15: Assessing business start-ups

Question 1

Business objectives

Answer 1

Clearly defined targets for a business to achieve over a certain time period.

Question 2

Profit satisficing

Answer 2

Making enough profit without risking too much stress or loss of control through employment of too many professional managers.

Question 3

Possible objectives that might be set by new businesses:

Answer 3

• PROFIT MAXIMISATION. Trying to earn as much profit as possible.
• A CERTAIN RATE OR LEVEL OF PROFIT.
• SURVIVAL.
• SALES GROWTH.
• SOCIAL OBJECTIVES.

Question 4

Why set objectives for a new business?

Answer 4

• Give direction and focus to the owners and the people who work in the business.
• Create a well-defined target so the owners can make appropriate plans to achieve these targets.
• Inform lenders and investors of the aims of the business.
• Give a guideline for assessing the performance of the business over time.

Question 5

The most effective objectives that a business might establish should meet the following criteria:

Answer 5

SMART OBJECTIVES:

• SPECIFIC. Clearly related to only that business. e.g. restaurant aim to serve 35 customers per night.
• MEASURABLE. Putting a value to an objective helps when assessing performance, for example to achieve sales of £500 per month.
• AGREED. By all of those involved in trying to achieve the objective. This will increase the motivational impact of the objective.
• REALISTIC. Objectives should be challenging but not impossible! THis would demotivate the staff involved.
• TIME SPECIFIC. Objectives should have a time limit so that performance can be assessed effectively. Setting an aim of reaching profits of £10,000 has little meaning unless a time period is specified, e.g. in the first year of trading.

Question 6

What are the risks of business start-ups?

Answer 6

• Lack of business and management skills.
• Lack of knowledge of legal requirements. Laws may be very detailed and complex for certain business ventures, such as those handling and slewing food or machinery to make goods. (Reduce risk by training courses, specialist legal advice)
• Competition. Competitors may take actions to make it very difficult for the new business to survive. (Reduce risk by closely monitoring the decisions and actions of key rivals, offer a better customer service than competitors)
• Increased taxes or interest rates.
• Change in consumer tastes. If consumer demand switches then business may have no other products to fall back on. (Reduce risk keeping close contact with customers - feedback v helpful.)
• Technology. (Reduce risk by training course)

Question 7

Why new businesses fail:

Answer 7

1) INSUFFICIENT CAPITAL. Underestimating the amount of money need both to start the business and keep it going during the first few years. By assuming a low break-even point and a rapid payback of initial loans many entrepreneurs mislead themselves and when reality strikes, the shortage of capital forces the business into insolvency.
2) POOR MANAGEMENT SKILLS. Not enough experience in areas of finance, record keeping, purchasing, selling, hiring & managing employees etc - entrepreneurs are starting business life with massive handicap.
3) POOR LOCATION.
4) LACK OF PLANNING. Failure to make realistic plans based on accurate, current information will often lead to business failure.
5) OVER-EXPANSION. New business owners often confuse success with how fast they can expand the business. However, rapid expansion requires injections of capital and management expertise.
6) EXTERNAL FACTORS. Unexpected changes in demand, sharp increases in costs or the unavailability of essential supplies are all factors beyond a new business’s control and they could all cause it to fail. Interest increases, oil prices rise and the failure of supplying a business are all evens that a difficult to predict and plan for.