Setting up a Business

1. Setting up a Business Unit 1

2. Starting a Business

3. Sources of Business Ideas • Two types of starting businesses: • Set up a business then think about products or services the business will provide. • Think about products or services the business will provide then set up a business. • Sources of Ideas: • A solution to a problem in an existing product. • Noticing a growing trend in a market. (Looking for opportunities) • Inspired by existing operating businesses. • Buying someone else’s idea. (Franchise)

4. Looking for a gap in the market • To determine whether a product or service will be successful, entrepreneurs conduct market research (the process of gathering, analyzing and presenting data relevant to marketing). Market research includes: • Key features of the market. • Size • Growth • The different types of potential customer for the product. • Who the competitors are. • What trends may be occurring. • Market Growth • Growth in a specific sector • The main competition and how your product is unique • Market share of competitors • A Niche (small part of a large market) in the market. • In niche markets, no large business competitors.

5. Reasons for starting a business • People who start businesses are called entrepreneurs (someone who is willing to take the risk involved in starting a business). There are a variety of motives to start a business: • They want to make their own decisions and be their own boss. • They want to keep all the profits the business makes. • They need a job and starting a business is one way of making sure they are employed. • They have an interest that they want to expand on by starting a business. • They want to prove something to themselves by showing they can start a business for themselves. (Self Satisfaction) • They want to provide a service for others. These are called social enterprises (a business that is set up not to make a profit but to serve the society).

6. Franchises • When a business chooses to become part of an existing business by buying a franchise (when a business sells the right to use its products and / or brand name to another business). • Advantages of buying a Franchise: • The idea already exists. The entrepreneur can judge the success of the existing company and decide whether to start up. Reduces the risk. • The brand name is already established, easy to gain immediate customers. • The franchisor provides support, training and existing methods. • Costs such as national marketing, can be shared between the franchisees. • Disadvantages of buying a Franchise: • A problem with one of the franchisees will reflect badly on all the other franchisees. • Disputes may occur over the balance of power and control between the franchisee and franchisor.

7. Types of Business Objectives • A business typically sets out a series of objectives (a target that is set for the business to achieve) for itself to follow. Although each individual objective may vary, they all typically center on these areas: • Survival: Mostly a objective when starting a business, the entrepreneur may have to charge lower prices and make lower profits to establish the brand’s name. • Providing a good product: Doing a good job and taking pride in their work. • Earning a profit: After a business is running, making a decent profit is essential to staying in operation. • Customer satisfaction: Providing a better customer service potentially leads to more profit in the long run. • Market share: Businesses may set themselves a target in terms of share of market they hope to achieve. • Ethical objectives: By being ethical, a business may benefit by getting favorable media coverage, by attracting customers, investor and employees.

8. Purpose of Setting Objectives • An object provides a focus for everything you do and will enable to see whether you have accomplished your targets. Objectives are important because: • Helps with decision making and with establishing priorities. • Helps investors understand the direction in which the business is heading. This might mean they are more willing to agree to certain decisions. • Provides a target so that everyone can compare the actual results with the planned results to decide how successful the business has been. • Helps them take appropriate decisions when things get off track. • Motivate everyone connected with the business because they know their aims.

9. Influence of stakeholders • The objectives of a business should be set by the owners, but the decision will most likely be influenced by stakeholders (individuals and organizations that are affect by and affect the activities of a business). • Employees want the business to grow so they have promotion opportunities. They want the business to behave ethically. • Suppliers want to be paid on time. • Community want the business to act responsibly, such as waste and noise reduction. • Buyers also affect the firms as they want lower prices, higher quality etc. • Stakeholders can influence a business in multiple ways: • Negotiation • Direct Action • Refusal to Cooperate • Voting

10. Purpose of Business Planning • A business plan (is a document setting out what the business does at present, and what it aims to achieve in the future), it is used to plan out the following areas: • Background information on the founders and investors and their previous experience. • An analysis of the market and the business’s position within it. • The business’s objectives. • The business’s plan on how it will compete with existing businesses. • An analysis of the financial position of the business, cash flow forecasts, profits, etc. • Business planning is important because a business needs to: • Identify and anticipate problems. • Have a sense of direction. • Show to potential investors or creditors. • Business plans need to be constantly updated, as there are changes in tastes, laws and competitors.

11. Business plans to reduce risk • There are many difficulties of business planning, some of them include: • Uncertainty: Plans might not be totally accurate as it is sometimes hard to estimate future market conditions or sales figures with any degree of accuracy. • Lack of experience: Small business do not have the resources to use experts for business planning. • To try to reduce the risk of business plans going wrong, entrepreneurs can: • Research the market thoroughly. • Talk to experts and consultants. • Plan for a variety of possible outcomes. • Regularly review and update the plan so it remains relevant.

12. Sole Trader • A sole trader is when a business is owned and managed by one person. They are allowed to have employees. • Advantages: • Quick and easy to set up, does not involve registering with the government. • You make all the decision yourself so you don’t need to have other’s approval. • You keep all the profits to yourself. • Disadvantages: • Can be stressful making decisions by yourself. • Needs to handle all aspects of the business, lack of different skillsets. • You have unlimited liability (when the personal possessions of the owners of the business are at risk if there are any problems). • You may find it difficult to raise money for the business. • Is likely to be small and will not have the power large business do over suppliers and distributors.

13. Partnership • Partnerships are formed when two or more people set up in business together. They must sign a Deed of Partnership which is an agreement of the rules of the partnership, such as how the profits will be divided, how decisions are to be made, etc. • Advantages: • Several people are involved in a partnership so each can contribute money. • More people can be involved with discussing problems, better decisions. • Each partner can specialize in an aspect of the business according to their skillset. • Partners can cover for each other, being in a partnership is less stressful. • Disadvantages: • There may be disputes when a conflict of ideas occur. • Decisions may be slower than a sole trader as because all the different partners need to be consulted. • The rewards are divided up. • The partners have unlimited liability.

14. Companies • A company is a business that has its own legal identity. It is made when the owner(s) complete two documents: • Memorandum of Association • Name of the company • Overall purpose of the business • Where the company is registered • A general statement on the business’s activities • The Articles of Association • The voting rights of shareholders • How profits are distributed • How directors are elected • The duties and powers of directors • A company is owned by its investors who are called shareholders (an owner of a company. Each shareholder owns a ‘share’ of the business).

15. Private Limited Companies • The features of Private Limited Companies are: • It has “ltd” after its name. • It is owned by shareholders. • It cannot sell shares to the general public, only privately. • Advantages: • Shareholders have limited liability (you can only lose what you invested into the business). • The business gains more status, people assume a company is at a higher level. • If the founders die, the company still exists. • Managers can be employed to run the day-to-day business. • Disadvantages: • Various legal procedures. • A summary of the business’s financial accounts must be made available to public. • Business must pay corporation tax. • Any additional investors become important stakeholders.

16. Factors influencing the location • The decision of a business’s location is vitally important, there are many factors that could affect or limit the choices, such as: • Type of business • A shop needs to be close to customers. • A factory is more concerned about distribution and transport systems. • Availability of locations • Competitors • Hotels want to open in established tourist areas. • Availability of raw materials • Availability and cost of labour • Transport links • Businesses to export abroad want to be near an airport or port. • Technology (communications systems) • Costs

17. Marketing

18. Reasons for conducting research • Usingmarket research (the process of gathering analyzing and processing data relevant to marketing decisions) enables the entrepreneur to learn about: • The Market • Market opportunities • Market size • Market growth • Market share • Market segments • Potential competitors • Pinpoint strengths and weaknesses • Customer needs • Price people are willing to pay • Best way of promoting • Where to sell

19. Methods of market research • To gather primary market research(research that has never been gathered before), entrepreneurs use a variety of methods: • Telephone surveys • Advantages: Relatively cheap, can be conducted from office. • Disadvantages: People are suspicious of phone surveys. • Questionnaires • Advantages: Opinions of people in a certain area. • Disadvantages: Opinion sample may not be representative. • Customer feedback • Advantages: Direct contact with customers • Disadvantages: Relies on existing customers • Internet research (secondary information) • Advantages: Cheap and fast, wide sample size. • Disadvantages: Not tailored to meet business needs, may be out of date.

20. Elements of the Marketing Mix • The marketing mix refers to all the activities influencing whether or not a customer buys a product. • Product: • Relating to the design, specifications and features of the product. • Promotion: • Promoting a product means communicating or advertising your business or a product. • Aimed to raise awareness and increase sales. • Price • Payment terms • Installments, discount if buying in large quantities. • Place • How are the products distributed? • By internet or via shops.

21. Choosing the best mix • The choice of the best marketing mix is dependent on these factors: • The product • Is it unique? • How long is it expected to last? • Competitor’s products • What do they offer? • How does it compare in terms of price and features? • The target customers • How much do they earn? • How much do they need it?

22. Use of ICT in marketing • Small businesses now can utilize the internet to access and reach wider international markets. A business can: • Set up a website • Purchase online advertising space. • Target specific groups. • Reach millions of potential customers.

23. Finance

24. Sources of Finance • Sources of finance are places where an entrepreneur might find the necessary money to start a business. • Owners’ funds: money put into the business by its owners. • Advantages: Most reliable and first source of finance. • Disadvantages: Limited funds • Bank loans: A bank lends the business a large sum of money and it is repaid in installments. • Advantages: Large sum of money, repaid in installments • Disadvantages: Charged interest, might ask for collateral. • Mortgages: Loans from banks that are used to buy land and buildings. • Advantages: Large sum of money, very long term up to 30 years. • Disadvantages: The land will be sold if the business is unable to repay. • Overdrafts: Gives businesses the right to borrow of money to an agreed limit. • Advantages: Very flexible, only used when required. • Disadvantages: High interest rate, right to withdraw overdraft.

25. Sources of Finance • Loans from friends and family: Borrowing money from friends and family • Advantages: Easy to arrange, free of interest. • Disadvantages: Limited money, may need the money suddenly. • Hire purchase: Purchasing assets and paying in installments • Advantages: Doesn’t need a large sum of money. • Disadvantages: Expensive in the long run. • Leasing: Allow businesses to rent assets such as vehicles. • Advantages: Item maintained by the leaser, doesn’t need large sum of money. • Disadvantages: Business never owns the asset. • Government grants: Encouraging people to start business, creates jobs. • Advantages: Do not have to be repaid. • Disadvantages: Difficult to obtain, only business that create a lot of jobs. • Shares: Companies can sell shares. • Advantages: Relatively easy, cheap source of finance. • Disadvantages: May lose control of the business.

26. Types of advice available • There are various ways to get help or advice for your business such as: • Business Link • The service the government provides that gives businesses advice. • Private websites • Give free or charged advice. • Smallbusiness.co.uk sponsored by major banks. • Banks • Help with writing business plans • Advice on starting a business • How to find suitable buildings • Issues involved with employing people • How to trade online • Accountants and Solicitors • Help with finance and law

27. Basic finance calculations • Price: the amount a business asks a customer to pay for a single product. • Sales: The number of products sold by a business over a time period. • Revenue: The income that a firm receives from selling its goods or services. • Costs: The spending that is necessary to set up and run a business. • Fixed costs: Rent, insurance • Variable costs: Stock, wages • Start – up costs: Machinery and equipment, buildings • Running costs: Taxes, wages • Profit = Revenue – Total Costs • Revenue = Selling Price x Sales • Total Costs = Fixed Costs + Variable Costs

28. Importance of cash flow forecast • It is common for a business to experience cash flow problems, this is when the forecasts come important: • They can identify times when the business is short on cash. • They can take action to avoid cash shortages becoming a major problems. • If they do not have enough cash to pay its bills, it becomes insolvent (occurs when a business is not able to meet its financial commitments). • There are many solutions to cash flow problems, such as: • Delay payments: Agree with suppliers to give them more time. • Speed up cash inflows: Persuading new customers to pay on delivery. • Find new sources of cash inflows: Extra services. • Reduce cash outflows: Employing fewer staff, using cheaper materials. • Arrange an overdraft: Short term, flexible loan.

29. People in Businesses

30. Recruitment methods • Internal Recruitment (when a job vacancy is filled from within the existing workforce) • By promoting existing employees to a more senior role by invitation. • By posting notices on workplace. • Advertising on internal website or business newsletter. • Benefits of this are: • Already have experience of the business. • Know the people they are working with. • Promotion motivates them. • Cheaper as it avoids expensive advertising. • External Recruitment (when a job vacancy is hiring employees who do not work there) • Advertising in newspaper classifieds etc. • Job Centers / Employment agencies. • Benefits of this are: • Wider choice of candidates with different skillsets. • New employees have the right skillsets immediately.

31. Remuneration • Remuneration is the payment of employees. • weekly wage = number of hours worked x pay rate per hour • Salaries are paid once a month and states the figure the person earns in one year. • Important factors that influence how much a person is paid are: • Skills • The skill of the worker translates to the quality of the product. • Allowing the business to charge higher for the product and more profit. • Experience • Unlikely to need any training. • Be able to perform the job efficiently without further need for improvement. • General level of wages • Look at what competitors are paying. • They want to employ better workers than their competitors.

32. Benefits • Monetary benefits: additional payments made to employees on top of their wages or salaries. • Bonuses: Employees get bonuses if they are able to achieve certain targets. • Employee’s Pensions: Employers pay part of their wagers into their pension. • Profit Sharing: Given a share of the profit, provides a motive for success. • Non-Monetary benefits • Flexible hours: Employees value being able to work hours that suit their responsibilities. • Free lunches: Can save employees money and also time to get make or pack. • Parties: Offer Christmas / Halloween parties to raise morale, to create good working relationships. • Teamwork: Making them feel responsible for a team.

33. Benefits of motivated staff • Hard working employees • Work ethic: • Work hard and try to do their jobs as well as possible. • Arrive at work on time. • Always polite and helpful. • The benefit is that this will help the business gain a good reputation. • Employee Loyalty • Reduce costs: • Avoid the cost of advertising for new employees and training. • Reduce time wasted in employees adapting. • Allows entrepreneur to concentrate on the business rather than hiring people.

34. Maslow’s Hierarchy of Needs

35. Methods of motivation used • Small businesses use a variety of ways to motivate employees: • Job enrichment • Making jobs more challenging • Extra higher-level tasks • Changing positions once in a while • Training • Shows the owner values the employee • Increase self esteem • Working in teams • Working becomes more social • Friendly working environment • Financial awards • Basic pay raise • Bonuses and profit sharing

36. Employee protection legislations • There are multiple laws protecting the employees from discrimination and mistreatment, they include: • National Minimum Wage 1998 • Equal Pay Act 1970 • Sex Discrimination Acts 1975 and 1986 • Race Relations Act 1976 • Disability Discrimination Act 1995 • Employment Equality Regulations 2006 • Health and Safety Act 1974 • Installation and maintenance of safety equipment. • Maintenance of workplace temperatures. • Giving employees sufficient breaks. • Providing protection against dangerous substance. • Writing and displaying a safety policy.

37. Methods of Production • Job Production: Products are made one by one. • Advantages: • Exact specification of customer • Can charge higher prices as it supplies a personal service. • Disadvantages: • Expensive method of production. • Cannot use machinery. • Often requires skilled employees. • Batch Production: A group of items moves through the production process together. • Advantages: • Can use machinery. • Employees to specialize in one task, rather than frequently switching. • Disadvantages: • The business has to estimate its sales. • Has to invest in expensive machinery if batch production is to be effective.

38. Efficiency & Technology • Efficiency is when a business produces a larger amount of output using less or the same resources. • To cut labor costs: • Replace employees with technology • Do not need to pay recruiting fees • Do not need to pay wages • Do not need to pay for training • To reduce waste: • Produce identical products every time. • Few will be rejected by quality control. • Environmental technology to save energy. • Technology often has high start-up costs but lower running costs. • Quality is the extent to which a customer is satisfied with a product.

39. Importance of customer service • Customer service is the part of a business’s activities that is concerned with meeting the customer’s needs. Customer service is important because: • The products themselves • Reliability: Good should be reliable and do exactly what is expected of them. • Safety: Safety is important as customers worry about safety in buying services such as flights. • Product information • After-sales service • Dealing with complaints quickly • Delivering products without delays (important for perishables) • Exchanging goods that are faulty • Repairing goods • Offering customers advice and support. • Accepting customer feedback.

40. Importance of customer service • Employees • Should be helpful and respond quickly to enquiries. • Should receive training. • Premises • Should be clean, especially where food is prepared. • Clear directions • Allowances for disabled people • Good facilities (toilets, changing babies nappies, etc.) • A variety of payment methods • Helps the business: • Attract new customers • Increasing sales revenue and profits • Rising market share • Customer Loyalty

41. Consumer protection laws • There are multiple laws protecting the consumers from unfair practices, they include: • Labeling of Food Regulations 1970 • Weights and Measures Act 1986 • Unfair Trading Regulations 2008 • Consumer Credit Act 1974 • Sales of Goods Act 1979 • Computer Misuse Act 1990 • Data Protection Act 1998 • Food and Drugs Act 1984 (Things that cannot be added to food) • Consumer Protection 1987 (Businesses liable for injury using their product) • Food Safety Act 1990

42. Impact of ICT • Using websites • Can give the customer information about the businesses and its products. (pictures / videos) • Help advertise a small business to a much larger group of customers. • Include FAQs, a customer feedback email. • Offer advice to current customers. • E-commerce • Shopping can take place at any time of the day. • Small businesses do not have to pay for a shop to sell their products. • It helps the business to sell products to people internationally.