1. AQA A Level Business 3.1.1 Understanding the nature and purpose of business

2. Lesson objectives Why businesses exist Business objectives such as profit, growth, survival, cash flow, social and ethical objectives The relationship between mission and objectives Why businesses set objectives The measurement and importance of profit Revenue Fixed costs Variable costs Total costs

3. Equipment needed for this lesson The 311 worksheet Lined paper for rough working out A calculator (does not need to do complex or scientific calculations) Pens to make notes

4. Starter - 3 quick questions 1.What are your current personal objectives? 2.Do you think you will you have the same objectives in 5 years time? 3.Do you think that the objectives of a business might also change over time?

5. Why businesses exist

6. Definition: Business Objectives A business objective is a goal or aim that a business wants to achieve. The best objectives are SMART and not vague, so that everyone in the business knows what direction the business is going in. SMART Specific Measurable Achievable Realistic Timely An example of SMART objective might be for a supermarket chain to gain 10% extra market share in one year. Can you prove why this is a SMART objective?

7. Business objective: profit Profit is total revenue (money into the business) minus total costs (money out of the business) Profit maximisation is the aim of most businesses, because it will give them the capital needed to expand and to grow the business Profit maximisation will enable the business to replace any old machines or equipment Read / watch this story – the decision to locate was driven by profit maximisation strategy

8. Business objective: Profit maximisation Lots of supermarket items are getting smaller, have you noticed this? This is known as shrinkflation – where a manufacturer keeps the price the same but makes the product smaller The ONS says that as many as 2,529 products have shrunk over the past 5 years The ONS says that as many as 2,529 products have shrunk over the past 5 years Can you link this to profit maximisation?

9. Business objective: Growth After the first year, most businesses want to grow and expand, to increase the amount of profit that they are making, or to increase their market share. They can grow in a number of ways (more on this in later units): Organically, by taking on more staff or opening more stores, or producing more goods Inorganically, with the help of another company, so through a merger or a take over Read this article, can you sum up how Boohoo has grown?

10. Business objective: Survival The business in the first year may just have survival as the objective while it builds a customer base and establishes itself in the market The objective is to reach a sustainable level of sales that allows the business to reach its break-even point This may involve penetration pricing of products or services at the outset to establish the business This may not mean much profit at the start, but when the business starts to grow it will able to comfortably raise prices Watch the video and decide if survival was the main business objective in this example

11. Business objective: Cash-flow A business may have the objective of having a positive cash flow to make sure that they have enough money in the business to pay their day-to-day expenses Having a positive cash flow would also mean that the business would not have to borrow from a bank, usually through an overdraft which can be very expensive What connection is there between poor cash flow and business failure?

12. Business objective: Social (The Big Issue) Social objectives are also known as ‘corporate social responsibility’ or CSR objectives This may involve: Reducing impact on the environment Fair wages in developing countries Helping society Compliance with laws to minimise negative externalities, such as a pub operating sensible hours so as not to cause noise pollution in the local community Watch the video – can you explain why The Big Issue is an example of a business with a social objective and not a charity?

13. Business objective: Social (The Body Shop) The Body Shop has sustainably sourced their shea butter from a Women’s Association in northern Ghana since 1994 As well as paying a fair price, they pay a premium to help empower these women and help them to achieve an independent income, increased confidence and respect This premium also helps fund community projects that positively impact the lives of 49,000 people across 11 villages every year Explore further: Body Shop Community Trade LINKLINK How can having a social objective help The Body Shop? Press esc for answer

14. Business objective: Social (Starbucks) “It is our vision that we will help inspire our partners, customers, suppliers and neighbours to create positive change To be innovators, leaders and contributors to an inclusive society and a healthy environment so that Starbucks and everyone we touch can endure and thrive” Explore further Starbuck’s CSR policy on their website LINKLINK

15. Business objective: Ethical Ethics are the moral principals behind human behaviour, the idea that a business knows right from wrong Society judges what is acceptable behaviour and what is not e.g. advertising junk food to kids Ethical objectives go beyond what is law e.g. pollution and slave labour Do you think these companies have the best ethical record in 2020 or the worst? Press esc for answer

16. The relationship between mission and objectives

17. Definition: Mission Statement A mission statement is a formal phrase that sets out the aims and values of a business or organisation

18. Mission and objectives A mission statement is at the top of a pyramid of corporate vision for the company The mission inspires the objectives and strategies of the business For example, the mission statement of Levis discusses sustainability, which means that part of their strategy is to source responsibly Mission Statement Corporate Strategy Business Objectives Functional Objectives

19. Why businesses set objectives

20. Why does a business set objectives? Objectives are a series of goals or markers to show if the business is progressing in the right direction If an objective is set then the results can be measured e.g. if a business wants to achieve 10% more market share and actually achieves 12% then it will have met and exceeded its objectives The performance of the business can be measured against how well it has met its set objectives Objective is set Performance is monitored Performance is evaluated

21. The measurement and importance of profit

22. Definition: Profit Profit (P) is the result of subtracting all costs (TC) from total revenue (TR) The formula for calculating profit is: P = TR – TC For example: a business earns £6,000 revenue in a year. The total costs were £2,000, leaving a profit of £4,000*

23. Total Costs (TC) Total costs (TC) of a business are a combination of fixed costs (FC) and variable costs (VC) In order to understand costs, it may help you to imagine that you run a stall selling hats and sunglasses at a festival Keep that in mind over the next few slides

24. Definition: Fixed costs (FC) Fixed costs are costs that do NOT vary with the level of output e.g. rent Fixed costs appear in formulae as FC

25. Examples of Fixed Costs (FC) Rent payments Mortgage payments Loan payments Insurances Lease of machinery or van (monthly fixed payments) Salaries of managers who will be there no matter what the level of output is If you were running a stall at a festival selling hats and sunglasses, what would your fixed costs be? Press Esc key

26. Calculating Fixed Costs (FC) If you know your Total Revenue (TR) and Total Variable Costs (TVC) and Profit (P) figures then you can calculate your Fixed Costs (FC) FC = TR – TVC – Profit Try this example TR £7,000 TVC £1,000 P £4,000 What is FC? ______________________ Will this type of formula also work to calculate TR or TVC? Press Esc Try sample question 1 on worksheet 3.1.1. at this point to check your understanding

27. Definition: Variable costs Variable costs are costs that do vary with level of output e.g. raw materials Note: Variable costs appear in formulae as TVC which stands for Total Variable Costs

28. Examples of Variable Costs (TVC) Examples of variable costs Cost of stock sold Raw materials Fuel Packaging Wages (not salaries) of casual staff If you were running a stall at a festival selling hats and sunglasses, what would your variable costs be? Press Esc key

29. Calculating Variable Costs (TVC) Formula to calculate variable costs: TVC = TR – FC – P Try this example TR £72,000 FC £20,000 P £44,000 TVC is _______________________

30. Definition: Revenue Revenue is income into a business; this could be through sales or investments. To clarify you may want to use the term “sales revenue”. Total Revenue appears in formulae as TR Revenue; there are many words that also mean revenue that you might find when reading older text books or the Internet, these include; turnover, receipts, and income

31. Sales revenue Examples of sales revenue: This is money into your till, cash tin or online basket and could be: Cash Cheque Card payments Apple Pay PayPal If you were running a stall at a festival selling hats and sunglasses, what would your sales revenue be? Press Esc key

32. Calculating Sales Revenue (TR) Use this formula to calculate sales revenue: TR = P + TVC + FC Or TR = P +TC Try this example P £1million TVC £75,000 FC £125,000 TC £200,000 TR is _______________________

33. Plenary quiz If TR = £21,000, TVC = £7,000 and TC are £11,000 a)What are the FC? £__________________ b) What is the P? £___________________

34. Sample questions These are taken from a mixture of past papers (current spec), past papers (legacy spec) and SAM materials.

35. Case study for sample question 1 (1/4)

36. Case study for sample question 1 (2/4)

37. Case study for sample question 1 (3/4)

38. Case study for sample question 1 (4/4)

39. Sample question 1 L1 1-3 L2 4-5 L3 6

40. Answer question 1: part 1 of 2

41. Answer question 1: part 2 of 2

42. Sample question 2

43. Answer question 2 Answer is D Hint: At zero output there are still costs of £40, these will be the fixed costs that have to be paid no matter how many goods are made. So £150 - £40 = £110

44. Revision video

45. Objective; A goal or aim of the business Social objective; An aim of the business is to help society Ethical objective; An aim of the business to trade ethically (in a morally correct way) Revenue; Income into a business Fixed Costs; Those costs in a business which do not vary with trade or activity e.g. rent Variable Costs; Those costs in a business which do vary with trade or activity e.g. raw materials Profit; Total revenue minus total costs (P= TR-TC)