Getting Started

Getting Started

business_square2

Key Learning Outcomes


In this section you will need to be able to identify

  • Why individuals wish to set up their own firms and ways of overcoming obstacles..
  • Finance options:

a. Main sources of finance available – three short term, three medium term and three long term sources.
b. Working capital management.
c. Basic cash flow statement and tax implications (PAYE, PRSI, VAT).

  • Ownership options:

a. Choosing forms of ownership and implications of choice.
b. Basic introduction to sole trader, partnership and Limited company.

  • Production processes/options:

a. Job
b. Batch
c. Mass

…and be able to draw up a Business Plan to include purpose, importance and layout.

Introduction: Getting Started


The following example will illustrate the key learning points above:

Paula and Thomas have recently returned to Ireland having worked with transnational companies for ten years. They wish to set up in business together in Ireland manufacturing a range of new organic breakfast cereals. Paula has particular expertise in production and finance and Thomas in marketing and human resources.

    1. Illustrate the elements involved in Paula and Thomas’s business startup.>

getting-started_01

  1. Discuss the advantages for Paula and Thomas of setting up their own business.
    • Profits/Income: A belief that they will make more money and enjoy a better standard of living through self-employment than they are currently receiving as employees.
    • Personal satisfaction: A desire for greater freedom, the wish to be independent and have control over one’s own situation, a great desire to be one’s own boss, make your own decisions and take responsibility rather than be told what to do.
    • Ambition: Challenge of achieving goals and creating your own business may be a lifelong objective.
    • Spotting an opportunity: They see an opportunity in the market that is not currently being served, or they come up with a new idea or invention and they wish to capitalise on this, knowing that they possess all the necessary resources and enterprise skills to set up the business.
  2. Outline the challenges Paula and Thomas might face in setting up their business and how these could be overcome.
    • Raising Finance/Capital: The business will have to choose suitable short-term (a bank overdraft to pay wages), medium-term (leasing equipment and machinery) and long-term (mortgage to purchase buildings) sources of finance. The business will have to raise finance to establish itself and survive. It will have to manage its cash flow and in particular its loan repayments.
      This challenge can be overcome by gaining professional advice. The business will need help from professionals such as an accountant for information and advice on accounting or taxation matters, a solicitor for checking on a lease, loan agreements or contracts, formation procedure legalities or advice on relevant legislation.
    • Ownership Option: The business will have to choose a suitable ownership option e.g. Sole Trader, Partnership or Private Limited Company. A company may be attractive because it offers the benefit of limited liability. A partnership allows new skills to be acquired whereas a sole trader may be attractive because the owners retain control.
      This challenge can be overcome by using a mentor who as an experienced business person may be able to offer their experience and expertise.
    • Production Method (Manufacturing Firm): The business must choose a suitable method of production e.g. job, mass or batch production. The method chosen must suit the business, guarantee quality and ensure competitive prices.
      This challenge can be overcome by training. Potential entrepreneurs may need training in the early stages of starting a business and in specific skills useful for a start-up.
    • Recruitment/Lack of Expertise: The business must recruit suitable staff with the right skills and qualifications that will enable the business to achieve its objectives. Trying to find employees who can work in teams, have good communication skills and work ethic is a challenge associated with a business start-up.
      This challenge can be overcome with the help of state agencies. A number of state agencies are available to assist the potential entrepreneur in starting up or developing their business including County and City Enterprise Boards, Enterprise Ireland and area partnership companies.
  3. Explain the term ‘short-term finance’ to Paula and Thomas.
    • Short-term finance is finance available for a period of up to one year. It should be repaid within twelve months and should be used for short-term needs.
  4. Outline two sources of short-term finance Paula and Thomas may consider meeting their working capital needs.
    • Bank Overdraft: This is a facility offered by a bank that allows current accountholders to withdraw more money from their account than they actually have in it. Interest is charged on the outstanding balance on a daily basis. It can be recalled by the bank at any time. Paula and Thomas could use an overdraft facility to purchase stock or pay the wages of staff.
    • Trade Credit: Paula and Thomas may buy stock for resale on a “buy now and pay later” basis. The amount of credit available may be dependent on their reputation and credit worthiness. There is no direct charge but cash discounts can be sacrificed if they choose to buy raw materials and stock on credit.
  5. In choosing either a short, medium or long-term source of finance Paula and Thomas have been advised that they should always match the source of finance with the purpose for which the finance is to be used. Explain using examples from each type of finance source why this is so.
    • Short-term finance is for less than one year and is used to pay day-to-day expenses and wages; these could be financed by bank overdraft. Purchase of stock could be financed by trade credit or bank overdraft. Short-term finance should not be used to finance long term projects as the payback period is too short.
    • Medium-term finance is for one to five years and could be used for purchasing computers, office equipment, motor vehicles, using hire purchase and leasing or term loan.
    • Long-term finance is money raised for a period of over five years and should be used to finance the permanent needs of the business. It is to purchase fixed assets such as land and buildings or other large capital items and could be financed by a share issue or mortgage.
    • In summary the payback period of the use of the finance must be the same as the repayment length of the source.
  6. Outline the advantages of a private limited company as a form of business ownership for Paula and Thomas’s start-up business.
    • Access to capital: One of the main advantages of the private limited company structure is the ability to raise capital by selling shares, up to a maximum of 99 shareholders. Start-up costs such as R&D, technology, marketing and staffing requirements are very high.
    • Limited liability: The shareholders of a private limited company have limited liability. This means that the shareholders are not personally liable and can only lose the amount of their original investment, if the business fails.
    • One share one vote: A private limited company is controlled by the shareholders based on the rule “one share one vote”. The original shareholders can maintain control of the company as long as they continue to hold 51% or more of the ordinary share capital. With a private limited company the members keep control as shares are not sold on the stock exchange.
    • Separate legal entity: The start-up business is incorporated and is a separate legal identity in the eyes of the law, meaning that it can sue or be sued in its own name and enter business contracts.
    • Continuity of existence: The company is legally independent of its owners and therefore it can stay in existence even after the death of a shareholder(s).
  7. Explain the type of production process that could be used by Paula and Thomas for manufacturing a range of organic breakfast cereals.
    • Batch Production: Refers to the production of certain quantities/group/batch of identical products at the same time, in one production run e.g. school textbooks. The machinery can then be changed to produce a batch of different products. Due to economies of scale the larger the batch the lower the unit cost.
  8. Explain the term “business plan” to Paula and Thomas.
    • A Business Plan is a written statement/proposal about the business and its objectives (where it wants to go) and strategies in areas such as marketing, ownership, production, finance and the identification of opportunities. It is very important in the context of a business start-up.

Sample Exam Q&A


Question

Michael Kelly is twenty nine years old and is a graduate with an engineering degree. He has been working in the area of research and development in a large transnational company since graduation. He has a desire to work for himself and feels that the time is right to form his own business in his home town producing electronic parts for domestic appliances. He has asked you to help him in writing his business plan.

(i)

Evaluate the importance of a business plan.

Sample Answer (i)

Focus: It sets out both short and long-term strategies / plans over agreed time periods, e.g. one year, five years and ten years. It plans how to get where the enterprise wants to go and as such, gives the entrepreneur a focus.

Finance: It is a vital document when approaching any financial institution, grant agencies or other investors seeking funds (capital) for the enterprise. No financial institution will give funds to an enterprise without being convinced that the investment has a good chance of being recovered. The business plan markets the enterprise; it sells the business ideas to others and encourages them to seriously consider the project.

Benchmarking: The nature of the business plan is such that targets are set in figures wherever possible. By having these figures available they can be used as the benchmarks or standards against which the operations and performance of the enterprise can be measured.

Evaluation: A business plan will enable the business to determine if it can be commercially viable. It may support the business when seeking sources of finance from potential investors. A business plan will enable actions to be taken to fix problems if the required standards/benchmarks are not reached.

(ii)

Draft a Business Plan for Michael Kelly’s venture under five main headings and make all relevant assumptions where necessary.

Sample Answer (ii)

Business Plan for Kelly’s Electronic Parts Ltd.
Ownership and Management (Key Personnel):
Name of Company: Kelly’s Electronic Parts Ltd, formed 31st May 2014.
Shareholders: Michael Kelly and Mary Kelly.
Address: 43, Main Street, Mallow, Co. Cork.
Email Address: michaelkelly@gmail.com
Accountants: Anne Kerry & Co. Accountants.
Bankers: Bank of Ireland, Mary Street, Mallow.
Managing Directors: Michael Kelly is a twenty nine year old graduate in engineering with experience in research and development in a large transnational company.
Product/Service (Operations):
Product: Michael Kelly is going to start a new business for the production of electronic parts for domestic appliances. A buoyant market exists world-wide for such appliances e.g. washing machines and dish washers.
Market Analysis:
Target Market: Twenty Transnational Appliance Manufacturers operating in Ireland and England require electronic parts
Competition: Five electronic parts for domestic appliances producers.
Marketing Strategies:
Product: Electronic parts for domestic appliances to corporate clients. Specialised knowledge in research and development (Unique Selling Point).
Price: 20% below industrial standard rates.
Promotion: Company brochure, follow-up phone campaign and press article on company launch in national media.
Place: Direct to customers, tendering process.
Financial Analysis:
Requirements:
Lease of Premises 300,000
Equipment 250,000
Working Capital 150,000 700,000
Sources:
Own Investment/Equity 200,000
Enterprise Ireland Grant 200,000
Bank Loan 5 Years 270,000
Bank Overdraft 30,000 700,000
Projected profit and loss account and balance sheet for next three years, cash flow forecasts with inflows and outflows of cash for the same length of time are all provided in Appendices.
Signed: Michael Kelly
Date: 31st May 2014

Student Activity


Q1 Outline two characteristics of a private limited company.

1.

 

2.

Q2 Contrast ‘job production’ and ‘batch production’, giving one appropriate example in each case.

Job Production:

 

Batch Production:

Q3 (i) Identify a suitable source of finance for the purchase of a delivery van in a new business enterprise.

 

(ii) Give two reasons for your choice.

Q4 The following table shows three types of production and four qualities. For each quality, tick (x) the type of production which is most likely to match that quality.

Job Batch Mass
Unique products
Group of products
Highly skilled labour
Expensive products
Q5 Rory Byrne, a trained chef, is considering setting up his own food business. He has no business experience so he approached his friend Sarah Dunne, a business graduate, for advice on a business start-up. He wants to find out what finance options he has and what organisation structure would be most suitable.

(i) Outline two reasons why a Business Plan should be prepared.

1)

 

2)

(ii) Explain three factors Rory should consider before choosing a source of finance.

1)

 

2)

 

3)

 

(iii) Outline two risks and two rewards of setting up a Sole Trader business.

Risk 1)

 

Risk 2)

 

Reward 1)

 

Reward 2)

 

 

Q6 List five heading usually contained in a business plan.

1)

2)

3)

4)

5)

Q7 List three short-term, three medium-term and three long-term soures of finance that could be used by a new business.

Short-term Medium-term Long-term
1.
2.
3.