IGCSE Business Notes

1.1.1
● Needs – Goods or services that are essential for living. These can include things such
as water, basic food and clothing.
● Wants – Goods and services that people would like to have but are not essential for
living. For example, brand name clothing, expensive food and luxury cars.
● Scarcity (The economic problem) – Unlimited wants but not enough products. The
cause of scarcity is because of not enough factors of production, the 4 factors of
production are…
1. Land – Natural resources from nature such as trees, forests and oil
2. Labor – Number of workers available to make products
3. Capital – Money required for a business to produce items that includes machinery,
robots etc…
4. Enterprise – Entrepreneurs with skills required to create a business.
● Opportunity Cost – A benefit/value that must be given up in order to achieve
something else. For example, if a bakery spends money on a new oven, the
opportunity cost of the oven could be a new refrigerator to store cakes.
● Specialization – Workers/machines specialize in some part of the production process.
For example, At a car factory, some workers cut metal parts, another worker
assembles the product and another paints the car. Specialization can help cut costs
and create higher quality products.
● Division of labor – Production process has been divided into different tasks for a
specialized worker to work on. e.g. painting cars at a car factory.

Advantages of division of labor are

● Increased efficiency because the worker does the same task over and over again.
● Workers don’t waste time moving from one task to another.

Disadvantages

● Workers may become bored doing the same task which results in decreased
efficiency
● Production may stop if one worker doesn’t do job
 ● Added Value = Selling price of the product – Cost price (materials etc…) Value added
is the difference between the selling price of a product and the cost to produce it.

Added value can be increased by either charging higher prices for the same product or by
reducing the cost of a product by lowering quality e.g. using cheaper materials.

1.2.1

Economic Sectors

Primary Sector – Extracts and uses the natural resources from the earth. e.g. Fishing, farming

Secondary Sector – Manufacture goods using raw materials from the primary sector. e.g. Car
manufacturers and other factories

Tertiary Sector – Provides service to consumers and other sectors of the industry e.g.
Restaurants, car showroom, travel agent

Importance of economic sector

The sector with the most workers is the most important in a country.

or

The sector with the most valuable goods/services is the most important in a country.

Changes in sector importance

De-industrialisation – when the manufacturing sector becomes less important in a country.

Why does the importance of sectors change?

Primary sector resources get used up e.g. overfishing, deforestation.

Factory costs (usually wages) are too high e.g. wages in China/India are cheaper
People spend more on the tertiary sector as they become wealthier. e.g. more restaurants,
travel agents

1.2.2

Mixed Economy

Private Sector – Businesses not owned by the government but by private individuals. (Goal =
Profit)

Advantages

● High efficiency and lower costs

● Competition is encouraged (prices will be lower)

Disadvantages

● Some services may be closed (run out of money)

● Workers may lose jobs to improve efficiency/cut cost (private sector business does not
care about employment rates in countries)

Public Sector – Government/State owned businesses. (Goal = non-profit, service for all citizens)
e.g. Electricity, police, public transit

Advantages

● Business is funded by government

● Encourage more jobs

Disadvantages

● Low efficiency
● No competition between businesses
1.3.1 – Enterprise and entrepreneurship
Entrepreneur – A person who organizes, and operates a business.

Characteristics of successful entrepreneurs

● Hard working – Long hours of work are needed to become successful

● Risk taker – Entrepreneurs never know if business idea will succeed
● Creative – Business ideas different from competitors
● Self-confident – Necessary to convince banks and investors.
● Effective communicator – Talk clearly to banks, customers, employees about
business.

Business Plan – Document with important information about your business e.g. Business
objective, operations, finance, owners

Business plan is needed to

● Apply for bank loans

● Plan business to reduce risk of failure

Business plan includes

● Products and services that you will sell

● Costs of your business
● Location of the business
● What do I need to operate my business e.g. Machines, employees

Governments supports new businesses because

● New businesses creates jobs (reduce unemployment)

● Increased competition (Businesses competing with each other means prices may be
lowered)
● Business may grow larger and contribute to the country
Government supports new businesses by

● Loans at low interest rates

● Land to set up businesses at low costs
● Grants (money) to train employees
● Use research facilities at public universities
● Business advice from experts

1.3.2 – Methods and problems of measuring business size

Methods of measuring size of a business

● Number of employees – Easy to calculate and compare with competitors. However,

some businesses can produce higher output with fewer employees. e.g. Some
factories use machines.

● Value of output – Easy to calculate and compare with competitors. However, some
businesses may be very small but produce very expensive products such as brand
name clothing while a very large factory may be producing cheap clothing.

● Value of sales – Easy to calculate and compare with other businesses. However, value
may be different for businesses for example, a sports car dealer may sell 2 cars a day
while a normal car dealer e.g. Toyota may sell 20 cars a day.

● Value of capital employed – Simple to compare with other businesses. However, this
method is inaccurate because different factories will use different types of capital e.g.
A factory may use expensive machinery and another may depend on employees.
There is no perfect way to compare businesses. Every business is different.

1.3.3 – Why some businesses grow and other remain small

Why do businesses grow?

● Increased chances of higher profit

● Better status and prestige of the owners and employees
● Lower average cost (more negotiating power)
● Increased control of the market

Ways businesses can grow

● Internal Growth – Business grows by itself (Business gets larger as profit increases
e.g. more customers)
● External Growth – Take-over or merger with another business.
1. Horizontal integration – Firms in the same industry at the same stage of production
merges. e.g. 2 Bakeries merging to form a larger business
2. Vertical integration – Business expands by merging with another business in another
stage of production. There are 2 types of vertical integration. Backwards and
forwards. Backward vertical integration is when a business merges with another
business in the previous stage of production for example, Bakery merges with wheat
farm. Forward is when a business merges with a business in the next stage of
production e.g. Sugar farm merges with candy factory.

Advantage of vertical integration is to have more control over distribution of goods and
services.

Conglomerate merger – Two businesses in a completely different industry combine to form a

new business. e.g. Insurance company buys an advertising agency.

Joint Ventures – Two or more businesses agree to start a new project together.

Problems of business growth

● Large businesses are difficult to control. Solution – Operate in business in small parts.
 ● Costs of expansion are high. Solution – Expand slowly
● There can be poor communication in large businesses. Solution – use technology to
communicate e.g. email. Operate the business in small parts.

Why do some businesses remain small?

● Type of industry e.g. hair salons stay small because of the connection with their
customers, if they grow too large they won’t be able to offer personal service to their
regular customers.
● Market size Some businesses such as stores in small towns are likely to remain small
due to the limited number of customers. Businesses that produce specialized goods
such as brand name clothing or luxury cars are also likely to remain small.
● Owner’s objective Some owners want to keep their businesses small to keep full
control and know all their employees and customers. Running a large business can
become stressful.

1.3.4 – Why some businesses fail

● Poor management – Many businesses fail due to poor management from lack of
experience by the managers.
● Failure to plan for change – The business environment is constantly changing,
Businesses need to change to keep up with technology.
● Poor financial management – Shortage of money means that the businesses cannot
be operated. Businesses needs to always make sure they have enough money
● Over expansion – Some businesses expand too quickly and not have enough money
to operate.
● Startup risk – Starting up a new business is always risky, entrepreneurs may lack
experience and not be able to compete with larger businesses.

1.4.1 – Main features of different forms of business

organization
Unincorporated Business – A business that does not have a separate legal identity from its
owner(s) e.g. If the business is sued, the owner is responsible and may need to cover the cost
with their own personal money.

Incorporated Business – Business that has a separate legal identity from its owner(s) e.g. If the
business goes bankrupt, the owners won’t be held responsible and only lose the money they
invested.

Unlimited Liability – (Owners are held liable for the business. If the business goes into debt, the
owner needs to pay back with their own money.

Limited Liability – (Opposite of Unlimited liability, If a business fails, the owners only lose what
they invested)

Main forms of business organizations

Unincorporated Businesses

Sole Trader – Owned and operated by one person.

Advantages

● Cheap and easy to startup

● Full control of your own business

Disadvantages

● Unlimited Liability
● If the owner dies, the business no longer exists
● Less money / difficult to expand business
Partnership – Similar to a sole trader but there are 2 owners.

Advantages

● 2 Owners mean that more money can be invested

● Less work since tasks can be done by 2 owners.
● Losses can be distributed among the 2 owners

Disadvantages

● Unlimited Liability
● If one owner dies/quits, the business no longer legally exists.
● There can be disagreement between the 2 owners.

Incorporated Businesses

Private limited company (LTD) – Owned by shareholders.

Advantages

● Limited Liability to all shareholders

● Capital can be invested by many shareholders
● Cheaper to set up than public limited companies
● Continuity of existence – If the business owner dies, the business still exists.

Disadvantages

● Slower to startup (many legal documents needs to be signed)

● Shares can only be sold to family and friends
● Other shareholders need to agree before shares can be sold
Public limited company (PLC) – Similar to a private limited company but shares can be sold to
the public. Great for large companies.

Advantages

● Limited Liability
● Shares can be sold to the general public without permission (Capital (Money) can be
raised quickly)
● Continuity of existence
● Company can grow and expand quickly

Disadvantages

● Complicated legal documents (Wastes money and time)

● Expensive to start up
● Company can grow large very quickly which will be difficult to control
● Original owners of the business may lose control of the company
● Shareholders may vote who manages the business in AGM (loss of control)

Annual General Meeting (AGM) – Meeting that must be held every year for shareholders to
vote for the company’s next directors.

Shareholders – Owners of a limited company, they buy shares which represent the percentage
they own of the company.

Franchising
Franchisor – Company that owns the original business, Franchisors sell the franchise to a
franchisee

Advantages

● Make money from selling the business’ name to franchisee

● Quick growth of the brand
● Operation of the business is the franchisee’ responsibility
Disadvantages

● If one franchisee has a bad reputation, the entire franchise will be affected e.g. If one
Mcdonalds store serves bad food, all the other Macdonald stores will have a bad
reputation.
● Profit from franchised stores are kept by the franchisee

Franchisee – Someone who buys a franchise from the franchisor to use the brand name

Advantages

● Less chances of failure since the business is well known.

● Most of the advertisements are paid by the franchisor
● Less decision making is required from the franchisee e.g. food recipe is already
planned from franchisor
● Staff training may be provided from franchisor

Disadvantages

● Franchisee won’t be able to make own decisions e.g. come up with own menu
● Franchisee needs to pay the franchisor to use brand name

Joint Ventures – 2 or more businesses start a new project together.

Advantages

● Costs can be shared amongst the companies

● Knowledge and skills from more than one company
● Risks are shared (If the project fails)

Disadvantages

● Profit is shared
● Businesses may disagree with each other.
1.5.1 – Businesses can have several objectives – and the
importance of these can change
Business objective - a target that a business works towards.

Why are objectives important for a business?

● They act as a motivator as they give managers and workers a target to move towards
● Helps with decision making (managers will know what is better for the business to
reach its target)
● Can make the entire business work toward a goal
● Managers can see if the business has achieved its goals or not.

Objectives that businesses set

Businesses often set multiple objectives which can change over time

● Business survival – This is common for new businesses and businesses in bad
economic times
● Profit – Businesses want to maximize profit.
● Growth – Businesses may want to grow for various reasons. Common reasons for
business growth are to obtain a higher market share, increase jobs etc…
● Return to shareholders – incorporated businesses (Private and public limited
companies) are owned by shareholders. There are 2 main ways to return to
shareholders 1.Businesses profits can be paid to shareholders as dividends and
increasing share price will keep the shareholders happy so managers won’t be voted
out.
● Market share – Businesses want to obtain a higher market share. The advantages of
this is to make the business more well known. With a higher market share, the
businesses may also be able to negotiate lower costs from suppliers (economies of
scale)
● Providing a service to society – Social enterprises are privately owned businesses that
focus on 1. providing a service to society such as providing jobs to disabled or
homeless people or 2. Protecting the environment.

Business objectives are likely to change over time. For example, A new business has survived a
few years so the managers decide to change the objective to maximizing profit.
1.5.2 – The role of stakeholder groups involved in business
activity
Stakeholder – A person or group with a direct interest in the performance and activities of a
business.

List of stakeholder groups

Internal stakeholders

● Owners – These are people who invested and set up the business. Objective = Profit
so they make money from the business.
● Workers – Employees of the business. Objective = Payment for their work, job
promotion (increased salary), job security.
● Managers – Employees that control other workers. Objective = Higher salary, job
security, Successful company means better status.

External

● Consumers – Customers who buy goods and services from the business. Objective =
Good products from business, reliable service and maintenance from the company.
● Government – Responsible for the economy of the country, laws to protect
customers and employees. Objective = Successful business means more jobs (less
unemployment), Tax paid by the business and the business’ contribution to the
country’s output.
● Community – Interested in how the business affects the local community, e,g,
employment, environment. Objective = Jobs for people, environmentally friendly
business, safe products for the customers.
● Bank – Lend money for the business to startup. Objective = Wants the business to
have enough money to pay them back.

These stakeholder objectives may conflict for example,

● Managers of a business want to build a factory in an area however the local

community are against this as it may cause pollution and noise in the area.
 ● Owners want to use cheaper low-quality materials to lower product costs and
increase profits however consumers are against this as the quality of the products
they are buying will be lowered.

1.5.3 – Demonstrate an awareness of the differences in the

aims and objectives of private sector and public sector
enterprises
Private sector business objectives

● Business survival
● Profit
● Growth
● Returns to shareholders
● Market share
● Service to society

Public sector business objectives

● Provide service to the public

● Increase living standards of the public e.g. health care, education
● Increase jobs to lower unemployment in the country

2.1.1 – The importance of a well-motivated workforce

Motivated worker – A hard working employee who works effectively for a business.

Why do people work?

● Money – People need money to buy food, water and other items they need to live.
● Social needs – People just like us like to feel part of a team, socialize and make
friends.
 ● Esteem needs – Feeling important, feeling that they are contributing to a business.
● Job satisfaction – enjoyment from the work and achievements they have
accomplished.
● Security – Feeling of having a secure job with a stable income. (not likely to lose a job
etc…)

Abraham Maslow’s hierarchy of needs

Abraham Maslow’s theory states that the more levels of needs achieved by the worker = the
higher motivation they will become. This also means that each level of motivation must be
achieved before an employee can move to the next level of motivation.

Criticisms

● These needs to not apply to all employees (all humans are different)
● Difficult for managers to determine which needs their employees need

F.W. Taylor’s theory

Employees are motivated by money.

More money = employees become more motivated

Criticisms

● Employees can be motivated by other factors not just money

 ● There is no guarantee that all employees will work harder if they are paid more
● There are many jobs where output cannot be measured easily (difficult to determine
if employee actually works hard)

Federick Herzberg’s theory

There are 2 factors: Hygiene & Motivation factors. Workers expect hygiene factors to be
available to them otherwise they will become demotivated. Hygiene factors will not motivate
the workers, only motivation factors will make the employees work harder.

2.1.2 – Methods of motivation

3 Ways to motivate employees

● Financial rewards
● Non-financial rewards
● Job satisfaction

Financial Rewards
● Wages (time rate) – Payment for a period of time such as amount per hour e.g. $10
per hour.
Cons – Good & bad workers get paid the same, Recording every employee’s working hours may
be complicated, and it costs businesses to hire an employee to calculate each workers’ wage.

● Wages (piece rate) – Workers paid depending on the quantity of product produced
e.g. $2 for every bicycle assembled.

Cons – Workers may rush and produce bad quality products, Workers that make slow high-
quality products will get paid less.

● Salaries – Employees paid monthly, often used to pay office workers. Managers only
need to calculate salaries once a month which uses less time.

Additional Payments (Money added to salaries)

● Commission – Sales staff are often paid a small percentage of the selling price of the
product they are selling e.g. If a car salesman sells a car, the salesman might get 20%
of the selling price of the car which is added to his salary.
● Profit sharing – Employees receive a share of the company’s profit. This benefits the
company because employees will want the company to have a higher profit.
● Bonus – Money paid to workers when they work well usually at the end of the year.
● Performance related pay – Employee’s pay is linked to the effectiveness of their
work. This is often used with jobs where output cannot be easily measured.
● Share ownership – Employees are given some of the company’s shares. This makes
them work hard as prices of shares may increase if the business is doing well. + This
also makes the employee feel that they are part of the company.

Non-Financial Rewards
Non-financial rewards given to employees are also called perks or fringe benefits.

Some examples include

● Health care paid by company

● Company cars
● Free trips / company holidays
● Employee of the month
● Free meals
 ● Discount on company’s products
● Free housing
● Children’s education fees paid by company

Job Satisfaction
● Pay
● Promotion
● Working conditions
● The work itself
● Status of the job

Ways to improve job satisfaction

● Job Rotation – Workers swap roles to do different tasks. This stops the employee
from getting bored.
● Job Enlargement – More extra tasks are given to the worker so they have a variety of
things to do. However, these tasks should not be more difficult. e.g. supermarket
cashiers now add price labels on items.
● Job Enrichment – Adding tasks that require more skill and responsibility. e.g.
receptionists employed to greet clients now deal with telephone enquiries.
● Autonomous work groups & team working – Working in teams make employees
more interested in the tasks since they can organize themselves.

2.2.1 – Draw, interpret and understand simple organizational

charts
Definition of Organization Structure

Organization structure refers to how responsibility and authority is shared in a business

organization.

This is often displayed in the form of an organizational chart. The 2 common type of charts are

● Tall organizational charts – These have a long chain of command and a small span of
control
 ● Flat organizational charts – Short chain of command, wide span of control

Advantages of an organizational chart

● Shows how everybody is linked together in a business

● Lines of communication are clear
● Motivational as employees can see where they belong and can plan their career
paths

Chain of Command – is how the power and authority is passed down from the top of the
organization (managers) to lower employees

Span of Control – The number of employees working directly under a manager.

Levels of Hierarchy – Number of layers in an organization structure

Advantages of short chain of command

● Faster communication – Communication is quicker and more accurate since it is

passed on by fewer people.
● Stronger relationship between high-level managers and employees – This is because
there are fewer levels between managers and employees.
● Each manager is responsible for more employees – This encourages them to delegate
(pass down) more work to employees.

Delayering – removing an entire row of management

2.2.2 – The role of management
Roles of managers in a business.

1. Planning

● Set goals for the future of the organization.

● Give the business a sense of direction and purpose (e.g. we will aim to increase sales
by 10% by next year.)

2. Organizing

● Organizing of people and resources so that the business operates efficiently

(Managers can’t do everything, they must delegate tasks to other employees)

3. Coordinating

● Making sure all departments are working together to achieve the overall objectives
and plans of the organization. (e.g. Manager makes sure marketing and operations
department work together to plan for a new product launch)

4. Commanding

● Guiding, leading and supervising employees in the organization. (Managers need to

make sure that employees are doing their work!)

5. Controlling

● This involves monitoring performance to ensure that objectives will be met.

Delegation – Passing down authority and responsibility to a subordinate (employee)

Advantages of delegation
 ● More time for manager to do other tasks
● More interesting and rewarding work for employee (motivational)
● Employee feels trusted (motivational)
● Trains employees to do important tasks.

2.2.3 – Leadership styles

There are 3 main leadership styles – Autocratic, democratic and laissez-faire

Autocratic – Leader is in charge and gives orders to employees

● Makes decision alone

● Everything depends on the leader
● May de-motivate employees
● May be an advantage for some businesses where decision needs to be made quickly

Democratic – Other employees involved in decision making

● Communication between managers and employees

● Future plans are discussed with other employees
● Motivates employees because they are involved in making decisions.
● Sharing of ideas within the business.
● Can delay decision making

Laissez-Faire – “let it be” Leader sets objectives and employees make decisions and organize
their own work.

● Can be useful when creative ideas are needed

● Highly motivational for employees as they control their own working life
● Poor coordination and decision making
● Relies on good team work

Leadership style may be dependent on various factors. e.g.

 ● Type of business (creative or supply driven)
● Nature of task (requires cooperation?)

2.2.4 – Trade unions

What is a trade union?

Trade union – Group of workers who have joined together to ensure their interests are
protected.

Why join a trade union?

● Improved conditions of employment

● Improved work environment
● Improved benefits
● Improved job satisfaction
● Advice/financial support
● Strength in number (many employees will join)

Disadvantages

● Cost money to be a member

● May be forced to take action e.g. strike even if you don’t agree

2.3.1 – The methods of recruiting and selecting workers

Why do businesses recruit?

● To replace staff who have left or been promoted

● Bring in staff with new skills
● Recruit more staff as business expands
Job Analysis – A study of the tasks and activities to be carried out by the new employee

Job Description – This describes the main duties and responsibilities of the job

Job Specifications – The qualifications and qualities necessary to perform the job (e.g.
educational requirements, experience needed)

Advertising the vacancy

Internal Recruitment – Promoting staff or moving workers from one job to another within the
company.

Advantages

● Saves time and money – Don’t need to spend money on advertising the job vacancy
● Applicants ‘know’ the firm
● Motivates other workers (chance for them to get promoted)

Disadvantages

● Applicants may not bring in new ideas

● Promoting an employee may make other employees jealous and unmotivated

External Recruitment – Recruiting someone who is not an existing employee and will be new to
the business.

Advantages

● New ideas from new workers

● More likely to hire someone who matches job specification

Disadvantages

● Expensive – need to advertise job

 ● Demotivating for internal candidates

Recruiting channels

Internal

● Noticeboards
● Company Newsletters
● Email

External

● Local newspaper
● National newspaper
● Recruitment agencies
● Job centers

Selection of staff

Application forms and CVs – To see if applicant matches the job specification

Interviews – Find out information about candidate’s abilities and personal qualities

Purpose of interview

1. Find out if applicant has the ability to do the job

2. Personal qualities about the applicant
3. To see if the candidate will ‘fit in’ with the culture of the business

Testing – Applicants may be required to undertake tests to check their ability to do the job.

Type of tests
 1. Skill test – to observe the candidate’s skills
2. Aptitude test – to see how quickly candidate can learn new skills
3. Personality test – to see if their personality has the characteristic that the job may
require
4. Group situation test – to see how candidate(s) works as a team

Part-time worker – employee that works fewer hours than a full-time worker.

Advantages

● Have more employees during busy periods

● Flexible working hours
● Less expensive than hiring full-time employees

Disadvantages

● Workers are less trained than full-time employees (because their job is temporary)
● Less committed to the business (temporary job)
● More difficult to communicate with part-time workers when they are not at work

2.3.2 – The importance of training and the methods of training

Why train employees?

● Trained workers are more productive

● decrease the amount supervision required
● may lead to job satisfaction
● reduce accidents and injuries
● improve chances for internal promotion
Induction training – Introduction given to a new employee explaining the company’s activities
and procedures and introducing them to other employees.

Advantages

● Helps new employee settle in

● Health and safety training may be required

Disadvantages

● Time consuming (delays the start of employee’s work)

● Wages are paid but no work has been done by the employee

On the job training – Experienced workers teach new workers how to do the job.

Advantages

● Training is cheap
● Training is specific for their job
● Work can be done while training

Disadvantages

● The trainer will not be getting work done.

● Training won’t be effective if the trainer is bad

Off the job training – Training taking place off the job (not being trained while doing job)

Advantages
 ● Trainers are experts (Skills can be taught)
● Training can be done outside of working hours (in employee’s own time)

Disadvantages

● Off the job training is expensive

● Worker may receive training paid by business and leave
● Training may not be specific for the job

2.3.3 – Why reducing the size of the workforce might be

necessary
Why might a business need to reduce the number of employees?

● automation (machines replace humans)

● factory/shop closure
● business relocating
● demand for goods/services falling
● business merging

Dismissal – Employee is told to leave because of bad behavior

Redundancy – Employee told to leave because the business doesn’t need a worker for that job
anymore (not employees fault)

How to decide who is made redundant?

● Some workers may volunteer because they might have planned to leave anyway.
● Length of time worked (employees who have worked there for a long time can stay)
● Workers with good skills remain
● Worker’s employment history (e.g. behavior / performance of employee)
2.3.4 – Legal controls over employment issues and their
impact on employers and employees
Most countries have laws to ensure that employees are treated equally

● Business must be careful when advertising job and while selecting applicants to make
sure they are all treated fairly/equally (e.g. Gender / race)

Employees need to be protected from

● Unfair discrimination at work and when applying for job

● Wage protection (e.g. minimum wage)
● Health and safety standards
● Unfair dismissal

2.4.1 – Why effective communication is important and the

methods used to achieve it
Communication – Process by which information or instruction is exchanged between one group
or person to another.

Internal communication (Communication from and to people within the business)

e.g. Employees talking to each other. Director sending an email to employees, Noticeboard in
office,

Poor internal communication leads to –

● Workers don’t understand what they have to do

● Poor motivation
● Wastage (e.g. 2 employees do the wrong task because of wrong instructions)
External communication (Communication from people inside the business to people outside the
business)

e.g. Employees talking to customers, Ordering materials from suppliers, Advertisements

Poor external communication leads to –

● Unhappy customers (leads to fewer sales)

● Bad business reputation (lower sales)
● Problems with suppliers/customers due to incorrect information (e.g. wrong supplies
being delivered)

Formal communication – Recognised and approved by business (e.g. formal emails, official
meetings, reports)

Informal communication – Information is sent and received casually (e.g. employee talking
during lunch break)

One way communication – Communication that does not allow for a response

Two-way communication – Communication where the receiver sends feedback to the sender
about the topic.

Advantages of two way communications

● Receiver can tell the sender that they have understood the information/instruction
● Chance to ask for more information
● Allows the receiver to contribute ideas

Methods of communication

● Verbal
● Visual
● Written
Verbal (oral) communication

● Discussions
● Telephone calls
● Meetings

Advantages of verbal comm

● Fast
● Opportunity for receiver to reply (2 way comm)
● Body language

Disadvantages of verbal comm

● Feedback from receiver slows process down

● No permanent record of the discussion

Written communication

● Emails
● Reports
● Newsletters
● Notices

Advantages of written comm

● permanent record of message

● May be required by law (e.g. legal information or safety notices)
● Can be easily sent to many people (e.g. emails to all employees)
Disadvantages of written comm

● Readers may find long letters boring and hard to read

● No feedback from receiver unless they reply
● No body language

Visual communication

● Posters
● Images
● Videos
● Graphs / Charts / Diagrams

Advantages of visual communication

● Interesting (Readers may pay more attention to posters / videos than boring letters)
● Information can be clearer than other methods (e.g. Video instructions can be clearer
than letter instructions)

Disadvantages of visual communication

● No feedback
● Some people may find charts / graphs difficult to read

2.4.2 – Demonstrate an awareness of communication barriers

Some examples of communication barriers are

Problems with the sender

 ● Difficult/technical language is used – The sender needs to use language that could be
understandable by the sender
● The sender speaks too quickly or not clear enough – The sender should ensure that
the message is clear
● The sender sends the wrong message or sends it to the wrong receiver – The sender
must make sure that the right person is being sent the correct message

Problems with the communication channel

● The wrong communication channel was used (e.g. important letter placed on board
that does not get seen) – The appropriate communication method must be selected
● No opportunity for feedback – Sender uses a one-way communication channel which
does not allow receiver to contribute ideas
● Long chain of command – Message needs to be sent through a long chain of
command where the message could be changed

3.1.1 – The role of marketing

Roles of marketing are to

● Identify and satisfy consumer needs

● Keep customers loyal
● Gather information about customers
● Recognise how customer’s needs are changing

Marketing goals

● Develop products that meet customer needs and wants

● Promoting product to customers
● Increase sales
● Target a new market
3.1.2 – Market changes
Why do consumer spending patterns change?

● Consumer taste and fashion change

● New technology being developed
● Changes in consumer income
● Aging population

BUSINESS MUST RESPOND TO THESE CHANGES OR FAIL!

Why have some markets become more competitive?

Globalization – Businesses can sell their products worldwide

Better transportation allows products to be distributed all over the world

Internet e-commerce (online shopping) allows customers to purchase goods from around the
world

How can businesses respond to increased competition?

1. Develop and maintain customer loyalty

2. Keep improving their product(s) and develop new ones that meet consumer needs
and wants
3. Keep costs low to remain competitive
4. Make their products better than their

3.1.3 – concepts of niche marketing and mass marketing

Mass marketing – Aimed at the whole market

+Advantages of mass marketing

 ● High sales and demands (higher number of consumers) which may lead to high
profits
● Benefit from economies of scale

-Disadvantages of mass marketing

● Higher competition
● Product is aimed at the whole market so specific customer needs are not met

Niche Marketing – Tailoring product to a particular type of customer (small specialized market)

+Advantages of niche marketing

● Small businesses can avoid competition from larger businesses

● Product meets specific consumer needs

-Disadvantages of niche marketing

● Smaller number of consumer so growth is difficult

● Risks are not spread so if demand for the specialized product falls, the business will
likely fail unless they develop more products

3.1.4 – How and why market segmentation is undertaken

Market segment – Subgroup of a market with a group of consumers who have similar
characteristics

Ways that businesses can segment a market

● Gender
 ● Age
● Income
● Location
● Lifestyle
● Use of the product (e.g. for personal use, business use)

+Advantages of market segment

● Business can concentrate on specific needs of a particular type of consumer

● Marketing becomes more effective (e.g. advertising)

-Disadvantages of market segment

● Business may only focus on one segment which is very risky (incase demands fall
business won't make money)

3.2.1 The role of market research and methods used

Market research – Research carried out to identify current and future consumer needs and
wants

Product-oriented business – Produce a product then try to convince people to buy it.

Market orientated business – Perform market research to discover consumer needs and wants
then develop a product that meets their needs and wants.

Businesses use market research to develop and produce products that consumers want. Market
research allows us to find out if

1. People would buy the product

2. What consumers like and hate about it
3. The price consumers would pay for it
4. Who would buy the product?
5. What their competitors are offering
Types of research
Primary research – Collection of original information by directly contacting with potential or
existing customers

Ways of collecting primary research

● Questionnaires +Detailed information and opinions about the product –Expensive

and time consuming
● Focus group (Group of consumers give detailed opinion about product) +Very
detailed information –Expensive and time consuming
● Interviews
● Observation -Little details

Sample – group of people selected to respond to market research questions such as interviews

Random sample – Samples are chosen randomly without reasons

Quota sample – People are selected based on certain characteristics (e.g. age, income)

Secondary research – Information that has already been collected and is available for use

Examples of where secondary research information can be found from

● Departmental records
● Newspaper
● Internet
● Reports
● Statistics

Market research is not always accurate

● Questions could be biased

● Sample may just give their own opinions
● Size of samples may be too small
 ● Secondary research information can be outdated or inaccurate e.g. inaccurate info
from internet

3.2.2 Presentation and use of market research results

Market research results can be presented in ways such as

● Tables
● Tally charts
● Graphs
● Charts

3.3.1 Product
Types of products

1. Consumer goods – consumed by people (final users of the product)

2. Consumer services – services for people
3. Producer goods – goods produced for other businesses to use (e.g. machines, raw
materials)
4. Producer services – Services for other businesses (e.g. Corporate lawyers, business
consultants)

What makes a product successful?

● Satisfies consumer needs and wants

● Low production cost to make profit
● Quality of the product that is kept consistent with the product image
● Introduced to the market before competitors
● Unique
Brand image
Brand name – Unique name of a product that makes it different from other brands

Benefits of branding – Advertising makes consumer aware of the quality of the product and
persuades them into buying the product

Brand loyalty – When customers continue buying from the same brand instead of the
competitors

Roles of packaging

Protection

● Protects the product

● Easy for transportation
● Allows the product to be used easily
● Suitable for the product

Promotes the product

● Attractive and appealing to customers

● Consistent with the brand image of the product (e.g. High end product in a fancy
packaging)

Product life cycle

 1. Development – Product is being developed, The business is spending money on
research and development. There are no sales at this time.
2. Introduction – Product is introduced onto the market, sales are starting to grow.
Informative advertising is used to make consumers aware of the product.
3. Growth – Sales are growing rapidly, Persuasive advertising is used. Prices are reduced
as competitors introduce their product to the market. Profits are now being made as
the development costs have been covered.
4. Maturity – Sales of the product increases slowly, there is intense competition. Pricing
strategies such as competitive or promotional pricing are being used to compete with
competitors.
5. Saturation – Sales have reached its highest point. Growth has stopped. Competitive
pricing is used.
6. Decline – Sales of the product has started to fall, Eventually, the product will be taken
out of the market.

Extending the product life cycle

● Introduce new variations of the original product

● Sell the product into new markets (e.g. distribute to other countries)
● Increase and create new advertising campaigns
● Lower the price
● Make changes to the product (e.g. new packaging)
3.3.2 Price
Pricing Methods

● Cost plus pricing – Cost of producing the product plus a profit

+Method is easy

-Lose sales if the selling price is a lot higher than your competitor’s price

● Competitive pricing – Product priced similarly to or just below the competitor’s price

+Sales are likely to be high as the price is competitive

-Researching your competitor’s prices can take time

● Psychological pricing
1. Charging high prices for a high-quality product so consumers purchase it as a status
symbol
2. Prices just below a whole number ($1.99)
3. Charge low prices for some items to attract customers into the store
● Penetration pricing – Low price for a new product in order to attract customers from
existing competitor’s products.

+Useful if launching product to a new market

+ Ensures product will be sold so the product enters the market

● Price Skimming – High price is set for a new product on the market

+Can make people think product is good quality because it’s expensive

– Consumers may not buy the product because they think it's overpriced
 ● Promotional pricing – Product sold at a low price for a short period of time.

+Useful when clearing old stock that doesn’t get sold

+ Promotes the business

– Low sales revenue as prices are low

3.3.3 Place
1. Producer to consumer (Products sold directly to customers) – This is when the
manufacturer sells the products to the customers who are the final users of the
product

Advantages

● Very simple
● suitable for some types of products (e.g. products from farms)
● Lower price for consumers

Disadvantages

● Not many customers live near farms/factories so it is difficult for them to buy the
products
● Transporting products to consumers can be expensive and not worth it.
● May not be suitable for some types of products

2. Producer to retailer to consumer – Producer sells products to retailers who then sell the
products to the consumers

Advantages

● Lower distribution costs (Only need to transport to the retailers not individual
customers)
Disadvantages

● No direct contact with customers

3. Producer to wholesaler to retailer to consumer – Wholesaler divides large bulks of products

into smaller ones for small retailers to buy.

Advantages

● Reduce storage cost for manufacturer and retailers

● Reduce transportation costs
● Small retailers can buy small bulks from wholesalers so products don’t expire
● Wholesalers can give advice to small retailers on what is selling well

Disadvantages

● Price is higher for retailers and consumers

● Wholesaler may not sell every product
● Longer time until products reach consumers which may be bad for fresh products

4. Producer to agent to wholesaler to retailer to consumer – Agent sells the products on behalf
of the manufacturer in another country so the manufacturer doesn’t have to contact foreign
wholesalers directly.

Advantages

● Agents have more knowledge about businesses in that country

● Save time for the producer as they don’t have to take care overseas distribution

Disadvantages

● Producer has to pay the agent commision / fee

● May lose control of how the product is sold to customers
Which distribution channel to use?
● The type of product
● Does the product need explanation (e.g. technical products)
● The price of the product
● The shelf life of the product
● Location of the customers

Methods of distribution

● Department stores
● Chain stores
● Discount stores
● Supermarkets
● Internet (E-Commerce)

E-Commerce
Advantages for the business

● Lower employment costs – Online shops don’t require salespersons

● Website can encourage customers to buy more

Disadvantages for the business

● Increased competition as customers can compare products with the competitors

● Delivery costs
● No contact with customers
● Technical stock control systems are required to manage online orders (expensive)

Advantages for consumers

 ● Online shopping is convenient
● Prices between brands can be easily compared
● Can buy from shops all over the world

Disadvantages for customers

● Require internet connection

● Products such as clothing cannot be tried on before buying
● No staff to explain how the product works
● Risk of credit card info being stolen when buying from unsecured websites

3.3.4 Promotion
Aims of promotion

● Increase sales and market share

● Create a brand image
● Introduce new products to the market
● To compete with competitors
1. Advertising

Informative advertising – Give audience detailed information about the product

Persuasive advertising – Tries to persuade audience that they need the product

Advertising methods

● Local newspaper (for local businesses) Cheap, Lots of information, Permanent copy. /
Not eye-catching, boring
● National newspaper (nationwide businesses)
● local or national television Seen by many people, video can be interesting, choose
which time to advertise (ad will be seen by target audience) / Very Expensive
● Internet Lots of information,
● Specialist magazines Read by audience with certain characteristics e.g car magazines,
sport magazine
● Social media
● Billboards
 ● Leaflets Cheap, Permanent copy, Range of audiences (given to anyone) / May not be
read

2. Sales promotion – Special deals to attract customers short term.

● Price reductions – Reducing the price to attract customers

● Gifts – Products for e.g. toys that come in cereal boxes makes customers want to buy
them.
● Competitions – Products that come with entry to competitions such as winning a
prize. (e.g. Win a car or airplane tickets)
● Point of sales display and demonstrations – Demonstrations to show how product
works (e.g. Food displays or cooking demonstrations at supermarkets)
● After sales service – Customers like buying from shops that offer repairs and
maintenance
● Free samples – Free samples can encourage customers to buy the product if they like
it (e.g. Food samples at supermarkets)

Advantages of sales promotion

● Maintain high sales throughout the year

● Encourages consumers to buy the products
● More competitive

Marketing budget – Financial plan for marketing of a product for a specific amount of time.

Which type of promotion to use?

● Stage of product life cycle

● Advertising budget
● Nature of the product itself
Public relations

Strategies used to promote a good image for the business. (e.g. Sponsoring activities such as
sports or charity events.

3.3.5 Technology and the marketing mix

Advantages of businesses advertising on social networking sites

● Can target specific types of consumers

● Advertisements and information can be edited/updated quickly
● Quite cheap

Disadvantages

● Customers may find online ads annoying

● Pop up advertisements cost money
● Advertisement can be edited by audience in a bad way (e.g. internet memes xD)

Advantages of business advertising on their own website

● Don’t need to pay for ads if website already hosted

● Ads can be changed/updated anytime
● Can provide more information on their own website

Disadvantages

● Fewer viewers
● May not be seen by most people

4.1.1 – The meaning of production

Production – Process of adding value to a product (using four factors of production – land,
labor, capital and enterprise) to satisfy customer needs and wants.
Productivity – How a business measures its efficiency

Productivity could mean using fewer inputs to produce the same amount of output. Or using
the same amount of input to produce a greater amount of output

Ways to improve productivity

● Improving layout of factory so production becomes faster and more efficient

● Training workers so they can be more productive
● Using automation

Benefits of increasing efficiency/productivity

● Lower cost per unit

● Less employees needed (reduce labor cost)
● Reduces overall costs.

Why do businesses hold stock?

Businesses keep stocks for a variety of reasons, for example, factories keep raw material
inventory to make sure there are enough materials for production while a shop might hold
stock to ensure that products are available to customers.

Too much stock

 ● Money wasted on storage cost
● Depreciation cost
● Shelf life (items may reach best before date before being sold)
● Money could’ve been used on something else

Not enough stock

● Opportunity lost (profit could be made if product sold)

Buffer stock (aka safety stock) – inventory to deal with sudden customer demands for a product
or in case supplies don't get delivered on time.

What is Lean production?

Lean Production – Term for techniques used by businesses to cut down waste and increase
efficiency.

Common wastes in businesses

 ● Overproduction – Producing too many products which then costs the business money
to keep the product in storage. (and may get damaged/expired etc..)
● Waiting – Goods not being processed
● Transporting – Materials being moved around the factory inefficiently
● Over-processing – e.g. using advanced machine to do simple tasks
● Defects- production of faulty products which can’t be sold.

Costs can be reduced by lean production

Benefits of lean production

● Less storage of raw materials (e..g no need for refrigeration costs, warehouse etc…)
● Less defects in production (broken products don’t get produced)
● Better use of equipment
● Speeding up production by cutting out unnecessary tasks
● Less money tied up in stock

3 Common lean production techniques

Kaizen – Kaizen means continuous improvement by eliminating waste.

● Workers meet regularly to discuss problems and possible solutions

● In this way, wastage is reduced and efficiency is improved
● Factory floors are usually rearranged so that the flow of production from one activity
to the next is improved.

Just-in-time production

● Focus on reducing the need to hold stocks of raw material or parts that are needed
(This reduces storage costs)
● Raw materials are delivered just in time by suppliers for production
● Reliable suppliers are needed for this to work

e.g. Milk gets delivered to the milkshake factory 30 minutes before production starts, this
means that the milkshake factory won’t have to spend money on expensive refrigerators to
store milk before it gets produced.
Cell production

● The production line is divided into separate teams of workers, each makes a part of
the finished production
● Motivation is improved due to the variety of tasks and the worker belonging to a
team

4.1.2 – The main methods of production

Job Production – Each product is different and made to specific instructions by the consumer.
e.g. tailor made suits, customizable birthday/wedding cakes

Advantages of Job production

● Workers have more varied job (They won’t become bored)

● Higher price can be charged for product
● Product meets requirements of the customer

Disadvantages of Job production

● Costs of production are high because skilled labor is used

● Product takes a long time to produce
● Products are made to order so any errors may be expensive for the company to fix

Batch production – Similar products are made in batches (e.g. batch of white shirts then
another batch of green shirts are made)

Advantages of Batch production

● Gives more variety of jobs to workers

● Production can be easily changed from one product to another
● Gives consumers a variety of products (e.g. many color shirts)
Disadvantages of Batch production

● Expensive to produce goods

● Machines have to be reset when changing from one batch to another which slows
down production (e.g. change color of shirts from white to green dye)
● Warehouse space is needed to store products

Flow production (Mass production) – Large quantities of identical products are produced on a
continuous basis

Advantages of Flow production

● Goods are produced quickly and cheaply (economies of scale)

● Increased efficiency through use of machinery
● Less labor is needed (machines do the work)
● Automated production line means production can operate overnight

Disadvantages of Flow production

● Very boring for workers (same product over and over)

● Starting costs are high (expensive machines, big factories etc…)
● If a machine breaks down the whole production line may stop
● Expensive storage costs as they are lots of products

Factors affecting which method of production to use

1. The nature of the product – Unique products will require job production.
2. Size of the market – Products with a small number of customers mean job or batch
production is used. Products with a large amount of consumers = flow production
should be used.
3. The nature of demand – Small and infrequent demand by customers means job or
batch production will be used.
4. The size of the business – Small businesses tend to operate using job and batch
production while large businesses may use flow production.
4.1.3 – How technology has changed production methods
Improvements in technology can help reduce costs and improve product quality

● Automation – Production by equipment which is controlled by computers.

● Mechanization – Production by machine operated by workers (human)
● Computer aided design (CAD) – 3D drawing software to design new products
● Electronic point of sale – Used at checkouts where stock records are automatically
adjusted as an item barcode is scanned when it is sold. e.g. supermarket stock
● Electronic funds transfer at point of sale (EFTPOS) – Cash registers connected to bank
(Customer’s card is swiped and money is transferred right away from customer’s
bank account

Advantages of technology

● Higher productivity
● Improved motivation as boring jobs are now done by machines
● Better quality products are produced
● Faster communication
● Improved flow of information for managers

Disadvantages of technology

● Higher unemployment as machines replace human labor

● Technology is expensive
● Technology becomes outdated very quickly and may needs to be upgraded often

4.2.1 – Identify and classify costs

Fixed cost – A cost that does not change as the amount of products produced or sold changes.

● Examples of fixed cost – rents such as office space or land, insurance and employee
salaries
● Fixed cost per product can be lowered by making more products.
Variable cost – A cost which changes as the amount of goods produced or sold changes.

● Examples of variable cost – Materials used to produce product, wages of production

workers

Total cost – Fixed cost and variable costs are combined

Average cost per product = Total cost / Number of products produced

4.2.3 – Explain, interpret and use a simple break-even chart

Break Even – method for finding out the minimum level of sales needed for a firm to pay for its
total cost.

Break even: Level of output where total costs equal total revenue

When Total cost = Revenue, the business will break even.

Advantages of break even charts

● Enables managers to see the level of production/sales needed to break even

● Allows managers to read off expected profit/loss for different levels of sales
● Impacts of business decisions can be seen (e.g. See effects of lowering variable costs)
● Break even chart shows safety margin

Disadvantages

● The chart is merely a forecast for the future. There is no guarantee that the figures
will prove to be correct.
● Assumes all goods manufactured will be sold. This may not always happen!
● Assumes costs and revenue are always drawn as straight lines. This is unlikely to be
the case.

4.2.2 – Economies and diseconomies of scale

Economies of scale – Factors that lead to a reduction in average cost as a business increase in
size.

● Purchasing economies – Large firms able to negotiate cheaper prices for raw
materials (e.g. Coca-Cola buying large bulks of sugar from supplier )
● Financial economies – Large firms able to negotiate cheaper finance deals (e.g. lower
bank loans because banks view large businesses as less risky)
● Managerial economies – Large businesses can afford to hire specialists to work for
them. This increases efficiency.
● Technical economies – Use of specialist machinery to produce large quantities of
products. (Small businesses cannot afford this)
● Marketing economies – 1. Buying your own vehicle to distribute product 2.
Advertising costs can be spread over a large number of products.

Diseconomies of scale – As a business becomes too large, it becomes less efficient leading to
higher cost of production.

● Poor communication
1. Difficult to send and receive accurate messages in large organizations.

2. Takes longer for decisions to be made

3. Top managers lose contact with customers.

● Low motivation – Workers begin to feel unimportant and not valued by management.
This leads to lower efficiency.

4.3.1 – Why quality is important and how quality production

might be achieved
Quality – to produce a good or service which meets customers expectations.

Why Is Quality Important for a business?

● Gives competitive advantage

● Encourages return purchases
● Provides customers with information and builds consumer confidence in the brand
● Reduces costs incurred in solving past sales problems (Customer refunds etc..)
● Helps improve efficiency

Quality control – Checking product quality at the end of the production process. If defective
products are found, the entire batch will be thrown away/repaired

Advantages of QC

● Faults are found before product is sold to customers

● Less training for the worker is required (compared to quality assurance)

Disadvantages of QC
 ● Hiring employee to check product costs money
● QC does not explain how fault occurred and can happen again.
● Fixing defective products cost money

Quality Assurance – Checking quality standards of a product throughout the production

process.

Advantages of QA

● Fewer customer complaints

● Tries to eliminate faults or errors before the customer receives the product
● Fewer defected(low quality) products produced (Reduce cost because there will be
less broken/low quality products to fix)

Disadvantages of QA

● Expensive to train employees

● Relies on employees following instructions

Total Quality Management – Continuous improvement of products and processes by focusing

on quality at each stage of production

Advantages of TQM

● All employees are aware of the need for quality

● Less likely to receive customer complaints
● Waste (defected products) is removed and efficiency increases
Disadvantages of TQM

● Expensive to train employees for TQM

● Relies heavily on employees following this idea

4.4.1 – The main factors influencing the location and

relocation decisions of a business
Location factors for a Manufacturing business
● Production methods – Large scale production requires the business to be near
component or raw material suppliers.
● Market – Being near to the customer is important if the product is bulky/heavy or is
perishable (likely to go bad e.g. Fresh food.)
● Availability of labor – is there a sufficient supply of suitably skilled labor in the area
● Government influence – may offer grants and subsidies to encourage firms to locate
to a specific area (e.g. Government may want factories to be built in area with high
unemployment rates to create jobs) The government may also restrict certain
locations for factories a specific reason e.g. to protect the natural environment
● Transport – Suitable transport is required for supplies/products to be delivered (e.g.
near airport to deliver product to customer)
● Power – Reliable source of electricity is needed

Location factors for a Retail business

● Shoppers – Need a lot of consumers in the area
● Nearby shops – Locate near businesses that are visited regularly (e.g. Schools)
● Parking facilities must be close by
● Security/crime in the area

Clustering – Competitors in the same area attract consumers (e.g. Clothing stores all next to
each other)
Location factors for a Service business
*Retail factors apply to service business

● Customers – Be near customers for a quick response time (e.g. Electrician located in
residential area can provide service to homes quickly)
● Labor – Availability of suitably skilled labor in the area
● Rents and taxes in the area – Businesses that don’t need to be near customers can be
located further away where rents are low
● Technology – Some services can be provided online which means that the business
won’t need to be located near customers.
● Personal preference of the owner

Reasons to relocate abroad

● New markets overseas – Locate near customers in another country (Reduce transport
costs)
● Cheaper materials – Raw materials may be cheaper in another country
● Unstable/expensive labor – A business (especially factories) may want to relocate to
another country with cheaper labor
● Rents and tax may be cheaper in another country
● Government grants for foreign businesses – The government may give businesses
grants(money) and reduce tax because they want the business to relocate to their
country
● Overcome trade and tariff barriers – Some countries may charge tax on imported
goods and businesses can overcome them by relocating their factory to that country
instead.

5.1.1 – The need for business finance

Why do businesses need finance?

● To startup the business – Businesses need money to buy land and equipment
● Expanding the business – Businesses need money to expand (e.g. buying more land
to expand factory, upgrading machines)
 ● Money required to pay for day to day expenses (working capital) – Businesses need
money to pay for day to day expenses such as employee wages and salaries,
purchasing raw material etc..

Capital expenditure – Money spent on purchasing fixed assets that lasts for over a year, (e.g.
office buildings, transport vehicles)

Revenue expenditure – Money spent on day to day expenses (e.g. salaries, maintenance of
office building)

Short term finance – working capital for day to day operations.

Long term finance – Finance that is available for over a year.

5.1.2 The main sources of capital

Examples of internal sources of finance
● Retained profit – Profit that is reinvested into the business and not distributed to
shareholders.
● Adv + Does not need to be repaid (they are not borrowing money)
● Dis – Profits may be too little for what they are planning to do. (e.g. Need
10Million for expansion but only have profit of 1million)

● Selling existing assets – Businesses can sell unused assets such as old machinery and
unused buildings.

Adv + Debt does not increase from this

Dis – Takes time until asset gets sold

 ● Selling inventory – Businesses can sell their inventory for a lower price.
Adv + This also lowers storage costs (e.g. smaller warehouse) Dis –
Opportunity cost of actually selling it to a customer for high price

Examples of external sources of finance

● Selling shares to shareholders
Adv + Capital raised does not need to be repaid to shareholders Dis –
Shareholders will be expecting profits to be shared with them as dividends
● Bank loans – Borrowing money from the bank
Adv + Fast source of finance Dis –
Have to be repaid with interest
● Government grants – Governments may give businesses a sum of money in exchange
for benefiting the country. (e.g. Locating factory in an area of high unemployment)

● Debt factoring – Definition

Adv + Receive money quickly Did –
The business won’t receive 100% of the debts they are owed.

Short term sources of finance

● Overdraft – bank arrangement to withdraw more money than the businesses actually
have. This is later paid back by the business with interest.
● Buying on credit – Businesses can pay suppliers on a later date by buying supplies on
credit.
● Debt factoring

Long term finance

● (long term) Bank loans
● Leasing – This is similar to renting (e.g. business can pay monthly fee to use assets
e.g. leasing a car for transport)
 ● Hire purchase (installment plan) – Businesses can buy an asset and pay the
manufacturer over time (e.g. buy a car, pay 1000 each month for 24 months)
● Selling shares

Businesses put into consideration factors such as purpose, time, amount and legal form before
choosing the source of finance.

Example – A business that needs cash immediately will need to use short term sources of
finance.

Microfinance – Financial services to low-income individuals in developing countries that are not
served by banks.

5.2.1 The importance of cash and of cash-flow forecasting

Cash – is a liquid asset immediately available for the business to use and spend.

Problems for the business if it has too little cash

● Can’t pay employees and suppliers

● Production of goods stops
● Liquidation (business stops and sells assets to pay debts)

Cash flow – money going into and out of a business over a period of time

Examples of cash inflow include

● Sales of products and services

● Money received from bank loans and sale of assets
● Capital raised from selling shares

Examples of cash outflow

 ● Purchasing of stock/inventory
● Buying assets such as buildings, machinery etc..
● Employee wages and salaries

Cash flow cycle

Cash is needed by the business for operation -> Products are produced -> Products sold ->
Customers pay cash to the business -> REPEAT

Cash flow forecast – Estimate of future cash inflows & outflows of the business and shows
expected balance at the end of each month.

Why do businesses need cash flow forecasts?

● To startup the business

● To show bank manager to get bank loan approved
● Manage cash flow

Businesses shouldn’t have too much cash in their bank account as it could’ve been used in
better ways e.g. expanding the business, investing, etc…

Simple Cash flow forecast

*You may be asked to fill in missing parts of a cash flow forecast in your exam.

Net cash flow = Cash inflow – Cash outflow

Examples of how businesses can solve short term cash flow problems

● Apply for a bank loan – Businesses can quickly borrow money from the bank,
however, interest will have to be paid.
● Delay or cancel plans to purchase new equipment – Delaying or canceling plans to
purchase new equipment such as new machines may significantly reduce cash
outflow. However, this is bad for the business in the long term as new machines can
increase the efficiency of the business.
● Purchasing supplies on credit – This means paying their suppliers at a later date
(delays cash outflow). However, some suppliers may not allow this or may only give
discounts to customers who don’t buy on credit.
● Only sell in cash, not credit – Businesses can choose to only sell to customers in cash,
this means that the business will get their money immediately. However, customers
may buy from competitors that sell on credit.

5.2.2 Working capital

Working capital – Capital (money) available for a business to pay for day to day operations

Working capital = current assets – current liabilities

Businesses need sufficient working capital to

● Pay employee wages and salaries

● Figure out if they are in a good financial position to purchase supplies that are
currently on sale (e.g. Suppliers may give discounts to customers that pay by cash not
credit)
● Ensure they have enough cash for day to day operations
● Pay debts

5.3.1 What profit is and why it is important

Profit = Sales Revenue – Costs

Profit can be increased by

● Reducing costs
● Increasing sales revenue (selling more products or increasing the price)

Profit is important to a private sector business because

● it is a Source of finance – Businesses need profit to grow the business

● Reward – Entrepreneurs want their business to profit so they can make money!

Profit is not the same thing as cash! Businesses can have profit but no cash to spend! Refer to
5.2 (Cash flow)

5.3.2 Income statements

Income statement (AKA Profit & loss account) – Financial document that shows the company’s
revenue and expenses over a period of time. (e.g. 1 year)

Income statement tells the company’s managers whether the company is making a profit or a
loss, managers can also compare this year’s income statement with last year to see if the
differences in profits or losses. In addition, this can also be compared with other businesses in
the same industry.

Income statements containS

● Revenue (Selling price x Quantity sold)

● Gross profit (Sales revenue – cost of sales)
● Cost of sales (aka Costs of goods sold) is the cost involved in selling a product – More
details here https://www.thebalancesmb.com/how-to-calculate-cost-of-goods-sold-
397501
● Net profit (Gross profit – expenses) | This is the actual profit after subtracting the
business’ operating expenses such as employee salaries & wages, taxes etc…
● Retained profit (Profit kept by the business for its own use)

Income statement example

5.4.1 The main elements of a balance sheet
Balance sheet – Financial statement which shows the value of a business’ assets, liabilities, and
equity at a point in time.

3 Main Sections of a Balance Sheet

1. Assets
2. Liabilities
3. Equity
Assets – Items which are owned by the business

– Current Assets – Items owned and used by the business within a year. e.g. Stock (inventory),
cash, debtors

– Non-current (fixed) Assets – Items owned by the business for more than one year. e.g.
Buildings, vehicles, machinery, ovens,

Tip: Make sure you can come up with examples! + Read the case study before answering the
balance sheet question.

Liabilities – Debts owed by the business

– Current Liabilities – Money owed by the business which must be repaid within a year. e.g.
Bank overdraft, creditors

– Non-current Liabilities – long-term borrowings which do not have to be repaid within a year.
e.g. Long term bank loans,

Equity (aka Shareholder’s equity, shareholder’s fund) – Total amount of money invested into
the business by the owners of the company.

– Share capital (Money raised from selling shares)

– Retained profits

– Reserves

5.4.2 Interpret a simple balance sheet and make deductions

from it
Interpreting balance sheet
 ● How a business is financing its activities.
Business expansion can be funded by increasing non-current liabilities e.g. long-term
loans, or through increasing shareholder’s equity e.g. selling more shares (share
capital), retained profits.
● What asset a business owns
Can be seen from the assets section of the balance sheet
● Sale of inventory to raise finance
If this occurs then inventory (stock) would decrease on the balance sheet

Balance sheet equations

● Equity = Total Assets – Total Liabilities

● Working Capital = Current Assets – Current Liabilities
^ Money required to pay for day to day expenses)
● Capital Employed = Equity + Non-Current Liabilities

Note: There are many accounting terms used by different textbooks/websites/exams. e.g.
Equity could be called Shareholder’s fund. Complete lots of past papers to make sure you are
aware of the terms used in your exam.

5.4 – Balance sheets are a quantitative part of the syllabus. Practicing lots of questions on your
textbook + past papers will help with this topic