Preliminary Business Studies Notes

Nature of Business
Role of Business
Produces goods and/or services to comply with customer demand.
Businesses help generate:
- Profit
- Employment
- Choice
- Innovation
- Entrepreneurship
- Wealth Creation
- Quality of Life
Types of Business
Classification of Businesses
- Size
o Small = less than 20
o Medium = 20 – 199
o Large = more than 200
- Geographical Spread
o Local
o National
o Global
- Industry Sector
o Primary; raw materials; eg – mines, farming
o Secondary; producing using materials; eg – car manufacturing
o Tertiary; services; eg – transport, hairdressing
o Quaternary; knowledge services; eg – bank, schools
o Quinary; Home-activity services; eg – movies, restaurant, hotel
- Legal Structure
o Sole Trader
 Only One Owner
 Unincorporated
 Unlimited Liability; owner responsible for all debt
o Partnership
 Between 2 and 20 owners
 Unincorporated
 Unlimited Liability
o Private Company
 Incorporated; separate legal entity from owners
 Limited Liability
 Has ‘Pty Ltd’ in its name
 May not enter the stock exchange
o Public Company
 Incorporated
  Limited Liability
 May enter the stock exchange
- Factors Influencing Choice of Legal Structure
o Size
o Ownership
o Finance

Influences in the Business Environment

External Influences
Things a business does not have much control of:
o Economic
 Recessions and Booms
o Financial
o Geographic
o Social
o Legal
o Political
o Institutional
 Government
 Regulatory Bodies
o Technological
o Competitive Situation
 Number of Competitors
o Markets
An Acronym is “A LIST OF PC GAMES” but just remove the ‘SAO’.

Internal Influences
Things a business has control of:
o Products
o Location
 Visibility
 Cost
 Proximity to Stakeholders
o Management
o Resources
o Business Culture
An Acronym is “PLUMBER” but with no vowels.

Stakeholders
Groups or Individuals who have an interest in, or are affected by a business:
o Society
o Employees
o Shareholders
o Customers
o Environment
o Managers
Business Growth and Decline
Stages of a Business Lifestyle
- Establishment
- Growth
- Maturity
- Post-Maturity

Voluntary and Involuntary Cessation – Liquidation

- Voluntary
- Involuntary

Business Management
Nature of Management
Management Skills
- Interpersonal
- Communication
- Strategic Thinking
- Vision
- Problem Solving
- Decision-Making
- Flexibility

Business Goals
- Profit
- Market Share
- Growth
- Social
- Environmental
Management Approaches
Classical Scientific
- Determines the most efficient method of work.
- Follows POLC
o Planning
o Organising
o Leading
o Controlling
- Co-operates with workers.
- Tends to be Autocratic

Classical Bureaucratic
- Strict Hierarchal management structure
- Strict rules and procedures
- Follows POLC
- Jobs broken into smaller tasks
- Very Autocratic

Behavioural Management
 - Humanistic Management
- Follows LCM
o Leading
o Communicating
o Mentoring
- Employee participation in management
- Very democratic

Contingency Management
- Very Flexible and Adaptable to change
- Reacts to influences when they occur.
Management Processes
Operations
Production Processes
- The production of goods and/or services based on business goals
- Responsible for transforming inputs into outputs
- All operations management undergoes the transformation process.
o Goods Ex: Cotton Fabric -> Machinery, etc; -> Shirt/Dress
o Service Ex: Drugs -> Diagnosis -> Healthy Patient

Quality Management
- A strategy to make sure that products meet customer expectations:
o Quality Control
 Checks for problems/defects in the production process
 Reduces problems and defects in the products and/or process
o Quality Assurance
 Checks if a business achieves a set standard of quality
 The ISO 9000 provides guidelines on how businesses establish quality
assurance.
o Total Quality Management
 Continuous Improvement in all business aspects.
Marketing
Elements of a Market
- Demographic
- Geographic
- Psychographic

Target Markets
- A grouping of customers with similar characteristics
o Mass Market Approach
 The production, distribution, and promotion of a product designed for the
benefit of all customers.
o Market Segmentation Approach
 The production, distribution, and promotion of a product designed for the
benefit of a selected group of customers
 Eg; Female, 20-30, Middle Income, Athletic
o Niche Market Approach
  Pretty much a segment within a segment
 A very small segment for a few selected people

Marketing Mix
- Product
o Deciding the product and its quality/design/packaging etc;
- Price
o There are generally three different pricing methods:
1. Cost-based: Adding a mark-up for profit.
2. Market-based: According to supply and demand.
3. Competition-based: Below/Equal/Above Competitors
- Promotion
o The main forms of promotions are as follows
- Personal Selling: Annoying people on the street selling stuff.
- Sales Promotion: Free samples and stuff
- Publicity + Public Relations: Like the YouTube publicity stuff
- Advertising: Print/Electronic/TV Advertisement
- Place
o This refers to the process of getting the product to the customer.
- Producer > Customer
- Producer > Retailer > Customer
- Producer > Wholesaler > Retailer > Customer
Finance
Cash Flow Statements
- Indicates the movement of cash inflows (received) and cash outflows (spent) in the business.
Cash Inflow Cash Outflow
Cash Sales Payment for Stock
Credit Sales Payment for Expenses (eg; wages, insurance)
Other Income (eg; interest, non-operating Payment for non-operating expenses
income)
Table 1 - Cash Flow items for a typical business

Cash Flow Statement for Plant 1 (first quarter, 2015)

January February March
$ $ $
Cash at the beginning of year 15,000 26,000 1,119,500
Cash Inflows
Sales:
Retail 20,000 23,000 54,000
Public 33,000 36,500 123,000
Other Manufacturers
A 1,000,500 2,560,000 2,600,000
B 250,000 250,000 250,000
C 3,400,000 3,200,000 2,800,000
Total Inflows 4,703,500 6,069,500 5,827,000
Cash Outflows
Raw Material 3,650,000 3,760,000 4,720,000
Service Cost 23,000 23,000 23,000
Leases
 Forklift 11,000 11,000 11,000
Equipment 125,000 125,000 125,000
Wages 850,000 990,000 980,000
Other 34,000 67,000 61,000
Total Outflows 4,693,000 4,976,000 5,920,000
Cash surplus/deficit 10,500 1,093,500 -93,000
Cash at end of year 26,000 1,119,500 1,026,500
Table 2 - Example of a Cash Flow Statement

Income Statements
- Shows the revenue earned and expenses incurred over the accounting period, resulting in a
profit or loss.
- Gross profit is the total revenue from sales minus the cost of goods sold
- COGS is the opening stock and the purchases minus the closing stock
- Net Profit is gross profit minus business expenses, or mathematically:

𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑂𝐺𝑆

𝐶𝑂𝐺𝑆 = 𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝐶𝑙𝑜𝑠𝑖𝑛𝑔 𝑆𝑡𝑜𝑐𝑘
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠

Income Statement for year ended 30 June 2011

$
Revenue from Sales 2,000,000
Cost of Goods Sold (COGS) 1,000,000
Gross Profit 1,000,000
Expenses 500,000
Net Profit 5,000,000
Table 3 – Example of an Income Statement

Balance Sheets
- Represents a business’s assets and liabilities and the net worth of the business.
- Assets are on the left
 Current Assets are those that are expected to be used up or turn over,
within 12 months.
Eg; debtors, inventories, cash.
 Non-Current Assets are those that are expected to have a life longer than 12
months.
Eg; buildings, land, machinery, furniture.
- Liabilities are on the right
 Current Liabilities are those expected to be repaid in short-term (12 months
or less).
Eg; credit card debt, accrued expenses, bank overdrafts.
 Non-Current Liabilities are expected to be repaid long-term (12 months or
over).
Eg; mortgage, lease, retirement benefit funds.
 Balance sheet for Real Quest P/L as at 30 June 2015
Assets Liabilities
Current Assets $ Current Liabilities $
Cash 4,000 Accounts Payable 550
Accounts Receivable 6,000 Bank Overdraft 1,200
Prepaid Expenses 6,000 Credit Cards 6,200
Stock 10,000 Accrued Expenses 550
----------- ----------
Total Current Assets 26,000 Total Current Liabilities 8,500

Non-Current Assets Non-Current Liabilities

Land and Buildings 50,000 Mortgage 65,000
Fixtures and Fittings 10,000
Intangibles 45,000
----------- ----------
Total Non-Current Assets 105,000 Total Liabilities 73,500

Owner’s Equity
Owners Capital 35,500
Retained Profits 22,000
----------
Total Owner’s Equity 56,500

Total Assets 131,000 Total Liabilities and Owner’s Equity 131,000

Table 4 - Example of a Balance Sheet

Human Resources
1. Acquisition
Selecting and hiring new employees Stage 1.
Acquisition
2. Development
- Training
- Helping those employees learn
new skills associated with their
Stage 4. Stage 2.
jobs. Separation Development
- Development
- Improving the skills, abilities and
knowledge of staff.

3. Maintenance Stage 3.
Motivating employees to stay in the business. Maintenance
- Monetary Benefits
- Reward through financial Figure 1 - The four main elements of the human resource
cycle
compensation. Eg; pay rates.
- Non-Monetary Benefits
- Reward through conditions. Eg; fringe benefits.

4. Separation – Involuntary/Voluntary
Employees leave the business 
- Voluntary: leave on their own accord. Eg; retirement, resignation.
- Involuntary: being asked or forced to leave. Eg; retrenchment, dismissal, death.

Business Planning
Success of SME’s
There are five common ‘keys’ to SME success.
1) Flexibility
2) Reputation
3) Focus on Market Niche
4) Entrepreneurial Ability
5) Access to Information
Influences in Establishing an SME
Personal Qualities
Qualities of management, owner, and employees.
- Qualifications
- Skills
- Motivation
- Entrepreneurship
- Cultural Background
- Gender

Sources of Information
Ways to obtain information or advice about business planning or management.
- Government Agencies
- Professional Advisors
 Accountants (finance advice)
 Solicitors (legal and structural advice)
 Bank Managers (finance advice)
 Management Consultants (management advice)
- Other. E.g. libraries.

The Business Idea

The businesses idea of what they’d like to sell to make a profit. This is done mainly by
motivational stuff or experiences.

Establishment Options
- New
- Existing
- Franchise

Market
- Determine what they’re going to sell
- Set price via
 Cost-Based
 Market-Based
  Competition-Based

Finance
- Sources of Finance
- Debt – (borrowing from other people)
 Short-Term Borrowing
Eg; Overdraft, Factoring
 Long-Term Borrowing
Eg; Mortgage, Debentures
- Equity – (taking from personal funds)

Legal
- All business owners have a legal obligation to observe regulations when
commencing and operating a business.
- Of the many laws and regulations that small business owners need to comply with,
some important regulations relate to:
 Business Name
 Land-Zoning
 Health Regulations
- The Competition and Consumer Act 2010 (Cwlth) aims to:
 Promote fair trade and competition in the market
 Protect consumers and businesses from misleading or deceptive practices.
Business Planning Process
Sources of Planning Ideas
- SWOT Analysis
 Strengths
 Weaknesses
 Opportunities
 Threats
Vision, Goals, and Objectives
- Vision Statement
States what the business wants to become in the future.
- Business Goals
What the business wants to achieve in a certain period of time.
Organising Resources
- Operations
- Marketing
- Finance
- Human Resources
Forecasting
- Total Revenue
𝑃𝑟𝑖𝑐𝑒 (𝑃) × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄) = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (𝑇𝑅)
- Break-Even Analysis
Used to determine the amount of sales needed to break-even
𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄) =
𝑈𝑛𝑖𝑡 𝑃𝑟𝑖𝑐𝑒 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
- Cash Flow Projections
Monitoring and Evaluations
 - Sales
- Budget
- Profit
Corrective Action
Critical Issues in Business Success and Failure
Importance of a Business Plan
- What a Business Plan Contains
 Statement of Goals
 Well Developed Plans
 Control Standards
- Why it’s important
 Works as a ‘blueprint’ for future growth.

Management – Staffing and Teams

- Must make the best of limited resources.
- Responsible for achieving business goals.
- Essential to have satisfied/motivated staff.

Trend Analysis
- Trend analysis is a process of investigating change over time and looking for a
pattern (trend).
- This analysis helps with forecasting.

Identifying and Sustaining Competitive Advantage

- Business success and failure is linked to a business’s strategy to sustain a
competitive advantage.
- A competitive advantage is achieved through
 Price/Cost Strategy
 Achieved through lowest production cost.
 Differentiation Strategy
 Providing customers a product not offered by other businesses.
 Ensuring Long Term Success
 Limiting the advancement of other competitors.

Avoiding over-extension of Finance

- A business can over-extend by:
 Using too much hire purchases
 Purchasing excess stock
 Employing too many staff
- A business can avoid over-extension by:
 Business Planning
 Avoid dependency on debt-financing
 Long-tern financial planning
 Starting small

Using Technology
- The integration of technology is essential for contemporary consumers.
 - This is done by
 E-Business
 Using internet to conduct a business.
 E-Commerce
 Buying/Selling via the internet.

Economic Conditions
- A nation’s economy will experience both:
 Boom’s
 Recessions
Booms
- Strong Economic Activity
- High Consumer Spending
- High Sales of Goods
- Service/Profit/Production rises
Recessions
- Weak Economic Activity
- Low Consumer Spending
- Low Sales of Goods
- Service/Profit/Production declines.