Chapter 15 – Business Start Up

1. Chapter 15 – Business Start Up Usually Q6, 7 in Long question’s Ms. Marshall 6th year business

2. Main topics in this chapter • 1. Finance (overlap chapter 13) • 2. Organisational Options (overlap with chapter 19, this material will be covered in more detail in Ch 19) • 3. Production Options • 4. Business Plan Ms. Marshall 6th year business

3. Why do people set up their own business? • Independence • Profit • Redundancy • Spotting an Opportunity • Ambition Ms. Marshall 6th year business

4. Short term Finance • Bank overdraft: • A short term loan given to current account holders designed to meet short term expenditure needs. The account holder is given permission to withdraw more than the amount in the account, up to a specified amount. Security is not usually required. Interest is calculated on a daily basis on the overdrawn balance. • Creditors: Suppliers give an agreed period of credit to their customers, who then sell the goods and services and have use of the money until the invoice has to be paid. No interest is charged and no security is required. However, if the invoice is not paid on time discounts may be lost. Short term finance is for less than one year and is used to finance short term assets, such as stock and pay expenses. Ms. Marshall 6th year business

5. Short Term Finance • Accrued Expenses: these are expenses that do not have to be paid until after the service has been provided e.g. gas, esb. By delaying the payment of these bills, the business can use the money as a short term source of finance for other purposes. • Taxation: the business collects taxes on behalf of the Revenue (e.g. VAT). These taxes are held by the business for a period of time before being forwarded to the Revenue. • Factoring: the business sells its debtors to a bank for cash. The business gets the money up front from the bank. In some cases, factoring with recourse, the business must reimburse the bank if any debtors don’t pay up. This gives businesses access to cash immediately, no security is required but the bank charges a high fee. Ms. Marshall 6th year business

6. Medium Term • Hire Purchase: purchasing assets and paying by instalments over an agreed period of time. Buyer obtains the item immediately but does not become legal owner until the last instalment is paid. The rate of interest is high and is charged on the initial sum borrowed. • Leasing: involves the renting of an asset from a finance company. The leasee has the possession and use of the asset but does not own it. No cash lump sum or security is needed. Lease payments can be offset against profits to reduce tax. • Medium-term loan: from the bank, repaid in fixed instalments over an agreed period. Borrower must complete a loan application form and the money is granted for a stated reason. Banks may want security on the loan in the event of non payment. Interest on a business term loan can be offset against tax in the profit and loss account. Medium term finance is for one to five years and is used to finance office equipment, vehicles and machinery. Ms. Marshall 6th year business

7. Long Term Finances • Debenture: a long term, fixed interest, loan for a business. Usually used for expansion. The loan is secured on the company’s assets. Interest payments on loans are a tax allowable expense in the profit and loss account. The company pays the interest every year and pays the loan back in one lump sum. • Share/Equity Capital: the owners sell some of their shares to investors in return for money. Shareholders receive a say in the running of the company and a dividend if the company makes a profit. There are no interest repayments and no security has to be provided. It is a permanent source of finance • Grant: a sum of money given by the government to a business, which does not have to be paid back, providing that they meet the conditions. E.g. a start up business may be given a grant to help buy machinery. Main providers of grants are Enterprise Ireland, IDA Ireland and the county and city enterprise boards. Finance that will take more than five years to repay Ms. Marshall 6th year business

8. Factors to consider • Cost • Risk • Security • Control • Purpose/Match • Amount You should be able to apply these to the different short, medium and long term sources Ms. Marshall 6th year business

9. Factors to consider – Short term finances Ms. Marshall 6th year business

10. Factors to consider: medium term finances Ms. Marshall 6th year business

11. Factors to consider: long term finance Ms. Marshall 6th year business

12. Working Capital • Working capital is the finance used for the day-to-day running and payment of immediate debts of the company(current assets minus current liabilities). • If positive, the business is LIQUID • If negative, the business is NOT LIQUID, and is said to be OVERTRADING • Overtrading occurs when a firm increases production and sales too much and runs short of cash. • To manage working capital a business must exercise: credit control, stock control, Cashflow management. Ms. Marshall 6th year business

13. Organisational Structure • To start up you can be a: • Sole Trader: a business set up, owned and run by one person, e.g. a local hairdressers or chemist. • Partnership: a business set up, owned and run by between two and twenty people with the intention of making a profit. E.g. KPMG, PWC accountants. • Private Limited Company:a business which may have between 1 and 99 shareholders, who operate the business with the benefit of limited liability e.g. Eason Ltd. Ms. Marshall 6th year business

14. Organisational Structure Ms. Marshall 6th year business

15. Production Options Ms. Marshall 6th year business

16. Examples Ms. Marshall 6th year business

17. Business Plan • What is a Business Plan? • Explain its role in business start ups (2005 HL 20 marks) • A business plan is a document that sets out the objectives of a business and the strategies by which these will be achieved. It is like a map for the entrepreneur telling her what she has to achieve to make her business a success and what steps she must take to get there. • It sets out details of the entrepreneur setting up the business, her business idea and especially her unique selling point. It also details how the entrepreneur is going to make and sell the product and how she intends to finance the business. • It is used to impress investors in order to attract investment to start up the business. They will judge whether the business is sound, e.g. by examining projected profit. • It will help to anticipate problems, e.g. how to produce the product. Solving problems in advance will reduce her risk of failure. Ms. Marshall 6th year business

18. See P288 Business Plan headings • Description of the Business • Market Analysis • Marketing Plan • Production Plan • Finance Plan A document that sets out the objectives of a business and the strategies by which these will be achieved. Ms. Marshall 6th year business

19. Business Plan: Headings • Description of the business: the people starting the business, its products and long term objectives. • Market Analysis: show that there is a viable market, how you intends to beat competition. Describe target market, market trends, competition, competitive advantage. • Marketing Plan: marketing strategy, how she intends to increase consumer interest and convince them to buy it. Ms. Marshall 6th year business

20. Business Plan • Production Plan: describe how the product will be made: Job, batch, mass? The equipment, how to ensure quality. • Finance Plan: How much it will cost, how much you have, how much you need? Set out collateral available. Projected Profit &Loss Account, Balance Sheet and Cash Flow Forecast. Ms. Marshall 6th year business

21. Business Plan: Benefits • A guide to future action: a plan provides focus for the business and guides the actions of the individuals as it sets the objectives and strategies. • Finance: needed if applying for finance from a financial institution or the govt. • Assessing Performance: provides a benchmark to measure your performance against. This will help control the business as corrective action can be taken. • Viability: A SWOT analysis is carried out, identifying problem areas. Problems can be dealt with. This will reduce the likelihood of failure. Ms. Marshall 6th year business

22. 2002 Ms. Marshall 6th year business

23. Recent Exam Questions • 2013 • SQ • Outline two characteristics of a private limited company. • 2013 • SQ. Write true or false after each of these statements. Ms. Marshall 6th year business

24. Recent Exam Questions • 2013 Mock • SQ: Illustrate your understanding of the term limited liability. • SQ: Column 1 is a list of business terms. Column 2 is a list of explanations for these terms. (One explanation does not refer to any of the terms.) Ms. Marshall 6th year business

25. Recent Exam Questions • 2012 Mock • SQ Outline three features of a partnership as a form of business ownership. • 2010 (Don’t do part A) Ms. Marshall 6th year business

26. Recent Exam Questions • 2009 Q • Contrast job production and batch production, giving one appropriate example in each case. (10 marks) • 2008 SQ • Distinguish between working capital and equity capital (10 marks) • 2008 Q7 • Outline the benefits for a new business of preparing a Business Plan (15 marks) • 2007 Mock • (A) Explain the benefits to a business of preparing a marketing plan (20 marks). Ms. Marshall 6th year business

27. Recent Exam Questions • 2004 SQ • Name and illustrate three types of production (10 marks). • 2005 SQ • The following table shows three types of production and four qualities. For each quality, tick the type of production which is most likely to match that quality. Ms. Marshall 6th year business