Case Study ‘Business Performance’

Tasks:

Obtain the final accounts of two large public limited companies of your choice in the same industry.

You have been asked to advise a large bank that is keen to invest money in the shares of these companies. You are to produce a report containing the following information:

• A brief history of each company

• Objectives of each company

• Evaluation of the financial performance of each company in terms of liquidity, sales, profits, costs, stock turnover

• Whether each organisation achieved its targets

• Reasons for changes in the performance of each company over the two-year period contained in their accounts

• An inter-firm performance comparisons and an evaluation of any differences

• Your recommendations to the bank – should they buy shares in one or both of these companies? Justify your choice.

Use ratio analysis to examine financial performance in your report. Make sure that any calculations are set out clearly and explained. To calculate financial ratios from information contained in company account, you may use a computer spreadsheet.

You should also consider any other means of measuring business performance, including performance in meeting non-financial objectives.

Also comment on how other factors, including the economic climate, government economic policy, and exchange rates may have affected performance.

Unit 14. Preparing a business plan

Key words: entrepreneur, business plan, break-even, profit, mission statement, asset insurance, insurance broker, public liability insurance, product liability insurance, freehold property, leasehold property, critical path analysis (CPA), GANNT chart

14.1. What Is a Business Plan?

Starting a new business

Business know-how, or the ability to organize and manage production, is known as enterprise. The people who have enterprise are known as entrepreneurs. They are the people who take the risks and decisions necessary to make a firm run successfully.

Starting a new business is not easy, because there are so many factors an entrepreneur cannot control, for example, legislation affecting the business, changes in taxes, economic conditions, consumer demand, and competition. About one in four businesses fail in their first few years. Starting a new business, therefore, needs careful planning and research which will include:

Evaluating a business idea

When evaluating a business idea, the key questions to ask are:

• Will you enjoy the work?

• Have you identified a gap in the market?

• Have you assessed the market potential?

• Who are your competitors?

Turning to the business itself, what is that you want to produce? Is it a good, a service or an intellectual property? Is the product something people will buy on a regular, such as food, or something that they are likely to want only now and again, for example, expensive jewellery or a carpet-cleaning service?

It is not always necessary to be innovative and make an entirely new product. You can provide a good or service that is already available – but do it better than the competition.

Many of the products we take for granted today started as the innovations of private individuals. For example, Persy Shaw became a millionaire after inventing ‘cats eyes’ for roads as a result of seeing his car headlights reflected in some broken glass. Swedish brothers Gad and Hans Rausing made ₤5.2 billion from their invention, the Tetra Pak Carton.

Spotting a ‘gap in the market’, i.e. identifying a consumer want that is not being satisfied – either because a particular product is not available, or because existing products are unsatisfactory in some way. A business that is able to satisfy these consumer desires stands a good chance of succeeding.

For example, mobile phones have filled a gap in the market for improved communications. Microwave ovens have filled a gap in the market for reduced cooking times, as the number of single working households has increased and more women go out to work. Even if a good or service is generally available, a gap may still exist in the market at a local level. For example, a small village may not be served by a newsagent’s shop or hairdressing salon.

Assessing the market potential

More opportunities for new business organizations exist in markets which are expanding. This means that sales of a particular product are rising. It is important for budding entrepreneurs to assess the future potential demand for their product ideas, by identifying trends in sales for similar products from published sources or, in the case of entirely new products, by using primary market research to gauge consumer demand.

Market research can help to identify who is likely to buy your new products, and how much they are willing to pay. The target audience for your product and advertising can be identified by age, sex, income, lifestyle, and geographical location. Expanding markets in the early 1990s included gardening products and DIY, personal computers, mobile phones and fax machines, CD-ROMs, camcorders, aromatherapy, and herbal drinks.

Competition

Unless your good or service is unique, you can expect to encounter competition from rival business organizations. You can attempt to minimize competition by offering better quality and service, lower prices, faster delivery, better customer care and after-sales service, advertising, longer opening hours, and so on, and generally differentiating your product or service from that of your rivals.

It will be important to study the strengths and weaknesses of rival organizations in terms of price, promotion, quality, image, and customer care. Size and location will also be important. For example, it would be madness to think you could successfully compete against giant organizations such as Sony in the market of recorded music. Similarly, it would be risky to open a hairdressing salon in an area already served by many competing salons.

Setting business objectives

One of the very first tasks for a budding entrepreneur is to identify business objectives for the short, medium, and long term. Once identified, these will provide the goals towards which the business works, and by which its success can be measured. Businesses may have many different objectives. However, all objectives will be reinforcing, and in financial terms, most will fall into one or other of the following categories:

1. To be subsidized: some organizations may aim to operate at a loss in order to keep prices low, and will receive a subsidy from another source to break even. For example, in the past, local and central governments have subsidized loss-making public transport services in order to ensure that the public receives a reasonable and affordable level of service.

2. To break-even: when a new business sets up, unless it has a very new and innovative product, it is unlikely that it will make a profit immediately. A more reasonable objective in the short term is simply to avoid making a loss, i.e. to break even. The break-even point is when total costs equal total revenues, and neither a profit nor a loss is made. The vast majority of entrepreneurs launching a new venture are quite pleased to be able to reach the target of breaking even by the end of their first year of trading.

3. Non-profit-making organizations, such as charities, will always attempt to break even, spending no more than they receive in donations and other incomes.

4. To maximize profits: this is the ultimate goal of most private-sector business organizations. In order to make a profit, a firm must earn revenues in excess of total costs. To achieve this, it will need to meet a number of other shorter term (or tactical) objectives along the way, such as establishing a product and brand name, gaining market share and customer loyalty, etc. Similarly, large firms may subsidize new subsidiaries or products if they are aiming to enter a new market, in order to help them to get established.

Mission statement

Many organizations summarize their business objectives in a mission statement. Such a statement is useful to inform both employees and public of the goals and purpose of the business. Mission statements usually highlight the key business objectives of the organization, as well as wider social goals, such as care for the environment, and being a responsible employer.