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Sole Trader
A self-employed person who owns and runs their own business as an individual. A sole trader business doesn't have any legal identity separate to its owner. That leads many to say that as a sole trader you are the business and there is unlimited liability
Sole Trader - Advantages
Can be your own boss so get to make your own decisions
Few legal requirements to set up
Able to organise and run the business as you wish
Control over employees
Can choose how long and when to work
Sole Trader - Disadvantages
Unlimited liability – sole traders are personally responsible for al the debts of the business
Hard to gain finance which can make expansion difficult.
Often need to take advice from outside - consultants can be costly
Hard to take time off if sick or want to go on holiday
Unlimited Liability
Each business owner is equally responsible for whatever debt within a business. If the company is unable to repay or defaults on its debt an owner's personal wealth can be seized to cover the balance owed- they can take things that you have put in your contract as collateral.
Partnerships
A Partnership is a joint ownership of a business between 2 to 20 or more people. Often used by professionals - Lawyers, accountants, doctors, architects. They are subject to the Partnership Act 1908
Partnerships - Advantages
Partnership Agreement clearly creates a business agreement between the partners
Increased levels of capital available
Shared responsibility
Increased knowledge and specialism
All partners motivated due to sharing of profits
Partnership - Disadvantages
Unlimited Liability - like the sole trader
If business fails, partners will be forced to contribute their personal resources to settle debts
Partners can disagree on important decisions
It can be time consuming to reach a consensus
Partners can suffer if one partner is inefficient or dishonest
What is the Partnership Act
A legal agreement between Partners that specifies their roles, responsibilities, profit, dividends- a contract.
Limited Companies
Companies are jointly owned by people with an interest in and have invested in the business
Private Limited Companies
Unlike a publicly limited company, where shares are traded on the stock exchange, a private limited company does not publicly trade shares and you have to be invited to hold shares in the company
PLC - Advantages
All shareholders have limited liability – personal assets owned by the shareholders are NOT sold off to pay for company debts
A large number of people can purchase the shares
Additional shares can be issued in order to raise capital and expand the company
PLC - Disadvantages
Legal costs issues when being established
Cannot sell shares to public
Public is able to view accounts
Difficult to transfer shares, all shareholders have to agree
Public Limited Companies
A public limited company, or 'PLC' for short, is a company that is legally allowed to offer its shares for sale to the public. They don't have to offer shares to the public if they choose not to, but the option is there if and when needed.
Internal Funding
Contribution by existing owners into the business, eg retained profit (keeping back profit).
External Funding
Funds provided by a bank or other finance company, eg a loan, mortgage or overdraft.
Short Term Finance
Provides working finance for the day to day running of a business eg: IT system, pay bills, buy small equipment
Finance needed for up to three years
Medium Term Finance
Often needed to purchase capital goods, e.g. farm tractor or printing equipment.
Finance needed for three to five years
Long Term Finance
Usually used to purchase long term fixed assets, e.g. additional buildings or plant.
Finance needed for more than ten years
Internal Funding - Retained Profit
Owners take their share of the profit and then the rest is ploughed back into the business.
Does not have to paid back to other finance
No interest has to be paid like a loan
Reduced dividend made to share owners
Some businesses profits are too low to fund expansion
A new business will not have retained profit
Internal Funding - Sale of Existing Assets
Any assets not required by the business could be sold, e.g. surplus land
A good use of the business capital
Sometimes takes time to sell an asset
This option is not available to new businesses
Internal Funding - Running down stock levels to raise cash
This means that businesses do not replace sold stock as quickly (the shelves have less on them)
A relatively quick way to raise cash
Reduces cost of storing stock
Businesses need to be careful to ensure stock levels meet demand
Internal Funding - Owner’s Savings
An option for sole traders and partnerships
Quickly available
No interest payments
Increases risk for owner due to unlimited liability
Owner may not have the required savings
External Funding - Issues of shares
Only available to limited liability companies
Would not need to be repaid to shareholders so is therefore permanent
No interest payments
Shareholders expect to be paid a dividend
Dividend
% of the profits each year, depends on how many shares they own
External Funding - Bank Loans
Size of loan and length of repayment can vary
Usually quick to organise
Larger companies usually able to borrow large amounts of money compared to smaller businesses
Interest must be paid
Loan needs to be repaid
Security or collateral usually required (eg: they use your building as security)
External Funding - Grants or subsidies from outside agencies
E.g. the government
Usually do not have to repaid
Usually some ‘string attached’ – such as time to complete a certain job.
Short Term Finance - Overdraft
Businesses are given permission to ‘overdraw’ their bank account. This finance can be used for everyday expenses, such as, wages.
Overdrafts can vary each month
Overdrafts can be cheaper than a loan
Interest rates vary
Banks can call in the overdraft at any time
Short Term Finance - Trade Credit
When businesses delay paying their suppliers. A little like an interest free loan.
Suppliers may withdraw any discounts or refuse to work with the business in the future
Medium Term Finance - Bank Loans
Usually require monthly payments
Interest charged – can be high
A large loan is not required to purchase an asset (buildings, machinery – anything the business owns of value)
Cash deposit is paid at beginning of loan period
Medium Term Finance - Hire Purchase
Payable over a fixed period
Allows a business to buy a fixed asset and pay it off over a long period
Business does not need to find large amounts of cash at purchase of asset Interest needs to be paid – rate can be high
Medium Term Finance - Leasing
Enables business to use asset they can not afford to purchase
Monthly payments for lease required
Leasing company responsible for maintenance
Cost of leasing higher than purchasing asset
Long Term Finance - Issue Shares
Only available to limited liability companies
Private limited liability businesses sell shares privately to friends, family or business associates
Share issue provides permanent capital
No interest payments
Dividends paid to share owners
Long Term Finance - Long Term Loans
Interest paid
Must be repaid
Often need security
Internal Communication
When messages or information is sent to people working in the same business or organisation
e.g. an email sent out a team or department, a manager talking to employees
External Communication
Methods used to send messages between one business or organisation and another, or to individuals, such as customers
e.g- orders sent to suppliers of stock, advertising goods or services, emailing pricing to potential customers
One Way Communication
When a message is sent and the receiver has no opportunity to reply or respond. e.g. take these to the storeroom
Two Way Communication
When the receiver is able to reply or respond to the sender. Sender is able to see whether the receiver has understood the information
Verbal Communication
Involves the sender of the message speaking to the receiver,
e.g: Telephone conversation One-to-one conversations Meetings Video conferencing, such as Skype
Written Communication
E.g; Written, Letters, Memos, Reports, Notices, Faxes,
Visual
E.g; Films, Videos, Powerpoints, Posters, Charts / Diagrams
Effective Communication - why is it so important? Motivates employees
Easier to control and keeps the business on track
Makes successful decision making easier for managers
Better communication with customers
Improves relationships with suppliers
Improves chances of obtaining a loan
Better communication with customers will increase sales
Improve relationships with suppliers and possibly lead to more reliable delivery
Improves chances of obtaining finance – e.g. keeping the bank up-to-date about how the business is doing
Barriers to Effective Communication
Different status of the sender and the receiver – eg communication between the boss and the worker may not be understood due to their different levels.
Use of jargon – unfamiliar language that not everyone understands (eg: text language, abbreviations)
Selective reporting – where the sender gives the person incorrect information
Poor timing – when info is not immediately received it becomes irrelevant
Conflict – if the sender and receiver don’t get along then information can be ignored.
Responsibilities of an Employer
To make the workplace safe, and to ensure the health and safety of those working in or visiting the workplace you control.
To provide all employees with a contract.
An employer has a social responsibility, duty and obligation to it’s employees to pay them fairly for the work they do.
To pay their employees on time
An employer has a legal obligation to keep all personal information, including medical records, confidential.
Responsibilities of an Employer (pt.2)
All employers have a duty to maintain a healthy and safe work environment.
This means employers must:
Provide clean drinking water and clean toilet facilities;
Provide safe working conditions;
Provide medical assistance in the case of emergencies.
Pay workers when sick
Advantages of being a Good Employer
Motivated employees which could lead to:
employees who work hard for their employers
increased productivity happy working environment reduced stress
fewer days sick
high quality service or production
Disadvantages of being a Bad Employer
De-motivated employees, which could lead to them:
a. reducing productivity
b. providing poor production or service quality
c. employees striking or taking industrial action
d. breakdowns in communication and relationships with employers
e. increased complaints about pay and working conditions
f. increased levels of stress / days sick / unhappy workplace.
Responsibilities of an Employee
to take reasonable care of your own health and safety
to turn up to work on time and perform the duties outlined in your job description
to complete the tasks set by your manager to the best of your ability
be aware of the health and safety of colleagues
Don’t disclose the employer’s confidential information
Look after the employer’s property
Be prepared to change when the job changes
Be honest
Trial Period
Trial Period: All businesses provide you with an offer of employment that includes a trial period of up to 90 days. A trial period is voluntary, and must be agreed to in writing in good faith as part of your employment agreement. A trial period may be agreed to only if you have not previously been employed by the employer.
Examples of Statutory Rights
Rights:
Have a written employment agreement. Which is either an individual agreement or a collective agreement.
Be paid at least the national minimum wage
Not to have illegal deductions made from pay T
he right to paid holidays – 4 weeks at present T
he right to join a union (protection against employers)
The right to maternity leave (one year in NZ)
Not to be discriminated against
Rest and meal breaks
Public holidays off (or get a day in lieu if working)
Entrepreneur definition
An Entrepreneur is someone who is willing to take the responsibility, risk and rewards of starting and operating a business.
Entrepreneur skills
Communication skills
Negotiation skills
Leadership skills
Organisational skills
People skills Management skills
Time-management skills
Advantages of becoming an Entrepreneur
They are their own boss so they will get to make all the decisions
They now have full responsibility for the success of their business compared to being an employee
Get to keep all the profits and decide how to spend them
Disadvantages of becoming an Entrepreneur
Loss of permanent income when they give up regular jobs
On-going stress of whether their business will make money in the future and if it will be a success.
Business could end up in bankruptcy
No demand for their business
Characteristics of Entrepreneurs
Passionate, Enthusiastic, Hardworking, Responsible, Risk-taking, Creative
Entrepreneurs gain advice by..
Finding a mentor to assist
Speaking to a business banking manager
Retired business person
Local Chamber of Commerce
Risk and Reward
In business there is a positive relationship between risk and reward. The greater the risk taken by an entrepreneur, the greater the potential reward in terms of the profit they hope to make. Entrepreneurs will only take on a risky venture if they see a great return from it. There is also the possibility that they lose money too.
Business Aims and Objectives definition
Are aims or targets a business works towards.
Reasons for Aims
To increase profits
To improve market share (gaining more customers from your competitors)
To increase sales
To make a high quality product
To open another outlet
Benefits of having objectives
Helps owners to make decisions
Used to motivate employees
Helps guide the business to change or improve
Consequence of not meeting objectives
If businesses fail to stay on track they can drift into areas that are not relevant to their business. Examples:
Producing products with no demand
Spending money on equipment that is not appropriate to the needs of the business
Getting loans from the bank with no purpose for what it will be used for.
Staff can become unmotivated and owners may make poor decisions
In the long term, the business can stop producing profits and may be forced to close.
What is a Business Plan?
A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals.
It may also contain background information about the organisation or team attempting to reach those goals.
What is a Annual Report?
An annual report is a comprehensive report on a company’s activities throughout the previous year.
Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance
Contents in an Annual Report
Chairperson's report
Owner’s / CEO's report
Auditor's report
Mission statement
Financial Statements
Invitation to the company's AGM (Annual General Meeting)
What are Financial Documents?
The financial documents of a business are called its ACCOUNTS
Financial Statements are produced at the end of the financial year (usually 31st March) and show the profit or loss made by the business and the equity.
Accounts vs an Accountant
Definition: The financial records of a firm’s transactions Accountants
Definition: Are professionally qualified people who have responsibility for keeping accurate accounts and producing the final accounts
Assets
A resource of value that you own or lease that helps you run your business.
Liabilities
Everything your business owes, presently and in the future. These include loans, legal debts or other obligations that arise in the course of business operations.
Equity
Represents the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off.
Final Accounts/ Financial Statements
Are produced at the end of the financial year (usually 31st March) and give details of the profit or loss made over the year and the worth of the business.
Useful if the business is to be sold or the owner wants to get a loan from the bank.
Documents
During the year there are a large number of financial documents that are created as the business buys and sells goods and services.
Receipts
Invoices
Credit notes
Purchase orders
Statement of Accounts
The documents will be used by Accountants to:
keep records about suppliers
keep records about customers
provide the data for final accounts
Inland Revenue Requirements
IRD requires businesses to keep their documents for 7 years in case of queries.
The IRD may need to check what tax has been paid so a business must keep their invoices, bank statements and employee information either online or hard copies.
Who is interested in the accounts?
Business owner - to see if the business has made a profit or loss, what to spend the money on.
Managers/ Employees of the business - to see if the business has made a profit so their jobs are safe.
IRD -to see what tax must be paid if the firm makes a profit.
Bank Managers - to see if the firm can pay back the loans.
Creditors - suppliers that the business owes money to. To see if they can pay them back.
Potential investors or buyers - wanting to see if the business is a good investment.
Customers – to assess the strength of the business
Competitors – to compare their performance
**They all want to check on the company accounts to see the financial performance.
Cash Flow
To ensure that a business is able to pay all their invoices (bills) on time
To continue to receive supplies (the stock) required to run the business efficiently
Why Stakeholders are interested in cash flow?
Suppliers want to know if the business will be able to pay if offered credit. Suppliers require payment on time as they will have their own suppliers who will require payment by a certain date
The owners and other investors want to evaluate future growth potential
Employees are interested in the overall cashflow of the business so they continue to get paid
Creditors (banks) to see if the business can pay back their loans