Prelim Business Studies Study Notes By Andrew Newbound © Andrew Newbound 2013.

Prelim Business Studies Study NotesBy Andrew Newbound

The Nature of BusinessTopic 1

Role of BusinessTopic 1.1

What is A Business A collection of activities that are

performed to design, produce, market, deliver and support its goods and services.

Its owners do this to receive benefits

The Nature of a Business- Produce goods and services Goods

Tangable object The clothes we wear, foods we eat,

television sets we watch and cars we drive

Services Coles, Woolworths, Aldi Intangible

Increase in services, decrease in goods

Profit Difference between the price at which a

good or service is sold and the costs of getting the good or service to market

Gross profit

Net profit

Employment Workforce had changed

Skilled jobs Young people in education and training Aging Increase in female participation 10,000 fewer people employed in

manufacturing than 5 years ago Businesses moving to low cost countries

Incomes Employee’s reward for working in a

business

Choice Market economy

Customer demand determines what products will be sold in the market

Regulation to protect consumers Dangerous products False claims

Regulation Government affected by a free market lobby

Restrict the market

Innovation A new idea that relates to a better

product, a service or a way of doing something

Niche market Buyers with specific, unmet needs

Entrepreneurship and Risk Risks associated with marketing new

ideas for products or new ways of marketing or distributing better and cheaper products

Wealth Wealth creation

People invest in business Want to grow the value of their wealth over

time Dividend

Payment of a share of profits Businesses retain 50% to fund future

growth 50% in form of dividend

Quality of Life Providing appropriate rewards for work Challenging and interesting work A safe working environment Effective training

Enable employees to do work well

Influences in the Business EnvironmentTopic 1.3

The Business Environment Anything that affects the operation of a

business

Efficient Managers Constantly monitoring the business

environment to pick up any change that may impact upon their business

External Influences on Business Outside the control of a business’s

managers

External Influences

Economic

Financial

Geographic

Social Legal Political

Institutional

Technological

Competitive Situation

Markets

Economic Attributed to the economic cycles

Predictable long-term pattern of changes in the national income

Economic Cycle

Economic Cycle•Confidence increases•Employment risesUpswing

•Low unemploymentBoom•Loss of confidence•Unemployment risesDownswing

•Confidence rock bottom•High unemploymentTrough

Economic Cycle Australia

Sustained growth in spending for ~17yrs following 1992 recession

Loss in confidence 2008/09 GFC Rapid decrease in spending

Monetary policy Determined by RBA Stabilise economic activity

Economic Cycle Recession

Unemployment rises Spending falls 2 consecutive quarters of negative growth

Inflation Demand begins to outstrip supply RBA decreases interest rates

Reserve Bank of Australia Stability of Australia’s currency Maintenance of full employment Economic prosperity of people of

Australia Welfare of people of Australia

2009 GFC US householders defaulting on

mortgages Those reliant on such funds could not be

payed Economic stimulus

Minimise impact of downswing $53 billion by Rudd Labor Government

$900 per household

Recessionary CycleRising

unemployment

Consumers more cautious

Reduced spending

Cost cutting

Boom CycleFalling

unemployment

Consumers confidence

returns

Increased spending

Increased production

Financial More significant with deregulation and

globalisation Important

Business inputs must be financed Raw materials Equipment

Financial – Derivatives Financial securities

E.g. contract Enable businesses to manage risk more

efficiently Contract between apple growers and

apple pie manufacturers Ensure price doesn’t change

Bad for either if price changes

Financial – Derivatives Qantas – Hedging

Transferred risk of fuel prices to hedge fund Business specialising in risk management

Competitive advantage over Virgin when fuel prices rose

Geographic Location of a business Australia in Asia Pacific region

Access to rapidly growing markets China India Lower transport costs

Mines in regional Australia Difficult to get skilled labour

Fly-in-fly-out workforce

International Trade All economic transactions that take

place between consumers, businesses and governments in different countries

Businesses specialise in goods and services that are produced more efficiently

Social Attitudes, values and beliefs of a society Changes in fashion

Make companies involved very susceptible

Aging population Opportunities

Leisure and travel needs Heath and medical needs

Social 2 income families

More women working full time Opportunities

Prepared and takeaway meals Healthy lifestyle

Rejecting soft drinks for bottled water Immigration

Diverse Australian population

Legal Framework of laws and regulations that

governs the operations of a business Fair Work Act 2009

Smaller number of awards and minimum conditions for employers

Political Ideas that come from the political

parties E.g.

Resources rent tax Carbon tax/emissions trading scheme

Not possible to insure against

Political

Federal Government• Taxes• Superannuat

ion• Customs

State Government• Employee

entitlements

Local Government• Approving new

development• Fire regulations• Parking

regulations• Size, location

and shape of business signs

Political

Labour market reforms

Social reforms

Environment management Taxation

Institutional Not only established organisations

Unions Trade associations

More importantly Established practices/customs in a

business Change = essential Make change more difficult

Technological Important because of rate of change How things are done in business E.g.

US car making process = completely automated

Woolworths Minimise component in distribution Saved over $4.5 billion with new system

Competitive Situation Market where other businesses are

providing products to meet the same consumer need

Competitive Situation

Ease of entry into market for a new business

Local and foreign

competition

Marketing strategies

employed by competitors

Number of competitors

Types Of Market Concentration

Monopoly 1 firm No competitors E.g.

Australia post Railcorp

Oligopoly Consists of a small

number of larger firms that dominate the market

E.g. Banks Oil companies Car manufacturers

Types Of Market Concentration

Monopolistic Competition

Large number of buyers and sellers

Differentiated goods

E.g. Clothing

manufacturers Local retailing

Perfect Competition

Large number of small businesses that sell products that are the same or similar

E.g. Fruit & vegetable

growers

Markets Market

Place in the commercial world where goods and services are sold

Internal Influences Things managers can influence

Products Businesses competing to produce a

product that better meets the needs of the competitors

Location

Visibility•How well•How often

Cost•Rent/lease

Proximity to suppliers•How close to suppliers

Proximity to customers•How close

Support services•e.g. accountants, lawyers

Resources

Finance Employees

Equipment

Raw materials

Resources Way are acquired Affect

Quality value

Management Attitudes and values

Manager Employees

‘Best practice’ Way the competitive businesses in the

industry do things and clearly involves ideas Efficiency Quality production High levels of customer services

Management – Flight Centre Family, village, tribe Business teams

Area leadership

National leadership

Regional leadership

Global board

Stakeholders Any group/individual on whom the

decisions/ actions have an impact have an interest in things a business

does Shareholders

People who have a ‘share’ in the ownership of a company

Stakeholders

Internal Stakeholders

Shareholders

Employees

Managers

External Stakeholders

Investors

Customers

Suppliers

Competitors

Unions

Government

The community

Types of BusinessesTopic: 1.2

Micro: <5

Small: <20

Medium: 50-200

Large: >200

Local, National, Global•Immediate market•E.g. Mike’s seafood, Inner Vision Surf N Skate

Local area

•Throughout Australia•E.g. Woolworths, QR NationalNational

•Portion of business outside of Australian borders•E.g. BHP Billiton, McDonalds , WestpacGlobal

Global: Advantages Most efficient production resources Distribute risk

Geographic Currency fluctuations

Industry

PrimaryExtraction of natural resources

E.g. Farmers, Rio Tinto, BHP Billiton, Xtrata, Fortesque

SecondaryConverts natural resources to finished & semi-finished goods

E.g. General Motors, Alchoa, Bluescope Steel, Bago Woodworks, Dorvic Steel

Tertiary

Industry

QuaternaryInformation processing services

E.g. Real estate, banks, media, insurance

QuinaryConsumer focused services

e.g. teachers, hotels, motels, restaurateurs

Industry Shifts away from primary industry into

the services sector Developed nation

Primary sector < tertiary sector Feeds into other aspects of the economy

Legal Structure

Sole Trader

Partnership

Legal Structure

Limited Partnership

For business venture with more risk of failure

Allows some partners to have limited liability

Normally silent partners

Investment purely for financial reasons

Public Company (Ltd.)

Unlimited owners (shareholders)

Limited liability Separate legal entity from owners

General public can buy shares

Financial records must be inspected by ASIC (Australian Securities and Investment Commission

Legal Structure

Private Company (Proprietary) (Pty. Ltd.)

1-50 people Know each other

Limited liability

Cannot ask general public for funds

Not listed on stock exchange

Transfer/sale of shares is restricted

‘Dividends’ Percentage of profits payed to shareholders

Legal StructureCooperatives Group of people with a common interest

Members invest in co-op which carries out their buying/selling for them

Often used in agricultural industries

7 members

Not required to pay tax on profits

Limited liability

Legal Structure

TrustsTrustee Person responsible for management of assets

Manage investments and minimise tax

Not a separate legal entity

Government EnterprisesBusinesses owned/operated by state or federal government

Types of Businesses for Legal Structures Not all legal structures suitable for all

businesses If the shoe fits

Sole trader All decisions = direct actions of manager Name does not make a separate legal

enterprise

Types of Businesses for Legal Structures Partnership agreement

Reduce likelihood of disputes Profit distribution Working arrangements Structure changes What happens if money is owed to creditors

Types of Businesses for Legal Structures Medium Large business = company

High amount of finances needed Specialist managers Large enough to avoid downside of

limited liability

Sole Trader

Advantages Disadvantages Unlimited liability for debts End of business when

owner dies Difficult to operate if sick Need to carry all losses Burden of management Need to perform a variety

of tasks Difficulty in raising finance

for expansion

Low cost of entry Simplest form Complete control Less costly to operate No partner disputes Owner’s right to keep all

profits Les government regulation No tax on profits, only on

personal income

Partnership

Advantages Disadvantages Unlimited liability

For all debts Disputes Difficulty in finding

a suitable partner Divided loyalty

and authority

Low start up costs Less costly to operate Shared responsibilities and

workload Pooled funds Minimum gov regulation No taxes on business

profits Business can keep going

upon death of 1 partner

Company

Advantages Public finance Limited liability Can transfer ownership Perpetual succession

Long life Experienced management Greater spread of risk Lower company tax rate Growth potential Only need 1 shareholder and

1 director

Disadvantages Cost of formation Double taxation Personal liability for debts if

directors knew that business was unable to pay debts

Yearly report of audited accounts

Public disclosure Inefficiencies from becoming

too large

Franchise Arrangement- Franchisor

Advantages Fast and selective

product distribution Avoids costs of

construction Does not have to

operate outlets Agreement ensures

some control Motivated franchisees

Disadvantages Unsuitable

franchisee Disagreement

over conditions and terms of contract

Franchise Arrangement- Franchisee

Advantages Limited finances

needed Guaranteed customer

base Established name Management

back-up Proven methods of

business

Disadvantages Franchisor retains great

deal of control Limited individuality Disagreements over

conditions and terms in the contract

If too successful, franchisor may open own outlet

Boost Juice Case Study 80% of businesses fail in first 3 years of

operation 20% of franchises fail in first 3 years of

operation

Business Growth & DeclineTopic 1.4

The Business Life Cycle Series of predictable phases businesses

experience as they developEstablishment

Growth

Maturity

Post Maturity

Establishment

Characteristics Customers not familiar with

product Retailers reluctant to put on

shelves Takes time to establish

product Expenses higher than sales

revenue Negative profits Businesses lose money in

establishment stage

Strategies Adequate savings to

address cash problems Effective marketing

strategies Undertake business

courses to develop management skills

Research government regulations

Growth

Characteristics Rapid increase in sales Pressure on resources,

particularly cash and labour

Cash problems develop Competitors attracted

by increasing sales

Strategies Prepare to work even

harder Effective credit policy

to collect debts Consider factoring Select time to

employ professional managers

Maturity

Characteristics Sales level off Market is saturated Time to employ

professional managers

Focus on remaining competitive

Strategies Focus on cutting costs Examine all aspects of

value chain to cut costs

Diversify into new products

Find new ways to grow value of business

Post-maturity

Characteristics Final stage of life

cycle Falling sales and loss

of market share Cash flow problems

emerge Business starts to

decline

Strategies Improve the competitive

position of the business through cost cutting

Renewal may be a possibility with new products

New managers with new ideas

Manage the closure effectively and ethically

Integration

Factors Contributing to Business Decline Failure to embrace change

Products Technology Production techniques

Lack of finance Business culture Environmental influences

E.g. economic recessions

Voluntary Cessation Owner decides to end business E.g.

Retire Business purchased by another and

customers, employees etc. are incorporated

All stakeholders interests are considered

Involuntary Cessation Forced ending of a business Creditors take legal action to wind up

business

Liquidation Turning assets into cash Distributed to secured creditors Remaining distributed to unsecured

creditors Sometimes at a proportionate amount

E.g. 50c in $1

Sole Trader Cessation Voluntary

Pay bills and stop trading Involuntary

Court orders trading to cease Debts paid Bankruptcy may be declared

Death of owner Business may die too OR succession

Partnership Cessation ‘Dissolved’

Arrangements set out in Partnership Agreement If not – Partnership Act honoured

Can occur A partner dies A partner is declared bankrupt A partner committed fraud By court order due to creditors not being

Company Cessation ‘Wound up’ Voluntary

1. Acquire solvency declaration so can pay bills2. Profits divided amongst owners3. Trading ceases

Involuntary1. Courts order a liquidator

Assets turned into cash

2. Creditors paid in order of priority3. Owners, shareholders liable to value of ownership

Problems Arising From Liquidation

Company directors

• Possible loss of directorship position• And/or disqualified as a director

• Could lose personal assets to pay for company’s debts• Possibility of a fine and/or imprisonment

Creditors (unsecured)

• May not receive any money owed• May only receive proportion of money owed

Employees

• Loss of jobs• Right to have outstanding wages and superannuation payed if money left over after

liquidator’s fees

Shareholders

• Unlikely to receive any payment• Rank behind creditors

• Liquidator can request that holders of unpaid/partly paid shares in the company pay outstanding amount on those shares

Society/economy

• Loss of production• Social and personal difficulties associated with job losses• Loss of economy confidence

Business ManagementTopic 2

Nature of ManagementTopic 2.1

Management Business activities

Planning Leading Organising Controlling

Process of working with and through other people to achieve business goals

Features of Effective Management - Orica Maintain business culture

Safety, health and the environment Trust

Commercial ownership Own something to make money out of it

Features of Effective Management - Orica Maintain business culture

Creative customer solutions Good customer service

Working together Collective knowledge Increase sales Effectively use limited resources

Skills of ManagementReconciling Interests of

Stakeholders

Strategic thinking Vision

Problem solving

Decision Making

Adaptability to change

Flexibility

Interpersonal

Communication

RSVP DA FIC

Skills of Management Communicate effectively Lead Delegate Motivate Negotiate

Richard Branson Interpersonal

Negotiation ACCC

Motivation Communicating

Communication Transmission of ideas and information

throughout a business Conveying meaning

Correct translations if necessary Avoiding ambiguity

Analogies don’t add confusion

Communication Listening

Ideas of others taken into consideration Efficient use of technology

Employees can quickly grasp concepts

Strategic Thinking Achieve future goals in uncertain

business environment Fluctuations in economic cycle

Strain on credit Maybe cut unnecessary spending Maybe put future projects on halt

Vision Manager imagines what business would

be like in a period of time Business as a whole strive towards

common goals Without

Unable to best manage a business

Problem Solving Address problems as they arise within a

business

Problem SolvingDevelop alternative solutions

Choose one alternative and implement it

Decision Making Choose between alternatives Best make positive decisions for the

business Acquire and analyse information Anticipate competitor’s moves Resource allocation Without

Competitors gain advantage

Flexibility Tackle challenges in dynamic business

environment 2009 GFC

Reduced customer demand Tackled incorrectly

Inadequate resources upon market return

Adaptability to Change Adapt to changes in consumer demand McDonalds

Consumers wanted healthy lifestyle New, healthier products Healthier means of manufacture

Kmart Consumers wanted cheaper products Removing underperforming and expensive

items Everyday Low Prices

Reconciling the Conflicting Interests of Stakeholders Stakeholders have different goals

Customers: Max benefits Shareholders: Min costs

Employees: Max benefits Shareholders: Min costs

Business: Max benefits Suppliers: Min costs

Community: Max benefits from things like low pollution levels

Shareholders: Min costs

Reconciling the Conflicting Interests of Stakeholders Mining company caused high lead levels

in childrenDecide on stance on issue Problem solving

Decide on alternative Decision making

Reduce dividends to shareholders

Decision making

Pay out annual compensation

Interpersonal (how much)

Pay out 50% of all medical fees immediately

Interpersonal (how much)

Reduce corporate bonuses Interpersonal (how much)

Demonstrate out objective Communication

Achieving Business Goals What a business’s stakeholders want it to

achieve Profit

Difference between revenue and cost incurred Dividends

Portion of profit distributed to shareholders Retained profits

Portion of business profit kept by business to sustain future growth

Market Share Percentage of the market a particular

business’s products has Reducing price of products

Able to increase revenue Increase overall profits

Less profit per individual product If cost of production is constant

Less innovation Other mechanism of increasing market share

Growth Increase in business revenues from year to year Opening additional stores

JB Hi Fi Selling more existing products at higher prices

BHP Billiton Luring clientele

Better than competitors Offering something that competitor can’t

Increasing value

Growth JB Hi Fi

Rapid growth Harvey Norman

Maturity stage Constant growth

Low in comparison

Share Price Price at which shares are bought and

sold on the secondary market JB Hi Fi

1000% growth from 2003-2010 (since listing)

Increase in market share reflective 40% profit returns in half year period

Social Providing employment Specific initiatives such as mentoring

indigenous people to get full time work

Environmental Concerned with sustainability Walmart

Sell products that sustain resources and the environment Throughout whole supply chain

Cannot sell products without Meaningful contribution

Achieving a mix of the above goals Walmart

Specific goals across supply chain Barcode tracking technology

Reduce staffing levels Cut costs

Environmental Reduce greenhouse gas emissions

Staff Involvement – Innovation Kmart Mt Druitt

Dressing up as characters of products they sell Boost sales Entice customers into the stores Excitement for less profitable products

Staff Involvement – Motivation Make staff enjoy the workplace more

Boost sales, effectiveness Staff recognise their contribution to

business success Kmart

Rewarding good performance Kmart gift cards

Bonus pool Every 1% of sales above budgeted amount

Staff Involvement – Training Employees are able to perform their role

well Kmart

Induction Continuous training

Particularly in customer service Main competitive advantage

Staff Involvement - Mentoring Experienced person trains and counsels

another employee Expensive Highly effective

Highly effective and proficient members Difficult aspects of the role

Management ApproachesTopic 2.2

Planning Setting of targets and goals Setting time frames Prioritise activities Suggest resource/financial allocation Defines parameters

Organising Allocates the actual resources and

money Determines organisational design Assigns work to employees Sets the channels of communications

Controlling Reviews actions undertaken Creates performance reports Accounts for variance between planned

and actual performances Suggests new parameters

Hierarchical organisational structure Small spans of command

Managers only in charge of a small group of people 4-14 subordinates

Division of labour Job divided into small, usually unskilled

tasks Rigid chain of command

Strict line of authority from top to bottom

Autocratic Leadership Style High level of direction Little/no participation of subordinates

Taylor Taylor’s four principles of management

Develop Select Divide Cooperate

Eliminate wasted movements Best qualified workers for a job Incentive systems

Henri Fayol More focussed to all managers than

Taylor Lowest level

Universal set of functions Widely followed by managers today

Fayol’s 14 Principles

Division of work

Authority

Discipline

Unit of command

Unity of direction

Remuneration•Fair wage

Subordination•Of individual interests to general interests

Esprit de corps•Team spirit

Scalar chain

Equity•Kind and fair

Initiative Order

Behavioural approachLeading•Change & conflicts dealt with

Motivating•Maximum productivity

Communicating•Managers employ their strategies effictively

Teams Self managing teams

Don’t need close supervision Wider span of control

Flat organisational structure

Participative/democratic leadership style Open communication channels Gain feedback

Better business decisions More motivated employees

Loyalty Productivity

Theorists

Elton Mayo

Douglas McGregor

Abraham Maslow

The Hawthorne Studies Western Electric Company

1924-1932 Productivity increased when the lighting

was turned up OR down Being accepted by the group

The human relations movement Importance of employee satisfaction

Douglas McGregor

Theory X•Workers•Little ambition•Dislike work•Avoid responsibility•Need to be closely directed to work effectively

Theory Y•Workers•Exercise self-direction•Accept responsibility•Consider work as natural as rest and play

Abraham Maslow – 5 Needs

Physiological Safety

Social Esteem

Self-actualisation

Comparative

Traditional Organisations•Less fluid•Division of labour•Rigid structure•Hierarchical•Autocratic, didactic management style•Delegation•Top-down

New and emerging

organisations•More fluid•People centred•Multi-task, multi-skilled•Inclusive•By consensus

Classical-scientific approach

Major strengths

•Easy to understand•Planning•Actual performance•Division of labour•Specialisation•Straightforward organisational structure•Rigid chain of command

Major weaknesses•Too simple•Workers treated as machines•Excessive supervision•Over-specialisation•Leadership is rigid and controlling•No input

Behavioural approaches

Major strengths

•Flexible and adaptable•People’s needs•People = important•Motivation•Satisfy business goals•Individual needs•Employees are valued•Communications = 2 way•More informed decisions

Major weaknesses•Developed before globalisation, technological advances•Uncertainty in task designs, expectations•Difficult to gauge link between productivity and human motivation•Different motivational needs•Difficult to adjust to•Decision making is time consuming

Contingency approach Uncertain future Competitors react to changes more

quickly Business can meet customer needs

more effectively than competitors Market share increases

Important to react quickly

Management ProcessTopic 2.3 Volume 1

Business Functions Interdependence

The different functions of the business working together in order to achieve something

Synergy The whole is greater than the sum of the

individual parts

Business FunctionsOperations•Manufacturing•Provision of services•Other value adding•Domestic/global

Human resources•Industrial relations (HR)•Human resources management (HRM)•Personnel

Marketing•Product•Price•Promotion•Placement

Accounting and finance•Administration•Financial management•Financial planning•Management and change

Coordination Ensuring that the different parts in a

business work together effectively Incitec Pivot

Goals in all 4 functions Communicate goal Improve employee productivity $530 million net profit

Operations Transforming inputs into outputs Quality

Repeat business Word-of-mouth new business Above competitors

The Production Process Series of stages a product progresses

through to be transformed Adds value to product

Inputs

Outputs

Quality Management Quality

Manufacture of services to meet pre-defined standards/specifications

Customers switch if don’t Coca Cola

Contain advertised amount Taste like Coke Be carbonated

Quality Management Minimisation of variation to defined

limits Building systems and procedures to

ensure

Standards Australia Develops and maintains expectations of

certain products Safety Performance Reliability

Works with international standards agencies Positive contribution to Australia

Purchasing/supply chain management Supply chain

Range of suppliers from which the business purchases materials and resources

Lead time Length of time it takes for the business to

actually meet the needs of the customer through provision of the good or service the customer/client seeks

Purchasing/supply chain management Supplier rationalisation

Process a business goes through when it reviews and reduces the number of suppliers it purchases from Best value for money

Quality assurance Systems and procedures to ensure

error/fault will not occur Incitec Pivot

Computerised bag loading Exact quantity in each bag

Much growth in recent years

Total Quality Management (TQM) Japanese concept

Constantly striving to improve all aspects of the business

Kmart Highest possible level of customer service

Assist customers who require assistance immediately

‘Kansei’ 24hr trading to improve convenience

Role of Marketing Find out what customers want and

develop products that will meet what they want

Target Market The component of the total market

which the business will focus its marketing

Identification of the Target Market Market segmentation

Breaking down market into small, manageable bits

Coca Cola’s lack of products for infants Differentiated marketing

Focusing marketing on a number of segments

Ford’s range of products

Customer Characteristics Geographics

Where consumer lives Demographics

Features of the population Psychographics

Characteristics of the target market

Marketing Mix Combination of the 4Ps to achieve

business objectives

Product Differentiation

Adding features not offered by others Brand

Positioning in market Associating logo/name/symbol with

characteristics Reliability/syling/value for money

Pricing Penetration pricing

Setting prices below competitors Woolworths and Coles price wars Suited for markets with competitors

Skimming pricing High prices only attracting top end of market Maximise profits Quickly recoup production costs Few competitors

Promotion

Personal selling

• Activities of a sales representative in helping a customer explain benefits of product

Advertising

• Paid communication• Directly to customers

• E.g.• Television• Newspapers• Radio

Promotion

Below-the-line promotions

• Competitions• Free samples• Coupons • E.g. Coca Cola’s win a beach house

Public relations

• Product mentioned in magazine/newspaper• Associating with positive marketing

Intensive distribution

• As many outlets as possible

Selective distribution

• Wide, yet more specific than intensive

Exclusive distribution

• Only available at very specific outlets• Luxury items

• Customers go to great lengths to purchase

Cash Flow Statements What is going in and going out on a

daily basis

Expenditure Capital expenditure

Money a business invests in assets E.g. property, equipment, computers

Revenue expenditure Cash a business spends to generate

revenue E.g. advertising, stock

Credit Bank loan

Allows a business access to large amounts of funds paid back over an extended period of time with interest

Overdraft A good source of short-term finance with a

pre-approved credit limit Trade credit

Extended trading terms offered to encourage higher sales

Reduce sales price to improve cash flow Able to pay creditors on time Prevent wastage Generate cash Increase volume of sales

Cash Flow StatementJan Feb Mar

Opening Balance

$2000 $4000 $0

Cash Inflow $5000 $2000 $3000

Cash Outflow $3000 $6000 $5000

Closing Balance $4000 $0 -$2000

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Definitions Liquidity

Ability to pay short term debts Profitability

Measure of the effectiveness of using resources available to a business

Resources

Sales revenue Assets

Owner’s investment

Assessment of business performance

Benchmarks

Budgets

Previous periods

Income Statement Measures the performance of a business AKA

Profit and loss statement (P&L)

Revenue statement Statement of earnings

Brackets deduction

Formulae

Revenue Statement of PMQ Motor Supplies for year ending 30 June 2006

Revenue (Sales) 300,000

Opening Stock 50,000

Purchases 40,000

Closing Stock 35,000

Total COGS 55,000

Gross Profit 245,000

Expenses

Wages 105,000

Electricity 15,000

Advertising 25,000

Total Expenses 145,000

Net Profit 100,000

Typical Income Statement

Gross Profit Ratio

Reflects margins between the business’ purchasing costs and its selling costs

Gross Profit Ratio Solving a change

Cheaper supplier Buy in bulk Hold less stock Buy local Alternative warehousing Increase mark-up on good/service

Absolute last alternative

Gross Profit RatioLow• High supply

costs• Low prices

charged for products

High• Low supply

costs• High prices

charged for products

Net Profit Ratio

Reflects operating costs/expenses of the business

Improve Decrease expenses faster than sales Increase stock turnover

Net Profit Ratio

Low*• Excessive costs

High*• Low

costs/expenses• Sound financial

management

* Especially if compared to GPR

Expense to Sales Ratio

Necessary Higher expenses create less profitability Should not rise faster than sales

Ratio Answer ProcessPut it in plain English

Identify trends

Compare to the norm

Revenue Statement Strategies

Increase Revenue

•Sales Promotion•e.g. advertise special deal

•Product rejuvenation•Give product a fresh look

Decrease Expenses

•Developing cost centres•Department within business that reviews all costs

•Expense minimisation•Keeping expenses as low as possible

Assets Anything the business owns that has

financial value and will provide future economic benefit to the business

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AssetsCurrent assets

•Bank savings•Cash on hand•Accounts receivable (debtors)•Prepaid expenses•Inventories (stock)

Non-current assets

•Property•Plant and equipment•Motor vehicles

Intangible assets

•Goodwill•Trademarks•Copyrights•Patents

Liabilities Any monetary amounts owed as the

result of past eventsCurrent

liabilities•Account payable (creditors)•Overdrafts•Credit card debts

Non-current liabilities

•Mortgages•Long term loan•Lease

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Owner’s Equity The money the business is worth to the

owners

Capital

• Money that the owners have put into the business

Retained profits

• Profits which have been earned by the business but have not been paid out as dividends

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Balance Sheet Definitions

Liquidity

• Whether the business has enough cash in and short term assets to cover debt

Solvency

• Ability of the business to repay debts as they fall due

Working capital

• The finance available for the day-to-day running of the business

Liquidity Whether the business has enough cash

in and short term assets to cover debt Highly liquid assets

Can be changed into cash quickly

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜=𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠=𝐶𝐴𝐶𝐿

Expressed as a ratio _:1

Safe working ratio = 2:1

Solvency AKA Debt to equity AKA Gearing Ability of the business to repay debts as

they fall due Insolvent

Cannot pay debts on time Indicates long term stability Relationship between debt and equity

funding

Solvency

𝐺𝑒𝑎𝑟𝑖𝑛𝑔𝑟𝑎𝑡𝑖𝑜=𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠𝑂𝑤𝑛𝑒𝑟 ′ 𝑠𝐸𝑞𝑢𝑖𝑡𝑦

=𝐿𝑂𝐸

Expressed as a ratio _:1

High > 1.5:1

Solvency

Too high• Relies too much on

borrowed funds• Vulnerable to

insolvency

Too low• Missing out on

investment opportunities

• Low risk creditors are happy

Improve working capital and liquidity

Decreasing liabilities

Factoring

Leasing•Instead of purchasing

Sale and lease-back

Creating greater cash

JIT (Just-In-Time) inventory

control

Improving the solvency

Decrease liabilities

Increase equity

Controlling loans•Using available finance to pay off liabilities

Issue new shares to finance purchases•If a public company

Human Resources ProcessBusiness plan

Job analysis

Recruitment

Selection

Recruitment Pool of potential applicants is developed

for jobs Internally

Transferring between roles Externally

External means Best possible candidate to apply

Selection Choosing right person for job1. Candidates apply for job2. Series of interviews/employment tests

Eliminated at each stage See if employee is adequate for the task

Training and development Training

Providing skills required to do job well Development

Employee is made more valuable resource to company

Up skilling Prepare employees for FUTURE jobs,

responsibilities

Modern Awards Basis of employment 10 key aspects of employment

Ensure fairness for workers in negotiating contracts

Wages Leave Dispute resolution

Enterprise Bargaining Employees in a certain enterprise

bargain as a collective Higher wages Trade offs

E.g. increase in productivity

Separation Voluntary

Employee leaves of own choosing E.g. redundancy

Agreed by employee Involuntary

Employee is dismissed Not of own choosing

Ethical Business Behaviour Lack of trust

Between customer and seller E.g. online business arrangements

Bribery Acceptable in 1 location, not another

Ethical Business Behaviour Environmental issues

Profitable Negatively affect environment

Online scams in general Damage a company

Management and ChangeTopic 2.4

Internal influences

Products

Location

Resources

Management & Business

Culture

External Influences

Social Legal Economic

Political Technological

Geographic

Financial

Competitive Situation Markets

Institutional

The Change Process1. Identifying the need for change

3. Resistance to change

4. Management consultants

Business Information Systems Planned system Collect info from internal and external

environments Store, process and disseminate date

Form managers require

Setting Achievable GoalsPreparing the workforce

Break cultural change into manageable bits

Resistance to Change Financial costs

Purchasing new equipment Redundancy payments Retraining Reorganising plant layout

Inertia of managers/owners

Resistance to Change Cultural incompatibility in mergers and

takeovers Staffing

Deskilling Acquiring new skills Loss of career prospects

Management Consultants Possess greater understanding of ‘best

practices’ within industry Best manage change Set out framework

Meet objectives

Business PlanningTopic 3

Small to Medium EnterprisesTopic 3.1

Business Size ATO

Micro•<5•e.g. Rainbow’s edge

Small•5-<20•Macquarie seafood

Medium•20-<200•Salt Water Wine

Large•200+•Coles

Business Size Small business

Independent ownership and operations SME

A business employing fewer than 15 employees

Role of SMEs Employment

99% of Australian workforce Retain during GFC

Part of supply chain Meet needs of community

Acutely aware Innovation

Risk taking nature

Gross Domestic Product (GDP) Sum total value of goods and services

produced in Australia in a year SMEs produce 58%

Success and/or failure of SMEs Fail

Impact of economic conditions

Lack of business

skills

Lack of capital

Failure to keep proper

Success and/or failure of SMEs 2009 = higher failure rate than 2008

Decline in consumer confidence GFC Inadequate funds to repay liabilities

Retail is most susceptible Cut by consumers in economic weakness

Retained Profits Proportion of business’s profits kept

within the business Not distributed to owners

Promote growth

Influences in Establishing a Small to Medium EnterpriseTopic 3.2

Qualifications Recommended

Certificate IV in small business management

Diploma of business Bachelor of Business

Skills Interpersonal skills

Vision Communication skills to communicate

vision to others

Motivation Desire/willingness to do something Work within the business comes easier Maximise productivity of other co-

workers

Entrepreneur Organises and operates a business Prepared to take greater than normal

financial risks High risk = high return

EntrepreneurshipSets realistic goals•Attempts to achieve them

Takes moderate

Good physical health

Motivated by achievement, not money

Confident in own ability

Desires responsibilit

Emotionally stable

High levels of energy

Makes decision, carries them

Strong drive

Basic desire to control and direct

Skilled organiser

Tolerates failure

Works well with people

Entrepreneurship Willingness and ability to turn ideas and

capabilities into reality Entrepreneur

Identifies a need Develops the idea Takes risks Develops strategies Is motivated

Entrepreneur Persistent Committed Patient Positive Optimistic Works long hours Active Hard working Practical

Reliable Helpful Organised Motivated Versatile Flexible Efficient Dependable

Entrepreneur Experienced Dynamic Problem solver Punctual Quick thinker Self confident

Realistic Responsible Determined Has integrity Thorough

Cultural Background Ideas, customs may lead down path Expectations of individual within culture

Gender Influence Business opportunities accessible to

women Ecommerce Retail Hospitality Health roles Children Hair dressing

Sources of Information

Federal•Advice•Grants•Ideas•Raising of finance

State•Advice•Registration•Loan finder•Checklists•Grants•‘Tech Vouchers’

Local•Training•Info about Port Macquarie

Competition Several businesses try to meet

customer needs more effectively than rivals

Type of market ‘mass’ broad market ‘niche’ specialised market

How to make business competitive Develop customer base Gain market share from competitors

Establishment Options – New

Advantages

•Cheap•Innovation•Flexibility•Grants

Disadvantages

•Lack of goodwill•Harder to get money•Time to build business

Establishment Options – Existing

Advantages•Known practices•Room for innovation•Brand recognition•Client base•Control•Equipment•Knowledge from current owners

Disadvantages

•Costly•Resistance to change•Staff entitlements•Loyalty to previous owner•Not as competitive

Establishment Options – Franchise

Advantages

•Support•Brand recognition•Competitive•Supply of equipment

Disadvantages

•Inflexible•No innovation•Royalties

Goodwill The value of the reputation of a

business Difference between total value of assets

and the sale price of the business

Existing Business Advice Thoroughly check operations

Work in business Finances more likely to lend

Access to financial records Goodwill may be associated with owner,

not business Intellectual property

Any invention/creation of the owner considered to be their property

Franchise Equipment Supplies Training Ongoing management assistance Collective buying power Brand recognition

Competitive advantage Marketing

Differentiation of product Unique brand

Loyalty

Location – Visibility Attract passing trade Easy to find for customers and suppliers More important for retail than

manufacturing

Location – Cost Purchase vs lease premises Areas with higher lease/rend Lease

Tax deductable Negative impact on cash flow

Location – Proximity to Suppliers Cost of transport Timing of delivery of stock Proximity to customers Accessible to target market

Location – Proximity to Support Services Activities needed to assist core

operations/prime functions of business Outsourcing of various functions

Accountant Marketing specialist

Access to technology Internet reduces importance of this

Finance Sources

Banks, NBFIs

Personal savings

Family and friends

Investors

Grants Stock exchange

Cost of Borrowing Interest you pay

Zoning Not all businesses are permitted in all

locations Environmental Act Particularly important for home

businesses

Training Employees gain skills needed to do job

wellMore productive employees

Further profitability

Enhancing business’ competitive position

Wage and non-wage outcomes Wage

Annual salary Non-wage

Other financial benefits Superannuation Annual leave loading Fringe benefits

Taxation – Federal Taxes Company tax

30% tax levied on the business’ profit PAYE tax

‘Pay as you Earn’ income tax on employees Forwarded by businesses to Fed. Gov.

GST Imposed on most private consumption (10%)

FBT (Fringe Benefits Tax) Applied to non-wage benefits

Taxation – State Taxes Payroll tax

Payed by employers whose payroll >$50k Land tax

A tax payed of 1.6% of the value of the land of all land owners in NSW

Taxation – State Taxes Superannuation

9% of the salary paid into a complying fund Registered with the Insurance and

Superannuation Commission Leave loading

17.5% on top of the employee’s salary for prescribed period of leave

Superannuation Quarterly contribution of 9% Workers <70 years $450+ per month Full time workers

The Business Planning ProcessTopic 3.3

•What a business is capable of doingStrengths

•What a competitor does betterWeaknesses

•A set of circumstances that allow something to be improvedOpportunities

•The obstacles a business faces in the external environmentThreats

INTERNAL

ASSESSME

EXTERNAL

ASSESSME

Vision Ideal of what a business will look like if

all goes to plan 3-5yr period

Long Term GrowthHigh growth• Less market

for older investors

High dividends• Detrimental to

business

Vision & Mission Statements

Vision Statement

•Business aspires to become•Future orientated

Mission statement

•Why a business exists•Purpose•Function

Organising Operations

What tasks need to be done?

What equipment and skills will employees need?

Which workers will do these tasks?

How will the workers doing particular tasks be grouped?

Who will supervise the workers or will we use self-managing teams?

Market Analysis Determining whether a business has

sufficient potential market in order to succeed without being squeezed out of the market

External influences

Sales Forecasting

Similar business as guide

How much consumers are likely to spend on products or a competitor’s

Estimation of daily sales x30

4P’s

Product Price

Promotion Place

Market AnalysisMarket size

• Present and potential sales

Market growth rate

• How much it is growing by

Market profitability

• Are existing businesses profitable?

Industry cost structure

• Costs in existing businesses

Market Analysis

Distribution channels

• The new or existing ways a business can distribute a product to gain a competitive advantage

Market trends

• How the market is changing both based on industry and region

Key success factors

• Elements that are necessary in order for a firm to achieve its marketing objectives

Key Success Factors

Access to resources

Economies of scale

Access to distribution channels

Technological progress

Forecasting Giving managers the best possible

information they need to make the best possible decisions in an uncertain environment

Break-even AnalysisBreak-even• A state where • No gain, no loss

Total revenue• Amount of money brought into a business through

the sale of its products

Total costs• Amount of money the production consumed for a

business

Break-even AnalysisFixed costs• Do not reflect the total level of sales

Variable costs• Change proportionately with the quantity of sales

𝐵𝑟𝑒𝑎𝑘−𝑒𝑣𝑒𝑛𝑝𝑜𝑖𝑛𝑡=𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑𝑐𝑜𝑠𝑡𝑠

𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

Cash Flow Projections Forecasting of the quantity of finances

moving from one aspect of a business to another

Set out basic cash requirements

Cash Flow Management Credit policy Generous discounts to customers who

pay early Link periods of surplus with large, fixed

payments

Sales Reports

Sales analysis

• Insight into market trends• Create most profitable mix of products

Market share analysis

• Comparison between businesses based on performance• Meeting needs as good/better than competitors

Profitability analysis

• Profit performance of various aspects of the busines

Budgets Form of highly effective control Determine how successful a business’

plans are

Taking corrective action

Establish goals and objectives

Monitor performance•What is happening?

Evaluate performance•Is what is happening good or bad? Why is it happening?

Corrective Action Reports Prevent

Repeat mistakes Loss of customers Dissatisfied customers Poor quality products Unhappy staff

Corrective Action Reports Better staff morale Reason for new customers

The Business Plan Executive Summary & Overview Operations plan

Daily operations Systems & Procedures Physical Layout Organisational structure

The Business Plan Marketing plan

Market research and target market Sales Objectives Analysis of competition Marketplace potential Marketing strategy and promotional

activities

The Business Plan Financial plan

Set-up Cost Cash flow Forecast Record-keeping systems Assets and Liabilities

Critical Issues in Business Success and FailureTopic 3.4

Business Plan - Components

Executive Summary

Marketing

Financial

Human Resources

Business Plan – Types

Start-up

Growth

Strategic

Feasibility

Management -Staffing Impact upon costs, costs through profits Overall productivity Teams

Employees feel a more significant component of business success

Trend Analysis Effective management Gauge past events Market segmentation Rapid response to issues

Over-extension Holding too much stock Investing too much in plant & machinery Spending heavily on advertising

Without results Too many staff

Over-extension Borrowing too much capital

Highly geared Failing to collect money owing Excessive drawings

Finance Advice Use personal savings

No debt servicing costs Lack of finances

Primary reason for failure Under capitalisation

Loan requirements 3 years financial statements Tax returns Business plan Sales projections

Finance Advice Budgeting is vital

Sufficient income Check industry average

Business plan Effective management of savings

Avoid Overextending Financially Business planning

Cash flow projections Establishment costs Budgets Financial statements Business goals and objectives

Avoiding overdependence on debt financing Avoid problems in weak economy

Avoid Overextending Financially Long term financial planning

Anticipates future problems Plan future direction

Growth and expansion Start small

Expand slowly

E-BusinessUsing internet to conduct business Find information Communicate via email Online working, paying accounts Research market conditions, industry

trends, economic forecasts Markets goods and services via its

website Lodge forms, apply for licences

E-Commerce Buying and selling of goods and services

via the internet

Prelim Business Studies Study Notes By Andrew Newbound © Andrew Newbound 2013.

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