Tayla Saab Topic 1: Nature of Business Practice Question 1: Discuss the nature of business and its role in society Practice Question 2: ‘Profit is the risk for reward’. Explain this statement Business: A business can be defined as the organised effort of individuals to produce and sell products that satisfy individual’s needs and wants for a profit. Role of Business Overview Economic Role The financial impact that activities of a business have on groups in the business environment - Has wealth been created for owners? - Can more people be employed? Social Role The impact of business on the community - How does the community benefit from the activities of business? - Do businesses provide essential services? - Are their actions environmentally friendly? Nature of Business Producing goods and services Product: The end result of production can be a good or a service Goods Tangible: Products we can see, feel, touch and weigh Services Intangible: Products which we cannot see, feel, touch or weigh. Activities that are done for you by others. Example: Food, equipment, clothes Profit - Example: Getting your makeup/hair done, Uber driver All businesses provide goods and services to consumers in order to satisfy their needs and wants These products are sold in a market where buyers and sellers meet Physical shop or online The return or reward that business owners receive for producing products that consumers want and need Essential for a business to meet its day to day expenses key consideration for long term survival SALES REVENUE = PRICE X QUANTITY Employment PROFIT = SALES REVENUE – EXPENSES Income - Many businesses employ people to perform various activities within the business The number of employees depends on the product and demand within the business Businesses provide around 80% of private sector jobs Businesses must provide income to owners, employees and shareholders. Employees provide their labour in return for a wage or salary. (remunerated) Dividend: Income shareholders in private/public companies receive Choice - Consumers have freedom of choice and the opportunity to purchase products used for similar purposes Drives competition in the market, in terms of prices and new inventions/innovations Innovation and invention Innovation Invention Improvement made to something already established Development of something new Tayla Saab Through research and development (R&D), existing products are improved and new products are created Entrepreneurship Entrepreneur: Someone who organises a business venture and assumes the monetary risk for it in hope and risk of making a profit. - Businesses provide individuals with the opportunity to turn their ideas and passions into a livelihood Wealth creation - Businesses provide jobs and money to employees who spend this money in the economy Results in result in higher levels of economic growth and wealth, more production of goods and more employment Quality of life - Businesses offer a vast array of products that improve our standard of living - Classification of Business Practice Question 1: Describe the different types of legal structure for businesses Practice Question 2: Distinguish between an incorporated and unincorporated business 1. Size Australian Bureau of Statistics has developed a number of criterion by which the size of a business can be classified CHARACTERISTICS Business type SMALL Corner store Local mechanic Hairdressing salon MEDIUM Services club Motel/hotel Engineering factory LARGE Woolworths Qantas National Australia Bank Number of employees Fewer than 20 employees 20-199 employees 200 or more employees Type of ownership Independently owned and operated - usually by one or two people Owned and operated by a few people and/or private shareholders Owned usually by thousands of shareholders Most common legal structure Sole trader Partnership Partnership Private company Public company Decision making Owner/s responsible for majority of decisions; simple and quick implementation of decisions Owner/s responsible for majority of decisions Complex decision making, due to division of responsibilities and layers of management Sources of finance Equity finance (owner own savings/funds raised by own owner) Owners/partners own savings or a loan and/or private shareholders Debt finance (obtained from financial institutions; loan) – difficulty in accessing loans due to high risk Equity and debt finance Many sources including cash reserves, retained profit, sale of shares, and loans from domestic and overseas institutions Small - usually local area, not dominant in the industry Medium - dominance within a Large - especially for geographic region, some multinational corporations market dominance that dominate the markets of many countries Market share Tayla Saab Classification by employees (summarised) Non-manufacturing Manufacturing Micro Small Medium Large Micro Small Medium Large 1-4 5-19 20-199 200+ 1-4 5-100 101-500 501+ 2. Geographical Spread Category Description Example Tends to be small or medium in size, and serves a local area. - Hairdresser - Bakery/butcher A business that operates within the boundaries of one country - Commonwealth/ National bank only. - National Australia Bank Global/transnational A business that has productive assets in more than one country, - McDonalds corporation) - Zara/ Starbucks Local National and is therefore operating on a worldwide scale. 3. Industry An Industry consists of businesses that are involved in a similar type of production. Category Description Example Primary Extraction of natural, raw materials/resources Mining, agriculture, forestry Secondary Manufacturing and production of products from raw materials Food processing, oil refining, energy production Tertiary The provision of services to consumers Quaternary Provision of information/intellectual services and knowledge E.g: journalism, teaching, banking Quinary Domestic services provided to others E.g: cleaners, restaurants, childcare 4. Legal Structure The legal structure selected by the business owner will affect: set up/startup costs liability – the financial responsibility of owners for any debt created by their business Tayla Saab Liability: responsibility of owners of business debt Business Structure Unincorporated Sole trader / partnership Incorporated Private / public Liability Unlimited The owner’s assets are linked to the business assets (one entity) Limited Business assets and owner’s personal assets are separate (separate entities) Personal assets must be used in order to pay business debt Personal assets do not have to be sold in order to pay business debt Tax Income tax Varies depending on how much is being made Company tax 30% Profit Owners take drawings from account Form of dividend to shareholders Structure Sole Trader Partnership Owners 1 owner 2-20 owners Advantages - - - Start-up costs are low Full control over decisions Majority of profit to owner Easy to cease operation Establish/operating is simple - Disadvantages - Unlimited liability Capacity to raise money is limited Taxed as single person Life of the business is limited Hard to take holidays - - Private Company Pty Ltd – Proprietary Limited 1-50 owners Start-up costs are low Partners get to share the responsibilities/burdens Other members of the family can be involved More capital can be raised Tax liability can be reduced Better work/life balance Minimal government regulations - Unlimited liability Risk of disagreements and tension between partners Don’t have total control Profits need to be shared Partnership may cease if one of them dies - - - Separate legal entity Limited Liability Perpetual Succession (doesn’t stop when owner dies) Borrowing capacity Smaller resources Cannot trade shares on ASX Detailed financial accounts Higher administration costs Limited personal control over decisions Public Company Ltd – Limited 1 – unlimited amount owners - Raise capital though selling shares - Widen shareholder base and spread risk - High borrowing capacity - Perpetual succession - Growth and expansion opportunities - More legal requirements - Transparency all details kept in public domain - Ownership and control issues - Initial financial commitment is higher Government Enterprise - Government enterprises (public sector businesses) are government-owned and operated businesses (GBEs) - Provide essential community services such as health, education and roads - Tendency for governments to sell off businesses they own to private citizens this is known as Privatisation - Privatisation results in better efficiency, increased competition, revenue raised from sale, and tax payable from new business Tayla Saab Factors influencing choice of legal structure Practice Question 1: Explain the factors influencing business classification Practice Question 2: Describe the impact of financial influences on the choice of legal structure 1. Size 2. Ownership Small business Usually has less complex legal structure (sole trader/partnership) - Smaller market share means less employees due to less products being produced and less owners due to smaller business responsibility and financing Larger business Usually has more complex legal structure (private/public company) - - Larger market share means more employees needed to produce more and more owners due to larger business responsibility and greater finance required If business expands, legal structure must change to cater for more employees and owners 3. Finance Legal structure depends on amount of control business owners want Source of finance may be limited depending on legal structure. Sole trader – Only option with complete control Sole trader/partnership - Limited availability of debt finance due to high risk - Mainly equity finance (own capital) however is hard to raise and obtain due to less owners Overall harder to obtain capital Partnership, private – Less control as owners must share control is diluted when more people join Public – Once a company floats and sells shares to the public, ownership is divided amongst thousands of small shareholders no control over business operations If original owner/s wish to retain ownership and control of the business, they must to hold more than 50% of all shares sold Private/Public company - Easy to obtain debt finance (large loans) due to less risk - Greater amount of shareholders allows for more external equity finance - Capital can be raised by selling shares in a public company Overall easier to obtain capital - - As business expands, owners have less control As business expands more capital is required External Influences in the business environment Practice Question 1: Outline two external influences on the business environment Practice Question 2: Discuss what you think is the most significant external influence. Give reasons for your answer. Factors which cannot be controlled by businesses, but affect their operations Economic Inflation Exchange Rates High inflation: Rising prices increase cost of borrowing, stop major investment and reduce customer spending (not good for business) Low inflation: Falling prices decrease cost of borrowing and encourage major investment and consumer spending (good for business) Depreciating: Value of Australian dollar compared to other currencies is falling. - Cheap exports, expensive imports Interest Rates Appreciating: Value of Australian dollar compared to other currencies is increasing. - Cheap imports, expensive exports Increasing: Reduces customer spending and increases business expenses (not good) Government Expenditure Decreasing: Increases consumer spending and decreases business expenses (good) Increased gov. expenditure: May increase tax lead to less consumer spending May increase employment encourages spending Economic Cycle Geographic Tayla Saab Decreased gov. expenditure: Slows growth in income and employment less consumer spending Expansion: Consumer confidence/spending rises and output by business increases Income rises (good for businesses) Contraction/downturn: Consumer confidence/spending falls and output by businesses decrease Income decreases (bad for businesses) Geographic location May influence the natural and other resources available for businesses to utilise - Australia’s location within the Asia-Pacific has provided opportunities for business expansion, sales and profit amongst other Asian nations Growth in China has helped dramatically Demography Specific characteristics of the population which affects the demand for goods and services - Australia has an aging population A loss in skilful employees and an increase in demand for age related services such as health and aged care has occurred Globalisation Process where international trade allows for businesses to contribute to global markets, by distributing goods and services internationally - Increased competition, expanded markets, access to better labour, cheaper materials, flexible location Social Ability to respond to changes in: - Legal Evolving Social Influences: Rising female participation, increased cultural diversity, customer activism Environmental Concern: Growing consumer awareness regarding environment (ethical practices) Social Trends: Influenced by celebrities, new research, government policy, social media and individual taste Legislation includes; - Laws on taxation - Industrial relations - Occupational health and safety - Equal employment opportunity - Anti-discrimination and protection of the environment E.g: Competition and Consumer Act (2010), Work Health and Safety At (2011) Businesses must comply with laws in order to avoid being fined, sued for damages, shut down or tarnishing business reputation Businesses must understand and accept legal responsibilities to stakeholders Political Political change can lead to uncertainty to business confidence. eg labour or liberal These include: - Labour market reforms: Decentralisation of wage determination, free trade policies/agreements - Taxations: GST (10% on the supply of goods), company tax cuts, tax incentives to keep national jobs - Social reforms: Paid parental leave, equal pay, gender workplace diversity - Environmental management: Gov. regulations, Emissions trading scheme, banning plastic bags, etc. Institutional Government - Federal - State - Local Regulatory Bodies - EPA - NSW fair trading - ASIC - ACCC Other - Employer associations - Trade and industry associations - ASX Tayla Saab 1. Government Federal Obligations include: - Payment of taxes for employees and for businesses with company tax and GST - Provision of employee superannuation - Observance of customer regulations - Abiding by relevant legislation 2. Regulatory Bodies The NSW Environment Protection Authority NSW Fair Trading The Australian Securities and Investments Commission State Obligations include: - Provision of employee entitlements, including workers compensation, occupational health and safety (OHS) requirements and award rates of pay - Payment of payroll taxes - Abiding by relevant state legislation and pollution controls - - Local Local government have control over: - Approving new development and alteration to existing building applications - Fire regulations - Parking regulations (provision of parking by new businesses) - Size, location and shape of business signs Primary environment regulator for NSW Aims to improve environmental performance and waste management for NSW through a wide range of programs and initiatives NSW consumer protection agency Provides information and assistance to all consumers Monitors market integrity and provides consumer protection in areas such as payment systems and financial services such as investment advice. 3. Other institutional influences Trade unions Main aim was to improve working conditions and pay rates Union membership declined substantially in the past 20 years because of: - New legislation that outlaws compulsory unionism - Changes to work patterns (increased part - time and casual work) - Workplace agreements Trade and industry associations National bodies that represent larger groups of employers (e.g) lobbying government on certain issues Examples include: - Australian Chamber of Commerce and Industry - National Farmers’ Federation - Australian Industry Group Technological - Robotics Telecommunication Internet and ecommerce Rapid advances in information technology (IT) have reduced communications delays and allows suppliers and customers to interact over great distances. With appropriate technology, businesses can increase efficiency and productivity, create new products and improve the quality and range of products and services. Competitive Situation Tayla Saab Each business aims to achieve a sustainable competitive advantage over its competition in order to capture a larger portion of the market Sustainable Competitive Advantage 1. Number of competitors The number of competitors refers to the size and number of firms that exist within an industry. Monopoly Complete concentration by one firm in the industry Australia Post Oligopoly Small number of larger firms have a greater control over a market Car manufacturers Monopolistic competition Large number of buyers and sellers in a particular market Retail shops, clothing Perfect competition Large number of small firms that sell similar products must use price to differentiation Fruit and vegetable growers / sellers 2. Ease of entry The ability of a person (or persons) to establish a business within a particular industry. Monopoly No competitiros can enter The one firm has control over all resources that are being sold Oligopoly Entry is difficult Monopolistic/perfect competition Easy entry businesses are small and it is more affordable for the business owner to gain a market sgare 3. Foreign and local competitors Differentiating factors between local and foreign: - Labour costs - Transport costs - Cost of stoke / raw materials Local Produce or sell a good or service in the same market. Local competitors must deal with the same variables as each other. Foreign Located overseas or offshore. They sell their goods and services in Australia and compete with local businesses. 4. Marketing Strategies A business will be influenced by the type of marketing measures taken by a competitor. - E.g: Businesses which use social media and TV advertising have greater exposure to consumers than those who rely on word of mouth The type and extent of marketing will depend on: - The size of the market - The size of the business - Number of competitors - The nature of the products Markets 1. Changes in financial / capital markets 2. Changes in labour markets Tayla Saab 3. Changes in consumer markets Financial markets have become more global. After 1983, Australia deregulated Australian financial market, allowing foreign banks in Australia e.g. ING, HSBC, ARAB BANK Internal Influences in the business environment Practice Question 1: Outline the five internal influences on the business environment Practice Question 2: Describe the different types of resources, giving an example for each. Factors affecting business operations which can be controlled by managers. Product 1. The type of goods and services produced will affect the internal operations of business E.g: physical space required for manufacturing, depending on size of good 2. Product influence will be reflected in the type of business (service, manufacturer or retailer) E.g: Clothes manufacture is structured differently compared to clothes retailer 3. Size of the business based on the range and type of goods and services produced, the level of technology utilised, and the volume of goods and services produced. E.g: The larger the business, the more goods and services produced influences internal structures and operations of the business Location Prime Location = Customer convenience + Visibility If a business is not convenient and visible customers may not make the effort to find the business. Location Factors A good location is an asset because it will lead to higher levels of sales and profits. A bad location is a liability that adversely affects sales and profits. Visibility - Retail business: Needs to be seen to attract customers, so must be located in a prime shopping area such as a main street or shopping centre. Manufacturing company: Does not rely on visibility Low-visibility location where there is space to produce goods. Cost - Busy location = more expensive lease/purchasing cost Manufactures need large sites cheaper, low visibility options Online stores not influenced by location Proximity to Suppliers - Business requiring large size and quantity of raw materials for production located close to supplier Closer location reduces cost of transporting raw materials - Proximity to Customers Importance of proximity to customers depends on the type of business. - Retail business will need to be located close to customers - Manufacturing/wholesaling business may decide it is cheaper to transport the product to the customer. Proximity to Support Services Support services are the activities needed to assist the core operations and prime functions of a business i.e. accountants, solicitors, government agencies. - Small businesses traditionally use external services Tayla Saab - Medium to large businesses often provide their own services or outsource to downsize staff and save money. Due to technology proximity to support services is no longer very important. Management Due to rapid advances in technology and increased competition due to globalisation, businesses have flattened their management structure (fewer levels of management) - Resources Emerging business structures can adapt quickly to meet changing consumer needs and market conditions because there are fewer s who need to approve decisions Businesses that adopt a flatter organisational structure reduce the number of levels of management, giving greater responsibility to individuals in the business Goods and services are produced by combining these resources. Human Resources Employees of the business and are generally the most important asset. - Players - Cleaners Informational Resources These resources include the knowledge and data required by the business. - Market research - Sales reports Physical Resources Include equipment, machinery, buildings and raw materials used by the business. - Trucks - Musical equipment Financial Resources Business Culture The funds the business uses to meet its obligations to various creditors. - Budgets - Grants from business Refers to the values, ideas, expectations and beliefs shared by members of the organisation. Business culture can be seen in the unwritten or informal rules that guide how people in the organisation behave or revealed in official policies or goals. 1. Values – Basic beliefs shared by employees (e.g honesty, hard work, teamwork, quality customer care) 2. Symbols - Events or objects that are used to represent something important Tayla Saab 3. Rituals, Rites and Celebrations - Routine behaviour patterns in a business’s everyday life (gathering together) 4. Heroes - Heroes are the business’s successful employees used as an example to others Cultural and Organisation structures - Formal businesses have prevailing cultures that show accountability, communication & cooperation - Less formal businesses show flexible, innovative and risk-taking cultures Management’s role in developing business culture Management must ensure the culture is kept alive by: - Training employees - Reinforcing the values - Rewarding staff Internal and External Stakeholders Practice Question 1: Distinguish between internal and external stakeholders Practice Question 2: Outline the businesses’ responsibility to stakeholders A stakeholder is any group or individual who has an interest or is affected by the activities of a business. - Businesses are expected to practice ethical management and do the ‘right’ thing in the interests of all stakeholders. Internal Stakeholder Individuals or groups within a business who have an interest in the company. - Managers Employers Employees External Stakeholder Entities outside of a business who care about or are affected by its performance - Government Customers Society Employer Associations - Unions Creditors Environment Customers Business Responsibility to Stakeholders Stakeholder Responsibility of Business to Stakeholder Shareholders - Hold an annual general meeting - shareholders are able to voice their concerns, given an opportunity to ask questions to the Board of Directors, provide an annual report - Return on investments in a sustainable and fair way share of profit, dividend - Educate managers about ethical responsibilities and legal requirements - Job specific training - Income (fair pay) - Sufficient resources to carry out their roles (factors of production) - Fairly payed - Proper training and enhancement of skills Managers Employees Tayla Saab Consumers Society Environment - Safe working environment - Fair pay - Provide for needs - Abide by laws (no discrimination) - Income remunerate - Empowerment contributes to an employees self worth, which in turn increases productivity and reduces absenteeism. - Safe, functional, quality, environmentally friendly products - Ethically sourced - Must keep up with consumer trends to satisfy needs and wants - Treat consumers fairly - Show concern and protection for the environment - Participate in a range of community projects and activities (fundraisers) - Developing and adopting to ecologically sustainable operating practices and policies - Protect the environment. Stages of Business life cycle Practice Question 1: Describe each stage of the business cycle, including challenges and strategies Practice Question 2: Outline the factors contributing to business decline Four main stages: 1. 2. 3. 4. Establishment Growth Maturity Post-Maturity Renewal Steady state Decline Cessation Tayla Saab Business Growth and Decline Phase Characteristics Establishment Business needs: - Location (land) - Staff (labour) - Resources (capital) Low sales: - Unknown business - No reputation - Small customer base - Very high fixed costs (premises, insurance, utilities) Growth - 33% of businesses fail within the first year of trading Increasing reliable customer base: marketing or word of mouth Increasing revenue/profit Developing reputation Expanding market share Cost decreases as resources as used more efficiently (materials, employees) Cash flow improves Merger and Acquisitions Another way a business can grow and expand through integration with other businesses - Merger/acquisitions are effective as a company can quickly increase its range of products and eliminate other competition in the marketplace Merger Acquisition When the owners of two separate businesses agree to combine their resources and form a new organisation. When one business takes control of another business by purchasing a controlling interest in it. Several different types of mergers or acquisitions: Vertical Integration Aims to secure resource supply chains, service providers, or control of distribution networks by buying firms before and after them in the production process a. Backward vertical integration: When a business integrates with one of its suppliers e.g bakery acquiring a wheat farm b. Forward vertical integration: When a business integrates with a firm it sells to e.g the bakery could merge with a supermarket chain that sells its bread Horizontal Integration When a business acquires or merges with another firm that makes/sells similar products e.g if a bakery merges with/acquired by another bakery. - Expands growth Bigger customer base + market share Dominance Maturity Tayla Saab Cash flows and spending costs are stable Sales will peak and eventually begin to slow down Good relationship with customers: reliability and loyalty Rate of growth slows and eventually flattens out; an early warning sign of possible decline Saturated market: All potential customers who could be buying your product are buying it - Product differentiation Focussing on unique, distinctive characteristics or features of a product to set it above competing products. Company buys into new industry to mitigate risk and loss. E.g: wine manufacture purchases shoe shop Product diversification Post Maturity Renewal Expanding original market for a product by altering it to suit other consumer needs. E.g: new flavoured timtams. Increase in sales/profits; new products developed and expansion of business through merger/takeover Merger: Two businesses join together Takeover: One business buys out another business Steady State Continues to operate at the level it has been during the maturity phase. Decline/Cessation Business is losing business because; - Competition more aggressive - Failure to respond to external influences - Lost touch with target market - Declining sales/profits Responding to challenges at each stage of the business cycle Phase Challenges Strategies Establishment Establishment costs are high, but low/no sales means small revenue - Lack of finance - Poor business planning - Hard to break into market - Ineffective marketing strategies - Hard to build reputation - - - Growth - Business may expand too rapidly May be unexperienced in managing larger business More finance needed to sustain growth (larger space, more resources/labour) May lost direction and move away from core business activity - - Establish good communication with potential suppliers Closely study target market to navigate need for products Use low cost marketing (social media) Create a budget with specific allocation for supplies and marketing Reinvest any profit rather than drawing from it Attend management courses Regularly evaluate sales in order to continue satisfying specific customer wants May hire external manager Pay to prioritise content on social media or hire marketing manager Invest profit into equipment which will increase production and cash flow Ensure employees can satisfy needs of the business by continually training them - Maturity - Post-maturity - Fewer new customers sales no longer increase and profit remains steady Market share decreases Expenses must be reduced to maximize profit May be shortage in finances Decreasing profits Harder to borrow money Unsold stock loses value Employees may seek better career opportunities May face cessation Tayla Saab Hold regular company meetings which ensure core business goals are fulfilled - Gain a competitive advantage by getting into niche markets - Lower costs by outsourcing or finding lower cost suppliers - Focus on increasing sales, such as implementing rewards program - Maintain positive business culture where employees feel valued - Ensure continual employee training If undergoing renewal: - Evaluate past sales to maintain customer satisfaction and quality - Differentiate products - Create and stick to strict budget - Entice employees by offering better working conditions If moving to cessation: - Respect suppliers and alert them that business is closing - Use discounts and sales to maximise profit - Use advertising to make customers aware of closing sales - Track financial progress to ensure debts are managed and can be repaid - Thank staff for loyalty by ensuring they are fully paid. Factors that can contribute to business decline Two main causes of business decline: Lack of management expertise - Lack of sufficient money Undercapitalization occurs when there is a lack of sufficient funds to operate a business normally. - Without sufficient capital and positive cash flow, businesses are unable to purchase stock and materials. - Inevitably results in loss of sales and falling profits Business fails to prepare a business plan as the environment changes Owner does not fulfil roles/characteristics of a manager business declines as they are not fulfilling their important role Tayla Saab Voluntary and Involuntary Cessation Practice Question 1: Distinguish between voluntary and involuntary cessation Practice Question 2: Explain the stages of voluntary cessation of a business Voluntary Cessation Business owners make the decision to shut down operations and terminate the existence of the firm. Example: Bardot, Colette, Kiki K Stages: 1. Receivership An Independent party steps in and attempts the help the business trade out of debt as ordered by the Supreme Court. (If this fails, liquidation will occur) 2. Liquidation Business operations are terminated by selling all business assets for cash, to pay off any outstanding debts. Involuntary Cessation External party forces owners of a business to cease operations and terminate existence of the firm. 1. Partnerships and Sole Traders If business shuts down, owners are held personally liable for debts and creditors may sell assets for repayment. If owners are unable to repay financial obligations they are officially declared bankrupt. 2. Public/private companies Owners and shareholders are not held responsible for debts (limited liability) If debts to creditors/financers are repaid following liquidation, additional funds ae distributed to stakeholders. When company ceases operation it has gone insolvent Topic 2: Business Management Manager: An individual who coordinates the business’s limited resources in order to achieve specific goals and affectively coordinate key business functions. Practice Question 1: Describe the nine skills of business management Practice Question 2: Explain the importance of these skills in creating an effective management environment Skills of Management Skill Interpersonal Definition Work, understand and communicate with others and their needs. - Relate to people and their needs: communicate information and goals/ideas, motivate, lead and inspire Communication Exchange of information between people. (verbal or non-verbal) - Ability to guide, discuss and convey ideas and plans with others clearly - Develop relationship between employees and managers Motivate workers: maximum labour input efficient operation Strategic thinking Mental or thinking process applied by an individual in the context of achieving success. - Help plan activities and ensure progression, organisation, tracking and improvement of long-term goals Vision Problem soling Decision making Tayla Saab The clear sense of direction that allows people to attain a common goal. - Knowing business goals and where the business is headed - Motivates, inspires and encourages workers to accept changes and realise their goals Searching for, identifying and implementing a course of action to correct an unworkable situation. 1. Identify the problem and causes 2. Gather information 3. Develop solutions and alternatives 4. Choose one solution 5. Implement solution Identifying the options available and choosing a specific course of action to solve a specific problem. - Ensuring the best interests of the company and employees are considered Flexibility Anticipate and adjust to changing circumstances. - Be prepared to take risks and guide company and employees in the new direction - Proactive making change before the damage is done. - Making adjustments to maximise/take advantage of opportunities and minimise threats Adapt to change To recover from or to adjust to change, thrive on change and unexpected routines. - Provide a vision to where the business is headed and what is going to be achieved - Share vision with others and influence people to set and achieve goals Reconciling the conflicting interests of stakeholders Negotiate and settle the conflicting interest of stakeholders in an attempt to satisfy all their interests. - Engaging in discussions with stakeholders to establish common interests - Ensuring best interests of all stakeholders are considered in decision making - Consulting and compromising with stakeholders Topic 2: Business Management Achieving Business Goals Practice Question 1: Describe the four financial goals of a business Practice Question 2: Why might social and environmental goals be important in creating a good business reputation? Financial Goals Maximise Profits Increase Market Share Efficient allocation of resources in order to limit production costs/expenditure and maximise profit. - Minimise expenses through efficient allocation of resources for production - Increase revenue by rising prices and/or increasing the amount of products Market Share: The proportion of a market controlled by a particular company or product. To do so, businesses must take consumers from other competitors within the market. Maximise Growth - Innovation and improvement of products - Acquiring competitors (horizontal/vertical integration) - Convincing consumers from other businesses to swap to their brands Increasing the market share and the size of the firm. - Larger market share means more dominance over the market greater potential profit Increasing the size of the firm allows for greater production capacity greater potential profit Tayla Saab Share Price Increase profit can be reinvested in order to continue growth of the firm Price of shares sold on the ASX: A share is a part ownership of a public company. - Price is influenced by dividend paid and the future prospects for the company Low share price may make the company a target for a takeover; is often seen by potential investors as an indication the company is not doing very well Share price determines whether the company is vulnerable to a takeover (low price) Share price represents the current market value of the business They offer a form of capital for the business when sold Social Goals Community Service Provision of Employment Social Justice Voluntary, unpaid work done by a person/group intended to help others. Often completed within the local area to ensure the community is benefitted by the work. Helps to: - Build and promote a positive culture within a company - Promote teamwork in the workplace - Reduce stress and anxiety of employees - Builds a positive reputation for the business - Encourages consumer spending in the business Providing jobs for individuals in society. Society benefits if people are employed. - People have an income to go and spent money. Increased consumption leads to more revenue for companies, more employees hired, more spending and overall economic growth How human rights and equality is achieved in the everyday life off all people in society. Includes the treatment of: certain races (racism), ages (ageism), gender (sexism), religion and sexuality. Businesses should care about social justice because it: - Creates a diverse working environment where everyone is accepted - Promotes different groups to work effectively together - Reinforces a positive business culture within the workplace - Ensures employees feel a sense of belonging which in turn boosts their performance Environmental Goals Aim at ensuring the lowest possible impact on the environment through sustainable industrial processes. Emissions - Reducing gases and other toxins released into the air through power plants or factories in the production process over a certain period time Energy - Increasing the use of renewable energy rather than non-renewable energy in and attempt to lower the environmental impact Effluent and Waste - Ensuring careful treatment processes of liquid waste and sewage discharge in order to limit the effect on water ways and the environment Reducing the amount of waste generated in the production process Recycling - Increasing recycling of old/excess materials in an attempt to reduce the amount of harmful waste being sent to landfill or into the environment Sustainable Development - Economic development and business growth conducted without the depletion of natural resources Tayla Saab Achieving a mix of business goals - Businesses do not have one specific goal; they have a range of goals to cater for different stakeholders and consumers Managers have a mix of goals to try and achieve simultaneously; effective leadership qualities are used to do this Staff Involvement Involving staff in the decision-making process. Work environments where staff are given necessary skills and rewards see higher satisfaction levels, and better labour productivity. Innovation - Entrepreneur: innovative employee who takes on the entrepreneurial roles within a business. Businesses encourage an innovative business culture: recognise employees (main source of ideas) Employees feel as if their contribution is valued; encourages them to continue sharing their ideas with the business Motivation - The individual, internal process that directs, energises and sustains a person’s behaviour. Good managers should be good motivators, encouraging employees and using positive reinforcement to influence behaviour Individual employees respond differently to various motivational techniques. Creates a sense of achievement and belonging for the individual; ensures the employee remains satisfied and continues working at an efficient rate - Mentoring - Training - Process of developing another individual by offering tutoring, coaching and modelling acceptable behaviour. Ensures employees are aware of expected/acceptable behaviour and creates belonging increased work efficiency Boosting knowledge and skills to teach staff how to perform their job more efficiently and effectively Teaching new employees what the business expects of them helps strengthen their dedication and commitment to the business. The goal of training is to improve employee productivity and strengthen their dedication and commitment to the business Management Approaches Practice Question 1: Describe the main functions of management in a classical management approach Practice Question 2: Explain how the classical organisational structure and leadership style may impact on employees Practice Question 3: Compare and contrast between the classical and behavioural management approaches Classical/Scientific Approach Planning (primary function of management) Preparation or predetermined course of action for a business to achieve both short and long term business visions and goals. 1. Strategic (long term): Planning for the following 3-5 years - Assists in determining where in the market the business wants to be and what the business wants to achieve in relation to its competitors 2. Tactical (medium term): Planning for the next 1-2 years - Assists in implementing strategic planning and allows the business to respond quickly to change; planning flexible/adaptable with emphasis on goals and allocation of resources 3. Operations (short term): Weekly/daily planning - Provides specific detail about the way the business will operate in the short term Organising Tayla Saab Organising the financial, human and material resources to achieve the goals of the business. Managers must put into practice goals determined at the planning stage. 1. Determining the work activities: Breaking down tasks into smaller more achievable steps 2. Classifying/grouping activities: Similar activities are grouped together to improve efficiency and enable the most appropriate allocation of resources 3. Assigning work and delegating authority: Determining who will carry out the work and who is responsible to ensure the work is carried out. Controlling Compares what was intended to happen with what has actually happened. - Establishes standards in line with the goals of the business, measuring performance of the business against these benchmarks - Changes are made where necessary to ensure the goals of the business have been maintained The control process: 1. Establish standards: In line with the firm’s goals and influence from employees, management, industry and government 2. Measure performance: Determine how comparisons will be made against standards or benchmarks 3. Take corrective action: Changing activities, processes and personnel to ensure that the goals of the business have been met Controlling methods 1. Quality control: Involves inspections, checking finished products and detecting and removing any components or final products that do not meet the required standard - Can result in considerable waste as sub-standard products are scrapped 2. Quality assurance: Quality control before and after production - Helps reduce wastage as it seeks to stop faults during the design rather than production stage 3. Total quality management: Concerned with encouraging all employees to think about the quality of everything they do - Places consumers at the centre of the production process Behavioural/Participative Approach Leading A manager’s leadership style is their way of doing things – their behaviour and attitude Autocratic (classical): Manager makes all decisions, dictates work methods and frequently checks employee performance Democratic (behavioural): Stresses that employees should be the main focus of the way in which the business is organised. Manager consults with employees, asks for their suggestions and seriously considers their best interest when making decisions. Motivating Communicating Concerned with energising and sustaining an employee’s behaviour to ensure they continue working at their most effective rate. Managers: - Use positive reinforcement for work - Give good feedback and recognition for the work done Concerned with the way in which managers and employees interact with each other to share directions, information and ideas. Involves managers in: - Effectively presenting and sharing ideas with other workers - Communicating directions clearly to employees in order to get them done properly - Being able to relate and empathise with workers and understand their situation Leadership style and organisational structure Tayla Saab Organisational Structure Classical/scientific Behavioural/participative Hierarchal Management sets out how the people in the business are to interact in order to achieve the goals of the business. Flattened A flattened management structure is more flexible. There are less levels of management and decisions are made collaboratively with all workers. • • • • • • Level of control/responsibility/accountability decreases as going down pyramid Long decision making many stages One way communication: top to bottom Employee has no autonomy Planning, ideas: upper/middle management Strict responsibilities Autocratic decisions made directly from management in terms of how and what to do. Important for inexperienced employees. Leadership style Span of control (narrow) employees are not trusted to carry out tasks independently, and are closely supervised. Chain of Command long, rigid chain of command Centralized decision making is centralized under higher levels of management Division of labour specialized people for effective, efficient work. May lead to increased costs if people cannot fill in for other duties • • • • • Level of control/responsibility/accountability is equal for all workers Decisions are made quickly less stages of management Communication is faster Allows businesses to adapt quickly Recognises workers are an important asset for ideas Democratic The opinions of employees are valued and considered. They have a large say in the decisions which are made however final decision is still made by upper management. Span of control (wide) Laissez-fairre - complete trust in employees to carry out tasks with little supervision Chain of Command short, flexible chain of command Decentralized decisions are made by teams rather than higher authorities Division of labour Multi-skilled: people are trained in various areas and can fill in for other roles Contingency Approach - Allows the business to adapt quickly to change by responding to the current business conditions in an appropriate way Either/or a combination of the classical and behavioural management approaches Advantages/Disadvantages of management approach Tayla Saab Classical/scientific - - Advantages - - Allows for inexperienced workers to be closely supervised and mentored by someone of higher power There is a clear line of control and authority where workers always have someone to report too Ensures that the best decisions are made, as they must be considered by many people first Clear communication Increases output Behavioural/participative - - - - - - Disadvantages - - Some workers may feel underappreciated as they do not have a large say in decisions Decision making takes a long time as it must go through many stages Low worker satisfaction Hard to respond to changes in environment Inflexibility May discourage innovation and creativity Specialized division of labour may lead to increase costs if already employed people cannot fill in for other duties - - - Workers feel valued in knowing their opinion matters and is considered this leads to higher work productivity Allows for better interaction between workers in a collaborative matter, which encourages communication skills Encourages a creative environment where workers can openly share individual ideas, which are then adapted to suit certain situation Improved relationship between employees and staff It may lead to procrastination where individuals do not work efficiently as they believe someone else on the team will do it It does not guarantee the best possible solution is made, as decisions are decided upon by groups rather than a higher authority It may take time to reach a consensus where the best interests and opinions of everyone are considered Contingency - - - - - - - - Allows managers to change the policies according to the situation Helps the manager enhance their leadership and decision making skills Provides options to the employees, helps them to grow and share their ideas to the business Recognises different situations demand different approaches Acknowledges there is no one best way Adapting to constant changes in the business environment can be challenging for management The process of selecting alternative courses of action depending on the situation can be costly in terms of time and money May be costly to continue changing approaches causes confusion Operations Practice Question 1: Explain the benefits of quality management Practice Question 2: Describe the production process Operations refers to the business processes that involve the transformation process of inputs outputs or, more generally, ‘production’. Operations management consists of all the activities in which managers engage to produce a good or service and will directly affect a business's competitive position. It helps to: - Establish the level of quality of the good or service - Tayla Saab Influence the overall cost of production, given that the operations function is responsible for the largest part of a business's capital and human expenses Determine whether sufficient products are available to satisfy consumer demand. The operations management function/process influences - Quality, cost and availability of a business's goods or services. Impacts whether the business achieves its other main goals (maximise profits, market share, or growth) Goods and/or services Goods Tangible object can be physically held Inputs: raw materials/resources Transformation process: Little human intervention; Usually unseen by customers (in factory). Services Intangible object activity performed for clients by someone else Inputs: humans/labour Transformation process: Service delivered by people; Visible (usually done in front of customers) Many businesses today produce a combination of both manufactured goods and services. The Production Process (Transformation Process) Inputs Resources used in the process of production. (My mum is tall, loving, caring) 1. 2. 3. 4. 5. 6. Processes Material Inputs: Capital equipment: Labour: People involved in the operation function. Information: Used for transformation process. Time: Efficient use are critical to all businesses. Money: Generally considered to be the most flexible. Can be easily converted into any quantity or combination of materials, capital or labour. Transformation process: conversion of inputs (resources) into outputs (goods or service) Transformation can include: - Computer Aided Design (CAD) - Computer Aided Manufacturing (CAM) - Hand-made (more expensive labour intensive) Outputs Final result of the business’s efforts (the good or service that is delivered to the customer). Outputs must always be responsive to consumer demands. ETM: are manufactured goods that are highly processed and valued. They are complex because of the amount of value-added processing they have undergone STM: (simply transformed manufacturers) are characterised by their ability to be further processed in a wide range of processes. Due to the limited amount of transformation they have undergone, STMs have a small amount of value added. Quality Management Quality CONTROL Quality ASSURANCE REACTIVE - Product orientated - Interested in product yield PROACTIVE - Process oriented - Interested in process yield Tayla Saab Total Quality Management - Product line function - Staff function PROACTIVE - Process oriented - Interested in continually improving processes - Staff function - Identifies flaws/defects - Looks for cause/prevents faults - Improves process to prevent faults - Focuses on tests and inspections carried out at various checkpoints guarantees output’s correctness - Focusses on selection of tools, testing methods and operator training, apply a planned/systematic production process to prevent defects - Focusses on continually revaluating processes and changing them so they work more effectively for business and customer - Problem, identification, analysis and feedback - Data collection, problem trend analysis, process identification and improvement - Continually re-evaluating data and improving process; every member of staff trained in maintaining quality - - ‘Best practise’ find processes best suitable by scanning what other business do ‘Kaizen’ management 1. Just in time inventory management 2. Statistical process control 3. Quality circle AIM: Offer highest reasonable quality of product possible and ensure no defected products leave factory AIM: Produce products of at least the same quality of competitors, if not better to sustain competitive advantages AIM: Improving already-developed processes to decrease manufacturing faults and defects Note: Reactive: Responds to problem after it has already occurred Proactive: Attempts to prevent problem before it has occurred Yield: Amount of defective products in comparison to total amount produced Marketing Practice Question 1: Practice Question 2: The total system of interacting activities designed to place, price, promote and distribute products to present and potential customers. Aims to find out what customer want and then attempt to satisfy their needs. Identification of the target market Target market refers to a group of potential customers within a business’ entire addressable market who share the same characteristics. Approaches: Tayla Saab Mass Marketing Market Segment Seeks to mass-produce, mass-distribute and mass-promote one product to all buyers. - One type of product (little or no variation) - One promotional program aimed at everyone - One price/distribution system to reach all customers Eg: basic food items, water, gas, electricity Segments market so it can direct marketing strategies to a specific group of customers - Ultimate aim to increase sales and profits - Better understanding/response to desires of target customers Demographic Population characteristics - Niche Market Age Gender Education Family size Income Occupation Social class Religion/ethnicity Geographic Where people live - Urban Suburban Rural Regional City size Climate Landforms Lifestyle People’s attitudes and values - Lifestyle - Personality - Motives - Socioeconomic group - Consumer opinions - Interests Behavioural Loyalty to a product - Purchase occasion - Benefits sought - Loyalty - Use rate - Price sensitivity A narrowly selected target segment within a market: ‘micro-market’ Segment 1 Segment 2 Segment 3 Niche Market Marketing Mix Marketing strategies are actions undertaken to achieve the business’s marketing goals through the marketing mix Product - Product are goods or services and consist of tangible and intangible features Determines products quality, design, name, warranty and guarantee Packaging Development of a container/ graphic design for a product; The packaging of a product assists sales Packaging helps preserve, inform, protect and promote the product Needs to satisfy needs of consumers and provides a sense of security/prestige Branding Graphic representation that identifies a business or product E.g ‘golden arches’ symbol is used by McDonald’s in some ads brand name doesn’t appear only brand symbol Positioning How does your product differentiate from the competitors product in the market Tayla Saab Price - Determines monetary value of a product as set by a business Must allow businesses to recover costs and make a profit Must compete against competitors whilst being affordable to the needs of target market Depends on positioning, price as charged by competitors, product lifecycle and market conditions Pricing Strategies Penetration pricing Setting low price to enter the market and establish large market share E.g: When entering a market with already recognised brands Price skimming Charging high prices E.g: Apple people willing to pay more for quality, brand name, etc Loss leaders Selling one product at a lower price to atttrcat customers who may purchase other products E.g: Coles $1 milk and bread Price points Specific prices at which customers are more likely to buy a product for psychological reasons E.g: $99.00 rather than $100.00 Discounts Where the normally quoted price is lowered for buyers E.g: Products that are slow to sell - Promotion Calculating Price Cost based Total cost of producing product + profit mark up Market based Based on levels of supply and demand whatever market is prepared to pay Competition based Below, equal or above competitors prices Concerned with communicating with potential customers in an effort to generate sales. Methods used by a business to inform, persuade and remind customers about its products Personal selling Salespeople communicating directly to customers about the product in an attempt to make a sale Sales promotion Activities or materials used by the business to attract interest and support for products through benefits of incentives for a limited time E.g: Free samples Publicity Effectively generate positive attention and exposure for the business and product for free Advertising Print or electronic mass media are used to communicate a message about the product Tayla Saab Refers to the distribution channels used to move finished products or supply services to the final customer. Place Producer to consumer Simplest channel and involves no intermediaries → virtually all services, from tax advice to car repairs, use this method Producer to retailer to consumer A retailer is an intermediary who buys from the producer and resells to customers → this channel is often used for bulky or perishable products such as furniture or fruit Most common method used for the distribution of consumer goods → a wholesaler is an intermediary who buys in bulk from a producer, then sells in smaller quantities to retailers Producer to wholesaler to retailer to consumer Human Resources Acquisition - 1. Planning: Identify staff needs; job analysis (determining the exact nature of the position to be filled) 2. Recruitment: attracting people to apply for the position in the business Hiring new employees Internal: Filling job vacancies with present employees rather than looking outside the business External: Filling job vacancies from people outside the business Type Positives Internal 1. Less expensive: reduced advertising costs 2. Quicker process: less applicants, known 3. Motivator for employee productivity 4. Applicants are familiar with business culture and goals 5. Safer option: trusted/known employee External 1. New ideas and perspective 2. May be more qualified/differing experience 3. Rapid business growth: increased employee numbers 4. Range of applicants to choose from Negatives 1. Internal conflict with unsuccessful applicants 2. No fresh perspective/less diversity of experience 3. No one may be suitable External recruitment needed to fill previous job spot 4. Limited to applicants within business 1. Costs associated with advertising the positions 2. Applicants are unknown: don’t know culture/goals 3. Increased induction and potential training costs 4. Tension in the workplace: lack of recognition for current employees 5. Development of trust/relationships with other employees 6. Longer process 3. Selection: choosing and hiring the most appropriate applicant (testing/interviewing) Training 1/ Induction and training - - Improving skills and abilities Teaching employees new skills and helping the learn tasks associated with their jobs Develop and maintain skills Tayla Saab Type Positives Internal 1. Less expensive: can conduct more often 2. Quicker process/convenient 3. Tailored specifically to business needs 4. Remains at work --. No need to hire replacement 5. Minimal disruption to business productivity External 1. More qualified instruction (up to date, contemporary) 2. Higher qualifications (TAFE) 3. Gain new external experience 4. Meeting new people Negatives 1. Less professional less resources, training, qualifications 2. Less access to contemporary training 1. 2. 3. 4. 5. 6. 7. More expensive Travel time may be long Time consuming More time off the job Not tailored Cost of replacements Disruption to work schedule and productivity Benefits of training for business Increased efficiencies in processes resulting in financial gain Increased capacity to adopt new technology and methods Increased innovation in strategies and products Goals + objectives easily met Increased monetary benefits to employees more job satisfaction, productivity, etc 2/Development: The process of improving the skills, abilities and knowledge of staff Maintenance Employment Agreements Motivating employees to remain within the business Legally binding, formal agreement between an employer and an employee. Modern awards Provide minimum wages and working conditions for employees specific to their industry Advantage Disadvantage - Covers all employees - Can be inflexible; may not suit performing similar jobs all employees - Sets minimum pay and - Prevent recognition of all conditions employee efforts (you work harder but get same pay) Enterprise Agreements Workplace agreement negotiated collectively through enterprise bargaining between employers and employees. Advantage Disadvantage - Possibility of improve pay - More time consuming: meeting conditions with individual - Motivation to employee greater productivity - Greater flexibility Common law Contracts Simple agreement between an employer and employee, enforced through court of law - Must satisfy BOOT test Advantage Disadvantage Flexibility to meet varied needs - Unfair bargaining position may of individual/firm exist: exploitation - Individual initiative rewarded motivation - Tayla Saab Expense of any court case if either party sues Monetary benefits Rewarding employees efforts through financial compensation: pay rates Non-monetary benefits Rewards such as conditions: fringe benefits 1. Family, medical, sick, maternity leave Separation Voluntary Employees leaving the business Employees leaving on own accord/free will Retirement Individual decides to leave the labour force - Resignation Formal statement of an individual’s intention to leave a job position - Redundancy Must give sufficient notice of 2-4 weeks depending on employment type A person’s job no longer exists due to change in operational requirements - Involuntary No retirement ages 65 years old: access pension/superannuation Technological change, insolvency Employees being asked to leave due to reasons beyond their control Dismissal With warning 3 warnings Summary on the spot (intoxication, theft, assault) Unfair Retrenchment Dismissal as there is not enough work to justify paying the individual - When redundancy occurs and there is no other job for them to change too Finance Concerned with where the business sources its funding - Contingencies: unanticipated events that can lead to financial difficulty Equity finance Internal finance - Owners contribution (from savings, etc) External equity finance: 1. Shares in a public company 2. Venture capital Debt finance External finance - Financial institution (bank) - 2 types; 1. Short term: paid within 12 months 2. Long term: 5-30 years Tayla Saab Accounting Financial management tool involved with recording and analysis of all business’s financial transactions Assets = liabilities + owners’ equity Assets Provide the opportunity for the business to generate future economic benefit Current Non-current Liabilities Money lent to the business by people other than its owners - Claims on business assets Owners’ Equity Money or capital put into the business by its owners Assets: Converted into cash within 12 months (liquidated) Liabilities: Owned and paid off within 12 months Assets: Used and liquidated in more than 12 months Liabilities: Long term debt; more than 12 months to pay off Financial Statements: Balance sheet Balance Sheet Measures the overall worth of a business; statement of the businesses assets, liabilities and owner’s equity at a set period in time - Shows the overall financial stability of the business Balance sheet should always balance Assets must equal liabilities Assets = liabilities + owners’ equity (A = L + OE) - Written in order of liquidity/how long to pay off Assets Current Cash Accounts Receivable (debtors) Inventories Non-Current Office equipment Fixtures and fittings Buildings and land Investments Plant and equipment Motor vehicles Goodwill (value of reputation) Trademarks/Copyrights/Patents Liabilities Current Overdraft Accounts payable (creditors) Credit card Non-Current Loans Bank loans Debentures (public companies) Mortgage Owner’s Equity Owner’s capital Retained Profit Less: Drawings Income statement Income All revenues (income earned) and expenses incurred over a period of time (revenue) - Important as it indicates profitability of a business statement Expenses: Selling (salary, advertising, wages) - Administrative (rent, insurance, accountant) - Financial (interest, lease, dividends) COGS Gross Profit Net Profit Opening stock + purchases – closing stock Sales – COGS Gross profit – expenses Tayla Saab Cash flow statement Cash Flow Indicates the movement of cash receipts (inflows) and cash payments (outflows) over a period of time Statement Total cash flow = Opening balance + inflows – outflows - Closing balance becomes opening balance for next period - CASH ONLY NO CREDIT E.g: no accounts receivable as money has not been received May have cyclical/seasonal flow of funds: predictable times when cash flow will be high Liquidity: Amount of cash a business has access to and how readily it can convert assets into cash - whether a business has an adequate/positive cash flow cash available meets payments due - to remain liquid, a budget or cash flow forecast/prediction should be created - owners should retain cash reserves when cash inflow is high Cash inflows - Cash sales - Debtor payments/accounts receivable - Interest received from investments - Sales of assets - Rental income - Dividends on shares owned Strategies for managing cash flows: - Discounts for debtors for early payment - Penalties for late payment - Leasing assets instead of buying - Staggering large annual payments into a series of smaller/regular payments - Prepaying some expenses where possible Cash outflows - Expenses (advertising, wages, electricity) - Dividend payments - Stock purchases - Repayments to owners - Capital purchases - Taxation - Just in time inventory; no storage costs Factoring of debts Supplier discounts; paying creditors early More income stream to increase cash flow Credit cards when cash reserves are low Lease rather than buy equipment Importance of cash flow statement: - Identify periods of cash shortage so action can be taken - Identify periods of cash surplus to plan expenditure and cash retention - Secure additional finance if needed, e.g: loans Consequences of cash flow problems: - Relationships with suppliers deteriorate: can’t pay trade credit - Workers may leave: can’t pay wages - Cease trading In the short term, cash is more important than profit – without cash, businesses cannot pay short term debts to be profitable Cash flow forecasting and budget predictions - Form of business planning - Allows to predict cash surplus and deficit plan spending accordingly - Comparing estimated spending to actual results allowed for comparison, more accurate future predictions and corrective action to be taken Good will Creditor Debtor Inventory Overdraft Intangible asset; added due to saved profits, good customer base and reputation Person or company to whom money is owed Person or company that owes money Another name for stock Short term debt which allows a business to overdraw their cheque account by a bank Tayla Saab Ethical Business Behaviour “Triple Bottom Line’ Business focus on people (social), planet (environmental) and profit, rather than just profit Ethics The study of how a business should act in the face of ethical dilemmas and controversial situations. Standards to business behaviour such as; - Fair and honest business practices - Decent workplace relations - Conflict of interest situations - Accurate financial management - Truthful communication Ethical behaviour Acting in ways consistent with what society and individuals typically believe are acceptable values. Social responsibility Linked to ethical responsibilities. Socially responsible businesses try to achieve two goals simultaneously: - 1. Expanding the business 2. Providing for the greater good of society Longer costs in short term, however increased benefit in long term Higher customer retention; more emphasis on environmental protection/sustainability = increased revenue/profit Some businesses may not adopt ethical practices due to increased costs new technology usually responsible for creation of environmental production processes; may be seen as unnecessary expenses Consequences for unethical behaviour include bad reputation and publicity may decrease revenue/profitability Code of conduct may be implemented to set ethical standards for managers and employees Management and Change Responding to internal and external influences Internal Factors affecting business operations which can be controlled by managers. - Product, location, management, resources, business culture External Factors which cannot be controlled by businesses, but affect their operations - Economic, geographic, social, legal, political, institutional, technological, markets E.g: Quantas Response to Coronavirus - Asked employees to take their leave; cut around 6000 jobs - Reduced flights available - Increased costs on cleaning and hygiene expenses Managing Change Effectively - Change for a business is disruptive and expensive managers must be proficient in change management - Managers aim to maximise benefits brought by change and minimise downsides and disadvantages 1. Identifying the Scan external business environment for trends. Businesses may use BUSINESS INFORMATION need for change SYSTEMS (BIS) - A process that provides information vital to manage a business in a highly effective manner Digital information contained in databases, websites, online surveys, financial systems and spreadsheets Tayla Saab - Identifies and produces reports on trends in the key business functions IT department responsible Importance: analyses internal business data; falling profit levels, slowing sales figures, poor employee motivation - Improvement of product and services: shows what products are being sold the fastest and most aim to develop or improve existing products to further satisfy the target market. - Information storage: businesses can track progression overtime; enables simple storage of operations data and eliminates expense and time of manually storing records - Simplified decision making: businesses can analyse trends in data to make decision making easier; firms are able to respond and adapt quickly to dynamic business environment - Employee communication: Easy flow of information between management and low level employees; limits miscommunication between worker as files are easily stored and accessible 2. Setting achievable goals - 3. Reduce resistance to change In order to implement change, managers must set goals and targets that employees can strive for and feel satisfied upon reaching vision statement Goals are usually set on a yearly basis Reassessment of goals allows management to detect changes and progress needed Creating a culture of change: - Change agents/management consultants support employees in establishing a new, positive and supportive workplace culture - Seek feedback and employee engagement - Recognize employee reactions to change and understand employees willingness to change Reasons for resistance to change: 1. Management - Some managers make hasty decisions that are poorly timed and unclear - Other managers may be indecisive and create uncertainty - This causes employees to lose confidence in the management’s decision-making abilities 2. Fear of job loss - Fearful if changes threaten their job or status - Resist or disapprove new processes if they feel the result will be forced redundancies and loss of control/power - E.g; technology/capital takes over labour 3. Disruption to routine - Employees are worried they cannot adapt to new procedures Made worse if training is not provided 4. Time - Not enough time to thin accept and implement changes 5. Fear of the unknown - Feeling of lack of control, unknown and uncertainty may lead to anxiety Worsened due to poor leadership and management 6. Inertia - Unenthusiastic response to proposed changes Business remains rigid rather than being open to change Employees do not want to venture ‘out of their comfort zone’ Complacency; status quo 7. Cost - Businesses must contemplate costs and benefits of change e.g: David Jones's recent successful upgrade of its network of stores cost $275 million to increase its floor space by over 20 per cent. Tayla Saab 4. Management consultants Specialized industry professionals who help organizations improve their performance through an analysis of existing problems and the development of plans for the future. Management consultants have specific skills, expertise or knowledge that is not possessed by the business’ managers such as: - Strategic vision on the industry within which the business operates - Experience from other businesses that have gone through similar change - Access to technology or processes that will assist with the change - Expertise in developing communication and Human Resource management strategies to assist staff through the change process Expertise in redundancy or retraining Change Models Created in 1940s by Kurt Lewin Unfreeze/change/ refreeze model 1/Unfreezing 2/Changing 3/Refreezing - Identify reasons for change create awareness of need for change Convince/persuade shareholders of the benefits of change Early adopters/change agents: employees in the business who receive training to support change - Management consultants: external people hired to assist change IMPLEMENTATION - Hardest step (fear, uncertainty) - Education, training, time - Remind of the benefits positive reinforcement of accepting change - Staff must understand the need for the change and agree to the steps - Change is completed; new rules/procedures established and formalised - Reinforce the change - Change is accepted - Change is cemented Advantages - Easy to understand; businesses don’t need external helpers or consultants - Focusses on behaviour and human element Disadvantages - Too simple; not guided enough - Too rigid; doesn’t reflect modern times where behaviour is constantly changing Tayla Saab Force field analysis Driving forces: Push towards the need for change Restraining forces: Hold the business back and resist any change - If these two forces are in equilibrium then no change can come about If driving forces are stronger, change is inevitable If restraining forces are strong, the business must weaken restraining forces Management must identity positive forces effective management skills create a positive culture for change - Motivate and communicate with staff, encourage participative decision making, provide training and counselling, enter into negotiation and possibly manipulate or even coerce - Retraining programs, work teams, flatter management structure can resist change Advantages - Helps to identify obstacles that lie ahead - Provides a visual/graphic summary of forces for and against change Disadvantages - Management ratings for driving/restraining forces may be unrealistic and dismissive of employee resistance Topic 3: Business Planning Small to medium enterprises A SME is a business who hires fewer than 200 people (non-manufacturing) or fewer than 500 people (manufacturing). - Other measures which indicate whether a business is a SME includes number of employees, type of ownership, sources of finance, legal structure, market share and management structure Role of SME’s - Provide the majority of private sector employment - Produce about half of Australia's total yearly production - Exporting - Account for 20% of money spent on Research and Development - Provide a wide range of products used by large businesses - Earn profits and pay taxes Tayla Saab Economic Contribution of SME’s GDP Employment GDP: total value of all goods and services produced by an economy within a period of time. Economic growth occurs through an increase in national GDP - Indicator of economic growth and whether populations needs are being met - Contribute to around 50% of Australia’s GDP - Small businesses employ 44% of the total workforce more than medium (24%) & large (32%) - Employment keeps the economy healthy: employed Australian’s use their income to purchase goods and services (circular flow of income) - Contribute to taxation revenue: Businesses and their employees pay tax - Taxation is used to provide collective goods and services that benefit the whole community increased tax allows for a rise in government expenditure Balance of payments (BOP) Country’s trade and financial transactions with the rest of the world over time, usually one year. Flow of funds in and out of a country - If exports are greater than imports, balance of payments and economic growth occurs - SMEs are more successful in exporting because they are highly adaptable and flexible in meeting the needs of overseas markets. - The number of SME Australian exports is growing faster than large exports. - SMEs in agribusiness, manufacturing and services are all experiencing rapid export growth. Invention and innovation - SMEs are the main source of invention and innovation in Australia. Account 20% of money spent on Research and Development This results in improved efficiency and increased productivity, improving GDP and economic growth. Half of the major technological advances of the twentieth century can be attributed to SMEs. Success or failure of SME’s Success of failure is usually caused by a combination of several factors: Success - Focus on niche market - Reputation - Entrepreneurial abilities - Flexibility - Access to information Failure - Failure to plan (marketing, financial, HR) - New competitors - Economic downturns - Suppliers, partnership and staff difficulties - Lack of access to information - Incorrect pricing, marketing, record keeping - Negative cash flow and lack of sales SME Failure rates After 1 years: 25% 2 years: 42% 3 years: 54% 4 years: 64% 5 years: 71% Tayla Saab Influence on establishing an SME 1/ Personal skill Qualifications Formal piece of writing that says you are skilled in this area - Qualification can increase chance of business success - Confidence to customer that you are eligible to provide product/service - Does not reflect competency Skills Competency, capability, capacity - Attained through experience, education and/or training - Leadership/management, communication, planning - Problem solving, financial management, interpersonal, flexibility Motivation Personal drive, determination and desire to achieve a goal or objective - Long hours, stress and responsibility - Motivated by profit, creative control, own boss Entrepreneurship Someone who starts, operates and assumes the risk of a business venture in the hope of making a profit - Coordination of economic resources, materials, labour and capital to achieve business objectives - Skills involved in risk taking behaviour in order to generate profit - Cost benefit analysis Cultural Can arise from a community’s traditions and beliefs, such as the ‘work ethic’ — the background willingness to work long and hard in an effort to be successful — which is strong in many European and Asian cultures. - 1/3 of SME’s owned by migrants - Qualifications may not be recognised Gender 2/ Sources of info Men and women - Changing social attitudes 33% owned by women Professional Advisors - Accountants, solicitors, bank managers, management consultants Government Agencies - Local: land zoning, subsidised land and consider development applications. - State: provides funding ($18 million Boosting Business Innovation Program) - Federal: business.gov.au/departments (info on establishment, operations, planning, exports) Other Sources - Chamber of Commerce: legal, financial, tax advice, explanation of legislation + training/seminars - Trade associations: information on product development and industry trends - ABS: Data on social, economic and demographic trends assists the business owner in analysing and understanding changes to the external environment 3/ Business idea Concept that makes money; centred on a good or service - Needs to appeal to a target market be relevant Identify a gap in the market unique and original Must be innovative to attract customers leading to profitability Tayla Saab 4/ Establishment options New, existing or franchise business NEW Description Advantages Disadvantages Entrepreneur establishes new business - Freedom/control of decision making - Usually the cheapest option; no goodwill or franchise fee - Avoids poor reputation - - 5/ Market considerations Funds limited and obtaining finance is more difficult Risk; may not break even or make profit Poor cash flow in establishment stage Time needed to build customer base EXISTING Buy pre-existing business from owner - Established customer base with immediate cash flow - Employees and suppliers in place - Established trade credit - Easier access to finance - - More expensive; goodwill Inherit any bad reputation Uphold/exceed existing image and standard Business may be overpriced FRANCHISE Gives rights to market product/trademark - Known business name and product - Established market for product - Franchisor provides training - Proven successful business formula - Easier to obtain finance - Expensive franchise fit outs - Expensive initial purchase + royalties - Ongoing operation rules; create less independence - Franchisor has say in location Crucial questions 1. What good/service will be sold? 2. What is the most suitable price for the goods/service? 3. What is the most appropriate location for the business? Market analysis - Collects, summaries, analyse information about market, customers, threats, opportunities, advantages and disadvantages a business has over competitors Pricing Methods - Cost based, market based, competition based Zoning - Determines where businesses can operate sets aside commercial and industrial zones and ensures business location prevents disruption of residents Tayla Saab 6/ Finance Internal/external source of finance + cost of finance Equity finance Internal finance - Generated from business itself (sales and revenue) - Owners contribution (from savings, etc) External equity finance: - Shares in a public company - Venture capital 7/ Legal considerations Debt finance External finance - Funds provided by sources outside of the business - Financial institution (bank) - 2 types; Short term: paid within 12 months Long term: 5-30 years Advantage No increase in debt and No interest Disadvantage A limited source of funds Advantage No increase in debt and No interest Disadvantage A limited source of funds No new shareholders to share with (profits or control) Might be wasted No new shareholders to share with (profits or control) Might be wasted - Legal obligation to observe the statutory regulations when commencing and operating a business. Businesses that do not obey the law risk losing customers and their reputation, being fined, or losing the right to continue trading. Law/regulation Registering business name Zoning Description - Prohibit anyone else from trading under a similar name - Unique identifier for customers to find and connect with business - Work health and safety regulations - Determines where some types of businesses can operate. Designed to keep business activities separate from residential areas and prevent householders being disturbed by businesses operations The process sets aside commercial and industrial zones and it is in these areas that most SMEs will operate. Must be followed in order to obtain an operating license; specifically for businesses dealing with food Work Health and Safety Act (2009) Public Health Act (2010) Tayla Saab 8/ Human Resources Employee costs Employee skills (wage & non-wage) Skilled employees are more productive and create wealth Employers can either: provide training to improve the skills of existing employees OR Recruit people who have the required skills The total cost of an employee is not solely the wage or salary paid. There are other employee expenses known as ON-COSTS The main ON-COSTS include: WHS requirements Workers compensation Long service leave Sick leave Superannuation Holiday pay Leaving Loading Study leave Maternity and paternity leave Superannuation - A required scheme set up the Federal Government - 9.5% of their employees’ earnings for retirement or leaving a job Annual Leaving Loading - 17.5% is added to an employee’s holiday pay - The amount is calculated on the four weeks’ annual leave to which each fulltime, permanent employee is entitled 9/ Taxation A compulsory payment of a proportion of earnings to the government Tax Income tax (pay – as – you – go): Imposed on the employee Taken from the employee’s salary or wage directly Progressive tax rates - More you earn, more tax Goods and services tax (GST) Levied by: Fed Gov Fed Gov A broad-based tax of 10 percent on the supply of most goods and services consumed in Australia One of the state’s purposes for the introduction of the GST was to make it more difficult for businesses and individuals operating in the ‘cash economy’ to avoid tax Fringe benefits tax (FBT) Tax on the provision of a benefit to an employee — such as cars for private use, low-interest loans, entertainment expenses, and housing and accommodation — in place of salary or wage Paid by the employer at a rate of 47 per cent of the value of the benefit provided Stamp Duty A tax levied on the transfer of property (e.g. businesses, real estate and shares) Fed Gov NSW Gov Land tax A tax on land owned by individuals or businesses over a certain value (in 2013 it was $412,000 or more) Land used for primary production or an individual’s primary residence are exempt from land tax Payroll tax Tayla Saab NSW Gov NSW Gov Payable on wages paid by an employer to their employees on payrolls that exceed $750,000 at a rate of 5.45 percent (2013) Input tax credit: is an allowable tax deduction that a business can claim for any GST included in the price of business inputs Business activity statement (BAS): records a business’s claim for input tax credits and accounts for GST payable Australian Business Number (ABN) o A single identifying number that a business uses when dealing with government departments and agencies o Allows businesses to participate in the GST system Local Government Rates and Charges Property rates is the main local government charge a business will face. Other taxes include: water and sewerage waste management services development and building approval fees parking permits
