GCSE
Business Studies
Unit 1
Examination, 45 Minutes
25% of Final Grade
Revision Guide
Notes about your Exam Paper
All the questions are multiple choice questions although
one or two questions will require mathematical calculations –
for example completing a cash flow forecast or calculating an
exchange rate.
The paper is 45 minutes long and there are 20 questions.
The questions will ask you to select the correct answer. The
question will either say:
Select ONE answer (from 4 possibilities)
Select TWO answers (from 5 possibilities)
Select THREE answers (from 6 possibilities)
For question 20, you will have to match some terms to
their definitions.
Some parts of the exam paper will provide some case study
materials (approximately 4-5 lines of information), then
questions that follow will relate to the case study. You MUST
read the information carefully before answering.
If you don’t know an answer, have an educated GUESS!!!
Topic 1.1 – Spotting a Business Opportunity
Businesses
Businesses make goods and services.
Goods – are physical products
Services – are non-physical products
Businesses deal with suppliers and customers. Businesses deal in different
markets. This is where buyers and sellers exchange goods or services.
When setting up a business there is a lot of things to think about:
 Is there an opportunity for the business? Will customers buy the product?
 Finance. Is there enough money to start the business?
 What will have to be bought to get the business up and running?
 Are there any legal aspects to think about? (Health & Safety, insurance)
Understanding Customer Needs
Customer needs are central to starting a business. Finding this out is done by
market research. There are two types of market research primary and
secondary.
Primary (Field) Research
Primary or Field research is research that no one has collected before. It can be
done in many different ways;
 Survey
 Questionnaire
 Focus Group
 Observations
Advantages
Can ask questions you want to
Will find out exactly what you need to
know
Disadvantages
Time Consuming
Expensive
Secondary (Desk) Research
Secondary or Desk research is information that already exists. It can be found in
many different ways;
 Telephone directory
 Internet
 Local Newspapers
 Market reports
Advantages
Quick to find
Cheap
Disadvantages
Might not find exactly what you are
looking for
Other businesses can collect same data
Research collected can be Qualitative, which is information about opinions,
judgements and attitudes. It can also be Quantitative, data that can be interpreted
in a numerical way.
Market Mapping
Business analyse the market by considering:
 Who will the potential customers be?
 What sort of products will they buy
 What sort of prices will customers be willing to pay?
 When would they want to use the business?
 How frequently would they use the business?
The potential market can be segmented (split up) into many different categories:
 Age – children, teenager, ‘twenty-something’ etc.
 Gender – male or female
 Income – low income, middle income or high income
 Area – England, Scotland, Wales OR Yorkshire, Lancashire, Midlands
 Ethnicity – White, Chinese, African etc.
 Socio-economic group – working class, middle class or upper class.
Businesses can be placed on Market Map to help see the position of the business in
a similar market:
High Price
Basic Quality
High Quality
Low Price
Market mapping can be used to see if there is a gap in the market.
Competition
Analysing the competition
All businesses, especially new businesses need to recognise their competition.
They will do this by investigating into them and researching different elements:
 Product Range – What products the competitor offer
 Quality – How good the quality is of the product
 Design – The design of the product (simple, elaborate)
 Selling experience – How good the customer service is
 After Sales Service – Refunds and exchanges offered
 Price – How the products are priced, cheap or expensive
 Brand Image – Are they a well known company
Businesses also need to know the strengths and weaknesses of their competitors.
Some examples could be; Location, Pricing, Customers, Reputation.
From the strengths and weaknesses researched, businesses can make decisions for
their own businesses to make the customers happy.
Added Value
Added Value is the increased worth that a business creates for a product – it is the
difference between what a business pays its suppliers and the price which they are
able to charge for the product/service.
Added Value is important in the business survival and success. Value can be added be
a number of different ways:
 Quality
 Design
 Convenience
 Speed and quality of service
 Branding - Creating a brand name helps business and products stand out
 Unique Selling Point (USP) – What makes it different from other products
Franchising
Franchise - the right given by a business to another to sell goods/services using its
name e.g. McDonalds, KFC
Franchisor – people who gives franchisee’s the right to sell product/service under
their name. They take a fixed amount of money from the franchisee
Franchisee – a business that sells a branded product/service under another
business name
Benefits of a Franchise
 Training – is given by the franchisor to ensure all businesses are selling in
the same way
 Equipment – Franchises provide equipment as part of the fixed payment
 Materials – Franchisors sell materials and products to the franchisee to
make sure they all sell the same product
 Finding customers – Franchisors advertise for the business
 A Brand Name – customers will recognise the name and buy from the
business.
Advantages for Franchisee
Suitable people are selected to
help the business be successful
Told exactly how much money
you will need to start up
Know the franchise name is
successful
Receive ongoing support from
franchisor
Disadvantages for Franchisee
Initial investment can be high and may not be
affordable
Limited freedom – have to check the selling of
the business with the franchisor
Franchisor can end the franchise arrangement at
any time
Choosing the right franchise is VERY important
– some could be more successful than others
Location – Location is VERY important for the success of most businesses. It has to
be somewhere the customers can access and busy enough to survive.
Topic 1.2:
Showing Enterprise
Entrepreneur
An entrepreneur is someone who owns and runs their own business. They are
risk takers. People who run their own business either sell a product or a service. A
product or “goods” are items that are tangible – they can be seen and touched.
Examples of goods or products are a TV, an MP3 player, and a football boot. A
service is something that is provided for a customer that is intangible – it cannot be
actually touched. An example of a service is a hair cut, cooking a meal in a
restaurant, and cleaning windows.
Enterprise Skills
There are three key enterprise skills:
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Being willing to take a risk
Showing initiative
A willingness to undertake new ventures
Thinking Creatively
Entrepreneurs have to come up with ideas about what goods or services to sell.
These ideas may be more successful if they are unique. Entrepreneurs use
deliberate creativity to stimulate their thinking about new ideas. These are
methods that can be used to think creatively:

Lateral thinking: thinking “outside the box” by producing ideas that no-one
else has thought of

Blue skies thinking: this is where you start with an idea or a question and
then write down every word or phrase that comes to mind. These ideas are
then used to help come up with a new idea

Six Thinking Hats: this method is used to try and organise your ideas
about a particular topic. The hats are six different colours – white (what is
the problem?), Red (How do you feel?), Black (what will be the problems?),
Yellow (What are the positive elements?), Green (can we be creative?) and
Blue (Will it work?).
Questions to be asked before setting up a business
Before deciding to set up a business, an entrepreneur needs to consider whether or
not the idea will work in practice. Questions they might ask themselves are:
 Why do I want to set up my business?
 What will be the disadvantages?
 What shall I do?
 Where will I locate my business?
 When shall I start up?
 Where will I get the money from?
 How will I carry out market research?
 Where can I get help?
Invention
Invention is the discovery of a new product or new ways of making products. James
Dyson invented the Dyson vacuum cleaner which had a different type of suction that
was more effective than the old vacuum cleaners.
Innovation
Innovation is the process of transforming an invention into a product that customers
will buy. James Dyson transformed his idea for a new vacuum cleaner and sold it to
the general public. This is an example of innovation.
Risk
Inventions and innovations are very risky. Many ideas fail and there is always the
danger that your ideas will be copied. This is why inventors protect their ideas.
Inventors can protect their ideas through a patent. Anyone copying a patented idea
can be take to court and sued for damages by the inventor. In the UK, patents last
for 20 years.
Anyone who creates films, music or books can protect their ideas through
copyright. Copyright gives the right to produce, control and copy the work solely
to the individual that originally protected the work. If others copy the work, they
may be taken to court and sued. Copyright lasts for the author’s lifetime and for 70
years after they are dead.
Businesses can also protect their business name or logo through a trademark. A
trademark is the name of a product or a business that cannot be copied. Coca Cola
is registered as a trademark.
Taking a calculated risk:
Risks and Rewards
Before setting up a business, an entrepreneur must asses the risk involved in setting
up the business. Potentially they may lose all their personal savings that they
invested in the business so they must be sure that their decision to set up the
business is the right one. An entrepreneur will therefore assess the upsides and
downsides of an idea before making a decision.
Downsides
Downsides are things that could go wrong with a venture. They are the risks
involved in setting up a business. Possible downsides to an idea might be:

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I might not get enough customers
I might not make enough profit
It might cost me too much to set up
Someone might copy my idea
Upsides
Upsides are the things that might go well with a venture. They are the rewards
involved in setting up a business. Possible upsides to an idea might be:

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I might sell large numbers of products and make a lot of money
I could buy in bulk from my suppliers and get a discount
I could get financial help from my family to help me get started
People who run their own business must look at a new idea or venture and decide
whether or not it is worth carrying through the idea. They must assess the possible
risks and rewards, and then make a decision whether or not the idea is feasible.
Entrepreneurs make mistakes and sometimes their ideas do not work. However,
they learn from their mistakes. James Dyson learned quickly to protect his ideas
through patents so that other people could not copy his innovative ideas.
Enterprise Skills
To be successful in business, you need the following enterprise skills:

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Being able to see new opportunities
Being a good planner
Being able to think ahead
Having the drive and determination to succeed
Entrepreneurs use mindmaps to collect their thoughts and help them see new
opportunities.
Topic 1.3 – Putting a Business idea into Practice
Objectives when starting up a business
Financial Objectives
 Profit and income – All businesses want to have an income to cover costs,
and eventually make a profit
 Wealth – A successful business does not only mean that that owners earn
money – but also become wealthier
 Financial Security – This is a long term objective, if someone owns a
business they have security knowing that they will earn profit (if they worked
for someone they could be made redundant)
Non-Financial Objectives
 Personal Satisfaction – Feeling proud and a sense of satisfaction
 Challenge - Starting a business from scratch is a huge challenge
 Independence and Control – being own boss, flexibility, not having to ask
anyone to be able to do something.
 Helping Others – Helping charities be successful (advertise)
The Qualities shown by an Entrepreneur
Determination – Taking control, it is linked with commitment. Never giving up
Initiative – making the first move, spotting opportunities and using them. Making
things happen
Taking Risks – It is a risk starting your own business, it could fail or succeed. Some
examples are borrowing a lot of money from the bank or that the business could
under perform
Making Decisions – Being a successful decision maker means being good at making
judgement
Planning – They need to know what they want to do with their business and how
they are going to get there. This is why aims and objectives are set.
Persuasion – Good entrepreneurs are able to persuade others to do what they
want to do
Showing Leadership – Having leadership skills and taking charge. Entrepreneurs
have to have self confidence-they have to believe in themselves.
Luck – Some businesses need luck- entrepreneurs need the skills to preserver if
they have no luck.
Estimating revenues, costs and profits
Estimating Revenue – Revenue is the amount of income a business will earn over
a period of time like a week, month or year. An estimate will be made up of the
money received form each product/service sold. The prediction is;
 How many products/services will be sold (sales revenue)
 What is the average price for each product/service
So………
Total Revenue = Price x Quality
Can also be……
TR
=
P x Q
Estimating Costs
There are a number of different costs a business has to consider, these are placed
into two categories;
1. Fixed Costs – Costs which do not change e.g. fixed wage, fixed bills,
insurance
2. Variable Costs – Costs which do change, because of the amount of
product/service produced e.g. materials (the amount ordered could change)
fuel (if the business has to travel further)
So…..
Total Costs = Fixed Costs + Variable Costs
Can also be……
TC
=
FC
+
VC
Price, Cost and Profit
The price a business charges for a product/service has to cover the costs. If £100
was charged and the costs were £90 the business has made a profit. If the costs
were £110 the business has made a loss.
Total Revenue, Total Cost and Profit
Profit is the difference between the total revenue and the total costs for the week;
Profit or loss = Total Revenue – Total Cost
e.g.
Loss
Profit
= £100 - £110
= £100 - £ 90
Impact of Profit and Loss
By estimating the outcome of a business it is a ‘guesstimate’ of whether the business
would make a profit or loss. Many factors could change to alter this;
 Price of petrol could go up
 Materials / suppliers may put prices up
 Insurance might be higher
 Amount of products sold might decrease
 Competition might make the price of product/service be lowered
 Interest rates on bank loan could go up
 Economy took a downturn and customers couldn’t afford to purchase
product/service
If businesses continue to make profit it can survive, it also means the business can
expand. If the business continues to make losses, eventually the business would be
forced to close.
Forecasting Cash Flow
Cash is vital for the success of any business. It has to be monitored to ensure the
business it making a profit and not a loss.
The importance of cash – if a business did not have enough money to pay bills
then the suppliers would not deliver products, therefore the business would have
nothing to sell and the business would make a loss. The business would be
insolvent.
Cash flow – This shows the flow of money in and out of the business;
Jan (£)
Receipts/Inflows
Sales
600
Cash
1,000
Loan
Total Receipts
800
2,400
Payments/Outflows
Equipment
200
Wages
200
Bills
400
Interest
100
Materials
Advertising
1,200
100
Total Payments
2,200
Net Cash Flow
200
Inflows (Receipts)
Cash from
sales
Loan
from bank
Cash from
savings
Cash Inflow
Outflows (Payments)
Cash Outflow
Bills
Materials
Interest on
the bank
loan
Wages
Equipment
Advertising
Cash flow forecast
This is planning ahead to ensure the business has enough money to survive each
week/month. Cash Flow Forecast shows a prediction of the profit and loss for the
business.
Opening Balance – the cash balance at the start of the month
Closing Balance – the cash balance at the end of the month
Cumulative cash flow – the sum of cash that flows into the business over time
Week 1 Week 2
Week 3 Week 4
15
15
15
15
Paper Round
Total Cash Inflow
PAYMENTS:
30
45
16
31
20
35
31
46
Bus Fares
School Money
10
15
10
15
10
15
10
15
CD’s
Present
Total Payments
15
15
5
45
15
15
40
40
Balance at start of month 10
(Opening Balance)
15
1
-4
Balance at end of month
(Closing Balance)
1
-4
2
RECEIPTS:
Pocket Money
40
15
Cash flow problems
A cash flow forecast can tell you if there is going to be some problems and which
months it will be. These can be prevented by;
 Increasing sales revenue
 Reducing Costs
 Putting more of own money into the business or getting bigger bank loan
Affects on cash flow
There are different things that can affect how much cash comes in and how much
goes out;
 Sales can change – some seasons can be busier than others
 Costs can change – bills could increase or the cost of materials could be
more expensive
 Credit terms can change – When the suppliers are paid could change
 Stock levels can change – Stocks are materials held by a business. If a
business held too much stock and didn’t sell it the business has paid for stock
but not receiving money for selling the materials
Importance of planning
The main rule ‘GET IT’;
Get the help and support of the bank and investors
Ensure market research is thorough
Thoughtful cash flow planning may avoid problems
Investigate where you can get help with spreading payments more evenly
Track the actual cash flow against the cash flow forecast before problems occur
The Business Plan
Purpose of a Business plan – This is a document which puts together all the
information showing how a business might survive in the competitive world. It is
important for two reasons;
1. It will help see all the aspects that have to be thought about to help the
business survive
2. It will help the bank manger and others helping the business see how they
intend to be successful
Contents of a Business Plan

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Name of the business, brief history, its location and legal structure
What equipment would be needed and cost
What premises would be needed
Who the suppliers would be
The product they plan to sell and the market research carried out
How would the product be advertised
What total costs and revenues of the business would be
A cash flow forecast for the first 12 months
The sources of finance planned to be used for the start-up of the
business
Obtaining Finance
Getting Started - From a business plan owners can see how much finance they will
need to start up their business; they also need to consider day-to-day expenses such
as;
 Wages for staff
 Bills such as electricity, water and gas
 Rent for the premises
 Any materials for the product
Long term sources of finance

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Share Capital – investors who buy shares in the business
Loans – theses can be obtained form the bank, they are secure and need to
be paid back with interest
Retained Profit – Once the business is up and running profit will be made
and this is put back into the business
Leasing – Some businesses use equipment or vehicles that can be rented
from another business. The leasing company pay form servicing and repairs.
Grants – Some businesses can be eligible for a grant. These can be from
charities such as Princes Trust; they can also come from the government.
Short term sources of finance

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Bank Overdraft – The businesses can use more money that is in their bank
account. This has to be arranged with the bank and paid back.
Trade Credit – suppliers usually will allow a period of time before the
supplies have to paid for
Factoring – A factor is a financial service company like a bank. They pay
invoices for businesses and then charge interest. This is not suitable for every
company.
Topic 1.4: Making the Start-up Effective
Customer Focus
A business can only survive if it has customers. A business must have enough
customers that are willing to pay a price that will make a profit for the business. To
be successful, a business must:

Identify customer needs – firms need to find out what their customers
like and dislike so they can produce a product or provide the service that
customers want.

Anticipate needs – firms must look ahead and anticipate what might
happen in the future. For example, fashion retailers must keep up with all the
latest fashions and anticipate what customers are going to want to buy next
season

Meeting customer needs – having identified and anticipated customers’
needs, firms must then make the product to meet those needs. In this way,
the business will maximise their profit.
The Marketing Mix
The marketing mix is the combination of factors that a business must consider when
launching a new product or service. There are four elements to the marketing mix:

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Product
Price
Place
Promotion
Product
Businesses must carry out market research to find out what customers like and
dislike. They must then design and produce a product that meets their customers’
needs.
Price
The price a business charges must reflect the value that the customer places on the
product. A business may produce a low cost necklace made of cheap materials and
sell this at a cheap price. Alternatively, a firm selling a gold necklace will charge a
higher price.
Place
Businesses must decide the best method of distribution to use in order for
customers to be able to buy the product/service they are selling. Distribution
methods include:

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Retailers (eg Boots)
Wholesalers (eg Macro)
The internet
Market stalls
Mail order catalogues
Promotion
Customers need to know that a product or service exists and is available to buy. A
business must therefore advertise and promote their products. Methods of
advertising might include:

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TV
Newspapers
Magazines
Billboards
Leaflets
Businesses can also use promotional methods such as:

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
Buy one get one free (BOGOF)
Discount vouchers
Sponsorship
The decisions made about the marketing mix will depend on the situation. For
example a new business would not be able to afford TV advertising; they are more
likely to use cheaper methods such as local newspapers and leaflets. A large
company such as Coca Cola however, have huge funds available and will use national
methods of advertising such as TV.
Business Ownership
Sole trader
A sole trader or sole proprietor is owned by one person. They make all the
decisions about running the business and they keep all the profit. They usually use
their own savings to start up the business and may get a bank loan. Sole traders
have unlimited liability. Sole traders are easy to set up but are risky because the
owner may lose their personal possessions if the business goes into debt.
Partnerships
Partnerships have 2-20 partners. The partners share the decision making and share
the profit the business makes. They usually use their own savings to start up and
may get a bank loan. Partnerships have unlimited liability. Partnerships are fairly
easy to set up but the partners risk losing their personal possessions if the business
goes into debt.
Private Limited Company
Private limited companies are owned by shareholders who invest their savings and
buy shares in a company. The shareholders are the owners of the company and
receive a share of the profit each year. The share of the profit is called a dividend.
Shareholders, however, do not run the company. They elect a Board of Directors at
the AGM (Annual General Meeting) and the directors run the company on a day-today basis. The shareholders in a company have limited liability – their personal
possessions cannot be used to pay off any company debts.
Unlimited and Limited Liability
Sole traders and partnerships have unlimited liability. This means that if
their business goes into debt, if necessary they would have to sell their personal
possessions to pay the debts.
Shareholders who are the owners of companies, have limited liability.
This means that if the company goes into debt, the shareholders’ personal
possessions cannot be sold to pay the debts.
Start-up and Legal Issues
It is important for a business to have a unique trading and business name. It often
reflects the type of business. Some firms have a trademark that cannot be copied
eg Coca Cola, Marks & Spencer.
It is essential that businesses keep very careful records of all the business
transactions. Taxes must be paid to HMRC (Her Majesty’s Revenue and Customs)
and this organisation expects businesses to keep very careful records of all their
income and expenditure. A new business must register to HMRC to let them know
that they are trading.
Income Tax
Income tax must be paid by all sole traders and partners. It is a tax on their
earnings. Any employees working for these businesses must also pay income tax.
Income tax is a tax on the amount of money you earn. The more you earn, the
more tax you have to pay to HMRC.
VAT
If a small business receives more than £67,000 a year in sales revenue, it must charge
VAT to all its customers. The current rate of VAT is 17.5% and this must be added
on to every product/service sold. A small business that receives less than £67,000 a
year in sales revenue has an advantage over a larger business because they do not
have to charge VAT and therefore their prices will be cheaper than their rivals. This
gives a small business a competitive advantage.
National Insurance Contributions (NICs)
NICs is a tax that is charged to all employees and the money is used to pay for the
UK social benefits system. The money collected in NICs is used therefore to pay for
benefits such as job seekers’ allowance, child benefit and pensions. Employers also
have to pay an NIC contribution for every employee they have working for them.
Corporation Tax
Corporation tax is a tax that is charged to limited companies only. It is a tax on
company profits.
Customer Satisfaction
The experience the customer has in dealing with a business is called customer
service. If the experience is positive, the customer is more likely to return and use
the business again. Customer service covers many areas:
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How a customer is greeted and how the business deals with customers
Fulfilling customer orders accurately and on time
The quality of products
The knowledge of staff
How a business deals with complaints
After sales service
Customer satisfaction must be at the core of a business if it is to be successful.
Dissatisfied customers might not buy again from the business. They will also tell
friends and family. The business reputation is at stake. In contrast, customers that
are satisfied will buy again and tell other people.
Many businesses rely on repeat business and repeat business. This is when
customers buy time and time again from the same firm. For example, holiday
makers might use the same travel company each time they go on holiday.
Recruiting, Training and Motivating Staff
Recruitment
When a firm wants to recruit a new employee, the following documents are
produced:

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


Job description – describes the tasks the employee will do on a day-to-day
basis
Person specification – lists the characteristics and qualifications required
to do the job
Job advertisement – advertises the job to possible applicants
Curriculum Vitae (CV) – produced by the applicant – a document which
provides the personal details, work experience and qualifications of the
applicant
Application Form – produced by the business and then completed by the
applicant – a document where applicants provide their personal details and
work experience
Most businesses use the following process when recruiting new employees:

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Identify the job
Produce job description and person specification
Advertise the post
Short list – reduce the number of applicants to a reasonable number that can
be interviewed
Interview
Ask for references
Offer the post
Inform the unsuccessful applicants
Training
Most businesses provide training for their staff so that they become better skilled at
their work. There are two main types of training:


On-the-job training: training that takes place in the workplace
Off-the-job training: training that takes place away from the workplace (eg
at a local college)
Skills and Attitude at Work
An employee must be skilled at the work they do. For example a car mechanic must
be able to service and mend cars. However, an employee’s attitude is equally
important at work. Firms want employees who have the following attitude:

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Attend regularly
Are on time
Work hard
Are honest
Are loyal to the business
Work well in a team
Motivation
Motivation is all about the way that a business can encourage its workers to give
their best to the business and be committed to what they are doing. A well
motivated workforce is likely to work hard. A business can motivate its workers by:
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Offering a fair wage for the work the employees do
Provide decent working conditions
Give workers some responsibility
Be consistent in how staff are dealt with
Keep workers informed about what is going on
Employment Law
All employees have certain rights and they are protected by law. Some laws related
to employment include:
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The right for men and women to be paid equally if they are doing the same
work
The right not to be discriminated against because of their age, sex,
disability or race
The right to a contract of employment which states their hours of work and
holiday entitlement
The right to be protected from danger (Health & Safety at Work Act)
The right to a 20 minute break every six hours (Working Time Directive)
Women have the right to get maternity leave
Topic 1.5: The Economic Context
Demand and Supply
Raw materials such as copper, iron ore, oil and wheat are sometimes called
commodities. These commodities are traded on world commodities markets.
The price suppliers can charge for these commodities depend on how much is
available at the time. If there is a surplus, suppliers can charge higher prices. If there
is a surplus, suppliers may have to lower their prices.
Normal markets are similar. When firms produce goods, the price they can charge
for their products depends on the demand at the time.
Demand for a product is the amount that buyers are willing and able to purchase at
a given price. If the price is too high, demand for a product will fall. Similarly, if you
decrease your price, demand is likely to increase. However, not all products are the
same. For example, the demand for a World Cup Final ticket will stay the same
whatever price is charged – people will be willing to pay a very high price just to
purchase a ticket.
Supply for a product is the amount that sellers are willing and able to sell at any
given price. The supply of a product could be affected by a number of factors. For
example, the weather - a drought means that the supply of wheat may fall. If there is
a shortage of a product, the price of that product often rises because people are
willing to pay a higher price to purchase it. Alternatively, there may be a surplus –
too much of a product being sold at one time. During a time of a surplus, the price
of the product is likely to fall because firms have to lower their prices in order to
sell the goods.
Commodity and energy prices can be very important to small businesses. When the
prices of the following commodities change, it affects the running costs of the
business:






Petrol
Copper
Iron ore
Gas
Electricity
Water
For example, if petrol prices increase, this seriously affects firms that make extensive
use of vehicles. For example, a taxi firm must decide whether or not to pass on this
cost increase to their customers. If they don’t put their prices up, their profit
margin will fall. However, if they do put their prices up, customers may not use
their business.
Interest Rates
Many small firms rely on credit for survival. That is, they have to borrow money in
order to keep the business going. The type of borrowing comes under two main
headings:
1. A bank loan: borrowing a set amount of money and paying it back with
interest in monthly instalments.
2. An overdraft: taking more money out of your bank account than you have
in it. The bank charges interest for every day that you are overdrawn. The
amount a person can be overdrawn by is limited to say, £5,000.
Long term loans are used to buy expensive equipment whereas overdrafts are used
to cover short-term expenses such as unexpected bills.
The Cost of Borrowing
Banks charge interest on any money they lend to other people or businesses. The
interest rate shows the amount of money that has to be paid to borrow a sum of
money. For example, if you borrowed £200 at 10% interest, you would have to pay
back £220 in total.
Interest rates change – the higher the interest rate, the more you have to pay back.
However, if the interest rate falls, the cost of borrowing money becomes cheaper.
When interest rates rise, the cost of running a business will increase because
the cost of any loans or overdrafts will increase. Similarly, if interest rates fall,
then the cost of running a business will fall because loans and overdrafts are
cheaper.
Interest rates affect peoples’ savings. When you invest your money in a savings
account, you will receive interest every year. If interest rates increase then the
interest you receive on your savings will increase. However, if interest rates fall
then you will receive less interest on your savings.
Interest rates also affect customers. Consumers borrow money just like firms do. If
interest rates rise then the cost of taking out a loan becomes more
expensive and consumers are less likely to borrow money to buy goods. For
example, most consumers need to borrow money to buy a new car. If interest rates
rise, then they are less likely to buy that new car, they are more likely to wait until
interest rates fall. This affects the sales of car companies – when interest rates
increase, it is likely that car sales will fall.
The Bank of England is our central bank and they set an interest rate which they
use to lend money to other banks. The other banks then tend to follow the Bank of
England – if the Bank of England lower their interest rate then the high street banks
do the same. The Monetary Policy Committee at the Bank of England meets every
month to discuss what to do with interest rates. If they want to encourage
consumer spending, they will reduce interest rates.
To summarise:
If interest rates rise:
 The cost of running a business will rise because the loan repayments will
increase
 Sales may fall because consumers are less likely to borrow money when
interest rates are high
If interest rates fall:
 The cost of running a business will fall because the loan repayments will be
cheaper. This would mean a firm will make more profit, or they could
reduce their prices because their running costs will fall
 Sales may increase because consumers are more likely to borrow money
when interest rates are lower
Exchange Rates
The exchange rate is the amount of currency you can buy when you exchange it
for another currency.
To convert £ to € or $, you must multiply:
If the exchange rate is €1.2 for every £1:
If you exchanged £10, you would receive €12
(£10 x 1.2 = €12)
If the exchange rate is $1.5 for every £1:
If you exchanged £10, you would receive $15
(£10 x 1.5 = $15)
In practice, you would actually receive a little less than these amounts because every
time you exchange currencies, you usually get charged commission – a small fee is
charged by the bank to exchange your money.
To convert € or $ to £, you must divide:
If the exchange rate is €1.2 for every £1:
If you exchanged €10, you would receive £8.33
(€10 / 1.2 = £8.33)
If the exchange rate is $1.5 for every £1:
If you exchanged $10, you would receive £6.66
($10 x 1.5 = £6.66)
In the examination, you may have to calculate what you would receive if you
exchanged £ for $ (dollars) or £ for € (Euros). The exchange rate will be given on
the examination paper.
Exchange rates are very important to all businesses that either import or export
any raw materials or products. Imports are goods that the UK receives from
abroad. Exports are goods that UK firms sell in other countries.
A firm that imports goods will have to pay the foreign company with their own
currency. If a firm exports goods abroad, the foreign company will have to convert
their currency into £ to pay for the goods.
Like interest rates, exchange rates fluctuate (they change every day). When
exchange rates change, it affects how much will be paid and how much will be
received. There is an easy way to remember the impact of a change in exchange
rates:
Ic
When the value of the pound n reases:


Imports will be cheaper
Therefore, exports will be more expensive
Then the reverse is true:
When the value of the pound decreases:
 Imports will be more expensive
 Exports will be cheaper
The Business Cycle
The economy is the term used to refer to all the people and businesses in a
country that engage in buying and selling. The business cycle shows the upturns and
downturns in the economy based on how much is being produced and sold.
In an upturn, there is economic growth. Firms produce and sell more goods and
services, thus making more profit. This increase in profits means that firms can
expand and employ more staff. All the extra jobs that are created in the economy
mean that consumers have more disposable income (more money to spend on
goods and services). This creates more demand for goods and services and
businesses continue to increase their profits. During an upturn, business output
increases (they produce more goods) and employment opportunities increase.
In a downturn, there is economic decline. This can lead to a recession. In a
downturn, demand for goods and services decrease so firms have to reduce the
amount they produce. Firms have to make cut backs and often are forced to make
employees redundant. Unemployment rises, consumers have less disposable income
(less money to spend on goods and services) which further reduces demand for
goods and services. During a downturn, business output decreases (they produce
less goods) and employment opportunities decrease.
During a recession, some types of businesses do particularly badly. For example
firms advertise less so advertising companies lose sales. Consumers and businesses
do not refurbish or build extensions so builders are badly hit. Firms like car
companies which need consumers to be able to get loans are often badly hit because
consumers are less likely to borrow money if there is a threat that they might be
made redundant.
However, some firms do better in a recession. Showrooms selling new cars may see
a fall in sales, but second hand car dealers may see an increase in sales. Overall,
small businesses find it difficult to survive in a recession because they depend on a
regular number of customers – they cannot survive long with a decrease in sales.
Stakeholders
Stakeholders are people and groups that are affected by the success of a business.
Stakeholders therefore have an interest in how the business operates and whether
or not it is successful. Stakeholders include the following:
Owners:
The owners want the business to be successful. They may try to
charge high prices so that they maximise their profit. Alternatively they may decide
to lower their prices in order to attract customers. Their goal is to earn a good
income for themselves now and in the future.
Managers: Managers help to run companies. They will want the business to be
successful otherwise they could lose their job. Managers hope to receive other
rewards such as a company car or a bonus – but the business may not be able to
afford to provide these sorts of benefits.
Workers:
Workers, like managers, help to run businesses. They will want the
business to be successful otherwise they could lose their job. They want pleasant
working conditions and a reasonable wage for the work they do for the business.
Customers: Customers are very important stakeholders because without them, a
business cannot survive. Customers want a good, reliable product at a fair price.
Suppliers: Suppliers are firms that sell products to other firms. Suppliers want
businesses to continue to buy from them and they want bulk orders so that they can
maximise their profits. Suppliers are important to a firm because firms need a
regular supply of raw materials/stock. For example, a local bakery may supply bread
to a local supermarket. The supermarket depends on the bakery to supply the
bread each week.
The Government: The government are a stakeholder for all businesses because
the government wants businesses to be successful. If firms are successful, they will
have to pay more tax to the government. Also successful firms employ more staff –
this provides job for people and these people have to pay taxes. In addition, the
government influences businesses because they set laws and regulations that
businesses must follow – for example The Health & Safety at Work Act sets out the
laws relating to safety at work.
The local community:
The local community are a stakeholder because they
are the people that provide workers for a business. The local community may also
put pressure on a business. For example, a local community may campaign to stop a
local supermarket expanding because of the impact it might have on smaller retail
shops.
The Conflicts of Stakeholders
All stakeholders have different needs and goals. These needs and goals sometimes
conflict. Here are some examples:

A workforce want a 10% pay rise but the owners cannot afford to pay this
wage increase. This conflict may result in an industrial dispute – an argument
between the management and the workforce which could ultimately result in
strike action.

A business wants to move location to another part of the country. The
owners may be happy because there is a potential for greater profits.
However, the workforce may be unhappy because they do not want to move
to another part of the country.

The government wants to improve waste re-cycling so it imposes new laws
on businesses. However, this increases the running costs for a business and
they have to put their prices up. This upsets customers who are unhappy
about the price increase.
Now you know it all – good luck!