Business Management Unit 3/4 Exam

Types of Businesses

• Sole Traders

• Partnerships

• Private Limited Companies (Pty Ltd)

• Public Listed Companies (PLC)

• Social Enterprises

• Government Business Enterprises

Sole Trader

An individual who owns the business and are the sole person legally responsible for all affairs conducted by that business.

Additional Features of a Sole Trader

The individual has full control over all business decisions and assets, there is unlimited liability and the business is unincorporated.

Benefits of a Sole Trader

• Cheap and simple to set up (suitable for an individual with low funds)

• Gov regulations are minimal

• Retains all profit

Limitations of a Sole Trader

• Owner has unlimited liability

• Harder to source finance (difficult to raise capital)

• Business relies on the owner’s knowledge and skills

Why is this a benefit: ‘Gov regulations are minimal’

The business is easier to set up and manage.

Why is this a limitation: ‘Owner has unlimited liability’

Assets may be seized to cover debt the debt, the owner may need to take out a loan.

Why is this a limitation: ‘Business relies on the owner’s knowledge and skills’

It decreases competitiveness (b/c harder to innovate)

Examples of a Sole Trader

• Tradespeople

• Freelancers and creative professionals

Examples of Tradespeople

Electricians, plumbers, gardners, mechanics.

Examples of Freelancers and Creative Professionals

Graphic designer, Web developer

Define Unlimited Liability

The owner(s) are liable for ALL Business debts and are therefore legally obligated to repay them using whatever means possible.

Requirements to set up a Sole Trader

• ABN (Australian Business Number)

• TFN (Tax File Number

• Business Name (unless owner’s legal name)

Partnership

A partnership is a business legal structure that involves 2 to 20 individuals who own a business together.

Additional Features of a Partnership

You have shared control over the business and split profits based on the partnership agreement, separate legal entity (unincorporated), unlimited liability.

How is unlimited liability distributed in a partnership?

The distribution of this is determined by the initial partnership agreement (unless changed)

Benefits of a Partnership

• More starting Capital (financial + physical), easier to raise + gain capital

• Relatively easy an inexpensive to set up

• Shared responsibility and workload

• Additional expertise available/knowledge

Why is it easier to raise/gain capital in a Partnership vs a Sole Trader

The distribution of contribution can be shared amongst members.

What is a sleeping partner in a partnership?

An individual who invests capital into the business but is not involved in the day-to-day.

Why is this a benefit: ‘Additional expertise available/knowledge’

It allows for more informed decisions and increased innovation and competitiveness

Limitations of a Partnership

• Personality clashes (conflicts in varying opinions)

• If one partner leaves,, the business life may not be ongoing/new partner may have to be chosen

• Partners are personally liable for the business debts

Examples of Partnerships

• Law firms (with two or more owners + unlimited liability)

• Accounting firms

• Medical firms

Public Listed Company (PLC)

Members (shareholders) own the company and the directors who run it. The company is listed in the stock exchange for members of the public, who trade shares in it.

Additional Features of a Public Listed Company

Listed on ASX, has unlimited no. of shareholders, must publish annual report for their shareholders, has limited liability.

What does ASX stand for?

Australian Securities Exchange

How many members can be in a partnership?

2 to 20.

Define Shareholders

A person, company or institution that owns at least one share of a company’s stock. (essentially an owner of the company)

What do shareholders care about?

Financial Interest (Dividends, R.O.I)

What does R.O.I stand for?

Return on Investment.

Benefits of Public Listed Companies

• Access to greater capital as there are more owners to raise capital

• Limited liabilities (B/c separate legal entity)

• Multiple perspectives

Why is this a benefit: ‘Multiple perspectives’

This leads to greater innovations and increased competitiveness.

Limitations of Public Listed Companies

• Complex decision making (due to no.owners, AGM and annual report)

• Dividends are paid out

• The business must have full disclosure (financial position)

What does AGM stand for?

Annual General Meeting.

Why is this a limitation: ‘Complex decision making’

Time consuming, not efficient.

Why is this a limitations: ‘Dividends are paid out’

May lower the amount of available capital for the business to use (shared profit)

Examples of Public Listed Companies

Commonwealth Bank, Qantas, Coles group limited, Telstra limited.

Define Incorporation

The legal process used to form a corporate entity or company. A corporation is a separate legal entity from its owners, with its own rights and obligations.

What is the main limitations of Incorporation?

Expensive and time consuming.

Private Limited Company

An Incorporated business. It is owned by up to 50 shareholders and is not listed on the stock exchange.

Additional features of a Private Limited Company

Limited to 50 shareholders, limited liability, annual company tax return, controlled by directors and owned by shareholders, needs a minimum of 1 director (can be owner)

Define Limited Liability

The company has its own legal entity so the liability of members/shareholders is limited and generally they will not be personally liable for the debts of the company.

Benefits of a Private Limited Company

• The shareholders have limited liability

• Extra capital can be raised by issuing additional shares

• Business is not threatened by leaving or passing shareholders

Why is this a benefit: ‘limited liability’

Reduces financial risk.

Limitations of a Private Limited Company

• More complex to set up (in regards to legal administrative tasks)

• Higher establishment and compliance costs

• More government regulations and greater reporting requirements

• Shared profit, conflict

What industries/types of businesses are Private Limited Companies?

Often small businesses (independent retailers, legal firms and accountants)

Examples of Private Limited Companies

• Vinsy

• Linfox

• PriceWaterhouseCoopers

Government Enterprise (GBE)

These are corporations owned by the government (commonwealth) as the major shareholder (sometimes the only shareholder)

How is a Government Enterprise different from a Government Department?

It aims to act under general business principles to make a profit.

Additional Features of a Government Enterprise

It aims to provide a service or product to the public and make a profit while doing so, the money made goes into things like schools and libraries.

Benefits of a Government Enterprise

• The community receives an essential service

• Government receives more funds through the profit made

• Significant access to capital

Why is this a benefit: ‘Government receives more funds through the profit made’

It allows for greater investment into services.

What form of Benefit does a Government Enterprise provide?

A community benefit.

What is a community benefit?

A benefit that helps better the economy, environment or social well-being of an area/community.

Limitations of a Government Enterprise

• Political interference

• Lack of flexibility/autonomy due to rigid gov policies + rules

• Delays in decision making (requires gov permission)

Why is this a limitation: ‘Political interference’

Political parties and changes in the government may lead to major restricting of the business.

Examples of a Government Enterprise

• Australia Postal Corporation

• NBN Co Limited

Why is Australia Post considered a Government Enterprise

It is 100% owned by the Commonwealth of Australia and raises profit through providing an essential service.

Social Enterprise

A profit-making business with social objectives whose surpluses are reinvested for that social objective.

Additional Features of a Social Enterprise

The business has an additional social benefit is made, a percentage must be distributed to a social objective, not solely focused on delivering profit to shareholders + owners.

Benefits of a Social Enterprise

• Fulfils a social need

• Access to gov grants + support

• Can become an employer of choice due to goodwill

Why is this a benefit: ‘Fulfils a social need’

Consumers purchase goods/services to make a difference, this builds positive reputation.

Limitations of Social Enterprise

• Challenging to raise + lack of cash flow

• You must constantly monitor the market to ensure the validity of your mission (ensure relevant social need)

Why is it difficult for Social Enterprises to raise to complete?

As this model does not have traditional shareholders attached.

What does cash flow refer?

Money in and out of the business.

Examples of a Social Enterprises

• ThankYou (hand sanitation projects)

• Who gives a crap

Types of Business Objectives

• To make a profit

• To increase market share

• To improve efficiency

• To improve effectiveness

• To fulfil a market need

• To fulfil a social need

• To meet shareholder expectations

Define Business Objectives

Goals established by the management of the business and will be influenced by a number factors and established into a hierarchy.

What must Business Objectives be?

• Measurable

• Specific

• Timebound

To make a profit

The surplus after all expenses have been deducted from the revenue. (objective is to increase these surpluses)

Features of Making a Profit

Profit can be reinvested into the business or distributed among the owners. (dividends)

The formula for Gross Profit

Revenue - Cost of goods sold

The formula for Net Profit

Total revenue - Total expenses

What stakeholders help achieve ‘To make a Profit’

Customers (through purchasing goods/services)

What is the key stakeholder in ‘To make a profit’

Owners/Shareholders as profit increases share price can as well as dividends

Define Dividends

A portion of a company’s profit distributed to shareholders as a return on their investment.

An example of ‘To make a profit’

Qantas (aims to make a profit/provide dividends)

To increase market share

This is the proportion of a market/industry that a business controls/owns.

Feature of ‘To increase market share’

It demonstrates a competitive advantage.

Formula for Market Share

(Your Business Revenue/Total Industry Revenue) x 100

How to increase Market Share

• Lower costs, lower prices, increase sales

• Increase quality

• Boost reputation

• Damage occurs to a competitor

Shareholders that help achieve ‘To increase Market share’

• Customers (though purchasing good/services)

• Employees (through sales, marketing and production staff)

An example of ‘To Increase Market Share’

ALDI (through cheap prices), Woolworths, Coles

To improve efficiency

To be efficient a business will avoid wasting materials, energy efforts, money and time in doing or producing something.

How is efficiency defined for a business

How well a business uses resources to achieve objectives.

Productivity

Measure of efficiency.

What determines Productivity?

Output/Input.

Define wastage

Being inefficient and having raw materials left over.

Features of ‘To improve efficiency’

It can reduce costs and wastage, helping the business to achieve another objective. (e.g Profit-making)

What stakeholders help achieve ‘To improve efficiency’

Employees, Managers (they directly manage and use these resources)

Examples of ‘To improve efficiency’

ALDI (simplified operations +tight control over processes)

To improve effectiveness

Effectiveness refers to a businesses ability to achieve their business objectives.

What determines effectiveness in a business?

The degree to which a business achieved its stated objectives.

Features of ‘To improve effectiveness’

It measures how well a business achieved both overall objectives and smaller targets (quality/performance goals)

Stakeholders that help achieve ‘To improve effectiveness’

Employees and Managers (can control inner processes)

Example of ‘To improve effectiveness’

Woolworths (changed reusable bag policies) —> helps attract more customers + gain more market share.

To fulfil a market need

Understanding and identifying what your customers demand is imperative for you to cater towards their needs.

Define Market Need

The desires or demand of customers (find and meet the gap in the market)

How to measure if a market need is fulfilled?

Measured by sales + market share.

Feature of ‘To fulfil a market need’

Builds customer loyalty and strengthens competitive position in the market.

Stakeholders that helps achieve ‘To fulfil a market need’

Customers (they define the market need), Managers (they decide what needs to cater towards)