week-1the business environment

8/2/2019 Week-1The Business Environment

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The Business

Environment


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What is businessenvironment

Understanding the environmentwithin which the business has tooperate is very important

for running a business unitsuccessfully.


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THE NATURE ANDPURPOSE OF BUSINESS

Categories of business- For Profit Business

- Not for profit


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For Profit Business

A for-profit organization existsprimarily to generate a profit,that is, to take in more money

than it spends. The owners candecide to keep all the profitthemselves, or they can spend

some or all of it on the businessitself. Or, they may decide toshare some of it with employeesthrough the use of various typesof compensation plans, e.g.,


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Not for profit

A nonprofit organization existsto provide a particular service tothe community. The word

"nonprofit" refers to a type ofbusiness -- one which isorganized under rules that forbid

the distribution of profits toowners. "Profit" in this context isa relatively technical accountingterm, related to but not identicalwith the notion of a surplus of


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Not for profit organizations

This may include:

Trade associationsThese exist to

provide services to their memberfirms, such as undertaking publicrelations and advertising for thetrade as a whole, publishing

trade magazines, providinginformation services andarranging exhibitions.


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Not for profit organizationsconti

Professional bodieswhich

provide qualifications andeducation, information services,employment advice, meetingsand conferences for their

members with the aim ofdeveloping and maintaining theirknowledge and skills in a

particular area of employment.


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Learned societieswhich exist to

further understanding, studiesand education in their specialistfield. An example is the RoyalHorticultural Society.


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Clubs which provide a variety of

activities catering for thespecific interests of theirmembers, such as sportsfacilities (for example, rugby,

football or tennis), dinner clubsfor members to meet newpeople, young farmers clubs for

those working in agriculture, etc.


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Think point

What is the key purpose of thebusinesses in your country and of theorganisations that you have worked

for? Make a list of five "for profit" and five

"not-for-profit"businesses that you

have regular dealings with. Each of these categories has a

distinct set of characteristics which

define their nature and
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Some examples

Adopted Vietnamese International (AVI)- An Online Cooperative of People

Adopted From Vietnam

Alliance for Youth Achievement -Children of Peace International hasestablished four orphanages

throughout Vietnam. Aid to Southeast Asia - A people-to-

people, international aid project

contributing to world peace and

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For Profit Business-The major objectives of business

usually include: Survival Profit maximization

Profit maximization- May bedefined in two ways:

Normal profit

opportunity cost-


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Survival

This is the prime objective of abusiness since, unless a business cangenerate sufficient sales to cover its

running costs, its start up capital willsoon be exhausted and it will fail.Once a firm has reached this stage,

which often takes a year or longer, itmay then change


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Profit maximisation

Making profit is normally essential fora business to survive in the longterm.

At the most basic level, the profitgenerated must be sufficient to makeit worthwhile to continue to operate

of business.


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Profit maximisation

Normal profit-

Normal profit which is theminimum return that owners mustmake on the capital sum theyinvest to prevent them fromclosing that business and moving

their capital to an alternativesource, which returns moreincome from that same capital

sum. This


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Opportuinity cost

". This concept describes thesituation in which as an individualinvestor uses his/her money to

support a particular firm, s/he losesthe opportunity of investing itanother way where a


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Activity 1

What is the opportunity cost of youstudying for this qualification?


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Supernormal profit

This is the excess of profit abovenormal profit. If firms earnsupernormal profit they will definitely

prefer to stay in business.


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profit

Market share-Gaining a share ofthe market for a particular product isessential for a business to survive.

In the short term, most new entrantsto a market aim to gain market sharethrough market penetration.


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Satisficing

Settling for less than the optimalsolution in order to reach asatisfactory solution as quickly and

cheaply as possible. . Herbert Simon, whose primary

object of research was problem

solving, coined the term 'to satisfice',which denotes the situation wherepeople seek solutions or accept

choices or judgments that are 'good'


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The reason for Satisficingcould be:

Time pressure

The influence of powerfulstakeholders

Lack of knowledge about futureexternal or internal factors.


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Activity

Choose two for-profit and two not-for-profit companies in your country.

(a)Find out the purpose of theirbusinesses what their mainobjectives are.

(b)Examine those business objectivesand compare the rationale behindany differences

(c)Try to find out how their mainbusiness ob ectives have chan ed


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THE BUSINESS AS ALEGAL ENTITY

Non-corporate organisations arethose which do not have aseparate legal identity from theirowners. The main forms of non-corporate organisations are sole

traders and partnerships. Corporate organisationsare

those where the legal status of

the organisation is separate

e ma n ca egor es o


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e ma n ca egor es ocorporate organisations

are: private limited companies

public limited companies (plc).


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limited and unlimitedliability

Unlimited liability means thatthe individual owner or ownersof an organisation haveunlimited liability for all debts oractions taken by the business.

If, say, the organisation fails, theowner(s) would be liable for thefull extent of any debts of the

organisation and would have to

on corpora e


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on-corpora eOrganisations

Sole trader

Partnerships

-

There are two main types ofpartnership

- Ordinary

- limited partnerships.


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Ordinary partnerships

There are two types of suchpartnerships

(a)Partnership without a legalcontract

where the partners informally set up

a business with no legal contract. Itis often applies to married couples ormembers of a family who open a

business together.


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Limited partnerships

The Partnership Act 1907 states thata limited partnership shall consist ofno more than twenty limited partnersand include one or more persons whoare termed general partners.

General partners have unlimitedliability whereas limited partnershave limited liability. From 20

December 2002, the restriction on


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Activity 3

Take a walk around your local areaand see what proportion ofbusinesses are sole traders or

partnerships, and in what businessspecialisations.

Find out how easy is it to become a

sole trader or to establish apartnership in your country.

Are there any restrictions on setting

up such a business?


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Limited Companies

A Limited Liability Company,quite simply is a company

whose liability is limited. Alimited company is a type ofcompany which when set-up

allows an entrepreneur tokeep their own assets andfinances separate from thebusiness itself. This means


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Limited companies

The owners of a limited company arethe shareholders those who haveinvested their money in the firm by

buying (ordinary) shares in thecompany.

If the company fails, the owners are

generally not responsible for settlingits debts. The shareholders' liabilityis limited to the amount of equity

they own and would lose only the


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Forming a limitedcompany

Articles of Association this is thedocument which sets out the rules bywhich shareholders and the companywill be administered, for examplevoting rights, powers of directors.

Memorandum of Association thisdocument sets out the companyname status address of the


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Forming a limitedcompany

Statement of Capitalthis givesdetails of the types of share(ordinary, preference, etc.), theamount paid up and unpaid on eachshare, the number of shares issued,

the nominal value of shares issued,voters rights and the shareholder'sdetails.


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private limited companies

Private Limited Companies aresimilar to public companies but canbe run with just one member and

cannot trade shares to the public toraise capital.

pu c m e compan es


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pu c m e compan es(plc).

Public Limited Companies alsoknown as PLCs, Public LimitedCompanies are businesses which

have been established with at least 2shareholders with at least 50,000worth of shares issued.

van ages o a so e


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van ages o a so etrader

Control - Sole traders maintain full control oftheir business. Running it how they pleasewithout the interference of others.

Profit retention Sole traders retain all theprofits of their business.

Private data Information about soletraders is kept private, unlike that of limited

companies which is necessarily made publicafter registration with Companies House.

Specialist Often a small business, soletraders can offer a more personal service with

local roots and ties. This can be more

sa van ages o a so e


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sa van ages o a so etrader

Liability They are subject tounlimited liability. This means if thebusiness gets into debt, the business

owner is liable. In the worst case, thismay mean a person risks their home,personal savings and any other

assets they have both in and outsideof the business.

Finance sole traders often find it

difficult to raise finance to fund their

van ages o


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van ages oPartnership

Capital Due to

the nature of thebusiness, thepartners will

fund the sa van ages o


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sa van ages oPartnership

Disagreements One of the mostobvious disadvantages of partnershipis the danger of disagreements

between the partners. Obviouslypeople are likely to have differentideas on how the business should be

run, who should be doing what andwhat the best interests of thebusiness are. This can lead todisagreements and disputes which

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week-1the business environment

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