Notes for AQA AS Business Studies

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Chapter 1 Understanding the nature and purpose of business

AQA Business for AS

Chapter 1 Understanding the nature and purpose of business

Learning Objective: To know why businesses exist.

To know the relationship between a business's mission and its objective.

To know the objectives that business's commonly set themselves.

To know the reasons why businesses set objectives.

To know how businesses measure profit and why it is important.

Why businesses exist

1. What are businesses

Businesses are organisations that supply an enormous range of goods and services demanded by consumers and other businesses. They create wealth, new products and can enhance a country's reputation.

2. Types of businesses

Primary - Agriculture, forestry, fishing, mining, quarrying and oil and gas extraction.

Secondary - Manufacturing, construction and the supply of electricity, gas and water.

Tertiary - supply of services: hotels, catering, transport, education and health

Mission and objectives

A mission statement sets out a businesses overall purpose to direct and stimulate the entire organisation

Aims are long-term plans of the business from which its corporate objectives are derived.

Objectives are medium to long-term goals established to coordinate the business.

Hierarchy of objectives:

1) Mission statement 2) Corporate aims 3) Corporate objectives 4) Functional objectives ( specific targets set by each department)

To be effective objectives they have to be SMART: specific, measurable, agreed, realistic, time specific.

Common business objectives

Profit maximisation, growth, survival, cash flow, social and ethical objectives, diversification, focus on core capabilities, improved image and social responsibility, increased market share and sustainability.

Why businesses set objectives

Businesses set objectives in order to ensure that all of the stakeholders are working towards the same overall goal, motivate employees and to measure and review the successes of a businesses plans.

The measurement and importance of profit

Profit can be measured using the formula :

Profit = total revenue - total costs

Business costs

Revenues are the earnings or income that is generated by a firm as a result of its trading.

A cost is an expenditure that a firm incurs as part of its trading and it can be split into two categories, fixed costs and variable costs.

Fixed costs do not change when a business alters its level of output. E.g. rent or salaries.

Variable costs alter directly with the businesses level of output. E.g. fuel costs, wages and commissions.

Semi-variable costs These are variable costs that have a fixed element. For example, businesses pay a fixed or annual charge for renting a car but wages and fuel increases if output increases.

Total Costs = Fixed costs + Variable costs