Nature Of Business Notes

1. Small To Medium Enterprises

A) Definition & Role
Businesses can be defined as the organised effort of individuals to produce and sell goods
(tangible) and services (intangible) that satisfy individuals needs and wants for a
profit. They occupy about 80%of all private sector (non-government) jobs.
Production refers to those activities undertaken by the business that combine the
resources needed to create the products.
Profit is the return or reward that business owners receive for producing products
that consumers need or want. A profit is earned if the sales revenue of the business is
greater than its operating expenses, which is the all the costs of running the business
except for the cost of goods sold.

Gross Profit = revenue cost of goods sold

Net Profit = gross profit expenses

Income is the amount of money businesses pay to their employees for providing their
labour and be in the form of a:
Wage- based on an hourly rate and usually paid on a weekly basis,
Salary- employee receives an annual fixed amount, which is usually, paid,
fortnightly or monthly.
The profit of a business is the income of its owner. However if the business is a
public or private company it will have several owners known as shareholders, this
means that the profit must then be divided. This form of income is called a dividend.
Choice is a customers ability to choose between competing products, this is what
drives the modern economy.
Innovation is the creation of a new or significantly improved product, service or
process.
Entrepreneurship is the ability and willingness to start, operate and assume the risks
of marketing new ideas and profit.
Wealth creation is when people invest in businesses to grow the value of their
wealth over time.
Quality of life refers to the overall wellbeing of an individual and is a combination of
both material and non-material benefits.

2. Types Of Business
A) Classification of business

i. Size
Micro- five employees or less.
Small- have fewer than 20 employees.
Medium- 20 to 199 employees.
Large- 200 or more employees e.g. Woolworths
ii. Local, National and Global
Local- serve the surrounding area and are mostly small to medium in size e.g.
hairdresser
 National- operate in one country e.g. Sportsgirl
Global Transnational Corporations (TNCs)- large businesses based in one country
that have their goods and services produced and sold on an international scale e.g.
Coca Cola

iii. Industry
Primary Industry- includes those businesses involved in the collection of natural
resources e.g. farming, mining, and fishing.
Secondary industry- includes all those businesses that use the output of firms in the
primary sector (raw materials) and process it into a finished or semi finished product
e.g. car manufacturing
Tertiary industry- provides services e.g. dentists, teachers, restaurants
Quaternary industry- jobs in information & finance
Quinary industry- includes all services that have traditionally been performed in the
home e.g. child care

iv. Legal Structure

Sole Traders
Unincorporated businesses with one owner.
Owner is responsible for all the decisions made within the business and retains all the
profits.
Funding comes from the owners own funds (owners equity) and money borrowed
from financial institutions (debt).
Since they are unincorporated they have unlimited liability, this means that the owner
of the business is personally responsible for the debt incurred by the business and can
have their assets taken if they are unable to make the payment.

Partnerships
Usually have 2-20 owners
Unincorporated and have unlimited liability
Should the business be unable to meet its financial obligations, each partner will be
held responsible and will be required to contribute to the business a portion of their
own money.

Private Companies
1-50 owners known as shareholders. In order to be a shareholder of a private
company you must first be invited, as private companies are not listed on the stock
exchange.
Incorporated so they have limited liability meaning they are a separate legal entity
from their shareholders and the company is legally recognised as a separate
organisation therefore its owners wont be responsible for its debts.
Private companies also have Proprietary Limited (Pty Ltd) after their name, the Pty
means the company is private and the Ltd means the company has limited liability.

Public Companies
Have ownership open to the public and can have a minimum of 5 shareholders but no
maximum amount of shareholders.
 Each of these shareholders have limited liability.
The company is listed on the Australian Stock Exchange (ASX) where its owners buy
shares from in return for a portion of the profits, this earning is known as a dividend.
Before the company can be visible on the stock exchange, a prospectus which is a
description of the nature of the business must first be issued.

B) Factors Influencing Choice Of Legal Structure

i. Size
Most businesses often start off as a sole trader, and then as it enters the growth phase
investors may be brought in to provide additional funds and expertise. The owners may
then move on to a private company structure, which protects investors through limited
liability. If the business plants to grow even further it may even move towards a public
company structure which allows for more shareholders, meaning easier access to funds.

ii. Ownership
Ownership is associated with control. Individuals who like the idea of being their own
boss may be best suited to a sole trader structure whilst those individuals who work well
with others may favour partnerships or private companies. Shareholders in large
companies have limited control over the business and its doings.

iii. Finance
Most businesses are established with a limited amount of capital. Growth may be
achieved by offering a partnership or by becoming a private company, which could not
only bring in more capital but it would also provide increased protection with limited
liability. Private companies may expand by becoming a public company so that shares
can be offered publically which would then give the business access to even more funds.

3. Influences In The Business Environment

A) External Influences
i. Economic
An economy is defined as a system where governments, businesses, consumers and other
relevant associations interact to satisfy the needs of society. Business can be regarded as
the engine that drives production, employment, price changes and our standard of living.
The economic cycle refers to the changes in consumer and business spending over a
period of time. It influences the level of employment and investment in an economy, the
profitability of a business and the amounts of goods and services produced.
 Employment- if employees have security they are likely to spend more of their
income on consumer goods. Increase in consumer demand encourages businesses to
employ more labour so they can produce more goods and services. This is known as
economic growth.

Inflation- occurs when prices rise and the cost of living increases. To compensate for
this employees will seek higher wages from their employers, which increases production
costs, possibly resulting in the business needing to reduce the size of their workforce,
increasing the workload on the employees who remain.

ii. Financial
A business environment in which market competitors are controlled more by market
forces rather than by government regulation. Due to the globalisation of the worlds
financial markets, it is no longer for many large Australian businesses to use only
domestic financial institutions for the raising of finance.

iii. Geographic
Australias geographical location within the Asia-Pacific region and the economic growth
in a number of Asian nations has provided opportunities for business expansion, sales and
profit. Globalisation, the flow of goods and services between countries, is another
important geographical influence.

A major demographic issue for businesses is Australias aging population, since a large
portion of the workforce is close to retiring it will result in some skill shortages as well as
an increase in demand for age-related services such as health and aged care.

iv. Social
Tastes in fashion and culture can lead to sales and profit opportunities and business
growth. There has also been increased consumer demand for environmentally friendly
products.

v. Legal
Legislation includes laws on taxation, industrial relations, occupational health and safety,
equal employment opportunity, anti-discrimination and protection of the environment. e.g
Trade Practices Act 1974 (Cwlth), administered by the Australian Competition and
Consumer Commission (ACCC), which is an independent statutory authority, dealing
with competition and consumer protection laws.

vi. Political Influences

Political influences include:
Changes in the labour market
Taxation (GST)
Social reforms e.g. paid parental leave
Environmental management

vii. Institutional Influences

Government
All levels of government have developed laws concerning the conduct, legal structure and
competitive behaviour of businesses.
Local- Health regulations on businesses providing food products to consumers
State- Occupational Health and Safety requirements
Federal- Employee superannuation

Regulatory Bodies
Regulatory bodies are set up to monitor and review business and consumers. They
include the Australian Taxation Office and the NSW Office of Fair Trading.

Other Institutional Influences

Trade Unions- protects and promotes the interests and working conditions of
employees.
Employer associations- promotes the interests of employers and lobby governments
to develop policies that benefit employers.
The Australian Stock Exchange (ASX)- a market where investors may buy and sell
shares in public companies.
Consumer associations- provide informative opinions to consumers on a wide range
of issues e.g. NRMA

viii. Technological Influences

Technology enables businesses to gain a competitive advantage by reducing costs.

ix. Competitive Situation

The Number Of Competitors
The number of competitors that businesses face is what shapes the competitive
environment for a business. Each business wants to have sustainable competitive
advantages where it will try to develop strategies to have the edge over its competitors
over a long period.
Ease Of Entry
This is the ease with which a business can enter a particular market. Three critical issues
dictate it:
Cost of establishing the business
Access to materials
Government regulations
x. Markets
The type of marketing measures taken by competitors influences businesses:
The type and extent of marketing will depend on:
Size of the market (number of existing and potential customers)
Size of the business
Number of competitors
The nature of product

Different types of markets can include

Financial/capital markets
Labour markets
Consumer markets

B) Internal Influences
i. Products
The main product influences are:
Type and range of goods and services produce
The type of business (service, manufacturer or retailor) will influence the structure
The size of the business will be based on the range and type of goods and services
produced, the amount of them and the level of technology utilised.

ii. Location
The two most important considerations are customer convenience and visibility. Locating
next to complementary businesses may be beneficial because more customers may be
attracted to a single site. Factors that influence location include:
Visibility (where it can be seen)
Cost
Proximity to suppliers, customers and support services

iii. Resources
The four main resources are:
Human resources employees
Information resources knowledge and date e.g. market research
Physical resources- equipment, machinery, buildings and raw materials
Financial resources- funds the business to meet its liabilities

iv. Management
Businesses today have flat structures meaning there are fewer levels of management,
giving greater responsibilities to individuals in the business. Characteristics of this
structure include:
People centred
Multi-task, multi-skilled
Democratic and laissez-faire management styles
Equal power-sharing (inclusive)
Wide span workers autonomous and independent
 Communication- by consensus
Delegation (communicating)- by agreement
Approach to employment relations- unitary

Collaborative workplaces allow for a more cohesive and inclusive business culture.

v. Business Culture
Business culture is the values, ideas, expectations and beliefs shared by the staff and
managers of the business. Business culture is often reflected in:
The policies, goals or slogans of the business
Unwritten/informal rules
Its organisational structure e.g. businesses with more formal structures put an
emphasis on bureaucracy, hierarchical management structures and less formal
businesses with flatter management structures exhibit highly flexible, innovative and
risk-taking cultures

vi. Stakeholders
Stakeholders are those affected by the decisions or actions of a business and include:
Owners (shareholders) Invest and risk funds into the business therefore businesses
are legally obligated to protect those funds and provide shareholders with a
reasonable return on their investment
Managers Must honestly and accurately manage business resources
Employees- Managers must motivate their staff and provide a safe workplace, award
wages, holiday pay, workers compensation and long service leave and make sure to
deal with any discrimination.
Customers- Under the Sale of Goods Act and Trade Practices Act businesses are
obliged to provide saleable goods.
Environment- Businesses must maintain a quality environment and adopt
ecologically sustainable operating practices.
Supplies and creditors- Businesses depend on their suppliers for raw materials and
components whilst the suppliers depend on the continued success of the business.
Businesses have an ethical obligation to pay the suppliers or creditors (those they
owe money to).
Society- socially responsible businesses will participate in community projects and
activities

4. Business Growth and Decline

A) Stages Of The Business Cycle
i. Establishment
This is when the business first enters the market and owners must make decisions on
location, types of products to be sold, trained staff and choose the most suitable legal
structure. Establishment is characterised by slow growth in sales and high costs e.g. cost of
acquiring premises, equipment, stock and raw materials. These costs must be financed
before sales can be generated.

Challenges faced by a business in the establishment stage include:

Generating enough sales to create a positive cash flow
Generating sufficient revenue to cover costs and provide owner with a profit
Choosing a suitable location that does not add financial strain but is in close
proximity to potential customers
Developing appropriate marketing strategies to create an awareness of the business
and its products among potential customers, gaining a reputation
Ensuring all government regulations are followed e.g. business registration, ohs and
taxation requirements

Responding to challenges
Detailed planning can help greatly reduce the risk of failing.

ii. Growth Phase

During this stage sales increase and the business begins to gain increased revenue,
profit and market share.
Management will need to analyse finances and develop a budget to control costs in
order to maintain liquidity, which is the ability of the business to fund its short-term
expenses.
Characterised by changes in staff and management taking on more specialist roles
e.g. employment relations, operations, finance and marketing
Managers will also need to develop effective stock-control methods so the business is
able to have access to the stock when it needs it

Responding to challenges
Management must examine opportunities in the business environment that will allow
the business to sustain its growth e.g. merging which is forming partnerships with
other businesses or acquisition, which is taking over other companies.
 This can be vertical integration which is when a business expands at different but
related levels in the production and marketing of a product e.g. car manufacturer buys
a car company or horizontal integration which is where a business acquires or
merges with another firm that makes and sells similar products e.g. bakery merges or
buys another bakery.
Diversification which is when a business moves from its initial prime function into
unrelated markets. This can give the same advantages as a merger or a takeover but
with the added benefit of breaking into new markets.

iii. Maturity Phase

In the maturity phase the businesses growth and market share begins to slow and the
business will begin to face increased competition from new market entrants.

Challenges faced in the maturity stage include:

Needing to develop strategies to maintain customer loyalty and interest
Motivating employees and management
Ensuring that financial position is sufficient to cover all expenses
Keeping up with changing consumer patterns, new production methods and
competitors marking strategies

Responding to challenges
Introducing a more formal organisational structure
Adapting to the latest technology
Improving efficiency of business operations
Taking advantage of new market opportunities
Build customer loyalty
Effectively manage cash flow and finance

iv. Post Maturity Phase

This is the final stage of the businesses lie cycle where key decisions affecting the long-
term survival of the business will be made. One of three paths will be taken:
Steady State- the business maintains it position and market share and has developed
a group of loyal customers. However increased competition may cause difficulties.
Decline Stage- the business has lost its competitive advantage and is experiencing
falling sales and a decline in market share. Continued business operation may not be
a viable option in this stage.
Renewal Stage- the business is experiencing an increase in sales and market share
once again as well as improving profits, this stage is often achieved through the
introduction of new goods or service or an extension of an existing product combined
with new marketing campaigns.
Challenges faced in the post-maturity phase
Increasing sales, cash flow and profits.
Seeking out and exploiting previously unmet demand in new markets.
Undertaking further diversification and integration.
Selling off any unprofitable activities or assets.

Responding to challenges
 Should it decide to close, the business should be aware of its legal responsibilities in
relation to its obligations to its creditors, suppliers and employees.
Motivate employees and create a workplace culture where change is embraced.
If the renewal stage is entered, active interests should be kept in the business
environment and be aware of changing consumer patterns, new production methods
and competitors marketing strategies.

v. Voluntary and Involuntary Cessation

Cessation refers to the closure of a business and may be involuntary or voluntary.
Voluntary cessation
When the owner of a business decides to cease its operations without being forced by
other parties. Reasons for this may be:
Loss of enthusiasm and ideas
Retirement or a somebody offering to purchase the business
Declining profits
Need to rest from the time demands of the business

Involuntary cessation
When the closure of a business is forced upon the owner, the reason for this may be:
NSW Supreme Court orders that the assets of the business are sold to cover debts, the
most common cause is the inability of the business to repay its debts.
Death of the owner
Lack of product demand or no longer able to keep up with low-cost competitors
Unfavourable economic conditions which discourages consumer spending

The Cessation Process

If registered as a sole trader or partnership then the owners of the business will be
held responsible for its financial obligations. If debts are unable to be paid then
creditors will go to the supreme court requesting the selling of the businesses assets
A business is in receivership when an independent party (receiver) is appointed by
the court to examine possible solutions of the business trading itself out of trouble.
Solutions include selling to new owners, restricting the organisation with a lower cost
base or hiring a new management team.
If receivership fails, the business may then face liquidation, which is when the assets
of the business are sold in order to recover outstanding debt. The receiver takes
responsibility for this sale and recovery of debt. If debts still remain then the
personal savings and assets of the business may be used to cover the debts. If the
owners do not have these funds or assets then they are considered bankrupt.
Public and private companies also face the prospect of receivership and then, if
necessary liquidation. Once the assets are sold and the creditors have been paid, any
remaining funds will be given to the shareholders. Because of limited liability the
receiver is legally unable to request the selling of the shareholders personal assets.