1.4 Making the Business Effective

What is unlimited liability?

The owner is personally responsible for ALL debts of the business. Personal assets (e.g. house, savings) can be used to pay business debts.

What is limited liability?

Shareholders/owners are only responsible for the amount they invested. Personal assets are protected if the business cannot pay its debts.

What is a sole trader?

A business owned and run by one person. Simple to set up, owner keeps all profits, but has unlimited liability.

Advantages of a sole trader.

Easy and cheap to set up. Owner keeps all profits. Full control over decisions. Privacy (no need to publish accounts).

Disadvantages of a sole trader.

Unlimited liability. Limited access to finance. Difficult to take holidays. Business depends entirely on one person.

What is a partnership?

A business owned by 2 to 20 partners who share responsibilities, decision-making, and profits. Usually governed by a Partnership Agreement.

Advantages of a partnership.

Shared workload and decision-making. More capital available than sole trader. Skills and expertise shared.

Disadvantages of a partnership.

Unlimited liability (usually). Profits shared. Potential for disagreements. Each partner is responsible for the actions of others.

What is a private limited company (Ltd)?

A business owned by shareholders with limited liability. Shares are NOT sold to the general public. More formal than sole trader/partnership.

Advantages of a private limited company.

Limited liability protects owners. Can raise capital by selling shares. Business continues even if owner changes. More credible to investors.

Disadvantages of a private limited company.

More expensive and complex to set up. Accounts must be published. Shareholders must agree on major decisions. Shares can't be sold publicly.

What is a franchise?

A business arrangement where a franchisee pays for the right to trade using the franchisor's brand, products, and business model.

What is a franchisor?

The company that owns the brand and sells the rights to use it to franchisees. E.g. McDonald's.

What is a franchisee?

The person or business that pays to run a branch using the franchisor's brand, systems, and products.

Advantages of franchising for the franchisee.

Established brand recognition, proven business model, training and support, lower failure rate than independent start-ups.

Disadvantages of franchising for the franchisee.

Franchise fees and ongoing royalties reduce profit. Must follow franchisor's rules. Cannot sell the business freely. Reputation depends on franchisor.

Advantages of franchising for the franchisor.

Business grows quickly with lower financial risk. Franchisees are motivated owners. Royalties provide steady income.

What factors influence business location?

Proximity to: customers/market, labour supply, raw materials, and competitors. Also: transport links, cost of premises, and nature of business.

What is the impact of the internet on location decisions?

E-commerce allows businesses to sell online without needing physical premises, removing the need to be close to customers.

What is the marketing mix?

The set of four key decisions (4Ps) a business makes to market its product: Product, Price, Place, Promotion.

What is 'product' in the marketing mix?

The good or service being sold — including its design, features, quality, branding, and USP.

What is 'price' in the marketing mix?

The amount charged to the customer. Pricing must reflect value, cover costs, and be competitive.

What pricing strategies are used by small businesses?

Cost-plus, competitive pricing, penetration pricing, price skimming, psychological pricing (e.g. £9.99).

What is cost-plus pricing?

Adding a fixed percentage mark-up to the cost of production to set the selling price. E.g. cost £10 + 50% mark-up = £15.

What is penetration pricing?

Setting a low initial price to attract customers and gain market share quickly, then raising the price later.

What is price skimming?

Setting a high initial price for a new or unique product to maximise profit before lowering it as competition enters the market.

What is competitive pricing?

Setting a price in line with or slightly below competitors, often used in highly competitive markets.

What is 'promotion' in the marketing mix?

The methods used to communicate the product to customers. E.g. advertising, social media, special offers, PR, sponsorship.

What is 'place' in the marketing mix?

Where and how the product is distributed and sold to customers — e.g. in-store, online, via wholesalers, or direct to consumer.

How does technology affect the marketing mix?

E-commerce affects Place (online selling). Social media affects Promotion (targeted digital advertising). Technology can also lower costs.

How do changing consumer needs affect the marketing mix?

Businesses must adapt their Product, Promotion, Price, or Place to meet new trends — e.g. healthier products in response to health-conscious consumers.

What is a business plan?

A written document outlining the business idea, objectives, target market, financial forecasts, marketing strategy, and operational plan.

Why is a business plan important?

It helps the owner plan, set targets, and secure finance from banks or investors by showing the business is well thought out.

What should a business plan include?

Business idea and aims, target market (market research), forecast revenue/costs/profit, cash-flow forecast, sources of finance, location, and marketing mix.

How does a business plan help minimise risk?

By forcing the entrepreneur to think through every aspect of the business — identifying potential problems before they arise.