Unit 3: Enterprise, business growth and size Flashcards
Entrepreneur
a person who organizes, operates and takes the risk for a new business. Entrepreneurs have to be: hard working, risk takers, creative, optimistic, self-confident, innovative, independent and effective communicators.
Advantages: independence, ability to put your own ideas into practice, opportunity to become famous and successful, the income might be higher than and employees one, and the ability to make use of personal interests and skills.
Disadvantages: High risk, need of capital, lack of knowledge and experience, opportunity cost (for not being and employee of another business).
Why should governments support start-ups?
- Reduce unemployment.
- Increase competition.
- Increase output.
- Benefit society. Entrepreneur may create social enterprises.
- Can grow further. Start-ups might become multinational businesses.
How do governments help start-ups?
- By organizing support sessions offered by experienced business people.
- Creating ‘enterprise zones’, which provide low-cost premises to start up business.
- Granting loans for small businesses at low interest rates.
- Grants (subsides) to help businesses train their employees,
- Encouraging universities to make their research facilities available to entrepreneur.
Business plan
document containing business objectives and important details about the operations, finance and owners. Banks will ask entrepreneurs for one before granting them a loan, this should help the entrepreneur to plan ahead and set objectives. It should state: the name of the business, the type of organisation, the business aim, the product, price, market aimed for, market research, human resources plan, details of business owners, production details and business costs, location, main equipment, forecast profit, cash flow and finance. SEE PAGE 24.
Comparing the size of businesses is useful to:
- Investors, before deciding on which business to put their saving into. They should try to find a business that is not a big one yet but will probably grow. Important.
- Governments, to establish different tax rates to small and big businesses.
- Competitors, to compare the size and importance with other firms.
- Workers, to know with how many people they will be working with.
- Banks, to see how important a loan is compared to the business size.
Comparing By Number of Employees
Easy to do but not trust-worthy at all. There are big companies which have little amount of workers, maybe because they use machines.
Comparing By Value of Output
common way of comparing businesses on the same industry. However, this is not trust worthy neither, as a business which hires few people and sells a few expensive products a year, might have higher output that one which sells cheaper products and hire more workers.
Comparing By Value of Sales
Often used when comparing size among retailing businesses. However it could be misleading when comparing the size of businesses that sell different products.
Comparing By Value of Capital Employed
the total value of capital invested into the business. However, some companies might use ‘labour intensive’ methods which require little capital equipment.
Comparing By Profit (not in the book):
Most trust-worthy parameter. How much money did a company make.
Why should a business grow?
- Higher profit for the owners.
- More status and prestige for managers.
- Lower average costs due to Economies of Scale.
- Larger share of its market, more influence when dealing with suppliers and distributors.
Internal growth
when a business expands its existing operations
External growth
when a company buys another business. Usually called integration. Involves either a takeover or a merger. A takeover is when one business buys out the owners of another business, and a merger is when the owners of two businesses agree to join their firms together. There are 3 ways of external growth: Horizontal integration, Vertical integration and Conglomerate integration
Horizontal integration
when one firm merges with or takes over another one in the same industry at the same level of production. A School buys another one. It reduces the number of competitors, increases the economies of scale, and guarantee a bigger share of the total market.
Vertical integration
one firm merges with or takes over another one in the same industry but at a different stage of production. It can be:
• Forward: if the firm integrates with another at a later stage of production (closer to the consumer). This could provide an assured outlet for the product, could reduce the profit margin made by the retailers, the retailers could be prevented from selling competitors’ products, and the information about the consumer needs and preferences can now be obtained directly.
• Backwards: if it integrates whit another one at an earlier stage of production (closer to the raw materials). This could guarantee the merger with an assured supply of raw materials, could absorb the profit margin of the supplier, could prevent the suppliers from supplying other manufacturer, and could help to control the costs of raw materials. Important factor for investors as it has to do with growth and also mean that the costs of production are lowered.
