Business - 01
Business - 01
Business - 01
Entrepreneurs
Entrepreneurs are people who bring new businesses and products/services into the market. They are usually
creative, patient, determined, resilient and passionate about their ideas. They often receive Government
grants to help and encourage them set up a business.
There are a lot of motives or reasons for becoming an entrepreneur, including the following…
There are several issues that young people may experience when becoming an entrepreneur…
Franchises
A franchisee is a person or company who has paid to become part of an established franchise like McDonalds.
A franchise enables you to run your own business whilst using a successful formula created by the franchisor.
The Government suggests that 70% of new businesses fail before three years compared with 7% of franchises.
This is usually because the idea for the business was not viable or because stronger competitors emerged.
- Décor
- Product range
- Staff uniforms
However the franchisee is usually able to make their own decisions about the following…
It is a good way of starting a business without having There is not much freedom in decision-making
to do it from scratch
Customers will recognise the brand easily The franchisor takes a cut of the business income
which can make it hard to make large profits
Due to the success of the franchise, banks can Franchises may not be as good as they sound. It can
approve more loans and with less interest be expensive to buy into with bad support
Protecting Ideas
An idea cannot be fully protected, but patents and copyrights are methods of preventing others from copying
and distributing an invention or creative piece of work. This is called Intellectual Property.
A Patent provides a certain amount of time for which an invention or product cannot be copied by anybody
else. Patents can cost from £1,000 to £500,000+ and breaking a patent is not a criminal offence. Owners of
patents can only claim damages through the civil courts.
A Trademark is a sign that can distinguish one product, service or brand from another another. These can be…
A Copyright applies to written work (for example: books and song lyrics). Unlike a patent, a copyright occurs
automatically and there is no need to pay for it.
Adding Value
The process of adding value involves doing something to a product to higher its price. For example: ready-
grated cheese is more expensive than a block of cheese. Products that are protected by patents can be used to
add value.
It is hard to add value to products This sector is manufacturing and Effective marketing can make
here as they are often the same adds the most value (eg: Walkers v products stand out here (eg: M&S)
(oil, coal, gas, etc) Tesco Value)
Business Plans
A business plan sets out how a business idea will be financed, marketed and put into practice. It is likely to be
essential in getting funding from a bank because they will need to see how well a business idea is thought
through and how financially viable it is.
- It gives directions
- It helps make decisions about resources that are needed
- It helps to measure success
Any business plan is only as good as the information on which it is based. It is a good guide, but is only a plan.
Benefits Problems
It makes the entrepreneur consider every aspect of The BP is only a plan and does not guarantee success.
the start-up so they can try to eliminate failures For example: sales may be lower than predicted
It makes the entrepreneur aware of what skills they If the plan is too rigid some problems may arise. It
are missing so that they can hire an expert must be flexible to adapt to market changes
Venture capital may be available to the business if High sales expectations may cause overspending in
investors like the business plan other areas such as stock and staffing
Legal Structures
The legal structure of a business is crucial in determining how seriously the owners will be financially impacted
if things go wrong. It also has an effect on the taxation levels that the business and owners need to pay.
In Unlimited Liability the owners of a business are fully responsible for any debts incurred, even if this requires
them to sell their personal assets or possessions. There are two types of businesses that have unlimited
liability…
- Sole traders
- Partnership
A Sole Trader is someone who owns and operates their own business. A sole trader can have employees, but
they must take all the final decisions about running the business.
They make all the decisions and keep all the profit The owner is the only one responsible if it fails
There are no administrative costs to pay There are long hours of work involved
They are confidential as accounts aren’t published Becoming ill causes problems running the business
A Partnership is where 2-20 people start their own business with the goal of making profit. Trust is vital.
There is additional skills and a shared workload There is UL even when it is your partners fault
There is more capital available to invest into There is a loss of control and profits are shared
With Limited Liability, debts incurred by the business must stay within the business. The owner doesn’t have
any personal liability and doesn’t need to sell personal possessions if the business fails.
A business must go through a legal process to gain limited liability. This process is called incorporation.
A small business can be started up as a sole trader, partnership or Private Limited Company (LTD). The start-
up for an LTD can be as little as £100 and the company can be fully owned by the entrepreneur.
Shares cannot be floated on the Stock Market – this allows the owner to have full control over the business.
Putting LTD after a company name is a legal requirement and says that a business is small with limited liability.
It gives confidence to shareholders to invest More annual costs (eg: audited accounts)
There is wider access to finance opportunities Businesses must publish financial information
An LTD can become a Public Limited Company (PLC) when it has £50,000+ in share capital. The business may
then be floated on the stock market where the public can buy shares. This provides finance for the business to
expand. However, too much cash in a short amount of time can make a business grow too fast.
Some other forms of businesses include non-profit organisations which focus on the interests of the members
and not shareholders, and Co-operatives which are worker-owned.
Market Research
Market research gathers information about consumers and competitors. A target market is the chunk of the
whole market that the product or service is aimed at.
It aims to identify consumers buying habits and attitudes to products and services. It can be numerical (how
many people buy the Daily Mail?) or qualitative (why do these people buy the Daily Mail?)
Secondary Research is data that already exists. Secondary research can be found through the internet,
newspapers and Government produced data.
Advantages Disadvantages
Primary Research is the process of gathering information directly from people within your target market. This
can be very expensive when carried out by specialist market research companies and there must be a lot of
care taken to eliminate bias from your research! Types of Primary Research may include the following…
- Observation/Experimentation
- Questionnaires
- Phone calls
Advantages Disadvantages
Quantitative research asks questions which usually provide simple, numerical answers. For example, ‘which
pack do you prefer?’ or ‘how many newspapers did you buy last week?’ However it can be hard to find valid
data when using quantitative methods in small-scale research.
Qualitative research is in-depth research into the motivations behind buying habits. It does not produce
statistics like ‘53% liked the chocolate’ but asks why they liked it instead. One form of this research could be
interviews. However, it is hard to collect qualitative research in small-scale samples and bias may creep in.
Sampling
A Random sample is where everybody in the population has an equal chance of being chosen. Achieving a truly
random sample requires careful thought because people may often be missing.
A Quota sample is where interviewees are selected in proportion to the consumer profile of the target market.
For example: if the total amount of people at college was 1,000 with 40% males and 60% females, the male
number would be 400 and the female number would be 600. These people can then be broken down into age
groups, directorates, etc.
This method allows interviewers to interview anybody as long as they achieve the correct quota in the end. It
can work out relatively cheap and effective and is used most often by market research companies.
A Stratified sample is when you interview people with specific characteristics (eg: 30-45 year olds). So within
this section of the population individuals can be found at random or by setting a quota.
There are many factors which can potentially influence the choice of sampling methods
- Cost
- Time
Sample Size
After deciding which method to use the next consideration is how many interviews should be conducted.
Some companies interview between 100 and 1,500 people and consider it large enough to reflect the views of
45 million people. This can be heavily argued.
A sample with at least 1,000 responses usually produces a high confidence level compared with 10 or 100.
However, it can be extremely expensive to conduct large amounts of research and sampling 1,000 people can
cost £30,000. Surveys of 4 or 5 new products may cost £120,000+ on research alone.
When answering a question on market research or quantitative figures I MUST question the following…
Types of Markets
A market can be anything from the amount of people that buy a specific product, the amount of products in a
category or how much is spent on one specific thing. They key elements to any market are…
Local markets are small firms which don’t really care about the size of the national market. They are more
concerned with the state of the local market (eg: local hairdressers and plumbers).
However, some small businesses may still be focused on the national market (eg: selling their products through
large supermarkets or by operating on the internet)
National markets cater for the nation but are also concerned about local competition (eg: H&M, New Look).
Therefore, these businesses are located everywhere and use national media to advertise.
Electronic markets are markets that used to be physical. The stock exchange and exchange currency markets
are now all on-screen and eBay and other auction markets are transforming how we make transactions.
Electronic markets often have key characteristics…
- They are very price competitive so the costs are kept down
- They can operate from anywhere
- The market is cheap to enter so new competitors can arrive anytime
Market Size is the amount of goods purchased or the amount spent on those goods.
By establishing Market Growth you can determine whether a market is growing or declining. The formula for
calculating market growth is below…
Market share is the proportion of the total market that is owned by one company. It is essential for evaluating
the success of a firm’s marketing activities. The formula for calculating market share is below…
Market Segmentation
Markets can be subdivided into several different ways. The magazine market is a good example and can be
split up into gender, age and lifestyle. Businesses must know their target markets’ needs and wants.
Advantages Disadvantages
Segmentation is acknowledgement that customers Segmentation only works if the business can provide
are not all the same and will not respond the same products and services that the market needs
With small adjustments, products can appeal to The size of the segmented market needs to be
different target markets (eg: a club at night and day) sufficient to be profitable for the business in question
The business can target their marketing efforts, Providing different products and services to different
therefore making more efficient use of the resources segments can cost more (lose economies of scale)
Demand
Demand is the desire to buy a product backed by the ability to do so. It is also known as effective demand.
- The higher the price of the product the less of the product people can afford to buy
- The price of other competitors products
- The value that the consumers place on the brand can affect its demand
Income has grown in the last century. The demand for most products and services grows with the economy.
- Normal goods
the demand for these grows broadly in line with economic growth (eg: petrol and food)
- Luxury goods
the demand for these grows faster than the growth of the economy
- Inferior goods
the demand for these falls as the economy grows. As we get wealthier we prefer to buy branded
products instead of home-brand ones
Of course, if the economy is struggling luxury goods quickly vanish and inferior goods become more popular.
The Actions of competitors plays a big influence on demand. For example, the demand for a Ryanair flight to
Dublin doesn’t just depend on the price of the flight or customers incomes but the prices of rival flights too.
A firm’s own Marketing objectives may also play a part in the demand for a product or service.
Seasonal factors are the biggest influence on demand for some businesses. For example: Ice cream sales will
boom in the summer whereas the coat market will be more successful in the winter.
Location
One of the most important factors influencing the success of a business is its location. This makes good
locations with good infrastructure very expensive, and small businesses often struggle to compete.
- Space
is there room for expansion? This should be a consideration in case the business does well
- Government grants
financial incentives that are offered by the government may influence the decision on location
- Accessibility of suppliers
businesses that use JIT will benefit from being close to suppliers due to shorter deliveries
- Infrastructure
the provisions available in a certain area, for example transport links and telecommunications. Online
businesses such as Amazon and Play will need to be in areas with sufficient transport links.
Sources of Finance
A source of finance is the term used to describe where a business gets its money from. Almost all new
businesses will need money to invest before it can start operating, including the following…
Businesses will also need to be able to raise money for other reasons such as expansion of premises,
machinery and employees, to buy more produce for large orders, or for more external reasons such as a dip in
the economy. The amount of finance available to a business will depend on:
Having sufficient funding will ensure that a business can meet its current and future needs. A distinction
between short, medium and long-term objectives should be made and the appropriate type of funding used.
Short-term finance (less than a year) should not be used to finance long-term projects.
Stretching existing capital further (eg: cutting stock) Bank loans and overdrafts
Retained profits (not suitable for start-ups) Trade credit (extending time to pay suppliers)
Selling some of the businesses assets (eg: buildings) Share capital and Venture capital
Description Advantages Disadvantages
Retained Profit Keeping previous profits to invest in the future It is free because it is an internal source! Not available to start-up businesses
Sale of assets Selling off items with value (eg: buildings and shares) It can reduce or eliminate debt You may have to pay TAX
Loans Borrowing money (usually from a bank) with interest May not have to pay interest if the You may have to pay large interest fees
financer is family or friends
Debentures A loan or share paid back with interest Interest is usually lower than bank loans You still have to pay interest
Venture capital When someone invests in a high-risk business It can be very successful (Dragons Den) It is very risky with a high failure rate
Share capital Selling shares on the stock market (PLC only!) You can make money to invest Giving away ownership of the business
Overdrafts Agreement with the bank to have a negative balance They are usually easy to access Interests are usually higher than loans
Leasing Renting something you cannot afford to buy It is yours to use whenever you want it You do not own it and it isn’t an asset
Trade credit You don’t have to pay for something immediately It can be easier to pay for things Money may not be available when due
Employees
An employee is somebody who works for an organisation; usually under a contract of employment in return
for a salary or a wage.
At the start of a new business it is common for an entrepreneur to work on their own, taking on all jobs
associated with running the business. However, as the business expands they may need help.
Specialists can be employed for short periods May have a lack of commitment (as with PT staff)
An alternative to hiring staff on a temporary basis is to use an employment agency. Although the workers carry
out work in your business, they are paid by the agency. This means that the business owner has a contract with
the agency and not the employee.
The main benefit to using an employment agency is that all recruitment/administration is done by the agency.
Businesses may choose to recruit an advisor/consultant for a specific period of time. These individuals provide
services such as accountancy, business strategy, IT, etc. They are paid a fee for their services.
Able to stand back and ask questions staff cannot see Their ideas may not be trusted
They bring ideas from outside the business They may not be ideal for the needs of the business
They can raise sensitive issues that staff may ignore They can often cost a lot of money to hire
Budgets
A budget is a detailed plan of the income and expenses expected over a certain period of time. Businesses will
be required to produce a Budget for Revenue and Profits in order to persuade banks to lend finance.
Advantages of budgets…
- They can help ensure that a business does not spend more than expected
- They can help measure manager’s performance
- They can motivate all the staff in the section (delegating budget-power can be motivating)
In a Profit budget is the expected difference between Revenue and Expenses (Income & Expenditure Budgets)
Setting budgets is not an easy job. How do you decide on the level of sales next month or next year? This is
especially hard for new businesses with no previous trading experience. Here’s how start-ups do it…
- They produce an estimate of sales in the first few months based on secondary and primary market
research conducted for their business plan
- The entrepreneur relies on their own instinct and experience in the industry
Most established firms will use last year’s figures as a guide to the next years with an adjustment for any
known changes or objectives.
Zero Based Budgeting is an alternative approach to Expenditure budgets. This starts each budget at zero
instead of last year’s figures. This helps to stop budgets from rising every year.
However, there may be some problems with this type of budgeting because managers may lack the experience
of knowing what things really cost.
- Relate the budget directly with the businesses objectives (what it is trying to achieve)
- To involve as many as possible during the process; budgets should then be agreed and realistic
- Make budgets realistic and meaningful to the staff who have to work with them
Cash Flows
A cash flow is the flow of money in and out of a business over a given period of time. Cash flow forecasting is
estimating the flow of money in and out of the business. Remember that cash does not always mean profit!
Managing cash flow is one of the most important aspects of financial management. Without the cash to pay
bills, all businesses will fall.
Cash flow problems are the most common reason for business failures. Cash flow forecasts are vital in business
start-ups because they help get finance and will also show the finance provider when they will be paid back.
All businesses need to manage their cash position carefully and will need to predict their cash position in the
forecast for at least the next six months. This will help enable them to take action if cash becomes short.
To prepare a cash flow forecast, businesses need to try and estimate all the money coming into and out of the
business. These flows are then set in a grid showing the cash movements each month. Cash Flow example…
In order to prepare cash flow forecasts, businesses need to make estimations, just like in budgets, so the
estimations are only as good as the research used to carry it out. It is much easier for an established business
to create a forecast but all companies must build their forecast in contingencies.
When conducting a forecast businesses must anticipate disasters like cash shortages. By creating a worst-case
forecast, companies will be able to arrange financial cover for these events before they happen.
The revenue received by a business can be a crucial factor of its success. When a business starts up they should
expect low revenues because…
Entrepreneurs start their financial planning by assessing what revenue they might receive in their first financial
year. Revenue is calculated by using the following formula…
A business that plans to increase its revenue may benefit more from selling a high amount of products at a low
price rather than a low amount of products at a high price.
Fixed Costs are those that do not vary with the level of output (eg: salaries, rent, utilities, interest charges).
Variable Costs are those that do vary with the level of output (eg: materials, piece-rate labour).
Profit is the difference between revenue and expenditure and is main motive for many businesses. However,
some businesses are not established with the aim of making a profit. Profit can be calculated by using the
following formula:
Total revenue – Total costs = Profit (Remember that revenue does not always mean profit!!)
Managers usually refer to Net/Operating Profit as the amount left once all fixed and variable costs have been
deducted from revenue. However, this is before TAX has been paid.
After working out the total profit after TAX, it can be used to…
- Pay shareholders
- Reinvest in the company (retained profits)
Forecasting costs and revenues can be difficult new businesses as they don’t have any past figures give them
ideas. It is possible that entrepreneurs will underestimate fixed and variable costs and overestimate revenues.
A business will want to compare its profitability over time. This is called the Net Profit margin and the higher
the margin the better! The Net Profit Margin can be calculated with the following formula…
Net Profit x 100 / Total revenue = Net profit margin
Calculating Break-Even
The breakeven analysis compares a company’s total revenue with its total costs to find out the minimum level
of sales required to cover its costs. This is usually shown on a graph called a breakeven chart. In order to
calculate the breakeven point a business will need to know the following:
Fixed costs / (Selling price per unit – Variable costs per unit) = Breakeven Output
Contribution is the difference between sales revenue and variable costs. It pays for a business’s fixed costs and
the remaining money is then counted as profit. Contribution can be calculated by using the following formula…
Selling price per unit – Variable costs per unit = Contribution PER UNIT
(Contribution PER UNIT is effectively just the second part of the breakeven formula)
Contribution can be reduced by lowering variable costs and increasing selling prices. Lowering fixed costs can
then also produce more profit as they are paid for by contribution.
Once you have calculated the breakeven point on a graph you can then work out the Safety Margin. This is the
amount of sales a business can lose before it starts to lose profits (the difference in units between the
breakeven point and the quantity of units sold)
You can work out the Margin of Safety using this formula…
Term Definition
Bank Overdraft An agreement with a bank to go into a negative balance – high interest
Breakeven Point The point at where a business’s revenue covers its total costs
Business Angel Someone who invests in a high-risk business and provides help/support
Business Plan Sets out how a business idea will be financed, marketed and put into practice
Cash Flow Forecast A forecast predicting the incomings and outgoings of a business
Contribution The difference between total revenue and total variable costs
Contribution Per Unit The difference between the selling price per unit and variable costs per unit
Demand The amount or price of a product that customers are willing to pay
Expenditure Budget The budget that sets out the total costs (usually split into categories)
Fixed Costs Costs that do not change with output (eg: rent, salaries, utilities)
Full-time Employee Somebody who works 30+ hours a week under a contract
Limited Liability Business owners/shareholders that are not fully responsible for a business fail
Margin of Safety The difference between the output sold and the breakeven point
Market The place where buyers and sellers come together to do business
Market Research The process of collecting and analysing data to help make marketing decisions
Market Segmentation Segmenting a market into difference sections (eg: age, gender)
Market Share The percentage of an market that particular business or product owns
Niche Market A small part of a large market where customers have specific needs
Opportunity Cost The cost of missing out on the next-best alternative
Permanent Employee Someone who works for a business with no set-out ending period
Primary Research Research which is carried out by a company for its own needs
Revenue The income of sales (selling price per unit * total units sold)
Risk The probability or change that wanted outcomes will not occur
Social Enterprise A business that has objectives other than making profits (eg: charities)
Total Costs A businesses total variable and fixed costs added together
Trade Credit When a business does not have to pay for something immediately
Trademark A sign that can distinguish the goods or services from one trader to another
Unlimited Liability Owners of a company that are completely liable if a business fails
USP A unique selling point of a product or service that makes it stand out
Working Capital The amount of money that a business has available for day-to-day activities