Cambridge IGCSE0450

Enterprise, business growth and size

Business Studies 0450 Chapter Notes

What this chapter covers

Enterprise, business growth and size - Enterprise and entrepreneurshipEnterprise, business growth and size - The methods and problems of measuring business sizeEnterprise, business growth and size - Why some businesses grow and others remain smallEnterprise, business growth and size - Why some (new or established) businesses fail

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1. What an entrepreneur is

An entrepreneur is a person who takes the risk to start a new business. The risk is financial: the entrepreneur's own money may be lost.

Be precise. An entrepreneur is not the same as a sole trader, an investor or a manager. The entrepreneur is responsible for starting the business, not simply managing it, investing in it or owning it.

Examiner insight

“A common mistake was to confuse entrepreneur with sole trader. Others made vague statements about having an idea for a business or taking risks without linking it to an individual starting up a business.”

Worked example 12 marks

Define ‘entrepreneur’.

1
Full definition: the person who (organises, operates and) takes the risk to start a new business. Or: an individual who takes the financial risk of starting (and managing) a new business. Or: a person who combines factors of production to start a business. [2]
2
Partial definition (1 mark only): a person who starts or sets up a business.

2. Characteristics of successful entrepreneurs

Successful entrepreneurs share personal qualities. The ones examiners see most often are risk-taker, hardworking, creative and innovative. Good communicator and self-confident are also credited.

Name the quality, then say what it does for this business. A characteristic is about the person. Having enough capital or a business plan is a factor in success, not a characteristic.

Examiner insight

“A common mistake was to identify functions of a manager rather than characteristics of an entrepreneur. Instead of development, some candidates reused the name of the characteristic rather than explaining it.” “The weakest responses did not focus on the personal attributes of the entrepreneur but on other factors for a successful business, such as having sufficient capital and drawing up a business plan.”

Worked example 16 marks

Zara Okoye has left her job to start Okoye Loaves, a bakery selling sourdough bread to local cafés. She bakes from 4 am every day and tries a new recipe each month. Explain two characteristics that make Zara a successful entrepreneur.

1
Knowledge: hardworking is a characteristic of a successful entrepreneur. [1]
2
Application: Zara bakes from 4 am every day. [1]
3
Analysis: the cafés get fresh bread each morning, so they keep ordering from her. [1]
4
Knowledge: creative (or innovative) is a characteristic of a successful entrepreneur. [1]
5
Application: she tries a new recipe each month. [1]
6
Analysis: new breads give the cafés something new to offer their customers, so they have a reason to choose Okoye Loaves over a rival. [1]

3. Contents of a business plan

A business plan sets out the business's objectives and other details of how it will work. The objectives are the key element. Other contents named in the reports are the market, details of operations and resources, and financial information such as a cash-flow forecast.

The contents are not the same as the uses. Saying a plan helps to get a bank loan describes what it is for, not what it contains. A cash-flow forecast is one content of the plan, not the plan itself.

Examiner insight

“Comprehensive responses recognised this and then proceeded to name another element such as details of its operations or finance. Instead of identifying another element, others stated uses of a business plan.” “Others confused the term with a budget or cash-flow forecast.”

Worked example 14 marks

Kofi Mensah plans to open FixIt, a stall repairing mobile phones in a market town. He is writing a business plan to show to a bank. Identify two contents of FixIt's business plan, and apply each to the business.

1
Knowledge: business objectives. [1]
2
Application: for example, to repair 20 phones a week within the first year. [1]
3
Knowledge: financial information, such as a cash-flow forecast. [1]
4
Application: the cost of the repair tools and the phone parts Kofi must buy before he earns anything. [1]

4. How business plans assist entrepreneurs

A business plan gives the entrepreneur a sense of direction. The objectives are set down, so decisions can be checked against them. The plan also helps to obtain a bank loan and to identify the resources needed.

Each point needs developing. A bank can see how the money will be earned and repaid, so it is more willing to lend. That is analysis. Repeating that banks lend because they trust the plan is not.

Examiner insight

“Most candidates knew business plans can be used to set goals or help get a bank loan but were not able to develop these points effectively. Instead of analysis, many identified new knowledge points or simply repeated what they had already written.” “Weaker answers just described or repeated the point and did not link the benefit of a business plan to this business.”

Worked example 16 marks

Lena Hart, a former chef, is starting Hart's Kitchen, a takeaway selling soup. She needs a loan of $20 000 to buy equipment and has written a business plan. Explain two ways the business plan could help Lena.

1
Knowledge: it can help her to obtain a bank loan. [1]
2
Application: she needs $20 000 for equipment. [1]
3
Analysis: the plan shows the bank how the soup sales will bring in cash to repay the loan, so the bank is more willing to lend. [1]
4
Knowledge: it identifies the resources needed. [1]
5
Application: the plan lists the equipment and ingredients a takeaway needs. [1]
6
Analysis: Lena can see what to buy before opening, so she does not run short on the first day. [1]

5. Why governments support start-ups

Governments want new businesses to start. The reasons examiners credit are reducing unemployment, economic growth, more tax revenue and more competition.

Explain the chain. Do not repeat the reason. New businesses create jobs, so the unemployment rate falls and the government has fewer welfare benefits to pay. Economic growth raises living standards for households. This is a question about why, not how.

Examiner insight

“Although the majority of candidates could give three or four correct reasons, they could not always go on to explain the reason but instead repeated the reasons such as ‘to provide jobs to increase employment’ rather than explaining that by creating more jobs the unemployment rate would decrease.” “Some weaker candidates explained how governments provided support rather than why.”

Worked example 16 marks

Amara Textiles is a start-up in a town where many people are out of work. It plans to hire 12 machinists to sew school uniforms. Explain two reasons why the government might support Amara Textiles.

1
Knowledge: to reduce unemployment. [1]
2
Application: Amara Textiles plans to hire 12 machinists in a town where many people are out of work. [1]
3
Analysis: the unemployment rate in the town falls, so the government has fewer welfare benefits to pay. [1]
4
Knowledge: to increase economic growth. [1]
5
Application: the school uniforms Amara Textiles makes add to the country's output. [1]
6
Analysis: higher output means a higher GDP, which raises living standards for households. [1]

6. How governments support start-ups

Two common ways are grants and lower taxes. Training schemes, which the syllabus also names, are a further example.

A grant is money that does not have to be repaid. It brings no interest, but the government may restrict how it can be spent. Bank loans and microfinance are not government support. Naming them is a common error.

Examiner insight

“Most candidates could identify at least one way with grants, and lower taxes being typical correct answers. A common mistake was to identify reasons why a government might help start-ups.” “Many wrongly assumed that the grant would need to be repaid.”

Worked example 14 marks

Noor Bakri is opening a small furniture workshop, Bakri Joinery, in a town that wants more new businesses. Identify two ways the government could support Noor and apply each to the workshop.

1
Knowledge: a grant. [1]
2
Application: it could help Noor to pay for her first set of woodworking tools without having to repay it. [1]
3
Knowledge: lower taxes. [1]
4
Application: Bakri Joinery would keep more of its first year's profit to buy timber. [1]

Recap

An entrepreneur takes the risk to start a new business. Owning, managing or investing in one is not enough.
Successful entrepreneurs are risk-takers, hardworking, creative and innovative. Name the quality, then apply and develop it.
A business plan contains the objectives first, then items such as the market, operations and financial information.
A business plan gives direction, helps to obtain a bank loan and identifies the resources needed. Develop each point.
Governments support start-ups to cut unemployment, grow the economy, raise tax revenue and increase competition.
Governments support start-ups with grants, lower taxes and training schemes. A grant does not have to be repaid.

7. Number of people employed

The size of a business can be measured in different ways. One method is the number of people employed: the business counts its workers.

The count is easy to calculate. It is the most popular answer in the exam.

Naming the method earns one mark. For the next mark, link it to the business: use the number the question gives you.

Examiner insight

“Weaker candidates only offered the way and then a definition of that way.” “A common error was to repeat the same answer for both ways or make vague statements about output or sales.”

Worked example 14 marks

Kestrel Bikes is a workshop in Leeds. It employs 12 people. Last year it sold 300 bicycles for £150 000 in total. Outline two ways Kestrel Bikes could measure its size.

1
Knowledge: number of people employed is one way. [1]
2
Application: Kestrel would count its 12 employees. [1]
3
Knowledge: the value of output (or sales) is a second way. [1]
4
Application: Kestrel sold bicycles worth £150 000 last year. [1]

8. Value of output and sales

A second method is the value of output: what the business produces, measured in money. A business can also use the value of sales.

The word value matters. Value is money. Volume is a number of units. A bakery that bakes 500 loaves has a volume of 500. Its value is what those loaves are worth.

Do not write “amount of output”. It does not say whether you mean volume or value.

Examiner insight

“Some answers were imprecise as they focused on the number rather than the value of possible measures including output and sales.” “Some candidates used the word ‘amount,’ but this does not clearly differentiate between volume and value.”

Worked example 12 marks

Harbour Bakery bakes 500 loaves a day. It sells each loaf for £2. Outline one way, other than the number of people employed, that Harbour Bakery could measure its size.

1
Knowledge: the value of output. [1]
2
Application: 500 loaves at £2 each is 500 × 2 = 1 000, so £1 000 of output a day. [1]

9. Capital employed

A third method is capital employed. Give it as a value: the money value of the capital the business uses.

A business that uses a lot of machinery has a high value of capital employed.

Do not confuse it with other terms. Working capital and revenue are different ideas. A vague phrase such as “the worth of the business” earns nothing.

Examiner insight

“A common error was to define other terms such as working capital or revenue.” “There were many vague statements about production, capital or the worth of the business which could not be credited.”

Worked example 16 marks

Pennine Plastics is a factory with 20 workers. It has £2 million invested in machinery. A rival factory has 65 workers and £0.5 million invested in machinery. Explain two ways Pennine Plastics could measure its size.

1
Knowledge: the value of capital employed. [1]
2
Application: Pennine has £2 million invested in machinery. [1]
3
Analysis: this is four times the rival’s £0.5 million, so on this measure Pennine is the larger business. [1]
4
Knowledge: the number of people employed. [1]
5
Application: Pennine has 20 workers. [1]
6
Analysis: the rival has 65, so on this measure Pennine is the smaller business. [1]

10. Profit is not a measure of size

Profit is not a method of measuring business size. A high profit does not make a business large.

Market share is not a method either. Examiners reported both as incorrect answers.

For safe marks, choose from number of people employed, value of output (or sales) and capital employed.

Examiner insight

“A small number of candidates incorrectly assumed that profit is a way to measure the size of a business.” “Common incorrect responses included profit and market share.”

Worked example 12 marks

Mr Osei owns a corner shop with 3 employees. He says his shop is a large business because it made a high profit last year. Identify the mistake Mr Osei has made and outline one method he could use instead.

1
Knowledge: profit is not a method of measuring business size. [1]
2
Application: Mr Osei could count his 3 employees, or use the value of the shop’s sales. [1]

11. Limitations of counting employees

Each method has limitations. The number of employees is easy to calculate, but it can be misleading.

A business with many part-time workers can appear much larger than it actually is.

A capital-intensive business uses a lot of machinery and few employees, so the count makes it look small.

Examiner insight

“The strongest candidates recognised the problems of part-time staff and capital-intensive production.” “For example, they could have explained that the number of employees is easy to calculate but it may be misleading if the business uses a lot of machinery.”

Worked example 16 marks

Brightside Cleaning has 80 part-time cleaners. Northgate Robotics has 15 workers and expensive machines. Explain two limitations of using number of employees to measure business size.

1
Knowledge: part-time workers are counted as employees. [1]
2
Application: all 80 of Brightside’s cleaners are part-time. [1]
3
Analysis: so a count of 80 makes Brightside appear much larger than it actually is. [1]
4
Knowledge: a business that uses a lot of machinery may have few employees. [1]
5
Application: Northgate has only 15 workers but uses expensive machines. [1]
6
Analysis: so a count of 15 makes Northgate look small when it may not be. [1]

12. Limitations of capital employed and output

Capital employed has limitations too. A labour-intensive business uses many workers and little capital, so it can look small. A capital-intensive business can look large with few workers.

A measure of output or sales must state value, not a number of units. The same business can look large on one measure and small on another.

Examiner insight

“Many candidates made vague statements about capital, output and efficiency which were not awarded.”

Worked example 14 marks

Willow Care employs 120 carers who visit people at home. It owns very little equipment. Explain one limitation of using capital employed to measure the size of Willow Care.

1
Knowledge: a labour-intensive business uses many workers and little capital. [1]
2
Application: Willow Care owns very little equipment, so its capital employed is low. [1]
3
Analysis: on this measure Willow Care would look small. [1]
4
Analysis: yet it employs 120 carers, so the measure is misleading about its size. [1]

Recap

Three methods: number of people employed, value of output (or sales), capital employed.
Say value, not amount: value is money, volume is a number of units.
Profit and market share are not methods of measuring size.
Employees: part-time staff and machinery can make the count misleading.
Capital employed: a labour-intensive business can look small.
Apply every point to the business, using a number from the question.

13. Why owners want to expand

Owners usually expand to increase profit and to increase market share. A bigger share of the market can give more dominance in the local market. More profit gives retained profit to finance the expansion.

Expansion can also spread risk and bring economies of scale. Buying in bulk earns discounts, so the average cost of each unit falls.

Each reason needs its own explanation and its own link to the business.

Examiner insight

“Weaker answers merged together and repeated explanations of increased profit and increased market share.” “Stronger candidates were able to explain that increased market share might lead to more dominance in the local market while increased profit would provide retained profit to finance the expansion.”

Worked example 16 marks

Tariq owns a shop in Leeds that sells ceramic tiles to local builders. He is a sole trader. He plans to open a second shop in York.

Explain two reasons why Tariq might want to expand his business.

1
Knowledge: to increase market share. [1]
2
Application: a second shop in York lets him sell tiles to builders he does not reach now. [1]
3
Analysis: more sales to more builders give a larger share of the tile market and more dominance in it. [1]
4
Knowledge: to benefit from economies of scale. [1]
5
Application: Tariq could buy tiles in bulk for two shops from his supplier. [1]
6
Analysis: bulk discounts lower the average cost of each tile, so the profit on each tile rises. [1]

14. Internal growth

A business can grow internally or externally. Examples of internal growth are developing a new product and entering new markets. For a café business, setting up a new café is internal growth.

Examiners also treat building more branches and franchising as internal methods. They earn no marks when a question asks for external growth.

A way of growing is not the same as a benefit of growing. Say how the method makes the business bigger.

Examiner insight

“Weaker candidates found it difficult to explain how the way resulted in growth for TT and provided the benefits of growth such as increased revenue or profit.” “A common error was to state internal methods, such as franchising or building more branches, or to explain how a business could increase sales.”

Worked example 14 marks

Marlow Bakery bakes bread in one shop in Bath. The owner, Jo, has a good local reputation and wants the business to grow.

Outline two ways Marlow Bakery could grow internally.

1
Knowledge: develop a new product. [1]
2
Application: Marlow could launch a range of gluten-free loaves for customers who cannot buy them from Jo now. [1]
3
Knowledge: build more branches. [1]
4
Application: Jo could open a second bakery on the other side of Bath. [1]

15. External growth

External growth is a merger with, or a takeover of, another business. In a takeover one business acquires another, such as a café acquiring a competitor's café.

A takeover can reduce competition and increase market share. The business gets an established customer base. It saves recruitment and training costs, because the competitor already has trained employees.

It can also cost a lot, and different management styles can lead to conflicts. Explain why it costs a lot: the goodwill and the integration costs.

Examiner insight

“Some candidates included vague statements, such as noting that acquiring a competitor’s café would be expensive. The underlying reasons for this, including goodwill, integration costs, or market value, were not explained.” “Some candidates incorrectly interpreted the taking over of a competitor’s café as going into a partnership or franchise and a few discussed the need to share profits and decisions with the owner of the competitor café.”

Worked example 16 marks

Kestrel Sports makes running shoes in a factory in Leicester. A rival firm, Fleet Footwear, has offered to sell its business. Kestrel's owner is thinking of taking it over.

Explain one advantage and one disadvantage to Kestrel Sports of taking over Fleet Footwear.

1
Knowledge: a takeover reduces competition. [1]
2
Application: Fleet Footwear sells running shoes too, so Kestrel loses a direct rival. [1]
3
Analysis: with fewer rivals Kestrel can gain market share and has more control over its prices. [1]
4
Knowledge: a takeover is expensive. [1]
5
Application: Kestrel must pay for Fleet's goodwill, then join Fleet's shoe production to its own factory in Leicester. [1]
6
Analysis: the goodwill and integration costs use up funds that Kestrel could have spent on new shoe designs. [1]

16. Problems linked to growth

A large business can suffer diseconomies of scale. Examiners credit poor communication, difficulties in control and low motivation or low morale among employees.

Name the problem exactly. 'Needing more employees' is not a problem. The lack of finance, or the additional cost of paying them, is the problem. 'Difficult to manage' is vague: say the business is difficult to control or coordinate.

Each problem needs a reason. Say why it happens, and how it leads to increased cost or lower productivity for this business.

Examiner insight

“Some candidates did not identify a problem. For example, ‘needing more employees’ is not a problem – it is the lack of finance or the additional cost to pay the employees that represents the problem.” “Weaker responses attempted to switch what they knew about economies of scale into a negative rather than identify actual diseconomies of scale.”

Worked example 16 marks

Orchard Tech designs apps for small firms. It has grown from 20 employees to 200 employees in four years and now has three offices.

Explain two problems Orchard Tech might face as it continues to grow.

1
Knowledge: poor communication. [1]
2
Application: a message about an app deadline must now reach 200 employees in three offices. [1]
3
Analysis: teams may work to different instructions, so mistakes are made and costs increase. [1]
4
Knowledge: low morale. [1]
5
Application: one app designer among 200 employees may feel that managers no longer notice her work. [1]
6
Analysis: less motivated designers work more slowly, so productivity falls. [1]

17. Overcoming a lack of finance

A lack of finance is a problem of growth. Expansion needs long-term finance. Short-term finance pays day-to-day expenses and solves cash flow problems.

Sources examiners saw for expansion are a bank loan, issuing more shares to family members, retained profit and the sale of assets. Give an advantage or a disadvantage of the source and apply it to the business. Retained profit does not need to be repaid, but a lack of profit may delay the expansion.

An overdraft is short-term finance, so it is the wrong answer for expansion. The source must also suit the size and ownership of the business.

Examiner insight

“A bank loan, issue of more shares to family members, retained profit and the sale of assets were the most popular answers.” “Some candidates switched the reasons for short-term finance with those of long-term finance.”

Worked example 16 marks

Bolt Bikes makes mountain bikes in Sheffield. It wants to open a larger factory, which will cost £200 000. It has made a profit in each of the last five years.

Explain two sources of finance Bolt Bikes could use to pay for its new factory.

1
Knowledge: retained profit. [1]
2
Application: Bolt has made a profit for five years, so it may have profit kept in the business. [1]
3
Analysis: it does not need to be repaid, so the factory adds no repayments to Bolt's costs. [1]
4
Knowledge: a bank loan. [1]
5
Application: Bolt could borrow the £200 000 that the larger factory costs. [1]
6
Analysis: the loan must be repaid with interest, so the cost of borrowing adds to Bolt's costs. [1]

18. Why some businesses remain small

Many businesses stay small for good reasons. The owner's choice is common: the owner may want control, a better work-life balance, or less stress and financial risk.

Other reasons are a lack of finance to expand, a small market size and the type of industry. Some industries need a personal service, and a niche market has limited demand.

Explain the reason: say why it stops the business growing. When a question asks which reason matters most, the decision must refer to two valid reasons.

Examiner insight

“Some candidates could only state the reason and did not explain why this resulted in a business remaining small.” “Some candidates incorrectly believed that reducing competition and avoiding a takeover were reasons why a business remained small.”

Worked example 16 marks

Amina is an entrepreneur. She plans to start up a business selling pens and paper and has collected some market research data. Amina wants to know why some businesses remain small.

Explain two reasons why a business might remain small. Which reason is likely to be the most important? Justify your answer.

1
Knowledge: the owner's choice or objectives. [1]
2
Analysis: the owner may want a better work-life balance. [1]
3
Knowledge: a lack of finance. [1]
4
Analysis: so the business cannot afford to expand. [1]
5
Evaluation: finance is likely to be the most important reason, as without finance the business cannot grow even if the owner wanted it to. [1]
6
Evaluation: whereas someone can be recruited to manage the business if the owner wanted time to do other things. [1]

Recap

Owners expand to increase profit and market share, spread risk and gain economies of scale.
Internal growth: new products, new markets, more branches, franchising.
External growth: a merger or a takeover. A takeover reduces competition but costs goodwill and integration.
Problems: diseconomies of scale (poor communication, difficulties in control, low morale) and a lack of finance.
Long-term finance for expansion: bank loan, shares, retained profit, sale of assets. Not an overdraft.
Reasons to stay small: owner's choice, lack of finance, small market size, type of industry.
Apply each point to the named business and explain it in a chain.

19. Lack of management skills and experience

One cause of business failure is lack of management skills. A manager with no experience may plan badly and make poor decisions.

Poor management of finance is a typical case. A business whose finance is badly managed may be unable to pay its suppliers. Over-expansion is another reason a business can fail.

Name the cause, then show how it leads to failure. Problems any business might have, such as efficiency or communication, do not say why a business fails.

Examiner insight

“Stronger responses explained that for example a lack of experience may have resulted in poor planning and poor decisions being made.” “A common mistake was to mention problems any business might have such as efficiency or communication which do not identify why a business might fail.”

Worked example 14 marks

Hartley Bikes is a new shop run by Imran, who has never managed a business before. It buys a large stock of bicycles in its first month. Explain one way in which Imran's lack of management experience could cause Hartley Bikes to fail.

1
Knowledge: lack of experience can lead to poor planning and poor decisions. [1]
2
Application: Imran has never managed a business, so he may buy more bicycles than the shop can sell. [1]
3
Analysis: the unsold bicycles tie up the money Hartley Bikes needs for its other costs. [1]
4
Analysis: with no money left it cannot pay its suppliers, so it cannot buy new stock and has to close. [1]

20. Liquidity problems and lack of working capital

Liquidity is the speed at which a business can turn its assets into cash. A liquidity problem means the business may be unable to pay its short-term debts.

Lack of working capital is a short-term shortage of capital. Working capital is the funds used to pay day-to-day costs. It is not the same as capital overall.

A profitable business can still have a liquidity problem. Wages and suppliers are paid with cash, not with profit, and a new business must pay them before it has regular cash inflows.

Examiner insight

“Lack of working capital was confused on a number of occasions with capital and candidates needed to appreciate that this was a short-term shortage of capital.” “Some candidates made vague comments about financial problems or cash issues.”

Worked example 14 marks

Seren's Kitchen delivers lunches to offices. The offices pay 60 days after each delivery, but Seren must pay her food suppliers and her drivers every week. Explain how a liquidity problem could cause Seren's Kitchen to fail.

1
Knowledge: a liquidity problem means the business may be unable to pay its short-term debts. [1]
2
Application: Seren pays her food suppliers and drivers every week but waits 60 days for the offices to pay. [1]
3
Analysis: cash goes out long before it comes in, so there may not be enough cash to pay the suppliers on time. [1]
4
Analysis: unpaid suppliers stop delivering food, so Seren cannot make the lunches and the business cannot trade. [1]

21. Changes in the business environment

A business can also fail because of changes in the business environment. It can fail if it does not plan to adapt to change in the market.

Two typical changes are lower demand and increased costs. Lower demand cuts sales. Higher costs cut the profit on each sale.

Increased competition is another change. A local business may fail if it cannot compete with the lower costs of larger companies.

Examiner insight

“Some candidates gave other likely reasons for the failure of the business such as over-expansion and failure to plan to adapt to change in the market.” “A common error was that many candidates did not attempt to link their answer to the scenario.”

Worked example 16 marks

Corner Print sells printed posters from a high street shop. Two years ago a rival began selling posters online at lower prices. This year the rent on the shop went up. Explain two ways in which changes in the business environment could cause Corner Print to fail.

1
Knowledge: a change in the market can cause lower demand. [1]
2
Application: customers can now buy cheaper posters online from the rival. [1]
3
Analysis: Corner Print sells fewer posters, so its revenue may no longer cover its costs. [1]
4
Knowledge: increased costs can cause a business to fail. [1]
5
Application: the rent on the high street shop has gone up. [1]
6
Analysis: less of each sale is left as profit, and raising prices to cover the rent would lose more customers to the cheaper rival. [1]

22. Why new businesses are at greater risk

New businesses are at a greater risk of failing than established ones. Common reasons are lack of finance, lack of experience, lack of demand and lack of planning.

A new business must also enter a market that large, successful businesses may dominate. Customers may already be loyal to an established brand.

A new business has no reserves from retained profit to see it through difficult times. It also has no steady cash inflow from sales when it first opens.

Examiner insight

“Better candidates stated a reason and then explained why this reason made a new business more likely to fail, such as discussion of problems with cash flow when the new business does not have reserves from retained profit to see them through difficult times or does not have a steady cash inflow from sales when first opening.” “The majority of candidates gave at least two or three valid reasons although weaker answers repeated the reason as explanation, hence restricting the marks that could be awarded.”

Worked example 18 marks

Noor opened Petal & Stem, a florist, three weeks ago. It is on a street where a large supermarket already sells flowers. Noor used all her savings to open. Explain two reasons why Petal & Stem is at greater risk of failing than an established florist.

1
Knowledge: a new business has no reserves from retained profit. [1]
2
Application: Noor used all her savings to open, and Petal & Stem has traded for only three weeks. [1]
3
Analysis: she has no money to see the shop through a week of slow sales. [1]
4
Analysis: she then cannot pay for fresh flowers, so she has nothing to sell and has to close. [1]
5
Knowledge: a new business must enter a market that a large, successful business may dominate. [1]
6
Application: the supermarket on the same street already sells flowers. [1]
7
Analysis: customers who are loyal to the supermarket keep buying their flowers there, so few try the new shop. [1]
8
Analysis: Petal & Stem's sales stay too low to cover its costs, so it cannot continue. [1]

Recap

Causes of failure include lack of management skills, changes in the business environment and liquidity problems.
Lack of experience can lead to poor planning and poor decisions.
Liquidity is the speed at which assets can be turned into cash. A liquidity problem means short-term debts may not be paid.
Lack of working capital is a short-term shortage of capital. Suppliers are paid with cash, not with profit.
Failing to plan to adapt to change in the market, lower demand and increased costs can all cause failure.
New businesses are at greater risk: lack of finance, experience, demand and planning, and strong competitors.
Always explain how the cause leads to failure. Never end with 'so the business failed'.

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

Tariq has left his job to open a bicycle repair shop called Spoke & Co. Define ‘entrepreneur’.2 marks
Priya has set up a company that makes eco-friendly phone cases. State two characteristics of a successful entrepreneur.2 marks
Greta plans to open Greta's Gelato, an ice-cream parlour near a beach. Identify two contents of her business plan and apply each to the parlour.4 marks
Dev is opening a mobile coffee van, Dev's Drip. He needs a bank loan to buy the van. Outline two ways a business plan could help Dev.4 marks
A government wants more new businesses in a region. Identify two ways it could support start-ups such as Zed Print, a new printing shop in the region, and apply each to the business.4 marks
A large factory has closed in the town of Calder and many people there are out of work. Pine & Peg, a new toy maker, will open in Calder with 8 workers. Outline two reasons why the government might support start-ups such as Pine & Peg.4 marks
Mei Lin has given up teaching to open Lin's Lanterns, a shop selling handmade paper lanterns online. She spends every evening making stock and often tries new designs. Explain two characteristics that make Mei Lin a successful entrepreneur.6 marks
Omar is starting Omar's Orchard, a farm shop selling fruit and juice. He needs $30 000 to buy a juicer and a delivery van. Explain two ways a business plan could help Omar.6 marks
Sefa Tui is starting Tui Tiles, which will make roof tiles from recycled plastic. She must buy a moulding machine costing $9 000 before she can make anything. She has few savings and expects to make no profit in her first year. The government offers each start-up one of two kinds of support: a grant that must be spent on equipment, or a lower rate of tax on profit for two years. Do you think the grant is the better way for the government to support Tui Tiles? Justify your answer.6 marks
Jon Reyes has left a job in a bank to open Reyes Repairs, fixing laptops in a university town. He has never run a business. He works 70 hours a week and has put all his savings into tools. He needs a bank loan of $15 000 to lease a shop, and the bank has asked to see his business plan. Jon wrote the plan six months ago, before a rival repair shop opened nearby. Jon says: ‘My characteristics as an entrepreneur matter more to the success of Reyes Repairs than my business plan.’ Do you agree? Justify your answer.12 marks
Tidewater Cafe is a small business in Brighton. Identify two ways Tidewater Cafe could measure its size.2 marks
Zara runs a market stall with 2 employees. She says it is a large business because it made £40 000 profit last year. Identify the mistake Zara has made and outline one method she could use instead.2 marks
Lumen Candles makes 2 000 candles a week. It sells each candle for £3. Outline one way, other than the number of people employed, that Lumen Candles could measure its size.2 marks
Ironbridge Steel has 40 workers and £5 million invested in machinery. Outline two ways Ironbridge Steel could measure its size.4 marks
Cobalt Print has 9 full-time and 14 part-time workers. Explain one limitation of using number of employees to measure the size of Cobalt Print.4 marks
Greenfinger Gardens employs 45 gardeners. Its only assets are hand tools and two vans. Explain one limitation of using capital employed to measure the size of Greenfinger Gardens.4 marks
Pippin Juice sells 1 000 bottles a week at £5 each. Regent Wines sells 400 bottles a week at £20 each. Which business is larger by value of sales? Show your working.4 marks
Maple Stores employs 200 people, of whom 160 work part-time. It rents its shops and owns few assets. Explain one limitation of using number of employees and one limitation of using capital employed to measure the size of Maple Stores.6 marks
Oakline and Fenwick both make furniture in the same town. The table gives data for last year. A newspaper reports that Oakline is the larger business because it has more employees, sells more units and makes more profit. Explain two reasons why the newspaper could be wrong. | | Oakline | Fenwick | | --- | --- | --- | | Employees | 60 (45 part-time) | 28 (all full-time) | | Units sold | 9 000 | 2 500 | | Average price per unit | £40 | £200 | | Capital employed | £0.3 million | £1.8 million | | Profit | £90 000 | £60 000 |8 marks
Riverside Council gives a grant to small businesses. It counts a business as small if it has fewer than 50 employees. Swift Riders delivers parcels by bicycle. Clearspring runs an automated bottling plant. The table gives their data for last year. Do you think number of employees is the best method for the council to use? Justify your answer. | | Swift Riders | Clearspring | | --- | --- | --- | | Employees | 140 (120 part-time) | 12 (all full-time) | | Capital employed | £0.1 million | £4 million | | Value of sales | £1.2 million | £6 million |12 marks
Lena owns a flower shop. State two reasons why the owner of a business may want to expand it.2 marks
Greenfield Bikes makes cycles in one workshop in Derby. State one internal way and one external way it could grow.2 marks
Pia's Pizza has one restaurant in Cardiff. Outline two ways Pia could grow the business internally.4 marks
Ahmed is a sole trader who repairs watches in a small shop in Bristol. He does all the repairs himself. Outline two reasons, other than lack of finance, why Ahmed's business might remain small.4 marks
Prime Logistics delivers parcels in Kent. In three years it has grown from 15 drivers to 150 drivers. Outline two problems Prime Logistics might face because of this growth.4 marks
Sunrise Printing prints leaflets for shops in Hull. The owner plans to buy a second printing machine and double output. Explain two reasons why the owner might want to expand the business.6 marks
Harbour Café sells coffee and cakes in Dover. Its owner is thinking of taking over a rival café nearby. Explain one advantage and one disadvantage to Harbour Café of the takeover.6 marks
Rosa owns a hairdressing salon in Truro. She has noticed that most salons in the town stay small. Explain two reasons why a business might remain small. Which reason is likely to be the most important? Justify your answer.6 marks
Ingrid is a sole trader. Her business, Fjord Kelp, grows seaweed on ropes in the sea and sells it dried to 12 restaurants. Orders have doubled in two years and Ingrid cannot fill them all. A second drying shed would cost £90 000. The business has £15 000 of retained profit. Ingrid sometimes pays her suppliers late because cash is short. Ingrid's problem is a lack of finance for growth. Explain two suitable sources of finance she could use to pay for the second drying shed.8 marks
Nordlys Ferries carries passengers between four islands with three ferries. Its owners want the business to grow. It has £2 m of retained profit. Option A: buy a fourth ferry for £2 m and start a route to a fifth island. The ferry takes 18 months to build, and a crew must be recruited and trained. Option B: take over Havn Line for £3 m. Havn Line is the only rival on the four-island routes. It has two ferries, trained crews and regular passengers. Its captains set their own timetables, but Nordlys sets every timetable at head office. Consider the two options. Which option should Nordlys Ferries choose? Justify your answer.12 marks
A bank manager says that Lina's Laundry may fail because of a lack of working capital. Define 'lack of working capital'.2 marks
Hugo is about to open a shoe repair stall. Identify two reasons why a new business is at greater risk of failing than an established business.2 marks
Zara has just opened a café. She has never run a business before. Explain one way in which her lack of experience could cause the café to fail.4 marks
Tomas repairs mobile phones in a small shop. Customers now prefer to post their phones to a repair company that collects them from home. Tomas has not changed how he works. Explain one way in which this could cause his business to fail.4 marks
Pablo's Pizza is a new business. The table shows its results for its first month. Explain how a liquidity problem could cause Pablo's Pizza to fail. | First month | Amount ($) | | --- | --- | | Loss | 2 000 | | Fall in cash | 3 000 |4 marks
Daniel opened a bakery last month. A large supermarket nearby sells bread. Explain two reasons why Daniel's bakery is at greater risk of failing than an established bakery.6 marks
Kiran runs a sandwich van. Over two years her sales have fallen and the price of her ingredients has risen. Explain two reasons why her business might fail.6 marks
Mia has opened a florist using all her savings. She has never managed a business. Explain two reasons why Mia's business might fail. Which reason is likely to be the most important? Justify your answer.6 marks
Brightway Printing has printed leaflets for local businesses for ten years. Last year it made a profit of $30 000. This year it opened three new shops and paid for them from its cash. Its customers pay 60 days after an order, but its paper suppliers must be paid within 30 days. Two suppliers now refuse to deliver. The owner says, 'We make a profit, so we cannot fail.' Explain two reasons why Brightway Printing might fail.8 marks
Aziz was a chef for ten years but has never managed a business. He is about to open a restaurant, Spice Route, using a bank loan with a repayment due every month. His food suppliers want payment on delivery. There are two other restaurants on the same street, and one has just cut its prices. Consider how each of these three factors could cause Spice Route to fail: lack of management skills, lack of working capital, and changes in the business environment. Which factor is the greatest threat to Spice Route? Justify your answer.12 marks

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Business activity Classification of businesses Types of business organisation Business objectives and stakeholder objectives Motivating employees Organisation and management

Read the notes

1. What an entrepreneur is#

2. Characteristics of successful entrepreneurs#

3. Contents of a business plan#

4. How business plans assist entrepreneurs#

5. Why governments support start-ups#

6. How governments support start-ups#

7. Number of people employed#

8. Value of output and sales#

9. Capital employed#

10. Profit is not a measure of size#

11. Limitations of counting employees#

12. Limitations of capital employed and output#

13. Why owners want to expand#

14. Internal growth#

15. External growth#

16. Problems linked to growth#

17. Overcoming a lack of finance#

18. Why some businesses remain small#

19. Lack of management skills and experience#

20. Liquidity problems and lack of working capital#

21. Changes in the business environment#

22. Why new businesses are at greater risk#

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Chapter at a Glance

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Related chapters

1. What an entrepreneur is

2. Characteristics of successful entrepreneurs

3. Contents of a business plan

4. How business plans assist entrepreneurs

5. Why governments support start-ups

6. How governments support start-ups

7. Number of people employed

8. Value of output and sales

9. Capital employed

10. Profit is not a measure of size

11. Limitations of counting employees

12. Limitations of capital employed and output

13. Why owners want to expand

14. Internal growth

15. External growth

16. Problems linked to growth

17. Overcoming a lack of finance

18. Why some businesses remain small

19. Lack of management skills and experience

20. Liquidity problems and lack of working capital

21. Changes in the business environment

22. Why new businesses are at greater risk