IGCSE Business Studies

Key Revision Booklet

Includes key definitions plus key

facts which must be learnt for the
IGCSE Business Studies Exam

1
 1.1.1 Business activity as a means of adding value and meeting customer needs

Adding Value: The difference between the cost to produce and the
selling price as a product moves through chain of production a product is
changed and thereby the price of the product increases – e.g. from a
stick of wood to a chair

Scarcity and Choice

All things are scarce (except the air). There is a limit to how much we can
have. As a result people, businesses and consumers must make choices. In
business these choices based on scarcity are called Opportunity Costs.

Opportunity Costs

All people and businesses have wants and needs. A need is something
that is considered essential and a want is something that would be
beneficial but we could do without.

However all goods and services are scarce – i.e. There is not an unlimited
supply of everything and as such everyone has to make choices. Making
a good choice will however mean that you will give up one thing in
favour of getting another. This is known as an opportunity cost.

Definition to learn
The opportunity cost is the loss of the good or service forgone
Example
Consider a can of coke and a bar of chocolate. Both are priced at KSh
40. You want to buy both but you only have 40Ksh in your pocket and so
you can only buy one.
If you decided you buy the can of coke then the opportunity cost would
be the bar of chocolate.

All organisations need to make opportunity cost decisions such as a

government may have to decide whether to improve the infrastructure in
a country or build and run a new hospital. If it chooses to build and run a
hospital then the opportunity cost of the hospital would be improve
infrastructure in the country.

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1.1.2: Classification of local and national firms into primary, secondary and tertiary
sectors

Production

Production is all activities that help to provide goods and services

that people want or need.

Factors of Production

These are the resources needed for a business to exist.

Land: This can be rented or bought. It also includes natural

resources such as oil, forests, and rivers.

Labour: This includes all the people who are paid for their services
and also people who offer their services for free (e.g. voluntary
workers or the family of a business owner.)

Capital: These are the physical equipment, tools and machinery

needed to run the business. Capital also includes money that is
used to set the business up.

Entrepreneurial Skills: This is the person who develops the business

idea and runs the business. An entrepreneur takes the risks, has the
ideas and reaps the rewards through profit (or suffers any losses!)

All of the factors of production work together to allow the business

functions to happen. Business functions include
o Production
o Research & Development
o Finance o
Marketing o
Administration
o Human Resources.
When these come together the business is able to produce the goods or
services that it set out to achieve.

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 Goods And Services

Consumer Goods: These are goods that are provided for the general
public. Consumer goods fall into two categories: Durable goods and non-
durable goods.

Durable Goods: Goods that are used repeatedly over a period of time.
Although they will eventually need replacing through wear and tear they are
not used up. Examples of durable goods include:

Tables Computers
Cars Mobile Phones
Non-Durable Goods: Goods that are used up and need replacing. In the
shops these are known as “fast moving consumer goods” – FMCGs.
Examples
include:

Food Toothpaste
Washing powder Ink Cartridge
Capital Goods. These are goods purchased by businesses to produce the
goods or services that they will eventually sell. Capital goods are one of
the
factors of production. Examples include

Vehicles Machinery
Fixtures & Fittings Premises
Many goods fall into different categories depending on where they are in
the production chain. For example a computer in a home is a consumer
durable but to a computer shop it is a capital good. Shampoo at home is
a consumer non-durable but it is a capital good in a hairdressers.

Services: This is an important sector of production that enables industry to

run efficiently. It includes all businesses providing services to industry such
as selling (a restaurant will buy meat form a butcher), to transport (a
manufacturer needs to get its products to their customers either at home
or abroad), banking and insurance and tourism.

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 Sectors of Production

Production is sometimes divided up into: -

1) Primary production means work that gets natural resources from the
land or sea.
Primary industry is sometimes known as the extractive industry
o Examples include: - Farming, fishing, mining, oil refinery and forestry

2) Secondary Production means work that turns natural resources

into finished goods
Secondary industry is sometimes called manufacturing and
construction industry
o Examples include: - factory work, building work, baking, tailoring
and making anything

3) Tertiary production means work that provides services rather than

goods.
The tertiary industry can also provide a service to the other twos sectors of
production.
o Examples include: - Teachers, clowns, doctors, beauticians and
transportation
Industrialisation and De-Industrialisation

Industrialisation is when a country experiences an increase in

secondary production.
De-industrialisation is when a country experiences a decline in
secondary production.

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 Sectors of Industry
Who carries out business activity? This falls into three main sectors

The Private Sector

This includes goods and services provided by businesses that are aimed
mainly at making a profit. The business owners are either individuals (sole
traders), small groups of business people (partners) or business people
who join together to form a joint stock company (i.e. a limited company).

The Public Sector

This includes goods and services provided by the government. These

goods and services may be supplied either for a profit or not for a profit.

Not for profit public sector goods: Some goods are provided by the
government because they are considered general needs that will benefit
everyone but if left to the private sector they either would not be provided or
would be too expensive for many people to buy. Examples include: -

o The Armed Forces

o International Consulates

o Infrastructure and road lighting.

o Education
Some services are provided by
o Health both the public and private sector
and people can choose if they
Sometimes the government has can afford to pay for it.

another priority other than profit

such as safety (public transport) or
quality (an publicly owned TV station such as the BBC).

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For profit public sector goods: Sometimes a government will help a business
to become competitive. For profit businesses that are owned by the
government will either be useful to the government because it employs lots
of people and so keeps unemployment down Usually the government will out
such a business that looks like it could go bust and will then sell it back to the
private sector when the business is considered to be a “going concern” (i.e.
able to survive on its own)

The Voluntary Sector

This is also known as the not for profit sector, Non-Governmental

Organisation (NGO) or charitable sector. These organisations exist to raise
money for good causes or draw attention to the needs of disadvantaged
groups in society. Examples include AIDS charities, The Red Cross and
Oxfam. The aim of this sector is to run with minimal costs and to pour as
much of the funding into helping the charity. Many staff will therefore work
for free, although larger organisations will employ administrators or many
pay survival wages to some staff. In some countries Non Government
Organisations (NGOs) will exist to ensure that funding that is donated goes
to the intended cause.

Funding of the sectors of production

Sector Funding
Public Taxation
Private Selling goods and services
Voluntary Charitable donations

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 1.1.3 Business growth and measurement of size

Growth and Measurement of Size

The growth of a business is when it expands in size. The size of a business

can be measured by the following means:

· Sales turnover (or sales revenue)

· Number of employees
· Market share
· Number of outlets (e.g. shops)
· Profit

Businesses either grow organically or externally (by acquisition and

mergers.)

Organic growth means the business grows by expanding its sales or their
operations and is financed through its own profits.

Acquisitions and mergers are when the business joins or buys other
businesses, not necessary of the same type.

Businesses may wish to expand for the following reasons:

1. Economies of scale
2. Increased market share
3. To survive a very competitive market.

A business can grow organically in the following ways:

a) Lower price
b) Increase advertising
c) Sell in different location
d) Sell on credit

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Mergers and Acquisitions

A merger is where two or more businesses AGREE to join together to

become one larger firm. An acquisition is when one firm BUYS another
firm.

When a one business buys another it is possible that the acquisition or

merger integrates the new product with the existing product. This
integration can either be vertical or horizontal integration.

Mergers and acquisitions are an important option for larger businesses

that wish to grow rapidly. However, they are a high risk strategy – it is easy
to buy the wrong business, at the wrong price for the wrong reasons!

The advantages of mergers and acquisitions are:

1. Economies of scale
2. Greater market share for horizontal integration, which means the
business can often charge higher prices.
3. Spreads risks if products different.
4. Reduces competition if a rival is taken over.
5. Other businesses can bring new skills and specialist departments to
the business.

The disadvantages of mergers and acquisitions are:

1. Diseconomies of scale if business becomes too large, which leads

to higher unit costs.
2. Clashes of culture between different types of businesses can occur,
reducing the effectiveness of the integration.
3. May need to make some workers redundant, especially at
management levels – this may have an effect on motivation.
4. May be a conflict of objectives between different businesses,
meaning decisions are more difficult to make and causing
disruption in the running of the business.

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 Constraints on Growth (Things stopping growth)

Though a business may wish to grow in size, there may be reasons why it
cannot do this:

1. Financial limitations – a business may not be able to raise the

necessary finance to grow any bigger – perhaps it has not made
enough profits to generate the cash or the bank is not keen to lend
it more money at the moment.

2. Size of the market – there is often a limit to number of people who

are willing to buy the type of product that the business is producing
– e.g. a printing press manufacturer will know that there are only a
small number of publishers in the UK who will be able to buy the
product.

3. Government controls means that a business cannot necessarily

have more than 25% of the market share. This often arises when one
business joins with another. If the government thinks it is not in the
public interest to have such a large business, then the joining
together may not take place.

4. Human resources are limited in terms of the skills available.

Especially in more specialised areas it may be difficult to find
enough qualified staff in the area to expand the business. In the
South East of England, where

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 1.1.4 Key features of own national
economy

Kenya Key Economic Facts

· Population: 40,000
· Unemployment: 40%
· 60% of population are classified employed earning below the
poverty level
· Average earnings $1,600 per person which is in the lowest 10% of
the world.
· Growth rate 2.6% (2009)
· Inflation rate: 10% (2009)
· Trends in the Sectors of Production

Country Primary Secondary Tertiary

UK (2006) 1.4% 18.2% 80.4%
Malaysia (2005) 13% 36% 51%
Sudan (1998) 80% 7% 13%
Kenya (2007) 75 % 8% 17%
Source CIA

Note that the higher the level of tertiary activity the higher the
development of the country.

· Even though the primary sector is the biggest sector in Kenya it only
amounts to 19% of the country’s income. 17% is secondary whilst 64%
comes from the tertiary sector.
· Tourism is Kenya’s biggest export.

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 1.2.1 Business objectives and their importance

Objectives: A specific statement that should be quantifiable.

Objectives should have SMART criteria

S Specific with regarded to exactly what is needed

M Measurable. (i.e. able to be judged)
Agreed with people that will be responsible for achieving the
A goals.
R Realistic to staff of achieving the goals
T Timetabled to state when a target should be reached by.

Level of importance / Conflicts

Profit Short term or long term?
New businesses may not be as concerned with profit but
as they grow and get more established the business will be
more focused on profit.
A sole trader, partnership or small private limited
company will be less profit motivated as they may be
motivated by keeping their jobs for themselves and their
families whereas a large Ltd or public limited companies
are
responsible to shareholders to make a profit.
Growth Growth brings economies of scale.
If the economy is good then a business may be growth
orientated whereas during a recession a business may
drop
growth as an objective and focus on survival.
Survival New business may aim to survive or break even
Economic situation – a firm may wish to survive a
recession or drought
A competitor opening up nearby may make a business
focus on survival rather than profit or growth.
Social, Some businesses (mainly in developed countries) are
more concerned with their impact on communities
Ethical & than
Environmental profit. Although these businesses will have owners that
want a finance return they do not want it “at any cost”
aims and
so will accept a lower return with a clean conscious!
Being social and responsible can be a USP. If your
 competitors promote this then you may have to also.

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 1.2.2 Stakeholders and their differing objectives

Definition: A stakeholder is an individual that has an interest

in and is affected by an organisation.

Stakeholder Stake

Shareholders / To receive high profits / dividends

Owners Self satisfaction – being your own boss

Employment (their own job and that of their

family)

Managers Their jobs and any bonus related pay

To have their own reputation well known

To make decisions and to set and control the

overall direction of the firm

Employees To get the best possible wage / salary possible

(Also Trade Unions) To have job security

To have good working conditions

Financiers (banks, To be paid on time and so be able to meet their

trade creditors and own debts

other lenders)

Customers To be able to buy the products or services

being sold

To buy products and services at the best

possible price

To have quality assurance in products and

services bought

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 1.2.3 Aims of private and public sector enterprises

Comparison Of Public Sector and Private Sector Objectives

The Objectives of the Public The Objectives of the Private

Sector Sector
1. Economic Growth 1. Profit
2. Low inflation rates 2. Growth and increased market
share
Break
3. Low levels of unemployment 3. even
4. Exchange rate stability 4. Survival
Balance of payments
5. equilibrium. 5. Social and ethical
considerations

Differing Objectives of State and Private Sector Organisations

The main objective of the state owned sector is to provide a service or

to help with meeting the government’s own objectives.
The main objective of most private sector firms is to make a profit.

The Objectives of the Public Affect on businesses

Sector
More people with money to spend
Economic Growth on
goods and services.
More technology to improve
production
Low inflation rates Avoids frequent changes in prices.
Makes setting wages easier to
predict
Low levels of unemployment More people employed to spend
more on goods and services.
Consumers can afford to buy more
expensive goods.
Exchange rate stability Businesses can get involved in
international trade without
worrying that the cost of imports
and exports will keep changing.
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 1.3.1 Government influence over decision making by using economic policy
measures

The government can influence the actions of businesses and buying

behaviour in a number of ways.

A. Legislation – laws that affect the way that a person or business can
act. This might include what can be produced, how production
should be monitored (e.g. health & safety laws), how and business
can advertise and the quality of goods and services produced

B. Fiscal Policies

(i) Taxation
Taxation comes in two forms:
1) Direct taxation – taxation on income and profits (income tax,
National Insurance and corporation tax).
· Corporation tax (tax on businesses profits) will reduce profits so a
business can reduce dividends or increase price to keep profit levels
high.
· Income tax will reduce the amount of money a customer has to spend.

2) Indirect taxation – taxation on spending (VAT, excise duty).

· VAT will increase the price of a good or service but the business will not
benefit from it.

(ii) Government Spending

Governments will spend money on health, education, defence, roads,
law and order and on supporting businesses and local communities.

Businesses can benefit direct or indirectly from the rest of the spending.

· Governments might provide money in the form of grants, subsides and

tax breaks (paying less tax than you should) to encourage businesses
to grow.

· Governments also provide support through advisory bodies

coordinated by the Department of Trade and Industry, especially for
small businesses.

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 · Businesses can also benefit indirectly because of the huge spending
that governments undertake. For instance the increases in health
spending will benefit businesses that produce medical products or
services to hospital (e.g. cleaning), roads will benefit businesses from
better infrastructure, money spent on police make it safer to trade etc.

C. Monetary Policies – the government or central bank will change

interest rates to influence the amount of money available to spend
in an economy

Interest rates

Credit is borrowed money. Many small firms depend on credit such as

bank loans and overdrafts to help finance their business activities.
Interest is the reward for lending and the cost of borrowing.

An increase in interest rates can affect a business in two ways:

· Customers with debts have less income to spend because they are
paying more interest to lenders. Sales fall as a result.
· Firms with overdrafts will have higher costs because they must now
pay more interest.

· The impact of a change in interest rates varies from business to business.

Firms that make luxury goods are hit hardest when interest rates rise. This
is because most customers cut back on non-essentials when their
incomes fall as a result of interest rate rises.

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 1.4.1 Mixed and market
Economies

No two economies are organized in exactly the same way, but all have to
solve three fundamental problems

1. What should be produced in the economy?

2. How should production be organised?

3. For whom should production take place?

Should everybody be entitled to an identical share of production, or

should some receive more than others? The gap between rich and poor
has widened considerably over the last twenty years and different market
economies try to address this

Free Market Economy Planned Economy

Private ownership of all
economic resources
Resources go towards
making what consumers
want to buy
Price determined by
market forces
State owns and or
controls most economic
resources
Mixed Economy Central state planning
decides what should be
produced and how it
should be distributed
Consumers have little
choice and prices do
not
reflect want customers
want.

Most economies are based on the mixed economy whereby

1. Many products only produced by private businesses – e.g. mobile
phones, cars etc.

2. Most essential services are provided by the state. These are known as
“Public goods”. Examples include police, fire service, defence, street lights
etc.

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3. Many important services that can benefit society are provided by the
state and private businesses. These are known as “Merit goods”.
Examples include school, health, broadcasting.

4. The state will monitor private businesses activities through law

governing pollution, health & safety, employment etc.

1.4.2 International trade (access to markets/tariffs)

· International trade is the exchange of goods and services between

different countries. UK business can compete against foreign rivals by
offering better designed, higher quality products at lower prices.

· Kenyan Exports are products made in Kenya and sold overseas, while
Kenyan imports are products made overseas and sold in the Kenya.

· Protectionism: The restriction of imports into a country by government

measures

Reasons For Protectionism

· Protects Kenyan businesses from extra competition

· Helps new Kenyan businesses to develop before they face
competition Helps protect Kenyan jobs
· Prevents foreign countries ‘dumping’ lots of cheap imports into Kenya
· Prevents imports of harmful or desirable goods

Trade Barriers (Methods of Protectionism)

1. Tariffs These are taxes on imported goods. They raise the price to
customers and make them less attractive
2. Quotas These are limits on the quantity of a product that can be
imported into a country e.g. 100,000 cars

Free Trade: Trade without any protectionist / trade barriers between

countries
1. Protectionism keeps Kenyan firms away from genuine competition. They
may become lazy and inefficient
2. Free trade forces Kenyan firms to produce quality goods and services
as they face much foreign competition of a better quality.

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3. If Kenya puts up trade barriers then other countries are likely to
retaliate (i.e. do the same to them).
4. Free trade encourages firms to export and import. This should
encourage a greater choice for consumers and a higher standard of
living
5. Trade barriers increase the cost of trading. For example, a tariff would
mean that Kenyan firms and consumers may have to pay more for
imports of raw materials or consumer goods

East African Union (EAU)

Kenya is a member of the East African Union which is working towards free
trade within e number of East African countries. At present the EAU agree
tariffs and quotas so that all products entering the EAU have the same
restrictions placed on then from one country to the next. Barriers between
EAU countries have been reduced – e.g. free movement of labour (you
don’t need a work permit to work in Uganda) and reduced tariffs.

1.4.3 Problems of entering new markets abroad

1. Legislation (laws): Businesses may find that the country they want to
enter has many restictive laws. For example some environmental laws
may cause a firm to locate in a country that is less concerned about
the environment.

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 2. Language barriers: Mainly an influence for a small to medium sized
business. As less staff are employed the business may not wish to locate
to a country with a different first language.

3. Cultural Barriers – some countries close shops on a Saturday, others a

Sunday. Some types of advertising are acceptable in one country
compared to another.

4. Awareness of local business opportunities – who to speak to, where the

target market might be located, how the market abroad differs from
the one in Kenya, general lack of contacts.

1.4.5 Concept of exchange rates and how changes in them affect business

· The exchange rate is the price of foreign currency one pound can
buy. If the current exchange rate is two dollars to the pound, then one
pound is worth two dollars.

The price of Kenyan exports and imports is affected by changes in the

exchange rate.
· An increase in the value of the Shilling means one hundred shillings
buys
more dollars. The pound has appreciated (gone up) in value and
become
stronger.
E.g.: 100KSh = $1 Or 100KSh = $1
100 KSh = $1.50 75KSh = $1

On the second example (as exchange rates will be shown to the $1 in your
exam) it now only costs 75KSh to buy a dollar whereas before it cost 100KSh

It is now cheaper to buy imports (maybe a companies raw materials sourced

abroad) but a businesses goods will be more expensive for foreigners to buy
(as

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if a product is priced 100KSh the USA firm will need to pay $1.33 to buy the
shillings)

· A fall in the value of sterling means one pound buys fewer dollars. This
means the pound has depreciated (fallen) in value and become weaker.

Kenyan exporters benefit from a fall in the value of the shilling. However
Kenyan firms importing raw materials, components or foreign-made goods
face higher costs and must either put up their prices or reduce their profit
margin.

2.1 Ownership and internal organization

2.1.2 Types of business organisation

(sole trader, partnerships, limited companies, franchise, joint
venture) 2.1.5 Limited and unlimited liability

Business Ownership

Unlimited Liability: The owner of the business has the same legal identify to
the business and is therefore can lose his/her personal possessions to cover
the debts of the business if it goes into liquidation.

Limited Liability: A person has a separate legal identify to the business and
is therefore only responsible for the amount of money s/he invested in the
business even if the business goes into liquidation.

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 1. Sole Trader (Sole Proprietor): A person who owns his or her own
business. This person is responsible for all the decisions within the
business, including employees and s/he is liable for any debts. A
sole trader has unlimited liability and thereby is the same legal
entity as the business

Advantages
Personal control
All profit go to the owner
Direct contact with customers
maintained
Accounts are not published
Disadvantages
Unlimited liability
Difficult to raise capital
Long hours and business worries
Owner is expected to be a
specialist in all areas

2. Partnership: Business owned by between 2 – 20 people who set up a

business together. They share responsibility and control. Most
partnerships have unlimited liability and thereby is the same legal
entity as the business

Advantages Disadvantages
Greater specialisation Unlimited liability
Additional capital Decisions may be slow as more
people
Sharing ideas More opportunities to disagree
More scope for holidays, sickness Profits must be shared
etc.

3. Limited Companies: Companies that are owned by shareholders.

Profits are distributed (usually) annually through dividends.
Shareholders make decisions about the running of the business at
an Annual General Meeting (AGM) though a board of directors
runs day-

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 to-day control of the business. There are two types of limited
company –

· a private limited company (LTD), which can only sell shares to

friends and family

· a public limited company (PLC), which sells shares on the Stock

Exchange. Formal documents must be produced before a limited
company can begin trading: -

Advantages Disadvantages
Limited liability Conflict can arise between owners
and managers
Large scale production is available Danger of poor communication
Ill health does not affect the By law annual accounts must be
business produced and published
Easier to raise large amounts of Higher rates of tax than for sole
capital traders and partnerships
Shareholders cannot be sued
personally

Differences Between a Private & a Public Limited Company

Private Limited Company Public Limited Company

Shares can only be sold to family &
friends
Capital raising potential can be
limited.
Owners tend to be more in control
of the business and can be less
profit motivated.
Operations influenced by the
owners who are not answerable to
the media.
Shares can be sold on the Stock
Exchange.
Vast amounts of capital can be
raised.
Owners can be extremely divorced
from the business – profit
motivated.
Media can be highly influential in
the business operations.

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 Franchise

An entrepreneur can opt to set up a new independent business and try

to win customers. An alternative is to buy into an existing business and
acquire the right to use an existing business idea. This is called franchising.
o A franchisee buys the right from a franchisor to copy a business format.
o And a franchisor sells the right to use a business idea in a
particular location.
Opening a franchise is usually less risky than setting up as an
independent retailer. The franchisee is adopting a proven business
model and selling a well-known product in a new local branch

Advantages of Franchising Disadvantages of Franchising

The franchisee is given support by Cost to buy franchise – can be very
the franchiser. This includes expensive (McDolands on Oxford
marketing and staff
training. Street In London cost £1.2 million!
But some such as a car wash
franchise can be very cheap)
Have to pay a percentage of
The franchisee may benefit from your
national advertising and being part
of revenue as a royalty payment to the
a well-known organisation with an business you have bought the
established name, format and franchiser from.
product.
Less investment is required at the Have to follow the franchise model,
start-up stage since the franchise so less flexible. You would probably
business idea has already been be told what prices to set, what
developed advertising to use and what type of
staff to employ.
A franchise allows people to start If one outlet of the franchise gains a
and run their own business with less poor reputation (say through bad
risk. The chance of failure among service) then this affects attitudes
new franchises is lower as their towards all other outlets.
product is a proven success and has
a
secure place in the market
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Joint Venture

A joint venture occurs when two or more businesses agree to run a

separate business or project together. Often the joint venture will be a
new company in which the joint venture partners invest
The pros and cons are similar to that of a partnership

2.1.3 Growth of multinational companies

A multinational (MNC) is a business which operates in more than one

country

Benefits of MNCs Drawbacks of MNCs

Employment
Unemployment can be created in
Ability to create jobs leads to the
increased GNP & improved standard host country due to increased
of living in the host country competition.
Technology & Expertise
Multi-nationals may introduce new Some multi-nationals bring trained
technology, production processes
and staff with them and do not train
management styles. staff in the host country and only
using local staff for low paid,
unskilled jobs.
Social Responsibility
Some Multi-nationals so not care Some multi-nationals take their
about the environment of the host social responsibly seriously and help
country and at times flouting the finance projects such as build new
lack of legislation related to health, roads.
safety and the environment and
child
labour etc.
Profit
Often a multi-national will not keep If the host country has lower levels
profits in the host national but will of tax than others then tax will be send
them back to the originating declared and paid in their country. country.
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 2.16 Internal Organisation

Functional Activities In Business

1. Marketing. This means trying to bring your product to the attention of

buyers and make more people buy it. This makes Revenue and (hopefully)
profit.

2. Production. This means making the product you are selling.

3. Purchasing. This means buying all the different inputs the business
needs in order to do its work.

4. Human Resources. This means looking after your workers and their
needs. The point of this is to improve motivation which improves
productivity so more product is made. When this extra product is sold this
means Revenue and profit.

5. Finance. This means looking after all the money needed to run the
business.

6. Research & Development. This means trying to make existing products

better and also trying to come up with new products.

7. Logistics/Transport. This means moving around inputs and outputs from

where they are made to where they are needed.

8. Management. This means planning for the future, making decisions

about the present, and organising the business in the most efficient
manner.

9. Administration. This means looking after the day-to-day needs of the

business and making sure everything runs smoothly.

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 2.1.4 Control and
responsibility

· Hierarchy: The order or levels of management of a business, from the

lowest to the highest. The hierarchy of a business shows the chain of
command.

· Chain of Command: The way authority and power are passed down in
a business. The chain of command shows the span of control.

· Span of Control: The number of subordinates working under a superior.

o A narrow span of control indicates close supervision, tight control and
better co-ordination of subordinates. Likewise communication is more
efficient.

o A wide span of control allows for better decision making by

subordinates which links to motivation theory. Costs of supervision will
also be lower.
 Page
27
· Delegation: passing authority to complete a task from a superior
(manager) to a subordinate (someone below the manager).
Responsibility is not passed down so the manager must be careful to
trust the delegate to do the job right.

2.1.7 Internal and external communication

2.1.8 Internal communication (effective communication and its attainment)

Types of communication

· Internal communications happen within the business.

· External communications take place between the business and

outside individuals or organisations.

· Vertical communications are messages sent between staff belonging

to different levels of the organisation hierarchy.

· Horizontal communications are messages sent between staff on the

same level of the organisation hierarchy.

· Formal communications are official messages sent by an organisation,

eg a company memo, fax or report.

· Informal communications are unofficial messages not formally

approved by the business, eg everyday conversation or gossip
between staff.
· A channel of communication is the path taken by a message

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28
 Effective communication

Communication makes a big impact on business

efficiency. Effective
communication means:

· Customers enjoy a good relationship with the business, eg complaints are

dealt with quickly and effectively.

· Staff understand their roles and responsibilities, eg tasks and deadlines are
understood and met.

· Staff motivation improves when, for instance, managers listen and

respond to suggestions.

Barriers to effective communication

A balance needs to be struck in communication between management

and
staff.

1. Insufficient communication leaves staff 'in the dark' and is

demotivating. Excessive communication leads to information
overload, eg when staff find hundreds of messages arriving in their
in-tray each day.

2. Too much paperwork or too many emails can lead to

miscommunication and inefficiency

3. Communications fail when a message is unclear or the receiver

does not understand technical jargon. Selecting the right medium is

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29
 important. Messages may never be received if they are sent at the
wrong time or to a junk email folder.

4. The result is inefficiency and higher costs, as more resources are

needed to achieve the same result.

5. Training staff to select an appropriate medium and send clear,

accurate, thorough messages will improve the quality of
communications, especially if there is an opportunity for feedback.

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 2.2.1 Use of funds

Why business needs finance

Finance refers to sources of money for a business. Firms need finance to:
1. Start up a business, eg pay for premises, new equipment and
advertising.

2. Run the business, eg having enough cash to pay staff wages and
suppliers on time.

3. Expand the business, eg having funds to pay for a new branch in a

different city or country.

4. New businesses find it difficult to raise finance because they usually

have just a few customers and many competitors. Lenders are put
off by the risk that the start-up may fail. If that happens, the owners
may be unable to repay borrowed money

2.2.2 Short- and longterm financial needs

2.2.3 Sources of internal and external funds (short- and longterm)

Source of Description
Finance
Retained Profit This is when a business decides not to pay all profit after S/T

tax to its shareholders or owners but will instead save up

to invest in future business projects.

Partnership Funds This is where a partnership or Ltd will look for new L/T

or share issue in a partners or shareholders amongst family and friends to

Private Limited invest in the business and thereby have some control in

Company the running of the business.

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Share Issue on This is where a Public or Private Limited Company makes L/T
the Stock
shares available for sale on the stock market. A share
Exchange.
issue is an external source of finance which dilutes

ownership of the business but allows for large amounts of

capital to be raised.

Overdraft This is where the bank allows a business to spend more S/T

than is in their bank cheque account for a short period of

time. The bank overdraft will be repaid and reborrowed

regularly. The bank will charge interest on a bank

overdraft which will reduce profit in the business.

Bank Loan This is where a bank will allow a business to borrow a sum L/T
of money over a medium to long period of time. The loan
is

repaid in installments, which affects cash flow. Often a

bank will require collateral (security) on a loan and will sell

the assets offered as collateral if the loan is not repaid.

Repayment affects cash flow

Debenture A debenture is an unsecured loan to a business. The L/T

business pays interest to the debenture holder at agreed

intervals and the whole loan repaid at the end of an
agreed

period of time – often very many years. Debentures are

usually traded like shares on eth stock exchange. They

have less impact on cash flow than bank loans which are

repaid slowly in installments.

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32
Factoring Where a business sells its debtor list to a factoring S/T
company who will collect the money owed to the
business.
The factoring company will charge up to 20% of the
value

of debts owed to the business but will save the business

time in chasing debts and waiting for trade debtors to
pay

them on eth due date. It creates instant liquidity.

Trade Credit This is where businesses agree with other businesses to S/T

pay for stock and finished goods at a later date when the

firm has sold the goods or services to the next stage in

the chain of production. Often businesses give a buyer
up
to 4 weeks to pay but likewise this business may have
been

allowed 4 weeks to pay their supplier.

Sale and Lease A business may sell assets it owns and use the money from S/T

Back the sale in their business. The business will then lease

(hire) assets from another business. Leasing can be

expensive but the leasee often pays for repairs and

updates and also ensures the business does not have
money

tied up in assets it may not use often.

2.2.4 Factors affecting the methods of finance chosen

1. A business will selct the most appropriate method of finance based on

2. Size of the business
3. Capital needed,
4. length of time money needed for
5. risk
 Page
33
 3.1.1 Role of marketing

Marketing is meeting the needs and wants of the consumer

3.1.2 Market research (primary and secondary)

o Market research is gathering information about consumers, competitors

and distributors within a firm’s target market in order to identify
consumers’ buying habits and attitudes to current and future products.

o Secondary Research is data that is used even though it has been

collected for another purpose – e.g. government statistics. (Desk
Research)

o Primary Research is gathering data first-hand that is specific to the issue

being investigated. (Field Research)

Factual information is called quantitative data. Information collected about opinions and
views is called qualitative data.

Types of research

Secondary Research includes

⇒ Trade Press (e.g. The Grocer)
⇒ Trade Associations (e.g. Society of Motor Manufacturers and Traders)
⇒ Market Intelligence reports (e.g. Mintel, Keynotes)
⇒ Government statistics (e.g. Social Trends, Household
Expenditure Reports, Census)
⇒ Company records

Primary Research includes

⇒ Observation
⇒ Interviews
⇒ Consumer groups
⇒ Postal or telephone surveys
⇒ Test marketing

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34
 Pros & Cons of Primary & Secondary Research

Secondary Research Primary Research

Pros Often obtained without Can aim questions directly at
cost your research objectives
Good overview of a market Latest information from the
marketplace
Usually based on actual Can assess the psychology of
sales figures or research on the customer
large samples

Cons Data may not be updated Expensive – over £5,000 per

regularly survey
Not tailored to your own Risk of questionnaire and
needs interviewer bias
Expensive, but reports on Research findings may only be
usable if comparable back
many different data
marketplaces exists

3.1.4 Market segmentation

Market Segmentation – Breaking a market down into groups of consumers

with similar characteristics

Target Marketing – Aiming the product or service at consumers in a

particular market segment.

Consumer profiles
· Age
· Lifestyle
· Income
· Geographic Location
· Gender

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35
 3.1.5 Mass market; niche
market

· Niche marketing is a business strategy of devising and selling products

specifically for a small, unexploited part of a market.

· Mass marketing is devising product with mass appeal and promoting

them to all types of customer.

Features of mass marketing

1. The creation of everyday brands

2. Brand names often become the known name – e.g. Hoover
(vacuum cleaner) and Barcardi (white rum)
3. Marketing economies of scale.
4. Global marketing (with some adjustments to suit local conditions)

Examples of mass marketing: Coca-Cola, McDonalds, Levi’s

Features of niche marketing

1. Specialised product.
2. High level of product differentiation. (i.e. a USP, branding
or something that makes the product different to the
norm.)
3. High price and low sales
Examples of niche marketing: Clinique perfumes, Braeburn Schools

Advantages of Niche Marketing Advantages of Mass Marketing

Whilst there are few competitors
businesses can sell at high prices
and high profit margins as
customers will pay high prices for
exclusive products.
Some large firms will have a range
of exclusive products that have
status and image alongside mass
marketed products.
(E.g. a car manufacturing
company
making special editions of highly
priced cars plus the family saloon)
Economies of scale and so mass
marketing has lower costs of
production.
Fewer risks than niche marketing as
the business involved in mass
marketing can usually change
production relatively quickly if
demand falls. The niche market
however could suffer if consumer
tastes change.
 Page
36
 3.1.6 Marketing mix

The marketing mix is the mixture of factors through which the firm hopes to
sell its products to its chosen market. These are known as the Four Ps –
product, price, place and promotion.

3.1.7 Product (design, brand, packaging, life cycle)

Product
A product is a good or a service that is sold to customers or other
businesses. Customers buy a product to meet a need. This means the firm
must concentrate on making products that best meet customer
requirements. Firms can be market or product orientated.
· Market orientation: producing products and services which satisfy eth
want and needs of the market.
· Product Orientation: Producing products and services based on
innovation which consumers are then persuaded to buy

A business needs to choose the function, appearance and cost most

likely to make a product appeal to the target market and stand out from
the competition. This is called product differentiation.

How product differentiation is created:

· Establishing a strong brand image (personality) for a good or service.
· Making clear the unique selling point (USP) of a good or service, for
example, by using the tag line quality items for less than a pound for a
chain of discount shops.

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37
· Offering a better location, features, functions, design, appearance or
selling price than rival products.
· Packaging will help a firm target a specific market such as children’s
(cartoon), adults, families (good for you), colour (cheap or expensive)
· Size will also target a market – family or children’s or business size

Product Life Cycle

1. Research & Development

2. Launch
3. Growth
4. Maturity
5. Saturation
6. Decline
7. Extension Strategy
8. Withdrawal

In the launch and growth stages sales rise. In the maturity stage, revenues
flatten out.
Getting a product known beyond the launch stage usually requires costly
promotion activity.
At some point sales begin to decline and the business has to decide
whether to withdraw the item or use an extension strategy to bolster sales.
Extension strategies include updating packaging, adding extra features or
lowering price.

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 3.1.8 Price (price elasticity of demand, pricing methods and strategies)

Price

Cost Plus Pricing

When a business adds a percentage mark up to the average cost of

producing a product.

This method of pricing is the most common but can cause problems when
operated in a competitive market as the final price could be higher than
competitors and therefore sales would be low or lower than competitors
and therefore the business will not make as much profit as it could.

Competitive Pricing

Methods of pricing based upon the prices charged by other competitors.

Price Maker: A company that can decide upon the price becaseu it has
the market share. Often benefits from economies of scale and so can sell
cheaper than competitors. E.g Nakumatt
Price Taker: Unable to compete at a lower price than the big firms and
cannot charge a higher price as customers will go to the big firm.

Price Skimming

Method of pricing where the business sets a high price to a small niche
market. Sales will be low and price high. When saturation occurs the
business will reduce price to the bigger segment. Sales will be high and
price low.

Most examples of price skimming tend to be electronic goods. Some

consumers will pay a higher price to get the most technical and up to
date products first. Others will wait until the price falls.

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Price Penetration

Method of pricing where the business sets an initial low price to try to
encourage consumers to try the product. The price will eventually rise to a
competitive price.

This pricing strategy is used where there is brand loyalty in the market and
is used to persuade consumers to switch from a competitor. Often
identified as “introductory price.”

Psychological Pricing

Method of pricing which makes a customer think that the product or

service is a reasonable price – e.g. $1.99 instead of $2

Elasticities of Demand
The change in a price of a product or service or the change in the
income levels of a person could influence how much a person buys.

1. Price Elastic Demand

· When a change in price results in a more than proportional change in
demand then it is considered to be elastic demand.
· If the price of beef goes down then people will start eating more beef
and less non-meat meals

2. Price Inelastic Demand

· When a change in price results in a less than proportional
change in demand then it is considered to be elastic demand.
· If the price of cigarettes goes up people will still buy cigarettes as they
are addictive. Likewise if the price of electricity goes up we may try
and use less but we will still use a lot.

Income elasticity works the same way but based not just on price but also
on income. Some goods we will continue to buy as we see them as
essential such as private education even if the price goes up. We will
spend less on something else rather than something we value. But if our
income goes down then we will spend less on what we consider to be
luxury goods such as holidays to the UK – we’d go to Mombasa instead.

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 3.1.9 Distribution Channels

Place

A channel of distribution is the route taken by a product as it passes from

the producer to the consumer. This can be
⇒ Directly to the consumer ⇒ Through a retail outlet
⇒ Through a wholesaler ⇒ Using an agent

Directly to the consumer – this can have problems in terms of the

buyer and seller identifying themselves to each other. However the
Internet is being used and also telesales can be effective.

Retail outlets – have a major role as they have the ability to reach the
huge numbers of customers. Retailers are able to influence manufacturers
to produce products that their customers want. As such a customer
orientated markets exist. Quality also tends to be an issue in the
distribution channel as the retailer’s reputation is at stake.

Wholesalers – act as links between producers and retailers. They buy

large quantities from the producers and then break them down into
smaller quantities suitable for the target market. E.g. 100 Kilo sacks of
maize will be bagged up into 1-kilo bags.

Agents – negotiate the sale on behalf of a seller. Examples include ticket

agencies. The agency will take a commission and return unsold items to
the seller.

Internet selling or e-commerce. Online selling is an increasingly popular

method of distribution and allows small firms a low cost method of
marketing their products overseas. A business website can be both a
method of distribution and promotion.

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 3.1.10 Promotion (advertising, sales, point of sale)

Promotion

Above the line: This is promotion that uses paid-for media to

advertise a product or service for sale.
1. TV – expensive but wide coverage
2. Billboards – effective but small coverage and can become ignored.
3. Newspaper and magazines – able to target a specific target
market e.g. True Love, parenting, Business Africa
4. Radio – cheap, speaks to the consumer.

Below the line: This is promotion that is not undertaken by paid-for

media to advertise a product or service for sale.

1. Publicity: This is promotion via press releases to news media. Press

releases are issued in the expectation that they will be given editorial
mention at no charge.

2. Direct mail: This involves direct communication with customers, either in

the form of a letter addressed to the recipient (a mail shot) or
unaddressed (a mail drop.)

3. Packaging: This is a promotion by means of design and display. The

intention is to create an impact at the point of sale.

4. Sales Promotions: This covers a range of activities such as competitions,

gifts, point-of-sale displays, leaflets and sponsorship.

5. Personal Selling: A promotional presentation made on a person-to-

person basis. This is a two-way discussion between salesperson and
buyer.

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 3.1.11 Marketing strategy

3.1.12 Marketing budget

Businesses need to make strategic decisions on how much to spend on

marketing. Budgets can be based on

3. Percentage of past sales.

4. Same level as competitors
5. Objectives of the Firm
6. Availability of funds

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 3.2 Production (Operations Management)

3.2.1 Using resources to produce goods and services

Production is the total amount made by a business in a given time period.

Productivity measures how much each employee makes over a period of
time. It is calculated by through output/input

Inputs include
2. Wages
3. Raw Materials
4. Overheads

Outputs include
2. Quantity Produced
3. Sales

To improve productivity a business must either reduce the cost of inputs or

increase the value of outputs.

3.2.2 Methods of production (job, batch, flow)

Job Production: The manufacture of single units usually to customer

requirements. Examples include hand made suits.

Batch Production: Groups of similar items are produced at the same time.

Flow Production: A product moves through a number of operations

continuously and in very large numbers.

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 Advantages
Job Production: · High quality work
· Highly motivated staff
· Orders can be made to
customer specifications
Batch · Workers are able to specialise
Production: and use specialist machinery
· Costs per item made lower
· Machinery can be adjusted for
different sizes, types etc.
Flow Production: · Large numbers of products can
roll off assembly lines.
· All tasks are broken down and
so staff only have to carry out
simple tasks which reduces
wages and training.
Disadvantages
* Expensive.
* High waged labour
* Tend to be labour
intensive (i.e. lots of
workers needed)
* Goods have to be stored
and held in stock (such as
body panels for cars)
* Specialist machinery may
have to be cleaned etc
when batch changed.
* Factory needs to be laid
out in sections.
* Workers tend to be
bored.
* Large amount of capital
(money to buy
equipment)
needed.
* Once built it is difficult
to adjust.
* Workers tend to be
bored.
* Breakdowns affect other
stages.
Page 45
 3.2.3 Scale of
production

Economies of scale – the reduction in costs per unit a business

experiences as a business grows

1. Technical Economies: Larger plants run more efficiently and running

costs do not rise in proportion with size. E.g. the cost of a double
Decker bus is not twice that of a single Decker as some of the parts,
such as the chassis and wheels do not need to be doubled

2. Managerial Economies: Larger firms can afford to employ specialists

who will be more efficient in their role.

3. Financial Economies: Large firms have a wider variety of sources of

finance (share capital), likewise they will have more assets to offer as
security and can also demand lower rates of interest.

4. Purchasing & Marketing Economies: Larger firms can get bulk buying
discounts, better trader credit terms (and so improved cash flow
position) and administration costs will also fall per unit. The cost of
marketing of products will also fall per unit as brand names are
advertised; sales forces sell more than one line etc.

5. Risk Bearing Economies: Larger firms are able to spread their risks
through diversification. They bring out more product lines and so the
risk of the whole firm failing is lessened, as all product lines are unlikely
to be unsuccessful.

Diseconomies of Scale -The rise in costs per unit which occurs as a firm
grows too large.

1. Communication Problems: The larger the firm the more difficult it is to

communicate within the firm.

2. Disharmony: Larger firms can suffer from poor relations between

management and the workforce and motivation tends to fall.

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3. Technical Diseconomies: If a break down occurs on a large plant then
the whole of output can be affected which would not

3.2.4 Lean production

Methods of implementing Lean

production Kaizen

o Workers meet regularly to discuss production and to come with

new ideas on how to increase efficiency and productivity.
o JIT is a form of Kaizen.

o Rearranging the layout of the factory floor so that workers are not
wasting time through moving stock etc from one area to another.

o Workers identify small improvements which are unlikely to cost a

lot to implement

o New ideas come from the workers who will feel empowered and
come up with good ideas from research and development to
after sales service.

Cell production
Cell production has the flow production line split into a number of self-
contained units. Each team or ‘cell’ is responsible for a significant part of
the finished article and, rather than each person only carrying out only
one very specific task, team members are skilled at a number of roles, so it
provides a means for job rotation.

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 Increased technology
IT could be used for
· Design work - CAD
· Planning & budgeting - spreadsheets
· Creating & using databases
· E-mail communication
· Stock control through EPOS (electronic point of sale – i.e. bar codes)
· EFTPOS (electronic funds transfer at point of sale)
· Teleworking

JIT
JIT is a production method that involves reducing or virtually eliminating
the need to hold stocks of raw materials or unsold stocks of the product.
Supplies arrive just at the time they are needed.

Improves cash flow as money is not A lot of faith is placed in the

tied up in working capital reliability and flexibility of suppliers

Reduces waste caused through

stock Increased ordering and

becoming obsolete or damaged administration costs

More factory space is available as Advantages of bulk buying reduced

stockholdings are reduced

Difficult to cope with sharp

increases in demand

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 3.2.5 Costs and cost classification

Variable costs are costs that change directly in proportion with output.
Examples include raw materials and piece rate labour.

Fixed Costs are costs that, in the short run, do not vary with output.
Examples include rent, salaries, and insurance.

Direct Costs are costs which can be directly allocated to a specific area
of production. Examples include the wages of a Physics teacher can be
allocated to the science department.

Indirect Costs are costs that cannot be directly allocated to a specific

area of production and thereby must be shared out between all areas of
production. Examples include electricity which wages must be shared out
as an overall running cost as it cannot be allocated to a specific
department.

3.2.6 Break-even analysis and simple cost based decision making

Break-even analysis is a technique widely used by production

management and management accountants. It is based on categorising
production costs between those which are "variable" (costs that change
when the production output changes) and those that are "fixed" (costs
not directly related to the volume of production).

Break Even occurs when Total Revenue = Total Costs

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49
Benefits of Break Even Point

1. The break-even point provides a focus for the business, but also
helps it work out whether the forecast sales will be enough to
produce a profit and whether further investment in the product is
worthwhile.

2. The graph creates a visual representation which is good for

presentations as well as for non-numeric members of staff.

Limitations of break-even charts are:

1. Do not take into account possible changes in costs over the time
period.
2. Do not allow for changes in the selling price.
3. Analysis only as good as the quality of information.

4. Do not allow for changes in market conditions in the time period –

e.g. entry of new competitor.

3.2.7 Quality control

Quality is meeting or exceeding customer expectations

Quality Control where finished products are checked by inspectors to

see if they meet the set standard.

Quality Assurance where quality is built into the production process. E.g.
all staff check all items at all stages of the production process for faults.
Everyone takes responsibility for delivering quality. Successful quality
assurance results in zero defect production

Quality assurance requires Total Quality Management (TQM), in which

managers try to bring about a change in business culture, convincing
employees to care about how products are being made and to do their
part to ensure standards are met.

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Main Principles of TQM

Prevention Prevention is better than cure. In the long run, it is

cheaper to stop products defects than trying to find

them

Zero defects The ultimate aim is no (zero) defects - or exceptionally

low defect levels if a product or service is complicated

produce
Getting things Better not to produce at all than something

right first time defective

involve concern
Quality s Quality is not just the of the production or
operations department - it involves everyone,
everyone including

marketing, finance and human resources

Businesses should always be looking for ways to

Continuous improve
processes to help
improvement quality

Those involved in production and operations have a

Employee vital
involveme
nt role to play in spotting improvement opportunities for

quality and in identifying quality problems

 Page
51
 3.2.8 Location decisions
Economics Factors Affecting Location

1. Availability of land.
2. Proximity to the customers.
3. Availability of labour.
4. Availability of raw material:
5. The availability of transport..
6. Nearby Parking!
7. Power supply

8. Government influence – maybe the government will give subsidies to

encourage a business to locate in a area of high unemployment.
9. Legal Constraints.
10. Social Influences:

Factors Affecting international Location

1. Protectionism:

2. Legislation and bureaucracy: (laws and too much paper work from
City Council etc)
3. Political Stability:
4. The labour force:
5. Market opportunities and transport costs
6. Financial incentives:
7. Globalisation:
8. The Euro:
9. Language barriers:
10. Manager preference

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 3.3 Financial information and decision making

3.3.1 Cash and cash flow forecasts

Companies need to budget and be aware of cash flow in order to stay

solvent.

Solvency is the ability of a business to pay their debts as and when they
become due.

Cash flow is the movement of money in and out of the business.

Profit and cash flow are two very different things. Cash flow is simply about
money coming and going from the business. The challenge for managers
is to make sure there is always enough cash to pay expenses when they
are due, as running out of cash threatens the survival of the business.

Insolvency
If a business runs out of cash and cannot pay its suppliers or workers it is
insolvent. The owners must raise extra finance or cease trading. This is why
planning ahead and drawing up a cash flow forecast is so important, as it
identifies when the firm might need an overdraft.

Item Jan Feb Mar

Opening bank balance $2,000 $1,000 $1,250

Total receipts (money in) $500 $750 $5,000
Total spending (money
out) $1,500 $3,000 $2,000
Closing bank balance $1,000 -$1,250 $1,750

If a business is unable to meet its short term debts it may go into liquidation
and so a business should ensure that timings of inflow and outflows an
carefully managed to avoid unauthorized overdrafts which may result in
bounced cheques.

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 3.3.2 Profit (what it is and why it matters)

· The main objective for many business is profit.

· A Trading profit & Loss Account shows Gross Profit and Net profit
· Gross Profit = Sales minus Cost of Goods Sold.
· Cost of Goods Sold = Opening Stock plus Purchases minus Closing
Stock
· Net Profit = Gross profit Less Expenses

Profit after tax can be retained in the business for future projects or
distributed to shareholders. A sensible company will give the shareholders
a reasonable dividend to keep them happy and keep some profit back in
the business as Retained Profit.

3.3.3 Purpose and main elements of profit/loss account

Sales 10,000
Less Cost of Goods Sold
Opening Stock 1,000
+ Purchases 5,000
- Closing Stock 2,000 4,000
GROSS PROFIT 6,000
Less Overheads

Electricity 500
Bills 1000 1,500
NET PROFIT BEFORE TAX 4,500
TAXATION 2,000
NET PROFIT AFTER TAX 2,500
DIVIDENDS 1,500
RETAINED PROFIT 1,000

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 3.3.4 Purpose and main elements of balance
sheet

A Balance Sheet shows the assests and liabilities of a business

Assets are those items of value which are owned by a business.

· Fixed Assets are items of value which a business buys to stay in

a business to help with production – e.g. land, machinery,
equipment, vehicles.
· Current Assets are items of value which a business buys to use up
in production – e.g. stock, debtors, bank and cash.

Liabilities are amounts of money which a business owes.

· Current Liabilities are amounts of money which a business owes

and must be paid back shortly – e.g. creditors, bank overdraft.
· Long Term Liabilities are amounts of money which a business
pays back over a long period of time – e.g. bank loans,
debentures.

Working Capital is the most important element of a balance sheet as it

shows the liquidity of a business.

Liquidity is the ability to turn an asset into cash with the least loss of
time, capital or interest.

If a business has liquidity problems it could find itself unable to meet debts
as and when they become due – i.e. insolvent

Additionally a balance sheet shows what the business owns on a

particular day in time and how these assets have been financed – e.g.
through capital, retained profit and borrowing. A bank will be worried
about lending to a business which already has a lot of borrowing.

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 Net Assets Employed = Net Capital Employed
3.3.5 Simple interpretation of financial statements using ratios
Profitability Ratios
Ratio Calculation
Gross Profit Margin Gross Profit x 100
Sales
Net Profit Margin Net Profit x 100
Sales
Return on capital Net Profit x 100
employed ("ROCE") Net Assets
Employed
Liquidity Ratios Liquidity ratios indicate how capable a business is of
meeting its short-term obligations as they fall due:
Ratio Calculation
Current Ratio Current Assets /
Current Liabilities
56
Comments
This ratio tells us something about
the business's ability consistently
to control its cost of goods sold or
ability to increase price.
Assuming a constant gross profit
margin, the net profit margin tells
us something about a company's
ability to control overheads.
ROCE is sometimes referred to as
the "primary ratio"; it tells us
what returns management has
made on the resources made
available to them before making
any distribution of those returns.
Comments
A simple measure that estimates
whether the business can pay
debts due within one year from
assets that it expects to turn into
cash within that year. Mostly 2:1
is acceptable but a ratio of less
than one is often a cause for
concern, particularly if it persists
for any length of time.
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 3.3.6 Working capital

The net working capital of a business is

Current Assets minus Current Liabilities

Current Assets include:

· Stocks
· Trade debtors
· Cash in hand or in the till
· Bank Balance
Current Liabilities include:
· Trade creditors
· Taxation payable
· Dividends payable

Every business needs adequate liquid resources in order to maintain day-

to-day cash flow. It needs enough cash to pay wages and salaries as they
fall due and to pay creditors if it is to keep its workforce and ensure its
supplies.

Maintaining adequate working capital is not just important in the short-

term. Sufficient liquidity must be maintained in order to ensure the survival
of the business in the long-term as well.

3.3.7 Financial budgets

Budgets and Budgeting

Budgets are estimates of the income and expenditure of a business or part

of a business over a period of time.

A cash flow forecast is a type of budget which estimates the inflows and
outflows of a business’s money. Other budgets include setting an amount
of money which a department can spend over a period of time.

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Advantages of budgeting
1. Helps to make sure that all resources are used efficiently.
2. Helps to monitor cash flow.

3. Helps to create a focus and discipline for managers responsible for

money in the business.
4. Motivating for budget holders (Herzberg)

Types of Budget

1. Flexible Budgets – budgets that change with the amount of output.

2. Objective Based Budgets – based on the objectives of the business -

.e.g a marketing budget may be created to introduce new

products in order to increase market share.

3. Fixed Budget – budgets set based on how much the business can
afford and allocated amongst departments.

3.3.8 Users of accounts

Internal Users

Owners 1. To identify whether they have made a profit.

2. To make a decision on what dividend to pay out.
Employees 1. To justify a pay rise or better working conditions. (If profit
has increased maybe it was because of their hard work.)
2. To check their job security.
Managers 1. For bonus related pay.
For self empowerment and to make them more marketable
2. as
a manager.

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External Users

Tax 1. Tax is paid after profit

Authority
Registrar Of 1. All limited companies must submit accounts to a central
Compani
es authority so that anyone can look at them. (Limited Liability)
(Companies
House)
Bankers or 1. Banks will look at the firm’s working capital to see whether
lenders they are solvent enough to repay existing debts or new
lending.
Banks will look at the Net Capital Employed to check
2. whether
the business has borrowed too much. A business should not
borrow more than it has invested in itself as share capital or
owners capital. (If they do, then the lenders are taking more
risk that the owners!)
Suppliers 1. Suppliers will want to check that the business can pay them
back if they are offering trade credit.
Competitors will check to see what new direction the
Competitors 1. business
might be going into or compare market share.
Future 1. Future investors will look at Gross and Net profit Margins,
Investors ROCE and dividends to see if the business looks like a good
investment.
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 Unit 4: People in Business

4.1.2 Methods of financial rewards

Payment methods

Managers can motivate staff by paying a fair wage. Payment methods

include:

1. Time rate: staff are paid for the number of hours worked.
2. Overtime: staff are paid extra for working beyond normal hours.
3. Piece rate: staff are paid for the number of items produced.
4. Commission: staff are paid for the number of items they sell.

5. Performance related pay: staff get a bonus for meeting a target set
by their manager.

6. Profit sharing: staff receive a part of any profits made by the

business.
7. Salary: staff are paid monthly no matter how many hours they work.

4.1.3 Non-financial rewards

Fringe benefits: are payments in kind, eg a company car or staff

discounts, cheap loans, free accommodation, time off, mobile phone.

4.1.4 Management styles and motivation methods

What is motivation?

Motivation is about the ways a business can encourage staff to give their
best. Motivated staff care about the success of the business and work
better.

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A motivated workforce results in:
1. Increased output caused by extra effort from workers.
2. Improved quality as staff take a greater pride in their work.

3. A higher level of staff retention. Workers are keen to stay with the firm
and also reluctant to take unnecessary days off work.

4.1 Human needs and rewards

Maslow

1. Physiological / Basic needs: Basic acceptable salary for the job,

good working conditions.

2. Safety / Security Needs: Feeling safe in eth work place and feeling
secure in the job that you will not be fired or made redundant and
that you have a permanent job.
3. Love & Belonging: Feeling happy with the people you work with.

4. Self Esteem: Feeling a sense of achievement, being recognised for

the good job you do, being promoted.

5. Self-Actualisation: Feeling in control and be able to make decisions.

Being allowed to be creative and do things your way.

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Herzberg

1. Motivators:Factors that give job satisfaction.

2. Hygiene Factors: Factors that can add to workers being dissatisfied.

Herzberg tends to agree with Maslow in many areas except that only the
higher levels of Maslow’s hierarchy motivate workers. Herzberg’s ideas are
often linked to job enrichment where workers have their jobs expanded so
that they can experience more of the production process.

Sense of achievement
Chance of promotion
Chance of improvement
Factors
Motivators which Recognition of effort
Motivate Responsibility
Nature of the job itself
Work
Pay
Conditions
Factors
Hygiene which Company Policy
need to be Treatment by
met management
to stop Inability to develop
dissatisfaction feelings of inadequacy

Hertzberg believed in job enlargement, job enrichment and job roation to

motivate workers.

1. Job Enlargement: Involves giving an employee more work to do of

a similar nature. For example a person would be responsible for
making the whole of a product instead of just part. Hence the job is
expands horizontally.

2. Job Rotation: Involves an employee changing jobs or tasks from

time to time. Employees are frequently organised into groups /
teams/ cells and are trained with skills to perform each other’s jobs
and as such
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 are able to rotate periodically. This is helpful to the employers as the
workforce becomes increasingly multi-skilled.

3. Teamwork: Involves teams deciding for themselves how work should

be distributed and how to solve problems as they arise.

4. Job Enrichment: Involves extending the job vertically to include

more of the decision-making tasks. For example an employee may
be given responsibility to plan a task, carry out quality control,
supervise the task, order materials and maintenance. Unused skills
are thereby developed

Type of Leadership
Type of Method
Leadership
Autocratic · Leader makes decisions alone. Others are informed and
carry out decisions.
· One-way communication.
· Demotivating.
Democratic · Leader encourages others to participate in decision-
making. Can persuasive (where leader has already made
a
decision and persuades others to agree) or consultative
(where leader consults others before making a decision).
· Time consuming
· Begs the question of whether staff should always be
involved in all decisions.
Leader delegates nearly all authority and decision
Laissez · making
Faire power.
· Empowering.
· Tends to be a lack of structure and feedback.
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 Recruitment and Selection

Organisations draw up workforce plans to identify their future staffing

requirements. For example, they may develop plans to recruit a new IT
Manager when the current one plans to retire in eight months time.

If a business does not have enough staff trained in the right areas then
production might be of a poor quality, customer service might be poor
and sales will be low. If a business has too many staff then they will have
lower profits.

Firms can recruit from inside or outside the organisation.

Internal recruitment involves appointing existing staff. A known person is
recruited.

Advantages
Employee already knows
procedures,
staff and how things work.
Is a motivator as staff can be
promoted up the ladder.
Disadvantages
Existing staff do not bring new ideas
into the firm.
Staff have to be recruited to
replace the promoted member of
staff

External recruitment involves hiring staff from outside the organisation.

Advantages
Brings new ideas and new skills into
the firm
Avoids existing staff getting upset
at a colleague getting a job they
wanted.
Disadvantages
Might be a poor recruitment – just
because someone performs well in
an
interview they might not be very
good at their job or maybe they
don’t
fit in with other staff.
Can be expensive and time
consuming.
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 The Recruitment Process

A. Identify a position
B. Produce a job description and person specification
C. Advertise position
D. Receive application forms, curriculum vitae & letters of application
E. Short list applicants
F. Check references

G. Interview candidates & carry out aptitude & psychometric tests (if
necessary)
H. If appropriate candidate identified offer position.
I. If no applicant if appropriate re-advertise position.

Job Description and Person Specification

Job descriptions explain the work to be done and typically set out the job
title, location of work and main tasks of the employee.
A job description makes sure a candidate understands exactly what is
required.

Person specifications list individual qualities of the person required, eg

qualifications, experience and skills.
A person specifications avoids unqualified candidates or wrong types of
people from applying for a job.

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Importance of Good Recruitment & Selection

1. Creates a more efficient workforce in terms of speed, wastage,

customer service and labour productivity.
2. Creates a more stable workforce in terms of staff turnover.
3. Reduces the cost of recruitment if less staff are leaving.

4. Reduces staff absenteeism, as well-recruited staff are less likely to take

time off work.

5. Staff who do not “fit in” well can lead to low moral and low motivation
in the workplace which in turn reduces productivity and increases staff
turnover.

Where to advertise a job vacancy

1. Internally on notice boards or through email.

2. Word of mouth – cheap but not many people will hear.

3. Notice boards in shops, malls etc – cheap but does not target specific
skills. Suitable for sales people and jobs with high turnovers.

4. Newspapers – can be put into specific newspapers e.g. a trade

magazine for IT people, or at times of the week which advertise
specific types of jobs, e.g. Marketing jobs might be advertised on a
Thursday in the Nation etc.
5. Internet – wide target market.

6. Job Centre – some countries have government run centers to help

people looking for job here about jobs available across the country.

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7. Recruitment Agency – companies which are specialists in recruitment.
Saves the business time and they benefit from the better skills in
recruitment offered by the agency. Can be expensive for top jobs.

Where to advertise depends on

· Turnover of staff (very high)
· Level of skills needed.
· Money available to advertise.
· Whether internal or external.

4.2.2 Training methods

It is a legal requirement that all staff are trained to an appropriate level
to be able to do their job.

1. Induction Training –enables a new recruit to become productive

as quickly as possible. It can avoid costly mistakes by recruits not
knowing the procedures or techniques of their new jobs. The
length of induction training will vary from job to job and will
depend on the complexity of the job, the size of the business and
the level or position of the job within the business.

The following areas may be included in induction training:

· Learning about the duties of the job

· Meeting new colleagues
· Seeing the layout the premises
· Learning the values and aims of the business
· Learning about the internal workings and policies of the business

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2. Multi-skilling – the process of training employees to do a number of
different tasks. This allows for more flexibility at the workplace. Multi-
skilling is considered a motivator and increases productivity, as
production does not stop due to absenteeism. (Herzberg)

3. Upgrading Skills – Particularly useful for upgrading workers ICT skills. This
is a form of job enrichment. (Maslow – Self Esteem)

Training Can be Internal, External, On the Job or Off the Job

Internal where the company trains staff within the business

External where staff are sent on courses run by specialists to

On-the-job training
On the job training occurs when workers pick up skills whilst working along
side experienced workers at their place of work. For example this could be
the actual assembly line or offices where the employee works. New
workers may simply “shadow” or observe fellow employees to begin with
and are often given instruction manuals or interactive training
programmes to work through.

Off-the-job training
This occurs when workers are taken away from their place of work to be
trained. This may take place at training agency or local college, although
many larger firms also have their own training centres. Training can take
the form of lectures or self-study and can be used to develop more
general skills and knowledge that can be used in a variety of situations,
e.g. management skills programme

On-the-Job Training Off-the-Job Training

Cheaper to carry out Learn from specialists in that area of
work who can provide more in-
depth
study
Training is very relevant and practical Can more easily deal with groups of
dealing with day to day requirements workers at the same time
of job

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Workers not taken away from jobs
so can still be productive
Employees who are new to a job
role become productive as quickly
as possible
Employees respond better when
taken away from pressures of
working environment
Workers may be able to
obtain qualifications or
certificates

Retaining workers is important to a firm because it costs time and money

to hire and train a replacement. Appraisal and training helps motivate
staff and so improves staff retention.

4.2.3 Dismissal and redundancy

Redundancy

Redundancy is when a business can no longer employ you because your

job no longer exists this might be through
· Falling sales means that a business needs fewer staff and some posts
are no longer required.
· Low revenues may lead a company to try to cut staffing costs.
· Changes in production methods such as increased machinery or
worker need to have more technical skills which exisiting staff do not
have.

Redundancy procedures must be fair, for example firms can use a last-in-
first-out method to shed staff.
Redundant workers receive compensation according to the number of
years with the firm.

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Dismissal

Dismissal is when a worked is asked to leave a firm due to unsatisfactory

work or action.

A worker will normally be given a number of chances to improve his/her

work which may be unsatisfactory due to poor punctuality, absenteeism,
poor quality of work etc. The worker will be given a verbal warning and a
chance to improve (maybe extra training), a written warning if the
situation does not improve and then s/he would be dismissed (sacked) if
still no improvement.

Instant Dismissal – instant dismissal (i.e. without any warnings) can occur if
the worker does something very bad – known as gross misconduct. This
would include theft, sexist, racist behaviour, ringing up sick when they are
actually well.

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 Unit 5: Regulating and Controlling Business Activity

5.1 Reasons for regulations

5.1.1 Impact of business decisions on people, the economy and the environment

Sometimes the government will intervene in a mixed economy when it

thinks that some its social and economics objectives cannot be met by
the private sector (revise private sector, public sector and objectives of
businesses and the government)

Market Failure

When the government gets involved this is often due to market failure
where the private sector either will not provide a good or service or will
only do so at a very high price or when the actions of the private sector is
not considering the social and environmental needs of the country.

Examples of Market Failure

Public Goods not provided by the free market because of their two main
characteristics

· Non-excludability where it is not possible to provide a good or service

to one person without it thereby being available for others to enjoy

· Non-rivalry where the consumption of a good or service by one

person will not prevent others from enjoying it

Examples: Street lighting / Lighthouse Protection, Police services, Air

defence systems, Roads / motorways, Terrestrial television, Flood defence
systems, Public parks & beaches

Because of their nature the private sector is unlikely to be willing and able
to provide public goods. The government therefore provides them for
collective consumption and finances them through general taxation.

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Merit Goods

Merit Goods are those goods and services that the government feels that
people left to themselves will under-consume and which therefore ought
to be subsidised or provided free at the point of use.

Both the public and private sector of the economy can provide merit goods
& services. Consumption of merit goods is thought to generate positive
externality effects where the social benefit from consumption exceeds the
private benefit.

Examples: Health services, Education, Work Training, Public Libraries,

Citizen's Advice, Inoculations

Monopoly – a monopoly exists when a business controls at least 25% of the

market and competitors are all very small. A monopoly can charge a high
price, provide poor quality and little choice. A government will avoid this
by setting laws limiting the size of a large business.

How Governments will intervene (get involved)

Government intervention may seek to correct for the distortions created

by market failure and to improve the efficiency in the way that markets
operate

· Pollution taxes to correct for externalities

· Taxation of monopoly profits (the Windfall Tax)
· Direct provision of public goods (defence)
· Policies to introduce competition into markets (de-regulation)
· Price controls for the recently privatised utilities
· Legislation

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The main areas of legislation that affect businesses are:

· Employment law
· Consumer protection
· Competition law

Most countries in a mixed economy have the following laws which the
government use to intervene to avoid the public or employers being
exploited by businesses. You do not need to know specific laws but read
through the following list to get an idea of how legislation helps
employees, customers and the local environment avoid employment laws
that a business needs to consider are:

Costs and Benefits of Business Legislation

Costs Benefits
Health and Safety at Work Act
Increased costs to maintain site, pay Less accidents, sickness and happier
for hard hats, check equipment, staff as hygiene factors are met
training (Herzberg)
Sex Discrimination Act, Disability Discrimination and Race Relations Act
An employer cannot employ who
s/he Happier staff knowing they can be
wants rewarded for their hard work and
the best person for the job is
appointed.
Consumer Protection Act and Trade Descriptions Act
A business must pay for quality Consumers are more satisfied as
checks quality improved.
Competition law
Businesses may not be able to
merge Consumers’ interests are protected
or take over other businesses to against being exploited through
benefit from economies of scale and high prices and low quality
growth benefits
 Page
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 Planning Permission
Business could find themselves going Local environment and local
through lots of paperwork to expand community rights protected against
or develop a business businesses opening up on Greenfield
sites or polluting businesses opening
up nearby

Trade Unions and Pressure groups will generally ensure that workers, social
and environmental rights are represented and upheld.

Costs and Benefits of Government Intervention

Costs Benefits
If the government supports one If a business is going to go bust
there would be lots of
business then other businesses have unemployment.
a less advantage and may fail as
they If the Government takes over the
business jobs will be
are not getting the benefit of saved
government help.
Government intervention might stop If government support industry
a business being competitive through creating training
programme
internationally (e.g. too many laws s then businesses have
make business costs go up.) better trained staff.
Governmen encourag
Government incentives encourages t incentives e
inefficiencies as companies can businesses to set up which creates
become lazy and not compete with jobs and improves standards of
quality etc. living.
Page 74
 5.2 Influences on business activity

5.2.1 Location decisions

Incentives: Various organisations offer incentives. E.g. EU, National & Local
Government etc. Incentives include low rental sites, purpose built
factories, re-settlement of key workers, tax allowances, advice &
consultancy etc.

Constraints: Planning permission often stops some building in certain areas

(e.g. Uhuru Park) etc.

Social Influences: Pressure groups occasionally get involved in stopping

industry from moving to a particular area

5.2.2 Workforce and the working environment (health and safety, employment
protection)

Trade Unions

Trade Unions are organisations representing workers who join together to

further their own interests.

Reasons to Join a Trade Union

1. Collective bargaining for pay rises

2. To protect and enforce workers legal rights.
3. Improved working conditions
4. To protect against unfair dismissal
5. To offer legal advice in employment areas.

6. To offer negotiated discounts to members by being part of a large

organisation.

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Labour / Management Relations

The owners of a business and the employees are stakeholders that

occasionally have conflicting objectives. The owners want the highest
possible profit and the employees want the highest possible pay and the
best possible working conditions.

Types of Industrial Action

· Go slow – where workers simply slow down

· Work to rule – where workers will read rule books before working and
not do anything that is not in their job description.

· Picketing – where workers stand outside a business to tell everyone

how poor working conditions are at the business to encourage local
people to support them and pressure groups.

· Strike – where workers refuse to go to work. This harms the workers and
the business as production stops and workers do not get paid. Can
force a business to agree to workers’ demands but in some countries
where trade unions are not as strong the

Protection for Staff

Employment rights

Staff are protected against age, sex, race or disability discrimination

To prevent exploitation, many governments pass laws that safeguard staff:
· Workers are guaranteed a minimum hourly wage rate
· Race, sex, age or disability discrimination is illegal.
· Maternity and paternity leave

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Protecting workers rights increases the costs of firms.

Health and safety

Health and safety procedures are put in place to prevent staff from
being harmed or becoming ill due to work.
The Health and Safety at Work Act is a primary piece of legislation
covering occupational health and safety in many countries.

Examples of when health and safety procedures need to be in place

· Using dangerous equipment at work
· Food processing
· Hotels (guest safety)
· Chemical production (dangerous processes, waste disposal)
· Air travel (passenger safety)
· Schools (student and staff safety)

Health and safety procedures are enforced by the government.

Costs and Benefits of Business Adhering to Employment Legislation

Costs
Cost of implementing the laws –
making sure fire alarms are
appropriate, fire drills, safe
equipment, hard hats etc.
Costs of someone monitoring the
safety of workers and visitors
Benefits
Less accidents and less illness due to
poor working conditions
Workers are happier as they have
better working conditions (Maslow –
basic needs)

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Discrimination
Discrimination in the workplace means treating one person unfairly in
recruitment, promotion, job assignment or termination (dismissal or
redundancy) due to their race, sex (including pregnancy and maternity),
martial status, disability or religious belief

Employees are usually protected under law for most of the above. These
laws vary from country to country – e.g. maternity leave in some countries
differ, and not all country have strong enough representation through
trade unions or lawyers or through local governance to properly protect
the workers and stand up for their right.

Examples of Discrimination
· Employing a man rather than a woman even though the woman can
equally do the job.
· Sacking a woman when she gets pregnant.
· Refusing to employ someone from a specific religious background or
race.
· Paying a man more than a woman for doing the same job.

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 5.2.4 External costs and benefits

Businesses affect the local environment - both natural and social. Ethical
businesses try to keep the impact of their operations on the environment
to a minimum.

Social costs and the environment

Business activity has an impact on the natural environment:

· Resources such as timber, oil and metals are used to manufacture goods.

· Manufacturing can have unintended spill over effects on others in the

form of noise and pollution.
· Land is lost to future generations when new houses or roads are built on
Greenfield sites.

The production process can often create air pollution

The unintended negative effects of business activity on people and
places are called social costs and include:
· noise
· pollution
· visual blight
· congestion

Ethical businesses are careful to minimise the impact of their behaviour on

the environment.

Government laws are used to protect the environment. For example, firms
must apply for planning permission before building factories or offices on
Greenfield sites. Grants are available to encourage firms to locate on
Brownfield sites, run down areas in need of regeneration.

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Social benefits

Social benefits are business activities that have a beneficial or favourable

impact on people or places. For example, a business start up can have a
multiplier effect. Suppliers will win new trade from them and the new
workforce will become customers in the local shops.
A proposed project often generates both costs and benefits. For example,
building a new factory on a greenfield site creates social benefits in the
form of new jobs. However, the loss of open land is a social cost. Building is
justified only if the benefits exceed the costs.

Short- and long-term environmental effects

Some business activity can cause short-term environmental costs which

can be put right in the longer term. For example, the impact of cutting
down forests for timber is much reduced if young trees are planted in their
place and left to grow into maturity.

5.2.6 Business cycle

The business cycle consists of a sequence in which a recession is followed

by recovery, which leads into a boom. After a period of boom conditions
there will be a downturn leading to recession. This is usually characterised
as a period of slower growth or stagnation. It can be followed
immediately by a period of recovery. Or persist to the point where
incomes and output are actually falling, in which case there is a
depression or a slump.

Recession
In a recession, you will probably observe the following: -

· Businesses complaining of falling demand

· Cuts in output.
· Rising unemployment
· Gloomy expectations
· Falling levels of investment
· Many businesses making losses

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 · Some businesses closing down.

Recovery
When it comes recovery is rather halting.

· Businesses are unsure that the improvement in demand will be

sustained.
· Expectations remain depressed.
· Investment will still be considered to be risky.
· Reluctance to take on new labour.
· Unemployment is likely to stay high.

Boom
As recovery turns into boom the following features emerge: -

· As investment increases, equipment suppliers have difficulty in

meeting demand.
· Most businesses work flat out.
· Many businesses experience a shortage of experienced staff.
· Wages increase as businesses bid against each other. This leads to
inflation.
· Prices increase

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