Chapter 1

Enterprise – The
nature of
business activity Pg 20 - 29
 1.1 The nature of business
activity
• Aim: satisfy people's needs, which require resources (i.e., management & owners
aim to add value to resources while meeting people's needs).
• Purpose of business activity:
• Use resources to meet the needs of customers to provide a good / service they demand.
• The activities in all the stages of production will add value to the final product – they will be made
desirable to the final purchaser.
• To enjoy a higher standard of living, businesses use scarce resources that will add value through its
activities, instead of being entirely self-sufficient in growing these resources which add less value in
their activities.
 1.1 The nature of business
activity
• What do businesses do?
1. ID the needs of customers
2. Purchase necessary resources to allow production to take place
3. Produce g&s that satisfy customers' needs while making a profit.
• The factors of production needed by businesses:
a) Land: NOT ONLY LAND... incl non-renewable resources (coal, crude oil, timber).
b) Labour: manual + skilled.
c) Capital: NOT ONLY FINANCE NEEDED TO SET UP / CONTINUE OPERATION... incl all manufactured resources
used in production – i.e., capital goods (computers, machines, factories, offices, vehicles).
d) Enterprise: i.e., the initiative taken by risk-taking individuals (entrepreneurs) who combine the other FOP to
produce g&s.
• Provides the managing, decision-making, and coordinating roles to achieve this.
 nature of
business
activity
• The factors of production
needed by businesses:
• BUT before being able
to produce g&s
successfully,
businesses have many
other needs; as shown
below:
 1.1 The nature of business
activity
• The concept of adding value:
• Businesses create value by selling their produced g&s for a higher price than what it cost them to buy the
materials.
• If the consumer is willing to buy the g&s at the higher price (i.e., greater than what it cost them to
produce) then the business is successful at adding value.
• The difference between the selling price & cost of materials bought = added value (w/o this, the business
cannot survive due to other costs needing to be paid & those who invested in the business).
• IF the business can add value w/o incr its costs, then it WILL incr its profit (the value added is not profit).
• But how does the business incr its profit w/o incr its costs?
1. If a jewellery shop has a well-designed shop display, attractive fittings, well-dressed and knowledgeable staff, and
beautiful packaging for each item, this might cause an incr in jewellery prices which are greater than the extra costs
involved.
 1.1 The nature of business
activity
• Economic activity and the problem of choice:
• i.e., just like in economics – resources are scarce, and customers have unlimited wants = economic problem.
• The purpose of economic activity = provide for as many wants as possible.
• BUT due to the economic problem, a choice needs to be made as we cannot satisfy all our wants...
therefore we must be prepared to give up certain wants which do not give us the greatest benefit (=
opportunity cost).
• This is not done by customers, but rather by gov, businesses, workers, charities, etc.

VS
 1.1 The nature of business
activity
• The dynamic business environment:
• There are changes in the business environment that make it risky to set up a new business as it can make the
original idea less successful (can be even worse if the business plan is too inflexible to deal with changes).
• Changes include:
1. New competitors entering the market
2. Legal changes - e.g., new safety regulations / buying limits.
3. Economic changes - e.g., incr in inflation = value of customers' money decr meaning they aren't able to buy as
much as they used to.
4. Technological changes - i.e., outdated tech.
1.1 The nature of business activity
• Why do some businesses succeed?
1. Good understanding of customer needs: = sales targets
being met.
2. Efficient management of operations: keeps costs under
control.
3. Flexible decision-making to adapt to new
situations: allows investment in new opportunities.
4. Appropriate and sufficient sources of finance: prevents
cash shortages & allows for expansion.
 1.1 The nature of business activity
• Why do some businesses fail?
1. Poor record keeping: i.e., lack of accurate records.
• This occurs because many small companies don't
pay enough attention to record keeping.
• Believe it isn't as NB as meeting customer
needs OR that they will remember everything.
• Some don't have enough computing power to
keep their records
• CAN overcome this by having paper records
as a back-up if computers fail & for tax
purposes if their tax calculations are disputed .
1.1 The nature of business activity
• Why do some businesses fail?
2. Lack of cash: most significant reason for failure.
• Working capital is vital as it is used to pay for the holding of inventories,
give trade credit to customers, pay for day-to-day activities.
• Lack of working capital = cannot buy more supplies, pay suppliers /
offer credit to NB customers
• How to reduce cash-flow problems:
a. Make & keep a cash-flow forecast up to date.
b. Inject enough capital at start-up to be able to operate the first
months when cash-flow from customers is slow.
c. Estb. good relations with banks so that S-T cash problems can be
financed via overdraft extension.
d. Effective credit control over customers' accounts (i.e., ensure they
pay on time).
 1.1 The nature of business activity
• Why do some businesses fail?
3. Poor management skills:
• May be lacking in the following areas:
o Leadership & decision-making
o Cash handling & management
o Planning, coordinating & communication
o Marketing, promotion & selling.
• Entrepreneurs may be enthusiastic, willing to work hard, and have
expertise in their field, but this isn’t always enough...
• BUT can minimise risk of failure by:
1. Gaining management experience beforehand
2. Obtain advice & training from specialist organisations.
3. Employ individuals with management experience (can be expensive
and new businesses may not be able to afford to do this).
1.1 The nature of business activity
• Local, national and international businesses
• Local businesses: operate in small, well-defined parts of the country.
• Do NOT AIM to expand / attract customers from other parts
• Examples: small building + carpentary firms, single-branch shops, hairdressers &
childminding
• National businesses: have branches across the country.
• Do NOT ATTEMPT to expand to other countries OR sell internationally.
• Examples: large car retailers, retail shops with branches across the country like Checkers
& national banks.
• International businesses: sell products in more than one country.
• Use foreign agents OR online selling.
• Multinational businesses: operations in more than one country.
• i.e., established a base for producing / selling outside their own domestic country