Acknowledgements ivIntroduction vii

Unit 1 Investigating business 1Chapter 1 Aims and objectives of businesses 2Chapter 2 Business ownership 11Chapter 3 Business location 29Chapter 4 Business activity 37Chapter 5 Functional areas within business 54Chapter 6 Business communications 101Chapter 7 External influences on business 112Portfolio evidence for Unit 1 137

Unit 2 People and business 147Chapter 8 Stakeholders 149Chapter 9 Investigating job roles 163Chapter 10 Working arrangements 186Chapter 11 Rights of employers and employees 203Chapter 12 Resolving disagreements 224Chapter 13 Recruitment 235Chapter 14 Personal job applications 246Chapter 15 Staff development and training 259Chapter 16 Customer service 269Portfolio evidence for Unit 2 285

Unit 3 Business finance 293Chapter 17 Investigating the flow of financial documents used

to make a business purchase 295Chapter 18 Investigating methods of making and receiving

payments 321Chapter 19 Covering the costs of a new product or service 332Chapter 20 Using a cash-flow forecast 337Chapter 21 Using a budget 350Chapter 22 Calculating the break-even point 357Chapter 23 Calculating the profit or loss of a business 366Chapter 24 Understanding a balance sheet 371Chapter 25 The importance of business accounts 378Chapter 26 Sources of business finance 385Chapter 27 Financial planning 397The external test for Unit 3 405

Appendix 1: Getting the most out of work experience 408

Appendix 2: Photocopiable documents for use with activitiesin Unit 3, Chapter 17 412

Index 419

iii

Contents

Organisations all over the world employ millions of individuals to dodifferent kinds of jobs. What kind of work do they do – and why? Howdo all these jobs and businesses link together? Who runs theseorganisations and what decisions do they have to take? Why are somebusinesses very successful and others not? What are they aiming to do?

All businesses exist to provide goods and services to theircustomers. Customers can be private individuals or they can be otherbusinesses. As consumers, we have daily links with the businessworld. Every time we buy something, we are sending a message aboutwhat we want – and what we don’t – to businesses. All businessesneed to buy supplies from other business organisations, either basicproducts, such as stationery and computers, and sometimes rawmaterials which they use to produce a different product, like tyres orwindscreens for cars.

The aim of businesses is to supply their customers with theproducts that they want, usually with the intention of making a profit.Products can be either goods or services, so charities and voluntaryassociations, football and fitness clubs, local councils and schools canbe described as businesses too – because they are all ‘in the business’of providing a service to their customers.

This unit introduces the world of business and helps you tounderstand what businesses do, how they are organised and thefactors which help to make them successful. When you havecompleted this unit, you should have a good understanding of thedifferent types of business that exist, why they are important andwhat factors influence the decisions they make.

1

Investigating business

Introduction to Unit 1

What you will learn

1 Aims and objectives of businesses2 Business ownership3 Business location4 Business activity5 Functional areas within the business6 Business communications7 External influences

Unit

Why do businesses exist?

All businesses exist for a reason or purpose –either to make a product or to offer aservice, and in some cases to do both. Tosurvive, a business needs income from sellingits goods or services, so it has to offersomething that consumers or industry wantand will pay to obtain.

Business aims

An aim is a goal the business wants to achieve.A business may have one aim or several:

● In the private sector, businesses aim tomake a profit. Public sector businessesaim to make a profit if possible and meetstrict expenditure targets (costs must notexceed grants and income).

● All businesses aim to provide goodsand/or services, either to their localcommunity (such as a newsagent) or to thewider community (such as Ford cars).

● When times are difficult, some businessesmay simply aim to survive.

● Some businesses aim to grow larger – toexpand.

● Often businesses aim to maximise sales.This means selling as much as they can.Or they may choose to improve the qualityof their products.

● Some businesses aim to provide a highly

Investigating business2 Unit 1

Aims and objectives of business

What you will learn

Linking business aims and objectives‘SMART’ objectivesMonitoring performance

Overview: business aims andobjectives

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Many businesses offer both products and services

Fact file

All organisations in the private sector need tomake a profit to survive in the long term.These are business enterprises owned andcontrolled by companies and privateindividuals. Their revenue – or income – fromsales must be greater than the costs ofrunning the business. Examples of privatesector businesses range from corner shops tolarge enterprises such as the supermarketchain Tesco.

Institutions owned or controlled by thegovernment or local authority are in thepublic sector. Their revenue comes mostlythrough government grants and funding.Although they may not have to make a profit,there are strict controls over how they spendtheir money. Examples include the police andthe National Health Service.

Chapter

competitive service, so that they will domore business than their competitors.

● Some businesses focus instead onproviding a charitable or voluntary service,such as the NSPCC or the Samaritans.

● Today, many businesses also aim to beenvironmentally friendly.

Although a business may have more than oneaim, most tend to focus on just two or three.This allows them to target their efforts moreeffectively.

Business objectives

We all have aims. For example, you may aim topass all your exams, or to get fitter, or to saveup for something you really want. To achieveyour aims you will need to take specific stepstowards them. First, you have to decide whatthese steps are (the easy bit!), then you have tokeep on doing them (which is much harder).You also need some way of measuring yourprogress so that you know whether you are‘on target’ to achieve your aims.

Businesses also need to decide what stepsto take to achieve their aims and to set targetsor objectives along the way. For instance, abusiness may try to:

● sell more products than its competitors● provide more services than in the

previous year● produce new goods or provide a new

service● improve a product or service.

It then has to work out how to achieve itsobjectives. It also needs to know when it hasachieved them and it can do this only if it canmeasure its progress.

This is achieved by having measurableobjectives. Therefore, instead of simply sayingyou will ‘save more’, you set yourself a target orobjective – ‘I will save £5 a month’, for example.It is then much easier to see if you aresucceeding or not. In a business, this meansdeciding exactly what will be done and by when,for example ‘We will introduce six new productsover the next 12 months’. The best objectives areSMART objectives, as you will see on page 6.

Linking aims and objectives

Organisations select only aims which areappropriate to their purpose and activities.

Once an aim has been agreed, objectives –or practical steps – are identified to help toachieve the aim. These are then converted intomeasurable targets. From this, you can see

Aims and objectives of business 3Chapter 1

Snapshot

GGooiinngg ffoorr oorrggaanniicc ggrroowwtthhResearch by the supermarket chain Tescoshowed that 63 per cent of its customerswould like to buy more organic products.In response, Tesco, which already offers1000 organic items, revised its aims andobjectives. It now wants to increase sales oforganic products to £1 billion by 2006 andintends to do this by increasing the rangeavailable and cutting prices, which arecurrently about 20 per cent higher than othergoods. It also hopes to supply more organicBritish products. At present about 80 per centof its organic range is imported.The largest supermarket supplier of organicproduce is currently Sainsbury’s, which sellsabout £235 million worth a year againstTesco’s sales, in 2001, of £200 million. Tescoaims to become a major supplier in this area.

Spot check

Write down your answers to the followingquestions:

1 What is an aim?2 Identify one personal aim you have.3 If you started your own business, what

would be your major aim?4 What is an objective?5 Decide one objective which would help

you to achieve your personal aim.6 Adams Childrenswear wants to grow by

20 per cent over the next five years. Is thisa measurable objective? Give a reason foryour answer.

that a business’s aims and objectives arelinked:

Aiming to make a profit

Although this is a major aim for virtually allorganisations, it is not always achieved. If thebusiness makes substantial losses, then it willhave to stop trading.

A successful organisation will normally tryto increase its profits each year. For example,the fast-food chain McDonald’s, which has28,000 restaurants in 120 countries, regularlyadvertises new product options with theobjective of keeping existing customers andattracting new ones. The more customers ithas, the better are its chances of increasingprofits.

An organisation in difficulties will focuson survival by identifying its problems andtrying to remedy them. It will set objectivessuch as improving sales and lowering costs.The high street retailer Marks & Spencer,which saw its clothing sales fall until autumn2001, set specific objectives to overcome theproblem.

Aiming to provide goods orservices to the local or widercommunity

Manufacturing companies make goods. Forinstance, Honda makes cars and Heinz makesfood products. Retailers sell the goods toconsumers. For example, Dixons sells

computers, camcorders and televisionsmanufactured by various companies.

Other organisations, such as travel agents,banks and solicitors, provide services. Theseare products that you cannot see but help youto achieve something. For example, you mayuse the services of a travel agent to book apackage holiday.

Some businesses provide both goods andservices, such as Hewlett Packard, whichmakes IT equipment and also offers IT servicesfor business.

Each business has to decide whether tooffer its goods or services locally, nationally orinternationally. A small business or oneproviding a personal service, such as an estateagent or hairdresser, is likely to concentrateon the local community. Larger organisationsmay operate on a national basis, such as thehigh street chemist, Boots, or the Nationwidebuilding society. Others are well known allover the world because they sell their productsinternationally, such as Coca-Cola andMicrosoft.

Their objectives must reflect both the typeof goods and services offered and the scale ofthe operation. It would not make sense foryour local newsagent to decide to increase itsscale of operations by delivering all round thecountry – yet these objectives would beappropriate for a national operator such asTesco. The newsagent would be better settingobjectives relating to the service provided tolocal customers and the range of goodsstocked, to make sure that the businesscontinues to meet its customers’ needs.

Aiming to survive or expand

If times are tough, then the whole focus of theorganisation will be on survival. But for someowners of small businesses, a small profit eachyear is sufficient to meet their needs. In thiscase their objectives may be to maintain sales,rather than to increase them. They may do thisby concentrating on providing a high-quality,reliable service so that they continue to have agood reputation with customers.

However, many businesses aim to expand,or grow. There are two ways to do this:

Investigating business4 Unit 1

Measurable targets

Business aim(s)

then decides

Business objectives

which are converted into

Purpose or main activity

which explains

● A business can grow slowly, by openingnew stores or operating on a larger scaleyear on year. An example is theSpecsavers chain of opticians whichstarted in Bristol in 1984 and now has 400outlets in Britain and Ireland and intendsto expand overseas.

● A business can grow much more quicklyby buying another business, or joining withanother organisation.

Aiming to maximise sales orimprove quality

Businesses have an important decision to make:

● Should they aim to ‘stack goods high andsell them cheap’ – and try to sell as manyas possible? or

● Should they aim to gain a reputation forselling premium quality goods, and if so, atwhat price?

Businesses must decide whether to make orsell to the mass market or to specialist orwealthy customers.

Some organisations concentrate onmaximising sales and to do this they need tokeep prices low. The discount clothing retailerMatalan is one example. The budget airlines,such as easyJet and Ryanair, are another. Theyoffer a ‘no frills’ service to customers whosimply buy a seat on the plane – they do notreceive tickets, food and drink on board areextra and there are no pre-allocated seats.

In return, customers get much cheaper faresthan the traditional airlines are able to offer.The budget airlines are able to do this becausethey keep down their overheads – the costs ofrunning the business.

On the other hand, specialist sports carproducers, such as Ferrari and Porsche,concentrate on the premium end of themarket, often producing limited editions ofvery expensive models.

No organisation likes to lose businessbecause customers are dissatisfied withquality. All customers are legally entitled tocertain minimum standards of quality and willchange their supplier if goods are poorly madeor sub-standard.

Quality of service is also as important asquality of products. If the business identifiesthat it is losing customers because of qualityproblems it must set objectives to overcomethis. Although Ikea, the Swedish furniturestore, has the aim of expandinginternationally, it also had another aim inopening a second store in north-west London.Customers had complained about the lack ofspace and the length of the queues in theexisting store. As a result, Ikea decided toopen a second store nearby to improve thequality of its customer service.

Aiming to provide a highlycompetitive service

Competition is generally good for consumers.This is because prices fall when the supply ofgoods is increased. An organisation which hasmany competitors must be alert to thechanging needs of its customers and theactions of competitors.

An organisation can be competitive:

● by selling its goods more cheaply than itscompetitors

● by offering additional services which itscompetitors do not

● by doing things better than itscompetitors.

Superstores are highly competitive and you willread about ‘price wars’ between stores such asAsda and Safeway as they try to attract

Aims and objectives of business 5Chapter 1

Fact file

If one business buys another, this is called atakeover, or acquisition. In 2000, the RoyalBank of Scotland acquired NatWest Bank.

If one business joins with another, this is amerger. For example, the Halifax and the Bankof Scotland merged in 2001 to become HBOS.As a much larger organisation it would be ableto compete with the major high street bankssuch as Barclays and Lloyds TSB. There are alsoother benefits to be gained from a merger. Thebank’s overall customer base is larger andcosts are reduced by combining premises andreducing staff.

customers away from each other. Superstoresalso tempt customers with other products andservices, such as loyalty cards, family parkingbays, coffee shops and cash machines. Tescooffers loans, travel insurance and car insuranceas well as home shopping via the Internet.

If the aim is to be highly competitive,objectives will be set to enable theorganisation to be one step ahead of its rivals.This may involve developing new products orfacilities or identifying where further pricecuts can be made.

Aiming to provide charitable orvoluntary services

There are many large charities in Britain whichare run like business organisations. Instead ofsales revenue, their income comes mainly fromdonations which are used to support specialcauses or provide a particular service. Well-known examples include the NSPCC, Oxfamand Shelter. Voluntary services, such as theSamaritans, take on unpaid helpers to providea service in addition to asking for donations.

Charitable and voluntary organisations donot aim to make a profit, although they maymake a surplus. From the money they obtainthrough fund-raising events, charity shops anddonations they deduct the costs of running theservice. Any remaining money is the surplusthey can use to support their aims. In2000–2001, the NSPCC spent £8.23 million onadministration and support costs. While thismay seem a lot, it amounted to only 10 percent of its total expenditure. The remainderwas spent on activities to end child cruelty andon campaigning and educating the public.Future objectives focus on ways in which theycan increase their surplus and target those inneed even more effectively.

Aiming to be environmentallyfriendly

All organisations have to comply withenvironmental legislation (see pages 128–131)

but many go much further. They want to berespected for having positive policies on issues

such as pollution, waste disposal, recycling,packaging and energy use. Someorganisations, such as The Body Shop, havebuilt their reputation on being‘environmentally friendly’. The Body Shop wasthe first cosmetics producer to advertise thatnone of its products had been tested onanimals, to sell them in reusable bottles and toidentify specific company environmental aims.

Today, many other companies have similaraims and objectives. Sainsbury’s has opened arevolutionary store in Greenwich, south-eastLondon, partly powered by wind turbines andwith an environmentally friendly combinedheat and power system.

‘SMART’ objectives

The best type of objectives are said to beSMART. This means they are

S – specificM – measurableA – agreedR – realisticT – time constrained.

In the snapshot on page 3, you saw that Tescowants to increase sales of organic products to£1 billion by 2006. This is a specific objective. Itis also measurable and is time constrained (itmust be achieved by 2006). Given customerinterest in organic produce, it is also realistic.If this objective has also been agreed withsuppliers and store managers, then it is aSMART objective. If Tesco had merely said itwanted ‘to increase sales of organic produce’,then this is not SMART – and also cannot bemeasured easily.

Objectives should be agreed with thepeople who have to achieve them. You knowyourself that if you agree to complete somework by a given date, you feel more committedtowards doing this than if the decision is madeby someone else and imposed upon you.Managers and employees feel the same way.They are more likely to work hard onachieving an objective when they have beeninvolved in setting it in the first place.

Investigating business6 Unit 1

External factors

These can include:

● unforeseen events – such as the terroristattacks on the USA on 11 September 2001which affected the travel and tourismindustries and many other organisations

● unexpected falls in customer demand –e.g. through economic problems, newtrends or more competition

● changes in technology.

Internal factors

These can include:● over-ambitious aims or objectives which

cannot be met● production problems or service delivery

problems which affect sales● failure to anticipate customer needs

accurately.

Monitoring performance

Many organisations set aims and objectivesand then have problems meeting them. Thisis because, in a rapidly changing world, it isnot always possible to predict future events.It is also possible that the aims set one yearmay not be appropriate the next.

All organisations monitor their progresstowards meeting goals – and take action ifthings are going wrong. Computers make thiseasy. Retail store managers, for example,receive daily print-outs of sales performanceso that they can see which product lines areselling well – and which are not. They canalso compare sales figures between storesand over different time periods. Correctiveaction, such as reducing prices, increasing

advertising or selling off unwanted stock atdiscount prices, can then be taken if thereare problems.

The flow chart below shows the way inwhich aims and objectives are reviewed byorganisations. Remember that this should notbe done once a month or once a year butshould be continuous. Unless organisationscontinually adapt and change they areunlikely to survive in today’s business world.

Aims and objectives of business 7Chapter 1

What can go wrong?

Organisations may fail to meet their statedaims and objectives because of externalfactors (which may be outside their influenceor control) or internal factors (which may bewithin their control).

Agree measurable objectives

Decide aims

Check performance regularly

Work towards objectives

Take corrective action

Review and adjust objectives where necessary

Review and change aims where necessary

if unsatisfactory

How organisations review

aims and objectives

It makes you think!

In your group, discuss how you might becomemore environmentally friendly.

a Decide what actions each of you couldtake to achieve this aim.

b Agree a statement which summarises themain aims of your group.

c Write down three SMART objectiveswhich will help you to achieve this aim.

d Suggest how you could monitor yourprogress.

Compare your suggestions with other groups.

Investigating business8 Unit 1

Case study

Hamleys

Simon Burke used to work for VirginEntertainment, where he ran cinemas andmegastores. In 1999 he took on the challenge ofrunning Hamleys, the well-known toy store inLondon’s Regent Street. Hamleys was struggling,despite its claim to be ‘the finest toyshop in theworld’. Profits were down to an all-time low;customers were dismayed at the poor serviceand complained about the limited range of toyswhich they also thought were over-priced. Unlessurgent action was taken by the new chairman,the company was unlikely to survive.

By 2001, the picture was very different.Profits had increased from £27,000 to £3.9 million,the store had been modernised to include a new‘cyber zone’ for computer games and interactivetoys, and a direct mail catalogue, online andphone service – Hamleys Direct – was fullyoperational. Unprofitable businesses, such as ajoint venture in Singapore, had been closed andthe old Toystack stores had been converted toBear Factory stores where customers could buytheir own customised teddy bear.

However, Simon Burke is adamant that thecompany will never open any branches, either in

the UK or abroad. He considers that one ofHamleys’ main attractions is the fact that it isunique and this feature would be lost if therewere Hamleys stores all over the country.

You can find out more about the business atwww.heinemann.co.uk/hotlinks.

1 Who is Simon Burke?2 How long has he worked at Hamleys?3 What was Simon Burke’s main aim when

he started at Hamleys?4 Why did he have this aim?5 Identify two actions Simon Burke has

taken to achieve this aim.6 What do you think Simon Burke will

want to continue to do?7 Why does Simon Burke think the store is

‘unique’?8 Do you think Simon Burke’s aims have

been met? Give a reason for your answer.1 Identify Simon Burke’s main aim when he

first started at Hamleys.2 State three objectives which were

identified to help to achieve this aim.3 What did customers think of Hamleys in

1999?4 Did Simon Burke take any notice of

customer views when he decided uponhis aims and objectives? Give a reasonfor your answer.

5 What do you think Simon Burke’s aimsare now? Give a reason for yourchoice(s).

6 Identify the one aim Simon Burke doesnot have, and say why he has made thisdecision.

7 To what extent do you thinkorganisations should adjust their aims totake into account current businessperformance and new salesopportunities, and why?

One of Hamleys’ attractions is that it is

unique – what makes it unique?

Chapter review and practicequestions

1 Decide which of the aims below would be mostappropriate for each organisation in the list.Some aims will apply to more than oneorganisation.

a Aim for high-quality performance at alltimes.

b Maximise sales by keeping prices low.c Provide a service to the local community.d Develop products that are more

environmentally friendly.e Expand by opening more outlets.

VetSupermarketCar manufacturerFootball clubVideo/DVD store

2 Each of the aims in the chart has an incorrectobjective alongside. Match each objective withan appropriate aim.

3 Develop the following aims so that eachbecomes a measurable objective:

a Open more stores.b Lower prices.c Produce new products.

4 The high street retailer W H Smith intends toopen 120 new shops in the UK by December2004. This is expected to cost £120 million andwill create 3000 jobs.a Explain whether this is an aim or an

objective. Give your reasons.b Suggest how this target could be

monitored.

1 All organisations set aims which link with theirpriorities (e.g. high quality versus low price)and their scale of operations. Suggest oneappropriate aim for each of the followingbusiness organisations:

a Oxfamb Woolworthsc Burger Kingd Blockbustere Fordf Armanig Kwik-Fith your local chemisti Nokiaj PC World.

2 Each of the organisations below has an aim,but has not yet decided on any objectives. Foreach aim, suggest two SMART objectives.To help, the first one is done for you.

a Chang’s Chinese restaurant wants to bemore competitive. Objectives: Open longerhours and offer takeaway delivery service,i.e. stay open two hours longer on Fridayand Saturday evenings and offer freedelivery on all orders over £10. Do both fortrial period of 3 months.

b A charity shop wants to maximise sales.c Your school wants to be more

environmentally friendly.d A graphic design company wants to

expand and offer its services to the widercommunity.

e A clothes manufacturer wants to improvethe quality of its products.

Aims and objectives of business 9Chapter 1

Objective Aim

Improve existing product Expand

Introduce a free Maximise salescounselling service

Only use recycled Provide a highlypaper competitive service

Open longer hours than Improve qualitynearest competitor

Open more stores Provide a charitableor voluntary service

Lower prices Be environmentallyfriendly

f A sandwich shop wants to survive duringa difficult period when road works outsidethe shop have prevented parking andreduced the number of customers comingto the shop.

g A new health and fitness club wants tomake a profit as quickly as possible.

3 For any two of the businesses in question 2,identify:

a how you would measure whether theobjectives were being met

b how often you would check thisc what action you would take if there was a

problem.

4 In the late 1990s Mothercare decided to sellmore goods from large, out-of-town storesand close its town centre shops. It is

developing Mothercare World outlets andimproving baby and toddler clothing andhome, travel and toy products. Four newMothercare World stores will open in 2002.But costly problems occurred when itchanged to a new warehouse in August 2001.Stock was wrongly located and the rightitems weren’t sent to stores. Low stockspromptly affected sales.

a Identify Mothercare’s main aim.b Identify Mothercare’s objectives to achieve

this aim.c Have recent problems affected its aims

and objectives? Give a reason for yourdecision.

d Suggest how the achievement of all itsobjectives may be monitored in future.

Investigating business10 Unit 1

Privately owned enterprises

Many people own and operate their own small,private business. These businesses includehairdressers, corner shops, plumbers. Theindividuals who run these businesses arecalled sole traders.

Some people own a business inpartnership with others. The partners areresponsible for all aspects of running andcontrolling the business. Examples ofpartnerships are firms of solicitors andaccountants.

Other people own and run a company. Ifthe company is large, then the owners may bedifferent people from the directors who arepaid to run the company as is the case withorganisations such as Vodafone and Dixons.

There are other types of privately ownedbusinesses. The manager of your local PizzaHut or Benetton may also own the business butas a franchisee. In this case, the managermakes the daily decisions but must comply withcertain conditions set by the larger company.

Where a group of people set up in businesstogether and share everything – there is nooverall boss or leader in control – this isknown as a co-operative. The Co-op is themost famous example of this.

There is one common feature about allthese businesses. The owners will always wantto make a profit. This is the reward forindividuals who are prepared to start abusiness and take the risk of investing – andpossibly losing – their own money. Anotherword for such an individual is entrepreneur. Ifthe business is successful, the owners can keepall the profit after paying the business’sexpenses and any tax due.

Business ownership 11Chapter 2

Business ownershipChapter

What you will learn

Private enterprisesThe public sector

Overview: business ownership

Fact file

There are four main types of privately ownedenterprises:

● sole traders – owned and run by oneindividual

● partnerships – owned and run by twoor more people

● private limited companies – often afamily-run business with the protection oflimited liability (see page 12)

● public limited companies – largeorganisations whose shares are traded onthe Stock Exchange.

In addition, there are two other types:

● co-operatives – where a group of peoplerun the enterprise together and share theprofits or losses

● franchises – where a large organisationallows a person to sell its products anduse its name in exchange for a fee and ashare of the profits.

Julian Richer, one of the UK’s top entrepreneurs

and owner of Richer Sounds

In other ways, the organisations are verydifferent:

● The owners will have differentresponsibilities and involvement in thebusiness.

● There are different benefits anddrawbacks for the owner(s).

● Some types are more suitable for smallbusinesses whereas others are moreappropriate for large-scale enterprises.

● They raise money to run the business indifferent ways.

● Their ability to develop and expand varies.● They have different legal responsibilities.● They are likely to use and distribute their

profits differently.

Publicly owned organisations

In Britain some organisations are publiclyowned. This means they are owned andcontrolled by the state on behalf of the people.Such organisations are monitored by thegovernment and are said to be in the publicsector. They include:● central government departments, such as

the Department of Health, which runs theNational Health Service

● local authorities, such as your localcouncil

● public corporations – large enterprisesowned by the government, such as theBBC.

In all these cases, the finance to run theenterprise comes mainly from the governmentand is raised by taxation.

The number of public corporations inBritain has fallen in the last 20 years asgovernments today prefer private ownership.Several public sector organisations have beenprivatised, that is, moved from the public tothe private sector. Examples include the coalmining industry, the railways and the BritishAirports Authority.

You may wonder why the governmentwants to own or run anything at all! There areseveral good reasons, which are described onpage 27.

Investigating business12 Unit 1

Fact file

All privately owned enterprises can be dividedinto two types:

● those with unlimited liability – soletraders and partnerships

● those with limited liability – allcompanies, some franchises, someco-operatives.

Unlimited liability means that the owners areresponsible for all the debts. If the businessstruggles, then the owners may have to sellpersonal possessions to pay the debts. If theycannot do this, they are declared bankrupt.

Limited liability restricts thisresponsibility. The owners are liable to paydebts only up to the limit of their investment.They would not usually have to sell theirpersonal possessions.

Spot check

Write down your answers to the followingquestions:

1 Identify three types of privately ownedenterprises.

2 Why do entrepreneurs start up inbusiness?

3 A sole trader is responsible for paying allthe expenses of the business, even if it isnecessary to sell personal possessions tomeet any debts. What is this called?

4 Who keeps the profit in a privately ownedenterprise?

5 Who owns enterprises in the publicsector?

6 Give one example of a publicly ownedenterprise.

7 Why is it considered beneficial for someenterprises to be publicly owned?

Private enterprises

Sole traders

Examples of sole traders include newsagents,plumbers, hairdressers, beauticians, smallretail shops, market traders and smallcatering outlets such as Chinese takeawayrestaurants.

Benefits of being a sole trader● It is easy to start in business. There are no

complicated procedures to followespecially if the sole trader is using his orher own name.

Business ownership 13Chapter 2

Fact file

The money used to start up a business iscalled capital. Most sole traders have to usetheir own savings or borrow from friends orrelatives.

The profit made before business expensesare paid is called gross profit. After expenseshave been paid, the amount left is the netprofit. It is on the net profit that the owner istaxed.

25 FloristHair Design

Plumber

Sole traders run a variety of businesses. Next time you visit your local

high street, see how many sole trader businesses you can spot

Snapshot

Joanne Williams, florist

Joanne Williams trained as a florist andthen opened her own business. She used hersavings to rent a shop, buy the items neededto equip it, pay for advertising and buy stock.Any profits will be her reward for starting thebusiness. However, she is responsible for payingall the business expenses and must also paynational insurance and income tax on herprofits to the Inland Revenue.If she is unsuccessful and makes a loss, thenthe business will close. If she owes money,then she is personally responsible for payingher debts. She could have to sell her personalpossessions to do this and even be madebankrupt. This is because all sole traders haveunlimited liability. As a sole trader, Joanne makes all the decisionsas to how the business is run. She must alsokeep accounts which show how much profit orloss has been made over the year.

● The sole trader is his or her own boss anddoesn’t have to take instructions fromanyone else.

● The opening hours and days worked canbe flexible.

● Other staff can be employed to help atbusy times.

● Quick decisions can be made – there is noone else to consult.

● A personal service can be offered tocustomers.

● Bad (unpaid) debts can usually be avoidedas customers are normally known to theowner and most purchases are paid forimmediately.

● Paperwork is easy – unless the business isregistered for value added tax (VAT) whenspecial accounts must be kept.

● The financial affairs and accounts of thesole trader are private, only the InlandRevenue must be informed.

Drawbacks of being a sole trader● Long working hours may be necessary for

the business to be a success.● Illness and sickness can create problems.

If the business is closed, then expensescontinue but no money is being made.

● Success is dependent on the skills of theowner.

● It can be difficult to raise capital to startup or expand the business.

● The sole trader has unlimited liability forall debts.

● The owner may have no experience ofrunning a business or have any businessskills, e.g. in completing accounts, payingwages, managing staff.

Other important facts● A sole trader is self-employed. He or she

must register the business with the InlandRevenue and is responsible for keepingaccurate business accounts and completingan annual self-assessment tax form.

● In law, the sole trader and the business arethe same thing. If you fell in Joanne’s shopbecause the floor was wet, and broke yourankle, you would sue the owner – Joanne.

● If the owner dies, then the business ceasesto exist.

● Money for expansion often comes fromploughing back the profits. This means theowner reinvests some or all the profitsinto the business to expand, but thisreduces the amount the owner receives asa reward.

● The biggest risk taken by a sole traderrelates to unlimited liability. If debts arelikely to be few, and very small, then therisk is worth taking. If debts may behigher and buying stock would be veryexpensive, it is advisable for the owner toform a company and gain limited liability(see pages 16 and 17).

Partnerships

Investigating business14 Unit 1

Snapshot

Mark Fox and Phil Eddington,M & P Motor Engineers

Mark Fox and Phil Eddington both trainedas motor mechanics and have decided to opentheir own workshop. They will specialise incar repairs and MOT tests.Mark is a good salesman and a skilledmechanic. Phil is the technical wizard andcan also repair bodywork. This extends therange of services they can offer. Neither ofthem is good at accounts, so they will employMark’s sister to do this. She will work forthem three mornings a week, making sure allthe bills are paid on time.Mark and Phil will pool their savings andborrow some money from Phil’s mum. They willoperate a partnership and will share the profitsthat they make. However, Phil’s mum makesthe loan conditional on them taking out aDeed of Partnership. This is a legal documentwhich sets out the details of their agreement,such as the salary of each partner, the share ofthe profits each will receive and the procedureto follow if there is a dispute. This is goodsense, as it may save any arguments later.

Most partnerships are relatively smallscale. They include accountants, dentists andestate agents. Many partnerships exist inprofessions where the professional body insiststhat members are personally responsible fortheir actions, such as accountants, solicitorsand doctors.

A few larger organisations are run on apartnership basis where the employeesbecome partners when they join the company.The largest company of this type in Britain isthe John Lewis Partnership, where all 54,000staff who work for John Lewis and Waitrosesupermarkets are classed as partners andreceive a share of the profits as a bonus eachyear.

Benefits of being in a partnership● Any problems or worries can be shared

and discussed.● Between them, the partners have more

skills and ideas than a single person.

● More capital can be raised as all thepartners contribute.

● Partners with different skills canspecialise in their own areas and increasethe range of services they offer tocustomers.

Drawbacks of being in a partnership● The partners may not always agree and

some may work harder than others, whichcan cause problems.

● The profits must be shared.● All the partners must be consulted before

a decision is made.● The partners have unlimited liability for

all the debts.● An action or decision made by one partner

is binding on all the other partners.● The death of a partner means that his or

her share must be taken out of thebusiness and paid into the partner’sestate. Because this can cause seriousproblems, each partner usually has a lifeassurance policy to cover this amount. Theinsurance company then pays this moneyinto the estate if the partner dies.

Other important facts● The minimum number of people required

to set up a partnership is two and themaximum allowed is normally 20.

● The partners are self-employed, like soletraders, so must register their businesswith the Inland Revenue, keep accurateaccounts and complete self-assessmenttax forms.

● In law, partners are ‘jointly and severally’liable for the actions of each other. Thismeans, for instance, that if one partner ranup large debts and then disappeared, theremaining partners would be responsible!

● All partnerships are governed by thePartnership Act 1890. This assumes thatall the partners are equally liable for thedebts and receive an equal share of theprofits unless a Deed of Partnership hasbeen drawn up with different terms. Oftenpartners share the profits equally, but notalways. In some organisations, such assolicitors, there may be senior partners(who receive a larger share) and junior

Business ownership 15Chapter 2

Fact file

Phil’s mum is lending money to increase theirstart-up capital. An alternative would be forher to invest money in the partnership andbecome a partner herself. However, whereasMark and Phil are active partners becausethey work every day in the business, shewould be a sleeping partner because shewould not take an active part in the business.She would still be entitled to a share in theprofits, but would normally receive a smalleramount than the active partners.

Vets often form partnerships

partners. All partners must pay nationalinsurance and income tax on the moneythey receive.

● Obtaining start-up capital and raisingmoney for expansion is easier for apartnership as all the partners contribute.

● All the partners have unlimited liabilityfor the debts but the accounts are stillprivate. From 6 April 2001, it has beenpossible to form a new type of enterprisein the UK – a limited liability partnership(LLP). The regulations relating to theformation of an LLP and their accounts aresimilar to those for a company (see pages17–18), but in other respects the businesscan operate as a partnership.

Private limited companies

Investigating business16 Unit 1

Snapshot

Knowing me, knowing you

Some partnerships are very famous and godown in history, such as the collaborationbetween Charles Rolls and Henry Royce whichled to the formation of Rolls-Royce. Othersstart as partnerships but are now onlyassociated with one person. Sir RichardBranson, Chairman of the Virgin Group,co-founded his original enterprise with NikPowell, a childhood friend. Bill Gates, founderof Microsoft, started out with a partner calledPaul Allen. Some famous entertainers havehad business partners, and then fallen outwith them, for example Elton John whose splitwith his former manager, John Reid, cost him£8 million in legal fees.Many partnerships start out with goodintentions, but are rarely permanent becausepartners can cease to agree on how they seeeither their own future or that of the business.Experts say that the more partners knowabout each other at the start and the morethey have worked out the business details oftheir arrangements, the less chance ofarguments later.

Snapshot

Website Designs Ltd

Nikki, Jamil and Rob all studied IT andworked in new media companies. Nikki was awebsite graphic designer, Jamil a programmerand Rob was both an IT and a marketingexpert. Between them they decided to formtheir own website production company todesign and create websites for other businesses.Rob suggested that they should form a smallcompany rather than a partnership. Hisreasons were these:• A company would help them to obtain

capital more easily – they would needexpensive IT equipment and software.Banks and other financial institutions arenormally more willing to lend to companies.

• A company would improve their ownfinancial security. Because they would havelimited liability each one of them couldlose only the amount they invested in thebusiness. If the business failed, then thecompany would go into liquidation, but asowners, they could not be made bankrupt.

Spot check

Write down your answers to the followingquestions:

1 What is a sole trader?2 Identify two advantages and two

disadvantages of being a sole trader.3 List three differences between a sole

trader and a partnership.4 Identify two benefits of going into

partnership, rather than running abusiness as a sole trader.

5 Identify two examples of typical soletrader businesses and two examples ofpartnerships.

6 What is the difference between an activepartner and a sleeping partner?

7 Clearly explain the term ‘limited liability’.

There are many examples of privatecompanies in your own area, such as garages,caterers, garden centres, small manufacturingcompanies, recruitment consultants andbuilding firms. Look through your local YellowPages and you will find examples of companynames which end in the word ‘Ltd’.

Benefits of forming a private limitedcompany● The business can still remain small. Many

private companies are family firms wherethe family members are the onlyshareholders. Under European law, oneperson can set up a private company onhis or her own.

● All the shareholders have the protectionof limited liability and can lose only the

amount they have invested no matter howmuch money is owed.

● Because the owners, or shareholders,work in the business they know it well andhave a vested interest in its success.

● Banks are more willing to lend money tolimited companies, both for start-upcapital and for expansion.

● The accounts are still private between theowners, their accountants and the InlandRevenue.

● Setting up a private company is quite easyand there is no fixed amount which has tobe invested. In some cases, owners mayinvest only £100 or £200 each at the outset.

● Shares cannot be transferred to otherpeople unless all the shareholders agree,and cannot be bought by members of thepublic. This gives the owners directcontrol of the business.

Drawbacks of forming a private limitedcompany● Limited companies have to comply with

more regulations than sole traders orpartnerships. They have to register withthe Registrar of Companies and largecompanies must have their accountsaudited (checked) by an accountant.

● The owners must decide on the structureof the company and other details beforeformation can be agreed and thedocuments completed. There are alsocosts involved, usually about £200.

● The owners must not choose a namewhich is the same as an existing companyif this would cause confusion to suppliersor customers.

● The company must comply with all therequirements of various Companies Acts.For instance, they must have an annualgeneral meeting (AGM) once a year.

● Because one share equals one vote, ashareholder with more shares than all theothers would always have control by out-voting the rest. Therefore, the proportions ofthe shares need to be carefully thought out.

Other important facts● The company has a separate legal identity

from the owners. This means that it:

Business ownership 17Chapter 2

• A company would provide a better ‘image’to its customers, who would see the letters‘Ltd’ after its name and consider theyhad greater financial security (whetherthey had or not!).

• A company would mean fewer problems ifone of them left the business. This isbecause the company is legally separatefrom the owners and would still continueuntil it was legally ‘wound up’.

Rob told them they must choose a name forthe company and decide how much each ofthem would invest in the business. They wouldthen visit a company registration organisationto draw up the Memorandum of Association,which sets out the structure of the company,and the Articles of Association, which set outhow it will operate. They would then receive aCertificate of Incorporation. In effect, this isthe company’s ‘birth certificate’.Each of them would receive shares in thecompany, in relation to the amount they hadinvested. Each share would equal one vote.The company would then employ each ofthem and pay them. They would be directorsof the company, because they ran it, and alsoshareholders, because they had shares in thecompany.

– owns property, hires and pays staff,not the owners

– continues after the death of theowners until it is formally ‘wound up’

– can be sold by its owners, simply byselling the shares

– can take legal action in its own name,and have legal action taken against it.If you broke your ankle because youfell on a slippery floor on thecompany’s premises, you would suethe company not the owners.

● The company pays corporation tax on itsprofits to the Inland Revenue. Thecompany also pays the directors and staffa salary on which they pay income tax asemployees.

● All the profit after tax belongs to theshareholders. This is usually distributedaccording to the proportion of shares heldbut it is usual to keep some back asreserves for financing futuredevelopments.

● There are more sources of financeavailable to companies, particularly thosewith a good track record. Sources caninclude local authorities (which controlcertain funds, such as European grantsfor development areas), specialist financehouses, investment banks and venturecapitalists (see Unit 3, Chapter 10).

● Additional capital can also be raised byselling shares to family members, friendsor employees.

Public limited companies

Carphone Warehouse is just one example of apublic limited company. Originally, it was aprivate limited company until it was ‘floated’on the London Stock Exchange. This is theterm used for launching a public limitedcompany, the largest type of private enterprisein the UK. These enterprises are easilyidentified because they have the initials ‘plc’after their name.

In common with many other organisations,Carphone Warehouse was floated to raisemore money. The existing shareholders knewthat the mobile phone business was growingand wanted to expand rapidly. If a plc isfloated, then many more shares are issuedand can be bought by the general publicsuch as private individuals and largeorganisational investors. The directors run thecompany as salaried employees and can

Investigating business18 Unit 1

It makes you think!

Within your group, imagine that you are goinginto business together, then discuss thefollowing issues:

a Decide on how many people you thinkwould be a sensible number to run thebusiness and justify your choice.

b Decide whether you want to form apartnership or a private limited company,and identify the advantages anddisadvantages of both types of enterprisebefore coming to a conclusion.

c In either case, you will need to reach anagreement on profit sharing and howdecisions are made. If you all shareeverything equally, then how will a‘leader’ be rewarded? If you have a leader,will this person receive more? If you haveno leader, what happens if you cannotagree? Discuss how you would solve thisproblem.

Compare your answers with other groups.

Carphone Warehouse is a public

limited company, or plc

choose whether to own shares or not. Theshareholders own shares, but have nothing todo with the day-to-day operation of thecompany.

A plc must have more than £50,000 inpaid-up share capital before it can be floatedon the Stock Exchange and also needs a goodfinancial track record. However, not all plcschoose to have a listing on the StockExchange. In this case, they are known asunlisted plcs.

Public limited companies are all thefamous names you regularly hear about, suchas Marks & Spencer and Barclays Bank. Theirshare prices are quoted every day in thefinancial pages of most national newspapers.Obtain a copy of a list from a newspaper andsee how many names you recognise!

Benefits of forming a public limitedcompany● The amount of capital for expansion and

development is greatly increased becausethere are thousands of shareholders.

● If the company is successful, then thevalue of the shares increases. Thisincreases the overall value of thecompany.

● A public company can remain a smallenterprise. The minimum is two directorsand two shareholders.

● A large public company can achievesavings which smaller companies cannot.For instance, they can mass producegoods for sale and buy in bulk to savemoney.

● Additional finance can be raised inseveral ways. The company can borrowfrom a range of financial institutions, issueadditional shares or ask for special loans,called debentures.

Drawbacks to forming a public limitedcompany● A public limited company is registered as

such with the Registrar of Companies andmust comply with many externalregulations.

● The financial affairs of the company and

the discussions and votes at the annualgeneral meeting are often reported in themedia. If a company is having problems orfinancial difficulties, this quickly becomespublic knowledge.

● Shareholders expect to receive a dividendin return for their investment and will alsowant the shares to increase in value. If thecompany is in difficulties and share valuesfall, then many shareholders may sell,which will lower the price further. This canmake the company vulnerable to a take-over bid.

● The shareholders often have differentaims from the directors. The shareholderswant quick results so that the share valueincreases, whereas the directors may belooking at the long-term prospects of thecompany. Most shareholders areinstitutional investors who hold largeblocks of shares and can easily outvotesmaller shareholders.

● The original owners will lose much oftheir control over the company, even ifthey retain some shares. This has led tosome entrepreneurs, such as RichardBranson, buying back the company at alater date!

Other important facts● Legally, the shareholders own the

company. As shares are constantly beingtraded on the Stock Exchange, the actual‘ownership’ is constantly changing.

● All public limited companies must complywith the requirements of the CompaniesActs and all listed plcs must also abide bythe rules of the Stock Exchange.

● The net profit (after tax) is usually dividedbetween paying a dividend toshareholders and keeping back aproportion as reserves. Deciding thisbalance can be critical, especially whenprofits are low. If the dividend is low,shareholders may sell their shares(depressing the price). If too little is keptin reserves, there may be insufficientmoney for reinvestment, e.g. to replaceoutdated equipment.

Business ownership 19Chapter 2

Co-operatives

Alpha Communications Ltd, in Durham, is agraphic design company. It is also a co-operative because each of its workers jointlyowns and controls the company. Their profitsare jointly shared. In addition, the ownerdirectors believe in co-operative values ofhonesty, caring for the community and theenvironment.

Investigating business20 Unit 1

It makes you think!

Imagine that the members of your group arethe directors of a private limited company.There are six shareholders. Four seniordirectors hold 20 per cent of the shares each,two junior directors have 10 per cent each.Your accountant informs you that thecompany’s profit this year (before tax) is£720,000. Assume that you will paycorporation tax at 20 per cent.

a What will be your profit after tax?b How will you distribute this, assuming

that you want to upgrade your computerfacilities this year?

Snapshot

A profitable experience!Until 1989, Rachel Elnaugh was a taxconsultant, but wanted to form her owncompany to develop a gift idea she had –packaging ‘experiences’. She joined with a friendand they both started working part time inRachel’s spare room, with Rachel continuing inher job while the business got off the ground.An important decision was the company name.Another friend suggested Red Letter Days – asthe name signifies an important occasion – andred packaging to match. In the first year thecompany took only £10,000 but thebreakthrough came at Christmas 1990 after amagazine promotion. At that point, Rachel lefther job and raised £10,000 from family andfriends in return for 20 per cent of the shares.Today, Rachel’s company is an unlisted plc,which offers 300 experiences, employs140 staff and has a turnover of £14 million.In 2000–2002, the company sold over120,000 experiences – from sky diving to aday at a health spa. Rachel has one furtherambition and one regret. She wants to floatthe company, not for additional finance butas a career achievement. But she regrets givingaway 20 per cent of the company for extrafinance all those years ago, especially giventhe amount it is worth today!

You can find out more about the experienceson offer at www.heinemann.co.uk/hotlinks.

A typical Red Letter Day experience

Spot check

Write down your answers to the followingquestions:

1 State how you could tell immediatelywhether a company is a private limitedcompany or a public limited company.

2 What is the main advantage of forming alimited company?

3 Who employs the directors of a limitedcompany?

4 What is the difference between incometax and corporation tax?

5 Identify two important differencesbetween private limited companies andpublic limited companies.

6 In a public limited company:a who are the ownersb who runs the company?

A graphic design company may not bethe first thought you had when you read theword ‘co-operative’. Most people think aboutretail co-operatives instead. However, alltypes of co-operatives – retail, worker andhousing, and so on – have the same aim: theyare run by the owners or the members for thebenefit of all.

Co-operatives have traditionally beenmore successful in Europe than in the UK, butmore is being done to encourage the formationof worker co-operatives in Britain, includingspecial types of finance for start-up capital andguidance services.

Benefits of forming a co-operative● Each worker/owner has an equal share in

the business and one vote each.● Each person also has an equal share of the

profits.● A worker co-operative can also be a

limited company, such as AlphaCommunications Ltd, and have theprotection of limited liability.

● Decisions are made jointly by the ownersand in the collective interests of everyone.

● Jobs can be rotated so people can extendtheir skills and the least popular jobs canbe shared.

● Because the workers own and work intheir own business, they are committed toits success.

● Workers are not forced to be owners. Eachworker can make an independentdecision.

Drawbacks of forming a co-operative● Traditional financial organisations, such as

banks, are often wary of lending money toco-operatives because there is norecognised leader.

● Suppliers may be reluctant to providegoods on credit for the same reason.

● Decision making can take a long time ifeveryone is involved.

● Hard business decisions may conflict withmembers’ social beliefs, such as sacking aworker even if this would be in the bestinterests of the business.

● Members often lack financial and businessskills.

● A good leader may become impatient andfeel unable to operate effectively.

● Job rotation may not work effectively –some people may not be sufficientlycompetent to do certain jobs.

Other important facts● The largest consumer co-operative is

The Co-op Group, which comprises theCo-operative Wholesale Society, the Co-operative Retail Society, the Co-operativeBank, the CIS (Co-operative InsuranceSociety), as well as funeral services,dairies, Travelcare and other businesses.In 2001, the group was valued at £9 billion.It employs more than 55,000 employees,runs over 5,000 shops and 44 superstoreswith annual sales across the group of£4.7 billion. In this case, the customers ownthe society, not the employees. Originally,each member was paid a dividend eachyear in relation to the amount they hadspent on goods. Following a review of thesociety in February 2001, there wereproposals to reintroduce this and pay a10 per cent minimum dividend tomembers each year.

● Workers’ co-operatives can often be theresult of a worker buyout when a companyis failing. In this case, rather than losetheir jobs, the workers get together toraise the money to buy and run theenterprise themselves.

● Other types of co-operatives includehousing and producer co-operatives.Housing co-operatives operate to give allthe members a voice in decisions relatingto their estate or area. In producer co-operatives, producers join together to helpto sell and market their products. Anexample is the Milk Marque, a dairyfarmers’ co-operative which buys milk fromfarmers and sells it to the dairy industry.

● All co-operatives share ethical values andprinciples and aim to be sociallyresponsible. Co-operative retail stores areanti-pesticide, pro-organic and won anaward for their support for fair trade. TheCo-op’s Fairtrade Mark guarantees a fairprice for Third World growers andproducers.

Business ownership 21Chapter 2

Franchises

If you like pizza, you may well have visitedPizza Hut as there are about 300 restaurantsand 130 takeaways around the country. Butwho owns and runs all these restaurants –Pizza Hut, the manager or someone else?

The company Pizza Hut is owned andcontrolled by Whitbread (the former brewery),together with Tricon Global Restaurants, butmany of the outlets are often franchiseoperations. This means that there is anowner/manager in charge who operates thebusiness with the agreement of Pizza Hut.

In common with many organisations, PizzaHut has used franchising as one way to enableit to grow faster, and more cheaply, thanbuying all the restaurants itself. Therestaurant owners benefit because they areusing a well-known name which is promotednationally, obtain advice on how to run thebusiness and usually have exclusive rights tooperate in a certain geographical area.

Benefits of owning a franchise● When the name is well known, franchises

have a higher success rate than othersmall businesses.

● In addition to advice, guidance andexpertise from the franchisor, thefranchisee can benefit from nationaladvertising campaigns.

● There are fewer decisions to make inrelation to operating the business andproblems can be discussed with thefranchisor.

Investigating business22 Unit 1

Snapshot

Lucky thirteen!

Pilling is a village about 10 miles fromBlackpool. It has few employers. In 1984,the largest employer was Tayban Precastwhich made pre-cast concrete products butthere were problems at the company. Theowner decided his only option was to relocateto Bolton, several miles away. The existingworkers were faced with redundancy.A member of staff, Jim Stamper, proposedinstead that the workers bought the businessand ran it as a workers’ co-operative. Thirteenfounder members invested £17,500 andpersuaded a bank to match this amount. Theyalso obtained financial support from LancashireEnterprises. In January 1985, the co-operativestarted trading as North West Precast Ltd.Today, the company employs over 40 peopleand is the major employer in Pilling. It hasdone much better than Tayban, which wentinto liquidation in Bolton not long after itsformation. Fact file

The owner/manager of a franchise outlet iscalled a franchisee. The company which lendsits name and expertise is called thefranchisor. The franchisee must raise most ofthe capital and pay an initial franchise fee tothe franchisor. The owner also has to payroyalty payments or a management servicefee each year, normally based on a percentageof the sales.

Two well-known franchises – look

out for franchise businesses in your area

● Most of the profit is retained by the owner.● It is easier to raise capital from a bank to

start a franchise than to start other smallbusinesses.

● Franchise operations in Britain areoverseen by the British FranchiseAssociation (BFA) which operates a code ofconduct for its members.

Drawbacks of owning a franchise● Some of the profit must be paid to the

franchisor.● The owner does not have the freedom to

make all the decisions, particularly inrelation to the product range or saleprices which may be controlled by thefranchisor.

● Only the franchisor’s product(s) orservice(s) can be sold.

● The terms of the franchise agreement aredrawn up by the franchisor. They arelikely to restrict the sale of the businessand may include ‘performance’ terms.This means that if target sales are not met,the agreement may be terminated.

● The franchisee is largely dependent on thepopularity of the franchisor’s product orservice and the amount of advertising andpromotion activities undertaken by thefranchisor.

● Business success is still dependent on theskill of the franchisee and also thedependability of the franchisor. If thesequalities are lacking, the business may fail.

Other important facts● Over 665 business franchises operated in

the UK in 2000 with an annual salesturnover of £9.3 billion. Many arehousehold names, such as Benetton,Wimpy, KFC and The Body Shop, andemployed 316,000 people. Ninety-five percent of franchisees reported they wereprofitable and 85 per cent consideredtheir relationship with the franchisor wassatisfactory (NatWest/BFA franchisesurvey, 2001).

● Franchising costs money which thefranchisee needs to borrow or save. Theinitial fee can range from £5,000 to£100,000 for a well-known name.Franchisees also often need to pay forequipment and stock and to rentpremises.

● The franchisor normally charges6–8 per cent of sales turnover a year in fees.

● Banks offer special loan packages tofranchisees which are more generous thannormal start-up loans.

● Franchisors provide initial training andongoing advice and support to franchisees.

● There are risks in buying a franchise froman unknown organisation. A fewdisreputable organisations may offerunfavourable terms, ask for large initialfees and then leave the franchisee withlittle or no support.

Business ownership 23Chapter 2

Snapshot

Copying can be a good ideaThe Young Entrepreneur scholarship scheme isjust one of many incentives offered to franchiseesby Prontaprint, the largest provider of digitaldesign, print and copy services in the UK. Othersupport includes guidance on obtaining start-upcapital, a comprehensive franchisee ‘package’and continued training and support. Existingfranchisees are also eligible for a range ofawards such as Franchisee of the Year andprizes for achieving top sales.

Prontaprint is a successful organisation. Ithas grown from one outlet in Newcastle in1971 to over 200 all over the UK. Itssuccess is due to its good reputation,technical expertise, its team of dedicatedsales people who continuously promote thebusiness and also because of the enthusiasmand commitment of its franchisees.Find out more atwww.heinemann.co.uk/hotlinks.

The public sector

Anna is an administrator in the NationalHealth Service (NHS). Katya works at the localJob Centre. Suhail, who was always good withfigures, is a trainee at the Inland Revenue andJason works in the housing department at thetown hall. What do these friends have incommon? They are all employed in the publicsector. This means they are either employed

by the government, another public authority,such as the local council, or a publiccorporation.

Central government departments

There are a large number of governmentdepartments, all of which deal with differentmatters at a national level. They overseepublic services provided across the nation –from education, health care and social securitybenefits, to defence (such as the army), thepolice and prison service, and motorwaybuilding and maintenance.

Each department is overseen by agovernment minister and has its own budget.Ministers bid for money each year from theTreasury, the government department whichmanages the government’s money. The amountwhich is agreed forms part of the maingovernment budget, which is raised from taxes.

Investigating business24 Unit 1

It makes you think!

Your friend has inherited £15,000 and wants toset up in business. She cannot decide whetherto be a sole trader or start a franchisebusiness. She has completed a business courseand is used to working in the retail trade.Within your group, summarise the advantagesand disadvantages of both courses of actionand decide which you would recommend,and why.

It makes you think!

Ten government departments are listed below. Within your group, decide what the main functions of eachone is likely to be.

● Ministry of Defence ● Department of Trade and Industry● Home Office ● Foreign and Commonwealth Office● Department for Education and Skills ● Department of Health● Department of Environment, Food and Rural Affairs ● Department of Culture, Media and Sport● Department of Transport, Local Government and ● Inland Revenue.

the Regions

You can find out about individual government departments through the government’s website atwww.heinemann.co.uk/hotlinks.

Spot check

Write down your answers to the followingquestions:

1 Who are the owners of a worker’s co-operative?

2 What is meant by the term ethical values?Give an example of an ethical value heldby The Co-op retail organisation.

3 Identify two advantages and twodisadvantages of operating a co-operative.

4 What is meant by the term franchisee?5 Who, or what, is a franchisor?6 Identify two benefits and two drawbacks

of being a franchisee.7 You are a franchisee with a sales turnover

of £40,000 after tax. Your franchiseagreement states you must pay thefranchisor 7 per cent of sales each year.Your profit after tax is £22,000. How muchwill you each receive that year?

Local authorities

Local authorities provide services within thelocal community. Needs for these can vary,depending upon the area. For instance, thoseof a rural community are very different fromthose of an inner city.

In most areas of the country, there is a two-tier system. County councils offer servicesacross a large area and district councils runspecific services for smaller communities. Forexample, social services would be overseen bythe county council but refuse collection wouldbe undertaken by the district council. In 1993,some authorities such as Blackpool bid forunitary status. These authorities are no longerresponsible to the county council for theservices they provide.

Councils receive money from thegovernment through the Revenue SupportGrant and also charge householders counciltax and levy a business rate on all businesses(see page 31). Other income comes fromloans, council house rents and the sale ofcouncil services such as leisure centrecharges. They spend the money on providinga range of services, as shown in thediagram below.

Each year a council must publish its budgetand send a copy to every council tax payer inthe area.

Public corporations and theprivatisation issue

The public sector is a very large employer inBritain, but it used to be even bigger. This wasbecause the state used to own a large numberof public corporations – businesses controlledby the government. Examples included BritishAirways, British Telecom, British Gas andBritish Steel. In the 1980s, it was decided thatthese organisations should no longer bepublicly owned and most were sold orprivatised, that is, ‘moved’ from the public tothe private sector. Today, there are few publiccorporations. The main organisations stillowned by the state are:

● the Bank of England ● the BBC● British Nuclear Fuels (which the

government plans to privatise)● Royal Mail Group (which runs post offices

and the Royal Mail).

Many services undertaken by governmentdepartments and local authorities have alsobeen partly privatised because this isconsidered more efficient. For instance:

● Refuse collection, meals on wheels andhome helps in your area are likely to beundertaken by private companies undercontract to your local authority to providethese services.

● Your local hospital will probablysubcontract its cleaning requirements to aprivate organisation.

● The computer systems in the income tax,social security and driving licence officesare operated by private companies.

Public and private together

Public–private partnership (PPP) and privatefinance initiative (PFI) refer to occasionswhen a privately owned organisation linkswith the public sector to set up and/or run anenterprise, such as when a private companybuilds a new school or hospital and may alsomanage it as part of the contract.

PPP is being used to improve the LondonUnderground. Some people are in favour of

Business ownership 25Chapter 2

Localauthorities

Fire service

Refuse collection

Road maintenance

Environmental health

Economicdevelopment

Magistrates' courtsand probation

service

Recreationand tourism

Police

SchoolsLibraries

Some of the services

provided by local authorities

this because private money will help improvethe service. Others think it will not work, asprivate organisations are interested in profitonly, rather than services or safety.

Why not privatise everything?

Many people consider that state ownership isstill beneficial in some cases:

● When a socially desirable or essentialservice would not make a profit so wouldnot be operated by a private business.Health care, education and socialservices are freely available foreveryone, regardless of income.

● When it is difficult to charge people forindividual use, such as police, the fireservice, the legal service and defence.

● When it is in the national interest to keepthe service in the hands of the state. TheBank of England is the government’s bankand is responsible for England’s banknotes. The government wouldn’t want tolose control of what the Bank does, norwould it want the Bank to be taken over byforeign interests.

Investigating business26 Unit 1

What can go wrong?

In the 1980s, those against public ownershipargued that it was inefficient. Most of thepublic corporations had a monopoly whichmeant they were the sole supplier. Forinstance, you could rent a telephone line onlyfrom British Telecom and buy gas only fromBritish Gas. Because customers had no choice,prices could be high and service poor. Inaddition, public corporations were notexpected to make a profit, only to break even– income and spending to be the same – yearafter year. If they made a loss, they were givena subsidy from the government. This moneywas largely raised from taxpayers, soproblems with public corporations were aptto lead to a rise in taxes.

The government was also concernedthat the costs of public services were too highand many local authorities and governmentdepartments were considered inefficient.Local authorities were told to put services outto tender. This means private companiescompete to obtain the contract.

Spot check

Write down your answers to the followingquestions:

1 Name two government departments andstate what they do.

2 List three services provided by your localauthority.

3 How are public services paid for?4 What is a public corporation?5 State two ways in which a public

corporation differs from a public limitedcompany.

Business ownership 27Chapter 2

Case study

Who should own the railways?

Until 1996, the railways in Britain, in commonwith most of Europe, were owned by the state.However, British Rail was considered inefficientand costly. Government grants and subsidieswere frequently required – in 1992, British Railhad losses of about £250 million and receivedgrants of £1 billion. In addition, investment inreplacing old track was forecast to cost a further£1.6 billion. This would mean further costs fortaxpayers.

To avoid this, the railways were privatised.Train operating companies (TOCs) would run thetrains. These are companies such as Virgin andConnex. Another company, Railtrack, would beresponsible for the track, stations, signals,bridges, tunnels and level crossings. Railtrack was‘floated’ as a public limited company and manyinstitutional and private investors bought sharesin the company. Each share cost £3.80, but thevalue increased so that by 1998 the shares wereworth £18 each.

Serious accidents at Southall, Paddingtonand Hatfield resulted in the scheduling of majorimprovements to safety systems and tracks,which would cost Railtrack billions of pounds.By mid-2001, Railtrack had serious financialproblems. In April it had requested £1.5 billion ofsubsidies from the government and by autumnsaid it would need even more.

The government refused. The TransportSecretary declared Railtrack insolvent because itcould no longer pay its debts. By November, theshares were virtually worthless. This angeredshareholders who were concerned they couldlose all their money.

Others argued that Railtrack’s payments oflarge shareholder dividends had been partly toblame, as this money should have been used tomodernise the railway system. They claimed thatthe railways are successful in France, Germanyand Spain because these governments havemade large investments in modern rail systems.They said this should be the same in Britain.

By late 2001, the government had four

choices: to create a ‘not for profit’ company to runthe railways; to put the railways back into stateownership (renationalise them); to let the traincompanies own and run their own tracks; to sellRailtrack to the highest private bidder.

1 Who owned the railway system in Britainbefore 1996?

2 What was Railtrack?3 What does the term floating a company

mean?4 Who owned Railtrack?5 What does insolvent mean?6 Why did the government decide

Railtrack was insolvent?7 Identify one benefit and one drawback

of state ownership of the railways.8 Do you think the railways should be

owned by the state or by a privatecompany? Give a reason for your opinionand then find out what actuallyhappened.

1 Who owns the railway systems inEurope?

2 How did the ownership of the railwayschange in Britain between 1995 and2001?

3 For what aspects of the railway networkwas Railtrack responsible?

4 Why did Railtrack need extra money in2001?

5 Why do you think the governmentinsisted Railtrack was insolvent ratherthan paying the subsidy?

6 Which group of people were annoyed bythis decision, and why?

7 Identify two reasons why some peoplethink the railways should berenationalised.

8 Evaluate each of the ownership choicesfaced by the government. Explain, withreasons, which one you think would be the most appropriate for the railways, then find out what thegovernment actually decided to do.

Chapter review and practicequestions

1 Match up the types of business organisationshown in the chart to the most appropriatedescription.

2 A sole trader is considering taking a partner.Suggest two benefits and two drawbacks ofdoing this.

3 a What are the benefits of having limitedliability?

b How would an entrepreneur obtain this?

4 Decide whether each of the statements belowis true or false. Then correct all the ‘false’statements.

a The public can own shares in a privatecompany.

b In a consumer co-operative the customersare the owners.

c State ownership of industry has decreasedin Britain.

d A franchisee can keep all the profits.e Public limited companies are the largest

type of private enterprise.f In a partnership, there is no one who acts

as the boss.

1 Decide which type of business enterprisewould be most appropriate in each of thefollowing cases:

a A husband and wife who decide to open asandwich shop.

b A group of ten workers who, whenthreatened with redundancy, decide totake over a clothing company and run thebusiness between them.

c A business which makes uPVC windowsand doors.

d A young graphic designer who decides towork for himself after inheriting £15,000.

e A chain of hire shops which wants toexpand nationally as quickly and cheaplyas possible.

f A mobile library in a rural area.g A large pharmaceuticals company.

2 A sole trader needs additional capital andcannot decide whether to take a partner or toform a private limited company. Explain thebenefits and drawbacks of both courses ofaction.

3 Your friend works for a firm of accountants, butis thinking of changing her job. She has beenfor an interview at an organisation whichoperates as a workers’ co-operative. She isunsure what this means.

a In two or three sentences, explain how aworkers’ co-operative operates.b

b What differences do you think your friendwill find if she starts work there?

4 In three or four sentences, clearly explain thedifference between private and publicownership.

Investigating business28 Unit 1

Type of business Description

Sole trader Large supermarket chain

Partnership Benefits Office

Private limited Plumber working on hiscompany own

Public limited Four friends who run acompany nursery school between

them with no one asoverall boss

Franchise Jeweller who owns threeshops

Workers’ Veterinary practice withco-operative three vets

State owned Car valeting company which wants to expandrapidly by appointingowner-managers