Edexcel Business A level

Theme 2

2.1 Raising Finance

Introduction to finance
Finance is the money used to run a business.
Working capital is the finance available for running day to day operations.
Financial concerns for start-ups:
·  How much the start up costs will be, from the idea to opening the stores doors.
·  How much running costs will be, fixed and variable.
·  How much revenue do you expect, down to forecasting.
 Raising finance:
To expand or start involves raising finance through short, medium or long-term sources.
* Short term – under a year.
- Bank overdraft – >allowing the firms bank account to go into debt with the bank up to a limit.
- Trade credit – >suppliers agree on a future payment of a good they get now.
* Medium term – 2-4 years.
- Bank term loan – >banks lend out money for a fixed interest rate and time-period to be paid back in.
- Leasing – >signing a contract to have another firm’s asset for an agreed time and payment monthly.
* Long term – over 5 years.
- Owners savings
- Sales of shares – >selling part of the business ownership.
- Reinvested Profits
- Venture Capital loans – >loans from specialist providers which lend money for expansion or start-ups.

Sources of finance
The need for finance; start-ups, growing or other situations such as cash flow problems.
 Internal finance: inside the business
- Retained profit
- Sale of assets
- Improved management of working capital
- Owners savings
 External sources of finance: outside the business
- Family and friends
- Banks
- Peer to peer funding
- Business angels – usually entrepreneurs willing to back high risk but high profit, new businesses.
- Crowd-funding – lots of small investments, usually done on through the internet.
- Other businesses

External methods of finance:

·  Loans – borrowing from a bank.
·  Share Capital
·  Venture Capital – outside investors because the business can’t get a bank loan or raise finance on the
stock market.
·  Overdrafts
·  Leasing
·  Trade credit
·  Grants – handouts to small firms from local authority or government.

Forms of businesses
Businesses with Unlimited Liability
This is when the finances of the business are treated as something inseparable to the personal finances
of the business owners. This means that, if the business were to lose £1 million, the owners would also
owe the money and could be forced to pay the money back in personal assets as well as business assets.
This could result in the owners becoming bankrupt as well. Two types of businesses tend to have
unlimited liability:

1. Sole Trader
This is an individual who owns and operates their own business. There may be one or two employees
but the final decisions are made by the owner. They are the only one to benefit financially from success
but they have to face the burden of failure themselves too. They have unlimited liability, meaning that if
a sole trader cannot pay the bills for the business the banks have the right to take personal assets as
repayment. If this is still not enough to repay the debt the individual is declared officially bankrupt. 
The sole trader is the most common form of legal business structure adopted by UK businesses, even
though it has the greatest financial risk involved. In some areas of the economy this structure is the
dominant structure, especially in fields where little finance is needed to set up and run the business, and
customers demand a more personal service. There are no formal rules to follow when establishing a sole
trader, and there are no administrative costs involved. Complete confidentiality can be maintained
because accounts are not published. 
The main disadvantages facing sole traders is the fact that there are only limited sources of finances
available, there are long working hours, and if they are unwell running the business whilst in ill health
can be difficult to do. 

2. Partnerships
These are formed when 2 or more people start a business together but they do not form an official
company. They also have unlimited liability, so their personal assets are at risk as well as business assets
if the business goes into debt. Because people are working together in this, and both are risking their
personal assets as well as business assets it is absolutely crucial that the partners trust each other with
their money. As a result, this legal structure is often found in professions such as medicine and law. The
main difference between a partnership and a sole trader is the number of owners involved. 

Businesses with Limited Liability

Limited liability means that no matter how much debt the business is in, they cannot take personal
assets as payment, and this is because the business has a separate legal identity to the business. This
means that, if the business were to lose £1 million, the owners would owe the money but they would
not be forced to pay the money back in personal assets. If there is still not enough money the business
would be closed down, but the owners and shareholders have no liability for any remaining debts from
it. 
To benefit from limited liability the business must go through a legal process to become an official
company. The process of incorporation creates a separate legal identity for the business, so in the eyes
of the law the business and the owners are 2 different identities. The business would be able to take
legal action against others and have legal action taken against it. In order to get this, the company must
be registered with the Registrar of Companies. 
Advantages of Forming a Limited Company
- Shareholders experience the benefits of limited liability - including the confidence to expand.
- A limited company is able to gain access to a wider range of borrowing opportunities than a sole trader
or partnership.
Disadvantages of Forming a Limited Company
- Limited companies must make financial information avaliable to the public.
- Limited companies have to follow more and more expensive rules than unlimited companies.

Private Limited Companies

The shares of a private limited company cannot be bought and sold without the agreement of the other
directors or managers in the company. This means that the company is not listed on the public stock
market, making it possible for the managers to maintain close control over how the business is run. This
is typically run by a family or a small group of friends. It may be very profit focused, or it could have
completely different objectives than profit maximisation. 
All private limited companies must have 'Ltd' after the company name to warn those dealing with the
business that they are relatively small and has limited liability. As limited liability protects the
shareholders from business debts, 'cowboys' can be attracted by the status and therefore take
advantage of this - which is why many places say they do not accept business cheques. 

Growth to PLC and Stock Market Flotation

When a company has expanded to the point in which it has share capital of more than £50 000 it can
convert to a Public Limited Company (PLC). This then means it can be floated onto the stock market and
members of the general public can buy shares in the company. This increases the company's access to
share capital and therefore makes it able to expand considerably. The key differences between a 'PLC'
and an 'Ltd' are as follows:
* A public company can raise capital from the general public, but a private company cannot do so.
* The minimum capital requirement of a public company is £50 000, but there is no minimum for a
private company.
* Public companies must publish far more detailed accounts than private companies.
Most large businesses are PLCs, but the process of converting from private to public can be extensive
and difficult. Usually, successful small firms grow steadily, sometimes at a rate of 10% per year. The
problem with floating onto the stock market is that it provides a sudden huge input of cash into the
business - this forces the business to try and grow faster in order to appease shareholders. 

Other Forms of Business

Franchising
Starting a new business with a new idea needs a massive amount of planning, and sometimes also luck.
Many of the problems involved with this can be avoided through the use of a franchise, which can be
considered as a 'half-way house' towards the running of their own business for new business owners. If
an independent business were to be set up, the owner would need to do all of the work on design,
systems creation, promotion etc. on their own, whereas if they were to adopt a franchise this would all
be done for them. The franchise owner also provides and handles all of the necessary staff training. 
Advantages of Running a Franchise
A young businessperson could treat being part of a franchise as a good source of training towards
becoming a full entrepreneur. Few people have the range of skills required to be an independent
business owner, which is why the failure rate for new independent businesses is higher than for
franchise businesses - and because of this the attitude of bankers is very different when business owners
seek finance for a franchise start-up. Franchises find finance easier and cheaper to get, especially as the
interest rates for the franchise would be lower than it would be for an independent business. 
Disadvantages of Running a Franchise
Independent-minded hate being a franchise owner, as they often want to be their own boss. A
franchisee is the boss of their own business, but without the normal freedoms of decision making as an
independent business owner - this can be very frustrating for them. It is also important to choose the
right franchise. There are some dubious franchises out there that promise training and advertising
support, but they give very little once they have been paid the franchising fee, which makes the careful
research into the franchiser essential. It is also important to consider that the franchiser's share in the
income can make it difficult to make a good amount of profits for the franchisee. 

Social Enterprise
Social Enterprise: When a business is set up by an individual with the aim to solve a community problem,
willing to take on the risk and effort needed to make a positive difference in the community.
Where 'private limited company' is a legal term with specific rules that need to be followed, 'social
enterprise' sounds great but actually promises little in return. The term 'social enterprise' means nothing
more than the idea that the business claims to do good, but for whom the 'good' is for is not actually
stated. A specific type of potentially social enterprise is the co-operative, such as John Lewis, which is a
worker-owned co-operative, or the retail Co-op, which is a customer-owned co-operative. These have
the potential to offer a more united cause for the workforce than the profit of shareholders. 

Lifestyle Businesses
Lifestyle Business: A business that has been set up based on the needs of their own or their family's
needs.
Some entrepreneurs start a business based on the needs of their own or their family's needs. For
example, a young couple might start a surf school by the sea in order to earn money whilst enjoying
their love of surfing. With a lifestyle business the usual rules about objectives and strategies may not
apply - the surfer entrepreneurs may target plenty of customers above plenty of revenue so they may
set lower prices than a profit seeking business would. 

Online Businesses
Online Business: A business that has been set up to be solely operated online, with free choice as to
whether they have limited or unlimited liability. 
Online businesses are so common nowadays that they barely need a separate category. Like any other
business, they have to decide on a limited or unlimited liability business structure. The only thing that
makes an online business different is that there is a different balance between risk and reward. Ordinary
'brick' businesses, such as a restaurant, there has to be a heavy financial investment before the business
can begin to trade. With an online business, the financial investment usually happens more gradually
over time, so they have more time to evaluate the risk before putting it out to risk capital. As well as
this, the scale of the business is normally limitless. With an online business the financial risks are lower
and the potential rewards are higher. 

Liability and Finance

 Unlimited Liability is where owners and liable for any debts of the business. >>Appropriate
finance for sole traders and partnerships are ; owner’s capital, bank overdraft or loan, leasing
and trade credit but mostly retained profit.
 Limited Liability is where owners can only lose what they invested in the business.
>>Appropriate finance for PLC’s and LTD’s are ; share capital, bank finance, venture
 capital/business angels/ crowdfunding and trade credit/leasing but again, mainly retained
profits.
Creditors - those owed money by a business.
Bank finance often requires collateral. This is an asset used as security for the loan.

Planning and Cash Flow

Business plan – a document setting out a business idea and showing how it is to be financed, marketed
and put into practice. This should be based on how it is going to achieve a competitive advantage if the
potential investor will become an investor in the future.
 Contents of a business plan:
- Executive Summary: Business overview, describes business opportunity, marketing and sales
strategy, operations and finance
- Business Opportunity: Description of the product, price and quantity to be produced
- Buying and Production: Where resources will be supplied from, production method to be used,
cost of production.
- The Business and its objectives: Name of the business, address, legal structure, aims and
objectives
- The Market: Size of the potential market, description of the potential customers, nature of the
competition, marketing priorities
- Personnel: Who will run the business, how many employees, skills and experience of those who
will work in the business
- Premises and Equipment: The premises (place) to be used, equipment which needs to be
obtained and financed
- Costing & Finance: Where the finance to start up and run the business will be sourced
- Financial Forecasts: Sales Forecasts, Cash-Flow forecast, profit-loss forecast and break-even
analysis
- SWOT Analysis

 Purposes of business plan:

- It enables management to think through the business in a logical and structured way and to set out
the stages in the achievement of the business objectives.
- It enables management to plot progress against the plan (through the management accounts)
- It ensures that both the resources needed to carry out the strategy and the time when they are
required are identified.
- It is a means for making all employees aware of the business's direction (assuming the key features
of the business plan are communicated to employees)
- It is an important document for discussion with prospective investors and lenders of finance (e.g.
banks and venture capitalists).

Cash flow forecast – estimating the monthly inflows and outflows of a business to give you the net cash
flow. Inflows are what comes into the business, outflows are what comes out.
These are used to calculate the Monthly balance – > inflow minus outflow, and the Opening and Closing
balance showing “how much cash that firm has at the start and end of the month”. The end balance
from the month is the start balance of the next.
 Analysis of cash flow forecasts, 3 main ways:
1. Calculating the difference between the closing balance at the end of the period and the opening
balance at the start.
2. Use the monthly closing balance to assess trends in the data.
3. Analyse timings for cash flows, most include cash for goods at the time sold but some may use trade
credit.
 Uses of Cash Flow Forecasts:
Earn more cash ;
·  Getting goods to the market asap.
·  Getting paid as quickly as possible.
·   Keeping stocks to a minimum – JIT
Keep cash ;
·   Leasing rather than buying equipment.
·   Renting buildings rather than buying.
·   Postponing expenditure on unnecessary extras. 
 Limitations of Cash Flow Forecasts:
·   Only as good as the data used to make them >> overestimate sales, underestimate operational
difficulties (cash outflows)
·   Risk of giving certainty when there is none >> how long business customers will take to pay?
·   Doesn’t allow for contingencies, things that can go wrong.

2.2 Financial Planning

Sales Forecasting
is a method of predicting future sales using statistical methods.
 Purpose of sales forecasts :
This forms the basis of other plans within the organization: human recourses, cash flow forecast, profit
forecasts and production scheduling, therefore drives many of the other plans and effective
management planning.
 Factors affecting sales forecasts:
- Consumer trends >>tastes and habits, demographics, globalization and affluence
- Economic variables >>real income (changes in household income after allowing for changes in prices,
e.g. inflation), exchange rates, taxation and inflation
- Competitors actions >>mergers
Difficulties of sales forecasting : is simply just not being able to predict the future, especially in the long
term.

Sales, Revenue and costs

Sales Volume is the number of units sold.
Sales revenue is the amount of money made form selling those goods.

Sales revenue = sales volume x price

Cost of production:
·  Fixed costs – those that do not change due to the output.
·  Variable costs – those that change in line with the output of production.
·  Total costs – variable and fixed costs together at a specific level of output.

Fixed costs + Variable costs = Total costs

Break-even
To calculate the break even point, you need to know:
·  Selling price per unit
·  Variable costs per unit
·  Total fixed costs
 Break-even: This is the point where revenue equals total costs, so no profit or loss is to be made.

Break-even output= Fixed costs / Contribution per unit

Contribution represents the portion of sales revenue that is not consumed by variable costs and so
contributes to the coverage of fixed costs

Contribution = total revenue - total variable costs

So, Contribution per unit is the difference between selling price and variable costs per unit

Contribution per unit = Selling price per unit – Variable costs per unit

Total contribution = Contribution per unit x Quantity sold

Total contribution - Fixed costs = Profit

Margin of Safety – the amount by which current output exceeds the break even output.(the demand can
fall before the firm starts making losses)>> the higher the margin of safety, the less likely a loss-making
situation will develop.

Margin of Safety = Sales volume – break even output

 Break even charts show different costs and revenues at all possible levels of output
Uses of Break even charts: showing the level of profits or losses at every possible level of output,
estimating future profits from higher sales and assessing impacts of price or cost changes.
 The effects of changes in Price, Output and Cost
1. Change in price
2. Change in demand
3. The effect of a rise/fall in variable costs
4. The effect of a rise/fall in fixed costs
 Limitations of Break-even analysis:
·  Simple – no benefit of bulk buying, when its total cost line will no longer be straight
·  Assumes all output is at a single fixed price.
·  Assumes all output will be sold and not wasted.
·  Static model – doesn’t consider any changes in trends etc.

Budgets
= is a target for revenue (income budget as a minimum revenue) or cost (expenditure as maximum for
spending) that a firm or department must aim to reach over a period.
 Purpose of Budgets:
- Ensure no department over-spends.
- Provides motivation to manager&staff
- Enable spending to delegated roles.
- Used as a measurement of success or failure in a period.
  Types of Budget:
·  Historical budget – >uses previous figures to create a budget.
·  Zero-based Budget – >setting budgets at zero to force managers to justify all spending.
Variance – the amount by which the actual results differ from the budget.
Favorable Variance – a difference which boosts the firms profit.
Adverse Variance – a difference which damages the firms profit.
 Difficulties of Budgeting:
The affecting factors to sales is often outside the control of the managers.
They also cost to make(opportunity costs), meaning it sometimes is worst to spend time and money on
making a budget.

2.3 Managing Finance

Profit
Profit = Sales revenue - total costs
OR Contribution per unit x Margin of Safety

Statement of comprehensive income (profit or loss account) showing the total revenue over the year,
and all costs incurred in that year, giving us the three types of profit.
 Three different types of profit:

Gross profit = Sales Revenue – Cost of Sales

Operating profit = Gross profit – fixed overheads

Net profit = Operating profit – other costs (corporation tax and net financing costs)

From the different types of Profit, we can measure the profitability using Profit Margins. This can be
used as a measurement against previous data or competitors.

Profit margin = Type of profit / Revenue (x100)

 To increase Profitability, a business must increase profits by:

·  Increase Revenue
·  Decrease Costs
·  Do a combination of both above
 Ways to do this are:
·  Increase the Price of the good
·  Cut Costs
 Difference between cash and profit:
Profit is what the business makes minus its costs, this can be reinvested and is what the business makes.
Whereas, Cash is the money the business has, this could be from the bank as a loan or could be the
profit from customers. Therefore, cash be the profit of the business, but profit is not cash.

Liquidity
Statement of Financial Income (balance sheet) – >an accounting statement that shows an organizations
assets and liabilities on the last day of the financial year.
Liquidity measures the ability of a firm to find cash to pay its bills.
 Current Ratio: Current Assets / Current Liabilities: 1

Accountants suggest the ‘ideal’ current ratio to be 1.5:1. Any higher would mean the organization has
too many recourses. Any lower than 1, the firm may not be able to pay its debts causing issues.

Acid Test Ratio: (Current Assets – Inventories) / Current Liabilities: 1

Accountants suggest the ideal acid test ratio is 1.1:1. Any lower may cause short-term debts a problem
to pay, but, any higher wouldn’t be an issue other than a possibility of wasted cash which could be
reinvested.
 Ways to improve Liquidity:
·  Selling under-used fixed assets
·   Raising more share capital
·   Increasing long-term borrowings
·   Postponing planned investments

Working Capital (Cash) ->the day to day finance for a business

Working capital = Current Assets – Current Liabilities

Managing working capital involves making sure cash in the business is sufficient for any requirements at
any time.
Working Capital Cycle – >how long it takes for a complete cycle from cash out to cash back in form a
customer payment.
Example:
Capital injected into the business at any stage. Then a constant cycle from raw materials, produced
goods, selling to customers on credit, customers pay up, then back to more raw materials.
 Managing working capital is therefore about two things:
>ensuring the business has enough finance to meet its needs
>keeping cash moving around the cycle, so enough to meet future orders
Uncertainty means a business needs to ensure enough cash for its usual working capital requirements,
as well as the allowance for any unexpected events or a little-used overdraft facility. This is known as
Contingency finance.(the financial back-up to allow for the unexpected)
 Businesses should manage its working capital through:
·  Controlled cash usage
·   Minimize spending on fixed assets
·   Plan by estimating future working capital needed

Business Failure
Business failure is the inability to keep the business going, either because of the inability to keep up with
bills/liabilities or because the profits aren’t worth continuation.
Administration – >when the directors of a business feel forced to hand over management control to an
administrator because of the threat of insolvency, they may try and sell the business or close it down
and sell its assets.
 Causes of business failure
Internal causes: when the business fall into administration
·  Marketing failure
·  Financial failure, poor management
·  Systems failure
External causes:
·  Fundamental change in technology
·  Effective competitors
·  Economic change
·  Behavior of Banks
Financial causes:
·  Cash flow crisis
·  Overtrading – when a business expands to quick for its capital
Non-financial causes:
·  Sudden urge of competitions products
·  Steady sales decline, as the business loses its long-term competitiveness

2.4 Resource Management

Resource management requires planning and control at every stage in the supply chain, form
purchasing to consumer delivery.
Production, productivity and efficiency
Production measures the quantity of output.
Productivity is a measure of efficiency, calculated by dividing output by average number of staff.

 Methods of production

Job Production - This is when a one-off item is produced such as a tailored suit.
Advantages:
- Can charge higher price
- Work more interesting for staff
Disadvantages:
- Cost per unit is high
- Finding staff with sufficient skills hard

Batch Production - Producing a set number of identical items.

Advantages:
- Allows variation in product being made
- Speedier than job production
Disadvantages:
- Costly to set up as machines
- Cost per unit still higher as machinery

Flow Production - The continuous production of a single item, usually using a production line.
Advantages:
- Unit labour costs are extremely low
- Huge volumes allow demand to be met
Disadvantages:
- High initial costs as machines (automation)
- Need to be identical products to suit
Cell Production - Group working to produce similar products but with flexibility for specialisation.
Advantages:
- Group working more ideas
- Small highly skilled cell
Disadvantages:
- Heavily reliant on people costs high
- Production volume not as high as flow

 Factors influencing productivity

- Specialisation and Division of Labour
- Education and Training
- Motivation of Workers
- Working Practices
- Labour Flexibility
- Capital Productivity – Investment in new technology

o Way to improve productivity

Improving labour productivity:
- Increase specialisation
- Improve motivation
- Training
- Increase labour flexibility
Improving capital productivity:
- Improve service and maintenance
- Update and replace old technology
- Well trained operatives

 Factors influencing efficiency and how it might be improved

- Introducing standardization
- Outsourcing
- Relocating – Lower rents and better transport links
- Downsizing – Reducing capacity which allows for a leaner, more competitive
production system and profitable business no longer subsiding unprofitable ones
- Delayering
- Investing in new technology
- Lean Production: Introduced by Toyota and aims to reduce the resources used in all
aspects of production aka space used, materials, stock, suppliers, labour, capital and
time.
 Raises Productivity
 Reduces costs and cuts lead times
 Reduces the number of defective products
 Improves reliability and speeds up product design
- Kaizen: Continuous improvement. Small changes add up to long term impact which
benefits the business.
- Just in Time Production (JIT): Involves minimising or eliminating the amount of
stock held by a business. It reduces all the costs associated with stock holding

 Distinction between labour and capital intensive production

Capital intensive production:
- Is done by machinery
- has high barriers to entry
- fewer costs, but initial costs high
- high percentage of costs as fixed
Labour intensive production:
- is done by humans
- has low barriers to entry
- labour costs are a high percentage of total costs
- adds value as needs met

 Competitive advantage from short product lead-in times

First-mover advantages:
- make a lasting impression on customers
- premium prices can be charged
- have more time to develop the production processes
- able to control resources in the industry

Capacity Utilization
Capacity Utilization measures a firm’s output level as a percentage of the firms maximum output. Said to
be best at around 90%

CU = Current Output / Maximum possible output (x100)

 Implications of under-utilization:
Fixed costs stay the same so increase cost of product, so CU has an inverse effect on costs per unit.
 Implications of over-utilization:
If demand increases then supply will not be able to meet, enabling competitors to benefit.
 Ways of improving Capacity Utilization:
·  Increase Demand through promotion or price cutting.
·  Cut capacity by reorganizing to increase efficiency.
Stock Control
Stock can be raw materials, work in progress or finished goods.
Buffer stock is the desired minimum stock level which is held in case of emergency.
Re-order level is the point at which new stock is ordered from the supplier automatically.
 Implications of poor stock control:
Too much:
·  Opportunity cost of holding wealth in the business prevents capital in other ways.
·  Cash flow problems (slow moving)
·  Increased storage costs
·  Increased finance costs if stock is paid for through borrowed capital.
·  Increased stock wastage for stock that can go out of date.
Too Little:
·  Lost orders through demand being higher than supply.
·  Worker downtime – paying staff not to do anything because supplies aren’t available.
·  Reputation loss.
Stockholding cost: the overheads resulting from the stock levels held by firms.
Therefore, the optimum level of output is where a firm’s cost of holding stock is the lowest.
  Just-In-Time (JIT) is a Japanese system of stock control which is the attempt to operate with zero
buffer stock by making sure all supplies are on time for production or selling. However, this puts
pressure on suppliers and everyone involved in the business to work more efficiently.
 Waste minimization uses JIT, so no stock is wasted by keeping it in the buffer stock too long.
 Lean production aims to produce more using less, by eliminating all forms of waste (anything
that doesn’t add value) from a product. Management focuses on minimizing the use of the key
business resources ( materials, manpower, capital, time).
This is a process of continuous refinement that:
·  Maximizes staff input
·  Focuses on quality
·  Minimizes wasted resources
·  Focuses on having a competitive advantage (speed)
Which results in:
·  Higher levels of productivity >> less labour
·  Requires less stock, space, capital >> cost advantages over the mass producer
·  Creates marketing advantages from fewer defects, improving quality and reliability for the customers
and rapid development of new products

Quality Management

Quality means providing what the customer wants, to the right standard and at the right time giving
high customer satisfaction. This can often be a trade-off between price which is accpected by customers.

(trade-off = accepting less of one thing to achieve more of another thing; lower quality in exchange for
cheapness.)

Methods of Improving Quality

 Quality Control (QC) – Traditional way using inspection at the end of the production process.
Advantages :
- It requires little staff training .
- It can help to prevent faulty goods and servies being sold.
- It is not disruptive to production as workers continue producing while inspectors do the checking.
- As with any quality system, the business may benefit from an improved reputationfor quality and and
this may increase sales.
Disadvantages :
- It does not prevent waste of resources when products are faulty.
- It doesn’t find out why the fault has occurred, so the it’s difficult to solve the problem.
- The process of inspecting the goods or service costs money, e.g. the wages paid to the inspectors, the
cost of testing goods in the laboratory.
- It does not encourage all workers to be responsible for quality.

 Quality Assurance (QA) – System that ensures quality at each stage of the production.
Advantages :
- Costs are reduced because there is less wastage and re-working of faulty products as the product is
checked at every stage.
- Faults and errors can be easily identified and solved.
- Stops customer complaints/gives better customer satisfaction
- It can help improve worker motivation as workers have more ownership and recognition for their
work.
- With all staff responsible for quality, this can help the firm gain competitive advantages arising from its
consistent level of quality.
Disadvantages :
- Time consuming.
- It is expensive to carry out such as training.
- It relies on employees following instructions.

 Total Quality Management (TQM)

- The continuous improvement of products and production processes by focusing on quality throughout
the whole business.
- There is great emphasis on ensuring that customers are satisfied.
- In TQM, customers just aren’t the consumers of the final product. It is every worker at each stage of
production. Workers at one stage have to ensure the quality standards are met for the product in
production at their stage before they are passed onto the next stage and so on. Thus, quality is
maintained throughout production and products are error-free.
- TQM also involves quality circles, workers come together and discuss issues and solutions, to reduce
waste ensure zero defects.
Advantages:
* Employees are aware of the need for quality. It is built into every part of the production process and
becomes central to the workers principles.
* Eliminates all faults before the product gets to the final customer
* No customer complaints and so improved brand image
* Less costs; as products don’t have to be scrapped or reworked
* Waste is removed and efficiency is improved
Disadvantages:
* Expensive to train employees
* Relies on all employees following TQM (how well are they motivated to follow the procedures?)

 Quality Circles
- A group of workers who do the same or similar work, meeting regularly to identify, analyze and solve
work-related problems.
- Participation is voluntary, takes place during work hours, and the group consists of three to twelve
members.
- The circle team members present their improvement solutions to management. This furthers
employee motivation and satisfaction.
Advantages :
- Promotion of teamwork
- Encourage employee involvement
- Develops employee positive attitudes
- Positive working environment
- Increased quality and productivity
Disadvantages
- Lack of management support
- Time required to implement
- Improper composition of Circles
  Zero Defects
- Zero defect is eliminating quality defects by getting things right first time.
- The advantage of achieving a zero-defect level is waste and cost reduction when building products to
customer specifications. Zero defects mean higher customer satisfaction and improved customer loyalty,
which invariably leads to better sales and profits. 
- However, a zero defects goal could lead to a scenario where a team is striving for a perfect process that
cannot realistically be met. The time and resources dedicated to reaching zero defects may negatively
impact performance and put a strain on employee morale and satisfaction.

 Kaizen (continuous improvement)

- An approach of constantly introducing small incremental changes in a business in order to improve
quality and/or efficiency.
- Improvements are based on many, small changes rather than the radical changes that might arise from
Research and Development.
- As the ideas come from the workers themselves, they are less likely to be radically different, and
therefore easier to implement.
- Small improvements are less likely to require major capital investment than major process changes.
- All employees should continually be seeking ways to improve their own performance.
- It helps encourage workers to take ownership for their work, and can help reinforce team working,
thereby improving worker motivation.

Competitive advantage from quality management

o Generate high levels of repeat purchase and therefore a longer product life cycle.
o Allow brand building and marketing benefits in the future.
o Allow a price premium which is greater than additional costs.
o Make products easier to place because retailers are more likely to stock reputative products.

2.5 External Influences

The economy is the state of a country or region in terms of the production and consumption of goods
and services and the supply of money.
The economic climate is the atmosphere surrounding the economy, so factors that help to create an
economic climate include:
 The business cycle
The process of boom and slump;
- In a downturn or slump, output falls and many businesses shed staff because sales are falling. The
economy experiences a recession.
- In an upturn or boom, businesses increase output and hire more staff to keep up with extra demand.
The economy experiences economic growth.
When the economy is growing rapidly, confidence increases which is great but may result in a bust
(2009).
Recession – where economic growth is negative for more than half a year. Business may run out of cash
and employees see wage cuts or redundancy.
 Inflation
Inflation measures the percentage annual rise is GDP or average price. This affects cash savers such as
pensioners, and the reduction of value in employee wages. Inflation is measured using the consumer
price index (CPI).
Effects on business include;
- benefits from those with large loans
- damages profitability for fixed price contracts
- global competitiveness will be affected if inflation is higher here than elsewhere.
 Interest Rates
Interest rate is the percentage added to saved or borrowed money. For firms, the level of interest rates
is important because;
- affects consumer demand, especially for goods bought on credit – higher the interest rate the lower
the sales
- can change operating costs because of the changes in overdraft rates
- low level of investment. Investors will be safe and keep their money in banks with high interest rates
rather than risks in businesses.
 Exchange rates
Exchange rates measure the price of one currency expressed in another.
How it affects different types of business, either export or import heavy;
SPICED – Strong Pound Imports Cheap Exports Dear
WPIDEC – Weak Pound Imports Dear Exports Cheap.
Therefore, importers like a strong pound (£appreciates>> imports get cheaper, but harder for UK firms),
whereas exporters like a weak pound (£depreciates >> exports get cheaper, sales volume rise)
 Taxation and Government spending
Increasing tax can also take spending power out of the pockets of consumers, so prices cannot rise as
demand isn’t high enough.
Cut spending on public sector (40% of the economy) can increase redundancies and dampen consumer
spending to keep prices for rising sharply.
Therefore, businessmen keep an eye on planned government actions, so they can also plan for these
changes.

Economic Uncertainty is because no one can predict what will happen in the future. This leaves business
plans for the year to be with little certainty of the economy, and even less certainty about economic
variables that have previously seen massive fluctuations including: economic variables, rates of
economic growth and the value of oil. So, all businesses need to make sure cash balances are high
enough for freak fluctuations.

Legislation
Legislation is defined by laws initiated by government but passed by parliament that relate to business
operations and therefore employees, the general public and the environment
 5 main areas in which the law affects businesses
* Consumer protection
Law designed to ensure consumers are treated fairly by companies they buy from. The main two acts
that are most important here are “The Sale of Goods Act” and “The Trade Descriptions Act”. These
ensure a level playing field with competition.
* Employee Protection
Laws designed to protect employees at work. These include minimum wage, right to a contract of
employment, sick pay, maternity leave, redundancy and trade union rights. Easiest law to remember is
“The National Minimum Wage legislation in 1999”.
* Environmental Protection
Laws that are put in place to restrict businesses to how much they may damage the environment
through landfill or processes of production for example. This limits business but has no benefit to them.
* Competition Policy
The Competition and Market Authority (CMA) are a government funded organisation to investigate
merges and takeovers, anti-competitive practices and cartel offenses. (Cartels are an agreement
between producers to control supply thereby control prices.)
* Health and safety
Legislation that is designed to protect employees and customers in the workplace. This is given by the
Health and Safety at Work Act in 1974. This means they must provide a safe environment to work in and
planning for any dangerous events that may occur.

The competitive environment

 Degree of competition in a business:
·  One dominant business (Monopoly) >> dominated by one large business
These are bad for consumers, they restrict choice and increase prices. But, great for the business.
·  Among a few giants (Oligopoly) >> dominated by a few large companies
They often have very intense rivalry, so price competitiveness isn’t often on the cards, this would lead to
a price war if both firms continue to cut prices. Firms tend to focus on non-price competition (= all
competitive strategies other than price, such as branding, product design and technological innovation)
when designing the marketing mix, gaining in market share result in loss of market share for
competition, which is good for them.
·  Fiercely Competitive Market >> fragmented market
These are made up of many small firms who each compete against each other. This means high product
differentiation that are very reluctant on price. Rivalry in commodity markets tends to be intense,
therefore firms must cut production costs as much as possible.
 Competition and Market size:
·  Big Markets suffer from serious competition.
·  Small markets are often oligopolies as there isn’t much room for any more.
Changes can come from new entrants or competitors going out of business, or because the market size
is changing.
 Response in changes
·  Price cutting and cutting their costs in line to preserve profit margins >> deteriorating brand image in
long term
·  Increase product differentiation, through a nicer design or new features >> less switching
·  Collusion (= Firms get together to discuss ways to work together to restrict supply or raise price) >>
Fixing prices with competitors, however, this is illegal.