Running a Business - Business Concepts PDF

OPTION 8 Running a business 8.1 Overview Numerous videos and interactivities are available just where you need them, at the point of learning, in your digital formats, learnON and eBookPLUS at www.jacplus.com.au. 8.1.1 Introduction A new business starts with an idea, and usually a very excited business person such as Zahara Jones, who strives to turn their dream into reality. Like many small business owners, Zahara had a will to succeed and has embraced the challenges of business ownership. Owning and operating your own business can be challenging, rewarding and stimulating, as well as hard work. It requires a great deal of planning, an understanding of customers and their needs, and constantly staying ahead of your competition. For those prepared to take the risk and who finally make it, the sense of achievement and satisfaction is well worth the effort. CONTENT FOCUS On completion of this topic, you will have: investigated how entrepreneurial attributes and dispositions contribute to business success examined the considerations involved when planning and running a business investigated key issues and processes related to the various aspects of running a business. TOPIC 8 Running a business 439 Resources Digital documents Key terms glossary (doc-32671) Worksheet 8.1 Start up! (doc-32727) eWorkbook Customisable worksheets for this topic (ewbk-0865) Video eLesson Running a business (eles-3513) 8.2 Being an entrepreneur Most of us have seen something advertised and thought, ‘that is just what I need’. Someone had the original idea for this product or service and went on to start, operate and assume the risk of a business venture — that someone is an entrepreneur. The motivating force behind them doing this is the hope of making a profit. The desire to be your own boss is a major reason for people starting their own business. Some people want the freedom to choose when and where they work, with whom they work and whether to work from home. The great attraction is the belief that they will have more control over their life. Of course, they are usually also motivated by the financial rewards they believe can be gained from establishing a business. The simplest but most significant question a prospective business owner must ask is: ‘Why do I want to go into business?’ The business owner’s personality, skills and ambitions need to be analysed because the future success of the business rests largely with the owner. For this reason, people should carefully consider the advantages and disadvantages of being self-employed. Advantages and disadvantages of being self-employed Advantages Disadvantages Be your own boss — independence Hard work and long hours Possibility of making a profit Other ‘bosses’ — customers, suppliers, financiers Challenge, reward and satisfaction Income may fluctuate and be uncertain Increase personal wealth Risk of failure Contribute to society Stress and worry Develop own creative ideas High levels of responsibility Overcome unemployment Constantly solving problems Achieve a better lifestyle Difficulty in selling the business Employ family members Possible tax advantages 8.2.1 Characteristics of an entrepreneur Bill Gates, co-founder of Microsoft Corporation, is a classic example of an entrepreneur. While a teenager, he decided to take the risk of establishing his own business and launched Microsoft. Today Microsoft software is used to operate millions of computers worldwide. However, entrepreneurial qualities are not confined to the world’s famous people. At a recent swimming carnival, Yolanda Zurack, a Year 10 student, arranged to take along an Esky filled with cold drinks. During the very hot day, she sold all the drinks and made a reasonable profit. Yolanda Zurack and Bill Gates are both entrepreneurs. They organised their business, undertook the necessary arrangements for it to 440 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 operate, and were prepared to take a risk. The size of the profits may differ, but they possess identical entrepreneurial qualities: the ability to see and take advantage of an opportunity; the ability to establish a shared vision; initiative, innovation and resilience; and an appreciation of the role of failure in success. Seeing and taking advantage of an opportunity Successful entrepreneurs are able to identify and take advantage of an opportunity. Identifying a business opportunity is not just about having an idea. An opportunity is something that a person can see as an avenue to success. It is often identified when a person feels they can provide goods or services in a better or different way from that already in the market, as it was the case with Kath Fry and Eisha Saleh’s business Baraka Women. CASE STUDY Baraka Women After both Kath Fry and Eisha Saleh experienced the challenge Eisha Saleh and Kath Fry, pictured in front of finding modest yet stylish clothing for women, the of Baraka label clothing designs. ‘baraka women’ decided to solve the fashion gap themselves. ‘Baraka’ means ‘blessing’ in Arabic. In 2008, the pair established a business designing and manufacturing modest clothes for stylish women. In 2010, Baraka opened the first designer maxi-dress boutique in Sydney, supplying designs for the over-30s female niche market that chooses to wear modest clothing. Kath has since left the business, so Eisha now manages her online Baraka Women store from a home base in Sydney’s Chester Hill. She aims to take the Baraka brand global, establishing small studios worldwide that offer a personalised shopping experience to customers. However, for Baraka Women, it’s not just about sales. Eisha says, ‘We want to empower women through producing beautiful clothes for them to wear and also put money into charitable projects that support women. Five per cent of what Baraka makes goes to charity.’ These charity projects promote the advancement of women through donations, upskilling and mentoring. Business owners should try to select a business At five foot eleven and with size eleven opportunity that suits their personality and builds on their feet, Mira Smoljko found it difficult strengths. If you look around, you will see so many to get shoes her size. After years of opportunities for starting a business. Potential business frustration, she decided to set up her own owners are always searching for opportunities, including niche business, Glamazon Shoes, which ideas for new products, new customers and new ways specialises in fashionable and affordable shoes for women with big feet. And by big, of running businesses. There are many sources of she means up to size 15, which is a big opportunities for business ideas, including innovation and step up from the size 10 or 11 maximums entrepreneurship, recognising and taking advantage of that most women’s shoe stores stock. market opportunities, changing customer needs, research and development, technological development and global markets. Successful business managers and entrepreneurs will be very quick to seize their opportunities. The source of a business idea may come from a person’s own experiences, interests, abilities or imagination. Inspiration for ideas and opportunities can be generated by: listening to people, particularly for ideas on goods or services that may not be readily available reading magazines and books and researching on the internet visiting displays and exhibitions in areas such as new technology or new products from overseas TOPIC 8 Running a business 441 accessing government statistics and research information identifying a ‘gap in the market’ — that is, a demand not currently being satisfied determining improvements that could be made to an existing product. The successful identification of a gap in the market is key to establishing a lucrative business. It means that the new business provides something not already available. Breaking into a market that is already well served means that the new business has to do something exceptional to draw customers away from existing businesses. Establishing a shared vision An important quality for an entrepreneur is the ability When Mike Cannon-Brookes and his university to set objectives and have a vision for the business’s friend, Scott Farquhar, decided to launch future. Vision refers to the clear, shared sense of Atlassian in 2002, their initial ambition was to direction that allows people to achieve a common earn at least $49 500 a year, which was the goal. A vision involves creating a short statement average graduate starting salary. Today, those that will guide the business over the next few years. same two guys are worth over $12 billion each, and Atlassian is valued at about $50 billion. It should be capable of motivating everyone within the Yes, they were both talented, but their vision is business to achieve a common goal. what differentiated them from others with similar Successful entrepreneurs have a clear understanding skills. The pair have done a great deal to build a or hope of what the business will be like in the future. global company from nothing, to be one of the This gives the business a clear direction. Having a most successful Australian companies in the last shared vision means that everyone in the business decade. works together, as a team, to develop and then accomplish a goal. When this happens, it is much more likely that staff will enthusiastically contribute to making sure the vision is realised. The most effective way managers can share their vision for the business is through the organisation’s goals. Knowing where the business is headed and what it is trying to achieve helps employees understand where the manager wishes to take the business. Without a shared vision a business will have no sense of cooperation and commitment, which makes achieving goals impossible. Demonstrating initiative, innovation and resilience A successful entrepreneur demonstrates initiative, innovation and resilience. Initiative refers to the ability to be resourceful and decide, in an independent way, what to do and when to do it. When you show initiative, you do things without being told; you find out what you need to know; you spot and take advantage of opportunities; and, you keep going when things get tough. Initiative requires resilience and determination. Running a business can be very stressful and unpredictable. Successful entrepreneurs, therefore, need to be resilient. Resilience refers to the ability to cope with the ups and downs, adapt well to change and bounce back from challenges. Innovation is often what excites and motivates a businessperson to establish a business. Innovation generally refers to the process of creating a new or significantly improved product, service or process (way of doing something). An invention refers to the development of something that is totally new, but innovation and invention both result in the creation of something unique. Ideas for new products or improvements to existing products will often provide the opportunity for the establishment of a new business. Innovation is certainly important at the beginning stages of a business, but many successful businesses have the ability to innovate and continually bring new benefits to the customer. Many business concepts are an innovation of an existing product. Tablet computers, for example, came into existence through people making technical advances with an established product. 442 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Young entrepreneur Chris Guzowski developed a new bitcoin ATM machine in 2014. There are now thousands of these machines around that allow users to buy and sell bitcoin currency or convert it into cash. CASE STUDY Christopher Lu — CLU. Living Business owner and designer Christopher Lu turned his passion for furniture design and interior design into a The CLU. brand is also bulit on excellent highly successful business employing three people. CLU. customer service. Living is a lifestyle furniture and homewares brand that offers home furnishing solutions and interior design for compact living. Christopher’s market research showed that because more people are living in apartments and townhouses, there was a growing demand for innovative ways to accommodate furniture in limited areas, incorporating multi-functionality and clever storage capabilities. His business is renowned for small space decorating using compact, space-saving, modular furniture, sourced both locally and from around the world. CLU. Living’s products are selected for their modern design, quality and affordability. ‘I studied the existing competition and their products, marketing techniques and unique selling points, and used this to create an exclusive offering with a unique look and feel. The CLU. brand is also built on excellent customer service. We listen carefully to our clients’ needs to make sure we provide custom solutions for their unique problems based on their budget and lifestyle. This has allowed us to establish a loyal customer base’ he said. TOPIC 8 Running a business 443 Appreciating the role of failure in success Failure happens to everyone. In fact, every successful entrepreneur has experienced failure. Entrepreneurs do not fear failure; instead, they appreciate the role of failure in success and view it as an opportunity to learn. Failure can teach us a lot. Everything leading up to failure is a lesson: the choices you made; the reasons behind your decision, and so on. What distinguishes a successful entrepreneur from a mediocre one is whether they get discouraged and contemplate giving up when failure arises or whether they embrace failure, learn from it and grow. 8.2.2 A successful entrepreneur An Aboriginal and Torres Strait Islander-owned business can be defined as a business that has at least one owner who identifies as being of Aboriginal and Torres Strait Islander origin. In 2016, there were more than 16 000 Aboriginal-owned businesses in Australia. There are many stories of Aboriginal success in business. One example of a successful entrepreneur is Dion Devow. The qualities and capabilities that have contributed to his success are outlined in the case study below. CASE STUDY Dion Devow – Indigenous entrepreneur Dion Devow established clothing label Darkies Design in 2010. The business produces contemporary Aboriginal- themed clothes and print media for mainstream, sports and promotional use. Dion identified a business opportunity after not being able to find Indigenous Australian clothing labels that suited him. The catalyst for Darkies Design was the realisation that there was a gap in the market for contemporary Indigenous Australian clothing. Dion chose the controversial name because he wanted to negate the derogatory term and express pride in his heritage and culture. In addition to running Darkies Design, Dion Devow also works closely with other Indigenous people to help empower them to start their own businesses and achieve economic independence. In 2015 he helped established an Indigenous business owners network, the Canberra Business Yarning Circle, which assists Indigenous people to develop business skills and confidence. Through his experiences running multiple businesses, he wanted to create a forum that provides advice and support to many Indigenous people who have aspirations of entering into business. Since its inception, this organisation has helped establish and mentor many new Indigenous Businesses. Dion enjoys this work and feels a sense of satisfaction in being able to give back to the community. Dion also began the Canberra Indigenous Entrepreneurs Centre whose vision is to create a supportive environment for the establishment and growth of small and medium Indigenous businesses. The motivation behind the establishment of this organisation as well as the Canberra Business Yarning Circle is due to his belief that business networking and developing relationships with others is one of the most important contributing factors to success. Dion hopes to use the knowledge and experience he’s obtained to be a positive example to others. He believes that all aspiring entrepreneurs should reach out and build relationships with other businesses either through mentoring, informal discussions, business associations or formal networking forums. ‘Networking introduces you to people who may become key contacts for developing your business. You never know who you’re going to meet and what opportunities will come from that. Building connections in your community often leads to positive word of mouth. If you make a good impression, you will find people who are always willing to help, offer advice or make a referral. No one achieves anything by themselves.’ Dion is a firm believer in undertaking market research as a way to mitigate the risks involved in running a business. He recommends that businesses starting out use economical methods such as social media. Whenever Dion has ideas for new designs, he puts up images on a variety of social media platforms to gauge people’s reaction. However, Dion warned that you need to be cautious of the response you receive as this type of 444 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 feedback isn’t always foolproof. Just because people ‘like’ something, doesn’t mean they will buy it. For instance, a few years back Dion had an idea to create a yoga mat with Aboriginal prints. He got some samples made and posted them on social media where he was overwhelmed with positive responses. Based on this feedback he decided to invest in the creation of the mats, but they didn’t sell. Dion believes it takes persistence, determination and courage to achieve success with any business venture. ‘It takes time to create a successful business and it’s not easy, but you have to believe in yourself and take a leap of faith. You need to be driven and have courage, as there are definitely a lot of risks involved. Setbacks are inevitable, but you should accept that failure is part of the process. If you are faced with a setback, don’t think of it as a total failure, but rather, think of it as a stepping-stone in your journey towards success. Running a business is very hard, but you need to persevere.’ In 2014, Dion’s business was named ACT NAIDOC Indigenous Business of the year and in 2016, he was named ACT NAIDOC Person of the Year. Two years later he was awarded the 2018 ACT Australian of the Year. Dion received this honour for his clothing enterprises and the work he has done supporting many Aboriginal people to achieve their dreams. Dion is humbled by these accolades and is hopeful that his achievements will inspire other Indigenous people. Another factor that may motivate some people to start their own business is the desire to make a difference in a particular area of social, cultural or environmental concern. Individuals may identify an issue or perceived need and develop a product or service to address that issue or need. People who develop such businesses are known as social entrepreneurs, and their businesses may operate under either a for-profit or not-for-profit structure. Anna Donaldson is one such social entrepreneur. Her not-for-profit enterprise, Lively, aims to provide training and employment opportunities for young people, while addressing the issue of social isolation among older Australians. CASE STUDY Social entrepreneur Anna Donaldson – Lively Interviewer: When and why did you start Lively? Anna Donaldson (left) created Lively to address social Anna: I started Lively after finishing my Arts isolation and youth unemployment, and to foster degree. While at university, I volunteered connections between younger and older Australians. as a life story writer for elderly people. I was introduced to an older lady who was very isolated and it really opened my eyes to how many older people live out the last years of their lives in loneliness. Meanwhile, I was growing increasingly concerned about youth unemployment and the lack of work opportunities available for young people. One day I had a lightbulb moment and saw an opportunity to bring the two problems together into one solution. I just had to make Lively happen! Interviewer: Why did you choose a not-for- profit structure? Anna: The main difference between a for-profit and not-for-profit organisation is ownership. In a for-profit company, individuals own the business (or a part thereof), and the profits the business makes go directly to them. In a not-for-profit company, no individuals own the business, and any profit made goes straight back into growing the business. I didn’t start Lively to make money for myself — I started it to make a positive difference in the community. I chose a not-for-profit structure, which has enabled us to access grants and other types of funding to start up and grow the business, while keeping the services as affordable as possible for people who need help. Interviewer: What have been the most satisfying and the most challenging aspects of establishing and running your business? Anna: It is satisfying seeing the positive difference that Lively has made to so many young and older people, and knowing that Lively is responsible for that. There’s great personal pride and a real sense of achievement that TOPIC 8 Running a business 445 comes with seeing an idea in your mind grow into fruition. It’s definitely challenging too! As an entrepreneur, you are often out of your comfort zone, learning on the go and working incredibly hard for what can seem like very little progress in the early days. Starting a business takes time, and it can feel very slow to begin with, but it’s worth sticking with! Interviewer: What advice would you give other prospective social entrepreneurs? Anna: Just get out there and give it a crack! Even if your idea doesn’t ultimately work, the skills you pick up along the way will open a lot of other doors. Seek out experienced mentors who can guide you and reach out to people in relevant industries to get feedback on your idea. Building networks, relationships and partnerships is key! Design your products or services with help from the people they are intended to benefit. They will know more about their needs. Lastly, be persistent! It took me almost three years to get Lively off the ground. If you believe in your idea, keep going! Resources Weblink The Foundation for Young Australians (FYA) Digital documents Worksheet 8.2 Do you have what it takes? (doc-32728) Worksheet 8.3 That’s a fantastic idea! (doc-32729) 8.2 Activity: Research and communication 1. In small groups, identify someone who successfully runs a small business. List the personal qualities that person possesses which contribute to the success of the business. 2. Using the Foundation for Young Australians weblink in the Resources tab, read two inspiring profiles and list the qualities and capabilities that have contributed to their success. 8.2 Exercise: Knowledge and understanding To answer questions online and to receive immediate feedback and sample responses for every question go to your learnON title at www.jacplus.com.au. 1. Discuss the advantages and disadvantages of being an entrepreneur. 2. Create a mind map of the four characteristics of a successful entrepreneur that were discussed in this chapter. 3. What is meant by a ‘business opportunity’? 4. Read the case study ’Baraka Women’ and answer the following questions: (a) What gap did Kath Fry and Eisha Saleh identify that led to their business opportunity? (b) Describe their target market. (c) How has Baraka Women achieved a sustainable competitive advantage? 5. Explain how failure can lead to success. 6. Read the case study on CLU. Living and then answer the following questions: (a) What entrepreneurial characteristics does Christopher Lu possess? (b) What business opportunity did Christopher Lu identify that motivated him to start this business? (c) How does CLU. Living achieve a sustainable competitive advantage? 7. Read the case study on Dion Devow and then answer the following questions: (a) What business opportunity did Dion Devow identify that inspired him to establish Darkies Design? (b) Outline the qualities and capabilities that Dion Devow believes contribute to business success. (c) What characteristics does Dion possess that make him a successful entrepreneur? 8. Aside from the four entrepreneurial characteristics discussed in this chapter, identify some other personal characteristics and qualities that successful entrepreneurs possess. 9. Think about a business you might one day like to own. What personal qualities and skills do you think are needed to be successful in this business? 10. Create a table with two columns. In the first column, list the skills that you presently possess and could bring to a small business. In the second column, list other skills that you would need to develop. Fully worked solutions and sample responses are available in your digital formats. 446 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 8.3 SkillBuilder: Cost–benefit analysis 8.3.1 Tell me Using a cost–benefit analysis A cost–benefit analysis is a detailed examination of the strengths and weaknesses of different alternatives in order to see whether the benefits outweigh the costs. The principle behind a cost–benefit analysis is that you should only decide to act on an alternative if the benefit from taking it is greater than the cost. Why is a cost–benefit analysis useful in commerce? A cost–benefit analysis is important for determining if an option will be a good decision or investment. It is also useful for comparing alternatives or projects, as well as estimating the resources needed to complete the alternative or project. A good cost–benefit analysis: identifies opportunities proposes alternative ways to take advantage of these opportunities calculates the costs and benefits compares the costs and benefits to determine if the benefits outweigh the costs informs the decision about the best alternative to recommend. 8.3.2 Show me We can apply the five elements of a good cost–benefit analysis to a case study, to see how this works in practice. CASE STUDY Olando’s opportunity Step 1: Identify opportunities in the market. Olando is the general manager of a large soft drink manufacturer. He and his team are looking at the market to identify opportunities. The manufacturer has spent a great deal of time looking closely at its business and the local market it sells to. By asking a wide range of questions they have determined that there are two business strategies that could meet the changing needs of the soft drink market. TOPIC 8 Running a business 447 Olando’s team believes that there is an unmet need in the Australian market for low-sugar alternatives to cola flavours. There are currently some products available, but customer feedback suggests some frustration with the lack of widespread access to these options. These options also suffer from poor quality. Step 2: Propose alternative ways to take advantage of these opportunities. The company thinks that there are two possible alternatives. Firstly, they can introduce a new range of low-sugar soft drinks based on the unmet need. The other alternative is to select suitable products that other companies are selling overseas and offer these, or copies of these, to local customers. This would involve buying the rights to distribute these soft drinks. Step 3: Calculate the costs and benefits of each alternative. Olando’s team conducts a cost–benefit analysis of the alternatives proposed. This means that they add up all the costs and all the benefits of each alternative, and then they compare the costs and benefits to decide if the benefits outweigh the costs. A summary of the costs and benefits of each alternative can be seen in the tables below. A summary of costs and benefits for a new range of low-sugar soft drinks Costs Benefits Monetary Total (including raw materials, factory Total (including sales): $30 million overheads, transportation, packaging, research and development, salaries): $20 million Non- Extra workload for staff monetary New research and development which could benefit the business in the future A positive image built up among customers and potential customers 448 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 A summary of costs and benefits for selling or imitating overseas products Costs Benefits Monetary Total (including raw materials, factory overheads, Total (including sales): transportation, packaging, salaries): $15 million $20 million Non- Staff dissatisfaction with using ideas from overseas Research and development monetary Customer dissatisfaction with using products team will be free to look at designed for overseas markets other products. Step 4: Compare the costs and benefits to determine if the benefits outweigh the costs. The team calculates that the benefits outweigh the costs when analysing the first alternative, introducing a new range of low-sugar soft drinks. The monetary costs are $20 million, while the monetary benefits are $30 million. This means that the monetary benefits outweigh the monetary costs by $10 million. They also consider that the non-monetary benefits considerably outweigh the non-monetary costs. When analysing the second alternative, selecting or imitating overseas products and selling these to local customers, the team calculates that the monetary benefits outweigh the monetary costs by $5 million. The team feels that, even though the non-monetary costs of this alternative are high, the non-monetary benefits still outweigh the non-monetary costs. Step 5: Choose the best alternative. The team determines that the best alternative is the first one, introducing a new range of low-sugar soft drinks. This is because they believe that the benefits of this alternative far outweigh the costs when compared to the second alternative. 8.3.3 Let me do it 8.3 Activities You can now carry out this five-step process to complete a cost–benefit analysis using the case study below. CASE STUDY Uncle Bill’s Uncle Bill’s is a global manufacturer of cereal products and snacks. Its marketing department has recommended that the business should respond to opportunities in the Australian market to produce products that meet different dietary needs, including low-salt, yeast-free and gluten-free products. It has proposed two alternatives. The first alternative is to introduce a new range of gluten-free cereals. The second alternative is to modify existing products already being used in other markets and sell these in the Australian market. Bridie is the Australian regional manager for Uncle Bill’s. She has asked you to be part of the team that will undertake a cost–benefit analysis of the alternatives proposed. Bridie has provided the team with a breakdown of the costs and benefits of each alternative (see the following tables). A breakdown of costs and benefits for Uncle Bill’s: Alternative 1 — new gluten-free products Costs Benefits Monetary Raw materials (ingredients): $12 million Improve market share by 5% Factory overheads — salaries, insurance, Sales of $50 million power, repairs and maintenance: $8 million Transportation: $1 million Packaging/labelling: $2 million Selling/distribution: $3 million Research and development — salaries, other overheads: $4 million (continued) TOPIC 8 Running a business 449 (continued) A breakdown of costs and benefits for Uncle Bill’s: Alternative 1 — new gluten-free products Costs Benefits Non- Extra workload for staff New research and development monetary which could benefit the business in the future Building a positive image among customers and potential customers Empower staff (as they are involved in the development of the new product) and improve corporate culture A breakdown of costs and benefits for Uncle Bill’s: Alternative 2 — modification of existing products Costs Benefits Monetary Raw materials (ingredients): $12 million Improve market share by 4% Factory overheads — salaries, insurance, Sales of $40 million power, repairs and maintenance: $8 million Transportation: $1 million Packaging/labelling: $2 million Selling/distribution: $3 million Non- Some staff may be dissatisfied with using Research and development team will be free monetary ideas from other countries when local ideas to look at other products. could have been used. Loss of customers who may be dissatisfied with products that are designed for overseas markets Construct your cost–benefit analysis by completing the following steps: Step 1: Identify the opportunities for Uncle Bill’s. Step 2: Identify the alternatives that have been proposed to take advantage of these opportunities. Step 3: Add up the costs and benefits of each alternative. Write down the total costs and benefits for alternative 1 and the total costs and benefits for alternative 2. Step 4: Compare the costs and benefits for each alternative. Do the benefits outweigh the costs for one alternative or both? In your opinion, which alternative has more benefits than costs? Step 5: Make a decision about which alternative to recommend. Complete the following questions. 1. How did you decide which alternative to recommend? 2. Compare your decisions to the decisions made by other people in your class. How do the decisions differ? Can you explain the variation in decisions? 3. What aspect of completing a cost–benefit analysis did you find relatively easy and what did you find more challenging? 4. Reading the Olando’s opportunity case study, identify the opportunities in the market for Olando’s soft-drink manufacturer. 5. How did Olando’s company respond to opportunities in the Australian market? 450 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 8.4 Planning for success 8.4.1 Key considerations involved when planning and organising a small business Prior to starting a new business, there are key considerations involved in planning and organising the new venture. These key considerations will be examined in this section. 8.4.2 Opportunities to run a small business Once a business opportunity has been identified, a number of areas need further investigation before the business opportunity becomes a reality. These other areas include market research, location, demographics, competition and target markets. Investigating business opportunity Market Location Demographics Competition Target markets research Market research There will always be a risk involved in starting up a new business. Will the proposed new product or service attract customers? Will it appeal to enough customers and generate sufficient sales to cover costs and make a profit? Anyone thinking about commencing a business should first gather some ‘facts and figures’, especially to determine whether the level of demand for the new or improved product is sufficient to generate a profit. The process of information gathering is known as market research. Market research involves collecting and analysing information about customers and the business opportunities available. Market research helps the entrepreneur to make better decisions by understanding consumer behaviour. By collecting and assessing information about the needs and wants of consumers, a more accurate and responsive marketing plan can be designed and, therefore, the risk of failure can be reduced. Many retailers use loyalty cards to gather market research. Loyalty cards provide stores with a huge amount of data about their customers, such as their gender, age, address and household size. When a customer scans their card, their transaction is recorded, and over time, the business will be able to create a profile about their buying habits. The business then uses that data to build a profile of each customer so they can promote their products in a more effective way. TOPIC 8 Running a business 451 To obtain accurate information, marketers usually follow a three-step approach. The three steps of the market research process Step Explanation 1 Determining information needs The problem is clearly and accurately stated to determine what needs to be measured and the issues involved. This is a crucial step. 2 Collecting data from primary At this stage the researchers know the facts that are needed and those that are and secondary sources already available. Plans must be made to gather missing data. Information may be collected from primary data (facts and figures collected from original sources for the purpose of the specific research problem — for example, surveys and focus groups) or from secondary sources (facts and figures already collected by some other person or organisation — for example, research reports or census data). 3 Analysing and interpreting data Facts by themselves do not always provide a solution to the marketing problem. They need to be analysed and interpreted to determine what they mean. Location A good location can make the difference A good location will lead to more sales. between success and failure. This is particularly true for retail ‘bricks and mortar’ businesses, which generally need a constant flow of people walking past the store. A suitable location might be a shopping centre, mall or main street, or the business owner may choose an online presence or prefer a home- based business. This will depend on the nature of the business. Where to locate a business is a crucial decision because this will have an impact on profits. The location chosen can affect many aspects of how a business operates, such as total sales and how expensive it is to run. Most businesses will seek locations that maximise their revenue and minimises their costs. The factors that should be considered when selecting an appropriate location will be examined in Section 8.6.4. Demographics It is important for an entrepreneur to understand the changes that are taking place in the make-up of the population. Demographic factors are population characteristics that affect customer spending and include age, ethnicity, gender, marital status, family size and income. An examination of a region’s demographic pattern will provide a clearer picture of a business’s possible customers. 452 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Ratio of working age (15–65) to pensioner age (>65) in New South Wales 70 65 60 Percentage of the workforce % 55 50 45 40 35 30 25 20 15 10 5 1976 1996 2019 2036* 2056* Source: Based on Sean Nicholls/The Sydney Morning Herald and Health Stats NSW. *Projected ﬁgures Competition Competition refers to rivalry among Both Coles and Woolworths are very similar in relation to the businesses that try to supply the needs brands they offer, prices, layouts, weekly specials and online and wants of a market. Competitors, options. In 2011, Coles began what became known as the therefore, are other businesses that ‘supermarket price wars’ by reducing the price of their own- offer rival products or services. brand milk to A$1 per litre. Woolworths hit back, triggering seven Businesses need to be mindful of the years of intense price competition. Now, rather than price, the two supermarkets have shifted their focus to service quality, social actions and strategies implemented programs and connecting with the community in an effort to get an by their competitors as this can affect advantage. their sales. Not only do they need to be aware of existing competitors, but they also have to monitor the environment for potential newcomers. Managers need to ensure that they respond to any changes in the actions of their competitors. Business owners should aim to achieve a sustainable competitive advantage over their competitors so they can capture a larger share of the market. A 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. Target markets Many entrepreneurs are so enthusiastic about starting, they often overlook one crucial question: ‘Who will buy my good or service?’ Sales are the lifeblood of the business, so it is necessary to have a good understanding of one’s target market. TOPIC 8 Running a business 453 Target market refers to the group of customers to whom the business intends to sell its products. Once the target market has been identified, the business concentrates its marketing activities on that group. For example, a sophisticated men’s suit business in central Sydney might typically aim its marketing activities at a customer who is male, aged 30 to 50, city-based and earning an above-average income. Target market is examined in detail in section 7.4. 8.4 Activity: Research and communication 1. In small groups, brainstorm the possible business opportunities available to your school canteen. Choose a spokesperson to share the group’s comments with the rest of the class. 2. Complete the mind map shown, to demonstrate the planning needed to successfully operate a small business. Collect and analyse information about customers. Planning needed to successfully operate a small business 8.4 Exercise: Knowledge and understanding To answer questions online and to receive immediate feedback and sample responses for every question go to your learnON title at www.jacplus.com.au. 1. Why is it important for an entrepreneur to: (a) undertake market research (b) identify their target market? 2. Why should businesses aim to achieve a sustainable competitive advantage over their competitors? 3. Identify different options for a business location, i.e. different places businesses can be located. 4. Maintaining a competitive advantage is essential for long-term business success. What do you think a business can do to keep ahead of its competitors? 5. Reflect on what you have read and learned so far. How would this information influence you if you were intending to start a small business? Would you still go ahead? Give reasons for your answer. 6. Besides an ageing population, outline other demographic issues that currently impact on businesses in Australia. 7. What factors should businesses consider when determining an appropriate location? Fully worked solutions and sample responses are available in your digital formats. 8.5 Key features of organisational structures 8.5.1 Types of legal structure There are a number of different legal ownership structures available to a person wishing to establish a business. Five main types of privately owned business entities are shown in the diagram — sole trader, partnership, private company, public company and incorporated association. 454 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Five main legal structures of privately owned businesses Private Public Incorporated Sole trader Partnership company Company association As can be seen by this diagram, these five entities can be divided into: unincorporated business entities, in the case of sole traders and partnerships incorporated business entities, in the case of private companies, public companies and incorporated associations. The term incorporated refers to the process companies go through to become a separate legal entity from the owner/s. This means the business exists in its own right, its own legal entity. Regardless of what happens to individual owners (shareholders) of the company, the business continues to operate. The business has taken on a life of its own. Consequently, the company can sue and be sued, can own and sell property, and has perpetual succession – it will continue to exist even when the owners change. An unincorporated business has no separate legal existence from its owner(s) and will be either a sole trader or partnership. This means the business entity and the owner(s) are one and the same. When the owner dies then so too does the business entity. Selecting the appropriate business structure is another important decision a business owner has to make. Each of the different legal structures is covered by different government regulations that must be followed and, as such, have an enormous effect on the overall running of the business. Sole trader A sole trader is a business that is owned and operated Jenna’s Flower Creations by one person. It is the most common type of business in Australia. A sole trader is the simplest and cheapest structure to establish. The sole trader receives all the profit and suffers all the losses. He or she has unlimited liability. This means he or she can be forced to sell personal assets such as the house or car to pay for business debts. Partnership A partnership is a business usually owned and operated by Jones, Rogers, Schmidt and Carr, Lawyers between two and 20 people, called partners. The partners share their profits and losses. It is common for people with similar skills, such as doctors and solicitors, to form a partnership. Partnerships also have unlimited liability, meaning that all the owners are personally responsible for the business’s debts. TOPIC 8 Running a business 455 Proprietary (private) company A private company usually has between two and 50 private owners called shareholders. These businesses tend to McPherson Logistics Pty Ltd be small to medium in size. Often, they are family-owned. Shares in private companies are offered only to those people the business wants as part-owners. This is why it is called a ‘private’ company. A private company must have the words ‘Proprietary Limited’, abbreviated to ‘Pty Ltd’, after its name. The main advantage of a private company is that shareholders have limited liability. This means that if the business cannot pay its debts, a shareholder generally loses only the money she or he has invested in the business. Public company A public company can have an unlimited number of shareholders. The shares for public companies are listed BHP Ltd and Rio Tinto Ltd on the Australian Securities Exchange (ASX), and the general public may buy and sell shares in those companies. Most public companies are large. Shareholders in public companies have limited liability. A public company must have the word ‘Limited’, abbreviated to ‘Ltd’, after its name. Incorporated Association A group of five or more people may form an incorporated association in New South Wales by registering with NSW Newtown Neighbourhood Centre Fair Trading. Incorporated associations are small-scale, non- profit and non-commercial in nature. They can only conduct business in the state in which they are registered. An incorporated association has its own legal identity separate from its members, which provides protection to members. Small community groups such as sports clubs and art groups usually choose to register as incorporated associations. The incorporated association structure can be more effective for these types of organisations as they are generally simpler and more affordable than a company structure. COMFACT The majority of registered companies in Australia are private limited. In 2016, ASIC reported that there were 2 349 382 private limited companies, representing 99 per cent of all registered companies. 456 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 8.5.2 Financing a business Finance can come from a variety of sources. However, two main types of sources are available to a business, as can be seen in the diagram. The business owner can contribute their own funds (equity) or they can obtain a loan (debt) from external sources. The two main types of finance available to small business owners Types of ﬁnance Debt Equity Other people’s money from: The owners or shareholders – banks contributions: – ﬁnance companies – capital – trade suppliers – retained proﬁts – ordinary shares There are advantages and disadvantages associated with each source of finance. For instance, the main advantage of debt financing is that the owner does not have to sell any ownership in the business to raise funds. Also, debt financing has certain taxation advantages. For these two reasons, debt financing is the most popular source of finance used by business people when starting a new business. Equity has an advantage over debt because it does not have to be repaid unless the owners leave the business. It is also cheaper than debt finance because there are no interest payments. The preparation of a loan application Some time in the near future, you may consider taking out a loan to pay for something such as a holiday, car or even a house. Most people wishing to start a new business don’t have the required funds so may need to obtain a loan. Loans are typically used for specific purposes — e.g. for a car, house or to start a business. A loan is an agreement to borrow a set amount of money that needs to be repaid within a certain period of time. This is called ‘the term’. The term of the loan can vary. Anyone that borrows money will need to pay interest on the amount they borrow. This interest may be at a fixed rate, where the interest rate is locked in for the term, or a variable rate, where the interest may go up or down over the term. While a fixed rate loan offers the benefit of set repayments, if you want to make extra payments from time to time, you will usually have to pay an additional fee. A loan may be secured or unsecured. A secured loan is where the borrower offers an asset as security, such as a car or a house, for the loan. If they don’t repay the loan, the lender may sell that asset to get their money back. Secured loans offer a lower interest rate but run the risk that the lender may have the right to sell the security if the borrower can’t pay. With an unsecured loan, the borrower does not need to have an asset to offer as security, but the interest rate is usually higher. A person wishing to get a loan will need to consider carefully which type of loan best suits their needs. TOPIC 8 Running a business 457 The following are steps involved in preparing to apply for a loan: Work out whether you can afford to borrow. Before you apply for a loan, you should prepare STEP 1 a budget to see exactly where you spend your money and whether you can afford to make the repayments on a loan. Save up as much as you can so that you will not need to borrow as much and you can save on interest. STEP 2 Work out how much you want to borrow. Decide what type of loan you want. There are different types of loans that you can apply for STEP 3 e.g. a mortgage, personal loan or business loan. You also need to determine whether you want a secured or unsecured loan as well as a fixed or variable interest rate. Shop around. Take the time to research and compare different lenders. Compare interest STEP 4 rates, product features, fees and charges. Even a small difference in the interest rate can make a big difference to how much you repay. You can seek the services of a mortgage broker or other professional to assist you in making a decision. Check your credit rating. It’s a good idea to check your credit rating before you apply for a loan to get an idea of where you stand. Your credit rating is important because it may influence how much STEP 5 credit a lender is willing to give you. The lender will usually look at this to verify your ability to meet the loan repayments. Fill in a loan application with the lender of your choice. In order to complete this, you will need to determine the term of the loan. Keep in mind that the longer the loan term, the more you will pay in STEP 6 interest. The credit provider will also need to collect lots of information from you such as your recent payslips, past tax returns, bank account statements, details of your assets, copies of other credit contracts or bills and proof of identity documents. Determine the frequency of your repayments. Most credit providers prefer you to make monthly STEP 7 payments by direct debit from your bank account so you don’t miss any payments. Read the credit contract carefully. The contract will detail: the amount you are borrowing; the interest rate, fees and charges; the amount of repayments and when they are due; and the term STEP 8 of the loan. Find out what fees and charges apply, e.g. a loan application fee, monthly service fees or late fees. Ask if there are penalties for paying off the loan in full before the end of the agreed term. Sign the credit contract. Always check the terms and conditions of your contract one last time before STEP 9 you sign. STEP 10 Now it’s time to sit back and wait for the lender to assess and approve your application. 458 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Prospectus As a general rule, if a public company offers securities for sale (for example, shares or debentures) then they must provide a disclosure document to potential investors. A prospectus is the most common type of disclosure document. A prospectus is a legal document issued by companies that are offering securities for sale. Typically, a prospectus must contain all the information that investors and their professional advisors would reasonably require to make an informed decision about the following: the rights and liabilities attached to the offered securities; and the issuing company’s assets and liabilities, financial position and performance, and their profits and losses. Although the Corporations Act contains a general disclosure test for a prospectus, it does not set out a ‘checklist’ with all the information it should contain. In practice, a prospectus typically includes information about the following: history of the business how the company will use the proceeds the company’s business model financial information risks details of the offer. description of management The role of the prospectus is to make investors aware of the risks of an investment. Without this information, they would basically have to make investments ‘sight unseen’. This disclosure also protects the company from future accusations that it did not fully disclose enough information about itself or the securities in question. 8.5 Exercise: Knowledge and understanding To answer questions online and to receive immediate feedback and sample responses for every question go to your learnON title at www.jacplus.com.au. 1. Select the most appropriate word from the list below to complete the sentences that follow. identity sole trader liability private twenty Trading limited unlimited commercial personal five two 50 public incorporation association A business entity with one owner is called a __________. This person faces __________ liability, which means he or she can be forced to sell his or her __________ assets to pay for the debts of the business. Partnerships normally consist of between __________ and __________ partners. Partnerships have unlimited __________. There are two types of companies, private and __________. A ________ company has between two and ________ private shareholders. The owners have _______ liability, and have gone through the process of _______. An incorporated _________ consists of a group of ________ or more people. The are usually small-scale, non-profit and non-________ in nature. They are registered with NSW Fair ________ and they have their own legal ________ separate from its members. 2. Create a table outlining the advantages and disadvantages of the five legal structures. 3. Distinguish between debt and equity finance. 4. Discuss the advantages and disadvantages of both debt and equity finance. 5. Distinguish between a secured and an unsecured loan. 6. In your notebook, complete the following table to show how each of the following businesses is owned by writing the name of the business in the correct column. The first one has been completed for you. Beck’s Pty Ltd Tom Wilson Plumbing M&M Communications Isabella’s Beauty Salon Tip Top Pty Ltd Tyler & Kelly Sole trader Partnership Private company Beck’s Pty Ltd TOPIC 8 Running a business 459 7. Decide what form of ownership structure is appropriate for each of the following businesses. Provide reasons for your answers. (a) A small bicycle shop (b) A not-for-profit community centre (c) A suburban hairdresser (d) A medical clinic 8. Michael operates a pizza and pasta shop as a sole trader and he employs two cooks, one full time and one part time. He decides to offer the full-time cook a 40 per cent partnership in the business. (a) What advantages will the owner gain from this arrangement that he does not have as a sole trader? (b) What disadvantages could the owner experience from the partnership arrangement? (c) Outline the advantages and disadvantages to the cook of entering into the partnership. (d) Prepare a list of questions the cook should ask the owner before entering into the partnership agreement. Fully worked solutions and sample responses are available in your digital formats. 8.6 Establishing a new business or purchasing an existing business There are three main ways of going into business: 1. setting up a new business 2. purchasing an existing business 3. purchasing a franchise. Choosing between the three main options is sometimes quite difficult; each has advantages and disadvantages. 8.6.1 Setting up a new business from scratch Usually it is better to start a new business than purchase an existing one when: a person has created something unique and starts a business to market their invention an existing small business does not satisfy the needs of customers the market has grown and existing businesses cannot support additional customers. Marko and Nebojsa Radisic, owners of Bathroom Brothers, display the commitment needed to start a new business. CASE STUDY An interview with the Bathroom Brothers Interviewer: Why did you want to establish your own business? Marko: After renovating multiple bathrooms for friends, family and our own properties, we felt passionate about the whole process of renovation. The satisfaction of seeing the old bathrooms transform and look so great was really rewarding. Also, having control of the hours we work and being our own boss is very appealing. Interviewer: How did you identify a business opportunity? Nebojsa: We had heard a lot of horror stories about tradespeople being unreliable, taking short-cuts, charging excessive amounts or being booked out for months. We found that when compared with quotes from experienced tradespeople, we were able to be very competitive from both price and quality aspects. The sheer level of interest through word of mouth made it apparent that this had the potential to progress into a full-time business. Marko: Also, we knew that the housing industry was going strong. We thought that many people with older existing houses who did not want to over-capitalise with a large renovation would see the benefit of having a new bathroom to add value to their property. 460 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Interviewer: How did you identify a potential target market? Marko: We identified that in the current economic climate people are often not able to afford major renovations Marko and Nebojsa Radisic of Bathroom but have enough for a kitchen or a bathroom update. Brothers We realised that the bathrooms we were completing for clients were those who were not able to afford a full house renovation but wanted to refresh and add value to their property with a new bathroom. Interviewer: You once said you take only moderate rather than high risks as entrepreneurs. Please elaborate. Nebojsa: The economy can turn at any time for whatever reason and having a family means others are depending on our success. While opening most types of business carries a certain level of risk, we would not be prepared to risk our family’s financial security by taking on large amounts of debt to fund a new business venture. There is just too much to lose at this stage in our lives. Interviewer: What would you consider to be your entrepreneurial skills? Marko: Neb and I are fairly similar in that we are able to identify demand in the market, are creative, organised and have great interpersonal skills. These have all been crucial in the early days of our business and will no doubt be important for its future success. Advantages and disadvantages Advantages of starting a business from Disadvantages of starting a business from scratch scratch The owner has the freedom to set up the business There is a high risk and a measure of uncertainty. exactly as he or she wishes. Without a previous business reputation, it may prove The owner’s objectives can be matched more difficult to secure finance. closely to the business. Time is needed to develop a customer base, employ The owner is able to determine the pace of growth staff and develop lines of credit from suppliers. and change. If the start-up period is slow, then profits may not be The owner has more flexibility to select the location, generated for some time. target market, range of products and level of Potential customers may be more difficult to attract customer service. than initially expected or unforeseen competition There is no goodwill for which the owner has may appear, especially if the level of planning was to pay. inadequate. If funds are limited, it is possible to begin on a smaller scale. 8.6.2 Purchasing an existing business When an existing business is purchased, the business is already operating and everything associated with the business is included in the purchase — for example, stock and equipment, premises, existing customer base, staff, reputation and goodwill. The owner of an existing business will always present the most positive picture when selling his or her business. It is important, therefore, to find out why the business is for sale. It may be a struggling business with complex problems rather than an exciting, once-in-a-lifetime opportunity. Before signing a contract of sale, the buyer should get financial and legal advice. TOPIC 8 Running a business 461 Advantages and disadvantages Advantages of purchasing an established Disadvantages of purchasing business an established business Sales to existing customers will generate instant The existing image of the business may be difficult to income. change, especially if the business had a poor A good business history increases the likelihood of reputation. business success. The success of the business may have been due to Stock has already been acquired and is ready the previous owner’s personality and contacts which for sale. may be lost when the business is sold. Equipment is available for immediate use. It may be difficult to assess the value of goodwill with Existing employees can provide valuable assistance. the likelihood of paying more than the business is worth. Some employees may resent any change to the business operation. CASE STUDY Kristen Lowe — owner of Cut and Curl Hair Studio Interviewer: Kristen, what made you want to own a salon? Kristen Lowe started in Kristen: In my fifth year of apprenticeship at the salon, the owner business in partnership with suggested that my colleague Michelle and I might like to buy the business. another hairdresser, but now Because we were both young and, looking back now, quite naive, we enjoys operating as a sole both said ‘yes’ on the spot. We had this idea the business would open on trader. Monday with us as the new owners. As simple as that! Interviewer: Why did you decide to purchase an existing business? Kristen: We both wanted a business that already had a good reputation and a viable customer base. This reduced the risk. As well, because we were working in the salon, we knew the customers, suppliers and how the business operated. Interviewer: Did you realise at this stage the risks you were taking? Kristen: No, not really. Michelle and I just thought the customers would keep on coming. Luckily they did! I think that was because Michelle and I had good reputations, and over the years we had built up a large clientele of regular customers. Interviewer: You started the business as a partnership but now operate it as a sole trader. Was it difficult being a sole trader? Kristen: Yes. At the beginning it was stressful without having someone to share the burden and talk things over with. However, as time went by, I found that I liked being solely in charge because I could make all the decisions, and knew that the success of the business rested solely with me. COMFACT Seventy per cent of all new businesses start from scratch, while 26 per cent are purchases of existing businesses. The remaining four per cent are businesses that have either been inherited from a family member, restarted from a previously failed business, or bought by employees from the original owners. 8.6.3 Franchising Under a franchise agreement a person (franchisee) buys the right to use the business name and distribute the goods or services of an existing business (franchisor). People choose to start a franchise in the hope of avoiding many of the problems associated with starting a new business. For a set fee, the small business owner receives the benefits of a successful business formula, a well-recognised name and established trademarks. Franchises are the fastest growing area of small business. There are approximately 1120 franchisors in Australia and 79 000 franchisees. 462 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Advantages and disadvantages Advantages of purchasing a franchise Disadvantages of purchasing a franchise Products, equipment, premises design and The franchisor usually controls everything to do with marketing are usually established. price, suppliers and health regulations. The franchisor often provides training. Profits must be shared with the franchisor. There is less need for the franchisee to have previous The franchisor often charges a service fee for advice. business experience. Contracts may be biased in favour of the franchisor. The investment risk may be lower. The franchisee may merely feel like an employee, but There is immediate benefit from the franchisor’s without the benefits and security. goodwill. The franchisee has to deal with day-to-day operations and they are legally accountable. CASE STUDY Gelatissimo — a successful franchise business model Domenico and Marco Lopresti founded Gelatissimo in 2002 as a The founders of Gelatissimo decided to adopt a franchise business single store on King Street in Sydney. model because they saw it as an ideal way to grow the business The business has since become quickly. Australia’s biggest chain store selling gelato (ice-crearn that originated in Italy). The brothers were already running a wholesale gelato business when they saw an opportunity to open a retail store using a secret family formula for gelato. Before long, word of mouth spread and there were queues out the door of their new store. They soon opened other stores. Initially, the owners had chosen a company-owned model for Gelatissimo. However. in 2004 they started franchising. The main reason for adopting a franchise model was because the company model was not working as expected, and the owners decided to try franchising instead. They trialled franchising with a particular franchisee — he was given the opportunity to turn a company-owned store around and was able to do so. The Lopresti brothers also saw franchising as an ideal way to grow their business quickly. Furthermore, as product quality and product presentation are critical for the business, the owners felt that Gelatissimo was best suited to a franchising model, which allows franchisees to bring passion and commitment to their own store. It is this passion and commitment to creating premium products without compromise that have led to Gelatissimo’s success. Gelatissimo now has stores in more than 40 locations across Australia, as well as in China, the Philippines, Singapore, Saudi Arabia, Kuwait and Bangladesh. With close to 50 gelato flavours, some of which have won awards, the business is well known for its quirky flavours. It often adds new ones, particularly limited-edition flavours, such as the ‘Hugh Chocman’ — named in honour of Hugh Jackman. Domenico and Marco have since left the business, but the decision they made to pursue a franchise business model clearly affected the ultimate success of Gelatissimo. COMFACT Franchising has a success rate of almost three times that of independent businesses, largely because it involves an established business name backed up by managerial expertise. TOPIC 8 Running a business 463 Many well-known businesses operate under a franchise agreement. COMFACT Owning your own McDonald’s might sound very appealing; however, in addition to having previous successful business experience, you would also have to agree to the following in order to become a franchisee: complete a 12-month unpaid part-time training program have approximately $1 200 000 to spend. be willing to relocate to anywhere within Australia commit to the business for about 20 years to ensure its success. 8.6.4 Important planning considerations Staffing Successful business owners recognise that they rely on the quality of their employees to achieve their aims of improved profit, growth and increased market share. People are a business’s most valuable asset, so it is important to hire the best people. Also, when an employee turns out to be an excellent worker, retaining that employee may be crucial to ongoing business success. Developing good working relationships with staff and motivating them to do their best in the workplace must be a high priority for the business owner. Good staff provide the business with a competitive advantage, especially if the business offers a service where the customers come into direct contact with the employees. Therefore, the management of the staffing function — the recruiting, selecting, maintaining, training and separating of employees — must be undertaken with care. 464 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 One mistake that some business owners often make is not providing enough time or financial resources to satisfactorily carry out the recruitment process. Making hasty recruitment and selection decisions often ends in misfortune for both the business owner and the employee. Different ways that business can recruit new staff include: newspaper advertisements online advertisements recruitment agencies company websites professional associations schools, TAFE colleges and universities word of mouth social networking sites temporary/casual agencies. Identifying an appropriate location Each individual business has different requirements and must satisfy their own criteria when deciding on the ‘best’ location. The diagram below outlines the factors to consider when choosing a location. These factors vary in importance from business to business, and will depend on a business’s main activity. Factors to consider when choosing a location Cost – how much will the premises cost to lease or purchase? A central location is more expensive than one with lower levels of passing trafﬁc Closeness to Competitors – sometimes Closeness to customers – you may be able to attract this is more important customers from your for retailers, as opposed competitors through to wholesalers or differentiation manufacturers or better marketing Location Closeness to factors Closeness to support suppliers – this is especially services – this refers important for manufacturers. to the activities needed to The further away you are from assist the prime function of a suppliers means longer business e.g. accountants delivery times and more or solicitors expensive delivery costs Closeness to complementary businesses – complementary businesses offer products or Visibility – is the services that relate to your location visible to business and appeal to your foot and vehicle trafﬁc? customers but don't take the place of what you offer — for example a pharmacy located next to a medical centre TOPIC 8 Running a business 465 Equipping premises Once the business owner has found an appropriate location, they will then need to determine the equipment they will need to run the business. Business owners need to ensure they have the right equipment, fittings, furniture and technology so their employees can work efficiently. This is especially important for those businesses that rely on visual appeal to attract customers, such as a shop or restaurant. If the business owner is not confident in equipping their premises, they can hire a professional such as an architect, professional shopfitter or interior designer to assist them. The following are some of the main things to keep in mind when equipping premises: Whether to rent/lease or purchase equipment How much money is required and what sources of funds to use Where to purchase the equipment How to maintain the equipment What training staff will need in order to use the equipment Obtaining realistic valuations If you plan on purchasing an existing business, it’s important that you determine the current worth of the business and its future prospects. There are many considerations that should be taken into account when estimating a business’s value including sales, costs, profits, assets, liabilities, tax and legal issues. You will therefore need access to a whole range of information in order to value the business properly. Below is a summary of the type of information you should seek: Business history Financial statements for the past few years Details of any assets the business owns such as machinery, equipment, stock, etc. Details about goodwill Legal information including legal documents such as leases and insurance policies, as well as any registration papers Sales information Business policies and procedures Staff, supplier and customer information If you can afford to, it is always a good idea to get professional advice through either an accountant, a business advisor or a business broker. These professionals can help you analyse all the information available to determine a realistic value of the business. They can also assist you organise your own finances. Below are some common methods that can be used to determine the value of a business. Look at the current marketplace value of similar businesses in the same industry. Use the return on investment (ROI) method. This method uses the business’s net profit to work out the value of the business. The ROI = (net annual profit / selling price) × 100. Use the business’s assets to calculate value. This involves calculating the value of the total assets of the business and using that figure as an indication of how much the business is worth. You will need to include both tangible assets (physical things you can touch such as equipment and stock) as well as intangible assets (things that can’t be touched but still have value such as intellectual property and goodwill). 8.6.5 Likely success of small business opportunities In the real world, success can be hard to achieve. While starting and operating your own business is very appealing, unfortunately there is a very high failure rate. Within the first year of trading, about one in four businesses will fail. This rises to approximately seven out of ten businesses failing within the first five years. Such figures tell a sobering story for anyone thinking of starting a small business. Therefore, undertaking thorough planning is absolutely essential to minimise the risk of failure. 466 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 Small to Medium Enterprises (SME) failure rates from year of establishment Period from commencement Cumulative total of approximate failure rate (%) After 1 year 25 2 years 42 3 years 54 4 years 64 5 years 71 Factors contributing to the success or failure of businesses Entrepreneurs under the microscope What does it really take to be a successful entrepreneur? You often read about entrepreneurs with no wealth or education becoming hugely successful. This can sometimes happen, but the latest research revealed in the book The anatomy of an entrepreneur: family background and motivation is that 90 per cent of 549 company founders were from middle-class or upper lower- class backgrounds, and were well educated. The entrepreneurs in this study gave their insight into what influences success or failure, as shown below. Keys to success Prior work experience in the field — knowledge of the business Ability to learn from mistakes Work with a strong team Access to information Entrepreneurial abilities Barriers to success Unwilling to take risks Not enough time or energy Difficulty raising capital to finance the business venture Failure to plan Negative cash flow Inaccurate record keeping Resources Digital documents Worksheet 8.4 You’re the DJ (doc-32730) Worksheet 8.5 Which business will I buy? (doc-32731) Weblink business.gov.au TOPIC 8 Running a business 467 8.6 Activity: Research and communication 1. Create an information brochure on franchises. Include useful facts along with details of organisations and websites that will assist a potential franchisee. 2. Go to the business.gov.au weblink and outline the factors that need to be considered when purchasing an existing business. 3. Aside from those that have been mentioned, identify some other factors that lead to the success or failure of businesses. 8.6 Exercise: Knowledge and understanding To answer questions online and to receive immediate feedback and sample responses for every question go to your learnON title at www.jacplus.com.au. 1. One advantage of setting up a new business is not having to pay for goodwill. Explain this advantage. 2. List three circumstances when it may be better to start a business from scratch than to purchase an existing one. 3. Why should a buyer of a business consult an accountant and solicitor before signing a contract of sale? 4. Read the ‘Kristen Lowe — owner of Cut and Curl Hair Studio’ case study and then answer the following questions. (a) Why did Kristen and Michelle decide to purchase an existing business? (b) Briefly outline Cut and Curl’s strengths and weaknesses. (c) According to Kristen, what are the benefits of being a sole trader? 5. Distinguish between a ‘franchisor’ and a ‘franchisee’. 6. Identify two main benefits of franchising for (i) the franchisor and (ii) the franchisee. 7. Read the Case Study on Marko and Nebojsa of Bathroom Brothers and answer the following questions: (a) What factors motivated Marko and Nebojsa to establish a new business? (b) Identify Marko and Nebojsa’s personal characteristics that have contributed to their success. 8. Read the case study on Gelatissimo and outline all the reasons why Domenico and Marco Lopresti decided to purchase a franchise. 9. How does the right staff help a business achieve a sustainable competitive advantage? 10. List in order of importance the factors a retailer should consider when choosing a location. 11. Why is equipping premises an important consideration for business owners? 12. Identify the type of information you should seek in order to obtain a realistic valuation of a business. 13. Explain what you consider to be the two most significant advantages and two most significant disadvantages of starting a business from scratch. 14. Suggest why some people choose to buy an existing business rather than set up a new one. 15. Explain what you consider to be the two most significant advantages and two most significant disadvantages of purchasing a franchise. 16. Why do you think businesses operating as a franchise have a success rate three times that of independent businesses? 17. Select a small business you patronise regularly. If this business was for sale, would you consider buying it? Give reasons for your answer. 18. Once a business advertises a job vacancy, they then need to determine which applicant they should hire. Identify strategies a business owner can use to help them select the best employee from the range of candidates that apply for a job. Fully worked solutions and sample responses are available in your digital formats. 8.7 Business operations 8.7.1 Key considerations involved in running a small business Once someone has made the decision to start their own business, there are a variety of factors that need to be considered. Some of these considerations include: regulations that affect the business’s operations; marketing strategies that can be used to promote the business; 468 Jacaranda New Concepts in Commerce Fourth Edition NSW Stages 4 & 5 ethical decision-making and corporate social responsibility; organisations that provide support and advice to small businesses. 8.7.2 Regulations affecting business operations Small business owners may sometimes feel they are overregulated. Fulfilling all the legal obligations may be frustrating at times, particularly when more than one level of government is involved. All small business owners should be aware of the legislation (laws) that affects their business, especially the regulations, licences and approvals they may require to operate legally. All three levels of government have regulations that must be followed by small business owners. Federal government regulations Federal government obligations include: payment of Pay As You Go (PAYG) income tax and fringe benefit tax, where applicable deduction of income tax from employees who earn above the minimum taxable wage level possible collection of goods and services tax (GST) on behalf of the Australian Taxation Office provisions for employee superannuation abiding by unfair dismissal laws when dismissing employees not engaging in anti-competitive practices ensuring employee working conditions abide by the National Employment Standards (annual leave, maximum number of working hours) registration of the business name unless the business carries the name of the owner protecting consumers from undesirable business practices not engaging in misleading or deceptive advertising. COMFACT Small business owners should consult a solicitor or accountant to help them understand the laws governing their business operations. State government regulations State government obligations include: provision of employee entitlements such as award rates of pay and conditions abiding by work health and safety regulations taking out workers’ compensation insurance abiding by any pollution controls observing regulations relating to the sale of food, cigarettes and alcohol adequate and non-deceptive labelling of all foodstuffs and clothing. Local government regulations Many small business owners overlook the importance of local government regulations. Any business using premises or land must first seek local government approval. Commencing trade before approval is obtained could result in the closure of the business. Local governments have control over the following business activities: determining land zoning (use) and approving new development applications fire regulations, especially fire prevention facilities parking regulations governing the number of spaces that need to be provided health regulations, especially the safe handling of food the size, shape and location of business signs. TOPIC 8 Running a business 469 Almost every aspect of business is affected by government regulations. Copyright Health regulations Employment of people Awards superannuation Licences occupational health and safety unfair dismissal

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