standard grade business management units 1 and 2 revision slides unit 1.1 unit 1.1 (slides 2-36)...
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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-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.