What is a Business?

What is a business? Any organisation involved in: Production of a good, or Provision of a service

Why businesses exist People and organisations have needs and wants A business aims to satisfy these needs and wants It tries to make a profit for itself And to earn a return on investment

Difference between a need and a want Needs satisfy our basic requirements for living: Food Water Warmth Security Shelter Wants are things we desire beyond our needs A better mobile phone A faster car

Nature of business activity Business activity refers to any part of a three-stage process INPUTS (e.g. raw materials, labour & machinery) and TRANSFORMING them into OUTPUTS (e.g. products & services) Transforming inputs is known as “adding value”

Main categories of inputs Land and natural resources E.g. fields to build factories on; energy to power factory Labour E.g. employees needed to operate machines, sell to customers Capital E.g. plant and machinery, computers, finance Entrepreneurship People who are prepared to invest in and manage a business Give business a sense of direction and energy

Products Product = anything that satisfies customer needs and wants. This can be: A “good” Something tangible E.g. a mobile phone A “service” Usually intangible Something other people do for you E.g. service you receive when you stay in a hotel

Consumer goods v Producer goods Consumed by consumers to satisfy a need or a want Made for households Cannot be used to produce more goods May create a flow of services (e.g. TV repair) Producer goods Used in production process Often to help make consumer goods Can be used to make more producer goods or consumer goods!

Examples of Consumer Goods Televisions Baked beans T-shirts Computer games Package holidays

Examples of Producer Goods Printing press Van Mechanical digger Sheet metal cutter Conveyor belt

Value Added Occurs when a business transforms inputs into outputs Value added is difference between: (1) Cost of inputs and (2) Price of outputs Adding value is way a business makes profit

What is Profit? Profit = difference between total revenues and total costs If total costs are higher than total revenues - business makes a “loss” Profit or loss of usually measured over a period of time (e.g. a year, six months) Described in an accounting statement called profit and loss account In the long-term, businesses need to make profits to survive

Costs of Starting a Business Company formation Legal bills Amounts paid to Companies House Research and development Creating product or service before it can be sold Marketing Designing business logo Advertising for first customers Promotional launch discounts Staff costs Operational set-up Equipping and setting up factory Paying first rent and rates due

Loss-making Business Has a choice (1) Continue trading and see if it can survive using existing finance (2) Raise new finance – could be difficult (3) Sell business – may be of value to a competitor (4) Close down and pay off all money it owes Most businesses will believe they can achieve first option Some businesses take many years to make their first profit (e.g. Amazon) In long-run businesses need to make a profit in order to satisfy investors

Entrepreneur A person who is willing to take a risk on a business Usually invests own money Organises elements of production within a business Driving force behind business Requires: Persistence Skill Judgement Luck