UNIT 1 – BUSINESS ORGANIZATION AND ENVIRONMENT

1.1 INTRODUCTION TO BUSINESS MANAGEMENT

Business: an organisation that offers a product or service, adding value to inputs in order to create outputs
and meet the needs and wants of consumers.

Added value: the difference between the costs of inputs and the final value of outputs of an organisation.
(achieved through quality, convenience, branding, design, USP…)

Functional areas: teams of employees who have similar skills, expertise and responsibilities.
(e.g. finance, HR, customer services, ICT, sales, marketing, operations)

Primary sector: acquisition of raw materials (e.g. extraction, mining, farming, fishing, etc)
Secondary sector: raw materials are processed, usually by manufacturing
Tertiary sector: services such as banking, insurance, transportation and consultancy are provided
Quaternary sector: providing services that are especially focused on knowledge (IT, media, etc)

Entrepreneur: self-employed people who provide innovative ideas for products or services and look for
new business opportunities.

Intrapreneur: people who provide innovative ideas for the business they are employed by.
1.2 TYPES OF BUSINESS ORGANIZATIONS

PRIVATE SECTOR: anything owned by private companies, which exist in order to make profit.
PUBLIC SECTOR: anything provided by the State or the federal government.
VOLUNTARY: non-profit organizations which exist in order to do good to society.

UNINCORPORATED BUSINESS: in which there is no legal distinctions between the owner and the business.
INCORPORATED BUSINESS: a business in which the owner and the company have separate legal identities.

SOLE TRADER: a business owned and controlled by a single person, who has unlimited liabilities.

Characteristics:
- the owner has unlimited liabilities
- there is no legal distinction between the owner and the business (unincorporated business)
- the income tax is assessed on the owner’s total income
- it raises money by asking for a loan

Advantages:
- complete control over the business
- freedom in decision making
- the owner keeps 100% of the profit
- simple to set up as a sole trader (only by filling a form at the tax office)

Disadvantages:
- unlimited liabilities
- high risks and responsibilities involved
- access to finance is difficult
- lack of skills and perspectives from others
- nobody to share the workload with

Unlimited liability: if the business has debts, the owner’s personal belongings can be taken away to pay off
these debts.

PARTNERSHIP: a business composed of between 2 and 20 people, with unlimited liabilities, who own and
control it.

Characteristics:
- every owner has unlimited liabilities
- it is an unincorporated business
- it is established through the signing of a deed of partnership
- taxes are paid individually on income
- it raises money by bringing in new members

Advantages:
- share the risks and liabilities (advantage for the owner, disadvantage for the partner)
- the partner brings new finances (easier access to capital)
- the partner brings new skills and perspectives
- share the workload with the partner

Disadvantages:
- less freedom in decision making
- share the profits
- setting up is time consuming and could be expensive (deed of partnership, legal advisor)

Deed of partnership: a legal contract signed by the partners which determines the terms of the
partnership.

LIMITED COMPANY: an incorporated business which is owned by shareholders with limited liabilities and
run by directors.

Characteristics:
- shareholders have limited liabilities
- it is owned by shareholders and run by directors
- the owner and the company have separate legal identities
- the company has its own legal status (it can sue and it can be sued)

Advantages:
- limited liabilities
- a company’s finances are improved by selling shares
- banks are more likely to lend money to companies due to their stability
- being a company is generally a recognition that the business has been successful (high status)

Disadvantages:
- part of the profits must be given to shareholders and employees
- a large amount of capital is usually required to start a company
- it takes more time to establish a company than an unincorporated business due to bureaucracy
- it is unlikely to be your own boss, you either submit to a superior or to shareholders

Limited liability: in the event of bankruptcy of the company, shareholders can only lose what they invested
in that company.

PRIVATE LIMITED COMPANY (Ltd): a privately held company owned by shareholders with limited liabilities.

Characteristics:
- there are controls on who can buy and sell the shares
- owners are often involved in day-to-day decisions
- it raises money by selling shares to acquaintances (people they know)

IPO / to float / to go public: when a private limited company enters the stock market and starts selling
shares, becoming a public limited company. The minimum value that a company has to have in order to go
public is of €60,000.

PUBLIC LIMITED COMPANY (PLC): a limited company whose shares are sold on the stock market.

Characteristics:
- anyone can buy or sell its shares
- shareholders are not involved in the day-to-day decisions
- shareholders give their opinion on the directors’ work in the annual general meeting
- it raises money by selling shares on the stock market
Share: a percentage of the ownership of a company.
Share price: the price of the shares on the stock market at any given moment.
Dividend: a portion of the profit which is paid to shareholders as a return for their investment.
Stock market: the place where shares in public limited companies are traded between buyers and sellers.

FOR-PROFIT SOCIAL ENTERPRISES: a business that aims to make profit but also to do something good for
the community.

COOPERATIVE: a for-profit social enterprise which can be run by an unlimited number of members.

Workers’ cooperative: a cooperative in which the people who work in it are also its owners.

Producer cooperative: groups of producers that collaborate in certain stages of the production of a good or
service.

Consumer cooperative: a group of consumers who work together in order to provide services for
themselves. It is more focused on the quality of the service than on the profits.

Financial cooperative: a cooperative in which members have a common fund wherewith they loan money
to each other (the more members, the less risk of losing what you invested).

Housing cooperative: a cooperative in which members share the ownership of a building.

MICRO-FINANCIERS: an organization that provides small amounts of finance to those who don’t have
access to it, with scheduled repayments and low interest rates. Their main aim is to help the less fortunate
to reach economic independence, especially in low income countries.

PUBLIC-PRIVATE PARTNERSHIP (PPP): a partnership between a company and the government, who come
together for the construction of a facility with social aim. The government usually brings the capital and the
company the expertise. A PPP has the same functional areas of a current business and takes decision in a
consultative and democratic way.

Advantages:
- favourable legal status
- employees are motivated and work with common sense
- it creates benefits for all stakeholders

Disadvantages:
- democratic decisions are usually time consuming
- the business model is not self-sufficient in the long term (risk of failure)

NON-PROFIT SOCIAL ENTERPRISES: a business that does not aim for any profit, but it generates surpluses,
which are used to advance the social purpose of the business.

NGO (non-governmental organization): a non-profit social enterprise that supports a socially desirable
cause (which could be political) and is not run by a government. As regular businesses, it is not exempt
from paying taxes.

Charity: a philanthropy-oriented non-profit, which aims to help those who cannot help themselves. Due to
its charitable status, it is exempt from paying taxes. It mainly raises funds through donations and it has no
clear ownership, meaning that there isn’t one person who takes the decisions.
1.3 ORGANIZATIONAL OBJECTIVES – 1.5 EXTERNAL ENVIRONMENT

Mission statement: the business sets out and publicizes its core objectives. It declares the purpose of the
business, the reason why it exists (in the present).

Vision statement: the business sets out and publicizes where it would like to be in the long term (future)
based on its core objectives.

SMART objectives: organizational objectives which are Specific, Measurable, Attainable, Relevant to the
business vision and Time-specific.

Objectives need to be SMART and flexible.

Strategic objectives: long-term, set by upper managers

Tactical objectives: medium-term, set by mid-managers
Operational objectives: short-term (day-to-day), set by supervision managers

Ethical objectives: targets set by the business based on a moral code (“doing the right thing”).

CSR (Corporate Social Responsibility): the business takes responsibility for the impact of their decisions
and activities on customers, employees, communities and the environment.

SWOT analysis: a planning and decision-making tool which assesses the harmful and the helpful features of
a business and it considers both internal and external factors that affect it. The factors it takes into
consideration are: strengths, weaknesses, opportunities and threats.
STEEPLE analysis: a simple framework that aims to examine the external environment of a business,
analysing how it influences the organization. It considers: social, technological, economic, ethical, political,
legal and ecological factors.

Ansoff matrix: a strategic management tool used to devise product and market growth strategies of a given
organization.

Market penetration: a growth strategy that focuses on developing existing markets with existing products
in order to increase sales revenue and market share.
→ present market, present product

Market development: a growth strategy that involves a business selling existing products in new or
unexplored markets or to look for new market segments.
→ new market, present product

Diversification: a growth strategy that involves the business moving into new markets with new products.
(it is the riskiest strategy)
→ new market, new product

Product development: a growth strategy that involves a business introducing new products to its existing
customers. It can be related (within the same industry) or unrelated (entering new industries).
→ present market, new product

Conglomeration: diversifying business risks by participating in various markets

1.4 STAKEHOLDERS

Stakeholders: people or entities who are interested in or affected by what the business does. They can be
internal (directly involved in the business) or external (outsiders).

Examples of internal: directors, shareholders, employees

Examples of external: government, customers, suppliers, sub-contractors, local community

Stakeholders map:
1.6 GROWTH AND EVOLUTION

Economies of scale: the bigger the scale of operation of a business, the lower the average production costs.

- Internal
o Purchasing: big businesses gain discounts by buying in large quantities
o Marketing: big businesses can direct effective campaigns and spread their costs across
units of production
o Managerial: big businesses can employ more specialized managers, who are more
productive/efficient → lower individual average cost
o Technical: big businesses can use more efficient machinery (e.g. bigger delivery truck)
o Financial: big businesses can loan money with lower interest rates (less risk for loaners)
o Risk bearing: big businesses are less risky (contingency plans, areas of business can support
each other)
- External
o Consumers: it is cheaper for businesses to locate their shops close to other similar shops
→ lower advertising costs to attract customers
o Employees: the bigger the local industry, the higher the availability of employees and
therefore the lower the recruitment costs

Diseconomies of scale: beyond a certain point, the bigger the scale of operation, the higher the average
production costs.

The advantages of being a big business:

- Greater chance of surviving

- Economies of scale
- Market leader status
- Increased market share

The advantages of being a small business:

- Greater focus on investments (higher return on investment)

- Greater cachet (sense of exclusiveness)
- Greater motivation (more attention to single employee)
- More personalized service can be a competitive advantage
- Less competition (especially in niche markets)

Internal (organic) growth: slow and steady growth out of the existing operations of the business (using
retained profit and loans)

External (fast-track) growth: quicker and riskier method of growth, with higher investments and potential
higher profits (achieved by collaborating with or acquiring another business). These are the main types:

- M&A (merger and acquisition, takeover)

- Joint Venture (see unit 4.7)
- Strategic alliance (separate companies, shared project and resources)
- Franchise
Types of M&A:

- Horizontal integration: the two integrated businesses are in the same chain of production
- Backward vertical integration: a business integrates with another business at an earlier stage of
the chain of production
- Forward vertical integration: a business integrates with another business at a later stage of the
chain of production
- Conglomeration: a parent company acquires and runs several smaller businesses in different
markets

Franchise: an agreement or license which gives a business (the franchisee) the rights to operate using the
name, logo and systems of a more established business (the franchisor).

Advantages Disadvantages
To the franchisee - immediate brand recognition - no flexibility
and loyalty - expensive royalties
- access to training, equipment - it takes the risk of opening the
and stock business
To the franchisor - quick way of expanding - lack of direct control of
- high fee received operations
- the franchisee has more local - franchisee’s mistakes affect the
knowledge (so it is more likely to franchisor’s image
be successful)
- no risk of opening a new
business
- the franchisee may come up
with an innovative idea

Globalisation: The process of increased worldwide connections, trade, production chains and
communication, leading to greater global interdependence.

Positives:
- Increased trade
- More opportunities
- More economic development
- Access to technologies and goods/services
- Lower prices

Negatives:
- Increased competition in poorer countries
- Easier spread of diseases
- Cheap labour
- Fear of losing culture
1.7 ORGANIZATIONAL PLANNING TOOLS

1) FISHBONE DIAGRAM: a decision-making tool to identify the potential causes of a business problem.

Stages:

- Identify the problem

- Identify 4 main causes
- Identify every possible sub-cause
- Identify the most likely causes

Advantages:

- Every possible cause is considered

- Simple and visual
- Always carried out in groups

Limitations:

- Subjective (can lead to disagreement)

- Doesn’t propose solutions
 2) DECISION TREE: a decision-making tool that helps a business decide between different options.

3) FORCE FIELD ANALYSIS: a decision-making tool that helps a business decide whether to implement
a change.

Stages:

- Propose a change
- Identify DRIVING and RESTRAINING
forces
- Assign them a score out of 5
- Calculate the total scores
- Evaluate whether to carry out the
change

Advantages:

- Simple and clear

- Decisive
- Quick

Limitations

- Subjective
- Quantitative data out of qualitative information
 4) GRANTT CHART: it helps schedule activities to increase productivity

Stages:

- Identify all tasks

- Put them in order
- Determine how long each task will take
- Update the chart while carrying out the task

Advantages:

- Organization
- Productivity

Limitations:

- Based on best guess

- It can be stressful and demotivating (focused on deadlines)
- Risk of rushing things to meet deadlines
- Complex for big project
UNIT 3 – FINANCE ACCOUNTS

3.1 SOURCES OF FINANCE

Revenue expenditure: ongoing operating expenses used to run the daily business operations (e.g. wages,
legal fees, utilities, advertising, office supplies, rent)

Capital expenditure: one-time large purchases of fixed assets that will be used to generate revenue over a
long time (e.g. building, machinery, land, vehicles, patent)

External sources of finance:

- Share capital (long-term): money raised from the sale of shares of a limited company.
- Business angel (long-term): wealthy, experienced individuals who provide financial capital and
knowledge to start-ups in return for a percentage of ownership.
- Venture capital (medium-term): financial capital provided by investors to high-risk, high-potential
start-ups in return for a higher percentage of ownership than business angels.
- Grants (medium-term): funds usually provided by the government that do not need to be repaid.
- Leasing (medium-term): it allows firms to use an asset in return for periodic leasing payments.
- Loan capital (medium/short-term): money supplied by financial institutions such as banks in return
for interests.
- Overdrafts (short-term): when a lending institution allows a firm to withdraw more money than it
currently has in its account in return for high, short-term interests.
- Trade credit (short-term): an agreement that allows firms to delay the payment of assets, usually at
a higher price.
- Subsidies (short-term): financial assistance granted by the government to support businesses that
are in public interest.
- Debt factoring (short-term): an arrangement where the debt factor takes the responsibility for
collecting the debts owed to the business in return for a lower sum in cash.

Internal sources of finance:

- Personal funds
- Retained profit
- Sale of assets
3.2 COSTS AND REVENUES – 3.3 BREAK-EVEN ANALYSIS

Variable costs: those costs that vary depending on the business’s level of output

Fixed costs: costs that do not alter when a business changes its output

Semi-variable costs: costs that remain fixed for a given level of output, beyond which they become variable
(e.g. salaries, which become variable for extra working hours)

Break-even: the level of production at which a business’s total costs and total revenues are equal

Contribution: how many products need to be sold in order to cover a firm’s costs

Margin of safety: the difference between current output and break-even output.

Break-even chart: shows a business’s costs and revenues and the level of production needed to break-even

Formulas:

- Profit/Loss = TR – TC
- Profit/Loss = (P* x Q) – [TFC + (VC* x Q)]

- Contribution per unit = P* – VC*

- Total Contribution = Q x (P – VC*)

- Break-even quantity = TFC / Contribution per unit

- Break-even revenue = (TFC / Contribution per unit) x P*
- Target profit output = (TFC + Target profit) / Contribution per unit
3.4 FINAL ACCOUNTS

PROFIT AND LOSS ACCOUNT: it shows the record of income and expenditure flows of a business over a
given period of time. It therefore established whether the business has made a profit or a loss.

Cost of goods sold: opening stock + purchases over the year – closing stock

XYZ Ltd
Profit and loss account for the year ended 30 June 2022

US$ million

Sales revenue 800

Cost of goods sold 250
Gross profit 550 (-)
Overhead expenses 300
Net profit before interest and tax 250 (-)
Interest 20
Net profit before tax 230 (-)
Tax 40
Net profit 190 (-)
Dividends 50
Retained profit 140 (-)

Trading account
Profit and loss account
Appropriation account
BALANCE SHEET: a financial statement that outlines the assets, liabilities and equity of a business at a given
time.

Assets: resources of value that a business owns. Current assets are expected to be used or turned into cash
within a year; fixed assets are resources for long-term use.

Liabilities: what a business owes to other firms, institutions or individuals. Current liabilities are short-term
debts that must be paid within a year; long-term liabilities are payable after 12 months.

Equity: how the net assets are financed using share capital and retained profit.

XYZ Ltd
Balance sheet as at 30 June 2022

$m $m

Fixed assets
Fixed assets 600
Accumulated depreciation 30
Net fixed assets 570 (-)

Current assets
Cash 20
Debtors 15
Stock 55
Total current assets 90 (+)

Current liabilities
Overdraft 10
Creditors 20
Short-term loans 15
Total current liabilities 45 (+)

Net current assets / working capital 45 (-)

Total assets less current liabilities 615 (+)

Long-term liabilities 250

Net assets 365 (-)

Financed by:
share capital 220
retained profit 145
Equity 365 (+)

* Net assets must be equal to Equity

Intangible assets (see unit 5.6): fixed assets with non-physical value

- patents
- goodwill
- copyright laws
- trademarks

DEPRECIATION: the decrease in value of a fixed asset during time (due to repeated use or obsolescence)

Straight-line depreciation: the cost of an asset is spread out equally over its years of lifetime.

Annual depreciation = (original cost – residual value) / expected years of lifetime

e.g. Annual depreciation = (30,000 – 6,000) / 4 = $6,000

Year Annual depreciation ($) Net book value ($)

0 (present) 0 30,000 (original cost)
1 6,000 24,000
2 6,000 18,000
3 6,000 12,000
4 6,000 6,000 (residual value)

Reducing-balance depreciation: the depreciation amount charged to an asset declines over time.

𝑁 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
Depreciation rate = 1 – √ 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡
Where N represents the expected years of useful lifetime

5 200
e.g. Depreciation rate = 1 – √2,000 = 0.37

Year Depreciation ($) Net book value ($)

0 0 2,000 (original cost)
1 2,000 x 0.37 = 740 1,260
2 1,260 x 0.37 = 466 794
3 794 x 0.37 = 294 500
4 500 x 0.37 = 185 315
5 315 x 0.37 = 117 198 (roughly 200 → residual value)
3.5 – 3.6 RATIO ANALYSIS

PROFITABILITY RATIOS
𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
Gross profit margin (GPM) = x 100
𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

GPM shows the percentage of gross profit that is available for the business to pay overhead expenses.

𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥

Net profit margin (NPM) = x 100
𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

NPM shows the profit that remains to a business after deducting the cost of goods sold and overhead
expenses.

LIQUIDITY RATIOS
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
Current ratio =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

If the current ratio < 1, the business has more current liabilities than current assets (causing
financial difficulties to pay creditors).
If the current ratio is too high, it may mean:
- there is too much cash being held and not being invested
- there is too much stock being held, leading to high storage costs
- there are too many debtors, increasing the possibility that some of the debtors cannot pay
off the debts

𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑠𝑡𝑜𝑐𝑘

Acid test ratio =
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

It shows how well a firm is able to pay off its short-term liabilities with cash and debtors. It doesn’t account
for stock, which is the least liquid of current assets.
EFFICIENCY RATIOS
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥
Return on capital employed (ROCE) = x 100
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Capital employed = long-term liabilities + share capital + retained profit

ROCE assesses the return a firm is making from its capital employed.

𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

Stock turnover ratio =
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑡𝑜𝑐𝑘

It calculates how many times a firm sells and replaces its stock over a given period of time.

𝑚𝑜𝑒𝑛𝑦 𝑜𝑤𝑛𝑒𝑑 𝑏𝑦 𝑑𝑒𝑏𝑡𝑜𝑟𝑠

Debtor days = x 365
𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

It calculates how many days it takes for a firm to collect its debts from debtors.

𝑚𝑜𝑒𝑛𝑦 𝑜𝑤𝑛𝑒𝑑 𝑡𝑜 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

Creditor days = x 365
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑

It calculates how many days it takes for a firm to pay off its creditors.

𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Gearing ratio = x 100
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

It measures the percentage of a firm’s capital employed that is financed by loan capital. The higher the
gearing ratio, the larger the burden of debts.
3.7 CASH FLOW

Cash flow: it refers to the amount of money (cash) that flows in and out of a business over a period of time.
It is therefore an indicator of a firm’s ability to meet its financial obligations.

Cash flow differs from profit as it doesn’t account for credit purchases, while it also considers borrowing
from financial institutions, funding by shareholders and return on investments.

Net cash flow = cash inflow – cash outflow

Ways to increase cash inflows:

- insist on cash payments (instead of credit purchases)

- offer discounts and incentives for debtors to pay debt
- diversify product offering to increase sales
- look for additional sources of finance

Ways to reduce cash outflows:

- negotiate with suppliers and creditors to delay payments
- decrease overhead expenses
- source cheaper supplies

Working capital (net current assets): the difference between current assets and current liabilities.

Working capital cycle: the period of time between the payment for supplies and the selling of goods.
CASH-FLOW FORECAST: the future predictions of a firm’s cash inflows and outflows over a period of time.

Opening cash balance: the cash held by a business at the start of a trading year and every month.

Closing cash balance: the estimated cash available for a business at the end of the month.
(opening balance + net cash flow)

Cash-flow forecast for XYZ Ltd for the first five months of trading

All figures in $ January February March April May

Opening balance 2,000 4,500 5,600 4,650 3,250

Cash inflows
Cash sales revenue 10,000 9,000 8,000 9,500 7,500
Payment from debtors 6,000 5,000 4,500 4,000 4,750
Rental income 4,000 4,000 4,000 4,000 4,000
Total cash inflows 20,000 18,000 16,500 17,500 16,250

Cash outflows
Raw materials 5,000 4,000 4,500 5,500 6,000
Overhead expenses 10,000 10,400 10,450 10,900 10,350
Loan repayments 2,500 2,500 2,500 2,500 2,500
Total cash outflows 17,500 16,900 17,450 18,900 18,850

Net cash flow 2,500 1,100 (950) (1,400) (2,600)

Closing balance 4,500 5,600 4,650 3,250 650
3.8 INVESTMENT APPRAISAL

Investment: the purchase of capital goods (fixed assets that can be converted to cash) with the expectation
of future returns (ROI).

Investment appraisal: a quantitative decision-making tool for managers to assess whether an investment is
viable.

Payback period (PBP): a method of investment appraisal that determines how long it will take for the initial
investment to be paid back.

𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡

When the annual cash flow from investment is constant, PBP = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑓𝑟𝑜𝑚 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡

When the annual cash flow from investment varies from year to year, PBP is calculated as follows:

Year Net C|F ($) Cumulative C|F ($) +/-

0 (300,000) (300,000) -
1 60,000 (240,000) -
2 80,000 (160,000) -
3 100,000 (60,000) -
4 120,0000 60,000 +

The investment is paid back when Cumulative cash flow becomes positive (after the third year).
60,000
PBP = 3 years + (120,000 x 12) months = 3 years + 6 months

Average rate of return (ARR): a method of investment appraisal that expresses the annual return on an
investment as a percentage of its capital cost.

(𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑡𝑢𝑟𝑛𝑠−𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡)

𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑢𝑠𝑎𝑔𝑒
ARR (%) = x 100
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡

Total returns refers to the sum of the annual net cash flows starting from the first year of usage.
Capital cost refers to the initial cost of the investment.

The main advantages of PBP and ARR are that they provide quantitative data and they are quick and simple.

However, neither of them accounts for the “time value of money” and they are both long-term forecasts,
hence they don’t consider the potential influence of unpredictable variables.

Time value of money: acknowledging that the purchasing power of money can vary depending on the
effects of inflation.
Net Present Value (NPV): the difference between the sum of the present values of future returns and the
original cost of an investment, accounting for the time value of money.

NPV = total present values – original cost

Year Net C|F ($) Discount factor (8%) Present value ($)
0 (500,000) 1 (500,000)
1 100,000 0.9259 92,590
2 200,000 0.8573 171,460
3 300,000 0.7938 238,140
4 250,000 0.7350 183,750

Total present values = 92,590 + 171,460 + 238,140 + 183,750 = $685,940

NPV = 685,940 – 500,000 = $185,940

Discount factors table:

3.9 BUDGETS

Budget: a financial plan that estimates revenue and expenditure over a specified future time period.

Budgets are important to organisations for:

- Planning
- Motivation
- Resource allocation
- Coordination
- Control

However, inflexible budgets do not consider any unforeseen changes in the external environment and
highly underspent budgets can result in wastage of resources.

Cost centre: a section of a business where costs are incurred and recorded. It can help managers to collect
and monitor cost data effectively.

Profit centre: a section of a business where both costs and revenues are identified and recorded. It allows
managers to calculate how much profit each centre makes.

Businesses can be divided into cost or profit centres by department, product or geographical location.

Cost and profit centres are useful to organisations as they aid decision making, improve accountability,
track problem areas, increase motivation and enable benchmarking.

However, they can create internal conflicts between centres and increase stress levels among employees.

Variance analysis: the process of assessing the difference between the budgeted and the actual figures at
the end of a budget period.

Favourable variance: when variance is financially beneficial to the business (actual revenues are higher
than budgeted or actual costs are lower than budgeted).

Adverse variance: when variance is financially costly to the business (actual revenues are lower than
budgeted or actual costs are higher than budgeted).

Strategic planning: an organisation’s process of defining its future direction and allocating resources
accordingly.
UNIT 4 – MARKETING
Marketing: the process of promoting and selling products or services to satisfy consumer needs and wants.

Product orientation: business is focused on the production process and the product itself. They believe
that a high quality product will satisfy customers and therefore will sell well.

The business focuses on the quality of the product and puts maximum effort on research and development.

Market orientation: business is focused on continually identifying, reviewing and analysing customers’
needs. They believe that once they identify the needs of the customers, they will be able to accordingly
produce a product that will satisfy their needs.

The business focuses on the satisfaction of the customer and puts maximum effort on market research.

Commercial marketing: the implementation of marketing methods to meet the needs and wants of
customers in a profitable way (seek to influence the consumers’ purchasing decisions).

Social marketing: the implementation of marketing methods to cause positive social change (seek to
influence behaviour for the good of society).

Social media marketing (SMM): the use of social media platforms to promote a product or service.

Market share: a business’ percentage of the total value of sales within a market.

Market leadership: the company holding the highest amount of market share in the industry.

Market size: the total sales of all businesses in a given market. It is measured by volume or monetary value.

Market growth: the percentage change in the market size over a given period of time.

Marketing planning: the process of deciding marketing strategies

- marketing objectives
- key strategic plans
- marketing actions
- marketing budgets

Market segment: a distinct group of customers with similar characteristics and similar needs and wants.

Target market: the market segment that a company aims to sell its product to.

Targeting: the process of marketing to a specific market segment.

Niche market: targets a specific and well-defined market segment.

Mass market: different market segments are targeted to maximise sales volume.

Consumer profile: the characteristics of consumers of a particular product in different markets.

Market segmentation: the process of dividing the market into market segments.

- Demographic: dividing by personal characteristics (e.g. age, gender, religion, family)

- Geographic: dividing by location
- Psychographic: dividing by lifestyle and behaviour (e.g. income, tastes and preferences, hobbies)

Positioning: the process of analysing how consumers perceive your product compared to other products in
the market (to identify competitors, opportunities and suitable target markets). It can be visually
represented through a position map.

Unique selling point (USP): a product’s feature that differentiates it from the other products in the market
(it justifies added value, offers competitive advantage, increases brand loyalty…).

Sales forecasting: the process of predicting a firm’s future sales based on past data. It is used to improve
budgeting and productive efficiency, although it can be inaccurate if you don’t have much data available.

Three-year moving average: (Y1+Y2+Y3) / 3

Four-year moving average: [(Y1+Y2+Y3+Y4) + (Y2+Y3+Y4+Y5)] / 8
Yearly variation: Sales Y2 – Trend Y2
Cyclical variation: variations average
Extrapolation: calculate future and past values using “line of best fit”

Market research: the process of collecting, analysing and reporting data related to a particular market, with
the purpose of identifying the needs and wants of the customers.

Primary market research: the research you carry out yourself.

- survey
- interview
- focus group
- observation

Secondary market research: a research which has already been carried out and published by others.

- academic journal
- media article
- government publication
- market analysis

Sampling method: the portion or subgroup of the population selected for market research purposes.

- Quota - by characteristics (age, gender…)

- Stratified - percentage of males and females
- Cluster - by geographical areas
- Snowball - the interviewer asks the interviewee to recommend other people they should speak to
- Convenience - people within easy reach
- Random

Qualitative data: non-numerical information

Quantitative data: numbers and statistics
PRODUCT

Product life cycle (PLC): a model that shows the different stages in the life of a product and the sales that
can be expected at each phase.

Development: the product is designed

Introduction: the launch stage of the product on to the market (price skimming)
Growth: revenues start to increase as the product is well received by the market (penetration pricing)
Maturity: the product is well established, with a stable and significant market share (psychological pricing)
Saturation: sales begin to fall as many competitors have entered the market (competitive pricing)
Decline: steady drop in sales and profits

Extension strategies: an attempt by firms to stop sales from falling.

- find a new market for existing products

- develop a wider product range
- change packaging/design
- target different market segments

Boston matrix: product portfolio analysis

Cash cow: sales won’t last long since market is expected to shrink, so you must ‘milk’ it as much as you can.

➔ Low market growth, high market share

Question marks: market is growing rapidly. If the company is able to maintain its share, sales will grow
along with the market. So the future is uncertain, but there is potential.

➔ High market growth, low market share

Stars (best option): the company needs to maintain its significant share as the market grows.

➔ High market growth, high market share

Dogs (worst option): low potential.

➔ Low market growth, low market share

BCG Matrix strategies:

- Harvesting strategy – cash cow

- Building strategy – question marks
- Holding strategy – stars
- Divesting strategy – dogs

Branding: the process of distinguishing one business’s product from competitors, adding value to it.

Brand awareness: customers recognize your product.

Brand development: specific focus on increasing brand awareness.
Brand loyalty: customers are loyal to the brand.
Brand value: the difference between the value of a branded product and the value of a non-branded one.

Packaging: it refers to the designing and production of the physical container or wrapper of a product.
PRICE

Pricing strategies:

Cost-plus Calculate the cost of making the product and add a % “mark-up”
pricing

Penetration Charge a low initial price to gain market share quickly - can raise the price
pricing later when established in the market

introduction
phase

Price Skimming Charge a high initial price to gain maximum profit from customers prepared to
pay high prices and lower prices later
only for one-off
sales

Psychological Pricing linked to customers’ perception e.g. perceived value (high price = high
pricing quality?) or $9.95 rather than $10

Loss leader Sell one product at a very low price (even at a loss) to get customers “through
the door” to spend regular prices on other products

Price Charge different prices to different groups of customers who have different
discrimination degrees of willingness/ability to pay and who cannot re-sell to another group
(e.g. different age groups). It can only be used if consumers can be
categorised

Competitive Setting a price relative to the competitors’ prices - usually similar/just below,
pricing but could also be deliberately lower to steal market share to put competitors
out of business (predatory/destroyer pricing)

PROMOTION

= communicating information about a firm’s products to consumers.

Above-the-line promotion: a paid for communication to promote a firm’s products (e.g. television, radio,
billboards, influencers…)

Below-the-line promotion: a form of communication where the firm has direct control over its promotional
activities.

- Direct marketing: advertising through emails, phone calls…

- Personal selling: face to face selling
- Public relations: reviews, newspaper articles…
- Sales promotion: make customers act quickly

Guerrilla marketing: cheap, untraditional promotional strategy that has immediate effect on sales.
PLACE

= how the product reaches consumers.

Zero intermediary channel: a product is sold directly from the producer to the consumer.

One intermediary channel: it involves an intermediary (retailer, agent…) to sell the product from the
producer to the consumer.

Two intermediary channel: it involves two intermediaries (wholesalers + retailer) to sell the product from
the producer to the consumer.

Wholesaler: a company that buys goods in bulk from the producer and sells them in smaller (but usually
still large) quantities to retailers.

4.6 EXTENDED MARKETING MIX (7 Ps)

Customer service: the support a business offers to its customers, both before and after they buy and use its
products or services. A good customer service helps customers have an easy, enjoyable experience with the
business, so it increases brand loyalty and makes them want to come back.

PHYSICAL EVIDENCE: It refers to tangible touchpoints (points of interaction) between a business and its
customers. A good physical evidence can distinguish a business from competition and justify higher prices.

PROCESS: how a business provides or delivers its goods or services to customers. To improve the ‘process’,
a business can invest in technological advances or in better employees.

PEOPLE: the human capital required in the production of goods or provision of services. To improve
efficiency and productivity, a business can organise training for employees.

4.7 INTERNATIONAL MARKETING

Firms may wish to enter new markets abroad as an extension strategy in the product life cycle or as market
development in the Ansoff matrix, to increase brand awareness, to acquire an international status, to
diversify the company, to compete for new sales, to seek investment opportunities…

Methods of entering international markets:

- The Internet (e-commerce): when a company aims to sell its goods/services abroad online, rather
than having a physical presence in another country.
- Direct exporting: a business commits to physically sell its products abroad on their own behalf,
with complete control over operations.
- Indirect exporting: when a company hires an external business to deliver its products abroad.
- Joint venture: a business arrangement where two or more parties from different countries agree to
invest in a particular business project abroad. All parties share resources, costs, profits and losses.
- International franchising: a business arrangement where a franchisor gives a franchisee the
permission to use its brand, trademark, concept and expertise abroad in exchange for a ‘royalty’.
4.8 E-COMMERCE

E-commerce: the buying and selling of goods and services through electronic networks, usually over the
Internet.

Advantages of e-commerce to businesses:

- more customers can be reached (higher potential revenue)

- lower costs (no need to pay physical space and people to sell the products)

Disadvantages of e-commerce to businesses:

- if consumers are unwilling to share private data, they won’t buy any product
- businesses can become vulnerable to competitors (who have access to product details)
- it can be expensive to maintain a website

Advantages of e-commerce to consumers:

- the purchase of products is less time-consuming

- increased choice

Disadvantages of e-commerce to consumers:

- you cannot physically try or test the product before purchasing it

- access to private information by businesses
UNIT 5 – OPERATIONS MANAGEMENT
5.1 THE ROLE OF OPERATIONS MANAGEMENT

Operations: the process of converting inputs (FOPs) into outputs (G+S) to meet consumers’ needs and
wants.

Added value: the difference in value between the inputs and outputs of an organisation.

Continuum of goods and services: the combination of goods (tangible) and services (intangible) produced
or provided by a business.

Capital intensive: the business relies on machinery and automation.

Labour intensive: the business relies on human capital.

Triple Bottom Line: accounting for economic, social and ecological sustainability when making business
decisions.

Economic sustainability: using resources wisely to ensure profitability, financial performance and stability.

Social sustainability: taking human factors into account when making a business decision.

Ecological sustainability: taking environmental factors into account when making a business decision.

5.2 PRODUCTION METHODS

Job production: production of a “one off” custom product made for a specific order.

(high cost per unit, highly skilled workers, long set-up time, long production time)

Batch production: production of a group of products that go together from one stage of production to the
next, hence allowing for variations in between stages.

(medium cost per unit, semi-skilled flexible workers, short set-up and production time once established)

Mass production: production of a high volume of identical, standardized products.

(low cost per unit, unskilled workers, long set-up time, short production time)

Job production Batch production Mass production

Raw materials Low High (buffer stock) High
Work in progress High Medium Low
Finished stock Low Medium High

Cellular production: a form of mass production in which different teams of workers are responsible for
certain parts of the production line.

Implications of changing production method:

- HR: relocation and retraining of workers, redefinition of responsibilities

- Marketing: impact on brand image due to change in orientation, distribution channel or price
- Finance: impact on stock control, working capital cycle and budgeting
5.3 LEAN PRODUCTION AND QUALITY MANAGEMENT

Lean production: an approach to operations management that focuses on cutting waste in the production
process for the sake of greater efficiency.

- Kaizen: based on continuous improvement

- Kanban: a system of messages to help manage production flows and supply chains
- Andon: a system of signals and alerts to inform workers of problems
- JIT: avoiding unutilised stock

Types of waste:

- Time
- Transportation
- Product
- Space
- Inventory
- Energy
- Talent

Cradle-to-cradle (C2C): opposite of “cradle-to-grave”, an approach to design and manufacturing that

focuses on sustainable development, based on recycling, lean production, renewable energy and CSR.
C2C certificates positively affect brand loyalty and reputation.

Quality: refers to the "value" of a product as perceived by customers, based on whether it is fit for purpose
and meets needs and expectations.

Quality control: a person or small group of employees within an organisation is responsible for making sure
the products meet quality standards.

Quality assurance: a business culture or attitude where all employees play a part in making sure the
products meet quality standards.

Quality circles: a formal group of volunteer employees who meet regularly to discuss ways of improving
quality in their organisation.

Benchmarking: a business comparing its quality standards against industry standards, historical data from
the same enterprise and internal targets.

Total quality management (TQM): a global approach to quality enhancement, which can include quality
circles and benchmarking, as well as kaizen, kanban and andon.
5.4 LOCATION

Factors affecting the location of a business:

- costs
- competition
- type of land
- markets
- familiarity with the area
- labour pool
- infrastructure
- suppliers
- government
- national, regional or international differences

Outsourcing: another company carries out part of the minor operations of a business, so that the business
can focus on its core activities. (opposite = in-housing / insourcing)

Offshoring: when a business moves part of its operations outside its home country (although workers are
employed by the same company). (opposite = reshoring)

5.5 PRODUCTION PLNNING (STOCK CONTROL)

Supply chain: the network of suppliers, resources, information and operations that a business needs in
order to produce goods or provide services.

JIT (just-in-time): avoiding extra stock by producing only when ordered and ordering supplies when
necessary.

JIC (just-in-case): holding a buffer stock (raw materials, machinery and finished goods) in case of a sudden
increase in demand or a problem in the supply chain.

Stock control diagram:

- maximum stock level: maximum stock that the firm can hold, depending on factors like physical
space and number of employees
- minimum stock level (buffer stock)
- reorder level: level at which stock has to be reordered
- reorder quantity: amount of stock that is ordered, the difference between max. and min.
- lead time: the time it takes for suppliers to deliver reorder quantity
Capacity utilization rate: it shows what percentage of its full capacity a business is using at a given time.
𝑎𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
= x 100
𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦

If CUR is too low, it means the business is not using its resources effectively, although it may be beneficial
for planning.

If CUR is too high, it means the business is near to its full capacity, hence it can’t meet an unexpected
increase in demand.

Productivity rate: it shows what percentage of its total inputs a business is able to convert into outputs. It
is therefore a measure of the efficiency of production and refers to the added value of the business.
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
= x 100
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑝𝑢𝑡𝑠

To increase productivity rate a business can try to increase motivation and training, invest on innovation or
change production method (or make it “leaner”). Productivity rate can be used as a term in collective
bargaining.

Cost to buy (CTB): P x Q

Cost to make (CTM): VC x Q

5.6 RESEARCH AND DEVELOPMENT

Research & Development: the spending of resources to develop new products and processes (either by
improving existing ones or by creating new ones).

Trademark: a legal protection of symbols, names and brands to stop competitors from using them and to
avoid the confusion of the customers. Trademarks need to be legally registered.

Copyright: a legal protection of creative outputs (books, songs, cartoons, etc). Copyright does not have to
be formally registered and it is limited in duration.

Patents: a legal protection of a product or production process. Patents are granted by the government and
they are exclusive to new inventions of tangible benefit for society.

Product innovation: improving a product or creating a new one.

Process innovation: improving or creating a new way of producing or distributing a product.
Positioning innovation: refocusing the market for an existing product or service.
Paradigm innovation: an innovation which disrupts existing markets completely.

Adaptive creativity: to transfer and apply existing forms of thinking to new scenarios.
Innovative creativity: to generate new forms of thinking from unusual perspectives.
5.7 CRISIS MANAGEMENT

Crisis: something which poses a genuine threat to the reputation or even survival of the organization.

Crisis management: to build a response communication programme that minimises the potential damage a
crisis may cause to the business.

An effective crisis management requires: Transparency, Communication, Speed, Control

Contingency planning: the process of identifying a potential crisis, assessing the likelihood of it to happen
and minimizing its potential impacts on the business by redacting a plan.

Benefits of contingency planning: saving of time and money in case of an emergency, lower stress levels

Limitations of contingency planning: opportunity cost, requires regular review