Business studies – Revision SA 3 – Grade 9

Chapter 3,4,5

Q1: Limited companies are large businesses. Explain two features of Limited companies.

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Q2: Explain two differences of limited companies and private limited companies.

Difference1:___________________________________________________________________________

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Difference2:___________________________________________________________________________

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Q3: Public limited companies have to produce a Memorandum of Association. What information would

this document contain?

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Q4: Outline why going public is expensive?

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Q5: Discuss three advantages and three disadvantages of a business as a sole trader.

Advantages Disadvantages

Q5: Define entrepreneur.

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Q6:Discuss the role played by entrepreneurs in

business._____________________________________________________________________________

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Q 7: Define the following terms:

Franchise_____________________________________________________________________________

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Franchisee____________________________________________________________________________

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Franchisor____________________________________________________________________________

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Q8: What are the benefits of franchise to a franchisor?

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Q9: What are the benefits of franchise to a franchisee?

Q10: Outline why going public is expensive?

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Q11: Explain three ways in which Limited company differ from sole trader.
Difference1:___________________________________________________________________________

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Difference2:___________________________________________________________________________

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 Business studies

Chapter wise Revision notes

1.3 – Enterprise, Business Growth and Size

Entrepreneurship
An entrepreneur is a person who organizes, operates and takes risks for a new business
venture. The entrepreneur brings together the various factors of production to produce goods or
services. Check below to see whether you have what it takes to be a successful entrepreneur!
 Risk taker
 Creative
 Optimistic
 Self-confident
 Innovative
 Independent
 Effective communicator
 Hard working

Business plan - A business plan is a document containing the business objectives and
important details about the operations, finance and owners of the new business.

It provides a complete description of a business and its plans for the first few years; explains
what the business does, who will buy the product or service and why; provides financial
forecasts demonstrating overall viability; indicates the finance available and explains the
financial requirements to start and operate the business.

Some of the content of a regular business plan are:

 Executive summary: brief summary of the key features of the business and the business plan
 The owner: educational background and what any previous experience in doing previously
 The business: name and address of the business and detailed description of the product or service
being produced and sold; how and where it will be produced, who is likely to buy it, and in what
quantities
 The market: describe the market research that has been carried out, what it has revealed and
details of prospective customers and competitors
 Advertising and promotion: how the business will be advertised to potential customers and
details of estimated costs of marketing
 Premises and equipment: details of planning regulations, costs of premises and the need for
equipment and buildings
 Business organization: whether the enterprise will take the form of sole trader, partnership,
company or cooperative
 Costs: indication of the cost of producing the product or service, the prices it proposes to charge
for the products
 Finance: how much of the capital will come from savings and how much will come from
borrowings
 Cash flow: forecast income (revenue) and outgoings (expenditures) over the first year
 Expansion: brief explanation of future plans
Making a business plan before actually starting the business can be very helpful. By
documenting the various details about the business, the owners will find it much easier to run it.
There is a lesser chance of losing sight of the mission and vision of the business as the
objectives have been written down. Moreover, having the objectives of the business set down
clearly will help motivate the employees. A new entrepreneur will find it easier to get a loan
or overdraft from the bank if they have a business plan.

Government support for business startups

According to startup.com, “a startup is a company typically in the early stages of its
development. These entrepreneurial ventures are typically started by 1-3 founders who focus on
capitalizing upon a perceived market demand by developing a viable product, service, or
platform”.
Why do governments want to help new start-ups?
 They provide employment to a lot of people
 They contribute to the growth of the economy
 They can also, if they grow to be successful, contribute to the exports of the country
 Start-ups often introduce fresh ideas and technologies into business and industry
How do governments support businesses?
 Organise advice: provide business advice to potential entrepreneurs, giving them information
useful in staring a venture, including legal and bureaucratic ones
 Provide low cost premises: provide land at low cost or low rent for new firms
 Provide loans at low interest rates
 Give grants for capital: provide financial aid to new firms for investment
 Give grants for training: provide financial aid for workforce training
 Give tax breaks/ holidays: high taxes are a disincentive for new firms to set up. Governments
can thus withdraw or lower taxation for new firms for a certain period of time

Measuring business size

Businesses come in many sizes. They can be owned by a single individual or have up to 50
shareholders. They can employ thousands of workers or have a mere handful. But how can we
classify a business as big or small?

Business size can be measured in the following ways:

 Number of employees: larger firms have larger workforce employed

 Value of output: larger firms are likely to produce more than smaller ones
 Value of capital employed: larger businesses are likely to employ much more capital than
smaller ones
However, these methods have their limitations and are not always accurate. Example: When
using the ‘number of employees’ method to compare business size is not accurate as a capital
intensive firm ( one that employs a large amount of capital equipment) can produce large output
by employing very little labour (workers). Similarly, value of capital employed is not a reliable
measure when comparing a capital-intensive firm with a labour-intensive firm. Output value is
also unreliable because some different types of products are valued differently, and the size of
the firm doesn’t depend on this.

Business growth

Businesses want to grow because growth helps reduce their average costs in the long-run, help
develop increased market share, and helps them produce and sell to them to new markets.

There are two ways in which a business can grow- internally and externally.

Internal growth
This occurs when a business expands its existing operations. For example, when a fast food
chain opens a new branch in another country. This is a slow means of growth but easier to
manage than external growth.
External growth
This is when a business takes over or merges with another business. It is sometimes
called integration as one firm is ‘integrated’ into the other.
A merger is when the owner of two businesses agree to join their firms together to make one
business.
A takeover occurs when one business buys out the owners of another business , which then
becomes a part of the ‘predator’ business.
External growth can largely be classified into three types:

 Horizontal merger/integration: This is when one firm merges with or takes over another
one in the same industry at the same stage of production. For example, when a firm that
manufactures furniture merges with another firm that also manufacturers furniture.
Benefits:
 Reduces number of competitors in the market, since two firms become one.
 Opportunities of economies of scale.
 Merging will allow the businesses to have a bigger share of the total market.

 Vertical merger/integration: This is when one firm merges with or takes over
another firm in the same industry but at a different stage of production. Therefore,
vertical integration can be of two types:
 Backward vertical integration: When one firm merges with or takes over another firm
in the same industry but at a stage of production that is behind the ‘predator’ firm.
For example, when a firm that manufactures furniture merges with a firm that supplies
wood for manufacturing furniture.
Benefits:
 Merger gives assured supply of essential components.
 The profit margin of the supplying firm is now absorbed by the expanded firm.
 The supplying firm can be prevented from supplying to competitors.
 Forward vertical integration: When one firm merges with or takes over another firm in
the same industry but at a stage of production that is ahead of the ‘predator’ firm.
 For example, when a firm that manufactures furniture merges with a furniture retail store.
Benefits:
 Merger gives assured outlet for their product.
 The profit margin of the retailer is now absorbed by the expanded firm.
 The retailer can be prevented from selling the goods of competitors.
 Conglomerate merger/integration: This is when one firm merges with or takes over a firm in
a completely different industry. This is also known as ‘diversification’. For example, when a
firm that manufactures furniture merges with a firm that produces clothing.
Benefits:
 Conglomerate integration allows businesses to have activities in more than one country. This
allows the firms to spread its risks.
 There could be a transfer of ideas between the two businesses even though they are in
different industries. This transfer o ideas could help improve the quality and demand for the
two products.

Drawbacks of growth
 Difficult to control staff: as a business grows, the business organization in terms of departments
and divisions will grow, along with the number of employees, making it harder to control, co-
ordinate and communicate with everyone
 Lack of funds: growth requires a lot of capital.
 Lack of expertise: growth is a long and difficult process that will require people with expertise in
the field to manage and coordinate activities
 Diseconomies of scale: this is the term used to describe how average costs of a firm tend to
increase as it grows beyond a point, reducing profitability. This is explored more deeply in a later
section.

Why businesses stay small

Not all businesses grow. Some stay small, employ a handful of workers and have little output.
Here are the reasons why.

 Type of industry: some firms remain small due to the industry they operate in. Examples of
these are hairdressers, car repairs, catering, etc, which give personal services and therefore
cannot grow.
 Market size: if the firm operates in areas where the total number of customers is small, such as
in rural areas, there is no need for the firm to grow and thus stays small.

 Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of
them prefer keeping their businesses small and having a personal contact with all of their
employees and customers, having flexibility in controlling and running the business,
having more control over decision-making, and to keep it less stressful.
 Why businesses fail

Not all businesses are successful. The main reasons why they fail are:

 Poor management: this is a common cause of business failure for new firms. The main reason
is lack of experience and planning which could lead to bad decision making. New
entrepreneurs could make mistakes when choosing the location of the firm, the raw materials to
be used for production, etc, all resulting in failure
 Over-expansion: this could lead to diseconomies of scale and greatly increase costs, if a firms
expands too quickly or over their optimum level
 Failure to plan for change: the demands of customers keep changing with change in tastes and
fashion. Due to this, firms must always be ready to change their products to meet the demand of
their customers. Failure to do so could result in losing customers and loss. They also won’t be
ready to quickly keep up with changes the competitors are making, and changes in laws and
regulations
 Poor financial management: if the owner of the firm does not manage his finances properly, it
could result in cash shortages. This will mean that the employees cannot be paid and enough
goods cannot be produced. Poor cash flow can therefore also cause businesses to fail
Why new businesses are at a greater risk of failure
 Less experience: a lack of experience in the market or in business gets a lot of firms easily
pushed out of the market
 New to the market: they may still not understand the nuances and trends of the market, that
existing competitors will have mastered
 Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in
the market. At a stage when they’re not selling much, they are at a greater risk of failing
 Don’t have a lot of money to support the business yet: financial issues can quickly get the
better of new firms if they aren’t very careful with their cash flows. It is only after they make
considerable sales and start making a profit, can they reinvest in the business and support it
 1.4 – Types of Business Organizations
Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person. Sole traders can employ other
workers, but only he/she invests and owns the business.
Advantages:
 Easy to set up: there are very few legal formalities involved in starting and running a sole
proprietorship. A less amount of capital is enough by sole traders to start the business. There is
no need to publish annual financial accounts.
 Full control: the sole trader has full control over the business. Decision-making is quick and
easy, since there are no other owners to discuss matters with.
 Sole trader receives all profit: Since there is only one owner, he/she will receive all of the
profits the company generates.
 Personal: since it is a small form of business, the owner can easily create and maintain contact
with customers, which will increase customer loyalty to the business and also let the owner know
about consumer wants and preferences.
Disadvantages:
 Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken against
the investors, where their even personal property can be seized, if their investments don’t meet
the unpaid amount. This is because the business and the investors are the legally not separate
(unincorporated).
 Full responsibility: Since there is only one owner, the sole owner has to undertake all running
activities. He/she doesn’t have anyone to share his responsibilities with. This workload and risks
are fully concentrated on him/her.
 Lack of capital: As only one owner/investor is there, the amount of capital invested in the
business will be very low. This can restrict growth and expansion of the business. Their only
sources of finance will be personal savings or borrowing or bank loans (though banks will be
reluctant to lend to sole traders since it is risky).
 Lack of continuity: If the owner dies or retires, the business dies with him/her.
Partnerships

A partnership is a legal agreement between two or more (usually, up to twenty)people to own,

finance and run a business jointly and to share all profits.
Advantages:
 Easy to set up: Similar to sole traders, very few legal formalities are required to start a
partnership business. A partnership agreement/ partnership deed is a legal document that all
partners have to sign, which forms the partnership. There is no need to publish annual financial
accounts.
 Partners can provide new skills and ideas: The partners may have some skills and ideas that
can be used by the business to improve business profits.
 More capital investments: Partners can invest more capital than what a sole trade only by
himself could.
Disadvantages:
 Conflicts: arguments may occur between partners while making decisions. This will delay
decision-making.
 Unlimited liability: similar to sole traders, partners too have unlimited liability- their personal
items are at risk if business goes bankrupt
 Lack of capital: smaller capital investments as compared to large companies.
 No continuity: if an owner retires or dies, the business also dies with them.
Joint-stock companies

These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people can buy these shares (stocks) and become a shareholder (owner) of the company.
Therefore they are jointly owned by the people who have bought it’s stocks. These shareholders
then receive dividends (part of the profit; a return on investment).
The shareholders in companies have limited liabilities. That is, only their individual investments
are at risk if the business fails or leaves debts. If the company owes money, it can be sued and
taken to court, but it’s shareholders cannot. The companies have a separate legal identity from
their owners, which is why the owners have a limited liability. These companies
are incorporated.
(When they’re unincorporated, shareholders have unlimited liability and don’t have a separate
legal identity from their business).
Companies also enjoys continuity, unlike partnerships and sole traders. That is, the business will
continue even if one of it’s owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-to-day
activities. In small companies, the shareholders with the highest percentage of shares invested
are directors, but directors don’t have to be shareholders. The more shares a shareholder has, the
more their voting power.
These are two types of companies:
Private Limited Companies: One or more owners who can sell its’ shares to only the people
known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its’ shares to any
individual/organization in the general public through stock exchanges (see Economics: topic 3.1
– Money and Banking). Example: Verizon Communications.
Advantages:
 Limited Liability: this is because; the company and the shareholders have separate legal
identities.
 Raise huge amounts of capital: selling shares to other people (especially in Public Ltd. Co.s),
raises a huge amount of capital, which is why companies are large.
 Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells
interested individuals about the business, it’s activities, profits, board of directors, shares on sale,
share prices etc. This will attract investors.
Disadvantages:
 Required to disclose financial information: Sometimes, private limited companies are required
by law to publish their financial statements annually, while for public limited companies, it is
legally compulsory to publish all accounts and reports. All the writing, printing and publishing of
such details can prove to be very expensive, and other competing companies could use it to learn
the company secrets.
 Private Limited Companies cannot sell shares to the public. Their shares can only be sold to
people they know with the agreement of other shareholders. Transfer of shares is restricted here.
This will raise lesser capital than Public Ltd. Companies.
 Public Ltd. Companies requires a lot of legal documents and investigations before it can be
listed on the stock exchange.
 Public and Private Limited Companies must also hold an Annual General Meeting (AGM),
where all shareholders are informed about the performance of the company and company
 decisions, vote on strategic decisions and elect board of directors. This is very expensive to set
up, especially if there are thousands of shareholders.
 Public Ltd. Companies may have managerial problems: since they are very large, they
become very difficult to manage. Communication problems may occur which will slow down
decision-making.
 In Public Ltd. Companies, there may be a divorce of ownership and control: The
shareholders can lose control of the company when other large shareholders outvote them or
when board of directors control company decisions.
A summary of everything learned until now, in this section, in case you’re getting confused:

Franchises

The owner of a business (the franchisor) grants a license to another person or business (the
franchisee) to use their business idea – often in a specific geographical area. Fast food
companies such as McDonald’s and Subway operate around the globe through lots of franchises
in different countries.
 ADVANTAGES DISADVANTAGES

Rapid, low cost method of

business expansion Profits from the franchise
Gets and income from needs to be shared with the
franchisee in the form of franchisee
franchise fees and Loss of control over
royalties running of business

Franchisee will better If one franchise fails, it can

understand the local tastes affect the reputation of the
and so can advertise and entire brand
sell appropriately
Franchisee may not be as
Can access ideas and skilled
suggestions from
franchisee Need to supply raw
material/product and
Franchisee will run the provide support and
TO operations training
FRANCHISOR

Cost of setting up business

No full control over
business- need to strictly
follow franchisor’s
standards and rules

An established brand and Profits have to be shared

trademark, so chance of with franchisor
business failing is low
Franchisor will give Need to pay franchisor
technical and managerial franchise fees and royalties
support
Need to advertise and
Franchisor will supply the promote the business in the
TO raw materials/products region themselves
FRANCHISEE

Joint Ventures

Joint venture is an agreement between two or more businesses to work together on a project.
The foreign business will work with a domestic business in the same industry. Eg: Google Earth
is a joint venture/project between Google and NASA.
 Advantages
 Reduces risks and cuts costs
 Each business brings different expertise to the joint venture
 The market potential for all the businesses in the joint venture is increased
 Market and product knowledge can be shared to the benefit of the businesses
Disadvantages
 Any mistakes made will reflect on all parties in the joint venture, which may damage their
reputations
 The decision-making process may be ineffective due to different business culture or different
styles of leadership
Public Sector Corporations

Public sector corporations are businesses owned by the government and run by directors
appointed by the government. They usually provide essentials services like water, electricity,
health services etc. The government provides the capital to run these corporations in the form of
subsidies (grants). The UK’s National Health Service (NHS) is an example. Public corporations
aim to:
 to keep prices low so everybody can afford the service.
 to keep people employed.
 to offer a service to the public everywhere.
Advantages:
 Some businesses are considered too important to be owned by an individual. (electricity, water,
airline)
 Other businesses, considered natural monopolies, are controlled by the government. (electricity,
water)
 Reduces waste in an industry. (e.g. two railway lines in one city)
 Rescue important businesses when they are failing through nationalization
 Provide essential services to the people
Drawbacks:
 Motivation might not be as high because profit is not an objective
 Subsidies lead to inefficiency. It is also considered unfair for private businesses
 There is normally no competition to public corporations, so there is no incentive to improve
 Businesses could be run for government popularity
 1.5 – Business Objectives and Stakeholder Objectives
Business objectives

Business objectives are the aims and targets that a business works towards to help it run
successfully. Although the setting of these objectives does not always guarantee the business
success, it has its benefits.

 Setting objectives increases motivation as employees and managers now have clear targets to
work towards.
 Decision making will be easier and less time consuming as there are set targets to base decisions
on. i.e., decisions will be taken in order to achieve business objectives.
 Setting objectives reduces conflicts and helps unite the business towards reaching the same
goal.
 Managers can compare the business’ performance to its objectives and make any changes in
its activities if required.
Objectives vary with different businesses due to size, sector and many other factors. However,
many business in the private sector aim to achieve the following objectives.

 Survival: new or small firms usually have survival as a primary objective. Firms in a highly
competitive market will also be more concerned with survival rather than any other objective. To
achieve this, firms could decide to lower prices, which would mean forsaking other objectives
such as profit maximization.
 Profit: this is the income of a business from its activities after deducting total costs. Private
sector firms usually have profit making as a primary objective. This is because profits are
required for further investment into the business as well as for the payment of return to the
shareholders/owners of the business.
 Growth: once a business has passed its survival stage it will aim for growth and expansion. This
is usually measured by value of sales or output. Aiming for business growth can be very
beneficial. A larger business can ensure greater job security and salaries for employees. The
business can also benefit from higher market share and economies of scale.
 Market share: this can be defined as the proportion of total market sales achieved by one
business. Increased market share can bring about many benefits to the business such as increased
customer loyalty, setting up of brand image, etc.
 Service to the society: some operations in the private sectors such as social enterprises do not
aim for profits and prefer to set more economical objectives. They aim to better the society by
providing social, environmental and financial aid. They help those in need, the underprivileged,
the unemployed, the economy and the government.
A business’ objectives do not remain the same forever. As market situations change and as the
business itself develops, its objectives will change to reflect its current market and economic
position. For example, a firm facing serious economic recession could change its objective from
profit maximization to short term survival.
 Stakeholders

A stakeholder is any person or group that is interested in or directly affected by the

performance or activities of a business. These stakeholder groups can be external – groups that
are outside the business or they can be internal – those groups that work for or own the business.
Internal stakeholders:

 Shareholder/ Owners: these are the risk takers of the business. They invest capital into the
business to set up and expand it. These shareholders are liable to a share of the profits made by
the business.
Objectives:
 Shareholders are entitled to a rate of return on the capital they have invested into the
business and will therefore have profit maximization as an objective.
 Business growth will also be an important objective as this will ensure that the value of the
shares will increase.
 Workers: these are the people that are employed by the business and are directly involved in
its activities.
Objectives:
 Contract of employment that states all the right and responsibilities to and of the
employees.
 Regular payment for the work done by the employees.
 Workers will want to benefit from job satisfaction as well as motivation.
 The employees will want job security– the ability to be able to work without the fear of
being dismissed or made redundant.
 Managers: they are also employees but managers control the work of others. Managers are
in charge of making key business decisions.
Objectives:
 Like regular employees, managers too will aim towards a secure job.
 Higher salaries due to their jobs requiring more skill and effort.
 Managers will also wish for business growth as a bigger business means that managers can
control a bigger and well known business.
External Stakeholders:

 Customers: they are a very important part of every business. They purchase and consume the
goods and services that the business produces/ provides. Successful businesses use market
research to find out customer preferences before producing their goods.
Objectives:
 Price that reflects the quality of the good.
 The products must be reliable and safe. i.e., there must not be any false advertisement of the
products.
 The products must be well designed and of a perceived quality.
 Government: the role of the government is to protect the workers and customers from the
business’ activities and safeguard their interests.
Objectives:
 The government will want the business to grow and survive as they will bring a lot of
benefits to the economy. A successful business will help increase the total output of the
 country, will improve employment as well as increase government revenue through
payment of taxes.
 They will expect the firms to stay within the rules and regulations set by the government.
 Banks: these banks provide financial help for the business’ operations’
Objectives:
 The banks will expect the business to be able to repay the amount that has been lent along
with the interest on it. The bank will thus have business liquidity as its objective.
 Community: this consists of all the stakeholder groups, especially the third parties that are
affected by the business’ activities.
Objectives:
 The business must offer jobs and employ local employees.
 The production process of the business must in no way harm the environment.
 Products must be socially responsible and must not pose any harmful effects from
consumption.

Public- sector businesses

Government owned and controlled businesses do not have the same objectives as those in the
private sector.

Objectives:
 Financial: although these businesses do not aim to maximize profits, they will have to meet the
profit target set by the government. This is so that it can be reinvested into the business
for meeting the needs of the society
 Service: the main aim of this organization is to provide a service to the community that must
meet the quality target set by the government
 Social: most of these social enterprises are set up in order to aid the community. This can be by
providing employment to citizens, providing good quality goods and services at an affordable
rate, etc.
 They help the economy by contributing to GDP, decreasing unemployment rate and raising
living standards.
This is in total contrast to private sector aims like profit, growth, survival, market share etc.

Conflicts of stakeholders’ objectives

As all stakeholders have their own aims they would like to achieve, it is natural that conflicts of
stakeholders’ interests could occur. Therefore, if a business tries to satisfy the objectives of one
stakeholder, it might mean that other stakeholders’ objectives could go unfulfilled.

For example, workers will aim towards earning higher salaries. Shareholders might not want
this to happen as paying higher salaries could mean that less profit will be left over for payment
of return to the shareholders.
Similarly, the business might want to grow by expanding operations to build new factories. But
this might conflict with the community’s want for clean and pollution-free localities.