Making A Business Effective Flashcards
Limited and unlimited liability
When an entrepreneur starts a business, they need to consider what kind of legal structure they want for their business.
Sole traders and partnerships offer no legal protection to the owners in that the business assets and the owner’s personal assets are viewed as being the same (unlimited liability).
The other forms of business ownership offer limited liability in which the assets of the owners are considered to be separate from those of the business.
Unlimited liability
The owners are fully responsible for all debts owed by the business.
Owners are also legally responsible for any unlawful acts committed by those connected to the business.
There is no legal distinction between owners with unlimited liability and the business.
As a result, these business owners may have to use their own personal assets to pay debts or legal fees.
Limited liability
Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails.
Shareholders are not responsible for business debts.
In most cases, the shareholders cannot be held responsible for unlawful acts committed by those connected with the business.
Companies are incorporated and owners are considered a separate legal entity to the business.
This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees.
Sole trader
A business that has a single owner (although they may still hire employees).
Advantages - Easy and inexpensive to set up.
The owner has complete control over the business.
All profits belong to the owner.
Simple tax arrangements.
Disadvantages - Unlimited liability, meaning the owner is personally responsible for any debts the business incurs.
Limited access to finance and capital.
Limited skill set of the owner/entrepreneur.
Partnership
Two or more people join together to form a business.
Good examples of this type of business include lawyers and accountants.
Advantages - Easy to set up and inexpensive.
Shared responsibilities and decision-making.
More skills and knowledge are available.
Increased access to finance and capital.
Disadvantages - Unlimited liability.
Potential for disputes between partners.
Profits are often shared equally, regardless of the contribution.
Difficult to transfer ownership.
Private limited company
The ownership of the business is broken down into a specified number of shares.
These shares can be sold by the owner, usually to friends and family or to venture capitalists.
Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO.
Advantages - Limited liability, meaning the owners are not personally responsible for the company’s debts.
Access to greater finance and capital.
Easier to transfer ownership.
Can have a professional image and reputation.
Disadvantages - More expensive and time-consuming to set up.
More complex legal requirements and regulations than sole traders.
Annual financial reporting and auditing are required.
Shareholders have little control over the company as the founder usually imposes their agenda.
Franchising
Franchising is a business model where an individual (franchisee) buys the rights to operate a business model, use its branding and software tools and receive support from a larger company (franchisor) in exchange for an initial lump sum plus ongoing fees.
The franchisee operates the business under the franchisor’s established system and receives training, marketing support, and ongoing assistance.
Advantages of franchising
Centralised advertising: A ready made, well recognised brand name, which will be promoted centrally by the Franchisor.
Training: The Franchisor provides training such as how to make pizzas properly to ensure the quality and consistency of the brand.
Supplies are provided: The Franchisor provides equipment and supplies so that the product will be the same, regardless of where it was purchased.
Exclusive location: The Franchisor provides an exclusive area or market to sell to. They will not create any more franchises in that area
Support services: Advice, training, use of software systems and problem solving are ongoing and the Franchisor may also provide the Franchisee with loans, insurance, etc.
Disadvantages of franchising
Overhead/Startup Cost: This is a fixed sum paid at the start of the franchise for the right to use the business name and resources.
Royalty costs: Usually paid quarterly and varies according to the level of sales. Often equal to 5 - 10 % of sales turnover.
Cost of supplies: The Franchisor may sell material or equipment to the Franchisee at inflated prices.
Quality control management: If the Franchisee does not produce the good/service to the required standard set by the Franchisor, the Franchise rights can be removed from them.
Proximity to: market, labour, materials and competitors
Proximity to the market refers to the distance between the business location and the target market. Locating near the market reduces transportation costs and increases its accessibility to potential customers.
Proximity to labour refers to the availability of qualified and skilled workers in the area. Businesses often locate in areas with a high concentration of skilled labour to ensure that they have access to the necessary workforce to run their operations efficiently.
Proximity to materials refers to the availability of raw materials and supplies needed for the business which will help to minimise transportation costs.
Proximity to competitors may be desired (or not) to take advantage of a shared customer base or to differentiate themselves by offering unique products or services.
Nature of the business activity
Different types of businesses have different requirements in terms of space, infrastructure, and accessibility.
E.g. A manufacturing plant may require a large space for equipment and a loading dock for shipping and receiving goods, while a service business such as a law firm may require less space and more accessible office locations.
The impact of the internet on location decisions: e-commerce and/or fixed premises.
The impact of the internet means businesses can reach customers from anywhere and physical location may not be as important as it once was.
E-commerce businesses may choose to operate from a fixed location, but their location may not be as critical as it is for traditional brick-and-mortar businesses that rely on foot traffic.
Providing customers with the opportunity to book services or purchase products online offers convenience and is likely to reduce business costs as premises in non-high profile areas are usually cheaper to rent or buy than high street or other busy areas.
For businesses that offer a combination of online and in-person services (restaurants or retail stores), location remains an important factor in their success.
Marketing mix
The marketing mix (4Ps of marketing) provides a framework for businesses to create and implement successful marketing strategies.
The 4Ps represent the key elements of a marketing strategy: product, price, place, and promotion.
These four components work together to satisfy the needs and want of a target market while achieving the company’s objectives.
By understanding and manipulating the marketing mix, businesses can differentiate themselves from competitors.
The marketing mix is an essential tool for any company looking to maximise its marketing impact and achieve long-term success.
Promotion
Promotion is an important element of the marketing mix as it plays a crucial role in generating customer awareness, interest and desire for a product/service.
A business can communicate its value proposition to potential customers and differentiate itself from competitors.
Promotion helps to build brand awareness and loyalty which can lead to repeat purchases and referrals.
The promotion element of the marketing mix includes a variety of promotional methods such as advertising, direct selling to potential customers, and public relations.
Product
The product design mix refers to the combination of elements that make up a product’s design
These elements include function, aesthetics, and cost
Balancing the elements of function, aesthetics, and cost, helps the product design to be both functional and attractive, while also being cost-effective for both the manufacturer and the consumer.
Some manufacturers aim to balance all three elements.
Businesses must take care to balance customers’ quality expectations with these elements.
The target market may value quality less than price and will not be prepared to pay a high price for goods even if they are of the highest quality.
Developing a strong brand can help to differentiate a product or service from those offered by competitors and can help a business to add value as customers are often willing to pay higher prices for brand they recognise and trust.
