Entrepreneurs Create & set-up a Business

 An entrepreneur is a person who is willing and able to create a new business

idea or invention and takes risks in pursuing success
o Successful entrepreneurs can identify and pursue opportunities, create
value for customers and build thriving businesses

What do Entrepreneurs do?

They Organise Resources They make Business Decisions They take R

 Entrepreneurs must be able to  Entrepreneursh
make decisions that will taking risks - fi
determine the success or failure personal, or pro
 An entrepreneur must be able to
of their business
gather and coordinate the
 E.g. A restaurant owner may  E.g. An entrepr
resources necessary to start and
need to decide what type of food invest their life
operate a business
to serve, where to locate the new venture or
 E.g. When Michael Dell started
restaurant, and what prices to job to start thei
his computer company from his
charge. These decisions require o They m
garage, he had to organise
a combination of market risks by
resources such as space,
research, creativity, and business new pro
computers, software tools, and
skill entering
employees, and manage the
 Making the wrong decisions can  These risks can
finances
lead to wasted resources, lost great rewards, b
opportunities, and ultimately also lead to fail
business failure financial loss

Characteristics & Skills Required by Entrepreneurs

 Entrepreneurs require a unique set of characteristics and skills
The skills and characteristics required by entrepreneurs include communication,
creativity and resilience
 Successful entrepreneurs tend to be very persuasive in their communication and
decisive in their decision-making

Characteristics of Successful Entrepreneurs

Characteristic Explanation
 Entrepreneurs take financial, personal, or professional risks
 An entrepreneur may invest their life savings into a new venture or quit a secure
their own business
Risk taker o They may also take risks by introducing new products or entering new m
o These risks can payoff with great rewards, but they can also lead to failu
loss

Decision maker  Entrepreneurs must be able to make decisions that will determine the success or
business
o E.g. A restaurant owner needs to decide what type of food to serve, wher
 restaurant, and what prices to charge
o These decisions require a combination of market research, creativity, and
skills
o Making the wrong decisions can lead to wasted resources, lost opportuni
ultimately business failure

 An entrepreneur must be able to gather and coordinate the resources necessary t

operate a business
Organised o E.g. When Michael Dell started his computer company from his garage,
organise resources such as space, computers, software tools, employees,

 Developing new solutions to solve existing or emerging problems is a key entre

that helps a business stand out from rivals and achieve success
o During the 2020 COVID-19 pandemic, many businesses used their creat
Creative
production techniques to cater for what the market wanted
o E.g Harrogate Gin switched from producing gin to hand sanitiser

 Entrepreneurs need to be persuasive communicators

Great  Persuading lenders, investors and customers to support their business is central t
communicator financial success

 Starting a business is often the sole responsibility of a single entrepreneur, who

able to solve problems with limited support
o E.g. The owner of Gymshark, Ben Francis, started off the company by b
Independent machine and making gym clothes in his parents garage with a few schoo
 This led to the growth of a multi million pound company employ
of people

EXAMINER TIP

Think about why successful entrepreneurs are important in the country that you are
based in. You should be able to explain why governments want to encourage more
entrepreneurs to set up in businesses there. Entrepreneurship drives business growth
and innovation, and knowing some examples of real life entrepreneurs who have
inspired you may help you to remember their skills and qualities (Mark Zuckerberg or
Elon Musk?)

Contents of a Business Plan

 A business plan is a document produced by the owner at start-up, which provides
forecasts of items such as sales, costs and cash flow
The main elements included in a business plan, although some differ slightly
depending on the nature of the business
 Producing a business plan forces the owner to think about every aspect of the
business before they start, which should reduce the risk of failure

Elements of a Business Plan

Element Explanation
 A clear explanation of the goods or services provided by the business which
investors
The business idea
o This may also include the history of the business idea

 What the business wants to achieve in the medium and long term
Business aims &
o These aims may be both financial and non-financial depending on the b
objectives
Target market  This section explains who the business is aimed at e.g. age, gender, income a
 part of the firms marketing strategy

 This section projects how much income the business plans to make through
o Sales Revenue = Price x Quantity Sold
Forecast revenue
o This can help plan for break even levels of output

 Firms need to forecast their fixed, variable and total costs in order to manage
Forecast costs o Some new businesses may have high start up costs, e.g. new stock

 Investors will be interested to see the firms profit forecasts to see whether the
Profit forecasts have the ability to pay back loaned funds e.g. bank

 An explanation of the firms marketing strategy for the product/service wh

how the firm plans to attract customers
Marketing mix
o This includes Product, Place, Price and Promotion

 This explains how the firm plans to manage its inflows and outflows of cash
Cash-flow forecast basis in order to avoid liquidity problems

 This section shows the sources of finance used to fund the new business e.g
Sources of finance funds or venture capital

 The location of the business is proposed, including a map along with an expl
Business location potential advantages such as transport links or proximity to customers

How Business Plans help Entrepreneurs

 The main aim of producing a business plan is to reduce the risk associated with
starting a new business and help the owners raise finance
 Having carried out research to support the plan, the business will be well-
informed about the potential problems and chance of success
 A well-written business plan can help a business obtain finance
o Lenders (e.g. banks) and other investors will be able to explore the plan
and make an informed decision about whether the business is credible
and worth the financial risk
o Investors (e.g. venture capitalists) will use the business plan to explore
whether there is an opportunity to increase the value of their
investment and make a worthwhile profit
 A clear action plan provides direction for the business and helps lenders and
investors have confidence in the future success of the business
 Most high street banks can provide a detailed template for business owners to
complete when applying for finance

Government Support of Business Start-ups

 Governments often provide support to entrepreneurs
o This encourages them to set up new businesses or take steps to grow
their business
 Reasons for providing government support include:
o Increase the country's level of output to achieve economic growth
 o Reduce the level of unemployment as new or growing businesses create
jobs
o Improve choice for consumers by providing competition for existing
businesses
 Encourage entrepreneurs to set up social enterprises which may support
disadvantaged groups or improve communities

How Governments Support Business Start-ups

Support Explanation
 Advice regarding finance, operations and marketing can often be access
local authorities
Training and
 Support sessions offered by business mentors allow entrepreneurs to ask sp
support sessions
questions related to their business

 Enterprise zones are geographic areas which provide tax breaks and Govern
help businesses grow
o Enterprise Zones can provide access to low-cost premises and incen
Enterprise zones reduced business rates
o They are often linked with universities that share expertise and facil
in less economically-developed regions

 Some governments provide low-interest start-up loans and grants for new
Finance businesses that create jobs or invest in training workers

Last updated: 11 June 2024

Methods of Measuring Business Size

 A simple way to classify businesses is to consider their size
Business size can be measured in several ways, including the size of the workforce, the
value of capital employed and the value of sales or output

Size of the workforce

 A measure of how many workers are in the business

 Small and medium-sized businesses (SMEs) employ less than 250 employees

 Large businesses have 250 or more employees

Value of capital employed by the business

 A measure of all the capital (money, equipment, buildings) that is currently

invested in a business

Value of business sales

 The total sales revenue achieved during a trading period

 It is calculated using the formula Price x Quantity

Value of business output

 The financial worth of goods produced, even though they may not all be sold
  It is calculated using the formula Total Costs x Quantity

Comparing Business Size

Company Size of the Workforce Capital Employed Value of O

 4 Designers

 5 Maintenance  High tech production line -  500 Microchip

Futuristic
staff $100,000 = $500,000
Microchips
 9 Total employees

 400 Farm workers

 Basic fruit-picking tools
 18 Managers  500, 000 oran
Tasty Satsumas $1= $500,000
 $20,000
 418 Total
employees

 Futuristic Microchips is the largest organisation using the measures of number

of employees and capital employed

 Tasty Satsumas is the same size as Futuristic Microchips in terms of the

value of output

Stakeholder interest in business size

 Banks wish to know how likely any loans will be repaid

o Larger businesses may present less of a lending risk

 Employees wish to know how secure their jobs are

o A growing business is likely to offer job security

 Suppliers may prefer to sell products to larger businesses

o Large business are likely to purchase in greater quantities

 Investors compare business size to distinguish between investment

opportunities

 Competitors may set growth objectives or benchmark their progress against

similar-sized rival businesses

 Governments apply different tax rates for small and large businesses

o Larger firms may need careful monitoring to ensure they do not abuse
their market power

EXAMINER TIP
When comparing business size, it is best to compare like with like, such as weighing up
an orange producer with other fruit producers

Limitations of the Methods of Measuring Business

size
 Each method of measuring business size has significant limitations

Limitations of Measures of Business Size

Method Limitations
 The method of production can influence this metric significantly

o Capital-intensive businesses produce high levels of output with few emp

o Labour intensive businesses have many employees that may generate a s

of output
Size of the
workforce  The nature of workers' contracts can make this measure unreliable

o Some businesses hire many part-time workers, while others prefer full-t

o Short-term, zero hours or agency worker contracts may not be included

measurement

 Not accurate when comparing labour-intensive and capital intensive productio

o European manufacturing businesses tend to have high levels of capital, s

or advanced machinery, compared to those located in countries such as
Indonesia
Value of capital
employed
o Property values differ significantly across the world, and even between

 E.g. The value of property in Singapore is significantly greater tha

mainland China

 Businesses sell very different products

o Comparing a market stall selling sweets with a retailer of luxury handbag

unrealistic, as their prices and volumes sold are very different
Value of sales
 Selling prices vary between markets

o Businesses may sell products to customers in low-income markets at a lo

in a higher-income market

Value of output  High value output can be produced by businesses with very few employees or w
capital employed
 o E.g. A bespoke jewellery maker may produce only a few expensive items

 The value of output does not measure how successful a business has been at selli
produced. If they are left unsold, they are a poor measure of business size

EXAMINER TIP

Profit is not a measure of business size. If a multinational like Netflix makes a loss, it
does not mean that a sole-trader hairdresser who earns a profit is a larger organisation.

Last updated: 11 June 2024

Reasons for Business Growth

 Many firms start small & will grow into large companies or even multi-national
corporations

o E.g. Amazon and Dell both started in entrepreneurs' garages

Reasons why Businesses Grow

 The owner's or manager's

 The owner's desire  The desire for stro
desire to run a large
for higher levels of market power (monopoly)
business & continually seek
share and profitability customers and supp
to grow it

 The desire to reduce costs

 Larger firms often
by benefiting from  Growth provides opportunities
access to finance
lower unit costs as output for product diversification
increases

Methods of Business Growth

 Business growth can be achieved by growing organically,
or inorganically (mergers and takeovers)

Organic (Internal) growth

 Organic growth is growth that is driven by internal expansion using reinvested
profits or loans

 It is usually achieved by:

o Gaining a greater market share

o Product diversification

o Opening new outlets

o International expansion (new markets)

 o Investing in new technology/production machinery

Examples of Organic Growth

Business Explanation
 International Expansion (new markets)
Apple expanded into new markets by opening its stores in new countries, such as China a
by partnering with telecom providers to sell its products.
Apple
 This helped them to organically increase their market share, sales revenue and profitab

 Product Innovation
Google introduced new products, such as Google Drive and Google Maps, to complemen
engine and advertising businesses
Google
 This helped them to organically increase their market penetration, sales revenue and prof

 Product Diversification
Disney has diversified into several areas, such as theme parks, cruise lines, television netw
movie studios.
Disney
 The brand strength has helped them organically increase market penetration in each of t
resulting in higher sales revenue and profitability

 Product diversification opens up new revenue streams for a business

o Firms may spend money on research and development, or

innovation to existing products to help create a new revenue stream

 Firms will often grow organically to the point where they are in a financial
position to integrate (merge or buy) with others

o Integration speeds up growth but also creates new challenges

Evaluation of Internal Growth

Advantages Disadvantages
 The pace of growth is manageable
 The pace of growth can be slow and frustratin
 Less risky as growth is financed by profits
 Not necessarily able to benefit from lower un
and there is existing business expertise in the
bulk purchasing discounts from suppliers) as
industry
would be able to
 The management knows & understands every
 Access to finance may be limited
part of the business

Inorganic (External) growth

 Firms will often grow organically to the point where they are in a financial
position to integrate (merge or takeover) with others
 o Integration in the form of mergers or takeovers results in rapid business
growth and is referred to as external or inorganic growth

 A merger occurs when two or more companies combine to form a new

company

o The original companies cease to exist and their assets and liabilities are
transferred to the newly created entity

 A takeover occurs when one company purchases another company, often

against its will

o The acquiring company buys a controlling stake in the target

company's shares (>50%) and gains control of its operations

Vertical integration

 Vertical integration refers to the merger or takeover of another firm in the

supply chain or different stage of the production process

o Forward vertical integration involves a merger with or takeover of a

firm further forward in the supply chain

 E.g. A dairy farmer merges with an ice cream manufacturer

o Backward vertical integration involves a merger with or takeover of a

firm further backwards in the supply chain

 E.g. An ice cream retailer takes over an ice cream manufacturer

A firm can grow through forward or backward vertical integration, merging with or taking
over another business in the supply chain

Horizontal integration
  Horizontal integration is the merger or takeover of a firm at the same stage of the
production process

o E.g. An ice cream manufacturer merges with another ice cream

manufacturer

Evaluation of Types of Growth

Type of
Advantages Disadvantages
Growth
 Reduces the cost of production as middle
man profits are eliminated
 Diseconomies of scale occu
 Lower costs make the firm more competitive increase e.g. unnecessary du
management roles
 Greater control over the supply chain reduces
risk as access to raw materials is more certain  There can be a culture clash
Vertical
two firms that have merged
Integration
 Quality of raw materials can be controlled
(Inorganic
 Possibly little expertise in r
growth)
 Forward integration adds additional profit as firm results in inefficiencies
the profits from the next stage of production
are assimilated  The price paid for the new f
long time to recoup
 Forward integration can increase brand
visibility

 Rapid increase of market share

 Reductions in the cost per unit due

 Diseconomies of scale may
to economies of scale
Horizontal increase e.g. unnecessary du
Integration management roles
 Reduces competition
(Inorganic
growth)  There can be a culture clash
 Existing knowledge of the industry means the
two firms that have merged
merger is more likely to be successful

 Firm may gain new knowledge or expertise

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Problems Caused by Business Growth

 In some cases, growing the size of a business can fail to improve
its profitability and can lead to cash flow and coordination problems
Businesses are often faced with a range of challenges when they grow
Problems and Solutions of Business Growth

Problem Explanation Solution

 Use the latest communic
 Longer chains of command and technologies, such as inst
wider spans of control for managers may calls, to improve commun
Poor
lead to slower decision-making times and between managers and wo
communication
inefficiency  Decentralisation may hel
decision-making

 Operate as a series of sma

units which allows local o
 As a business grows in size, it can
Larger firms are area managers to have mo
experience diseconomies of scale such as
often harder to  Increase delegation in ord
poor co-ordination of resources
control to empower workers and
more quickly
  Expansion can be very expensive as it may
 Grow slowly using profit
involve developing a new product range or
loans to fund gradual and
buying a new factory
expansion
High costs and o High costs in the short/medium
 Manage cash flow carefu
cashflow problems term means the business may need
of retained profits and sho
additional finance to avoid
borrowing to counter cash
cashflow problems

 Ensure good communicati

 A culture clash may occur if a merger or employees are less likely
Difficulties of acquisition takes place between two to change
mergers and different firms due to different  Take time to carefully neg
acquisitions management styles mergers/acquisitions to re
problems'

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Why Some Businesses Remain Small

 Some entrepreneurs choose for their business to remain small
o In 2021, 98.9% of businesses in the European Union (EU) were classified
as small firms with less than 49 employees
o Small businesses dominate some industries, such as hair and beauty,
home improvement and childcare services

Reasons why Small Firms Exist

They offer a personalised service and They provide a prod

They are unable to access external
focus on building relationships with a niche market - sm
finance for expansion
customers (excellent customer service) but potential for h
By remaining small they are able Rapid growth can cause diseconomies Small business ow
to respond quickly to changing customer of scale which can be avoided by is (satisficing) rath
needs/preferences remaining small maximisat
 While developments in technology often benefit large businesses, some can
work to the advantage of small firms
 The Internet offers low cost access to market for many firms
o Social media allows even the smallest business to achieve an online
presence and target specific groups of customers
o Online storefronts such as Amazon Marketplace, Etsy and Ebay provide
low-cost distribution options

Evaluation of Remaining Small

Advantages Disadvantages
 Small firms often provide highly  Small firms are unlikely to b
customised or unique goods/services which are sold from economies of scale as
profitably in small quantities at high prices e.g. pet grooming output is lower than that of la
in the customer's home  Access to finance such as ba
 Personal relationships can be developed with loyal or trade credit is likely to be
customers which helps to generate word-of-mouth advertising  Recruiting/retaining high q
 staff can be challenging as w
wage benefits are less compe
 Smaller firms can respond quickly to changing market those offered by bigger firms
conditions such as changes in fashions/trends  Small business owners may s
take holidays/sick leave as t
relies on their presence to fun

EXAMINER TIP

Do not focus too much on making a judgement about whether businesses are better big
or small. Businesses of all sizes can - and do - succeed

It is more important consider whether the size of the business allows it to achieve its
overall aim and whether other factors such as its culture and organisational structure
contribute to its success

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Causes of Business Failure

 Business failure is a risk to both new and established businesses
o In 2021, an average of 8% of businesses in EU countries failed
 The highest failure rate was in Estonia, where almost one in four
businesses failed
 The lowest failure rate was in Greece, where just over 2% of
businesses failed
 New businesses are often more at risk of failure than well-established
businesses
o This is often due to lack of management skills, limited
experience or cashflow problems during the initial start-up phase
o The volume and variety of tasks required of new business owners can
be overwhelming
o Market research is unlikely to be detailed, as small business owners may
lack the skills to understand findings and make effective decisions

The Main Reasons why Some Businesses Fail

Financial Factors Poor Management

 A business may be unable to generate
enough revenue to sustain its operations  Lack of experience can lead to poor decis
 Costs may rise sharply and eliminate profit product range, pricing or promotional acti
margins  Making decisions based on hunches rathe
 Cash shortages mean that creditors cannot be research
paid what they are owed  Ineffective coordination and planning o
 Limited access to finance, such as loans/trade operations, such as stock purchasing or sta
credit can be particularly problematic for start- increase costs
ups

External Factors Overtrading

 Ineffective or delayed response to new  This occurs when a business expands too
 technology, powerful new competitors and
major economic change  Poor coordination and planning of grow
 Changes in laws or taxation can increase to diseconomies of scale, which increases
pressure on businesses to make difficult choices

EXAMINER TIP

It is worth remembering that making losses does NOT always mean business failure. In
many cases, businesses make little (if any) profit in the early stages of operation. This is
because they invest in order to increase sales, which should increase profitability in the
long run

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