BUSINESS STUDIES

SYLLABUS SECTION
1
UNDERSTANDING BUSINESS ACTIVITY
SECTION 1.3: ENTERPRISE, BUSINESS
GROWTH AND SIZE
1.3.1: Enterprise and entrepreneurship
1.3.2: The methods and problems of measuring business size
1.3.3: Why some businesses grow and others remain small
1.3.4: Why some (new or established) businesses fail
ENTERPRISE AND ENTREPRENEURSHIP

• Entrepreneur – a person who organises, operates, and takes the risk for a new venture
Characteristics of successful entrepreneurs
• Hardworking – they need to work long hours and take short holidays to make business thrive
• Risk taker – deciding to provide products that people might or might not buy is very risky
• Creative – you need new ideas for new products and processes to make yours product different
• Optimistic – an entrepreneur believes the future will be better
• Self-confident – in order to convince others of the value of the product, one needs to be successful
• Innovative – it’s important to combine existing ideas and practices in new and interesting ways
• Independent – they have to work on their own before they cab employ others.
• Effective communicator – important for employees to understand what they need to do
CONTENTS OF A BUSINESS PLAN

• Business plan – a document that outlines business objectives and details the operations,
finance, and owners of the new business. It gives information about
• Description of the business – summarises the business, its history, and its objectives
• Products – describes the products and strategies for continuing production and improving
competitiveness
• Market – describes the total market size, predicted market growth, and the target market. It
analyses competitors, predicts future market changes and forecasts sales revenue. It includes a
marketing strategy
• Business location and distribution – describes where the business will be located and how its
products will reach customers
CONTENTS OF A BUSINESS PLAN

• Organisation structure and management – includes the number of employees and skills required
for the employees
• Financial information:
• Projected future financial statements for several years into the future – include Income statement and
statement of financial position
• Sources of capital e.g. revenue, bank loans, owners’ capital
• Predicted costs – fixed and variable costs
• Cash flow and working capital forecasts
• Projected profitability and liquidity ratios

• Business strategy - demonstrates how the business will be successful by detailing how it will satisfy
customer demands and increase brand loyalty, using key points from the other sections
HOW BUSINESS PLANS ASSIST ENTREPRENEURS

• Financing:
• Banks and other institutions that provide loans and grants use the business plan to see how
seriously the entrepreneurs have thought about the business and to determine whether it is
likely to be profitable. If they are satisfied, they will give the start-up the money it needs.

• Planning
• Completing the business plan forces the entrepreneur to think ahead and consider the different
aspects of the business in detail. It also forces them to plan carefully for the future.

• Strategy
• Focusing on the future and thinking carefully about as well as current and historic business
trends allows the business to develop strategies that will help the business grow.
WHY AND HOW GOVERNMENTS SUPPORT
BUSINESS START-UPS
WHY GOVERNMENTS SUPPORT HOW GOVERNMENTS SUPPORT
BUSINESS START-UPS BUSINESS START-UPS
• Reduce unemployment – growth of new businesses creates • Finance – involves giving money in the 2 ways:
jobs • Grants – allocated for a special purpose and don’t have to be paid
back
• Increase competition – more products on the markets gives • Loans – given to businesses at low interest rates
consumers choice
• Training – free training or grants to train employees to improve
• Increased output – the economy does well when a lot of productivity
products are produced • Premises – provide premises at low cost to start-ups
• Benefit society – outside of their economic activity, • Business ideas and help – organise sessions where established
businesses do things that help the community businesses advise and support entrepreneurs

• Further growth – government support can help businesses • Research – encourage universities to make their research and
facilities available to entrepreneurs. Sometimes involves giving
grow which increases the benefits of having the businesses
grants to the universities to pursue certain areas of research
METHODS OF MEASURING BUSINESS SIZE AND
THEIR LIMITATIONS
• Number of people employed – easy to
calculate and compare
• Automation results in companies that have
high output and revenue but employ few
people. These companies are capital-
intensive and could produce more than a
company with more employees making it
difficult to determine size just by looking at
labour
• The use of part-time workers makes the
method inaccurate. How does one compare
part-time labour to full time labour?
• Value of output – used to compare companies
in the same industry, especially in
manufacturing
• High output values doesn’t mean a business is
large. A firm with a few employees producing
a few very expensive products may have
higher output values than a firm with many
employees that produces many products.
• The value of output isn’t the same as the value
of sales. When some goods aren’t sold the
company doesn’t get any revenue from them or
make a profit
METHODS OF MEASURING BUSINESS SIZE AND
THEIR LIMITATIONS
• Value of sales – used to compare retail
businesses esp. those selling similar
goods
• Is misleading when used to compare the
size of businesses that sell very different
products
• None of the methods are perfect
• Get better results when you use more than one method and compare the results
• Value of capital employed – the total
value of the capital invested in the
business.
• Capital intensive businesses and
labour-intensive businesses cannot be
compared to each other using this
measure
WHY THE OWNERS OF A BUSINESS MAY WANT
TO EXPAND THE BUSINESS
• Higher profits for the owners: expansion leads to increased sales which results in increased
revenue. The shareholders get higher dividends or increased share price.
• More status and prestige for the owners and managers: managers who control bigger
businesses get higher salaries and larger companies may be listed on multiples stock
exchanges
• Lower average costs (section 4.2.2: economies of scale): bulk buying can result in a discount
• Larger market share: the greater the market share, the more influence the business has on the
market and with its suppliers. An increase in market share can result in increased revenue.
DIFFERENT WAYS IN WHICH BUSINESSES CAN
GROW
• Internal growth – is growth that is paid for by
profits from the existing business
• Slow but easier to manager
• External growth – growth that involves a takeover
or merger with another business. Also called
integration
• Merger – when business owners agree to combine
their businesses into one
• Takeover or acquisition – when one business buys
another business
• Horizontal integration – external growth – happens
when both companies are in the same industry and at
the same stage of production
• Vertical integration – external growth – when
the two businesses are in the same industry but
at different stages of production. It can be
forward or backward
• Forward – integration with a business at a later
stage of production
• Backward – integration with a business at an
earlier stage of production
• Conglomerate integration –external growth –
also known as diversification. When one
business integrates with another business in a
completely different industry
PROBLEMS LINKED TO BUSINESS GROWTH AND
HOW THEY MIGHT BE OVERCOME
PROBLEMS
• Larger businesses are harder to control
• Larger business leads to poor
communication
• High cost of financing expansion might
leave the business short of finance
• Integration with another business can
prove more difficult than expected
POSSIBLE SOLUTIONS
• Decentralisation – work in smaller units
• Decentalisation
• Use latest IT communication equipment
but that can cause problems
• Expand more slowly
• Ensure there is enough long-term finance
• Very good communication – the
employees need to know why changes
are being introduced
WHY SOME BUSINESSES REMAIN SMALL

• Type of business e.g. hairdressing, car repairs, window cleaning, plumbing, catering
• They offer personal services or specialised products and if they grow, they wouldn’t be able to meet the
personal services required by consumers.
• They are easy to set up and lots of competition keeps the businesses small

• Market size e.g. shops in rural areas and market for luxury cars
• a small number of total customers in the market (small market size) makes it more likely for businesses to
remain small

• Owners’ objectives
• Business owners may be more interested in keeping control of a smaller business than running a larger
business
• They might also want to avoid the stress of running a larger business
CAUSES OF BUSINESS FAILURE

• Lack of management skills

• It leads to bad business decisions e.g. choosing a location with high costs and low demand. This is
particularly relevant to small businesses taken over by family members

• Changes in the business environment

• Failing to plan for the future results in higher uncertainty and risk. Changes such as new technology,
competition, big financial changes can cause a business to shut down if it doesn’t respond to them

• Poor financial management

• Failure to plan and forecast cashflows can cause cash shortages which means workers, suppliers, and other
creditors can’t be paid what they are owed

• Over-expansion
• Rapid expansion causes management and financial problems which can make the business shut down
WHY NEW BUSINESSES ARE AT GREATER RISK
OF FAILING
• Lack of finance and other resources
• Poor planning
• Inadequate research
• Lack of experience
• Lack of decision making skills
New businesses are always at greater risk of failing than established businesses