1.1.1 Understanding The Nature And Purpose Of Business

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Targets that a business wants to achieve within a set period of time.

A business will set objectives for organisation as a whole e.g. social and ethical objectives.

Each functional area will set functional objectives.

Objectives should be smart.

A business target to maximise financial returns, in form of profit, in a set period of time.

This is seen as the main reason why individuals and businesses operate in private sector. (However, individuals may have other motivators)

Public Limited Companies are likely to see profit maximisation as the most important factor.

Focuses on increasing the customer base rather than profit.

It is a common business objective.

Might be measure in terms if market share or by numerical change e.g. 10% increase in revenue.

Pursued under the common belief that with greater growth firms will be more able to exploit its market position and through this receive higher profits.

A target focused on keeping the business alive.

Survival is the first objective of all businesses. Without this no objective can be achieved.

This is a key objective for start up businesses and also firms that are subject to intense competition or recession.

At its most basic level survival is about avoiding bankruptcy.

A financial objective to achieve a specific net cash balance at the end of a month, year pr specified trading period.

A positive cash flow target is important to a firm's liquidity and hence its ability to survive.

May be specifically linked to measures of financial efficiency including payable days and receivable days.

These are the targets that a firm may set regarding the ethical and social decisions made by a firm.

May include:

Fair trade

Environmental choices.

Businesses my set targets to reduce their negative impact upon the environment or increase their positive influence.

These targets may be turned into quantifiable objectives for firm to measure their performance against.

E.g. reduce carbon emission by given % by 2020.

These set out what a firm wants to achieve in an aspirational manner.

This is often expressed in the form of a mission statement.

Business missions might offer clarity to all stakeholders and thus offer direction towards the overall outcome.

The surplus money made by when revenue exceeds costs.

In order for a business to achieve a profit total revenue must be higher than total cost.

Total Revenue - Total Cost

May attempt to increase profit by:

Reducing cost e.g. cheaper supplier; Increase revenue e.g. introduce new promotions.

The money coming into a business from the sale of goods or service.

Also known as total revenue/sales, sales turnover.

Selling price x Quantity sold

Used to calculate:

Profit Margin

Break-even Output

Total amount of money coming into a business from the sale of goods or service.

Another word for revenue.

Selling price x Quantity sold

Total amount of money coming into the business from sales of goods and services

Selling price x Quantity sold

In order for a business to achieve a profit, sales revenue must be higher than total cost.

Costs to a business that stay the same regardless of output.

Include rent and rates, salaries and interest payments.

Shown as a horizontal line on a break-even chart.

Cost to a business that might change in relation to output.

Include raw materials, wages and distribution cost.

Shown as a diagonal line from the origin of a break-even chart.

All cost associated with the provision of a good or a service.

Fixed cost + Variable Costs

In order for a business to achieve a profit total revenue must be higher than total costs.