To defi ne a successful business it is necessary to begin by understanding what a business is - in essence "a commercial operation that is run with the aim of making a profit". This poses two questions: what is a commercial operation and what is profi t?
. A commercial operation is an activity that is conducted for the
benefi t of its owners. The signifi cant part is "for the benefi t of its
owners", which differentiates it from a government organisation
or a charity where the activity is conducted for the benefi t of the
people it serves. Although the difference is about who gains from
success, the route to success for all these activities is to understand
and satisfy customers better than your competitors.
. A profi t is a trading surplus whereby the revenues earned from
a commercial operation exceed its costs. This surplus belongs
to the owners of the business to use as they choose; to take for
themselves, to reinvest in the business or a mixture of the two. For
a government organisation or a not for profi t organisation such as
a charity the surplus is reinvested back in the activities to further
benefi t the people it serves.
Business structure
A business can take many forms ranging from a sole trader to a large
multinational company. The principal aim of "making a profi t for its
owners" is still the same. A person starting out and setting up a business
will take all the risk and reward as the venture gets under way. As the
business grows it can be advantageous to share the risk with others and
separate the business activities from those of the owner by establishing
a company.
A company is a legal entity in its own right that is separate from its
owners. An investor is risking only the money paid for buying some
shares in the company. If the company ceases trading, the shareholders
(owners) are not liable to make up any shortfall between the value of the
company's assets and its liabilities.
There are fi ve broad categories of business:
. Sole trader. Someone who sets up a business alone and takes all
the risk and reward of running it, and who may employ staff.
. Partnership. Two or more people who set up a business together.
The partners have joint ownership and share the risk and reward
of running the business. Like a sole trader they may employ staff.
. Limited liability partnership (llp). A hybrid of a partnership
and company which provides the owners with the limited risk
of a company and the shared ownership and tax status of a
partnership.
. Private company. Usually a small organisation raising its money
from a few private investors. The shares may be diffi cult to trade
as they are not listed on any stockmarket. Investors liability in
private and public companies is limited to the amount of their
investment.
. Public company. Typically a large organisation that is usually
listed on a stock exchange. Because of its size it may require
signifi cant investment, and hence it may need to draw investment
from many investors.
In this book the focus will be mainly on companies, though the principles
can be equally well applied to a sole trader, a partnership and
indeed not for profi t organisations.