CIMA BA1 Study Text

Chapter 1

Business Organisations
Chapter 1 Business Organisations

1. Economics, the micro and the macro!

Let’s start at the beginning. When people are asked what they think economics is all
about they usually say money, finance or something similar and whilst all those things are
in it somewhere, that isn’t really it.

Economics actually concerns the allocation of scarce resources. So considering the

economics of a country, one scarce resource to be allocated is the Government's
budget – what to spend those limited funds on – hospitals, schools, defence and so on.
Another scarce resource is people – there are only so many in a country and economics
concerns itself with how those people should be used to best effect for the country as
a whole.

Economics does not just consider countries though, it also considers companies and
so, we split the subject into two different areas microeconomics and macroeconomics.
Microeconomics deals with decisions being made at the level of the company.
Decisions based on the type of organisation and the market that they operate in.

Macroeconomics, on the other hand, considers the environment surrounding the

business. The decisions being made by governments and their impact on interest and
exchange rates, unemployment, inflation and the growth of the economy (all these
terms will be explained in later chapters if you're not quite sure what they all mean).

In this study text, first we will consider economics at the micro level and then go on to
consider the macro. The last sections will deal with how companies collect and use data
and information and lastly, the impact of financial markets and we'll also be covering
some financial maths.

2. Types of business organisations

Organisations
Chances are, you used Google today. The search engine is part of our everyday lives. But
have you ever wondered who runs this organisation? How do they make decisions? To
whom are they accountable?

Well, in truth, Google is just an organisation of people, like any other. An organisation is
a group of people that is organised and managed in a way that aims to follow a
corporate goal or need.

All types of businesses have a structure which is how the organisation's people are
organised. This structure will explain who is in charge of how and who has responsibility
over what!

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Chapter 1 Business Organisations

All organisations also have systems, which are processes with steps of tasks which make
things happen efficiently and in a consistent way. A factory may have a production
process – the steps for producing a product, or a financial department, a process for
paying supplier invoices that ensures suppliers are always paid correctly and on time.

For example, if Fred starts freelancing as a painter and decorator he will have to do
everything, from painting to marketing through to accounting. A single-person operation
is a valid, if demanding, business set-up. But if he then takes on an assistant he will have
a group: that's now an organisation. The more people Fred takes on, the more people
and things he will need to organise and he may set up some standard processes e.g. the
steps in painting a window. He may even need to change the structure and legal status of
his organisation to manage and account for its growth and activities.

So, as we have seen, organisations have common goals, a clear structure and
standardised systems and they need management to control them:

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Chapter 1 Business Organisations

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Chapter 1 Business Organisations

Types of organisation
Organisations can be profit seeking or not for profit. Public-sector organisations are
generally not run for profit, but for the administration of the state.

So we have two different goals here, profit making and not profit making.
Diagrammatically, using this as the main goal, organisations are split as follows:

Let's examine these different types of organisation in more detail.

Profit seeking organisations

As the name suggests, the primary objective of profit seeking organisations is to
maximise returns for the owners (or shareholders). These organisations can further be
split into two main groups: unincorporated and incorporated.

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Chapter 1 Business Organisations

Unincorporated organisations

In unincorporated organisations, the business owners and the business itself hold the
same legal identity. For example, if Fred Smith becomes self-employed as a painter and
decorator, he may decide not to incorporate and simply trade solely as Fred Smith. It
certainly keeps things simple!

But there's a catch. Not incorporating means that the owners are held personally
responsible for the debts the business activity may incur. In other words, if Fred's
business gets into debt, he will have to pay it back out of his own money just like any
other person. Therefore, unincorporated entities are considered to have unlimited
liability for the business’s debts.

The two main types of ownership in this category are:

• Sole trader – One sole owner of the business (wholly liable for debts), such as
Fred.

• Partnership – A collection of owners working together (jointly liable for debts),

for example if Fred joins forces with his friend, Barney.

Imagine that Fred and some friends pooled together their savings and took out a
loan at a bank in order to start an unincorporated partnership. If things go badly
for them (which hopefully they won't!), then they would not only lose their
combined savings, but would also have to repay any debts to lenders (such as the
bank and any suppliers). This is what we mean by an unlimited liability.

There are other approaches available, to help Fred, and his friends, avoid this sticky end
– they can become incorporated...

Incorporated organisations

To protect their personal finances, the business owners may decide to create a separate
legal identity for their business. This means that the owners are not held personally
responsible for the debts the company may incur. Therefore they are considered to have
limited liability for the business’s debts.

In the UK there are two main types of ownership in this category are:

• Private limited companies (Ltd) - In a private limited company shares cannot be

issued to the public. These are often smaller companies, such as a market town
retailer. However, larger companies looking to retain a high degree of control
sometimes stay private. By choosing to stay private, they don't have to report to a
large number of shareholders. However, they still have to publish their financial
accounts. For example, Walkers Snack Foods Ltd or Virgin Group Ltd.

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Chapter 1 Business Organisations

• Public limited companies (PLC) - In a PLC, shares can be issued to the public.
Usually larger companies go public when they wish to increase funding for
business ventures through a public share offering. For example, Tesco Plc and
British Airways Plc. However, the owners risk losing control by selling stakes to
the public. They must also comply with additional regulations when trading
publicly.

So, looking back at our last example, if Fred and his friends had set up an incorporated
business instead of an unincorporated partnership, they would still lose their initial
investment (their pooled savings), but they would not be personally responsible for
repaying the company's debts. Now, that is an important difference in the business world
and Fred's family are more secure, knowing they can still pay the mortgage even if the
company fails!

Here are 4 names of organisations set up in the UK, can you figure out which of these are
unincorporated and which are incorporated?

1) ABC Ltd

2) Good Products PLC

3) Smith, Jones and Borthwick

4) Robert Newing T/A Brighter Windows

1 is a limited company (Ltd) and has been set up as a separate legal entity separate from
the directors. 2 is a public limited company (PLC), it too maintains a legal identity
separate from the directors, but its shares are usually more widely available through
stock markets.

3 is a partnership which is not an incorporated entity (the clue is that there is no Ltd or
PLC) and that there are multiple people in the name, while 4 is a sole trader (just one
person), again not an incorporated entity. T/A by the way stands for “Trading As” which
is the name used in their marketing.

Co-operatives

A cooperative is an organisation which is owned and controlled by the members, rather

than shareholders. Those members may be staff such as with the John Lewis
Partnership, or customers as with The Cooperative Group. While profits are important,
the welfare of members is also a key goal.

Mutual organisations are similar to cooperatives in that they are owned for the benefit
of members who tend to be customers too, although they tend to focus on financial
services rather than physical products. e.g. mutual building societies such as the
Nationwide in the UK where the customers are also members and benefit from the

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Chapter 1 Business Organisations

services they provide such as savings accounts, current accounts or mortgages and
secondly, also from receiving any trading surplus that is made.

Not for profit organisations

Now, on the other side of the fence, we have not for profit organisations (or non-profits).
As the name suggests, non-profits do not set out to make a profit for their owners.

Like profit seeking companies, non-profits aim to operate efficiently and to be cost
effective. Not-for-profit organisations include trade unions, charities, clubs, societies
and educational establishments. Not-for-profit organisations can exist in both the public
and private sector:

Public sector

Public sector not for profit organisations are owned by the state and are responsible to
the government for their business activities. Public sector organisations can be in the
form of a state owned industry or a government run department. For example, The NHS
in the UK and The Peace Corps in the US.

Private sector – Non-Governmental organisations (NGOs)

Private sector not for profit organisations have a similar structure to profit seeking
companies in that they are owned by investors and responsible to the
shareholders/owners. However, their goals and objectives do not focus on profit
maximisation. Instead, they focus on other goals such as ethical standards and service
delivery. For example, Oxfam and The Make-A-Wish Foundation. These organisations are
called Non-Governmental Organisations or NGOs.

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