Standard Grade Business Management - How Do Businesses Start?
How do Businesses Start?
Why do people set up in business? <ul><li>they want to be their own boss </li></ul><ul><li>they have an idea for a new product or service </li></ul><ul><li>they have been made redundant and start up their own business as an alternative to unemployment </li></ul><ul><li>they have a hobby which gradually turns into a business, eg a keen gardener </li></ul>People who have been successful in starting their own business are said to have shown “enterprise”
some famous people who have shown “enterprise” … Richard Branson Duncan Bannatyne Using the Internet, see what you can find out about these entrepreneurs and their businesses Anita Roddick Michelle Mone Rachel Elnaugh
ENTERPRISE <ul><li>Enterprise means that an individual: </li></ul><ul><li>has good ideas </li></ul><ul><li>is enthusiastic and hardworking </li></ul><ul><li>is determined to succeed </li></ul><ul><li>is prepared to take risks </li></ul>
Enterprising people get their ideas in different ways. These include: <ul><li>mixing 2 ideas together – having a coffee shop inside a garden centre, or a takeaway inside a video shop </li></ul><ul><li>spotting a ‘gap’ in the market – staring a home delivery service for video/DVD rentals </li></ul><ul><li>taking an ‘old’ idea and improving it or providing it at a cheaper rate </li></ul>
What is needed to start a new business? These are known as the Factors of Production land labour capital enterprise
Factors of Production LAND means the natural resources which businesses use, eg plot of land, coal, diamonds, forest, water, wood
Factors of Production LABOUR means the workforce of a business
Factors of Production CAPITAL means the tools, machinery and equipment that a business owns or controls. It also includes the finance that the owner has invested in the business
Factors of Production ENTERPRISE means the business ideas that an entrepreneur or owner has on how to use land, labour and capital in his/her business
What are the risks of setting up a business? <ul><li>Entrepreneurs risk: </li></ul><ul><li>no-one buying their product/service </li></ul><ul><li>being unable to pay everyday bills/expenses </li></ul><ul><li>losing all their money </li></ul><ul><li>losing their personal possessions (eg car/house) if unable to pay back money borrowed </li></ul>
How can these risks be reduced? The owner of the business should: <ul><li>conduct Market Research – to make sure that there is a demand for their goods/services </li></ul><ul><li>visit an accountant or their Bank Manager for advice on starting a business </li></ul><ul><li>prepare a Cash Flow Forecast – to calculate all possible costs/expenses and likely income, to see if the business will be worthwhile </li></ul><ul><li>produce a Business Plan </li></ul>
What is a Business Plan? <ul><li>A Business Plan outlines the objectives of a business and how it intends to achieve these objectives. </li></ul><ul><li>Information contained in a business plan may include: </li></ul><ul><li>a description of the business (name, structure etc) </li></ul><ul><li>how the business will be financed </li></ul><ul><li>a description of the product/service </li></ul><ul><li>the market at which the product is being aimed </li></ul><ul><li>any market research that may have been carried out </li></ul><ul><li>who the main competitors are </li></ul><ul><li>the resources being used – staff, premises, equipment etc </li></ul><ul><li>projected sales figures, cash flow forecasts and profit estimates </li></ul>
Why produce a business plan? Sometimes the person starting up in business will not have all the finance they need. Therefore a business plan may convince someone (possibly a bank manager) to lend the business initial start-up cash. The Business Plan shows that the person starting up the business has taken time to consider their idea.
Sources of Assistance <ul><li>A new or existing business can turn to a variety of different organisations for support and assistance. These include: </li></ul><ul><li>Local Enterprise Agencies – government funded organisations set up to help small businesses. They offer free advice, training courses and provide contacts. </li></ul><ul><li>The Prince’s Trust – gives advice, training and grants to young people starting in business. In Scotland they are known as The Prince’s Scottish Youth Business Trust. </li></ul>
More Sources of Assistance <ul><li>Trade Associations – Provide advice in their area of business. Examples include the Association of British Travel Agents and the Institute of Plumbing </li></ul><ul><li>Banks – give advice on sources of finance and drawing up a business plan. </li></ul><ul><li>Inland Revenue – gives advice on taxation matters </li></ul><ul><li>Lawyers – give advice on legalities associated with setting up a business and employment legislation. </li></ul>
Where does the money come from to finance a business?
FINANCE All businesses need money (finance) in order to set up and run the business. This money will be used to pay for a range of goods and services they will require, such as: <ul><li>Land & Premises </li></ul><ul><li>Machinery </li></ul><ul><li>Vehicles </li></ul><ul><li>Raw Materials </li></ul><ul><li>Stock for Resale </li></ul><ul><li>Wages </li></ul><ul><li>Rent </li></ul><ul><li>Heat & Light </li></ul><ul><li>Insurance </li></ul>
The sources of finance available to a business varies greatly depending on: <ul><li>The size of the business . Generally the larger the business the easier it tends to be for it to borrow money since lenders prefer to lend money to ‘safe bets’. </li></ul><ul><li>(If a business does not have the money to pay back a lender, it can always raise the cash needed by selling its assets. Assets used to raise cash in an emergency are known as ‘collateral’.) </li></ul><ul><li>what the money is needed for </li></ul><ul><li>the amount of money involved </li></ul>
There are 2 main ways in which a business can get finance: INTERNALLY – finance from within the business, eg selling assets, reinvesting profits and the owner investing their own savings (introducing more capital) <ul><li>Internally generated funds have advantages for a business in that it does not need to: </li></ul><ul><li>Pay interest </li></ul><ul><li>Convince others that it is a ‘safe bet’ </li></ul>
Externally Generated Finance The main types of external finance for businesses include: <ul><li>Issuing Shares </li></ul><ul><li>Issuing Debentures </li></ul><ul><li>Loans </li></ul><ul><li>Hire Purchase </li></ul><ul><li>Overdrafts </li></ul><ul><li>Leasing Agreements </li></ul><ul><li>Trade Credit </li></ul><ul><li>Small Business Loans Guarantee Scheme </li></ul><ul><li>Grants </li></ul>
Issuing Shares This is an option for Limited Companies and can raise very large amounts. If they require more capital then they may be able to issue shares. Shareholders have limited liability and receive an annual dividend in return for their investment. However, the cost of issuing shares can be expensive.
Issuing Debentures This is a source of finance used by plcs. A debenture is a type of long term loan. Debenture holders (the people who have loaned the money) receive fixed interest over the period of the loan and then receive the full amount of the loan back at the end (eg after 25 years).
Loans Loans are usually a medium term form of financing a business. The bank (or other lender) agrees to lend an amount of money for a specific period of time, with the borrower repaying it back in instalments. The borrower must remember that interest will be repayable on any amount borrowed.
Hire Purchase This is when a business buys assets now and pays for them later. It is a common way of purchasing new vehicles. The business will pay a deposit with the balance being repaid in equal instalments. This results in the cost of the asset being spread, making it easier to afford. However, the asset is not owned fully by the business until it is fully paid, and interest rates can be high. If payments are not made the asset may be repossessed by the Hire Purchase Company
Overdrafts Overdrafts are a short term source of finance. The customer arranges to take out more from their bank account than they have in it. It is simple to arrange and the amount of overdraft varies. Interest is only charged on the amount overdrawn for the actual number of days overdrawn. It can however work out expensive if used for a long period of time.
Leasing Agreements A business may rent their premises, equipment or vehicles from a leasing company. By leasing the business never owns the asset however it can be used to avoid major expenditure on assets. At the end of the lease, the asset can be changed with a new model (usually ideal for vehicles and computing equipment)
Trade Credit Businesses will receive stock from suppliers now and pay for them at a later date (usually 30 days). This is useful for new businesses that do not have a steady flow of income. However discount for prompt payment may be lost.
Grants Some businesses receive a grant from either central or local government, the European Union or Enterprise companies. This may be an incentive for organisations to locate in certain parts of the country needing regenerated because of high unemployment etc. They are one off payments.
Small Business Loans Guarantee Scheme This is a government backed scheme that guarantees that 80% of a business loan will be paid back by the government if the business defaults (fails to make their payments)