Why businesses exist

A business takes inputs (land, labour, capital, enterprise), transforms them, and sells outputs that customers value more than the inputs cost. That gap is added value. Everything else in the specification is a decision about how to widen or defend that gap.

Businesses set objectives — measurable targets — because they turn a vague purpose into something you can plan for, delegate, and later judge performance against. AQA's common objectives are:

• Profit — often the default, but not always the priority.
• Growth — sales, market share, scale.
• Survival — the overriding objective for a start-up, or for anyone in a recession or a cash crisis.
• Cash flow — you can be profitable and still go bust; cash pays the wages.
• Social and ethical objectives — e.g. Fairtrade sourcing, B-Corp certification, net-zero targets.

Evaluation habit (AO4): objectives are not equally weighted, and they change with context. The same firm may chase growth in a boom and survival in a downturn. Whenever you are asked "what should this business do?", ask first: what is it actually trying to achieve, and why?

Mission and objectives

A mission is a qualitative statement of what the business is for — its enduring purpose and values. Objectives are the quantified, time-bound targets that flow from it. Below the objectives sit strategy (the long-term plan) and tactics (the short-term actions).

A good objective is SMART. "Be the best" is a mission fragment; "raise UK market share from 12% to 18% by December 2028" is an objective you can actually manage.

Measuring profit

AQA is precise about the components of profit, and you must be too:

• Revenue (also called turnover or sales) — the value of sales, before any costs.
• Fixed costs — do not vary with output in the short run: rent, salaried staff, insurance, depreciation.
• Variable costs — vary directly with output: raw materials, packaging, piece-rate wages, delivery.
• Total costs = fixed + variable.

Nail the distinction: "fixed" does not mean unchangeable — rent can rise. It means fixed with respect to output. If you make one unit or ten thousand, the rent bill is the same.

Fixed or variable?

Your turn — total costs

Your turn — profit

Different business forms

The single biggest issue is liability.

• Unlimited liability (sole traders, ordinary partnerships): the owner and the business are the same legal person. Business debts are your debts — your house is at risk.
• Limited liability (Ltd and plc): the company is a separate legal entity. Shareholders can lose only what they invested. This is what makes large-scale outside investment possible at all.

Then the split within limited companies:

• Private limited company (Ltd) — shares sold privately, usually needing the other owners' agreement. Keeps control tight; limits the money you can raise.
• Public limited company (plc) — shares traded on a stock exchange. Huge access to capital, but full disclosure, dispersed ownership, exposure to a hostile takeover, and pressure for short-term results.

Beyond the private sector: public sector organisations (state-owned, funded by taxation, objectives are service-based) and non-profits — charities and mutuals — where any surplus is reinvested into the mission rather than distributed.

Public sector and non-profit organisations

Not every organisation you meet in a case study is chasing profit.

• Public sector — owned by the state and funded largely through taxation (the NHS, state schools, the BBC). Objectives are service objectives: coverage, waiting times, universal access. Success is judged on value for money, not return on capital, and decisions are exposed to political change.
• Non-profit organisations — charities and mutuals (building societies, co-operatives) are owned by their members or held in trust for a cause. They can and do make a surplus; the difference is that the surplus is reinvested in the mission rather than distributed to shareholders.

Common exam trap: "non-profit" does not mean "no surplus" and does not mean the organisation ignores efficiency. A charity that runs at a deficit fails its beneficiaries. It means the claim on the surplus is different — and that changes the objectives, not the need to manage well.

Which business form?

Tap a feature, then tap the business form it belongs to.

Shareholders, share price and market capitalisation

Ordinary share capital is money raised by selling ownership. Shareholders invest for two returns:

• Dividends — a share of the profits, paid out per share.
• Capital gain — selling the share for more than they paid.

Share price is driven by expected future profits: trading results, strategic announcements, the wider economy, interest rates (higher rates make shares relatively less attractive), and rumour. A falling share price matters because it makes raising new equity dearer, dents the reputation of the board, and can put the firm in play as a takeover target.

Ownership shapes objectives. A founder-owned Ltd can nurse a loss-making product for a decade. A plc answering to institutional investors on quarterly results often cannot — this is the pressure for short-termism that reappears in 3.7 and 3.10.

Your turn — market capitalisation

So what if the share price falls?

Businesses operate in an external environment

External change hits a business through exactly two doors: it changes costs, or it changes demand. Sort every stimulus you meet into one of those.

• Competition — more rivals → downward pressure on price → lower revenue per unit; may also raise costs (more advertising).
• Market conditions — a growing market lifts demand for everyone; a saturated one turns growth into a fight for share.
• Incomes — rising real incomes lift demand for normal and especially luxury goods; they reduce demand for inferior goods (own-label value ranges).
• Interest rates — up: borrowing costs up, mortgage payments up, disposable income down, demand for credit-financed goods (cars, sofas) down, and firms' own loan costs up.
• Demographics — an ageing population reshapes both the customer base and the labour supply.
• Environmental issues and Fairtrade — raise input costs, but can raise willingness to pay and protect the brand.

Interest rates: who hurts most?

Your turn — percentage change

Match each objective to the situation that fits it

Tap an item on the left, then its partner on the right.

Thinking like an examiner

Nearly every "What is business?" question is really asking you to weigh competing objectives. Build the judgement into your answer:

• It depends on the time frame. Cutting the R&D budget raises profit this year and destroys it in five.
• It depends on ownership. A plc under activist-investor pressure and a family Ltd will answer the same question differently — and both can be right.
• It depends on the market. Survival is the sane objective in a shrinking market; in a booming one, failing to chase growth hands the scale advantage to a rival forever.
• Profit ≠ cash. A profitable firm that has sold on 90-day credit and paid its suppliers in 30 can still be unable to pay the wages. Remember this when you meet cash flow forecasting in 3.5.

A-level move: don't just list objectives — rank them for this business, in this context, and say what would have to be true for your ranking to change.

Changing business form

The big ideas to know

Press Finish to see your score.