C1/H1 - Introduction to Business Flashcards

Question

Entrepreneurs have a number of motives for starting a business

Answer 1

Financial Motives of Entrepreneurs >Financial Reward – They may earn more owning their business and receiving all profit generated than they would receiving a wage or salary >Lack of employment opportunities – If recently made redundant or unable to find work they may have more incentive to explore owning their own business to receive a source of income >Government incentives – The government may sometimes offer incentives to encourage small business start ups Non-Financial Motives of Entrepreneurs >Independence – some people want the flexibility to dictate their own working hours and to decide what type of work they do or do not undertake >Personal Satisfaction – some people may wish to pursue a given interest or passion and therefore pursue work they enjoy as well as giving them the satisfaction of building their own business >Some may prefer to work by themselves as opposed to being part of an organisation where they have to work with others or as part of a team. Some entrepreneurs may feel this stifles their creativity.

Answer 2

* Being a risk taker – entrepreneurs are not always about new products or new ideas. They are often just doing things better than they were done before. However, they are all risk takers – they risk capital and their own time to try to create profits. They may remortgage the house, borrow from friends and family, or give up well-paid jobs to try to make a success out of their business idea. * Taking the initiative and being proactive – successful entrepreneurs are able to take the initiative when required. They do not panic and allow events to overwhelm them – they are proactive and able to change as needed. * Being an effective organiser– an ability to organise effectively is central to running a business effectively. The entrepreneur may need to undertake a wide range of activities; from hiring labour and buying inputs, such as raw materials, to producing the finished product for sale. * Having creativity and being innovative – creativity in business means the ability to come up with innovative concepts and ideas, or developing a better way of doing things. * Being hard working – successful entrepreneurs are, generally, hard working. It is estimated that entrepreneurs in the UK work for around an average of 52 hours a week, plus another 40 hours thinking or worrying about their business venture. Compare this to the average working week of 38 hours for an employed person. * Being determined and having perseverance– entrepreneurs also need to be determined, as new businesses have low success rates. Entrepreneurs must also have considerable perseverance, and be willing to keep trying if initial ideas fail.

Answer 3

Business activities have a major impact on our lives – both as consumers and employees. Business is in every sector of the economy: >Primary sector: Involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector. In the primary sector, providing the food we need, farming, supplying the power we use through mining or extracting oil from the North Sea >Secondary sector: Involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector. In the secondary sector private enterprises provide us with a massive amount of consumer goods; manufacturing cars, processing food, making clothes, designing and producing consumer electronics – in fact all the goods that surround us in the shops we visit, that help satisfy our every want >Tertiary sector: Involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector. In the tertiary (service) sector private companies provide gyms, oﬀering ﬁnancial advice, operating ﬂeets of buses and trucks, prepare marketing campaigns and so much more

Answer 4

* Innovators - entrepreneurs bring new ideas to the market and drive forward new technologies. * Wealth creators – enterprise is vital to boosting economic growth by providing new products which can be sold thereby boosting demand and spending in the economy. * Job creators – as an entrepreneur builds his or her business they will need employees so therefore jobs are created which means higher levels of employment in the UK economy. * Society builders – often entrepreneurs will give something back to society. This may be through charitable giving or through work with the local community e.g. schools or hospitals. * Exports – if an entrepreneur’s products or services are sold abroad then this brings revenue into the UK economy * Taxes – all business will pay some form of taxation. Sole traders and partners will be liable for income tax and limited companies will pay corporation tax.

Answer 5

Impact for businesses: >Entrepreneurs identify opportunities in the market which allows for new businesses to be developed. >Entrepreneurs have the vision and the willingness to take risks which drive business forward. >Entrepreneurs are important because they are innovative, they can provide better ways of doing things and can also lead to new business, thus increasing profit for businesses and their stakeholders Impact for the economy: >Entrepreneurs help the economy by creating new jobs. Government will also benefit from taxation both on the profits of the business and the income of the employees. >Help to boost the economy by providing new products. Without entrepreneurs, our economy would not benefit from the boost they give from added business and ideas and wealth creation. >Increasing exports - helps balance of payments.

Answer 6

Small businesses must compete for customers with large national and multi-national organisations. The main problem they will face in competing with large organisations is that the bigger firms can purchase their supplies in larger quantities therefore get lower prices in the forms of discounts from suppliers. This allows them to offer lower prices to customers. This is known as economies of scale. This means that as an organisation grows it can operate more efficiently to reduce unit costs.

Answer 7

* Lack of resources makes it difficult to compete against larger businesses; both in terms of physical and human resources. * It can be harder to obtain finance; Lenders may view the businesses as too risky to lend to. * Competition * Lack of expertise in certain areas e.g. how best to market the product * External factors such as a down turn in the economy, new laws, social changes, new technology * Not having the finance to invest in R&D and fixed assets * Cash flow issues * Promoting to the right market * Consumers in many cases are much more familiar with larger businesses; therefore they may consider the product or service to be of a higher quality.

Answer 8

>Shareholders >Directors and managers >Employees/workers >Customers >Suppliers >The Government >Local communities

Answer 9

Shareholders are the owners of a limited company. In theory, all shareholders share the common objective of sustained long-term growth, giving both capital gain and increasing income. However, the reality is that even shareholders can come into conflict. Institutional shareholders (investment and pension funds) are often driven by the need to achieve in the short term. This means that they require high dividends and strategies to achieve short-term growth from the businesses that they have invested in. However, these strategies may be at odds with achieving long-term growth through reinvestment of profits and investing in brand value, which are what the individual, long-term investor may be looking for. Unfortunately for the small private shareholder, the institutional view is the one that more often than not wins the day.

Answer 10

Directors and managers in large organisations focus their efforts on achieving the long- term objectives of the business. They use the resources under their control to achieve maximum benefits for the business and to gain the most from the assets that they manage. Often the success or failure of the business will be reflected in the rewards they receive. Unfortunately for some businesses, the main long-term objective of some managers is the protection of their position. This idea of self-preservation is sometimes a motivator for middle managers which can result in the establishment of whole layers of hierarchy whose role is to preserve their position. Senior managers are also sometimes accused of personal objectives ahead of those of the business by attempting to maximise their salaries and benefits, whilst cutting costs through redundancies and rationalisations.

Answer 11

Employees/workers from middle management down receive a wage and possibly fringe benefits such as pensions. Naturally, a major concern of this category of stakeholders is job security. With many businesses seeking to incorporate technology, and reduce the size of the workforce, there will be obvious conflicts in the views of stakeholders. In the past this conflict would have often led to industrial action. However, over the last two decades it seems that the labour force has become more aware of the realities of modern employment, and are therefore less likely to take part in strikes. The labour force is more willing to accept job restructuring, and redundancy and to move jobs, relocate and retrain. However, industrial action does still take place and those employees who are members of strong trade unions are able to influence their pay and conditions to a greater extent than non-unionised workers.

Answer 12

Customers are an increasingly important stakeholder: satisfying customers’ needs profitably should lead to financial success to satisfy the other stakeholders. Customers want efficient service and a quality product, at a competitive price. These requirements should not be at odds with good business practice, but unfortunately sometimes they are. The short term nature of businesses can mean that achievement of immediate profit comes ahead of long-term customer satisfaction. Also customers like to feel needed and respected; it is all too easy to alienate your customer base. Maintaining good public relations is increasingly important – something which the banking and financial industry has come to realise in relation to the treatment of its customers.

Answer 13

Suppliers depend on the success of businesses for their sales – and businesses depend upon suppliers in order to carry on their operations. They are mutually dependent. Suppliers want a fair price for their products whilst businesses wish to minimise costs. Following supply and demand theory, each market should achieve an equilibrium price, which should allocate rewards between supplier and buyer efficiently in a competitive market. However, unfortunately for suppliers, the power in the market often rests with the buyer, and we are seeing this market imperfection more and more. The big four supermarkets dominate the UK’s farming industry, continually forcing down the prices they pay to producers, reducing farm incomes (for example, consider the recent milk price war and its impact). The situation is often worse when suppliers are based in developing countries, with the original producer receiving a tiny proportion of the product’s final sale value. Fair trade goods try to make the supplier–buyer relationship more balanced.

Answer 14

The Government benefits from business success as it results in increased tax revenues, higher employment and lower benefit payments. However, the same economic success also means increased pollution, increased traffic, and loss of greenfield sites through development. In the past the priority was invariably given to growth, but increased environmental awareness has forced the government into limiting developments, encouraging development of brownfield sites, and into imposing taxes such as the Climate Change Levy and the Landfill Tax. These taxes on businesses increase business costs, reduce competitiveness, and potentially increase unemployment. As a stakeholder the government has to balance business and economic growth against external costs of business activity.

Answer 15

Local communities need to be considered as a stakeholder. There are a number of benefits to a local community that stem from local business activity. These may include employment, increased regional wealth, improved facilities and infrastructure. Often the economic prosperity of a community may depend on one large employer in their area – the presence of which may support a range of other businesses such as shops, garages and hairdressers. Businesses may also support local charities as well as being involved with local schools and colleges. However conflicts can also occur between local communities and the businesses that operate close to them. This can involve potential pollution, environmental damage and loss of open space. Heavy transport moving 24/7 can affect the peace and quiet of a community.

Answer 16

Businesses in the British economy are divided into two categories: the private sector and the public sector

Answer 17

Private Sector Public Sector: This is made up of all organisations that are owned by private individuals or shareholders. This includes; sole traders, partnerships, co-operatives and limited companies. The majority of private sector organisations are for profit organisations e.g. Virgin, Tesco and Ford. However, private sector organisations can be not-for-profit organisations such as charities or churches. The public sector: is made up of organisations and activities that are owned and/or funded by national or local government. These include public services such as the NHS and municipal services such as leisure centres and libraries. The largest public sector organisation, the NHS, is the biggest civilian employer in Europe, costing nearly £120 billion a year to run.

Answer 18

Aims and objectives will inevitably differ between organisations in the private and public sector An aim refers to the long term goal of a business. In other words, business aims describe what the business is trying to achieve in the long term, perhaps over 3 to 5 years. Objectives are how the business intends to achieve this overall aim. Objectives that relate to the aim above might be to develop a marketing campaign to appeal to American customers, or to find shops in the USA that are willing to stock the product. Objectives can change over time and can be short term or long term. Business objectives need to be SMART: * Specific – this means the firm should know when an objective has been reached by making the objective as definite or clear as possible. * Measurable – managers need to be able to measure whether or not an objective has been met. * Agreed – the objectives must be agreed and shared with those responsible for achieving them in order to be motivational. * Realistic – can the firm actually achieve the objective with the resources allocated? In other word sis the objective attainable. * Time Specific – there must be a certain time period within which time the objectives should be achieved.

Answer 19

``` Public aims: > Provide a quality service > Provide value for money > Provide for consumers needs > Don't waste taxpayers money ``` The main objective of privately owned firms is to make profits, but for organisations in the public sector performance must be measured differently. For example, a doctor’s surgery could look at meeting the following aims, instead of looking for how much profit they can generate.

Answer 20

Some goods and services which we need in our everyday lives would simply not be provided by the private sector who are looking to make profits. These necessities include street lighting, defence (army, navy, air force) and the police. The problem with these goods is that we can all benefit from them without paying for them. So if someone paid for, and installed street lighting, anyone walking down that road would benefit. If you are benefiting without paying, why pay? These goods which will only be provided by the government are called public goods. Public goods (and services) have two features: * Non-excludable: this means that individuals cannot be prevented from enjoying the benefits of the provision of public goods or services. We all gain from having violent criminals kept behind bars, as the threat to our family’s well-being is reduced. No individual is excluded from this benefit. The same non-excludability would apply to having public goods such as street lighting– if street lights are provided by a local authority all will benefit from this provision as nobody can be excluded from the benefits. * Non-rivalry: this means that one person gaining from consumption of a good or service does not prevent others from also gaining from the good or service. If an individual eats an ice cream for example, then less ice-cream is available for others to consume. Rivalry exists here However, if an individual benefits from gaining justice in the Law Courts, this does not prevent any other individual from also being able to benefit from such a public service. They are not rivals for this service. Not all goods provided by the public sector are public goods. There is another group of goods and services that is supplied by both the private and public sectors, but if left to just the private sector the quantity supplied of these goods and services is likely to be much less than the level of provision which is most efficient for the economy. The two best examples of these merit goods are education and health care. There are of course private schools and private hospitals but most patients are treated by the NHS, and most children go to state schools. The government spends a great deal of money trying to ensure that we have an effective Health Service and schools and colleges that supply a well-educated and trained workforce. We would under consume merit goods if it were left to the market. Some consumers could not afford the goods; others would fail to see the full benefit of consuming these goods. These merit goods are said to have positive externalities. This means that the consumption of these goods will have positive effects not only on the individual that consumes them, but also on society in general. By attending school, individuals become better educated and skilled. Some individuals may use their knowledge and skills to set up businesses which employ people who themselves will pay tax and contribute to society. So there are positive externalities to education. Also if individuals succeed in school they are less likely to commit crime or require the safety net of the benefits system. It is because of these positive externalities and likely under consumption if left to the market, that the government provides merit goods (mainly) free at the point of delivery. Instead of paying to consume these goods or services directly, we pay for them through general taxation. The public sector is focussed much more on needs than wants. There are public-owned leisure facilities, theatres, museums and so on that look to attract paying customers, but the core role of the public sector is to create a fair and just society and, if possible, an efficient economy.

Answer 21

This is the part of the UK economy that is operated by businesses owned by shareholders or private individuals. Although making profits, and giving a return to owners (increasing shareholder value), will always be the number one and two priorities of businesses in the long run, in the short term there can be other important objectives to pursue. 1. To make a profit. This means to make a return on the capital invested in the business. Some firms will be happy to make a satisfactory level of profit. This can often be an objective of smaller firms who are focussed on other objectives such as growth. Profit maximisation means the firm will be concerned with maximising brand value and minimising costs. This can sometimes lead to short term decisions being made. An objective of profit maximisation can conflict with other objectives. 2. To increase shareholder value This is measured by the dividend paid and the share price. This is often the main objective for directors of limited companies. Many senior managers will have bonus schemes related to increasing share price and dividends. 3. Survival Survival is the initial objective of most firms. This can be more important than making profits in the short term as the majority of businesses fail within the first two years. For a small business to survive the initial start-up period will mean gaining customers and establishing a good reputation. Larger businesses may have this objective during difficult economic times such as a recession when the market is very competitive. 4. Growth/gaining market share Growth related to a firm wanting to expand. Growth can be achieved through expanding the scale of operations or increasing market share. Increasing market share means gaining more customers within the market. In order to do this firms may need to spend to gain these customers will may reduce profits in the short term but will hopefully increase profits in the long run. 5. Ethics There are some businesses that will try to minimise the impact of their activities of the environment or ensure their suppliers get a good deal. Such ethical objectives are likely to increase costs and reduce profits.

Answer 22

Private sector •The private sector is answerable to shareholders/business owners who are mostly motivated by profit. This forces the organisation to be more efficient and to cut out waste, whereas the public sector is motivated by other factors. •The private sector often finds it easier to raise capital when required than the public sector. This is important in terms of investing in modernisation. •The private sector is not directly influenced by political factors. •Even where a profit is not possible private sector charities can provide necessary services to the community, e.g. health and education. Public sector •The public sector provides many merit goods, which when left entirely to the private sector will be under provided e.g. health and education, as some people will not be able to afford these. This will be to the detriment of society as a whole. Some merit goods improve the quality of life, but are not commercially viable, include the provision of libraries, museums and public parks and so are provided for by the public sector. •The private sector cannot charge people for the use of public goods and so would not provide such things as it is difficult, if not impossible, to collect money from individuals for the use of certain public goods e.g., street lighting, street cleaning, the armed services. •The public sector may take a long-run view of things where as the private sector may be looking for short term returns. •Whenever the private sector is in trouble it looks to the government to bail it out!

Answer 23

> Sole Trader > Partnership > Limited Companies > Private Limited Companies > Public Limited Companies

Answer 24

The simplest and most common form of private sector business is a sole trader. This type of business organisation is owned by one person. The owner runs the business and may employ any number of people to help. Examples of businesses that may typically operate as a sole trader include; fisherman, builder, hairdresser, restaurant etc. There are no legal formalities involved in setting up as a sole trader. However once their turnover reaches £81,000 sole traders must register for VAT. They must also abide by all employment legislation for example health and safety. There is a big downside to operating as a sole trader. It occurs because, in the eyes of the law, there is no difference between the person running the business and the business itself as the business does not have its own legal identify. A sole trader is, therefore, an unincorporated business. One consequence of this is that the business owner (sole trader) is liable for any debts that the business incurs. If the business takes out a loan or buys goods and services on credit, then the sole trader himself/herself is liable to repay the debt. This is known as unlimited liability. As a sole trader is personally responsible for any debts run up by the business, this means the home or other assets owned by the entrepreneur may be at risk if the business cannot service their debts. Advantages of being a sole trader: >No lengthy setting up procedures or expensive administration costs therefore it is relatively quick and easy to set up as a sole trader. >Any profit made after tax is kept by the owner and they do not have to share this with business partners. >Owner is in complete control and is free to make all decisions without interference. Owner has flexibility to choose hours of work. Disadvantages of being a sole trader: >Sole traders have unlimited liability. This means that the sole trader is legally responsible for any debt incurred by the business. >Sole traders find it difficult to raise finance as they tend to be small and therefore more risky. Money for expansion must often come from profits or savings. >Although independence is an advantage it can also be a disadvantage as it brings immense pressure. A sole trader may prefer to share decision making. Being a sole trader can also mean a limited range of skills available within the business.

Answer 25

A Partnership is defined in the Partnership Act 1890 as the “relation between persons carrying on business with common view to profit.” Partnerships are where between 2 and 20 people own a business and usually share responsibility for running the business and share the profits. After sole traders, partnerships are the most common type of business organisation. There are no legal formalities to complete when a partnership is formed. However, partners may draw up a DEED OF PARTNERSHIP. This is a legal document which states partners’ rights in the event of a dispute. It covers issues such as: * How much capital each partner will contribute * How profits and losses will be shared amongst the partners * The procedure for ending the partnership * How much control each partner has. * Rules for taking on new partners Advantages of a partnership: >Fewer legal formalities to complete when setting up the business as a partnership compared to a limited company >There may be a wider range of skills available in the business. This many mean that each partner can specialise. This may improve the running of the business >More finance can be raised than a sole trader as each partner can financially contribute to the business. Partners can share the workload and cover during illness and holidays. Disadvantages of a partnership: >The individual partners have unlimited liability - each partner is equally liable for debts. This may be even more of a problem in a partnership as partners are legally responsible for decisions and debts incurred by other partners. >Profits have to be shared amongst more owners than a sole trader which may mean a lower financial reward. >Partners may disagree about the direction the business should take; this may lead to the break-up of the organisation

Answer 26

These businesses exist separately from their owners, who are known as shareholders. Employees are employed by the Ltd or PLC, and assets (buildings, machinery) are owned by the Ltd or PLC. This separate legal existence is known as incorporation – the business exists in the eyes of the law. Any legal action is taken against the business and not the shareholders. Shareholders are only liable to lose the amount of money they have invested in the business – hence, their liability is limited. An important feature of companies is that they are incorporated business which means the businesses all have a separate legal identity from their owners. Another feature is that the owners all have limited liability. The owners of a limited company are shareholders, when they invest in the company they buy shares. The more shares a shareholder has the more dividends they receive and the more control they have. Limited companies are run by directors who are appointed by the shareholders. The board of directors, headed by the chairperson, is accountable to shareholders and should run the company as the shareholders wish. If the company’s performance does not live up to the shareholders’ expectations, directors can be “voted out” at an Annual General Meeting. Whereas sole traders and partnerships pay income tax on profits limited companies pay corporation tax on profits. In order to set up a limited company two documents need to be produced: * Memorandum of Association – this gives details of the company * Articles of Association - this gives details of the running of the company: rights of shareholders, procedures for appointing directors etc. There are 2 types of limited companies; there are private limited companies and public limited companies. Although they have the same type of liability there is one major difference. Public limited companies trade their shares on the stock market. Shares on these stock markets are freely bought and sold: so in effect the ownership of PLCs are changing all the time. This change of ownership normally has very little impact on the running of the business. One small shareholder sells their shareholding, another small shareholder buys, and this happens thousands of times a day.In the UK there are two main stock markets. These are: * The Alternative Investment Market (AIM) – for smaller companies; * The London Stock Exchange (LSE) – for larger businesses.

Answer 27

Shares in private limited companies can only be transferred privately and all shareholders must agree on the transfer. These are often family businesses owned by members of the family or close friends. The directors of the firm tend to be shareholders and are involved in the running of the businesses. Private limited companies tend to have the letters “LTD” after their name. Advantages of a private limited company: >Shareholders have limited liability – as a result more people are prepared to invest their money as the risk is lower. > More capital can be raised versus sole trader and partnership >Control of the company cannot be lost to outsiders – shares can only be sold to new members if all shareholders agree Disadvantages of a private limited company: >Profits have to be shared out amongst a much larger number of members versus say partnership >There is a legal procedure to set up the business and this takes time and money >Firms are not allowed to advertise shares to the public. This can restrict the amount of capital that can be raised.

Answer 28

Public limited companies tend to be larger and company names ends in PLC. There are around 1.2 million registered limited companies in the UK but only around 1% of them are public limited companies. However, PLCs contribute far more to national output and employ far more people than private limited companies. The shares of these companies can be bought and sold by the public on the stock exchange. To set up a public limited company in addition to the memorandum and articles of association PLCs must provide a statutory declaration. This states that the requirements of all the Company Acts have been met. “Going public” is expensive because lawyers are needed to ensure that the prospectus is legally correct. Also glossy publications have to be made available. The company will have big advertising and administrative expenses. The company must have a minimum of £50,000 share capital. Advantages of a public limited company: >Huge amounts of money can be raised from the sale of shares to the public which can be used to fund expansion. >Because of their size plc’s can often dominate the market and production costs may be lower as firms may gain economies of scale >Easier to raise finance and loans from bank as they have more of a proven track record with the banks and must publish their accounts which means the banks may perceive them as lower risk Disadvantages of a public limited company: >There may be a divorce of ownership and control which might lead to the interests of the owners being ignored to some extent >It is very expensive to set us as a plc and since anyone can buy the shares, it is possible for an outside interest to take control of the company >All of the company accounts can be inspected by members of the public. This is the same for Ltd however more information needs to be shared. Competitors may be able to use some of this information to their advantage

Answer 29

There are a number of factors that will impact upon the choice of legal structure:- •Objectives of owners e.g. growth, profit maximisation, social purpose, control over working life. •Finance available as there is a financial cost in becoming a limited company and therefore companies must ensure their cash flow position is stable before considering this as a choice of business ownership * Stage in businesses lifetime for most newly formed businesses the owners will choose to set up as a sole trader or partnership. Almost no businesses will ever set up as a PLC! * Target market. If the business has a small target market will be more likely to be sole trader * Skills needed sometimes a partnership may be a suitable option if need to share workloads/skills with another. * Need for finance. Becoming a limited company can be one way firms can raise finance to fund growth.

Answer 30

Explain the main features of not for profit organisations including social enterprises, charities, co-operatives and societies: There are a growing number of business organisations that are not in business for the money – they are not out to maximise profits. Instead their focus is on social or ethical objectives. Within this group of organisations we find charities, co-operatives and social enterprises, between them providing a range of goods and services, and more often than not competing with ‘for-profit businesses’. These not-for-profit organisations cannot just sell on the basis of who they are or what they stand for – if they just did this it is unlikely they would last for long. They have to provide a quality and value-for-money service, just like any other business.

Answer 31

Charities are established with the aim of collecting money from individuals and spending it on a cause, which is usually specified in its title. Although they are not established to make profits, they can earn surpluses. Many well-known charities such as Oxfam, Friends of the Earth and Save the Children have been around for a long time and employ many people. Oxfam was started in 1942; the RSPCA began over 100 years earlier, in 1824.

Answer 32

A cooperative is an organisation owned by its members. Employees of a cooperative automatically become members after a short probationary period and shoppers at cooperative shops can apply to become members and will automatically be accepted. Members benefit through the payment of a dividend (their share of the co-operatives profits) in the form of money-off vouchers. Just like any business, co-operatives have managers and there is a business hierarchy, but it is much flatter than that found in a typical business – there are fewer layers to the hierarchy. Pay differentials between the most senior and most junior workers may be just 2 or 3 times (it is likely to be 30 times or more in a PLC). When major decisions need to be made, each member has an equal vote. Shoppers at the ‘Co-op’ have the right to vote for elected members and can actually stand in the election for representatives of the Co-operative Group. The main type of co-operative is a worker cooperative. This is where a business is jointly owned by its employees. Examples of this type of business ownership are John Lewis/Waitrose, Edinburgh Bicycle Co-operative and Chester City Football Club. As owners of the business, all employees are likely to be well motivated because they are all working towards the same goal.

Answer 33

Societies are also known as mutual organisations. A building society is a good example of this kind of organisation. This means that instead of having shareholders, it has members who collectively own the business and are also its customers. The main examples of this type of organisation in the UK are mutual insurance companies and building societies. Members have the right to vote for directors regardless of how much or how little money they have with the society.

Answer 34

Social enterprises are a booming organisation structure. They are businesses with clear social objectives and are currently thriving in a number of industries and sectors of the economy. • Social enterprises trade to help solve social problems, improve the communities they operate in, and improve the environment. • Many social enterprises aim to make profits from selling goods and services in the open market; but then, instead of paying dividends, they reinvest these profits, towards achieving their social objectives. • The chef Jamie Oliver has had great success with his ‘15’ chain of restaurants, providing training in a range of cooking and catering skills for homeless and unskilled young people. Profits from the first restaurant go towards opening new restaurants and spreading the benefits to a larger number. • The government is looking at the social enterprise model as a way of providing services such as child protection. Other social enterprises operate in the housing, drinks and holiday sectors, as well as many other sectors, and the number of social entrepreneurs is rapidly growing.

Answer 35

Charities - Charities are not for profit organisations. They operate in what has become known as the 'Third Sector" (not public, private but not for profit). They are usually Charitable Trusts, founded for a social purpose. They reinvest their profits in the company or the community, and attempt to change lives for the better. Co – operatives - In a worker cooperative, ownership and control of the business come from working in the company, rather than from simply investing capital in it. So it is not the investors who are the most important stakeholders, but the workers. Profits are shared amongst worker-owners according to either the hours worked or level of pay. Societies - A mutual society is an organisation owned by its members. Profits are usually reinvested to help improve the service, rather than paid out to external shareholders as they would be in a public limited company (PLC). Members also have a say in the running of the mutual, as they part-own it. Social Enterprise - Social Enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose. Well known examples of social enterprises include Jamie Oliver's restaurant Fifteen, The Big Issue, the Eden project, the Co-op Bank and fair-trade coffee company Cafedirect. Social enterprises account for 5% of all businesses with employees, and contribute £8.4 billion per year to the UK economy.

Answer 36

A business plan provides information about a new business or venture. It is a statement that outlines the way that a business will achieve its aims and objectives. The business plan should describe in detail the market opportunities the business intends to exploit, how it will do so and what resources are required in order for them to achieve their objectives. The purpose of the business plan may be:- 1. To provide a sense of direction and purpose 2. To allow for the strengths and weaknesses of the business venture to be fully assessed 3. To convince creditors that they have a good chance of being repaid, by providing details of the market and financial information such as profit forecasts. 4. To convince investors that there is a good market for the product or service and so they have a good chance of receiving a return on their investment

Answer 37

1. The overview or executive summary When preparing a business plan the entrepreneur should first of all clearly describe the business idea. This overview of the business will briefly describe the business opportunity that is to be exploited. It should summarise the strategies that will be employed and how finance will be obtained. This overview is very important in setting out the overall aims and objectives of the business. There is no set pattern for a business plan but there are key elements that need to be included – the plan needs to be flexible and able to adapt to changing market circumstances. 2. The marketing plan This is an important part of any business plan and it should be based on both field and desk research. The market research carried out needs to establish if possible the size of the market, the needs of the customers and the level of competition. Once market research findings have been examined then the marketing plan (strategy) can be prepared. If market research has identified weaknesses with the initial idea, this may be the time to adapt the product to more closely meet the needs of the customer or clearly differentiate it from the competition. 3. The operations plan This will include details of where the business will be located, production methods and any equipment needed. In addition, information on the costs of production and where the business will buy supplies may also be included. 4. The human resources plan The number of employees and the skills, experience and qualifications they require will be outlined. Any management team will also be identified. 5. The financial plan A variety of forecasting will be necessary; a sales forecast indicating potential revenues; a cash flow forecast for the first 12 months; a profit and loss and balance forecast for the end of the first year; a break even analysis. In addition, information should be provided on where the finance for starting and running the business will come from. This will indicate the available start-up capital as well as any potential borrowing.

Answer 38

Advantages of business plans: > A business plan contains revenue and cost forecasts which may be motivating to those involved in the business. These forecasts can also act as a monitoring tool as actual figures can be compared to those forecasted to ensure the business is on course to meet their objectives. > A business plan is essential for convincing lenders that loans can be repaid through providing details of break even and profit forecasts. Small businesses start-up businesses often require external finance to purchase the necessary equipment, premises etc. > A business plan forces an entrepreneur to look at all aspects of their proposed business venture. For example they will be forced to assess competition, finance available and market research, this should allow them to identify and address any weaknesses before the business starts to trade. Disadvantages of business plans: > There are examples of businesses that set up and prosper without a business plan – these are often very small businesses that target a small market. For example a window cleaning business consisting of one person may not require a large amount of finance to start up and they may gain work based on recommendations. These factors reduce the need for a business plan. > A business plan will be of little use if it is poorly constructed and based on inaccurate information. For example if market research is carried out poorly this could lead to unrealistic profit forecasts. > A business plan can quickly become outdated as the external environment is susceptible to change. For example new competitors may enter the market or suppliers may increase prices both will mean profit forecasts become unrealistic. Overall a business plan should reduce the risk of failure; however no business plan regardless of how comprehensive it is will guarantee success. This is because exogenous shocks can occur which a business plan cannot predict and the external environment changes meaning business plans can quickly lose relevance

Answer 39

* Bank Managers: provide business plan templates and other advice for SMEs * Small Business Advisors: independent advice for SMEs * Accountants: support with business plan writing and setting appropriate targets * Local Enterprise Agencies: offer impartial and independent advice, support and training on starting or developing a small business.

Answer 40

2. Market and competition 3. Infrastructure 4. Economies of concentration 5. Labour 6. Government Influences 7. Social reasons 8. Prestige / brand / image

Answer 41

For most new businesses the most important location factor is likely to be the cost. New businesses, especially sole traders, will have limited capital so they will need to keep their costs low. The setting up of a new business will incur a number of location costs including: * planning permission; * purchasing or rental/leasing; * refurbishment; * business rates; * labour costs; * transport costs. A new business may be unable to choose the ideal location for their business as they may not be able to afford the location costs. Therefore new businesses will often consider locating elsewhere, accepting that they are not selecting the optimum location. In the longer term they may have an objective to relocate when they have built up a customer base and have increased capital. A new business will need to consider the importance of location on its success. This will depend on its products and services and the market it will operate in. Because a new business may be limited in its choice of a suitable location due to costs, it will need to consider the other key location factors and determine what the most important factor is for them.

Answer 42

The market is the place where buyers and sellers meet. Most commercial B2C exchanges (buying and selling in consumer markets) still take place face-to-face, so a physical location is required. Retail location should be driven by access to customers, but there will be a balance between customer footfall and rental/lease costs . Costs of location will vary according to likely sales and customer potential, but within each price band there will be both good and bad locations. Identical stores from the same chain with the same staffing levels and sales square footage can have significant variations in annual turnover. Retail location is not just about footfall, it is about type of footfall. If a new retail store is looking to locate in a shopping centre, it is a must to look carefully at the image of the anchor tenant. An anchor tenant is usually the first and the leading tenant in a shopping centre whose prestige and name recognition attracts other tenants and, it is hoped, shoppers. The anchor tenant sets the tone and image of the shopping centre, so the business owners need to examine the demographics of customers and whether their product would match the customer profile. Sometimes being near similar stores can help. Sometimes, being in close proximity to competitors, a business can benefit from their marketing efforts. Large businesses spend a sizeable proportion of their advertising budget on driving consumer traffic to their locations, a flow of customers that a competitor business can take advantage of. There are also competitor businesses that, by congregating in the same area, create more customer interest and higher individual sales. A good example of this situation would be antique emporiums and book shops, where a collection of shops attract customers from a wide catchment area. Regional markets also apply to B2B (Business to Business) relationships. Manufacturers of components in many industries need to be located close to the users of their products. This has become increasingly true with the increased use of just-in-time systems, where being ‘on the doorstep’ is now the expected norm.

Answer 43

Infrastructure refers to the structure and facilities needed for the operation of a business. The type and quality of infrastructure also affects access to markets. Infrastructure used to mean roads, rail and shipping. However, a more modern definition includes electronic communication systems, training agencies and financial services. For many modern businesses, such as those that are e-commerce based or the rapidly growing call centre industry, quality infrastructure has a very different meaning from that understood by road hauliers and heavy goods manufacturers. In the UK there is a major imbalance in development between the South East and the rest of the country. Improved infrastructure is being planned to resolve this problem (for example, HS2); but it is likely that this will be a very long-term solution.

Answer 44

Infrastructure refers to the structure and facilities needed for the operation of a business. The type and quality of infrastructure also affects access to markets. Infrastructure used to mean roads, rail and shipping. However, a more modern definition includes electronic communication systems, training agencies and financial services. For many modern businesses, such as those that are e-commerce based or the rapidly growing call centre industry, quality infrastructure has a very different meaning from that understood by road hauliers and heavy goods manufacturers. In the UK there is a major imbalance in development between the South East and the rest of the country. Improved infrastructure is being planned to resolve this problem (for example, HS2); but it is likely that this will be a very long-term solution.

Answer 45

Occur when a number of businesses in the same, or related industries, locate close together. They are able to gain mutual advantages. New businesses are attracted by existing infrastructure clusters and in high-tech industries it is often worthwhile for specialist businesses and universities to undertake research, provide education, training and information, from which all businesses can benefit.

Answer 46

The factor of production labour can also be a deciding factor in determining location. By labour we mean cost of labour, availability of labour, and the skills of labour. Businesses can be attracted to certain areas by the skilled labour that may be available. For example, the aero technology workers in Coventry and Bristol, or the thriving community of software developers in Cambridge, linked to the university. Cardiff is rapidly developing a booming media industry which is attracting new international investors looking to recruit talented workers. The cost of labour is also a determining factor. International location has a habit of following low-cost labour to wherever it is available. Many UK manufacturing businesses have relocated to the Far East and China where labour costs are very low; although there is some evidence that this trend will be reversed as wage rates in these areas start to increase.

Answer 47

The cost of labour can be affected by the availability of government grants, giving incentives to move to particular regions of a country, and by government taxation policies. The availability of low cost and suitable land resources can also be an important factor when determining location. National governments, along with regional development agencies, often work hard to ensure that planning permission is available to allow large developments to proceed and they also offer incentives such as tax breaks and help with recruitment and training of workers.

Answer 48

These too can also have an impact on location. Managers want to live in an environment that suits them and their families. They want leisure facilities, good schools, and low crime. Alternatively managers can often retain a commitment to their existing workforce, even when it makes economic and business sense to relocate a business.

Answer 49

Despite the high cost of a location such as Mayfair in London, businesses may choose to set up there due to the prestige and in order to fit with their brand identity.

Answer 50

Footloose businesses are those that move from location to location, basing themselves wherever best suits their needs at a particular point in time: * changing patterns of trade; * improved communications; * Freer flows of capital. All of the above mean that the largest businesses, though still influenced by the same factors that dictate national location of business, do have the alternative of locating their production facilities virtually anywhere in the world. As long as there is a stable political background and an available workforce, most countries will offer the possibility of hosting a production (or even a remote service) base. Reason Labour: costs, skills, availability - Cheap labour countries such as India or China are often the choice of manufacturers. Cheap labour gives them a competitive advantage. However, high quality labour – a highly educated and skilled workforce - is important for keeping facilities such as R&D headquarters in high labour cost countries. Falling costs of international transport - It is cheaper than every to import and export goods all over the world. With falling fuel and transport costs more businesses can decrease costs by offshoring production. Freedom from restrictions - Businesses can reduce their costs if they locate operations in countries where for example employment law is less strict Political factors - trading blocs - trading blocs allowing tariff and quota free access if set up a production facility within that trading bloc eg EU and NAFTA (North American Free Trade Association) Political factors – Tax avoidance - Companies can establish head offices where taxation levels are lower than their home base. This can allow transfer costing (businesses are able to inflate their profits in countries where taxation levels are relatively low and decrease their profits where taxation levels are relatively high eg Starbucks and Amazon)

Answer 51

The choice of business location is dependent on the type and nature of the business. For example: * Manufacturing business will be more important to be close to raw materials/good infrastructure * Retail based businesses will be more important to be close to consumers and other similar businesses * Online businesses will be important to be close to transport links if selling tangible good/cheaper locations.

Answer 52

unlimited wants + limited resources