AQA A Level Business

3.1.1
Understanding the nature and purpose
of business
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
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
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?
Why businesses exist
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 An example of SMART objective might be for a
supermarket chain to gain 10% extra market
• Achievable share in one year.
• Realistic Can you prove why this is a SMART objective?
• Timely
Business objective: profit
• Profit is total revenue (money
into the business) minus total
costs (money out of the business)
Read / watch this
• Profit maximisation is the aim of story – the
most businesses, because it will decision to locate
was driven by
give them the capital needed to profit
expand and to grow the business maximisation
strategy
• Profit maximisation will enable
the business to replace any old
machines or equipment
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 t
he past 5 years
• Can you link this to profit
maximisation?
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 Read this article, can you sum up how
company, so through a merger or a Boohoo has grown?
take over
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 Watch the video and decide if survival was
the main business objective in this example
• This may not mean much profit at the
start, but when the business starts to grow
it will able to comfortably raise prices
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?
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 Watch the video – can you explain why
operating sensible hours so as not to The Big Issue is an example of a business
cause noise pollution in the local with a social objective and not a
community charity?
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 How can having a social objective
Trade LINK help The Body Shop?
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 LINK
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
The relationship between mission and objectives
Definition: Mission Statement
• A mission statement is a formal phrase that sets out the aims and
values of a business or organisation
How the Hierarchy Works
• The objectives cascade down from the mission
getting progressively more specific
• Overall objectives are translated into more specific
objectives for different parts of the business
• The hierarchy ensures that at each level the objectives
are consistent with the objectives that are above
them in the hierarchy
Mission and objectives
• A mission statement is at the top
of a pyramid of corporate vision
for the company Mission
Statement
• The mission inspires the
objectives and strategies of the Corporate
business Strategy
• For example, the mission
statement of Levis discusses Business Objectives
sustainability, which means that
part of their strategy is to source
responsibly Functional Objectives
Why businesses set objectives
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 Performance Objective is
• If an objective is set then the results is evaluated set
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
Performance
• The performance of the business is monitored
can be measured against how well it
has met its set objectives
Main functions of objectives
• A clear statement of what needs to be achieved
• A focus for all activity
• Targets for individual and group achievement
• A means of measuring performance
How objectives can be used
• Implement the mission
• Provide a clear focus for decision making
• Provide a target
• Motivate employees
• Facilitate control of actual performance
• Provide a criteria for evaluating performance
• Reduce uncertainty
• Provide a sense of unity
The measurement and importance of profit
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*
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
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

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
If you were running a stall at a festival selling
of output is hats and sunglasses, what would your fixed
costs be? Press Esc key
Calculating Fixed Costs (FC)
• If you know your Total Revenue
(TR) and Total Variable Costs Try this example
(TVC) and Profit (P) figures then
you can calculate your Fixed
Costs (FC) TR £7,000
TVC £1,000
P £4,000
• FC = TR – TVC – Profit
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
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
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
Calculating Variable Costs (TVC)
• Formula to calculate variable
costs: Try this example
• TVC = TR – FC – P

TR £72,000
FC £20,000
P £44,000
TVC is _______________________
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
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 If you were running a stall at a festival selling
hats and sunglasses, what would your sales
• PayPal revenue be? Press Esc key
Calculating Sales Revenue (TR)
• Use this formula to calculate
sales revenue: Try this example
• TR = P + TVC + FC
P £1million
Or
TVC £75,000
• TR = P +TC
FC £125,000
TC £200,000
TR is _______________________
Plenary quiz

If TR = £21,000, TVC = £7,000 and TC are £11,000

a) What are the FC? £__________________

b) What is the P? £___________________

 Sample questions
These are taken from a mixture of past papers (current spec),
past papers (legacy spec) and SAM materials.
Case study
for sample
question 1
(1/4)
Case study
for sample
question 1
(2/4)
Case study
for sample
question 1
(3/4)
Case study
for sample
question 1
(4/4)
Sample question 1

L1 L2 L3
1-3 4-5 6
Answer question 1: part 1 of 2
Answer question 1: part 2 of 2
Sample question 2
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
Revision video
• 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)