Business and Management revision

Section 1: Introduction to business

Business activity:
A business is a collection of people or resources involved in providing goods or
services for an end user.

Fast moving consumer goods (fmcgs) – products which are sold to consumers
week in, week out which are consumed only once

Consumer durables – products which are sold to consumers, but are purchased
less frequently as they can be used many times

Capital goods – products supplied from one business to another (assembly of

products)

Factors of production:
 Land
 Labour
 Capital
 Managerial ability/entrepreneurial ability

Business functions:
 Marketing – much wider than advertising; it involves the process which
identifies what customers want, then devises a strategy which will satisfy
those wants. The four P’s (product, price, place(distribution) and promotion
 Production (operations)
 Finance
 People
  Directors – responsible for considering the long-term objectives of the
business and for ensuring that resources are organised carefully so that
long-term objectives are achieved.
 Management – planning, organising, controlling, coordinating, motivating
Added value – the process involved in making the selling price worth more than
the cost (make production more efficient, encouraging customers via effective
marketing to purchase a product that is priced higher than its cost

External factors effecting business:

 Environment
 Competition
 Government
 Unions
 Culture & purchasing habits
 Economic climate

Four stages of production:

 Primary sector – the extraction or creation of raw materials
 Secondary sector – once the materials have been extracted, they are
turned into either part-finished goods or components, then assembled
 Tertiary sector – the services which have evolved from the success of
manufacturing
 Quaternary sector – this has evolved in recent years, based on the
revolution in IT (tertiary business associated with IT

Market – the place where buyers meets seller

Opportunity cost – the benefit foregone when the next best option has been
chosen
Setting up in business
Reasons people set up in business:
 To fulfil a dream
 To redistribute wealth
 To provide a service to customers
 To have an interesting job
 To have freedom of action
 To provide career opportunities
 to fund an ambition or personal goal

Business plan – this is a detailed document stating various stages the business
must go through and various targets the business needs to achieve if it is to be
successful

Consists of: details of the business, goals and objectives, present state of the
market, customer profile, competition analysis, projection of sales volumes and
revenue in the short and long term, present orders, assets and required financing,
staff, external factors, ownership, financial forecast

Typical problems a new business may face:

 Lack of market research – very little demand
 Insignificance in the market-place
 Cash flow problems
 Lack of skill
 Lack of finance
 Over-expansion (over trading)
 Megalomania

The conditions for success in business:

  A well designed product which fulfils a particular need or want
 Imagination
 Tight financial control – a budget
 Motivated employees and directors
 An efficient production system
 Commitment and vision

Entrepreneur – person who develops a business from the idea through to the
birth of the business; often the owner as well
Seed capital – money raised to fund the start of the business
Development capital – money raised to fund the growth of the business
Liquidation – the legal process of turning assets into cash when a business is being
wound up

Types of business
Businesses are part of either the private sector of the public sector.
Private sector – business owned by firms and individuals
Public sector – business owned by the government
Private sector

Unincorporated companies have two distinct features:

 The unincorporated business does not have a separate legal identity. The
owner and the business are one and the same in the eyes of the law.
Consequently, if there are problems with the business, it is the owner who
is sued or fined for any wrongdoing
 Unlimited liability

Two types of unincorporated companies are soles traders and parnetships.

Sole trade – a person who has total ownership of and responsibility for managing
the business.

Reasons for being a sole trader:

 Only a few prodcedure have to be undertaken in order to start as a sole
trader
 Premises can be rented rather than paid for, so no need to find large sums
of money
 Labour is often provided by member of family, who are not as expensive as
normal staff

Advantages:
 Any profit belongs to the owner
 Total control as to how the business is operated
 As it is likely that the owner will have to undertake all the tasks (buying
selling, delivery), there is plenty of variety of work
 Working for oneself is highly motivating

Disadvantages:
 All the tasks have to be performed by the owner; unless the finance is
available to pay for additional help
 The hours are long, as there are insufficient funds to hire specialist staff
 Unlimited liability
 Difficulty of competing with larger companies
 No one else taking the same risks to share ideas with

Partnerships: when two or more people operate a business for the common goal
of making a profit
Up to 20 partners are allowed in any one partnership
Having more people involved in running the business allows the parents to
specialise where possible.
Advantages:
 Cheap to set up as there are no formalities to comply with
 Specialisation of partnets allows for greater efficiency and therefore
cheaper costs
 The burden of work can be shared
 The potential to access more finance is greater with more owners
 Better decision making due to shared knowledge and expertise

Disadvantages:
 Each partner has to share the decision making and therefore has less
control of the business
 Each partner must share the burden of poor decision making or work of
partner
 Decision making may take longer and arguments may arise
 Any profits are shared, irrespective of effort
 Unlimited liability
 Finance limited to 20 partners
 Continuity may be broken on death of a partner

Incorporation – the process by which a company gains its own separate legal
identity
Limited liability – because incorporated businesses have a separate legal identity,
the owners of the business can be liable only for the amount of money that they
invested.

All limited companies have shareholders who own shares in the business and take
a proportion of any profit made. There are two types of limited companies:
private limited companies, public limited companies
Private limited companies (Ltd) – limited companies must have at least two
member or shareholders, although there is no upper limit. Also, the word ‘limited’
must appear in the name of the company, allowing other businesses to be aware
of the type of company they are trading with. Although shares are issued, they
are not allowed to be bought and sold by members of the general public.

Advantages:
 Access to capital is better than for unincorporated companies because i)
there is no limit to the number of shareholder, and ii) limited liablility
means less risk, which attracts more investors
 Some control of the business is possible because the shares are sold
privately
 No break in continuity if a shareholder dies as shares can be sold to another
by invitation

Disadvantages:
 The formation of the business requires legal documentation which is time
consuming and expensive
 Financial accounts have to be filed with the registrar of companies, and can
be viewed by members of the public, including competitors
 Shares cannot be sold to the general public which suggests it is harder to
raise capital
 Profits are distributed to shareholders and must therefore be shared

Public limited companies (PLC) – there has to be a minimum of two shareholders,

as there does for private limited companies. However there is no maximum
number of shareholders.

Advantages:
  Access to finance in the present – stock exchanges around thw rold act as a
market for buyers and sellers to meet. This simply makes it easier to raise
money, if this is the chosen source of finance for the business.
 Access to finance in the future
 Prestige
 Access to other forms of finance – a bank will look more favorably on a
business which is a PLC because it is larger and therefore more stable.
 Reduction in gearing (gearing measure the ratio of borrowed money to the
amount of money raised through shares and is calculated by borrowed
money over equity

Disadvantages:
 Overall cost – the cost of launching the business on the stock market, the
cost of maintaining shareholders
 Dividends
 Lack of control – it will bring outside ownership, which may reduce the
amount of influence the family has over decision making
 Threat of takeover

Public sector
This sector involves businesses that are owned by or accountable to the
government. They have their own legal status and therefore can enter into
contracts or be sued just like any other incorporated business.

Privatisation – the process that transfers ownership of public sector bodies to the
private sector
Advantages:
 Likely to make the business more efficient
 Saves the government expenditure in the form of subsidies
 Efficiency may lead to either lower costs wich can be passed on to the
consumer or greater profits which are passed to shareholders
 Offers the opporutinty for members of the public to become shareholders
Disadvantages:
 Once the sale of the business has taken place any revenue opportuinites
are lost
 Selling the ‘family silver’ may be viewed as the sale of what belongs to the
general public
 The objective to improve the efficiency of the business led to a reduction
in the number of employees, thus increasing unemployment

Local authority
Sleeping parents – a parents who contributes financially but takes no part in the
running of the business

Size of business
Difference measures of size:
 Revenue – the value of products sold – this can be used by any business,
although it is more frequently quoted on the news when comparing two
very large businesses which compete with each other in the same market.
 Capital employed – the amount of money tied up in (net) assets by
shareholders – this can be found by examining sets of company reports
 Volume – this can be used only if the volume is compared to other
businesses, that that a view of relative size can be ascertained.
 Profit – this measure is rather crude, because it depends on the accounting
policies of the company in question. It is also very difficult to make
international comparisons in profit due to differences in accounting
regulations. The main reason for using profit is to assess how much the
business might be worth in the future
 Number of employees – this is relatively easy to measure and allows
comparisons to be made across industries as an indication both of size and
whether the business is labour-intensive. A labour-intensive business tends
to have a high proportion of labour costs in comparison with total costs.
  Market capitalization – this is calculated by the number of shares x share
price.

Reasons for the importance of the size of a business:

 Customers tend to be attracted to bigger names in the high street
 Larger companies tend to have greater status when purchasing products
from a supplier
 Payment terms are easier to negotiate when a company is larger, especially
when reveiving goods from a supplier
 Sponsorship and local community relations are easier to develop when the
business is big enough and profitable enough to allocate resources

Advantgages of being a small company:

 Ability to change to meet trend e.t.c
 Attraction of media
 Contact with customer

Economies of scale – the reduction in unit cost as output increases:

 Technical economies of scale (increased size of container on truck can hold
more)
 Purchasing economies of scale – as a business purchases more from its
suppliers, it may be possible to negotiate a bulk purchase discount
 Technological economies of scale – if a business buys new machinery which
is of a higher technical specification, this ought to bring benefits in terms of
increased efficiency
 Marketing economies of scale – companies like Nestle become more
proficient at launching new products as their experience grows. This means
that launching each new product becomes less expensive because the
company becomes more expert at targetin and marketing the product
correctly
 Financial economies of scale – when businesses float on the stock market,
they gain prestige and status in the world of finance. This means that banks
may well be more willing to lend them money than if they were a small
unknown company
  Managerial economies of scale – as growth occurs, it is more likely that the
business will employ specialists to run individual functions
 Risk-bearing economies of scale – when profits grow and a business gains
more access to finance, it can diversify into other areas of business which
are no related to its core or main business.

Effects of different fuctions of an increase in size:

 Marketing, an increase in slaes volume or expansion into anew market will
require more marketing resources.
 Production – new machinery will be required and growth may necessitate a
change in either the scale or the type of production
 Finance – as business grow, they need more money. Sometimes a business
may grow too quickly (overtrading) which may cause a strain on cash flow
 Management and personnel – as businesses grow, the need to control and
communicate effectively with employees becomes more challenging.

Diseconomies of scale – unit costs rise as output increase:

 As a business gets closer to full capacity output, it may be forced to pay
overtime or extra money for unsocial hours
 If a business pushes its output to the limit, this may mean that machines
are run for longer periods of time than normal
 If extra materials are ordered and the supplier is in the position described
in either of the above points, then the supplier may be forced to chager at a
higher price
 A growth in the number of personnel, customers, departments e.t.c may
mean the coordination becomes very difficult.

Limitations to growth:
  Lack of market growth – a company might need to expand into a new
market if its present market ceases to grow
 Lack of productive capacity – when a business reaches capacitiy, it may
need to turn away new orders, subcontract, or prioritse present cusomters
 Lack of finance
 Lack of trained staff
 Objectives
 Government restrictions – may prevent two businesses in uniting. Implying
laws such as minimum wage

Mergers and acquisitions

Merger – when two or more firms combimes voluntarily to form one business in
an attempt to enhance their profitability, productivity or position in the market
Takeover – when one business gains control of another
Acquisition – when one business gains control of part of another business
Types of integration –
 Horizontal integration – this is when there is a merger between two
companies that are in the same stage of production. The benefits of this
type of integration are economies of scale, such as purchasing and
technical.
 Vertical integration – when two firms join together from different stages of
production. Backward vertical integration occurs when a company joins
with another from an ealier stage of production. Forward vertical
integration.
 Conglomerate integration – when two companies join together which are
not related, regardless of the stages of production they are in. one of the
main reasons for this is diversification.

Asset stripping – some conglomerates or holding companies acquire other

businesses with the sole intent of selling off the parts that will yield a profit.
Survival
Synergy – by merging, the ‘new’ business will be more efficient and more able to
dominate the market that two separate businesses. (2+2=5)
Access to new technology
Demerger – the breaking up of a merged business into two or more separate
parts
Globalisation – the growth of companies that own business throughout the world

Stakeholders
A stakeholder is a person or persons or organisation that has an interest in the
actions and reaction of a particular business.
 Banks
 Community
 Competition
 Customers
 Consumer organisations
 Employees and dependants
 Government
 Manager and directors
 Retailer/wholesalers
 Shareholders
 Suppliers and subcontractors
 Unions

Debt-equity swap – where a bank converts the money it has lent a business into
shares
In-house – where a business manufactures a product itself rather than inviting a
subcontractor to do it
Objectives and strategy
Mission statement – sets out the purpose of the business which is communicated
to all the employees and shareholders. Almost all businesses will have either
growth, profit or survival as their main aim.

Strategy – the way in which the objectives are achieved

Ansoff martrix –

Products
Existing
(New)

Market penetration Product development

Existing

A C

Market
B D

Market development Diversification

(New)

A- market penetration reuiqres the business to sell a greater quantity of an

existing product to consumers in an existing market
B- market development involves selling an existing product to new customers
C- product development requires the business to sell a new product to
existing consumers
D- diversification requires the business to develop a new product to be sold to
new consumers
SWOT – used to see where its competitive advantage may lie
Tactics – this involves the implementation of the strategic plan on a day-to-day
basis. Each part of the strategic plan must be broken down into departmental
secondary objectives with targers that can be measured.

Hierarchy of objectives:
A- mission statement or Aim (the primary objective)
B- objectives that are necessart to fulfil the mission statement
C- strategy, the implementation of the objectives
D- tactics, for which targets are set which are monitored

constraints in fulfilling objectives

internal constraints –
 legal structure – frequently sole traders are unable to find the finance that
they need to expand the business further.
 Time
 Geographical location – when a firm operates in several countries, it
becomes difficult to coordinate such operations
 Conflict of interests – whenever an individual manager or employee
produces a new idea, there is likely to be some opposition to it because it
causes a conflict of interest.
 Finance – very few business can do everything that they want to do : there
is a constraint on the availability of fainnce which means the business must
ration itself in some respects

External constraints –
 Competition
 Government policy (local and nation) – planning permission, rising VAT
 Economic – the state of the economy may mean that plans for an
expansion programme have to be delayed as the economy moves into
recession.
 Ethics – ethical issues, human rights
Hierarchy of objective – the different levels of objectives set by the business
Corporate culture – the ethos that governs the way the business operates
Price leader – a company sets a price which others in the industry follow
Contingency plan – a method of dealing with changes in constraints on business
activity

Economic theory
To gauge the actual or effective demand for a given product, it is important to
realise that there are two main factors operating:
 The ability to purchase (influenced by price and income)
 The willingness or desire (influenced by choice)

Changes in the condition of demand:

 Income
 Advertising – taste and choice
 Changes in the season
 Change in the population
 Changes in government legislation
 Changes in economic policy
 Changes in the attitudes and information
 Changes in taste and fashion
 Changes in the prices of other products – substitutes and complementary
goods

Derived demand – when automatically an increase in the demand for one product
leads to an increase in the demand for another. (increase in demand for houses
will lead to an increased demand for land)
Changes in condition of supply:
 changes in the productive efficiency of the business – technology
improvement
 changes in the cost of production
 government legislation

equilibrium – the point where demand and supply are equal at a given price
market forces – factors that influence the price of a product (demand and supply)
disequilibrium – where at a given price demand and supply are not equal
market failure – when the market fails to provide or allow sufficient consumers
access to merit goods

transfer payments – money paid by the government in the form of benefits (social
security) to individuals who have not undertaken any economic activity

introduction to the business environment

the external forces to be considered SELECT CCEEPP –
 social
 economic – hard to remove their investment as quickly as possible
 legal – planning permission
 environment – claims whether or not productions damages ozone layer or
not
 customer base – change in the customer base as customers change their
demands and lifestyles
 technology
 competition
 culture – religious beliefs and ethical beliefs
 ethics
 Europe
 Political – minimum wage
 Pressure groups
Demographic trends – the change in the age and number of the population
Concentrated – extent to which an industry’s total sales are taken up by individual
businesses
EC directives – quality guidelines for certain products
Corporate governance – the directors of a business are charged with operating
the business in a responsible manner

End of section questions:

What are the four stages of production? Land, labour, capital and managerial
ability
Define added value: the prcoess involved in making the selling price worth more
than the cost
Explain why the concept of opportunity cost is important for a business? Because
they will have to consider what they will miss out on when an decision is to be
made
What is asset stripping? This is where conglomerates or holding companies
acquire other businesses with the sole intent of selling off the parts that will yield
a profit.
What is a conglomerate business? A business that own companies with no
obvious connection
Why does a business aim to achieve economies of scale? They gain a reduction in
unit costs as output increases. Any reduction in unit cost allows the company the
luxury of taking a decision on whether to reduce the price it charges and sell more
product or to keep price at the same level and earn more profit per unit.
What I meant by the term capitalisation? This is the number of shares issued x
share price.
Name two measures of the size of business: profit, revenue, capital employed,
volume, number of employees
 Diseconomies of scale – increase in unit cost as output increases

Economies of scale

Average
cost Diseconomies of
scale

output
Why do demerger occur? Problems with increase in size (difficulties in control),
diseconomies of scale can lead to increase in average costs of goods.
difference between a merger and an acquisition? A merger is when two or more
firms combine volutariliy to form one business; a acquisition is when one business
gains control of part of another business
using an example, explain to term fast moving consumer good: FMCG is a good
that must be purchased frequently once it has been used and they are used day in
– day out, e.g. washing powder
explain two difference between a parnership and a sole trader: parnership, profit
has to be shared, whereas sole trader gets all profits. The burden of work can be
shared with parnership, whereas sole trader must carry out all on there own.
Give 3 reasona why two businesses might merge?
1) Synergy, new business will be more efficient (2+2=5)
2) Reduction in costs
3) Economies of scale
4) Access to new technology
 5) Survival
Explain the term limited liablitiy – where the business owner can only be sued for
what they have invested into the company
Identify difference between private limited and public limited company:
1) Privat limited must have the word limitied in their name
2) Shares cannot be sold to general public for private limited whereas they
can be for public llimited
Identify two purposes of a business plan:
 Demonsrate the particular detials of a business with regard to its market
and financial objectives, the details of its operation, its customer base and
financial status
What is the difference between a stakeholder and a shareholder? A stakeholder is
a person or persons or ogranisation that has an interest in the action and reaction
of a particular business and a shareholder it a type of stakeholder

List 5 stakeholders of a cosmetics business:

1) Customers
2) Banks
3) Consumer organisations
4) Competition
5) Employees and dependants
6) Retailer/wholesalers
7) Suppliers and subcontractors
What is a mission statement? Statement that sets out the purpose of the business
which is communicated to all the employees and shareholders
Define strategy – the implementation of objectives, the method for achieving
objectives
Corportate culture? The ethod that governs the way the business operates
List two internal constraints toa business achieving its objectives:
1) Legal structure
2) Time
3) Geographical location
4) Conflict of interests
5) Finance

Marketing
Introduction to marketing
The marketing process is defined as the ‘identification, anticipation and
satisfaction of the customer’s needs, profitably’.
Marketing mix – product, place, price, promotion
There are several reasons why marketing has become more significant to the
success of a business:
 Mass production – unique selling point
 Economic growth
 Competition
 Technology

Marketing objectives:
 Building brand recognition – theme or logo
 Repeat purchases – the customer buys the product on a regual basis
 Gaining market leadership
 Increasing market share
 Market domination
Marketing decision and the link with other parts of the business:
  Production – marketing department will need to ensure that the production
department is actually able to manufacture the item according to the
specifications laid down by the customer
 Finance – marketing costs money. Not only is extensive research required
before the product is launched, but the advertising may well be expensive.
The finance department will be anxious to see that other departments
spend within their budget, otherwise it might have to raise more money,
which in turn will add to the cost of the product
 Personnel – as the sales of a product increase, the business will need to
maintain customr contacts with a view to conintuing the feedback
response.

Market aggregation – only selling one product to an entire market

Market segmentation – this is the subdivision of a market into separate and
distinct groups of customers, each having a distinct marketing mix.
 Geographic segmentation – businesses tend to target a particular part of
the country for customers that display similair purchasing habits
 Demographic segementation – a market can be divided by using
characteristics of the population in terms of age, sex or income.
 Psychographic segmentation – the is a more complex method of
segmentation which considers the lifetstyle and expectations of an
individual

Consumer profile – a process of identifying the lifestyle and spending habits of

consumers. This consists of:
 Cconsumer details – sex, age, income, lifestyle
 Spending details in terms of products purchased, wuantities and frequency
of use

Marketing mix – product, price, place, promotion – the methods used to satisfy
customer needs and wants
Competitive advantage – the business gaining an edge over its competitors
Product orientation – emphasis on designing the product which the company
hopes to sell
Market orientation – emphasis on researching customer needs then designing
and producing a product appropriate to meet those needs
Unique selling point – an attempt to differentiate the product from competition
Market aggregation – the process of aiming a product at an entire market
Socio-economic groups – a method of segmentation according to income
Consumer profile – a process of identifying the lifestyle and spending habits of
consumers
Market research
Market research – the collecting, processing and interpreting of information that
aids the decision making process for the marketing of goods and services.
Why is it important? Unless a business continues to research into the reaction to
a give brand, it may lose sales because it has failed to anticipate a change in the
tastes of consumers.
Research can highlight cultural differences.
Market research is also important in assessing the effectiveness of the marketing
of the product.

What information is required?

 Statistics on the size and growth or decline of the market
 Existing company sales by product, region, segment of the market
 Degree of competition
 Existing product plan and plans for the future to ensure any new product
fits with in the company’s product portfolio
 Government legislation and economic policy that may affect the design of
the product and the likely demand for the product
Quantitative research – concentrate on the provision of facts, howmany, what
age e.t.c. it provides statistical data to show
Qualitative research – concentrates on the attitudes of the consumer towards a
given product.
Desk research – this involves the collection, collation and interpretation of market
data that has already been published. Also known as secondary data, the data has
been collected by another business or body, but can be used by different
businesses for different reasons
Sources – government statistics – competition commission reports – newspapers
and magazines

Benefits of desk research:

 Because data has already been collected, it is relatively quick to obtain and
is therefore also relatively inexpensive.
 Allows a business to gain a picture of the market from a quantitative
perspective

Drawbacks:
 The information has not necessarily been collected specifically for one
individual business and therefore may not be entirely appropriate
 The information may be out of date and therefore less reliable

Field research – also known as primary research, involves the collection of data by
a variety of techniques that will be unique to the collector and is therefore more
reliable.

Questionnaires – can be used to ascertain a wide range of information, from a

detailed profile of a conusmer’s lifestyle and expenditure, to a simple reaction to
the meal a consumer has just eaten or a shop just visited.
Interviews – allows for classification and an opportunity to ask supplementary
questions in an attempt to ensure the question is fully understood and the answer
is thorough and helpful especially if consumers suddenly become reluctant to
purchase a particular product. However, they are more time consuming and more
expensive. Data collection by phone and by post.

Consumer panels – often used to assess the reaction a consumer either to a test
product that has yet to be launched and is one of several on trial, or to a product
that has yet to be launched nationwide.

Benefit of field research:

 It provides specific information on the behaviour of consumers and their
attitudes
 It can be collected to suit the specific needs of the business concerned

Samples
Stratified sampling – particular people who are classified in a variety of ways.
Slecting all males or all females.

Random sampling – not aimed at any particular group of consumers, then

everyone has an equal change of being selected. However, there is no certainty
that those who are randomly selected will be of any value to the business
concerned.

Cluster sampling – a form of random sample but taken within a slected area.
Quota sampling – to ensure a more representative sample, interviewing particular
members of people within a segment is preferable to a random sample.
Convenience sampling – if a very quick estimation of views is required and when
cost is a major constraint, then conducting a sample within the area that is the
mot accessible at the time is classified as this.

Presentation of data
Tabulations – an effective method of presenting data where there is a large
number of variables to be shown. Main advantage being able to present a lot of
information in a relatively simple manner. It is easy to glance at the table and
quickly assess which size is sold most.
However, there can be lack of information
Pie charts – derives from portions of the edible pie.
Judging the percentage of replies that are very small is almost impossible and it is
therefore advisable not to use pie charts when there is a large number of
categories to be shown. Also of limited value when comparisons are to be made
from year to year. Benefit is that it provides a simplistic visualization of the
breakdown of data when there is only a limited number of items involved.

Bar charts – the length of the bar is a clear indication as to which classification is
the most significant. Comparative bar charts and compound or component bar
charts.

Pictograms – another form of bar chart where the data is presented using
pictures.
Lines graphs – enable two variables to be shown. They are easy to understand
and interpret quickly.

Spreadsheets – a convenient method of storing and presenting data.

Index numbers – a method to enable meaningful comparisons to be made
between figures over a peiod of time, by converting the figured to the value for a
selected year.

Method of summarizing data

Mean – the average of the data
Weighted average – placing more importance on certain items within calculation
due to their relative importance
Cumulative distribution – a method of calculation the mean whereby the
progressive total is taken of the frequency at each class
Crude mode – the mid-point of the most common observation when the data is
grouped
Assumed mean – the mid-point of each class, assumed to be the mean when
applying the weighting process
Standard deviation – the average distance of each observation from the mean
Null hypothesis – a statement which is being tested using the normal distribution
Alternative hypothesis – the claim which is opposite to the null hypothesis i.e.
either the null or the alternative is correct
Confidence limit – a range of data, which the business is reasonably certain can be
trusted to be valid

Forecasting and decision trees

Forcasting gives a business the oportunity to plan for the future as well as
planning for various changes. Methods of forecasting:
 Qualitative – based on opinion
 Quantitative – based on numerical evidence

Qualitative forecasting
a) Consumer pannels – this is a group of individuals which meets regualry to
discuss possible changes. Advantage is that the group can ‘bounce’ ideas off
each other, helping to generate discussion.
b) Delphi technique – takes the same form of open-ended prediction as a
consumer pannel discussion, although the difference is that there is no
group discussion, rahter one-to-one between the company and the
individual. Idea of this is that it removes the influence of group or peer
pressure and arguable allows more individual ideas to come through.

Quantitative forecasting
Moving averages:
 Trend – this is underlying movement of data
 Cyclical variation – annual data. Reasons for cyclical variation:
- Trade cycle, which refers to the fluctuation in economic activity over a
period of years. Companies whose product is income-elastic tend to pay
close attention to pattern of the trade cycle
- The product life cycle, which may vary from product to product – if the
product with a life cycle of eight years is in decline, sales will be lower
than in other years
- The entry of new competitors into the market place – this can suddenly
make sales fall away, or alternatively, if a competitor leaves a market or
gerion, sales may increase significantly
 Seasonal variation – this is based on the same principle as cyclical variation,
but refers to chhanges in sales data within a particular year
 Random variation – this is part of the time series which is impossible to
predict, by definition of the word random.
Limitations and assumptions:
  Forecasting assumes that past infromation leads directly to the future.
Although past information can be useful in presenting a quide to the future,
because of the nature of forecasting, there can never be anu guarantee
 The techniquie takes no account of changes which are outside the control
of the company, such as competitve pressure, governemt influence in
running the economy of perhaps changes in the law affecting business and
the product
 It also takes no account of a possible change in company objectives;
perhaps a business is planning a big sales drive to increase sales volume,
which would not be accounted for in the forecast.
 Sometimes it is the most recent information which is regarded as being the
most significant.

Problems of using decision trees:

 It is purely quantitaive technique which is designed only to allow for
probablitliy and pay-off (estimated revenue_ i.e. there is no allowance for
external issues which may be relevant to the decision being made
 The probablities are extremely difficult to predict accurately, given their
nature
Advantages of using decision trees:
 They provide a starting point in terms of allocating probablities and pay-offs
to different decision
 They allow all potential decisions to be viewed simultaneously
 They can therefore act as an aid to decision making and must be used in
conjunction with other factors which affect the decision

Extrapolation – forecsstinf on a graph, by extending the trend line

Moving average – the process of building the calculation for the trend, in order to
remove the cyclical or seasonal variation
Centring – used when the trend line will not correspond to a time period when
data is collected. It occurs if the cyclical movement of data occurs on an even
number of points
Acutal value – the forecast return from a particualr decision
Expected value – the actual value multiplied by the proability

Product
Product – a product is anything that fulfils a customer’s needs. It has two general
aspects: 1. It has some form of aesthetic value attached to it in that it is pleasing to
the eye, 2. It can be produced at a cost which is (hopefully) less than the price it
can be sold for
Ways of protecting a new product from larger companies:
 Patent – are used to protect new products from being copied. This is applied
for through the Patent Office which is a government agency.
 Copyright – this is used for published material so that writers cannot actually
copy the text of another writer without specific permission from the
publishers
 Trademarks – these are used to make a company or a product distinctive
from its competitors

Product life cycle – one method of analysing the sales and profit of a particular
product over time is by examining its product life cycle. This simply is a record of
sales and how they fluctuate as time passes. Allows a company to chart the
progress of a product and then make changes to other parts of the marketing mix
according to the pattern of sales.
 Introduction and devlopment – product is developed and launched on to the
market. Sales usually begin slowly as customers are naturally cautious about
anything which is new
 Growth – sales begin to pick up as customer interest grows. Sometimes the
growth period can be sudden and without warning, resulting in the business
losing orders if it has not built up its stock accordingly
 Maturity – sales flatten off as the product becomes well established and
more competitors join the market. Frequently the market becomes saturated
 Decline – the business experiences a gradual fall in sals and must decide
whether to extend the product’s life, or whteher to let it die
 - Development and introduction – the devlopment of the product does come
before the introduction. The customers that are targeted tend to be
summarily known as ‘innovators’ in that they are seen as the first to
purchase. Introduction – where the product is officialy launched on to the
market. The initial launch could be part of a test market where the product is
‘trialled’ for a period of time and feedback from customers is then used to
refine and modify the product accordingly. At this point, the business makes
very little profit on sales because is unable to achieve the benefit of
economies of scale.
- Growth – as the product moves in growth phase, the increase in volume
means that unit costs can fall due to economies of scale altohugh there is a
possibility of other busineses producing copies of the product. With patents,
if the product is protected against copying here, then it will grow more
quikcly and earn more profit. Customers known as ‘adopters’. At this point
in the product life cylce, there may be a squeeze on cash flow due to the
business producing for sales at a much higher level.
- Maturity – although the product is popular, the increase in popularity falls
and the level of sales flattens. The business is earning most money from the
product because it is established. Also a phase where the cash flow for the
product is at its greatest and business is achieving economies of scale
through mass production. However, competition increases due to me-too
products being released. Market saturation occurs – where the nmarket as a
whole ceases to grow in terms of the number of customers, so there remains
one of two options in order to increase growth: 1. Encourage customers to
purchase and replace the product more frequently, 2. Attract sales from
competition i.e. achieve growth by taking market share from competitors
- Decline – consider two choice:
 Accelerate decline by having a sell-off, usually ar a significantly
discounted price in order to ensure the volume is sold
 To discontinue the product to allow sales to fall at the rate the market
decides
Extension strategies – business will prolong the maturity phase of a product
because the cost of devloping and launching a new product is much more
expensive.
Typical exmaples of extension stratgegies:
 Finding a new use for an old product, or a new market
 Increasing the product range
 Change in style
 Change of name
 Reduction in price
 Offering finance
Implications of the product life cycle for planning
 Distribution – the channel of distribution will be affected as sales grow
because demand increases, so must the product’s availability
 Advertising – as competitors intensifies, the type of advertising will
becomes more competitive and persuasive
 Stock levels – at introduction stage, business will not wish to hold too much
stock in case product fails. As sales grow, there must be plenty of stock. As
sales flatten in maturity, the fact thattt they are easier to predict means that
stock can fall to a lower level
 Cash flow – as the product moves through the different stages, the cash flow
will alter
 Research and devlopment (R and D) – altough majority of r and d
expenditure takes place at start of project, before it is launched, business is
likely to continue to spend money on it, especially if consumer needs are
changing, if only to monitor customers reaciton.
 Pricing strategies – as the product is launched, the business will need to
decide whether it aimes to achieve market sahre, gaining a foothold in the
market, or whether it wishes to achieve a high profit margin. As product
becomes more competitive, business willl push the price down
 New product devlopment (NPD) – since product life cylce do not last
forever, a business must constantly develop new products, so as to achieve a
 range of products, prefarbly with at least one product at each stage of the
pruct life cycle
Positioning – product mapping – allows a business to assess not only its own
portfolio, but that of its rivals as well.

Boston matrix – method of classification – classifies products according to 3

variables:
 Market share relative to its nearest competitor
 Market growth
 Its position on the grid in relation to other products
H Market share L

STAR Question mark or problem

child

Market
growth

Cash cow dog

Dog – low market share and low market growth; sales have either failed to take off
or the product has gone into the decline stage of the poduct life cycle. No business
wants a dog!!
Question market mark or problem child – a product where th market is growing,
but as yet the product itself is unknown to the market. May succeed if sufficient
money is invested in ot. Product is in introductino stage
Star – occurs when a product has ‘taken off’ and sales are growing in relation to
the market. Unlikely to be earning suficiant cash flow as the business is investing
in more advertising and working hard to establish into maturity
Cash cow – product in maturity. Business is ‘milking’ the cash cow.

New product devlopment –

Twinkles – these are genuine new ideas which are devloped into new products.
Tweaks – the are constant upgrades to existing brands such as new flavours
Twists – there are clever manipulations of products which already exist in order to
introduct them to a new segment

Saturation – the market sstops growing, so to increase market share a business has
to becomes more competitve
Product differentiation – when a company attempts to make its product
significantly different from its competition

Pricing
Price is defined as the amount a customer pays in return for a good or service
Pricing objectives:
 Profitability – the price must allow for the costs of manufactre as well as the
costs or dividends, interest and tax.
 Market share – to achieve a market share of a certain percentage
 Competetive advantage –
 Barrier to entry
 Survival – if competition intensifies – then a business may need to reduce its
prices, just to encourage customers to purchase

There are 3 types of pricing strategy – cost based, market based and competition
based
  Cost based – used by calculating the cost of producing a certain number of
units of output, and basing the price on that figure. Costs can be divided
according to variable costs or total costs. The main problem with cost based
pricing is that it takes no account of the price which the customer is willing
or able to pay.
 Market based – used by a business that needs to listen to the market in terms
of what they are willing to pay. Is appropriate where there are several market
segments for the same product and so the business may be able to charge
different ammounts for the same prudct sold to different people. Main
problem is it takes no account of the cost of producing a unit of output, so
the business may well end up charging a price which customers are willing
to pay, but which fails to meet the unit costs.
 Competition based – sometimes a business will price its products with the
dilberate objective of beating competition, even if it is well below the
amount that the customer expects to pay and well below the costs. This
approach take no account og either the costs or the deamd. Consequently, a
buiness may end up charging a price which means it makes a loss or
undercharging customers, incurring the opportunity cost of the extra revenue
and profit which could have been earned.
New products – two possible pricing stratergies are employed with new products:
 Market penetration – the price is deliberately set at a low level with a view
to gaining customer interest and establishing a foothold in the market.
Sometimes the product will be sold at a loss as part of a sales promotion,
although the business will hope either that it will be able to increase the
price once some brand loyalty has been achieved, or that costs will fall due
to economies of scale as demand picks up.
 Market skimming – a business may decide to set the price at a high level,
with a view to ‘creaming’ off the profit at the top end of the market.
Volumes will ovbiously be lower and the rpfit margin will be higher than
with market penetration.

Price skimming
Pricing methods
Cost based
 Marginal cost pricing – e.g. fixed cost of $4, variable cost of $2, the business
will aim to charge a price of at least $6. This method is therefore based on
the variable or marginal cost and is designed to ensure a contributuoin is
earned. This method is more appropriate when output levels are changing
because if output changes, fixed cost per unit changes, but variable cost per
unit stays the same
 Full cost pricing – this uses the calculation of total cost per unti, and then
adds on a mark up to get the price. Mark up is defined as the perceantage of
the cost that is added on to the cost to find the price. Full cost pricing can be
used when the fixed costs have been allocated to a particular product, using
the technique of full costing which takes the fixed cost as one lump sum and
allocate them to each product according to one criterion.

Market based
 Price discrimination – this is where the business charges different amounts
of exactly the same product
  Premium pricing – when a product is considered to be of particulary high
value, due to its exceptional level of quality, or the brand image it portrays,
then a business may decide to charge a premium for the privilege or
purhcasing the product.
 Psychological pricing – a business will play on the susceptibility of a
customer by stating a price such as $9,995 or $4.99.
Competition based
 Going rate pricing – if the product is homogeneous (exactly the same) there
is very close rivalry between companies based on the price. Any change in
the level of price is likely to mean that customers move to an alternative
company
 Destroyer/predatory pricing – there are times when compeition is so intesnt
that a business may embark on a method of pricing which is designed to
remove all tbut the bravest and most efficient companies.
 Loss leaders
Factorss affecting price
 Costs
 State of market – this refer not just to the rate of growth, but also to the
number of competitors and the degree of concentration
 Competition – the more competitive the market is, in terms of the number of
firms in the same market, the greater the pressure to use prices as a method
of competing.
 Customer’s perception value
 Marketing mix – the marketing mix must be unified
 Legislation – taxes etc.
 Weather
 Product life cycle
 Distribution channel
 Trade cycle – incomes
  Exchange rates – a stronger domestic currency will mean that a business
selling abroad will earn less revenue when the foreign currency is translated
back into pounds. A stronger currency also means that companies will face
greater competition, because the forein companies do not have to charge as
much to earn the same revenue. The only advantage of a stronger currency
in this case is if the business imports some of its raw materials.

Elasticity
Elasticity is a measure of responsiveness. A business likes to be able to predict the
likely response to a change in any factors that affect demand.
Factors affecting demand:
 Price of own product
 Price of competitor’s product, whether it is a substitue of a complement
 Income
 Consumer tastes and trends
A change in demand following a change in price is measure by price elasticity of
demand.
Price elacticity of demand = percentage chanfe in quanitity demanded
Percentage change In price
If the damnd is price inelastic and the business has an objective to increase revnue,
the price must be inreased. Alternatively, if the dmeand is price elastic with the
same objective, the price must be decreased.
Cross price elasicity of demand = percentage change in demand for product A
Percentage change in price of product B
Eg. Products A and B are complements. If the price of A increases, demand for
product B will decrease. The answer to the cross price elasticity is therefore
negative if the products are complements.
e.g. if products A and B are substitutes, then an increase in the price of A will
make B appear relatively less expensive, therefore demand for B will increase. The
answer to the cross price elasticity is therefore positive if the products are
substitues.
Income elasticity = percentage change in demand
Percentage change in income
Advertising elasticity = percentage change in quanitity demanded
Percentage change in advertising

Factors determining the level of elasticity

 Nature of the product
 The number of substitues
 Complemntary products
 Size of price changes
 Level of price
 Previous change

Difficulties in using elasticity

 The different measurements of elasticity make a clear assumption that only
one factor can change demand at any one time. However, in reliaty, demand
may be affected by income, price of competitiors and advertising all at the
same time.
 Difficulty in measuring – unless the business has already changed its prices
and all other factors have stayed the same, the predicted change in dmeand is
difficult to estimate.
Elastic – demand changes by greater proportion that the change in other variable.
The answer is more than one
Inelastic – demand changes by proportionately less of a change in the other
variable. The answer is less than one
Distribution
The channel of distribution refers not only to the final outlet where consumers can
purchase the products of their choice, but the route that is taken from the
manufacturer to the consumer.
Wholesaler – the role of te wholesaler is to act as a communicational link between
the manufacturer and the retailer.
Advantages of using a wholesaler:
 The existence of the wholesaler enables the manufacturer to deliver to only a
few locations instead of to every retailer, saving time and therefore money
 There is a link between the manufacturer, the retailer and the consumer.
 The wholesaler helps the manufacturer by providing valuable information
about the trends in the market which are provided by the retailer. Such
information can help the manufaturer plan its production schedules
 If any complaints are received about a product by the retailer they can be
passed back to the manfacturer via the wholesaler, providing the manfacutrer
with infroamtion that may lead to improvements in the product concerned
 the wholesaler allows the retailer to purchase many of the products it needs
from one location, saving the time and the inconvinience of dealing with a
range of manufacturers
 The retailers will probably enjot the benefit of credit facilities provided by
the wholesaler which will enhance its cash flow.
 There will be more choice at a wholesaler than that available from one
particular manufacturer because the wholesaler will stock products from a
range of manufacturers

Disadvantages of using a wholesaler:

 The wholesaler will add on its profit margin to the price
 The manufacturer has less control over where the product is sold or for
what price it is sold
  There are fewer opportunities for the manufacturer to market the product
at the wholesalers, where it will be copmeting with other manfacturers’
brands
Agent – an intermediary between the producer or the sller and the consumer. They
simply perform the task of selling the product or service on behalf of the seller.
Franchise – an arrangement between a person who wishes to operate a business
under the name of the franchise and the company itself. Franchising is a
compromise between owning one’s own business but having the financial and
marketing expertise and brand recognition of a large company.
Direct selling
This is where goods are sold directly from the producer to the consumer without
the need for any middlemen or intermediaries.
- Mail order – the goods are selected in the customer’s home and are ordered
from the mail oder company, either by phone of by post.
- Telesales
- Online shopping
Physical distribution – this is concerned with the actual movement of the products
and has recently become more important as the cost of moving goods from the
manufacturer to their final destination has escalated dramatically.
The major costs involved with move ment of goods – wages, machinery,
warehousing, packaging
Selectingg the appropriate channel of distribution:
 Type of product – consideration needs to be given to the characteristics of
the product. Its size, shape, weight, value and fragility are all of concern.
 Consumers – the consumer segment that is being targeted will influence the
outlet in which the product will be sold and therefore which channel of
distribution will be required
 Quantity to be delivered – the number of items to be delivered is important;
if only a few are required it would not be cost-effective to use a short
channel as the manufacturer would be involved in transporting just a few
items many times over.
  Frequency of delivery – delivering on a regular basis may make it
worthwhile establishing a particular channel for the items involved.
 Location – distribution to n isolated village would not be economical for a
manufacturer so a longer channel would need to be used.
 Budget – this will be of signficance, especially when the physical
distribution factors are considered.
Regional distribution centre – a large-scale depot used by national retail chain to
distribute goods to its own stores as and where he reuired.

Promotion
Promotion is used as a part of the marketing mix in an attempt to persuade the
customer to purchase the produccts or services of the business.
It is important for promotion to help the customer to become aware of the product
and to understand its selling features and distinctiveness. DAGMAR (Defining
Advertising Goals Measuring Advertsing Results)
The promotional mix consits of a variety of methods in order to gain sales.
Above the line promotion – involves the use of media over which a business has
little control.
Advertising:
Purpose of advertising – one of the main purposes of advertising is to create a
distinctive image for the product to enable the business to add value to the product
or service. There are two types of advertising:
 Informative – informs customer thaat the product exists
 Persuasive – appeal to the customer by suggesting how life will be better if
the product is purchased
AIDA –important for all advertisement to satisfy AIDA:
 Attention – without gaining the attention of the cusstomer, the message
cannot be successfully delivered
  Interest – once the attention of the customer has been gained, the
advertisement must maintain the interest of the customer throught, in order
for the message to be delivered and understood
 Desire – it is important for the advertisement to create a level of desire for
the product that leads to positive action on behalf of the customer
 Action – if the advertisement has been successful, the customer will actually
purchase the product or service and will be not be diverted into buying an
laternative at the point of sale
Methods of attraction:
 Famous people
 Comedy
 Cartoons
 Sex
 Financial incentives
Through media:
 Television
 Radio
 Cinema
 Newspapers
 Magazines
 Posters
 On the internet
 Successful adverts
Constraints on advertisement:
 The advertising standards authority (ASA) – is it legal, decent, honest and
truthful
  The committee of advertising practic (CAP) – attempt to ensure that adverts
on the internet are policied properly
 Ethics
Below the line promotion – much more specific and uses media over which the
business had control such as direct marketing and sales promotion offers on its
packaging. Includes sales of promotion, mailshots (direct marketing), packaging,
merchandising, telemarketing
The main attrubute of this type of promotion is that a business can target specific
customers more easily than in the ase for above the line.

Sales promotion is divided into two parts:

 Into the pipeline, which refers to attempts by manufacturers to encourage
retailers and wholesalers to stock the product
 Out of the pipeline, which refers to attempts by manufacturers to encourage
customers to purchase
 Sales-force – motivated staff, variety of incentives
 Trade fairs
 Retailers and wholesalers

Merchandsing – another form of incentive at the point of sale that is used to entice
the customer into buying. It concentrates on how the products are presented to the
customer.
Packaging – can also be used to highlight the brand name of a product
Many fuctions that packaging performs:
 It protects and preserves, therby extending the shelf life of the product
 It allows the retailer to display and stack more easily
 Is a form of advertising and allows the customer to recognise the brand
 It adds value by turning a product into a gift
Above the line promotion – general promotion which is not able to target specific
customers
Below the line promotion – promotion that targets specific customers by direct
contact
Sales promotion – and incentive at the point of sale
Mercahndising – a further incentive to buy, concentrating on the display of
products

Marketing strategy
A marketing strategy is a long-term plan which is designed to meet the company’s
marketing objectives. The implementation of the strategy is carried out using the
four P’s of the marketing mix, otherwise known as product, price, place,
promotion. There are always constraints on achieving the strategy:
 Customers
 Competition
 Exchange rates
 Interest rates
 Marketing budget
 Distinctive competence of company
Global marketing – with the growth in multinational businesses, there are now
more opportunities to sell products throughout the world.
Another major avantage of globalisation is that the business is able to cope with
the slowdown in economies in a particualr area of the world.
Niche marketing – where a business wishes to concentrate on a a particular
specialised segment of the market rather than attempting to appeal to the mass
market. Often used by smaller businesses that are unable to compete with the
dominant businesses within the market, due to lack of resources and inablility to
exploit economies of scale. Larger businesses may use this when they wish to
expand their product portfolio.
Segmentation – frequently occurs when there is an obvious subdivision of the type
of customer who buys the product.
Global marketing – finding markets in any part of the world in order to achieve
exonomies of scale
Globalisation – similair to global marketing, but pays closer sttention to local
markets
Market-led marketing – a strategy which responds to customer needs
Asset-led marketing – a strategy which generates ideas and products which are
based on the company’s assets
Marketing plan – the programme of how a business plans to achieve its objectives
through the strategy, focusing primarily on the marketing mix
Marketing audit – a review of the effectivenes of the marketing plan

End of section questions

Define marketing: identification, anticipation and satisfaction of the customer’s
needs
Explain the meaning of market segmentation: the process of plitting the market
into distinct groups, with a view to targeting each specific group
Explain the different between product orientation and market orientation: product
oreintation emphasise on designing the product which the company hopes to sell
whereas market orientation emphasise on researching customer needs then
designing and producing a product appropriate to meet those needs
Define unique selling point: an attempt to differentiate the product from
competition
Suggest two marketing objectives:
 Increase market share
 Market domination
 Repeat purchasing
 Gaining market leadership
What is secondary data? Also known as desk research, involves the collection,
collation and interpretation of market data that has already been published.
What is a quota sample? It is a set number to enhance reliability of a sample
When might a quota sample be used? When the characteristics of the market are
known
Difference between bar chart and histogram? Bar uses only length of bar to show
degree of importance of data whereas histrogram uses height and width
Characteristics of normal distribution? The mean, median and mode are the same.
The distance between the mean and the standard deviation will inculde a certain
percentage of observations

Accounting and finance

Introduction to fiannce
Finance is defined as anyting that allows the business to operate. This is meant in
the broadest sense; runing machinery, purchasing materials, investing in a patent,
paying the work-force, running an advertising campaign.

Accounting is the process which allows the business to control its expenditure and
focus on profit and cash flow. It is divided in two distinct areas:
 Financial accounting – involves reporting to the shareholders of the business
in terms of the assets, liablilites, profit and cash for the entire financial year.
It is mainly for external users such as shareholders, suppliers and banks who
utilise the annual report
 Management accounting – focuses more on detailed internal accounts than
the above so that a business can analyse its performance internally. This
allows the business to:
- calculate the break-even level of output
- evaluate the performance of particular departments
- set clear, definable financial targets
- monitor cash flow on a monthly basis
financial acocunting, therefore, is about reporting past information about the
business, whereas mangament accounting is about running the business in the
present and making decision for the future.
Annual report:
 summary of results – provides an overview of the company’s results,
normally referring to the main numerical areas of interest for the
shareholders e.g. dividends and profit
 aims of the company – this is intended to give readers a feel for the activities
and objectives
 chairman’s statement and report – this provides an overall synopsis on the
company and the state of the markets it operates in, in terms of whether
conditions have worsened or not
 director’s report – this includes a summary of each part of the business,
whether by product, location or both. It provides a detailed account of
investment plans and reports on the previous year. It also provides the reader
with a summary of accounting policies
 auditor’s report – directors are faced with the problem of producing an
anlytical opinion on their own performance, so the law states than an auditor
must first check that the accounts represent true and fair view of the business
at the time they are put together. The idea behind this is to protect the
interest of shreholders and potential shareholders
 financial statements and notes to the accounts – profit and loss account,
balance sheet and cash flow statement.

All stakeholders will have an interest in a particular aspect of the annual report:
 shareholders – the business will be paying dividends, which normally
increase from year to year, not only to protect the investor against inflation
but also to ensure the dividend increase compares with competitors.
 Managers – if the business is profitable, with a strong cash flow, then they
are likely to keep their job
 Customers – they would want a statement to show identification and
satisfaction of their needs are met
  Pressure groups – if consumer groups such as which identify a business that
seems to be making excessive profit, possibly at the expense of customers,
they will us ethe report to gather evidence which supports their case
 Directors – the main way that directors are judged is by increasing the
wealth of the shareholders. A convincing annual report will obviously be in
their interest because it will hopefully encourage present shareholders to
maintain their investment in the business, as well as encourgaring
shareholders to invest
 Government – the government will want to use an annual report with a view
to encouraging foreign companies to locate in the UK
 Suppliers – they will iwsh to see a positive cash flow, and possibly the
company making a statement of intent in their objectives with regard to
prompt payment of suppliers
 Employees – they will be concerned with their job security and will
therefore consider the amount of capital investment and potential cost
savings which the company may be aiming to make in the future
Balance sheet – shows the stock of assets which the business owns and which is
balanced against the amounts of money which the business owes. It applies to a
precise point in time (as at 31/12/00)
Profit and loss – calculates the surplus (or deficit) of income over all of a
company’s costs. Income is earned by selling products and costs are deducted
which apply to the products sold (such as material costs) or to the accounting
period (rent for the year)
The balance sheet is therefore the stock of wealth at a point in time and the profit
and loss is flow of income and expenses during the year which results in the
company being either wealthier or poorer.
Cash flow – the third and final statement concenrs the flow of cash through the
business. It is not the same as a cash flow forecast, which represents the predicted
cash flow on a short-term basis over a period of time into the future. Rather it is a
record of how cash has moved into and out of the business, in broad totals, over the
past year.
Accounting principles or concepts – this is to ensure some degree of accuracy is
maintained as well as common rules between each company:
 Matching (or accruals) principle: states that a business must match revenues
with costs of goods sold which relate to an account
 Materiality – when accounts are drawn up, the figures should focus on items
which are significant financial matters, rather than those of little or no
importance
 Objectivity – when accounts are drawn up, there should be no personal,
subjective calculation of values i.e. the asset value of a business must be
calculated based on opinions of directors. The aim is to avoid overvaluing
the business
 Realisation – this states that a sale is recognised when the goods change
hands and not when cash is received.
 Consitency – the same assumptions e.g. about asset values must be ,ade
from one year to the next.
 Prudence (conserveatism) – states that when a business draws up the
accounts, it presents the worst possible case by valuing its profit at the
lowest value
Accounting conventions:
 True and fair view – the auditors sign the financial report, by making this
statement. Auditors are bound by this claim and there have been occasions in
history where auditors have been held reponsible for innacurate information
in the balance sheet
 Business entity – the business will always be seen as a separate entity from
the wealth of the owners and any assets which belong to the business as
separate from those of the owners. Any profit which is earned belongs to the
owners, whose wealth is separate from that of the business
 Going concern – the business could easily overvalue the assets if it inteded
to wind itself up
 Double entry – for every possible transaction, there is an equal and opposite
reaction in the balance sheet
Finance – anything which allows the business to operate
Accounting – the process or recording, reporting and analysing financial
information
Financial accounting – information collected for the external user e.g. balance
sheets
Management accounting – information collected for managers to help with the
decision making
Accounts – the actual record of financial information
Annual report – the main method of communication with shareholders; required by
law for all fully listed companies
Auditor – normally an accountant who is responsible for ensuring an objective,
true and fair view of the financial position of the business
Accounting principles – rules and regulations governing how accounts are drawn
up
Accounting convention – traditional ideas behind drawing up accounts

Cash flow and working capital

Cash is the money which allos the business to operate; with cash, the business will
cease, for a variety of reasons:
 Without cash the business cannot pay its employees, who will look for work
elsewhere
 Suppliers will cease to provide materials
 Banks will call in loans
 Shareholders will withdraw their investment if no dividends are paid due to
cash flow shortages
 Landlords will evict businesses from rented property
 Gas, electricity and water supplies will be cut off if the business fails to the
bills
Working capital – allows the business to operate on a day-to-day basis. Working
capital therefore involves the money required to buy materials and components,
pay for labour, pay the rent, pay for suppliers of electricity etc.

Costs of holding too much cash:

 Loss of interest – although there may be a token amount of interest earned
on current accounts, it will be nowhere near the interest rate for longer-term
accounts
 Loss of purchasing power – unless the rate of interest is more than the rate of
inflation, the money held in a bank account will actually lose its purchasing
power
 Opportunity cost – shareholders do not invest money in a business for the
business to store it in a bank account
Costs of holdin too little cash:
 Inability to meet creditors’ demands – when suppliers require cash payment
for goods, lack of payment or consistent late payment could well result in a
company losing its credit facility
 Need to borrow at expensive rates – overdrafts, especially those which are
un-authorised, are expensive in terms in interest.
Causes of cash flow problems:
 Overtrading – if a business grows too quickly, then it will need to buy
materials and machinery for a production level which is much higher than
the cash which is coming in from sales. Such a fast rate of expansion can
frequently lead to companies being wound up because of their inablility to
pay creditors
 Holding too much stock – a business may well pile up stock, especially if it
thinks prices have temporarily fallen to an unusually low level.
Alternatively, a supplier may be winding up the business and selling off
stock at a huge loss
 High borrowing (high interest payments) – when a business overtrades it
frequently needs to borrow money to finance both fixed and working capital,
because the cash from sales is insufficient to meet its expansion plans
  Allowing too many goods to be bouhgt on credit – this is frequently used as
a method of promotion. Unfortunately, as credit periods lengthen it is
possible to concentrate too much on sales as opposed to getting the cash in
 Businesses that rely on seasonal trade – during the time that sales are very
low, cash still needs to be spent on running the business. Such an outfit will
then experience a sudden rush of cash flow during the period of sales
 High unemployment – leading to lack of demand for products and less
revenue and cash
Methods of improving cash flow:
 Stock – the longer a product stays in storage, the less efficient the company;
the longer the debtors take to pay, the less able to company is to reinvest the
cash. A fast turnover of debtors can also be achieved by factoring the
debtors
 Debtors – reducing the credit period given to customers. The business may
well have to offers a discount to encourage prompt payment
 Creditors – increasing the time it takes to pay creditors reuiqres
understanding suppliers, and the business may well lose out on discount
which has been offered by the supplier for prompt payment
 Dropping prices – although an obvious idea, this is ought to generate greater
revenue, although the credit terms will also be significant in this respect.
Extra sales are of little value unless the money comes in
 Leasing as opposed to buying – when a business wants to keep cash within
the business, it may choose to lease assets, therby not needing to find the
principal sum for outright purchase
 Subcontraction – instead of paying the work-force a regual weekly wage,
tehb suiness may decide to contract out work to a company which will alow
a generous credit period
 Selling fixed or idle assets – only those assets which are earning money for
a business should be kept. Sometimes a business will sell its headquarters
and move into rented accommodation in order to improve cash flow
Cash flow forecast – this will provide a visual easy-to-understand check of the cash
flows in and out the business. It should provide the oopruinty to predict the times
when there may be problems, where more cash is flowing out than is flowing in:
 A visual representation of the figures enables the reader to assess when the
main problem times are going to be and where remedies may be found.
Perhaps it may be wise at an early stage of the business to pay themselves
less or purchase less stock
 It highlights how quickly a business can utilize cash, even when the initial
amount appears to be sufficient
 Ways of delaying payment for stock may help to reduce the outflows
 It highlights that the start-up capital is insufficient
 It may indicate that the business is not going to be viable- note the time of
the year
Cash flow – the amount of liquid assets moving in and out of the business
Overdraft – when a business draws out more from the bank than it owns
Working capital – the finance required to run the business on a day-to-day basis
Overtrading – rapid expansion which normally results in a strain on cash flow
Credit control – the process of monitoring debtors to reduce pressure on cash flow
Cash flow forecast – predicting likely movement of cash in and out of the business

Profit and loss account

Profit is the return on the enterprise factor of production, a reward to the
entrepreneur for his or her endeavours. It is essential if a business is to thrive and
prosper. It is needed for growth, to purchase machines. It can be a source of
income for investors in the business. It is used as a measure of performance.

There are other factors that have to be borne in mine when calculating the
turnover: VAT, excise duties, customs duties need to be subtracted. Any goods that
are returned under guarantee or not required for any reason being in actual fact,
they have no been sold.

Subtracting the cost of sales from the turnover/sales will give you gross profit:
Turnover 700000
Cost of sales 250000
Gross profit 450000

Cost of sales allowing for stock adjustments:

Opening stock 1.1.00 52000
Stock purchases during 00 308000
Goods available 360000
Less closing stock 110000
Cost of sales 31.12.00 250000

Sales – cost of sales = gross profit

Gross profit – expenses = operating profit

Sales/turnover 700000
Minus cost of sales 250000
Gross profit 450000
Minus expenses 300000
Operating profit 150000
Add Rent 10000
Minus interest 50000
Profit before tax 110000

Profit before tax is also referred to as net profit.

Corporation tax – this is a tax on the profits of companies and is paid a proportion
of profit before tax. One corporation tax has been deducted, this is known as profit
after tax.
The final deduction is the dividend that is paid to shareholder. Directors may avoid
paying a dividend if an insufficient amount of profit has been earned. Once these
final deductions have been made, the business is left with retained profit, which the
business can use for investment purposed.
Plant-it LTD P&L account year for the year ending 31.12.99
Turnover/sales 700000
Less cost of sales 250000
Gross profit 450000
Less expenses 300000
Operating profit 150000
Plus non-operating income 10000
Less interest payable 50000
Profit before tax 110000
Less tax 25000
Profit after tax 85000
Less dividends 15000
Retained profit 70000

Any retained profit that the business earns is transferred to the retained profit
reserve in the balance sheet. All retained profit is expressed as a liability, because
it belongs to the shareholders, whether it is in the form of cash or has already been
used to buy stock or machinery.

Uses of the P&L account:

- The directors of the business need the information with the P&L iin order to
assess the success of the decisions that have been made in the past and to
help them make the appropriate decisions for the future
- Provides the basis to apply specific rations to measure particular aspects of
the business’s performance (include return on net assets, profit margin,
interest cover
 - A business will always be keen to us eht resukts from the P&L account,
providing they are good results, to show the shareholders that the business is
prospering.
Bad reasons: to comply with a legal requirement, a copy of the P&Lhas to be filed
with the Registrar of Companies, and can be thus viewed by competition
Turnover – main source of income; calculated by the number of units sold x price
Cost of sales – direct costs; raw materials, labour costs of production

Expenses – fixed costs or oeverheads, not related to the [productive process

Non-operating income – other sources of income; rent and interest