Preliminary (Year 11) Business Studies Summary Notes PDF

Preliminary (Year 11) Business Studies Summary The Nature of Business 2 Role of Business 2 The Nature of a Business 2...

Preliminary (Year 11) Business Studies Summary The Nature of Business 2 Role of Business 2 The Nature of a Business 2 Producing Goods and Services 2 Other Functions 2 Types of Businesses 3 Classification of Business 3 Size 3 Geographical Spread 3 Industry 3 Legal Structure 4 Factors Influencing Choice of Legal Structure 5 Influences in the Business Environment 5 External Influences 5 Internal Influences 7 Stakeholders 7 Business Growth and Decline 7 Stages of the Business Life Cycle 7 Establishment 7 Growth 8 Maturity 8 Post-maturity; Renewal 8 Post-maturity; Steady State 8 Post-maturity; Decline 9 Responding to Challenges at Each Stage of the Business Life Cycle 9 Factors that can Contribute to Business Decline 10 Voluntary and Involuntary Cessation - Liquidation 10 Business Management 11 Nature of Management 11 Features of Effective Management 11 Skills of Management 11 Interpersonal 11 Communication 11 Strategic Thinking 11 Vision 11 Problem Solving 11 Flexibility/Adaptability to Change 11 Reconciling the conflicting interests of Stakeholders 11 Achieving Business Goals 11 ○ Profits 11 ○ Market share 11 ○ Growth 11 ○ Share price 11 ○ Social 11 ○ Environmental 11 ○ Personal 11 2  Staff Involvement 11 Management Approaches 12 Classical Approach 12 Management as Planning, Organising and Controlling 12 Hierarchical Organisational Structure 12 Autocratic Leadership Style 13 Behavioural Approach 13 Management as Leading, Motivating, Communicating 13 Teams 14 Participative/Democratic Leadership Style 14 Contingency Approach 14 Adapting to Changing Circumstances 14 Management Process 14 Coordinating Key Business Functions and Resources 14 Operations 15 Goods and/or Services 15 The Production Progress 15 Quality management 15 Marketing 16 Identification of the Target Market 16 Marketing Mix (4Ps) 16 Finance 16 Cash Flow Statement 16 Income Statement 16 Balance Sheet 17 Human Resources 18 Recruitment 18 Training 18 Employment Contracts 19 Separation - Voluntary/Involuntary 19 Ethical Business Behaviour 19 Management and Change 21 Responding to Internal and External Influences 21 Managing Change Effectively 21 Identifying the Need for Change 21 Business Information Systems 21 Setting Achievable Goals 21 Resistance to Change 21 Management Consultants 22 Business Planning 22 Small to Medium Enterprises 22 Definition 22 Role 22 Economic Contribution 23 Success and/or Failure 23 Influences in Establishing a Small to Medium Enterprise 24 3  Personal Qualities 24 Sources of Information 24 The Business Idea 24 Establishment Options 25 Market 26 Finance 27 Legal 27 Human Resources 28 Skills 28 Costs 28 Taxation 28 The Business Planning Process 28 Sources of Planning Ideas 28 Situational Analysis 28 Vision, Goals, and.or Objectives 28 Vision 28 Business Goals 28 Long-term Growth 28 Organising Resources 28 Forecasting 28 Total Revenue, Total Cost 28 Break-even Analysis 29 Cash Flow Projections 29 Monitoring and Evaluations 29 Sales 30 Budget 30 Profit 30 Taking Corrective Action 30 Critical Issues in Business Success and Failure 30 Importance of a Business Plan 30 Management 32 Trend Analysis 33 Identifying and Sustaining Competitive Advantage 34 Avoiding Overextension of Finance and Other Resources 35 Using Technology 35 Economic Conditions 35 4 The Nature of Business Role of Business The Nature of a Business Business: The organised effort of individuals to produce goods and sell, for a profit, the products (goods and services) that satisfy individuals’ needs and wants SME: Small-Medium Enterprise Producing Goods and Services Goods: Physical items that can be seen or touched Services: Things done for you by others in exchange for payment Importance of Business to an economy: ○ SMEs provide employment to approximately 50% of the workforce ○ Help to increase the national income and living standards ○ Greater choice for customers Businesses distribute wealth to: ○ Governments - tax ○ Employees - salary/wage ○ Business owners and shareholders - dividends ○ The business itself - depreciation Other Functions Profit ○ When the business’ income is greater than its operating expenses Employment ○ Consumers need money in order to purchase products and this is earned through jobs provided by businesses. Incomes ○ Money received by a person for providing their service to a business ○ Wage: money received by employees (normally weekly, fortnightly or monthly) ○ Salary: fixed amount of money paid on a regular basis to a permanent employee ○ Shareholders own a portion of a company due to owning a portion of the company’s shares ○ Dividend: part of a company’s profit divided among its shareholders Choice ○ Act of selecting among alternatives ○ Most businesses usually offer a range of products Innovation ○ Improvement on something already existing. ○ Invention: development of something new ○ SMEs generally display a consistent, positive attitude toward innovation Entrepreneurship and Risk 5  ○ Entrepreneur: someone who starts, operates and assumes the risk of a business venture in the hope of making a profit ○ These risks include: Losing invested finances Long working hours Slow starting Debts Wealth ○ The more that is produced, the more wealth is generated ○ Wages and salaries received and products add to the wealth of individuals and households Quality of Life ○ Overall well-being of an individual, and is a combination of both material and non-material benefits. ○ Businesses have a responsibility to help provide what consumers want to minimise what they don’t want Types of Businesses Classification of Business Size Micro: 12 months Liquidity: amount of cash a business has access to and how readily it can convert assets into cash to pay debt Current Assets ○ Current ratio = --------------------------- Current Liabilities ○ This can be then expressed in terms of a ration and a textual statement ○ Rule of thumb for ratio is 2 current assets for every dollar of current liability ○ If not, it means the business doesn’t have enough liquid assets to pay short term debt Solvency/Gearing: ability to pay long term debt on time Total Liabilities Debt to Equity = -------------------- Owner’s Equity A = L + OE ○ Assets = Liability + OE 21 Human Resources Recruitment Finding and attracting the right people for job vacancies Method depends on business size, position type, job type, etc May be internal or external, eg positions for current employees to apply for a new position or external people applying for their first position in the company Selection criteria may include: ○ Written application ○ Testing ○ Interview ○ Background checks Training Training: teaching staff to do job more effectively and efficiently by boosting knowledge and skills Development: preparing employees for more responsibilities in the future Aim: long term change in employee skills, knowledge, attitudes, behaviour and work performance Types of training:formal, eg simulations, and informal, eg coaching 22 Employment Contracts Award: minimum conditions Enterprise Agreement: negotiated agreement between employer and union or group of employees Common Law Contract: covers employees that aren’t under award or enterprise agreement Separation - Voluntary/Involuntary Redundancy: when a job no longer exists Retrenchment: when a employee is dismissed as they are not needed due to lack of work Dismissal: when an employees behaviour is unacceptable and so their employment contract is terminated Ethical Business Behaviour Majority of businesses want to be seen as responsible corporate citizens The triple bottom line refers to the economic, environmental and social performance of a business Ethics: standards that define what is acceptable and unacceptable behaviour Business ethics: the application of moral standards to business behaviour such as: ○ Fair and honest business practices ○ Decent workplace relations ○ Conflict of interest situations ○ Accurate financial management ○ Truthful communication A corporate code of conduct encourages ethical business behaviour Corporate Code of Conduct: a set of ethical standards for managers and employees to abide by Conflict of interest: when a person takes advantage of a citation or information for their own benefit rather than the employer’s interest Audit: independent check if the accuracy if records and procedures 23  Corporate social responsibility: refers to open and accountable business actions based on respect for people, community/society, and environment. It involves businesses doing more then just complying with laws and regulations. Management and Change Responding to Internal and External Influences External influences have an indirect impact on businesses and businesses have very little control over them Internal Influences have a direct impact on a business and the business has some control over them Managing Change Effectively Identifying the Need for Change Having up to date data Business Information Systems ○ Gathers data, organises and summarises before converting into practical information used to make decisions Setting Achievable Goals SMART goals Vision Statement: a statement explaining the view and aim of the business Resistance to Change Find out why there’s a resistance to change, eg: ○ Management issues ○ Fear of job loss ○ Disruption ○ Time ○ Fear of unknown ○ Inertia ○ Costs Strategies to overcome resistance to change: ○ Reasonable changes ○ Allow employees participation ○ Discussion of the change ○ Clearly say why ○ Build employee trust ○ Follow a sensible time frime - don’t rush 24 Management Consultants Someone who has specialised knowledge and skills within an area of business, helping in providing change management advice Methodical approach to dealing with change froma perspective of a business and an individual level They provide: ○ Wide range of business experiences ○ Specialised knowledge and skills ○ External viewpoint ○ Access to the latest research ○ Awareness of industry best practices 25 Business Planning Small to Medium Enterprises Definition Up to 199 employees Role Employ 68.3% of private sector (44.2% small businesses, 24.1% medium) Produce 55% products produced each year Generate increasing amounts of total exports 43% of all money spent on R&D Provides products for large businesses More profits and tax than large businesses. Economic Contribution The SME sector contributes: ○ 55.8% GDP ○ 68.3% private sector employment ○ To our balance of payments, since they are often more successful at exporting than large businesses ○ Significantly to the level of R&D. ○ SMEs can enter the global market by selling directly to customers in export territories, marketing products through a local distributor, participating in a joint venture with a local business partner or selling through a website. Success and/or Failure While many people are successful in their business ventures, many others unfortunately experience failure. The five common ‘keys’ to SME success are: ○ flexibility ○ reputation ○ focus on market niche ○ entrepreneurial abilities ○ access to information. An SME has failed when it is: ○ unincorporated and declared bankrupt - a legal process of distributing among the creditors the property of a business or person who cannot or will not pay their debts ○ or incorporated and either forced into liquidation or voluntary cessation. SMEs have a high failure rate. 60% of businesses fail in 3 years. The most common causes of SME failure are managerial inexperience and incompetence, undercapitalisation and lack of planning. 26 Influences in Establishing a Small to Medium Enterprise Personal Qualities Qualifications ○ No qualifications are necessarily needed to operate a SMEs however some may have qualifications specific to them Skills ○ Experience ○ Education/training Motivation ○ Having drive and desire to achieve Entrepreneurship ○ Assuming the risks Cultural Background ○ Traditions and beliefs ○ Experiences and knowledge Gender ○ More women are getting into the workforce, and starting businesses ○ Women and men have different needs, wants, idea, management, etc Sources of Information There are a variety of support services to assist businesses. Some are free and some are other businesses. Professional advisors such as accountants, solicitors, bank managers and management consultants. Both local, state and federal governments have established agencies that provide advice and support. Other sources include chambers of commerce, the Small Enterprise Association of Australia and New Zealand (SEAANZ), trade associations, libraries and reference materials, the Australian Bureau of Statistics and business mentors. The Business Idea Business idea: describes the core activities of the business, and the specific features and value of the goods or services it provides. Business opportunity: something an entrepreneur can see as an avenue to success. Opportunities may arise due to either a ‘gap’ in the market, or an interest or hobby. Competition: ○ Is rivalry among businesses that seek to satisfy a market. ○ SME owners must decide how to make a business competitive. This can be done by either reducing the costs of production or providing something not already available Establishment Options 27  Option Definition Advantages Disadvantages New Starting a new Owner has freedom High risk business to setup their way Time and money is Owner determines needed how it is run Slow to start No customers Existing Purchasing an Existing reputation May be hard to existing business and customer base change Business plan Employee already in place resentment Customer uncertainty Franchise Purchasing rights Business is already Little room for to a franchise setup individuality and owning a Good reputation - Less freedom business under the name is known the company Plan is in place easily to follow More resources Market Goods and/or Services ○ The first thing business owners need to determine is what good or service they are going to sell. ○ Businesses fail without a market, so they must conduct a feasibility study and undertake market research. Feasibility study: assessment of the business idea’s potential for success. - This involves determining how practical the idea is and if it would successfully translate to the market. ○ Market research: systematically collecting, recording and analysing information concerning a specific marketing problem. Price ○ Cost-based: calculating the total cost of producing or purchasing a product and then adding a mark–up for profit ○ Market-based: prices according to the interaction between the levels of supply and demand ○ Competition-based: price that is either below, equal to or above that of the competitors Location ○ One of the key decisions of a prospective small business owner is concerning the actual location of the business. ○ Different types of business will be suited to different locations. Finance Source ○ A business can’t commence without finance ○ SME owners must determine how their business will be financed 28  ○ Businesses can obtain funds from either internal (equity) or external (debt) sources. ○ Debt finance relates to the short-term and long-term borrowing from external sources by a business. ○ Examples of short-term finance available to businesses include an overdraft, commercial bills and factoring. Examples of long-term finance include a mortgage, debenture and unsecured note. ○ Equity: funds contributed by the owner(s) of a business to start and expand the business. ○ Some of the common sources of equity finance include self-funding (bootstrapping), family or friends, private investors, issuing shares and crowdfunding Cost ○ Establishment Cost: expenses in setting up a business ○ Operating Cost: expenses in running a business ○ The business owner must consider the cost of finance. This will depend on the type of finance, the source and the term. Legal Business Name ○ Business names must be registered through ASIC unless it is just the name of the owner ○ Business name registration does not protects or establish any rights, instead a trademark is needed Zoning ○ Acquisition and development of business premises is influenced by local government zoning ○ Local governments can restrict where business operate to ensure city planning and separation ○ Zones include Residential Commercial Industrial 29  Agricultural Recreational ○ Business must contact local council in regards to zoning regulations Health and Other Regulations ○ The Public Health Act 2010 (NSW) imposes regulations that ensure safe and suitable food for human consumptions ○ Requirements include The temperature for food storage Kitchen layout Employee clothing requirements Time for which food can be kept Correct food handling ○ Competition and Consumer Act 2010 is law that protects both consumers and businesses. It protects consumers from deceptive or misleading practices, and it regulates the trade practices of businesses. ○ Business owners who are planning to employ staff will need to comply with a variety of employment laws and regulations. Human Resources Sources of employment: ○ Temporary/casual services ○ Tertiary education ○ Internal searches ○ Word of mouth ○ Private employment agencies ○ Job services ○ Advertisements Skills General: transferable from one workplace to another Specific: skills often required by law to perform a particular job Costs Wage: businesses need to observe any legal requirements Employee benefits, eg leave, superannuation, etc Insurance Non wage: non financial rewards 30 Taxation 31 The Business Planning Process Business Plan: ‘roadmap’ for future growth and development - sets out goals and direction Sources of Planning Ideas Information can come from: ○ Internal sources ○ External sources ○ Specialists Situational Analysis SWOT ○ Strengths ○ Weaknesses ○ Opportunities ○ Threats 32 Vision, Goals, and.or Objectives Vision Vision statement: broadly states what the business aspires to be in the future Business Goals Long-term Growth Long-term Growth: maintaining profits over time by continually expanding ○ Not accidental - requires planning ○ Exploiting competitive advantage Organising Resources 33 Forecasting Total Revenue, Total Cost Total Revenue: total amount received from sales of a good or service TR = P x Q ○ Total Revenue = selling Price x Qty units sold Total Costs: ○ Fixed Costs (FC): don’t vary regardless of how many units of units are produced ○ Variable Costs (VC): depend on number of goods or services produced TC = FC + VC ○ Total Cost = Fixed Costs + Variable Costs Break-even Analysis Used to determine the level of sales that needs to be generated to cover the total cost of production Break even sales quantity: Total Fixed Costs ○ Quantity (Q) = ------------------------------------------------- Unit Price - Variable costs Per Unit 34 Cash Flow Projections Shows the changes to the cash position brought about by the operating, investing and financing activities of the business ○ Month by month projections of cash inflows and outflows ○ Tells more much cash and capital is needed and when ○ Different to cash flow statement which shows what has happened, this shows what is predicted for the future Monitoring and Evaluations Monitoring: process of measuring actual performance against planned performance Performance Standard: forecast level of performance against which actual performance can be compared Evaluating: process of assessing whether or not the business has achieved stated goals Sales Budgeted sales should be compared to actual sales Sales can indicated how well a business is performing Budget Budget should be checked regularly with actual revenue and expenses to detect any issues Profit Profit levels are an indicator of a business’ performance and should be carefully monitored and evaluated Profit levels should be carefully monitored and evaluated because: ○ Profit as a reward ○ Profit maximisation ○ Profit as a source of finance ○ Profit as a performance indicator ○ Profit as dividend payment Taking Corrective Action If goals aren’t achieved then change is needed Are standards unrealistic? Have external influences changed Corrective action involves changing any part(s) of the business plan in order to correct negative change 35 Critical Issues in Business Success and Failure Importance of a Business Plan Helps test business viability Assists business to be proactive, not reactive Assists maintenance of business operations Indicates owner’s ability and commitment Forces justification and deeper the thinking Identifies strengths and weaknesses A business plan should contain ○ Clear, concise statement of goals ○ Well-developed plan for achieving goals ○ Reliable control standards for performance measurement Management Working with and through other people to achieve business goals in a changing environment Staffing ○ A manager’s skill is the most critical factor for success ○ It is essential to have employees who are satisfied and motivated ○ Staff can be improved by: External recruitment Skills audit Skills inventory Teams ○ Replacing individual as the basic building blocks of businesses ○ How teams are managed is another critical factor Trend Analysis Process of investigating changes over time and looking for a trend in order to predict the future Assists SME owners to achieve success Identifying and Sustaining Competitive Advantage Competitive Advantage: the strategies used by a business to gain an ‘edge’ over its competitors Price/Cost Strategy: Accomplished by achieving the lowest production costs, allowing to reduce product price ○ Leading on costs - lower prices ○ Efficiency of operation ○ Low cost ○ Economics of scale ○ Technology Differentiation: offers customers something different 36  ○ Offering something not available elsewhere ○ High quality products and service ○ Innovation ○ Positive image Ensuring Long-term Success: assured if a business sustains its competitive edge by limiting the advancements of competitors ○ R&D ○ Intellectual property rights (patent, ™) ○ Exclusive supplier contracts ○ Lobbying government to limit foreign rivals ○ Dynamic management to stay ahead of competition Avoiding Overextension of Finance and Other Resources Finance: ○ Leasing instead of purchasing ○ Planning, forecasting ○ Raise capital instead of borrowing ○ Start small then grow Stock and Staff ○ Appropriate inventory management ○ Use technology instead of workers; outsourcing Using Technology Technology is essential in modern society ○ Allows more efficient and effective practices, cutting costs and improving productivity Leading edge technology: newness means problems can arise from choosing wrong product or application Established technology: cost, performance and servicing is readily available E-Business: using internet to conduct business E-Commerce: buying and selling via internet Economic Conditions Business must be able to respond to changes in economic conditions and be aware of possible future changes Can cause economic risk If change isn’t managed, failure can occur Periods of boom and recession Strong economic activity leads to a rise in consumer spending, sales, production and profit Weak economic activity leads to a fall in consumer spending, sales, production and profit 37