Term 3 - Business Planning

Question 1

What are the roles of SMEs?

Answer 1

• 85% of employees work in SMEs in the private sector
• Provided >80% of Australia’s employment growth in the past 15 years
• 50% of all goods and services are from SMEs
• Earn more profits and pay more taxes than large businesses
• Contribute to invention and innovation

Question 2

What are monetary and non-monetary motivations of being a business owner?

Answer 2

Monetary: Profit, increase in wealth.
Non-monetary: Personal challenge, control, flexibility.

Question 3

What is a BOP?

Answer 3

Balance of Payments (BOP), which is a net record of a country’s trade and financial transactions. This includes exports and imports with other countries. As most SMEs engage in foreign trade, more SMEs exports can maintain favourable BOP.

Question 4

What info can accountants give you?

Answer 4

Tax, Risk and Control, Financial Management and Reporting Issues.

Question 5

What info can bank managers/financial advisers give you?

Answer 5

Financial Resource Advice, Budgeting, Financial Planning.

Question 6

What info can Lawyers/Solicitors give you?

Answer 6

Contracts, Legislations, Patents.

Question 7

What info can other consultants give you?

Answer 7

Specific areas like Engineering, Design, Construction.

Question 8

What info can Local Government, State Government, and Federal Government give you?

Answer 8

Local: Advice on local zoning, advertising to the local community, and local development

State: Business Enterprise Centre Australia (BECA) and NSW Department of State and Regional Development Advice on starting a new business, current issues, latest laws etc.

Federal: ATO, ACCC etc. Advice on trading, competition, tax, R&D of new products, grants.

Question 9

What are the three ways of starting a business?

Answer 9

1) Starting from scratch
2) Buying an existing business
3) Buying a franchise

Question 10

What are the three main short term debt types in establishing a business?

Answer 10

Short term finance (need to pay within a year): to fund day-to-day working of the business (COF)
1. Commercial bills: short-term loans issued by financial institutions, for larger amounts (usually over $100,000) for a period of generally between 30 and 180 days.
2. Overdraft: the bank allows a business to overdraw their account up to agreed limit for a specified time, to overcome a temporary cash shortfall.
3. Factoring: the selling of accounts receivable for a discounted price to a finance or factoring company.

Question 11

What are the three main long term debt types in establishing a business?

Answer 11

Long term finance (paid over a years time): used to purchase buildings, land, plat, and equipment (MUD)
1. Mortgage: a loan secured by the property of the borrower (business).
2. Unsecured note: a loan from investors for a set period of time. It is not secured against the businesses’ assets.
3. Debenture: issued by a company for a fixed rate of interest and a fixed period of time.

Question 12

What are advantages and disadvantages of debt and equity?

Answer 12

Debt adv: Owners retain control of the business operation, easier to budget and calculate the expected cash flow.

Debt dis-adv: Fixed Repayment is necessary regardless of the performance situation,
Interest can be costly, Good Credit Rating is needed to receive the loan

Equity adv: Less risky, If there’s no profit, dividend is not distributed, There is no cash outflow (unless withdrawn from investment)

Debt dis-adv: Investors expect a high return, Loss of control due to multiple investors, Conflicts can arise if partners do not agree

Question 13

What is a dividend?

Answer 13

Dividends are the percentage of a company’s earnings that is paid to its shareholders as their share of the profits.

Question 14

What is the cost of debts as a way of establishing a business?

Answer 14

Interest.

Question 15

What is the cost of equity as a way of establishing a business?

Answer 15

Dividend.

Question 16

What is an investor?

Answer 16

A person or organization that puts money into financial schemes, property, etc. with the expectation of achieving a profit.

Question 17

What are the legal factors when establishing a business?

Answer 17

1. Business Name (The Australian Securities and Investments Commission (ASIC) is responsible for a national business name registrations service).
2. Zoning
3. Health Regulations

Question 18

What is income tax?

Answer 18

Taken from employees’ salary/wage.

Question 19

What is Fringe Benefits tax (FBT)?

Answer 19

Tax applied to non-cash benefits. FBT is paid by the employer and it is based on the taxable value of the benefits provided to the employees.

Question 20

What is GST?

Answer 20

A tax on goods and services.

Question 21

What is Company Tax?

Answer 21

Imposed on the profits of companies depending on how much they make.

Question 22

What is a Business Plan?

Answer 22

Business Plan is a written statement of the business’ objectives and the strategies to be taken in order to achieve them. A business plan is the ‘travel itinerary’ for future growth and development with a business. It sets out the desired goals and direction of the business

Question 23

What does SWOT stand for?

Answer 23

Strengths, Weaknesses, Opportunities, Threats.

Question 24

What are the main aspects to the business planning process?

Answer 24

• Sources of planning ideas (SWOT)
• Vision Statement and Goals (SMART goals)
• Organising Resources (Key business functions)
• Forecasting
• Monitoring and evaluation

Question 25

What are the three types of forecasting?

Answer 25

Total Revenue, Total Cost
Break even analysis
Balance Sheet

Question 26

What is forecasting?

Answer 26

Forecasts (or projections) are the business’ predictions about the future. An owner may need to forecast the availability of labour, raw materials, finance, and building requirements.

Question 27

What are the four aspects of total revenue, total cost?

Answer 27

Total Revenue: Amount of money from sales.
Total Cost: Variable Cost + Fixed Costs
Fixed Costs: Costs that stay the same regardless of amount of goods/services provided (e.g. rent)
Variable Costs: Costs that depend on the amount of goods/services produced (e.g. material)

Question 28

What are the formulas for TR and TC?

Answer 28

TR= Unit Selling Price (P) x Number of Units Sold (Q)
TC= FIxed Cost (FC) + Variable Cost (VC)
Variable Cost = Cost per unit x Number of goods or services produced

Question 29

What is break-even analysis?

Answer 29

Break-even (BE) is the number of sales that needs to be generated to cover the total cost of production. That is: Total Revenue - Total Cost; No Profit & No loss

Question 30

What is the BE formula?

Answer 30

(total FC)/(Units selling price - variable cost

Question 31

What is a Cash Flow Projection?

Answer 31

The cash flow projection shows the changes to the cash position brought about by the operating, investing, and financial activities of the business.
It provides information concerning the business’s expected cash receipts (cash inflows) and cash payments (cash outflows) over an accounting period, usually 12 months.
Positive cash flow: money coming into > cash leaving.
It is NOT a Cash Flow Statement which indicates the past period of time. The cash flow projection shows a period of time into the future.

Question 32

What is so important about a cash flow forecast?

Answer 32

• A clear indication of how much capital investment is needed.
• Creditors (or banks) ensure that the business has a good credit rating and is able to pay debts on time.
• A forecast of possible changes to cash position due to the business’ operating, investing, and financing activities.
• A cash flow projection is used in the financial plan section of the business plan.
• Cash flow forecasts also help identify when expenses are too high and when a short-term investment is possible due to a cash surplus.

Question 33

What is the Monitoring and Evaluating Process?

Answer 33

1) Establish goals and objectives (What do we want to achieve?)
2) Monitor Performance (What is actually happening?)
3) Take corrective action (is what is happening good or bad? Why is it happening?)
4) Evaluate performance (What should be done about it?)

Once Monitoring and Evaluating performance has been done, companies need to implement corrective actions (if needed). Modifying the process is to change existing plans to ensure business goals can be achieved. Examples:
- Reduce expenses
- Decrease sales price to attract more customers
- Negotiate longer days (or by instalments) to pay for expenses can enhance cash flow

Question 34

What is trend analysis?

Answer 34

Trend analysis is a process of inspecting, comparing and investigating changes over a period of time and looking for a pattern (trend) in order to predict the future. Management can develop effective strategies in response to the trends. Factors that can affect trends:
Past history
Market conditions
Political events
Culture changes
Technology
Other unexpected events

Question 35

How can businesses sustain competitive advantage?

Answer 35

• Price/cost strategies
• Differentiation strategies
• Be aware of changes
• Use technology

Question 36

What is overextensions of resources/finance?

Answer 36

Resources: Overestimating amount of sales and investing too much on materials.

Finance:
- Employing too much staff
- Excessive stock/inventory
- Huge purchases/commitments on cars, furniture, etc.

Question 37

What happens during periods of economic boom?

Answer 37

• Increase consumer spending
• Increase business investment and production
• Increase economic growth
• Reduce in unemployment

Question 38

What happens during periods of economic downturn?

Answer 38

• Decrease in consumer spending
• Lower business investment and production
• Decrease economic growth
• Rise in unemployment