Business Studies | Creating a Business

Handling Finances

Financial information in an organisation enables managers to perform three functions:

• To record. The money values of resources and of transactions in any organisation can be recorded using accounting techniques. The records enable companies to produce periodic statements of the value of assets, liabilities and capital.

• To analyse. The presentation of financial information is required by law, and so accounting conventions have developed for presenting financial information. The standard or conventional methods of accounting enable organisations to analyse financial information, and to make comparisons of performance between one year and another (intra-firm comparisons), and between similar organisations (inter-firm comparisons).

• To control. Organisations can maintain a degree of control over departments by examining and regulating their expenditure. Accountancy provides reliable techniques for the internal management of organisations.

Principles of accountancy :

The priciples that underlay accountancy practice in firms ensure there is a high degree of confidence in the fairness and accuracy of their financial information. These principles are:

• Objectivity . Subjective judgements should be avoided, and evidence should be used to support and judgement, for instance, at the assessment of historic costs.
• Going concern . The financial information should reflect the viability of the organisation, and so should deal with present and future activity as well as past performance.
• Accruals . The records showing income and expenditure and should show transactions when due, i.e. Debts due. This is to make sure that the view of the firm’s financial position is consistent.
• Consistency . Records should be made on the same basis from year to year so that fair comparisons can be made.
• Conservatism . The accounting record should be of items that are certain rather than estimated. For example it is better to record sales made, rather than orders taken, as orders can be cancelled.

Management accounts

The purpose of management accounts is to prepare the profit and loss account in advance. They provide a forecast of a firms financial performance. Management accounts are produced fairly frequently – monthly or even weekly. They provide information in the comparative performance of different departments and sections in a company such as production, marketing/sales and personnel. The departmental managers use this information to estimate future activity, make plans and control operations. The benefits of management accounts are that they improve the co-ordination between departments and help managers in their decision-making.

Social accounting

Contemporary accounting is not solely concerned with the financial state of an organisation. There is an increasing interest in how an organisation impacts on its employees, on the community and on the environment. A social audit of a company could stress:

• Employment practices – Does the firm implement an effective equal opportunities policy?
• Concern for customers – Is the service given to issues such as customer complaints or customer information adequate? The regulator fined the rail companies for not dealing adequately with customers’ requests for timetable information.
• Concern for the environment – Does the company contribute to the sustainability of resources by minimising waste and reducing pollution.

Recording transactions

There are three reasons why organisations should record their transactions:

• The companies Acts impose statutory requirements on companies to publish their accounts. Public limited companies and non-exempt private companies must keep and publish a proper record of transactions with respect to a) receipts and expenses; b) sales and purchases; c) assets and liabilities. The accounts must give a true and fair view of a company’s affairs.
• Private commercial organisations have to pay tax on any surpluses earned thought trading. Consequently, they must keep proper books of accounts that represent in a fair way all transactions. The Inland Revenue will examine these books.
• It is in the interests of a public company to publish its financial information in a form, which is readily understood. Public limited companies require long-term finance from the general public, and the shareholders’ and potential investors assessment of a company is normally obtained through its published financial record.

The recording and presentation of financial information is carried out according to accounts conventions. The two mist important standard documents are the profit and loss account, and the balance sheet.

The profit and loss account

The profit and loss account records what has happened during a particular period (normally the financial year).

The profit and loss account is a summary of a firms activities during a financial period : it does not show that income and expenditure take place constantly, that every working day, sales will be made and resources will be required.

Profit performs two important functions. As the profit and loss account shows, if a firm makes sufficient profit after tax, then some money can be ‘ploughed back’ into the organisation through a reserve fund. Profit enables a company to grow. Equally important is the second function of profit: it provides short-term funds (working capital) to meet day to day expenses. So profit provides both long term and short term finance.

Problems in measuring profit

In spite of the development of standards in the presentation of the profit and loss account, there are problems in assessing and measuring profit.

Profit is a relative measure. Profit has more meaning when it is seen in relation to the amount of capital employed in its creation. For example, if company ABC has assets of £2,000m and makes £2m net profit, it would be unreasonable to conclude that both companies were equally successful. Net profit is a relative figure. It needs some qualification if it is to be used as a test of efficiency.

Timing . Profits can fluctuate from year to year and therefore annual profit and loss accounts describe the fortunes of a company only for a limited period.

Inflation . Money as a measure of value is not reliable during periods of inflation. Consequently, organisations have problems in valuing stocks or in deciding on the amount to set aside for the depreciation of fixed assets. Since there is an element of choice regarding the presentation of certain money values in the profit and loss account, the accounts do not always give a ‘true and fair view’ of the performance of a firm.

Allocation of costs in large organisations . In large organisations, the cost of some items is not east to apportion to particular trading activities. For example, where a large corporation spends money on corporate advertising or on cetranlised research and development, the cost of these activities is not easy to allocate. Poor allocation of costs could hide unprofitable ventures and distort profit figures.

The balance sheet

The balance sheet is a statement of the financial position of a company at a certain date. It provides details on the assets, liabilities and owners’ equity; and is required by law to be produced once during a financial year. Some companies produce ‘interim’ statements to show the position at a quarer or half-year.

The purposes of a balance sheet are:

• To show, at a specified time, the total capital employed in the business (share capital, loans and amounts due to creditors).
• To show how the organisation has converted money into real or productive assets.
• To provide a record this allows auditors and owners to keep a check on the assets of a company.
• To provide a record this can be analysed to show how the organisation is performing. The balance sheet shows the gearing of the company, the balance between fixed assets and current assets, and the balance between current assets and current liabilities.

The fixed and current assets of a company are the resources that the company employ in addition to people in order to produce goods and services. Assets are required by incurring liabilities and by using shareholders equity. Therefore the fixed and current assets should equal the equity (which includes any reserved and retained profit) and liabilities of a company. If a company’s books are correctly kept, then both sides of the balance sheet should balance.

Assets = Liabilities + Owners equity

The apparent precision of a balance sheet is misleading. The techniques of accounting, if they are carried out correctly, ensure that a balance sheet always balances. But the information that is disclosed can be deceptive. The problems of inflation and changing money values affect the accuracy of Balance sheets. Fixed assets, such as premises, do not necessarily represent their actual values. Similarly the value of stocks and the allowance for bad debts can only be estimated. It would be unwise to assume that the guesses of accountants fairest view of the position of a company. Like the profit and loss account, it is not an absolute record.

The presentation of the balance sheet in a vertical format is a relatively recent practice. The traditional form of presentation is a horizontal format. The information included in both the vertical and the horizontal formats is similar: it is customary in both formats to show assets and liabilities in order of liquidity – the least liquid item is shown first, and the most liquid last. The two advantages of the vertical format are firstly, it is generally easier to understand. For example, the horizontal layout shows shareholders’ capital as a liability and this can cause confusion. Secondly it emphasises important features such as the working capital and net worth of the company.

This passage has taken you through how to handle your finances, with accounting concepts. Legal aspects of the above mentioned also plays a big role in finance + accounts.

Types of business

There are, of course, hundreds of thousands of types of firms producing goods and services in the economy. Businesses can be classified in several ways.

Classifying business by sector

• The primary sector comprises firms involved in extractive industries, such as mining, fishing and forestry.
• The secondary sector comprises businesses involved in manufacturing, such as the car industry and firms producing personal computers.
• The tertiary sector consists of organisations in the service sector, such as universities, banks and the travel industry.

In the UK, the tertiary sector has been growing in importance whilst the secondary sector has been declining. The primary sector is very small indeed in the UK.

Classifying firms according to their size

Firms are often classified according to their size. The size of a firm can be measured in terms of:

• The value of its sales revenue
• The share of the market it has (E.G Ford selling 30% of all cars sold in the UK)
• The number of workers employed
• The value of the things it owns (the items owned by a firm care called its assets.

The most appropriate way of measuring the size of a firm depends on the industry you are considering. For taxi firms or haulage firms, it mat make sense to measure the number of vehicles; in the retail sector (shops) you may want to measure the number of outlets a firm has. In some bases, a firm will be big using one measure of size, but small using other measures! If you look at the National Health Service, for example, it has thousands of employees but does not generate sales revenue.

Input outputs and transformation

The process of business involves turning inputs into outputs. Firms take resources and transform these in some way to produce a product. Thus, a brewery uses hops, malt and water, as well as labor services, the brewery buildings and machinery, as inputs. The outputs are beer or lager. To be successful, the value of the outputs needs to be greater than the value of the inputs. In other words, the selling price of the beer must exceed the cost of the inputs. In this way, the organization ‘adds value’.

Over time the nature of the goods and services produced and the way we produce them has changed considerably. New technology, new markets, changes in customer tastes and employee needs have all led to revolutions in the various aspects of business activity. You only need to look at the incredible growth of the internet and the thousands of new products launched in our shops each year to help you appreciate how rapid the rate of change is in the business world. The business world is always changing, with new firms developing and others ending. This is what makes it such a fascinating area to watch and study, and why those involved in business have to monitor their markets very closely all the time.

However, despite the incredible amount of change occurring in the business world the basic elements of all businesses remain the same:

• Resources
• A transformation process to add value
• Output
• Managers to plan, organise, coordinate and control the whole process.

The most successful organisations are those which can manage this transformation process most effectively. This means that they use their resources efficiently and do not waste them, and that they produce goods and services which their customers value highly. The ‘best’ firms offer customers excellent products and, at the same time, add a great deal of value for their owners.

At the moment, organisations such as Microsoft, Coca-cola, Tesco, Wal-Mart and Virgin are thought of as highly successful. However, even they cannot guarantee success in the future. Markets change, new competitors emerge, customers’ tastes change, managers and employees leave. These developments can turn organisations from being winners into losers very rapidly. Marks and Spencer was regarded as an excellent British business in the 1980’s and early 1990’s, however, by the year 2000 it was attacked for poor management and disappointing financial performance. By comparison, some of the biggest businesses in the world, such as Microsoft, are relatively new. As the business world changes, re-shaped and develops organisations must look for the new opportunities this creates and, also, be aware of the possible dangers.

The process of managing a business is, therefore, a tremendously challenging one. It involves ensuring the tight mix if inputs, the development of an efficient transformation process and the production of goods and services those customers want.

Setting up in business

The first thing to do if you are thinking of setting up in business is to identify a business opportunity and decide exactly what product or service you want o offer. You will need to be sure that there is a market for you product or server and that people will be prepared to pay for it.

You must also be confident that people will be willing to buy the product or service from you, rather than from someone else. Ask yourself what makes you product better than other firms’:

• Is it cheaper?
• Is it easier to buy?
• Is it better designed?

Yet another matter to consider is the cost of running the business. Will you be able to make any money from you idea? Or is it likely to cost you more than it earns you?

In some way, having the idea for a business is relatively easy. Most of us have had an idea for a new product or service at some point in out lives; what matters is whether it is possible to turn the idea into a reality that people want, and ether it is profitable. So, when considering a business idea you need to think about a number of factors.

• Is there likely to be any demand? If so, how much? How many units do you think you will be able to sell over the next few years?
• Is the idea profitable? Will the income (or revenue) cover the costs? If so, will the business make enough profit for it to be worthwhile? Imagine you are in a job paying £30,000 a year at the moment. You may be willing to leave this and start your own business if you only expect to earn £15,000. How much would you need to earn for you to be willing to take the risk of starting out on your own?
• Will you be able to provide the product of service? How difficult is the product to produce? Do you have the skills to develop the idea?
• Would people buy the product or service from you rather than from other firms? Can you offer a better price? Or a better service?

Doing research

To answer these questions you will need to find out about the market and about customers needs and wants. What do your potential customers like and what don’t they like? How much are they prepared to pay for the product? What are your competitors prices? This information can be discovered through market research.

It may seem obvious to say that you need to research the market before actually setting up in business, but many individuals are short of money at this stage. Because of this, they prefer to use the money that they do have to develop the product rather than finding out what customers actually want. However foolish this may seem, people who have had a business idea are often so eager to get on with starting up, that that think market research is a waste of valuable time and money.

Given that the amount of money you have available to spend, research is likely to be limited, you will probably have to carry out most of it yourself rather that use specialist companies to do it for you. The cheapest and quickest way of doing this is to see what information about the market already exists. What data has been collected and published in the past? There is a tremendous amount of information already available on the internet, in libraries and in newspapers, for example.

However, in some cases you mat have to gather information for the first time (this is called primary research). For example, you may want to discover what people in your local area think of your idea, whether they are likely to use your service or what they think of you business name. This sort of information will not exist already, so you will need to undertake new research.

Primary research can be tailored precisely to your own needs but can be quite expensive and time consuming, compared to using information already collected.

What makes an idea successful?

If you want your business to be successful, you must be sure that there will be enough demand for your product service. You must also be sure that your sales will be high enough to cover your costs in the long run. Although It is common for firms to make a loss when they first start out, obviously you cannot afford to carry on making losses for long periods. If you do, your business may be forced to close. So before you start, you have to try and make sure demand is going to be high enough.

Pricing

How much you actually earn from your business will depend, not only on how many items you expect to sell, but also on how much you charge for each one. If you multiply the number of units sold by the average price you charge, this gives the total revenue. Getting the price right is crucial. Charge too much and you may not sell enough. Charge too little and you may sell a lot but not make enough revenue to cover the costs.

The product

The level of demand will also depend on the product or service itself. Is it something people really want? Does it meet a need and what else is available? Are there competitors offering a similar or better product at a better price? If so, you may struggle to survive. A successful product is one offering good value for money. This does not necessarily mean that it is cheap, but that it provides a high level of benefits compared to the price charged.

A product or service is more likely to be successful if it has a unique selling proposition (USP). This is something which makes it different from the competition. For example, you may decide to keep your shop open later than the competition, to deliver to the door or to tailor-make the product to the customers’ orders. Burger King’s USP is its flamed-grilled burgers, for example.

Protecting the idea

One of the problems of having a good idea is that other people may copy it! To some extent this is inevitable. Other people and companies can see what you have done and replicate it. Not too long ago a book called the little book of Calm was published. This was a small book of advice on how to keep calm, which was displayed next to the tills in book shops and sold hundreds of thousands of copies; within months there was the little book of joy, the little book of happiness and so on. It is possible to gain some protection by taking out a patent of through copyright legislation.

A patent is a means of protecting a new invention. You can take out a patent by registering your product or production process at the patents office. This means that other people or firms cannot copy your invention unless you agree to licence it to them. You can charge them for the licence. However, to really protect your idea you need to take out patents all around the world to prevent it being copied elsewhere. This can be expensive.

Parents are absolutely vital to the success of firms in industries such as pharmaceuticals.

In this informative passage, we have been though the basics of setting up a business, before you actually do it. Many factors are involved within this. Remember, it’s not a simple 1-2-3 guide to making your millions, you have to have persistence.

Good Luck, and the very best.

Marketing

What is marketing?

• It is an exchange process – that is, it is two way. The firm offers the consumer something (normally goods or service) and in return receives something, usually payment.
• It is mutually beneficial because both sides should gain from the exchange. Customers should be satisfied and firms should make a profit (assuming the firm is a profit-making organisation).
• It aims to identify and anticipate customer needs. It is not always enough to just identify customer’ needs: the customers may not know themselves what they want. In some markets such as fashion and film, firms have to anticipate what customers will want in the future. They have to predict trends even before most customers know what these trends will be.
• It aims to delight customers. Nowadays satisfying customers may not be enough, most other firms are doing this as well! Much better is to delight the customer.

The purpose of marketing is to match the abilities and strengths of the firm to the needs of the market. A business aims to supply goods and services that customers want and which will generate suitable rewards for the organisation.

Marketing involves:

• Market research – This involves gathering and analysing information to make better marketing decisions.
• Market analysis – This is an examination of market conditions to identify new opportunities.
• Marketing strategy – This involves developing a plan detailing how and where to compete.
• The marketing mix – This covers the decisions all businesses have to make regarding selling prices, how and where the product is sold, the image of the product and the precise nature of the product itself.

Effective marketing means that the organisation understands its customers and prices them with what they want, when they want. At the same time it ensures the firm itself benefits from this transaction. Marketing involves a whole range of activates, including researching the market, developing new products, packaging and printing the products, and setting the price. All these activities are aimed at providing goods and services which will satisfy the customer (so he or she will buy it), and at making a profit for the firm. The better the marketing, the better the product or service which is provided for the customer and the more money the business should be able to make.

Markets

All businesses trade in markets. These can be small, local markets with a specified location. Other markets are national or international with no single location. For example, the world market for oil is a global market in which buyers and sellers are linked by telephones, faxes and the internet, and trading takes place in many locations.

• Company orientation

Market Orientation

A market oriented (or market-led) firm is one that bases its decisions on the customers needs. It continually monitors its environment to find out what customers want, what competitors are offering and what changes are occurring in the market. By being market orientated, a firm should be able to ensure that the product or service it provides matches its customers needs.

Product orientation

By comparison, a product oriented (or product led) firm focuses more on what it can produce and hopes that this will fit with customer requirements. This is a very risky approach because the firm may end up producing something the customer does not want. Although being production oriented is less likely to succeed than being market oriented, it can work if the customer has limited choice ( for example, in the past in Eastern Europe the government only allowed a few firms to produce particular products).

If it is lucky, the firm may happen to produce a product that people want.

Asset led marketing

A wise firm may adopt an approach which looks for market opportunities and marches these to the firms own strengths. This is known as ‘asset-led marketing’. Rather than basing its activities just on what the market wants, this approach focuses on the most appropriate opportunities, given the firm’s assets. These assets might include the firm’s brand name, its access to markets, its marketing expertise or its product range. For example, IBM used the knowledge and expertise it gained from selling computers to move into the consultancy business.

Adding value

The value of something depends on the benefits it offers, compared to the price. The more benefits something offers in relation to the price, the better value it is. This means a product does not have to be cheap to be good value. It has to be cheap in relation to the benefits it provides. You may spend quite a lot of money on a pair of trainers for example, but if they are just what you wanted, you may think they are a good value for money.

To be competitive, a firm must at least match the value offered by its competitors. Wherever possible, it must offer better value to keep its own customers and win some from the competition.

Adding value can often be achieved by relatively small amendments to products – just think how useful it is to have batteries which show you how much energy is left, although some major brands are doing something similar. And what about keys cut out of different coloured metal so you can tell them apart.

To summarise, the aim of a firm is to provide benefits which customers are willing to pay for. To do this, it will need a detailed insight into customer needs. It will also have to monitor these needs, because they will change over time and because competitors are also trying to offer new, attractive products and services. The first bank to offer telephone banking provided its customers which an additional benefits; it was not along before others followed and the firm bank had to think about what else it could do to offer more benefits than the competition. Internet banking followed swiftly.

More marketing techniques

A marketing objective is a target set by the marketing function. It sets out what the firm wants to achieve in terms of its marketing activities.

Like any good objective, a marketing objective should be SMART (specific, measurable, agreed, realistic, time specific).

For example, a marketing objective might be ‘to increase sales by 10% by March 2008).

Marketing objectives often focus on sales. In most cases, firms want to increase their overall sales, but they may also set objectives for particular products or regions. For example, a firm might be very eager to promote some of its products to a greater extent in the North or it may want to boost sales of its latest brand in particular. A firm might want to smooth out sales over the year (if its existing sales are very seasonal). It may even want to reduce sales, if It knows it cannot meet the orders and that to accept them might lead to long waiting lists and dissatisfied customers.

Marketing strategy and targets

As we have seen, a strategy is the means of achieving an objective. A marketing strategy is, therefore, a way of achieving a marketing objective. This means it is the long term plan the firm has to ensure it meets its marketing target. A marketing strategy involves analysing markets, choosing which markets to operate in and which products to offer. The strategy involves analysing markets, choosing which markets to operate in and which products to offer. The strategy is implemented through marketing tactics. These tactics involve detailed decisions and about factors such as the price and the way they product is distributed.

• A firms marketing objective might be to increase sales by 30% over the next 6 years.
• Its marketing strategy might be to launch some of its products abroad.
• The marketing tactics used might include launching the products at a low price in France and Germany first and gradually extending this to other countries.

Types of marketing strategy

There are many types of marketing strategies. These include nice marketing and mass marketing.

Niche marketing

This occurs when a firm focuses on a specific segment of the market with which the major competitors are not concerned. For example, a radio station may concentrate on playing a type of music which is not featured much on other radio stations. Classic FM may be an example of a radio station using this type of marketing strategy. A fashion company may focus on a particular item of clothing which most other firms do not, such as cufflinks or socks.

There are a number of advantages of operating in a niche market:

• A firm may be able to survive because it is offering a product or service that the larger firms are not bothered about supplying. If a small firm tried to compete in the mass market, the existing competitors might react aggressively.
• The firm may be able to operate on a small scale. Many niche markets are relatively small and specialised. Small organisations are, therefore, able to meet the demand in this market, whereas they might lack the resources to meet demand in a mass market.

However, firms producing and selling in niche markets also face disadvantages:

• If the business earns high profits, other firms might enter the market, making it more competitive. In some cases, the niche producer will struggle to survive if larger, more powerful firms enter the market and sell at lower prices.
• The market as a whole may be quite small which may limit the overall returns a firm can achieve.
• The market may consist of a small number of customers. This may mean that the firm is vulnerable to the loss of one or two customers. In the mass market this is less of a problem: if one customer is lost there are normally plenty more!

Mass marketing

This takes place when a firm aims a product or service at more of the market. ITV is a mass-market TV channel because it tries to cater for a majority of tastes. The Ford escort is aimed at the average car user, and therefore sells in a mass market.

To operate in a mass market, a firm must be able to produce goods on a large scale. This may require a heavy investment in equipment and in the recruitment of staff. The danger of mass marketing is that if demand does fall the firm may need left with unused resources. Machines may sit idle and there may not be enough work for employees. Before investing in the large scale resources essential for a mass marketing strategy, a business must be sure that demand will be sustained.

The advantage of mass marketing is that the firm can produce large numbers of relatively standardised products this means the production process is relatively repetitive and the cost per unit should be low. However, even though the firm will be producing many thousands of the same items it still needs to differentiate itself from the competition. Ariel, Daz, and surf all compete in the same market but try to make themselves from each other – trough the product itself or the price. This is product differentiation.

• Market development – this entails a firm selling its existing products in the new market. This may either be a new segment of the market or a new market geographically. For example, Johnson and Johnson’s talcum powder, originally marketed for babies has been sold to adults as well. Companies such as Unilever have been trying to sell much more of their products (such as Persil) in Asia in recent years as this is a very fast growing market.
• New product development – Firms pursuing this strategy develop new products to sell to existing customers. This may either be a modification of an existing product or a completely new one. For example, Sony developed the disk man, gradually replaced by the walkman.
• Diversification – This strategy occurs when a firm offers a new product in a new market. This does not mean this product or market didn’t exist before, but simply that this firm had not been involved before. For example, CAT is a producer of industrial equipment but has used its brand to move into the clothes market. Diversification is quite a high risk strategy because it means the managers of a business are becoming involved in an area in which they do not have any expertise.

Hopefully you have learnt the basics and a little more advanced topics involved in product marketing. Good luck !

Financing a start up

Once you have researched the market and, assuming it still looks like you have got a good idea, you will need to raise some money to actually start the business. If you are lucky, you may have some savings. However, this many not be very much and you may be worried about risking all your savings in a new venture. So, where else can you get money?

Borrowing from family and friends

In many cases, people setting up in business have to borrow from family and friends. This has its advantages - the people who have lent you money may be willing for some time to be repaid. On the other hand, you may feel worried about borrowing money from friends and family in case you cannot pay them back. You may also find that they want to become more involved in the business than you would like and this can put a strain on your relationship with them.

The bank

Another alternative is to borrow money from a bank. This has the advantage of being a formal arrangement (sometimes borrowing from friends and family causes problems because the arrangement is not clearly set out). However, banks will charge interest on any money they lend. This means you have to pay them a fee in return for them lending you the money. Banks will usually leave you to run the business for yourself, but they will insist on being paid, whereas you may be able to delay payment to friends and family.

Raising money may be particularly difficult for a few firms especially if the person involved has no previous experience of running a business. Banks may be wary of lending to them. Also, the business may only have a few assets to use as a guarantee for a loan - this is called collateral. The interest charges on any loans may be high because of the risk that the business may fail.

Investment

Yet another way of raising finance is to bring in outside investors. In return for putting money into the business, they gain some control over it. You may not want to raise money this way if you want to remain totally in charge.

This decision on how to raise business finance will depend on a combination of factors:

• Where can you get money from?
• What will it cost?
• When and how will you have to repay?
• Siting a business

The location of a business can be crucial to its survival. The location of an hotel, a restaurant or a new shop can make all the difference between success and failure. It is important that the business is in a suitable place for employees and suppliers and especially customers. Even in the case of a manufacturer, the location can be important because it can affect the costs of production and the ease of getting the product to the market.

However, small firms often lack the money to afford the best location. For example, someone setting up a few shop may not be able to pay high street rents and so many end up in a side street, away from most of the customers. Also, the best locations may already have been taken, meaning that the new business is immediately at a disadvantage compared to existing firms.

The first few years

New businesses are particularly likely to fail early on - over 50% do so in the first 5 years. If a business can survive this period, it will usually continue for many more years afterwards. One reason why firms often fail in their early years Is because it takes time to build up a base of regular customers.

For your first few months or even years, customers may be unaware that your business exists. Even if they do know you are there, they may be uncertain about using your business because you are relatively new. Over time, providing you offer good value for money, you are likely to build up a reputation and attract more people by word of mouth. You should also be building up customer loyalty, meaning that the same people come back again and again. This should mean that you have a more steady flow of income and that you can predict what you will be earning more easily. In the early stages of the business however, income may be slow to come in, even though costs may be relatively high !

This leads us on to the problem of cash flow. Cash flow refers to the timing of receipts of money from customers and money paid out. If businesses customers are slow to pay, it may have cash flow problems and be unable to pay its suppliers. In the early days, a businesses suppliers may expect to be paid promptly, making it a more difficult to manage cash flow.

A business plan

If you are thinking of starting up a business, one of the tings you should always do is produce a business plan. This sets out what you are hoping achieve over the coming few years and how you will achieve these targets.

The plan should include:

1) Your objectives - what do you hope to achieve with this business? How much money do you expect to make? How much time do you want to spend working?
2) Information on the market and competitors.
3) Sales estimates
4) Estimates of costs, revenues and profits
5) Research on customer needs and how you think your business will meet those needs.
6) Information on what makes your business unique. Selling proposition.

Producing a business plan is a very useful exercise for anyone who is setting up in business because it makes them thing carefully about what they are doing. Too many people rush into it without thinking through their idea. Planning makes you look in some detail at the different aspects of the idea and consider some of the potential problems.

A business plan is also a useful document if you are hoping o raise money. Banks nearly always insist on seeing a business plan. If you have idea where you want the business to go, it is unlikely you are going to succeed and so the bank is unlikely to lend to you. In comparison, someone who produces well thought out well researched plan of what they want to achieve, and how they intent to achieve it … is more likely to be successful. As a result the bank is more likely to lend money.

Corporate aims and goals

The corporate aim is the overall purpose of the business. Imagine you have set up your own business. What is it that you really want to achieve? Do you want to become the biggest business in the world? Or the best known? Do you want it to be the bu siness marking the largest profits? Or is the most important thing that iy have fun and enjoy the work, regardless of how much you earn? Would you be happy if it made you just enough money to live on?

The answers to these questions are all business aims. We tend to assume that the aim of all firms is simply to make profit. In fact, the aims are likely to be far more complex than this. Profit may be one of the aims. However, those involved in the business also may be looking for a range of other things, such as a good quality of life, a motivating job or the chance to contribute to society.

The mission statement

Organisations often produce their aims in the form of a mission statement. Mission statements set out in writing what the firm wants to achieve and often include information on the values of the business, i.e. what it believes in and how it wants to act. Mission statements make the corporate aims of the organisation clear for everyone to see.

Aims can vary greatly between organisations. Just look at the examples below:

‘Our purpose in the UK is to meet the everyday needs of people everywhere to anticipate the aspirations of out consumers and customers and to respond creatively and competitively with branded products and services which raise the quality of live.’ Unilever.

‘ICI is a science based chemicals company which produces consistently outstanding performance through market leadership, technological edge and a world competitive cost base. The company’s vision is to be the industry leader in creating value for customers and shareholders. It aims to achieve this by market driven innovation in products and services.’ ICI

‘Oxfam works with others to overcome poverty and suffering’. Oxfam.

What determines a firms aims?

The aims of a firm will be determined by its owners and its managers. The owners will have certain aims of their own, such as a desire for the business to grow, a desire to establish the firm as the leading provider of a particular type of product or service of even to keep the business within the family. However, their aims might be influenced by what the managers think is realistic given the existing sate of the firm and the market conditions.

The aims of a firm may well change over time. When people first set up in business they sometimes think it will be their path to fame and fortune (and for some it is!). However, as the years go by, people often find they have other aims in life: they want more time to bring up their families, to travel, to take part in a sport or hobby; they are often prepared to accept less profits from their business provided they can fulfil these other ambitions.

Social considerations

Many organisations have social objectives. These set out what they hope to do for society in general, or for their local community. Targets may include recruiting more women or people from different ethnic groups, creating more jobs in the local area, reducing pollution levels or ensuring the fair treatment of disadvantaged groups.

Employee welfare

Many organisations appreciate the importance of people to their success and their responsibilities to their employees. After all, an employee spends much of his or her day working for the organisation. In return, the organisation may consider the type of work it provides how it threats people and the career and social opportunities available within the firm.

Short term and long term objectives

When deciding what they want to achieve firms can set both short-term and long term objectives. If firms are aiming to grow in the long term they may want to invest in training their stag, building up their brands, expanding into new markets and putting money into developing new products. All these activities may prove effective in the long run but cost money, in the short term profits may fall.

By comparison, a firm which wanted to maximise its rewards in the short run and was not concerned about the long term might cut back on all these activities. Imagine, for example that you took over a business and were determined to make as much profit as you could in the next year. What could you do to achieve this objective? You could stop moist of the repairs to the buildings and facilities, you could stop all research into new products, you could stop training people you could end most of your advertising. In the short run profits may increase, but in the long run your business may be in a much weaker position.

UK firms are often criticised for setting objectives which are ’short-termist’ and do not involve long term planning. Critics say that UK businesses fail to invest enough to ensure they are strong enough in the long term. Instead, they often go for short-term rewards. In their defence, UK managers often blame their investors for insisting on short term rewards.

Many shareholders in the UK are companies such as pension finds and banks. These companies need to make money for their own investors and often want there earnings quickly; if a firm cannot deliver, they simply move their investment elsewhere. By comparison in some other countries, such as Japan, investors and often other firms involved in the same industry (E.G. suppliers and distributors); these firms are more willing to wait for long term gains and have an interest in the long term survival and success of the company.

Now you have gathered your information and set up a business, and have your priorities set straight, the only way is up. Marketing your product is coming up next.

The business cycle

All countries suffer fluctuations in the level of activity within their economies. At times spending, output and employment all rise; during other periods the opposite is true. A nation’s gross domestic product measures the value of a countries output over a period of time. This figure is dependant upon the levels of economic activity. Rising economic activity will cause a higher level of GDP.

The business cycle describes the regular fluctuations in economic activity and GDP occurring over time.

Trade cycles generally have four stages:

1)      Recovery or upswing

2)      Boom

3)      Recession

4)      Slump

Boom

A boom follows with high levels of production and expenditure by firms, consumers and the government. Booms lead to prosperity and confidence in the business community. Investment in fixed assets is likely to increase. However, sectors of the economy experience pressure during booms. Skilled workers may become scarce and firms may offer higher wages. Simultaneously, as the economy approaches maximum production, shortages and bottlenecks occur as insufficient raw materials and components exist to meet demand. Prices rise. The combination of rising wages and rising prices of the raw materials and components creates inflation.  Inflation usually leads to the end of a boom.

Recession

In a recession incomes and output start to fall. Rising prices of labour and materials increase costs of production. This eats into businesses’ profits. In circumstances such as this, the UK government has raised internet rates to avoid inflation. Falling profits and rising interest rates are likely to lead to delays in implementing plans to invest in new factories and offices. The level of production in the economy may stagnate or even fall and the amount of spare capacity rises. Some businesses fail and the level of bankruptcies is also likely to rise.

Slump

 A slump often, but not always, follows a recession. In some circumstances an economy may enter the upswing stage of the business cycle without moving through a slump period. Governments may take action to encourage this by for example, increasing their own spending or lowering interest rates. A slump sees production at its lowest, unemployment is high and increasing numbers of firms suffer insolvency (limited companies become insolvent, whilst the term bankruptcy applies to individuals, sole traders and partnerships).

Demand and the business cycle

Producers and retailers of basic foodstuffs, public transport and water services may notice little change in demand for their products  as the trade cycle moves through its various stages. This is because these are essential items which consumers continue to purchase even when their incomes are falling – demand for them is not sensitive to changes in income.

Demand for other products is more sensitive to changes in income levels and the stages of the business cycle. Examples include foreign holidays, electrical products, such as televisions and CD players, and construction materials, such as bricks.

Firms selling basic foodstuffs might have to take little or no action to survive a recession. Demand for their products might increase as consumers switch from more expensive alternatives. At the other extreme, businesses supplying materials to the construction industry could be hard hit as firms delay or abandon plans to extend factories and build new offices.  Their position might be made worse by a fall in demand for new houses as hard-up consumers abandon schemes to move home.

External influences – markets + competition

There are many outside influences which affect businesses, of which the market is just one.

Size of the market

Businesses are heavily influenced by the markets in which they trade. The size of the market influences businesses: whether it is local, national or international will affect the nature of the product they supply, as well as the number of units.

Degree of competition

Markets also vary in terms of the degree of competition. It is true to say that improved communications and methods of transportation have made markets more competitive. Many UK businesses now face competition from European and Asian producers, as well as domestic rivals. Competition has become even more intense since the giant American retailer Wal-mart made a bid for Asda, and was successful.

What are markets?

A market is a place where buyers and sellers meet to establish prices and to exchange goods and services. Markets can take two main forms:

1)      Traditional, geographical markets

2)      Non – geographical markets

Traditional, geographical markets

Consumers can purchase fresh fruit or vegetables at a local street market. Firms wishing to sell these products can take a stall at the market and expect to meet buyers. Thus, the market brings together buyers and sellers. The same is true of a high street in any town or city. Retailers set up stores in these locations and customers know where to find the shops.

Neo-geographical markets

An increasing range of products are bought and sold without buyers and seller ever meeting. It is possible to purchase books, company shares and groceries on the internet using a credit card. Rail tickets and theatre tickets can be purchased by phone. Businesses purchase oil and foreign currencies over the phone. Modern forms of communication hae replaced face to face communication in traditional markets.

In general, markets do their job efficiently if information on prices and products is available to buyers and sellers.

Classifying markets

Markets can be classified according to the number of firms trading and the degree of competition. This type of categorisation allows the likely effects on the business to be identified and analysed. Three main categories exist:

1)      Perfect competition

2)      Oligopoly

3)      Monopoly

Perfect competition

Perfectly competitive markets have many small firms producing virtually identical products at very similar prices. Firms can enter and leave such markets freely. Firms operating in such markets do not earn excessive profits and use resources with great efficiency.

Oligopoly

A market is said to be oligopolistic when few firms exist and the firms are interdependent in their actions. Oligopolistic firms consider the likely reactions of competitors when considering changing prices of introducing new products. Oligopolistic markets are common and include industries such as chocolate manufacture, television broadcasting and high street banking.

Monopoly

A monopoly exists when only a single producer operates within a market. Examples of UK monopolies might include the Post Office (delivering letters) and Transco – the company responsible for piping gas.

Planning/developing the workforce

Human resource management is the process of making the most efficient use of an organisations personnel. HRM covers a broad range of business activities.

-         Assessing future labour needs

-         Recruitment and selection

-         Training

-         Appraisal

-         Motivation and reward of employees

Until recently, most businesses have relied on the concept of personnel management. Latterly, the influence of Japanese management techniques has encouraged the adoption of at least some elements of HRM. The most enthusiastic supporters of HRM are foreign-owned companies operating in the EU. However, many firms do not engage in human resource planning and management.

HRM views activities relating to the workforce as integrated and vital in helping the organisation to achieve its objectives. People are viewed as an important resource to be developed through training. Thus, policies relating to recruitment and training, for example, should be formulated as part of a co-ordinated humans resource strategy.

Conversely, personnel management considers the elements that comprise managing people (Recruitment, selection and so forth) as separate elements. It does not take into account how these parts combine to assist in the achievement of organisational objectives. At its simplest, personnel management within businesses carries out a series of unrelated tasks.

Planning the workforce

Before business recruits or trains employees, it must establish future labour needs. This is not simply a matter of recruiting sufficient employees. Those recruited must have the right skills and experience to help the organisation achieve its corporate objectives.

Managers will draw up a human resource plan to detail the number and type of workers the business needs to recruit.

The plan will also specify how the business will implement its human resource policies. As important element of the plan is a skills audit to identify the abilities and qualities of the existing workforce. This many highlight skills and experience of which managers were unaware.

Businesses require specific information when developing human resource plans:

-         They need to research to provide sales forecasts for the next year or two. This will help identify the quantity and type of labour required.

-         Data will be needed to show the number of employees likely to be leaving the labour force in general (and the firm in particular). Information will be required on potential entrants to the labour force.

-         If wages are expected to rise, then businesses may reduce their demand for labour and seek to make greater use of technology.

-         The plan will reflect any anticipated changes in the output of the workforce due to changed in productivity or the length of the working week.

-         Technological developments will impact on planning the workforce. Developments in this field may reduce the need for unskilled employees whilst creating employment for those with technical skills.

Developing the workforce.

One strategy to improve the performance of employees requires businesses to recruit employees with the appropriate skills from outside the organisation. An alternative is to train existing staff to develop their skills and knowledge. This option can be expensive and takes time.

Empowerment and Team working!

Empowerment involves redesigning employee’s jobs to allow them greater control over their working lives. Empowerment gives employees the opportunity to decide how to carry out their duties and how to organise their work.

Empowerment can make work more interesting as it offers opportunities to meet a number of individual needs. Empowered workers can propose and implement new methods of working as they bring a new perspective to decision-making. They may spend a part of their working lives considering the problems they face and proposing solutions.

Vauxhall Motors operated empowerment teams at its Luton plant. In 1998, one team proved productivity by designing a swing chair to improve access to cars on the production line. Using the chair made it easier for employees to move in and out of the cars when adding components and improved productivity.

Empowerment would receive the approval of Maslow and Hertzberg. It provides motivators, as well as offering employees the opportunity to fulfil higher needs.

Employees require training if they are to be empowered. They are unlikely to have the skills necessary to schedule tasks, solve problems, recruit new employees and introduce new working practices. It takes time to implement empowerment and teething problems are common.

Team working

Team working exists when an organisation breaks down its production processes into large units instead of relying upon the use of the division of labour. Teams are then given responsibility for completing the large units of work. Team members carry out a variety of duties including planning, problem solving and target-setting.

A number of different team types operate within businesses:

-         Production teams – many production lines have been organised into distinct elements called cells. Each of these cells is staffed by teams whose members are multi-skilled. They monitor product quality and ensure that production targets are met.

-         Quality circle teams – these are small teams designed to propose solutions to existing problems and to suggest improvements in production methods. The teams contain members drawn from all levels within the organisation.

-         Management teams – increasingly, managers see themselves as complementary teams establishing the organisations objectives and overseeing their achievement.

There has been a major trend in businesses towards team working over recent years. Team Working is a major part of the so-called Japanese approach to production and its benefits have been extolled by major companies such as Honda and John Lewis.

Team working offers employees the opportunity to meet their social needs, as identified by Maslow; Hertzberg identified relationships with fellow workers as a hygiene factor. However, much of the motivational force arising from team working comes with the change in job design that usually accompanies it. Team working requires jobs to be redesigned, offering employees the chance to fulfil some of the higher needs identified by Maslow such as esteem needs. Similarly, team working offers some of the motivators, for example – achievement.

This is an example which can be used in team working

The style of leadership – Some managers are content to give employees greater freedom in organising their working liven in an attempt to motivate them. Others prefer to retain control and rely on monetary techniques of motivation.

Profit sharing, employment + motivation

Profit sharing schemes may improve employees loyalty to the company. These schemes can help to break down the ‘them and us’ attitude. Under profit sharing schemes, a greater level of profit regarded as being of benefit to all employees, and not just senior managers and shareholders. Employees may be more willing to accept changed designed to improve the businesses profitability. The danger with profit-sharing schemes is that they can be too small and fail to provide employees with a worthwhile payment. On the other hand, if schemes are too generous, the company may have insufficient funds for capital investment.

Share ownership

This can be a development of profit-sharing schemes. Some businesses pau their employees share of the profits in the form of company shares. Share ownership schemes vary enormously in their operation. We shall consider two of the main schemes operated by UK companies.

Some businesses such as Asda offer employees the opportunity to purchase shares after saving for a period of time. After say, 5 years, employees can purchase shares at the price they were at the start of the saving scheme. This is a popular type of scheme, though tax changes introduced in the chancellor’s 1999 budget will make it more difficult to operate in the future.

Share options are a form of share ownership normally aimed at senior managers. About 14% of UK companies operate share option schemes, according to a recent survey.

Under share options, managers have the opportunity to buy company shares at some agreed date in the future, but at the current share price. This, the current share price might be £2.50 and the manager is given the option to purchase 1000 shares in 3 years’ time at this price. In 3 years the market price of shares may have risen to £3.50. This offers the manager the chance to purchase the 1000 shares for £2500 (£2.50 x 1000) and to sell them immediately for £3500, giving a profit of £1000. If the share price falls over the 3-year period the manager will choose not to buy the shares.

Job enrichment

Job enrichment occurs when employee’s jobs are redesigned to provide them with more challenging and complex tasks. This price also called vertical loading is designed to use all employees’ abilities. The intention is to enrich the employee’s experience of work.

Frederick Hertzberg was a strong supporter of job enrichment. He believed that enrichment provided employees with motivators that increase the satisfaction they might get from working. Job enrichment normally involves a number of elements:

-         Redesigning jobs so as to increase not just the range of tasks, but the complexity of them

-         Giving employees greater responsibility for managing themselves

-         Offering employees the authority to identify and solve problems relating to their work

-         Providing employees with the training and skills essential to allow them to carry out their enriched jobs effectively.

Job enrichment involves a high degree of skill on the par of these managers overseeing it. They must ensure that they do not ask employees to carry out duties of which they are not capable.

Wages

Salaries and wages

Most employees in the UK receive their payments in the form of salaries or wages. Salaries are expressed in annual terms (E.G production manager earns £30,000 a year) and are normally paid monthly. Salaried employees are not normally required to work a set number of hours per week though their contract of employment may state a minimum number of hours.

On the other hand, wages are usually paid weekly and employees are required to be at work for a specified number of hours. Employees are normally paid a higher rate (knows as overtime) for any additional hours worked.

Fringe Benefits

These are sometimes referred to as ‘perks’. Fringe benefits are those extras an employee receives as a park of their reward package. Examples include the following

-         A company car

-         Luncheon vouchers

-         Private health insurance

-         Employers’ contributions to pension schemes

-         Discounts for company products

Firms tend to use fringe benefits to encourage employee loyalty and to reduce the proportion of employees leaving the firm. A danger of the widespread use of fringe benefits are that costs can increase quickly, reducing profitability.

Performance related pay

Performance related pay has become more widely used over recent years and has developed along with employee appraisal systems. Performance related pay is only paid to those employees who meet or exceed some agreed targets. Under performance related pay, employees are paid for their contribution to the organisation, rather than their status within it.

A number of large-scale manufacturers such as Cadburys and Nissan, and public sector industries, for example the NHS, introduced performance related pay schemes during the early 1990’s. A recent survey indicated that 68% of private sector businesses in the UK have introduced Performance related pay for some or all of their non-manual employees, thought the rate at which performance related pay is being introduced is slowing.

Criticisms of price related pay

- A number of criticisms of performance related pay have been put forward:

Many employees perceive performance related pay as fundamentally unfair. This is particularly true of those working in the services sector where employee performance is difficult to measure. Employees fear that they might be discriminated against because they do not get on with the manager conducting their appraisal interview. This can result in their performance worsening, not improving.

- A majority of businesses operating performance related pay systems do not put sufficient funds into the scheme. Typically, the operation of a performance related pay scheme adds 3-4% to a businesses wage bill. This only allows employees to enjoy relatively small performance awards, which may be inadequate to change employee performance.

Development in performance related pay

Increasing numbers of firms are implementing a system knows as variable pay. Companies such as Levi-Strauss in America and Unilever in Britain recognise that company performance often depends upon the achievements of the few.

Variable pay is really a development of performance related pay. It is similar in that it rewards employee performance, but there are differences. Performance related pay operates according to a formula used throughout the company. Variable pay is far more flexible and the potential rewards for star employees are greater. The Bank Of England, for example, retains 10% of its pay budget to reward good performers amongst their employees.