Professional Documents
Culture Documents
Entrepreneurs
Entrepreneurs are people who bring new businesses and products/services into the
market. They are usually creative, patient, determined, resilient and passionate
about their ideas. They often receive Government grants to help and encourage them set
up a business.
Entrepreneurs are important in the business world because they
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There are a lot of motives or reasons for becoming an entrepreneur, including the
following
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There are several issues that young people may experience when becoming an
entrepreneur
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Franchises
A franchisee is a person or company who has paid to become part of an established
franchise like McDonalds. A franchise enables you to run your own business whilst using
a successful formula created by the franchisor.
The Government suggests that 70% of new businesses fail before three years compared
with 7% of franchises. This is usually because the idea for the business was not viable or
because stronger competitors emerged.
The franchisor usually controls the rules concerning the following
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Dcor
Product range
Staff uniforms
However the franchisee is usually able to make their own decisions about the following
Advantages
Disadvantages
Protecting Ideas
An idea cannot be fully protected, but patents and copyrights are methods of preventing
others from copying and distributing an invention or creative piece of work. This is called
Intellectual Property.
A Patent provides a certain amount of time for which an invention or product cannot be
copied by anybody else. Patents can cost from 1,000 to 500,000+ and breaking a
patent is not a criminal offence. Owners of patents can only claim damages through the
civil courts.
A Trademark is a sign that can distinguish one product, service or brand from another
another. These can be
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A Copyright applies to written work (for example: books and song lyrics). Unlike a
patent, a copyright occurs automatically and there is no need to pay for it.
Adding Value
The process of adding value involves doing something to a product to higher its price. For
example: ready-grated cheese is more expensive than a block of cheese. Products that
are protected by patents can be used to add value.
Primary Sector
Secondary Sector
Tertiary Sector
Business Plans
A business plan sets out how a business idea will be financed, marketed and put into
practice. It is likely to be essential in getting funding from a bank because they will need
to see how well a business idea is thought through and how financially viable it is.
It is a great idea to create a business plan because of the following
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It gives directions
It helps make decisions about resources that are needed
It helps to measure success
Any business plan is only as good as the information on which it is based. It is a good
guide, but is only a plan.
Benefits
Problems
Legal Structures
The legal structure of a business is crucial in determining how seriously the owners will
be financially impacted if things go wrong. It also has an effect on the taxation levels that
the business and owners need to pay.
In Unlimited Liability the owners of a business are fully responsible for any debts
incurred, even if this requires them to sell their personal assets or possessions. There are
two types of businesses that have unlimited liability
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Sole traders
Partnership
A Sole Trader is someone who owns and operates their own business. A sole trader can
have employees, but they must take all the final decisions about running the business.
A Partnership is where 2-20 people start their own business with the goal of making
profit. Trust is vital.
Advantages of Partnerships
Disadvantages of Partnerships
With Limited Liability, debts incurred by the business must stay within the business.
The owner doesnt have any personal liability and doesnt need to sell personal
possessions if the business fails.
A business must go through a legal process to gain limited liability. This process is called
incorporation.
A small business can be started up as a sole trader, partnership or Private Limited
Company (LTD). The start-up for an LTD can be as little as 100 and the company can
be fully owned by the entrepreneur.
Shares cannot be floated on the Stock Market this allows the owner to have full control
over the business.
Putting LTD after a company name is a legal requirement and says that a business is
small with limited liability.
An LTD can become a Public Limited Company (PLC) when it has 50,000+ in share
capital. The business may then be floated on the stock market where the public can buy
shares. This provides finance for the business to expand. However, too much cash in a
short amount of time can make a business grow too fast.
There may also be some other problems with PLCs
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Some other forms of businesses include non-profit organisations which focus on the
interests of the members and not shareholders, and Co-operatives which are workerowned.
Market Research
Market research gathers information about consumers and competitors. A target market
is the chunk of the whole market that the product or service is aimed at.
It aims to identify consumers buying habits and attitudes to products and services. It can
be numerical (how many people buy the Daily Mail?) or qualitative (why do these people
buy the Daily Mail?)
Secondary Research is data that already exists. Secondary research can be found
through the internet, newspapers and Government produced data.
Advantages
Disadvantages
It is easy to access
Primary Research is the process of gathering information directly from people within
your target market. This can be very expensive when carried out by specialist market
research companies and there must be a lot of care taken to eliminate bias from your
research! Types of Primary Research may include the following
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Observation/Experimentation
Questionnaires
Phone calls
Advantages
Disadvantages
It can be time-consuming
Qualitative research is in-depth research into the motivations behind buying habits. It
does not produce statistics like 53% liked the chocolate but asks why they liked it
instead. One form of this research could be interviews. However, it is hard to collect
qualitative research in small-scale samples and bias may creep in.
Sampling
A Random sample is where everybody in the population has an equal chance of being
chosen. Achieving a truly random sample requires careful thought because people may
often be missing.
A Quota sample is where interviewees are selected in proportion to the consumer profile
of the target market. For example: if the total amount of people at college was 1,000 with
40% males and 60% females, the male number would be 400 and the female number
would be 600. These people can then be broken down into age groups, directorates, etc.
This method allows interviewers to interview anybody as long as they achieve the correct
quota in the end. It can work out relatively cheap and effective and is used most often by
market research companies.
A Stratified sample is when you interview people with specific characteristics (eg: 30-45
year olds). So within this section of the population individuals can be found at random or
by setting a quota.
There are many factors which can potentially influence the choice of sampling methods
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Cost
Time
Sample Size
After deciding which method to use the next consideration is how many interviews should
be conducted. Some companies interview between 100 and 1,500 people and consider it
large enough to reflect the views of 45 million people. This can be heavily argued.
A sample with at least 1,000 responses usually produces a high confidence level
compared with 10 or 100.
However, it can be extremely expensive to conduct large amounts of research and
sampling 1,000 people can cost 30,000. Surveys of 4 or 5 new products may cost
120,000+ on research alone.
When answering a question on market research or quantitative figures I MUST question
the following
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Types of Markets
A market can be anything from the amount of people that buy a specific product, the
amount of products in a category or how much is spent on one specific thing. They key
elements to any market are
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Local markets are small firms which dont really care about the size of the national
market. They are more concerned with the state of the local market (eg: local
hairdressers and plumbers).
However, some small businesses may still be focused on the national market (eg: selling
their products through large supermarkets or by operating on the internet)
National markets cater for the nation but are also concerned about local competition
(eg: H&M, New Look). Therefore, these businesses are located everywhere and use
national media to advertise.
Electronic markets are markets that used to be physical. The stock exchange and
exchange currency markets are now all on-screen and eBay and other auction markets
are transforming how we make transactions. Electronic markets often have key
characteristics
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They are very price competitive so the costs are kept down
They can operate from anywhere
The market is cheap to enter so new competitors can arrive anytime
Market share is the proportion of the total market that is owned by one company. It is
essential for evaluating the success of a firms marketing activities. The formula for
calculating market share is below
Company revenue / whole market revenue * 100 = % of Market Share
There are many advantages of being a market leader
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Market Segmentation
Markets can be subdivided into several different ways. The magazine market is a good
example and can be split up into gender, age and lifestyle. Businesses must know their
target markets needs and wants.
Advantages
Disadvantages
Demand
Demand is the desire to buy a product backed by the ability to do so. It is also known as
effective demand.
Price can affect demand in the following ways
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The higher the price of the product the less of the product people can afford to
buy
The price of other competitors products
The value that the consumers place on the brand can affect its demand
Income has grown in the last century. The demand for most products and services grows
with the economy.
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Normal goods
the demand for these grows broadly in line with economic growth (eg: petrol and
food)
Luxury goods
the demand for these grows faster than the growth of the economy
Inferior goods
the demand for these falls as the economy grows. As we get wealthier we prefer
to buy branded products instead of home-brand ones
Of course, if the economy is struggling luxury goods quickly vanish and inferior goods
become more popular.
The Actions of competitors plays a big influence on demand. For example, the
demand for a Ryanair flight to Dublin doesnt just depend on the price of the flight or
customers incomes but the prices of rival flights too.
A firms own Marketing objectives may also play a part in the demand for a product or
service.
Seasonal factors are the biggest influence on demand for some businesses. For
example: Ice cream sales will boom in the summer whereas the coat market will be more
successful in the winter.
Location
One of the most important factors influencing the success of a business is its location.
This makes good locations with good infrastructure very expensive, and small businesses
often struggle to compete.
Factors affecting the choice of location
Space
is there room for expansion? This should be a consideration in case the business
does well
Government grants
financial incentives that are offered by the government may influence the
decision on location
Accessibility of suppliers
businesses that use JIT will benefit from being close to suppliers due to shorter
deliveries
Infrastructure
the provisions available in a certain area, for example transport links and
telecommunications. Online businesses such as Amazon and Play will need to be
in areas with sufficient transport links.
Sources of Finance
A source of finance is the term used to describe where a business gets its money from.
Almost all new businesses will need money to invest before it can start operating,
including the following
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Businesses will also need to be able to raise money for other reasons such as expansion
of premises, machinery and employees, to buy more produce for large orders, or for
more external reasons such as a dip in the economy. The amount of finance available to a
business will depend on:
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Having sufficient funding will ensure that a business can meet its current and future
needs. A distinction between short, medium and long-term objectives should be made
and the appropriate type of funding used.
Short-term finance (less than a year) should not be used to finance long-term projects.
Internal finance
External finance
Description
Advantages
Retained Profit
Sale of assets
Loans
Debentures
Venture capital
Share capital
Overdrafts
Leasing
Trade credit
Employees
An employee is somebody who works for an organisation; usually under a contract of
employment in return for a salary or a wage.
At the start of a new business it is common for an entrepreneur to work on their own,
taking on all jobs associated with running the business. However, as the business
expands they may need help.
Types of employees include
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Recruitment costs
Training costs
Recruitment costs
Training costs
Advantages of advisors/consultants
Disadvantages of advisors/consultants
Budgets
A budget is a detailed plan of the income and expenses expected over a certain period of
time. Businesses will be required to produce a Budget for Revenue and Profits in order to
persuade banks to lend finance.
Advantages of budgets
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They can help ensure that a business does not spend more than expected
They can help measure managers performance
They can motivate all the staff in the section (delegating budget-power can be
motivating)
Setting budgets is not an easy job. How do you decide on the level of sales next month or
next year? This is especially hard for new businesses with no previous trading
experience. Heres how start-ups do it
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They produce an estimate of sales in the first few months based on secondary and
primary market research conducted for their business plan
The entrepreneur relies on their own instinct and experience in the industry
Most established firms will use last years figures as a guide to the next years with an
adjustment for any known changes or objectives.
Zero Based Budgeting is an alternative approach to Expenditure budgets. This starts
each budget at zero instead of last years figures. This helps to stop budgets from rising
every year.
However, there may be some problems with this type of budgeting because managers
may lack the experience of knowing what things really cost.
The best way to set budgets is to
Relate the budget directly with the businesses objectives (what it is trying to
achieve)
To involve as many as possible during the process; budgets should then be agreed
and realistic
Make budgets realistic and meaningful to the staff who have to work with them
Cash Flows
A cash flow is the flow of money in and out of a business over a given period of time.
Cash flow forecasting is estimating the flow of money in and out of the business.
Remember that cash does not always mean profit!
Managing cash flow is one of the most important aspects of financial management.
Without the cash to pay bills, all businesses will fall.
Cash flow problems are the most common reason for business failures. Cash flow
forecasts are vital in business start-ups because they help get finance and will also show
the finance provider when they will be paid back.
All businesses need to manage their cash position carefully and will need to predict their
cash position in the forecast for at least the next six months. This will help enable them
to take action if cash becomes short.
To prepare a cash flow forecast, businesses need to try and estimate all the money
coming into and out of the business. These flows are then set in a grid showing the cash
movements each month. Cash Flow example
In order to prepare cash flow forecasts, businesses need to make estimations, just like in
budgets, so the estimations are only as good as the research used to carry it out. It is
much easier for an established business to create a forecast but all companies must build
their forecast in contingencies.
When conducting a forecast businesses must anticipate disasters like cash shortages. By
creating a worst-case forecast, companies will be able to arrange financial cover for
these events before they happen.
Entrepreneurs start their financial planning by assessing what revenue they might
receive in their first financial year. Revenue is calculated by using the following formula
Quantity of goods sold * Selling Price = Sales Revenue
A business that plans to increase its revenue may benefit more from selling a high
amount of products at a low price rather than a low amount of products at a high price.
Fixed Costs are those that do not vary with the level of output (eg: salaries, rent,
utilities, interest charges).
Variable Costs are those that do vary with the level of output (eg: materials, piece-rate
labour).
The formula for calculating Total Costs is:
Fixed costs + Variable costs = Total costs
Profit is the difference between revenue and expenditure and is main motive for many
businesses. However, some businesses are not established with the aim of making a
profit. Profit can be calculated by using the following formula:
Total revenue Total costs = Profit
always mean profit!!)
Managers usually refer to Net/Operating Profit as the amount left once all fixed and
variable costs have been deducted from revenue. However, this is before TAX has been
paid.
After working out the total profit after TAX, it can be used to
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Pay shareholders
Reinvest in the company (retained profits)
Forecasting costs and revenues can be difficult new businesses as they dont have any
past figures give them ideas. It is possible that entrepreneurs will underestimate fixed
and variable costs and overestimate revenues.
A business will want to compare its profitability over time. This is called the Net Profit
margin and the higher the margin the better! The Net Profit Margin can be calculated
with the following formula
Net Profit x 100 / Total revenue = Net profit margin
Calculating Break-Even
The breakeven analysis compares a companys total revenue with its total costs to find
out the minimum level of sales required to cover its costs. This is usually shown on a
graph called a breakeven chart. In order to calculate the breakeven point a business will
need to know the following:
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Contribution is the difference between sales revenue and variable costs. It pays for a
businesss fixed costs and the remaining money is then counted as profit. Contribution
can be calculated by using the following formula
Selling price per unit Variable costs per unit = Contribution PER UNIT
Total revenue Total variable costs = Contribution
(Contribution PER UNIT is effectively just the second part of the breakeven
formula)
Contribution can be reduced by lowering variable costs and increasing selling prices.
Lowering fixed costs can then also produce more profit as they are paid for by
contribution.
Once you have calculated the breakeven point on a graph you can then work out the
Safety Margin. This is the amount of sales a business can lose before it starts to lose
profits (the difference in units between the breakeven point and the quantity of units
sold)
Key Terms
Term
Definition
Adding Value
Advisor/consultant
Bank Loan
Bank Overdraft
Breakeven Point
Budget
Business Angel
Business Plan
Sets out how a business idea will be financed, marketed and put
into practice
Business Objective
Cash Flow
Contribution
Contribution Per
Unit
The difference between the selling price per unit and variable
costs per unit
Costs
Demand
Demographic
Elasticity of
Demand
Electronic Market
Enterprise
Entrepreneur
Expenditure Budget
The budget that sets out the total costs (usually split into
categories)
Fixed Costs
Costs that do not change with output (eg: rent, salaries, utilities)
Franchisor
Full-time Employee
Income Budget
Input
Limited Liability
Location
Margin of Safety
The difference between the output sold and the breakeven point
Market
Market Growth
Market Research
Market
Segmentation
Market Share
Market Size
Niche Market
Opportunity Cost
Patent
Permanent
Employee
Primary Research
Profit
Qualitative
Research
Quantitative
Research
Returns
Revenue
The income of sales (selling price per unit * total units sold)
Risk
Sample
Share Capital
Social Enterprise
Sole Trader
Supplier
Total Costs
Trade Credit
Trademark
Unlimited Liability
USP
Variable Costs
Venture Capital
Working Capital
The amount of money that a business has available for day-today activities