Edexcel GCSE Business Introduction To Small Business Student Book

Edexcel GCSE
Business: Introduction to Small Business

Written by Alain Anderton • Ian Gunn
Consultant editor: Andrew Ashwin
Edexcel GCSE
Business:
Edexcel GCSE Introduction to Small Business

The Edexcel GCSE Business Studies: Introduction to Small
Business Student Book has been written to build students’
Uses exam performance data to highlight
business knowledge, understanding and skills, and to help
common pitfalls and misconceptions
them prepare for their GCSE assessment. In this book you
will find:
• motivating, relevant content which directly follows the
structure of the specification.
Introduction to
• many case studies of small businesses which help
students to apply concepts, methods and issues. Annotated sample students’ answers and
Small Business
revision support to help students prepare for the
• a section on Unit 2 controlled assessment with practical
exams.
help and advice.
Student Book
• plenty of practice questions for all exam question styles.
Also in this series:
Building a Business 9781846904974
Business Communications 9781846904981
Introduction to Economic
Understanding 9781846904998
ActiveTeach 9781846904950
To find out more about the other titles in the

Edexcel GCSE Business series go to:
www.edexcel.com/gcse2009
Edexcel is part of
Enlarge and project T 01865 888000

every part and every F 01865 314091
myorders@pearson.com
page of the Student www.edexcel.com
Book for focused whole-
class teaching
Alain Anderton • Ian Gunn
Andrew Ashwin consultant editor
CVR_EMWH_SB_GCSE_4967_CVR.indd 1 6/4/12 10:43:10 AM

Edexcel GCSE
Business:
Introduction to
Small Business
Student Book
Alain Anderton • Ian Gunn

Andrew Ashwin consultant editor
A01_EMBU_SB_GCSE_xxxx_PREL.indd 1 6/4/12 10:54:33 AM

Acknowledgements
Pearson Education Limited
Edinburgh Gate
Harlow
Essex
CM 20 2JE
England
© Pearson Education 2009
4 The right of Alain Anderton, Ian Gunn and Andrew Ashwin to be identified as the authors of this work has been asserted
by them in accordance with the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic, mechanic, photocopying, recording or otherwise without either the prior written
permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright
Licensing Agency Ltd, 90 Tottenham Court Road, London W1P 9EH
ISBN 978-1-84690-496-7
Graphics by Kevin O’Brien
Cartoons by Alan Fraser
Photography Andrew Allen
Edited by Dave Gray
Proof reading by Mike Kidson
Cover image by © Getty Images/Martin Mistretta
First edition 2009
Page origination by Caroline Waring-Collins, Waring Collins Ltd
Printed and bound by Scotprint, Haddington, Scotland
The publisher and author wish to thank the following for materials and photographs used in the production of this book.
BBC p96, Digital Vision pp 95, 123, Photodisk p 59, Michael Simon/Rex Features p 93 (r), Shutterstock pp 6, 7, 8, 10, 11, 15,
16, 17, 19, 20, 21, 23, 24, 25, 27, 34, 35, 36, 39, 43, 44, 45, 47, 48, 50, 51, 52, 54, 55, 56, 58, 62, 63, 64, 64, 65, 66, 67, 68, 69, 71,
72, 76, 77, 79, 80, 80, 81, 82, 83, 84, 90, 91, 92, 99, 100, 103, 104, 105, 107108, 109, 111, 114, 115, 116, 118,119, 120, 124, 126,
127, 128, 129, 131, 132, 135, 138-151, 152, 158. Stockbyte pp 38, 40, 122, Topfoto p98.
Every effort has been made to locate copyright owners of material used in this book. Any errors and omissions brought
to the attention of the publisher are regretted and will be credited in any subsequent edition of this publication.
Thanks
I would like to thank Dave Gray, who as usual has done a superb job publishing and editing the book, Mike Kidson
for proof reading and Andrew Ashwin, who has given invaluable feedback. The page origination was sensitively
accomplished by Caroline Waring-Collins. Not least I would like to thank my wife for her help with the project.
Alain Anderton
My wife Mary for her long suffering patience, support and encouragement, the 6953 Dream Team for their inspiration.
Per magistra, ave Maria. Ian Gunn
I would like to thank all my colleagues at Biz/ed for supporting me in doing this project, specifically Andy Hargrave, Jill
Jones, Stewart Perrygrove and John Yates. There are many people who worked on the development of the qualification
on which this book is based. Their faith, support, encouragement and considerable hard work and skill were crucial
in getting the qualification live. As a result thanks go to Susan Hoxley, Kelly Padwick, Beverley Anim-Antwi, Derek
Richardson and Lizzie Firth. No book would be produced without the dedication of the authors who combine
considerable work pressures with the task of producing the book and supporting materials, mostly in their own time.
The fact that the production process has been relatively trouble free is largely due to their dedication, commitment,
professionalism and support. Thanks go to Alain Anderton, Ian Gunn, Keith Hirst, Andrew Malcolm, Jonathan Shields
and Nicola Walker for their contributions and effort. At Pearson, Dave Gray has been a much valued publisher - his
skill in handling people, deadlines, vast quantities of text and queries, whilst retaining patience and humour, has been
invaluable. It has been a privilege to work with you Dave - thank you. Finally, thanks go to my family, Sue, Alex and
Johnny for their patience and love. Andrew Ashwin
This material has been published on behalf of Edexcel and offers high-quality support for the delivery of Edexcel
qualifications. This does not mean that the material is essential to achieve any Edexcel qualification, nor does it mean
that it is the only suitable material available to support any Edexcel qualification. Material from this publication will not
be used verbatim in any examination or assessment set by Edexcel. Any resource lists produced by Edexcel shall include
this and other appropriate resources. Copies of official specifications for all Edexcel qualifications may be found on the
Edexcel website: www.edexcel.com.’

Contents: delivering the EDEXCEL GCSE
Business (Introduction to Small Business) Specification Unit 1
Introduction 4
Topic 1.1 Spotting a business opportunity 6
1 Businesses 8 5
2 Understanding customer needs 12
3 Market mapping 16
4 Competition 20
5 Added value 24
6 Franchising 28
Exam zone featuring results plus 32
Topic 1.2 Showing enterprise 34

7 What is enterprise? 36
8 Thinking creatively 40
9 Questions to be asked 44
10 Invention and innovation 48
11 Taking a calculated risk 52
12 Important enterprise skills 56
Topic 1.3 Putting a business idea into practice 62

13 Objectives when starting up 64
14 The qualities shown by entrepreneurs 68
15 Estimating revenues, costs and profits 72
16 Forecasting cash flows 76
17 The business plan 80
18 Obtaining finance 84
Topic 1.4 Making the start-up effective 90

19 Customer focus and the marketing mix 92
20 The importance of limited liability 96
21 Start-up legal and tax issues 100
22 Customer satisfaction 104
23 Recruiting, training and motivating staff 108
Topic 1.5 The economic context 114

24 Demand and supply 116
25 The impact of interest rates 120
26 The impact of exchange rates 124
27 The impact of the business cycle 128
28 Business decisions and stakeholders 132
Unit 2 Investigating small business – controlled assessment 138

Exam zone 152
Zone in: Getting into the perfect mental zone for revision 152
Planning zone: How to plan your revision effectively 153
Know zone: All the facts you need to know and exam-style practice 154
Don’t panic zone: Last-minute revision tips 158
Exam zone: Understanding the questions and meet the exam paper 159
Zone out: What happens after the exam 161
Index 163
A01_EMBU_SB_GCSE_xxxx_PREL.indd 3 22/9/09 09:13:54

Welcome to the Edexcel GCSE How to use this book
Business Studies series Each Edexcel GCSE Business Studies unit is divided
into topics. These books are written in the same
The Edexcel GCSE Business Studies Series has been easy-to-follow format, with each topic split into
produced to build students’ business knowledge, digestible chapters. You will find these features in
understanding and skills, and to help them prepare each chapter:
for their GCSE assessment. The books include Topic overview A case study sets the scene for
lots of engaging features to enthuse students and each topic, accompanied by a series of questions.
provide the range of support needed. The student Your teacher might look at this as a starter activity
books in the series are: to find out what you already know about the
subject. You’ll find a summary of the assessment
• Introduction to Small Business covering Units 1 for the topic.
and 2 (compulsory for the Full Course) and Unit Content and objectives Each chapter starts with a
6 (for the Short Course) case study to put the content in a context, followed
• Building a business (Unit 3) by the objectives for that chapter.
• Business Communications (Unit 4) Edexcel key terms are highlighted and defined in
each chapter.
• Introduction to Economic Understanding
(Unit 5) Test yourself question practice in every chapter
contains objective and multiple choice questions.
Over to you question practice in every chapter. A
Introduction to Small Business short case study is followed by questions written in
exam paper style.
Unit 1: The specification emphasises small
businesses and business start-ups and the book
reflects this focus. Every example and case study
relates to a small business context rather than
large organisations that are often difficult to
understand. The text helps build understanding Annotated sample students’ answer and revisions
and confidence in what many are interested in – support to help students prepare for the exams.
how to set up and run a small business. The sums We’ve broken down the six stages of revision to
of money involved are not bewildering and abstract ensure you are prepared every step of the way.
and the subject feels very real.
Zone in: How to get into the perfect ‘zone’ for
Unit 2: This is the controlled assessment Unit revision.
for the core part of the qualifi0cation. Controlled
Planning zone: Tips and advice on how to
assessment is new to the course and so presents its
effectively plan revision.
own challenges. The advice given will help to make
sense of its aims and purpose, and there is plenty Know zone: The facts you need to know, memory
of practical advice on how to research and write up tips and exam-style practice at the end of every
the work. topic.
Unit 6: The content, questions and guidance for Don’t panic zone: Last-minute revision tips.
Units 1 and 2 cover Unit 6 (the Short Course). Exam zone: What to expect on the exam paper
and the key terms used.
Zone out: What happens after the exams.

These features use exam performance data to help you prepare as well as you can.
There are three different types of ResultsPlus features throughout this book:
Exam question reports show

previous exam questions with
details about how well students
answered them.
• Red shows the number of
students who scored low
marks
• Orange shows the number of
students who did okay Watch out! These warn you about
• Green shows the number of common mistakes and misconceptions
students who did well. that students often make.
They explain how students could have achieved the top marks so that
you can make sure that you answer these questions correctly in future.
Build Better Answers The Know Zone Build better answers pages Build Better Answers give an opportunity
at the end of each section include an exam-style question with a to answer exam-style questions. They
student answer, examiner comments and an improved answer so that include tips for what a basic or
you can improve your own writting. incorrect , good and excellent
answer will contain.
Assessment
Information on external examinations is covered in the Examzone at the end of the book. This
provides details on assessment for the Unit 1 or Unit 6 exams (see pages 152-162). There is a whole
section of valuable information about the Unit 2 controlled assessment, starting on page 138.

EDBUS_C01.QXD 16/7/09 11:04 Page 2
Topic 1.1 Spotting a business opportunity
Topic 1.1: Spotting a

business opportunity
Topic overview
Case study This topic considers how to spot a successful business opportunity.
Kristen Lockey had worked What do customers need and how can this be identified? What gaps in
for her father’s building the market are there? What are other businesses doing? How can value
company for ten years. be added? Should a business buy into an existing franchise or not?
Now, she wanted to go it
alone and start her own
business. She didn’t want to compete directly with her father’s
company. So she looked around for a different line of business. After
much research, she came up with the idea of setting up a business
specialising in building conservatories, verandas and decking.
Her father’s company had already done a few jobs installing
conservatories. Kristen knew that there was a good market out there.
However, she didn’t want to compete directly with the big companies
in the market. They advertised heavily and had large numbers of
people in sales, promoting their products. Kristen saw, though, there
was a gap in the market for one-off, specially designed conservatories
and decking. These would be made with the best materials. So
Kristen would be able to charge her customers a high price for a
product which had a lot of value added. High quality both of the
product and of service would be the unique selling points for the
business.
In her research, Kristen looked at whether there were any
franchising opportunities available in the manufacture of
conservatories. Taking on a franchise could help her establish her
own business. However, she couldn’t find anything that looked
suitable. So she decided that she would have to set up in business on
her own.
1. Why are the needs of customers important for the success of
Kristen Lockey’s new business?
2. Explain why Kristen Lockey decided to make ‘one-off,
specially designed’ conservatories.
3. Why might an entrepreneur looking to set up a new business
consider a franchise?
EDBUS_C01.QXD 16/7/09 11:04 Page 3
Topic 1.1 Spotting a business opportunity
What will I learn?

Understanding customer needs Why are customer needs central to starting a business? What are the
different types of market research? How can market research data be collected and interpreted? Why is
market knowledge through direct customer contact important?
Market mapping How can customer buying habits and preferences be analysed? How can businesses
identify market segments? How can businesses map their market and identify market gaps?
Analysing competitor strengths and weaknesses Why should initial planning for a business start-
up include an analysis of market competitors? How can competitor strengths and weaknesses be
analysed? Why should a business compare its offering with that its rivals?
Understanding the need to add value What is meant by ‘added value’ and why is it important to
business survival and success? What are the main sources of added value?
What options exist for starting up a business? What is a franchise? What are the advantages and
disadvantages of using a franchise to start up a business compared to other alternatives? What is a
good location for a business?
How will I be assessed?

Unit 1 A forty-five minute written examination of multiple choice and objective test questions.
Unit 2 Research and investigate a real life business from a choice of five tasks and write up the results
under controlled assessment conditions.
Unit 6 A forty-five minute written examination of multiple choice, objective test and extended answer
questions.
EDBUS_C01.QXD 16/7/09 11:04 Page 4
1 Businesses
1 Businesses
Case Study
8 Jack Padmore has just set up a business renting out bouncy
castles. His children loved playing on bouncy castles and he
had often hired one for birthday parties. It looked the sort of
business he could do too in his spare time to earn some extra
money.
Small businesses
Objectives In the UK today, there are over 4 million businesses. This is about one business
G Understand what a business does. for every 13 people living in the country. A few of these businesses are large
G Appreciate that most businesses are businesses like Tesco, Toyota or British Gas. But there are only around 33,000
very small. businesses that employ more than 50 people. Almost all businesses are therefore
G Appreciate that large numbers of small businesses. Three quarters of all businesses have only one person, the
businesses are created and closed owner, working in the business. Jack Padmore’s business was a business like this.
down each year. He was the only person who worked in the business.
G Understand the concepts of New businesses are being created all the time. According to one estimate,
production, suppliers, customers and 200,000 new businesses are created each year in the UK. Equally, businesses are
markets. being closed down all the time. Of the 200,000 new businesses created each year,
G Appreciate that there are many one in ten will have closed within the first 12 months. One in three will have
important aspects to starting up a closed within three years. Less than half will still exist after five years.
business.
The purpose of a business
Why do businesses exist? Why do we need businesses? The answer is that
businesses exist to make goods and services.
• Goods are physical items like a can of baked beans, a litre of petrol, a
Nintendo Wii or a bus.
• Services are non-physical products like a hair cut, a bus journey, a lesson in a
classroom or a consultation with a doctor.
Most businesses make services rather than goods. Around 70 per cent of all that
is produced in the UK are services. Nearly 8 in every 10 people work in service
industries. The chances are that you too will work in a service industry. Jack
Watch Out! Padmore’s business is a service business. Businesses that rent out products like
bouncy castles provide a service to customers.
You often hear about very successful
businesses and entrepreneurs making
millions of pounds and becoming very Production
wealthy. The number of people who Businesses make goods and services. They do this by buying resources such as
become very wealthy through starting up raw materials, labour and machines and then using them to make products. Jack
their own business is small. Also, many Padmore, for example, uses a number of different resources in his business.
people start a business for other reasons • There are different pieces of equipment: the bouncy castle itself, an electric
than making large amounts of money. For pump to blow it up and a van to transport the bouncy castle.
example, they may enjoy working for • There are raw materials. He has to put petrol into his van. He also uses
themselves and being their own boss. electricity to power the electric pump.
• There is also his time (called ‘labour’). Workers are very important to any
business.
EDBUS_C01.QXD 16/7/09 11:04 Page 5
1 Businesses
Suppliers and customers

Businesses buy the goods and services they need from suppliers, as shown in
Figure 1. Jack Padmore, for example, bought his bouncy castle from a bouncy
castle manufacturer. The petrol he puts into his van comes from garages.
Businesses sell to customers. Most of Jack Padmore’s customers are ordinary
people who hire a bouncy castle for a special event. They are consumers of the
product that he sells. Some of Jack Padmore’s customers, though, are other
businesses. A business might hire a bouncy castle for a works party. Sometimes 9
a local pub will hire a bouncy castle for a weekend for a special event.
Markets
Jack Padmore’s business operates in a number of different markets. A market
exists in any situation when buyers and sellers exchange goods and services.
There is a market for bouncy castle hire. It is a part of a larger market for
equipment hire for entertainment. When Jack Padmore fills up his van with
petrol, he is a small buyer in the large worldwide market for oil. Whenever Jack
buys from a supplier or sells to a customer, he is operating within a market.
Setting up in business
When Jack Padmore set up his business, he had a lot of things to think about.
• He had to spot a business opportunity. Would customers hire his bouncy
castle?
• There was the finance to think about. Did he have the money to start the
business? Could he make a profit out of the business?
• What would he have to buy to get the business up and running?
• There were also the legal aspects to worry about. Health and safety would be
very important. He would have to take out insurance in case someone had an
accident on his bouncy castle. Then he would have to sort out paying the right
amount of tax to the government.
Going out of business Figure 1

Jack Padmore closed his business after
three years. The business was
moderately successful and orders
came in on a regular basis, particularly
during the summer months. But he
was not making enough profit to
make it worthwhile. It was not just Suppliers
the time he spent travelling to a
customer, putting up the bouncy Buys from
castle and taking it down again.
There was all the paper work and the
telephone calls. He was doing all this BUSINESS
in his spare time. His regular job Supplier – a business which sells (or
brought him in enough money for supplies) products to another business.
him to be comfortably off. The
Sells to
Customer – any person or organisation
bouncy castle business added a lot of which buys or is supplied with a product
pressure to his life without bringing in Customers by a business.
the sort of money that might have Consumer – the person who ultimately
made it worthwhile. Jack Padmore uses (or consumes) a product.
became part of the statistic that says Markets – where buyers and sellers
more than half of all new businesses meet to exchange goods and services.
do not survive their first five years of
operation.
EDBUS_C01.QXD 16/7/09 11:04 Page 6
1 Businesses
Build Better Answers
Asif Rahman trained as an artist at college. His business

paints designs on cars and motor bikes from a workshop.
Which two of the following business activities would involve
10 him dealing directly with suppliers?
A Ringing a car dealer to say a design is ready
B Paying business rates to the local authority
C Ordering paint for the designs
D Talking to a bike owner about a new design
E Taking delivery of leaflets to advertise the paint shop
F Receiving payment for a design
Answer C and E
Technique guide: There is a number of choices available so
first:
Think: What service do suppliers provide for a business? Who
are the suppliers to Asif’s business?
Then: Dismiss the choices that are obviously wrong – B Go through these: A, D and F are all activities that deal
involves dealing with the local authority which is neither a directly with customers.
supplier or a customer.
This leaves you with the correct answers of C and E.
Decide: You are left with A, C, D, E and F. You have Suppliers provide services for the business such as
narrowed down the options. providing paint supplies and printing leaflets.
Test yourself
1. What is the purpose of a business? Select one answer.
A To give everyone a job
B To make big profits for its owners
C To produce goods and services
D To pay taxes to the government
2. A small business makes cakes for parties and weddings.

Which two of the following are most likely to be resources it
uses directly in production? Select two of the following.
A Labour
B Taxes
C Television adverts
D Flour
E Airfreight
A A club renting his services
3. Justin Terrett is a professional DJ who travels to B A television company writing an article about the business
engagements in his van with all his kit. Which two of the C A local petrol garage
following are most likely to be suppliers to his business? D The individuals who attend his gigs
Select two of the following. E Record stores
EDBUS_C01.QXD 16/7/09 11:04 Page 7
1 Businesses
Over to you
The Jayne Varndall Motorcycle School prepares motorcylists
for their riding tests. To ride a motorcycle, you need to have a
specialist driving licence which is different from one for driving
a car or a lorry. Jayne Varndall, the owner, employs four people:
a secretary and administrator and three instructors. She has an 11
office and a large car park that she uses to instruct
motorcyclists at the start of their training. Her business has
operated for the past six years.
Jayne’s customers pay for a basic instruction course in riding
a bike. Then they are charged by the hour for on-road practice
before taking their test at a local government centre. For their
training, they can either hire a motorbike from her or bring their
own bike. The market for motorcycle instruction is competitive.
There are three other businesses in the area that offer similar
services. There used to be four, but one business closed down
because it couldn’t get enough customers.
1. ‘Jayne Varndall provides a service to her customers.’ What

is meant by ‘a service’ and ‘customers’ for Jayne Varndall’s
business? (4)
2. Identify and explain how two resources are used by Jayne
Varndall to produce the service she provides. (8)
3. ‘One business closed down because it could not get enough
customers’. Giving reasons for your answer, analyse two
possible reasons why Jayne Varndall’s business has
managed to survive against the competition for six years. (6)
EDBUS_C02.QXD 28/1/09 3:18 pm Page 2
2 Understanding customer needs

Case Study
12 Ben Noakes has worked for 15 years for Tesco. He has
worked his way up from the bottom doing a variety of
jobs. Now he wants to do something else apart from
work for a big firm. Ben wants to set up his own
business. Because the only thing he knows about is
retailing (shops), Ben has begun to investigate setting
up his own shop. He thinks he might have spotted the
right business opportunity - a fancy dress shop.
Customer needs
Objectives Working for Tesco has taught Ben that putting customers first is essential for the
Understand that customer needs are success of a business. Tesco today is the UK’s largest retailer. £1 in every £8 that
central to starting a business. the British consumer spends in shops is spent at Tesco. One of the reasons why
Understand how to collect and Tesco is so successful is that it gives its shoppers what they want to buy, at the
interpret primary and secondary right price and in the right place.
market research in the context of Ben has always enjoyed fancy dress parties. But there is no fancy dress shop in
starting a new business. the large town that he lives in now. Hiring a fancy dress costume means a thirty
Understand the difference between minute car ride to the next town. His customer needs are definitely not being
qualitative and quantitative research met here.
data. When he goes into a fancy dress shop, Ben wants plenty of choice at a
Understand the value of market reasonable price. The costumes should be well made and in good condition.
knowledge through direct customer There is nothing more annoying that hiring an outfit and finding the zip is
contact. broken, there are buttons missing or there is a tear in the fabric. Ben also
appreciates knowledgeable and friendly service. Going to choose a costume is
part of the fun of going to a fancy dress party.
Ben thinks that his customers have the same needs as he does:
• convenient location;
• reasonable price;
• good range;
• good quality;
• knowledgeable and friendly customer service.
Market research
Leaving his job and setting up on his own is a big step for Ben. Whilst he might
think a fancy dress shop is a good idea, others might not think the same way. To
Customer needs – the wants and desires of make his business a success, he needs plenty of customers.
buyers of a product or the customers of a To make sure that he is doing the right thing, Ben has been conducting some
business. market research. This is designed to give information about his likely market,
Market research – the process of gaining such as who his customers might be and what they might be prepared to pay for
information about customers, competitors purchases. There are two types of market research: primary research and
and market trends through collecting secondary research.
primary and secondary data.
Primary (or field) research – the gathering Primary research
of new information, called primary data, Primary research (or field research) involves the collection of primary data -
which has not been collected before.
information which no one else has collected. There are several types of primary
research.
• Surveys usually involve asking questions of respondents – people or

organisations who reply to the questions asked. The list of questions asked is
called a questionnaire. You might have seen people in the local high street
with clip boards asking people to answer a questionnaire. Surveys can also be
conducted over the telephone. A business might conduct a survey of the
views of its workers.
• A focus group is a small group of people. They are invited by the researcher
13
to talk together about a product or idea. The researcher then records their
responses. With a focus group, the researcher is particularly interested in how
people react to each other as they talk. This can point to whether a product or
idea will be successful or not.
• Observation is another type of primary research. Looking at and recording
how people or other businesses behave can give important information.
• In some situations it is possible to conduct experiments. For example, a small
manufacturing business might build a number of early versions (called
‘prototypes’) of a new product. It could show these prototypes to potential
customers to see their reaction.
Ben Noakes used three of these types of market research. Firstly, he conducted
a survey of his friends, his work colleagues and anybody else he could get to
answer his questions. He wanted to know
• whether they had ever hired or bought fancy dress costumes;
• what sort of costumes did they wear to parties;
• how much were they prepared to pay;
• from where did they get costumes.
He also noted down some personal details like whether they were male or Watch Out!
female, approximate age and whether they had young children. The answers to
Researchers must be very careful about
these questions gave him some guide as to what his sales might be and what he
bias when conducting surveys. How
should offer for sale in his shop. questions are worded can affect the
The second type of market research he used was observation. When he went to answers that are given. Also, who is
fancy dress parties, he jotted down what everyone was wearing. More asked to answer the survey can be
importantly, he visited the nearest ten fancy dress shops he could find. He untypical of the target customer. For
pretended to be a customer. In fact, he noted down the location of the shop, how example, if you conducted a survey of
the shop was laid out and what stock they seemed to have. He wrote down some ten of your friends about baked beans, it
sample prices and the conditions of sale for hire of costumes. He also tried to is most unlikely that the results would be
assess how friendly the staff were. typical of the average buyer of baked
Third, he invited some friends round to dinner. He then used them as a focus beans.
group. By introducing ideas about how he would run his future business, he
could see their reactions.
Survey – research involving asking

questions of people or organisations.
Respondents – those who provide data
for a survey usually by answering
questions in a questionnaire or interview.
Questionnaire – a list of questions to be
answered by respondents, designed to
gather information about consumers’
tastes.
Focus group – in market research, a
group of people brought together to
answer questions and discuss a product,
brand or issue.
Primary research, using a questionnaire

Secondary research Thomson Local Directory to find the location of all the
Secondary or desk research involves the collection of fancy dress shops within a fifty mile radius. He could
secondary data. This is information which is already also see the size of the entry and what made an attractive
available both from within an existing business and from advertisement in these directories.
outside the business. • He put ‘Fancy Dress Shop UK’ into the Google search
Ben knew, for example, that Tesco constantly analyses its engine on the Internet on his computer. He found
sales. Products that do not sell well in an individual store hundreds of sites. On some of them, you could order
14
are withdrawn and the shelf space used to stock goods that goods over the internet. Others were little more than an
sell better. Once his shop was up and running, Ben would advertisement for a shop. He found it interesting to
be able to analyse data like sales to decide what to sell. browse through the sites for two reasons. First, he could
For the time being, though, Ben had to research using data see what they were selling. Second, he could see the
that came from outside the business. prices they were charging. He also wondered whether
• One simple piece of data he used was the telephone he ought to have a website and if so, what would he
directory. He looked in Yellow Pages and its competitor want it to do.
• Ben looked in the local newspapers in his area to see
whether any of the existing fancy dress shops advertised
in these publications. This would tell him whether or not
Watch Out! it would be worthwhile for him to advertise.
Small businesses have very limited resources for researching their
• Ben went to a large reference library thirty miles away to
market. Many small business start-ups do very little market see whether there were any market reports on Fancy
research. They rely on the gut instinct of the person setting up the Dress shops. Market reports are produced by market
business. But a start-up business which has done some market research organisations such as Mintel. At several
research is more likely to survive and be successful than a start-up hundred pounds each, they are too expensive for a small
business which has done very little market research. Market business to buy. But they were available to read for free
research can help to reduce the risk involved even if it is only by a at the public library.
small amount.
Qualitative and quantitative data
Some of the information that Ben collected was qualitative
data. This is information about opinions, judgements and
attitudes. Ben was collecting qualitative data when he asked
Secondary (or desk) research – the process of gathering friends about their likes and dislikes of fancy dress
secondary data, which is information that has already been costumes, or of fancy dress shops. He was also collecting
gathered such as sales records, government statistics, qualitative data when he tried to get an impression of the
newspaper articles or reports from market research groups. level of customer service when he visited existing fancy
Qualitative data – information about opinions, judgements and dress shops.
attitudes. Other information collected was quantitative data. This is
Quantitative data – data that can be expressed as numbers and data that can be interpreted in a numerical way. For example,
can be statistically analysed. from his survey, Ben was able to say that 30 per cent of his
respondents used a fancy dress shop in one nearby town, 20
per cent used a different fancy dress shop in another town
and 50 per cent made their own costumes. He was also able
to say what proportion of respondents spent £1-£10, £11-£20,
£20-£30 and over £30 on a fancy dress outfit.
Direct customer contact

Tesco is a highly successful retailer because it understands
its customers. It has complex computer systems that analyse
what customers are buying. Ben knows that, once his
business is up and running, he must listen to his customers.
These customers will be vital in giving him market
knowledge. Direct customer contact will help him to
understand how the fancy dress market is working and how
it is changing.
Sources of secondary research
Interpreting the data what other people liked. He would have to listen hard to
In his market research, Ben collected a large amount of data. his customers to get the formula for his shop just right.
He then had to interpret (or analyse) the data. What did it Overall, though, Ben judged that his market research
all mean? What was important and what was not showed there would be enough customers for his shop to
important? He analysed the quantitative data, comparing be a success. However, he knew there was a risk that the
numbers like prices and ages of customers. The qualitative market research could be wrong. If there were too few
data showed him that what he liked was not necessarily customers, his business would fail.
15
Over to you Test yourself

Grace and 1. Chris wants to set up a business fitting kitchens and looks in
Peter Fletcher Yellow Pages (a commercial telephone directory) to see
had always what other businesses offer similar services in his area. This
made fabulous is an example of what type of research? Select one answer.
cakes. Their
A Qualitative
friends knew B Primary
this and often, C Secondary
when picking D Observation
up children
from school, 2. Which one of the following is a type of primary research?
they would be Select one answer.
asked to make A Conducting a survey
a cake for a B Analysing past sales figures of other businesses
child’s birthday party. As their children got older, they began to C Reading market reports
think that they could turn their cake making skills into a proper D Consulting local newspapers
business.
3. Which two of the following are most likely to give a
Grace and Peter took their time to research the market. They researcher qualitative data? Select two answers.
had kept records and photographs of all the cakes made for
other people. They analysed these to see what sort of cakes A The meeting of a focus group
were popular and how much they had charged. Going to their B Researching names of businesses in an area from a
local supermarket, they saw what special cakes were available telephone directory
on the shelves. For several Saturdays in a row, they spent an C Researching the products made by competitors by looking
hour in the cake aisle noting down who bought these special at internet sites
cakes. They used the local telephone directory, Yellow Pages
D Conducting interviews with shoppers in a supermarket
E Analysing government statistics
and Thomson Local Directory to see who offered cake making
services in the local area. They rang all the local suppliers to
get a quote on a cake, so that they could see what prices the
potential competition charged. They also looked in their local
newspaper to see if cake makers paid for advertisements and Exam Question Report
what sort of adverts they placed.
During this period of research, when they made a cake for (b) (ii) Identify one type of desk research. (1) (June 2006)
someone else, they would make a second small cake exactly the How students answered
same. They would invite their friends round for a cup of coffee
and a piece of the second cake. This was so they could listen to
their opinions about cakes.
Many students (44%) answered this question incorrectly (0 marks).
1. Explain what is meant by ‘primary research’. In your answer, The main reason was a lack of understanding of the difference
give two examples of primary research used by Grace and between desk (secondary) and field (primary) research. As a result.
Peter Fletcher. (6) some gave examples of field research, such as market
research/taking a sample of customers’ views/using questionnaires.
2. Explain what is meant by ‘secondary research’. In your
answer, give two examples of secondary research used by
Grace and Peter Fletcher. (6)
3. Do you think that Grace and Peter Fletcher have a good The majority of students (56%) answered this question correctly
understanding of their customers’ needs? Justify your (1 mark). Common correct answers given included government
answer. (6) statistics/specialist articles/Internet/existing market research
reports/existing sales figures.
3 Market mapping
3 Market mapping
Case Study
16 Ruby Jacobs was just 21 years of age. She came from a family of
shopkeepers. Her mother owned a ladies fashion boutique, whilst her
uncle owned a general grocery store. Having studied Food and Catering
for three years at university, Ruby wanted to set up her own business. She
decided that for her first business, she would set up a café. She had found
a possible location for a café just off the high street of a local parade of
shops in her local area of London.
Analysing the customer

Objectives Before making the decision about
Understand that customers tend to whether or not to lease (i.e. rent)
buy through habit and preference. the premises for the café, Ruby
Understand how to analyse these carefully researched her potential
customer buying habits and market. She wanted to find out:
preferences. • who her potential customers might be;
Understand how businesses can • what sort of products they would like to buy;
identify market segments. • what sort of prices they would be prepared to pay for their products;
Understand how businesses can map • when they would want to use the services of the café;
their market to set out the key features • how many times they would use the café;
of the market. • whether she could identify any buying habits in her potential customers.
Understand how businesses use this She used a mix of techniques to find her information. She had been attracted
information to identify and target gaps to the area because the people who lived there tended to earn high incomes.
in the market. Because they were affluent (i.e. well off), they had money to spend in cafés. Most
people in the locality owned their own homes. She also knew from her own local
knowledge of the area that there was a good spread of people of different ages.
So there were plenty of young people in their twenties and thirties. There were a
good number of young families. But also there were people in their 40s and 50s.
They had more income available to spend on ‘luxuries’ like cafés because they had
good jobs. They had paid also off most of their borrowings, including the
mortgage on their homes. Then there were the old age pensioners who had
plenty of time on their hands and the money to spend in coffee shops.
She also knew that there was a number of small businesses on or near the high
street. She made a survey on foot of all the businesses within five minutes
walking distance of the potential site for the café. There were estate agents,
Watch Out! building societies, insurance brokers, a solicitors and a funeral director, as well as
There are many ways to segment a a number of shops. Workers in those businesses could want a cup of coffee or
market. Often, the best way is to combine perhaps lunch. So they were potential customers.
a number of characteristics of customers Ruby visited a large number of cafes in different areas of London. Some areas
to produce a typical customer. For were very different from her local area, some were very similar. She would take a
example, two typical customers for a bus photograph of the menu on the outside of the café using her mobile phone. Then
company might be the over 60s on lower at home she would print out a copy. At each café, she would go in and order
incomes and teenagers at school or something off the menu. Then she would take out her notebook and record
college. impressions of the café. What time was it? Who was in the café? What were
they eating and drinking? What was the décor and layout like? Were the staff
friendly or not and what made them friendly? Did the staff wear uniforms? Of
3 Market mapping
what did the café smell? Did it feel like a successful business or not? Table 1 – Socio-economic classification
She spent two days, a Wednesday and a Saturday, outside the possible location
of her café. She noted down everyone who passed by the premises. For example,
1 Higher managerial and professional
she tried to guess their age, whether they were a local worker, retired, or a mum
occupations
or dad at home looking after the children. Another weekday, she conducted a
1.1 Large employers and higher
survey asking people questions like whether they worked in one of the premises
managerial occupations
in the local area, where they might stop and have a cup of coffee at the moment
1.2 Higher professional occupations 17
and where did they get lunch.
2 Lower managerial and professional
Market segments occupations
Ruby knew that there were groups of customers who had similar buying habits. 3 Intermediate occupations
Teenagers between the ages of 14 and 16, for example, tend to buy similar products 4 Small employers and own account
and buy at the same shops. For some products, though, male teenagers have workers
different buying habits from female teenagers. Businesses can investigate these 5 Lower supervisory and technical
habits and break their market down into market segments. A market segment is a occupations
part of a market that contains a group of buyers with similar characteristics. 6 Semi-routine occupations
Ruby used the information she collected to identify three important market 7 Routine occupations
segments for her café business. 8 Never worked and long-term
• The local worker who wanted a good cup of coffee or tea such as can be unemployed
bought at national coffee chains like Costa. Some of these local workers also
wanted a sandwich for lunch. Some would come to the coffee shop but there
was also a market for delivery of coffee and sandwiches to their place of work.
These local workers wanted a quality product and good service but were not
too price sensitive. Being price sensitive means that price is very important
in your decision about whether or not to buy. The local workers were not too
worried about whether the price of a cup of coffee was £1.65 or £1.85 so long
as it was good quality.
• Mothers with small children were another important market segment. They
wanted a child friendly place to meet with their friends. Quality was
important but so too was price. They wanted to feel that they had had good
value from what they had bought.
• Then there was the local shopper who would reward themselves with a coffee
at the café. This market segment tended to be women of all ages, but
particularly those in the 60-75 age range. They wanted friendly service and a
feeling that their little treat had not cost too much.
All three sorts of customers would tend to be repeat customers. This means
that they would keep coming back to the café for their coffee and sandwiches.
She did not expect there to be too many one-off customers. These are customers
who buy a product once but are unlikely to buy again.
There are many other ways in which Ruby could have segmented (i.e. split up)
her potential market. How a business splits up its market depends very much on
the product being sold and who is the customer. For example, businesses could
split up their market on: Market segments in a café - age, gender,
• age – children, teenagers,‘twenty somethings’ and so on; income and ethnicity
• gender – male or female;
• income – such as low income, middle income, high income;
• area – for a national company, customers in Scotland, Wales or the South West
of England;
Market segment – part of a market that
• ethnicity – for example, white, Afro-Caribbean, Chinese, Asian;
contains a group of buyers with similar
• religious groups – many religious groups have laws about what they can eat;
buying habits, such as age or income.
there is a market for Kosher food for the Jewish community or halal meat for
Price sensitive – when the price is very
the Muslim community;
important in the decision about whether
• socio-economic group – this refers to whether an individual customer is
or not to buy.
working class, middle class or upper class.
There is a national classification of this type of grouping called The National
3 Market mapping
Statistics Socio-economic Classification Analytic Classes

(NS-SEC). It classifies people according to the type of Figure 1 – Market map of local cafes
occupation they have as shown in Table 1 on the previous
High price
page.
Ruby’s café
Market mapping Organics café

Having visited so many cafes, Ruby understood that one
18
café could be very different from another café. She made a
Costa
list of all the differences. One important difference was
Basic quality High quality
price. Then there was the quality of food and drink.
Colin’s home
Another difference was the atmosphere of the café – cooking
whether it was aimed at providing comfortable seating or
whether it was a ‘greasy spoon’ place serving cheap food in a The quick stop
basic setting.
Low price
Exam Question Report

She then drew a market map (also sometimes called a
2 (b) EPP (a cinema) offers a range of products that appeal to perceptual map or a positioning map). This is a diagram
different age groups. that shows the range of possible positions for two features
(ii) Why does it do this? (8) (June 2006) of a product. Figure 1 shows the market map drawn by
Ruby for local cafes based on her market research. Each
How students answered
name shows an individual café. Ruby has to decide where
to put her café. Will her café charge above average prices?
In that case, she needs to put her café above the horizontal
Some students (36%) scored poorly (ie 0-3) on this question. line. Will her café serve above average quality food and
Some answers simply stated a reason, which almost re-stated the drink? In that case, she needs to put her dot to the right of
question such as ‘to appeal to a range of people’. There was the vertical line. Given the location of her café, she decides
limited explanation of why a business would do this. that the best positioning of her café is indeed high price,
high quality. So her café will be in the top right hand corner
of the diagram.
Most students (57%) gained good (ie 4-6) marks on this question. Ruby could have drawn a number of different market
These answers would have given reasons, such as appealing to a maps each showing different features. One map, for
different range of groups. They explained that people of different example, could have shown the range of food and drink on
age groups have different tastes, for example retired people may offer (from a large range to a small range) and the physical
go to the cinema in the daytime. size of the café (from a large floor area to a small floor area).
Market maps show the position of a product or group of
products in the market compared to other products. For
Few students (7%) gained very good (ie 7-8) marks on this example, a BMW car is more luxurious than a Nissan Micra.
question. A can of Heinz baked beans is more expensive than a can of
Only a few answers gave reasons for extending the product range value baked beans from a supermarket chain.
and offered judgements about why the business did this. These
answers considered that increasing the product range would Market gaps
spread the risk and increase sales and market share.
There was another café near where Ruby hoped she could
open her own café. However, it did not seem very popular.
It was a rather old fashioned café serving low quality tea and
coffee. Ruby saw that there was a gap in the market for
her café. A gap in the market occurs when no business is
serving the needs of customers for a particular product.
Market map (or Perceptual map or Positioning map) – a diagram New businesses like Ruby’s café can be very successful if
that shows the range of possible positions for two features of a
they spot a gap in the market and fill that gap. Many new
product, such as low to high price and low to high quality.
businesses, though, make products that are very similar to
Gap in the market – occurs when no business is currently serving other businesses. This too can lead to success if there is a
the needs of customers for a particular product.
big enough market to be divided up among businesses.
3 Market mapping
Test yourself
1. A part of a market that contains a group of buyers with 3. Katie Lunn is investigating setting up as an independent
similar characteristics is called a market newsagent. She has drawn up several market maps to
A map help her in her market research. A market map is a visual
B segment means of showing
C gap Select one answer. 19
D resource
A where the business is located
Select one answer.
B the conclusions of a market survey
2. A toy manufacturer sells toys which are linked to a popular C where a product is positioned in the market
television programme aimed at 1-4 year olds. It also sells D market segments
toys aimed at 5-9 year olds. The two age ranges for the toy
manufacturer are examples of market
A resources
B maps
C gaps
D segments
Select one answer.
Over to you
Kendrick King trained as a hair stylist. He became the manager
of a hair salon at the age of 23 and then decided that he wanted
to set up his own salon. He knew there was a gap in the market
in his local area because there were no hairdressers for Afro-
Caribbeans. There was a significant population of Afro-
Caribbeans where he lived, but the nearest Afro-Caribbean
salon was several miles away. Kendrick researched the market
carefully visiting a number of Afro-Caribbean salons in other
areas to find out what services they offered and what prices
they charged. Another part of his market research was to ask
all his friends about what they would like to see in a salon.
1. ‘There was a gap in the market in his local area.’ Explain

what is meant by a gap in the market, using Kendrick new
salon as an example. (3)
2. What features of the market could Kendrick’s have put on a
market map to help him position his product? Explain your
answer carefully, drawing a market map to help you. (6)
3. Will spotting a gap in the market guarantee that Kendrick’s
new business will be successful? Justify your answer. (6)
4 Competition
4 Competition
Case Study
20 Chloe Stirch graduated with a degree in fashion
design three years ago. She went on to work at
management level for a large department store
with much of her work focussed on shoes.
Having gained this experience, she feels that now
is a good time to launch her own business selling
shoes.
Analysing the competition

Objectives Within the department store, there were a number of different shoe stores (called
Appreciate that initial planning to set concessions) where each different shoe store rented floor space in the
up a business will require recognition department store and paid the department store a proportion of the money it
and investigation into other received in sales. The different shoe stores competed with each other for
businesses offering similar customers. Being able to see their sales figures, Chloe knew that some shoe
products/services (competitors). stores were more successful than others in attracting customers. If she were to set
Understand that new businesses will up her own shoe store, she would have to analyse the strengths and weaknesses
need to find out more about their of her competitors. This might allow her to find a gap in the market.
competitors - their strengths and The shoe stores in her local area fell into three categories. First, there were
weaknesses. stores that were part of a national chain. These were stores like Clarks, Ravel, and
Appreciate that entrepreneurs can Barratts. Second, there were local independent stores. These were either owned
spot further opportunities by individually or formed part of a small chain that operated in the local area. Third,
comparing their business offerings there were fashion retailers, department stores and some supermarkets selling
with that of their rivals.
clothes which also had an area devoted to selling shoes.
Each shoe outlet had a slightly different product offering. This means that
individual products were different. So too was the mix (or product range) of
products for sale. Chloe investigated these and came up with a list of different
criteria with which to judge the potential competition.
Product range Shoe stores in the centre of town tended to specialise. There
were a large number of stores that only sold women’s shoes. She could find only
one specialist men’s shoes store. Where a shoe store sold both men’s and
women’s shoes the sales area for women’s shoes tended to be much larger than
for men’s shoes. Most shoe stores sold fashion shoes. Independent shoe stores
on small parades of shops in the suburbs tended to sell a mix of men’s, women’s
and children’s shoes. They tended to sell ‘everyday’ shoes rather than
concentrating on fashion shoes.
Quality Different stores offered different quality products. For example, in more
expensive stores, shoes were made of high quality materials such as leather. The
Product range – a group of similar quality of manufacture of the shoe was also better. In cheaper stores, many of the
products made by a business, like a shoes were made of plastic or ‘imitation leather’. The quality of work could be
number of different soap powders.
poor with glue showing on the seam between the uppers of the shoe and the
sole, or slight scuff marks on the shoe.
4 Competition
21
Some stores offer a shopping experience.
Design More expensive shoes tended to have a more elaborate design than
cheaper shoes. They are often more comfortable to wear because of design
features built into the shoe. So the design helps more expensive shoes to look
better and be comfortable.
Selling experience The shopping experience is very important for many

customers who buy shoes. At the top end of the market, there are shoe boutiques Watch Out!
that are beautifully fitted out. Each shoe is displayed like a piece of art in a Having strong competitors makes it more
museum. There is excellent service. Then there is the stylish bag to take your difficult for a new business to be
purchase home. When you are charging £100-£500 for a pair of shoes, customers successful. However, a new business
expect this type of luxury service. At the bottom end of the market, there are the can survive and do well if it can find a
shops that are selling shoes at between £5 and £25. Pairs of shoes are displayed different way of doing things, meet the
on cheap display racks for customers to try on themselves. The only service is needs of the customers that have been
given by the person on the till taking the money. identified as forming the market for the
new business and try to match the
After-sales service Shoe stores, by law, have to refund monies on shoes that are strength of its competitors. What
happens in this situation is that the new
faulty. But many will also give a refund if the person buying the shoes goes home
competitor takes away sales that would
and decides they do not like them.
otherwise have gone to another
business.
Price There are large differences in price between different shoe stores. A pair of
ladies’ shoes might cost £10 in one store and £500 in another. Chloe noticed that
children’s shoes that came in a variety of widths as well as size were very
expensive in comparison with adult shoes. She also noticed that there seemed to
be a narrower range of prices for men’s shoes than for women’s shoes. Whilst
she could find women’s shoes priced at £300 in her department store, she
Brand – a named product which
couldn’t find any men’s shoes at that sort of price.
customers see as being different from
other products and which they can
Brand image Chloe was very aware of brand image. A brand is a named associate or identify with.
product which customers see as being different from other products and which
Brand image - the idea/impression/image
has an identity that customers can associate with and recognise. Famous brands that customers have in their minds about
include Heinz baked beans, Kellog’s cornflakes or a BMW car. Brand image is the the brand.
idea or image that customers have in their minds about the brand. Jimmy Choo
and Manolo Blahnik are designer brands. If you buy a pair of shoes from Faith
4 Competition
and Schuh, the brand image is of a fashionable shoe Opening a shoe store on the high street that looked like
appealing to teenagers and young people. Clark’s has an Faith or Clark’s would be tough. There was certainly no gap
image of being solid, reliable and safe. It is a place where in the market here because their strengths far outweighed
children as well as mums and dads could find a pair of their weaknesses.
shoes. The image of a brand is reinforced by advertising. The local independents had one main strength. They were
Some shoe brands spent large amounts on advertising and located near their customers in the suburbs and local
other forms of marketing. shopping parades. However, many of them seemed poorly
22
run to Chloe. Shoes were too often jumbled all together.
Suppliers Chloe knew that the major shoe chains had very They often did not seem to be clear whether they were
efficient buying teams. These teams had a detailed catering to customers who wanted low price, low quality
knowledge of their customers and their needs and travelled shoes or high price, high quality shoes. The problem for
the world to find the right product at the right price with the Chloe was that she was not enthusiastic about opening a
right delivery dates. Most small independent outlets bought shoe store trying to cater for everyone from a two year old
their shoes from wholesalers. These are businesses that boy to an 80 year old granny.
buy from manufacturers worldwide. Then they sell in bulk So this left her with the idea of opening a shoe store
to individual shoe stores. Some independent outlets, selling exclusive, high quality brands to high-spending,
however, bought high fashion branded shoes from a shoe fashion conscious women. There was not an independent
manufacturer. Often they would have the exclusive right to shoe store in her local city centre that offered this service.
sell these shoes in a local area. She would need to find the right suppliers that had strong
brand images in the minds of her customers. This could be
Strengths and weaknesses the opportunity that Chloe was seeking. However, she faced
From her experience in working at a department store, one major threat. She would face competition from her own
Chloe knew that the major high street chains of shoe department store. So there would a lot of risk attached to
retailers were very competitive. Some seasons, they did not her business venture. She would leave the security of a paid
quite get the fashion trends right and lost sales. However, job with promotion prospects at the department store to set
they had had years of experience getting their quality lined up in business on her own.
up with price, in-store ‘experience’ and brand image.
A window cleaning service operating in central Birmingham wants Answer D and E

to expand to the outer parts of the city. It has looked at the services
Technique guide: There is a number of choices available so
offered by its rivals. Which two of the following are most likely to
first:
show that there is an opportunity for the business to grow?
A Mike Gibson specialises in cleaning industrial buildings and Think: What might be the strengths and weaknesses of a
has a good reputation amongst local businesses. window cleaning business? What is the relevance of the ‘outer
parts of the city’ in the question?
B Colin Cain, a rival who works on his own, has a brother who
lives in London. Then: Dismiss the choices that are obviously wrong - that
C Isabela Cioni, the nearest rival, has many friends in the area would be B
and is trusted to look after house keys if they are away. Decide: You are left with A, C, D, E and F. You have narrowed
D Isabela Cioni has recently refused to clean conservatories. down the options.
E Colin Cain is not in the UK for two months every summer. Go through these: A, C and F are all strengths of other
F Mike Gibson charges competitive prices. businesses - quality, services for customers and low
prices.
This leaves D and E. They are possible weaknesses. The outer
parts of the city is more likely to have houses which may have
conservatories - this leaves a gap In the market. If Colin is out
of the country that leaves people who will still want their
windows cleaning. The business can exploit this.
4 Competition
Over to you
Ellie Morgan is currently the manager of a gym in London. The a small business in
gym is part of a national chain but things are not going well. The the Midlands that had
number of clients taking out annual subscriptions has fallen. had special gym
There are also too few clients coming in and paying a one-off equipment
entrance fee for a single session. The equipment and the décor manufactured for 23
are looking tired and rather shabby. Overall, her branch is losing primary school
money. Ellie thinks the gym is likely to be closed within the next children. The
12 months by its owners. This is an opportunity for Ellie to take machines are much
a different path by opening her own business. smaller than those for
She has a good understanding of the local competition. The adults. The
market is very crowded. There are national chains of gyms like equipment, together
Esporta that offer good facilities and have a good brand image. with a trainer, is then
They can be a little expensive for customers. However, they hired by primary
seem to have a steady flow of customers. schools or community
Then there are the small gyms that are owned by a single centres. Ellie could
person. These are often cheaper for customers although their see a gap in the
facilities are usually not as good as the national chains. market in London for
Finally, there are gyms that are part of a larger business. this service.
There are a couple of hotels in her local area that have a gym for
their guests. Local people, though, can also use the gym if they 1. Identify four
pay. There is also a health spa that offers gym facilities. With different ways in which gyms compete with each other for
both the hotels and the health spa, the gym area is fairly small. customers. (4)
However, the equipment is well maintained and some customers
2. Analyse why it might be too expensive for Ellie to set up a
like the more intimate atmosphere of the facilities.
successful gym aimed at adults. (6)
With such strong competition, Ellie is not sure she would be
able to set up a successful gym on her own. It would need far 3. Do you think that Ellie could make a success of a gym for
too much money to set it up. Reading around, though, she found children? Justify your answer. (6)
Test yourself
Read the passage below carefully and then answer questions 2. Which two of the following reasons are the most likely
1 and 2 that relate to the passage. explanations for why Tyler’s has lost half its sales since the
new hypermarket has been built?
Tyler’s is a small independent shoe store. It is located in a
local high street. A new hypermarket that sells shoes as part Select two answers.
of its product offering has just been built at the bottom of the
A The hypermarket is a more convenient place for shoppers
high street. Tyler’s has seen its sales fall in recent months and
to buy shoes
the owner is looking at ways he can compete more effectively.
B The level of customer service has got worse at Tyler’s
1. Which two of the following methods are most likely to help C The average price of shoes at Tyler’s has increased
reduce Tyler’s costs in an effort to compete more D Tyler’s has cut its costs by making one of its four staff
effectively? redundant
E The hypermarket offers for sale many of the same styles of
Select two answers.
shoes as Tyler’s
A Increase its advertising in the local newspaper
3. A business makes bottled and canned soft drinks. Which
B Provide better service by taking on more staff
of the following in itself is most likely to make it more
C Increasing the range of its shoes
competitive against its rivals?
D Ordering cheaper shoes from its suppliers
E Making one member of staff redundant in order to be able Select one answer.
to offer lower prices
A The employment of two extra workers
B An increase in profit compared to last year
C The launch of a new range of drinks
D A rise in the price of its drinks range
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5 Added value
5 Added value
Case Study
24 Kamran Younis is in the last year of his degree course in Catering
and Food Studies in London. He does not want to get a job
working for a company. Instead, he wants to set up his own
business. He has always liked chocolate. On his degree course, he
has used the time to learn as much as possible about how to
make chocolate products. Now he wants to set up in business
selling chocolates, based in London.
Added value
Objectives Kamran knew there was
G Understand the meaning of the term no point in trying to
‘added value’ and explain its compete against industry
importance in business survival and giants like Cadbury, Mars
success. and Nestlé. Products like
G Appreciate the main sources of added Yorkie, Aero, Mars Bar and
value: convenience and speed, KitKat had massive sales. They were backed by a strong brand image and
branding, quality, design, and unique millions of pounds of advertising and other types of promotion. These chocolate
selling point. products also had the advantage that they were available widely and in every
newsagent and garage shop, not to mention supermarkets. Who would want to
sell a different product from an unknown business in their shop?
So Kamran had to find a way of adding value to any product he made. Added
value is the increased worth that a business creates for a product. For example, a
food manufacturer might sell a single chocolate bar for 20p. It pays 5p for the
ingredients such as cocoa and sugar, as well as other costs such as the electricity
to power machines. It would then add 15p of value for each bar sold. For the
business as a whole, it is the difference between the total value of its sales and
Watch Out! what it has to pay its suppliers, sometimes referred to as the ‘bought in’ costs.
Added value is the difference between
what a business pays its suppliers and Sources of added value
what it receives for selling its products. The challenge then for Kamran was to find a product where he could charge more
The wages its pays its staff are part of its than it would cost him to buy in the raw materials to make the product. He knew
value added. The workers of a business that there were many products that were very successful at adding value and that
add value to the output of a business. part of their success was in persuading customers to pay the price charged. A pair
of Nike trainers, for example, are pretty much the same as a non-branded pair of
trainers. They are probably made by the same people in the same factories
somewhere, in a country like Indonesia or Vietnam. Somehow, Nike has managed
to persuade customers to pay four or five times as much for their trainers as for
the non-branded ones. Were they four or five times the quality? Probably not. The
Added value – the increased worth that a real difference was in the fact that the Nike trainers had the famous ‘swoosh’ on
business creates for a product; it is the them and that is what added the value.
difference between what a business pays Kamran decided that the only way to do this was to make high quality,
its suppliers and the price that it is able to
speciality chocolates. These would be sold to restaurants, by mail order and to
charge for the product/service.
specialist patisserie (cake) shops. What would then be the main sources of value
added in this product? They would be the same as for any business.
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5 Added value
25
High quality chocolates can add value
Quality The quality of his chocolates would be very high. They would therefore
appeal to a relatively small group of people who were prepared to pay a high,
premium, price for the product.
Design and formula All Kamran’s chocolates would be hand-made. They would
have a design distinctive from the sort of chocolates found in chocolate selections.
They would also have unique formulations. So his chocolates would taste different
to the chocolates made by any other manufacturer. Customers would therefore be
able to see that the chocolates they were buying and eating were very different.
Kamran could also do a design which related to different restaurants and
patisseries, so that they would be even more unique. Each restaurant or patisserie
would have its ‘own chocolates’ with its name or logo on them.
Convenience For restaurants and patisseries, buying his chocolates would mean
they did not have to produce their own chocolates for sale. A restaurant, for
example, might want to have a single chocolate to accompany a coffee. Rather than
making the chocolate itself, it might be cheaper and easier to buy in these
chocolates. For a patisserie, it might make all its own cakes, but sell a variety of high
quality goods made by other manufacturers. It is more convenient and cheaper to
buy in these extra goods rather than making them themselves. The addition of the
Watch Out!
individual design or logo would be an even better selling point.
A product may have more than one
Speed and quality of service In today’s world, customers expect high quality unique selling point. There could be
service. A business, for example, expects its suppliers to meet tight delivery several ways in which the product is
schedules. They are prepared to pay a higher price to suppliers that can deliver different to other products on the market.
more quickly than other suppliers or be flexible in responding to customer needs.
For example, in London, Kamran would offer next day delivery for orders. Outside
of London and for mail order, he would offer 48 hour deliveries.
Branding Over time, Kamran would aim to create a strong brand for his
chocolate products. Creating a brand means creating a distinctive product that
stands out from those of competitors. The brand image would be one of a high Unique selling point or USP – a
quality, luxury product. Whenever people saw or heard of Kamran’s chocolates, characteristic of a product that makes it
these would be the things that they would associate them with. different from other similar products
being sold in the market such as design,
quality or image.
Unique selling point A unique selling point, or USP, is a characteristic of the
product that makes it different from other similar products being sold in the
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5 Added value
market. The unique selling point could, for example, be the ingredients and sells his chocolates for £10, he makes a loss
design, quality or level of service associated with a product. of £2. If this were to continue, he would be forced to close.
For Kamran, the unique selling point had to be the distinct The most successful businesses are the ones that can
quality of his chocolates. This was the one thing that no achieve high levels of value added for the type of product
other business could copy easily. Very few businesses that is being sold. If Kamran can sell his chocolates for £20
produced such high quality chocolates as he intended to when the cost of ingredients is £12, then he has added £8 in
make. Their chocolate would be different in terms of taste value. However, he would be more successful if he could
26
and design from his chocolate. sell his chocolates for £30 when the cost of ingredients is
£12. Then he has added £18 in value. The higher the added
The importance of value added value, the more likely it is that Kamran’s business will
Every business, including Kamran’s, must add value to survive, grow and be successful in the long term.
survive and be successful. If Kamran pays £12 for
Test yourself
1. Jacob Simms is a solo singer who tours the country
Gemma Mullens lives in Norfolk. Her business is driving appearing at concerts and revues. Select one answer.
people for a night out, taking them to their destination and The added value of his singing business is
picking them up. She noticed that people often complain
A the total costs of putting on the concerts minus the
about the service they receive from taxis in the area.
revenue earned from selling tickets to his concerts
B what he makes in fees minus his costs such as petrol
(a) Explain two ways in which Gemma could add value to her and hotels
business. (6) C the total costs of the concerts at which he appears
minus what he has to pay to concert hall owners
Basic States up to 2 methods of offering a better service D the wage he pays himself minus what he spends
only. (1-2)
2. Which two of the following might be a source of added value
for a farming business? Select two answers.
Good Identifies up to 2 methods and offers some A Quality of products grown on the farm
explanation. The explanation offers up to 3 basic links. A B The wages of the farm workers
basic link would be ‘offering a better quality service (1) by C The profit earned by the farmer
guaranteeing that a car will arrive within 5 minutes of the D Speed of delivery from harvesting to the customer
time it is booked (1). This makes her business convenient E The receipts from sales of farm produce
for customers who are prepared to pay for this
convenience’ (1). (3-4) 3. Why is added value important to the survival of a
business? Select one answer.
It is important because
Excellent Identifies up to 2 methods and offers
some explanation. Links are developed clearly and A added value allows a business to target its customers
examined in detail. For example, ‘offering a better quality successfully
service (1) could be by guaranteeing that a car will B added value always means a better quality of product
arrive within 5 minutes of the time it is booked (1). People C a business that has negative value added is one that is
would have confidence in the business and use its not likely to be making enough money to pay its costs
services again (1). The confidence in the quality of the D all businesses have to have a unique selling point
service is valued by customers (1) and they are prepared
to pay for this quality (1). As a result, a quality service
enables Gemma to add value to her business (1).’ (5-6)
EDBUS_C05.QXD 23/9/09 13:04 Page 5
5 Added value
Over to you
27
Corey Molnar was the manager of a garage. He had worked his and make the business more successful. Working as a
way up through the trade, starting at 16 as an apprentice manager, Corey knew that personal customers valued
mechanic. Hard work and reliability had led to successive competitive prices, high quality workmanship and service
promotions. He had recently inherited a property. He felt that feedback. The mechanics that did a job would be the ones who
now was the right time to open his own garage business using would report back to customers on the work done on a car.
the money from the sale of the house. Corey also wanted to employ a female mechanic who would
Within a few miles’ radius of where he hoped to set up, there work on cars delivered by female customers. This could be a
were garages for all the major brands of cars such as Ford, big selling point for the business amongst the growing number of
Citroen or Toyota. As official franchises of these companies, female drivers who arranged their own repairs and servicing.
their mechanics were specially trained to work on these makes
of cars. They also only used parts approved by the car
manufacturer in services and repairs. Corey knew he had no 1. Explain two ways in which an official franchise garage for a
hope of getting a franchise for a major car company. Instead, he company like Ford or Toyota adds value to the service it
would have to set up as an independent garage. This would provides. (6)
keep down the cost of establishing a business anyway.
2. Explain two unique selling points of Corey Molnar’s new
Competition from other independent garages would be tough.
business. (6)
Corey planned to buy an existing garage rather than start the
business from scratch. The garage would therefore come with 3. Do you think that Corey Molnar will make a success of his
an existing set of customers. However, he planned to expand garage business? Justify your answer. (6)
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6 Franchising
6 Franchising
Case Study
28 Toni&Guy is an international company that offers a
creative hair styling service. Toni&Guy Hairdressing
was founded in London over 40 years ago by Toni and
Guy Mascolo. Its styles are varied to reflect
customers’ different face shapes and lifestyles. In
2008, there were 275 UK salons and another 193
salons internationally. It also had 28 training
academies across the world. Gary France worked at
Toni&Guy for 15 years as art director. Then he
decided that he wanted to set up his own
hairdressing business. He decided that, rather than
going alone, he would become a franchisee of
Toni&Guy.
Franchisors and franchisees

Objectives Toni&Guy is a well known and very successful business. The Toni&Guy brand is
G Understand the principles of associated with high quality and style. Gary knew that the business offered
franchising as it applies to small franchises for sale. This means that entrepreneurs can pay a fee to the Toni&Guy
business start-ups. organisation to get important benefits. They have the right to use the Toni&Guy
G Appreciate the advantages and name for example. However, they stay as independent businesses. Franchising is
disadvantages of using a franchise as one of the ways in which Toni&Guy has expanded. There are many examples of
a means of starting a new business. franchise operations, such as Prontaprint, McDonald’s, Snappy Snaps, Dominos
G Assess franchising against other Pizza and Dyno-Rod.
business start-up options. When Gary investigated buying into a Toni&Guy franchise he found out that
G Identify a suitable start-up location for the organisation offered part-owned salons that provide hair styling services. Gary
a franchise. could own part of the business and the Toni&Guy organisation would own the
remainder. Gary had other options. He could set up his own salon as a sole trader
or in partnership with his wife. There was also the option of setting up as a
private limited company. However, there were many risks to setting up completely
Watch Out! on your own.
Buying into the Toni&Guy franchise meant that Gary had the advantage of
Becoming a franchisee might seem like a running his own business but with the support and success of the Toni&Guy
good idea. However, there are plenty of organisation behind him. The investment he had to put into the franchise was
franchisees who think they are paying too quite high but when Gary compared it to the amount he would have to raise to
much for the privilege of being a set up entirely on his own he decided that the risk-reward ratio favoured the
franchisee and wished they had started
franchise option. So Gary France, together with his wife, bought 49 per cent of the
their business independently.
franchise to a Toni&Guy salon in Kensington in London.
The Toni&Guy franchise developed partly because of the commitment of the
business to training staff. Rather than having them set up in competition as
rivals, Toni and Guy Mascolo thought it would be far better to allow them to
remain part of the business and have the challenge of running their own business
Franchise – the right given by one whilst spreading the Toni&Guy name.
business to another to sell goods or Many franchises are national or even international companies. They have
services using its name. developed successful products and use their skills and experience to help others
to set up in business.
EDBUS_C06.QXD 23/9/09 13:05 Page 3
6 Franchising
The benefits of a franchise

There are certain advantages to someone like Gary France of using a franchise as
the means of starting up a business. In the relationship Gary would be called the
franchisee and the Toni&Guy organisation the franchisor. The advantages
include the following.
Training Franchisees usually receive training from the franchisor. Toni&Guy, for 29
example, has academies around the world where it provides basic and advanced
training. This means that the training given by Toni&Guy’s is particularly
rigorous. Many franchises want to maintain their good name and ensure that
franchise operations are successful. Giving the right training is vital.
Equipment Most franchises provide equipment to entrepreneurs as part of the

total package. Toni&Guy sells equipment to its franchisees, including hair styling
equipment, televisions and its ‘salon genius system’ computerised till.
Materials to use in the product of a good or service Franchisors typically sell

their franchisees some or all of the materials used in production. Toni&Guy
franchisees can only use Toni&Guy products in their salons, and not other brands
of hair products.
Finding customers Toni&Guy, like other franchises, helps new business owners
like Gary find customers through national advertising. It also provides publicity
material such as posters. The brand name of ‘Toni&Guy’, of course, also brings in
customers because they are already aware of the business and its reputation. This
reduces the risk of failure.
Back up services The franchise package will often come with a range of back up
services. Toni&Guy provides advice, loans and insurance cover for example.
A brand name Branding can be crucial to the success of the business. Toni&Guy
Popular UK franchisees
is known nationally because of its size and its advertising. It has regional
managers that check that staff wear uniforms, pictures are correctly used and staff
are being properly trained. All this is to make sure that the same high standard is
found in every Toni&Guy outlet throughout the world. This helps maintain the Watch Out!
quality that customers expect. It provides consistency of customer experience The advantages of buying a franchise
wherever the franchise is located. have to be balanced against the
restrictions that exist for the franchisee.
Exclusive area Often, new franchise operations are given an exclusive area from A franchise may be a means to run a
which to draw customers. This is true at Toni&Guy. This means that franchises business but it is not totally independent.
are not in direct competition with each other.
The costs to the franchisee

The franchisor does not provide all its services for nothing. The average amount
of money needed to start up a franchise is around £250,000 according to the
Franchisee – a business that agrees to
British Franchise Association. The amount depends on the type of franchise with
manufacture, distribute or provide a
the more successful ones requiring a greater investment. Franchisors often charge branded product, under licence by a
a fixed sum at the start of the franchise agreement to cover the costs of starting franchisor.
up a new branch. Then they usually charge a fee, or royalty, measured as a
Franchisor – the business that gives
proportion of the value of everything sold. Sometimes they also charge high franchisees the right to sell its product,
prices for the products they sell to the franchisee, making a profit on this. For in return for a fixed sum of money or a
example, Gary France has a renewable 5 year contract for the Kensington branch royalty payment.
of Toni&Guy. He pays a monthly royalty of 10 per cent of sales.
EDBUS_C06.QXD 23/9/09 13:05 Page 4
6 Franchising
Advantages for the franchisee tested and has been successful. So the franchisee only
Starting your own business is very risky. There are has to repeat the success of franchises.
advantages to buying into a franchise if it can cut down on • The franchisor provides on-going support and can help
those risks. There are a number of reasons why risk is the franchisee sort out any problems such as quality
reduced. control or tax problems.
• The franchisor should select people from those who want
to buy a franchise. This tends to eliminate people who
Disadvantages for the franchisee
30 Whilst buying into a franchise can help reduce risk and
are unsuitable for the business.
brings advantages from the amount of support given, there
• The franchisor sets out at the start how much money the
are drawbacks.
franchisee needs to put into the business. Many new
• The initial investment can be very high and may not be
businesses fail because the owners badly underestimate
affordable. The payments that have to be made whilst
the amount of money they will need to survive in
running the business can take away much of the profit
business.
from the business. At worst, a business that could have
• The franchise formula has already been tried out and
survived making low profits as an independent business
is forced into making losses because of the payments it
has to make the franchisor.
Build Better Answers • The franchisee can not sell the business without the
permission of the franchisor. This limits the freedom of a
Which two of the following would be the most likely advantages business owner wanting to sell up or close down the
to a new business becoming a franchisee of Merry Maids, a business.
franchise which provides cleaning services. • In some franchises, the franchisor can end the franchise
arrangement without having to give any reason or pay
A Working in an area where no other Merry Maids franchise any compensation. Everything a franchisee has been
was allowed to set up working for could suddenly disappear.
B Having to arrange your own insurance and loans • Some franchise businesses are more successful than
C Making a loss in the first year others. Toni&Guy is a highly successful franchise both for
D Starting from scratch to find your own customers its owners and for franchisees. However, with some
E Being part of a business that is a household name
franchises, too many of the franchisees fail to establish a
F Training staff in a new business
successful business. Choosing the right franchise is very
Answer A and E
important for someone wanting to set up in business.
Technique guide: There is a number of choices available, so first: Location
Think: What help do new businesses get from joining a franchise? Location is very important for the success of most
Then: Dismiss the choices that are obviously wrong - that would businesses. Toni&Guy, for example, carefully chooses new
be C. locations for its business. The location has to be somewhere
busy in the centre of a town where customers can easily get
Decide: You are left with A B, D, E and F.
to the hair salon. The same is true for any retailing (or
Go through these: B, D and F are all potential problems for shop) location or restaurant location. A fast food chain like
new businesses that may be prevented if they join a McDonald’s sites its outlets in the centre of towns. Or they
franchise. Training staff can be costly and difficult if the
are sited out of town where it is easy to go by car and there
business is new. It can be difficult for new businesses to find
are good parking facilities. Franchise operations that work
customers and arrange loans. Buying into a franchise can
reduce the risks associated with these areas. with children tend to use school or church halls so they are
convenient for parents to bring their children.
This leaves A and E as the most likely answers. Selling in an With some franchises, the precise location is less
area with no competition from another franchise and selling important. If you are operating a domestic cleaning service
a brand name can help a franchise. Some franchises will or a service that provides signs for businesses, the office
have exclusive rights to operate in an area which reduces could be located at home or on an industrial estate. The
risk. In addition, buying into a brand that is already
important thing with these sort of franchise operations is
successful is easier than having to build the reputation up
that the franchisee can be contacted by phone, text and
from scratch. Again, this reduces the risk.
email. Services are then taken to the customer. For
example, the franchise might be unblocking drains, or
replacing a tyre on a car.
EDBUS_C06.QXD 6/2/12 8:06 AM Page 5
6 Franchising
Test yourself
1. Which of the following is a correct statement about 3. Which two of the following are most likely to be
franchisees? Select one answer. disadvantages of becoming a franchisee. Select two
A Franchisees sell the right to make a product to answers.
franchisors
A Franchises are more likely to fail than businesses which
B Franchisees receive a royalty from franchisors 31
have been set up independently
C Franchisees receive training and support from
B The franchisee has to pay a fee to the franchisor for
franchisors
setting up in business
D Franchisees sell materials for use in production to
C Franchises tend to sell products that are unpopular with
franchisors
customers
2. Which two of the following are most likely to be advantages D The franchisee cannot sell the business without the
of taking on a franchise. Select two answers. franchisor’s permission
E Franchisees need far more business skills to be
A The franchisor provides a tried and tested product to sell
successful than people who set up on their own
B The franchisor pays the franchisee to set up in business
C The franchisee receives ongoing help and support from
the franchisor
D The franchisor is responsible for paying the taxes of the
business
E Franchisees do not need to have so many business skills
as people who set up on their own
Over to you
TruGreen
TruGreen is a franchise opportunity that allows enterprising
Merry Maids - domestic cleaning services individuals to enter the profitable and growing lawn care market
Merry Maids is a franchise that provides domestic cleaning and provide specialist services on the highest of levels. The
services for households. Merry Maids are looking for mature franchise benefits from the respected professional standing of its
couples or individuals to acquire ownership of a Merry Maids parent company, ServiceMaster limited. It operates with low
Franchise who have the skills to manage a fast growing business overheads and attractive margins and is an enjoyable and
and the cleaning staff who work within it. Merry Maids potentially rewarding business.
specialised, two person cleaning concept and accompanying TruGreen offers a franchise that means:
pay incentives attract people who seek part time weekday • You can work from home, with low overheads, plus great
employment, convenient hours and above average salaries on Monday to Friday daytime hours.
the quality and quantity of the homes they service. These • Your franchise will be in the service sector with exceptional
employees are among Merry Maid’s greatest assets. Hence the growth predictions.
initial franchise fee charged by Merry Maid also includes an • No cash flow problems and high profit margins.
exclusive and unique service worker selection program to make • 90% repeat customers, in your own territory.
sure you bring the right people into your business. Franchise Fee: £15,000 (Plus VAT)
Also included in the initial franchise fee is the equipment, Equipment Package: £10,500
supplies and exclusive Merry Maids’ cleaning products to equip Royalty fee: 10%
four two person cleaning teams. Each cleaning team, when
properly trained and scheduled, can clean two to three homes a
day. Merry Maids exclusive Business Management System is yet health and safety. Dot works in a garden shop. They are
another important factor that has contributed to the company’s both keen gardeners. Jim was given a redundancy package
position of Market Leader.
which included a payment of £22,500.
Franchise Fee: £9,950 (Plus VAT)
Equipment Package: £5,700 (Plus VAT) 1. Identify the services being offered by Merry Maids and
Royalty fee: 7% TruGreen. (2)
2. How much would it cost in total for Jim and Dot to set up (a)
a Merry Maids franchise (2) and (b) a TruGreen franchise?
ServiceMaster is a successful US franchisor which came to
(2)
Britain in 1959. Today it has over 900 franchisees in the UK
covering 6 different businesses. Two of these are Merry Maids 3. Explain one advantage and one disadvantage to Jim and Dot
and TruGreen. of setting up in business as a franchisee rather than setting
Jim and Dot Truepenny are looking to operate a franchise. up an independent business. (6)
Jim is 52 and has just been made redundant from his job as a 4. Which of the two franchises do you think would most suit
maintenance supervisor, responsible amongst other things for Jim and Dot? Justify your answer. (6)
EDBUS_C06.QXD 23/9/09 13:06 Page 6
Know Zone: Topic 1.1

1.1 Spotting a business opportunity
In this topic you have learned about: searching the market weaknesses that a new business has to look at, added value, by
32 carefully and identifying customer needs, the use of market which a new business or product establishes itself, the options
mapping to get the product right and to improve the chances of available to a new business in terms of ownership and how
success, analysing competition and identifying the strengths and location can affect success.
You should know… Added value could simply be a quantitative value on top of
costs to get to a price; or it could be a qualitative value
Primary research is collected by the business wanting such as ‘image’ which gets the product noticed.
information first hand. The Unique Selling Point (USP) is what every business
Secondary research is looking at other information which other wants for its product or service and is often what makes
businesses or organisations have collected and published. one product sell more quickly than another. It is closely
Quantitative research involves data which can be counted and related to added value. The Nike Air Trainer is a good
then analysed to give numerical evidence. example of both ‘added value’ (Nike image) and USP (Air
Qualitative research involves looking for opinions and reasons for cushioning).
consumers’ behaviour to help planning in the business. A franchise is a business opportunity whereby someone
Data are independent statistics collected by a business. can buy the right to sell someone else’s idea and product,
Information is processed data, when two or more items of data like a copy of the original.
are connected to create a new meaning or trend. The franchisor sells the franchise. McDonald’s is a
A survey is what a business uses to find out what already exists. franchisor. It sells the ‘right’ to open a new McDonald’s.
A questionnaire is one method a business uses to collect new The franchisee buys the franchise, for example, from
data. McDonald’s.
A market is where buyers and sellers meet to agree to trade. Location is important for any business; a wrong location
Market mapping is used by an entrepreneur to look at where could mean a good idea does not stand a chance.
they see the product or service getting its best chance of Location is especially important for a franchise because
success. the product is already established.
A market segment is a part of the market with similar buying Some franchises can be set up anywhere, e.g. a plumbing
habits and at which the product or service is aimed. Typical franchise, but others may need a specific location, e.g. a
examples are gender, age and employment type. food franchise needs to be where there are plenty of
An analysis of competitors is used by a new business to see people.
where it has an advantage over existing businesses, and where A franchise has advantages such as tested product,
problems might lie. national advertising and training.
Added value is the difference between the price paid by the A franchise has disadvantages such as high cost to buy,
consumer and the bought in costs - the direct costs of limited scope to expand and the ‘business’ is still owned by
production such as raw materials, component parts etc. the franchise.
Students could: other similar ones, e.g. McDonald’s v Burger King,

• find out and list ten franchises from a range of business • take a franchise and identify the target market (customer
activities using the Internet, needs),
• make a list of the different locations and whether they are in or • consider how the original business discovered a market.
out of town,
• conduct a survey of the local high street. How many franchises
• identify the USP or ‘added value’ of 5 franchises compared with are there? How many small sole traders? How many ‘others’?
Stretch activity
Look at three different franchises in terms of their product or Consider the price of the franchise compared with the projected
service, business to business (businesses selling to each other) returns and support.
and whether location is critical or they are footloose and can Evaluate in terms of value for money and risk.
locate anywhere.
Undertake an analysis of the strengths and weaknesses of each.
(a) Bernard lives in the middle of Birmingham. He has been made about horses he would give it a try. This will cost him £4,500.
redundant from his job with a plumbing firm. With the £5,000 he (i) What is a franchise? (1)
has been given he has decided to buy a franchise. He looked up
a list of franchise opportunities on the Internet and settled on (ii) Explain why Bernard might not do well with this franchise. (3)
Kirsty’s Horses. This was a horse sitting service where the Think: What is a franchise? Who sells, who buys? What is in this
business involved looking after horses for owners who had to go scenario to use in the answer? What are the issues facing
away for periods, such as on holiday. Bernard read that the Bernard in making this business a success?
business was very successful so, even though he knew nothing
Student answer Examiner comment Build a better answer

(i) A business where you sell someone A basic answer including an example. Use a clear phrase such as ‘buying the right
else’s product like McDonald’s. to sell a product using someone else’s trading
name, e.g. Kirsty’s Horses.’
(ii) Because he doesn’t know much about A basic comment which is correct, but Identify one of the problems then link it to
horses. not developed. others. ‘He doesn’t know much about horses, so
he doesn’t know if there is any demand in his
local area. The cost of buying into the franchise
is using up most of his money so he doesn’t seem
to have much left to use.’
Move the concepts around to get a similar

answer. ‘He is using up most of his money on
buying the franchise so he has not much to play
with. He knows the business is successful but he
does not have much experience in this business.
This could prove to be a problem.’
Dara Coyle was an excellent cook. She was also keen on growing apart from the rest, that they would sell and she would make a
organic food. Dara often went to garden centres and noticed that profit. They might be bigger and cheaper but her products were
many of them had cafés. Although the aroma of the cafés was truly local.
enticing Dara thought the food was often overpriced and nothing
(a) Two Unique Selling Points for a product or service could be the
special. She thought she could do better. The idea occurred to her
to open up her own business, selling homemade food using home A image of the product D design of the product
grown products. B place to put a price label E amount of points the buyer
C somewhere to advertise earns on their loyalty card
Dara decided to do some research and she observed the buying
F strength of the competition (2)
habits of customers at several garden centre cafés. This
convinced her there were different groups of buyers and that she (b) (i) Identify one way Dara can add value to her products. (1)
could meet the needs of some of them. Dara tried out her menus (ii) Explain how this way will help Dara to add value to her
on some local people who told her they were delighted with the products. (3)
high quality taste of the food, the fact it was local and that they
(c) Dara has plans to expand her business through offering it as a
could talk with the ‘boss’. Encouraged by this Dara started trading
franchise if it is a success. In your opinion, would this type of
as ‘Goodness Nose.’ Dara knew that she would face competition
business make a suitable franchise? Justify your answer. (6)
from the garden centres and maybe other cafés. However, her
research had convinced her that the quality of her products set her
EDBUS_C07.QXD 16/7/09 11:23 Page 2
Topic 1.2 Showing enterprise
Topic 1.2: Showing enterprise

Topic overview
This topic considers the skills needed to be enterprising. How does
creative thinking develop a competitive advantage for a business?
What questions do entrepreneurs ask? How can new business ideas
come about and how can they be successfully brought to market?
Why do calculated risks need to be taken? How will planning, thinking
ahead and making connections help a business to be successful?
Case study
Antawan Hayes is a keen cycle rider, but finds that punctures happen too
often and always at an inconvenient moment. Antawan is also a keen
inventor and entrepreneur. Sometimes, his inventions come from
accidental creativity, when he chances upon a discovery. Other times,
inventions come from deliberate creativity, when he spends a great deal of
time working through a problem. With inventions, lateral thinking is
needed. Antawan, like many inventors, finds he has to think of the
unusual and unexpected to come up with a solution to a problem.
Last year, Antawan decided to tackle the problem of bicycle tyre
punctures. He began to work on the idea of injecting a substance into the
tyre, which would automatically find the hole, cover it with a layer of
material and repair the puncture. He kept asking himself questions such
as ‘What?’ and ‘Why?’,‘What if?’ He needed to look beyond the obvious.
If he could crack the technical problem, Antawan knew there was a long
road ahead of him to get the product to market. An invention protected
by a patent was one thing. Successful innovation was another. Planning,
thinking ahead, seeing business opportunities and drive and
determination were enterprise skills he would need. He also knew that
the probability of success was low. There were so many risks that he
faced. He thought that he stood a less than 1 in 100 chance of getting an
invention stocked in bicycle shops. However, Antawan was not afraid to
take risks and was always willing to undertake new ventures.
Having worked on the problem for six months, Antawan could find no
satisfactory solution. He weighed up the risks and rewards of continuing
to work on the idea and decided that his idea was probably not viable. So
he abandoned the work and began searching round for a new idea.
1. Explain whether (a) a bicycle and (b) a bicycle repair at a bicycle
repair shop are goods or services.
2. What enterprise skills does an entrepreneur like Antawan need?
3. (a) What is the difference between invention and innovation and
(b) why are both important for Antawan’s puncture repair idea?
4. Do you think that having a ‘less than 1 in 100 chance of getting a
successful invention stocked in bicycle shops’ means that
Antawan should never have spent any time trying to develop his
invention? Justify your answer.
EDBUS_C07.QXD 16/7/09 11:23 Page 3
1.2 Showing enterprise
35
What will I learn?

What is enterprise? Why does enterprise involve taking risks, showing initiative and being willing to
undertake new ventures? What is the difference between a good and a service?
Thinking creatively Why is thinking creatively important in developing both competitive advantage
and a new business? What is the role of lateral thinking and deliberate creativity in developing new
business ideas?
What questions do entrepreneurs ask? What are the important questions to ask when coming up
with new business ideas? Why should entrepreneurs look beyond the obvious? Why are questions
such as 'What if?', 'Why?' and 'Why not?' important. Why do entrepreneurs need to judge the value of
outcomes?
Invention and innovation - generating new business ideas How do new business ideas come
about? What is the difference between innovation and invention? How does the process of innovation
bring a new idea to the market? How can patents and copyright help entrepreneurs protect their ideas?
Taking a calculated risk What is the principle of taking a calculated risk? Why is weighing up the
risks and rewards of a new business idea an important part of the process of judging outcomes and the
viability of a start-up? Why are mistakes an important part of the process of learning to succeed?
Other important enterprise skills What is the importance of planning, thinking ahead, seeing
opportunities and having drive and determination to enterprise skills? How can an entrepreneur make
connections? What is the role of mindmaps in collecting thoughts and seeing opportunities?
questions.
EDBUS_C07.QXD 16/7/09 11:23 Page 4
7 What is enterprise?
Case Study
36 Dean Fellows is a serial entrepreneur. He is
someone who has set up a number of different
businesses in his lifetime. He started off working
as a cook in a restaurant but soon got bored with
that. He quit and spent two years setting up and
running a window cleaning business. This did not
pay enough, so he set up another business cleaning
people’s houses. After five years, he sold the
business and moved into property development.
He brought run down houses, renovated them and
then either sold them at a profit or rented them
out. The latest property he bought had a fish and
chip shop on the ground floor and several flats
upstairs. Within six months, the man who rented
the fish and chip shop premises handed in notice
that he was quitting. Dean could not find anyone
to take over the fish and chip shop. So he decided
to run it himself using his restaurant experience
until he could find a tenant. Twelve months on,
Dean is still running the shop. But he has got an
idea for a new business: the manufacture of a new
type of chip fryer.
Enterprise
Objectives Dean Fellows is an entrepreneur. This means that he owns and runs his own
G Appreciate that enterprise involves business and that he is a risk taker. He has already set up three enterprises or
taking risks, showing initiative, and a businesses. He is now thinking of setting up a fourth business. Dean has clearly
willingness to undertake new shown enterprise skills. These involve taking risks, showing initiative and having
ventures. a willingness to undertake new ventures.
G Understand the difference between
providing goods or a service. Risk taking Being enterprising has an element of risk. There are so many
things that can go wrong when setting up a business. Dean, for example, found
he was not making as much money as he wanted from his window cleaning
business. However, worse things could have happened. He might have fallen off
a ladder and injured himself. Running a fish and chip shop also could lead to
physical injury. In his property business, Dean could find that he loses money
Entrepreneur – a person who owns and rather than gains it. If the price of property goes down, property developers can
runs their own business and takes risks. make a loss. Dean’s idea for the manufacture of a new type of chip fryer is also
Enterprises – another word for businesses. risky. What if no one wants to buy the fryer? What if he finds his idea does not
work when he starts making sample products?
Enterprise – a willingness by an individual
or a business to take risks, show initiative
and undertake new ventures. Showing initiative Being enterprising involves showing initiative. Initiative
means making the first move and making things happen. Dean, for example,
Risk – the chance of damage or loss
occurring as a result of making a
showed initiative when he left his job in the factory and set up his own window
decision. cleaning business. He is showing initiative in developing a new chip fryer. Dean
has shown throughout his working life that he is someone who makes things
happen.
EDBUS_C07.QXD 16/7/09 11:23 Page 5
A willingness to undertake new ventures A willingness to undertake new

ventures is part of being enterprising. Dean has a history of undertaking new
ventures. He is always on the look out for new business opportunities. Moving
from working in a factory to cleaning houses to running a fish and chip shop all
show his ability to take on new challenges. Being willing to take on something
new does not mean that you are always successful. For example, Dean’s window
cleaning business was not successful enough for him to stay with the business.
37
His chip fryer might never get to the stage where it is available for sale to
customers. However, Dean is enterprising because he has the courage to quit
what is less successful and start something new.
Goods and services

When Dean worked in a factory, he made parts for motor cars. These are
classified as goods. A good is something tangible and physical. It can be seen
and touched. Car parts, kitchen fryers, carpets and lamp posts are all goods.
Most of Dean’s working life, though, has been spent providing services.
Services are products that are intangible. They cannot be touched. Cleaning
windows or houses is a service. So too is renting out property or offering take-
away meals like fish and chips. When customers buy fish and chips, they buy
physical products – the fish, the chips and the wrapping paper for example. But
Dean does not make the raw fish, the chips or the wrapping paper, all of which
are examples of goods. His fish comes from a supplier. He buys frozen chips
from a food manufacturer. The paper comes from a paper manufacturing
company. Dean converts these ingredients into a ready meal waiting to be eaten.
What Dean provides is a service to his customers.
Take-away outlets like fish and chip shops or a McDonald’s are therefore part of
the service sector of the economy. So too are restaurants. In fact, most of what is
produced today in the UK is services. Over 70 per cent of all the economic
activity in the UK is classified as services. This includes education, health care,
rubbish collection, shops, banking, public transport and tourism.
Figure 1 – Enterprise skills

Watch Out!
The word ‘enterprise’ can be used as

another name for a business. But
Showing
Risk taking ‘enterprise’ has another meaning. It
initiative describes the willingness of an individual
or organisation to take risks, show
initiative and undertake new ventures. So
enterprise should be a characteristic of all
Enterprise entrepreneurs.
skills
Goods – physical, tangible products like a

Willingness to undertake car, a pair of scissors or a television set.
new ventures Services – non-physical, intangible

products like a taxi journey, a haircut or a
television programme.
EDBUS_C07.QXD 16/7/09 11:23 Page 6
Test yourself
1. Which three of the following are most likely to be 3. Lewis Hunting runs a hairdressers. Which one of the
examples of being enterprising? following is correct? Select one answer.
Select three answers. A A haircut is an example of a service
B There are no risks in running a hairdressing business
38 A Being made redundant
C A bottle of shampoo is an example of a service
B Carrying out an order from your boss
D Lewis Hunting never needs to show initiative in
C Taking risks
running his business
D Taking the initiative
E Taking your summer holiday at a time convenient for
your employer
F Undertaking a new venture
G Being told that your job will change
2. Which three of the following are examples of services?
Select three of the following.
A A school desk
B A train carriage
C A tonne of coal
D A train journey
E A knife and fork
F Menu advice in a restaurant
G Education in a state school
9. Select the items in the list below that would be considered

to be the four most important qualities and skills found in an
entrepreneur. (4) (May 2008) Many students (47%) gained good (ie 2-3) marks on this
(a) Ability to speak in public question.
(b) Determination These answers identified two or three qualities. They may
(c) Aggressiveness have failed to pick up full marks by suggesting that the ability
(d) Decisiveness to speak in public or aggressiveness were more important.
(e) Willingness to take risks Although they might be useful in some circumstances, they
(f) Showing leadership are not likely to be as important as the four factors stated as
(g) Having rich parents correct. A non-aggressive person might also be a successful
(h) Being careful to avoid risk entrepreneur, for instance.
Answer B, D, E and F
Most students (52%) gained very good (ie 4) marks on this

question.
Very few students (1%) scored poorly (ie 0-1) on this question. These answers will have identified the four most important
These answers identified no qualities or just one correct qualities correctly.
quality, such as determination which is an obvious quality.
EDBUS_C07.QXD 16/7/09 11:23 Page 7
Over to you
39
Charlotte Yelland had always loved horses. As a child, she had saddles and riding hats. The business would be built up
done lots of riding and spent as much time as possible at the gradually over a five year period to reduce the risk of failure.
stables where she kept the horse her parents had bought for Charlotte had been advised that very quick expansions often
her. As an adult, Charlotte had continued to ride even though failed. Money to fund the expansion often ran out. Also, the
she could no longer afford to keep a horse of her own. owner could find themselves out of their depth too quickly,
Her break came when she inherited over half a million without enough time to sort out all the inevitable problems that
pounds. A local stables was up for sale and Charlotte decided come with an expanding business. Charlotte, though, hoped
to buy it. The stables were not making much money and so it that she could build up the business more quickly than the five
was a risky venture for Charlotte. However, she thought she years proposed in her business plan.
could turn the business round and establish a successful
enterprise. 1. Explain why a horse riding hat is an example of a good, but a
In her business plan, Charlotte outlined how she would lesson at a horse riding school is an example of a service. (6)
transform the business. Currently, the main source of income 2. Explain three different ways in which Charlotte is showing
was individual horse owners paying to have their horses kept at enterprise. (9)
the stables. Charlotte wanted to open a riding school, offering 3. Would it be better if she expanded her business much more
riding lessons particularly to children. She also wanted to open quickly than the five years she has put in her business plan?
a shop selling everything a horse rider might need such as Justify your answer. (6)
8 Thinking creatively
Case Study
Megan Rider has done a lot of jobs in her life. Currently she works in a bag
40 manufacturing business with her husband, Tyler Rider. They wanted to launch
their own business and are looking around for a business idea. They were
aware that many shops and supermarkets need bags for the goods they sell.
They need to think creatively.
Objectives
Understand that having creative ideas
is a key aspect to setting up a new
The importance of
business and developing a competitive creative thinking for
advantage. entrepreneurs
Appreciate that sometimes new Many new businesses are not based on creative thinking. Their business idea is a
business ideas come about through ‘Me too’ approach – copying someone else’s idea. Opening a local corner grocery
lateral thinking. shop, for example, does not require much creative thinking. There are thousands
Understand the role of deliberate of such shops around the country. Copying what others do is enough to create a
creativity in developing new business successful business. Franchising is also based on the idea of copying. A franchisee
ideas. copies the formula of the franchise company to create a successful business.
Thinking creatively means coming up with an idea that is unique and did not
exist before. Developing a unique idea can give a new business a competitive
advantage. Having a competitive advantage means that it is not easy for a
Watch Out! competitor to copy an idea, or imitate a product or a method of working. Having
a competitive advantage means that a business is better in at least one way than
Gaining a competitive advantage does not
mean that a business has to be better at other businesses with which it is in direct competition.
everything compared to other businesses. There are many examples of competitive advantage. For example, a business
Being better at one thing is enough for may:
success. For some businesses, simply • have a better product than other businesses;
being the only firm in a local area is enough • have a better way of producing what it makes which results in lower costs or
to give it a competitive advantage. Take a better quality;
small local corner grocery shop. It can • give its customers better service;
survive if it offers a service to people living • be better than its rivals at selling its products to customers;
around the shop despite the fact that Tesco • come up with an idea or product that is unique;
or Asda offers a much bigger range and
• use some technology or technique that makes its product or service unique.
has lower prices.
Megan and Tyler could create a ‘Me too’ idea based on the business for which
they currently work. However, it will be tough competing with an existing
business in the market. So they want to find something new that they can do
with their new business. They want to create a competitive advantage.
Thinking creatively (or creative thinking) –
coming up with new and unique ideas. Deliberate creativity
People think creatively all the time. They come up with new ways of doing
Competitive advantage – an advantage a
things. They respond to new situations. However, most of this type of creative
business has that enables it to perform
better than its rivals in the market and thinking happens accidentally. There is often no method behind how the ideas
which is both distinctive and defensible. are generated. The ideas that come out are often not followed up or used in an
Deliberate creativity – the intentional
organised way.
creation of new ideas through recognised Deliberate creativity uses a range of techniques to stimulate thinking and the
and accepted techniques. production of new ideas. Deliberate creativity involves the use of different
methods of thinking. By going through different thought processes, new ideas
emerge.
Lateral thinking
To come up with a business idea, Megan and Tyler have gone on a course provided
by their local Business Link. This is an organisation paid for by government that
promotes business and in particular the setting up of small businesses. On the
course, Megan and Tyler are introduced to a number of different techniques in a
deliberate attempt to get them to come up with a business idea.
In most situations, people mainly use one way of thinking. Some people tend to
41
be very logical. They think things through step by step. Other people tend to base
their decisions on emotions and feelings. Others have a gut reaction as to what to
do. They base their decisions on their instincts. Whichever way of thinking is used, Figure 1
the ideas that come up are fairly predictable.
On the Business Link course, Megan and Tyler were introduced to the idea of
lateral thinking. This is about producing ideas that people would not come up Bag
with during their normal day-to-day lives. It is about creating new and unexpected Plastic Tip
ideas. Sometimes it is described as ‘thinking out of the box’. Black Lorry
Megan and Tyler need to engage in lateral thinking if they want to come up with Dustbin Supermarket
a new business idea that will give them a competitive advantage. There is a variety Cheap Cupboard
of techniques that promote lateral thinking including blue skies thinking and Six On a roll Dirty
Thinking Hats. Refuse Argument
Recycling Strong
Fancydress Ripped
Blue skies thinking
Christmas presents Run out
One commonly used technique in deliberate creative thinking is blue skies
thinking. There are many ways of blue skies thinking. One way is to start with
an idea or an object or a question. Megan and Tyler began their blue skies
thinking with a plastic bag they brought home from a supermarket. They put the
bag on their kitchen table and then started the next stage of blue skies thinking.
They both wrote down anything that came into their minds as they looked at the
plastic bag. Figure 1 shows some of the ideas they came up with in 15 minutes.
With blue skies thinking, it is important to bring out as many thoughts as
possible. The thoughts or ideas should not be analysed in any way at this stage.
No thoughts are ‘unimportant’ or ‘silly’ or ‘not worth having’. At this stage, the Watch Out!
most important thing is to have as many ideas as possible. Lateral thinking can be vital in overcoming
The blue skies thinking should stop once participants have run out of ideas. At problems. However, the solution to a
this stage, the words and ideas that have been written down can be analysed. problem is often fairly obvious and does
Which of these ideas is not important? Which could provide an answer to a not need any lateral thinking to solve it. If
problem? What needs to be done next to take an idea forward? items remain unsold in a shop for over a
Blue skies thinking has helped Megan and Tyler come up with a business idea. year, for example, it is almost certainly
Their idea is to produce a range of plastic bin liners for all the different types of true that the shop has stock problems.
dustbins and recycling bins that households now have to use. The obvious solution is to get rid of this
stock and use the space to sell items that
Six Thinking Hats are selling more quickly.
Blue skies thinking involves putting all ideas down on paper. ‘Six Thinking Hats’
is a technique that helps organise and focus those ideas.
There are many different ways of looking at a problem or issue. ‘Six Thinking
Hats’ takes six different types or styles of thinking. Groups using this technique
have to put on the ‘hats’ one at a time to think about a problem. The six hats are
white, red, black, yellow, green and blue. Megan and Tyler used the Six Thinking
Hats to explore their business idea about plastic bin liners. Lateral thinking – thinking differently to
try and find new and unexpected ideas.
White Hat White hat thinking is about facts. What are the facts about the Blue skies thinking – a technique of
problem or issue? Megan and Tyler, for example, put down on paper that there creative thinking where participants are
are around 25 million households in the UK. Each on average has two bins that encouraged to think of as many ideas as
are collected at least once every two weeks. If every household used bin liners, possible about an issue or a problem.
that would be a minimum of 1.25 billion bin liners used per year. If just 1 in every
100 households used bin liners, this would be 12.5 million bin liners a year. The
cost of a machine to make bin liners would be £50,000. Three Green Hat Green Hat thinking is creative thinking. It is
quarters of all bin liners sold currently in the UK are sold about lateral thinking. If there is a problem, how can we get
through the major supermarkets. round it? How can we maximise the benefits? For example,
Megan and Tyler thought about the problem of the
Red Hat Red Hat thinking is about emotions and gut feelings. supermarkets. If the supermarkets will not buy their
Tyler felt excited about the idea of setting up his own business. products, they could sell them through small local shops or
He thought the bin liner idea would be really attractive to over the Internet. To persuade customers to buy the liners,
42
customers. Offering different coloured bin liners would make they could emphasise problems of hygiene and germs.
the product seem ‘cool’. Megan was worried about the money
they would need to invest to set up the business. Her gut Blue Hat Blue Hat thinking is ‘thinking about thinking’.
instinct was that the major supermarket chains would refuse to Any one who is organising and managing the thinking
buy plastic bags from a small start-up business. process, like a group leader or a group facilitator, is engaged
in Blue Hat thinking. Everyone in a group is Blue Hat
Black Hat Black Hat thinking is about the problems and thinking at the start when they think about what they want
difficulties of the idea. It is about looking at things to achieve. If everyone at the end thinks about what has
pessimistically – at what can go wrong. For example, Megan been learnt, that too is Blue Hat thinking. Megan and Tyler
and Tyler both put down that they could lose thousands of put on Blue Hats after they had put on all the other Hats.
pounds if the business failed. Customers would not want to buy They looked at all the ideas they had come up with and
bin liners that would simply be thrown away. Again, the idea decided not to go ahead with the bin liner idea. They were
that supermarkets would not buy the product was put down. very worried that the product would not prove popular with
customers. They also thought the risk that supermarkets
Yellow Hat Yellow Hat thinking is about the positive aspects would not stock their product was too high.
of an idea. It is about looking at things optimistically. What
can go right? What are the opportunities? What are the For Megan and Tyler, the outcome of using the Six Thinking
potential benefits and value of the idea? Megan and Tyler Hats technique was that they rejected their business idea.
thought about how good it would be to be independent and They would have to come up with a better idea if they
run their own business. They thought about the sales and the wanted to achieve their goal of setting up their own
profits they would make. successful business.
24. Which two of the following best describe the process of How students answered
Deliberate Creativity? (2) (May 2008)
(a) A management day spent paintballing, which helps
build teamwork Some students (16%) scored poorly (ie 0) on this question.
(b) Where a business advertises for someone who is highly These answers did not identify either of the best descriptions
creative to fill a senior post of Deliberate Creativity – the intentional creation of new ideas
(c) A process that provides a structure for encouraging through following a deliberate process. They may have
creativity throughout a business suggested that a management day spent paintballing was an
(d) A period of three days a week put aside to focus purely answer, which is more to do with motivational techniques than
on creativity by the senior management Deliberate Creativity.
(e) A means of involving and encouraging staff at all levels
to think about changes and improvements
(f) A process that requires the hiring of professional
creative thinkers to act as consultants for the business Some students (40%) scored well (ie 1) on this question.
(g) A situation in a business where someone has a flash of These answers identified just one of the best descriptions of
inspiration about a new product Deliberate Creativity.
Answer C and E
Most students (44%) gained very good (ie 2) marks on this

question.
These answers identified both of the best descriptions of
Deliberate Creativity.
Test yourself
1. Jacob attends a course on setting up a business. On the 3. Courtney Farnham is investigating setting up in business
course, he participates in a blue skies thinking session. as a dance teacher and is thinking particularly of how she
Which one of the following is most likely to be correct? could attract pupils to take up her dance classes. Which
Select one answer. one of the following is most likely for her to be an example
Blue skies thinking of lateral thinking about attracting customers? Select one 43
answer.
A will put him at a competitive disadvantage when he
starts his own business A She will have to give up her present job with a salary
B is an example of creative thinking of £20,000 a year
C is the opposite of lateral thinking B It would be a good idea for her to take out insurance
D discourages people from thinking of new ideas in case of accidents to her pupils
C She should get advice from experts on how to set up
2. Alfie Tarrach is setting up a sandwich making business.
a business
Which one of the following is most likely to give his
D She could give singing lessons for pupils that wanted
business a competitive advantage? Select one answer.
to perform in musicals
A High quality locally sourced ingredients
B High borrowing costs
C Shorter opening hours than competitors
D Expensive rent on his premises
Over to you
Lily Ashbourne is at university studying Graphic Design. She is 4. Do you think that Lily Ashbourne could gain a competitive
in her final year and thinking about her future. Ideally, she advantage over the major producers of greetings cards in
would like to set up her own business and has come up with the the UK? Justify your answer. (9)
idea of designing greetings cards, such as birthday cards and
wedding cards, and cards that can be included with presents.
She has already used blue skies thinking to consider possible
options. For example, would it be best to get a job with an
established card company? Would it be possible to design
cards but get them printed by someone else? Should she print
them herself? What about having unique hand painted cards
that would be sold at a high price? How is she going to get her
cards to customers? Would it be best to sell them to shops or
set up a shop herself to sell her own designs?
Gaining a competitive advantage would be essential if she
were to be successful. How could she establish a competitive
advantage? One of her careers advisors suggested she should
go on a course about setting up in business. Whilst on the
course, she was taught to use the Six Thinking Hats technique.
When she put on the Red Hat, she felt passionately committed
to the idea of making greetings cards. However, putting on the
Black Hat made her realise just how many obstacles there were
in the way of setting up in business successfully. However, she
was convinced that, by using techniques which stimulated
creative thinking, she could overcome these problems.
1. Explain, using Lilly Ashbourne’s case, what is meant by ‘blue

skies thinking’. (3)
2. Explain, using Lilly Ashbourne’s case, what is meant by
‘lateral thinking’. (3)
3. Lily could sell cards herself or sell them through shops.
Which do you think could be best for Lily? Justify your
answer. (6)
EDBUS_C09.QXD 30/1/09 10:52 am Page 2
9 Questions to be asked
Case Study
44 Rachel Owen has worked as a sales manager for the past ten years
for a car hire company. Her salary is reasonable, but Rachel finds the
work boring. For the past twelve months, she has been thinking of
quitting to set up her own business, making and selling traditional
sweets, biscuits and cakes. What questions should she ask herself as
she explores and researches this change in her working life?
Questions
Objectives It is vitally important for
Appreciate the important questions to future entrepreneurs like
ask when coming up with new Rachel to ask themselves
business ideas such as ‘Why?’, ‘Why questions. Questions allow
not?’ and ‘What if?’. them to sort out issues and
Understand the concept of looking explore alternatives. It helps
beyond the obvious, asking ‘What if?’ them to get at what is best
and judging the value of outcomes. for the business. It also helps
them to see what should stay
the same and what should be
changed. Questions like
‘Why?’,‘Why not?’ and ‘What
if?’ are very important.
Why?
One important question that any entrepreneur should ask is ‘Why?’ Rachel asked
herself: ‘Why do I want to make this change?’ She thought carefully about the
answer. It was not because the money she earned in her present job was too low.
Like anybody, earning would be great, but money was not the issue. Nor was it
that she positively disliked her job. Her boss was nice and the people she worked
with were pleasant. The real answer was that she was bored. So her answer to
‘Why make the change?’ was ‘Because I want to do something more exciting even
Watch Out! if I earn less’.
With some questions, there is a single Why not?

definite answer. However, with many Another question entrepreneurs should ask themselves is: ‘Why not?’ An obvious
questions, there is a range of possible question for Rachel was: ‘Why not set up my own car rental business?’ She
answers, all of which could turn out to be
answered this question fairly quickly. First, she was not just bored with her job.
correct in the future. In your thinking, you
She was also bored with the whole idea of car rental. For example, she was being
need to show you understand this. Often it
told all the time by her company that customer service was of absolute importance.
is correct to say ‘This could happen’ and
incorrect to say ‘This will happen’. Even However, she could not find it in herself to be really concerned with whether a
better is to say how likely something is to customer had a ‘great experience’ when hiring one of her company’s cars.
happen. ‘This is very likely to be the So she asked herself: ‘Why not use my work skills to create some other business?’
outcome’ or ‘This could be an outcome but She went through her local Yellow Pages telephone directory and asked herself:
it is most unlikely’. ‘Why not start up a business like this?’. She kept crossing off the businesses.
Funeral Directors? No. Roofing contractors? No. Tree surgeons? No.
45
Rachel might ask ‘Where will she make her cakes and biscuits?’ and ‘What types will she make?’
What?
‘What?’ questions are important in setting up and running a business. Rachel had
not got anywhere with asking ‘Why not become a Funeral Director, roofing
contractor or tree surgeon?’ So she asked herself: ‘What do you want to do?’ She
went back to the why question of ‘Why do I want to quit my job?’ Her answer had
been: ‘Because I am bored’. So the obvious questions were: ‘What do you find
interesting? What are you passionate about?’
Rachel had always adored sweets and biscuits. As a child, she loved going to
the local shop to choose the sort of sweets that were kept in large bottles behind
the counter. She pestered her mother to help her make cakes and biscuits at
home. As an adult, she had delighted her young nieces and nephews by showing
them how to make cakes and biscuits. Recently on holiday, she had come across a
‘traditional sweet shop’ that she hoped would be full of the most wonderful, hand
made, sweets. However, when she went into the shop, she was disappointed. The
shop fittings were all traditional, but the sweets themselves were just modern,
mass manufactured products. Could this be her business idea, though? A
traditional sweet shop with hand made, traditional sweets, biscuits and cakes?
How? Where? When?

Rachel began extensive research into how she might turn this passion into a real
business. She asked “How?’,‘Where?’ and ‘When?’
• Where will I make them and where will I sell them?
• When could I start the business?
• Where can I get help and advice?
Then she went back to some ‘How?’ questions.
• How will I make the sweets?
• How will I decide what sweets, cakes and biscuits to make?
• How do I set up a business?
• How do I know whether there are enough people who want to buy my
products?
• How will I earn a profit from the business?
• How will I build up a customer base?
• How will I research my market?
What if? value of the loss would be £20,000 because this was her take
All entrepreneurs need to ask themselves the ‘What if?’ home pay. The likelihood that this would happen, she
question. Rachel had a large number of ‘What if?’ questions. estimated, was high. She had to admit there was at least a
• What if I leave my paid job and do not earn any money 50:50 chance of this.
from my new business for the first twelve months?
• What if my business loses money? Her decision
• What if my customers do not like my products? Her new business venture, Rachel realised, was high risk. So
46
• What if I run into problems with the law over food having asked lots of questions and done lots of research, she
hygiene or tax? decided she would be best to stay in her present job for the
• What if I fall ill? time being but start her business in her spare time. In the
• What will happen if the economy slows down? evenings and weekends, she would make her sweets and
Rachel realised that every time she made a decision about then sell them at local fairs and street markets. This way, she
what she might do, she needed to test this decision by asking could minimise the risk of failure and build up her expertise.
the ‘What if?’ question. What would happen if things did not After twelve months, she would review the whole operation
go according to plan? What could the worst case scenario? by asking a large number of searching questions. She would
Not only did she have to look beyond the obvious but she have information on aspects of the business, such as her
also had to assess the value and likelihood of any income and the time spent on the venture. Then she would
possible outcome. For example, if she left her job and did be in a position to know whether to develop the business
not earn any money from her business for the first year, the further or to close it.
Which one of the following is the most likely to create a Decide: You are left with A, B, C and D.
competitive advantage for a small business?
Go through these: Having the same product will not give a
A Having the best reputation for a high quality after-sales competitive advantage - so B is incorrect. Competitors, not
service the business, could have a competitive advantage in the
B Having the same product as rivals case of C as they will sell at lower prices which is more
C Selling at higher prices than those of competitors likely to attract customers. Lowering prices could be a form
of competitive advantage if it was not easy for rivals to
D Lowering prices to encourage additional sales
copy this, but in many cases it is, so D is not the most likely
E Selling no products in June reason.
Answer A
That leaves you with the correct answer of A. This will give
Technique guide: There is a number of choices available so a business a competitive advantage over all rivals.
first: Developing high quality customer service is not something
Think: What is competitive advantage? How does a business that can be easily copied and it is also distinctive, fulfilling
gain competitive advantage? one of the characteristics of competitive advantage.
Then: Dismiss the choices that are obviously wrong - that

would be E.
Test yourself
1. Ethan Blake is developing a new product for the market.
It is a software program that will allow a user instantly to
compare different results from different search engines
on the Internet. Which one of the following questions
should he ask himself if he wants to find out whether 47
there will be customers for his product? Select one
answer.
A How many programs will I sell if I charge £20 per
copy?
B What will be the costs of production?
C How much should I spend on advertising?
D Where might customers want their orders delivered?
2. Callum Fisher has decided to set up a shop selling
teenage fashion clothes. He is worried about whether
the business will be financially successful. Which one of
the following questions is the most important to ask
himself if he wants to research this more fully? Select one 3. Connor Reely is thinking of setting up a restaurant. He
answer. wants his restaurant to offer customers something
different from other restaurants in his local area. Which
A What if I spend my money on going on holiday to
one of the following questions is he likely to ask himself
Turkey rather than to Spain?
when researching this difference? Select one answer.
B What if the bank charges a very high rate of interest
on the money I will borrow? A Why not get a bank loan?
C What if I have to get up half an hour earlier to get to B Why not do the laundry on the premises rather than
work on time? sending it out to professional cleaners?
D What if I get 10 applications for the job of sales C Why not buy an estate car rather than a van for the
assistant in the shop? business?
D Why not offer 100% organic food on the menu?
Over to you
Ling Tan is thinking of setting up a business producing luxury this stage about the finances of her future business. (1)
leather wedding albums. The albums would be sold mainly to (b) Explain why she should ask this question. (3)
professional wedding photographers, who in turn would sell 4. Which do you think are the two most important questions that
them to their clients. Ling Tan should be asking herself? Justify your answer. (6)
The production of the albums is a highly specialised, skilled
task. The outside of the wedding album is made of the finest
leather. Ling Tan intends initially to do this work herself. As the
business becomes more established and orders rise, she hopes
to be able to hire and train up another worker to share in the
production work.
Her business premises at the start will be her double garage.
However, she expects to have to rent larger premises if the
business becomes established and successful.
1. (a) Suggest one question that Ling Tan should be asking at

this stage about her possible customers. (1)
(b) Explain why she should ask this question. (3)
this stage about the workers in her future business. (1)
(b) Explain why she should ask this question. (3)
10 Invention and innovation

Case Study
48 Ethan and Lucy Mitson have been keen board game players
since childhood. They loved games like Monopoly, Cluedo and
Connect4. Today they are in their twenties and continue to play
board games together, with friends and with their son. Both
have got a full time job. Over the past year, though, in their
spare time, they have been developing a new board game. They
want to bring this game to market. How can they do this?
How new
Objectives business ideas come about
G Appreciate how new business ideas Every year, millions of new business ideas are developed worldwide. In the past,
come about. successful business ideas developed by small start-up businesses have included
G Understand the difference between Coca-Cola (first sold in 1886), Kellogg's Cornflakes (first sold in 1906), the Dyson
innovation and invention and vacuum cleaner (first sold in 1986) and Innocent Smoothies (first sold in 1998).
appreciate how innovation means The Nintendo Wii (first sold in 2006) was developed by Nintendo, already a large
bringing a new idea to the market. company.
G Explain the steps an entrepreneur can New business ideas come about in different ways.
take to protect their ideas through • Some business ideas are developed by people who use a product. Ethan and
patents and copyright. Lucy, for example, loved playing board games. It was a natural step for them to
develop a new board game. James Dyson developed his revolutionary bagless
vacuum cleaner after using an ordinary inefficient vacuum cleaner to clean his
house in 1978.
• Some business ideas are developed by people who already have a good
understanding of their product. They may work for a large company but
develop a new idea on their own and start up a small business.
• Many business ideas are developed by research departments in medium to
large companies. The Wii, for example, was developed by the Japanese
company Nintendo. It deliberately set out to develop a new product that would
replace the Nintendo GameCube, a games console which was introduced in
2000.
Watch Out!
Invention and innovation
It is very easy to confuse invention with Ethan and Lucy want to see their new game sold to customers. There are two
innovation. Invention is the process of stages to this.
discovering new ideas. Innovation is
transforming an idea into a real product Invention The discovery of potential new products and new ways of making
which can be sold to customers.
products is called invention. Ethan and Lucy invented their board game when
they came up with the rules of the game and the layout of the board. Kellogg's
Cornflakes was invented in 1894, twelve years before the first packet of Kellogg's
Cornflakes were sold to the general public. The idea of a bagless vacuum cleaner
came to James Dyson in 1978, eight years before the first cleaner was sold to the
general public. Over the past one hundred years, there have been a number of
Invention – the discovery of new processes very important inventions like the television, the mobile phone, nuclear power
and potential new products, typically after a stations and the aeroplane. However, there have been millions of other much
period of research. smaller inventions. In the world of board games, some of the big inventions have
been Monopoly, Scrabble and Cluedo. Each year, though, thousands of new board
games are invented by people like Ethan and Lucy and by other toy manufacturers.
EDBUS_C10.QXD 6/4/12 12:42 PM Page 3
Innovation The process of transforming an invention into a product that

customers will buy is called innovation. It is the commercial exploitation of an
invention. For Ethan and Lucy, it is the process of transforming their idea into
something that can be sold in shops and over the Internet. Ethan and Lucy have a
number of different ways in which they could do this. One would be to sell their
invention to a large toy manufacturer. The toy manufacturer would then organise
the production and selling of the game. Alternatively, they could set up their own
49
business to produce and sell the game. This would be a more difficult option.
They would have to organise the manufacture of all the parts of the game from the
box, to the board, to the pieces on the board and the printed instructions about
how to play the game. They would then have to find ways of selling this to
Watch Out!
customers. Could they get enough sales simply by advertising over the Internet?
Do they stand any chance of selling the game to big retailers such as WH Smith, Taking out a patent or getting copyright
Argos or Toys R Us? does not stop another business from
copying the idea. When this happens,
small businesses have to take the other
Risk
business to court to sue for damages.
Invention and innovation are very risky. Many inventions never get to the point
Going to court is very expensive and it is
where an actual product is sold. Innovation also often leads to failure. For
not always easy to prove that copying has
example, in the 1990s, 'virtual reality' seemed to be an exciting technology. People taken place. Many small businesses feel
would be able to put on a headset that would make a game or a situation seem they have been cheated out of their
totally real. However, in practice, the headsets were too heavy and caused eye inventions because much larger
strain in those that used them a lot. Innovation was abandoned. businesses have copied them without
making any payment.
Patents and copyright
The risk with any invention is that someone will copy it. There is no point in a
business spending time and money developing something new if a competitor can
steal the idea. To prevent this from happening, businesses can apply for patents
and copyrights to protect their business ideas. Businesses can also register a
brand, trade name or trade mark which prevents others from using them. Watch Out!
Patents Inventors can gain protection through patents. Anyone copying a Copyright is a very complex area.
patented idea can be taken to court and sued for damages. In the UK, patents are Developments in technology such as the
given for twenty years. Patents must be registered with the Intellectual Property Internet have made copyright protection
more difficult to enforce. Illegal copying
Office. Patents can also be registered internationally although this is expensive.
of DVDs and computer programs is a
Patents are given for products or production processes. Patents last 20 years from
multi-billion pound industry world wide.
when they were first granted.
Copyright This is given for intellectual property rights such as films, music and
books. Copyright gives the right to produce, control and copy the work solely to
the individual or company that produced the work originally. If others copy such
material they can also be taken to court and sued. Ethan and Lucy registered the
rules of their new game with the Intellectual Property Office. Copyright protection Innovation - the process of transforming
inventions into products that can be sold
lasts longer than for patents. Authors of books, for example, have copyright over
to customers.
the book during their lifetime and for 70 years after they are dead. If Ethan and
Lucy's board game is as successful as Scrabble or Monopoly, their children and Patent - right of ownership of an
invention or process when it is registered
grandchildren will still be earning money from the game long after Ethan and Lucy
with the government.
have died.
Copyright - legal ownership of material
such as books, music and films which
Trademarks A Trademark is the name of a product or a business that cannot be
prevents these being copied by others.
copied. For example, the name 'Coca-Cola' is registered as a trademark. Coca-
Cola can sue any business which tries to sell any product under the Coca-Cola Trademarks - the symbol, sign, or other
features of a product or business that
name. 'Monopoly', 'Scrabble' and 'Cluedo' are all trademarks of board games.
can be protected in law.
Ethan and Lucy therefore could not give these names to their board game. They
had to come up with a name that no other board game had been given.
Ethan and Lucy have to be very careful when it comes to

patents and copyright. First, they have to make sure their Test yourself
idea is original and that no one else owns the copyright.
Second, they have to make sure their idea is properly 1. Jeff Briggs, an entrepreneur. spends £10,000 taking a
patented and copyrighted. Third, they have to make sure recipe for a new chocolate cake through manufacture of
that no one steals their idea. As a small business, they are the product to first sales to customers. This process
very vulnerable to theft of intellectual property. Big would be an example of
50
businesses know that it is very expensive for a small business A innovation
to take them to court. James Dyson, for example, had to B a patent
fight a number of court battles to protect the patents on his C copyright
range of vacuum cleaners because much larger companies D branding
copied his ideas. Select one answer.
2. A small business has developed a new type of product.
It can best legally protect its discovery by
A more new inventions
B innovation
C developing a brand
D taking out a patent
Select one answer.
3. Three musicians have got together to form a group.
They compose some original songs. Their songs can
legally be protected through
A patents
B copyright
C innovation
D invention
Select one answer.
Books and films have copyright

Over to you
51
Matthew and Claire Wyon own and run Flyte Ltd, a company The company has received over £100,000 in funding from
which designs, assembles, markets and sells dance shoes, investors to bring the new ballet shoe to market.
clothing and accessories. Matthew Wyon is a lecturer at
Wolverhampton University in the School of Sport, Performing Source: adapted from the Express & Star, 20.10.2008.
Arts and Leisure. Thanks to him, the university is now a major
contributor to dance science research in the UK.
1. Using Flyte Ltd as an example, explain what is meant by
His company has used this research, and advances in the
(a) 'invention' and (b) innovation. (6)
sports shoe industry, to develop a new type of ballet shoe. The
shoe lasts longer than traditional ballet shoes. It improves the 2. Define the term patent and explain how it can help Flyte Ltd
balance of the dancer. It also provides much better shock protect its new ballet shoe. (3)
absorption when a dancer is jumping. Matthew and Claire have 3. Innovation is very expensive. Do you think that Flyte Ltd
designed the shoe with the aim of reducing the number of foot should continue to innovate? Justify your answer. (6)
and ankle injuries that are so common amongst ballet dancers.
A manufacturer of sports equipment has invented a machine Good Defines invention as discovering new products or
that can help people exercise whist sitting at their desks at new ways of making products (1) and innovation as the
work. process of transforming an invention into a product that
(a) What is meant by the term invention? (1) customers will buy (1) and that has commercial potential (1).
(b) Explain the difference between invention and innovation
using the example of the sports equipment manufacturer. (3) Excellent Defines invention as discovering new
products or new ways of making products (1) and that
Think: What is invention? What is innovation? How might innovation is the process of transforming an invention into a
invention and innovation apply to a manufacturer of sports product that customers will buy (1) and that has
equipment? commercial potential (1). The sports manufacturer could
create the new exercise equipment but it will only be
Basic Defines the term invention only. (1) innovation if it can be sold to people sitting at desks who
want to exercise. (1)
11 Taking a calculated risk

Case Study
52 Darnell and Asia Everett were primary school teachers,
but struggled to find a suitable nursery for their children.
This gave them their first business idea. They got
together with a group of others mums and dads, taking
turns to look after each others' children. Within twelve
months, the group was looking after other children too,
but charging their parents a fee. Over time, members of
the group dropped out as their children got older.
Darnell and Asia found themselves more and more in
control of this venture, until finally they took complete
control. After six years, and having built up a successful
nursery, they sold it and moved into selling nursery
equipment to other nurseries. This proved disappointing
because they couldn't sell enough equipment to make a
reasonable profit. So they gave up and moved into
selling children's clothes.
Taking a calculated risk

Objectives Darnell and Asia developed their first nursery business without very much
● Understand the principle of taking a planning. However, once the nursery began charging for children to be looked
calculated risk. after, they were legally forced to do risk assessments. For example, they had to
● Understand that weighing up the risks estimate the risks involved in different activities. If the children did some cookery,
and the rewards of a new business what could be the dangers for them? If they went outside to play, what harm
idea is an important part of the could they suffer and how likely was this?
process of judging outcome viability of Calculated risk is about putting a numerical value or probability on the risk.
a start-up. For example, what is the risk of a child getting burned from a cooking activity?
● Appreciate that seeing mistakes is If a 2 year old child is allowed to use a cooker, the risk is very high: this could
part of the process of learning to 50:50 or 50 per cent on any one occasion. If the cooker is kept in a separate
succeed. room from the children and the children are not allowed into the room, the risk
is almost zero or 0 per cent.
Risks and rewards of a new business

Darnell and Asia were prepared to take calculated risks. When they set up their
next business, the nursery equipment business, they were very organised. Part of
their preparation was to write a business plan. This was a document that outlined
all aspects of the future business. In their business plan, they carefully weighed up
the downsides as well as the upsides of the nursery equipment business.
Calculated risk - the probability of a Downsides

negative event occurring. The downsides are what can go wrong. One possible downside for Darnell and
Downsides - the disadvantages of a course Asia was that they would not get enough customers for the business to make a
of action, including what can go wrong. reasonable profit. Another downside was that the equipment bought from
Upsides - the advantages of a course of manufacturers and sold to customers might be faulty, leading to angry customers
action, including what can go right. and lost sales. The major risk was that the business could fail. Darnell and Asia
had to think about what they would lose if it did. They had to think about how
much money they might lose in the venture and whether any personal
possessions might be taken to pay for debts. Darnell and Asia were able to put a
figure on what they might lose if things did go wrong.
Upsides
Upsides are what can go right in a business. One possible upside for Darnell and
Asia was that they would sell lots of equipment and earn lots of money. Another
upside of large sales would be that they could get the equipment more cheaply from
manufacturers. By buying in bulk, they could negotiate cheaper prices from suppliers. 53
In their business plan they were able to prepare a forecast of possible profits in the
future. This forecast was based on the market research that they had carried out.
Again, Darnell and Asia were able to put a figure on the reward to make a
comparison with the risks. Watch Out!
In their business plan, Darnell and Asia tried to assess the chances of the upsides
and downsides happening. They judged that the risk of equipment being faulty was Estimating risk is often very difficult
small. This risk was perhaps 1 in 20 or 5 per cent. On the other hand, they estimated particularly for a small start-up business.
More established businesses have some
that the chances of the business selling £60,000 worth of equipment in its first year
understanding of how frequently problems
were high at 3 to 1, or 75 per cent. Overall, they concluded that the chances of
occur. A small start-up business has no
making more reward from selling nursery equipment was greater than the money history by which to judge these things.
they were making from running the current nursery business. So they took the This is one of the reasons why businesses
calculated risk of going ahead. that are started by people who have
already worked in the industry have a
better chance of survival than businesses
started by people with no knowledge.
17. Patrick Harris is the ‘Fishmanwithadifference’! Patrick retired Answer B and C

from a senior position in a bank when he was 60. After relaxing for How students answered
a few months he got restless and began to look for opportunities
to work. Most of the jobs he was offered were ones that did not
require much thinking or personal challenge. Patrick heard about
a franchise opportunity with Dining Room Solutions Ltd. This Very few students (3%) scored poorly (ie 0) on this question.
would involve him in travelling around the south west of England These answers did not identify either of the two most likely
delivering high quality fish and other types of gourmet foods to his ways in which risk could be reduced. They may have
customers’ homes. He gave the opportunity some thought before suggested that Patrick spending a day reading the Financial
asking himself ‘why not?’ Patrick’s business has been successful. Times might help him appreciate markets better, but this would
His experience of business and dealing with customers has been not necessarily reduce risk directly.
a key factor in this. Word of mouth has also been important in
building up his number of customers. Patrick was aware of some
of the risks that he was taking when he bought the franchise for
Dining Room Solutions Ltd. Some students (43%) scored well (ie 1) on this question.
Which two of the following are most likely to be ways in which These answers identified only one of most likely ways in which
Patrick could reduce the risks? (2) (May 2008) risk could be reduced.
(a) Talking to his friends at the bank about raising finance
(b) Planning ahead to meet customers' needs
(c) Patrick makes sure that he is punctual and gets to his
customers when he says he will Most students (54%) gained very good (ie 2) marks on this
(d) Patrick spends several hours a day reading the Financial Times question. These answers identified both of the most likely
(e) Patrick has ensured that he has more customers than he can ways in which risk could be reduced.
manage to make sure he can cope with a fall in demand
Making mistakes been a safe and risk-free alternative. So, learning from
Darnell and Asia 's nursery equipment business turned out to mistakes in the nursery equipment business, they moved on to
be disappointing. In the end, the downsides of the business setting up their new business, selling children's clothes. They
venture were greater than the upsides. They sold less calculated that this would be a more viable start-up than the
equipment and made less profit than they had calculated in nursery furniture business had been.
the business plan.
54 Darnell and Asia realised that they had made a
mistake in setting up this business. They had
hoped that the potential upsides of selling
nursery equipment would be far greater than
running a nursery. The nursery business had
been a safe, dependable business, even if
earnings from it had not been great. Many
entrepreneurs would have been happy to
continue making a steady income from the
business. The risks in running the business were
low and it was a safe way of making a living.
However, Darnell and Asia wanted more than
this. That is why they sold the nursery and
started up the nursery equipment business.
Darnell and Asia really enjoyed being their own
bosses and running a business. They did not
want to go back to teaching, which would have
In business, it is easy to make mistakes and be forced to close.
Watch Out!
It is often thought in the UK that someone who has failed in

business is likely to fail again if they start a new business. In
the USA, failure in one business is more likely to be seen as a
learning experience. If the entrepreneur starts another
business, they are more likely to succeed. People do learn
from their mistakes.
Test yourself
1. Dylan runs a restaurant. Which one of the following A A rise in the wages he pays to his staff
would be an example of a calculated risk for his business? B An increase in the cost of postage
Select one answer. C A rise in taxes on toys
D A fall in the price of wood
A There is a 50: 50 chance that he would lose over 10
per cent of his customers if he put up his prices by a 3. Alicia runs a hairdressing business. Which one of the
fifth following would be an example of a downside for her
B A customer might not like a new recipe business? Select one answer.
C The price of fish might go up by a quarter over the
A A fall in the prices she has to pay her suppliers for
next 12 months
hair care products
D The insurance bill for his business has increased by
B A rise in the wages she pays her staff
10 per cent
C A rise in the number of her customers
2. Javier runs a small business that makes wooden toys for D A fall in the rent she pays on her business premises
sale by mail order and over the Internet as well as to toy
shops and gift companies. Which one of the following
would be an example of an upside for his business?
Select one answer.
Over to you
55
Nicky Mullinder works for a small engineering company. In her would be a huge risk since there was no guarantee that she
spare time, she has come up with an idea for a new type of can would earn a single penny in her new business. In fact, there
opener. She is investigating whether or not to leave her job and was a good chance that the business would make a loss and
set up a business that would make and sell the new can opener. her new can opener would never become a popular product.
Nicky has gone on a course provided by the local Business
Link on setting up a business. Business Link is an organisation 1. Explain two possible upsides to Nicky's possible new
that provides help and advice for small businesses. Before she business. (6)
went on the course, she was very optimistic about this new 2. Explain two possible downsides to Nicky's possible new
business. She dreamed of selling millions of can openers a business. (6)
year. There would be a large factory making the can openers 3. Why should Nicky apply the principle of calculated risk to
with a number of people working for her. Money from sales her business proposition? (3)
would flow into the business and she would earn a large profit. 4. What are the most important things that Nicky now needs to
Then she would have enough money to buy a luxury car and a do if she is serious about setting up a business making can
large house. openers? Justify your answer. (6)
However, the course has made her much more pessimistic.
Making a few can openers by hand in her home would be very
different from making thousands every day in a factory. She had
done no market research on whether customers liked her
invention. She had no idea where the money would come from
to start up her business. Giving up her job with a steady salary
EDBUS_C12.QXD 23/9/09 13:09 Page 2
12 Important enterprise skills

Case Study
56 Max Holthan is 18. He is finishing his A levels,
but does not want to go on to university.
Whilst at school, he has already set up a
number of businesses. For example, at age 12,
he sold second hand comics. At 15, he was
cleaning windows near where he lived. Now
he wanted a new business idea that could
make him some serious money. This new
business would be washing and valeting cars.
Enterprise skills
Objectives There are many skills that an entrepreneur needs to be successful. Four of them
● Explain the importance of the are seeing opportunities, being an effective planner, thinking ahead and having
enterprise skills of planning, thinking drive and determination. Max Holthan had all these skills.
ahead, seeing opportunities and
having drive and determination. Seeing opportunities Max was very good at seeing opportunities. At secondary
● Appreciate that making connections is school, he had run a number of small businesses. If there was an opportunity to
an important part of setting up a make some money, Max would take it. He was also very good at comparing
successful business. opportunities. If an activity turned out not to be very profitable, he would drop it
● Recognise the role that mindmaps and do something else. His latest idea was to set up a business washing and
play in helping entrepreneurs to valeting cars. He saw the opportunity when he noticed that his local large
collect thoughts and see supermarket had long queues, at weekends especially, for its car wash facilities.
opportunities. On a trip to see family in another city, he also noticed a car valeting business on a
busy main road. There was a queue of cars with a small team of cleaners washing
and drying the cars at the front of the queue.
Effective planning Effective planning, as Max had discovered, was vital to the
success of any business. With little or no planning, a business might start well but
get into difficulties as soon as something went wrong. For the car valeting idea,
Max knew that he had almost no money to put into the business at the start.
He needed an idea that would earn him cash from the first day, out of which he
could later pay his bills. He had a friend whose father owned a disused garage site
on a business main road. The site was up for sale. However, the father said that
Max could use it to run a valeting business for a small rent payable at the end of
every month. Buying some sponges, buckets and cleaning products would not cost
very much. A few large signs advertising the service would be painted on large
boards from a salvage yard. The staff would be 16-18 year olds employed and paid
by the day. Prices would be low but so too would be costs. Having looked at the
competition in the local area, he felt that the main competitive advantage he
would have would be the location of the business on the main road. Too many car
valeting services were tucked away in side streets.
EDBUS_C12.QXD 23/9/09 13:09 Page 3
Thinking ahead Max was also very good at thinking ahead. His car valeting
business would have a short life. After all, the garage site could be sold tomorrow.
If it was successful, his friend's father might decide to put up the rent. There were
also all sorts of tax and insurance issues if he kept the business running too long.
His main aim was to save up enough money from the business to be able to start
another business. What that business would be, he had not decided yet. However,
most businesses need start-up money. So, thinking ahead, this business was a
stepping stone to another bigger and better business. 57
Drive and determination Max was a very driven person. He had very clear goals.
He knew that he wanted to own and run a large and successful business. To get to
this, he would have to work hard and remained focussed. Determination was Driven - in business, being very motivated.
important because there were always setbacks. He was determined to succeed. So
Mindmap - is a diagram that is used to
he knew that he had to overcome the obstacles that lay in his way. Sometimes, the
record words and ideas connected to a
best way was to tackle the problem head-on. Sometimes, it was best to go round central word or idea.
the obstacle. With his window cleaning business, for example, he found he was
working too many hours for too little pay. Max couldn't see a way round the
problem. So he closed the business and moved onto something else.
Making connections Watch Out!

One technique that is often useful when planning, thinking ahead and seeing
You do not need to be good at everything
opportunities is to use mindmaps. A mindmap is a diagram that records words and
to be a successful entrepreneur.
ideas. At the centre of the map, or page, is the main word or idea. Flowing out from
However, knowing your strengths and
this main word or idea is a number of key words and ideas linked to the main word. weaknesses is very helpful. Where you
Figure 1 shows a mindmap drawn up by Max. He wanted to think about his main have weaknesses, you can overcome
strengths. So in the centre he put the word 'strengths'. Then round that word, these by buying in help. So if you are not
connected by lines, he wrote down five main strengths - planning, thinking ahead, very good with numbers, you can hire an
seeing opportunities, drive, determination. After this, he looked at each strength accountant. If you are not very good at
and thought about what helped him to have that strength. For 'planning', he wrote dealing with customers, you can hire a
down the words 'methodical', 'hard working', 'desire to succeed' and 'past salesperson.
experience'.
Figure 1 – Mindmap for Max's strengths
desire to past
succeed experience
methodical hard working
Planning
realistic methodical
good gut instinct
good gut My
Thinking ahead Seeing opportunities
instinct strengths
risk taker
understand
where I am now Hard working
want to get
things right
hard working Drive Determination not easily

discouraged
appreciate want to do not

my own goals dynamic succeed let up
EDBUS_C12.QXD 23/9/09 13:09 Page 4
Mindmaps are sometimes used in blue skies thinking mind map can be helpful in getting an overview of all the
sessions. Participants are asked to think about words as they different things that businesses have to think about and to
are put down on a chart. It is a good way of recording the see where connections can be made. For example, Max was
results of blue skies thinking because otherwise ideas are able to see that being methodical and hard working were
disconnected and it is difficult to see what links the ideas. strengths of both his planning and his thinking ahead.
Mind maps can also be useful to help see the big picture. The
centre of the map might be the business but the ideas
58 flowing out of the map can all be separate but linked. A
Test yourself
Read the following and answer questions 1-3. 2. Which one of the following is most likely to be an example
of Mike Noake showing the enterprise skill of 'seeing
Mike Noake is a plumber and he has just set up his own
opportunities'? Select one answer.
business offering plumbing services mainly to households.
A Driving to the home of a customer to fix a leaking
1. Which one of the following is most likely to be an example
basin
of Mike Noake showing the enterprise skill of 'planning'?
B Contacting a local house builder about doing some
Select one answer.
work for him
A Answering the phone from a customer who has a C Changing his mobile phone contract
leaking pipe D Getting his van repaired after an accident
B Buying a pipe at a plumbers' merchant
C Calculating how much he needs to save to replace his
van in twelve months’ time
3. Which one of the following is most likely to be an example
D Drawing up the bill for a customer who has had his
of Mike Noake showing the enterprise skills of 'drive and
central heating fixed
determination'? Select one answer.
A Phoning a local house builder five times to see if he
has any work for him
B Filling his van up with petrol every week
C Arranging insurance for his business once a year
D Paying his tax on time every month
EDBUS_C12.QXD 23/9/09 13:09 Page 5
Build better answers
Which one of the following is the most likely use for a mind map Go through these:
by an entrepreneur?
A Is incorrect. An entrepreneur would make use of a cash flow
A To calculate cash flow in the next six months 59
forecast for this.
B To help staff to find their way round the business' premises
C To plan the costs of a new product.
B Is incorrect. This is clearly a wrong distracter that plays on
D To take to a bank to support a loan application
the word 'map'.
E To provide an overview of key factors that make the
business more competitive than its rivals C Is incorrect. A business would calculate this, perhaps with a
Answer E budget.
Technique guide: There is a number of choices available so D Is unlikely. A business plan would be more suitable for
first: this.
Think: What is a mind map? Why is it used? What is included in E Is the most likely. A mind map can be used to outline the
a mind map? How might a business use a mind map? strengths of a business.
Then: Consider each alternative.
Over to you
More and more businesses are closing down.
Unemployment is climbing. Sales of new cars are half what
they were last year. You would have thought that now is
not the time to start a new business. However, Jamie
Speke has bucked the trend and launched out on his own.
Jamie has worked for three small engineering firms in his
career. In his last job, he was the manager of a small
company that made most of its money from maintenance
contracts. The company would sign a deal with a
customer to give 24 hour 7 day a week service. If a
customer’s machine broke down, he would go out and
repair the machine.
However, Jamie had become frustrated with the
company that employed him. The owners did not want to
take any risks and were not interested in expanding the
business. So he made plans to set up his own business.
An opportunity came when a rival business was forced to
close. It had been very badly run and Jamie was able to
buy its building and machines for a knock down price.
His first priority was to keep the firm's existing
customers. Equally important, he went out and found new
customers. Some of the more skilled workers were re-
employed and new ways of working were introduced which
cut costs. By raising sales and cutting costs, Jamie has been 1. Jamie Speke has a number of enterprise skills. Explain three
able to turn the business around in its first twelve months of of these enterprise skills. (9)
operation. It has been hard work for Jamie, but having drive 2. Analyse two reasons why buying a 'rival business' was a good
and determination has helped him establish a successful way for Jamie to establish his own successful business. (8)
business. 3. Construct a mindmap to show the issues faced by Jamie in
setting up his new business. (6)
EDBUS_C12.QXD 23/9/09 13:09 Page 6

Showing enterprise
In this topic you have learned about: showing enterprise, such as difference between invention, the design of a new product or
taking risks and showing initiative, the difference between goods concept, and innovation, bringing an idea or product successfully
and services, different methods of creative thinking, such as to a market, taking calculated risk and the upsides and
lateral thinking and deliberate creativity, possible questions to be downsides of new businesses, and the skills that successful
60 asked by an entrepreneur when starting up a business, the entrepreneurs need.
You should know…

Enterprise is an ability to look at something new, in different Questioning is a vital part of every stage of a business.
ways and try to make it happen. Examples include Why? Why not? And What if?
Risk goes with enterprise because a business idea could Opportunity is the chance to exploit a gap in the market. It
succeed or fail. could be created, or it could happen by accident or luck.
Calculated risk involves using numbers to help decide if the Planning is essential. Planning is needed to see if a 'great'
business is likely to succeed. There is more chance if the idea will actually work in practice.
'balance' is in favour. Mind mapping is a way of writing down thinking. This could
Mistakes could be the result of taking a risk. Mistakes need to be be related to the product or could be personal strengths
seen as an opportunity to learn, so that the risk in future ventures and weaknesses. It is an open-ended analysis.
can be reduced. Connections involve carrying out analysis to see where
Initiative is a willingness to make it happen, not sitting back and various parts come together.
waiting for it to happen. Invention is creating and making the new product or
Drive and determination are personal strengths that service.
entrepreneurs need to ensure their idea succeeds. Innovation is getting the invention to the right market
Creativity is a mind process that involves thinking of what successfully.
opportunities might exist. Patents, trademarks and copyright are legal ways to
Lateral thinking is a way of looking at something in many different protect the invention from being used by other people
ways, positive and negative. It may give a new look to an idea. without permission. They help create a USP.
To help understand the characteristics of entrepreneurs, identify two What risks did you take? How much luck was involved? How much
things that you have done successfully. It could be something at was hard work?
school or college or at home. It could be a hobby, a sport or a part- Now place a tick against all those things that you think are the
time job. characteristics that an entrepreneur would need to start up a new
Make a list of the characteristics you had to show to be successful in business.
your chosen two things. Explain why you needed to show these. For In the light of the number of ticks you have highlighted, do you think
example, did you need to show determination because of setbacks? you have what it takes to be an entrepreneur? Justify your answer.
Stretch activity
Compare two products or businesses that have been successful. It • Why did they fail or succeed?
could be two products produced by different businesses or two You can use the Internet or past newspapers to help.
parts of the same business, for example Virgin.
Alternatively, search http://www.bized.co.uk for businesses such
Consider the following questions. as Nubrella and MetroNaps. In your opinion will these products
• Were the products new inventions? become a commercial success? Justify your answer in relation to
• What risks were taken? your knowledge of innovation.
(a) Helen Rodgers has invented a headband that incorporates radio (i) What is meant by the term 'patent? (1)
and mp3. It is lightweight and can be customised into a fashion (ii) Explain why Helen needs to patent this product. (3)
accessory. She realised that once the technology becomes
Think: What is a patent? What does it do? How does it help? What is
known she would lose the USP of the product and her
in this scenario to use in the answer? What is the problem?
competitive advantage. In order to recover the costs of the
invention and innovation she has taken out a patent.

(i) Something you take out on a product Just enough to get the mark but does Use clear phrases such as '… a legal
to protect it. not use clear terminology well. Has left room process to stop someone else using the same
for doubt in the examiner's mind. idea or technology.'
Or
'… a legal way to protect the idea or method from
being used by somebody else as their idea.'
(ii) Because she doesn't want anyone to A basic comment which is correct, but Use appropriate terminology in the answer
copy it so she can make a mint. not developed. rather than ‘street language’. Remember that this
is a business course. Identify one of the benefits
then link it others. ‘She wants to protect her idea
from being copied, because she has developed it
and paid for the innovation. By protecting it she
can get her costs back more quickly as she can
charge a high price as she is a monopoly.’
Move the concepts around to get a similar
answer. ’In order to get her development costs
back Helen needs to be able to charge a high
price to start with. She could do this if she was
the only supplier and, by taking out a patent, she
knows nobody can copy it so she will have a USP
and be the only supplier.’
Jason Stait was angry. He was in a restaurant and the service was research and found there was no other product like it. A local
slow. It wasn't that the waiters weren't working hard, they were. It restaurant tried it out and agreed Jason was on to a winner. Jason
was the fact that they seemed to waste so much time running back produced a business plan which showed that he would have to
and forward to the kitchen, the till and the phone. spend a lot of money to develop the product.
Jason began to think creatively about the problem and came up (a) Which two of the following would Jason be most likely to do
with the idea of ‘i-Waiter’. This would be an electronic device by before deciding whether to launch the i-Waiter? (2)
which waiters could send orders directly to the kitchen. It would
A Design a flyer to advertise it
have a ‘time-received’ feature, so the kitchen could prioritise
B Get a patent to protect the idea
orders. When an order was ready a message would flash on the
C Assess the idea using lateral thinking
device to inform the waiter to collect and serve. At the end of the
D Sell shares on the stock exchange to raise money
meal the waiter could use the stored order information to produce
E Use his savings to buy a restaurant
a bill and accept chip-and-pin payment.
F Check out the existing competition
Jason approached his friend Richey Sugg, who was an
(b) Identify and explain two questions that Jason, as an
electronics expert, to help develop the product because he lacked
entrepreneur, needs to ask about his new business idea. (6)
technical knowledge. Jason just knew it would work and he hoped
(c) Do you think that the risks are too great for Jason to go ahead
that he could leave his job and set up a successful enterprise.
and set up his business? Justify your answer. (6)
Jason had not run a business before, but he thought that he had
the determination and drive to be successful. Jason did some
EDBUS_C13.QXD 16/7/09 11:40 Page 2
Topic 1.3 Putting a business idea into practice
Topic 1.3: Putting a

business idea into practice
Topic overview
Case study This topic considers the practicalities of making a business idea
Claire Critchlow worked in happen. What are the objectives in setting up? What are the qualities of
salons and as a mobile a successful entrepreneur? How will estimates of revenues, costs,
beautician. Now she is profits and cash flow fit into the business plan? What sources of finance
setting up her own beauty are available to a start-up business?
salon in a former doctor’s
surgery. The salon will offer
services and products such as manicures, pedicures, spray tans, sun beds and
permanent make-up. Claire’s objective to start with is to survive the first
year. Then she hopes the business will make a profit and she can open more
salons. Facing a challenge and doing something new have always given
Claire personal satisfaction. Setting up on her own, as a mobile beautician,
gave her a sense of achievement. Now she wants to build something bigger.
Taking on staff will allow Claire to show leadership qualities. She will also
need determination and initiative. The project will test her ability to plan,
make decisions and take sensible risks. Claire has the backing of a business
adviser, Rachael, from a government agency, Business Link. She helped
Claire get on courses to develop the skills she would need to set up in
business on her own.
Rachael also helped Claire to write a business plan. This is a document
that covers all aspects of the business, including finance, marketing and
people. In the finance part, Claire had to estimate revenues and costs for
the first two years of trading. From this, she was able to forecast the profit
for the next two years. She also produced a cash flow forecast. This showed
how revenues and costs would affect the amount of cash in the business.
The cash flow forecast was vital for survival of the salon. If it ran out of
cash, it would be forced to close.
Setting up the business required cash. It was needed for converting the
surgery, advertising and buying equipment. Although Claire rented the
premises, the landlord wanted a deposit up front. Claire had some savings
of her own that she put into the business. Her father gave her some money.
She borrowed the rest from the bank.
Success will require hard work and determination from Claire, as well as
luck. She has taken advice and prepared a business plan. These will
improve her chances of survival in the short term and her success in the
long term.
1. Why did Claire want to set up a business?
2. What qualities did she have that might have made her a successful
entrepreneur?
3. Why was estimating future revenues, costs, profits and cash flows
important for Claire?
4. How did Claire raise the money to start her business?
EDBUS_C13.QXD 16/7/09 11:41 Page 3
Topic 1.3 Putting a business idea into practice
63
What will I learn?

Objectives when starting up What are the possible financial objectives of start-up businesses? Are they,
for example, to make high profits or high income? What are the possible non-financial objectives? Are
they, for example, the personal satisfaction that comes from running a business or a desire to help others?
The qualities shown by entrepreneurs What are the qualities of a successful entrepreneur? Examples
include determination and taking the initiative, leadership skills and a willingness to take risks.
Estimating revenues, costs and profits How will the number of sales and the prices charged affect
revenues? What will be the costs of the business? How will revenues and costs affect profits?
Forecasting cash flows What is cash flow? Why is forecasting cash flow so important for a start-up
business? How does a cash flow forecast fit into a business plan?
Obtaining finance What are the main sources of short-term and long-term finance for a business?
What is the difference between a loan and an overdraft, or share capital and trade credit?

questions.
EDBUS_C13.QXD 16/7/09 11:41 Page 4
13 Objectives when starting up

Case Study
64 Jayne and David Shelswell worked for a
business that designed websites for the
Internet. David worked in sales and Jayne
designed the sites. But after a few years,
they decided they had had enough. They
wanted to set up their own website design
business. There was a number of reasons
why they wanted to become entrepreneurs,
running their own business.
Objectives
G Understand a range of possible
financial objectives for an
entrepreneur starting up a business,
such as profit, income, financial
security and wealth.
G Understand a range of possible non-
financial objectives of entrepreneurs
such as personal satisfaction and
challenge.
G Make a distinction between the
possible objectives of entrepreneurs
starting up a profit-making business
and those starting social enterprises.
Financial objectives
Jayne and David wanted to earn more financially. They earned two salaries
working for their present employer. But no matter how hard they worked, the
amount they could earn was limited. So what were their financial objectives in
setting up their own business?
Survival Jayne and David were realistic about their new business. They knew
that many businesses fail within the first few years. So, to start with, they just
wanted to survive. It would take time to build up a base of customers. There
would be heavy expenses at the start because they would need to buy computers.
They would have to rent premises and buy office equipment. If they could get
through this difficult time, they could then achieve the long term financial
objectives.
Profit and income Jayne and David knew that in the first year or two, they would
Financial objectives – targets expressed in
have to take a cut in income. But in the long term, they wanted to earn more
money terms such as making a profit,
than their present salaries. So they were motivated by the thought of higher
earning income or building wealth.
incomes. Their business would pay them a wage. But on top of that, they would
also get the profit made by the business.
EDBUS_C13.QXD 16/7/09 11:41 Page 5
Wealth Jayne and David were also looking forward to their retirement. Their
business, if it was successful, could be sold. The price they got for the business
would be the value of the wealth they had built up in the business. A successful
business would not only mean that they earned more but also that they would
become wealthier. That wealth could be used to fund their retirement.
Financial security Owning a business carries risks. What would happen if Jayne
65
and David were to lose important customers? What would happen if the price of
new software shot up? What if the business failed? But working for someone
else also carries risks. What would happen if Jayne and David were made
redundant? Jayne and David felt that owning their own business would give them
Watch Out!
greater financial security in the long term. Financial security therefore was a long
term personal objective for them. Not everyone starting up their own
business has the same range of
Non-financial objectives objectives. Some may be very profit
Money was one reason why Jayne and David wanted to set up their own driven. Others may be more concerned
business. But they had other, non-financial, objectives too. about their quality of life than earning an
extra £1. Treat each case individually and
look out for the clues about the motives of
Personal satisfaction Jayne and David looked forward to running their own
the entrepreneurs concerned.
successful business. They would feel proud and get a great sense of achievement.
Building a business would be exciting. They would both get personal satisfaction
from their new venture.
Test yourself
1. Which three of the following are the most likely reasons 3. Which two of the following personal objectives does Kim
why individuals would want to start in business as a sole have in opening her restaurant, according to the passage?
trader? Select three answers. Select two answers.
A To increase their earnings A To give customer service
B They dislike taking risks B To increase her income
C Because they enjoy a challenge C To let someone else make the decisions
D To give them greater control over their future D To become wealthy
E They prefer to work for someone else E To help others
F They are afraid of failure
G Because they have followed a course in business studies
2. Which one of the following would be a non-financial

objective for individuals to start a business? Select one
answer.
A To increase income
B To get greater work satisfaction
C To accumulate wealth
D To maximise profit
Read the passage below carefully and then answer question 3.

Kim Lawton has just set up a restaurant in London. She wants
the business to be profitable within six months. After that, she
hopes profits will increase sufficiently for her to open a second
restaurant within two years. Her personal objective is to own
a small chain of restaurants within five years which would
make her a wealthy person earning a large amount of money.
EDBUS_C13.QXD 16/7/09 11:41 Page 6
Challenge Jayne and David both enjoyed a challenge. Helping others Jayne designed posters for charities.
Creating a successful business from scratch would be their Sometimes she would stop and have a chat when she
ultimate challenge. Many entrepreneurs like David and delivered them. She admired how some people were more
Jayne find the challenge of running a business very motivated to work to help others than to earn extra money.
satisfying. A friend of hers, Gemma, had actually helped set up a sports
charity working with disadvantaged children on a local
Independence and control Entrepreneurs like Jayne and estate. Gemma spent most of her spare time unpaid with
66
David often enjoy the independence that comes with these children, coaching them in sports.
owning a business. They can be their own boss. They don’t
have to ask anybody else’s permission to take time off work.
They have more flexibility to organise their lives compared
to working for someone else. This gives them more control
over how they live their lives.
Joe Smith has recently set up in business on his own as a plumber.

Which two of the following would be his financial objectives?
A Job creation
B Earning more than in his previous job
C As a result of a dare
D Being in control of his hours of work
E Using profits to fund a pension
F To keep his family happy
Answer B and E
Technique guide: There is a number of choices available so first:
Think: What is a financial objective? How is it different from a
non-financial objective?
Then: Dismiss the choices that are obviously wrong – that
would be C.
Decide: You are left with A, B, D, E and F. You have narrowed
down the options.
Go through these: A, D and F are non-financial objectives - this
is why it is important to be clear at the outset what the
difference is between financial and non-financial
objectives.
That leaves you with the correct answers of B and E. They are
both financial objectives. Check to make sure your choices are
right.
EDBUS_C13.QXD 16/7/09 11:41 Page 7
Over to you
When Emma Ratner graduated
from university after getting a
pharmacy degree, she went to
work for a large chain of 67
chemists. Her ambition,
though, was always to have her
own pharmacy. With financial
help from her family and a bank
loan, she was able to buy a
pharmacy after five years. She
was determined to repay the
loan as quickly as possible and
become financially
independent. Within two years,
she had increased the profits of
the pharmacy 50 per cent by
increasing the amount of stock
available for sale in the shop.
Soon, she was looking to buy a second pharmacy so
she could increase her profits further.
Peter Shannon also graduated with a pharmacy
degree. Like Emma, he began his working career as a
pharmacist at a large high street chain. But it took
him ten years to buy his own pharmacy. He enjoyed
the contact his own pharmacy gave him with
customers. The shop gave him a good profit. But he
saw giving a service to the local community as more
important than earning extra profit.
1. Explain one financial objective that Emma Ratner

might have had in buying her pharmacy. (3)
2. Explain one non-financial objective that Peter
Shannon might have had when buying his
pharmacy. (3)
3. Compare the personal objectives of Emma Ratner
with Peter Shannon in setting up and running their
own businesses. (6)
4. Do you think that Peter Shannon should buy a
second pharmacy like Emma Ratner?
Justify your answer. (6)
14 The qualities shown by entrepreneurs
14 The qualities shown by

entrepreneurs
68
Case Study
Rahul Sharma worked for
a company which
specialised in making
plastic goods. He joined
the business from
university and quickly
became a manager. Then
he decided to launch his
own company. Sharma
Plastics manufactures
plastic products. For
example, a designer
plastic table might have
been made by the
business. What qualities
did Rahul have which
might make him a
successful entrepreneur?
Determination
Objectives Setting up a business is difficult. There is so much that has to be done before it
Understand the qualities shown by can start trading. Rahul Sharma, for example, had to find a factory unit from
entrepreneurs: which to operate. He had to buy machinery and hire workers. He also had to get
determination customers and persuade his bank to lend him money. One quality that Rahul had
initiative was determination. He was able to take control of events. Every step he took
brought him closer to setting up his business and then running it successfully.
the willingness to take risks
Determination is linked to commitment. Rahul could easily have given up when
decision making
he came across problems. But he was totally committed to setting up and
the ability to plan running his own business. For the first two years, he earned less money and
the gift of persuasion worked longer hours than he did when he was working at his former company.
showing leadership But his determination and commitment meant that he stuck to his vision of
being lucky. creating his own business.
Initiative
Entrepreneurs need to be able to take the initiative. Initiative means making the
first move. They must spot opportunities early and act to take advantage of them.
Being pro-active, making things happen for their benefit, is important. The
opposite of being pro-active is being ’re-active’, responding to events after they
have happened. Being re-active can be dangerous because events can get out of
control. Taking the initiative is linked to being a self-starter. Entrepreneurs have
to work independently. They have to make the first move to start things off.
Rahul Sharma had the initiative to set up his own business. He then needed the
determination to see his business become successful.
Taking risks
Entrepreneurs have to be risk takers. Their business may succeed
or it may fail. It is almost always riskier to own your business than
to be employed by someone else. Rahul Sharma faced two types of
risk when he set up his business. The first was that he borrowed
money from the bank at the start. He used his house as security.
69
This meant that, if he failed to keep up the repayments, his bank
could take his house and sell it to recover the money. So he risked
losing his house if the business failed. The second risk was that
the business would underperform. It wouldn’t make a big enough
profit. The risk was that he would have been better off staying as a
worker at his former company.
Making decisions Entrepreneurs need to be able to plan work

Business owners have to make decisions. They are in charge. Being a successful and pursuade others
decision maker means being good at making judgements. Successful
entrepreneurs are often good at taking in information and listening to advice.
They have a vision of where they want the business to be in the future. They can
then make the right decision for their business. Rahul Sharma had worked as a
manager. So he had plenty of practice in making decisions. But he had
sometimes been frustrated because his decisions had been overturned by senior
managers. Owning his own business meant that he was the boss. Nobody could
overturn his decisions because he was at the top of the organisation. But Rahul
was also aware that his decisions would now affect the success of his own
business. Making the right decisions was even more important than before.
Planning
Running even quite a small business requires some planning. The larger the
business, the more important is planning. Entrepreneurs need to be successful
planners. This means two things. One is that they know what they want to do
with their business. So they have clear objectives. The second is that they have
mapped out how they can achieve those objectives. Small businesses are always
encouraged by advisers, bankers and government to draw up business plans.
These are documents giving the objectives of the business and how it will achieve
those objectives. Planning is also important on a day-to-day basis. Successful
entrepreneurs are often good at organising their own time and planning what
their workers will do each day. Running your own business is very time
consuming. Time-management is an important skill. Rahul Sharma had Watch Out!
experience of planning in his former job. He was able to apply those skills when
it came to running his own business. Do not think that every business owner
has to have every skill needed to be a
successful entrepreneur. All
Persuasion entrepreneurs have strengths and
Entrepreneurs spend time dealing with other people. There are customers and weaknesses. Good entrepreneurs have
suppliers as well as workers for example. Good entrepreneurs are able to enough strengths and few enough
persuade others to do what they want them to do. With customers, a successful weaknesses for them to make a success
entrepreneur can persuade them to buy the business’s products. With suppliers, it of running a business. Many of them
might mean buying at a low price or getting better delivery times. Rahul Sharma know their strengths and their
was very good at getting the best out of his workers. He could persuade them weaknesses and are prepared to work at
without difficulty to work overtime if there was a rush order. Where changes overcoming their weaknesses.
were needed, he could persuade them it was for the best to make the changes.
The skills of persuasion are closely linked to high levels of people skills – being
able to get on with people from a wide range of backgrounds and the ability to
create mutual respect.
Showing leadership Luck

Entrepreneurs are leaders of their own business. So they Businesses need some luck to do well. Rahul Sharma
should have good leadership skills. Having a vision, created his business in 1996. The economy was doing well
knowing where the business is heading, being good at and he was able to slowly expand the business. But things
planning and having the gift of persuasion are all examples might have been very different if the economy had suddenly
of those skills. Another is self-confidence. Successful slowed down. Orders would not have been so easy to get.
70 entrepreneurs have a belief they will succeed. This gives Or what if had been involved in a serious car accident in
them the confidence to lead their business. Rahul Sharma 1997 and been unable to work for 12 months? Some
had considerable self-confidence. He felt that what he had entrepreneurs never recover from unlucky events. But
learnt working for his former company had given him the others, with the same bad luck, have the skills of
skills to succeed with his own business. perseverance. They stick at it when luck does not go their
way. They carry on and get through the difficult times.
People who give up when the going gets tough are not likely
to make good entrepreneurs.
Test yourself
1. In this question, match a quality of an entrepreneur, shown 2. In this question, match a quality of an entrepreneur, shown
on the left, with an example of that quality, shown on the on the left, with an example of that quality, shown on the
right. Each quality has only one example. Show each of right. Each quality has only one example. Show each of
your five answers by writing out a quality with the example your five answers by writing out a quality with the example
of the quality. of the quality.
Quality shown by Quality shown by

Example of quality Example of quality
entrepreneurs entrepreneurs
Persuasion 1 a Preparing a production Determination 1 a Reorganising the layout of

schedule for the next four the factory
weeks
Initiative 2 b Talking a supplier round Leadership 2 b Talking a worker round to
to giving an extra 2 per doing some overtime
cent discount on an order
Luck 3 c Ordering in 20 per cent Making decisions 3 c Having been rejected for a
more stock in the hope loan by four banks,
that sales will increase applying to another bank
shortly for the loan
Risk taking 4 d Employing a worker who Persuasion 4 d An ice cream
turns out to be much manufacturer has its best
better and more skilled sales ever because of the
than expected hottest summer on record
Planning 5 e Following the loss of an Luck 5 e Having a vision for where
important customer, the business should be in
deciding to prioritise two years time
getting more orders
Over to you
Michelle Welsman read a newspaper Mai Ling Tsui lived in a different part
article about a business selling gift of the country from Michelle. She
wrapping services. She immediately too read the same newspaper article
fell in love with the idea and began about a business offering gift
her research. She found there was no wrapping services. Like Michelle, 71
gift wrapping business in her own she saw this as a business
area and so there would be no opportunity. She took some time to
competition. But then she began to research and prepare a business
worry about the money she could lose plan which saw her as working part-
if her business was not a success. time in the business at the start, moving to full-time within two
Going out with her new boyfriend also put a limit on the years once the business had become established. The plan
amount of time she could spend on the project. Her family enabled her to keep control over her costs more easily. Initial
said she should stick with her present job because it costs were kept to a minimum because the business was
brought in a regular salary. Setting up in business was too operated from home. Her only major cost was setting up a
risky. So she decided to start up the business using what website and using the local paper for advertising. After two
spare time she had. To begin with, she targeted friends and years, the business was profitable. But Mai Ling decided
family for orders. But not many orders came in and after six the profits were not good enough. So she moved on, setting
months she abandoned the idea of setting up a business. up another business selling bridal gowns.
1. Explain how both Michelle and Mai Ling showed initiative 3. Compare Michelle’s entrepreneurial qualities with those of
after they had read about the newspaper article. (3) Mai Ling’s: consider their attitude to risk, their decision
making and planning skills and their self-confidence. (8)
2. Explain how Mai Ling showed enterprise qualities in
setting up her business. (3) 4. Do you think that Mai Ling Tsui will make a success of her
bridal business? Justify your answer. (6)
Diane Frost works for a friend who makes soft furnishings, such a
pillows and bedspreads. Her friend is giving up the business, partly
for health reasons and partly because profits are falling. Diane
knows there is a big contract very soon with a chain of local
hotels. Her instinct is to make her friend an offer for the business.
(a) Identify one risk Diane has to take. (1)
(b) Explain how she might use entrepreneurial skills to get around
this. (3)
Think: What could the risks be? Not enough cash/ the mention
that profits are falling/ deal falls through/ no staff. How could she
get around it?
Basic Mentions/ states one risk but offers no

explanation. (1)
Excellent One risk is that the profits seem to be falling.
Good One risk is that there is not enough cash (1). Diane
(1) Diane could use her initiative to find ways of reversing the
could think ahead (1) to make contact with her bank to
falling sales or rising costs (1). She may think about new ways
arrange finance (1).
of encouraging sales of soft furnishings or make new designs
(1). This could help to reverse the fall in profits (1).
15 Estimating revenues, costs and profits
15 Estimating revenues, costs

and profits
72
Case Study
David Lutter was a taxi driver working for a local firm. On Saturdays,
he would sometimes be asked to drive a wedding car. Then he had a
stroke of luck when he received an inheritance of £30,000. David had
been thinking for some time about setting up in business on his own
specialising in wedding cars and limousines. This was his opportunity
to strike out on his own. Before starting the business, David drew up
a business plan. Part of that plan was a section dealing with estimates
for his revenues, costs and profits in his first two years of trading.
Estimating revenues
Objectives David started off by estimating his revenues. This is the amount of income his
Understand how businesses forecast business will earn over a period of time like a week, month or a year. Revenues
sales volumes and selling prices to are sometimes also called sales revenue, turnover, or sales turnover. His
estimate revenue. revenue will be made up of the money he receives from each job that he does.
Understand how to determine fixed But to estimate his total revenues, David has to predict:
and variable costs. • how many jobs he will do (called his sales volume);
Understand the difference between • what will be the average price that he can charge for each job.
price and cost and the concept of Sales volume for David is the number of bookings he makes. People hire
profit. limousines for all sorts of occasions. It could be a wedding. It could be to take
Explain how profit is the difference school leavers to a school prom. He also plans to have a car to take business
between the total revenue generated executives to the airport or to a party. In a typical week, he hopes that he will
over a period and the total costs. have 15 bookings. This estimate was based on the casual Saturday work he did
Understand the impact of profits and for the wedding car hire company. He also asked contacts he knew in four similar
losses on a business and its owners. local businesses about the amount of work they did in a typical week.
Hiring a wedding car or a limousine is not cheap. For a wedding, for instance,
Table 1 – The more jobs done, the higher he plans to charge around £400. For taking someone to the airport in a luxury
will be David Lutter’s revenues car, he might charge £70. These were the sorts of prices being charged by local
Number of Price Total competitors. Because each job differs and the price he can charge is different,
jobs done per job revenue David has worked out his average price. On average, he predicts he will generate
10 £100 £1,000 £100 per job.
20 £100 £2,000 Now he can work out his estimated weekly revenues. His total revenue is the
average selling price multiplied by the sales volume (the quantity sold).
30 £100 £3,000
40 £100 £4,000 Total revenue = Price x Quantity
or
TR = P x Q
where TR is total revenue, P is average price and Q is quantity. In this case, Q is
Revenues or sales revenue or turnover or
the number of jobs that David does.
sales turnover – the amount of income
15 jobs per week, at an average price of £100, is £1,500 per week. The more jobs
received from selling goods or services
over a period of time. he does, the higher the revenues as Table 1 shows. It is also true that the higher
the average price, the more revenue he makes as Table 2 shows. The two tables
Sales volume – the number of items or
products or services sold by a business
tell us that David can increase his revenue either by increasing sales at the same
over a period of time. price or increasing his prices if the amount of work he does remains the same.
Estimating costs Table 2 – The higher the price per job, the
higher will be David Lutter’s revenues
There is a number of different costs in running a limousine business. For
example, David has to buy the cars he will run. There are petrol, advertising and Number of Price Total
telephone costs. He also has to pay a wage to himself and his wife who takes the jobs done per job revenue
bookings and does the paper work. 10 £100 £1,000
Some of these costs stay the same whatever the amount of work that David 10 £200 £2,000
does. For example, David borrowed the money to buy three cars – a vintage 10 £300 £3,000 73
wedding car, a stretch limousine and a Jaguar car. The repayments on the loan 10 £400 £4,000
are the same whatever the number of bookings that he makes. On his mobile
phone contract, he pays a minimum fixed amount per month. He also pays
himself and his wife a fixed wage. There is the insurance for the business
including his cars. Costs which do not change with output (in this case, the
number of jobs that David does) are called fixed costs. One very important fact
about fixed costs is that they have to be paid even if David has no bookings. Table
3 shows the fixed costs of his business he has to pay each week.
Other costs, called variable costs, vary directly with the amount produced. For
example, the more miles David drives, the more petrol he uses. So petrol is a
variable cost for David. For some bookings, passengers are given a ‘free’ bottle of
champagne. The bottle of champagne is a variable cost to the business. Table 4 Watch Out!
shows the estimated weekly variable costs, assuming that he does 15 jobs per
week. The more jobs he does, the higher the variable costs. Variable costs would Forecasts and estimates may be very
accurate. But in the case of a small start-
be zero if he did no jobs at all.
up business, forecasting sales and costs
Fixed costs plus variable costs add up to total costs. This can be shown in the
over the first twelve months of operation is
formula
very difficult. Many new businesses fail
because they overestimate revenues and
TC = FC + VC underestimate costs.
where TC is total cost, FC is fixed cost and VC is variable cost.
Having researched all his costs, David has estimated that his total cost will add
up to £1,400 per week for 15 jobs.
Watch Out!
Total revenues and total costs are over a

Table 3 – Fixed costs per week for David Lutter period of time. Always make sure you
understand whether it is, for example, a
£ day, a week, a month, a quarter (three
Repayments on loan £300 months) or a year.
Wages of permanent workers £710
Web site and phones £60
Advertising £40
Insurance £90
Total fixed costs £1,200 Fixed costs – costs which do not vary
with the output produced such as rent,
business rates, advertising costs,
administration costs and salaries.
Table 4 – Variable costs per week for David Lutter for 15 jobs.
Total costs – all the costs of a business;
£ it is equal to fixed costs plus variable
Fuel £110 costs.
Wages of casual staff £30 Variable costs – costs which change
Champagne and other refreshments £40 directly with the number of products
made by a business such as the cost of
Car valeting (cleaning cars) £20
buying raw materials.
Total variable costs £200
Price, cost and profit

When David earns £100 for a job, what happens to the Watch Out!
money? The £100 has to be used to cover his costs. He has
to pay his bills and the wages to staff. There is tax to pay to Price and cost are sometimes used to mean the same thing but
sometimes they refer to two completely different things. The
the government as well. If his costs are £90, then he has
price of a product is the amount paid by the customer who buys
made a profit on the job. If his costs come to more than
the product. So the cost to the customer of buying the product
74 £100, then he makes a loss. So the difference between the is the same here as price. But the cost to the producer is
price paid and the cost is either profit or loss. different. Cost in this sense refers to the cost of production.
Usually in Business Studies, the word ‘cost’ means the cost of
Total revenue, total cost and profit production. Price means the price paid for a product.
On a weekly basis, his profit is the difference between total
revenue and total costs for the week.
Profit/Loss = Total revenue – Total cost

Watch Out!
David has estimated that his weekly total revenue will be
Making a profit is not necessarily a sign of success. What if a
£1,500. He has also estimated that his weekly total costs
business makes a profit of £10 a year? If a business does not
will be £1,400. So his estimated weekly profit is £100
make enough profit, its owners may close the business.
(£1,500 - £1,400). Equally, making a loss isn’t necessarily bad. Start-up businesses
His estimates could turn out to be wrong. Many start-up often make losses when they first begin trading. It is large
businesses overestimate their revenues and underestimate losses over a period of time that force businesses to close.
their costs. If
• David only has total revenues of £1,000 per week and
• his total weekly costs are £1,500 then
• he will make a loss of £500 (£1,000 - £1,500).
Profit – occurs when the revenues of a business are greater than

The impact of profits and losses its costs over a period of time.
David estimated that his business would show a small profit
Loss – occurs when the revenues of a business are less than its
in its first year. His ‘guesstimate’ was £100 per week. This
costs over a period of time.
would amount to £5,200 (52 x £100) per year. But he also
knew he could easily have been too optimistic. His guesses
and estimates might be wrong.
• What if the price of petrol went up?
• What if the cars cost more to buy than he thought?
• What if the cost of insurance was higher? A construction business builds flats. It buys raw materials from local
• What if he didn’t get the number of jobs he estimated? suppliers. Joey Simms is the construction manager. He is paid a
• What if it took much longer for him to build up his salary each year, but does not earn bonuses or overtime. He works
customer base? in an office in Norwich, which the business rents each month. Which
• What if competition was so fierce that he was forced to one of the following is the best example of a variable cost?
offer much lower prices? A The yearly salary of a construction manager
B The rent paid for the offices
• What if the interest rate on his bank loans went up?
C Insurance for the business
• What if the economy took a downturn and some people
D Cement used in the construction of the buildings
could no longer afford the luxury of hiring a limousine?
The £30,000 he inherited was a cushion in case things went Answer C
badly wrong and he made a big loss in his first year. He Think: What costs change as output changes? What costs stay
could survive. But if he carried on making losses, eventually the same as output changes?
he would be forced to close the business. Losses are a sign Then: Go through these. A, B and C are all costs that do not
that the business needs to make changes or close. change as output changes. They are fixed costs. A construction
Businesses that make profit can survive. Profit is also a manager will be paid a fixed salary a year. Rent for offices is a
sign of whether a business should grow in size. Could the fixed payment. So is the insurance payment.
business make even bigger profits by expanding? If nothing This leaves you with the correct answer of C. Variable costs
else, large profits give a business the money to pay for new increase as output increases. As more flats are built, the cost of
investment. Large profits also provide the incentive to make materials like cement used in the production of flats will increase.
the business successful.
Test yourself
1. Which three of the following are examples of variable 3. A maker of electric guitars has fixed costs of £2,000 per
costs? Select three answers. month. Last month, it manufactured 50 guitars items. Its
variable cost was £70 per guitar. This month, it has
A Rent on a factory unit
produced 60 guitars and the variable cost per guitar has
B The cost of clothes bought by a high street fashion
boutique
stayed the same. What effect will this have on its total 75
costs? Select one answer. Its total cost will increase:
C Advertising in a local newspaper
D The salary of the managing director of a company A by 20 per cent
E Coca-Cola drinks in a fast food restaurant B by £700
F Diesel fuel used by a taxi driver C from £3,500 to £4,200
G The interest on a loan D by £70
2. A paint ball business charges customers £10 for each paint
ball session. Last year customers paid for 5,000 sessions.
This year, it increased its prices to £11 but the number of
sessions sold fell to 4,000. What effect will this have had on
revenues? Select one answer.
A increase by 10 per cent
B fall by £10,000
C change from £50,000 to £44,000
D increase by £1,000
Over to you
Pets Havens is a business which is now two years old. Set up
by Kevin and Emma, it provides a mobile pet-grooming service.
They decided there was a gap in the market in their local area
of Bournemouth and hope to expand the business to cover other
services such as providing kennels for overnight
accommodation for pets.
To start the business, they took out a loan for £20,000
repayable over five years. Most of this was used to pay for two
vans. A small van transports equipment to allow grooming in
the client’s home. A large van acts as mobile premises and
‘doggie makeovers’ are given in the van itself. Around £5,000
was used to buy equipment for the business and set up a
2. (a) How many pet grooming sessions do they sell each
website. Kevin and Emma are paying back the loan at a rate of
year? (b) What is the average price paid by customers for
£400 per month.
each pet grooming session? (c) What is Kevin and Emma’s
They have a variety of other costs which stay the same
total sales revenue for the year? (3)
however much work they complete. For example, they pay an
accountant to sort out their finances. They have to pay 3. Kevin and Emma have worked out that their total fixed
insurance on their vans and for their business. They also costs are £10,000 per year. Explain how they calculated
advertise in Yellow Pages. These costs add up to £5,200 a year. this. (3)
Each visit they make to a client costs money too. There are 4 (a) What is their variable cost per pet grooming session?
petrol costs as well as the cost of shampoos and other (b) What are their total variable costs per year? (2)
grooming materials. These costs work out at £5 per session. 5. Calculate the value of their total costs. (3)
The average price they charge clients is £20 per session. 6. How much profit do they make over a year giving 2,000 pet
Kevin and Emma complete around ten sessions a day, which, grooming sessions? (3)
by the time you take holidays into account, is 2,000 sessions a
7. Would they have made a profit if they had only completed
year.
400 sessions in a year? Explain your answer. (6)
1. Make a list of Kevin and Emma’s (a) fixed costs and 8. What might be the advantages and disadvantages for them
(b) variable costs in running their business that are of expanding their business to offer kennels for overnight
mentioned in the passage. (4) accommodation of pets? (9)
16 Forecasting cash flows

Case Study
76 Holly Buckley worked at a local arts centre. She had learnt flower
arranging skills as part of her college course. Holly decided to set up a
business providing flower arrangements called Floral Events. She
would run this from a shop in the town centre. Weddings were likely
to be a big market, but Holly also thought that flower arrangements
would be needed for sports events and festivals.
Objectives Cash
Understand the role and importance of Holly knew that cash is vital for the success of a business. Cash is not just notes
cash flow to a business. and coins. It is also money in the bank. Holly needed cash to start up her
business. For example, she had to pay for shelves and equipment in her shop.
Estimate cash flows.
Once she opened the shop, she had regular bills to pay. There was rent, telephone
Understand the difference between a
and electricity bills and wages. She also had to buy the flowers to sell. Holly paid
cash flow forecast (an estimate) and a
cash flow statement (what has
some bills with notes and coins. Most bills, though, she paid directly out of her
actually happened). bank account. Cash came into the business too. Customers paid her cash for the
flowers she sold. Every day, Holly would go to the bank to deposit her takings.
Explain how cash flow problems arise
and how they can be minimised.
Explain how cash flow problems can
What is cash flow?
affect a business. Cash flow is the flow of money into and out of a business.
Appreciate how careful planning can Inflows Inflows are the cash coming into the business
minimise risk. • Holly put some of her own money into the business.
• She took out a small loan from the bank.
• The business received cash from its sales.
Inflows are the receipts of the business - the money it receives. Figure 1 shows
these inflows from Holly’s business in its first six months.
Outflows Outflows are the cash going out of the business.

Holly had a number of
Watch Out! outflows. Figure 1 – Cash inflows to Floral Events in the first
• Wages. six months
Cash flow is NOT the same as profit.
Profit is sales revenue (price x quantity
• Equipment.
Cash from Holly Loan from the bank Cash from sales
sold) minus costs. Cash flow is all inflows • Telephone, gas and
of cash minus all outflows of cash. electricity and other bills,
and rent for the premises.
• Flowers and display stands
CASH INFLOW
from suppliers.
• Interest on the loan.
• Advertising in local Figure 2 – Cash outflows from Floral Events in the
Cash – notes, coins and money in the bank. first six months
papers.
Cash flow – the flow of cash into and out Outflows are the payments
of a business. Equipment Advertising
of the business to others. Flowers and Wages Bills Interest on
Inflow – the cash flowing into a business, Figure 2 shows these other materials the bank loan
its receipts. outflows from Holly’s
Outflow – the cash flowing out of a business in its first six
business, its payments. months. CASH OUTFLOW
Cash flows can be shown in a table. Table 1 – Inflows and outflows

Table 1 shows the cash inflows and Jan (£)
outflows from Holly’s business in its Receipts/inflows
first month. The net cash flow is Sales 600
inflows minus outflows. It is the
Cash from Holly 1,000
difference between receipts and
payments. £2,400 came into the Loan 800
Total receipts 2,400 77
business in the first month. £2,200
left the business. So the net cash Payments/outflows
flow was £200. Equipment 200
Wages 200
The importance of cash Bills 400
Holly’s business cannot survive without cash. Imagine what would happen if
Interest 100
Holly didn’t have the cash to pay her bills. Her creditors, anyone to whom she
Materials 1,200
owes money, would take her to court to recover their money. But by this time her
business could have failed. Her workers could have left because they were not Advertising 100
being paid. Her flower suppliers could have stopped deliveries because they Total payments 2,200
weren’t getting paid. The business would become insolvent. Net cash flow 200
A business needs enough cash to survive on a day-to-day basis. If Holly runs
out of cash, she might have enough cash of her own to put into the business. Or
perhaps Holly could persuade her bank to give her a loan. Completely running
out of cash almost certainly means the business will fail.
Cash flow forecasts

Cash is vital for the success of a business. So Holly must plan ahead to make sure
she will always have enough cash in the business to survive. She does this by
producing a cash flow forecast. A cash flow forecast is a prediction of how cash
will flow into and out of a business in future. Businesses use cash flow forecasts:
• to see how well they should be performing in the near future: cash flow
forecasts are part of a business plan;
• to see if action needs to be taken to avoid a cash crisis; Watch Out!
• to take to the bank if the business needs a loan to cover a shortage of cash.
More money in than out is a SURPLUS
Table 2 shows the cash flow forecast for Floral Events during the first 6 months of (not profit). Less money in than out is a
the business. Look down the column for January. SHORTFALL (not loss). Do not refer to
• Total receipts, all the cash coming into Floral Events, was £2,400. them as profit and loss.
• Total payments, all the cash going out of the business, was £2,200.
• Net cash flow was £200. This is total receipts minus total payments:
£2,400 - £2,200 = £200.
• The opening balance is the cash balance at the start of the month. In January
when the business starts, it is zero.
Net cash flow – the receipts of a
• The net cash flow is added to the opening balance to give the closing business minus its payments.
balance. In January the opening balance is 0 and adding net cash flow of £200
Insolvency – when a business can no
gives a closing balance of £0 + £200 = £200. The closing balance becomes the
longer pay its debts.
opening balance for next month. The closing balance shows the cumulative
Cash flow forecast – a prediction of how
cash flow of the business.
cash will flow through a business in a
Table 2 – Cash flow forecast for Floral Events during the first 6 months of the business period of time in future.
(£) January February March April May June Opening balance – the amount of money
in a business at the start of a month.
Receipts 2,400 2,400 3,000 3,400 4,500 5,000
Closing balance – the amount of money
Payments 2,200 2,500 3,400 4,000 4,200 4,200
in a business at the end of a month.
Net cash flow 200 -100 -400 -600 300 800
Cumulative cash flow – the sum of cash
Opening balance 0 200 100 -300 -900 -600 that flows into a business over time.
Closing balance 200 100 -300 -900 -600 200
Cash flow problems temporarily because cash is not flowing out of the business
Look at Table 2. Does Floral Events have a cash flow as quickly. If she doesn’t eventually pay her bills, her
problem? suppliers will stop supplying her with flowers and electricity.
• Look across the table, along the line for net cash flow. It Floral Events is lucky because most of its sales are for cash
shows that more cash leaves the business between on delivery. In her shop, customers pay cash. For weddings,
February and April than comes in. This could be a she insists on payment when the flowers are delivered. But
problem if the business runs out of cash. for sports events and festivals, she has to give her customers
78
• Look across the table, along the line for the closing trade credit. Where possible, she only gives two weeks to pay
balance. This shows how much cash is left in the rather than one month. This makes the cash come in more
business at the end of the month. In March, this is quickly and so improves her cash flow.
negative (-£300). This shows that during the month, the
business has run out of cash. At this point, Holly’s Stock levels can change Stocks are materials held by a
business will almost certainly fail. business. For example, Floral Events holds stocks of fresh
So Holly’s cash flow forecast shows her that her business and dried flowers, waiting for sale. A car manufacturer
probably won’t survive the first few months of trading. She would hold stocks of steel, paint, car engines and finished
will have to take action to avoid this by: cars. Buying in stock means an outflow of cash. Selling the
• increasing sales revenues; stock means that cash comes into the business. So stock
• reducing costs; levels affect cash flow. Increasing stocks without increasing
• putting more of her own money into the business or
getting a bigger bank loan.
Table 2 also shows that her problems are temporary. In
May and June, monthly cash flow becomes positive. By the Trade credit – where a supplier gives a customer a period of time
end of June, the closing balance has turned positive. This is to pay a bill (or invoice) for goods or services once they have
been delivered.
goods news. But to survive to the end of June, Holly first
has to sort out the cash flow crisis in March. Stocks – materials that a business holds. Some could be
materials waiting to be used in the production process and some
could be finished stock waiting to be delivered to customers.
What affects cash flow?
Cash flows into and out of a business. There are different
things which affect how much cash comes in and how
much goes out.
Sales can change At Floral Events, summer is busier than
winter because there are more weddings and more orders (a) Identify one factor that can affect the cash flow of a business. (1)
for flowers. Mother’s day gives a huge boost to cash (b) Explain how this factor can lead to a cash flow problem. (3)
coming into the business as people buy flowers. For many
local clothes boutiques near to Floral Events, half of all sales Think: What factors affect cash flow? What is a cash flow
are between September and Christmas. Events like sales problem? How do changes in these factors affect cash flow?
can help boost cash into the business.
Basic Mentions one factor but offers no explanation or an
incorrect explanation. (1)
Costs can change Table 1 shows the costs for Floral
Events. The price of flowers from growers has been going Good Identifies one factor and offers some explanation
up over time. Gas and electricity prices can change. Wages that shows how it might lead to a cash flow problem. The
go up each year. Any increase in costs will lead to higher explanation offers up to 2 basic links to show the effect on cash
flows of cash out of the business. Every business needs to flow. A basic link would be ‘a rise in costs will increase
keep its costs under control to avoid cash flow problems. outgoings.’ (2-3)
Credit terms can change Typically, a business does not have Excellent Identifies one factor and offers an explanation
to pay for goods and services it receives until after they have that shows how it might lead to a cash flow problem. The
been delivered. This is called trade credit. It is a form of explanation offers up to 3 basic links to show the effect on cash
flow. For example, ‘a rise in costs will increase outgoings, if
loan given by a business to a customer. At Floral Events,
inflows remain the same, the business will have less cash
most bills have to be paid within a month. But like many
available.’ (4)
small businesses, if Holly doesn’t have the cash to pay the
bill, she delays the payment. So she might pay a bill after two
months or three months. This improves her cash flow
EDBUS_C16 copy.QXD 6/4/12 12:47 PM Page 5
sales will lead to a worsening of the cash flow position. If

Floral Events buys lots of dried flowers but doesn’t sell them, Over to you
it will have more stocks of dried flowers in its shop. But its
Aziz Duah decided to set
cash flow situation will worsen because the dried flowers
up a business selling
will have to be paid for and so cash will flow out. printed t-shirts. He
researched the market
The importance of planning and found that there was 79
How can a business avoid cash flow problems? Careful no-one in the area
planning will help. Many strategies are possible, but a good offering this service. He
rule of thumb would be ‘GET IT’: thought that selling to
• Get the help and support of the bank and investors. businesses or to up and
• Ensure market research is thorough. coming bands for their
• Thoughtful cash flow planning may avoid problems. fans would be successful.
Aziz would offer to design and print the t-shirts with their own
• Investigate where you can get help with spreading
designs. He would begin trading in September. His sales
payments more evenly.
forecast included the following information.
• Track the actual cash flow against the forecast before it
becomes a problem. Receipts
• September £14,000, October £15,000, November £18,500
and December £19,500
Test yourself
Payments
• Machinery and office equipment are £9,000 in September.
1. A small bakery has just launched a new range of cakes.
• Wages are £5,000 in September and October and £10,000 in
Which of the following is not a cash inflow for the small
November and December.
bakery business? Select one answer.
• Heating and lighting are £1,000 a quarter. The first payment
A Capital from the owner to help launch the range is October.
B Buying ingredients for the cakes • Other costs are £2,200 a month.
C A loan to help launch the range • Materials are £2,000 a month in September, October and
D Sales from the new range of cakes November. In December Aziz plans to arrange a 30 day
payment period for materials.
2. A business has a produced a cash flow forecast for • Insurance is £3,500 for the year, payable in October.
January. • There is no opening cash balance.
Total receipts of the business are £17,000.
Total payments are £15,000. (£) Sept Oct Nov Dec
The opening balance is £10,000.
Total receipts 14,000 15,000 8,500 19,500
What will be the net cash flow at the end of January?
Select one answer. Payments
Machinery/equipment 9,000 0 0 0
A £10,000
B £12,000 Wages 5,000 5,000 10,000 10,000
C £2,000 Heating & lighting 0 1,000 0 0
D £32,000 Other costs 2,200 2,200 2,200 2,200
Materials 2,000 2,000 2,000 0
3. The following table shows the cash flow forecast for
Insurance 0 3,500 0 0
business for three months of the year. Fill in the blanks.
Total payments 18,200 14,200 12,200
(£) June July August Net cash flow 1,300 5,700
Total receipts 60,000 78,000 Opening balance 0 -4,200 -2,900 1,400
Payments Closing balance -4,200 -2,900 8,700
Materials 30,000 42,000
Other costs 60,000 75,000 85,000
1. Calculate the missing figures in the table. (4)
Total payments 80,000 105,000 127,000
2. Explain why the business has a cash flow problem in
September but not December. (6)
Net cash flow -20,000 -35,000
3. Aziz is thinking of taking out a long-term bank loan to
Opening balance 30,000 -25,000 improve cash flow. Do you think he should do this? Justify
Closing balance 10,000 -25,000 -74,000 your answer. (6)
17 The business plan

Case Study
80 Chloe and Samir met at primary school and have been friends ever
since. Chloe has been working for a construction company for the
past five years, whilst Samir has done a variety of office jobs,
including some accounting and designing. Chloe would like to set
up her own business, which would specialise in shop fitting. This
sort of business designs the inside of shops and fits everything
from shelves and counters to lighting and tills. Samir has agreed to
give up his current job to join her. Finance is going to be tight and
they have talked through their ideas with several banks to find out
if they could borrow money. All the banks have said that any loan
would only be given if they had drawn up a business plan.
The purpose of the business plan

Objectives Chloe and Samir needed to borrow money from a bank to start their business.
Appreciate the role and importance of The banks they approached were interested in what the money would be used
a business plan in minimising the risk for. But they were also concerned about customers, costs, cash flow and the
involved in setting up a business. competition. They wanted to see a business plan. This is a document which puts
together all the information showing how a business might survive in a
competitive world.
The plan had two main functions. First, drawing up the plan would force Chloe
and Samir to think about all aspects of their business and not just aspects like
design and computers. It saved them from making costly mistakes about matters
like insurance and tax, which they had not thought about. It would also force
them to make a forecast of cash flow. All this research and forecasting will help
reduce the risk of the business failing in its first couple of years of operation.
Second, it would help their bank manager, as well as others who would help
them set up the business, to see whether the business stood a chance of being
successful. After all, bank managers will only lend money to a business if they feel
that it will be able to repay the loan with interest. If the business fails, the bank
could lose the money it has loaned.
Watch Out!
The business plan
Each bank gave Chloe and Samir a booklet about what should be included in a
Don’t assume that every start-up business business plan. The details differed from bank to bank, but the main areas covered
has a business plan. However, the were resources, production, marketing and finance. Examples included:
evidence shows that businesses which do • the name of the business, a brief history, its location, its legal structure
have a business plan are more likely to (whether it is a limited company for instance) and who would be the owners;
survive the first few years of trading than • what equipment would be needed and its cost;
those which do not have a business plan. • what premises would be needed;
• who would be the suppliers to the business;
• the key personnel in the business including their position and salary;
• the product, whether it had been test marketed and what market research had
been carried out;
Business plan – a plan for the development
• what production methods would be used;
of a business giving forecasts of items such • how the service would be marketed;
as sales, costs and cash flow. • what the total costs and revenues of the business would be;
• a cash flow forecast for the first 12 months;
• the sources of finance for the start-up of the business.
Chloe and Samir were now in a position to draw up their business plan. Part of
this is shown in Figure 1. They found completing the business plan very difficult
because it forced them to think of many areas of the business which they had not
thought about at all. But once they had completed it, they showed it to Chloe’s
mother, Mary, who ran her own business. Mary evaluated the business plan. This
meant she looked at it critically in two ways.
• She checked that all parts of the business plan had been completed.
81
• She thought about whether each part of the business plan was feasible. For
example, could they really get that many orders in the first six months? Would
the marketing make any impact?
Watch Out!
In a business plan, it is better for

entrepreneurs to be cautious about the
future prospects of the business. Then
they can see what will happen if things do
not go well. Can they survive even if sales
are disappointing? Can they survive if
costs are higher than might be expected?
Vicki McFarland and Wendy Jeffery have spotted the chance to be

professional exam markers. There is some risk as work will usually
only flow when students are taking major exams. Their research
shows that they can make sufficient in the busy times to offset the
quiet times. They decide to construct a business plan to try to think
through their ideas.
Which two of the following are the most likely reasons to produce a
business plan?
A To show what good markers they are
B To get support from the bank when cash flow might be slow
C To show other people they could create a business plan
D To show a bank their route to making a fortune
E To convince the exam boards to give them more work
F To help them monitor actual earnings against forecast earnings Go through these.
C is not relevant because it is not the purpose of a business plan.
Answer B and F D a business plan may help to show a bank how a business is
There is a number of choices available so first: expected to be a success but it is not a plan for making a
fortune.
Think: What is the benefit of a business plan to Vicky and Wendy?
What is not relevant to the plan? E relates to the quality of their marking not the quality of the
business plan.
Then: Dismiss the choices that are obviously wrong – that would
be A. This leaves you with the most likely correct answers of B and F.
Decide: You are left with B, C, D, E and F. You have narrowed They are both direct and practical uses of a business plan.
down the options. Check to make sure your choices are right.
82
Figure 1 – Part of the business plan of Skyfitters
Chloe Simpson
Samir Audard
Test yourself
1. Which three of the following would a start-up business be 3. Drawing up a business plan helps reduce the risks of
most likely to include in its business plan? starting a business because
Select three answers. A banks like to see a business plan
B every business has a business plan
A A cash flow forecast
C a business plan encourages the entrepreneur to think
B A photograph of the business owners
about all aspects of the business
C The location of the business
D profits can only be made if a business plan has been
D How the product will be marketed
drawn up
E The names of all its past customers
F The names of all its past suppliers Select one answer.
G The names and addresses of all employees
2. Which two of the following are most likely to be the reasons
why the owners of a start-up business would draw up a
business plan?
Select two answers.
A To minimise the risks associated with starting a business
B To persuade a bank to lend money to the business
C To prove to Her Majesty’s Revenue and Customs that the
right amount of tax is being paid.
D To calculate the profit from the operations of the business
to date
E To reduce the rent on the premises which the business is
using
Over to you
83
Kenton Travel Ltd was set up in 2009. It managed to achieve its regularly in Sunday newspapers. They predicted that
first business aim, to make a profit of £5,000, in the first year. customers would spend an average of £3,000 each. In their
Kenton Travel is owned by Mohammad Ashraful and Atiur cash flow forecast, they put in high figures for their costs and
Rahman. The travel company provides small group tours to low figures for the sales. They hoped that making very cautious
places like Vietnam, Cambodia and Indonesia. estimates would minimise the risk of their business failing within
Both Mohammad and Atiur are experienced travellers and the first year due to lack of cash.
wanted to mix business with pleasure when they first decided to
start a business. They are both actively involved in leading 1. (a) What is meant by the term business plan? (1)
tours and thoroughly enjoy what they do. Indeed, their success (b) Give three examples of things that Mohammed and Atiur
in business is partly down to their passion for travel that rubs off would have included in their business plan. (3)
on their small group customers. However, planning before they
2. Explain two ways in which Mohammad and Atiur did
started trading was also an important ingredient. The pair spent
research which helped them to write their business plan
nearly two years researching destinations, accommodation,
before trading began. (8)
modes of travel and routes before drawing up a comprehensive
business plan. They also went on courses to learn about 3. Mohammad and Atiur had a ‘passion’ for their business and
marketing and accounting. drew up a business plan before they started. In your
When Mohammad and Atiur drew up their cash flow forecast, opinion, would this help to get rid of all the risks of setting up
they included the cost of setting up a website and advertising a new business? Justify your answer. (8)
EDBUS_C18.QXD 16/7/09 11:44 Page 2
18 Obtaining finance
Case Study
84 Business idea
Thousands of chefs dream about owning their own restaurant. But for
Kiara Williams, it was not just a dream. It was a burning ambition. She
trained as a chef in Cardiff and worked in some of the top hotels in
London and Paris. She also worked in two famous restaurants – one in
Oxford and one in London. Over a number of years she developed a
wide range of cooking skills and a good understanding of the restaurant
industry. She also managed to save up £20,000. Now she was ready to
realise her ambition.
Objectives Getting started

G Explain the main sources of finance for Kiara drew up a business plan. She knew she would need to raise money to get
a small business start-up. started and run the business. She calculated she needed £100,000 to fit out the
G Understand long-term sources of restaurant. Then she would need another £50,000 to cover her day-to-day
finance, such as loans, personal expenses, such as
savings, profit, venture capital and • wages for staff;
share capital in the context of a private • utility bills such as electricity, water and gas;
limited company. • the rent on the premises;
G Understand short-term sources of • food ingredients for meals.
finance such as overdrafts and trade £150,000 was a lot of money to find. She was advised that most of it should come
credit. from long-term finance but some of it could be short-term finance. The
difference is that long-term finance either never has to be repaid or it will be paid
off over a long period of time. For small companies like Kiara’s, this typically
means up to five years although in some cases it can be up to 25 years. Short-
Long-term finance – sources of money for term finance may have to be paid back over a much shorter period of time, up to
businesses that are borrowed or invested one year’s time.
typically for more than a year. Having taken advice, Kiara decided to set up a private limited company for her
Short-term finance – sources of money for business. This reduced her risks if the business failed. It also meant that she
businesses that may have to be repaid could have several people investing in the company and becoming its
either immediately or fairly quickly, such as shareholders or owners.
an overdraft, usually within a year.
Share – a part ownership in a business; for Long-term sources of finance
example a shareholder owning 25 per cent
Kiara looked at three different types of long-term finance for her company.
of the shares of a business owns a quarter
of the business.
Share capital One source of long-term capital for a start-up business is investors
Personal savings – money that has been
who will buy shares in the company. This means they take part-ownership of the
set aside and not spent by individuals and
business. Kiara was prepared to put all her £20,000 of personal savings into the
households.
business in this way. Who else could she find who might also invest in the
Share capital – the monetary value of a
business? For almost all small business start-ups, it is relations, friends or work
company which belongs to its
colleagues who invest. Kiara talked to her father and he agreed to invest £75,000.
shareholders; for example, if five people
each invest £10,000 into a business, the Kiara also had a friend with whom she had worked in the past. He was prepared
share capital will be £50,000. to put £25,000 into the business. So, in total she had found £120,000 of share
capital. There would be three shareholders in the business. As part owners of
Shareholders – the owners of a company.
the business, they would be entitled to a share of any profit made.
EDBUS_C18.QXD 16/7/09 11:44 Page 3
Very occasionally, entrepreneurs find professional investors who are willing to

put money into a new company. These people or companies are called venture
capitalists. They risk (or venture) their money (or capital) in the hope that the
business will be a success. They are prepared to invest because they hope to be
able to sell their share of the business at a large profit at a later date.
Loans Another source of long-term finance is a loan. Kiara persuaded her bank
85
to lend her £30,000. Bank loans to businesses tend to be for periods up to 5 years.
Banks prefer to have security (or collateral as it is sometimes called) for a loan.
This is something of value, which the bank can sell if the business fails to repay
the loan. Many small business owners offer their own home as security. If they
don’t repay the loan, the bank can force the house to be sold. The loan is then
repaid from the proceeds of the sale. A loan is where property is offered as
security is often called a mortgage. Banks loans have to be paid back with
interest, usually in regular instalments at a fixed rate of interest, over a period of Watch Out!
time. Kiara’s bank loan was repayable over three years at £1,000 per month.
Remember to make sure you understand
However, some bank loans have rates of interest which can change as interest
the difference between the money needed
rates in the economy change. The costs of these loans can go down or they can
to start-up a business and the money
go up.
needed to run and expand the business
when it is up and running. They are not
Retained profit Once the business is up and running, it will hopefully make a always the same.
profit. The profit belongs to the owners of the business. In Kiara’s case, the
profits belonged to the three shareholders. They could choose to take the profit
out of the company as a dividend payment. This would be their reward for
having invested in the company. They could agree to put the profit back into the
business. It would then become retained profit. The money could be used to
make the business financially stronger, for example by paying off debts. Or it
Venture capitalist – an individual or
could be used to finance expansion. Kiara hoped that retained profit within a
company which buys shares in what they
couple of years could finance the opening of a second restaurant. hope will be a fast growing company
with a long-term view of selling the
Leasing Some businesses use equipment or vehicles that can be rented from shares at a profit.
another business. This is an alternative to buying the equipment and borrowing Loan – borrowing a sum of money which
the money to pay for it. Such rental agreements by businesses are called leasing. has to be repaid with interest over a
Often maintenance is including in the leasing agreement. Kiara’s restaurant leases period of time, such as 1-5 years.
a van and also the computer systems that are used in the business. Repairs and Security (or collateral) – assets owned
servicing for both are paid for by the leasing company. by a business which are used to
guarantee repayments of a loan; if the
Grants Some start-up businesses are eligible for grants. Very small start-ups business fails to pay off the loan, the
might get a grant from charities like the Prince’s Trust. Grants are also available lender can sell what has been offered
through government and the European Union particularly if the business is as security.
located in an area of high unemployment or where the government wants to Mortgage – a loan where property is
encourage investment into the local economy. The great advantage of a grant is used as security.
that the money does not have to be repaid and there is no interest either. Dividend – a share of the profits of a
However, in some cases, there are conditions attached to getting and using a company received by shareholders who
grant. For example, the business might have to promise to provide jobs for a own shares.
number of people. Retained profit – profit which is kept
back in the business and used to pay for
Short-term sources of finance investment in the business.
Kiara’s restaurant business needs to use a variety of short-term sources of finance. Leasing – renting equipment or premises.
Overdraft facility – borrowing money
Bank overdraft Kiara opened a bank account for the company to pay its day-to- from a bank by drawing more money than
day bills using cheques and bank cards. Money received from customers also was is actually in a current account. Interest
paid into the account. Kiara negotiated an overdraft facility of £2,000 with the is charged on the amount overdrawn.
bank. What this means is that the restaurant’s account at the bank can go into
EDBUS_C18.QXD 16/7/09 11:44 Page 4
the ‘red’ by up to £2,000: it can borrow up to £2,000 at any credit too. So they get paid late for what they sell. But
one time. The great advantage of an overdraft is that money restaurants are lucky because most of their customers pay
is only borrowed when needed which cuts down on the immediately.
interest that has to be paid on the borrowing. One day, the
account might be in the ‘black’, with money in the bank. Factoring Some businesses raise finance through
The next day, a cheque might have been paid out and the factoring. When a business supplies goods or services to
account slips into the red. For Kiara, the winter months other businesses, it typically has to give trade credit. This
86
were always better for business than the summer months. means it will often have to wait for at least 30 days for its
So in the summer, she tended to borrow money using her invoices to be paid. A factor is a financial service company
overdraft. An overdraft facility was one way she could like a bank. It will pay the business typically 90 per cent of
manage her cash flow more effectively. A disadvantage of the value of invoices immediately. Instead of waiting 30 or
an overdraft is that the rate of interest can often be quite more days, the business gets its money now. There is a price
high, especially for small businesses. to be paid for this service. The factor charges a fee, which is
like the interest on a loan. Not all businesses can use a
Trade credit When the restaurant orders supplies, its factor even if they wanted to do so. Customers of Kiara’s
suppliers usually will allow a period of time before the restaurant business, for example, pay immediately. So
supplies have to be paid. This is called trade credit. factoring is not a suitable method of finance for Kiara.
Typically, suppliers will give 30 days for a bill (called an
invoice) to be paid. Even then, there is often no penalty if
the bill is paid late. Trade credit is a form of short-term
borrowing because goods and services do not have to be Factoring – a source of finance where a business is able to receive
paid for immediately. For many businesses, the advantage cash immediately for the invoices it has issued from a factor, such
as a bank, instead of waiting the typical 30 days to be paid.
of not having to pay for goods immediately is cancelled out
by the fact that they have to offer their customers trade
5 (b) Lucy has a brother Dominic who is also a dentist. He is

currently working as an associate dentist in another local
practice but they are considering forming a partnership and
opening an NHS dental practice in another town. Most students (61%) gained good (between 5-8) marks on this
question.
The purchase of a second dental practice required Lucy and These answers considered the nature of a dental practice
Dominic to raise extra finance. Discuss the most suitable and the NHS. They discussed appropriate sources of finance,
sources of finance they might have used for the purchase of the such as government grants, mortgages, loans and partners’
second dental practice. (12) (June 2007) own capital/retained finance.
Some students (23%) scored poorly (ie 0-4) on this question. Some students (16%) gained very good (ie 9-12) marks on this
question.
These answers gave incorrect or inappropriate sources of
These answers showed good judgement skills (the command
finance for a small business such as a dental practice,
word ‘discuss’ implies that evaluation is required). They
which was a partnership. An answer giving selling shares on
chose appropriate sources of finance, gave clear reasons
the stock market would be incorrect. Some answers were
and judged why these sources were suitable for this type of
not appropriate (i.e. a coffee morning or a raffle), whilst an
business (i.e. a partnership which is a relatively small
overdraft is mainly a short-term source of finance and would
business) rather than other types of business.
not be used for the purchase of premises.
EDBUS_C18.QXD 16/7/09 11:44 Page 5
Over to you Test yourself

1. Which two of the following are examples of long-term
finance for a high street chain of fashion shops? Select
two answers.
A An overdraft
B Trade credit 87
C A three year bank loan
D New shares
E A Christmas sale
2. On which one of the following would a business pay
interest? Select one answer.
A A bank loan
B Shares
C Personal savings
D Retained profit
3. Which one of the following is most likely to be an

example of a type of finance where the lender can
demand immediate repayment from a business which has
borrowed the money?
Perth Holdings Ltd is a Scottish-based company that makes A An overdraft
drilling and other engineering equipment for the oil industry. It B A share
was set up in 2001 with £160,000 of share capital, a £40,000 bank C A bank loan
loan and a £10,000 local authority grant. The shares were owned D Retained profit
equally by Ella McDonald and Shane MacTaggart. Ella, who
studied Business at Glasgow University, insisted that the
business should be properly funded at the start. She knew that
small businesses that lacked funding in the initial stages often
struggled. The company rents a factory unit on an industrial
estate and leases about 80 per cent of its machinery and
equipment. Watch Out!
The company has done well since starting up. The rising oil The typical business start-up needs a mix of both long-term and
price has resulted in a boom in oil exploration and Perth short-term finance. It needs long-term finance to pay for all the
Holdings has benefited. Most of the company’s recent growth costs of setting up and then running the business. It needs
has been funded through retained profit. This has avoided the short-term finance to cope with changing cash flows through
need to increase the amount borrowed through loans the business. For instance, many businesses see sales peak in
significantly. the run up to Christmas. They use short-term finance to get
In 2008, the price of oil reached a record high and the factory them through this period when costs tend to be high.
was running at full capacity. Ella and Shane decided it was time
to move to larger premises and cash in on the continuing boom.
They drew up a business plan for expansion. They calculated
they would need to raise £200,000 to make the move and update
their technology. A bank agreed to loan them all the money.
1. Analyse two differences between ‘£160,000 of share capital’

and a ‘£40,000 bank loan’. (6) Watch Out!
2. Explain two reasons why a company like Perth Holdings
Many start-up businesses fail because they do not have enough
would choose to lease machinery and equipment rather
long-term finance. Then either they cannot get enough short-
than buying it outright. (6)
term finance to run the business and have to stop trading. Or
3. Perth Holdings Ltd could borrow the £200,000 from a bank or they get into financial difficulties: banks and other businesses
seek investment from a venture capitalist to help it expand. then ask for what they are owed to be paid immediately which
In your opinion, which would be the better option for Perth the business cannot do. So the business collapses owing money.
Holdings Ltd to fund its expansion? (8)
EDBUS_C18.QXD 16/7/09 11:44 Page 6

Putting a business idea into practice
In this topic you have learned about: cash flow and its role in a business up and running, understanding how external influences
88 new business, objectives and how they provide a focus for a new can affect small businesses and estimating revenue and costs and
business when starting up, obtaining suitable finance to get the how to calculate profit or loss.
business going, qualities needed by the entrepreneur to get the
You should know…

A financial objective is one set by the entrepreneur involving A cash flow statement is used to show what actually
money and will be quantitative and easy to measure. happened and provides the means to make a comparison.
A non-financial objective is one set by the entrepreneur which Revenue is the income a business receives from its
will be more personal to her or him and will be qualitative. Only customers. It is found by multiplying price charged by the
the entrepreneur really knows if this has been achieved. number of items sold.
An entrepreneur is someone who is prepared to take a risk on Price is what the customer pays the business for
something they have researched, planned and in which they something the customer buys. It is what has to be given
believe. up to acquire a good or service in exchange.
Entrepreneurs need the personal skills of drive and leadership. Cost is what the business pays for resources such as
labour, equipment, buildings, materials and so on, which
Entrepreneurs need the technical skills of thorough research are needed to produce goods and services.
and good financial planning.
If revenue is higher than cost over a period of time this
Cash flow is a record of the money flowing into and out of a gives the business a profit.
business.
If costs are higher than revenue over a given time, this
More money flowing into the business than out of it is called a gives the business a loss.
‘surplus’.
Long-term finance is used for big purchases that last a
More money flowing out of a business than in is called a long time and can be used over and over again such as
‘shortfall’. buildings or expensive equipment and machinery.
A cash flow forecast is only an estimate. An entrepreneur uses Short-term finance is for smaller immediate purchases
it to check with what actually happens to see if the planning that are more irregular such as stock.
and research were correct.
To help understand cash flow students should think about their Calculate their net cash flow – the amount they receive minus the
own cash flow in a week. amount they pay.
Make a list of the different ways they receive cash and the Consider how any money left over might be used and when it
amounts they receive. Add up the totals. would be used.
Make a list of the different ways they pay out cash and the Consider what they might do if they did not have enough cash to
amounts they pay out. Add up the totals. pay for the things they wanted to buy.
Stretch activity
To challenge yourself to see if you can manage cash flow over a and ability to react to changes in the business to see if you can
period of a year, visit survive the year. Sound easy? Bear in mind that over 80% of
http://www.bized.co.uk/learn/business/accounting/cashflow/ those who attempt this end up being forced to close so it is a
simulation/index.htm - Biz/ed’s Cash Flow Simulation game. real challenge, as is the case with real businesses, to manage
Here you will be presented with a scenario and a cash flow cash flow carefully.
forecast for a small business. You can test your understanding
(a) Sourav has opened a cycle shop in Nottingham. He is preparing (i) What is meant by the term ‘cash flow’? (1)
a cash flow forecast for the next six months from July to the end (ii) Explain why the cycle shop has a cash flow problem. (3)
of the year. In July the business has an opening balance of
Think: What is cash flow? How does cash flow work? What is the
£50,000. In July total receipts are £45,000 and total payments are
cash flow in this scenario? What is the problem facing the business?
£120,000.

(i) Cash flow is money in and out of a A basic answer that has the idea but Use phrases like ‘money flowing in and out
business. which does not use appropriate terminology. of a business’ and state what the money flowing
in and out represents. For example, ‘…money
flowing in is as a result of the revenues received
from sales whereas the money flowing out is the
payments for raw materials, stock and overheads
that make up the cost of production’.
(ii) The cycle shop has a cash flow A good answer that identifies the Start with a clear statement of the problem
problem because in July money flowing amount of the cash flowing in and out of the in July, showing working out. For example, ‘In
out is higher than money flowing in. The business and which works out the negative July total payments (£120,000) are higher than
business has a negative net cash flow of cash flow. The problem is then identified – total receipts (£45,000) The net cash flow is,
- £75,000. There is not enough in the the business does not have enough cash to therefore, negative, (-£75,000)’. Then relate the
business at the start of January to cover pay for the outgoings. negative cash flow to the opening balance to
this. show that the business does not have enough
cash to be able to finance its operations. For
example, ‘The opening balance is £50,000 so this
means the closing balance is -£25,000. This
presents the business with a problem because it
does not have the cash to buy stock’.
Anne Milford knew from her work in the fashion world that there set out in a business plan. As a result of looking at the plan they
was a demand for up-market hampers for glamorous picnics and decided not to invest. Anne turned to her bank, as her personal
parties. Even though she had not been involved in this type of savings were not enough. The bank told her that her business plan
business, she felt her contacts would give her the start she needed. was not detailed enough and that she needed to think about her
financial projections more carefully. They also wanted to see a
She did some research locally and found there were no
cash flow forecast and some budgets. Anne had been happier
competitors. However, she did not carry out in-depth research
drawing up the marketing part of the plan than the financial part.
about sales beyond her contacts. She was not aware of sales
trends, what prices were charged or even whether such (a) Which two of the following costs will Anne not have to pay? (2)
businesses existed. She believed the quality of the product, her
A Staff wages D Rent
reputation, determination, self-belief and word of mouth would be
B Raw materials E Heating
enough to generate sales and meet her objectives of being rich
C Electricity F Water
and famous. She had £20,000 of her own to start the business,
which she would run from the house that she owned in (b) Anne sees herself as an entrepreneur. Describe two qualities
Sunderland. Apart from some utility bills, such as gas, electricity, she will need to succeed in her business venture. (4)
telephone and water, accountants’ fees and raw material costs,
(c) Do you think that you would invest in Anne’s business?
Anne thought she would have no other overheads. This led her to
Justify your answer. (6)
believe the objective of being rich would happen relatively easily.
From her research Anne knew that she would need some extra
finance to start her business. She asked her friends Toni and Linda
if they would like to invest. They looked at the ideas which she had
EDBUS_C19.QXD 16/7/09 11:49 Page 2
Topic 1.4 Making the start-up effective
Topic 1.4: Making the start-

up effective
Topic overview
This topic considers the practicalities of making a business idea
Case study
Jason Livermore had worked in
happen. What are the objectives in setting up? What are the qualities of
sports centres for a number of a successful entrepreneur? How will estimates of revenues, costs,
years. At 28 he was feeling profits and cash flow fit into the business plan? What sources of finance
frustrated and wanted to take are available to a start-up business?
on more responsibility. He
noticed that at certain times of the day a certain type of customer visited the centres. They were
either parents who looked after children or business people who appeared to have limited time. He
talked to these customers and found that they would like a personal trainer who could tailor fitness
programmes to their needs.
That was four years ago. He set up his own business having rented rooms in a town centre and
operated as a fitness centre specialising in offering tailor made personal fitness programmes. The
marketing mix for the new business was simple. He charged a competitive price for his programmes
compared to local sports and fitness centres. His promotion strategy was to maintain contact with
customers through phone calls and emails. At regular intervals he would meet with his customers to
check that the programme was to their satisfaction. At the same time, he would ask whether there
were any other people they knew who would be interested in his services. As for ‘place’in the
marketing mix, he dealt directly with customers who were all in the local area, within 15 miles of his
centre.
For the first couple of years, Jason operated as a sole trader. As the number of customers expanded
he moved to new premises. Having taken advice, Jason decided to change the ownership and
became a private limited company to reduce risks should the business not do well in the future. By
this stage, he was employing four workers and had registered to pay VAT six months previously. His
company was now responsible for paying VAT, National Insurance contributions and corporation tax.
He and his workers also paid income tax.
Two years further on and Jason bought new machinery because of the demand for his services. He
also expanded the services to include lifestyle advice and yoga. He put his success down to excellent
customer service. His programmes suited his customers’needs. He knew his customers were
satisfied because of the amount of repeat business he did. Nearly all customers renewed their
membership each year.
Buying the new machines meant recruiting more staff. With skilled workers in short supply, he did
not get many applications from his adverts. He was also aware that he wanted to recruit staff that
would be well motivated and have a positive attitude to work.
Dealing with all the legal aspects of running a business was difficult. For a start, there was all the
employment legislation relating to discrimination, recruitment and redundancy. However, he felt
that, if he treated his staff fairly, they would be well motivated and he would keep within the law.
1. Explain why customers and customer satisfaction are so important for Jason’s business.
2. Why does setting up a private limited company reduce risk compared to operating as a
sole trader?
3. What could be the problems for Jason’s business if his staff were not well motivated?
4. Should Jason spend more on promoting his business to customers? Justify your
answer.
EDBUS_C19.QXD 16/7/09 11:49 Page 3
Topic 1.4 Making the start-up effective
91
What will I learn?

Customer focus Why must a business anticipate, identify and meet customer needs if it is to be successful?
The marketing mix Why are price, product, promotion and place important elements of the marketing mix?
Why do different businesses place different emphasis on the elements of the marketing mix? How can the
marketing mix can be amended to meet changing consumer needs?
The importance of limited liability What is the principle of limited and unlimited liability? Why does
liability have implications for choice on the status of the business? What are the differences between sole trade
and private limited company status?
Start-up legal and tax issues Why is establishing a unique trading and business name important? Why is it
necessary to keep careful business records? What are the implications of VAT, income tax, National Insurance
and Corporation Tax for the business?
Effective on-time delivery and customer satisfaction Why is fulfilling customer orders accurately and on-
time and dealing with complaints important for effective customer service? Why is customer satisfaction
important to the success of a business? Why is repeat purchase important for a business?
Recruiting, training and motivating staff What are the basic processes involved in recruiting staff to work in
a small business? Is skill more important than attitude when it comes to recruiting and training staff? Why is
treating staff fairly important? What impact does employment legislation, for example relating to age, sex, race
and disability discrimination, have on a business?
Unit 2 Research and investigate a real life business from a choice of five tasks and write up the results under
controlled assessment conditions.
Unit 6 A forty-five minute written examination of multiple choice, objective test and extended answer questions.
EDBUS_C19.QXD 16/7/09 11:49 Page 4
19 Customer focus and the marketing mix
19 Customer focus and

the marketing mix
92
Case Study
Fahmida Nabi is in her final year of university. She has been
studying for the past two and half years for a degree in
Silversmithing, Goldsmithing and Jewellery. At the end of her
course, she would like to set up in business making original pieces
of jewellery. However, she has a lot of choices to make about the
direction of her business.
Customer focus
Objectives A business can only survive if it
G Understand that any business needs has customers. A business must
customers to survive. have enough customers willing
to pay a high enough price for it
G Appreciate that knowing who and how
many customers might be interested to cover its costs and make a profit.
in buying products from the business Focusing on what the customer wants is vital to most businesses. Also, successful
is important. businesses are often ones that are able to anticipate changes in customer needs.
G Understand that a business must For a small or start-up business, customer focus is essential if it wants to make
anticipate, identify and meet customer the business a success. Entrepreneurs may think they have a good idea for a
needs if it is to be successful. product but there have to be customers willing to pay money if the idea is to
G Understand that a business will have become a business.
to consider its price, the product itself,
how to make customers aware of the Identifying needs Businesses must understand what their customers want from
product (promotion) and how to get a product. Fahmida knows that there are already many successful businesses in the
the product to the consumer (place) jewellery trade. Some businesses make jewellery which is a fun, impulse (or spur
as important elements in meeting of the moment) purchase. This sort of jewellery tends to be cheap and colourful. It
customer needs. is the sort of jewellery you might buy on a Saturday afternoon shopping expedition
G Understand that different businesses when you are looking for clothes or shoes. Other businesses make more
will place different emphasis on the expensive jewellery designed to be a one-off purchase. It might be an engagement
elements of the mix and that the mix ring or wedding ring for example. This sort of jewellery satisfies a completely
can be amended to meet changing different customer need. It is about status, prestige and showing commitment.
consumer needs.
Anticipating needs Jewellery is part of the wider fashion industry. As with
clothes, fashion in jewellery changes over time. A successful business must
understand what its customers want in advance. If Fahmida makes jewellery that
was fashionable ten years ago but is no longer fashionable today, she will not do
very well. For Fahmida to succeed, she must be at the forefront of fashion. She
has to be able to try to understand how fashions change and how this might affect
customer wants and needs.
Meeting customer needs Identifying and anticipating customer needs is not

enough. Businesses then have to meet those needs. If the market wants smart but
inexpensive jewellery, Fahmida must supply those products. Quality will be
important whatever the price charged. If her customers buy a £2 necklace, they will
not expect it to be made with gold and diamonds. But they will expect the clasp
that closes the necklace to work. It will not meet customer needs if it has to be
thrown away broken after being worn once.
EDBUS_C19.QXD 16/7/09 11:49 Page 5
93
The marketing mix of Primark, Topshop and Dolce & Gabbana are likely to be different
Watch Out!
In some industries, the needs of customers

The marketing mix change very quickly. In fashion retailing, for
Any business must consider the marketing mix. This is the combination of factors example, there are new styles and trends
that helps a business sell its products. There are four parts to the marketing mix: every season. In other industries, the needs
of customers change very slowly. A farmer
price, product, promotion and place. These are often called the ‘4 Ps’ because each
growing sprouts or cabbages is not
word starts with a P.
operating in a fast changing customer
environment. Think very carefully about
Price The price of a product must reflect the value that customers place on the what you write in a question about customer
product. Fahmida could produce low cost costume jewellery made from cheap needs. You do not want to be saying that
materials. Customers might be happy to buy this but only at a low price. Equally, farmers should change their milk or their
Fahmida could produce high cost jewellery made from expensive materials, such as cabbages or their potatoes every few
gold and diamonds, with a high level of quality. The price could then be high to months to satisfy customer needs.
reflect what customers are prepared to pay for this quality. Price, quality and how
customers perceive the product are all interlinked. Price is also important for
Fahmida because it will affect how much she earns from her work. Her business
will only be successful if the price she charges allows her to make a profit.
Marketing mix – the combination of
Product The product sold must meet customer needs. For Fahmida, this means
factors which help the business to take
identifying into which segment of the market she plans to sell. Will it be cheap and into account customer needs when
cheerful jewellery aimed at a mass market? Will it be expensive hand crafted selling a product - usually summarised
jewellery with each piece costing hundreds or thousands of pounds? Once in as the 4 Ps, which are price, product,
production, she must ensure that her product is attractive and well made for the promotion and place.
price. Other businesses have to make sure that the product meets customer needs Price – the amount of money customers
by doing what it says it will do or having appropriate technical specifications. The have to give up to acquire a product.
look and design of a product might be important factors in consumers’ decisions Product – a good or service produced by
about buying it. a business or organisation and made
available to customers for consumption.
Promotion Customers need to know that a product exists and is available for Promotion – communication between the
purchase. Promotion is partly about giving them knowledge about the product: business and customer, making the
making them aware that it exists. It is also about persuading them that they want to customer aware that the product is for
buy the product. Promotion includes advertising, printed brochures, mailing leaflets sale, telling or explaining to them what is
to customers (direct mail), sales promotions like two for one offers or free gifts, and the product, making the customers
sponsorship. For Fahmida, it is about getting her jewellery noticed by customers. aware of how the product will meet the
She could not afford to advertise on television. However, she could afford to have a customers’ needs and persuading them
catalogue printed and sent to possible customers. If she opened a jewellery shop, to buy it for the first time or again.
she might consider advertising in her local newspaper.
EDBUS_C19.QXD 16/7/09 11:49 Page 6
Place Place is about having a product available to customers only be afforded by large companies selling branded
where they want it, when they want it. Having Christmas products like cars, alcoholic drink or branded food products.
turkeys on sale in Scotland in July for sale to customers in However, she could afford to run a website. Alternatively,
London is bad marketing. Fahmida faces difficult decisions she could sell her jewellery on eBay, an Internet auction site.
about place. How can she get her jewellery to customers? Her business will be very different depending on whether
Should she sell to specialist jewellery shops? Should she try she produces high quality, expensive jewellery or cheap
to get products stocked by supermarkets such as Tesco or jewellery. In the same way, the marketing mix for fashion
94
clothes retailers like Primark or TopShop? Could she sell houses like Yves St Laurent or Dolce & Gabbana is different
directly to customers through mail order or over the Internet? from that of Marks & Spencer, TopShop or Primark. A much
Could she have a market stall or open her own shop and if larger proportion of the cost of a garment bought at Dolce &
so, where should it be? Then she has to think of timing. Are Gabbana is spent on promotion than of a garment bought
there periods of peak demand for jewellery during the year? from TopShop.
Is it like many products where sales peak at Christmas? Fahmida has to think carefully about her marketing mix.
Say she chooses to make low cost, cheap but fashionable
Differences in the marketing mix jewellery. Her price then has to be relatively low to reflect the
The marketing mix is different for each business and for each ‘throw away’ nature of the product. The product has to look
industry. So the marketing mix for cars is different from that fashionable but because the price consumers are prepared to
for cornflakes or that for jewellery. Fahmida could not afford pay is low the materials she uses will have to be inexpensive
to advertise on television. This is so expensive that it can if she is to make a profit on her sales. She might choose to
produce leaflets to promote her jewellery and give them to
younger people. As for ‘place’, she might consider setting up
Watch Out! a market stall in a city centre where lots of young people
shop - the sort of people who are most likely to buy her
Place is much more than about where a product is sold (like a jewellery. She may feel that, in addition, she could sell her
shop for example). It is about how the business gets its product to jewellery on a website like eBay.
its customers when they want it. Place is, therefore, about The decisions Fahmida makes on the four elements of the
distribution methods. mix might be very different from those made by businesses
outside the fashion world, such as a children’s entertainer or
a landscape gardener. Large businesses will have a very
different marketing mix from small businesses, if only
because they have more money and so more options.
Place – the way in which a product is distributed - However, they all have one thing in common - they must
how it gets from the producer to the consumer. focus on what the customer wants to be successful.
Test yourself
1. Which two of the following would be essential elements 3. Which two of the following would be the most likely
of customer focus for a business? examples of promotion?
A Anticipating customer needs A Stocks
B Ordering stocks of raw materials B Two for one offers
C Meeting customer needs C Production
D Paying consumer tax D Quality
E Paying workers E Advertising
Select two answers. Select two answers.
2. Which two of the following would be part of the marketing
mix for a business?
A Production
B Place
C Stocks
D Price
E Workers
Select two answers.
EDBUS_C19.QXD 16/7/09 11:49 Page 7
Over to you
Hannah Abruquah works in the design department for a
designer clothes manufacturing business. However, she has
plans to set up her own business. The business will
manufacture clothes specially designed by Hannah for women
aged 20-40 years who are sized 16 and above. Hannah’s friends 95
and family have always told her how frustrated they are that so
many fashion shops do not stock larger sizes for fashion
conscious women. They said ‘You should really do something
about this’. She wants her clothes to be exciting, fashionable
but reasonably priced. Her range will include pieces suitable to
wear to go to work at the office, or for a night out with friends.
Working for an existing business, Hannah knows that one of
her biggest problems will be persuading shops to buy her
collection of clothes. If she cannot get her clothes into shops,
she will not be able to get her 20-40 year old target market to 1. Explain how each one of the following elements of the
buy her clothes. Setting up a website to sell directly to marketing mix could contribute to the success of Hannah’s
customers is one way round the problem. However, this future business:
probably will not give enough sales to make her business a (a) price; (3)
success. She will have to persuade shops and boutiques to (b) product; (3)
stock her clothes. To do this, she will have to take a stand at (c) promotion; (3)
the regular trade fairs that are visited by the owners of (d) place. (3)
independent clothes retailers where they choose and buy their 2. (i) What is meant by ‘customer focus’? (1)
stock. Promotion would also mean sending out brochures and (ii) Explain why customer focus will be important to
leaflets to shops that might consider buying her products. Hannah’s business. (3)
Advertisements in selected magazines might also be affordable. 3. ‘The marketing mix for a shop which sold fashion clothes in
larger sizes would be very different from the marketing mix
for Hannah’s business.’ Do you agree with this? Justify your
answer. (6)
(a) Draw four lines to match the following with the appropriate Think: what are the features of the 4Ps of the marketing mix?
element of the marketing mix.
Then: decide which elements clearly relate to parts of the
marketing mix.
(i) Charging the same as the competition A Price
(ii) New improved version B Product Decide:
(iii)Stamps available online C Promotion
(iv) In-store display D Place ‘Charging’ is about price. So (i) = A
(v) Free gift E Promotion A new ‘version’ is about the product. So (ii) = B
Answer Stamps available ‘online’ is about where the stamps are

(i) - A (iv) - C or E available, which relates to place in the marketing mix. So
(ii) - B (v) - C or E (iii) = D.
(iii) - D
This leaves ‘Instore displays’ and ‘Free gifts’ as examples of
Technique: You have 4 Ps of the marketing mix (price, promotions - both are ways in which consumer awareness
promotion, product and place) but 5 elements. This means that of a product is increased. So either (iv) = C and (v) = E or
two of the elements relate to just one of the marketing mix (iv) = E and (v) = C.
(promotion) which is included twice, in C and E.
20 The importance of limited liability
20 The importance
of limited liability
96
Case Study
Rich Perry is a national record plugger. Record companies and
their artists, like music bands or solo singers, want to get their
music played on radio stations such as Radio 1` and Kiss. Not only
do they get a royalty fee every time their music is played, but it is
free publicity for the artist. They are then likely to sell more CDs
and more people will come and hear them play live at gigs. Rich
Perry uses his knowledge of the music industry to ‘plug’ or promote
the artists he represents to music stations.
Unlimited liability and being a sole trader

Objectives Rich Perry is a sole trader (or sole proprietor). This means he is the only owner
Explain the principle of limited and of his business. There are nearly 4 million sole traders in the UK today. Sole
unlimited liability. traders, for example, might be farmers, plumbers, electricians or shop owners.
Understand how the amount that Sole traders have unlimited liability. The word ‘liability’ here means being
could be lost in the event of business legally responsible for debts. ‘Unlimited’ means there is no limit to this
failure influences the choice of the responsibility to pay debts. So sole traders are completely responsible for paying
type of business ownership. all the debts of their business.
Appreciate the differences between One feature of unlimited liability is that there is no legal difference between their
sole trader and private limited own personal finances and the finances of the business. The owner and the
company status. business are seen as one and the same thing. For example, Rich Perry might use
his credit card to pay for a meal at a restaurant. He is personally responsible for
paying the credit card bill whether he went to the restaurant with friends, or he
was taking one of his clients out to lunch for business purposes.
This could be very important if Rich Perry were to borrow money to buy
premises for his business. Say he borrowed £300,000 to buy an office. He would
be personally responsible for paying back the loan. If he could not afford the
repayments, then he could be forced to sell his house to repay the loan.
Unlimited liability therefore creates personal risk for sole traders. If their
business does badly and makes a loss, the sole trader is personally responsible for
Sole trader (or Sole proprietor) – the only all the debts of the business.
owner of a business which has unlimited However, most business start-ups choose to become sole traders. This is
liability. because it is easy to set up and easy to run compared to other forms of business
Unlimited liability – a legal obligation on ownership. Being a sole trader means that someone like Rich Perry can own their
the owner of a business to settle (pay off) all business. Sole traders do not have to share ownership of the business with anyone
debts of the business. In law, there is no else. All the profits of the business go to the sole trader. So when Rich Perry is
distinction between what the business successful in his business, he gets all the rewards. He does not have to share these
owes and owns and what the business with anyone else. A sole trader also has complete control of the business.
owner owes and owns.
Limited liability – when shareholders of a Limited liability and private limited companies
company are not personally liable for the Rich Perry could have chosen to make his business into a private limited
debts of the company: the most they can company. Owners of this type of business have limited liability. This means
lose is the value of their investment in the that the owners of the business are only partly responsible for repaying any debts
shares of the company.
of the business. It also means that the finances of the business are legally separate
from the finances of the owners of the business.
Businesses that have limited liability are called companies in the UK. The owners
of a company are called shareholders. There must be at least one shareholder in a
private limited company. Shareholders have limited liability. This means that the
personal finances of the shareholders are completely separate from those of the
company. If the company gets into financial difficulties, the shareholders can lose
what they invested in the shares of the company in the first place. But this is the
limit of their liability. They are not personally liable for any more of the debts of the
company. If the company is forced to close but owes money to other businesses such 97
as banks, the shareholders cannot be forced, for example, to sell their homes to pay
off those debts.
Say someone set up a company and invested £10,000 in the shares of the
company along with another investor. The company buys an office costing £300,000.
This is financed by a loan of £300,000 from a bank. The company then does very
badly and is forced to close. Neither of the two shareholders would be responsible
for paying any of the £300,000 or any other debts of the company. The bank could
sell the office to try and get back its money. However, it could not force either of the
shareholders to sell their own personal possessions like a house. The most the two
investors could lose is the £10,000 they each put into the company at the start.
Differences between private limited companies and sole

Watch Out!
traders
There is a number of differences between private limited companies and sole Being a shareholder in a limited company
traders. reduces risks compared to being a sole
trader but it does not get rid of all risks. If
Risk Limited liability means that owning a company is less risky than being a sole you have invested £100,000 in the shares
trader. If things go badly for a limited liability company, the owners can only lose of a limited company, you stand to lose all
the value of their shares in the company. If things go badly for sole traders, they can the £100,000 if the company fails and has
to be closed. However, unlike with a sole
at worst lose everything they own including their personnel assets like a house.
trader, you would not be forced to pay any
outstanding debts of the company.
Control Control of the typical private limited company depends on the proportion
of shares owned by a shareholder. Say Rich Perry owned a company and had 80 per
cent of the shares. The other 20 per cent was owned by a friend. Rich Perry would
then control the company because he would have 80 per cent of the votes at any
shareholders’ meeting. However, if Rich Perry had 40 per cent of the shares and two
friends had 30 per cent each, no one shareholder would control the company. In
contrast, control of a sole trader would be in the hands of the owner and no-one
else. Watch Out!
Remember that a sole trader has a single

Profits Profits of a company are also typically distributed according to the
owner but may employ many people.
proportion of shares owned. If a shareholder owns 80 per cent of the shares, then
the shareholder gets 80 per cent of any profit paid out to the owners. With sole
traders, because they are the only owners of their business, they get all the profits.
Privacy Private limited companies must, by law, file their accounts each year with
an agency of government called Companies House. Their accounts are a record of
the value of their sales, their costs and their profits for a 12 month period. These
accounts can then be seen by anyone who asks and pays a small fee to Companies Companies – businesses whose
House to see them. In comparison, no private individual or business has a right to shareholders have limited liability.
see the accounts of a sole trader. So being a sole trader gives someone like Rich
Perry more privacy than being a limited company.
Test yourself
1. A shareholder in a private limited company has
A unlimited liability
B an entitlement to a share of the profits of the company
C complete control of the company
98 D complete privacy about the financial affairs of the
company
Select one answer.
2. A sole trader faces more risk than a shareholder in a
company because of
A changes in profits
B lack of control of the business
C unlimited liability
D lack of privacy
Select one answer.
3. Alfie Parkes is a sole trader who works as a gardener. His
business has performed very poorly and it has run up debts
of £50,000. Alfie has invested £75,000 in the business
overall and has used his house as security for a loan of
£30,000. His house is worth £200,000. He owes £20,000 to
suppliers. How much of the debts run up by his business is
Alfie responsible for paying himself if the business were to
close? Select one answer.
A £20,000
B £50,000
C £75,000
D £30,000
Select one answer.
3 (b) (ii) Why do you think limited liability is seen as a benefit to liability means that only investments in the business are lost.
shareholders? (4) (June 2006) Some limited judgement might have been made, such as
How students answered reduced risk.
Most students (68%) scored poorly (ie 0-1) on this question.

These answers demonstrated lack of depth of knowledge or Few students (6%) gained very good (ie 4) marks on this
did not make a judgement. When a question starts with ‘why question. These answers would have included an explanation
do you think’ it means some judgement is required. They may and a judgement. For example, ‘If the business goes bust the
have simply stated that limited liability gives protection to shareholders only lose the amount of their investment not their
shareholders without going into more detail about why it was personal possessions. This encourages them to invest. Having
a benefit. limited liability is therefore less risky for investors.’
Some students (26%) gained good (ie 2-3) marks on this

question. These answers would have explained that limited
Over to you
99
Edward and Reece Westwick, two brothers, worked for a owning half the company each. Setting up a private limited
number of building companies before deciding to set up their company would also have the advantage that it would reduce
own business as scaffolders. Health and safety laws today risks if the business did not do as well as they hoped.
mean that scaffolding is needed for most building jobs above
first floor height level. So they expected to get plenty of work 1. Explain, using the Westwick brothers as an example, what is
from builders needing scaffolding to be put up. meant by (a) limited companies and (b) shareholders. (6)
They have to decide what type of business they would form. 2. Why might setting up a limited company reduce risks for the
Edward was the older brother and had more experience. They two brothers? (3)
could have agreed to set up as a sole trader with Edward as the 3. Consider two possible advantages for the two brothers of
owner and Reece as an employee. However, Reece was not Edward becoming a sole trader and employing Reece, rather
keen on simply being an employee. He wanted to be the joint than setting up a limited company and both being
owner of a business. So they are probably going to set up a shareholders. (6)
private limited company. They would both be shareholders,
21 Start-up legal and tax issues
21 Start-up legal
and tax issues
100
Case Study
Isabel Sheldean set up a business specialising
in fitting and maintaining burglar alarms in
Bristol where she lives. Having gone on a
course about setting up a business, she has a
long list of things she knows she must do in
the first year of operation.
Business name
Objectives One thing Isabel must do is choose a name for her business. There are two main
Understand the need to establish a things she has to think about in doing this.
unique trading and business name. • The name should usually be different from the name of any other business.
Understand the importance for a new Isabel cannot choose the name of an established business which carries a
business to keep careful records. trademark. So she cannot call her business ‘Tesco’ or ‘Marks & Spencer’ or
Appreciate the implications for a small ‘Nintendo’. If she sets up a company, the company name must be unique. This
business and business start-up of VAT, will be checked by Companies House, the government organisation which gives
income tax, National Insurance and legal permission for a new company to be set up. If she becomes a sole trader,
corporation tax. the name she chooses must not be the same as that of any other similar
business in her local area.
• The name should promote the business. Imagine calling a business ‘Bad value’
or ‘Incompetent’ or ‘The bad service company’. These names would put off
customers from using the business. Many famous names today come from the
names of the founders of the business. So Mr Marks and Mr Spencer were real
people who founded ‘Marks & Spencer’. Isabel could call her business ‘
Sheldean’. However, this does not give any information about what the
business makes or sells. She could call her business something like ‘Feel Safe’.
Looking on the Internet, Isabel found a number of security businesses that had
‘Feel Safe’ in their business name. ‘Feel Safe’ is a good name because it gives an
impression to customers of the service they can expect. They are installing or
maintaining an alarm system to feel safe. In the end, Isabel decided to give her
business a name that directly showed what her business offered. She called it
‘Sheldean Alarm Systems’. Her customers then knew who owned the business
- Ms Sheldean - and the service offered by the business.
Whether or not Isabel decides to run her business as a sole trader or private
limited company will also affect her business name. If she decides to become a
sole trader, her business will be ‘Sheldean Alarm Systems’. If she decided to run a
private limited company, she will add the word ‘Limited’ after the name. So it
would become Sheldean Alarm Systems Limited. The world ‘Limited’ is often
abbreviated to ‘Ltd’. So she could also call her business ‘Sheldean Alarm Systems
Ltd’. Ltd is a warning to traders with a business that it has limited liability.
Keeping records
All businesses have to keep records. A record is evidence of what has happened in
the past. For example, Isabel knows she should keep a record of the names,
addresses, telephone numbers and email addresses of her customers. These will be
essential to her as she grows her business. Where she has installed a burglar alarm
system, she wants her customers to buy an annual maintenance check. Where there
are problems with an installation, she will want to check that she did indeed do the
101
work and that she is responsible for fixing the problem.
It is good business practice to keep a wide variety of different records. However,
there are some records that a business must keep by law. One of the most
important of these concerns tax. Isabel will be responsible for paying a number of
different taxes. It is essential that she keeps these records as she can use them to
prove she has paid the correct amount of tax - not too much nor too little.
These taxes are paid to a government agency called Her Majesty’s Revenue &
Customs (HMR&C). It expects businesses to keep tax records. These records will
allow Isabel to calculate how much tax she should pay. They will also allow HM
Revenue & Customs to check that Isabel has paid the right amount of tax if they
choose to inspect her business.
In her everyday life, Isabel is not that good at keeping receipts and tends to lose
them, but she knows that for this business she should be meticulous. Every time she
buys equipment, pays bills, receives invoices from suppliers, makes payments and
receives revenue from customers, she must keep records. Isabel tries to keep the
Watch Out!
paper work carefully and enters all her receipts and payments into a book.
Isabel is responsible for paying VAT and for claiming it back in certain You might think that the financial records
circumstances, so it is important she knows what she has bought, from whom and of all small businesses are well organised
when. The income she receives is also taxed. Isabel has to pay income tax and and accurate. In practice, too many small
National Insurance contributions and so she has to make sure that she has a record businesses have chaotic financial
of the income she receives, so that she does not pay too much tax and can prove to records. The owners of the business are
HMR&C that she is paying the right amount. too busy working at producing what they
make to bother keeping accurate records.
HMR&C will expect Isabel to complete forms to help calculate how much tax she
Many owners of small businesses also
should pay. These can be time-consuming and sometimes quite complicated. Isabel
have never learnt how to keep records.
knows that if her record keeping is up to date and well organised it makes this One way around this problem is for a
aspect of the business slightly easier. small business to hire an accounting firm
Isabel also knows that if she does not keep records carefully it can cause major to keep its ‘books’ (or financial records).
problems for her business. She knew of one other firm who were poor at keeping This, however, adds to business costs.
records. HMR&C investigated the business and they received a demand for unpaid
tax of £8,000. The business simply did not have that sort of money available and was
forced to close. Taxes have to be paid by law.
Businesses are also responsible for registering themselves with HMR&C. This
means they have to tell HMR&C that they have to pay them tax. However, the
system is complex and a business has to tell the tax authorities separately for most
of the different types of taxes they pay. The taxes that Isabel will have to pay depend
on:
• the amount of sales she has over a year;
Records – evidence of what has
• whether or not she employs any workers;
happened in the past; records could be
• whether she sets up as a sole trader or a limited company.
kept in paper form or in computer files
for example.
Taxes on small businesses HM Revenue & Customs (HMR&C) – the
There is a variety of taxes that a small business might have to pay. government authorities in the UK
responsible for collecting tax.
VAT VAT is Value Added Tax. It is a tax on the value of sales of a business. A VAT (Value Added Tax) – a tax on the
small business only has to pay VAT if its sales are more than £67,000 a year (as at value of sales: it is paid by businesses to
November 2008). For the first year at least, Isabel does not think she will have sales government.
of £67,000. So she will not register for VAT. This will give her an advantage over
larger businesses that have to pay VAT of 17.5 per cent (the standard rate in
November 2008). If her sales were £100,000, Isabel would petrol and other expenses. So her net earnings are £16,000
have to pay £17,500 in VAT. This would have to be paid by (£30,000 minus £14,000). This is the amount on which she
her customers in higher prices. So not paying VAT gives has to pay income tax.
Isabel a competitive advantage over larger firms.VAT can be
quite complex because businesses only pay it on the value National Insurance contributions (NICs) These are a
they have added in the production process. If Isabel buys in type of tax linked to a number of government benefits such
equipment, she has to pay the supplier VAT but can then as the state pension and incapacity benefit. To get these and
102
claim this back. The complexity of the system is something other benefits, the employee has to have paid a certain
that many small businesses find difficult to manage. They amount of National Insurance contributions or NICs.
also find it very time-consuming to make sure they have Businesses have to pay different types of NICs. If the
completed all the paperwork correctly. business employs any workers, it has to pay two types. First,
as with income tax, it has to deduct National Insurance
Income tax A business is responsible for paying income tax contributions from the pay packet of its employees and pass
in two ways. First, if it employs any workers, it must take this on to HMR&C. Second, it has to pay employers
away the income tax due by those workers on their wages National Insurance contributions. This is calculated as a
and pass the money to HMR&C. This is called the PAYE proportion of the wages of employees. In addition, if the
system: Pay As You Earn system. Second, if businesses are business is a sole trader, the owner has to pay a flat rate
sole traders, owners must pay income tax on their earnings. National Insurance contribution plus a percentage of net
Their earnings are the difference between their sales earnings.
revenues and the expenses of running the business. Isabel
predicts that she will have £30,000 of sales in her first year. Corporation tax This is only paid by limited companies.
However, she will have to pay out £14,000 for equipment, Corporation tax is a tax on the profits of a company. In
contrast, sole traders pay income tax on their profits.
Tax is one of the factors that influence entrepreneurs about

Income tax – a tax on the value of income earned by workers; whether they become sole traders or set up limited
this includes sole traders who have to pay income tax on their companies. Isabel, like everyone, would like to pay as little
net earnings.
tax as possible. At least for her first year, she thinks she will
National Insurance contributions (NICs) – a tax on the earnings be better off as a sole trader. However, she knows that she
of workers; Employers’ National Insurance contributions are paid must keep this under review. Keeping proper financial
by employers on the wages of their workers; employees and sole
records for tax is a major cost to businesses in terms of the
traders have to pay National Insurance contributions on their
time and effort needed to do it properly. They often act as
earnings.
unpaid tax collectors for government. It is not surprising that
Corporation tax – a tax on the profits of limited companies.
many businesses do not like the tax authorities.
Test yourself
1. VAT is a tax on 3. A sole trader must keep financial records because
A sales A suppliers have a right to see them
B income B customers have a right to see them
C profit C they must be available for inspection by HM Revenue
D property & Customs
D all sole traders have to pay both Corporation Tax,
Select one answer. Employers’ National Insurance contributions and VAT
2. National Insurance contributions are a tax on
Select one answer.
A sales
B income
C profit
D property
Select one answer.

Over to you
Lara York has worked for three years at a computer repair
business. She now wants to set up her own business
specialising in computer repairs for other businesses.
She is drawing up a business plan. One issue is what to call
her business. ‘Lara York Computer Repairs’ is one possibility but 103
it is a rather long name. ‘York Repairs’ would be snappier, but
will it give the right impression to her customers?
She has taken some advice about tax matters and has found
out that her tax affairs will be different depending on whether
she sets up as a sole trader or as a limited company.
Whichever she chooses, keeping financial records will be
essential. In her first couple of years, her business will probably
not have sales of more than £50,000, so she does not think she
will need to register with HM Revenue & Customs for VAT. Nor
does she intend to employ anyone to start with, so that will cut
down the paper work. However, she is not looking forward to
keeping records and acting as an unpaid tax collector for the
government. Nor is she looking forward to having to calculate
how much tax she should pay on her earnings or profits.
1. Explain two types of tax that Lara York’s business might have
to pay. (6)
2. Analyse why keeping financial records is essential for Lara
York once she has set up her business. (4)
3. Lara has come up with the idea of calling the business Royal
Kare - based partly on an anagram of her name. In your
opinion would Royal Kare Computers be an appropriate
name for this business? Justify your answer. (6)
Sanjana Prasad has recently set up a printing business that Then: Go through the options carefully trying to identify reason
designs and prints magazines and leaflets for other businesses. why the business would not keep records.
Which two of the following are most likely to be reasons why
she keeps records of her income and spending? It is not likely that a business would want to show rivals its
records - so B is incorrect.
A To be able to prove to HM Revenue and Customs that she is
Sanjana might want to show that her business is doing well,
paying the right amount of tax
but this is not a legal reason to keep records and so it is not
B To show rivals how the business is operating one of the most likely reasons why records are kept - so C is
C To be able to prove to her family that the business is incorrect.
running well
D To ensure the business has the correct information to give Records of income and spending would not be used to show
to its accountant that paper was damaged - so E is incorrect.
E To be able to return damaged paper that has been delivered This leaves you with the most likely answers - A and D.
Answer A and D A business must have records of income and spending to
Technique guide: There is a number of choices available so calculate its tax correctly and prove this to HM Revenue and
first: Customs.
Think: What records does a business keep? What records are

required by law? What reasons might a business keep records?
22 Customer satisfaction
Case Study
104 Lewis Ashton owns a successful chemist’s shop. He knows just
how much difference there is between the price at which he sells
his products and the price he has to pay the manufacturers. On
many basic items, the gap between the two is very large. For
Lewis, this presents a business opportunity. What if he could cut
the unit costs by buying in large quantities? What if he could get
rid of the small, high rent, high street chemist’s shop and sell
directly to the customer over the Internet?
Customer service
Objectives The experience the
Understand the meaning of the term customer has in dealing
‘customer satisfaction’ with a business is called
customer service. If that
Explain how effective customer
experience is positive there
satisfaction includes fulfilling
is more likelihood that the
customer orders accurately and on-
customer will use the
time and dealing with complaints.
business again. The
Recognise the importance of customer experience will be positive
satisfaction in the success of a if the customer feels that
business. their expectations have been met and exceeded. Getting customers and hanging
Appreciate the importance of repeat on to them is an important issue for many businesses and high levels of customer
purchases for a business. service can be important in achieving these aims.
Customer service covers many areas - the way a customer is treated, the quality
of the products, the knowledge of staff, how a customer is greeted, how the
business deals with customers after they have bought products or items and so on.
Lewis knows that an on-line chemist’s shop will only be successful if it provides
effective customer service. One of his key business ideas is that customers will be
able to save money by using an on-line service. However, no amount of price
discounting will get customers to buy from the business unless they are satisfied
with the rest of the service.
In his business plan, Lewis has identified a number of important points about
customer service.
• It must be convenient to use the service. Customers use his chemist’s shop
because it is near where they live. They use a high street chemist like Boots
because it is convenient to use when they are out shopping for other items.
They will only buy from his Internet service if his website is easy to use. So
website design is a very important part of his customer service. Also, an
advantage of an online business is that customers can order from their
computer. They do not have physically to go to a chemist’s shop. Customers
can order in the evening, on Sundays, at home or from an office. Ordering
Customer service – the experience that a online is more convenient than buying from a shop for some people.
customer gets when dealing with a • Orders must be dispatched as quickly as possible and always on time. If
business and the extent to which that customers go to a chemist’s shop, they can take away what they have bought
experience meets and exceeds customer immediately. An on-line service cannot match this level of service. However, it
needs and expectations. can aim to deliver within 24 hours. Lewis has set himself the goal of turning
round 95 per cent of orders within 24 hours. Customers should get next day
delivery.
• Orders must be 100 per cent accurate. If they are not accurate, this will cause
customer dissatisfaction. 100 per cent accuracy is also required by law for any
doctor’s prescriptions with which the company will deal. Sending out the wrong
medicine could have very grave consequences for a customer’s health.
• If there any complaints about the service, they must be dealt with immediately.
The business must always be polite to customers even if they are not very polite
when making the complaint. The customer should always be put first. So if
customers order the wrong products and then complain, the right products 105
should be sent out without there being any penalties such as extra postage
charges. The way in which a business deals with customer complaints is often a
key indicator of overall customer satisfaction.
Customer satisfaction
Watch Out!
Customer satisfaction must be at the core of every business if it is to be successful.
Dissatisfied customers might not buy again from the business. They will also talk Some businesses are highly dependent on
about what has gone wrong with friends and colleagues. The reputation of a repeat purchases. A local fish and chip
company is therefore at stake. In contrast, if consumers are satisfied with the good shop, for example, or a national
or service, they will buy again and tell other people. This is called ‘word of mouth’ supermarket chain like Tesco rely on
and is a very important method of promotion for a small business. Customer customers coming back time and time
satisfaction is therefore important for the public relations (or PR) of the business. again for their sales. However, some
For Lewis, good PR that comes from satisfied customers can be worth far more in businesses tend to sell to a customer only
extra sales than an advertising campaign. What is more, PR is free, whereas an ever once or very infrequently. Take, for
advertising campaign costs money. example, a restaurant in a seaside resort,
a ride in a travelling fair ground, or the
Repeat business manufacturer of an electric cooker. They
Many businesses rely on repeat purchases or repeat business. This is when need to find a way of attracting customers
customers buy time and time again from the same firm. Holiday-makers might use to make a single purchase. The best they
the same travel company each time they go on vacation. Shoppers might use the can usually hope for is that a satisfied
same supermarket each week. A business might order steel from the same steel customer will recommend their product to
stockholders as before. someone else.
An online chemist business is vitally dependent on repeat purchases. The value of
each order will be relatively small. To generate the amount of sales needed to make
the business successful, customers must keep coming back to place more orders.
Lewis plans to use a number of
different ways to keep customers
coming back.
• Cheaper prices than at high street
chemists will attract the price-
conscious customer.
• An easy to use website with fast
ordering and quick payment for
existing customers using a
password system will attract those
who want a convenient service.
• Effective customer service through
fast deliveries.
• Promotions aimed at existing
customers. For example,
customers who have not ordered Customer satisfaction – a measure of
within the past three months how much products meet customers’
could be emailed with a money- expectations.
off voucher. Repeat purchases (or repeat business) –
Once his business is up and orders or sales that occur from
running, Lewis expects 90 per cent of customers who have bought the product
all orders to be repeat business. So or service in the past.
his existing customers will be at the
centre of the success of the business. Repeat business is important for a chemist’s
Test yourself
1. Which two of the following are the best examples of 3. Witton Industrial Ceramics is a business that
effective customer service? manufactures and sells pottery.
A Selling large quantities to customers Select two answer.
106 B Fulfilling customer orders accurately
Repeat purchases from customers are most likely to be
C Holding a Christmas sale to dispose of stock
important to the success of Witton Industrial Ceramics
D Dealing promptly with customer complaints
because they increase
E Having no repeat purchases
A fixed costs
Select two answers.
B prices
2. Hay’s is a small pizza business offering either take-away C sales turnover
pizza from its shop or a pizza delivery service. D venture capital
Select two answer.
On-time delivery is important to the success of the
business because
A otherwise stocks would be too low
B it creates more jobs
C it helps to improve cash flow
D it leads to customer satisfaction
Jilly takes great pride in the level of customer service at her Good Identifies one method of improving customer
business. She runs a small hairdressing salon for men and service - the experience that a customer gets when dealing
women. There is a great deal of competition in her immediate with a business and the extent to which that experience
area and she relies on clients returning to the salon as well as meets and exceeds customer needs and expectations. (1)
attracting new customers. Explains that good service could mean that customers are
(a) (i) Identify one way in which a business such as Jilly’s could satisfied. This could lead to customer loyalty and repeat
improve customer service. (1) business. (1) It might also attract new customers. (1)
(ii) Explain how the way you have identified in (i) above could
Excellent Identifies one method of improving customer
benefit Jilly’s business. (3)
service - the experience that a customer gets when dealing
Think: Who are the customers of a small hairdressers? What with a business and the extent to which that experience
is customer service? What services would customers at such meets and exceeds customer needs and expectations. (1).
a business expect to receive? What does a business receive Explains that, in a highly competitive market, good service
in return for these services? could make the difference between the success of Jilly's
business and those of her rivals. This would help to develop
Basic Identifies one method of improving customer brand loyalty and lead to repeat business. (1) Word of mouth
service (1) - the experience that a customer gets when and a good reputation mean that it could possibly attract
dealing with a business and the extent to which that new customers, especially when the business is small. (1)
experience meets and exceeds customer needs and Higher customer spending would increase sales revenue
expectations. (1) and could lead to higher profits. (1)
Over to you
107
Libby Headon trained as a plumber ten years ago and set up her contact her. The other two she asks her customers to give to
own plumbing business. Although some of her work is for friends or relations in case they should ever need a plumber. If
building companies, most of her time is spent dealing with there is ever any problem with the work she has done, she calls
household repairs. back as quickly as possible to fix it.
Libby’s business has three unique selling points. First, the Many plumbers pay to advertise in publications like Yellow
quality of her work is excellent. Second, her charges are very Pages. Libby Headon has not spent any money on advertising
reasonable. Third, she is a woman. Many female customers for the past eight years. All her work comes from previous
say they prefer having a woman doing repairs in their house. customers or through word of mouth recommendations.
They feel safer and they trust the quality of the work.
Libby has a tried and tested formula when someone rings her 1. Explain the importance of (a) quality of work and (b) dealing
up. She arranges when she can do the work and tells the with complaints to the success of Libby Headon’s business.
customer what she charges for a call out and the rate per hour (6)
of work. If on the day of the appointment she is running late, 2. How does repeat business contribute to the success of
she always lets her clients know by telephoning them. Once at Libby’s business? (3)
the customer’s house, she gives a quote for the work. Once the 3. ‘A successful plumbing business is all about customer
work is completed, she gives the customer three of her service’. Do you agree with this statement? Justify your
business cards. One is for them to keep in case they need to answer. (6)
EDBUS_C23.QXD 23/9/09 13:11 Page 2
23 Recruiting, training and motivating staff
23 Recruiting, training and

motivating staff
108
Case Study
When you open a door, you use a door handle. The door itself
swings open on hinges. If it is a front door, there is a letter box
and a door knocker. Today, most door handles, hinges and
letter boxes are mass produced cheaply in China. However,
Belfield’s is a small UK business that manufactures traditional
decorative and builder’s ironmongery. It uses traditional
techniques to produce items of much higher quality and better
design than you would find from producers in other countries.
Some of its designs go back two hundred years. It currently
has a vacancy for an administrative assistant in the office.
Application
Objectives Belfield’s started the recruiting process by drawing up a number of documents.
G Understand the process by which
small businesses recruit staff. Job advert Belfield’s decided to advertise the job in the local newspapers. It also
G Appreciate that attitude as well as notified the local JobCentre. Run by government, JobCentres are places where
skill is an important factor in recruiting those seeking a job can get help and advice as well as see what jobs and training
staff in small businesses. are on offer locally. So Belfield’s drew up a job advert. The job advert gave a brief
G Appreciate that there is a number of description of the job and the sort of skills and experience it was looking for in an
laws that small businesses have to applicant. Belfield’s could also have included the rate of pay. However, it decided
adhere to in relation to employees. to leave that detail to the job particulars.
G Understand the meaning of motivation
in relation to small businesses. Job particulars The job particulars usually give information about the business
and about the job. The information is more detailed than in a job advert.
Belfield’s, for example, gave a brief history of its business and what it expected of
the successful job applicant. It gave the conditions of work, including the rate of
pay, hours of work and holidays. Finally, it explained how to apply for the job.
Job description Belfield’s drew up a job description that it sent out with the job
particulars to all applicants. A job description sets out what the person appointed
to the job will have to do. The administrative assistant at Belfield’s, for example,
would have to answer the telephone, deal with visitors to the business premises
and deal with the incoming mail. The administrative assistant would also have to
Job applicant – a person who shows they write letters, keep minutes at meetings and file documents.
would like to be considered for appointment
to a particular job with a business.
Person specification This is a description of the sort of person who would be
Job description – document that describes suited to the job. For the job at Belfield’s the person specification included
the duties of a worker and his or her status
having had previous experience of being a secretary, having good computer skills
in the organisation.
and having good communication skills.
Person specification – a profile of the type
of person needed for a job – their skills and
CVs and application forms Belfield’s could have produced an application form.
qualities.
This form would have to be filled in by all applicants giving details about
Application form – document to be filled in themselves and why they wanted the job. However, Belfield’s is only a small
with personal details.
business and preparing an application form to send out takes time. Instead, it
asked its applicants to send in a CV and a letter explaining why they wanted the
EDBUS_C23.QXD 23/9/09 13:11 Page 3
job. CV is an abbreviation of curriculum vitae. This is a document that the

applicant writes. It gives the main details about the applicant such as name,
address, qualifications and experience.
Belfield’s first advertised the job. Then it sent out job particulars and a job
description to those who wrote in or phoned enquiring about the job. It asked
applicants to send in a CV and a letter of application. Now it was in a position to
start the process of selection.
109
Selection
Selection is about choosing someone to fill a job. Belfield’s had five people apply for
the post. Two of these were rejected because they did not have the right experience.
Another person was rejected at this stage because she could not spell words
properly or write in proper sentences on her letter of application. So that left two Watch Out!
people on the shortlist of candidates. It invited these two candidates to interview.
Application forms, job descriptions and
An interview is very important part of the selection process. It is where the person specifications might exist in a
employer and the applicant meet. The interview is a two-way process. It not only lets medium to large employer. However,
the business find out more about the candidate and whether they would be these documents might not exist in a small
appropriate but also gives the candidate the chance to find out whether they will fit business appointing a new employee. The
into the business. By asking questions at interview, the employer attempts to find business might not even advertise a job.
out whether the applicant would be suitable for the job and be the best candidate Instead, the owner might take on a family
for the job. When Belfield’s interviewed the two candidates, it was clear which of member or a friend. In small businesses,
the two applicants was the better candidate. Not only were the qualifications and the recruitment process is likely to be far
experience better, but she also had much better communication skills. more informal than in a larger business.
The last stage of the selection process was to take up references. These are
reports on the employee from his or her current or last employer. Alternatively, they
might be from someone who knows them and can say something about them.
Schools are often asked to write references for former students. Belfield’s took up
references from the candidate’s current employer.
Training staff
In the modern work environment, it is important that employees receive regular
training. Small businesses, like Belfield’s, find it difficult to allocate the money to
spend on formal training of its workers. They tend to use on-the-job training. This
means training workers in the workplace as they work. At Belfield’s, one foundry
worker showing another worker how to do a job would be an example of on-the-
job training. Larger businesses tend to use more off-the-job training. This is
where workers are taken away from their work to be trained. The new secretary at
Belfield’s, for example, was sent on a one day course to learn how to use a new
accounts computer program.
Skill versus attitude in recruitment and training

Workers at Belfield have to be skilled at their job. They are making high quality
products that are sold at premium or high prices. However, the level of skill of a
worker is only part of what makes them a good worker. Equally important is the Interviews are part of the selection process
attitude of staff. For example, does an employee work hard? Are they honest? Are
they loyal to the business? Are they positive about their work? Are they good team
players? Belfield’s is hoping that its new secretary will be better than the previous
one. She didn’t work hard. At the slightest excuse, she would have days off sick.
She was always complaining about her work. In the end, she was dismissed
because she was found to have stolen some money from the petty cash tin. Overall,
Curriculum vitae – a brief list of the
she had a bad attitude towards her work.
main details about a person, including
Belfield’s obviously wants to employ people who have a positive attitude towards name, address, qualifications and
their work. In larger businesses, workers might be sent on training courses that are experience.
aimed at changing attitudes. However, it is more difficult to change a person’s
attitudes than it is to give them extra skills.
EDBUS_C23.QXD 23/9/09 13:11 Page 4
Motivation Appointment and training of staff Workers cannot be

The way in which a business like Belfield’s treats its staff has discriminated against on the basis of age, sex, race or
a very important impact on attitudes and motivation. disability. For example, when Belfield’s appointed a
Motivation is all about the ways in which a business can secretary, it could not reject applicants who were, say, under
encourage its workers to give their best to the business, to be 25, or over 50. Nor could it reject applicants because they
committed to doing what they do to the best of their ability - were male or female, or belonged to a particular ethnic
all the time. A well motivated workforce is more likely to group. Belfield’s also could not discriminate on grounds of
110 disability. Equally, Belfeld’s could not refuse to train a 55 year
work hard.
A business can help motivate its workers in a variety of old worker on the grounds that he was too old, or that he
ways. For example, it can: was a male or Asian.
• pay its workers a fair wage, reflecting wages paid to other
workers in the industry; Protection at work The law says that workers must be paid
• provide decent working conditions; the same for doing the same job. Female workers, for
• keep its workers informed about what is going on in the example, cannot be paid less than male workers for the same
business so they understand why decisions are being work. Workers must be paid regularly according to the
made; contract of employment that they must be given when they
• give workers as much power as possible to organise the start work. The contract of employment also states their
way in which they do their work, for example through holiday entitlement. Workers must be protected from
working at home or providing flexible hours; accidents under health and safety laws. There are also rights
• be sympathetic about requests for time off due to family about joining a trade union.
and other problems;
• be consistent in how staff are dealt with, which means Leaving work Workers are protected from unfair dismissal
having a set of work rules and following what is laid by law. They cannot lose their jobs without a good reason.
down in the law. Workers who retire may be entitled to a pension from their
employer. Typically, workers have to make contributions to a
The law pension fund to be entitled to a pension.
Workers have considerable rights in law. Over the years,
Parliament in London has passed legislation (i.e. laws) that Other rights The impact of the law can be greater on small
protect workers from unfair practices by employers. There is businesses than on larger firms. For example, women are
a number of rights that the law gives to workers at Belfield’s. allowed time off to have children and their jobs have to be held
open. For a small business only employing three or four people
this can be disruptive and difficult to manage. There are also
directives from the EU to be considered such as the Working
Time Directive which outlines how many hours workers should
be expected to work over a period of time. All these laws and
Motivation – in work, the desire to complete a task and meet the
needs of the business consistently. directives make it more difficult, time consuming and expensive
for small businesses to take on new staff.
Test yourself
1. Spitzer’s is a small business that has just sent out a job A curriculum vitae
description to applicants for a job. A job description is a B person specification
document that C job description
D set of fringe benefits
A shows a candidate’s personal details and
qualifications
Select one answer.
B gives a description of the business and what it does
C asks a candidate about their name, address and work 3. Which one of the following would always be illegal under
experience UK law for a small business? Select one answer.
D lists what the applicant would be expected to do if
A Making a worker redundant
appointed to the job
B Paying a female worker less than a male worker for
doing exactly the same job
Select one answer.
C Hiring a younger worker over an older worker who
2. Spitzer’s is a small business. It has asked applicants for a had also applied for the job
job to send in a letter of application together with a D Expecting workers to work in very hot conditions
EDBUS_C23.QXD 23/9/09 13:11 Page 5
Over to you
Feeman’s is a small business that specialises in
converting cars to make them suitable for disabled
users. The job is highly skilled. It involves taking a
standard car and fixing lifts and hoists for wheelchairs,
converting gear boxes and altering control panels. 111
It currently has a vacancy for a mechanic. The
successful applicant would need to have extensive
experience of car repairs and bodywork. They would
have to show that they had a positive attitude, were
well motivated and could work in a team.
Two people applied for the job. The older male
applicant, aged 56, met all the requirements of the job
description and the person specification and had better
experience and qualifications than the younger, female,
applicant aged 25. He also had a more positive attitude.
The owner of Feeman’s decided, though, to appoint the
25 year old. The older person would soon have to retire
and the owner thought that the female applicant would
‘add glamour to the workshop’. There were too many older
workers at Feeman's anyway.
2. The older applicant ‘had a more positive attitude’. Explain,
1. Describe the likely process of recruiting a new mechanic at using examples what this means. (3)
Feeman’s from advertising for the job to offering the job to 3. Do you think that Feeman’s has broken the law in appointing
the successful applicant. (3) the younger applicant? Justify your answer. (6)
5(b)(ii) Other areas where the government offers protection to

employees are
• against unfair discrimination either in pay or with regard to Some students (24%) gained good (ie 4-6) marks on this
disability question.
• health and safety These answers would have given a basic explanation and
(ii) Consider whether it might be expensive for Dovecotes, as a application of the law and how it affects a small business, but
small business, to apply the relevant laws to one of the areas with only a basic judgment, for example, ‘giving equal pay will
above. (9) (June 2007) cost a small business a lot of money.’
Very few students (around 1%) gained very good (ie 7-9) marks
on this question.
Most students (75%) scored poorly (ie 0-3) on this question.
These answers gave an explanation of how the law chosen
These answers may not have understood the purpose of the
would affect a small business and how big the effect would
laws and or shown their effect on a business. Some ignored
be. They recognised that small businesses have difficulty
the prompt in the question regarding a ‘small business’ and
generating the revenue to comply with laws and some would
commented on any business. The links made between the law
not be able to afford it. These answers made the cost and the
and the cost may have been simple and no judgment was
effect clear, for example, paying for additional safety
made.
equipment for a small business to meet health and safety laws
might add a large amount to costs and the business may have
to cut back on staff or raise prices to cope.
EDBUS_C23.QXD 23/9/09 13:11 Page 6

Making the start-up effective
In this topic you have learned about: customer needs before, starting up a business, taxation and how it affects business, the
112 during and after selling to ensure progress and repeat sales, emphasis placed on the elements of the marketing mix with
liability and how this differs between a sole trader and a private different products recruitment and the aspects a business needs
limited company, unique trading names and their role when to consider to get it right.
You should know…

Meeting customer needs are essential to survive and be Repeat purchases can benefit a business as customers
successful for a business. There are three stages in getting this return to buy goods rather then buying from competitors.
right - anticipate, identify and meet the needs, often via market Businesses must recruit the right staff, in the right place,
research. at the right time.
The marketing mix, the 4Ps, is price (types), product, promotion Job adverts are used to encourage applicants for posts.
(where, is it suitable?), place (how to get the product to the A job description is an overview of the job, e.g. a cleaner
customer). wanted for a restaurant.
The emphasis on elements of the marketing mix can be Job particulars give more detail of the post, e.g hours of
changed, for example to meet changing customer needs. work, wages.
There are benefits and drawbacks of unlimited liability (more A person specification includes the skills, qualities,
freedom, high risk, could lose everything) and of limited liability attitudes and qualifications needed for a job, e.g. good
(more rules, less risk of losing home). communication skills, degree in Maths etc.
A sole trader has certain characteristics - own boss, sets own The selection process involves letters of application, CV,
targets, has unlimited liability, keeps the profits, can be risky. short-listing and interviewing.
Private limited companies have different characteristics - Selection criteria includes a review of the candidate's
shareholders, must file accounts, shares profits and decisions, skills and attitude and also whether they will fit in.
limited liability limits risk for shareholders - can only lose what
Training can be on the job (in-house) or off the job
they put in.
(college, role play).
Establishing a unique trading or business name could be a USP
There are laws affecting recruitment and selection, e.g.
for a business. The name must be memorable.
equality, minimum wage, health and safety.
Record keeping is important to help get tax payments right. .
Employees can be motivated by giving them incentives
Tax responsibilities for a business can include VAT (not related and empowerment. A well motivated workforce is more
to wages but to buying and selling), income tax (paid by the likely to work hard and to keep labour turnover down.
business on behalf of employees), National Insurance
.
contributions (paid by both employees and employers) and
corporation tax (paid by some larger companies on the profits
they make).
• Identify the 4Ps, with examples, from three local businesses differences between the features of a job description and a
using local newspapers, directories or using local knowledge. person specification.
• Identify three job adverts and try and get information on the job • Use your own experience to list the good and poor features of
description and person specification for each job. Identify customer service.
Stretch activity
• Identify one example of an online shop and a traditional shop in • Identify three job adverts and try and obtain details of the job
the same market. Compare and contrast the customer description and person specification for each. Write a short
experience of shopping online with traditional shopping. Which report evaluating the quality of the information included, where
do you think offer the best level of customer service and why? they were advertised and how useful they were to prospective
• Compare and contrast the marketing mix of two small or applicants in providing appropriate information.
medium-sized local businesses.
(a) Gabriel Ribeiro is setting up his own kitchen studio, Cozinha, in (i) What is meant by the term 'limited liability'? (1)
Manchester. He has put £20,000 of his own money into starting the (ii) Explain why Gabriel was advised to make 'Cozinha' a private limited
business. Friends have invested another £40,000. The kitchens will be company rather than stay as a sole trader. (3)
made indiviually to customer specifications and so Gabriel estimates
Think: What is limited liability? What benefits? What drawbacks? What
most kitchens will be priced upwards of £10,000. Gabriel has been
is in this scenario to use in the answer? Is there an alternative? Is it
advised to make Cozinha a private limited company so he himself will
better or worse?
have limited liability.

(i) You're only liable for a limited Very weak answer rescued, Use clear phrases such as '… as a shareholder you can
amount. just, by the addition of the word only lose the amount of money you invested, so your own
'amount'. Has left a lot of doubt in possessions are safe.'
the examiner's mind about actual Or use an example, such as 'you're only liable to lose the
understanding. amount of money you put in, in Gabriel's case £20,000.'
(ii) Because he doesn't want to A very basic comment which is Identify one positive feature and its benefit but then link it to
lose everything he owns. correct but not developed. others. For example, 'Gabriel is dealing in expensive items so
business might be infrequent. If the business failed then the
maximum he could lose would be £20,000. This means his house
and other possessions are safe, but it means not all the profit is
his. This would be less of a risk than being a sole trader. '
Or identify an alternative and explain why that is not a good idea
to get a similar answer. For example, 'As a sole trader he would
be liable for all debts if the business had to close. This means
he could risk losing his house, his car, in fact he could lose
everything. By creating a private limited company he only risks
losing what he invested (£20,000)'.
Sharon Kocabas was environmentally friendly. She sorted all her staff to sell the product, but who also had detailed knowledge of the
rubbish into different bags for recycling. It was time-consuming and product to ensure customers were happy and would recommend
Sharon wished it would happen automatically. Then the idea hit her her product to others. General office staff were needed to assist
to design a bin where you put the rubbish in the top, it read the bar with the day-to-day running of the business. Sharon advertised for
code and sorted the rubbish into appropriate coloured bags via a staff using a variety of adverts appropriate for the job. In order to
rotating carousel. Refuse collectors simply picked up the bags and keep staff motivated and to make them feel valued, Sharon
put them onto the wagons. Sharon realised this had potential with a introduced pay incentives and free health care.
USP, but needed to be marketed properly. She decided to call it
(a) Which two of the following best describe Sharon's reason for
BINSKA in order to get the idea across that it was a bin and it
offering free health care? She wants to:
scanned. SCANBIN didn't sound right and using the K added a bit of
class, she thought. A motivate the staff to work hard for her
B improve her record keeping
In creating her marketing mix Sharon focused on promotion to
C meet customer needs
show how it worked. She felt the product spoke for itself, price
D promote the image of the product
would not be an issue at £149.99 and she would sell it through DIY
E advertise for new staff
outlets and to local councils. BINSKA would also supply the bags,
F keep staff from leaving (2)
which are recyclable, and took out a patent on them. Sharon got
support from the bank, but it advised her to make BINSKA a private (b) Explain how Sharon plans to deliver good customer service. (3)
limited company to protect any investment. Sharon could not do it
(c) Evaluate Sharon's marketing mix for launching BINSKA. (8)
all by herself. She needed someone to look after the record-keeping
such as VAT, National Insurance, tax and wages. She needed sales
EDBUS_C24.QXD 16/7/09 12:02 Page 2
Topic 1.5 Understanding the economic context
Topic 1.5: Understanding

the economic context
Topic overview
This topic considers the economic factors that affect businesses. How
Case study
Norford’s is a small business
does the interaction of demand and supply affect the price charged and
that manufactures testing the quantity sold? How do changes in interest rates affect a business?
equipment. Its customers are How do changes in exchange rates affect exports and imports? What is
other businesses that need to the business cycle and how are businesses affected at different stages
test the quality of their own in the cycle? How are stakeholders affected by these factors?
products. For example, a crane
manufacturing company might want to test the strength of a piece of steel when put under pressure.
At what stress level will it snap? An aircraft manufacturer might want to test at what temperature -
both high and low - a component might explode due to extreme heat or cold.
Norford's operates in a market with only a small number of competitors. Like many businesses, it
can set its own prices. However, this is very different from some of the firms from which it buys. Some
of these suppliers have to accept the price that the market dictates. One example is suppliers who
manufacture steel. Steel firms produce a commodity product. The price of steel is determined on
international markets like the London Metal Exchange. Here buyers and sellers of steel from all over
the world meet to agree trades, which set the price for steel. When demand for steel falls, even by a few
per cent, there can be a large fall in the price of steel. Norford's uses a lot of steel in its products.
Changes in steel prices can have a major effect on Norford's costs - either increasing them or cutting
them.
Interest rates are another major cost that Norford's has to face. It has loans and an overdraft of
£50,000. If interest rates fall, this can help cut the interest payments that the business has to make. If
interest rates rise, the increase in costs can be damaging to the cash flow of the business.
Interest rates are likely to fall if the economy suffers a downturn. When this happens orders for
equipment from Norford's can fall dramatically, as the customers it supplies cut back on their spending.
The situation only gets better when consumer spending picks up again. Until that time firms will not
feel confident about ordering new equipment; why should they if they do not think they will sell what
they are producing?
One positive aspect of a downturn in the economy for Norford's is that the value of the pound is
likely to fall. This makes its exports more price competitive. Without a fall in the exchange rate, the
drop in orders could be even greater.
In a time of economic downturn, Norford's has some difficult decisions to make. It employs 11
workers. Should it make some workers redundant? If the firm is making a loss, the two owners of the
business will not be able to take any profit out of the business. If this happens then Norford's has to
investigate other ways in which it could cut costs. Could it squeeze its suppliers more by negotiating
lower prices? Could it use the fall in the exchange rate to put up its prices to foreign customers?
1. How might Norford’s be affected by each of the following?
(a) There is a sharp cut in worldwide demand for oil.
(b) The Bank of England decides to raise interest rates.
(c) The value of the pound rises against the euro.
(d) The economy goes into recession.
2. Who are the stakeholders in Norford’s highlighted in the passage?
3. How might an increase in demand for testing equipment affect Norford’s stakeholders?
EDBUS_C24.QXD 16/7/09 12:03 Page 3
Topic 1.5 Understanding the economic context
115
What will I learn?

Market demand and supply How do the forces of demand and supply determine the price of goods
in commodity markets? What are the differences between commodity markets and normal markets?
What is the impact on small firms of price changes in raw materials and energy costs?
The impact of changes in interest rates on small businesses How do changes in interest rates
affect small firms that tend to rely on overdrafts and loans for finance? What is the impact of
changing interest rates on consumer spending?
Impact of changes in exchange rates What is meant by an ‘exchange rate’? How do changes in the
value of the pound against the dollar and the euro affect small firms that trade abroad or face
competition from abroad? What impact do changing exchange rates have on the price of imported
and exported goods? How can the prices of products be calculated using exchange rates?
How business cycles affect small businesses Why does the level of economic activity tend to rise
and fall? How can changes in the level of economic activity affect small businesses?
The effect of business decisions on stakeholders What is meant by the term ‘stakeholder? How
do business decisions have different effects on different stakeholders? What are the problems that a
business may face in meeting the demands of all stakeholders?

Unit 2 Research and investigate a real life business from a choice of five tasks and write up the
results under controlled assessment conditions.
questions.
EDBUS_C24.QXD 16/7/09 12:03 Page 4
24 Demand and supply

Case Study
George Rixon owns a farm. For most of the
116
past ten years, George has struggled to make a
profit. This is the reason why he and his wife,
Hannah, have diversified their business.
‘Diversified’ means they have done other
things apart from growing crops and rearing
animals. They started by opening their farm to
school groups. Then they opened a tea shop to
cater for the growing number of visitors. This
year, Hannah will be opening a farm shop.
Demand and supply in commodity markets

Objectives Raw materials like copper, iron ore, coal, oil and wheat are called commodities.
G Understand that prices in commodity Farmers produce a range of commodities from wheat and potatoes to carrots, beef
markets are determined by the and milk.
balance between supply and demand. Many commodities are traded on organised, global commodity markets where
G Appreciate the difference between buyers (who represent the demand for a commodity) and sellers (who represent
commodity markets and normal the supply of a commodity) come together to agree prices. Farmers like George,
markets. for example, send their wheat harvest off to market to be sold. The price they get
G Understand the effect on small firms is set by the balance between demand and supply.
of price changes in raw materials and
energy costs. Demand Demand for a product is the amount that buyers are willing and able to
purchase at any given price. Wheat, for example, is used to make products such as
bread, pasta, biscuits, beer, flour and animal feed. The demand for wheat is affected
by the decisions of millions of businesses and individuals throughout the world
who buy these products. If the demand for wheat rises, it will affect the price of
wheat. Countries like China and Russia are major importers of wheat, buying
Commodities – raw materials such as coal, wheat on world markets. China is a fast growing economy. With fast rising
oil, copper, iron ore, wheat and soya. incomes, Chinese people are choosing to eat more food including more meat. This
Commodity markets – where buyers and increases the demand for wheat because wheat is used for food and to feed
sellers meet to exchange commodities - animals.
often these are international, organised
markets, for example the London Metal Supply Supply for a product is the amount that sellers are willing and able to sell
Exchange and the New York Mercantile
at any given price. The supply of wheat, for example, is just as affected by global
Exchange.
conditions as the demand for wheat. There are hundreds of thousands of small
Demand – the amount consumers are farmers who produce wheat throughout the world. The supply of wheat depends
willing and able to buy at any given price.
partly upon the prices that farmers think they will get for wheat compared to other
Supply – the amount sellers are willing to products they could grow. It also depends on weather conditions, pests and
offer for sale at any given price.
diseases, all of which affect the size of harvests. In 2007, for example, bad weather
Shortage – when the demand for a good or hit wheat harvests in Australia, parts of Canada, the United States and Europe with
service is greater than the supply. When a the result that the world supply of wheat fell.
shortage exists, prices will tend to rise.
If demand for a commodity is greater than supply, then there will be a shortage.
Surplus – when the demand for a good or Prices will rise when a shortage exists in a market. The bigger the shortage the
service is less than the available supply. greater will be the rise in price. In other situations, the supply of a commodity can
When a surplus exists, prices will tend to fall.
be greater than the demand. In this situation, there will be a surplus and prices
will fall.
EDBUS_C24.QXD 16/7/09 12:03 Page 5
Differences between markets

In recent years, the price of oil has changed very quickly - rising sharply in some
periods but then falling back just as quickly. However, the price of most items in the
shops does not change like this. There is a difference between commodity markets
and the market for everyday goods and services that we all use, called goods
markets.
Hannah Rixon, for example, will sell a packet of luxury biscuits in her farm shop at
117
the same price over a period of time. The price of a cup of tea in her tea shop stays
the same for at least 12 months. The price of most of what we buy in the shops
changes only slowly. So what is the difference between the price of wheat and the
price of a packet of biscuits?
Consumers like prices to stay the same. They find it confusing if prices are Watch Out!
changing sharply week by week. For example, Hannah’s tea shop customers would
not like it if one week she charged 80p for a cup of tea and £1.50 the next week. Some firms are price takers. This means
Schools would not like it if they organised a visit to George’s farm and found the they cannot control the price they get for
entrance price had gone up by 50 per cent. So, businesses are under pressure to their production. Producers of
commodities are price takers. Most firms,
keep their prices the same. It can also be expensive for businesses to keep changing
though, are price makers. They have
prices - the labels would have to be changed, for example.
some limited ability to set their own prices.
George has less control over the price he gets for selling his wheat. He sends it to However, price makers still face the harsh
auction and gets what price he can for it. However, a biscuit manufacturer has law of demand. The higher the price, the
much more control over prices. It can issue a list of prices for its products to less it will sell. So price makers have to
customers like Hannah who wants to stock some luxury biscuit lines in her new trade off higher sales for lower prices and
shop. If sales are down one week, it can quickly stop producing or stockpile what it vice versa.
does not sell. In normal economic conditions, most businesses can fix the prices of
the products they sell, at least in the short-term.
Changing commodity prices and planning

Businesses have little control over the price they have to pay for many of the raw
materials they have to buy. The prices are determined on international markets.
However, changes in the prices of commodities can affect small businesses Watch Out!
significantly. In 2007 - 2008, the price of oil rose dramatically, from around $60 a Remember that there is a difference
barrel to $147 a barrel. By December 2008 the price of oil had fallen to under $50 between ‘price’ and ‘cost’. Price is the
again. The prices of commodities like wheat, beef, oil or copper change on a minute amount of money that has to be handed
by minute and day by day basis. George Rixon can take his cattle to market one over to acquire a good or service. Cost
week and get a different price from the one he gets the next week when he takes refers to the amount paid by producers to
more cattle to be sold. manufacture or produce a product or
With commodity prices changing so quickly, the plans of small businesses, such as service, for example, for wages, raw
materials, equipment and machinery,
cash flow forecasts, can be thrown into chaos. A plumber, for example, might find
insurance, taxes and premises etc.
the cost of copper piping rising quickly because of global commodity price changes.
Bakers may find wheat prices rising sharply. Builders may have to pay more for steel
used in construction projects.
Raw material and energy costs

For many small businesses the largest single cost is paying wages to employees or
paying yourself a wage. There are many other costs such as rent on premises, taxes
payable to the government or new machinery.
Many small businesses also have to buy raw materials (commodities) and energy.
George Rixon on his farm, for example, has to pay out for fertilizers, seeds and
diesel. Hannah Rixon in her café has to pay electricity and gas bills for heating,
lighting and cooking. If commodity prices change, it can have a major impact on the
costs of production for small businesses. The size of the effect depends on three
Goods markets – the market for everyday
factors. products such as clothes, food, petrol,
• What proportion of total costs are made up of raw materials and energy costs? going to the cinema, a DVD etc.
Raw materials are a large proportion of the total costs for George Rixon on his
farm. So changes in their prices have a big impact on his costs and his profit.
EDBUS_C24.QXD 16/7/09 12:03 Page 6
These costs are a much smaller proportion of total cost for increases in costs. This means they can increase their
Hannah in her café and her new farm shop. So she is less prices to reflect the higher prices they have paid for raw
affected. materials. In her café, Hannah Rixon can add 10p to a
• How large is the change in price? If commodity prices go cup of tea if the price of electricity goes up. Businesses
up by 1 per cent, this will have little impact on many usually absorb small increases in costs in the short term.
businesses, even those where they are a large proportion However, many businesses review and if necessary
of total costs. If commodity prices go up by 50 per cent, change their prices at least once a year to reflect changes
118
this is likely to have a more significant impact on all in costs.
businesses. Ultimately, changes in costs of raw materials are important
• Can the business pass on the increase in costs? If the to a business because they have an impact on profit and
price of fertilizer goes up by 50 per cent, George Rixon survival. Rises in costs will lead to a fall in profits unless it
cannot pass on any of these extra costs to his customers. can raise its prices or sell more of its products. If it cannot
This is because he has no control over the price he gets raise its prices or find a way of selling more products, the
for his products. He sells them at auction and has to business could start making a loss. Ultimately, this could
accept whatever price is set. So some businesses have to force it to close down.
absorb increases in costs. They have to pay them Falls in costs, however, tend to make things easier for a
themselves. This reduces their profits and in some cases business. It has to decide whether it can raise its profits by
can even push a business into a loss. If the price of fuel, not passing on the cost reductions to customers. Or it could
seeds and fertilizer rises but George gets a lower price for cut its own prices and hope that demand for its products will
his wheat then it can force him to have to think about rise.
closing the business. Other businesses can pass on
Test yourself
1. The price of oil rises on world markets. This is most likely
to be because
A the demand for oil has fallen
B the supply of oil has risen
C the supply of oil has risen faster than the demand for
oil
D the demand for oil has risen faster than the supply of
oil
Select one answer.
2. Jake Wooley runs a flower shop in London. He buys most
of his flowers from a supplier in the Netherlands. The
supplier in the Netherlands increases its prices. Jake's
decision about whether he puts up the price of flowers to
his customers because of this cost increase is most likely
to depend on
A how much insurance he pays
B how big is the increase in the price of the flowers he
buys
C the amount of flowers he sells each week
D which supplier he buys his flowers from
E how large a proportion of his total costs is made up
Select one answer.
from buying flowers
A He has to accept whatever price is set at auction for
Select two answers.
his tin
3. Dylan Parkes has re-opened a former tin mine in Cornwall. B He has no control over the price he sets for visitors to
He produces a small amount of tin which he sells at see the mine
auction in London. He also uses the mine as a tourist C He cannot charge a higher ticket price to visitors in
attraction, charging visitors to come and see old workings. July and August than at other times of the year
Which one of the following is most likely to be true about D He can decide for what price he sells his tin
his business?
EDBUS_C24.QXD 16/7/09 12:03 Page 7
Over to you
Gillams is a small firm that makes steel parts for machines.
Over the past twelve months it has seen the price of steel
double. Steel is a commodity that is traded on world markets.
In recent years, the demand for steel from China and other fast
growing economies has increased rapidly. The size of the 119
Chinese economy is doubling every seven years. China’s cities
Otherwise, it faced making a loss and it could in the long term
are seeing a construction boom and steel is in very heavy
be forced to close.
demand for new buildings.
Gillams has no choice but to pay the higher prices for steel. 1. Steel is a commodity. Its price is determined in international
However, it is being hard hit by the price increases. Its markets. Explain why the price of steel might rise on these
customers are putting pressure on the company not to put up its markets. (3)
prices. They are hinting that they will buy their parts from a 2. Analyse two possible effects on Gillam's if it had not
different supplier if Gillams chooses to go ahead with a price increased its prices by 10 per cent. (6)
rise. On the other hand, Gillams has worked closely with many 3. Evaluate how Gillam's customers might react to the 10 per
of its customers for a number of years, giving excellent service. cent increase in price. (6)
Competitors have also been putting up their prices. So Gillams 4. Discuss whether Gillam's workers have benefited from the
has made the decision to raise its prices too by 10 per cent. 10 per cent price increase. (6)
15. Tina Dutton and Andrea Winders live in Warrington, How students answered
Cheshire. Together they have set up a new business called Pink
Ladies. Tina had wanted to set up her own business for some
time but it was when talking to her daughter, Leanna, that she Some students (32%) scored poorly (ie 0) on this question.
got the idea for Pink Ladies. Leanna had explained how she was These answers did not identify any factors that would have
often scared coming home at night in a taxi. Tina and Andrea did caused a fall in demand. They chose answers A, B, D, E and F,
some market research and found that a surprising number of which were all likely to have caused a rise in demand for taxis
women were attacked in unlicensed taxis. Their business or have little direct effect. For example, a rise in the local
provides a taxi service for women only. The taxis are all painted crime rate (B) could have persuaded women to use a taxi
pink and have pink interiors and are driven by women who have service particularly geared towards women, rather then walk,
undergone training not only in driving but also in self-defence. leading to a rise in demand for a taxi service. A rise in the
The taxis all have satellite navigation and tracking devices. exchange rate (F) is not likely to directly affect the demand for
Customers pay to become members of the Pink Ladies Club and a taxi service in Warrington.
so the cars do not have cash with them. Customers receive text
messages or phone calls to tell them where the taxi is and the
driver does not leave until the customer is safely in their
destination. Most students (51%) gained good (ie 1) marks on this question.
Which two of the following would be the most likely causes of a These answers identified one of the factors that would have
fall in demand for the Pink Ladies taxi service? (May 2008) (2) caused a fall in demand. For example, a rise in unemployment
A A rise in the cost of buying the taxis in the Warrington area (C) could mean fewer people with jobs
B A rise in the local crime rate and less income. They may cut back on taxi rides and either
C A rise in unemployment in the Warrington area walk or find cheaper alternatives.
D A rise in the prices charged by other taxi firms in the
Warrington area
E A fall in interest rates
F A rise in the exchange rate with the Euro Some students (17%) gained very good (ie 2) marks on this
G A reduction in the price of late night bus fares in the question.
Warrington area These answers identified that both a rise in unemployment (C)
H An upturn in the business cycle and a reduction in the price of late night buses in Warrington
(G) would lead to fall in demand. People often take taxis at
night and cheaper bus fares may lead them to use an
Answer C and G alternative form of transport and demand fewer taxi rides.
EDBUS_C25.QXD 23/9/09 13:18 Page 2
25 The impact of interest rates
25 The impact of
interest rates
120
Case Study
Amodu is a small firm that manufactures communications
accessories, such as mobile phone holders, headphones and
plastic mp3 player covers. Fenidi Amodu, who founded the
company, employs three workers. His factory, which he rents, is
on a small industrial estate. His customers are other businesses.
Some act as wholesalers, buying from Amodu and then selling
to small shops and other retail outlets. Others are large chains
of shops and Internet sellers that buy direct from Amodu.
Credit
Objectives Like many small firms, Amodu is crucially dependent on credit for its survival.
G Understand how changing interest Credit is simply a term to describe the different ways in which businesses borrow
rates affect small firms that tend to money. Amodu needs to borrow money to maintain its operations.
rely on overdrafts and loans for • It has some long-term loans from the bank (loans that are taken out over a
finance. long period of time - generally longer than a year). It borrowed the money to
G Appreciate the impact of changing pay for new machinery.
interest rates on consumer spending. • It runs an overdraft from its bank. The overdraft allows Amodu to go into the
red (withdraw money it does not have in the account) on its account with the
bank up to a limit of £5,000. Amodu finds that its sales increase from
September to November in the run up to Christmas. First, it has to produce
the products, such as a plastic cover, and pay for the raw materials. Later, it
sells them and receives payment from its customers. Amodu uses its overdraft
to fund its production until it receives payment.
It is good business practice for small firms to use loans to buy equipment and
finance longer-term expansion. Overdrafts should be used to cover short-term
changes in cash flow and sudden unexpected bills.
The cost of borrowing for small businesses

Banks charge interest on the money they lend out. Interest is the price that has to
be paid to borrow money. The interest rate shows the amount of money that has to
be paid to borrow a sum of money. For example, a bank may charge 10 per cent a
year to borrow money on overdraft. This means that if a firm like Amodu borrows
£1,000 for the whole year, it will have to pay £100 in interest. Since many
businesses have loans of some kind, the interest they have to pay is an important
cost that they have to take into consideration.
Interest rates can change. For borrowers, the higher the interest rate, the larger
will be the amount of interest payable on any loan. Equally, a fall in interest rates
will cut the interest payable. For example, if the bank used by Amodu increased its
interest rate to 15 per cent, a £1,000 loan would cost £150 a year in interest
payments. If it cut its interest rate to 6 per cent a year on a £1,000 loan, Amodu
would see its interest bill fall to £600.
Rises in bank interest rates therefore increase the costs of borrowing to firms like
Amodu. Their total costs will rise because they have to pay more in interest. A fall
in bank interest rates should benefit firms because the amount of interest they pay
out should fall.
EDBUS_C25.QXD 23/9/09 13:18 Page 3
The Bank of England

The interest rate that businesses have to pay is affected by the interest rate set by
the Bank of England. The Bank of England is called a central bank. It acts as a
banker to all the banks. It has a committee, called the Monetary Policy Committee
(MPC), that meets every month to decide what interest rate it will charge to lend
money to other banks. This interest rate affects interest rates throughout the banking
system. If the Bank of England increases interest rates then banks will generally also
121
increase their interest rates to businesses and to other borrowers. Equally, if the
Bank of England reduces interest rates then borrowing becomes cheaper for
businesses and also for people with mortgages or those wanting to borrow to buy
goods like cars and washing machines.
Fixed and variable rates of interest

The exact impact of changes in interest rates depends on whether they are variable
or fixed.
• The interest rate on bank overdrafts usually changes over the year. This means
that these interest rates are variable interest rates. Bank overdraft rates tend to
be linked to the rate of interest set by the Bank of England. It uses changes in
interest rates to control inflation - the rate of change in prices in the economy.
So, the rate of interest on Amodu’s overdraft will tend to change several times a
year as the Bank of England rate changes. This means that it is difficult for a firm
like Amodu to predict exactly the cost of borrowing. Large rises in the Bank of
England rate mean large increases in Amodu’s interest bill. Small changes in the
rate of interest mean small changes in the total interest bill for Amodu. Watch Out!
• The interest rate on loans may vary too. However, many loans to small Changes in interest rates affect
businesses carry fixed interest rates. This means the rate of interest on the loan businesses in different ways. A small
does not change whilst the loan is being repaid. If the rate of interest were 8 per change in interest rates will not have
cent on a loan for two years, it would stay at 8 per cent for the two year period. much impact on the vast majority of
Fixed interest rates reduce some of the risk of borrowing for small firms. businesses.
Saving and small businesses

Amodu is typical of many small businesses in having both loans and an overdraft.
However, many other small businesses do not have any borrowings. In fact, they
have positive amounts of cash in the business. This means they have savings. For
businesses with savings, higher interest rates mean they can earn more interest on
those savings. So they benefit in this way from high interest rates. They lose out Interest rate – the percentage reward or
when interest rates fall. payment over a period of time that is
given to savers or paid by borrowers on
savings or loans.
Interest rates and consumer spending Bank of England – the central bank for
Firms borrow money. So too do consumers. For example, they might borrow the UK. Its role is to monitor the banking
money to buy a house. Or they might borrow to buy a car or some new furniture. system and to be a banker to the banks.
Just as firms borrow money on overdraft to get them through difficult months when It is responsible for setting interest rates
more cash leaves the business than comes in, so consumers do the same. At in the UK.
Christmas, for example, consumers may borrow money on overdraft, or through a Variable interest rates – interest rates
credit card, to pay for presents. that can change over the lifetime of a
When interest rates go up, this makes the cost of borrowing higher. Some loan depending on what is happening to
consumers will be put off borrowing money because of this. They might work out other interest rates in the economy.
that they cannot afford the repayments on a loan, for example, at the higher rate of Fixed interest rates – interest rates that
interest. Also, they have to pay more in interest to banks and credit card companies. stay the same over an agreed period of a
This reduces the amount they have to spend on other items. This includes the plastic loan.
covers produced by Amodu.
EDBUS_C25.QXD 23/9/09 13:18 Page 4
Amodu, though, is lucky that it is not affected as seriously twice before making decisions to buy such products if the
by interest rate changes as other firms. Some firms can be interest rate is higher. The reverse applies if interest rates fall.
very badly hit by large rises in interest rates. This is because
they sell products that are typically bought on credit i.e. Summary
through borrowing. These tend to be products that have a Remember that interest rates affect businesses in two ways.
high price attached to them or are seen as being luxuries. • If they have loans, a change in the interest rate can
Examples include furniture, washing machines, dish washers, increase or decrease the cost of borrowing and thus
122
cookers, new kitchens and bathroom suites, TVs and so on. affects its cash flow.
New house building companies can see sales fall • Changes in interest rates influence decisions by
dramatically if the rate of interest on mortgages - loans to consumers about what they buy. If interest rates fall then
buy a house - rise significantly. The same is true of car businesses might see an increase in their sales but if
dealers. Cars, whether new or second hand, are often interest rates rise they might see sales slow down.
bought on credit. A large rise in interest rates, which shows The precise effects will depend on how much the interest
through in large increases in the monthly repayment cost of rate changes and what type of products a business sells and
a loan, hits cars sales badly. Faced with the higher cost of to whom.
financing these types of purchasers, consumers will think
Test yourself
1. A small bookshop runs an overdraft of £1,000 for the past
twelve months. The rate of interest on the overdraft was 8
per cent. The bank has now written to the business saying
that its overdraft rate will change to 10 per cent. What will
be the increase in its overdraft interest if it borrows £1,000
for another twelve months? Select one answer.
A £100
B £80
C £20
D £10
3. Most of the customers of a furniture shop buy items through

2. A small car dealer, which buys and sells second hand cars, borrowing the money. The furniture shop has an overdraft
has £5,000 in the bank in savings and has no loans. and a bank loan. Interest rates come down substantially.
Interest rates rise substantially. What is most likely to be What is most likely to be the effect on the shop? Select one
the effect on this firm? Select one answer. answer.
A It may be better off because its car sales are likely to A Its sales will rise and it will pay more interest on its
rise and it will receive more interest on its savings borrowings
B It may be worse off because, although it will receive B Its sales will rise and it will pay less interest on its
more interest on its savings, its car sales will fall borrowings
C It may be worse off because its car sales will fall and C Its sales will fall and it will pay more interest on its
it will receive less interest on its savings borrowings
D It may be better off because its car sales will rise D Its sales will fall and it will pay less interest on its
although it will receive less interest on its savings borrowings
EDBUS_C25.QXD 23/9/09 13:18 Page 5
Over to you
Twelve months ago, Cotgrove’s was a thriving business. The small
firm had three shops that sold electrical appliances such as
televisions, games consoles, washing machines, cookers and carpet
cleaners. The last shop had only recently opened. To finance the
opening, Cotgrove’s had borrowed £100,000 from its bank at a fixed 123
rate of interest over four years. The repayments were £30,000 a year
spread over the four years. Cotgrove’s also had an overdraft facility
of £30,000, which meant that it could become overdrawn on its
current account at the bank by up to £30,000.
Since this time, the Bank of England has put up interest rates from
2.5 per cent to 6.0 per cent. It was worried about rising inflation in
the economy. The rise in interest rates has had a dramatic impact
on Cotgrove’s. Sales have fallen by 20 per cent. The company has
been left with all the costs of running three shops but with fewer
customers buying its products. Its overdraft has risen as Cotgrove’s
has struggled to pay its day to day bills. The actual overdraft now
stands at £27,000 and is still rising. To get some more cash flowing 2. Using examples, show how Cotgrove’s costs have been
through the business, Cotgrove’s has decided to run a sale offering affected by the rise in interest rates. (3)
large discounts on its stock of products. 3. Discuss whether or not the sale will help solve Cotgrove’s
problems in both the short term and the long term. (9)
1. Explain how a rise in interest rates has led to a fall in 4. Evaluate whether Cotgrove’s should close one of its shops to
spending at Cotgrove’s. (3) solve its problems. (6)
Rob Jennings owns a computer repair business. He has a Then: Dismiss the choices that appear obviously wrong. That
mortgage on the small workshop, a £3,000 fixed interest loan and a would be D.
small overdraft of £800. Most of Rob’s customers are people who
have computers that are a few years old. Decide: You are left with A, B, C and E. You have narrowed
down the options.
Interest rates have just been reduced by banks. Which two of the
following are most likely to be the effect on Rob’s business? Go through these:
Select two answers Be careful with A and F. Because the loan has a fixed interest
rate, then neither of these is correct.
A The amount of interest paid on the loan will fall
B The mortgage payments will increase B is incorrect because a reduction in interest rates will not
C The amount of interest paid on the overdraft will fall lead to an increase in the cost of borrowing, such as
D The business will cease to trade mortgage payments.
E Some customers may now choose to buy new computers and
may not use Rob’s services This leaves you with the correct answers of C and E. Check
F The amount of interest paid on the loan will fall them.
Answer C and E C is likely because businesses pay interest on the amount
overdrawn. If interest rates fall so do payments.
Technique guide: There is a number of choices available so first:
E is also likely. The fall in interest rates makes borrowing
Think: What is meant by a reduction in interest rates? What cheaper and so some customers may decide to buy a new
features of a business are affected by changes in interest rates? computer rather than using Rob’s service to update or repair
How will they be affected by a reduction in interest rates? their old computers.
EDBUS_C26.QXD 23/9/09 13:22 Page 2
26 The impact of changes in exchange rates
26 The impact of changes

in exchange rates
124
Case Study
Carrick’s is a small business which manufactures ‘fasteners’. In
manufacturing, fasteners are any objective which holds two
things together. Examples of fasteners include nails, buttons
and screws. Carrick’s specialises in designing and
manufacturing small numbers of metal and plastic fasteners for
one-off jobs. It sells its products worldwide and its customers
have included luxury and racing car manufacturers and aircraft
manufacturers. The exchange rate of the pound is vitally
important to Carrick’s because it buys raw materials from
abroad and sells much of its output to foreign customers.
Exchange rates
Objectives Exchange rates are vitally important both for businesses and consumers. Many
G Explain the concept of exchange rates. people take foreign holidays. They then have to buy foreign currency. If you went
G Explain how changes in the £/$ or to Spain, you would have to buy euros, the type of money that is used in most of
£/euro exchange rate affect small Europe. If you went to Disneyland in Florida, you would have to buy US dollars.
firms that trade abroad or face If you took a holiday in Australia, you would need Australian dollars (which are
competition from abroad. different from US dollars). The exchange rate is the amount of currency you can
G Appreciate the impact of changing buy with one unit of another currency. For example, if the exchange rate is £1 =
exchange rates on the price of 1.20 euro, it means that you can buy 1.20 euros in exchange for 1 British pound.
imported and exported goods. The British pound is often called the pound sterling.
G Understand how to calculate Carrick’s has to buy different types of metals to make its fasteners. It has to buy
exchange rates on product prices. these metals from other companies, most of which are located in foreign countries.
When UK businesses, like Carrick’s, buy imports (goods from abroad), they have
to pay the foreign firm with their own currency. So UK businesses have to buy
foreign money.
Carrick’s sells most of its products to other companies abroad. It expects to be
Exchange rate – the exchange rate is the paid in pounds for these sales. When UK businesses like Carrick’s sell exports
price of buying a foreign currency. It tells
(goods or services sold abroad), foreign buyers have to buy pounds to pay for
you how much of the foreign currency you
them. They buy these pounds with their own local currency.
will get for every pound or how many
pounds you have to give up to acquire a
foreign currency. Calculating the cost of foreign exchange
Export – an export is the sale of a good or To calculate the cost of a foreign exchange transaction, you need to know the
service to a foreign buyer that leads to a exchange rate. For example, say Carrick’s sells £10,000 worth of fasteners to a
flow of money into the UK. The foreign buyer customer in France. The exchange rate is £1 = 1.20 euro. The French customer
will have to change their currency into then has to pay 12,000 euro for the £10,000. This is calculated by multiplying the
pounds to complete the purchase. £10,000 by the exchange rate of 1.20 euro.
Import – an import is the purchase of a good Another example would be if Carrick’s sold £20,000 of fasteners to a customer in
or service from a foreign business that leads the United States. If the exchange rate is £1 = $1.50, then the US customer would
to a flow of money out of the UK. The UK need to pay $30,000. This is the £20,000 multiplied by the exchange rate of $1.50.
buyer will have to change pounds into the In practice, the cost would be slightly higher. This is because banks who
seller’s currency to make the transaction. specialise in buying and selling foreign exchange also charge commission. This is a
small fee for the work they do in acquiring the currency for the customer.
EDBUS_C26.QXD 23/9/09 13:22 Page 3
Fluctuating exchange rates and prices

The exact price of foreign currencies goes up and down on a minute-by-minute
basis. Around the world, firms need foreign currency to carry out their business and
there are specialist markets that deal with foreign exchange transactions on behalf of
banks and businesses. Banks and other foreign exchange dealers, therefore, are
buying and selling foreign exchange 24 hours a day. Changes in the exchange rate
of a currency affect the amount of another currency that has to be given up to
125
acquire an amount of another. This, therefore, has the effect of changing the price of
imports and exports.
For example, if the exchange rate is £1 = $1.50, then a £10,000 order for fastenings
made by Carrick’s and sold to the US will cost the US customer $15,000 (£10,000 x
1.50). What if the value of the pound falls so that £1 will buy fewer US dollars? Say
the new value of the pound is £1 = $1. Then a £10,000 order will cost the US
customer just $10,000 compared to $15,000 before.
This example shows that if the value of the pound falls, the price of goods to
foreign customers will go down in their currencies. A fall in the value of the pound
means a fall in the export prices of UK firms. The reverse is also true. A rise in the
value of the pound means a rise in the export prices of UK firms. For example, if the
value of the pound rose against the dollar to £1 = $1.75, then the US buyer of
£10,000 worth of fastenings would have to pay $17,500.
The same type of calculation can be applied to imports. Say Carrick’s buys
$20,000 of raw materials from abroad. If the value of the pound is £1 = $1, then it
will pay £20,000. However, if the value of the pound is £1 = $2, then it will only pay
£10,000.
This example shows that if the value of the pound rises, so that £1 can buy more
foreign currency, the price of imports to the UK will go down. Equally, if the value
of the pound falls, so that £1 buys less of a foreign currency, the price of imports to
the UK will go up.
The impact of a fall in the value of the pound on small

firms
A fall in the value of the pound is good news for two types of British firm.
• For exporting firms like Carrick’s, a fall in the value of the pound means the price
of their products falls for foreigners. A fall in the price means firms like Carrick’s Watch Out!
should be able to sell more. So a fall in the value of the pound makes exports When you make an exchange rate
and exporting firms more competitive. calculation, use your common sense to
• A fall in the value of the pound makes imported goods more expensive. This is check whether the answer is right.
good news for any firms in the UK that are trying to compete against foreign Should you get more or fewer dollars or
imports. With foreign imports more expensive, UK firms should be able to sell euros for the amount of money you need
more in the UK. to exchange?
However, a fall in the value of the pound can also be bad news for some British
firms. Remember, a fall in the value of the pound raises the price of imports to the
UK. If a UK firm like Carrick’s imports materials from abroad, then it will find that it
has to pay more for these materials. Carrick’s costs will therefore rise. If it passes on
those higher costs in the form of higher prices to its customers, it could lose sales. If
Carrick’s does not pass on these costs, then its profits will fall.
Watch Out!
The impact of a rise in the value of the pound on small
firms Many firms that export goods also buy
A rise in the value of the pound has the opposite impact on small UK firms of a fall. imported products. Whether a change in
the value of the pound is good for them
• It is bad news for exporting firms like Carrick’s. The price of their exports to
depends on the balance between their
foreigners will rise. So they will sell less.
exports and their imports.
• It is bad news for UK firms that compete against foreign imports. The price of
imports into the UK will fall. So UK firms trying to sell products in the UK will
become less price competitive and are likely to lose sales.
EDBUS_C26.QXD 23/9/09 13:22 Page 4
• It is good news for UK firms that use imported materials. Summary

The price of imports will fall. This means that the costs of To convert pounds to a foreign currency, multiply the amount
these UK firms will fall. They can then choose to pass on of pounds by the rate.
those lower costs in lower prices to customers and For example, if you want to change £500 into dollars at a
probably gain sales. Or they can keep their prices the rate of £1 = $1.50, multiply 500 x 1.50 = $750.
same and increase their profits. To convert an amount in a foreign currency to pounds,
126 divide by the rate. If you want to know how much 300 euro
is in pounds when the exchange rate is £1 = 1.10 euro, divide
300 by 1.10. This then equals £272.73.
Test yourself
1. A small firm orders $6,000 worth of materials from a foreign
supplier. If the exchange rate is £1 = $1.50, how much in £
will it have to pay for the order?
A £4,000
B £6,000
C £9,000
D £10,000
Select one answer.
2. A UK firm sells furniture and kitchen products to customers

in Europe and buys raw materials from Germany. The value
of the £ (pound sterling) falls sharply against the euro.
The fall in the value of the £ is most likely to mean that
A its sales to customers in Europe will fall
B the cost of raw materials bought from Germany will
fall
C it will export more to customers in Europe
D its total costs will fall
Select one answer.
3. The value of the pound (£) rises against other currencies.

This is likely to
A increase exports of goods by UK firms
B make UK firms less competitive in foreign markets
C reduce imports of goods by UK firms
D make UK firms more competitive in the domestic
market against imports to the UK
Select one answer.

EDBUS_C26.QXD 23/9/09 13:22 Page 5
Over to you
Bishton’s has been pleased with the fall in the value of the
pound. It is mounting an aggressive sales drive abroad to
market its products. Lower prices are one of the key elements
in this marketing initiative.
However, Bishton’s costs have risen. In the short-term, this 127
has affected profits because it takes time for overseas sales to
increase. Profits have also been affected because it has not
increased its prices to UK customers. It sells 30 per cent of its
output in the UK, all to shops and other retail outlets in tourist
centres in the UK.
1. Bishton’s buys 13,000 euro worth of raw materials from
France. Using the exchange rates mentioned in the
passage, calculate the difference in price in pounds (£) that
it paid six months ago compared to today. Show your
workings. (3)
2. The price of a pack of biscuits that Bishton’s sells is £1.50.
Explain what has happened to the change in the amount that
its French customers will have to pay if the value of the
Bishton’s is a small food manufacturer based in Milton Keynes. pound changes from £1 = 1.30 euro to £1 = 1.00 euro. Show
It makes frozen foods that it sells worldwide. It buys some of its your workings. (3)
ingredients from abroad. 3. Explain two reasons why Bishton’s might be ‘mounting an
Over the past six months, the value of the pound has fallen aggressive sales drive abroad’. (6)
against the euro and the dollar. For example, whereas six 4. Do you think the fall in the value of the pound will benefit
months ago, £1 would buy 1.30 euro, it now only buys 1.00 euro. Bishton’s or harm the business? Justify your answer. (6)
Stephen Cleeves has a small business making models of racing Think: What is meant by a rise in the value of the pound? How is
cars and other famous vehicles. Most of his business is with this likely to affect exporters of goods from the UK, importers of
collectors in Europe, particularly France and Italy, whose currency materials to the UK, businesses in foreign countries, buyers in
is the euro. He exports his products to these countries. Some of foreign countries?
the materials he uses are imported from France.
Then: Dismiss the choices that appear wrong. That would be B -
Which one the following is most likely to be the result of a rise in it is not likely that Stephen would move his premises because
the value of the pound from £1 = 1 euro to £1 = 1.20 euro for the value of the pound has risen.
Stephen’s business? Select one answer.
Decide: You are left with A, C and D. You have narrowed down
the options.
A Sales to collectors in Europe will rise
B The business would move premises Go through these:
C The price of materials he uses in the models brought in from
France will increase A is incorrect. If you remember the SPICED mnemonic, the
D The price of his products to collectors in Europe will rise price of Stephen’s products to his European customers will
rise as a result of a rise in the value of the pound. So the
Answer D business is likely to sell less, not more.
C is incorrect. Again, use SPICED to help you here - the price

Technique guide: A good way to remember the effect of the
of imported raw materials for Stephen will fall. So material
change in exchange rates is the mnemonic SPICED.
prices from France will fall, not rise.
Strong Pound - Imports Cheaper, Exports Dearer. This leaves you with the correct answer of D. As the value of
the pound rises, the price of exports to foreigners is likely to
There is a number of choices available so first:
rise.
EDBUS_C27.QXD 23/9/09 13:25 Page 2
27 The impact of the business cycle
27 The impact of
the business cycle
128
Case Study
Lily Moatt owns and runs a small car dealership. She sells second
hand cars. Sales have been good for the past five years but this
year they have fallen dramatically. It is because of the recession
that has gripped the economy.
The Economy
Objectives Every day millions of people in the UK make decisions to buy goods and services.
G Understand that economic activity Businesses provide goods and services to final consumers and to customers who
tends to rise and fall. may be other businesses. The simple act of deciding whether to buy a chocolate
G Appreciate that changes in the level of bar from a local newsagent is just one example of what we call economic activity.
economic activity can have serious Economic activity is the amount of buying and selling that takes place in a period
effects on small businesses. of time.
The economy is the term used to refer to all the people and businesses in a
country that engage in this buying and selling. Over time, the level of economic
activity changes. Sometimes the amount of buying and selling rises. People may
feel confident about their jobs, their incomes may be rising and they make
decisions to spend money. They may choose to go out to the cinema more often,
eat meals out, buy new furniture for their homes, go on holidays and so on. When
Watch Out! this happens, we say the economy is expanding.
There are other times when people feel less confident about the future. There
Not every business suffers in a recession. may be a lot of news about job losses; people may worry that they might lose their
In a recession, the government often job and so decide to cut back spending and postpone decisions to make some
increases its spending. So firms that types of purchase. For example, they may decide to do without a holiday abroad,
supply the government might see their decide to make do with the existing furniture they have rather than buy new and
sales increase.
decide to go out to eat less each month. If this happens across the economy then
the amount of buying and selling - economic activity - will fall.
Economic growth
Fifty years ago, very few people owned a car. Today, there is one car on the roads
for nearly every two people who live in the UK. People over the past fifty years
have become much better off. They can afford to buy more and better food.
Economic activity – the amount of buying
Homes are packed with electrical appliances, from fridges to washing machines to
and selling that takes place in a period of
televisions and games consoles. People live longer because they live in better
time.
housing and because they receive better medical care from the National Health
The economy – the economic activity
Service. The norm today is for teenagers to stay on in full time education to the
carried out by people and businesses in a
age of 18 and one third go on to university or college.
country.
The reason why people are better off is because there has been economic
Economic growth – rises in the rate of
growth averaging around 2.5 per cent per year. This means that every year, on
economic activity in an economy. It is
average, the economy produces 2.5 per cent more goods and services than it did in
measured by calculating the value of sales
in an economy over a period of time. the previous year. The Office for National Statistics (ONS) collects and publishes
information about the level of economic growth in the UK. If you look at a graph
of economic growth it shows how economic activity has changed over time. In one
EDBUS_C27.QXD 23/9/09 13:25 Page 3
year, economic growth may be 3.5%, in the next year, 2.9% in the next year, 2.5%
and so on. It is important to remember that economic growth of 1% is slower than a
rate of 2.0%, for example, but it is still ‘growth’. What has changed is the rate of
growth.
Lily Moatt’s car dealership has done well in recent years from this economic
growth. With people buying more cars each year, her sales have increased.
The business cycle 129

On average, production and incomes have gone up by 2.5 per cent over the last 50
years. However, in some years, it is more than this and in some years it is less.
Over a period of time there tends to be a regular pattern to the level of economic
activity. There might be a few years where economic activity is rising but then there
are other years when the economy slows down. In some cases, this slowdown can
be prolonged and this has a special name - recession. The tendency for economies
to have different levels of economic activity is called the business cycle.
How businesses are affected by different stages in the

business cycle
In some years there is a strong increase in the level of economic activity. The
economy is growing strongly (called a period of ‘boom’). People feel confident
about the security of their jobs and they may be getting reasonable pay increases
each year. In these sorts of conditions, firms like Lily Moatt’s car dealership can do
very well. Consumers feel confident enough to make decisions to buy large items,
like cars or furniture. Many of these expensive items are bought on credit. So levels
of borrowing are high too. All types of businesses might be doing well. Restaurants
may find they are busy every night. Firms who offer leisure and entertainment may
find they see sales rise. People may decide to extend their houses or decorate and so
builders find their services are in demand. In turn, businesses which supply other
businesses, like builders merchants, for example, may also see an increase in their
sales.
Strong economic growth does not last forever. There will be other times when
economic activity begins to slow down. This is sometimes called a ‘slowdown’ or a
‘downturn’. In this sort of situation, consumer confidence begins to fall. Consumers
become less willing to borrow money to buy large items like cars. Lily Moatt’s sales
may fall in a downturn. She may react by cutting her stock of cars. This means she
buys fewer second hand cars from the car auction rooms to sell to her customers.
She does not want to be stuck with lots of cars on her garage forecourt that are not Businesses can do well when there is a strong
selling. Also, she knows that she will have problems with finance and cash flow. increase in the level of economic activity
Selling fewer cars means that money will not be coming into the business so
frequently. So cutting the number of cars she buys is one way to reduce the amount
of money flowing out of her business.
In a downturn different businesses will be affected in different ways. Businesses
that sell ‘essential’ items like food might not see sales fall very much. Other firms
such as restaurants or leisure providers who sell goods or services people see as
‘luxuries’ may see their sales fall quite dramatically.
If people are cutting back on spending then it tends to be the ‘luxuries’ that they
cut back on first. They may decide that their home is all right as it is and does not
need decorating or any new furniture. Firms that sell products such as paint, DIY
items and furniture may see their sales fall sharply. In turn they order fewer supplies Business cycle – fluctuations in the
from manufacturers so these businesses also see their sales start to fall. level of economic activity over a period
In some cases the slowdown can be quite severe. If confidence is so bad that many of time. Most economies experience
times when economic activity is rising
people throughout the economy are cutting back it can cause major problems.
and others when economic activity is
Businesses may see sales fall so far that they are forced to close down. If many
slowing.
businesses are closing down then people lose their jobs. They may find it hard to get
other jobs and so they will have to cut back spending. Those who have jobs are
EDBUS_C27.QXD 23/9/09 13:25 Page 4
lucky if they get a pay rise. Businesses who supply other Eventually, however, the economy begins to recover and
businesses may also have to close because they have lost return to positive growth. In a recovery, economic activity
their main customers. begins to rise. So too do consumers’ incomes. Consumers
The slowdown can be so bad that the amount of goods feel more confident and are prepared to increase their
and services produced in one time period can actually be less spending again. In particular, they begin to increase their
than that produced in the previous one - the economy borrowing to buy items. This is good news for Lily Moatt’s
shrinks in size. In this case, economic growth will actually be car dealership. She begins to sell more cars, although it may
130
negative. For example, economic growth of -1.5% means not be as many as when the economy was growing strongly.
that the economy produced 1.5% less than it did in the Rising sales helps her to return to profit, although the profit
previous year. The ONS usually produce statistics for is small. The recovery from recession can take quite a long
economic growth every quarter (there are four quarters to a time.
year). If economic growth is negative for two successive
quarters, then it is called a recession. Test yourself
In a recession, businesses like Lily Moatt’s are particularly
hard hit. Buying a car is a major expense and in a recession
1. Cremin’s is an independent shop selling DVDs. It has
people may simply feel they cannot afford to buy products decided to open a second store in a nearby area of
that have a large price tag like a car. In a recession, Lily London. Which one of the following is most likely to be the
might see her sales fall by 50 per cent. Seeing her sales halve reason why it has decided to expand?
in size means that she may make a loss instead of a profit.
A Interest rates are at record high levels
She still has to pay rent on the premises. Her electricity and B The economy is growing very fast
telephone bills are still very much the same. So, she cannot C Competition from Internet retailers of DVDs is getting
halve her costs to match the fall in her sales. The best she more intense
can do is reduce the number of cars she has for sale and D Rents on shops are very high
make some of her workers redundant. Some businesses do
not survive and are forced to close and this is more likely for Select one answer.
some types of businesses in a recession.
2. Agaba’s is a restaurant. The economy is doing badly at
the moment, incomes are falling and unemployment is
rising. Agaba’s has seen a drop in sales too. Which one
Watch Out! of the following is most likely to help Agaba’s survive?
Do not confuse ‘redundancy’ with ‘sacking’.In times when It should

the economy is slowing, firms may look to reduce the size A take on an extra worker
of its workforce. In this case it may look to make workers B buy another local loss-making restaurant
redundant. This is where a job ceases to exist anymore. Do C introduce a take-away service
not say that businesses will sack workers - sacking D increase the pay of the owners of the restaurant
workers refers to a case where the employee has broken Select one answer.
the terms of their contract in some way - possibly through
some disciplinary matter such as stealing or assaulting a 3. Dineley’s is a small taxi firm. It has decided to sell one of
colleague. its taxis. Which one of the following is the most likely
reason for this? Over the past twelve months
A the level of economic activity in the economy has
fallen
B the price of diesel has fallen
C another local taxi firm has closed
Recession – a situation when the level of economic growth is D the price of second hand cars has fallen
negative for two successive quarters. Select one answer.
EDBUS_C27.QXD 23/9/09 13:25 Page 5
Over to you
Gisborne’s is a small firm which
supplies spare parts for diggers
used in construction and road
building. It buys stocks from major
manufacturers and then sells them 131
to businesses that own diggers.
Twelve months ago, the firm was
doing well and had achieved the
highest sales ever in its four year
history. It had expanded the number
of parts it kept in stock to cope with
higher sales and taken on an extra
member of staff. It had also moved
to larger premises, taking out a large
loan to pay for the move.
However, recent months have
been very bad for Gisborne’s. The
level of economic activity has fallen
and the economy has gone into
recession. As the business cycle has changed, economic 1. Explain what is meant by the business cycle. (3)
growth has fallen by 2 per cent. The construction industry has 2. Explain the likely impact that the change in the level of
been particularly badly affected with sales falling by 25 per economic activity over the past 12 months is having on
cent. This means that there are now a lot of diggers lying idle in Gisborne’s. In your answer, analyse the likely impact on
builder’s yards that do not need any replacement parts. The revenues, costs and profits. (6)
only good thing is that construction companies have stopped 3. Explain how making a worker redundant might help
buying new diggers. They have been making do with the Gisbourne's during a slowdown. (3)
diggers they already own. Older machines break down more 4. Compare two different measures that Gisbourne's might take
frequently and so need more parts. Even so, Gisborne’s has to survive the slowdown apart from making workers
seen its sales fall by 20 per cent. redundant. Discuss which one you think could be the most
important in ensuring its survival. (9)
The economy is growing strongly. Explain how this could affect a Excellent Explains that growth has certain features, many
business. (3) of which can benefit a business, although there can also be
costs and challenges. For example, ‘If the economy is growing
Think: What does growing strongly mean? What are the features of strongly, incomes are relatively high and people are confident
strong growth? How could strong growth affect businesses? about the future. (1) High incomes and confidence lead to
higher levels of spending by customers and decisions can be
Basic Explains that a business could benefit as people taken with reasonable certainty. (1) Businesses earn high
have more money. ‘Strong growth means people spend more revenues and profits as a result and may be able to expand,
and businesses profits will rise.’ (1) although the expansion may lead to issues, such as having to
employ more staff and changing catalogues for new products.’
Good Explains that in a growth period income is relatively (1)
high. (1) Businesses may benefit, as people are earning more
and so will spend more on goods and services produced by
businesses. (1)
EDBUS_C28.QXD 16/7/09 12:15 Page 2
28 Business decisions and stakeholders
28 Business decisions and

stakeholders
132
Case Study
Quemby Recycling Ltd is a small private
limited company. Its core business is the
recycling of automotive waste. This is waste
associated with cars and lorries. Waste
includes old tyres, batteries, brake fluid,
antifreeze and engine oil. Tyres, for example,
can be recycled into large rubber bowls.
Quemby offers garages and tyre fitters a
collection service. For a fee, it will pick up
automotive waste from a site and then
dispose of the waste in accordance with the
latest government regulations.
Stakeholders
Objectives All businesses, including Quemby Recycling, have a number of different
G Understand that stakeholders are stakeholders. A stakeholder is an individual or a group that is affected by the
those groups or individuals with an business. Stakeholders therefore have an interest in how the business operates
interest in a business. and whether or not it is successful. Stakeholders include the following.
G Recognise that business decisions
have different effects on different Owners The owners of a business want the business to be successful. Usually,
stakeholders. success means how much money the owners can make from the business. How
G Appreciate the problems a business much profit is the business making? How much income can the owners pay
may face in meeting the demands of themselves through owning the business? Can the owners sell the business for
all stakeholders. more than they invested in it? Quemby Recycling is a private limited company. It
is owned by two shareholders, husband and wife, Rob and Shirley Quemby. Their
goal is to earn a good income for themselves now and sell the company at a high
price when they retire.
Managers Quemby Recycling is a relatively small firm and Rob is the manager of
the company. However, in some small companies, the shareholders appoint a
manager to run the company on a day to day basis. Managers want the firm to be
successful. If it not successful, they could lose their job. However, managers are
also interested in their own rewards. They want a large salary. Perhaps they might
also get a company car. So long as the firm is profitable and doing well, managers
might be more interested in their own rewards than in squeezing an extra £1 of
profit for the shareholders of the company.
Workers Quemby Recycling employs 9 workers. Like managers, they want the
firm to be successful enough to keep them in a job and give them regular pay rises.
Stakeholder – an individual or a group However, workers want to have as large a wage as possible. They want good
which has an interest in and is affected by working conditions and a generous holiday entitlement. These all represent costs
the activities of a business; stakeholders to a business and higher costs might mean lower profits. The objectives of workers
have an interest in how the business
might conflict with those of the owners who are seeking to make high profits.
operates and whether or not it is
successful.
Customers Customers are very important stakeholders. They want a firm to give
them a good, reliable, quality product at a fair price. Quemby’s customers, for
EDBUS_C28.QXD 16/7/09 12:15 Page 3
Figure 1 – Stakeholders
The local
community
Suppliers Owners
Stakeholders
Customers Managers
133
Government Workers
example, expect the firm to come to their premises on time and take away the waste
that has been agreed. They have chosen Quemby because it gives them a
competitive price on waste disposal. In return, Quemby expects its customers to pay
them on time for the service that they provide.
Suppliers Suppliers are firms that sell products to another firm. Quemby’s
suppliers include the electricity company that sells it electricity and the equipment
manufacturer that sold it recycling equipment. Suppliers want their customer to
continue buying from them.
Government There are various parts of government that are stakeholders in a firm
like Quemby’s. Central government is a stakeholder because it taxes Quemby’s and
expects it to collect taxes on its behalf as well as passing laws that all businesses
have to abide by such as those covering equal opportunities and employment. Local
government also imposes Business Rates on the company. Government agencies
like the Health and Safety Executive monitor and inspect the company to make sure
it keeps to the law.
The local community The local community has a stake in a firm like Quemby’s.
On the one hand, Quemby’s provides jobs for local people. It also provides a service
that local people want to see performed. They do not want garages to dump old
tyres by the side of the road or throw contaminated oil down the drain. On the
other hand, some local residents are worried about the pollution that Quemby’s
might cause. No one wants to live near a recycling plant especially if it is dealing
with potentially dangerous materials like rubber or acid from old car batteries.
Conflicting objectives
Businesses are constantly making decisions. However, each decision has different
impacts on stakeholders. Some decisions benefit some stakeholders, other decisions
benefit other stakeholders. Let us look at four examples of decisions that impact
differently on the different stakeholders of Quemby’s.
Watch Out!
Quemby Recycling decides to expand Quemby’s sales are rising. The owners,
Rob and Shirley Quemby, decide that now is a good time to expand. To do this, they Waste recycling businesses provide a
would need to move to a larger site. For Rob and Shirley, expansion means a more good example of the way in which local
successful business with larger profits. Suppliers are in favour because expansion communities can oppose the siting of
potentially means more orders for them. However, two of the workers are unhappy firms in their area. However, most local
because the new site would add another 15 minutes to their journey time to and communities take no interest in the siting
of firms. This is because firms typically
from work. Residents near the new site are strongly against the proposal. They are
site themselves in areas that have been
worried about possible pollution. On the other hand, residents near the existing site
set aside by planning laws for business
are very pleased because they will be getting rid of Quemby’s.
use. Housing and industry are kept apart
to prevent disputes about pollution.
Quemby Recycling puts up its prices to customers Costs for Quemby Recycling
have been rising. New government regulations have forced it to buy some new
equipment. Electricity prices have been rising. Workers also received a 2 per cent
EDBUS_C28.QXD 16/7/09 12:15 Page 4
wage rise. So the firm has decided to put up its prices to They now receive a lower wage than they would have done if
maintain profits. For the owners, this safeguards their they had received their usual pay rise.
income. For workers, it is a way in which the company can
afford to give them the pay rise. However, it is bad news for The government imposes new waste recycling
customers who now have to pay more to have their waste requirements The government decides to tighten up on
recycled. waste recycling. It means that Quemby’s has to buy new,
more expensive equipment. The new processes also take
134
Quemby Recycling refuses to give its workers a pay longer and this means higher costs in terms of labour. The
increase Quemby’s workers expect to get a pay rise each government is acting on behalf of the wider community. The
year. However, conditions have been difficult and profits at community benefits because waste is recycled to a higher
the firm have fallen. The owners have decided that they will standard. However, Quemby’s raises its prices to its
not be giving their workers a pay rise. This benefits the customers. Ultimately, motorists have to pay higher charges
owners because their profits would fall even further if they to garages for the recycling. So motorists lose out.
awarded a pay rise. On the other hand, the workers lose out.
21. Look at the following statements referring to stakeholders. How students answered
(i) Planning for the restructuring of the business to cut costs Answer
which results in the announcement of a series of (i) Employee, Management
redundancies. (ii) Management, Local Community
(iii) Customer, Employee
(ii) A decision by those who run the business to introduce a
iv) Supplier, Shareholder
system for monitoring the amount of pollution that it creates.
(iii) The introduction of a system of production which puts the
staff at the heart of the decision-making process in an effort
to improve productivity and quality, allowing the business to Most students (67%) scored poorly (ie 0-1) on this question.
reduce prices.
(iv) A decision is taken to switch the sourcing of raw materials
and component parts from the UK to a firm in Malaysia
Some students (32%) gained good (ie 2-3) marks on this
which reduces costs and boosts profit.
question.
Identify the two most likely stakeholders who would be most
affected by the actions in each statement and write the
appropriate letters in the spaces provided.
Few students (1%) gained very good (ie 4) marks on this
A Customer
question.
B Customer
C Supplier The key to the correct answers lies with the wording of the
D Supplier question.
(i) refers to planning to make redundancies. Employees are
E Shareholder
most likely to be immediately affected by the
F Shareholder redundancies and management would have been the
G Local Community stakeholders who would have been involved in the
H Local Community planning.
(ii) refers to those who run the business, which implies the
I Government,
management, and pollution, which affects the local
J Government community.
K Employee (iii) refers to putting staff at the heart of the decision-making
L Employee process, which implies that employees will be directly
affected here. The reduction in price is most likely to
M Management
directly affect customers.
N Management (iv) refers to a change in sourcing of raw materials and
(May 2008) (4) component parts – existing suppliers will, therefore, be
affected by this decision. The increase in profits will be of
benefit to shareholders.
EDBUS_C28.QXD 16/7/09 12:15 Page 5
Over to you
Manian’s Ltd is a small company which provides a
repairs and maintenance service for commercial and
residential property. Most of their work comes
through maintenance agreements. The owners of a
building, like an office block or a block of flats, sign a 135
maintenance agreement with Manian’s. In return,
Manian’s guarantees a 24 hour, 365 days-a-year call
out service. Manian’s employs a team of 12
electricians, plumbers, carpenters and decorators to
do its work. It also hires extra workers by the day if it
is very busy.
A typical job might be a leak in a pipe. A plumber
will be sent out to fix the leak. If it is serious enough,
it might need a carpenter to repair damaged
woodwork or refix a ceiling. A serious leak is also
likely to have damaged wall and ceiling decoration.
So the company’s decorators will be sent out to redecorate. they will have established a business that will be worth several
The company prides itself on getting work done quickly. It also million pounds to a buyer.
aims to provide a one-stop service. The owners of the building
do not have to look for more builders to do day- to-day repair and 1. Explain the interest that each of the following stakeholders
maintenance work. If there is a job that is beyond the expertise has in Manian’s.
of Manian’s workers, like a difficult repair job to a boiler, (a) Fred Mansell and Brian Simister;
Manian’s will organise a company to come and fix the problem (b) the 12 employees of Manian’s;
immediately. Outside maintenance of a building is just as (c) the customers of Manian’s;
important as inside. Having a well kept outside deters burglars (d) the local community. (12)
and enhances the look of the local area. It also helps maintain 2. Manian’s decides to put up the prices of its maintenance
the value of the property, particularly important if the customer is contracts by 4 per cent to reflect increases in costs, including
a group of flat owners in a complex of flats. a pay rise to its workers. Explain what impact this might have
Manian’s is owned by Fred Mansell and Brian Simister. They on two different stakeholders in the company. (6)
both had long experience in the building trade before setting up 3. Fred Mansell and Brian Simister decide they could increase
the company. They see quality of work and speed of response the profitability of the company if they made two workers
as key to running a successful company. They have seen their redundant and hired more temporary workers when work
sales and their profits grow substantially since setting up the was busy. Discuss whether this is in the best interests of the
company five years ago. They hope that by the time they retire, customers and the owners of the business (6)
Test yourself
1. Cantwell’s is a business that makes zips for clothing. It B Workers because their jobs will now be more secure
decides to make five workers redundant. Which one of the C Supermarkets because the price of wire trolleys will
following stakeholders is most likely to benefit from this increase
decision? Select one answer. D The government because it will now collect less in tax
A Suppliers of the business because they will now sell 3. Sangar’s is a small meat packing business. Its workers
more zips to Cantwell’s have demanded a 10 per cent pay rise. Which stakeholder
B The local community because there will now be more in the company is most likely to be affected if the company
spending in local shops awards the pay rise in full? Select one answer.
C The government because it will now collect more in
A Suppliers to Sangar’s that will see a rise in sales to
tax
the company
D The owners because their costs will fall
B Customers who will see a fall in price of the products
2. Bettany’s is a business that makes wire trolleys for made by Sangar’s
supermarkets. It has decided to invest in a new machine C The owners who will see the costs of the company
and take on two more workers because orders are rise
increasing. Which stakeholder in the company is most D The local community that will see a fall in spending in
likely to benefit by the decision. Select one answer. local shops
A Owners because increasing sales means their total
costs will fall
EDBUS_C28.QXD 16/7/09 12:15 Page 6

Understanding the economic context
In this topic you have learned about: stakeholders, the people with interest rates, which are the price of taking out loans and the
an interest in how well a business does, exports, the goods and rewards to savers, commodities, such as oil, wheat, copper and
services a business sells abroad for which they receive payment beef, where prices vary regularly and where producers are price
and imports, the goods and services that a business buys in from takers, business cycles, where the economy goes through periods
abroad which have to be paid for, supply, the amount a producer called ‘cycles’ of growth, downturn, recession, recovery, and
will offer for sale at a given price, and demand, the amount that exchange rates, the price of one currency in terms of another.
consumers are willing and able to purchase at different prices,
136 markets, where buyers and sellers get together to agree a price,
You should know…

Economic activity is the amount of buying and selling that goes on Imports are the goods and services that businesses buy from
in a country in a period of time. overseas and which lead to money flowing out of the UK to
The economy is all the people in a country who engage in buying pay for them.
and selling – economic activity. Currency is what countries use as money, e.g. £, $ or euro.
Commodities are raw materials. Their prices change depending Exchange rates are the value of one currency against
on the level of demand and supply for them. another, e.g exchange £1 to get $x or x euro.
Demand is what people are willing and able purchase to at Fall in the exchange rate (Fall in value of pound) = £ buys less
different prices. of a foreign currency. Export prices fall – results in more
Supply is the amount that businesses are prepared to offer for exports sold; Import prices rise – fewer imports bought.
sale at different prices. Rise in the exchange rate (Rise in value of pound) = £ buys
Commodity markets are often organised markets where buyers more of a foreign currency. Export prices rise – demand for
and sellers meet to agree prices and sales, for example, the exports fall; Import prices fall – demand for imported goods
London Metal Exchange. Suppliers in commodity markets are rises.
often price takers. Can use the mnemonic SPICED (Strong Pound – Imports
Normal markets or ordinary products tend to have more stable Cheaper, Exports Dearer) to remember the effect of exchange
prices. rates.
Credit is the term used to refer to loans - borrowing money now to Economic growth is the increase in the value of goods and
buy something. Interest is paid on borrowing. services produced in an economy in a year.
An overdraft is a short-term form of finance that allows Economic growth leads to more employment, higher incomes,
businesses and individuals to withdraw money that they do not better standard of living.
have in their account. Business cycle has different stages – Growth, Downturn,
Interest rates is the price paid on loans (credit) and overdrafts – Recession, Recovery.
usually expressed as a percentage. Stakeholders are any individual or group with an interest in a
Fixed interest rates stay the same over the lifetime of a loan. business – owners, managers, workers, customers, suppliers,
Variable interest rates can change over the lifetime of a loan. government, the local community.
Savings are what people have in the bank. Many savings Stakeholders have conflicting objectives, what stakeholders
accounts earn interest. can have, one group gains at another’s expense, e.g. reduced
Exports are the goods and services that businesses sell overseas prices (customer gains) = profit falls = jobs lost (workers
and for which they receive a payment – money comes into the UK. lose).
• Imagine you are a business selling goods to another business would have on your sales? Explain your answer.
in America. The price of the good you sell is £500. Use a • You are thinking of buying a new car that is priced at £10,000.
currency calculator in the Internet (for example You will have to borrow the money from a bank to pay for it.
http://www.xe.com/ucc) and find out how what the price in Visit your local bank and get a leaflet which shows the interest
dollars would be to buy your product. Two weeks later – do the rate on loans. Assume that you want to borrow the money over
same exercise. How much is the price in dollars now? three years. Using the interest rate information, calculate how
What has happened to the exchange rate between the pound much you will have to pay in interest to borrow the money to
and the dollar? buy the car.
What effect do you think the movement in the exchange rate
Stretch activity
• Make a list of the prices of five goods in the UK. Using a • Choose one business which could be a well-known business, a
currency calculator from the Internet, calculate how much business you know or a business that you have relative working
these goods would cost a buyer in the USA. Investigate how at. Explain how two different stakeholders of the business
these prices would change if the value of the pound fell and might have different stakeholder objectives. Explain why a
increased against the dollar. What do you think the effect conflict might arise between these stakeholders and what the
would be on the UK seller in each case if the value of the pound business might do to resolve the conflict.
FELL against the dollar. Remember to try and say something
about how much the business concerned would be affected.
(a) Umar Kazi runs a fresh fruit and vegetable stall in Newcastle’s indoor (ii) Explain why Umar needs to keep ‘the prices he charges’ as stable as
market. He gets the produce delivered daily. Because what he sells are possible. (3)
commodities the price he pays for individual fruits can vary significantly Think: What is a commodity? What is different about it? What can Umar
depending on the season, the weather and the state of the economy. control and not control of prices? What is in this scenario to use in the
Umar tries to keep the prices he charges his customers stable. answer? What is the problem?
(i) What is meant by the term ‘commodities? (1)

(i) Something you buy to make Just enough to get the mark by Use clear phrases such as ‘… a raw material where prices
something else. showing the knowledge that it is change on a very regular basis.’ Or ‘… a product sold in an
something which is used in organised market where buyers and sellers meet to agree a
(ii) Because he wants repeat production. The student has not price.’ Use clear phrases such as ‘… so that he gets customer
purchases and people to come used clear terminology well. Has loyalty, a good reputation by giving his customers good service
back. left room for doubt in the examiner’s because they have a good idea what the prices will be.’ Or ‘…
mind. A very basic comment which it will help his cash flow because customers will keep coming
is correct but not developed. The back to him as they do not get overcharged.’ Or identify one of
phrase ‘repeat purchase’ is a good the problems facing Umar then link it the scenario. ‘Umar has
one and shows some understanding costs to pay whether he sells anything or not. By keeping his
of what a small business does. prices stable he may sometimes lose profit but he gets regular
custom so his cash flow is steady. Some weeks he will make
more profit than others.’
Claire Graham is a furniture designer and an entrepreneur. She (a) Which two of the following are most likely to exist in a growing
saw a market for her speciality furniture, took the opportunity and economy? (2)
set up her company called ‘C-scapes Ltd’. She needed specialist
A The value of goods and services produced is going down
equipment, premises and well qualified staff as her products were
B Consumer confidence is low
expensive and often made to order. The price reflects an added
C The standard of living is going up
value of 20%. Most raw materials were imported from Europe as
D Incomes are going down
Claire could not get them in the UK. The economy was growing, so
E Employment is rising
Claire took out loans to buy the equipment, a mortgage to buy the
F There is less competition
premises and she arranged an overdraft facility to help the
company if there were cash flow problems in the early days of
(b) (i) What is meant by the phrase ‘a fall in the value of the
trading. Most of the ‘C-scapes Ltd’ customers were based in the
pound’? (1)
UK, though they did export a few items to Europe. Claire was
(ii) Explain one way in which a fall in the value of the pound
careful in how she ran ‘C-scapes Ltd’ and being aware of how
might affect C-scapes. (3)
economic activity could change she ensured that most of the
profits were kept in the company so that it always had cash
(c) Evaluate one likely effect on two stakeholders of your choice in
available. After 2 years interest rates rose and the value of the
C-scapes of the downturn in the economy. (6)
pound fell against the euro. There was a downturn in the economy
as growth slowed.
EDBUS_UNIT_2.QXD 2/2/09 8:58 am Page 2
Unit 2 Controlled Assessment
Unit 2
Controlled Assessment
Overview
Controlled assessment (CA) has replaced regulations for coursework and may have been
coursework as an element of the internal producing work that was not their own in some
assessment of the qualification. It is important to way. The underlying principle of CA, therefore, is to
understand the reasons why controlled assessment specify what levels of control are required to be
has been introduced. It is primarily because of the implemented at different stages of the production of
concern that students may have abused the a piece of work for internal assessment.
The nature of controlled assessment
CA is designed to assess the ‘higher order skills’ There will 5 tasks based on the topics in Unit 1 set
relating to the content outlined in Unit 1, as by Edexcel. These will change each year, so you will
opposed to the Unit 1 exam, which focuses not be able to re-submit the same piece of work.
primarily on A01 and A02. The assessment for CA is Students must choose one task.
weighted more towards A02 and A03. These skills
The tasks give you the opportunity to focus on an
are explained in the Exam Zone at the back of this
area which
book.
• interests you most
Students should be encouraged to demonstrate
• you understand best
understanding and use of concepts rather than just
stating a concept without explanation or in context. • you can investigate most appropriately.
Simply knowing terminology is static. Whilst the question is based on a sub-topic of Unit
Demonstrating understanding is dynamic. For 1 (for example, on ‘Spotting a Business Opportunity’
example,‘Elisha Bonda is a florist. She is a sole or ‘Understanding the Economic Context’) you
trader. A sole trader is someone who ....‘, is a static should not be frightened of bringing in other
explanation.‘Elisha Bonda is a florist. She works for aspects of Unit 1 if they are relevant. This will help
herself because it is easier and she wants to keep all to show your all-round understanding of the
the profit for herself. She decided to set up as a sole business world and that you know the business you
trader because … ‘ moves towards a more dynamic investigated is affected by all elements of business.
understanding of a sole trader. By doing this you will again show dynamic
The application of concepts to a particular context understanding rather than just listing static
and the different research that each student will statements.
carry out means that each piece will be capable of Remember:
being based on similar concepts and knowledge, but
Dynamic
be interpreted differently within the context and so
turn out differently. This helps to differentiate more Improves
effectively and allow the full range of the mark Static
scheme to be applied. To
Improve
Learning
What controlled assessment is not
CA is not coursework or a project. It cannot be You will have one opportunity to write up the work,
written up in stages over the course with review, so time management alongside good research is
feedback and redrafting. It is an assignment essential.
emerging from research and then being written up 139
Research files should not include a plan of the
under controlled conditions. Work will not be
answer, a model answer etc. or anything that is
submitted to teachers for consideration nor will
against the spirit of controlled assessment.
advice be given on how to improve it.
How long it will take?
Part One - Research time Part Two - Writing up time

This can be up to 6 hours and will be subject to light This will be up to 3 hours and will be conducted
supervision. It can be done in the classroom or under strictly controlled conditions.
outside. Students are advised to set up and keep a
The write up can be done in a 3 hour chunk or
research log of what they have done and how long
broken down into different time slots, for example, 3
they spent doing it. For example:
‘one hours’ or 6 half hours.
Date Time spent Activity
14/06/10 45 minutes Internet research
17/06/10 20 minutes Observation in local
shop
23/06/10 1 hour Write up of
observation notes
and production of
chart to show store
footfall.
Where it will take place?
The controlled assessment writing up will take place The 3 hours of writing up need not be a single slot
within the centre only in lesson time. but if it is done over, for example, 3 one hour sessions
then at the end of each session student materials
The centre may choose to have this done in an
must be collected in, held securely and handed back
examination room with a schedule arranged to
out at the start of the next session.
facilitate invigilation, or it could take place within
normal lesson time and within the classroom.
140
What are controlled conditions?
There are different levels of control which apply to • You can use the research during the writing up
different parts of the CA. time.
• Formal supervision (High level of control) - the • The teacher must inspect the research and be
candidate must be in direct sight of the supervisor satisfied the research is your own work and that it
at all times. Use of resources and interaction with does not contain inappropriate material such as a
other candidates is tightly prescribed. plan or model answer.
• Informal supervision (Medium level of control) Writing up time which is subject to formal
- questions/tasks are outlined, the use of resources supervision (High level of control)
is not tightly prescribed and assessable outcomes • All writing up time is subject to strict supervision.
may be informed by group work. Supervision is • The write up will be your own work. You will get
confined to (i) ensuring that the contributions of only one attempt - no drafts are allowed and no
individual candidates are recorded accurately, and feedback can be offered by, or asked for from, a
(ii) ensuring that plagiarism does not take place. teacher.
The supervisor may provide limited guidance to
• During the writing up time the teacher must keep a
candidates.
record of the writing up time - in a similar way to
• Limited supervision (Low level of control) - the records kept for any other formal assessment.
requirements are clearly specified, but some work The teacher needs to keep research folders secure
may be completed without direct supervision and so that students do not have access to them outside
will not contribute directly to assessable outcomes. research time.
Source: QCA Guidelines.
• Once the writing up time is completed the work
will be collected in by the teacher who is
There are 3 linked processes within the controlled responsible for keeping the work secure.
assessment
Task marking
Task setting
• This section is carried out by the teacher and is
• This section is subject to formal supervision
subject to informal supervision (Medium level
(High level of control). The tasks are set by
of control).
Edexcel at the start of each academic year. Centres
• Once the controlled assessment write up is
are not permitted to make up their own titles or
completed, it should be marked and kept secure.
use a title from a previous series in a current
This includes both research and written up work.
session.
Task taking
This section falls into 2 parts.
Research which is subject to limited supervision
(Low level of control).
• During the research period you may work outside
the centre. Results can be recorded in writing or
electronically.
The nature of the tasks set

There will 5 questions based on each of the sub sections Task 4
of Unit 1 content set by Edexcel. What is the most important element of the marketing 141
Examples of these types of tasks could be as follows. mix to a business you have chosen?
Task 1 You could:
What are the most important qualities that an • Investigate the marketing mix of a local business of
entrepreneur needs to possess, in order to start up your choice
and run a business successfully? • Research the marketing mix of the business (gather
information/data)
You could:
• Collect useful information/data
• Identify a local entrepreneur
• Present useful information/data
• Research entrepreneurs (gather information/data)
• Analyse the presented information/data
• Design a questionnaire or set of questions to ask a local
• Evaluate the task using your analysis and suggest
entrepreneur. Use a questionnaire, if entrepreneur does
improvements.
not visit the school or and interview, if entrepreneur
does visit the school to explore the relevant qualities of Task 5
the entrepreneur To what extent have recent changes in interest rates
• Collect useful information/data affected the business you have chosen to investigate?
• Present useful information/data You could:
• Analyse the presented information/data • Investigate how interest rate changes are affecting a
• Evaluate the task using your analysis. local business of your choice
Task 2 • Research interest changes and their impact (gather
What is the most important way in which a business information/data)
you have chosen competes with its rivals? • Collect useful information/data
You could:
• Choose a local business that has at least one
• Evaluate the task using your analysis.
competitor in the locality
• Research the competing businesses (gather Task 6
information/data) How have changes in commodity prices affected the
• Collect useful information/data costs and profits of a business you have chosen?
• Present useful information/data You could:
• Analyse the presented information/data • Choose a local business that sells a commodity or relies
• Evaluate the task using your analysis and suggest heavily on one
improvements. • Investigate how commodity market price changes
Task 3 affecting a local business of your choice
What is the most important way in which a business • Research commodity market price changes and their
you have chosen motivates its workers? impact (gather information/data)
• Collect useful information/data
You could:
• Choose a local business and investigate its human
resources management
• Evaluate the task using your analysis.
• Research HR management
policies/processes/techniques (gather information/ Note that the bullet point list given in each case above is
data) a suggestion only - there are other ways of tackling the
• Collect useful information/data question and this will depend on what access the centre
• Present useful information/data has to businesses, where the centre is located, the
• Analyse the presented information/data school’s facilities and resources and so on.
• Evaluate the task using your analysis and suggest
Source: tasks from EDEXCEL sample papers and guidance.
improvements.
142 Research
Remember - this is the 6 hour section of the controlled 3. There are two methods or types of research
assessment and, as such, sets the foundation for the write • Primary - surveys, questionnaires, focus groups,
up. interviews.
• Secondary - Internet pages, books, magazines,
The research element is subject to limited supervisory brochures, statistics from the Office of National
control. The research has to be the student’s own work. Statistics, journals etc.
Teachers can offer limited guidance on research such as
what business is appropriate to be studied and where to Good research may involve both primary and secondary
find relevant information. research where appropriate. You will need to decide if
the method of research you choose will get you the
In Unit 2 controlled assessment up to 12 marks will be appropriate information that will help you to answer the
given for research. Remember, research is the start of the question. Teachers should make it absolutely clear that
whole process. Everything depends on the quality of the there is no benefit to volume if selection is lacking.
research collected. Good research leads to an improved Primary research, for example, is not compulsory and
chance of success. should be used only when appropriate. It might be
difficult for some schools to be able to allow students to
When planning the research it is important to think about do primary research - the tasks are capable of being
what information you are trying to find and why. Ask researched through purely secondary research if
yourself the question ‘is what I am collecting suitable and necessary.
fit for purpose?’ It is not the amount of information you
collect but how useful it is to you in helping you ask the Be clear about which one you will use and the reason for
question. Better to have less but relevant data than large its use - it has to give you appropriate information that
quantities of useless data. will help you answer the question.
1. In deciding what data to collect and from where you 4. So with all the data collected it is time to measure it.
will need to plan. Start with the idea that ‘it depends Arguably, this is the most important stage in the work.
on...’:
• What you need; You must look at the data and decide if it is suitable,
• The sources from which relevant information can be useful and will allow you to answer the task in hand.
obtained;
• Purpose - what is this data source going to bring? If the answer is yes, then you can proceed to all the
• Can it be gained - does the data exist? other sections and these will become straightforward.
• When? Can it be obtained within the time frame?
• Can you actually obtain it (for example, getting If the answer is no, then you must think again how
financial information about private limited you might improve it because data that is not useful
companies can be difficult), will not allow suitable presentation or analysis to
• Whether you can do something useful with the enable you to answer the question properly.
information you collect,
• Whether it will help yield answers to the task in As you research keep asking these questions.
hand. Can this data be analysed - can it be broken down to
make meaningful information that help me answer
2. Having decided on this then review the plan. Again, the question?
ask the question ‘it depends on...’: Will it allow me successfully to complete the write up?
• Is the research suitable? Is something missing?
• Is there enough volume?
• Is there enough detail? You will need 3 yes answers to make the write up
• Is the business studied appropriate to the task effective.
chosen?
• Are the secondary sources suitable?
Good practice in research its workers?’ then a question such as ‘are you male
or female’ is not of much value. Stick to the point.
• Plan it carefully. For example, if you’re asking for You’ll get better results.
opinions make sure you ask the right people. • Beware of biased information. Getting information
• Make sure you can get it, for example if you are from a company website is good practice but be
carrying out a survey or an interview are the certain any claims are in context. For example, a
questions you are asking suitable? company might claim to have 33% market share, so 143
• Will they give you relevant information? ask yourself ‘what market?’‘How do they know
• Are there any questions that are not necessary (do this?’‘Is this accurate?’
you need to know someone’s age for example? • Having avoided information overload be sure you
• Could any of the questions be deemed prying or have enough data. For example, a survey of 5
offensive? people might not be enough to make a judgement
• Be very clear about what you want. about how a business is performing (although it
• Ensure you know the difference between could be depending on the type of information you
qualitiative and quantitative research. have gathered from them).
• Use as wide a range as possible and practical within • Researching and learning key terms is of very
the time limit you have - people, newspapers, limited value. You need to be able to apply terms
Internet, for example. But make sure that the and concepts to the context of the business you are
information you collect is manageable - remember investigating.
quality is more important than amount of
information. Your guiding principle should be
• Be sure you can manipulate the data into usable
information. Will the planned research yield sufficient and suitable
• Observation is an acceptable means of research. evidence to support the writing up of the other sections?
• Note and acknowledge all secondary sources, e.g.
web site URLs, the source of graphs, charts or Marks for research
images, the source of a quote etc.
The following highlights the mark scheme for research
Possible problems in research and how to avoid them and shows examples of marks that might be gained.
• Don’t collect information for information’s sake. 1-3 marks

This will only lead to confusion and waste time You will only get this mark range if you have only used
when you are writing up. one source, e.g. the business’ website, a survey or a
• Beware of information overload. If you’ve collected questionnaire and nothing else in your research.
facts from a secondary source check them but don’t
collect them again. It only leads to confusion and 4-6 marks
wastes time. If you have used more than one source then you can get
• Simply downloading lots of information from a web into this range. There is no rule about how many sources
site without selecting what is useful and leaving out you have to use other than it is likely to be more than
what is not is a waste of time and will not help you one. Some sources give more information than others.
when you come to do the writing up - be selective. However, it is advisable to try to use at least two and
• Be wary that when asking qualitative (open) possibly more. For example, you might use the Internet
questions such as ‘What do you think of product x? and local newspapers clearly related to the business and
or ‘why do you shop at Jeffords?’This is unlikely to the tasks set to help you gather information.
be of much help in answering a task on ‘What is the
most important element of the marketing mix to a 7-9 marks
business you have chosen?’You might have asked To get to this mark range you will not only have used
20 people who could each give 20 different, and more than one source but you will be demonstrating the
conflicting, answers.You will have to analyse the skill of being able to select what information to use and
results and lots of opinions can be difficult to what to leave out.
analyse and interpret.
• A questionnaire should be well constructed and 10-12 marks
make the interviewee feel their opinion is valued so The top of the mark range requires you to use more than
avoid questions which are irrelevant. For example, one source, select material appropriately and then
if your task involves ‘What is the most important organise it carefully to help answer the question and
way in which a business you have chosen motivates support the answer you give.
144 Presentation
In Unit 2 controlled assessment up to 8 marks will be Graphs and charts - which can be used to show
given for presentation. things such as trends and
which show data better than
Presentation is the act of creating new information and words can.
displaying it in an appropriate way for the task in hand.
There is a choice of methods based on evidence collected You should aim to integrate different methods to make
in your research. your presentation as effective as possible. However,
remember that it is not how many different methods you
The most important element in presenting data is to get use but whether they help to answer the question.
the message across successfully. For it to be successful you
should look at a range of methods and decide which is Good practice in presentation
appropriate for what part of the message. For example,
quantitative data is often best presented using graphs or • Use a range of presentation methods to keep the
charts as the image conveys the message. A quote might work lively, balanced and varied.
be useful in making a point, a diagram may help to • Use methods suitable to the data collected and the
convey something better than text can and so on. Equally, information produced
well chosen phrases can show clear understanding and • Use facilities such as a spellchecker to improve the
summarise a point well. Think what form of presentation quality of language - if it doesn’t make sense to the
will best get the point across that you are trying to make reader then it will be difficult to access the marks.
in relation to the answer. • Use graphs and charts to enhance the work but
make sure you explain what they are showing -
In this section you will need to explain them.
Arrange the data you have collected
• Use methods with which you feel comfortable. For
Organise the analysis of your research
example, you may feel most comfortable creating a
Think of the best way to convey your findings about
slideshow because of its drag and drop facilities.
the task.
• Ensure the presentation gets the whole of your
Methods of presentation findings and analysis across.
There is a range of methods that can be used. Possible problems in presentation and how to avoid them
These are: • Don’t use methods in the wrong way. For example,
qualitative data does not lend itself to graphs and
Text - for example a handwritten or charts.
word-processed document • Don’t ignore spelling mistakes. Language is an
Slideshow - which may facilitate integral part of the presentation.
••
integration and placement of • Don’t use shortcuts such as • to indicate ‘because’
images more easily or text language.
Diagrams - which can often give context, • Be careful how graphs and charts are used.
such as a store layout, to an Choosing the wrong type will stop you gaining
answer higher marks. The example over the page shows
Images - which can be used to improve this.
the quality of the presentation
and to add context for
example using the logo of the
business investigated or a
photo to show where a shop is
positioned in relation to its
rivals
Your guiding principle should be

This graph is
Number of buyers
30 inappropriate as the Be selective about methods used. Fewer used correctly
Number data are discrete*. will collect more marks than more used haphazardly.
25 of buyers Technically good ICT but
not a suitable method.
N o b 20 The message is not Marks for research
u f u conveyed. The axes are The following highlights the mark scheme for presentation 145
m y
b e 15 correctly labelled but and shows examples of marks that might be gained.
e r the Y-axis is messy.
r s
10 * Discrete data are data 1-2 marks
that are not a flow, e.g. In this range you might have used a basic graph but not
5 number of pupils in each said anything about what it tells you in relation to the
class.
* Continuous data are data question. The chart used might be inappropriate and
0
that measure a flow, e.g. unclear.
0-14 15-24 25-34 35-49 50-59 60+
the profit a business
Price ranges makes over time. 3-4 marks
You are likely to have used some different methods to
This is a better present your answer and given some explanation of the
Number of buyers chart as the data information included. For example, you may have used
are used correctly. appropriate graphs/ charts with a title.
However, whilst the
0-14 ICT is again 5-6 marks
15-24 technically sound
In this mark range you will be likely to have included well
the image and,
25-34 chosen graphs/ charts with title and axis labels. Text-
therefore, the
35-49 message is not based evidence uses an easy to follow and progressive
50-59 clear. No clear key layout that communicates the information well. Images
60+ is provided to help and logos may have been added where appropriate.You
understanding of may have taken care to get the methods chosen accurate -
what message the for example, made sure the chart communicates the
chart is giving. information appropriately, has all the axes properly
labelled with units of value where appropriate and so on.
Number of buyers This is very
30
suitable. The 7-8 marks
25 data are At the top of the range you will have selected a range of
Number
of buyers
presented appropriate methods of presentation to illustrate the
correctly as the
Number of buyers
20 points you are making.You will have taken care to attend

columns are to detail. The methods used will communicate the
15 discrete. It is
information very clearly. Images and logos added where
clear that the
greatest number appropriate will enhance and clarify the points being
10
of buyers is in made rather than simply be used for the sake of it. There
5 the 25-34 price will be a consistency throughout in terms of layout.
range. The axes
0 are correctly During the writing up time make sure you think about
0-14 15-24 25-34 35-49 50-59 60+ labelled. whether the presentation can be improved. To be
Price ranges (£) effective ask yourself the following questions.
Whilst processing and presenting the data:
• Be careful to use ICT effectively rather than cleverly. • Was this carried out correctly and accurately?
A smart looking chart is of no use without a title or • Was it rushed?
without labelled axes; inappropriate adding of • Was the presentation suitable?
clipart will detract from rather than enhance the • Did it create new information?
presentation. Remember - the chart is there to help
• Can the information be understood more easily the
you answer the question, not to show how good
way you presented it or is there a better way?
you are at ICT. This is an assessment in business
understanding not ICT. • How can it be improved - if at all?
If there are areas of doubt then look again to see if you
can improve it.
146 Analysis
In the CA up to 12 marks will be given for analysis. Advantages and disadvantages - gives a balanced
Analysis is the art of breaking down complicated topics, overview of an issue.
questions, issues etc. into more manageable chunks that
help you explain something more easily. Patterns - where the information you have collected
In this section you will need to: highlights a pattern that can be identified and commented
upon.
Understand the key issues, factors, reasons, causes and
consequences related to the question. Good practice in analysis
Offer an explanation of these.
Show how the factor you are considering is related to • Separate the evidence into manageable parts and
the question overall what you see as key issues.
How an appropriate factor, cause etc. does what it does • Don’t be afraid to use different topic areas to show
Why it does what it does. the ‘whole’ business environment.
• Analyse each factor/cause/reason/issue etc. in turn
Types of analysis • Show understanding by stating an observation then
adding ‘which shows that’.
There is a range of different ways of analysing.
• Try and use a range of methods even within the
same key issue; it makes the conclusion more
Descriptive/narrative - which is analysis at a very basic
substantial.
level, simply describing what you found or telling a story.
This does not really help the reader to understand what is • Use appropriate methods. For example, qualitative
happening and why it does happen. data might be best analysed using descriptive
explanations, whilst numerical data show up best
Correlation - where you would look at various aspects of statistically.
the business and see whether the evidence was similar to • Link the types of analysis, for example, explain what
what textbooks, for example, predict might happen; a graph shows in relation to the question. This
whether various parts of the business fitted well together, shows understanding of the business and the
for example was the price a suitable one for the type of context in which it operates.
product. If you correlate things you are putting them • Remember there may be more than one outcome.
together to see how closely they match. Comment on pros and cons you found to support
the original task.
Compare/contrast - whereby you would compare your • Use business terminology in context and in order to
findings against other criteria, maybe another company, anchor or reinforce a point. This is a business
maybe with what you set out to investigate. Essentially, qualification so you will be expected to use
you would be looking for things that were the same or appropriate terms and concepts where relevant.
different upon which to comment and explain so that • Be objective and use objective criteria. Objectivity
conclusions would be valid. refers to facts - things that can be tested to find out
if they are true. Support these with evidence.
Statistical - which is closely linked with presentation and • Be wary of subjectivity - opinions - which cannot be
where the analysis is based and supported by statistical tested to find out if it is true.
eveidence, usually numerical. - For example: ‘I think that Notts County FC are a
better team than Newcastle United’. This is a
Cause and effect - where the research produces evidence subjective statement - it is my opinion.
of an outcome (effect) and where there has been a clear
- Notts County had the nickname ‘The Magpies’ long
stimulus (cause) identified and explained.
before Newcastle United did.’This is an objective
statement - we can do some research to find out if
Data mining - where you analyse what you have and
this is indeed true or if it is false.
extra information emerges, often not what you were
originally looking for!
147
• Link the parts you have identifed to show how: 4-6 marks
- the business fits together as a whole In this range you might have identified a couple of factors
- your research fits together. and tried to offer some explanation of each.Your
• Reach a conclusion supported by evidence explanation might be confused or inaccurate. You will
make some basic attempt to relate findings to some of the
key topics in business. There will be some use of evidence
Possible problems in analysis
you have collected to support your comments and
explanation.
• Don’t try and analyse the whole research as one
piece.
7-9 marks
• Use analytical tools correctly - don’t make the In this range you will be able to give a reasoned
mistake of trying to include every type just for the explanation of a range of factors. The explanation will be
sake of it. mostly accurate and appropriate.You will be able to link
• Don’t state business terminology then go on to the research to concepts and use these to help answer the
explain it without relating it to the research and the question.You will be able to use evidence to support and
task. comment on the key topics in the business in relation to
• Don’t make subjective comments unless there is data the question. There will be good attention to detail
to back it up. emerging from the research and comments made in
support or rejection of the conclusions drawn in relation to
Your guiding principles should be the question.
1. Show understanding rather than knowledge. 10-12 marks

2. Link areas of the business to show how they fit At the top of the range you will be able to offer an accurate
together to make it work. and detailed explanation of a range of key factors.You will
be able to integrate terms and concepts and the different
Mark schemes factors etc. you have considered to show how elements are
interrelated. There will be clear recognition of information
The following highlights the mark scheme for analysis and which may reject as well as support the answer to the
shows examples of marks that might be gained. question to give a full and balanced account.
1-3 marks To be effective ask yourself the following questions.

In this level you will tend to give a description of what was • Was the analysis suitable to the task?
found from the research only, rather than explaining it in • Did my explanations stick to the question?
relation to the question. There will be little attempt to link • Was there sufficient data to arrive at a conclusion?
business concepts to the description. It will not be clear • Did the primary and secondary data synchronise or
that you have understood why something is happening, give different outcomes?
what caused it to happen, what the effects were, what the
• Were the conclusions drawn objective and based on
key factors were and so on.
evidence or were they subjective and based on bias?
Evaluation
In the CA up to 8 marks will be given for evaluation. • Do you think price is the most important element of
the marketing mix?
Evaluation is the act of making a judgement. In making a • Has the business managed to retain staff? How well
judgement you say something about how has it done this? Very well, quite well, not very well at
important/significant/valuable/ something is.You will be all?
148 expected to offer some support for your judgement which • How unique is the USP of the business? Totally unique,
means using evidence to back up your judgement. For quite unique, not that unique at all? Can it be easily
example: replicated?
• How much part has location played in the success of
‘Manchester United is a more successful club than Newcastle the business? A great deal, quite a lot, not much at all?
United’. This is your judgement. What evidence is there to • To what extent did the business use market mapping
support this judgement? before going ahead? A great deal, quite a lot, not much
at all?
The evidence is that • The ‘it depends’rule. The size of the effect/cause etc.
will depend on a number of things. For example, The
‘Manchester United has won the Premier League title (or its effect of a rise in price will depend on how big the price
equivalent) 17 times, the Champions League 3 times, the FA rise is, whether consumers are loyal to the business,
Cup 11 times, the League Cup twice and are the 2008 World what competitors do and so on.
Club Champions. Newcastle United on the other hand has To carry out evaluation you need two main elements.
only won the top division title 4 times (the last in 1927), never • Criteria by which to make the judgement.
won the Champions’League, the FA Cup only 6 times and • Consideration of both sides of the argument.
the Inter Cities Fairs Cup once - in 1969.’
The criteria are the benchmarks at which to look. For
Note that this is:
example, if you are asked ‘should the business take out a
• An objective evaluation
loan’, you could consider the ‘it depends’rule. This gives you
• Answers a question about whether Manchester United
criteria such as: it depends on the:
is a more successful club, not whether it is a better
• risk
club.
• reason
Your judgements, therefore, should be objective which • cost of repayments
means they require evidence to back them up, not subjective • urgency
which is about often unsupported opinion. Only offer • size of the business
subjective comments if they can be backed up. For example, if • amount of debt against money put in by the owners.
you interview 20 people about the quality of a product from
business X and 80% of your survey says the product is high The second is the evidence you need to complete the
quality in their opinion you can make a judgement that your evaluation. For example:
survey would support the view that Business X provides a • one advantage of a loan might be that the business can
high quality product. get the money immediately
• one disadvantage of a loan might be that the cost of
Does the evidence you collected and your interpretation of paying back could be high if interest rates are high.
it support the task you investigated? In Business Studies You must then make a judgement.
examples of evaluation might be: • If the advantages outweigh the disadvantages you
• do you think that the business will be successful - if so might decide that the business should take out the
how successful - very, very successful, quite successful, loan.
reasonably successful, hardly successful at all? • If the disadvantages outweigh the advantages you
• do you think that the business should raise its price - if might decide that the business should not take out the
so by how much and why? loan.
• what are the most important characteristics of a
successful entrepreneur? To really make the evaluation of high quality you need to use
• should the business take out a loan? Justify your your research to try and place a value on the different
answer. possibilities/qualities/factors/causes/reasons etc. This is where
• to what extent has limited liability helped the business your research and the quality of your research is really
- a great deal, quite a lot, hardly any way at all? important.
• how much do you think that interest rates affected the
business - a significant amount, quite a lot, a Good practice in evaluation
reasonable amount or hardly at all?
• do you think that the business should set up as a • Always come to a decision. For example ‘Given the
franchise? If so why - what are the reasons and why evidence presented the business should not raise its
are these reasons more important than the reasons for price.’
setting up as another type of business organisation? • There are key words which will help - ‘because’is one.
These ‘joining’words help support and explain the service from Goodall’s Farm Shop (positive) but I think
judgement. For example, the evidence showed the the place is rubbish (negative)’is not good evaluation.
cash flow forecast was accurate because the actual If your evidence told you all the people thought service
figures matched up well.’ was good then you have to accept what your evidence
• Another useful phrase to support and consolidate the has told you rather than your own personal opinion
evaluation is ‘which means that’. For example,‘Helen which has no evidence to back it up.
Rogers now works only 4 days a week which means • Be careful not to confuse conclusion with evaluation.
149
that the objectives were met and she was right to set Evaluative comments can be given throughout your
up on her own.’ answer. The conclusion will draw together your
• Remember that although you are being asked for your analysis and allow you to arrive at a judgement based
opinion, it should be objective - based on the on the evidence and which relates to the question.
evidence. For example,’After considering the evidence • Recommendations are not the same as evaluation.
carefully, the advantages of becoming a franchise Recommendations emerge from conclusions - to
clearly outweigh the disadvantages for this business. In make them valid they must be supported with
this case the business should consider becoming a reasons. A recommendation is a judgement,
franchisee rather than operating as an independent remember.
business.’
• Don’t lose sight of the original task in evaluating the Your guiding principle should be
outcome. For example, if the task requires an
investigation into whether taking out a franchise was a What was the original task and ask the question - was the
wise move then comments such as ‘Yes, because there work produced fit for the purpose.
was no competition and the company provided the
intial support’are fine but ‘No, he should have gone on Mark schemes
his own as sole trader’is irrelevant to the task.’No, The following highlights the mark scheme for evaluation and
because he doesn’t motivate his staff’is not. It may be shows examples of marks that might be gained.
true but it is not relevant to the task set.
• Be rigorous with the facts. For example,‘there is a 1-2 marks
feeling that the business might not last’lacks rigour At this level your judgements will be simple, using little
and focus. It is too speculative. objective evidence to support them. Phrases such as ‘I think
• Above all keep a balanced view. By looking at all the that is true because 20 people in my survey said so.’
elements, the positives and the negatives, the
evaluation becomes a source of added value. Don’t just 3-4 marks
assume that there must always be a positive outcome - Judgements will be based on some supporting evidence,
sometimes the evidence tells you something different - probably to support the question. Phrases such as ‘The
go with the evidence. evidence from the survey shows that ... and also that … This
• The sequence of events can help you to evaluate. For means that …’
example,‘If X happens …. then y occurs …. this is
because… .’ 5-6 marks
In this mark range you will be making clear conclusions and
Possible problems in evaluation judgements using a range of the data collected to support
these. You will have some balance to your answer to
• Saying ‘I think the business should get a franchise’is recognise that there are two sides to the story. There will be
your judgement. On its own this personal/subjective good balance to the conclusion. Phrases such as ‘During the
comment is not of much value because it has nothing research the business stated that it did … However, some
to back it up and so has limited validity. other research showed that … This would suggest that …
• It is not about what you did. For example,‘I went to because the other research included a greater number of
the bakery to collect the information because it was people and was carried out over 3 years.’
local’is simple narrative (story) of what happened. It
is not evaluation; no judgement is made. 7-8 marks
• Nor is evaluation about your participation. For The top range will have in-depth evaluation of all the
example,‘I enjoyed doing the graphs because I am evidence collected and the analysis. The judgements and
good at IT and I could make a good job of them’is an conclusions will be related closely to the task and use the
example of evaluation of process - what you did. This evidence clearly and appropriately to support judgements
is not something that will be given credit in the and conclusions made in relation to the question. Balanced
assessment. judgements will be made using phrases such as ‘At this stage
• Presenting an opposite view for the sake of it, whilst the research overall shows that ... But it could be argued that
tempting, should be avoided. For example,‘all of the … This would seem to suggest that … and However this
people surveyed agreed they got good customer depends on …’.
150
How analysis and evaluation fit together
In the sample assessment material (SAMs) the following writing up, the examiners would expect you to identify
question is given: around 3 - 4 qualities.
The analysis will come in explaining what these qualities
What is the most important qualities that an entrepreneur are - in relation to your entrepreneur - and how they help
needs to possess in order to start up and run a business him/her to set up and run their business.
successfully?
In each question the maximum number of factors/issues etc.
The implication of this question is that there is a number of that you might be expected to identify and explain is
qualities that an entrepreneur needs to possess to get a between 3 and 5 depending on the question and the
business up and running. In your research you will need to context.You simply do not have time to do any more than 5
identify what these might be in relation to the at most. Remember the examiners are more interested in
business/entrepreneur that you have chosen to investigate. you demonstrating the skills rather than how many factors
Given the time that you have available for research and you can identify.
151
Having identified and analysed the factors using the The very fact that you are investigating a particular business
research you have gained, you will then have to arrive at a means that your answer will be different from those of other
judgement in relation to the question. Which of the 3 or 4 people. If your friend is looking at another entrepreneur
qualities that you have identified and analysed do you think then his/her conclusion may be that leadership was the most
is the most important to get the business up and running important quality. The evidence in that case may have
successfully? Remember, there is no ‘right’answer to this - pointed to this conclusion.
your judgement needs to be supported by the evidence you
have collected and the analysis you have given. If you think
that determination is the most important quality - that is
fine provided your analysis contains enough evidence to
support your judgement.
Revising for your exams can sometimes be a scary prospect.

Exam Zone
In this section of the book we’ll take you through the best way
of revising for your exams, step-by-step, to help you prepare
as well you can.
152
Have you ever had that same feeling in any activity in your life On the other hand, we all know what it feels like when our brains
when a challenging task feels easy, and you feel totally absorbed start running away with us in pressurised situations and can say
in the task, without worrying about all the other issues in your lots of unhelpful things like ‘I’ve always been bad at exams’, or ‘I
life? This is a feeling familiar to many athletes and performers, know I am going to forget everything I thought I knew when I look
and is one that they strive hard to recreate in order to perform at at the exam paper’.
their very best. It’s a feeling of being ‘in the zone’.
The good news is that ‘being in the zone’ can be achieved by
taking some steps in advance of the exam. Here are our top tips
on getting ‘into the zone’.
UNDERSTAND IT COMPARTMENTALISE
Understand the exam process and what revision you need to do. You might not be able to deal with all issues. For example, you
This will give you confidence but also help you to put things into may be worried about an ill friend, or just be afraid of the exam.
proportion. These pages are a good place to find some starting In this case, you can employ
pointers for performing well at exams. a useful technique of
putting all of these things
into an imagined box in
your mind at the start of
DEAL WITH your revision (or in the
exam) and mentally
DISTRACTIONS locking it, then opening
Think about the issues in it again at the end of
your life that may interfere your revision session.
with revision. Write them
all down. Then think about
how you can deal with
each so they don’t affect
your revision. BUILD CONFIDENCE
Use your revision time not just to revise content, but to build
your confidence for tackling the examination.
FRIENDS AND
FAMILY DIET AND EXERCISE
Make sure that they know
Make sure you eat well and exercise. If your body is
when you want to revise
not in the right state, how
and even share your
can your mind be?
revision plan with them.
Help them to understand
that you must not get
distracted. Set aside
quality time with them,
when you aren’t revising
and when you aren’t
worrying about what you
should be doing. More on the Active Teach CD
EDBUS_C30.QXD 23/9/09 12:57 Page 3
Zone in Planning Zone Know Zone Don’t Panic Zone Exam Zone Zone Out
Exam Zone
The key to success in exams and revision often lies in the right planning. Knowing what you need to do and when you need to do
it is your best path to a stress-free experience. Here are some top tips in creating a great personal revision plan.
First of all, know your strengths and weaknesses. Go 153

through each topic making a list of how well you think you
MAY
know the topic. Use your mock examination results and
any further tests that are available to you as a check on
your self-assessment. This will help you to plan your
personal revision effectively by putting a little more time
into your weaker areas. Importantly, make sure you do
not just identify strengths and weaknesses in your
knowledge of the content but also in terms of exam
technique – what aspects of the assessment objectives
are you weakest on, for example?
Next, create your plan!

Use the guidelines across the page to e you
to smaller how much tim
sion down in Be realistic in
help you. Cut your revi ore your revisi on , but
will make it m can devote to
sections. This ting. In t in en ough
and less daun llow the also make su
re you pu
Finally, follow the plan! manageable uld fo gu la r br eaks
dies you co e yo urself re
Business Stu sions within tim e. Giv
tivities to give ed
your
You can use the sections in the following
r of topi cs and sub-divi or different ac
orde which is ance. Revisio
n ne
pages to kick-start your revision and for some the specification, life some vari
to pics in Revise one on sentence
.
great ideas for helping you to revise and d up already. not be a pris
clearly divide give more
remember key points. t ensure you
at a time, bu identified
that you have
time to topics
in.
weaknesses
Make s
ure
assessin you allow tim
g progr e for
initial s e
Find out your exam dates. elf-asse ss against you
Measur ssm r
Go to www.edexcel.com to ing prog ent.
you to s ress wil
ee l all
find all final exam dates, and improve and celebrate ow
check with your teacher. ment an your
victorie d
s will bu these little
confide ild your
nce for
the fina
l exam.
g how topics
ti m e fo r considerin ess Studies,
M a ke ple, in Busin ndar or list of
interrelate . Fo r e xa m Draw up a cale
arts of the om when you
ere all the p siness has to all the dates fr
try to see wh gether. A bu revision throug
h
specif ic a ti o n fi t to
once and can start your
h lo ts o f things all at have to to your exams.
deal w it
th e m o u t easily. You
cannot sepa
ra te factors.
u a re a w a re of all these
show that yo might plan a
, a business
For example as to take in
to
rategy but h ight
marketing st that intere st ra te s m
fa c t
accou n t th e at exc nge
h a
d a ff e ct sales or th es if Make sure that you know what the
chan g e a n s and revenu
s m a y a ff e ct both cost assessment objectives against which
rate d.
trades abroa you will be measured are and what
the business they mean. Get to know the command
words that will give you a guide as to
what assessment objectives you are
More on the Active Teach CD
expected to demonstrate.
EDBUS_C30.QXD 23/9/09 12:58 Page 4
Exam Zone
In this section you’ll find some useful suggestions about how to structure your
revision for each of the main topics. You might want to skim-read this before starting
your revision planning, to help you think about the best way to revise the content.
154 Different people learn in different ways – some remember visually and therefore
might want to think about using diagrams and other drawings for their revision.
Others remember better through sound or through writing things out. Some people
work best alone, whereas others work best when bouncing ideas off friends on the
same course. Try to think about what works best for you by trialling a few methods
for the first topic.
Remember that each part of the specification could be tested, so revise it all.
Writing revision plans

A useful technique to help you revise important points is to identify the important information in each point;
summarise topics into short points. It can be difficult to remember
lots of information from textbooks or the notes you have taken decide how to summarise each point into a short sentence so
during your course. To make notes on a topic: that it is easy to remember.
Below is an example of how this could be done for the topic
read the topic carefully;
‘forecasting cash flow’ – which is part of Topic 1.3, Unit 1 –
highlight the key points in the topic; Introduction to Small Business.
Topic 1.3, Unit 1: Forecasting cash flows – Revision points

Cash is notes and coins and money in the bank. The opening balance plus the net cash flow equals closing
balance.
Cash flow is the flow of money into and out of a business.
The closing balance in one month or other period becomes the
Inflows (receipts) are cash coming into the business from opening balance in the next.
owners, loans or cash from sales.
If a business has a negative closing balance it will have a
Outflows (payments) are cash leaving the business to pay for cash flow problem. It must avoid this by raising sales revenue,
wages, equipment, bills and materials. reducing costs or putting money into the business from an
Net cash flow is calculated by inflows minus outflows. owner or from a loan.
Selling more goods brings cash into the business.
If inflows are greater than outflows, net cash flow in positive.
If inflows are less than outflows, net cash flow is negative. Cutting the cost of production reduces the cash going out of
the business.
A negative net cash flow can be a problem as less money is
coming into the business than is going out. Paying suppliers later for materials using trade credit reduces
the cash going out of the business immediately.
Without cash, a business may no longer be able to pay its
debts and may become insolvent. Payments using cash by customers increases the cash
coming into the business immediately.
A cash flow forecast is a prediction of how cash will flow
through a business in a period of time in future. Buying less stock reduces the cash going out of the business.
Careful planning is needed to avoid cash flow problems before
The opening balance in a cash flow forecast is the cash a
they occur.
business has at the start of a month or other period.
It might also be helpful to make short notes on the type of question
The closing balance in a cash flow forecast is the cash a
that could be asked in this area of the course and write down
business has at the end of a month or other period.
helpful tips in answering these questions. Across the page is an
The closing balance shows the cumulative cash flow of a example of how this could be done for the topic ‘Forecasting cash
business. flows’ – which is part of Unit 1 – Introduction to Small Business.
EDBUS_C30.QXD 23/9/09 12:58 Page 5
Exam Zone
Topic 1.3, Unit 1: Forecasting cash flows – Important tips
In an examination, questions ask students to make calculations in Opening balance = closing balance from last period.
a cash flow forecast by filling in gaps. Use the following formulae.
Closing balance = opening balance + net cash flow.
Total receipts are found by adding up all the inflows of cash to 155
the business. I could be asked to comment on the cash flow position of
businesses, state what problems/issues arise and explain how a
Total payments are found by adding up all the outflows of cash business might be able to deal with the situation it faces. I must
to the business. take into account the scenario given in the question. For example,
Net cash flow = inflows – outflows. a sole trader cannot bring more money in by selling more shares
as there are no shares in a sole trader business.
Memory tips Others might be a list of phrases, such as:

In the examination you will need to remember important facts, the main sources of added value;
information and data that will help you to answer questions. Some
of these will simply be a list of terms, such as: the advantages and disadvantages of a franchise in starting up
a business;
the names of sources of short-term finance of a start up
business; the qualities shown by entrepreneurs when starting up a
business.
the stakeholders of a business;
Different people remember in different ways. You might use some
the methods of primary or secondary market research. of the following methods to help you.
Memory tips – Mnemonics

This is a word that is made up from the first letters of the terms you You can make up your own mnemonic for a topic. For example, you
want to remember. Some well-known mnemonics in business might want to remember the main sources of added value as
studies are: BUSCQD – Branding, Unique selling point, Speed, Convenience,
Quality, Design (thinking about a bus queue and calling it Bus-ce-
PESTLE – the Political, Economic, Social, Technological, Legal qued).
and Environmental factors affecting a business;
You can make-up mnemonics to help with explanation. For example,
SWOT – the Strengths, Weaknesses, Opportunities and Threats SPICED helps you to remember the effect of changes in the
facing a business; exchange rate:
the 4 Ps of the marketing mix – Price, Product, Promotion Strong Pound – Imports Cheaper, Exports Dearer.
and Place.

EDBUS_C30.QXD 23/9/09 12:58 Page 6
Exam Zone
Memory tips – Visual presentation

Some people remember if the information is a picture or diagram. Examples of diagrams that could be used include the following.
156
A diagram to show the relationship between costs.
A diagram to show objectives when starting a business. A diagram to show the stages in recruitment.
Objectives Write job description, person specification,

job particulars and job advert
Financial Non-Financial Advertise job
Profit Personal satisfaction Get CV’s and application forms

Income Challenge
Financial security Helping others
Wealth Short-list applicants
Select suitable candidate
Check references
EDBUS_C30.QXD 23/9/09 12:58 Page 7
Exam Zone
Memory tips – Mindmaps
A mindmap is a diagram that records words and ideas and shows words and ideas linked to the main word. Mindmaps are used in
connections. At the centre of the map, or page, is the main word or business as explained in section 12 of this book. But you can use a
idea. Flowing out from this main word or idea is a number of key mindmap for your revision. Below is a simple mindmap outlining the
Qualities shown by entrepreneurs.
157
Risk taking
Determination Planning
Qualities of entrepreneurs
Decision making Persuading

Initiative

EDBUS_C30.QXD 23/9/09 12:59 Page 8
Zone
Zoneinin Planning
PlanningZone
Zone Know
KnowZone
Zone Don’t PanicZone
Don’t Panic Zone Exam
ExamZone
Zone Zone Out
Zone Out
Don’t Panic Zone

E
Exxa
ammZ
Once you have completed your revision in your plan, you’ll be Last minute learning tips for
Zoon
coming closer and closer to The Big Day. Many students find
ne
Business Studies
e
this the most stressful time and tend to go into panic-mode,

158 either working long hours without really giving their brain a
The week before the exam should be spent going through past
chance to absorb information, or giving up and staring blankly
papers. Look at each question carefully and compare question
at the wall. Some top tips are shown here.
types. Make sure that you are familiar with the different types
of question and you know the style needed to answer each
Test yourself by relating your knowledge to business issues question.
that arise in the news – can you explain what is happening
in these issues and why? There will be multi choice questions or objective test
questions. These ask you to make a choice from a series of
Get hold of past papers and the mark schemes for the
options, such as ‘Which two of the following are the most
papers. Look carefully at what the mark schemes are
important in spotting a new business opportunity?’ or ‘Which
expecting of the candidate in relation to the question.
of the following is a reason why customer service is so
Get hold of a copy of the Examiner’s Report from the important to the success of a small business? Select one
previous exam series. It contains lots of useful advice about answer.’
where candidates performed well and where the main
mistakes were. Learn from these. The Examiner’s Report There will be questions assessing your knowledge and
and past papers are often available on the awarding body application skills, such as ‘What is meant by the term
Website – check with your teacher. “stakeholder”?’ and ‘Identify two examples of secondary
market research data in the passage.’
Do plenty of practice papers to hone your technique, help
manage your time and build confidence in dealing with Certain questions will test analysis and evaluation such as
different questions. ‘Explain how a hierarchical structure in a business might make
communication more difficult’ and ‘To what extent can a
Relax the night before your exam – last minute revision for
business be ethically responsible and profitable? Justify your
several hours rarely has much additional benefit. A runner
answer.’
doing a marathon is unlikely to practice the night before by
going for a quick 15 mile run. Your brain needs to be rested
Try to devote some time to actually writing out the answers in
and relaxed to perform at its best.
the time period allowed to refine your skills. You can check
Remember the purpose of the exam – it is for you to show your answers against the mark scheme to see how you would
the examiner what you have learnt and understood about have performed. Make sure you understand what the
business. It is not a means of trying to trick you. command words are for each question and how they relate to
the assessment objectives. For example, an 8 mark question
might consist of 2 marks for knowledge, 2 for application and 4
for analysis and evaluation.
Remember that you can get full marks by answering in the

space provided on the exam paper - it is not the amount you
write but the quality and the extent to which you demonstrate
the assessment objectives being targeted.
On the night before the exam, relax, give your brain a rest and
try and do something you enjoy. Get to bed at a reasonable
hour so that you can get a good night’s sleep and be refreshed
for the exam.
Moreon
More onthe
theActive
ActiveTeach
TeachCD
CD
Exam Zone
About the exam paper For Unit 2 This is an internally assessed task which is
researched over a maximum of 6 hours and written up in
You’ll notice a few different types of question on the controlled conditions in a maximum of 3 hours. More guidance
examination paper. on unit 2 assessment is given earlier in this book. 159
For Unit 1 This is an external examination made up of For Unit 6 This is an external examination made up of
compulsory multiple choice and objective test questions with compulsory multiple choice, objective test and extended answer
a total of 40 marks. You will be given 45 minutes to answer questions with a total of 40 marks. You will be given 45 minutes to
these questions. answers these questions.
Understanding the language of the exam paper

Which of the following is... You need to identify the correct response from a selection of options.
Select one answer
Which two of the following are... You need to identify the two correct responses from a selection of options.
Which of the following The key is ‘most likely’ – this means that there could be more than one option that is
is most likely to... possible; you have to decide which is the most likely.
Which of the following is not... This is a question asking you to spot the negative option from a list – read each option carefully.
Fill in the blanks This may require you to complete some calculations in a table, for example.
What is meant by... This requires you to give a definition of a key term in business studies – an example to
help support the definition is usually worth giving also.
Identify... This type of question requires only a one word answer or a short phrase or sentence – it
is associated with knowledge and understanding and often requires the student to extract
information from a context.
State... Similar to ‘identify’ – again usually only requires a one word answer.
Describe... Give the main characteristics of a topic or issue.
Explain... Describe the issue, term etc, giving reasons or features.
Analyse... Break down the topic or issue into manageable parts to help explain what is going on,
how something works, what relationships may exist and what assumptions might be made.
Assess... Offer a judgement on the importance, significance, relevance and value of something,
with reasons why you have made such a judgement.
Do you think... Asking you to make a judgement – which requires support and reasons to be given for
the judgement.
What is the most important... Another question asking you to make a judgement and offer support for the judgement.
Explain why one factor is more important than another and why.
To what extent... Is the issue very, very important/significant/, quite important/significant, moderately
important/significant, not very significant/important at all – and why?
Evaluate... Arrive at a judgement – with some support for your reasoning.
Justify... Offer support and reasons for the judgement you have made – and why.
Write a report... A report might consist of advantages and disadvantages, key features, summaries and
judgements about the value of one option against others.
EDBUS_C30.QXD 23/9/09 12:59 Page 10
Exam Zone
Meet the exam paper

This diagram shows the front cover of the exam paper. These instructions,
160 information and advice will always appear on the front of the paper. It is worth
reading it carefully now. Check you understand it. Now is a good opportunity to ask
your teacher about anything you are not sure of here.
Print your surname here, and Here you fill in your personal
your initial afterwards and exam number. Take care
sign the paper. This is an when writing it down
additional safeguard to because the number is
ensure that the exam board important to the exam board
awards the marks to the when writing your score.
right candidate.
In this box, the examiner

Here will be the school’s will write the total marks
centre number. you have achieved in the
exam paper.
Ensure that you understand

exactly how long the Make sure you understand
examination will last, and what you are allowed to
plan your time accordingly. take into the exam and
what you are not.
Make sure you are aware

of how many marks are Make sure that you
given for each question and understand exactly which
write to justify these marks. questions you should
attempt and the style you
should use to answer them.

Exam Zone
This section provides answers to the most common questions students have about
what happens after they complete their exams. For much more information, visit
www.examzone.co.uk
161
About your grades

Whether you’ve done better than, worse than or just as you expected, your grades are
the final measure of your performance on your course and in the exams. On this page we
explain some of the information that appears on your results slip and tell you what to do if
you think something is wrong. We answer the most popular questions about grades and
look at some of the options facing you.
When will my results be published?

Results for summer examinations are issued on the middle two Thursdays in August, with
GCE first and GCSE second.
Can I get my results online?
Visit www.resultsplusdirect.co.uk, where you will find detailed student results information
including the ‘Edexcel Gradeometer’ which demonstrates how close you were to the
nearest grade boundary. Students can only gain their results online if their centre gives
them permission to do so.
I haven’t done as well as I expected. What can I do now?

First of all, talk to your subject teacher. After all the teaching that you have had, tests and
internal examinations, he/she is the person who best knows what grade you are capable
of achieving. Take your results slip to your subject teacher, and go through the
information on it in detail. If you both think that there is something wrong with the result,
the school or college can apply to see your completed examination paper and then, if
necessary, ask for a re-mark immediately. The original mark can be confirmed or lowered,
as well as raised, as a result of a re-mark.
How do my grades compare with those of everybody else who

sat this exam?
You can compare your results with those of others in the UK who have completed the
same examination using the information on our website at: http://www.edexcel.com
Exam Zone
What happens if I was ill over the period of my examinations?

If you become ill before or during the examination period you are eligible for special
consideration. This also applies if you have been affected by an accident, bereavement
or serious disturbance during an examination.
162
If my school has requested special consideration for me, is this shown

on my Statement of Results?
If your school has requested special consideration for you, it is not shown on your
results slip, but it will be shown on a subject mark report that is sent to your school or
college. If you want to know whether special consideration was requested for you, you
should ask your Examinations Officer.
Can I have a re-mark of my examination paper?

Yes, this is possible, but remember that only your school or college can apply for a
re-mark, not you or your parents/carers. First of all, you should consider carefully
whether or not to ask your school or college to make a request for a re-mark. You should
remember that very few re-marks result in a change to a grade - not because Edexcel is
embarrassed that a change of marks has been made, but simply because a re-mark
request has shown that the original marking was accurate.
Check the closing date for remarking requests with your Examinations Officer.
When I asked for a re-mark of my paper, my subject grade went down.

What can I do?
There is no guarantee that your grades will go up if your papers are remarked. They can
also go down or stay the same. After a re-mark, the only way to improve your grade is to
take the examination again. Your school or college Examinations Officer can tell you
when you can do that.
Can I resit a unit?
If you are sitting your exams from 2014 onwards, you will be sitting all your exams
together at the end of your course. Make sure you know in which order you are sitting
the exams, and prepare for each accordingly – check with your teacher if you’re not
sure. They are likely to be about a week apart, so make sure you allow plenty of revision
time for each before your first exam.
For much more information, visit www.examzone.co.uk

EDBUS_Z01.QXD 23/9/09 12:54 Page 1
Index
C
Page references which appear in colour are
defined in the Key Terms sections in each
subtopic.
calculated risk 52, 52-54
cash 76
cash flow 76, 76-79, 120
A
cash flow forecast 77, 77-79
closing balance 77
commission 116
added value 24, 24-26 commodities 116
advertising 93 commodity markets 116, 116-117
after-sales service 21 company 97
application form 108 and tax 102
attitude 109 competition 20
competitive advantage 40
concessions 20
B
consumer spending 121-122
consumers 9
control of business 97
Bank of England 121 copyright 49
blue skies thinking 41, 57 corporation tax 102
boom 129 cost of borrowing 120-121
borrowing costs 73
see loan, overdraft, interest rates and cash flow 78
brand 21, 21-22 and profit 74
and added value 25 creative thinking 40, 40-42
and franchises 29 credit 120, 122
brand image 21, 21-22 credit terms 78
British Franchise Association 29 cumulative cash flow 77
business cycle 129, 129-130 curriculum vitae 109, 108-109
business name 100 customer focus 92-94
business plan 80, 69, 80-82 customer needs 12
EDBUS_Z01.QXD 23/9/09 12:54 Page 2
Index
customer satisfaction 105 exchange rate 124, 124-126

customer service 104, 104-105 export 124, 124-126
customers 9
and stakeholders 133
164
F
CV 109, 108-109
D
factor 86
factoring 86
field research 12
decision making 69 finance 84-86
deliberate creativity 40, 40-42 and franchises 28, 29, 30
demand 116 financial objectives 64-65
design financial security 65
and added value 25 fixed costs 73
and competition 21 fixed rate of interest 121
desk research 14 focus group 13
determination 68 formula
direct customer contact 14 and added value 25
dividends 85 franchise 28, 28-30
downside 52, 52-53 franchisee 29, 28-30
downturn 129-130 franchisor 29, 28-30
E G
economic activity 128 gap in the market 18
economic growth 128, 128-130 goods 35, 8
economy 128 goods markets 117
employment law 110 government
enterprise 36-37 and stakeholders 117
enterprise skills 56-57 grants 85
entrepreneur 36
and qualities 68-70
and skills 36-37
EDBUS_Z01.QXD 23/9/09 12:54 Page 3
Index
H L
health and safety 110 lateral thinking 37
Her Majesty's Revenue & Customs leasing 85 165
(HMR&C) 101, 101-102 legislation

and employment 110
limited liability 96, 96-97
I
loans 85, 120. 121
local communities
import 124, 124-126 and stakeholders 133
income tax 102 local newspapers 14
inflow 72 location of industry
initiative 36, 68 and franchises 30
innovation 49 long term finance 84, 84-85
insolvent 77 long term loan 84-85, 120. 121
intellectual property rights 49 loss 74
interest 85, 120-122 luck 70
interest rates 121, 120-122
Internet
and market research 14
interview 109
M
invention 48, 48-49 managers
invoice 86 and stakeholders 132
market 9
market analysis 15, 16
J market gap 18
market mapping 18, 16-18
market reports 14
job advert 108 market research 12, 12-14, 16-18
job applicant 108 market segments 17, 17-18
job description 108 and marketing mix 93
job particulars 108 marketing mix 93, 93-94
Jobcentres 108 mindmap 57
mortgage 85
motivation 110
EDBUS_Z01.QXD 23/9/09 12:54 Page 4
Index
N
planning 56-57, 69
and cash flow 79
positioning map 18
National Insurance contributions 102 PR 105
166
National Statistics Socio-economic price 93
classification 18 and competition 21
net cash flow 77 and commodity markets 117
and marketing mix 93
O
and profit 74
and repeat business 105
and revenue 72
objectives 64-66 price makers 117
off-the-job training 109 price sensitive 17
on-the-job training 109 price takers 117
opening balance 77 primary data 12
outflow 76 primary research 12
overdraft 77-78, 120, 121 privacy 97
overdraft facility 85, 85-86 private limited company 96-97
owners 132 probability 52
product 93
and marketing mix 93
P
product offering 20
product range 20
production 8
patent 49 profit 74
Pay-as-You-Earn 102 retained 85
PAYE 102 and companies 97
payments 76 and corporation tax 102
perceptual map 18 and objectives 64
person specification 108 promotion 93
personal satisfaction 65 and customer satisfaction 105
personal savings 84 and repeat business 105
place 94 public relations 105
EDBUS_Z01.QXD 23/9/09 12:54 Page 5
Index
Q S
qualitative data 14, 15 sales
167
quality and cash flow 78
and added value 25 sales revenue - see revenue
and competition 20 sales turnover - see revenue
and marketing mix 93 sales volume 72
quantitative data 14, 15 saving 121
questionnaires 13 secondary data 14
questions 44-46 secondary research 14
security 85
selection 109
R
self-starter 68
selling experience 21
services 37, 8
raw material costs 117 share capital 84, 84-85
rate of interest 121, 120-122 shareholders 84, 84-85
recession 129, 129-130 shares 84, 84-85
receipts 76 shortage 116
recovery 130 shortlist 109
records 101 short-term finance 84, 84-85
recruiting process 108-109 Six Thinking Hats 41, 41-42
recruitment 108-109 skills of workers 109
registering for tax 101 slowdown 129-130
repeat business or purchase 105 socio-economic classification 17-18
research department 48 sole trader 96, 96-97
respondents 13 and tax 102
retained profit 85 stakeholders 132, 132-134
revenue 72, 72, 72-74 stocks 78
risk 46, 52-54 and cashflow 78-79
and innovation and invention 49 supplier 9, 22
and limited liability 97 and stakeholders 133
risk taking 36, 69 supply 116
surplus 116
surveys 13
survival 64
EDBUS_Z01.QXD 23/9/09 12:54 Page 6
Index
T V
telephone directory Value Added Tax (VAT) 101, 101-102
168
and research 14 variable cost 73
thinking creatively 40, 40-42 variable rate of interest 121
Thomson local directory 14 venture capitalist 85
total cost 73, 73-74
trade credit 78, 86
W
and cashflow 78
trademark 49, 100
training 109
and franchising 28 wholesaler 22
turnover - see revenue word of mouth 105
workers
and stakeholders 132
U
Working Time Directive 110
Y
unfair dismissal 110
unique selling point 25
unlimited liability 96, 96-97
upside 52 Yellow Pages 14
USP 26

Edexcel GCSE Business Introduction To Small Business Student Book

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Edexcel GCSE

Business: Introduction to Small Business

Edexcel GCSE Introduction to Small Business

To find out more about the other titles in the

Enlarge and project T 01865 888000

CVR_EMWH_SB_GCSE_4967_CVR.indd 1 6/4/12 10:43:10 AM

Alain Anderton • Ian Gunn

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A01_EMBU_SB_GCSE_xxxx_PREL.indd 2 7/11/12 7:34:42 AM

Topic 1.2 Showing enterprise 34

Topic 1.3 Putting a business idea into practice 62

Topic 1.4 Making the start-up effective 90

Topic 1.5 The economic context 114

Unit 2 Investigating small business – controlled assessment 138

A01_EMBU_SB_GCSE_xxxx_PREL.indd 3 22/9/09 09:13:54

A01_EMBU_SB_GCSE_xxxx_PREL.indd 4 6/4/12 10:54:34 AM

Exam question reports show

A01_EMBU_SB_GCSE_xxxx_PREL.indd 5 7/11/12 7:34:54 AM

Topic 1.1 Spotting a business opportunity

Topic 1.1: Spotting a

Topic 1.1 Spotting a business opportunity

What will I learn?

How will I be assessed?

Suppliers and customers

Going out of business Figure 1

Build Better Answers

Asif Rahman trained as an artist at college. His business

2. A small business makes cakes for parties and weddings.

1. ‘Jayne Varndall provides a service to her customers.’ What

2 Understanding customer needs

2 Understanding customer needs

2 Understanding customer needs

• Surveys usually involve asking questions of respondents – people or

Survey – research involving asking

Primary research, using a questionnaire

2 Understanding customer needs

Direct customer contact

2 Understanding customer needs

Over to you Test yourself

Analysing the customer

Statistics Socio-economic Classification Analytic Classes

Market mapping Organics café

Exam Question Report

1. ‘There was a gap in the market in his local area.’ Explain

Analysing the competition

Some stores offer a shopping experience.

Selling experience The shopping experience is very important for many

Build Better Answers

A window cleaning service operating in central Birmingham wants Answer D and E

High quality chocolates can add value

Franchisors and franchisees

The benefits of a franchise

Equipment Most franchises provide equipment to entrepreneurs as part of the

Materials to use in the product of a good or service Franchisors typically sell

The costs to the franchisee

Know Zone: Topic 1.1

Students could: other similar ones, e.g. McDonald’s v Burger King,

Build Better Answers

Student answer Examiner comment Build a better answer

Move the concepts around to get a similar

Topic 1.2 Showing enterprise

Topic 1.2: Showing enterprise

1.2 Showing enterprise