Standard Grade Business Management

Units 1 and 2 Revision Slides

Unit 1.1Unit 1.1 (Slides 2-36)(Slides 2-36) Unit 2.1Unit 2.1 (Slides 105-145)(Slides 105-145)

Unit 1.2Unit 1.2 (Slides 37-71)(Slides 37-71) Unit 2.2 Unit 2.2 (Slides 146-176)(Slides 146-176)

Unit 1.3Unit 1.3 (Slides 72-104)(Slides 72-104) Unit 2.3 Unit 2.3 (Slides 177-264) (Slides 177-264)

Unit 2.4Unit 2.4 (Slides 265-283) (Slides 265-283)

Why Do Businesses Grow?Why Do Businesses Grow?

FINFIN How Do Businesses Survive? How Do Businesses Survive?

How Do Businesses Start?How Do Businesses Start?What Do Businesses Do?What Do Businesses Do?

Why Do Businesses Exist?Why Do Businesses Exist?

How Are Businesses Organised?How Are Businesses Organised?

What Is Business? How Do Businesses Develop?

Why Do Businesses Fail?Why Do Businesses Fail?

Press F5 to Start

Standard Grade Business Management

Unit 1.1Unit 1.1

What Do Businesses Do?What Do Businesses Do?

Business activity can be described as:-

“Any activity which provides us with goods and services to satisfy our

wants.”

1.11.1

Needs and Wants

Needs (Necessities)

Water Food Shelter Heat Clothing

Wants (Luxuries)

DVD player Computer More money To learn Designer clothes

These are essential for us to stay alive.

These help to make life more comfortable.

1.11.1

Goods and Services

Goods

These are what we buy in our everyday lives. Theyare:

Tangible Can be seen and touched

And can be either: Durable Last a long time Non-durable Don’t last a long time

1.11.1

Goods and Services

Services

Services are things like:

Hairdressing Driving lessons Dry cleaning

Intangible Cannot be seen nor touched

1.11.1

Factors of Production

Capital Enterprise Labour Land

For each of these the business receives a “reward”.

These are the tools that a business needs in order for it to work properly:

1.11.1

Capital

To purchase a business, buildings and equipment

To buy tools needed for the job

To buy raw materials to make the products

Capital includes the things that can be purchased with money to make and sell goods and services.

1.11.1

Enterprise

The land The labour The capital

Enterprise means having anidea for a new business andtaking risks with the otherfactors of production tomake the business a success:

1.11.1

Land

All the natural resources whichthe land provides for us:

Farmland – crops, animals

Buildings – land needed for housing, businesses

Water

Coal-mining to provide heat

oil/gas-refineries

1.11.1

Labour

Accountants Bank Managers Teacher

Assembly workers, eg a car production

line A baker – mixing of ingredients to make bread and cakes

Labour is physical and mental effort.

People who use mental effort include:

People who use physical effort include:

1.11.1

Divisions of Industry: Primary

These are extractive industrieswhich use the earth’s natural resources.

Fishermen – fish/shellfish Farmers – wheat, beef, lamb,

oranges, berries Refineries – oil, gas Coal miners – coal either finished or semi-finished

products

1.11.1

Divisions of Industry: Secondary

These types of businesses areinvolved with making things, which go through several different stages.

They use raw materials, semi-finished goods

1.11.1

Divisions of Industry: Secondary

Stages of Production:

Input Process Output

This involves taking raw materials or semi-finished goods and putting them through processes to make finished goods.

1.11.1

Divisions of Industry: Tertiary

These are service the industries and

the following are some examples:

Banking Deliveries Nursing Mail deliveries Hair dressing/barber Insurance

1.11.1

Sectors of the Economy: 3 Types

Private Public Voluntary

What do each of these groups aim to do?What do each of these groups aim to do?

Make profit Make profit for ownersfor owners

Provide a Provide a serviceservice

Help people Help people in needin need

1.11.1

Sectors of the Economy: Private

PRIVATE

Sole TradersPartnerships

Private Limited Companies (Ltd)Public Limited Companies (Plc)

Franchise

Owned by:Sole Trader/Partners

Shareholders

Financed by ownmoney, bank loan,

money from selling shares

““For the benefit of individuals”For the benefit of individuals”

1.11.1

Sectors of the Economy : Public

PUBLIC

National and Local GovernmentServices, eg

Schools, Hospitals, Fire Brigade, Army

Financed through taxation, eg council tax, business

rates, income tax

Owned by the State

““For the benefit of society”For the benefit of society”

1.11.1

Sectors of the Economy : Voluntary

VOLUNTARY

Organisations like, charities, egOxfam, social and sports

clubs

Financed by money from donations and/or gifts

Benefit the community and people less fortunate

““To help people in need”To help people in need”

1.11.1

Public Sector

Private Sector

Voluntary Sector

Essential Services

Maximise Profit

Help People

Sole Trader

Partner-ship

Private Limited

Public Limited

Franchise

Invited To Buy Shares

All Can Buy

Shares

e.g. RNLI

e.g. NHS

Govt / Tax

Charity / Donations

Sectors of the Economy

Public

Public sector

Public limited company

Government run, not for profit, for public good.

Shares issued to public, for profit. Operate in the private sector.

oror

1.11.1

Private

Private sector

Private limited company

Privately run, for profit, for owner’s good.

Shares issued to private group, for profit. Operate in the private sector.

oror

1.11.1

Types of Business Ownership

Sole Trader – one person Partnership – 2 to 20 people Private Limited Company – Ltd Public Limited Company – Plc Franchise – already established “business

name”

A business can be formed in the following ways. All 5 are in the private sector.

1.11.1

Types of Business Ownership

Examples of Sole Traders:

Hairdresser Plumber Electrician Mechanic

Sole Trader

This is the most common type of business.

It is owned, controlled and financed by

one person.

1.11.1

Sole Trader

Advantages:

Decisions are made quickly

Profits are not shared Usually local, so can

satisfy the needs of thearea

No special paperwork is required

The affairs of the business are kept private

Disadvantages:

Unlimited Liability for debts

Long hours Finance may be difficult

to raise Prices may be higher

than those of larger organisations

Difficult to provide cover for holidays and illness

1.11.1

Liability

Unlimited Liability:

This means beingresponsible for allthe debts incurred in

the running of the business.

This may mean that the owner could lose

their personal possessions, eg their home.

Limited Liability:

This is only losing the amount that you have invested in the business.

You have to be a “limited” partner and not be involved in the day-to-day running of the business.

Your personal possessions are not at risk.

1.11.1

Types of Business Ownership

Partnership

Owned by minimum of 2 and a maximum of 20 people called “partners”.

This type of business is commonly found in professional practices:

Vets Doctors Dentists Solicitors

1.11.1

Partnership

Advantages:

Can raise more capital (from partners)

Risks and responsibility for the business are spread among the partners

Can be a family affair and still keep the activities private

Disadvantages:

Unlimited Liability for the debts of the business

Formal paperwork required which has to be prepared for each new partnership

Limited number of partners

Disagreements among the partners on how to run the business

1.11.1

Types of Business Ownership

Private Limited Company (Ltd)

Owned by Shareholders (invited)

Minimum of 2 shareholders

Not allowed to sell shares on the Stock Market

1.11.1

Types of Business Ownership

Owned by shareholders (open to all)

Shares are bought and sold on the Stock Market

Can raise more capital than all the other types of business organisations

Public Limited Company (Plc)

1.11.1

Public Limited Company (Plc)

Advantages:

Easier to raise capital

Limited liability for shareholders

Can employ specialists

Disadvantages:

Special paperwork required

Affairs are public

Decision-making process may be slow

1.11.1

Types of Business Ownership

This is where a new business trades on an already established successful business.

The new business pays for permission to copy the existing business.

McDonalds Pizza Hut

Franchise

1.11.1

Franchise

Advantages:

Already established name which people recognise

Guaranteed customers

Cost less to set up Less chance of failure

Disadvantages:

Have to give a percentage of profits to business owner (franchisor)

The franchise has to be run according to the rules set by the franchisor

Little scope for personal ideas and methods

1.11.1

Production and Consumption

Production

This is where goods are made by going through a number of stages.

They can be completed ready to be consumed.

They can be semi-finished goods which go on to another stage of production.

Consumption

Consumption is the using up of goods, eg eating food. It also includes making use of services such as banking and insurance.

1.11.1

Creating Wealth

Wealth is created by making goods or providing services and selling them to people in return for money.

Wealth is created when an item or service increases in value by more than it costs to make or provide.

1.11.1

Adding Value

Denim cloth is produced £ Cloth is made into jeans £££ Designer label is added £££££ Jeans sold in shop £££££££

Cheap denim can be turned into expensive jeans.

1.11.1

Standard Grade Business Management

Unit 1.2Unit 1.2

Why Do Businesses Exist?Why Do Businesses Exist?

Why do businesses exist? Enterprise Develop ideas

Profit Grow financially

Charity Help people

Public Service Serve society

1.21.2

Why do businesses exist? Enterprise Develop ideas

Profit Grow financially

Charity Help people

Public Service Serve society

1.21.2

Enterprise

A person who has enterprise is one who has the skill to develop an idea for a new business or product and takes risks to turn the idea into a success. This is where we get the term entrepreneur.

Remember, enterprise is one of the four factors of production.

1.21.2

Why do businesses exist? Enterprise Develop ideas

Profit Grow financially

Charity Help people

Public Service Serve society

1.21.2

Profit

In business, profit is the difference between the cost of providing goods and services to customers and the amount the customers pay for them.

A business has to make a profit so that its owners are encouraged to continue is business and remain efficient.

Companies which do not make a profit do not survive.

1.21.2

Profit

Profit is the difference between the cost of providing goods and services to customers and the amount the customers pay for them.

Profit = Income - Expenses

What we can keep

Money that comes in

Money that goes out

1.21.2

Profit

Aztec Plc made £120,000 in sales during 2007-2008. However the bills for supplies, rent, wages and tax came to £135,000.

How much profit did they make?

Profit = Income – Expenses -£15,000 = 120,000 – 135,000

The company actually made a £15,000 loss. What could happen?

1.21.2

Why do businesses exist? Enterprise Develop ideas

Profit Grow financially

Charity Help people

Public Service Serve society

1.21.2

Charity

A charity is formed to raise the awareness of the general public about the plight of needy people or animals and to raise funds for worthy causes.

Which charities can we name?

1.21.2

Why do businesses exist? Enterprise Develop ideas

Profit Grow financially

Charity Help people

Public Service Serve society

1.21.2

Public Service

Public Services provide the same quality of service to everyone in a country

Hospitals Stirling Royal Infirmary

Schools Wallace High School

Local Government Stirling Council

Police Central Scotland Police

Defence Royal Navy

1.21.2

Aims of Business

Private Sector – Profits

Public Sector – Provide Services

Voluntary Sector – Charitable, non profit-making

1.21.2

Aims of Business

To maximise profits

To turn gaps in the market/innovative ideas into successful a business enterprise

Continuing to meet customers’ needs and wants through adapting existing products/services

To expand and benefit from growth

Private Sector

1.21.2

Aims of Business

To provide the same quality of service to everyone, eg the same hospital service throughout the UK

Public Sector

To provide a service which is essential to everyone

1.21.2

Aims of Business

Charity To raise awareness of worthy causes To receive funds to help worthy causes, fund- raising events, eg Comic Relief Provide information on how the funds have been spent

Voluntary Sector

Non profit-making organisation

To provide the best service and facilities for its members

1.21.2

Stakeholders?

1.21.2

Stakeholders in Business

A stakeholder is a person, group or organisation that has an interest in how an organisation is run.

If we have an interest in an organisation then we can influence its success or failure.

1.21.2

Sticky Hot Tar Plc Sticky Hot Tar Plc wants to build a tar production plant

next to a large housing estate. The tar would be used to repair local roads, which are in a poor state of repair.

The plant would operate 24 hours a day and produce lots of smoke. It would employ 500 local people, who are currently unemployed.

Who are the stakeholders here?

What are their interests in this case?

Are all the stakeholders directly linked to the running of the business?

1.21.2

Sticky Hot Tar Plc

Local residents could be for new jobs or against pollution.

The council could be for more tar to repair local roads.

Suppliers could be for a new tar factory.

Competitors could be against a new tar factory.

Shareholders could be for a larger company and therefore increased dividends on their shares.

1.21.2

Stakeholders

Stakeholders are people who have an interest in a business.

Who are the stakeholders in our school?

Pupils Parents Teachers Local Residents Stirling Council Scottish Government.

1.21.2

Some Stakeholders

Shareholders

Managers

Employees

Customers Banks Suppliers

Local Community

Local Government

Central Government

1.21.2

Shareholders

Shareholders are people who have a financial investment in a company.

In return for investing their money, they receive a certificate of shares, hence the term shareholder.

1.21.2

Risk Taking

They use their own and other people’s money to support a business venture.

Failure may bring bad publicity

Borrowing may be limited and costs not covered

Sales may be affected by poor market research for a new product or service

Entrepreneurs are described as “Risk takers”. Why?

1.21.2

Social Costs and Benefits

Social Costs Traffic congestion Traffic pollution – poor

air quality Noise pollution Health problems

These are negative effects on a communityas a result of a new business.

Social Benefits Improved road

network New housing New schools

These are positive effects on a community as a result of a new business

1.21.2

Economic Costs and Benefits

Economic Costs

Money spent on premises, roads for new business rather than other things

Increase in council taxation, eg

Rates Council tax Water rates

These are negative money effects on a community as a result of a new business

Economic Benefits

More jobs – more people employed

More money available to spend in local shops

Business growth

Improved standard of living

These are positivemoney effects on acommunity as a result ofa new business

1.21.2

Social and Economic Costs and Benefits Businesses affect local communities.

A community’s quality of life can be affected. This is called either a social benefit (an advantage) or a social cost (a disadvantage).

A community’s finances (money) can also be affected. This is called either an economic benefit (an advantage) or an economic cost (a disadvantage).

1.21.2

A New Cinema for Stirling

The Vue Cinema in Stirling opened in 2008.

As a new business, the cinema created Social Costs and Social Benefits.

It also created Economic Costs and Economic Benefits.

What are some examples?

1.21.2

A New Cinema for Stirling

Social Costs Social Benefits

More traffic New jobs

Late night noise New leisure choices

Loss of trade elsewhere More films to watch

A community’s quality of life can be affected. This is called either a social benefit (an advantage) or a social cost (a disadvantage).

1.21.2

Economic Costs Economic Benefits

Old shops lose trade R’side gains trade

Road/lighting costs Taxi companies benefit

Extra rubbish collections House prices increase

A New Cinema for Stirling

A community’s finances (money) can also be affected. This is called either an economic benefit (an advantage) or an economic cost (a disadvantage).

1.21.2

The new cinema creates lots of benefits (advantages) and costs (disadvantages).

Local community may gain… an economic benefit (raised house prices) a social benefit (more leisure opportunities)

Local community may also suffer… an economic cost (increased Council Tax) a social cost (noise, traffic and litter)

A New Cinema for Stirling1.21.2

Why Do Businesses Exist?

Be able to give reasons why businesses exist.

e.g. a Charity exists to raise funds (collect money) in order to help the poor and needy, or the victims of disasters such as earthquakes or famine.

1.21.2

Why Do Businesses Exist?

Know about the Aims of a business.

All businesses have aims or objectives (things they want to do or be).

Enterprise Develop ideas

Profit Grow financially

Charity Help people

Public Service Serve society

1.21.2

Why Do Businesses Exist?

Know what is meant by Stakeholders.

Stakeholders are people or groups of people who have a connection with and an interest in the business and the way it is being run or managed. Stakeholders can include workers, management, suppliers, customers, government, and shareholders.

You should also be aware of why they are interested in the business.

1.21.2

Why Do Businesses Exist?

You need to know the meaning of and be able to give examples of…

COSTS (disadvantages) and BENEFITS (advantages) of business.

They come under two headings…

SOCIAL (quality of life) and ECONOMIC (money)

1.21.2

Standard Grade Business Management

Unit 1.3Unit 1.3

How Are How Are

Businesses Organised?Businesses Organised?

What Will We Learn in Unit 1.3?

We are going to look at how businesses are organised.

This means that we will discover how businesses are made up or constructed.

We will find out about how different people in a business work together.

We will also find out about the different jobs that exist within a business.

1.31.3

Why Will We Learn This?

Businesses may employ tens, hundreds or even thousands of staff to do lots of things.

Everybody in a business needs to know clearly what somebody does and who they report to, otherwise life becomes confusing.

Because there are lots of jobs in business, we need to start exploring these as we will use them more and more in future lessons.

1.31.3

Our School

Wallace High School has over 60 members of staff.

Trying to work out what each person does is hard enough.

Trying to work out where each person fits into the organisation of the school is even harder!

Let’s start on a more simple level.

1.31.3

UnderstandingOrganisational Structures If we thought of a family as a business then it might

look like this. The lines show control.

Parents

Son Daughter

Parents at the top, they control the family

Both children are equal, they follow their parents’ instructions

1.31.3

Organisational Charts

An organisational chart is a diagram (or picture) which shows how each person in a company links in with everybody else.

We call these links relationships.

Relationships tell us who has control.

Control means who is in charge of who.

1.31.3

Organising Our School

We know that different teachers do different things.

Some staff are in charge of other staff.

Mr Smith is the subordinate to Mr Winton. This is because Mr Winton has authority over Mr Smith, as he is Mr Smith’s line manager.

Mr Smith is the co-worker of Mr McGraw because they are both classroom teachers and neither is in charge of the other.

1.31.3

Head Teacher

Mrs Horsburgh

Depute Head Teacher

Mrs RitchieAirthrey

Depute Head Teacher

Mrs HunterLogie

Depute Head Teacher

Mr CordinerPowis

Faculty Manager

Mr WintonICT

Faculty Manager

Mr HughesCommunication

Faculty Manager

Mr GauldCulture & Design

Mrs BuchananICT

Mrs Inglis ICT

Mr SmithICT

Mr RossICT

Mr McGrawICT

1.31.3

Last time we looked at the organisation chart for our school.

We discovered that different staff have different jobs, based on their responsibility and experience within the school.

Mrs Horsburgh is the most senior teacher because she has lots of experience and is responsible for every teacher and pupil.

Mr Smith is one of the junior teachers because he has less experience and is only responsible for his own classes.

The organisation chart made this easier to understand.

What Does This Show?1.31.3

Head Teacher

Mrs Horsburgh

Depute Head Teacher

Mrs RitchieAirthrey

Depute Head Teacher

Mrs HunterLogie

Depute Head Teacher

Mr CordinerPowis

Faculty Manager

Mr WintonICT

Faculty Manager

Mr HughesCommunication

Faculty Manager

Mr GauldCulture & Design

Mrs BuchananICT

Mrs Inglis ICT

Mr SmithICT

Mr RossICT

Mr McGrawICT

There are three lines of authority between Mr Smith and Mrs Horsburgh. Communication does not jump directly, but passes forwards and backwards through Mr Winton and Mrs Hunter.

1.31.3

Headteacher

Depute Head Teachers

Faculty Managers

Classroom Teachers

More responsibility and experience

Less responsibility and experience

1

3

8

70

1.31.3

Organisation Chart

An organisation chart gives us a snapshot of:

How the organisation is structured (made up).

Who is involved in the decision-making process

Who is responsible for what, for whom and to whom.

Mr Smith is responsible for each of his classes. He is not responsible for any other member of staff. He is responsible to Mr Winton.

1.31.3

Organisation Chart

The lines of authority, which means Who is in charge Who is next in charge Who each person is directly responsible to and for The direct line relationship between the most senior manager and the staff in each department

Organisation charts show us:

The departments within an organisation

How the departments link together

It is important that everybody knows where they are otherwise people don’t know who to work with, and who they should be looking after.

1.31.3

Organisation Structures

Different organisations have different structures.

This means that they are made up in different ways.

Some have lots of managers and others have only a few.

The structure affects the way that people work.

How does the structure of Tesco compare to the structure of Sony Centre?

1.31.3

StoreManager

Deputy Store Manager

Three AssistantStore Managers

Fresh FoodManager

Frozen FoodManager

Dry FoodManager

HomewareManager

ElectricalManager

Fresh FoodStaff

Frozen FoodStaff

Dry FoodStaff

HomewareStaff

ElectricalStaff

Tesco

1.31.3

Store Manager

Tall structures are very pointy, with lots of levels

(5 here)

Deputy Store Manager

Assistant Store Managers

Department Managers

Department Staff

Tesco

1.31.3

StoreManager

AssistantManager

Salesperson Salesperson Salesperson

SonyCentre

1.31.3

Store Manager

Assistant Store Manager

Salespeople

Flat structures are less pointy, with fewer levels

(3 here)

SonyCentre

1.31.3

Organisation Structures

Tesco and the Sony Centre are two different businesses because: They have different customers The sell different things

They are also different businesses because they have different structures.

Tesco has a tall structure because it has lots of managers.

The Sony Centre has a flat structure because it has fewer managers.

1.31.3

Tall Organisation Structures

This is the traditional approach to the structure of an organisation.

There are long lines of communication between the most senior member of staff and the most junior. It can take time to pass messages.

Many other organisations have tall structures, such as the police and the council.

The British Army has 19 ranks betweenPrivate and General!

1.31.3

Flat Organisation Structures

This is the newer approach to the structure of an organisation.

There are fewer levels of responsibility.

There are also fewer levels of authority.

1.31.3

Which Organisation Structure Is Best? Tall organisation structures Have many levels of management Have many levels of responsibility Have a narrow span of control Make communication slower Make decision making slower

Flat organisation structures Have fewer levels of management Have fewer levels of responsibility Have a wider span of control Make communication quicker Make decision making quicker

1.31.3

Authority and Responsibility

Responsibility Having responsibility means being answerable for

actions and decisions taken by ourselves and others.

Authority Having authority means having the right and power to

take certain actions. We can ask people below us to do tasks, either on their own or delegated. Delegating means we pass some authority to people below us.

Everybody in a company has responsibility, but only managers have authority.

1.31.3

Span of Control - Wide

Mr X

Mr A Ms B Ms C Mr D Ms E

Ms F Mr G Ms H Mr I

Mr X and Ms E control a lot of people

1.31.3

Span of Control - Narrow

Mr X

Mr A Mr B

Mr C Ms D Mr E Ms F

Mr X, Mr A and Mr B control a few people

1.31.3

Span of Control

In tall structures there is usually a narrow span of control. People in charge control a few people.

Advantages: Clear who is manager Individual managers have

authority over fewer people

Disadvantages: Too many levels of

management Difficult to run

In flat structures there is usually a wide span of control. People in charge control a lot of people.

Advantages:Fewer levels of managementMore trust

Disadvantages:Those in authority supervise more peopleLess chance of promotion

1.31.3

Operations Department

Human Resource Department

Marketing Department

Finance Department

Senior Managers

1.31.3

Functional Areas of Business

All businesses must operate the following activities and some will have departments solely responsible for:

Finance Operations Marketing Human Resources

Money Production(Making)

Promotion (Advertising)

Staff

Administration helps all these areas by handling customer enquiries and keeping

records. ICT helps all these areas by buying and maintaining computer systems.

1.31.3

Functional Areas of Business

Finance (Money)

Companies need money to stay healthy.

The finance department uses a budget to make sure there is enough money in the business.

It also prepares accounts to show senior managers where money has been spent.

1.31.3

Functional Areas of Business

Operations (Production)

Companies have to produce (make) goods or provide services to stay in business.

The operations department designs new products.

It also gathers raw materials (like flour), changes these into something useful (like bread) and then distributes (sells) to shops (like Tesco).

1.31.3

Functional Areas of Business

Marketing (Promotion and Advertising)

Companies have to tell people about goods and services, so that customers know what to buy.

The marketing department researches (finds out about) what people like and don’t like buying.

It also decides what price to sell something at, which place to sell in, what the product can be described as, and how it can be promoted.

A Jaguar XJ sports car sells at £43,700 (price). It is sold in specialist garages (place). It is a well-made, luxury item (product). It is advertised in expensive, glossy magazines (promotion).

1.31.3

Functional Areas of Business

Human Resources (Staff)

Companies have to look after their staff, otherwise they might get cross and not work hard.

The human resources department recruits (hires) new staff, to help a business do more things.

It also trains staff to keep their skills up to date, and tries to stop people going on strike.

1.31.3

Functional Relationships

When one department offers direct services to another department it has a functional relationship – linking together for a shared reason.

Marketing promotes the work of operations, helping to sell products by advertising them. These two departments have a functional relationship.

Human resources has a functional relationship with all departments because it recruits and looks after marketing, finance and operations staff.

Operations makes and sells products, but marketing helps promote the goods and finance controls the income from customers.

Finance provides money for all departments to keep working. It gets this money from customers that the business sells products and services to.

1.31.3

Standard Grade Business Management

Unit 2.1Unit 2.1

How Do How Do

Businesses Start?Businesses Start?

What Is In Unit 2.1?

In this unit, we will look at how businesses start.

We will look at how an entrepreneur takes an idea and develops it into a product or service.

We will also find out how to meet customers’ needs and wants, and how to draw up a business plan.

2.12.1

Enterprise - The Business Journey

IdeaDevelopment

Research

Production

Sales

Profit

2.12.1

Starting A Business

To start successfully, every business must answer these questions:

What will we sell? Who are our customers? Where are our customers? What are the risks? Who can help us succeed? Have we got a good plan?

2.12.1

Logie T-Shirts2.12.1

Logie T-Shirts

A new business called Logie T-Shirts has just started.

When it is up and running, the business will sell personalised t-shirts to the public.

This means that customers will be able to have their own designs printed onto a t-shirt.

2.12.1

Logie T-Shirts The owners of Logie T-Shirts have never run a

business before, and need your professional help.

As business managers, help the company to plan what they will need to do before they start.

Work in pairs to decide: What the company needs to have What the company needs to do How it will meet customers needs/wants What problems it might face when starting What help it might need Who can provide this help

2.12.1

Logie T-shirts

We are helping a new business to start.

We have already found some things that Logie T-Shirts will need to do before it can start.

We have also found some problems that it might face…

2.12.1

Name: Logie T-Shirts

What things do we need to have? Staff, materials, building.

What things do we need to do? Train staff, learn how to make T-Shirts.

How do we get the right customers?

Target younger people. Find out what they want.

What problems could the business have?

Nobody buys, not able to pay bills, unlimited liability.

What help will the business need? Help finding money.

Help getting business advice.

Who will help the business? Money: Bank, family.

Advice: Business agencies.

Risks

All new businesses face risks; things that could close down the business.

Some risks include not finding customers and losing all the money in the business.

Businesses need to plan (in advance) and monitor (day to day checking) to avoid as many risks as possible.

2.12.1

The Problems with Starting A Businessa) Think of some problems, or risks, that Logie T-Shirts

could face when it tries to start up.

b) Then think of ways that Logie T-Shirts could reduce (lower) these risks.

2.12.1

Risks

All new businesses face risks; things that could close down the business.

Some risks include not finding customers and losing all the money in the business.

Businesses need to plan (in advance) and monitor (day to day checking) to avoid as many risks as possible.

2.12.1

Help and Advice

Because of risks, new businesses need help to start up.

Money can come from bank loans, family or charities like The Prince’s Trust.

Advice can come from agencies like Business Gateway, or from speaking to other business people.

2.12.1

The Market Where Buyers and Sellers Meet

2.12.1

The Market

A market is any place where buyers (customers) and sellers (companies) come together to do business.

Sometimes buyers and sellers physically meet each other at a market, like shopping centres.

Sometimes buyers and sellers do not physically meet each other. These markets include mail order catalogues.

2.12.1

The Market

a) A market is a place where buyers and sellers come together to trade (do business).

Where might Logie T-Shirts trade with customers?

Think about the two different types of market.

2.12.1

The Market

We know that markets are places where buyers (customers) and sellers (businesses) come together to trade.

Markets include shopping centres, internet shopping, door to door sales and vending machines.

2.12.1

Different Markets forDifferent Customers Different people have different needs and

wants.

Businesses sell goods and services to people who are most likely to need or want them.

This is because businesses cannot appeal to everybody.

2.12.1

Coach Holiday Luxury Cruise Festival Weekend

Who Are The Target Customers?What types of people would be most likely to go on these holidays?

2.12.1

Who Are The Target Customers?What types of people would be most likely to go on these holidays?

Families

Pensioners

People on a budget, or with less spare time

Well-off people

Couples

People with lots of spare

time

Teenagers

Groups of friends

People into music

Coach Holiday Luxury Cruise Festival Weekend

2.12.1

Different Markets forDifferent Customers If a market was an orange, then each

segment would be a different customer feature.

Age

Job

Income

(pay)

Market

Luxury Cruise

40+

Professional

£50,000 +

2.12.1

Different Markets forDifferent Customers

Businesses need to know their most likely customer’s:

Age Gender (male or female) Job Income (pay or money available) Location (town or country) Lifestyle (hobbies etc.)

2.12.1

Where Is Our Market? What kind of people do you think would be most likely

to buy a personalised t-shirt from Logie T-Shirts?

Look at your list of market segments.

Think about the most likely customer’s…

Age Job (work or school) Income (pay or money available) Location (town or country) Lifestyle (hobbies etc.)

2.12.1

Market Research

We know that there are risks in business: Customers don’t know about the goods or services. The price is too high. The product isn’t quite what people want.

Businesses need to research their market before they can start selling goods or services.

2.12.1

Selling Boeing 747 Jumbo Jets

Number 1 built in 1969 Number 1306 built in 2003

The first ever Boeing 747 aeroplane was designed to test the market – would airlines buy what was, at the time, the world’s largest plane?

To begin with, Boeing only made one plane because they did not yet have any orders from airlines. This is called a prototype.

2.12.1

Market Research

New businesses often create a prototype of their product.

This is a one-off example that shows the public what the real product might look like.

Feedback from the public helps to change the design, packaging and price before actual production starts.

2.12.1

Market Research at Logie T-Shirts

Logie T-Shirts show 20 people some prototype t-shirts, before production starts.

What kinds of questions might Logie T-Shirts hear from the audience?

Why would Logie T-Shirts want to hear these questions?

2.12.1

Market Research at Logie T-Shirts

“The t-shirts look really good”

“The price is far too high”

“The large size is too small”

“Great, we know that our quality is high” .

.

“Maybe we should lower the price”

“We need some more sizes”

People’s Comments

Company’s Replies

2.12.1

Market Research

Field research involves collecting primary information from surveys, focus groups and product tests.

Desk research involves studying and evaluating secondary information from books, the Internet and the Government.

2.12.1

The Business Plan

Business owners and their stakeholders, such as banks, need a unique business plan.

Writing down how the business will work reduces the chance of failure and increases the chance of assistance.

2.12.1

Win Some, Lose Some

Amstrad PCW Emailer +

easyJet easyCinema

Alan Sugar

Stelios

2.12.1

The Business Plan (8 Steps)

1. General details about the business Name, Aims, Sole Trader/Ltd/Plc

2. The Staff Numbers, Positions, Skills, Wages

3. The Product or Service What is it? Price, Details.

4. The Market Target Customer, Results from Market

Research, Advertising ideas

2.12.1

The Business Plan (8 Steps)

5. Premises and Equipment Location, Rent, Facilities.

6. Profit estimates Forecast of sales.

7. Cash flow Budgets, Expected income and expenses,

Loan amounts.

8. Capital Where the initial funding will come from, to

start the business – owner/loan.

2.12.1

1. The River Teith Café example

General details about the business The River Teith Café is a 40-seat table-service café

owned by Robert and Jane McKenzie. The business has three objectives:

To attract 8,000 customers a year between April and October.

To provide top quality home-made food and baking. The café will be located in a 1950s wooden cabin,

next to the River Teith on the Stirling to Calendar road.

2.12.1

2.

The Staff Six staff, including the owners, will be employed.: Robert will control the ordering of ingredients and equipment,

and will be in charge of building maintenance. Jane has worked as a finance manager and will handle all the

money, and communicate with the bank. A chef will be employed to staff the kitchen. They will need

experience and the ability to work on their own. A kitchen assistant will help the chef, by preparing ingredients

and washing dishes. Two waiters/waitresses will also be employed, to take food to

the customers.

2.12.1

3.

The Product or Service The café will offer a menu of 12 different

starters, main courses and desserts. There will also be a daily selection of baking. The café expects to serve up to 120 customers a day in the busiest summer weeks. Prices will be slightly higher than average to reflect the “cooked to order” and “home made” nature of the business. In return, customers can admire the local scenery and access daily newspapers.

2.12.1

4.

The Market The target customers would be: Families on holiday, who need to feed their children. Older people driving in the countryside, who want to

stop for a cup of tea. Market research suggests that because there is no

café nearby, both these market segments would use the café. A survey of 100 passing motorists was carried out to get this information.

2.12.1

5.

Premises and Equipment The 1950s wooden cabin has space for a dining

area, office, store room and kitchen. It meets all current fire regulations and also has central heating. It is located next to the roadside and has a car-park that holds 25 cars. The rent is £200 per week, for 52 weeks a year. The following equipment will be required:

10 tables and 40 chairs. 120 sets of cutlery, plates, glasses and mugs. Oven, microwave, food processor and kettle.

2.12.1

6.

Profit estimates The café aims to attract 8,000 customers a

year, between April and October. The business expects to make a profit of £11,600 in the first year (see below).

2.12.1

7.

Cash flow Each of the 8,000 customers will spend an average

of £6. Costs include rent (£10,400), ingredients (£3,000), wages (£10,000), electricity bills (£1,000) and loan repayments (£12,000).

The profit estimate for the first year is: Sales = Income = 8,000 x £6 = £48,000 Costs = Expenses = £36,400 Profit = Income – Expenses = £48,000 - £36,400 =

£11,600

2.12.1

8.

Capital The owners will each invest £20,000 into the

business. A bank loan from the Royal Bank of Scotland will be required, for £100,000. This will be paid back at £1,000 per month.

2.12.1

Standard Grade Business Management

Unit 2.2Unit 2.2

Why Do Why Do

Businesses Grow?Businesses Grow?

Why Do Businesses Grow? To avoid being taken over.

To reduce the risk of failure.

To become a market leader.

To increase profits.

To remove a competitor.

To take advantages of economies of scale (a big business with many customers has lower costs per item sold).

2.22.2

In The Beginning…

All businesses start off small.

There are very few successful large firms which did not start off as a small business.

When a small business becomes successful, growing profits can be re-invested into the business.

Some businesses choose to remain small, but many want to grow.

2.22.2

Small Businesses andLarge BusinessesBusiness Name Business Type Reason?

Rock and Road Small One shop

Subway Large Many shops

Ogilvie Construction Large Lots of staff

2.22.2

The Biggest Businesses The world’s biggest business, by income, is

the Exxon Mobil oil company in the USA. It had an income of £200 billion last year and employed 80,000 staff.

In Britain, BP began in 1908. 100 years later it has…

An income of £150 billion. 100,000 staff in 22 countries. 24,000 petrol stations and 17 refineries.

2.22.2

Internal Expansion

The easiest way for a business to grow is by expanding within itself.

The business keeps doing what it does best as time passes.

Sometimes this isn’t enough to beat competition.

2.22.2

Internal Expansion

Product/service is successful

Sales are good, profits are made

Profits are re-invested

More equipment can be bought

Better products/services can be produced

Sales are even better, more profits made.

2.22.2

External Expansion

Businesses can also grow by moving outside their own surroundings.

A merger - two or more businesses (usually a similar size) join together to create one business.

A takeover – one business (usually the larger one) buys another (smaller) business.

2.22.2

Merger (Amalgamation)

Began in 1853

Ended in 2001

Began in 1695

Ended in 2001

Began in 2001

Ended in 2009?

Merger

=

+

2.22.2

Takeover (Acquisition)

Began in 1982 Began in 1890

Ended in 2000

Takeover

=

Continues

2.22.2

How Do Businesses Grow?

To survive and compete, businesses grow.

Many businesses grow by integrating with other companies, to become much larger businesses.

There are 3 types of integration Horizontal Vertical Diversification

2.22.2

Horizontal Integration

Businesses providing the same type of product or service in the same sector integrate.

If two banks were to horizontally integrate then costs would be cut, and the bank would have more power.

2.22.2

Horizontal Integration

Royal Bank of Scotland

NatWest Bank

The Royal Bank of Scotland took over NatWest in 2000.

The Royal Bank of Scotland decided to keep the NatWest brand.

This takeover is an example of horizontal integration because both companies do similar things.

2.22.2

Vertical Integration

Businesses providing a different type of product or service in the same sector integrate.

Forward vertical integration - a business near the start of the chain takes over a customer. This allows a firm to control supply and distribution of a product.

Backward vertical integration – a business near the end of chain takes over a supplier. This guarantees a supply of stock, making the product cheaper.

2.22.2

Vertical Integration

Oil Rigs

Oil Refineries

Petrol Stations

Forwards

controls

controls

BP

BP controls all stages.

2.22.2

Vertical Integration

Farms

Packaging

Restaurants

Backwards

controls

controls

McDonalds

McDonalds controls all stages.

2.22.2

Diversification Businesses providing different

types of products or services in different sector integrate.

Diversification spreads risk. The business as a whole is less likely to fail, because ‘all the eggs are not in one basket’.

Each separate business is called a conglomerate.

2.22.2

Diversification

Travel and Tourism

Media and Communication

Finance and Health

Leisure

2.22.2

Innovation

Many businesses grow by innovation – making discoveries and creating new products.

Keeping ahead of competitors increases the chance of a business growing.

2.22.2

Innovation

Apple are an innovative company, and the iPod is one of their most successful products.

What makes the iPod so successful?

Why is it the market leader?

2.22.2

Innovation

The iPod is so successful because:

It is always being developed – 6 versions of the core product (iPod Classic) in 7 years.

Adding new features attracts new customers each time.

This means that Apple grows due to the success of the iPod.

2.22.2

Research and Development

Companies carry out R&D to see if products or services are viable (likely to work).

Market led R&D – offering what customers want.

Product led R&D – offering what you think will sell regardless.

2.22.2

Development

Many products that we buy are not brand new, but are developments of older products.

The iPod Classic has developed between the 1st Generation model and the 6th Generation model.

Each time, new features are added.

Why is this?

2.22.2

Development

Products are developed to: Keep up with technology. Attract new customers. Beat competition. Grow the company.

Products are developed by: Developing the idea Analysing the problems Producing a prototype (a test one) Testing the market Launching the new product.

2.22.2

Product Life Cycle

All products have a life span.

The steps are: Introduction Growth Mature Decline

Businesses can only grow if they keep developing products past the mature stage.

2.22.2

Product Life Cycle – Portable MusicIntroduction Growth Mature Decline

iPod Touch

1iPod Classic

2CD Player

3Cassette Player

4

S ALES

TIME

1 2 3 4

2.22.2

Economies of Scale

Large companies are able to do the same tasks cheaper than small companies.

There are internal and external economies of scale.

2.22.2

Economies of ScaleInternal Technical economies – large firms benefit

from robots and computer systems.

Financial economies – banks see large firms as less of a risk; they get larger loans and lower interest rates.

2.22.2

Economies of ScaleInternal Managerial economies – large firms have

many specialist managers, who have particular skills.

Marketing economies – large firms can afford to advertise their business in different ways.

2.22.2

Economies of ScaleExternal Infrastructure – new roads to an incoming

large firm benefit the local community.

Other benefits – large shops attract customers, who may also visit small shops nearby.

2.22.2

Diseconomies of Scale

Large firms can become so big that they have problems: Communicating with staff Keeping customers satisfied Controlling all the parts of the firm.

2.22.2

Standard Grade Business Management

Unit 2.3Unit 2.3

How Do How Do

Businesses Survive?Businesses Survive?

What Is In Unit 2.3?

In this unit, we will look at how businesses survive.

Businesses need to plan and manage their money to keep going.

2.32.3

Project Planning

Building the Oblivion rollercoaster was one of Alton Towers’ most complicated projects. As a business, the ride had to be value for money and profitable.

2.32.3

Project Planning

Alton Towers spent two years and £12m designing and building Oblivion.

Watch the video and think about this question:

What would the business need to plan before they started digging?

2.32.3

Project Planning

1. What would the business need to plan before they started digging? (3)

2. What problems could there have been if Oblivion hadn’t been properly planned? (2)

2.32.3

Project Planning

1) What would the business need to plan before they started digging?

Where to build. What to build. How to build. Who to employ to build. How to make ride fit for purpose. How to make ride income (ticket sales) greater

than ride costs (building materials, labour etc).

2.32.3

Project Planning

2) What problems could there have been if Oblivion hadn’t been properly planned?

The ride might not have worked. Customers may not have liked it. Costs could have been too big. The ride would make a loss.

2.32.3

Planning

Successful businesses plan what they are going to do before they do it.

If they plan their actions they should remain profitable by covering their costs and reducing risk.

2.32.3

Project Costs

Alton Towers gets its income from entrance tickets.

We know that Oblivion cost £12m to design and build.

What was their expenditure (things they spent money on)?

2.32.3

Project Costs

Income Expenditure(Money IN) (Money OUT)

Ticket Sales DesignSavings Interest Landscaping

PartsMachineryLabourAdvertising

To survive, Alton Towers had to cover theircosts. Income had to be at least equal toexpenditure, otherwise they would make aloss.

2.32.3

Costs

Businesses spend money on things. These costs can be either fixed (e.g. rent) or variable (e.g. electricity).

To break even, sales must at least equal income.

Sales < Costs = Loss Sales = Costs = Break Even Point Sales > Costs = Profit

2.32.3

Break Even Point Fixed Costs = £12,000 Variable Costs = £15 Selling Price = £20

BEP = FC SP-VC

BEP = 12,000 (20-15)

BEP = 2,400

If If 2,400 or more 2,400 or more visitors arrive each day, visitors arrive each day, then Alton Towers makes athen Alton Towers makes a profit. profit.

each day

2.32.3

Costs Think of Alton Towers in terms of the

wider business.

What are their fixed costs (costs that always stay the same)?

What are their variable costs (costs that change depending how much an item is used)?

2.32.3

Costs

Fixed Costs Variable Costs

Wages Telephone

Loan Repayments Electricity

Advertising

Maintenance

2.32.3

Cash Budgets

A cash budget tells a business whether or not it will break even in the months ahead.

It is a planning tool which shows an owner where their cash goes, and helps them make decisions.

2.32.3

Cash Budgets

1. What are the problems here?

2. How could Alton Towers improve their cash flow?

2.32.3

Decision Making withCash Budgets What are the problems here?

Alton Towers would run out of cash in October. In December they would be in debt by £1,565,000!

How could Alton Towers improve their cash flow? Reduce their purchases. Reduce their other expenses. Increase their sales revenue.

2.32.3

Alton Towers Hotel - 12.32.3

Alton Towers Hotel - 2

1. The Opening Balance in January is £160,000.

2. Sales Revenue is £40,000 each month apart from June, when this doubles due to a conference.

3. Purchases are £15,000 each month apart from May, when these double due to replacing tinned goods.

4. Wages are £45,000.

5. Rent is £8,000.

6. Other Expenses are £1,000 in January, April and May. They are £2,000 in February, March and June.

Complete the cash budget.

Does the hotel always make profit?

2.32.3

Alton Towers Hotel - 3

You are the hotel restaurant’s finance manager.

1. Would you be happy with this cash budget? Why?

2. What would you change? Why?

2.32.3

Alton Towers Hotel - 4

How could we improve the Purchases problem?

2.32.3

Alton Towers Hotel - 5

Spreading the cost of the extra purchases evenly over each of the 6 months would prevent the hotel restaurant making a loss.

2.32.3

Ice Cream Stand - 12.32.3

Ice Cream Stand - 2

1. The Opening Balance in June is £12,000.

2. Sales Revenue is £10,000 in June and September. In July and August it is double. In October and November it is half.

3. Purchases are £1,000 each month apart from June and July, when these double.

4. Wages are £2,000.

5. Rent is £3,000.

6. Other Expenses are £1,000, apart from September when they double to pay for maintenance.

Complete the cash budget.

2.32.3

Ice Cream Stand - 3

You are in charge of the ice cream stand.

1. Would you be happy with this cash budget? Why?

2. How healthy would you say the business is? Why?

2.32.3

Ice Cream Stand - 42.32.3

Ice Cream Stand - 5

Closing Balance June to November 2009

0

10

20

30

40

50

Closing Balance

Month

Sal

es £

000

JUN

JUL

AUG

SEP

OCT

NOV

2.32.3

Questions

What is the difference between fixed costs and variable costs? Give examples of each. (4)

Why is breaking even a goal for all businesses? (4)

Why is a cash budget a useful planning tool? Give examples of how it might help a business. (6)

2.32.3

Financial Information

Businesses use three types of financial information: Cash Flow Statement Trading, Profit and Loss Account Balance Sheet

Businesses also use ratios (financial calculations).

2.32.3

Trading, Profit and Loss Account

Money comes into a businesses from selling goods and services.

Money goes out of a business to pay for: The cost of making/providing the goods and services. The cost of running the business.

A Trading, Profit and Loss Account shows the financial position of a business at the end of a year.

2.32.3

Trading, Profit and Loss Account

Part 1 - Trading Account:

Shows the GROSS PROFIT (the difference between the selling price of the goods and the cost of the goods sold to customers)

2.32.3

Sidney the Salesman Sidney the Salesman runs his own

business; Company X.

He’s pretty happy…

I have made £100,000 in sales during this year. Nice one!

Trading Account2.32.3

Sidney the Salesman Sidney has enjoyed a good year but

we now need to work out how much these items cost him to buy to help us calculate his profit.

Can’t I keep the whole £100,000 for myself? Why not?

Trading Account2.32.3

Opening Stock At the start of the year, Sidney’s

warehouse was almost empty. He only had £20,000 worth of stock left.

I need to buy some more stock this year, iPods sell well.

Trading Account2.32.3

Purchases Sidney bought £50,000 worth of new

stock during the year which he intended to sell to the general public.

These new iPods don’t come cheap you know!

Trading Account2.32.3

Closing Stock Closing Stock is the value of the

stock left in the business at the end of the year. Sidney had unsold stock worth £15,000.

Not even I can sell everything, we’re in a recession you know!

Trading Account2.32.3

Cost of Goods Sold The Cost of Goods Sold figure helps

us to work out how much money Sidney has made from the buying and selling of stock during the year.

There’s a calculation coming up, pay attention!

Trading Account2.32.3

Cost of Goods Sold

Opening Stock 20

+ Purchases + 50

- Closing Stock - 15

= Cost of Goods Sold = 55

Not bad, I sold goods worth £55,000!But did I make a profit?

Trading Account

£000

2.32.3

Gross Profit

Sales 100

- Cost of Goods Sold - 55

= Gross Profit = 45

£45,000 Gross Profit!This must be all mine to spend as I please?

Trading Account

£000

2.32.3

Trading, Profit and Loss Account

Part 2 - Profit and Loss Account:

Shows the NET PROFIT by taking into account other expenses that the business must pay, e.g. electricity, rent, wages.

2.32.3

From Gross Profit to Net Profit Sorry Sidney, but you do not have

£45,000 to spend! This figure is only the Gross Profit, we still need to take away all of your expenses.

Well, it did sound too good to be true I suppose.

Profit and Loss Account2.32.3

Expenses All business have expenses, things

that they have to be paid to keep the business running. These must be taken away from the Gross Profit.

What kind of expenses might I have? Can you guess?

Profit and Loss Account2.32.3

Expenses

Rent 3

+ Advertising + 4

+ Electricity + 2

+ Telephone + 1

+ Wages + 10

= Expenses = 20

Profit and Loss Account

£000

2.32.3

Net Profit To work out the Net Profit, we take

away the Expenses from the Gross Profit.

Here comes the best bit!

Profit and Loss Account2.32.3

Net Profit

Gross Profit 45

- Expenses - 20

= Net Profit = 25

Profit and Loss Account

£000

£25,000 Net Profit! That will go towards a new Ferrari!

2.32.3

Trading, Profit and Loss Account

A Trading, Profit and Loss Account can now be created using the numbers that we have used.

Businesses must display the following information in a standard way: Sales, Cost of Goods Sold

(also known as Cost of Sales), Gross Profit, Expenses, Net Profit.

2.32.3

Income from sales made over the past year.

2.32.3

How much was actually sold.

2.32.3

Stock already in the business from last year.

2.32.3

Stock bought in this year.

2.32.3

What was left (unsold stock).

2.32.3

Profit BEFORE expenses.

2.32.3

Costs from running the business.

2.32.3

Profit AFTER expenses.

2.32.3

Key Words

Sales – money from customers.

Stock – things bought in to sell on.

Gross profit – profit before internal expenses.

Net profit – profit after internal expenses (“the bottom line”).

Trading, Profit and Loss Account2.32.3

Trading, Profit and Loss Account

Money comes into a businesses from selling goods and services.

Money goes out of a business to pay for: The cost of making/providing the goods and services. The cost of running the business.

A Trading, Profit and Loss Account shows the financial position of a business at the end of a year.

2.32.3

Balance Sheet

A Balance Sheet is used by businesses to help them to understand their financial position at a given moment in time.

It shows the assets and liabilities of a business, and show how the money is being used.

2.32.3

Sidney the Salesman Sidney the Salesman still runs his

own business; Company X.

Let’s see how it’s doing.

My business is none of your business, Mr Smith!

Balance Sheet2.32.3

Fixed Assets The business has quite a few Fixed

Assets – things that the business owns and will stay with the business for longer than one year.

What does a business own and keep for more than a year?

Balance Sheet2.32.3

Fixed Assets

Equipment 40

+ Vehicles + 30

+ Premises + 100

= Fixed Assets = 170

Balance Sheet

£000

This is how much each of my Fixed Assets is worth.

2.32.3

Current Assets The business also has some Current

Assets – things that the business owns and will be used up in less than one year.

What things would a business keep for less than a year?

Balance Sheet2.32.3

Current Assets Cash is normally spent quickly. Stock should be sold within a year. Debtors are people who owe us money.

They are expected to pay us back within a year!

I don’t like to be kept waiting for money that I am owed!

Balance Sheet2.32.3

Current Assets

Stock at Year End 15

+ Debtors + 30

+ Cash + 30

= Current Assets = 75

Balance Sheet

£000

This is how much each of my Current Assets is worth.

2.32.3

Current Liabilities Current Liabilities are things that a

business will need to pay out for within 12 months.

Creditors are people (e.g. suppliers) that we owe money to.

I owe my suppliers £30,000. Must keep an eye on this.

Balance Sheet2.32.3

Working Capital Working Capital is the total of all the

Current Assets minus any Current Liabilities.

It is the amount of money available for day-to-day operations.

Why do businesses need Working Capital?

Balance Sheet2.32.3

Working Capital

Current Assets 75

- Creditors - 15

= Working Capital = 60

Balance Sheet

£000

This is how much cash I can call on quickly.

2.32.3

Capital Employed Capital Employed is the total of the

Fixed Assets and the Working Capital. This is how much money is tied up in

the business.

We’re nearly there.

Balance Sheet2.32.3

Capital Employed

Fixed Assets 170

+ Current Assets + 60

= Capital Employed = 230

Balance Sheet

£000

This is what my business is worth. Not bad at all!

2.32.3

Balance Sheet

A Balance Sheet can now be created using the numbers that we have used.

Businesses must display the following information in a standard way: Fixed Assets, Current Assets, Current Liabilities, Working Capital, Capital Employed.

Balance Sheet2.32.3

Fixed Assets: Things that we own which will still be with us in a year’s time (equipment, buildings, machinery, etc.)

=

2.32.3

Current Assets: Things that we own which will be used up within a year.

=

2.32.3

=

Current Liabilities: We take-away things that we owe to other people.

2.32.3

=

Capital Employed shows how valuable the business is.

Capital should balance (match) because this is how much money the owner has invested.

2.32.3

Key Words

Fixed Assets – things we own which will last longer than a year.

Current Assets – things we own which will last less than a year.

Debtors – people who owe us money.

Current Liabilities – people we owe money to.

Balance Sheet2.32.3

Questions

What is the difference between fixed assets and current assets? Give examples of each.

What is the difference between debtors and creditors?

2.32.3

Ratios

Ratios are calculations that show us how well a business is being run.

We need to learn and understand 5 ratios in Standard Grade Business Management.

This means lots of practice in your own time.

Ratios2.32.3

Ratios

Gross Profit Percentage Net Profit Percentage Return on Capital Employed Rate of Stock Turnover Working Capital

Ratios2.32.3

Gross Profit Percentage

The Gross Profit Percentage shows how much profit is made from the buying and selling of goods.

Ratios

Gross Profit

SalesX 100=

2.32.3

Net Profit Percentage The Net Profit Percentage provides a

more accurate reading on how much profit a business has made. It takes away all of the costs and expenses, not just those from the buying and selling of our goods.

Ratios

Net Profit

SalesX 100=

2.32.3

Return on Capital Return on Capital looks at how much

money you get back from investing in a business. The higher the value of the ratio the better!

Ratios

Net Profit

Capital EmployedX 100

FROM THE PROFIT AND LOSS ACCOUNT

FROM THE BALANCE SHEET

=

2.32.3

Rate of Stock Turnover The Rate of Stock Turnover shows

how often a business gets through its stock. If stock sits around for too long, it can lose value or may get damaged.

Ratios

Cost of Goods Sold

Average Stock=

2.32.3

Working Capital Working Capital is the ready cash

that a business needs to meet its day to day expenses. If a business doesn’t have enough cash to meet its bills, it has a cash-flow problem.

Ratios

Current Assets

Current Liabilities=

2.32.3

Calculating Ratios Calculate the five ratios for Company X Show your working. After each answer, explain what the

result means.

How’s my business doing?

2.32.3

Gross Profit PercentageRatios

Gross Profit

SalesX 100=

45,000

100,000X 100=

= 45%

A 45% Gross Profit means that the company makes 45% profit on the selling of the goods.

2.32.3

Net Profit PercentageRatios

Net Profit

SalesX 100=

25,000

100,000X 100=

= 25%

The business is making a 25% Net Profit, once other expenses have been paid.

2.32.3

Rate of Stock Turnover

Ratios

Cost of Goods Sold

Average Stock=

70,000

(20,000+30,000) / 2=

= 1.4 times

70,000

50,000=

Stock turns over 1.4 times per year.

2.32.3

Return on Capital Employed

Ratios

Net Profit

Capital EmployedX 100=

25,000

230,000X 100=

= 10.8%

For every £100 invested in the business, only 10.8% is being returned as profit.

2.32.3

Working CapitalRatios

Current Assets

Current Liabilities=

75,000

15,000=

= 5:1

For every £1 of Current Liabilities owed, there are £5 of Current Assets to pay for them.

2.32.3

Standard Grade Business Management

Unit 2.4Unit 2.4

Why Do Why Do

Businesses Fail?Businesses Fail?

What Is In Unit 2.4?

In this unit, we will look at why businesses fail.

Businesses usually fail because they are not run properly by the owner, or because there are things happening outside of the business that cannot be controlled.

2.42.4

A Healthy Business

S ALES

TIME

A healthy business has more and more sales as time goes on.

2.42.4

A Failing Business

S ALES

TIME

A failing business has fewer and fewer sales as time goes on.

2.42.4

Recent Failed Businesses

Woolworths Zavvi Zoom OSC Whittards Barratts Wedgewood Northern Rock

2.42.4

6 Main Reasons Why Businesses Fail

Competition is too fierce. The economy is in recession. Cash flow problems. Business does not move with the

times. Poor resource management. External factors.

2.42.4

Competition

Healthy competition ensures that businesses work hard to meet customers’ needs and wants.

If competition is too strong then businesses may fail. Larger businesses can use tactics such as destroyer pricing to undercut smaller businesses.

2.42.4

Competition

In most countries, more than one business provides a similar good or service to customers.

The extent of this choice can be good and bad, for both customers and businesses.

2.42.4

Positive Effects of Increased Competition

For Customers More choice initially Lower prices initially Special offers initially

For Other Local Businesses More people may visit location New business may sell local produce

2.42.4

Negative Effects of Increased Competition

For Customers Reduced choice eventually Higher prices eventually

For Other Local Businesses Specialist shops (e.g. music) close Destroyer pricing forces smaller shops to

close Best locations are bought up

2.42.4

Recession

A recession is, officially, “two continuous 3-month periods of negative economic growth”.

This means that the value and power of money in the country decreases, and customers and businesses are affected.

2.42.4

Recession

1990-92 2008-?1980-821973-75

Value of the economy

Time

Years of recession in the UKTrough (“Bust”)

Peak (“Boom”)

Recession Growth

R G

2.42.4

Recession

The current recession will cause some companies to fail because:

Less is spent by customers, so Less is bought by retailers, so Less is produced by producers, so More people become unemployed, and Loans are harder to come by for everybody.

2.42.4

Cash Flow Problems

If a business has a deficit at the end of each month, more money is being spent than is being earned.

Running out of cash is one of the main reasons why businesses fail.

2.42.4

Business Does Not Move With The Times Products are obsolete. Production equipment is outdated; need for

automation and technology. Out of fashion. Marketing, advertising and promotion is not

effective. Reached end of its life cycle. No attempt to

extend lifespan.

2.42.4

External Business Environment

The external business environment includes factors over which a company has no control.

Even though a company has no control over the external business environment it must react and change. It cannot ignore the external business environment.

2.42.4

P E S

T E C

External Business Environment

The Business

Political Factors

Economic Factors

Social Factors

Technology Factors

Environmental Factors

Competitive Factors

2.42.4

External Factors (PESTEC)

Political Laws Economic Value of money Social Changes in society Technological Advancing IT/gadgets Environmental Natural world Competitive More than one business

Businesses cannot control these external factors, but they cannot ignore them either.

2.42.4

Poor Resource Management Supermarket car parks are poorly maintained. Shabby paintwork, faulty doors, poorly heated building. Equipment and machinery which are badly maintained – cause

accidents, lead to inefficient, costly production. Lack of efficient security could lead to pilfering and theft. Failure to keep accurate records of assets could lead to fraud

and theft. Poor management of staff – demotivation and staff shortages.