BUSS1 Basics


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Essential application, analysis and evaluation points to consider in your BUSS1 exam answers

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BUSS1 Basics

  1. 1. BUSS1 Basics Essential application, analysis andevaluation points to consider in your BUSS1 exam answers
  2. 2. Enterprise and EntrepreneursRisk is not something for an entrepreneur to fear. It is a part of businesslife. The challenge is to identify the key risks, evaluate them, and thenmake decisions using sound judgement.It is relatively easy to start a new business in the UK. However, thesupport provided by the government for entrepreneurs is limited - fewstartups make use of government help - most just get on with theprocess of getting trading.Running a startup is always tough - even a successful business mightseem to have many problems and challenges to overcome. Rememberthis when the examiner describes a business that seems to be in trouble.It is vital that you are able to describe the reasons why people want tobecome entrepreneurs and the characteristics that successfulentrepreneurs tend to have.
  3. 3. Generating and Protecting Business IdeasRemember that the best business ideas are usually copied, often quickly, bycompetitors. Relatively few startups are able to get protection from patents,copyright or trademarks. The most effective protection for a small businessusually comes from delivering a great product and building customer loyalty.Make sure you know the difference between a trademark, patent andcopyright. They offer different kinds of protection. Patents, in particular, arequite difficult to obtain. Many startups don’t bother getting protection fromany of these options.You should appreciate that a startup doesn’t have to have a new idea. Itmight focus on doing the same thing as a competitor, only cheaper, quickeror better.Startups are also constrained by their time and resources. A business ideaoften comes from personal or business experience, and is developed whilstthe entrepreneur is working for someone else!
  4. 4. Adding Value and Targeting a Niche MarketAdding value and niche markets are core and popular topics in the BUSS1exam. Focus on them.Adding value is the route for a startup to win customers and earn profits.There are many different ways a business can add value, but it is alsoimportant for a startup to keep things simple - only offering the things thatcustomers are prepared to pay for.Look out for low profits or (worse) losses as a sign that the BUSS1 case studybusiness is not adding sufficient value. Are input costs too high? Is theselling price of the output too low?Startups are nearly always better advised to target a niche segment.Opportunities in niche markets are usually lower risk and provide a startupwith the right idea to deliver added value. The two concepts are very closelylinked!
  5. 5. FranchisingFranchising is a very popular topic with the BUSS1 examiner - make sure youknow this topic well!Remember that a business idea for a startup doesn’t have to be original.Many new businesses are formed with the intention of offering an existingbusiness idea. The use of franchises is a great example of that. Why set up anew pizza delivery outlet when you might be able to open a Dominos Pizzashop and trade successfully almost immediately?Opportunity cost is an important concept to remember here (and a greatone to use in an exam answer). By choosing a franchise, the entrepreneur isforegoing some potential benefits that he/she might have enjoyed by settingup all alone. For example, a 100% share of the profits earned (rather thansharing them with the franchisor).
  6. 6. Market Research for a StartupMarket research is a crucial activity for a startup as it helps reduce the risksinvolved in the enterprise.However, startups rarely have the resources to invest in substantial marketresearch, so research should be clearly focused and ideally be low-cost.You should be able to explain the advantages and disadvantages of thedifferent kinds of market research.You should also question the data that is provided about market research inBUSS1. Was the sample size large enough? Is it out-of-date? How relevantis it to the target market and customers?The best market research insights for a startup often come simply fromtrading, talking to customers and suppliers, observing what happens with aproduct launch etc.
  7. 7. Analysing & Understanding the MarketThere is lots of opportunity to analyse a market in a way that helps a startup:segments, growth, size, trends, customers etc. A startup that is focused onreally understanding its market has the best chance of success. Look out forevidence of this in your BUSS1 case study.In the exam you will be expected to be able to calculate market share,market size and market growth, and to be able to interpret the calculations.Make sure you practice these calculations - don’t shy away from them!You should also appreciate that there are several factors that affect demandfor a product, not just price. Some factors will be more important thanothers - it depends on the product and market!Startups often find it hard to estimate likely demand for their business andmany entrepreneurs underestimate how hard it is to establish and build acustomer base from scratch.
  8. 8. Choosing a Legal StructureWhilst most startups choose the sole trader option, this is mainly because ofthe perceived convenience rather than any compelling advantage. It is muchbetter to form a limited company.Getting the protection of limited liability is essential if the entrepreneur isinvesting significant capital into a startup or if the business will have largedebts.Remember that BUSS1 is about startups and small businesses. Thesebusinesses almost never become public limited companies in the first 5-10years of trading, so don’t bother spending too much time learning aboutpublic companies and stock market flotations.Make sure you have a strong knowledge of the advantages anddisadvantages of the various forms of business organisation.
  9. 9. Sources of Finance for a StartupIt is vital that a startup chooses sources of finance that are appropriate andsufficient for its needs. Remember that too much finance of the wrong sort(e.g. an unnecessary large bank loan) can create huge problems for astartup.Many startups find it hard to raise finance until they have established atrading record. It is almost always up to the founder to invest funds to getthings going.Entrepreneurs are best advised to retain as much control over their businessas possible. That means not selling substantial proportions of the sharecapital to other investors.A well run startup uses its cash flow forecasts to identify when additionalfinance is required. This means that a startup may choose to raise finance atseveral stages - not always right at the start of trading.
  10. 10. Choosing a Business LocationMany startups begin in the back bedroom, kitchen or garage - i.e. wherecosts are low. The rapid improvement in communication and collaborationtechnologies makes it possible for even large businesses to operate withoutthe expense of traditional business locations.A startup often changes location several times in the early years of trading,adding more space as required. Having too much paid-for space increasesthe fixed costs of a startup and raises the break-even level of output.Startups and small businesses often have a local geographical focus,particularly retailers and franchises. However, a startup business thatfocuses on e-commerce might quickly find itself serving a national andinternational market.In the BUSS1 exam, the location issues will very much be determined by thekind of business (product, customer, sector etc). The location issues tend tobe more challenging for manufacturing and retail businesses.
  11. 11. Employing People in a New BusinessFor an entrepreneur, employing the first few people in a new business isfraught with risk. Make the wrong choices or pay someone too much, andthe startup’s overheads soon increase significantly. Remember - everyperson added to the payroll will increase the breakeven output. The use ofpart-time or temporary staff is a popular way of handling increasedworkload.On the other hand there is a temptation for a small business owner to wantto do everything himself/herself. This can restrict the growth potential of thebusiness. A successful startup will soon need people with a variety of skillsand experience.Make sure you can describe the main advantages and disadvantages of thedifferent kinds of employment.
  12. 12. Calculating Costs, Revenues and ProfitsAn entrepreneur starting a new business often finds it hard to forecast sales,costs and profits, especially if he/she has no experience of trading in themarket. It is not unusual for the initial assumptions made in a business planto prove inaccurate, so don’t be too critical of the entrepreneur if this comesup in your BUSS1 case study.Setting the price for a new product is particularly difficult. Many factorsinfluence the price that customers are prepared to pay. A good piece ofadvice to offer in your answers is for the entrepreneur to experiment withdifferent prices, promotions etc in order to find a profitable price whichcustomers are happy to accept.Startups often under-price their product because they fear too high a pricewill discourage demand when the business or product is launched. Anincrease in price will not necessarily result in lower quantity demanded.
  13. 13. Breakeven AnalysisFocus on understanding how various changes in the business can affect thebreakeven level of output. A breakeven chart can help you illustrate this, butit is more important to understand why the changes affect breakevenoutput, and what a business can do in response.Don’t assume that breakeven analysis is a proven, scientific method. Itmakes lots of assumptions about the ability of the business to identify whichcosts are variable and which are fixed - in reality this can be quite tough.Breakeven analysis is particularly useful for a new business or for anybusiness which is loss-making or barely making profits.In the exam, you are unlikely to be asked to draw a breakeven chart fromscratch. But you might have to complete the missing bits of a part-completechart and/or identify the results of the chart.
  14. 14. Cash Flow Forecasting for a StartupYou cannot underestimate the importance of cash flow forecasting for a startup.Think of the cash flow forecast as the “early warning system”, which will showwhen the danger periods are and how viable the business is.Don’t forget that cash flow forecasts have limitations, not the least because theyare based on estimates and assumptions. It is important for the entrepreneur tothink about the different scenarios that might arise The “worst-case” scenario isalways worth assessing to see what might happen if things do go badly wrong!It is really important to understand that cash flow is not the same as profit. Abusiness can be profitable, but suffer from cash outflows if customers don’t paytheir debts or suppliers need paying early. Investment in fixed assets (cashoutflows) will help profits in the medium-term, but is bad news for cash flow inthe short term.Make the links in BUSS1: e.g. market research can help improve the accuracy andreliability of cash flow assumptions.
  15. 15. Business Planning & BudgetingTime spent setting and monitoring budgets has an opportunity cost - workingon a budget spreadsheet could be spent instead on visiting customers,training staff or developing new product ideas. So a startup budget can besimple - often nothing more than a single spreadsheet - to be effective.Remember that a business plan isn’t just written to raise finance. It plays animportant role in the whole startup process.A startup’s business plan needs to be flexible. The figures are bound tochange once the business starts trading and the entrepreneur discovers whatthe market is really like. A good business plan provides a focus and adiscipline for the entrepreneur. However, it is no substitute for what reallymatters to make the business a success - i.e. hard work, skill, luck etc.Too much business planning is a bit like procrastination - putting off moreimportant work. The entrepreneur needs to spend most time out in themarket, finding customers, promoting the product etc.
  16. 16. Objectives of StartupsIt is vital that you appreciate the different objectives that a startup mighthave. Not every business wants to grow rapidly into a multi-million poundconcern. Many small businesses simply want to earn a lifestyle return.Think about the motivation of the entrepreneur featured in the BUSS1 casestudy. What motivates him/her to start a business? What evidence is thereabout what objectives are important? How realistic are these objectives?Most startups don’t last beyond their third birthday, so it is quite likely thatthe business idea featured in the case study is not a viable one. Look out forevidence that the entrepreneur is being over-optimistic about the chancesof success.
  17. 17. Startup Risks - What Can Go Wrong?In the BUSS1 case study, you should expect the business to be facing risks,problems and the possibility of eventual failure. This is entirely normal for astartup.You should also expect reality to be different from the assumptions made inthe original business plan.Look for the overall balance of evidence about how well the business isperforming and how effective the business planning process was. Howmuch market research was undertaken and was the evidence from thatresearch reliable and acted upon?Also consider whether the entrepreneur(s) featured has what it takes tomake the business a success. Lots of potential problems and hurdles can beovercome if the entrepreneur possesses the right qualities (e.g.determination, persistence)
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