Introduction
Business: an organization/entity which uses (natural) resources to produce desirable goods/services to meet the demands of its customers.
Inputs of the business/Factors of Production: resources required to produce the desirable output that satisfy consumers' needs. This can be classified into 4 main types:
Basic inputs:
Input | Definition/Examples |
Land | - site of the building - all the natural resources used (For e.g. coal, steel, if you're operating in the manufacturing industry) |
Labour | manual and skilled labour who make up the workforce |
Capital | - finance required (to set up business + pay for its continuing operation) - man-made resources used (machinery, factories) |
Enterprise | provided by risk-taking individuals who combine all the factors of production into a unit that is capable of producing services/goods. |
Additional inputs:
- customers
- suppliers
- government: law and order, roads/rail/airport, Schools/colleges
Consumer goods: physical and tangible goods sold to the general public. Durable means can be used repeatedly e.g. washing machine, cars whereas non-durable is usable only once e.g. food, drinks.
Consumer services: non-tangible products sold to the general public. E.g. hotels, Insurance services.
Capitals goods: physical goods that are sold to another business rather than to the general public to aid in the production of other finished goods/services (which can later be sold to consumers) E.g. capitals goods such as machinery and equipment will be sold to automobile company to produce commercial vehicles.
Business Functions
Human resource management: identifies workforce needs such as recruitment, training, deployment or redundancy to help a business achieve its overall objectives.
Finance and accounts:
- monitors the flow of finance into and out of the business
- keeps and analyses accounts
Marketing:
- conducts market research to identify consumer needs
- makes decisions regarding pricing, promotion and sales.
Operations management:
- ensures adequate resources available for production
- ensures quality levels of production
- aims to achieve high productive efficiency
Economic Structure/Business Activity
Businesses classified into 4 sectors based on its production:
Primary sector: firms involved in extraction of natural resources which can be sold to other businesses for processing. E.g. Fishing, mining.
Secondary sector: firms that turn raw materials obtained from natural resources into processed products. Eg: computers, clothing, baking
Tertiary sector: firms that provide services to consumers/other businesses. Eg: banking, tourism
Quaternary sector: "knowledge based" support services such as IT businesses and information service providers. Eg: research and development, business consultancy.
Economic structure: the balance between the 4 economic sectors of a particular country.
Changes in Economic Structure
Gross Domestic Product (GDP): market value of all the finished goods/services produced in a country at a specific time period.
Industrialization: describes the growing importance of manufacturing companies in the secondary sector in a developing country.
Benefits:
- GDP increase, thereby increasing average standard of living.
- Higher employment and (higher) tax paid to the government, resulting from expanding manufacturing businesses.
- Results in higher exports and lower imports of the goods produced, thereby saving money.
- Processing adds value to products rather than exporting them as raw, unprocessed products.
Problems:
- Housing/Social problems caused by huge movement of people from rural to towns due to higher job opportunities.
- Depopulation of rural areas resulting in a lack of labourers for jobs such as farming.
- Processing may cause pollution adding to the environmental problems of a country.
- Expansion of the manufacturing industry may cause problems with recruitment and retainment of employees by a business.
- Majority of the industry's growth is caused by multinational companies
Deindustrialization: general decline in the importance of secondary sector activity and an increase in the tertiary sector in developed countries.
Causes:
- higher standards of living causes consumers to spend more on services than goods. E.g. tourism, restaurant and hotels.
- forced closure of many secondary sector businesses due to industrialization of developing countries which tend to be more efficient and cheaper, thereby gaining an competitive advantage.
Results:
- Structural unemployment: a mismatch between the jobs available and the unemployed which occurs due to a shift in the economic structure of a country. For e.g: manufacturing industry workers may find it hard to find employment in other sectors.
Competitive advantage: factors that allow a business to outperform its competitors. Eg: producing cheaply or higher sales.
Starting a Business
Entrepreneurship Vs Intrapreneurship
Entrepreneur | Intrapreneur |
Takes a financial risk of starting and managing a new business venture | financial risk is accepted by the organization one works for |
accepts the risks of failure | risks of failure accepted by the organization; except the risk of losing the job |
accepts the responsibility of managing a business | accepts the responsibility of turning an idea into a "finished product" through "entrepreneurial talents" like innovation and risk taking. |
has a novel idea for a new business | has a novel idea for a product that is developed within an organization |
Qualities of an Entrepreneur
- Innovative: able to carve a new "niche" in the market, attract customer in innovative ways, able to present the business as "unique"
- Commitment, Self motivated: willingness to work hard and long, undiscouraged by setbacks, keen ambition to succeed
- Multiskilled: includes making/providing the product, promoting, selling, handling money, keeping accounting records, social skills (get on with people), leadership skills.
- Risk-taker: risk such as investing one's savings. (in intrapreneur, risk of losing job)
Impact of enterprise (and intrapreneurship) on business activity
- employment creation
- increase in GDP(economic growth), standard living conditions and tax revenues to the government
- Innovation and technological change: adds dynamism to country's economy, thereby increasing competition
- Firms' survival and growth: leads to higher employment, increase in economic growth and replaces declining businesses
Reasons to start a business
- losing a job
- desire for independence
- belief that owning a business might generate higher income
- existence of a business opportunity that one could take an advantage of
Steps in starting a business
1. Identify a market opportunity that could generate sufficient demand from customers in order to be profitable.
- by conducting a small-budget market research
- derived from one's own skills/hobbies
- previous job experience
- attending franchising conferences or exhibitions to get inspiration
2. Sourcing Capital (finance): one's own savings, family, friends, banks, government grants or venture capitalists.
3. Determining a location: renting a building (raises cost issues), visit customers at their home (e.g. hairdressing) or set up at home which may cause:
- family tensions
- inability to separate work from personal life
- status issues caused by a lack of prestigious premise
- sales issues caused by not being close to the area with the biggest market potential
4. Building a customer base: new, small businesses tend to overcome cost and pricing advantages of its larger competitors by offering better service like:
- personal customer service
- providing for one-off customer requests
- knowledgeable pre- and after-sales service
Problems faced by start ups
1. Competition: from established larger business unless the idea is unique
2. Lack of finance/working capital:
Causes:
- lack of personal finance
- lack of awareness of financial grants and supports available
- lack of trading record to present to banks to acquire a loan
- poorly produced business plan than fails to convince investors to loan money
Solution:
- constructing cash flow forecast so that liquidity and working capital needs can be assessed regularly
- establishing good relationship with the bank to overcome short term problems with an overdraft
- using effective credit control
- injecting sufficient capital at the first few months of start-up where cash flow from customers are slow to build up
3. Lack of record keeping: useful to pay taxes, bills and chase up debtors
4. Poor management skills
5. change in the business environment: new competitors, legal changes, economic recession, technological change
Liquidity: determines how quickly a business can convert an asset into cash without affecting its market price. Cash is the most liquid of assets while tangible items are less liquid.
Trade credit: an agreement where the customer is allowed to pay the supplier at a later date.
Overdraft: a financial facility that enables you to withdraw money from your bank account (savings or current), even if you do not have any account balance.
Break-even: a level of output where total costs and revenue are the same; a business is neither making a profit nor a loss.
Business Plans
Business plans: A written document that describes a business, its objectives and strategies, the market it aims for and its financial forecasts.
Headline | Contents |
executive summary | overview of the business and its objectives |
description of the business opportunity | details of the entrepreneur, what is sold, why, to whom |
marketing strategy | what and how a product will be sold |
management team and personnel | skills and experience of entrepreneur and the staff |
operations | premises, production facilities, IT systems |
financial forecasts | profit and cash flow, future projection of sales |
Importance of business plans to different users:
- Banks, investors: uses it to judge the viability of the idea in order to provide a loan
- Employees, Managers: Helps identify objectives and targets which provides a clear sense of purpose and directions. Financial and other forecasts can act as budgets and control benchmarks.
- Suppliers: can use it to decide whether to establish a long-term relationship with a business
Stock market flotation: conversion of a private company to a public one by selling shares to the public.
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