Business Success & Failure + Types of Businesses

• Strong business plans, good financial management, understanding the market, and effective customer service are reasons for business success.
• Poor cash flow management, lack of planning, insufficient customers, and bad location or poor marketing are reasons for business failure.

Types of Businesses

• Sole trader: Owned and run by one person with unlimited liability.
• Partnership: Ownership, responsibilities, and profits are shared between two or more people; also has unlimited liability.
• Sole proprietorship: A business owned by a single individual, operating under their own name.
• Proprietary company: A business that exists as a separate entity entitled to do business in its own right.
• Private company (Pty Ltd): Owned by a maximum of 50 private shareholders, with limited liability.
• Public company (Ltd): Listed on the stock exchange, owned by shareholders, with limited liability.
• Social enterprise: Aims to benefit the community while making a profit.
• Government Business Enterprise (GBE): Owned by the government but operates like a business (e.g., Australia Post).
• Unlimited liability: The owner must pay business debts, possibly using personal assets.
• Limited liability: The owner only loses the money invested in the business, protecting personal assets.

Sizes of Businesses

• Small businesses have fewer than 20 employees (non-manufacturing) or 100 employees (manufacturing), often sole traders or partnerships, where the manager and owner are the same person.
• Medium businesses have between 20-199 employees and may be private companies.
• Large businesses have 200+ employees and are often public companies with complex management structures.

Owning a Business

• Independence: Being your own boss and making decisions.
• Financial gain: Potential to earn more than a salary.
• Flexibility: Control over work hours and lifestyle.
• Passion: Turn a hobby or interest into a career.
• Legacy: Build something to pass on to future generations.
• Job security: Avoid reliance on employers.
• Creative freedom: Implement your own ideas and innovations.
• Social impact: Contribute to the community or a cause.
• Challenge and growth: Learn new skills and push yourself.
• Tax benefits: Potential deductions and financial advantages.

Nature of Business Operations

• Retail/trading: Purchases finished goods for resale.
• Service: Sells time, labor, and expertise to perform a service.
• Manufacturing: Produces goods it sells using a production process.
• Mixed businesses: Combining one or more business operations.

Alternatives to Buying

• Buying an existing business: Purchase an operational business with an established customer base, staff, and processes.
• Franchising: Operate a business under an established brand with support and a proven business model (e.g., McDonald’s, Chatime).
• Licensing: Use another company’s intellectual property (e.g., product designs, software) for a fee.
• Partnership or investment: Join an existing business as a partner or investor instead of starting from zero.
• Family business involvement: Take over or work in a family-owned business.
• Online selling and dropshipping: Sell products without managing inventory by partnering with suppliers.
• Investment options include cash, property and shares.

Risks of Owning Property

• Property market prices can fluctuate.
• Interest rates can reduce capital gain for investors.
• Rent is not guaranteed, and finding a suitable tenant may be difficult.

Personal Qualities of a Successful Business Owner

• Resilience: Ability to overcome challenges and setbacks.
• Leadership: Inspire and manage employees effectively.
• Decision-making skills: Make informed and timely choices.
• Innovation and creativity: Develop new ideas and solutions.
• Strong work ethic: Stay committed and motivated.
• Financial literacy: Understand budgeting, costs, and profits.
• Customer focus: Prioritize customer needs and satisfaction.
• Adaptability: Adjust to market changes and trends.
• Risk-taking: Willingness to take calculated risks.
• Communication skills: Effectively negotiate, market, and interact with stakeholders.
• Expertise, entrepreneurship, determination, confidence, cordiality and patience, humility are all useful traits.

Resources Required to Establish a Business

• Financial resources: Money for startup costs (e.g., savings, loans).
• Human resources: Employees or skilled workers.
• Physical resources: Equipment, tools, office space, technology.
• Legal resources: Licenses, permits, and business registration.
• Marketing resources: Advertising, branding, customer research.

Sources of Assistance for Business Owners

• Government agencies: Grants, advice, and training (e.g., Small Business Administration).
• Banks and financial institutions: Business loans and financial advice.
• Business mentors: Experienced entrepreneurs offering guidance.
• Online resources: Business courses, articles, and forums.

Business Based on Nature of Operations

• Manufacturing businesses produce goods by transforming raw materials into finished products, selling to wholesalers, retailers, or directly to consumers (e.g., Toyota, Nestlé).
• Retail & wholesale businesses sell goods to consumers (retail) or in bulk to other businesses (wholesale), acting as intermediaries and not producing goods (e.g., Woolworths, Costco).
• Service businesses provide services rather than physical products, including professional, financial, hospitality, and personal services (e.g., Banks, hair salons, restaurants).
• Social enterprises aim to benefit society while generating revenue, reinvesting profits into their cause, while government businesses provide public services. (e.g., The Big Issue, and Australia Post, respectively)
• rate of return evaluates the performance of a business as an investment: Income or capital gain/amount invested x 100

Internal and External Sources of Finance

• Businesses require money to start, grow, and manage daily expenses, which can be sourced internally or externally.

Internal Sources of Finance

• Owner’s capital is the money the owner invests from personal savings.
• Retained profits are earnings the business keeps instead of distributing to owners or shareholders.
• Selling assets involves selling owned items, like equipment or buildings, for cash.
• Capital contribution is money or property received from a shareholder.
• Retained earnings are past earnings kept by the business, which is a good way to fund the business without borrowing, but new businesses may not have enough profit to use.

External Sources of Finance

• Debt finance: Borrowed money that must be repaid, including bank loans with interest, overdrafts, and trade credit.
• Equity finance: Raising money by selling shares or ownership to investors.
• Grants and subsidies: Money given by the government or other organizations that does not need to be repaid.
• Trade credit allows businesses to buy goods or services and pay later, helping with cash flow but requiring trust between the business and the supplier
• Term loans are external finance from banks and other lenders for a specific purpose and repaid over time.
• Lease is where a business (lessee) rents an asset from another party (lessor) for a fixed period in exchange for regular payments and can be either a finance lease, where the lessee records the asset and liability on the balance sheet, or operating lease, where payments are treated as an expense
• Bank overdraft allows a person or business can take out more money than it has in the bank.
• Personal savings is money from the business owner and is simple because there is no debt, but it might not be enough for big costs
• Bank loans allow businesses to borrow a set amount of money and repay it over time with interest, banks often ask for security (collateral), like property or equipment, before giving a loan
• Venture capital is money from investors that give funds in exchange for a share of the business and is useful for businesses that want to grow fast, but the owner may lose some control of the business (internal)

Guidelines for Seeking External Finance

• Have a clear reason for needing money.
• Choose the right type of finance.
• Compare interest rates and terms.
• Prepare financial documents to prove the ability to repay.
• Ensure the business can handle extra debt.

Forms of Finance Available to Small Businesses

• Owner’s equity: Money from the owner’s savings.
• Retained profits: Profits saved from past business earnings.
• Bank loans: Borrowing money from a bank, repaid with interest.
• Trade credit: Buying goods now and paying later.
• Overdraft: A bank allows spending more than what is in the account.
• Leasing: Renting assets instead of buying them.
• Government grants: Free money from the government for business growth.

Advantages and Disadvantages of Types of Finance

• Owner’s equity has no repayment or interest but is limited to the owner’s savings.
• Retained profits have no debt or interest but are only available if the business made a profit.
• Bank loans have large amounts available, but must be repaid with interest.
• Trade credit helps with cash flow but may have high fees for late payments.
• Overdraft provides quick access to extra funds but has high interest rates.
• Leasing has no large upfront cost, but the business never owns the asset.
• Government grants are free money with no repayment, but are hard to qualify for.

Information Needed to Apply for a Loan

• Business plan.
• Financial statements (profit & loss, balance sheet).
• Loan amount and purpose.
• Repayment plan.
• Credit history.

Calculate Interest for Loans

• Simple interest formula: Interest=P×R×T
• P = Principal (amount borrowed)
• R = Interest rate (as a decimal)
• T = Time (in years)
• Reducing balance interest is charged on the remaining loan amount each period, so total interest paid is lower than simple interest.

Debt Ratio and Return on Owner’s Investment

• Debt Ratio indicates how much of a business is financed by debt: Debt Ratio=Total Liabilities/Total Assets×100
• Return on Owner’s Investment (ROI) indicates how much profit the owner earns from their investment: ROI=Net Profit/Owner’s Equity×100

Effect of Internal and External Finance on Debt Ratio

• Internal finance (e.g., retained profits) lowers the Debt Ratio because no extra debt is added.
• External finance (e.g., loans) increases the Debt Ratio because it adds more liabilities.

Relationship Between Debt Ratio, Risk, and Return

• Higher debt ratio → more debt → higher risk (more pressure to repay) → higher potential return (because borrowed money can help grow the business).
• Lower debt ratio → less debt → lower risk → lower potential return.

Price Setting Strategies

• Premium pricing involves keeping the price of a product relatively high.
• Penetration pricing involves offering a lower price to initially attract customers before raising it.
• Price skimming involves setting a high initial price and lowering it over time.
• Loss leader involves setting a product price lower than its production cost.

Pricing Methods

• Recommended retail pricing is suggestive/not mandatory from the manufacturer or wholesaler; the recommended price is inclusive of GST
• Competitor pricing involves prices charged by the business’ competing in the same market and small businesses may actually increase their price, and compete on service, expertise or product range
• Market reaction is the response of customers in a particular marketplace to price levels for a particular good or service, high demand may lead to higher prices, low demand may lead to lower prices
• Quotes are a method of determining a selling price by estimating the costs involved with a particular job, and then adding on a certain amount to provide for profit, for some businesses, setting a standard price may not be appropriate as each job will be unique, this is particularly true for service businesses where the amount of labour can vary job to job, a business must consider cost of labour, cost of materials and desired profit
• Markup percentage involves determining selling prices by adding to the cost price a predetermined profit margin and the mark-up formula is: selling Price = cost price x (1 + mark-up/100)
• Cost volume profit analysis is an analysis tool that allows a business to determine a selling price or volume of sales that will let them achieve a specific profit goal

Importance of Appropriate Pricing

• If prices are set too high, customers may be driven into the arms of the firm’s competitors, and insufficient sales will be made
• If prices are set too low, the business may generate plenty of sales, but those sales will not provide sufficient revenue to meet expenses, and the firm will not be able to earn a profit
• Minimum desired profit is the lowest acceptable profit figure, usually similar to previous income plus a return on the amount invested
• Quantity to be sold = total fixed costs + profit / selling price per – variable cost per unit

Calculating GST

• To calculate the final price after adding GST: if the original price is $1,000 and GST is 18%, final price = 1000×(1+0.18) = 1180
• To find the pre-GST price from a GST-inclusive amount: if the GST-inclusive price is $1,180 and GST is 18%, original price = 1180/1 + 0.18 = 1000
• To find the GST amount on an original price: GST Amount=Original Price×GST Rate
• To find the GST amount from an inclusive price: GST Amount=GST-Inclusive Price×GST Rate/1+GST Rate