OCR GCSE Business

The purpose of business activity

A business exists to provide goods or services that customers want. Goods are physical products such as bread or laptops; services are things done for a customer, such as a haircut or a repair. Making money is usually part of the reason a business exists, but the reason it can keep going is that it satisfies a need or a want better than the alternatives do. A business that sells something nobody wants has no revenue, whatever the owner hopes.

Enterprise is the activity of spotting an opportunity and organising resources to take advantage of it. An entrepreneur is the person who does this: they notice a gap in a market, develop an idea to fill it and take on the responsibility of starting the business. The opportunity might come from an unmet need (no shop sells fresh food within walking distance of a new housing estate), from a problem with an existing product (a charger that wears out within a year), from a change in technology or fashion, or from the entrepreneur's own skill or hobby.

Spotting an opportunity is only the first step. The idea then has to be developed into something customers will pay for. That means deciding what exactly is being sold, who will buy it, how it will be made or delivered and what it will cost. An idea that has not been tested against these questions is a hope rather than a business.

Characteristics of an entrepreneur

Entrepreneurs tend to share some characteristics, and each one helps with a particular problem a new business meets.

• Creativity: coming up with a product, a way of making it or a way of reaching customers that other businesses have not used, which gives customers a reason to choose the new business.
• Risk taking: being willing to put in money, time and a secure income without knowing whether the business will succeed.
• Determination: carrying on when early sales are slow, a supplier lets the business down or a bank refuses a loan. Most new businesses have a difficult first year.
• Confidence: believing in the idea enough to persuade customers, suppliers and lenders to back it, and making decisions without waiting for certainty.

These are tendencies and not guarantees. A confident entrepreneur who ignores warning signs can lose money, and a very cautious one may never launch.

Risk and reward

Risk is the chance that a business decision will turn out badly, so that money is lost or the business fails. Reward is what the entrepreneur gains if it goes well: profit, independence, the satisfaction of building something and, in a successful business, the chance to grow it or sell it.

The two are linked, because a business that offers a large possible reward usually carries a large risk. Opening a restaurant in a busy city centre might bring high profits if it is popular, but rent is high and many restaurants close within a few years. Selling the same food from a market stall costs much less to start and so risks less, but it is also unlikely to make as much.

An entrepreneur's own money is at stake. If the business fails, they may lose their savings and, depending on how the business is owned, they may also owe money from their own pocket. A business can reduce risk by researching its market, by planning carefully and by starting on a small scale, but it cannot remove it. Risk also changes as a business grows: an established firm has more to lose in absolute terms, though it usually has more resources to survive a bad year.

Business planning

Planning means working out in advance what a business will do, what it needs to do it and how it will pay for it. The main purposes of planning are to reduce risk and to help the business succeed. Having to write out the numbers forces an entrepreneur to find problems (a price that does not cover costs, a market that is too small) before money has been spent.

The business plan

A business plan is a written document setting out the idea for a business and how it will be put into practice. It is useful in several ways.

• It identifies the market: who the customers are, how many there are likely to be and who the competitors are.
• It identifies the resources the business needs to operate, such as premises, equipment, materials and staff, and what each will cost.
• It helps with obtaining finance. A bank or investor deciding whether to lend will want to see that the owner has thought through the costs, expected sales and when the money will be repaid, and a plan with a realistic cash flow forecast makes a loan far more likely.
• It sets out the aims and objectives of the business, which gives the owner something to measure progress against. If sales are well below the plan after six months, the owner can see this and respond.

A plan has limits. It rests on forecasts of sales and costs, which are estimates and can be wrong, and it takes time to prepare. Having a plan does not guarantee success, and a plan that is never revisited becomes out of date as conditions change. Written well and updated, it lowers the chance of failure and gives the owner a clear route.