NATURE OF BUSINESS

DOTPOINT NOTES

Role of business

The nature of business

- Producing goods and services

- Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of life

❖ Producing goods and services - when businesses combine their resources to create products that satisfy customer needs and wants.

➢ Businesses undertake various activities to provide products

❖ Profit - The return businesses receive for producing products.➢ What remains after businesses expenses have been deducted➢ Profit is earned when revenue is higher than operating expenses

■ Revenue: money received as payment for products

❖ Employment - Businesses provides approximately 80% of all private sector jobs➢ Businesses employ individuals to aid the business➢ The more that is sold, the more employees hired

❖ Incomes - Money received by an individual for providing their labour.➢ Business income = amount earned after all expenses are paid.➢ Businesses provide income through;

■ Payment to employees - In return for providing their labour, employees receive a wage (weekly earnings for services provided) or salary (fixed amount for permanent employees)

■ Profit■ Dividends to shareholders

❖ Choice - Act of selecting among alternatives.➢ The greater the competitions, the greater the choice availability➢ Choice leads to competitive prices

❖ Innovation - Creating a new product, service or process or improving an existing one.➢ Ideas for new products or improvements to preexisting ones leads to new

businesses➢ Research and development leads to innovation

❖ Entrepreneurship and risk - Ability and willingness to start, operate and assume the risk of starting a business in the hope of making a profit. Many risks in doing so.

➢ Entrepreneurs - people who transform their ideas into a new business. Must take the risk of starting a business

➢ Explore untapped markets - unsure if business will succeed or fail.■ Risk of not being paid.■ Risk of owner losing all or part of the money they put into the business.

❖ Wealth ➢ profit made by a business.➢ The more that is produced means the more wealth generated within Australian

economy■ Business pays employees, who spend money to satisfy their needs and

wants➢ Redistributed to;

■ Employees (wages/ salaries)

■ Governments (taxes)■ Business owners/shareholders (dividends)■ Lenders (loan repayments)■ The business (retained profits)

❖ Quality of life - Overall well being of an individual, and is a combination of material and non-material benefits.

➢ Non material benefits include fresh air, clean water and unpolluted earth➢ Responses to quality-of-life issues include implementing environmentally

friendly procedures.

Types of businesses (p.g. 22)

Classification of businesses

- size – small to medium enterprises (SMEs), large

- local, national, global

- industry – primary, secondary, tertiary, quaternary, quinary

- legal structure – sole trader, partnership, private company, public company, government enterprise

❖ Private or public company → shareholders who receive dividends❖ Size - Determined by number of employees, owners, market share and legal structure

➢ Classified as small or medium sized if:■ Owner makes majority of management decisions■ Owner provides majority of finance (capital)■ Business has little control of market■ Independently owned and operated■ Locally based■ Less than $10 million turnover

➢ Micro-business■ Up to 5 employees, including the owner■ Usually home based

➢ Small■ Less than 20 employees■ Independently owned and operated usually by 1-2 people■ Usually sole trader or partnership

➢ Medium■ 20 - 199 employees■ Owned and operated by a few people and/or private shareholders■ Usually a partnership or private company

➢ Large■ 200 or more employees■ Usually owned by thousands of public shareholders■ Public company - listed on stock exchange.

❖ Geographical spread - Presence of a business and the range of its products across a suburb, city, state or country.

➢ Local■ Restricted geographical spread - serves surrounding area.■ Usually small to medium in size.■ E.g. Newsagent, corner store or hairdresser

➢ National■ Operates within one country■ E.g. Coles and David Jones.

➢ Global■ Multinational corporation (TNC)■ Large company with branches in many countries.■ Finance, assets and information flows freely between countries.■ E.g. Coca-Cola, McDonalds, Toyota.

❖ Industry sector

➢ Primary■ Businesses involved in collection of natural (raw) resources

Provides all food requirements.■ 60% of exports come from primary industry■ E.g. Farming, mining, fishing.

➢ Secondary■ Take the output of firms in primary sector and process it into finished or

semi-finished products.■ E.g. Iron ore, coal and limestone → steel - used to make cars

➢ Tertiary■ Performing a service for other people■ Majority of total employment■ E.g. Dentists, retailers, banks.

➢ Quaternary■ Services involving the transfer and processing of information and

knowledge■ E.g property, computing, education and telecommunication

➢ Quinary■ Services traditionally performed in the home.■ E.g. hospitality, tourism and childcare.

❖ Legal structure ➢ Main legal structures of privately owned businesses

➢ Unincorporated■ Business has no separate legal existences from its owner. (Business

entity and owner/s are one in the same)● Business ends when owner dies● Easy and cheap to establish● Unlimited liability

◆ Business owner is personally responsible for all debts of the business

◆ Responsibility may include selling personal assets such as property.

■ Classified as either:● Sole Trader

◆ Owned and operated by one person

◆ Can employ others, but owner provides all finance, makes all decisions and takes all responsibility.

◆ If business name is same as owner’s, no registration required

➢ E.g. Business name is P. Jones or Paul Jones, then no registration needed

◆ If business name is not the same as the owner, must be registered with Australian Securities and Investments commission (ASIC)

◆ Unincorporated - business and owner seen as one➢ If business is sued, then the owner is sued

◆ Unlimited liability

Advantages and disadvantages of being a sole trader

Advantages Disadvantages

- Low cost of entry- Simplest form- Complete control- Less costly to operate- Owner has right to all profits

- Unlimited liability- Business ends when owner

dies- Must perform wide range of

tasks- Difficult to raise finance for

expansion

● Partnership◆ Owned and operated by 2 - 20 people with the aim of

making a profit◆ Similar to sole trader - owner and business regarded as

the same - no legal entity - unincorporated◆ Unlimited liability◆ Partnership agreement can be made:

➢ Verbally➢ In writing➢ By implication - partnership is set up without

legally binding agreement.◆ Limited partnerships - allows partner/s to contribute

financially to business without partaking in running of partnership.

➢ Silent partner.

Advantages and disadvantages of partnerships

Advantages Disadvantages

- Low start up costs- Shared responsibility and

workload- Business continues operating

after one partner dies

- Unlimited liability- Liability for all debts, including

partner’s debts- Divided loyalty and authority- Possible disputes

➢ Incorporated■ Process companies go through to become a separate legal entity from

the owner/s (shareholders)● Can lease, sell and buy property● Exists after owner dies or changes● Can sue and be sued● Company name must be registered● Directors run company on behalf of owners● Limited liability

◆ Owner has gone through process to become separate legal entity from business

◆ Limits each owner’s financial liability to amount they have paid in business shares.

◆ Do not need to sell personal assets if business goes into liquidation.

◆ Double taxation - company and personal assets◆ Requires business to publish a yearly report of accounts◆ ‘Ltd’ signifies business offers limited liability

■ Classified as either:● Proprietary (private) companies

◆ Pty Ltd (P/L)◆ Incorporated business usually with 2 - 50 private

shareholders.◆ Usually small to medium sized, family owned.◆ Shares offered and sold privately.◆ Shareholders can only sell their shares to director

approved individuals.◆ Not listed on stock exchange◆ ‘Proprietary limited’ (Pty Ltd) found after name◆ Shareholders have limited liability◆ More complex to close business compared to sole trader

or partnership business.◆ All shareholders must agree to close company◆ Liquidator manages process of selling company assets,

paying debts and distributing funds from sales to shareholders.

Advantages and disadvantages of private companies

Advantages Disadvantages

- Shareholders have limited liability protection

- Shareholders need directors approval

- Access to finance- Complex to close

● Public companies◆ Shares are listed on Australian Securities exchange

(ASX)◆ Share can be bought/sold by the public◆ Large in size◆ E.g. Woolworths, Telstra and Westfield◆ Public companies must:

➢ At least 1 shareholder with no maximum number➢ No restrictions on transfer of shares➢ To issue a prospectus when it begins selling

shares.■ A prospectus is a document giving details

of a company and inviting the public to buy shares in it.

➢ At least 3 directors, 2 who live in Australia➢ The word ‘Limited’ or ‘Ltd’➢ Public heir financial accounts each year in an

annual report.

Advantages and disadvantages of public companies

Advantages Disadvantages

- Unlimited about of shareholders

- Shareholders have limited liability

- Shares bought and sold freely

- More access to capital

- Complex and costly process - must issue a prospectus

- May be too big or slow to make changes in business

➢ Government enterprise■ Government-owned and operated businesses. Aka government

business enterprises (GBEs)■ Usually large, employing many people around Australia■ Owned and operated by all levels of government: federal, state and

local■ E.g. NSW Trains, Australia Post and Medibank Private■ Public sector businesses■ Offer essential community services (i.e. health, education and roads)■ Established by Parliament Act which defines their powers and functions,

Government either wholly or partially owns GBE.■ Privatisation

● Transferring the ownership of a government business to the private sector

Factors influencing choice of legal structure

- size , ownership, finance

❖ As business expands, usually moves from unincorporated structure to incorporated structure

❖ Size of Business ➢ Small or micro businesses - sole trader or partnership

■ Businesses usually start at this size■ Micro businesses - up to 5 employees including the owner

➢ Growth and expansion of business requires more money. Risk of losses increases.

➢ Partnership or private company.■ New partners bring extra finance and skills.■ New partners or private shareholders■ Seek limited liability is expansion is rapid.

➢ National and transnational companies■ Business raises finances/money from sharemarket float

● Float : Raising of capital in a company through public sale of shares

■ Prospectus is issued● Prospectus: Document giving details of a company and inviting

public to buy shares.● Business is listed on stock exchange● Shares are sold to public

➢ No rigid formula for legal structure of business - company can choose.■ Business owner makes personal decision that suits conditions at the

time, personal preferences and the business environment.

❖ Ownership ➢ Sole trader - owner has complete control and ownership of business➢ Partnership - If owner wants to share ownership with others➢ Private company - Owner has large degree of control + protection of limited

liability■ Owner can control who becomes business shareholder■ Shareholders usually restricted to 50■ Owner of company must hold more than 50% of shares

➢ When company is floated, ownership divided among thousands of individual shareholders and few institutional shareholders

■ Original owner must hold more than 50% of all shares sold to retain ownership and control of business

❖ Finances ➢ Injections of finance needed for expansion of business

■ Used for new equipment, staff, etc.➢ Sole trader and partnership -

■ Unlimited liability puts them at risk● Will find difficulty in finding needed finance

■ Traditional sources of finance (e.g. banks) believe the finance request is high risk

■ Possibly source of finance - venture capital● Money invested in small, struggling businesses that have

potential● Investors take equity position in business (own part of it) +

provide supplementary finance■ Business owner may sell shares to raise finance (difficulty from asking

banks or financial institutions)➢ To overcome difficulties, business may become incorporated

■ Becomes either public or private company■ Legal structure does not guarantee needed finances will be obtained■ Limited liability - individuals more prepared to invest in business

structure.

Influences in the business environment

external influences – economic, financial, geographic, social, legal, political,

❖ Economic➢ Economic cycles - periods of growth (boom) and recession (bust) that occurs

due to fluctuations in the economy.➢ Cycle is complete after a recession or depression occurs, followed by prosperity

institutional, technological, competitive situation, markets

➢ Boom period - higher levels of employment, inflation, wage increase and levels of spending.

➢ Bust period - Higher unemployment levels, less likely chance of wage increase and decrease in spending levels.

■ Inflation may remain stable or fall.■ Higher chance of business loss.

➢ Influences a business’s capability to compete and customer’s willingness to spend.

❖ Financial➢ Deregulation of Australia’s financial system continues to change

■ Deregulation: Removal of government regulation from industry to increase efficiency and improve competition.

■ Process has resulted in the opening up of the financial industry to greater competition.

➢ Main finance source for businesses is debt finance.■ Influenced by interest rates.

➢ Increase of interest rates → business become more cautious when taking on more debt

➢ Drop in interest rates → business take on more debt

❖ Geographical➢ Factors impacting Australian business activity:

■ Australia’s geographical location (Asia Pacific)■ Economic growth of businesses in neighbouring countries■ Changing demographic factors (e.g. size of population, age, sex,

income and background)● Change in factors leads to change in demands

◆ Leads to change in products and services■ Globalisation■ Ageing baby boomer generation

● Fewer people will be working who will be needed to support the generation in retirement

● Shortage of skills in workforce● More demand in health an age-related services● Affects business activity

❖ Social➢ Changing beliefs, values and attitudes of society➢ Rapid changes and responses from businesses to meet consumer demands➢ Successful response → growth in business popularity + increase of

sales➢ Unsuccessful response → business stability at risk➢ Determines the sales of a business➢ Includes growing desire for economically friendly products, recognition of

workplace diversity and more family friendly workplaces.

❖ Legal➢ legal obligations and regulations in a business➢ Costly and time consuming➢ An understanding of the laws affecting businesses is essential➢ Governs all aspects of the business’s life

■ Affects obligations and conduct➢ Can face penalties if not complied➢ Statutes involving laws on:

■ Taxation■ WH&S practises■ anti-discrimination■ protection of the environment.

❖ Political➢ Regular elections can impact businesses➢ Policy of free trade (enormous impact).

■ Barriers of trade are removed.■ Tariff rates (tax on imported goods) have dropped in recent years.■ Some businesses unable to compete with cheaper imported goods,

leading to their closure.➢ Political influences include:

■ Taxation (GST)■ Social reforms (paid parental leave)■ Environmental management (Emissions trading scheme)■ Labour market reforms (decentralisation of wage determination)■ Process of deregulation and privatisation.

❖ Institutional➢ Three main influences ➢ GOVERNMENT

■ Federal obligations:● Payment of taxes for employees and businesses with company

tax and GST● Provision of employee superannuation● Observance of customer regulations.

■ State obligations:● Payment of payroll taxes● Abiding by relevant state legislation● Abiding by pollution controls

■ Local obligations:● Approve new developments and alteration applications● Fire regulations● Parking regulations

➢ REGULATORY BODIES■ Set up to monitor and review actions of businesses and consumers in

certain areas, as well as appropriate legislation.■ Include:

● NSW environment Protection Authority● NSW Fair Trading● Australian Securities and Investments Commission.

➢ OTHER INFLUENCES■ Include:

● Employment associations◆ Response to the growth of trade unions◆ Represent interests of employees

● Trade and industry associations◆ Represent larger groups of employers. Include ACCI,

National Farmers’ Federation, etc.◆ Trade Unions◆ Aim to improve working conditions and pay rates◆ Workplace agreements and new legislations have led to

a decline in membership.● Australian Securities Exchange

◆ Runs an sharemarket where companies can raise funds by issuing shares in the company.

❖ Technological➢ Improves the range of products of a business, as well as the efficiency and

productivity of a company➢ Hi-tech robots have led to greater productivity

■ Resulted in reduced operating costs and need for human staff➢ Reduced communication delays, greater interaction over great distances➢ Greater technology → Competitive company with higher chance of

success

❖ Competitive situation➢ Competition between firms/businesses to be the ‘market leader’ or to win

customer loyalty➢ Provides customer with more choices, qualities and variety of prices➢ Creates efficiency within business, leads to better quality of product/service➢ Businesses want to achieve competitive advantage over competition

■ Business’s ability to develop strategies that ensure it has an ‘edge’ over competitors for long periods of time

➢ Influenced by:■ Number of competitors■ Ease of entry into a market for a new business■ Local and foreign competition■ Marketing strategies employed by competitors.

❖ Markets➢ Finance is now more mobile and flows easily between countries➢ Capital (finance) flows to countries with investment opportunities and where

returns are favourable

internal influences – products, location, resources, management and business culture

❖ Products➢ Businesses create and sell products to satisfy the needs and wants of society,

in return for profit➢ Main influences:

■ Type of good/service produced affects internal operations of a business● Greater the variety of products, the greater the impact on the

business. Will need to expand operations and internal structures■ Product influence is reflected in type of business (service, manufacturer

or retailer).● Size of business will be based on range of products, level of

technology used, and volume of products being produced. More goods and services produced when the business is larger

❖ Location➢ Where the business is located.➢ If a business does not have a prime location, customers will not be able to see

or access the business. Results in loss of sales➢ Ideal locations for retail businesses:

■ shopping centres or main streets.■ Feature parking availability → more likely to attract traffic flow

-leads to increase in sales and profit.■ These locations are costlier to buy/rent.

➢ Businesses must consider:■ Cost – how much will it cost to buy/rent the location?■ Visibility – Can customers see me?■ Proximity to customers – can individuals access the business location?■ Proximity to suppliers – Mainly applies to companies that rely on bulky

raw materials or finished products. Ideal to locate premises near suppliers to reduce transportation costs.

■ Proximity to support services –Services that aid in central operations (e.g. accountants, solicitors and government agencies). No longer a defining location factor due to technological advancements.

❖ Resources➢ 4 main resources:

■ Human Resources : Employees of the business, usually its most important asset.

■ Information resources: Knowledge and data needed by a company. (e.g. market research, sales reports, legal advice, etc)

■ Physical resources: Equipment, machinery, buildings, raw materials. What is needed or used.

■ Financial resources: Funds used by a business to fulfil obligations to numerous creditors.

➢ By combining quantity and quality, a good or service which is demanded for by individuals is produced.

❖ Management➢ Technological advances and increased competition have flattened business

structures, meaning fewer levels of management.➢ Flatter organisational structure reduce levels of management

■ Gives more responsibilities to individuals➢ New organisational structures -

■ People centred■ Contemporary and forward thinking

■ Decentralised➢ Collaborative workplaces have more cohesive and inclusive business culture.➢ Different management style for the size and activity of business.

❖ Business culture➢ The values, ideas, expectations and beliefs shared by members of the

organisation.➢ Style of business is reflected in their culture

■ Found officially in policies, goals and slogans belonging to the business■ Also found in informal rules that guide employees on how to behave

(e.g. how to dress, language used and how to treat others)■ An appreciation of business culture means that it is easier to get tasks

done quickly or to initiate a change in routine■ Businesses with a healthy, well developed and strong culture are more

likely to succeed. Seen as a more positive and personalised workplace.➢ Consists of:

■ Values - shared among employees. Includes honesty, hard work, teamwork and innovation.

■ Symbols - Objects or events that symbolise something that the business sees as important.

■ Rituals, rites and celebrations - Routine behavioural patterns in a business’s everyday life. Social gatherings can encourage team building and help develop a sense of belonging.

■ Heroes - Successful employees who reflect the business’s values and therefore act as a role model for others.

Stakeholders ❖ Stakeholder : Any group or individual who is affected or is interested in activities of a business.

➢ E.g. Shareholder - partial owners of business who get a return❖ Businesses are expected to:

➢ Be enterprising➢ Comply with the law➢ Be socially just and ecologically sustainable in operations➢ Practice ethical management➢ Do the ‘right’ thing➢ Are sensitive to public opinion➢ Good corporate citizens➢ Can increase chances of success when pursuing goals that align with

interests/expectations of shareholders.

❖ Internal➢ Direct influence or interest in business and may directly affect business

decisions■ Owners

■ Shareholders● Purchase shares in a company, making them partial owners● Receive dividends (profits)● Have voting rights on major business decisions

■ Managers● Responsible for running a profitable and successful business● Must understand ethical/social responsibilities and legal issues● Introduce policies and procedures into the workplace

■ Employees● Manufacture or produce the product the organisation sells● Quality of product depends on skill and commitment to process● More motivated to work if needs are addressed by company

❖ External➢ Have an indirect influence or interest in the business and may be affected by

business decisions

■ Customers● Are informed and educated → more likely to seek

compensation if needs are not met● Prepared to run publicity campaigns to expose business

wrongdoings● Greater demand for environmentally friendly products● Businesses must assess consumer changes and wants + needs

■ Environment● Growing pressure for businesses to adopt ecologically

sustainable operating practises

■ Society/general public● Increasingly expect organisations to show concern for

environment● Expect businesses to be socially responsible

■ Government● Interest in business because;

◆ Receives taxes from profits, employee incomes and customer purchases

◆ Businesses provide jobs - employment levels and benefit payments affected

◆ Legislations and regulations of a business

■ Suppliers● Provide services to businesses, as well as raw materials and

finished goods.● Expect:

◆ To be paid in timely fashion◆ To receive regular orders

Business growth and decline

Stages of the business life cycle

- Establishment

- Growth- Maturity- Post-maturity

responding to challenges at each stage of the business life cycle

❖ Stages of growth and development a business can experience❖ At each stage, businesses are confronted with new challenges and presented different

opportunities.❖ Business owners must continually assess business’s position on the life cycle

❖ Stage 1 - Establishment➢ Considered birth of business➢ New businesses are vulnerable, need to establish solid foundation.➢ Not always easy to establish➢ Sales needed to generate income, used for expenses and to generate cash

flow (money coming in/going out)➢ Detailed planning can reduce risk of failure➢ Features and challenges

■ Goals - survival and setting a firm foundation for future growth■ Sales - Usually begin slowly and are somewhat erratic■ Profit - slow at first, can be a loss.■ Costs - high fixed costs. Premises, equipment, insurance, etc.■ Failure rate - very high.■ Main problems - lack of money cash flow shortages■ Business entity - usually sole trader or partnership

❖ Stage 2 - Growth➢ Sales increase and cash flow is usually positive➢ More emphasis on marketing➢ Features and challenges

■ Goals - Increase levels of sales and diversify business activities.■ Sales - New products introduced, unpopular products removed■ Profit - Increase due to more sales and fall in production costs■ Cash flow - Must be maintained to continue expansion.■ Costs - decrease in product and production costs.■ Employees - 10-15, can include family members.■ Management - Formal organisation structure. Introduction of

supervisors.■ Failure rate - lower, reduced competition.■ Main problems - losing control of business from rapid expansion, need

for finance to continue with growth.■ Risk level - reduced. Liabilities may become greater than assets if

borrowing increase too rapidly.■ Business entity - Incorporated; Private or public

➢ Main challenges■ Maintaining adequate cash flow■ Developing new products to satisfy customer needs + wants■ Managing a growing company.

➢ Methods of expansion■ Merger - When owners of 2 separate businesses agree to combine their

resources and form a new organisation■ Acquisition (takeover) - When one business takes control of another

business by purchasing a controlling interest in it.■ Types of mergers and takeovers:

● Vertical integration - When a business expands at different but related levels in the production and marketing of a product

● Forward integration - When a business integrates within a firm it sells to.

● Horizontal integration - When a business acquires or merges with another firm that makes/sells similar products. E.g. competition

● Diversification - When a business acquires or merges with a business in a completely unrelated industry.

❖ Stage 3 - Maturity Stage➢ More competition within the economy and reduced market share➢ More price competition➢ Sales and profits level off➢ Market experiences product saturation➢ Business focuses on maintaining profit levels➢ Features and challenges

■ Goals - Maintain profits at pre-existing levels

■ Sales - Rate of growth slows and flattens out; plateaus. Also with profit■ Marketing - Advertising to maintain customer and brand loyalty.■ Costs - Must control costs/keep costs down■ Management - leadership is crucial. Need to redefine business’s

objectives. Entrenched hierarchy.■ Main problems - Rate of sale increases begins to falter, loss of initial

enthusiasm.■ Business entity - Usually no change in beginning. If situation

deteriorates, parts of business may be sold➢ Main challenges

■ Plateauing of sales - Business will require change to marketing strategies (not only to maintain customers but to acquire new ones), greater product range

■ Financial management - efficiency needs to be improvised by keeping costs under control. Profit margins may decrease if not done so

■ Complacent of management and staff - New business objectives must be defined, hierarchy needs to be reorganised and a team approach introduced

❖ Stage 4 - Post Maturity➢ 3 possibilities for a business at this stage

■ Steady State● Keep business operating at the level it has been in the maturity

phase;focus on service■ Renewal

● Increasing sales and profits due to new growth areas; expands; new products and services

■ Decline● Products become obsolete, profits fall and there is poor cash

flow● Final business phase could be cessation.

➢ Key to long term success - producing what the customers demand for➢ Main challenges

■ Increasing sales - Businesses must:● identify new markets● develop new products● INvest funds into market research to determine customer wants● Identify change in trends

■ Raising capital to invest in research and development - Costs increase due to restructuring, research and development, and marketing. Cash flow must be managed due to decreasing sales and loss of products, but must also invest in development of new products and markets

■ Implementing an organisational development program.

■ Features and challenges● Goals - Increase sales, cash flow and profits. Sell of any

unprofitable assets and undertake further diversification and integration

● Sales - Increase over time● Profit - Improves over long term● Costs - Research and development, marketing, integration and

restructuring will be high in short term● Main problems - Sales may not be as high as hoped due to

inaccurate forecasts, inappropriate marketing strategies.

factors that can contribute to business decline

❖ 2 main causes:➢ Lack of management expertise - When a business either fails to prepare a

business plan or fails to keep on modifying an existing plan as the environment change

➢ Lack of sufficient money - Undercapitalisation. Without sufficient funding and a poor cash flow, the business will not be able to purchase stock and materials. Leads to losing sales and falling profits.

■ Undercapitalisation: lack of sufficient funds to operate a business normally.

❖ Other causes:➢ Lack of adequate cash flow➢ Failure to plan➢ Increased competition➢ Lack of management skills➢ Failure to adapt to changes

❖ Managing cash flow:➢ Cash must flow in and out of the business - can’t survive without cash

voluntary and involuntary cessation – liquidation

❖ Voluntary cessation - when a business ceases to operate of their own accord (chooses to close)

➢ Occurs when the owner wishes to retire, wants a change in lifestyle, or has died (SOLE TRADER)

➢ Business failure - if owner wishes to prevent accumulation of debt, they will close business on their own accord.

❖ Involuntary cessation - when the owner is forced to cease trading by creditors or the business

➢ Creditors are people or business who are owed money by the company■ E.g. banks, suppliers, shareholders, employees.

❖ Bankruptcy➢ Declare bankruptcy - declaration that the business or person is unable to pay

their debts.■ Voluntary or involuntary

➢ For Sole traders and partnerships➢ STEPS:

■ Business declares bankruptcy■ Business or creditors apply to court for a bankruptcy order■ Court appoints representative

● Money owed to business is collected● Personal assets and business is sold

■ Realisation - converting assets into cash● Money is divided among creditors

❖ Voluntary administration➢ When an independent administrator is appointed to operate the business in the

hope of trading out financial problems.➢ If successful, business resumes trading➢ If unsuccessful, business goes into liquidation

❖ Liquidation➢ When an independent and qualified person/group - the liquidator - is appointed

to take control of a business in order to sell its assets to pay the creditors➢ Any surplus cash is paid to owners➢ Company in liquidation can also be in receivership - when a business has a

receiver take charge of the business’s affairs.■ Appointed by creditors or the Court■ Business may not be wound up if in receivership

➢ Equivalent of bankruptcy➢ Occurs as company can’t pay debts

➢ Two types of liquidation:■ Creditors (voluntary) liquidation.

● Occurs in one of two ways:◆ Creditors vote for liquidation following a voluntary

administration.◆ Shareholders agree to liquidate the company and appoint

a liquidator.■ Court (involuntary) liquidations.

● Court appoints liquidator after an application has been made by creditors, shareholders or company director

➢ Liquidators main functions:■ Take possession and realise (convert into cash) company assets■ Report to creditors the company’s financial affairs■ Determine and pay debts owed to creditors■ Dissolve the company

➢ Problems for stakeholders due to liquidation ■ Company directors

● Possible loss of position● Possible loss of personal assets

■ Creditors (unsecured)● Mant not recover any money owed● May receive part payment for money owed if left over money

■ Employees● Loss of jobs● May be paid outstanding wages if funds are left over

■ Shareholders● Unlikely to receive any payment● Liquidator can request holders of unpaid shares to pay

outstanding amounts■ Society/economy

● Loss of production● Personal and social difficulties due to job losses● Loss of economic confidence

BUSINESS MANAGEMENT

DOTPOINT NOTES

Nature of management

features of effective management

❖ Manager: Someone who coordinated the business’s limited resources in order to achieve specific goals

❖ Management definitions:➢ Traditional: Process of coordinating a business's resources to

achieve its goals.■ 4 main resources available to a business are:

● Human resources - employees of the business● Informational resources - knowledge and data

required by the business● Physical resources - equipment, machinery and

buildings● Financial resources - funds used to meet obligations

of various creditors➢ Contemporary: Process of working with and through other people to

achieve the goals of the business in a rapidly changing environment.■ Key aspects of the management process

● Working with and through others● Getting the most from limited resources (efficiency)● Coping with rapidly changing environment● Balancing efficiency and effectiveness● Achieving business goals

Features of effective management❖ Planning - the preparation of a predetermined course of action for a

business.➢ Refers to process of setting objectives and finding methods to

achieve them❖ Organising - Structuring of the organisation to translate plans and

goals into action❖ Leading : Process of influencing or motivating people to work towards

the company’s objectives❖ Controlling - compares what was intended to happen with what has

actually occurred.

❖ Needed for business to succeed❖ Effective management joins the efforts of employees and directs them on

how to achieve business goals❖ Influences success or failure of a business.

skills of management– interpersonal, communication, strategic thinking, vision, problem-solving, decision-making, flexibility, adaptability to change,

❖ Interpersonal (people)➢ Skills needed to work and communicate with other people and to

understand their needs➢ Centre on the ability to relate to people and to appreciate their needs➢ Ability to communicate, motivate, lead and inspire

❖ Communication➢ The exchange of information between people; the sending and

receiving of messages

reconciling the conflicting interests of stakeholder

➢ Needed for long term survival of business➢ Managers who are good communicators will easily influence others➢ Nonverbal communication - any message not written or spoken.

Usually body language❖ Strategic thinking

➢ Allows a manager to see the business as a whole and to take the broad, long term view

➢ Lets the manager see the ‘big picture’➢ Allows manager to:

■ Visualise how work teams and individuals interrelate■ Understand the effect of actions on the business■ Gain insight into an unknown future

➢ Thinking about the business’s future and future goals❖ Vision

➢ Clear, shared sense of direction that allows people to attain a common goal

➢ Manager must have clear vision for future of the business➢ To share their vision, managers must show leadership

■ Ability to influence people to set and achieve goals❖ Problem solving

➢ Searching for, identifying and implementing a course of action to correct an unworkable situation.

➢ Steps to solving problems:1. Identify the problem and causes2. Gather relevant information3. Develop alternative solutions4. Analyse the alternatives5. Choose one alternative and implement it6. Evaluate the solution.

❖ Decision-making➢ Process of identifying options available and then choosing a specific

course of action to solve a problem➢ Effective decision making means making decisions in time frames➢ Manager must assess risk involved if decision is implemented

❖ Flexibility and adaptability to change➢ Flexible - being responsive to change and able to adjust to changing

circumstances➢ Managers must anticipate and adjust to changing circumstances➢ Proactive rather than reactive

■ Proactive - Forward thinking to achieve objectivesReconciling the conflicting interests of stakeholders (135)

❖ Stakeholders - groups or individuals who interact with the business❖ Businesses expected to act responsibly and accountable❖ Reconciling conflicting interests ensures long term growth and survive❖ Stakeholders place demands on businesses

➢ May be compatible e.g. quality products at reasonable prices➢ Some expectations are incompatible; oppose each other

■ Results in some stakeholders being dissatisfied❖ Managers must attempt to satisfy as many stakeholder expectations as

possible➢ Must also act in responsible manner

❖ Strategies:➢ Place emphasis on environmental practises

■ Benefits society and shareholders

➢ Management of stakeholder value❖ Employee share acquisition schemes

➢ Allows eligible employees to buy shares of the business at a reduced price

➢ Aligns interests of both groups as employees are then shareholders❖ Offer training and professional development to employees

➢ Greater efficiency → reduces production costs➢ Raises profits → pleases shareholders➢ Higher quality product

❖ Responsible, informed managers❖ Stakeholder engagement - businesses sharing information with and seeking

input from stakeholders and involving them in decision making.

achieving business goals– profits, market share, growth, share price, social, environmental– achieving a mix of the above goals– staff involvement – innovation (INTRAPRENEUR), motivation, mentoring, training

Goals benefit managers by...❖ Serving as targets❖ Measuring sticks - Benchmark against which a business can measure

performance❖ Motivation❖ Commitment

SMART goals❖ Specific❖ Measureable❖ Achievable❖ Realistic❖ Timebound

Achieving business goals❖ Profit

➢ Profit maximisation - When there is a maximum difference between the total revenue (sales x price) and total costs being paid out

➢ Done through: Increasing sales■ Lowering price so customers purchase more■ Marketing campaigns

❖ Market share➢ Business’s share of the total industry of sales for a certain product➢ Goals for businesses dominating the market

■ Small market gains - large profits➢ Promotion

■ Methods used to inform, persuade and remind a market about a business’s products

■ Convinces new customers to try products while maintaining established customer loyalty

❖ Growth➢ Internal

■ employing more people■ increasing sales■ new equipment■ establishing new outlets

➢ External■ Merging with or acquiring other businesses■ Merger - two businesses combine■ Acquisition - One businesses purchases another

➢ Some SME owners decide not to expand businesses to:

■ Avoid added pressure■ Keep control of business operations■ Maintain personal contact with customers

❖ Share Price➢ Share - Part ownership of a business

■ Reasons why shares are bought:● To sell them at a higher price● Shareholder is entitled to part of company’s profits

(dividends)➢ Successful businesses maximise shareholder returns

■ Keep share price rising■ Paying back good dividends

❖ Social➢ Goals benefitting the community while achieving financial goals➢ Social goals:

■ Community service - Sponsorship of community events and programs

■ Provision of employment - Small businesses often employ family members who would otherwise be unemployed

■ Social justice - Set of policies ensuring employees and community members are treated fairly and equally.

❖ Environmental➢ Sustainable development - balance between economic and

environmental concerns■ When needs of population are met without endangering

ability of future generations to meet their needs➢ Increasing awareness of environmental issues from society

Staff Involvement❖ Involving employees in the decision making process and giving them

needed skills and rewards❖ Employees are a business's most important resource❖ Business must provide work environment that maximises employee

involvement and labour productivity➢ Measures how much an employee can produce in a set period of

time❖ Allows employees some authority in decision making

➢ Encouraged to accept responsibility for their work❖ Influences business performance - employees gain confidence

➢ Show determination and initiative in reaching goals➢ Solves organisational problems

❖ Must recognise importance of the following:➢ Innovation

■ When a new idea is applied to improve a preexisting product■ Allows for competitive advantage■ Intrapreneurs - employees who take on an entrepreneurial

role in a business● Staff must be encouraged to be innovative● Practises include:

◆ Rewarding employees for profitable innovative ideas

◆ Management that does not micromanage people

➢ Motivation■ Process that directs, energises and sustains a person’s

behavior - what drives people■ Motivation techniques:

● Lead by example● Encourage suggestions● Clear expectations● Communication● Positive reinforcement● Providing a safe work environment● Delegate responsibility

■ Money works as a short term motivator■ Good managers must be good motivators

➢ Mentoring■ Process of coaching, tutoring and modelling acceptable

behaviour.● Mentor - someone who helps a less experienced

employee◆ usually a more experienced person◆ Act as a guide

■ Passes on acceptable behaviours and attitudes■ Teaches individuals what is expected of them■ Assists with training and development■ Transfer of skills and abilities■ Provides career and personal support

➢ Training■ Process of teaching staff how to perform their job more

efficiently by enhancing knowledge and skills■ Creates multi skilled employees who are able to:

● Adapt to changing technological environments● Provide better customer service● Show greater commitment to the business

■ Improves productivity■ Done through:

● Informal, on the job training● Formal off the job training

◆ Lectures and classroom teaching◆ Conferences and seminars

■ Investment in the human capital of the business, rather than an expense.

Management approaches

Classical approach- Management

as planning, organising and controlling

- Hierarchical organisational structure

- Autocratic

❖ Classical approach : Stresses the best way to manage and organise workers in order to improve productivity (output)

Management as planning❖ Planning: preparation of a business’s predetermined course of action.❖ Levels of planning:

➢ Strategic (long-term)■ Planning for the next 3-5 years■ Used to determine the business’s location in the market and

achievements compared to competitors

leadership style ➢ Tactical (medium-term) planning

■ Usually 1-2 years■ Flexible and adaptable - business responds quickly to change■ Helps implement a strategic plan.■ How goals will be achieved through allocation of resources.

➢ Operational (short-term) planning■ How the business operates in the short term■ Management controls daily operations contributing to short

term goals■ E.g. daily production schedules

Management as organising❖ Organising: Structuring of the business to turn plans and goals into actions❖ Organising the financial, human and material resources❖ The organisation process:

➢ The range of activities that turn business goals into reality.1. Determining the work activities

■ Must be broken down into smaller steps

2. Classifying and grouping activities■ Similar activities are grouped together.■ Improves efficiency■ E.g. grouping activities into departments and allocating

employees to each section

3. Assigning work and delegating authority.■ Determine who is carrying out the work■ Ensuring the delegated people carry out the process

Management as controlling❖ Controlling: Evaluating performance and taking action to ensure that

objectives are achieved.❖ Compares what was intended to happen with what occurred❖ Control process:

1. Establish standards lined with business goals and influences2. Measure performance and determine how comparisons against

standards are made3. Take corrective action to ensure business goals are met

Hierarchical organisational structure.❖ Management hierarchy: Arrangement providing increasing authority at

higher levels➢ Senior management has more responsibilities compared to lower

levels.➢ Management hierarchy:

➢ Traditional hierarchical structures - people grouped according to their specialised functions.

Autocratic Leadership style❖ Autocratic leadership style : When the manager makes all decisions, dictates

work methods and constantly checks employee performance➢ E.g. army officer during military exercises.

❖ Provides clear instructions without listening to or allowing employee input❖ Controlling, expect obedience❖ Provides more negative feedback❖ Can be effective during a crisis or when employees lack skills❖ Does not encourage best performance

❖ Advantages➢ Directions are clear with less chance of uncertainty➢ Control is centralised - time is used efficiently➢ Problems are dealt with quickly due to no discussion➢ Hierarchical structure - outcomes match management objectives

❖ Disadvantages➢ No employee input - do not feel valued

■ Ideas are not encouraged or shared➢ Ignores importance of employee motivation➢ Conflict increases

Behavioural approach

- Management as leading, motivating, communicating

- Teams- participate/

democratic leadership style

❖ Behavioural approach: Stresses that people/employees are the main focus of the way a business is organised

❖ Belief that successful management depends on a manager’s ability to work with diverse people

❖ Features:➢ Employees are the most important resource➢ Economic and social needs of employees must be satisfied➢ Employee participation in decision making

Management as...❖ Leading : influencing or motivating people to work together to achieve a goal

➢ Managers must should empathy and be good listeners➢ High employee expectations of their ability to implement ideas

➢ Successful leaders:■ Concentrates on employee needs■ Delegates tasks■ Leads by example

❖ Motivating:➢ Encourages an individual’’s behaviour➢ Motivated workers perform at a high level➢ Efficient managers must motivate employees to perform at a higher

level■ Motivating work practices■ Including them leads to sense of involvement

● Sense of importance → motivating force■ Recognition, self worth and positive reinforcement - important

as external factors (e.g. pay rates)➢ Must foster employee participation

❖ Communicating➢ Exchanging information - sending and receiving messages.➢ Complex➢ Good communicators + ability to share thoughts and plans =

influence over others■ Motivates

➢ Leads to higher performance levels of employees and businesses

Teams❖ Teamwork : Involves individuals interacting and coordinating their work

towards a common goal❖ Functioning teams = superior performance❖ Managers must understand team dynamics❖ Teams lead to flatter organisational structures

➢ Leads to greater responsibilities of individuals❖ Managers do not control, only facilitate

Participative or democratic leadership style❖ Leadership style where managers ask for employee suggestions and

seriously considers them when making decisions❖ Behavioural approach❖ Leaders share decision making authority with employees❖ Effective when business environment is undergoing change❖ Advantages:

➢ Communication is 2-way process➢ Positive employer/employee relations➢ High motivation and job satisfaction - employees are included➢ Employees develop more skills➢ High level of trust

❖ Disadvantages:➢ Time consuming to reach decisions➢ Role of management may be weakened if employees have too much

power➢ Internal conflict➢ Not all employees want to contribute

Contingency approach

- Adapting to changing circumstances

❖ Contingency approach : stresses the need for flexibility in management practices to suit changing circumstances.

❖ No situations are the same - need their own solution➢ Managers must be adaptable to solve problems

❖ Urges managers to blend various management approaches and practices

Management process

Coordinating key business functions and resources

❖ Key functions are interdependent➢ Work best when they work together

❖ Interdependence : Mutual dependence business functions have on one another. Support for the others

❖ Key business functions:➢ Operations➢ Marketing➢ Finance➢ Human resources

❖ Functions should be coordinated - common purpose❖ Divided into departments in large businesses

➢ Division: separation of key business functions into departments.❖ Functions often overlap in small businesses

Operations- Goods and/or

services- The

production process

- Quality management

❖ Operations : The business processes that involve transformation or production.

➢ Applies to manufacturing and service sector❖ Goal of all businesses - maximise profit

➢ Achieved through production of goods and services❖ Operations management: All activities managers engage in to produce

goods or services.➢ Creating, operating and controlling the process that takes input and

creates output for customers❖ Production involves bringing together numerous resources to create finished

products➢ Resources - finance, equipment, management, technology and

people❖ Operations management function affects business’s competitive position

➢ Influences quality, cost and availability of goods and services■ Affects business’s ability to achieve other goals

GOODS AND SERVICES❖ Manufacturer transforms inputs into tangible products (tangibles)❖ Tangibles : Goods or physical products that can be touched

➢ E.g. bread, clothing, cars❖ Production process and consumption are not linked - little customer

involvement in production❖ Service organisations transform input into services (intangibles)❖ Intangibles: includes services that cannot be touched

➢ E.g. training course, skills❖ Customer may need to be present when service is being delivered

➢ E.g. haircut❖ Businesses provide mix of goods and services

THE PRODUCTION PROCESS

Three key elements:

❖ Inputs: resources used in the transformation (production) process➢ May come from suppliers or are already owned by business.➢ Divided into those those transformed and those that are transforming

resources■ Transformed resources: Inputs that are changed or converted

in the operations process● Includes:

◆ Materials - basic elements◆ Information - knowledged gained from

research◆ Customers - transformed resource when their

choices shape inputs.■ Transforming resources: Inputs that carry out the the

transforming process.● Includes:

◆ Human resources - employees◆ Facilities - The factory or office and machinery

used during operation process

❖ Transformation Processes➢ Transformation: conversion of inputs (resources) into outputs (goods

and services)■ Includes physical changes and conversions into services

➢ Operations manager creates, operates and controls the transformation process

➢ Transformation process in manufacturing businesses■ Involves different kind of processing - some transform basic

resources into final goods, other types involve step-like transformations across various businesses.

● E.g. for a business manufacturing building products, the transformation process includes design,

manufacturing and quality control

➢ Transformation process in service businesses■ Less physical or visible (intangible nature)■ Includes knowledge, inputs, expertise, etc.■ Reasons transformation process in service businesses is

different:● Outputs are intangible● Heavy reliance on customer interaction in determining

output.

Differences between manufacturing and service businesses

Manufacturing businesses Service businesses

- Mass produced tangible items

- Close to suppliers- Unskilled workers - low

workforce costs

- Intangible - customised to suit individuals

- Close to their markets- Skilled workers - high labour

costs

❖ Outputs : The end result of a business’s efforts - the service or product delivered or provided.

➢ Must be responsive to customer demands

QUALITY MANAGEMENT

❖ Strategy used by a businesses to ensure products meet customer expectations

❖ Quality: Degree of excellence of goods or service and its fitness for a stated purpose

❖ Benefits of quality management practices:➢ Reduces waste and defects➢ Reduced costs➢ Improved reputation and customer satisfaction➢ Increased productivity

❖ Quality control➢ Use of inspectors at various points in production process to check for

problems and defects➢ Measured in relation to benchmarks

❖ Quality assurance➢ Use of a system so that a business achieves set standards in

production❖ Total quality management

➢ Ongoing, business-wide commitment to excellence that is applied to every aspect of the business’s operation

➢ Includes:■ Employee empowerment

● Quality circles : groups of employees who meet to solve issues related to quality

■ Continuous improvement● Constant evaluation and improvement of work

methods■ Improved customer focus

● Focus on customer requirements

Marketing- Identification

of the target market

- Marketing mix

❖ The process of planning and executing the conception, pricing, promotion and distribution of ideas, goods and services to create exchanges that satisfy individual and organisational objectives

➢ System of interacting activities designed to plan, price, promote and distribute products to customers.

❖ Brings buyer and seller together to make sale❖ Businesses must exceed customer expectations, and not only meet them❖ 7 tips

Target Market

❖ Group of customers with similar characteristics who presently, or may in the future, purchase the product.

❖ Types of broad approaches:

➢ Mass marketing approach■ Where the seller mass-produces, mass-distributes and

mass-promotes one product to all buyers.■ Seeks large range of customers■ Develops single marketing mix or product and directs it at the

entire market■ Little to no variation to the product, one promotional program

for everyone

➢ Market segmentation approach■ When total market is subdivided into groups of people who

share one or more common characteristics● Based on 4 elements: Demographic, geographic,

psychographic, behavioural■ Market is segmented so marketing strategies can be better

directed to specific groups● Aim: increase sales and profils by responding to the

desires of the target market■ Approach allows businesses to:

● Use marketing resources more efficiently● Better understand consumer buying behaviour within

market● Collect data to make comparisons within target market● Refine influential marketing strategies

■ Sometimes able to identify primary and secondary target market

● E.g. primary market= 18-25 yr olds, secondary = 26-40

➢ Niche market approach■ A narrowly selected target market segment

Marketing Mix

❖ Combination of the 4 elements of marketing (product, price, promotion, place) - that make up the marketing strategy

❖ Elements of marketing:➢ Products - good or services

■ Tangible and intangible➢ Packaging preserves, inform, protect and promote product

■ Product branding - marketing. Includes brand logo➢ Pricing

■ Ways to calculate price:● Cost-based● Market based● Competition based

➢ Promotion■ Methods used to inform, persuade and remind customers

about a business’s products

Finance- Cash flow

statement- Income

statement- Balance sheet

❖ Accounting: Managerial and administrative tool for recording financial transactions, so that a summary of what happened to business money can be traced.

❖ Finance: How a business funds its activities

➢ Businesses must be able to manage its borrowings and cost management

❖ Financial managers must:➢ Manage cash flow➢ Ensure enough income in the form of cash➢ Ensure enough money is saved for unexpected challenges

(contingencies)■ Contingencies: Unanticipated events leading to financial

difficulty.● Places businesses under financial pressure

❖ Business need good credit rating➢ Individuals are likely to lend money

■ Used to expand operations and overseas, and update technologies

➢ Determined by financial organisations■ Assess capacity to repay debt and manage finances

❖ Important to internal and external stakeholders❖ Provides information on a business’s:

➢ Cash flows➢ Trends in earnings, borrowing and sales

❖ Financial statement: reports that summarise transactions over a period of time

➢ E.g. cash flow statements, income statements and balance sheets➢ Allows owners to determine whether cash flow is sufficient and

whether or not the business is trading profitably

CASH FLOW STATEMENTS

❖ Cash flow statement: statement indicating the movement of cash receipts (inflows) and cash payments (outflow) from transactions over a period of time.

❖ Describe whether a business has a good cash flow - liquidity➢ Liquidity: amount of cash a business has access to and how readily it

can convert its assets into cash so that debt can be paid❖ Inflows:

➢ Cash and credit sales➢ Other income (e.g. interest from investments)

❖ Outflows:➢ Payment for stock + expenses

❖ Provides information on the timing of payments and receipts on time❖ Statements are closely related to budgets❖ Allows businesses to control finances and plan strategies for financial

benefit❖ Divided into three categories:

➢ Cash from operating activities■ Provisions of goods and services.■ Inflows and outflows relating to main business activity

➢ Cash from investing activities■ Related to the purchase and sale of investments and

noncurrent assets➢ Cash from financing activities

■ Related to the acquisition and repayment of debt and equity finance

INCOME/REVENUE STATEMENT

❖ Income statement: summary of the income earned and the expenses incurred over a period of trading.

➢ Allows users of information to see exactly how much money has come into the businesses as revenue, how much has gone out as expenditure and how much has been derived as profit.

❖ Features of an income statement :

➢ Heading stating the period of time over which the business was operating for the statement

❖ Features:➢ Revenue or income

■ Net sales: Amount of revenue a business earns from sales when the effects of sales returns are deducted

● Income of sales■ Stated at top of income statement

➢ Cost of goods sold (COGS)■ Cost of goods sold (COGS): Value of stock that a business

has sold to its customers

●◆ Opening stock: value of stock (inventory) that

the business has at the start of the financial year.

◆ Closing stock: Value of stock on hand at the end of the financial year

➢ Gross profit

■➢ Expenses

■ Expenses: costs■ Types of expenses:

● Selling◆ E.g. commision, salaries, advertising

● Administrative◆ E.g. stationary, rent, rates, insurances

● Financial◆ E.g. interest and lease payments, dividends,

insurance payments➢ Net profit

■ Net profit: Amount remaining when operating and non-operating expenses are deducted from gross profit.

■

BALANCE SHEETS

❖ Balance sheet : Shows a business’s assets and liabilities at a particular point in time

➢ represents the net worth of the business.❖ Must always balance❖ Sum of both left hand side (assets) must total the sum of the right hand

(liabilities and owner’s equity) side❖ Equation:

➢ A = L + OE■ Assets = Liabilities + Owner’s Equity

❖ Balance sheet items➢ Assets

■ What the business owns■ Assets : Items of value owned by the business that can be

given a monetary value■ LHS

● Types of assets:◆ Current - assets that can be used up or turned

over within 12 months➢ e.g. cash, inventory

◆ Non-current - assets that have an expected

life longer than 12 months➢ e.g. buildings, land

◆ Intangible - Items of worth with no physical substance

➢ Liabilities■ What the business owes■ Liabilities: Items of debt owed to other organisations (e.g.

suppliers, banks) and include loans, credit card debt and mortgages.

■ RHS● Types of liabilities:

◆ Current - expected to be repaid within 12 months

➢ E.g. accounts payable◆ Non-current - long term debt items.

➢ E.g. mortgage➢ Owner’s equity

■ Owner’s equity: The funds contributed by the owners to establish and build the business.

■ RHS● RETAINED PROFITS● OWNER’S CAPITAL

Human resources- Recruitment- Training- Employment

contracts- Separation -

❖ Human resource management (HRM) : Effective management of the formal relationship between the employer and the employees

❖ Businesses must balance regard for employees with concern for success❖ Businesses rely on quality of employees to achieve business goals

Human resource Cycle

voluntary/involuntary

❖ Covers all stages in the process of employing staff

Stages:❖ ACQUISITION

➢ Hiring employees = recruiting and selecting➢ Activities:➢ Planning

■ Identifying staffing needs■ Developing strategies to meet a business’s future staffing

needs■ Exact nature of job must be determined before recruitment■ Job analysis: A study of each employee’s duties, tasks and

work environment● Detailed job advertisement● Consists of:

◆ Job description : Written statement describing the employee’s tasks and responsibilities in the job

◆ Job specification: List of qualifications needed to perform a job in terms of education, skills and experiences

➢ Recruitment■ Recruitment : Process of finding the right individuals to apply

for a job vacancy.■ Done by:

● Internal recruitment : Filling a job vacancy with present employees

◆ E.g. MSJ - Internally recruited Ms Papas for the role of HSIE coordinator, rather than bringing in a new teacher

● External recruitment : Filling job vacancies with people from outside the business

➢ Selection

■ Employee selection: Gathering information from each applicant for a positing, then using it to choose the most appropriate applicant.

● Conducted through:◆ Written application - resume◆ Interviews◆ Testing◆ Background checks - referees

❖ DEVELOPMENT➢ The employer develops, trains and improves employees’ skills and

abilities■ Training: Teaching staff to perform their job more efficiently

and effectively.■ Development : Activities preparing staff to take greater

responsibility➢ Benefits for employees:

■ Opportunity for promotion■ Improved job satisfaction■ Improved chances of future employability

➢ Benefits for employers:■ Higher productivity■ Reduced costs■ Easily retained stadd■ Business goals met

➢ Technology creates the need for ongoing training➢ Types of training:

■ Formal off-the-job● Industry courses

■ Informal on-the-job● coaching

■ Action learning - learning by experience➢ Training is an investment

❖ MAINTENANCE ➢ The employer motivates employees to remain within the business➢ Use of monetary (e.g. bonuses) and non-monetary rewards (e.g.

team outing days)➢ Employment contract : Legally binding agreement between an

employer and employee - obligations➢ Employer obligations:

■ To provide work■ Payment of income■ Care for the safety of employees

➢ Employee obligations:■ Use of care and skill■ Obey reasonable commands■ Act in the interest of the employer

➢ Minimum employment standards (part/full time)■ Hours of work■ Parental leave - 12 months■ Community service leave■ Notice of termination and redundancy

➢ Award: Legally binding agreement setting out the minimum wages

and conditions for a group of employees■ Sets out minimum wages and conditions

➢ Enterprise agreements : Agreements made between an employer and a union, acting on behalf of its employees.

■ Possibility of improved pay

❖ Separation➢ The ending of the employment relation➢ Types of separation:

■ Voluntary● Employee chooses to leave the business of their own

free will● Includes:

◆ Retirement◆ Resignation◆ Redundancy

➢ Job no longer exists➢ Voluntary redundancy - nominate

themselves to leave - offered package■ Involuntary

● Employee is asked to leave the business against their free will

● Includes:◆ Retrenchment

➢ Employee is dismissed because there is not enough work to justify their pay

◆ Dismissal➢ Behaviour of an employee is

unacceptable➢ Business terminates the employee’s

employment contract■ Summary dismissal - dismissed

without notice■ Dismissal on notice - given

notice. No longer performs their job satisfactorily.

➢ Unfair dismissal : Employee is dismissed for discriminatory reasons

◆ Redundancy➢ Voluntary - business is forced to decide

which employees are made redundant

Ethical business behaviour

❖ Business ethics : Application of moral standards to business behaviour❖ Standards defining acceptable and unacceptable behaviour

➢ Will provide a safe work environment and will not provide misleading product descriptions

❖ Unethical behaviour → negative publicity and loss of reputation❖ Triple bottom line : Economic, environmental and social business

performance❖ Ethical issues

➢ Fairness and honesty■ Businesses are expected to not provide deceptive or

misleading information - obeys all regulations■ Employees are expected to be dealt with fairly and honestly

■ Honours commitment➢ Respect for people

■ Treats staff with expect, expects the same● Respecting confidentiality agreements

➢ Conflict of interests■ Conflict of interests: When a person takes advantage of a

situation for their gain rather than the business’s interests■ Difference between gifts and bribes

● Bribes lead to business corruption➢ Financial management

■ Must reflect business objectives and interests of shareholders■ Valuing of assets - can be overestimating expenditure and

underestimating revenue - ethical issue■ Record should be audited.

➢ Truthful communication■ Advertising - not being misleading or false

Encouraging ethical business behaviour❖ Corporate code of conduct : Set of ethical standards for managers and

employees to abide by.

Management and change

Responding to internal and external influences

❖ Long term survival of business = managing change❖ Change : Any alteration in the internal or external environments

➢ E.g:■ Consumer tastes■ Production methods■ Products sold

❖ Organisational change :Adoption of a new idea or behaviour resulting in a difference in the business operation over time

❖ Must be embraced - is not easy being forced to adapt❖ Responding to changes - businesses will:

➢ Undergo organisational change■ Outsourcing, flatter structures and work teams

➢ Modify corporate culture➢ Implemented new organisational skills➢ Developed different work patterns

❖ Change - aspect of strategic planning➢ Leads to profitable opportunities➢ Determines a business’s competitive advantage➢ Opportunities

❖ Successful managers anticipate and adjust to change➢ Proactive - not reactive

■ Proactive: To initiate change rather than reacting to events■ Reactive : Waiting for a change to occur before responding to

it❖ Change must renew and strengthen a business

➢ Must occur at a pace accepted by the business❖ External and internal changes❖ Forms of change:

➢ Major (transformational)■ Complete restructure throughout the business■ New organisational structure (usually flatter)

■ New work procedures● Greater use of technology

■ Changed employee structure

➢ Minor (Incremental change)■ Results in minor changes involving few employees

● E.g. Change from using a fax to using email to send information

❖ Both changes may be implemented simultaneously❖ Employees impacted by change - should be involved in the process

Structural responses to change❖ Structural responses to change : Changes in the business structure

➢ I.e. organisational chart❖ Introduced to streamline business operations, improve efficiency and

empower employees❖ Main structural changes:

➢ Outsourcing■ Outsourcing: Contracting of organisational operations to

outside suppliers■ Allows businesses to focus on core activities■ Rearranged to employ less full-time employees

● Use people from outside the business

POSITIVES NEGATIVES- Keeps costs low- Able to produce

products more efficiently

- Restructure of business- Loss of jobs- Loss of control of specific

business function

➢ Flat structures■ Middle management positions abolished■ Transforming from former, hierarchical structures

with various levels → less formal, loose structures■ Characteristics:

● Sharing best practice methods● Focus on business’s needs● Supportive learning environment

■ Longer chain of command, wider span

➢ Work teams■ Allows businesses to be more flexible and responsive■ Work closely with flatter structures■ Motivates employees to be creative, develop broader view of

goals, transform workplace cultures, practices, operations and productivity levels.

❖ Impact of change on business culture➢ Changes should reflect business culture➢ New external environments may leads to new business culture➢ Businesses can operate successfully if culture + external

environment fits.❖ Impact of change on human resource management

➢ Organisational change impacts all employees➢ Adjustments to HRM function

■ Improves effectiveness of changes made elsewhere➢ Main HRM changes:

■ Training must be offered to existing employees in the areas of teamwork, problem solving and decision making

■ Flexible working arrangement to attract and maintain skilled employees

■ Recruitment + selection is altered to reflect the needs for individuals required to handle the changing circumstances

■ Appropriate termination processes if employees are made redundant

❖ Impact of change on operations management➢ Reducing costs to gain a competitive advantage➢ Businesses looking for ways to speed up production time, shorten

production development and streamline distributions➢ Operations management changes:

■ Businesses have refitted and reorganised factories to take advantage of technological improvements.

■ Advances in production technology accompanied by changes in the organisation of the production process

● Flexible manufacturing : Production by computer controlled machines adapted to various versions of the same operation

◆ Shrinks production plants■ Emphasis on quality management - quality assurance and

quality management

Managing change effectively

- Identifying the need for change - Business information systems

- Setting achievable goals

- Resistance to change

- Management consultants

❖ Change must be productive - revitalises + strengthens the business❖ Strategies for managing change:

❖ Identifying the need for change➢ Requires holistic view of the outside world + awareness of the

potential impact on the business■ Holistic : an approaching looking at the whole picture

➢ Business information systems■ Business/management information system (BIS) :

Gathers,organises and summaries data, then converts it into practical information

■ Material for decision making■ Summarises future possibilities, past and present

performances

❖ Setting achievable goals➢ Vision statement : States the purpose of the business

■ Key goals➢ Statement + business goals must be reviewed if changes to the

external environment might impact the business➢ New goals must be realistic and attainable

❖ Resistance to change

➢ Change is difficult to accept - resistance➢ Reasons for resistance to change:

■ Financial costs● Purchasing new equipment● Redundancy payments

■ Retraining■ Reorganising plant layout■ Inertia

● Unenthusiastic response to proposed change● Change = moving out of your comfort zone

➢ Driving and resisting forces■ Driving forces - support the change■ Resisting forces - work against the change

➢ Strategies for reducing resistance■ Creating a culture of change

● Risk taking is required when adopting change● Business culture must be supportive to help

employees take new risks● Method to assist in process: identify change agents

◆ individual/s who act as a catalyst, taking on responsibility for managing the change process

➢ E.g. members of the management team, employees, or outside consultants

◆ Help to establish a positive + supportive workplace culture

● Effective teams have open communication channels for transferring information

◆ Offer a supportive environment● Effective teams lead to a decline in staff turnover and

absences.◆ Productivity rises

■ Positive leadership● Sharing the vision● Leads to less resistance

❖ Management consultants➢ Individuals who have specialised knowledge and skills in the area of

business➢ Provide awareness of industry best practices

■ Business practices that are seen as the highest standard in the industry

➢ Help businesses to improve their performance■ Investigate existing problems■ Develop plans for improvement■ Provide change management advice

● Approach to dealing with change, both from the business + individual level perspective

➢ Help to manage the introduction of change■ Create a supportive business culture

BUSINESS PLANNING

Small to medium enterprises (SME’S)

Definition ❖ No accepted definition of SME’s❖ Measurements determining size of business:

➢ Number of employees➢ Type of ownership➢ Source of finance➢ Legal structure➢ Market share➢ Management structure

❖ Classification of a business according to the ABS:

❖ Characteristics of SME’s➢ Independently owned + operated➢ Not dominant in the industry - small share➢ Locally based➢ Owner is responsible for decision making➢ Non-manufacturing companies - less than 20 employees➢ Manufacturing companies - less than 100 employees

❖ Many SME owners stay small to avoid pressures + difficulties experienced in larger companies

➢ Can offer personalised service

❖ The number of SME’s➢ 2010 → approx 98% of all private sector businesses were

SME’s➢ Difficult to provide accurate number:

■ No universally accepted definition of a SME■ Sector is dynamic, changes daily and fluctuates due to state

of the economy

Role ❖ Employ 70% of people working in the private sector❖ Have created 80% of Australia’s employment gains in the last 10 years

❖ Produce approx. 50% of all produced products yearly❖ Generate an increasing amount in total exports❖ Provide range of products used by large businesses❖ Earn more profit + pay more taxes than large businesses

Economic contribution

❖ Economy: System determining what to produce, how to produce and to whom production will be distributed

➢ What we produce depends on available resources➢ How we produce depends on skills and available tools➢ Whom production will go divided among community

❖ In Australia - Market capitalist economy

❖ Contribution to gross domestic product (GDP):➢ Economic growth : Occurs when a nation increases the real value of

goods + services over a period of time.➢ GDP : Total money value of all goods + services produced in Australia

over a one-year period■ Measurement of whether economic growth has occurred

● If GDP has grown➢ ABS estimates that SME’s contribute 50% of Aus’s GDP

❖ Contribution to employment➢ Employment maintains a healthy economy

■ Wages used to buy goods + services■ Supports businesses + creates jobs

➢ SME’s provided 73% of total private sector employment➢ SME’s contribute to revenue through tax

■ Income tax + tax paid by business

❖ Contribution to the balance of payments➢ Exporting goods + services contributes to balance of payments

■ Balance of payments (BOP): Record of a country’s trade + financial transactions with the rest of the world

➢ Must export more than import for a good BOP + encourage economic growth

➢ SME’s more successful at exporting than larger businesses

❖ Contribution to invention and innovation➢ Main source of inventions + innovation in Australia

■ Invention: Development of something new■ Innovation : When something already established is improved

upon➢ Leads to greater efficiency and increased productivity➢ Research and development (R&D): Activities intended to develop

new ideas and improvements in production➢ Reasons for difficulty in raising finance: SME’s financial request seen

as high risk➢ Source of finance: venture capital

■ Venture capitalist: Investor who takes an equity position in the business (owns part of it) and provides supplementary finance for the business

Success and/or failure

❖ 7 for every 10 SME’s go out of business within first 5 years

❖ Success for SME’s➢ Use of the five ‘keys’ of business success

■ Entrepreneurial abilities● Characteristics such as drive, enthusiasm, optimism

and risk■ Access to relevant information

● Regarding profitability, the quality of goods + services and employee performance

■ Flexibility● ability to adapt quickly to changes in the external

environment■ Focus on a niche market■ Development of a reputation

❖ Failure of SME’s➢ Business failure classified when an SME is:

■ Unincorporated and declared bankrupt■ Incorporated and either forced into liquidation or voluntarily

closes because it can and faces cash flow problems➢ Reasons for SME failure

■ Failure to plan■ Lack of information■ Inaccurate record keeping■ Complacency■ Lack of financial planning■ Negative cash flow■ New competitors■ Economic downturn■ Insufficient capital■ Lack of management experiences

➢ Main reasons:■ Managerial inexperience■ Undercapitalisation■ Lack of planning