Small Business Flashcards
Reasons for establishing a business 4
Profit motive
Being your own boss
Identifying a market opportunity
Unemployment
Profit motive
Rightly or wrongly, many people think that owning a small business is a gateway to nancial riches and see becoming an owner as the best way to improve their income. Although wealth and security are by no means guaranteed, the pro t motive is a powerful factor in the decision to purchase or start a business.
A desire for greater freedom/independence – to be your own boss
Many people become frustrated as employees, either because they think they have a better way of doing things, or because they feel that their efforts are under-recognised. By owning their own business, small business owners gain their independence as well as all the nancial rewards that their hard work has gained. This extends to being able to choose the hours they work, and the way that work is done.
Identifying a market opportunity
A business opportunity can sometimes present itself in a way that an ambitious or creative person cannot ignore. An idea for a new or cheaper/better quality product, or a service that is not currently being provided can be a strong incentive to go into business for yourself so that the market demand is satis ed (not to mention the recognition – and hopefully pro ts – that will eventuate).
Unemployment
Due to retrenchment or other factors some individuals may discover that self-employment is their only option. The old saying about one door closing and another one opening is apt for those who are forced into what can turn out to be a highly rewarding small business.
3 alternative investment options to small business
Cash property shares
2 different cash investment options
Bank accounts
Term deposits
Investing in bank accounts
The most basic and common form of cash investment is to put money in the bank or a similar institution such as a building society or credit union. It has the advantage that the cash is readily accessible and that there is virtually no risk of the business losing its investment as the government guarantees all bank deposits. However, basic on- call business bank accounts pay a very low return, with interest on deposits earned at only half a percent to one-and-a-half per cent. (It is highly possible that when account- keeping fees are factored in, the return on a bank account could actually be negative.)
Investing in term deposits
Term deposits are an investment option available from banks that does provide a higher rate of interest in return for agreeing to invest for a set term. The term can vary, ranging from three months to ve years. If the investor requires the funds before the end of the term, they may be available but this would be at the cost of any interest that would have been earned, plus additional costs for early termination of the investment.
Investing in property
Investing in property essentially means buying real estate of some type, which can provide both a capital gain and an income stream in the form of rent. Some investors actually borrow to invest in property in order to earn a capital gain from the increase in its market value. In addition, as long as the rental income is less than the cost of the property (including the interest payments on the loan), the investor will make a ‘loss’, thus reducing their taxable income. This is known as negative gearing.
Investing in shares
When an investor buys shares they are buying part-ownership of a business, giving the shareholder some say in the running of the company. In terms of a return, it gives the shareholder access to an income stream in the form of dividends (a share of the rm’s pro t). In addition, the ability to trade shares through the stock exchange gives the shareholder a potential for capital gains if the market value of the shares increases.
4 benefits of shares
Greater returns compared to other options
Tax benefits
Diversification
Flexibility
Risks of shares
Investing in shares carries risks similar to those involved with property, with the dividend return dependent on the pro tability of the company, and the capital gain dependent on the share market. An investor who holds shares in an unpro table company will see little or no return in terms of dividends, and is also likely to suffer a capital loss as the market value of their shares falls below their purchase price.
3 types of resources required to establish a small business
Financial resources
Personal resources
External support resources
5 personal qualities/resources required for a small business owner
Expertise Entrepreneurship Determination Confidence Cordiality and patience Humility
