business setting up.pdf

Business Start Ups -there are many reasons to start a business -start ups face many challenges in setting up also Reasons for Starting a Business -family tradition -personal ambition -unemployment/redundancy -spotting a gap in the market -independence -earn more money -security for future...

Business Start Ups -there are many reasons to start a business -start ups face many challenges in setting up also Reasons for Starting a Business -family tradition -personal ambition -unemployment/redundancy -spotting a gap in the market -independence -earn more money -security for future -challenge -desire 37 Challenges in Starting a Business 1. Raising Finance (a lot of business start ups fail and as a result reluctant lenders charge high interest rates on debt capital to lessen their risk, this carries the risks associated with being highly geared or if the business owner chooses to sell shares in the company to raise equity capital, they have to give away control, as shares come with voting rights, new owners might also be limited by the amount of personal savings they have to invest as capital) 2. Ownership Structure (the entrepreneur needs to decide to set up as a sole trader, partnership, co-operative or limited company, each option have their own benefits and disadvantages in terms of his, control, tax and liability) (Unit 6 Notes page 22) 3. Production Method (firm must choose an appropriate method of production between job, batch and mass production, the decision will be made based on levels of production, automation, staffing, storage and potential product demand) (Unit 5 Notes page 39) 4. Staff (when the country is close to full employment and the live register has very low levels, everyone who wants a job has one, it is hard for a business to find staff, especially excellent staff, the business might have to offer higher wages and better working conditions to attract staff from other jobs, and staff might not want to work for a new business if they are unsure of job security) (Unit 6 Notes page 29) 5. Unique Selling Point (a business might have a useful idea, but it needs to stand out from competitors, a USP that sets the product apart from what competitors offer without infringing on copyright or patenting issues is essential) 6. Location (a good business idea might not work in the wrong location, the cost of rent can be prohibitive for a new business, especially one looking for a premium location with better footfall, choosing a cheaper location might result in lower sales, as fewer people walk by the shop, there is also the cost of fitting out the premises to the owner's liking, including furniture and fittings, purchasing machinery and potentially hiring an interior designer) 7. Marketing (the target market will not be aware of a new company's existence until it spends money on market research, marketing and advertising itself which will cost money and resources) 38 Start Up Decisions 1. Finance Option 2. Ownership Structure Option 3. Production Method Option Start Up Finance Option Decision -the new business must decide where to get the finance needed and what type of finance to use -many factors will influence the firm’s choice of finance (risk, tax, gearing, interest, control, cost, security, purpose, time horizon) (Unit 4 Notes page 8) -the new business must ensure it has sufficient working capital (current assets - current liabilities) to fund the day-to-day running of the business (Unit 4 Notes page 68) -if current liabilities exceed current assets, the business has insufficient working capital and is said to over overtrading (Unit 4 Notes page 75) -it must decide whether it will opt for equity or debt financing or a mix of both -reserves/retained earnings are not available to new businesses as equity finance as these are profits that are ploughed back into the business overtime (Unit 4 Notes page 7) -Unit 4 Notes page 2 Start Up Production Method Decision -there are three main types of production methods available to start ups -job production -batch production -mass production Job Production -when a business creates a specific product tailored to a customer's needs -production starts only when an order is made by a customer -product is individual, unique and produced one at a time -eg aa debs dress designer makes dresses to customers’ exact design specifications Job Production Features 39 -made to order, once off, customised (not produced for stock) -unique, one of a kind (vary from customer to customer) -specialised machinery (flexible machinery that can be adapted for each design) -highly skilled workers (labour intensive, high wage costs) -expensive product (may be hard to buy raw materials in bulk, as different orders require different raw materials which increases cost per unit as well as due to high wage costs) -premium price (products are of a higher standard so can demand higher selling price) -slower process (fewer orders can be made compared with batch or mass production) -eg customised cakes Batch Production -when a business makes a limited quantity of identical products at the same time in a production run -each stage of production is completed entirely for all goods in a batch before moving onto the next batch -after each batch of identical products, it switches production to make a group of another batch of identical products -eg UGG produces a batch of size 5 boots and then switches to producing a size 6 batch Batch Production Features -limited number of identical goods -production is not continuous -goods in batches are made for stock -high planning of production (production process must be continuously stopped and restarted to produce different batches) -skilled or semi-skilled workers (lower wage costs than job production) -less expensive product (easier to buy raw materials in bulk thus lower cost per unit as well as due to lower wage costs) -average price products -quicker process (faster than job production, as goods can be made for stock, not just when an order is made by a customer) 40 Mass Production -also known as flow production -when a business produces the same goods non-stop in a continuous production process at a large scale -eg tinfoil rolls are mass produced Mass Production Features -goods are made for stock -identical goods -automated production assembly line (computer aided manufacturing is used) -high initial capital investment (initial set up and high financial cost of machine-heavy production line is required) -lowly skilled workers (labour needs are lower and tend to be less skilled due to high automation of process, wages are often low) -large scale production -less expensive product (materials can be purchased in bulk, so due to economies of scale goods can be made for a much lower cost per unit as well as due to low wages) -low price products -fast process Impact of Advancing from Job to Batch/Mass Production Method -investment required (batch and mass production generally involve more automation, so a large capital investment will be required to set up the production process -loss of USP (a business might set itself apart from its competitors because of the custom orders and unique products it makes for its customers, if it starts to sell batch- produced or mass-produced goods instead, it could lose this advantage and it might lose sales and consumer loyalty because of the less personalised or lower quality goods) -stock control (a business might be used to creating goods as orders come in from customers, if it switches to batch or mass, it will need to have storage space for the extra goods produced, if it overstocks, some goods might become obsolete or lose value if they are not sold, and this will also result in higher storage and insurance costs because the company is holding additional stock on its premises) (Unit 3 Notes page 45) 41 -lower selling prices (a business might have to change its pricing strategy, as a premium strategy might not work when selling batch-produced or mass-produced goods, it might need to sell at a lower price than its competitors to build up a good market share) -reduced costs per unit (lower wages and lower cost of raw materials due to bulk buying economies of scale, the cost per unit will be reduced which overtime may offset the high initial capital investment for automated machinery and CAM in batch/mass production) -lower profit margins (as a business will plan to sell more products at a lower price than before, its gross and net profit margins may fall, overall profits may rise from the increase in sales, but profit per item sold may reduce) Impact of Advancing from Batch to Mass Production Method -fewer options for consumers (a business using a mass method of production might now only produce one standardised product, rather than offering the variety of different shapes, sizes and colours it did when batch producing) -low price becomes product USP (if a business cannot sufficiently lower its selling price when switching to mass production, it might not survive because without additional features and choice for consumers, it needs to be able to stand out as a leader in price to compete with other offerings) -market size (a business will produce more of the product when swapping to mass production, therefore, it needs to carry out market research to make sure there are enough potential customers to meet the increased quantity produced) -high capital investment (setting up production lines requires a large initial investment, as the business will need to purchase new machinery because mass production is usually highly automated, it will also be faced with higher maintenance costs for the machines and might need to offer redundancy payments to existing staff who are no longer required as their jobs have been replaced by machinery) -staff impact (a business will make redundancies, as some staff will now be surplus to requirements, this might cause industrial disputes and low morale for remaining staff who might become bored, as they have more repetitive tasks than they had when batch producing) -less diversified business (change might be risky for the business, which might now be selling less variety and more standardised products, it might be less flexible when 42 responding to changing market needs than it would have been with the machinery and staff it had before) -brand image impacted (a business might be seen as a low cost or cheaper brand when selling mass-produced goods at lower prices, this might affect sales of different products it offers that are not mass produced, as the brand is now associated with mass production) Start Up Ownership Structure Decision -a start-up business must decide on the most appropriate ownership structure -factors such as liability, control, risk, cost, -many factors will influence the firm’s choice of ownership structure (control, risk, tax, liability, cost, privacy, legal regulations, legal entity, profits, continuity of existence, ability) (Unit 6 Notes page 22) -there are four main ownership structures a business can choose from -sole trader -partnership -private limited company (LTD) -public limited company (PLC) Sole Trader -single owner -unlimited liability (if the business fails, the owners bears all the financial risks, their personal assets can be used to bail out the business) -capital comes from equity (owner’s own investment) and debt (loans) -owner has full control over decision making -no documents required -profit is kept by owner -financial accounts are confidential -no continuity of existence (business dies if owner dies) -standard rates of 20%/40% income tax payable on profits earned -little access to capital (just one owner and less access to credit facilities from lenders) -Unit 6 Notes page 8 43 Partnership -no less than two and no more than 20 partners -unlimited liability (if the business fails, the partners bear all the financial risks) -capital comes from equity (partners’ own investments) and debt (loans) -partners share control and decision making in proportion to ownership percentage -deed of partnership documents required -profit is shared by partners in proportion to ownership percentage -financial accounts are confidential -no continuity of existence (business dies if partners die) -standard rates of 20%/40% income tax payable on profits earned -greater access to capital (more owners and more access to credit facilities from lenders) -Unit 6 Notes page 9 Private Limited Company -no less than one and no more than 99 shareholders -limited liability (if the business fails, the shareholders only lose the amount they have personally invested in the business as equity capital, their personal assets cannot be used to bail out the business) -capital comes from equity (company reserves and shareholders’ investments) and debt (loans) -shareholders share control and decision making in proportion to ownership percentage -memorandum of association, articles of association and certificate of association required -profits are ploughed back into the business as retained earnings (reserves) or are shared out to the shareholders through dividends -financial accounts must be externally audited, sent to Companies Office and are sections of accounts are publicly available -continuity of existence (business lives even when shareholders die as it is its own separate legal entity) -corporation tax of 12.5% payable on company profits earned 44 -greater access to capital (more shareholders and greater access to credit facilities from lenders) -Unit 6 Notes page 10 Public Limited Company -no less than seven shareholders and no maximum amount -limited liability (if the business fails, the shareholders only lose the amount they have personally invested in the business as equity capital, their personal assets cannot be used to bail out the business) -capital comes from equity (company reserves, stock market shareholders’ investments) and debt (loans) -shareholders share control and decision making in proportion to ownership percentage -memorandum of association and register of companies trading certificate required -profits are ploughed back into the business as retained earnings (reserves) or are shared out to the shareholders through dividends -financial accounts must be externally audited, sent to Companies Office and full accounts are publicly available -continuity of existence (business lives even when shareholders die as it is its own separate legal entity) -corporation tax of 12.5% payable on company profits earned -greater access to capital (stock market shareholders and greater company reputation and credit rating thus greater access to credit facilities from lenders) -Unit 6 Notes page 12 Business Plan -a written document prepared by the entrepreneur to lay out what the business is and what it wants to achieve -it explains the strategies for marketing, ownership, production and finance, and identifies areas of opportunity -the written document sets out who is setting up the enterprise, what is the product or service, how it is going to be produced and promoted, where it is going to be sold and where the finance is expected to come from 45 -it is a comprehensive statement about the business, its objectives and strategies, and the production, marketing and financial implications involved in trying to achieve these objectives Business Plan Functions 1. Business Objectives (states the reasons why the business was set up and gives a clear description of how the business started and developed as well as its over all intentions) 2. Business Goals (outlines the future short, medium and long term goals of the business and how these goals will be achieved through operational, tactical, strategic plans) (Unit 3 Notes page 33) 3. Raising Finance (provides lending institutions with information to help persuade them to finance the business) (Unit 4 Notes page 2) 4. Anticipate Problems (helps entrepreneurs thunk through their ideas and anticipate possible forthcoming problems and prepare solutions to reduce any risks) (Unit 4 Notes page 21) 5. Evaluate Performance (the business plan is used as a blueprint benchmark for the firm to evaluate its performance against through outlining its targets, benchmarks and expected timeframes) (Unit 3 Notes page 36) 6. Employee Needs (employees are interested in a business plan to confirm if the business is going to survive so they can have employment, they may also be interested to see if the business is going to expand and possibly offer opportunities for promotion in the future) 7. Credit Worthiness (suppliers will be interested in a customer’s business plan to ensure that the business is viable and can sustain any line of credit that is offered to them) Business Plan Elements Description Points Business Details & Ownership This describes what the business is, where it is located, who owns it and what skills, experience and qualifications they have. It outlines what market the business will operate in and set out its long-term vision in the mission statement and strategic plan. -business name -business address -owners’ names -owners’ addresses -business structure -names of key personnel -qualifications of key personnel -description of business -brief history of business Business Plan Elements 46 Market Analysis It includes data the business has collected about the market in which it plans to operate. It will need to show the potential size of the market, and how the market is broken up (for example, segmented by age, gender, location), and see if it is dealing in a niche market. Information on competitors, trends and recent sales figures also go in this section along with targets for the business. -market size -target market -target market segments -competitors -customer preferences -market trends -sales targets -niche market Marketing Plan A marketing plan is based on the 4Ps: Product: the USP, branding, the shape, design, function Price: the pricing strategy (for example, premium, penetration, price discrimination, tiered pricing) the business plans to use and how that compares with competitors Place: where it will be available for sale, whether through wholesalers/ retailers/ online and why those points of sale suit the target market Promotion: information on the planned advertising campaign, its potential reach, cost, options, what sales promotions it might use to increase sales when launching (for example, two-for-one introductory offers) -product/service description -USP -branding -patenting/licensing agreements -pricing strategy -channels of distribution -selling and distribution methods -promotion methods -promotional mix elements Production Plan This outlines where the factory or warehouse is and the cost of purchasing or leasing it. It also contains the number of machines and computers needed, staffing costs and recruitment plans. It includes the type of production used (job, batch, mass), and why. It states whether the business will strive for any quality symbols (ISO 9001, etc.). It details where it will source raw materials, what they will cost, different options, where they will be stored, etc. -manufacturing process -type of production method -competitiveness of operation -raw materials sourcing -description of premises -description of equipment -quality control and provisions -capital outlay expected -method of financing production Business Plan Elements Description Points 47 Business Plan Users -employees = they can use the business plan to better understand the business, so they have a clearer idea of the culture and objectives, employees are interested in a business plan to confirm if the business is going to survive so they can have employment, they may also be interested to see if the business is going to expand and possibly offer opportunities for promotion in the future -management = the business plan is used by management as a blueprint benchmark for the firm to evaluate its performance against through outlining its targets, benchmarks and expected timeframes -financial institutions = provides lending institutions with information to help persuade them to finance the business, shows banks why the entrepreneur thinks the business is viable and profitable and it lists the financial assets that could be used as collateral, and sales projections and planned cash flow to show the ability to repay loans -suppliers = suppliers will be interested in a customer’s business plan to ensure that the business is viable and can sustain any line of credit that is offered to them -state agencies = government agencies will be interested if finance or other assistance is sought by businesses, Local Enterprise Offices (LEOS) and Enterprise Ireland will need to see a plan if the business is applying for a grant from them, Enterprise Ireland has to see potential for growth in export markets before providing a grant Financial Plan This gives financial projections for the short term using a cash flow forecast. It might include sources of finance such as negotiated overdrafts or trading terms from suppliers. It shows long-term financial projections (predicted future sales and profit levels) as well as sources of finance available, i.e. the amount of long-term loans (debt capital) and shareholders' investment (equity capital). It can also list any assets used as collateral against loans taken out. A break-even analysis can be included to show how many units need to be sold so that the business will not make a loss. -total amount of finance required -why finance is required -equity finance available (shares, reserves, grants) -debt finance needed to borrow (loans) (debt finance required = total finance required - equity finance available) -collateral available -percentage shareholding available to investors -projected statements of accounts -cash flow forecasts -financial control Business Plan Elements Description Points 48 -shareholders = projected sales and profits are shown as well as market size, competition etc so potential investors can calculate whether the potential return on investment (ROI) is worth the risk