1 Starting A Business

Unit 1: Planning and financing a business Starting a business
Chapter 1
Enterprise
Key terms
enterprise: the process by which new businesses are formed and new products and services are created and brought to the market. enterprise skills: skills that allow an individual or organisation to respond
effectively to changing market situations, including: problem-solving skills, the ability to think and act innovatively and creatively, risk management and
risk-taking skills and a can-do-attitude. entrepreneurs: individuals who have an idea that they develop by setting up a new business and encouraging it to grow. They take the risk and the subsequent profits
that come with success or the losses that come with failure.
The characteristics of successful entrepreneurs

From your knowledge of very successful entrepreneurs, try to identify some common characteristics that they all share. Does your list include any of the following? determination and persistence passion the ability to spot and take advantage of opportunities relevant skills and expertise vision, creativity and innovation motivation to succeed and not be daunted by failure willingness to take risks possibly the most important quality of an entrepreneur
The importance of risk

Is it ever worth taking a risk? In the UK, people tend to be risk averse, with over one-third of people surveyed in
the Global Entrepreneurship Monitor in 2006 saying that they are afraid of failure. As the majority of new businesses fail, such fears are well placed.
However, the ability to evaluate the risks and uncertainty is an integral part of almost all business decisions and an important element of successful entrepreneurship.
The notion of opportunity cost

Opportunity cost is the real cost of taking a particular action or the next best alternative forgone, i.e. the next best thing that could have been chosen but was not.
Suggest examples of opportunity cost from the point of view of you

as a student, your school/college and a business.
Motives for becoming an entrepreneur

What do you think are the main motives for becoming an entrepreneur? Check your ideas against the following list:
some to gain more freedom at work most to make money

some to sustain a going concern, such as a family business some to provide employment for the local community, sometimes in the form of social enterprises
Government support for enterprise and entrepreneurs (1)

Brainstorm what type of support the government offers to business start-ups. Check your ideas against the following list:
reducing business taxes and trying to establish and maintain a modern and competitive business tax system
reducing the regulatory burden on enterprises reducing barriers to raising finance for small businesses improving the support for small and new businesses promoting a change in the UKs enterprise culture encouraging business start-ups in economically deprived regions of the UK introducing legislation to promote competition
Government support for enterprise and entrepreneurs (2)

funding projects to raise awareness of enterprise among under-represented groups of people and reviewing how to encourage unemployed people to move into self-employment giving financial support to voluntary and not-for-profit organisations that are carrying out excellent work
Enterprise education
The government believes that equipping young people with vital skills is a way of securing the future economic success of the UK. Since September 2005, all Key Stage 4 students have had an entitlement to the equivalent of 5 days activity each year to develop their enterprise capability. In its budget of April 2007, the government announced further funding of 180 million over the next 3 years to encourage this development in schools. Working in groups, discuss how valuable the enterprise education you have received has been in developing your entrepreneurial skills. Share your conclusions with the rest of the class.
Discussion questions (1)

Work in small groups. Each group is allocated one of the following questions. Use the information and case studies in Chapter 1 and other resources available to produce a short report on the topic. Share the main points with the rest of the class and respond to any comments or feedback from the class. 1 To what extent is passion and determination sufficient for business success? 2 Are there certain characteristics that all successful entrepreneurs have?
3 What appear to be the main reasons for becoming an entrepreneur?

4 Is the ability to cope with uncertainty, make mistakes and take risks an essential characteristic of a successful entrepreneur? Illustrate your answer with actual examples.
Discussion questions (2)

5 Should the government provide more money to support start-up businesses? If so, how might it judge which entrepreneurs or businesses to support?
6 Can government agencies ever be really effective in providing advice for entrepreneurs?
Chapter 2
Generating and protecting business ideas
Sources of business ideas

Research suggests there are four major sources of ideas for entrepreneurs: Spotting trends and anticipating their impact on peoples lives. (Innocent smoothie drinks tapped into the growing desire for healthier lifestyles.) Noticing something that is missing from the market or that can be improved on, i.e. identifying a market niche. (Bigger Feet Ltd identified a gap in the market for people with big shoes.) Copying ideas from other countries. (Howard Schultz of Starbucks did not invent the espresso coffee machine or the coffee bar, but he saw the coffee bar culture in Italy and thought that it could be introduced in the USA.) Taking a scientific approach and inventing original new products. (James Dyson developed the Dyson carpet cleaner through technical research.) Can you suggest other sources of ideas and/or other examples of businesses to illustrate these sources of ideas?
Franchising (1)
Franchising is when a business (the franchisor) gives the right to supply its product or service to another business (the franchisee).
Operation of a franchise
The most common franchise arrangement is a business format franchise. It has the following characteristics: The owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea often in a specific geographical area. The franchisee sells the franchisors products or services, trades under the franchisors trademark or trade name and benefits from the franchisors help and support.
Franchising (2)
The franchisee pays an initial fee to the franchisor and then a percentage royalty on sales. The franchisee owns the outlet he/she runs, but the franchisor keeps control of how products and services are marketed and sold, and how its business idea is used. Identify the franchise businesses you are aware of. In pairs or small groups, investigate the benefits of operating as a franchise and the possible pitfalls of operating as a franchise. Share your findings with the rest of the class to come up with a summary of all the main benefits and possible pitfalls of operating as a franchise.
Protecting a business idea: information

Business ideas can be protected by using copyright, patents and trademarks. copyright: legal protection against copying for authors, composers and artists. patent: an official document granting the holder the right to be the only user or producer of a newly invented product or process for a specified period. trade mark: signs, logos, symbols or words displayed on a companys products or advertising, including sounds, which distinguish its brands from those of its competitors. intellectual property includes the business name, its logo, designs and inventions all of those aspects covered by copyright, patents and trade marks. All businesses have some form of intellectual property, which is likely to be a valuable asset that can: set the business apart from competitors be sold or licensed, forming an important source of income offer customers something new and different form an essential part of marketing or branding
Protecting a business idea: activities (1)

Copyright
In general, copyright protection for literary, dramatic, musical and artistic works lasts until 70 years after the death of the creator, but copyright in sound recordings, broadcasts and cable programmes lasts 50 years. To what extent is this difference in copyright protection time reasonable? (Refer to the fact file on p. 19 of the textbook for further details.)
Trademarks
Trademarks act as powerful marketing tools, helping customers recognise the products of a business and distinguishing them from those of competitors. Identify as many trademarks as you can.
Protecting a business idea: activities (2)

Patents
In small groups, explore the issues involved in obtaining and holding patents. In particular, consider each of the following issues:
why holding a patent might be helpful to a business

why small firms might wish to sell their patents to larger firms in what sense patents are barriers to entry, protecting businesses from possible competitors entering the market Share your views with the rest of the class.
Chapter 3
Transforming resources into goods and services
Factors of production: key terms

resources (inputs): the elements that go into producing goods and services. factors of production: the resources used to convert inputs into outputs, classified into four distinct elements land, labour, capital and enterprise.
land: natural resources that can be used for production.

labour: the physical and mental effort involved in production. capital: goods that are made in order to produce other goods and services. enterprise: the act of bringing together the other factors of production to create
goods and services. It involves making decisions and taking financial risk.
Factors of production: examples

In small groups, find five different examples of: land labour capital Each group should aim to come up with examples that show the most variety and breadth, using labour and capital in particular, in their widest sense.
Enterprise
The key entrepreneurial functions are: decision making risk taking
Using your knowledge of one small and one large organisation, give examples
of each entrepreneurial function. Are both functions carried out by the same person in the small organisation? Are both functions carried out by the same person in the large organisation?
Is enterprise a separate factor of production, or is it just a case of someone providing skilled labour alongside capital?
Improving the efficiency of the factors of production

Greater efficiency means that a factor of production can produce more goods and services than before. In small groups, identify four different ways in which the factors of production
could be made more efficient. You could make one suggestion for each factor of production.
Do your suggestions include any of the following? improving the fertility of land using renewable or recyclable resources
greater education and training of labour increasing the use of machinery

encouraging people to take risks combining the factors of production in a balanced way extending the overall scale of production
Production (1)
production: the process whereby resources (factors of production) are converted into a form that is intended to satisfy the requirements of potential customers. The output of the production process may be a service (e.g. a haircut) or a finished good (e.g. a toy). transformation process: the conversion of a firms inputs into outputs that reach the customer.
The transformation process
Production (2)
Describe the transformation process for: a haircut a childs toy
What factors of production are needed in each case?

Are any inputs changed in the production process?
Classifying outputs: the structure of industry

Production is classified into three different sectors: primary sector: those organisations involved in extracting raw materials secondary (manufacturing) sector: those organisations involved in processing or refining raw materials from the primary sector into finished or semi-finished products tertiary sector: those organisations involved in providing services Give three examples of businesses in the primary sector.
Give three examples of businesses in the secondary sector.

Give three examples of businesses in the tertiary sector.
Adding value
Adding value is the process of increasing the worth of resources by modifying them. It can be calculated by the following formula: added value = sales revenue the cost of bought-in materials, components and services Example: selling price = 50 cost of materials and components = 15 cost of bought-in services = 12
value added = 50 (15 + 12) = 50 27 = 23

Discussion: why does the government use value added to measure the output of a business and not the sales revenue from its finished products?
How to add value

Four examples of ways in which value can be added are: the transformation process selection of the most efficient factors of production and combining them effectively marketing customer service In small groups, provide examples of products that have achieved added value in each of the above ways.
Added value: follow-up activity

Each of you should bring one product into the lesson. In small groups, discuss which of the products in your group has created the highest added value and which has created the lowest added value.
Each group should then explain to the whole class the reasons why its
products have created the highest and lowest added value. The class should then vote on which product has created the greatest added value the lowest added value
Discussion: how do businesses add value?
Chapter 4
Developing business plans
Business plans
business plan: a report describing the marketing strategy, operational issues and financial implications of a business start-up.
Purpose and benefits of a business plan

The purpose of a business plan is to improve the likelihood of success of a business by: helping to clarify objectives and identify what needs to be done to meet them persuading lenders to invest capital in the business being used as a valuable tool to help in the running of the business
Potential problems of a business plan

To be a valuable tool and a persuasive document, a business plan needs to be accurate and realistic. Poor plans tend to: underestimate how much it will cost to get the business off the ground, hence operating costs turn out to be more than the amount budgeted for make assumptions about the size of the market without any supporting market research evidence, or are vague about identifying competitors, their products and price are overly optimistic in their sales forecasts and unrealistic about when payments can be expected As a result, lenders/investors are more difficult to find, cash-flow problems are more likely to result, and the business may take longer to break even or may never achieve it.
The content of a business plan

details about the business and its owners, managers and staff objectives of the business marketing plan production plan details of fixed assets sales and cash-flow forecast and projected profit and loss account and balance sheet details of the finance needed from the lender or investor and the collateral to be
offered brief account of the long-term forecasts and plans of the business
SWOT analysis In groups, explore precisely what information would be required under one or more of the above headings and share your findings with the rest of the class.
Sources of information and guidance (1)

Small business advisory services including: Business Link local enterprise agencies chambers of commerce local trade associations the Princes Trust PRIME (the Princes Initiative for Mature Enterprise) Accountants and bank managers provide advice and guidance on how to manage a business financially and when and how to obtain finance, both at the start-up stage and later when the business wants to expand.
Sources of information and guidance (2)

Explore the website of Business Link (www.businesslink.gov.uk) and the Princes Trust (www.princes-trust.org.uk) and discover what advice they provide on business planning.
Use this information and that in your textbook to compile a brief guide to business planning for a new start-up business. The guide should be in the
form of a leaflet (e.g. a sheet of A4, folded in half to give four A5 sides) that summarises the purposes, benefits and recommended content of a business plan.
Chapter 5
Conducting start-up market research
Marketing
marketing: the process of anticipating and satisfying customers wants in a way that delights the customer and also meets the needs of the organisation. What are the key features of this definition of marketing? Marketing is about: anticipating customers wants satisfying customers wants delighting customers meeting the needs of the organisation
Market research
market research: the systematic and objective collection, analysis and evaluation of information that is intended to assist the marketing process. What are the key features of this definition of market research? Market research is about: systematic collection objective collection analysis and evaluation of information assisting the marketing process
Types of market research

Market research is classified in two ways, according to: how the data are collected (primary or secondary) the content of the data (quantitative or qualitative)
How data are collected

primary market research: the collection of information first-hand for a specific purpose. secondary market research: the use of information that has already
been collected for a different purpose.
Methods of conducting primary research

experiment observation focus groups surveys personal interviews surveys postal surveys surveys telephone interviews internet surveys test marketing
In small groups, draw up lists of the advantages and disadvantages of two methods of conducting primary research. Provide examples of market research that a business might carry out and that
are best suited to the two methods of primary research you have selected.
After the lesson, check these arguments with the textbook.
Secondary market research

Working in pairs, produce a list of different sources of secondary market research. Agree a class summary of the most useful sources of secondary market
research.
Summarise two benefits and two problems of secondary market research in general, when compared to primary market research. After the lesson, check these arguments with the textbook.
Quantitative and qualitative market research

Market research can be classified according to its content: qualitative market research: the collection of information about the market based on subjective factors such as opinions and reasons.
quantitative market research: the collection of information about the market

based on numbers.
Choosing between quantitative and qualitative market research (1)

Would you choose quantitative or qualitative market research in these situations? 1 You wish to predict future sales levels.
2 You want to know why people like your product.

3 You want to know your market share. 4 You want to know if your product will appeal to male teenagers. 5 You want to know whether customers like your packaging.
6 You want to compare your performance with a competitor.
Choosing between quantitative and qualitative market research (2)

Answers
1 You wish to predict future sales levels. 2 You want to know why people like your product. 3 You want to know your market share. 4 You want to know if your product will appeal to male teenagers. 5 You want to know whether customers like your packaging. 6 You want to compare your performance with a competitor. QUANTITATIVE QUALITATIVE QUANTITATIVE QUALITATIVE QUALITATIVE QUANTITATIVE
Sampling
sample: a group of respondents or factors whose views or behaviour should be representative of the target market as a whole
Methods of sampling
random sample: a group of respondents in which each member of the target population has an equal chance of being chosen. quota sample: a group of respondents comprising several different segments, each sharing a common feature (e.g. age, gender). The number of interviewees in each
classification is fixed to reflect their percentage in the total target population; they are selected non-randomly by the interviewer.
stratified sample: a group of respondents are selected according to particular features (e.g. age, gender). The final selection is chosen specifically, but not by the interviewer.
Factors influencing the choice of sampling methods

In small groups, identify four different factors that might influence the size of the sample and/or the sampling method chosen by a firm. Give the reasons for your choices.
Did you choose any of the following?

costs and the availability of finance time the attitudes of different market segments/sections whether the business is targeting a specific group of customers the firms understanding of its customer base
Sampling methods: follow-up activity

Select a piece of primary market research that you wish to conduct and complete the following tasks: Identify the questions that you will ask. Identify any secondary market research you might also use. Indicate the size of your sample. Identify what method of sampling you will use and whom you will ask. Identify three reasons why your survey results may be unreliable.
Chapter 6
Understanding markets
Markets
A market is a place where buyers and sellers come together.
Geographical classification
local markets regional markets national markets
Other classification
physical markets non-physical markets Give one example of each of these five types of market. For each of the five examples, identify one benefit to the seller from operating in that market.
The importance of demand

demand: the amount of a product or service that consumers are willing and able to buy at any given price over a period of time. In pairs or sets of three, select one example of a good or service. In your pair or group, produce a list of factors that might influence the level of demand for the chosen good or service. Each group should provide at least six factors. Now, as a whole class, discuss and agree six factors that have the most influence on demand for products and services. Compare your list of factors with those listed on the next slide.
Main factors influencing demand

The key factors vary between different products and services, but certain general factors influence the demand for most products. Compare the list compiled in the last activity with the following list of widely agreed factors that influence demand. price of the product or service income and wealth of customers tastes and fashion seasonal factors price of other goods substitutes Try to find a product where all or most of these factors are relevant. Provide an assessment of the importance of these factors for that product. price of other goods complements demographic factors marketing and advertising government action
Market segmentation
market segmentation: the classification of customers or potential customers into groups or subgroups (market segments), each of which responds differently to different products or marketing approaches.
Identify one example of a type of market segmentation.

Explain, using this example, how important this market segment might be to a particular product. In small groups, identify four other examples of market segmentation. Provide examples of products that would appeal to each of those market segments.
Market segmentation: AQA examples

The AQA AS business studies specification requires an understanding of the following types of market segmentation: age gender social class geographic If any of these factors have not been covered already, provide an example of a product to which they apply. Use the textbook to research other types of market segmentation, if they have not been covered already.
Benefits of market segmentation

Market segmentation can help a firm: to increase market share to develop new products to extend products into new markets to identify ways of marketing a product
Problems with market segmentation

Market segmentation may involve the following problems: difficulty in identifying the most important segments for the product knowing how to reach the chosen segment with the firms marketing recognising changes in the segments interested in the product failing to meet the needs of customers not included in the chosen segment
Market size, growth and share: definitions

market size: the volume of sales of a product (e.g. the number of computers sold) or the value of sales of a product (e.g. the total revenue from computer sales). market growth: the percentage change in sales (volume or value) over a period of
time.
market share: the percentage or proportion of the total sales of a product or service achieved by a firm or a specific brand of a product. Market share is usually measured as a percentage, calculated by the formula: market share = sales of one product or brand or company 100 total sales in the market
Market size, growth and share: calculations (1)

Use the following data to complete the calculations on the next slide.
Market data
Number of oojamiflips Average price of oojamiflips Sales value of oojamiflips
2007
100,000 5
2008
105,000 5
Company X data
Number of oojamiflips sold Average price of oojamiflips Sales value of oojamiflips
2007
25,000 7 175,000
2008
35,000 6 210,000
Market size, growth and share: calculations (2)

1 Indicate the market size of oojamiflips by volume in 2007 and 2008. 2 Calculate the market size of oojamiflips by value in 2007 and 2008. 3 Calculate the percentage increase in the market size of oojamiflips between 2007 and 2008. 4 Calculate company Xs market share by volume in 2007. 5 Calculate company Xs market share by value in 2007. 6 Calculate company Xs market share by volume in 2008. 7 Calculate company Xs market share by value in 2008. 8 Explain the reasons for the differences between the four answers in questions 47.
Market size, growth and share: answers to calculations (1)

1 2007 = 100,000 oojamiflips 3 525,000 500,000 x 100 500,000 4 25,000 x 100 100,000 5 175,000 x 100 = 35% 33.3% = 40% = 25% 2008 = 105,000 oojamiflips = 25,000 x 100 500,000 = 5% 2 2007 = 100,000 x 5 = 500,000 2008 = 105,000 x 5 = 525,000
500,000
6 35,000 x 100 105,000 7 210,000 x 100 =
525,000
Market size, growth and share: answers to calculations (2)

8 Company X is able to sell its oojamiflips at a higher price than the market average, so in both years, its market share by value is higher than its market share by volume. In 2008, it was able to increase its price at a time when the market price was stagnant and yet still gain extra sales at the expense of its competitors. This suggests that the market is becoming more attracted to Company Xs high-quality version of the product.
Understanding markets: follow-up activity

Investigate a specific product and answer the following questions. If possible, try to find the market leader for this product, i.e. the company with the largest market share.
1 In which type of market is it normally sold?

2 Why is it normally sold in this type of market? 3 What are the main factors influencing the demand for this product? 4 Identify three main market segments to which it appeals. Justify your choices.
Chapter 7
Choosing the right legal structure for the business
Legal structures of businesses in the private sector
Business classifications
Unincorporated and incorporated businesses
In an unincorporated business, there is no distinction in law between the individual owner and the business itself. The identity of the business and the
owner is the same. Such businesses tend to be sole traders or partnerships. In an incorporated business, the business has a legal identity that is separate
from the individual owners. As a result, these organisations can own assets, owe money and enter into contracts in their own right. Such businesses include private limited companies and public limited companies.
Limited and unlimited liability

Unlimited liability is a situation in which the owners of a business are liable for all the debts that the business may incur. Limited liability is a situation in which the liability of the owners of a business is limited to the fully paid-up value of the share capital.
Types of legal structure (1)

A sole trader is a business owned by one person. The owner may operate on his or her own or may employ other people. The business is unincorporated and liability is unlimited.
A partnership is a form of business in which two or more people operate for the common goal of making a profit. In a general partnership, the business is
unincorporated and liability is unlimited. A private limited company is a small to medium-sized business, usually run by the family or the small group of individuals who own it. Its shares cannot be sold
without the agreement of the other shareholders. It must have Ltd after the company name.
Types of legal structure (2)

A public limited company is a business with limited liability, share capital of over 50,000, at least two shareholders, two directors and a qualified company secretary, and usually a wide spread of shareholders. Its shares are traded on the Stock Exchange. It must have plc after the company name. Divide into groups. Depending on the number of groups, each group should investigate the advantages and/or disadvantages of one type of business structure. Try to identify particular businesses that represent the points you make. Share your findings with the rest of the class so that everyone is aware of the advantages and disadvantages of each type of business structure.
Public and private companies

The number of public limited companies on the London Stock Exchange declined sharply from almost 1,600 in 1997 to fewer than 1,000 in 2007. Fewer than 10% of the companies that ceased trading as public limited companies suffered financial failure. Many simply reverted back to being private limited companies. Well-known companies that have done this include Debenhams, Arcadia, Selfridges, Harvey Nichols, Hamleys, New Look, Fitness First, Cannons, Esporta and Pizza Express. Using your textbooks and other sources of information such as the internet, explore the possible reasons for such high profile companies becoming private limited companies.
Not-for-profit organisations
Not-for-profit organisations are increasingly known as the third sector (i.e. the noncommercial or public sector). They generally share the following characteristics: They are non-governmental organisations. A governing body is responsible for managing their affairs. They are value driven and have social, environmental, community, welfare or cultural aims and objectives. They are usually established for purposes other than financial gain. Any profits or surpluses are reinvested in the organisation to further its objectives.
Many use volunteer staff in addition to paid employees.

Some may make a profit, but their objective is not to maximise profit for shareholders and owners. They can operate under a number of different legal structures, including charities, trusts and companies limited by guarantee.
Not-for-profit organisation activity

In groups, research one example of an organisation in the not-for-profit sector. Establish how well the previous characteristics fit your chosen organisation and, if it does trade and make a profit, how this profit is used. Share your examples with the rest of the class.
Chapter 8
Raising finance
Raising finance for a business start-up

If you wanted to start a business, from where might you get finance? Compare your suggestions with the list of sources required by the AQA AS business studies specification. ordinary share capital venture capital personal sources bank loans bank overdrafts Note that this list only applies to a start-up a business that does not yet exist and which will operate on a small-scale. Other sources of finance will be accepted if they are relevant.
Methods of raising finance

In small groups, research one of the sources of finance given on the previous slide. Share your findings by giving a presentation to the rest of the class.
Your research should include the following pieces of information: a definition and description of the method of raising finance
the main advantages of the type of finance the main disadvantages of the type of finance an example of what it might be used for
The following 10 slides are a checklist of key points that should appear in the
presentations.
Ordinary share capital (1)

ordinary share capital: money given to a company by shareholders in return for a share certificate, which gives them part ownership of the company and entitles them to a share of the profits.
Advantages of ordinary share capital

Limited liability. It is not necessary to pay shareholders a dividend if the business cannot afford it. Bringing new shareholders into a small business often means that further expertise is brought into the business. Increasing ordinary share capital can make it easier to borrow more funds from a bank as the share capital can purchase assets that can be used as collateral. Ordinary share capital is permanent it is not repaid.
Ordinary share capital (2)

Disadvantages of ordinary share capital
In profitable years, ordinary shareholders will expect high dividends. The original aims of the business may be lost. As the business grows, the percentage shareholding of the original owner(s) will probably decline. This can ultimately lead to a smaller share of the profit and even a loss of control of the business.
Venture capital
venture capital: finance that is provided to small or medium-sized firms that seek growth, but which may be considered risky by typical share buyers or other lenders.
Advantages of venture capital

It is useful for high-risk firms that are unable to get finance. Venture capitalists will sometimes allow interest or dividends to be delayed. Venture capitalists will often provide advice too.
Disadvantages of venture capital

Venture capitalists will often want a significant share of the business.
In return for the high risks, venture capitalists will often want high interest payments or dividends. It is possible that venture capitalists will exert too much influence, so the original owner may lose his/her independence.
Personal sources (1)

personal sources of finance: money that is provided by the owner or owners of the business from their own savings or personal wealth. For small business start-ups, such as sole traders or partnerships, this is often the
most practical way of raising finance for a new business, particularly if the owner has no previous experience of running a business and is therefore unlikely to be able to
get a loan. The main personal sources are: personal savings
a mortgage borrowing from friends and family

selling private assets
Personal sources (2)

Advantages of personal sources
They are generally cheaper than other sources. They allow the owner to keep control. They may be the only option possible.
Disadvantages of personal sources

They can cause family tensions. There may be insufficient funds available. They may cause stress for the entrepreneur.
Bank loans (1)

bank loan: a sum of money provided to a firm or an individual by a bank for a specific, agreed purpose.
Advantages of bank loans

The interest rate and thus the repayments are fixed in advance, making it easy to budget the schedule for repayments. Interest rates are normally lower because of the security provided. The size of the loan and the period of repayment can be arranged to match the exact needs of the firm.
Bank loans (2)

Disadvantages of bank loans
The size of the loan may be limited by the amount of collateral that can be provided rather than by the amount of money needed by the business. There is less flexibility in a bank loan, so the business will tend to pay interest for the agreed period, even if it gets into a position where it can pay off the loan early. It is more expensive than alternatives such as personal finance.
Bank overdrafts
bank overdraft: when a bank allows an individual or organisation to overspend on a current account held with the bank up to an agreed (overdraft) limit and for a stated time period.
Advantages of bank overdrafts

They are extremely flexible and can even be used for a single day if the business has a temporary cash-flow problem. Interest is only paid on the amount of the overdraft being used rather than the maximum level allowed. Bank overdrafts are particularly useful to seasonal businesses, which are likely to experience some cash-flow problems at certain times of the year. Security is not usually required.
Disadvantages of bank overdrafts

The interest rate charged is usually higher than for a loan. Banks can demand immediate repayment (although this is rare).
Capital expenditure and revenue expenditure

When considering sources of finance, the most critical factor is the length of time for which the finance is needed. Finance is used to fund: Capital expenditure. This is spending on items that can be used time and time again (fixed assets). It may take a long time before these items generate enough revenue to pay for themselves, so a long-term source of finance is ideal. Revenue expenditure. This is spending on current, day-to-day items, such as the purchase of raw materials and payment of wages. Such expenditure provides a quick return, so the company should rely on a short-term source of finance,
usually repayable within 1 year but possibly 2 years.
Factors influencing the method of raising finance

The relative importance of the different ways of raising finance may vary according to the specific context and circumstances facing the business. When deciding which source of finance to use, a business person will weigh up: the legal structure of the business the use of the finance the amount required the level of risk the views of the owners
Exercise 1 Raising finance

In the five situations below, which method of raising finance is best? You have 5 minutes to decide. 1 A newly formed plc is seeking to undertake a major expansion programme. Interest rates are high. The plc is confident that the expansion programme will be profitable and will start to produce high profits in 5 10 years time. Eventually it will be very profitable. 2 3 4 5 A partnership is hoping to update its computer network. It expects this action to increase profits so that it can cover the costs paid after 3 years. A small business is involved in a high-risk but potentially profitable activity. The current owners would be prepared to share ownership, if necessary. Sales are seasonal and the business needs money to pay a variety of bills that must be settled before it can earn revenue from selling its products. A start-up owner wants to keep control of the business because they value their independence. They own a building that they do not need. Interest rates are currently quite high.
Exercise 1 Raising finance: answers and scoring

1 Ordinary shares: 5 marks 2 Bank loan: 5 marks 3 Venture capital: 5 marks Venture capital: 2 marks Personal sources: 3 marks Ordinary shares: 3 marks
4 Bank overdraft: 5 marks

Bank loan: 2 marks
Bank loan: 2 marks
5 Personal finance from selling the building: 5 marks
Exercise 2 Raising finance

Your target is to match or beat your score for Exercise 1. Again you have 5 minutes to decide which method of raising finance is best. 6 A private limited company has just received a patent but cannot provide any security. The patent is expected to lead to a large increase in profits, but it requires a large sum of money to develop it and the existing owners do not have much money. 7 The owners have high levels of savings and are confident that the business will succeed. They have a completed business plan. 8 A start-up has just discovered that its customers will expect to be given 3 months credit. However, its suppliers will need immediate payment. Furthermore, the business will take a month to manufacture each product. 9 The owners have prepared an excellent business plan which shows that the business will need to buy a new delivery vehicle. 10 A new start-up has been turned down by the bank manager, who said, The bank expects me to be cautiousYou also need some expert advice to guarantee success.
Exercise 2 Raising finance: answers and scoring

6 7 8 Ordinary shares: 5 marks Personal finance: 5 marks Bank overdraft: 5 marks Venture capital: 3 marks Bank loan: 3 marks Bank loan: 2 marks
Bank loan: 5 marks
Ordinary shares: 1 marks

Ordinary shares: 2 marks
10 Venture capital: 5 marks
Chapter 9
Locating the business
Locating the business

What factors influence the location of a new business? Working individually, provide a list of five factors that influence business location. The AQA specification recognises that there is a range of different factors but focuses on the following: technology costs infrastructure the market qualitative factors
Technology
Technology allows more small firms to operate from the owners home, using communication technologies, for example, mobile phones, personal computers and the internet
Teleworking involves working in a location that is separate from a central workplace, using telecommunication technologies. Most teleworking jobs do not
mean that the person stays at home for the whole day. Key facts: In the UK there are 3.3 million teleworkers; 62% are self-employed, 38% are
employees. 41% of self-employed people in the UK are teleworkers.

In manufacturing, if technological equipment is needed, location tends to be on an industrial estate or similar factory premises.
Costs
least-cost site: the business location that allows a firm to minimise its costs (and hence its selling price). Key costs are:
Land costs. These are vital for small businesses because they can represent such a large percentage of total costs. Many small businesses locate at home or
away from town centres to benefit from lower rents. Labour costs. In the UK there are significant variations in wage levels between regions. The southeast of England is the most expensive region. The labour cost per unit produced is more important than the wage level. Transport costs. The location of raw materials or suppliers is the crucial influence for bulk-reducing or weight-losing industries. Bulk-increasing or weight-gaining industries tend to locate closer to the market than to raw materials.
Infrastructure
infrastructure: the network of utilities, such as transport links, sewerage, telecommunications systems, health services and educational facilities. The following questions are of particular significance to a small business:
Are parking spaces available nearby? How much does it cost to park?
Is traffic flow good? Is the site on a bus route or close to a station? If the business is a retail outlet, is the shop isolated or convenient for visits to other shops too? Is it easy to receive deliveries?
The market
For retailers and other service industries, the market is the most important influence on location. Key factors:
convenience and easy access for customers footfall the number of potential customers walking past the shop
proximity to complementary businesses proximity to suppliers desirability of the local area
Qualitative factors
These are subjective factors, mainly based on the opinions and preferences of the owner. Location may be based on factors other than business criteria for example: the owners home town a place that can enhance its reputation, such as an exclusive area of town attractive premises, such as a listed building quality of life in an area (e.g. local facilities) family connections and residences
proximity to leisure pursuits geographical factors, such as local scenery and the weather
Survey of factors influencing small firm location

The key factors that a small firm should consider are: demographic factors, e.g. whether the local population matches the target market the economic wealth of the local area and whether it could support the number of businesses located in the vicinity pedestrian traffic flow (footfall) during opening times parking factors cost and time competitors locations is competition fierce or will competition attract potential
customers into the area? location history does the actual site have a good track record of successful
business activity? council policies, e.g. limiting certain business activities, such as nightclubs, to certain areas of a town
Follow-up exercise: Fleetmouth

Study the map of Fleetmouth on the next slide. Fleetmouth is a seaside town on the south coast. You are thinking of opening a take-away restaurant catering for the holidaymakers that visit Fleetmouth.
There are three possible locations, identified as A, B and C on the map.

Your target market is the customers of the various campsites (marked CS) on the map. The larger the campsite, the more potential customers at that site. Existing take-away restaurants are marked with a T. You will want to avoid these. You would like to be close to a shopping centre for supplies. Although this is not vital, it
will also bring you a small amount of passing trade.

The closer you are to the main shopping centre, the higher the rent. At which of the three locations will you locate? You can include qualitative factors in your reasoning.
Map of Fleetmouth
Fleetmouth exercise: key factors

Location A Relatively close to the large campsite on the main road. Only slightly closer to its main market than the competitors. Closest to the main shopping centre, so has the highest rent. On the main road between the two shopping centres, so is the most likely site to get passing trade. No nearly competitors Location B Very close to two campsites. No nearby competitors. Location C Only close to one campsite.
Fleetmouth exercise: conclusion

Location B is probably the best location. On qualitative grounds, it is close to the beach and may be a pleasant location. However, a case could be made for location A if it is assumed that the rent will only be slightly higher and if passing trade is deemed to be a vital factor. It will also be cheaper for deliveries. Location C should be definitely rejected.
Chapter 10
Employing people
Reasons for employing people

Brainstorm the reasons why a small business might need to employ people. Now check your ideas against the following list of reasons:
Owners may not have the capacity to carry out all the tasks necessary to provide the finished product or service.
Entrepreneurs setting up a new business will not often have all the skills (e.g. in production, marketing and finance) required to run a business. Seasonal businesses need to ensure that they can meet demand during the peak season by employing additional staff. A start-up business that wants to expand is likely to have to take on new staff in order to be able to meet demand.
Types of employee used in small businesses

permanent employees, who can be full time or part time temporary or fixed-term contract employees employees on zero-hours contracts that allow a business to have people on call to work whenever necessary and mutually convenient employment agency staff, who have contracts with the employment agency that supplies them self-employed freelancers, consultants and contractors Working in groups, consider one of these contractual arrangements for employing people. Try to identify examples and explore the reasons that would lead a business to employ people under the contractual arrangement you are considering rather than any other.
Permanent or temporary staff (1)

Using your own experience and giving examples, consider when it would be most appropriate for a business to employ permanent staff and when it might be more appropriate to employ temporary staff.
Compare your ideas with the following:

Staff who are required throughout the year and whose services are necessary to the continued running of the business, day-in, day-out, are likely to be permanent employees. Where additional staff are needed (e.g. to meet the seasonal demand for goods or services or to complete a particular task, cover a particular event or cover for staff absence), they are more likely to be employed on a temporary basis.
Permanent or temporary staff (2)

What do you think are the advantages to a business of employing permanent rather than temporary staff? Compare your ideas with the following: Permanent staff tend to be more loyal to the business and more motivated than temporary staff, who may have less allegiance and less commitment to the business.
Full-time or part-time staff

Using your own experience and giving examples, consider when it would be most appropriate for a business to employ staff on a full-time basis and when it might be more appropriate to employ them on a part-time basis.
Identify the advantages to a business of employing staff on a part-time basis.

Compare your answers with the following: Employing part-time staff is an efficient way to keep costs down in areas where full-time cover is not necessary. It is a way of building in flexibility, allowing a business to respond to changes in
demand more easily. If part-time work suits employees, they may be more motivated, absenteeism
and stress may be reduced and productivity may increase. Part-time work may create a wider pool of candidates for recruitment. The opportunity to work part time may mean the business is able to retain valued employees.
External consultants, contractors and advisors

Examples: Except in a large business, an accountant is unlikely to be an employee of the business. A small business is likely to hire the services of an accountant and pay an hourly or annual fee for the services provided. A design consultant might be hired to advise the business on particular aspects of packaging design, working with the business for a few weeks only. An IT contractor might be hired to build a business website. A freelance PR consultant might be hired when a business needs a promotional
push. Other advisers, such as Business Link and Princes Trust mentors, provide their
services free to start-up businesses. Identify possible benefits to a business of engaging the services of external consultants, contractors and advisers.
Drawbacks and difficulties of employing people

the cost of employing people meeting the range of employment legislation requirements problems in managing staff the impact of employee absence Working in groups, select one of the factors listed above. Use your experience and any resources you have available (e.g. textbooks, the internet) to devise a short case study scenario of a small business
illustrating your chosen factor.

Suggest how a business might overcome the drawback or difficulty you have illustrated. Share your scenario with the rest of the class.

1 Starting A Business

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

1 Starting A Business

Enviado por

Direitos autorais:

Formatos disponíveis

Unit 1: Planning and financing a business Starting a business

Unit 1: Planning and financing a business Starting a business

Unit 1: Planning and financing a business Starting a business

The characteristics of successful entrepreneurs

Unit 1: Planning and financing a business Starting a business

The importance of risk

Unit 1: Planning and financing a business Starting a business

The notion of opportunity cost

Suggest examples of opportunity cost from the point of view of you

Unit 1: Planning and financing a business Starting a business

Motives for becoming an entrepreneur

some to gain more freedom at work most to make money

Unit 1: Planning and financing a business Starting a business

Government support for enterprise and entrepreneurs (1)

Unit 1: Planning and financing a business Starting a business

Government support for enterprise and entrepreneurs (2)

Unit 1: Planning and financing a business Starting a business

Unit 1: Planning and financing a business Starting a business

Discussion questions (1)

3 What appear to be the main reasons for becoming an entrepreneur?

Unit 1: Planning and financing a business Starting a business

Discussion questions (2)

Unit 1: Planning and financing a business Starting a business

Generating and protecting business ideas

Unit 1: Planning and financing a business Starting a business

Sources of business ideas

Unit 1: Planning and financing a business Starting a business

Unit 1: Planning and financing a business Starting a business

Unit 1: Planning and financing a business Starting a business

Protecting a business idea: information

Unit 1: Planning and financing a business Starting a business

Protecting a business idea: activities (1)

Unit 1: Planning and financing a business Starting a business

Protecting a business idea: activities (2)

why holding a patent might be helpful to a business

Unit 1: Planning and financing a business Starting a business

Transforming resources into goods and services

Unit 1: Planning and financing a business Starting a business

Factors of production: key terms

land: natural resources that can be used for production.

Unit 1: Planning and financing a business Starting a business

Factors of production: examples

Unit 1: Planning and financing a business Starting a business

Unit 1: Planning and financing a business Starting a business

Improving the efficiency of the factors of production

greater education and training of labour increasing the use of machinery

Unit 1: Planning and financing a business Starting a business

The transformation process

Unit 1: Planning and financing a business Starting a business

What factors of production are needed in each case?

Unit 1: Planning and financing a business Starting a business

Classifying outputs: the structure of industry

Give three examples of businesses in the secondary sector.

Unit 1: Planning and financing a business Starting a business

value added = 50 (15 + 12) = 50 27 = 23

Unit 1: Planning and financing a business Starting a business

How to add value

Unit 1: Planning and financing a business Starting a business

Added value: follow-up activity

Discussion: how do businesses add value?

Unit 1: Planning and financing a business Starting a business

Developing business plans

Unit 1: Planning and financing a business Starting a business