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Nature of Business

Role of Business
What is the role that Business plays in Australia today?
Status
Trade
International confidence
Politics
Defence
Consumerism
Clean industry
Jobs & income
Economic growth
GDP
Economic development
Living standards
Education
Legal systems

A business is an organisation that attempts to satisfy the needs and wants of the community by
providing goods and/or services. Eg. caf, newsagency

To provide goods and services to the community, businesses make use of inputs or raw materials. By
combining inputs with equipment and human skill, businesses add value.

Key Roles of Business
1. Profit
Profit is essential if a business is to meet day-to-day expenses (such as production costs, wages,
insurance, electricity and rent) and provide a return on the owners' financial investment.
2. Wealth Creation
By increasing sales and developing strategies to promote brand awareness and sales, the
management of a business hopes to increase the value of the organisation. This in turn, will
increase the value of the funds that owners have invested in the business.
3. Employment
With this labour, businesses are able to offer the community a diverse range of goods and
services. In return for their services, a business will pay a form of income to their workforce.
This allows the workforce to spend part of its income on satisfying its needs and wants.
4. Innovation
This is the process of improving the features of a product. Eg. pencil pen computer
5. Quality of Life
Business research and development has also contributed to the quality of life in a community.
6. Choice
Businesses produce goods and services for consumers; which provides consumers a choice.
7. Entrepreneurship & risk
Entrepreneurs take risks by developing strategies for their ideas to com to function. Eg. Lorna
Jane


Business Activities
Management
Coordinating a business's limited resources to achieve specific goals
Organising Resources
Natural, capital & human
Distribution
Goods & services
Delivery & transport
Finance, production & business needs
Local council permission & planning
Sales, expenses & profit
Supplier changes
Production control
Quantity & quality
Feedback from customers
Marketing
Online stores
Production
innovation

Questions
1. Recall the main activity of a business
The main activity of a business is to produce and seel goods and services to consumers, for
example, a caf.

2. Describe the relationship between revenue, operating expenses and profit.
Revenue is the money received as payment for the selling of products while operating
expenses are those paid to run the business and produce the products. Profit is determined by
subtracting the operating expenses from the revenue. If the revenue is greater than the
operating expenses, the business has made a profit, while if the operating expenses are
greater than the revenue, the business has lost money.

3. Calculate which of the following businesses has made a profit.
a. Sally's Pet Shop: expenses $2000/wk, revenue $3500/wk
Profit = $1500
b. Ben's gardening supplies: revenue $6000/wk for a month, expenses $7000 first week,
$8000 second & third week, $3000 fourth week.
Loss = $2000

4. 'Profit is the reward for risk taking.' Explain.
Starting a business is a risk as there isn't a guarantee of success, but if it is a success, the profit
is the reward. The profit therefore is the motive which drives risk takers.

5. Describe the two main risks associated with operating a business.
The two main risks associated with operating a business are financial crisis; where the business
becomes bankrupt or runs out of money, and unsuccessful products which don't satisfy the
needs and wants of the community.

Types of Businesses
How are businesses classified?
A business can be classified according to:
1. Size - sole trader, partnership
2. Industry sector - tertiary, primary, secondary
3. Legal structure
4. Geographic location

Size
Characteristics Small Medium Large
Business type Corner Store
Local mechanic
Hairdressing salon
Services club
Hotel/motel
Engineering factory
Woolworths
Qantas
National Australia
Bank
No. of employees
(according to the Australian
Bureau of Statistics (ABS)
business register definition)
Less than 20 employees 20-199 employees 200 or more
employees
Type of ownership Independently owned
and operated by usually
one or two people
Owned and
operated by a few
people and/or
private
shareholders
Owned usually by
thousands of public
shareholders
Most common legal structure Sole trader
partnership
Partnership
Private company
Public company
(numerous)

Micro business - employs fewer than five people (including the owner)

Geographic Location
Geographical spread - presence of a business and the range of its products across a suburb, city,
state or country or the globe

Local business - very restricted geographical spread and serves the surrounding area

National Business - one that operates within just one country

Global business/Transnational Corporation (TNC) - large business with a home base in one country
that operates partially owned or wholly owned businesses in other countries

Industry

1. Primary - involves acquiring raw materials. Eg. farming, logging
2. Secondary - turns raw materials and natural resources into finished or semi-finished products.
Eg. making dairy products, manufacturing wool/cotton to make clothes
3. Tertiary - businesses which provide a service. Eg. doctor, restaurant, real estate, school
4.
5. Quinary - industry involved in all services that have traditionally been performed in the
home.
Eg. tourism, childcare, hospitality




Types of Industries
Industry types Explanation Examples of
businesses in this
industry
Potential jobs in
this industry
Primary

Production
directly
associated
with
natural
resource
Mining companies,
e.g. BHP & Rio
Tinto
A cattle, crops &
sheep farmer

Construction
Manufacturing
Water Supply
Energy Supply
Farming

Secondary Taking a Car manufacturers Bicycle

raw
material &
making it
into a semi-
finished or
finished
product
Textile
manufacturers

NOTE: this is just
the manufacturing
of the good, not
the selling of it

manufacturers
House
builders
Road
construction
companies
CD
manufacturers

Tertiary

Performing
a service
for other
people
Retailers, e.g.
General Pants and
Kikki K
Dentists
Solicitors/lawyers
Banks, e.g.
Commonwealth
Bank
Museums
Health workers,
e.g. nurse, social
worker,
psychologist,
nursing homes

Retail
Wholesale
Banking
&Insurance
Solicitors
Tourism &
Leisure
Driving
Instructors
Hairdressers

Tertiary sub-sectors Knowledge
sharing
Telecommunicatio
n
Property
Computing
Finance
Education, e.g.
Abbotsleigh &
Macquarie
University

IT consultant
Property
valuer
Accountant
Teacher
University
lecturer
Tertiary sub-sectors Services
traditionally
performed
in the home
Hospitality, e.g. a
hotel or restaurant
Tourism
Craft-based
activities, such as
a tailor or
alterations
business
Childcare

Waitress
Chef
Child care
worker
Important to note
Some business can cross into 2 or 3 industries, e.g. a Dairy farmer producing milk is a part of the
primary and secondary industry. If they also sell their dairy product in a retail shop then they are a
part of the tertiary sector as well. Perhaps we could go even further and say that this dairy farm also
trains potential dairy farmers in how to milk the cattle, therefore they are now also a part of the
quaternary industry as they are sharing knowledge and information.
Legal Structure

Sole trader - business that is owned and operated by only one person.

Partnership - legal business structure that is owned and operated by between two and 20 people
with the aim of making a profit.

Incorporated - refers to the process companies go through to become a separate legal entity from
the owner/s.

Private Company - Companies which are not publically listed on the ASX. Private companies are a
proprietary limited company and lodge a company tax return. They can have two to fifty
shareholders.

Public Company - A company which is listed publically on the ASX and has unlimited shareholders.

Government Enterprise - government-owned and operated business.

Franchise - buying the rights from another business to distribute its product under its name.

Unlimited Liability - when the business owner is personally responsible for all the debts of his or her
business.

Limited Liability - feature of a corporate ownership that limits each owner's financial liability to the
amount of money he or she has paid for the business's shares.

Example
Newport Beach General Practice is a small, incorporated, private business. The company is
proprietary limited, with limited liability protection and owned by two people. The owners of
Newport Beach General Practice chose this particular legal structure as they wanted ownership
independence and flexibility. The owners also wanted an automatous business, or one which they
ran by themselves. This independence allowed them the flexibility in the way services are provided.


Figure 3.1 Legal Structure of Newport Beach General Practice

Factors Influencing Choice of Legal Structure


Questions
4. Compare a micro business with a small business.
A micro business only employs up to 5 people whereas small businesses can employ up
to 20.

5. Define the term 'geographical spread'.
Geographical spread is the presence of a business and the range of its products across a
suburb, city, state or country or the globe.

6. Distinguish between a local and national business. Provide examples.
A local business has a very restricted geographical spread and serves the surrounding
area, for example, a caf. A national business is one that operates within just one
country, for example, David Jones.

7. Recall another name for a global business.
A global business can also be known as a transnational corporation (TNC).

8. Identify three examples of TNCs.
TNCs include Coca-Cola, McDonalds and Toyota.

9. State what features all TNCs have in common.
All TNCs have a home base in one country, for example, Boost, Australia.

10. Summarise the four main interrelated forces leading businesses to serve national and/or
global markets.
There are four interrelated forces which lead to businesses expanding to a national or
global market. Firstly, as the business's products become more widely known, sales
increase. More business owners desire to increase profits and increase in market share.
Finally, there are more global consumers encouraging e-commerce, which is the buying
and selling of information and products online.

Influences in the Business Environment
Business environment - the surrounding conditions in which the business operates. It can be divided
into two broad categories: internal and external.

External environment - factors over which the business has very little control.

Internal environment - factors over which the business has some degree of control.

External Influences
Economic
Economic cycles - periods of growth and recession that occur as a result of fluctuations in the
general level or economic activity.
Example
Economy interest rates have a secondary influence on Newport Beach General Practice as
they indirectly impact the business. When interest rates are high, there is less disposable
income causing clients to be more reluctant to spend money on health issues. This may impact
the business as there may be occasional periods of downturn in trade.

Financial
Deregulation - removal of government regulation from industry, with the aim of increasing
efficiency and improving competition.

Geographic
Globalisation - the process that sees people, goods, money and ideas moving around the world
faster and more cheaply than before.
Example
Business reliance prior to the opening of the surgery, the Newport Pharmacy relied on the
presence of a medical practice for service delivery. As there were no medical services for the
pharmacy to function with, the owners of Newport Beach General Practice opened its surgery
adjacent to the Newport Pharmacy to work cooperatively with the owners. Both businesses
rely on each other and require each other to function.

Social
Example
Market need before business establishment, there was a genuine need of doctors and
general practitioners in the local area. The lack of services being provided influenced the
owners of Newport Beach General Practice to open their business to provide the service the
community needed.

Legal
Government interference - regulations

Political

Institutional

Federal Government State Government Local Government
Federal government obligations
include:
Payment of taxes for
employees (earning above
the minimum taxable
income level) and for
businesses with company
tax and GST
Provision of employee
superannuation
Observance of customs
regulations
Abiding by relevant
legislation that would
affect business operations
State government obligations
include:
Provision of employee
entitlements, including
workers compensation,
occupational health and
safety (OHS)
requirements, award
rates of pay and
entitlements
Payment of payroll taxes
Abiding by relevant
state legislation (e.g.
health, trade practices,
employment)
Abiding by pollution
controls
Local government (city, municipal
and shire councils) have control
over the following business
activities:
Approving new
development and alteration
(to an existing building)
applications
Fire regulations
Parking regulations (e.g.
provision of parking by new
businesses)
Size, location and shape of
business signs


Technological
Cost of technology
Technology careers
Technology and farming
Changing workplace rules
Globalisation and technology

Example
The stakeholders of Newport Beach General Practice include employees, employers and clients. The
influences of technology on the businesss stakeholders all relate to one another and contribute to
the business. There are four interconnected influences of technology on the businesss stakeholders.
The keeping of documents and files on the computer has reduced the amount of employees
needed. In the long-term, this may affect current and future employees as some current tasks
may become redundant or no longer needed.
Relay of information between specialist service providers has greatly improved because of
improved technology.
Increased communications between those who provide specialist services has improved
service delivery to clients.
Technology has enhanced the access to information which has improved service delivery.

Competitive Situation
Sustainable competitive advantage - the ability of a business to develop new strategies that will
ensure it has an 'edge' over its competitors for a long period of time.

Market concentration - the number of competitors in a particular market. There are four main types
of market concentration:
Monopoly - complete concentration by one firm in the industry, e.g. Australia Post
Oligopoly - a small number of larger firms have a greater control over a market, e.g. car
manufacturers, banks
Monopolistic competition - larger number of buyers and sellers in a particular market, e.g.
local retailing shops
Perfect competition - large number of small firms that sell similar products. They are unable to
differentiate products from each other and so can only use price as a way of achieving market
share, e.g. fruit and vegetable growers

Local and foreign competitors
Labour costs
Transport costs
The economy
Cost of stock/raw materials

Marketing Strategies
Size of the market - number of existing and potential customers
Size of the business - the larger the business, the more likely it is to invest in a range of
marketing activities, especially more expensive forms of marketing such as television and
newspapers. Smaller businesses may rely on simple marketing methods such as pamphlets,
local paper advertisements and word of mouth.
Number of competitors - the more competitors there are in a market, the greater the need for
marketing. This is necessary to maintain or increase market share.
Nature of the product - refers to the type of product and whether it requires extensive
marketing. Some products, such as postage stamps, dont need to be advertised in order to
make sales.


Markets
Changes in financial/capital markets
Changes in labour markets
Changes in consumer markets

Internal Influences
Products
Type of goods and services sold
Product influence will reflect type of business
Type of business will be determined by the range of goods and services produced

Location
Visibility
Cost
Proximity suppliers
Proximity to customers
Proximity to support services

Prime location = customer convenience + visibility

Resources
Human resources - the employees of the business and are generally its most important asset.
Information resources - the knowledge and data required by the business, such as market
research, sales reports, economic forecasts, technical material and legal advice.
Physical resources - equipment, machinery, buildings and raw materials.
Financial resources - funds the business uses to meet its obligations to various creditors.

Management
Rapid advances in technology, coupled with the significant pressures on businesses from increased
competition due to forces of globalisation, have resulted in businesses flattening their structures.
This means there are fewer levels or management. Such businesses can adapt quickly to meet
changing consumer needs and market conditions because there are fewer managers who need to
approve decisions.

Business Culture
The values, ideas and expectations and beliefs shared by members of the organisation.
Values - business's basic beliefs, shared among its employees, e.g. honesty, hard work.
Symbols - events or objects used to represent something the business believes important, e.g.
employee development and loyalty through training and development programs.
Rituals, rites and celebrations - routine behaviour pattern, e.g. regular social gatherings.
Heroes - business's successful employees who reflect its values, and therefore act as an
example for others.




Stakeholders
Any group or individual who has an interest in or is affected by the activities of a business.

Business Growth and Decline
Business Life Cycle
The stages of growth and development a business can experience.

Stages of the Business Life Cycle
Establishment Stage
Main challenge is to get the business on a solid foundation by generating enough sales to
create a positive cash flow
Detailed planning can help greatly reduce the risk of failing
Small businesses, such as a sole trader or partnership, have unlimited liability

Growth Stage
Business has increased sales, a regular customer base, develops new products and improves it
cash flow
Complexity and responsibility - creates need for long-term planning
Growth or expansion can occur either through a merger or acquisition

Maturity Stage
Requires a more professional approach to planning
Business introduces a more formal organisational structure
Sales increase but at a slower rate; an early warning sign of possible decline

Post-Maturity Stage
Three possible outcomes: steady state, decline or renewal
Steady state: the business is neither declining nor expanding
Decline: fall in sales, cash flow and eventual business failure
Renewal: new products are developed and new markets are created, leading to increased
sales and a positive cash flow

Factors contributing to business decline
Business decline and failure is not generally caused by just one single factor, however the two main
issues are:
Lack of management expertise
Lack of sufficient money

Lack of Management Expertise
When a business either fails to prepare a business plan or fails to keep on modifying an existing plan
as the environment changes, the stage is set for imminent failure.
Businesses don't plan to fail, they fail to plan.

Lack of Sufficient Money
Many small businesses start out on a 'shoestring' budget. Without sufficient capital and a positive
cash flow the business will not be able to purchase stock and materials. This inevitably results in lost
sales and falling profits.

Undercapitalisation
Occurs when there is a lack of sufficient funds to operate a business normally.

Liquidation/Cessation
Liquidation occurs when an independent and suitably qualified person - the liquidator - is appointed
to take control of the business with the intention of selling all the company's assets in an orderly and
fair way in order to pay the creditors.

Voluntary cessation occurs when the owner ceases to operate the business of their own accord.

Involuntary cessation occurs when the owner is forced to cease trading by the creditors of the
business.

Creditors are those people or businesses who are owed money.

A company has two options when facing financial difficulties:
Voluntary administration occurs when an independent administrator is appointed to operate
the business in the hope of trading out of the present financial problems
Voluntary or involuntary liquidation is the process of an appointed liquidator converting the
business's assets into cash

Liquidation normally occurs because the company is insolvent. Being insolvent occurs when a
company is not able to pay its debts as and when they fall due.

It is estimated that an average 30 to 40 people are personally affected by one company insolvency.

Bankruptcy is a declaration that a business, or person, is unable to pay his or her debts.

Can be voluntary or involuntary
Either the business owner or a creditor applies to a court for a bankruptcy order to be made.
o The court appoints a representative to collect any money owed to the business.
This money, along with money raised from the sale of any assets of the business
(as well as some personal assets of the owner), is then between the creditors
The process of converting the assets of a business into cash is called realisation

Realisation is the process of converting the assets of a business into cash.

A company in liquidation can also be in receivership. Receivership is where a business has a receiver
take charge of the affairs of the business. Unlike liquidation, the business may not necessarily be
wound up.