explain the reasons why organisations may choose to operate as a plc. (4 marks) Discuss the effects on ownership and control of becoming a plc. (4 marks) 8 marks = 15 minutes Now write out your own answer!

Suggested solution – question 1 Limited Liability – shareholders will only lose the money they invest – less risk Large amount of finance can be raised – this will allow for development or expansion of the business Easier to borrow money – lower risk to investors Additional capital will make it easier to expand – allows the club to be more dominate/successful Economies of scale – lowers production/running costs

Suggested solution – question 2 Anyone can own shares in a plc as shares are available to the pubic Ownership lies with the shareholders who are entitled to vote Shareholders can sell shares and the ownership changes A shareholder with the majority of shares has the most power Board of Directors run the company Board of Directors are elected by shareholders

“Organisations accountable to Central or Local Government” THE PUBLIC SECTOR “Organisations accountable to Central or Local Government”

Who makes the decisions? Who owns it? The Government Who makes the decisions? Government elected ministers Who provides the funds? Government funds from taxpayers How are rewards shared? What rewards?? Government tends to supply services rather than produce goods. Eg NHS, schools, community centres, street lighting

GOVERNMENT-FUNDED SERVICE PROVIDERS National Health Service Social Security Defence These are services that the private sector would be unlikely to offer in a way that the government would find acceptable.

PUBLIC CORPORATIONS Separate legal identity from their owners (Government) minister appoints a Chairperson and Board to run the organisation Board has overall responsibility for policy and is accountable to the minister Eg BBC, Bank of England, Royal Mint, Scottish Water Authority

QUANGOs (Quasi Autonomous Non-Governmental Organisations) Suppliers of specialist services Many rely on Government funding Accountable to different Government Departments depending on their area of specialism Examples - SNH (Scottish Natural Heritage), Scottish Enterprise, Visit Scotland, SQA, SportScotland https://www.youtube.com/watch?v=9kuD5NGMWsA http://www.telegraph.co.uk/news/politics/8063628/Quango-reform-full-list.html

LOCAL AUTHORITIES Provide government funded services for the local area Funded from grants, council tax and from users fees Eg Highland Council provides education, housing, roads and transport, leisure services, street lighting and refuse collection

THE third SECTOR “social activity undertaken by non-profit or non-governmental organisations”

Organisations that are: regulated by Government (Register of Charities) exempt from paying some taxes run by paid professionals (along with a committee of volunteers – Treasurer, etc) assisted by volunteers Funded through donations, grants, membership fees, fundraising, profits from shops/mail order

They aim to: relieve poverty advance education fund research (eg into various medical conditions) carry out beneficial activities in society

Social Enterprise can exist in all 3 sectors Paired Task: Bright RED clips can exist in all 3 sectors Paired Task: What is a social enterprise Find examples of social enterprises Costs and benefits of a social enterprise Present your findings in a poster/leaflet