what is the purpose of a business plan gcse

Business Plans

In this post

Business plans are used to outline the industry in which a business is working in as well as the economic structure of a company to give an idea of the financial prospects of a business. They are used primarily to organise the routes to market that a company will take and give projections on earnings and target dates for when the company expects to have a certain income.

Writing a strong business plan is important for any business, whether large or small, and is the perfect way to map out your route to success. Not only will the plan contain your aims and plans to attract new customers but it can also act as a strong tool for financial projections and help you to set out goals for your company. Throughout the units that we have already covered on this course we have seen a lot of aspects that could be included in a business plan, and including as much information as possible is key.

A lot of entrepreneurs fail to produce a clear business plan when they set up a new company and this can be a big issue further down the line. By not outlining your company and its operations you may affect the business in a negative way and be unable to keep track on the progress and route the business is taking. If you are seeking finance to launch your company it is more than likely that you will need to create a business plan to secure a loan, but this should not be thrown away once you have started the business. Your plan can be updated and adapted at any time and you must try to keep things relevant and up to date so you know the long-term aims of your company.

Why create a business plan?

Some entrepreneurs fail to create a business plan before starting a company because they feel it is a waste of time. They know what they want to do, how they want to do it and everything that is needed has been formulated in their heads. This is a very good skill to have, but without your thoughts and projections down on paper it can be very easy for them to become misinterpreted, forgotten or skewed. Simply having things thought out in your mind is not enough to convince others or explain your strategies to those you are working with. Business plans are used to organise your approach and produce a strategy that allows you the best possible chance of success. They should include:

• Information about your company so that you can plan the structure and objectives which you have
• Your relationships with others and how these can be used (e.g. banks, lenders and accountants)
• To find weaknesses in your plans and areas where you must improve
• Areas for discussion so that you can find out other people’s opinions and include them in the planning process

Some people start a business and want everything to be done immediately. With great confidence that they can do it all alone and have no input from experts, they may not stop and think about forming a clear plan that includes facts and figures to help them along the way. Doing this can be of massive detriment to any business and you need to gather as many opinions, facts and ideas as possible from those around you.

What to avoid

A business plan should include lots of information but there are a few things that should be avoided. You should put some restrictions on the long-term (over 1 year) predictions of your finances. A long-range prediction on the amount of money you will have coming into the business can be completely meaningless because it is very hard to predict how a business will perform far into the future.

Very few business plans get the figures projected spot on, so remember to give a good indication of what you expect to earn but try to be conservative with this. By exaggerating the earning potential of the company you will not be impressing anyone and this will make it difficult for you to plan your spending. Outline clear time frames and indicate your aims during these periods. Try to show what you will be working on at any time, for example if your business will take quite a lot of setting up then the first 6 months may be devoted solely to this and you should outline this in your plans and projections. Try to correctly anticipate the money and time that will be required for processes to be completed and always factor in a margin of error. By slightly exaggerating the money that will be required when completing a stage of expansion or setting more time than is needed, you will be well prepared if some unforeseen issue crops up.

Don’t just use the business plan to explain how great your product or service is. This alone will not turn your business into a big success (although it is very important). Identifying areas to improve and how you will market your company is much more important than simply relying on the uniqueness of your product.

The purpose of a business plan

Business plans are used for a variety of different reasons and the importance of these should not be underestimated. Creating a plan that is precise and includes information that is relevant to the new or existing business will ensure that ideas are implemented quickly. Without a solid business plan it will be much more difficult to judge the success of the new venture and the direction of the company will be hard for everyone to see.

Minimising risk

The risks when starting a new business can be huge. Money is invested into new businesses and time will also be spent on getting a company off the ground. Without a business plan in place, owners and employees could end up wasting their time in certain areas. Using resources inefficiently and having no clear direction for a business can lead to disaster very quickly. The best way to avoid this is with a clear outline of what the business needs to work on and what resources will be needed in order to make the venture work. A business plan will be used to set goals and objectives while losing no time in areas that do not see a large enough return on the investment.

Securing finance

Many people use business plans to secure finance for a new venture. This finance can come from several different sources such as banks, investors and start-up funds. Having a business plan that shows exactly how the business will operate and where money will be made will act as a way to convince potential investors to finance the company. With clear profits to be made and a route to market mapped clearly, investing in a business will be a much more desirable prospect for a potential investor.

Formats of business plans

There are many different formats which a business plan can be created in but the main areas to cover are:

Executive summary

Company summary, products and services, market analysis, strategy and implementation, management and personnel, financial plan.

Any business plan should include an executive summary which gives an outline of the business and the vision of the owners. Here you should briefly explain the business and its activities as well as the key areas that will help the company to succeed. A mission statement can be included to explain why your company will be unique in the market and what will give you the edge over your competitors.

You should also include some information about the financial aspirations of the company here to show the economic aims over the first few years in operation. Remember, these do not need to be hugely accurate and taking a realistic look at what can be earned is essential. It is usually best to complete the executive summary of the company last as you can include information from other sections in this part of the plan to give a good overview and concise insight into the business and your plans.

The company summary will explain key aspects of the operation of the company. This includes the owners of the business as well as where the business is located. Information about all directors must be included in this area of the plan and you should summarise their roles within the organisation. If you have any other personnel that will be involved at a senior level then they should be included also. In this part of the business plan you need to outline the funds required to set up and maintain the business also. By including information about the company’s location and operations you will be able to forecast the money required to get the company started and any investment that will be needed. Try to include a spreadsheet showing where the initial funding will come from and how much is being put into the business to start with. Remember, most new businesses make a loss in their first year due to the expenses involved in starting a new company, so be realistic. Plan the initial outlays and costs carefully and make sure you know the limits to how much you can put into the company to get started.

The location of the business can also be included here and any rent that you will be required to pay can be outlined and the costs per square foot for the company premises. Then you can go on to make projections about the sales required to cover all of your fixed costs such as office and equipment rentals.

Next we move on to explaining the things which will earn your business money – the goods and services that you have to offer. In this section you must include descriptions of what you can offer your customers and the prices you will be charging. Outline what makes your goods and services special and the key aspects that will influence potential clients and convert them into paying customers. It is also a good idea to compare your pricing structure to your competitors. It may be that you offer the same products but cheaper, or with any additional features to make your products more appealing. You should explore the need for your products and services to be better than any of the competition. As a new business you may struggle to compete unless you have something that nobody else has. By bringing to the market something which is already selling well with another company that has established its brand in the marketplace, you might struggle to take a large enough section of the market to warrant starting a whole new company. If this is the case then you must compare your pricing to your biggest competitors and ensure that you are competitive.

In this section you can also include any products and services that you may offer in the future. Explain your product development processes and how you will be able to innovate and bring new products or services to the marketplace.

Next you need to carry out some market analysis to identify your potential customers . In this section of the business plan you need to include information about your ideal customers and what sort of people they will be. Think about the earnings of your potential clients, the type of lifestyles they will live and the products and services they expect from a business. This part of your plan is great for you to use figures about your market and show any growth projections for the sector in the future.

Explain market trends and analyse the need for your goods/services in this sector. Attempt to find some facts about the disposable income of your potential customers and target certain people who will be interested in what your company offers. Think about how you will be attracting your customers and the potential for growth over the first 3 years in operation. Make estimations about the number of people in the area where you will be offering your products and services to get a good idea of how many different potential clients you can attract. Having a good understanding of your target market will give you the tools to design marketing strategies and techniques to attract the maximum number of customers to your business.

Having outlined your market and explained who your products/services will attract, it is time to explain your techniques when doing this and show how you are going to market your company. Explain the key aspects of what you offer and the main selling points that should be tailored to suit the target clients that you have in mind. Products designed for the more affluent will need to be luxurious and have an exclusivity about them, whereas items that are for people with limited incomes will need to offer greater value for money. Try to understand a clear link between the market in which you will be operating, your potential clients and the main aspects of your business which you should focus on.

Ensuring that your business suits the needs of customers is essential to getting the most customers. For example, opening up a luxury spa in an area where there is high unemployment and typically lower incomes will encounter lots of issues as the potential customers (those within a 15-mile radius) will have no need for this service and may not be able to afford what you have to offer. You will need to come up with at least five ways of promoting your business that will appeal to your target market and attract clients. Remember all of the techniques and skills we discussed on marketing and try to link what you know about your potential clients to the advertising methods you will use.

Here you can also outline the potential sales forecasts and investments which you will make when promoting your goods and services. Come up with some realistic projections about the money to be spent on advertising and increasing awareness of your brand as well as any sales targets you may wish to set. Be conservative with your sales projections as it takes time for any business to get a good level of customers and building brand awareness does not happen overnight. Your sales in year 1 will normally be fairly low and you need to take this into account when projecting your income and the amount it will cost to set up your company.

The next thing to plan is the personnel involved in your business. This will include the owners and directors as well as any senior managers that are to be involved in the company. Explain the team structure and hierarchy of your new company and the number of employees you will be hiring. Knowing the team behind the company and their individual duties will let you outline the various skills that your team possesses and establish each person’s duties within the organisation.

Outlining the duties of each person and giving a brief job description is a good way for you to understand the team dynamic and responsibilities of each member. Most new companies make the mistake of hiring too soon, but with a clear plan of the business personnel that will be involved in your company you will be able to ensure each person is needed for the business to operate. Establishing a business will require you to be frugal in your approach and employing staff that are not needed can have a terrible impact on your profits and end up costing you tens of thousands of pounds a year.

Outline the wages of your employees and then come up with some totals for staffing costs that can be used when writing your executive summary.

Your financial plan will provide a clear breakdown of all the income and outgoings of the business that you expect. These will only be projected figures so will be likely to change in reality, but you should be able to predict fairly accurately using your knowledge of costs incurred and the pricing and potential customer base for your products/services.

Make projected figures for your fixed and variable costs as well as the profits you expect to earn from sales. This will then help you to create a break-even analysis for your company that will show the amount of money required to cover all of your outgoings. Remember that your first year will have fixed and variable costs as well as additional outgoings which come from setting up your company. You will also have a limited number of sales during the first 12 months as you build up your customer base, so the projected net profit for year 1 will be lower than any other year. Try to think about the most popular goods/services you offer and come up with an average sale price for your customers. This will then help you to identify the number of customers you need in your first year to break even.

Come up with some cash flow and profit and loss charts (look over our work in Unit 1.3 to help) to project how much money you can expect to see in the business each year. This will help you to come up with clear and concise predictions for how much money you will be making in your first three years.

Reformulating a business plan

If you do ever happen to make a slight error in judgement on your initial business plan this can always be altered and the plan changed as required. The chances of figures being completely correct in your first projections are very slim and there will be certain things that you miss or random payments to be made when setting up your business which you did not account for. This is the main reason why being conservative with your income projections and adding in a ‘safety net’ figure to your costings will help you to deal with these circumstances. Business plans should be flexible and are a working document, so chopping and changing them is fine. When doing this try to use what you already have to create a new plan for the next few years rather than just altering figures to make it look like you got the initial plan correct.

Business plans are working documents, so they should be altered and added to as time goes by to determine where your company is heading and how it will get there. Being understanding of the nature of business and the fact that you will not be able to predict certain outcomes will give you an edge and allow you to put in place certain measures to help if you ever do come up against any problems.

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GCSE Business

• Specification
• Planning resources
• Teaching resources
• Assessment resources
• Introduction
• Specification at a glance
• 3.1 Business in the real world
• 3.2 Influences on business
• 3.3 Business operations
• 3.4 Human resources
• 3.5 Marketing
• 3.6 Finance
• Scheme of assessment
• General administration
• Appendix: quantitative skills in business

3.1.6 Business planning

Business Plans

Why do businesses create plans.

It is important for any new or existing business to create a plan in order to have an understanding of how it plans to achieve its aims and objectives. There are 4 key reasons why businesses create plans:

Important for new businesses

• When Peter Jones and Theo Paphitis invested in Levi Roots Reggae Reggae Sauce, they asked to see Levi’s business plan before they committed to providing their expertise and investment.

Raising finance

• To decide whether to give finance to a business, investors and banks need in-depth financial information.
• When Facebook raised finance from venture capitalists to grow and when Snap Inc listed on the New York Stock Exchange they had to provide business plans.

Setting objectives

• A plan lets a business clearly set out what the business’ objectives are and how they are going to go about achieving them.
• These specific business objectives help firms to achieve their aims as they are measurable targets for the firm to work towards.
• It also allows a business to see which areas (growth, sales, profits etc.) they need to improve and which they are doing well on. If they fail to meet an objective then it can be easier to understand why it was not met.

Business organisation

• By detailing how functions of the business will be organised, a business plan can help improve the way that a business is run.
• A local cafe can plan its purchasing, pricing and staffing in a business plan that can help it manage its operations.

The Main Parts of a Business Plan

There are lots of different ways to structure a business plan. However, some sections are very important and are almost always included.

Executive summary

• The executive summary should be a concise overview of the entire business plan.

Mission statement

• A mission statement says what a company wants to achieve.

Products or services

• This section should clearly describe which products or services the company sells and why customers will benefit from this.
• This also may include what a product’s unique selling point (USP) is. The USP of a product or service is how this product or service is different (or unique) from the products or services offered by the competition.

Market analysis

• Analysis of competitors – Who the main competition are and where they are positioned in the market.
• Analysis of customers – The different customer segments and which of these will be the ‘target market’.

Organisation and management team

• This will outline the company’s organisation structure and provide personal details of the owners and other important personnel.

Production details

• This will outline how a firm will produce its products or provide its services.
• This includes things like the location of factories, who the suppliers will be, what materials will be needed and how much they will cost.

• Cost and profit - This includes detailed outlines of the forecasts for cost, revenue and profit.
• This section usually includes a cash-flow forecast and projected profit and loss account for the first 12 months of trading.
• Sources of finance - This section often includes details of how a company will fund investment if it is required.

Advantages and Disadvantages of a Business Plan

There are advantages and disadvantages of creating business plans.

• Business plans provide parameters for setting targets.
• Management can check staffing, incomes, product ranges and lots of other things against previous business plans and expansion plans.
• A business plan can be used as a benchmark against outcomes like cashflow, production outcomes or service delivery. The plan can also be compared to the behaviour of competitors and the business’ own performance in past years.

Disadvantages

• Businesses need to be flexible and able to adapt to a changing environment. A business plan may stop a company changing.
• Business plans can be costly and time consuming to make. If an entrepreneur has less time to spend designing a good product and selling to customers, then the time spent making a business plan may be negative for the business.
• Also, forecasts of revenue and profit may be misleading and lead to bad decisions.

1 Enterprise & Entrepreneurship

1.1 The Dynamic Nature of Businesses

1.1.1 The Dynamic Nature of Businesses

1.1.2 Risk & Reward

1.1.3 The Role of Business Enterprise

1.1.4 The Role of Business Enterprise 2

1.1.5 The Role of the Entrepreneur

1.1.6 End of Topic Test - Dynamic Nature of Business

1.1.7 Grade 9 - Dynamic Nature of Business

1.2 Spotting a Business Opportunity

1.2.1 Customer Needs

1.2.2 Market Research

1.2.3 Market Segmentation

1.2.4 The Competitive Environment

1.2.5 Primary & Secondary Market Research

1.2.6 End of Topic Test - Business Opportunities

1.2.7 Application Questions - Business Opportunities

1.2.8 Exam-Style Questions - Market Segmentation

1.3 Putting a Business Idea into Practice

1.3.1 Business Aims

1.3.2 Business Objectives

1.3.3 Business Revenues & Costs

1.3.4 Costs - Calculations

1.3.5 Revenue - Calculations

1.3.6 Business Profits & Break-Even Analysis

1.3.7 Profits & Losses - Calculations

1.3.8 Interest - Calculations

1.3.9 Cash & Cash Flow

1.3.10 Cash & Cash Flow 2

1.3.11 Cash Flow - Calculations

1.3.12 Sources of Business Finance

1.3.13 End of Topic Test - Business in Practice

1.3.14 Grade 9 - Business in Practice

1.3.15 Exam-Style Questions - Business in Practice

1.4 Making the Business Effective

1.4.1 The Options for Start-Up & Small Businesses

1.4.2 Limited Liability

1.4.3 Franchising & Not-For-Profits

1.4.4 Business Location

1.4.5 The Marketing Mix

1.4.6 Business Plans

1.4.7 End of Topic Test - Effective Business

1.4.8 Application Questions - Effective Business

1.4.9 Exam-Style Questions - Business Plans

1.5 Business Stakeholders

1.5.1 Business Stakeholders

1.5.2 Technology & Business

1.5.3 Legislation & Business

1.5.4 Legislation & Business 2

1.5.5 The Economy & Business

1.5.6 External Influences

1.5.7 End of Topic Test - Business Stakeholders

1.5.8 Grade 9 - Business Stakeholders

2 Building a Business

2.1 Growing the Business

2.1.1 Business Growth

2.1.2 Finance

2.1.3 Changes in Business Aims & Globalisation

2.1.4 Ethics & Business

2.1.5 The Environment & Business

2.1.6 End of Topic Test - Growing a Business

2.1.7 Application Questions - Growing a Business

2.1.8 Exam-Style Questions - Business Growth

2.2 Making Marketing Decisions

2.2.1 Product

2.2.2 Product Life Cycle

2.2.3 Price

2.2.4 Pricing Methods

2.2.5 End of Topic Test - Product & Price

2.2.6 Grade 9 - Product & Price

2.2.7 Promotion & Advertising

2.2.8 PR & Sales Promotions

2.2.9 Sponsorship & Product Placement

2.2.10 Promotional Mix

2.2.11 End of Topic Test - Promotion

2.2.12 Application Questions - Promotion

2.2.13 Exam-Style Questions - Promotional Mix

2.2.14 Place & Wholesalers

2.2.15 Direct to Consumer

2.2.16 E-commerce & M-commerce

2.3 Making Operational Decisions

2.3.1 Job Production

2.3.2 Batch & Flow Production

2.3.3 Working with Suppliers

2.3.4 Effective Supply Chains

2.3.5 Just In Time & Just In Case

2.3.6 Managing Quality

2.3.7 Total Quality Management

2.3.8 The Sales Process

2.3.9 End of Topic Test - Operational Decisions

2.3.10 Grade 9 - Operational Decisions

2.3.11 Exam-Style Questions - Managing Stock

2.4 Making Financial Decisions

2.4.1 Gross Profit & Net Profit - Definitions

2.4.2 Gross Profit - Calculations

2.4.3 Net Profit - Calculations

2.4.4 Rate of Return

2.4.5 Rate of Return - Calculations

2.4.6 Research & Financial Data

2.4.7 Marketing Data

2.4.8 Percentage Change - Calculations

2.5 Making Human Resource Decisions

2.5.1 Organisational Structures

2.5.2 Organisational Structures 2

2.5.3 Recruitment

2.5.4 Effective Recruitment

2.5.5 Training a Workforce

2.5.6 Motivating a Workforce

2.5.7 End of Topic Tests - Human Resources

2.5.8 Application Questions - Human Resources

2.5.9 Exam-Style Questions - Human Resources

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The Marketing Mix

End of Topic Test - Effective Business

Business plans and their purpose

Business Plans and Their Purpose

What is a Business Plan?

• A business plan is a detailed written document outlining the goals, objectives, strategies, and financial forecast of a business.
• It is usually created at the start-up phase of a business but should be revisited regularly as a business evolves and grows.
• A business plan can also identify potential issues or risks that a business might face and provide possible solutions.

Purpose of a Business Plan

• Guide for operation: Business plans provide a clear path that the business should follow. By having a well-laid plan, decision-making processes can be simplified and it helps to stay focused on the pre-determined goals and objectives.
• Attracting investors: A business plan is a key tool in convincing potential investors or lenders about the viability of the business idea. It gives them a clear picture of the business’s potential for success and return on investment.
• Evaluating progress: A business plan can actually act as a benchmark that allows the business to track progress and growth. It can help identify areas where the business has done well or where improvements need to be made.
• Resource allocation: It aids companies in the optimal distribution of resources, ensuring they are used effectively to achieve set objectives.
• Risk management: A good business plan outlines potential risks that the business might face and provides a guide on how to mitigate those risks.

Key Components of a Business Plan

• Executive Summary: This is a brief overview of the business plan, highlighting all key points. It should inspire the reader to read more about the proposed business.
• Company Description: This section gives clarification about the legal structure, location, type and nature of the business.
• Market Analysis: Here, the business should denote the target market, customer demographics, market trends, and competitors. It helps to understand the unique selling proposition of the business.
• Organisation and Management: It describes the organisational structure and the team who will be running the business.
• Services or Product Line: This explains in detail what product/service the business is offering and how it serves the needs of customers.
• Marketing and Sales: This section discusses the marketing and sales strategies to attract and retain customers.
• Financial Projections: This provides an overview of projected revenue, expenses and profitability over the next three to five years.
• Funding Request: If the business is seeking for investment, this section would detail the amount of funding required and how it would be used.
• Appendix: This section has supporting documents like charts, graphs, designs, legal documents, etc.

Remember, a well-drafted business plan can be the difference between the success or failure of a business. A strong understanding of the above points will not only help in your exam preparation but also in real-life business scenarios.

INTERACTIVE VIDEO

It’s time to follow the journey of Finley Thomas, an aspiring entrepreneur who dreams of opening a small local shop. Throughout the interactive video, we will follow Finley through the process of creating a well-thought-out business plan, which is essential for the success of any business venture.

• DETAILED EXPLAINER VIDEO
• 10 QUESTION MULTIPLE-CHOICE QUIZ
• 6 INTERACTIVE ACTIVITIES
• INTERACTIVE CASE STUDY
• SUPPORTING STUDENT WORKSHEETS

CASE STUDY ANALYSIS MP MECHANICS

The real-life case study explores the journey of Molly Pratt, who started her own mechanics workshop in a small town in Lincolnshire, specialising in luxury vehicles. Despite approaching a bank for a loan of £20,000 to cover the costs of specialist equipment, she was unable to afford to employ any additional staff, resulting in high levels of stress. Unfortunately, MP Mechanics closed down in January 2019 due to a lack of interest in luxury vehicle repair and Molly's difficulties in managing the workload alone.

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AQA GCSE Business 3.1.1 The Purpose of Business

Subject: Business and finance

Age range: 14-16

Resource type: Lesson (complete)

Last updated

1 March 2024

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AQA GCSE Business 3.1.1 The Purpose of Business understand what a business is and the reasons for starting a business (including producing goods, supplying services, distributing products, fulfilling a business opportunity and providing a good or service to benefit others) understand the difference between goods and services, needs and wants understand the meaning of factors of production – land, labour, capital, enterprise define opportunity cost define the three sectors of primary, secondary and tertiary and give examples of types of business that operate in each sector understand the term enterprise and what is meant by an entrepreneur outline the characteristics of an entrepreneur, such as hard working, innovative, organised and willingness to take a risk outline the objectives of an entrepreneur, including to be their own boss, flexible working hours, to pursue an interest, earn more money, identify a gap in the market and dissatisfaction with current job understand that businesses face a constantly changing business environment due to changes in technology, economic situation, legislation and environmental expectations

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AQA GCSE Business: Business In The Real World

This section provides revision resources for AQA GCSE Business and the Business In The Real World chapter. The revision notes cover the AQA exam board and the new specification. As part of your GCSE Business course, you need to know the following topics below within this chapter:

• AQA Business
• Business In The Real World

The purpose and nature of businesses

By the end of this chapter, you should know the following information:

The purpose of businesses

• The reasons for starting a business
• The basic functions and types of businesses that exist
• Business enterprise and entrepreneurship
• The dynamic nature of business

The purpose of a business is to produce goods and/or supply services that are in demand to customers in a voluntary transaction.

A good is a physical product, for example a motorbike, while a service is an intangible item that you cannot physically touch such as legal advice.

A business will have people that work for it and this can range from one person to potentially thousands of employees all working to keep the business continuing. 

It is important to distinguish between a customer and a consumer.

If you buy a mobile phone for example and then use it yourself too, you are the customer (the person who bought it) and also the consumer (the person who uses it). If however, you buy the phone but then give it to your sister, you are the customer but your sister will be the consumer.

A business is successful if it can meet the needs and wants of its customers effectively. The difference between a need and want in business is a need is a basic human requirement, such as food and drink while a want is a desire for a particular product.

• A good is a physical product, such as a motorbike.
• A service is an intangible product that you cannot touch such as legal advice or a ride on a bus.
• A customer is someone who buys the product from the business.
• A consumer is someone who uses the goods and services that are produced by the business

Reasons for starting a business

Individuals who embark on their own business ventures are termed entrepreneurs. These entrepreneurs are prepared to undertake risks to establish enterprises of their own. They possess the determination, drive, and focus necessary to start their own businesses instead of working for others. The aptitude to embrace risks in order to develop a business concept is commonly known as entrepreneurship.

What are the objectives of entrepreneaurs?

There are numerous reasons why individuals might choose to become entrepreneurs:

• They desire to be their own boss and make their own decisions, rather than working for someone else.
• They wish to retain the full profits of a business for themselves, unlike when they work for others.
• They are driven by the ambition of establishing their own enterprise based on their own ideas and the potential of earning significant money.
• They aim to validate their abilities to themselves and potentially benefit others, achieving a sense of accomplishment.
• They are dissatisfied with their current job and seek more flexible working conditions that suit their preferences.
• They have identified a business opportunity which they believe can be profitable.
• They intend to provide a service for others. For example, some businesses are founded to assist the local community or particular groups, and these are often referred to as social enterprises, which do not always focus on profit-making.

Setting up a business presents numerous exciting opportunities – individuals can make their own choices and create something new. If the enterprise is successful, it can lead to a profound sense of personal achievement. Establishing a business offers a chance to demonstrate their abilities and possibly earn more than they could by working for someone else.

• A entrepreneur is someone that is willing to take on the risk of starting a new business
• Entrepreneurship refers to the ability to be an entrepreneur and to take risks in the development of a business idea
• A social enterprise is a business that has been set up to help improve society in some way rather than just simply make a profit.

Factors of production: land, labour, capital and enterprise

Factors of production are the resources or materials that businesses use to produce their goods or services. These are:

• Land – the physical land and the site on which the business is located, and other natural resources a business might use.
• Labour – the skills and numbers of employees employed by a business
• Capital – the equipment used to provide the goods or services, such as machinery and equipment
• Enterprise – the skills of the people involved in the business to identify business opportunities and bring together resources to meet these opportunities.

What a business is able to produce will depend on the quality and quantity of its resources and the way in which these resources are effectively combined and managed.

What is opportunity cost?

The opportunity cost is the sacrifice we make whenever we decide to do anything. If we decide to go out drinking tonight, we sacrifice the work we could have done had we stayed at home. If we stay at home, we sacrifice the enjoyment of going out. There is always a trade-off when we do anything. Whenever you make a decision, it is important to consider the opportunity cost and what are you giving up.

For example, if you decide to set up your own business, you may be giving up a more secure income in your existing job. If you decide to invest your savings in a business, then you are not using these savings to earn money through the interest that could have accrued from holding it in the bank.

What are the characteristics of entrepreneurs?

In any given nation, there are likely thousands or even millions of entrepreneurs, and while their traits can vary significantly, some characteristics are commonly observed among them:

• Innovative : Entrepreneurs are adept at recognizing opportunities. They are capable of identifying issues with current methods and envisioning more effective approaches. They possess a clear vision of what could be improved.
• Risk-takers : Entrepreneurs are willing to take the gamble that their concept will work, despite knowing that many new ideas do not succeed. Establishing a business demands both time and emotional commitment. A wrong decision can lead to the loss of savings and a sense of failure, so resilience is key.
• Hardworking and resolute : Starting a business is often challenging. For fledgling businesses, there may be tough negotiations and a lack of public awareness. Entrepreneurs must put in considerable effort to gain traction and deal with suppliers, often shouldering the burden alone at the outset, which can be demanding.
• Organised : Operating a business requires a broad array of skills and the capacity to make numerous decisions. Entrepreneurs often need to juggle various tasks and are typically required to coordinate materials, workforce, production, orders, deliveries, and finances, necessitating strong organisational skills.

Types of businesses

Businesses can be classified based on where they sit within the production process:

• The primary sector is made of of businesses that are in the first stage of production and use raw materials. Examples of such include farms, oil companies and fishing fleets.
• The secondary sector is made up of businesses that are in the second stage of the production process. They will use primary resources and convert these into products. Examples of secondary sector businesses include manufacturers.
• The tertiary sector is the final stage and comprises of businesses that provide services. Examples include fast food stores, estate agents and even delivery companies.

The functions of a business

A business must engage in several core activities to operate effectively and meet its objectives. These can be broken down into four main functions:

• Operations : This area is concerned with the actual production of the goods or services. It involves managing the day-to-day processes that contribute to the creation of the product, such as conducting quality checks, maintenance, and the logistics of getting the product out to the market.
• Human Resources : This function focuses on the people who work within the business. It encompasses various aspects of managing personnel, from hiring and recruitment to training and development. In large organisations, this might involve overseeing thousands of employees.
• Marketing : This function is critical for the promotion and sale of the product or service. It involves understanding customer needs and desires, and then creating a strategy to communicate the benefits of the product in such a way that customers are persuaded to purchase.
• Finance : The financial function is integral to the business's sustainability, dealing with the management of funds. It includes tasks such as budgeting, financial reporting, and investment planning to ensure that the business has the resources it needs to continue operations and grow.

The business environment

A business will be influenced by changes in the 'business environment.' This term encompasses all the external factors that can impact a business.

Changes in the business environment can be categorised under several headings:

• Technological Change : The pace of technological advancement is swift, creating new markets and products. For instance, Snapchat is a relatively recent phenomenon. Technology also transforms our shopping habits and the products we purchase. Consider the alternative accommodations provided by platforms like Airbnb, which now enable individuals to stay in another person's home instead of a traditional hotel.
• Economic Change : This includes various economic elements external to a business, such as the cost of borrowing money, known as the interest rate, the rate at which prices rise, referred to as inflation, and the overall income within the economy, known as the Gross Domestic Product or GDP. The term 'economic environment' often refers to these factors.
• Legal Change : Changes in laws and regulations can influence business costs, such as the requirement for businesses to pay a statutory minimum wage to their employees, or demand for products, such as restrictions on tobacco company advertising.
• Environmental Expectations : The public and consumers are increasingly interested in how a business impacts the environment. Questions such as what resources a business uses, how products are manufactured, and the logistics of product distribution are now significant considerations. The business's environmental impact can affect consumer choice, regardless of demand shifts. People are concerned about environmental issues not only for the present but also for the impact on future generations.

The business environment is always in flux, which highlights its dynamic nature. Regularly reviewing relevant news websites and the market landscape will reveal the extent of some of these changes. In response, a business must keep adapting and remain agile to how factors such as income, culture, new competitors and even changes in consumer attitudes shift. 

A good example is smoking which has seen a constant decrease in the UK due to changes in legislation (laws prohibiting how they are sold), social attitudes (prohibitions on how they are marketed and promoted) and economic factors (they have become really expensive).

Business ownership

There are different ways in which businesses can be set up in the UK and we will examine what these are and the advantages and disadvantages of each. By the end of this topic, you will know about each of the following types of ownership:

• What a sole trader is
• What a partnership is
• A private limited company (ltd)
• What a public limited public company is
• What a not-for-profit organisation is
• The advantages and disadvantage of each of these types of ownership

Sole trader

When a business is formed as a sole trader, it is owned and managed by one person although can employ other staff. Setting up as a sole trader is simple, you can start trading straight away and you are not required to register with the government or fill out lots of forms to begin trading. This makes operating as a sole trader popular and is why this business setup is often the first experienced by successful entrepreneurs. 

What are the advantages of being a sole trader?

The main advantages of being a sole trader are as follows:

• Becoming a sole trader is quick and easy to set up when compared to other types of businesses which require registering with the government.
• All decisions are made by yourself (the owner) and there is complete autonomy without the need to consult with other people. This results in fast decision making and the work and business operating in the way you want them to.
• All profits are kept by yourself, the sole trader and this means the businesses success results in you benefiting completely. There is no need to share the rewards with others unlike other business set ups.

What are the Disadvantages of being a sole trader?

The main disadvantages of being a sole trader are as follows:

• It can be highly stressful to make every decision by yourself, and some individuals may find it overwhelming to manage all aspects of the business.
• A sole proprietor must oversee all facets of the enterprise: the fiscal matters, marketing, and the operational side of the business. Not everyone excels in these areas.
• If the business encounters difficulties, you bear unlimited liability, which implies that you could forfeit everything you possess.
• The workload for a sole trader can be considerable. As you strive to grow the business, it may become challenging to find time for a break, risking the business's momentum.
• Should the sole proprietor pass away, the business typically ceases to operate, regardless of its history.
• As a sole trader, amassing significant capital can be challenging. It often relies on personal funds or loans from acquaintances to start the business. Banks may be hesitant to lend due to the high failure rate of new enterprises and often impose steep interest rates on loans.
• A business run by a sole proprietor is often smaller in scale and may not possess the buying leverage of larger companies, potentially resulting in higher costs and reduced profit margins.

Partnership

In accordance with the 1890 Partnership Act, a partnership is formed when two or more individuals collaborate to pursue a shared goal. For instance, a group of medical professionals might join together to establish a practice, or a team of designers could unite to start a studio. Partnerships are typically composed of a minimum of two individuals but can include up to twenty, encompassing professions like lawyers, accountants, auctioneers, and real estate agents.

Deed of Partnership

When establishing a partnership, those involved are advised to formalise a Deed of Partnership. This legal document delineates several aspects of the partnership, such as:

• The division of profits and how much work each partner does.
• The amount of money each partner contributes initially.
• The rights related to decision-making and leaving the business.
• The process of valuing the business if new members are considered or if a partner exits.
• The method of resolving disputes within the partnership.

The purpose of the Deed is to ensure clarity on how decisions are made and how profits are distributed. Without such a Deed, profits are divided equally, regardless of the individual input.

Advantages of Partnerships

The advantages of a business set up as a partnership are as follows:

• Partnerships enable multiple individuals to contribute financially, reducing the reliance on personal funds.
• More people are involved in a partnership compared to a sole trader, which can lead to more comprehensive strategizing and problem-solving, with partners benefiting from each other’s expertise.
• Partners can specialize in different areas of the business, offering a wider range of services than a sole trader might be capable of.
• Partners can support one another during absences, making it less burdensome than running a business alone.

Disdvantages of Partnerships

The disadvantages of a business set up as a partnership are as follows:

• The different partners may all have differing ideas on how they want to run the business which can lead to dispute. Having multiple partners invites the potential for disagreements on key decisions making it difficult to run the business effectively or responsively to the business environment. 
• Decisions made in a partnership set up can take longer to make as all equal partners will need to agree to such. This hinders efficiency compared to a sole trader for example, who can make the decision themselves quickly without the need to discuss this at any length.
• The rewards of the business have to be divided amongst the partners rather than kept by one person, as would be the case as a sole trader.
• A partnership often means the partners all have unlimited liability and if a mistake is made by one partner, they are all responsible for it. This can create problems as the poor or bad behaviour of one partner can seriously damage another partners life in different ways.

A company is financed by its investors, known as shareholders. While various types of shares exist, the most commonly issued are 'ordinary shares.' Holders of these shares are typically entitled to one vote per share during company decisions. For instance, owning 51% of the shares equates to 51% of the voting power.

Legally, a company is recognized as its own entity, separate from its owners, capable of owning assets such as property and equipment. This separation also implies that when members of the public buy shares, they're investing in the company itself, not the individuals behind it. This structure affords shareholders limited liability, a crucial factor that encourages investment by reducing the risk of losing personal assets if the company encounters difficulties.

The governance of a company is in the hands of its shareholders. Daily operational decisions, however, are made by managers. In private limited companies, shareholders may also act as managers, but in public limited companies, there is typically a distinction between shareholders and management, leading to potential disparities in objectives. For instance, managers might prioritize long-term growth, while shareholders could be more interested in immediate financial returns, creating possible conflicts.

In the UK, under the 1980 Companies Act, there are two types of companies which are:

Private limited company (ltd)

Public limited company (plc).

Both types are owned by shareholders with limited liability however there are key differences which we will explore below.

• A company is a business with its own legal entity. It can own assets (items), owe money to people and also sue or be sued by other people or companies.
• A shareholder is a person or organisation that owns a part of the company through the purchase of shares.

A private limited company will put 'ltd' after their names (e.g. Acme ltd) and will not publicly advertise its shares for sale. Private limited companies are usually owned by family members and there can be restrictions on whom the shares could be sold to (through it's Articles of Association) which allows the business to be kept within a family or certain group of owners.

Advantages of a private limited company

• The liability of shareholders is restricted, safeguarding personal assets and making it more appealing for investors to contribute capital without the fear of unlimited liability. Should things not go as planned, their financial risk is confined.
• Customers often perceive a company as more prestigious than a sole proprietorship, potentially giving the company an edge in the market.
• The company's existence is not tied to its founders. If the original owners pass away, the company continues, with the ownership of shares transferring within the business structure.
• Professional managers can be appointed to oversee daily operations, allowing owners to focus on strategic aspects while profits are shared among the shareholders.

Disadvantages of a private limited company

• Establishing a private limited company involves several legal formalities, including registration, which requires both time and financial resources.
• Companies are obligated to produce and disclose their financial statements to the public, which can lead to a loss of confidentiality and could potentially benefit competitors.
• The accounts of the company need to be regularly checked by an independent accountant (known as an auditor) which results in additional costs.
• The company will need to pay corporation tax and this can under some circumstances be higher than income tax if there business was set up as a sole trader.
• Every investor in the company become a shareholder and they subsequently have a vote on on the direction of the business. The values of such investors may not necessarily be the same as the original owners and this can lead to clashes on the direction of the company or how it is run.

A public limited company will put 'plc' after their names (e.g. Acme plc) and can advertise their shares for sale or be listed on the Stock Exchange if it has a share capital of over £50,000. With public limited companies (plc) it is not possible to restrict who the shares can be sold to and means shareholders can subsequently sell them on to whoever they wish via the Stock Exchange.

The share price and increase or decrease dependent on demand which in itself has benefits and drawbacks. 

Advantages of public limited companies

• Plcs can promote their shares to the general populace, leading to increased capital potential due to wider market access. This could facilitate significant fundraising for business expansion.
• Such companies often receive more media attention, which can translate to heightened public interest and serve as an economical form of advertising.
• Public limited companies generally carry more prestige compared to private companies, potentially boosting customer confidence.
• Investors in plcs have the flexibility to sell their shares with relative ease given the active trading on stock exchanges, providing liquidity to their investment.

Disadvantages of public limited companies

• While increased media exposure can be beneficial, it also means that any negative events are more likely to be highlighted, possibly damaging the company's reputation.
• A plc has less control over its shareholder base, risking the possibility of a takeover if a competitor acquires enough shares.
• Plcs face stricter regulations than private limited companies, necessitating the provision of detailed annual financial reports to shareholders and the public, which can be costly and reveal sensitive information.
• Transitioning from a private to a public limited company can introduce new stakeholders with different perspectives, potentially leading to conflicts in the company’s strategic direction.

When a private limited company decides to become a public limited company, this is called a floatation . To do this, the shares must be sold to the general public and the firm needs to meet the Stock Exchanges rules.

Share ownership

Shares in public limited companies are usually owned by financial institutions such as banks or insurance companies and such financial institutions often pressure the companies to pay out profits in the form of dividends. While this may make shares in such companies lucrative to own, it means that the plcs then have less funds to invest in the business itself and it's growth.

In the UK, only approximately 14% of plc shares are actually owned by individuals. 

Not-for-profit organisations

Not-for-profit organisations, such as charities are set up to achieve specific aims and objectives rather than turn over a profit for the benefit of shareholders. For example, you have many charities that are set up to help causes such as homelessness or disaster relief in countries that may be struck by natural events such as earthquakes or tsunami's. You may even have someone set up a not-for-profit for young people in the form of a youth club to help educate or offer diversionary activity that tackles crime. 

Similar to profit based companies, not-for-profit organisations will have to raise money to operate and invest but the key difference is it's purpose is not to make a profit but usually to serve a social good or cause, known as social objectives. It will be set up to help society in some form and any profits that are made will be invested back into the business to help its societal objectives further.

How to choose the right business structure?

Choosing the correct structure for a business is contingent on various factors. Initially, many entrepreneurs opt for sole trader due to its straightforward setup and commencement process, without the need for registration or complex legalities. In the early phases, the entrepreneur's focus is less on the potential risks and more on the growth of the business, making the protection of personal assets through limited liability less urgent.

However, as the business expands, the need to shield personal wealth might grow, prompting the entrepreneur to consider attracting external investors and restructuring the business to facilitate further growth and limit personal liability.

For those driven by societal benefits rather than profit, establishing a not-for-profit organization is a viable option. Such entities reinvest all earnings back into their social missions rather than distributing profits to shareholders.

Setting business aims and objectives

This next section looks at how businesses set their aims and objectives. The AQA GCSE Business specification states you need to know the following:

• What are business aims and objectives
• Purpose of setting objectives
• Role of objectives in running a business
• Changing objectives
• Use of objectives in judging success

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The Purpose of Business ( AQA GCSE Business )

Revision note.

Business Content Creator

What is a Business?

Businesses exist to obtain and process inputs so that they can provide goods and/or services that meet the needs or wants of customers while adding value

Diagram: The Purpose of Business Activity

The purpose of business activity is to take inputs, add value to them, and create products which meet customer needs

 To produce goods or services

The primary purpose of business activity is to produce and sell goods or services that satisfy a demand in the market

Goods are physical, tangible products, such as bicycles and T-shirts

Services are non-physical , intangible products such as hairdressing, tourism and manicures 

Meeting customer needs and wants

The ultimate goal is to create products that meet the needs, wants and preferences of customers and provide value to them

By meeting customer needs, businesses can build customer loyalty , increase brand awareness, and generate revenue

To add value

The third purpose of business activity is to add value to products or services 

Value-added features can differentiate products from competitors, create a unique selling point , and increase customer satisfaction

E.g. a product that is easier to use, has a better design, or is of higher quality than competitors can create a competitive advantage for a business

Reasons for Starting a Business

Businesses are established for a range of reasons

Producing goods and services

Identifying an opportunity to produce a unique product

E.g. Levi Roots identified an opportunity to produce his Reggae Reggae Sauce products on a large scale

Distribution of products

Ensuring customers can purchase products that they may otherwise be unable to obtain

E.g. Wing Yip Wholesale sells Chinese cooking ingredients to restaurants and small businesses in the Birmingham area

Fulfilling a business opportunity

Having a business idea that has the potential to make a profit

E.g. Elvis & Kresse 's owners spotted the potential to turn used fire hose material into luxury accessories such as handbags, belts and wallets

Providing a good product to benefit others

Meeting a social need that is currently overlooked

E.g. Creed Outdoor Learning provides holiday adventure activities at an affordable price to families in Kent

Further information on the reasons entrepreneurs set up and run businesses can be found here

Added value is often confused with profit. However, there is a key difference. Profit is revenue minus all direct and indirect costs, whereas added value is revenue minus the cost of a product . Added value doesn't include marketing, promotional, or advertising costs, and indirect costs such as rent, utilities and employees' salaries are also not included in its calculation.

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Author: Lisa Eades

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

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The Purpose & Nature of Business | AQA GCSE Business

Last updated 21 Dec 2023

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This quiz tests GCSE Business students' knowledge & understanding of the purpose and nature of business. The quiz is for the AQA GCSE business specification.

Click here to access the revision quiz on The Purpose & Nature of Business

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