MODULE 1: NATURE OF BUSINESS

1.1 Role of Business

1 - Producing goods and services

Introduction

One of the main reasons a business produces goods and services is to make a profit (i.e. maximize revenue and limit costs).

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- A good is seen as an item that can be seen or touched and involves production with inputs, machines, and inventory management (tangible).

- A service is an action that is performed by a person or machinery for someone else (intangible).

Needs and Wants

• A need is an item or service that is required for a good standard of living or a material needed to survive.

• A want is a desire for an item or service that is not detrimental to the survival of an individual but can improve the quality of life.

Production of Goods and Services

Businesses engage in numerous activities to meet customer demand, as shown in the figure below.

However, the most crucial of these activities is production. Production involves combining resources to create products that fulfill customers' needs and wants.

The production of a good or service, to satisfy a need or want, contains three distinct parts:

Input - resources required to create goods and services

Transformation Processes - resources that take the inputs and transform them into the desired output

Outputs - the good and services produced to earn profit 

Businesses add value by combining inputs like raw materials, human skill, and technology (capital) to create products more valuable to consumers than the individual resources. For example; milk, cream and flavouring are processed with machinery and skills to produce ice cream.

2 - Profit, Employment, Incomes, Choice, innovation, Entrepreneurship and Risk, Wealth and Quality of Life

Profit 

The surplus of revenue over costs. If the business’ expenses are greater than the sales revenue, it is called a loss. 

Revenue - Costs = Profit

Employment

Businesses contribute to the economy by providing jobs to individuals, allowing the business to reach demands of the customers as well as partners. 

 The employment generates income for workers. This income circulates through the economy as individuals purchase goods and services, allowing a circular economy to occur.

Income

An important function of businesses is to provide income. Income is the amount of money received for providing labour. 

A business’s income is the amount it earns after covering all of its expenses: a return on its investments.

There are many different types of income that employees can receive. For example:

Choice

Consumers are allowed to choose the products with the features, quality levels and price points that suit them.

Innovation

Innovation means coming up with new ways to do something. Innovation may result in:

• Developing new products or services, enhancing existing products or services or introducing technology. (Product innovation)

• Improving operational processes regarding how the business operates or products are manufactured. (process innovation)

• Changing how products or services are promoted and the channels used to distribute them (market innovation).

To be innovative, businesses need to undergo research and development (R&D). Large businesses generally have greater resources to spend on innovative processes such as research and development.

Entrepreneurship and Risk

An entrepreneur is someone who transforms an original idea into a new business. Entrepreneurs are exposed to a number of risks as they tend to explore new markets with no track record of proven consumer demand or guaranteed returns.

The greater the potential return, the greater the risk.

Wealth

The more that is produced, the more wealth is generated within the Australian economy.

During normal operations, a business earns revenue from customers in exchange for its products while also paying expenses to other businesses to cover operational costs. The difference between revenue and expenses, represents the wealth (profit) generated by the business. This wealth is then distributed among employees, governments, lenders, owners/shareholders, and the business itself.

Quality of Life

Quality of life encompasses both material and non-material aspects of wellbeing, with employment playing a key role in providing income, self-esteem, and a sense of contribution to society. 

Jobs can also foster social connections that impact health and overall happiness. Many businesses are adopting environmentally friendly practices, such as using recycled materials and reducing energy consumption. 

The Body Shop, for instance, supports corporate social responsibility through initiatives like recycled packaging and funding efforts such as ‘Stop Violence in the Home.’

1.2 Types of Business

• Classification of Business

• Size - Small to medium enterprises (SME’s), large

• Local, national, global

• Industry - primary, secondary, tertiary, quaternary, quinary

• Legal structure - sole trader, partnership, private company, public company, government enterprise

• Factors Influencing Choice of Legal Structure

• Size, ownership and finance

1. Size - Small to medium enterprises (SME’s), large

Businesses come in FOUR different sizes:

• Micro - Fewer than 5 employees (including the owner)

• Small - Between 5 and 19 employees

• Medium - Between 20 and 199 employees

• Large - 200 or more employees

There are a number of measurements that can be used to determine the size of a business. These measurements include the:

Number of employees - the people hired to complete the work.

Number of owners - for example, a business that operates as a sole trader has one owner.

Market share - this represents the percentage of an industry, or a market's total sales that is earned by a particular company over a specified time period.

Legal structure - this is how a business is legally organised (e.g. sole trader, partnership, private company, public company). 

Amount of revenue earned - The Australian Taxation Office (ATO) defines a small business as one that has less than $10 million in annual turnover. Large businesses are defined as those with turnover levels above $250 million.

Small to medium enterprises (SME’s) defined by the Australian Bureau of Statistics as firms with fewer than 200 full-time equivalent employees and/or less than $10 million turnover.

SMEs accounted for 99.8% of Australian businesses as of 2019.

2. Local, National and Global

3. Industry 

An industry consists of businesses that are involved in similar types of production. For example:

• Ford and Toyota are part of the Automotive Industry

• Myer, David Jones and Kmart are part of the Retail Industry

The 5 main industry sectors

Semi-finished products: a product that can be created into another fully finished product. An example of a semi-finished product is flour which you buy to make the final product - bread.

4. The Legal Structures of a Business

In Australia, all businesses are classified into two broad groups:

Unincorporated: The business entity and the owner are one and the same - business owners are personally liable for any debts or lawsuits against the business. When the owner dies so does the business.

AND

Incorporated: The business is legally separate from its owners. It exists in its own right - a separate legal entity from the owners. 

In Australia, liability depends on the legal structure chosen by the business owner.

Unlimited Liability: The business owner is personally responsible for all the business’s debt.

Limited Liability: A feature of corporate ownership that limits each owner’s financial liability to the amount of money they have paid for the business’s shares.

Types of Business include:

Sole Trader: Any business that is owned and controlled by one person. The simplest form of business structure and is relatively easy and inexpensive to set up. The owner is under unlimited liability.

Partnership: Businesses owned by between two and twenty people who distribute income or losses between themselves. The owners are under limited liability. 

Company: A business with a separate legal identity from its shareholders. This means the company had the same rights as a natural person and can incur debt, sue and be sued. They give shareholders limited liability - meaning shareholders are not liable for debts of the businesses and will only lose the amound of money they invested in that business if the company were to be liquidated.

Private (ends in “Pty Ltd”): A entity with private ownership. Shares are not public and only by offers to potential investors.

Public:

1.2(.5) Factors influencing choice of legal structure

1.  Size, Ownership and Finance

The THREE key factors influencing this decision are the size of the business, ownership, and finances, which are interconnected in shaping the owner’s choice.

1.4. Influences in the Business Environment

External

Internal

1.3 Business growth and decline

• Stages of the business life cycle

• Establishment

• Growth

• Maturity

• Post Maturity

• Responding to challenges at each stages of the business life style

• Factors that can contribute to business decline

• Voluntary and involuntary cessation - liquidation

1. Stages of the business life cycle

The business life cycle is the change and stages that a business goes through over the course of it’s existence.

Break even point: made enough money to cover costs (no profit, no loss)

Fixed Costs: business costs, such as rent, that are constant whatever the amount of goods produced.

Variable Costs: a cost that varies with the level of output.