1.5 Flashcards
What is an entrepreneur?
An individual who sets up a business and takes on the risks associated with the business
What is the role of an entrepreneur?
- creating and setting up a business
- running and expanding/developing a business
- innovation within a business (intrapreneurship)
- barriers to entrepreneurship
- anticipating risk and uncertainty in the business environment
What is involved in creating and setting up a business?
⮕ creating a list of ideas
⮕ trailing different concepts
⮕ market research
⮕ creating a logo
⮕ seeking financial support
What is involved in running and expanding/developing a business?
⮕ buying stock
⮕ completing the finances
⮕ listing stock for sale
⮕ contacting customers
⮕ chasing payment
What is involved in innovation within a business?
⮕ taking risks
⮕ being creative or innovative
⮕ solves problems
⮕ focusses on processes to improve productivity
⮕ drives innovation
⮕ understanding trends
⮕ self-confident
⮕ proactive in adding value
What is involved in barriers to entrepreneurship?
⮕Financial: lack of funding, lack of start up capital
⮕Economical: taxes, recession, inflation, increased cost of living, market entry regulations
⮕Personal: health/family issues, lack of knowledge, lack of self-esteem, being risk averse, fear of failure
⮕Political: trade issues, war, instability within the government
⮕Other barriers:
- entrepreneurship capability
- access to finance
- lack of training
What is involved in anticipating risk and uncertainty in the business environment?
- reactions and responses of competitions
- reactions of customers not aligning with research
⮕Risk: Quantifiable. Business may be able to calculate the probability and anticipated returns associated with a decision
⮕Genuine Uncertainty: Business do not know the possible outcomes in advance, let alone their probabilities. It occurs in complex systems, such as the economy.
What is an entrepreneurial motive?
The factor that drives a person to start a business e.g. to be their own boss
What is an entrepreneurial characteristic?
A quality or trait of the person starting the business e.g. creativity
Examples of possible entrepreneurial motives?
- to be own boss
- for social reasons - e.g. help community
- to make a profit
- more control over working life
- turn hobby into a revenue generator
- increase income
- become independent
- driven by a personal passion
- to sell something new
Examples of entrepreneurial characteristics?
- resilient
- hard-working
- determined
- creative
- self confident
- lots of self initiative
- risk taker
- positive
- ambitious
What are the financial motives?
⮕Profit maximisation: Where an entrepreneur starts a business and their key focus is the financial return of the business. It could be argues that they are more likely to marginalise the needs of other stakeholders
⮕ Profit satisficing: Where an entrepreneur seeks to make just enough profit to maintain their interest in the business (they don’t seek to maximise profit or expand)
What are the non-financial motives?
⮕Ethical stance: A minority of people may set up a business in support of a moral belief they have
⮕Social Enterprise: Organisations that trade with the aim of improving human and environmental wellbeing
⮕Independence: A lot of people want to be their own boss, therefore, they set up a business to achieve this
⮕Home working: Entrepreneurs set up their business at home; they like the flexibility
What is the definition of a business objective?
Goals or targets of a business to help it achieve it’s aim
The best objectives are SMART
Examples of business objectives?
- survival
- profit maximisation
- sales maximisation
- market share
- cost efficiency
- employee welfare
- customer satisfaction
- social objectives
What is involved in the business objective of survival?
- short-term objective
- new business
- may have this objective whilst building a customer base and establishing itself in the market
- the objective is to reach a sustainable level of sales that allows the business to reach it’s break even point
- may involve penetration pricing
What is involved in the business objective of profit maximisation?
- when a business makes the most profit possible
- helps business recoup R&D costs
- help business maintain high levels of product development and innovation
What is shrinkflation?
Where a manufacturer keeps the price the same but makes the product smaller
What is involved in the business objective of sales maximisation?
- profit figures tend to be annually so sales figures can be examined on a daily, weekly or monthly bill
- managers find sales figures more satisfying as targets as profits go to owners and salaries are often linked to sales levels
- anyone investing - can see sales data and may use it as an indicator of performance
- often found in sales driven environments e.g. estate agents, car dealership
What is involved in the business objective of market share?
- may be used in a very competitive market where consumers switch between suppliers (super markets)
- very important for investors to judge how a business is doing against competitors
- loss in market share - can be indicator of long-term serious financial problems
What is involved in the business objective of cost efficiency?
- common in transport and construction industries
- may be achieved by:
→ paying minimum wage to unskilled workers
→ subcontracting where economically viable
→ lean production or construction where material, time and process waste is eliminated to save costs
→ increase the perceived value of the product through strong branding
→ lower the quality and price of product - lowering the average cost means economies of scale
What is involved in the business objective of employee welfare?
- some businesses seek the harmonious relations to their workforce as an objective, they aim to achieve this through employee welfare
- employees that are satisfied are loyal and hard working, have increased morale, motivation and productivity
- business also benefits from an enhanced public image as a good place to work - makes recruitment easier
What is involved in the business objective of customer satisfaction?
- business who follow this objective will seek to monitor customer service levels through surveys and will focus on quality
- attempt to identify and understand what customers want and then provide this
- want to reduce the number of complaints
- satisfied customers will tell others and reputation and word of mouth are very cheap ways of highly effective marketing to improve sales
- a customer centres approach will:
→ ensure repeat sales
→ create brand loyalty to prevent customers from switch to similar brands
What is involved in the business objective of social objectives?
- also known as corporate social responsibility or CSR objectives
- may become the USP of the business (e.g. lush/body shop)
- may involve:
→ reducing impact on the environment
→ fair wages in developing countries
→ helping society
→ compliance with laws to minimise externalities like operating sensible hours so not to noise pollute the local community
What is limited liability?
The owner of the business has no personal liability for business debts
The owner has a separate legal identity from the business and is NOT liable for payment of the debts from their own personal funds
What is unlimited liability?
If a business gains debts, goes bust, or is sued this could be a problem for the owner
If there is no money in the business then the owner would NEED to pay using their own savings/finances - they may even have to remortgage their home or sell their car to pay off debts
What are the 4 main forms of ownership?
Sole trader
Partnership
Private limited company (Ltd)
Public limited company (plc)
What is a sole trader?
Any business that is owned and controlled by one person.
They pay income tax on any earnings from the business.
Also known as an unincorporated business.
Examples of a sole trader?
hairdressers, butchers, bakery, florist
Advantages of being a sole trader?
- own boss = freedom
- you gain all the money you make
- in complete control of decisions and decisions can be made more quickly
- business is quick and easy to set up (can be transferred to limited company later)
- minimal paperwork and fewer legalities
Disadvantages of being a sole trader?
- lots of responsibility
- unlimited liability so owners take on all the risk themselves
- harder to raise finance
- business suffers if owner becomes ill, loses interest etc
- must become multi-skilled
- tend to work long hours (hard to ensure work-life balance)
What is a partnership?
A business or organisation in which two or more people own the business, and run it for the common goal of making a return.
They pay income tax.
Examples of a partnership?
Doctors, dentists, estate agents, soliciters
Advantages of being a partnership?
- spreads risk across more people (there are more people to share the burden of debt - unlimited liability)
- raise more finances than sole traders
- different partners can bring different skills to the business
- partners are able to share the workload and responsibilities
- increased credibility with potential customers and suppliers
Disadvantages or being a partnership?
- have to share profit
- less control of the business for the individual
- disputes over workload
- problems if partners disagree over direction of business
- still have unlimited liability if the business haven’t set up a Limited Liability Partnership
What is a private limited company (Ltd)?
A business that is owned by it’s share holders, run by directors and where the liability of shareholders for the debts of the company is limited.
Must be at least 1: shareholder, director and secretary.
Pay corporation tax on profits.
Advantages of an Ltd ?
- owned by one or more shareholders (often family members)
- profits are only shared between shareholders (received as a dividend)
- able to raise money by borrowing
- if company fails, the investors have limited liability
Disadvantages of an Ltd ?
- accounts of companies cannot be kept private
- more difficult/expensive to set up
- cannot sell shares on the stock exchange, which limits the amount of capital that it can raise
- legal set up costs are expensive
- as profits are only shared with shareholders, it is harder to motivate and control workers who do not hold onto shares
What is a public limited company (plc)?
A company that is able to offer its shares to the public.
Shares are sold to the public on the stock market.
Incorporated business (limited liability)
Run by a board of directors on behalf of shareholders (they make the decisions)
Advantages of a plc?
- better access to capital
- opportunities to easily make acquisitions
- more prestigious profile, which may enable the business to gain contracts
- limited liability
Disadvantages of a plc?
- once listed on a stock exchange, the company is likely to have a much larger sum of external shareholders, to whom the company directors will be help accountable (greater pressure)
- financial markets will govern the value of the company through the trading of the company’s shares
- vulnerable to a hostile takeover
- expensive to become a plc
- greater public scrutiny as accounts are published publicly
What is franchising?
Where a small business owner buys the rights to sell the goods and services of a large, well-established company.
There is usually a set up fee which can be costly.
What is a franchisee?
This is the small business owner who is buying the rights
What is a franchisor?
This is the large business who are selling the rights e.g. subway
Advantages of franchising?
- the franchisor chooses the franchisees carefully as they know what characteristics are needed to make a successful franchisee
- the franchisor decides how much money the franchisee must invest in the business
- the franchisor provides support (management advice and training which help franchisee solve problems)
Disadvantages of franchising?
- franchisees do not have freedom of running their own business; bound by rules e.g. can’t vary product price
- franchisee cannot sell the business without franchisors permission
- franchisor can end the franchise without consulting franchisee
- franchisee pays percentage of profits in royalties
- franchisee will never own the business outright
What is social enterprising?
A business that trades fro a social and/or environmental purpose.
Not a charity, but achieve the social aim through donations and grants, NOT through trading.
What is a lifestyle business?
It aims to provide a great quality of life for the owner.
- owners start a business hoping to sustain a certain lifestyle
- may start business by doing something they enjoy
- allows an entrepreneur to live how they want and still run a business
What is an opportunity cost?
The cost of missing out on the next best alternative when making a decision.
It represents the benefits that could have been gained by taking a different decision.
What are the personal opportunity costs of developing a business idea?
- Missing out on the opportunity to earn a regular income
- Outlay on a lease/building work/fixtured/machinery/staff
- The wear and tear on the family
What are trade offs?
Arises when having more of one thing results in having less of another e.g. trading off the start-up of a business against a year’s international travel.
What are the risks of changing from entrepreneur to leader?
- additional workload
- staff may find it hard to accept a new manager
- authority should be passed down the hierarchy to middle managers without interference form above
- motivating staff is difficult
