Ch1 Business

• Business


  A decision-making organization involved in the process of using inputs to produce goods and provide services
• Inputs


  Resources that a business uses in the production process to generate output/products
• Goods


  Physical tangible products
• Services


  Intangible products
• Needs


  Basic necessities that people must have to survive such as food, water, warmth, shelter, and clothing
• Wants


  People's desires
• Entrepreneur


  An individual who plans, organizes, and manages a business, taking financial risks in doing so
• Entrepreneurship


  Describes the traits of a business leader who tends to be distinctive in their temperament, attitude, and outlook, driving the business to achieve its goals
• Traits of an Entrepreneur

  • Creative, innovative, highly passionate, self-motivated
  • Search for and exploit business opportunities by forecasting and responding to changes in the marketplace
  • Demonstrates enterprise and initiative to make a profit
  • Passion for work, especially if related to personal interests
• Added value


  Positive difference between the selling price of a product and the cost of producing it, appealing to customers who are willing to pay a higher price
• The purpose of business activity

  Generate added value
• The role of business

  Combine human, physical, and financial resources to create a product that satisfies the needs and wants of people, organization, and government
• Functional areas of a business


  • HR
  • Finance & accounts
  • Marketing
  • Operations management
• Types of products


  • Consumer goods
  • Consumer durables
  • Consumer non-durables
  • Capital goods (or producer goods)
• Business functions and their roles

  • Human resource management
  • Finance and accounts
  • Marketing
  • Operations management
• Stages of production/Chain of production


  • Primary sector
  • Secondary sector
  • Tertiary sector
  • Quaternary sector
• Challenges for starting up a business include lack of finance, unestablished customer base & attracting customers, and cash flow problems
• Interest charges might affect the cash flow position
• Factors affecting unestablished customer base & attracting customers

  • Problem intensified with well-established competitors
  • Building customer loyalty over time may require marketing and large amounts of money
• Cash flow problems


  • Financing working capital is a challenge
  • Business might have stock that cannot easily turn into cash
  • Customers demanding lengthy credit periods
  • Business needing to pay ongoing costs during credit period
• Marketing problems


  • Arise when businesses fail to meet customer needs
  • New businesses lacking expertise
  • Key is to identify a niche in the market and fill it
• People management problems


  • New businesses lacking experience in hiring the right staff
  • Leading to poor labor productivity
  • Need for retraining or rehiring staff
  • Lack of knowledge in ideal organizational structure and staff motivation
• Production problems


  • Difficulty in accurately forecasting demand
  • Likelihood of overproduction or underproduction
  • Overproduction leading to stockpiling, wastage, and increased costs
  • Underproduction leading to dissatisfied customers and loss of potential sales
• Legalities


  • Setting up a business can be cumbersome, confusing, time-consuming, and expensive
  • Oversights leading to financial penalties
• High production costs


  • Large amount of money needed for capital equipment, machinery, stocks, rent, advertising, insurance
  • Smaller businesses at a cost disadvantage due to lack of economies of scale
• Poor location


  • Busy areas offer high potential customers but come with high costs
  • Fixed costs like rent or mortgage payments account for a large percentage of total costs
  • Aim for new businesses to reach break-even by keeping fixed costs down
• External influences


  • New businesses prone to exogenous shocks creating a challenging trading environment
  • Larger and more established firms better resourced to handle external influences
• Opportunities for starting up a business

  • Growth
  • Earnings
  • Transference and inheritance
  • Challenge
  • Autonomy
  • Security
  • Hobbies
• Private vs Public sector

  • Private sector: Run, controlled, and operated by private individuals and businesses
  • Main aim is to earn profit for its owners
  • Public sector: Controlled by the government, providing essential goods and services
• Profit based business entities

  1. Sole trader/sole proprietor

  2. Partnership
• Sole trader/sole proprietor


  An individual who owns his/her personal business where the owner runs and controls the business and is the only person held responsible for its success or failure
• Sole trader/sole proprietor


  • May choose to work alone or employ others
  • Set up with a relatively small amount of capital obtained from personal savings and borrowing
  • Unincorporated, meaning the owner is the same legal entity as the business itself
  • Owner is personally responsible and liable for all the debts of the business
• Partnership


  A for-profit private sector business owned by two or more persons who share the responsibilities and burdens of running and owning the business
• Partnership


  • Financed mainly from personal funds of each owner
  • Partners can pool funds together to raise more finance than sole traders
  • Silent partners/sleeping partners do not actively take part in running the partnership but have a financial stake
  • At least one owner must have unlimited liability
  • Deed of partnership is the legal contract specifying responsibilities of each partner and their share of profits or losses
• Unlimited liability


  Feature of sole traders and ordinary partnerships where owners are legally liable for monies owed to creditors, risking personal possessions to pay debts
• Limited liability


  Restriction on the amount of money owners of a company can lose if the business goes bankrupt, shareholders cannot lose more than the amount they invested
• Incorporation


  Legal difference between owners of a company and the business itself, protecting owners with limited liability
• Company/ corporation


  Limited liability business owned by shareholders with a separate legal identity from its owners, separate legal entity with own rights and duties
• Company/ corporation


  • Setting up can be complicated and expensive due to rules and regulations
  • Shareholders invest money to provide share capital
  • Corporations/ joint-stock companies have shares jointly held by numerous entities
  • Board of Directors (BOD) elected by shareholders to run the company on their behalf
• Public sector examples


  • State healthcare and education services
  • Emergency services
  • Social housing
  • National defence