15

Running a
small business
Owning and operating your own small business can be
challenging, rewarding and stimulating, as well as hard work.
It requires a great deal of planning, an understanding of
customers and their needs and constantly staying ahead of your
competition. For those prepared to take the risk and who finally
make it, the sense of achievement and satisfaction is well worth
the effort.

focus
On completion of this chapter, you will have become actively engaged in
planning, organising and running a small business and developed
strategies to address problems as they arise.

outcomes
A student can:
5.3 Examine the role of law in society
5.5 Evaluate options for solving commercial and legal problems and issues
5.6 Monitor and modify the implementation of plans designed to solve
commercial and legal problems and issues
5.7 Research and assess commercial and legal information using a variety
of sources
5.8 Explain commercial and legal information using a variety of forms
5.9 Work independently and collaboratively to meet individual and
collective goals within specified timelines.

glossary
assets: items of value owned by a business
balance sheet: shows the financial position of a business
at a particular time
Business Activity Statement: documentation required by
the Australian Taxation Office recording a businesss
financial activities over a set period of time
business opportunity: something an entrepreneur can see
as an avenue to success
cash flow statement: indicates the movement of cash
receipts (inflows) and cash payments (outflows) over a
period of time
competition: rivalry among businesses that seek to satisfy
a market
demographic factors: population characteristics that affect
customer spending and include: age, ethnicity, gender,
marital status, family size and income
entrepreneur: someone who starts, operates and assumes
the risk of a business venture in the hope of making a
profit
expenses: the costs incurred in running a business
franchise: the rights from a manufacturer to distribute its
products under its name
goodwill: the monetary value of a businesss reputation,
location, customer base and other factors that make a
business a profitable concern

gross profit/loss: amount remaining when the cost of

goods sold is deducted from revenue
incorporation: the company has become a separate legal
entity from its owners (shareholders)
liabilities: the debts owed by a business to others
liquidity: the ability of a business to pay its debts on
time
management: the coordination of the human, physical,
financial and information resources to achieve the goals
of the business
market research: collecting and analysing information
about customers and the business opportunities available
net profit/loss: amount remaining when operating
expenses are deducted from gross profit
owners equity: the value of the business to the
owner(s)
perpetual succession: a company will continue to exist
when the owners change
promotion: methods used by a business to inform,
persuade and remind customers about its products
revenue: the income earned by a business
revenue statement: a summary of a businesss revenues
and expenses incurred during a set period of time
target market: the group of customers to which the
business intends to sell its products

15.1
Being an entrepreneur
Most of us have seen something advertised and
thought, that is just what I need. Someone, somewhere had the idea to provide this product. From
this original idea, a business was formed to
develop, produce and market this product. All businesses begin when a person or group of people has
an idea for a new or improved product. It takes
someone to start, operate and assume the risk of a
business venture. The motivating force behind
them doing this is the hope of making a profit. Such
a person is called an entrepreneur.

Reasons for being self-employed

The desire to be your own boss is a major reason for
wanting to start your own business. Many people
start on their own because they believe they can do
better for themselves than if they remain with their
present employer. Often they desire the freedom to
choose when and where they work, with whom they
work and whether to work from home. The great
attraction is the belief that owners will have more
control over their destiny.
Most business owners are motivated by the
rewards they believe can be gained from establishing a business, including both monetary and
non-monetary rewards.
Normally, a person decides to establish a business
for several reasons. The simplest but most significant question a prospective business owner must ask
is: why do I want to go into business? The business
owners personality, skills and ambitions need to be
analysed because the future success of the business
rests largely with the owner. For this reason, people
should be clear about exactly why they want to
establish a business. They need to consider the
advantages and disadvantages.
Advantages and disadvantages of being self-employed
Advantages

Disadvantages

Be your own boss

independence
Possibility of making a
profit
Challenge, reward and
satisfaction
Increase personal wealth
Contribute to society
Develop own creative ideas
Overcome unemployment
Possible tax advantage

Hard work and long hours

Other bosses
customers, suppliers,
financiers
Income may fluctuate and
be uncertain
Risk of failure
Stress and worry
High levels of
responsibility
Constantly solving
problems
Difficulty in selling the
business

Skills required and personal

characteristics needed
The thousands of businesses in Australia today are
owned and operated by all types of people. Not
everyone, however, is suited to the role of business
owner. Certain skills and personal qualities are
required to succeed.
Starting a new business requires courage, determination and energy, and it demands a wide range
of skills. It is important that people recognise their
strengths and weaknesses. Do I have what it takes
to make a success? Have I the right personal characteristics to be a business owner? Can I learn the
skills that I dont currently have? It is best for
business owners to select a business opportunity that
suits their personality and builds on their strengths.

If people have an honest understanding of their own

personal qualities, then failure can be minimised: the
square peg in a round hole problem can be avoided.

There is no simple checklist of skills and personal

characteristics that will guarantee success. However,
many studies have shown that certain skills and
personality characteristics are helpful in operating a
business.

Yummy Mummys hair

(and child) care
The inspiration for Yummy Mummys came to former Telstra marketing
executive Sandra Thoma when she was expecting her second baby and
needed to visit the hairdresser. She realised she wouldnt just need to
pay a babysitter to look after her two-year-old while her hair was cut,
shed also have difficulty finding one. Fifteen months and one baby
later, she started Yummy Mummys with her business partner Nicole
Gunnis, who also worked for Telstra.
The idea behind Yummy Mummys is simple: it is a full-service hairdressing and beauty salon with its own crche staffed by professional
childcare workers. Its been open for almost a year and has been hugely
successful; recently it was listed in Vogue as one of the top salons in
Australia. This success is despite neither of the partners having any
experience in these industries.
In fact, as Thoma says, the success has a lot to do with the fact that
the partners dont have industry experience. They dont get bogged
down in doing the day-to-day work of the business, instead they get to
work on the business. She says: Its not run like a normal small business hairdressers. Weve put systems in place that you might expect to
see in a big corporation for example, we have a human-resources
policy.

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New Concepts in Commerce

The skills and

characteristics
of a successful
small business
owner

Marketing skills

Financial skills
Budgeting
Administration and
bookkeeping
Banking
Arranging finance
Profit forecasts
Taxation
Accounting

Market research
Store layout
Customer service
Pricing
Ecommerce
Product promotion
Competitor evaluation

Personal characteristics

Operating skills
Stock control
Ordering
Plant and equipment
Quality control
Problem solving
Computer applications
Recruitment and training

Women today own approximately one-third of all the

small businesses in Australia. Small businesses that
were started by women:
make up the fastest growing area within the private
business sector
have grown at a faster rate than that for men
have a higher survival rate than that of businesses
owned by men
are often small office home office businesses
(SOHOs)
borrow very little money.

Self-motivated
Self-disciplined
Moderate risk taker
Logical decision maker
Good communicator
Sets goals
Accepts responsibility
Takes advice
Willing to learn
Deals with failure
Gets on well w
Leadership qualities
Good health
Desire to succed

UNDERSTAND
1 What is the role of an entrepreneur?
2 Briefly outline the main advantages and

disadvantages of running your own business.

COMMUNICATE
3 Choose a business you would like to own. What

personal qualities do you think are needed to be

successful in this business? Share your response
with a classmate and discuss the main differences
in your answers.
4 In groups of three or four, identify someone who
successfully runs a small business. List the
personal qualities the manager possesses that
contribute to the success of the business.
5 Set up a class debate to consider the following
topic: Women are better suited to starting a small
business than men. Share roles so that those not
debating are involved either in assisting with
research or in running the debate and keeping
notes on the arguments on both sides.

This approach means the two women can more easily combine
running a business with taking care of their children. They each work
three days a week. In addition to meeting and greeting clients and
working the phones, Gunnis looks after the marketing side of the
business and managing suppliers, while Thoma concentrates on the
accounts and the human resources.
Thoma says she has hired the best possible hairdressers and beauticians. We knew we had to give great haircuts or the business
wouldnt work. The employees are all entrepreneurial and know that
they could get a slice of business later on.

E-LEARNING
6 Go to www.jaconline.com.au/commerce, select

weblinks and click on the link for the Enterprise

Network for Young Australians (ENYA). Outline the
role of ENYA.
WORKSHEETS

15.1 Do you have what it takes?

303
Running a small business

15.2
Selecting business opportunities
Identifying a business opportunity is not just
about having an idea. An opportunity is something
that a person can see as an avenue to success, such
as a gap in the market that is not already being
satisfied by larger businesses. Sou Long, for
example, operates a mobile pet washing service
something vets tend to overlook.
There are four emerging opportunities for small
businesses. These are:
1. High technology. Businesses set up by people with
specialised scientific, computer and engineering
knowledge.
2. Small office home office (SOHO). People who
work from home and provide services as such as
accounting, word-processing and financial advice.
3. Aged services. Businesses that provide services
such as home-delivered meals and healthcare
for the elderly.
4. Franchising. This popular small business form
of operation provides services ranging from
garden maintenance to take-away restaurants.
Market research
Market research involves collecting and analysing
information about customers and the business
opportunities available. Surveys, questionnaires
and interviews are used to reveal the facts and the
attitudes of customers. Market research helps the
small business owner to make better decisions by
understanding consumer behaviour.
Market research asks questions such as:
Who are our customers?
What are they like?
Why do they buy our product?

Location
A good location can make the difference between
success and failure. A good location is an asset and
will lead to high levels of sales and profits. A bad
location is a liability, affecting sales adversely.
Therefore, the choice
of location is important.
This is particularly true
for retail and serviceoriented
businesses
which need a constant
flow of people walking
past the store the
passing trade and
for this reason will
need to be located in a
shopping centre, mall
or main street.
Location must be
considered carefully
when establishing a
business.

For every successfully launched new product, there

are at least four that fail.

Demographics
It is important for a small business owner to understand the changes that are taking place in the
make-up of the population. Demographic factors
are population characteristics that affect customer
spending and include age, ethnicity, gender, marital
status, family size and income.
An examination of a countrys demographic pattern will provide a clearer picture of a businesss
possible customers.
Competition
Competition is rivalry among businesses that seek
to satisfy a market. When identifying a business
opportunity, the entrepreneur must decide on the
type of market in which their good or service will
compete. This means deciding whether to target the
goods or services at a broad market (mass market)
or a more specialised market (niche market). Once
this decision is made, the small business owner is
able to identify the level of competition and the main
competitors.

Surveying customers provides valuable information

about their buying behaviour.

304
New Concepts in Commerce

Target market
Many new small business operators are so enthusiastic about starting they often overlook one crucial
question: who will buy my good or service? Sales
are the lifeblood of the business so it is necessary to
have a good understanding of ones target market.
Target market refers to the group of customers
to which the business intends to sell its products.
Once the target market has been identified, the business concentrates its marketing activities on that
group. A womens fashion boutique in central Sydney,
for example, would normally aim its marketing
activities at the following type of customer:
female
2545
city-based
high income.

UNDERSTAND
1 What is meant by identifying a business opportunity?
2 Assume you have been employed by a newspaper

to write an article on future growth areas for small

business. Construct a mock newspaper page and
include your article using an appropriate heading. You
may wish to use desktop publishing software to
present the newspaper page with text and graphics.
3 Why is it important for a small business to
undertake market research?
4 Here are three different target market segments:
(i) young married couple, no children
(ii) older single person, female, retired
(iii) male teenager, full-time student.
Listed below are five products. Copy the list into
your notes and, beside each item, write the most
appropriate target market segment number for that
product. In some cases, you may want to write
more than one number. Compare your answers
with those of the rest of the class.
(a) Financial advice
(b) Lawnmower
(c) Computer
(d) Textbook
(e) Furniture
COMMUNICATE
5 Complete the following mind map to show the

planning needed to successfully operate a small

business. The first one has been started for you.

mation about cust

Target market for an exclusive womens fashion boutique

Success and failure of small

businesses
In the real world, success can be hard to achieve.
Unfortunately, the majority of small businesses end
in failure. Within the first year of trading, about
one-third of small businesses fail. This rises to
approximately three-quarters within the first five
years. Such figures tell a sobering story for anyone
thinking of starting a small business: the chances
of failure are high. Therefore, it is absolutely essential to undertake thorough planning to minimise
the risk of failure.

6 In groups of three or four, visit the local shopping

centre or mall. Identify the best located shops.

Explain why they have the best locations.
7 Keeping ahead of the competition is essential for
long-term business success. In groups of three or
four, brainstorm how a business can keep on top
of its competitors. Select a spokesperson to
present your groups ideas to the rest of the class.
E-LEARNING
8 Go to www.jaconline.com.au/commerce, choose

weblinks and click on the Business Entry Point link

for this textbook. What advice does this federal
government site provide regarding setting up a new
business?

Small businesses dont plan to fail, they fail to plan.

305
Running a small business

15.3
Selecting the
appropriate
structure
There are four different legal structures to choose
from when deciding how a business is to be owned
and operated. These structures are described below.

Proprietary (private) company

A private company usually has between two and 50
private owners called shareholders. These businesses
tend to be small to medium in size. Often, they are
family-owned. Shares in private companies are offered
only to those people the business wants as part-owners.
This is why it is called a private company.
A private company must have the words Proprietary
Limited, abbreviated to Pty Ltd, after its name. The
main advantage of a private company is that
shareholders have limited liability.
This means that if the
business cannot pay its
debts, a shareholder
loses only the money
she or he has invested
in the business.

Sole trader
A sole trader is a business that
is owned and operated by one
person. It is the most common
type of business in Australia.
A sole trader business can
operate in almost any field.
Usually, however, they are
stores, cafs, newsagents and
hairdressers as well as trades
such as plumbers and
electricians.
The sole trader receives all
the profit and suffers all the
losses. He or she has unlimited
liability. This means he or she
can be forced to sell personal
assets such as the house or
car to pay for business debts.
A sole trader usually has only
one persons name in its
business name, for example
Marias Caf.

Partnership
A partnership is a
business usually owned
and operated by between
two and 20 people, called
partners. The partners
share their profits and
losses, usually equally. Together
they decide how best to operate the business. It is common
for people with similar skills, such as doctors, solicitors and
dentists, to form a partnership. Partnerships tend to have the
names of the partners in the business name, for example
Harries and Davidson Accountants. Partnerships have
unlimited liability.

Most small businesses are financed with a mix of

debt and equity.

306
New Concepts in Commerce

Public
company
A public
company
can have an
unlimited
number of
shareholders.
The general
public may buy
and sell shares
in these
companies.
This is done
through the
stock
exchange.
Most public
companies
are large.
Examples include
Westfield Group, Billabong and Woolworths. Shareholders in
public companies have limited liability.
A public company must have the word Limited, abbreviated
to Ltd, after its name.
All companies are incorporated enterprises or have gone
through incorporation. This means the company has become a
separate legal entity from its owners (shareholders).
Consequently, the company can sue and be sued, can own and
sell property, and has perpetual succession it will continue to
exist when the owners change.

Arranging finance
There are two main types of finance available to
start and operate a small business.

UNDERSTAND
1 Select the most appropriate word from the list

below to complete the sentences that follow.

public
sole trader
stock
exchange

Other peoples money from:

banks
finance companies
credit unions
trade suppliers

20
limited
unlimited
incorporation

A business entity with one owner is called a

. This person faces
liability,
which means he or she can be forced to sell his or
her
assets to pay for the debts of the
business. Partnerships normally consist of
between
and
partners.
Partnerships have unlimited
. There are
two types of companies, private and
.
A
company has between 2 and 50
private shareholders. Shares in public companies
are bought and sold on the
. Companies
have
liability, and have gone
through the process of
.
2 What is meant by the terms incorporation

and perpetual succession?

3 Explain the difference between debt and equity

finance.
4 What are the advantages of debt finance?
5 In your notebook, complete this table to show how

each of the businesses below is owned. The first

one has been completed for you.
Sole
trader

Types of finance

Debt

two
personal
private
liability

Private
company

Partnership

Public
company

Becks Pty Ltd

Becks Pty Ltd

M&M Communications
Tip Top Pty Ltd
Tom Wilson Plumbing

Equity
Your own or a
partner

CGM Ltd
Tyler & Kelly
Tais Take-away
Global Ltd

COMMUNICATE
6 In groups of four or five, decide what form of

The two main types of finance available to small business

owners

Debt finance is money obtained through loans.

Equity finance is money received from the sale of
shares of ownership in the business. The main
advantage with debt financing is that the owner
does not have to sell any ownership in the business.
Also, debt financing has certain taxation advantages. For these two reasons, debt financing is the
most popular source of finance used by businesspeople when starting a small business.

business ownership is appropriate for:

(a) a small bicycle shop that offers personal and
professional advice by the owner
(b) a national retail chain that would require
$589 million to establish
(c) a suburban hairdresser
(d) a medical clinic.
E-LEARNING
7 To find out more about business loans and to examine

a loan application, go to www.jaconline.com.au/

commerce, select weblinks and click on the National
Australia Bank link for this textbook.

307
Running a small business

15.4
Going into business
There are two main ways of going into business:
setting up a new business from scratch, including
a franchise
purchasing an existing business.
Choosing between the two main options is sometimes quite difficult; each has advantages and disadvantages. The ten essential steps in establishing
a small business, as outlined below, apply equally
to both options.

There are approximately 747 franchise systems and

50 000 franchised outlets currently operating in
Australia. Australia is the most franchised nation per
head of population in the world.

Moniques
Restaurant
An interview with
Monique Etuille,
owner of Moniques
Restaurant.

Monique, what made

you want to own a
restaurant?
Ever since year 9 I wanted to
be a chef and run my own restaurant. I was 15 years old when I
started working as a kitchen hand in a friends restaurant. I
worked on a casual basis. This experience gave me a good
understanding of the restaurant scene and my passion for fine
food.
Do you enjoy your work? Why?
Working as a chef involves hard work and long hours. You are
always working quickly and nearly always under pressure.
However, the creative satisfaction in producing great food that
not only looks good, but tastes good too, makes it worthwhile.
Would you prefer to work for yourself or be a salaried employee?
I prefer working for myself. Not only does this allow me to be
creative with my dishes but it allows me to generate my own
income.
Why did you establish a new business instead of purchasing an
existing restaurant?
In the beginning, I weighed up the advantages and disadvantages
of each option. The main advantages of setting up a new
business were that I would have freedom of choice to set up the
business exactly as I wished; there was no goodwill which had to
be paid for; and importantly, because my funds were limited, I
was able to begin on a smaller scale. The main disadvantage was
the high risk of failure because there was no previous business
reputation or existing customer base to draw upon. This also
made it more difficult to obtain a loan.
On the other hand, the main advantage of purchasing an
existing business is that it is already operating and everything
that is associated with the business is included in the purchase.
This includes stock, equipment, premises, an existing customer
base, goodwill and so on. If the business has a good reputation,
then sales to existing customers will generate instant income. As
well, a proven track record will make it easier to obtain finance.

The ten essential steps in establishing a small business

Approximately 70 per cent of all new small

businesses start from scratch.

308
New Concepts in Commerce

UNDERSTAND
1 Why did Monique decide to establish a new

4 What factors did Monique consider when selecting a

business?
2 According to Monique, what are the benefits of being
self-employed?
3 Outline the main advantages and disadvantages of:
(a) starting a new business from scratch
(b) purchasing an existing business
(c) operating a franchise.
One way of representing this information is to use a
T table. A T table for starting a new business from
scratch has been started for you.

5 What benefits would a small business owner gain by

suitable location?
considering the ten essential steps in establishing a
small business?
PARTICIPATE
6 As a class, brainstorm why business franchise

systems are so popular.

COMMUNICATE
7 In pairs, predict what may happen to Moniques

business over the next two years.

Starting a new business from scratch
Advantages

E-LEARNING
8 Construct a web page for Moniques restaurant. Provide

Disadvantages

a facility for ordering takeaway food online. You may

wish to use FrontPage or a similar software package.

1. Owner has free choice

WORKSHEETS

15.2 Youre the DJ

However, the main disadvantages are the existing image of

the business may be difficult to change; it may be difficult to
assess the value of the goodwill; and, the success of the
business may have been due to the previous owners
personality and contacts and this may be lost when the
business is sold.
Do you think you made the
right decision?
Yes. Even though it was hard
in the beginning, with plenty
of minor dramas, I would
make the same decision
again. It is immensely
satisfying to know that I am
creating something from
nothing.
Did you consider operating as
a franchise?
Not really. I did not want a
franchisor controlling how I
operate my business. Nor did
I want to share my profit or
pay a fee to trade under their
name. However, if I lacked
experience I would have
chosen this option because
operating under a well-recognised brand and using a
successful business formula would reduce the risk of failure.
What factors did you take into account when deciding where
to locate the restaurant?
The two most important factors are customer convenience
and visibility. Without these, the customer may not make the
effort to find the business. Consequently, I wanted a location
in the main street with easy access to parking. I was prepared
to pay a high rent. I wanted to avoid establishing the
business in a low rental area as this can create a bad image.

Was it difficult
finding suitably
qualified staff?
No. I have plenty of
contacts in the
industry. I wanted to
select employees
whose business
approach
complemented
mine. Selecting the
wrong staff can lead
to friction between
staff members, low
morale and
unhappy customers.
I am proud of the
team. They are
committed, and
all accept
responsibility. It is
more like a family
atmosphere than a
traditional
workplace.
Did you buy or lease the equipment?
I leased the expensive items such as fridges, ovens and the
dishwasher. The advantage of leasing is that I did not have to
make a large outlay and payments made for the lease are an
expense and therefore tax deductible. Cutlery, tablecloths,
glasses and so on I purchased from a wholesaler.
Finally, Monique, hows business so far?
Well, as you know, I set up Moniques in 2003. Since then,
I have been pleased to see that there is a growing customer
base. I am very satisfied with the profits so far. So, eat up and
bon appetit!

309
Running a small business

15.5
Meeting regulations and
selling products
Small business owners may sometimes feel they
are overregulated. Fulfilling all the legal obligations may be frustrating at times, particularly
when more than one level of government is
involved. All small business owners should be
aware of the legislation (laws) that affects their
business, especially the regulations, licences and
approvals they may require to operate legally.
All three levels of government have regulations
that must be followed by small business owners.

Small business owners should consult a solicitor or

accountant to help them understand the laws
governing their business operations.

Federal Government
Federal Government obligations include:
1. payment of Pay As You Go (PAYG) income tax
and fringe benefit tax
2. deduction of income tax from employees who
earn above the minimum taxable wage level
3. possible collection of Goods and Services tax
(GST) on behalf of the Australian Taxation Office
4. provisions for employee superannuation
5. abiding by unfair dismissal laws when dismissing employees
6. not engaging in anti-competitive or restrictive
trade practices.

State government
State government obligations include:
1. registration of the business name unless the
business carries the name of the owner
2. provision of employee entitlements such as:
workers compensation
occupational health and safety
award rates of pay and conditions
3. not engaging in misleading or deceptive advertising
4. abiding by any pollution controls
5. observing regulations relating to the sale of
food, cigarettes and alcohol
6. adequate and non-deceptive labelling of all
foodstuffs and clothing.

Some of the state governments guidelines for small

businesses

Local government
Many small business owners overlook the importance of local government regulations. Any business
using premises or land must first seek local government approval. Commencing trade before approval is
obtained could result in the closure of the business.
Local governments have control over the following
business activities:
1. determining land zoning (use) and approving
new development applications
2. fire regulations, especially fire prevention facilities
3. parking regulations governing the number of
spaces that need to be provided
4. health regulations, especially the safe handling
of food

The Federal Government website Business Entry Point

is a useful resource for someone starting a business.

310
New Concepts in Commerce

5. the size, shape and

location of business
signs.

Selling products
You may have established a
business selling a worldfirst proven product. However, products do not sell
themselves. Without customers, a product even
if revolutionary, exciting
and so on is useless.
Many small business
owners have
failed despite
having an
excellent
product. They
lacked
customers,
and no
customers
means no profit.
Consequently, you will have
Local governments are
responsible for regulating
to promote your business;
the safe handling and
that is, inform, persuade or
sale of food.
remind customers about your
product. The main forms of promotion are as follows.
1. Personal selling: a sales assistant outlines the
features of the good or service to the customer.
2. Sales promotion: free samples, coupons with
refunds and loyalty programs are used to attract
interest in the good or service.
3. Publicity: the business sets up a free news story
about its product.
4. Advertising: print or electronic mass media are
used to communicate a message about the
product. Advertising is used to attract potential
customers, create a demand for the product and
communicate essential information.

UNDERSTAND
1 What is meant by the term promotion?
2 Provide an example for each form of promotion.
3 Complete the following table by listing three

examples of regulations for the following levels of

government. You may wish to use a wordprocessing application to complete the table.
Federal

State

Local

1.

1.

1.

2.

2.

2.

3.

3.

3.

INVESTIGATE
4 Imagine you are about to open a long-day care

centre. In groups of three or four, investigate what

federal, state and local government regulations you
would have to satisfy.
COMMUNICATE
5 In groups of three or four, arrange an interview with

a local small business owner. Prepare either a twopage written or five-minute oral report. You may wish
to develop your report under the following headings:
(a) reasons for establishing the business
(b) brief history of the business
(c) regulations required to operate the business
(d) success and failure along the way.
6 Design a promotional brochure to advertise the
opening of a new pizza store in the local area. Be
sure to include the following details:
(a) name and address of the store
(b) date of opening
(c) hours of trading
(d) details of opening specials or other promotional
activities.
You may wish to use desktop publishing software
to present the brochure with text and graphics.
E-LEARNING
7 Choose one of the following regulatory bodies and

complete the questions listed below:

Office of Fair Trading
Australian Securities and Investments Commission
Australian Competition and Consumer
Commission
(a) Briefly describe their role.
(b) Why is their role important in terms of
business?
To help you, go to Jacarandas website
www.jaconline.com.au/commerce choose
weblinks and click on the link for one of the
regulatory bodies above.
WORKSHEETS

15.3 Promote your business

Advertising is a popular method of promotion.

311
Running a small business

15.6
Maintaining records
Taxation requirements
All small business owners have to provide some
form of written account of the businesss activities.
Usually this information consists of a set of financial records compiled for taxation purposes. As well,
accurate and up-to-date business records:
make it easier to complete the Business Activity
Statement (BAS) and prepare the annual income
tax return
help avoid being penalised for neglecting to keep
records required by law
help ensure tax liabilities are paid on time
are useful when selling the business.

Financial records must be kept for five years after

they are prepared.

Revenue statement
A business earns income by selling a good or service to its customers. This is known as trading. To
measure how successful a business is at trading, a
financial report called a revenue statement, or
statement of financial performance, is drawn up.
This statement shows:
the amount of income or revenue earned
the costs or expenses incurred in earning that
revenue
whether a profit or a loss has been incurred in
the period under review.

The revenue earned

The first step in completing a revenue statement is
to record the revenue, which is the income earned
by a business. For example, a caf earns revenue by
selling food and drinks.
The expenses incurred
The second step in completing a revenue statement
is to record the expenses. To earn a revenue, a
business must pay some costs or expenses.
Common expenses include wages and salaries,
purchases of raw materials or finished goods for
resale, payments for telephone, electricity, postage,
motor vehicle expenses and so on.
The calculation of profit or loss
The third step in completing a revenue statement is
to calculate the gross and net profits. A gross profit/
loss is the amount remaining when the cost of goods
sold is deducted from revenue. A net profit/loss is
the amount remaining when operating expenses are
deducted from gross profit. The word net means
that all expenses have been deducted.
To understand a revenue statement, we will
examine Angelos Eatery, an eat-in and takeaway caf.

Angelos Eatery
Revenue statement for the year ending 30 June 2005
Revenue
Cash sales
less Cost of goods sold
Gross profit
less Expenses
Wages
Lease payments
Electricity
Advertising
Insurance
Interest on loan
Net profit

38 000
20 000
5 500
3 550
2 750
3 500

$
215 000
90 000
125 000

73 300
51 700

Revenue statement for Angelos Eatery

Revenue earned less cost of goods sold = gross profit

Gross profit less operating expenses = net profit

Small business owner, Angelo Ceccato

312
New Concepts in Commerce

Balance Sheet
The balance sheet or statement of financial position shows the financial position of a business at a
particular time. It records three different sets of
accounts value of assets; value of liabilities; and
proprietorship or owners equity.
To understand a balance sheet we will examine
Angelos Eatery. Angelo also supplies two other
restaurants with cakes and breads.
Assets
Assets are items of value owned by a business. The
assets of Angelos Eatery are cash at bank, accounts
receivable/debtors (the money the other two
restaurants owe him), equipment (ovens,
tables and chairs), motor vehicle, glasses
and cutlery, and stock on hand (fruit and
vegetables and wines).

2. Non-current assets will last for longer than a year.

Examples include motor vehicles and equipment.
Liabilities
Liabilities are the debts owed by a business to
others. Angelos current liabilities include accounts
payable/creditors (the money he owes to other businesses for supplies) and a bank overdraft. His noncurrent liabilities include the long-term loan from
the bank used to buy equipment for the caf.
Owners equity
Owners equity represents the value of the business
to the owner(s). It is sometimes called proprietorship
or capital, as it represents the money the owner
has invested in the business. To calculate
Angelos equity, we total all the assets and subtract all the liabilities. This is the basic
accounting equation.

Assets

Liabilities
+
owners equity

Balance
Some of the assets of
Angelo's Eatery

Assets = liabilities + owners equity (the accounting

equation)

Assets can be divided into two different types:

1. Current assets will be used up within one year.
Examples include cash at bank and stock.

The two sides of the equation must be equal. The

balance sheet for Angelos Eatery is shown below.

Angelos Eatery
Balance sheet as at 30 June 2005
Assets
Current assets
Cash at bank
Accounts receivable
Stock on hand
Non-current assets
Equipment
Motor vehicle
Glasses and cutlery

Total assets

$
68 000
31 200
22 300

58 000
37 000
12 500

Liabilities
Current liabilities
Accounts payable

$
35 000

121 500
Non-current liabilities
Bank loan
Owners equity
Net profit retained
Capital

107 500

Total liabilities and

owners equity

229 000

313
Running a small business

55 000
51 700
87 300

139 000

229 000

Cash flow statement

A cash flow statement indicates the movement of
cash receipts (inflows such as money from sales),
and cash payments (outflows such as payments
for expenses), over a period of time. By regularly
comparing the totals of receipts and payments, a
business is able to calculate its surplus or deficit of
cash. This is an important indicator of a businesss
liquidity the ability of a business to pay its
debts on time.
A typical cash flow statement is shown below.

Lenders require, at least, the information contained

in the financial records before they will approve any
loans.
Suppliers generally ask for such information
before they agree to provide trade credit.
Potential investors will demand to view the financial records before they decide to invest in the
business.
Angelos financial records must provide all this
information, in the required form. It is important
that a business owner ensures that such information is accurate and thorough enough to satisfy
these outside groups.

Angelos Eatery
Cash flow statement for the year ending 30 June 2005
$
Cash inflows
Net operating activities
Borrowed funds
Total cash inflows
Cash outflows
Wages
Lease payment
Electricity
Advertising
Insurance
Interest on loan
Total cash outflows
Net cash flow (TCI TCO)
Opening cash balance
Closing cash balance

75 300
55 000
130 300
38 000
20 000
5 500
3 550
2 750
3 500
73 300
57 000
11 000
68 000

Importance of financial records

Friend:
Angelo:
Friend:
Angelo:

How well has the business been doing

this year, Angelo?
It is performing really well.
Thats good, but how can you tell?
I check the financial records carefully
every week. These financial statements
measure the financial performance of the
business. Without them I would not be
able to determine whether the business is
performing better or worse over time.

Angelo, as the owner of the business, is the

main user of the set of financial records. They help
him measure the success of his plans and goals.
Much of this financial information is private; it is
not made known to anyone outside his business.
However, apart from the taxation department, certain financial information is demanded by outside
individuals and organisations with which Angelo
deals.

Angelos Eatery

314
New Concepts in Commerce

UNDERSTAND
1 What is the main use of a revenue statement to a

business?

6
7
8
9
10
11

12

asset and accounts payable/creditors as a liability?

17 Calculate the missing figure for each of the following:

revenue statement.
What does the word net signify in accounting?
List the three sets of accounts recorded in a balance
sheet.
What is the difference between an asset and a
liability?
Complete the following accounting equation:
Assets = ____________ + _____________
What does owners equity represent?
What does the cash flow statement record?
What is meant by the term liquidity?
Complete the following accounting equations:
(a) Revenue Cost of Goods Sold = ___________
(b) Gross Profit _____________ = Net Profit
Copy out the following revenue statement and insert
the missing figures.

Revenue statement for Sarena Phong for the period

ended 31 November 2004
Sales
Less cost of goods sold
Gross profit
Less expenses
Wages
Advertising
Rent
Electricity
Net profit

a non-current asset? Provide two examples of each.

16 Why is accounts receivable/debtors classified as an

2 What is another name for a revenue statement?

3 List the three steps necessary to complete a
4
5

15 What is the difference between a current asset and

$
150 000
70 000

18

19

20

$
21

XXXX
14 000
12 000
XXXX
5 000

42 000
XXXX

22

13 Julian Moloney owns and operates Blue Hills Corner

Store. Last year he had a sales revenue of $178 000.

His cost of goods sold totalled $75 000. His
operating expenses were: electricity $1800,
advertising $2200, interest charges $3000,
salaries $12 000, rent $15 000.
(a) Construct a revenue statement for Julian and tell
him whether or not he has made a net profit.
(b) Advise Julian on how he could increase the net
profit for the following year. Compare your
answer with those of other class members.
14 Copy the following list of balance sheet items into
your notebook and indicate whether they are assets
or liabilities: furniture, bank loan, equipment,
accounts payable, stock on hand, cash
at bank, mortgage.

(a) Assets = $458 000, Liabilities = $88 000,

Owners equity = XXXX
(b) Assets = $27 500, Liabilities = XXXX, Owners
equity = $11 500.
Sandra Dyer, who makes customised jewellery, has
asked you to help her construct a balance sheet.
(a) Briefly explain to her how a balance sheet is set
out.
(b) Draw up her balance sheet as at todays date from
the following information: cash at bank $200,
building $17 800, accounts payable $6500,
machinery $5200, accounts receivable
$800, motor vehicle $7000, mortgage
$5500, stock $2000.
Classify each of these as either a cash inflow or a
cash outflow item: cash sales, purchase of stock,
income from interest received, tax on income,
purchase of equipment.
Outline why a toy retailer might experience a
fluctuating cash flow depending on the time of year.
Compare your answer with those of other class
members.
Jenny owns a craft shop. During July, the business
sold $8200 of craft goods and received $200 in bank
interest. She paid her sales assistant a monthly
wage of $1350. During this month, the business
spent $2800 purchasing craft equipment, $350 for
rent, $750 for insurance and $150 for
electricity. Prepare a cash flow statement
for the month of July for Jennys business.
Why do:
(a) lenders
(b) suppliers
(c) potential investors
need to view a businesss financial records?

INVESTIGATE
23 Obtain the annual report of a company listed on the

Australian Stock Exchange. Find its balance sheet

(statement of financial position) and make a list of all
the items under the following headings:
(a) current assets
(b) non-current assets
(c) current liabilities
(d) non-current liabilities
(e) owners equity.
WORKSHEETS

15.4 Maintaining financial records

315
Running a small business

15.7
Risk management and key issues
related to running a business
Risk management
It takes courage to establish and operate a small
business. There are so many risks that the small
business owner must be prepared to take and
manage. Risk management is the process of:
evaluating the risks faced
calculating the possible costs
implementing procedures to minimise such risks.
Planning for the future
Unexpected occurrences may be costly and threaten
the viability of the business. Thorough planning is
required to minimise the damage of these unexpected
events. Below are some possible risks and strategies
to help reduce their impact on the business.

Key issues relating to running a business

Establishing a business is just the beginning. Keeping
the business successfully running takes time, effort,
dedication and management. Small businesses, like
all businesses, must be managed: they do not operate

Managing a small business is a complex task.

Possible risks and strategies to minimise risk

Possible risk

Risk minimisation strategy

1. Rising bad debts

If customers are consistently late in

paying, enforce a strict credit policy

2. Lawsuits

Comply with statutory regulations and take

precautions not to harm others a
reasonable duty of care

3. Falling sales

Conduct market research to find out why

sales are falling. Try to reduce costs to
ensure the business survives

4. Machinery
breakdowns

Set aside money to cover the costs of

repairs and service equipment regularly

5. Physical damage

Take out an appropriate insurance policy

such as fire, storm, flood or earthquake

6. Copyright
infringement

Obtain protection of your new product or

idea (patent)

7. Supplier
problems

Use a number of suppliers. Do not rely on

only one

8. Ill health

Death or disability insurance can protect

your business

9. Tax obligations

Keep up to date with changes to taxation

and keep detailed records

10. Expanding too

quickly

Slow the growth rate to a more sustainable

level

11. Writing cheques

Examine your cash position and talk to
in excess of funds your suppliers
12. Theft

Put in place stock loss and crime

prevention measures and improve security

13. Computer
security

Install anti-virus software, operate from a

secure site and back up all files.

316
New Concepts in Commerce

automatically. Management requires the coordination of the human, physical, financial and information resources to achieve the goals of the business.

Operating a business
We now come to perhaps the most crucial stage in a
small businesss existence: to push the start button
and get the business operating. The knowledge and
skills you have gained while studying this topic can
now be put into practice. To gain more experience,
set up and run a simulated or school-based business. This will give you the opportunity to further
develop your business skills. The world of business
is most definitely an exciting one.

Management of administration
Small business owners often complain about paperwork,
with some labelling it paper warfare. However, for any
small business to succeed, the owner must maintain and
have easy access to a reliable and accurate set of records.
Such records contain very useful information.
Administrative records include:
payroll salaries and benefits
financial statements revenue statement, balance sheet
and cash flow
order processing and invoicing
customer database names and addresses of customers.

Management of marketing
To maximise customer awareness and sales, an organised
marketing campaign is necessary, involving:
1. Product quality, design, name and packaging
2. Price setting the correct price for the product
3. Promotion methods used to inform, persuade and
remind customers about the products
4. Place (distribution) how to get the product from the
business to the customer.

UNDERSTAND
1 What is meant by the term risk management?
2 Identify a suitable risk minimisation strategy for the

following risks:
(a) physical damage
(b) supplier problems
(c) falling sales
(d) lawsuits.
COMMUNICATE
3 In pairs, reorder these scrambled words to form a

sentence. You will get clues from the text. The first
word is in the correct position.
(a) A competent needs small owner business
manager to risk a be.
(b) Thorough required planning damage minimise is
unexpected to events of the.
(c) It strategies develop minimisation important risk
is to.
4 Design a pamphlet warning small business owners
of some possible business risks. You may wish to
use desktop publishing software to present the
pamphlet with text and graphics. Display your
pamphlets in the classroom.
5 Complete the following mind map showing the key
management issues relating to running a business.
The first one has been started for you.

set of recor

Management of production
This involves four separate tasks.
1. Purchasing obtaining raw materials and equipment to
produce goods or services.
2. Stock control to have the right amount of stock on
hand
3. Scheduling ensuring that correct materials are
delivered at the right time to the right place
4. Quality control ensuring that goods and services are
produced to meet set standards.

Management of staffing
This involves the recruitment and selection, training,
developing and rewarding of the people needed to achieve
the business goals: hiring the right person for the right
position.

Management of finance
It is necessary to prepare a cash flow statement, construct a
revenue statement and prepare a balance sheet so as to
determine the businesss financial performance.

PARTICIPATE
6 Arrange for a representative of your nearest

Business Enterprise Centre to visit your class.

Conduct a current affairs interview with the
representative. You will need to select a panel of
interviewers from the class and prepare a list of
questions. You may wish to video the interview.
Make sure you explain all this to the representative
before she or he arrives at the school.
After the visit, explain how using this interview
method helped you understand the role of the
Business Enterprise Centre.
WORKSHEETS

15.5 Topic test running a small business

317
Running a small business