Business Notes By Nicholas Cavasinni

Year 11 Business Studies Preliminary Course Check List

Topic 1- Nature of Business

Section 1.1: The Role of Business

1) What is a BUSINESS?
A BUSINESS is an organisation that produces goods or services that
people want.
-Businesses take Inputs and combine them in the process of the production of
goods and services. And through this process the business adds value to the
inputs, transforming them into Output of goods and services.
- People buy these goods and services to satisfy their wants and needs. By
selling these goods and services, businesses strive to make a PROFIT.

- However, not all businesses strive to make a profit. Some businesses, known
as nonprofit organizations, seek to provide support services for the community.

2) What is meant by the term PRIME FUNCTION?

The PRIME FUNCTION is the major activity or productive process of a
business. Assisted by support services (accounting/finance, marketing &
employment relations).

3) What are the social and economic roles of business?

Businesses have social and economic responsibilities to the nation to generate
wealth, create employment and improve the standard of living. Many also
produce profits and create a choice for consumers
Profit
Employment1
Incomes
Choice
Innovation, Entrepreneurship & Risk
Wealth
Quality of Life

4) What is meant by the term PROFIT and how does it differ from a
LOSS?
PROFIT is what remains after all business expenses have been deducted from
sales revenue.
When a businesss expenses are greater than its sales revenue, it is called a
LOSS.
Business Notes By Nicholas Cavasinni

5) What is the difference between a WAGE and a SALARY?

A WAGE is money received by workers, usually on a weekly basis, for services
they provide to an employer.
A salary, on the other hand, is a fixed amount of money paid on a regular basis
to a permanent employee of a business.

6) Explain how businesses improve peoples quality of life.

Quality of life refers to the overall wellbeing of an individual, and is a
combination of both material and non-material benefits.

Whilst we all might enjoy watching television, few of us have the knowledge to
build one. Business influences our quality of life by providing access to goods
(such as televisions) that we would not have the time, resources or knowledge to
make ourselves.

Section 1.2: Types of Businesses

1) What are the various ways of classifying a business?

A) Size
a. Large (200+, for manufacturing, 20+ for non-
manufacturing)
b. Small (20-100, for manufacturing, 0-20 for non-man)
c. Micro (1-5)
B) Location
Local (Small Geographic Area), National (Operates within
just one country), Global (Operates World Wide, More
Than One Country)
C) Industry
a. Primary Industry
Provide raw materials for other businesses. (i.e.
Mining, Forestry, Farming, Fishing)
b. Secondary Industry
Use the raw materials provided by primary industry.
(i.e. all manufacturing businesses)
c. Tertiary Industry
Provide services for the economy rather than
producing physical goods. (i.e. transport, storage and
distribution of goods, leisure and entertainment)
d. Quaternary Industry
Focus on the processing of information, and include
the information technology, telecommunications,
media and financial services industries.
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e. Quinary Industry
Those industries that focus on providing domestic
services, including home cleaning, take away food,
child care and nursing homes.

D) Legal Structure
a. Unincorporated Enterprises (
i. Sole Traders
ii. Partnerships
b. Incorporated Enterprises
i. Companies
1. Proprietary Limited Company
2. Public Company

2) What are QUATERNARY and QUINARY industries?

Quaternary Industry
o Those businesses which focus on the processing of
information, and include the information technology,
Business Notes By Nicholas Cavasinni

telecommunications, media and financial services

industries.
Quinary Industry
o Those industries that focus on providing domestic
services, including home cleaning, take away food,
child care and nursing homes.

3) What is the difference between an incorporated and an unincorporated

business? Give an example of each.
Being incorporated means that a business is officially registered
as a company and is subject to the requirements of the
Corporations Law. Once a business has been incorporated, it
becomes a legal entity in its own right, quite distinct from its
owners.

4) What are the advantages and disadvantages of SOLE TRADERS?

SOLE TRADER business is owned and operated by a single person.

Advantages
Owner is his/her own boss
Owner is responsible for all the decisions made which
concern the business
All profits belong to the owner
Owner may offset business losses against other income
It is an inexpensive business structure to establish and
maintain, with less responsibility to the government

Disadvantages
Owner must bear all the losses of the business
Owner needs to wear many hats
Owner is personally liable for debts (UNLIMITED
LIABILITY), which means personal assets may be at risk
Owner is responsible for the business and therefore might
not be able to take a holiday because no one else has the
expertise

5) What are the advantages and disadvantages of PARTNERSHIPS?

A PARTNERSHIP exists where more than one person carries on a
business together, sharing the profits.
Advantages
The responsibility for running the business is shared
Business Notes By Nicholas Cavasinni

Establishment costs are low compared with setting up a

company
Taxation obligations may be minimised
Each partner is able to specialise in one area of business
The ability to raise finance for the business is enhanced, by
the business being able to take on more partners

Disadvantages
The partners have unlimited liability
The availability of capital is restricted
No one person has complete control
Profits are shared amongst more individuals
If one partner incurs any debts or dies, the other partners are
left with the liabilities
6) What are the advantages and disadvantages of a Proprietary Limited
Company?
It has the words Pty Ltd after its name, indicating that it is private and
the shareholders have LIMITED LIABILITY.

Advantages
Shareholders liability is limited to the amount of shares that
they own
Shares can be sold without disrupting the operations of the
company
It is easier to increase ownership of the company
Perpetual succession means that the business does not need
to be wound up in the event of the death or replacement of
the directors

Disadvantages
Shares cannot be offered to the public
The company must lodge a return with ASIC for each
financial year
Establishment costs are high in comparison with sole traders
Lenders will often seek personal guarantees from directors
before making a loan to the company

7) What are the factors that influence choice of Legal Structure?

A) Size
Business Notes By Nicholas Cavasinni

One of the most important factors in determining what legal structure a business
should adopt is the size of the business. In their earliest stages, business often
start out with an unincorporated structure: sole trader ship or a partnership. This
is the easiest and cheapest way to get established. As the business expands and
more money is at risk, many owners opt to establish a company. This gives
them the important benefit of limited liability and, sometimes, greater access
to finance.
B) Ownership
Businesses whose main aim is to cater to specific community needs, such as a
local sports club, may choose a structure that will make it easier for people to
move in and out of business ownership, such as through a membership
structure rather than through shareholdings.

Business owners also place a high priority on the freedom of being self-
employed having substantial (if not complete) control over their working life
and not having to report to someone else. The prospect of having this freedom
weakened through a partnership or an incorporated structure where there are
other business owners can be unattractive.

C) Finance
Most businesses begin with very limited access to investment capital,
normally relying on the personal resources of the business owner or owners. As
the business develops and its need for finance grows, a company structure may
become more appropriate. This is suitable if there are several owners in the
business and this structure can maximise access to capital by attracting
shareholders to the company as part-owners.

If a business has plans for significant expansion, and needs access to millions of
dollars, its best option is to become a public company. Becoming a public
company offers major financial advantages, but it also has a downside. It is an
expensive option, involving significant legal and accounting fees and possibly
resulting in the original owner losing control over the business to other
investors.

Section 1.3: Types of Businesses

1) What is the BUSINESS ENVIRONMENT?

The business environment is the factors which affect business, including laws,
regulations, actions of competing businesses, changes in consumer tastes, new
technologies and changes in economic conditions.
Business Notes By Nicholas Cavasinni

Internal business environment is the factors that can impact the operation of
the performance of a business where the business has control. This includes
products, location, resources, management an business culture.
External business environment is the factors that can impact the operation of
the performance of a business where the business does not have control.

2) Using examples, differentiate between the internal and external business

environment.
General Factors
Economic conditions
Consumer attitudes
Technological developments
Legal and regulatory changes

Specific Factors
Cost of inputs
Availability of inputs
New substitute products
New competitors

3) How do economic and social factors impact on business?

Although the economy grows virtually every year, the rate of growth is not
smooth. Instead, it tends to follow a cyclical pattern. Economies generally go
through a cycle of accelerating growth, a boom, a sharp slowdown (recession),
and then recovery and growth. This pattern is known as the BUSINESS or
ECONOMIC CYCLE. An economic cycle has been depicted in the figure
below. The figure below summarises the factors that affect business
performance.

Changes in social attitudes can have a marked influence on a business. The

attitudes of customers towards a particular business or product are a large
determinant of a businesss success.
Business Notes By Nicholas Cavasinni

As social attitudes change, products will go out of fashion and their popularity
will decline, leading to lower business profits. Managers must be aware of
emerging social trends and how these will affect the success of existing and
planned products. A business can often create a competitive advantage for
itself by predicting changes in social trends and changing their production
accordingly.

4) How can the competitive situation impact upon business?

The conduct of competitors is a vitally important part of the external
environment for businesses. If a business chooses to enter a highly competitive
market, it is essential for it to differentiate itself from competitors and find
strategies which attract and sustain competitors. To do this, the firm must
understand the behaviour of its competitors and the nature of the industry in
which it operates.

Number of Competitors
MARKET CONCENTRATION is the term used to describe the number and
size of firms in an industry.
Where businesses operate in markets with a high degree of concentration (few
competitors) there is often a price maker which is usually a dominant firm in
the market. It is likely to have more control over its pricing and may not need to
discount. Although there are a number of key industries where there is market
concentration, recent government policy has been to promote competition.
Bodies such as the Australian Competition and Consumer Commission
(ACCC) investigate situations where businesses operate in such a way as to
stifle competition.

Ease of Entry
Often markets that are quite difficult to enter are characterized by large outlays
of capital equipment and facilities. Only businesses that are prepared and
capable of outlaying large sums of money are able to penetrate these markets.

Local and Foreign Competitors

Even if a company faces few Australian competitors, it must be mindful of

overseas competition. The rapid growth of trade, developments in information
and communication technologies and reductions in trade barriers have created a
global marketplace in which few companies can ignore their overseas
competitors. In this highly competitive environment, businesses must price their
goods and services with an eye towards the threat of overseas competitors.
Business Notes By Nicholas Cavasinni

Marketing Strategies

A business needs to take account of its competitors marketing strategies in its

efforts to reach customers and sustain customer relationships. In some
situations, a business may need to adopt alternative approaches to reach
customers if consumers are already likely to have been saturated with other
marketing efforts.

Substitutes

If a customer can easily switch to a competitors product, and the product is

very similar, it will be necessary to do more to make the product stand out from
the rest of the market. This is done by changing features of the product or
developing a different branding through packaging and advertising. If customers
are likely to find products almost identical, a business is likely to need a greater
focus on building brand loyalty.
5) How does the government impact on business?

Governments play a major role in influencing the climate for businesses.

They can influence the economic environment,

the legal environment
the financial environment mainly through the taxation system.

Governments can also have a more direct influence on an individual industry

through assistance packages and specific programs such as those to assist
exporters. Governments move in cycles. It is uncommon for a political party in
Australia to remain in power for more than three consecutive terms (12 years).
Each party will have its own objectives for businesses, and will create
legislation or policies to influence business in varying ways.

6) List those influences which can be controlled by the business

owner/manager.
Products
Location
Resources
Management
Business Culture

7) What is a STAKEHOLDER?
Business Notes By Nicholas Cavasinni

A STAKEHOLDER in a business is an individual or another business with a

vested interest or concern in the operations of a business or organisation.
Stakeholders include:
Customers
Employees
Owners or Shareholders
Suppliers
Creditors or Financiers
Governments
Society
Physical Environment and Future Generations

8) Identify the following stakeholders: CEO/SCG/SPEFG

CEO: Chief Executive Officer

Section 1.4: Business Growth and Decline

1) Using a diagram, identify the four distinct stages in the BUSINESS

LIFE CYCLE.

2) Outline the key elements that characterise each stage.

Establishment
The establishment stage is where the business entrepreneurial idea is created.
What is the most appropriate legal structure for the
business?
Who is going to provide the finance?
Where is the right location for the business?
Business Notes By Nicholas Cavasinni

What government regulations must be adhered to?

What type of staff will the business employ?

Growth
Once a business has survived its establishment stage, it moves on to a period of
rapid growth.

Customer awareness of the business and what it

offers increases.
Business OPERATIONS generally improve resulting
in cost savings.
Increased sales may also result in ECONOMIES OF
SCALE.
DISTRIBUTION CHANNELS & MARKETING
are often refined.
The business benefits from better management
having learnt from earlier mistakes.
It becomes easier to obtain finance.

Maturity

The owner may be content with the size of the

business
The owner may not wish to take the risks that he/she
used to.
The management may have run out of ideas.
The overall growth in demand may have slowed with
the emergence of numerous competitors

Post-Maturity
A short period of time after the business reaches its peak, its sales can either
stay where they are, or show a growth or decline. This can happen rapidly or
over a long period of time.

3) What are the three directions a business that is in POST-MATURITY

can head?
Post-Maturity
1) Steady State

Sales levels are maintained and the business remains profitable without any
significant changes to the overall business strategy.
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2) Renewal

The business takes off and expands again. This expansion might be fuelled by
the introduction of new products, a takeover or merger, or expansion into new
markets (such as new markets for the products overseas).

3) Decline/Cessation

The business may lose its competitive advantage or its product may become
obsolete. Profits may decline steadily, finally reaching a point where the
business is no longer viable.

4) Outline at least three challenges that businesses face at each stage.

Establishment
High costs associated with the setup of the business.
Difficulties in obtaining the necessary funds for the
business.
Slow growth in sales putting pressure on cash flow.
Difficulties in attracting staff with appropriate skills.
High costs associated with the promotion of the
business.

Growth
Ensuring the quality of service or production is
maintained as output grows.
Developing appropriate accounting and financial
information systems which provide management
with detail about the business.
Managing the cash flow and being aware of the
financial requirements involved in expanding the
business.
Sustaining growth and not letting the successes of the
business create a sense of self-satisfaction or laziness.
Business Notes By Nicholas Cavasinni

Redefining the role of management so that the

managers workload is not overwhelming.
Recruiting new employees and delegating
responsibility.

Maturity
Staying responsive to changes in consumer
demands.

Identifying opportunities for innovation in products

and services.

Rationalizing business operations and minimizing

costs.

Sustaining the motivation of management and staff

and avoiding laziness and complacency.

Post-Maturity

Understanding the changing tastes and needs of the

customer base.

Shifting into new or related markets where there are

greater growth opportunities.

Orienting the management and staff towards

change.

5) What is the difference between VOLUNTARY and INVOLUNTARY

cessation?

Voluntary cessation IS NOT considered to be a business failure.

Example: Owners wish to get out, whether it be for retirement or so that
they can redeploy their investment funds elsewhere.

Involuntary cessation IS considered to be a business failure.

Business may have been forced to close its doors because of its
inability to pay its debts.

6) List three internal and three external reasons for business failure.
Internal:
Lack of management knowledge and skills
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Inadequate planning
Lack of adequate cash flow and finance
Incorrect location
Unable to service excessive debt
Death or illness of a key individual

External:
Although these are beyond the control of a business, careful planning can
minimize the impact.
Government policies
Unexpected competition
Natural disasters