Risk and reward

Last Lesson

Answer from memory before the answers appear.

• Give the three reasons why new business ideas come about.

  Changes in technology, changes in consumer wants, and products or services becoming obsolete.

• What does obsolete mean?

  Out of date and no longer wanted, because something better has replaced it.

• Give the two ways new business ideas come about.

  Original ideas, and adapting existing products, services or ideas.

• Why is adapting an idea less risky than an original idea?

  Customers already understand and want the product.

What Is an Entrepreneur?

An entrepreneur is someone who sets up a business, taking a risk in the hope of a reward.

• Spots an opportunity

  Sees a gap in the market or a way to do something better.

• Organises resources

  Brings together the money, people, equipment and premises the business needs.

• Makes decisions

  Decides what to sell, at what price and to whom.

• Takes risks

  Puts their own time and money into an idea that might not work.

Business Failure

The business may not survive.

• What it is

  The business closes because it cannot make enough money to cover its costs.

• How common

  Many new businesses close within their first few years; official UK figures show fewer than half are still trading after five years.

• Why it happens

  Not enough customers, strong competitors, costs higher than expected, poor planning, or running out of cash.

• The impact

  The entrepreneur loses the business they have built and the time and money they put into it.

Financial Loss

The entrepreneur could lose money - sometimes more than they put in.

• Their own money

  Most entrepreneurs use their savings to start the business. If it fails, those savings may be lost.

• Borrowed money

  Loans still have to be repaid, with interest, even if the business fails.

• Personal belongings

  For some types of business, such as a sole trader, the owner can be made to pay the business's debts from personal belongings, even their home.

• Impact on decisions

  The fear of losing money may stop people starting a business at all, or make them borrow less and start smaller.

Lack of Security

Working for yourself means giving up the security of employment.

• No regular income

  An employee is paid the same wage every month. An entrepreneur's income depends on how well the business does, and in the early months it may be nothing at all.

• No paid holiday or sick pay

  If an entrepreneur is ill or takes time off, the business may earn nothing.

• Uncertainty

  It is hard to plan ahead - for example to get a mortgage - without a predictable income.

• Long hours

  Many entrepreneurs work far longer hours than they did as employees, especially at the start.

The Three Rewards

• Business success

  Achieving what they set out to do: a business that survives, grows and is respected. Many entrepreneurs value the satisfaction and recognition as much as the money.

• Profit

  The money left when all the costs have been taken away from revenue. The owner can keep it, or reinvest it to grow the business. It is the reward for taking the risk.

• Independence

  Being your own boss: choosing what to do, when to work and how the business is run, and doing something you enjoy.

Business Success

Success means different things to different entrepreneurs.

• Survival

  For a new business, simply lasting the first year or two is a success.

• Growth

  Opening more branches, taking on staff or selling to more customers.

• Satisfaction

  Pride in having built something from nothing, and in doing something the entrepreneur cares about.

• Recognition

  A good reputation, loyal customers and respect in the local community.

Profit

Profit = total revenue - total costs.

• What it is

  The money the business makes after all its costs have been paid.

• Reward for risk

  Profit is what an entrepreneur receives in return for risking their own money.

• Choices

  The owner can keep the profit as income, or reinvest it in the business to help it grow.

• Potentially unlimited

  An employee's pay is fixed; an entrepreneur whose business does well can earn far more.

Independence

Being your own boss.

• Control

  The entrepreneur makes the decisions and does not have to follow someone else's orders.

• Flexibility

  They can choose their own working hours and where they work.

• Doing what they enjoy

  Many people start a business to turn a hobby or passion into a job.

• The trade-off

  Independence also means responsibility: when things go wrong there is nobody else to blame.

How Entrepreneurs Reduce Risk

Entrepreneurs cannot remove risk, but they can reduce it.

• Market research

  Checking that customers actually want the product before spending money on it.

• A business plan

  Thinking through costs, revenue and cash before starting.

• Starting small

  Beginning part-time, from home or online, while keeping a job.

• Limiting borrowing

  Using savings the owner can afford to lose rather than large loans.