What is a Business?

A business is any organization that uses resources to meet the needs of customers by providing a product or service that they demand.

Both for-profit and non-profit organizations are classified as businesses.

• Profit-making businesses aim to make a profit by selling goods or services.

• Non-profit making businesses aim to please the customer and a human’s well-being rather than make a profit.

Stages in the Production of Finished Goods

The Economic Problem

Needs & Wants

• A need is something we have to live.

  • Ex: food, water, clothing

• A want is something we desire but don’t necessarily have to have

  • Ex: holidays abroad, laptop, accessories

• Wants are unlimited, however resources are limited. Thus, creating scarcity.

• When making a choice the next best alternative is called opportunity cost

Opportunity Cost

• It is defined as the best alternative that is foregone when making a decision.

• Differs from Accounting Cost - in that accounting costs do not look at the cost/value of forgone choices

• Example:

  Transportation Choices

  Using public transportation to travel to a particular destination by foregoing the option of traveling in one’s own vehicle

The Main Functions of Business

Human Resources [HR]

• Responsible for managing the personnel of the organization

• Deal with issues such as:

  • workforce planning

  • recruitment

  • planning

  • training

Finance & Accounts

• In charge of managing the organization’s money

• The director must ensure that accurate recordings and reporting of financial documentation takes place.

Marketing

• Responsible for identifying and satisfying the needs and wants of customers

• In charge of ensuring that the firm’s products sold

• Functions of a product:

  • Price

  • Promotion

  • Place

Operations/Production

• Responsible for the process of converting raw materials and components into finished goods

• Applies to the process of providing services to customers

Sectors of Industry

Primary Sector

Businesses involved in the cultivation or extraction of natural resources

Examples: fishing & agriculture

Secondary Sector

The construction and manufacturing of physical products

Examples: clothing manufacturers & factories

Tertiary Sector

Providing services to the general population

Examples: transportation & restaurants

Quarternary Sector

Involved in intellectual, knowledge-based activities that generate and share information

Examples: consultancy services & scientific research

Factors of Production

In the production of any good or service, the following resources are needed:

• Land - all natural resources provided by natural [forests, fisheries]

• Labor - efforts and skills of people

  • skilled laborers = mental ability

  • unskilled laborers = physical ability

• Capital - the finances, machinery, and equipment

• Enterprise (Entrepreneurship) - the management, organization, and planning of the three factors of production

Entrepreneurship & Intrapreneurship

An entrepreneur is an individual who plans, organizes, and managed a business, taking on financial risks in doing so. They combine the 3 factors of production to produce a good and/or service.

Intrapreneurship is the act of being an entrepreneur but as an employee within a large organization. An intrapreneur is described as an employee who thinks and acts as an entrepreneur within a section of the organization.

Reasons for Starting Up a Business

Earnings

• Potential returns from setting up your own business can easily outweigh the costs, even if the risks are high.

Growth

• Capital Growth - assets such as property and land tend to increase in value over time

Transference & Inheritance

• Many self-employed people view their business as something they can pass on to their children. This helps maintain a sense of security that might not be possible if they chose to work for an employer.

Challenge

• Setting up and running a business may be viewed as a challenge. However, it is this challenge that drives people to perform and get that personal satisfaction.

Autonomy

• Being self-employed means that there is independence, freedom of choice, and flexibility in how things are done within the organization.

Security

• More job security when someone is their own boss

• Risks are great, but being self-employed makes it potentially easier to accumulate personal wealth (financial security) to provide higher funds for retirement.

Hobbies

• successful entrepreneurs have a passion for what they do and this is made easier if the nature of the work is directly related to their interests.

Steps in the Process of Starting Up a Business

1. Write a Business Plan

This includes the goals and objectives for the new business with an outline plan of how these targets are to be accomplished.

2. Obtain Start-Up Capital

Small business owners will use their own savings and/or obtain loans to finance their start-ups. The loan process can take several months to complete, with the lender usually requesting a completed business plan before any funds are approved.

3. Obtain Business Registration

Before a business can trade or hire workers, it must satisfy registration and licensing requirements. The owner must also register the legal status of the business.

4. Open a Business Bank Account

Setting up a business bank account allows the business to pay for its costs of operation and to receive payments from customers.

5. Marketing

Potential customers need to know about the business and its products. This includes market research, advertising, and social media.

Problems that a New Business May Face

Lack of Finance

• Owners of new or small businesses might not have the credentials or experience to secure funding.

• Some business owners might have to remortgage their own homes to raise the funds needed

Cash Flow Problems

• Problem with working capital [money available for the daily running of a business]

  • Lots of raw materials that can’t be easily turned into cash

  • Customers might demand a lengthy credit period [buy now - pay later]

  • Ongoing costs = wages, rent, utility bills

• Produce cash flow forecast - a safety net to cover any shortfalls

Marketing Problems

• Arise when businesses fail to meet customer needs which results in poor sales

• The key to success is to market research - identify a gap in the market and fill it

Unestablished Customer Base

• Attracting customers is an issue new businesses face

• Customer loyalty is built over a long period of time and may require marketing and large amounts of money

People Management Problems

• New businesses lack experience in hiring appropriate staff, with all the necessary skills

  • leaders to poor levels of customers service

  • the need to retain staff or rehire people

Legalities

• paperwork and legal requirements of setting up a business can be confusing, time-consuming, and expensive

• any oversight may lead to paying compensation or penalty fees

Production Problems

• difficult to forecast the level of demand

  • Overproduction: stockpiling, wastage, increased costs

  • Underproduction: dissatisfied customers, loss of potential sales

High Production Costs

• huge amounts of money needed for purchasing assets required for production

• need to pay start-up costs such as rent, advertising, and insurance

Poor Location

• Busy areas offer the highest potential numbers of customers, but rent will cost the most

• try to keep fixed costs [rents & mortgage] low

External Influences

• all businesses are prone to shocks that create a difficult trading environment

• new businesses are more vulnerable, so potential for business failure is greater