Unit 1 Outline
• Module 1: Innovations and Entrepreneurs
• Module 2: Small Business
• Module 3: Marketing
• Module 4: Accounting
Reasons for
establishing
a small
business
Module 2
Factors
leading to
success or
failure
Establishing
a Small
Business
Sources of
finance +
preoperational
decisions
Session 1: Learning Intentions
• Define a small business
• List the reasons for owning a small business
• Identify the alternatives to establishing a small business
• Identify the resources required to establish a small
business
• Distinguish between businesses based on the nature of
their operations
• Identify and explain the advantages and disadvantages of
various ownership structures
• Explain why some small businesses succeed where others
fail
Module 2 Timeline
Week 3
Week 4
and
Week 5
• Module 2: Slides 1-32
• Assessment: Element 3
• Module 2: Slides 33 - 65
• Assessment: Element 4 and 5
What is a Small Business?
• Small businesses are businesses owned and
managed by the same person and employ fewer
than 15 people.
• They represent 96% of all private sector businesses.
• How many private sector small businesses exist in
Australia?
• 2.3 million!
Small vs Medium vs Large
Size of
Business
Employees
Small
< 15
Medium
Large
15 - 199
> 200
Brainstorm 3 businesses you know
that would fit each size description.
Why is the Small Business sector
important?
• Small businesses employ almost 5 million people
nationwide.
• This is half of all private sector employment!
• They also contribute strongly to Australia’s level of
economic activity and production, exports and tax
revenue.
Owning a Small Business
Reasons for owning a business include:
• the profit motive
• a desire for greater independence
• the identification of a market opportunity
• employment
Owning a Small Business
Most successful business owners are experts in
their field, entrepreneurial, determined, confident,
cordial, patient and willing to recognise their own
limitations and seek assistance
Risks of Small Business
There are costs and risks associated with starting a
small business:
• Extra responsibilities (longer work hours and stress)
• Loss of a secure income and other benefits (such as
annual leave, sick pay and employer-funded
superannuation)
• Risk of investing own funds – if the business fails,
personal investment funding will be lost
Alternatives to Owning a Small
Business
Since small business ownership can be risky, an
individual may prefer to invest elsewhere.
The three main asset groups that can be used as
alternative investment options to starting a small
business:
• Cash
• Property
• Shares
Alternatives to Owning a Small
Business
Factors to consider when choosing investments:
• Risk + Return  risker investments usually have higher
returns
• Term (length)  for investment options subject to
business cycles and other fluctuations, a long-term
investment may be required to generate an adequate
return.
• Liquidity  how easily it can be converted back into
cash if the individual needed their funds immediately
Alternative Investments: Cash
• Bank accounts
+ High liquidity
- Low return
• Term deposit = investment option that requires the investor
to agree to invest for a specified length of time
+ Marginally higher return
- Lower liquidity
Alternative Investments: Property
+ Property investment provides a dual return:
• Capital gain = a return generated from an investment in
the form of an increase in the value of an asset that can be
sold for more than its purchase cost.
• Negative gearing = strategy used by investors to reduce
their taxable income, by purchasing property which
generates rental income which is less than the cost of the
property. This is recorded as “loss” and thereby reducing
taxable income.
+ Also provides income stream via rent.
Alternative Investments: Property
Risks of property investment:
- Reliant on the property market which fluctuates
- Dependent on ability of buyers to pay, which depends on the
cost of borrowing (i.e. interest rates)
- Rental income is not guaranteed and bad tenants can create
costs
- Low liquidity (property investment is medium to long-term
- Capital gains tax (tax charged when a gain is made on the sale
of an asset)
Alternative Investments: Shares
Share = part-ownership in a business
+ Higher returns (when sold, and also via dividend which is
a share of the profit earned by a company that is
distributed to shareholders)
+ Tax benefits (dividends are usually paid from profits that
have already had company tax deducted, this reduces the
tax that must be paid by the investor – we call this a
franking credit).
+ Diversification (2200 companies on the ASX!)
+ High liquidity
Alternative Investments: Shares
- Dividend dependent on profitability of company
- Capital gain dependent on share market
- Capital loss can occur if market value of shares fall below their
purchase price.
Alternative Investments
Practice Exam Question!
Explain why an individual should explore alternative
investments when considering starting their own small
business.
Planning a small business
• A detailed business plan is essential before
operations commence. The more information
included in the plan, the greater the business’s
chances of success
• A business plan may make it easier to convince a
financial institution to provide finance
Planning:
Elements of Business Plan
• Business operations and description
• Product or service description
• Legal structure
• Staffing requirements
• Market analysis (inc. marketing strategies)
• Projected sales figures and estimated running costs
Business Operations
• Nature of a business’ operations is determined by
• the market; and
• the product / service
• Businesses can be classified by the nature of their
operations:
• Trading,
• Service, or
• Manufacturing businesses
• In some cases, businesses will combine one or more
types of operation
Business Operations: Trading
• Retail / Trading businesses purchase finished goods for the
sole purpose of resale.
• Stock is purchased from wholesalers / manufacturers at cost
price, and then sold through a retail outlet at a marked-up
selling price.
• Cost price = original purchase price of stock
Business Operations: Service
• Service businesses perform a service for the customer so that
what is being sold is the time, labour and expertise of the
business.
• There is no physical exchange of goods.
Business Operations: Manufacturing
• Manufacturing business produce the goods they sell, using a
production process to transform raw materials into a finished
product.
Business Operations: Mixed Businesses
• A business can combine one or more types of operations.
Review
1.
2.
3.
4.
5.
Practice Exam Questions!
Explain how a trading firm earns a profit. State two
examples of trading firms in Ararat.
Explain how a service firm earns profit.
Suggest 2 reasons why manufacturing firms sell
predominantly to trading firms rather than the general
public.
Suggest 1 reason why manufacturing firms may open a
factory outlet to sell direct to the public.
Provide 2 examples of businesses in Ararat that are
“mixed” businesses.
Review
1. Explain how a trading firm earns a profit. State two
examples of trading firms in Ararat.
• A trading firm purchases finished goods for
the sole purpose of resale.
• Stock is purchased from
wholesalers/manufacturers at a cost price,
and then sold to consumers through a retail
outlet at a marked-up selling price.
• Examples: Zest Living, Safeway, Newsagency
Review
2. Explain how a service firm earns profit.
A service firm performs a service for the customer, so in
fact what is being sold is the time, labour and expertise of
the business.
Review
3. Suggest 2 reasons why manufacturing firms sell
predominantly to trading firms rather than the general
public.
• To make a greater profit
• To guarantee sales
Review
4. Suggest 1 reason why manufacturing firms may open a
factory outlet to sell direct to the public.
To generate additional sales (other than to trading firms)
To generate a greater awareness of their product to the
general public.
Review
5. Provide 2 examples of businesses in Ararat that are
“mixed” businesses
Hairdresser
Vines
Assignment Session 1:
Starting your own small business
• If you were given a $10,000 grant to start a new
business, what business would you start?
• What would the business do?
• Why would you choose that particular type of
business?
• Who would it employ?
• Where would the business be located?
Ownership Structures
The choice of ownership structure will have consequences for a
whole host of issues, including:
• Owner’s personal accountability for the debts of the business
• Tax liability
• Firm’s ability to raise capital
• Costs of establishing the business and compliance with
government regulations
• Ability to shut down the business
• Control over the decision-making in the business
Ownership Structures
• The three principle ownership structures are:
• Sole proprietorships
• Partnerships
• Companies
Ownership Structures
Sole
Proprietorship
Partnership
Proprietary
Company
(Pty Ltd)
Liability
Unlimited
Unlimited
Limited
Owner
Single individual
Two or more
persons
Separate legal
entity
What is limited / unlimited liability?
• Limited liability = legal status of a company which means that
the owners (shareholders) have no further responsibility for
any liabilities incurred by the business unless they signed
personal guarantees
• Unlimited liability = legal status of sole proprietorships and
partnerships, which does not recognise the owner as a
separate legal entity, so the owner is personally liable for the
debts of the business.
Sole Proprietorship
Sole proprietorship = business that is owned by a single individual, operating
the business in their own right under their own name or a registered business
name.
Advantages
Disadvantages
• Easy and cheap to set up
• Unlimited liability – this liability can
• Owner has full control over
extend to personal assets jointly owned
decision-making
by another person (eg. family home)
• Owner receives all profits and • Business has limited life (if owner dies,
has full access to capital of
continuity of the business is at risk)
the business
• All start up capital must come from one
• Simple to wind up or sell
person
• Owner may endure personal hardship
(long work hours)
Partnership
Partnership = 2 or more persons in business together operating
under their own names or as a registered business name, with a
view to making profit.
Advantages
Disadvantages
• Easy and cheap to set up
• Greater access to capital
and skills – more partners
mean more resources
• Simple to wind up or sell
• Tax advantages can exist
where partner are married
(profits split between them,
giving them 2 tax-free
thresholds)
• Unlimited liability – this liability can
extend to personal assets jointly owned
by another person (eg. family home)
• Partnership has limited life (if 1 owner
dies, is declared insane or leaves the
business, the partnership is dissolved)
• Control over decisionmaking is shared –
can lead to disputes.
• Profits are shared
Proprietary Company (Pty Ltd)
Proprietary Company = business that exists as a
separate legal entity that is entitled to do business in its
own right.
• Comes into existence by incorporation under the
Corporations Act 2001.
• Can be owned and operated by 1 person (being both
shareholder and director), but can have no more than
50 non-employee shareholders.
• Being a separate legal entity means the company can
sue and be sued, and is subject to taxation in its own
right.
Proprietary Company (Pty Ltd)
Advantages
•
•
•
•
Limited liability – directors
have no personal
responsibility for debts
unless they caused the
debts recklessly, negligently
or fraudulently.
Greater ability to attract
capital (b/c of limited
liability)
Life of business is ongoing
b/c separate legal entity (it
exists until it is wound up)
Can conduct business
Australia wide using the
company name.
Disadvantages
•
•
•
•
Establishment costs are high
($460 - $1000)
Difficiult to attract additional
capital because Pty Ltd not
allowed to publicly advertise for
funds.
Hard to sell shares and recover
investment b/c limitations on who
can purchase shares
High compliance costs – tax laws,
ASIC
Public Company
• Proprietary companies (Pty Ltd) aka private / family
companies.
• A private company (Pty Ltd) tends to be of a small nature
and their ownership is more difficult to transfer and they do
not have to make their financial reports available to the
public.
• A public company (Ltd) is a large business structure
that can publicly raise funds by advertising and selling
shares though the Australian Stock Exchange. A public
company is also open to scrutiny by the public and
has to make its financial reports public.
• Note: you cannot select a public company for your
assignment since we are focusing on small business
structures.
Small Business
• A prospective business owner can:
• Start a new business,
• Buy an existing business, or
• Buy a franchise
• Small businesses can also gain assistance from a variety of
sources
Starting A Business From Scratch
Advantages:
• Almost total freedom in determining how the
business operates
• Freedom to set customer expectations
• No need to pay for goodwill
• Rewarding for the owner knowing they have
created the entire business
What is goodwill?
• Goodwill is an intangible asset representing the
value of the firm’s reputation, clientele, viability
and future growth prospects.
Starting A Business From Scratch
Disadvantages:
• No track record, so greater risk of failure
• No customer base – could mean low cash inflows
in first months of operation
• Large start-up capital required that will
essentially have to be provided by the owner
• More difficult to obtain finance
Buying a Business
Advantages:
• A proven track record can increase the chances
of success
• All assets, practices, suppliers and customers are
already established
• An immediate income stream is available
• Previous owner(s) and current employees can
assist in the change of ownership as they can
provide helpful advice
Buying a Business
Disadvantages:
• Previous success may have been dependent on
the skills of the previous owner(s) and their
relationship with customers
• Difficult to change existing procedures, staff and
customer expectations
• Must pay for goodwill (which is difficult to value
accurately)
• Existing assets may require major renovation,
repair or even replacement
Advantages And Disadvantages Of Starting
A Business From Scratch
Disadvantages:
• No track record, so greater risk of failure
• No customer base – could mean low cash inflows
in first months of operation
• Large start-up capital required that will
essentially have to be provided by the owner
• More difficult to obtain finance
Buying a business
Goodwill can bring both benefits and costs for
the purchaser of an existing small business:
• Purchasing an existing business (and thus its
goodwill) means the reputation and clientele
already exist, enabling the new owner to have an
immediate income stream, and all practices are
already established. However, purchasing an
existing business means you have to pay for the
goodwill, which is difficult to value accurately.
Buying a franchise
• A franchise is an arrangement under which one
party (the franchisor) grants to another party
(the franchisee) certain rights, including the use
of the franchise name and business practices.
Buying a franchise
Advantages:
• Recognised brand name/national advertising
• Established (and proven) reputation and business
practices
• All equipment necessary to commence operations
is provided
• Bulk buying power through the franchise group.
Buying a franchise
Disadvantages:
• High purchase price, ranging from $15 000 for a
lawn-mowing business to upwards of a million
dollars for a fast-food restaurant
• Ongoing franchise fees (frequently based on
sales) to cover expenses, such as advertising and
administration)
• Rigid guidelines for operations
• Competition from fellow franchisees
• Dependence on the operations of the franchisor.
Recipe for a Successful Small
Business
Successful small businesses have:
• High demand for their product or service
• A location that is visible and easily accessible for customers
• A thorough business plan that details all aspects of the firm’s
operations
• Sufficient starting capital that can support the business and
the owner until the business is functioning in a profitable
manner
• An owner who exhibits the following qualities …
Staffing a small business
When staffing a small business you will need to consider the
following factors:
• How many staff are required?
• Small businesses have < 15 employees
• What qualifications will they have and what training will they
need?
• E.g. VCE Certificate, graduate diploma, bachelor degree.
• What skills and knowledge will be required of management?
• E.g. Do they need specific industry knowledge such as biotechnology
or agriculture knowledge, or specific skills such as electrical
engineering or plumbing?
Staffing a small business
Staff can be employed under a number of categories.
• Some categories offer more flexibility for workers, while others provide more
security for the business.
• Choosing to employ staff under different categories can maintain flexibility in your
workforce while also meeting the needs of the business.
• Choose a structure for each staff member that suits the business and the employee.
• E.g. may need a full-time administration worker but only a part-time IT
employee.
Each category has a different set of obligations for your business and your staff.
• Full-time: generally employees work 38 - 40 hours per week
• Part-time: employees work < 38 hours per week, with a guaranteed minimum
number of hours.
• Casual: employees work hours may vary per week, depending on the work available.
• Fixed term: employees are generally employed for a set period of time.
Staffing a small business
To properly determine your obligations as an employer, it's important
for you to distinguish if your workers are employees or independent
contractors. This will help to determine wages and other conditions.
When you hire people as employees,
they:
A contractor or independent contractor
usually:
• receive payment as wages or salary
• have their tax taken out by their
employer
• are based at your business, work at
your home or are mobile
• can be full-time, part-time,
apprentices, trainees or casual, and
can be directed when, what and how
to do a task.
• doesn't receive wages but invoices
for their work
• runs their own businesses with an
Australian Business Number (ABN)
• does a set task, such as designing a
computer system and once the task is
done, the engagement ends
• can work for more than one customer
Recipe for a Successful Small
Business
…
• a strong knowledge of the good or service that they are
selling
• business acumen – insight or good judgement when it comes
to business dealings and decisions
• humility – not being afraid to seek assistance for any areas
that they feel they don’t have the required level of expertise;
for example, legal or financial matters
• friendly and fair – when dealing with the public, whether
employees or customers
• resilience – the ability to withstand failures, learn from
mistakes and resolve issues and move on.
Why do small businesses fail?
80% of small businesses fail in the first five years of operation.
Reasons include:
• Competition from other small and large businesses
• A poor location
• Insufficient start-up capital
• Poor marketing, targeting either the wrong people or no one
at all
• Poor management skills and a lack of willingness to seek
professional advice
• Poor customer relations
Example of Small Business
• Piece of Cake sells cakes from a shop in Ararat. For the past 3
years it has been owned and operated as a sole
proprietorship by Danica, who left her job as an analyst at an
Google in search of greater independence.
• Danica frequently called on her friend Ryder, who is an
accountant, for assistance. Ryder has now expressed a desire
to join Danica as a joint owner of the business.
Example of Small Business
Practice Exam Questions!
1. State 2 reasons why people leave paid employment to own a small business.
2. State 2 costs to Danica of leaving paid employment to start her own business.
3. Explain the difference between a sole proprietorship and a proprietary company
in terms of their legal difference.
4. State one disadvantage of establishing the business as a proprietary company.
5. State one benefit Danica would derive from entering into a partnership with
Ryder.
6. State two benefits Danica derived by buying an existing business rather than
staring her own.
7. Explain one reason why this business may still fail.
8. State two sources from which Danica can seek alternative professional advice.
Example of Small Business
Question 1: State 2 reasons why people leave paid
employment to own a small business.
• Reason 1: Profit motive
• Reason 2: Identifying a market opportunity OR
unemployment
Question 2: State 2 costs to Danica of leaving paid
employment to start her own business.
• Cost 1: Loss of secure income through paid employment
• Cost 2: Potential risk of losing life savings if the business
does not succeed OR loss of other benefits associated with
paid employment, e.g. paid sick leave and holidays
Example of Small Business
Question 3: difference between a sole
proprietorship and a proprietary company in terms
of their legal difference.
• A company has its own separate legal existence from
that of its owner(s) and thus can sue or be sued in its
own right and provides the owner(s) limited liability
due to this. A sole proprietorship is not a separate
legal entity and can only exist legally through its
owner. Therefore, it has unlimited liability as if the
business is to be sued it must be sued through the
owner.
Example of Small Business
Question 4: State one disadvantage of establishing the
business as a proprietary company.
• Greater establishment costs
• More compliance costs
• Greater regulation
Question 5: State one benefit Danica would derive from
entering into a partnership with Ryder.
• Greater access to capital and skills OR sharing of workload
and any potential losses
Example of Small Business
Question 6: State two benefits Danica derived by buying an
existing business rather than staring her own.
• Benefit 1: Proven track record
• Benefit 2: All assets and customers are established OR an
immediate income stream OR previous owner and
employees can assist in changeover
Example of Small Business
Question 7: Explain one reason why this business may still
fail.
• The previous success of the business may have been
dependant on the skills and customer relations of the
previous owner and Elena cannot replicate this. This may
cause customers to shop elsewhere causing a loss of sales
(income) and potential business failure. Other explanations
are possible.
Question 8: State two sources from which Danica can seek
alternative professional advice.
• Accountants / Solicitors / bank managers / small business
agencies, e.g. SBCS (Small Business Counselling Service)