Business - Business Activity

Purpose of Business Activity

Spotting an opportunity, developing an idea for a business, satisfying the needs of customers.

Why Businesses Exist

To satisfy the needs of customers by providing goods and services at a price people are willing to pay, in return for profit (hopefully). The three steps are Spotting an idea, Developing an idea, and Satisfying the needs of customers.

Developing an Idea

Turning a spotted business opportunity or idea into a working business. Requires market research to gauge real demand, and writing a business plan to attract funding.

Entrepreneur

Someone who has a business idea and develops it. They take risks and the profits that come with success, as well as the losses that may come with failure.

Key Characteristics of an Entrepreneur

Creativity, risk taking, determination, and confidence. Other characteristics include: willingness to take risks, passionate, hard working, motivated, disciplined, adaptable, flexible, knowledgeable, and being a people person.

Potential Rewards for Risk Taking

Financial (incomes/profits), Independence (don't want to work for someone else), Self Satisfaction (doing something happy), Changing consumer habits (e.g., creating ethical consumers).

Potential Drawbacks for Risk Taking

Financial (lose investment/personal belongings), Health (takes a lot of time and commitment), Strained Relationships (starting a business may take up all time).

The Reward for Enterprise

Profit.

Business Plan

A plan detailing how a business aims to achieve its objectives. Usually written before the business starts or during a major change.

Purpose of Business Planning

To reduce risk and help a business succeed. This may be achieved by highlighting potential problem areas early.

Role of a Business Plan

Identifying markets, helping with obtaining finance, identifying resources a business needs to operate, and achieving business aims and objectives.

Business Plan: Helping with Finance

A bank will lend money if confident it will be repaid. A plan can 'sell' your business to the bank.

Contents of a Business Plan (Key Sections)

The business idea (what is produced or sold), The people running the business (experience and abilities), Market research (evidence of demand, advertising, pricing), Finance (cost of setting up, source of money), Resources of the business (machines, staff, skills), Objectives, The target market (customers, age group, income), and Competitors (who offers similar products/services, location).

Cost

The expenditure firms incur when buying resources (factors of production) to produce goods and services.

Fixed Cost

Costs that do not vary with output. These must be paid even if nothing is produced (Examples: rent, loan repayments, salaries).

Variable Cost

Costs that vary with output. These increase as more output is produced and decrease when less is produced (Examples: raw materials, wages for zero hour contract employees).

Total Cost Formula

Total Fixed Cost + Total Variable Cost.

Average Cost Formula

Cost of producing a single unit: Total cost / Quantity Produced.

Total Revenue Formula

Price x Quantity Sold.

Average Revenue Formula

Total Revenue / Quantity Sold. This is equal to the selling price of the product.

Profit/Loss Formula

Total Revenue - Total Costs.

Importance of Profit (Generates Finance)

Businesses can use profits to expand (buy a new factory or capital equipment); it is a cheap source of finance as it comes without interest like a loan would.

Importance of Profit (Acts as a Signal)

Profits signal for new firms to enter the markets to take advantage of the profits, which may bring added competition.

Importance of Profit (Attracts Resources)

Banks are more willing to lend; easier to attract good employees; and attracts potential investors.

How to Maximise Profit

Decrease total costs and/or increase total revenue.

Economies of Scale

Cost advantages a firm can gain by increasing the scale of production. As a result, average costs of production fall as output rises, making the business more efficient and competitive.

Sole Trader

Business owned by one owner, also known as a sole proprietor. It is the easiest form of business to set up. Must pay income tax on profits.

Unlimited Liability

The owner is personally responsible for the debts of the business, extending to their personal wealth (e.g., house and car). The owner and business are legally considered the same thing. Applies to Sole Traders and Ordinary Partners.

Sole Trader Advantages

Easy to set up, very little start-up finance needed, complete control, owner keeps all of the profits, financial info is kept private.

Sole Trader Disadvantages

Unlimited liability, long hours worked, no one else to help, skill shortages, no continuity if owner dies.

Partnership

Business owned by joint owners. Partnerships usually have 2–20 owners.

Deed of Partnership

A legal contract governing the partnership operations. It outlines information on how the partnership operates, the role of each partner, how profits/losses are shared, and details of capital contributed.

Partnership Advantages

Workload shared, more skills, easy to set up, more capital than a sole trader, financial info is kept private.

Partnership Disadvantages

Profits shared, unlimited liability (for ordinary partners), slower decision making, shortage of capital if only a few partners, no continuity if owners die.

Limited Liability

Owners (shareholders) are not personally responsible for business debts. This means they can only lose what they have invested in the company.

Private Limited Company (LTD)

Shares cannot be bought by the public; sale is restricted (invited friends/family/associates). Owners control who buys the shares. Owners are called shareholders and have limited liability.

LTD Advantages

Limited liability, easier to raise capital than Sole Trader/Partnership, continuity (if owner dies the company can still exist), owner can control who owns shares.

LTD Disadvantages

Financial info has to be published, more complex and expensive to start up, sale of shares restricted, profit is shared amongst shareholders (dividends paid).

Public Limited Company (PLC)

Shares can be bought and sold by anyone on the Stock Exchange. Normally start as LTD then become PLC. Normally very large companies.

PLC Advantages

Limited Liability, ability to raise large amounts of capital, continuity, easier to borrow finance as seen as lower risk.

PLC Disadvantages

Possibility of a hostile takeover, high cost of setting up (£50,000 of share capital needs to be raised as a minimum), size of company complex to manage, financial info available to public/competitors.

Factors Determining Ownership Suitability

The decision of which business ownership to use may depend on the owner(s), the product or service offered, the market or industry, and where finance for the business needs to come from.

Aim

States the overall purpose for the business, the long term goal.

Mission Statement

General description of the overall aims of the business.

Objectives

Specific, measurable targets to help meet the aims of the business.

Four Main Business Objectives

Profit, Survival, Growth, and Providing a service.

Maximise Profits

Making as much profit as possible.

Profit Satisficing

Making just enough profit to pay for general needs.

Growth

Expanding the business in order to increase sales and profit. This is important for larger firms especially PLCs.

Forms of Growth (Sales/Market Share/Competition)

Sales growth (Make more sales), Market share (Big share of market), Elimination of Competition (takeover is a common method).

Survival

Particularly important to new businesses or established businesses facing problems. This should only be seen as a temporary objective.

Providing a Service

Customer satisfaction may be the priority for some businesses. This should lead to increased profit.

Reason for Different Objectives

The objectives of a business change throughout the business' lifetime. Objectives vary from business to business and change as the business develops.

Stakeholders

Groups or individuals who have an interest in a business.

Internal Stakeholders

Those internal to the business: Shareholders/Owners and Managers/Employees.

External Stakeholders

Those whose relationship is not based on a legal contract: Customers, Suppliers, Banks/Finance Providers (Creditors), Government, and the Local Community/Society.

Shareholders/Owners Objectives

Return on investment + profits and dividends, success and growth of the business, and proper running of the business.

Managers/Employees Objectives

Rewards (pay/incentives), job security & working conditions, promotion opportunities + job satisfaction & status.

Customers Objectives

Value for money, product quality & customer service.

Suppliers Objectives

Continued, profitable trade with the business, and financial stability (can the business pay its bills?).

Government Objectives

The correct collection and payment of taxes (e.g., VAT), helping the business to grow (creating jobs), and compliance with business legislation.

Local Community Objectives

Success of the business (creating and retaining jobs), and compliance with local laws and regulations (e.g., noise, pollution).

Stakeholder Influence

Stakeholders can influence the activity of a business.

Organic (Internal) Growth

Growth achieved internally by increasing output, gaining new customers, developing new products, or increasing market share.

Ways to Achieve Organic Growth

Increase output (increase volume/factory size/workers); Gain new customers (reduce prices, open new shops/locations, improve marketing, e-commerce); Develop new products; Increase market share.

Benefit of Organic Growth

Can maintain current management style/culture/ethics; is usually lower risk; usually financed by profits; easy to control magnitude; less disruptive changes mean workers’ efficiency/morale remain high.

Drawback of Organic Growth

Can take a long time to grow internally; restricted if the market size is not growing; adaptation to big market changes takes time; may miss out on opportunities for more ambitious growth.

External Growth (Inorganic Growth)

Growth of a business by takeover or merger.

Merger

Where two or more businesses agree to join together to become one business.

Takeover

Where one business buys control of another. This is done by taking a controlling interest, e.g., buying more than 50% of the shares in it.

Horizontal Integration

Businesses joining are in the same industry and at the same level of production (e.g., two furniture companies merging). Advantage: Allows for larger scale production, leading to cost benefits/economies of scale, and gets rid of the competition.

Backward Vertical Integration

A business merges with or takes over a firm behind them in the production process (i.e., a supplier). Advantage: Control over the supply of components or raw materials, which can reduce costs.

Forward Vertical Integration

A business merges with or takes over a firm ahead of them in the production process (i.e., a retailer). Advantage: Control over sales outlets.

Diversification / Conglomerate Integration

Business merges with or takes over a business with no connection (a different industry). Advantage: Spreads risk and reduces dependency on one product or service area.