Reward: what pulls someone into business despite the risk
Definition
Reward: what an entrepreneur gains if the business works, which is what makes taking the risk worthwhile.
Profit: the money left over once all the costs of running the business have been taken off its revenue.
Independence: being your own boss, so you decide what the business sells, when you work and how it is run.
- Nobody accepts the risks of the previous guide for nothing, so Edexcel pairs them with three rewards.
- Business success: the idea works, customers come back, and the business grows a reputation that makes the next sale easier.
- Profit: what is left after costs belongs to the owner, not to an employer.
- Independence: the owner sets the hours, chooses the products and answers to customers rather than to a manager.
- Profit is the reward that pays for the other two, since it funds the owner's wages and the money put back into growing the business.
- A market stall that takes £1,280 in a week and spends £950 on beans, cups and the pitch is left with £330, which shows how thin the reward can be at the start.
- Business success is broader than profit, because a firm can count survival, a growing customer base or a well-known name as success before the profit arrives.
Example
- Julian Dunkerton started Superdry from a market stall in Cheltenham.
- The stall grew into a clothing brand sold on high streets, which is business success on a scale a single pitch could never reach.
- All three rewards show up there: the profit from selling clothes, the success of a recognised brand, and the independence of choosing his own designs and shops.
- The stall could equally have failed, which is why reward is the return for accepting risk rather than a prize for having an idea.
The impact of reward: it decides what a business chases
- Which reward an owner wants most changes the decisions the business makes.
- An owner chasing profit prices to protect the margin, controls costs tightly and drops products that do not pay.
- An owner chasing business success may cut prices to win market share and accept a thin profit for a few years.
- An owner who values independence may refuse outside investors and stay small, because taking their money means sharing control.
- Reward is also what keeps a business going through the difficult first years, since the prospect of profit is what justifies the unpaid hours.
Note
- Reward is closely tied to the aims and objectives a business sets.
- Financial and non-financial aims are examined in 1.3.1, so keep the detail of survival, market share and social objectives for that guide.
Each reward comes with a catch
- None of the three rewards arrives cleanly, and naming the catch is what turns a list into analysis.
- Profit: it is uncertain and often late, so many owners pay themselves less than they earned as an employee for the first year or two.
- Independence: being in charge means there is nobody else to cover a sick day, so the hours are longer and the responsibility does not switch off.
- Business success: growth brings staff to manage, premises to pay for and, if investors are brought in, a loss of the very independence that attracted the owner.
- The three rewards can also pull against each other, since the quickest route to profit is often to take investment that costs the owner some control.
Common Mistake
- Do not treat profit and revenue as the same thing.
- Revenue is everything that comes in, and profit is only what survives after the costs are paid.
- A stall taking £1,280 a week is not making £1,280 a week.
- Do not assume reward means money either, since independence is a reward the mark scheme credits just as readily.
Judging whether the reward justifies the risk
- Start with what the entrepreneur values. Someone seeking independence may accept a lower profit than someone whose main reward is financial.
- Then consider how likely the reward is and how long it will take to arrive. A large possible profit is less attractive if competition makes it unlikely or the owner cannot wait years for it.
- Overall, reward justifies risk when what the entrepreneur is likely to gain matters more to them than the loss they could reasonably face.
Exam technique
- Questions here almost always ask you to weigh risk against reward rather than to list one of them.
- Give a developed chain on each side, then judge using what this owner seems to want.
- The mark most often dropped is independence, since answers reach for profit and forget that being your own boss is one of the three rewards.
- Where the source booklet quotes profit figures, use them, and say what the number means for the owner rather than repeating it.
Self review
- Name the three rewards Edexcel lists for business activity.
- Give one measure of business success other than profit.
- A stall takes £1,280 and has costs of £950, so what is its profit?
- Give one drawback of independence as a reward.
- Why might two entrepreneurs judge the same idea differently?
