Nature of Business

Unit 1: Role of Business

1.1 The nature of a business- A business is the organised effort of individuals to produce and sell, for a profit, the products that satisfy individuals’ needs and wants.- Why are businesses important?

- They provide much-needed goods and services to the community.- They improve people’s lifestyle/quality of life.- Stimulate the economy/increase cash flow.- Strengthen trade relations.- Increases competition and stimulates innovation.- Creates job opportunities.- Encourages tourism.- Pays taxes to government.- Undertakes investment (which leads to economic growth).- Produces a wide range of goods, giving consumers choice.- Provides a training ground for future business people.- Creates value, which encourages economic growth.- Assists in the development and use of new technology.

1.1.1 Producing goods and services- Production refers to the activities undertaken by the business that combine the resources to create products that satisfy consumers’ needs and wants.- Production is regarded as the most important business activity because every business needs a good or service to sell so that they are able to make a profit.- A finished product is a product that is ready to be purchased by a consumer.- A product is a good or service that can be bought.- Goods are items that can be seen or touched (tangible).- Services are things done for you by others (intangible).

1.1.2 Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of lifeBusinesses provide:- Quality of life: businesses provide a wide array of products that improve our standard of living.- Profit: this is the return or reward that business owners receive for producing products that consumers need and want.- Employment: businesses provide about 80% of all private sector jobs.- Incomes: businesses provide income to business owners, shareholders and employees.- Choice: consumers have freedom of choice and the opportunity to purchase products at competitive prices.- Innovation: through research and development, existing products are improved and new products are created.- Entrepreneurship: businesses provide individuals with the opportunity to turn their ideas and passions into a livelihood.

- Wealth creation: businesses offer a vast array of products that improve our standard of living.

Unit 2: Types of businesses

2.1 Classification of businessesThere are several ways that businesses in today’s society can be classified. These are:- Size of business.- Geographic location/spread.- Industry group to which it belongs.- Ownership.- Legal structure.

2.1.1 Size- Businesses can be classified according to their size which depends on the number of employees, market share, ownership, legal structure and who makes the decision.- A Small Business is a manufacturing organisation with fewer than 100 employees or a non-manufacturing organisation with fewer than 20 employees. They may have a high degree of specialisation of labour and are owner controlled.- A Micro Business is an organisation with a workforce of five or fewer employees (including the owner) and is very closely controlled by the owner. These businesses are often family run and may be non-employing. 58% of micro businesses are sole traders/partnerships and usually working from home (SOHO – small office, home office).- A Small to Medium Enterprise (SME) employs between 20 and 199 employees and are characterised by a degree of internal labour specialisation and some use of outsourcing. SME’s can be quite large, particularly when involved in manufacturing.- A Large Business is a manufacturing organisation with 200 or more employees or a non-manufacturing organisation with more than 20 employees. They have specialised functions and market dominance through significant market share. Many large businesses have a national or international reach and rely on brand strength.- In summary for non-manufacturing businesses:

- Micro – less than 5 employees.- Small – between 5 and 19 employees.- Medium – between 20 and 199 employees.- Large – over 200 employees.

Characteristics Small Business Medium Business Large Business

Examples of businesses

- Corner store- Local mechanic- Hairdresser

- Services club- Motel- Engineering factory

- Woolworths- QANTAS- NAB

Number of employees

Less than 20 20-199 Over 200

Type of ownership Independently owned and operated by one or two people.

Owned by a few people and/or private shareholders.

Owned by thousands of public shareholders.

Decision making Owner responsible for majority of decisions; simple and quick.

Owner responsible for most decisions; slower and more complicated.

Complex decisions due to divisions; slow implementation.

Sources of income Owner, difficulty in accessing loans.

Owner/partners own savings, easier access to loans.

Many resources, cash reserves and retained profits.

Market share Small, usually local area.

Medium, dominance within geographic region.

Large, dominating the markets of various countries.

Most common legal structure

Sole Trader/Partnership

Partnership/Public Company

Private Company/ Public Company

2.1.2 Geographical spread- Businesses can also be classified as local, national or global according to their geographical spread. This method examines where the business is based and in which country its goods are manufactured.- A Local Business is designed to serve in a particular suburb or area. These businesses are usually small in size and have a small revenue turnover (e.g. corner shops and butcheries).- A National Business is a larger business, which has a capacity to serve customers throughout the country (e.g. Commonwealth Bank and Telstra). - An International Business produces its goods in one country and then exports these to other countries.- A Transnational Business (TNC) produces its goods in several countries and exports these around the world (e.g. Coca-Cola and Toyota).- Four interrelated forces lead businesses to serve a national or international market. These are:

- Increase in sales.- Desire to increase profits.- Increase in market share.- To obtain global consumers.

2.1.3 Industry- An industry consists of businesses that are involved in similar types of production. When classifying a business according to industry sector, there are three main industry sectors (and five classifications as the tertiary industry is divided into a further two).- The primary industry includes all businesses in which production is directly associated with the acquisition of raw materials including natural resources (e.g. farming, mining and fishing).

- The secondary industry involves all businesses taking raw materials (the output from firms in the primary sector) and making them into a finished or semi-finished product (e.g. steel and car manufacturing).- The tertiary industry includes businesses, which perform a service for other people (e.g. retailers, dentists and solicitors).- The quaternary industry involves businesses whose services involve the transfer of knowledge and processing of information (e.g. telecommunications, property and finance).- The quinary industry includes businesses that provide services that have traditionally been performed in the home (e.g. hospitality, tourism and childcare).

2.1.4 Legal Structure- The legal structure of a business refers to how the ownership of a business is registered.- Sole traders and Partnerships are unincorporated businesses.- Private companies and public companies are incorporated businesses.- An unincorporated business is a sole trader or partnership where the business entity and the owner are one and the same. When the owner dies, then so does the business. This is the most common legal structure as it is the easiest and cheapest to establish.- An incorporated business is a business that goes through the process of incorporation to become a separate legal entity. Regardless of what happens to individual owners of the business, the business continues to operate.- A Sole Trader is a business that is owned and operated by one person. The owner may employ other people, but the owner makes the decisions, makes the decisions and is responsible for the outcomes of the business.- A sole trader is not regarded as a separate legal entity. If the business runs into financial difficulty, the owner is responsible. This may mean they have to sell property or other personal assets. This is also referred to as unlimited liability.- Advantages of a sole trader are:

- Low cost of entry.- Simplest form.- Complete control.- Less costly to operate.- No partner disputes.- Owner’s right to keep all profits.- Less government regulation.- No tax on profits, only on personal income.

- Disadvantages of a sole trader are:- Unlimited liability.- End of business when the owner dies.- Difficult to operate if sick.- Need to carry all losses.- Burden of management.- Difficulty in raising finance.

- A Partnership is a business structure that is owned and operated by 2 people. Partnerships also have unlimited liability. A partnership can be made verbally or in writing. Limited partnerships allow for partners to contribute financially but not in the decision making process.- Advantages of a partnership are:

- Low start up costs.

- Less costly to operate than a company.- Shared responsibility and workload.- Pooled funds and talent.- Minimal government regulation.- On death of one partner, the business can keep going.

- Disadvantages of a partnership are:- Personal unlimited liability.- Liability for all debts, including partners.- Possibility of disputes.- Difficulty in finding suitable partner.- Divided loyalty and authority.

- Limited liability means that the most money a shareholder can lose is the amount they paid for their shares. If the company goes into liquidation, the shareholders cannot be forced to sell their personal assets. The sign ‘Ltd.’ signify that a company offers limited liability. A company can be either private or public.- Advantages of limited liability are:

- Easier to attract public finance.- Can transfer ownership.- Enjoys a long life (perpetual succession).- Greater spread of risk.- Company tax rate lower than personal income tax rate.- Growth potential.

- Disadvantages of limited liability are:- Cost of formation.- Double taxation (personal and company).- Must publish an annual report of audited accounts.- Public disclosure.- Becomes too large resulting in inefficiencies.

- A private company is the most common type of business and employs between 2-50 people. Shares are only offered to the people the business wishes to be part owners. Shareholders can only sell to other people approved by the business. A private company must have the words ‘proprietary limited’ (shortened to ‘Pty. Ltd.’) after its name.- A public company is listed on the ASX and anyone can buy shares. A public company has more than one shareholder with no maximum, no restrictions on the transfer of shares or raising money from the public by offering shares, to issue a prospectus when selling its shares for the first time, a minimum of three directors (two must live in Australia), the word ‘limited’ in its name and must publish an annual report.

2.2 Factors influencing choice of legal structure- Size: if sales continue to increase and the business keeps on growing then further expansion will be needed and the business becomes a medium or large sized one. So if a business starts off as a small or micro the most suitable legal structure would be a sole trader and if the business continued to grow they could switch into a medium enterprise and look at becoming a private company.- Ownership: if a business owner wishes to have complete control and ownership of a business then becoming a sole trader would be most suitable. If they were looking to share the ownership partnership would be ideal for them. But also a private company would allow the owner to maintain a high degree of control ad would also offer the protection from limited

liability, this is because a private company structure allows the owner to have a lot of control over who can be a shareholder.- Finance: sole traders and partnerships because of their exposure to risk with few business assets can sometimes find it difficult to obtain adequate finance.

Unit 3: Influences in the business environment

3.1 External Influences- The external environment includes those factors over which the business has little control over.- Economic: how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and global economic factors.- Characteristics of a boom period are:

- Higher levels of employment.- Inflation may increase.- Wages increase.- The level of spending by consumers increase.

- Characteristics of a recession period are:- Unemployment levels rise.- Inflation may remain stable or fall.- Wages are less likely to rise.- The level of spending usually decreases.

- Financial: changes in financial markets and the effects on businesses, such as the financial transactions all around the world and affect the level of investment by a business.- Geographic: the impact of the geographic region on the business, such as the impact of Australia’s proximity to the Asia-Pacific region and the process of globalisation.- Social: how consumers, households and communities behave and their beliefs change. For instance, changes in attitude towards health, or a greater number of pensioners in a population.- Legal: the way in which legislation in society affects the business (e.g. changes in employment laws on working hours).- Political: how changes in government policy might affect the business e.g. taxation and paid parental leave.- Institutional: how certain institutions change the way businesses operate, such as ACCC and trade unions.- Technological: how the rapid pace of change in production processes and product innovation affect a business. - Competitive Situations: The competitive situation between businesses promotes choices, a range of qualities and a variety of prices. Other businesses may harness or promote growth in certain businesses.- Market concentration refers to the number of competitors in a particular market:

- A monopoly is complete concentration by one firm in the industry e.g. Australia Post.- An oligopoly is where small number of large firms have control e.g. car manufacturers.- A monopolistic competition is a large number of buyers and sellers in one market.- A perfect competition is where there is a large number of firms selling similar items.

- Markets – includes the changes in capital, labour and consumer markets through the impacts of the other influences.

3.2 Internal influences- The internal environment includes the factors over which the business has a high degree of control over.- Product: Affects a range of internal structures and operations within the business (e.g. types of goods and services produced will affect international operations).- Location: The location will have a direct impact on the sales and profits on some businesses. A good location is an asset and will lead to high levels of sales and profit. Factors to consider when choosing a location are visibility, cost, proximity to suppliers, proximity to customers and proximity to support services.- Resources: The four main resources of a business are human (employees), information (knowledge and data), physical (machinery, buildings and raw materials) and financial (funds).- Management: flatter organisational structure reduces the number of levels of management, giving greater flexibility to individuals in the business.- Business Culture: This can be seen in the unwritten or informal rules that guide how people in the organisation behave. There are four essential elements of a business culture: values, symbols, rituals and heroes.

3.3 Stakeholders- A Stakeholder is any group or individual who has an interest in or is affected by the activities of a business.- Internal stakeholders are those that are within the business and the business can influence directly (e.g. owners, managers, employees and shareholders).- External stakeholders are those outside the business, which the business cannot directly influence (e.g. customers, suppliers, competitors, investors, unions, government and the community/society).- Responsibilities of managers:

- Support the actions of management- Provide adequate resourcing levels and lines of communication

- Responsibilities of employees- Fair pay and conditions- Provide safe working environment- Access to training and development

- Responsibilities of shareholders- Provide information about the businesses performance- Produce an annual report- Manage the funds so a reasonable return is paid

- Responsibilities to the environment- Consider impact on the environment- Care and preservation of the environment- Sound and responsible environmental management

- Responsibilities to Customers- Quality products- Fair prices- Service during and after sales

- Safety- Responsibilities to society/general public

- Fair and honest business practices- Ethically responsible decisions

Unit 4: Business Growth and Decline

4.1 Stages of the business life cycle- The business life cycle refers to the stages of growth and development a business can experience. In each stage of the cycle, the business is confronted with new challenges and presented with different opportunities.

4.1.1 Establishment - Characteristics are:

- Slow growth.- Need to establish cash flow.- Erratic sales.- Usually a loss for first few sectors.

- Challenges are:- A high vulnerability.- High risk.- High start-up costs.- Erratic sales.

- Strategies are:- Business planning.- Setting goals.- Marketing.- Establishing a customer base.

4.1.2 Growth- Characteristics are:

- Accelerating growth.- Cash flow is positive.- Development of new products.- Emphasis on marketing.- Good reputation.

- Challenges are:- Complexity.- Higher responsibility.- Need for long term planning.- Problems with expanding too quickly.- Moving away from core business function.- Need for finance.

Strategies are:- Long-term planning.- Forecast of sales and expenditures.- Increase marketing presence.

4.1.3 Maturity- Characteristics are:

- Maintained brand loyalty.- Cash flow may begin to deteriorate if costs cannot be controlled.- Sales plateau.- Customers may sense a degree of impersonality.

- Challenges are:- Sense of complacency.- Loss of personal connection.- Rate of increase in sales falters.- Lack of initial enthusiasm.

- Some strategies are:- Control costs.- Increase in marketing.- Focus finances on product development.- Increase leadership impact.

4.1.4 Post-Maturity- Steady State

- Characteristics are:- Neither expanding nor contracting.- Satisfying customer demand.- Maintaining profit levels.- Continues to produce what it has done in the past.

- Challenges are:- Continuing research and development.- Changing customers’ tastes.- New competitors with more efficient or cheaper products.

- Strategies are:- Aiming for growth or revival.- Increase in marketing.- Undertake R&D.

- Decline- Characteristics are:

- Cash flow is negative.

- Falling sales.- Lack of finance available.

- Challenges are:- Employees may leave.- Products become obsolete.- Restrictions on credit.

- Strategies are:- Planning for cessation.- Invest in new products.

- Renewal- Characteristics are:

- Carefully planned strategies can revive a business.- Increasing sales and profits due to new growth.

- Challenges are:- Very difficult to accomplish.- Initial costs are very high.- Cash flow shortfalls in the short term.- Employees disenchanted.

- Strategies are:- Business planning.- Investing in product development.

4.3 Factors that can contribute to business decline- Lack of management expertise.- Lack of sufficient money (undercapitalisation).

4.4 Voluntary and involuntary cessation - liquidation- Voluntarily Cessation occurs if a business decides to cease operations and any assets owned by the business are sold. The business may continue if the owner wants to retire, however most businesses do not continue after they have failed.- Involuntary Cessation occurs if the business is forced to cease trading by the creditors. Creditors are those who are owed money.- Bankruptcy: Sole traders or partnerships may end up being declared bankrupt. Bankruptcy is a declaration that a person or business is unable to pay his or her debts. If bankruptcy occurs, the business owner or a creditor applies to the court for a bankruptcy order to be made. The court then appoints a representative to collect any money owed to the business. This money, along with money raised from the sale of the assets of the business owner is divided among creditors. The process of converting the assets of a business is called realisation.- Voluntary administration occurs when an independent administrator is appointed to operate the business in hope of fixing financial problems. The administrator’s main roles are to bring the business and its creditors together and examine the financial affairs of the business. If the business is successful it may resume normal trading. If unsuccessful, the business goes into liquidation.- Liquidation occurs when an independent and suitably qualified person is appointed to take control of the business with the intention of selling all of the company’s assets in an orderly and fair way in order to pay the creditors.

- A company in liquidation can also be in receivership. Receivership is where a business has been appointed by creditors or the Courts to take charge of the affairs of the business. Unlike liquidation, though, the business may not cease operation.- The main features of liquidation are:

- It can be regarded as the equivalent of bankruptcy for a company.- Results in the life of a company coming to an end.- Normally occurs because the company is unable to pay its debts as and when they fall due (it has become insolvent).

- There are two types of insolvent liquidation:- Creditors (voluntary) liquidation: This is the most common type of liquidation process and can come about in one of two ways. The first method involves creditors voting for liquidation following a voluntary administration. The second method involves the company’s shareholders agreeing to liquidate the company and appoint a liquidator.- Court (involuntary) liquidationIn this situation a court appoints a liquidator to wind up the company, usually after the application has been made from either a creditor, a shareholder, a company director or, in some circumstances, the Australian Securities and Investments Commission (ASIC).

- The liquidator’s main functions are to:- Take possession of and realise (convert to cash) the company’s assets.- Investigate and report to creditors about the company’s financial and related business affairs.- Determine debts owed by the company and pay the company’s creditors.- Scrutinise the reasons for company failure.- Report possible offences by people involved with the company to ASIC- To deregister or dissolve the company.

- A liquidator is not required to do any work unless there are enough assets to pay their costs.