Buisness notes term 1 exam prep

What is a business

A buisness is an organised effort of individulals, to produce and sell for a profit, the products that satisfy the individuals needs and wants

The roles and importance of buisness

1. Entrepreneurship - Buisness provides the opportunity for individuals with ideas to develop them and gain rewards

2. Innovation - Buisness provides the incentive and the resources needed to maintain continuous R&D programs.

3. Employment - Buisness roadies almost 80% of the opportunities for employment in Australia

4. Provider of good and services - Buisness combines labour and other resources to produce goods and services beyond the ability of most individuals to produce

5. Choice - Through competition and trade, consumers have access to a wide range of goods and services

6. Quality of life - Buisness enables the production of an enormous range of goods and services that improve our standard of living

7. Wealth creation - Buisness provides an avenue for investment and the potential to make a profit

8. Source of government revenue - Buisness provides the government with revenue from taxation

Innovation

-In order to maintain a competitive edge over other buisnesses it must be constantly seeking ideas or new products, product modifications or different market for existing products

Entrepreneurship and risk

- An entrepreneur is someone who starts, operates and assumes the risk of a buisness venture in the hope of making a profit.

- Entrepreneurs are prepared to take the risk of starting and operating a buisness venture; of turning their dreams and passions into a livelihood.

- Entrepreneurs have to take risks because usually they explore untapped markets with no track record of proven consumer demand or guaranteed returns

Role of Business

A business’s main role is to meet the needs and wants of its customers through providing products including goods and services to them which generate a profit for their business

- Product: A product is a good or service that can be bought

- Good: A good is an item that is tangible, this means it can be seen and touched

- Service: A service is an intangible product that can not be touched

Producing gods and services

- Production: Refers to those activities undertaken by the business that combine the resources to create products that satisfy customers needs and wants

- Finished Product: A finish product is one that is ready for customers to buy and use

why are buisinesses important?

Profit

- The generation of profit is the primary role of business

- The production of goods and services is the means of fulfilling this role

- Sale Revenue - Operating expenses = profit

Employment

- Businesses allows employment to occur

Income

- Buisnesses provide income to business owners/shareholders and employees through the provision of wages, salaries and dividends

Choice

- Consumers have freedom of choice

- The choice of what to purchase and where to purchase it

- Businesses have a choice of what they produce

Wealth

- The more that is produced the more wealth is generated within the Australian economy

- The thousands of individual businesses operating everyday act as an ‘engine room’ for society, helping drive the economy.  forward to achieve greater levels of economic growth and wealth

Quality of life

- Refers to the overall wellbeing of an individual, and is a combination of both material and non-material benefited

Types of Businesses

- Can greatly vary in their size and structure

- A business can be classified according to :

       - Which industry it belongs to

       - The size of the business

       - The industry/ economic sector

       - The legal structure

Types of Industry

Primary Industry

- Includes all those businesses which production is directly associated with natural resources

- All production begins here

- Examples of these businesses include all of farming, mining, fishing, grazing and forestry

Tertiary Industry

- Involves people preforming a vast range of services for other people

- Examples include retailers, dentists, solicitors, banks

- This is the biggest industry people work in today

Classification by size

- Micro - up to 5 employees

- Small - up to 19 employees

- Medium - 20-199 employees

- Larger -  greater than 200 employees

Business Size

- Determined according to their employment size or the size of their workforce

- According to the ABS, SMEs are firms with up to 199 full-time employees and/or less than $10 million in turnover

Classification of geographic spread

Local

- A local business has a very restricted geographic spread; it serves the surrounding area.

- It serves the surrounding area and has a main costumer base who are consumers that live nearby

National

- A national business is one that operates within just one country.

- (E.g David Jones, Coles)

- These companies operate all around Australia

Global

- A global buisness is commonly referred to as a Transnational corporation (TNC)

- It is a large business that operates in more than one country and has a home base in one country

Secondary Industry

- Includes all those businesses that take the output of firms in the primary secr (raw material)

- They process it into a finished or semi finished product

- For example iron ore, coal and limestone are turned into steel- a semi finished product that is then used to manufacture cars

Quaternary Industry

- Includes services that involve the transfer and processing of information and knowledge

- Examples include telecommunication, property, computing, finance and education

Quinary Industry

- Includes all services that have traditionally been preformed in the home.

- Examples include hospitality, tourism, craft-based activities and childcare

The Change of Industry in Australia

- Australia has seen changes in the industries that are employing people

- These changes have been the result of social and consumer changes and rapid expansions of industries due to reasearch and development

- Quaternary Indstry - boom in technology field

- Quinary - due to time poor double income families

Legal Structure of Business

- Refers to how the business is viewed in the eyes of. The law, in regards to operation and ownership

- It determines who owns the business and how it is operated

- Privately owned business can be split into two broad categories; incorporated and unincorporated

- Incorporated companies acts as. Its own seperate entity; owners only have limited lability

- Unincorporated companies are not registrated as a company and the owners have unlimited liability

Incorporated

- The amount of liability you have is limited to a small amount

- If the business is sued, the business loses money and might be forced to shut down, but your own personal money is untouched

Unincorporated

-  The amount of liability you have knows no bounds

- Everything is your responsibility

- Everything is your fault if something goes wrong

- If the business is sued, you yourself are sued and can ruined

Types of legal Structure

Sole trader

-Owned and operated by a single person

- Simple and cheap,  but risks personal savings if the business doesn’t go well

Advantages include:

- Low cost of entry

- Simplest form of business

- Complete control

- Less costly to operate

- No partner disputes

- Owner’s right to keep all profits

- Less government regulations

- No tax on profits,  only on personal income

Disadvantages include:

- Personal (unlimited liability for business debts

-End of business when owner dies

- Difficult to operate if sick

- Need to carry all losses

- Burrden of management

- Need to perform a large variety of tasks

- Difficulty in raising finance for expansion

Public Company

- A company listed on the Australian Securities Exchange (ASX), allowing the general public to. Buy a share of the company

Private company

- Usually has “Proprietary Limited” (Pty Ltd) after its name, showing it is privately owned and shareholder have limited liability, up to the value of their shares. As such their own personal   Effects are kept safe in the event that the business fails Maximum 50 shareholders and shares con not be sold publicly on the stock exchange ( purchasers must be approved by directors)

Advantages

- Easier to attract public finance

- Limited liability- seperate legal entity

- Can ransfer ownership easily

- Enjoys 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

- Recent legislation allows a company to have only one shareholder and one director

Disadvantages

- Cost of formation

- Double taxation - company and personal

- Personal liability for business debts if directors knew at the time that the business was unable to pay loans

- Most publish a yearly annual report of audited accounts

- Public disclosure - reporting of certain information

- Becomes too large resulting in inefficiencies

Government Enterprise

- Owned and operated by the government

- These businesses are typically large and can operate at a local, state or federal level

- These can sometimes become privatised and sold too private investors

- For example both the Commonwealth Bank and Telstra used to be government enterprises, but have since been sold and turned into public companies

Choice of Legal Structure

Size

- Most businesses start off small or micro with a simple, unincorporated business structure

- Over time however, if the business grows, then it could move up into different size classifications and the ownership structure may need to change. This is due to new needs arise for financing, skills or limiting liability

- This would require an injection of money into the business which can come from partnership or private company

- If expansion continues to grow rapidly a business may chose to become a large national or transnational corporation (TNC)

-  To finance this level of expansion, the business will now decide to raise money from a sharemarkets float

- A float is the raising of capital in company through the sale of shares to the public

- A prospectus. (Document providing information about the company to existing investors) will be issued, the business listed on the Australian Seecurities Exxchange (ASX) and shares are offered for sale.

Ownership

- A bigger business means less control for the owner(s)

- Unincorporated business ( sole trader/partnerships) allow the owner to assume complete control of the business,  however they could raise more money for expansion with other structures, such as going public,  but with a cut of their level of control

Choice of Legal Structure

Finance

- How a company chooses to fund its operations will impact its decision on legal structure

- Businesses with unlimited liability can find it hard to raise finance, as banks may be unwilling to give loans to someone without many assets and a large amount of risk

- A public company can issue shares to raise funds, at the cost of some control of the business

- Another option is receiving money from a venture capitalist

- Venture capitalist : Someone idling to invest in your business, with the expectation that they will make a profit from the venture

External influences

- Influences which occur outside of the business

environment which the business cannot control,

but must respond to.

External influences:

Economic

● The Australian economy experiences periods of expansion

and contraction known as the economic cycle/ business

cycle.

● The economic cycle is defined as periods of growth and

recession that result from fluctuations in economic activity.

Economic cycles vary based on global and domestic economic

conditions. Governments aim to ensure economies do not

enter the recession stage.

● Economic factors have a significant impact on businesses and

customers.

○ Businesses are influenced by their capacity to compete

○ Customers are influenced by their willingness and

ability to spend

The Business Environment

▪The business environment is DYNAMIC. Businesses must be

able to adapt to the changing circumstances in order to survive.

▪The business environment refers to the surrounding conditions

in which the business operates and can be divided into two

broad categories: external and internal.

▪The internal environment includes those factors over which

the business has some degree of control, such as products,

location, resources, management and business culture.

▪The external environment includes those factors over which

the business has little control, such as government policy,

technology, economic conditions and social attitudes

The four main stages in an economic cycle are:

1. Boom/ Peak – economic activity is at an unsustainable level.

2. Recovery – Occurs when economic activity is expanding.

3. Recession – defined by a period of negative growth over a 6 month period (2 consecutive quarters).

4. Depression – defined by negative growth for a 12 month period or longer.

External Influences :: Fianance

- Australian financial systems have gone through significant changes since financial deregulation that began in 1983.

-This has led the financial sector to become more competitive seen in the

establishment of multiple new banking products that aim to accommodate the business sector.

- A main source of finance for business is debt finance → significantly influenced by interest rates.

- As interest rates increase, businesses will become more cautious in relation to taking on extra debt and as interest rates drop, then businesses will take on more debt.

-The current cash rate is 3.10% (Jan 2023).

- The Royal Banking Commission (2019) has put additional regulation on the lending practices financial institutions must adhere to.

- This is due to poor lending practices banks were using in the past.

- Deregulation is the removal of governmental regulation from industry, with the aim of increasing efficiency and improving competition

External influences: Legal

● While most business owners are willing to comply with

regulations, compliance is often time consuming and costly, and

regulations can be confusing and contradictory.

● Businesses need to have a sound working knowledge of the laws

that will affect their operations → avoid penalties and ensure

understanding and acceptance of all legal responsibilities.

● The Fair Work Act 2009 (Cwlth) is a key piece of legislation that

has been breached by many Australian businesses primarily in the

retail/ hospitality industries for wage fraud/ under payment

● The Competition and Consumer Act 2010 (Cwlth) applies to

virtually all businesses in Australia and is administered by the

Australian Competition and Consumer Commission (ACCC).

External influences:

Geographic

● Two factors that have a large impact on business activity

are Australia’s geographic location within the Asia–Pacific

region and the impacts of globalisation.

● Demographic changes have led to changes in the demand

and the nature of particular products and services. Eg:

Australia’s ageing population will cause skill shortages in

the workforce as well as an increase in the demand for

age-related services such as aged care.

● Another influence is the fact we live in a global world,

rather than a world limited by national borders → ease of

global trade and business.

External influences:

Social

Quick identification and response to changes in tastes, fashions and

culture can lead to sales and profit opportunities, and business growth.

Failure to respond to social changes can threaten business stability and

viability. Eg: Blockbuster

Three social issues are leading to significant change or have the potential

to influence major change in business practices:

•Concerns a growing awareness of our vulnerable environment.

•Desire for businesses to provide family friendly workplaces.

•The growing belief that businesses must cater for workplace diversity.

Employees will have different issues that may be related to gender, age,

language, ethnicity, cultural background, disability, sexual orientation

and religious belief. Businesses are required to effectively manage a

diverse range of employees and cater for their specific need

TWO main aims: Protect consumers from false or misleading

conduct & Aims to regulate certain trade practices that may

restrict competition

● A breach of any of the consumer protection provisions of the

Competition and Consumer Act can result in criminal proceedings.

The Act allows the courts to impose penalties of up to $1.1 million

for companies, and $220 000 for individuals who breach the Act

External Influence: Institutional

Regulatory bodies

- The Australian Competition and Consumer Commision (ACCC) and the Office of Fair Traing work to protect individuals by keeping businesses in line with government regulations.

-Buisnesses must comply with these regulations or risk facing heavy penalties

Other Institutional Influences

- Includeemmployer associations and trade unions, which work to protect the interest of their respective membership groups

- The Environmental Protection Agency (EPA) is a government agency which works to protect the environment, manage late change and monitor water sources

- Buisesses often need to take into consideration the demands and wishes of these organisations

External influences - Political

- Government policies that often reflect on the party’s partisan stance can change over time, but can also evolve into longer-term legal influences, such as changes to leave, tax and environmental management.

- Similar influence to legal, however, these can be considered more short-term in their influence, as government can change with each election, as well as what they choose to focus on throughout their term

External Influencees: Technology

- rapid advances in information technology (IT) have reduced communication delays and allow suppliers and coustoerss to interact over great distances

- The use of hi-tech robotics in any manufacturing industries s improving productivity, reducing operation costs and eliminating many boring and repetitive tasks

- All these have meant business management needs to respond to change within the business environment to ensure their business practices and operations are able to compete on a level playing field characterised by efficiency

- Examples of the use of technology in business include payment options, e- procriument and app sharing platforms

External Influences: Competitive Situation

- Competition within markets provides consumers with more choice and generally less to competitive pricing

-for business- competition encourages efficiency and innovation

- Buisnesses aim to achieve a sustainable competitive advantage over competitors in order to capture a large portion of the market

- Te ability to outperform the competition in terms of quality and price is referred to as a competitive advantage

- Having a company’s. sustainable competitive advantages means being able to meet the needs of customers better than competitors

External Influences: Market

Change in Financial/Capital markets

-Fianance is now more mobile and flows easily between countries

- This has led to the rapid expansion of international financial flow over the last 30 years

- This has made it easier for individual ad a business to access overseas share markets

Changes in Labour Market

- due to the political barriers, the flow of people between countries is more restricted now than during 1850-1900, when migration occurred

- However, temporary, skilled migrant workers and the demand or highly trained employees are recent trends that have resulted in the movement of workers

- Globalisation has opened labour markets in low wage countries that businesses use to outsource some of their labour equipment

External Influenes: Market

Changes in consumers markets

- Countries are achieving cost saving by specialising in products they can produce efficiently

- As a result, new consumer markets emerge, particularly in developing countries, like China and India

-Australia’s consumer markets are changing due to our changing population

          - Birth rates have decreased

          - More multicultural

- Improved technologies and communications have changed consumer markets - the internet has allowed for much larger markets globally ( online shopping)

External Influences

- Financial

- Economic

- Legal

- Technological

Political

Internal Influences: Products

- The type of good or service provided- physically large products and products that need any raw meterials require organisational structures to organise and monitor the production process

- The type of business ( service,manufacturer or retailer) - the operations for a service provider will largely to that of a manufacturer or retailer. Some goods or services require extensive preparation while others merely sell-finished goods

- The size of he business- the larger the business produce a higher volume of goods and deliver more services. This will influence the internal structures and operations of the business as it grows in size.

Internal Influences: Management

- rapid advances in technology and increased global competition has led to buisnessesflattening their structures

- Flattening structure — fewer levels of management = Businesscan adapt to changing needs due to more efficient decision making

Internal Influences: Resources

the four main resources available to a business are:

- Humann resources: employees of the business and are generally the most important resources available

- Information resources: Includes knowledge and data required but the business such as market research, sale reports, economic forecasts and legal advice

- Physical resources: Equipment, machinery, buildings and raw materials

- Financial resources: the funds the business uses to meet its obligations to various creditors

Internal Influences: Buisnesses Culture

- Business ( corporate) culture refers to the values, ideas, expectations. And beliefs shared by members of the organisation

- Knowing and appreciating a business’s culture makes it easier to get things done faster or to initiate a change in routine

- A manager must understand and assess all facets of a business’s unique culture as this is a powerful tool for achieving goals

-  A business culture normally. Consists of 4 essential elements:

1.  Values

- These are the.  Business’s basic beliefs, shared among its employees. Such as. Honesty, hard work, teamwork, quality consumer service ,  employee participation and innovation

2. Symbols

-  Events or objects that are used to represent something the business believes to be important

3. Rituals, rites and celebrations

- The routine behaviours patterns in a business’s everyday life.

- Such as regular social gathering that develop a sense of belonging among employees

4. Hero’s

- The business’s successful employees who reflect its values and act as an example for other

Stakeholders

- Any group of individuals who has an interest in or is affected by the activities of a business

- Stakeholders interact in some way with the business and have a vested interest in its activities

-  Stakeholders can in be internal or external

- Internal stakeholders are directly impacted by the activities of a business whereas external stakeholders are indirectly impacted by the activities of the business

Business Lifecycle

1.  Establishment

- First stage in the business

- Wherethe business idea is created and the business begins trading

- This is a vulnerable stage in the business lifecycle

- The main concern is to get the business to generate enough sales to bring in the much needed income (Cash) to pay expenses and create a positive cash flow

- Goal: survival - The business wants to carve out market share within the industry they are operating in

- Main challenge :  Low cash flow, high costs, few employees,  high risk

- Cash flow: Is simply the money coming into the business in the form of cash recipts, and the money leaving the business as cash payments

2.  Growth

- Second stage in the business

- It is when the business idea takes off

- Sales are increasing at a rapid rate and cash flow is positive

- A customer base has been established and the business relies on regular clients

- Business undertakes the development of new products to satisfy different market segments

- Goal: Business expansion through agressive marketing and new product developments

- Main Challenges: Managing high levels of sales, increased levels of employees, expanding too rapidly and losing control of business activity

- Credit. Policy: Is a set of terms that lays out how your company will issue credit to its clients and collect unpaid debts

2. Growth Stage - Mergers and Acquisitions

- A merger or acquisition is an effective way a company can quickly increase its range of products,  or in order to eliminate competition in the marketplace

- A merger occurs when the owners of two seperate businesses agree to combine their resources and form a new organisation

- An acquisition occurs when one business takes on troll of another business by purchasing a controlling interest in it

- There are different types of mergers or acquitions including

         - Vertical Integration

         - Horizontal Integration

         - Diversification

3. Maturity

- The third stage of a business

- When sales and growth level off usually due to increase in competition

-   Business will often fail 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 which means the growth stage has slowed

- Goal: Maintain profits at pre-existing levels

- Main Challenges: Rate of sales start to fall,  less of initial enthusiasm and complacency

Value Chain

-   Is a series of consecutive steps that go into the creation of a finished product, from its initial design to its arrival at a customer’s door.

-The chain identifies each step in the process at which value is added, including the sourcing, manufacturing, and marketing stages of its production

Diversification

- Occurs when a business is acquires or merges with a business in a completely unrelated industry

- For example if a bakery merges with a furniture manufacturer

Horizontal Integration

- Occurs when a business acquires or merges with another firm that makes and sells similar products

- For example, if a bakery merges or is acquired by another bakery

Vertical Integration

- When a business expands into related but different levels of a product

- When a business integrates with one of its suppliers this is refereed to as backward vertical integration

- For example, a bakery acquiring a wheat farm

- Forward integration is when a business integrates with a firm. To sell to

- For examples,  the bakery could merge with a supermarket chain that sells its bread

4. Post- maturity

- Final stage in the business lifecycle

- The events of this phase is dependant on how managers respond to the challenges they are faced in the maturity phase

1. Steady State. -  Business continues on similar path

2. Renewal -  Business enters a new phase of growth

3. Decline - Fall in profits but the business continues

4. Cessation - Closure of business due do decline

- There are many opportunities and threats during this stage and the decisions made by the owner will be crucial for the future success of the business

Post- maturity - Steady State

-  When a business is neither declining nor expanding

- It is when a business is maintaining its profit levels

- Does not continue expenditure on research and development

- Business continues making what it has in the past

- Eventually the environment will change and the business will be adversely affected

-  When the business stays the same and does not grow, the business loses sales and its competitive edge and moves into the decline stage

Post-maturity - Decline

- As customers stop purchasing products, cash flow is severely impacted and profits will decline

- The process of decline is difficult to reverse because:

  - Harder to borrow money from the bank

  - Suppliers restrict their credit and may insist on cash  payments   

  - Employees may begin to leave to seek better opportunities

- This phase eventually leads into cessation ( Voluntary or Involuntary)

Post- maturity - Renewal

- Business decline can be overcome by focusing on new markets being tapped and satisfying unmet demand

- The key to recovery in sales is to focus production on what the customer are presently demanding

- Extennsive market research is needed to forecast for future customer trends

- Business who are proactive rather than reactive at this stage are more successful

Factors that can contribute to business decline

- Faliure to meet customer needs

- Lack of demand for the product

- Failure to plan

- Increased competition

- Lack of adequate cash flow

- Poor location

- Lack of management skills

- Uncontrolled growth

- Faliure to price product correctly

Main two causes of business decline

1. Lack of management expertise

- When an organisation fails to prepare a business plans or fails to keep on modifying an existing plan as the environment change, the stage is set for imminent failure

2. Lack of sufficient money ( undercapitalisation)

- Many small businesses start out on a very small budget

- Without sufficient capital and a positive cash flow, the business will not be able to purchase stock and materials and results in lost sales and falling profits

Voluntary and Involuntary cessation

- Cessation : Is when a business creases to operate

- Voluntary Cessation: Occurs when the owner decided to close the business ad is able to settle their accounts receivables and payable

- Involuntary Cessation: Occurs when the owner is forced to close usually by a court order after creditors have launched an action in court