Theme 1 - investigating a small business

What is business enterprise?

The process of identifying new business opportunities, and then taking advantage of them

What can business enterprise involve?

- Starting up a new business

- helping to expand an existing business by coming up with new ideas

What could the purposes of business activity be?

- providing people with a good or a service by other people to aid the customer

- To meet customer needs -providing goods and services that people will want to by (customer needs often change so businesses may need to change the products they sell to keep up)

- To add value to an existing product - the business finds ways to improve a product, so customers are willing to pay more for it compared to competitors' products.

What are the ways that a business could add value to a product ?

- Making a product more convenient for customers to get or use

- building a good brand image for a product - customers will be more willing to spend money on the product as they'll recognise the brand and know that its trustworthy and desirable

- improving the product's design or quality

- giving the product a unique selling point - a feature that makes it different from its competitors, which makes it an original product

What are reasons that new business ideas come about?

- Changes in technology - e.g apps from the invention of a tablet

- changing in what customers want - e.g people are concerned about the environment, so business have offered more environmentally friendly products

- A good or service becoming obsolete - this means it is no longer used, usually because it has become outdated and has been replaced by something else (business owners have to come up with new ideas so that the business survives)

What two things will business ideas be?

Either completely original or an adaptation of an existing product or idea

What is an entrepreneur?

Someone who takes on the risks of enterprise activity

What things must an entrepreneur be able to do to successfully run a business?

- Organise resources - to keep on top of all the day to day tasks + planning for the future - they need to make sure the business has all the right resources at the right time

- Take risks - the entrepreneur may have to give up their current job and invest money that they could lose if the business idea fails - they can make a business plan to avoid this - they need to be able to take calculated risks

- Make business decisions - e.g the entrepreneur needs to be able to decide on the business's aims, its structure, who to employ, how to grow, and what to do if things start to go wrong

What are the risks of being an entrepreneur?

- The entrepreneur needs money to buy equipment and pay workers - they will often use their own money, but they'll probably need to raise more from banks or other investors as well - if the business makes a financial loss, it won't be able to pay back all the money that's been borrowed

- Entrepreneurs don't have much security - they will usually have to give up their current job, and of things could go wrong - they could lose money and end up without any job, having a huge impact on their quality of life

- There is always a risk that a business will fail - so the entrepreneur risks the money, time and effort they put to trying to make the business work

What are the rewards of being an entrepreneur?

- seeing their business idea becoming a success

- If the business makes lots of profit, the entrepreneur could earn more money - better quality of life

- It gives the entrepreneur independence to choose what they do day to day, and what direction the business goes in

What are the components of a market?

- Place : Where goods are traded between customers and suppliers (e.g village market quare + internet shopping website)

- Product : Trade in a particular type of products, e.g the oil market

- People : The potential customers for a product, e.g the age 18-25 market

What are competitors?

The different businesses that sell the same products in the same market - They compete with each other over sales to customers

How do businesses stand out in a competitive environment?

Businesses need to make decisions that will persuade customers to but from them, rather than their competitors - when making these decisions, the business might look at the strengths and weaknesses of the competitors

Why is price important in a business when looking at the strengths and weaknesses of its competitors?

- Customers will often want to pay less for a given product - of all the products in the market become the same, then the price becomes one of the most important factors affecting which products customers will buy

- Therefore, firms may decide to charge lower prices to stop customers from buying elsewhere - However, this means that a firm may not make much profit per product sold

Why is customer service important in a business when looking at the strengths and weaknesses of its competitors?

- Offering customers service can attract customers and may mean that customers are willing to pay more money for a product

-To stand out from competition, a business may decide to train its staff in good customer service, or provide extra services (e.g user training) when the customer buys the product

-

Why is quality important in businesses when looking at the strengths and weaknesses of its competitors?

- Offering better quality products may mean that customers are more satisfied. This may mean that the business will be more competitive, even if its products are more expensive

- Businesses may decide to spend money on developing high quality products or on promotional material that emphasises quality - however, this will be costly for the firm

Why is product range important in businesses when looking at the strengths and weaknesses of its competitors?

- Having a large range of products may make a business more attractive to customers - eg greengrocers may be able to compete with a convenience store if it sells more types of fruit and vegetables, since customers will have a better selection in one place

- A business may also try to fill any gap in the market by developing new products

Why is Location important in a business when looking at the strengths and weaknesses of its competitors?

- Customers will be more likely to buy a product if it sells products in a convenient place as they wont have the inconvenience of travelling and waiting for the product

- Therefore businesses may decide to open stores in particular locations or to sell items online to offer the greatest convenience to customers as possible

Why do businesses carry out market research for understanding markets?

in order to find out about the market and how they are performing in it - e.g they may want to know the overall market size and the business's market share

What is the market size?

the number of individuals (including companies) within the market which are potential buyers or sellers of products. it can also mean the total value of products in the market

What is the market share of a business?

- the proportion of total sales within a market that is controlled by a business

- As well as understanding the business's place in a market, it's important for the business to carry out market research into its customers

Why do businesses carry out market research for understanding customers?

- Because all businesses need their customers to buy their products, otherwise they won't survive

- Businesses will use market research to identify who their customers are - they can use market segmentation to help them do this

- Market research can then be used to give businesses an understanding of their customers - e.g what their needs are and how to satisfy them

What are examples of customer needs?

price, quality, choice, convenience

What is the benefit to a business understanding customer needs?

Businesses will be able to make products that meet these needs - This will increase their sales and help to ensure the business's survival

What does market research help a business do to improve it?

- Make informed decisions -provides useful information to help the business decide things like what products to sell, where to sell them, how to promote them, and what price to sell them for

- To spot a gap in the market - when a group of customers will have a need that isn't being met - a business will want to find a wat to meet its customers' needs before its competitors do

- To reduce risks - If a business sells a product that customers don't want or tries to sell products at a price that is too high or in the wrong location, it could end up losing a lot of money - using market research will help the business to avoid this and reduce the risk of making costly mistakes

What is primary research?

It involves getting information from customers or potential customers

What are examples of primary research?

interviews, surveys, focus groups from a research study

Why is primary research used for?

It is useful for finding out new information, and getting customers' views - however a business can't ask every potential customer for their views - usually just a sample of people

What are the advantages and disadvantages of using a large sample?

They are the most accurate but also the most expensive - small businesses may have to compromise here and use small sample groups to keep their costs down

- businesses can also can save on costs by carrying out research over the telephone or internet rather than in person

What does primary research provide?

Data that is up-to-date, relevant and specific to the needs of your business - the research can also be specific to the target market

What are the disadvantages of primary research?

•Its expensive

•Its time consuming

What are some advantages and disadvantages to different types of primary research?

- observations are really cheap and give accurate information, but also don't allow customers to give opinions

- Questionnaires are cheap and can be used to sample a large geographic area, but it's likely that many people won't respond

- Phone surveys have a much higher rate of response but they can be more expensive

- Focus groups are faster than surveying several people individually, but may mean that quieter individuals don't their opinions heard

What is secondary research?

gathering information that already exists about the topic in question (library or internet research) getting information second hand that has already been collect by someone else.

Why is secondary research useful?

It allows access to a wide range of data - not just the views of their sample group - it's useful for looking at the whole market, and analysing past trends to predict the future

What are examples of secondary market research?

market research reports, government reports, articles in newspapers, magazines on the internet

What are the advantages of secondary market research?

- Its cheaper than primary research

- The data is easily found and instantly available

What are the disadvantages of secondary market research?

- Its not always relevant to your needs

- Its not specifically about the products

- Its often out of date

How can social media be used for market research?

It allows people to create profiles of themselves on the internet, including putting the things they enjoy.

- Businesses can sometimes collect this information and use it for their market research. For example, they can see what sorts of things are popular or are increasing in popularity

What two things can data be?

Quantitative or qualitative

What is quantitative data?

information that can be measured and written down with numbers

What is qualitative data?

descriptive data - people's feeling and opinions - it is tricky to analyse because it's hard to compare two people's opinions - however, it will give a greater depth of information

What does it mean for market research to be reliable?

It means that its results can be repeated by another researcher - reliable market research represents the people that the business is interested in accurately - the more reliable the data is, the more useful it is

What is market segmentation?

Dividing a market into distinct groups of buyers who have different needs, characteristics, or behaviors, and who might require separate products or marketing programs

Why is market segmentation useful for a business?

It can help a business to figure out who exactly they are most interested in selling to- they can also use market research data to create a market map to figure out what they need to do to increase sales

What is segmentation?

When people within a market are divided into different groups - A business can then create a marketing strategy aimed at their target market

What can a market be segmented by?

By its demographics - the identifiable characteristics that people within one population might have

What are examples of demographics?

Age, income

other ways that aren't demographics to segment a market include location, lifestyle

What does market mapping help?

It helps a business understand its location within the market, and the market's key features

What information can a business get from market mapping?

- information about competitors selling similar products, and how customers perceive them

- Any gaps in the market

How can making a market map help a business?

- It allows a business to see how customers perceive key features of its competitors' products

- Once they have spotted a potential gap in the market, the business will need to use market research to confirm whether or not there is demand for the type of product which they have identified

- Then the business can focus on creating products with the features needed to fill the gap

- This will help the business to be different from the competition and so increase its sales

What are the aims of a business?

The overall goals that they want to achieve

What are the objectives of a business?

The goals that are set to achieve its mission

What are financial aims?

- survival : surviving is the main and important short-term aim of all new businesses- this means the business needs to have enough money to stay open , e.g to buy stock + pay staff

- maximise profit : The vast majority of firms will aim to maximise profits- however it may take a few years to make any profit at all

- increase market share : Market share tells you what percentage of a market's total sales a particular product or company has made

-maximise sale

- achieve financial security : many businesses will depend on external sources of finance such as loans or the business owners' personal savings when they first start. e.g an aim for a new business is likely to be achieving a point where it can depend on its own revenue to fund its activities

What are non-financial aims?

Aims linked to anything other than making money for the business:

social objectives

personal satisfaction

independence

control

challenge

Explain some examples of non-financial objectives?

- Accomplishing a personal challenge

- Achieving personal satisfaction

- Gaining independence and control - being their own boss, making decisions on how the business is run, flexible working hour

- Doing what's right for society - e.g not testing on animals

What are objectives specifically?

They are measurable steps on the way to the aim - .eg if a firm's aim is to maximise sales, an objective might be to increase income from sales 30% over two years

What are the different types of objectives?

objectives related to survival, profit, market share, financial security, personal reasons, social issues

What are different factors that affect the aims and objectives of a business?

- The size and age of the business - small + new business are more likely to focus on survival and growth - as a business grows and become more established they may concentrate more on achieving financial security, increasing sales and market share

- Who owns the business - for small businesses owned by one/a small number of people (sole trader/partnerships) achieving personal satisfaction may be more important than growing sales/market share - for companies owned by many shareholders (eg. plt ) there may be pressure to have aims and objectives focused on maximising profits so shareholders get more money

- The level of competition the business faces - if a business is in a highly competitive market, it might focus on survival and maximising sales - if a business doesn't have much competition, it might focus more on increasing market share and maximising profit

What is revenue?

The income earned by a business

What is the formula for revenue?

Revenue = Price x Quantity

What are costs?

Expenses paid out to run the business

What are fixed costs?

Costs that do not vary with the quantity of output produced - e.g rent, insurance, fixed salaries, advertising

- fixed costs are only fixed for a short period of time - an expanding firm's fixed costs will go up

What are variable costs?

costs that vary with the quantity of output produced - costs of factory labour, raw materials, running machinery

What are the total costs?

fixed costs + variable costs

What is interest?

The cost of borrowing money - when a business borrows money, it will usually have to pay it back with interest - so the business will pay back more than what was borrowed

What is the formula for interest?

Total repayment - borrowed amount / borrowed amount x 100

What is interest added onto?

onto savings - so a business can also earn money through interest on savings

What is profit?

total revenue - total cost (the difference between revenue and costs over a period of time)

What does it mean if costs are higher than the revenue?

The business will make a loss instead of a profit, and the number would be negative

What is break even?

the sales level at which a company neither earns a profit nor incurs a loss

What does break-even analysis allow the business to do?

To find out the minimum amount they need to sell to get by

What is the break-even point?

the level of sales a firm needs to just cover its costs

What is the formula for break even?

Fixed costs / selling price - variable costs

What happens if a firm sells more than the break even point?

It will make a profit - if it sells less, it'll make a loss

Why is a low level of break even output good for a business?

Because it won't have to sell as much to make a profit

What does a break-even diagram look like?

The number of sales or output is on the x-axis, and the costs and revenues on the y-axis

What is the margin of safety?

the gap between the current level of output and the break-even output

What is the formula for margin of safety?

actual sales (budgeted sales) - break even sales

What will a business use budgeted sales for?

If it is trying to forecast its future margin of safety - the budgeted sales will be the sales that it expects to make

What can break even diagrams also be used for?

for seeing how changes in revenue and costs may affect the break even output - e.g the rate at which revenue changes may decrease if the business decides to lower its prices

What is cash?

the money a company can spend immediately - a business needs cash in order to pay its employees, its suppliers and overheads (ongoing expenses)

What is profit in terms of costs?

The amount of money a company earns after costs have been taken into account - so a business can make a profit if it earns more than it spends but still run out of cash if it uses its cash to invest in other assets for the business

What is cash flow?

The flow of all money into and out of a business.

cash inflow : when a business sells its products money flows in

cash outflow : when it buys materials/ pays wages money flows out

What is the formula for net cash flow?

cash inflows - cash outflows for a given period of time

What does positive cash flow mean?

There is more cash inflow than outflow for a given time period - business has no problem in making payments

What does a cash flow forecast do?

It lists all the inflows and outflows of cash that appear in the budget

- it can be used to show when the business may face a shortage in cash, which could lead to business failure, due to the inability to pay debts (insolvency) unless it sells of its assets

- so, a business can use a cash flow forecast to determine when it will need a short term source of finance to cover its costs

What is credit?

buying a good or service now and paying for it later

What do credit terms tell you?

How long after agreeing to buy a product the customer has to pay - this can affect the timing of a business's cash flows

Why do businesses need finance?

- Start up capital (money/assets needed to set up a business

- New firms often have poor initial cash flow - so they need additional finance to cover costs

- sometimes customers delay payment - so finance is needed to cover this shortfall in cash

- If a business is struggling, it may need additional finance to meet its day-to-day running costs

- A business may need finance in order to expand - e.g to buy larger premises

What are short term sources of finance?

Trade credit, overdraft

What is trade credit?

The practice of buying goods or services now and paying for them later. - this is useful for small businesses as they have time to earn the money needed to pay the debt

What are overdrafts?

-short-term source of finance that needs to be repaid quickly, as interest rates are typically very high

- If it isn't paid off, then the bank can take some of the business's assets

What are long term sources of finance?

They can either be paid back over a longer period of time - usually more than a year, or don't need to be paid back at all .

What is a loan?

borrowed money with an agreement to repay it with interest within a certain amount of time

- they are quick and easy to take out.

- Like overdrafts, they are repaid with interest and if they aren't repaid, the bank can repossess the business's assets

- However, the interest rate for loans is usually lower than for overdrafts

What are personal savings?

Money saved up by the business owner that is put into the business - a business owner may invest their own money into the business to get it started or if is having cash flow problems. - However, this is risky as the owner could end up losing their money if the business fails

What is share capital?

When shareholders invest money into the business - individuals can buy shares in the business - this means that they will have part ownership in the business and the business can use the money gained through issuing shares

What is venture capital?

money provided by large investors to finance new products and new businesses that have a good chance to be very profitable. - This is money raised through selling shares to individuals or businesses who specialise in giving finance to new or expanding small businesses

- venture capitalists will usually buy shares in businesses that are risky but have the potential to grow quickly - the will take a stake in the business and may expect returns more quickly than other shareholders would

What is retained profit?

Profit kept within a business from profit for the year to help finance future activities. These are profits that the owners have decided to plough back into the business after they've paid themselves a dividend

What is crowd funding?

When a large number of people contribute money towards starting up a business or funding a business idea

- its often used for creative or innovative businesses and usually takes place online - normally each person only contributes a small amount of money - sometimes the people that contribute money may get a reward in return

What are sole trader businesses?

Businesses that just have one owner - most small businesses are sole traders.