‘A’ LEVEL BUSINESS STUDIES

REVISION GUIDE

QUESTION AND SOLUTIONS

BOOKLET

PAPERS

1&2

CASE STUDIES

DATA RESPONSES
Tinofamba nevanofamba
 PAPER 1
1. a. Distinguish between short term and long term sources of finance for busines

Short-term financing refers to business or personal loans that have a shorter-than-

average time span for repaying the loan, typically one year or less. Long-term
financing refers to business or personal loans that have Longer time span for repaying
the loan, more than a year. [4]

b. Explain any two factors considered when selecting an appropriate source of

finance.

Purpose
Amount required
Expalnations required [4]

2. a. Explain the meaning of market segmentation.

Market segmentation is the process of dividing a market of potential customers into

groups, or segments, based on different characteristics. The segments created are
composed of consumers who will respond similarly to marketing strategies and who
share traits such as similar interests, needs, or locations. [2]

b. Why may businesses wish to segment markets for their product?

1.Better Satisfy Customer Needs and Wants
Through segmentation, a company can match customers’ needs and wants. Since all
customers have differing needs, they must be handled in different ways.
Segmentation enables identification of the different customer segments and their
preferences. Then, a solution can be customized for each segment using the
company’s products or services. As customers grow older, their preferences and
buying behaviors change. By identifying these changes, solutions can be provided to
customers throughout their ‘life cycle’ by adopting the product or service to the
segment’s needs. This is a great way to retain customers as they change their
behaviors over time.

2. Better Communication
A marketing message needs to be targeted to specific customer segments for it to be
effective. Since customers have different needs and wants, solutions to each segment
need to be communicated separately. Mass marketing causes some target customers to
miss the intended message. Also, too much money is spent on advertising to
customers who will never purchase the product. Through segmentation, customers can
 be reached with a specific marketing message that is designed to solve their individual
problems, which is less costly for the company.
3. Opportunity for Growth
Segmentation enables identification of potential customers who wouldn’t normally
buy a product. By segmenting the market, a company can create its own ‘niche’ and
attract customers who normally would look to alternative sources for a solution to
their problem. If these unique problems are identified, companies can adjust their
product offering to provide a solution. Also, segmentation can increase sales as
customers are introduced to new versions and upgrades of their current product. If
they try out a product with a lower price point and like the product, they can upgrade
to a more premium version.
4. Increased Innovation
With segmentation, smaller segments in the market that have similar needs and wants
can be identified. Although these segments may not be traditional customers,
identifying new needs can stimulate innovative ideas to solve new problems. With
newly developed products and services to meet these needs, problems, premium
prices can be charged and the advantage in the market can be sustained.
5. Higher Profits/Market Share
Consumers have different price sensitivities so by segmenting the market, different
prices can be charged to extract the most consumer surplus. In doing this, profits are
increased. Since segmentation supports niche strategies, highly attractive segments
can be identified and market leadership can be achieved. A competitive position
results from this place in the market, along with improved relationships and a stronger
brand presence. Also, competitive production and decreased marketing costs are
associated with segmentation. Due to all of these factors, profitability increases .
Accept any two explanations [4]
3. How are businesses affected by an increase in taxation?
Taxation policy affects business costs. For example, a rise in corporation tax (on
business profits) has the same effect as an increase in costs. Businesses can pass some
of this tax on to consumers in higher prices, but it will also affect the bottom line.
Other business taxes are environmental taxes (e.g. landfill tax), and VAT (value
added tax). VAT is actually passed down the line to the final consumer but the
administration of the VAT system is a cost for business. [4]
4. a. Why are most governments keen to promote exports?

Exports earn foreign currency , which can be use to buy imports. More exports means
more people needed to produce them, increasing employment and standards of living.
Successful exporters earn more money and have to pay more profits tax . [4]

b. Outline any 3 drawbacks of import controls [3]

 lack of variety of products
 promote sub-standard goods in the local market
5. a. Why might a firm employ part time workers?

Employing part-time workers has a range of potential business benefits, such as:

 Being an efficient way to keep costs down in areas where you don't yet need
full-time cover
 increasing recruitment and retention of staff by offering family-friendly
working practices
 being able to show potential clients and customers that you value having a
diverse workforce and ethical employment practices
 allowing you to bring in highly skilled and experienced staff members even
when you have a fixed budget and can't afford to bring someone in on a full-
time basis
 expanding the pool of potential recruits - part-time work tends to attract
parents with younger children and older people, who may not want to work
full time but can bring a wealth of skills, experience and expertise
 increasing the ability of your business to respond to change and peaks of
demands - for example, you can use more workers at peak times and extend
your operating hours by using part-time workers in the evening or at weekends
 helping to reduce the workloads of other workers, eg when you don't have
enough work for a new full-time position but are regularly using overtime to
meet demands - this can reduce your overtime costs and help prevent the
negative effects of stress and fatigue
Any three explanations [3]

b. What may be the disadvantages of hiring part time workers?

There are also some disadvantages when employing part-time staff:
recruitment costs may be greater than if you were taking on a single full-time worker
there could be additional costs in terms of pension provision, benefits and training
the job-sharers' manager may spend more time supervising two workers instead of
one [3]

6. Highlight any 3 factors a firm should consider when choosing a supplier

A key criterion in selecting the right supplier is value. Cost should not be the lone
driver; you should instead look at the total cost of ownership, which looks at the
supplier’s:
• Customer service
• Delivery commitments
• Reliability and responsiveness
• Resource savings (hard and soft) [3]
7. a. How might branding help in the successful marketing of a product?

Increased credibility.
Brand work can help increase your credibility by improving the perception of your
business. People buy more from companies they trust.
It can make you appear more established.
Increase the value of your business (if you plan to sell). If you present a well-rounded
business package, including marketing materials and graphics, your business will look
more complete and more attractive to potential buyers.

Brands are one of the most valuable assets a company has, as brand equity is one of
the factors that can increase the financial value of a business to potential buyers.
Many companies put the value of their brand on the balance sheet. [3]

b. Assess the usefulness of desk research

Usefulness
The first advantage of using secondary data (SD) has always been the saving of time .
Not enough with this, in the so called Internet Era, this fact is more than evident. In
the past, secondary data collection used to require many hours of tracking on the long
libraries corridors.

Strongly connected to the previous advantage is the saving of money . In general, it is

much less expensive than other ways of collecting data. One may analyzed larger data
sets like those collected by government surveys with no additional cost.

Disadvantages
Inappropriateness of the data . Data collected by oneself (primary data) is collected
with a concrete idea in mind. Usually to answer a research question or just meet
certain objectives. In this sense, secondary data sources may provide you with vast
amount of information, but quantity is not synonymous of appropriateness. This is
simply because it has been collected to answer a different research question or
objectives. The inappropriateness may be, for instance, because of the data was
collected many years ago, the information refers to a entire country when one aims to
study a specific region, or the opposite, one aims to study an entire country but the
information is given in a region wide. [3]
8. a. How might workers actively resist change?

Employees resist change in the workplace because of various reasons. The major
reason why employees resist change at work is because of bad management of change
[3]

b. Explain any 2 consequences of a poor organisation structure

Poor Communication
A poor organizational structure can lead to miscommunication because people might
not be sure who needs information or where to send important messages. For
example, a sales manager at a small company might create a new customer sign-up
form to help new clients start ordering more easily, getting approval from the owner
of the company to use the form. If the new form isn’t shared with the bookkeeper, she
might not know how to qualify new customers for credit or invoice them properly.
This can lead to delayed orders and long waits for payment from clients. This also can
result in customers not getting product, forcing them to find another supplier.
Reduced Productivity
When your organization isn’t set up to create effective communications or doesn’t
foster creative strategic management, you can miss opportunities, allow problems to
continue and reduce employee morale. An employee who has two superiors might get
conflicting directions and not want to follow either until she gets approval from
higher up. When employees aren’t happy, they might not volunteer new ideas or
might leave for a better job. Poor organizational structure can lead to a reduction in
productivity, decreasing your growth potential. For example, when sales people don’t
communicate with production managers about large orders they know will be coming
in the months ahead, the production department can’t make the most effective
scheduling plans, leading to a lack of production capacity, labor availability,
warehouse storage space and shipping efficiencies. [4]

9. a. Show how any 2 elements of the marketing mix might help in achieving the
marketing objectives of a firm.

A good quality product outshines its competitors easily. However, a good product also
needs to be complemented with a good price and great promotions. Sometimes,
having one of the four elements strong, makes up for any weakness in the other areas.
Like you offer great quality and people are willing to pay higher prices. Your quality
or your prices become the talk of the town and you automatically reap its benefits and
do not have to struggle with the promotions part. So, a deep understanding of these
elements helps you achieve the best thing — sales and revenue because after all you
want to earn profits from your product and brand. Here, I will discuss the role these
elements play in your marketing strategy.
Product: This is the central element in your marketing strategy. Not just the success of
your marketing strategy but the image of your brand too depends on the success of
your product. In 21st century were competition has become only all the more intense
you need to have a great quality product to shine n the shelf. Otherwise your product
gets lost in the crowd of brands every customer comes across in the market. So, you
do not want you product to be a loser. You must fill it with quality. Consider the
example of Apple. It is its product range that has made the brand a celebrity. The case
of Starbucks also proves that good quality products are easier to sell.

Price: Pricing is also an important part of a brand’s marketing strategy. Many times
you pricing strategy is the most effective part of your marketing strategy. Consider
Walmart. It is the most favorite retailer of majority of Americans because it sells at
the lowest prices. Apple has priced its products high because it is marketing its
products to the upper end of customers. IKEA has a smart pricing strategy that has
helped it target the middle class customers effectively. If it was not for its pricing
strategy, its customer base would shrink to less than half of its current customer
segment. So, you must keep your target market and your competition in mind before
pricing your products. This does not just help you attract the right customers but also
helps you build distinct image.

Promotion: After pricing, it is the promotional part. Despite getting the rest elements
of your marketing mix right, you might need to do some marketing to let your
customers have a better glimpse of your product and its features and quality. You
have a great product and a smart pricing strategy but still you need to reach your
target market and help it know and understand your brand and its value proposition. It
is because there is a lot of competition and you have to reach your customers before
others do. This is the importance of your promotional strategy and being smart at it
means achieving higher sales and penetrating your target market deeper than the
competitors.
Marketers must focus on all these aspects of their marketing mix to get the desired
results from their marketing campaigns. It is not all about promotion because without
a great product all the promotion will return no results. So, focus on making all these
aspects strong and if you can truly outshine your customers in a few areas, it might
lead to a need for less investment in the others. Even an average product can sell
given your pricing, placement and promotional strategies are right. [4]

b. List any four ways in which a business may attempt to extend the maturity
phase of a products life cycle.
Keep Refining Your Offers to Maximize Profitability
Maximizing profits is the main goal of your business; but how you go about it is key.
When a product is already in its market, there are several factors to maintain and
refine it for optimum profitability, these include:
Pricing Adjustments
Advertising and Promotion
Increasing Penetration with Customer Base
Finding New Customer Segments
A great way to maximize profitability with an existing product is to introduce a
“follow-up” product – one that is considered an enhancement or add-on for your
already thriving offer. The idea here is to keep your product competitive and refined
in the marketplace, adding additional value for your customers.

Update Products to Keep and Escalate Customer Relationships

You should never underestimate the value and power of a loyal customer base. By
keeping relationships fresh with updated products, you will continue to see repeat
purchases and satisfied consumers; this is something that money just cannot buy.
Customer relationships are what aid in promoting your business effectively.
According to the global management-consulting firm, Bain and Company, a 5%
increase in retention yields profit increases of 25 to 100 percent. On average, repeat
customers spend nearly 67% more than that of new customers. So this proves that
building sound customer relationships is key for your business to thrive in its given
industry.
One way of going about keeping and escalating your customer relationships is by
updating products and services. Offering something valuable in exchange for their
business is crucial for maximizing positive relationships. Large improvements or
additions don’t have to be necessary. This might just include a new bonus, providing
insights or advice on the usefulness of your product or staying in touch with your
consumer.
Another method of updating your products may include technology or R&D (research
and development) efforts to introduce an updated, yet very similar product or service.
Take for example the technology giant, Apple. The iPod was a major offering that
consumers fell in love with from its release in 2001. Thereafter, Apple has
continuously updated and released “better and more updated” versions of that same
product. Now, the iPod touch, nano and shuffle have all made their appearances and
have answered the musical needs of Apple’s consumer base.

3. Constantly Innovate and Improve Your Products and Services

There are many reasons why you should be continuously innovating and improving
upon your products and services. By doing so, you are improving upon the success of
your business. Those businesses that fail to innovate face the risk of losing to their
competitors, losing the customers that they have built long-lasting relationships with
and also risk reaching the ‘decline’ stage in the Product Life Cycle. Innovation and
new product launches can be an essential factor between becoming a market leader or
just another general product provider.
Below are some very simple steps to incorporate to continuously innovate and
improve upon your products and services:
Respond to trends and competition within your industry
Taking a product you already have and building upon it
Develop a unique selling point and use that in your marketing

4. Explore New Markets and Niches

By exploring new markets and niches, you are making every effort to help your
business grow. Incorporating diversification and unique market categories, your
business will strive. Staying in the same market or niche for too long risks the
dangers of entering the ‘decline’ stage of the Product Life Cycle much quicker than
not. In the challenging economic times that we are currently in, it is evermore
important to constantly find new products or services to provide for new and
 prospering markets. Not only will this diversify your business, it will also allow for
new and improved revenue streams.
However, this may be a risky strategy to focus on. Many business owners are finding
that diversifying products or trying to incorporate new markets all at one time is a
delicate balance. Try to focus on your new product through mindful processing of
information gained from your initial target market. My one tip for you when trying to
expand to other areas is to carefully and strategically focus on one issue at a time.
This will help reduce the amount of adjustments needed in future ventures. Spotting
and exploiting new market opportunities for your products allows for your offering to
enter into uncharted territory, and the positive results could be that of remarkable
success.

5. Consider Continuity Programs or Other Recurring Revenue Programs to

Extend the Life Cycle
Continuity programs, or other recurring revenue programs, can provide higher
retention rates and keep costs of marketing to the consumer much lower than that of
reaching out to new consumers. In the economy crunch we are in today, successful
continuity programs provide relief to businesses, simply because they offer expected
revenue streams. [4]

10. a. What do you understand by the following terms:

i. Recruitment
Recruitment (hiring) refers to the overall process of attracting, shortlisting,
selecting and appointing suitable candidates for jobs (either permanent or
temporary) within an organization or Recruitment is the process of
identifying that the organisation needs to employ someone up to the point
at which application forms for the post have arrived at the organisation.
ii. Selection
Selection then consists of the processes involved in choosing from
applicants a suitable candidate to fill a post. [2]
b. Justify the need for induction training in an organisation

The main purpose of induction training is to integrate new employees into the
company and make them understand the systems and procedures followed by the
organization. Induction training helps new employees settle down quickly in the new
work environment, and gives them a sense of belonging.
Let’s now look at the benefits of induction training, both from the perspective of the
firm and the new employee.
Benefits of effective induction training to the organization
1. Saves a lot of money and time: Induction training is the first training program in
which the employee participates after he joins the organization. Induction training
provides him all the information needed to start performing his duties. If an employee
is trained well in the induction program, he can easily adapt to his new role and start
delivering results quickly – that’s how it saves the organization a lot of money and
time.
2. Reduces employee turnover: People join a company with a lot of expectations, and
at the same time, they have lot of questions about the organization. All these queries
must be answered in the induction training. Ineffective induction training leaves new
employee confused about the job. Employees may feel frustrated and helpless, if they
are not trained properly. On the other hand, effective induction training goes a long
way in increasing staff retention rate and reducing employee turnover in a big way.
3. Ensures operational efficiency: A good induction training program covers all
aspects of the company thoroughly. It helps new employees become familiar with the
organization’s work culture, vision, mission, and goals. At the same time, new
employees understand their own role in achieving the goals of the company. This will
help enhance the efficiency of employees quickly, as they adjust to the work culture
of the organization and get involved in their job. Overall, it greatly helps increase the
operational efficiency of the organization.
Advantages of proper induction training to the new employee
4. Makes the new employee feel respected and valued: Good induction training gives
a warm welcome to the employee and focuses on clarifying all his doubts about the
organization and his job. It ensures that the new employee feels comfortable in the
 organization. It also makes him feel that he is welcomed, respected, and valued. This
motivates the new employee greatly.
5. Provides the necessary information: A comprehensive induction training program
helps the new employee get all the necessary information about the company and
clarifies the organization’s expectations on him. This helps him understand the
culture, work norms, policies and procedures of the organization, and thus enables
him to quickly adapt to the work environment.
6. Helps in establishing good communication: Induction training helps the new
employee in establishing good communication with the organization. As part of the
induction training program, the new employee is introduced to his direct supervisor,
other employees, leads, and directors of the organization. This makes him more
comfortable when he has to communicate with them later. [4]
11. Distinguish between fixed and variable costs giving examples of each.
Fixed Cost is the cost which does not vary with the changes in the quantity of
production units whereas Variable Cost is the cost which varies with the changes in
the number of production units. Fixed cost are time-related, i.e. they remains constant
over a period unlike Variable Cost which are volume related, i.e. they change with the
change in volume. Examples of fixed costs are rent, tax, salary, depreciation, fees,
duties, insurance, etc. Whereas examples of variable cost are packing expenses,
freight, material consumed, wages, etc. [4]

12. List any two basic economic systems excluding mixed economy.
Market economy
Traditional economy [2]

13. a.Define management by objectives.

Management by objectives (MBO) is a management model that aims to improve the
performance of an organization by clearly defining objectives that are agreed to by
both management and employees. According to the theory, having a say in goal
setting and action plans encourages participation and commitment among employees,
as well as aligning objectives across the organization. [2]
b. Identify any two Internal Economies of Scale
Technical economies of scale
Monopsony power
 Managerial economies of scale
Financial economies of scale
Accept any two [2]
14. a.State any two forms of assistance given to small businesses by the government
ofyour country.

Economic Development
Loan Programs
Research and Development
Infrastructure Improvement
Education and Training
Accept any two [2]

b. Assess the importance of parastatals to the economy of your country.

Advantages
The government controls the provision of strategic products.
Provides products at cheap prices.
Provides employment to people.
Reduces duplication of resources .
Implement government policies i.e. in terms of setting the prices of products.
Provide a source of income for the government thus reducing the tax burden.

Disadvantages
Operate at below full capacity , oftentimes at a loss.
They are oftentimes inefficient and waste resources.
Tend to provide poor quality products since they are monopolies e.g. ZESA and
its frequent power cuts.
There is political interference in their operation.
They are expensive to maintain and run.
There is a lot of bureaucracy which lead to further inefficiency. [4]

15. Explain any three qualities of a good leader. [6]

 Appreciative – A wise leader values their team and the person. Success is only
achieved with the help of others. What’s more, genuine appreciation provides
encouragement, develops confidence, and builds on strengths.

 Confident – Trust and confidence in leadership is a reliable indicator of

employee satisfaction. Good leaders aren’t afraid of being challenged. Their
confidence inspires.

 Compassionate – Compassion is a strength. A good leader uses compassion to

perceive the needs of those they leads and to decide a course of action that is
of greatest benefit to the person and the team.
  Courageous – Perhaps I should have put this at the top of my list? A
courageous leader is prepared to take risks when no one else will. A
courageous leader has faith in other people. A courageous leader raises
difficult issues, is ready to give difficult feedback, and share unpopular
opinions.

 Fair – Fairness is what people want. Good leaders don’t have favourites in the
team. They reward for results not partiality; they promise fairness.

 Flexible – The good leader is able to flex. They alter and adapt their style
according to the situation, context and circumstances they experience. They
welcome new ideas and change.

 Honest – Wise leaders are not afraid of communicating the truth to their
people. Honesty is about being truthful, having integrity, and building trust.
Honesty leads to better more productive relationships.

 Impartial – Good leaders are impartial. They recognise their biases, prejudices,
and predispositions. They also recognise biases in others and face them.

 Responsive – Good leaders are responsive to the needs of those they lead.
They adjust their behaviour to best match the situation. They listen to their
team; they value their team.
Accept any 3 [6]

16. a.Name any two methods of communication.

 Verbal

 Verbal communication (written and oral communication). [2]

b.Discuss the impact of informal communication to a clothing manufacturing

firm

Informal communication is information exchange that occurs outside of the official

communication processes of an organization such as events, meetings, formal
messages and documentation. The following are common types of informal
communication.
Grapevine
Information that is secret or speculative that is nonetheless spread through networks
of social connections. For example, rumors of a restructuring that spread to everyone
 in a firm before its officially announced. The grapevine is often highly inaccurate. As
such, organizations may try to prevent grapevine rumors by communicating official
information as early as possible.
Influence
Influence based on social connections as opposed to the
authority structures of an organization. For example, a manager who has more
influence than most executives in a firm due to their social network and influencing
skills.

Team Building
Informal communication is an essential element of employee engagement and team
building. Social connections and experiences can be one of the main benefits of a job
[5]

17. a.What is meant by the term demand?

Demand is an economic principle referring to a consumer's desire and willingness to

pay a price for a specific good or service. [2]

b.To what extent is the Product Life Cycle (PLC) concept useful to a marketing
manager?

The Benefits of Product Life Cycle

Strategies – The number 1 benefit of Product life cycle is that it can help you to define
the strategies which can be used based on the life cycle stage. So if a product is in
growth stage, then naturally a lot of advertising and investments are needed to keep
the product in the growth stage. Thus, strategizing becomes easier with the Product
life cycle.

Decision making – Whenever you are presented with multiple options, you need more
data to take a decision on which direction to move in. Product life cycle helps
managers with such decision making because it has the sales data as well
performance over time data. The combination of these 2 can help managers take
decisions faster.

Forecasting sales becomes easier – With enough experience, it is easier to forecast

how a product will move through the product life cycle and therefore, what levels of
sales will it achieve.

For example – If Samsung launches a new mobile phone, it knows that the mobile
will grow for 1 or 2 months, it will then reach maturity for 3 to 6 months and then the
model will start declining because consumers start searching for new models. On an
average, a single product in the portfolio of Samsung Smartphones survives for 2 – 3
years at the max, even though product series like Galaxy or Note might survive
longer.

Competitive advantage – A marketing manager can also run the product life cycle of
competitors products besides running their own (provided they have the sales data).
This gives a good insight into the preparations the competitors must be going through.
Accordingly, the firm doing this analysis has a competitive advantage as it can take
one step ahead of the competitor.

Example – Competitors product is in the introductory stage whereas the company’s

product is in the maturity stage. The mature product starts advertising and pulling
customers so that the newer product never takes off. Or alternatively, the company
can themselves introduce a new product which competes with the competitors
product.

Saying Goodbye – Its always hard to say goodbye especially to a product you
launched with so many hopes. However, the product life cycle is the perfect measure
of when to say goodbye to a product and it can help marketing managers with the
decision to eliminate a product from their portfolio when the sales has declined far
below the market average. Such products will demand investments but the returns will
be very poor.

Limitations of the Product Life Cycle

Fluctuations in sales data – One major problem in the Product life cycle is that the
graph is completely dependent on sales data. Thus if there are fluctuations in the sales
data, then the graph is useless and cannot be used to predict precisely the movement
of products or the overall product rise and decline. Such fluctuations can arise due to
production issues, seasonal sales of the product or due to any other reason.

Delay in sales data – Another limitation for the product life cycle is that there is delay
in collecting and analysing the sales data. Sales is generally recorded after the
movement of goods and besides this, the actual movement of one product from one
life cycle to another might be recorded months down the line. This is because of delay
in analytics.

Varying market conditions – There may be a variance in the sales data due to varying
market conditions. Therefore products which are hit in one place, might not be hit in
other regions or territories due to the differences in consumption patterns of those
territories.

Effect of other elements – There are various other elements which effect the product
life cycle. Product itself is just one P amongst the 4 P’s of marketing and there are
three other elements such as Price, Place, promotions or even people and packaging.
 Overall Marketing, Logistics, Price etc have an effect on the sales of the product and
hence the stages and their length in the PLC might vary based on these elements.
Not applicable to brands or services – Product life cycle is generally applicable to
products only and not applicable to brands or services. For example – Microsoft has
so many products which have come and gone but this does not mean that the brand
Microsoft is in Maturity stage or decline stage. Some products of the brand are
growing whereas others are maturing or declining. [4]

18. a.Why might a firm find it beneficial to carry out market research?

What is the purposes of marketing research

Marketing research can help a business do one or more of the following:

Gain a more detailed understanding of consumers’ needs – marketing research can

help firms to discover consumers’ opinions on a huge range of issues, e.g., views on
products’ prices, packaging, recent advertising campaigns

Reduce the risk of product/business failure – there is no guarantee that any new idea
will be a commercial success, but accurate and up-to-date information on the market
can help a business make informed decisions, hopefully leading to products that
consumers want in sufficient numbers to achieve commercial success.

Forecast future trends – marketing research can not only provide information
regarding the current state of the market but it can also be used to anticipate future
customer needs. Firms can then make the necessary adjustments to their product
portfolios and levels of output in order to remain successful. [4]

b.Discuss the importance of market segmentation to a sportswear supplier.

Marketers must remember that a market can be viewed and segmented in several
different ways. The biggest benefit of using segmentation approaches like
demographic or benefit segmentation is to understand the overall market and identify
the unfulfilled needs of the customer [5]

19 Distinguish between Last In First Out (LIFO) and First In First Out (FIFO)methods
of stockvaluation.

A method of stock valuation in which last received lot in hand is issued first is known
as LIFO. FIFO is a short form for First in, first out in which the inventory produced or
purchased first, is disposed off or sold out first. In LIFO, the stock in hand represents,
oldest stock while in FIFO, the stock in hand is the latest lot of goods. In LIFO, the
cost of goods sold (COGS) shows current market price while in the case of FIFO the
cost of unsold stock shows current market price. [4]
20. a. Explain any two factors which influence the choice of source of finance to be
used by a business.

The choice of the source of finance depends upon a number of factors further
depending upon the time, purpose, the type of organization etc. All these factors are to
be considered before making a choice of source of funds:
 Cost:
Both types of cost i.e. the cost of procurement of funds and cost of utilizing the funds
should be taken into account while deciding about the source of funds .
 Financial strength and stability of operations:
The financial strength i.e. sound financial position to repay the principal amount and
interest on the borrowed amount is a major factor for this choice. When the earnings
of the organization are not stable, fixed charged funds like preference shares and
debentures should be carefully selected as these add to the financial burden of the
organization.
 Form of organization and legal status:
The form of business organization and status affects the choice of a source for raising
money, e.g. a partnership firm cannot raise money by issue of equity shares.
 Purpose and time period:
A short-term need can be met through borrowing funds at low rate of interest through
trade credit, commercial paper, etc. whereas for long term finance, sources such as
issue of shares and debentures are more appropriate. Similarly, a long-term business
expansion plan should not be financed by a bank overdraft which will be required to
be repaid in the short term.
 Risk profile:
Business should evaluate each of the sources of finance on the basis of risk involved.
E.g. there is a least risk in equity as compared to a loan that has a repayment schedule
for both the principal and the interest. The interest must be paid even if the borrowing
company is incurring a loss.
 Control:
Issue of equity shares means risk of dilution of the control as equity share holders
enjoy voting rights. Thus, business firm should choose a source keeping in mind the
extent to which they are willing to share their control over business.
 Effect on credit worthiness:
The dependence of business on certain sources may affect its credit worthiness in the
market e.g. issue of secured debentures may affect the interest of unsecured creditors
of the company and may adversely affect their willingness to extend further loans as
credit to the company.
 Flexibility and ease:
Restrictive provisions, detailed investigation and documentation in case of borrowings
from banks and financial institutions may be the reason that a business organization
may not prefer it, if other options are readily available.
 Tax benefits:
The dividend on preference shares is not tax deductible, interest paid on debentures
and loan is tax deductible and may, therefore, be preferred by organizations seeking
tax advantage.

Accept any 2 [4]

b. Analyse the possible drawbacks to a firm of increasing cash inflows by selling
idle assets.

If a particular asset isn't helping your businesses overall sucess sale will not only ease cash
flow problems but also enhance the overall profitability of the business.
Buildings and machinery may be difficult to sell quickly and a business who is trying to make
a quick sale will usually accept a much lower price
Fundamental principle of business that a firm shouldn't sell fixed assets to improve liquidity
[4]

21. Explain any two benefits of motivation to a business enterprise.

Increase in productivity,
Reducing cost of operations, and
Improving overall efficiency.
Accept any two [4]

22. State any three ways of resolving disputes in a business enterprise.

 Consider the views of all parties involved
 Get to the root of the issue
 Accept people for who they are and who they are not
 Implement regular feedback meetings
 Have the team create a conflict resolution protocol where everyone buys in
 Have the team adopt communication
Accept any three [3]

23. Discuss the importance of decision trees in planning for a business enterprise.

Decision trees assist managers in evaluating upcoming choices. The tree creates a
visual representation of all possible outcomes, rewards and follow-up decisions in one
document. Each subsequent decision resulting from the original choice is also
depicted on the tree, so you can see the overall effect of any one decision. As you go
through the tree and make choices, you will see a specific path from one node to
another and the impact a decision made now could have down the road.

A drawback of using decision trees is that the outcomes of decisions, subsequent

decisions and payoffs may be based primarily on expectations. When actual decisions
are made, the payoffs and resulting decisions may not be the same as those you've
planned for. It may be impossible to plan for all contingencies that can arise as a
result of a decision. This can lead to an unrealistic decision tree that could guide you
toward a bad decision. Also, unexpected events may alter decisions and change the
payoffs in a decision tree. For example, if you expect that your parents will pay for
half of your college when deciding to go to school, but later discover that you will
have to pay for all of your tuition, your expected payoffs will be dramatically
different than reality.
[6]
 PAPER 2-ESSAYS
1. a) Explain the factors that are likely to determine the price of a product. [10]

Pricing is often one of the most difficult things to get right in business. There are several
factors a business needs to consider in setting a price:

Competitors – a huge impact on pricing decisions. The relative market shares (or market
strength) of competitors influences whether a business can set prices independently, or
whether it has to follow the lead shown by competitors

Costs – a business cannot ignore the cost of production or buying a product when it comes to
setting a selling price. In the long-term, a business will fail if it sells for less than cost, or if its
gross profit margin is too low to cover the fixed costs of the business.

The state of the market for the product – if there is a high demand for the product, but a
shortage of supply, then the business can put prices up.

The state of the economy – some products are more sensitive to changes in unemployment
and workers wages than others. Makers of luxury products will need to drop prices especially
when the economy is in a downturn.

The bargaining power of customers in the target market – who are the buyers of the
product? Do they have any bargaining power over the price set? An individual consumer has
little bargaining power over a supermarket (though they can take their custom elsewhere).
However, an industrial customer that buys substantial quantities of a product from a business
may be able to negotiate lower or special prices.

Other elements of the marketing mix – it is important to understand that prices cannot be
set without reference to other parts of the marketing mix. The distribution channels used will
affect price – different prices might be charged for the same product sold direct to consumers
or via intermediaries. The price of a product in the decline stage of its product life-cycle will
need to be lower than when it was first launched.
 b) To what extent is price the most important factor in the successful marketing of a
firm’s products?[15]
Price is important to marketers because it represents marketers' assessment of the value
customers see in the product or service and are willing to pay for a product or service. The
other elements of the marketing mix (product, place and promotion ) may seem to be more
glamorous than price, and thus get more attention, but determining the price of a product or
service is actually one of the most important management decisions. Here's why.

While product, place and promotion affect costs, price is the only element that affects
revenues, and thus, a business's profits . Price can lead to a firm's survival or demise.

Adjusting the price has a profound impact on the marketing strategy, and depending on the
price elasticity of the product, it will often affect the demand and sales as well. Both a price
that is too high and one that is too low can limit growth. The wrong price can also negatively
influence sales and cash flow .

Problems occur if the marketer fails to set a price that complements the other elements of the
marketing mix and the business objectives, as pricing contributes to how customers perceive
a product or a service. A high price indicates high quality. The term luxury comes to mind. If,
however, a firm wants to position itself as a low-cost provider, it will charge low prices. Just
as they do with high-end providers, consumers know what to expect when they see low
prices.

So, as you can see, it is important that a company sets the right price. A company's success
can depend on it. However, with so many factors to consider along with the lack of a crystal
ball that will show the effect of a price change, It isn't so easy to do.

2. “Break even analysis is of limited value to business.” To what extent is this statement
true? [25]

Breakeven Analysis

Break-even analysis is a practical and popular tool for many businesses, including start-ups.
However, you also need to know about the limitations of the method. Here is a summary of
the key issues from the perspective of a start up or new business, for whom breakeven
analysis is particularly relevant and important.

Strengths of breakeven analysis

Focuses entrepreneur on how long it will take before a start-up reaches profitability – i.e.
what output or total sales is required

Helps entrepreneur understand the viability of a business proposition, and also those who will
lend money to, or invest in the business

Margin of safety calculation shows how much a sales forecast can prove over-optimistic
before losses are incurred
Helps entrepreneur understand the level of risk involved in a start-up

Illustrates the importance of a start-up keeping fixed costs down to a minimum (higher fixed
costs = higher break-even output)

Calculations are quick and easy – great for giving quick estimates

Limitations of breakeven analysis

Unrealistic assumptions – products are not sold at the same price at different levels of output;
fixed costs do vary when output changes

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted
output too

Variable costs do not always stay the same. For example, as output rises, the business may
benefit from being able to buy inputs at lower prices (buying power), which would reduce
variable cost per unit.

Most businesses sell more than one product, so break-even for the business becomes harder
to calculate

Break-even analysis should be seen as a planning aid rather than a decision-making tool

3. Evaluate the significance of setting objectives to a business organisation. [25]

Provides direction for the customer and organisation

It’s important to be on the same page as your customer to create a common sense of purpose.
The customer feels like they are a part of the brand, not separated from it, when they are able
to see the course the brand is taking . Providing direction for the customer makes them feel
more secure and gives your organisation guidance for promotional activities.

Fundamental for human motivation within the organisation

Employees need guidance and motivation. By providing them with a target you give them a
reason to prove themselves. Nobody wants employees running around the office like a bunch
of lunatics because they have no idea where they’re supposed to go. Setting objectives
motivates them to achieve.

Keeps your performance in check

How do you know that your strategies producing epic results when you don’t have any
objectives to measure your results against? Of course, there’s a chance you may not be
meeting your objectives, but that’s okay, because now that you keep yourself in check, you
can improve your performance before anyone even notices that you were slacking.
Allows you to organise various marketing techniques towards a common goal

Within the marketing process, there are many factors that need to be accomplished such as
campaigns, strategies, research, reporting, content creation and development. If you have set
common goals then you will be able to aim and integrate all of these factors in the same
direction. Establishing this will make your brand that much stronger.

Encourages frequent communication within the organisation

Setting objectives leads to good communication. The organisation needs to constantly be

reassessing and re-evaluating the objectives they have set and how they can be increased or
improves. This means that the various departments have to communicate and coordinate with
one another in order to achieve this.

Bridges the gap between customer expectations and reality

Realistic and attainable objectives assure that your customer will not have expectations that
are impossible for you to meet. This allows you to set goals that are achievable and
measurable, and when you do achieve them, it builds up the customers trust in you. By not
setting objectives, you could be aiming for a successful campaign while the customer has
been preparing for world domination. Set objectives that bridge that gap.

Key driver of your strategies

And by key driver, we mean absolutely, one hundred percent necessary. By setting
objectives, you are able to come up with well-defined strategies that are guaranteed to make
you look like a marketing guru ( because that is what you are of course). Without setting
objectives, your strategies have no purpose and that’s definitely not what you’re going for. .

Challenges you to think creatively and strategically

We all care what we look like. So if you’re going to set bland, easy objectives that don’t
challenge you, you won’t look very impressive. We know you want your customers to be
blown out of the water, so setting objectives that require you to get your creative skills and
strategic thinking caps on, will undoubtedly produce an outcome that will be far greater than
the alternative.

Increases customer loyalty

As you begin to smash the objectives you set out of the ball park, your customers admiration,
satisfaction and loyalty towards your brand will begin to increase. You will be set apart, and
look better than everyone else.
4. Assess the importance of the following activities in an organisation.

a) Job evaluation [9]

Job evaluation is the systematic process for assessing the relative worth of jobs within an
organization. A comprehensive analysis of each position’s tasks, responsibilities, knowledge,
and skill requirements is used to assess the value to the employer of the job’s content and
provide an internal ranking of the jobs. It is important to remember that job evaluation is a
measurement of the internal relativity of the position and not the incumbent in the position.
This analysis can also contribute to effective job design by establishing the organizational
context and value of the job, and to hiring and promotion processes by providing job analysis
on skill and competencies required to successfully meet job requirements.

Job evaluation provides a rational and consistent approach for determining the pay of
employees within an organization. Paying fairly based on internal relative worth is called
Internal Equity. Job evaluation can be used independently, although it is usually part of a
compensation system designed to provide appropriate salary ranges for all positions. This
process will ensure an equitable and defensible compensation structure that compensates
employees fairly for job value.

b) on-the-job training [8]

On-the-job training is a form of training taking place in a normal working situation. It is a

one-on-one training located at the job site, where someone who knows how to do a task
shows another how to perform it. In antiquity, the work performed by most people did not
rely on abstract thinking or academic education. Parents or community members, who knew
the skills necessary for survival, passed their knowledge on to the children through direct
instruction.

On the Job Training is still widely used today. It is a frequently used method of training
because it requires only a person who knows how to do the task, and the tools the person uses
to do the task. It may not be the most effective or the most efficient method at times, but it is
normally the easiest to arrange and manage. Because the training takes place on the job, it can
be highly realistic and no transfer of learning is required. It is often inexpensive because no
special equipment is needed other than what is normally used on the job. One drawback is
that On the Job Training takes the trainer and materials out of production for the duration of
the training time. In addition, due to safety or other production factors, it is prohibitive in
some environment.

c) collective bargaining [8]

Collective bargaining is a process of negotiation between employers and a group of

employees aimed at agreements to regulate working salaries, working conditions, benefits,
and other aspects of workers' compensation and rights. The interests of the employees are
commonly presented by representatives of a trade union to which the employees belong. The
collective agreements reached by these negotiations usually set out wage scales, working
hours, training, health and safety, overtime, grievance mechanisms, and rights to participate
in workplace or company affairs.

The union may negotiate with a single employer (who is typically representing a company's
shareholders) or may negotiate with a group of businesses, depending on the country, to reach
an industry-wide agreement. A collective agreement functions as a labour contract between
an employer and one or more unions. Collective bargaining consists of the process of
negotiation between representatives of a union and employers (generally represented by
management, or, in some countries such as Austria, Sweden and the Netherlands, by an
employers' organization ) in respect of the terms and conditions of employment of
employees, such as wages, hours of work, working conditions, grievance procedures, and
about the rights and responsibilities of trade unions.

5 a) Explain the distinction between financial and management accounting. [5]

Financial accounting has its focus on the financial statements which are distributed to
stockholders, lenders, financial analysts, and others outside of the company. Courses in
financial accounting cover the generally accepted accounting principles which must be
followed when reporting the results of a corporation's past transactions on its balance sheet,
income statement, statement of cash flow, and statement of changes in stockholders' equity.

Managerial accounting has its focus on providing information within the company so that its
management can operate the company more effectively. Managerial accounting and cost
accounting also provide instructions on computing the cost of products at a manufacturing
enterprise. These costs will then be used in the external financial statements. In addition to
cost systems for manufacturers, courses in managerial accounting will include topics such as
cost behaviour, break-even point, profit planning, operational budgeting, capital budgeting ,
relevant costs for decision making, activity based costing, and standard costing.

b) Discuss the importance of ratio analysis to the following stakeholders:[20]

Ratios as a tool of financial analysis provide symptoms with the help of which any analyst is
in a position to diagnose the financial health of the unit. Financial analysis may be compared
with biopsy conducted by the doctor on the patient in order to diagnose the causes of illness
so that treatment may be prescribed to the patient to help him recover. Ratio analysis serves
the purposes of various interested parties of the financial statements. The interested parties
are top management, shareholders, creditors, employees, government and tax authorities.
With the use of ratio analysis, one can measure the financial condition of the business
concern and assess as whether the condition is strong, questionable or poor. As, already
hinted different groups of persons are interested in the affairs of any business entity,
therefore, significance of ratio analysis for various groups is different and may be discussed
as follows:
 i) Creditors

Creditors may broadly be classified into short-term and long term. Short-term creditors are
trade creditors, bills payables, creditors for expenses etc., they are interested in analyzing the
liquidity of the unit. Long-term creditors are financial institutions, debenture holders,
mortgage creditors etc., they are interested in analyzing the capacity of the unit to repay
periodical interest and repayment of loans on schedule. Ratio analysis provides, both type of
creditors, answers to their questions.

ii) Shareholders

Existing as well as prospective owners or shareholders are fundamentally interested in the (a)
long-term solvency and (b) profitability of the unit. Ratio analysis can help them by
analyzing and interpreting both the aspects of their unit. Long term solvency ratios ensure the
growth of the business concern and possibility of getting back their investments. Ratio
analysis will be useful for deciding whether the present financial position warrants further
investments or not.

iii) Workers

Employees are interested in fair wages, adequate fringe benefits and bonus linked with
productivity/profitability. Ratio analysis provides them adequate information regarding
efficiency and profitability of the unit. This knowledge helps them to bargain with the
management regarding their demands for improved wages, bonus etc. If financial position is
strong, then, the employees are getting wages, salaries and perquisites in time. They can get
adequate financial increment and promotion in time. There is a guarantee in employment.

iv) Management

Ratio analysis helps the management to assess the performance of the business concern and
improve the management functions such as planning, coordination and control. Some ratios
are calculated for a number of years. These are working as guide to the management.
Meaningful conclusions can be drawn from these ratios. The financial strength and weakness
of the business concern can be find out through calculating some ratios. It means that
communication is facilitated by ratios. If financial position is very weak, better co-ordination
is formulated by the top management for improving efficiency. Standard ratios can be used
for finding variations or deviations. Such variations can be found by comparing the actual
with the standards so as to take a corrective action at the right time.
v) Government

The government can prepare the industrial policies on the basis of financial position
information available from various units. Various loan scheme with subsidies can be chalked
out by the government. The government can assess the economic condition of the nation. The
contribution of each industrial sector to GDP is also identified by the government.

6. Why firms need finance

Businesses need finance to:-

Start a business-a new business will need finance to buy assets, materials and employ staff.
There will also need to be money to cover the running costs. (running costs = ongoing costs
such as electricity, rent, insurance)

Finance expansions to production capacity-As a business grows, it needs to be able to

produce more and new technology and machinery to cut costs and keep up with competitors.

To develop and market new products- a business needs to spend money on developing and
marketing new products e.g. to do marketing research and test new products in “pilot”
markets.
To enter new markets-When a business grows it may sell products into new markets. These
can be new geographical areas to sell to (e.g.export markets) or new types of customers.
This costs money in terms of research and marketing e.g. advertising campaigns and setting
up retail outlets.

Take-over or acquisition-When a business buys another business, it will need to money to

pay for the acquisition (acquisitions involve significant investment).

To pay for the day to day running of business-A business needs money to pay for day to
day items such as paying a supplier for raw materials or paying the wages or buying a new
printer cartridge.
7. Ratio Analysis Importance and Limitations

Ratio analysis is an important and useful technique to check upon the efficiency of an
organization. The management can arrive at important decisions by using ration analysis. The
ratio is used for expressing the mutual relation to different accounts consisting in the financial
statement.

In fact, any given data in the financial statements are not important in itself. To make its real
importance clear, it is to be expressed in referring to other figures. With the help of ratio, the
big figure or groups can be made short and simple. From this, the business activities are made
possible to analyze systematically.

Importance of Ratio Analysis

Helpful in assessing operating efficiency of the Business-The ratio can be used as the
measuring rod of efficiency. With the help of this, the evaluation of changes during different
period can be performed. In this way, the comparative efficiency of company can be
informed.

Helpful in measuring financial solvency-Ratios are useful tools for evaluating the liquidity
and solvency position of a concern. They point out the liquidity position of an organization to
meet its short and long term obligations.

Helpful in future forecasting-Ration analysis is very helpful in financial forecasting and

planning. The ration calculation of past years works guide line for the future.

Helpful in decision making-Ratio analysis is also very helpful for decision making. The
information provided by ration analysis is very useful for making decision on any financial
activity.

Helpful in corrective action-Ratio analysis can also point out the deficiencies of the
business so that corrective steps may be taken accordingly.

Helpful in comparing inter firm performance-Due to inter firm comparison, ratio analysis
also serves as a stepping stone to remedial measures. It helps management evolving future
'market strategies'.

Helpful in communication-Ratio is an effective means of communication. Different

financial ratios communicate the strength and financial standing of the firm to the internal
and external parties.

Helpful in cost control-From the use of ratio, it is possible to control the different costs of
the concern.
Limitations of Ratio Analysis

The ratio analysis contributes a lot to portray the financial position of a business. But they
suffer from various limitations.

Limited use of single ratio-A single ratio in itself is not important. It would not be able to
convey anything. For making a meaningful conclusion, a number of ratios which makes
confusion to analyst is to be calculated.

Difficult to interpreter-It is very difficult task to fix an adequate standard for compression
purpose. There are no rules of thumb for all ratios which can be accepted as norm. It renders
interpretation of the ration difficult.

Ignored qualitative factors- Ratio analysis is related to the quantitative analysis only but
not with a qualitative analysis because it is ignored by ratio analysis.

Limitation of accounting record-Ratio analysis is related to financial statement. Financial

statement itself is subject to limitations. This ratio analysis also suffers from the inherent
weakness of the financial statement.

Mislead by accounting procedure-There must be uniformity in the accounting procedure

used by the concerns which are going to be taken as a window dressed. So the analyst must
be very careful on making decision from ratio calculated from such financial statement.

Wrong conclusion-The analyst or the user must have knowledge about the concern whose
statements have been used for calculating the ratios. Only then the conclusion may be draw.
The conclusion may be wrong if it has been drawn.

Price level changes-While making comparisons of ratios, no allowance for changes in

general price level is made. A change in price level can seriously affect the validity of
comparisons of ratios computed for different periods.

Personal Bias-Ratios have to be interpreted and different people may interpret the same ratio
in different ways. Ratios are means to achieve a particular and but not an end itself. It totally
depends upon the user as what conclusion he draws on the basis of ratio calculation.

8. Causes of Cash Flow Problems

A cash flow problem arises when a business struggles to pay its debts as they become due.
Note that a cash flow problem is not necessarily the same as experiencing a cash outflow. A
business often experiences a net cash outflow, for example when making a large payment for
raw materials, new equipment or where there is a seasonal drop in demand. However, when
cash flow is consistently negative and the business uses up its cash balances, then the
problem becomes serious.
The main causes of cash flow problems are:

Low profits-There is a direct link between low profits or losses and cash flow problems.
Remember - most loss-making businesses eventually run out of cash.

Over-investment in capacity-This happens when a business spends too much on production

capacity. Factory equipment which is not being used does not generate revenues – so is often
a waste of cash.

Too much stock-Holding too much stock ties up cash and there is an increased risk that
stocks become obsolete (that is it can't be sold).

Allowing customers too much credit-Customers who buy on credit are called "trade
debtors" Offering credit to customers is a good way to build revenue, but late payment is a
common problem and slow-paying customers put a strain on cash flow

Overtrading (growing too fast)-This occurs where a business expands too quickly, putting
pressure on short-term finance. For example, a retail chain might try to open too many stores
too quickly before each starts to generate profits

Seasonal demand-Predictable changes in seasonal demand create cash flow problems – but
because they are expected, a business should be able to handle them

9. Compare and contrast the various methods of investment appraisal. To what

extent would it be true to say there is a place for each of them (25)
As capital investment decisions usually involve significant amounts of finance, it is important
to fully evaluate each decision using sound appraisal techniques. The main methods used to
evaluate investment in capital projects are:

Accounting rate of return.

Payback method.
Net present value.
Internal rate of return

These methods use different approaches to evaluating the value of an investment for an
organisation. While three of the methods focus on cash flow, the accounting rate of return
uses accounting profit in its appraisal calculation, providing a view of the overall profitability
of the investment.
The accounting rate of return method calculates the estimated overall profit or loss on an
investment project and relates that profit to the amount of capital invested and to the period
for which it is required. It is the profit that is directly related to the investment project that is
used in the appraisal process and thus costs or revenues generated elsewhere in the business
are excluded. A business will have a required minimum rate of return for any investment.
This is related to the cost of capital of the business. If an investment yields a return greater
than the cost of capital, then the investment would be considered suitable and profitable.
Accounting rate of return

The accounting rate of return is an average rate of return calculated by expressing average
annual profit as a percentage of the average value of the investment.

Its main advantages are

- It takes account of the overall profitability of the project.

- It is simple to understand and easy to use.
- Its end result is expressed as a percentage, allowing projects of differing sizes to be
compared.

Its main disadvantages are

-It is based on accounting profits rather than cash flows. The calculation of profit and capital
employed depend on which items of expenditure are treated as capital (on the balance sheet)
and as revenue (charged to the profit and loss account). Despite guidelines in this area, it can
be quite subjective. Also different accounting policies (depreciation) can produce different
profit and capital employed figures, thus allowing the profit and balance sheet figures to be
somewhat manipulated. It is for this reason that capital projects are also evaluated in terms of
cash flows.
-The ARR does not take into account the timing of cash flows. For example, project A may
give an ARR of 20 per cent compared to project B’s 18 per cent. However project A may be
an eight year project whereas project B may be a five year project. Investors may choose a
project that is slightly less profitable but which generates cash earlier.

- The ARR does not take into account the time value of money. It does not take into account
the cost of waiting to recoup the investment.

- The ARR takes no account of the size of the initial investment. A five per cent return on an
investment of $25,000 might be acceptable, however it may not be an acceptable return on an
initial investment of $10 million.

The payback method

The payback method of investment appraisal simply asks the question ‘ how long before I get
my money back? ’ In other words how quickly will the cash flows arising from the project
exactly equal the amount of the investment. It is a simple method, widely used in industry
and is based on management’s concern to be reimbursed on the initial outlay as soon as
possible. It is not concerned with overall profitability or the level of profitability.

Based on this method a business will simply reject a project with a payback period longer
than that required.

The advantages of payback are

-It is simple to understand and apply.

- It promotes a policy of caution in investment.
Its main disadvantages are

- It takes no account of the timing of cash flows ($100 received today is worth more than
$100 received in 12 months time). This is known as the time value of money and will be
considered in more detail below.

- It is only concerned with how quickly the initial investment is recovered and thus it ignores
the overall profitability and return on capital for the whole project. The accounting rate of
return incorporates the overall profitability of the investment.

The Net Present Value

The net present value approach involves discounting all cash outflows and inflows of a
capital investment project at a chosen target rate of return or cost of capital. The present value
of the cash inflows minus the present value of the cash outflows is the net present value. If
the NPV is positive, the project is likely to be profitable, whereas if the NPV is negative, the
project is likely to be unprofitable.

Its main advantages are

- It takes into account the time value of money.

- Profit and the difficulties of profit measurement are excluded.
- Using cash flows emphasises the importance of liquidity.
- It is easy to compare the NPV of different projects.

The main disadvantages associated with this method are

-It is that it is not as easily understood as the payback and accounting rate of return.
- Also, the net present value approach requires knowledge of the company’s cost of capital,
which is difficult to calculate.

Internal Rate of Return

The IRR method calculates the exact rate of return which the project is expected to achieve
based on the projected cash flows. The IRR is the discount factor which will have the effect
of producing a NPV of 0. It is the return from the project, taking into account the time value
of money. Its decision rule is to accept the project if it’s IRR is greater than the cost of
capital.

It main advantage is that the information it provides is more easily understood by managers,
especially non-financial managers.

Its main disadvantages are

-It is possible to calculate more than two different IRR’s for a project. This occurs where the
cash flows over the life of the project are a combination of positive and negative values.
Under these circumstances it is not easy to identify the real IRR and the method should be
avoided.

- In certain circumstances the IRR and the NPV can give conflicting results. This occurs
because the IRR ignores the relative size of investments as it is based on a percentage return
rather than the cash value of the return. As a result, when considering 2 projects, one may
give an IRR of 10 per cent and the other an IRR of 13 per cent. However the project with the
lower IRR may yield a higher NPV in cash terms and thus would be preferable.

Overall all four methods provide different approaches to investment appraisal and can
provided a difference outlook on a proposed investment. Thus it would seem prudent that
management should use all four methods in assessing investment projects. However the NPV
approach is the one approach with the least amount of weaknesses or disadvantages and
hence this approach should be used as the main guide in evaluating investment projects.

10.Define privatization. What are the advantages and disadvantages of

privatization?(25)

Privatization is the process of transferring ownership of a business, enterprise, agency, public

service or property from the public sector (government) to the private sector or to private
non-profit organizations. The term is also used in a quite different sense, to mean government
out-sourcing of services to private firms.

Government takes this step whenever any government enterprise does loss continuously or if
the enterprise decreases profit alarmingly or if the government thinks the enterprise would cut
more profit if it was operated by the private governing body.

Advantage of privatization

 Privatization places the risk in the hands of business or private enterprise.

 Private enterprise is more responsive to customer complaints and innovation.
 The government should not be a player and an umpire.
 Privatization provides a one off cash boost for govt. this can be spent on hospitals etc.
 Privatization leads to lower prices and greater supply.
 Competition in privatization increases differentiation.

Disadvantage of privatization

 Privatization is expensive and generates a lot of income in fees for specialist adviser
such as banks.
 Public monopolies have been turned into private monopolies with too little
competition, so consumers have not benefited as much as had been hoped.
 The nationalized industries were sold off too quickly and too cheaply. With patience a
better price could have been had with more beneficial results on the government’s
revenue. In almost all cases the share prices rose sharply as soon as dealing began
after privatization.
  The privatized businesses have sold off or closed down unprofitable parts of the
business and so services.
 Wide share ownership did not really happen as many small investors took their profits
and didn’t buy anything else.

However, there are also several reasons for what the government doesn’t give over an
enterprise to the private sector even after experiencing loss years after years.

11. What is labout turnover and its main causes of Labour Turnover?
Labour turnover is defined as the proportion of a firm’s workforce that leaves during the
course of a year.
The causes of labour turnover may be put into two groups, i.e.,
(1) Avoidable causes and
(2) Unavoidable causes

(a) Avoidable causes - These include:

(i) Dissatisfaction with jobs,

(ii) Dissatisfaction with remuneration,
(iii) Bad working conditions,
(iv) Odd hours of work,
(v) Lack of incentives and promotional avenues,
(vi) Lack of adequate recreational facilities,
(vii) Inadequate housing and medical facilities,
(viii) Poor worker-supervisor relationship,
(ix) Poor group relations,
(x) Discrimination between one worker and another, etc.
(b) Unavoidable causes - Unavoidable causes may be personal or impersonal. These
include:
(i) Personal betterment,
(ii) Retirement, death or disablement,
(iii)Domestic responsibilities, i.e., to look after old parents,
(iv)Discharge due to factors like unsuitability, insubordination, and negligence,
(v) Marriage in case of women workers, etc.

Every organisation must see that leaving due to avoidable causes is prevented.
 CASH FLOW PROBLEMS AND SOLUTIONS

Most small businesses encounter a cash flow problem at one time or another. Fortunately,
most cash flow problems can be prevented with a bit of preparation and the right strategy.

This article lists the 5 most common cash flow problems, along with ways to solve them.

1. High overhead expenses

Overhead expenses are the costs of running a business that are not tied directly to selling a
specific product or service. Examples of overhead include rent, telephone, utilities, etc.
Sometimes overhead expenses get out of hand relative to the revenue the business produces.
High overhead expenses can hurt your business’s cash flow.

High overhead expenses are particularly challenging because they are persistent. These
expenses affect your cash flow every day until the problem is corrected.

Solution

The solution to this problem is simple, but it is not easy. Audit your expenses and cut back
where you can. Be careful not to cut too much, as that approach could also hurt the company.

If you cannot cut back, consider cheaper options. In fact, every business should audit
expenses regularly to ensure that overhead expenses stay in line.

2. Slow-paying invoices

Slow-paying invoices are a common cause for cash flow problems. As a small business, you
have to offer 30-day to 60-day payment terms to clients. However, small companies can’t
always afford to wait this long for payment. They need money sooner. Eventually, slow
payments create a financial problem that can seriously affect your business even if it’s
growing quickly .

Solution

There are two ways to solve this problem. One solution is to provide clients with an incentive
to pay faster. Offering a 2% discount in exchange for a payment in 10 days can motivate
clients to pay quickly. However, this incentive needs to be negotiated directly with each
client.

An alternative is to use invoice factoring to finance slow-paying invoices. This method

improves cash flow immediately and enables you to offer payment terms with confidence. To
learn more about factoring, read this article.

3. Excess inventory

This problem can affect companies that manufacture goods or re-sellers that keep a
warehouse stocked with products. If too much product is made or purchased, it ends up
sitting on shelves and tying up cash flow.
Solution

Fine-tune your inventory so that you stock items for the shortest possible time before being
sold or used in the manufacturing process. The amount of product you keep in stock depends
on your volume, sales forecasts, available cash, and supplier capabilities. Monitor inventory
levels carefully. Having key products out of stock is a sure way to lose clients.

Companies that re-sell products can also use purchase order financing to finance large sales
that exceed their cash flow capabilities. When used correctly, purchase order financing can
improve your cash flow and allow you to finance the supplier expenses associated with large
orders.

4. Too much bad debt

Bad debt occurs when you sell product, or provide a service, to a client who does not pay.
Bad debt presents an obvious harm to your cash flow and your profitability.

Solution

The solution to this problem is to review the commercial credit of your clients before you
extend payment terms. Provide terms only to clients who have good credit and a solid
payment record. Others should prepay until they have built a track record with your company.
This strategy may cost you some sales. However, it will only cost you clients who were
deemed credit risks to begin with.

5. Insufficient gross margins

Small businesses sometimes sell their products and services for such low prices that they
have low, or negative, gross margins. This scenario often happens in highly competitive
environments with constant pricing pressure. It usually affects small business owners who do
not have a clear understanding of their costs.

Solution

To solve this problem, audit all your products and services to determine the all-inclusive cost
of delivering your products and services. This step is difficult but necessary. Once you have
determined the all-inclusive cost, do the following:

1. If you can, raise the prices of products/services that have weak margins
2. If you can’t raise prices, consider dropping products/services that have weak margins
3. Ensure that all proposals price your products according to their cost
 WHY BUSINESSES NEED FINANCE

Right from the moment someone thinks of a business idea, there needs to be cash. As the business
grows there are inevitably greater calls for more money to finance expansion. The day to day running
of the business also needs money.

The main reasons a business needs finance are to:

Start a business

Depending on the type of business, it will need to finance the purchase of assets, materials and
employing people. There will also need to be money to cover the running costs. It may be some time
before the business generates enough cash from sales to pay for these costs. Link to cash flow
forecasting.

Finance expansions to production capacity

As a business grows, it needs higher capacity and new technology to cut unit costs and keep up with
competitors. New technology can be relatively expensive to the business and is seen as a long term
investment, because the costs will outweigh the money saved or generated for a considerable period
of time. And remember new technology is not just dealing with computer systems, but also new
machinery and tools to perform processes quicker, more efficiently and with greater quality.

To develop and market new products

In fast moving markets, where competitors are constantly updating their products, a business needs to
spend money on developing and marketing new products e.g. to do marketing research and test new
products in "pilot" markets. These costs are not normally covered by sales of the products for some
time (if at all), so money needs to be raised to pay for the research.

To enter new markets

When a business seeks to expand it may look to sell their products into new markets. These can be
new geographical areas to sell to (e.g. export markets) or new types of customers. This costs money in
terms of research and marketing e.g. advertising campaigns and setting up retail outlets.

Take-over or acquisition

When a business buys another business, it will need to find money to pay for the acquisition
(acquisitions involve significant investment). This money will be used to pay owners of the business
which is being bought.

Moving to new premises

Finance is needed to pay for simple expenses such as the cost of renting of removal vans, through to
relocation packages for employees and the installation of machinery.

To pay for the day to day running of business

A business has many calls on its cash on a day to day basis, from paying a supplier for raw materials,
paying the wages through to buying a new printer cartridge.
 CHOOSING THE RIGHT SOURCE OF FINANCE

A business needs to assess the different types of finance based on the following criteria:

Amount of money required – a large amount of money is not available through some sources and
the other sources of finance may not offer enough flexibility for a smaller amount.

How quickly the money is needed – the longer a business can spend trying to raise the money,
normally the cheaper it is. However it may need the money very quickly (say if had to pay a big wage
bill which if not paid would mean the factory would close down). The business would then have to
accept a higher cost.

The cheapest option available – the cost of finance is normally measured in terms of the extra
money that needs to be paid to secure the initial amount – the typical cost is the interest that has to be
paid on the borrowed amount. The cheapest form of money to a business comes from its trading
profits.

The amount of risk involved in the reason for the cash – a project which has less chance of leading
to a profit is deemed more risky than one that does. Potential sources of finance (especially external
sources) take this into account and may not lend money to higher risk business projects, unless there
is some sort of guarantee that their money will be returned.

The length of time of the requirement for finance - a good entrepreneur will judge whether the
finance needed is for a long-term project or short term and therefore decide what type of finance they
wish to use.

FEATURES OF FORMAL ORGANIZATION

Formal organization has the following features:

Deliberately created structure : It is deliberately created organization structure that defines

official relationships amongst people working at different job positions.

Job-oriented: It focuses more on jobs than people. It allocates jobs to people and defines the
structure of relationships amongst them for achieving the formal organizational objectives.

Division of work : Work load is divided into smaller units and assigned to individuals on the
basis of their skills and abilities. Decision of work amongst people results in specialization
and increases organizational output.

Departmentation: Departmentation is the basis or foundation of organization structure that

is, organization structure depends upon departmentation. Departmentation refers to division
of work into smaller units and their re-grouping into bigger units (apartments) on the basis of
similarity of activities. The functional departmentation divides organization structure into
production, finance, personnel and marketing departments. Departmentation helps in fixing
responsibly of various department heads.
Formal authority : People at various positions exercise authority by virtue of their position
in the organizational hierarchy. Authority is linked to position within the organization, and,
though it, in the person occupying the positing. It involves the right to command, to perform,
to make decisions and to spend resources.

Delegation: Work is officially delegated from top levels to lower levels. The work load is
divided into various units, a part is assigned to subordinates and authority is given to them to
carry out the assigned task. This concept of division of work and tits assignment to people
down the scalar chain is called delegation. “Delegation is the process by which a manager
assigns tasks and authority to subordinates who accept responsibility for those jobs. “

Coordination: Managers coordinate or integrate the activities of individual and units into a
concerted effort so that departments and individuals work towards common goals. It is
necessary for manages to coordinate the activates of organization by communicating
organizational goals to each department, setting departmental goals and liking the
performance of each department with others so that a all the departments collectively
contribute towards the organizational goals. Coordination is “ the process of linking the
activities of the various departments of the organization.”

Based on principles of organizing : Formal organization is based on formal principles of

organizing.

FEATURES OF INFORMAL ORGANIZATION

Informal organization has the following features:

Unplanned structure: This structure is not planned by top managers. It arises spontaneously
out of formal interactions amongst people. When people formally interact with each other,
they tend to discuss their interests, attitudes, hobbies, beliefs etc.and in the course of doing
so, form groups whose goals are different from formal organizational goals. Their informal
relationships gradually develop an informal organization that co-exists with the formal
organization.

Fulfilment of social needs: The basic purpose of informal organization is fulfillment of

social and personal needs of people. People share common thoughts, feelings and interests
different from formal organizational goals. Their social needs of friendship, love and support
are strengthened by informal organization.

No formal organization structure: A formal organization has a definite saturate, It is

depicted by lines and boxes on the organization chart (organization chart is a visual
representation of organization structure). Informal organizaiton does not have any formal
structure; It cannot be precisely shown on the organization chart. Relationships amongst
people change according to changes in their interests and liking or each other. Workers of
production department may consult sales managers for solving their personal problems rather
than production managers and vice versa. There are no superiors and subordinates in informal
organization. People contact each other in all forms; vertical, horizontal and diagonal.
Informal leaders:

Leaders are informally elected by group members. They strongly influence group activities
and contribute to formal goals positively or negatively.

Informal communication system: The system of communication is informal; It does not

follow the chain of command. It operated along with formal channels of communication and
works faster than the formal channel. It transmits the messages at a much faster spread
though rumors may also spread along with formal massages.

Communication flows in every direction; vertical, horizontal, diagonal and connects propel
throughout the organization.

No rules and regulations: It has no fixed rules and regulations that govern functions of the
organization. Rules are framed and changed by people according to their convenience.

No fixed tenure: It is formed at the will of the people and dissolves at their will. It does not
operate for a fixed time period. Desolation of informal organization also does not follow any
legal procedure.

STAFF TRAINING

One important aspect of business is training the staffs as they are one of the valuable assets. It
is mandatory to train the staffs with skill and knowledge required to meet the business
objectives. With the assistance of training, the best can be got from the staffs and they are
made even more productive. By this way job satisfaction is achieved and the staffs also
retains back which avoids recruitment.

Staff training plan is an important aspect of business and should be implemented at regular
intervals. Here are discussed a few aspects about staff training like importance , continuous
training advantages and disadvantages etc.

IMPORTANCE OF STAFF TRAINING:

Once orientation takes place, there is need for training of employees in any work place. In
order to improve the capabilities, skills and knowledge of the staff to do a specific job, staff
training is important.

With the help of such training the quality performance is gained as output from employees
and also the thinking of the staffs are molded. Staff training is important for the following
reasons.

Enhancement in performance:

When weakness and shortcomings are identified, then employees are required to be trained.
Hence employee training is important as it amplifies skills and helps the staffs to gain new
skills. It has become important for companies to focus on training needs for individuals.
Enhanced productivity:

With the state of the art situations, productivity mainly depends on the technology being used
rather than the staffs. Training and development these days focuses how well the employees
are making use of technologies. The employees are trained on existing technologies where
they abandon the out-of-date ones. By this way of training, work runs in an efficient manner
and hence productivity increases.

Tackle shortcomings:

There are shortcomings faced by every staff and hence training for employees is important as
it helps them face any shortcomings . Training can be given appropriate to a specific group so
that they turn out to be skilled.

Employee satisfaction:

Training is important in an organization as organizations that arrange for training are said to
have satisfied their employees. Training must be ones that are relevant for employees and
they have something to educate themselves.

They are up-to-date:

Whether it is work, training, methods or legislation there are many things that keep changing
in work place. With the aid of continuous training, the staffs as well as business do not lag
behind and they work at the best every day and also in future.

Sharing higher knowledge:

Promotion and career growth are some parameters that are mandatory at workplace. By
conducting training, the employees are able to share knowledge about higher job postings and
the responsibilities they handle.

Retain star players:

Staff training important as they help to enhance skill set and improve performance of staffs.
By this way retention is increased and star players are kept back in the organization.

Consistency:

With the help of training program for employees, the employees possess a consistent
experience along with background knowledge. The consistency of an employee is associated
with the organizations policies and procedures.

Safety in industries:

Staff training is important so that they handle machinery in a safe manner . Such trained
staffs are well known about safety devices in the industry and result in less industrial
accidents.
 BENEFITS OF TRAINING

Improves employee morale: With the help of training, the employees gain job satisfaction
and security. When a staff is very much satisfied, then his morale is greater.By this way the
employee contributes more to organizational success and hence the absenteeism and turn over
would be less.

Minimal supervision: When an employee is trained he is well accustomed to the job and
hence requires very less supervision. By this way times and efforts are reduced.

Opportunities for promotion: At times of training, employees get the chance to acquire
enhanced skills and knowledge which offers them a clear way and enhanced opportunity for
promotion. By this way they become an asset for the organization. This is one of the benefits
of training staff.

Productivity increases: With trained employees the efficiency is increased which in turn
increases the productivity. Quantity as well as quality performance is achieved by the
employees as they are well trained.

Better economic usage: Trained staff would have the knowledge to make best economic
usage of materials and equipment’s. There will be less wastage, apart from accidents;
damaged equipment’s in the organization would be minimal in the case of trained employees.

Uniform procedures: The best methods required for the specific work are standardized and
adopted by all the staff as an effect of training. With the assistance of standardization, there is
improved level of performance.

Systematic usage of skills: The main benefit of a training program in an organization is that
it helps to lessen the learning time so that a level of performance is reached. The employees
can learn from training methods instead of following others or by trial and error method.

New inventory skills are developed: An organization may be in need of new skills for its
operation and may face hindrance with employment. Training can be beneficial in picking out
the perfect fit and eradicating defects if present in the recruitment process.

Another good suggestion would be to pick employees from within the organization and train
them rather than recruiting new employees.

Updated with latest technology: There are constant changes with the industry and hence it
is important for employees to be updated with the latest trends. It is quite often that new
technology pops up and hence one off training session would not be complete.

In order to make sure that the organization is making use of latest technology, regular training
is conducted.
 ADVANTAGES OF STAFF TRAINING:

There can be many training and development advantages of the staff as they could use it for
their company’s growth.

Stay ahead of competitors: In order to stay ahead of competitors it is mandatory to monitor

that your employees are advancing. By undergoing staff training, the organization with its
employees would definitely be ahead of their competitors.

Keep up with industry changes: In order to be parallel with all industries and not left
behind, staff training is necessary. With the help of staff training the industry is said to be
abiding by the industry regulations and also makes sure that the employees are updated with
the latest skills.

An opportunity to learn: When staff training is provided in the development path, the
employees would have the interest to learn, implement the new strategies learned.

Grabs in new talent: The aim for any organization would be to possess the best talents in
their industry. With the help of staff training not only employee retention is attained, best
talents from outside are also grabbed in. With staff training, good image is developed for
business which is desired by most job seekers.

Self-confidence: There is more of self-confidence for employees when staff training is

offered. There is more of adjustment amongst workers and the employees are not humiliated
in the presence of seniors. With self-confidence the employees are able to put in best efforts
for future.

Positive attitude: With the help of staff training, there is positive attitude amongst
employees, along with enhanced motivation levels which enhances the result of the
organization.

Group effort: Staff training not only trains the staff but also helps them understand about
working with a team with complete efforts. With such training group efforts are achieved.

Handles customers well: Trained staffs are ones who know the techniques to handle
customer in the right manner. By this way the business is run in the better manner where
customer inquiries, sales and lot more are handled effectively.
 DISADVANTAGES OF STAFF TRAINING:

Waste of time and money: There is surely waste of valuable resources, as the organization
needs to spend money, time, and hire other people for training. They also need to pay wages
for both the trainer as well as the employees.

Increased stress: In order to keep the staffs up to date with latest trends and knowledgeable
in their specific area, training staffs for more number of hours can make them stressed. As
they are stressed, their job levels may go down too.

Too much of theory:

Training programs for certain departments are too much of theory than application. These
kinds of lectures make it tough for employees to learn the subject. Thus theoretical lectures
makes the whole training program boring when it’s for prolonged period.

Loss of interest: At times of training sessions which lead for long hours, employees are
bored and aren’t interested in their session. Data and information is thus not retained for
employees who do not listen. When training programs are conducted continuously with same
data or theory again and again, the employees lose interest .

Leave for new job: When an employee is trained and updated with all the latest knowledge
and skills. They are prepared and ready to jump to another organization which offers good
perks and salary.

Time requirements: The other main important disadvantages of employee training is that
there may not be enough time for staff training with the daily hectic schedule.

There are many organizations who dedicate very less time, which may not be helpful in
making the employee productive or knowledgeable. With very less time, the trainer usually
rushed through the main parts of job which is to be understood by the employees.

Control of training: When your responsibility of training for new employees is delegated to
some other trainer or employee, then it is mandatory to think about what the employees are
learning. The trainer may not be a skilled and talented one like you; hence the employees
may pick some bad habits and end up with quality less training. This would spoil the
complete training. Hence having a good control over training is necessary.

In conclusion the mentioned are a few advantages and disadvantages of staff training,
benefits and importance of staff training. Staff training is mandatory and can be forced to be
conducted in all organizations for the various benefits it brings in. The best part of staff
training is that the organization and productivity increases. The organization earns a special
image by providing quality training for the organization. Higher officials and managers must
thus focus on such training and make it mandatory in organizations at required sessions.
 GROWTH STRATEGIES IN BUSINESS

Most small companies have plans to grow their business and increase sales and profits.
However, there are certain methods companies must use for implementing a growth strategy.
The method a company uses to expand its business is largely contingent upon its financial
situation, the competition and even government regulation. Some common growth strategies
in business include market penetration, market expansion, product expansion, diversification
and acquisition.

Market Penetration

One growth strategy in business is market penetration. A small company uses a market
penetration strategy when it decides to market existing products within the same market it has
been using. The only way to grow using existing products and markets is to increase market
share, according to small business experts. Market share is the percent of unit and dollar sales
a company holds within a certain market vs. all other competitors. One way to increase
market share is by lowering prices. For example, in markets where there is little
differentiation among products, a lower price may help a company increase its share of the
market.

Market Expansion

A market expansion growth strategy, often called market development, entails selling current
products in a new market. There several reasons why a company may consider a market
expansion strategy. First, the competition may be such that there is no room for growth
within the current market. If a business does not find new markets for its products, it cannot
increase sales or profits. A small company may also use a market expansion strategy if it
finds new uses for its product. For example, a small soap distributor that sells to retail stores
may discover that factory workers also use its product.

Product Expansion

A small company may also expand its product line or add new features to increase its sales
and profits. When small companies employ a product expansion strategy, also known as
product development, they continue selling within the existing market. A product expansion
growth strategy often works well when technology starts to change. A small company may
also be forced to add new products as older ones become outmoded.

Diversification Strategies

Growth strategies in business also include diversification, where a small company will sell
new products to new markets. This type of strategy can be very risky. A small company will
need to plan carefully when using a diversification growth strategy. Marketing research is
essential because a company will need to determine if consumers in the new market will
potentially like the new products.

Acquisition Strategies
Growth strategies in business can also includes an acquisition. In acquisition, a company
purchases another company to expand its operations. A small company may use this type of
strategy to expand its product line and enter new markets. An acquisition growth strategy can
be risky, but not as risky as a diversification strategy. One reason is that the products and
market are already established. A company must know exactly what it wants to achieve when
using an acquisition strategy, mainly because of the significant investment required to
implement it.

ORGANIZATIONAL GROWTH

Growth is something for which most companies strive, regardless of their size. Small firms
want to get big, big firms want to get bigger. Indeed, companies have to grow at least a bit
every year in order to accommodate the increased expenses that develop over time. With the
passage of time, salaries increase and the costs of employment benefits rise as well. Even if
no other company expenses rise, these two cost areas almost always increase over time. It is
not always possible to pass along these increased costs to customers and clients in the form of
higher prices. Consequently, growth must occur if the business wishes to keep up.

Organizational growth has the potential to provide small businesses with a myriad of benefits,
including things like greater efficiencies from economies of scale, increased power, a greater
ability to withstand market fluctuations, an increased survival rate, greater profits, and
increased prestige for organizational members. Many small firms desire growth because it is
seen generally as a sign of success, progress. Organizational growth is, in fact, used as one
indicator of effectiveness for small businesses and is a fundamental concern of many
practicing managers.

Organizational growth, however, means different things to different organizations. There are
many parameters a company may use to measure its growth. Since the ultimate goal of most
companies is profitability, most companies will measure their growth in terms of net profit,
revenue, and other financial data. Other business owners may use one of the following
criteria for assessing their growth: sales, number of employees, physical expansion, success
of a product line, or increased market share. Ultimately, success and growth will be gauged
by how well a firm does relative to the goals it has set for itself.
 MANAGEMENT BY OBJECTIVES

Management by Objectives ( MBO) is a personnel management technique where managers

and employees work together to set, record and monitor goals for a specific period of time.
Organizational goals and planning flow top-down through the organization and are translated
into personal goals for organizational members.

ADVANTAGES OF MANAGEMENT BY OBJECTIVES (M.B.O)

1. M.B.O. forces the managers not simply to plan activities but plan for results . The
managers define the objectives while formulating plans. When once goals are set up clearly,
they act as incentives and standards for control purposes.

2. M.B.O. enables the managers to concentrate on really important and profit influencing
tasks instead of on tasks which could have little impact on overall results.

3. M.B.O. makes clear organizational goals and structures . It identifies the key result areas
and make individuals who are in-charge of them responsible for the attainment of goals.

4. Employees commit themselves to perform the work assigned to them as agreed and
expected. They know their objectives clearly and also know how to move towards its
achievements. Thus they need not wait for any instructions, directions, guidance from their
superiors.

5. It helps to develop effective control. Control involves establishing own standards,

evaluating performance and taking necessary remedial action if there are any deviations. The
well defined objectives serve as the best standard for effective control.

6. It helps the management to formulate better management training programs on the basis of
performance reviews.

7. Since the subordinates participate and are directly involved in setting goals, there is a
greater commitment on their part for performance . People become willing and enthusiastic
masters of their own fate.

8. M.B.O. helps in more effective planning . Actionable objectives are established with
planning, and result-oriented planning makes real sense. It forces managers to think of
planning by results, rather than merely planning activities. To achieve given results, the
managers are also required to give full consideration to the question of the personnel and the
resources needed.

9. M.B.O. aids in developing effective controls: The standards/yardsticks or reach-points are

laid down for measurement of performance, through which actual performance can be
measured and deviations corrected in time. Through these standards, performance
measurement of different cadres of people can be possible.

10. M.B.O. provides more confidence to the management in managing its task , the reason
being that the management is more sure of what it wants to do and where it wants to go. It
can, therefore, communicate in a better way with different rungs of organizational hierarchy.
Better communication is an important benefit of M.B.O.

DISADVANTAGES OF MANAGEMENT BY OBJECTIVES

1. The philosophy of M.B.O. should be well understood by managers. If the persons who are
to operate management by objectives do not fully understand the philosophy of M.B.O., it is
no wonder that M.B.O. fails.

2. If the goals are to be attainable, they should be realistic. If the goals are vague uncertain
and unambiguous managers may not be in a position to carry out their work successfully.

3. Setting up of verifiable goals is not an easy task . It involves lot of time , study, effort and
work.

4. M.B.O. lay emphasis on short-term goals and neglect the long range goals. But adequate
attention towards both the goals should be given.

5. Effective interactions between the superiors and subordinates may not be possible due to
differences in their status.
 CASE STUDIES

AND

DATA RESPONSE

Tinofambanevanofamba

2018 PRODUCTION
 Section A: Data Response [25 marks] NO.1
Read the passage below and answer all the questions that follow.
Tomtit Cuisine is a sole proprietorship established ten years ago by Tom, a retiree from a
leading hotel. It provides catering services for special occasions like weddings, graduation
ceremonies and seminars. The business has a staff compliment of two chefs and four waiters.

Tom has always wanted his business to remain small. His major reason has been to allow him
to retain control of the business. He believes that sales and profit of the business have always
been steady due to his personal involvement. His employees, however, want Tom to let the
business grow. They view growth as a way of ensuring higher salaries and job security.

Tom’s philosophy of wanting the business to remain small contradicted with that of his
employees who expected the business to grow. He now intends to dispose of the business and
has made this known to his employees. The employees are worried about the possibility of
job losses, even though Tom has assured them that their jobs will be secure under a new
owner. Most these workers now regret having been employed by Tomtit Cuisine in the first
place.

Meanwhile, Tom has engaged an accountant to prepare the final accounts of the business.
The following is an extract of The Statement of Financial Position (Balance Sheet) drawn by
the accountant.

Tomtit Cuisine

Statement of Financial Position (Balance Sheet) extract as at 31 December 2013

Non current assets: Equipment 50 000

Motor vans 40 000
Goodwill 10 000
Current Assets: Inventory (stock) 20 000
Trade receivables (debtors) 20 000
Cash 10 000
Current Liabilities: Trade payables 20 000

Tom is looking forward to disposing of the business at the best possible value.

(a) From the information in the passage, calculate the

(i) current ratio, [3]

(ii) quick (acid test) ratio. [3]
(b) Comment on the liquidity position of Tomtit Cuisine, from your results in (a). [3]
(c) Explain why employees of Tomtit Cuisine should worry about the sale of the business.[6]
(d) Evaluate the importance of growth to a business such as Tomtit Cuisine. [10]
 Section A: Data Response [25 marks] NO.2
Read the passage below and answer all the questions that follow.
Furnitec Inc. is a manufacturing and supplier of home and office furniture. The company
manufactures the furniture at its head office in Harare and distributes it through its retail
shops in Bulawayo and Mutare.

The business’s main market has been local households and newly-established firms. The
company’s two furniture retail shops are strategically located near the borders to facilitate
supply of furniture to neighbouring countries if prospects arise. However, the economic
recession faced by the country is negatively affecting Furnitec Inc.’s operations. Worst
affected by viability problems is the company’s Mutare Branch.

Workers at Mutare branch are restless amid speculation of the possibility of retrenchment.
Consequently, staff motivation is at its lowest ebb and this has further reduced performance
of the branch. Rapid fall in consumer income has reduced demand for furniture and
competitors have responded by reducing furniture prices significantly.

Management has prepared interim accounts to analyse the impact of Mutare branch’s
viability problems on the performance of the company. Appendices below show extracts
from those accounts.

Appendix 1: Balance Sheet Extract of Furnitec Inc. as at 30 June 2006

$million
Current assets:
Stocks 3
Debtors 2
Cash 0.5
Current Liabilities:
Trade payables 10

Appendix 2: Table of Revenues and Costs for the Retail Branches

Sales 200 100 300

Variable Costs 140 60 200
Allocated fixed costs 70 20 90
Profit/(Loss) -10 20 10
a) From Appendix 1, calculate two different liquidity ratios and comment on this liquidity
position. [4]

b) i) From Appendix 2, calculate the contribution for each branch. [4]

ii) Using calculations from b) i) and any other calculations, advise Furnitec Inc’s
management whether to close down the Mutare branch or not. [7]

c) Discuss other factors that might be considered before deciding whether or not to close
down the Mutare branch. [10]
 ‘A’ LEVEL BUSINESS STUDIES EXAM
FORM 6
PAPER 1
TIME: 3 HOURS

SECTION A [70 Marks]

Answer all questions

1 (a) Define the following terms:

(i) management buy-out [2]

(ii) contracting out [2]

(b) Distinguish between a public limited company and a public corporation . [4]

2. (a) List any two types of production methods. [2]

(b) How can a manufacturer of cellphones improve the productivity of his workers? [4]

3. Explain any two communication problems that are beyond the receiver’s control. [4]

4 (a) State and explain any two non-financial methods of motivation. [4]
(b) Comment on Herzberg’s ideas on motivation. [5]

5. Is democratic leadership necessarily a good management style? [4]

6. (a) What is niche marketing? [2]

(b) Evaluate the usefulness of market skimming. [4]

7. (a) What is benchmarking? [2]

(b) Assess the significance of maintaining quality in a business organisation. [5]

8. (a) Outline two advantages of the payback method. [2]

(b) (i) What is investment appraisal? [2]
(ii) Analyse the importance of Net Present Value as a method of evaluating
projects. [4]

9. Show how a producer of flour can benefit from bulk-buying economies of scale. [3]

10. (a) State any three factors a firm has to consider when choosing a supplier. [3]
(b) Outline any two qualitative and any two quantitative benefits derived from quality
Circles. [4]

11. (a) Identify two stakeholders who are interested in the accounts of a firm. [2]
(b) Define the following terms:
(i) zero budgeting, [1]
(ii) cost centre. [1]

12. Distinguish between money market and capital market. [4]

 Section B [ 30 Marks ]

Read the following case study and answer all the questions that follow.

Plastic Trades Ltd

Plastic Trades Ltd is a company that manufactures quality plastic products in Zimbabwe
which sells profitably in the local market. Amongst its products are plumbing materials,
domestic utensils and gadgets, poultry and irrigation equipment. Most of the company’s raw
materials and chemicals are imported from South Africa and China.

In a recent strategic planning board meeting, several ideas were brought up and analysed. The
marketing manager suggested that the company would generate more revenue by opening up
trade opportunities in the Southern African Development Community (SADC).

However, the finance manager is worried about the financing of the project due to the current
unfavourable financial position of the company.

Mr Power, the Chief Executive Officer for Plastic Trades Ltd, keen to launch their products
in the neighbouring countries said, “ I am aware our firm is facing liquidity problems, but let
me assure you not to worry much because our long time friends in the finance sector are
prepared to give us the support we need. Our major challenge is the fluctuating exchange
rates.” She then advised the Finance Manager to file a loan application with their bank.

The bank requested the company’s financial statements in response to a loan application by
the company. The information submitted to the bank revealed that the company’s current
assets stood at $185 million and its current liabilities amounted to $190 million. The
company also owns a number of buildings in the city centre, machines of high value and
shares in other reputable companies.

13 (a) (i) Calculate Plastic Trades Ltd’s current working capital. [2]

(ii) Why would a profitable company like Plastic Trades Ltd have liquidity
problems? [4]

(b) Briefly comment on the usefulness of any two items of financial information
required by the bank before it issues a loan to Plastic Trades Ltd. [4]
14 To what extend will Plastic Trades Ltd find the internet useful in marketing its
products? [10]

15 “Our major challenge is the fluctuating exchange rates.” How are fluctuations in
exchange rates likely to affect production at Plastic Trades Ltd? [10]