Business SAC - AOS2

business environment

business environment

the surrounding conditions in which the business operates

• broken into 2 sections: internal & external environment

internal environment

factors over which the business has some/most degree of control and affects one business.

internal environment factors

• business model

• business location

• business support services

• legal business structure

• employees, managers, suppliers etc

• sources of finance

external environment

factors over which the business has little control and is divided into 2 categories: marco & operating environment

macro environment

broad conditions and trends in society and the economy that affect all businesses

macro environment factors

• corporate social responsibility (CSR)

• global issues

• economic conditions

• legal & gov. regulations

• societal attitudes & behaviours

• technological considerations

operating environment

specific outside stakeholders with whom the business interacts in conducting its business. it usually affects an industry

operating environment factors

• customers

• competitors

• suppliers

• special interest groups

how external environment affects in internal environment

• external environment has greater impact on internal environment

• businesses are at mercy of much of the external environment and have to adapt

• if businesses are proactive, they are more likely to succeed in responding to external environment factors

how internal environment affects external environment

• suppliers → businesses can implement supplier policies that ensure they source law materials in accordance w/ business’ values

• competitors → competing businesses will respond to each other’s behaviours to try and gain market share

• local community → businesses can be positive & create jobs but can also be negative (eg pollution, increased traffic/noise etc)

types of businesses/legal ownership structure

• sole trader (UNincorporated)

• partnership (UNincorporated)

• company - public & private (incorporated)

sole trader

a business owned and operated by one person. the owner/sole trader is the person who:

• provides all the finance,

• makes all the decisions and,

• takes all the responsibility for the business’ operations.

can still employ others.

sole trader - pros

• low cost of entry

• simplest form

• complete control

• less costly to operate

• no partner disputes

• owner’s right to keep all profits

• no tax on profits, only personal income

• less gov. regulation

sole trader - cons

• unlimited liability (= person liable for business debts)

• end of business if owner dies

• difficult to operate if sick

• need to carry all loses

• burden of management

• need to perform wide variety of tasks

• difficulty in raising finance for expansion

partnerships

an unincorporated business ownership structure

• min: 2 | max: 20, but there are exceptions

→ medical practitioners.. stockbrokers = 50max,

solicitors.. accountants = 400max,

vets.. architects.. chemist = 100max

• written partnership agreement not compulsory - verbally or implications is fine.

• limited partnerships allow 1 or more partners to contribute financially to business but take no part in running the partnership

partnerships - pros

• low start-up cost

• less costly to operate than a company

• shared responsibility and workload

• pooled funds and talent

• minimal government regulation

• no taxes on business profits, only personal income

• on death of one partner, business can continue

partnerships - cons

• unlimited liability (business & partners regarded as the same)

• liability for all debts, including partner’s debt even before partnership begins

• possibility of disputes

• difficulty in finding suitable partners

• divided loyalty and authority

incorporation

the process companies go through to become a separate legal legal entity from the owner(s)

limited liability

means that a company has a separate legal entity to its owners

• shareholders (owners) cannot be forced to sell personal assets to pay for the debts of the business and;

• can only lose the amount they paid for their shares.

private limited company

a proprietary company that is not listed on a stock exchange.

• usually 2-50 private shareholders

• ‘pty ltd’ after its name

• tends to be small-medium sized, family owned businesses

public listed company

a company with its shares listed on the stock exchange (eg Australian Securities Exchanged), and publishes its audited financial accounts annually

• min. of 1 shareholder, no max.

• no restrictions on the transfer of shares or raising of money from public via share offers.

• requirement to issue a prospectus when selling its shares for the first time

• ‘ltd’ in its name.

companies - pros

• easier to attract public finance

• limited liability

• easy transfer of ownership

• a long life = perpetual succession

• experienced management - board of directors

• greater spread of risk

• company tax rate lower than personal income tax rate

• growth potential

• ability to have only 1 shareholder and director as per recent legislation (???)

companies - cons

• cost of formation

• double taxation - company + personal

• personal liability for business debts if directors knew at the time that business couldn’t pay loans.

• requirement to punish an annual report of audited accounts

• too much growth = inefficiencies

• public disclosure - reporting of certain info

social enterprises

businesses that put the interests of people and planet ahead of shareholder gain.

• funded by the gov. and various organizations

government business enterprises

businesses where the gov. is the major shareholder and;

aim to provide essential goods/services to the public while making a profit in doing so.

• likely that product/service is currently not provided by the free market

• corporatized - trying to run like a company in the private sector ie making a profit, but if not gov still funds them.

factors to consider when deciding most suitable structure

• size of business

• people involved

• type of business

• taxation & other financial issues

• finance

• start-up cost

• degree of risk

• personal preference

• how much control will be given up

business model

a plan that outlines how the business will run its operations to generate a profit. needs to include:

• goals of the business

• type of good/service offered and how to sell it

• target customers

• types of costs that will be incurred

• establish new business or enter into a franchise agreement

types of business models

• online businesses

• bricks & mortar

• import & export

• direct to consumer business

• franchise

online businesses

businesses that exist solely on the internet

online businesses - pros

• can reach customers across the globe

• avoid expenses of having a physical store

online businesses - cons

• customers may be reluctant due to risk of paying online

• unsatisfied customers who aren’t able to physically inspect an item prior to purchase

• issues over returns

bricks & mortar

refers to a business that has a physical location

• many have established an online presence as well - referred to as ‘bricks and clicks’

bricks & mortar - pros

• face to face customer interaction

• security for customers that they can physically inspect goods

bricks & mortar - cons

• more expensive - can be hard to compete on price alone

• space limitations

import & export

businesses that earn their income by trading goods internationally

imports

goods/services produced overseas and sold to Australian consumers.

importers:

• source goods that will be competitively priced on Aus market due to superior quality, cheaper cost of prod and/or lack of alternatives

• can often provide goods that aren’t available locally - provides chance foro business to grow

• must ensure goods meet country’s standards for health, safety and quality

• factor in costs of: purchase of goods, shipping, distribution, taxes etc

exports

goods/services made in Australia to be sold overseas

• exporting allows business to reduce dependence on local markets and open up to new customers

• exporters must ensure they are aware legal requirements of nation to which they are exporting to

franchise

when a business under a franchise agreement sells to others the right to use the business name and distribute its products.

• franchisor grants these rights, franchisee buys

franchise - pros & cons

pros:

• franchisor supplies business name, required training & staff development, method of doing business, management skills and materials

• receive a successful business formula, a well-known name and established trademarks - a higher chance to attract a solid customer base.

cons:

• set fee to pay to start (often expensive) and ongoing fees as well as having less independence

purchasing an existing business - benefits

• existing customers generate instant income

• a proven track record makes it easier to obtain finance

• stock is already there and ready for sale

• existing employees provide valuable assistance

• the seller may offer advice and training

• equipment is available for immediate use

purchasing an existing business - costs

• existing image may be difficult to change

• the success of the business may have been due to the previous owner’s personality and contacts - this may be lost when the business is sold

• assessing the value of goodwill is tough

• some employees may resent the change

establishing a new business - benefits

• freedom to set up as wanted

• no goodwill needed

• if funds are limited, it’s possible to begin on a smaller scale

• owner can determine pace of growth and change

establishing a new business - costs

• high risk and measure of uncertainty

• hard to secure finance

• time is needed to develop customer base, employ staff, develop lines of credit from suppliers

• if startup period is slow, may take time to generate profit

business resource needs

resources: the people and objects needed for a business to function properly. 3 categories:

• natural

• labour

• capital

natural resources

items used by the business that come from the natural environment

eg:

• land

• water

• raw materials

factors to consider when planning Natural Resource Needs

• where will they source them from?

• are the raw materials sustainable, accessible and reasonably priced?

• how can wastage and environmental damage be reduced during the production process?

• are the products environmentally friendly, can they minimize any negative effects?

• are shops/offices/factories designed in a sustainable way to reduce energy use?

labour resources

refer to the people that provide their skills, effort and knowledge to the business.

eg:

• the business owner

• employees

• subcontractors

factors to consider when planning Labour Resource Needs

• number of workers required

• skills and qualifications required

• training

• legal responsibilities such as equal opportunity, fair pay and working conditions

capital resources

refer to the tools and machinery that are used to produce goods or perform services

• maximise the efficiency of labour

factors to consider when planning Capital Resource Needs

• tools and machinery required

• repairs

• maintenance

• replacement

types of business location

• shopping centre

• retail shopping strip

• online presence

• home-based business

factors affecting choice of business location

• visibility

-some businesses need high visibility in order to attract customers, for some other businesses visibility isn’t as important.

• cost

-leasing or purchasing a central location in a busy shopping centre will be far more expensive than some other areas.

-business owner needs to be confident of generating enough business to justify the higher cost.

• proximity to customers & suppliers

-some will focus on being located close to where their customers are, others will choose to be located in an area that is convenient for their suppliers to be able to deliver their goods to them.

• proximity to competitors

-businesses don’t want to be located close to their competitors - areas with low competition are preferred.

-however, can work in their favour eg food court draws customers.

• complementary businesses

-a business offering products/services that are aimed at the same customers. eg doctors office and pharmacy

sources of finance

external sources:

• debt

short term - bank overdraft, bank bills, trade credit.

long term - mortgage, leasing, bank loans.

• government grants

equity finance (internal sources):

• self-funding

• family/friends

• private investors

• shares

• crowdfunding

equity finance + pros&cons

the funds contributed by the owner/s of a business to start & build the business

pros:

• no need to be repaid (unless owner leaves business)

• cheaper - no interest payments

cons:

• expectation of a good return on investment

• often may only be a small amount - low profits/returns

equity finance sources

• self-funding - owner uses personal finance to fund the business | risky as all investments will be lost if business fails.

• family/friends - quick & easy way to gain finance | risks damaging personal relationships

• private investors - (sharktank) good business plan may attract people who invest in new business and provide good advice | risks loss of control over business.

• shares - business can sell shares in business but must operate as a company to do so.

it’s easier for public company as they can share to the public through Initial Public Offering (IPO), they list on stock exchange & raise signi. money | con: IPO expensive & complex.

• crowdfunding - raises finance by using online & social media networks eg GoFundMe.

quick & owners can gain feedback from customers | con: generating interest can be difficult & no guarantee amount wanted will be received.

external sources - debt finance: short term borrowing

• bank overdraft - where a bank allows a business/indiv to overdraw their account up to an agreed limit for a specified time to help overcome temporary cash shortfall.

• bank bills - a type of bill of exchange, given for larger amounts for a period of 90-180 days. borrower receives money immed. and promises to repay money and interest at future time.

• trade credit - when a supplier provides product to a business w/ agreement to charge for the goods/services later. 30-90 days to pay, no interest. easy to obtain.

external sources - debt finance: long term borrowing

this type of debt is generally required to be paid back after a period longer than 2 years.

• loan: borrowing money for business purposes.

-it may be secured. (offer another asset eg house & lower interest rate) or unsecured (no collateral but higher interest rate)

→ mortgage most common for loan

• leasing: paying money to use equipment owned by another party. - allows businesses to use equipment w/o large capital eg cars, machinery

pros:

• long term financing w/o reducing control of ownership

• lease payments are a tax deduction

• easy to monitor cash flow

cons:

• interest may be higher

• need to have regular cash flow to make payments

external sources - government grants

grants awarded to businesses from state/fed govs if criterias are met.

factors affecting the choice of finance

• the term of finance (ie how long the loan is for, when repayments need to be made)

• business structure (eg larger businesses = easier to borrow, smaller businesses = likely need to raise equity)

• overall cost (ie including interest to be paid for any debt)

• flexibility (ie how will business can respond to rapid changes)

• level of control

business support services

support services that exist to provide assistance to a business

• legal & financial

• technological advice

• community based services

• formal & informal networks

• business mentors

legal & financial

• aid on: appropriate legal structure, tax & financial costs associated w each structure, business registrations, drafting legally binding contracting agreements

advisors eg:

• solicitors:

business formation & struct.

registration,

contracts, leases.

partnership agreements,

patents, legislation,

company law changes

• accountants:

financial management issues,

financial reporting, taxation obligations,

recording financial events accurately, speedily w max. security

• bank managers:

financial services

sources of finance

basic business management

technological advice

may seek techno. advice to:

• establish online business presence

• network multiple computers within business premises

• maximise use of mobile devices

business.vic.gov.au is a gov resource outlining establishment of online presence, e-commerce, online marketing etc

community based services

• provides business people w opp. to engage in community service projects

• membership can help owners establish business networks - access to advice, support and info

eg:

business enterprise centres australia - info, mentoring, training, workshops, referrals to profes. assistance

formal & informal networks

formal:

• networks found within structure of established organisations that encourage business owners through access to info and support to assist business

informal:

• casual conversations with other individuals regarding a connection to company interests, similar views etc

business mentors

• mentors offer knowledge, wisdom and experience

• can provide invaluable advice and strats to small business owners on variety of issues

• mentors may charge for services OR share knowledge out of goodwill

planning tools - SWOT analysis

• SWOT analysis: planning tool that identifies business’s internal strengths & weaknesses and any opportunities & threats from the external enviro.

internal factors:

• strengths:

what is business good at?

product popular?

loyal customers?

solid in financial pos?

equipment state of art?

• weaknesses:

competent staff?

technology obsolete?

past failures?

inefficient facilities to meet demands and competitors?

external factors:

• opportunities:

benefits from new technology?

strong economy?

low interest rates?

possible new markets?

business expansion?

• threats:

trends evident in the markets?

new laws regulating business activities?

new competitors?

current competitors taking over market shares?

planning tools - SWOT analysis: pros&cons

pros:

• low cost

• simple & straightforward

• allows person completing SWOT become more familiar w business

• helps develop goals and strats to achieve plans

cons:

• only small part of planning process, not THE process

• could be in conjunction w market research & a business plan

• may gen. large info → not all may be useful

• can be subjective

• no solutions to weaknesses/threats provided

business plans + pros&cons

written statement of the goals and objectives for the business and the steps to achieve them.

pros:

• helps test viability of business

• assists business to be proactive rather than reactive

• assists in maintaining business operation

• indicates owner’s ability & level of commitment

• forces owner to justify their plans/actions

• identifies strengths and weaknesses

cons:

• just a plan - no guarantee of success

• too much time may be spent doing plan rather than creating and selling products

• plans need to be implemented - not just written & forgotten.

typical plan should include:

• executive summary - one page doc describing business & objectives

• financial plan - how it will be financed, projected cash flow, expenses, profits etc

• operations plan - outlines how business will be set up

• marketing plan - outlines key info of industry business will be entering & marketing strat.

corporate social responsibility

when businesses go above and beyond legal requirements in regards to the community, staff and the environment.

pros:

• brand rep increase

• staff morale increase

• employer of choice

• profit

cons:

• costly in terms of money

• time consuming

• not unique - competitors can copy

potential CSR regarding business planning

CSR issues to consider:

• resource needs

• choice of location

• source of finance

• buying existing business/legal struct.

• types of business model

• business support services

• business planning tools

how to spot CSR/ethical issues in any topic?

• __E__nvironment - is enviro being affected in any way?

• __S__taff - are lives/wellbeing of staff/their families being affected?

• __C__ustomers & Community - is the community as a whole being affected?

direct to consumer

when a business sells goods/services directly to consumers without involving intermediaries like retailers or wholesalers.