Ms. Marshall 6th year business
Chapter 15 – Business Start Up
Usually Q6, 7 in Long question’s
Ms. Marshall 6th year business
Main topics in this chapter 1. Finance (overlap chapter 13) 2. Organisational Options (overlap
with chapter 19, this material will be covered in more detail in Ch 19)
3. Production Options 4. Business Plan
Ms. Marshall 6th year business
Why do people set up their own business?
Independence Profit Redundancy Spotting an Opportunity Ambition
Ms. Marshall 6th year business
Short term FinanceBusinessSourcesBank overdraftCreditors – trade creditAccrued ExpensesTaxationFactoringUses:Purchase stockPay wages/expensesPay creditors
Bank overdraft: A short term loan given to current
account holders designed to meet short term expenditure needs. The account holder is given permission to withdraw more than the amount in the account, up to a specified amount. Security is not usually required. Interest is calculated on a daily basis on the overdrawn balance.
Creditors: Suppliers give an agreed period of credit to their customers, who then sell the goods and services and have use of the money until the invoice has to be paid. No interest is charged and no security is required. However, if the invoice is not paid on time discounts may be lost.
Short term finance is for less than one year and is used to finance short term assets, such as stock and pay expenses.
Ms. Marshall 6th year business
Short Term Finance Accrued Expenses: these are
expenses that do not have to be paid until after the service has been provided e.g. gas, esb. By delaying the payment of these bills, the business can use the money as a short term source of finance for other purposes.
Taxation: the business collects taxes on behalf of the Revenue (e.g. VAT). These taxes are held by the business for a period of time before being forwarded to the Revenue.
Factoring: the business sells its debtors to a bank for cash. The business gets the money up front from the bank. In some cases, factoring with recourse, the business must reimburse the bank if any debtors don’t pay up. This gives businesses access to cash immediately, no security is required but the bank charges a high fee.
Ms. Marshall 6th year business
Medium TermBusinessSourcesHire PurchaseLeasingTerm LoanUses:ComputersOffice EquipmentVehiclesMachinery
Hire Purchase: purchasing assets and paying by instalments over an agreed period of time. Buyer obtains the item immediately but does not become legal owner until the last instalment is paid. The rate of interest is high and is charged on the initial sum borrowed.
Leasing: involves the renting of an asset from a finance company. The leasee has the possession and use of the asset but does not own it. No cash lump sum or security is needed. Lease payments can be offset against profits to reduce tax.
Medium-term loan: from the bank, repaid in fixed instalments over an agreed period. Borrower must complete a loan application form and the money is granted for a stated reason. Banks may want security on the loan in the event of non payment. Interest on a business term loan can be offset against tax in the profit and loss account.Medium term finance is for one to five
years and is used to finance office equipment, vehicles and machinery.
Ms. Marshall 6th year business
Long Term FinancesBusiness
Sources
Debenture
Share Capital
Grants
Uses
Purchase of land and buildings
Debenture: a long term, fixed interest, loan for a business. Usually used for expansion. The loan is secured on the company’s assets. Interest payments on loans are a tax allowable expense in the profit and loss account. The company pays the interest every year and pays the loan back in one lump sum.
Share/Equity Capital: the owners sell some of their shares to investors in return for money. Shareholders receive a say in the running of the company and a dividend if the company makes a profit. There are no interest repayments and no security has to be provided. It is a permanent source of finance
Grant: a sum of money given by the government to a business, which does not have to be paid back, providing that they meet the conditions. E.g. a start up business may be given a grant to help buy machinery. Main providers of grants are Enterprise Ireland, IDA Ireland and the county and city enterprise boards.
Finance that will take more than five years to repay
Ms. Marshall 6th year business
Factors to consider Cost Risk Security Control Purpose/Match Amount
You should be able to apply these to the different
short, medium and long term sources
Ms. Marshall 6th year business
Factors to consider – Short term finances
Bank Overdraft
Trade Credit Accrued Expenses
Cost Interest on amount overdrawn
Free source but interest may be charged if overdue
Free source - no interest
Risk Full repayment could be demanded
Damage to credit rating.
Damage to credit rating.
Security None None NoneControl Full Full Full
Ms. Marshall 6th year business
Factors to consider: medium term finances
Medium Term Loan
Leasing Hire Purchase
Cost Interest Tax deductible High interestRisk Damage to
credit rating, loss of assets
Damage to credit rating, repossession
Damage to credit rating, repossession
Security May be required None NoneControl Full Full Full
Ms. Marshall 6th year business
Factors to consider: long term finance
Equity Capital Long term loans
Government grants
Cost Dividend paid to shareholders – negotiable
Interest None – as long as conditions are met
Risk Loss of capital if business goes bankrupt.
Damage to credit rating, loss of assets
Recalled if conditions not met
Security No Yes NoControl Loss/dilution Full Full
Ms. Marshall 6th year business
Working Capital Working capital is the finance used for the day-to-
day running and payment of immediate debts of the company(current assets minus current liabilities).
If positive, the business is LIQUID If negative, the business is NOT LIQUID, and is said
to be OVERTRADING Overtrading occurs when a firm increases
production and sales too much and runs short of cash.
To manage working capital a business must exercise: credit control, stock control, Cashflow management.
Ms. Marshall 6th year business
Organisational Structure To start up you can be a: Sole Trader: a business set up, owned and run by
one person, e.g. a local hairdressers or chemist. Partnership: a business set up, owned and run by
between two and twenty people with the intention of making a profit. E.g. KPMG, PWC accountants.
Private Limited Company: a business which may have between 1 and 99 shareholders, who operate the business with the benefit of limited liability e.g. Eason Ltd.
Ms. Marshall 6th year business
Organisational StructureSole Trader Partner LTD. Co
Formation & Dissolution Easy to set up.Register with Revenue for tax.Register name if different.No continuity
Easy to set up.Register with Revenue for tax.Register name if different.Deed of Partnership – contract drawn up before setting up.No continuity.
Register with Revenue.Register with CRO.Continuity.LTD after name.
Ownership & Control Owned & controlled by one ownerConfidential business
Owned & controlled by partners.Confidential business.
Owned by shareholders.Controlled by BOD.Not confidential.One share=one vote.
Management & Finance Decisions made by one owner.Raising finance can be difficult.Often long hours & a lot of stress.
Decisions made by partners.More partners = more finance but dilution of ownership.Stress & hours shared.
Decisions made by BOD with shareholder approval.Finance can be raised by selling shares, but NOT on stock exchange.
Profits & Risk Keeps all profits.Pays income tax.Unlimited liability.
Share profits. Pay income tax.Unlimited liability.
Profits shared.Corporation tax paid.Limited liability.
Ms. Marshall 6th year business
Production OptionsJob Batch MassSpecific Customer Order
The production of certain quantities of identical products in one production run and then production switches to a different batch
Large numbers of identical products
One -off Skilled or semi skilled labour
Continuous production
Not produced to be held in stock
Flexible machines Produced for stock and sold
Highly skilled Average price Low labour costs – high automation
Expensive Held in stock Unit cost decrease as economies of scale apply
Ms. Marshall 6th year business
ExamplesJob Batch MassWedding Dress Clothes Chocolate bars e.g.
Turkish DelightCrystal Textbooks Toilet paperHand crafted furniture Bakery – bread,
cakes, croissants Pens
Ms. Marshall 6th year business
Business Plan What is a Business Plan? Explain its role in business start ups (2005 HL 20 marks) A business plan is a document that sets out the objectives of a
business and the strategies by which these will be achieved. It is like a map for the entrepreneur telling her what she has to achieve to make her business a success and what steps she must take to get there.
It sets out details of the entrepreneur setting up the business, her business idea and especially her unique selling point. It also details how the entrepreneur is going to make and sell the product and how she intends to finance the business.
It is used to impress investors in order to attract investment to start up the business. They will judge whether the business is sound, e.g. by examining projected profit.
It will help to anticipate problems, e.g. how to produce the product. Solving problems in advance will reduce her risk of failure.
Ms. Marshall 6th year business
Business Plan headings Description of the Business Market Analysis Marketing Plan Production Plan Finance Plan
See P288
A document that sets out the objectives of a business and
the strategies by which these will be achieved.
Ms. Marshall 6th year business
Business Plan: Headings Description of the business: the people
starting the business, its products and long term objectives.
Market Analysis: show that there is a viable market, how you intends to beat competition. Describe target market, market trends, competition, competitive advantage.
Marketing Plan: marketing strategy, how she intends to increase consumer interest and convince them to buy it.
Ms. Marshall 6th year business
Business Plan Production Plan: describe how the
product will be made: Job, batch, mass? The equipment, how to ensure quality.
Finance Plan: How much it will cost, how much you have, how much you need? Set out collateral available. Projected Profit &Loss Account, Balance Sheet and Cash Flow Forecast.
Ms. Marshall 6th year business
Business Plan: Benefits
A guide to future action: a plan provides focus for the business and guides the actions of the individuals as it sets the objectives and strategies.
Finance: needed if applying for finance from a financial institution or the govt.
Assessing Performance: provides a benchmark to measure your performance against. This will help control the business as corrective action can be taken.
Viability: A SWOT analysis is carried out, identifying problem areas. Problems can be dealt with. This will reduce the likelihood of failure.
Ms. Marshall 6th year business
2002
Ms. Marshall 6th year business
Recent Exam Questions 2013 SQ Outline two characteristics of a private limited company. 2013 SQ. Write true or false after each of these statements.
Sentence True or False
1 Batch Production is used when making a single, one off, unique product.
2 In a Hire Purchase agreement legal ownership of the good transfers when the first instalment is made.
3 A Cash Flow deficit can be addressed by negotiating a shorter period of credit with debtors.
4 A sole trader is an ownership structure that benefits from limited liability.
5 When a company’s equiity capital is greater than its debt capital it has low gearing.
Ms. Marshall 6th year business
Recent Exam Questions 2013 Mock SQ: Illustrate your understanding of the term limited liability. SQ: Column 1 is a list of business terms. Column 2 is a list of explanations for these
terms. (One explanation does not refer to any of the terms.)
Terms Explanation1. Insolvent A. An asset that a lender has a claim to if the loan is not repaid.2. Collateral B. All finance belonging to ordinary shareholders in the business. 3. Factoring C. Business is closed and all assets are sold off to clear debts that are
owed.4. Liquidation D. The selling of the debt of a business at a discount in order to raise
cash.5. Equity Capital E. The business is unable to pay its debts, total liabilities exceed total
assets. F. A medium term source of finance offered by financial institutions.
1 2 3 4 5
Ms. Marshall 6th year business
Recent Exam Questions 2012 Mock SQ Outline three features of a partnership as a form of business
ownership. 2010 (Don’t do part A)
Ms. Marshall 6th year business
Recent Exam Questions 2009 Q Contrast job production and batch production, giving
one appropriate example in each case. (10 marks) 2008 SQ Distinguish between working capital and equity
capital (10 marks) 2008 Q7 Outline the benefits for a new business of preparing a
Business Plan (15 marks) 2007 Mock (A) Explain the benefits to a business of preparing a
marketing plan (20 marks).
Ms. Marshall 6th year business
Recent Exam Questions 2004 SQ Name and illustrate three types of production (10 marks). 2005 SQ The following table shows three types of production and four qualities. For
each quality, tick the type of production which is most likely to match that quality.
Job Batch MassUnique ProductsGroups of productsHighly skilled labourExpensive products.
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