Entrepreneurs are people who raise business finances and organise activities needed to start a business.
Successful entrepreneurs tend to be risk-takers and creative. Many of their ideas may be inspired from observing a gap in the market. Additionally, an idea may come from an existing product and improving upon it.
The Government tend to encourage new enterprises because it can increase jobs and help the economy. Business Link also provide help and service to those having difficulties.
Entrepreneurs need to make sure they understand the market that they are competing in.
A business may want to make sure that they do the appropriate research in order to provide that right product/service. This may include Primary Research or Secondary Research.
However, most new businesses fail. And this can be becuase of a number of factors: lack of experience, too much optimism, inaccurate business plans and forecasts, not enough market research and choosing a wrong location.
Niche vs Mass Markets
Products that are aimed at Mass Markets are designed to appeal to lots of consumers; e.g. Coca Cola
Other products may be aimed at a Niche Market - a smaller and more specific group of customers; e.g. fishing rods would only be aimed at fishermen
Niche products allow USP's (Unique Selling Points) to be exploited. Additionally, small businesses that tend to focus on niche markets are more successful than those who focus on mass markets.
Since larger comapnies don't tend to focus on niche markets, this leaves room for smaller companies to seize that gap in the market.
Although sometimes larger companies do attempt to get into the niche markets; e.g. Walkers crisps introduced "Sensations" which had more particular flavours.
Protection of Ideas
A Patent is a way of protecting a new invention. A business will be able to patent a method or a product itself so that no others are able to copy your ideas. This allows you to charge premium prices for what is a USP. However, a patent can be a long process and it can be expensive, so a business may also want to sell the patent onto another business.
Trademarks protect logos or slogans. For example; McDonalds "Golden Arch" is trademarked so that no other business can use it. This is useful because if any other business used it, it could possibly give it a bad reputation.
Copyright gives protection to written work and music. Having copyright means that radios etc. must pay royalties for their music to be played.
Franchises aren't a type of business, more like an agreement which allow one business to use the idea, name and reputation of another business.
The Franchisor is the business willing to sell. The Franchisee is the business who wants to buy.
- A well known name
- A successful and proven business idea
- Training and financial support
- Expensive equipment can be leased from the franchisor
- They have to pay the franchisor royalties
- Others may give the business a bad reputation
Businesses will try to increase their market share by increasing demand for their products among consumers. If demand increases, the business will sell more products and make bigger profits.
Reasons for fluctuations in demand may be because of:
- Price - As price goes up, demand tends to go down. And vice versa.
- Competition - If a new competitor enters the market by using Destroyer pricing to become the market leader. Demand will go down.
- Seasonal - e.g. Ice cream is in higher demand in the summer
- Marketing - Successful marketing stimulates demand
- Tastes & Fashion - There may be a new direction of fashion that decreases demand for your product
A sole trader is an individual trading under their own name. Sole traders are self employed.
- Freedom - They are their own boss and have complete control over their business
- Profit - They keep 100% of the profits
- Simplicity - Easy to set up and simple bookkeeping
- Unlimited Liability - The sole trader is responsible for all the debts of the business
- Illness - There is no cover if the sole trader becomes ill and profits will be lost
- Time - Sole traders often need to work long hours
A partnership is 2 - 20 people who share their names within the business. Partnerships generally operate under a Deed of Partnership.
- More capital - The more owners, the more starting capital the business will have
- Expertise - More partners can bring more skills and expertise to the business
- Illness - Partners can cover each others illnesses
- Unlimited Liability - Debts will be shared out according to the Deed of Partnership
- Conflict - There may be a risk of conflict
- Control - Control is shared among the partners
Private Limited Comapny
Public limited companies are often the most high profile organisations. They must have the letters "LTD." in its name. These are usually run by family or friends.
- Limited Liability - The business are only partly responsible for its debts if the business folds.
- Capital - Ltd's have more access to capital
- Accounts - Accounts are hidden so competitors cannot see them
- Finance - It is more difficult to raise finance than a plc.
- Setup - Costs more to set up the business and there are more legal formalities
- Shares - More difficult to sell because they are not on the Stock Exchange
Location is one of the main reasons for start up businesses failing. There are many factors that will affect a business' choice of location.
Technology is now allowing more and more people to be able to work at home and away from centralised offices.
Cost factors of choosing a location will be vital for small businesses since they have less capital. Considerations in keeping costs low will involve land costs (town centre vs outside of town), Labour costs, so the London will pay the highest the wages, Transport costs will involve the delivery of raw materials and to attempt to keep those to a minimum.
Infastructure includes anything to do with transport links, educational facilities etc.
Qualitative Factors include such things as customer convienience (is it easy to reach?), does the site itself have any USP's? Is the quality of life in that area high? Even though this may not be suitable if the business is wanting the smallest cost possible.
Raising Finance (1)
New businesses can't often pay fees such as wages, rent, raw materials etc. So in order to survive the business needs to gain finance, there are many ways of doing this:
Share Capital - This is when money is given to the company by shareholders, in return for a share of the company and this entitles them to that share of the profits. Limited Liability attracts shareholders because there is less risk of losing their money. Also it can bring in expertise within the business. However shareholders will expect good dividends in more profitable years. As more shareholders are involved in the business, the owner may lose more of his overall percentage and may lose total control as a result.
Bank Loan - A sum of money provided to a firm or an individual by a bank for a specific agreed purpose. Repayments are fixed and therefore easy to budget. Also interest rates will be lower if the business can provide collateral. There is less flexibility however with a bank loan. Loans tend to be a very expensive for business start ups since they are not able to provide secure collateral.
Raising Finance (2)
Bank Overdraft - When a bank allows an individual or organisation to overspend its account in the bank to an agreed limit. Overdrafts are very flexible and can be used on a short term basis, additionally interest is only paid on the amount of the overdraft being used. But the interest rate itself is quite high. Also banks can demand immediate repayment although, this is rare.
Venture Capitalist - Is a person who is willing to give money to a small business in return for some of it's shares. Venture capitalists can often allow dividend payments to be delayed. Also venture capitalists can also provide advice to help the business. But, venture capitalists will often demand a very high share of the business and it they may exert too much influence on the business as well.
Personal Sources - Money that is provided by the owner of the business from their own savings. There is no interest to be paid. Also using savings allows the owner to keep full control of the business. Many however, won't have enough savings to finance a new business and most new businesses will end up failing anyway so there is a lot of risk involved.
Small businesses may need to change their staffing numbers because of situations such as; the business may be expanding, demand may be increasing or a change in direction which will need new expertise.
The types of employment includes; Permanent employees (Full time & Part time) whch means that they have an open-ended contract with the business, which has extensive obligations to them. Temporary employees (Full time & Part time) who have an employment contract with the business but it is for a predetermined time or until a specific task has been completed. Employment Agency Staff have contracts with the employment agency that supplies them, but the business still has certain legal responsibilities towards them.
The cost of employing people is a major problem for small businesses, as well as the actual wage there are other costs such as training, admin etc. Employee absence can have a significant impact upon the business. Also the legal requirements such as minimum wage, equal pay, health and safety etc will cost time as well as money to make sure these are carried out.
A business plan is a report describing the marketing strategy, operational issues and financial implications of a business start up.
A business plan can be helpful in assisting the entrepreneur clarify their objectives for their business. Business plans are essential in trying to persuade lenders to invest capital in the business by demonstrating it's likelihood of success. However, for the plan to be useful it needs to be accurate and realistic, it should not only show strengths but also weaknesses as well. Business plans can take on an optimistic view which will make it unreliable. Many business plans underestimate how much it will cost to get the business off the ground.
A business plan needs to be SMART (Specific, Measureable, Agreed, Realistic and Time-bound). It also must conduct a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of itself.
Transforming Goods and Resources
In order to produce goods and services a business will need to use resources. These resources are inputs known as the factors of production.
The factors of production are; land, labour, capital and enterprise.
The finished products after the transformation process are known as outputs. There are 3 sectors of outputs. Primary, Secondary and Tertiary.
Adding Value is the process of increasing the worth of resources by modifying them.
Added Value = Sales revenue - Cost of raw materials
Marketing is the anticipation and satisfying of customers' wants in a way that delights the consumer and also meets the needs of the company. Market research is the systematic and objective collection of information intended to assist the marketing process.
There are 2 types of research; Primary and Secondary.
Primary research is the collection of data first-hand for a specific purpose. It is useful because it is relevant and modern. But it often takes time and money to conduct.
Secondary research is the use of data that has already been collected but for a different purpose. It is quick and easy to find. But it may not be up to date and may not be relevant for the company.
Qualitative research is based on opions and reasons. Quantitative research is based on numbers.
Revenues and Costs
Total Revenue is the income recieved from an organisation's activities.
Total Revenue = Price per unit x Quantity of units sold
Total Costs is the sum of Fixed costs and Variable costs
Total Costs = Fixed costs + Variable Costs
Break-Even Analysis (1)
Break-even is when a business is making neither profit nor loss. Break-even analysis studies the link between Total costs and Total Revenue to identify the output at which a business breaks-even.
Contribution looks at whether an individual product is helping the business make a profit.
Contribution per unit = Selling price per unit - Variable cost per unit
Total Contribution = Total revenue - Total Variable costs
New businesses will do a break-even analysis to see how many units need to be made before they are able to break-even. This is worked out by:
Break-Even Output = Fixed Costs / Contribution per Unit
Break-Even Analysis (2)
Advantages of Break-Even Analysis
- A business will be able to predict its profit levels if it knows the amount of units it is going to sell
- Calculations are quick and easy
- They will be able to spot which products are doing well and which are not
- The calculations can be used to show when they have reached a particular profit level
Disadvantages of Break-Even Analysis
- The information may be unreliable since they are based on forecasts
- Sales are unlikely to be exactly the same as output
- Fixed costs may not stay the same as output changes
- If the selling price changes due to sales levels then demand may be increase or decrease depending on this change, therefore the analysis may not be particularly accurate
Cash Flow (1)
Cash flow is the amounts of money flowing in and out of a business over a period of time. Cash flow forecasting is the process of estimating the amount of cash inflows and outflows over a period of time.
Sources of cash flow forecasting include:
- Previous cash flow forecasts
- Consumer research
- Study of competitors' cash flow
However there are problems with Cash Flow forecasting:
- Changes in the economy
- Changes in taste
- Inaccurate Market research
Cash Flow (2)
The main items within a cash flow forecast are; cash inflows, cash outflows, net cash flow and opening/closing balance.
Net cash flow is used to show the monthly situation, it is calculated using:
Net Cash Flow = Cash Inflows - Cash Outflows
Opening/Closing balance shows how much money they have (or don't have) at the beginning of the next month, it is worked out using:
Closing Balance = Opening balance + Net Cash flow
Cash Flow (3)
There are many reasons why a business may decide to use a cash flow forecast.
- To identify potential cash flow problems in advance
- To guide the firm towards an appropriate action
- To make sure there is enough cash availiable to pay off suppliers and creditors etc.
- To provide evidence in support for a request for financial assistance
Setting Budgets (1)
A budget is an agreed plan establishing in numerical or financial terms. When a business wants to create a budget they will need 3 kinds of budget. Income, expenditure and profit.
Income budget shows the agreed, planned income of a business over a period of time. Expenditure budget shows the agreed, planned expenditure of a business over a period of time. Profit Budget shows the agreed, planned profit of the business over a period of time.
Profit Budget - Income budget - Expenditure budget
There are many methods that a business can use to make its budget, these include:
- Budgeting according to company objectives
- Budget according to competitor's spending
- Setting a budget as a percentage of sales revenue
- Zero Budgeting/based on expected outocmes
- Budgeting according to last year's budget allocation
Setting Budgets (2)
Reasons for setting budgets may include:
- To gain financial support
- To ensure the business does not overspend
- To establish priorities
- To motivate staff
- To improve efficiency
However, there are some problems with setting budgets as well:
- Managers may not be informed about certain divisions
- There may be problems in gathering information
- There may be unforeseen changes
- Budgets may be imposed
- It can be time-consuming