Revision Notes ReTyped

A business can be classified by its:

1. Size

2. Industry

3. Geographic

4. Legal Structure

For Size business are classified on the number of employees they have.

- A Micro Business has 1-4 employees

- A small business has 5-20 employees
- A medium-sized business has 21-199 employees
- A large business has 200+ employees

Small businesses play key roles in the commercial environment as they provide larger suppliers with
materials, they provide Australians with job opportunities, and they serve the interests and needs of
the local community.

Geographic:

1. Local: A business operating only within 1 area.

2. National: A business operating across an entire country. These tend to be trusted brands.

3. Global/ International: A business producing in 1 country but operating internationally or across

the whole world. This is done through exports.

4. Transnational: A business producing and operating in a number of different countries.

Industry:

1. Primary Industry: Business involved with acquiring raw materials.

2. Secondary Industry: Business involved with using raw materials, combined with labour and capital
equipment or machinery to produce a finished good or service.

3. Tertiary Industry: Business having its main function as providing a service.

a. Quaternary Sector: Business providing information services to customers

b. Quinary Sector: Business providing services traditionally performed at home.

Legal Structure:

1. Sole Trader: An incorporated business with one owner, who is responsible for all debt and all
profits, as well as the decisions and responsibilities of the business.

- A negative with sole traders is unlimited liability, as the owner is personally reliable/ responsible for
the debt incurred by the business.
- Another negative is that the law recognises the business and the owner as one and the same and ic
case of business failure, this could result in the business owner, having to sell personal assets if
money is not available to pay off debt.

2. Partnership: An unincorporated business, with more than 1 owner (typically 2-20, however there
are circumstances where this can be exceeded such as a national VET business).

A partnership agreement is required as governed by the Partnership Act, stating that the business
should have at least 2 owners, also placing limitation on the number of partners involved.

+ Advantages of partnerships, include: Access to specialist skills and knowledge of possible investors,
responsibility and decision-making process is spread, additional funds can be brought in to fund the
business growth and expansion.

- Disadvantages of partnerships include: As it is unincorporated and like sole traders hasn’t gone
through the legal steps of incorporation, partnership owners are under unlimited liability, meaning
they are personally responsible for the debt incurred by the partnership and each partner may be
needed to contribute a portion of their own money to pay off debt. Further, problems may arise in
the decision-making process and this can have a long-term impact on the survival of the business.

3. Private Company: It is an incorporated business, with limited liabity, having between 1 and 50
owners, known as shareholders. This means that the company is seen as a legal entity separate from
its owners, and that is has gone through the legal steps to be recognised as a separate organisation.

- Shareholders appoint directors, who manage the long term operations of the company.
These directors can be one of the shareholders.

Negatives, if private company fails to financial obligations, The directors if found to be doing any
illegal or unethical practices can be fined or imprisoned, whereas the shareholders can only lose the
portion of the ufnds they invested and not their personal assets.

- Private companies are governed by the Corporations Act 2001, which states that a
document must be set up outlining, hwo the business will operate, the number of
ownersand issues relating to the sale of shareholdings within the business. This document
also known as a company constitution, must be lodged to the ASIC.

Pty Ltd- Means Proprietary Limited. Proprietary referring to the business being private and that
decisions about ownership is based on the wishes of the current shareholders. Limited refers to the
company having limited liability.

4.Public Company: An incorporated business having limited liability, having ownership open to all
members of the public, however the minimum requirement of shareholders is 5.

Ownership is available through shares of the company, which in return provide dividends or
payments paid ever 3 or 6 months to the shareholders, and shares can also be sold to make money.

- For a business to be listed on the ASX, it first must issue a prospectus, which outlines the
nature of the business, financial performance and future difficulties. The prospectus must be
approved by ASIC and ASX.
- Then for a public company to maintain its integrity and trustworthiness, its must issue an
annual report outlining the performance of the business in the past year.

- The consequences for inability to fulfill financial obligations, results in shareholders losing amount
of money invested in the company.
Demutualisation falls under public companies. Demutualisation refers to a business ofeering shares
to its members or members of the public becoming a shareholder-based organisation rather than an
organisation controlled by its members. In other words, changing a company limited by guarantee or
else non-for-profit organisation to a public company (which is highly unlikely and would be met by
considerable resistance form its members)

5. Government Enterprise: A business acting for behalf of the government.

- They generally have the purpose of executing government policies through community services or
through commercial activities with the aim of making a profit.

- Some businesses that were previously owned by the government have been privatised and
become public companies.

- Privatisation is a process transferring the ownership of a government business to the

private sector (all for-proit busiunesses that are not owned or operated by the government) by
issuing a prospectus and listing the business on the ASX as a public company.

Factors Influencing Choice of Legal Structure:

1. Size: (as mentioned above on the sizes)

- Benefits that come with the size of the business and the phases it goes through eg. Early stages =
sole trader, growth phase = investors brought in, providing additional funds and expertise, resulting
in a partnership. During the growing phase for higher security of investors through limited liability =
private company. Then shareholders may decide to give up part of the ownership for easier access of
funds= public company.

2. Ownership:

People may seek the freedom of being self-employed and enjoy the responsibility of making all the
decisions. Others look to the satisfaction of providing a valued and much-needed service to the
community.

- However, some organisation for practical reasons, cannot change their legal structure. E.g.
Imagine a local community theatre organisations having the service provided as their
primary concern, being sold to a group of private investors for profit.
- However this is possible as discussed in demutualisation.

3. Finance:

The growth of a business is often accompanied by an increase in demand for financial resources. This
may be achieved by:

-Offering a partnership

-Providing increased protection and

-By initiating the development to a private company

Moving the business to a public company has both positives and negatives:

+By offering shares to the public provides the business with access to a considerable amount of
funds, which the original owners may decide to keep or reinvest in the operations of the business.
Negatives: Increased regulatory requirements (financial statements holding shareholder meetings),
Loss of Control (less ownership weakening the control of the founders), Higher Costs (Going public is
an expensive process to initiate, and there are ongoing costs with regulatory compliance), Greater
Scrutiny (Greater exposure to reputational risks, if negative publicity), Market Volatility or Instability
(Fluctuations in the stock market )

Influences in the business environment – Change in inevitable:

External Influences:

1. Economic: (Economic Cycle, Employment, Inflation, Government policies)

- The economic cycle referring to the changes in consumer and business spending over a period of
time. It influences: The level of employment and investment in an economy ,The profitability of a
business, The amount of goods and services produced.

Gross Domestic Product (GDP) is the measure of the total value of all goods produced and
services provided within a country’s domestic economy in 1 year. - The higher the GDP the
stronger the business is-

- Employment: If employees believe they have job security, they are likely to spend more of their
income on consumer goods. If there is a high level of unemployment, then there is less consumer
spending. An increase in consumer demand (due to increased spending) is the main reason why
more goods and services are provided and this causes what is known as economic growth.

- Inflation is the rate at which the cost of goods and services is rising which affects the value of
currency: as prices go up the same amount of money will buy less.

Its negative impacts on a business include:

O When prices rise, the cost-of-living increases

o In response to this employees will seek high wages.

O Higher wages increase the cost of production.

O Therefore to avoid a higher cost of production to a degree, businesses may need to reduce
their workforce and the remaining employees may need to accept a greater workload.

Government Polices- The commonwealth government make use of 3 key polices to influence the
level of economic activity in Australia:

a. The fiscal Policy: Refers to the use of taxation (on revenue) and expenditure to businesses.

b. The monetary policy: Refers to the actions taken by the Reserve Bank of Australia to control the
level of interest rates in the Australian economy.

- This has similar effects to that of inflation as consumers use more of their income to fund
the higher interest charges on their mortgage and that applicable to their credit cards.

c. Microeconomic reform: Refers to policies developed by the government to promote greater

competition within a particular industry, to provide consumers with greater choice and lower prices.

2. Financial: (Debt Finance and Equity Finance, Deregulation)

The 2 main sources of finance for businesses are:

a. Debt Finance: Funds borrowed from a bank, an investor or another firm.

- It involves of an agreement that specifies the need to repay the principal

(original amount borrowed) as well as interest, and states the set period of
time over which the debt must be repaid.

b. Equity Finance: Finance provided by the owners, who can give the business capital or can
contribute cash by buying shares. It can also refer to any net profit reinvested in the business.

- Deregulation: The government’s removal of or reduction in controls and regulations on an industry

or sector of the economy or market in order to achieve greater competition. his also allowed
international factors to have a greater influence of Australia’s money market as foreign financial
institutions entered the marketplace.

3. Geographic:

Geographic influences for businesses in Australia include:

- Population shifts from rural to urban areas.

- Located close its suppliers

- Demographics: age, gender, sex, income, and cultural background.

4. Social:

Society expects business to contribute to the community’s quality of life.

This can be done by: Businesses sponsoring teams, Businesses making donations to worthy causes
and Businesses assisting in community projects.

Businesses need to be aware of their community’s needs, opinions and attitudes.

CSR (Corporate social responsibility)- Society expects businesses to behave ethically and responsibly.

5. Legal:

The aim of government regulation of businesses is to promote fair conduct, including regulations
covering environmental and customer protection, competition, occupational health and safety and
industrial relations.

6. Political:

-Political influences can affect competition in the market as governments undertake trade
negotiations and enter into trade agreements such as China-Australia Free Trade agreement in
December 2015.

-The government can privatise its businesses.

7. Institutional (9 institutions):

a. Environmental Protection Policy (EPA): The main role of EPA is to enforce NSW government laws
regarding protection of the environment.

b. Australian Taxation Office (ATO): Its primary role is to enforce and administer federal government
taxation policies and laws.
c. Australian Securities and Investments Commission (ASIC): The primary roles of ASIC is to monitor
the operations of financial institutions regulating the reporting of financial data by companies to
their shareholders seeking to ensure that a company’s investors are provided with an honest,
accurate record of the company’s financial position.

But to do this they require an annual report detailing the financial performance of the
business over the past year..

d. Australian Competitions and Consumer Commission (ACCC): It aims to promote fair and ethical
behaviour by businesses towards their competitors and is able to penalise businesses that engage in
deceptive and misleading conduct and those that engage in price-fixing with competitors.

- Price-fixing occurs when 2 or more business competitors conspire to set a high price within
the market

e. NSW Fair Trading: Established to protect the rights of the customers, while also regulating the
registration of business names and licensing applications.

f. Trade Unions: Organisations that aim to protect and promote the interests, pay and working
conditions of employees.

g. Employer Associations: They lobby, guide, advise governments to develop policies that benefit
employers.

h. Australian Securities Exchange: Organisation responsible for acting as a market where investors
may buy and sell shares in public companies.

i. Consumer Associations: Organisations that are developed to provide informative opinions to

consumers on a wide range of issues, such as product quality and pricing.

8. Technological:

- Increased Awareness of what other countries and societies develop has resulted in changes to
consumer demand, production methods, and government rules and regulations.

- Additional costs for training staff in the usage of new technological aspects of the company.

- E-commerce refers to the use of electronic communications to carry out business.

These are online trade facilities that improve business-to-business (B2B) communications and offer
savings in time and money. E-commerce has extended business to consumer (B2C) use and allows
such services as banking, payment of accounts and the purchase of goods to take place.

9. Competitive Situation:

- The competitive situation is influenced by the number of competitors and the ease with which a
business can enter a particular market (Cost of establishing bus. Access to inputs, Marketing
Strategies)

Some business may operate in an environment with a few competitors. This is known an oligopoly,
whereby there are only a limited number of suppliers to the market, and so there is less pressure on
businesses to offer low prices. A monopoly is a situation where there is only one firm in the
marketplace. This may be due to either high entry costs or government regulations.
10. Markets:

- Free trade agreements, allowing the export and import of goods and services between ‘member’
countries to proceed without restrictions, making the world a smaller place.

- Outsourcing occurs when a firm makes a commercial arrangement with another firm to provide
services that it originally would have undertaken itself, for example cleaning, security and
advertising.