Download Setting up a Business

Setting up a Business
Unit 1
Starting a Business
Sources of Business Ideas
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Two types of starting businesses:
– Set up a business then think about products or services the business will
provide.
– Think about products or services the business will provide then set up a
business.
Sources of Ideas:
– A solution to a problem in an existing product.
– Noticing a growing trend in a market. (Looking for opportunities)
– Inspired by existing operating businesses.
– Buying someone else’s idea. (Franchise)
Looking for a gap in the market
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To determine whether a product or service will be successful, entrepreneurs conduct
market research (the process of gathering, analyzing and presenting data relevant
to marketing). Market research includes:
– Key features of the market.
– Size
– Growth
– The different types of potential customer for the product.
– Who the competitors are.
– What trends may be occurring.
– Market Growth
– Growth in a specific sector
– The main competition and how your product is unique
– Market share of competitors
– A Niche (small part of a large market) in the market.
– In niche markets, no large business competitors.
Reasons for starting a business
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People who start businesses are called entrepreneurs (someone who is willing to
take the risk involved in starting a business). There are a variety of motives to start a
business:
– They want to make their own decisions and be their own boss.
– They want to keep all the profits the business makes.
– They need a job and starting a business is one way of making sure they are
employed.
– They have an interest that they want to expand on by starting a business.
– They want to prove something to themselves by showing they can start a
business for themselves. (Self Satisfaction)
– They want to provide a service for others. These are called social enterprises
(a business that is set up not to make a profit but to serve the society).
Franchises
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When a business chooses to become part of an existing business by buying a
franchise (when a business sells the right to use its products and / or brand name to
another business).
Advantages of buying a Franchise:
– The idea already exists. The entrepreneur can judge the success of the existing
company and decide whether to start up. Reduces the risk.
– The brand name is already established, easy to gain immediate customers.
– The franchisor provides support, training and existing methods.
– Costs such as national marketing, can be shared between the franchisees.
Disadvantages of buying a Franchise:
– A problem with one of the franchisees will reflect badly on all the other
franchisees.
– Disputes may occur over the balance of power and control between the
franchisee and franchisor.
Types of Business Objectives
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A business typically sets out a series of objectives (a target that is set for the
business to achieve) for itself to follow. Although each individual objective may vary,
they all typically center on these areas:
– Survival: Mostly a objective when starting a business, the entrepreneur may have
to charge lower prices and make lower profits to establish the brand’s name.
– Providing a good product: Doing a good job and taking pride in their work.
– Earning a profit: After a business is running, making a decent profit is essential to
staying in operation.
– Customer satisfaction: Providing a better customer service potentially leads to
more profit in the long run.
– Market share: Businesses may set themselves a target in terms of share of
market they hope to achieve.
– Ethical objectives: By being ethical, a business may benefit by getting favorable
media coverage, by attracting customers, investor and employees.
Purpose of Setting Objectives
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An object provides a focus for everything you do and will enable to see whether you
have accomplished your targets. Objectives are important because:
– Helps with decision making and with establishing priorities.
– Helps investors understand the direction in which the business is heading. This
might mean they are more willing to agree to certain decisions.
– Provides a target so that everyone can compare the actual results with the
planned results to decide how successful the business has been.
– Helps them take appropriate decisions when things get off track.
– Motivate everyone connected with the business because they know their aims.
Influence of stakeholders
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The objectives of a business should be set by the owners, but the decision will most
likely be influenced by stakeholders (individuals and organizations that are affect by
and affect the activities of a business).
– Employees want the business to grow so they have promotion opportunities.
They want the business to behave ethically.
– Suppliers want to be paid on time.
– Community want the business to act responsibly, such as waste and noise
reduction.
– Buyers also affect the firms as they want lower prices, higher quality etc.
Stakeholders can influence a business in multiple ways:
– Negotiation
– Direct Action
– Refusal to Cooperate
– Voting
Purpose of Business Planning
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A business plan (is a document setting out what the business does at present, and
what it aims to achieve in the future), it is used to plan out the following areas:
– Background information on the founders and investors and their previous
experience.
– An analysis of the market and the business’s position within it.
– The business’s objectives.
– The business’s plan on how it will compete with existing businesses.
– An analysis of the financial position of the business, cash flow forecasts, profits,
etc.
Business planning is important because a business needs to:
– Identify and anticipate problems.
– Have a sense of direction.
– Show to potential investors or creditors.
Business plans need to be constantly updated, as there are changes in tastes, laws
and competitors.
Business plans to reduce risk
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There are many difficulties of business planning, some of them include:
– Uncertainty: Plans might not be totally accurate as it is sometimes hard to
estimate future market conditions or sales figures with any degree of accuracy.
– Lack of experience: Small business do not have the resources to use experts for
business planning.
To try to reduce the risk of business plans going wrong, entrepreneurs can:
– Research the market thoroughly.
– Talk to experts and consultants.
– Plan for a variety of possible outcomes.
– Regularly review and update the plan so it remains relevant.
Sole Trader
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A sole trader is when a business is owned and managed by one person. They are
allowed to have employees.
Advantages:
– Quick and easy to set up, does not involve registering with the government.
– You make all the decision yourself so you don’t need to have other’s approval.
– You keep all the profits to yourself.
Disadvantages:
– Can be stressful making decisions by yourself.
– Needs to handle all aspects of the business, lack of different skillsets.
– You have unlimited liability (when the personal possessions of the owners of
the business are at risk if there are any problems).
– You may find it difficult to raise money for the business.
– Is likely to be small and will not have the power large business do over suppliers
and distributors.
Partnership
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Partnerships are formed when two or more people set up in business together. They
must sign a Deed of Partnership which is an agreement of the rules of the
partnership, such as how the profits will be divided, how decisions are to be made,
etc.
Advantages:
– Several people are involved in a partnership so each can contribute money.
– More people can be involved with discussing problems, better decisions.
– Each partner can specialize in an aspect of the business according to their
skillset.
– Partners can cover for each other, being in a partnership is less stressful.
Disadvantages:
– There may be disputes when a conflict of ideas occur.
– Decisions may be slower than a sole trader as because all the different partners
need to be consulted.
– The rewards are divided up.
– The partners have unlimited liability.
Companies
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A company is a business that has its own legal identity. It is made when the owner(s)
complete two documents:
– Memorandum of Association
– Name of the company
– Overall purpose of the business
– Where the company is registered
– A general statement on the business’s activities
– The Articles of Association
– The voting rights of shareholders
– How profits are distributed
– How directors are elected
– The duties and powers of directors
A company is owned by its investors who are called shareholders (an owner of a
company. Each shareholder owns a ‘share’ of the business).
Private Limited Companies
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The features of Private Limited Companies are:
– It has “ltd” after its name.
– It is owned by shareholders.
– It cannot sell shares to the general public, only privately.
Advantages:
– Shareholders have limited liability (you can only lose what you invested into the
business).
– The business gains more status, people assume a company is at a higher level.
– If the founders die, the company still exists.
– Managers can be employed to run the day-to-day business.
Disadvantages:
– Various legal procedures.
– A summary of the business’s financial accounts must be made available to
public.
– Business must pay corporation tax.
– Any additional investors become important stakeholders.
Factors influencing the location
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The decision of a business’s location is vitally important, there are many factors that
could affect or limit the choices, such as:
– Type of business
– A shop needs to be close to customers.
– A factory is more concerned about distribution and transport systems.
– Availability of locations
– Competitors
– Hotels want to open in established tourist areas.
– Availability of raw materials
– Availability and cost of labour
– Transport links
– Businesses to export abroad want to be near an airport or port.
– Technology (communications systems)
– Costs
Marketing
Reasons for conducting
research
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Using market research (the process of gathering analyzing and processing data
relevant to marketing decisions) enables the entrepreneur to learn about:
– The Market
– Market opportunities
– Market size
– Market growth
– Market share
– Market segments
– Potential competitors
– Pinpoint strengths and weaknesses
– Customer needs
– Price people are willing to pay
– Best way of promoting
– Where to sell
Methods of market research
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To gather primary market research (research that has never been gathered before),
entrepreneurs use a variety of methods:
– Telephone surveys
– Advantages: Relatively cheap, can be conducted from office.
– Disadvantages: People are suspicious of phone surveys.
– Questionnaires
– Advantages: Opinions of people in a certain area.
– Disadvantages: Opinion sample may not be representative.
– Customer feedback
– Advantages: Direct contact with customers
– Disadvantages: Relies on existing customers
– Internet research (secondary information)
– Advantages: Cheap and fast, wide sample size.
– Disadvantages: Not tailored to meet business needs, may be out of date.
Elements of the Marketing Mix
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The marketing mix refers to all the activities influencing whether or not a customer
buys a product.
– Product:
– Relating to the design, specifications and features of the product.
– Promotion:
– Promoting a product means communicating or advertising your business or
a product.
– Aimed to raise awareness and increase sales.
– Price
– Payment terms
– Installments, discount if buying in large quantities.
– Place
– How are the products distributed?
– By internet or via shops.
Choosing the best mix
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The choice of the best marketing mix is dependent on these factors:
– The product
– Is it unique?
– How long is it expected to last?
– Competitor’s products
– What do they offer?
– How does it compare in terms of price and features?
– The target customers
– How much do they earn?
– How much do they need it?
Use of ICT in marketing
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Small businesses now can utilize the internet to access and reach wider international
markets. A business can:
– Set up a website
– Purchase online advertising space.
– Target specific groups.
– Reach millions of potential customers.
Finance
Sources of Finance
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Sources of finance are places where an entrepreneur might find the necessary
money to start a business.
– Owners’ funds: money put into the business by its owners.
– Advantages: Most reliable and first source of finance.
– Disadvantages: Limited funds
– Bank loans: A bank lends the business a large sum of money and it is repaid in
installments.
– Advantages: Large sum of money, repaid in installments
– Disadvantages: Charged interest, might ask for collateral.
– Mortgages: Loans from banks that are used to buy land and buildings.
– Advantages: Large sum of money, very long term up to 30 years.
– Disadvantages: The land will be sold if the business is unable to repay.
– Overdrafts: Gives businesses the right to borrow of money to an agreed limit.
– Advantages: Very flexible, only used when required.
– Disadvantages: High interest rate, right to withdraw overdraft.
Sources of Finance
– Loans from friends and family: Borrowing money from friends and family
– Advantages: Easy to arrange, free of interest.
– Disadvantages: Limited money, may need the money suddenly.
– Hire purchase: Purchasing assets and paying in installments
– Advantages: Doesn’t need a large sum of money.
– Disadvantages: Expensive in the long run.
– Leasing: Allow businesses to rent assets such as vehicles.
– Advantages: Item maintained by the leaser, doesn’t need large sum of
money.
– Disadvantages: Business never owns the asset.
– Government grants: Encouraging people to start business, creates jobs.
– Advantages: Do not have to be repaid.
– Disadvantages: Difficult to obtain, only business that create a lot of jobs.
– Shares: Companies can sell shares.
– Advantages: Relatively easy, cheap source of finance.
– Disadvantages: May lose control of the business.
Types of advice available
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There are various ways to get help or advice for your business such as:
– Business Link
– The service the government provides that gives businesses advice.
– Private websites
– Give free or charged advice.
– Smallbusiness.co.uk sponsored by major banks.
– Banks
– Help with writing business plans
– Advice on starting a business
– How to find suitable buildings
– Issues involved with employing people
– How to trade online
– Accountants and Solicitors
– Help with finance and law
Basic finance calculations
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Price: the amount a business asks a customer to pay for a single product.
Sales: The number of products sold by a business over a time period.
Revenue: The income that a firm receives from selling its goods or services.
Costs: The spending that is necessary to set up and run a business.
– Fixed costs: Rent, insurance
– Variable costs: Stock, wages
– Start – up costs: Machinery and equipment, buildings
– Running costs: Taxes, wages
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Profit = Revenue – Total Costs
Revenue = Selling Price x Sales
Total Costs = Fixed Costs + Variable Costs
Importance of cash flow
forecast
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It is common for a business to experience cash flow problems, this is when the
forecasts come important:
– They can identify times when the business is short on cash.
– They can take action to avoid cash shortages becoming a major problems.
If they do not have enough cash to pay its bills, it becomes insolvent (occurs when a
business is not able to meet its financial commitments).
There are many solutions to cash flow problems, such as:
– Delay payments: Agree with suppliers to give them more time.
– Speed up cash inflows: Persuading new customers to pay on delivery.
– Find new sources of cash inflows: Extra services.
– Reduce cash outflows: Employing fewer staff, using cheaper materials.
– Arrange an overdraft: Short term, flexible loan.
People in Businesses
Recruitment methods
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Internal Recruitment (when a job vacancy is filled from within the existing workforce)
– By promoting existing employees to a more senior role by invitation.
– By posting notices on workplace.
– Advertising on internal website or business newsletter.
– Benefits of this are:
– Already have experience of the business.
– Know the people they are working with.
– Promotion motivates them.
– Cheaper as it avoids expensive advertising.
External Recruitment (when a job vacancy is hiring employees who do not work
there)
– Advertising in newspaper classifieds etc.
– Job Centers / Employment agencies.
– Benefits of this are:
– Wider choice of candidates with different skillsets.
– New employees have the right skillsets immediately.
Remuneration
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Remuneration is the payment of employees.
weekly wage = number of hours worked x pay rate per hour
Salaries are paid once a month and states the figure the person earns in one year.
Important factors that influence how much a person is paid are:
– Skills
– The skill of the worker translates to the quality of the product.
– Allowing the business to charge higher for the product and more profit.
– Experience
– Unlikely to need any training.
– Be able to perform the job efficiently without further need for improvement.
– General level of wages
– Look at what competitors are paying.
– They want to employ better workers than their competitors.
Benefits
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Monetary benefits: additional payments made to employees on top of their wages or
salaries.
– Bonuses: Employees get bonuses if they are able to achieve certain targets.
– Employee’s Pensions: Employers pay part of their wagers into their pension.
– Profit Sharing: Given a share of the profit, provides a motive for success.
Non-Monetary benefits
– Flexible hours: Employees value being able to work hours that suit their
responsibilities.
– Free lunches: Can save employees money and also time to get make or pack.
– Parties: Offer Christmas / Halloween parties to raise morale, to create good
working relationships.
– Teamwork: Making them feel responsible for a team.
Benefits of motivated staff
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Hard working employees
– Work ethic:
– Work hard and try to do their jobs as well as possible.
– Arrive at work on time.
– Always polite and helpful.
– The benefit is that this will help the business gain a good reputation.
Employee Loyalty
– Reduce costs:
– Avoid the cost of advertising for new employees and training.
– Reduce time wasted in employees adapting.
– Allows entrepreneur to concentrate on the business rather than hiring people.
Maslow’s Hierarchy of Needs
Methods of motivation used
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Small businesses use a variety of ways to motivate employees:
– Job enrichment
– Making jobs more challenging
– Extra higher-level tasks
– Changing positions once in a while
– Training
– Shows the owner values the employee
– Increase self esteem
– Working in teams
– Working becomes more social
– Friendly working environment
– Financial awards
– Basic pay raise
– Bonuses and profit sharing
Employee protection legislations
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There are multiple laws protecting the employees from discrimination and
mistreatment, they include:
– National Minimum Wage 1998
– Equal Pay Act 1970
– Sex Discrimination Acts 1975 and 1986
– Race Relations Act 1976
– Disability Discrimination Act 1995
– Employment Equality Regulations 2006
– Health and Safety Act 1974
– Installation and maintenance of safety equipment.
– Maintenance of workplace temperatures.
– Giving employees sufficient breaks.
– Providing protection against dangerous substance.
– Writing and displaying a safety policy.
Methods of Production
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Job Production: Products are made one by one.
– Advantages:
– Exact specification of customer
– Can charge higher prices as it supplies a personal service.
– Disadvantages:
– Expensive method of production.
– Cannot use machinery.
– Often requires skilled employees.
Batch Production: A group of items moves through the production process together.
– Advantages:
– Can use machinery.
– Employees to specialize in one task, rather than frequently switching.
– Disadvantages:
– The business has to estimate its sales.
– Has to invest in expensive machinery if batch production is to be effective.
Efficiency & Technology
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Efficiency is when a business produces a larger amount of output using less or the
same resources.
– To cut labor costs:
– Replace employees with technology
– Do not need to pay recruiting fees
– Do not need to pay wages
– Do not need to pay for training
– To reduce waste:
– Produce identical products every time.
– Few will be rejected by quality control.
– Environmental technology to save energy.
– Technology often has high start-up costs but lower running costs.
Quality is the extent to which a customer is satisfied with a product.
Importance of customer service
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Customer service is the part of a business’s activities that is concerned with meeting
the customer’s needs. Customer service is important because:
– The products themselves
– Reliability: Good should be reliable and do exactly what is expected of them.
– Safety: Safety is important as customers worry about safety in buying
services such as flights.
– Product information
– After-sales service
– Dealing with complaints quickly
– Delivering products without delays (important for perishables)
– Exchanging goods that are faulty
– Repairing goods
– Offering customers advice and support.
– Accepting customer feedback.
Importance of customer service
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– Employees
– Should be helpful and respond quickly to enquiries.
– Should receive training.
– Premises
– Should be clean, especially where food is prepared.
– Clear directions
– Allowances for disabled people
– Good facilities (toilets, changing babies nappies, etc.)
– A variety of payment methods
Helps the business:
– Attract new customers
– Increasing sales revenue and profits
– Rising market share
– Customer Loyalty
Consumer protection laws
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There are multiple laws protecting the consumers from unfair practices, they include:
– Labeling of Food Regulations 1970
– Weights and Measures Act 1986
– Unfair Trading Regulations 2008
– Consumer Credit Act 1974
– Sales of Goods Act 1979
– Computer Misuse Act 1990
– Data Protection Act 1998
– Food and Drugs Act 1984 (Things that cannot be added to food)
– Consumer Protection 1987 (Businesses liable for injury using their product)
– Food Safety Act 1990
Impact of ICT
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Using websites
– Can give the customer information about the businesses and its products.
(pictures / videos)
– Help advertise a small business to a much larger group of customers.
– Include FAQs, a customer feedback email.
– Offer advice to current customers.
E-commerce
– Shopping can take place at any time of the day.
– Small businesses do not have to pay for a shop to sell their products.
– It helps the business to sell products to people internationally.