Business Studies Unit 1 Starting a Business

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what is a business?

organisation that provides goods/services to customers

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what are the reasons for setting up a business?

1. somebody decides they can make goods/provide service that people are willing to pay for

2. financial reasons: making huge fortune from firm's profits/steady income

3. personal reasons: independence of being own boss/difficulties finding job/desire to see product ideas put into practice

4. help otherse.g. starting charity

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what are a business' main aims?

1. make a profit to survive so it doesn't go bust

2. be biggest in their market

3. provide highest quality product possible

4. expanding business as much/quickly as possible

5. satisfying customers

6. limit environmental damage caused

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why wouldn't a business try and make a profit?

1. 'not-for-profit' organisation e.g. charity

2. in public sector (owned by government)

they need to earn enough income to cover costs/surplus put back into business

3. social enterprises/'more-than-profit' organisations seek profit to achieve social objectives/benefit society e.g. help for homeless/farmers in poorer countries 

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what does enterprise mean?

  • business/organisation


  • ability to see/take advantage of new business opportunity
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what is involved in enterprise?

1. identifyng/taking advantage of new business opportunities

2. always risk of failure

3. profit is reward for successful enterprise activity

4. starting up new business/helping exisiting one expand with new ideas

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what makes a good business idea?

product/service that no other business is already providing that customers will be willing to pay for e.g. gap in market

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who is an entrepreneur?

someone who takes on risks of enterprise activity

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what is a market niche/niche market?

  • small part of overall market made up of customers with particular need
  • big companies don't often bother making products for niche markets, so great opportunities for small companies
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how will an enterprise balance risks/rewards?

1. entrepreneur gathers all resources needed to start/expand business (key resource is money to buy equipment/pay workers)

2. entrepreneur may use own money but will probably need more from banks/investors too

3. entrepreneur hopes business will make enough profit to pay back any borrowed money or business will fail/entrepreneur loses all money invested in company

4. good entrepreneur takes calculated risk/if risk worth taking, business venture goes ahead (research/plan business carefully for good chance of success/weigh up consequences of failure)

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what are qualities of a successful entrepreneur?

1. ability to think ahead/identify future opportunities

2. initiative to seek out/seize business opportunities

3. drive/determination to turn ideas into practice

4. decisiveness so they don't shy away from making tough decisions

5. networking skills to identify people who can provide money/other resources

6. leadership skills/powers of persuasion to motivate other people to support their ideas

7. willingness to take calculated risks/profit from enterprise activities

8. ability to plan carefully/minimise risk of failure

9. ability to learn from mistakes/ see them as 'part of learning to succeed'

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what is a sole trader?

someone who can start trading without having to do anything else

e.g. most small businesses, plumbers, hairdressers, newsagents , fishmongers

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what are the advantages of being a sole trader?

1. very easy to set up, all you need is an idea

2. be your own boss

3. only you decides what happens to profit

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what are the disadvantages of being a sole trader?

1. work long hours with not many holidays

2. unlimited liability (if business goes bust you may have to sell everything you own to pay debts)

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what is a partnership?

  • partners have equal say in making decisions/share of profits
  • deed of partnership agreement changes this
  • not common

e.g. accountancy, solicitors, doctors

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what are the advantages of a partnership?

1. more owners = more ideas/more people to share work/more capital (money) can be put into business

2. can have limited liability

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what are the disadvantages of a partnership?

1. each partner legally responsible for what all partners do

2. unlimited liability

3. more owners = more disagreements as there's more than one boss (disagreement about business direction/time put in can be unpleasant)

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what is a limited company?

1. limited liability (owners only risk losing money they invest in business regardless of debt size) 

2. must have Memorandum of Assoociation (tells world who business is/where it's based)

3. must have Article of Association (sets out how business will run)

4. owned by shareholders (more shares owned = more control)

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what is a private limited company?

  • ownership restricted
  • firms whose shares can only be sold if all shareholders agree
  • shareholders often from same family
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what are advantages of a private limited company?

linited liability (can't lose more than you invest)

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what are disadvantages of private limited company?

1. more expensive to set up than partnerships because of legal paperwork needed

2. company legally obliged to publish accounts every year

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what are features of a limited liability company?

1. can own money/property/make contracts/take legal action against people/have it taken against them/ pay tax etc. completely separately from owners

2. money owned by company in its own bank account (not owners')

3. company gets fined if law broken

4. indiviudals can get into trouble e.g. directors running company have legal obligation to act responsibly 

5. company has own list of things to do e.g. pay taxes/publish accounts etc.

6. have range of stakeholders (bigger business = more stakeholders there can be e.g. employees, customers, suppliers etc.)

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what is a franchise?

right to sell another firm's products/use trademarks in return for fee

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what is a franchisor?

product manufactuers

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what is a franchisee?

firm selling franchisor's products

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what is a branded franchise?

  • popular with big firms in fast-food industry
  • franchisee buys right to trade under name of franchisor/pays them flat fee or percentage of profits
  • public think they're buying from franchisor instead of different firm
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what are the advantages of franchising ?

1. franchisee's business model established/proven success/popular (e.g. high quality food, good reputation) so less risk of business failing/more likely to get bank loan to help start up

2. franchisor can provide marketing/training/staff management/accounting support which can really help new firm

3. franchisee can benefit from wider marketing as franchisor may help promote brand

4. franchisor can increase market share without increasing size of own firm (very profitable way to expand)

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what are the disadvantages of franchising?

1. franchisees don't have as much control over business as independent businesses do

2. franchisee only able to sell products of franchise so can't create own

3. franchisee has to run business following franchisor's rules so freedom limited

4. franchisor's brand could get bad reputation if franchise has poor standards (e.g. customer service)

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what are a business' possible overall goals?

survival: main/most important short-term aim of all new businesses (over 2/3 new businesses close within 5 years of start-up)

profit: vast majority aim to make profit but may take few years for new firm to achieve (profitable firms important source of wealth creation for economy)

growth: may firms aim to grow (increasing number of employees/products sold/sales income

market share: 0 market share when first start up so 1 of first aims to capture part of market, establish itself, aim to increase it (type of growth) (product sales / total market sales) x 100

environmental sustainability: minimising impact of firm's activities on environment (consumers more concerned about issues like climate change/more likely to buy from businesses reducing their effect/effect of products on environment)

ethical considerations: company acts in way society believes morally right e.g. many think animal testing on cosmetics wrong

customer satisfaction: how happy consumers are with products/services e.g. customer opinion surveys (market research)

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what is an objective?

  • usually more short-term than aims (steps on way to achieve aims)
  • need to be set once aims established
  • different types (survival/profit/growth/market share/customer satisfaction/ethical/environmental issues)
  • more specific than aims (measurable)
  • e.g. aim = grow, objective = increase sales income by 30% over 2 years 
  • e.g. aim = improve environmental sustainability, objective = increase recycled material usage in production from 20% to 50% within next 6 months
  • clear targets to work towards once set
  • used later to measure whether firm successful or not
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how are numerical targets used to measure success?

compare them against actual performance

target 1 = £10,000 sales, £1,000 profits after 1 year

target 2 = increase sales by 5%, profits by 10% every year after this for next 5 years

  • business measures how well targets met at end of each year/take action to improve performance
  • might make later targets harder if 1st target easily met e.g. increase profits by 15% each year
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how can non-numerical targets measure success?

more difficult for 'soft' aims e.g. behaving in ethical way

  • business could list some ethical activities will do/unethical activities won't do/check later if promises kept
  • conduct impact assessments to find out what stakeholders think of behaviour (surveys sometimes done by researchers with no connection to business) e.g. environmental impact assessment 
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what is a stakeholder?

  • anyone affected by business (even small ones may have lots)
  • internal = inside firm (owners/shareholders in ltd. company, employees)
  • external = outside firm (customers, suppliers, local community, government)
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what are employees' ideal objectives?

interested in:

  • job security
  • promotion prospects
  • decent wage
  • good working conditions

improved if firm profitable/growing

benefit most when objectives based on profitability/growth/ethics

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what are suppliers' ideal objectives?

  • firm buys raw materials from them/provides their income
  • firm needs more materials/supplier gets more business if firm profitable/grows

benefit most from objectives based on profitability/growth

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what are the local community's ideal objectives?

  • will suffer if firm causes noise/pollution
  • gain if firm provides good jobs/sponsors local activities
  • benefit from objectives based on environmental sustainability/ethical considerations/profitability/growth
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what are customers' ideal objectives?

  • want high quality products at low prices
  • benefit when objectives based on customer satisfaction
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what are the government's ideal objectives?

  • receive taxes if firm makes profit
  • benefit when objectives based on profitability/growth/job creation 
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how far do stakeholders influence objectives?

  • owners most important stakeholders as they decide what happens to business
  • business can't ignore customers/won't survive if can't sell products
  • may become unproductive if workers unhappy
  • company may not mind being unpopular in local community if most products sold elsewhere
  • owners should consider other stakeholders' interests when setting objectives
  • may ignore some needs/have to take others into account to survive
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what is a business plan?

  • clear idea of what business is going to do to be successful for owner/financial backers
  • outline of what new business will do/how it aims to do it
  • forces owner to think carefully about what business is going to do/what resources are needed/allows them to calculate how much start-up capital needed
  • can convince financial bankers that business is sound investment e.g. banks
  • planning should help owner/financial backers realise if business is bad idea at early stage before they've wasted time/money on business never going to work 
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what are the features of a business plan?

1. executive summary: summaries whole thing

2. personal details: of owner/other important personnel e.g. CVs (financial backers want to know who they're trusting with their money)

3. mission statement: describes broad aims of company (usually uses long words to say something general/obvious)

4. objectives: more specific than aims

5. product description: details of market, competitors, explains how firm will achieve product differentiation/unique selling point (USP), describe maketing strategy using 4 Ps, all statements supported with field/desk research

6. production details: how firm will make product/provide service, lists all equipment needed/location

7. staffing requirements: personnel needed/how many/job descriptions/expected wage bill

8. finance: how much money needed to start up/cash flow forecast/projected profit & loss account/balance sheet/ratios to show backer likely returns on investment

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what are the risks a business plan can't control?

good business plan is no guarantee of success

starting business involves many risks/uncertainties that can't be controlled

1. health of economy: UK entered sharp recession in 2009 that very few people predicted/many businesses closed as result

2. competitors' actions: few businesses know what competitors planning (especially if new firms planning to enter market with innovative ideas)/successful business constantly monitors plan/factors affecting success e.g. regularly carrying out market/competitor research

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how does a business decide where to locate?

compromise between producing where cheapest & generating most income

1. location of raw materials: near raw materials lowers transport costs/important for bulk-reducing firms (uses bulky raw materials to produce smaller finished products)

2. labour supply: near area of high unemployment keeps wages low/might be government subsidies available/local colleges able to provide training (in built-up area)

3. transport: sea ports import extra resources/export finished goods, road/rail links transport goods around country, airport

4. economies of concentration: similar businesses nearby/easy to find skilled labour/already local suppliers/customers know where to come (some prefer to be away from competitors)

5. communication links: built-up area has good telephone/internet/postal services well established

6. location of market: firms like breweries pay more to transport finished products than raw materials(cheaper for bulk-increasing firms to locate near customers/opposite for services like dentists/florists so people can easily get to them)

7. government policy: governments often pay big multinationals to locate in their country/give subsidies/tax breaks to firms locating in areas of high unemployment 

each of these improtant in some industries but not in others

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when is location not important for a business?

modern technology means many businesses can trade over internet (more flexible about location/can maybe locate abroad)

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