Business Summary Notes PDF

Business: Summary Notes Nature of Business 9.1.1 role of business The nature of a business What is a business? - A business can be defined as an organised effort of individuals to produce and sell the goods and services that satisfy individuals needs and w...

Business: Summary Notes Nature of Business 9.1.1 role of business The nature of a business What is a business? - A business can be defined as an organised effort of individuals to produce and sell the goods and services that satisfy individuals needs and wants, usually to generate a profit. producing goods and services Goods: A tangible item. E.g → Shoes, clothes, chocolates, a car, etc… Services: Intangible - exchange of money for skills → services involving cars, plumbing, electrical, dog wash, hair style, etc… profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of life PROFIT Businesses provide financial benefit when revenue exceeds expenses. → PROFIT = SALES REVENUE - OPERATING EXPENSES EMPLOYMENT Businesses employ people INCOME Business provide income to employees and shareholders Types of income: Salary, wage, dividends CHOICE Consumers have freedom of choice and benefit from competition. INNOVATION Research and development cause innovation and invention. ENTREPRENEURSHIP & RISK Businesses provide individuals with the opportunity to turn their ideas into a livelihood. WEALTH Business activity results in higher levels of economic growth and wealth. QUALITY OF LIFE Businesses offer a vast array of products that improve our standard of living. 9.1.2 types of businesses Classification of business size – small to medium enterprises (SMEs), large - Micro: Employs fewer than 5 people - Small: Employs between 5 – 19 people - SME: Employs 200 or less - Medium: Employs 20 – 199 people - Large: Employs 200+ people - local, national, global Local: Operates in one area, small to medium size. E.g., corner store. National: Operates in one country but in several states, medium to large size. E.g., Coles. Global: Large business with home base in one country (and franchises), operates in more than one country - includes TNC's. E.g., Maccas. Industry – primary, secondary, tertiary, quaternary, quinary Primary: Acquisition of raw materials (natural resources), E.g., wheat/sugarcane. Secondary: Uses raw materials (manufacturing and construction) to produce a finished good, E.g., bread. Tertiary: Provides a service, E.g., hairdresser. Quaternary: Provides information services like research and computer technology, E.g., software design. Quinary: Provides domestic services (human services), E.g., cleaning, education. legal structure – sole trader, partnership, private company, public company, government enterprise Unincorporated Business: A business structure in which the business entity and the owner are one and the same, E.g., sole traders & partnership. Incorporated Business: Companies that have separate legal entities from their owners, E.g., private & public companies. Unlimited Liability: The business owner is personally responsible for any loss the business makes. Limited Liability: Limited liability means the business owners’ liability for debts is restricted to the amount they put into the business. Companies: Incorporated enterprises, administered by ASIC.  Government Enterprise: Government owned and operated businesses, provide essential community services. E.g., health, education & welfare. Advantages Disadvantages Sole trader - Be your own boss - Unlimited liability - A business owned by - Full control of business - Responsible for all one person. activity decisions - Cheap & easy to - Limited capital to establish start business Partnership - Easy to establish - Unlimited liability - Owned and operated by - shared responsibility, - Management 2-20 people. risk, and decisions disagreements - Low start-up cost - Liable for partners losses Private company - Limited liability - Limited capital - 2-50 shareholders - Easy to raise capital by available - Separate legal entity - selling shares - Harder to establish Don’t publicly disclose - Continuous life - Only by invitation to data be a shareholder - Pty Ltd’ Proprietary Limited Public company - Limited liability - Expensive & hard to - Shares are traded freely - Separate legal entity establish on a stock exchange - Continuous life - Lack of privacy (ASX) - Financial - ‘Ltd’ Limited performance available to public size, ownership, finance Size: - As sales increase and the business operations grow to meet higher levels of consumer demands, the business may need to select a more appropriate legal structure. Ownership: - If the business wants to have complete ownership of the business, sole trader is the only option. - If they want to share with others, partnership is ideal.  - A private company would also allow the owner to maintain more control and protection of limited liability as they have control over who becomes a shareholder. - Once a company floats (shares issued to the public) and sells shares to the public, ownership is divided among thousands of small, individual shareholders and a few institutional shareholders. Finance: - When a business expands, it will require additions of finance for new equipment, research and development, staff, exploit new markets, open new outlets. - Shares in the business may be used to raise these finances. - Therefore, the business will be incorporated and either a private or public company formed. 9.1.3 influences in the business environment External influences – economic, financial, geographic, social, legal, political, institutional, technological, competitive situation, markets Economic: It affects businesses through its cycle of growth and recession due to fluctuations in economic activity. Financial: Finance is money. The financial market is the market of money. It affects businesses as businesses depend on finance to start-up, grow and develop new products. Geographic: Is related to physical whereabouts and surroundings. Social: Is related to the trends of society. It affects business as these trends result in changes in taste, fashions, and culture of consumers. Legal: Legal is related by the laws of the government at all levels. It affects businesses as they must adhere to these laws and regulations. Political: Political is related to government policies. It affects businesses as major political change can lead to different policies affecting business. Institutional: Institutional is related to the various regulatory bodies that are involved in the business operations (ASIC, ACCC). Technological: It affects businesses by aiding business activities or potentially creating technological difficulties. Competitive Situation: Refers to the types of competition experienced in industries (monopoly, oligopoly, monopolistic, perfect competition). Markets: Australia is part of a global marketplace. Struggle because people prefer to buy from overseas. Outsourcing services of support (cleaning, advertising). Due to demographic changes, preferences for goods have also changed. Internal influences – products, location, resources, management and business culture Products: Type and volume. Location: The physical location of a business. It affects the business as a good location is an asset, whereas a bad one is a liability (problem). Cost, visibility, proximity to customers, proximity to suppliers. Resources: Human resources, financial, physical (equipment), information (market trends etc.). Resources are supplies available to the business. Management: - Hierarchical, less fluid (traditional ranked leaders based on power and importance), bad communication, stressful, sense of inferiority. - Flat structure, more fluid (teamwork, shared responsibility), calm feeling of importance, good communication. - Management is the way that a business is controlled by those in charge Business Culture: Values, ideas, expectations, and beliefs shared by members in the business. A business culture consists of four elements - rituals, values, heroes, symbols. A good business culture will keep employees happy and will create better productivity, and therefore, better sales etc. Stakeholders Stakeholder: Any person/group that has an interest in the business and will be affected by the decisions of the business. Stakeholders can be internal or external. Conflict Between Stakeholders: Different requirements of stakeholders can cause conflict – If owners want more profit, they may increase prices. Customers, however, want lower prices. Stakeholder Influence: When conflict occurs, it is likely that the stakeholder with the influence will get what they want. Difference Between Stakeholder & Shareholder: A stakeholder is anyone interested in the business and/or affected by its actions. Whereas a shareholder is someone who buys shares of the business.  Internal stakeholders External stakeholders - Owner - Customers - Managers - Suppliers - Employees - Local communities - Investors - Government 9.1.4 business growth and decline Stages of the business life cycle: Responding to challenges at each stage of the business life cycle Establishment, growth, maturity, post-maturity Characteristics Challenges Establishment - The first stage in the life of business, - Lack of money business is vulnerable - Cash flow shortages - Low level of sales and level of output - Establishing a customer base Growth - Accelerating growth - Expanding too rapidly - Sales increase, cash flow slowly - Rapid cash outflow becoming positive - Securing finance for future - Associated with increase of business growth size - can be achieved via merger (agreement between the business to combine) or takeover (business buying shares in another business to become dominant shareholder). Maturity - Sales increase, but at a slower rate, - Plateauing sales profits start to level out - No enthusiasm - More competitors - Complacency (laziness) - Sense of laziness arises Focus shifts to improving efficiency to maintain profit margins Post maturity Once a business reaches this, the final stage, Decline Challenges it is faced with 4 possible outcomes: - Falling sales - Difficulty in obtaining finance - - Steady state = neither declining nor Suppliers restrict credit facilities expanding Steady State Challenges - Renewal = business undergoes revival - Plateauing sales - Decline = falling sales and profits - No enthusiasm - Cessation = complete shutdown - Complacency (laziness) Renewal Challenges - Expanding too rapidly - Rapid cash flow  Factors that can contribute to business decline - Failure to meet customer's needs - Uncontrolled growth - Lack of demand for product - Poor location - Lack of adequate cash flow Voluntary and involuntary cessation – liquidation Voluntary Cessation: Occurs when the owner ceases to operate the business of their own accord. Involuntary Cessation: Occurs the owner is forced to cease trading by the creditors of the business. Company Options – Cessation 1. Voluntary administration occurs when an independent administrator is appointed to operate the business in the hope of trading out of the present financial problems. 2. Voluntary or involuntary liquidation is the process of an appointed liquidator converting the business's assets into cash to pay the creditor. Liquidation: - Can be regarded as the equivalent of bankruptcy for a company (corporation). Results in the life of a company coming to an end. Normally occurs because the company is unable to pay its debts as and when they fall due. - It has become insolvent → unable to pay its owed debts - A company in liquidation can also be receivership - i.e., where a business has a receiver appointed by creditors or the courts to take charge of the affairs of the business. Unlike liquidation the business may not be wound up. Business Management 9.2.1 Nature of management Features of effective management A Manager: Someone who coordinates and oversees the work of other people so that organisational goals can be accomplished. Management: The process of coordinating a business's rescuers to accomplish business goals. Effectiveness: Measures the degree to which a goal has been achieved. Efficiency: Compares the resources needed to achieve a goal (the costs) against what was achieved (the benefits). Key Aspects: - Working with and through others: Managers must interact and communicate well with employees. - Getting the most from limited resources: Managers need to coordinate resources effectively/efficiently. - Coping with a rapidly changing environment: Successful managers are those who anticipate and adjust to changing circumstances. Skills of management Interpersonal, communication, strategic thinking, vision, problem-solving, decision-making, flexibility, adaptability to change, reconciling the conflicting interests of stakeholders Skills of Effective Management - Interpersonal: Those skills needed to work and communicate with other people and to understand their needs. - Communication: Communication is the exchange of information between people. It can be either verbal or non-verbal. - Strategic Thinking: Mental or thinking process applied by an individual in the context of achieving success. - Vision: The clear sense of direction that allows people to attain a common goal.  - Problem-solving: Searching for, identifying, and implementing a course of action to correct an unworkable situation. - Decision-making: The process of identifying the options available and choosing a specific course of action to solve a specific problem. - Flexibility: Regardless of their level of management, successful managers are those who anticipate and adjust to changing circumstances. - Adaptability to Change: To recover from or to adjust to change, thrive on change and unexpected routines. - Reconciling the Conflicting Interest of Stakeholders: A stakeholder is any person or group that has an interest in a business. Achieving business goals Profits, market share, growth, share price, social, environmental Goal: A desired outcome that an individual intends to achieve within a certain time frame. SMART Goals: - Specific - Measurable - Attainable - Relevant - Time-bound Achieving a mix of the above goals Profit: Money left after the costs have been deducted from money of sales. Only profitable businesses survive, therefore, to maximise profits, you will need to increase sales by lowering the prices, use well targeted marketing campaigns, and create innovative products/services. Market Share: The business's share of the total industry sales for a particular product. One of the most successful strategies used to increase market share is promotion, to inform, persuade and remind a market about its products. Growth: Internal growth includes employing more people, increasing sales, introducing innovative products, purchasing new equipment, or establishing more outlets, while external growth includes merging with other businesses. Share Price: A share is a part ownership of a public company. For companies that wish to be successful, they must maximise their shareholders, by constantly improving the share price. Social: Include social justice where businesses may adopt a set of policies to ensure employees/community members are treated equally and fairly. Environmental: Businesses are adopting practices of recycle, renew, and regenerate, as well developing products and ideas that are environmentally friendly, as well as creating sustainable development, which occurs when the needs of the present population are met without endangering future generations. Staff involvement - innovation, motivation, mentoring, and training - Involves employees in the decision-making process and gives them the necessary skills/rewards. - Employees are a business's most important resource, therefore it's important to recruit and select appropriate ones. - It is vital to provide a work environment that maximises employee involvement and satisfaction, as this results in increasing labour productivity and sales. INNOVATION Occurs when a new idea is applied to improving an existing product or creating a new one. Often, a business can gain a competitive advantage if it innovates successfully. MOTIVATION Refers to the process that directs, energises, and sustains a person's behaviour. Motivating employees results in increasing rates of productivity. Tips for motivating staff include rewards, punishment, regular and taking an interest in employees' development. MENTORING A mentor is someone usually more experienced than yourself, who helps develop an individual, acting as a teacher, coach, and role model, demonstrating acceptable behaviour. Teaching new employees what the business expects of them helps strengthen their dedication and commitment to the firm and helps to expose the values the business believes are important. TRAINING The process of teaching staff how to perform their job more efficiently and effectively by boosting their knowledge and skills, with the aim of developing multi-skilled employees, which are better able to provide better customer service and participate effectively in work teams. Businesses should view training as an investment rather than an expense, as it's necessary for business growth. 9.2.2 Management approaches Classical approach The classical approach management stresses how best to manage and organise workers to improve productivity. This included scientifically examining each part of a task to determine the most efficient method, selecting suitable workers, training them, cooperating with them, and dividing work and responsibility. management as planning, organising and controlling PLANNING: Involves showing how the business will achieve its stated mission and business goals. ORGANISING: Determining what is to be done, who is to do it and how it is to be done. Involves determining work activities, classifying, and grouping activities, assigning work and delegating authority. CONTROLLING: The control process refers to establishing standards in line with the goals of the business, measuring the performance against those standards, and making changes where necessary. - hierarchical organisational structure The arrangement provides increasing authority at higher levels of the hierarchy, meaning that senior managers have greater accountability, responsibility and power compared to those at lower levels. Characteristics include numerous levels of management, clearly distinguishable organisational positions, roles and responsibilities, and specialisation of labour resulting in tasks being divided into separate jobs. autocratic leadership style Characterised by individual control over all decisions and little input from group members. Autocratic leaders typically make choices based on their ideas and judgments and rarely accept advice from followers. Behavioural approach Stresses that employees should be the main focus of the way in which the business is organised. Believed that successful management depends largely on the manager's ability to work with people who have a variety of diverse backgrounds, hopes, desires and expectations. management as leading, motivating, communicating LEADING: Leading and directing human resources in an organisation to achieve its objectives. MOTIVATING: Motivation is the individual, internal process that energises, directs, and sustains an individual's behaviour. It is the personal force that causes a person to behave in a particular way. COMMUNICATING: Communication is the exchange of information between people, the sending and receiving of messages. teams TEAMWORK: Involves people who coordinate their work towards a common goal. Such teams have no common purpose and therefore lack any sense of belonging and cohesion. STRUCTURE: Has evolved, resulting in the elimination of management levels. Results in each work member being responsible for a wide range of functions, and employees feeling a part of a team, leading to increased job satisfaction. participative/democratic leadership style A leadership style where the manager consults with employees to ask for suggestions, considering them when making decisions. Sometimes referred to as the 'we' approach, as these managers recognise the strengths and abilities of employees; and their contribution is valued. Employees therefore have a commitment to the business's goals because of their own input in the firm. Through activities such as brainstorming, a diverse range of opinions/ideas can be generated resulting in improved decision making.  Contingency approach adapting to changing circumstances Stresses the need for flexibility and adaptation of management practices to suit changing circumstances. Contingency theorists point out to managers that no two situations are identical, therefore each situation requires its own unique solution and urges managers to borrow and blend from a wide range of management approaches and practices. Although a business can separate the key business functions into departments that perform their distinct roles, the functions are interdependent which is the dependence that key functions have on one another. 9.2.3 Management process Coordinating key business functions and resources Operations: Refers to the business processes that involve transformation or, more generally, 'production'. goods and/or services the production process quality management OPERATIONS MANAGEMENT Consists of all the activities in which managers engage to produce a good or service. PRODUCTION PROCESS - INPUTS: Resources used in the production process, including materials, labour, information, time, and money. - TRANSFORMATION: The conversion of inputs (resources) into outputs (goods and services) and refers to the manufacturing and assembling of a product. - OUTPUTS: The result of a business's efforts, which is the good or service. QUALITY MANAGEMENt The strategy which a business uses to make sure that its products meet customer expectations. QUALITY CONTROL Involve the use of inspections at various points in the production process to check for problems and defects. QUALITY ASSURANCE The use of a system so that a business achieves set standards in production. TOTAL QUALITY A commitment to excellence that emphasises continuous MANAGEMENT improvement. The aim is to create a defect free product, allowing the business to attain a competitive advantage. EMPLOYEE EMPOWERMENT/ Includes quality circles, who meet to solve problems relating to QUALITY CIRCLES the quality and processes, aiming to improve their performance. CONTINUOUS IMPROVEMENT Involves an ongoing commitment to achieving perfection. GOODS Tangible items purchased to satisfy needs and wants. SERVICES Intangible products/services that cannot be touched. Marketing: The process of planning and executing the conception, pricing, promotion and distribution of ideas, goods, and services to create exchanges that satisfy individual and organisational objectives identification of the target market marketing mix TARGET MARKET A group of customers with similar characteristics who presently, or who may in the future, purchase the product. MASS MARKET The seller mass-produces, mass-distributes, and mass-promotes one product to all buyers. MARKET SEGMENTATION When the total market is subdivided into groups of people who share one or more common characteristics. NICHE MARKET A narrowly selected target market segment. CUSTOMER BUYING The decisions and actions of consumers when they purchase BEHAVIOUR goods and services for personal household use. MARKETING STRATEGIES Actions undertaken to achieve the business's marketing goals. MARKETING MIX Four elements of marketing. Price, product, place, and promotion. PRICE: The payment required to purchase a product. A price set too high could mean lost sales, and a price set too low may give customers the impression of a 'cheap' product. PRODUCT: The products quality, design, name, warranty, packaging, and labelling. PLACE: Activities that make products available, when and where customers want to purchase them. PROMOTION: The methods used by a business to inform, persuade, and remind customers about its products.  Finance: Refers to how a business funds its activities, as well as the costs, risks, and benefits of different types of borrowings. Accounting: A managerial and administrative tool that involves the recording of financial transactions, so that a clear summary of what has happened to the money coming in and going out can be traced over time. cash flow statement CASH FLOW STATEMENT Finance - Cash Flow Statement (CFS) - A financial statement that indicates the movement of cash receipts and cash payments resulting from transactions over a period of time. - They are vital for the business to assess whether money inflows match money outflows. - Cash flow statements are closely related to budgets, which are estimates of future cash flows. Income statement INCOME STATEMENT A summary of the income earned, and the expenses incurred over a period of trading. It shows how much has been derived as profit. GROSS PROFIT The term given to the sales less the cost of goods sold (COGS). I.e. Sales - COGS = Gross Profit COST OF GOODS SOLD (COGS) The value of stock that a business has sold to its customers. I.e. Opening Stock + Purchase - Closing Stock = COGS NET PROFIT The difference between the gross profit and the operating and non-operating expenses. I.e. Gross Profit - Expenses = Net Profit balance sheet BALANCE SHEET A statement of the business's assets and liabilities (financial position) at a particular time. ASSETS Items of value owned by the business that can be given a monetary value. LIABILITIES Items of debt owed to outside parties and/or other organisations, including loans, accounts due to be paid by the business, mortgages, credit card debt and accumulated expenses. OWNER’S EQUITY The money that the owner gives the business to acquire resources and begin operating, known as capital. As the business operates, it should start to earn an income to cover its costs and then later earn a profit. BALANCE SHEET EQUATION The sum of items on the left-hand side must total the sum of items on the right-hand side. By applying the equation, we can find the missing item. I.e. Assets = Liabilities + Owners Equity (A = L + OE) Human resources Management: The effective management of the formal relationship between the employer and employees. - HR Cycle: Covers all stages in the process of employing staff, from initial planning through recruitment, selection, introduction, training, development, performance, management, and separation - HR Planning: The development of strategies to meet the business's future staffing needs. - Job Analysis: A systematic study of each employee's duties, tasks, and work environment. - Job Description: A written statement describing the employee's duties, tasks and responsibilities associated with the job. - Job Specification: A list of the key qualifications needed to perform a particular job in terms of education, skills, and experience. - Recruitment RECRUITMENT The process of attracting qualified job applicants from which to select the most appropriate person for a specific job. INTERNAL RECRUITMENT Occurs when a business decides to appoint someone already within the business to a vacancy. This usually involves an opportunity for a person to take on different duties and can mean a promotion to take on greater responsibilities within the business. EXTERNAL RECRUITMENT Is used to find suitable applicants from outside the business, because staff planning has identified the need for a new position, an existing employee has resigned or retired, or the person previously performing the duties has been transferred or promoted to a new position within the business. EMPLOYEE SELECTION Involves gathering information about each applicant for a position, then using that information to choose the most appropriate applicant. E.g., Interviews, testing & background checks. CURRICULUM VITAE / RESUME A summary of a person's previous employment experience. Training TRAINING & DEVELOPMENT The aim of training and development is to seek long-term change in employees' skills, knowledge, attitudes, and behaviour in order to improve work performance in the business. DEVELOPMENT Refers to activities that prepare staff to take greater responsibility in their future. INDUCTION Introduces new employees to the business, allows them to become familiar with the workings of the organisation and provides them with information about the businesses day- to-day. TRAINING Refers to the process of teaching staff how to perform their job more efficiently and effectively by boosting their knowledge and skills. LEARNING ORGANISATION Monitors and interprets its environment, seeking to improve its understanding of the relationship between its actions and its environment. employment contracts EMPLOYEE CONTRACTS A legally binding, formal agreement between employee and employer. AWARDS Outlines an employee's minimum pay and conditions. COMPENSATION Refers to the payment or benefits (or both) an employee receives in exchange for labour. ENTERPRISE AGREEMENTS A negotiated arrangement between an employer and a union or a group of employees. COMMON LAW (EMPLOYEE) CONTRACTS Exists when employers and employees have the right to sue for compensation if either party does not fulfil their part of the contract. WORKPLACE HEALTH & SAFETY Refers to the responsibility the employer has to ensure the workplace is safe for employees and that steps are taken to minimise harm. separation – voluntary/involuntary SEPERATION Involves the ending of the employment relationship. This separation may come from either the employee or the employer. It is the termination of the employment contract between the employer and employee. VOLUNTARY SEPARATION Occurs when an employee chooses to leave the business of their own free will. E.g., Retirement, redundancy. - Retirement: Occurs when an employee decides to give up full-time or part-time work. - Redundancy: Is when a particular job a person is doing is no longer required to be performed, usually due to technological changes, a merger or takeover. INVOLUNTARY SEPARATION Occurs when an employee is asked to leave the business against their will. E.g., Retrenchment, dismissal. Retrenchment: Is when a business dismisses an employee because there is not enough work to justify paying him or her. Dismissal: Is when the behaviour of an employee is unacceptable, and it then becomes necessary for a business to terminate the employee's employment contract. Ethical business behaviour Is the application of moral standards to business behaviour. - Fair and honest business practices - Decent workplace relations - Conflict of interest situation - Accurate financial management - Truthful communication 9.2.4 Management and change Responding to internal and external influences Internal Influences of Change - Managers: managers are key driving forces for change. - Employees: employees working in an innovative environment are likely to recommend changes to policies, production processes or products. E-commerce - New systems and procedures - New business cultures - External influences of Change - Changing nature of markets - Economic - Financial - Geographical - Social - Legal - Political - Technological Managing change effectively - identify the need for change - Set achievable goals - Creating a culture of change - Develop strategies to overcome resistance to change - Utilise management consultants and change models - identifying the need for change Identifying the Need for Change: Managers must be careful not to adopt change just for the 'sake of it'. Making change purposefully and linking it with the vision and future direction of the business will help people develop a sense of purpose for the change and reduce their resistance to it. Reasons: To remain productive, to maintain competitive advantage, to be legally compliant, to resolve disputes. business information systems Much of a business's success or failure to accurately identify what needs to be changed depends on its ability to collect, organise, process, and retrieve information quickly. A BIS gathers data, organises, and summarises them, and then converts them into practical information to be used by managers who use them to make decisions. Setting achievable goals Reassessment of business goals may be required if management detects changes in the external business environment that may have a major impact on business activities. Goals need to be specific, measurable, achievable, realistic, and time-bound (SMART). resistance to change Resistance to change is strong because for most people personal change is only achieved with considerable effort and often stressful. - Financial costs (purchasing new equipment, redundancy payouts, retraining, reorganisation of plant layout) - Inertia (fear of the unknown) of managers and owners - Cultural incompatibility in mergers and takeovers - Issues relating to staffing (deskilling, new skills, loss of job prospects/opportunities for promotion) - management consultants The main role of management consultants is to help businesses improve their performance and assist with change management. Functions: - Problem solving - Making recommendations - Assisting with change management Business Planning 9.3.1 Small to medium enterprises Definition A SME is a business who hires fewer than 200 people (non-manufacturing) or fewer than 500 people (manufacturing). - Other measures which indicate whether a business is a SME includes number of employees, type of ownership, sources of finance, legal structure, market share and management structure. Role Employ about 70% of all the people working in the private sector - Have created 80% of Australia’s employment gains during the past ten years - Produce approximately 50% of all the products produced each year - Generate an increasing amount of our total exports - Account for 20% of all money spent on R&D - Earn more profits and pay more taxes than do large businesses. Economic contribution - Economy: A system or way of organising what goods and services are produced, how they are produced, and how they are distributed. - GDP: Contribute to approximately 50% of Australia’s GDP. - Employment: SMEs employ around 8 million people, representing about 70% of total private sector employment (47% representing small businesses and 23% representing medium businesses). During the last 20 years, the SME sector has been the major generator of new jobs in the Australian economy. - Balance Of Payments: If exports are greater than imports, balance of payments and economic growth occurs. - Innovation And Invention: SMEs are the main source of invention and innovation in Australia. Account 20% of money spent on Research and Development. Success and/or failure Success: - Entrepreneurial Abilities: Attitudes and personalities of owners will vary enormously. Some will have drive and enthusiasm, set targets, take big risks, and are highly motivated and optimistic. - Access To Information: It is always difficult for a SME owner to choose relevant information. As a bare minimum, the operator must have information regarding profitability, quality, and the performance of employees. Accurate and up to date information will allow the SME owner to make better decisions.  - Flexibility: The small size of the business allows the owner to adapt quickly to changes in the external environment. Because there are fewer levels of management, decisions can be made quickly. In addition, the close contact between owners and their customers allows the establishment of personal relationships and allows owners to respond rapidly to clients’ changing tastes and preferences. - Focus On Market Niche: Small businesses can concentrate their efforts on a few key customers or a specific segment of the market. This provides the opportunity for the SME to become more specialised and able to deliver a high level of service. - Reputation: Because the SME is servicing a narrow market niche, it can develop reputations for quality and service Failure: Small to medium enterprises fail for many reasons, and may not be caused by one single factor, but rather a combination of several factors: - Failure to plan (marketing, financial, HR) - New competitors - Economic downturns - Suppliers, partnership, and staff difficulty - Lack of access to information - Incorrect pricing, marketing, record keeping - Negative cash flow and lack of sales - FAILURE RATES: - After 1 year: 25% - After 2 years: 42% - After 3 years: 54% - After 4 years: 64% - After 5 years: 71% 9.3.2 influences in establishing a small to medium enterprise personal qualities – qualifications, skills, motivation, entrepreneurship, cultural background, gender A business owner requires a range of skills and personal qualities in order to succeed. - Qualifications: Qualifications include TAFE and University. Courses improve business skills of an owner. Formal education lowers the failure rate of a SME. - Skills: Essential and can be attained with experience, education, or training. - Motivation: Personal drive, determination, and desire to achieve a goal or objective.  - Entrepreneurship: Someone who starts, operates, and assumes the risk of a business venture in the hope of making a profit. - Cultural Background: Particularly important for global businesses, different cultures have different customs which need to be respected. - Gender: More likely to engage in different sectors based on gender. sources of information - Personal Advisors: individuals knowledgeable in specific areas e.g., bank manager. - Government Agencies: local, state, and federal governments provide support and guidance e.g., the council. - Other Sources: the chamber of commerce and trade associations. the business idea – competition Concept that makes money; centred on a good or service - Needs to appeal to a target market à be relevant - Identify a gap in the market à unique and original - Must be innovative to attract customers à leading to profitability establishment options – new, existing, franchise ADVANTAGES DISADVANTAGES NEW - Freedom/control of decision Funds limited and obtaining Entrepreneur establishes making finance is more difficult new business - Usually the cheapest option; - Risk; may not break even or no goodwill or franchise fee make profit - Avoids poor reputation - Poor cash flow in establishment stage EXISTING - Established customer base - More expensive; goodwill Buy pre-existing business with immediate cash flow - Inherit any bad reputation from owner - Employees and suppliers in - Uphold/exceed existing image place and standard - Established trade credit - Business may be overpriced - Easier access to finance FRANCHISE - Known business name and - Expensive franchise fit outs An agreement between a product - Expensive initial purchase + franchisee and franchisor. - Established market for royalties product - Ongoing operation rules; Franchisee’s pay for the - Franchisor provides training create less independence right to use an established - Proven successful business - Franchisor has a say in business’s name and formula location formula. Franchisee pays - Easier to obtain finance money and part market – goods and/or services, price, location Goods & Services: A good or service will fail if there is no market for it. Businesses undertake market analysis to determine what people want to buy. CRUCIAL QUESTIONS: 1. What goods/services will be sold? 2. What Is The Most Suitable Price For The Goods/service? 3. What Is The Most Appropriate Location For The Business? Market Analysis: Collects, summaries, analyses information about market, customers, threats, opportunities, advantages and disadvantages a business has over competitors. Price: - Cost Based: A pricing method derived from calculating the total cost of producing or purchasing a product and then adding a markup for profit. - Market Based: A method of setting prices according to the interaction between the levels of supply and demand (whatever the market is prepared to pay). - Competition Based: Choosing a price that is either below, equal to or above that of the competitors. - Location: Impacted by aspects such as zoning, cost, proximity to suppliers and competitors. Can be: - Shopping centre complex - Retail shopping strip - Online presence - Home-based business finance – source, cost Finance can come from a variety of sources. The business owner can contribute their own funds (equity or capital), which is an internal source of funds. The owner can also obtain loans (debt) from external sources. Source: Debt: short term and long-term borrowing from external sources. - Overdraft - Leasing  - Mortgage - Loans Equity: funds from a business owner. - Capital - start-up money - Retained profits – money reinvested into business by the owner - Shares – public companies Cost: The cost of finance will depend on the type of finance, the source, and the term. The type of finance used by a business will influence the cost of capital. Debt financing requires the use of money from an external source, such as a bank, and will have the cost of interest charged by the institution. However, if capital is raised through equity finance, no interest is charged, as the entrepreneur has invested the money. The cost of equity finance can be measured in terms of liability, which is unlimited if the business is operated as a sole trader/partnership. This means that creditors will sell business and personal assets to recover the debt. legal – business name, zoning, health and other regulations Legal obligation to observe the statutory regulations when commencing and operating a business. Businesses that do not obey the law risk losing customers and their reputation, being fined, or losing the right to continue trading. Business Name: - Prohibit anyone else from trading under a similar name. - Unique identifier for customers to find and connect with business. Zoning: - Determines where businesses can operate à sets aside commercial and industrial zones and ensures business location prevents disruption of residents. Health: Local government also imposes health regulations under the Public Health Act 2010 (NSW). Each local council supplies businesses (primarily those dealing with food, such as cafés, restaurants, butcher shops and bakeries) with the requirements and standards to meet in order to receive a licence to operate. A health inspector will assess premises regularly and often without warning to ensure the business owner/operator maintains standards.  human resources Human Resources - Skills: A business owner should always remember that the overriding objective of recruiting is to attract a pool of qualified applicants, people with the most suitable skills, from which to choose the most appropriate person for a particular job. Skilled employees are more productive and create wealth for the business. If the skills level of employees is not adequate enough for them to fulfil their jobs effectively, then the business owner has two options Provide training to improve the skills level of existing employees Recruit people who have the required skills. costs – wage and non-wage Costs – wage and non-wage: A business will only employ someone if the return is greater than the cost. The total cost of an employee is not solely the wage or salary paid. The employer is also responsible for other employee expenses, referred to as on-costs, which account for around 30–40 per cent of the total remuneration package (see the following Snapshot). taxation – federal and state taxes, local rates and charges Taxation – federal and state taxes, local rates, and charges The compulsory payment of a proportion of earnings to the government. Taxation is an important issue when a person is considering all aspects of opening a business. - Federal & State Taxes: includes taxes such as income tax, GST, company tax and land tax - Local Government Rates: Property rates is the main local government charge a business will face. Other taxes include: o Water and sewerage o Waste management services o Development and building approval fees o Parking permits - Input Tax Credit: is an allowable tax deduction that a business can claim for any GST included in the price of business inputs. - Business Activity Statement (BAS): records a business’s claim for input tax credits and accounts for GST payable. o Australian Business Number (ABN): - A single identifying number that a business uses when dealing with government departments and agencies. - Allows businesses to participate in the GST system. 9.3.3 the business planning process sources of planning ideas – situational analysis A situational (SWOT) analysis involves the identification and analysis of the internal strengths and weaknesses of the business, and the opportunities in, and threats from, the external environment. - The internal and external business environments are sources of planning ideas. - Information is the essential ingredient needed to prepare a business plan. - A situational (SWOT) analysis can be used at all stages of the planning process Vision, goals and/or objectives vision Vision: The vision statement broadly states what the business aspires to become; its purpose and its function. The main purpose of the vision statement is to guide and direct the business owners, managers, and employees. It creates culture within the business and acts as a benchmark against which to measure all the business’s decisions and operations. business goals Business Goals: More specific statement of what is intended to be achieved. In operating a business, the owner is always trying to achieve three broad goals: - Financial goals: profit, market share, growth, and diversification. - Social goals: community service, ecological sustainability. - Personal goals: individual preferences. long-term growth Long-Term Growth: Longer term growth is the ability of a business to continually expand. Longer term growth depends on a business’s ability to develop and use its asset structure to increase sales, profits, and market share. organising resources operations marketing finance human resources Operations The operations function of a business involves transforming different types of inputs (raw materials, labour, equipment, and other resources) into finished or semi- finished goods or services. To produce either a good or service, therefore, a business needs to have essential equipment and knowledge. Researching the Business Studies Preliminary – Summarised Topic 3 Notes answers to these questions enables the SME owner to clarify what changes may need to be made to either the structure of the business or the production process. Operations The operations function of a business involves transforming different types of inputs (raw materials, labour, equipment, and other resources) into finished or semi- finished goods or services. To produce either a good or service, therefore, a business needs to have essential equipment and knowledge. Researching the answers to these questions enables the SME owner to clarify what changes may need to be made to either the structure of the business or the production process. Marketing A marketing plan will only succeed if all sections of the business are involved in satisfying a customer’s needs and wants, while achieving the business’s goals. This means that the marketing plan needs to become integrated into all aspects of the business. Adequate resources, therefore, must be devoted to the marketing plan. Where existing employees do not have the expertise or levels of skills required, additional training may be needed to bring them up to the levels needed. Additional funds may be needed to accomplish all the marketing objectives given to a specific department or team. The efforts of all employees in the marketing department must be coordinated and this is best achieved by adequate resourcing. For example, the sales consultants, advertising personnel, market research staff, distribution people and so on must be provided with the informational, financial, and physical resources to perform their jobs. Finance The most important question the SME owner needs to answer is ‘What will be the most appropriate source of financing?’ The most common sources are personal savings and/or loans from family, friends, or banks. Another important issue associated with organising finances is the amount of equity (ownership of the business) and potential control a SME owner must hand over to obtain the necessary financing. If the SME owner decides to fund the business by using equity capital, the investor will be given some form of ownership in the business. Frequently, SMEs that are aiming for relatively moderate growth use mainly debt capital with the owners retaining most or all of the equity. Human Resources Employees are a SME’s most important resource. A great deal of care and thought, therefore, needs to be given to how best to organise this crucial resource. SME owners need to use good recruitment and selection processes to find employees who will be invaluable assets as the business grows and expands. Other important aspects all SME owners need to consider when organising their human resources is to provide adequate training and development for staff, to seek ways to motivate and retain employees, and to ensure they comply with existing legislation relating to employees. Forecasting: A business needs more than just information about present business conditions. It also needs information about possible future events. Forecasts (or projections) are the business’s predictions about the future. total revenue, total cost break-even analysis cash flow projections Total Revenue, Total Cost - Total Cost: the costs involved in operating a business can be broadly classified as either fixed or variable costs. Fixed costs (FC) are costs that do not vary regardless of how many units of a good or service are produced. Variable costs (VC) are costs that depend on the number of goods or services produced. Variable cost, therefore, will increase if more goods and services are produced and decrease when fewer goods and services are produced. The total cost (TC) of producing a certain number of goods or services is the sum of the fixed costs (FC) and variable costs (VC) for those units. This can be represented mathematically as: E.g FC+VC=TC Break-Even Analysis: financial planning tool that can be used to forecast how many items to be produced and sold in order to cover cost. E.g Q=TOTAL÷UNIT PRICE–VCP UNIT Cash Flow Projections: The cash flow projection shows the changes to the cash position brought about by the operating, investing and financial activities of the business. It provides information concerning the business’s expected cash receipts (cash inflows) and cash payments (cash outflows) over an accounting period, usually 12 months. The cash flow projection is an important tool for cash flow management. It offers: - the SME owner a clear indication of how much capital investment the business idea requires - bank loans officer evidence that the business is a good credit risk. monitoring and evaluations sales budgets profit Monitoring is the process of measuring actual performance against planned performance. Evaluation is the process of assessing whether or not the business has achieved its stated goals.  - Total Revenue (TR): the total amount received from the sales of a good or service and is calculated by multiplying the selling price (P) by the quantity (Q) of units sold. This can be represented mathematically as: - PxQ=TR Sales: sales generate revenue for the business, so it is important that the sales management control function be regularly performed. Sales management control involves comparing budgeted sales against actual sales and making changes where necessary. - TOTAL SALES = PRICE PER UNIT x NUMBER OF GOODS SOLD Budgets: an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Profit: the revenue remaining after all costs have been met is the business's profit. - PROFIT = TOTAL REVENUE – TOTAL COST taking corrective action - Modifying is the process of changing existing plans, using updated information to shape future plans. - Corrective action may involve changes to the materials, products that are the firm’s output, the costs of turning raw materials into products, management practices, delivery of products to the market and so on. - It may also involve changes to the organisation’s human resources because each individual’s performance in the organisation is as important as the finished product. 9.3.4 critical issues in business success and failure importance of a business plan management – staffing and teams trend analysis identifying and sustaining competitive advantage avoiding over-extension of finance and other resources using technology economic conditions