Business - prelim study Flashcards
The nature of a business -
what is producing goods and services?
Organising resources to provide goods and services that customers want.
Production = creating products
The nature of a business -
what are Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of life?
- Profit = what remains after all business expenses have been deducted
- Employment = paid labour
- Income = wage – hourly and salary – yearly
- Choice = options
- Innovation = creating new and improved products
- Entrepreneurship and risk = creating new ideas and being prepared for failure
- Wealth = the amount of money passes and earned
- Quality of life = the overall wellbeing of an individual
Classification of business -
Size – small to medium enterprises (SMEs), large
- Micro business = fewer than 5 employees
- Small business = 5-19 employees
- Medium business = 20-199 employees
- Large business = 200 or more employees
- Small to medium enterprises (SMEs) = firms fewer than 200 full-time equivalent employees and/or less than $10 million turnover
Classification of business -
Local, national, global
- Geographical spread = the presence of a business and the range of its products across a suburb, city, state or country or the globe
- Local = a business that has a restricted geographical spread; it serves the surrounding area (eg. a newsagent, corner store, hairdresser).
- National = a business that operates within one country (eg. Coles, David Jones, Bank of Queensland (BOQ)).
- Global = aka a multinational corporation is a large company that has branches in many different countries (eg. Coca-Cola, Google, Toyota, McDonalds, Westfields).
Classification of business -
Industry – primary, secondary, tertiary, quaternary, quinary
- Industry = businesses that are involved in similar types of production
- Primary industry = includes those businesses involved in the collection of natural resources (eg. all types of farming, mining, fishing, grazing and forestry).
- Secondary industry = includes businesses that take a raw material and makes it into a finished or semi-finished product (eg. iron-ore, coal and limestone are turned into steel – a semi-finished product that is then used to manufacture cars).
- Tertiary industry = involves people performing a vast range of services for other people (eg. retailers, dentists, solicitors, banks, museums and health workers).
- Quaternary industry = includes services that involve the transfer and processing of information and knowledge (eg. telcommunications, property, computing, finance and education).
- Quinary industry = includes all services that have traditionally been performed in the home (eg. hospitality, tourism, craft-based activities and childcare, both paid and unpaid).
Classification of business -
Legal structure – sole trader, partnership, private company, public company and government enterprise
What is the private sector?
Is operated by private individuals and companies for the purpose of making profit (eg. sole traders, partnerships and companies).
What is the public sector?
It is operated by government.
It is the least common type of business
Also known as government enterprises.
What does ‘incorporated’ mean?
Refers to the process companies go through to become a separate legal entity from the owner/s.
In the case of privately and publicly owned companies, if owner dies, the business continues to operate.
What is an unincorporated business?
Has no separate legal existence from its owner/s
Will be either a sole trader or partnership
When the owner dies, then so too does the business entity.
What is a sole trader?
Is a business that is owned and operated by one person and takes all of responsibility for the operation of the business.
The only legal requirement specific is that the name of the business be registered if the name is different to the owner.
Not regarded as a separate legal entity.
Has unlimited liability, meaning if there is a financial problem you have to sell person assets such as property or motor vehicle to pay for the liabilities.
What are the advantages and disadvantages of a sole trader?
Advantages:
Low cost of entity
Simplest form
Complete control
Disadvantages:
Personal (unlimited) liability for business debt
End of business when owner dies
What is a partnership?
Is a legal business structure that is owned and operated by between 2 to 20 people.
However, there are exceptions:
- Medical practitioners and stockbrokers are allowed up to 50 partnerships
- Veterinarians, architects and chemists are allowed up to 100 partners
- Solicitors and accountants are allowed up to 400 partners.
No separate legal entity
Unlimited reliability
Personally responsible
Can be made verbally, in writing or implication
Limited partnerships allow one or more partners to contribute financially but take no part in the running
Silent or sleeping partners add more capital or finance.
What are the advantages and disadvantages of a partnership?
Advantages:
Low start-up costs
Less costly to operate than a company
Disadvantages
Personal unlimited liability
Possibility of disputes
What is unlimited liability?
Unlimited liability is when the business owner is personally responsible for all the businesses debt.
What is a company?
All companies are incorporated enterprises and have gone through the process or incorporation meaning company has become a separate legal entity from its owners – referred to as ‘veil of incorporation’.
It has perpetual succession, which means it will continue to exist even when the owners change.
To become incorporated, you must register with ASIC to receive a certificate of incorporation and an Australian Company Number (ACN). A Director must then be appointed.
All companies have limited liability meaning the most money a shareholder can lose is the amount they paid for their shares. If the company goes into liquidation, shareholders cannot be forced to sell personal assets to pay for the debt. This does not extend to directors.
What are the advantages and disadvantages of companies?
Advantages
Easier to attract public finance
Limited liability – separate legal entity
Disadvantages
Cost of formation
Double taxation – company and personal
What is a proprietary (private) company?
Most common
Usually has between 2 and 50 shareholders
Tend to be small to medium sized, family owned businesses
Shareholders can only sell their shares to people approved of by the other directors
It is not listed on, and its shares are not sold through, a stock exchange
Must have the words ‘proprietary limited’ (‘Pty Ltd’) after its name
Main advantage = that shareholders have limited liability protection
If the decision is made to close a business all the shareholders of the company must agree to the company being wound up
A liquidator will manage the process of selling the company’s assets, paying its debts and distributing funds from the asset sales among the shareholders
What is a public company?
Shares are listed on the Australian Securities Exchange
The general public may buy and sell shares
Most public companies are large in size and market a large range of products
A public company has:
- At least one shareholder, with no maximum number
- No restrictions on the transfer of shares or raising money from the public by offering shares
- To issue a prospectus when selling its shares for the first time
- A minimum requirement of three directors (two must live in Australia)
- The word ‘Limited’ or ‘Ltd’ in its name
- To publish its audited financial accounts each year, its annual report
What is a government enterprise?
Government enterprises are government-owned and operates
Goal of making a profit
Although small in number, they are typically large
Are owned and operated by all levels of government: federal, state and local
Often referred to as public sector businesses and provide essential community services such as health, education, roads and welfare
Established by an Act of Parliament to carry out a function specified in detail in that act
The act defines the powers and functions
Privatisation = the process of transferring the ownership of a government business to the private sector
What factors influence the choice of legal structure? (x3)
Size of business
Ownership
Finance
What are external influences on the business environment? (List 5)
Economic
Financial
Geographical
Social
Legal
Political
Institutional
Technological
Competitive situation
Changes in markets
What are internal influences on the business environment? (List 3)
Products
Location
Resources
Management
Business culture
List 4 stakeholders of a business.
Shareholders
Managers
Employees
Consumers
Society/general public
Environment
What are the 4 stages of the business life cycle?
Establishment
Growth
Maturity
Post-maturity
What are some characteristics of the establishment phase of the business life cycle? (List 4)
- Management - informal
- Costs - very high
- Profit - usually slow to begin with
- Sales - begin slowly
- Goals - survival
- Typically characterised by negative profits
- Expenses higher than sales revenue
- Takes time to establish a product
- Failure rate is very high (up to 33% within the first year of trading)
What are some characteristics of the growth phase of the business life cycle? (List 4)
- Goal - to constantly grow/increase sales
- Profit - should increase due to rising sales and falling production costs
- Costs - tend to decrease due to economies of scale (ie. cheaper unit costs due to larger production runs)
- Management - delegation of some responsibilities
- Failure rate - lessened
- Main problems - expanding too rapidly; moving away from core business
- Rapid increase in sales
- Pressure on resources, particularly cash and labour
What are some characteristics of the maturity phase of the business life cycle? (List 4)
- Goal - to maintain profits
- Sales - rate of growth slows and eventually flattens out
- Profit - rate of growth slows, eventually flattens out
- Costs - keeping costs under control is now essential
- Failure rate - will increase the longer the business takes to react and reverse plateauing sales
- Sales level off
- Market for product is saturated (limited growth left)
- Time to employ professional managers
What are some characteristics of the post-maturity phase of the business life cycle? (List 4)
- Goals - the increase sales, cash flow and profits
- Profit - will improve over the long term
- Costs - cost will be high in the short term due to research and development, marketing, restructuring costs etc
- Failure rate - lessened compared to other phases
- Final stage of life cycle
- Falling sales and loss of market shares
- Cash flow problems emerge
- Business starts to decline
What is the business life cycle?
The different phases a business and/or its products will often go through over the course of its existence.
What is the stage in the post-maturity phase of the business life cycle called when a business experiences a fall in sales and has been unsuccessful in developing new strategies?
Decline
What is revenue?
All funds flowing into the business. These include: sales receipts and fees for services, rent, interest from investments and dividends on shares in other businesses.
How do you respond to challenges at each stage of the business life cycle?
Establishment - mindful of finance; do research; take risks
Growth - add more product/services; be prepared for and adapt to challenges
Maturity - always stay relevant; adapt to customer’s changing needs/wants
Post-maturity - take risks; add more product/service
What factors can contribute to business decline?
Lack of management expertise
Competition is too great
Unmotivated or poorly performing employees and managers
Inability to keep up with economical demands and changes
What is cessation?
When a business ceases to operate
What is bankruptcy?
A declaration that a business, or person, is unable to pay his or her debts
What is voluntary administration?
When a company is experiencing financial difficulties, it can be placed in voluntary administration.
Voluntary administration occurs when an independent administrator is appointed to operate the business in the hope of trading out of the present financial problems.
What is liquidation?
Liquidation occurs when an independent and suitably qualified person, the liquidator, is appointed to take control of the business with the intention of selling all the company’s assets in an orderly and fair way in order to pay the creditors.
What are the main features of liquidation?
Can be regarded as the equivalent of bankruptcy for a company (corporation)
Results in the life of a company coming to an end
Normally occurs because the company is unable to pay its debts as and when they fall due, it has become insolvent.
Same as bankruptcy, a business can choose or be forced into liquidation.
What are the characteristics of effective management?
Having the ability to analyse information, attend meetings and communicate with a wide range of people within and outside the business
Possessing the skills to manage change effectively
Having the vision to see how things could be, rather than accepting things the way they are
Providing leadership through the desire to encourage, motivate and guide employees
Understanding their roles and responsibilities in order to achieve the goals of the business
What are the 4 main resources for a business?
Human resources - the employees and most important asset
Information resources - the knowledge and data required by the business (eg. legal advice, sales reports, economic forecasts etc)
Physical resources - these include equipment, machinery, buildings and raw materials
Financial resources - these are the funds the business uses to meet its obligations to various creditors
What does a manager do?
A manager is someone who coordinates the business’s limited resources in order to achieve specific goals.
What is a contemporary definition of management?
the process of working with and through other people to achieve the goals of the business in a rapidly changing environment.
What are managers required to do?
Work with and through others - ie communicate well
Achieve the goals of the business - ie. be effective
Get the most from the limited resources - ie. be efficient
Balance efficiency and effectiveness
Cope with a rapidly changing environment - ie. anticipate and adjust to changing circumstances
What does effectiveness measure in relation to business management?
The degree to which a goal has been achieved
What does efficiency measure in relation to business management?
Compares the resources needed to achieve a goal (the costs) against what was actually achieved (the benefits).
What does an effective manager need to be good at?
Planning - process of setting objectives and decided on the methods to achieve them
Organising - the process of structuring the organisation to translate plans and goals into action
Leading - the process of influencing or motivating people to work towards the organisation’s objectives
Controlling - the process of evaluating performance and taking corrective action to ensure that the set objectives are being achieved.
Management is the process of…
Coordinating a business’s resources to achieve its goals.
Working with and through other people to achieve business goals in a changing environment.
Make sure the joint efforts of employees are directed towards achieving the business’s goals.
What are some management myths?
The effective manager is a methodical planner, reflects on what has been achieved, with time to systematically work through problems encountered throughout the day.
The effective manager has no regular activities to carry out. It is all a matter of coordinating other people’s responsibilities and then sitting back to watch others do the work.
Management is a science and, as such, can be reduced to a formula and set of ‘laws’ that, if followed, result in goals being achieved.
Management reality:
The typical manager is constantly interrupted, with no more than approximately ten minutes spent on any one activity. The manager takes on a great deal and has little time for reflection.
Although managers’ days are constantly interrupted by both trivialities and crises, they still have regular duties to perform.
They must interpret and analyse information, attend meetings and communicate regularly with other parts of the business.
The manager’s job is more art than science. Managers rely heavily on judgement, past experience, perception and intuition.
What skills are important for management?
Interpersonal:
- those skills needed to work and communicate with other people and to understand their needs
- Characteristics: empathy, active communication, body language, verbal etc
Communication:
- The exchange of information between people; the sending and receiving of messages.
- Characteristics: sender, receiver, verbal, non-verbal
Strategic thinking:
- Allows a manager to see the business as a whole and to take the broad, long-term view
- Characteristics: adaptability, innovative thinking, future-oriented mindset, ability to think systematically, ability to identify patters
Vision:
- The clear, shared sense of direction that allows people to attain a common goal.
- Characteristics: able to predict, conceptualise, good financial management skills, motivation
Problem solving:
- A broad set of activities involved in searching for identifying and then implementing a course of action to correct a situation
- Characteristics: calm under pressure, quick thinking, can come up with solutions, communication
Decision making:
- The process of identifying the options available and then choosing a specific course of action to solve a specific problem
- Characteristics: available options, calm under pressure, quick thinking, communication, ability to identify
Flexibility:
- Adaptability to change in a dynamic environment
- Characteristics: adapt to change, flexible, changing circumstances
Adaptability to change:
- possessing the skills and the knowledge and understanding to meet the needs of new problems/issues
- Characteristics: flexible, changing conditions
Reconciling the conflicting interest of stakeholders:
- Stakeholders having different ideas for how the business should run.
- Characteristics: active verbal and non-verbal communication, being transparent
What are the markers for achieving business goals?
Profit
Market share
Growth
- Achieve growth internally or externally
Share price
- Is a part ownership of a public company. Shareholders therefore are the real owner of the company. Companies that want to be successful, need to maximise the returns of their shareholders
Social
- All businesses operate within a community and have certain social responsibilities. Many businesses develop social goals and adopt strategies that will benefit the community.
Environmental
- Businesses are starting to play their part in achieving sustainable development and taking care of the environment. Pressure to change has come from society’s increasing awareness of environmental issues.
What is profit?
Maximising revenue, minimising expenses as much as possible.
