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Business Studies (Unit 1)

Entrepreneurs are people who bring new businesses and products/services into the
market. They are usually creative, patient, determined, resilient and passionate
about their ideas. They often receive Government grants to help and encourage them set
up a business.
Entrepreneurs are important in the business world because they

Create jobs and opportunities

Are able to spot gaps in a market

There are a lot of motives or reasons for becoming an entrepreneur, including the

Were made redundant or retired

Spotted an opportunity
Wanted control over their working life

There are several issues that young people may experience when becoming an

Difficult to get funding due to a lack of experience

Age discrimination not being taken seriously

A franchisee is a person or company who has paid to become part of an established
franchise like McDonalds. A franchise enables you to run your own business whilst using
a successful formula created by the franchisor.
The Government suggests that 70% of new businesses fail before three years compared
with 7% of franchises. This is usually because the idea for the business was not viable or
because stronger competitors emerged.
The franchisor usually controls the rules concerning the following

Product range
Staff uniforms

However the franchisee is usually able to make their own decisions about the following

Staff recruitment and training

Stock management



It is a good way of starting a business

without having to do it from scratch

There is not much freedom in decisionmaking

Customers will recognise the brand easily

The franchisor takes a cut of the business

income which can make it hard to make
large profits

Due to the success of the franchise, banks

can approve more loans and with less

Franchises may not be as good as they

sound. It can be expensive to buy into with
bad support

Protecting Ideas
An idea cannot be fully protected, but patents and copyrights are methods of preventing
others from copying and distributing an invention or creative piece of work. This is called
Intellectual Property.
A Patent provides a certain amount of time for which an invention or product cannot be
copied by anybody else. Patents can cost from 1,000 to 500,000+ and breaking a
patent is not a criminal offence. Owners of patents can only claim damages through the
civil courts.
A Trademark is a sign that can distinguish one product, service or brand from another
another. These can be

Logos and Pictures


A Copyright applies to written work (for example: books and song lyrics). Unlike a
patent, a copyright occurs automatically and there is no need to pay for it.

Adding Value
The process of adding value involves doing something to a product to higher its price. For
example: ready-grated cheese is more expensive than a block of cheese. Products that
are protected by patents can be used to add value.

Primary Sector

Secondary Sector

Tertiary Sector

It is hard to add value to

products here as they are
often the same (oil, coal,
gas, etc)

This sector is manufacturing

and adds the most value
(eg: Walkers v Tesco Value)

Effective marketing can

make products stand out
here (eg: M&S)

Business Plans
A business plan sets out how a business idea will be financed, marketed and put into
practice. It is likely to be essential in getting funding from a bank because they will need
to see how well a business idea is thought through and how financially viable it is.
It is a great idea to create a business plan because of the following

It gives directions
It helps make decisions about resources that are needed
It helps to measure success

A good business plan should contain


How you are going to develop your business

How you will manage your finance

Any business plan is only as good as the information on which it is based. It is a good
guide, but is only a plan.



It makes the entrepreneur consider every

aspect of the start-up so they can try to
eliminate failures

The BP is only a plan and does not

guarantee success. For example: sales may
be lower than predicted

It makes the entrepreneur aware of what

skills they are missing so that they can hire
an expert

If the plan is too rigid some problems may

arise. It must be flexible to adapt to market

Venture capital may be available to the

business if investors like the business plan

High sales expectations may cause

overspending in other areas such as stock
and staffing

Legal Structures
The legal structure of a business is crucial in determining how seriously the owners will
be financially impacted if things go wrong. It also has an effect on the taxation levels that
the business and owners need to pay.

In Unlimited Liability the owners of a business are fully responsible for any debts
incurred, even if this requires them to sell their personal assets or possessions. There are
two types of businesses that have unlimited liability

Sole traders

A Sole Trader is someone who owns and operates their own business. A sole trader can
have employees, but they must take all the final decisions about running the business.

Advantages of Sole Traders

Disadvantages of Sole Traders

They make all the decisions and keep all

the profit

The owner is the only one responsible if it


There are no administrative costs to pay

There are long hours of work involved

They are confidential as accounts arent


Becoming ill causes problems running the


A Partnership is where 2-20 people start their own business with the goal of making
profit. Trust is vital.

Advantages of Partnerships

Disadvantages of Partnerships

There is additional skills and a shared


There is UL even when it is your partners


There is more capital available to invest


There is a loss of control and profits are


There are no administrative costs to pay

There may be business disagreements

With Limited Liability, debts incurred by the business must stay within the business.
The owner doesnt have any personal liability and doesnt need to sell personal
possessions if the business fails.
A business must go through a legal process to gain limited liability. This process is called
A small business can be started up as a sole trader, partnership or Private Limited
Company (LTD). The start-up for an LTD can be as little as 100 and the company can
be fully owned by the entrepreneur.
Shares cannot be floated on the Stock Market this allows the owner to have full control
over the business.

Putting LTD after a company name is a legal requirement and says that a business is
small with limited liability.

Advantages of Limited liability

Disadvantages of Limited liability

It gives confidence to shareholders to


More annual costs (eg: audited accounts)

There is wider access to finance


Businesses must publish financial


An LTD can become a Public Limited Company (PLC) when it has 50,000+ in share
capital. The business may then be floated on the stock market where the public can buy
shares. This provides finance for the business to expand. However, too much cash in a
short amount of time can make a business grow too fast.
There may also be some other problems with PLCs

It is hard to have any objectives other than profit

A small group of control can be unlikely due to the availability of shares on the
There may be a lack of concern for the future of the business if the only goal is

Some other forms of businesses include non-profit organisations which focus on the
interests of the members and not shareholders, and Co-operatives which are workerowned.

Market Research
Market research gathers information about consumers and competitors. A target market
is the chunk of the whole market that the product or service is aimed at.
It aims to identify consumers buying habits and attitudes to products and services. It can
be numerical (how many people buy the Daily Mail?) or qualitative (why do these people
buy the Daily Mail?)
Secondary Research is data that already exists. Secondary research can be found
through the internet, newspapers and Government produced data.



It is easy to access

It may not be to the specific needs of your


It is usually cheap or even free

It may not be accurate

It saves a lot of time

The reliability and quality may be


Primary Research is the process of gathering information directly from people within
your target market. This can be very expensive when carried out by specialist market
research companies and there must be a lot of care taken to eliminate bias from your
research! Types of Primary Research may include the following

Phone calls



The research will be specific to your


It can be time-consuming

You can guarantee reliability and quality

It can be very expensive

It is confidential to you and your business

Quantitative research asks questions which usually provide simple, numerical
answers. For example, which pack do you prefer? or how many newspapers did you buy
last week? However it can be hard to find valid data when using quantitative methods in
small-scale research.

Qualitative research is in-depth research into the motivations behind buying habits. It
does not produce statistics like 53% liked the chocolate but asks why they liked it
instead. One form of this research could be interviews. However, it is hard to collect
qualitative research in small-scale samples and bias may creep in.

A Random sample is where everybody in the population has an equal chance of being
chosen. Achieving a truly random sample requires careful thought because people may
often be missing.
A Quota sample is where interviewees are selected in proportion to the consumer profile
of the target market. For example: if the total amount of people at college was 1,000 with
40% males and 60% females, the male number would be 400 and the female number
would be 600. These people can then be broken down into age groups, directorates, etc.
This method allows interviewers to interview anybody as long as they achieve the correct
quota in the end. It can work out relatively cheap and effective and is used most often by
market research companies.

A Stratified sample is when you interview people with specific characteristics (eg: 30-45
year olds). So within this section of the population individuals can be found at random or
by setting a quota.

There are many factors which can potentially influence the choice of sampling methods


Sample Size
After deciding which method to use the next consideration is how many interviews should
be conducted. Some companies interview between 100 and 1,500 people and consider it
large enough to reflect the views of 45 million people. This can be heavily argued.
A sample with at least 1,000 responses usually produces a high confidence level
compared with 10 or 100.
However, it can be extremely expensive to conduct large amounts of research and
sampling 1,000 people can cost 30,000. Surveys of 4 or 5 new products may cost
120,000+ on research alone.
When answering a question on market research or quantitative figures I MUST question
the following

Who produced the information?

How was it produced?
What was the sample size?
What is the confidence level of the research?

Types of Markets
A market can be anything from the amount of people that buy a specific product, the
amount of products in a category or how much is spent on one specific thing. They key
elements to any market are

Size (how much is spent every year)

The extent to which it can be divided (eg: TV magazines, health magazines,
clothing magazines, etc.)
Market share (eg: the food market can be divided into breakfast cereals and
Kelloggs are the leader)

Local markets are small firms which dont really care about the size of the national
market. They are more concerned with the state of the local market (eg: local
hairdressers and plumbers).
However, some small businesses may still be focused on the national market (eg: selling
their products through large supermarkets or by operating on the internet)
National markets cater for the nation but are also concerned about local competition
(eg: H&M, New Look). Therefore, these businesses are located everywhere and use
national media to advertise.

Electronic markets are markets that used to be physical. The stock exchange and
exchange currency markets are now all on-screen and eBay and other auction markets
are transforming how we make transactions. Electronic markets often have key

They are very price competitive so the costs are kept down
They can operate from anywhere
The market is cheap to enter so new competitors can arrive anytime

Market Size, Growth and Share

Market Size is the amount of goods purchased or the amount spent on those goods.
By establishing Market Growth you can determine whether a market is growing or
declining. The formula for calculating market growth is below
New figure old figure = Market Change
Market Change / the old figure * 100 = % in Market Change

Market share is the proportion of the total market that is owned by one company. It is
essential for evaluating the success of a firms marketing activities. The formula for
calculating market share is below
Company revenue / whole market revenue * 100 = % of Market Share
There are many advantages of being a market leader

High distribution without much effort

Able to charge higher prices
Able to get new products onto shelves as their name is widely recognised

Market Segmentation
Markets can be subdivided into several different ways. The magazine market is a good
example and can be split up into gender, age and lifestyle. Businesses must know their
target markets needs and wants.



Segmentation is acknowledgement that

customers are not all the same and will not
respond the same

Segmentation only works if the business

can provide products and services that the
market needs

With small adjustments, products can

appeal to different target markets (eg: a
club at night and day)

The size of the segmented market needs to

be sufficient to be profitable for the
business in question

The business can target their marketing

efforts, therefore making more efficient use
of the resources

Providing different products and services to

different segments can cost more (lose
economies of scale)

Demand is the desire to buy a product backed by the ability to do so. It is also known as
effective demand.
Price can affect demand in the following ways

The higher the price of the product the less of the product people can afford to
The price of other competitors products
The value that the consumers place on the brand can affect its demand

Income has grown in the last century. The demand for most products and services grows
with the economy.

Normal goods
the demand for these grows broadly in line with economic growth (eg: petrol and

Luxury goods
the demand for these grows faster than the growth of the economy

Inferior goods
the demand for these falls as the economy grows. As we get wealthier we prefer
to buy branded products instead of home-brand ones

Of course, if the economy is struggling luxury goods quickly vanish and inferior goods
become more popular.
The Actions of competitors plays a big influence on demand. For example, the
demand for a Ryanair flight to Dublin doesnt just depend on the price of the flight or
customers incomes but the prices of rival flights too.
A firms own Marketing objectives may also play a part in the demand for a product or
Seasonal factors are the biggest influence on demand for some businesses. For
example: Ice cream sales will boom in the summer whereas the coat market will be more
successful in the winter.

One of the most important factors influencing the success of a business is its location.
This makes good locations with good infrastructure very expensive, and small businesses
often struggle to compete.
Factors affecting the choice of location

The cost of land

a business whos products are price sensitive need to keep costs down so a cheap
location may help

is there room for expansion? This should be a consideration in case the business
does well

Government grants
financial incentives that are offered by the government may influence the
decision on location

Accessibility to the market

businesses that operate on the internet may not need to worry about this factor
but hairdressers and such will benefit from being close to their target market

Accessibility of suppliers
businesses that use JIT will benefit from being close to suppliers due to shorter

Cost of labour in the location

locating in a high area of unemployment may help to keep costs down, but will
the workforce have the required skills?

the provisions available in a certain area, for example transport links and
telecommunications. Online businesses such as Amazon and Play will need to be
in areas with sufficient transport links.

Sources of Finance
A source of finance is the term used to describe where a business gets its money from.
Almost all new businesses will need money to invest before it can start operating,
including the following

Capital investments such as machinery, equipment and property

Money for running the business (bills, wages, etc.)

Businesses will also need to be able to raise money for other reasons such as expansion
of premises, machinery and employees, to buy more produce for large orders, or for
more external reasons such as a dip in the economy. The amount of finance available to a
business will depend on:

The type of business

a sole trader is somewhat restricted to the amount they can put into a business
from their own resources. A limited company will be able to raise share capital in
addition to being able to borrow. A balance between equity (own money) and debt
(loans) should be around 50:50

The stage of development of the business

new businesses will have a harder time raising finances than a business that is
already established

The state of the economy

if the economy is booming there will be higher business confidence and therefore
more money

Having sufficient funding will ensure that a business can meet its current and future
needs. A distinction between short, medium and long-term objectives should be made
and the appropriate type of funding used.
Short-term finance (less than a year) should not be used to finance long-term projects.

Internal finance

External finance

Stretching existing capital further (eg:

cutting stock)

Bank loans and overdrafts

Retained profits (not suitable for start-ups)

Trade credit (extending time to pay


Selling some of the businesses assets (eg:


Share capital and Venture capital



Retained Profit

Keeping previous profits to invest in the


It is free because it is an internal


Sale of assets

Selling off items with value (eg: buildings

and shares)

It can reduce or eliminate debt


Borrowing money (usually from a bank)

with interest

May not have to pay interest if

the financer is family or friends


A loan or share paid back with interest

Interest is usually lower than

bank loans

Venture capital

When someone invests in a high-risk


It can be very successful

(Dragons Den)

Share capital

Selling shares on the stock market (PLC


You can make money to invest


Agreement with the bank to have a

negative balance

They are usually easy to access


Renting something you cannot afford to


It is yours to use whenever you

want it

Trade credit

You dont have to pay for something


It can be easier to pay for things

An employee is somebody who works for an organisation; usually under a contract of
employment in return for a salary or a wage.
At the start of a new business it is common for an entrepreneur to work on their own,
taking on all jobs associated with running the business. However, as the business
expands they may need help.
Types of employees include

Temporary and permanent part-time (less than 30 hours per week)

Temporary and permanent full-time

Advantages of part-time staf

Disadvantages of part-time staf

Flexible and able to respond to fluctuations

Recruitment costs

Theyre cheaper because they arent in


Training costs

They may improve the quality of the

workforce (more motivation and
higher productivity and a decrease in
absenteeism and labour turnover

May miss out on vital information as

theyre not 24/7

Advantages of temporary staf

Disadvantages of temporary staf

Flexible and able to respond to fluctuations

Recruitment costs

They are able to cover for permanent


Training costs

Specialists can be employed for short


May have a lack of commitment (as with PT


An alternative to hiring staff on a temporary basis is to use an employment agency.

Although the workers carry out work in your business, they are paid by the agency. This
means that the business owner has a contract with the agency and not the employee.
The main benefit to using an employment agency is that all recruitment/administration is
done by the agency.

Businesses may choose to recruit an advisor/consultant for a specific period of time.

These individuals provide services such as accountancy, business strategy, IT, etc. They
are paid a fee for their services.

Advantages of advisors/consultants

Disadvantages of advisors/consultants

Able to stand back and ask questions staff

cannot see

Their ideas may not be trusted

They bring ideas from outside the business

They may not be ideal for the needs of the


They can raise sensitive issues that staff

may ignore

They can often cost a lot of money to hire

A budget is a detailed plan of the income and expenses expected over a certain period of
time. Businesses will be required to produce a Budget for Revenue and Profits in order to
persuade banks to lend finance.
Advantages of budgets

They can help ensure that a business does not spend more than expected
They can help measure managers performance
They can motivate all the staff in the section (delegating budget-power can be

An Income budget is the expected Revenue over a certain period of time.

An Expenditure budget is the expected Expenses over a certain period of time.
In a Profit budget is the expected difference between Revenue and Expenses (Income &
Expenditure Budgets)

Setting budgets is not an easy job. How do you decide on the level of sales next month or
next year? This is especially hard for new businesses with no previous trading
experience. Heres how start-ups do it

They produce an estimate of sales in the first few months based on secondary and
primary market research conducted for their business plan
The entrepreneur relies on their own instinct and experience in the industry

Most established firms will use last years figures as a guide to the next years with an
adjustment for any known changes or objectives.
Zero Based Budgeting is an alternative approach to Expenditure budgets. This starts
each budget at zero instead of last years figures. This helps to stop budgets from rising
every year.
However, there may be some problems with this type of budgeting because managers
may lack the experience of knowing what things really cost.
The best way to set budgets is to

Relate the budget directly with the businesses objectives (what it is trying to
To involve as many as possible during the process; budgets should then be agreed
and realistic
Make budgets realistic and meaningful to the staff who have to work with them

Cash Flows
A cash flow is the flow of money in and out of a business over a given period of time.
Cash flow forecasting is estimating the flow of money in and out of the business.
Remember that cash does not always mean profit!
Managing cash flow is one of the most important aspects of financial management.
Without the cash to pay bills, all businesses will fall.
Cash flow problems are the most common reason for business failures. Cash flow
forecasts are vital in business start-ups because they help get finance and will also show
the finance provider when they will be paid back.
All businesses need to manage their cash position carefully and will need to predict their
cash position in the forecast for at least the next six months. This will help enable them
to take action if cash becomes short.
To prepare a cash flow forecast, businesses need to try and estimate all the money
coming into and out of the business. These flows are then set in a grid showing the cash
movements each month. Cash Flow example

In order to prepare cash flow forecasts, businesses need to make estimations, just like in
budgets, so the estimations are only as good as the research used to carry it out. It is
much easier for an established business to create a forecast but all companies must build
their forecast in contingencies.

When conducting a forecast businesses must anticipate disasters like cash shortages. By
creating a worst-case forecast, companies will be able to arrange financial cover for
these events before they happen.

Calculating Revenue, Costs and Profit

The revenue received by a business can be a crucial factor of its success. When a
business starts up they should expect low revenues because

Their company or product is unknown

They are unable to buy large amounts of stock to supply big orders
Its difficult to charge premium prices as they arent yet established

Entrepreneurs start their financial planning by assessing what revenue they might
receive in their first financial year. Revenue is calculated by using the following formula
Quantity of goods sold * Selling Price = Sales Revenue

A business that plans to increase its revenue may benefit more from selling a high
amount of products at a low price rather than a low amount of products at a high price.

The Cost of Production is important for a manager to know because it will


Assess whether it is possible to trade

Find out how actual costs and predicted costs match
Makes judgements on cost efficiency

Fixed Costs are those that do not vary with the level of output (eg: salaries, rent,
utilities, interest charges).
Variable Costs are those that do vary with the level of output (eg: materials, piece-rate
The formula for calculating Total Costs is:
Fixed costs + Variable costs = Total costs

Profit is the difference between revenue and expenditure and is main motive for many
businesses. However, some businesses are not established with the aim of making a
profit. Profit can be calculated by using the following formula:
Total revenue Total costs = Profit
always mean profit!!)

(Remember that revenue does not

Managers usually refer to Net/Operating Profit as the amount left once all fixed and
variable costs have been deducted from revenue. However, this is before TAX has been

After working out the total profit after TAX, it can be used to

Pay shareholders
Reinvest in the company (retained profits)

Profits are important for most businesses because


They provide a measure for business success

They are the best source of new finance for a business (retained profits)

Forecasting costs and revenues can be difficult new businesses as they dont have any
past figures give them ideas. It is possible that entrepreneurs will underestimate fixed
and variable costs and overestimate revenues.
A business will want to compare its profitability over time. This is called the Net Profit
margin and the higher the margin the better! The Net Profit Margin can be calculated
with the following formula
Net Profit x 100 / Total revenue = Net profit margin

Calculating Break-Even
The breakeven analysis compares a companys total revenue with its total costs to find
out the minimum level of sales required to cover its costs. This is usually shown on a
graph called a breakeven chart. In order to calculate the breakeven point a business will
need to know the following:

The selling price of the product/unit

Their fixed costs
The variable costs per unit

The breakeven point can be calculated by using the following formula

Fixed costs / (Selling price per unit Variable costs per unit) = Breakeven Output

Contribution is the difference between sales revenue and variable costs. It pays for a
businesss fixed costs and the remaining money is then counted as profit. Contribution
can be calculated by using the following formula
Selling price per unit Variable costs per unit = Contribution PER UNIT
Total revenue Total variable costs = Contribution
(Contribution PER UNIT is effectively just the second part of the breakeven

Contribution can be reduced by lowering variable costs and increasing selling prices.
Lowering fixed costs can then also produce more profit as they are paid for by

If sales revenues exceed the variable costs,

the product will be making a positive
contribution. Contribution should rise as
output increases, covering fixed costs and
then increasing profits.

Once you have calculated the breakeven point on a graph you can then work out the
Safety Margin. This is the amount of sales a business can lose before it starts to lose
profits (the difference in units between the breakeven point and the quantity of units

You can work out the Margin of Safety using

this formula
Number of units sold Breakeven point
You can also work out the Margin of Safety in
MOS in units * Selling price per unit =
MOS in

Key Terms


Adding Value

Doing something to a product in order to increase its price


Somebody who provides businesses with help and advice

Bank Loan

Borrowing a fixed amount from a bank with interest

Bank Overdraft

An agreement with a bank to go into a negative balance high


Breakeven Point

The point at where a businesss revenue covers its total costs


A plan of income and expenses expected over a period of time

Business Angel

Someone who invests in a high-risk business and provides


Business Plan

Sets out how a business idea will be financed, marketed and put
into practice

Business Objective

A goal that a business wishes to achieve

Cash Flow

The incomings and outgoings of a business

Cash Flow Forecast

A forecast predicting the incomings and outgoings of a business


The difference between total revenue and total variable costs

Contribution Per

The difference between the selling price per unit and variable
costs per unit


Amounts incurred by a business during trading operations


The amount or price of a product that customers are willing to



Defining a market in terms of segmentation (eg: age, income)

Elasticity of

The responsiveness of demand to a change in price or

customers incomes

Electronic Market

A market where sellers and customers do not meet (eg: Play,



Where new businesses are formed to offer products or services


Somebody who takes calculated risks to start up a business

Expenditure Budget

The budget that sets out the total costs (usually split into

Fixed Costs

Costs that do not change with output (eg: rent, salaries, utilities)


Someone/a business who rents their business to other


Full-time Employee

Somebody who works 30+ hours a week under a contract

Income Budget

The budget which sets out estimates of revenue


The resources that go into producing goods and services

Limited Liability

Business owners/shareholders that are not fully responsible for a

business fail


The place where a company is located or does business

Margin of Safety

The difference between the output sold and the breakeven point


The place where buyers and sellers come together to do


Market Growth

The percentage of growth of a market over a time-period

Market Research

The process of collecting and analysing data to help make

marketing decisions


Segmenting a market into difference sections (eg: age, gender)

Market Share

The percentage of an market that particular business or product


Market Size

The total demand or value in a specific market

Niche Market

A small part of a large market where customers have specific


Opportunity Cost

The cost of missing out on the next-best alternative


The right to be the only producer of a specific product or service


Someone who works for a business with no set-out ending


Primary Research

Research which is carried out by a company for its own needs


The difference between total sales and total costs


Detailed research like beliefs, values and opinions


Non-detailed numerical research like sales figures


The rewards to a business (eg: profit, customer satisfaction)


The income of sales (selling price per unit * total units sold)


The probability or change that wanted outcomes will not occur


A subset of a population usually chosen for market research

Share Capital

Finance invested into a business by shareholders

Social Enterprise

A business that has objectives other than making profits (eg:


Sole Trader

A one-person business with unlimited liability


A business that provides goods or services to other firms

Total Costs

A businesses total variable and fixed costs added together

Trade Credit

When a business does not have to pay for something



A sign that can distinguish the goods or services from one

trader to another

Unlimited Liability

Owners of a company that are completely liable if a business



A unique selling point of a product or service that makes it stand


Variable Costs

Costs that change with the level of output

Venture Capital

Someone who invests in a new start-up business

Working Capital

The amount of money that a business has available for day-today activities