BUSINESS UNIT 114th May 2012

Candidates should consider the role, importance and characteristics of an entrepreneur in establishing a new

business. The role of an entrepreneur when

establishing a new business is to make sure everything is running smoothly.

The importance of an entrepreneur is vital. Without one there would be no business.

The characteristics include: Passionate, driven, determined and

focused. Very organised, calculated risk-takers. Natural leader and extremely persuasive.

Entrepreneurship can take a number of forms including spotting a gap in the market or

developing a new or innovative product or process.

There are 3 different motives for starting up a new business through development of a new product or process. These are:

The Traditional Motive- all about spotting a gap in the market and filling it.

The Innovation Motive- all about creating the need for your product and creating a fan base before it is even released. (e.g Apple products like the iPad)

The Wrong Motive- all about creating a product or service and hoping that a market for it arrives.

The sources of ideas may include brain-storming, own personal experience and business experience.

The generation of business ideas must be in relation to a small business with limited resources. Business Experience is a common method of sourcing

ideas. They come from people who work in a particular industry so there is potentially less need for start-up market research and they probably already have the necessary knowledge to start-up a business immediately.

Personal Experience is another common method. It's about peoples interests and hobbies and the challenges people face everyday. Also, bad experiences with a product or service can create irritation which leads to a fantastic business idea!

Brain-storming is a less popular idea where potentially you sit down and just try to come up with ideas but this is a lot harder. The need for start-up market research is a lot more probable and costly.

Candidates should be familiar with the formation and operation of franchises and understand the benefits and

pitfalls to franchisors or franchisees of operating a franchise as opposed to starting a new business.

A franchise is when a business sells the rights to a business in order for them to sell their products and use their brand name. (For example, Subway).

A franchisee is the main person involved with this new business. This person is the person who has set it all up with the franchisor. The franchisor is the business who are selling their rights.

Benefits of a franchise include not having to come up with an original business idea, taking advantage of having the brand name when it comes to advertising and promotion and financing it may be easier as banks are more likely to lend to a well-established company in order to buy a franchise.

Disadvantages of a franchise include a lot higher costs than you might expect as there is an initial fixed cost then possibly buying up supplies and also the franchisor may go out of business.

Transforming Resources into Goods and Services

This topic should be considered within the context of the tertiary, secondary and primary

industries. The Tertiary Industry is the service sector. This is all

about paying for a service rather than a product. Examples include Beauticians and Lawyers.

The Secondary Industry is all about transforming resources into commercial products/manufactured goods. A lot of the time this for leisure purposes such as board games or clothing.

The Primary Industry is all about natural resources. These are products such as copper, oil or wheat that we extract. Raw materials taken from the Earth.

Candidates should be aware of the benefits and problems of plans/planning for small

businesses.BENEFITS: Producing a document allows people to see gaps in

information. It encourages the entrepreneur to focus on what's

important and how customers/finance-providers can be convinced at how successful the business will be.

The plan provides information which can be used to measure actual performance.

PROBLEMS: It's not a straight forward and easy process. It's very time-consuming so the plan is sometimes

produced with out-of date information. Financial aspects of the plan are usually created with

optimism about the business start-up which is often incorrect.

Contents of a Business Plan Executive Summary Market Product Competition Protecting the Idea Management Team Marketing Production/Operations Financial projections Funding Requirements Exit Strategy

The planning process involves decisions based on the resources to be used and factors providing competitive advantage.

The sources of information should include: small business advisors, accountants, bank managers

and government agencies. Small Business Advisors- These are people who are called

in to assess, advise and counsel on a topic(s). They provide recommendations. Some are free whilst others charge.

Accountants- Help with number crunching, book-keeping, advise on presentation. Unless they are are friend of the business they will charge.

Bank Managers- Provide free face to face advice on business planning. Comprehensive start-up guides including business planning. They might also employ specialist local business managers in order for the entrepreneur to have legal contacts. They also provide free networking opportunities at local business seminars.

Government Agencies- Such as Business Link (online) and Regional Enterprise Agencies offer direct information and/or advice to entrepreneurs.

Candidates should be aware of the relative value of different approaches to market

research. Primary Market Research is basically field

research. It doesn't already exist and someone goes out of the business place to get new first hand data.

Secondary Market Research is desk research. It already exists and is usually completed online, by visiting libraries and directly contacting sources.

Qualitative Research is all to do with quality. It's based on opinions and attitudes.

Quantitive Research is all to do with quantity. It's based on actual data and facts.

Methods of Primary and Secondary Market Research

PRIMARY Face to Face

Interview Telephone

Interview Postal/Email

Questionnaire Direct Observation Consumer Panel Test Marketing

SECONDARY Visiting Libraries Surfing the

Internet Contacting

sources direction by phone, fax or email.

Advantages and Disadvantages of the Methods of Primary Market

ResearchADVANTAGES OF FACE TO FACE Detailed, Accurate

Information. Good Response Rate. Harder to ignore than postal.

ADVANTAGES OF POSTAL/EMAIL Easy to target respondents. Relatively cheap. More likely to be truthful.

ADVANTAGES OF DIRECT OBSERVATION

Simple and you can survey large numbers.

DISADVANTAGES OF FACE TO FACE

Time consuming and costly

Answers might not be truthful and the respondent may tell the interviewer what they think they want to hear.

DISADVANTAGES OF POSTAL/EMAIL

Low response rate- easy to ignore and it's a slow process.

Short questions and no opportunity to clarify.

DISADVANTAGES OF DIRECT OBSERVATION

Time consuming and no clarification.

Methods of sampling should include: random, quota and stratified.

RANDOM Individuals are chosen to

be sampled in a completely accidental way. Everyone has equal chance of being picked.

No bias and a sampling error can be calculated if the sampling frame is obtained.

BUT, it's more time consuming, costly and complex. And, the sampling frame is almost impossible to obtain for large populations.

STRATIFIED When the population is

divided into groups that share common characteristics such as age then a random sample being taken from each group.

QUOTA When the population is

divided into groups such as gender. Then the researcher is given a number of people to research in each group.

Candidates should be aware that the available finance, the nature of the product, the risk involved and the target market will influence the choice of

sampling method and size of sample. Sample size depends on: The variability of characteristics. Size of population. Sampling methods

The larger the sampling size the more accurate the findings.

BUT The longer the research time, (I.e data

collection, collation and analysis) the greater the research costs.

Candidates should be aware that markets take different forms, eg local, national,

physical and electronic.

LOCAL Where customers are only a

short distance from suppliers.

Common for sale of locally-sourced and fresh products.

However the market size may be relatively small.

PHYSICAL A physical market brings

buyers and sellers together in the same location.

Prices are often negotiable. EXAMPLE: Car-boot sale.

ELECTRONIC Transactions are completed

electronically with the delivery method depending on the nature of the product.

EXAMPLE: eBay.

NATIONAL The same product or service

is spread and sold all around the country.

A business may have several locations in order to reach different customers.

Candidates should know that demand is affected by a range of factors including the price of the product, competitor actions, consumer incomes, success of

businesses’ marketing and seasonal factors.Price of the Product

If the price of a product goes up then demand will usually fall. This is all about elasticity of demand though. Some products the demand will not change according to price.

Competitor Actions

This is what the competitors do. If they have a better marketing strategy. For example, a supermarket with a much cheaper price demand will be higher.

Consumer Incomes

Consumer income is the amount of income left after tax and living costs have been deducted. If the consumer income is high then the demand for luxury products will be higher.Seasonal Factors

This is all about the time of year. For example, Christmas is always very strong for retailers and Summer is always at peak-demand for overseas holidays.

Success of Businesses' marketing

This is to do with how well a business has marketed a product. If a product has been widely promoted then the likelihood is that demand will increase. If a product has not been marketed well then less people will demand it.

Candidates should be aware of the benefits and drawbacks of types of segmentation.

DEMOGRAPHIC SEGMENTATION

This is about dividing the markets into groups such based on variables as age, gender, family size, income, occupation, education, religion, race and nationality.

GEOGRAPHIC SEGMENTATION

This is to do with dividing the population into geographical units such as regions, countries, city size or population density.

Limitations include the lack of information and data, difficulty measuring and predicting and reaching customer segments once identified.

A start-up that is focused on really understanding it's market has the best chance of success.

Candidates should be able to calculate market size, growth and share.

Market size- The number of buyers and sellers in a particular market. It is what your revenue would be if you had 100% market share in your business.

Market Growth- ALWAYS expressed as a percentage.

FORMULA: New Value-Old Value/Old Value x 100= n%

Market Share- The Percentage of the market owned by each competitor

FORMULA: Sales of Firm/Total Market Sales x 100 = n%

Candidates should be aware of the benefits and drawbacks of legal

structures and understand plc’s as a means of comparison.

Sole Trader

Most common. A sole trader is simply an individual owning the business on their own.

A sole trader can employ people but don't share in ownership.

Partnership

A business is started and owned by more than one person.

The partners between them all own the business assets and owe all business liabilities. This means that Partners also have unlimited liability.

Limited Company

These are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued.

They are owned by shareholders and run by directors. Shareholders own a share but not assets and aren't liable for the debts of the company.

Social Enterprises

Trade in goods or services for a social purpose.

Surplus goes towards social aims.

Not-for-profit

These are businesses that trade in order to benefit the community.

EXAMPLE: charity.

Social aims include job creation and training.

Limited vs Unlimited Liability

Unlimited liability means that the finances of the business are treated as inseparable from those of the business owners. If the business has debts that the owner cannot pay, they can be made personally bankrupt. Two types of businesses that have unlimited liability would be Sole-Traders and Partnerships.

Limited liability means that the legal duty to pay debts run up by a business stays with the business itself, not the owners (shareholders). If a company has £1million of debts and has insufficient cash to repay them, the courts can force the business to sell its assets. If there is still not enough money, the company is closed down, but the owner/shareholders have no personal liability for the remaining debts.

Sources of finance should include: ordinary share capital, loan capital (bank loans, overdrafts only),

venture capital and personal sources.Ordinary Share Capital Ordinary shares in the

equity capital of a business entitle the holders to all distributed of profits after the holders of debentures and preference shares have been paid. This is also known as equity funding.

Loan Capital Venture capital loans typically are

entitled to interest and are usually, though not necessarily repayable. Loans may be secured on the company's assets or may be unsecured. A secured loan will rank ahead of unsecured loans and certain other creditors of the company. A loan may be convertible into equity shares. Alternatively, it may have a warrant attached which gives the loan holder the option to subscribe for new equity shares on terms fixed in the warrant. They typically carry a higher rate of interest than bank term loans and rank behind the bank for payment of interest and repayment of capital.Personal Sources

Things such as cash and investments, redundancy payments, inheritances, personal credit cards, re-mortgaging and working for free. They are important because they are cheap and they maintain control.

Venture Capital Venture Capital is a form of

"risk capital". In other words, capital that is invested in a project (in this case - a business) where there is a substantial element of risk relating to the future creation of profits and cash flows.

LOCATING A BUSINESS: The factors should include: technology, costs, infrastructure, the market and

qualitative factors. Candidates should understand that their relative importance may vary according to the

type of business.Technology Most start-ups can quickly

establish reliable broadband internet connections.

Costs Costs and proximity to

customers are key factors in choosing an optimal location.

The market and qualitative factors

A start-up may need to be located near particular centres of population.

Franchise business often analyse the population characteristics of a potential new territory before setting up in a new location.

Infrastructure The basic physical and

organisational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society or enterprise

The types of employees should include: temporary, permanent, full-time and part-time. Candidates should be aware of the reasons, drawbacks and

difficulties of employing people and/or using consultants and advisors.

TEMPORARY They don't have

to have a permanent contract so they are easier to get rid of.

People want a permanent contract. Harder to employ people.

PERMANENT There are

committed members of staff employed. Worth training employees if on contract.

PART-TIME Often don't have

to pay national insurance. Lower costs.

Lots of different people, more employees, more people to call on.

FULL-TIME Businesses know

who their staff are. They can train people on the job.

CONSULTANTS AND ADVISORS Self-employed. Individuals and businesses external to the business which

provide specific services and advice. Eg. Accountants, Lawyers and Marketing Specialists.

Candidates should understand the relationships between cost, price, revenue

and profits.COST

The total capital, time and resources associated with a purchase or activity.

Fixed Costs are the costs that don't change when output changes. Variable costs are the opposite

PRICE

A value that will purchase a definite quantity, weight, or other measure of a good or service.

PROFITS

The surplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid.

PROFIT = TOTAL SALES – TOTAL COSTS.

REVENUE

Sales revenue (or turnover) refers to the total value of sales achieved in a particular period. TOTAL SALES = VOLUME SOLD X AVERAGE SELLING PRICE.

Candidates should understand how start-up businesses may use contribution and break-even to

analyse the impact of different costs and prices, and make decisions on whether to start the

business. CONTRIBUTION

CONTRIBUTION= TOTAL SALES – TOTAL VARIABLE COSTS

CONTRIBUTION PER UNIT= SELLING PRICE PER UNIT – VARIABLE COSTS PER UNIT

TOTAL CONTRIBUTION COULD ALSO BE CALCULATED AS CONTRIBUTION PER UNIT X NUMBER OF UNITS SOLD

Contribution is the difference between sales and variable costs of production.

BREAK-EVEN

BREAK-EVEN OUTPUT= FIXED COSTS/CONTRIBUTION PER UNIT

This is all about calculating the production output at which the business achieves break-even.

Break even output is always expressed in terms of units.

Candidates should be aware of the strengths and weaknesses of break-even

analysis. STRENGTHS Tells the entrepreneur how long

it will take for the business to become profitable.

Helps entrepreneur and any sources of finance to understand the viability of the business proposition.

Margin of Safety calculation shows how much a sales forecast can prove-over optimistic before losses are incurred.

Helps in trying to understand the risk involved in a start-up.

Calculations are quick and easy.

LIMITATIONS Unrealistic assumptions are

sometimes made when products are not sold at the same price at different levels of output which causes the fixed costs to change.

Sales are unlikely to be the same as output.

Variable costs do not always stay the same.

Should be seen as a planning aid rather than decision making tool.

Candidates should understand the sources of information for cash flow forecasts and

understand the significance of the forecasts. The main sources will be:

Entrepreneur experience- some assumptions will be make on instinct. A cash flow forecast produced by and inexperienced entrepreneur has to rely heavily on other sources.

Market research into the key aspects of sales and costs- Example: Seasonal Fluctuations in Demand, Average Selling Price and Quantities in the Market, Typical Gross Profit Margins.

Suppliers- mostly about timing and costs.

Advisers- Example: Business Link.

Cash flows are VITAL for a business. They are used to:

Identify potential shortfalls in cash balances in advance. A bit like an early warning system.

Make sure that a business can afford to pay its suppliers and employees.

Spot problems with customer payments.

Give to external stakeholders such as banks who may require a regular forecast.

Candidates should be able to amend or complete a cash flow forecast.

Cash inflows (into the bank account)- When customers pay for their sales, when a loan is received from the bank, interest is received or when assets are sold. These are movements of cash into the business.

Cash outflows (out of the bank account)- When suppliers are paid, employee wages and salaries are paid to the bank and so on. These are movements of cash out of the business.

Net Cash Flow- The difference between the total cash inflows and the total cash outflows. This will vary by month.

Opening Balance- Simply the balance in the bank at the start of a period. For a start-up this is often 0. The opening balance in any one month should equal the closing balance at the end of the previous month.

Closing Balance- The amount in the bank at the end of the month. In the exam you may be asked to calculate this balance. The formula for closing balance is: Opening Balance+Net Cash Flow.

Limitations of Cash Flow Forecasting.

Sales sometimes prove lower than expected. - Often too easy to make optimistic assumptions when starting-up. Market research often helps this.

Customers do not pay up on time. - This is a key issue for business that allow credit for a certain agreed period before they pay for their purchases. This is very popular with expensive household items such as TVs or Sofas.

The cost of raw materials and other inputs prove higher than expected. - EXAMPLE: A business may underestimate the price that has to be paid for each supply.

Certain costs are not included. - This is an extremely common problem in start-ups particularly if there has been no previous experience in the market before.

Candidates should be aware of the reasons for setting budgets and the

problems in so doing. A budget is a financial plan

for the future concerning the revenues and costs of a business.

Businesses use budgets to measure whether key objectives and targets are being achieved, to control expenditure by allocating who can spend what, to provide a sense of direction and to monitor actual results against budget.

PROBLEMS

Putting a sales budget together is often hard for a start-up because there is perhaps no experience in the market and they have to predict sales volume and prices.

Budgets are based on estimates and assumptions so the actual results always turn out differently.

Start-ups have no trading history.

Time Consuming.

Limited motivational effect, especially if the business has no employees.

Candidates should be able to amend or complete a budget.

Income Budget-An operational budget based upon achievement of specific income levels.

Expenditure Budget-This is an expense plan and is a vital part of a start-up because the business is likely to incur costs before it even starts trading.

Profit Budget-A planned financial forecast for the net income of a business.

Sales Budget-A sales budget is a detailed schedule showing the expected sales for the budget period.

It need to take account of market research when being completed.

Candidates should be aware that objectives for start-ups may vary and that determinants of success and

failure depend upon the circumstances.

COMMON OBJECTIVES Financial- Capital gains

and just the fact of making a living.

Personal- Proving people wrong, gaining control and building something.

Social- Because your giving something back.

TO SUCCEED- You need a business model that can make money, a market in the gap and a well executed idea.

You need Entrepreneurial characteristics: Passion, commitment, resilience, energy, initiative, risk-taking, multitasking, hard-work and lots of luck.

WHY START-UPS FAIL- No market in the gap because of poor market research, an unrealistic plan and competitor response.

Good idea, poor execution such as the wrong people so consequently poor management, if growth is too quick or too slow and there is a failure to manage cash-flow.

Or it could be due to economic shocks such as the credit crunch.

Causes of failure should include: unexpected changes in demand or costs,

unavailability of supplies and delays.

(pretty self-explanatory)

FINALLY FINISHED.GOOD LUCK EVERYONE!

Jasminexx