WAQADEMY

SHORT
REVISION NOTES

AS LEVEL BUSINESS (9609)

in 30 pages

Waqas Majeed

+92 323 4828815

@waqademy
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Enterprise 1.1
What do businesses do? Identify the needs of consumers, combine factors of production through an entrepreneur
and produce a good or service with the aim of profit-making.

Consumer Goods: Goods that are consumed/bought by the general public. Example: bread
Consumer Services: Services that are consumed by the general public. Example: a haircut
Creating Value: Widening the gap between the cost of materials purchased and the selling price.

Factors of Production: land, labour, capital, enterprise

Entrepreneur: A person who combines the factors of production and takes the risk to start a new business. They
are innovative, committed to work hard, motivated, multi-skilled, have leadership skills, ability to adapt, risk-
takers, emotionally intelligent, self-aware, persistent, confident, up to date, etc. Example: Elon Musk, founder of
Tesla.

Major challenges faced by an Entrepreneur (at the start):

• How to Raise Capital?

• Determining a Location?
• Competition?
• How to Build a Customer Base?

Why do New Businesses Fail?

• Lack of Proper Accounts/Record Keeping:

• Lack of Working Capital
• Poor Management Skills
• Lack of Adaptability
• Unsustainable Growth
• Changes in the Business

Types of industries: primary (extraction of natural resources), secondary (manufacturing), tertiary (selling)

‘Intrapreneurs’ are people who have the same qualities as entrepreneurs while working at an organisation.
Example: Ken Kutaragi, an engineer at Sony

Business plan: a written document that describes a business, its objectives and its strategies, the market it is in
and its financial forecasts. Content includes:

 an overview and summary of the business

 details of entrepreneur and products
 marketing and sales strategy
 management team
 operations
 financial forecasts

Business Impact on a Country’s Economy: employment creation, economic growth, exports increase, personal
development, innovation, technological change, increased social cohesion

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1.2 Business Structure
Business industry classification
Public Sector: Where the organisations are owned and controlled by the government.

Private Sector: Business organisations owned and controlled by private individuals.

Free Market Economy: Economic resources are owned and controlled largely by the private sector with very little
state intervention.

Command/Planned Economy: This is where the economic resources are owned and controlled by the
government.

Mixed Economy: Where the economic resources are owned and controlled by both the state and the private
individuals.

Business Organisations in the Private Sector

Sole Trader: A business that is run and controlled by a single person.

Adv: direct control over everything, profits are not shared, no such/minimal legal requirements
Disadv: unlimited liability, limited sources of finance available, no separate legal identity

Partnership: A business with 2 or more partners that agree to run and control the operations together.
Adv: losses are shared, responsibility is shared, influx of new ideas from partner
Disadv: unlimited liability, no separate legal identity, profits are shared

Private Limited Companies: a small to medium size business, owned and controlled by shareholders who are
often members of the same family. They cannot list on the stock exchange or sell shares to the general public.
Adv: limited liability, separate legal identity, higher status than the sole trader and partnership in terms of capital,
production, and identity
Disadv: legal formalities are involved, shares cannot be sold to the public
Public Limited Company: A limited company, often large one with the legal right to sell shares to the general
public.
Adv: limited liability, huge capital can be raised as shares are sold to the general public, ease of shares trading for
the public
Disadv: legal formalities, share price keeps on fluctuating, as the shares are listed on the stock exchange
Cooperatives: In this, all members can contribute to the running of the business, sharing workload,
responsibilities, and decision-making. Profits are shared equally among members. All members have one vote at
important meetings. Focus more on agriculture and retailing. Example: The Mondragon Corporation based in
Spain
Adv: workload and responsibility shared, bulk buying would lead to a reduction in cost
Disadv: poor management skills unless professional managers are employed and would be costly, slow decision
making if all members are consulted upon every decision
Worker/Employee Cooperative: A worker cooperative is a cooperative owned and self-managed by its workers.
Community Cooperative: The community is the owners of the business.
Retail Cooperative: The retailers are the owners of the business

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Franchise: A business that uses the name, logo, and trading systems of an already existing business. Example:
Subway branches in Pakistan.
Adv: training of staff is offered by the franchisor, fewer chances of failure as the franchised business are already
known
Disadv: initial license fee has to be paid to the franchisor, share of profits and revenues need to be split with the
franchisor
Joint Venture: when two or more businesses agree to work together on a project and create a separate business
division to do so. Example: Sony and Panasonic in OLED TV Displays
Adv: costs and risks of a new business are shared between the companies
Disadv: disputes might arise, business failure of one of the partners would jeopardize the entire project
Holding Company: a business organization that holds and controls a number of separate businesses but does not
unite them into one unified Company.
Social enterprises: Social Enterprises are businesses that aim to make profit in socially responsible ways. Three
main aims:
1. Economic (financial) Triple bottom line: meaning
2. Social profit is not the sole objective
3. Environmental of these enterprises.

Public Corporations: these are businesses that are owned and controlled by the state, they are also known as
nationalized businesses.
Adv: managed with social objectives rather than just making a profit, financed by the government, so no worry of
how to raise finance
Disadv: inefficiency through the organization exists due to the lack of profit as the main motive
Unlimited Liability: refers to the scenario where the owners are liable for the debts of the business.
Limited Liability: refers where the only Liability the owners have towards the business is the amount they have
invested, should the business fail or file for bankruptcy.

Legal Formalities in setting up a limited company

• Memorandum of Association: includes the name of the Company, the address of the head office,
maximum share capital, and declared official aims of the business.
• Articles of Association: includes the internal working framework and control of the business, official
procedures, and names of directors

1.3 Size of a Business

Different ways a business can be measured

1. Number of Employees:
Description: easy to calculate, simple measure
Limit: some businesses are capital-intensive
2. Revenue/Sales
Description: The higher the revenue, the bigger the firm is considered
Limit: Less effective when comparing firms in different industries
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3. Capital employed
Description: The larger the capital employed, the larger the business organization
Limit: Two different firms may have different capital equipment needs
4. Market Capitalization (Market share price x shares issued)
Description: Tells about the total value of a company’s issued shares
Limit: As share price fluctuates daily, this measure gives an inaccurate picture
5. Market Share (Company’s sales/total market sales x 100)
Description: Referred to as the amount of share the Company has in terms of the entire market
Limit: When the size of the total market is small, a higher market share will not indicate a very large firm

Small Firms: Businesses that are owned by private individuals, partners, and corporations which have fewer
employees, resources, and revenue than a large firm. They operate on a small scale. Example: Ben & Jerry's is a
well-known small ice cream company.
Significance of small firms
 Employment creation
 Mostly dynamic risk-takers who are innovators provide a variety of goods and services to consumers
 Small firms can create competition for the large businesses
 Costs incurred are lower this could be passed down to the consumer in the shape of low prices

Government’s Assistance for Small Firms

 educed rate of profit tax
 loan guarantee scheme
 government-financed small workshops

Advantages
It can be managed and controlled by the owner since the size is
small
Often adapt quickly to consumer demands as they are more
consumer-oriented and communication is effective since
employees are few
They offer personalized services to consumers.
Disadvantages
Have limited access to sources of finance, banks are also not
easily willing to give out loans
Since the owners are not able to employ specialist managers as
they cost a lot, the responsibility of almost everything lies on
their shoulders
Small firms do not diversify their product/service portfolio, which
brings risks of failure associated with a change in the external
environment.

Strengths of a Family Business Weaknesses of a Family Business

Commitment Succession/continuity problem
Reliability & Pride Informality
Knowledge & Continuity Traditional
Conflict
How can a business grow?
• Internal growth: opening new branches or factories and increasing production scale without external help
or support
• External growth: merging with or taking over another business
• Merger: an agreement by shareholders of two businesses to bring both firms together
• Takeover: when a company buys more than 50% of the shares of another company

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Types of Integration

Horizontal Vertical Conglomerate

•Integration with firms in the
same industry at the same stage
of production.
• Forward integration with a •Integration with a business in a
business in the same industry but different industry
a customer of the exisiting
business.
•Backward integration with a
business in the same industry but
a supplier of the exisitng
business.

Strategic alliances (external growth): are agreements between firms in which each agrees to commit resources
to achieve an agreed set of objectives.
Advs of Joint Venture and Strategic Alliance: creating a joint venture or a strategic alliance will provide you with
more resources, such as specialized staff and technology. you can now use all of the equipment and capital that
you require for your project
Disadv of Joint Venture and Strategic Alliance: because a joint venture brings together organisations from various
industries and with varying interests, there is frequently a severe lack of communication among partners.

1.4 Business Objectives

Business objectives: the specific, measurable results that companies hope to maintain as their organization grows.
Effective business objectives meet the ‘SMART’ criteria (Specific, Measurable, Achievable, Realistic and Relevant,
Time Specific)
Corporate Aims: These are the very long-term goals that a business hopes to achieve.
Mission Statement: A mission statement is a concise explanation of the organization’s reason for existence.
Example: Nike, “Just do it”
Adv: quickly inform groups outside the business what the central aim and vision are
Disadv: too vague and general
Common Corporate Objectives
1. Profit maximization
2. Profit satisficing
3. Growth
4. Increasing market share
5. Survival
6. Corporate Social Responsibility
7. Maximizing short-term sales revenue
8. Maximizing shareholder value

Stages in the decision-making framework:

1- Set Objectives 2-Assess the problem or situation 3-Gather data about the problem and possible solutions. 4
Consider all decision options. 5-Make the strategic decision. 6-Plan and implement the decision. 7-Review its
success against the original objectives

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Factors that determine the corporate objectives of a business
1. Corporate culture
2. The size and legal form of the business
3. Public-sector or private-sector businesses
4. The number of years the business has been operating
5. Divisional, departmental and individual objectives

Management by objectives (MBO): a method of coordinating and motivating all staff in an organization by
dividing its overall aim into specific targets for each department, manager and employee.
Effective Communication: Effective communication within an organization is defined as communication between
two or more persons in which the intended message is properly encoded and a feedback is provided.
Ethical code (code of conduct): a document detailing a company’s rules and guidelines on staff behavior that must
be followed by all employees.
Business Ethics: a set of moral rules & ethical principles that govern how a business operates, makes decisions &
how people are treated.
Strict ethical code: A code of ethics sets out an organization's ethical guidelines and best practices to follow for
honesty, integrity, and professionalism.
Relaxed Ethical code: A management that does not emphasis strict control over ethic to be followed and are
lenient towards employees if they violate the business ethics.

Benefits and drawbacks of Ethical business decisions

Benefits Drawbacks
Avoiding potentially expensive court cases can reduce Using ethical and Fairtrade suppliers can add to
the costs of fines business’s costs
Ethical policies can lead to good publicity and Not taking bribes to secure business contracts can
increased sales mean failing to secure significant sales
Well-qualified staff may be attracted to work for the Accepting that it is wrong to fix prices with
companies competitors might lead to lower prices and profits

1.5 Stakeholders in a Business

Shareholders: they are owners of the business and the firm has a legal binding duty to put their needs first, the
firm takes action and makes decisions in such a way that maximizes the returns to their investments and increases
the shareholder value.
Stakeholder: Individuals or groups that are directly or indirectly affected by the business activity and thus are
interested in the business decisions as well.
Internal Stakeholders: Internal stakeholders are people or groups whose interest in a company comes through a
direct relationship. Such as Employees, Owners, Investors
External Stakeholders: External stakeholders are those who do not directly work with a company but are affected
somehow by the actions and outcomes of the business. Such as: suppliers, creditors, the Government and public
groups

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Consumer vs Customer: A consumer is the person who finally consumes the product or service whereas a
customer is an individual that pays for the product or service. One individual can be both the consumer and the
customer at the same time.

Main Stakeholders

Customers Suppliers Community Government Lenders

Role Buy goods and Supply goods Provide local Provide law & Provide finance
services and services services & order to allow to the business
infrastructure legal business in different
to the business activity forms
Right To receive goods To be paid on To be consulted Businesses have To be repaid on
& services that time as per law about major the duty to the the agreed
meet all the local decisions government to date
health & safety affecting them meet all legal
laws constraints
Responsibility To pay for goods To provide To meet To treat Provide the
and services supplies on reasonable businesses agreed amount
time requests from equally under of finance
the business the law

Corporate Social Responsibility: the concept that accepts that businesses should consider the interests of Society
in their activities and decisions, beyond the legal obligations that they have. Example: Starbucks has set
environmental goals, such as reducing its carbon emissions and water usage.

Benefits
CSR benefits society and can boost business profits.
Over time, CSR can pay for itself through marketing, PR,
and employee motivation.
1. CSR builds brand reputation and loyalty.
Critiques
Diverts resources from profit-making, potentially hindering
business growth.
Can backfire if seen as insincere or aimed solely at
improving public relations.
May be used to lobby for fewer government regulations.

Attracts socially conscious employees and local support. Is sometimes viewed as mere PR to mask unethical
business practices.
Opting for sustainability practices like reducing carbon
emissions and saving power enhances long-term business
sustainability.

2.1 Human Resource Management

Human resource management (HRM): the strategic approach to the effective management of an organization’s
workers so that they help the business gain a competitive advantage.
Hard HRM: an approach to managing staff that focuses on cutting costs, e.g. temporary and part-time
employment contracts, offering maximum flexibility but with minimum training costs.
Soft HRM: an approach to managing staff that focuses on developing staff so that they reach self-fulfillment and
are motivated to work hard and stay with the business.

HRM Department focuses on

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 Workforce planning
 Recruitment and selection
 Developing employees
 Employment contracts
 Ensuring HRM operates across the business
 Employee morale and welfare
 Incentive systems
 Monitoring

Recruitment: The process of identifying the need for a new employee, defining the job role, and attracting suitable
candidates
Selection: The process where candidates are interviewed, tested, and screened to select the best fit for a vacant
position. Techniques used for the selection process:
1. Interviews
2. Psychometric tests
3. Assessment Centers
Internal Recruitment: when an organization looks to fill jobs with their current employees within the company.
Adv: applicants may already be known to the selection team
Disadv: can promote jealousy among employees if one is selected and the other isn’t
External Recruitment: when an organization goes beyond their boundaries and hires a new employee from
outside the organization.
Adv: should be a wide choice of potential applicants
Disadv: Time Consuming process

Steps for recruitment and selection process

1) Establishing the exact nature of the job vacancy and drawing up a job description
2) Drawing up a person specification
3) Preparing a job advertisement
4) Drawing up a shortlist of applicants
5) Selecting between the applicants

Employment contract: a legal document that sets out the terms and conditions governing a worker’s job.
Adv: Retain Valuable Employees, gives security to both ends, act as a negotiator in conflict
Disadv: Limits Ability to Fire an Employee, costly and time consuming to finalise details

Labor turnover: measures the rate at which employees are leaving an organization.
number of employees leaving in 1 year/total number of people employed x 100
If labour turnover is high:
Adv: low-skilled and less productive staff might be leaving
Disadv: costs of recruiting, selecting and training new staff

Training: the process of increasing the knowledge and skills of the workforce to enable them to perform their jobs
effectively. Types of training:

1) Induction training: an introductory training programme to familiarize new recruits

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2) On-the-job training: instruction at the place of work on how a job should be carried out
3) Off-the-job training: all training undertaken away from the business, e.g. work-related college courses

Advantages Disadvantages
Employees will be motivated as their skill set will Poaching: Employees might leave after being trained
enhance
Increased productivity Reduced wastage Can be very expensive

Disciplinary Procedures: These are the policies that specify what types of behaviour are unacceptable at work and
what measures will be taken if the rules are broken.

Employee appraisal: the process of assessing the effectiveness of an employee judged against pre-set objectives
Employee morale: Employee morale is defined as the attitude, satisfaction and overall outlook of employees
during their association with an organization or a business.
Employee welfare: Employee welfare encompasses monitoring working conditions, fostering harmony, and
providing health infrastructure, industrial relations, and insurance for workers and their families against disease,
accidents, and unemployment.
Dismissal: being dismissed or sacked from a job due to incompetence or breach of discipline.
Unfair dismissal: ending a worker’s employment contract for a reason that the law regards as being unfair.
Redundancy occurs when workers’ jobs are no longer required, perhaps because of a fall in demand or a change
in technology.
Equality policy: practices and processes aimed at achieving a fair organization where everyone is treated in the
same way and has the opportunity to fulfil their potential.
Diversity policy: practices and processes aimed at creating a mixed workforce and placing positive value on
diversity in the workplace. Adv: develops a good reputation for the business
Trade union: an organization of working people with the objective of improving the pay and working conditions
of their members and providing them with support and legal services.
Collective bargaining: the process of negotiating the terms of employment between an employer and a group of
workers whom a trade union official usually represents.
Terms of employment: include working conditions, pay, work hours, shift length, holidays, sick leave, retirement
benefits and health care benefits.

2.2 MOTIVATION
Motivation: Motivation is a driving force which affects the choice of alternatives in the behavior of a person. It
improves, stimulates and induces employees leading to goal-oriented behavior.

Motivational Theories

Taylor’s Scientific Approach (Economic Man)

 Money is the main motivator for a rational man
 Use piece rate as payment method

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Mayo’s- Hawthorne effect

• Working conditions and financial rewards have little or no effect on productivity.
• Managements interest in employees, improves motivation
• Working in teams and developing a team spirit can improve productivity.
• Freedom and control, such as deciding when to take breaks, has a positive motivational effect on
workers.

Maslow-hierarchy of needs
1) Self-Actualisation: Reaching one’s full potential
2) Esteem Needs: Respect from others: status; recognition of achievement
3) Social Needs: Trust; acceptance; friendship; belonging to a group; social facilities
4) Safety Needs: Protection from threats; job security; health and safety from work
5) Physical Needs: Food; shelter; water; rest

Critiques: not everyone has the same needs as is assumed by Maslow, it can be very difficult to identify the degree
to which each need has been met and which level a worker is on, money is necessary to satisfy physical needs,
self-actualization is never permanently achieved

Herzberg-Two Factor Theory

Motivating factors (motivators): aspects of a worker’s job that can lead to positive job satisfaction, such as
achievement, recognition, meaningful and interesting work and advancement at work.

Hygiene factors: aspects of a worker’s job that have the potential to cause dissatisfaction, such as pay, working
conditions, status and over-supervision by managers

Job enrichment: aims to use the full capabilities of workers by giving them the opportunity to do more challenging
and fulfilling work. three main features of job enrichment:

 Complete units of work: Herzberg argued that complete and identifiable units of work should be assigned
to workers
 Feedback on performance
 A range of tasks: To give challenge and to stretch the individual, a range of tasks should be given

McClelland- Motivational Needs theory

1) Achievement motivation: A person with the strong motivational need for achievement will seek to reach
realistic and challenging goals and job advancement.
2) Authority/power motivation: A person with this dominant need is ‘authority motivated’.
3) Affiliation motivation: The person with need for affiliation as the strongest driver or motivator has a need
for friendly relationships and is motivated towards interaction with other people.

Vroom Expectancy theory

1) Valence: The depth of the want of an employee for an extrinsic reward, such as money, or an intrinsic
reward, such as satisfaction.
2) Expectancy: The degree to which people believe that putting eff ort into work will lead to a given level of
performance.

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3) Instrumentality: The confidence of employees that they will actually get what they desire, even if the
manager has promised it.

Financial Reward Systems

• Time-based wage rate: Payment to a worker made for each period of time worked, example, one hour.
• Piece rate: A payment to a worker for each unit produced
• Salary: annual income that is usually paid on a monthly basis.
• Commission: a payment to a salesperson for each sale made.
• Bonus Payments: a payment made in addition to the contracted wage or salary.
• Performance-related pay (PRP): a bonus scheme to reward staff for above-average work performance.
• Profit Sharing: a bonus for staff based on the profits of the business, usually paid as a proportion of basic
salary.
• Fringe Benefits: benefits given, separate from pay, by an employer to some or all employees.

Non-Financial Methods of Motivation

• Job Enlargement: attempting to increase the scope of a job by broadening or deepening the tasks
undertaken.
• Job Enrichment: the process often involves a reduction of direct supervision as workers take more
responsibility for their own work and are allowed some degree of decision-making authority.
• Job redesign: involves the restructuring of a job – usually with employees’ involvement and agreement –
to make work more interesting, satisfying and challenging.
• Training: the process of increasing the knowledge and skills of the workforce to enable them to perform
their jobs effectively.
• Quality circles: voluntary groups of workers who meet regularly to discuss work-related problems and
issues.
• Worker participation: workers are actively encouraged to become involved in decision-making within the
organization.
• Team-working: production is organized so that groups of workers undertake complete units of work.
• Delegation: the passing down of authority to perform tasks and take decisions from higher to lower levels
in the organization.
• Empowerment: Empowerment in business is a management practice of sharing information, rewards,
and power with employees.

2.3 Management
Managers: Responsible for setting objectives, organizing resources and motivating staff so that the organization’s
aims are met.
Management: Management is the coordination and administration of tasks to achieve a goal.

As per Fayol & Drucker, the functions of management include:

1) Setting objectives and planning

2) Organizing resources to meet the objectives
3) Directing and motivating staff
4) Coordinating activities
5) Controlling and measuring performance against targets

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Management Roles by Mintzberg
• Interpersonal roles – dealing with and motivating staff at all levels of the organization.
• Informational roles – acting as a source, receiver and transmitter of information.
• Decisional roles – taking decisions and allocating resources to meet the organization’s objectives.

Leadership: Is the ability of an individual or a group to influence and guide followers and other members of the
organization. It is the art of motivating a group of people towards achieving a common business objective.

Leadership qualities – confident, creative, multi-skilled, committed, passionate, good communicator, incisive
decision-makers

Leadership styles:

1. Autocratic: In this leader takes all decisions and gives little information to staff.

Adv: Autocratic leaders provide clear and direct instructions to their team
Disadv: Demotivates staff who want to contribute and accept responsibility

2. Democratic: In this participation encouraged two-way communication used

Adv: Allows feedback from staff

Disadv: Consultation with staff can be time-consuming

3. Laissez-Faire/Free Rein: In this managers delegate virtually all authority and decision-making powers

Adv: encourages employees to think independently and come up with creative solutions to problems
Disadv: workers may not appreciate the lack of structure and direction in their work

4. Paternalistic: Paternalistic (father-like) managers listen, explain issues and consult with workers but don’t allow
them to take decisions.

Adv: employees tend to develop a strong sense of loyalty and trust towards paternalistic leaders
Disadv: some workers will be dissatisfied with the apparent attempts to consult while not having any real power

Douglas McGregor’s Theory X and Theory Y

Theory X Managers Believe That Workers Theory Y Managers Believe That Workers
dislike work can derive as much enjoyment from work as from rest and play

will avoid responsibility will accept responsibility

are not creative are creative

Informal Leader: a person who has no formal authority but has the respect of colleagues and some power over
them.

3.1 Marketing
Marketing: identifying and satisfying customer needs profitably by delivering the right product, at the right price,
to the right place, and at the right time.

Market: A place where the buyer meets the seller and trade takes place.

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Marketing objectives: the goals set for the marketing department to help the business achieve its overall
objectives. Example: increasing market share.

Marketing strategy: long-term plan established for achieving marketing objectives.

Market orientation: Market orientation is an approach to business that prioritizes identifying the needs and
desires of consumers and creating products and services that satisfy them.
Adv: The chances of newly developed products failing in the market are much reduced, if consumer needs are
being met with appropriate products, then they are likely to survive longer and make higher profits
Disadv: An excessive focus on addressing the needs of consumers reduces the scope for innovation, consumer
desires are not fixed and can change very rapidly which makes it hard to meet
Product orientation: Where the business develops products based on what it is good at making or doing rather
than what a customer wants.
Adv: Consumer desires are not fixed and can change very rapidly, relying on them can be too risky
Disadv: The customers may not be interested in what you're selling, risk of failure might increase
Asset-led marketing: this bases strategy on the firm’s existing strengths and assets instead of purely on what the
customer wants.
Societal marketing: this approach considers the demands of consumers and the effects on society involved in
some way when firms meet these demands.
Demand: the quantity of a product that consumers are willing and able to buy at a given price in a time period.
When price increases, demand decreases and vice versa.
Supply: the willingness and ability of the quantity of a product that firms are prepared to supply at a given price
in a time period. When price increases, supply decreases and vice versa.
Equilibrium price: the market price that equates supply and demand for a product.
Subsidy: A subsidy or government incentive is a form of financial aid or support extended to an economic sector
generally with the aim of promoting economic and social policy.
Indirect Tax: An indirect tax is a tax that is levied upon goods and services before they reach the customer who
ultimately pays the indirect tax as a part of market price of the good or service purchase

Features of markets: location, size, growth, share and competitors

• Market size: the total level of sales of all producers within a market. This can be measured in two ways:
volume of sales (units sold) or value of goods sold (revenue).
• Market share formula: firm’s sales in time period/total market sales in time period x 100.

Adv of higher market share:

 sales are higher than those of any competing business in the same market and this could lead to
higher profits too.
 consumers are often keen to buy ‘the most popular’ brands
 retailers will be keen to stock and promote the best-selling brands
• Market growth: the percentage change in the total size of a market (volume or value) over a period of
time.

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Competition: This is primarily based on price but there are also non-price competition, like customer service.

Marketing concepts

1) Creating/adding value: the difference between the selling price of a product and the cost of the materials.
2) USP − unique selling point: the special feature of a product that differentiates it from competitors’
products.
3) Product differentiation: making a product distinctive to stand out from competitors’ products in
consumers’ perception.
4) Niche marketing: identifying and exploiting a small segment of a larger market by developing products to
suit it.
Adv: small firms may be able to survive and thrive in markets that are dominated by larger firms, niche
market products can also be used by large firms to create status and image
Disadv: any change in consumer buying habits could lead to a rapid decline in sales, small market niches
do not allow economies of scale to be achieved
5) Mass marketing: selling the same products at a very large scale to the whole market without attempting
to target groups within it.
Adv: mass-market businesses are likely to enjoy substantially lower average costs of production, any
change in a consumer’s buying habits should not have a significant impact on sales
Disadv: low adaptability
6) Market segmentation: identifying different segments within a market and targeting different products or
services to them.
Adv: businesses can define their target market precisely and design and produce goods that are
specifically aimed at these groups, price discrimination can be used to increase revenue and profits
Disadv: research and development and production costs might be high, time consuming
7) Market segment: a sub-group of a whole market in which consumers have similar characteristics.

Ways to market segment

1) Geographical Differences: Consumer tastes may vary between different geographic areas, products and
marketing are offered in ‘location-specific’ ways. These geographical differences might result from
cultural differences. Example: Alcohol cannot be promoted in Muslim countries.
2) Demographic differences: These are the most commonly used basis for segmentation. Demography is the
study of population data and trends, and demographic factors – such as age, gender, family size and ethnic
background – can all be used to separate markets. Example: Coca-Cola and Coca-Cola Zero Sugar are
marketed to younger consumers, while Diet Coke is often marketed to an older demographic.
3) Psychographic factors: These are to do with differences between people’s lifestyles, personalities, values
and attitudes. Many of these can be influenced by an individual’s social class too – so the middle class
tends to have a very different attitude towards private education than most of the working class, which is
why some are prepared to spend large amounts of money on it for their children.

Consumer profile: a quantified picture of consumers of a firm’s products, showing proportions of age groups,
income levels, location, gender and social class.

Customer relationship management (CRM): It is a strategy for managing a company's interactions with present
and potential customers. Example: customer support services, providing as much information to customers as
possible, targeted marketing, using social media sites like Twitter, LinkedIn and Facebook to track and
communicate with customers

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Adv: increased customer loyalty, helps in gaining competitive advantage
Disadv: It is costly as training and motivation is necessary for workers

3.2 Market Research

Market research: this is the process of collecting, recording and analyzing data about customers, competitors and
the market.

The need for market research:

1) To reduce the risks associated with new product launches
2) To predict future demand changes
3) To explain patterns in sales of existing products and market trends
4) To assess the most favored designs, flavors, styles, promotions and packages for a product

Sources of data − primary and secondary research

 Primary research/Field Research: the collection of first-hand data that is directly related to a firm’s needs.
Example: collecting data through questionnaires. Two types:
 Qualitative research: research into the in-depth motivations behind consumer buying behavior or
opinions.
 Quantitative research: research that leads to numerical results that can be statistically analyzed.
 Secondary research/Desk Research: data from secondhand sources that is already published and
available. Example: market reports.

Advantages of Disadvantages of Secondary

Advantages of Disadvantages of Secondary Research Research
Primary Research Primary Research
often obtainable very may be out-of-date
up-to-date costly cheaply
relevant time-consuming to obtainable quickly data-collection methods and
collect accuracy of these may be unknown
confidential doubts over allows comparison of may not be entirely suitable or
accuracy and data from different presented in the most effective way
validity sources for the business using it
Market research will produce vast amounts of data, this data is said to be ‘raw’ because it has not yet been
presented or analyzed in ways that will assist business decision-making. Once these stages have been
undertaken, the raw data becomes information that can be used.

Interpretation of data
• Tables
• Pie graphs (or pie charts)
• Line graphs
• Bar charts
• Histograms

3.3 Marketing Mix

The marketing mix is made up of four interrelated decisions − the 4Ps: product, price, promotion and place.

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1) Product: the end result of the production process sold on the market to satisfy a customer need.

Brand: an identifying symbol, name, image or trademark that distinguishes a product from its competitors.
Intangible attributes of a product: subjective opinions of customers about a product that cannot be measured or
compared easily.
Tangible attributes of a product: measurable features of a product that can be easily compared with other
products.
Unique selling point: is the marketing strategy of informing customers about how one's own brand or product is
superior/different to its competitors. The most successful new products are those that are differentiated from
competitors’ products and offer something ‘special’.
Product Differentiation: It is working on new product features that will help the company stand out in the
industry.
Product positioning: the consumer perception of a product or service as compared to its competitors.
Product portfolio analysis: analyzing the range of existing products of a business to help allocate resources
effectively between them. More the products larger the portfolio.
Product life cycle: the pattern of sales recorded by a product from launch to withdrawal from the market and is
one of the main forms of product portfolio analysis. It mainly consists of four stages introduction, growth,
maturity, decline.
Product portfolio analysis: It is a method of analyzing a company's units/products/services/elements in order to
determine its effectiveness.
Product life cycle
• Introduction: This is when the product has just been launched after development and testing.
• Growth: If the product is effectively promoted and well received by the market, then sales should grow
significantly.
• Maturity or saturation: At this stage, sales fail to grow, but they do not decline significantly either. Here
the business adopts extension strategies:
Extension strategies: these are marketing plans to extend the maturity stage of the product before a
brand new one is needed.
• Decline: During this phase, sales will decline steadily.

Consumer durable: manufactured product that can be reused and is expected to have a reasonably long life, such
as a car or washing machine.

Boston Matrix: a method of analyzing the product portfolio of a business in terms of market share and market
growth.
• Low market growth – high market share: product A: ‘cash cow’
• High market growth – high market share: product B: ‘star’
• High market growth – low market share: product C: ‘problem child’
• Low market growth – low market share: product D: ‘dog’

HIGH LOW

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HIGH STARS QUESTION MARKS

LOW CASH COWS DOGS

Boston Matrix and strategic analysis:

1. Building – supporting ‘problem child’ products with additional advertising or further distribution outlets.
2. Holding – continuing support for ‘star’ products so that they can maintain their good market position.
3. Milking – taking the positive cash flow from established products and investing in other products in the
portfolio.
4. Divesting – identifying the worst performing ‘dogs’ and stopping the production and supply of these.

The pricing decision – how do managers determine the appropriate price?

Determinants of the pricing decision for any product
1) Costs of production
2) Competitive conditions in the market
3) Competitors’ prices
4) Business and marketing objectives
5) Price elasticity of demand
6) Whether it is a new or an existing product

Pricing methods
1) Cost-based pricing: firms assess their costs of producing each unit, and then add an amount on top of the
calculated cost.
Price= Cost + Markup
Adv: it is easy to calculate as only markup needs to be added, it is easy to modify selling price as only markup
needs to be changed.
Disadv: markup is an estimated figure which can lead to incorrect selling prices

Mark-up pricing: adding a fixed mark-up for profit to the unit price of a product.
Target pricing: setting a price that will give a required rate of return at a certain level of output/sales
2) Full-cost pricing: setting a price by calculating a unit cost for the product (allocated fixed and variable
costs) and then adding a fixed profit margin.
3) Contribution-cost pricing: setting prices based on the variable costs of making a product in order to
contribute towards fixed costs and profit.
4) Competition-based pricing: In this, a firm will base its price upon the price set by its competitors.
Penetration pricing: setting a relatively low price often supported by strong promotion in order to achieve a high
volume of sales.
Market skimming: setting a high price for a new product when a firm has a unique or highly differentiated product
with low price elasticity of demand.

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Dynamic Pricing: It sells things at a variable price based on the level of demand and the consumers' ability to pay.

3.4 The marketing mix –promotion and place

Promotion: the use of advertising, sales promotion, personal selling, direct mail, trade fairs, sponsorship and
public relations to inform consumers and persuade them to buy. The three objectives are:

• Inform Customers: Inform them of product changes, new deals, and new releases.
• Persuade Customers: Compare and contrast the advantages of your product with those of your
competitors.
• Reassure Customers: Assuage the buyer's fears by assuring them that they made the proper decision.

Promotion mix: the combination of promotional techniques that a firm uses to sell a product.
Above-the-line promotion: a form of promotion that is undertaken by a business by paying for communication
Advertising: paid-for communication with consumers to inform and persuade, e.g. TV and cinema advertising.
Types:
1) Informative advertising – adverts that give information to potential purchasers of a product, rather than
just trying to create a brand image.
2) Persuasive advertising – adverts trying to create a distinct image or brand identity for the product.

Below-the-line promotion: promotion that is not a directly paid-for means of communication, but based on short-
term incentives to purchase. For e.g. discounts
Sales promotion: incentives such as special offers or special deals directed at consumers or retailers to achieve
short-term sales increases and repeat purchases by consumers.
Personal selling: a member of the sales staff communicates with one consumer with the aim of selling the product
and establishing a long-term relationship between company and consumer.
Direct mail: This directs information to potential customers, identified by market research, who have a potential
interest in this type of product.
Trade fairs and exhibitions: These are used in marketing to other businesses to sell products to the ‘trade’, i.e.
retailers and wholesalers.
Sponsorship: payment by a company to the organizers of an event or team/individuals so that the company name
becomes associated with the event/team/individual
Public relations: the deliberate use of free publicity provided by newspapers, TV and other media to communicate
with and achieve understanding by the public.
Brand: It's a symbol, name, picture, or trademark that sets the product apart from the competition.
Branding: the strategy of differentiating products from those of competitors by creating an identifiable image and
clear expectations about a product.
Merchandising: It entails putting a product's name on a variety of different goods, such as CDs, T-shirts, posters,
mugs, and so on.
Packaging: The material used to wrap a consumer item in order to enclose, identify, characterize, protect, exhibit,
and market it.

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Channel of distribution: this refers to the chain of intermediaries a product passes through from producer to final
consumer.
Different Channels of Distribution
1) Direct selling: no intermediaries. Can be referred to as ‘zero intermediary’ channel.
Adv: no intermediaries, so no mark-up or profit margin taken by other businesses, quicker than other channels
Disadv: all storage and stock costs have to be paid for by producer, may not be convenient for consumer
2) One-intermediary channel. Usually used for consumer goods but could also be an agent for selling
industrial products to businesses.
Adv: retailer holds stocks and pays for cost of this, producers can focus on production – not on selling the
products to consumers
Disadv: intermediary takes a profit mark-up, producer has delivery costs to retailer
3) Two-intermediaries channel. Wholesaler buys goods from producer and sells to retailer.
Adv: reduces stock-holding costs of producer, wholesaler pays for transport costs to retailer
Disadv: producer loses further control over marketing mix, slows down the distribution chain

Internet (online) marketing: refers to advertising and marketing activities that use the Internet, email and mobile
communications to encourage direct sales via electronic commerce.
E-commerce: the buying and selling of goods and services by businesses and consumers through an electronic
medium.
Viral marketing: the use of social media sites or text messages to increase brand awareness or sell products.

4.1 The Nature of Operations

Operations Management: it is the administration of business practices to create the highest level of efficiency
possible within an organization. It is concerned with converting materials and labor into goods and services as
efficiently as possible to maximize the profit of an organization.

In doing this, operations managers must be concerned with:

 efficiency of production − keeping costs as low as possible will help to give competitive advantage
 quality − the good or service must be suitable for the purpose intended
 flexibility and innovation − the need to develop and adapt to new processes and new products is
increasingly important in today’s dynamic business environment

Added value: the difference between the cost of purchasing raw materials and the price the finished goods are
sold for – this is the same as creating value.

Production Process/ Transformation Process: an action or set of activities that converts inputs such as land, labor,
and capital into outputs such as commodities and services.

Productivity: the ratio of outputs to inputs during production, e.g. output per worker per time period. Productivity
is concerned with how efficiently inputs are converted into outputs. The most common measures of efficiency
are:

1) Labor Productivity (number of units per worker) = Total Output in a given time period/Total Workers
Employed

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2) Capital Productivity= Total Output/Capital Employed

There are four main ways in which productivity levels could be increased:

1) Improve the training of staff to raise skill levels

2) Improve worker motivation
3) Purchase more technologically advanced equipment
4) More efficient management

Sustainability: taking environmentally friendly business decisions is one way in which companies can demonstrate
their commitment to sustainability. They can do this in a number of ways by:

• reducing energy use and carbon emissions

• reducing the use of plastic and other non-biodegradable materials
• using recycled materials
• manufacturing products that are recyclable

Adv: Enhanced Brand Reputation, helps in gaining a competitive advantage

Disadv: often requires a large initial investment, green marketing efforts could be mistaken as greenwashing by
consumers
Efficiency: producing output at the highest ratio of output to input.
Efficiency in management means performing activities with the minimum wastage of resources which also refers
to optimum utilization of resources so that the organization can maximize the profit.
Effectiveness: meeting the objectives of the enterprise by using inputs productively to meet customers’ needs.
Labor intensive: involving a high level of labor input compared with capital equipment.
Capital intensive: involving a high quantity of capital equipment compared with labor input.
Operations planning: preparing input resources to supply products to meet expected demand.

The decisions taken by operations managers can have a significant impact on the success of businesses. These
decisions are often influenced by: marketing factors, availability of resources, technology

Production methods

1) Job production: producing a one-off item specially designed for the customer. Example: specially designed
wedding stage

Adv: able to undertake specialist projects, high levels of worker motivation

Disadv: time-consuming

2) Batch production: producing a limited number of identical products – each item in the batch passes
through one stage of production before passing on to the next stage. Example: making batches of rolls.

Adv: some flexibility in design of product in each batch, faster production with lower unit costs than job
production
Disadv: high levels of stocks at each production stage

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3) Flow production: The process of flow production is used where individual products move from stage to
stage of the production process as soon as they are ready, without having to wait for any other products.
Example: a coca cola production plant.

Adv: low unit costs due to constant working of machines, high labor productivity and economies of scale
Disadv: inflexible – often very difficult and time consuming to switch from one type of product to another,
expensive machinery

4) Mass customization: the use of flexible computer aided production systems to produce items to meet
individual customers’ requirements at mass-production cost levels. Example: Dell computers can make a
customized computer to suit your specific needs in a matter of hours. By changing just a few of the key
components – but keeping the rest the same.

Adv: combines low unit costs with flexibility to meet customers’ individual requirements
Disadv: expensive flexible capital equipment needed, expensive product redesign may be needed

Factors influencing the choice of production methods: Size of the market, amount of capital available, Availability
of other resources

4.2 Inventory management

Inventory (stock): refers to the materials and goods required to allow for the production and supply of products
to the customer.

Manufacturing businesses will hold inventories in three distinct forms:

1) Raw materials and components

2) Work in progress
3) Finished goods

Without effective inventory management, several problems can arise for a business:

• Might be insufficient inventories to meet unforeseen changes in demand.

• Out-of-date inventories might be held if an appropriate rotation system is not used.
• Inventory wastage might occur due to mishandling or incorrect storage conditions.
• Very high inventory levels may result in excessive storage costs and a high opportunity cost for the capital
tied up.
• Poor management of the supplies purchasing function can result in late deliveries, low discounts from
suppliers or too large a delivery for the warehouse to cope with.

Inventory management: is a part of the supply chain management, which includes various aspects such as the
process of ordering, storing and using the company's inventory like raw materials, its components, and the
finished products. It is also used for controlling the number of products for sale.

Supply Chain Management: is a management function of growing importance in nearly all businesses. Businesses
of any size will benefit from reducing the time it takes to convert raw materials into completed products available
for sale.

Inventory-holding costs:

1) Opportunity cost

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2) Storage costs
3) Risk of wastage and obsolescence

Costs of not holding enough Inventory:

1) Lost sales
2) Idle production resources
3) Special orders could be expensive
4) Small order quantities

Economic order quantity: the optimum or least-cost quantity of stock to re-order, taking into account delivery
costs and stock-holding costs.

Buffer inventories: the minimum inventory level that should be held to ensure that production can still take place
should a delay in delivery occur or should production rates increase.

Re-order quantity: the number of units ordered each time. This will be influenced by the economic order quantity
concept.

Lead time: the normal time taken between ordering new stocks and their delivery. The longer this period of time,
then the higher will have to be the reorder stock level. The less reliable suppliers are, the greater the buffer stock
level might have to be.

Re-order stock level: This is the level of stocks that will trigger a new order to be sent to the supplier.

Maximum inventory level: This may be limited by space or by the financial costs of holding even higher
inventories. One way to calculate this maximum level is to add the EOQ of each component to the ‘buffer’ level
for that item.

Just-in-time: this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just
as they are needed in production and completed products are produced to order. Important requirements for JIT:

• Relationships with suppliers have to be excellent

• Production staff must be multiscale and prepared to change jobs at short notice
• Equipment and machinery must be flexible
• Accurate demand forecasts will make JIT a much more successful policy
• The latest IT equipment will allow JIT to be more successful
• Excellent employee-employer relationships are essential for JIT to operate smoothly
• Quality must be everyone’s priority

Adv: Capital invested in inventory and the opportunity cost of inventory holding is reduced, costs of storage and
inventory holding are reduced, the multi skilled and adaptable staff required for JIT to work may gain from
improved motivation

Disadv: Any failure to receive supplies of materials or components in time will lead to expensive production delays,
Delivery costs will increase as frequent small deliveries are an essential feature of JIT

4.3 Capacity utilization and outsourcing

Capacity utilization: the proportion of maximum output capacity currently being achieved.

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When utilization is at a high rate, average fixed costs will be spread out over a large number of units – unit fixed
costs will be relatively low. When utilization is low, fixed costs will have to be borne by fewer units, and unit fixed
costs will rise.

Excess capacity: exists when the current levels of demand are less than the full capacity output of a business –
also known as spare capacity.

Adv: excess capacity can act as a buffer during periods of increased demand or unexpected spikes in orders, excess
capacity can result in cost savings through economies of scale.
Disadv: inefficient allocation of resources, as underutilized assets, labor, and capital can lead to higher per-unit
costs, reducing profitability

The ‘time factor’:

1) Is spare capacity just a short-term, seasonal problem such as might exist for ice creams in the colder
months?
2) Is spare capacity a long-term problem resulting from a fashion change, technological development of rival
products or an economic recession?

Ways to improve excess capacity in the short-term:

1) Maintain high output levels but add to stocks

2) Adopt a more flexible production system allowing other goods to be made that might be sold at other
times of the year
3) Offer only flexible employment contracts to staff so that during periods of low demand and excess
capacity, staff may be laid off and costs saved

Ways to improve excess capacity in the long-term:

1) A cut in production capacity should be considered. This is often referred to as rationalization and will have
both cost and industrial-relations implications

Rationalization: reducing capacity by cutting overheads to increase efficiency of operations, such as closing a
factory or office department, often involving redundancies.

Full capacity: when a business produces at maximum output

Advantages of operating at full capacity Disadvantages of operating at full capacity

Unit fixed costs will be at their lowest possible level
The business will be able to claim how successful it is as
it has no spare capacity.
Staff may feel under pressure due to the workload and
this could raise stress levels.
Regular customers who wish to increase their orders
will have to be turned away or kept waiting for long
periods.

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This situation will also give employees a sense of Machinery will be working flat out and there may be
security for their jobs insufficient time for maintenance and preventative
repairs.

Capacity shortage: when the demand for a business’s products exceeds production capacity

Adv: the business will be able to charge higher prices, it can enhance the businesses reputation
Disadv: lost sales, competitors may take advantage of a business's capacity shortage to gain market share

Ways to improve capacity shortage

1) Use subcontractors or outsourcing of supplies, components or even finished goods

2) Capital investment in expansion of production facilities

Outsourcing: using another business (a ‘third party’) to undertake a part of the production process rather than
doing it within the business using the firm’s own employees. Example: Apple, one of the world's largest technology
companies, outsources the production of its devices, such as iPhones, iPads, and MacBooks, to Foxconn, which is
based in Taiwan but has a significant manufacturing presence in China.

Business-process outsourcing (BPO): a form of outsourcing that uses a third party to take responsibility for certain
business functions, such as HR and finance

Benefits and Drawbacks of outsourcing

Benefits: Reduction and control of operating costs, Improved company focus, Increased flexibility

Drawbacks: Loss of jobs within the business, Customer resistance, security

5.1 Business Finance

Start-up capital: the capital needed by an entrepreneur to set up a business.

Working capital: the capital needed to pay for raw materials, day-to-day running costs and credit offered to
customers. In accounting terms working capital = current assets – current liabilities
Without sufficient working capital a business will be illiquid – unable to pay its immediate or short-term debts.

Capital expenditure: the purchase of assets that are expected to last for more than one year, such as building and
machinery.

Revenue expenditure: spending on all costs and assets other than fixed assets and includes wages and salaries
and materials bought for stock.

Liquidity: the ability of a firm to be able to pay its short term debts.

Liquidation: when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.

Internal sources of finance: These are funds that are generated internally from within the business organization.
There is no interest to be paid on the amount or a need to be repaid as the money is generated ‘organically’ from
the business.

• Profits retained in the business

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• Sale of assets
• Reductions in working capital

Adv: no direct cost to the business, does not increase the liabilities or debts of the business, no risk of loss of
control by the original owners as no shares are sold
Disadv: it is not available for all companies, solely depending on internal sources of finance for expansion can slow
down business growth, if assets are leased back once sold there will be leasing charges

External sources of finance: These are funds that are raised through external means i.e., from outside entities.
They are needed to be repaid along with the agreed interest and given time period.

Short-term sources

• bank overdrafts: bank agrees to a business borrowing up to an agreed limit as and when required.
Adv: very flexible: amount raised can vary from day to day, depending on the particular needs of the
business
Disadv: has a limit beyond which the firm should not go
• trade credit: by delaying the payment of bills for goods or services received, a business is, in effect,
obtaining finance.
Adv: this is as good as ‘lending money’
Disadv: they are not free – discounts for quick payment and supplier confidence are often lost if the
business takes too long to pay its suppliers
• debt factoring: when a business sells goods on credit, it creates trade receivables. The longer the time
allowed to pay up, the more finance the business has to find to carry on trading.
Adv: simplified collections, reduced credit risks
Disadv: loss of profits, includes fees and discount charges

Sources of medium-term finance

• hire purchase and leasing: an asset is sold to a company that agrees to pay fixed repayments over an
agreed time period – the asset belongs to the company.
Adv: allows the firm to avoid cash purchase of the asset, the risk of using unreliable or outdated
equipment is reduced as the leasing company will repair and update the asset as part of the agreement
Disadv: not a cheap option
• medium-term bank loan

Long-term finance

• Debt finance and equity finance: permanent finance raised by companies through the sale of shares.
Adv: as no shares are sold, the ownership of the company does not change or is not ‘diluted’ by the
issue of additional shares, it never has to be repaid; it is permanent capital
• long-term loans from banks: loans that do not have to be repaid for at least one year
Adv: offered at either a variable or a fixed interest rate
Disadv: they can turn out to be expensive if the loan is agreed at a time of high interest rates
• debentures: (also known as loan stock or corporate bonds)
• grants: agencies that are prepared, under certain circumstances, to grant funds to businesses

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• venture capital: risk capital invested in business start-ups or expanding small businesses that have good
profit potential but do not find it easy to gain finance from other sources
• finance for unincorporated businesses: grants are available to small and newly formed businesses as
part of most governments’ assistance to small businesses
• microfinance: providing financial services for poor and low-income customers who do not have access
to banking services
• crowd funding: the use of small amounts of capital from a large number of individuals to finance a new
business venture.

Overdraft: bank agrees to a business borrowing up to an agreed limit as and when required.

Factoring: selling of claims over trade receivables to a debt factor in exchange for immediate liquidity – only a
proportion of the value of the debts will be received as cash.

Hire purchase: an asset is sold to a company that agrees to pay fixed repayments over an agreed time period –
the asset belongs to the company.

Leasing: obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period,
this avoids the need for the business to raise long-term capital to buy the asset; ownership remains with the
leasing company.

Microfinance: providing financial services for poor and low-income customers who do not have access to
banking services, such as loans and overdrafts offered by traditional commercial banks.

Crowd funding: the use of small amounts of capital from a large number of individuals to finance a new business
venture.

Business plan: a detailed document giving evidence about a new or existing business, and that aims to convince
external lenders and investors to extend finance to the business.

Adv: attracts investment, enhances credibility, provides financial decision support

Disadv: if a business plan lacks important details or is too vague, it can deter potential investors and creditors,
time-consuming

Main Financial Stakeholders: shareholders, banks, creditors

Factors Influencing Financial Choice: Use to which finance is to be put which affects the time period for which
finance is required, cost, amount required

5.2 Forecasting and Managing Cash Flows

Cash flow: the sum of cash payments to a business (inflows) less the sum of cash payments (outflows).

Liquidation: when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.

Insolvent: when a business cannot meet its short-term debts.

Cash inflows: payments in cash received by a business, such as those from customers (trade receivables) or from
the bank, e.g. receiving a loan.

Cash outflows: payments in cash made by a business, such as those to suppliers and workers.

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Cash-flow forecast: is the process of obtaining an estimate or forecast of a company's future financial position;
the cash flow forecast is typically based on anticipated cash inflows and outflows.

Forecasting cash inflows

Here are some example cash inflows:

• Owner’s own capital injection

• Bank loan payments
• Customers’ cash purchases
• Trade receivables payments

Forecasting cash outflows

Here are some example cash outflows: lease payment for premises, annual rent payments, labor cost payments

The causes of cash-flow problems: lack of planning, poor, credit control, allowing customers too long to pay,
expanding too rapidly, unexpected events

Bad debt: unpaid customers’ bills that are now very unlikely to ever be paid.

Overtrading: expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow
shortage develops

Ways to improve cash flow

1) Increase cash inflows:

• Overdraft
• Short-term loan
• Sale of assets
• Sale and leaseback
• Reduce credit terms
• Debt factoring

2) Reduce cash outflows

• Delay payments to suppliers

• Delay spending on capital equipment
• Use leasing, not outright purchase of capital equipment
• Cut overhead spending that does not directly affect output

Trade receivables
Trade receivables can be managed in many different ways:

• Not extending credit to customers – or extending it for shorter time periods: Will they still buy from this
business?
• Selling claims on trade receivables to specialist financial institutions acting as debt factors
• By being careful to discover whether new customers are creditworthy
• By offering a discount to clients who pay promptly

Creditors or trade payables

Credit from suppliers can be managed in two main ways:

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1) Increasing the range of goods and services bought on credit
2) Extend the period of time taken to pay

5.3 Budgets
Budget: a budget is a document that management makes to estimate the revenues and expenses for an upcoming
period based on their goals for the business.

Setting budgets and establishing financial plans for the future have seven main purposes:

1) Planning
2) Effective allocation of resources
3) Setting targets to be achieved
4) Coordination
5) Monitoring and controlling
6) Modifying
7) Measuring and assessing performance

Budget holder: the individual responsible for the initial setting and achievement of a budget.

Variance analysis: calculating differences between budgets and actual performance and analyzing reasons for
such differences. There are two types of variances: favourable (these have a positive impact) or adverse (these
have a negative impact). For example, the budgeted sales revenue is $ 100,000, and the actual sales revenue is $
90,000. The difference which is -$10,000, would be the variance, and it would be an adverse one.

Delegated budgets: giving some delegated authority over the setting and achievement of budgets to junior
managers.

Setting budgets
There are several ways in which the budget level can be set.

• Incremental budgeting: uses last year’s budget as a basis and an adjustment is made for the coming year.
• Zero budgeting: setting budgets to zero each year and budget holders have to argue their case to receive
any finance.
• Flexible budgeting: cost budgets for each expense are allowed to vary if sales or production vary from
budgeted levels.

Limitations of budgeting: lack of flexibility, focused on the short term, training needs must be met

Variance analysis: A variance is the difference between budgeted and actual figures.

Favorable variance: exists when the difference between the budgeted and actual figure leads to a higher than-
expected profit.

Adverse variance: exists when the difference between the budgeted and actual figure leads to a lower-than
expected profit.

Costing

Full Costing: Full costing is a cost accounting technique that takes into account all of the costs associated with
producing a single unit of goods, including fixed and variable overhead. Direct material costs, direct labor
expenses, and all overhead charges are included in these costs.
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Contribution Costing: After all direct costs have been deducted from revenue, contribution is the amount of
earnings left. This sum is available to pay for any fixed expenditures incurred by a company during a reporting
period.

5.4 Costs
Why is it important for a business to be able to identify and calculate its costs?

• Business costs are a key factor in the ‘profit equation’.

• Cost data are also of great importance to other departments, such as marketing.
• Keeping cost records also allows comparisons to be made with past periods of time.
• Past cost data can help to set budgets for the future.
• Comparing cost data can help a manager make decisions about resource use.
• Calculating the costs of different options can assist managers in their decision-making and help improve
business performance.

Direct costs: these costs can be clearly identified with each unit of production and can be allocated to a cost
center.

Indirect costs: costs that cannot be identified with a unit of production or allocated accurately to a cost center.

Fixed costs: costs that do not vary with output, These remain fixed no matter what the level of output, such as
rent of premises.

Variable costs: costs that vary with output.

Total variable costs= Variable costs/unit X total quantity

Marginal costs: the extra cost of producing one more unit of output.

Full costing technique: Full costing allocates all costs to each product.

Uses of Full Costing Limitations of Full Costing

All costs are allocated so no costs are left out of theThere is no attempt to allocate each overhead cost to
calculation of total full cost or unit full cost. cost centers or profit centers on the basis of actual
expenditure incurred.
Full costing is a good basis for pricing decisions in Inappropriate methods of overhead allocation can
single-product firms. lead to inconsistencies between departments and
products.
Full costing data can be compared from one time It can be risky to use this cost method for making
period to another to assess performance decisions.
Contribution or marginal costing: Contribution costing solves the problem of deciding on the most appropriate
way to allocate or share out overhead costs between products – it does not allocate them at all.

Break-even point of production: the level of output at which total costs equal total revenue, neither a profit nor
a loss is made.

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Calculation of Breakeven

break-even level of output = fixed cost/contribution per unit

Contribution per unit= Selling price-variable costs

Breakeven uses

In addition to obtaining break-even levels of production and margins of safety, the break-even techniques can
also be used to assist managers in making key decisions. The charts can be redrawn showing a potential new
situation and this can then be compared with the existing position of the business. Here are three examples of
further uses of the break-even technique:

1) A marketing decision – the impact of a price increase. The assumption made in this example is that
maximum sales will still be made. With a higher price level, this may well be unlikely.
2) An operations-management decision – the purchase of new equipment with lower variable costs
3) Choosing between two locations for a new factory.

Benefits of Breakeven Analysis Limitations of breakeven analysis

Charts are relatively easy to construct and interpret.
Analysis provides useful guidelines to management on
break-even points, safety margins and profit/loss levels
at different rates of output.
Not all costs can be conveniently classified into fixed
and variable costs.
The assumption that costs and revenues are always
represented by straight lines is unrealistic. Not all
variable costs change directly or ‘smoothly’ with
output.

The equation produces a precise break-even result. There is no allowance made for inventory levels on the
break-even chart.

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