Aims and Objectives of Private Firms

Profitability.
The most obvious objective of any business is to make profits that are a
return on the capital (money) invested in the business. After all, why on
earth run a business or invest in a business, if there is not going to be a
worthwhile cash return? Profitability can be measured in a number of
ways (you will learn these in detail when you study Financial Accounts),
these measures of profitability include Gross Profit, and Gross Profit
Margin, Net Profit and Net Profit Mar-gin, and Return on Capital Employed
(a measure of profitability against money invested).
When examining profits a firm will need to make comparisons against rival
forms, and so benchmark their own profitability. Long run increases in all
measurers of profitability, linked to increasing share-holder value (see
below), will be the main factors that create ongoing motivation in business
owners and managers.
Profit maximisation is a key expression when considering how
profitable a firm is. Many firms have been taken over because
opportunities to increase or maximise profits have been spotted by
predatory outside investors. Profit maximisation is often based on
maximising brand value and minimising costs.

The most obvious objective of any business is to make profits…..

After all, why on earth run a business or invest in a business, if there
is not going to be a worthwhile cash return
Increasing

Shareholder value—measured by dividend paid and share price.

Dividend is the share of profits paid out to shareholders, so a dividend
could be 4p per share. The important figure is Dividend Yield which is the
amount of dividend as a proportion of the share price. Increases in share
price are expected over time, the total in-crease in value of shares held is
called capital gain. Many senior managers have bonus schemes related to
increasing share prices and dividends; these will then become the main
focus of the business. This is likely to be seen as both a short run and long
run objective. In the shorter term other objectives can arise, and for some
businesses these can, at least for the immediate future, be more
important than making profits. These other objectives include;
Survival - around 30% of businesses fail within 2 years of being set up.
So for a small business, the initial objective is to survive the difficult time
of gaining customers, establishing a good local name, and build-ing a
reputation. Even for some big businesses survival can become a priority.
Marconi, one of Britain's most successful hi-Tec engineering firms in the
80's and 90's, was taken over by it’s banks in 2002, as a result of falling
profits and an inability to pay it’s debts. Euro Tunnel is in a similar
situation, with £6 billion of debt, and not earning enough profits to pay
interest on this debt mountain.
Gaining Market Share - some firms will spend to gain customers,
reducing profits in the short run, but hopefully increasing profits in the
longer term. They may even be able to force other competitors out of the
market, by using loss making pricing strategies.

Increasing Brand Identity- some firms may concentrate on

establishing their brand name, becoming the most recognised firm in their
market. This costs money, so reducing profits.

Ethics and going green - there are businesses that will try to
minimise the impact of their business activities on the environment, they
may try to ensure suppliers in developing counties get a good deal, they
may pay their workers over the odds. All of theses ethical strategies will
increase costs and so reduce profits.
So we see that although making profits, and giving a return to owners
(increasing shareholder value), will always be the number one and two
priorities of businesses in the long run, in the short term can there be
other more important objectives to pursue.

Exam Question Answer all the questions in the spaces provided.

1. The Mattress Doctor expands through franchising
Former accountant Bryan Walters and his business associate Bruce King
were looking at various business options. Bruce’s wife suffered from
asthma and in their research they came across businesses in Germany
and the USA which cleaned mattresses to try to get rid of dust mites and
ease the asthmatic symptoms. They discovered that no one was running
such a business in the UK, where allergy rates are the highest in Europe,
and so the Mattress Doctor was born. Business was doing very well and
Bruce and Bryan started to think about growing it. They decided that
franchising would be the most suitable route for expansion. A Mattress
Doctor franchise costs from about £8000 and there is a monthly charge
of £250 to cover repair and replacement of equipment and continued
support. Their main business objective is growth, and inside one year they
had 24 UK franchises with the aim of reaching 100 within the next three
years.
Adapted: Franchising, Working Lunch
BBC
(a) Apart from growth, outline two other business objectives that the
Mattress Doctor might
have. [4]
(i)……………………………………………………………………………………..
(ii)………………………………………………………………………………………
 Ownership and Control of Private
Firms.
Introduction
Business managers as a business steadily grows in size are in the main
able to cope, learn and develop new skills. Change is gradual, there are
few major shocks. Unfortunately business growth is unlikely to be a steady
process, with regular growth of say 5% a year. Instead business growth
often occurs as rapid bursts, followed by a period of steady growth, then
followed again by a rapid burst in growth..
The change in legal form of business often mirrors this growth pattern.
The move from sole trader to partnership involves injections of further
capital, move into new markets or market niches. The switch from
partnership to private limited company expands the number of manager /
owners, moves and rear-ranges responsibilities, as well reforming the
decision making process. When a business floats on the stock market
becomes a PLC, the owners are now distant individual shareholders, or the
perhaps not distant enough, institutional investors.
Business growth does not always follow the pattern of changing legal form
de-scribed above, but what we are concerned with are the problems,
inefficiencies and contradictory pressures that can occur within a
business, as a firm grows. So in this case the pattern of sole trader –
partnership – private limited company – public limited company is ideal for
examining the problems that can occur with transition in size.

Business growth is unlikely to be a steady process, with regular growth of say 5% a year.
Instead business growth often occurs as rapid bursts………..

Sole Traders
Sole traders are the most popular of business legal forms, owned and
often run by a single individual they are found on every street corner in
the country. A quick examination of a business directory such as yellow
pages will show that there are thousands in every town or city.
There are both advantages and disadvantages to operating as a sole
trader, and these are:
Advantages
 Easy to set up – it is just a matter of informing the Inland Revenue
that an individual is self employed and registering for class 2 national
insurance contributions within three months of starting in business.
 Low cost – no legal formalities mean there is little administrative
costs to setting up as a sole trader. Also no formal audited accounts are
required, though it makes good business sense to keep a full set of
business records.
 Decision making is fast - no need for consultations.
 Hire and fire as you please – the sole trader employs people
that they are happy to work with.

Disadvantages
 Limited capital – Sole traders often rely on their own savings and
perhaps secured business loans.
 Limited range of skills – a sole trader may be an expert plumber;
bur is he expert at marketing, managing staff, and controlling cash flow?
 Immense pressure – all the decisions and the future success of a
business rest with one person.
 Unlimited liability – the sole trader is liable for all the debts of the
business, up to and including the value of all assets held, and potential
future in-come.

Sole Trader to Partnership.

Partnerships involve the joint ownership of a business. Normally there can
be between 2 and 20 partners, but in certain businesses such as
accountancy firms, there can be many more partners than this.
Partnerships are often found in the professions, such as between lawyers,
accountants, doctors etc, but can be found in any type of business
activity. The rules of partnership are laid down in a Partnership
Agreement, or the Deed of Partnership.
The Deed of Partnership lays out such rules of operations as:
 The amounts of capital invested
 The share of profits each partner is to receive.
 The voting shares of the partners
 What is to happen on the death of a partner
 Methods of leaving the partnership
 Rules for dissolution of the partnership
Should a dispute arise without a partnership agreement giving methods of
setting the dispute, then the dispute would be settled according to the
1890 Partnership Act. This is best avoided, particularly were limited
liability is involved, as the act states that each partner is equally
responsible for any debts. Each partner is ‘jointly and severally’ liable.
Advantages of partnerships include:
 Wider range of skills
 Greater availability of capital
 Privacy of business affairs (no accounts need to be published)
 Decision making is shared
But becoming a partner does not solve all the disadvantages of being a
sold trader.

Disadvantages of partnerships:
 Capital can still be limited
 Unlimited liability of partners ( sleeping partners who invest, but take
no part in day to day running of the business can have limited liability)
 Partnerships are dissolved on the death of a partner and this can cause
complications in re-establishing the partnership.

Partnerships are often found in the professions, such as between

lawyers, accountants, doctors etc

Although, as we have seen, there are many advantages when partners

become involved in a business for the first time ( such as increased
capital, greater input into decision making, wider spread of skills), new
partner’s can and do cause strains within a business.
These strains often result from the loss of control of the sole trader over
many aspects of business activity. For example suppliers or
manufacturing methods may be changed by new partners, the
relationships between managers and employees may now be different.
One case study into these pressures examined a small boat yard involved
in building handcrafted wooden yachts. The existing owner under financial
pressure took on a partner, who wished to introduce more modern
methods of manufacture such as GRP moulding. The move from
traditional methods of manufacture, to modern batch production methods,
meant that the previous owner felt disempowered, his skills that had built
the business were in effect redundant, even his relationships with existing
customers were not now so important, as new customers brought in the
bulk of the business. These problems were only resolved by the original
owner learning to adapt his skills to modern working methods.
The loss of customer contact indicated above, can be one of the main
problems that arises because of business growth. Customer relationships
and personal ser-vice may be the keys to success of small businesses.
As the business grows, then the original owner/manager may find that his
or her time is being taken up with administration, staff management and
paper-work. Working relationships that have brought the business success
may be difficult to maintain. Often partnerships, when founded, are based
upon the sole trader re-establishing the roles that made the business
successful and passing the less customer orientated tasks onto the new
partner, or partners.
The situation where owners may take little interest in the
ongoing management of a firm, really starts to occur in limited
companies.

From Partnership to Private Limited Company (Ltd)

Private limited companies are incorporated bodies. They are established
through the issue of a Certificate of Incorporation. This is issued by the
Registrar of Companies, based at companies house Cardiff. The issue of a
Certificate of Incorporation follows the completion, and submission of two
documents. These are:
A Memorandum of Association, which provides de-tails of the
companies name, statement of Limited liability of the shareholders,
company registered office address, and a description of the business
activities of the company, ( for example the retailing of furniture).
And secondly the Articles of Association, which provides details
of the roles of the Directors, the voting rights of shareholders, dividend
policy, formal procedures of the Annual General Meeting, and methods of
calling an Extraordinary General Meeting.
Setting up a Limited Company is not complex, companies can be bought
“off the shelf”, for around £60, and the relevant details inserted, or they
can be registered and incorporated on-line, with just a simple fee to be
paid, and only 2 shareholders needed.
The owners of limited companies are of course shareholders. The
minimum number of shareholders is only 2, and it is not unusual to find
limited companies with just £100 of issued share capital, two
shareholders, with one holding 99 shares the other 1 share. In this
situation the owner is very likely to be the manager. This type of limited
company is often bought „off the shelf‟, at a cost of perhaps £60.
Limited companies (both Ltd’s and Plc’s), are incorporated. This means
they have a legal existence separate from that of the owners of the
business. Limited companies can own property and other as-sets, can
enter into contracts, and sue and be sued. They survive the death of
owners, and can borrow and lend money.

Setting up a Limited Company is not complex, companies can be

bought “off the shelf”, for around £60, and the relevant details
inserted ….

When establishing a limited Company, two documents are required, these

are

 A memorandum of association
 Articles of association

What is a memorandum of association?

This document sets out:
 the company's name,
 where the registered office of the company is situated (in England,
Wales or Scotland); and what it will do (its objects). The object of a
company may simply be to carry on business as a general commercial
company.
Other clauses to be included in the memorandum depend on the type of
company be-ing incorporated. The form of memorandum for each type of
company is set out in a set of tables called The Companies (Tables A to F)
Regulations, 1985.

What are articles of association?

This document sets out the rules for the running of the company's internal
affairs. The Articles deal with internal matters such as general meetings,
appointment of directors, issue and transfer of shares, dividends, ac-
counts and audit.
Limited Company status has one major advantage over sole traders and
partnerships that is the owners (shareholders) have limited liability. This
means that they are liable for the debts of the business only up to the
amount of capital invested.
There are exceptions to this limited liability status. If share-holder
directors are found to have traded when they new or should have known
that the business was not financially vi-able, then they can be held liable
for debts that have accrued after the time they should have or did know.
Also if directors acted in a foolhardy way, creating debts and liabilities,
then in these circumstances, they can be held liable as above.
Private Limited Companies also have the advantage of potentially
accessing greater amounts of capital through the sale of shares, but they
are not allowed to advertise shares for sale, only being able to sell
through word of mouth. There is though no limit to the number of
shareholders in a private limited company (Ltd), but the restrictions on
how shares can be sold, mean that shares must be offered to sale to
existing shareholders before they can be sold outside the cur-rent
shareholders. This prevents loss of control by existing owners.

There are also disadvantages, to Limited Company status. Firstly Accounts

must be published. For Private Limited Companies this means making full
copies available at Companies House, where they can, for a small fee, be
viewed by anyone. Also accounts must be audited, by an independent
accountant, and there can be high costs to this.

Divorce of Ownership from Control

The move to limited company status is likely to be the first stage of
growth when there is some degree of divorce of ownership from control.
Although sleep-ing partners may exist in a partnership (sleeping partners
take no part in day to day business management, but benefit from limited
liability), the situation where owners may take little interest in the ongoing
management of a firm, really starts to occur in limited companies.
Limited companies are often family businesses, which often include other
key members of staff as shareholders. The main shareholders may take
an active part in the business, or may be on the fringes of day to day
business activity. If the shareholders are not engaged in managing the
business, then we see the divorce of ownership and control occurring.
Ownership is in the hands of shareholders, but day to day control is in the
hands of managers.
This separation of ownership and day to day control is one of the reasons
why limited liability in necessary. When large amounts of capital were first
needed for business ventures (around the time of the industrial
revolution), large scale investment was limited by the risks inherent with
unlimited liability. The development of joint stock companies, where
investors risk’s were contained by the use of limited liability and
incorporation, allowed firms to raise the large amounts of capital required.
Because there can be perhaps hundreds of shareholders (though more
likely to be less), boards of Directors are appointed to oversee the
management of the business. In smaller Ltd’s the Board of Directors are
often managers, but in larger Ltd’s, it is likely that many members of the
Board are not involved in business management.

From private to publicly quoted. Ltd to PLC.

When a firm becomes a PLC, then instead of being a „family run‟
business, we switch to a situation where the major shareholders are often
financial institutions, such as venture capital companies, pensions funds,
or insurance companies.

How can a private company convert to a PLC?

A private company limited by shares ( a Ltd.) can re-register as a PLC, A
private company must pass a special resolution that it be so re-registered
and deliver a copy of the resolution together with an application form to
the Registrar of Companies. The resolution must also:

 alter the company's memorandum so that it states that the company is

to be a public limited company;
 make any other alterations to the memorandum so that it conforms to
that required for a public limited company;
 make any required alterations to the articles of association of the
company

There are also requirements in regard to publishing of accounts and

providing fully audited accounts before the change occurs.
Public Limited Companies are often the largest type of business. Perhaps
with millions of shareholders, they may be worth £50 billion or more.
Some, of course, are much smaller, but what they all have in common is a
requirement for full disclosure of accounts, which must be made available
to the public at large.

….In larger Ltd’s, it is likely that many members of the Board are
not involved in business management.
In the case of PLCs we see the situation arising where there can be a full
„divorce or ownership from control‟. This means that those who own the
business have little or no say in the day to day running of the business.

Limited Company Shares

To see how this divorce of ownership and control arises we can follow, a
simple pattern of growth.
Stage 1. With Private Limited companies, we often see a development of
shareholding as illustrated be-low.
Stage 2. Control (day to day management) and ownership initially rests
in the same hands, but as further

capital is raised (in this example from venture capital company), we see
some loss of control from the majority shareholders. The Venture Capital
Company may appoint senior management, and have one or more seats
on the Board of Directors.

Stage 3. The true impact of divorce of ownership from control is only felt
when a company goes public. Now there are likely to be 10‟s of thousands
of shareholders, but these will not be all small investors, there will also be
institutional investors as well. These institutional investors, for example
insurance companies, pension funds, and unit trust managers, may have a
great influence over how the business is run, but the small investor,
perhaps in the majority
when they are all taken together, may have little or no influence, on the
strategy, or objectives of the company they own.
In the case of PLCs it is the role of shareholders to appoint the Board of
Directors, who must act in the best interest of the shareholders.
The Board of Directors is made up of:
Chairman – the titular head of the business, The Chair-man can be no
more than a figurehead, or alternatively the real driving force behind the
company.
Chief Executive – the senior manager of the business. The Chief
Executive often runs the business, deciding on overall objectives and
strategy.
Executive Directors – department or division heads.
Non– Executive Directors. Outside appointments, with no
departmental responsibilities. These non-executives are appointed as the
independent voice of shareholders.
The institutional investors can and often do have a very different
set of priorities to those of the existing management. Institution fund
managers (the people who make the decision to invest), are often driven
by the need to see short term performance returns. This performance may
relate directly to the level of dividends paid, or short term increases in
share prices.
As the institution objectives can be very different from those of existing
management, we may therefore see two groups of owners with different
views. One (institutional investors) targeting short term aims, the other,
(existing management), trying to focus on long term goals.

This conflict can have direct, and material effects on the business. These
effects include:
 Conflict over objectives – diverting management time from day to day
business management
 Weakening of strategic objectives – loss of long term plan
 Payment of increasing dividends means less capital re-mains available
for reinvestment, this in turn can lead to increased gearing.
 Pressure to maximise returns on existing products – which may be done
through sweating assets or squeezing brands.
 Loss of ethical objectives as profit becomes the overriding priority.

Operating in a within a new culture brings new demands in regard

to market research, promotion and product development.

National to International.
When a business moves into overseas markets for the first time, there are
number of problems that can arise which are separate from those
indicated by change in size or form of ownership.
The first of these problems is related to marketing. Operating in a within
a new culture brings new demands in regard to market research,
promotion and product development. To give one simple example, around
10 years ago a Swedish drinks manufacturer attempted to move into the
UK market, with a fizzy drink, named psschitt (the sound made upon the
opening of a bottle). Obviously there were problems!
Secondly, distribution networks need to be established or distribution
agreements negotiated or signed.
Thirdly a business operating in international markets for the first time will
come up against problems resulting from currency conversion.
Fluctuations in ex-change rates can make trading unprofitable or force re-
thinks on pricing strategies. Hedging currencies can reduce these risks.
Also not all countries allow free flows of capital across borders, profits
made in one country may not be easily transferable back home.
British firms may be able to predict patterns of trade resulting
from changing levels of economic activity in the UK, but this will
be much harder in unknown or little understood foreign markets.
Economic factors affecting trade abroad can also cause problems. British
firms may be able to predict patterns of trade resulting from changing
levels of economic activity in the UK, but this will be much harder in
unknown or little understood foreign markets.
Also, technological factors also play an important part in success in
overseas markets. Foreign countries may have different safety standards,
(although most standards in the EU now harmonised), and there will be
costs involved in meeting these safety standards. Also different
regulations may apply. Sales of MG cars in California, an important
overseas market, were finished by tougher pollution laws which could not
be met.
Finally, competition, the numbers of, and methods used by competition
might be misunderstood.
British firms, operating abroad have a tendency to buy up existing firms,
or use established methods of distribution. This method of expansion can
help overcome many of the problems of a move into international
markets, but it is an option open only to larger firms.
Social Enterprises.
“A social enterprise is a business with primarily social objectives whose
surpluses are principally reinvested for that purpose in the business or in
the community, rather than being driven by the need to maximise profit
for shareholders and owners.” - UK Government Definition. (Surpluses are
normally profits).
Social enterprises share common characteristics:
 Firstly they are Enterprises – they are like other businesses directly
involved in producing goods or providing services to a market.
 Social aims – they have explicit social aims such as job creation,
training or the provision of local services. This is not just talk, these aims
are clearly laid out. Their ethical values may include a commitment to
improving the local com-munity and the skills of the people who live
there.
 Their profits are principally reinvested to achieve their social
objectives. Or alternatively profits can be distributed as profit sharing to a
much wider range of stakeholders than just owners and workers, for
example profits can be used to benefit of the community, or returned to
customers, or suppliers.
 Increasingly social enterprises measure their social impact, through
preparing documents such as a Social Audit.
 Many social enterprises are also characterised by their social
ownership. They are autonomous organisations whose management and
owner ship structures are normally based on participation by stakeholder
groups such as employees and social investors or by trustees or worker
directors who control the enterprise on behalf of a wider group of
stakeholders.
Workers’ Co-operatives.
Worker Cooperatives are a form of business ownership where the
employees in a for profit firm directly own and control the business on the
basis of "one person, one vote." Each member has an equal say. Typically
all workers, including management, are eligible to be worker-owners after
working for a certain period of time perhaps 6 months and paying a
membership fee. In a worker cooperative, ownership and control of the
business derive from working in the company, rather than from simply
investing capital in it. So it is not the providers of capital who are the most
important stakeholders, but instead the thinking is that labour employs
capital, rather than capital employing labour, so the workers are the most
important stake-holders. The normal worker cooperative structure
prevents non-workers from holding voting shares, and so keeps control of
the firm within the workforce, pre-venting takeovers and outside
influence.
Profits and losses from the business are shared amongst worker-owners
according to either the hours worked or gross pay. Skill and seniority
determine wage rates, which are often set by an equitable ratio between
the highest and lowest paid worker-owners. This means that instead of
huge differences between pay levels between the most senior and junior
members of staff, pay differentials throughout the levels of seniority and
responsibility may be as low as 50%.

Exam Questions Answer all the questions in the spaces provided.

1. Brighter Homes experiences growing pains
Brighter Homes is a domestic cleaning service which has enjoyed a good
deal of success since it was started by its proprietor, Dawn Richards, in
2004. Initially she employed just two cleaners, but as her reputation grew
so did business, and today Dawn has a workforce of 30 full time cleaners.
In the last twelve months demand seems to be stronger than ever.
Running the business from home is no longer feasible. Dawn needs to rent
an office and employ a clerical assistant, which will cost her £16 000 a
year. This is approximately the cost of the two new vans she requires to
service the extra business that she is anticipating in the next twelve
months. She cannot afford both and is undecided about what to do.
Dawn has found that the stress of managing the business on her own has
become impossible and she has offered Julie Jones, one of the workers
who has been with her from the start, a management position. She has
always been totally reliable and Dawn feels that she would be ideal in
dealing with recruitment and ensuring that the quality of the service was
maintained. This would free up time for Dawn to sort out her income tax
and to pursue some of the potentially profitable commercial cleaning
contracts that she has been unable to consider in the past. Julie, having
seen the business grow so successfully, is keen to take up the
management role, but would like to become a partner and is offering £20
000 to buy her way in. Julie’s offer came as a surprise to Dawn and she
now has yet another major decision to make in relation to the future of
her business.
(a) Using the passage to support your answer, explain what is
meant by the concept of
‘opportunity cost’. [4]

2. DUTTSONROCKS
Six months in the Royal Marines followed by six years as a DJ is perhaps
not the most obvious route to starting up a business selling diamonds.
Neil Duttson left school with no qualifications and at 26 he realised that
his life was going nowhere. It was at this point he started thinking about
diamonds. “I had always had a passion for diamonds. When I was 18, I
bought a book ongemology,” said Duttson. He searched the internet and
found a school in Antwerp that ran a six month course. He mortgaged his
flat and took out £50 000 equity to pay for the course and support himself
while doing it. He said: “I loved it. At the weekends I travelled around
Europe going into jewellery shops pretending I was getting engaged”.
Armed with his new-found knowledge, Duttson set himself up as a
diamond jeweller. Duttson’s first clients were friends who were getting
engaged. Without funds to buy stock, he adopted the innovative approach
of showing potential customers a selection of fakes in every single cut and
shape of diamond, and only when they had chosen and paid a deposit,
would he buy the real diamond. The diamond was then passed on to a
jeweller to be made into a ring. Neil Duttson was successful and in 2002
he formed Duttson Rocks Ltd.

(a) Evaluate Neil’s decision to change from operating as a sole

trader to setting up as a private limited company? [8]

3. John Young began his working life in a workers’ co-operative,

manufacturing packaging material. Although he enjoyed his work, John
was frustrated by the relatively low wages and he decided to leave the co-
operative, having been invited by one of its local competitors, JCL Ltd., to
join its board of directors. John had to re-mortgage his house to raise the
£30 000 needed to become a shareholder and has not looked back since.
Today, JCL Ltd. has reached a point where it has 4% of the UK market. A
number of the shareholders on the board see an opportunity for the
business to grow even further and they want to float the company on the
stock market, as a public limited company (plc).

1. Outline the main characteristics of a workers’ co-operative.

[4]

2. Discuss the view that not-for-profit organisations play as

important a role, in meeting the needs and wants of society,
as for-profit organisations. [8]

The Business Plan

What is a Business Plan?
If you studied GCSE Business and for your course-work project completed
the Planning a Business task, then you would have written a business
plan.
A business plan precisely describes a business - the reader of the plan can
see exactly what the business does, how it does it, what it intends to do,
and how the firm finances it’s activities. The business plan gives a
complete overview of the business.
For new businesses, the plan will make clear what the business will do,
and how it intends to do it. It allows the planning of finance, of marketing,
of people and so on.
For an existing business, it helps allocate resources properly, handle
unforeseen complications, and helps make good business decisions.
Because it provides specific and organised information about a company
and how it will repay borrowed money, a good business plan is a crucial
part of any loan application. Additionally, it informs sales personnel,
suppliers, and others about the firms operations and goals.
Why prepare a business plan?
There are a number of important reasons why a business should have an
up to date business plan. These are
 To set out the business idea – as indicated above the business
plan will show what business does, how it does it, and what it intends to
do.
 As part of the capital raising process – it tells potential
lenders and investors what the business does, what it will do with the
capital invested, the level of returns expected from money invested, and
how it intends to repay borrowed money.
 To monitor performance – as it sets out objectives of the
business, the business plan will allow checking that these objectives are
being achieved, and point out when and where action should be taken.

Who uses a business plan?

The primary user of a business plan, especially in a small business, is the
business owner(s). If the business plan is one for a potential rather than
an existing business, then the preparation of the business plan helps
ensure that the business opportunity has been investigated fully. Potential
entrepreneurs often jump in feet first without considering many, if any, of
the potential pitfalls of their business. Preparation of a complete business
plan makes these business people stop and think – who will be my
customers? Who is the competition? What am I really trying to achieve?
Can I be profitable? And so on.
For an existing business the preparation of plan allows the owners to
examine where they are now, where they intend to go, and how they will
get there. It points out the businesses strengths and weaknesses. It allows
the business owners to make clear the objectives of the business and the
means of achieving these objectives.
Potential lenders and investors will also use a business plan. It
is a ‘must have’ for a visit to the bank manager, who will need to examine
in detail the potential of a business before any loans or overdraft facilities
are offered.
The contents of a business plan.
The basic parts include:
 Business Information and Statement of Purpose
 Marketing plan and Analysis
 Financial analysis
 Operations and production plan
 Concluding Statement

Business Information and Statement of Purpose.

A business plan should start with information that identifies the business
and its owners and a statement of purpose i.e. what is the business plan
for.
This section should describe:
 Name of company
 The ownership of the business and the legal structure.
 CVs of owners including the skills and experience the owners bring to
the business, plus details of management responsibilities
 Location
 Objectives of business
If a loan or other form of finance is required, then it should be detailed in
this section, specifically the plan should include
 Purpose of the loan / finance
 Amount and type of loan required
 Amount of money the owners are putting in
 Timescale for repayment
 Security offered

Marketing Plan and Analysis

The marketing plan describes the marketing strategy and tactics which
will used to achieve the business objectives. If the Business Plan is being
used to raise funds than it must be realised that lenders will not accept
management gut feelings as proof of market potential. The lender will be
interested in who or where the new market is, why they will buy the
product/service, who is the competition, whether it is a growth or static
market and what percentage of the market will be targeted for in the first
year and into the future.
The estimates of sales created from this analysis will form the backbone
of the financial statements, as well as be a justification for receiving a
loan.

The Marketing Plan will therefore:

 Describe the products/services offered.
 Identify the customer demand for the product/service.
 Explain how the product/service will be advertised and marketed.
 Explain the marketing mix

Financial Analysis
The financial section contains the business’s cash flow, start-up costs,
equipment list, and projected Profit and Loss Account, a break even point
and ‘what if’ analysis (looking at different sales figures etc) and historical
records (for an existing business). It should make clear whether the
business is financial sound and if the objectives are financially achievable.
The actual documents contained in the financial analysis section should
therefore include:

 The source and the amount of initial or existing capital.

 The amounts of finance required
 Monthly cash flow for the first year.
 Projected Profit and Loss Accounts and Balance Sheets
 The breakeven point.
 Provide "what if" statements that address alternative approaches to
any problem that may develop.

Operations and production

This section will establish the day to day management structure of the
business, the methods of supply of the product, and provide the reader
with a picture of the actual functioning of the business – this is what we
do, this is how we do it.
The Operations and Production section will therefore cover:

 How the business will be managed on a day-to-day basis.

 Hiring and personnel procedures.
 Account for the equipment necessary to produce the products or
services.
 Describe the methods of production and delivery of products and
services.

Concluding Statement
The Business Plan will finish with a Concluding Statement. This is a
reminder, and will provide an overall summary of key points. The
appealing factors of the business will be highlighted; the strengths of the
business stressed and the objectives of the business and how they are to
be achieved will be briefly repeated.
Judging the viability of a business plan
Just because a firm has prepared a Business Plan, it does not in itself
guarantee business success. We should use the business plan to see how
well thought through the business idea is. Any reader of a plan should be
able to see clear indicators of the potential of a business project. When
examining the potential of a business using a business plan, we should
ask questions like:
 Are the financial resources available – even if loans are included, is
there enough working capital?
 Are the skills needed available – do the owners, employees, have
the abilities to fulfil the plans?
 Are the objectives realistic – can the sales levels be achieved, are
the output targets feasible?
 Will the competition react in a way that could undermine the
business – what if a financially stronger competitor reduces prices in
reaction to the new competition?

 Are the economic conditions right – will a change in exchange rates

impact upon the business?

The answers to these questions will provide a good estimate of the risks
involved. If the risks of failure are too high; don’t proceed or don’t provide
the finance, if the risks are acceptable; proceed with caution.

Exam Question

(a) Evaluate the importance of a business plan to the success of a

small business. [6]

The Public Sector

The public sector is made up of organisations that are owned and run by
the government, whether central or local. This part of the economy is
huge, and includes some of the largest employers in Europe as well as the
UK. The government spends over £400 billion a year running public sector
organisations and providing public sector services. The largest public
sector organisation, the NHS, is the biggest civilian employer in Europe,
costing nearly £90 billion a year to run.
Why do we need a public sector?
Public Goods
Some goods and services which we need in our everyday lives would
simply not be provided by the private sector looking to make profits.
These necessities include street lighting, defence (army, navy, air force),
and the police. The problem with these goods is that we can all benefit
without paying for them. So if someone paid for and installed street
lighting, anyone walk-ing down that road would benefit and if you are
benefiting without paying, why pay? These goods which will only be
provided by the government are called 'public goods'. Be careful here as
not all goods provided by the Public Sector are public goods. What defines
public goods according to economists is that they are ‘non excludable’
and ‘non rival’.

Some goods and services which we need in our

everyday lives, would simply not be provided by the private sector
looking to make profits.

Non excludable means that individuals cannot be pre-vented from

enjoying the benefit of provision of the goods or services. So we all gain
from having violent criminals kept behind bars, as the threat to our
families well being is reduced. No individual is excluded from this benefit;
the same would apply to having clean air or peace created by an effective
armed ser-vices and foreign policy.
Non rival means that one person gaining from consumption of the good or
service does not prevent others from gaining from the good or service. If I
eat an ice cream, no one else can benefit from that ice cream, that good
is rival, but if I gaze through clean air at the views of the Gower
peninsular, that does not prevent others from gaining benefit from the
same view, the good or service is non rival. The same with being able to
feel safe walking the streets, non rival.

Merit Goods
There is another group of goods and services that is supplied by the
private sector, but the quantity sup-plied of these goods and services is
likely to be much less than what is most efficient for the economy. The
two best examples of these are education and health care. There are of
course private schools and private hospitals but most patients are treated
by the NHS, and most children go to State Schools. The government
spends a great deal of money trying to ensure that we have an effective
Health Service and schools and colleges that supply a well educated and
trained work force. We would under consume merit goods if it were left to
the market. Some consumers could not afford the goods, others would fail
to see the full benefit of consuming these goods.
Merit Goods are said to have positive externalities. This means that the
consumption of these goods have positive effects not only on the
individual that consumes them, but also on society in general. By attend-
ing school you become better educated, become skilled, maybe use your
knowledge and skills to set up your own business, you employ people, pay
tax society benefits. So there are positive externalities to your education.
Also if you succeed in school you are less likely to commit crime and
require the safety net of the benefits system. It is because of these
positive externalities and under consumption if left to the market, that the
government provides merit goods (mainly) free at the point of delivery.
Instead of paying to consume these goods or services directly, we pay for
them through general taxation.

Objectives of the Public Sector

The main objective of privately owned firms is to make profits, but for
organisations in the public sec-tor, performance is measured differently.
Instead of looking for profits, we might say ‘do GP surgeries offer value for
money, treating patients effectively, whilst not overspending on
medicines’ or ‘should they be reorganised to offer a more efficient service,
so every £ spent has greater benefits for patients’? Another way of
measuring effectiveness is through measuring customer satisfaction or by
tables of performance. So inspectors are sent into schools, and exam
results league tables are published. The idea of these is to make
organisations that are not normally facing competition, to behave as if
they have to compete for their customers (in the case of schools that
mean pupils). And as you know, competition improves efficiency and
quality.
We can say then that the main objectives of Public Sector
organisations are:

 Provide a quality service. You expect the best possible

treatment from your local hospital, you expect traffic to be smooth flowing
on the country’s roads, benefits should be paid on time etc.
 Provide value for money. Money spent should be seen to be
achieving something worthwhile. There should not be excessive spending
or obvious waste.
 Provide for customers/consumers needs. What the
government spends money on should meet the needs of the populace;
after all it is our money that is being spent.
 Don't waste tax payers money. The National Audit Office is
the government department which has the job of checking on the
effectiveness of government spending. A quick look at the reports it
produces shows that there are huge amounts of waste, £100’s of millions
spent on failed projects, computer systems that never work, or
consultants that state the obvious.

Exam Questions: Answer all the questions in the spaces provided.

1. PERSONAL DEBT IN THE UK REACHES RECORD LEVELS
If people were to limit their spending mainly to things that they really
need and were to spend less on things that they want, there would not be
such a problem in the UK of rising personal debt.

(a) With the use of examples, explain the difference

between needs and wants. [4]

2. MORE POST OFFICE CLOSURES

The Post Office, which is part of the public sector, recently announced
plans to close 2 500 of its branches because it was losing £4m a week.
After these closures, the Government is still going to pump a £150m
annual subsidy into a network in which only 4 000 of the remaining 12
000 branches will be profitable.

(b) In what ways do the aims and objectives of the public

sector differ from those of the private sector? [4]

3. ANGER OVER GAS PRICES

The supply of gas was one of the many industries that were part of the
Government’s
nationalisation programme following the end of World War Two. It was
eventually nationalised in 1948. In effect, therefore, the Government had
a monopoly of the gas industry which lasted until 1986 when the
Conservative Government passed legislation to privatise the industry once
again. Recently announced rises in the price of gas, well above the rate of
inflation, have angered both industrial and domestic users.
Representatives of the glass making industry, which relies heavily on the
use of energy, have gone to Westminster to try to persuade MPs to do
something about the problem.
David Watkins, a householder in Buckinghamshire, told the BBC that his
annual bill from British Gas will rise by £130 following the recent
increases. Whilst he accepts that he can shop around for cheaper prices,
he also points out that, following deregulation and privatisation, the
industry has been left with only six suppliers, who currently govern the
market. In addition, one of the biggest problems seems to be that when a
customer joins a new supplier, it immediately increases its charges. This
would seem to run contrary to one of the reasons for the privatisation of
the gas industry twenty years ago.
Adapted: BBC News, October
2005

(a) What do you understand by the term nationalisation? [2]

(b) Explain, with references to particular industries, the

arguments in favour of privatisation. [6]