Review of the nature of business. Flashcards
1.4.1 Summary
The nature of a business
Businesses play a crucial role in our society, largely determining our standard of living.
The one common feature shared by both the largest and the smallest business is that they produce a product — goods or service — which is sold in a market where buyers and sellers meet.
Businesses have an enormous impact on our lives every day.
What is main role of a business?
The main role of a business is to produce and sell, for a profit, the products that satisfy individuals’ needs and wants.
- Business enterprises undertake many activities to provide the products demanded by customers, with production being one of the most important.
- Production refers to those activities undertaken by the business that combine resources to create products that satisfy customers’ needs and wants.
Other roles of business
Profit is what remains after all business expenses have been deducted from sales revenue.
- Profit is the reward that business owners receive for assuming the considerable risks of ownership.
SMEs provide employment for about 66 per cent of Australia’s private sector.
- Businesses generate income for:
employees — from wages, salaries, bonuses, overtime, commissions and/or fringe benefits
business owners — from profits
shareholders — from dividends.
In our society, consumers have freedom of choice and the opportunity to purchase a variety of products at competitive prices.
- Research and development (R&D) leads to innovation (the creation of new products, services or processes, or the improvement of existing ones).
- People who transform their ideas into a new business are called entrepreneurs. They are prepared to take the risk of starting and operating a business venture in the hope of making a profit.
An entrepreneur’s drive and motivation to establish and operate a business lie at the heart of our private economic system.
Business is a major creator of wealth within the Australian economy.
Businesses produce a vast range of products that enable us to satisfy many and varied wants, which results in a higher standard of living.
Quality of life refers to the wellbeing of an individual, and is a combination of material and non-material benefits.
What is a business? devidend? entrepreneur? finished product? income? innovation? operating expenses? product? production? profit? quality of life? research and development? risk? salary? service? shareholders? wage?
business the organised effort of individuals to produce and sell, for a profit, the products that satisfy individuals’ needs and wants
choice the act of selecting among alternatives
dividend a distribution of a company’s profits (either yearly or half-yearly) to shareholders that is calculated as a number of cents per share.
entrepreneur someone who starts, operates and assumes the risk of a business venture in the hope of making a profit
entrepreneurship the ability and willingness to start, operate and assume the risk of a business venture in the hope of making a profit
finished product one that is ready for customers to buy and use
goods items that can be seen or touched
income money received by a person for providing his or her labour, or a business from a return on its investments
innovation either creating a new product, service or process, or significantly improving an existing one
operating expenses all the costs of running the business except the cost of goods sold
product a good or service that can be bought or sold
production refers to those activities undertaken by the business that combine the resources to create products that satisfy customers’ needs and wants
profit what remains after all business expenses have been deducted from sales revenue
quality of life refers to the overall wellbeing of an individual, and is a combination of both material and non-material benefits
research and development (R&D) a set of activities undertaken to improve existing products, create new products and improve production
revenue the money a business receives as payment for its products
risk refers to the possibility of loss
salary a fixed regular payment, usually paid on a fortnightly or monthly basis but often expressed as an annual sum, made to a permanent employee of a business
services things done for you by others
shareholders people who are part owners of a company because they own a number of shares
wage money received by workers, usually on an hourly or daily basis, for services they provide to an employer
How is business classified through size? legal structure? What are the 3 factors influencing choice of legal structure?
2.7.1 Summary
Classification by size
Businesses can be classified as micro, small, medium or large.
Their classification will depend on such things as number of employees, market share, ownership and who makes the decisions.
The most common way to categorise a business by size is by number of employees.
A micro business is one that employs fewer than five people, a small business employs between 5 and 19 people, a medium business employs 20–199 people and a large business is one that employs over 200 people.
Classification by legal structure
The four main legal structures of privately owned businesses are sole traders, partnerships, private companies and public companies.
Privately owned business structures can be either unincorporated or incorporated.
A business that is incorporated becomes a separate legal entity from the owner/s.
A sole trader — an unincorporated business entity — is a business that is owned and operated by one person and has unlimited liability.
A partnership — an unincorporated business entity — is a business that is owned and operated by between 2 and 20 people and has unlimited liability.
The partnership can be made verbally or in writing or by implication.
All companies are incorporated enterprises.
In limited liability companies, the most money a shareholder can lose is the amount they paid for their shares.
A proprietary (private) company usually has fewer than 50 shareholders and must have the words ‘proprietary limited’ (Pty Ltd) after its name.
The shares for a public company are listed on the Australian Securities Exchange.
A public company must have the word ‘limited’ or ‘Ltd’ in its name.
Government enterprises are government-owned and operated, and provide essential community services.
Due to privatisation some government enterprises have become public companies.
Factors influencing choice of legal structure
The most appropriate legal structure to select will depend on many variables including size, ownership and finance.
Size: as businesses expand, then the business may wish to seek the protection of limited liability.
Ownership: how much control and ownership of the business does the owner require?
Finance: how much finance is required to expand and what sources of funds are required?
As a business expands, it normally moves from an unincorporated structure to an incorporated structure.
how is businesses classified by geographical spread? by industry sector?
Classification by geographical spread
Businesses can also be classified as local, national or global according to their geographical spread.
A local business has a very restricted geographical spread; it serves its surrounding area.
A national business operates in just one country.
A global business — a multinational corporation (MNC) — is a large business with a home base in one country that operates partially owned or wholly owned businesses in other countries.
Classification by industry sector
An industry consists of businesses that are involved in similar types of production.
Primary industry — businesses involved in collection of natural resources
Secondary industry — production of finished or semi-finished goods
Tertiary industry — performing a service
Quaternary industry — services that involve the transfer and processing of information and knowledge
Quinary industry — services that have traditionally been performed in the home
What is float? geographical spread? government enterprises? incorporated? industry? limited liability? local business? medium business? micro business? multinational corporation? national business? partnership? primary industry? privatisation? proprietary? prospectus? quaternary industry? quinary industry? secondary industry?
What is small business? sole trader? tertiary industry? unlimited liability? venture capital?
float the raising of capital in a company through the sale of shares to the public
geographical spread the presence of a business and the range of its products across a suburb, city, state or country, or the globe
government enterprises government-owned and operated businesses
incorporated refers to the process companies go through to become a separate legal entity from the owner/s
industry businesses that are involved in similar types of production
large business a business with 200 or more employees
limited liability a feature of corporate ownership that limits each owner’s financial liability to the amount of money he or she has paid for the business’s shares
local business a business that has a restricted geographical spread; it serves the surrounding area.
medium business a business with 20–199 employees
micro business a business with fewer than five employees
multinational corporation a company that has branches in many different countries
national business a business that operates within just one country
partnership a legal business structure that is owned and operated by between 2 and 20 people with the aim of making a profit
primary industry includes those businesses involved in the collection of natural resources
privatisation the process of transferring the ownership of a government business to the private sector
proprietary (private) company an incorporated business and usually has between 2 and 50 private shareholders
prospectus a document giving details of a company and inviting the public to buy shares in it
quaternary industry includes services that involve the transfer and processing of information and knowledge
quinary industry includes services that have traditionally been performed in the home
secondary industry includes businesses that take a raw material and make it into a finished or semi-finished product
small business a business with 5–19 employees
small to medium enterprises defined by the Australian Bureau of Statistics as firms with fewer than 200 full-time equivalent employees and/or less than $10 million turnover
sole trader a business that is owned and operated by only one person
tertiary industry involves people performing a vast range of services for other people
unlimited liability when the business owner is personally responsible for all the business’s debt
venture capital money that is invested in small and sometimes struggling businesses that have the potential to become successful
What are the 4 influences?
Business Influences and Factors
Economic Influences:
* Dependence on economic environment, characterized by boom and recession periods.
* Global and domestic financial market changes affect borrowing costs and investment levels.
Geographical Factors:
* Australia’s location within the Asia-Pacific region.
* Changes in demographic factors.
* Globalisation process.
Social Influences:
* Changes in fashion and culture affect business sales and profits.
* Growing environmental awareness, family-friendly workplaces, and workplace diversity.
Legal Influences:
* Regulations within which a business operates.
What is are the 2 factors the business environment is influenced by?
The business environment is influenced by both internal and external factors.
The external environment includes those factors over which the business has very little control.
The internal environment includes those factors over which the business has some degree of control.
External influences on business include economic, geographic, financial, social, legal, political, institutional, technological, the competitive situation and changes in the market.
Economic influences on a business relate directly to their economic environment, which is dependent on changes in economic growth. These changes are characterised by boom and recessionary periods in the economic cycle.
Changes in the global and domestic financial markets will influence the cost of borrowing money and therefore directly affect the level of investment by a business.
Three major geographical factors that affect business activity are:
Australia’s geographic location within the Asia–Pacific region
changing demographic factors
the process of globalisation.
Social influences, such as changes to fashion and culture, have the capacity to affect business sales and profits.
Three social issues that have had a significant impact on business practices include the growing awareness of the environment, the growing desire for businesses to provide family-friendly workplaces and the growing belief that businesses must cater for workplace diversity.
Legal influences are the regulations (legal framework) within which a business must operate.
Give 4 examples of legal influences?
the NSW Environment Protection Authority
NSW Fair Trading
the Australian Securities and Investments Commission
the Australian Competition and Consumer Commission.
NSW Environmental and Consumer Protection Agencies
* NSW Environment Protection Authority (EPA): Primary environmental regulator aiming to improve environmental performance and waste management.
* NSW Fair Trading: Consumer protection agency providing information and assistance on fair and ethical practices.
* Australian Securities and Investments Commission (ASIC): Monitors market integrity and provides consumer protection in areas like payment systems and financial services.
* Australian Competition and Consumer Commission (ACCC): Independent statutory authority administering the Competition and Consumer Act 2010.
* Monitors anti-competitive and unfair market practices, mergers and acquisitions, product safety, and misleading advertising.
What is employer associations? Trade and industry associations?
Employer Associations and Trade Unions Overview
* Employer associations represent employers’ interests and assist in policy formulation, negotiation, promotion, and government submissions.
* Trade and industry associations represent larger employer groups, such as the Australian Chamber of Commerce and Industry (ACCI).
* Trade unions aim to improve working conditions and pay rates, but membership has declined due to new legislation, shifts in work patterns, workplace agreements, and privatisation of union-dominated industries.
* The Australian Securities Exchange operates a sharemarket for companies to raise funds by issuing shares, primarily for expansion and development.
What is political influences? What institutions influence the business? What are the technological influences? What are the factors influencing business’s competitiveness?
Political influences are derived from state and federal government policies and include free trade policies and the process of deregulation.
Institutions that influence business include government, regulatory bodies and other groups such as trade unions and employer associations.
Technological influences can increase business productivity and communication.
Each business is influenced by their competitors and should aim to achieve a sustainable competitive advantage.
Factors influencing a business’s competitiveness include the ease of entry into a market for a new business, local and foreign competition, and the number of competitors.
Other external influences include changes in financial, labour and consumer markets.
What is monopolistic competition?
The goods and services sold are differentiated from competitors using methods such as packaging, advertising, brand names and quality.
What are the features of perfect competition?
- Large number of small businesses that sell products that are the same or similar
- Very little advertising is used to increase market share
- The only way to achieve market share is through price competition.
What is market concentration?
market concentration refers to the number of competitors in a particular market. There are four main types of market concentration.
The internal influences on a business include product, location, resources, management and business culture.
Product influences affect a range of internal structures and operations within the business.
Location will have a direct impact on the sales and profits of some businesses.
Factors to consider when choosing a location are:
visibility
cost
proximity to suppliers
proximity to customers.
The four main resources that influence a business are human, information, physical and financial.
Businesses can adopt a traditional hierarchical structure or a flat organisational structure.
Business culture can be seen in the unwritten or informal rules that guide how people in the organisation behave.
There are four essential elements of a business culture: values, symbols, rituals and heroes.
What are the stakeholders in businesses?
Businesses have many stakeholders that will influence their operations.
Shareholders have a direct influence on a business because they have voting rights on major business decisions.
Companies need to ensure that they maximise returns on their shareholders’ investments.
Managers will influence organisational policies and procedures as well as employees’ productivity.
Employees will influence the quality of an organisation’s products.
To ensure its future viability, a business should consider the needs of its customers.
Members of the community increasingly expect organisations to show concern for the environment and to be socially responsible.
There is growing pressure for businesses to adopt ecologically sustainable operating practices.
What is business? business environement? complementary business? deregulation? ecologically sustainable? economic cycles? external environment? financial resources? globalisation? human resources? information resources? internal environment? market concentration? monopolistic competition? monopoly? oligopoly? perfect competition? physical resources? regulations? stakeholder? support services? sustainable competitive advantages?
business (corporate) culture the values, ideas, expectations and beliefs shared by members of the organisation
business environment refers to the surrounding conditions in which the business operates. It can be divided into two broad categories: external and internal.
complementary business one that sells a similar range of goods and services
deregulation the removal of government regulation from industry, with the aim of increasing efficiency and improving competition
ecologically sustainable when economic growth meets the needs of the present population without endangering the ability of future generations to meet their needs
economic cycles (or business cycles) the periods of growth (‘boom’) and recession (‘bust’) that occur as a result of fluctuations in the general level of economic activity
external environment includes those factors over which the business has very little control
financial resources the funds the business uses to meet its obligations to various creditors
globalisation the process that sees people, goods, money and ideas moving around the world faster and more cheaply than before
human resources the employees of the business; generally its most important asset
information resources the knowledge and data required by the business, such as market research, sales reports, economic forecasts, technical material and legal advice
internal environment includes those factors over which the business has some degree of control
market concentration refers to the number of competitors in a particular market. There are four main types of market concentration.
monopolistic competition where there is a large number of buyers and sellers in a particular market (e.g. local retailing shops)
monopoly complete concentration by one business in the industry (e.g. Australia Post)
oligopoly where a small number of larger firms have a greater control over a market (e.g. car manufacturers)
perfect competition where there is a large number of small firms that sell similar products. They are unable to differentiate products from each other and so can only use price as a way of achieving market share (e.g. fruit and vegetable growers).
physical resources the equipment, machinery, buildings and raw materials used by the business
regulations rules, laws or orders that businesses must follow
stakeholder any group or individual who has an interest in, or is affected by, the activities of a business
support services the activities needed to assist the core operations or prime function of a business
sustainable competitive advantage refers to the ability of a business to develop strategies that will ensure it has an ‘edge’ over its competitors for a long period of time
What are stakeholders? shareholders? managers? employees? community?
Stakeholders
Businesses have many stakeholders that will influence their operations.
Shareholders have a direct influence on a business because they have voting rights on major business decisions.
Companies need to ensure that they maximise returns on their shareholders’ investments.
Managers will influence organisational policies and procedures as well as employees’ productivity.
Employees will influence the quality of an organisation’s products.
To ensure its future viability, a business should consider the needs of its customers.
Members of the community increasingly expect organisations to show concern for the environment and to be socially responsible.
There is growing pressure for businesses to adopt ecologically sustainable operating practices.
What is business life cycle? what are 5 stages of a business life cycle? Define 3 each type of 3 possible outcomes in post maturity stage?
Business life cycle — stages and responding to challenges
The business life cycle refers to the stages of growth and development a business can experience.
The stages are establishment, growth, maturity and post-maturity.
In each stage of the cycle, a business is confronted with new challenges and presented with different opportunities.
The main challenge at the establishment stage is to get the business on a solid foundation by generating enough sales to create a positive cash flow.
Detailed planning can help greatly reduce the risk of failing.
Small businesses, such as a sole trader or partnership, have unlimited liability: that is, the business owner is personally responsible for all the debts of his or her business.
During the growth stage the business has increased sales, a regular customer base, develops new products and improves its cash flow.
With growth comes complexity and responsibility, which creates the need for long-term planning.
Growth and expansion can occur either through a merger or acquisition (takeover).
A merger occurs when the owners of two separate businesses agree to combine their resources and form a new organisation.
An acquisition (takeover) occurs when one business takes control of another business by purchasing a controlling interest in it.
Vertical integration occurs when a business expands at different but related levels in the production and marketing of a product.
Horizontal integration occurs when a business acquires or merges with another firm that makes and sells similar products.
Diversification (or conglomerate integration) occurs when a business acquires or merges with a business in a completely unrelated industry.
The maturity stage requires a more professional approach to planning.
In the maturity stage, the rate of growth slows and eventually flattens out; an early warning sign of possible decline.
A sense of complacency often envelops the business.
Managers may need to restructure or reorganise the business.
There are three possible outcomes at the post-maturity stage: steady state, decline or renewal.
Steady state: the business is neither declining nor expanding.
Decline: fall in sales, cash flow and eventual business failure.
Renewal: new products are developed and new markets are created, leading to increased sales and a positive cash flow.
What is voluntary and involuntary cessation? What is voluntary administration? voluntary or involuntary liquidation? when does liquidation normally happen?
Voluntary and involuntary cessation
The two main causes of business decline (and possible failure) are lack of management expertise or undercapitalisation.
Voluntary cessation occurs when the owner ceases to operate the business of their own accord.
Involuntary cessation occurs when the owner is forced to cease trading by the creditors of the business.
Sole traders and partnerships may voluntarily or involuntarily go into bankruptcy: a declaration that a business, or person, is unable to pay his or her debts.
A company has two options when facing financial difficulties:
Voluntary administration occurs when an independent administrator is appointed to operate the business in the hope of trading out of the present financial problems.
Voluntary or involuntary liquidation is the process of an appointed liquidator converting the business’s assets into cash.
Liquidation normally occurs because the company is insolvent.
It is estimated that an average 30 to 40 people are personally affected by one company insolvency.
What is acquisition? bankruptcy? business life cycle? cash flow? creditors? diversification? horizontal integration? insolvent? involuntary cessation? liquidation? merger? realisation?
acquisition when one business takes control of another business by purchasing a controlling interest in it
bankruptcy a declaration that a business or person is unable to pay his or her debts
business life cycle refers to the stages of growth and development a business can experience
cash flow the money coming into the business in the form of cash receipts, and the money leaving the business as cash payments
creditors those people or businesses who are owed money
diversification (or conglomerate integration) when a business acquires or merges with a business in a completely unrelated industry
horizontal integration when a business acquires or merges with another business that makes and sells similar products
insolvent when a company is not able to pay its debts as and when they fall due
involuntary cessation when the owner is forced to cease trading by the creditors of the business
liquidation 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
merger when the owners of two separate businesses agree to combine their resources and form a new organisation
realisation the process of converting the assets of a business into cash
What is receivership? vertical integration? voluntary administration? voluntary cessation?
receivership when a business has a receiver take charge of the affairs of the business. Unlike liquidation, the business may not necessarily be wound up.
vertical integration when a business expands at different but related levels in the production and marketing of a product
voluntary administration when an independent administrator is appointed to operate the business in the hope of trading out of present financial problems
voluntary cessation when the owner ceases to operate the business of their own accord
