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1.1 Purpose of business

1.1.1: The purpose and nature of business
• Businesses are set up to satisfy the needs and wants of customers.
Businesses provide goods and services.
• Needs: are things that are essential for living. Such as food,
clothing, shelter, and air.
• Wants: are things that people would like to have but they are not
essential or living. Such as a computer.
• Production: the process of combining the four factors of
production to provide a good and a service.
• Added value: is the difference between the selling price and the
cost of bought in materials. It is everything that a business does
to make a good more desirable and suitable for customers.
• For example, a business selling chairs might buy wood for one
chair that costs $20 and sells the chair for $50. The added value is
$30.
• Scarcity: is a situation where there is not enough for all the things
would like to do. This is because resources are limited in supply
whereas wants are unlimited. For this reason choices have to be
made all the time.
• Example: there might not be enough land to build both a school
and a hospital. Then we have to make choice. If we chose to
build a school then we cannot build a hospital on the same piece
of land. The hospital then is the opportunity cost.
• Opportunity cost: is the next best alternative given up for the one
chosen.

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1.1.2 Factors of production and dynamic businesses

Factors of production: are the resources that go into making products.
They include:
a. land: includes both physical land and other natural resources like
coal.
It is important as it provides a physical space from which a business
can operate and also provides raw materials to use in the production
process.
b. labor: consists of physical and mental effort of employees. For
example, builders and engineers.
c. capital: all items that go into producing other things. For example,
machines and financial capital in order to pay its bills.
d. enterprise: is the factors that brings other factors together to
produce goods. They are risk takers. They take risks by running
businesses.

Rewards to factors of production

- Enterprise: The reward for enterprise is profit. It could be also in the form
of enjoyment the gain from being their own boss and running an enterprise
in a creative way.
- Profits are not guaranteed. If an enterprise fails the entrepreneurs may
have to pay for losses out of their own funds, which will ultimately drive
them out of business.
- Labor: The reward for labor is wages. The more skilled laborers are the
higher the wage he will earn.
- Land: The reward for land is rent.
- Capital: The reward for capital is interest. For example, interest received
for depositing money in a bank.

Dynamic business
• Businesses operate in a dynamic business world and so they have to
respond appropriately to the changes.
• Businesses need to be aware of what competitors are doing and try
to stay ahead of them.
• For example, a business will need to change its prices and make new
offers to consumers in response to a competitor bringing out new
products.

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1.1.3 The sectors of the economy

Business activity is classified in the following three ways:
1. Extractive / primary industry: is concerned with extraction of
natural resources from earth. For example, farming and mining.

2. Manufacturing and construction / secondary industry: is

concerned with making and assembling products or producing
semi-manufactured goods. For example, cars and sell of an
airplane that has not yet had and engine inside.

3. Services / tertiary sector: it provides intangible things for people.

For example, cinema or education.
- Industrialization: the process of shifting resources from primary to
secondary activities.
- Deindustrialization: involves shifting resources into tertiary activities.

1.1.4 What is an entrepreneur?

An entrepreneur: is someone who comes up with a new idea and is able
to put this idea into practice.
- An entrepreneur may find a new variation or style on an existing
product, or a new process of production or selling.
- They are risk takers. If the business idea is successful, the entrepreneur
will make profits but if the idea fails the entrepreneur will lose money.
Objectives of entrepreneurs:
- To make profits.
- To earn their living after being unemployed.
- To become their own boss.
- To provide something important to the community.

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Limitations of being an entrepreneur:

- It requires hard work and long hours of work.
- It requires a lot of attention to details.
- It requires someone who is creative and imaginative.
Benefits of being an entrepreneur Disadvantages of being an entrepreneur
Independence Risk of failure especially if poor planned
Can put own ideas into practice Capital is limited as the have to invest
their own money in the business. The
may also need to search for additional
sources of finance
May become famous and successful May lack knowledge and experience in
starting and operating a business
May become profitable and get a higher May experience opportunity cost as they
income than if employed in another lose the income that they would have
business earned if employed in another business
Can make use of personal interests and
skills

Characteristics of a successful entrepreneur:

Entrepreneurs need to be confident enough to make decisions and take
risks and thus they have to possess the following characteristics:
Characteristics of Reasons why important
successful
entrepreneurs
Hard working They work long hours and take short holidays to make their
business successful
Risk taker Deciding on products which people may buy is potentially risky
(wrong decision - products will not sell)
Creative They should find new ideas about products, services, ways of
attracting customers to differentiate their business from others
Optimistic Being able to look forward to a better future is essential for
success
Self-confident It is important to convince other people of your skills and
convince banks, and other lenders and customers that your
business is going to be successful
Innovative Being able to put new ideas into practice in interesting and
different ways. They may also present existing goods and
services in a new way.
Self-motivated and They have the drive to keep going, even when things get difficult
determined
Multi-skilled They require good understanding of the functions of finance,

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operations human resources and marketing.

Strong leadership Have good communication skills, the ability to motivate others
qualities and are good decision makers.
Initiative They are able to develop a good plan for achieving the business’s
objective
Result driven They are focused on achieving results and make sure products
are sold for profit
Good networking They are prepared to learn from others
Independent They will need to work on their own before they can afford to
employ others. They must be well motivated to work without
any help
Effective Talking clearly and confidently to banks, other lenders,
communicator customers and government agencies about the new business will
raise the profile of the new business.
Logical, perceptive, good at getting things done
organized, realistic,
responsible
Sociable, good can win people over instead of irritating them
leader
Individual not afraid to stand out from a crowd, or of what others think
Knowledgeable can respond to changes in a dynamic way
about the dynamic
business
environment.

1.2 Business ownership

1.2.1 Sole traders and partnerships

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- Privately businesses / private sector : are businesses that are owned by individuals
or groups of owners rather than by the government.
Examples, Sole traders, partnerships and companies.
- Public businesses / public sector: are government owned businesses.
Sole traders:

• are businesses that are owned and controlled by one person.

• It is the most common way of owning a business since it is the easiest to set
up.
• It may still employ a large number of people

Advantages Disadvantages
Easy to set up; doesn’t require special Unlimited liability which puts personal
paperwork possessions at risk
Can start with a small amount of start- Difficult to raise finance
up capital
Quick decision making as few people Cannot benefit from economies of scale
are involved in decision making
Personal attention can be given to Prices are often higher than larger
business affairs organizations
Special services can be offered to Ill health and holidays may affect the
customers running of the business
Close contact with customers so can Narrow range of skills as owned by only
quickly respond to needs of customers one person
Profits are not shared No colleagues to give advice so
mistakes may occur
Secrecy of business matters

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Partnerships
Partnership:
- is a business association between two to twenty owners of an enterprise.
- it involves creating a legal agreement between the partners.

Advantages Disadvantages
More capital is available than a sole Unlimited liability except for sleeping
trader partners (a person who invests in the
business but doesn’t take part in
decision making)
Larger scale than sole traders Disagreement between partners
Members of family can join Laws may restrict the number of
partners to twenty
Business affairs can be kept private No continuity of the business.
partnership needs to be re-formed if
one partner dies
Responsibilities of running the business Profits are shared
are shared – absence of one partner will
not cause problems.
Reduced workload for each partner as
responsibilities are shared
Better decisions than sole trader as they It is difficult to raise finance for
are shared between partners expansion
Losses are shared by partners Consulting all partners is time
consuming
Easy to set up. They only sign
partnership agreement which sets out
the rights and obligations of each
partner

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1.2.2 Other types of business organizations

Company:
- a group of people who have come together to set up a business.
- it has sperate legal identity from its owners
- it is an incorporated business which involves registering the company with the
registrar of companies.
- it is owned by shareholders. They appoint a board of directors to make strategic
decisions. For example, how much profit to distribute to shareholders and how
much to retain in the co.
- the managing director has the lead role in managing the business.

Advantages Disadvantages
shareholders benefit from limited liability. This Complicated legal matters needed to register the
means that should the business gets into financial company and requirement to produce annual
difficulty, shareholders will lose the assets of the reports
business only and not their private possessions.

It is easier to sell than unincorporated businesses.

This is because all co. arrangements of setting up
the business have already been done. Also
companies keep detailed accounts so that the
buyers can immediately see the financial situation
of the company.

Types of limited companies

Private limited companies Public limited companies

Shares can be bought directly from the company Shares can be traded in the stock exchange. It
with the permission of the can be sold to anyone.
Board of directors
It has quite small number of shareholders. It Large numbers of shareholders all over the
might be a family-run business. world
Has access to less capital than a public company It has access to more capital which enables
growth
Original owners can stop outsiders from buying up
their company.

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Advantages of private limited companies Disadvantages of private limited companies

Larger sums to invest in the company as shares Significant legal matters in order to form the
can be sold to family and friends company
a. articles of association: contains rules
under which the company will be
managed
b. Memorandum of association: contains
important information about the
company and the directors
Company is a separate legal identity and will Shares cannot be sold or transferred to anyone
continue should one of the owners die else without the agreement of the other
Shareholders have limited liability - shareholders shareholder – some people will be reluctant to
only lose their original investment in the company invest in ltd as they may not be able to sell their
shares quickly if they require their investment
back
Original owners may be able to keep control of Accounts of the company aren’t secret as the
their business if they didn’t sell too many shares to have to be sent to registrar of companies and
other shareholders can be inspected by any person
Company has higher status than unincorporated Finance for expansion is limited as shares
businesses cannot be sold to the general public

Advantages of public limited company Disadvantages of public limited company

Shareholders have limited liability Complicated legal formalities and time
consuming
It is incorporated business and is a separate legal More regulations and controls by the
unit government over plc. in order to protect the
interests of shareholders (publication of
accounts which can be inspected by any
person)
Can raise very large capital sums to invest in the Selling shares to the public is expensive due to
business commission taken by specialize brokers and
cost of printing thousands of prospectus.

No restrictions on trading of shares Original owners will lose control over their
business as they cannot keep majority of
shares to themselves
Divorce between ownership and control of the
business
The business has high status which encourages There is a risk that the company will be taken
suppliers to sell on credit to them. Banks are also over by a competing business
willing to lend them. Customers may also be
attracted to buy from large companies.

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Franchises
• A franchise is a business based upon the use of the brand names, promotional
logos and trading methods of an existing successful business. The franchisee
buys the license to operate this business from the franchisor.

• Franchisor: an established enterprise (often public limited co.) with a well-known

name and products or services. It grants a license to a franchisee to produce a
product, sell it or provide services in a given area. For example, McDonald’s
franchises
• Franchisees: pay for the franchise to trade in a given area. They will receive
training and equipment from the franchisor. They will share the profits with the
franchisor.

Advantages to the franchisor Disadvantages to the franchisor

Income from selling the license to the franchisee Franchisee keeps profits from the
Expansion of the franchised business is faster outlet
that if the business used internal expansion
Less management burden as it is the Poor management of one of the
responsibility of the franchisee franchised outlet could lead to a bad
Profits from selling products to the franchisor reputation for the whole business

Advantages to the franchisee Disadvantages to the franchisee

Less chance of business failure because a well- Less independent than with operating
known product is being sold a non-franchised business
Advertising cost is borne by the franchisor
Reliability and assured quality of supplies since Unable to take decisions that suits the
all supplies are obtained from the franchisor local area
Fewer decisions to make since prices, store
layout and range of products are all determined
by franchisor
Franchisor trains staff and management License fee must be paid to the
Banks find it less risky to lend franchisees franchisor and possibly a percentage
of the annual turnover

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Joint venture
• It is when two or more companies agree to start a new project together
sharing the capital, the risks, and the profits.
• It can take the form of an incorporated business or a partnership.
• It is commonly used when a business from one country wants to enter a new
country but prefers to do so with a local partner.

Advantages of joint ventures Disadvantages of joint ventures

Sharing of cost Profits have to be shared with the joint
venture partner
Local knowledge Disagreement over important decisions
may occur
Risks are shared The two joint venture partners might have
different ways of running a business due to
difference in culture
Each business brings different expertise to the Any mistakes made may damage the
joint venture reputation of all firms in the joint venture

Non-profit organizations
- Non-profit organizations are organizations that have objectives other than making
profit for their owners. For example, Amnesty international which has the objective
to protect human rights worldwide.
- Money made by a non-for-profit organization is used to keep it running and to
meet its objectives.
- In many countries it is free of gov. taxes. Money could be earned from selling
goods and services and from donations.
- In non-profit organizations excess income overspending is called surplus and not
profit.

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1.2.3 Limited and unlimited liability

Risk and ownership
- The owners of a business risk the capital that they put into it.
- More businesses fail than succeed. Newly established businesses have high risk of
failing in its first year of trading.
- The owners of a business are liable for its debts. Sole traders and partners are
required by law to meet all the liabilities of their business unlike shareholders in a
company who only lose the original amount of money invested in the business.
Limited liability
Limited liability limits the risk for shareholders to the sum that person has invested
in a company.
A shareholder may be an individual, with only a small sum of money invested in a
company. Alternatively, the shareholder might be a huge pension fund, investing
the savings of millions of pensioners in these companies. These shareholders would
not buy shares in companies if they were held liable for the business debts. They
only lose the money invested in the co. if it fails.

- The protection of limited liability therefore makes it possible for companies across
the globe to raise large sums of money.

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1.2.4 Private and public sector businesses

Businesses could be classified into public and private sectors.
The private sector consists of business that are owned by private individuals and
businesses that are owned by shareholders
- Most economies in the world consist of a mix of private sector and public
Sector enterprises, so they are called mixed economies.
- In some countries like China and Cuba, the majority of production is carried out by
stat-owned enterprises. On the other hand, in some other economies like USA,
Canada, Mexico, Japan & EU countries the majority of production is carried out by
private businesses in the private sector.
Over the last 20 years, the size of the private sector has increased in countries like
China.
Public enterprise

• In many countries the government is a major employer. Governments

employ public sector workers to carry out work on their behalf such as
providing police force, education and health services.
• The goal of public sector enterprise is to provide an essential service for the
nation. For example, railways.
• Public sector enterprises need to be carefully run. Then are funded by
taxpayers so they are keen to look after the taxpayer interests by providing
the best possible value for money.

1.2.5 Business organizations in the public sector

What is a public corporation?
Public corporations/ state owned enterprises / state owner corporations are
businesses owned by governments.

• The controllers of the corporation are given considerable freedom to make

their own decisions.
• A public corporation is created by passing a law to create the new form of
business.
• The government appoints a chairperson and a board of managers to lead it.

Purposes of public corporations

• Public corporations are created to make sure that important activities that
affect the whole nation are carried out well.
• For example, railways which transports a lot of people and goods. Also state
broadcasting which present news in a fair way which is not influenced by
political or commercial interests.
• Some public corporations are set up to preserve jobs.

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• The gov. raises money from taxpayers to provide service to locations where it
is not economical to provide them. For example, provide water supplies to
remote areas where there is shortage of water.
• Government involvement in a particular industry can reduce wasteful
competition. For example, providing water supply saves wasteful duplication
of pipelines.
• Nationalization: when the government takes over a business that used to
operate in the private sector.
• Privatization: is selling a public corporation to shareholders.

Disadvantages of public corporations:

• Public corporations can become too large and difficult to manage.
• Lack of competition can lead to higher prices and wasteful use of resources.
• Subsidizing a public corporation through taxes may prevent the revenues
from being used more efficiently for another purpose.

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1.3 Setting business aims and objectives

1.3.1 Business aims and objectives
Business objectives: are the aims or goal that a business works towards.
Businesses need also to establish more precise objectives that give clarity about how
the aims can be achieved. objectives should be SMART.
Business Objective need to be SMART
Specific: it should focus on what the business does and should apply directly to that
business. For example: 75% bed occupancy for a particular hotel over the winter
period.
Measurable: for the target to be effective it has to have a quantitative value. For
example, increase sales of a certain branch by 15%.
Achievable and Agreed: the business should be able to meet the objectives within
the given time and resources.
Realistic and Relevant: should be realistic when compared with the resources of the
company and should be expressed in terms relevant to the people who have to carry
them out. For example, informing a factory cleaner about increase in market share is
less relevant than a target of reducing usage of cleaning materials by 20%.
Time-specific: a time limit should be set when an objective is established. Without a
time limit it will be impossible to assess whether the objective has actually met.
Benefits of setting objectives:
1. Give workers and managers a sense of direction and an aim to work towards
achieving it thus it motivates them.
2. Taking decisions will be focused on achieving the target.
3. Help unite the business towards the same goal.
4. Help assess the performance of the business.
5. Help develop a plan for the business which will list the resources needed to
achieve the objective

Business objectives:
1. Growth:
Growth is obtained if the customers are satisfied with the products or
services provided by the business. It is usually measured in terms of sales
value or output or increase number of employees. Example: increase sales by
20% by 2020

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Benefits of growth:
a. More secure jobs for employees
b. Increase salaries and status of managers
c. Open up new possibilities and help to spread the risk of the business by
moving into new products and new markets
d. Obtain a higher market share from growth of sales
e. Obtain economies of scale

2. Profit: It is the total income of a business (sales revenue) less total cost. All
private sector businesses aim for profits. Example: increase operating profits
by 5% per year for the next 5 years.
Benefits of profit:
a. Pay a return for the owners of the business for the capital invested and
the risk taken
b. Provide finance for further expansion of the business
c. Businesses should be profitable to stay competitive and to make
improvements.
Consequences of raising prices to increase profits:
a. Some consumers will stop buying the product
b. New competitors may enter the market which will reduce the
profits in the long run for the original business
c. Paying too much taxes to the government

2. Market share:
The proportion of total market sales achieved by one business.
𝑐𝑜𝑚𝑝𝑎𝑛𝑦 𝑠𝑎𝑙𝑒𝑠
Market share % = × 100
𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑎𝑙𝑒𝑠

Example: Winning 60% of the market share by 2020

Benefits of increased market share:
a. Good publicity
b. Increased influence over suppliers
c. Increased influence over consumers – help develop a strong brand image
which makes it easier to sell the product to consumers

Objectives of social enterprises (not-for-profit):

Social enterprise: is an enterprise that is set up to achieve objectives which
relate to meeting the needs of society or the environment.

• Social enterprises seek to make a ‘surplus’ rather than a profit.

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objectives of social enterprises:

• social: to provide jobs and support for disadvantaged groups in society
• environmental: to protect the environment
• financial: to make profit which will be reinvested into the business to
perform more social work.

Benefits of being socially responsible:

• Businesses will be able to avoid the risk of bad publicity and possible legal
action taken by pressure groups which could have affected the reputation,
sales, revenue and profits of a business.

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1.3.2 Changing objectives as a business grows

Business objectives
- The key objective for businesses is to make profit. However, this objective
is achieved varies with the type of business,
- Big companies start small with just one or two enterprising individuals at its
head.
- The objective of the owners of small businesses may be to earn a living and
support their families. They may also prefer to work for themselves rather
than for someone else.
- A business aiming to remain small and maintain control within a small group
of owners will best operate as an unincorporated business.
- When businesses want to grow and purchase expensive capital, it may
convert to become incorporated and raise money from large number of
shareholders.

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1.3.3 Aims of the private and public sector

- The aims and objectives of businesses will be different depending on whether they
are operating in the private or the public sector.

Aims and objectives in the private sector:

The most common objectives for businesses in the private sector are to achieve:
Survival
Survival is an important short-term objective. Once survival is achieved the
business will have to focus on long-term objectives such as profit and growth.
It will be thought when:
a. The business has been recently set up
b. the economy is moving into recession
c. new competitors enter the market.

In any of these cases, the managers will feel threatened and would lower
prices in order to survive though the profit on each item sold will be reduced.
Other objectives of private sector businesses include:
- building a strong brand reputation
- winning customer loyalty
- coming up with exciting new ideas and innovations

Aims and objectives in the public sector:

• Public sector organizations have more responsibilities than just making
profits. They are expected to meet wider responsibilities to the community
like providing a cheap and efficient train service for all members of society.
• Nowadays, they are increasingly required to combine public service with
making a profit wherever possible.

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1.3.4 Why businesses fail

• Many businesses close down within 12 months or two years of start-up.
• It is important to differentiate between business failure and business closure.

Causes of business failure:

• Not having enough cash to pay outstanding bills.
o A business may be profitable but has poor financial management. It
might not plan well the timings of trade receivables and trade
payables.
• Operating in a line of business where profit margins are low (often due to
competition).
• Failure to meet customer requirements.
• Changes in external environment.
o Increased competition can reduce profit margins
o Changes in laws and regulations. Regulations can increase business
cost. For example, legal min wage
o Failure to respond to changes in consumer preferences and tastes.
o Poor selling of products. Lack of customer knowledge about the
products may lead to lost sales.
o Relying too much on a single customer. If the customer gets into
financial difficulties and has to close down then the market will
disappear.
o Poor management.
o Lack of planning which means that the business will have poor
direction.
o Trying to grow too quickly. A business may borrow to grow. Then it
will lack finance to repay the loan and its interest if sales become
lower than anticipated.

Why small businesses are at greater risk?

• Lack of business and management experience.
• Lack of cash to re-pay loans with its interest as it takes time for cash to be
earned by the business whereas repayment on the loans starts early.
• Lack of knowledge about the market.
• Lack of appreciation to the strength of the existing competition, the cost of
setting up, the importance of careful planning ..etc.
• New entrepreneurs are more optimistic about sales and market trends than
existing ones who are more realistic.
• A new start-up may just focus their planning on the growth part of the
business cycle and underestimate the way in which the market for their
product may contract in the future periods.

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Why some businesses remain small?

• Small businesses are more flexible. The owner can make quick decisions.
• Doesn’t increase debt of a business as it doesn’t require large sums of capital
• Owner has greater control over his business.
• Direct interface that owners and managers can have with customers.
• Allows better understanding of the market because its scale is limited.
• Reduced level of complexity of decision-making resulting in a less-stressful
life for the owners.

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1.4 Stakeholders
1.4.1 stakeholders and their different objectives
A stakeholder: is any person or group with a direct interest in the performance and
activities of a business because they are affected by its activities and decisions.
Internal stakeholders: they are part-owners or they work within the business
External stakeholders: individuals or groups other than the owners and employees
who have direct interest in the performance of the business.
Internal Stakeholder groups and their objectives:
- Owners
a. Owners are sole traders, partners and / or shareholders. Without them
the business would not exist.
b. Interested to know if a business is profitable or not. Profit / dividend is
the reward for owners for risking their investment in the business.
c. Growth of the business and profits so that market value of shares is likely
to rise. Shareholders will gain from selling their shares for a higher price
than they paid for them.
- Managers
a. The company provides managers a living.
b. Growth of the business which will give them higher status and power.
c. higher salaries and bonuses
d. Secure jobs and promotions

- Workers / employees
a. The company provides managers a living.
b. receiving their payments regularly
c. having a contract of employment
d. job security and a chance of receiving higher pay
e. job satisfaction and motivation
f. profit sharing schemes
g. promotion

External Stakeholder groups and their objectives:

1. Banks / lenders
a. Existing lenders will ensure that the business is able to pay interest and repay
amount borrowed.
b. Potential lenders will want to know about the long-term profitability of the
business and the existing loans borrowed by the business. They want to

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know if the business has enough assets that can serve as collateral (security)
against any lending.

2. Suppliers
a. they want to feel valued by the company that they supply.
b. They want to know if the business has enough cash and will be able to pay
them on time for goods they have supplied to the business on credit.
c. the more successful a business is, the more successful its supplier will be as if
the business is expanding then will order more inventories. This will increase
the sales and potential profits of the business.
d. However, if the business buys greater quantities of inventories, then they
may ask for discounts which will reduce the profit margins of suppliers.

3. Customers
a. safe and reliable products
b. reasonable prices if the business expands and benefits from economies of
scale
c. well-designed and good quality products
d. reliability of service and maintenance
e. better variety of goods

4. Government
a. Success of the business in order to pay taxes which will increase the
revenues paid to the government. Then the government can use this
money to spend on social services like education and healthcare.
b. Employ workers and thus reduce unemployment. The government pays
less unemployment benefits.
c. increase a country’s output
d. having all firms comply with laws

5. Local and national communities

a. Safer products that are socially responsible
b. production that doesn’t damage the environment
c. Creation of jobs for the working population. This will in turn lead to
greater revenue and profits of local businesses such as retailers since the
workers will spend their money locally.
d. Businesses may sponsor a local sports team or provide leisure facilities for
use by local residence.
e. Local community may also be harmed as businesses will cause pollution,
traffic problems and road congestion during particular times of the day.

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6. Pressure groups
• Are organized groups with interests and points of view. For example, the
Greenpeace who see themselves as defending the environment.
7. Trade unions
• Represent the interests of groups of employees. For example, seeking secure
high wages, better working conditions.
8. Employers’ associations
• Are employer’s equivalent of trade unions; these associations represent the
interests of groups of employers.

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1.5 Business location

1.5.1 Factors influencing location and relocation
Factors affecting location decision:
- Nearness to the market:
o Manufacturing industries locate close to the market especially if they
produce bulky or fragile items that are expensive to transport.
o Service industries such as restaurants need to be near to customers.
o Services such as banks may need to locate near to customers though
it is of less importance now as a lot of them carry out online
transactions.

- Availability of raw materials

o If the raw materials are heavier than the end-product then it is better
to locate near to raw materials to cut on cost of transporting raw
materials.
o For example steel is lighter than its ore, limestone and other materials
used to produce it so it is better to locate near by suppliers of raw
materials to cut on transport cost.

- Transport costs
o If the industry is ‘bulk increasing’ it is better to locate near to the
market to cut transport cost. Example, beverage production.
o If the industry is ‘bulk decreasing’ it is better to locate near to the
sources of raw materials to cut on transport cost. For example, copper
mining.

- Availability of land / cost of rent

o Firms that need a wide area to make their goods or provide services
will choose locations with low cost/rent. For example a supermarket
may locate outskirts of town to lower its rent cost.

- Availability of labor
o if a business wants a large pool of cheap labor, they might set up in
areas with high unemployment.
o If a business wants skilled labor, they will set up where they are most
likely to find those skills. For example, western companies locate in
India where there are large numbers of highly educated people with
IT skills and where wage costs are relatively low.

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- Safety
o It is wise for some industries to locate their premises away from
heavily populated areas to avoid danger to the public. For example,
nuclear power stations & chemical companies.

- Utilities
o A business must consider a location where gas, electricity, water,
disposal of waste and drainage are available.
o Industries such as food preparation and paper production use large
quantities of water so they have to locate in an area where water is
available.

- Communications
o Some businesses need to locate in areas where communication are
clear and reliable to facilitate their operations as they may require
strong core of IT communication systems.
o Cities with excellent wireless and broadband facilities are strong
attraction for new businesses.

- Regional factors
o Some businesses may consider locating in the same area where
similar businesses, suppliers and markets are available.
o The quality of local schools, housing and leisure facilities can also help
toe encourage high-quality staff to join and stay with the business.

- Government incentives and other legal factors

o Governments may provide financial support to businesses to set up in
some regions where unemployment is high.
o Some legal factors may make the business not being able to locate
industrial premises in residential areas.

Deciding on which country to locate

• Access to larger markets

o Some countries like India and China may have new, huge and growing
markets which allows companies to have increased sales.
• Reducing costs in new locations
o In some countries cost of labor, rent and raw materials may be
cheaper which reduces business costs.
• Stability of the government and the exchange rate in the host country.
o If exchange rates fluctuate often, this causes difficulty in planning and
predicting the value of sales and costs such as wages.

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1.6 Business planning

1.6.1 Contents of a business plan and how a business plan and how
business plans assist entrepreneurs
How a business plan assists entrepreneurs:
- A business plan helps to anticipate problems and work out how to deal with
them. This reduces the risk of failing
- It supports a bank loan request as it gives essential information to lenders.
- It provides a checklist of what need to be done to achieve the objective of the
business. It explains what the business does. It is a complete description of a
business for the next one to three years.
- It gives information about potential customers.
- It provides financial forecasts demonstrating overall viability and it indicates the
finance available and explains the financial requirements.

Contents of a business plan

1. Executive summary: a very brief summary of the key features of the business and
the business plan.
2. The owner: it gives information about owner (s) including their educational
background and their work experience. It also contains names and addresses of two
referees.
3. The business: it contains the name and the address of the business. It gives a
detailed description of the product or service being offered, how and where it will be
produced, who is likely to buy it, and in what quantities.
4. The market: it contains information about the market research. It gives description
of amount of prospective customers and how much they would be prepared to pay.
Details of the competition will also be included in this section.
5. Advertising and promotion: it contains information about the way and the cost of
publicizing the business to potential customers.
6. Premises and equipment: it shows the locations that had been considered by the
business and the chosen best site. It also gives details of planning regulations, cost
of premises and the need for equipment.
7. Business organization: it shows whether the business will become a sole trader,
partnership, company or cooperative.
8. Costings: it contains information about the cost of producing the product / service
and the prices it proposes to charge. It may show profit calculation.
9. The finance: it gives details of how the business will be financed, how much comes
from savings and how much need to be borrowed.
10. Cash flow: it should list all expected income and outgoings over the first year. It
shows cash flow forecasts.
11. Expansion: it contains information about future plans of expansion. For example,
whether the business will produce steady output or grow overtime or whether it will
introduce new products. It will also contain information about new competition that
is likely to emerge and how will the business deal with it.

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1.6.2 Fixed and variable costs

The importance of costs
- Calculation of costs is a key aspect of business planning.
- It is essential to keep costs of production as low as possible which will give the
business an advantage over rivals.

Fixed and variable costs

Fixed costs and variable costs
Fixed costs: are costs which do not vary with the number of items sold or produced
in the short run. They have to be paid whether the business is making any sales or
not. They are known as overhead costs. For example, salaries and rent paid for
property.
Variable costs: are costs which changes directly with the number of items sold or
produced. For example, cost of raw materials and piece-rate labor costs.

Total cost and average cost

Total cost: are fixed and variable costs combined during a period of time.
Average cost per unit: is the total cost of production divided by total output
(sometimes referred to as ‘unit cost’.)
= total cost of production in a time period / total output in a time period

Using cost data

Cost data can be used to help make the following decisions:
- Setting prices
- Deciding whether to stop production
- eciding the best location

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1.6.3 Basic financial calculations (breakeven)

- Cost analysis helps a business to decide whether to produce
additional units of output.
- Break-even: is the point at which an organization covers its costs
with the money it makes through sales. It is where Total Revenue
= Total cost.
o Beyond this point, profits are made. If this point is not
reached then losses are made.
- Break-chart can help in decision making. It helps the business
decide the level of output it needs to sell at a particular price to
break-even.

Limitations of the break-even chart

- It is not easy to estimate costs

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- Variable costs can change quickly. Foe example increase in wages

or in variable cost.
- Variable cost may change with the scale of production. The
organization may benefit from economies of scale so AC may
decrease.

Drawing a break-even chart

Break-even charts are graphs which show how costs and revenues of a business
change with sales. They show the level of sales the business must make in order to
breakeven.
The revenue: is the income during a period of time from the sale of goods or

0 units 2000 units

(Maximum output)
Fixed cost 5000 5000
Variable cost 0 6000
(unit variable cost x
number of units)
Total cost 5000 11000
(FC +VC)

services. Total revenue = Quantity sold x price

Example:
Fixed cost = $5000 per year
Variable cost of each pair of shoes are $ 3
Each pair of shoes is sold for $ 8

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Revenue 0 16000
(PxQ)
The factory can produce a maximum output of 2000 pairs of shoes per year

Uses of break-even charts

Advantages of break-even charts Limitation of break-even charts
Managers can read off any expected It assumes that all goods produced are
profit or loss at any level of output sold – inventories may build up
Redrawing the graph will show the Fixed costs are only constant if the
impact on profit or loss of a certain scale of production doesn’t change.
business decision (pricing decisions,
location decisions…etc)
It can show the safety margin: the It assumes that costs and revenues can
amount by which sales exceed the be drawn with straight lines. The

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break-even point variable cost line may slope more

steeply upwards if overtime wages are
paid. Also sales revenue line will be
less steep if discounts are offered

Break-even point: the calculation method

Break-even point = Total fixed costs / (selling price – variable costs)

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1.7 Expanding a business

1.7.1 Business growth
- Business growth may allow the business to cut costs and win a
greater market.
- Growth may allow a business to develop new products or sell to
new markers.
- Growth may be internal or external
Internal growth
- Organic growth takes place within a business.
- Expansion is financed by ploughing back profits into the business
or owners can invest more money from their savings.
- Small businesses are likely to grow organically at their early years
of operations as the owners will not want to risk borrowing money
from outside the business.
- Owners can keep control of their own business.
- Limitation: it is often a slow way of growing a business and can
put a lot of pressure on the existing owners.
Forms of internal growth:
- It can take place by investing in new products or selling more of
existing products.
- Franchising: allowing others to use a business idea or format that
has been created by franchisor.
- Opening new stores or other outlets. For example, having a chain
of restaurants.
- E-commerce: an online platform enables small businesses to
expand organically to a potential worldwide market.
- Outsourcing: it involves contracting out some of the business
work to an outside supplier who will then make goods or provide
services on behalf of the business. It makes it possible to grow
quickly at low cost, partly because managing tasks is done by
people external to the business.

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External growth
- External growth involves the takeover of another business, or
merger with another business.
- Merger: is where two businesses combine to form a single
company. The existing shareholders of both businesses retain a
shared interest in the new business.
- Takeover: is where a business buys majority of shareholding or all
the shares in the business. It can take place by investing in new
products or selling more of existing products or opening new
branches of the business.
- An acquisition: occurs when one business gains control of part of
another business. A business may sell off one of tis divisions that
it no longer wishes to keep.
Benefits of external growth:
- Business buy new and exciting brands where sales are likely to be
high
- Acquire new inventions and new technologies
- Break into new markers in other countries
- It enables more rapid expansion and enables a business to gain
skills and knowledge that it may not possess internally.
Limitations:
- It is risky as the existing business may be joining with others that it
has little knowledge of.

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1.7.2 Scale of production

- Economies of scale: are the factors that lead to a reduction in average costs
as a business increases in size.
- Internal economies of scale: result from growth of a business
- External economies of scale: result from growth of the industry of
which the business is part.

Internal economies of scale:

- Labor and management economies: large organizations can
employ specialist staff such as accountants. Less mistakes will be
done and AC will fall.
- Buying and selling economies: large firms can buy raw materials
in bulk and get discounts from suppliers which reduces AC.
o Cost of transport per unit will be lower with larger loads.
o If a firm is capable to sell its output to one or a few buyers,
the cost of making each sale will be considerably lower than
it deals with thousands of separate customers.
- Financial economies: large firms are regarded as less risky to lend
than small ones so they can get cheaper loans.
- Risk-bearing economies: large firms are diversified which means
that they can spread risks over a number of products or markets.
If one product fails or one market is less profitable, other products
or sales in other markets may counter balance the losses made by
the failing product or market.
Diseconomies of scale:
Diseconomies of scale: are the factors that lead to an increase in average costs as a
business grows beyond a certain size.

- Managing an organization that gets too big. The organization that

takes on too many activities may not have the resources to carry
out all of them efficiently.
- Low morale: In large businesses workers may feel unimportant and not
valued by the management. Also the lack of close relationship between
workers and top managers can lead to low morale and low efficiency
amongst workers.

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- Slow decision making : It will take a long time for the decision made by
managers to reach all groups of workers and would take longer time for
workers to respond and act upon managers’ decisions.
- Also managers will be too busy to have contact with customers of the firm
and they could become too removed from the products and markets the firm
operates in.

- Poor communication: Larger organizations may have slow and inaccurate

communication which leads to serious mistakes that will lower the efficiency
and higher the average costs.
-
External economies of scale:
- Economies of concentration:
o As firms within an industry grow larger, many special
services may develop.
o Businesses in that area may gain an improved reputation.
o Suppliers of parts and services may move to the same area.
- Economies of information:
o Larger industries can set up special information services to
benefit all companies. For example, setting up a specialist
research organization jointly owned by a number or firms,
or specialists magazines and publications about a particular
industry.

External diseconomies of scale:

- Pollution
- Congestion
- Too much competition which drives down prices

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