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The Business Unit
1
The Business Unit
Chapter 13
Location of Business
Many find that there is a need to look for a location through some of these factors.
Land
- Sufficient
- Suitable
- Able to secure financially
- Positioned well
Labour
- With a good no-strike record
- Influence by social amenities such as housing and medical facilities
Environment
- Climatic conditions are important
- Example, agricultural industries
Fuel or Power
- Unnecessary to be located next to fuel or power.
- Except for those needed to be near source such as water.
Suppliers & Competition
Near other businesses on which they depend or in a similar line of business.
Government Influence
- Improve regional balance
- Reduce overcrowding in cities and towns
Market Pull
- Close to where potential customers can be found
- Near where shoppers will be
Communications Facilities
Communications Facitlities
Ease of access to transport facilities as well as information networks.
Raw Materials
Close to raw materials influence choice of site.
Industrial Inertia
Industrial Inertia
Still staying at the a particular site although the original reason no longer applies.
Solutions by Government
How Governments Solve Disparities?
Development Areas
Development Areas
- Grants offered to land purchases and new buildings
- Lead to new jobs in areas of high unemployment
Intermediate Areas
Intermediate Areas
- Unemployment not as high as development areas
- A need for preventive action
- Provision of government-built buildings and government intervention
- Cheap rents and training grants for workers
Enterprise Zones
Enterprise Zones
- Small geographical areas
- Encourage development in rundown inner city areas.
Incentives
Offer Incentives?
- Reduced local rate charges by local government for a period
- Tax incentives from central government to locate within a zone
- Simplified local planning procedure
Public Sector
The businesses that are owned by all the public through government ownership.
2
Categories
2 broad categories of public sector businesses
Municipal Undertakings
- Operated on a commercial basis by local government authorities.
- Financed by local taxation and charges made from their services or other commercial activities.
- Could be subsidised by grants from central government.
State Undertakings
State Undertakings
- Variety of enterprises operated by the government on behalf of the public.
- set up by an Act of Parliament to provide commercial or industrial functions (monopolistic position).
- Legal identity separate from government.
- Policy is decided by government in consultation with corporation board.
3 ways of making profit
Profit
- Pay interest on charges on capital borrowed.
- Set aside for future repayment of loans.
- Reinvested to improve or expand the service.
Nationalisation
Public corporations that have been in private ownership and taken into public ownership by the government.
Example: Shell Petroleum in Brunei
Privatisation
Government-owned enterprise is passed into private ownership.
Brunei's thoughts on privatisation is ongoing.
Reasons for state ownership
State Ownership
- Removing monopoly out of private ownership for citizen's benefits.
- Keep the natural monopoly in public ownership.
- Initial capital cost too high for private enterprise.
- Essential for our welfare but not economically wise for private businesses.
- National security protected.
- Avoid equipment replication and duplication of services
- Save ailing industry and protect jobs.
Advantages vs Disadvantages
Advantages
Disadvantages
Can be overcaustious as they are answerable to the public
Resources to fund a vast industry even uneconomic
Ensures provision of essential services
Bosses are politicians without expertise
Public Ownership
Reduces possible duplication of services and equipment
Local issues may be disregarded
State monopoly could be inefficient and has insufficient profit
Large sections of economy into single strategy plan
Profit benefits whole nation
Losses met by taxpayer
Enjoy max. economies of scale
Personnel appointed because of proven ability
Private Sector
Businesses that run for profit and not owned by the government.
Owned by individuals or commercial companies.
Limited Liability
Companies face many risks.
The most obvious risk is not making profit or making a loss. The worst it could go is bankruptcy.
Unlimited Liability
Unlimited Liability
Not only liable to lose money invested in the firm but can also have their personal assets taken in order to pay off their debts.
What is limited liability?
What is it?
Allows investment to happen without facing risks of unlimited liability.
Investors are only liable to lose the amount of money invested into the business.
Limited liability has a separate corporate identity.
Sole Trader
- Personal service provided
- Limited capital available for startup
- Large-scale production unrequired
What is it?
Operated by proprietor alone or employ several people.
Main feature owned by one person and tends to be relatively small business.
Sole trade can be anyone
Popular for start-up business
Not just a Retailer
What do sole traders have?
Have?
- Have few employees and less machinery or capital.
- Less plant and fewer opportunities for economies of scale
- Market is less diversified as output is limited.
Advantages vs Disadvantages of Sole Trader
Advantages
vs
Disadvantages
Disadvantages
Advantages
Difficult to get loan as risk higher
Less capital
Profit is mine!
Unlimited liability. They can take everything!
Own boss!
Expansion of Sole Trader
Expansion
- Makes business more stable and to give it greater continuity.
- A way is to offer part-ownership to one or more people forming a partnership.
Partnership
Partnership
It can involve between two and 20 people.
There are other exceptions in other firms.
What are they?
What are their solutions for sole trader?
Solutions
- More people more experience and knowledge
- Some have specialist knowledge
- If both have sufficient personal possessions to meet debts, they will make equal contributions.
What are their limitations?
Limitations
- Unlimited liability
- Possible to have limited liability but at least one has unlimited liability.
- Some professional associations do not allow limited liability.
Partnership Deed
It is an agreement that outlines the rights of each partner regarding the division of the profits and so on.
Sleeping Partner
A partner who is willing to provide capital into the business but does not wish to take part actively.
He or she will still have the share of the debts if the business go bankrupt.
Disadvantages
Advantages
Easily formed
Generally unlimited liability
Advantages and Disadvantages
More people to contribute capital
Possible disagreements between partners
Greater continuity than sole trader
Each are liable for debts of business
Limit to 20 members
Shared expenses and business management
There are 2 limited companies
Limited Company
Private Limited Companies
Private
- Company must include the word 'Limited' or 'Ltd' in its title.
- Allowed to have minimum of one shareholder.
- Capital is divided into shares.
- If company makes a profit, pays dividend on shares.
- Some may wish to keep control over the transfer of shares.
- Carefully audited accounts have to be kept for annual inspection.
Disadvantages
Advantages
Not allowed to sell shares to the public on Stock Exchange
More people to invest capital
Advantages vs. Disadvantages
Restrict share transfer which then limit capital raised.
Work and responsibility is shared
Longer decision making as many are involved.
Limited liability
Keep audited accounts.
Public Limited Companies
Public
- Indicate its public status by including PLC (or plc) in its title.
- Minimum of 2 shareholders.
- Shareholders won't be involved with the day-to-day activities, hence, Board of Directors are elected.
- Chairperson will then be elected by the board to regulate their meetings.
Managing Director
A salaried person will be appointed to run the business by being involved on the day-to-day activities.
Advantages of Public Companies
Advantages
Obtain large quantities of capital and resources and changing them into large, strong business units.
Enjoy economies of scale such as:
- ability to purchase supplies in bulk, hence, obtaining favourable prices
- purchasing equipment to save labour and cut costs
- ease of borrowing money and obtaining credit
- greater opportunity to undertake research programmes
Disadvantages of Public Companies
Disadvantages
Large company, more paperwork. Feeling of detachment from day-to-day business activities and decision-making take longer time.
A copy of audited accounts will be sent to the Registrar of Companies. Difficult to keep confidentiality.
As shares are transferred easily, another company can easily take over the company by gaining major shares.
Management in the company would be too impersonal, inflexible, inefficient and overstaffed.
How to set up a limited company?
Setting up a limited company
1) Register with Registrar of Business Names.
2) Regulated by Companies Acts of the country, name of business registered with Registrar of Companies with 2 completed documents.
3) Once satisfied by Registrar of Companies, Certificate of Incorporation will be issued.
Memorandum of Association
MoA
External relationships of the business.
The document states:
- name of the business and its status
- address of registered office
- objective which the business is formed
- liability of owners
- amount of capital is registered and how it is divided into shares
- association - declaration signed by those forming the business.
Articles of Association
AoA
Internal relationships of the business.
Promoters make declarations and statements to the Registrar of Companies, which are:
- rights of shareholders
- methods and manner of election of directors
- manner in which meetings are to be conducted
- remuneration, appointment, removal of auditors
- method of audit
- issue and transfer and forfeiture of shares
Miscellaneous Declarations
Miscellaneous
- Amount of registered capital and how it is divided into shares
- Declaration made under oath by company secretary or director to confirm that all requirements are met
- List of first directors
- Statement of consent by each director for their willingness of action
- Registered address of the company
Franchise
Franchises
It is a firm that has a successful service or product (franchisor) and enters into a contractual relationship with another business (franchisee) and in exchange for a fee (royalties).
How It Works?
Franchisee receives the majority profits and losses.
Franchisor provides extensive marketing backup in return for the money it receives.
Advantages
Advantages of Franchises
- Reduce start-up risks
- Market an established name
- Easier financing as banks are more willing to approve a loan
- Franchisor provides marketing and advertising services, reducing the franchisee's costs
- Franchisee gains exclusive right to market within a specified area
- Franchisee does not need to create relationship with suppliers as there are existing established relationship from the franchisor
- Franchisor provides backup such as training, marketing, advertising, promotional material and national advertising
Disadvantages
Disadvantages of Franchises
- If franchisor did not make the right market research, the franchisee would suffer a loss.
- Costs may be higher affecting the profit of the franchisee
- Franchise agreement has restrictions on how the business should run and could restrict the approach to local market conditions.
- Franchisee are required to agree to non-competition clauses that prevents them from expanding.
- Franchisee must adhere to the changes the franchisor has made.
- If franchisor is out of business, this directly affects the franchisee.
- More difficult to sell a franchise business.
Multinational
Multinationals
It is a business operating internationally, although its ownership is usually based in one country.
How It Works?
Can contribute to each country where they are active.
Expansion of global economy has encouraged the global expansion of multinational companies.
Advantages
Advantages of Multinationals
- Cheaper labour
- Provide a means of entering tariff-protected markets
- Reduce unemployment
- Factors of productions employed more effectively because multinationals raise competition levels.
- Advanced technology is encouraged and trainings are provided for higher technological skills.
- Increased teamwork and shared goals
- Greater variety of product choice
- Increased employment choices are promoted, resulting in higher incomes.
Disadvantages
Disadvantages of Multinationals
- Can be counterproductive as it could lead to too much red tape and decision making is slower.
- Motivated by self-interest instead of the interests of the host country.
- Can use economic power that could be socially unacceptable such as exploitation of cheap labour and diminishing raw materials, and ignoring environmental issues.