Commerce

Earning an Income
An income is money received on a regular basis from work, property, business or welfare payments.
Main types of income:
Wage – A type of income calculated by the hour. Overtime and penalty rates may be earned by working
outside normal times.
Commission – When a person sells and receives a percentage of it
Salary – The income earned from performing a job, usually a yearly amount. There are no extra
payments for extra hours worked
Superannuation – Where employers contribute money to be invested on employee’s behalf, which the
employees receive when they retire
Fee – Payment for a service performed
Profit – People who operate their own business (self-employed) can make their own income from profit
Royalties – The return you receive from writing published or recorded material, such as a book, lyrics or
music
Rent – Purchasing a property as an investment, and rent can be earned when tenants are found
(The return from investing in property)
Dole/government payment/benefits – A payment for someone who is unemployed, age, disability and
the need to care for children
Dividend – Returns from investing in shares and represents your share of the company’s profits
Interest – From their bank accounts and other investments
Investments – Savings, short-term/long-term deposits
Employment contract – an agreement between an employer and an employee as to what work will be performed
and what the pay and conditions will be for that particular job.
TYPES OF WORK
The types are called full-time, part-time, permanent and casual.
Full-time and part-time can be permanent or casual.
9,232,000 Australians were employed in 2002: 72% full-time, 28% part-time.
INCOME FROM INVESTMENTS
The most common form of investing is saving money in a bank. Simplest = savings account (a bank account
where money is placed to save; the interest rate is usually quite small). They reward the saver with an interest
payment often at the end of each financial year (the year from 1 July one year to 30 June the next year).
DISPOSABLE INCOME
The money people receive after paying tax on the income they have earned. Can be either spent or saved or a
combination.
EXPENDITURE
People spend part or all of their income to provide for their basic needs – food, drink, shelter and clothing – so
they can survive. Fixed expenditures must be paid on a regular basis (rent, mortgage, insurance).
Spending and saving income
Savings is part of income that is not spent. First expenditure is spending over which you do not really have
much control. It is spending which you have to do. Variable or discretionary expenditure is spending over
which you have some control.
Benefits from saving:
• Being able to buy an expensive item in the future
• Having funds available in an emergency
• Feeling a sense of security
• Being able to invest your savings to earn even more income
• Having money to live on when you retire and stop working
Income
As income increase, spending will increase and savings will increase also. High-income earners tend to save a
greater proportion of their income than low income earners. Low income earners often must spend nearly all of
their income on necessities, high-income earners may purchase goods and services (holidays etc.).
Age
When people first begin working, they spend most of their income and save very little. Workers who are nearing
retirement save a greater proportion of their income.
Location
Where you live can influence the amount you spend on transport and entertainment. In urban areas, housing is
usually more expensive than rural areas. Transport is usually cheaper for city dwellers who pay less for petrol
and have better access to public transport.
Wealth
Wealth is how much your assets are worth. It is possible for people to be earning the same amount of money in
income but have very different levels of wealth.
Business decisions
Retailers offer consumers interest-free no-deposit deals when they purchase items such as furniture. These may
influence a consumer not to wait until they have saved for a deposit and instead purchase the item they want
immediately.
Tastes and attitudes
Peer groups can influence what you spend your money on. Depending on the things/interests that are important
to you, you will spend money on those things.
Examples of fixed expenses: water, rent, gas, insurance, electricity
Variable expenses: coffee beans, casual staff, furniture, utensils/cups, milk/sugar
Borrowing money
Reasons:
• They do not earn enough income. Therefore they may need extra money to be able to purchase certain
goods and services or to make large purchases (house/unit, car, furniture, holiday)
• People can use their credit cards to buy day-to-day products & they may owe the credit card a lot of
money at the end of the month
• They wish to spend more money than they have at the moment
• To invest in the share market or the property market. These people are able to gain tax advantages for
these purchases. The Australian Tax Office (ATO) allows investors to make a number of claims against
these borrowings as tax deductions. This means that they will pay less tax
• They want an item now rather than in the future
• They wish to spend more money than they have at the moment
Retailers may provide loan facilities such as store cards, interest-free loans and offers like “no payment required
for 12 months”. The general demands of consumers to own modern products and the ready availability of credit
(borrowing money or buying things now and paying for them later) has led to an increasing use of borrowed
funds to finance the purchase of these products.
When you borrow money you are in debt, it is not a problem as long as you can remain in control (able to make
repayments). The money that is borrowed is called the loan principal.
Saving a deposit (a part payment that you pay to obtain an item, with the remaining amount to be paid late) and
then paying off an item may prove to be a better idea for many consumers.
Advantages Disadvantages
Need only a small or no deposit Need to pay interest
Can repay the loan over a longer time period Have a financial commitment over a length of time
Able to possess the item now Interest rates may increase

GETTING A LOAN
Lenders, usually lending institutions (suppliers of money for people to borrow e.g. banks and credit unions) look
for the borrower to have security (assets that can be sold by the lender if the borrower does not repay the loan).
Building up a portfolio (a collection of investments that you own) that increases a borrower’s assets will increase
the chance of getting a loan.
Most look for:
• A secure job or
• The length of current employment position
• Previous savings history
• The ownership of assets (items of value) which are offered as security against the loan
A person applying for a loan will have several options:
• They can apply in person to the lending institution
• They can use a broker to arrange the loan
• They can arrange the loan over the phone
• They can make an online application for the loan
Types of loans
Common loans provided by lending Loans used for:
institutions
 Car New cars and used cars
House House, unit and land
Personal Travel, furniture, holidays and home improvements
Investment Shares and property

Lending institutions
The traditional suppliers of money for borrowing were banks. New banks came into the Australian financial
system in the 1980’s. Many permanent building societies have also become banks. Credit unions, often based in
occupations such as teaching and the police force, now offer all the services of a bank. Accepting deposits from
customers, operating savings accounts and debit cards, offering cheque accounts, credit card facilities and loans
have become the chief services provided by banks.
The Australian Prudential Regulation Authority (APRA) is the government body that looks after the deposit-
taking and lending operations for the financial services industry and provides guidelines for its operation.
Customers can access their accounts through automatic teller machines (ATMs), Electronic Funds Transfer Point
of Sale (EFTPOS), phone banking or the Internet. BPAY and Giropost (Australia Post) have also assisted in
depositing money and paying bills from their accounts.
The whole financial system has lenders who target two main customers:
• Individuals
• Businesses
Authorised deposit takers (ADIs) – Banks in Australia are grouped in the following way:
• Australian-owned banks
• Foreign subsidiary banks
• Branches of foreign banks
• Building societies
• Credit unions
Main types of lending institutions Loans offered
Banks – Australian and foreign e.g. Westpac, HSCBC Houses, land, investment, personal loans for a range of
items
Permanent building societies e.g. Newcastle Houses and land
Permanent Building Society Ltd, Heritage Building
Society Ltd
Credit unions e.g. Teachers, police Houses, land, investment, personal loans for a range of
items
Ability to repay
In deciding a borrower’s ability to repay a loan, lenders look at the:
• Borrower’s income
• Total amount being borrowed
• Interest rate being charged
• Amount of deposit that is being provided
• Regular loan repayment amount
• Regular repayment time period
• Total length of the loan repayment period
• Penalty conditions of the loan if not paid promptly
The ability to borrow an amount of money and still live well is referred to as a borrower’s ability to service a loan
(the ability to repay the amount of money you have borrowed plus the interest). A rise in interest rates may cause
some concern for people with a loan because they had not planned for potential increase. They can threaten
financial security and for some people, ownership of their houses.
Credit rating
A credit check can be conducted on a person to verify their previous borrowing history and see f they are a good
risk for a lender. A rating (or credit report) is provided which shows how dependable a person is in paying their
financial commitments. Credit ratings (information about a person’s previous borrowing record; an indication
they are a good risk) are provided by businesses that specialise in this service. Borrowing small amounts of
money to buy small-value items is a good idea (can build good credit record).
Managing Finances
FEATURES OF RESPONSIBLE FINANCIAL MANAGEMENT
Responsible financial management: balancing income and expenses, borrowing and repayments, savings and
future needs.
It includes trying to make the most of your bank accounts. Banks make money on any unpaid debt by charging
interest on credit card amounts not paid off by the date due. People who are wise financial managers use credit
cards to their advantage.
Steps to responsible financial management:
• Finding employment that provides regular income
• Living within your income
• Work within a budget
• Use credit cards to your advantage (a longer time period used before the credit card bill arrives for 55 day
credit)
WHAT CAN BUDGETS DO TO HELP CONSUMERS?
• To show people where their money goes
• Help people plan their spending
• Prevent people from going too deep into debt
• Help people save towards particular goals
• Help people save so that they earn income from their savings
~ Poor budgeting can lead to excessive debt, overspending, lifestyle decreasing, bad credit rating,
bankruptcy
Use cash for Use credit for
Buying smaller items so you don’t have a debt to repay The times when you don’t have enough cash
later
Getting a better price by paying the cash price Buying something at a time when you don’t have
enough money, but are able to have substantially on
the price by buying it now
Buying now, but knowing you will have saved the
money by the time the credit card bill arrives
When you over-extend your ability to repay borrowed funds, the company can cease your assets (repossess items
and sell them in an attempt to cover some of the outstanding debt)
BUDGETING
Budgeting means planning your income and expenses. It helps plan choices about what goods and services to
buy now, which ones to buy in the future and which ones to give up altogether on a weekly, monthly or yearly
basis. Bad budgeting -> problem of excessive debt.
Preparing a budget
Income earned and expenses. Budgeting aims to balance them. For individual consumers, budgeting usually
involves planning how to allocate their expenditure from the income they earn. Businesses also budget by
looking at past earnings and expenses and noting expected future sales and revenue. If expenses are greater than
income, a consumer is overcommitted (living beyond your means; taking on more debt than you can afford to
pay) and needs to either earn more or spend less.
Saving
Two ways to increase savings: reduce spending or increase income. Most people like to have some savings
because:
• It provides a feeling of security. People know they have some money put aside to use in emergencies
• Some people get more satisfaction from saving money than spending it
• Some people have a specific purpose for saving their money. They may want to buy something special
• There are people saving to have a better life in the future. They may want to provide for an income from
investments when they retire. By budgeting and saving from their present income, they help to safeguard
their lifelong welfare.
Debentures are offered by finance companies. Depositors lock money away for a set time at a set return
(interest).
Monitoring and record keeping
All employers must give their employees an income slip. This shows the income earned, the tax paid to the
Australian Tax Office (ATO) and any other deductions that an employee has arranged to have taken from their
pay. Employees can keep an accurate record of the money they’ve earned. Consumers make purchases using cash
or credit cards. Monitoring means holding onto receipts that are received from these transactions and checking
them. Keeping receipts provides proof of purchase in cases of warranty claims or product returns.
It is hard to monitor debit and credit card expenditure if you do not keep dockets, especially when statements are
often received weeks after the purchases are made.
Financial records can be monitored accurately through a record-keeping process that shows the movement of
money. IN business, money received is referred to as revenue and money going out is expenditure. This can be
recorded in a notebook or in spreadsheets on a personal computer which allows the balance to be calculated
quickly.
Avoiding over commitments
Credit card purchases have the advantage of delaying the repayment until a later date. Problems arise when too
many purchases are made and the credit card debt is too large for one payment.
INSURANCE
Insurance (payment of a premium to an insurance company which pays to repair or replace an insured item that
is lost, stolen or damaged) allows consumers and businesses to protect themselves from financial loss in the case
of specified events.
• Most insurance deals with houses and cars
• Houses can be insured against accidental fire and break-ins by thieves
• The contents of the house can also be insured
• People who rent can arrange renter’s contents insurance
• Cars can be insured against accidents and theft
Numerous other items and events can be insured against:
• Medical insurance helps a consumer get back some of their payments (rebates: a refund for part of an
amount that has been paid)) if they have medical services provided by medical practitioners
• Life insurance is available to insure a person in the event of death
• Special item insurance is available (e.g. insurance against rain on the day of an outdoor event, or against
having to pay a golfer for a prize of getting a hole-in-one during a tournament). Insurance companies will
be happy to negotiate a package
• Travel insurance covers travellers for medical expenses, loss of luggage and other specified events on
their trip
• Income protection insurance helps support employees who cannot work because of accident or illness
CONSEQUENCES OF POOR FINANCIAL MANAGEMENT
Extremes of poor financial management can lead to personal bankruptcy (the situation in which you have been
taken to court for not being able to pay your debts).
SECURITY FOR A LOAN
When a person buys a house/unit, the bank will lend them money but will need to have some security that the
loan will be repayed. The person will use the unit they are about to buy as security. This means that the bank will
hold the title deeds to the property until the debt/loan is fully repayed. When a person buys a car on finance
(when they borrow money), the finance company owns the car until the loan is repayed.
Consequences of poor financial management People affected
Financial • The individual
• It can lead to a shortage of money for • Partners
purchases • Family
• It decreases a person’s ability to provide for the • Extended family
basics of life • Business partners
• A poor credit rating will lead to an inability to • Sellers of goods
receive future credit • Providers of services
• An inability to repay a loan may also suffer • Providers of credit and finance
financially
• Debt collection agencies
• Future lenders
Legal • The individual
• It can lead to legal problems where a person • Partners
may be pursued to repay loans or credit they • Family
have taken • Extended family
• Legal actions by those owed the money may • Business partners
lead to the purchaser being declared bankrupt. • Sellers of goods
This will lead to longer-term difficulties in
• Providers of services
getting credit
• Solicitors and courts
• Future lenders
Social • The individual
• It can lead to social costs for two groups: the • Partners
individual or family and the community • Family
• For the individual or family, it leads to • Extended family
hardship and an inability to purchase items. • Business partners
Sometimes it can lead to depression and/or • Customers
domestic violence
• Sellers of goods
• Across society it could lead to problems such as
• Providers of services
 poverty and people unable to repay amounts • The community at large
owing. This is particularly hard for families
• Debt across large sectors of the population
creates problems. Behaviour such as theft can
become common
Repossession
The lender has the right to take a valuable piece of property away from you and sell it if you can’t pay them back.
Before the lender can come and repossess the secured property, they usually must send a default notice which
gives 30 days to solve the problem. Money is still owed even after the secured property has been taken and sold.
Bad credit rating
Credit reporting agencies collect information about what loans you have had and whether you repay them. It is
collected from banks, building societies, phone companies and retailers. If you are late repaying a debt or you
cannot repay your debt and/or become bankrupt, this will recorded in your file which may make it difficult to get
a loan in the future.
Being taken to court
The lender may take you to court to get you to the money. You will receive a ‘Statement of Liquidated Claim’
which sets out how much the other person believes you owe them. If you don’t respond, the court will rule that
you owe money and may arrange for the sheriff’s office to take and sell some of your personal property, arrange
for money to be deducted from your pay or bank account (garnishee order) or bankrupt you.
Bankruptcy
A person can ask a court to declare them bankrupt (voluntary bankruptcy) or their creditors can ask a court to do
it. Once a court declares you bankrupt, your creditors can no longer demand payment from you and your debts
are cancelled. A trustee is appointed to manage your financial affairs. All of your assets will be controlled by this
trustee who will probably take and sell your possessions to repay your debts.
SOURCES OF FINANCIAL ADVICE
The financial services industry
The prime function (the main purpose or goal of an organisation) of lenders in the financial services industry is
to offer a place to deposit money and obtain loans. A large number of advisors specialise in advising clients
approaching retirement on their superannuation (money put aside and invested in a special fund for your
retirement. It is not accessible until you retire) options.
The services offered
The large number of mortgage (a long-term loan used to purchase time such as houses, with the house or
purchased item being security for the loan) options is an example of financial providers striving to offer new
products to their customers.
The main services offered to retail customers by financial institutions include:
• Saving accounts
• Term deposits
• Cheque accounts
• Credit cards
• Safety-deposit boxes
• Investment advice:
- Capital growth of funds – increasing the value of invested funds
- Income stream (a regular and reliable income flowing in from investments)
- Tax minimisation schemes (legal strategies to reduce the tax that has to be paid on the income from
investments)
• Insurance
• Life insurance
• Foreign currency
• Foreign investment
• Share trading facilities
• Cash management schemes - schemes to invest available cash that gives a degree of access to cash if
needed but still with an income from the interest
• Property investment
• Superannuation advice and planning
• Travel
The range of organisations
Organisations that offer financial services can be grouped as: traditional, advice and money linkages, financial
planners and support agencies.
Traditional Advice and money Financial planners Support agencies
organisations linkages
Banks Mortgage brokers e.g. Life insurance companies Consumer affairs
Aussie Home Loans, e.g. Citicorp Life
Mortgage Choice Insurance Ltd
Credit unions Investment agencies Superannuation Charitable organisations
companies e.g. AMP, MLC e.g. Salvation Army
Permanent building Stockbroking firms e.g. Controlling bodies e.g.
societies ABN AMRO Morgan’s, ombudsman, APRA
Goldman Sachs JB Were
THE RESPONSIBILITIES OF LENDERS AND ADVIROS AND THEIR
LEGAL OBLIGLATIONS
Financial planners/advisors, lending institutions and mortgage brokers (people and organisations who arrange
mortgages for people who wish to borrow to buy property) provide services to clients and in return receive a
payment. The certified financial planners (people who are licensed by the Australian Securities and Investment
Commission (ASIC) to provide financial plans and advice for clients with funds to invest) operate under eight
major areas of professional conduct, expressed as the Code of Ethics (an agreed standard of how businesses and
advisors should behave).
The laws that regulate and monitor the financial services industry
The laws that regulate (to make rules for, and to monitor the actions of the people involved in a certain industry)
the financial services industry are designed to ensure that financial advisors/planners and mortgage brokers
serve their clients well and act in the best interests of the client. The industry is regulated by certain authorities
who are also responsible for assisting in consumer complaints and makings sure institutions and individuals
behave professionally. However, in the event of inappropriate behaviour (behaviour that is not in the consumer’s
interest and goes against any existing code of ethics) the court system will deal with the service provider.

Investing money
As prices rise over time due to inflation (a general increase in prices over time), the money saved will buy less
unless it is invested and put to work to earn more income.
We invest our money in order to increase our wealth (that is, the stock of things we possess such as money, a
house, works of art and shares) and provide for future needs.
REASONS FOR INVESTING
• Earning an income
• Minimising taxation
• Capital growth of original investment
• Offsetting inflation – reducing or minimising the impact of inflation
• Building wealth for the future
But the four main ones are: investing for extra income, investing for retirement, saving for a major purchase and
saving for a ‘rainy day’ (emergencies).
Common types of investments include:-
• Cash in term deposits
• Cash management trusts
• Debentures
• Shares (part of a company; you receive dividends depending on company profits and the number of
shares that you own)
• Property
• Tax minimisation schemes (legal strategies to reduce the tax that has to be paid on the income from
investments)
Which investment and institution an investor chooses will depend on:-
• The amount of money to be invested
• The degree of risk an investor wishes to take
• The length of time the investment is to last
A major purchase as an investment
Lenders will often demand:
• A deposit
• A good savings record
• A stable job that has lasted for some time
 • A stable living address
• Lack of other financial commitments
Investing for extra income
Investment property (a property purchased in order to make money from either the rent or the property
increasing in value)
Negative gearing (investment aimed at making a loss so that the level of taxation on other income can be
reduced)
Investment for retirement
The aim of superannuation is to ensure that a person who reaches retirement is able to provide for themselves
during their retirement years. Self-employed (people who run their own business and therefore work for
themselves) people may choose a superannuation strategy from a number of options.
Type of fund Total assets Total accounts No. Of funds
($ billions) (million)
Corporate 55.1 1.0 1582
Industry 62.6 7.7 105
Public sector 115.8 3.0 65
Retail 192.3 13.3 245
Small funds (with less 127.5 0.5 281845
than 5 numbers)
Annuities, life office 12.7 N/A N/A
reserves
Total 565.9 25.6 283842

Labour force Covered Covered (%) Not covered Total (millions)

status (millions) (millions)
Total males 4.329 87.6 0.613 4.942
employed
Males employed 3.951 91.2 0.381 4.332
full-time
Males employed 0.379 62.1 0.231 0.610
part-time
Total females 3.294 95.4 0.563 3.857
employed
Females employed 1.994 93.1 0.148 2.142
full-time
Females employed 1.302 75.9 0.413 1.715
part-time
Total persons 7.629 86.7 1.170 8.799
employed
The disadvantage of building a superannuation portfolio is that the person’s income is reduced during their early
working life.
OVERVIEW OF INVESTMENT OPTIONS
The return from investment strategies is linked to the risk of that investment. The higher the risk, the higher the
likely return. The common forms of investments include shares, investment property, superannuation and
managed funds.
Shares
Shares are purchased on the Australian Stock Exchange (ASX) (the place where Australian public companies are
registered and where the public can buy and sell shares. Shares need to be purchased for an investor by a
stockbroker. They occur in two forms: primary market (shares being sold for the first time, by a newly-listed
company) or second market (shares are sold by existing shareholders to other shareholders).
Advantages of purchasing shares Disadvantages
Easy to organise their purchase Risk of poor dividends
Easy to monitor performance of the share Risk of drop in value of the share
Easy to sell if necessary
Can increase in value
‘Blue chip’ shares: shares in well-established and reliable companies; they are considered a safe investment
because of the nature of the company.
Property
 • Interest and costs of maintaining the building can be claimed as tax deductions (types of spending that
enable you to reduce your taxable income and thus pay less tax) against its earnings
• Negative gearing is also a method of reducing taxes
• Growth in the value of the property over time
• An income stream of regular weekly rental payments
Investment properties are popular investments because of the ATO’s allowance called negative gearing (allows
interest on the mortgage loan to be deducted from the rental income of the property).
Managed funds (investment accounts)
Managed funds offer information from an advisor working for a specialised financial institution in a number of
different financial areas: cash, shares, property and fixed interest in domestic markets (places where money can
be invested within Australia) and foreign markets (places where money can be invested outside Australia).
• A relatively safe alternative for investors not sure of how to invest
• Suited to investors who are not willing to take larger risks
• For investors who do not have enough money for lager investments such as purchasing property
They are available through a large number of providers and the spread of investments aims to ensure the best
capital growth and interest return to all the investors.
HOW DOES THIS WORK?
If a person borrows money to buy an investment (shares, property, a business, antiques), the interest they have
to pay is a tax deduction which reduces the amount of tax the person has to pay.
- Mortgage – land or property
- Long term loan – 15-25 years
- Lower interest rate
- Source of mortgage – bank*, credit union*, finance, finance company (very high interest)
(* = lower interest rates)
- Amount borrowed depends on cost of house, your income, your ability to repay (total: $100000 - $1M)
- Borrowing -> debt (Debt attracts interest)
- Sources of debt finance:
• Finance co
• Insurance co
• Credit union
• Money lenders
• Bank – personal loan, credit card
• Family and friends
Debt must be kept in control Credit cards lead to overspending, impulse buying and debt related problems for
some people.
Some people borrow to pay for existing debt. This leads to a debt spiral – out of control. The borrowed amount is
called the principal. Loans can have either fixed or variable interest rates.
Fixed: means that the same rate of interest is charged throughout the loan
Variable: lender can change the rate at any time during the loan period
- Interest is not the only cost of borrowing
- Loan documents attract stamp duty, loan application fees, legal costs, banks charges
- 4 big banks: CBA, Westpac, NAB, ANZ
HOW DO BANKS OPERATE?
- Attract deposits from customers (lend to individuals and businesses)
- Deposits attract interest
- By lending, the banks make money as it chargers a higher rate of interest

Before borrowing, a number of things need to be considered.

Step 1: Debt = principal + interest
Step 2: Loan agreement: how much?
Step 3: Repayment = cost + time
Step 4: Can’t pay? Consequences
Running a business
• About 95% of all Australian businesses are small
• Small businesses are those employing few than 20 people
• Micro businesses are those employing between 2-5 people
• Small business employ over 50% of all workers
• There are over 1.2 million small businesses in Australia
• They are a source of many new ideas and inventions
• Many do grow into big businesses
 • They supply many large businesses with goods and services
• There is always a risk involved in starting up a new business
• The failure rate of a business: after 1 year 20%, after 3 years, 15%, after 5 years 15%, after 10 years 30%
Being an entrepreneur
An entrepreneur is someone who organises and manages a business. It usually involves some of their own money
and a fair amount of risk.
WHY BE SELF-EMPLOYED?
Advantages Disadvantages
Ability to be your own boss No access to fringe benefits that some employees e.g.
company car
Ability to increase your wealth High rate of business failure which could mean loss of
money
Personal satisfaction from doing something for Added pressure on relationships with family and
yourself friends due to long hours
Greater freedom to make decisions e.g. when you start Physical demands of running a business e.g. being
and finish work there all the time
Ability to suit your preferred lifestyle, e.g. working Pressure to keep up-to-date with new information and
from home technologies
Ability to provide jobs for family members
WHAT SKILLS AND PERSONAL CHARACTERISTICS ARE NEEDED?
Business skills Personal skills
Having good financial abilities – able to manage Being a motivated self-starter and being able to follow
money and plan finances through ideas
Being able to predict what consumers will want Being able to give instructions and know what work
has to be done and who can do it
Being multi-skilled – able to carry out a variety of tasks Having energy and enthusiasm
Being flexible and willing to change the business plan if Being creative – able to think of new ideas and always
necessary to put them into practice
Being able to manage budgets – able to balance income Being able to accept criticism and learn from it
and expenditure and manage cash flow
Being able to negotiate and be willing to see other Being positive and not give up when things get difficult
people’s point of view
Having good communication skills Being able to work well with others
Being able to work long hours when required Having strong planning abilities
Planning for success
Businesses do not plan to fail, they fail to plan. Before an entrepreneur starts operating his/her business, he/she
must make a number of important decisions. These include:
• Selecting a business opportunity – type of business
• Where to locate the business
• Selecting the appropriate structure – legal/ownership of the business
• Arranging the finance to start and operate the business
• Establishing a new business or purchase an existing one
Running a successful business requires an enormous amount of planning. This includes selecting business
opportunities, selecting an appropriate business structure, arranging finance and deciding whether to establish a
new business or purchase an already existing one.
• Do something you love. Find your true talents and skills
• Raise sufficient capital to fund your investment
• Set realistic budget and cash flow forecasts
• Always be prepared to change
• Have a business plan and a financial plan
SELECTING BUSINESS OPPORTUNITIES
Market research
Market research (surveying potential customers to see if there is sufficient demand for a product or service) can
include these methods:-
• Surveys and interviews (in person, by phone or by mail, computers)
• Customer feedback especially in hotels
• Using ABS (Australian Bureau Statistics)
• Market research companies using focus groups
 • Existing sources in the business environment: government agencies, reports from competitors, computer
databases, magazines and newspapers
This plays a major role in finding out what consumers want. Businesses can use consumer profiles to help them
decide the goods and services they will produce. The census provides a good analysis of this as well.
Location
Location factors can affect the planning and operation of a business:
• Geography/size – is it big enough? Is there room for parking and expansion?
• Demand – do customers walk past? Can they be attracted to buy goods?
• Location/supply – are premises available? What about rent and leasing conditions?
• Local government – what are the zoning regulations (rules set by the local council about what activity can
be located in a particular area) and town planning laws?
• Employees – are skilled, experienced workers available to start?
• Competitors – can I offer better service? Am I more convenient? What promotion do I need?
This refers to where to locate the business. Some factors when deciding this would be proximity to customers
and suppliers together with costs of various locations.
Competition
Lowering prices, opening at more convenient times or offering incentives to customers, a successful business will
plan a response to a competitor’s tactics. If the plan is to beat competitors by offering better services, you have to
plan how to go on improving the service not to match it.
Competition arises when different businesses seek to sell to the same target market. Businesses subject to
competition are forced to differentiate their product or service to make it stand out from the rest. The level of
competition will affect the business’ decision on what to produce. Too much competition within an industry with
little competition may abstract more businesses as there is more incentive to make a profit.
Demographics
Demographic (the study of populations and their characteristics such as age distribution, birth and death rates,
incomes and cultures) factors include age, gender, income, education, family size and cultural
background. They can affect what people buy and how often.
This relates to the segment of the population to which your product is targeted (see bold).
Target markets
Modern information and technology can bring together customers and businesses. Many successful small
businesses have targeted consumers who are willing to pay more for things. The target market refers to how a
business intends to sell a product to a particular audience.
A business needs to define what it is selling and to whom. A business usually starts off targeting a narrow
segment of the market.
SELECTING THE APPROPRIATE STRUCTURE
Firms can be organised by size to suit the owner’s needs and circumstances such as:-
• Type of business
• The amount of money needed to start and run it
• The risks involved
The most common business structures for smaller businesses are sole trader, partnership or proprietary limited
company. Small non-profit, community-based groups may be formed into incorporated associations.
Sole trader
A sole trader is the simplest business structure. The business is owned by only one person. It is the easiest and
the least expensive businesses to set up. However, legal costs, lease feels and insurance can add up to thousands
of dollars. All the capital (money the owner puts into a business) (from savings or loans) comes from the one
owner. There is unlimited liability (a situation in a business that means the owner is responsible for all the
business’s debts and can lose all their money in the business and even their personal assets if the business is
unsuccessful).
Advantages Disadvantages
You are your own boss You risk losing personal assets with unlimited liability
You get all the profits You may have to work long hours
You can open anytime (subject to planning approval) To take holidays you may need to close or pay a
manager
You can organise hours and holidays to suit yourself As owner/operator you do not have holiday pay, sick
and the needs of the business leave or workers compensation
It is easier and less expensive to set up than other Capital is limited to how much you (the sole owner)
business structures have or can borrow, so it is hard to update and expand
the business
Partnership
A partnership involves an agreement between 2 or more people to carry on a business together (generally 2-20
people). However, there are exceptions to this rule, for example accountants or solicitors may have up to 200
partners. It is often the least successful form of business organisation because of arguments between partners. It
is wise to have a partnership agreement (this document sets out the conditions of the partnership and what the
responsibility of each partner are).
Advantages Disadvantages
Increased capital (capital from more than one person) Unlimited liability
so business can expand or modernise
Partners share risks and responsibilities Joint and several liability so risk losing personal assets
With added skills, partners can specialise in Creditors can sue all partners or just the richest one
responsibilities
Risk of disagreement between partners
Each partner can sign contracts that affect the others
e.g. a partner can sign the business up for deals that
can lose or make money for the business

Private company
A private company is a complex business structure formed by 2-50 people who wish to have a business that is
legally separate to the owners. It has limited liability (if debts of the business cannot be paid, the owners can lose
all the assets of the business but their personal assets will be safe); the most money that investors can lose is the
amount they paid for their fully paid-up shares. The letters ‘Pty Ltd’ usually appear after the company name. ‘Pty’
stands for ‘proprietary’ which means that the shares can be offered for sale only to selected people and cannot be
sold publicly. The company is not listed on the stock exchange and the general public cannot be invited to buy
shares or lend it money. ‘Ltd’ (limited) indicates limited liability. The main advantages are:
• If the business fails the most the owners can lose is the money invested in the business, not their
personal assets
• The business is a legal entity separate from its owners and can continue to operate even if some of the
owners decide to sell their interest on the business.
Public company
There is no limit to the number of people who can own shares in a public company. Such companies are listed on
the Australian Stock Exchange and are run by a board of directors elected by the shareholders. A public company
usually has ‘Ltd’ after its name, indicating limited liability.
Advantages for public/private Disadvantages
More capital (supplied by the shareholders) is available Many government regulations must be taken into
account
Borrowing money is easier Limits are placed on the board of directors
The liability of shareholders is limited Owners (shareholders) do not always have control over
the decisions made
It is a legal entity It can be expensive to set up, maintain and organise
Specialised people can be employed to run different It may become too large and inefficient
elements of the business
Ownership and control can change frequently without
a new agreement being entered into (this is referred to
as perpetual succession)
Companies
A company exists separately from its owners. Hence, the company itself earns all the profits and is responsible
for all the debts. Individuals become owners or shareholders of the company by purchasing shares. While they
have a share of the company, the profits the company makes can be passed on to the owners through a payment
called dividend. Main advantage is that the owners of the company are only responsible for the debts to the
extent of the amount they originally paid for their shares. Main disadvantages are the costs and paperwork
involved in establishing and then running a company.
Incorporated association
For small, non-profit, community-based groups an incorporated association is an alternative to forming a
company. It can trade but it cannot be its main objective. Any profit from trading must be put back into the
association and not given to its members.
Arranging finance
Owner’s equity is money provided by the owner(s) or shareholders (the capital). Debt finance is money that has
been borrowed by the business from a bank or another financial institution. This money will have to be paid back
with interest.
OWNER’S EQUITY
Small business owners may decide to put all of their savings into establishing a business so they may put their
own assets (computers, cars etc.) into the business. These items represent owner’s equity (represents the owners’
share in the business. It is the amount the owners would expect to receive if all the business assets were sold and
the liabilities were paid. Sources include:-
• Savings that the owners have put aside for business use
• Owners’ assets, such as cars or computers that may be transferred to the business
• Profits retained by the business
DEBT FINANCE
A business may raise funds for its operation by borrowing for its establishment or expansion. Sources include:-
• Term loans
• Mortgage (security on a loan; the lender can sell property such as land and buildings if the loan is not
repaid) loans
• Bank overdrafts (a loan that allows the borrower to write cheques up to a fixed amount more than they
have in their bank account)
• Trade credit
Term loans
These are loans for a fixed time. They can be repaid over a period of 2-25 years. Most banks and other financial
institutions offer these. The cost of this type of finance is the interest charged on the loan.
Mortgage loans
When a business purchases property it usually requires a mortgage loan from a financial institution. If the
borrower cannot afford to complete the repayments, including interest charges on the loan, the mortgaged
property can be sold by the lender.
Bank overdrafts
This is a type of short-term finance often used by businesses to meet everyday payments. An overdraft facility for
an agreed limit is linked to the business cheque account. This allows the business to write cheques for more than
it has in its bank account.
Trade credit
Trade credit is another commonly sued type of short-0term finance for business. It allows a business to buy
goods and services and pay for them some time later, usually 30-60 days. This means that a business can sell the
goods before they have paid for them.
Establishing a new business or purchasing an existing one
A new business
For most of us wanting to get into business, there are only two options. We can either establish a new business or
purchase an existing one. Each approach has its problems and advantages.
• A suitable location
• Reliable staff
• Regular customers
• Suppliers
In starting from scratch, there are a number of problems getting customers, capital (having enough money to buy
supplies, rent furniture to fit out to give it the wow factor, emergencies and pay wages (employ staff).
An established business
Steps needed to take before you purchase:
• Find out all you can about the people (customers and staff) you’ll be dealing with (e.g. their age, main
interests, goals, past work experiences and qualifications)
• Get good advice from your accountant and other experts
• Go into the business with enough capital to pay business and personal expenses until you get to the stage
where you can make a profit
Advantages of a new business Advantages of an existing business
Usually cheaper as you are not buying goodwill (an Easier to raise finance
established reputation and customers)
Not taking over existing problems Suppliers, contacts and customers are already
established
Can introduce new equipment, staff and techniques Immediate cash flow from established customers
Can set the direction of the business Regular customers provide repeat business and word
of mouth promotion (goodwill)
Location
Location links a business to its customers and its suppliers. Concerns:-
• Are there empty premises?
• Are there sufficient customers nearby?
• Are there good transport links and nearby parking if the customers have to travel?
• Can deliveries be easily be made?
• Are the premises big enough and do they have the facilities for staff?
• How much will it cost?
• Where are the competitors?
The best location is likely to be a compromise between what you want and what is available.
Staffing and equipping
If it is an existing business, the new owner will need to make sure staff can: carry out the work correctly without
major mistakes; do the job efficient and get along with their employer. If it is a new business, the owner will need
to recruit new staff and then train them so they can do the job efficiently. Staff will need to be made familiar with
the routines of the workplace and the way the business operates. Most staff will be employed either on a
permanent or a casual basis.
Franchising
A franchisor is a business firm who give exclusive rights to the franchisee.
Franchisor: provides support to franchisee: marketing, finance, training, suppliers, equipment, brand name and
reputation.
Franchisee: pays fee to franchisor for assistance and back-up.
Franchising is a method of starting and operating a business that is supported by an organisation that repeats
the look, the products and operating procedures of that business.
The manufacturer’s identifying name or trademark is usually sued by the franchisee.
Business format franchise
The franchisor provides a format or a complete system for operating the business including planning,
management, location, appearance and image and quality of goods.
Advantages Disadvantages
Products known Expensive to purchase
Regular customers Equipment and products may be expensive
Staff training available Business operation must be exactly liked
Equipment and products supplied Other franchises
Guarantee of marketing and advertising Unable to use own initiative
Business operation
METTING REGULATIONS
Licenses to operate: hairdressers, travel agents, demolition businesses, real estate agents, second-hand dealers
and all building trades need licenses because then they can do the work properly.
Local regulations
For home-based small business, the business activity is not allowed if it affects the quality of the residential
neighbourhood including:
• The appearance of any building (e.g. a delivery shed near the footpath)
• Works or materials used (e.g. stripped down vehicles in the front yard)
• The hours of operation (e.g. late night use of a compressor or grinder)
• Electrical interference creating background noise on neighbour’s radios and TVs
• The storage of dangerous goods (e.g. storing large amounts of paint solvents)
State regulations
Many businesses need state government licences (a permission to operate a business and provide a product or
service; it is given to a person by the government after the person has shown they have the proper training or
qualifications to be able to correctly supply the product or survive) and permits before they begin operating. In
NSW a business can operate under the owner’s name without registering a business name as long as the owner’s
name is not changed or added to.

Health and safety requirements: all employers must provide a safe working environment that is without risks to
the health of employees and others who enter the workplace. Risk management includes:-
• Identifying the hazards
• Assessing the risks
 • Eliminating or controlling the risks
• Reviewing the risk assessments
Federal regulations
Taxation regulations: businesses need to apply for an Australian Business Number (ABN), a tax file number
(TFN) and may have to register for goods and services tax (TST). A business must register for GST if its annual
turnover is $50,000 or above.
Registering a company: new companies must register with the Australian Securities and Investments
Commission (ASIC)
Working conditions: employers are responsible for employee’s awards, conditions and workplace safety. Awards
outline minimum wage rates and conditions for employees.
Sex Discrimination Act: sexual harassment in the workplace was made unlawful by the Sex Discrimination Act
(1984).
Maintaining records
Records help owners or managers to keep control of the business and work out how to reduce costs or increase
income to make more profits. Four important records that should be kept by a business: a cash book, a debtor’s
ledger (this document shows how much people and other businesses owe the business), a balance sheet and a
revenue statement.
Cash book
Businesses need to make purchases, paid for by cash, cheque or corporate credit card. It is important that all
records of both the receipts and payments include:
• Date of the transaction
• Reason for payment (e.g. advertising, wages)
• Nature of the receipt (e.g. example sales)
• The amount that was received or paid out
Bank reconciliation statement
The balance in the cash book should be reconciled (brought into agreement with the business’s own records by
adding late deposits and subtracting unpresented cheques to the bank statement and including direct payment in
the business’ books) regularly with the bank statements for that account.
Risk management – planning for the future
BUSINESS PLANNING
There are a number of benefits in having a business plan:
• It forces the owner or manager to thoroughly assess possible actions and to set goals
• It allows the owner or manger to anticipate any problems and think about how to avoid or solve them
• It shows others that the owner or manager has the intention to operate a business successfully
• It shows lenders and suppliers the owner or manager is well prepared and understands what is involved
in running their business
INSURANCE FOR BUSINESS
Insurance can help protect against financial loss from some of the risks that businesses face. Business owners
can guard against financial loss from many risks through insurance.
OTHER PROTECTIONS
An owner could also:
Take out a patent to stop anyone else from stealing their invention
Use copyright laws to stop other people performing or reproducing their artistic or other works
Register a trademark so other cannot use it to profit from its reputation. Trademarks can include: a letter,
numeral, word, name, signature, brand, heading or symbols
CAN STAFF TRAINING HELP REDUCE RISK?
Owners and managers need staff that can cope with changes and one solution is to teach them new skills. Multi-
skilling adds flexibility to a business; if staffs are absent operations can still continue as alternative staff
members can substitute them.
GETTING ADVICE
Managers can use expert professional advice from an accountant, a tax agent or a personnel consultant (a
consultant who gives advice on hiring staff and training and managing these staff). Advice for small business
owners is available from the Office of Fair Trading and courses run by community colleges and TAFE.
BANKRUPTCY AND LIQUIDATION
Individuals who do not have the financial means to pay their debts may be declared bankrupt (a sole trader or
partnership can be declared bankrupt by a court when it is unable to pay its debts). The assets can be realised
(assets such as land and motor vehicles that have been sold and converted into cash). A liquidator can be
appointed to sell off the assets, the proceeds for which hare used to pay the creditors.
Aspects of key issues relating to running a business
Issue Possible problem Consequences
Changing markets • Not reacting to what competitors do • Not enough stock
• Not being aware of new products or • Too much stock
changes to customer numbers/tastes
Business records • Records not up-to-date • Not aware of problems till too late
• Records not fully used • Not enough information to plan properly
• Not enough cash to pay bills when due
Staffing • Low wages and incentives • Low morale, rapid staff changes, low work
• Poor training rate, high absenteeism
• Poor customer service
Promotion • Not enough promotion • Low sales
• Prices set too high • Not enough cash flow
Legal requirements • Not knowing legal requirements • Being sued or fined
• Not carrying out legal requirements • Loss of licenses
Customer relations • Poor service – needs of customers not • Low sales
being met • Cash crisis
• Poor staff morale
Operating a business
Three approaches are suggested:
• Start up an actual business – preferably in-school so it can be supervised by our Commerce teacher. The
school should have the opportunity to support the venture
• Run a ‘one-off’ event
• Organise a simulation or game
A ‘REAL’ BUSINESS
This approach will involve the sale, or production and sale of one or more products. The benefits that can be
gained from this approach will be lost if it is allowed to continue for too long a time. If the chosen product is a
food item the canteen and principal will need to be consulted. Production and/or sale can be organised as a
whole class activity or in groups of about 5-8.
‘ONE-OFF’ EVENTS
The organisation presents fewer problems and is easier to maintain enthusiasm.
Simulation or game
Find board games that could be used and it can be organised as a team event.