Why businesses exist Business objectives such as: Profit Growth Survival Cash Flow Social Ethical The relationship between mission and objectives Why businesses set objectives The measurement and importance of profit: Revenue (also known as turnover or sales) Fixed Costs Variable Costs Total Costs

1. 3.1.1 Understanding the nature
and purpose of business

2. You will need worksheet 3.1.1 for this topic

3. Lesson objectives NEW spec
• Why businesses exist
• Business objectives such as:
• Profit
• Growth
• Survival
• Cash Flow
• Social
• Ethical
• The relationship between mission and objectives
• Why businesses set objectives
• The measurement and importance of profit:
• Revenue (also known as turnover or sales)
• Fixed Costs
• Variable Costs
• Total Costs

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

5. Why businesses exist

6. Discussion – why does a business exist?
Dog walker
Eyelash extensions
TikTok shop
Cafe

7. Why does a business exist?
• Some possible answers to the discussion:
• Every business was started for a reason by an entrepreneur who was
prepared to take a risk in the hope of a reward. These may have been
started:
• Because the owner wanted their own business
• Because the owner wanted more control
• Because the owner wanted to start a business that helped the planet or their
local community in some way

8. Definition: Business Objectives
• A business objective is a goal or an aim that a business wants to
achieve.

9. SMART objectives
An example of SMART objective might be for a
supermarket chain to gain an extra 10% market share
in one year.
Can you explain why this is an
example of a SMART objective?
To be useful and meaningful to a business the objectives need to be SMART

10. Business objective: Profit
• Profit is total revenue (money
into the business) minus total
costs (money out of the
business) P=TR-TC
• Profit maximisation is the aim of
most businesses, because it will
give it the capital needed to
expand and grow
• Profit maximisation will enable
the business to replace any old
machines or equipment

11. Business objective: Profit maximisation
• Many products in supermarkets
are getting smaller, can you give
any examples?
• This is known as shrinkflation
where a manufacturer keeps the
price the same but makes the
product smaller
• Can you link shrinkflation to
profit maximisation?

12. 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 takeover

13. Business objective: Survival
• A 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 not mean much profit at the
start, but when the business starts to
grow it will able to comfortably raise
prices

14. 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
• Can you explain the connection between
poor cash flow and business failure?

15. Business objective: Social
• Social objectives are also known
as ‘Corporate Social
Responsibility’ or CSR objectives
• This may involve:
A. Reducing impact on the
environment
B. Fair wages in developing
countries
C. Helping society
D. 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
Video 2 minutes 45 seconds - Can you
explain why The Big Issue is an example
of a business with a social objective and
not a charity?

16. Business objective:
Ethical
• Ethics are the moral principles 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
• Did you know that Kellogg’s was one
of the most ethical companies on the
planet? Can you find other
examples?
• Kellogg’s provide training and
technical aid to farmers and
workers around the world. The goal is
to help them increase
productivity, regenerate soil, protect
species and habitats, and improve
their livelihoods.
• Kellogg’s are working towards 100%
reusable, recyclable, or compostable
packaging by 2025.

17. The relationship between mission and objectives

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

19. Example of a mission statement

20. 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

21. Why businesses set objectives

22. 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

23. The measurement and importance of profit

24. Definition: Profit
• The formula for calculating profit is: P = TR – TC
• Where P is Profit
• Where TR is Total Revenue
• Where TC are Total Costs
• For example, a business earns £6,000 in revenue in a year. The total
costs were £2,000, leaving a profit of £4,000*

25. Total Costs (TC)
• The total costs (TC) of a business
are a combination of Fixed Costs
(FC) and Total Variable Costs
(TVC)
• 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

26. Definition: Fixed costs (FC)
• Fixed costs are costs that do NOT vary with the level of output. These
are costs that must be paid no matter what is happening in the
business. For example, the rent must be paid even if the company is
not producing or selling any products.
• Fixed costs appear in the formula as FC

27. Examples of Fixed Costs (FC)
A. Rent payments
B. Mortgage payments
C. Loan payments
D. Insurances
E. Lease of machinery or van
(monthly fixed payments)
F. 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

28. Fixed costs formula
The formula to calculate fixed costs is:
FC = TR – TVC – P
Where:
• P is profit
• FC are Fixed Costs
• TR is Total Revenue
• TVC are Total Variable Costs

29. Fixed Costs (FC) example calculation
Try this example Fixed Costs (FC) calculation:
TR £7,000
TVC £1,000
P £4,000
What are the FC? ______________________
• Will this type of formula also work to calculate TR or TVC?

30. Fixed Costs (FC) Answers
TR £7,000
TVC £1,000
P £4,000
FC £2,000
• Will this type of formula also work to calculate TR or TVC?
• And yes it works for TVC: TVC = TR – FC – P
• TR is an addition: TR = P + TVC + FC

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

32. Examples of Variable Costs (TVC)
A. Cost of the stock sold (Known
as COS or Cost of Sales in
accounting)
B. Raw materials
C. Fuel
D. Packaging
E. 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

33. Variable Costs (VC) formula
The formula to calculate variable costs is:
TVC = TR – FC – P
Where:
• P is profit
• FC are Fixed Costs
• TR is Total Revenue
• TVC are Total Variable Costs

34. Variable Costs (TVC) example calculation
Try this example variable costs calculation:
TR £72,000
FC £20,000
P £44,000
TVC is _______________________

35. Variable Costs (TVC) answer
TR £72,000
FC £20,000
P £44,000
TVC £8,000

36. Definition: Revenue
• Revenue is income into a business; this could be through sales or
investments.
• Total Revenue appears in the profit formula as TR
• Revenue; there are many words that also mean revenue including;
sales revenue, turnover, or sales

37. Sales revenue / Total Revenue (TR)
• Sales revenue is income into a
business and is referred to by
AQA as Total Revenue (TR)
• This is money into the business
till, cash tin or online basket and
could be:
1. Cash
2. Cheque
3. Card payments
4. Apple Pay
5. PayPal
If you were running a stall at a festival
selling hats and sunglasses, what would
your sales revenue be? Press Esc key

38. Total Revenue (TR) formulae
The formulae to calculate Total Revenue are:
TR = P + TVC + FC Or TR = P + TC
Where:
• P is profit
• FC are Fixed Costs
• TR is Total Revenue
• TVC are Total Variable Costs
• TC is Total Costs (FC + TVC)

39. Total Revenue (TR) example calculation
Try this example Total Revenue calculation:
P £1million
TVC £75,000
FC £125,000
TC £200,000
TR is _______________________

40. Calculating Total Revenue (TR) answers
P £1million
TVC £75,000
FC £125,000
TC £200,000
TR £1.2 million

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

42. If TR = £21,000, TVC = £7,000 and TC are £11,000
a) What are the FC? £4,000
b) What is the P? £10,000

44. Sample question 1

45. Answer question 1
• Answer is D
• Why?
• 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 therefore £150 – £40 = £110

46. Sample
question
2

47. Answer question 2
• C
• Why?
• At zero the business only pays the fixed costs which are £420 and as
they are fixed they will also be £420 at 3 units of output.
• £1320 - £420 = £900

48. • Objective; A goal or aim of the business
• Social objective; An aim of the business is to help
society or the planet in some way
• Ethical objective; An aim of the business to trade
ethically (in a morally correct way)
• Total 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)