Business Prelim Notes

1st Topic: Nature of Business:

Role of Business:
 The nature of a business:
- Businesses satisfy consumers wants and needs with goods and services.
- To provide goods and services to the community, businesses make use of raw
materials and transform them into outputs.
- The key roles of a business include:
1. Profit
2. Employment
3. Income (Wage, salary, dividend, shareholders)
4. Choice
5. Innovation
6. Entrepreneurship and risk
7. Wealth creation
8. Quality of life

Types of Businesses:
 Classification of business:
- Size (Small, medium or Large)
- Geographic spread (Local, National, Global)
- Legal structure (Sole trader, partnership, private and public, franchise and
Government enterprise)
- Industry Sector (Primary, Secondary, Tertiary, Quaternary, Quinary)
 Factors influencing choice of legal structure:
- The size of the business that they want to create
- Whether they want to have full responsibility of the business or want to go into a
partnership etc.
- Whether they are worried about having unlimited liability if their business fails or
if they want to make the business private or public to have limited liability.

Influences in the business environment:

 External influences:
- Economic: They influence a business’s capacity to compete and customers
willingness and ability to spend.
- Financial: Debt finance is influenced by interest rates. As interests rates increase,
businesses will become more cautious in relation to taking on extra debt.
- Geographical: The geographic location of where different businesses are based
have a huge effect on business expansion, sales and profit.
- Social: Many businesses face social influences and pressures that shape the
functioning and management of the business. E.g. Feminisation, enviro friendly
- Legal: The laws that are made by the government e.g. health and safety,
minimum wage, lockout laws.
- Political: Government policies can either be positive or negative due to the
fluctuations this aspect can be influenced in a variety of ways.
 - Institutional: The rules and regulations that are set by bodies and other
institutions. The levels of government – Federal, State and Local
- Technological: Ranges from technology that complete tasks to services that help
customers, technological advancements are growing every day.
- Competitive Situations: Competition between firms to be the market leader or
to win customer loyalty which can benefit both the consumer and the business.
- Markets: The influence depends on the size of the market, size of the business,
number of competitors and the nature of the product.
 Internal Influences:
- Products: Influences and affects a range of internal structures and operations
within the business.
- Location: A good location is an asset and will lead high levels of sales and profits.
Prime location = customer convenience + Visibility
- Resources: Combining Human resources, Information resources, Physical
resources and financial resources will all result in goods and services being
produced efficiently.
- Management: Due to the flatter management structure there are fewer levels of
management giving responsibility to individuals in the business. A flatter
management structure emphasises teamwork and responsibility.
- Business Culture: Refers to the values, ideas, expectations and beliefs shared by
members of the organisation. Can be both informal and formal.
 Stakeholders:
- A stakeholder is any group or individual who has an interest in or is affected by
the activities of the business.
- Stakeholders include:
- Managers, Society/ general public, employees, shareholders, customers and the
environment.

Business growth and decline:

 Stages of the business life cycle:
- Establishment: Legal structure, finance, location, staff and abiding by
government legislation.
- Growth: Developing HR policy, developing a financial management plan and
inventory control.
- Maturity: Adopting to latest technology to improve product, management
releases the business plan and management needs to take advantage of new
market opportunities.
- Post- Maturity: Businesses have 3 options which include, Renewal, Steady state
and decline and cessation.
 Responding to challenges at each state of the business life cycle:
- Establishment: Few sales, little to no profit, high establishment costs, no
customer base and cash flow shortages.
- Growth: Challenge of legal structure, production keeping up with demand,
reassess long term goals and need to expand marketing strategies.
- Maturity: Growth and market share slow down, more competition, the need to
improve efficiency, maintain customer loyalty.
 - Post- Maturity: Whether to renewal, steady state or go into cessation of the
business.
 Factors that contribute to business decline:
1. Lack of management
2. Lack of sufficient funds
 Voluntary and Involuntary cessation – liquidation
- Voluntary cessation: When the owner ceases to operate the business of their
own accord. E.g. Retirement, death or change of lifestyle
- Involuntary cessation: When the owner is forced to cease trading by the creditors
of the business.
- Liquidation: Occurs when an independent and suitably qualified person is
appointed to take control of the business with the intention of selling all the
company’s assets in an orderly and fair way in order to pay the creditors.

2nd Topic: Business Management

Nature of management:
 Features of effective management:
- Management is the process of coordinating a business’s resources to achieve its
goals.
- The contemporary definition of management: The process of working with and
through other people to achieve business goals in a changing environment.
Crucial to this process is the effective and efficient use of limited resources.
 Skills of Management:
- Interpersonal: The skills required to work and communicate with other people
and to understand their needs.
- Communication: The exchange of information between people.
- Strategic Thinking: Allows the manager to see the business as a whole and to
take the broad, long term view.
- Vision: The clear, shared sense of direction that allows people to achieve a
common goal.
- Problem Solving: A broad set of activities involved in searching for, identifying
and implementing a course of action to solve an unworkable situation.
- Decision making: The process of identifying the options available and then
choosing a specific course of action to solve a problem.
- Flexibility: Being responsive to change and being able to adjust to changing
circumstances.
- Adaptability to change: A management style that incorporates dynamic action
and forward planning to achieve particular objectives.
- Reconciling conflicting interests of stakeholders: Business sharing info with and
seeking input from stakeholders and involving them in decisions.
Achieving Business Goals:
- Most Businesses use SMART goals. Specific, Measurable, Achievable, Realistic
and time bound.
- Profit Maximisation: Occurs when there is a maximum difference between the
total revenue.
- Market Share: The business’s share of the total industry slaws for a particular
product.
- Growth: Most businesses want to grow either internally or externally.
- Environmental: As owners of the business you need to be concerned about its
future prospects. There are signs that businesses are becoming more
environmentally aware.
- Social: Social goals include Community service, provision of employment and
social justice.
- Share Price: As a business you constantly want to improve your share price so
that your company becomes worth more money.
- Staff involvement – Innovation, Motivation, Mentoring and training.
- Innovation: Let your employees come up with new ideas which could help
contribute to the business.
- Motivation: Refers to the individuals, internal process that directs, energises and
sustains a person’s behaviour.
- Mentoring: The process of developing another individual by offering tutoring and
coaching and modelling acceptable behaviour.
- Training: The process of training staff on how to perform their job more
efficiently and effectively by boosting their knowledge and skills.

Management Approaches:
 Classical approach:
- Based on scientific analysis of work processes and has highly programmed staff
performing simple repetitive tasks.
- Management as planning, organising and controlling
- Hierarchy organisation structure (communication only moves down)
- Autocratic leadership style with no input from lower management
- Designers of the approach were Fred Taylor, Max weber and Henri Fayol.
 Behavioural Approach:
- The behavioural approach emphasises the importance of people in business
organisations.
- Management as leading, motivating and through communication
- Flatter Hierarchal structure and work through teams
- Participative/ democratic leadership style
 Contingency approach:
- Stresses the need for flexibility and adaptation in management practices to suit
changing circumstances.
- Adapts to changing circumstances
Management Process:
 Coordinating key business functions and resources:
- Depends on: The broad goals of the business
- The size of the business
 Operations:
- Refers to the business processes that involves the transformation or production
of goods.
- Establish the level of quality of the good or service you want to provide.
- Influence the overall cost of production
- Determine whether sufficient products are available to satisfy consumer demand
- The production process consists of 3 key elements in any business.
- Inputs are resources that are used in the process of production.
- The processes is the conversion of inputs (resources) into outputs (Goods or
Services).
- Outputs are the end result of a business’s efforts – the service or product that is
delivered or provided to the customer.
- Quality management is the strategy which a business uses to make sure that its
products meets customer expectations.
 Marketing:
- Marketing is the process of planning, pricing, promoting and distributing
products to represent and bring in potential customers.
- A target market is a group of customers with similar characteristics who
presently, or who may in the future, purchase the product.
- The target market factors include age, gender, income, urban/rural, geographic,
behavioural, occupation and education level.
- The marketing mix consists of Product, Price, Promotion and Place
- Product includes the brand name/ Logo, Packaging, Quality, Design, Exclusive
features, customer service and warranty and guarantee.
- Price includes what pricing method they choose – Cost based, Market based, and
Competition based. Businesses may also use pricing strategies at various times
which include Market penetration, Market skimming and Loss leaders.
- Promotion includes whether the business is selling your goods or services
through Personal selling, Sales promotion, Publicity, Advertising and negative
publicity. Promotion describes the methods used by a business to inform,
persuade and remind a market about its products.
- Place refers to the distribution channels – 1. Producer to customer 2. Producer to
retailer to customer and 3. Product to wholesaler to retailer to customer. It also
refers to the location of markets, warehousing, transport and inventory.
 Human Resources:
- Recruitment: The process of finding and attracting the right quantity of staff to
apply for employment vacancies.
- Training: Refers to the process of teaching staff how to perform their job more
efficiently and effectively by boosting their knowledge and skills.
- Employment contracts: A legally binding, formal agreement between an
employer and an employee.
- Separation: The ending of the employment relationship.
- Voluntary separation includes: Retirement and Resignation
 - Involuntary separation includes: Retrenchment and Dismissal
 Ethical Business Behaviour:
- The principles of honesty and fairness to relationships with co-workers and
customers. Ethical individuals make an effort to treat everyone with respect.
 Finance:
- A cashflow statement is a financial statement that indicates the movement of
cash receipts and cash payments resulting from transactions over a period of
time.
- An Income statement is a summary of the income earned and the expenses
incurred over a period of trading.
- A balance sheet is a statement of the assets, liabilities, and capital of a business
at a particular point in time, detailing the balance of income and expenditure
over the preceding period.
- COGS formula = Opening stock + Purchases – Closing Stock
- Gross Profit formula = Revenue - COGS
- Net Profit formula = Gross profit – Expenses
- The Balance Sheet equation = A = L + OE

Management and Change:

 Responding to internal and external influences:
Internal Influences:
- Management: Business’s have flattened their management structure. A flatter
management structure emphasises teamwork and responsibility.
- Employees: Employees working for a business expect to be paid fairly, trained
properly and treated ethically in return for their contribution to production.
External Influences:
- Competition: Business’s need to monitor the activities of their competition and
determine what effect they may be having in the marketplace.
- Legislation: Whenever new laws are passed; businesses must comply with the
new legislative requirements.
- Technology: A business that wants to be locally, nationally or internationally
competitive must adapt to the appropriate technology.
- Social: Businesses operate within society and must adopt to changes in society’s
attitudes and values. Society requires that large businesses sell safe products and
treat staff with respect.
 Managing Change effectively:
- The ability to embrace, manage and adapt to change will increasingly determine
a business’s competitive advantage.
- Successful managers are the ones who anticipate and adjust to changing
circumstances.
- The rapidly pace of change threatens to overwhelm many businesses.
Strategies for reducing resistance to change:
- Provide constant feedback - Avoid threats if possible
- Offer support
- Build trust among employees - Outline the positives and negatives
- Make sure the changes are reasonable
- Specify the nature of the change - Make sure communication is 2 way
 - Allow employees to participate in the change process
- Discuss any upcoming change
- Support change with new learning
- Follow a sensible time frame

3rd Topic Business Planning:

Small to Medium enterprises:

 Definition:
- To attempt to determine whether a business is small or medium sized the
following quantitative and qualitive measures can be used.
- Number of employees: Up to 200
- Type of ownership: Few owners/ private
- Sources of finance: Debt or equity
- Legal Structure: Sole trader, partnership or private
 Role:
- Provide employment
- Produce products
- Add to exports
- Provide choice
- Earn Profits for owners
 Economic Contribution:
- GDP: Gross Domestic Product (Value of goods and services in a country in 1 year)
- Employment
- Balance of payments: (Difference in total value between payments into and out
of a country over a period)
- Invention and innovation
 Success and/or failure:
Success:
- Entrepreneurial abilities
- Access to information
- Flexibility
- Focus on market niche
- Reputation
Failure:
- Unincorporated and declared bankrupt
- Incorporated and either forced into liquidation or voluntarily closes down.

Influences in establishing a small to medium enterprise:

 Personal qualities – qualifications, skills, motivation, entrepreneurship, cultural
background and gender.
 Sources of information
 The business idea – competition
 Establishment options – new, existing, franchise
 Market – goods and/or services, price, location
 Finance – source, cost
 Legal – business name, zoning, health and other regulations
  Human Resources
- Skills
- Costs – wage and non-wage
 Taxation – Federal and State taxes, local rates and charges

The Business Planning Process:

 Sources of planning ideas:
- Situational analysis: Refers to a collection of methods that managers use to
analyse an organisation's internal and external environment to understand the
organisation's capabilities, customers, and business environment.
 Vision, goals and/or objectives:
- Vision: A vision statement broadly states what the business aspires to become;
its purpose and its function.
- Business goals: Some businesses segment their goals into Financial goals, Social
goals and personal goals. These goals include maximising profits, increasing
market share, growth, social goals and environmental goals.
- Long term growth: Long-term business strategies are used to steer your business
in a pre-defined direction for the future. These desired outcomes are normally
results-based, and these plans are set within a timeframe.
 Organising resources:
- Operations
- Marketing
- Finance
- Human Resources
 Forecasting:
- Total revenue: The amount received from the sales of a good or service.
- Total cost: A certain number of goods or services which is the sum of the fixed
and variable costs for those units.
- Break – even analysis: Used to determine the level of sales that need to be
generated to cover the total cost of production.
- Cash flow projection: Shows the changes to the cash position brought about by
the operating, investing and financial activities of the business.
 Monitoring and evaluation:
- Sales
- Budgets
- Profit
 Taking corrective action:
- Final stage of business plan and may lead to the business owner changing
components of the original plan to fit in with the internal and external
environments.

Critical issues in business success and failure:

 Importance of a business plan
 Management – staffing and teams
 Trend analysis
- Investigating changes over time looking for a pattern in order to predict the
future.
 Identifying and sustaining competitive advantage
- Strategies include, price/cost strategy, efficiency of operations, low cost labour,
technology, economies of scale and differentiation.
 Avoid over extension
- On things such as business planning, long term financial planning, a small start
and other resources such as stock and staff.
 Using Technology:
- E-Business: Using the internet to conduct business
- E-Commerce: Buying and selling goods and services via the internet.
 Economic conditions:
- Periods of upswing help success:
- High levels of consumer spending, falling unemployment, increased production
- Periods of downswing negatively impact success:
- Low levels of consumer spending, rising unemployment and decreased
production.