9.1 The Nature of Businesses

good

Good: a tangible product sold by businesses

service

an intangible product sold by a busine

Profit:

 When a business’s revenue is greater than its operating expenses

Revenue → money received from customers in exchange for products

Loss → operating costs exceed revenue

Employment

the fact of someone being paid to work for a company or organization

Wage

money received by workers, usually on a weekly or fortnightly basis, for services they provide to an employer

Salary

a fixed amount of money paid on a regular basis, usually fortnightly or monthly to a permanent employee of a business

Dividend

 a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits

forms of income

wages, salaries and dividens

roles of a business

Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of life

Choice

consumers have freedom of choice and the opportunity to purchase products at competitive prices

Innovation

 through research and development, existing products are improved and new products are created

Entrepreneurship and risk:

 businesses provide individuals with the opportunity to turn their ideas and passions into a livelihood

Wealth:

 business activity results in higher levels of economic growth

Quality of life

businesses offer a vast array of products and services that improve our standard of living

3 business sizes

small, medium large

Small business

less than 20 employees. Most commonly a sole trader or partnership run by one or two people that caters to the local community. They have difficulty accessing loans.

Medium business

20-199 employees. Most commonly a partnership or private company run by a few people, medium businesses have easier time accessing loans and have greater market share

Large business

more than 200 employees. Most commonly owned by thousands of public shareholders and is a public company. They are TNC’s

three scales of a business

local, national, global

Local business

serves the surrounding area and are used by customers who live close

National business

operates within one country and its customers are the domestic market

Global business

multinational cooperations and TNC’s that branch in many different countries. Global businesses have greatest access to consumers, assets and resources. 

what are the industry sectors of a business

 primary, secondary, tertiary, quaternary, quinary

Primary business

businesses involved in the collection of natural resources

Secondary business

businesses involved in turning raw materials into semi finished goods

Tertiary business

businesses performing a vast range of services for others

Quaternary business

 range of services that involve a transfer or processing of information or knowledge

Quinary business

includes all services that have been traditionally been performed at home

different legal structures

soletrader, partnership, private company, public company, government enterprise

Soletrader

a business that is owned and operated by one person. They are unincorporated by unlimited liability

Partnership

a business that is owned and operated by 2-20 people who come together and share assets. Unincorporated by unlimited liability. 

Private company

Pty Ltd, tend to be SMEs and have 2-50 private shareholders. Incorporated with limited liability

Public company

They are listed on the ASX and are large companies, they must have 1 shareholder, issue a prospectus and publish awaited financial records annually. Incorporated with limited liability

Government enterprise

they are called GBEs and are government owned/operated and can go through privatisation which is selling a public company to investors

Factors influencing choice of legal structure

Size, ownership and finance

size (Factors influencing choice of legal structure)

 if increasing customer demand leads to business growth then a business may outgrow it’s legal structure

ownership (Factors influencing choice of legal structure)

depending on how you want control to be spread, if you want to own the whole business or want less responsibility

Finance (Factors influencing choice of legal structure)

  difficulties obtaining finances to help business growth can lead to change in legal structure to assist in getting loans

external influences to the business environment

economic, financial, geographic, social, legal, political, institutional, technological, competitive situation, markets

Economic (external influence)

the boom and bust cycles of the economy effect the businesses capacity and consumer spending

Financial (external influence)

removal of government regulation on the market which creates genuine competition. Most businesses are debt and finance which is influenced by interest rates and the cash rate

Geographic (external influence)

 negative as it promotes exploitation of labour laws

Globalisation → the removal of trade barriers

Social(external influence)

changes in the needs and wants of the consumers

Legal (external influence)

the laws businesses must follow 

Compliance cost → cost of having to follow laws 

ACCC → help enforce laws protecting consumer rights

Political influences(external influence)

Taxation → GST, company tax

Labour market reform → decentralization, free trade, skills etc. 

Social reforms → changes in social values

internal influences in the business envrionment

products, location, resources, management and business culture

Products (internal influence)

Types of products → what the product requires/manufacturing needs

Types of businesses → the category of business eg) services, manufacturing, retail

Size of business → to know the product quantity needed

Location (internal influence)

Proximity to supplier → closer to reduce distribution costs 

Cost → prime storefronts are costly but important 

Visibility → reduced visibility is reduced foot traffic 

Proximity to customer → how accessible for target market

Resources ( internal inluence)

Human resources → These are the employees of the business and are generally its

most important asset.

Information resources → These resources include the knowledge and data required

by the business such as market research, sales reports, economic forecasts,

technical material and legal advice.

Physical resources → include equipment, machinery, buildings and raw materials.

Financial resources → are the funds the business uses to meet its obligations to

various creditors.

Management (internal influence)

Business culture (internal influence)

the values, ideas, expectations and beliefs shared by the staff and managers of the business seen in the unwritten or informal rules that guide how people in the business behave

Stakeholders

person and groups that interact in some way with the business and have a vested interest in activities: Shareholders Managers Employees Customers Society Environment .

Stages of the business life cycle

establishment growth maturity post-maturity

Establishment stage

The overriding concern is to get the business on a solid foundation. This requires enough sales to be generated to bring in the much needed income, which will be used to pay expenses and to generate a positive cash flow

Growth stage

Sales increase and the cash flow is normally positive. A customer base has been established with regular clients accounting for a large percentage of total sales. The business undertakes the development of new products to satisfy different market segments. The business has a good reputation in the community, and owners develop a sense of pride in the products and personal service

Mergers

occurs when the owners of two separate businesses agree to combine their resources and form a new organisation.

Acquisition

(takeover) occurs when one business takes control of another business by purchasing a controlling interest in it.

intergration

Vertical integration → occurs when a business expands at different but related levels in the production and marketing of a product.

Horizontal integration → occurs when a business acquires or merges with another firm that makes and sells similar products

Diversification

 occurs when a business acquires or merges with a business in a completely unrelated industry

Maturity stage

Businesses will often fall into a state of complacency, but at this time, the owner needs to restructure and reorganise the business to ensure its future viability. Sales are increasing but at a slower rate → the growth stage has slowed

Post Maturity stage

Steady state: the business continues to operate at the level it has been during the maturity stage.

Decline: falling sales and profits ultimately resulting in business failure.
Renewal: increasing sales and profits due to new growth areas

Establishment (responding to challenges business life cycle)

Challenge → Erratic cash flow → cash shortages = risk of failure

Response →Detailed planning can reduce the risk of failure and injection of finance from the owner/s to ease the lack of funds.

Growth(responding to challenges business life cycle)

Challenge → Loss of business direction due to rapid growth and attempt to enter new customer markets.

Response → The business must continually improve its competitive edge to remain competitive. Forecasting is crucial to ensure long term viability of the business.

Maturity (responding to challenges business life cycle)

Challenge → Sales are no longer increasing and ‘stale’ management who find it difficult to be innovative

Response → The owner needs to restructure the management to ensure the future success of the business → by restructuring there will be increased efficiency

Post maturity (responding to challenges business life cycle)

Challenge → Anticipated sales may not eventuate and resistance to change from employees

Response → Detailed market research needs to be carried out to see what customers are wanting (vital). Employees also need training and need to be informed about changes to avoid resistance

Factors that can contribute to business decline

• Failure to plan

• Increased competition

• Lack of adequate cashflow

• Failure to meet customer needs

• Unfavourable economic conditions

Voluntary cessation

A business may cease operations and voluntarily wind up its affairs. Any assets owned by the business are sold

Involuntary cessation

The owner is forced to cease trading by the creditors of the business; that is, undergo involuntary cessation

Bankruptcy

Sole traders and partnerships may end up being declared bankrupt - when the business, or person is unable to pay his or her debts. Bankruptcy can be voluntary or involuntary → the owner or a creditor can apply to a court for a bankruptcy order to be made

Voluntary administration

occurs when an independent administrator is appointed to operate the business in the hope of trading out of the present financial problemsIf successful, the business may resume normal trading. If unsuccessful, the business goes into liquidation.

Liquidation

Businesses are considered insolvent when it is not able to pay its debts when they fall due

Creditors (voluntary) liquidation

Most common type and can occur in two ways.The first method involves creditors voting for liquidation following a voluntary administration. The second involves the company’s shareholders agreeing to liquidate the company and appoint a liquidator.

Court (involuntary) liquidation

 In this situation a court appoints a liquidator to wind up the company, usually after an application has been made from either a creditor, a shareholder, a company director or, in some circumstances, the Australian Securities and Investments Commission (ASIC)