Elements of Business

Topic 1
•1

BUSINESS OWNERSHIP

- Notes & Chapter 4, 5

 Understanding the nature of
Business
•2

Notes

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 The Nature of Business
•33

A business is an organization that strives for

a “profit” by providing goods and services
desired by its customers.

Goods and services

that are the basis of our
Businesses “standard of living”
provide…
Jobs, goods and
services that help
determine our “quality of life”

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 The Nature of Business
•4

Standard A country’s output of goods and

of Living services that people can buy with the
money they have.

- measured by standards such as real

income/ purchasing power per person
and poverty rate

4
4
 The Nature of Business
•5

Quality The general level of human happiness

of Life based on such things as life
expectancy, educational standards,
health, sanitation, and leisure time.

- A broader measure than the

material
standard of living

5
5
 Profit
•66

The money a company

Revenue earns from providing services
or selling goods to customers.
less

Expenses that a company

Costs incurs from creating and
selling goods and services.

equals

The money left over after

Profit all expenses are paid.

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 Not-for-Profit Organizations
•77

A not-for-profit organization
is an organization
that exists to achieve some
other goal than the
usual business goal of profit.

Government
is the largest
not-for-profit group.

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 Factors of Production
•88

Natural Resources

Labor

Capital

Entrepreneurship

Knowledge

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 Stakeholders
•9

Employees

Stakeholders Customers
of a
Business General Public
Suppliers

Investors:
General Public
Shareholders and Creditors
Investors:
Shareholders and Creditors

* Stakeholders are the individuals or groups to whom a business has a responsibility.

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 Investors: Shareholders
•1
10
0

Entrepreneur Stockholder

10
 Investors: Creditors
•1
11
1

Loans

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 Entrepreneurship:
Starting and Managing Your Own
Business
•1
2

Notes &
Chapter 5

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 Learning Goals
•1
3

Why people like to become an entrepreneur?

 Which characteristics do successful entrepreneurs share?

 What are the first steps to take if you are starting your own
business?

 What are the advantages and disadvantages facing owners of

small businesses?

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 Entrepreneurs
•1
4

Entrepreneurs People with vision, drive, and

creativity who are willing to take the
risk of starting and managing a
business to make a profit, or greatly
changing the scope and direction of an
existing firm.

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14
 Entrepreneurship
•1
15
5

Creates Accepts

IDEAS RISK

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 Why people like to become an Entrepreneur?
•1
6

The challenge of building a business

The desire to control their own destiny

Financial independence

Frustration working for someone else

Personal satisfaction

Creating the desired lifestyle

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Attributes of being a successful entrepreneur
•1
17
7

1. Ambitious 6. Passionate

2.Independent 7. Committed

3. Self-confident 8. Energetic

4. Risk taking 9. Creative

5. Visionary

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 What is a Small Business?
•1
8

Independently managed

Owned by an individual
Characteristics or a small group
of a
Small Business
Locally based

Not a dominant company

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Small Business: Distribution – 33%

Retail Transportation

Wholesale Communication

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 Small Business: Service – 48%

Medical and Dental Care Watch, TV, and Shoe Repair

Financial Services Restaurant Meals

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Small Business: Production – 19%

Construction, Mining, and Manufacturing

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 Advantages and Disadvantages of
Small Business Ownership (* Text Bk Ch.5)

Advantages Disadvantages
•Personal relationships • High risk of failure
with customers • Limited potential
•Ability to adapt to change • Limited ability to raise
•Simplified record keeping capital
•Independence
•Others: Profit retention,
Ease of start-up, Ability to
keep secrets

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Sources of Capital for Entrepreneurs

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 Start Your Own Business
•2
4

What are the first steps to take if you are

starting your own business?

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 Three options for starting a business
•2
25
5

A. Start from Scratch

B. Buy an Existing Business

C. Buy a Franchise

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 Before your start your own business…
•2
6

Something that you have to consider….

ü Identify your reasons

ü Self-analysis
ü Personal skills and experience
ü Findinga niche
ü Market analysis
ü Planning your startup
ü Finances

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 Sources of Inspiration to start your own
business
•2
27
7

Working in the same or related industry

Personal experiences as a consumer

Hobbies and personal interests

Suggestions from customers, family, and

friends
College courses or other education

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 Financing the Business:
Two Basic Ways
•2
8

Debt
- borrowed funds that must be repaid with interest over a stated time
period

Equity
- through the sale of stock (ownership) in the business

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 Debt Financing
•2
29
9

Loan Rate

Interest
Capital

Collateral

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 Equity Financing (By issuing stock)
•3
30
0

Dividend Policy

Retained Earnings

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 Don’t Forget that Business is Risky
•3
1

Economic
Economicfactors
factors

Financial
Financialcauses
causes
Reasons for
Business
Failures
Lack
Lackof
ofexperience
experience

Personal
Personalreasons
reasons

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 Managing a Small Business
•3
2

1. Using outside consultants

2. Hiring and retaining employees

3. Entering the global marketplace

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 Forms of Business Ownership
•3
3

Notes &
Chapter 4 & 5

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 Learning Goals
•3
4

 What are the advantages and disadvantages of the sole

proprietorship form of business organization?
 What are the advantages of operating as a partnership, and
what downside risks should partners consider?
 How does the corporate structure provide advantages and
disadvantages to a company?
 What other options for business organization does a company
have in addition to sole proprietorships, partnerships, and
corporations?
 What makes franchising an appropriate form of organization
for some types of business, and why does it continue to grow in
importance?

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 Business Ownership (* Text Bk Ch.4)
•3
5

Financing?
Employees?
Business taxes?
Debt liability?
Operating control?
Ownership?

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 Sole Proprietorship

A business owned
and (usually) operated
by one person
Simplest form of
business ownership
The most popular form
of business ownership
Many large businesses began as small
struggling sole proprietorships.

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 Sole Proprietorship:
Advantages and Disadvantages

Advantages
§ Ease of start-up and
closure
§ Pride of ownership
§ Retention of all profits
§ No special taxes
§ Flexibility of being your
own boss
Disadvantages
Unlimited liability
Lack of continuity
Lack of money
Limited management
skills
Difficulty in hiring
employees

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Sole Proprietorship: Unlimited Liability

Unlimited liability is a legal

concept that holds a
business owner personally
responsible for all the debts
of the business.

© EDYTA PAWLOWSKA/SHUTTERSTOC K
This is the major factor
discouraging the use of sole
proprietorship.

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 Partnership

A partnership is a voluntary association of two or

more persons to act as co-owners of a business
for profit.
• Usually a pooling of special
talents or the result of a sole
proprietor taking on a partner.
• No legal limit on the maximum
number of partners; most have
only two.
• Large accounting, law, and
advertising partnerships have multiple partners.

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 Partnership: General Partnership

A general
partnership is a
business co-owned
by two or more
general partners
who are liable for
everything the
business does.

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 Partnership: Limited Partnership

A limited partnership is a business co-owned by one

or more general partners who manage the business
and limited partners who contribute capital.
General partners have management responsibility
and liability for
all losses.
Limited partners have no
management responsibility and

© NEVENA RADON JA/SHUTTERSTOCK

no liability for losses beyond
their investment.

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 Partnership:
Advantages and Disadvantages

Advantages Disadvantages
§ Ease of start-up Unlimited liability
§ Availability of capital Management
and credit disagreements
§ Personal interest
Lack of continuity
§ Combined business
skills and knowledge Frozen investment

§ Retention of profits
§ No special taxes

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 Corporation

A corporation is an artificial person created by law

with most of the legal rights of a real person, including
the rights to start and operate a business, to buy or
sell property, to borrow money, to sue or be sued, and
to enter into binding contracts.

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 Corporate Ownership: Stock

Stock The shares

of ownership of a
corporation
Stockholder A
person who owns a
corporation's stock

© AP PHOT O/KEVIN P.CASEY

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 Corporate Ownership:
Closed and Open Corporations

Closed Corporation
Stock is owned by relatively
few people and not sold to
public.

Open Corporation
Stock is bought and sold on
security exchanges and can
be bought by anyone.
© AP PHOTO/RICHARD DREW

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 Corporation:
Advantages and Disadvantages

Advantages Disadvantages
§ Limited liability – each Difficulty and expense
owner's financial liability of formation
is limited to the amount
of money that he or she Government regulation
has paid for stock and increased
§ Ease of raising capital paperwork
§ Ease of transfer of Conflict within the
ownership corporation
§ Perpetual life Double taxation (eg.in
§ Specialized in USA, but not in HK)
management
Lack of secrecy
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 Advantages and Disadvantages of a Sole
Proprietorship, Partnership, and Corporation
Sole General Corporation
Proprietorship Partnership

Protecting against Difficult Difficult Easy

liability for debts

Raising money Difficult Difficult Easy

Ownership transfer Difficult Difficult Easy

Preserving Difficult Difficult Easy

continuity
Government Few Few Many
regulations

Formation Easy Easy Difficult

Income taxation Once Once Twice
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Specialized Form of Business Organization:
Franchise (*Text ch. 5)

A franchise is a license to operate an

individually owned business as though it
were part of a chain of outlets or stores.

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 Franchising

Franchise

© TUPUNGATO/SHUTTERSTOCK
Agreement

Franchisor

Franchisee

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 Types of Franchises

A manufacturer
authorizes retailers
to sell a certain
brand-name item.
A producer licenses
distributors to sell a
product to retailers.

A franchisor supplies brand names, techniques, or

services instead of a complete product.

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 The Growth of Franchising: Success

The success rate for franchises is significantly higher

than that for other small businesses.
94% of franchise owners report that they are
successful.
Too rapid expansion, inadequate capital or
management skills, or other problems can cause
franchises to fail.

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 Advantages of Franchising
To the Franchiser
 Fast and well controlled
distribution of its products
 No need to construct and
operate its own outlets
 More working capital
available for expanded
production and advertising
 Franchising agreements
maintain product and
quality standards
 Motivated work force of
franchisees
To the Franchisee
• Opportunity to start a
proven business with
limited capital
• Guaranteed customers
• Franchisor available for
advice and guidance
• Materials for local
promotional campaigns
and participation in
national campaigns
• Cost savings when
purchasing in cooperation
with other franchisees
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 Disadvantages of Franchising

To the Franchiser To the Franchisee

 Failure of the • Franchisor retains a
franchisee to operate large amount of control
franchise properly over the franchisee’s
activities
 Disputes with and • Franchisor opening
lawsuits by competing franchises
franchisees over within the franchisee’s
the terms of the market
franchise

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 Business Plan
•5
4

Notes

54
 Developing a Business Plan
•5
5

Key Features

 General description of the company

 Qualifications of the owner(s)
 Description of the product or service
 Analysis of the market
 Financial plan

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 An Outline of the Business Plan
•5
56
6

 Title Page
 Table of Contents
 Executive Summary
 Vision and Mission Statement
 Company overview
 Product and/or service plan
 Marketing plan
 Management plan
 Operating plan
 Financial plan
 Appendix of supporting documents

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