Business Studies Topic 1 Revision Notes Definition: Is the organized effort of individuals to produce and sell, for a profit. The roles of a business include: - Employment of people - Provide the basis for a nations economy - Bring about technological change and innovation - Provide opportunities for individuals to become entrepreneurs - Offer choices relating to work consumption - Provide social interaction What business does: The role of a business is to provide goods and services and add value to the process of production. - Value Chain: Is the concept that value is added at each stage of production, as raw materials are transformed into finished products. - Making a profit is important to most businesses. Some businesses exist to achieve other goals, such as providing specific services to the community E.g. ABC and CSIRO. - Business Management: Is the process of organizing all aspects of running a business, involves choosing particular product or service, setting up the right legal structure, arranging sources of finance, employing staff, organizing marketing and promotional activity, coordinating relationships with supplies and customers. The Importance of small business: - Small business/ Non manufacturing- less than 20 employees/ manufacturing less than 100 employees. - Small businesses employ 3.5 million people 40% of total employment. Business Goals: Financial Goals - Breaking Even: First major goal is survival. Business needs to have enough revenue to cover its costs, or else losses are made and it cannot survive in the long term. In starting of a business may experience loss however its operators will lift revenue so that it can cover costs. - Making a profit: The main aim of businesses is to maximize profit. The level of profit will depend on the amount of money invested and the degree of risk taken. - Growth: Business growth should mean lower per unit costs of production as costs are spread over more units of output. - Market Share: When establishing, businesses aim to capture market share than to make a profit. Market share refers to the percentage of total sales of a product sold by a business in the total market. Social Goals - Providing services to the community - Providing workers with employment, income and better career paths - Environmental awareness and education Personal Goals - Greater freedom, status, self esteem - Being your own boss, working your own hours - More control over you life, career, future etc. Conflicting Goals: often goals may conflict with each other. In order to increase market share shot term profits must be sacrificed. Profit sacrifices due to environmentally friendly production. Challenges in running a business: often people who start up a business do not have well developed general skills to manage the complex functions involved in running a business. One of the major problems associated with Business is Under cpitalsation: Not starting with enough money to keep the business alive. Management: Business management involves coordinating all of the different aspects of a business including planning, market research, product design, production distribution, marketing staffing and budgeting. Senior managers provide direction for the whole business and try to ensure business goals are met. The Business Life Cycle: The business life cycle consists of four stages: - Establishment - Growth - Maturity - Post Maturity/ renewal/ plateau/ steady state/ decline Cessation Establishment stage: One of the most challenging phases in the business life cycle. The business has high costs associated with its setup. Difficulties may be experienced in obtaining necessary funds. Challenges: Choosing appropriate legal structure, finding the right size and location of premises, working out the best marketing strategies, choosing appropriate product to produce. Growth stage: once the business has survived establishment stage, it moves to a period rapid growth. Customers become aware of the company and what it offers. Business operator may have learnt from mistakes in establishment stage and there might be better management. Easier to obtain finance and employees. Challenges: Ensure quality of production is maintained as output grows, develop financial and accounting systems that provide management with details about performance, Recruit new employees and delegating responsibilities, Changing role of management so there is a low workload. Maturity: The third phase in the business life cycle when rapid growth phase levels off. Challenges: Staying responsive to changes in consumer demands, rationalizing business operations and minimizing costs, identifying opportunities for innovating. Post Maturity: may continue at steady state, may go through renewal and expand again, may decline of shut down. Challenges: Understanding the changing tastes and needs of consumers, orientating the management and staff towards change, shifting to new market where there is more growth. Closing a business: Voluntary: reasons for ending the business refer to a choice made by the owner of a firm that is not forced on them. Involuntary: Business is forced to close due to lack of management, excessive borrowing, not enough demand for the good, unfavorable economic conditions. Stakeholders: the community of people affected by business are sometimes known as the stakeholders. They include: - Employees - Customers - Management - Suppliers - Local communities - Future generations - The natural environment Business ethics: relates to the values underlying the decisions and actions of businesses. Ethical issues include fair treatment of workers, honesty in advertisement and responsibility to environment. The Public and Private Sector: Public Sector: includes all three levels of government (local, state, federal). It includes All departments and agencies of all levels of government. Private Sector: Covers all businesses that are not owned by the government. Most Business activity is undertaken by the private sector. Sizes: Large: 200 or more people Medium: More than 20 but less than 200 Small: less that 20 people Very Small/ Micro: less than 5 people Industry Sector: Primary Industries: exploit natural resources such as agriculture, mining, forestry products and fishing. They provide raw materials needed in other industries such as timber wheat and iron ore. Secondary Industries: Use raw materials and manufacture goods. Tertiary Industries: provide services for the economy such as transport, storage and distribution, leisure and entertainment. Quaternary Industries: focus on the processing of information, include information technology, telecommunications, media and financial services. Quinary Industries: focus on providing domestic services, including home cleaning, take away food, childcare and nursing homes. Legal Structure: Private sector businesses are usually divided into two main groups incorporated and unincorporated enterprises. Incorporated: means it’s officially registered as a company and is a legal entity in its own right. They include Private companies, Public companies, cooperatives and trusts. Unincorporated: means there is no difference between the owners themselves therefore the owners have legal responsibility for all actions and debts of the company. They usually include sole traders, partnerships and limited partnerships. Unincorporated Legal Structures Sole Traders: business is owned and operated by a single person. Usually small due to limited amount of finance. E.g. Barber, Newsagent, Small retail shop. Must be registered through department of fair-trading. Advantages: Establishment is small and cheap, owner keeps all profits, Free to make business decisions, flexibly hours. Disadvantages: Unlimited liabilities, difficult to obtain finance, business depends on the individual. Partnership: Exists when two or more people two or more (2- 20) operate a business together, sharing the profits. Must also register under the department of fair-trading. Also a partnership agreement must exist be formed stating rights and obligations- it is a legally binding document. Advantages: Responsibility can be shared and does not rely on individual allowing room for specialization, better access to finance, may get tax benefits to split incomes. Disadvantages: unlimited liability, often disagreements may occur, profits must be shared, partnership ends when one partner dies. Limited partnerships: Allows a person to invest capital in a business venture, without being responsible for the debts and failures of the business. In a limited partnership the only risk for an investor is the loss of investment funds. This structure is popular for higher risk business ventures. A limited partnership must have one general partner who has unlimited liability and is involved in managing the business. Incorporated Legal structures: Companies: Are separate legal entities from their owners. This means the owners cannot be held responsible for the debts of the company. When forming a company it is necessary to comply with the corporations act, which requires signing up a constitution and lodgment of appropriate forms to Australian securities and investment commission (ASIC), then a certificate of incorporation is issued. Difference between companies and unincorporated businesses: - The owners (shareholders) in companies have limited liabilities - Companies are subject to company tax- 30 cents in the dollar - Companies raise most finance through equity finance, and to a lesser extent debt finance. Equity finance is raising money through sale of shares. Debt finance is borrowing money from individuals or financial institution. - The day today running of a company is done by managers appointed by board of directors, who are elected by shareholders. Different types of companies: A proprietary company is a private company, As such in the words “Proprietary Limited” (Pty Ltd). 2- 50 shareholders and shares cannot be sold to the general public through stock exchange. A public company is one that is listed on the stock exchange. Firstly the company must issue a prospectus. Must meet approval of the ASIC and comply with rules imposed by Australian Stock exchange (ASX). A public company has the word “Limited” (Ltd) after its name indicating shareholders have limited liability. Must have at least 5 shareholders but no upper limits apply. More capital can be raised in public company. Cooperatives: are incorporated organizations owned and controlled by members, which have been set up to provide benefits those members. The formation and operation of cooperatives is governed by Corporations Act, this requires at least 7 members. The cooperative must register its rules covering such issues as shareholdings, membership, support and participation, voting and meeting procedures. - Commercial cooperatives: usually operates in primary industries, covering rural activities such as dairy farming. Commercial cooperatives also exist in tertiary industries such as real estate, wholesaling and retailing. - Financial cooperatives: provide common financial benefits to members. Includes building societies and credit unions where members can invest money, and when required borrow money for personal needs. - Community service cooperatives: set up to provide services to the community. They cover wide range of services from ethnic community services, childcare, sports and social clubs. Characteristics of cooperatives: - Cooperative not required to pay tax on any profits that are distributed. But members must pay tax on this money as personal income. - Separate legal entity from its owners - Members elect bored of directors Trusts: A trust is an organization where the trustee is responsible for the management of assets on behalf of other persons, known as the beneficiaries. Trusts help people minimize tax payments. Major benefits include: - No tax required on behalf on investors. Instead, returns are taxed in the hands of the unit holders. - Liability for any loses is born by unit holders, with loss being reflected by a decline in the value of each unit holding. International, multinational and transnational businesses: International business: Is a legal entity where ownership and production are based in one country, but exports goods and services to other countries. Multinational business: Ownership is still restricted, operation in more than one country. Transnational business: has international ownership and operations. The choice of legal structure: The key factors influencing choice of legal structure include: - Size: As businesses become larger they will find advantages in changing their legal structure, businesses may start of unincorporated but work their way to become incorporated as a result may gain benefits such as limited liability and greater access to finance. - Finance: Most business begin with very little capital, normally relying on resources of business owners. As business develops its need for finance grows and a company structure may be more appropriate. - Ownership: Some businesses may not be interested in making a profit but might rather choose the structure of a cooperative or a company limited by guarantee. In choosing the appropriate structure, it may be easier for people to move in and out of business ownership. - Personal Factors: Business owners place a high priority on the freedom of being self employed. Personal factors are a very important part of decision making. Relaxed working life greater control over work hours. To avoid disputes between parties etc. - Changes In Government Ownership: Many companies feel that to achieve more efficient and profitability it is necessary to shift out government ownership. Many government businesses were sold through the process of privatization. The role of the SME sector: - Over 96% of all businesses in Australia are small to medium size enterprises (SMEs) - Employ 50% of the Australian workforce - Non-agricultural SMEs have increased by 6.1%- 951 100 businesses. - SMEs have certain advantages over larger businesses. Their capacity to adopt, innovate, be creative, respond to changes in the marketplace, and create new products. - Outsourcing also occurs where larger companies contract work out to SMEs - People in smaller businesses often feel that they can influence the performance of the firm directly.