Module 1

They are an organisation’s performance targets – that is, the results and outcomes it wants to

achieve in a particular time frame.

What is an objective?

An objective should contain the action to be performed, the condition under which it will be

performed and a time frame in which it should be performed. However, there are times when all

three components might not be present in an objective. In such a case we refer to it as a ‘partial

objective’. These partial objectives should contain the action to be performed and a time frame

in which the action should be performed.

Well-written objectives should have the following CHARACTERISTICS, which form the

acronym ‘SMART’:

CHARACTERISTICS

1. Specific – objectives should be quantifiable and precise:

● This objective is precise and states exactly what management wants to accomplish.

Compare it with this example: ‘To achieve healthy growth in sales’ (this is not

meaningful as ‘healthy growth’ is too wide and can easily be misconstrued).

● Broad and ambiguous objectives can lead to chaos as their interpretations

● The targets of the business must be clearly stated without any ambiguity and must be

properly communicated to all employees of the organisation.

2. Measurable – managers should be able to plot the organisation’s progress toward its

objectives.
 ● This requires a well-defined reference point from which to start and a scale for

measuring progress

● The targets of the business must be clearly stated without any ambiguity and must

be properly communicated to all employees of the organisation.

. With this objective, the managers can measure the business progress over the 12-month

period until the financial year has ended. They can take the necessary action, if needed, from

early on to prevent a shortfall in their sales target for the year.

3. Attainable (or Achievable) – while the objectives should encourage people to work harder,

achieving them must be within their reach.

● This is to say that the objectives should be not so extreme that they are impossible for the

firm to attain.

● When writing objectives, firms must take into consideration their ability to achieve them

within the expected time frame.

● While being achievable, objectives must also be challenging. This will motivate and

encourage employees to work hard and propel the business forward.

4. Relevant (or Realistic) – many businesses have failed because they set unrealistic and

irrelevant objectives, especially in their earlier years.

● The objectives must be relevant for the firm given its market share, resource base

and employees’ capabilities.

5. Timely – earlier we stated that the business should track the achievement of its

objectives over a period of time. With this in mind, objectives must specify not only what

is to be achieved but also a time frame for its achievement.

Importance of objectives
It is important that we realise that being successful will never mean that there may not be

failures, since success can be judged by our ability to achieve the objectives that were

established.

For a business to become successful, it needs to outline measurable and achievable

objectives. As mentioned above, they must be ‘SMART’. This will give the employers,

employees and clients or customers a clear vision of where the business is going and how it

plans to get there.

The importance of objectives is outlined below:

Functions

● Objectives act as a guide for employees and the employer to follow in order to propel

the business forward and thus attain its goal

● They give employees a sense of direction as to where the business is going

● Objectives are also used as a tool to analyse the performance of the business and its

employees over a period of time

● They are important in the decision-making process, as they provide a guide and

framework for management to make decisions.

● They are used to help management to explore different courses of action or try

different business strategies

● Objectives can also be used to set targets for individual departments as the firm aims

to achieve its corporate objectives.

 Types of objectives

Objectives can be broken down into short-term, mediumterm and long-term objectives, based

on the time frame in which they should be achieved. These are outlined below.

Short-term objectives

These are sometimes referred to as ‘specific objectives’. These are outcomes that a business

wants to accomplish within a short period of time – usually a year to 18 months. The period

of time set for the accomplishment of these objectives may vary across businesses. These

objectives are the most critical for newly established businesses, and can be broken down, in

terms of their achievement, on a monthly, quarterly or yearly basis

Medium-term objectives

Medium-term objectives are usually less general than long-term objectives. They form the basis

on which shortterm objectives are written and the stepping stone for the achievement of long-

term objectives. Medium-term objectives are usually written for a period of one to four years.

An example of such an objective would be ‘To increase the firm’s product line in two years’

time’.

Long-term objectives

These are sometimes referred to as ‘general objectives’. Longterm objectives are often

developed from the firm’s mission statement and describe where the organisation wants to be at

some point in the future, usually five years or more later.

● These can be more general, but should give the reader an indication of the overall

direction of the business

 Hierarchy of objectives

Objectives can be broken

down into different

categories. As we ascend on

the hierarchy, the objectives

become broader and more

general.

Basic Purpose

a) At the pinnacle of the hierarchy is the business’s aim. An aim or vision is where the

business wants to go in the future. It is a statement of purpose – for example, the

business aims to expand its market share across the Caribbean.

b) The vision of the firm is often broad, with very few specifics as to when it will be

achieved. The vision gives an idea of the firm’s plans for development and is also used

as a tool for marketing, especially for potential investors.

● The vision statement of a firm must be able to motivate workers by giving them drive to

accomplish beyond what is happening at present.

● While the terms ‘goal’ and ‘vision’ are sometimes used interchangeably, the vision outlines

the firm’s goal which is said to be a desired future outcome that the organisation attempts

to realise. The overall aim of the organisation should form the firm’s mission statement and

objectives.

c) Mission statement
● This is a statement which outlines the main aim of a business or company.

● A mission statement gives a clear outline of the business’s aspirations and values. It enables

all the stakeholders (employees, managers, customers and suppliers) to understand the

underlying reasons for the actions that are taken by the business.

● While the firm’s vision outlines where it hopes to be in the future, the mission statement

usually says what the firm sets out to do during its operation.

● A good mission statement carries a number of elements which will give a clear indication of

the strength and effectiveness of such a mission.

A well-written mission statement should:

⮚ Give a clear indication of the purpose of the organisation

⮚ Outline the legitimacy of the organisation

⮚ Clearly describe the organisation’s values, objectives or targets and reason for existence

⮚ Be customer focused or oriented and at the same time catering to the needs of the employees

and other stakeholders

⮚ Outline the products that are being offered and its desire to maintain these

⮚ State the firm’s commitment to the fulfilment and satisfaction of customers’ needs

⮚ Signal how it will maintain a competitive edge over its rival organisations.

From the mission statement the organisation will construct objectives which will clearly

outline the plan of action that it will take in order to fulfil its overall mission. These

objectives must be stated in a form that is measurable and attainable

 Senior Management

Corporate objectives

Having established its vision and mission, it is essential for a business to develop its corporate

objectives. These will give an understanding of how the business plans to achieve its vision and

mission. Vision and mission statements are broad and general; therefore the corporate

objectives help to narrow the focus.

Corporate objectives can therefore be defined as specific, realistic and measurable aims which

an organisation plans to achieve within a given period of time. These objectives are usually

written as longterm objectives with a time frame of five years or more.

Both corporate and strategic objectives, which will be discussed below, are often set by top or

senior management.

Strategic objectives

Some firms do not have a separation of their corporate and strategic objectives. However,

strategic objectives are usually medium to long term and relate to outcomes that strengthen

an organisation’s overall business position and competitive vitality. They refer to an

organisation’s articulated aims or responses to address major change, improvement or

competitiveness and outline how the firm plans to accomplish its corporate objectives.

Some examples of strategic objectives are:

⮚ To be ranked in the top five of the best hotel accommodation in the country in terms of

market share by three years’ time

 ⮚ To concentrate on innovation as the way to satisfy our customers in order to gain 20 per

cent increase in sales by two years’ time.

Middle Management

Tactical objectives

Strategic objectives are sometimes called tactical objectives.

They are performance targets established by middle management (department heads) for

achieving specific organisational outcomes. They are plans designed to help execute the major

strategic objectives and to accomplish a specific part of the organisation’s strategy. Tactical

objectives are usually short- to medium-term targets which the firm is expected to achieve

within a year or close to a year

Lower management

Operational objectives

Operational objectives are short-term organisational objectives necessary to achieve longer-

term tactical and strategic objectives.

They are usually managed by lowerlevel management such as supervisory personnel who are

concerned with immediate results. They are detailed costed and timed plans of what the

organisation will do to meet each tactical or strategic objective

TO remember

AM – CS- TO

AIM- MISSION-CORPORATE- STRATGETIC- TACTICAL- OPERATIONAL

 Business ethics and social responsibility

This has encouraged many businesses to change their strategies to include objectives of

an ethical and/or social nature. This can also be attributed to adverse or bad publicity that is

being faced by these businesses which is perceived as damaging to stakeholders and the wider

world.

Changes in legislation at local, national and international levels can also be attributed to

this move by businesses. Organisations such as the National Environmental Protection Agency

(NEPA) in Jamaica have filed lawsuits against companies against whom it has evidence of

damage being done to the environment.

Some businesses have dedicated a portion of their yearly budget to the minimisation of

pollution and the improvement of their social responsibility. This is a practice of firms to act in a

manner so that their actions do not negatively affect society or the environment

Some examples of these include:

Producers who use recycled materials in the

manufacture of their products. Some producers

have also encouraged consumers to recycle their

packaging, for example the repurchasing of

plastic drinks bottles for recycling

Obligation of the firm to their staeholders

Good corporate governance

Corporate governance is often defined as a set of rules, practices and processes which guide the

way a business is operated. The aim of corporate governance is to balance the interest of the

stakeholders of the company – that is, the firm must cater for the needs and interest of its

stakeholders as much as is possible.

Business ethics

This refers to the morals or set of standards that are used to guide a business on how it should

conduct its affairs.

This usually includes written and unwritten codes on how businesses should behave. Some

common ethical issues within CARICOM include:

⮚ The testing of products on animals

⮚ The use of child labour

⮚ How employees deal with customers Truthful versus deceptive advertisements.

Code of ethics

This is a document issued by the firm, outlining the set of guidelines that will be used to govern

the behaviour of management and employees.

This code is often based on a set of pre-established standards or principles and usually includes:

⮚ The firm’s corporate social responsibility statement

⮚ The relationship that the firm has with its customers and suppliers

⮚ Environment requirements and unanswered questions

⮚ Rules on relating to the maintenance of integrity

Government’s response to social irresponsibility

The following steps can be taken by governments to deal with businesses that are being socially

irresponsible and unethical:

● Impose taxes to offset the cost to the environment (social cost)

● Pass legislation limiting noise and other forms of pollution

● Refuse to give contracts to companies that are unethical or socially irresponsible Impose

stiff penalties.

Decision Making

Any decision that is taken will

result in some benefits or costs to

the decision maker.

 These decisions are influenced by a number of factors, including preference and financial

standing

Decision making is the act of choosing between two or more alternatives.

Decisions are made at three basic levels in most organisations:

● Strategic level – long-term decisions that entail high risks and are usually made by

top management.

Strategic decisions influence the direction, overall policy and performance of the

business (for example, building a new plant or entering a new market)

● Tactical level – short- to medium-term decisions that are usually made at the middle

management level. They carry fewer risks and would involve decisions such as what

price to charge, which supplier to purchase from and who to employ or make redundant

● Operational level – short-term decisions that deal with the administration of the

firm’s strategic and tactical decisions. They involve few risks and can be made quickly.

At this level, decisions such as which credit limit can be offered to a customer or on the

ordering of stationery are made.

Decision Making

Essential features of information

In order to make effective decisions it is vital that firms gather sufficient information to

aid in the decision-making process.

 However, any information collected must have FOUR ESSENTIAL FEATURES which

can be summarised using the acronym ‘CART’, broken down into:

● Cost effectiveness – the cost of gathering the information should not outweigh its

benefits. The information should be gathered in the least costly way while maintaining its

accuracy and relevance

● Accuracy – information collected must be accurate so that it can be relied upon by the

manager. Misleading information may impede the decision being made and results in

undue cost to the firm

● Relevance – the information collected must be appropriate for the situation or decision

being made. It must be up to date, as outdated information is useless

● Timeliness – information must be available to managers and other decision makers on

time. It should be obtained in a timely manner, since failure to do so may lead to bad

decisions

Significance of QUALITATIVE versus QUANTITATIVE Decision making

Qualitative- Non numerical quantitative –Numerical

The sources that are consulted may influence the decisions that are made.

There are two forms of decisions that firms make which are based on the resources that are

consulted. These are qualitative and quantitative decision making

A qualitative decision is one that is made based on non-quantifiable information. These

decisions often entail people’s value judgements and opinions.

● Firms embarking on qualitative decision making may make use of the

 ● ‘SWOT’ analysis (Strengths, Weaknesses, Opportunities and Threats

● ‘PEST’ analysis (Political, Economic, Social and Technological factors).

● These decisions tend to be very subjective since they are not based on statistical data.

In contrast, a QUANTITATIVE DECISION is one based on statistical data. Unlike qualitative

decisions, quantitative decisions rely on historical data that can be quantified and analysed to

make generalisations and draw conclusions.

Quantitative decisions could be based on information gathered from sources such as market

research, historical sales figures and accounting information.

The stages of decision making

Definition of problem or opportunity

The first step of the decision-making process is to identify the problem to be solved or the

objective to be achieved. The problem may be identified by thoroughly searching through the

firm’s annual reports or financial statements or from customers’ feedback, among other sources.

When the problem is identified, it is imperative that it is clearly defined so as to prevent the

business from going in the wrong direction (advantage)

A dynamic firm is one that is able to turn its problems or the problems of others into an

opportunity to provide goods or a service.

Data collection

Having identified the problem, the firm must now decide how and from what sources the data

will be collected. The data needed may be collected from primary and/ or secondary sources.

Developing alternatives
After collecting sufficient data, the next step is to develop a list of possible actions that can be

taken. These options may be developed individually, by teams or through analysis of similar

situations in comparable organisations. These alternatives should be geared toward solving the

problem or achieving the objective outlined above.

Analysing the Alternatives

To assess the appropriateness of an alternative, the decision maker should consider its adequacy

to address the problem. The decision maker should also consider the costs or benefits of

choosing each alternative.

Selecting and implementing the alternatives

However, there are some situations where sufficient quantitative data is present to aid in the

selection of a particular alternative. Once selected, the option(s) should be implemented in the

least costly way feasible. It is also possible that

management may encounter unforeseen

problems and face resistance to change from

employees.

Evaluation

The final stage is the evaluation of the option(s)

that were implemented above. Here, the decision

maker needs to evaluate the outcome of the

decision taken. These results are then compared

with the original objectives or problem to

ascertain whether they were achieved or solved.

The results are often presented in a report

Factors influencing decision Making

Government, political and legal

The government is responsible for passing various laws and requirements and establishing

frameworks that will affect decision making.

The legal environment of the Caribbean is becoming even more pressing, with the signing of a

regional treaty to form the Caribbean Single Market and Economy (CSME).
In the Caribbean there are currently a number of laws governing the behaviour and operation of

businesses. These include:

● Employment laws which govern contracts, recruitment, termination of employment,

redundancy, health and safety in the workplace, unionisation, dispute resolution and

minimum wage payments aware of these laws when making decisions since they have

serious implications for them.

● Laws to promote competition in business. Governments have enacted laws revoking

previous monopoly licences and liberating some of these markets in order to foster

competition

● Consumer rights which protect consumers from exploitation and unfair practice in

business

● Environmental laws. With the emphasis that is being placed on global warming in recent

times, firms now have to be more careful about their impact on the environment

Nb
Module 2
Functions and Theories Management

The Classical Theories originated as far back as when the industrial revolution took place and it

was developed as a result of employee dissatisfaction as a result of businesses being too busy to

solve these issues.

The three Main Classical Theorists are:

● Frederick W Taylor
● Henri Fayol
● Max Weber
Frederick Taylor (1856-1915) / Scientific Management

● He is regarded as the father of Scientific Management.

● He viewed man as an ‘Economic Animal’ which means he made economic choices based
on monetary or material reward.
● Had many criticisms
Henri Fayol (1841-1925) / Administrative Management

● He is considered as the ‘Father of Modern Management’

● He focused on management from upper level of administration, he did not focus on
workers
● Fayol's five function of management: Planning, Organizing, Commanding, coordinating,
controlling
● It was widely accepted

Max Weber (1864-1920) / Bureaucratic Management

● His work focused on how the organization was structured rather than problems of
management like the other theorists
● Ideal bureaucracy was based on legal authority given
The Hawthorne Study by Eltom Mayo was to determine the the effect of work conditions

on productivity

● Maslow / Hierarchy of Needs

● Mcgregor / Theory X and Theory Y
● Herzberg / Two Factor Theory
Human Relations School Proposed

● Job Enlargement
● Job Enrichment
● Job Rotation
● Group Working
Contingency Theory / Joan Woodward - There is no one way to treat issues, different issues

come with different resolutions

Synergy - Total output is greater than sum of all total input

Entropy - This happens when systems run down and die, especially when not properly

maintained.

Subsystems - Individual parts of a system that are interdependent meaning they depend on each

other, changes to one, changes all

*System Management focuses on the organization as a unit

It sees the organization having four components

Input -> Transformation -> Output -> Feedback

Closed Systems have very little to no interaction with external environment

Open system Has interaction with external environment

The Functions of Management are divided into three:

● Top Level
● Middle Level
● Low Level
Main functions carried out by management : Planning, Organising, Directing, controlling,

Staffing

The Organization and Its Structure

Classifications of organizations

● Functional Organizational Structure - contributed by Frederick W Taylor and is the most

widely used structure
● Product Organizational Structure
● Geographical Organizational Structure
● Matrix Organizational Structure
● Team Organizational Structure
● Network Organizational Structure
● Virtual Organizational Structure
Span of Control refers to the amount of employees that are directly under the control of one

manager

Chain of Command shows the lines of authority within an organization

Centralization - Management is in control of full decision making

Decentralization - Decision making includes subordinate and there are delegation of tasks and

responsibility

Theory and Application of Motivation

Motivation is the ‘will achieve’ it may be influenced by internal or external factors

Factors that stimulate and influence Motivation

● Individual needs
● Self-motivation
● Ability to make choices
● Environmental Opportunities
Theories of motivation can be divided into two main theories: content and process theory

Content Theory focuses on employees needs and how these needs influence them

Two of the most prominent content theorists are: Abraham Maslow and Frederick Herzberg
 Maslow's needs from highest category downwards

● Self Actualization
● Esteem Needs
● Belongingness
● Safety Needs
● Physiological Needs
Frederick two-factor theory

One leads to job satisfaction (Motivators) and the other leads to job dissatisfaction (hygiene

factors)

Process Theory states that peoples thoughts processes will influence their behavior. They select

behavioral actions to meet their needs.

Victor Vroom's Expectancy Theory suggest that employees will be motivated to carry out tasks

in order to a goal if it is worthwhile to do so

Adam’s Equity Theory says that inequalities will exist if people feel that the rewards they

receive for a tasks is unequal to other people who did the same task

Financial and Non Financial Motivators

Financial Strategies

● Time rates (paid fixed rate per hour eg $75/1)

● Piece rates or Piecework (paid based up on unit produced eg manufacturing)
● Commision
● Fringe Benefits
● Appraisal
● Job Evaluation (use qualification to determine pay)
● Work Study
● Profit sharing and share Ownership
Non Financial Strategies

● Individual job news

● Participation
● Job Enrichment
● Job Enlargement
● Job Rotation
● Opportunities for promotion
● Group or teamwork
● Quality control circles
Leadership

Leadership Power

● Coercive Power
● Legitimate Power
● Expert Power
● Referent Power
● Reward Power

McGregor Theory X and Y

For theory X leaders ten to exercise coercive power or autocratic leadership

For theory Y leaders tend to exercise democratic leadership and have open discussions

The Trait Theory

In summary it says effective leaders are born and not made.

The main theorists

*Ralph Stogdil

*Richard D Mann
*Hans Eysenck

*The five factor theory

Leadership skills

● Communication
● Critical thinking
● Problem Solving
● Planning
● Consideration

Leadership styles

● Autocratic or directive leadership

● Democratic or Participative
● Paternalistic - similar to autocratic but seen as ‘father figure’ however workers are
consulted but still dictatorial
● Constitutional or bureaucratic - follows rules of firm
● Laissez Faire
● Transformational leadership - seeks to inspire and encourage subordinates

NB///Informal leader is someone who is able to inspire and encourage his or her peers even

though they do not have a formal leadership role.

Team Management and Conflict

The nature of formal teams

● Composition (skills, knowledge, experience and personalities

● Objectives : the objective to be achieved will determine the group members
● Interaction: This interaction may be in the form of face to face meetings, telephone
conversations, video conferencing
Stages of team development
 ● Forming - members are just getting to know each other
● Storming - intra team conflicts and disagreements may develop as they form an idea
about each member
● Norming - Conflicts and disagreements subside when they get to know more about each
other and unacceptable and acceptable behaviour can be differentiated
● Performing - Focus of the team is to get the job done
● Adjourning - Tsks was performed and now team members look to separating
Types of formal group

● Command Group - this usually consists of department heads and the subordinates that
work in the departments
● Functional Group - these are groups which are formed to carry out a particular goal or
function of the firm.
● Task Group - Groups try to complete a specific task given to them
Management of conflict

● Avoidance
● Smoothing
● Compromise
● Collaboration
● confrontation
Management of Change

Factors that may cause change in an organization

Can be divided into two parts internal and external influences

Internal Influences:

● New products
● Mergers and/or takeovers
● Quality control systems
● Customer service

External Influences:

● Technological
● Economical
● Demographic
● Social
● Legal/political
Differentiate between leading and managing

Leading: “the act of motivating subordinates, directing others, selecting the most effective

communication channel and resolving conflicts”

Managing: “ the act of bringing people together to achieve a common goal or objective.

*Resistance to change is any action of not wanting to change/non conformance

Factors that may lead to resistance of change

● Fear of the unknown

● Disrupted habits
● Loss of control and confidence
● Poor training
● Redistribution of workload
● Lack of purpose
● Loss of power
● Lack of communication
Strategies to manage change

● Communication and education

● Participation in the change
● Negotiation
● Play supportive role
● Coerce employees to comply
Leadership

Leadership is the act of influencing people so that they perform assigned tasks
willingly and in an efficient and effective manner. Some argue that leaders are
born with natural attributes that create an aura of charisma that others will find
appealing. Other research supports the view that leaders can be trained to adopt the
key attributes of good leadership.

Leadership Theories

McGregor’s theory X and theory Y (from 1906 – 1964 )

McGregor believed that managers viewed workers as lazy with a dislike for work.
Most workers must be controlled, directed or threatened with punishment to get
them to make an adequate effort. There workers he termed theory as Theory X
workers.

McGregor proposed theory Y as a more realistic view of workers. These workers

found work as natural as play or rest; they wanted responsibilities and were
capable of being creative in finding solutions to organizational problems.
Managers who accepted the theory X view of workers would practice autocratic
leadership; have centralized decision making and stress on extrinsic (external)
(financial) factors of reward.

Acceptance of the theory Y worker results in democratic or lassie-faire style of

leadership, decentralization of decision making and stress on intrinsic (internal)
factors for reward (non-financial methods).

Trait Theory

The main assumption of this theory is that effective leaders are born and not made.
These leaders have outstanding leadership qualities that assist them in becoming
great leaders.

A trait is defined as a distinguishing feature in character appearance or habit from

which an individual’s personality is formed and can be identified. Some of the
traits identifies includes:

● Physiological ( appearance, height and weight)

● Demographic (age, education, socio-economic background)
● Personality ( self- confidence and aggressiveness )

Some of the traits that a good leader should possess are:

- A drive to achieve ie there should be a high level of effort, ambition
and energy.
- Honesty and integrity i.e the leader should be trustworthy and
reliable.
 - High level of self –confidence
- Knowledgeable- must be familiar with the industry

Leadership skills

1. Communication – the leader must be able to give unambiguous instructions

and be able to communicate the objectives and goals of the firm to their
subordinates. Poor communication can lead to low worker morale and
confusion regarding the expectations of employees.
2. Critical thinking – a critical thinker is an individual who asks the appropriate
questions in order to ascertain relevant information and then uses the
information to draw logical conclusions.
3. Problem solving- the leader must be able to work through the details of a
problem and to reach an appropriate solution.
4. Planning- The leader must be able to identify opportunities and develop the
courses of action to take in order to take advantage of the opportunities.

Leadership Styles

1. Autocratic

The autocratic leader is authoritarian and assumes responsibility for all aspects of
the operation. Communication is one way with little or no scope for feedback. The
leader will set the business objectives, issue instructions to workers and check to
ensure that they are carried out. This style is appropriate in the armed forces and
the police service where orders may need to be issued quickly with immediate
response.
Advantages

● There is a clear chain of command with no ambiguity

● It produces quick decisions
● Suitable for businesses with an unskilled labour force.

Disadvantages

● Creates frustration and resentment among employees since they have no

input in decision making.
● The work group becomes very dependent on the leader and would be unable
to act independently

2. Democratic

The democratic or participative leader seeks the opinion of subordinates and strives
for mutual understanding. Most democratic leaders consult but retain the ultimate
responsibility for decision making. The democratic leader facilitates two-way
communication the employee’s input is highly regarded.

Advantages

● This style results in improved decision making, higher morale and greater
commitment.
● Suitable for complex decisions that require specialist skills.
● Encourages team building.

Disadvantages

● Consultation is time consuming

● There is a risk of loss of management control
 ● Requires a skilled labour force for informative decisions.

3. Laissez Faire

The laissez faire leader sets goals for subordinates and the subordinate is left alone
to achieve the objectives. This style works well when subordinates are willing and
able to accept responsibility.

Advantages

● This style results in more motivated and enthusiastic workers

● Workers are allowed to be creative

Disadvantages

● The success of this style is dependent on the competence and integrity of

subordinates
● Lack of direction may lead to waste of resources.
4. Transformational

These are similar to charismatic leaders but are distinguished by their special
ability to bring about innovation and change by recognizing follower’s needs and
concerns; helping them to look at old problems in new ways and encouraging them
to question the status quo. This style of leadership involves the delegation of
responsibility to subordinates rather than “leading from the front”

Advantages

● Helps to stimulate people to think differently.

● Helps to improve worker motivation.
Disadvantages

● Leaders may have to invest a lot of time into making this work.
Informal Leadership

An informal leader is a person who does not have formal authority in the firm but
has been able to inspire and motivate his/her peers to achieve a set of goals. The
informal leader plays an integral role in the organization. They may have more
influence over the activities of the group than the formal leaders. They can:

~motivate and inspire peers to achieve the goals of the organization

~bridge the communication gap between management and employees

~offer mentorship and support for others

Advantages

● Can improve the employee’s social relationship

● Informal leaders have information since they are ‘on the ground’ and
managers can use this information to improve the workplace.
● Managers can use informal leaders to get employees to accept an idea.

Disadvantages

● They can use their influence to resist changes in the firm.

● The informal leader can carry misinformation which can undermine the
morale of workers.
 Globalisation

Definition

#1 the processes by which businesses or other organizations develop international influence

or start operating on an international scale.

#2 The process of globalizing something; specif., the expansion of many businesses into

markets throughout the world, marked by an increase in international investment, the

proliferation of large multinational corporations, worldwide economic integration, etc

#3 Globalization is the word used to describe the growing interdependence of the world's

economies, cultures, and populations, brought about by cross-border trade in goods and services,

technology, and flows of investment, people, and information.

#4 Globalization means the speedup of movements and exchanges (of human beings,

goods, and services, capital, technologies or cultural practices) all over the planet. One of the

effects of globalization is that it promotes and increases interactions between different regions

and populations around the globe.

#5 Globalisation entails the increased connectivity and interdependence of the world

economy.

The growth of globalisation is seen in the growing integration of the world’s market. This has

been amplified in the past two decades by advancements in technology. Globalisation has opened

access to markets all around the world so that it truly has become ‘a single marketplace’.

The growth of globalisation is being driven by the following factors:

● Reduction of transportation costs – this has led to easier access to markets as the

available modes of transportation have increased.

Businesses can make and receive shipments within a day by using courier services. Local

consumers can purchase products from abroad and easily ship them to their country of

origin

● Technological advancement – improvements in internet technology and communication

networks have also contributed to the growth in globalisation.

It is much easier to communicate with the world and this fosters the growth of businesses

and business opportunities. Communication in the Caribbean has evolved rapidly over the

last decade or so. Most people now have access to cellular internet technology.

Companies have laid underwater fibre-optic cables to improve efficiency and speed. All

this has contributed to the growth of globalisation

● Trade liberalisation – as discussed earlier, the liberalisation of trade has opened a

number of markets that were once heavily protected. This is evident in CSME where

business people can locate in any member state without restrictions

● Deregulation of business and financial markets – in recent years, governments have

removed restrictions and regulations in certain industries, giving them more leverage.

A number of public-sector businesses have been privatised, increasing competition and

the need to expand abroad. Deregulation has led to the abolition of capital controls in

many countries, making it easier to acquire capital overseas. Developing countries will

also benefit from increased foreign direct investment as money flows more freely across

national boundaries

● Change in the tastes and preferences of consumers – consumers’ interest in foreign

products has increased significantly over the years. More people are now demanding

international products and new market opportunities are opening up

The impact of globalisation

● The impact on the economy Increased unemployment – unfortunately, the impact of

globalisation is not always good. Increased competition may cause some small vulnerable

businesses to shut down. When this occurs, workers will be made redundant and the

country’s unemployment rate will increase. This can cause a reduction in standards of

living and suppress economic growth

● Depletion of local resources – if international demand increases significantly, local

resources may be over utilised to meet such demand, increasing their depletion. Most of
 these resources are non-renewable and so a rapid depletion may be disastrous for the

nation in the future

● Opportunity for economic growth – with trade liberalisation and the opening up of the

world market, local companies can increase trade. The increase in trade will earn more

foreign exchange for the country and profits for the businesses. This money can be

ploughed back into the local industry, causing growth. In addition, the local industry can

benefit from foreign direct investments as international businesses seek to enter our local

markets

● Opening up the markets of countries will also open up an opportunity for the

underground economy. This may include the drugs trade and money laundering. Unless

local authorities are able to curtail this problem, it can spiral into an increase in criminal

offences of all natures

● Caribbean economies are usually small and open. This makes them vulnerable to global

or external shocks and globalisation increases their vulnerability. The possible impact of

global or external shocks was made evident with the contraction of the global economy in

2008–09. The recession, which started in the United States, affected all Caribbean

countries, sending their economies into turmoil

The role of government in Globalisation

● International policies may impede central governments’ ability to control the economy.

Caribbean governments may have to adhere to the policies outlined by institutions such
 as the World Bank, the World Trade Organization and the International Monetary Fund

(IMF), and therefore lose their power to pursue their own macroeconomic policies

● With the negative impact of globalisation on some Caribbean countries, governments

now need to develop policies and find the necessary resources to combat these negative

impacts. This may put strain on the already cash-strapped local economy

● Some governments may find that multinationals have grown so large that they are no

longer able to control them. These businesses may avoid taxes and contravene labour

laws.

In order to reap the full benefits of globalisation or to ensure that multinationals operate in

accordance with the country’s laws, the government has to play the following roles:

● Facilitating or creating the right environment.

Amid the negative impact of globalisation, it can be beneficial to the country and as such

the government has a key role to play. The country’s business environment can either impede

or foster the establishment of multinationals or the transaction of trade by global organisations.

The country’s business environment must be one that is inviting, with proper infrastructure

such as road networks and communication technology. The government should also work on

lowering crime and violence which can be a deterrent for potential investors. The government

could also improve the ease with which business can be conducted within the country – that is,

removing or reducing ‘red tape’

● Developing the necessary legal framework.

 The government also has the responsibility for developing laws and regulations to

monitor these overseas-based companies. It has to ensure that its consumers are protected from

unfair trading practices and that they are not exploited. The legal requirements for formation

must also be clearly outlined, as these can be different from those in other countries.

Consumer behaviour

Consumers within the domestic economy will also benefit from globalisation. Some of these

benefits are outlined below:

Variety of choices – consumers benefit from a greater variety of goods and services to choose

from. Since the growth of globalisation, consumers can acquire products that were not previously

available to them. These can now be accessed via e-commerce. Some of these goods may help to

improve customers’ standard of living Most of the time, consumers are on the receiving end of

increased competition. They benefit from increases in product quality and after-sales service as

companies tries to outdo each other. They also benefit from lower prices if companies are

involved in price wars. Increased competition also forces businesses to become more efficient as

they seek to create brand loyalty

Employment – some consumers also benefit from employment in multinational corporations

and other firms that were established through Foreign Direct Investment (FDI) Changes in taste

and preference – as the market opens to international influences, local consumers might gravitate

towards foreign products. This could influence what they eat and how they dress, among other

things

Quality – some MNCs have the tendency to provide a higher-quality product to their consumers

in their homeland. However, in the absence of stringent laws or quality standards in the regional
countries, they may produce sub-standard products. To this end, consumers must ensure that they

do not settle for mediocrity but remain adamant that quality be maintained by these MNCs.

Without valiant efforts by consumers, the firm may produce and sell sub-standard products

Responsibility – consumers have a responsibility to ensure that their rights are not infringed by

MNCs. Consumers must be aware of the fact that some MNCs may run away from more

stringent laws in their home countries and as such may not provide the best service to their host

countries. With this in mind, consumers should hold them responsible for providing quality

service.

Domestic businesses

The impact of globalisation is felt by businesses worldwide. The impact might be different

among these businesses, though. Below are some of the possible ways in which businesses might

be affected by globalisation:

Competition – businesses are likely to face increased competition from foreign firms. As

barriers are reduced and businesses are deregulated, they can enter markets that were once

difficult to get into. Globalisation also paved the way for new and innovative firms to enter

markets and compete with existing firms. This may be detrimental for some small domestic firms

which are not able to compete with large multinationals. The Caribbean is characterised by small

entities that are sometimes undercapitalised and therefore they may not be competitive

Economies of scale – domestic firms can also expand into the global market. As they do so,

large-scale production brings about economies of scale. Their fixed costs can be spread over a

larger amount of output which leads to a reduction in unit cost and a lower price. These firms

may also benefit from purchasing economies as they conduct bulk buying
Technology advancement – businesses gain access to improved technology which can be used

to increase output and productivity. Advanced technology will also allow the firm to reduce its

costs of production as older technology is often inefficient and causes wastage

Choice of location – globalisation opens a number of markets that were previously inaccessible

and as a result firms can now choose to locate in different countries. Doing so may provide

businesses with other opportunities such as labour cost saving and increased sales

The internet is a main driver of globalisation and this provides businesses with numerous

opportunities. With the internet through e-commerce, the business can advertise, sell or

purchase online

Pricing policy – globalisation can also affect the prices charged by domestic businesses. Where

international firms are able to sell their products at a lower price than domestic firms the latter

may be forced to lower their prices. This could mean serious losses or reduced profits for local

firms

Quality assurance – this is a guarantee to maintain an agreed or established set of quality

standards. Regional businesses that desire to sell their products in foreign countries may have to

seek certification to prove that these products meet international standards. Two international

standards by which the firm may be certified include the British Standards Institution (BSI) and

the International Organization for Standardization (ISO).

Having certification from these bodies gives a business a stamp of quality that will make it easier

for it to trade on the international market.

Trade liberalisation

Trade liberalisation is the removal of barriers to trade and giving free access to the market. This

access may be limited to certain products or it may be a total lifting of the barriers to trade.

The emphasis on trade liberalisation started in the Caribbean with the formation of the Caribbean

Free Trade Association (CARIFTA) in 1965.

● The association’s main aims were to increase, liberalise and diversify trade among the

member states

In 1973 CARICOM was established, with the aim of improving on CARIFTA. One of its

objectives was to include r1 economic integration in the region, R2 along with each member

implementing a common external tariff (CET).

Trade among the member states would be free while the region was protected by the

CET. Today, CARICOM has grown into the Caribbean Single Market and Economy (CSME).

The CSME finally came into being in 2006, having been proposed and agreed upon from 1989.

The CSME is designed to R1represent a single economic space where people, goods, services and

capital can move freely within the member states.

Article Six of the revised Treaty of Chaguaramas which established the CSME has outlined the

following objectives:

● improved standards of living and work

● full employment of labour and other factors of production

● accelerated, coordinated and sustained economic development and convergence

● expansion of trade and economic relations with third states

 ● enhanced levels of international competitiveness

● Organisation for increased production and productivity.

The CSME Agreement had the following key elements:

● Movement of capital – which will be achieved by eliminating foreign exchange controls

and establishing a common currency. This also includes the integration of the regional

capital market (for example, establishing a regional stock market)

● Movement of labour – this will allow skilled labour to travel and work in any of the

member states. It will facilitate the harmonisation of social services (education and health

services) and transfer of social security benefits (pension benefits)

● Movement of goods and services – which is achieved through the removal of all trade

barriers among member states and setting regional standards for the goods being traded

● Right of establishment – this element allows business people from any member state to

establish and own businesses in another member state without restrictions

● A common external tariff gives each member state the right to apply the same rate of

tariff on all imports that are not coming from a member state.

● A common trade policy allows for joint negotiation on matters relating to internal and

international trade and a coordinated external trade policy

● Free circulation – goods that are imported from non-member states are allowed to be

circulated within the region duty free since the relevant taxes would have been collected

at the first point of entry

● Harmonisation of laws – laws in the region are to be carefully coordinated to reflect

‘oneness’. These laws include intellectual property rights and company laws
 ● Monetary policy measures – there should be a coordination of exchange rate and

interest rate policies. Fiscal policy measures include the coordination of indirect taxes

and budget deficits.

The concept of trade liberalisation has also taken the spotlight in the world economy. This was

evident with the establishment of the General Agreement on Tariffs and Trade (GATT) in

1947.

Its main objective includes the regulation of trade among about 150 countries.

It sought to ‘significantly reduce tariffs and other trade barriers and eliminate preferences, on a

reciprocal and mutually advantageous basis’.

GATT was later replaced by the World Trade Organization (WTO) in 1995. The essential

functions of the WTO are:

● Administering and implementing the multilateral trade agreements that collectively make

up the WTO

● Acting as a forum for multilateral trade negotiations

● Seeking to resolve trade disputes

● Reviewing national trade policies

● Cooperating with other international institutions involved in global economic policy

making

The WTO embraces the two main operational principles of the original GATT:

● Reciprocity – arranging for countries to receive foreign tariff reductions in return for

tariff cuts of their own The ‘Most Favoured Nation’

 ● Rule – requiring that a country should apply its lowest tariff for any particular product to

all its suppliers

Protectionism

The impact of trade liberalisation and globalisation is evident in different spheres of the business

environment. In order to protect the interests of Caribbean businesses, some governments have

embarked on protectionism. This refers to attempts by the government of a country to restrict the

importation of goods and services. Protections may be placed on the importation of goods and

services in order to:

● Prevent the dumping of the surplus of foreign goods into the local market. These are

usually low priced and will compete against local firms

● Since some firms would have to shut down if they cannot compete with foreign firms,

some workers would have lost their jobs. However, with protectionism unemployment

may be reduced

● Protect infant industries by giving them a space to grow and settle in the market with

little or no competition

● Rectify balance of payment disequilibria – that is, where the value of imports exceeds the

value of exports. Protectionism will reduce the amount of imported goods and reduce or

rectify the disequilibria.

The following are the types of protection that are commonly used by Caribbean governments:

● Tariff is a tax on imported goods. The tax can be a fixed amount per unit or can be

calculated as a percentage of the value of the imports. Since the tax will cause imported

goods to be more expensive, the amount of goods that are imported should fall. Local
 firms will be able to sell more products. This method is often used successfully in the

agricultural sector in most Caribbean countries

● Quota is a restriction that is placed on the quantity of a product that can be imported at a

given time

● Embargo is a complete ban on trade between two countries

● Export subsidies – the government may grant subsidies to local firms so that their

products can be sold at a lower price than imports Exchange controls – this is a deliberate

restriction of the foreign currency available to citizens. Since most Caribbean countries

trade using the US dollar, if it is unavailable or in short supply, people will tend to

consume fewer imported products

Other barriers to trade

● The government may also use other barriers to trade, such as:

● Rules and regulations

● Import licences

● Voluntary export restraints (VER) which limit the amount of goods that can be exported

from a countries
 Sources of Finance

In sourcing finance, businesses need to assess the following

options before making a final decision:
Equity capital versus debt capital
Internal versus external.

Equity capital
Equity capital is money or funding that is raised from the issuing of shares. It is also seen as a
personal investment in a business by its owner(s). The major risk associated with equity capital is
that the owner(s) stand(s) to lose all the money that was invested in the business should it fail. A
business wishing to access equity capital must be willing to surrender some of its ownership, as a
share represents ownership in the issuing company. However, businesses using equity capital do
not have to worry about repayment since it is not a loan but an investment on the part of each
shareholder. The company will only pay dividend when it has made profit and it is feasible to do
so. The major sources of equity capital include sale on the stock exchange, personal
savings, partners, venture capitalist companies and friends and families (that is, where the funds
are not in the form of a loan).
Debt capital

Debt capital represents any money that is borrowed by the business which must be repaid with
interest. One of the main advantages of using debt capital is that businesses do not have to
surrender any of their ownership in order to source capital. It is important to note, though, that,
with debt capital, the funds must be repaid along with interest, whether or not the company is
profitable. This loan will have to be carried on the business’s balance sheet as a liability until it is
repaid. The major sources of debt capital include commercial banks, building societies, trade
credit, credit unions, bonds and other financial institutions.
Internal sources of finance
Sale of fixed assets – a business has the option of disposing of non-productive assets to generate
much needed funds. Excess or obsolete assets represent financial resources that could be used
otherwise. The cash received from the disposal of these assets can be used to fulfil the business’s
demand for funds.
Retained profit (earnings) – this represents a business’s after-tax profit that is ploughed back into
the business. Such profit will not be issued to owners in the form of dividends but is used to
purchase fixed or current assets.
Working capital – the management of working capital was discussed earlier in the chapter. This
also serves as a source of funds for the business which can reduce its stock balance by selling
more, collecting outstanding funds from debtors or increasing its creditors.
External sources of finance
Some of the major external sources of finance include:
Issue of shares
Bank loans and overdrafts
Debentures
Venture capital
Government assistance.
Criteria for seeking finance
Short-term financing
‘Short-term’ usually refers to a period of time of one year or less. Funding that is sourced on a
short-term basis is not normally used for long-term financing in the organization. It may be used
for financing day-to-day activities. These funds might come from one of three major sources:
trade credit, bank overdraft and factoring of debt.
Trade credit
Trade credit is the deferment of payment for goods or services supplied to the business. The
supplier delivers the product, but an arrangement is made to collect the payment due at a later
agreed date. The amount of time given will depend on the relationship between supplier and
business or the credit policy of the supplier. The longer the credit period, the more money the
business will have in the short run. The business will now have the opportunity of making
revenues from the sale of these products before payment becomes due.
Sources of capital Advantages Disadvantages
Bank overdrafts
It may be argued that it is not good to spend more money than you have but in the world of
business this can provide firms with much-needed funds in the short run. However, running a
bank overdraft on an account must be done as a result of an agreement between the bank and
the business. The agreement would be one where the business is allowed to draw cheques in
excess of its account balance at the bank. The limit of the overdraft would be specified in the
agreement. This option provides the business with short-term funds. It is now able to settle debts
(pay suppliers and bills) in the short term, knowing that these cheques will still be honored by the
bank.
Factoring of debt
As discussed earlier, this can provide businesses with extra funds given by a ‘factor’ company in
exchange for a business’s debtor balances. This can be classified as short or medium term,
depending on the time frame given by the factoring company. We are now living in a
competitive environment and banks are offering more options to business to solve their cash
woes, at least in the short term. One such way, which was not mentioned in the three major
categories above, is the issuing of credit cards to businesses. Firms can now buy their supplies or
pay their debts by simply ‘swiping’, while making payments to the bank at a later date. These
cards are issued by some of our major banks, including National Commercial Bank (NCB) and
Bank of Nova Scotia (BNS).
Medium-term financing
The medium term refers to a period of between one year and five years. Finances that can be
sourced in the medium term include loan, hire purchase and leasing.
Loans
These are set sums of money that are borrowed by the business from either a bank or other
financial institutions such as credit unions. The time for repayment and the interest to be charged
are specified upon the agreement of the loan. In addition to the payment of interest, most banks
or financial institutions may require security or collateral upon the issuing of the loan. This poses
a problem for some firms which may not be able to provide meaningful and substantial collateral
to secure such loans. Institutions lending for start-up purposes may also require a well defined
business plan before agreeing to lend.
Hire purchase
This means of financing is usually given to customers of most furniture and appliance stores in
Jamaica. The hire purchase agreement (contract) is made between the buyer and seller or a
provider of credit facility. Under such agreement, an initial amount is paid as a down payment
and the balance is paid overtime in fixed instalments along with any interest accrued for the
period. Businesses wanting to purchase assets can utilize this facility while using those same
assets to generate revenue to pay the monthly instalments. For example,
an entrepreneur setting up a launderette may purchase commercial washing machines on hire
purchase from a reputable appliance store such as Courts Plc for a five-year period. The income
generated on a monthly basis will then be used to cover the monthly instalment, including
interest.
Leasing
Firms that do not have sufficient funds, especially for startup, can lease assets rather than buy
them. Leasing will help to minimize the finance that is needed to purchase capital equipment.
Under a lease agreement, the asset will remain the property of the lessor, who grants the lessee
the right to use the asset for a specified period of time in return for a specified payment. This can
be beneficial for the business since a large amount of capital (funds) is not tied up for a
prolonged period.
Long-term financing
The long term is a period of time over five years. Long-term financing is usually used for capital
projects or to purchase fixed assets such as land and buildings. The business can choose from
various sources of long-term financing. These include:
Sale of shares
Venture capital
Debentures
Mortgage and
Assistance from government.
The sale of shares
The sale of shares is the major source of capital for limited companies. A share can be defined
simply as a unit of ownership in a company. Holders of shares are seen as part owners and have
the right to participate in the decision-making process. The company will issue shares in
exchange for money. The shares issued can be categorized as either ordinary or preference
shares.
Ordinary shares
The owners of ordinary shares have greater risk than preference shareholders as they will be the
last to receive repayment if the company fails. The ordinary shareholders have the following
rights in the company:
To vote at meetings – for example, Annual General
Meetings (AGMs)
To receive dividends when declared
To claim undivided assets if the company goes into
liquidation
To subscribe for additional shares before they are offered
to the public.
Preference shares
Holders of these shares have a lower risk than ordinary shareholders. Preference shares carry a
fixed rate of dividend and payment will be made before ordinary shareholders receive their
dividend. Preference shareholders also have certain rights in the company:
To receive dividend at the specified rate before ordinary
shareholders
To receive a share of the company’s assets before
ordinary shareholders in the case of liquidation.
Venture capital
This was discussed earlier in this chapter. The period of time for payment would be used to
categorize it as long term or medium term. However, such financing is usually seen as
being long term.
Debentures (loan stock)
Debentures are fixed-interest loans that are issued to companies and are secured against its
assets. The lender of the funds is issued with a debenture certificate which will specify the rate of
interest to be paid by the company. The company must honor such interest payments whether it
makes a profit or loss. Debentures are either redeemable or irredeemable. Redeemable
debentures will be repaid by the company at or by the date specified on the certificate. This
can go up to ten or more years. Conversely, irredeemable debentures are only repaid when the
company is being wound up or liquidated.
Bonds
Bonds are often called ‘fixed income securities. A bond is a loan from individuals or firms at a
fixed income rate and for a defined period of time. Bonds are usually divided into
government or corporate bonds. The entity that is indebted issues the bond and the person or
entity lending the money takes it up. Put another way, the issuer of the bond owes the holder of
the bond until it matures. The indebted firm is usually the one to state the interest rate that will
be paid and when the bond will be repaid. The amount of money lent is known as the ‘bond
principal’, the interest paid as the ‘coupon’ and the date of repayment is known as the ‘maturity
date’. The period of time that a bond takes to mature may vary but could run from 90 days to
even 30 years.
Mortgage
This is a loan that is given to a person or a business and is secured over or guaranteed by the
mortgagor’s property. The rate of interest charged can be either fixed or variable.
The interest, along with a portion of the principal, is paid in instalments over the life of the
mortgage.
Assistance from government
While this is not prevalent in the private sector, some businesses have benefited from
government assistance. This can be in the form of grants, subsidies or loan guarantees.
This type of assistance is usually given to sectors that are critical within the country but are
undergoing financial difficulties. In Jamaica, for example, fertiliser manufacturer
The government may also stand as guarantor for loans that are given to certain
industries. If the firm is unable to pay back the loan, then the government will have to stand the
cost.
How to choose from these sources of
funds?
In choosing among the sources of finance, a business needs
to consider the following factors. Careful consideration of
each factor will assist the business in making a decision:
Cost to the firm
The costs incurred by a firm sourcing finance will include administrative costs and interest
payments on loans and bank overdrafts. The business may want to use sources of finance that
charge lower fees and interest.
The use of the funds
As mentioned earlier, it is not a wise decision to use short-term funding for long-term projects.
Long-term funding is usually more suited to projects that will take large amounts
of capital outlay or expenditure.
Size of the firm
A larger firm is more likely to secure certain sources of finance than a smaller firm. A number of
financial institutions would rather give a loan to a company than to a sole trader. On the other
hand, larger firms are more likely to secure collateral for loans than smaller firms.
Financial stability
Banks and other financial institutions normally ascertain the financial viability of the business
and the project being undertaken before they will lend funds. A firm that is financially unstable
is less likely to secure certain financing and even if the loan is given the rate of interest may be
very high.
Gearing of the firm
A company’s gearing refers to the relationship of its equity capital (ordinary shares) to loan
capital (long-term loans and preference shares). A company is said to be highly geared if
its loan capital is significantly higher than its share capital. It is low geared if its loan capital is
smaller than its share capital. The gearing ratio will also be used to determine the source of
financing undertaken by the company. A highly geared company may refuse to sink itself further
into debt by borrowing, therefore it may seek other sources of finance such as issuing additional
shares.
Money and capital markets and international financial institutions. While potential entrepreneurs
and businesses can raise their own finance, there are a number of agencies and institutions
throughout the Caribbean that can provide meaningful information about business operations.
The Money and Capital markets
The Money Market
This is a market where financial institutions such as banks lend and borrow money from each
other on a short-term basis. It is a source of funds for government and institutions that have
short-term cash problems. Institutions in the money market will lend money by using a variety of
different securities including Treasury bills and certificates of deposit. These securities are very
liquid and mature in the short term.

The capital market or stock market

This market involves the buying and selling of company stocks and shares and government
bonds. The stock market provides the link between companies that are in need of
financing and people who have money to invest. The stock market is divided into a primary
market, where capital is raised through the issue of new securities (stocks, shares and
bonds), and the secondary market, where existing securities are traded. The trading in the stock
market is done through a marketplace known as the stock exchange. The stock exchange has the
following basic functions:
To provide a channel through which people can save
and invest
To foster the expansion and growth of the financial
service sector
To offer some level of protection to its savers from
inflation
To help to minimise borrowing by providing companies
with equity financing.
Prospectus issue – the offering of a security to the public at a fixed price.
Offer for sale – the offering of a security to the public, by or on behalf of a third party, at a fixed
price.
Offer by tender – the offering of a security to the public by tender by or on behalf of a company
or a third party.
Placing – an offer made to a stockbroker to sell the securities of a company to the public
Introduction – where none of the company's securities is being offered to the public.

Components of Financial Statements

Income statements
An income statement is sometimes referred to by the IAS as a ‘statement of comprehensive
income’. However, there are slight differences between the two, especially in terms
of how profit and loss is calculated. The income statement is a financial statement that assesses
the firm’s financial performance over an accounting period (usually a year). It shows how
revenues are earned and expenses incurred by the business. The income statement is divided into
the following sections:
Trading account
This shows the calculation of gross profit from trading. Gross profit is calculated as:
Sales – Cost of Sales
The gross profit gives an indication of the level of efficiency with which materials and labour
were used to produce the goods and services. Cost of sales is calculated as:
Opening inventory + Purchases – Closing inventory
Sales represents the total amount of money earned from the provision of goods and services to
customers. Opening inventory is the cost of the inventory at the beginning of the accounting
period.
Purchases – this represents goods that are bought with the intention of reselling.
Closing inventory is the cost of the inventory at the end of the accounting period.
Profit and loss account
This shows the calculation of net profit, by adding any additional income to gross profit then
subtracting all the expenses:
Revenues (receivables) – this represents income earned by the firm outside of its regular trading
activities. They may include rent received, commission received, and discount received.
Expenses are also known as overheads and represent costs that are incurred for the purpose of
earning income. Some common examples of expenses include, but are not limited to, wages,
salaries, utilities payments, stationery, rent, rates and interest payments.
Balance sheet
The balance sheet is another important statement for businesses. It is referred to as a ‘statement
of financial position’ by the IAS. As stated, it shows the financial position of the firm at a given
point in time – that is, its assets (what it owns) and its liabilities (what it owes). The balance
sheet is organised under headings such as ‘non-current assets’ (Fixed assets), ‘Current assets’,
‘Current liabilities’ and ‘Share capital’.
Non-current assets (Fixed assets) – these include assets that are durable (for example, physical
properties) and are used in the operations of the business. Their useful life is usually longer than
a year. These assets appear on the balance sheet in order of permanency – that is, the most
permanent first, then least permanent.
Current assets – represent assets that can easily be converted into cash, sold or consumed within
a one-year period. These assets appear in the balance sheet in the order of liquidity, starting with
least liquid and moving to most liquid.
Current liabilities – these are monies owed by the business that are expected to be repaid within
the next 12 months.
Working capital or Net current assets – this is the difference between Current assets and Current
liabilities. It is the money that is used for the day-to-day expenses of the business. Low working
capital can result in serious liquidity problems for the firm.
Non-current liabilities – these are monies owed by the firm which are not expected to be paid
within a one-year period.
Capital employed or Net assets – this is the total of Fixed and Current assets minus Current and
Long-term liabilities. Total assets are usually financed by the owner(s) of the business in terms
of the capital they put in the business. This figure should be equal to the final figure in the
‘Financed by’ section
Financed by – this segment shows how the business acquired finance for the business.
Relationship between statement of comprehensive income and
statement of financial position
The statement of comprehensive income records the changes to the business’s net assets over a
given period of time. It shows the gains or losses that the business experienced within that time
frame. On the other hand, the statement of financial position gives a snapshot of the business’s
assets and liabilities during a particular period of time. It shows all the assets and liabilities along
with the equity of the business. It gives readers a clear picture of the financial health of the
business. While the statements are separate, they are closely related, and both must be published
as part of the firm’s final accounts. One such relation is that the total comprehensive income at
the end of the period must be transferred from the statement of comprehensive income to the
statement of financial position. To this end, if a profit is made in the statement of comprehensive
income, it will increase the net assets of the firm in the statement of financial position.
Cash flow statement
According to IAS 7, all companies should publish a cash flow statement showing how inflows
were generated and outflows spent. A cash flow statement shows the movement of cash into
and out of the business. In order to understand this statement better it is important to define
‘cash’ to include cash in hand and demand deposits (a bank deposit where withdrawal can be
made freely, without prior notice) and ‘cash equivalents’, which are short-term, highly liquid
investments that are easily and readily converted into known amounts of cash.
Purposes of cash flow statement
The main reasons for preparing a cash flow statement are:
Sourcing finance – most financial institutions will require a breakdown of the firm’s cash flow
statement, showing how it will repay the money borrowed
Monitoring and control – the statement will enable the firm to monitor its income and
expenditure on a monthly or annual basis, matching them to the actual figures.
Provides timing for large expenditures – the firm can budget to purchase capital equipment in
times when large amount of funds are available.
Advantages of the cash flow statement
Fosters proper judgement on the amount, timing and degree of certainty of future cash inflows or
outflow. Provides information on the firm’s liquidity and financial viability. Is not easily
manipulated and so is not affected by judgements or accounting policies. Allows for comparison
of the present and future values of fund passing through the business. Shows the relationship
between profitability of the firm and its ability to generate cash.
Disadvantages of the cash flow statement
While cash flow is necessary for short-term operations, the firm needs profit in order to be viable
in the long term. As a result, it may need to sacrifice cash flow for
large investments. Since they are based on past data, cash flow statements
may not provide accurate information about future cash flow.

Format of cash flow statements

According to IAS 7, cash flow statements should have three standard headings:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities.
An explanation of operating activities
Net profit before taxation – since taxes are dealt with in the operating activities, the profit used in
this section is taken before taxes are paid. This will prevent the firm from subtracting the figure
twice.
Depreciation – since this does not actually represent cash flowing out of the business but is just
an estimated reduction in the value of the assets, it should be added back to profit.
Loss/profit on disposal – a profit or loss on disposal of an asset is dependent on the amount by
which the firm had depreciated the asset. As a result, a loss on disposal should be added back to
net profit since the firm is not really losing funds. While a profit on disposal of assets is
subtracted, there is no real gain.
Increase or decrease in inventories – an increase in the stock figure suggests that new stock was
purchased over the period and hence money was paid out to acquire this; whereas a decrease in
stock suggests that an amount was sold hence the firm would have had revenue from the sale
Increase or decrease in debtors – an increase in debtors means that the firm has sold stock for
which it has not yet received payment, hence an outflow of cash; whereas a decrease means that
the firm has received payment from its debtors.
Increase or decrease in creditors – an increase in creditors means that the firm has received
inventories that it won’t have to pay for now, therefore an inflow of cash; whereas a decrease
means that the firm has paid some of it debts, resulting in an outflow of cash.
Preference dividends and interest paid are normally accounted for in the operating activities,
according to IAS 7.
Income taxes paid should be disclosed separately in the operating activities instead of being
carried over in the net profit from the trading account.
Possible solutions for a cash shortfall
A shortfall of cash may pose a number of problems for businesses, especially liquidity problems.
Firms may not be able to pay for their expenses and debts and this may lead to insolvency or
bankruptcy. As a result, firms have to find the most appropriate ways to solve a shortfall of cash.
Financial Statement Analysis
Importance of financial analysis
Enables the firm to know whether or not it can meet its debts when they become due.
The necessary steps can be taken to correct any problems identified during the analysis.
Enables the firm to compare its performance over a number of years.
Gives a clearer view of the accounting data since it is broken up into ratio analysis.
Advantages of ratio analysis
Provides the framework and information to compare a business’s performance with other
businesses in the same industry or of the same nature.
Can produce vital information about the performance of the firm
A good tool to use to assess the financial position of the business.
Can be used to identify possible weaknesses within a business which would not have been
detected from simply drafting final accounts.
Helps management to formulate future plans and policies regarding the firm.
Can be used as a guide in making investment decisions.
Gives meaning, clarity and perspective to the accounting data presented in the final accounts.
Limitations or disadvantages of ratio analysis
Ratio analysis is predominantly quantitative and hardly focuses on quality, customer service and
the morale of employees.
Ratio analysis focuses on historical data, with little emphasis on the future, though it can be used
to make projections.
Any ratio that is calculated is only as accurate and reliable as the information that was used in its
calculation – that is, if the financial report is not credible, then the ratio cannot be either
Its usefulness is dependent on the skill of the user. It requires experience to interpret properly
and place in context.
Ratios can only be used to compare similar companies and present with previous data
If the ratios are not adjusted for inflation, they might be misleading.
Types of ratios
There are a number of ratios that are available to accountants. These are grouped into five
categories:
Profitability ratios or performance ratios – these measure how well the business is doing in
terms of profit, turnover or sales and capital employed.
They reflect the performance of the company and management
Liquidity ratios – this show whether or not the company can effectively pay its debt. They also
reflect the firm’s short-term strength or solvency.
Investors’ ratios or shareholders’ ratios – these measure the returns on the capital invested by
shareholders or other investors. They also show the relationship of ordinary shares and their
price to the profits, dividends and assets of the company.
Efficiency ratios – this measure how efficiently resources are utilized. They also determine the
efficiency of the firm in collecting its debts
Financial ratios or gearing ratios – these ratios assess the financial structure of the business,
including the proportion of its financing that is obtained from debt capital.
Profitability ratios
Return on Capital Employed (ROCE)
This ratio shows the amount of money that has been made on the capital that was employed over
the period. This is sometimes referred to as the ‘primary efficiency ratio’ because of its
importance. It is calculated in one of two ways:
Gross profit percentage
This is also known as ‘gross profit margin’. It shows gross profit expressed as a percentage of
sales or turnover. It shows the percentage of the firm’s sales that goes to gross profit. Higher
gross profit suggests that management has been able to use the available resources to generate
high profits. A firm earning higher profit could plough back some of that profit into research and
development, which should improve its operations.
Net profit percentage
This is also known as ‘net profit margin’. It shows net profit expressed as a percentage of sales
or turnover. It gives a good idea of how the firm controls its expenses or overheads – that is,
whether or not its overheads are too high and are depleting the gross profit earned. It also shows
the firm’s level of efficiency.
The firm would want to keep its net profit margin and gross profit margin close to each other.
This will show investors that the firm is not incurring huge selling and distribution and
administrative expenses. A net profit margin that is close to a gross profit margin suggests that
overheads or expenses are low, which is desirable as the firm would be converting its revenue
into actual profit. Where the firm may have a high gross profit margin but low net profit margin
it is indicating that the overheads are too high. This can be dangerous, as a decline in sales could
see the firm making net losses. The net profit margin can be improved in one of two main ways:
reducing costs or increasing revenues.

Liquidity ratios
There are two types of liquidity ratios that assess the solvency of the company. These ratios are:
Current ratio
This is also known as the ‘working capital ratio’. The current ratio assesses whether the firm’s
current assets (if liquidated) can cover its short-term obligations or current liabilities. It compares
the firm’s current assets with its current liabilities.
Acid test ratio
This ratio is also known as the ‘quick ratio’. Its assessment is similar to that of the current ratio;
however, stock is omitted from the total of the Current assets. The reason for this is that
stock may take a long time to sell, therefore funds may not be forthcoming. To include stock
would mean that, though the business has a good acid test ratio, its current assets may not be as
liquid.
Debtor to sales ratio
This ratio attempts to assess how much of the company money made from sales it tied up in
debtors. It is normally advisable to collect debts as soon as possible, since money owed to the
firm is unproductive and could be put to better use. This ratio is measured in terms of days in
order to ascertain the length of time that debtors are taking to clear their debts. It is calculated as:
Creditor to purchases ratio
This ratio shows the time period given by suppliers for the firm to pay its debts. Just examining
the ratio may not be enough to decide whether it is good or bad, as the firm may have been given
a longer time than usual to clear its debts. What is important here is to ascertain whether the firm
is able to meet its deadlines for payments when they become due.
Stock turnover
This ratio measures the number of times that stock turned over in the financial year – that is, the
amount of time in which stock was sold and replenished. It also indicates how efficient the
business is in maintaining the best possible level of stock. A low stock turnover indicates that
stock might be piling up and the business is not selling its stock as quickly as it should. The more
quickly stock turns over, the more quickly profits can be made and the higher sales revenue
will be.
Asset turnover
Asset turnover measures the effectiveness of how assets are being used to generate sales. The
result of this ratio is best compared with the ratio of similar businesses or competitors. Where a
business’s asset turnover is lower than those of its competitors, there may be over-investment in
assets.

Gearing ratio
This is also called the ‘leverage ratio’. It shows the relationship between a company’s equity
capital and its debt capital. Put another way, it is measuring the proportion of the total assets
invested in the firm that is financed by borrowing. This ratio is very essential when it comes on
to the long-term financial health and stability of the business, as investors need to know that the
capital structure of the company is not too dependent on borrowings. The ratio is normally
interpreted in terms of high gearing and low gearing. A highly geared company is one that has
more of its capital being financed by debt capital or fixed-interest securities – that is, more than
50 per cent. A low-geared company would be one that has most of its capital being financed by
equity. The implication for ordinary shareholders is that they are less likely to be paid dividends
if the company is highly geared, as the company would have to honour its interest payments
on debentures and preference shares before dividends can be paid to them. This is further
exacerbated by the fact that, unlike dividend payments, payment of interest and debt is
not optional. There is more than one formula to calculate the gearing ratio, however, the most
popular is.
2009

Gross Profit Margin

i. 1.35 x 100 = 27%

5.0
Net Profit Margin

ii. 0.75 x100 = 15%

5.0
Return on Capital Employed

iii. 0.75 x 100 = 16.5%

4.5

2010

Gross Profit Margin

i. 1.025 x 100 = 25%

4.10
Net Profit Margin

ii. 0.375 x 100 = 9.1%

4.10
Return on Capital Employed
iii. 0.375 x 100 = 12.5%
3.0

Gross profit margin

In 2009 the firm recorded a gross profit margin of 27% and in 2010 the gross profit margin fell

to 25%. Based on the results the business was less profitable in 2010 than it was in 2009. The fall

in the ratio is as a result of a fall in both sales and gross profit compared to those recorded in

2009.

Objectives:

1. Prepare income statement and balance sheet

2. Analyse financial statements using ratios

R Mendez

Income Statement for the year ended 30 September 2007

$ $ $
Sales 18,600
Less: Return Inwards (205)
Net Sales 18,395
Less: Cost of Goods

Sold
Opening Stock 2,368
Add: Purchases 11,874
Less: Return Outwards (322) 11,552
Add: Carriage Inwards 310
 14,230
Less: Closing 2,946 (11,284)

Inventory
Gross Profit 7,111
Less: Expenses
Carriage Outwards 200
Wages 3,862
Rent and Rates 304
Insurance 78
Motor Expense 664
Office Expense 216
Lighting Expense 166
General Expense 314 (5,804)
Net Profit 1,307

R. Mendez

Balance Sheet as at 30 September 2007

$ $
Fixed Assets
 Motor Vehicle 1,800
Fixtures and Fittings 350
Computer Equipment 5,000 7,150
Current Assets
Stock 2,946
Debtors 3,896
Bank 482
7,324
Less: Current Liabilities
Creditors 1,731
Working Capital 5,593
Net Assets 12,743
Financed by:
Capital 12,636
Add: Net Profit 1,307
13,943
Less: Drawings (1200)
12,743

Efficiency Ratios

1. Stock Turnover
Cost of Sales
Average Stock

Average stock = opening stock + Closing stock

2

AS = 2,368 + 2,946
 2
5314 = 2657
2
Stock Turnover 11284 = 4.25 Times
2657
2. Debtor Day Ratio
Debtors x 365
Sales

3896 x 365 = 77 Days

18395

Profitability Ratios

1. Gross Profit Percentage/Margin

Gross Profit x 100

Sales

7111x 100 = 38.66%

18,395

2. Net Profit Percentage/ Margin

Net Profit x 100 =
Sales
1307 x 100 = 7.11%
18,395

3. Return on Capital Employed

Net Profit x 100 =
Capital Employed

1307 x 100 = 10.26%

12,743

4. Mark up
Gross Profit x100
Cost of Goods Sold

7,111 x 100 = 63.02%

11,284

Liquidity Ratios

1. Current Ratio

Current Assets
Current Liabilities
7,324
1,731
= 4.23 or 4.23:1

2. Acid Test Ratio/ Quick Ratio

Liquid Assets
Current Liabilities

4378 = 2.53 or 2.53:1

1731

Gearing

Long term debts x 100

Capital Employed

40,000 x 100 = 40%

100,000