Setting up a BusinessUnit 1

Starting a Business

Sources of Business Ideas– Two types of starting businesses:

– Set up a business then think about products or services the business will provide.

– Think about products or services the business will provide then set up a business.

– Sources of Ideas:– A solution to a problem in an existing product.– Noticing a growing trend in a market. (Looking for opportunities)– Inspired by existing operating businesses.– Buying someone else’s idea. (Franchise)

Looking for a gap in the market

– To determine whether a product or service will be successful, entrepreneurs conduct market research (the process of gathering, analyzing and presenting data relevant to marketing). Market research includes:– Key features of the market.

– Size– Growth

– The different types of potential customer for the product.– Who the competitors are.– What trends may be occurring.

– Market Growth – Growth in a specific sector– The main competition and how your product is unique

– Market share of competitors– A Niche (small part of a large market) in the market.

– In niche markets, no large business competitors.

Reasons for starting a business

– People who start businesses are called entrepreneurs (someone who is willing to take the risk involved in starting a business). There are a variety of motives to start a business:– They want to make their own decisions and be their own boss.– They want to keep all the profits the business makes.– They need a job and starting a business is one way of making sure they

are employed.– They have an interest that they want to expand on by starting a

business.– They want to prove something to themselves by showing they can start

a business for themselves. (Self Satisfaction)– They want to provide a service for others. These are called social

enterprises (a business that is set up not to make a profit but to serve the society).

Franchises– When a business chooses to become part of an existing business by buying

a franchise (when a business sells the right to use its products and / or brand name to another business).

– Advantages of buying a Franchise:– The idea already exists. The entrepreneur can judge the success of the

existing company and decide whether to start up. Reduces the risk.– The brand name is already established, easy to gain immediate

customers.– The franchisor provides support, training and existing methods.– Costs such as national marketing, can be shared between the

franchisees.– Disadvantages of buying a Franchise:

– A problem with one of the franchisees will reflect badly on all the other franchisees.

– Disputes may occur over the balance of power and control between the franchisee and franchisor.

Types of Business Objectives

– A business typically sets out a series of objectives (a target that is set for the business to achieve) for itself to follow. Although each individual objective may vary, they all typically center on these areas:– Survival: Mostly a objective when starting a business, the entrepreneur

may have to charge lower prices and make lower profits to establish the brand’s name.

– Providing a good product: Doing a good job and taking pride in their work.

– Earning a profit: After a business is running, making a decent profit is essential to staying in operation.

– Customer satisfaction: Providing a better customer service potentially leads to more profit in the long run.

– Market share: Businesses may set themselves a target in terms of share of market they hope to achieve.

– Ethical objectives: By being ethical, a business may benefit by getting favorable media coverage, by attracting customers, investor and employees.

Purpose of Setting Objectives

– An object provides a focus for everything you do and will enable to see whether you have accomplished your targets. Objectives are important because:– Helps with decision making and with establishing priorities.– Helps investors understand the direction in which the business is

heading. This might mean they are more willing to agree to certain decisions.

– Provides a target so that everyone can compare the actual results with the planned results to decide how successful the business has been.

– Helps them take appropriate decisions when things get off track.– Motivate everyone connected with the business because they know

their aims.

Influence of stakeholders– The objectives of a business should be set by the owners, but the decision

will most likely be influenced by stakeholders (individuals and organizations that are affect by and affect the activities of a business).– Employees want the business to grow so they have promotion

opportunities. They want the business to behave ethically.– Suppliers want to be paid on time.– Community want the business to act responsibly, such as waste and

noise reduction.– Buyers also affect the firms as they want lower prices, higher quality

etc.– Stakeholders can influence a business in multiple ways:

– Negotiation– Direct Action– Refusal to Cooperate– Voting

Purpose of Business Planning

– A business plan (is a document setting out what the business does at present, and what it aims to achieve in the future), it is used to plan out the following areas:– Background information on the founders and investors and their

previous experience.– An analysis of the market and the business’s position within it.– The business’s objectives.– The business’s plan on how it will compete with existing businesses.– An analysis of the financial position of the business, cash flow

forecasts, profits, etc.– Business planning is important because a business needs to:

– Identify and anticipate problems.– Have a sense of direction.– Show to potential investors or creditors.

– Business plans need to be constantly updated, as there are changes in tastes, laws and competitors.

Business plans to reduce risk

– There are many difficulties of business planning, some of them include:– Uncertainty: Plans might not be totally accurate as it is sometimes hard

to estimate future market conditions or sales figures with any degree of accuracy.

– Lack of experience: Small business do not have the resources to use experts for business planning.

– To try to reduce the risk of business plans going wrong, entrepreneurs can:– Research the market thoroughly.– Talk to experts and consultants.– Plan for a variety of possible outcomes.– Regularly review and update the plan so it remains relevant.

Sole Trader– A sole trader is when a business is owned and managed by one person.

They are allowed to have employees.– Advantages:

– Quick and easy to set up, does not involve registering with the government.

– You make all the decision yourself so you don’t need to have other’s approval.

– You keep all the profits to yourself.– Disadvantages:

– Can be stressful making decisions by yourself.– Needs to handle all aspects of the business, lack of different skillsets.– You have unlimited liability (when the personal possessions of the

owners of the business are at risk if there are any problems).– You may find it difficult to raise money for the business.– Is likely to be small and will not have the power large business do over

suppliers and distributors.

Partnership– Partnerships are formed when two or more people set up in business

together. They must sign a Deed of Partnership which is an agreement of the rules of the partnership, such as how the profits will be divided, how decisions are to be made, etc.

– Advantages:– Several people are involved in a partnership so each can contribute

money.– More people can be involved with discussing problems, better

decisions.– Each partner can specialize in an aspect of the business according to

their skillset.– Partners can cover for each other, being in a partnership is less

stressful.– Disadvantages:

– There may be disputes when a conflict of ideas occur.– Decisions may be slower than a sole trader as because all the different

partners need to be consulted.– The rewards are divided up.– The partners have unlimited liability.

Companies– A company is a business that has its own legal identity. It is made when the

owner(s) complete two documents:– Memorandum of Association

– Name of the company– Overall purpose of the business– Where the company is registered– A general statement on the business’s activities

– The Articles of Association– The voting rights of shareholders– How profits are distributed– How directors are elected– The duties and powers of directors

– A company is owned by its investors who are called shareholders (an owner of a company. Each shareholder owns a ‘share’ of the business).

Private Limited Companies– The features of Private Limited Companies are:

– It has “ltd” after its name.– It is owned by shareholders.– It cannot sell shares to the general public, only privately.

– Advantages:– Shareholders have limited liability (you can only lose what you

invested into the business).– The business gains more status, people assume a company is at a

higher level.– If the founders die, the company still exists.– Managers can be employed to run the day-to-day business.

– Disadvantages:– Various legal procedures.– A summary of the business’s financial accounts must be made

available to public.– Business must pay corporation tax.– Any additional investors become important stakeholders.

Factors influencing the location

– The decision of a business’s location is vitally important, there are many factors that could affect or limit the choices, such as:– Type of business

– A shop needs to be close to customers.– A factory is more concerned about distribution and transport

systems.– Availability of locations– Competitors

– Hotels want to open in established tourist areas.– Availability of raw materials– Availability and cost of labour– Transport links

– Businesses to export abroad want to be near an airport or port.– Technology (communications systems)– Costs

Marketing

Reasons for conducting research

– Using market research (the process of gathering analyzing and processing data relevant to marketing decisions) enables the entrepreneur to learn about:– The Market

– Market opportunities– Market size– Market growth– Market share– Market segments

– Potential competitors– Pinpoint strengths and weaknesses

– Customer needs– Price people are willing to pay– Best way of promoting– Where to sell

Methods of market research– To gather primary market research (research that has never been

gathered before), entrepreneurs use a variety of methods:– Telephone surveys

– Advantages: Relatively cheap, can be conducted from office.– Disadvantages: People are suspicious of phone surveys.

– Questionnaires– Advantages: Opinions of people in a certain area.– Disadvantages: Opinion sample may not be representative.

– Customer feedback– Advantages: Direct contact with customers– Disadvantages: Relies on existing customers

– Internet research (secondary information)– Advantages: Cheap and fast, wide sample size.– Disadvantages: Not tailored to meet business needs, may be out of

date.

Elements of the Marketing Mix

– The marketing mix refers to all the activities influencing whether or not a customer buys a product.– Product:

– Relating to the design, specifications and features of the product.– Promotion:

– Promoting a product means communicating or advertising your business or a product.

– Aimed to raise awareness and increase sales.– Price

– Payment terms– Installments, discount if buying in large quantities.

– Place– How are the products distributed? – By internet or via shops.

Choosing the best mix– The choice of the best marketing mix is dependent on these factors:

– The product– Is it unique? – How long is it expected to last?

– Competitor’s products– What do they offer?– How does it compare in terms of price and features?

– The target customers– How much do they earn? – How much do they need it?

Use of ICT in marketing– Small businesses now can utilize the internet to access and reach wider

international markets. A business can:– Set up a website– Purchase online advertising space.

– Target specific groups.– Reach millions of potential customers.

Finance

Sources of Finance– Sources of finance are places where an entrepreneur might find the necessary

money to start a business.– Owners’ funds: money put into the business by its owners.

– Advantages: Most reliable and first source of finance.– Disadvantages: Limited funds

– Bank loans: A bank lends the business a large sum of money and it is repaid in installments.

– Advantages: Large sum of money, repaid in installments– Disadvantages: Charged interest, might ask for collateral.

– Mortgages: Loans from banks that are used to buy land and buildings.– Advantages: Large sum of money, very long term up to 30 years.– Disadvantages: The land will be sold if the business is unable to repay.

– Overdrafts: Gives businesses the right to borrow of money to an agreed limit.

– Advantages: Very flexible, only used when required.– Disadvantages: High interest rate, right to withdraw overdraft.

Sources of Finance– Loans from friends and family: Borrowing money from friends and

family– Advantages: Easy to arrange, free of interest.– Disadvantages: Limited money, may need the money suddenly.

– Hire purchase: Purchasing assets and paying in installments– Advantages: Doesn’t need a large sum of money.– Disadvantages: Expensive in the long run.

– Leasing: Allow businesses to rent assets such as vehicles.– Advantages: Item maintained by the leaser, doesn’t need large

sum of money.– Disadvantages: Business never owns the asset.

– Government grants: Encouraging people to start business, creates jobs.– Advantages: Do not have to be repaid.– Disadvantages: Difficult to obtain, only business that create a lot of

jobs.– Shares: Companies can sell shares.

– Advantages: Relatively easy, cheap source of finance.– Disadvantages: May lose control of the business.

Types of advice available– There are various ways to get help or advice for your business such as:

– Business Link– The service the government provides that gives businesses advice.

– Private websites– Give free or charged advice.– Smallbusiness.co.uk sponsored by major banks.

– Banks– Help with writing business plans– Advice on starting a business– How to find suitable buildings– Issues involved with employing people– How to trade online

– Accountants and Solicitors– Help with finance and law

Basic finance calculations– Price: the amount a business asks a customer to pay for a single product.– Sales: The number of products sold by a business over a time period.– Revenue: The income that a firm receives from selling its goods or

services.– Costs: The spending that is necessary to set up and run a business.

– Fixed costs: Rent, insurance– Variable costs: Stock, wages– Start – up costs: Machinery and equipment, buildings– Running costs: Taxes, wages

– Profit = Revenue – Total Costs– Revenue = Selling Price x Sales– Total Costs = Fixed Costs + Variable Costs

Importance of cash flow forecast– It is common for a business to experience cash flow problems, this is when

the forecasts come important:– They can identify times when the business is short on cash.– They can take action to avoid cash shortages becoming a major

problems.– If they do not have enough cash to pay its bills, it becomes insolvent

(occurs when a business is not able to meet its financial commitments).– There are many solutions to cash flow problems, such as:

– Delay payments: Agree with suppliers to give them more time.– Speed up cash inflows: Persuading new customers to pay on delivery.– Find new sources of cash inflows: Extra services.– Reduce cash outflows: Employing fewer staff, using cheaper materials.– Arrange an overdraft: Short term, flexible loan.

People in Businesses

Recruitment methods– Internal Recruitment (when a job vacancy is filled from within the existing

workforce)– By promoting existing employees to a more senior role by invitation.– By posting notices on workplace.– Advertising on internal website or business newsletter.– Benefits of this are:

– Already have experience of the business.– Know the people they are working with.– Promotion motivates them.– Cheaper as it avoids expensive advertising.

– External Recruitment (when a job vacancy is hiring employees who do not work there)– Advertising in newspaper classifieds etc.– Job Centers / Employment agencies.– Benefits of this are:

– Wider choice of candidates with different skillsets.– New employees have the right skillsets immediately.

Remuneration– Remuneration is the payment of employees.– weekly wage = number of hours worked x pay rate per hour– Salaries are paid once a month and states the figure the person earns in

one year.– Important factors that influence how much a person is paid are:

– Skills– The skill of the worker translates to the quality of the product.

– Allowing the business to charge higher for the product and more profit.

– Experience– Unlikely to need any training.– Be able to perform the job efficiently without further need for

improvement.– General level of wages

– Look at what competitors are paying.– They want to employ better workers than their competitors.

Benefits– Monetary benefits: additional payments made to employees on top of their

wages or salaries.– Bonuses: Employees get bonuses if they are able to achieve certain

targets.– Employee’s Pensions: Employers pay part of their wagers into their

pension.– Profit Sharing: Given a share of the profit, provides a motive for

success.– Non-Monetary benefits

– Flexible hours: Employees value being able to work hours that suit their responsibilities.

– Free lunches: Can save employees money and also time to get make or pack.

– Parties: Offer Christmas / Halloween parties to raise morale, to create good working relationships.

– Teamwork: Making them feel responsible for a team.

Benefits of motivated staff– Hard working employees

– Work ethic:– Work hard and try to do their jobs as well as possible.– Arrive at work on time.– Always polite and helpful.

– The benefit is that this will help the business gain a good reputation.– Employee Loyalty

– Reduce costs:– Avoid the cost of advertising for new employees and training.– Reduce time wasted in employees adapting.

– Allows entrepreneur to concentrate on the business rather than hiring people.

Maslow’s Hierarchy of Needs

Methods of motivation used– Small businesses use a variety of ways to motivate employees:

– Job enrichment– Making jobs more challenging– Extra higher-level tasks– Changing positions once in a while

– Training– Shows the owner values the employee– Increase self esteem

– Working in teams– Working becomes more social– Friendly working environment

– Financial awards– Basic pay raise– Bonuses and profit sharing

Employee protection legislations

– There are multiple laws protecting the employees from discrimination and mistreatment, they include:– National Minimum Wage 1998– Equal Pay Act 1970– Sex Discrimination Acts 1975 and 1986– Race Relations Act 1976– Disability Discrimination Act 1995– Employment Equality Regulations 2006– Health and Safety Act 1974

– Installation and maintenance of safety equipment.– Maintenance of workplace temperatures.– Giving employees sufficient breaks.– Providing protection against dangerous substance.– Writing and displaying a safety policy.

Methods of Production– Job Production: Products are made one by one.

– Advantages:– Exact specification of customer– Can charge higher prices as it supplies a personal service.

– Disadvantages:– Expensive method of production.– Cannot use machinery.– Often requires skilled employees.

– Batch Production: A group of items moves through the production process together.– Advantages:

– Can use machinery.– Employees to specialize in one task, rather than frequently

switching.– Disadvantages:

– The business has to estimate its sales.– Has to invest in expensive machinery if batch production is to be

effective.

Efficiency & Technology– Efficiency is when a business produces a larger amount of output using less

or the same resources. – To cut labor costs:

– Replace employees with technology– Do not need to pay recruiting fees– Do not need to pay wages– Do not need to pay for training

– To reduce waste:– Produce identical products every time.

– Few will be rejected by quality control.– Environmental technology to save energy.

– Technology often has high start-up costs but lower running costs.– Quality is the extent to which a customer is satisfied with a product.

Importance of customer service

– Customer service is the part of a business’s activities that is concerned with meeting the customer’s needs. Customer service is important because:– The products themselves

– Reliability: Good should be reliable and do exactly what is expected of them.

– Safety: Safety is important as customers worry about safety in buying services such as flights.

– Product information– After-sales service

– Dealing with complaints quickly– Delivering products without delays (important for perishables)– Exchanging goods that are faulty– Repairing goods– Offering customers advice and support.– Accepting customer feedback.

Importance of customer service

– Employees– Should be helpful and respond quickly to enquiries.– Should receive training.

– Premises– Should be clean, especially where food is prepared.– Clear directions– Allowances for disabled people– Good facilities (toilets, changing babies nappies, etc.)

– A variety of payment methods– Helps the business:

– Attract new customers– Increasing sales revenue and profits– Rising market share– Customer Loyalty

Consumer protection laws– There are multiple laws protecting the consumers from unfair practices,

they include:– Labeling of Food Regulations 1970– Weights and Measures Act 1986– Unfair Trading Regulations 2008– Consumer Credit Act 1974– Sales of Goods Act 1979– Computer Misuse Act 1990– Data Protection Act 1998– Food and Drugs Act 1984 (Things that cannot be added to food)– Consumer Protection 1987 (Businesses liable for injury using their

product)– Food Safety Act 1990

Impact of ICT– Using websites

– Can give the customer information about the businesses and its products. (pictures / videos)

– Help advertise a small business to a much larger group of customers.– Include FAQs, a customer feedback email.– Offer advice to current customers.

– E-commerce– Shopping can take place at any time of the day.– Small businesses do not have to pay for a shop to sell their products.– It helps the business to sell products to people internationally.