BUSINESS STUDIESUNIT 1

ENTERPRISE AND ENTREPRENEURSCharacteristics of successful entrepreneurs-Passionate (about the product)

-Visionary (have faith)

-Energetic and driven(prepared to work hard)

-Calculated risk taker (take risk to maximise rewards)

-Multi-tasker (take on more than one role)

-Resilient (able to handle problems)

-Focused(set clear goals)

-Results orientated(take pleasure from achieving targets)

ENTERPRISE AND ENTREPRENEURS

Reasons for Starting a business-More flexibility over working life

-Escape an uninteresting job

-Pursue an interest

-Want to be your own boss

-Feeling of satisfaction

-Wanting more of the rewards from your effort

-Fed up of working un a business hierarchy

-Financial necessity

ENTERPRISE AND ENTREPRENEURS

Risks of starting a business-Potential loss of investments

-Loss of pay from previous job

-Potential unlimited liability

-Stress and pressure

-Earning little

-isolation

Rewards for the Entrepreneur-Potential for income and profit

-Satisfaction

-Freedom

-Control

-Capital Gain

ENTERPRISE AND ENTREPRENEURS

Sources of Government SupportThe government are encouraging start-ups for economic growth

-BIS (Dept for Business, Innovation and Skills)

-Business Link

-DirectGov (advice on tax, laws and regulations)

-UKTI (help with international sales)

-Tax incentives or breaks for investment

Other Support and Advice for Start-ups-Many online sources

-Business Associations (the Princes Trust and Federation of small businesses)

-Local business networks

-Professional Firms (Accountants and Lawyers)

-Campaigning Organisations (start-up Britain)

OPPORTUNITY COSTOpportunity Cost- is the cost of missing out on the next best alternative. The benefits that could have been gained by taking a different decision.

How opportunity costs affect the startup:

- Resources are limited

- Decisions need to be made when resources are scarce

- Take calculated risks and weigh up potential implications before choosing what they think is best for the business.

GENERATING AND PROTECTING IDEAS

Sources of ideas- Brainstorming and creative thinking

- Business/ Personal Experience

- Frustrations with poor service

- Copying an existing idea (Franchising)

- Innovation or invention

What makes a good Idea?- Solving a problem

- Cheaper or better product/service

- Easier to use

- Can be developed easily

- exploits gap in the market or an emerging growth trend

GENERATING AND PROTECTING IDEASPatents- Difficult to obtain

- On a new invention or innovative product or production method

- The patent owner is given up to 20 years protection against competitors

- Ability to license right to use the invention in return for royalties

- Patents are expensive and time consuming to obtain

Trademarks- Identifies a product

- Can be a name, logo or symbol etc.

- Trademark allows a business from using identical or confusingly similar marks

- Trademark protection lasts for 10 years

Copyright- Important source of protection for any startup in creative or knowledge industries

- Protection is granted automatically

- Protects the way in which an idea is expressed as soon as it is published

- Lasts for 70 years after authors death

ADDING VALUE AND TARGETING A NICHE MARKET

Added value – is the difference between the price of the finished product and the cost of the inputs used in making it.

How to add value:

- Delivering excellent and distinctive customer service

- Building a distinctive brand

- Product features and benefits

Why add value?

- Can charge higher price

- Differentiate from competition

- Build customer loyalty

- Focus on customer needs

ADDING VALUE AND TARGETING A NICHE MARKET

Niche Market- is a smaller, specialist part of a larger market where customers have particular needs and wants.Market Segments:

- Geographic (countries, regions and population)

- Demographic (customer age, gender, lifestyle etc)

Advantages of niche segments:

- Better able to add value

- Customer needs are more precisely defined

- Potential to charger higher prices

- Encounter less competition

- Target potential customers easier

Disadvantages of niche segments:

- Customers are more demanding

- Existing established competitors

- Less able to benefit economies of scale

- Competitors soon attracted when market becomes mainstream

FRANCHISINGFranchise- the business format which a franchisor allows a franchisee to use, under license.

Franchisor- the ultimate owner of the franchise format

Franchisee- the business who is granted the right to operate a franchise on behalf of the franchisor.

Costs of being a franchisee:

- Initial cost

- Service fee

- Advertising levy

- Mark ups

Franchisees can be seen as a lower risk:

- Easier to gain customers

- Tried and tested business model

- Easier to raise bank finance

FRANCHISINGADVANTAGES DISADVANTAGES

FRANCHISEE

- It is your own business- Business format is well thought- Ongoing advice and support from the

franchisor- Should be running a business with a

reputation and brand name- Don’t necessarily need experience- Benefit from franchisors scale

- You don’t own the business format- Expected to act in the best interests

of the franchisor- Restrictions on trading (prices and

location)- Large proportion of revenues go to

the franchisor- Risk of the franchisor of going out of

business

FRANCHISOR

- Relatively quick method of expansion

- Lower investment needed- Regular fees and levies provide a

strong flow of income.

- Franchisees profit from the franchisors business model.

- Poor franchisee can damage reputation of whole franchise

- Need robust franchisee recruitment and management systems.

ANALYSING AND UNDERSTANDING THE MARKET

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

Local Markets:

+ Customers are a short distance from suppliers

+ Close to the customers and respond to market change

- Market is small and often competitive

National Markets:

+ Much larger target market

- Customers are spread throughout the country

- Needs to be operated efficiently and hard to maintain

Physical markets:

+ Buyers and sellers meet in the same location(eg car boot sale)

+ Easier for buyers and sellers to exchange information

- Needs to be open for trade to take place

Electronic Market

+ Any connection between buyer and seller using electronic means

+ Ability to reach global market

- Price is highly competitive

- Product then has to be delivered

ANALYSING AND UNDERSTANDING THE MARKET

Demand is how much customers are prepared and willing to buy a product at a given price.

Factors that affect demand:

- Price

- Incomes (how much money the customer has to spend)

- Taste and fashions

- Competitor actions

Market size – the value and volume

Market share – proportion of market owned

Market growth – the percentage growth over a period of time

CHOOSING A LEGAL STRUCTURE

Sole Trader

A business owned by a single individual

+ Quick and easy to set up

+ Simple to run

+ Minimal paperwork and simple accounting

- Full personal liability

- Harder to raise finance

- The business is the owner

CHOOSING A LEGAL STRUCTURE

Partnership

Where a business is owned by two or more people

+ The simplest way for two people to form a business together

+ Benefit from the expertise from all the owners

+ Greater potential to raise finance

- Full personal liability

- A poor decision by one partner damages the interests of others

- Harder to raise finance than a company

- Partners are bound to hour decisions of others

CHOOSING A LEGAL STRUCTURE

Limited company

A separate corporation owned by the shareholders

+ Limited liability

+ Easier to raise finance

+ Stable form of structure

- Greater admin costs

- Public disclosure of company information

- Directors legal duties

CHOOSING A LEGAL STRUCTURE

Social Enterprise

A business with a primarily social objective whose surplus is re-invested for that purpose in the business or community.

- Still running a proper business

- Giving something back

- Activities that benefit society

- Availability of government grants and other finance support

- Stakeholders gain from profits reinvested

- Example is the big issue

SOURCES OF FINANCE

Internal sources:

- Personal sources

- Retained profits

- Share capital from entrepreneur

- Sales of assets

External sources:

- Share capital from outside investors

- Friends and family

- Bank overdraft

- Bank loan

- Grants and other government incentives

Factors affecting choice:

- Control

- Cost

- Amount

- Timing and flexibility

SOURCES OF FINANCE

ADVANTAGES DISADVANTAGES

Personal Sources

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

start up.

- Opportunity cost- Entrepreneurs funds at risk- May be limited

Retained Profit

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

- External shareholders may want a dividend

- Start-ups struggle to reach profitability

Bank Overdraft

- Flexible short term source of finance

- Only used when needed

- Expensive (high rate of interest)- Repayable to bank on demand

Bank Loan

- longer-term finance and more secure

- No effect on ownership

- Hard for a startup to obtain- Interest payable on entire amount- Bank may require security

Venture Capitalist

- Potentially significant source- Expertise and contacts can be

useful

- Loss of control- Longer and complex

Friends and Family

- Flexible- Doesn’t have to mean loss of

control

- Potential for personal disputes- May want some control or influence

over decisions

BUSINESS LOCATION

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

Quantitative factors- based on measureable information such as cost.

Qualitative factors- based on personal opinions and preferences such as quality of life.

Home Based Startup-

+ Low cost

+ Little travelling

+ Can be combined with domestic tasks

+ Lowers business risk

+ Freedom over what to wear

- Requires greater self discipline

- Work often interrupted

- Work never goes away

- Potentially lonely

- Could give poor impression to customers

BUSINESS LOCATION

Factors that influence the choice of location:

- Cost

- fixed costs raises break even output

- it’s best to try to minimise costs to lower risk of failure

- Proximity to the market

- need to be close to potential customers

- Infrastructure

- transport, telecommunication

- Personal and other qualitative issues

- location may create a USP that could attract customers or staff

EMPLOYING PEOPLEFull- Time- contracted employee working more than 30 hours a week

+ maximises output from each employee

+ available all the time

+ better returns from training

+ potentially better for customer service

- Higher costs

- is there enough work to justify a full timer

- Reduced flexibility

- Raises the breakeven output=higher risk

Part- Time- contracted employee working less than 30 hours a week

+ keeps costs down= lower breakeven output

+ may be easier to recruit

+ consistent with increasing demand for flexible working

- Not always able to handle the high workload

- Less opportunity for training

- Harder to communicate with them as they aren’t working long

Permanent- employed by the business for a non-specified amount of time.

Temporary- employment for a specific period after which employment is terminated or renewed.

+ Flexibility

+ ideal for certain tasks or projects

- Higher cost per hour

- Temps are less likely to know and understand

- Potentially negative customer service

Consultant- individuals and businesses external to the business that provide specific services and advice.

CALCULATING COSTS, REVENUES AND PROFITS

Costs- incurred in making and delivery of the products/services

Revenue- amounts earned by a business by selling products and services (Revenue= price x quantity sold)

Profit- the difference between total revenues and total costs.

Variable costs – costs which change as a result of changes in output

Fixed costs- costs which do not change in relation to changes in output

BREAKEVEN ANALYSIS

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

Contribution- the difference between revenues and variable costs

Margin of safety- the difference between actual output and the breakeven output.

To reduce breakeven output:

- Maximise added value

- Reduce variable costs

- Reduce Fixed costs

Breakeven output =Fixed costs (£)

Contribution per unit (£)

Contribution per unit= selling price- variable cost per unit

Total contribution= contribution per unit x number of units sold

BREAKEVEN ANALYSIS

+ A crucial milestone

+ Focuses entrepreneur on a target

+ Encourages forecasting's of cash flow

+ Provides a measureable target

+ A key part of any credible business plan

+ Involves making estimates that could be wrong

- Ignores price and cost changes

- Assumes all output is sold

- New entrepreneurs may lack experience to make realistic estimates

- Breakeven output changes

CASH FLOW FORECASTING

A cash flow forecast is a prediction of cash inflow and outflow over a period of time.

Why a business should produce a cash flow forecast:

- Identifies potential shortfalls

- Ensure the business can afford to pay suppliers

- Spot problems with customer payments

- Important discipline of financial planning

- External stakeholders and banks may require a forecast

However a forecast may not be reliable as:

- Difficult to forecast the timings

- Linked to the quality of market research

- Need to be cautious

- Good to have different scenarios

- Will have to make assumptions

BUSINESS PLANNING AND BUDGETING

- Income sales budget

- Expenditure costs budget

- Profit budget

A business plan:

Contents include, executive summary, market profile, competition, protection of the business idea, management team, marketing, operations, financials, funding and exit strategy.

+ Provides a focus on the business idea

+ Clarifies thoughts and identifies gaps in information and market research

+ Encourages the entrepreneur to focus and plan the future

+ Measure against performance

+ Essential to raise finance

- Assumptions about a business are uncertain

- Entrepreneurs may be optimistic

- Market research may be limited/unreliable

- Startups may incur unanticipated costs

- Budgeting is generally easier when there has been experience in trading

OBJECTIVES OF STARTUPS

- Survival

- Growth

- Profit

- Or Intangible such as freedom

What can go wrong:

- Poor management

- Sales lower than expected

- Startup costs too high

- Poor quality

- Overtrading

- Competitor actions

- Lack of finance