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Enterprise : Almost any business or organisation can be called an enterprise but the term usually refers to the
process by which new businesses are formed and new products and services created and brought to the market.
Enterprise skills: Skills that allow an individual or organisation to respond effectively to changing market situations,
including problems-solving skills, thinking and acting innovatively and creatively, and understanding the importance
of risk and uncertainty. The definition of enterprise capability used by the Department for Children, School and
Families includes innovation, creativity, risk management, risk taking and a ‘can-do’ attitude.
Entrepreneurs: Individuals who have an idea that they develop buy 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.
Characteristics of an entrepreneurs:
Determination
Persistence
Passion
The ability to spot and take advantage of opportunities
Relevant skills and expertise
Vision, creativity and innovation
Motivation
Willingness to take risks
Opportunity cost: The ‘real cost’ of taking a particular action or the next best alternative forgone, i.e. the next best
thing that you could have chosen but did not.
Franchising
Franchise : when a business gives another business the right to supply its product or service.
Costs my be higher
Is one franchise gets a bad reputation they all do
Franchise agreement often restricts how the business should be run
Franchisees are required to sign non-competition clauses, agreeing not to set up competing businesses in
the franchisor’s industry for a significant period after the end of the franchise agreement.
A % of profits given to franchisor
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.
Trademark: Signs, logo, symbols or words displayed on a company’s products or on its advertising, including sounds
or music, which distinguish its brands from those of it competitors.
Factors of production- the four elements – land, labour, capital and enterprise – used in the production of goods
and services.
Production : The process whereby resources (factors if production) are converted into a form that is intended to
satisfy the requirements of potential customers.
Primary sector: those organisations involved in extracting raw materials (e.g. farming, fishing, forestry and the
extractive industries such as oil exploration, mining and quarrying)
Secondary sector: Those organisations involved in processing or refining the raw materials from the primary sector
into finished or semi finished products ( e.g. paper mills, oil refineries, textile manufacturers, food processors and
vehicle manufacturers)
Tertiary sector Those organisations involved in providing services to customers and to other businesses, in either
the public or the private sector.
Adding value: the process of increasing the worth of resources by modifying them
Value added: sales revenue minus the cost of bought in materials, components and services.
Business plan : a report describing the marketing strategy, operational issues and financial implications
of a business start up
Benefits
Problems
Content
Marketing : the anticipation and satisfying of customers’ wants in a way that delights consumers and also
meets the needs of the organisation
Market research – the systematic and objective collection, analysis and evaluation of information that is
intended to assist the marketing process.
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.
Government publications
Newspapers
Magazines
Company records
Competitors
Market research organisations
Loyalty cards
The internet
Qualitative market research : The collection of information about the market based on subjective factors
such as opinions and reasons.
Quantative market research : the collection of information about the market based on number s
Sample : a group of respondents or factors whose views or behaviours should be representative of the
target market as a whole
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, but the interviewees are selected non-
randomly by the interviewer
Stratified sample: A group of respondents selected according to particular features (e.g. age, gender).
However, unlike quota sampling the sub-groups and their sizes are chosen specifically.
Local markets most common form of market for consumer goods. Individuals tend to buy products
within a limited geographical area, close to where they live.
National markets
Physical markets
Non-physical markets
Price
Income and wealth of consumers
Tastes and fashion
Prices of other goods. Demographic factors (relation to population)
Marketing and advertising
Competitors’ actions
Seasonal factors
Government action
Market segmentation : the classification of customers or potential customers into groups or sub-
groups( market segments), each of which responds differently to different products or marketing
approaches
Segmentation analysis : where a firm uses quantitative and qualitative data or information to try to
discover the types of consumers who buy its products and why
Geographic segmentation
Drawbacks
Market size: the volume of sales of a product or the value of sales of a product
Economic growth
The nature of the product
Changes in taste
Social changes
Fashion
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 = the percentage or proportion of the total sale of a product or service achieved by a firm
or a specific brand of a product
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
Incorporated business: This has a legal identity that is separate from the individual owners. As a result,
these organsiations can own assets, owe money and enter into contracts in their own right. Such
businesses include private limited companies and public limited companies.
Unlimited liability: a situation in which the owners of a business are liable for all the debts that the
business may incur
Limited liability: a situation in which the liability of the owners of a business is limited to the fully paid-up
value of the share capital.
Sole trader: a business owned by one person. The owner may operate on his or her own or many employ
other people.
Partnership: a form of business in which two or more people operate for the common goal of making
profit
Private limited company: a small to medium sized business that is usually run by the family or the small
group of individuals who own it.
Public Limited company: a business with limited liability; a share capital of over 50000 ; at least two
directors, a qualified company secretary and , usually, a wide spread of shareholder. It has plc after the
company name.
Disadvantages of plc
Loss of control as the business moves away from the ownership and support of a family or close
knit group of individuals and becomes responsible to shareholders, including institutional
investors.
Subjects the business to constant scrutiny by the financial press
It may cause the business to focus on short term profits for shareholders and maintaining share
prices in order to avoid takeover pressure which detracts from long term decision making
Structure Advantages Disadvantages
Sole trader Easy and cheap to set up Unlimited liability
Fe w legal formalities Limited collateral to support
Able to respond quickly to changes applications for loans
in circumstances Limited capital for investment and
Owner takes all the profit and expansion
hence there is good motivation Difficulties when the owner wishes
Independence to go on holiday or is ill
More privacy than other legal Limited skills as the owner needs to
structures, as financial details do be a ‘jack of all trades’
not have to be published
Partnership Between them, partners may have Control is shared among the
a wide range of skills and partners
knowledge Arguments are common among
Partners are able to raise greater partners
amounts of capital than sole There is still an absolute shortage of
traders capital even 20 people can only raise
The pressure on owners is reduced so much
as cover is available for holidays Unlimited liability unless limited
and decisions are made jointly partnership
Ltd Limited liability and the business Shares are less attractive, as they
has a separate legal identity cannot be traded on the Stock
Access to more capital than Exchange and hence could be
unincorporated business difficult to sell
More privacy than a plc as it is only Less flexible if expansion needs
required to divulge a limited finance which is more difficult to
amount of financial information raise than for a plc
More flexible than a plc There are more legal formalities
than for n incorporated business
PLC Limited liability and the business Must publish a great deal of
has a separate legal identity financial information about its
Easier to raise finance as a result of performance
its stock exchange listing Greater scrutiny of activities
Greater scope for new investment Significant administrative expenses
Can gain positive publicity as a Founders of the firm may lose
result of trading on the stock control if their shareholding falls
exchange below 51%
Suppliers tend to be more willing A stock exchange listing means
to offer credit to public limited pressure from investors may lead to
companies. more emphasis on short term
financial results, not long term
performance.
Chapter 8 – raising finance
Ordinary share capital – money given to a company by share folders in return for a share certificate that
gives them part of the company and entitles them to a share of the profits
Features
Known as risk capital or equity capital. If the business is successful , each shareholder receives a
dividend.
Ordinary share capital appeals to investors who are prepared to take a risk in return for higher
rewards. If a business foes into liquidation and ceases to exists because it cannot pay its debts,
money invested by shareholders will only be returned to them if every debt has been paid in full.
On the other hand, because profitable companies can borrow at low interest rates, shareholders
can get high returns when things go well.
In the case of liquidation, the shareholder is protected by the limited liability provided by limited
companies. This means that shareholders can only lose the paid up value of their shares and
cannot be asked to pay any more money
Ordinary shares are often known as permanent capital, as the business will always have
shareholders who own these shares. For this reason, ordinary share capital is used a as long
term source of finance, to set up the firm in the first place or for major expansion plan that
cannot be financed from other sources.
For expansion plans, companies will often use a rights issue, where the new shares are sold to
existing shareholders. This reduces the administrative shares are sold to existing shareholders.
This reduces the administrative costs that are an element of issuing ordinary share capital, as the
new shares are often sold in proportion to the existing number of shares.
Advantages
Limited liability encourages shareholders to invest in the business, as it restricts the amount of
money they can lose
it is not necessary to pay shareholders a dividend if the business cannot afford these payments.
This contrasts sharply with loans- interest must be paid on these , regardless of the success or
failure of the business
bringing new shareholders into a small business can add further expertise. This usually applies
when the additional share capital is being provided by a business angel or venture capitalist
increasing ordinary share capital can make it easier to borrow more funds from a bank, as the
share capital can help to pay for assets that can be used as collateral.
It is permanent, so the business will never be required to gather together sufficient funds to
repay it; the money stays permanently in the business.
Disadvantages
In profitable year shareholders will expect good dividends and this is likely to be more expensive
than the interest charged on a loan
The original aims of the business may be lost as new shareholders may not have the same values
as the original owners
As the business grows through this source of finance, it is probable that the percentage
shareholding of the original owner(s) will decline. This can ultimately lead to a smaller share of
the profit and even a loss of control of the business.
Loan capital = money received by an organisation in return for the organization’s agreement to pay
interest during the period of the loan and to repay the loan within an agreed time.
The interest rate and therefore 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, although it is possible to get
unsecured loans at a higher interest charge if the business cannot provide collateral.
The size of the loan and the period of repayment can be organised to match the exact needs of
the firm
Disadvantages
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 may be possible to
repay the loan earlier but a fee must be paid for doing this.
Loans are more expensive than alternatives such as personal finance. This is particularly true for
stat ups which are charged higher rates of interest because they are unable to provide the
guarantees that the bank prefers.
Bank overdrafts : when a bank allows an indivual or organisation to overspend its current account in the
bank up to an agreed limit and for a stated time period.
Advantages
Flexible
Short term
Interest only paid on the amount of the overdraft being used rather than the maximum level
allowed
They are particularly useful to sessasonal businesses, which are likely to experience some cash
flow problems at certain times of the year
Security is not usually required
Disadvantages
Venture capital: finance that is provided to small or medium sized firms that seek growth nut which may
be considered as risky by typical share buyers or other lenders.
Other sources
Personal savings
Mortgages
Borrowing privately from friends and family
Selling private assets
Capital expenditure = this is spending on items that can be used time and time again (fixed assets). Long
time may be needed before these items generate enough profit to pay for themselves.
Revenue expenditure = this is spending on current, day-today costs such as the purchase of raw
materials and payment of wages. Such expenditure provides a quick return, so the company should rely
for this one a sort term source of finance, usually repayable within 1year.
Technology
o With the development of communication technologies such as mobile phones, personal
computers and the internet, it is becoming increasingly feasible for people to work from
home or in locations that are away from centralised office, distribution or production
bases. This types of working arrangement is known as teleworking.
Cost of factors of production
o Businesses often try to find least-cost site (the business location that allows a firm to
minimize its costs (and hence its selling price)).
o Land costs
o Labour costs
o Transport costs
Infrastructure
o The network of utilities such as transport links, sewerage, telecommunications systems,
health services and educational facilities.
The market
Qualitative factors
o Convenience (for business owner)
o USP
o Quality of life
o Inertia
Unwillingness to move
Desire of the owner’s family to remain in the same place for personal reasons
Difficulties in building up a new customer base in a new location
Loyalty to its existing labour force
A desire to keep the same locally based suppliers
A fear of change
Lower morale and productivity before the relocation, as a result of some stage
probably losing their jobs
The cost of relocation
Transitional difficulties while adjusting to the new location and processes
The key factors that a small firm should consider were found to be:
Demographic factors – i.e. whether the local population matched the business’ 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 during opening times
Parking factors – cost and time
Competitors’ locations
Location history – did the indivual site have a good track record of successful business activity?
Council policies, such as limiting certain business activities (nightclubs) to certain areas of town.
Meet demand
Skills
Seasonal demand
Expansion
Types of employee
Permanent
Temporary of fixed contract employs
Employees on zero-hour contract
Employment agency staff
Self-employment freelancers, consultants and contractors.
Cost
Meeting the range of employment legislation requirements
Managing staff
Employee absence
Total revenue = the income received form an organization’s activities ( a.k.a. income, revenue, sales
revenue, sales turnover, turnover) = price per unit x quantity sold)
Profit = the difference between the income of a business and its total costs = total revenue – total costs
Fixed costs = costs that do not vary directly with output n the short run
Variable costs = costs that vary directly with output in the short run
Total contribution = the difference between total revenue and total variable cost. = cpu x q =revenue –
total variable costs
Breakeven analysis = study of the relationship between total costs and total revenue to identify the
output at which a business breaks even
Breakeven output = the level of output at which total sales revenue is equal to total costs of production.
Using table
Using formula breakeven output =(fc)/(CpU) or (fc)/(sp-vc/u)
Used to calculate how long it will take to reach the level of output needed to make a profit. Will
help to assess whether or not the business is viable
Simple, straightforward way of discovering whether a business plan is likely to succeed
financially.
Usually, a start up will use breakeven analysis to plan not only its expected results but also a
‘best case’ scenario and a ‘worst case’ scenario. This allows the entrepreneur to see the
maximum possible profit and minimum profit. This information can indicate the level of risk
involved in the start up
What if?
Strengths of BEA
Shows the different levels of profit arising from the various levels of output and sales that might
be achieved
Calculations are quick and easy to complete, thus saving businesses time.
Foresee future changes
Target profit level.
Weaknesses
Unreliable as forecast
Sales unlikely to be exactly the same as output
Sp may change as more is purchased
FC may not stay the same as output changes.,.
Assume that VC per unit are always the same ignoring factors such as buying in bulk.
Cash flow = the amounts of money flowing into and out of a business over a period of time
Cash inflows : receipts of cash , typically arising from sales of items, payments by debtors, loans received,
rent charged, sale of assets and interest received
Cash outflows = payments of cash typically arising from the purchase of items , payments to creditors,
loan repaid or given, rental payments, purchase of assets and interest payments.
Net cash flow = the sum of cash inflows to an organisation minus the sum of cash outflows over a period
of time.
Cash flow cycle: The regular pattern of inflows and outflows of cash within a business.
Previous forecasts
Cash flow statements (a description of how cash flowed into and out of a business during a
particular period of time )
Consumer research
Study of similar businesses such as competitors
Establishing the level of resources needed
Banks
Consultants
The cash flow forecast itself
Potential problems that may cause inaccuracy in a cash flow forecast include the following
Structure
The main reasons for forecasting cash flow are therefore as follows
Budget : an agreed plan establishing, in numerical or financial terms, the policy to be pursued and the
anticipated outcomes of that policy,
Management accounting: The production and use of financial and accounting information for internal
purposes of planning, review and control. It is based on predictions of what will happen and analysis of
the actual outcomes in comparison to the original plans.
Income budget: shows the agreed, planned income of a business (or division of a business) over a
period of time. It may also be described as a revenue budget or sales budget,
Expenditure budget: Shows the agreed, planned expenditure of a business (or division of a business)
over a period of time.
Profit budget: shows the agreed, planned profit of a business (or division of a business) over a period of
time.
Budgeting according to company objectives the more ambitious the objectives, the greater
the budget that needs to be allocated.
Budgeting according to competitors’ spending In order to stay competitive, a business may
have to match the spending of its rival.
Setting the budget as a percentage of sales revenue
Zero budgeting/ budgeting based on expected outcomes
Budgeting according to last year’s budget allocation