Chapter 15: Business Startup

Question 1

Explain three types of organisational options.

Answer 1

1. Sole Trader-Business owned and operated by one person. Suitable for small business, entrepreneur owns and controls it. E.g. Razors Edge
2. Partnership-Involves bringing partners on board. Partnership is owned and run by 2-20 people. Combine expertise and resources. E.g. KPMG
3. Private Limited Company-Set up by 1-99 people called shareholders who enjoy limited liability. Business is separate from the owners, can be owned by one person but must be ran by at least two directors. E.g. Eason

Question 2

What are the advantages of sole trader?

Answer 2

Advantages:
1. Easy to set up, few legal obligations.
2. Keep all the profits, increased motivation.
3. Accounts are confidential (not published)
4. Make decisions quickly, take advantage of opportunities.

Question 3

What are the disadvantages of sole trader?

Answer 3

Disadvantages:
1. Unlimited liability - Huge Risk. Lose personal possessions. E.g. House
2. Lack of Expertise-lacking necessary skills
3. Responsibility to provide all the capital yourself
4. Stressful-burn out

Question 4

What are the advantages of partnership?

Answer 4

1. Simple to setup, few legal obligations. Advisable to draw up a “Deed of Partnership” (contract) for use in the event of disagreement.
2. More partners = More capital
3. More skills available, split the work between them. More opinions leads to better decisions.
4. Accounts dont have to be published.

Question 5

What are the disadvantages of partnership?

Answer 5

1. Unlimited Liability - jointly and severally liable
2. Slower decision making-less flexible to change
3. Shared Profits - Profit sharing ratio agreed, could be unfair
4. Disputes between partners

Question 6

What are the advantages of a private limited company?

Answer 6

1. Limited Liability
2. Easier to raise capital
3. Directors are appointed to run the business, workload and skill set is split.
4. Lower tax on profits - Corporation Tax
5. Continuity of existence if one owner dies as long as it does not go bankrupt

Question 7

What are the disadvantages of a private limited company?

Answer 7

1. Complicated to set up, apply for permission from Registrar of companies, Need a certificate of Incorporation before trading.
2. Legally obliged to publish their accounts.
3. Legal requirements, Annual return to CRO, Financial Audit annually. High cost for these services.

Question 8

Name three types of production options.

Answer 8

1. Job Production
2. Batch Production
3. Mass Production

Question 9

Explain job production.

Answer 9

Making the products one at a time. Individual and unique with USP.
Exactly what the consumer wants E.g. Dressmaker.
Need highly skilled workers
Flexible workers with flexible and capable equipment.
More expensive for business and consumer.

Question 10

Explain Batch Production.

Answer 10

Make large quantities in one go. All products the same. E.g. Newspapers, DVD’s.
Ready made products in shops.
Lower skilled workers not creating one off products.
Machinery still needs to be flexible.
Cheaper to make each product per unit and is cheaper for consumers.(economies of scale)

Question 11

Explain Mass Production.

Answer 11

Making the product every day.
Products identical and made in advance.
Suitable for products in continuous demand. E.g. Chocolate Bars
Cheaper to make each product per unit and cheaper for consumers(economies of scale.)
Generally lower skilled workers.

Question 12

Explain finance options and name three types of finance options.

Answer 12

Entrepreneur has to decide where they will get the capital from.
Short Term-repaid within 1 year
Medium Term-repaid 2-5 years
Long Term-+5 years

Question 13

Name four factors when choosing a source of finance.

Answer 13

1. Cost
2. Purpose
3. Collateral
4. Control

Question 14

Explain business plan.

Answer 14

Written document which sets out the objectives, strategies to achieve them and direction of the business like a map. Explains USP and outlines Finance Options.

Question 15

Name the five business plan headings in order.

Answer 15

1. Description of Business
2. Market Analysis
3. Marketing Plan
4. Production Plan
5. Finance Plan

Question 16

Explain four reasons why a business plan is important.

Answer 16

1. Raise Finance - Business plan could include accounts, cash flow forecast
2. Control - Entrepreneur can control the progress of the business by setting targets and then measure performance against them targets.
3. Sets out targets - gives business direction and focus. Sets out steps to guide business to success.
4. Solutions - Anticipate problems and come up with solutions in advance. E.g. Cash flow

Question 17

Outline two challenges facing business startups.

Answer 17

Loan Repayments: A lot of business startups fail as a result of lenders charging high interest rates to lower their risk. This makes business highly geared and at risk of bankruptcy.
Liquidity Problems: A lack of adequate cash within the first year of operation is a reason startups fail because they cannot pay their bills when they fall due and our sued into bankruptcy.

Question 18

Implications of switching from batch to mass production.

Answer 18

Staff Working Conditions: More repetitive boring work may make people leave.
Capital Required: Can sufficient investment be obtained to purchase machinery necessary to set up a new production line.
Quality: Can the same level of quality been maintained that customers have come to expect when only one type of good is being produced.