NATURE OF BUSINESS

ROLE OF BUSINESS
Business
- The organized effort of individuals to produce and sell for a profit that satisfy
individuals needs and wants. A business makes a profit when the income is greater
than the costs of production

Goods and Services

- Producing goods and services is the very core of the business. E.g. Clothes, food, cars.
Businesses in the world compete with each other to produce goods that meet the needs
of customers better than their competitors.

Economic Roles
Profit
- A business makes a profit when the income earned is greater than the costs of
production
- Everyone else (employees, suppliers) must be paid before the owners. And If there is
no profit there can be no payment to owners.
- Depends largely on how successful a company is in selling its products.

Employment
- The labor force can be used as a competitive advantage. The income given to
employees leads to increased spending hence a higher standard of living.

Wealth Creation
- Businesses aim to make a profit and hence create more wealth for the owners.
- Employees receive an income which can be put back into the economy by spending
needs and wants
- Both the money received and the products purchased add to the wealth of individuals
and households

Innovation
- Innovation refers to new ideas in the creation of goods and services or finding new
ways to do things. It allows a business to maintain a competitive edge.

Entrepreneurship
- Business people who are willing to take a risk in order of making a profit. The driving
force for innovation and growth and the reason behind the businesses existence.
- Explore untapped markets

Choice
- More competition= more choice
- More choice and hence competition leads to higher quality products and better
picking for consumers.

Social Roles
Employment
 - Employees must be paid an acceptable amount of income. The business needs to
ensure that they are working in safe workplace and one that is free of discrimination.
The business must also provide Equal Opportunity Employment.

Quality of Life
- Businesses provide goods and services that make consumers lives simpler, more
enjoyable and easier. These all contribute towards greater leisure time and improve
our quality of life.

TYPES OF BUSINESSES

Classification of businesses
- Size
- Local, national, global
- Industry- primary, secondary, tertiary, quaternary, quinary
- Legal structure- sole trader, partnership, private company, public company (listed on
ASX), government enterprise .
- Factors influencing choice of legal structures- size, ownership, finance

Primary (raw materials)

All those businesses in which productions directly associated with natural resources. All
production begins here. Examples of these businesses include all types of farming, mining,
fishing, grazing and forestry. Its role is essential because it provides all our food
requirements. 60 % of all our exports come from these industries

Secondary (manufacturing and assembly)

All those businesses that take the output of firms in the primary sector (raw materials) and
process it into a furnished or semi-finished product. Example iron ore, coal and limestone,
can be later used to manufacture products. Steel and car manufacturers are both examples of
secondary industry businesses.

Tertiary-
All businesses that provide a service. Tertiary involves people performing a vast range of
services for other people. Examples include retailers, dentists, solicitors, banks, museums and
health workers.

Quaternary-
All businesses that involves the transfer and processing of information and knowledge.
Examples include telecommunication, property, computing, finance and education. The
quaternary sector is expected to undergo dramatic change over the next 20 years due to rapid
advances in telecommunications.

Quinary-
All services that have traditionally been performed in the home. Examples include
hospitality, tourism, craft based activities (etsy) and childcare. Includes paid and unpaid
work. Many small businesses in particular have recently begun providing these services,
filling a niche in the market.

Size of Business
Small business= Employing less than 20 people.

Categories of small businesses Includes=

- Non- employing businesses- sole proprietorships and partnerships without employees
- Micro businesses- businesses employing less than 5 people
- Other small businesses- businesses employing 5 or more people, but less than 20
Small business management and organizational characteristics;
- Independent ownership and operations
- Close control by owners/manages
- Principal decision making by owners/managers

Medium business = A business employing between 20-200 employees in a non-

manufacturing industry and fewer than 100 in a manufacturing business.

Large Business = A business employing greater than 200 employees in both non-
manufacturing and manufacturing industries. Large businesses can also be defined by
qualitative and quantitative techniques.

(SME’s)
Qualitative= The way in which the business is organized, owned, managed, financed and
operated.
Quantitative= Based on some statistical calculation such as number of employees.

Classification by Geographical spread

Local=
- has a very restricted geographical spread,
- serves the surrounding area
- Frequently used by consumers who live nearby
- These businesses are often SME’s

National =
- Are business that produce, market and sell products entirely within one country.
- E.g. Australian geographic, Coles, David Jones

Global =
- operate and market their products in more than country and often own subsidiaries in
more than one country.
- Commonly referred to as a Transnational corporation (TNC) is a large business with a
home base in one country that operates partially owned or wholly owned in other
countries.
- E.g. Coca-Cola, McDonalds, Toyota

Legal structure

Sole trader= Is a business owned and operated by one person.

 - Owner may employ to work in the business, ultimately it is the owner who provides
all the finance, makes all the decisions and takes responsibility for the operation of the
business.
- Their responsibilities may include selling personal assets, such as property or motor
vehicles to pay for the liabilities of the business. This is referred to unlimited liability.

Partnership = is a business owned and operated by between 2 – 20 people with the aim of
making profit.
- No legal entity (finances are not separate from owner, e.g. company in debt= owner in
debt)
- Can be made verbally or in writing or by implication
- Decisions are shared amongst the partners

Private company (PTY LTD)= an incorporated enterprise where the owners are called
shareholders. A private company is between one and 50 shareholders.
- Private companies tend to be SME’s, often family owned businesses
- Shares in a private company are only offered to those people the business wishes to
have as part owners. Shareholders can only sell their shares to people approved by the
other shareholders.
- Must state proprietary limited or ‘Pty ltd’,
- Main feature of private companies is that its shareholders have limited liability.
Meaning if the company goes into liquidation (business failure), the shareholder
cannot be forced to sell their personal assets to pay off the debts of the company

Public company = Is an incorporated business. This means that it is a separate legal entity
from the owners.
Shares of public companies are listed on the stock exchange and the general public may
buy and sell share in them
Public companies must have=
- At least 1 shareholder
- No restrictions on the transfer of shares or raising money form public offering of
shares
- Min. requirement of three directors
- The word Limited at the end or “Ltd’
To publish its audited financial accounts each year, its annual report.

Government business enterprise= Government business enterprises range from local

authorities running theatres and sportsgrounds to national enterprises such as Australia Post.
Many government enterprises have now been privatized.

Two main groups

Unincorporated business entities = sole traders and partnerships
Incorporated business entities = private companies, public companies, government entities

Factors influencing choice of Legal structure

Size
The size of a business is measured on terms of =
- Turnover (sales in a given period of time)
 - Employee no.
- Asset value (the entire value of what the business owns)

Ownership
The degree of control and ownership of a business is influenced by its structure
e.g.
Sole trader= complete control, no legal entity
Partnership = shared control, no legal entity

Finance
A business’ ability to gain additional equity (difference between your assets and
liabilities/debt) or debt finance can also affect its choice of legal structure.
- Sole trader= relying on the assets of one individual to act as security
- Partnerships= advantage of more owners to draw equity, greater pool of assets to act
as security
- Private co.= equity finance raises with more owners, able to access additional equity
finance by simply selling shares in the company.
- Public co.= greatest ability to raise finance simply because of its size. However
releasing more shares= company’s share value may fall.

INFLUENCES IN THE BUSINESS ENVIRONMENT

External influences
Consists of factors that are largely outside the direct control of owners , directors and
managers
e.g. economic, financial, geographical, social, legal political, institutional, technological,
competitive situation, markets

Competitive situations influence = no. of competitors, ease of entry, marketing strategies,

substitutes

legal influences= deregulation and regulations

geographical influences= our location in the Asia-pacific region (economic growth),

Demography (slow down our population, ageing population.

Social influences= relation got changes in beliefs, business ethics, work attitudes, etc.

Political influences = government regulations, Australian Competition and Consumer

Commission (ACCC, protects customers from misleading and deceptive business behavior,
businesses must comply with these laws ) and Australian Securities and investments
commission (ASIC).

Technological developments = New communications technology- faster communication to a

larger number of people. Allowed to businesses to reorganize their structures. Helps maintain
s sustainable competitive advantage.

Geographical influences
Two major factors
- Australia’s geographic location within the Asia-Pacific region
- The economic growth in a number of Asian nations, especially China.
Financial influences
Deregulation has resulted in a more flexible, market orientated approach across the financial
sector. The process of financial deregulation has resulted in the opening up of the financial
industry to greater competition.

Social influences
Two social issues =
- Growing awareness of our vulnerable environment
- Growing desire for family-friendly programs, conflict between work and family is a
key factor causing women to leave businesses.

Legal influences
- Society expects business owners to abide by the laws of the country
- Owners comply with regulations though they are time consuming, costly, confusing
and contradictory
There is one law available for all Australian businesses = ACL ( Australian Consumer Law) ,
general standard of business conduct and product related services (e.g. consumer guarantees
for G&Ss)

Technological influences
New communication technologies allow information to be rapidly transmitted to an ever-
increasing number of customers. If businesses are slow and behind the competitive
technology, their business is most likely going to fail
- Businesses must adopt appropriate technology for competitive and convenience
reasons

Political influences
As governments at all levels in Australia regularly face elections, there is an element of
politics in most major issues that affect the business environment.

Internal Influences
Consists of factors that are within the direct control of owners, directors and managers.
e.g. products, location, resources, management and business culture

Products= the products a business produces are determined largely by the businesses prime
function- which is the main or core activity of the business. E.g. Rubi’s Shoes sells aesthetic
trendy shoes for cheaper, businesses use product differentiation to make products different to
competitors.

Location= A bad location is a liability that can adversely affect a businesses’ sales and
profits, the choice of location therefore is important

Resources= A business needs to make important decisions about its resources with regards to
the quality of inputs and the reliability of their suppliers. Poor quality inputs and unreliable
suppliers could negatively impact a business’s sales.

Business culture= the way in which managers and employees behave and operate. This is
largely determined on the values and attitudes of the owners and managers of the business.
Management= businesses must be effectively managed as effective management is usually
the major factor that influences a business’s success or failure.

Stakeholders
Stakeholder = Anyone who has an interest or is affected (not ownership) in a business. (could
be positive or negative opinions)

Internal stakeholders, those who have a direct interest in the business. Includes;
- Owners/shareholders (want businesses to profit, because they get paid)
- Managers
- Employees

External stakeholders, who are indirectly affected by the activities of a business. Includes;
- Suppliers
- Creditors
- Customers
- Governments
- The environment
- Society/ general public

BUSINESS GROWTH & DECLINE

Stages of Business life cycle

Establishment
- Many challenges confront the entrepreneur at this stage, and how they react and the
decisions that are made will either build a solid foundation for the business to grow or
set it up for failure.
- Owner/ Manager has to pick an adequate legal structure, finance, location and stay
motivated.

Growth
- The essential feature of this stage is the continual improvement in the business’s
working capital and the protection of its initial investment.
- Process may involve= developing human resource management, financial
management plan, controlling inventories
- Business will undergo a number of difficult tasks managers need to complete.
- At this stage owners might seek out help, by ‘contracting out’ linked to outsourcing
- By outsourcing many of the non-core activities, management and workers can
concentrate on the prime function of the business and improve its quality and
efficiency.

Maturity
- Businesses growth and market share start to slow down
- Management becomes more routine
 - In the maturity stage the growth in sales levels off. The business is selling the same
value of products year after year.

Post-maturity
- Final stage of the business cycle.
- Characterized by falling sales and loss of market share, the business soon becomes
unprofitable, business starts to decline, if something isn’t done the business will fail
- Improvements such as cost cutting can help maintain the businesses position in the
marketplace, this type of position is called steady state
- Another possibility to keep businesses alive is renewal, developing new products or
more competitive ways of providing customer benefits. This type of change is rare
needs new managers w/ new ideas

Responding to challenges at each stage of the business life cycle

Main problem//
Establishment= lack of money with possible cash flow shortages
Strategy= prepare for the cash problem with adequate savings

Growth = Expanding too rapidly, losing control of businesses direction, moving away from
core business activities
Strategy= Prepare to work harder, develop an effective credit policy to collect debts
efficiently.

Maturity = rate of increase in sales begins to falter, loss of initial enthusiasm

Strategy= focus on cutting costs, diversify new products, find ways to grow the value of the
business

Post-maturity (renewal) = anticipated sales may not eventuate due to poor marketing
strategies, employees may not like the constant changes.
Strategy= new managers and new ideas, cost cutting, manage the closure effectively and
ethically

Factors that can contribute to business decline

- Lack of management expertise = business fails to provide a business plan or doesn’t
modify the plan according to environment changes
- Lack of sufficient money = undercapitalization. Without sufficient capital and a
positive cash flow the business will not be able to buy stock, inevitably results in lost
sales and falling products.

Voluntary and involuntary cessation – Liquidation… cessations= ending

Voluntary cessation=
A business owner will realize his business is failing , to prevent an accumulation of debt the
owner will need to cease operating the business of their own accord; undergoing voluntary
cessation

Involuntary cession=
The owner is forced to cease trading by the creditors of the business; undergo involuntary
cession.