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, accounts 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. 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

Divorce of Ownership from Control

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 rethinks 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 cooperative, 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 attending 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]