1.4 - Making the Business Effective

Question 1

What happens when an entrepreneur starts a business?

Answer 1

+When an entrepreneur starts a business there are some important decisions to make.

+For example what legal structure the business should have.

Question 2

What is the easiest business to start?

Answer 2

Sole Traders

Question 3

What are sole trader businesses?

Answer 3

+Sole trader businesses have just one owner [though the owner may employ other people to work for them].

+Most small businesses are sole traders - you don’t need to do much except start trading.

+Examples include plumbers, hairdressers, newsagents and fishmongers.

Question 4

What are the advantages of sole traders?

Answer 4

• They’re easy to set up, which means they’re great for start up businesses.
• You get to be your own boss.
• You alone decide what happens to any profit.

Question 5

What are the disadvantages of sole traders?

Answer 5

• You might have to work long hours and not get many holidays.
• You’re unincorporated, meaning the business doesn’t have its own legal identity - So if anyone sues the business they’ll sue you personally.
• You have unlimited liability, meaning you are liable [legally responsible] for paying back all of the business’s debts if it goes bust - As you aren’t legally separate from the business, your personal finances are at risk [eg. you might have to sell everything you own to pay the debts].
• It can be hard to raise money - Banks often see sole traders as risky, so it may be hard to get a loan; You often have to rely on your own savings, or family and friends.

Question 6

What is limited liability?

Answer 6

+Some companies have limited liability - which means the amount of debt the owners have to pay back is limited to the amount they invested.

Question 7

What are Partnerships?

Answer 7

They are like two or more sole traders

Question 8

Where do you get Partnerships?

Answer 8

+You get partnerships in businesses like accountancy firms, solicitors and doctors’ surgeries.

+Partnerships generally have between two and twenty partners.

+Each partner has an equal say in making decisions and an equal share of profits - unless they have an agreement called a deed of partnership that says different.

Question 9

What are the advantages of Partnerships?

Answer 9

• More owners means more ideas, and a greater range of skills and expertise - [eg. one partner might be great at sales, while another is good at planning].
• It also means more people to share the work
• More owners means more capital [money] can be put into the business, so it can grow faster.

Question 10

What are the disadvantages of Partnerships?

Answer 10

• Each partner is legally responsible for what all the other partners do.
• Like sole traders, most partnerships have unlimited liability.
• More owners means more disagreements - You’re not the only boss; if the partners disagree about which direction the business should go in and how much time to put in, it can get unpleasant.
• The profits are shared between the partners - so if a sole trader decides to go into partnership with another person, they could end up with less money for themselves.

Question 11

Who owns Limited Companies?

Answer 11

+Limited companies are owned by shareholders

+The more shares you own, the more control you get.

Question 12

What are the two types of limited company?

Answer 12

+They are Private and Public

+But both kinds have some important differences compared to sole traders and partnerships.

Question 13

What is a limited company?

Answer 13

+A limited company is incorporated - it has a separate legal identity from the owners.

+So any money, property, tax bills etc. in the company’s name belong to the company, not the owners.

Question 14

What does being incorporated mean?

Answer 14

+Being incorporated means the owners have limited liability - if anything goes wrong [eg. somebody sues the company or it goes bust], it’s the company that’s liable, not the owners.

+The owners only risk losing the money that they have invested.

Question 15

What happens in Private Limited Companies?

Answer 15

Ownership is restricted

Question 16

What does ‘Private’ in Private Limited Company mean?

Answer 16

+‘Private’ means that shares can only be sold if all the shareholders agree.

+The shareholders are often all members of the same family,

+Private limited companies have Ltd. after their name.

Question 17

What are the advantages of Private Limited Companies?

Answer 17

+The big advantage over sole traders and partnerships is limited liability - you can’t lose more than you invest.

+It’s easier for a Ltd. company to get a loan or mortgage than it is for a sole trader or partnership.

Question 18

What are the disadvantages of Private Limited Companies?

Answer 18

+They’re more expensive to set up than partnerships because of all the legal paperwork.

+Unlike sole traders or partnerships, the company is legally obliged to publish its accounts every year [although they don’t have to be made public].

Question 19

What does Franchising use?

Answer 19

Franchising uses the brand name or product of another firm.

Question 20

What is setting up as a franchise of another company?

Answer 20

+This is where they sell the products or use the trademarks of another firm - they then give the firm they’re franchising from a royalty fee or a percentage of their profits.

Question 21

What are franchisors and franchisees?

Answer 21

+The product manufacturers are known as franchisors and the firms selling their products are franchisees.

Question 22

What can Franchises trade under the name of?

Answer 22

+Franchises can trade under the name of the franchisee but advertise that they sell a particular manufacturer’s products [eg. car dealerships].

+Or the franchisee might buy the right to trade under the name of the franchisor - most of the big firms in the fast-food industry are this type of franchise.

Question 23

What are the advantages of franchising?

Answer 23

• Customers will already recognise the franchisor’s brand so are more likely to buy from the franchisee - this means there’s less risk of the business failing.
• As franchises are less risky than starting a business from scratch, it can be easier to get a bank loan to start up.
• The franchisor might provide the franchisee with training, or help with things like management and accounting and advertising.

Question 24

What are the disadvantages of franchising?

Answer 24

• The franchisor might have strict rules about what the business can sell and how it can operate, so the franchisee’s freedom is limited.
• The franchisee usually has to pay a lot of money to start the franchise and then make regular payments to the franchisor [ongoing royalties and commision] - these costs may mean they end up with less money than if they started a business from scratch.
• There is always a risk the franchisor could go out of business, so the franchisee will suffer.
• If there is bad publicity elsewhere in another part of the franchise, it will also affect every single establishment, decreasing customers and profit.

Question 25

Sometimes, what is business success all about being?

Answer 25

+Sometimes, success in business is all about being in the right place - When a firm chooses where it’s going to locate, there are lots of things to think about to get a site that suits the business and its customers.

Question 26

How is the location of a business influenced?

Answer 26

+The location of a business is influenced by different factors.

+Suppose a new start-up company Granite King are looking for a location for their new kitchen worktop manufacturing business - They’ll want to think about these things:

1. Location of Raw Materials
2. Labour Supply
3. Competition
4. Location of the Market
5. Using the internet

Question 27

How does the Location of Raw Materials influence the location of a business?

Answer 27

+Raw Materials [a granite quarry] are located nearby - this will lower transport costs.

+This is important for a firm like Granite King where they’re using bulky raw materials to produce smaller finished products.

Question 28

How does Labour Supply influence the location of a business?

Answer 28

+The location needs to close to an area of high unemployment - this will help keep wages low.

+it also means there’ll be a good selection of people to choose from, and the firm should be able to find enough workers.

+If it is a built up area, there will also be colleges that might be able to provide training.

Question 29

What do firms also need to consider when choosing a location to operate in?

Answer 29

+Firms also need to consider how much a location will cost to operate in.

+Eg. the cost of rent or labour in that location.

+The transport links availible will also affect their choice.

Question 30

How does competition influence the location of a business?

Answer 30

+There are similar businesses nearby - being near competitors can be an advantage.

+Eg. it should be able to find skilled labour, there are already local suppliers, and customers will know where to come.

+[Other businesses might prefer to be away from competitors so they don’t lose sales or don’t have to reduce their prices to be more competitive.]

Question 31

How does the Location of the market influence the location of a business?

Answer 31

+Some firms pay more to transport their finished products than their raw materials - These types of firms find it cheapest to locate near to their customers.

+Some businesses locate near to their market so people know about them and can easily get to them - it also helps them to get sales through passing trade [eg. from people who walk past the business].

Question 32

How does using the internet influence the location of a business?

Answer 32

• The internet means that the location of some firms is more flexible.
• Eg. trading over the internet [e-commerce] means manufacturers can locate further from their market, but closer to their raw materials - it may also mean they don’t need fixed premises [eg. a shop] to sell their products from.
• Documents can also be accessed over the internet, which means some businesses no longer need fixed premises for offices - instead, their employees can work from home and the business can potentially employ people all over the world.

Question 33

What will the nature of the business influence when choosing their location?

Answer 33

+The nature of the business will influence what they prioritise when choosing their location.

+Eg. a business that relies on customers visiting its site is likely to prioritise being close to the market.

+However, a manufacturing firm may prioritise somewhere close to its raw materials or with a good labour supply.

Question 34

What do human beings have?

Answer 34

Human beings have needs - essential things like water, food and shelter.

+Once our needs are satisfied, we start to want luxuries too, and we’re prepared to pay for them.

Question 35

What is marketing about?

Answer 35

+Marketing is about coming up with a product that people need or want - then making it as easy as possible for them to buy it.

Question 36

What does marketing consist of?

Answer 36

+The four Ps - Product, Price, Promotion and Place.

+They’re key to understanding what marketing is all about.

Question 37

What happens if a firm gets the 4ps right?

Answer 37

+If a firm gets the, right then customers will be more likely to buy its product.

+If it gets even one of them wrong, its in trouble.

Question 38

Together what are the four Ps called?

Answer 38

The Marketing Mix

Question 39

What is Product?

Answer 39

+The firm must first identify customers’ needs [or wants] - Then it needs to come up with a product that will fulfil some [or one] of these needs.

+So spinach flavoured sweets, for example, probably wouldn’t sell that well.

Question 40

What is Price?

Answer 40

+The price must be one that the customer thinks is good value for money - this isn’t the same as being cheap.

+You might be prepared to pay a lot of money for a brand new, 50-inch plasma-screen TV, but you’d expect an old basic 12-inch model to be much cheaper.

Question 41

What is Promotion?

Answer 41

+The product must be promoted so that potential customers are aware that it exists and will want to buy it.

Question 42

What is Place?

Answer 42

+Place can refer to the method of distribution used to get a product from the company to the customer.

+For example, whether it is sold through retailers or sold straight to a customer.

Question 43

What can affect the marketing mix?

Answer 43

+Lots of factors can affect the business’s marketing mix. Eg:

• Quality of Product
• Changes in Technology
• Changing customer needs
• Competition

Question 44

How can quality affect the marketing mix?

Answer 44

+The different parts of the marketing mix will affect each other.

+For example, the quality of the product will affect how much it costs to make, and therefore the price it will be sold for.

Question 45

How can changes in technology affect the marketing mix?

Answer 45

+Changes in technology may affect different parts of the marketing mix - Eg. improvements in e-commerce [selling products through the internet] means that more companies are selling their products online rather than in stores.

+Changes in digital communication have also affected how companies promote their products online.

Question 46

How can changing customer needs affect the marketing mix?

Answer 46

+What customers need will change over time too.

+Eg. companies may have to lower their prices for products that use older technology as these products no longer meet the needs of customers.

Question 47

How can competition affect the marketing mix?

Answer 47

• How competitive the market is and what a business’s competitors are doing will also affect how a firm balances the elements of its marketing mix.
• For example, if competitors are offering the same products at lower prices, a business may need to lower its own prices to stay competitive.
• If a competitor starts selling a brand new product, a business may need to develop its own version of the same product in order to offer a similar range of products to its customers.
• In a really competitive market, customers may have lots of products to choose from, so businesses may choose to spend more money on promotion to make their products seem more appealing than their competitors’.

Question 48

What do small businesses need to be careful with?

Answer 48

+Small businesses need to be careful with their marketing mix

+When a business is just starting out, it needs to be very careful to make sure it gets its marketing mix right.

+This is because it will have fewer sources of finance availible to it than more established businesses, so it will be more likely to fail.

Question 49

How can a small businesses focus on price of its marketing mix?

Answer 49

+Small businesses can’t benefit from economies of scale in the way that larger businesses can - this is because they won’t be able to buy raw materials in large enough quantities and they may not have the right equipment to make their processes as efficient as possible.

+New businesses also have lots of start up costs, such as buying new machinery.

+So new and small businesses are likely to have higher prices than large businesses as they will need to cover their costs in order to survive.

Question 50

How can small businesses focus on product of its marketing mix?

Answer 50

+Small businesses won’t have much money to spend on developing lots of different products.

+This may mean that they will have a smaller range of products compared to larger businesses.

+They may instead focus on providing higher quality products - eg. they may choose to make their products using job production rather than flow production.

Question 51

How can small businesses focus on promotion of its marketing mix?

Answer 51

+Methods of promotion such as TV advertising are unlikely to be used by small firms since they’re very expensive - A small firms is likely to use cheaper methods, such as flyers or free samples.

+Promoting the right brand [the overall image of the company] is really important - especially for a new business as it will be trying to establish an image with its customers.

+Small businesses are more likely to promote to local customers [unless they are mainly based online], which is likely to affect the way in which they promote themselves. [Eg. it may be effective to advertise in local rather than national newspapers].

Question 52

How can small businesses focus on place of its marketing mix?

Answer 52

+Small businesses are unlikely to produce products in large enough quantities to sell through very large retailers - and large retailers may also not want to sell products from a new, unrecognised brand in case no one wants to buy the products.

+So many small businesses may choose to sell directly to customers or through smaller retailers.

Question 53

Give an example of a small business using its marketing mix.

Answer 53

1. Jacob has started a new business selling cards for all occasions.
2. He only has a small amount of start-up finance and so decides to start his business by selling customers via an e-tailer in order to avoid the costs of renting space.
3. He has a range of 15 different cards, all of which he makes himself - other online card makers have over 100 different cards, so he decides to make his using much higher quality materials.
4. He pays a small fee to the online e-tailer to have his products promoted on its website.

Question 54

What is vital that a Business has a clear idea of?

Answer 54

+It is vital that a business has a clear idea of what it’s going to do if it wants to be successful - this is where thee business plan comes in.

+You need to know why businesses have them and what they should contain.

Question 55

Who is the plan for?

Answer 55

+The plan is for the owner and financial backers

Question 56

What is a business plan?

Answer 56

+A business plan is an outline of what a business will do, and how it aims to do it.

+Anyone wanting to start a business should have a plan, but they’re also useful when an existing firm wants to make changes.

Question 57

What does a business plan force the owner to do?

Answer 57

+A business plan forces the owner to think carefully about what the business is going to do, how it will be organised and what resources it needs.

+This allows the owner to calculate how much money is needed.

Question 58

Who can a business plan be used to convince?

Answer 58

+The plan can be used to convince financial backers [eg. banks] that the idea is a sound investment.

+The business owner can show the financial backer information about how the business will operate, which should help the backer decide how likely it is that they’ll get their money back.

Question 59

What can writing a business plan help reduce?

Answer 59

+Writing a business plan should also help to reduce the risks of a new business idea.

+If the business is a bad idea, the planning should help the owner or the financial backers realise this at an early stage - before they’ve wasted time and money on an idea that was never going to work.

Question 60

For a new business what can a business plan help managers do?

Answer 60

+For a new business, the business plan helps managers decide what objectives need to be set to achieve their aims once the business is up an running.

+They can also help entrepreneurs make business decisions - eg. if they have a sales forecast, they should know how much stock they’ll need to buy in order to meet demand.

Question 61

What does the business plan describe?

Answer 61

+The business plan describes how the business will be run.

Question 62

What does a business plan usually contain?

Answer 62

+There is no single correct way to write a business plan - but the best ones for new businesses include the information below:

• The business idea
• Business aims and objectives
• Target market
• Market mix
• Location
• Finance

Question 63

What is the business idea section of a business plan about?

Answer 63

+This should explain what the firm is all about.

+It could include details of the product the firm will be selling, such as how the firm will achieve its unique selling point [USP].

Question 64

What are the Business aims and objectives section of a business plan about?

Answer 64

+Aims usually say something general and obvious [eg. “To be the market-leading sandwich shop in Kent”.

+Objectives are more specific [eg. “To average 160 sandwich sales per lunchtime over 4 years.”]

Question 65

What is the target market section of a business plan about?

Answer 65

+The plan should explain who the business is aiming to sell to.

+This should be backed up by market research showing that the target market will be interested in buying the product.

Question 66

What is the marketing mix section of a business plan about?

Answer 66

+The plan should describe where the business will locate and why.

+For example, whether it wants to be near its target market, or near its suppliers.

Question 67

What is the finance section of a business plan about?

Answer 67

+The plan should explain how much money is needed to start up the business, and identify where this money will come from.

+There should be a cash flow forecast and forcasts of the business’s costs, revenue and profits.

+There should also be ratios to show the backer the likely return on their investment.