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© Andrew Newbound 2013
Prelim Business Studies Study NotesBy Andrew Newbound
© Andrew Newbound 2013
The Nature of BusinessTopic 1
© Andrew Newbound 2013
Role of BusinessTopic 1.1
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What is A Business A collection of activities that are
performed to design, produce, market, deliver and support its goods and services.
Its owners do this to receive benefits
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The Nature of a Business- Produce goods and services Goods
Tangable object The clothes we wear, foods we eat,
television sets we watch and cars we drive
Services Coles, Woolworths, Aldi Intangible
Increase in services, decrease in goods
© Andrew Newbound 2013
Profit Difference between the price at which a
good or service is sold and the costs of getting the good or service to market
Gross profit
Net profit
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Employment Workforce had changed
Skilled jobs Young people in education and training Aging Increase in female participation 10,000 fewer people employed in
manufacturing than 5 years ago Businesses moving to low cost countries
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Incomes Employee’s reward for working in a
business
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Choice Market economy
Customer demand determines what products will be sold in the market
Regulation to protect consumers Dangerous products False claims
Regulation Government affected by a free market lobby
Restrict the market
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Innovation A new idea that relates to a better
product, a service or a way of doing something
Niche market Buyers with specific, unmet needs
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Entrepreneurship and Risk Risks associated with marketing new
ideas for products or new ways of marketing or distributing better and cheaper products
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Wealth Wealth creation
People invest in business Want to grow the value of their wealth over
time Dividend
Payment of a share of profits Businesses retain 50% to fund future
growth 50% in form of dividend
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Quality of Life Providing appropriate rewards for work Challenging and interesting work A safe working environment Effective training
Enable employees to do work well
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Influences in the Business EnvironmentTopic 1.3
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The Business Environment Anything that affects the operation of a
business
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Efficient Managers Constantly monitoring the business
environment to pick up any change that may impact upon their business
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External Influences on Business Outside the control of a business’s
managers
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External InfluencesEconomi
c Financial Geographic
Social Legal Political
Institutional
Technological
Competitive Situation
Markets
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Economic Attributed to the economic cycles
Predictable long-term pattern of changes in the national income
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Economic Cycle
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Economic Cycle•Confidence increases•Employment risesUpswing•Low unemploymentBoom•Loss of confidence•Unemployment risesDownswing•Confidence rock bottom•High unemploymentTrough
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Economic Cycle Australia
Sustained growth in spending for ~17yrs following 1992 recession
Loss in confidence 2008/09 GFC Rapid decrease in spending
Monetary policy Determined by RBA Stabilise economic activity
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Economic Cycle Recession
Unemployment rises Spending falls 2 consecutive quarters of negative growth
Inflation Demand begins to outstrip supply RBA decreases interest rates
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Reserve Bank of Australia Stability of Australia’s currency Maintenance of full employment Economic prosperity of people of
Australia Welfare of people of Australia
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2009 GFC US householders defaulting on
mortgages Those reliant on such funds could not be
payed Economic stimulus
Minimise impact of downswing $53 billion by Rudd Labor Government
$900 per household
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Recessionary CycleRising
unemployment
Consumers more cautious
Reduced spending
Cost cutting
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Boom CycleFalling
unemployment
Consumers confidence
returns
Increased spending
Increased production
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Financial More significant with deregulation and
globalisation Important
Business inputs must be financed Raw materials Equipment
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Financial – Derivatives Financial securities
E.g. contract Enable businesses to manage risk more
efficiently Contract between apple growers and
apple pie manufacturers Ensure price doesn’t change
Bad for either if price changes
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Financial – Derivatives Qantas – Hedging
Transferred risk of fuel prices to hedge fund Business specialising in risk management
Competitive advantage over Virgin when fuel prices rose
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Geographic Location of a business Australia in Asia Pacific region
Access to rapidly growing markets China India Lower transport costs
Mines in regional Australia Difficult to get skilled labour
Fly-in-fly-out workforce
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International Trade All economic transactions that take
place between consumers, businesses and governments in different countries
Businesses specialise in goods and services that are produced more efficiently
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Social Attitudes, values and beliefs of a society Changes in fashion
Make companies involved very susceptible
Aging population Opportunities
Leisure and travel needs Heath and medical needs
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Social 2 income families
More women working full time Opportunities
Prepared and takeaway meals Healthy lifestyle
Rejecting soft drinks for bottled water Immigration
Diverse Australian population
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Legal Framework of laws and regulations that
governs the operations of a business Fair Work Act 2009
Smaller number of awards and minimum conditions for employers
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Political Ideas that come from the political
parties E.g.
Resources rent tax Carbon tax/emissions trading scheme
Not possible to insure against
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Political
Federal Government• Taxes• Superannuat
ion• Customs
State Government• Employee
entitlements
Local Government• Approving new
development• Fire regulations• Parking
regulations• Size, location
and shape of business signs
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PoliticalLabour market reforms
Social reforms
Environment management Taxation
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Institutional Not only established organisations
Unions Trade associations
More importantly Established practices/customs in a
business Change = essential Make change more difficult
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Technological Important because of rate of change How things are done in business E.g.
US car making process = completely automated
Woolworths Minimise component in distribution Saved over $4.5 billion with new system
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Competitive Situation Market where other businesses are
providing products to meet the same consumer need
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Competitive SituationEase of entry
into market for a new business
Local and foreign
competition
Marketing strategies
employed by competitors
Number of competitors
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Types Of Market ConcentrationMonopoly
1 firm No competitors E.g.
Australia post Railcorp
Oligopoly Consists of a small
number of larger firms that dominate the market
E.g. Banks Oil companies Car manufacturers
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Types Of Market ConcentrationMonopolistic Competition
Large number of buyers and sellers
Differentiated goods E.g.
Clothing manufacturers
Local retailing
Perfect Competition Large number of
small businesses that sell products that are the same or similar
E.g. Fruit & vegetable
growers
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Markets Market
Place in the commercial world where goods and services are sold
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Internal Influences Things managers can influence
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Products Businesses competing to produce a
product that better meets the needs of the competitors
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LocationVisibility•How well•How often
Cost•Rent/lease
Proximity to suppliers•How close to suppliers
Proximity to customers•How close
Support services•e.g. accountants, lawyers
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Resources
Finance Employees
Equipment
Raw materials
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Resources Way are acquired Affect
Quality value
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Management Attitudes and values
Manager Employees
‘Best practice’ Way the competitive businesses in the
industry do things and clearly involves ideas Efficiency Quality production High levels of customer services
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Management – Flight Centre Family, village, tribe Business teams
Area leadership
National leadership
Regional leadership
Global board
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Stakeholders Any group/individual on whom the
decisions/ actions have an impact have an interest in things a business
does Shareholders
People who have a ‘share’ in the ownership of a company
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StakeholdersInternal Stakeholders
Shareholders
Employees
Managers
External Stakeholders
InvestorsCustomersSuppliers
CompetitorsUnions
GovernmentThe community
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Types of BusinessesTopic: 1.2
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Size
Micro: <5
Small: <20
Medium: 50-200
Large: >200
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Local, National, Global•Immediate market•E.g. Mike’s seafood, Inner Vision Surf N SkateLocal area
•Throughout Australia•E.g. Woolworths, QR NationalNational•Portion of business outside of Australian borders•E.g. BHP Billiton, McDonalds , WestpacGlobal
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Global: Advantages Most efficient production resources Distribute risk
Geographic Currency fluctuations
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Industry
PrimaryExtraction of natural resources
E.g. Farmers, Rio Tinto, BHP Billiton, Xtrata, Fortesque
SecondaryConverts natural resources to finished & semi-finished goods
E.g. General Motors, Alchoa, Bluescope Steel, Bago Woodworks, Dorvic Steel
Tertiary
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Industry
Quaternary Information processing services
E.g. Real estate, banks, media, insurance
Quinary Consumer focused services
e.g. teachers, hotels, motels, restaurateurs
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Industry Shifts away from primary industry into
the services sector Developed nation
Primary sector < tertiary sector Feeds into other aspects of the economy
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Legal Structure
Sole Trader
Partnership
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Legal Structure
Limited Partnership
For business venture with more risk of failure
Allows some partners to have limited liability Normally silent partners
Investment purely for financial reasons
Public Company (Ltd.)
Unlimited owners (shareholders)
Limited liability Separate legal entity from owners
General public can buy shares
Financial records must be inspected by ASIC (Australian Securities and Investment Commission
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Legal Structure
Private Company (Proprietary) (Pty. Ltd.)
1-50 people Know each other
Limited liability
Cannot ask general public for funds
Not listed on stock exchange
Transfer/sale of shares is restricted
‘Dividends’ Percentage of profits payed to shareholders
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Legal StructureCooperatives Group of people with a common interest
Members invest in co-op which carries out their buying/selling for themOften used in agricultural industries
7 members
Not required to pay tax on profits
Limited liability
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Legal Structure
TrustsTrustee Person responsible for management of assets
Manage investments and minimise tax
Not a separate legal entity
Government Enterprises Businesses owned/operated by state or federal government
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Types of Businesses for Legal Structures Not all legal structures suitable for all
businesses If the shoe fits
Sole trader All decisions = direct actions of manager Name does not make a separate legal
enterprise
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Types of Businesses for Legal Structures Partnership agreement
Reduce likelihood of disputes Profit distribution Working arrangements Structure changes What happens if money is owed to creditors
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Types of Businesses for Legal Structures Medium Large business = company
High amount of finances needed Specialist managers Large enough to avoid downside of
limited liability
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Sole TraderAdvantages Disadvantages
Unlimited liability for debts End of business when
owner dies Difficult to operate if sick Need to carry all losses Burden of management Need to perform a variety
of tasks Difficulty in raising finance
for expansion
Low cost of entry Simplest form Complete control Less costly to operate No partner disputes Owner’s right to keep all
profits Les government regulation No tax on profits, only on
personal income
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PartnershipAdvantages Disadvantages
Unlimited liability For all debts
Disputes Difficulty in finding
a suitable partner Divided loyalty
and authority
Low start up costs Less costly to operate Shared responsibilities and
workload Pooled funds Minimum gov regulation No taxes on business profits Business can keep going
upon death of 1 partner
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CompanyAdvantages
Public finance Limited liability Can transfer ownership Perpetual succession
Long life Experienced management Greater spread of risk Lower company tax rate Growth potential Only need 1 shareholder and 1
director
Disadvantages Cost of formation Double taxation Personal liability for debts if
directors knew that business was unable to pay debts
Yearly report of audited accounts
Public disclosure Inefficiencies from becoming
too large
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Franchise Arrangement- Franchisor
Advantages Fast and selective
product distribution Avoids costs of
construction Does not have to
operate outlets Agreement ensures
some control Motivated franchisees
Disadvantages Unsuitable
franchisee Disagreement
over conditions and terms of contract
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Franchise Arrangement- Franchisee
Advantages Limited finances needed Guaranteed customer
base Established name Management
back-up Proven methods of
business
Disadvantages Franchisor retains great
deal of control Limited individuality Disagreements over
conditions and terms in the contract
If too successful, franchisor may open own outlet
© Andrew Newbound 2013
Boost Juice Case Study 80% of businesses fail in first 3 years of
operation 20% of franchises fail in first 3 years of
operation
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Business Growth & DeclineTopic 1.4
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The Business Life Cycle Series of predictable phases businesses
experience as they developEstablishment
Growth
Maturity
Post Maturity
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EstablishmentCharacteristics
Customers not familiar with product
Retailers reluctant to put on shelves
Takes time to establish product
Expenses higher than sales revenue
Negative profits Businesses lose money in
establishment stage
Strategies Adequate savings to
address cash problems Effective marketing
strategies Undertake business
courses to develop management skills
Research government regulations
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GrowthCharacteristics
Rapid increase in sales Pressure on resources,
particularly cash and labour
Cash problems develop Competitors attracted
by increasing sales
Strategies Prepare to work even
harder Effective credit policy
to collect debts Consider factoring Select time to employ
professional managers
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MaturityCharacteristics
Sales level off Market is saturated Time to employ
professional managers
Focus on remaining competitive
Strategies Focus on cutting costs Examine all aspects of
value chain to cut costs
Diversify into new products
Find new ways to grow value of business
© Andrew Newbound 2013
Post-maturityCharacteristics
Final stage of life cycle
Falling sales and loss of market share
Cash flow problems emerge
Business starts to decline
Strategies Improve the competitive
position of the business through cost cutting
Renewal may be a possibility with new products
New managers with new ideas
Manage the closure effectively and ethically
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Integration
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Factors Contributing to Business Decline Failure to embrace change
Products Technology Production techniques
Lack of finance Business culture Environmental influences
E.g. economic recessions
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Voluntary Cessation Owner decides to end business E.g.
Retire Business purchased by another and
customers, employees etc. are incorporated
All stakeholders interests are considered
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Involuntary Cessation Forced ending of a business Creditors take legal action to wind up
business
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Liquidation Turning assets into cash Distributed to secured creditors Remaining distributed to unsecured
creditors Sometimes at a proportionate amount
E.g. 50c in $1
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Sole Trader Cessation Voluntary
Pay bills and stop trading Involuntary
Court orders trading to cease Debts paid Bankruptcy may be declared
Death of owner Business may die too OR succession
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Partnership Cessation ‘Dissolved’
Arrangements set out in Partnership Agreement If not – Partnership Act honoured
Can occur A partner dies A partner is declared bankrupt A partner committed fraud By court order due to creditors not being paid
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Company Cessation ‘Wound up’ Voluntary
1. Acquire solvency declaration so can pay bills2. Profits divided amongst owners3. Trading ceases
Involuntary1. Courts order a liquidator
Assets turned into cash2. Creditors paid in order of priority3. Owners, shareholders liable to value of ownership
© Andrew Newbound 2013
Problems Arising From Liquidation
Company directors
• Possible loss of directorship position• And/or disqualified as a director
• Could lose personal assets to pay for company’s debts• Possibility of a fine and/or imprisonment
© Andrew Newbound 2013
Problems Arising From Liquidation
Creditors (unsecured)
• May not receive any money owed• May only receive proportion of money owed
Employees
• Loss of jobs• Right to have outstanding wages and superannuation payed if money left over after liquidator’s
fees
© Andrew Newbound 2013
Problems Arising From Liquidation
Shareholders
• Unlikely to receive any payment• Rank behind creditors
• Liquidator can request that holders of unpaid/partly paid shares in the company pay outstanding amount on those shares
Society/economy
• Loss of production• Social and personal difficulties associated with job losses• Loss of economy confidence
© Andrew Newbound 2013
Business ManagementTopic 2
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Nature of ManagementTopic 2.1
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Management Business activities
Planning Leading Organising Controlling
Process of working with and through other people to achieve business goals
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Features of Effective Management - Orica Maintain business culture
Safety, health and the environment Trust
Commercial ownership Own something to make money out of it
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Features of Effective Management - Orica Maintain business culture
Creative customer solutions Good customer service
Working together Collective knowledge Increase sales Effectively use limited resources
© Andrew Newbound 2013
Skills of ManagementReconciling Interests of
StakeholdersStrategic thinking Vision
Problem solving
Decision Making
Adaptability to change
Flexibility
Interpersonal
Communication
RSVP DA FIC
© Andrew Newbound 2013
Skills of Management Communicate effectively Lead Delegate Motivate Negotiate
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Richard Branson Interpersonal
Negotiation ACCC
Motivation Communicating
Media
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Communication Transmission of ideas and information
throughout a business Conveying meaning
Correct translations if necessary Avoiding ambiguity
Analogies don’t add confusion
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Communication Listening
Ideas of others taken into consideration Efficient use of technology
Employees can quickly grasp concepts
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Strategic Thinking Achieve future goals in uncertain
business environment Fluctuations in economic cycle
Strain on credit Maybe cut unnecessary spending Maybe put future projects on halt
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Vision Manager imagines what business would
be like in a period of time Business as a whole strive towards
common goals Without
Unable to best manage a business
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Problem Solving Address problems as they arise within a
business
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Problem SolvingIdentify the problem and causes
Gather relevant information
Develop alternative solutions
Analyse the alternatives
Choose one alternative and implement it
© Andrew Newbound 2013
Decision Making Choose between alternatives Best make positive decisions for the
business Acquire and analyse information Anticipate competitor’s moves Resource allocation Without
Competitors gain advantage
© Andrew Newbound 2013
Flexibility Tackle challenges in dynamic business
environment 2009 GFC
Reduced customer demand Tackled incorrectly
Inadequate resources upon market return
© Andrew Newbound 2013
Adaptability to Change Adapt to changes in consumer demand McDonalds
Consumers wanted healthy lifestyle New, healthier products Healthier means of manufacture
Kmart Consumers wanted cheaper products Removing underperforming and expensive items Everyday Low Prices
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Reconciling the Conflicting Interests of Stakeholders Stakeholders have different goals
Customers: Max benefits Shareholders: Min costs
Employees: Max benefits Shareholders: Min costs
Business: Max benefits Suppliers: Min costsCommunity: Max benefits from things like low pollution levels
Shareholders: Min costs
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Reconciling the Conflicting Interests of Stakeholders Mining company caused high lead levels
in childrenDecide on stance on issue Problem solvingDecide on alternative Decision makingReduce dividends to shareholders
Decision making
Pay out annual compensation
Interpersonal (how much)
Pay out 50% of all medical fees immediately
Interpersonal (how much)
Reduce corporate bonuses Interpersonal (how much)Demonstrate out objective Communication
© Andrew Newbound 2013
Achieving Business Goals What a business’s stakeholders want it to
achieve Profit
Difference between revenue and cost incurred Dividends
Portion of profit distributed to shareholders Retained profits
Portion of business profit kept by business to sustain future growth
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Market Share Percentage of the market a particular
business’s products has Reducing price of products
Able to increase revenue Increase overall profits
Less profit per individual product If cost of production is constant
Less innovation Other mechanism of increasing market share
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Growth Increase in business revenues from year to year Opening additional stores
JB Hi Fi Selling more existing products at higher prices
BHP Billiton Luring clientele
Better than competitors Offering something that competitor can’t
Increasing value
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Growth JB Hi Fi
Rapid growth Harvey Norman
Maturity stage Constant growth
Low in comparison
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Share Price Price at which shares are bought and
sold on the secondary market JB Hi Fi
1000% growth from 2003-2010 (since listing)
Increase in market share reflective 40% profit returns in half year period
© Andrew Newbound 2013
Social Providing employment Specific initiatives such as mentoring
indigenous people to get full time work
© Andrew Newbound 2013
Environmental Concerned with sustainability Walmart
Sell products that sustain resources and the environment Throughout whole supply chain
Cannot sell products without Meaningful contribution
© Andrew Newbound 2013
Achieving a mix of the above goals Walmart
Specific goals across supply chain Barcode tracking technology
Reduce staffing levels Cut costs
Environmental Reduce greenhouse gas emissions
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Staff Involvement – Innovation Kmart Mt Druitt
Dressing up as characters of products they sell Boost sales Entice customers into the stores Excitement for less profitable products
© Andrew Newbound 2013
Staff Involvement – Motivation Make staff enjoy the workplace more
Boost sales, effectiveness Staff recognise their contribution to
business success Kmart
Rewarding good performance Kmart gift cards
Bonus pool Every 1% of sales above budgeted amount
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Staff Involvement – Training Employees are able to perform their role
well Kmart
Induction Continuous training
Particularly in customer service Main competitive advantage
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Staff Involvement - Mentoring Experienced person trains and counsels
another employee Expensive Highly effective
Highly effective and proficient members Difficult aspects of the role
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Management ApproachesTopic 2.2
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Planning Setting of targets and goals Setting time frames Prioritise activities Suggest resource/financial allocation Defines parameters
Clas
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Organising Allocates the actual resources and
money Determines organisational design Assigns work to employees Sets the channels of communications
Clas
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Controlling Reviews actions undertaken Creates performance reports Accounts for variance between planned
and actual performances Suggests new parameters
Clas
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Hierarchical organisational structure Small spans of command
Managers only in charge of a small group of people 4-14 subordinates
Division of labour Job divided into small, usually unskilled
tasks Rigid chain of command
Strict line of authority from top to bottom
Clas
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Autocratic Leadership Style High level of direction Little/no participation of subordinates
Clas
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Taylor Taylor’s four principles of management
Develop Select Divide Cooperate
Eliminate wasted movements Best qualified workers for a job Incentive systems
Clas
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Henri Fayol More focussed to all managers than
Taylor Lowest level
Universal set of functions Widely followed by managers today
Clas
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Fayol’s 14 PrinciplesDivision of work
Authority
Discipline
Unit of command
Unity of direction
Remuneration•Fair wage
Subordination•Of individual interests to general interests
Esprit de corps•Team spirit
Scalar chain
Equity•Kind and fair
Initiative Order
Clas
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Behavioural approachLeading•Change & conflicts dealt with
Motivating•Maximum productivity
Communicating•Managers employ their strategies effictively
Beha
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Teams Self managing teams
Don’t need close supervision Wider span of control
Flat organisational structure
Beha
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Participative/democratic leadership style Open communication channels Gain feedback
Better business decisions More motivated employees
Loyalty Productivity
Beha
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© Andrew Newbound 2013
TheoristsElton Mayo
Douglas McGregor
Abraham Maslow
Beha
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The Hawthorne Studies Western Electric Company
1924-1932 Productivity increased when the lighting
was turned up OR down Being accepted by the group
Beha
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The human relations movement Importance of employee satisfaction
Beha
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Douglas McGregor
Theory X•Workers•Little ambition•Dislike work•Avoid responsibility•Need to be closely directed to work effectively
Theory Y•Workers•Exercise self-direction•Accept responsibility•Consider work as natural as rest and play
Beha
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appr
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© Andrew Newbound 2013
Abraham Maslow – 5 NeedsPhysiolo
gical Safety
Social Esteem
Self-actualisation
Beha
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ComparativeTraditional
Organisations•Less fluid•Division of labour•Rigid structure•Hierarchical•Autocratic, didactic management style•Delegation•Top-down
New and emerging
organisations•More fluid•People centred•Multi-task, multi-skilled•Inclusive•By consensus
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Classical-scientific approachMajor
strengths•Easy to understand•Planning•Actual performance•Division of labour•Specialisation•Straightforward organisational structure•Rigid chain of command
Major weaknesses•Too simple•Workers treated as machines•Excessive supervision•Over-specialisation•Leadership is rigid and controlling•No input
© Andrew Newbound 2013
Behavioural approachesMajor
strengths•Flexible and adaptable•People’s needs•People = important•Motivation•Satisfy business goals•Individual needs•Employees are valued•Communications = 2 way•More informed decisions
Major weaknesses
•Developed before globalisation, technological advances•Uncertainty in task designs, expectations•Difficult to gauge link between productivity and human motivation•Different motivational needs•Difficult to adjust to•Decision making is time consuming
© Andrew Newbound 2013
Contingency approach Uncertain future Competitors react to changes more
quickly Business can meet customer needs
more effectively than competitors Market share increases
Important to react quickly
© Andrew Newbound 2013
Management ProcessTopic 2.3 Volume 1
© Andrew Newbound 2013
Business Functions Interdependence
The different functions of the business working together in order to achieve something
Synergy The whole is greater than the sum of the
individual parts
© Andrew Newbound 2013
Business FunctionsOperations•Manufacturing•Provision of services•Other value adding•Domestic/global
Human resources•Industrial relations (HR)•Human resources management (HRM)•Personnel
Marketing•Product•Price•Promotion•Placement
Accounting and finance•Administration•Financial management•Financial planning•Management and change
© Andrew Newbound 2013
Coordination Ensuring that the different parts in a
business work together effectively Incitec Pivot
Goals in all 4 functions Communicate goal Improve employee productivity $530 million net profit
© Andrew Newbound 2013
Operations Transforming inputs into outputs Quality
Repeat business Word-of-mouth new business Above competitors
© Andrew Newbound 2013
The Production Process Series of stages a product progresses
through to be transformed Adds value to product
Inputs
Processes/Transformations
Outputs
© Andrew Newbound 2013
Quality Management Quality
Manufacture of services to meet pre-defined standards/specifications
Customers switch if don’t Coca Cola
Contain advertised amount Taste like Coke Be carbonated
© Andrew Newbound 2013
Quality Management Minimisation of variation to defined
limits Building systems and procedures to
ensure
© Andrew Newbound 2013
Standards Australia Develops and maintains expectations of
certain products Safety Performance Reliability
Works with international standards agencies Positive contribution to Australia
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Purchasing/supply chain management Supply chain
Range of suppliers from which the business purchases materials and resources
Lead time Length of time it takes for the business to
actually meet the needs of the customer through provision of the good or service the customer/client seeks
© Andrew Newbound 2013
Purchasing/supply chain management Supplier rationalisation
Process a business goes through when it reviews and reduces the number of suppliers it purchases from Best value for money
© Andrew Newbound 2013
Quality assurance Systems and procedures to ensure
error/fault will not occur Incitec Pivot
Computerised bag loading Exact quantity in each bag
Much growth in recent years
© Andrew Newbound 2013
Total Quality Management (TQM) Japanese concept
Constantly striving to improve all aspects of the business
Kmart Highest possible level of customer service
Assist customers who require assistance immediately
‘Kansei’ 24hr trading to improve convenience
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Management ProcessTopic 2.3 Volume 2
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Role of Marketing Find out what customers want and
develop products that will meet what they want
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Target Market The component of the total market
which the business will focus its marketing
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Identification of the Target Market Market segmentation
Breaking down market into small, manageable bits
Coca Cola’s lack of products for infants Differentiated marketing
Focusing marketing on a number of segments
Ford’s range of products
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Customer Characteristics Geographics
Where consumer lives Demographics
Features of the population Psychographics
Characteristics of the target market
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Marketing Mix Combination of the 4Ps to achieve
business objectives
© Andrew Newbound 2013
Product Differentiation
Adding features not offered by others Brand
Positioning in market Associating logo/name/symbol with
characteristics Reliability/syling/value for money
© Andrew Newbound 2013
Pricing Penetration pricing
Setting prices below competitors Woolworths and Coles price wars Suited for markets with competitors
Skimming pricing High prices only attracting top end of market Maximise profits Quickly recoup production costs Few competitors
© Andrew Newbound 2013
PromotionPersonal selling
• Activities of a sales representative in helping a customer explain benefits of product
Advertising
• Paid communication• Directly to customers
• E.g.• Television• Newspapers• Radio
© Andrew Newbound 2013
PromotionBelow-the-line promotions
• Competitions• Free samples• Coupons • E.g. Coca Cola’s win a beach house
Public relations
• Product mentioned in magazine/newspaper• Associating with positive marketing
© Andrew Newbound 2013
PlaceIntensive distribution
• As many outlets as possible
Selective distribution
• Wide, yet more specific than intensive
Exclusive distribution• Only available at very specific outlets• Luxury items
• Customers go to great lengths to purchase
© Andrew Newbound 2013
Management ProcessTopic 2.3 Volume 3
© Andrew Newbound 2013
Cash Flow Statements What is going in and going out on a
daily basis
© Andrew Newbound 2013
Expenditure Capital expenditure
Money a business invests in assets E.g. property, equipment, computers
Revenue expenditure Cash a business spends to generate
revenue E.g. advertising, stock
© Andrew Newbound 2013
Credit Bank loan
Allows a business access to large amounts of funds paid back over an extended period of time with interest
Overdraft A good source of short-term finance with a
pre-approved credit limit Trade credit
Extended trading terms offered to encourage higher sales
© Andrew Newbound 2013
Reduce sales price to improve cash flow Able to pay creditors on time Prevent wastage Generate cash Increase volume of sales
© Andrew Newbound 2013
Cash Flow StatementJan Feb Mar
Opening Balance
$2000 $4000 $0
Cash Inflow $5000 $2000 $3000Cash Outflow $3000 $6000 $5000Closing Balance $4000 $0 -$2000
𝐶𝐵=𝑂𝐵+𝐶𝐼 −𝐶𝑂
© Andrew Newbound 2013
Definitions Liquidity
Ability to pay short term debts Profitability
Measure of the effectiveness of using resources available to a business
© Andrew Newbound 2013
ResourcesSales
revenue AssetsOwner’s
investment
© Andrew Newbound 2013
Assessment of business performance
Benchmarks Budgets
Previous periods
© Andrew Newbound 2013
Income Statement Measures the performance of a business AKA
Profit and loss statement (P&L)
Revenue statement Statement of earnings
Brackets deduction
© Andrew Newbound 2013
Formulae
© Andrew Newbound 2013
Revenue Statement of PMQ Motor Supplies for year ending 30 June 2006
$ $Revenue (Sales) 300,000Opening Stock 50,000Purchases 40,000Closing Stock 35,000Total COGS 55,000Gross Profit 245,000
ExpensesWages 105,000Electricity 15,000Advertising 25,000Total Expenses 145,000Net Profit 100,000
Typical Income Statement
© Andrew Newbound 2013
Gross Profit Ratio
Reflects margins between the business’ purchasing costs and its selling costs
© Andrew Newbound 2013
Gross Profit Ratio Solving a change
Cheaper supplier Buy in bulk Hold less stock Buy local Alternative warehousing Increase mark-up on good/service
Absolute last alternative
© Andrew Newbound 2013
Gross Profit RatioLow• High supply
costs• Low prices
charged for products
High• Low supply
costs• High prices
charged for products
© Andrew Newbound 2013
Net Profit Ratio
Reflects operating costs/expenses of the business
Improve Decrease expenses faster than sales Increase stock turnover
© Andrew Newbound 2013
Net Profit RatioLow*• Excessive costs
High*• Low
costs/expenses• Sound financial
management
* Especially if compared to GPR
© Andrew Newbound 2013
Expense to Sales Ratio
Necessary Higher expenses create less profitability Should not rise faster than sales
© Andrew Newbound 2013
Ratio Answer ProcessPut it in plain English
Identify trends
Compare to the norm
© Andrew Newbound 2013
Revenue Statement StrategiesIncrease Revenue
•Sales Promotion•e.g. advertise special deal
•Product rejuvenation•Give product a fresh look
Decrease Expenses
•Developing cost centres•Department within business that reviews all costs
•Expense minimisation•Keeping expenses as low as possible
© Andrew Newbound 2013
Assets Anything the business owns that has
financial value and will provide future economic benefit to the business
𝐴=𝐿+𝑂𝐸
© Andrew Newbound 2013
AssetsCurrent assets
•Bank savings•Cash on hand•Accounts receivable (debtors)•Prepaid expenses•Inventories (stock)
Non-current assets
•Property•Plant and equipment•Motor vehicles
Intangible assets
•Goodwill•Trademarks•Copyrights•Patents
© Andrew Newbound 2013
Liabilities Any monetary amounts owed as the
result of past eventsCurrent liabilities
•Account payable (creditors)•Overdrafts•Credit card debts
Non-current liabilities
•Mortgages•Long term loan•Lease
𝐿=𝐴−𝑂𝐸
© Andrew Newbound 2013
Owner’s Equity The money the business is worth to the
owners
Capital• Money that the owners have put into the business
Retained profits• Profits which have been earned by the business but have
not been paid out as dividends
𝑂𝐸=𝐴−𝐿
© Andrew Newbound 2013
Balance Sheet DefinitionsLiquidity
• Whether the business has enough cash in and short term assets to cover debt
Solvency
• Ability of the business to repay debts as they fall due
Working capital
• The finance available for the day-to-day running of the business
© Andrew Newbound 2013
Liquidity Whether the business has enough cash
in and short term assets to cover debt Highly liquid assets
Can be changed into cash quickly
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠=𝐶𝐴𝐶𝐿
Expressed as a ratio _:1
Safe working ratio = 2:1
© Andrew Newbound 2013
Solvency AKA Debt to equity AKA Gearing Ability of the business to repay debts as
they fall due Insolvent
Cannot pay debts on time Indicates long term stability Relationship between debt and equity
funding
© Andrew Newbound 2013
Solvency
𝐺𝑒𝑎𝑟𝑖𝑛𝑔𝑟𝑎𝑡𝑖𝑜=𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠𝑂𝑤𝑛𝑒𝑟 ′ 𝑠𝐸𝑞𝑢𝑖𝑡𝑦
=𝐿𝑂𝐸
Expressed as a ratio _:1
High > 1.5:1
© Andrew Newbound 2013
Solvency
Too high• Relies too much on
borrowed funds• Vulnerable to
insolvency
Too low• Missing out on
investment opportunities
• Low risk creditors are happy
© Andrew Newbound 2013
Improve working capital and liquidity
Decreasing liabilities
Factoring
Leasing•Instead of purchasing
Sale and lease-back
Creating greater cash
flow
JIT (Just-In-Time) inventory
control
© Andrew Newbound 2013
Improving the solvencyDecrease liabilities
Increase equity
Controlling loans•Using available finance to pay off liabilities
Issue new shares to finance purchases•If a public company
© Andrew Newbound 2013
Management ProcessTopic 2.3 Volume 4
© Andrew Newbound 2013
Human Resources ProcessBusiness plan
Job analysis
Recruitment
Selection
© Andrew Newbound 2013
Recruitment Pool of potential applicants is developed
for jobs Internally
Transferring between roles Externally
External means Best possible candidate to apply
© Andrew Newbound 2013
Selection Choosing right person for job1. Candidates apply for job2. Series of interviews/employment tests
Eliminated at each stage See if employee is adequate for the task
© Andrew Newbound 2013
Training and development Training
Providing skills required to do job well Development
Employee is made more valuable resource to company
Up skilling Prepare employees for FUTURE jobs,
responsibilities
© Andrew Newbound 2013
Modern Awards Basis of employment 10 key aspects of employment
Ensure fairness for workers in negotiating contracts
Wages Leave Dispute resolution
© Andrew Newbound 2013
Enterprise Bargaining Employees in a certain enterprise
bargain as a collective Higher wages Trade offs
E.g. increase in productivity
© Andrew Newbound 2013
Separation Voluntary
Employee leaves of own choosing E.g. redundancy
Agreed by employee Involuntary
Employee is dismissed Not of own choosing
© Andrew Newbound 2013
Ethical Business Behaviour Lack of trust
Between customer and seller E.g. online business arrangements
Bribery Acceptable in 1 location, not another
© Andrew Newbound 2013
Ethical Business Behaviour Environmental issues
Profitable Negatively affect environment
Online scams in general Damage a company
© Andrew Newbound 2013
Management and ChangeTopic 2.4
© Andrew Newbound 2013
Internal influences
Products Location
Resources
Management & Business
Culture
© Andrew Newbound 2013
External InfluencesSocial Legal Economi
c
Political Technological
Geographic
Financial Competitive Situation Markets
Institutional
© Andrew Newbound 2013
The Change Process1. Identifying the need for change
2. Setting achievable goals
3. Resistance to change
4. Management consultants
© Andrew Newbound 2013
Business Information Systems Planned system Collect info from internal and external
environments Store, process and disseminate date
Form managers require
© Andrew Newbound 2013
Setting Achievable GoalsPreparing the workforce
Break cultural change into manageable bits
© Andrew Newbound 2013
Resistance to Change Financial costs
Purchasing new equipment Redundancy payments Retraining Reorganising plant layout
Inertia of managers/owners
© Andrew Newbound 2013
Resistance to Change Cultural incompatibility in mergers and
takeovers Staffing
Deskilling Acquiring new skills Loss of career prospects
© Andrew Newbound 2013
Management Consultants Possess greater understanding of ‘best
practices’ within industry Best manage change Set out framework
Meet objectives
© Andrew Newbound 2013
Business PlanningTopic 3
© Andrew Newbound 2013
Small to Medium EnterprisesTopic 3.1
© Andrew Newbound 2013
Business Size ATOMicro•<5•e.g. Rainbow’s edge
Small•5-<20•Macquarie seafood
Medium•20-<200•Salt Water Wine
Large•200+•Coles
© Andrew Newbound 2013
Business Size Small business
Independent ownership and operations SME
A business employing fewer than 15 employees
© Andrew Newbound 2013
Role of SMEs Employment
99% of Australian workforce Retain during GFC
Part of supply chain Meet needs of community
Acutely aware Innovation
Risk taking nature
© Andrew Newbound 2013
Gross Domestic Product (GDP) Sum total value of goods and services
produced in Australia in a year SMEs produce 58%
© Andrew Newbound 2013
Success and/or failure of SMEs Fail
Impact of economic conditions
Lack of business
skills
Lack of capital
Failure to keep proper
books
© Andrew Newbound 2013
Success and/or failure of SMEs 2009 = higher failure rate than 2008
Decline in consumer confidence GFC Inadequate funds to repay liabilities
Retail is most susceptible Cut by consumers in economic weakness
© Andrew Newbound 2013
Retained Profits Proportion of business’s profits kept
within the business Not distributed to owners
Promote growth
© Andrew Newbound 2013
Influences in Establishing a Small to Medium EnterpriseTopic 3.2
© Andrew Newbound 2013
Qualifications Recommended
Certificate IV in small business management
Diploma of business Bachelor of Business
© Andrew Newbound 2013
Skills Interpersonal skills
Vision Communication skills to communicate
vision to others
© Andrew Newbound 2013
Motivation Desire/willingness to do something Work within the business comes easier Maximise productivity of other co-
workers
© Andrew Newbound 2013
Entrepreneur Organises and operates a business Prepared to take greater than normal
financial risks High risk = high return
© Andrew Newbound 2013
EntrepreneurshipSets realistic goals•Attempts to achieve them
Takes moderate
risks
Good physical health
Motivated by achievement,
not money
Confident in own ability
Desires responsibility
Emotionally stable
High levels of energy
Makes decision, carries them
outStrong drive
Basic desire to control and
directSkilled
organiser
Tolerates failure
Works well with people
© Andrew Newbound 2013
Entrepreneurship Willingness and ability to turn ideas and
capabilities into reality Entrepreneur
Identifies a need Develops the idea Takes risks Develops strategies Is motivated
© Andrew Newbound 2013
Entrepreneur Persistent Committed Patient Positive Optimistic Works long hours Active Hard working Practical
Reliable Helpful Organised Motivated Versatile Flexible Efficient Dependable
© Andrew Newbound 2013
Entrepreneur Experienced Dynamic Problem solver Punctual Quick thinker Self confident
Realistic Responsible Determined Has integrity Thorough
© Andrew Newbound 2013
Cultural Background Ideas, customs may lead down path Expectations of individual within culture
© Andrew Newbound 2013
Gender Influence Business opportunities accessible to
women Ecommerce Retail Hospitality Health roles Children Hair dressing
© Andrew Newbound 2013
Sources of InformationFederal•Advice•Grants•Ideas•Raising of finance
State•Advice•Registration•Loan finder•Checklists•Grants•‘Tech Vouchers’
Local•Training•Info about Port Macquarie
© Andrew Newbound 2013
Competition Several businesses try to meet
customer needs more effectively than rivals
Type of market ‘mass’ broad market ‘niche’ specialised market
How to make business competitive Develop customer base Gain market share from competitors
© Andrew Newbound 2013
Establishment Options – New
Advantages•Cheap•Innovation•Flexibility•Grants
Disadvantages
•Lack of goodwill•Harder to get money•Time to build business
© Andrew Newbound 2013
Establishment Options – Existing
Advantages•Known practices•Room for innovation•Brand recognition•Client base•Control•Equipment•Knowledge from current owners
Disadvantages
•Costly•Resistance to change•Staff entitlements•Loyalty to previous owner•Not as competitive
© Andrew Newbound 2013
Establishment Options – Franchise
Advantages•Support•Brand recognition•Competitive•Supply of equipment
Disadvantages
•Inflexible•No innovation•Royalties
© Andrew Newbound 2013
Goodwill The value of the reputation of a
business Difference between total value of assets
and the sale price of the business
© Andrew Newbound 2013
Existing Business Advice Thoroughly check operations
Work in business Finances more likely to lend
Access to financial records Goodwill may be associated with owner,
not business Intellectual property
Any invention/creation of the owner considered to be their property
© Andrew Newbound 2013
Franchise Equipment Supplies Training Ongoing management assistance Collective buying power Brand recognition
© Andrew Newbound 2013
Competitive advantage Marketing
Differentiation of product Unique brand
Loyalty
© Andrew Newbound 2013
Location – Visibility Attract passing trade Easy to find for customers and suppliers More important for retail than
manufacturing
© Andrew Newbound 2013
Location – Cost Purchase vs lease premises Areas with higher lease/rend Lease
Tax deductable Negative impact on cash flow
© Andrew Newbound 2013
Location – Proximity to Suppliers Cost of transport Timing of delivery of stock Proximity to customers Accessible to target market
© Andrew Newbound 2013
Location – Proximity to Support Services Activities needed to assist core
operations/prime functions of business Outsourcing of various functions
Accountant Marketing specialist
Access to technology Internet reduces importance of this
© Andrew Newbound 2013
Finance SourcesBanks, NBFIs
Personal savings
Family and friends
Investors
Grants Stock exchange
© Andrew Newbound 2013
Cost of Borrowing Interest you pay
© Andrew Newbound 2013
Zoning Not all businesses are permitted in all
locations Environmental Act Particularly important for home
businesses
© Andrew Newbound 2013
Training Employees gain skills needed to do job
wellMore productive employees
Further profitability
Enhancing business’ competitive position
© Andrew Newbound 2013
Wage and non-wage outcomes Wage
Annual salary Non-wage
Other financial benefits Superannuation Annual leave loading Fringe benefits
© Andrew Newbound 2013
Taxation – Federal Taxes Company tax
30% tax levied on the business’ profit PAYE tax
‘Pay as you Earn’ income tax on employees Forwarded by businesses to Fed. Gov.
GST Imposed on most private consumption (10%)
FBT (Fringe Benefits Tax) Applied to non-wage benefits
© Andrew Newbound 2013
Taxation – State Taxes Payroll tax
Payed by employers whose payroll >$50k Land tax
A tax payed of 1.6% of the value of the land of all land owners in NSW
© Andrew Newbound 2013
Taxation – State Taxes Superannuation
9% of the salary paid into a complying fund Registered with the Insurance and
Superannuation Commission Leave loading
17.5% on top of the employee’s salary for prescribed period of leave
© Andrew Newbound 2013
Superannuation Quarterly contribution of 9% Workers <70 years $450+ per month Full time workers
© Andrew Newbound 2013
The Business Planning ProcessTopic 3.3
© Andrew Newbound 2013
SWOT•What a business is capable of doingStrengths•What a competitor does betterWeaknesses•A set of circumstances that allow something to be improvedOpportunities
•The obstacles a business faces in the external environmentThreats
INTERNAL
ASSESSME
NT
EXTERNAL
ASSESSME
NT
© Andrew Newbound 2013
Vision Ideal of what a business will look like if
all goes to plan 3-5yr period
© Andrew Newbound 2013
Long Term GrowthHigh growth• Less market
for older investors
High dividends• Detrimental to
business
© Andrew Newbound 2013
Vision & Mission Statements
Vision Statement
•Business aspires to become•Future orientated
Mission statement
•Why a business exists•Purpose•Function
© Andrew Newbound 2013
Organising OperationsWhat tasks need to be done?
What equipment and skills will employees need?
Which workers will do these tasks?
How will the workers doing particular tasks be grouped?Who will supervise the workers or will we use self-managing teams?
© Andrew Newbound 2013
Market Analysis Determining whether a business has
sufficient potential market in order to succeed without being squeezed out of the market
External influences
© Andrew Newbound 2013
Sales ForecastingSimilar business as guide
How much consumers are likely to spend on products or a competitor’s
Estimation of daily sales x30
© Andrew Newbound 2013
4P’s
Product PricePromotio
n Place
© Andrew Newbound 2013
Market AnalysisMarket size• Present and potential sales
Market growth rate• How much it is growing by
Market profitability• Are existing businesses profitable?
Industry cost structure• Costs in existing businesses
© Andrew Newbound 2013
Market AnalysisDistribution channels
• The new or existing ways a business can distribute a product to gain a competitive advantage
Market trends
• How the market is changing both based on industry and region
Key success factors
• Elements that are necessary in order for a firm to achieve its marketing objectives
© Andrew Newbound 2013
Key Success FactorsAccess to resources
Economies of scale
Access to distribution channels
Technological progress
© Andrew Newbound 2013
Forecasting Giving managers the best possible
information they need to make the best possible decisions in an uncertain environment
© Andrew Newbound 2013
Break-even AnalysisBreak-even• A state where • No gain, no lossTotal revenue• Amount of money brought into a business through
the sale of its productsTotal costs• Amount of money the production consumed for a
business
© Andrew Newbound 2013
Break-even AnalysisFixed costs• Do not reflect the total level of salesVariable costs• Change proportionately with the quantity of sales
made
𝐵𝑟𝑒𝑎𝑘−𝑒𝑣𝑒𝑛𝑝𝑜𝑖𝑛𝑡= 𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑𝑐𝑜𝑠𝑡𝑠𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
© Andrew Newbound 2013
Cash Flow Projections Forecasting of the quantity of finances
moving from one aspect of a business to another
Set out basic cash requirements
© Andrew Newbound 2013
Cash Flow Management Credit policy Generous discounts to customers who
pay early Link periods of surplus with large, fixed
payments
© Andrew Newbound 2013
Sales ReportsSales analysis• Insight into market trends• Create most profitable mix of products
Market share analysis• Comparison between businesses based on performance• Meeting needs as good/better than competitors
Profitability analysis
• Profit performance of various aspects of the busines
© Andrew Newbound 2013
Budgets Form of highly effective control Determine how successful a business’
plans are
© Andrew Newbound 2013
Taking corrective actionEstablish goals and objectives
Monitor performance•What is happening?
Evaluate performance•Is what is happening good or bad? Why is it happening?
© Andrew Newbound 2013
Corrective Action Reports Prevent
Repeat mistakes Loss of customers Dissatisfied customers Poor quality products Unhappy staff
© Andrew Newbound 2013
Corrective Action Reports Better staff morale Reason for new customers
© Andrew Newbound 2013
The Business Plan Executive Summary & Overview Operations plan
Daily operations Systems & Procedures Physical Layout Organisational structure
© Andrew Newbound 2013
The Business Plan Marketing plan
Market research and target market Sales Objectives Analysis of competition Marketplace potential Marketing strategy and promotional
activities
© Andrew Newbound 2013
The Business Plan Financial plan
Set-up Cost Cash flow Forecast Record-keeping systems Assets and Liabilities
© Andrew Newbound 2013
Critical Issues in Business Success and FailureTopic 3.4
© Andrew Newbound 2013
Business Plan - ComponentsExecutive Summary
Marketing
Financial
Human Resources
© Andrew Newbound 2013
Business Plan – Types Start-up
Growth
Strategic
Feasibility
© Andrew Newbound 2013
Management -Staffing Impact upon costs, costs through profits Overall productivity Teams
Employees feel a more significant component of business success
© Andrew Newbound 2013
Trend Analysis Effective management Gauge past events Market segmentation Rapid response to issues
© Andrew Newbound 2013
Over-extension Holding too much stock Investing too much in plant & machinery Spending heavily on advertising
Without results Too many staff
© Andrew Newbound 2013
Over-extension Borrowing too much capital
Highly geared Failing to collect money owing Excessive drawings
© Andrew Newbound 2013
Finance Advice Use personal savings
No debt servicing costs Lack of finances
Primary reason for failure Under capitalisation
Loan requirements 3 years financial statements Tax returns Business plan Sales projections
© Andrew Newbound 2013
Finance Advice Budgeting is vital
Sufficient income Check industry average
Business plan Effective management of savings
© Andrew Newbound 2013
Avoid Overextending Financially Business planning
Cash flow projections Establishment costs Budgets Financial statements Business goals and objectives
Avoiding overdependence on debt financing Avoid problems in weak economy
© Andrew Newbound 2013
Avoid Overextending Financially Long term financial planning
Anticipates future problems Plan future direction
Growth and expansion Start small
Expand slowly
© Andrew Newbound 2013
E-BusinessUsing internet to conduct business Find information Communicate via email Online working, paying accounts Research market conditions, industry
trends, economic forecasts Markets goods and services via its
website Lodge forms, apply for licences
© Andrew Newbound 2013
E-Commerce Buying and selling of goods and services
via the internet
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