GCSE Business Studies/Business Success

From Wikibooks, open books for an open world
Jump to: navigation, search

Views on Success[edit]

There is more to being a successful business than making a huge profit. Different stakeholders will have different views on what the business must do to be successful. Note that some of these might be in conflict with the objectives that the business sets itself.

For a business to be successful, it must meet the objectives that it has set for itself. The way in which the business tries to achieve its objectives is called its strategy. In this strategy, the business will set itself success criteria - these are targets it will use to measure whether or not it has met their objectives.

Examples of Different Opinions[edit]

Activist in pressure group
  • "The business is too big and powerful"
  • "They pollute the environment and treat animals badly"
  • "Even though they create lots of jobs, we'd be better off with a lower income and a healthier planet"
Consumer
  • "I want good quality products at a low price"
  • "Some firms are too powerful and charge too much"
  • "I am concerned about the environment, but can't always afford environmentally-friendly products"
Shareholder
  • "I want the firm to be as profitable as possible so I can get a large dividend"
  • "I don't care how the business achieves this, but I don't want them upsetting other stakeholders, as this could hurt profits"
Government
  • "I want the business to create wealth and jobs for the economy, then voters will think I'm doing a good job and vote for me in the next general election"

Measuring Success[edit]

There are five main ways of measuring business success.

  1. Profitability
    • How profitable is the business?
    • This is measured by financial ratios like profit margin. (See Ratio Analysis)
  2. Job Creation
    • How many jobs has the business created?
    • This is measured by counting the number of employees.
  3. Market Share
    • How big is the business?
    • This is measured by dividing the business's sales into the total sales of the market.
  4. Customer Satisfaction
    • How happy are customers with the business's products?
    • This is measured by carrying out customer opinion surveys and market research.
  5. Ethical Consideration
    • How does the business's activities impact the environment?
    • This is measured by whether society believes the business is doing things the right way.

Business Failure[edit]

Most businesses fail because they become insolvent. That means that they don't have enough cash to pay their debts. There are three main reasons for this:

Poor Sales
This could be due to a recession in the economy. If there is a lack of demand from consumers for the business's products, then they have less money coming in and therefore cannot pay its debts.
Overtrading
If the business takes on too many orders, then they may buy too many raw materials or hire too many staff. The business cannot fulfill all the orders and so they don't get the money from their customers quick enough to pay its debts.
Poor Business Decisions
A decision is taken which does not bring in as much money as predicted, for example expanding into new markets or bringing out new products.

In all cases, someone whom the business owes money to (called a creditor) does not get paid, and they decide to take legal action to get their money back.

For a sole trader or partnership, the creditor will sue the business in court in an attempt to get their money back. If the business does not have the money to pay them, the court can appoint an Official Receiver to run the business. The business will then be in receivership. The Official Receiver has full legal rights over all the owner's property, and it's their job to find the funds needed to pay the business's debts. If the business is believed to still be profitable, it will continue to be run. Otherwise, the owner's property will be sold in order the pay the business's debts. The business will close and the owner will be declared bankrupt.

For a limited company, the Official Receiver's job is to sell the assets of the business, not the owner's. If they think the business can still be profitable, they will try to find a buyer to sell the business to. If not, the company will enter liquidation: the Official Receiver will sell off the assets until they have enough cash to pay off all the debts. If there are not enough assets to pay everyone then some creditors may not get paid.