Business Plans

Why do businesses create plans.

It is important for any new or existing business to create a plan in order to have an understanding of how it plans to achieve its aims and objectives. There are 4 key reasons why businesses create plans:

Illustrative background for Important for new businesses

Important for new businesses

  • When Peter Jones and Theo Paphitis invested in Levi Roots Reggae Reggae Sauce, they asked to see Levi’s business plan before they committed to providing their expertise and investment.

Illustrative background for Raising finance

Raising finance

  • To decide whether to give finance to a business, investors and banks need in-depth financial information.
  • When Facebook raised finance from venture capitalists to grow and when Snap Inc listed on the New York Stock Exchange they had to provide business plans.

Illustrative background for Setting objectives

Setting objectives

  • A plan lets a business clearly set out what the business’ objectives are and how they are going to go about achieving them.
  • These specific business objectives help firms to achieve their aims as they are measurable targets for the firm to work towards.
  • It also allows a business to see which areas (growth, sales, profits etc.) they need to improve and which they are doing well on. If they fail to meet an objective then it can be easier to understand why it was not met.

Illustrative background for Business organisation

Business organisation

  • By detailing how functions of the business will be organised, a business plan can help improve the way that a business is run.
  • A local cafe can plan its purchasing, pricing and staffing in a business plan that can help it manage its operations.

The Main Parts of a Business Plan

There are lots of different ways to structure a business plan. However, some sections are very important and are almost always included.

Illustrative background for Executive summary

Executive summary

  • The executive summary should be a concise overview of the entire business plan.

Illustrative background for Mission statement

Mission statement

  • A mission statement says what a company wants to achieve.

Illustrative background for Products or services

Products or services

  • This section should clearly describe which products or services the company sells and why customers will benefit from this.
  • This also may include what a product’s unique selling point (USP) is. The USP of a product or service is how this product or service is different (or unique) from the products or services offered by the competition.

Illustrative background for Market analysis

Market analysis

  • Analysis of competitors – Who the main competition are and where they are positioned in the market.
  • Analysis of customers – The different customer segments and which of these will be the ‘target market’.

Illustrative background for Organisation and management team

Organisation and management team

  • This will outline the company’s organisation structure and provide personal details of the owners and other important personnel.

Illustrative background for Production details

Production details

  • This will outline how a firm will produce its products or provide its services.
  • This includes things like the location of factories, who the suppliers will be, what materials will be needed and how much they will cost.

Illustrative background for Finance

  • Cost and profit - This includes detailed outlines of the forecasts for cost, revenue and profit.
  • This section usually includes a cash-flow forecast and projected profit and loss account for the first 12 months of trading.
  • Sources of finance - This section often includes details of how a company will fund investment if it is required.

Advantages and Disadvantages of a Business Plan

There are advantages and disadvantages of creating business plans.

Illustrative background for Advantages

  • Business plans provide parameters for setting targets.
  • Management can check staffing, incomes, product ranges and lots of other things against previous business plans and expansion plans.
  • A business plan can be used as a benchmark against outcomes like cashflow, production outcomes or service delivery. The plan can also be compared to the behaviour of competitors and the business’ own performance in past years.

Illustrative background for Disadvantages

Disadvantages

  • Businesses need to be flexible and able to adapt to a changing environment. A business plan may stop a company changing.
  • Business plans can be costly and time consuming to make. If an entrepreneur has less time to spend designing a good product and selling to customers, then the time spent making a business plan may be negative for the business.
  • Also, forecasts of revenue and profit may be misleading and lead to bad decisions.

1 Enterprise & Entrepreneurship

1.1 The Dynamic Nature of Businesses

1.1.1 The Dynamic Nature of Businesses

1.1.2 Risk & Reward

1.1.3 The Role of Business Enterprise

1.1.4 The Role of Business Enterprise 2

1.1.5 The Role of the Entrepreneur

1.1.6 End of Topic Test - Dynamic Nature of Business

1.1.7 Grade 9 - Dynamic Nature of Business

1.2 Spotting a Business Opportunity

1.2.1 Customer Needs

1.2.2 Market Research

1.2.3 Market Segmentation

1.2.4 The Competitive Environment

1.2.5 Primary & Secondary Market Research

1.2.6 End of Topic Test - Business Opportunities

1.2.7 Application Questions - Business Opportunities

1.2.8 Exam-Style Questions - Market Segmentation

1.3 Putting a Business Idea into Practice

1.3.1 Business Aims

1.3.2 Business Objectives

1.3.3 Business Revenues & Costs

1.3.4 Costs - Calculations

1.3.5 Revenue - Calculations

1.3.6 Business Profits & Break-Even Analysis

1.3.7 Profits & Losses - Calculations

1.3.8 Interest - Calculations

1.3.9 Cash & Cash Flow

1.3.10 Cash & Cash Flow 2

1.3.11 Cash Flow - Calculations

1.3.12 Sources of Business Finance

1.3.13 End of Topic Test - Business in Practice

1.3.14 Grade 9 - Business in Practice

1.3.15 Exam-Style Questions - Business in Practice

1.4 Making the Business Effective

1.4.1 The Options for Start-Up & Small Businesses

1.4.2 Limited Liability

1.4.3 Franchising & Not-For-Profits

1.4.4 Business Location

1.4.5 The Marketing Mix

1.4.6 Business Plans

1.4.7 End of Topic Test - Effective Business

1.4.8 Application Questions - Effective Business

1.4.9 Exam-Style Questions - Business Plans

1.5 Business Stakeholders

1.5.1 Business Stakeholders

1.5.2 Technology & Business

1.5.3 Legislation & Business

1.5.4 Legislation & Business 2

1.5.5 The Economy & Business

1.5.6 External Influences

1.5.7 End of Topic Test - Business Stakeholders

1.5.8 Grade 9 - Business Stakeholders

2 Building a Business

2.1 Growing the Business

2.1.1 Business Growth

2.1.2 Finance

2.1.3 Changes in Business Aims & Globalisation

2.1.4 Ethics & Business

2.1.5 The Environment & Business

2.1.6 End of Topic Test - Growing a Business

2.1.7 Application Questions - Growing a Business

2.1.8 Exam-Style Questions - Business Growth

2.2 Making Marketing Decisions

2.2.1 Product

2.2.2 Product Life Cycle

2.2.3 Price

2.2.4 Pricing Methods

2.2.5 End of Topic Test - Product & Price

2.2.6 Grade 9 - Product & Price

2.2.7 Promotion & Advertising

2.2.8 PR & Sales Promotions

2.2.9 Sponsorship & Product Placement

2.2.10 Promotional Mix

2.2.11 End of Topic Test - Promotion

2.2.12 Application Questions - Promotion

2.2.13 Exam-Style Questions - Promotional Mix

2.2.14 Place & Wholesalers

2.2.15 Direct to Consumer

2.2.16 E-commerce & M-commerce

2.3 Making Operational Decisions

2.3.1 Job Production

2.3.2 Batch & Flow Production

2.3.3 Working with Suppliers

2.3.4 Effective Supply Chains

2.3.5 Just In Time & Just In Case

2.3.6 Managing Quality

2.3.7 Total Quality Management

2.3.8 The Sales Process

2.3.9 End of Topic Test - Operational Decisions

2.3.10 Grade 9 - Operational Decisions

2.3.11 Exam-Style Questions - Managing Stock

2.4 Making Financial Decisions

2.4.1 Gross Profit & Net Profit - Definitions

2.4.2 Gross Profit - Calculations

2.4.3 Net Profit - Calculations

2.4.4 Rate of Return

2.4.5 Rate of Return - Calculations

2.4.6 Research & Financial Data

2.4.7 Marketing Data

2.4.8 Percentage Change - Calculations

2.5 Making Human Resource Decisions

2.5.1 Organisational Structures

2.5.2 Organisational Structures 2

2.5.3 Recruitment

2.5.4 Effective Recruitment

2.5.5 Training a Workforce

2.5.6 Motivating a Workforce

2.5.7 End of Topic Tests - Human Resources

2.5.8 Application Questions - Human Resources

2.5.9 Exam-Style Questions - Human Resources

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The Marketing Mix

End of Topic Test - Effective Business

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Business Plans

Business Plan

In this post

Business plans are used to outline the industry in which a business is working in as well as the economic structure of a company to give an idea of the financial prospects of a business. They are used primarily to organise the routes to market that a company will take and give projections on earnings and target dates for when the company expects to have a certain income.

Writing a strong business plan is important for any business, whether large or small, and is the perfect way to map out your route to success. Not only will the plan contain your aims and plans to attract new customers but it can also act as a strong tool for financial projections and help you to set out goals for your company. Throughout the units that we have already covered on this course we have seen a lot of aspects that could be included in a business plan, and including as much information as possible is key.

A lot of entrepreneurs fail to produce a clear business plan when they set up a new company and this can be a big issue further down the line. By not outlining your company and its operations you may affect the business in a negative way and be unable to keep track on the progress and route the business is taking. If you are seeking finance to launch your company it is more than likely that you will need to create a business plan to secure a loan, but this should not be thrown away once you have started the business. Your plan can be updated and adapted at any time and you must try to keep things relevant and up to date so you know the long-term aims of your company.

Why create a business plan?

Some entrepreneurs fail to create a business plan before starting a company because they feel it is a waste of time. They know what they want to do, how they want to do it and everything that is needed has been formulated in their heads. This is a very good skill to have, but without your thoughts and projections down on paper it can be very easy for them to become misinterpreted, forgotten or skewed. Simply having things thought out in your mind is not enough to convince others or explain your strategies to those you are working with. Business plans are used to organise your approach and produce a strategy that allows you the best possible chance of success. They should include:

  • Information about your company so that you can plan the structure and objectives which you have
  • Your relationships with others and how these can be used (e.g. banks, lenders and accountants)
  • To find weaknesses in your plans and areas where you must improve
  • Areas for discussion so that you can find out other people’s opinions and include them in the planning process

Some people start a business and want everything to be done immediately. With great confidence that they can do it all alone and have no input from experts, they may not stop and think about forming a clear plan that includes facts and figures to help them along the way. Doing this can be of massive detriment to any business and you need to gather as many opinions, facts and ideas as possible from those around you.

What to avoid

A business plan should include lots of information but there are a few things that should be avoided. You should put some restrictions on the long-term (over 1 year) predictions of your finances. A long-range prediction on the amount of money you will have coming into the business can be completely meaningless because it is very hard to predict how a business will perform far into the future.

Very few business plans get the figures projected spot on, so remember to give a good indication of what you expect to earn but try to be conservative with this. By exaggerating the earning potential of the company you will not be impressing anyone and this will make it difficult for you to plan your spending. Outline clear time frames and indicate your aims during these periods. Try to show what you will be working on at any time, for example if your business will take quite a lot of setting up then the first 6 months may be devoted solely to this and you should outline this in your plans and projections. Try to correctly anticipate the money and time that will be required for processes to be completed and always factor in a margin of error. By slightly exaggerating the money that will be required when completing a stage of expansion or setting more time than is needed, you will be well prepared if some unforeseen issue crops up.

Don’t just use the business plan to explain how great your product or service is. This alone will not turn your business into a big success (although it is very important). Identifying areas to improve and how you will market your company is much more important than simply relying on the uniqueness of your product.

The purpose of a business plan

The purpose of a business plan

Business plans are used for a variety of different reasons and the importance of these should not be underestimated. Creating a plan that is precise and includes information that is relevant to the new or existing business will ensure that ideas are implemented quickly. Without a solid business plan it will be much more difficult to judge the success of the new venture and the direction of the company will be hard for everyone to see.

Minimising risk

The risks when starting a new business can be huge. Money is invested into new businesses and time will also be spent on getting a company off the ground. Without a business plan in place, owners and employees could end up wasting their time in certain areas. Using resources inefficiently and having no clear direction for a business can lead to disaster very quickly. The best way to avoid this is with a clear outline of what the business needs to work on and what resources will be needed in order to make the venture work. A business plan will be used to set goals and objectives while losing no time in areas that do not see a large enough return on the investment.

Securing finance

Many people use business plans to secure finance for a new venture. This finance can come from several different sources such as banks, investors and start-up funds. Having a business plan that shows exactly how the business will operate and where money will be made will act as a way to convince potential investors to finance the company. With clear profits to be made and a route to market mapped clearly, investing in a business will be a much more desirable prospect for a potential investor.

Formats of business plans

There are many different formats which a business plan can be created in but the main areas to cover are:

Executive summary

Company summary, products and services, market analysis, strategy and implementation, management and personnel, financial plan.

Any business plan should include an executive summary which gives an outline of the business and the vision of the owners. Here you should briefly explain the business and its activities as well as the key areas that will help the company to succeed. A mission statement can be included to explain why your company will be unique in the market and what will give you the edge over your competitors.

You should also include some information about the financial aspirations of the company here to show the economic aims over the first few years in operation. Remember, these do not need to be hugely accurate and taking a realistic look at what can be earned is essential. It is usually best to complete the executive summary of the company last as you can include information from other sections in this part of the plan to give a good overview and concise insight into the business and your plans.

The company summary will explain key aspects of the operation of the company. This includes the owners of the business as well as where the business is located. Information about all directors must be included in this area of the plan and you should summarise their roles within the organisation. If you have any other personnel that will be involved at a senior level then they should be included also. In this part of the business plan you need to outline the funds required to set up and maintain the business also. By including information about the company’s location and operations you will be able to forecast the money required to get the company started and any investment that will be needed. Try to include a spreadsheet showing where the initial funding will come from and how much is being put into the business to start with. Remember, most new businesses make a loss in their first year due to the expenses involved in starting a new company, so be realistic. Plan the initial outlays and costs carefully and make sure you know the limits to how much you can put into the company to get started.

The location of the business can also be included here and any rent that you will be required to pay can be outlined and the costs per square foot for the company premises. Then you can go on to make projections about the sales required to cover all of your fixed costs such as office and equipment rentals.

Next we move on to explaining the things which will earn your business money – the goods and services that you have to offer. In this section you must include descriptions of what you can offer your customers and the prices you will be charging. Outline what makes your goods and services special and the key aspects that will influence potential clients and convert them into paying customers. It is also a good idea to compare your pricing structure to your competitors. It may be that you offer the same products but cheaper, or with any additional features to make your products more appealing. You should explore the need for your products and services to be better than any of the competition. As a new business you may struggle to compete unless you have something that nobody else has. By bringing to the market something which is already selling well with another company that has established its brand in the marketplace, you might struggle to take a large enough section of the market to warrant starting a whole new company. If this is the case then you must compare your pricing to your biggest competitors and ensure that you are competitive.

In this section you can also include any products and services that you may offer in the future. Explain your product development processes and how you will be able to innovate and bring new products or services to the marketplace.

Next you need to carry out some market analysis to identify your potential customers . In this section of the business plan you need to include information about your ideal customers and what sort of people they will be. Think about the earnings of your potential clients, the type of lifestyles they will live and the products and services they expect from a business. This part of your plan is great for you to use figures about your market and show any growth projections for the sector in the future.

Explain market trends and analyse the need for your goods/services in this sector. Attempt to find some facts about the disposable income of your potential customers and target certain people who will be interested in what your company offers. Think about how you will be attracting your customers and the potential for growth over the first 3 years in operation. Make estimations about the number of people in the area where you will be offering your products and services to get a good idea of how many different potential clients you can attract. Having a good understanding of your target market will give you the tools to design marketing strategies and techniques to attract the maximum number of customers to your business.

Having outlined your market and explained who your products/services will attract, it is time to explain your techniques when doing this and show how you are going to market your company. Explain the key aspects of what you offer and the main selling points that should be tailored to suit the target clients that you have in mind. Products designed for the more affluent will need to be luxurious and have an exclusivity about them, whereas items that are for people with limited incomes will need to offer greater value for money. Try to understand a clear link between the market in which you will be operating, your potential clients and the main aspects of your business which you should focus on.

Ensuring that your business suits the needs of customers is essential to getting the most customers. For example, opening up a luxury spa in an area where there is high unemployment and typically lower incomes will encounter lots of issues as the potential customers (those within a 15-mile radius) will have no need for this service and may not be able to afford what you have to offer. You will need to come up with at least five ways of promoting your business that will appeal to your target market and attract clients. Remember all of the techniques and skills we discussed on marketing and try to link what you know about your potential clients to the advertising methods you will use.

Here you can also outline the potential sales forecasts and investments which you will make when promoting your goods and services. Come up with some realistic projections about the money to be spent on advertising and increasing awareness of your brand as well as any sales targets you may wish to set. Be conservative with your sales projections as it takes time for any business to get a good level of customers and building brand awareness does not happen overnight. Your sales in year 1 will normally be fairly low and you need to take this into account when projecting your income and the amount it will cost to set up your company.

The next thing to plan is the personnel involved in your business. This will include the owners and directors as well as any senior managers that are to be involved in the company. Explain the team structure and hierarchy of your new company and the number of employees you will be hiring. Knowing the team behind the company and their individual duties will let you outline the various skills that your team possesses and establish each person’s duties within the organisation.

Outlining the duties of each person and giving a brief job description is a good way for you to understand the team dynamic and responsibilities of each member. Most new companies make the mistake of hiring too soon, but with a clear plan of the business personnel that will be involved in your company you will be able to ensure each person is needed for the business to operate. Establishing a business will require you to be frugal in your approach and employing staff that are not needed can have a terrible impact on your profits and end up costing you tens of thousands of pounds a year.

Outline the wages of your employees and then come up with some totals for staffing costs that can be used when writing your executive summary.

Your financial plan will provide a clear breakdown of all the income and outgoings of the business that you expect. These will only be projected figures so will be likely to change in reality, but you should be able to predict fairly accurately using your knowledge of costs incurred and the pricing and potential customer base for your products/services.

Make projected figures for your fixed and variable costs as well as the profits you expect to earn from sales. This will then help you to create a break-even analysis for your company that will show the amount of money required to cover all of your outgoings. Remember that your first year will have fixed and variable costs as well as additional outgoings which come from setting up your company. You will also have a limited number of sales during the first 12 months as you build up your customer base, so the projected net profit for year 1 will be lower than any other year. Try to think about the most popular goods/services you offer and come up with an average sale price for your customers. This will then help you to identify the number of customers you need in your first year to break even.

Come up with some cash flow and profit and loss charts (look over our work in Unit 1.3 to help) to project how much money you can expect to see in the business each year. This will help you to come up with clear and concise predictions for how much money you will be making in your first three years.

Financial plan

Reformulating a business plan

If you do ever happen to make a slight error in judgement on your initial business plan this can always be altered and the plan changed as required. The chances of figures being completely correct in your first projections are very slim and there will be certain things that you miss or random payments to be made when setting up your business which you did not account for. This is the main reason why being conservative with your income projections and adding in a ‘safety net’ figure to your costings will help you to deal with these circumstances. Business plans should be flexible and are a working document, so chopping and changing them is fine. When doing this try to use what you already have to create a new plan for the next few years rather than just altering figures to make it look like you got the initial plan correct.

Business plans are working documents, so they should be altered and added to as time goes by to determine where your company is heading and how it will get there. Being understanding of the nature of business and the fact that you will not be able to predict certain outcomes will give you an edge and allow you to put in place certain measures to help if you ever do come up against any problems.

reformulating a business plan

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 Business planning

3.1.6 Business planning

advantages of business plan gcse

INTERACTIVE VIDEO

It’s time to follow the journey of Finley Thomas, an aspiring entrepreneur who dreams of opening a small local shop. Throughout the interactive video, we will follow Finley through the process of creating a well-thought-out business plan, which is essential for the success of any business venture.

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CASE STUDY ANALYSIS MP MECHANICS

The real-life case study explores the journey of Molly Pratt, who started her own mechanics workshop in a small town in Lincolnshire, specialising in luxury vehicles. Despite approaching a bank for a loan of £20,000 to cover the costs of specialist equipment, she was unable to afford to employ any additional staff, resulting in high levels of stress. Unfortunately, MP Mechanics closed down in January 2019 due to a lack of interest in luxury vehicle repair and Molly's difficulties in managing the workload alone.

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Starting a Business: Contents of a Startup Business Plan (GCSE)

Last updated 22 Mar 2021

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For a start-up there are usually two kinds of business plan - a simple one and a detailed one. Some businesses need to produce both.

The simple business plan is rarely shown to outsiders of the business. It is written by the entrepreneur, for the entrepreneur. The simple plan helps summarise the key aims and targets of the business and the actions required to make the business a reality. It is likely to be written in quite an informal way. What would go into the simple plan? Areas such as:

  • The idea - a simple description of the proposed business
  • Where the idea came from and why it is a good one
  • Key targets for the business - sales, profit, growth (gives a sense of direction for the business), ideally for the next 3-4 years
  • Finance required - how much from the founder, how much to be loaned over how loan and from who
  • Market overview - main segments, market size (value, quantity), growth, market shares of main competitors (if known)
  • How the business will operate (location, premises, staff, distribution methods)
  • Cash flow forecast (important) + trading forecast

A detailed business plan is needed if a more complicated or larger business is planned as a start-up, or if the entrepreneur needs to raise money from business angels or get a substantial loan from a bank. Here is a summary of the key content:

Executive summary: a brief 1-2 page summary of the detail! Should contain nothing new, but highlight the key points

Market: a profile of the target market based on market research

Product: what it is and how it is different from the competition (the "unique selling point")

Competition: an honest description of the competition in the target market - what they do well, their weaknesses and their likely response

Protecting the idea: how the product and business can be protected from competition - e.g. patents, trademarks, distinctive approaches to marketing or distribution that competitors will find hard to replicate

Management team: a crucial area for any investor. Who is involved in the start-up and what will they be doing? What experience and expertise do they bring? Which management roles will need to be filled as the business grows?

Marketing: the key elements of the marketing mix should be explained here. Remember that for a start-up the marketing budget is likely to limited, so the plan should describe a credible approach to promoting the product and include realistic assumptions about how many customers will buy and at what price

Production /operations: this explains what is involved in the production process, what capacity is needed, who will supply the business, where it will be located etc.

Financial projections : a summary of the cash flow and trading forecasts. This section should highlight the key assumptions that have been made and also outline the main risks and opportunities in the forecasts (i.e. what might go wrong, or where things might prove better than forecast).

Sources of finance: here the figures from the cash flow forecast are taken and used to highlight what funding the business needs, and when.

Returns on investment: another key area for any investor. This is a description of how the entrepreneur expects investors to get a return on their investment. Who might eventually buy the business, when, and for how much?

  • Business plan

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advantages of business plan gcse

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!

  • Self-confident
  • 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 organisation: 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:

  • 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.
  • 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.
  • 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 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 organisation 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 tends 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

Notes submitted by Lintha

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18 thoughts on “ 1.3 – Enterprise, Business Growth and Size ”

I am SOOO surprised to use this website. My teacher lit uses this to make notes but he made it more complex by using those high fi words. But this, OMG it’s so ez when I read these notes it was so much easier than I thought I just love this THANKS SOOO MUCHHH!!!!!!

Like Liked by 1 person

thid is bestest nots for bussines studys thx

Wonderful information 🥰🥰 It really helped me a lot thanks for de info

What about value of sales ( for ways if measuring a business) ? Because the IGCSE textbook I use does talk about that..

Yes. You can add that as a measure of evaluating business size, but it too runs into the same limitations as the other measures.

okay, thank you !!

the absolute best

Like Liked by 2 people

HEy I would like if anyone here would be able to help me with business because im facing hella problems

you still have problems

yes i do too lol

If you are facing problem in Business Studies (IGCSE/O Levels), Feel free to contact me. My name is Afzal Shad and I have a website with same name. (Google: Sir Afzal Shad) and you will get my website to contact me.

Hope Admin of website won’t mind.

this one is really useful💓love this one

Thank you so much 🙂

Quite understandable 👌👌

exactly.. profit is NOT a measure of business size

Hey. In the Business Studies syllabus, it was mentioned that, and I quote “profit is not a method of measuring business size”, but it was mentioned here. I just wanted to point that out because I think that is an error that was published here. Thanks.

Well, Profit can also be a measure of business size but not alone. Most of the times we use a combination of sizes. For example, the Covered Area, the Capital Employed or even the Number of Employees can not be the perfect measure, if they are used alone.

We normally take combinations of Business Size to measure them. Using one won’t be an accurate measure.

Afzal Shad IGCSE /A Levels Business Teacher Google me: (Sir Afzal Shad)

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Advantages and disadvantages of business planning

  • Created by: 14kumari4079
  • Created on: 13-03-18 21:30
  • Business Studies
  • Business Planning

Report Thu 20th May, 2021 @ 14:55

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