chapter 15 – business start up

Ms. Marshall 6th year business

Chapter 15 – Business Start Up

Usually Q6, 7 in Long question’s


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


Why do people set up their own business?

Independence Profit Redundancy Spotting an Opportunity Ambition


Short term FinanceBusinessSourcesBank overdraftCreditors – trade creditAccrued ExpensesTaxationFactoringUses:Purchase stockPay wages/expensesPay creditors

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.


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.


Medium TermBusinessSourcesHire PurchaseLeasingTerm LoanUses:ComputersOffice EquipmentVehiclesMachinery

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.


Long Term FinancesBusiness

Sources

Debenture

Share Capital

Grants

Uses

Purchase of land and buildings

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


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


Factors to consider – Short term finances

Bank Overdraft

Trade Credit Accrued Expenses

Cost Interest on amount overdrawn

Free source but interest may be charged if overdue

Free source - no interest

Risk Full repayment could be demanded

Damage to credit rating.

Damage to credit rating.

Security None None NoneControl Full Full Full


Factors to consider: medium term finances

Medium Term Loan

Leasing Hire Purchase

Cost Interest Tax deductible High interestRisk Damage to

credit rating, loss of assets

Damage to credit rating, repossession

Damage to credit rating, repossession

Security May be required None NoneControl Full Full Full


Factors to consider: long term finance

Equity Capital Long term loans

Government grants

Cost Dividend paid to shareholders – negotiable

Interest None – as long as conditions are met

Risk Loss of capital if business goes bankrupt.

Damage to credit rating, loss of assets

Recalled if conditions not met

Security No Yes NoControl Loss/dilution Full Full


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.


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.


Organisational StructureSole Trader Partner LTD. Co

Formation & Dissolution Easy to set up.Register with Revenue for tax.Register name if different.No continuity

Easy to set up.Register with Revenue for tax.Register name if different.Deed of Partnership – contract drawn up before setting up.No continuity.

Register with Revenue.Register with CRO.Continuity.LTD after name.

Ownership & Control Owned & controlled by one ownerConfidential business

Owned & controlled by partners.Confidential business.

Owned by shareholders.Controlled by BOD.Not confidential.One share=one vote.

Management & Finance Decisions made by one owner.Raising finance can be difficult.Often long hours & a lot of stress.

Decisions made by partners.More partners = more finance but dilution of ownership.Stress & hours shared.

Decisions made by BOD with shareholder approval.Finance can be raised by selling shares, but NOT on stock exchange.

Profits & Risk Keeps all profits.Pays income tax.Unlimited liability.

Share profits. Pay income tax.Unlimited liability.

Profits shared.Corporation tax paid.Limited liability.


Production OptionsJob Batch MassSpecific Customer Order

The production of certain quantities of identical products in one production run and then production switches to a different batch

Large numbers of identical products

One -off Skilled or semi skilled labour

Continuous production

Not produced to be held in stock

Flexible machines Produced for stock and sold

Highly skilled Average price Low labour costs – high automation

Expensive Held in stock Unit cost decrease as economies of scale apply


ExamplesJob Batch MassWedding Dress Clothes Chocolate bars e.g.

Turkish DelightCrystal Textbooks Toilet paperHand crafted furniture Bakery – bread,

cakes, croissants Pens


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.


Business Plan headings Description of the Business Market Analysis Marketing Plan Production Plan Finance Plan

See P288

A document that sets out the objectives of a business and

the strategies by which these will be achieved.


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.


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.


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.


2002


Recent Exam Questions 2013 SQ Outline two characteristics of a private limited company. 2013 SQ. Write true or false after each of these statements.

Sentence True or False

1 Batch Production is used when making a single, one off, unique product.

2 In a Hire Purchase agreement legal ownership of the good transfers when the first instalment is made.

3 A Cash Flow deficit can be addressed by negotiating a shorter period of credit with debtors.

4 A sole trader is an ownership structure that benefits from limited liability.

5 When a company’s equiity capital is greater than its debt capital it has low gearing.


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.)

Terms Explanation1. Insolvent A. An asset that a lender has a claim to if the loan is not repaid.2. Collateral B. All finance belonging to ordinary shareholders in the business. 3. Factoring C. Business is closed and all assets are sold off to clear debts that are

owed.4. Liquidation D. The selling of the debt of a business at a discount in order to raise

cash.5. Equity Capital E. The business is unable to pay its debts, total liabilities exceed total

assets. F. A medium term source of finance offered by financial institutions.

1 2 3 4 5


Recent Exam Questions 2012 Mock SQ Outline three features of a partnership as a form of business

ownership. 2010 (Don’t do part A)


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).


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.

Job Batch MassUnique ProductsGroups of productsHighly skilled labourExpensive products.

chapter 15 – business start up

Documents

business term loan

short term loan

business planms

short term assets

short term source of

short term expenditure

year businesswhy

finance company