AQA AS Business Studies BUSS1stmbusiness.weebly.com/uploads/1/2/6/5/12655241/buss1... · 2013-05-14 · startups make use of government help ... Govt keen to encourage startups =

AQA AS Business Studies

BUSS1Planning & Financing a BusinessUnit Revision Guide

Jim Riley

BUSS1-Revision-Guide.indd 1 15/10/2012 11:58:02

AQA AS Business Studies BUSS1 Revision Guide Page 2

Enterprise and Entrepreneurs

Passionate about their product and getting things right for the customer

Visionary – they have faith in what they are trying to do

Energetic and driven – prepared to work consistently long hours, especially in the early stages; determined

Self-starting and decisive – they don’t wait for others to take decisions

Calculated risk taker – not reckless; they are prepared to take a risk in order to maximise the rewards

Multitasker – able to take on more than one role (e.g. product development, selling, recruitment)

Resilient – able to handle problems and overcome hurdles

Focused – sets clear goals and self-imposed high standards

Results-orientated – take pleasure from achieving targets and setting the bar higher

CharaCteristiCs of suCCessful entrePreneurs

risks of starting uP a Business rewards for the entrePreneur

• Investing personal assets = potential loss• Loss of pay from previous job• Stigma of failure• Potentially unlimited liability for business debts• Stress & pressure on personal relationships• Period of time earning little or nothing• Loneliness and isolation

• Potential for significant income and profit• Satisfaction of building a business• Freedom of decision-making• Control over working life• Capital gain if a valuable business is built and then sold

More control over working life, including flexibility

Feel that skills are being wasted and that potential is not being fulfilled

Want to escape an uninteresting job or poor career prospects

A desire to pursue an interest or hobby

Fed up with being told what to do – want to be the boss!

Want the feeling of satisfaction from building a business

Want more of the rewards from the effort being put in

Fed up with working in a business hierarchy or bureaucratic organisation

As a response to a change in personal circumstances – e.g. redundancy, illness, bereavement

Out of financial necessity - e.g. to earn income or repay debt

reasons for starting a Business

key Buss1 exam Points

Risk is not something for an entrepreneur to fear. It is a part of business life. The challenge is to identify the key risks, evaluate them, and then make decisions using sound judgement.

It is relatively easy to start a new business in the UK. However, the support provided by the government for entrepreneurs is limited - few startups make use of government help - most just get on with the process of getting trading.

Running a startup is always tough - even a successful business might seem to have many problems and challenges to overcome. Remember this when the examiner describes a business that seems to be in trouble.

It is vital that you are able to describe the reasons why people want to become entrepreneurs and the characteristics that successful entrepreneurs tend to have.

Govt keen to encourage startups = economic growthBIS - Dept for Business, Innovation & SkillsBusiness Link (although regional funding now removed)DirectGov - advice on tax, business laws & regulations etcUKTI - helps with international salesMentoring scheme - mentorsme.co.ukTax incentives; tax breaks for investment

sourCes of government suPPort

Many online sources (e.g. Smarta.com , Startups.co.uk, startupdonut.co.uk)

Business associations - e.g. Federation of Small Businesses

Local business networks / Business clubs

Campaigning organisations - e.g. Startup Britain

Youth organisations - e.g. Shell LIVEWire, Princes Trust

Professional firms - e.g. accountants, lawyers

other suPPort & adviCe for startuPs


Page 3

Generating and Protecting Business Ideas

Brainstorming & other creative thinking (e.g. “blue-sky”)

Business experience - in-depth expertise

Personal experience

Frustrations with poor service - how can things be done better?

Copying an existing idea (e.g. franchising)

Innovation - seeing a new use for existing technology

Invention - developing something genuinely new

Common sourCes of Business ideas

Something which solves a problem

A cheaper or better way of providing an existing product or service

Something which is simpler or easier to use

Can be developed, tested and brought to market quickly

Is clearly focused on the needs of the target customer

Anticipates a change in the market or exploits an emerging growth trend

what makes a good Business idea?

Opportunity Cost


Remember that the best business ideas are usually copied, often quickly, by competitors. Relatively few startups are able to get protection from patents, copyright or trademarks. The most effective protection for a small business usually comes from delivering a great product and building customer loyalty.

Make sure you know the difference between a trademark, patent and copyright. They offer different kinds of protection. Patents, in particular, are quite difficult to obtain. Many startups don’t bother getting protection from any of these options.

You should appreciate that a startup doesn’t have to have a new idea. It might focus on doing the same thing as a competitor, only cheaper, quicker or better.

Startups are also constrained by their time and resources. A business idea often comes from personal or business experience, and is developed whilst the entrepreneur is working for someone else!

ProteCting a Business idea

Patents trademarks CoPyright

• Difficult to obtain: must be based on inventions that are new, innovative, capable of industrial action

• If granted, patent owner is given protection (up to 20 years) against competitors who try to copy

• Key benefit is ability to licence right to use the invention in return for royalties• But...patents are expensive and time consuming to obtain

• Something which identifies a product in eye of a customer (can be part of a USP)

• Can be a name, logo, symbol etc

• Trademark allows a business to prevent others from using identical or confusingly similar marks

• If granted, trademark protection lasts for 10 years

• Important source of protection for any startup in creative or knowledge industries (e.g. books, music, online)

• Protection is granted automatically

• Protects the way an idea is expressed, as soon as the work is published

• Lasts for 70 years after authors death

what is oPPortunity Cost? how oPPortunity Costs affeCt the startuP

Definition:The cost of missing out on the next best alternativeThe benefits that could have been gained by taking a different decision

Example:A decision to spend on a promotional launch campaign may mean less cash to spend on equipment or market research

• For nearly every startup, resources are limited: time, cash etc

• When resources are scarce, significant decisions about what to spend and where to focus become more risky

• Successful entrepreneurs take calculated risks and weigh-up the potential implications of decisions (opportunity costs) before choosing the options they believe are best for their business



Adding Value and Targeting a Niche Market


Adding value and niche markets are core and popular topics in the BUSS1 exam. Focus on them.

Adding value is the route for a startup to win customers and earn profits. There are many different ways a business can add value, but it is also important for a startup to keep things simple - only offering the things that customers are prepared to pay for.

Look out for low profits or (worse) losses as a sign that the BUSS1 case study business is not adding sufficient value. Are input costs too high? Is the selling price of the output too low?

Startups are nearly always better advised to target a niche segment. Opportunities in niche markets are usually lower risk and provide a startup with the right idea to deliver added value. The two concepts are very closely linked!

Definition:The difference between the price of a finished product and cost of the inputs used in making it

ExamplesBasic food ingredients (inputs) like potatoes can be turned into premium-priced snacks like crisps

The time and skills (input) of a car mechanic are used to transform a broken-down car into a working one!

what is added value?

• Delivering excellent & distinctive customer service - which adds to the perceived value enjoyed by customers

• Building a distinctive brand - particularly a reputation for innovation & quality

• Product features and benefits which customers value - e.g. better functionality, simplicity, time-saving, speed

• Key benefits of adding value for a startup: can charge a higher price, differentiate from competition, build customer loyalty and focus business even more on customer needs

how Can a startuP suCCessfully add value?

Definition:A smaller, specialist part of a larger market where customers have particular needs and wants

Examples• Specialist holiday operators• Up-market restaurants• Organic or distinctive local food produce• Specialist professional or technical services

what is a niChe market segment?

Market can be divided into groups using variables such as:

Geographic: countries, regions, cities, population densities

Demographic: customer age, gender, family size, socio-economic group, religion, social class, lifestyle

Some limitations of segmentation: • Startups likely to have relatively little data & information• Difficult to measure and categorise consumer behaviour• Still have to be able to reach a target segment once identified

two ways to segment a market

should a startuP target a niChe segment?advantages disadvantages

• Better able to add value through distinctive and innovative products, customer service and higher quality

• Customer needs and wants are more precisely defined - helps with product design

• Potential to charge higher selling prices and earn higher profit margins if the product is valued by customers

• Possibly encounter less competition, particularly if startup is first to the market with an innovative and attractive product

• Easier to reach potential customers through targeted promotion & then build repeat business

• Customers are more demanding - may be more costly to serve

• Likely to be existing competitors in the niche with established customer base - difficult to gain market share from them

• Less able to benefit from cost savings associated with operating at a higher scale

• Competitors soon attracted to a niche segment that becomes more mainstream


Page 5

Franchising


Franchising is a very popular topic with the BUSS1 examiner - make sure you know this topic well!

Remember that a business idea for a startup doesn’t have to be original. Many new businesses are formed with the intention of offering an existing business idea. The use of franchises is a great example of that. Why set up a new pizza delivery outlet when you might be able to open a Dominos Pizza shop and trade successfully almost immediately?

Opportunity cost is an important concept to remember here (and a great one to use in an exam answer). By choosing a franchise, the entrepreneur is foregoing some potential benefits that he/she might have enjoyed by setting up all alone. For example, a 100% share of the profits earned (rather than sharing them with the franchisor).

Franchise: The business format (product, brand) which a franchisor allows a franchisee to use, under licence

Franchisor: The ultimate owner of the franchise format

Franchisee: The business which is granted the right to operate a franchise on behalf of the franchisor

Franchise Agreement: legal contract which sets out the commercial deal between franchisor and franchisee, including investment requirements, ongoing fees & costs, and protections for both parties

Examples of UK franchises (note: mainly found in service sector): Subway | Costa Coffee | McDonalds | Dominos Pizza | Interlink Express

franChise Jargon Buster

Initial cost: varies from £25k to £100,000; goes towards shopfitting, equipment, initial stock, IT systems etc

Service fee: an average of around 10% of sales, paid weekly or monthly

Advertising levy: a contribution from each franchisee towards franchisor advertising costs (average of approx 2-3% of sales)

Mark-ups: some franchisors insist franchisees buy goods from them and add a mark-up to the price paid

Costs of Being a franChisee

who wins from the franChise arrangement?advantages disadvantages

Franchisee(operator of the franchise)

• It is your own business

• Business format should be well thought through with reliable operations

• Ongoing advice & support from franchisor

• Should be running a business with a recognised and (hopefully) trusted brand name & reputation

• Don’t necessarily need experience of the market

• Benefit from franchisor’s scale (e.g. buying power)

• You don’t own the business format

• Expected to act in best interests of the franchisor and other franchisees

• Restrictions on trading - limited to geography; pricing & marketing activities

• Large proportion of revenues and profits have to be paid to franchisor

• Risk of the franchisor going out of business

Franchisor(owner of the franchise)

• Relatively quick method of expansion

• Lower investment needed - franchisees finance much of the expansion through their initial cost

• Regular fees and levies from franchisees create a strong flow of income & cash

• Franchisees profit from a franchisor’s good business model - have to share the profits

• Poor franchisee can damage reputation of whole franchise

• Need robust franchisee recruitment and management systems

Franchisor should have a tried and tested business model - from which the startup entrepreneur can benefit.

New customer acquisition is easier - customers may already be aware of the brand and/or there will be customer testimonials and

word-of-mouth recommendation.

Easier to raise bank finance: banks have specialist teams used to providing loans for well-known franchises. They understand the risks involved.

why are franChisees seen as lower risk for startuPs?



Market Research for a Startup


Market research is a crucial activity for a startup as it helps reduce the risks involved in the enterprise.

However, startups rarely have the resources to invest in substantial market research, so research should be clearly focused and ideally be low-cost.

You should be able to explain the advantages and disadvantages of the different kinds of market research.

You should also question the data that is provided about market research in BUSS1. Was the sample size large enough? Is it out-of-date? How relevant is it to the target market and customers?

The best market research insights for a startup often come simply from trading, talking to customers and suppliers, observing what happens with a product launch etc.

Market research: information that helps explain the size (e.g. value of sales), structure (e.g. competitors) and nature (e.g. customer needs) of a market

Primary research: information collected first-hand for a specific research purpose (also called “field research”)

Secondary research: information that already exists, collected for a different use (also called “desk research”)

Qualitative research: based on opinions, attitudes, beliefs, intentions: asks questions such as “why”, “would you” “how”?

Quantitative research: based on proper samples and provides insights based on numerical data: asks questions such as “how many”, “how often” & where”?

market researCh Jargon Buster

Market research plays a crucial role in startup business planning;

Is there likely to be sufficient demand for a new business idea?

What competition will be faced? Does the business plan realistically allow for their potential response?

What evidence is there that the product will meet the needs and wants of customers?

Does the business plan make realistic allowance for the costs of operating in the target market?

why researCh is CruCial for startuPs

what kind of market researCh is Best for a startuP?advantages disadvantages

Primary(e.g. focus groups, surveys, test marketing, observation)

Specific to the needs of the startup - very focusedUp-to-date (provided used in time!)Easy to obtain informally and relatively cheaply (e.g. through social networks or face-to-face)Helps fill in gaps from secondary research

Expensive & time-consuming if research needs are extensive (+ most startups can’t afford a research agency)Can delay the best kind of research - actually launching a new product or business idea!

Secondary(e.g. market reports, govt stats)

Available internally (within the business) once trading has begun - e.g. sales reports, customer feedbackMuch of it is free - e.g. Google, Govt, trade reports

Will vary in usefulness, relavance and reliabilityCommercial market reports are very expensiveData also available to competitors

Quantitative(based on data)

Easier to analyse (because of numeric data)When done over time, may highlight important trendsSummarises data concisely

Usually more time-consuming & expensive to collectSample sizes need to be sufficient for valid insightsDoesn’t help explain crucial questions like “why”?

Qualitative(based on opinions)

Provides useful insights into opinions & attitudes of target new customers from relatively little researchCan help identify new ideas & approaches

Often based on limited sample sizes - how reliable?Difficult to form definitive conclusionsExpensive to gather

using samPling in researCh

random samPle Quota samPle stratified samPle

• Gives each member of a population an equal chance of being chosen

• Main advantage - low bias

• Main drawback - cost of large sample size

• Population is segmented into groups with similar characteristics

• Can help focus research on target customers or a niche market segment

• Takes more time & prone to bias

• Sample chosen (at random) just from a specific section of the population

• Lower bias


Page 7

Analysing & Understanding the Market


There is lots of opportunity to analyse a market in a way that helps a startup: segments, growth, size, trends, customers etc. A startup that is focused on really understanding its market has the best chance of success. Look out for evidence of this in your BUSS1 case study.

In the exam you will be expected to be able to calculate market share, market size and market growth, and to be able to interpret the calculations. Make sure you practice these calculations - don’t shy away from them!

You should also appreciate that there are several factors that affect demand for a product, not just price. Some factors will be more important than others - it depends on the product and market!

Startups often find it hard to estimate likely demand for their business and many entrepreneurs underestimate how hard it is to establish and build a customer base from scratch.

what is a market?A market is any location where buyers and sellers come together to transact with each other

loCal markets national markets

• Where customers are a short distance from suppliers

• Good for getting close to customers & responding to market changes

• Drawback: likely to be small and often fiercely competitive

• Where customers are spread throughout the country or over a large geographical area - same product offered to all customers

• Benefit: much larger than local; can spread marketing efforts

• Drawback: requires scale to operate efficiently; hard to manage

PhysiCal markets eleCtroniC markets

• Buyers and sellers meet in the same physical location (e.g. a car boot sale or local market stall)

• Easier for buyers and sellers to exchange information & preferences (e.g. on price, product information)

• Drawback - needs to be open for trade to take place

• Any connection between buyer & seller using electronic means

• Transaction completed online but delivery method depends on nature of product / service sold

• Provide great opportunities for startups (e.g. ability to reach global customer base & 24/7 selling)

• But highly price competitive (lower profit margins?)

Definition: How much customers are prepared and willing to buy at a given price

How measured:Value of sales | Volume of product bought

what is demand?

• Price - perhaps the most important factor - a key signal of “value” for most customers; demand for some products more “price-sensitive” than others. Setting the right price is hard

• Incomes - what people buy is linked to their disposable income & attitude to credit. As incomes change, customers often switch or substitute to alternative products

• Tastes & fashions - often changing, particular for consumer products

• Competitor actions - price often used as a competitive weapon to gain sales

faCtors that affeCt demand for a startuP’s ProduCt

measuring the market

CalCulation startuP Considerations

Market sizemeasured in both value (e.g. revenues) and volume (quantities)

A market niche likely to be much smaller in value/volume than a mainstream or mass market. Of less interest to bigger firms?

Market shareProportion (or %) of a market owned by each competitor or product)

Startup unlikely to achieve a high market share initially unless it is helping to define a new market (“first-mover”)

Market growthThe percentage growth in the size of a market over a period

Startups usually do better in fast-growing and changing markets rather than low-growth or mature markets (where existing competition likely to be fiercer)



Choosing a Legal Structure


Whilst most startups choose the sole trader option, this is mainly because of the perceived convenience rather than any compelling advantage. It is much better to form a limited company.Getting the protection of limited liability is essential if the entrepreneur is investing significant capital into a startup or if the business will have large debts.

Remember that BUSS1 is about startups and small businesses. These businesses almost never become public limited companies in the first 5-10 years of trading, so don’t bother spending too much time learning about public companies and stock market flotations.

Make sure you have a strong knowledge of the advantages and disadvantages of the various forms of business organisation.

Sole trader: a business owned by a single individual (unincorporated)

Partnership: where a business is owned by two or more people (unincorporated)

Limited company: a separate corporation owned by the shareholders

Unlimited liability: the owner is liable for all the debts of the business

Limited liability: the liability of the owners is limited to the amount they invested

Social enterprise: a business with a primarily social objective whose surplus is reinvested for that purpose in the business or community

legal struCture Jargon Buster

• Still running a proper business• Giving something back• Activities that benefit society• Availability of government grants & other finance support• Stakeholders gain from profits reinvested• An example of “not for profit” business

why Choose soCial enterPrise?

what legal struCture is Best for a startuP?advantages disadvantages

Sole Trader • Quick & easy to set up – the business can always be transferred to a limited company once launched

• Simple to run – owner has complete control over decision-making

• Minimal paperwork & simple accounting

• Full personal liability – “unlimited liability”

• Harder to raise finance – sole traders often have limited funds of their own and security against which to raise loans

• The business is the owner – the business suffers if the owner becomes ill or loses interest

Partnership • The simplest way for two or more people to form a business together

• Business benefits from the expertise and efforts of more than one owner + specialist skills

• Greater potential to raise finance – partners each provide the investment

• Full personal liability – “unlimited liability”

• A poor decision by one partner damages the interests of the other partners

• Harder to raise finance than a company

• Partners are bound to honour decisions of others

Limited Company

• Limited liability – protects the personal wealth of the shareholders (vitally important)

• Easier to raise finance – both through the sale of shares and also easier to raise loans (debt)

• Stable form of structure – business continues to exist even when shareholders change

• Greater admin costs

• Public disclosure of company information

• Directors’ legal duties (more onerous)

The concept of limited liability provides a startup entrepreneur with significant protection - it helps reduce the risk of investment in a new business venture. Setting up a company is cheap and easy - a tiny price to pay for the protection offered through a limited company!

startuPs and inCorPoration - the imPortanCe of lmited liaBility


Page 9

Sources of Finance for a Startup


It is vital that a startup chooses sources of finance that are appropriate and sufficient for its needs. Remember that too much finance of the wrong sort (e.g. an unnecessary large bank loan) can create huge problems for a startup.

Many startups find it hard to raise finance until they have established a trading record. It is almost always up to the founder to invest funds to get things going.

Entrepreneurs are best advised to retain as much control over their business as possible. That means not selling substantial proportions of the share capital to other investors.

A well run startup uses its cash flow forecasts to identify when additional finance is required. This means that a startup may choose to raise finance at several stages - not always right at the start of trading.

what kinds of finanCe are availaBle to a startuP?Why a startup needs finance: to fund pre-trading costs, business set-up, initial losses, growth once established...

internal sourCes of finanCe external sourCes of finanCe

• Personal sources (e.g. savings, redundancy, remortgaging)

• Retained profits (profits earned once trading has begun which are simply reinvested into the business)

• Share capital invested by the entrepreneur

• Sale of assets (although relatively unusual in a startup)

• Share capital from outside investors (e.g. business angels)

• Friends and family - (e.g. informal loans; gifts)

• Bank overdraft (short-term bank borrowing facility)

• Bank loan (medium-long-term loan, often secured)

• Grants and other government incentives (limited availability)

whiCh sourCe of finanCe is Best for a startuP?advantages disadvantages

Personal sources

• Owner remains in control• Flexible and the lowest cost• Builds personal commitment to the startup

• Opportunity cost - alternative investment uses• Entrepreneur’s personal funds at risk• May be limited (depends on personal circumstances)

Retained profit

• Cheap and highly flexible• No loss of business control• Potentially large if profits are strong

• External shareholders may want a dividend (but unlikely in a startup)• Startups struggle to reach profitability

Bank overdraft

• Flexible, short-term source of finance, ideal for handling temporary cash flow problems / needs• Only used when needed

• Expensive - high rate of interest• Reyable to bank on demand

Bank loan • Longer-term finance and more secure• No effect on ownership

• Hard for a startup to obtain (banks don’t like risk)• Interest payable on entire amount• Bank may require security (collateral)

Business angel

• Potentially significant source of external finance• Angel’s expertise and contacts useful

• Loss of control - usually significant• Longer and more complex finance-raising process

Friends and family

• Flexible and potentially significant

• Doesn’t have to mean a loss of control (e.g. loan)

• Potential for personal tensions & disputes

• May want some control or influence over decisions

Control - entrepreneurs should try to hold onto as much control as possible

Cost - finance provider by the entrepreneur is cheapest (e.g. personal sources) but still has an opportunity cost. Loan finance is usually cheaper than external share investment, but may need collateral

Amount - smaller amounts usually easy to source from personal sources or friends/family. Larger amounts more complex to raise

Timing & flexibility - startup may not need all the finance at once; an overdraft is much more flexible than a bank loan

faCtors affeCting the amount and ChoiCe of finanCe



Choosing a Business Location


Many startups begin in the back bedroom, kitchen or garage - i.e. where costs are low. The rapid improvement in communication and collaboration technologies makes it possible for even large businesses to operate without the expense of traditional business locations.

A startup often changes location several times in the early years of trading, adding more space as required. Having too much paid-for space increases the fixed costs of a startup and raises the break-even level of output.

Startups and small businesses often have a local geographical focus, particularly retailers and franchises. However, a startup business that focuses on e-commerce might quickly find itself serving a national and international market.

In the BUSS1 exam, the location issues will very much be determined by the kind of business (product, customer, sector etc). The location issues tend to be more challenging for manufacturing and retail businesses.

Location: the physical place from which a business is operated and controlled

Quantitative factors: based on measurable information such as cost of premises, wage rates, distance from key suppliers, distance to customers, availability of government support

Qualitative factors: based on the personal opinions and preferences of the entrepreneur, such as quality of life, local environment, proximity to friends and family

loCation Jargon Buster Benefits & drawBaCks of a home-Based startuP

what faCtors influenCe the ChoiCe of loCation for a startuP?why this matters what is Best for a startuP?

Cost • Location costs can be significant to a startup

• Often fixed (e.g. office or warehouse rent) which raises breakeven output

• Low cost does not necessarily mean best - e.g. may mean a poor location for an outlet needing customers

• Try to minimise the cost commitment initially (e.g. take a short-term lease rather than long-term)

• If possible, start the business from home

• Potential cost-savings (and lower risk) from sharing a location with other startups (e.g. business hub)

Proximity to market

• The market is where buyers and sellers come together! Retail and other service startups (including franchises) need to be close to their customers

• A startup targeting a national market will need to develop multiple suitable locations - a challenge!

• Depends on the nature of the startup product

• Much less important for startups operating in electronic markets (e.g. online stores) provided they have good distribution arrangements

• Best location for a local service business is as close to customers as possible, given reasonable cost

Infrastructure • Startup may be dependent on availability of external services (e.g. transport, telecommunications)

• Ability to recruit the right employees may be affected by local infrastructure

• For many startups, quality of communications infrastructure is vital, but less restrictive than in the past (e.g. big improvements in broadband availability)

• Key consideration: easy of working with customers and suppliers + ability to recruit staff

Personal & other qualitative issues

• Quality of life is often a key motivation for an entrepreneur to start a business

• Location may help create a unique selling point (USP) or point of differentiation - could help attract customers and staff

• A location that fits the culture of the startup (e.g. home-based for a low cost online operation)

• Communications technology makes almost anywhere a suitable place - easy to collaborate virtually

Benefits drawBaCks

Very low cost

Little travelling

Can be combined with domestic tasks

Lowers business risk - no commitments to leases or rents (overheads)

Freedom over what to wear!

Requires greater self-discipline

Work often interrupted

Work nevers goes away - need to create separation from family life

Potentially lonely

Could give poor impression to customers


Page 11

Employing People in a New Business


For an entrepreneur, employing the first few people in a new business is fraught with risk. Make the wrong choices or pay someone too much, and the startup’s overheads soon increase significantly. Remember - every person added to the payroll will increase the breakeven output. The use of part-time or temporary staff is a popular way of handling increased workload.

On the other hand there is a temptation for a small business owner to want to do everything himself/herself. This can restrict the growth potential of the business. A successful startup will soon need people with a variety of skills and experience.

Make sure you can describe the main advantages and disadvantages of the different kinds of employment.

Full-time: contracted employee who works more than 30 hours per week

Part-time: person contracted to work less than 30 hours per week

Permanent: employed by the business for a non-specified, open-ended period of time

Temporary: employment is for a specific period (e.g. 3 months) after which employment is terminated or renewed.

Consultant: Individuals and businesses external to the business that provide specific services and advice

tyPes of emPloyee why use Consultants & advisers?

Benefits and drawBaCks of alternative emPloyment oPtions

advantages disadvantages

Temporary • Flexibility - gives entrepreneur greater control over costs, bringing in people when required• Ideal for certain tasks & projects - e.g. introduction of IT systems, handling seasonal demand (e.g. Christmas peak)

• Higher cost per hour (temps often provided by agencies who add a mark-up to hourly rate)• Temps less likely to know & understand the business & fit in with the culture• Potentially negative for customer service - depends on training & quality of people

Full-time • Maximises output from each employee• Available to handle peaks or unexpected increases in workload• Potentially better for customer service• Better returns from training

• Cost - the major disadvantage for a startup• Is there enough work to justify a full-time employee - particularly one with specialist skills?• Reduced flexibility (much easier with part-time)• Raises the breakeven output = higher risk

Part-time • Keeps costs down = lowers breakeven output• May be easier to recruit• Consistent with increasing demand for flexible working

• Not always able to handle higher workload• Less opportunity for training• Harder to communicate with them if the part-time hours are relatively low

Benefits drawBaCks

Flexibility and lower costs - access specialist skills only when needed

An independent opinion & guidance to support the entrepreneur

Over time, the adviser gets to know the business well

Often expensive – but that it is the cost of getting specialist advice

May not know or appreciate the culture of the business

Potentially less committed to the business, since they don’t work there

Part-time working - covered aboveFlexi-time - employees choose the hours they work outside a standard set of hours set by the employerJob sharing - two workers share a full-time job (i.e. two part-timers)

Term time working - normal permanent contract, but the employee can take unpaid time off in school holidaysZero-hours contracts - staff work only the hours they are needed

startuPs and methods of flexiBle working



Calculating Costs, Revenues and Profits


An entrepreneur starting a new business often finds it hard to forecast sales, costs and profits, especially if he/she has no experience of trading in the market. It is not unusual for the initial assumptions made in a business plan to prove inaccurate, so don’t be too critical of the entrepreneur if this comes up in your BUSS1 case study.

Setting the price for a new product is particularly difficult. Many factors influence the price that customers are prepared to pay. A good piece of advice to offer in your answers is for the entrepreneur to experiment with different prices, promotions etc in order to find a profitable price which customers are happy to accept.

Startups often under-price their product because they fear too high a price will discourage demand when the business or product is launched. An increase in price will not necessarily result in lower quantity demanded.

Incurred in the making and delivery of products and services

What it costs to support the business functions

what are Costs?

Categorising Business Costs

variaBle Costs fixed Costs

Costs which change as a result of changes in output Costs which do not change in relation to changes in output

Examples:Raw materialsOther bought-in components and suppliesWages of employees where pay is linked to output (e.g. pay per hour or per unit produced)Marketing costs based on how much is sold (e.g. sales commission)

Examples:Rent & rates for premisesWages and salaries not linked to outputMarketing costs (e.g. advertising)Insurance, bank charges, consultant feesSoftware costs - e.g. website hosting, equipment leasingProduct development costs

Amounts earned by a business by selling products and services

Revenue = price x quantity sold

what is revenue?

The difference between total revenues and total costs

The return for risks taken by entrepreneurs

what is Profit?

examPle of revenues, Costs and Profit CalCulation

January feBruary marCh

Quantity sold (units) (Q) 1,000 2,000 1,500

Selling price per unit (SP) £10 £8 £10

REVENUE (Q x SP) £10,000 £16,000 £15,000

Variable costs per unit (VC) £5 £5 £5

VARIABLE COSTS (Q x VC) £5,000 £10,000 £7,500

FIXED COSTS (FC) £2,000 £7,000 £4,000

TOTAL COSTS (fixed + variable) (TC) £7,000 £17,000 £11,500

PROFIT / (LOSS) (revenue less total costs) £3,000 £(1,000) £3,500

Costs drain away the profits made by a business

Are the difference between making a good and a poor profit margin

Are the main cause of cash flow problems in a small business

Vary as the output or activity of a business changes – the entrepreneur needs to know how these are likely to change

why entrePreneurs should Be oBsessed with Costs


Page 13

Breakeven Analysis (1)

Breakeven point: the output at which total revenues equal total costs

Contribution: the different between revenues and variable costs

Contribution per unit: Selling price per unit less variable cost per unit

Margin of safety: the difference between actual output and the breakeven output

loCation Jargon Buster

Reaching the breakeven point means that a business is capable of earning profits

The risk of losses (and business failure) is directly linked with the breakeven output

A lower breakeven point usually means lower risk for an entrepreneur

Operating above the breakeven point provides the startuo with the opportunity to obtain finance through retained profits

why Breakeven is so imPortant for a startuP

CalCulating Breakeven using the Breakeven Chart

Contribution per unit =

Selling price per unit (£)

less

Variable cost per unit (£)

Total Contribution =

Contribution per unit

x

Number of units sold

Maximise added value per unit sold: aim to maximise the selling price per unit. Entrepreneurs often lack the confidence to set selling prices high enough to justify the product or service being offered.

Negotiate hard to reduce the cost of raw materials and other inputs ( = lower variable cost per unit). Ask for discounts when buying; look to buy in bulk

Keep overheads under control: work from home; use second-hand equipment; lease, don’t buy

ways to reduCe Breakeven outPut

Fixed costs (£)

Contribution per unit (£)Breakeven output =

startuPs on a shoestring

Develop the business idea whilst still working for someone else

Start the business at home: lower fixed costs (e.g. avoid rent)

Multitask - don’t employ anyone until the business can afford it

Market research for free - ask friends, online

Don’t borrow more than you need (or at all, if possible)

Ask yourself - do you really need this? Question all costs

Use commission-based sales rather than employ sales staff

Ask customers for deposits

Lease or borrow rather than buy equipment outright




Focus your BUSS1 studies on understanding how various changes in the business can affect the breakeven level of output. A breakeven chart can help you illustrate this, but it is more important to understand why the changes affect breakeven output, and what a business can do in response.

Don’t assume that breakeven analysis is a proven, scientific method. It makes lots of assumptions about the ability of the business to identify which costs are variable and which are fixed - in reality this can be quite tough.

Breakeven analysis is particularly useful for a new business or for any business which is loss-making or barely making profits.

In the exam, you are unlikely to be asked to draw a breakeven chart from scratch. But you might have to complete the missing bits of a part-complete chart and/or identify the results of the chart.

Breakeven Analysis (2)

how useful is Breakeven analysis for a startuP?advantages disadvantages

• A crucial milestone for any startup

• Focuses entrepreneur on the minimum value/quantity of sales required to start making a profit

• Encourages forecasting of costs, revenues and profits to see what happens at different levels of sales activity

• Provides a measurable target - reaching breakeven is a key objective for many startups

• A key part of any credible business plan - potential investors and other providers of finance (e.g. banks) will want to know what the breakeven output is

• Involves making estimates about revenues and costs which inevitably prove wide of the mark

• Ignores changes in selling prices and variable costs - they are assumed to be the same

• Assumes all output is sold - which may not be the case

• New entrepreneurs may lack the experience to make realistic estimates

• Breakeven output changes as the scale and complexity of a business changes

how does the Breakeven Point Change in resPonse to Changes in the Business?Change Effect on Contribution per Unit Effect on Break-even Output

Higher selling price Higher Lower

Lower selling price Lower Higher

Higher variable cost per unit Lower Higher

Lower variable cost per unit Higher Lower

Increase in fixed costs No change Higher

Decrease in fixed costs No change Lower

examPle of Breakeven CalCulation

Selling price per unit (£) £30 per unit

Variable cost per unit (£) £10 per unit

Contribution per unit )£) £20 per unit

Fixed costs £10,000

Breakeven output (Fixed costs / Contribution per unit) 500 units

Actual output sold (units) 650 units

Margin of safety 150 units


Page 15

Cash Flow Forecasting for a Startup


You cannot underestimate the importance of cash flow forecasting for a startup. Think of the cash flow forecast as the “early warning system”, which will show when the danger periods are and how viable the business is.

Don’t forget that cash flow forecasts have limitations, not the least because they are based on estimates and assumptions. It is important for the entrepreneur to think about the different scenarios that might arise The “worst-case” scenario is always worth assessing to see what might happen if things do go badly wrong!

It is really important to understand that cash flow is not the same as profit. A business can be profitable, but suffer from cash outflows if customers don’t pay their debts or suppliers need paying early. Investment in fixed assets (cash outflows) will help profits in the medium-term, but is bad news for cash flow in the short term.

Make the links in BUSS1: e.g. market research can help improve the accuracy and reliability of cash flow assumptions.

Examples:Receipts from customers (cash & on credit)

Investment in the business (e.g. share capital, personal sources)

Other receipts (e.g. government grants, sale of assets)

Cash inflows

Examples:Payments to suppliers and employees (payroll costs)

Finance costs (e.g. bank interest)

Rental and lease payments

Cash outflows

examPle of Cash flow foreCast

may June July

CASH INFLOWS

Amounts invested 30,000 0 0

Sales 10,000 20,000 25,000

Total Cash Inflows (1) 40,000 20,000 25,000

CASH OUTFLOWS

Materials 5,000 10,000 7,000

Wages & other expenses 10,000 10.000 10,000

Capital spending 5,000 5,000 2,000

Total Cash Outflows (2) 20,000 25,000 19,000

NET CASH FLOW (1 less 2) 20,000 (5,000) 6,000

Opening Balance 0 20,000 15,000

Closing Balance 20,000 15,000 21,000

essential reasons for a startuP Cash flow foreCast will the foreCast Be reliaBle?Identifies potential shortfalls in cash balances in advance – the cash flow forecast is used as an “early warning system”

Ensures the business can afford to pay suppliers and employees

Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts.

An important discipline of financial planning - similar to preparing business budgets

External stakeholders such as banks may require a regular forecast. Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals

Closely linked to quality of market research

Difficult to forecast the timing of key cash flows - particularly if customers are allowed a period of credit

Needs to be prudent (cautious) and also allow some slack (contingency) for things that go wrong

Good practice to have several versions based on different startup scenarios (e.g. best-case, worst case)

Will have to make assumptions about the economy, actions by competitors etc



Business Planning & Budgeting


Time spent setting and monitoring budgets has an opportunity cost - working on a budget spreadsheet could be spent instead on visiting customers, training staff or developing new product ideas. So a startup budget can be simple - often nothing more than a single spreadsheet - to be effective.

Remember that a business plan isn’t just written to raise finance. It plays an important role in the whole startup process.

A startup’s business plan needs to be flexible. The figures are bound to change once the business starts trading and the entrepreneur discovers what the market is really like. A good business plan provides a focus and a discipline for the entrepreneur. However, it is no substitute for what really matters to make the business a success - i.e. hard work, skill, luck etc.

Too much business planning is a bit like procrastination - putting off more important work. The entrepreneur needs to spend most time out in the market, finding customers, promoting the product etc.

the three key Budgets for a startuP

Income (Sales) Budget Expenditure (Costs) Budget Profit Budget

A difficult budget for a startup: sales budget needs to take into account factors such as the size of the market, existing competitors and their response and the capacity of the business.

What sales volumes will be achieved?What price can the product or service be sold at?When will the sales arise and through which distribution channels?

What it will cost to deliver the planned product and support the business. Important that the expenditure budget is as detailed as possible:

What are the direct costs of sales – i.e. costs of raw materials, components or subcontractors to make the product or supply the service?What are the sales-related expenses, such as commissions?What are the fixed costs or overheads?

The profit budget is simply the difference between the sales budget and the expenditure budget.

The profit budget isn’t simply a mathematical calculation. It enables the entrepreneur to look at costs and work out ways to reduce them. It can also help highlight potential cash flow problems, since periods where the business is budgeted to be loss-making are often associated with negative cash flow.

By definition, assumptions about a new business are bound to be uncertain

Entrepreneurs are often optimistic by nature - may inflate their expectations of revenues

Market research may be limited or unreliable

Competitor response is uncertain

Startups often incur costs which they did not anticipate

Budgeting generally easier when based on experience of historical trading

limitations of Budgeting By a startuP

Provides a focus on the business idea - is it really a good one, and why?

Clarifies thoughts and identify gaps in information & market research

Provides a logical structure to thinking about the business model

Encourages the entrepreneur to focus on what the business is really about and how customers and finance-providers can be convinced

Helps test the viability of the idea - can the business achieve the required level of profitability and can it be sustained?

Provides something which can be used to measure actual performance

Essential to raising finance from outside providers - particular investors and banks

why a startuP needs a Business Plan

vital Contents of an effeCtive startuP Business Plan

Executive summary: highlights the key pointsMarket: a profile of the target market based on market researchProduct: what is it and how is it differentiated from the competition (the USP or unique selling point)?Competition: who are they, what they do well, their weaknesses and how they might respond?Protecting the business idea: legal protection & other sources of protection or advantage

Management team: Who is involved; their experience & expertiseMarketing: the detailed plan for market entry (price, promotion, distribution etc)Operations: the operational processes to enable the product to be delivered - includes location & people requirementsFinancials: cash flow and trading projectionsFunding: how much cash is needed and when?Exit strategy: who might buy the business?


Page 17

Assessing the Viability of a Business Idea

is the Business idea a good one?Not very good business idea turns out to be a viable business. Here are some key questions to consider about the BUSS1 startup case study when you evaluate the likely success of the new business:

faCtor to Consider what information / analysis is useful

Is there a market for it? Thorough market research can test likelihood of demand

Smaller profit margins requires greater demand to generate sufficient contribution to breakeven

Growing markets are preferable - appeal more to investors and provide better business opportunities

Does it make life easier or solve a problem?

Is it clear what purpose the product serves - what benefits does it offer

Does the product respond to a market gap?

Is it viable? Low starting costs and fewer (if any) staff are more likely to work

Important to have a realistic assumptions about how much can be made, sold, offered to customers

Can it generate profit? Work out all costs and allow for contingencies

Compare with estimated sale price

What is the breakeven point and how quickly can it be reached?

Is there room for growth? Expanding sectors, the web, more products, new locations, bigger customer base

Consider how the market might develop

Growth markets preferable

Avoid fads, fashions and other short-term trends


It is vital that you appreciate the different objectives that a startup might have. Not every business wants to grow rapidly into a multi-million pound concern. Many small businesses simply want to earn a lifestyle return.

Think about the motivation of the entrepreneur featured in the BUSS1 case study. What motivates him/her to start a business? What evidence is there about what objectives are important? How realistic are these objectives?

Most startups don’t last beyond their third birthday, so it is quite likely that the business idea featured in the case study is not a viable one. Look out for evidence that the entrepreneur is being over-optimistic about the chances of success.

Objectives of Startups

Survival - reaching the breakeven point and being able to generate a positive cash flow

Growth - increasing the revenue and scale of the business

Profit - earning profits from trading and increasing the value of the business

Intangible - freedom of decision-making; sense of satisfaction from building a business

Common oBJeCtives

Part-time businesses: a great way to start a business; most aim to supplement an existing living, or earn money to cover costs.

Lifestyle businesses: where the entrepreneur works full-time, but the main aim of the enterprise is to provide a satisfactory living.

Social enterprises: businesses that trade in goods or services for a social purpose. Focus on the “triple bottom line”, where their objectives are measured in terms of: (1) Financial surplus (surplus is similar to profit) (2) Social responsibility and contribution and (3) Environmental impact

Ambitious businesses: ambitious businesses aim for significant growth – in sales, profits etc. These businesses tend to need higher investment, they take more risks, but the returns are potentially higher.

different styles of startuP



Startup Risks - What Can Go Wrong?


In the BUSS1 case study, you should expect the business to be facing risks, problems and the possibility of eventual failure. This is entirely normal for a startup.

You should also expect reality to be different from the assumptions made in the original business plan.

Look for the overall balance of evidence about how well the business is performing and how effective the business planning process was. How much market research was undertaken and was the evidence from that research reliable and acted upon?

Also consider whether the entrepreneur(s) featured has what it takes to make the business a success. Lots of potential problems and hurdles can be overcome if the entrepreneur possesses the right qualities (e.g. determination, persistence)

why do so many startuPs fail? (most don’t reach their 3rd birthday!)

Poor managementPlain and simple. Poor decisions are taken; costs are not kept under control; management don’t understand their market & customers well enough and offer a poor quality product. Bad management is at the heart of most business failures.

Sales lower than expected

It is very easy to over-estimate the sales that will be achieved by a startup. The business plan can be over-optimistic about the price that customers will accept and the volumes they will buy.

Startup costs too highAnother common weakness of startup business planning. Sometimes costs are simply missed out of the cost budgets and cash flow forecast. Alternatively the amount is under-estimated. This is a big concern at the startup stage, where finance is limited.

Overdependence on small number of customers

A startup that is too reliant on one or more customers is at greater risk of failure than one which has a broader, more diverse customer base. If the customer relationship breaks down, or the customer itself fails, then the business is at risk.

Poor qualityThis is linked to poor management. Persistently poor quality products or services will ultimately kill a business.

Overtrading

Sometimes a small business can grow too quickly and, as a result, it runs into serious cash flow problems. A business whose sales grow rapidly might find that customers take too long to pay their debts, whereas stocks build and suppliers demand payment on time. The result can be a business which appears to be successful and profitable, but which runs out of money.

Competitor actionsEvery startup faces competition - both from existing players in the market and from new entrants. If competitors have a better product or can operate at lower cost, then a startup may find itself at a disadvantage which it cannot overcome.

Lack of financeA startup might be under-financed at the beginning, or run out of money as losses mount. Ultimately, it is the lack of finance that results in a new business failing.

New customers don’t turn into repeat customersKey targets set in the business plan are not met

Poor response from initial market researchSuppliers reluctant to provide trade credit

Entrepreneur suffering health problems from the workload of setting the business upUnexpected costs and persistent cash flow problems

some warning signs of Business failure for a startuP


Page 19

Opportunities for Evaluation

Here are some good ways in which you can demonstrate evaluation in your BUSS1 exam answers;

key sPeCifiCation toPiC evaluation oPPortunities

Enterprise and entrepreneursDo the potential rewards outweigh the risks of the proposed business?Does the entrepreneur have the personal characteristics and/or experience to succeed?If you were an investor or bank, would you provide finance to this person / idea?

Generating and protecting business ideas

Is franchising an option? A lower risk opportunity or alternative?Does the business idea need protection? If so, has this been done effectively?

Adding valueHow distinctive is the idea and transformation process being used?Does the added value provide a source of competitive advantage for the startup?Is efficient use being used of inputs (materials, labour, capital)

Market researchHas sufficient research been carried out to inform the business planning process?Is the research reliable - what type & when?Has the research been used appropriately?

Business planningHow seriously has the business planning process been - suffient time and attention?Has the business plan been tested and reviewd by someone with sufficient experience?What advice has been taken / support received? Appropriate?

Understanding marketsIs the target market suitable for the startup? Existing competition? Size? Growth?Has market research helped understanding of customer needs & wants in the target market?Does the startup understand the factors that are likely to affect demand?

Legal structureHas the startup taken advantage of opportunity for limited liability protection?Is the chosen business structure appropriate for the startup?Could an alternative structure from the one chosen benefit the business?

Employing people

Has the startup done all it can to minimise staff costs?How flexible are the employment options chosen by the startup?Relative merits of decisions to employ permanent v temporary staffHas appropriate use been made of consultants and advisers? Were they needed?

Business locationWas homeworking an option? If so, was it chosen?How suitable was the choice of location if it needed to be close to customers, suppliers?What evidence is there that the chosen location benefited or damaged the business?

Sources of finance

Was sufficient finance raised? Not too much, but not too little?Has the choice of finance affected the amount of control entrepreneur has over the business?Are chosen sources suitable for short and long-term needs?

Costs, revenues & profitsWas market research used effectively in estimating revenues and costs?Effectiveness of the process for identifying likely costs?What is the balance between fixed and variable costs? Appropriate?

Breakeven analysisHas the entrepreneur calculated the breakeven output?What steps have been taken to minimise fixed costs?What evidence does the likely breakeven point provide about business viability?

Cash flow forecastingHas a realistic cash flow forecast been prepared as part of the business plan?What are the most likely factors which will cause cash flow problems for the business?Are the chosen sources of finance capable of handling a cash flow problem?

BudgetsHas a suitable budgeting process been completed?Is the business in control of its costs?

Assessing startups

What are the key objectives of the entrepreneur?What are the main risks that the business will fail?What evidence is there that the business will prove to be viable?How effective was the startup business planning process?


Getting to Grips with the BUSS1 Case Study

finanCef • Appropriate and sufficient sources of finance?• Reliable and realistic cash flow forecast?• Enough cash to survive until breakeven?

ideai• What is the product?• Who are the target customers?• Does the idea have a USP?• Does the idea target a niche segment?

viaBilityv• How much added value can be achieved?• What is the breakeven point and how quick to reach?• Are assumptions about likely demand realistic?• Are costs being minimised? How much are fixed?

entrePreneure• Experience and expertise in the target market?• The right personal characteristics and motivation?• How much does the entrepreneur have to lose?• What other support (people, location etc) is needed?

risksr• Is the market research relevant and reliable?• Has a realistic business plan and budget been produced?• How much competition will be faced / likely response?• Is the business plan flexible to handle setbacks?

Your BUSS1 exam paper will contain a case study about a business startup. The exam questions require you to consider circumstances of the case study. You need to think about the new business being set up and apply your answers using insights gained from the case. The trick to remember is that all the answers are contained in the case study - strong exam answers pick up the clues provided and address them when asked.

Use the following acronym (FIVER) to help remember some of the key issues that you need to think about as your read through the BUSS1 case study when you turn the exam paper over...


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