Why People Set Up Businesses (Edexcel A-Level Business): Revision Notes
Why People Set Up Businesses
Entrepreneurs establish businesses for many different reasons. These motivations can be grouped into two main categories: financial and non-financial. Understanding these motives helps explain the diverse nature of entrepreneurship and why people choose self-employment over working for others.
The reasons for starting a business fall into two distinct categories that reflect different priorities and goals. While most entrepreneurs have a mix of both motivations, understanding each category helps explain the decisions business owners make about how to operate their ventures.
Financial motives
Many entrepreneurs are driven primarily by the opportunity to make money. They believe they can earn significantly more by working for themselves than by being employed by someone else. Profit is the central motivation for most entrepreneurs, and without the potential for financial reward, many businesses would simply not exist.
When pursuing profit, entrepreneurs typically adopt one of two distinct approaches.
Profit maximisation
Profit maximisation means attempting to make as much profit as possible within a given time period. Entrepreneurs who follow this approach are strongly motivated by financial returns and focus primarily on maximising the money they can make from their business efforts.
Risk and Reward Relationship
Business owners pursuing profit maximisation often take bigger risks, as there is usually a direct relationship between risk and potential reward. Higher potential profits typically require greater financial commitment and risk-taking.
Worked Example: Investment Risk in Profit Maximisation
A small manufacturing business might invest $250,000 in computer numerically controlled (CNC) machinery to replace workers, expecting this to significantly increase profits.
However, the risk:
- If production levels cannot increase sufficiently to cover this cost, the financial burden could create severe cash-flow problems
- The business could face serious threats to its survival if the investment doesn't generate expected returns
This illustrates how profit maximisers accept higher risks in pursuit of greater financial rewards.
Impact on Other Stakeholders
Profit maximisers may prioritise financial returns over the needs of other stakeholders. For instance, they might:
- Use zero hours contracts to maintain flexibility and reduce fixed costs
- Pay only the legal minimum wage to reduce expenses and increase profits
This approach can maximise profits but may negatively affect employee welfare and job security.
Profit satisficing
Some entrepreneurs take a different approach, aiming to make enough profit to maintain their interest in the business rather than maximising profits. This is called profit satisficing.
Entrepreneurs choose this approach for various reasons. Many do not want the extra responsibility that comes with business expansion, which is often necessary to generate higher profits. Others run lifestyle businesses – ventures that generate sufficient profit to provide the flexibility needed to sustain a particular way of life. This allows business owners to spend more time with family or pursuing other interests.
Worked Example: Lifestyle Business in Practice
Scenario: A couple running a bed and breakfast in a coastal location
Their approach:
- Close for four months during winter to visit family in Australia
- Earn enough profit during the remaining eight months to support their lifestyle and business needs
- Choose not to push for maximum profits at the expense of their personal priorities
Result: They achieve sufficient income while maintaining the lifestyle balance they value, demonstrating profit satisficing in action.
Non-financial motives
For many entrepreneurs, non-financial motivations are equally or more important than making money. While these business owners still need to generate enough profit to keep operating, money is not their primary driving force. Several key non-financial motives exist.
Ethical stance
Some entrepreneurs establish businesses to support their moral beliefs or ethical principles. For instance, a vegetarian who believes killing animals for meat is wrong might open a vegetarian restaurant. By attracting customers (particularly non-vegetarians), they contribute to reducing animal slaughter.
Another example would be an environmentalist setting up a solar farm to generate clean electricity. This type of business allows the entrepreneur to contribute towards reducing carbon emissions and environmental damage while still earning an income.
Ethical Businesses in Action
Ethical stance businesses operate on the principle that commercial activity can drive positive social or environmental change. The business model itself becomes a vehicle for promoting the entrepreneur's values, whether through:
- The products or services offered
- The production methods used
- The business practices adopted
Social enterprise
Social enterprises are organisations that trade with the primary aim of improving human and environmental wellbeing. Often called not-for-profit organisations, they have clear social or environmental missions and generate most of their income through trade or donations rather than maximising profit for owners.
Worked Example: Fairtrade as Social Enterprise
Organisation: Fairtrade
Mission: Markets products from small-scale farmers and workers who face barriers to normal trade
How it works:
- Sources products (such as coffee) directly from small producers in developing countries
- Ensures these producers receive better prices for their goods
- Uses premium payments to support community development projects
Results:
- Helps reduce poverty in producer communities
- Improves working conditions for farmers and workers
- Demonstrates sustainable trade practices
This shows how social enterprises prioritise social impact over profit maximisation while remaining commercially viable.
Independence
The desire to "be your own boss" represents a powerful non-financial motive for many entrepreneurs. These individuals are driven by the freedom to make their own decisions without answering to an employer. Making independent choices about how to run a business is highly appealing to people who dislike being told what to do at work.
Research by Startups.co.uk found that nearly 90 per cent of respondents rated independence as very important when considering entrepreneurship. Being your own boss means having control over business direction, working hours, and operational decisions.
The Reality of Independence
While independence is highly valued, it has practical limits. Entrepreneurs still face obligations such as:
- Completing work to deadlines and quality standards
- Paying taxes and meeting legal requirements
- Satisfying lenders or investors who may influence decisions
Despite these constraints, business owners generally enjoy significantly more independence than employees working for others.
Home working
Many entrepreneurs establish businesses that operate from home. This includes tradespeople such as plumbers, decorators, and electricians who use their homes as a business base. Increasingly, knowledge workers like writers, accountants, software designers, app developers, artists, tutors, and financial analysts also run businesses from home offices.
Home working offers two major benefits:
Key Benefits of Home Working
Time and cost savings: Entrepreneurs eliminate the time and expense of commuting to and from a workplace. This saves money on travel costs and provides extra hours each day for productive work or personal activities.
Flexibility: Home-based entrepreneurs can structure their working day around personal needs. They can:
- Take meals and breaks whenever they choose
- Fit work around their children's schedules
- Collect children from school without taking time off
- Care for family members during holidays or emergencies
This flexibility is particularly valuable for parents and those with caring responsibilities.
Exam guidance
Exam Strategy: Distinguishing Motives
When answering exam questions about why people set up businesses, clearly distinguish between financial and non-financial motives.
For evaluation questions, consider that most entrepreneurs have mixed motives – rarely is someone driven purely by money or purely by non-financial factors.
Application to case studies:
- If an entrepreneur closes their business during certain months → link to profit satisficing and lifestyle business motivations
- If an entrepreneur focuses heavily on growth and market share → suggests profit maximisation approach
- Look for evidence of ethical concerns or social missions → indicates non-financial motives
Key Points to Remember:
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Entrepreneurs start businesses for either financial motives (making money) or non-financial motives (other personal goals)
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Profit maximisation means making as much profit as possible, often involving higher risks and potentially marginalising other stakeholders
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Profit satisficing means making enough profit to maintain interest in the business, often chosen by those running lifestyle businesses
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Non-financial motives include ethical stance, social enterprise, independence, and home working benefits
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Most entrepreneurs have a mixture of financial and non-financial motivations, though one type usually dominates
Key terms:
- Profit maximisation: Attempting to make as much profit as possible in a given time period
- Profit satisficing: Making enough profit to satisfy the needs of the business owner(s)
- Social enterprise: Organisation trading to improve human and environmental wellbeing rather than maximise profit
- Lifestyle business: Business generating sufficient profit to provide flexibility for a particular way of life