Tayla Saab

Topic 1: Nature of Business

Practice Question 1: Discuss the nature of business and its role in society
Practice Question 2: ‘Profit is the risk for reward’. Explain this statement
Business:
A business can be defined as the organised effort of individuals to produce and sell products that satisfy individual’s
needs and wants for a profit.
Role of Business Overview

Economic Role The financial impact that activities of a business have on groups in the business environment
- Has wealth been created for owners?
- Can more people be employed?

Social Role The impact of business on the community

- How does the community benefit from the activities of business?
- Do businesses provide essential services?
- Are their actions environmentally friendly?

Nature of Business

Producing goods Product: The end result of production  can be a good or a service
and services
Goods Services
Tangible: Products we can see, feel, touch and Intangible: Products which we cannot see, feel,
weigh touch or weigh. Activities that are done for you
by others.
Example: Food, equipment, clothes
Example: Getting your makeup/hair done, Uber
driver
- All businesses provide goods and services to consumers in order to satisfy their needs and wants
- These products are sold in a market where buyers and sellers meet  Physical shop or online
Profit - The return or reward that business owners receive for producing products that consumers want
and need
- Essential for a business to meet its day to day expenses  key consideration for long term
survival

SALES REVENUE = PRICE X QUANTITY PROFIT = SALES REVENUE

– EXPENSES
Employment - Many businesses employ people to perform various activities within the business
- The number of employees depends on the product and demand within the business
- Businesses provide around 80% of private sector jobs
Income - Businesses must provide income to owners, employees and shareholders.
- Employees provide their labour in return for a wage or salary. (remunerated)
- Dividend: Income shareholders in private/public companies receive

Choice - Consumers have freedom of choice and the opportunity to purchase products used for similar
purposes
- Drives competition in the market, in terms of prices and new inventions/innovations
Innovation and
invention Innovation Improvement made to something already established
Invention Development of something new

- Through research and development (R&D), existing products are improved and new products
are created
Entrepreneurship Entrepreneur: Someone who organises a business venture and assumes the monetary risk for it in hope
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and risk of making a profit.
- Businesses provide individuals with the opportunity to turn their ideas and passions into a
livelihood
Wealth creation - Businesses provide jobs and money to employees who spend this money in the economy 
Results in result in higher levels of economic growth and wealth, more production of goods and
more employment
Quality of life - Businesses offer a vast array of products that improve our standard of living

Classification of Business
Practice Question 1: Describe the different types of legal structure for businesses
Practice Question 2: Distinguish between an incorporated and unincorporated business
1. Size

CHARACTERISTICS SMALL MEDIUM LARGE

Business type Corner store Services club Woolworths
Local mechanic Motel/hotel Qantas
Hairdressing salon Engineering factory National Australia Bank

Number of employees Fewer than 20 employees 20-199 employees 200 or more employees

Type of ownership Independently owned and Owned and operated by a few Owned usually by thousands
operated - usually by one or people and/or private of shareholders
two people shareholders

Most common legal Sole trader Partnership Public company

structure Partnership Private company

Decision making Owner/s responsible for Owner/s responsible for Complex decision making,
majority of decisions; simple majority of decisions due to division of
and quick implementation of responsibilities and layers of
decisions management

Sources of finance Equity finance (owner own Owners/partners own savings Many sources including cash
savings/funds raised by own or a loan and/or private reserves, retained profit, sale
owner) shareholders of shares, and loans from
domestic and overseas
Debt finance (obtained from Equity and debt finance institutions
financial institutions; loan) –
difficulty in accessing loans
due to high risk

Market share Small - usually local area, not Medium - dominance within Large - especially for
dominant in the industry a geographic region, some multinational corporations
market dominance that dominate the markets of
many countries

Australian Bureau of Statistics has developed a number of criterion by which the size of a business can be
classified

Classification by employees (summarised)

Micro 1-4
Small 5-19
Medium 20-199
Large 200+
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Micro 1-4
Small 5-100
Medium 101-500
Large 501+
Non-manufacturing Manufacturing

Category Description Example

Local Tends to be small or medium in size, and serves a local area. - Hairdresser
- Bakery/butcher
National A business that operates within the boundaries of one country - Commonwealth/ National bank
only. - National Australia Bank
Global/transnational A business that has productive assets in more than one country, - McDonalds
corporation) and is therefore operating on a worldwide scale. - Zara/ Starbucks
2. Geographical Spread

3. Industry
An Industry consists of businesses that are involved in a similar type of production.

Category Description Example

Primary Extraction of natural, raw materials/resources Mining, agriculture, forestry

Secondary Manufacturing and production of products from raw Food processing, oil refining, energy
materials production

Tertiary The provision of services to consumers

Quaternary Provision of information/intellectual services and knowledge

E.g: journalism, teaching, banking

Quinary Domestic services provided to others

E.g: cleaners, restaurants, childcare

4. Legal Structure

The legal structure selected by the business owner will affect:

 set up/startup costs

 liability – the financial responsibility of owners for any debt created by their business
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Liability: responsibility of owners of business debt

Business Unincorporated Incorporated

Structure Sole trader / partnership Private / public

Liability Unlimited Limited

The owner’s assets are linked to the Business assets and owner’s personal
business assets (one entity) assets are separate (separate entities)

Personal assets must be used in order Personal assets do not have to be sold
to pay business debt in order to pay business debt

Tax Income tax Company tax

Varies depending on how much is 30%
being made

Profit Owners take drawings from account Form of dividend to shareholders

Structure Sole Trader Partnership Private Company Public Company

Pty Ltd – Proprietary Ltd – Limited
Limited
Owners 1 owner 2-20 owners 1-50 owners 1 – unlimited amount
owners
Advantages - Start-up costs are low - Start-up costs are low - Separate legal entity - Raise capital
- Full control over - Partners get to share the - Limited Liability though selling
decisions responsibilities/burdens - Perpetual Succession shares
- Majority of profit to - Other members of the (doesn’t stop when - Widen
owner family can be involved owner dies) shareholder base
- Easy to cease operation - More capital can be - Borrowing capacity and spread risk
- Establish/operating is raised - High borrowing
simple - Tax liability can be capacity
reduced - Perpetual
- Better work/life balance succession
- Minimal government - Growth and
regulations expansion
opportunities
Disadvantages - Unlimited liability - Unlimited liability - Smaller resources - More legal
- Capacity to raise - Risk of disagreements - Cannot trade shares requirements
money is limited and tension between on ASX - Transparency 
- Taxed as single person partners - Detailed financial all details kept in
- Life of the business is - Don’t have total control accounts public domain
limited - Profits need to be shared - Higher - Ownership and
- Hard to take holidays - Partnership may cease if administration costs control issues
one of them dies - Limited personal - Initial financial
control over commitment is
decisions higher

Government Enterprise
- Government enterprises (public sector businesses) are government-owned and operated businesses (GBEs)
- Provide essential community services such as health, education and roads
- Tendency for governments to sell off businesses they own to private citizens this is known as Privatisation
- Privatisation results in better efficiency, increased competition, revenue raised from sale, and tax payable from
new business
Factors influencing choice of legal structure
Practice Question 1: Explain the factors influencing business classification
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Practice Question 2: Describe the impact of financial influences on the choice of legal structure

1. Size 2. Ownership 3. Finance

Legal structure depends on amount Source of finance may be limited
Small business
of control business owners want depending on legal structure.
Usually has less complex legal
structure (sole trader/partnership) Sole trader – Only option with Sole trader/partnership
- Smaller market share means less complete control - Limited availability of debt
employees due to less products finance due to high risk
being produced and less owners Partnership, private – Less control - Mainly equity finance (own
due to smaller business as owners must share  control is capital) however is hard to raise
responsibility and financing diluted when more people join and obtain due to less owners
Overall  harder to obtain capital
Larger business Public – Once a company floats and
Usually has more complex legal sells shares to the public, ownership Private/Public company
structure (private/public company) is divided amongst thousands of - Easy to obtain debt finance
small shareholders  no control (large loans) due to less risk
- Larger market share means more over business operations - Greater amount of shareholders
employees needed to produce allows for more external equity
more and more owners due to If original owner/s wish to retain finance
larger business responsibility ownership and control of the - Capital can be raised by selling
and greater finance required business, they must to hold more shares in a public company
than 50% of all shares sold Overall  easier to obtain capital
- If business expands, legal
structure must change to cater - As business expands, owners - As business expands more
for more employees and owners have less control capital is required

External Influences in the business environment

Practice Question 1: Outline two external influences on the business environment
Practice Question 2: Discuss what you think is the most significant external influence. Give reasons for your answer.
Factors which cannot be controlled by businesses, but affect their operations

Economic Inflation High inflation: Rising prices increase cost of borrowing, stop major investment and
reduce customer spending (not good for business)

Low inflation: Falling prices decrease cost of borrowing and encourage major
investment and consumer spending (good for business)
Exchange Rates Depreciating: Value of Australian dollar compared to other currencies is falling.
- Cheap exports, expensive imports

Appreciating: Value of Australian dollar compared to other currencies is increasing.

- Cheap imports, expensive exports
Interest Rates Increasing: Reduces customer spending and increases business expenses (not good)

Decreasing: Increases consumer spending and decreases business expenses (good)

Government Increased gov. expenditure: May increase tax  lead to less consumer spending
Expenditure May increase employment  encourages spending

Decreased gov. expenditure: Slows growth in income and employment  less

consumer spending
Economic Cycle Expansion: Consumer confidence/spending rises and output by business increases
 Income rises (good for businesses)
Contraction/downturn: Consumer confidence/spending falls and output by
businesses decrease  Income decreases (bad for businesses)
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Geographic Geographic location
May influence the natural and other resources available for businesses to utilise
- Australia’s location within the Asia-Pacific has provided opportunities for business expansion, sales and
profit amongst other Asian nations  Growth in China has helped dramatically

Demography
Specific characteristics of the population which affects the demand for goods and services
- Australia has an aging population  A loss in skilful employees and an increase in demand for age
related services such as health and aged care has occurred

Globalisation
Process where international trade allows for businesses to contribute to global markets, by distributing
goods and services internationally
- Increased competition, expanded markets, access to better labour, cheaper materials, flexible location

Social Ability to respond to changes in:

- Evolving Social Influences: Rising female participation, increased cultural diversity, customer
activism
- Environmental Concern: Growing consumer awareness regarding environment (ethical practices)
- Social Trends: Influenced by celebrities, new research, government policy, social media and
individual taste
Legal Legislation includes;
- Laws on taxation
- Industrial relations
- Occupational health and safety
- Equal employment opportunity
- Anti-discrimination and protection of the environment
E.g: Competition and Consumer Act (2010), Work Health and Safety At (2011)

Businesses must comply with laws in order to avoid being fined, sued for damages, shut down or tarnishing
business reputation Businesses must understand and accept legal responsibilities to stakeholders

Political Political change can lead to uncertainty to business confidence. eg labour or liberal
These include:
- Labour market reforms: Decentralisation of wage determination, free trade policies/agreements
- Taxations: GST (10% on the supply of goods), company tax cuts, tax incentives to keep national
jobs
- Social reforms: Paid parental leave, equal pay, gender workplace diversity
- Environmental management: Gov. regulations, Emissions trading scheme, banning plastic bags,
etc.

Institutional Government Regulatory Bodies Other

- Federal - EPA - Employer associations
- State - NSW fair trading - Trade and industry
- Local - ASIC associations
- ACCC - ASX

1. Government

Federal State Local

Obligations include: Obligations include: Local government have control
- Payment of taxes for - Provision of employee over:
employees and for entitlements, including - Approving new development
businesses with company workers compensation, and alteration to existing
tax and GST occupational health and building applications
- Provision of employee safety (OHS) requirements - Fire regulations
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superannuation and award rates of pay - Parking regulations (provision
- Observance of customer - Payment of payroll taxes of parking by new businesses)
regulations - Abiding by relevant state - Size, location and shape of
- Abiding by relevant legislation and pollution business signs
legislation controls

2. Regulatory Bodies

The NSW Environment - Primary environment regulator for NSW

Protection Authority - Aims to improve environmental performance and waste
management for NSW through a wide range of programs and
initiatives
NSW Fair Trading - NSW consumer protection agency

- Provides information and assistance to all consumers

The Australian Securities - Monitors market integrity and provides consumer protection in areas
and Investments such as payment systems and financial services such as investment
Commission advice.

3. Other institutional influences

Trade unions Main aim was to improve working conditions and pay rates
Union membership declined substantially in the past 20 years because
of:
- New legislation that outlaws compulsory unionism
- Changes to work patterns (increased part - time and casual
work)
- Workplace agreements

Trade and industry National bodies that represent larger groups of employers
associations (e.g) lobbying government on certain issues

Examples include:
- Australian Chamber of Commerce and Industry
- National Farmers’ Federation
- Australian Industry Group
Technological - Robotics
- Telecommunication
- Internet and ecommerce
Rapid advances in information technology (IT) have reduced communications delays and allows suppliers
and customers to interact over great distances.

With appropriate technology, businesses can increase efficiency and productivity, create new products and
improve the quality and range of products and services.

Competitive Each business aims to achieve a sustainable competitive advantage over its competition in order to
Situation capture a larger portion of the market

Sustainable Competitive Advantage

1. Number of competitors
The number of competitors refers to the size and number of firms that exist within an industry.
Monopoly Complete concentration by one firm in the industry
Australia Post
Oligopoly Small number of larger firms have a greater control over a market
Car manufacturers

Monopolistic Large number of buyers and sellers in a particular market

competition Retail shops, clothing
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Perfect competition Large number of small firms that sell similar products  must use price to
differentiation
Fruit and vegetable growers / sellers

2. Ease of entry
The ability of a person (or persons) to establish a business within a particular industry.
Monopoly No competitiros can enter  The one firm has control over all resources
that are being sold

Oligopoly Entry is difficult

Monopolistic/perfect Easy entry  businesses are small and it is more affordable for the business
competition owner to gain a market sgare

3. Foreign and local competitors

Differentiating factors between local and foreign:
- Labour costs
- Transport costs
- Cost of stoke / raw materials

Local Produce or sell a good or service in the same market. Local competitors
must deal with the same variables as each other.

Foreign Located overseas or offshore. They sell their goods and services in
Australia and compete with local businesses.

4. Marketing Strategies
A business will be influenced by the type of marketing measures taken by a competitor.
- E.g: Businesses which use social media and TV advertising have greater exposure to consumers than
those who rely on word of mouth
The type and extent of marketing will depend on:
- The size of the market
- The size of the business
- Number of competitors
- The nature of the products

Markets 1. Changes in financial / capital markets

2. Changes in labour markets
3. Changes in consumer markets

Financial markets have become more global. After 1983, Australia deregulated Australian financial market,
allowing foreign banks in Australia e.g. ING, HSBC, ARAB BANK

Internal Influences in the business environment

Practice Question 1: Outline the five internal influences on the business environment
Practice Question 2: Describe the different types of resources, giving an example for each.
Factors affecting business operations which can be controlled by managers.

Product 1. The type of goods and services produced will affect the internal operations of business
E.g: physical space required for manufacturing, depending on size of good
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2. Product influence will be reflected in the type of business (service, manufacturer or retailer)
E.g: Clothes manufacture is structured differently compared to clothes retailer

3. Size of the business based on the range and type of goods and services produced, the level of
technology utilised, and the volume of goods and services produced.
E.g: The larger the business, the more goods and services produced  influences internal structures
and operations of the business

Location
Prime Location = Customer convenience +
Visibility
If a business is not convenient and visible customers may not make the effort to find the business.

Location Factors
A good location is an asset because it will lead to higher levels of sales and profits.
A bad location is a liability that adversely affects sales and profits.

Visibility - Retail business: Needs to be seen to attract customers, so must be located in a prime
shopping area such as a main street or shopping centre.
- Manufacturing company: Does not rely on visibility  Low-visibility location
where there is space to produce goods.

Cost - Busy location = more expensive lease/purchasing cost

- Manufactures need large sites  cheaper, low visibility options
- Online stores  not influenced by location

Proximity to - Business requiring large size and quantity of raw materials for production  located
Suppliers close to supplier
- Closer location reduces cost of transporting raw materials

Proximity to Importance of proximity to customers depends on the type of business.

Customers - Retail business will need to be located close to customers
- Manufacturing/wholesaling business may decide it is cheaper to transport the
product to the customer.

Proximity to Support services are the activities needed to assist the core operations and prime
Support functions of a business i.e. accountants, solicitors, government agencies.
Services - Small businesses traditionally use external services
- Medium to large businesses often provide their own services or outsource to
downsize staff and save money.
Due to technology proximity to support services is no longer very important.

Management Due to rapid advances in technology and increased competition due to globalisation, businesses have
flattened their management structure (fewer levels of management)
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- Emerging business structures can adapt quickly to meet changing consumer needs and market
conditions because there are fewer
- s who need to approve decisions
- Businesses that adopt a flatter organisational structure reduce the number of levels of management,
giving greater responsibility to individuals in the business

Resources Goods and services are produced by combining these resources.

Human Resources Employees of the business and are generally the most important asset.
- Players
- Cleaners

Informational These resources include the knowledge and data required by the business.
Resources - Market research
- Sales reports

Physical Resources Include equipment, machinery, buildings and raw materials used by the business.
- Trucks
- Musical equipment

Financial Resources The funds the business uses to meet its obligations to various creditors.
- Budgets
- Grants from business
Business Refers to the values, ideas, expectations and beliefs shared by members of the organisation.
Culture
Business culture can be seen in the unwritten or informal rules that guide how people in the organisation
behave or revealed in official policies or goals.

1. Values – Basic beliefs shared by employees (e.g honesty, hard work, teamwork, quality customer care)
2. Symbols - Events or objects that are used to represent something important
3. Rituals, Rites and Celebrations - Routine behaviour patterns in a business’s everyday life (gathering
together)
4. Heroes - Heroes are the business’s successful employees used as an example to others

Cultural and Organisation structures

- Formal businesses have prevailing cultures that show accountability, communication & cooperation
- Less formal businesses show flexible, innovative and risk-taking cultures

Management’s role in developing business culture

Management must ensure the culture is kept alive by:
- Training employees
- Reinforcing the values
- Rewarding staff

Internal and External Stakeholders

Practice Question 1: Distinguish between internal and external stakeholders
Practice Question 2: Outline the businesses’ responsibility to stakeholders
A stakeholder is any group or individual who has an interest or is affected by the activities of a business.
- Businesses are expected to practice ethical management and do the ‘right’ thing in the interests of all stakeholders.

Internal Individuals or groups within a business who - Managers

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Stakeholder have an interest in the company. - Employers
- Employees

External Entities outside of a business who care about or - Government - Unions

Stakeholder are affected by its performance - Customers - Creditors
- Society - Environment
- Employer - Customers
Associations

Business Responsibility to Stakeholders

Stakeholder Responsibility of Business to Stakeholder

Shareholders - Hold an annual general meeting - shareholders are able to voice their concerns, given an
opportunity to ask questions to the Board of Directors, provide an annual report
- Return on investments in a sustainable and fair way  share of profit, dividend
Managers - Educate managers about ethical responsibilities and legal requirements
- Job specific training
- Income (fair pay)
- Sufficient resources to carry out their roles (factors of production)
Employees - Fairly payed
- Proper training and enhancement of skills
- Safe working environment
- Fair pay
- Provide for needs
- Abide by laws (no discrimination)
- Income  remunerate
- Empowerment contributes to an employees self worth, which in turn increases productivity and
reduces absenteeism.
Consumers - Safe, functional, quality, environmentally friendly products
- Ethically sourced
- Must keep up with consumer trends to satisfy needs and wants
- Treat consumers fairly
Society - Show concern and protection for the environment
- Participate in a range of community projects and activities (fundraisers)
Environment - Developing and adopting to ecologically sustainable operating practices and policies
- Protect the environment.

Stages of Business life cycle

Practice Question 1: Describe each stage of the business cycle, including challenges and strategies
Practice Question 2: Outline the factors contributing to business decline
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Four main stages:
1. Establishment
2. Growth
3. Maturity
4. Post-Maturity  Renewal
 Steady state
 Decline  Cessation

Business Growth and Decline

Phase Characteristics

Establishment Business needs:

- Location (land)
- Staff (labour)
- Resources (capital)

Low sales:
- Unknown business
- No reputation
- Small customer base
- Very high fixed costs (premises, insurance, utilities)

33% of businesses fail within the first year of trading

Growth - Increasing reliable customer base: marketing or word of mouth
- Increasing revenue/profit
- Developing reputation
- Expanding market share
- Cost decreases as resources as used more efficiently (materials, employees)
- Cash flow improves

Merger and Acquisitions

Another way a business can grow and expand through integration with other businesses
- Merger/acquisitions are effective as a company can quickly increase its range of products and eliminate
other competition in the marketplace

Merger When the owners of two separate businesses agree to combine their resources
and form a new organisation.
Acquisition When one business takes control of another business by purchasing a
controlling interest in it.

Several different types of mergers or acquisitions:

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Vertical Integration Aims to secure resource supply chains, service providers, or control of
distribution networks by buying firms before and after them in the production
process
a. Backward vertical integration: When a business integrates with one of
its suppliers
e.g bakery acquiring a wheat farm

b. Forward vertical integration: When a business integrates with a firm it

sells to
e.g the bakery could merge with a supermarket chain that sells its bread

Horizontal When a business acquires or merges with another firm that makes/sells similar
Integration products
e.g if a bakery merges with/acquired by another bakery.

- Expands growth
- Bigger customer base + market share
- Dominance

Maturity - Cash flows and spending costs are stable

- Sales will peak and eventually begin to slow down
- Good relationship with customers: reliability and loyalty
- Rate of growth slows and eventually flattens out; an early warning sign of possible decline
- Saturated market: All potential customers who could be buying your product are buying it

Product differentiation Focussing on unique, distinctive characteristics or features of a product to

set it above competing products.

Company buys into new industry to mitigate risk and loss.

E.g: wine manufacture purchases shoe shop

Product diversification Expanding original market for a product by altering it to suit other
consumer needs.
E.g: new flavoured timtams.

Post Maturity Renewal Increase in sales/profits; new products developed and expansion of
business through merger/takeover

Merger: Two businesses join together

Takeover: One business buys out another business

Steady State Continues to operate at the level it has been during the maturity phase.

Decline/Cessation Business is losing business because;

- Competition more aggressive
- Failure to respond to external influences
- Lost touch with target market
- Declining sales/profits

Responding to challenges at each stage of the business cycle

Phase Challenges Strategies

Establishment Establishment costs are high, but low/no sales - Establish good communication with potential
means small revenue suppliers
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- Lack of finance - Closely study target market to navigate need for
- Poor business planning products
- Hard to break into market - Use low cost marketing (social media)
- Ineffective marketing strategies - Create a budget with specific allocation for
- Hard to build reputation supplies and marketing
- Reinvest any profit rather than drawing from it
- Attend management courses

Growth - Business may expand too rapidly - Regularly evaluate sales in order to continue
- May be unexperienced in managing larger satisfying specific customer wants
business - May hire external manager
- More finance needed to sustain growth (larger - Pay to prioritise content on social media or hire
space, more resources/labour) marketing manager
- May lost direction and move away from core - Invest profit into equipment which will increase
business activity production and cash flow
- Ensure employees can satisfy needs of the
business by continually training them
- Hold regular company meetings which ensure
core business goals are fulfilled

Maturity - Fewer new customers  sales no longer - Gain a competitive advantage by getting into
increase and profit remains steady niche markets
- Market share decreases - Lower costs by outsourcing or finding lower
- Expenses must be reduced to maximize profit cost suppliers
- May be shortage in finances - Focus on increasing sales, such as
implementing rewards program
- Maintain positive business culture where
employees feel valued
- Ensure continual employee training
Post-maturity - Decreasing profits If undergoing renewal:
- Harder to borrow money - Evaluate past sales to maintain customer
- Unsold stock loses value satisfaction and quality
- Employees may seek better career opportunities - Differentiate products
- May face cessation - Create and stick to strict budget
- Entice employees by offering better working
conditions

If moving to cessation:
- Respect suppliers and alert them that business
is closing
- Use discounts and sales to maximise profit
- Use advertising to make customers aware of
closing sales
- Track financial progress to ensure debts are
managed and can be repaid
- Thank staff for loyalty by ensuring they are
fully paid.

Factors that can contribute to business decline

Lack of management expertise - Business fails to prepare a business plan as the environment changes
- Owner does not fulfil roles/characteristics of a manager  business declines as they
are not fulfilling their important role

Lack of sufficient money Undercapitalization occurs when there is a lack of sufficient funds to operate a business
normally.
- Without sufficient capital and positive cash flow, businesses are unable to purchase
stock and materials.
- Inevitably results in loss of sales and falling profits
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Two main causes of business decline:

Voluntary and Involuntary Cessation

Practice Question 1: Distinguish between voluntary and involuntary cessation
Practice Question 2: Explain the stages of voluntary cessation of a business
Voluntary Cessation
Business owners make the decision to shut down operations and terminate the existence of the firm.
Example: Bardot, Colette, Kiki K
Stages:
1. Receivership
An Independent party steps in and attempts the help the business trade out of debt as ordered by the Supreme
Court.
(If this fails, liquidation will occur)

2. Liquidation
Business operations are terminated by selling all business assets for cash, to pay off any outstanding debts.
Involuntary Cessation
External party forces owners of a business to cease operations and terminate existence of the firm.
1. Partnerships and Sole Traders
If business shuts down, owners are held personally liable for debts and creditors may sell assets for
repayment.
If owners are unable to repay financial obligations they are officially declared bankrupt.

2. Public/private companies
Owners and shareholders are not held responsible for debts (limited liability)
If debts to creditors/financers are repaid following liquidation, additional funds ae distributed to stakeholders.
When company ceases operation it has gone insolvent
Topic 2: Business Management
Manager: An individual who coordinates the business’s limited resources in order to achieve specific goals and
affectively coordinate key business functions.
Practice Question 1: Describe the nine skills of business management
Practice Question 2: Explain the importance of these skills in creating an effective management environment
Skills of Management

Skill Definition
Interpersonal Work, understand and communicate with others and their needs.
- Relate to people and their needs: communicate information and goals/ideas, motivate, lead and inspire
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Communicatio Exchange of information between people. (verbal or non-verbal)
n - Ability to guide, discuss and convey ideas and plans with others clearly
- Develop relationship between employees and managers
Motivate workers: maximum labour input  efficient operation

Strategic Mental or thinking process applied by an individual in the context of achieving success.
thinking - Help plan activities and ensure progression, organisation, tracking and improvement of long-term goals

Vision The clear sense of direction that allows people to attain a common goal.
- Knowing business goals and where the business is headed
- Motivates, inspires and encourages workers to accept changes and realise their goals
Problem soling Searching for, identifying and implementing a course of action to correct an unworkable situation.
1. Identify the problem and causes
2. Gather information
3. Develop solutions and alternatives
4. Choose one solution
5. Implement solution
Decision Identifying the options available and choosing a specific course of action to solve a specific problem.
making - Ensuring the best interests of the company and employees are considered

Flexibility Anticipate and adjust to changing circumstances.

- Be prepared to take risks and guide company and employees in the new direction
- Proactive making change before the damage is done.
- Making adjustments to maximise/take advantage of opportunities and minimise threats

Adapt to To recover from or to adjust to change, thrive on change and unexpected routines.
change - Provide a vision to where the business is headed and what is going to be achieved
- Share vision with others and influence people to set and achieve goals

Reconciling the Negotiate and settle the conflicting interest of stakeholders in an attempt to satisfy all their interests.
conflicting - Engaging in discussions with stakeholders to establish common interests
interests of - Ensuring best interests of all stakeholders are considered in decision making
stakeholders - Consulting and compromising with stakeholders

Topic 2: Business Management

Achieving Business Goals
Practice Question 1: Describe the four financial goals of a business
Practice Question 2: Why might social and environmental goals be important in creating a good business reputation?
Financial Goals

Maximise Efficient allocation of resources in order to limit production costs/expenditure and maximise profit.
Profits

- Minimise expenses through efficient allocation of resources for production

- Increase revenue by rising prices and/or increasing the amount of products

Increase Market Market Share: The proportion of a market controlled by a particular company or product.
Share
To do so, businesses must take consumers from other competitors within the market.
- Innovation and improvement of products
- Acquiring competitors (horizontal/vertical integration)
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- Convincing consumers from other businesses to swap to their brands

Maximise Increasing the market share and the size of the firm.
Growth
- Larger market share means more dominance over the market  greater potential profit
- Increasing the size of the firm allows for greater production capacity  greater potential profit
- Increase profit can be reinvested in order to continue growth of the firm

Share Price Price of shares sold on the ASX: A share is a part ownership of a public company.

- Price is influenced by dividend paid and the future prospects for the company
- Low share price may make the company a target for a takeover; is often seen by potential investors as
an indication the company is not doing very well
 Share price determines whether the company is vulnerable to a takeover (low price)
 Share price represents the current market value of the business
 They offer a form of capital for the business when sold

Social Goals

Community Voluntary, unpaid work done by a person/group intended to help others. Often completed within the local
Service area to ensure the community is benefitted by the work. Helps to:

- Build and promote a positive culture within a company

- Promote teamwork in the workplace
- Reduce stress and anxiety of employees
- Builds a positive reputation for the business
- Encourages consumer spending in the business
Provision of Providing jobs for individuals in society. Society benefits if people are employed.
Employment - People have an income to go and spent money. Increased consumption leads to more revenue
for companies, more employees hired, more spending and overall economic growth

Social Justice How human rights and equality is achieved in the everyday life off all people in society.
Includes the treatment of: certain races (racism), ages (ageism), gender (sexism), religion and sexuality.

Businesses should care about social justice because it:

- Creates a diverse working environment where everyone is accepted
- Promotes different groups to work effectively together
- Reinforces a positive business culture within the workplace
- Ensures employees feel a sense of belonging which in turn boosts their performance

Environmental Goals
Aim at ensuring the lowest possible impact on the environment through sustainable industrial processes.
Emissions - Reducing gases and other toxins released into the air through power plants or factories in the
production process over a certain period time

Energy - Increasing the use of renewable energy rather than non-renewable energy in and attempt to lower the
environmental impact

Effluent and - Ensuring careful treatment processes of liquid waste and sewage discharge in order to limit the effect
Waste on water ways and the environment
- Reducing the amount of waste generated in the production process

Recycling - Increasing recycling of old/excess materials in an attempt to reduce the amount of harmful waste being
sent to landfill or into the environment
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Sustainable - Economic development and business growth conducted without the depletion of natural resources
Development
Achieving a mix of business goals
- Businesses do not have one specific goal; they have a range of goals to cater for different stakeholders and
consumers
- Managers have a mix of goals to try and achieve simultaneously; effective leadership qualities are used to do this
Staff Involvement
Involving staff in the decision-making process. Work environments where staff are given necessary skills and rewards
see higher satisfaction levels, and better labour productivity.

Innovation - Entrepreneur: innovative employee who takes on the entrepreneurial roles within a business.
- Businesses encourage an innovative business culture: recognise employees (main source of ideas)
- Employees feel as if their contribution is valued; encourages them to continue sharing their ideas with the
business

Motivation - The individual, internal process that directs, energises and sustains a person’s behaviour.
- Good managers should be good motivators, encouraging employees and using positive reinforcement to
influence behaviour
- Individual employees respond differently to various motivational techniques.
- Creates a sense of achievement and belonging for the individual; ensures the employee remains satisfied
and continues working at an efficient rate

Mentoring - Process of developing another individual by offering tutoring, coaching and modelling acceptable
behaviour.
- Ensures employees are aware of expected/acceptable behaviour and creates belonging  increased work
efficiency

Training - Boosting knowledge and skills to teach staff how to perform their job more efficiently and effectively
- Teaching new employees what the business expects of them helps strengthen their dedication and
commitment to the business.
- The goal of training is to improve employee productivity and strengthen their dedication and commitment
to the business

Management Approaches
Practice Question 1: Describe the main functions of management in a classical management approach
Practice Question 2: Explain how the classical organisational structure and leadership style may impact on
employees
Practice Question 3: Compare and contrast between the classical and behavioural management approaches
Classical/Scientific Approach

Planning (primary Preparation or predetermined course of action for a business to achieve both short and long term
function of business visions and goals.
management)
1. Strategic (long term): Planning for the following 3-5 years
- Assists in determining where in the market the business wants to be and what the business
wants to achieve in relation to its competitors
2. Tactical (medium term): Planning for the next 1-2 years
- Assists in implementing strategic planning and allows the business to respond quickly to
change; planning flexible/adaptable with emphasis on goals and allocation of resources
3. Operations (short term): Weekly/daily planning
- Provides specific detail about the way the business will operate in the short term

Organising Organising the financial, human and material resources to achieve the goals of the business.
Managers must put into practice goals determined at the planning stage.
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1. Determining the work activities: Breaking down tasks into smaller more achievable steps
2. Classifying/grouping activities: Similar activities are grouped together to improve efficiency and
enable the most appropriate allocation of resources
3. Assigning work and delegating authority: Determining who will carry out the work and who is
responsible to ensure the work is carried out.

Controlling Compares what was intended to happen with what has actually happened.
- Establishes standards in line with the goals of the business, measuring performance of the
business against these benchmarks
- Changes are made where necessary to ensure the goals of the business have been maintained

The control process:

1. Establish standards: In line with the firm’s goals and influence from employees, management,
industry and government
2. Measure performance: Determine how comparisons will be made against standards or
benchmarks
3. Take corrective action: Changing activities, processes and personnel to ensure that the goals of
the business have been met

Controlling methods
1. Quality control: Involves inspections, checking finished products and detecting and removing any
components or final products that do not meet the required standard
- Can result in considerable waste as sub-standard products are scrapped
2. Quality assurance: Quality control before and after production
- Helps reduce wastage as it seeks to stop faults during the design rather than production stage
3. Total quality management: Concerned with encouraging all employees to think about the quality
of everything they do
- Places consumers at the centre of the production process

Behavioural/Participative Approach

Leading A manager’s leadership style is their way of doing things – their behaviour and attitude

Autocratic (classical): Manager makes all decisions, dictates work methods and frequently checks
employee performance
Democratic (behavioural): Stresses that employees should be the main focus of the way in which the
business is organised. Manager consults with employees, asks for their suggestions and seriously
considers their best interest when making decisions.

Motivating Concerned with energising and sustaining an employee’s behaviour to ensure they continue working at
their most effective rate. Managers:

- Use positive reinforcement for work

- Give good feedback and recognition for the work done
Communicating Concerned with the way in which managers and employees interact with each other to share directions,
information and ideas.
Involves managers in:
- Effectively presenting and sharing ideas with other workers
- Communicating directions clearly to employees in order to get them done properly
- Being able to relate and empathise with workers and understand their situation

Leadership style and organisational structure

Classical/scientific Behavioural/participative

Hierarchal Flattened
Organisational
Management sets out how the people in the A flattened management structure is more flexible.
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business are to interact in order to achieve the goals There are less levels of management and decisions are
of the business. made collaboratively with all workers.

• Level of • Level of control/responsibility/accountability

control/responsibility/accountability is equal for all workers
Structure decreases as going down pyramid • Decisions are made quickly  less stages of
• Long decision making  many stages management
• One way communication: top to bottom • Communication is faster
• Employee has no autonomy • Allows businesses to adapt quickly
• Planning, ideas: upper/middle management • Recognises workers are an important asset for
• Strict responsibilities ideas

Autocratic  decisions made directly from Democratic  The opinions of employees are valued
management in terms of how and what to do. and considered. They have a large say in the decisions
Important for inexperienced employees. which are made however final decision is still made by
upper management.
Span of control (narrow)  employees are not
trusted to carry out tasks independently, and are Span of control (wide)  Laissez-fairre - complete
closely supervised. trust in employees to carry out tasks with little
Leadership supervision
style Chain of Command  long, rigid chain of
command Chain of Command  short, flexible chain of
command
Centralized  decision making is centralized
under higher levels of management Decentralized  decisions are made by teams rather
than higher authorities
Division of labour  specialized people for
effective, efficient work. May lead to increased Division of labour  Multi-skilled: people are trained
costs if people cannot fill in for other duties in various areas and can fill in for other roles

Contingency Approach

- Allows the business to adapt quickly to change by responding to the current business conditions in an
appropriate way
- Either/or a combination of the classical and behavioural management approaches

Advantages/Disadvantages of management approach

Classical/scientific Behavioural/participative Contingency

- Allows for - Workers feel valued in - Allows managers to change

Advantages
inexperienced workers knowing their opinion the policies according to the
to be closely supervised matters and is considered situation
and mentored by  this leads to higher - Helps the manager enhance
someone of higher work productivity their leadership and decision
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power - Allows for better making skills
- There is a clear line of interaction between - Provides options to the
control and authority workers in a employees, helps them to
where workers always collaborative matter, grow and share their ideas to
have someone to report which encourages the business
too communication skills - Recognises different
- Ensures that the best - Encourages a creative situations demand different
decisions are made, as environment where approaches
they must be considered workers can openly - Acknowledges there is no one
by many people first share individual ideas, best way
- Clear communication which are then adapted
- Increases output to suit certain situation
- Improved relationship
between employees and
staff
- Some workers may feel - It may lead to - Adapting to constant changes
underappreciated as procrastination where in the business environment
they do not have a large individuals do not work can be challenging for
say in decisions efficiently as they management
- Decision making takes believe someone else on - The process of selecting
a long time as it must the team will do it alternative courses of action
go through many stages - It does not guarantee the depending on the situation
- Low worker satisfaction best possible solution is can be costly in terms of time
- Hard to respond to made, as decisions are and money
Disadvantage decided upon by groups
changes in environment
s
- Inflexibility rather than a higher - May be costly to continue
- May discourage authority changing approaches 
innovation and - It may take time to reach causes confusion
creativity a consensus where the
- Specialized division of best interests and
labour may lead to opinions of everyone are
increase costs if already considered
employed people cannot
fill in for other duties

Operations
Practice Question 1: Explain the benefits of quality management
Practice Question 2: Describe the production process
Operations refers to the business processes that involve the transformation process of inputs  outputs or, more
generally, ‘production’.
Operations management consists of all the activities in which managers engage to produce a good or service and will
directly affect a business's competitive position. It helps to:
- Establish the level of quality of the good or service
- Influence the overall cost of production, given that the operations function is responsible for the largest part of a
business's capital and human expenses
- Determine whether sufficient products are available to satisfy consumer demand.

The operations management function/process influences

- Quality, cost and availability of a business's goods or services.
- Impacts whether the business achieves its other main goals (maximise profits, market share, or growth)
Goods and/or services

Goods Services
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Tangible object  can be physically held Intangible object  activity performed for clients by
someone else
Inputs: raw materials/resources Inputs: humans/labour
Transformation process: Little human intervention; Usually Transformation process: Service delivered by people;
unseen by customers (in factory). Visible (usually done in front of customers)

Many businesses today produce a combination of both manufactured goods and services.
The Production Process (Transformation Process)

Inputs Resources used in the process of production. (My mum is tall, loving, caring)

1. Material Inputs:
2. Capital equipment:
3. Labour: People involved in the operation function.
4. Information: Used for transformation process.
5. Time: Efficient use are critical to all businesses.
6. Money: Generally considered to be the most flexible. Can be easily converted into any quantity or
combination of materials, capital or labour.
Processes Transformation process: conversion of inputs (resources) into outputs (goods or service)

Transformation can include:

- Computer Aided Design (CAD)
- Computer Aided Manufacturing (CAM)
- Hand-made (more expensive  labour intensive)

Outputs Final result of the business’s efforts (the good or service that is delivered to the customer). Outputs must
always be responsive to consumer demands.

ETM: are manufactured goods that are highly processed and valued. They are complex because of the
amount of value-added processing they have undergone

STM: (simply transformed manufacturers) are characterised by their ability to be further processed in a
wide range of processes. Due to the limited amount of transformation they have undergone, STMs have a
small amount of value added.

Quality Management

Quality CONTROL Quality ASSURANCE Total Quality Management

REACTIVE PROACTIVE PROACTIVE

- Product orientated - Process oriented - Process oriented
- Interested in product yield - Interested in process yield - Interested in continually improving
processes
- Product line function - Staff function - Staff function

- Identifies flaws/defects - Looks for cause/prevents faults - Improves process to prevent faults

- Focuses on tests and inspections - Focusses on selection of tools, - Focusses on continually revaluating
carried out at various checkpoints testing methods and operator processes and changing them so
 guarantees output’s correctness training, apply a planned/systematic they work more effectively for
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production process to prevent business and customer
defects

- Problem, identification, analysis - Data collection, problem trend - Continually re-evaluating data and
and feedback analysis, process identification and improving process; every member of
improvement staff trained in maintaining quality

- - ‘Best practise’ find processes best ‘Kaizen’ management

suitable by scanning what other 1. Just in time inventory management
business do 2. Statistical process control
3. Quality circle

AIM: Offer highest reasonable quality AIM: Produce products of at least the AIM: Improving already-developed
of product possible and ensure no same quality of competitors, if not better processes to decrease manufacturing
defected products leave factory to sustain competitive advantages faults and defects
Note:
Reactive: Responds to problem after it has already occurred
Proactive: Attempts to prevent problem before it has occurred
Yield: Amount of defective products in comparison to total amount produced
Marketing
Practice Question 1:
Practice Question 2:
The total system of interacting activities designed to place, price, promote and distribute products to present and
potential customers. Aims to find out what customer want and then attempt to satisfy their needs.
Identification of the target market
Target market refers to a group of potential customers within a business’ entire addressable market who share
the same characteristics.

Approaches:

Mass Marketing Seeks to mass-produce, mass-distribute and mass-promote one product to all buyers.
- One type of product (little or no variation)
- One promotional program aimed at everyone
- One price/distribution system to reach all customers

Eg: basic food items, water, gas, electricity

Market Segment Segments market so it can direct marketing strategies to a specific group of customers
- Ultimate aim to increase sales and profits
- Better understanding/response to desires of target customers

Demographic Geographic Lifestyle Behavioural

Population Where people live People’s attitudes and Loyalty to a
characteristics values product
- Age - Urban - Lifestyle - Purchas
- Gender - Suburba - Personality e
- Education n - Motives occasion
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- Family size - Rural - Socioeconom - Benefits
- Income - Regional ic group sought
- Occupation - City size - Consumer - Loyalty
- Social class - Climate opinions - Use rate
- Religion/ - Landfor - Interests - Price
ethnicity ms sensitivi
ty
Niche Market A narrowly selected target segment within a market: ‘micro-market’

Segment 1
Segment 2
Segment 3
Niche Market

Marketing Mix
Marketing strategies are actions undertaken to achieve the business’s marketing goals through the marketing
mix
Product - Product are goods or services and consist of tangible and intangible features
- Determines products quality, design, name, warranty and guarantee

Packaging Development of a container/ graphic design for a product;

 The packaging of a product assists sales

 Packaging helps preserve, inform, protect and promote the product

Needs to satisfy needs of consumers and provides a sense of security/prestige

Branding Graphic representation that identifies a business or product

E.g ‘golden arches’ symbol is used by McDonald’s  in some ads brand

name doesn’t appear only brand symbol

Positioning How does your product differentiate from the competitors product in the
market

Price - Determines monetary value of a product as set by a business

- Must allow businesses to recover costs and make a profit
- Must compete against competitors whilst being affordable to the needs of target market
- Depends on positioning, price as charged by competitors, product lifecycle and market
conditions

Pricing Strategies

Penetration Setting low price to enter the market and establish large market share
pricing E.g: When entering a market with already recognised brands

Price skimming Charging high prices

E.g: Apple  people willing to pay more for quality, brand name, etc

Loss leaders Selling one product at a lower price to atttrcat customers who may purchase
other products
E.g: Coles  $1 milk and bread

Price points Specific prices at which customers are more likely to buy a product for
psychological reasons
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E.g: $99.00 rather than $100.00

Discounts Where the normally quoted price is lowered for buyers

E.g: Products that are slow to sell

- Calculating Price

Cost based Total cost of producing product + profit mark up

Market based Based on levels of supply and demand  whatever market is prepared to pay

Competition based Below, equal or above competitors prices

Promotion Concerned with communicating with potential customers in an effort to generate sales. Methods used
by a business to inform, persuade and remind customers about its products

Personal selling Salespeople communicating directly to customers about the product in an

attempt to make a sale

Sales promotion Activities or materials used by the business to attract interest and support for
products through benefits of incentives for a limited time
E.g: Free samples

Publicity Effectively generate positive attention and exposure for the business and
product for free

Advertising Print or electronic mass media are used to communicate a message about the
product

Place Refers to the distribution channels used to move finished products or supply services to the final
customer.
Producer to Simplest channel and involves no intermediaries → virtually all services, from
consumer tax advice to car repairs, use this method

Producer to A retailer is an intermediary who buys from the producer and resells to
retailer to customers → this channel is often used for bulky or perishable products such
consumer as furniture or fruit

Producer to Most common method used for the distribution of consumer goods → a
wholesaler to wholesaler is an intermediary who buys in bulk from a producer, then sells in
retailer to smaller quantities to retailers
consumer

Human Resources
Acquisition
- Hiring new employees
1. Planning: Identify staff needs; job analysis (determining the exact nature of the position to be filled)
2. Recruitment: attracting people to apply for the position in the business

Internal: Filling job vacancies with present employees rather than looking outside the business
External: Filling job vacancies from people outside the business
3. Selection: choosing and hiring the most appropriate applicant (testing/interviewing)
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Training
Type Positives Negatives
- Impro
Internal 1. Less expensive: reduced 1. Internal conflict with unsuccessful ving
advertising costs applicants skills
2. Quicker process: less applicants, 2. No fresh perspective/less diversity of and
known experience
3. Motivator for employee 3. No one may be suitable
productivity External recruitment needed to fill
4. Applicants are familiar with previous job spot
business culture and goals 4. Limited to applicants within business
5. Safer option: trusted/known
employee

External 1. New ideas and perspective 1. Costs associated with advertising the
2. May be more qualified/differing positions
experience 2. Applicants are unknown: don’t know
3. Rapid business growth: increased culture/goals
employee numbers 3. Increased induction and potential
4. Range of applicants to choose from training costs
4. Tension in the workplace: lack of
recognition for current employees
5. Development of trust/relationships
with other employees
6. Longer process
abilities
1/ Induction and training
- Teaching employees new skills and helping the learn tasks associated with their jobs
- Develop and maintain skills
Benefits
Type Positives Negatives
of
Internal 1. Less expensive: can conduct more 1. Less professional  less resources, training
often training, qualifications for
2. Quicker process/convenient 2. Less access to contemporary training business
3. Tailored specifically to business  In
needs cr
4. Remains at work --. No need to hire ea
replacement se
5. Minimal disruption to business d
productivity

External 1. More qualified instruction (up to date, 1. More expensive

contemporary) 2. Travel time may be long
2. Higher qualifications (TAFE) 3. Time consuming
3. Gain new external experience 4. More time off the job
4. Meeting new people 5. Not tailored
6. Cost of replacements
7. Disruption to work schedule and
productivity
efficiencies in processes resulting in financial gain
 Increased capacity to adopt new technology and methods
 Increased innovation in strategies and products
 Goals + objectives easily met
 Increased monetary benefits to employees  more job satisfaction, productivity, etc
2/Development: The process of improving the skills, abilities and knowledge of staff
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Maintenance
Motivating employees to remain within the business

Employment Agreements
Legally binding, formal agreement between an employer and an employee.

Modern awards Provide minimum wages and working conditions for employees specific to
their industry
Advantage Disadvantage
- Covers all employees - Can be inflexible; may not suit
performing similar jobs all employees
- Sets minimum pay and - Prevent recognition of all
conditions employee efforts (you work
harder but get same pay)

Enterprise Workplace agreement negotiated collectively through enterprise bargaining

Agreements between employers and employees.
Advantage Disadvantage
- Possibility of improve pay - More time consuming: meeting
conditions with individual
- Motivation to employee 
greater productivity
- Greater flexibility

Common law Simple agreement between an employer and employee, enforced through
Contracts court of law
- Must satisfy BOOT test
Advantage Disadvantage
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- Flexibility to meet varied needs - Unfair bargaining position may
of individual/firm exist: exploitation
- Individual initiative rewarded - Expense of any court case if
 motivation either party sues

Monetary benefits Rewarding employees efforts through financial compensation: pay

rates Separation
Employees
Non-monetary benefits Rewards such as conditions: fringe benefits leaving the
1. Family, medical, sick, maternity leave business

Voluntary
Dismissal Employees
With
leaving
warning  accord/free
on own 3 warnings will
Summary  on the spot (intoxication, theft, assault)
Retirement Individual decides to leave the labour force
Unfair  Finance
- No retirement ages
- 65 years old: access pension/superannuation Concerned
Retrenchment Dismissal as there is not enough work to justify paying with where
the individual the business
Resignation Formal statement of an individual’s intention to leave a
- When redundancy occurs and there is no other job
job position sources its
for them to change too funding
- Must give sufficient notice of 2-4 weeks depending - Co
on employment type nti
nge
Redundancy A person’s job no longer exists due to change in nci
operational requirements es:
- Technological change, insolvency

Involuntary Employees being asked to leave due to reasons beyond their control

unanticipated events that can lead to financial difficulty

Equity finance Debt finance

Internal finance External finance
- Owners contribution (from savings, etc) - Financial institution (bank)
External equity finance: - 2 types;
1. Shares in a public company 1. Short term: paid within 12 months
2. Venture capital 2. Long term: 5-30 years
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Accounting
Financial management tool involved with recording and analysis of all business’s financial transactions

Assets = liabilities + owners’ equity

Assets Liabilities Owners’ Equity
Provide the opportunity for the business Money lent to the business by people Money or capital put into the business by
to generate future economic benefit other than its owners its owners
- Claims on business assets

Current Assets: Converted into cash within 12 months (liquidated)

Liabilities: Owned and paid off within 12 months
Non-current Assets: Used and liquidated in more than 12 months
Liabilities: Long term debt; more than 12 months to pay off

Financial Statements:
Balance sheet
Balance Sheet Measures the overall worth of a business; statement of the businesses assets, liabilities and owner’s equity
at a set period in time

- Shows the overall financial stability of the business

- Balance sheet should always balance  Assets must equal liabilities

Assets = liabilities + owners’ equity  (A = L + OE)

- Written in order of liquidity/how long to pay off

Assets Liabilities
Current Current
Cash Overdraft
Accounts Receivable (debtors) Accounts payable (creditors)
Inventories Credit card

Non-Current Non-Current
Office equipment Loans
Fixtures and fittings Bank loans
Buildings and land Debentures (public companies)
Investments Mortgage
Plant and equipment
Motor vehicles Owner’s Equity
Goodwill (value of reputation) Owner’s capital
Trademarks/Copyrights/Patents Retained Profit
Less: Drawings

Income statement
Income All revenues (income earned) and expenses incurred over a period of time
(revenue) - Important as it indicates profitability of a business
statement
Expenses: Selling (salary, advertising, wages)
- Administrative (rent, insurance, accountant)
- Financial (interest, lease, dividends)
COGS Opening stock + purchases – closing stock
Gross Profit Sales – COGS
Net Profit Gross profit – expenses

Cash flow statement

Cash Flow Indicates the movement of cash receipts (inflows) and cash payments (outflows) over a period of time
Statement
Total cash flow = Opening balance + inflows – outflows
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- Closing balance becomes opening balance for next period

- CASH ONLY NO CREDIT  E.g: no accounts receivable as money has not been received
- May have cyclical/seasonal flow of funds: predictable times when cash flow will be high

Liquidity: Amount of cash a business has access to and how readily it can convert assets into cash
- whether a business has an adequate/positive cash flow  cash available meets payments due
- to remain liquid, a budget or cash flow forecast/prediction should be created
- owners should retain cash reserves when cash inflow is high

Cash inflows Cash outflows

- Cash sales - Expenses (advertising, wages, electricity)
- Debtor payments/accounts receivable - Dividend payments
- Interest received from investments - Stock purchases
- Sales of assets - Repayments to owners
- Rental income - Capital purchases
- Dividends on shares owned - Taxation

Strategies for managing cash flows:

- Discounts for debtors for early payment - Just in time inventory; no storage costs
- Penalties for late payment - Factoring of debts
- Leasing assets instead of buying - Supplier discounts; paying creditors early
- Staggering large annual payments into a - More income stream to increase cash flow
series of smaller/regular payments - Credit cards when cash reserves are low
- Prepaying some expenses where possible - Lease rather than buy equipment

Importance of cash flow statement:

- Identify periods of cash shortage so action can be taken
- Identify periods of cash surplus to plan expenditure and cash retention
- Secure additional finance if needed, e.g: loans

Consequences of cash flow problems:

- Relationships with suppliers deteriorate: can’t pay trade credit
- Workers may leave: can’t pay wages
- Cease trading
 In the short term, cash is more important than profit – without cash,
businesses cannot pay short term debts to be profitable

Cash flow forecasting and budget predictions

- Form of business planning
- Allows to predict cash surplus and deficit  plan spending accordingly
- Comparing estimated spending to actual results allowed for comparison, more accurate future
predictions and corrective action to be taken

Good will Intangible asset; added due to saved profits, good customer base and reputation
Creditor Person or company to whom money is owed
Debtor Person or company that owes money
Inventory Another name for stock
Overdraft Short term debt which allows a business to overdraw their cheque account by a bank
Ethical Business Behaviour
“Triple Bottom Line’  Business focus on people (social), planet (environmental) and profit, rather than just profit

Ethics The study of how a business should act in the face of ethical dilemmas and controversial
situations.

Standards to business behaviour such as;

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- Fair and honest business practices
- Decent workplace relations
- Conflict of interest situations
- Accurate financial management
- Truthful communication

Ethical behaviour Acting in ways consistent with what society and individuals typically believe are acceptable
values.

Social responsibility
Linked to ethical responsibilities. Socially responsible businesses try to achieve two goals simultaneously:
1. Expanding the business
2. Providing for the greater good of society
- Longer costs in short term, however increased benefit in long term
- Higher customer retention; more emphasis on environmental protection/sustainability = increased revenue/profit
- Some businesses may not adopt ethical practices due to increased costs  new technology usually responsible for
creation of environmental production processes; may be seen as unnecessary expenses
- Consequences for unethical behaviour include bad reputation and publicity  may decrease revenue/profitability
- Code of conduct may be implemented to set ethical standards for managers and employees

Management and Change

Responding to Internal Factors affecting business operations which can be controlled by managers.
internal and external - Product, location, management, resources, business culture
influences
External Factors which cannot be controlled by businesses, but affect their operations
- Economic, geographic, social, legal, political, institutional, technological,
markets

E.g: Quantas Response to Coronavirus

- Asked employees to take their leave; cut around 6000 jobs
- Reduced flights available
- Increased costs on cleaning and hygiene expenses

Managing Change Effectively

- Change for a business is disruptive and expensive  managers must be proficient in change management
- Managers aim to maximise benefits brought by change and minimise downsides and disadvantages

1. Identifying the Scan external business environment for trends. Businesses may use BUSINESS INFORMATION
need for change SYSTEMS (BIS)

- A process that provides information vital to manage a business in a highly effective manner
- Digital information contained in databases, websites, online surveys, financial systems and
spreadsheets
- Identifies and produces reports on trends in the key business functions
- IT department responsible

Importance: analyses internal business data; falling profit levels, slowing sales figures, poor
employee motivation
- Improvement of product and services: shows what products are being sold the fastest and
most  aim to develop or improve existing products to further satisfy the target market.
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- Information storage: businesses can track progression overtime; enables simple storage of
operations data and eliminates expense and time of manually storing records
- Simplified decision making: businesses can analyse trends in data to make decision making
easier; firms are able to respond and adapt quickly to dynamic business environment
- Employee communication: Easy flow of information between management and low level
employees; limits miscommunication between worker as files are easily stored and accessible

2. Setting - In order to implement change, managers must set goals and targets that employees can strive
achievable goals for and feel satisfied upon reaching  vision statement
- Goals are usually set on a yearly basis
- Reassessment of goals allows management to detect changes and progress needed

Creating a culture of change:

- Change agents/management consultants  support employees in establishing a new,
positive and supportive workplace culture
- Seek feedback and employee engagement
- Recognize employee reactions to change and understand employees willingness to change
3. Reduce Reasons for resistance to change:
resistance to 1. Management - Some managers make hasty decisions that are poorly timed and
change unclear
- Other managers may be indecisive and create uncertainty
- This causes employees to lose confidence in the management’s
decision-making abilities
2. Fear of job loss - Fearful if changes threaten their job or status
- Resist or disapprove new processes if they feel the result will
be forced redundancies and loss of control/power
- E.g; technology/capital takes over labour

3. Disruption to - Employees are worried they cannot adapt to new procedures

routine - Made worse if training is not provided

4. Time - Not enough time to thin accept and implement changes

5. Fear of the - Feeling of lack of control, unknown and uncertainty may lead
unknown to anxiety
- Worsened due to poor leadership and management

6. Inertia - Unenthusiastic response to proposed changes

- Business remains rigid rather than being open to change
- Employees do not want to venture ‘out of their comfort zone’
- Complacency; status quo

7. Cost - Businesses must contemplate costs and benefits of change

e.g: David Jones's recent successful upgrade of its network of
stores cost $275 million to increase its floor space by over 20
per cent.
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4. Management Specialized industry professionals who help organizations improve their performance through an
consultants analysis of existing problems and the development of plans for the future.

Management consultants have specific skills, expertise or knowledge that is not possessed by the
business’ managers such as:
- Strategic vision on the industry within which the business operates
- Experience from other businesses that have gone through similar change
- Access to technology or processes that will assist with the change
- Expertise in developing communication and Human Resource management strategies to
assist staff through the change process
Expertise in redundancy or retraining

Change Models  Created in 1940s by Kurt Lewin

Unfreeze/
change/ 1/Unfreezing - Identify reasons for change  create awareness of need for change
refreeze model - Convince/persuade shareholders of the benefits of change
- Early adopters/change agents: employees in the business who receive training to
support change
- Management consultants: external people hired to assist change
2/Changing IMPLEMENTATION
- Hardest step (fear, uncertainty)
- Education, training, time
- Remind of the benefits  positive reinforcement of accepting change
- Staff must understand the need for the change and agree to the steps
3/Refreezing - Change is completed; new rules/procedures established and formalised
- Reinforce the change
- Change is accepted
- Change is cemented

Advantages Disadvantages
- Easy to understand; - Too simple; not guided
businesses don’t need enough
external helpers or - Too rigid; doesn’t
consultants reflect modern times
- Focusses on behaviour and where behaviour is
human element constantly changing

Force field Driving forces: Push towards the need for change
analysis Restraining forces: Hold the business back and resist any change

- If these two forces are in equilibrium then no change can come about
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- If driving forces are stronger, change is inevitable
- If restraining forces are strong, the business must weaken restraining forces

Management must identity positive forces  effective management skills create a positive culture for
change
- Motivate and communicate with staff, encourage participative decision making, provide training and
counselling, enter into negotiation and possibly manipulate or even coerce
- Retraining programs, work teams, flatter management structure can resist change

Advantages Disadvantages
- Helps to identify obstacles that lie ahead - Management ratings for driving/restraining
- Provides a visual/graphic summary of forces may be unrealistic and dismissive of
forces for and against change employee resistance

Topic 3: Business Planning

Small to medium enterprises
A SME is a business who hires fewer than 200 people (non-manufacturing) or fewer than 500 people (manufacturing).
- Other measures which indicate whether a business is a SME includes number of employees, type of ownership,
sources of finance, legal structure, market share and management structure
Role of SME’s
- Provide the majority of private sector employment
- Produce about half of Australia's total yearly production
- Exporting
- Account for 20% of money spent on Research and Development
- Provide a wide range of products used by large businesses
- Earn profits and pay taxes

Economic Contribution of SME’s

GDP GDP: total value of all goods and services produced by an economy within a period of time. Economic
growth occurs through an increase in national GDP
- Indicator of economic growth and whether populations needs are being met
- Contribute to around 50% of Australia’s GDP
Employment - Small businesses employ 44% of the total workforce  more than medium (24%) & large (32%)
- Employment keeps the economy healthy: employed Australian’s use their income to purchase
goods and services (circular flow of income)
- Contribute to taxation revenue: Businesses and their employees pay tax
- Taxation is used to provide collective goods and services that benefit the whole community 
increased tax allows for a rise in government expenditure
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Balance of Country’s trade and financial transactions with the rest of the world over time, usually one year.
payments (BOP)  Flow of funds in and out of a country
- If exports are greater than imports, balance of payments and economic growth occurs
- SMEs are more successful in exporting because they are highly adaptable and flexible in meeting
the needs of overseas markets.
- The number of SME Australian exports is growing faster than large exports.
- SMEs in agribusiness, manufacturing and services are all experiencing rapid export growth.

Invention and - SMEs are the main source of invention and innovation in Australia.
innovation - Account 20% of money spent on Research and Development
- This results in improved efficiency and increased productivity, improving GDP and economic
growth.
- Half of the major technological advances of the twentieth century can be attributed to SMEs.

Success or failure of SME’s

Success of failure is usually caused by a combination of several factors:

Success Failure SME Failure rates

- Focus on niche market - Failure to plan (marketing, financial, HR) After 1 years: 25%
- Reputation - New competitors 2 years: 42%
- Entrepreneurial abilities - Economic downturns 3 years: 54%
- Flexibility - Suppliers, partnership and staff difficulties 4 years: 64%
- Access to information - Lack of access to information 5 years: 71%
- Incorrect pricing, marketing, record keeping
- Negative cash flow and lack of sales

Influence on establishing an SME

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1/ Personal
skill Qualifications Formal piece of writing that says you are skilled in this area
- Qualification can increase chance of business success
- Confidence to customer that you are eligible to provide product/service
- Does not reflect competency

Skills Competency, capability, capacity

- Attained through experience, education and/or training
- Leadership/management, communication, planning
- Problem solving, financial management, interpersonal, flexibility

Motivation Personal drive, determination and desire to achieve a goal or objective

- Long hours, stress and responsibility
- Motivated by profit, creative control, own boss

Entrepreneursh Someone who starts, operates and assumes the risk of a business venture in the
ip hope of making a profit
- Coordination of economic resources, materials, labour and capital to achieve
business objectives
- Skills involved in risk taking behaviour in order to generate profit
- Cost benefit analysis
Cultural Can arise from a community’s traditions and beliefs, such as the ‘work ethic’ —
background the willingness to work long and hard in an effort to be successful — which is
strong in many European and Asian cultures.
- 1/3 of SME’s owned by migrants
- Qualifications may not be recognised

Gender Men and women

- Changing social attitudes  33% owned by women

2/ Sources of Professional Advisors

info - Accountants, solicitors, bank managers, management consultants

Government Agencies
- Local: land zoning, subsidised land and consider development applications.
- State: provides funding ($18 million Boosting Business Innovation Program)
- Federal: business.gov.au/departments (info on establishment, operations, planning, exports)

Other Sources
- Chamber of Commerce: legal, financial, tax advice, explanation of legislation + training/seminars
- Trade associations: information on product development and industry trends
- ABS: Data on social, economic and demographic trends  assists the business owner in analysing and
understanding changes to the external environment

3/ Business Concept that makes money; centred on a good or service

idea
- Needs to appeal to a target market  be relevant
- Identify a gap in the market  unique and original
- Must be innovative to attract customers  leading to profitability

4/ New, existing or franchise business

Establishment
options NEW EXISTING FRANCHISE

Description Entrepreneur establishes new Buy pre-existing business Gives rights to market
business from owner product/trademark
Advantages - Freedom/control of - Established customer - Known business name
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decision making base with immediate and product
- Usually the cheapest cash flow - Established market for
option; no goodwill or - Employees and product
franchise fee suppliers in place - Franchisor provides
- Avoids poor - Established trade training
reputation credit - Proven successful
- Easier access to business formula
finance - Easier to obtain
finance
Disadvantage - Funds limited and - More expensive; - Expensive franchise
s obtaining finance is goodwill fit outs
more difficult - Inherit any bad - Expensive initial
- Risk; may not break reputation purchase + royalties
even or make profit - Uphold/exceed - Ongoing operation
- Poor cash flow in existing image and rules; create less
establishment stage standard independence
- Time needed to build - Business may be - Franchisor has say in
customer base overpriced location

5/ Market Crucial questions

considerations
1. What good/service will be sold?
2. What is the most suitable price for the goods/service?
3. What is the most appropriate location for the business?

Market analysis

- Collects, summaries, analyse information about market, customers, threats, opportunities, advantages
and disadvantages a business has over competitors

Pricing Methods

- Cost based, market based, competition based

Zoning

- Determines where businesses can operate  sets aside commercial and industrial zones and ensures
business location prevents disruption of residents

6/ Finance Internal/external source of finance + cost of finance

Equity finance Debt finance

Internal finance External finance
- Generated from business itself (sales and - Funds provided by sources outside of the
revenue) business
- Owners contribution (from savings, etc) - Financial institution (bank)
External equity finance: - 2 types;
- Shares in a public company Short term: paid within 12 months
- Venture capital Long term: 5-30 years
Advantage Disadvantage
Advantage Disadvantage No increase in debt and A limited source of
No increase in debt and A limited source of No interest funds
No interest funds
No new shareholders to Might be wasted
No new shareholders to Might be wasted share with (profits or
share with (profits or control)
control)
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7/ Legal - Legal obligation to observe the statutory regulations when commencing and operating a business.
considerations - Businesses that do not obey the law risk losing customers and their reputation, being fined, or losing
the right to continue trading.

Law/regulation Description
Registering business - Prohibit anyone else from trading under a similar name
name - Unique identifier for customers to find and connect with business

Zoning - Determines where some types of businesses can operate.

- Designed to keep business activities separate from residential areas and
prevent householders being disturbed by businesses operations
- The process sets aside commercial and industrial zones and it is in these
areas that most SMEs will operate.
Work health and - Must be followed in order to obtain an operating license; specifically for
safety regulations businesses dealing with food
- Work Health and Safety Act (2009)
- Public Health Act (2010)

8/ Human
Resources Employee skills Employee costs
(wage & non-wage)

Skilled employees are more

productive and create wealth The total cost of an employee is
not solely the wage or salary
paid. There are other employee
expenses known as ON-COSTS
Employers can either:
provide training to improve
the skills of existing The main ON-COSTS include:
employees  WHS requirements
OR  Workers compensation
Recruit people who have the  Long service leave
required skills
 Sick leave
 Superannuation
 Holiday pay
 Leaving Loading
 Study leave
 Maternity and paternity leave

Superannuation
- A required scheme set up the Federal Government
- 9.5% of their employees’ earnings for retirement or leaving a job
Annual Leaving Loading
- 17.5% is added to an employee’s holiday pay
- The amount is calculated on the four weeks’ annual leave to which each fulltime, permanent
employee is entitled

9/ Taxation A compulsory payment of a proportion of earnings to the government

Tax Levied by:

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Income tax (pay – as – you – go): Fed Gov
 Imposed on the employee
 Taken from the employee’s salary or wage directly
 Progressive tax rates - More you earn, more tax

Goods and services tax (GST) Fed Gov

 A broad-based tax of 10 percent on the supply of most goods and services
consumed in Australia
 One of the state’s purposes for the introduction of the GST was to make it
more difficult for businesses and individuals operating in the ‘cash economy’
to avoid tax
Fringe benefits tax (FBT) Fed Gov
 Tax on the provision of a benefit to an employee — such as cars for private
use, low-interest loans, entertainment expenses, and housing and
accommodation — in place of salary or wage
 Paid by the employer at a rate of 47 per cent of the value of the benefit
provided
Stamp Duty NSW Gov
 A tax levied on the transfer of property (e.g. businesses, real
estate and shares)
Land tax NSW Gov
 A tax on land owned by individuals or businesses over a certain value (in 2013
it was $412,000 or more)
 Land used for primary production or an individual’s primary residence are
exempt from land tax
Payroll tax NSW Gov
 Payable on wages paid by an employer to their employees on payrolls that
exceed $750,000 at a rate of 5.45 percent (2013)

Input tax credit: is an allowable tax deduction that a business can claim for any GST included in the price of
business inputs

Business activity statement (BAS): records a business’s claim for input tax credits and accounts for GST
payable
 Australian Business Number (ABN)
o A single identifying number that a business uses when dealing with government departments
and agencies
o Allows businesses to participate in the GST system
Local Government Rates and Charges
Property rates is the main local government charge a business will face.
Other taxes include:
 water and sewerage
 waste management services
 development and building approval fees
 parking permits