Business Management AT 2

Question 1

Define business environment

Answer 1

The surrounding conditions in which the business operates. It can be categorised into two broad categories: internal and external.

Question 2

Define internal environment

Answer 2

Factors over which the business has some degree of control.

Question 3

Identify the main elements of the internal environment (EMLL)

Answer 3

Employees: those that work for the business.

Managers: people who have responsibility for achieving business objectives.

Locations: where the business is located, accessible to customers.

Legal Business Structure: sole trader, partnership, private or public company.

Question 4

Define external environment

Answer 4

Factors over which the business has little control.

Question 5

Identify the two sub categories of an external environment

Answer 5

Operating environment and macro environment.

Question 6

Define operating environment

Answer 6

The specific outside stakeholders with whom the business interacts in conducting its business. Occasionally called the task environment.

Question 7

Identify the 4 main stakeholders
(CCSS)

Answer 7

Customers: people who purchase the goods and services.

Competitors: other businesses who produce and sell rival or competing goods.

Suppliers: businesses or individuals that supply materials and other resources.

Special interest group: unions, lobby groups, business associations.

Question 8

Define macro environment

Answer 8

The broad conditions and trends in the economy and society within which a business operates.

Question 9

Identify the main factors of a macro environment (LESTGC)

Answer 9

Legal and government regulations: laws and regulations that impact on operations.

Societal attitudes: behaviours, tastes, lifestyles, attitudes.

Economic conditions : taxes, wages, unemployment, interest rates, inflation.

Technological considerations : growing use of tools, techniques or systems.

Global issues : world wide markets and their impact.

Corporate Social Responsibility issues : consider the broader social welfare of the community.

Question 10

Explain the relationship between the internal and external environment

Answer 10

External environment has a much greater degree of influence on the internal environment of a business than the internal environment has on the external environment.

However, businesses can have an impact on the various aspects of their operating environment and can even affect the macro environment to a small degree.

Question 11

Identify factors from internal that can affect external

Answer 11

Customers - the way products are marketed can affect a business’ customers. smartphones and social media applications have changed the way people think of an item (others who have good or bad reviews).

Suppliers - implement supplier policies to ensure that suppliers source their raw materials in accordance with the values of the business.

Competitors - competing businesses will usually respond to each other’s behaviour. an example is if a business lowers their prices, the competing business will do the same to retain its share in the market.

Question 12

Identify the unincorporated legal business structures

Answer 12

Sole trader and partnership.

Question 13

Identify the incorporated legal business structures.

Answer 13

Private and public company.

Question 14

Define business entity

Answer 14

Organisation that exists separately to its owner in order to produce and sell goods and services.

Question 15

Define incorporated legal business structure

Answer 15

An incorporated business has its own separate legal existence. Regardless of what happens to
individual owners (shareholders) of the company, the business can continue to operate.

Limited liability – private company, public company.
When the business is a separate legal entity from its owners.

Question 16

Define unincorporated legal business structure

Answer 16

An unincorporated business has no separate legal existence from its owner(s). The most common legal structure for businesses in Australia is the unincorporated enterprise, because this structure is the easiest and cheapest to establish.

Unlimited liability – sole trader, partnership.
When the business owner is personally responsible for all the debts of the business.

Question 17

Define sole trader

Answer 17

A business owned and operated by one person.

A sole trader is not regarded as a separate legal entity - that is, the owner and the business are regarded as the same. This means that if the business is sued, then the owner is sued.

Unlimited liability: when the business owner is personally responsible for all the debts of the business.

An example is people who sell handmade/second-hand items at Sunday markets/farmers’ markets.

Question 18

Advantages of a sole trader

Answer 18

Complete control
Owner’s right to keep all profits
Less government regulation.

Question 19

Disadvantages of a sole trader

Answer 19

Personal (unlimited) liability for business debts
Difficult to operate if sick
Burden of management.

Question 20

Factors to consider for sole trader

Answer 20

Is the owner prepared to risk the unlimited liability of operating their business?

Will the owner have enough finances, skills and expertise to establish and grow the business?

Is the owner prepared to take complete responsibility of the business in exchange for complete control and the right to keep all profits?

Does the lower cost of establishing and maintain business as a sole trader outweigh the benefits of incorporation?

Question 21

Define partnership

Answer 21

An unincorporated business structure with a minimum of two and maximum of 20 owners.

Similar to sole trader, as unlimited liability still exists and not a separate legal entity.

A partnership can be made verbally or in writing, or by implication (i.e. if two people set up a business together without a legally binding partnership agreement).

A written partnership agreement is not compulsory, but it is certainly worthwhile if disputes arise.

Silent partner - one who contributes financially to a business but takes no part in the running of a business.

Question 22

Advantages of partnership

Answer 22

Minimal government regulation
On death of one partner, business can keep going
No taxes on business profits, only on personal income.

Question 23

Disadvantages of partnership

Answer 23

Liability for all debts, including partner’s debts, even before the partnership has begun
Difficulty in finding a suitable partner
Divided loyalty and authority

Question 24

Factors to consider for partnership

Answer 24

Are the owners prepared to risk the unlimited liability of operating their business?

Will the prospective partners have enough finances, skills and expertise to establish and grow the business?

Do the individuals believe that their prospective partners will act in the best
interests of the business?

Is each individual certain that their prospective partners will not expose them to personal debts?

Can the prospective partners foresee disputes arising due to a clash of personalities or opinions?

Question 25

Define incorporation

Answer 25

Incorporation refers to the process that companies go through to become a separate legal entity from the owner/s.

As a business grows it may change its ownership structure to that of a company (incorporation).

Leads to Limited liability: When the shareholders of a company cannot be held personally responsible for the debts of the business

The letters ‘Ltd’ signify that a business is a company that has limited liability. A company can be organised as either a proprietary (private) or public company.

Question 26

Define private company

Answer 26

An incorporated business with a minimum of one shareholder and a maximum of 50 non-employee shareholders.

Tend to be medium sized, family owned businesses.

Shares in this type of business are only offered by the business to those they wish to have as a part owner.
A shareholder can only sell their share to someone approved by the directors.

It is not listed, bought or sold on the stock exchange.
These companies will have “Pty Ltd” after their name.

Examples of proprietary companies include small businesses such as, a local grocery store, a local clothes store, a freelance graphic designer agency.

Question 27

Define public company

Answer 27

The shares for publicly listed Australian companies are listed on the Australian Stock Exchange (ASX).

The general public may buy and sell shares in these companies.

Most public companies are large, E.g. Telstra, BHP, Woolworths, NAB.

Question 28

Attributes of a public company

Answer 28

A minimum of 5 shareholders with no maximum number.

No restrictions on the transfer of shares or raising of money from the public via share offers.

A requirement to issue a prospectus when selling its shares for the first time.
A minimum requirement of three directors (of who two must live in Australia).

The word ‘Limited’ or ‘Ltd’ in its name.
A requirement to publish its audited financial accounts each year – called the annual report.

Question 29

Advantages of company business ownership

Answer 29

Easier to attract public finance
Limited liability (separate legal entity)
Experienced management (board of directors).

Question 30

Disadvantages of company business ownership

Answer 30

Cost of formation
Double taxation (company and personal)
Requirement to publish an annual report of audited accounts

Question 31

Factors to consider for public company

Answer 31

Does the owner need the extra legal security offered by limited liability?

Will the business need public finance, as is possible with a public company?

Will the owners be willing to relinquish control of the company to unknown
investors by going public?

Is it worth the extra costs associated with establishing a company and preparing separate yearly tax returns?

Question 32

Define business model

Answer 32

The way in which the business will run its operations to generate a profit.
The business model arises in the earliest stages of planning for a business, however, as a business grows the business model may need to be altered to reflect the change.

Question 33

Elements to consider

Answer 33

What is the main goal of the business?
What types of goods or services will the business offer?

How will the business sell these goods/services?

Who are the target customers?

What types of cost will the business expect to incur?

Will a new business be established or will a franchise agreement be entered into?

Question 34

Identify the 5 main types of business model (BODIF)

Answer 34

Bricks and mortar, Online, Direct to consumer business, Import and export and Franchise.

Question 35

Define online business

Answer 35

They exist solely on the internet, with a small number of offices to support their online presence.

Examples are netflix, amazon, facebook and shein.

Question 36

Advantages of online business

Answer 36

Online businesses are able to reach customers across the globe via the internet.

They also avoid many of the expenses associated with having a physical store, such as rent and wages for shop staff.

Question 37

Disadvantages of online business

Answer 37

Customers are not able to physically see, touch or try an item before purchasing it.

Some online businesses may expose customers to the risk of credit card theft when making payments online.

Question 38

Define bricks and mortar

Answer 38

Bricks and mortar is a term that refers to businesses that have a physical location, such as a store in a shopping centre.

The most traditional and common business model for many of the biggest retail, manufacturing and wholesale businesses in the world.

Nowadays, many traditional bricks and mortar businesses have adapted into bricks and click, to establish an online presence to complement their physical stores.

Examples are jb hi fi, kmart, target and woolworths.

Question 39

Advantages of brick and mortar

Answer 39

Offer face-to-face customer interaction

Provide security that comes with being able to physically inspect or test goods prior to purchase.

Question 40

Disadvantages of brick and mortar

Answer 40

Costs are much higher

Little competitive advantage on price

Question 41

Define direct to consumer business

Answer 41

DTC are businesses that sell their products directly to consumers without any intermediaries, such as retailers or wholesalers.

Examples are Blue Apron and BarkBox.

Question 42

Advantages and disadvantages of direct to consumer business

Answer 42

Advantages:
A strong focus on and connection with their customer – to build customer loyalty

Lower costs – competitive advantage in price

Disadvantages:
Time consuming and less efficient than selling to retailers that specialise in selling

Cybersecurity and data protection

Question 43

Define franchise and define franchisor and franchisee

Answer 43

An agreement whereby the franchisor grants the franchisee the rights to use its business
name and distribute its goods/services.

The franchisor – the business that owns the rights, eg McDonald’s – provides their
name, advertising, method of doing business, training methods etc.

The franchisee – the person who purchases the business – provides setup money,
labour, operates the franchise and agrees to abide by the agreement.

Examples are McDonalds and Gongcha.

Question 44

Advantages and disadvantages of franchise

Answer 44

Advantages:
Less problems of starting a new business

Higher success rate

Well-known brand name and tested formula and operating pattern

Disadvantages:
Little scope for making independent decisions as the franchisor has control over much of the operations

Forgoing the possibility of expanding an original brand as a franchisor

Question 45

Define import and export

Answer 45

Import and export businesses earn their money from trading goods internationally.

The advancement in technology and transport has aided growth in this area in recent years.

Question 46

Define purchasing an existing business

Answer 46

Business that is already operating and everything associated with the business is included in the purchase such as the stock and equipment, business premises, employees, an existing customer base, and reputation and goodwill.

Goodwill: The monetary value attached to the reputation of a business.

Question 47

Things to consider to purchase an existing business

Answer 47

Check if you’re business ready (your skills, capital and hard work.

Find the right business (potential to be successful)

Do your research (why the business is for sale)

Value the business (financial health of the business)

Conduct due diligence (legal documents and business operation)

Make an offer

Question 48

Benefits of purchasing an existing business

Answer 48

Instant income from sales to existing customers

Proven record of business, makes getting finance easier

Stock and suppliers are in place

Equipment is on hand and ready for use

Existing employees can give advice and provide knowledge

The seller may give advice and training

A proven business model increases the chance of success

Question 49

Costs of purchasing an existing business

Answer 49

The existing image and policies may be difficult to change, especially if the reputation is poor

The success of the business may be due to the personality or personal contacts of the previous owner

Goodwill may be hard to assess and the owner will want lots

Employees might resist change

Question 50

Define starting a new business from scratch

Answer 50

Common reasons to start a new business are:
- Recognition of a gap in the market
- Development of new goods or services
- Desire for independence
- Profit (Monetary reward)

The most common reason for setting up a new business is the recognition of a gap in the market — where it
is clear that existing providers are not catering to the demand for particular goods or services.

Another reason is the development of new goods or services — when a person who has created something unique chooses to go into business to market their innovation or invention.

Attempting to enter a market that is already well served by existing businesses involves having to attract customers away from
competitors.

Question 51

Benefits of starting a new business

Answer 51

You can set up your business exactly how you want

You can determine things like pace of change and growth

No Goodwill, no extra costs

If funds are limited, you can start off on a small scale

Question 52

Costs of starting a new business

Answer 52

Because of high risk and uncertainty, money lenders may be unwilling to provide finance.

Time is needed to develop a customer base and getting employees recruited and up to speed, and securing trade credit from suppliers

If the start up is small or slow, profits may take some time to generate

Question 53

Define resources

Answer 53

The people and objects that are needed for the business to function properly.

Question 54

Identify the three types of resources (NLC)

Answer 54

Natural, labour and capital

Question 55

Define natural resources

Answer 55

Items the business uses that come from the natural environment.

Used in the production of many types of goods such as crops, fruits and vegetables.

A business must ensure that it uses natural resources wisely and does not harm the natural environment in its operations.

Examples are land, water and raw materials (oil, coal etc)

Question 56

Factors to consider for natural resources

Answer 56

Where will they source their natural resources from?

Are the raw materials that they plan to use in production sustainable and reasonably priced?

How can they reduce wastage and environmental damage during the production process?

Are their products environmentally friendly, and how can they minimise the negative effect of their products on the environment?

Are the shops, offices and/or factories of the business designed in a sustainable way that minimises energy usage?

Question 57

Define labour resources

Answer 57

The people that provide their skills, effort and knowledge to the business.

Subcontractor a person that is not directly employed by the business but has been contracted to perform certain tasks.

An example of a subcontractor is a plumber that goes to the school to fix or an inspector or maintenance.
Other examples are owners and employees.

A business must ensure that it treats its workers both legally and fairly, and not as just another resource that contributes to the profitability of the business.

Question 58

Factors to consider for labour resources

Answer 58

How many workers will be needed and what kind of skills will they need?

How will the business attract and retain these workers?

What kind of training should the business offer to its workers to help them grow and benefit the business?

How will the business provide fair pay and healthy working conditions for its employees?

What are the legal responsibilities of the business towards its employees?

How will the business resolve any disputes that arise with employees?

Does the location of the business allow access to the types of workers that it needs?

Question 59

Define capital resources

Answer 59

The tools and machinery that are used to produce goods or perform services.

Used to maximise the efficiency of labour.

An example is a tractor that helps with the production.
Other examples are heavy machinery, commercial buildings and vehicles.

Question 60

Factors to consider for capital resources

Answer 60

What kind of tools and machinery will be needed?

How will the business repair, maintain and replace its capital equipment when needed?

Does the business have the right workers with the right skills to operate the machinery they need?

Question 61

Define business location

Answer 61

The physical location of a business can determine whether or not it will ultimately succeed.

Question 62

Different types of business location

Answer 62

Different types of business will be suited to different locations and the owner must consider a range of factors when determining the ideal location.

Suitable locations include:
Shopping centre
Retail shopping strip
Online presence
Home based business

Question 63

Define zoning

Answer 63

Means by which local councils allocate land for different uses, such as residential, commercial, recreational and industrial.

Zoning is designed to keep business activities separate from residential areas and prevent households from being disturbed by businesses operating late at night.

Question 64

Identify the 4 suitable business locations (ROSH)

Answer 64

Retail shopping strip, online presence, shopping centre and home based business.

Question 65

Define shopping centre

Answer 65

Shopping centres have only existed in Australia for less than 50 years.

There is usually one department store, 1-2 supermarkets, other essentials such as post office and bank, as well as retail stores, hairdressers, newsagents etc.

There will be many car parks provided.

There will usually be undercover parking and walkways.

Examples are highpoint and chadstone shopping centre.

Question 66

Advantages and disadvantages for shopping centre

Answer 66

Advantages:
Good location if a business owner wants to purchase and operate an existing business.

A new business in an established shopping centre is more likely to be successful if there are no competitors.

Disadvantages
Leasing a store in a shopping centre can be expensive

A business may need to remain open during the shopping centre’s hours, which may be seven days a week

The business relies on the shopping centre renewing its lease. If they do not, then the business will be forced to move elsewhere (the location is not permanent)

Question 67

Define retail shopping strip

Answer 67

Shopping strips were traditionally located along major roads and/or close to public transport.

An example is Sydney Rd, Elizabeth St.

Question 68

Advantages and disadvantages of retail shopping strip

Answer 68

Advantages:
High visibility for passing traffic

The costs of locating in a retail shopping strip are less than those of a shopping centre.

People who work or live in the local area provide a strong source of customers.

Popular locating for ‘after hours’

Disadvantages:
A lack of parking

Offer limited protection from the weather.

Question 69

Define online presence

Answer 69

Most businesses will have some type of online presence to keep up with the competition and benefit of online sales.
Some may be online only and not have a ‘bricks and mortar’ store to avoid expenses such as rent.

Businesses can use the internet for:
Information on products/services.
Online ordering/shopping.
Accepting payments.

Question 70

Advantages and disadvantages of online presence

Answer 70

Advantages:
Increased access to new customers (instead of people who come to the store from the local area or limited travelling, the store can be reached by a nationwide or internationally)

Comfortability - not having to travel and can just buy anywhere.

Disadvantages:
The costs of planning, designing and maintaining an online presence.

Protect personal information.

Question 71

Define home based business

Answer 71

Some businesses do not need a physical commercial location. They may run their business from their home. An example is a tradesman (plumber, electrician) may do this.

The use of internet, computer applications
and software, and a mobile phone with relevant apps allows are more affordable and access way to conduct business.
Online ordering and payments.

Technology has meant that there are now home based retailers now. An example is the use of eBay.

Question 72

Advantages and disadvantages of home based business

Answer 72

Advantages:
The business owner does not face any substantial expenditure on renting or purchasing premises (cause not locating a business).

Risk is reduced if the owner is starting a new business.

Provides flexibility around when the owner works and reduces commuting time.

Disadvantages:
Difficult for the owner to keep work and home life separate.

Feel isolated from other people and miss social interaction.

Question 73

Identify the factors impacting choice of business location (VCCPP)

Answer 73

Visibility
Cost
Proximity to customers and suppliers
Proximity to competitors
Complementary businesses

Question 74

Define visibility

Answer 74

Visibility is important for retail and service based businesses such as clothing stores and hairdressers.

A business wanting high visibility would locate in a prime shopping area, such as a shopping centre or main street.

It is of little importance to manufacturing businesses. They arrange to transport their goods to various
retail outlets, so they do not need a highly visible location to attract customers.

Question 75

Define cost

Answer 75

Leasing or purchasing a central location in a busy shopping centre will be far more expensive than a location with lower levels of passing customer traffic.
- Higher levels of passing customer traffic means more potential customers.
- The business owner will need to be confident of generating sufficient business to justify the
higher cost.

Locating in a cheaper, but quieter location may severely impact profit as there is lower levels of passing customer traffic.
- If the business is a café or food outlet, passing traffic is a major source of customers, so cutting costs
by selecting a less visible location may be counterproductive.

Question 76

Define proximity to customers and suppliers

Answer 76

All businesses would choose to locate close to
customers and suppliers, both for customer convenience and to minimise the costs of transportation from suppliers.

It’s good for retail businesses to be close to customers or easily accessible. An example is a shopping centre with parking etc.

Proximity to customers is not an issue for manufacturing businesses. But access to transport is important - for receipt of raw materials, and the distribution of the goods manufactured.

Question 77

Define proximity to competitors

Answer 77

Proximity to competitors is only really an issue for retailers and service providers.

It would not make good business sense to set up a business in a shopping centre if there is already one or more of that type of business in the shopping centre, unless the existing business is not satisfying demand.

Being the first to establish a particular type
of business in a shopping precinct, or otherwise ensuring there are no local competitors, is likely to increase the chances of success.

Question 78

Define complementary business

Answer 78

The proximity of complementary businesses can assist in bringing customers to a new business.
Complementary businesses offer goods or services aimed at the same customers.

For example, homemaker centres contain shops selling electronics, furniture, bedding etc.
Another example is a medical centre with a doctor, a pharmacy, radiology etc.

Question 79

What are the two sources of finance?

Answer 79

The business owner can contribute their own funds (equity or capital) - which is an internal source of funds.

The business can obtain finance from external sources, such as a bank loan.

Question 80

Define equity finance (internal)

Answer 80

Equity refers to the funds contributed by the business owners to start and then expand the business.
- If the business is a company, then this contribution is referred to as a shareholder’s equity.

Question 81

Advantages and disadvantages for equity finance (internal)

Answer 81

Advantages
Does not have to be repaid unless the owners leave the business.
Cheaper than other sources of finance as there are no interest payments for the business.
An owner who contributes the equity to a business retains control over how that finance is used.

Disadvantages
The owner may expect a good return on their investment, but the small amount of finance may only generate low profits and low returns.
Smaller amount of money than external finance options.

Question 82

What are the ways in which equity finance (internal) can be raised

Answer 82

Self-funding
Family or friends
Private investors
Shares
Crowdfunding

Question 83

Define self-funding and family or friends

Answer 83

Self-funding
When the owner of the business uses their personal finance to fund the business.
The owner will not need to share ownership with anyone else.
There is a risk that the owner will lose all of their investment should the business fail.
This source is also known as bootstrapping - the business financing the operations without borrowing from external sources
Businesses who do bootstrapping need to be cautious of their expenses.

Family or friends
They may expect a share of the profit in return.
An easy and quick way to obtain extra finance.

This source should be considered carefully as there is a danger that relationships could be adversely affected.
Businesses who do this should put the details of the arrangement in writing.

Question 84

Define private investors and shares

Answer 84

Private investors
Business owners may be able to find private investors for their business if an attractive idea and strong business plan can be presented.
May contribute funds to the business in return for a share in the business’s profit and equity.

‘Angel investors’ are individuals or businesses that invest in a new business (provide finance).
Often willing to provide support and advice to the business owner, as well as receive a return on their investment.
Taking on investors means that the owner will lose complete control of the business as the investors are part owners who have a say in how the business operates.

Shares
A business may raise funds by selling shares in the business.
Only companies can make use of this source of finance.
Public listed companies can access more capital than private limited companies, because they are able to sell and issue shares to the public known as initial public offering - listing on stock exchange so the public can freely trade the shares (complex and expensive option).

Question 85

Define crowdfunding

Answer 85

A method of raising finance by using online and social media networks.
E.g. Appeal to a large group of people to provide funding for the launch of a new product
This may involve setting a goal for the project, providing the details of the project and inviting people to contribute finance.
E.g. GoFundMe provides business owners and entrepreneurs with an opportunity to raise money to start or improve a business.

Advantages
A quick way to raise finance with with few fees.
Allows the business owner to connect to potential customers and receive feedback.
Gain some guidance on how to improve the business or product.

Disadvantages
Generating interest in the project requires a great deal of work, and there is no guarantee that the owner will reach their funding target.
Damage to business’s reputation.

Question 86

What is the main external source of finance

Answer 86

Debt
The borrowing of funds provided by banks, other financial institutions, government and suppliers.
Debt must be paid back over time, with interest.

Sourcing funds from outside the business should result in an increase of earnings and profit.
Regular repayments on the borrowings must be made, so the business must generate sufficient earnings to make these payments.

There is higher risk for businesses using debt for finance, as the interest and government charges have to be paid on top of the principal amount borrowed.
AUS tax system provides tax deductions for interest payments.

Question 87

Define short term borrowing

Answer 87

Short term borrowing is provided by financial institutions through bank overdrafts, bank bills and bank loans. This type of borrowing is used to finance shortages in cash flow or financing working capital.
Generally needs to be repaid within one or two years.

Question 88

Explain the ways of short term borrowing

Answer 88

Bank overdraft
One of the most common types of short term borrowing.
A bank allows a business to overdraw its account to an agreed limit - maintained at a high level and require some security.
Assist businesses with short-term liquidity problems like a seasonal decrease in sales.
The costs for bank overdrafts are minimal and interest rates are normally lower than on other forms of borrowing.
Variable interest rates allow businesses flexibility in managing the finances.

Bank bills
Short-term securities issued by a business and bought by a bank.
A type of bill of exchange and are given for larger amounts, usually over $100,000 for a period of 90-180 days.
The borrower receives the money immediately and promises to pay the sum of money and interest at a future time.
The bank acting as agent guarantees that the money will be repaid when it is due.

Trade credit
When a supplier provides products to a business with an agreement to charge for the goods or services later.
Businesses are granted a period of time, from 30-90 days before payment is required.
No interest charge and it is easy to obtain.
If a business has a good credit record, as the business grows purchases increase and trade credit becomes even easier to obtain.

Question 89

Define long term borrowing

Answer 89

Funds borrowed for periods longer than two years.
Can be secured or unsecured, and interest rates are usually variable.
Used to finance real estate, plant and equipment.
The most common long term borrowing is a mortgage.

Question 90

Explain the ways of long term borrowing

Answer 90

Loan
A loan intended for business purposes and is used to start a business.
May be taken out as a secured or unsecured loan.

A secured loan might come with a lower interest rate, but the owner will need to offer up another asset (e.g. home or another business) as security against the loan.
A unsecured loan does not require any collateral, but it might have a higher interest rate.

A mortgage is a loan on a property, secured by the property of the borrower (the business).
The property that is mortgaged cannot be sold or used as security for further borrowing until the mortgage is repaid.
Used to finance property purchases, such as new premises, a factory or an office.
Repaid, usually through regular repayments, over an agreed period.
Consider - amount, type of loan, time, affordability.

Leasing
Paying money to use equipment that is owned by another party.
Enables a business to borrow funds and use the equipment without the large capital outlay required.
The lessee (the person or business to whom a lease is granted) uses the equipment, and the lessor (the owner of an asset that is leased under an agreement to the lessee) owns and leases the equipment for an agreed period.

Leasing of machinery and motor vehicles is common in business. Cannot usually be cancelled without incurring a financial penalty.

Advantages
Long-term financing without reducing control of ownership.
Permits 100 per cent financing of assets.
Lease payments are a tax deduction.
Repayments of the lease are fixed for a specific period so cash flow can more easily be monitored (e.g. $50 for one hour)

Government grants
Governments provide finance to businesses in the form of grants for business development, especially to promote exports.
Obtained to start a business through both federal and state governments, such as the Victorian Government’s Regional Jobs Fund.
Administered through business development departments or small business development centres, which advise individuals on setting up and administering a business.
Meet the conditions imposed and be used for a specific purpose.

Question 91

Explain the factors affecting the choice of finance (TTOFL)

Answer 91

Terms of finance
Suit the purpose for which the funds are required.
Short term finance to fund short term assets, vice versa with long term.

The business structure
Influence financial decisions.
Large businesses have more opportunities for equity capital than small businesses.
Small businesses have to raise equity from private sources or by taking on a partner.

Overall cost
The business needs to calculate projected costs of each source of finance in order to make a well-informed decision when planning for its financial needs.
Easy - clearly defined rates of interest and terms
Difficult - taking on an investor or partner who will receive a share in the profits from business
Must project the future profits and value of the business in order to determine what a share of the business is worth.

Flexibility
A business’s circumstances can change quite rapidly, and these changes may often be completely outside of its control.
As circumstances change, the way in which the business has sourced its finance previously may no longer suit the needs.
Adjust terms of the financial agreement or having the option of exiting the agreement entirely.
Risk - paying unfavourable expenses, such as interest on a loan that is no longer needed.

Level of control
Business owners dedicate a great deal of time, effort and money into their businesses.
A business is the reflection of the owner - most owners wish to retain as much control over their business as possible.
This level of control can be undermined if the business sources its finances externally.
Partners and investors who wish to see a greater return on their investment may have other ideas about how the business should run - result in a source of conflict and overtaking of owner’s control.

Question 92

State the business support services (LTCFFIB)

Answer 92

Legal and financial advice
Technological advice
Community based services
Formal networks private
Formal networks federal state and local government
Informal networks
Business mentors

Question 93

Explain legal and financial advice

Answer 93

The owner will seek legal and financial advice to ensure that all the important aspects of the business are planned for.
Required during the initial business planning stage to understand the differing structures, taxation and establishment costs. Once established the business will still require advice on an ongoing basis.

Solicitors
Provide information concerning business formation and structures, registration, contracts, leases, partnership agreements, patents and legislation.
Up to date with any changes to company law and can advise the business owner on how best to deal with such changes

Accountants
Provide valuable advice on all financial management issues and taxation obligations.
Access to the latest changes to taxation and financial reporting requirements, and know procedures for recording financial events accurately, speedily and with maximum security.

Question 94

Explain technological advice

Answer 94

Establishing an online business presence, networking a number of computers within the business premises or making maximum use of mobile devices can all improve the business efficiency.
Purchasing equipment from a supplier who offers advice and backup support, or establishing a relationship with an ICT consultant is important to consider.
The federal government has established a website that includes information relating technology in business.

Question 95

Explain community-based services

Answer 95

Many business owners are able to join business service clubs such as Rotary, Apex and Lions.
Provide business people with an opportunity to engage in community service projects.
Membership can put business owners in touch with other local businesspeople.
Advice, support and information can be accessed through such local networks.

Business Enterprise Centres (BEC) Australia
A not-for-profit network of business enterprise centres, which provide support to small business owners.
These centres provide information, mentoring, training programs, workshops and seminars, referrals to accountants, solicitors and government programs and access to networks of other businesspeople.

Question 96

Explain formal network private

Answer 96

Business owners can access information and support from a large number of professional organisations.

Chambers of commerce
These are local associations of businesspeople, usually centred on a suburb or region.
Provide legal and financial help, taxation advice, explanations of legislation and industrial relations information.
Organise training seminars, arrange industry conferences and liaise with government departments.

Others are Small Business Association of Australia and Trade associations (specific industry information and assistance).

Question 97

Explain formal networks federal state and local government

Answer 97

All levels of government provide a range of services to businesses.

Federal gov
Delivers assistance, programs and services that support businesses.
The Department of Industry, Science, Energy and Resources maintains a website, a contact centre and a national network to streamline access to information, advice, forms and services for businesses.
All areas of planning, starting, running and exiting a business are covered on the website, and there are links to other government websites to help business owners find what they are looking for.
E.g. Australian Bureau of Statistics (ABS) is Australia’s national statistical agency. Provides data about communities, regions, society and the economy to help business owners to make good planning decisions.

State gov
In Victoria, the Department of Jobs, Precincts and Regions’ Business Victoria website provides entry and links to information and support on all aspects of starting and managing a business- advocates, resolves disputes, monitors the small business environment and engages with the small business community.
The Victorian Small Business Commission (VSBC) is a statutory office established to enhance a competitive and fair operating environment for small and medium businesses.

Local gov
Local councils offer advice on land zoning, assist with subsidised land and consider development applications.

Question 98

Explain informal networks

Answer 98

Businesspeople can use their network of friends and colleagues, as well as other local business owners to gain information and advice.
Active membership of local chambers of commerce, trade associations and service clubs can lead to friendships and contacts that go beyond the formal activities of these bodies.

Question 99

Explain business mentors

Answer 99

Small business owners will often seek advice on a regular basis from a person who is experienced or knowledgeable in the field.
Provide invaluable advice and strategies to the small business owner on a variety of issues.
May charge services, or may simply share their wealth of knowledge out of goodwill.
A mentoring relationship can be rewarding for the mentor as well as the mentee.

Question 100

Define SWOT analysis

Answer 100

A SWOT analysis is a planning tool that identifies the business’s internal strengths and weaknesses, as well as any opportunities and threats from the external environment.
Used to evaluate the business’s current situation and interpret information about what the business might do well, where improvements can be made and where the business might be placed in the external environment.

Question 101

What are the benefits and limitations of conducting a SWOT analysis

Answer 101

Benefits
Relatively low cost.
Fairly simple and straightforward to use.
Become more familiar with the business as they are making planning decisions.
Addressing weaknesses, responding to threats, taking advantage of strengths and seizing opportunities.
Assist the owner to develop goals and strategies for achieving them, which can then be written into the business plan.

Limitations
A SWOT analysis is only a small part of the business planning process.
A SWOT analysis may also generate a large amount of information, not all of which may be useful.
A SWOT analysis does not provide solutions to weaknesses or threats; nor does it help the business owner choose which strengths or opportunities are the best options.

Question 102

Define business plan

Answer 102

A business plan is a written statement of the goals and objectives for a business, and the steps to be taken to achieve them.
A summary and an evaluation of a business concept.

A comprehensive business plan will also assist when arranging finance for the business. The plan provides information that lenders need to know, and it shows that the business is being properly organised and managed.

Question 103

Explain the benefits and limitations of a business plan

Answer 103

Benefits
Helps test the viability of the business.
Identifies the business’s strengths and weaknesses.
Forces the business owner to justify his or her plans and actions.
Indicates the owner’s ability and level of commitment.
Assists the business to be proactive rather than reactive.
Assists in maintaining the business operation, especially focusing attention on the goals and objectives.

Limitations
It is simply a plan — it does not guarantee the ultimate success of a business. For example, profit may be lower than anticipated, because a range of factors out of the owner’s control can affect it.

The business owner may spend excessive amounts of time preparing the business plan rather than creating and selling the business’s product.

Business plans need to be implemented; many business owners develop a business plan and then neglect to follow it.

Question 104

Explain the key elements involved in a business plan

Answer 104

1. Executive summary.
   This is a one-page document describing the business and its objectives. This is usually prepared at the end
   of the plan-writing process.
2. Operations plan.
   This outlines how the business will be set up and the human resource needs.
3. Financial plan.
   This details how the business will be financed, and projected cash flow, revenue, expenses and profit.
4. Marketing plan.
   This outlines key information from the industry the business will be entering and the gap in the market that
   the business will be filling. The marketing strategy is included in this section.

Question 105

Define corporate social responsibility

Answer 105

To be socially responsible, a business must not simply abide by the laws and generate the largest profit possible; it needs to consider how it can go above and beyond its basic legal requirements to improve the welfare of its stakeholders, including its employees, customers and the wider community.

Question 106

Importance of corporate social responsibility

Answer 106

Staff morale
A business that generally acts in a socially responsible manner is far more likely to attract customers. A failure to do so can result in customers boycotting the business and turning to more socially responsible competitors.

Employee retention
A business that fails to act ethically towards its employees can damage the relationship it has with its most important asset. Dissatisfied workers are more likely to leave a business, resulting in an expensive process of finding and training new staff to replace them.

Question 107

Limitations of corporate social responsibility

Answer 107

A financial cost may occur to reduce the impact of the business’ operations on the environment (e.g. installing solar panels or water tanks).

Time consuming - Planning socially responsible practices and then producing policies that reflect them can divert resources from other important tasks.

There is no guarantee of a good reputation by conducting socially responsible practices.

Question 108

State the common issues to consider for CSR

Answer 108

Environmental issues.
Customer issues.
Staffing issues.

Question 109

Explain environmental issues

Answer 109

Environmental issues
When making planning decisions, the business owner should consider the potential impact of their business on the environment
E.g. energy use, recycling, waste reduction measures and sustainable materials

To determine the impact of the business on the environment, the owner may choose to conduct an environmental audit, a review of the extent to which a business’ activities have an impact on the environment - assess the nature and extent of the business’s impact on the environment and how it can be managed.
Demonstrate accountability to stakeholders.

Environmental management system (EMS) - implementing an EMS during the planning process will allow the owner to manage the business’ environmental impact in a systematic and methodical manner.

Question 110

Explain customer issues

Answer 110

Business owner must plan to meet the needs of customers as without customers, there’s no business.
Therefore customer satisfaction is very important - treated fairly and equitably.

This can be achieved through reliable and safe products or services. Businesses should not engage in misleading or deceptive behaviour.

Businesses that respect and satisfy customers are more likely to experience success.

Question 111

Explain staffing issues

Answer 111

Given that the decisions a business owner makes will often have a great impact on employees, it is very important that the socially responsible management of staff be considered when planning the business. When planning, the business owner should consider:

Fair pay
Business owner should ensure that employees are fairly compensated for the work they perform

Safe and healthy working conditions
Businesses should ensure that workers’ health and safety is prioritised. Business should plan to act above and beyond the law, ensure no long term health issues from their work

Employing disadvantaged groups
May plan to offer employment opportunities to disadvantaged or marginalised members of society

Question 112

Socially responsible policies

Answer 112

Adopt and implement policies that reflect a commitment to social responsibility

Through policies expectations for employees can be set as well as what the company deems to be appropriate behaviour

Policies may relate to things including - environmental sustainability, workplace bullying, equal opportunities, employee leave and flexible work arrangements