Flash Cards For First Topic
Define a business.
A business is a repeatable process that provides a good or a service that people want or need at a price they can afford so that it meets consumer expectations so the business generates a profit and can reasonably continue operating.
What are the roles of business in society ?
The 4 main roles of business in society is to
- Improve quality of life
- Provide income and employment
- Generate innovation
- Provide a wider range of choice
What are the 4 ways to classify a business?
Geographic spread
Size
Industry sector
Legal structure
Classify Business by Size (Quantitative and Qualitative)
Customer retention rate
Revenue
Employee numbers
Market share
Type of ownership/number of owners
Legal structure
Business type
Decision making
Sources of finance
Classify business geographic spread
Local
- small operations
- restricted spread / small # of stores
- small market share
- embedded in community
- supplies drawn from other local firms or from afar
- news agency, butcher, restaurant, convenience store
- typically sole trader, partnership possibly private business.
Domestic
- operating within the nation
- established outlets in a variety of locations
- operates and constructs projects in wide locations
- less local connections and community attachment
- SME more employee, market share, higher revenue
- More investment required, higher risk higher reward
- retail chain, property developer, asset manager, legal firm
- partnership, private or public company
Global
- operates globally (outlets internationally, factories overseas, global asset ownership)
- usually have a corporate headquarters in a single nation
- national borders no barrier to trade
- thousands of employees
- sourcing input globally from thousands of suppliers
- capture large revenue and market share by entering new markets
- Apple Coca Cola Nike Citibank Amazon
Classify business industry sector
Primary
- extraction and production of raw materials
- mining, fossil fuels, fishing, logging, agriculture
Secondary
- manufactures and physical product using primary resources and intermediate goods
- can be manufacturing of a finished goods (end consumer) or intermediate goods (to another business)
- shoe factory, food processing plant, car makers, clothing factories, plastic components
Tertiary
- provides a revive, nothing physical is made by the firm
- does something for the consumer
- largest sector in Australia +80% of GDP and largest employer
- further divided into quarternary and quinary sectors
- retailers, health services, mechanics, financial firms, legal firms
Quarternary
- delivers service in the form of transferral and processing information and knowledge.
- telecommunications, online media, television, educational firms
Quinary
- businesses that deliver services traditionally done in the home
- hospitality industry (hotels restaurants) child care services, cleaning
Classify business legal structure
Sole Trader
Partnership
Private company pty ltd
Public company ltd
Define, advantages disadvantages of sole trader
Define: a business owned by a single person who provides all finance, tasked all risk and makes all decisions. They have unlimited liability. Same legal entity, when ST dies so does business.
Adv:
- low cost of entry
- complete control
- few disputes
- owner keeps all profit
- less gov reg
- no tax on profit, no 2x tax
Disadv:
- unlimited liability
- ST dies so does business
- challenges when sick
- must carry all losses, high risk
- perform all varieties of tasks’
- hard to raise finance to expand
Partnership, define adv disadv
Define: Business owned by 2-20 people with unlimited liability, all partners are responsible. Partnership agreements lay out duties and responsibilities of each partner, also states whether they’re silent or active partners. Allows for pooled funding and draws from various talent.
Pro:
- low cost of entry
- shared responsibility and workload
- pooled talent
- pooled funds
- no taxes on profits, only on personal income of partners
Con:
- unlimited liability on owners, personal debt prior to partnership is important
- possible disputes, workload business direction responsibilities performance
- challenges in finding suitable partners
- divided authority’
- decision making challenges
Private company define pro con
Define: A business that has become incorporated, meaning the business and owners are separate legal entities. This means they have limited liability, more finance, protection of personal assets,rapid business growth. Between 2 and 50 private invite only shareholders. Typically SME family owned firms. PTY LTD.
Pro
- limited liability
- obtain finance easier
- legal regulation protection and support business owners in event of failure
- can create subsidiaries to separate business activity limiting liability further for parent firm
Con
- higher cost of entry establishment — fees to ASIC and legal fees for corporate agreement
- legal responsibilities to run a board, meeting frequently and keeping minutes
- double taxation, business profits and personal income of owners
Public company define pro con
Define
- a large business that has become incorporated that has made their shares available to purchase for the public on ASX. Uses equity funds to expand operations, owned by thousands of shareholders and subject to public scrutiny. Has LTD after name. Difficult sand expensive to run and establish. Has many many thousands of employees.
Pro
- Limtied liability for owners
- unlimited number of shareholders, access to vast pool of capital to grow business
- easier to obtain debt finance
- rapid growth potential with access to finance to pursue growth
Con
- high cost of establishment and access to equity finance through sharemarkets
- high levels of regulation and legal compliance, board operations, reporting, continuous disclosure
- increased transparency
- double tax, business profits separate unless business offers fully franked dividends to shareholders.
Define and benefits of incorporation
The process of creating a business that has a separate legal entity to its owners; in order to gain limited liability, more finance, protect personal assets and grow the business rapidly.
Limited / Unlimited liability
Liability means the level of personal responsibility owners have to cover business debts. Unlimtied means total personal accountability. Limited liability personal losses limited to investment funds only.
Factors influencing choice of legal structure
Size
- as demand and sakes increase the business must grow!!!!!! Glory to capitalism!!!
- to meet those higher levels, owner may need to change the legal structure of the firm to minimise personal risk and allow business to grow to potential
- New plant / equipment or new contract for supplying large order, may require more funds
- addiotnal finance might require more partners or establishment of pty Ltd to invite private shareholders.
- pty Ltd might grow to the point of needing to float shares on asx
Finance
- level of finance required by a firm to enter market will determine the legal structure
- low cost of entry will go ST or PS. As soon as firm requires large capital it must adopt LimLia LS.
- finance is limited for unincorporated firms
- incorporated firms attract funds easier
- loans, venture capital firms, selling shares on asx are ways to grow business.
Ownership
- owners must consider desired level of control over direction and operations
- full control only with ST. PS has split control
- pty Ltd high control invite shareholders. More freedom
- Ltd heaps of shareholders, each with voting rights to determine BoD
Franchising define and benefits
Franchise means buying the rights from another business to distribute its products under its name.
Franchisor firm that offers franchises. Offers successful business model, brand awareness, training and method of operations. MOTHERSHIP
Franchisee provides start-up capital and labour, operates franchise business, and agrees to follow TC’s of agreement. SENTINEL
Franchise business have high success rates in comparison to individual businesses. This is because brand recognition and trusted brand and proven product.
Business looking to expand rapidly can sell franchise opportunities. This reduces capital expenditure required whilst generating fee income and a percentage of the profits / revenue.
