1. Understanding business

2. 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

3. 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

4. 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.

5. 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.

6. 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

7. 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

8. SECTORS of industry

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

10. 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

11. Organisations owned by individuals
THE PRIVATE SECTOR
Organisations owned by individuals

12. 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

13. 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

14. “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

15. 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

16. 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

17. 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

18. 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

19. 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)

20. 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

21. 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.

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

23. 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

24. 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

25. 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

26. 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

27. 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

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

29. 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!

30. 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

31. 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

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

33. 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

34. 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.

35. 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

36. 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

37. 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

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

39. 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

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

41. 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