Business Plans

Reasons for creating a business:

- Make a profit, big financial rewards

- Be their own boss

- Earn more than working as an employee for someone else

- Owning a business with a topic they're interested in

Other objectives:

- To offer the highest quality goods/services

- Providing good customer services

- Having a good image and reputation

- Limit their impact on the environment

- Plan future activities

- Control what the workers are doing and money being spent

- Coordinate different functions and departments to ensure they're all working towards their main objective

Production - Turning raw materials into a finished good/service

Human Resources Management - The right number of employees of the right quality in the right place at the right time

Marketing - Identifying what customers want/need and how best to sell it to them

Research and Development - When needing to discover new ideas for products that may be wanted in the future, preparing them to be launched onto the market

Primary Sector - The extraction of the raw materials from the ground e.g farming

Secondary Sector - The process of manufacturing the raw materials e.g cars

Tertiary Sector - A business providing services e.g banking

Enterprise - Creating a new business

Entrepreneurs:

- Innovative

- Risk takers

- Organisers

- Planners

- Perseverance

- Target either a mass or niche market

Patent - A way of registering and protecting a new invention

Trademarks - Protects slogans and logos etc

Copyright - Protects written work and music

Franchises - Special agreements between one business and another

Franchisor - The business willing to sell or license their idea, name, and reputation

Franchisee - The business wanting to buy and use the name

Franchisee benefits:

- Well known name with reputation

- Training and financial support

- Buying is done by franchisor, keeping costs low

Drawbacks:

- Must pay the franchisor for the rights

- Must run the business according to the franchisor's rules so less flexibility

Industrial markets - Where businesses sell to other businesses e.g wholesalers supplying retailers

Consumer markets - Where firms sell to individual customers e.g high street shops

Local markets - Where firms sell to customers who live nearby

Electronic markets - Non physical markets where trade is completed over the internet e.g eBay

Market size - A measurement of the total volume of a given market

Market share - The percentage of sales in a particular market that belong to a company/brand.                           Market share (%) = sales ÷ total market size x 100

Market growth - When demand for a product increases.                                                                            Market growth = difference between size of old and new market ÷ size of old market x 100

Market segmentation - Identifying the different types of customer in a market e.g gender

Segmentation can be done by:

- Income

- Age

- Gender

- Lifestyle

Businesses monitor sales to make sure their marketing strategies are having the right effect

Primary Research:

- Uses sampling e.g questionnaires and interviews to make predictions about the whole market off that sample

-  It is always up to date 

- However it is labour intensive, expensive and slow

Secondary Research:

- Internal sources of data e.g loyalty cards, and feedback from salesmen, stock records

- External sources of data e.g government publications, and pressure groups, trade magazines

- Secondary data is easier, faster, and cheaper

- However it may contain errors and be out of date

Simple random sample - Names are picked randomly from a list

Stratified sampling - Population divided into groups and people selected randomly from each group

Quota sample - People are picked who fit into a category

Market research must avoid being biased, and the lower amount spent on the research increases the risk

Partnership - A group of individuals working together with unlimited liability

Advantages:

- More owners so more capital to start with

- Can provide cover for each other as well as more ideas

Disadvantages:

- Unlimited liability so liable for all the debts of the business

- A risk of conflict between partners as they're all liable for decisions made by other partners

Sole trader - A business run by one person with unlimited liability, known as an unincorporated business

Advantages:

- Keep all the profit

- Freedom over decisions

- Savings on fees 

Disadvantages:

- Responsible for all the debts

- No cover if they're unavailable for a day

- Usually work long hours because of deadlines

These companies have limited liability, owned by shareholders, and run by directors

Private Limited Companies (Ltd):

- Can't sell shares to the public

- Usually small family businesses

- No minimum share capital requirment

Public Limited Companies (Plc):

- Can sell shares to the public

- Require over £50,000 of share capital

- Usually start as an Ltd and expand to a Plc to raise more capital

Bank Loans - Borrowing a fixed amount of money from a bank and paying it back over a period of time with interest

Advantages:

- Guaranteed money for the duration of the loan

- Interest charges for a loan are usually lower than an overdraft

- Only pay the loan and interest back, nothing else

Disadvantages:

- Difficult to arrange as banks will only lend the money if they feel the entrepreneur will be able to pay them back

- Entrepreneur may have to pay a charge if they decide to pay back early

- Repayments can be made difficult for the business if the cash flow is slow

Overdrafts - Where a bank lets a business spend more money than it has in its account, up to a certain limit.

Advantages:

- Quick and easy to set up as banks can offer them to anyone

- They're flexible as the business only have to pay interest on what they owe and can borrow any amount up to the overdraft limit

Disadvantages:

- The interest rate is usually high, therefore they're expensive if they're used over a long period of time

- The bank can remove the overdraft limit at any time and demand all the money back immediately 

Choosing a location:

- Transport costs, e.g located near customers to cut distribution costs

- Good infrastructure

- Good land and labour resources e.g labour with special skills\

- Qualitative factors e.g good image

Assisted areas - Economically less developed parts of UK

Part-time staff

Advantages for the business:

- Saves the business money

- More flexibility to manage workloads (part-time workers can cover when needed)

- Happier staff as a better work/life balance (less stress)

Disadvantages for the business:

- Difficult to find part-time staff as they're looking for full-time work

- Staff may be less dedicated and loyal

- Less experience than full-time staff

Business Plan - A document statuing what the owners want to do and how they plan on doing it.

Sections of a business plan:

- Executive summary: A general overview with key points

- Business summary:Legal structure, and the future of the business

- Production plan: How many products the business intend to produce 

- Marketing plan: Main competitors and unique selling point 

- Human resources plan: Qualifications and employment of employees

- Operations plan: Location of the business

- Financial plan: All the financial forecasts

Revenue= Selling price per unit x Units sold

Profit= Revenue - Total costs

Fixed costs - Costs that do not change with the level of output e.g rent

Variable costs - Costs that do change with the level of output e.g raw material costs

Opportunity costs - The costs of a decision where the benefits outweigh the next alternative

Calculated risk - Where the positives and negatives are weighed up to make an educated decision

Average costs = Total Cost / Output

Variable cost per unit = Variable cost / Quantity

Break Even= Fixed costs ÷ Contribution per unit

Contribution per unit = Selling price per unit - Variable costs per unit

Margin of safety - The amount between the current output and break even

Break even analysis 

Advantages:

- Easy to do as it's plotting figures on a graph

- It is quick to complete

- A method to persuade banksto provide them with a loan

Disadvantages:

- If the data is wrong, the results will be wrong

- Says how many units must be sold to break even

- Assumes variable costs remain the same

Cash Flow - Money flowing in and out of a firm

Cash Flow Cycle - The gap between money going out and coming in

Net Cash Flow = Cash inflows - Total costs

Closing Balance = Opening balance + Net cash flow

Budget - A financial plan estimating a businesses future earnings and spendings

Income Budget - Forecasts the businesses revenue

Expenditure Budget - Forecasts the businesses total costs of fixed and variable costs

Profit Budget - Forecasts the expected profits from the income and expenditure budgets

Budgets 

Advantages:

- Help control income and expenditure

- Forces managers to review activities

- Allows departments to coordinate spending

Disadvantages:

- Can cause rivalry if departments have to compete for money

- Can be restrictive

- Time consuming as managers may get too occupied 

Historical budgets are updated each year, and they're quick and simple, assuming business conditions stay unchanged each year

Zero budgeting is starting from scratch after each year. Starting with £0, the budget holders must get approval to spend money on activities over the next year. It may take longer than historical budgeting however it's more accurate if it is done properly.

Fixed budgeting - Budget hokders must stick to their budget plans throughout the year

Flexible budgeting - Allows budgets to be altered to signficant changes in the market/economy

Variance - The difference between the actual figures and budget figures

Favourable Variance - Revenue is more than the budget says

Adverse Variance - Less inflows than the budget says

External Factors Causing Variance:

- Competitors behaviour

- Economical changes 

- Raw materials cost increase

Internal Factors Causing Variance:

- Improving efficiency

- Businesses overestimating money saved by streamlining its production methods

- Businesses underestimating costs of making organisational changes

Variance Analysis - Identifying and expiaining variances

Fixing Adverse Variances:

- Change the marketing mix

- Cutting prices, increasing sales

- Streamlining production

- Motivate employees to work harder

Fixing Favourable Variances:

- Set more ambitious targets next time

Percentage Change in Profit= Current Year's Profit - Previous Year's Profit ÷ Previous Year's Profit x 100

Two types of profit: Gross and Net profit

Gross Profit= Revenue - Variable Costs

Net Profit= Revenue - (Fixed+Variable Costs)

Net Profit Margin(%)= Net Profit ÷ Revenue x 100

Return on Capital Employed(%)= Net Profit ÷ Capital Employed x 100

Franchisor benefits:

- Get paid for the use of their name with a share of the profits

- More franchises increases the spread of their name

Drawbacks:

- Must help the franchisee set up the new franchise, taking time

- If the franchisees don't have good standards then the brand may get a bad reputation