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Exam Date: 24th May 2017 Key Terms to Revise Businesses Goods-are physical items like a can of baked beans, litre of petrol, an x box 360 or a watch. Service- are non-physical products like a haircut, a bus journey, a lesson in a classroom or a consultation with a doctor. Understanding customer needs Market research- the process of gaining information about customers, competitors and market trends through collecting primary and secondary research. Primary research- the gathering of new information i.e. first-hand information. Examples are questionnaires, interviews, focus groups and observations. Secondary research- the process of gathering secondary data, which is information that has already been gathered, i.e. 2nd hand information. Examples are newspapers, internet, magazines, and books. Qualitative data- information about opinions, judgments and attitudes. For example I think red is a nice colour. Quantitative data- data that can be expressed as numbers and can be statistically analysed. For example 5/10 people like red or 50% of people like red. Market mapping Market Mapping- helps businesses to identify market segments and position their products through identifying gaps in the market. Market segment- part of a market that contains a group of buyers with similar buying habits, such as age or income. Price sensitive- when the price is very important in the decision about whether to buy or not to buy. Gap in the market- occurs when no business is currently serving the needs of customers for a particular product. Competition Brand- a named product which customers see as being different from other products and which they can associate or identify with. Ways to compete: Better design Better product features Higher quality More enjoyable experience Lower prices Added Value Added value- the increased worth that a business creates for a product. It is difference between what the business pays its suppliers and the price that it is able to charge for the product/service. Ways to add value: USP Better design Improved quality Branding More convenience Unique selling point (USP) - a characteristic of a product that makes it different from other similar products being sold in the market such as design, quality or image. Franchising Franchise- the right given by one business to another to sell goods or services using its name. Franchisor- the business that gives franchisees the right to sell its product, in return for a fixed sum of money or a royalty payment. Franchisee- a business that agrees to manufacture, distribute or provide a branded product with the permission of the franchisor. Benefits of a franchise for franchisee: Training given to franchisee Equipment given to franchisee Materials given to franchisee Help finding customers A brand name Exclusive areas to trade Disadvantage to franchisee: The initial investment can be high and not easily affordable The franchisee cannot sell the business without the permission of the franchisor The franchisor in some cases can end the agreement without giving a reason or paying compensation. Enterprise Entrepreneur- a person who owns and runs their own business and takes risk Enterprise- another word for business Enterprise Skills: Risk taking Showing initiative Willingness to undertake new ventures Thinking creatively Thinking creatively-coming up with new and unique ideas Lateral thinking- thinking differently to try and find new and unexpected ideas. Blue skies thinking- a technique of creative thinking where participants are encouraged to think of as many ideas as possible about an issue or a problem Invention and innovation Invention- the discovery of new processes and potential new products, typically after a period of research. Innovation- the process of transforming inventions into products that can be sold to customers. Patent- right of ownership of an invention or process when it is registered with the government. Copy right- legal ownership of materials such as books, music, films which prevents these from being copied by others. Trademark- the symbol, sign, or other feature of a product or business that can be protected by law. Objectives Financial objectives- targets set by a business which is expressed in money terms such as making a profit, earning income or building wealth. Non-financial objective- a target set by a business that does not involve money such as helping other, personal satisfaction, independence and control. Qualities shown by entrepreneurs Planning Initiative (being pro-active) Taking Risks Determination Making Decisions Persuasion Leadership Luck Marketing Mix (4 Ps) Marketing mix- the combination of factors that help the business to take into account customers needs when selling a product. Also known as the 4Ps Price, Product, Promotion and Place. Price- how much it cost for customers to buy the product Product- the good or service the business is selling Promotion- Making the customer aware of the business and its product. E.g. advertising. Place- where will the product be sold, how will it get there. Customer Focus Understanding customers and focusing on their needs is vital if a business intends to attract people to buy their product. There are three stages of being customer focused: 1) Identifying needs of customers 2) Anticipating the needs of customers e.g. if it’s hot customers may want a cool drink 3) Meeting customer needs Business Ownership Unlimited liability- a legal obligation on the owner of a business to pay off all the debts of the business. The owner could lose their personal property (car, house etc) in order to pay off the debt. Limited liability- The most that the owners of the business will lose is the amount of money that they invest in the business. So if owner invested £20 in the business that’s all they can lose. They will not lose their personal property to pay off the debt. Three types business ownership: Sole trader- the business is owned by one owner. Unlimited liability for debts. Partnership- the business is owned by two or more people. Unlimited liability for debts. Companies- businesses whose owners have limited liability. Taxes VAT (value added tax)- a tax on the value of sales. It is paid by the business to the government. Income tax- a tax on the income earned by workers. National insurance contributions- a tax on the earning of workers. Business takes it from the employees pay and give it to the government. Sole traders have to pay this tax themselves. Corporate tax- a tax on the profits of a company. Sole traders do not pay this tax because they are not a company. Recruitment and training Recruitment documents: Job description- document that describes the duties of a worker and his or hers status in the business. Person specification- a profile of the type of person needed for the job- their skills and qualities. Application form- document to be filled in with persona details. Curriculum Vitae (CV)- a brief list of the main details about a person, including name, qualifications and experience. Draw up recruitment documents Receive applications Shortlisting Selection Training Employment legislation Employers must abide by laws that protect employees in a number of areas: Recruitment- employers cannot discriminate on the basis of sex, age ,gender or disability Pay- employees must be paid equally for doing the same job. Discipline- employees are protected from unfair dismissal Working hours- employees cannot be expected to work over a certain number of hours. Demand and Supply Commodities- raw materials such as coal, oil, copper, iron ore, wheat, soya. Demand- the amount consumers are willing and able to buy at any given price. Supply – the amount sellers are willing to offer for sale at any given price. Shortage- when the demand for a good or service is greater than the supply. When a shortage exists, prices will tend to rise. Surplus- when the demand for a good or service is less than the available supply. When a surplus exists, prices will tend to fall. Interest Rates Economy- the amount of buying and selling that takes place in a country. Interest rates- the cost of borrowing money. The higher the interest rate the more money you will have to pay back on the loan or credit card. Variable interest rate- interest rates that can change over the lifetime of a loan depending on what is happening to the economy. Fixed interest rate- interest rate that stays the same throughout the life time of the loan. Exchange Rate Exchange rate- the exchange rate is the price of buying a foreign currency. It tells you how much of the foreign currency you will get for every pound or how many pounds you have to give up to acquire a foreign currency. Exports- an export is the sale of a good or service to foreign buyer that leads to a flow of money into the UK. The foreign buyer will have to change their currency into pounds to complete the purchase. Import-an import is the purchase of a good and service from a foreign business that leads to a flow of money out of the UK. The UK buyers will have to change pounds into the sellers currency to make the transaction. The effect of a fall in the value of the pound: Good for UK exporter of Goods-prices of export falls-sales increase. Good for UK tourism-prices cheaper to foreigners- tourism increases Good for UK businesses-import more expensive-people buy more UK goods Bad for UK importers of materials-imports more expensive-cost rise The effect of a rise in the value of the pound: Bad for UK exporters of goods-price of exports rises-sales fall. Bad for UK tourism-prices more expensive to foreigners-tourism falls Bad for UK businesses-imports cheaper-people buy fewer UK goods Good for UK importers of materials-imports cheaper-costs fall The Economy Economic activity- the amount of buying and selling that takes place in a period of time in a country. Business cycle- fluctuations (rises and falls) in the level of economic activity over a period of time. Most economies experience times when economic activity is rising and others when economic activity is slowing. Recession- a situation where the level of economic growth is negative (state of decline) for successive financial quarters. During recessions there is an increase in unemployment and the cost of living might increase. Boom- where there’s a lot of economic activity and the economy is doing well. During these periods there is low unemployment and people have lots of money to spend. Stakeholders Stakeholders- an individual or a group which has an interest in and is affected by the activities of a business; stakeholders have an interest in how the business operates and whether or not it is successful. For example workers, suppliers, governments, managers, customers. Revenue and Cost Revenue or sales or Turnover- the amount of income received from selling goods or services over a period of time. Total revenue (total money raised from sales)= Price x Quantity Sale volume- the number of items or products or service sold by a business over a period of time. Fixed costs- costs that do not vary with the output produced (the amount of products a business makes or sell), such as rent, business rates, advertising cost, insurance, administration cost and salaries. For example even if a business sells 1 or a million products they still pay the same rent. Variable cost- cost which change directly with the number of products made by a business such as the cost of buying raw material. For example if you make 1 pizza you use less raw material than if you make 1 million pizzas hence the amount of cost will be different. Total cost- all the cost of a business; it is equal to fixed cost plus variable costs. Total Cost = Fixed Cost + variable cost Profit- money left over once all cost has been taken away from money earned. Profit/Loss = Total revenue – Total cost Cash flow Money going in and out of a business. Cash flow Forecasting Predicting the flow of money in and out of a business. Businesses do this to try and anticipate times when they might struggle financially. If they predict they might have trouble financially they can take out a loan, make cut backs to workers or try to reduce spending in other areas. Why is Cash flow important? Without sufficient cash within the business a business would go insolvent. This means that it would not be able to pay its debts, pay wages, promote the business or buy raw materials and products to sell. Business Plan A business plan is a plan for the development of a business, giving forecast of items such as sales, costs and cash flow. Business owners may write a business plan to: Convince a bank to loan the business money Forecast financial projections Identify needs of customers provide owner with a plan of action What goes into a business plan? Overview- name, location, type of business Objectives- what the business hopes of achieve Market research Personnel- who works for the business Finances- source of finance, cost, cash flow, profits Production- information on suppliers Obtaining Finance Long term sources of finance, sources that do not need to be paid back within a year such as: Share capital (for limited companies only, not sole traders) Personal savings Venture capital Grants Loans Leasing Short term sources of finance, sources that are repaid immediately or fairly quickly, usually within a year such as: Bank overdraft Trade credit Credit Card Factoring