Economics

Competitive Advantage

A unique benefit or feature that makes customers choose a business over its competitors.

Types of Competitive Advantage

1.      Price/Cost Advantage (cheapest option)

2.       Quality Advantage (best product/service)

3.       Product Differentiation (unique features)

4.      Brand/Reputation (trusted name)

5.      Customer Service (best experience)

6.      Convenience/Location (easiest to access)

7.       Innovation/Technology (newest/smartest)

8.       Sustainability/Ethics (environmentally/socially responsible

Sole Trader

A sole trader is owned by a single individual usually under their own name. Commencing this business isn’t complex and requires an ABN. Finance is usually from their owner. They use professionals such as accountants and lawyers to guide them.

Partnership

Partnership:
A partnership is a business with two or more people operating together, sharing the responsibility. The business has its own tax file number and a partnership tax return is submitted to the tax office. The owners are legally liable for all the debts of the business and each partner pays personal income tax.

Private Company

Private Company:
A private company is a registered legal entity to do business and complies with the Corporations Act. One person can be a director or many directors. The business has up to 50 employees and not listed on the public stock exchange.

Public Company

Public Company:
A public company is a large, registered legal entity incorporated. They raise capital by selling shares on the stock market. They have a board of directors and unlimited employees. They must publish financial statements to the public.

Franchise

Franchise:
A franchise is an arrangement where the franchisor grants a person rights to use the franchise name and business practices. It costs the franchisee capital to buy and share the profit with the franchisor.

Advantages of Sole Trader

-          Easy and inexpensive to set up

-          Owner keeps all profits

-          Full control over decision-making

Simple to sell or wind up

Disadvantages of Sole Trader

-          Limited skillset

-          Unlimited liability (responsible for all debts of business)

-          Limited access to capital (limited financial resources)

-          Limited life of business in case owner dies

May have to endure personal hardship

Advantages of Partnership

-          Relatively cheap to set up

-          Relatively simple to wind up

-          Wider access to variety of skills

-          Greater access to capital

-          Share responsibility

-          Tax advantages may exist where partners are married

Disadvantages of Partnership

-          Profits are shared

-          Shared control over decision making

-          Unlimited liability

-          Partnership has limited life

Advantages of private company

-          Limited liability – owners not responsible for liabilities incurred by business

Greater ability to attract capital than sole trader or partnership

Disadvantages of private company

-          Shares cannot be sold on the stock exchange

-          Expensive to establish

-          Harder to raise money than a public company

-          Higher compliance costs

Separate tax return for both ASIC and ATO

Advantages of public company

-          Can raise larger amounts of money by selling shares publicly

-          Limited liability

-          Easier to grow and expand

-          Greater ability to attract capital

-          Greater transferability of ownership

Life of business ongoing as it’s a separate entity

Disadvantages of public company

-          Very expensive to establish and ongoing administration, compliance costs are high

-          More public scrutiny

-          Must produce a prospectus

-          Greater separation between ownership and control

-          Separate tax return to ASIC and ATO – degree of regulation much higher

Greater disclosure requirements

Franchise Advantages

-          Recognised brand name/national advertising

-          Established reputation and business practices

-          All equipment necessary to commence operations

Bulk-buying power through franchise group

Franchise Disadvantages

-          High purchase price

-          Ongoing franchise fees to cover expenses such as advertising and administration

-          Rigid guidelines for operations

-          Competition from fellow franchisees

Dependence on the operations of the franchisor

Capital Contribution

: Funds contributed by the owner to commence, support or expand business operations, which creates a claim by the owner on the assets of the business.

Retained Earnings

business profits that are kept to fund further expansion.

Capital Contribution vs Retained Earnings

While retained earnings and capital contribution are very similar, capital contribution depends on the owner’s own savings or investment while retained earnings are dependent on the success of the business and its profits.

Adv Capital Contribution

-          No set repayment date

-          No interest charge

Disadv Capital Contribution

-          limited to resources of owner

-          personal savings at risk

Retained Earnings Adv

-          No set repayment date

No interest charge

Retained Earnings Disadv

Limited to previous profits

Trade Credit

Facility offered by suppliers that allows its customers to purchase goods or services immediately and pay at a later date. It is an agreement that businesses set up. This means a business can order goods/supplies, receive these goods and pay for them later.

Bank Overdraft

Facility offered by a bank, which allows a business to use their bank account and overdraw up to a limit. It is accessible and flexible. This means there is no additional bank account to operate, and the values of the overdraft can change daily. The main disadvantage is the daily interest charged on any amount overdrawn.

Mortgage

A type of term loan. This means the business borrows a fixed amount from a bank or finance institution. There is a fixed term or number of years in which the loan is to be paid back with interest. Mortgages have an asset such as a property or building which is secure for this loan.

Leasing

Form of rental agreement that allows a business to use and control an asset for a length of time in return for specific periodic payments and is very useful for assets that need to be replaced frequently.

Trade Credit Adv

-          Immediate access to goods/services

-          Gives businesses time to generate sales before payment is required

Discounts available from some suppliers for early payment

Trade Credit Disadv

Can only be used for purchases with that supplier

Bank Overdraft Adv

-          Readily accessible

-          Flexible – variety of purposes

Bank Overdraft Disadv

-          High interest charge

-          Can be recalled at short notice

Mortgage Adv

-          Makes purchase of expensive assets possible

-          Flexible – variety of purposes

Secured loans attract lower interest rate

Mortgage Disadv

-          Interest charges

-          Requires commitment by business to make repayments for term of loan

Principal and interest repayments can put pressure on cash flow

Leasing Adv

-          Reduces initial outlay to acquire assets

-          Allows assets to be updated

Reduces maintenance and repair costs

Leasing Disadv

-          No ownership of asset

Requires commitment by business for term of lease