Business Studies | Creating a Business

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.

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.

Entrepreneurial structures and factors determining organisational structures

These are frequently found in businesses operating in competitive markets and particularity in those where rapid decisions are essential. News organisations, for example Sky News, often operate with an entrepreneurial structure. A few key workers at the core of the organisation – frequently the owners in the case of small businesses – make all the major decisions. The business is heavily dependant upon the knowledge and skills of these key workers. Entrepreneurial structures are suited to markets where rapid decisions are essential and where organisations are small enough to be controlled effectively by a few trusted employees. It is a structure frequently used by charismatic and dynamic leaders. Sir Alan Sugar used this approach to manage his electronics company Amstrad during the early years of its business. Because all-important decisions are taken at the centre, little use is made of the hierarchies and the organisation is relatively ‘flat’.

However, there are distinct drawbacks to the entrepreneurial structure. Its effectiveness depends upon two factors:

1)      The quality of management and decision-making by the ‘core’ employees. If decisions are delayed or if the workers lose touch with the market, the business is unlikely to perform effectively.

2)      As the business grows, the ‘core’ employees experience increasing difficulty in managing the business. The work may overwhelm them and the quality + speed of decisions may suffer. At this point the business may adopt another structure.

When deciding upon an organisational structure a business will be subject to both internal and external influences.

The size of the business

As the scale of the business increases an entrepreneur structure, for example, becomes unsuitable. As the business grows further, the chain of command is likely to be lengthened, encouraging the removal of some layers of hierarchy and broader spans of control.

The nature of the product

If the firm supplies a diverse range of products it may organise itself traditionally – perhaps in the form of division’s reporting to the board of directors. The rank organisation operated in this way with key areas of the business, such as film services and leisure activities such as the hard rock cafes, having some degree of independence.

The skills of the workforce

The higher the level of skill the typical employee has, the more likely it is that businesses will organise along matrix or informal lines. A small group of professionals may simply carry out their professional duties with administrative support from the organisation. Less skilled employees may respond better to a more formal structure with more authority retained further up the hierarchy.

The culture of the organisation

This is a major influence on the structure the firm adopts. If a business has a highly innovative culture whereby it wishes to be a market leader selling advanced products, it may adopt a matrix structure to minimise bureaucracy and to allow teams to carry out the necessary research. On the other hand, an organisation which places importance on traditions and wants to appear conventional may be best suited to a form, hierarchical structure. This structure places emphasis on positions rather than people and this factor encourages the continuance of existing policies and practices. Some high-class hotels may fall into this category.

Different types of organisations

Organisational structures

An organisational structure is the way in which a business is arranged to carry out its activities. The organisational structure, which may be shown in an organisational chart, sets out :

1)      The routes by which communication passes through the business

2)      Who has authority, power and responsibility within the organisation

3)      The roles and titles of individuals within the organisation

4)      The people to whom individual employees are accountable and those for whom they are responsible.

Businesses change the structure of their organisation rapidly and regularly; some entrepreneurs believe that they should be continually reorganising their firms to meet the demands of a dynamic marketplace.

A principle reason for the regular change in organisational structures is the pace of external change. All businesses have to ensure that they are able to compete with rival firms. Keeping costs to a minimum is an important part of competing successfully and is a common factor causing businesses to change their organisational structures.

The main issues in organisational structures

Factors determining the structure adopted by an organisation include the number of levels or layers of hierarchy used and the extent of the span of control.

Levels of hierarchy

Organisations with a large number of layers of hierarchy are referred to as ‘tall’. That is, there are a substantial number of people between the person at the top of the organisation and those at the bottom.

Traditionally,     UK businesses have tended to be tell. Such businesses have long chains of command from those at the top of the organisation to those at the bottom. Businesses with many layers of hierarchy frequently experience communication problems as messages moving up and down the organisation pass through many people.

Perhaps attracted by the prospect of faster and more effective communication, and influenced by Japanese and American companies, UK businesses have moved towards flatter organisational structures. This process of flattening structures has led to businesses operating with significantly wider spans of control.

Spans of control

A narrow span of control allows supervisors and managers to keep close control over the activities of the employees for whom they are responsible. As the span of control widens, the subordinate is likely to be able to operate with a greater degree of independence. This is because it is impossible for an individual to monitor closely the work of a large number of subordinates. A traditional view is that the span of control should not exceed six, if close supervision is to be maintained. However, where subordinates are carrying out similar duties, a span of control is ten or even twelve is not unusual. It is normal for a span of control to be less at the top of an organisation. This is because senior employees have more complex and diverse duties and are, therefore, more difficult to supervise.  

Delayering

Delayering occurs when businesses remove one of more layers of hierarchy from the organisation. A number of businesses have implemented large-scale delayering programmed over recent years. Many businesses have removed middle managers from their organisational structures.