Enterprise, entrepreneurs and adding value

What a business actually does

A business takes inputs (land, labour, capital, enterprise), transforms them, and sells outputs. The point of the transformation is added value: selling price minus the cost of bought-in materials. A bakery that buys $2$ of flour and sells a loaf for $5$ has added $3$ — note that added value is not profit, because wages, rent and energy have not been taken off yet.

Ways to add more value

Branding, better design, faster service, packaging, convenience of location. Each raises what a customer will pay without necessarily raising material cost. When a question asks how a business could add value, the answer must name a method and say why customers would pay more for it.

The entrepreneur

Enterprise is the fourth factor of production: the person who spots an opportunity, organises the other three and bears the risk. Risk-bearing is what separates an entrepreneur from a manager, and it is the word Cambridge looks for.

Why new businesses fail

The usual causes are lack of finance, poor cash-flow management, weak market research and over-optimistic forecasts. Notice that a business can be profitable on paper and still fail because cash runs out — that distinction runs through the whole syllabus.