Business Studies - 01 Exam

Sole Trader

A self-employed person who owns and runs their own business as an individual. A sole trader business doesn't have any legal identity separate to its owner. That leads many to say that as a sole trader you are the business and there is unlimited liability

Sole Trader - Advantages

Can be your own boss so get to make your own decisions

Few legal requirements to set up

Able to organise and run the business as you wish

Control over employees

Can choose how long and when to work

Sole Trader - Disadvantages

Unlimited liability – sole traders are personally responsible for al the debts of the business

Hard to gain finance which can make expansion difficult.

Often need to take advice from outside - consultants can be costly

Hard to take time off if sick or want to go on holiday

Unlimited Liability

Each business owner is equally responsible for whatever debt within a business. If the company is unable to repay or defaults on its debt an owner's personal wealth can be seized to cover the balance owed- they can take things that you have put in your contract as collateral.

Partnerships

A Partnership is a joint ownership of a business between 2 to 20 or more people. Often used by professionals - Lawyers, accountants, doctors, architects. They are subject to the Partnership Act 1908

Partnerships - Advantages

Partnership Agreement clearly creates a business agreement between the partners

Increased levels of capital available

Shared responsibility

Increased knowledge and specialism

All partners motivated due to sharing of profits

Partnership - Disadvantages

Unlimited Liability - like the sole trader

If business fails, partners will be forced to contribute their personal resources to settle debts

Partners can disagree on important decisions

It can be time consuming to reach a consensus

Partners can suffer if one partner is inefficient or dishonest

What is the Partnership Act

A legal agreement between Partners that specifies their roles, responsibilities, profit, dividends- a contract.

Limited Companies

Companies are jointly owned by people with an interest in and have invested in the business

Private Limited Companies

Unlike a publicly limited company, where shares are traded on the stock exchange, a private limited company does not publicly trade shares and you have to be invited to hold shares in the company

PLC - Advantages

All shareholders have limited liability – personal assets owned by the shareholders are NOT sold off to pay for company debts

A large number of people can purchase the shares

Additional shares can be issued in order to raise capital and expand the company

PLC - Disadvantages

Legal costs issues when being established

Cannot sell shares to public

Public is able to view accounts

Difficult to transfer shares, all shareholders have to agree

Public Limited Companies

A public limited company, or 'PLC' for short, is a company that is legally allowed to offer its shares for sale to the public. They don't have to offer shares to the public if they choose not to, but the option is there if and when needed.

Internal Funding

Contribution by existing owners into the business, eg retained profit (keeping back profit).

External Funding

Funds provided by a bank or other finance company, eg a loan, mortgage or overdraft.

Short Term Finance

Provides working finance for the day to day running of a business eg: IT system, pay bills, buy small equipment

Finance needed for up to three years

Medium Term Finance

Often needed to purchase capital goods, e.g. farm tractor or printing equipment.

Finance needed for three to five years

Long Term Finance

Usually used to purchase long term fixed assets, e.g. additional buildings or plant.

Finance needed for more than ten years

Internal Funding - Retained Profit

Owners take their share of the profit and then the rest is ploughed back into the business.

Does not have to paid back to other finance

No interest has to be paid like a loan

Reduced dividend made to share owners

Some businesses profits are too low to fund expansion

A new business will not have retained profit

Internal Funding - Sale of Existing Assets

Any assets not required by the business could be sold, e.g. surplus land

A good use of the business capital

Sometimes takes time to sell an asset

This option is not available to new businesses

Internal Funding - Running down stock levels to raise cash

This means that businesses do not replace sold stock as quickly (the shelves have less on them)

A relatively quick way to raise cash

Reduces cost of storing stock

Businesses need to be careful to ensure stock levels meet demand

Internal Funding - Owner’s Savings

An option for sole traders and partnerships

Quickly available

No interest payments

Increases risk for owner due to unlimited liability

Owner may not have the required savings

External Funding - Issues of shares

Only available to limited liability companies

Would not need to be repaid to shareholders so is therefore permanent

No interest payments

Shareholders expect to be paid a dividend

Dividend

% of the profits each year, depends on how many shares they own

External Funding - Bank Loans

Size of loan and length of repayment can vary

Usually quick to organise

Larger companies usually able to borrow large amounts of money compared to smaller businesses

Interest must be paid

Loan needs to be repaid

Security or collateral usually required (eg: they use your building as security)

External Funding - Grants or subsidies from outside agencies

E.g. the government

Usually do not have to repaid

Usually some ‘string attached’ – such as time to complete a certain job.

Short Term Finance - Overdraft

Businesses are given permission to ‘overdraw’ their bank account. This finance can be used for everyday expenses, such as, wages.

Overdrafts can vary each month

Overdrafts can be cheaper than a loan

Interest rates vary

Banks can call in the overdraft at any time

Short Term Finance - Trade Credit

When businesses delay paying their suppliers. A little like an interest free loan.

Suppliers may withdraw any discounts or refuse to work with the business in the future

Medium Term Finance - Bank Loans

Usually require monthly payments

Interest charged – can be high

A large loan is not required to purchase an asset (buildings, machinery – anything the business owns of value)

Cash deposit is paid at beginning of loan period

Medium Term Finance - Hire Purchase

Payable over a fixed period

Allows a business to buy a fixed asset and pay it off over a long period

Business does not need to find large amounts of cash at purchase of asset Interest needs to be paid – rate can be high

Medium Term Finance - Leasing

Enables business to use asset they can not afford to purchase

Monthly payments for lease required

Leasing company responsible for maintenance

Cost of leasing higher than purchasing asset

Long Term Finance - Issue Shares

Only available to limited liability companies

Private limited liability businesses sell shares privately to friends, family or business associates

Share issue provides permanent capital

No interest payments

Dividends paid to share owners

Long Term Finance - Long Term Loans

Interest paid

Must be repaid

Often need security

Internal Communication

When messages or information is sent to people working in the same business or organisation

e.g. an email sent out a team or department, a manager talking to employees

External Communication

Methods used to send messages between one business or organisation and another, or to individuals, such as customers

e.g- orders sent to suppliers of stock, advertising goods or services, emailing pricing to potential customers

One Way Communication

When a message is sent and the receiver has no opportunity to reply or respond. e.g. take these to the storeroom

Two Way Communication

When the receiver is able to reply or respond to the sender. Sender is able to see whether the receiver has understood the information

Verbal Communication

Involves the sender of the message speaking to the receiver,

e.g: Telephone conversation One-to-one conversations Meetings Video conferencing, such as Skype

Written Communication

E.g; Written, Letters, Memos, Reports, Notices, Faxes,

e-mail

Visual

E.g; Films, Videos, Powerpoints, Posters, Charts / Diagrams

Effective Communication - why is it so important? Motivates employees

Easier to control and keeps the business on track

Makes successful decision making easier for managers

Better communication with customers

Improves relationships with suppliers

Improves chances of obtaining a loan

Better communication with customers will increase sales

Improve relationships with suppliers and possibly lead to more reliable delivery

Improves chances of obtaining finance – e.g. keeping the bank up-to-date about how the business is doing

Barriers to Effective Communication

Different status of the sender and the receiver – eg communication between the boss and the worker may not be understood due to their different levels.

Use of jargon – unfamiliar language that not everyone understands (eg: text language, abbreviations)

Selective reporting – where the sender gives the person incorrect information

Poor timing – when info is not immediately received it becomes irrelevant

Conflict – if the sender and receiver don’t get along then information can be ignored.

Responsibilities of an Employer

To make the workplace safe, and to ensure the health and safety of those working in or visiting the workplace you control.

To provide all employees with a contract.

An employer has a social responsibility, duty and obligation to it’s employees to pay them fairly for the work they do.

To pay their employees on time

An employer has a legal obligation to keep all personal information, including medical records, confidential.

Responsibilities of an Employer (pt.2)

All employers have a duty to maintain a healthy and safe work environment.

This means employers must:

Provide clean drinking water and clean toilet facilities;

Provide safe working conditions;

Provide medical assistance in the case of emergencies.

Pay workers when sick

Advantages of being a Good Employer

Motivated employees which could lead to:

employees who work hard for their employers

increased productivity happy working environment reduced stress

fewer days sick

high quality service or production

Disadvantages of being a Bad Employer

De-motivated employees, which could lead to them:

a. reducing productivity

b. providing poor production or service quality

c. employees striking or taking industrial action

d. breakdowns in communication and relationships with employers

e. increased complaints about pay and working conditions

f. increased levels of stress / days sick / unhappy workplace.

Responsibilities of an Employee

to take reasonable care of your own health and safety

to turn up to work on time and perform the duties outlined in your job description

to complete the tasks set by your manager to the best of your ability

be aware of the health and safety of colleagues

Don’t disclose the employer’s confidential information

Look after the employer’s property

Be prepared to change when the job changes

Be honest

Trial Period

Trial Period: All businesses provide you with an offer of employment that includes a trial period of up to 90 days. A trial period is voluntary, and must be agreed to in writing in good faith as part of your employment agreement. A trial period may be agreed to only if you have not previously been employed by the employer.

Examples of Statutory Rights

Rights:

Have a written employment agreement. Which is either an individual agreement or a collective agreement.

Be paid at least the national minimum wage

Not to have illegal deductions made from pay T

he right to paid holidays – 4 weeks at present T

he right to join a union (protection against employers)

The right to maternity leave (one year in NZ)

Not to be discriminated against

Rest and meal breaks

Public holidays off (or get a day in lieu if working)

Entrepreneur definition

An Entrepreneur is someone who is willing to take the responsibility, risk and rewards of starting and operating a business.

Entrepreneur skills

Communication skills

Negotiation skills

Leadership skills

Organisational skills

People skills Management skills

Time-management skills

Advantages of becoming an Entrepreneur

They are their own boss so they will get to make all the decisions

They now have full responsibility for the success of their business compared to being an employee

Get to keep all the profits and decide how to spend them

Disadvantages of becoming an Entrepreneur

Loss of permanent income when they give up regular jobs

On-going stress of whether their business will make money in the future and if it will be a success.

Business could end up in bankruptcy

No demand for their business

Characteristics of Entrepreneurs

Passionate, Enthusiastic, Hardworking, Responsible, Risk-taking, Creative

Entrepreneurs gain advice by..

Finding a mentor to assist

Speaking to a business banking manager

Retired business person

Local Chamber of Commerce

Risk and Reward

In business there is a positive relationship between risk and reward. The greater the risk taken by an entrepreneur, the greater the potential reward in terms of the profit they hope to make. Entrepreneurs will only take on a risky venture if they see a great return from it. There is also the possibility that they lose money too.

Business Aims and Objectives definition

Are aims or targets a business works towards.

Reasons for Aims

To increase profits

To improve market share (gaining more customers from your competitors)

To increase sales

To make a high quality product

To open another outlet

Benefits of having objectives

Helps owners to make decisions

Used to motivate employees

Helps guide the business to change or improve

Consequence of not meeting objectives

• If businesses fail to stay on track they can drift into areas that are not relevant to their business. Examples:

• Producing products with no demand

• Spending money on equipment that is not appropriate to the needs of the business

• Getting loans from the bank with no purpose for what it will be used for.

• Staff can become unmotivated and owners may make poor decisions

• In the long term, the business can stop producing profits and may be forced to close.

What is a Business Plan?

A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals.

It may also contain background information about the organisation or team attempting to reach those goals.

What is a Annual Report?

An annual report is a comprehensive report on a company’s activities throughout the previous year.

Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance

Contents in an Annual Report

Chairperson's report

Owner’s / CEO's report

Auditor's report

Mission statement

Financial Statements

Invitation to the company's AGM (Annual General Meeting)

What are Financial Documents?

The financial documents of a business are called its ACCOUNTS

Financial Statements are produced at the end of the financial year (usually 31st March) and show the profit or loss made by the business and the equity.

Accounts vs an Accountant

Definition: The financial records of a firm’s transactions Accountants

Definition: Are professionally qualified people who have responsibility for keeping accurate accounts and producing the final accounts

Assets

A resource of value that you own or lease that helps you run your business.

Liabilities

Everything your business owes, presently and in the future. These include loans, legal debts or other obligations that arise in the course of business operations.

Equity

Represents the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off.

Final Accounts/ Financial Statements

Are produced at the end of the financial year (usually 31st March) and give details of the profit or loss made over the year and the worth of the business.

Useful if the business is to be sold or the owner wants to get a loan from the bank.

Documents

During the year there are a large number of financial documents that are created as the business buys and sells goods and services.

Receipts

Invoices

Credit notes

Purchase orders

Statement of Accounts

The documents will be used by Accountants to:

keep records about suppliers

keep records about customers

provide the data for final accounts

Inland Revenue Requirements

IRD requires businesses to keep their documents for 7 years in case of queries.

The IRD may need to check what tax has been paid so a business must keep their invoices, bank statements and employee information either online or hard copies.

Who is interested in the accounts?

• Business owner - to see if the business has made a profit or loss, what to spend the money on.

• Managers/ Employees of the business - to see if the business has made a profit so their jobs are safe.

• IRD -to see what tax must be paid if the firm makes a profit.

• Bank Managers - to see if the firm can pay back the loans.

• Creditors - suppliers that the business owes money to. To see if they can pay them back.

• Potential investors or buyers - wanting to see if the business is a good investment.

• Customers – to assess the strength of the business

• Competitors – to compare their performance

**They all want to check on the company accounts to see the financial performance.

Cash Flow

To ensure that a business is able to pay all their invoices (bills) on time

To continue to receive supplies (the stock) required to run the business efficiently

Why Stakeholders are interested in cash flow?

• Suppliers want to know if the business will be able to pay if offered credit. Suppliers require payment on time as they will have their own suppliers who will require payment by a certain date

• The owners and other investors want to evaluate future growth potential

• Employees are interested in the overall cashflow of the business so they continue to get paid

Creditors (banks) to see if the business can pay back their loans