Untitled Flashcards Set

  1.0 | Nature of Business

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1.1  – Role of Business

1.1.1 – the nature of business

· Good – a tangible product, e.g. a pen.

· Service – intangible (something that is performed), e.g lawyer provides service

· Production – refers to the activities undertaken by the business that combine the resources to create products. 3 ingredients to production process:

®     Natural resources:

o   known as raw materials

o   resources that are supplies by nature

o   everything produced in the world must start form these resources.

®     Capital resources:

o   these are human made objects that help in producing products.

o   machinery and technology

o   buildings, equipment’s

®     Labour resources:

o   human skill and effort.

®     Value Chain – during each stage of production value is added to the product. This is known as value adding.

®     Intermediate vs Finished products – an intermediate product is one which is produced by a business then used as an input for another. A finished product is one which requires no more transformations.

· Profit – financial gain made when the revenue (money earned from sales) exceeds its costs and expenses.

· Employment – refers to the state of having a job, or the number of people working in a business or an economy.

· Incomes – the money earned by an individual or business. For individuals this usually comes in the form of wages or salaries, for businesses earn income through sales or investments.

· Choice – refers to the ability of consumers, businesses and individuals to make decisions about how to allocate their resources to meet their needs and wants.

· Innovation – the process of developing new products, services or ways of doing things that improve upon existing ones.

· Entrepreneurship and Risk – the act of starting and running a new business, while risk refers to the potential for loss or failure in the process of this.

· Wealth – refers to the accumulation of assets, such as money, property or investments that have value.

· Quality of Life – refers to the general well-being of individuals, including their physical and mental health, education, income, and overall satisfaction with their lifestyle.

1.2  – Types of Businesses

1.2.1 – classification of businesses

· Small and Medium Enterprises (SMEs), large

®     micro: fewer than 4 employees

®     small business: 5-19 employees

®     medium business: 20-199 employees

®     large business: 200+ employees.

· Further way to classify business is based on if there local, national or global. This is determined off where the business is based and where their goods are manufactured

· Primary – obtaining or providing natural raw materials, e.g. orchards, quarry

· Secondary – manufacturing, e.g. bowral bricks

· Tertiary – services, e.g. removalists, restaurant,

· Quaterny – information based, e.g. web designers, legal centre

· Quinary – home based services, e.g. cleaner, childcare.

· Sole trader – the owner is the person who provides all the finance, makes all the decisions and takes all responsibility for the operation of the business.

®     Unincorporated:

o   not a separate legal identity (between business and owner), e.g. if business is sued, owner is sued.

o   business and owner are legally tied.

o   unlimited liability

®     Unlimited Liability – the owner is solely responsible for all debts and obligations of the business. If the business cannot pay its debts, the owners’ personal assets could be seized and used to cover the debts.

®     Advantages:

o   low cost of entry

o   simplest form of business

o   complete control

®     Disadvantages:

o   unlimited liability

o   difficult to operate when sick

o   burden of management

· Partnership – a legal business structure that is owned and operated from 2-20 people.

®     Unincorporated

®     Unlimited liability

o   Joint and several liability

®     Can be made verbally or in writing.

®     Advantages:

o   Low startup costs

o   Lest costly to operate than a company

o   Shared responsibility

®     Disadvantages:

o   Personal unlimited liability.

o   Liable for all debts

o   Disputes.

· Companies

®     All companies are incorporated

®     The company can:

o   Be sued and sue

o   Perpetual succession

®     Limited liability:

o   Shareholders cannot be forced to sell any personal assets for any company liabilities.

o   Exceptions:

§  Directors will not be protected if they make false or misleading statements

®     Advantages:

o   Easier to public financer

o   Limited liability

o   Transfer ownership easily

o   Experienced management

®     Disadvantages:

o   Cost of formation

o   Double taxation (personal and company).

o   Must publish yearly annual of audited accounts.

®     Proprietary Companies (PTYLTD)

o   Most common

o   2-50 shareholders

o   Tend to be SME’s and family owned.

o   Shares only offered to those who the business wants as owners.

o   Not listed on ASX

o   Limited liability.

®     Public Companies (LTD)

o   Shares listed on ASX, and the general public may buy and sell.

o   Tend to be large.

o   Characteristics:

§  At least one shareholder, no maximum number.

§  Minimum three directors; 2 must live in Australia.

§  Has to issue prospectus when issuing shares for the first time

§  Publish annual audited financial accounts.

§  No restrictions in the transfer of shares.

· Government Enterprises (GBE)

®     Government owned and operated.

®     Typically, large business

®     Provide essential community services.

®     Privatisation: selling government-controlled business to private investors.

o   Change from GBE to public company

o   Rational: economic efficiency.

®     Deregulation: removal or reductions of government regulations.

®     Corporatisation: government owned, has people trying to run it like a private company.

1.2.2 – factors influencing choice of legal structure

· Size

®     Most businesses start as a sole trader

o   If sales continue to increase businesses might need more resources

®     Partnership with new partners to provide additional capital and assist in running the business.

®     Private company may be formed if expansion is rapid, and the owners may seek the protection of limited liability.

o   Private shareholders bring with them extra finance, skills and expertise.

®     As a business grows it becomes a national or transnational corporation (TNC).

o   To finance this level of expansion, it will be necessary to draw from a large pool of available finances.

®     A public company can raise money from a share market float (the raising of capital in a company through the sale of shares to the public).

o   Prospectus – a document giving details of a company and inviting the public to buy share in it. It is issued as a business is listed on the stock exchange.

· Ownership

®     Sole traders – have complete control over the ownership of the business

®     Private company – the owner has a high degree of control and the protection of limited liability. The owner also controls who becomes a shareholder.

®     Public company – ownership is related to the number of shares owned. More shares equal more ownership. If original owner wants ot retain ownership they need to hold 50% of all shares sold. Profits are divided among shareholders (dividends).

· Finance

®     Businesses require more money to purchase new equipment, undertake research, hire more staff and open new outlets.

®     Due to unlimited liability, it can be hard to obtain adequate finance.

®     One source of finance is venturing capital

o   Money that is invested in small or struggling businesses that have potential to become very successful.

1.3  – Influences in Business Environment

1.3.1 – external influences

· Economic cycle – the periods of growth (boom) and recession (bust) that occur because of fluctuations in the general level of economic activity. Downturn (contraction), upturn (expansion)

®         

®     Recovery:

o   Increasing consumer spending

o   Business expectations increasingly optimistic

o   Increasing business investment

o   Sales and profit rising

o   Unemployment decreasing

®     Recession:

o   Decreasing consumer spending

o   Business expectations increasingly pessimistic (expecting the worst).

o   Decreasing business investment

o   Sales and profit falling

o   Unemployment rising

®     Peaks:

o   Wages and salaries

o   Business operating at full capacity

o   Sales and profits at highest levels.

o   Low levels of unemployment

o   Inflation may increase

®     Troughs:

o   Wages and salaries at low levels

o   Business operating at below full capacity.

o   Sales and profits are at lowest levels.

o   Consumer spending at lowest levels

o   High levels of unemployment

o   Inflation may remain stable or fall.

®     Boom high economic activity – employment is high in business, wages increase, consumer spending increases, more secure in job, so consumers tend to spend more. Inflation may increase.

®     Bust low economic activity – employment is low, business hires less staff. Wages are stable and are less likely to increase and employees are concerned with job security. Consumer spending decreases, less job security so they rather save then spend.

·  Financial – changes in the global and domestic financial market (places where investors and lenders can provide businesses with money) will influence the cost of borrowing money and directly affect the level of investment by a business.

·  Geographical:

®     Australians’ location within the Asia-Pacific region.

®     Economic growth in a number of Asian nations, especially China.

®     They provide challenging opportunities for business expansion, sales and profits.

®     Cheaper to get other countries to manufacture products at a cheaper cost.

®     Age structure of population. Skill shortage when elderly people retire.

·  Social – constantly adapting to changes in tastes, fashions and culture can lead to sales and profit opportunities, with business growth.

·  Legal – government regulations and laws that may affect business. Businesses need to have a good knowledge of the laws that will affect their operations.

·  Political – changes in government policy can affect a business in a number of ways.

®     Reregulation – removal of government regulations from industry, to increase efficiency and improve conditions.

®     Political reforms include labour market reforms, social reforms, environmental and taxation.

·  Institutional – three main institutional influences on business are:

®     Government

®     Regulating bodies

®     Other groups, e.g. Trade unions, and employer associations. 

·  Technological:

®     Global technological innovation has increased at a remarkable pace.

®     With technology businesses can increase efficiency and productivity, create new products and improve the quality and range of products.

®     If a business wants to be competitive, it must adopt the appropriate technology.

·  Competitive Situation – competitiveness between firms can benefit customers and consumers. Provide consumers with more choice, range of quality and prices. For businesses competing can stimulate greater efficiency in production and results in better quality products or services at the lowest price.

®     Sustainable competitive advantage – refers to the ability of a business to develop strategies that will ensure it has an edge over its competitors for a long period of time. Each business aims to achieve a sustainable competitive advantage over its competitors.

·  Markets

®     Financial/capital markets – finance(capital) flows freely between countries. Easier for businesses to access overseas share markets.

®     Labour markets – political barriers – flow of people between countries is restricted, movement of large number of temporary skilled migrant workers have been very important to Australia, growing demand for highly trained employees – people are more mobile.

®     Consumer markets – massive global trade growth due to globalisation, technology – economies up scale and outsourcing new consumer’s

1.3.2 – internal influences

· Products – influence a range of internal structures and operation within the business.

®     Affects the transformation process: range, complexity, size of products; goods, which are large or require many raw material inputs, requires structures to organise and monitor the production process.

®     Affects different businesses differently in there: manufacturer, service provide or retailers; some products require extensive preparation while others only require deliveries.

®     Affects the size of business: range, level of technology and volume of products; the large r the business the more products produced, which will influence the internal structures and operations of the business.

· Location – the location of a good can lead to improve efficiency, which in turn could lead to increased sales and profits. Factors that affect location:

®     High visibility in prime shopping area

®     Cost – leasing or purchasing a prime location can be expensive.

®     Retail businesses must be located near to their customer base.

®     Proximity to support services – the activities needed to assist the core operations or prime function of a business

· Resources

®     Human resources – employees

®     Information resources – knowledge and date (market research, legal data etc._

®     Physical resources – equipment, buildings and raw materials.

®     Financial resources – funds.

·  Management

®     Traditionally management was very centralised, bosses made decisions, everyone else followed.

®     Modern management uses flatter structure, this allows for greater contribution from the lover level employees.

®     Businesses can adapt quickly to meet changing consumer needs and market conditions because fewer managers need to approve decisions.

·  Business Culture – refers to the values, ideas, expectations and beliefs shared by the members of the organisation.

®     Businesses with a healthy, well-developed and strong culture are more likely to be successful.

®     Need to consider different ethical beliefs in the workforce. This includes when products are worldwide. Need to take into consideration if they are ethical in other countries. e.g killing animals in the ag industry and halal.

1.3.3 – stakeholders

·  Stakeholders – any group or individual who has an interest in or is affected by the activities of a business.

®     Businesses have many stakeholders.

®     Businesses have an increased chance of success when they meet their interests and expectations of their stakeholders.

®     Two types – internal and external.

·  Shareholders – main responsibility to is to maximise the return on the shareholders’ investment

·  Managers – must give an honest and accurate account of their management of the business’s resources.

·  Employees – safe work environment, respect differences, welfare, motivation, reward, equal opportunity and privacy.

·  Consumers – consumer satisfaction.

·  Environment – adopt ecologically sustainable operating practices.

1.4 – Business Growth and Decline

1.4.1 – stages of the business life cycle

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·  Establishment – recently established businesses are vulnerable; the overriding concern is to get the business on a solid foundation. This requires enough sales to be generated to bring in the much-needed income, which will be used to pay expenses and to generate a positive cash flow.

·  Growth – a time of accelerating growth. Sales increase and the cash flow is normally positive. Customer base established. Business develops new products to satisfy different market segments. More emphasis on marketing. Loyalty to the business is strong. Business has a good reputation in the community, owners develop sense of pride in their product. Businesses must continually improve its competitive edge, otherwise, competitors will take away customers and the growth will stall. During growth and expansion, a business can integrate with other businesses through a merger or acquisition (takeover).

®     A merger occurs when the owners of two separate businesses agree to combine their resources and form a new organisation.

®     An acquisition occurs when one business takes control of another business by purchasing a controlling interest in it.

®     Several types of mergers or acquisitions:

o   Vertical integration – occurs when a business expands at different but related levels in the production and marketing of a product. (e.g bakery acquires a wheat farm)

o   Horizontal integration – occurs when a business acquires or merges with another firm that makes and sells similar products.

o   Diversification – occurs when a business acquires or merges with a business in a completely unrelated industry.

·  Maturity – at this time the owner realises that the business could easily lose the energy, enthusiasm and vitality of its earlier times. A sense of complacency often envelops the business, affecting both management and staff. May come the need to completely restructure and reorganise he business, which can be quite a painful experience. Business may lose ‘family’ culture and turn into a more clinical and professional culture. The size of the business dictates a more formal organisational structure.

·  Post-maturity state – represents many opportunities but also many threats. The decisions made by the owner is crucial for the survival of the business:

®     Steady State – A business in this phase is neither expanding nor declining, similar to an airplane in a holding pattern. It meets customer demand and maintains profit levels but does not invest in research and development. Instead, it relies on marketing replacement products. However, like an airplane, a business cannot remain in this state indefinitely—eventually, external changes such as evolving consumer preferences or new competitors will force it into either renewal or decline. 

®     Decline – When a business loses its competitive edge, sales drop, and cash flow weakens. Over time, profits decline, and the business faces challenges such as difficulty borrowing money, loss of supplier support, obsolete products, and employee departures. If these issues persist, the business may fail, leading to cessation. 

®     Renewal – A struggling business can avoid failure by identifying new markets, adapting to consumer demand, and implementing strategic changes. A successful turnaround requires extensive market research and proactive decision-making. Businesses that respond too late to change often lose market share, while those that anticipate trends can recover and sustain long-term success.