Hada look [_| Nearly there [ | Nailed it! [_| Businesses A BUSINESS is an organisation whose PURPOSE is to produce goods and services to meet the needs of customers. A business might produce its own goods or buy them from a SUPPLIER and sell them to CUSTOMERS. Things to think about when setting up a business: (U's there a business opportunity? UY What legal aspects have to be Y How will the business be financed? considered? What is required to get the business (Y What products or services will be up and running? sold and to whom? What businesses do SUPPLIERS PRODUCTION CUSTOMERS / CONSUMERS: ey B (iy 2 pw S pusiness | > sau => fy 7 oh oi LR rf Supplier: A business that Customer: A person or organisation Ie errle) erodicts production: Using raw materials, labour that buys the product or service we ‘and machinery to make products Consumer: The person that uses (consumes) the product. The market is where buyers and sellers meet to exchange goods and services. ‘What is the purpose of a business? Select one answer, (I mark) A [1] To give everyone a job B [) To make big profits for its owners C [Bl To provide goods and services ‘To pay taxes to the government 1 Which of the following is most likely to be a supplier to a small business making costumes for parties? Select one answer. (1 mark) A [J Aclown who entertains children at parties © [7] A taxi that takes people to parties B [1] A manufacturer of buttons D [| People who buy costumesBEETS : Had a look [_| Nearly there [_| Nailed it! [_| Leas | Understanding customer needs 1 Most customer needs are based on good quality, good product range, convenient location, good customer service, a fair price. The problem is that all customers are different and need different things! Market research Market research can tell a business: Y what features customers want WY how much they are willing to pay These questions can be answered through: + PRIMARY RESEARCH — collecting 6 data that did not exist before (e.g. Y where they sh © where they shay by asking questions). © what age and gender they are 2 alot ctin + SECONDARY RESEARCH - collecting 2 MMOLE MM COMPS N SAFE: data that already exists (e.g. internet WU if the market is growing or shrinking. research). i Lisa Gallagher believes there is a growing market for gardening services, She has conducted some market research to test her idea and has summarised her findings. ‘Type of household Percentage (Service 1 Single — no children 7 . Service 2 Single — with children i Bs Single — pensioner 28 BB service 3 Couple — no children s —T (J) Combination of ‘Couple — with children 31 asus Couple — pensioners 4 afasivics Table 1 igure 1 Study Table 1 and Figure 1. According to this information, which three conclusions ean Lisa draw from the data? Select three answers. Cnn» G marks) Fewer than four in ten students got all three ‘marks for this question. When interpreting, data in figures and tables, be prepared to make comparisons, carry out calculations, identify characteristics and look at trends. A [fl 100% more single pensioners than pensioner ‘couples are interested in Lisa’s business B [] Lisa should not offer Services 2 or 3 as there is no demand Her main two segments are couples with children and single pensioners D [Xl More than half of people prefer something other than Service 1 E [1 Couples with children are more likely to use Service 1 ‘This was ayeal exam question that alot ofstudents struggled with—be prepared! 1. Which one of the following is an example of primary market research? Select one answer, (1 mark) A [J Government statistics C1 Survey of customers D [Internet research B [] Newspaper articles i. Had a look [_| Nearly there [_| Nailed it! [_| Understanding customer needs 2 PRIMARY RESEARCH (field research) is collecting information that did not exist before. This first-hand contact with customers is valuable to a business in understanding their market. SECONDARY RESEARCH (desk research) is the process of gathering secondary data, which is information that already exists. a Internet sites ‘ocus groups Surveys ree eal newspapers Observations eee ts —— wf [ Primary fe Secondary | { research \ research Telephone A > ee directories einen Questionnaires Experiments eer Bevetriment: statistics Sales data Market reports * More general. * Less time-consuming. * Effective at collecting quantitative data. * More accurate. * Up to date. * Specific to needs. + Effective at collecting qualitative data. * Direct customer contact. Qualitative and quantitative data * QUALITATIVE DATA — information about When INTERPRETING DATA, businesses opinions, judgements and attitudes. should look for issues to identify the * QUANTITATIVE DATA — data that canbe potential size of the market, trends in the expressed as numbers and statistically market (e.g. tastes) and an indication of analysed. what customers want. Worked examp.: Which of the following are the benefits of conducting secondary market research instead of primary market research? Select two answers A [1] Itadds value to products (marks) D [J Itis more specific to the target market B [Ri Itis less time-consuming E [1] Itwill lower the costs of production C [Bl Itoffers a wider range of information 1 Which of the following would not be an appropriate method of market research for a new small business? Select one answer. (1 mark) A [-] Employing a specialist market research company to carry out a survey of 10000 people B [1] Using published statistics about market trends C [1] Asking customers to fll ina short questionnaire on the premises D [1 Conducting an interview with a group of volunteer customersUNIT 1 Had a look [_| Nearly there |_| Nailed it! [ Market mapping MARKET MAPPING helps businesses to identify products through identifying gaps in the market. Analysing customer buying habits Businesses must research potential customers’ buying preferences, i.e. who the customers are, what they want, what they buy and how often they buy. It can do this by: * finding information about customers * using their own experience * looking at existing businesses and trying competitors’ products * observation and surveys. Market segmentation Segmentation allows a business to: Bample of a market map using price and quality. A MARKET MAPPING * meet specific customer needs * differentiate their products *+ focus on a specific group of customers + target marketing activity * develop a unique brand image @ Foor prodict market segments and position their Market segments ‘(A MARKET SEGMENT is a group of buyers with similar characteristics and buying habits. A market can be segmented in many ways: + Age (e.g. 18-24), * Gender (e.g. male). * Income (e.g. socio-economic group). * Lifestyle (e.g. adventure). * Life-stage (e.g, newlyweds). PRICE high diagram can be used to position and compare products in a market, and identify opportunities where customer needs are Premium © product Mid-range }® product _ QUALITY (nthe * build close customer © Badger Marker / not being met, relationships. product | Nee ee orked example Hin He According to the market map, where is there a GI (cies Tees Atala gap in the market? (mark) Siete Ten snd Guy E-D. eboner | | | aize sibes A business that provides: A (7 high price / traditional taken Fation "men Barber Shop Hair Today (Grade One men's cuts opportunity in the cycling market? Select two an: A. [1] Being able to produce a product cheaply B [1] Recognising a new gap in the market € [1 Being a keen cyclist B [1 high price / fashion C Clow price / traditional D [Bl low price / fashion (2 marks) D [5 Identifying the possible competitors swers, E_ [J Having a large amount of personal savings | Nearly there [_| Nailed it! [_| Had a look [_| | Abusiness might use a number of criteria to analyse and judge the STRENGTHS and WEAKNESSES of its potential COMPETITION in order to improve its ‘business offering’ | and DIFFERENTIATE from them. Competition Better after- Wider product range i Stronger Ni sales service brand image av Better product More enjoyable eee aac Ways to compete iat j— Higher quality Better design Instead of competing head-to-head, businesses Branding can try to DIFFERENTIATE their products. | A brand is a named product | that customers see as being different from other products, and that they can associate or identify with. A company or product can develop a unique brand image that customers associate them with. le lead Competition , | evsness |[Cemed > an products and accepted techniques. For example: | | cheaper . J Thinking |, * creating lists | | Production entity NeW 6 grind mapping / brainstorming creatively ) opportunities and markets Improved customer service techniques + make it bigger / smaller * combining things together. Blue skies and lateral thinking * BLUE SKIES THINKING is coming up with as many ideas as possible to solve a problem, * LATERAL THINKING involves thinking differently to try to find new and De Bono's six thinking hats give six different ways to think about an issue, idea or problent Facts about an idea eo unexpected ideas. DE BONO’S SIX How's get amy eae THINKING HATS is an example of lateral Se ore ves Positive aspects of the idea NOs dtm ch Sg Deliberate creativity involves which two of the following techniques? Select two answers. (2 marks) rn F259. 4 C Starting a business that provides a B [ Brainstorming business ideas vice C [Rl Creating lists to compare options D [1 Producing a cash-flow forecast E [1 Preparing a business plan | © ‘Vakas Shah used his engineering background to develop CycleSure, a lightweight but strong cable that secures the wheels and frame of a bicycle. 1 Vakas needed to think creatively to produce CycleSure. Why is thinking creatively important? Select one answer. (i mark) A [1] Avoids having to answer the ‘what if?” question C [[] Generates competitive advantage Four in ten students got both marks for this question, Deliberate creativity involves developing ideas through recognised techniques such as brainstorming (B) and creating lists (C). ‘This was a eal exam question that alot of studonts struggled with be prepared! B [1 Increases the calculated risk D_ [1 Avoids the need for lateral thinkingUNIT 1 Had alook |_| Nearly there [ | Nailed it! [_ | Had a look |_| Questions entrepreneurs ask It is vitally important that entrepreneurs ask themselves questions when they start their own business. Helps identify business objectives Helps develop aspects of the business plan @ Why? and Why not? These sorts of questions will help identify the purpose and direction of the business. * Why do | want to start my own business? * Why do | want to change? * Why not set up my own website business? RESEARCH AND DEVELOPMENT Why ask questions? ) Risk Invention and innovation are risky. They can be expensive and time consuming, and many new products fail to make it to market. Businesses gain a competitive advantage from invention and innovation, but some businesses choose to wait to copy or ‘follow’ other businesses, creating ‘me too’ products. Identifies potential problems and pittalls Helps make ~ important decisions How? Where? and When? These questions help identify specifics about the business that can help form parts of the business plan. * How do | set up the business? + How do | build up a customer base? * How will | research my market? * Where can I get help and advice? * When could | open the business? What if? These questions allow an entrepreneur | to assess the value and likelihood of any possible outcome. Solutions can then be | identified from these questions. * What if my business loses money? | © What if my customers do not like my products? * What if there is too much competition? * What if | am ill for a long period of time? Worked example Which one of the following best describes the term ‘invention’? Select one answer. (1 mark) Seed tM et bata { Alyssa has started a singing career. She needs to buy PA equipment and a microphone ‘A [i Identifying new products and new ways of making products B [[] Identifying a gap in the market for new products Which two of the following questions would she be most likely to ask to help her buy the most. (2 marks) Suitable products? Select two answers. C [1] New business ideas which are profitable D [1] The process of transforming new ideas into products that can be sold A [1] Where are the locations she will be singing? B [J When will she need to buy the equipment? C [Rl What does she have to spend? D [J Where does she live? E [Rl What space for equipment does she have in her va +h. He is going to advertise his new range of trainers in the local John runs a sports shop in Nor paper over the summer months. iw A [J What if his staff take holidays in summer? of the following questions would he ask? Select one answer. (1 mark) B [7] What if local people go abroad in summer? © Select one answer. | | | | C LF] What if he needs to change his store layout in summer? D [J What if he redecorates the shop in summer? Nearly there [_| Nailed it! Invention and innovation 5 om Fe | POTENTIAL PRODUCTS: ‘AND PROCESSES: PRODUCTS READY TO ‘SELL TO CUSTOMERS | Protecting business ideas ‘+ PATENTS — right of ownership of an invention, design or process when it is registered with the government. * COPYRIGHT — legal ownership of material such as books, music and films which prevent these being copied by others. + TRADEMARKS - the logo, symbol, sign, or other features of a product or business that cannot be copied by others. ex One in three students got this question right. On topics where there are similarities between key terms, try to remember one key difference to help you distinguish between them. In this case, innovation takes invention one step further to create actual products for consumers. ‘This was areal exam question that alot of, students struggled with -be prey er is one possible benefit of a patent to the patent owner? (1 mark) A [[] Prevents another business from using the same brand name B [1] Provides the tight of ownership of an invention or process C [1 Isan insurance policy which provides protection from financial loss D [[] Ensures the business will not make a loss for 20 years 3Had a look |_| Nearly there [_ Taking a calculated risk Taking a CALCULATED RISK is about putting a numerical value or probability on a risk and the likelihood of it coming true, Weighing up the risks and rewards of a new business idea is important in judging the outcome and viability of a start-up. Calculated risk A business can calculate risk through market research, and understanding the risk can help a business make decisions that will reduce the likelihood of a negative outcome. Examples of calculated risk include: * 50:50 chance of an advert’s success * Lin 3 chance of a business failing * 10% of customers will return products. Making mistakes Risk can be calculated by identifying and comparing UPSIDES and DOWNSIDES. Upsides are things that can go right (or the reward). Downsides are the things that can go wrong. Below is an example of the upsides and downsides of selling products through a website instead of in-store (scoring out of 5). v Wider target market 5 ¥ Lower costs 3 ¥ Competition from | Nailed itt [_ Reducing risk is an important part of running a business, but entrepreneurs often have to fail before they learn how to be successful. Making mistakes is an important part of developing a business. ‘As entrepreneurs learn from their mistakes | they will become better at calculating risk. ¥ Loss of customer experience 3 V Website maintenance costs | Had a look [_| Nearly there [ | Nailed it! |_| Lonrr 1 ast Other important enterprise skills Being a successful entrepreneur is about more than just taking risks and identifying an opportunity. There is a range of important skills that also contribute to an individual's success. Planning — identifying a direction and plan of action for the business. Drive — being hardworking and motivated to achieve success. Thinking ahead — having the foresight to identify potential problems. Determination — being resilient when things go wrong / not giving up. Seeing opportunities — having the creativity and imagination to do things differently. Use this mnemonic to remember the important enterprise skills: Please Don't Trip Down Stairs Mind maps & apeettets Mind maps are often used in ‘Blue Rea Skies Thinking’ (see page Il). Mind Packaging — maps are also useful in helping an Premium (high) Price — Discounted (low) Product: 4 ~~ 1 Price match (same) Function: entrepreneur get their ideas down Marketing | ‘on paper when thinking ahead, Advertising mix } planning the business and trying to Ye 2 5 Direct / Online identify new opportunities. A mind Promotion —~ 4 / Retailer map to remember the marketing Mik op Liochures | Sales Place might look like this: Direct mail Promotions Wholesaler ¥ Automated ordering | Total = 9 online businesses Which one of the following is an example of a calculated value toa tsk. risk for Sonia’s business? Select one answer. ‘This was areal xara ‘A [J Sonia’s costs had risen by 30% in the past 6 months | Suaton ae re B [7] Sonia has calculated her yearly income tax as £795 be prepared! C [Ql There is an 80:20 chance of Sonia’s business failing D [1] Sonia has estimated that demand will rise by 10% over the next six months csi Six in ten students got this right, Cis the only answer that gives a numerical ‘Alex Tew took 20 minutes to come up with a successful business idea. Within three months he had made a million dollars by selling pixels on a website to businesses. The businesses could buy any ‘number of pixels for $1 each and use them to place an advert link to their business. Which one of the following enterprise skills do you think was the most important in contributing to Alex’s success? Select one answer, (1 mark) A [] He asked why people would pay $1 for a pixel on awebsite B [1] He showed initiative in solving his problem of student debt C [Bi He didn’t just ask all the right questions, he actually got up and did it D [1] He thought creatively about ways to make a million (_ Marcus Borega is a sole trader. His business imports high-quality cars from the USA. ie 1 Which one of the following is an example of a calculated risk for Marcus? Select one answer. A [1 His fixed costs are 50% of his total costs B [] There is a 40% chance of the business surviving the first year C [J Marcus’ variable costs rise by 25% in the first six months D [1] 10% of his customers will be over 65 years of age 1 Successful entrepreneurs need to think creatively and make connections between ideas. What is the name of the diagram which can be used to record words and ideas connected to a central (1 mark) » word or idea? Select one answer, A 1 Spreadsheet B [1] Market map (1 mark) C Scatter diagram D [J Mind mapunre | Had a look [_| Nearly there [_| Nailed it! Had a look [_| Nearly there [| Nailed it! |_ ———— —_s ) Objectives when starting up Qualities shown by entrepreneurs All businesses set OBJECTIVES. Sometimes these are financial objectives, which can be expressed in money terms. Businesses also have non-financial objectives, These are more personal and may involve helping others. Objectives Objectives are the goals that a business is trying to achieve. Objectives are important for all businesses, especially business start-ups. Setting objectives gives a business a direction and a target to measure success against. Businesses do not all have the same objectives, some of these can be personal to the entrepreneur. Successful entrepreneurs have a number of important qualities. There is no definitive list of qualities that make the perfect entrepreneur. Each entrepreneur will have his or her ‘own mix of qualities that make them successful in business. Entrepreneurial qualities Planning Tdentifying a direction and plan of action for the business, ¢.g. deciding to buy a new machine in a year when new technology will be available. Tiiative Being pro-active and getting a job done, €.g- approaching a competitor to discuss the possibility cof working together on a new product “king Hoks Tmntrepreneure are risk takers because they Invest their own time and capital, €.g. ordering 20% in the hope that sales will increase shortly. Determination | Being resilient when things go wrong /not giving up, e.g. working ito the evening to solve a problem. lata asians | Excsorerore vad qoid aganatis op) aocing Bia want wlble sous oF] ~ atart-up finding. Financial objectives Non-financial objectives Persuasion Being abe to conince Customers, suppliers and barks, e.g, tallng supplier round | to give an extra 2% discount. on an order. | ee AR ok, ATs ca bh Se em ~s. Entrepreneurs employ and lead others, e.g. motivating otaff to meet a deadline. Survival Profit and Wealth Financial Personal _— Independence Helping others Sometimes luck counts, e.g. an ice cream manufacturer has its best sales because of income security satisfaction and control (social enterprise) | the hottest summer on record. \ | TW MEE EC AS Dolesnd actos meet ly somone aly GMP Motch the qualities onthe lef wit the examples on the right (4 marks) an individual would want to start a business? S, i EB Select two answers. (marks) C-B — aay ample Leadership [i ‘a | Reorganising the layout of the factory A [Bl Touse the profits ofa business to make a difference Determination | it b | Talking a worker around to doing some overtime B [) To work fewer hours each week ‘Making iit ‘¢ | Having been rejected for a loan by four banks, applying to another C [ Toavoid paying income tax decisions bank for the foan Persuasion —_| i¢ | Having a vision for where the business should be in two years time. D [1] To show their boss that they are as good as them E [Ri To control their own future 1 Which three of the following are the most likely reasons why Sonia decided to set up as a sole trader? Select three answers. G marks) 1 Which two of the following are key qualities needed by an entrepreneur? ‘A (She will benefit from limited liability D_ [[] She would take all of the profits Select two answers. @ marks) B [J She could raise finance from selling --B_ [7] She would have the ability to make her A [1] A willingness to take risks D [1] A degree in Business Studies shares ‘own decisions B (1 Awillingness to employ at least EL] The ability to raise finance C [1] To have greater contro! within the F [[] Itwould make survival easier five workers business C [7] A willingness to take the initiative 16| UNIT 1 Nailed it! [7] Lower Had a look |_| Nearly there [_| Nailed it! [_| Had a look [_| Nearly there [_| —— Revenues, costs and profits 1 A business must understand the difference between the price it charges to customers and the cost of producing its products. If it knows how many products it sells, it can Revenues, costs and profits 2 A business must be able to calculate whether it is making a profit or loss. It must also understand how making a profit or loss can have an impact on the business and its owners. calculate its total revenue and its total costs. It can then calculate profit. REVENUE, SALES REVENUE or TURNOVER is the amount of income received from selling goods or services over a period of time Price x Quantity = Total revenue : Bp =TR * FIXED COSTS do not vary with the output produced by a business, e.g. salaries and business rates. * VARIABLE COSTS change directly with the number of products made, e.g. raw materials and labour. Variable costs = Cost of one unit x | Quantity produced | Total costs TOTAL COSTS are all the costs of a business. It can be calculated using the formula: Fixed costs + Variable costs = Total costs ie, £400 + (£5 x 100) Hancock's is a small pottery business which specialises in garden plant pots. It has the following financial information for one month. Number of pots produced and sold: 150 Average price per pot: £10 Variable costs per pot: £2 Fixed costs per month: £500 What are the total costs for Hancock’s during the ‘month? Select one answer. (1 marly A [£450 C Ki £800 BL] £650 D [1 £1500 1 The following table shows the costs, revenues and profits for Merry Maids for a two-month period. Fill in the four blanks (a)-(d) to complete the table. (4 marks) 400 + £500 = £900 Just over half of students got this question tight, Just because some of the figures in the options given can be arrived at, it doesn’t ‘mean this is the right option, ixed costs + variable costs ‘This was areal exam question hata lot ofstudents struggled October ‘November Total receipts | £14000 £12000 Fixed costs £2000 £2000 Variable costs | (a) © Total costs £9000 @ Profit ® £5000 Profit and loss PROFIT occurs when revenues of a business are greater than its total costs. If a business's costs are greater than its revenves then it will make a LOSS. Profit or loss can be calculated used the formula: Total revenue — Total costs = Profit or Loss i.e. £1000 ~ £900 = £100 profit a ae . te X PROFIT or 7 I Eze) bree Ways to increase profits © Lower variable costs. @ Lower fixed costs. V Increase the sales price WY Increase the quantity of sales. Worked example ‘The owners of Han increase profit decide to try to Which three of the actions below will most likely achieve this, assuming it sells the same ‘number of pots each month? Select three answers. @ marks) Buy cheaper raw materials to make its products B [J Increase the sales price of an average pot to £11 C [5] Increase the number of workers employed over the weekend ‘A business spent: + £10000 on raw materials + £30000 on fixed costs + £7500 on other variable costs and had a turnover of £50000 Profit is the objective of many businesses because it allows a business to: GY survive WY reinvest profits for expansion Y give an incentive to start the business © provide security and savings WY reward employees © generate wealth for the owner. Making a loss can have a significant impact on a business. The business might be * unable to repay loans * unable to pay bills such as wages * experiencing cash-flow problems * unable to survive, leading to the business stopping trading. Fewer than six in ten students got all three marks for this question, Options A, B and F are all correct answers because ‘each would either raise revenue (B) or lower costs (A and F), ‘This was a zeal exam question that alotof| tudents etraggled with ~ be prepare D [1] Buy more expensive raw materials to make its pots E [1] Increase advertising expenditure F [Xi] Relocate to cheaper premises 1 The business now buys its raw materials 10% more cheaply from anew supplier. What effect will this have on profit? Select one answer. (1 mark) The profit level will: A [| Increase by £2500 B [Fall by £2500 € C1 Increase from £2500 to £3500 D [1] Increase by 10%UNIT 1 Had a look [_| Nearly there [_| Nailed it! [_| Forecasting cash flows 1 CASH FLOW is the money flowing into and out of a business on a day-to-day basis. A CASH- FLOW FORECAST predicts how cash will flow through a business over time. A business can use it to identify periods where it could have a CASH-FLOW PROBLEM, where it does not have enough money flowing into the business to pay its day-to-day bills. Cash-flow forecasts sept | oct | Nov al otal receipts | 8000 | 8500 | 13500 \\ Payments aay Machinery and 15099 a 3 lequipment oo ei ieee 4400 | 4400] 6000 eating, Without suff lightning and 0| 3500 1000 ffotal payments 14400 | 7900] 7000 © pay its debts Net cash tow |-6400] 600 | 6500 * repay bank loans [Opening balance 0 | -6400 | -s800 losing balance _|-6400 | -5800 } 700 | ‘11700 rorked example in the four blanks to complete this table, (4 marks) Ore a Jan [Feb [Mar Receipts (£) 10000[ _ 8500[ 5000 Payments (@) Raw materials 2000] 2500] 3600 Fixed costs 4000] 4000 4000 Other costs 000[ 5200] 5900 Total payments | 11000| 11700| 13500] [Net cash flow =j000[ -3200[ 1500] (Opening balance 500] 500] 3700 (Closing balance =soo] 3700] —2200 Ii how cash-fiow problems can lead to insolvency. Change in sales revenue / change in demand Credit terms can ies change (period of time or amount needed to.— pay a bill or invoice) Change in stock levels Cash flow and insolvency nt cash within the business a business would become INSOLVENT. This means that it would be unable to: * pay wages to employees * buy raw materials and products to sell * promote the business. Pram U ag Which two of the following are the most likely ways that PrintZone Ltd could improve its cash flow position? Select two answers. (2 marks) A [1] Use a mind map to improve financial planning B [J Carry out quantitative market research C [Rl Increase revenue by improving sales D (KI Negotiate lower prices with suppliers E [1] Employ two more full-time members of staff Now try this Had a look |_| Nearly there [_] Nailed it! [_| What impacts | on cash flow? Forecasting cash flows 2 important for a business to understand the factors that affect its cash flow and also Change in costs (commodity prices) Seasonality in sales —— {such as sun cream) ~_ Business expansion or contraction Cash flow, profit and risk Cash flow is not profit. A profitable business may still have a cash-flow problem and go out of business. Cash fiow is an important part of any BUSINESS PLAN. Planning to avoid | cash-flow problems can reduce RISK. ex» Just under half of students scored both marks for this question. The question asks which methods are most likely to improve its cash flow position. Market research might help in the longer term but Options C and D are more immediate and obvious ‘ways to improve cash flow. Cay five mio qaimiacast eee toes 1 ‘A business has the following cash-flow information for one particular month, ing balance: £5000 Cash inflow: £7000 Cash outflow: £14000 @ 1. What is the closing balance for the business at the end of the month? Select one answer. (1 mark) A [J -£12000 BC] -£2000 c TJ £9000 DL £16000 20 Monthly sales at PrintZone remain unchanged from April to October. Given this fact, which two of the following are possible reasons for the worsening cash-flow position of the business during this time? Select two answers. (2 marks) A [[] Increased spending on stocks of ink cartridges and printers by PrintZone B_[] Change in the interest rate on PrintZone’s bank loan from 5% to 4% C [7] Monthly rent on PrintZone’s premises changing from £700 to £650 D [1] More favourable trade credit terms provided by suppliers to PrintZone E [1] PrintZone’s monthly advertising costs changing from £800 to £1400| UNIT 1 Had a look | sa | Nearly there [_| Nailed it! |_| The business plan A BUSINESS PLAN is a plan for the development of a business, giving forecasts of items such as sales, costs and cash flow. The purpose of a business plan A business owner may write a business plan to: * convince a bank to loan the business money * forecast financial projections * identify the needs of customers * formulate market research into important information, e.g. about competitors * provide information, €.g. about competitors * provide the owner with a ‘plan of action’ that will minimise risk, What goes into a business plan? | Objectives = ‘Name, location, ‘What the business Size, growth, ‘Who wil work ‘Sources of Information on type ofbusiness | opestoachieve | fEatues and tends within the business france, cashfny _supplers and how yr tepapase | aspeoiic paod | 9 the market. ardwhat ther | forecasts, products wit fatepedcs —oftinefaginthe toes wil Tovanues, cost ade and supped. ‘wil sl. fist six months ‘and profits, crwth tee years). Which three of the following would Marie have had to include in her business plan? NDE @Y Select three answers. [All her invoices and receipts from purchases and sales Gumsrts) (C1 Acopy of the design of her business card [fl A cash-flow forecast A record of all her profits from the business for the past five years [Rl An overview of the nature of the business [fl A summary of the market research she has carried out Which two of the following are the most likely reasons to produce a business plan’? Select two answers. (2 marks) ‘A [1] Toshow off the skills of the D [1] To convince eustomers to buy from the entrepreneur business B [1] To get support from a bank E [1] Tohelp monitor actual sales against forecast sales C [To show other people you can create a business plan 22 Had a look |_| Nearly there [_| Nailed it! |_| ay, Obtaining finance 1 Long-term sources of finance * Share capital (for limited companies * Loans (from a lender such as a bank). only, not sole traders). * Mortgage (a loan secured against * Personal savings (from the owner). a property). * Venture capitalist (external investor * Retained profit (if there is any) looking for fast growth and return * Leasing (renting a property, equipment on their investment). or vehicle instead of buying it). | * Grants. 1 % ‘Selling shares 2 Security (Collateral) Often when money is borrowed the lender will be given some form of security or COLLATERAL against the loan. In the case of a mortgage this is the property. The incentive for a bank to loan money is the INTEREST they will receive. The A share is a part- ‘ownership in a business. A start-up, that is a limited company, can sell SHARES to potential investors to raise capital <| sharchoWderX SharcholderY These investors are then rate of interest or nature of the security ert 400 stares) SHAREHOLDERS in the determines the level of risk associated with lending the money. That’s why an entrepreneur is a risk taker! tok cumership) 60% owerchp} BUSINESS and are entitled to a share of any profits generated. ex Worked example ‘Asa sole trader, which three of the following are long-term sources of finance for Sonia? Only two in ten students got all three marks for this question. The context of this question is a ‘sole poelect.throe answers marks) trader’ and not a limited company. Only limited A [Rl Profit D () Trade credit companies can raise capital through selling shares. B 1 Overdran By Stare capita! GY (sara oan aon are Sg | Cl Bank loan F [Xl Personal savings Jane oulee, peti Be Prepare ‘Mark is a qualified hairdresser looking to set up as a sole trader. Mark is considering different sourees of finance to start his business. 1 Which two of the following would be most appropriate for Mark to start up his business? Select two answers. (2 marks) ‘A [Personal savings B [1] Selling the business’s assets D [J Retained profit E (Bank loan © [1 Issuing shares to new shareholders 23UNIT 1 | Had alook |_| Nearly there [| Nailed it! —— Obtaining finance 2 Businesses may require finance in the short term, as well as from long-term sources (see page 23 for more on long-term finance). Short-term sources of finance are sources that are repaid immediately or fairly quickly, usually within a year. Delayed payment (some Bank overdraft businesses may try to delay payments to reduce ff cash outflows) / Trade | Short-term \_ Credit cards credit —|( gourees of finance) ("0% term So : borrowing) Factoring (receiving cash immediately from a factor such as a bank, instead of waiting to be paid) What would be the most appropriate way that Sparkle Oven Cleaning Company Ltd could cope with its negative cash flow in August and September? Select one answer. (1 mark) A [1] Approach its bank to take outa foan B [| Sell more shares in the company C [Rl Arrange an overdraft with its bank D [1 Seek out the services of a venture capitalist ie 1 Match the terms on the left with the correct definitions on the right. (4 marks) “Term | [Definition Grants 1 |@ [Receiving cash immediately from a third party, instead of waiting to be paid. Debt is then passed on to the third party to collect. ‘Venture capitalist [i || | An individual or company that buys shares in what they hope will be a fast-growing company. Overdraft Ti [€ [An amount of money provided to a business from the government or a charity, which does not have to be repaid. Factoring iv | [@ [A short-term loan allowing a business to overspend on their bank account up to a limit and with interest charged. € | A source of finance where owners are entitled to a share of any profits generated, Had a look [|_| Nearly there |_| Nailed it! [_| unr 1 Pa} Customer focus Understanding customers and focusing on their needs is a vital if a business intends to attract people to buy their products. There are three stages of being CUSTOMER FOCUSED. Being customer focused Customer focus in practice denbiiying gece = vena Fochnbaics A business asking customers to complete Siehvas aie oseanchite Aid Oge mx a questionnaire as they leave the store. what customers want. Anticipating needs — the best A pub opening a beer garden, anticipating @ businesses are able to identify =p warm weather, or a fashion brand changing needs in advance to give them a clothing in its stores to match the styles competitive advantage. at a national fashion show. Meeting customer needs — a business A business adapting elements of the must be able to provide whatever =p marketing mix, €.g. using recycled customers want, whether that is packaging for environmentally conscious quality, low prices or excellent service. customers. Worked example ‘Sparkle Oven Cleaning Company Ltd offers an oven cleaning servi owner, Eddie Lowe, says the focus of the business is competitive prices, high standards and good customer service. Which one of the following might be a key part of the customer focus for Sparkle Oven Cleaning Company Ltd? Select one answer. (1 mark) A [Rl Making sure that appointments are kept on time B [Ens C [1] Monitoring competitors and changing slightly higher prices than them staff do the job in as short a time as possible to maximise sales D [J Managing a business so it can make the maximum profit possible 1 Which two of the following would be essential elements of customer focus for a business? (@ marks) A [[] Anticipating customer needs B [J Ordering stocks of raw materials C [J Providing customers with what they want D [1 Paying customer tax E [] Paying employees| | UNIT 1 Had a look L Nearly there b - The marketing mix Product The PRODUCT itself has to meet the needs of customers and have the correct attributes and features that the customer wants. A successful business will try to differentiate their products. Promotion PROMOTION is communication between the business and customer that makes the customer aware of its products, including: * advertising Place PLACE is the way in which a product is distributed — how it gets from the producer to the consumer. Businesses have to consider the channel (e.g. online or through retail stores). For example, a luxury suit might be sold in an upmarket boutique on Bond Street in London. Price The PRICE of a product must reflect the value customers place on the product. High-quality products have a high price. Customers are also willing to pay more for special features. Price is very subjective because it Nailed it! (_| Had a look Ol Nearly there [_| Nailed it! CO Lge Limited liability The term LIABILITY refers to the legal responsibility of a business towards its debts. Unlimited liability Sole traders (or sole proprietors) are businesses owned by one person. The owner has UNLIMITED LIABILITY. The ‘owner is legally responsible for any debts of the business. Therefore there is potential for the owner to lose his or her personal belongings to pay off any debts. Limited liability ¢. Ss (11) sinezo fs 8 separate ensty fom ounes | eae Private limited companies (Ltd) have LIMITED LIABILITY. The owners and the business are separate legal entities. Any debts incurred by the business belong to the business and the owners can only lose | up to the amount that they have invested. Their personal belongings are not liable. | = sponsorship * sales promotions * public relations. Lisa believes there is a market for gardening services and Jes) has carried out market research. Some of her results are LR ; 1) shown below. depends on many factors, such as commodity prices (see page 31) and the price set by competitors. The differences between sole traders and Ltds | Private limited companies: Limited Nability reduces the risk for the owners. Risk Control ‘According to the table, which element Unlimited lability means there is more risk, of the marketing mix should Lisa focus on in her business? "The owner has 100% control of decisions. |The control of the main owner will depend on the [proportion of the business sold as shares to other Select one answer. (1 mark) = phan, = What is the most important factor in the Frolts | The owners keep 100% of the profits. its are shared proportionately between the decision to choose a gardening service? A.D|Plass: CD Product shares owned by shareholders. | | ‘Number of responses B [| Price D ( Promotion Privacy | There ts more privacy. eran ‘are filed with Somes = ‘and ean be mii peneatge viewed by anyone on pay. i Price of the service 2 i ja ae ia es elie: ol ian ee Quality of the work 4 Wo d example “Advertisement in the 16 od hee local paper Which two of the following might be the most likely reasons why someone might set up as a private Customer serviee 20 $M» cited company? Select two answers. (@ marks) (eS ©) A [She wants to raise lots of money on the Stock Exchange B [Rl She believes the risk would be less D [1] She would have access to limited sources of finance She would be liable only for the amount she invested if the business failed C [J She wants to be the sole owner Chocolicious is a small business making handmade chocolates. The market it operates in is very of the business competitive. One source of competitive advantage it holds is in the quality of its chocolates. The owners are worried by the recent rise in the price of cocoa. 1 Chocolicious has decided that it needs to change its marketing mix in response to the rising price of cocoa. Which two changes to the marketing mix would you advise, given what is happening in this market? Select two answers. (2 marks) A [J Reducing its Corporation Tax payments D [[] Making five members of staff redundant 1 Identify one disadvantage of unlimited liability for a sole trader. Select one answer. to cut costs: A. [[] The need to pay higher taxes B (J Less control of the business (1 mark) B (J Producing a new business plan CL Sharing profit with other shareholders © Ly Contacting supermarkets to seek new (| Using cheaper ingredients in the product 7 D_ [J Risk of losing personal possessions retailers for its products 26UNHT 1| Had a look fal Nearly there [_| Nailed it! ey ee 28 Start-up legal and tax issues There are regulations and tax issues that all businesses have to adhere to. Every business must keep up-to-date records on its business activity, and trade under a unique name. Why have legislation? Businesses have to adhere to legal requirements: * 80 that the government can keep a track of business activity * 90 taxes can be collected * to protect businesses from illegal activity * to protect customers from illegal business practices. The legal requirements of a small business * Register and trade under a unique name that promotes the business (a limited company will have Ltd at the end). * Keep records of sales, purchases and names of businesses they have worked with. * Register with Her Majesty's Revenue & Customs (HMRC ~ the government authority in the UK responsible for collecting tax). | Pay the appropriate level of tax to HMRC. Value Added Tax (VAT) ~a tax on the value of sales of a business. Businesses that sell more than a certain amount will register to pay VAT. Corporation tax —a tax paid by limited companies on the profits of the company. National Insurance Contributions (NIC) — a tax on earnings of workers and sole traders linked to state benefits. Marcus Borega is a sole trader. His business alate init ve any meen Renee imports high-quality cars from the USA. Income tax —a tax on the income earned by workers and sole traders. M039. this question. Know your taxes and which types of businesses have to pay them. As Marcus is a sole Which two of the following taxes will Marcus have to pay in the course of running his business? Select two answers. A [1] Corporation tax @ marl ag D (J Labour tax trader he is required to pay Income Tax and National Insurance Contributions. Remember, National Insurance Contributions are still a tax even though ‘tax’ does not appear in the name, Had a look [_| Nearly there [_| Nailed it! |_| (unre 1 Customer satisfaction CUSTOMER SATISFACTION is a measure of how much a business or its products meet customers’ expectations. Good customer service To meet the needs of customers, businesses must provide effective CUSTOMER SERVICE. How can they do this? * Dispatching orders quickly. * Being 100% accurate in orders / deliveries. * Offering excellent after-sales care. * Providing a personal service. * Going the ‘extra mile’ to get what customers want. * Being convenient. * Being polite and friendly. * Responding immediately to any complaints. Keeping the customer coming back REPEAT PURCHASES help achieve long-term sales and therefore the success of a business. Repeat © Repeat purchase. purchases can be stimulated through: G Loyalty. * cheaper prices than competitors © Business can charge a premium price. | * easy and convenient service UY Improves business reputation (good * effective customer service public relations and word of mouth). | + promotions and special offers Y Can differentiate a business and | * building good relationships with customers become their USP. (good communication). Benefits of good customer satisfaction "This was a veal exam question that alot of BE) Dietatbtton | suds struggled wid—be prepared C Bl Income tax E (I National Insurance Contributions Marie set up a new private limited company selling gift bags. 1 Which one of the following would be the most likely reasons why Marie has to keep a record of her business's income and spending? Select one answer, (1 mark) ‘A [So that she could return any faulty goods she bought to the shop B [J Tobe able to prove to Her Majesty’s Revenue & Customs that she is paying the right amount of tax C [J Tobe able to prove to her family that she is running the business properly D [1] So that if she made a loss she could see what item of spending caused the loss Martin Hudson runs Buckingham Ltd, a business selling high-quality office furniture to other businesses. Which two of the following are likely to be the most effective methods that Buckingham might use to deliver high levels of customer satisfaction? Select two answers. (Q marks) A [1] Securing repeat purchases by customers B [Ri Fulfilling customer orders accurately C [J Setting non-financial objectives D [RJ Introducing a 24-hour customer helpline E [1] Advertising on local radio stations Which of the following is a reason why customer service is important to the success of a small business? Select one answer. (1 mark) A [7] Customers are the ones who add value B [1] A small business wants to get repeat purchases C [1 Castomers will buy a product if the price is right D [1] Ithas to meet legal requirements 29