Small Business Basics – Part II
The field of business can mean different things to different people. For instance, the dictionary defines business as dealings involving trading, hiring, managing, and marketing of material possessions. A business is also defined as an organized group or corporation engaging in commercial, corporate, or other productive activities. Companies can be either for-profit entities operated for the benefit of the owners, or non-profitable ones that work to meet a social purpose or further a socially worthy cause. Whatever the definition, business is vital to modern life because without it people will be left to pursue other endeavors primarily for personal gain.
Because of the wide variety of business activities, there are a wide variety of goals and agendas. Some of the most important key takeaways key points economic value added of business activities include increasing profits, reducing costs, improving service, and building relationships. All of these factors can have a significant impact on the bottom line of any business. However, the profitability of any given business depends in large part on how well those key stakeholders conduct themselves. Below are some of the key factors affecting business profitability that all stakeholders should consider.
Financial profits and losses. This is often used as the driving force behind many businesses in helping them determine whether to invest in assets or to sell off those same assets. The key stakeholders in almost all businesses determine the health and profitability of the business by looking at the profit margin. The larger the profit margin, the more successful a business is likely to be.
Key Performance Indicators. Also known as KPI, this includes a number of financial statistics and measures that reflect a particular corporation or business. These statistics are often used by corporations to help them determine whether their business is profitable. Examples of KPI include customer satisfaction, employee satisfaction, profitability, and the number of patents issued by the corporation. The more closely a business resembles a standard benchmark of performance, the more closely it is judged to be in that benchmark.
Market Research. As businesses develop products and/or services, they often conduct market research to determine what their customers want and need. Without market research, corporations will not be able to formulate strategies that effectively serve their customers. As a result, many businesses rely on the information gathered during market research to come up with innovative products and/or services.
Limited Liability Company. A limited liability company is a separate legal entity from its owners. This separation protects the owners of a corporation from being personally liable for debts or other failures of the business.
Dividend Reinvestment. Dividends are payments made directly to shareholders. Many businesses use dividend reinvestment to increase cash flow and increase shareholder value. All dividends, however, must be reported to the government in order to be taxable. Corporations may also choose to reinvest the dividends in additional shares of stock within the company. A corporation may also choose not to reinvest all dividends received in any one year.
Shareholders. Shareholders in a business are people who own a portion of the ownership interest in the entity. They include individual investors, companies, and other entities. Shareholders are generally entitled to a vote with respect to any matter within the business. A corporation must identify the shareholders of any entity and account for their percentage of ownership in the entity each year.
Limited Liability Company. A limited liability company (or LLC) is a separate legal entity. This means that the business can only be sued by the people or entities it represents – the corporation. The people or entities represented are called the LLC owners. A corporation can only be sued by individuals if it is an entity. It is important to note that a corporation may choose to be represented by an LLC even though it is a separate entity.
Profit Split. A profit split between the proprietor (the person running the business) and the other owners of the entity is often used when a business is growing and needs more capital to grow. When the profit is split between two or more owners, each owner is usually paid a fraction of the profit. For example, one owner could receive one tenth of the profit and the other owner another tenth of the profit.
Sole Proprietorship. A sole proprietorship is a legal entity by itself. It is not a corporation, LLC, or LLC any more than it is a sole member of an organization. A sole proprietorship is one of the only ways to form a business that is considered to be a single unit. However, it does not have all the corporate or LLC legal rights of other forms. Therefore, it can be difficult to overcome legal challenges brought against it.