Commerce Yr 9

Promoting and Selling By Crystal Fung

Word Meanings:

Break-even point – the point at which total costs equal total revenue (from sales)

Mark up – a system whereby the price set is a fixed percentage above the cost price

Recommended retail price – the price suggested by an organization for a product to be sold to customers

Price leadership – where a business, by virtue of its size and influence, sets the prevailing price for a product

Product differentiation – strategies by a seller to show that their product is superior to a competitor’s

Premium pricing – where the price of a product is set very high in order to create an image of quality

Discounts – reductions in the price of goods and services

Marketing – a set of strategies to promote, advertise, and sell goods and services to consumers

Target market – the type of customers a business is aiming to sell to

Loss leaders – products advertised heavily and sold at a loss to entice customers to buy other products

Niche market – a small selective market for a limited number of customers

Market share – an expected given percentage of the total market

Advertising – providing information to the public about a product or service, and convincing them to purchase it

Brand loyalty – where people will always buy a recognised, well advertised product

The selling process

Selling in simply providing goods or services for a consideration (usually money). The seller makes the offer and the purchaser accepts it and either pays an agreed price straight away or agrees to pay at a future date. The selling process takes many forms. In can involve items of small value, such as an ice cream, or valuable items, such as a house or car. The transactions can be in the form of cash or credit. The selling process can be aggressive or “hard sell”, it can be targeted at certain people, and it can involve discounts, special deals, plans and promotions. One aspect that is common to all forms of selling however is that there is an agreed price.

Setting prices

Sellers must set a price for the goods and services they provide. The price may be fixed or it may vary, if the seller is willing to bargain (As happens in many street markets in Australia and also overseas). The price may have been discounted or it may have been subject to bargaining, but however it has been decided upon, it is important for the seller to cover the costs of providing the product and (in most cases) makes a profit.

Costs may be either fixed or variable. Fixed costs are those that must be paid for by the seller regardless of the volume of the sales. They are an integral part of the business and include such things as furniture and fittings and rent on premises. Variable costs (or operating costs) are those that vary according to output. They include such things as raw materials, wages, electricity and telephone charges. Sellers must be able to cover at least the variable costs and set their prices accordingly. Any income that is in excess of variable costs then goes to pay for the fixed costs until the break-even point is reached. After that, any income to the seller can be regarded as profit. Some sellers use a strict mark up policy where the product is costed (total cost per unit) and a fixed percentage increase is applied to determine the selling price.

Sometimes a company, an association or a governing body will set a recommended retail price to be charged to customers. A publisher, for example, may set a recommended retail price at which books are sold in bookstores. However, schools may be offered discount prices for bulk orders. Legal or medical associations may set recommended prices for certain professional services, but lawyers and doctors are then free to charge whatever they like.

Large companies especially are able to influence price by their price leadership. Oil companies and car manufacturers are examples, where the largest company sets a price and smaller companies tend to follow.

Sellers, whether small or large, aim for product differentiation. They look for ways to show that their product is in some way better than others. If they can show that their product is superior in quality they may feel justified in charging a higher price than a potential competitor. Large companies may spend large sums of money in advertising to differentiate their products. The factors that differentiate products include:

Quality

Service

Convenience

Value (for money)

Social and environmental factors are also considerations.

What the market will bear

Although it is important that sellers cover all costs, both fixed and variable, they must be aware of their market. To put too high price on an item may turn customers off. Sellers of some products will use a premium pricing policy where the very high price set actually encourages people to buy more. Cosmetics, fashion clothing and luxury motor vehicles are obvious examples where people believe that “if the price is high, it must be good”. Other sellers may use discounts with the aim of bulk sales so that they can still make profit.

A good example to illustrate the principle of what the market will bear occurs in an auction where people bidding indicate exactly how much they are prepared to pay. The website of eBay works as an auction system, allowing people to bid for goods via the Internet.

Selling techniques

Some goods and services are suited to specific selling techniques. Foe example, fashion clothing and cosmetics tend to be sold in retail stores and shopping centres, while discount clothing may be sold at factory outlets. Encyclopaedias and vacuum cleaners have often been sold door-to-door while domestic air travel is now popularly sold over the Internet. Telemarketing is used to sell holiday packages while mail order sales may be more convenient for people who are unable to visit the shops or who live is isolated communities.

Evaluating selling techniques

Companies need to evaluate different selling techniques as part of their aim for maximising profits. This might involve analysing sales figures and breaking them down into specific markets. For example, certain techniques may be effective with the teenage market but not with the retirees.

Legal and ethical issues

There are clearout laws governing some selling techniques. One example is the “cooling off period” where people may have been pressured into buying goods that they either didn’t really want or couldn’t afford at the time. Other issues relate to guarantees and warranties. However, there are also ethical and/or moral issues, which, while not necessary illegal, are often considered to be unfair by community standards. Examples might include a person on a low income signing up for a loan contract, while the seller may know that the person will not be able to keep up the loan instalments.

Targeting consumers

The targeting of consumers is an important part of the business of marketing. The term “marketing” is used widely in business today to cover not only selling but a whole range of activities, including advertising. It involves an analysis of customers or target markets, their preferences, their buying behaviour, their responses to special marketing techniques – such as special promotions, discounts, sales, competitions and give-away prizes. Some retail stores use special promotions of a particular product that they sell at a loss but hope to entice customers into the store to buy other products. Such advertised goods are sometimes called loss leaders.

Marketing also includes packaging, advertising, product research, sales analysis and sales promotion – all aimed at maximising company profits. Some companies have very advanced marketing systems, such as the Coca Cola Company.

Product Research

Product research is an important aspect of business life today, with some companies spending vast sums of money developing new products. The entry of a new and exciting product into the market can be a great advantage to the company, especially if it beats its competitors. Consider the new brands of ice creams that come regularly onto the market. Some companies, especially drug companies or pharmaceutical manufacturers spend incredible sums of money on product research, or what is termed R&R (research & development).

Market research

Market research is more concerned with analysing what consumers want and how they can be encouraged to buy. Questions that market research wants answered are:

Do consumers like the product?

Is there any competition from other firms?

Are there any substitute products?

What is the likely size of the market for the product?

What is the best price to set for the product?

Market research companies employ a variety of methods, such as surveys, questionnaires, phone surveys and taste tests. Marketing is now big business and the research can be quite sophisticated. Some companies try to concentrate on a highly specialised product for a relatively small, exclusive group of people. This is known as a niche market. Fashion clothing is a typical example. In a highly competitive market, some companies may plan to maintain a particular market share and be satisfied with that.

Advertising

Advertising plays such an important part in the marketing of goods and services that it is now a multimillion-dollar industry in itself. Advertising takes many forms, from the simple blackboard or cardboard sign outside someone’s home advertising “bike for sale”, to expensive television commercials. Somme of the main methods used to advertise includes:

Signs and billboards

Local newspapers

Television

Mail order catalogues and letter box pamphlets

Radio

National newspapers

Promotional functions

The Internet

Advertising methods are generally tailored to specific products. For example, new motor cars are often advertised nationally, using expensive television adverts, while advertising for the local pizza shop is normally in the form of letter box pamphlets offering “special deals”. Some companies prefer to use a variety of techniques, including television and radio as well as newspapers and billboards.

Advertising over the Internet has seen remarkable growth in recent years. Many websites and search engines contain advertising space on their web pages to advertise related products.

Advertising may be informative, persuasive or both. Informative advertising merely attempts to provide the information about a product while persuasive advertising (more common) uses all sorts of techniques to differentiate products and persuade customers to buy particular brands. Large companies especially aim for brand loyalty and their advertising often reflects this. Some famous brand names have come to be absorbed into the English language. For example, people talk of “hoovering” the carpet; “Esky” is a brand name for a container to keep things cool.

Very often we fell antagonistic towards some advertisements but the experts tell us that this is just as effective as those that impress us. The brand name, for whatever reason, sticks in our mind.

Advertising is highly specialised and big business in Australia today. Most large firms employ an advertising agency to create an advertisement or a complete advertising campaign using a variety of media. Sometimes advertising agencies compete with each other for the accounts of the big firms. These firms might reject many ideas before accepting the type of advertisement that they are happy with.

Advertising is changing

The advertising industry is always trying to re-invent itself in response to negative consumer attitudes. For example, many people tire of constant advertisements that interrupt their television programs and either “turn off”, change channels or else record their show and watch it later, skipping the advertisements. To combat this, advertisers and marketing agencies are now producing television shows, making films, publishing books, writing songs and organising events. The strategy relies on consumers believing that they have discovered something rather than being sold something. Popular television shows life “Big Brother” and Temptation Island” are starting to offer new ways of promoting products. Advertisers are using lifestyle shows, such as “Better Homes and Gardens”, “Getaway”, “Great Outdoors”, “Backyard Blitz” and “Changing Rooms” to sell their products. These shows are sometimes referred to as “infotainment” but often the information side barely conceals the soft sell.

Movies are also a powerful medium now being used by advertisers in which multimillion-dollar sponsorship deals are made.

Special events such as pop concerts and sporting contests are now very heavily advertised. According to some, advertising has almost reached saturation point. Consider a major sporting event such as test cricket, a championship tennis match or a football final. It would be interesting to count all the advertisers and the methods they use, from logos on clothing and sporting equipment, to coloured markings on the field, to billboards and signs around the ground.

Advertising has always been a significant part of marketing but its share is decreasing. Direct marketing methods such as mail-outs, phone calls and emails are fast replacing traditional advertisements as companies target their market. Although mass media advertising will always be with us, companies like Telstra, Qantas and the Commonwealth Bank are now concentrating on direct marketing, building up databases on consumers.

Today, consumers are protected from false or misleading advertising by state laws, by the Australian Broadcasting Control Board (for radio and television) and by the Advertising Standards Council. Advertisements that are in poor taste (in relation to general community standards), or those which denigrate particular groups of people are also subject to scrutiny by the Advertising Standards Council. This means, for example, that advertisements are not supposed to promote racism or sexism. There are, however, plenty of examples of advertisements that have been controversial because of their portrayal of particular groups (such as young women) in a stereotypical way.

Advertisements that encourage dangerous behaviour, such as car advertisements, which highlight speed or reckless driving, have been called into question. Advertising of tobacco products has been subject to strict controls for many years and advertising of alcohol products is also likely to face greater scrutiny.

Global Links

Word Meanings:

Global economy – economy that exists beyond the borders of any single nation, based on international trade and investment

Globalisation – the process by which national barriers are breaking down, allowing the free movement of ideas, goods and services, and people

Transnational corporations – generally very large companies that operate in more than one country, also called multinational corporations

Comparative advantage – gains made by countries that specialise and trade their surpluses

Exports – goods and services that a country trades, or sends to other countries

Imports – goods and services brought into a country from other countries

Balance of payments – the difference in value between a country’s exports and its imports

Current account surplus – where the value of exports is greater than the value of imports

Current account deficit – where the value of imports is greater than the value of exports

Foreign investment – putting funds into a business in another country

Indexes – numerical indicators of trends (in shares)

Futures – commodities that are traded in a special market for future delivery

Merger – when two companies join to form one

Acquisition – when one company buys another

Bilateral – involving two parties or countries

Multilateral – involving more than two parties or countries

Tariff – a tax or change on goods being imported into a country

Quota – a set quantity of a goof that can be imported

Embargo – a ban on a good or service entering a country

Trade agreements – signed agreements between member countries agreeing to reduce trade barriers

Foreign exchange market – the market in which buyers and sellers of foreign currencies interact (also called the forex market)

Speculators – people or companies who buy and sell foreign currency to make a profit

The global consumer

We live in a rapidly changing world and links with other countries are constantly increasing. Advances in transport and communications have made the world appear much smaller than it is. We are now able to travel to the other side of the world in less than twenty-four hours, something unheard of in the previous centuries. We can make contact instantaneously by telephone, by facsimile (Fax) or via the Internet with people on the other side of the world. As a result, we can do business with people from other countries much more easily than in the past. There is now a substantial flow of goods, services and money from Australia to other countries, and from these countries to Australia. As a result of advances on technology, especially communications technology, there has been an increase in the movement of goods, services and money. For example, we can eat a McDonald’s hamburger or drink a can of Coke in any one pf over a hundred countries in the world. We can see a film or watch a television show made in the United States, the United Kingdom or China, we can buy furniture designed in Sweden or we can drive a Japanese car. We can buy CDs from the United States or United Kingdom over the Internet. We are part of what is sometimes called “the global village”, meaning that we live in a true global economy.

Global markets

Over the past twenty years there has been a rapidly growing trend towards globalisation as countries and businesses become increasingly integrated. The barriers that have historically separated countries are being broken down. The forces at work in this trend are:

An increase in the free movements of goods, services and people – the result of improved methods of transport and communication

The influence of global media networks in the information and entertainment industries (such as Rupert Murdoch’s News Limited and companies like Time Warner and Disney)

The growth of transnational corporations (TNCs)

Globalisation has seen the reduction of trade barriers, relaxation of foreign investment restrictions, and advances in technology (trough the Internet) that have resulted in the free flow of goods, services, information, skills and capital throughout the world.

Australia’s international trade

International trade is the exchange of goods and services between countries. It is based on the idea that a country specialises in producing certain goods and services to produce a surplus, and then trading that surplus for other goods and services that it cannot produce (or those which the country cannot produce efficiently). International trade is based on the principle of comparative advantage. Australia, for example, is an efficient producer of wool and so it specialises in wool production, exports the surplus wool and then imports other goods, such as machinery.

International trading has many benefits:

It allows businesses to grow

It provides employment

It encourages efficiency

It provides consumers with a wider choice of goods and services

It delivers lower prices for goods because of lower production costs

It contributes to an increased standard of living

Changing trade patterns

There have been significant changes in both the composition and direction of Australia’s trade. Wool, wheat and meat were once out major exports, but these have now been replaced in importance by coal, iron ore and other minerals. Gold, for example, is now a major export earner for Australia. Australia’s imports have traditionally consisted of manufactured goods, such as machinery, motor vehicles and electrical appliances. Australia now exports a wider variety of goods and services, including some manufactured goods. Services exported by Australia include tourism and education.

The direction of Australia's trade has also changed. Whereas our major trading partner was once the United Kingdom, it is now the Asia-Pacific region, particularly Japan and the United States. Japan is currently our main trading partner; however, there has been a marked increase in Australia’s trade with China in recent years.

Australia’s balance of payments

The balance of payments is a record of Australia’s transactions with the rest of the world. Just as an individual household must keep records of the income it receives and its outgoing expenses, the nation also must keep track of its income from overseas and its payments to overseas countries.

Australia receives income from other countries through the sales of goods and services to those countries. Goods and services sold overseas are called exports. On the other hand, when we buy goods and services from overseas, we must make payments for them. Those goods and services brought into Australia from overseas are called imports. In reality, parcels of money do not actually enter or leave the country at all. The transactions are recorded in the banking systems of the countries concerned, which means that our exports pay for our imports.

Calculating the balance of payments

The balance of payments consists of two parts, the current account and the capital account. The current account measures the value of imports against the value of exports (as measured in Australian dollars, A$). If the value of exports is greater than the value of imports, then we are said to have a current account surplus. On the other hand, if the value of our imports is greater than the value of our exports, then we have a current account deficit. The capital account measures capital inflows and outflows. If Toyota builds a car manufacturing plant in Victoria, this is a capital inflow. If the Australian government builds a bridge in Vietnam, this is a capital outflow.

Australia has historically had a series of deficits on its current account. Despite this, there have been some periods when there has been a trade surplus. In the September quarter 2001, for example, Australia’s current account showed a surplus of $545 million. This was mostly due to the low value of the Australian dollar on international currency markets. A low dollar makes our exports cheaper to the rest of the world. Imports, on the other hand, down by 2 per cent, at the time. However, the value of the Australian dollar rose again during 2003, making exports dearer.

Balancing the books

For most of the past fifty years, Australia has been paying the rest of the world more for its imports than it has been earning from the sale of its exports. Because our exports do not fully pay for our imports, we have had to borrow from other countries to make up the difference. If we keep borrowing, however, it becomes more difficult to repay the money, and we must pay interest on the debts. What can be done?

Some solutions to the problem include the following:

Place heavy restrictions on what we import. Import restrictions, however, are against current international agreements such as those with the World Trade Organization (WTO)

Reduce the amount of goods that we import by producing similar sorts of goods in Australia. This is called import replacement. The “buy Australian” campaigns, such as the one being pursued by people like Dick Smith, illustrate what can be done.

Increase the values of our exports. The prices of some of our major exports, especially agricultural products and minerals, are determined on the world market and therefore subject to fluctuation.

Develop a value added approach to exports. For example, instead of exporting woodchips, we could process them into paper and other products and export them.

Focus on new products that are in greater demand throughout the world. Australia has had some success in exporting high-tech products, such as aircraft navigation equipment and biotechnology and medical technology products.

Initiate export drive campaigns or trade fairs to help sell our products to the rest of the world.

The government can finance the deficit by selling off assets. This can be done if overseas investors are encouraged to buy real estate in Australia or buy Australian shares. However, if we are to reduce our debt to the rest of the world, we must try to produce new products and become more competitive with other countries.

The global investor

Individuals and companies in Australia sometimes wish to invest their funds in overseas ventures. Equally, foreign individuals and companies wish to invest in Australia enterprises. This process is known as foreign investment and may take the form of buying shares in foreign companies or setting up subsidiary companies in another country. The giant United States company General Motors, for example, established a subsidiary company known as General Motors=Holden in Australia over fifty years ago. The company produced the first Australian-made motorcar, the Holden. Although the profits of GMH returned to shareholders in the United States, the venture generated employment opportunities for Australians and also encouraged smaller Australian firms producing car parts and accessories. Virgin Blue is another example of foreign investment.

There has been a substantial amount of investment by foreign companies in Australia over the past fifty years, not only in motor vehicle manufacture but also in petro-chemical industries, manufacturing and, more recently, the media. Foreign takeovers have been common. Also, there has been much interest shown by foreign individuals and companies in Australian real estate. To protect Australia from too much foreign investment, the federal government has established the Foreign Investment Review Board (FIRB) to oversee all foreign investment and to block some projects if they are considered to be against Australia’s interests. The FIRB were asked to examine two recent merger/takeover bids. The merger of Australian company BHP with the United Kingdom company Billiton was approved. However, the large oil company Shell made a $10 billion takeover bid for Australian mining Woodside Petroleum but it was rejected as it was considered to be “not in the national interest”.

World money markets

Each night on the television news and each day in the newspapers, there are reports on the financial markets in Australia and overseas. These reports include information on the exchange rate, usually against the US$, the price of gold, and particular shares (which may have risen or fallen sharply during the day). We also hear of the All Ordinaries Index (All Ords), the Dow Jones, the Nikkei, the Hang Seng, the NASDAQ and the FTSE (pronounced “footsie” short for the Financial Times Stock Exchange). These indicate share market movements in selected countries.

Market fluctuations

Stock markets in general are influenced by speculation or risk taking. It has also been said that they are driven by greed and fear. Greed will force prices up, while fear will drive prices down as shareholders rush to sell their shares – thus driving the price even lower.

Financial markets worldwide also incorporate what are termed futures. A futures market is where people but and sell commodities and foreign currencies for future delivery. Worldwide, the futures market swaps many billions of dollars every day. Sydney is the ninth biggest futures market in the world and the biggest in the Asia=Pacific region, outranking Tokyo and Hong Kong. Because of the world’s varying time zones the market moves its way around the globe every twenty-four hours. New York, Chicago, Sydney, Tokyo, Singapore, Frankfurt, Paris, London – as the sun passes over that country, so does a great deal of money!

Transactional organizations

Transactional corporations (TNCs), sometimes called multinational corporations, have increased in size and area of influence over the past fifty years. Corporations like General Motors, Shell, IBM, McDonald’s, Toyota, Coca-Cola, Nike, Sony and Nestle have enormous resources and spread their influence in a large number of countries. The sales figures of some of these multinationals, such as General Electric ($255 billion) and IBM ($148 billion), are greater than the GDP (gross domestic product) of countries like Finland ($139 billion) and Malaysia ($126 billion). The influence of global media networks like News Corporation, Time Warner and Disney had also been widespread, especially with the use of satellite technology.

TNCs and the world economy

The world’s large TNCs have been able to grow by merger and by acquisition. They have been able to identify similar companies in other countries and either buy them or merge with them. The BHP-Billiton merger is an example.

TNCs are now a major part of the world economy. Their growth has been greater than most national economies.

Global Business

There are several organizations, both international and Australian, that assists companies in finding and developing markets for their goods and services and enhancing free trade in the global economy. On the world scene there is the World Trade Organization (WTO) and G-8. There are also bilateral and multilateral trade agreements between countries for their mutual benefit. However, in Australia there is a government-sponsored organization that helps exporters, known as Austrade.

Barriers to trade

The benefits of international trade to all countries involved, as shown by the principle of comparative advantage, can easily be seen/ there are, however, some groups of people who may be worse off. If we specialise too much we may cause hardship for some of our key industries and employment opportunities may be lost. In the past, countries have often tried to protect their industries by placing some barriers or restrictions on international trade. For example, a country may impose a tariff (or import tax) on some goods coming into the country. A more severe restriction still is an embargo placed on a particular product.

In our complex commercial economy, it is important that Australians do not isolate themselves from the rest of the world – to do so would be to deprive Australian people of the highest standard of living we can enjoy by trading with the rest of the world. Australia already has a free trade agreement with New Zealand through its Closer Economic Relations (CER) policy and in 2003 was negotiating a trade agreement with the United States.

Arguments about free trade versus protection are common. Aware of the benefits of free trade, many countries in the past attempted to form trade agreements or alliances. Trade agreements were signed, often between neighbouring countries. After World War II ended, one of the most successful trade agreements was the formation of the European Common Market (or European Economic Community), where the countries of Europe realised the benefits of more open free trade arrangements. The economic growth experienced by member countries was so noticeable that other countries gradually joined.

In 1947, there was another major development when about twenty United Nations (UN) member countries met to sign the General Agreement on Tariffs and Trade (GATT) under UN supervision. GATT was supposed to settle trade disputes and organise negotiations under which member countries would mutually agree to cut tariffs. There were many rounds of talks, with varying degrees of success, until the final round of GATT talks ended in late 1994. A new body, the World Trade Organization (WTO) was formed.

Global financial markets

Australia has a range of financial links with the world. Apart from international trade and the related financial payments system, Australia has important links with other countries, such as foreign investment and foreign aid. These links involve funds being transferred between countries for specific purposes. The flow of these funds may be in either direction, into or out of Australia. Any transfer of funds from one country to another can only be facilitated by the use of exchange rates.

Exchange Rates

Every country has its own money system of currency. In Indonesia they have the rupiah, in Thailand it is the baht, in China the yuan, in Zambia the kwacha and in United Kingdom it is the pound stirling. Other countries use dollars similar to Australia, such as the United States, Canada, Singapore, New Zealand and Jamaica, but they are all different. European currencies, such as the French franc, the German deutschmark and the Italian lira, have now been phased out on favour of the common EU currency, the euro.

To allow us to buy products from overseas or to sell our products to overseas countries we must have some way of comparing the value of our currency (A$) with the currencies of other countries. Our exchange rate basically tells us how much the rest of the world is prepared to pay for our products and how much it costs us to buy things from the rest of the world. When our exchange rate falls, the things we buy overseas will become more expensive.

Determining the value of the Australian dollar

Like many other things, the value of the Australian dollar is determined in the marketplace; in this case the buyers and sellers in the foreign exchange market (known as the forex market). When the buyers and sellers agree on a price then a transaction takes place. Just as there is a market for cars there is also a market for Australian dollars or for any other currency.

The people who buy and sell Australian dollars and other currencies are called foreign exchange dealers. Their job is to match up buyers with sellers of Australian dollars. For example, if someone had Australian dollars and wants Japanese yen then the foreign exchange dealer will try to find someone with Japanese yen who wants Australian dollars. The typical foreign exchange market, as found in the head offices of most major banks, is a very busy place.

Movements in exchange rates vary according to movements in international trade and finance. For example, if overseas countries want more of our exports then they will also want more of our currency with which to pay for our exports. If more people want to buy Australian dollars then our exchange rate will increase. On the other hand, if other countries want less of our exports then the value of the Australian dollar falls in comparison to other currencies. We can therefore buy fewer goods and services from the rest of the world. A falling Australian dollar makes our exports cheaper and our imports dearer. While this might be good news for farmers and mining companies, it is not so good for consumers wanting to buy imported products or for Australian tourists travelling overseas.

Exchange rates are changing constantly, sometimes by only a fraction of a cent. However, when you consider exports and imports worth millions of dollars, this can still amount to a considerable amount of money. Sometimes the exchange rate is affected by speculators who have the buying power to drive the exchange rate up or down and profit from their buying and selling.

International aid programs

Foreign aid involves the transfer of funds from a donor country (usually a wealthy developed country) to a recipient country (generally a less developed or poor country) to assist them in some way. The assistance can be in either monetary form, such as gifts or loans (in which the donor country pays the interest), or in real form, such as technical assistance and advice. The government department responsible for implementing and administering foreign aid is the Australian Agency for International Development, commonly known as AusAID.

Australia’s aid program concentrates mainly on the Asia-Pacific region, with Papua New Guinea as the country receiving the greatest amount of aid.

Foreign aid may be either bilateral, or multilateral, which includes many countries. Multilateral aid consists of Australian donations and subscriptions to UN agencies such as the World Food Program and UNICEF (UN Children’s Fund) and contributions to the World Bank and to various multilateral development banks. The focus of Australia’s foreign aid is bilateral and tends to include health, education, agriculture, transport infrastructure and governance. The UN had many agencies dealing with foreign aid and related matters, including United Nations Conference on Trade and Development (UNCTAD).

Current issues

Globalisation, as we have already seen, has had a significant affect on our everyday lives. It is such a powerful movement that issues related to it are bound to continue to be in the news. One such issue, the anti-globalisation movement, has dominated the news in recent years and is likely to continue to receive strong media coverage.

The anti-globalisation movement

Globalisation is not just about big transnational corporations getting rich at the expense of the poor. It is a much broader concept that relates to the way in which we communicate and trade on a global basis. There are, however, people who are concerned about the negative effects that globalisation has had on people, communities and on countries.

The anti-globalisation movement has grown rapidly in recent years. Support comes mainly from the relatively wealthy countries in Europe, North America and Australia. Protesters are becoming more vocal and more organised, such that it is now becoming difficult for international economic organizations to meet without attracting crowds of protesters criticising globalisation. There have been “global attraction days” at world conferences such as the one that took place at the WTO summit meetings in Seattle in December 1999. Economic meetings in Gothenburg (Sweden), Prague (Czech Republic), Davos (Switzerland) and Melbourne (Australia) have also seen massive protests against globalisation. In Jul 2001, at the G-8 Summit Meeting in Genoa, Italy, a protester was killed by a police.

The people who protest are a diverse group, consisting of:

Trade unionists concerned about losing their jobs

Students activists who wanted to help the developing world

Environmentalists concerned about ecological degradation

Anarchists who object to all forms of international regulations

Globalisation has its supporters and its critics.

Supporters say…

The growth in world trade increases the wealth for everyone

World prosperity is enhanced by greater exchange between nations

Wealthy countries can provide loans to poorer countries for development projects

Individual nations have a dual responsibility to both their citizens and to the world society as a whole

Critics say…

Countries with the most wealth, resources and technology are growing richer while the less fortunate countries are getting poorer

The gap between the “haves” and the “have nots” is increasing

The institutions that govern world trade and finance are not accountable and are unde democratic

Running A Business

Word Meanings:

Entity – something that exists on its own

Proprietor – the owner or part of a business

Unlimited liability – where the owner is responsible for all the debts of the business

Capital – the money initially invested in a business by the owner or owners

Limited liability – where shareholders’ obligations are limited to the amounts they have invested in a company

Business plan – an outline of the actions needed to achieve success in business

Cash flow – a measure of the actual cash coming into the business less the cash going out (to pay bills)

Owner’s equity – the money put into a business by the owner

Par value – the value of a share when first issued by a company

Liquidation – when a company is wound up, its assets sold and the proceeds distributed to the company’s creditors

Management – planning, directing and controlling activities

Leadership – guiding, controlling and setting directions for others

Directors – shareholders of a company who have been elected to make decisions on the running of that company

Chief executive officer – the person who is in charge of a large company (CEO)

Financial transactions – business dealings, involving buying or selling of a good or service for money

Accountant – a person who supervises the accounts of a business

Auditor – a person who officially examines and verifies financial records

Order form – a document used to order goods or services

Tax invoice – a document to a customer that indicates goods or services supplied and the GST that applies

Credit note – a document issued to a customer when goods are returned

Statement of account – a document issued to a customer to indicate amount owing; also known as a bill

Assets – what a business owns

Liabilities – what a business owes (to others including the owner or owners)

Being an entrepreneur

The word business occurs everywhere in our everyday lives. We hear of people who “go into business”, people who “run a business”, people who “sell a business”, or even people who “go out of business”.

A person who runs a business is said to be an entrepreneur. This means that the person organises, manages and takes responsibility for its successful operation. This necessarily involves an element of risk as the business may not be successful, but people are encouraged by the opportunity of making a profit. Profit is said to be the reward that goes to the owner of the business for taking a risk. Small businesses, if successful, can grow into large businesses. Some may remain small and some may get into difficulties and cease to exist.

If the business is very successful, its owner or owners may well earn substantial profits. If the business is unsuccessful the owner or owners may well suffer a loss. They may lose the money they have invested or put into the business. There are some people who fail in a business venture but are prepared to try again, sometimes with great success. Others try again, but again without success. Not everyone wants to go into business. There are many people who don’t have enough money to start or buy one, or who simply don’t wish to go into business for themselves.

Being successful in business can sometimes be a matter of luck but in general it does require certain personal characteristics and skills to be successful. These include:

A capacity for hard work

Leadership

Courtesy

Competitive spirit

Ability to accept responsibility

Adaptability

Concern for others

Planning for success

There are no simple answers about what makes a successful businessperson. Is it hard work, luck, intelligence, ability, or a combination of these factors? Perhaps you think that all people in business are male, old, conservatively dressed and well educated? In reality, however, this is not always the case. As mentioned, there are no guarantees of success in business, but the four guidelines described below may help to identify factors leading to success.

Know yourself

To be successful in business you need to have several attributes. First you need to know yourself, your personality and your strengths and weaknesses. You need to show initiative, judgement and have a willingness to take risks. You also need to be flexible and be prepared for possible setbacks.

Look after your staff

In business your best resource is often your staff. Managing your employees is a great responsibility for business people. Staff should be chosen carefully and looked after if they are valuable resource that you hoped for. If you have top staff your competitors mat well try to get them away from you. In business, if you look after your staff they will be more often loyal, and in turn look after you and your business.

Work hard and work smart

What are the qualities of a successful businessperson? Running a successful business can be very demanding. It is true that there are many outside factors that will determine whether a business succeeds or not. Sometimes luck may play a part. Yet it is the personal qualities of the businessperson, which very often play such an important part in a successful business.

Keep accurate and up-to-date records

It is important to remember that as soon as you start a business venture you must keep good financial records. You need to consider that your business is an entity and therefore separate from your personal life. Your personal finances should be kept quite separate from your business finances. You will also need to understand the workings of the GST as you have an obligation to complete a form, called a Business Activity Statement (BAS) on a regular basis. This underlines the importance of proper financial management and accounting.

Selecting business opportunities

There are several issues to consider when selecting business opportunities. Here is a checklist of some items you might think about:

Have you researched the market carefully? Are you likely to be able to sell your product? If your talents lie in baking French pastries it is no good turning out thousands of cakes and pastries if there are already three or four cake shops operating in your local area and satisfying the demand. You may love to make wooden toys, but what is the use if no one will buy them?

Will there still be a demand for your product next year and the year after? There is no use in starting a business if you are unable to continue to sell your product in the future.

Have you considered the costs involved? If you need shop premises in a main street or a shopping centre, how much per week is the rent? Can you afford the shop fittings (shelves, racks, furniture, cash registers, etc.) and then buy a stock of goods to sell? What about telephone, electricity, cleaning and other charges?

Will you be able to sell your product at a competitive price? How much can you sell your product for after calculating your costs? Are you opponents’ prices cheaper?

Do you know how to keep financial records for your business?

How will you deliver and market (sell) your product? Will you need special transportation? What about advertising?

Are you good at dealing with people?

Are you in good health? Remember that losing time through illness could be disastrous for your business.

Do you wish to establish a business from scratch, buy an existing business or buy into a franchise? Also, do you wish to establish your business as a company? If you do you will have to outlay several hundred dollars to have you company registered and the relevant documents lodged by accountants or solicitors.

Do you have enough money to start your business? The best way to find this out is to make a few calculations, based on your savings, your current income and your current pattern of expenses.

Types of business structures

Businesses are organizations that operate to satisfy people’s wants. They may vary in size from small businesses (which may employ only a few people), to medium size businesses (employing hundreds of people), up to large businesses (which employ many thousands of people). Small businesses, of which there are many, are important to the Australian economy.

There are many different kinds of businesses structures in Australian today. We may classify businesses according to size, ownership and industry. In fact, most businesses in Australia are small or medium-sized, employing fewer than 100 people. It is estimated that there are over a million small businesses is Australia today.

Businesses can be classified, according to ownership, into sole traders, partnerships and limited liability companies. Companies may, in turn, be further subdivided into private and public companies.

The sole trader

A sole trader is the name given to a business that has only one owner. The owner or proprietor runs the business and, if successful, receives all of the profits from the business. The owner effectively is the business, and as such is liable for all of its debts if it does not succeed. The owner therefore has what is called unlimited liability. This means that if the business tuns at a loss; it is the owner who suffers the loss. If the debts of the business are greater than the value of the assets (what the business owns) then the personal belongings of the owner may be seized and sold to pay the outstanding debts. The owner’s luxury car, boat or holiday house may have to be sold to pay the debts of the business. The owner is allowed to keep personal items such as clothing, bedding and tools of trade.

A sole trader should also make provision for such things as sickness, accident and retirement, in case they are unable to work for long periods. Most sole traders therefore take out various forms of insurance.

The sole trader is the most common form of business organization in Australia today. It is simple in structure and relatively small in size. To expand the business, the sole trader must obtain more finance, either from profits or by borrowing more money from the bank. This is often very difficult or expensive to do and so sole traders tend to remain relatively small in the size of their operations.

Examples of sole traders may be found in neighbourhood stores, small farms, tradespeople (electricians, builders), hair salons and restaurants.

Partnerships

A partnership is a business that is owned by two or more people. By law a partnership can have up to twenty people but it is more usual to find partnerships that have between two and six partners. The partners share in the contribution of funds to the business; they generally share the workload as well as the profits (or losses). Although such sharing is generally equal, it need not be so. Partners who only contribute a small percentage of the funds – or capital – would probably expect only a small percentage of the profits. Some partners may contribute funds but are not able to share in the workload of the business. For example, a solicitor from a law partnership may become a politician but still wish to remain in the business (as a sleeping partner).

In order to have a partnership properly organised, it is advisable for the partners to make a partnership agreement. This agreement, drawn up on the advice of a solicitor or accountant, would set out things such as:

The name and address of the business

The type of business

The names and addresses of each partner

The duties and responsibilities of each partner

The amount of capital each partner in to contribute

How decisions affecting the business are to be made

The way in which the profits are to be shared (generally this is in proportion to the amount of capital invested)

What is to happen if one partner dies or wishes to leave the partnership

In Australia, partnerships are most common in the professions (solicitors, doctors, dentists, accountants) and in the building trades (electricians, plumbers).

Companies

Companies are very different from sole traders and partnerships as a form of business organization. A company is created by law and exists separately from its owners. It has “perpetual succession”, meaning that its existence does not cease if one of the members dies or becomes bankrupt. A company may sue or be sued and it may hold land in its own right.

The most important difference between a company and a sole trader or partnership is in the matter of liability. The owners of a company are called shareholders. Each shareholder contributes a certain sum of money to the company by buying shares. Under the Companies Act, shareholders have limited liability. This means that if the company is unable to pay its dents the liability of the shareholders is limited to the money they contributed when they bought their shares.

Shareholders, as part owners, are entitled to a share in any profit made by the company. Naturally, the mire shares a member owns the more profits they would be entitled to receive. When a company makes a profit it distributes some or all of it in the form of dividends.

Companies may be either private or public. A private company is referred to as a proprietary company and generally has the letters Pty Ltd after its name. The shares are offered privately to selected people and are not offered to the public for sale and these shared are traded openly on the stock exchange. Public companies, therefore, trend to be quite large with the advantage that they can attract large amounts of capital through the open sale of shares.

Incorporated associations

Another type of business structure, the incorporated association, is established and run much the same as a company except that the proceeds (or profits) do not go to shareholders but are used for the mutual benefit of members. Large licensed clubs are examples, such as the Parramatta Leagues Club Limited.

Establishing a new business

There are several important steps required before you can start a business. Some of them are required by law, so it is important to spend time finding out exactly what you need to do. You need to:

Develop a business plan

Apply for business registration

Raise the funds

Developing a business plan

If you plan to succeed in business, you must first succeed in planning. The road to success will involve planning where you go and how you will get there. A business plan is essential, whether you are starting or enlarging and business.

Key questions

There are really four key questions to answer in a business plan:

What business am I in?

What am I selling?

Why would anyone want this product?

Who will I be selling to?

To start a business or to buy an existing business, certain basics must also be included in your plan, which must be written down. There are:

Financial transactions and record keeping

Labour (Who will do each task?)

Equipment (What do you need to start and what will be needed in the future? Should you have a website?)

Market (What, where and to whom are you selling?)

Finance and capital (Where is the money coming from to start?)

Legal and tax issues

The critical areas of your plan are the three M’s:

Money

Marketing

Management

Applying for business registration

To start a business an Application for Registration form must be completed and lodged, together with a fee of $118, to the NSW Department of Fair Trading. This is to register your business name. Other information required on the form includes:

The name for the company. It is compulsory to register a business name and it must be one that cannot be confused with the name of another company already in existence.

The nature of the business. This should indicate the trade or profession in which the name will be used.

The registered address of the company for all official correspondence.

The name and address of all the applicants.

Another legal requirement for starting a business today is that you must apply to the ATO for an Australian Business Number (ABN). This is an eleven-digit number that must be quoted on all your business documents as it involves the collection of the GST.

Raising the finance

To start a business you need money, or what business people call capital. If you have your own pool of savings you have a better chance of success than if you rely on some form of banking finance.

Businesses that rely on bank finance (whether it is an overdraft, a business loan or a home equity loan) generally have higher initial expenses because of the interest payments. Even then, banks or other financial institutions are wary about lending large sums of money unless the borrower has a good track record. For example, a bank may wish to see tax returns, a detailed business plan and cash flow projections before lending money for a business venture.

In starting a business you would therefore need to consider your establishment costs (costs of getting started) as well as working out a budget that will allow you a sufficient income in the early months when business may be slow.

Funds put into a business are sometimes referred to as owner’s equity, which is effectively what the business owes the owner. This can be seen more clearly when you examine a balance sheet.

How to form a company

If you want to form a company (as opposed to a sole trader or partnership_ there are more formalities to address and so it is advisable to seek the advice of a solicitor and/or an accountant. The procedure for forming a (limited liability) company involves the following steps:

Selecting a name for the company. You must be careful in doing this, as you will not be permitted to use a name already in use by another company. The proposed name must be reserved (and a fee of $118 paid) before the company can be formed.

Drawing up a document called a Memorandum of Association: This document must contain: the name of the company, the objects of the company (including the type of business to be carried out); a statement indicating that the liability of the members is limited; the amount of share capital with which the company proposes to be formed and the par value of those shares. For example, a company may wish to raise its capital by issuing 100 000 shares with a par value of 50 cents each, providing $50 000 capital.

Drawing up another document called Articles of Association: This document sets out the rules and regulations by which the company is organised. This might involve such things as when shareholder’s meetings are to be held and how decisions such as the distribution of profits will be made.

Registering these documents, together with the company’s name, with the Australian Securities and Investments Commission (ASIC): ASIC will then issue a Certificate of Incorporation which indicates that the company has been legally and properly formed and has the right to carry out business activities under its company name. The company becomes an independent body and will continue to exist regardless of what happens to the owners.

Winding up a company

Sometimes a company has difficulties in paying its debts. If it is a short-term problem the company may be able to trade its way out, but if the problem continues, the company may need to be wound up. Liquidation may be voluntary) when the shareholders agree) or may be forced.

During the 1980s, a number of large, high profile companies found themselves in difficulties and were subsequently liquidated or underwent a lengthy process of liquidation. The best known of these were the Bond Corporation (Alan Bond) and the Qintex Group (Christopher Skase). More recent examples include the large HIH Insurance Group and the telecommunications company One Tel.

Managing a business

The efficient management of a business is crucial to its success. It requires planning, careful, well-considered organization, effective leadership and supervision or control. A business plan is an essential element in the successful management of a business. Profit levels and growth in the business are the more obvious pointers to success, but also the contentment, loyalty and well-being of the employees could be judged an indicator of a successful business.

Running a company

While sole traders and partnerships are generally run by the owners themselves, it is not so simple in the case of a company where there are many owners (shareholders). Obviously a large company cannot by run by thousands of people. Shareholders hold a general meeting and elect directors to act on their behalf and the company is run by a chief executive officer appointed by the directors.

Company executives

As mentioned, the shareholders elect directors, who act on their behalf. The directors would then elect:

A chairman of the board – a board director who chairs or controls board meetings.

The CEO is appointed by the board and may be either:

A managing director – a director of a company who also runs it day-to-day, or

A general manager- a professional company manager who is not a director, but who is employed to run the company and is answerable to the board.

Meeting regulations

Businesses must be fully aware of all the government regulations that affect them. These may range from local council regulations (such as zoning laws) to state government regulations (initiated, for example, by the Department of Fair Trading). There are also federal government regulations (such as anti-competitive behaviour or restrictive trade practices). The Australian Competition and Consumer Commission (ACCC) have been established to consider these issues.

Keeping records

Proper accounting records provide businesses with the information on which decisions can be made. Records provide businesses with the answers to important questions such as:

What are total income and expenses for the year?

What are the business’s assets and liabilities?

How much stock is the business carrying?

How much do debtors owe the business?

How much does the business owe to its creditors?

How much ready cash does the business have (for emergencies)?

How much tax will the business have to pay?

Importance of financial management

How would you like to be involved in a business where you never knew how much money was coming in, how much was going out or how much profit you were making? Imagine someone asking you: “How is the business going?” And you are embarrassed to say that you don’t know! The proper, orderly keeping of all financial transactions for a business, no matter how large or small, is fundamental to business success. Most businesses today use some type of computer software to record their financial transactions. Programs like Cash Flow Manager or the more complex MYOB (Mind Your Own Business) and QuickBooks by Quicken are some of the more popular ones.

Many businesses have failed in the past due to lack of proper accounting procedures or financial control, as well as lack of management skill and experience. Most large businesses not only employ an accountant to supervise the financial record keeping but have the accounts audited by an external auditor. The auditing of the financial records of public companies is compulsory.

Financial management can be divided into four separate phases and summed up as the P-I-R-C technique:

P: planning or budgeting phase, where ideas and theories are set out

I: implementation phase, where financial transactions are recorded in financial documents

R: reporting phase, where financial transactions are recorded in financial documents

C: control phase, where financial reports are interpreted and used to monitor performance.

Recording transactions

All transactions generate a recorded in the form of a business document. These source documents, as they are called, need to be organised and recorded in systematic way. There are two types of transaction:

Cash

Credit.

Many years ago, bookkeeping procedures were very precisely laid down. Every transaction was first entered into a journal (like a day book) and then posted into ledger accounts. Although computerised bookkeeping systems have taken over in businesses, both large and small, the basic bookkeeping principles are the same. Today’s financial records are entered into a computer on a spreadsheet.

Cash transactions

Cash transactions involve either receiving or paying cash. If a business receives cash it issues a receipt – or a cash register docket. If a business pays cash it is usually done by cheque. Customers (and businesses) may use credit cards of EFTPOS facilities to make purchases. These are not strictly credit transactions as the credit card company guarantees the money to the business. Sometimes, if the cash payment is very small, it may be taken out of a cash register or a “petty cash tin”, in which case a petty cash voucher is the document issued.

Copies of receipts, credit card vouchers, petty cash vouchers and cheque butts are the original documents from which bookkeepers or accountants prepare the cashbook. In this book, cash receipts are recorded on the left hand side and cash payments on the right. To make analysis of transactions easier, some cashbooks are divided into several columns.

A summary of the transactions of a dissected cashbook can be seen in a statement of receipts and payments by adding the various columns. Such a statement is a good indication of the cash flow of the business. Where payments exceed receipts over several months, this may be cause for concern.

Bank reconciliation statement

The balance in the cashbook of the business must match up with (or be reconciled with) the bank statements. Very often, when a business receives a bank statement the final balances do not match up. This is because of the time lag between when transactions are made and when they are recorded in the books of the business and in the bank’s records. Examples might include:

A business deposits cash late on a Friday afternoon, too late for it to be recorded on the bank statement

Some cheques written by the business have not yet been presented to the bank (The payee has not yet taken them to their bank)

There are bank fees and charges that may not be known by the business/

Credit transactions

Credit transactions involve buying from a business now and paying for the goods later. When you buy foods on credit you complete an order form. When you receive the goods you receive a tax invoice. If any goods are returned a credit nite is issued. These are the original documents used in credit transactions. At a later time, usually at the end of the month, but sometimes after seven days, a statement of account is sent to the customer. This is commonly known as a “bill”. It indicates how much a customer owes and when payment is due.

Remember that in credit transactions, it is the business, which is offering the customer the credit, not a credit card company. Credit transactions involve a tax invoice and a statement of account. The obligation is then on the customer to pay the bill.

It is essential to keep a close record of customer’s accounts so that you know how much they owe you.

Financial statements

There are several financial statements normally prepared by businesses. The most common ones are:

The profit and loss statement (or revenue statement)

The balance sheet

Firms prepare other statements, such as cash flow forecasts and budgets, but the two mentioned above provide the best indication of the accounting process.

The profit and loss statement

The profit and loss statement (sometimes called a revenue statement) will tell the owners of a business the difference between revenues and expenses for a period of time and whether they have made a profit or a loss.

The balance sheet

The balance sheet is like a set of scales that weighs the assets on one side, and liabilities and owner’s equity on the other, known collectively as equities. Owner’s equity is basically what the business owes back to its owner or owners and can be calculated from the balance sheet (assets les liabilities).

Commerce Yr 9

Saturday, November 12, 2005

Commerce By Pratik Jaipuriar

Thursday, November 10, 2005

Commerce - Crystal Fung

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