Business Notes

SECTION A: Role of Business

The nature of a business:
- Producing goods and services
Business is defined as the organised efforts of individuals to produce and sell, for a
profit, the products that satisfy individual’s needs and wants. They produce a product
(goods or service) which is sold in a market where buyers and sellers meet.
The difference between a good and a service is their tangibility. A good is something
that can be seen or touched whilst a service is something that is done for you by others.

- Profit, employment, incomes, choice, innovation,

entrepreneurship and risk, wealth and quality of life
Profit: A business receives sales revenue from its customers in exchange for products. If
the revenue is greater than operating expenses, the business makes a profit.
Employment: Businesses hire employees to produce and sell their products. SME
sector accounts for 50% of all private sector employment.
Income: Income is the amount of money received for providing labour.
- Wage (received by workers usually on a weekly basis for the amount of services they
provide to an employer that week)
- Salary (a fixed amount of money paid on a regularly basis to permanent employees)
- Dividend (shared profit among shareholders)
Choice: The act of selecting among alternatives. Business provide the freedom of choice
and a variety of products from competing businesses.
Innovation: Innovation = development of a new product/improvement to existing
products. Invention = idea for a new product, satisfying a need that is not presently
satisfied. This results in improved efficiency, increase productivity and better products.
Entrepreneurship and risk: People who transform their ideas into a new business.
They take a risk by exploring untapped markets with no guaranteed returns, and the
profit they receive is the reward for taking the risk.
Wealth creation: Businesses help to achieve greater levels of economic growth.
- Government (taxes) - Shareholders (dividends)
- Lenders (loan repayments and interest) - Employees (wages/salaries)
- Business itself (retained profits) - GDP (higher output = higher GDP)
No businesses = no income for employees (reduce wealth in households, people cannot
purchase wants) = flow of money contract = poverty
Quality of life: It is a combination of material (goods/services) and non-material (clean
water/recycled materials) benefits and leading to the overall wellbeing of an individual.
SECTION B: Types of Businesses
Classification of business
- Size
Small Medium Large
Employees < 20 employees 20 – 199 employees 200+ employees
Decision Owner is Owner is responsible Complex decision making
Making responsible for for majority of due to division of
making decisions; decisions; slower responsibilities among
simple and quick implementation due directors/ senior
implementation to influences of directs management; slow
implementation due to
layers of management
Source of Owner’s Owner/ partner Cash reserves/ retained
Finance saving/loan saving/ loan or profits/ sale of shares/
private shareholders loans
Market Usually local area Dominance within a Dominate market of many
Share geographic region countries
Micro Business- Less than 5 people, including the owner (they usually work from home
and are dominated by women / young people)
SOHO (Small office home office) - working from home

- Geological spread
Local National Global (transnational corporation)
 Has restricted  Operates  Home base in one country and operates
geographical within one partially/ wholly owned businesses in
spread country other countries
 Serves customers  Has increased  Finance/ assets/ technology/
who live nearby range of information/ employees/ goods and
products and services all flow freely from one country
area to another
Reasons for business expansion-
1) Increase in sales (more well-known = increase in customer demand)
2) Increase in profits (wider market = higher sales = growth)
3) Increase in market share (competitors = struggle for market share)
4) Global consumers (development of internet = online shopping = consumers
purchase foreign made goods)

- Industry Sector
Primary Secondary Tertiary
 Businesses in  Businesses that  Businesses that provide a service
which production take the output of  Quaternary = services that
is directed primary sector involve transfer and processing of
(raw materials)
 associated with and process it into information and knowledge
natural resources finished/ semi- (computing/ finance)
 E.g. farming/ finished products  Quinary = services that have
mining  E.g. Steel traditionally been performed in
manufacturer the home (hospitality/ childcare)

- Legal Structure
Unincorporated business- where the business entity and owner are one and the same.
Unlimited liability- the owner and business have same legal entity (business and owner
sued together, enter legal contract together). The owner is responsible to selling
personal assets if the business has financial difficulties.
Sole Trader Partnership
 Owned and operated by one person  Owned and operated by 2 – 20 people
 One person operates all finance,  Can be set up without a legally
makes all decisions and takes all binding partnership agreement
responsibility for the business  On death of one partner, business can
 Low start-up/ operation cost and is keep going
simple due to complete control  Low start-up cost and easy to operate
 Difficult to operate if sick and end of  Divided loyalty, workloads and
business when owner dies authority and can cause disputes

Incorporation- When the company has become a different legal entity from its owners
(shareholders). This means the company can sue/be sued, lease/sell/own property and
it has perpetual succession (the business will exist even when owners change).
Limited liability- Corporate ownership that limits each owner’s financial liability, and
the most money they can lose is the amount they have paid for their shares. If the
business goes through liquidation, shareholders cannot be forced to sell personal assets.
Proprietary (private) Company Public Company
 Has 2 – 50 shareholders  Shares are listed on stock exchange
 Tend to be small/medium sized and for general public (no maximum
family-owned number)
 Shares are only offered to the  Tend to be large in size
business wishes to be part owners  Must have Limited (Ltd) after its
(approved by other directors). name
 Must have proprietary limited (Pty  Must publish its audited financial
Ltd) after its name accounts each year

Government enterprises:
- Large and employee many people
- Owned and operated by all levels of Government (local/state/federal)
- Public sector business (community services i.e. health/education/ welfare)
- Privatisation = selling Government controlled enterprises to private investors
Franchising:
- Franchise = when an individual/business (franchisee) buys the right to use the
business name and distribute the goods or services of an existing business
(franchisor)
Franchisor Franchisee
 Supplies business name, required  Supplies start-up money and labour
training and staff development,  Operates the business
managing skills and materials  Must abide term and conditions

Factors influencing choice of legal structure

- Size
Business owners may need to select a more appropriate legal structure as sales increase
and the business operations grow to meet higher level of demand.

 Partnership or private company- extra capital to purchase new plant and

equipment. If expansion is rapid, seek protection from limited liability.
 Public company to draw from a large pool of available finances (share market
float). A float is the raising of capital in a company through the sale of shares to
the public. When a business makes it onto the ASX, a prospectus is issued it is a
document giving details of a company and inviting the public to buy shares in it.

- Ownership
Sole trader = complete control and ownership of a business.
Partnership = share the ownership with other people.
Private company = owner to maintain a high degree of control and it would also offer
the protection of limited liability. The degree of ownership is directly related to the
number of shares owned: more shares, more ownership. If the original owner wished to
retain ownership and control of the business, they would need to hold more than 50%
of all the shares sold.
Public company = ownership divided in thousands of small, individual shareholders.

- Finance
Money is used to purchase new equipment, undertake research and development, hire
more staff, exploit new markets, and open new outlets.
 Unincorporated business- Perceive as high risk by banks. Possible source of
finance = Venture capital (money that is invested in small and sometimes
struggling businesses that have the potential to become very successful)
 Incorporated business- shareholders and other financial institutions
SECTION C: Influences in the business environment
The business environment refers to the surrounding conditions in which the business
operates. The external influences are those outside the control of a business. Internal
influences includes those factors over which the business has some degree of control.

External Influences:
- Economic
Economic cycles (business cycles) are a feature of the economies businesses operate in.
Economic cycle refers to the predictable long-term pattern of changes in the national
income. Economic cycles are the periods of growth/boom (high employment rates, and
increase in wages, spending and prices) and recession/bust (high unemployment rates,
inflation may be stable or fall, wages remain same and spending decreases) that occur
as a result of fluctuations in the general level of economic activity.

- Financial
Finance is a crucial element in the competitiveness of a business because business
inputs such as raw materials and equipment must be financed.
Deregulation- removal of government regulation from industry to increase efficiency
and improve competition, resulting in a more flexible, market-oriented approach.
Globalisation and communication technology allows for finance from worldwide
sources rather than only domestic financial institutions.

- Geographic
Refers to the impact of location on the business. Australia’s geographic location within
the Asia–Pacific region and the economic growth in a number of Asian nations,
especially China.

Impacts of geographic location on a business-

Demographics: Refers to population, age, sex, income, cultural background and family
size. Changes in any of these factors can lead to changes in demand levels and the nature
of products and services.
Globalization: International trade: the buying and selling of goods and services between
nations (e-commerce).

- Social
Social influences refer to the attitudes, values and beliefs of society.
Major issues influencing the changes in business practices:
 Concerns for environment: Growing concern within populations for the well-
being of the environment
  Desire for family-friendly business: conflict between work and family
responsibilities cause women exiting the workforce. Some businesses have
implement family-friendly workplace practices that assist employees and to
reduce the associated costs to employers.

- Legal
Legal influences refer to the framework of laws and regulations that govern the
operation of a business. Businesses are forced to meet an increasing number of legal
obligations linked with every aspect of the business. These obligations can be
consuming and costly, and regulations can be confusing and contradictory. However,
failure to meet these obligations can lead to heavy fines imposed on the business.

- Political
Political influences refer to the ideas that come from the political parties.
 Introduction in July 2000 of a GST tax- 10% on the supply of most goods and
services consumed in Australia. Businesses became responsible for collecting the
tax on behalf of the government.
 Process of deregulation and privatisation. E.g. Qantas and Telstra

- Institutional
There are 3 types of institutions:

 Government: Each level of government imposes a range of regulations on

businesses to standardise and protect their dealings with consumers and
competitors
 A regulatory body is one that is set up to monitor and review the actions of
businesses and consumers in relation to certain issues and the appropriate
legislation. Examples include the fair-trading office, ACCC
 Others (unions and trade associations)

- Technological
Global technological innovation has increased at a remarkable pace, revolutionising the
workplace and every aspect of daily life.
Impacts of technological advancements:
 Increased efficiency and productivity
 Create new products and improve the quality and range of products and services
 Reduce operating costs and eliminating many boring and repetitious tasks.
 New communications technologies allow information to be rapidly transmitted
to customers
 - Competitive situation
Refers to the market where other businesses are providing products to meet the same
customer need. It can stimulate greater efficiency in production and a better-quality
product or service at the lowest cost to the business. Each business aims to achieve a
sustainable competitive advantage (to have strategies that will have an edge over its
competitors for a long period of time) over its competition in order to capture a larger
portion of the market.

Factors that affect competitive situation:

 Number of competitors- refers to the size and number of firms that exist within
an industry (market concentration).
 Monopoly: complete concentration by one firm in the industry
 Oligopoly: small number of larger firms that control a market
 Monopolistic competition: large number of buyers and sellers
 Perfect competition: large number of small firms that sell similar
products, and price is the only way of achieving market share
 Marketing strategies
 Businesses are influenced by the type of marketing measures taken by a
competitor. Marketing strategies are determined by the size of the market
and business, number of competitors and the nature of the product
 Local and foreign competition
 Local competitors- produce or sell a good or service in the same market.
Include labour costs, transport costs, economy and cost of stock/raw
materials.
 Foreign competitors- located overseas or offshore and sell their goods or
services in Australia and compete with local businesses.
 Ease of entry into a market for a new business
 Refers to the ability of a person to establish a business within a particular
industry. It is determined by the type of market concentration.

- Markets
A market is a place in the commercial world where goods and services are sold. It
relates to the capital and labour between countries and expansion of consumer bases.
Changes in Markets:
o Financial: Capital flows to countries where the investment opportunities and
returns are favourable.
o Labour markets: Due to political barriers, the flow of people between countries is
becoming more restricted.
o Consumer markets: Countries to achieve cost savings by specialising in products
they can produce efficiently. Improved technologies and communications allow
businesses to have economies of scale and to reach larger markets.
Internal Influences:
- Products
The product a business wishes to manufacture and distributes, greatly impacts the
business.
 The type of goods and services produced will affect the internal operations of a
business. (materials and equipment)
 The range of goods and services (number produced by the business). More
consumer demands = more products = required to expand to accommodate
larger scaled operations
 Type of business (service, manufacturer or retailer)
 The size of the business will be based on the range and type of goods and
services produced, the level of technology utilised, and the volume of goods and
services produced.

- Location
A good location is an asset and will lead to high levels of success.
Prime location = Customer convenience + Visibility
Factors to consider when deciding location:

 Proximity to suppliers: Depends on the size and quantity of the raw materials
needed for production, or the size of the finished goods to be supplied.
 Proximity to support services: Support services are the activities needed to assist
the core operations or prime function of a business. (Applicable to smaller
businesses) E.g. accountants, solicitors and government agencies. It is not
important due advancements in technology have enabled all businesses to access
through the use internet.
 Proximity to consumers: A retail business must locate close to its customer base.
A manufacturing or wholesaling business may decide it is more cost effective to
transport the product to the customer.
 Cost: A central location in a busy shopping centre will be expensive.
 Visibility to consumers: Businesses which rely on potential customers passing
the business must have high visibility and be located in a prime shopping area.

- Resources
The four main resources available to a business are:
 Human resources- employees
 Information resources- knowledge and data required by the business (market
research, sales reports, economic forecasts, technical material and legal advice)
 Physical resources- equipment, machinery, buildings and raw materials.
 Financial resources- funds
 - Management
Refers to the activities associated with running a business, i.e. controlling, leading,
monitoring, organizing and planning.

Traditional organisational structures: Non-traditional organizational

- Centralised structures:
- Task/activity centred 
 - Decentralised
- People centred
- Division of labour
- Multi-task, multi-skilled
- Rigid structure: hierarchical
- Flexible structure
- Autocratic, didactic management
- Democratic management styles
style 
 - Equal power-sharing (inclusive)
- Power not shared (exclusive) - Wide span: workers autonomous
- Narrow span: workers controlled - Communication: by consensus
- Communication: top–down - Delegation: by agreement

- Delegation: top–down
- Modern, forward thinking,
- Traditional, conservative
contemporary

- Business Culture
Refers to the values, ideas, expectations and beliefs shared by the staff and managers of
the business.

A business culture normally consists of four essential elements:

 Value- beliefs, shared among its employees

 Symbols- events or objects that are used to represent something the business
believes to be important
 Rituals, rites and celebrations- These are the routine behaviour patterns in a
business’s everyday life.
 Heroes- business’s successful employees who reflect its values

Stakeholders
Refers to the people and groups that interact in some way with the business and have a
vested interest in its activities. 


Different types of stakeholders:

 Shareholders- The main responsibility of the business is to maximise the return

on the shareholders’ investment in a sustainable way.
 Provide information about the business’s performance
 Produce an annual report – which is audited financial account
  Manage the funds so a reasonable return is paid. As a result of investing in
a business shareholder’s money is at risk, thus it is expected that
shareholders are entitled to a reasonable return rate.
 Managers are responsible for running and administrating the business.
 Support the actions and decisions of management
 Provide adequate resourcing and lines of communication.
 Employees: Employees need a safe and psychologically rewarding work
environment. Businesses responsibilities (being ethical and fair):

 Elimination of discrimination on gender, marital status and pregnancy
 Promoting equality of men and women
 Elimination of harassment, intimidation and bullying
 Consumers: Customer satisfaction should always be of prime concern for any
business. Businesses that respect and satisfy their customers have a much
greater chance of success.
 Quality products and fair prices
 Service before and after sales
 Society: Businesses have a responsibility to the local community to be good
corporate citizens. Society expects businesses to give back to the community.
 Ethically responsible decision
 Fair and honest business practice
 Environment: There is growing pressure for businesses to adopt ecologically
sustainable operating practices. This is in response to concerns about climate
change and the destruction of the natural environment.
 Care and preservation for the environment
 Sound and responsible environmental management
SECTION C: Business Growth and Decline

Stages of the business life cycle:

Businesses will pass through a number of distinct stages as it develops. In each stage, a
business is confront with new challenges and presented with different opportunities.

 Cash flow is an essential part of a business’s success. It is the money coming into
the business in the form of cash receipts and the money leaving the business as
cash payments.

- Establishment

Reasons why a business may not survive past the establishment phase:

i. Incompetent business idea

ii. Inability to achieve a sustainable customer base
iii. Poor management or misallocations of resources
iv. Lack of access to funds

Features
- Business goal is survive and set a
firm foundation for future growth
- Sales normally begin slowly and
are somewhat erratic
- Business introduces its products
to its market through heavy
promotion (inexpensive)
- Expensive due to high unit cost
and low economies of scale
Challenges
- Lengthy process in stablishing a
loyal customer base
- Pricing is set relatively low and
companies resort to price
skimming and price penetration
strategies
- Failure rate is extremely high due
to poor cash flow management
- Profits are usually slow to be

- Growth
Businesses must grow and expand to improve its competitive edge. One method
frequently used is to integrate with other businesses through a merger (owners of two
separate businesses agree to combine their resources and form a new organisation) or
an acquisition (one business takes control of another business by purchasing a
controlling interest in it.

Types of mergers/takeovers:

 Vertical integration: expands at different but related levels in the production and
marketing of a project (E.g. backwards integration = merging with suppliers)
 Horizontal integration: acquires or merges with another firm that makes and
sells similar products
 Diversification (conglomerate integration): acquires or merges with a business
in a complete unrelated industry

Features
- Goal is to constantly increase the
average level of sales and diversify
business activities
- Rising sales, falling production
costs, leading to higher profits
- Cash flow slowly becomes positive
- Unit cost fall with economies of
scale
- New products developed and slow
products deleted
- Development of a formal
organisation structure
Challenges
- Providing sufficient supply to
meet market demand
- Time lags between orders and
delivery, resulting in customer
dissatisfaction
- Maintain funds in re-investment
- Advertise to maximise market
share
- Ensure staff levels are adequate

- Maturity

Where the sales are still increasing but at a slower rate, and may lead to business
decline from poor business management.

Features
- Sales plateau
- More competitors enter the
market
- Focus shifts in improving
efficiency in order to maintain
profit margins
- Management team seeks employee
with specialist in al key business
areas to ensure business
objectives are met
Challenges
- Examine the value chain to reduce
non-value added aspects
- Innovation- new and improved
products
- Scan environment for competitors
- Apply latest technology
 - Post Maturity

3 outcomes to post maturity:

a) Steady state: Business operates at the level of the maturity phase. There is no
significant expenditure on research and development. The owner produces what
it has in the past and rely on marketing replacement products, which becomes
very unstable and the business stagnates, and reaches decline.
b) Decline: Business’s sales and profits fall, resulting in failure. The longer the
business attempts to ‘stagger on’, the greater the risk of failing.
It is difficult to reverse due to:
o Difficulty to raise financial funds
o Suppliers restricting their credit facilities
o Products become obsolete, leaving the business with unsold stock
o Well-qualified employees may leave and seek better opportunities.
c) Renewal: Business increases sales and profits due to new growth areas. Through
extensive market research, new markets, and forecasting market trends.

Table for business renewal:

Features
- Business seeks new markets to
satisfy previously unmet demands
- Sales, cash flow and profits begin
to increase
- Focus on production and
satisfying customer demand
- Market research is undertaken to
forecast customer trends and
demands
- Management implements
programs to realign objectives
Challenges
- Cash flow may decline in the short
term as new products are
developed
- Research and development in new
products and markets is an length
and expensive process
- Overcome employee’s resistance
to change in business operation
and structure
- Undertaking new strategies
involves some degree of risk

Factors that can contribute to business decline

Business decline and failure are caused by the following factors:

a) Ill-conceived business idea

b) Failure to meet customers’ needs
c) Producing a product that few people want
d) Not preparing a business plan
e) Ignorance of existing competition
f) Lack of management skills
The two main causes of business decline, particularly of SMEs, are:


1. Lack of management expertise: when a business either fails to prepare a

business plan or fails to keep on modifying an existing plan as the environment
changes.
2. Lack of sufficient money (undercapitalisation): Many small businesses start out
on a ‘shoestring’ budget. Without sufficient capital and a positive cash flow the
business will not be able to purchase stock and materials (or suppliers will not
continue to supply them). This inevitably results in lost sales and falling profits.

Managing cash flow:

Cash-flow refers to the net amount of cash and cash-equivalents being transferred into
and out of a business. If the cash flowing into a business is greater than the cash flowing
out, then the business can continue to operate. But if the cash flowing out is greater than
the cash flowing in, then the business will eventually run out of money and be forced to
close.

Voluntary and involuntary cessation – liquidation

A business may cease operating, either voluntarily or involuntarily. The difference
between the two depends on who instigates the process.

Voluntary cessation occurs when the owner ceases to operate the business of their own
accord. Involuntary cessation occurs when the owner is forced to cease trading by the
creditors of the business. Businesses with different legal structures have different
methods available to wind up a business.

o Unincorporated businesses- Bankruptcy is a declaration that a business, or

person, is unable to pay his or her debts. It can be either voluntary or
involuntary, with either the business owner or a creditor applying to a court for a
bankruptcy order to be made. The court then appoints a representative to collect
any money owed to the business. This money, along with money raised from the
sale of any assets of the business (and some personal assets of the owner), is
then divided between the creditors. The process of converting the assets of a
business into cash is called realisation.
o Incorporated companies- Voluntary administration occurs when an independent
administrator is appointed to operate the business in the hope of trading out of
the present financial problems. They are to bring the business and its creditors
together, and examine the financial affairs of the business. Appointing a
voluntary administrator is becoming an increasingly attractive alternative. If
successful, the business may resume normal trading. If unsuccessful, the
business goes into liquidation.
  Liquidation occurs when an independent and suitably qualified person
(liquidator) is appointed to take control of the business with the intention
of selling all the company’s assets in an orderly and fair way in order to
pay the creditors. Once the creditors have been paid, any surplus cash is
paid to the owners of the company. A company in liquidation can also be
in receivership. Receivership is where a business has a receiver appointed
by creditors or the Courts to take charge of the affairs of the business.
Unlike liquidation, the business may not necessarily be wound up.
The main features of liquidation are that it:

- Regarded as the equivalent of bankruptcy for a company (corporation) 


- Results in the life of a company coming to an end 

- Normally occurs because the company is unable to pay its debts as and when 

they fall due – it has become insolvent (unable to pay back debts).
 Two types of insolvent liquidation: 

1. Creditors’ (voluntary) liquidation. It involves creditors voting
for liquidation following a voluntary administration or it
involves the company’s shareholders agreeing to liquidate the
company and appoint a liquidator.
2. Court (involuntary) liquidation. A court appoints a liquidator
to wind up the company, usually after an application has been
made from either a creditor, a shareholder, a company
director or the Australian Securities and Investments
Commission (ASIC). 

When a company is being liquidated because it is insolvent, the liquidator’s prime
responsibility is to the company’s creditors. A liquidator is not required to do any work
unless there are enough assets to pay their costs. 

The liquidator’s main functions are to:

 Take possession of and convert the company’s assets into cash

 Investigate and report to creditors about the company’s financial and business
affairs
 Determine debts owed by the company and pay the company’s creditors
 Scrutinise the reasons for the company failure 

 Report possible offences by people involved with the company to ASIC
 Finally, to deregister or dissolve the company.