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Chapter 21: Getting Started in Business - Coggle Diagram
Chapter 21: Getting Started in Business
When an entrepreneur decides to take the risk of setting up a new business, Many important decisions must be made.
Ownership Structure
Location
Source of Finance
Production Method
Once these decisions have been made, A detailed business plan must be made
Decision 1: Ownership structure
Entrepreneurs must decide which ownership structure to use.
Sole Trader
Partnership
Private Limited Company (PLC)
Co-Operative
Sole Trader
Business owned and run by one person. Makes all business decisions. Very common form of business in Ireland as it is easy and quick to set up. Suited to small businesses such as local shops, farmers and taxi drivers.
Advantages and Disadvantages of a Sole Trader
Advantages
Easy to Set Up
Few legal requirements unless a licence is needed for trade i.e pharmaceuticals. Sole Traders must also register a business for tax purposes, i.e VAAT and self-assessment income tax
Keeps All Profits
Owner keeps all profits made
Decision-making
Owner has complete control over all the decisions to be made.
E.G What to sell, business hours
Confidentiality
Not required by law to publish their financial accounts, so their financial position remains confidential
Disadvantages
Unlimited Liability
Owner is personally responsible for all business debts and losses. May have to sell personal assets to repay debts.
E.G Private house or car
No Continuity of Existence
When owner dies or retires the business may close down if their is nobody else to take over.
Stress
Sole traders can experience high stress due to long working hours, decision making and raising finance. May cause burnout
Lack of Capital
Sole Traders may have difficulty obtaining capital from financial institutions as sole traders are seen as having a high risk of business failure
Companies Registration office
CRO is the organisation where information on Irish companies and business names is stored and managed.
Functions include
Incorporation of companies, i.e authority for registering new companies
Receipt and registration of relevant documents required to set up a company
Making information available to the public.
E.G Company name and registered office
Partnership
Business between 2-20 partners. Common types of businesses that are set up as partnerships include accountants, solicitors and doctors
Advantages & Disadvantages of Partnerships
Advantages
Easy to Setup
Partnership is relatively easy to establish by drawing up a deed of partnership between interested parties
Decision-making
Partners have a range of skills and experience, can help improve decision-making
Increased Capital
More people are available to invest in the business, so raising additional capital can be easier
Confidentiality
Partnerships are not requires by law to publish their financial accounts, so their position remains private
Disadvantages
Unlimited Liabilities
Partners have unlimited liability, i.e they are responsible for all business debts, may use personal assets to repay
Profits
Profits are shared between the partners. The deed pf the partnership specifies how this is done.
E.G Rather profits are equally shared or inline with investment amounts
Decision-making
Can be slow, as all partners must be consulted. Different opinions may arise. May lead to a dissolvement
Legal Entity
Partnership and busniess are not seprate legal entities, i.e the partners-not the business can be sued
Private Limited Company (PLC)
Common form of business structure and under the Companies Act 2014 there are a number of variations of a PLC.
E.G PLC by shares allows for 1-149 people to become the owners
Advantages & Disadvantages to a PLC
Advantages
Limited Liability
Owners are not personally responsible for business debts. If they fail they only lose amount invested
Continuity of Existence
Business continues to exist after the death of one of the shareholders
Separate Legal Entity
PLC Company is a separate legal entity from its owner. Company can be sue and be sued in its own name and enter business contracts
Taxation
Companies pay corporation tax of 12.5% pn its profits, which is a lower rate then self-assessment income tax paid by partnerships and sole traders
Disadvantages
Expensive to Set Up
PLC is more expensive to set up then a sole trader or partnership
Shared Profits
Profits of the business are shared between all shareholders of the company
Less Confidentiality
Accounts of the business must be submitted to the CRO. Summarised versions are made available to the public
Time
Takes longer to set up and start a PLC as the business cannot begin trading until it receives a certificate of incorporation from the CRO
Co-Operatives
This type of business structure is set up, owned and run by members rather then shareholders, It operates for the benefit of its members and registers with the Registry of Friendly Societies.
4 Main Types
Producer
Worker
Community
Financial
Advantages & Disadvantages of a Co-Op
Advantages
Limited Liabilities
Members of a co-op are protected by limited liability, i.e they are not personally responsible for the business debts
Tax
Co-ops' profits are taxed under the corporation tax of 12.5%
Continuity of Existence
Co-Op continues to operate as a business even if a member dies or sells their share
Democratic Decision-making
All members have an equal say in the running of the co-op as each member has one vote, regardless of the number of shares they own
Disadvantages
Lack of Capital
As each member has only one vote there is a lack of incentive to invest more capital. Can delay expansion
Registration
There is more complex than for a sole trader. THe co-op must register with the registry of friendly societies. It must in clude 'society' an 'Limited' in its name
Profits
Profits have to be shared equally among the members, unlike the sole trader
Confidentiality
Co-ops must publish annual financial accounts, reduces confidentiality
Decision 2: Location
Choice of location is an important decision when establishing an developing a successful business, Modern tech and the ability to source raw materials and customer across a wide geographic area means that many firms can locate almost anywhere.
Infrastructure
Well-developed transport links, access raw materials, good distribution of goods
High speed broadband
Utilities,waste disposal, water supply
Land
Opportunity to further expand
Governments
Stable government free from corruption and bribery
Government programmes, grants to encourage business
Raw Materials
Access to raw materials
Local Environment
Clean, healthy & Safe
Positive support/feedback from locals
Market
Easy access, wide range of customers
Sufficient disposable incomes to purchase products & Services
Knowledge of competitors
Employees
Wide range of qualified staff
Education facilities for high skilled workforce
Decision 3: Sources of Finance
An entrepreneur will rarely have enough money of their own to set up a their business. They will need to make a decision on the best way to finance their business.
Short(<1 repay), Medium(1-5 Years repay), Long term(>5 year repay) loans
Short Term Finance (<1 Year)
Bank overdraft, Accrued Expenses, Trade credits
Purchasing of trading stock, Day to Day runnings
Medium Term Finance (1-5 Years)
Medium term hire purchase, term loan, Leasing
Purchase of fixed assets such as delivery vans
Long Term Finance(>5 Years)
Debentuners, Equity Capital, Grants
Purchase of land & buildings, development of new products and ideas (RnD)
Decision 4: Production Method
If the business is involved in producing good it also needs to decide which method of production to use. 3 Main types
Job, Batch, Mass Production
A business may use only one of combine 2
Job Production
Unique items made to customers' specifications.
High quality
High skilled labourers, High wages
Flexible Machinery, Capable of producing wide ranges of products
Costs are high, Raw materials and machinery, Premium Prices charged
Examples include tailored made clothes, Privately requested items such as cars, planes or cakes
Batch Production
Limited number of identical items are made in production runs. Goods produced for stock
Less skilled workers then job, receives lower wages
Machines are flexible when one batch ends, the same machine is capable of making another product
Lower costs then job, multiple items can be produced at once, Increased efficiency
Examples include food and drink items or clothes of same style various sizes
Mass (Flow) Production
Identical items made continuously, stock in large quantities
Unskilled assembly lines, repetitive moral may be low, Very low pay
Large capital investments, automated machines, machines are only specific to one product
High machinery costs, befits from economics of scale, reduces production costs.
Examples include stationary items, and day to day small items
Implications of Changing Production Methods
Changing in the business such as expansion or increased competition may result in change of its production method
Investment
Batch and mass production methods are both heavily automated. This requires a large investment in machinery, equipment and premises
Finance
Additional long-term sources of finance may be needed to set up a new production process,
E.G Mass production, If the firm does not have sufficient retained earnings, it may need to obtain a debenture
Ownership Structure
The business may have to change its structure in order to be able to raise the finance necessary for the investment.
E.G from sole trader to a private limited company
Changes to Stock Control
If the business changes from job to batch production. it will no longer be making good to order for the customer. Both natch and mass create goods for stock, so an efficient stock control system will need developed
Marketing Plan
A revised marketing plan will need to be developed and implemented to cater for the increased level of goods being produced
Subcontracting/Outsourcing
Subcontracting or outsourcing means that a business employs another firm to manufacture or produce part of a product or a whole product.
E.G Nissan and Renault each manufacture cars but use engines from other businesses
Advantages & Disadvantages of Outsourcing/Subcontracting
Advantages
Cost Savings
Less money is needed for the purchase of ex[ensive machines
Staff Savings
Fewer staff are needed, the cost of labour is the responsibility of the business to which the job are outsourced
Meet Demand
If the demand for a businesses' product is greater than what the business can produce, it can be quicker and cheaper to outsource the extra products
Less Bureaucracy
Regulations such as employment law are the responsibility of the manufacturing firm
Disadvantages
Loss of Control
The business can lose control over aspects of production such as quality. Poor quality products could damage the firm's reputation
Industrial Relations
Staff may fear their jobs, as fewer employees may be required if their work is now being done by outside employees
Competition
The business to which the work is subcontracted may decide to manufacture the product themselves, Would then become a competitor in the market, manufacturing a similar product and selling it under their own brand name
The Business Plan
Clear idea of its aims and objectives and how to achieve them. Can be incorporated into firm's business plan.
Reasons for Preparing a business Plan
To Obtain Finances
Investors such as banks and governments agencies will want to examine a business plan before they provide funding. Shows investors that the business has spent time planning and this increases the likelihood of business success
To Measure Performance
The firm can use the business plan to set a standard against which it measures, for example, sales and production figures. Standards are not achieved, action can be taken to remedy the situation
Identify Problems
A business plan can help a firm to identify problems
E.G Lack of finance
Can put plans in place to overcome these issues
E.G Overdrafts
Formulate Strategies
A business plan sets out short- and long-term strategies
E.G One and five years. Sets out steps businesses uses to achieve goals
E.G Profit turn over within 5 years
Elements of a Business Plan
Each business must prepare its own plan to suit its particular needs. How ever, some common heading included in a plan are
Business Details
Information about the firm's directors, and the legal structure
E.G Sole trader
Objectives
The overall aims and objectives of the business, including its mission statement
Product Details
A brief description of the products or services that it will produce or sell. Also refer to its Unique selling point (USP)
Market Details
Analysis of market research,
E.G market size, competeitors and target market,
Outlines marketing mix that will be used to maximise sales and shares
Production Details
The production method the business will use,
E.G Job or batch production also outlines production targets to be met
Financial Details
How much money will be needed to set up the business and how money will be sourced
E.G Equity finance and loans, may also include a cash flow forecast
Business plan does not guarantee success, uncertainties when setting up and running a business, and even the best laid plans cannot protect against from
Unexpected Events
These can increase of decrease product demand
E.G Water pollution upsets bottle water sales
Market Trends
Changes within the market such as fashion trends can be difficult for a business to predict
E.G People buy less leggins and change to older style bootleg jeans
Competition
New competitors can threaten market share.
E.G intense competition between Apple and Samsung
The Economy
Changes in economy, a recession leads to less disposable income