BUSINESS STUDIES

(0450/7115)
CAIE IGCSE

Talha Adeel Khan

0332-0301065

SUMMARIZED NOTES ON THE DEFINITIONS SYLLABUS

CAIE IGCSE BUSINESS STUDIES (0450)

becomes part of the 'predator' business [the business

which has taken it over]
1. Definitions 22. A merger is when the owners of two businesses agree
to join their businesses together to make one
business
1.1. Understanding business activity
23. Horizontal integration is when one business merges
1. A need is a good or service essential for living with or takes over another one in the same industry
2. A want is a good or service which people would like to at the same stage of production
have, but which is not essential for living. People's 24. Vertical integration is when one business merges with
wants are unlimited or takes over another one in the same industry but at
3. Economic Problem- There exist unlimited wants but a different stage of production. Vertical integration
limited resources to produce the goods and services can be forward or backward.
to satisfy those wants. This creates scarcity 25. Conglomerate integration is when one business
4. Factors of production are those resources needed to merges with or takes over a business in a completely
produce goods and services. There are four factors of different industry. This is also known as
production and they are in limited supply diversification.
5. Scarcity is the lack of sufficient products to fulfill the 26. Sole trader is a business owned by one person
total wants of the population 27. Limited liability means that the liability of
6. Opportunity cost is the next best alternative given up shareholders in a company is limited to only the
by choosing another item amount they invested
7. Specialization occurs when people and businesses 28. Unlimited liability means that the owners of a
concentrate on what they are best at business can be held responsible for the debts of the
8. Division of labour is when the production process is business they own. Their liability is not limited to the
split up into different tasks and each worker performs investment they made in the business
one of those tasks. It is a form of specialization 29. Partnership is a form of business in which two or
9. Businesses combine the factors of production to more people agree to jointly own a business
make goods and services which satisfy people's wants 30. Unincorporated business is one that does not have a
10. Added value is the difference between the selling separate legal identity. Sole traders and partnerships
price and the cost of bought-in materials and are unincorporated businesses
components 31. incorporated businesses are companies that have
11. The primary sector of industry extracts and uses the separate legal status from their owners
natural resources of Earth to produce raw materials 32. Shareholders are the owners of a limited company.
used by other businesses They buy shares which represent part-ownership of
12. The secondary sector of industry manufactures goods the company.
using the raw materials provided by the primary 33. Private limited companies are businesses owned by
sector shareholders but they cannot sell shares to the public.
13. The tertiary sector of industry provides services to 34. Public limited companies are businesses owned by
consumers and other sectors of industry shareholders but they can sell shares to the public
14. De -industrialisation occurs when there is a decline in and their shares are tradable on the Stock Exchange
the importance of the secondary, manufacturing 35. Dividends are payments made to shareholders from
sector of industry in a country the profits [after tax] of a company. They are the
15. Mixed economy has both a private sector and a public returns to shareholders for investing in the company.
36. A franchise is a business based upon the use of the
(state) sector
16. Capital is the money invested into the business by the brand names, promotional logos and trading methods
owners of an existing successful business. The franchisee
17. An entrepreneur is a person who organises, operates buys the license to operate this business from the
and takes the risk for a new business venture franchisor
18. Capital employed is the total value of capital used in 37. A joint venture is where two or more businesses start
the business a new project together, sharing capital, risks and
19. Internal Growth occurs when a business expands its profits
existing operations 38. A public corporation is a business in the public sector
20. External Growth is when a business takes over or that is owned and controlled by the state
merges with another business. It is often called [government]
integration as one business is integrated into another 39. Business objectives are the aims or targets that a
one business works towards
21. A takeover or acquisition is when one business buys 40. Profit is total income of a business [revenue] minus
out the owners of another business, which then total costs

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES (0450)

41. Market share is the percentage of total market sales organisational structure
held by one brand or business 24. Staff managers are specialists who provide support,
42. A social enterprise has social objectives as well as an information and assistance to line managers.
aim to make a profit to reinvest back into the business 25. Delegation means giving a subordinate the authority
43. A stakeholder is any person or group with direct to perform particular tasks
interest in the performance and activities of a 26. Leadership styles are the different approaches to
business dealing with people and making decisions when in
apposition of authority - autocratic, democratic and
1.2. People in business laissez-faire
27. Autocratic leadership is where the manager expects
1. Motivation is the reason why employees want to work to be in charge of the business and to have their
hard and work effectively for the business orders followed
2. Wage is a payment for work, usually paid weekly 28. Democratic leadership gets other employees involved
3. Time rate is the amount paid to an employee for one in the decision-making process
hour of work 29. Laissez-faire leadership makes the broad objectives of
4. Piece rate is an amount paid for each unit of output the business known to employees, but then they are
5. Salary is payment for work, usually paid monthly. left to make their own decisions and organise their
6. Bonus is an additional amount of payment above own work
basic pay as a reward for good work 30. Recruitment is the process from identifying that the
7. Commission is payment relating to the number of business needs to employ someone up to the point at
sales made which applications have arrived at the business
8. Profit sharing is a system whereby a proportion of the 31. Job analysis identifies and records the responsibilities
company's profits are paid out to employees and tasks relating to a job
9. Job satisfaction is the enjoyment derived from feeling 32. Job description outlines the responsibilities and duties
that you have done a good job to be carried out by someone employed to do a
10. Job rotation involves workers swapping around and specific job
doing each specific task for only a limited time and 33. Job specification is a document which outlines the
then changing around again requirements, qualifications, expertise, physical
11. Job enrichment involves looking at jobs and adding characteristics, etc., for a specified job
tasks that require more and/or responsibility 34. Internal recruitment is when a vacancy is filled by
12. Team-working involves using groups of workers and someone who is an existing employee of the business
allocating specific tasks and responsibilities to them 35. External recruitment is when a vacancy is filled by
13. Training is the process of improving a worker's skills someone who is not an existing employee and will be
14. Promotion is the advancement of an employee in an new to the business
organisation, for example, to a higher job/managerial 36. induction training is an introduction given to a new
level employee, explaining the business's activities,
15. Organisational structure refers to the levels of customs and procedures and introducing them to
management and division of responsibilities within an their fellow workers
organisation 37. On-the-job training occurs by watching a more
16. Organisational chart refers to a diagram that outlines experienced worker doing the job
the internal management structure 38. Off-the-job training involves being trained away from
17. Hierarchy refers to the levels of management in any the workplace, usually by specialist trainers.
organisation, from the highest to the lowest. 39. Workforce planning is establishing the workforce
18. A level of hierarchy refers to needed by the business for the foreseeable future in
managers/supervisors/other employees who are terms of the number and skills of employees required
given a similar level of responsibility in an 40. Dismissal is when employment is ended against the
organisation will of the employee, usually for not working
19. Chain of command is the structure in an organisation according to the employment contract
which allows instructions to be passed down from 41. Redundancy is when the employee is no longer
senior management to lower levels of management needed and so loses their job. It is not due to any
20. The span of control is the number of subordinates aspect of their work being unsatisfactory
working directly under a manger 42. A contract of employment is a legal agreement
21. Directors are senior managers who lead a particular between an employer and an employee, listing the
department or a division of a business rights and responsibilities of workers
22. Line managers have direct responsibility for people 43. Communication is the transferring of a message from
below them in the hierarchy of an organisation the sender to the receiver, who understands the
23. Supervisors are junior managers who have direct message
control over the employees below them in the

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES (0450)

44. A message is the information or instructions being 12. Market-orientated business is one which carries out
passed by the sender to the receiver market research to find out consumer wants before a
45. Internal communication is communication between product is developed and produced
members of the same organisation 13. Marketing budget is a financial plan for the marketing
46. External communication is communication between of a product or product range for some specific
the organisation and other organisations or period of time. It specifies how much money is
individuals available to market the product or range, so that the
47. The transmitter or sender of the message is the Marketing department may know how much it may
person starting off the process by sending the spend
message 14. Primary research is the collection and collation of
48. The medium of communication is the method used to original data via direct contact with potential or
send a message, for example, a letter is a method of existing customers
written communication and a meeting is a method of 15. Secondary research uses information that has already
verbal communication been collected and is available for use by others
49. The receiver is the person who receives the message 16. A questionnaire is a set of questions to be answered
50. Feedback is the reply from the receiver which shows as a means of collecting data for market research
whether the message has arrived, been understood 17. Online surveys require the target sample to answer a
and, if necessary, acted upon series of questions over the internet
51. One-way communication involves a message which 18. Interviews involve asking individuals a series of
does not call for or require a response questions, often face-to-face or over the phone
52. Two-way communication is when the receiver gives a 19. A focus group is a group of people who are
response to the message and there is a discussion representative of the target market
about it 20. A sample is the group of people who are selected to
53. Formal communication is when messages are sent respond to a market research exercise, such as a
through established channels using professional questionnaire
language 21. A random sample is when people are selected at
54. Informal communication is when information is sent random as a source of information for market
and received casually using everyday language research
55. Communication barriers are factors that stop effective 22. A quota sample is when people are selected on the
communication of messages basis of certain characteristics (such as age, gender or
income) as a source of information for market
1.3. Marketing research
23. The marketing mix is a term which is used to describe
1. Marketing is identifying customer wants and satisfying all the activities which go into marketing a product or
them profitably service. These activities are often summarized as the
2. A customer is a person, business or other four Ps - product, price, place and promotion
organisation which buys goods or services from a 24. The USP is the special feature of a product that
business differentiates it from the products of competitors
3. Customer loyalty is when existing customers 25. The brand name is the unique name of a product that
continually buy products from the same business distinguishes it from other brands
4. Customer relationships is communicating with 26. Brand loyalty is when consumers keep buying the
customers to encourage them to become loyal to the same brand again and again instead of choosing a
business and its products competitor's brand
5. Market share is the percentage of total market sales 27. Brand image is an image or identity given to a product
held by one brand or business which gives it a personality of its own and
6. Consumer buys goods or services for personal distinguishes it from its competitors' brands
services- not to re-sell 28. Packaging is the physical container or wrapping for a
7. Mass market is where there is a large number of sales product. It is also used for promotion and selling
of a product appeal
8. Niche market is a small, usually specialised, segment 29. The product life cycle describes the stages a product
of a much larger market will pass through from its introduction, through its
9. Market segment is an identifiable sub-group of a growth until it is mature, and then finally its decline
whole market in which consumers have similar 30. Extension strategy is a way of keeping a product at
characteristics or preferences the maturity stage of the life cycle and extending the
10. Market research is the process of gathering, analyzing cycle
and interpreting information about a market 31. Cost-plus pricing is the cost of manufacturing the
11. Product-orientated business is one whose main focus product plus a profit mark-up
of activity is on the product itself

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES (0450)

32. Competitive pricing is when the product is priced in mix for a product or a service to achieve a particular
line with or just below competitors' prices to try to marketing objective(s)
capture more of the market
33. Penetration pricing is when the price is set lower than 1.4. Operations Management
the competitors' prices in order to be able to enter a
new market 1. Productivity is the output measured against the
34. Price skimming is where a high price is set for a new inputs used to create it
product on the market 2. The buffer inventory level is the inventory held to deal
35. Promotional pricing is when a product is sold at a very with uncertainty in customer demand and deliveries
low price for a short period of time of supplies
36. Dynamic pricing is when businesses change product 3. Lean production is a term for those techniques used
prices, usually when selling online, depending on the by business to cut down on waste and therefore
level of demand increase efficiency, for example, by reducing the time
37. Price elastic demand is where consumers are very it takes for a product to be developed and become
sensitive to changes in price available for sale.
38. Price inelastic demand is where consumers are not 4. Kaizen is a Japanese term meaning 'continuous
sensitive to changes in price improvement through the elimination of waste
39. A distribution channel is the means by which a 5. Just-in-time is a production method that involves
product is passed from the place of production to the reducing or virtually eliminating the need to hold
consumer inventories of raw materials or unsold inventories of
40. An agent is an independent person or business that is the finished product
appointed to deal with the sales and distribution of a 6. Job production is where a single product is made at a
product or a range of products time
41. Promotion is where marketing activities aim to raise 7. Batch production is where a quantity of one product
customer awareness, of a product or a brand, is made, and then a quantity of another item will be
generating sales and helping to create brand loyalty produced
42. Advertising means paying for communication with 8. Flow production is where large quantities of a product
potential customers about a product to encourage are produced in a continuous process. It is sometimes
them to buy it referred to as mass production
43. informative advertising is where the emphasis of 9. Fixed costs are costs which do not vary in the short
advertising or sales promotion is to give full run with the number of items sold or produced. They
information about the product have to be paid whether the business is making any
44. Persuasive advertising is advertising or promotion sales or not. They are also known as overhead costs.
which is trying to persuade the consumer that they 10. Variable costs are costs which vary directly with the
really need the product and should buy it number of items sold or produced
45. Target audience refers to people who are potential 11. Total costs are fixed and variable costs combined
buyers of a product or a service 12. Average cost per unit (unit cost) is the total cost of
46. Sales promotions are incentives such as special offers production divided by total output
aimed at consumers to achieve short-term increase in 13. Economies of scale are the factors that lead to a
sales reduction in average costs as a business increases in
47. Marketing budget is a financial plan for the marketing size
of a product or a product range for a specified period 14. Diseconomies of scale are the factors that lead to an
of time increase in average costs as a business grows beyond
48. Social media marketing is a form of internet a certain size
marketing that involves creating and sharing content 15. Break-even point is the level of sales at which total
on social media networks in order to achieve costs = total revenue
marketing and branding goals. It includes activities 16. The revenue of a business is the income during a
such as posting text and image updates, videos, and period of time from the sale of goods or services.
other content that achieves audience engagement as 17. Quality means to produce a good or service which
well as paid social media advertising means customer expectations
49. Viral marketing is when consumers are encouraged to 18. Quality control is the checking for quality at the end of
share information online about the products of a the production process; it uses quality inspectors as a
business way of finding any faults
50. E-commerce is the 'online' buying and selling of goods 19. Quality assurance is the checking for quality
and services using computer systems linked to the standards throughout the production process by
internet and apps on mobile (cell) phones employees.
51. A marketing strategy is a plan to combine the right
combination of the four elements of the marketing

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES (0450)

22. The revenue is the income to a business during a

1.5. Financial information and decisions
period of time from the sale of goods and services
1. Start-up capital is the finance needed by a new 23. The cost of sales is the cost of producing or buying in
the goods actually sold by the business during a time
business to pay for essential non- current and current
period
assets before it can begin trading
24. A gross profit is made when revenue is greater than
2. Working capital is the finance needed by a business to
pay for its day-to-day activities the cost of sales
3. Capital expenditure is money spent on non-current 25. A trading accounts shows how the gross profit of a
business is calculated
assets which will last for more than one year
26. Net profit is the profit made by a business after all
4. Revenue expenditure is money spent on day-to-day
costs have been deducted from revenue. It is
expenses which do not involve the purchase of a long-
term asset, for example, wages or rent calculated by subtracting overhead costs from gross
5. Internal finance is obtained from within the business profits
27. Depreciation is the fall in the value of a fixed asset
itself
over time
6. External finance is obtained from sources outside of
and separate from the business 28. Retained profit is the net profit reinvested back into
7. Micro-finance is providing financial services - including the company, after deducting tax and payments to
small loans - to poor people not served by traditional owners, such as dividends
29. The statement of financial position shows the value of
banks
a business's assets and liabilities at a particular time
8. Crowdfunding is funding a project or venture by
raising money from a large number of people who 30. Assets are those items of value which are owned by
each contribute a relatively small amount, typically via the business. They may be non- current (fixed) assets
the internet or currents assets
31. Liabilities are debts owed by the business. They may
9. The cash flow of a business is the cash inflows and
be non-current liabilities or currents liabilities
outflows over a period of time
10. Cash inflows are the sums of money received by a 32. Non-current assets are items owned by the business
business during a period of time for more than one year
11. Cash outflows are the sums of money paid out by a 33. Current assets are owned by the business and used
within one year
business during a period of time
34. Non-current liabilities are long-term debts owed by
12. A cash flow cycle shows the stages between paying
out cash for labour, materials, and so on, and the business, repaid over more than one year
receiving cash from the sale of goods 35. Current liabilities are short-term debts owed by the
13. Profit is the surplus after total costs have been business, repaid in less than one year
36. Capital employed is shareholders' equity + non-
subtracted from revenue
current liabilities and is the total long-term and
14. A cash flow forecast is an estimate of future cash
inflows and outflows of a business, usually on a permanent capital invested in a business
month-by-month basis. This then shows the expected 37. Liquidity is the ability of a business to pay back its
short-term debts
cash balance at the end of each month
38. Profitability is the measurement of the profit made
15. Net cash flow is the difference, each month, between
relative to either the value of sales achieved or the
inflows and outflows.
16. Closing cash (or bank balance) is the amount of cash capital invested in the business
held by the business at the end of each month. This 39. Illiquid means that assets are not easily convertible
into cash
becomes next month's opening cash balance.
17. Opening cash (or bank balance) is the amount of cash
held by the business at the start of the month 1.6. External influences on business
18. Working capital is the finance needed by a business to
activity
pay for its day-to-day expenses
19. Accounts are the financial records of a firm's
1. Gross Domestic Product (GDP) is the total value of
transactions output of goods and services in acountry in one year
20. Final accounts are produced at the end of the 2. Recession is when there is a period of falling GDP
financial year and give details of the profit or loss
3. Inflation is the increase in the average price level of
made over the year and the worth of the business
goods and services over time
21. An income statement is a financial statement that
4. Unemployment exists when the people who are
records the income of a business and all costs willing and able to work cannot find a job
incurred to earn that income over a period of time. It
5. Economic growth is when a country's GDP increases-
is also known as a profit and loss account
more goods and services are produced than in the
previous year

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES (0450)

6. Balance of payments records the difference between 21. Private costs of an activity are the costs paid for by a
a country's exports and imports business or the consumer of the product
7. Real income is the value of income and it falls when 22. Private benefits of an activity are the gains to a
prices rise faster than money income business or the consumer of the product
8. Exports are goods and services sold from one country 23. External costs are costs paid for by the rest of society,
to other countries other than the business, as a result of business
9. imports are goods and services bought in by one activity
country from other countries 24. External benefits are the gains to the rest of society,
10. Exchange rate is the price of one currency in terms of other than the business, as a result of business
another activity
11. Exchange rate appreciation is the rise in the value of a 25. Social cost = external costs + private costs
currency compared with other currencies 26. Social benefit = external benefits + private benefits
12. Exchange rate depreciation is the fall in value of a 27. Globalization is the term used to describe increases in
currency compared with other currencies worldwide trade and movement of people and capital
13. Fiscal policy is any change by the government in tax between countries
rates or public sector spending 28. Free trade agreements exist when countries agree to
14. Direct taxes are paid directly from incomes, eg- trade imports/exports with no barriers such as tariffs
income tax or profits tax or quotas
15. indirect taxes are added to the prices of goods and 29. An import tariff is a tax placed on imported goods
taxpayers pay the tax as they purchase the goods, eg- when they arrive into the country
VAT 30. An import quota is a restriction on the quantity of a
16. Disposable income is the level of income a taxpayer product that can be imported
has after paying income tax 31. Protectionism is when a government protects
17. Import tariff is a tax on an imported product domestic businesses from foreign competition using
18. Import quota is a physical limit on the quantity of a tariffs and quotas
product that can be imported 32. Multinational businesses are those with factories,
19. Monetary policy is a change in rates by the production or service operations in more than one
government or central bank country
20. Supply-side policies aim to increase supply and make
the economy more efficient

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Businesses combine scarce factors of production to

produce goods or services to satisfy people’s needs and
1. Understanding Business wants.
Business Activity:
Activity Combines scare factors
Produces goods and services
1.1. Business Activity Employees people

Needs: goods or services that are essential for survival. 1.4. Added Value
Wants: goods or services customers desire but are not
essential for survival. Added value is the difference between the cost of
Economic Problem: unlimited wants but limited resources purchasing bought-in material and the price of the
to satisfy the wants. finished goods.
Scarcity: the lack of sufficient products to fulfil the total
wants of the population. Added Value = selling price – total cost
Factors of production: resources needed to produce
For example, by transforming cotton into a T-shirt, the
goods and services; they are:
business adds value to the cotton, as the same material
Land – any natural resource used in production.
can be sold for more after the transformation.
Labour – mental and physical efforts of employees.
It is NOT the profit because added value does not include
Capital – finance, machinery and equipment needed
the expenses of producing this good (e.g. labour,
for the manufacture of goods.
electricity, machinery, etc.)
Enterprise – individual/s who manage/coordinate the
three other factors, make decisions and take risks. Advantages Disadvantages
Opportunity Cost: the next best alternative is given up by
Maybe able to make a profit if
choosing another item. Increasing the product's price
these other costs come to a
Due to scarce resources, a choice has to be made; this can lead to lower sales and,
total less than the added
leads to opportunity cost. perhaps, profit.
value
It can be used to pay other
1.2. Importance of Specialisation expenses.

Specialisation: When people and businesses focus on what

To increase added value, a business can either:
they are best at.
Increase the selling price by increasing the quality of
Division of labour is when production is split into different
goods and services to convince customers/consumers
tasks, and each worker performs one of these tasks. It’s a
Reduce the cost of materials but keep the price the same.
form of specialisation.

Advantages Disadvantages 1.5. Classification of Businesses

Workers are trained in one repetitive tasks can cause
task and specialise in this, boredom and burnout for Businesses can be classified into three sectors:
increasing productivity and employees, reducing Primary Sector: Industry extracts and uses the earth's
efficiency motivation and job efficiency natural resources to produce raw materials for other
businesses.
If a worker is not present,
Secondary Sector: The industry manufactures goods
Specialisation with division of production will be disrupted,
using the raw materials provided by the primary
labour will result in better causing a waste of time and
sector.
quality output resources, as well as less
Tertiary sector: The Industry provides services to
output and efficiency.
consumers and other industry sectors.
Specialised workers require Developing Countries: where the primary sector is the
An increase in efficiency will higher wages, and training most important, as more employees and output are
lead to economies of scale. current employees will produced than in secondary and tertiary sectors
increase costs. Developed Countries: where the output of the tertiary
Workers become more skilled sector is often higher than the other two sectors
and experienced, reducing combined.
waste of time and resources. De-industrialisation occurs when there is a decline in the
importance of the secondary sector.

1.3. Purpose of Business Activity

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Reasons for changes in the relative importance of the Advantages Disadvantages

three sectors over time: It may become successful and Lack of knowledge and
When sources of some primary products become
very profitable if the business experience in starting and
depleted
grows operating a business
Developed economies are losing competitiveness to
Lost income from not being
newly industrialised countries. Able to make use of personal
an employee for another
Due to the rise in living standards, consumers spend interests and skills
business (Opportunity cost)
more of their income on services such as travel and
restaurants than on manufactured goods. They will have to invest their
savings as well as find other
Profits to themselves, no need
sources of finance, which is
1.6. Mixed Economy to share them with anyone
time-consuming and
expensive
Has both a private sector and a public sector.
Private Sector: Businesses NOT owned by the Income is higher than a
government will decide what and how to produce. The regular employee
main aim is to make profits.
Public Sector: Owned by the government. Government 1.8. Business Plans
will decide what and how to produce (i.e. healthcare,
education, defence, public transport). The main aim is Business Plan: a document containing the business
to provide a service to customers. objectives and essential details about operations, finance
Privatisation refers to selling a public sector business to and owners of the new business.
the private sector. Contents of business plan:-
Description of the product
Arguments against
Arguments for Privatisation Products and services
Privatisation
The market
Costs can be controlled Increased unemployment as Business location and how products will reach
because the private sector’s private sector businesses may customers
main objective is profit. want to cut costs. Organisation structure and management
Less likely to focus on social Financial information
More efficient use of capital
objective business strategy
Competition between private Business plans assist entrepreneurs because:
sector businesses will help It helps gain finance. Banks will ask for a business plan
improve product quality. before agreeing to a loan or overdraft for the business
It forces the entrepreneur to plan carefully, which
reduces the risk of the business failing.
1.7. Enterprise, Business Growth and
Size 1.9. Government Support for Start-Ups
An entrepreneur is a person who organises, operates and Governments encourage entrepreneurs to set up a
takes risk to make the business better business because start-ups:
Characteristics of Entrepreneurs: reduce unemployment
Hard-working Increase competition
Risk Takers Increase output
Creative Benefit society
Effective Communicators Further growth of the economy
Optimistic Governments may give support to entrepreneurs by:
Self-confident Business ideas & help, organising training for
Innovative entrepreneurs that gives advice, and support
Independent. sessions.
Finance, they may lend loans at low-interest rates or
Advantages and Disadvantages of being an Entrepreneur:
grants, as well as low-cost premises
Advantages Disadvantages Governments provide grants for training employees to
entrepreneurs will have to put make them more efficient and productive
Independent, able to choose
their own money into the Governments allow entrepreneurs to use research
how to use time and money
business. facilities in Universities
Able to put own ideas into many entrepreneur’s
practice businesses fail (risky) 1.10. Business Size

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Why is it beneficial to compare business size? Merger: When two owners of a business agree to join
Investors can decide which business to invest in. their businesses together
Government, different tax rates for small and large There are three types of External Growth:
firms. Horizontal Integration: The same industry and stage of
Competitors, to compare size and importance with production firms merge or take over.
other firms. For example, a chocolate manufacturer takes over
Workers, to have an idea of the number of employees another chocolate manufacturer.
needed. Benefits:
Banks, the importance of the loan compared to Reduces the number of competitors in the
business size. industry
There are several different measurements of business Opportunities for economies of scale
size, and they all have limitations: A bigger share of the total market can be
achieved
Measurements Limitations Problems include diseconomies of scale and
The number of people Capital-intensive firms difficulty in controlling and managing the business
employed in the business employ fewer people but Vertical Integration: when one business merges or
(accessible to calculate) produce high levels of output. takes over another business in the same industry but
The value of the output of the Does not take into account at different stages of production, it can be forward or
business (useful for same the value of goods sold and backward.
industry Businesses) the sale of goods. Forward integration is when merging/takeover is
done with the next stage of production, Ex. a
The value of sales (useful for different businesses sell
chocolate manufacturing company (secondary
retail businesses, especially if different products (expensive
sector) merging with a chocolate shop (tertiary
similar products) and cheap)
sector)
Some businesses use Labour- Benefits for forward:
The total value of capital
intensive methods, which The merger provides an assured outlet for
employed (takes into account
require less capital, more its products
all values of capital)
workers The expanded business absorbs the profit
margin made by the retailer/Manufacturer.
Capital Employed: the total value of capital used in the Information regarding consumer needs and
business preferences can be obtained directly from
No method of measuring the size is considered correct, the manufacturer.
as each method gives different answers. Businesses Backward integration is when
choose the method they think is the best. Therefore, merging/takeover is done with the previous
businesses may use more than one method. stage of production, Ex. a chocolate
manufacturing company takes over a cocoa
1.11. Business Growth farm.
Benefits for Backward:
Benefits of the expansion of the business: Merger gives an assured supply of
The possibility of higher profits for the owner. essential components
More status and prestige for owners and managers. The expanding business absorbs the
Lower average costs. profit margin of suppliers.
A larger share of its market portion of total market A supplier could be prevented from
sales it makes is greater. supplying to other manufacturers.
Costs of components and supplies are
Ways of Business Growth controlled.
Conglomerate Merger: a firm merging/taking over
Businesses can either grow by: another firm in a different industry. (also known as
Internal Growth ‘diversification’)
External Growth For example, a chocolate manufacturer is merging
Internal Growth is when the business expands its existing with a photography company.
operations Benefits:
External Growth is when the business takes over or Activity in more than one industry will diversify
merges with another business. and spread the risk taken by the business.
Takeover: When one business buys out the owners of Transfer of ideas in the different sections can
another business, which then becomes part of the help the business.
‘predator’ business.
Disadvantages Caused by Business Growth

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Control and management get harder with expansion (can It is a business owned and controlled by one person- the
be prevented by carefully planning expansions and owner, who is the sole proprietor. It is a form of an
adjusting management style and hierarchy). unincorporated business.
Larger businesses lead to poor communication (stronger
and more efficient communication channels can prevent Advantages Disadvantages
it). Few legal regulations (Easy to Decisions can be hard to
Expansion costs are high and can result in a shortage of set up) make
finance for businesses (A financial plan must be prepared No separate legal identity,
in anticipation of expansion; it can include short/long-term Complete control
unlimited liability
loans to compensate for financial loss).
May not be able to raise funds
Integrating with another business can have conflicts and Flexible working time
to expand business
difficulties, for example, business culture and style of
Ability to respond quickly to
management. (Compromises will have to be made, or a
new style of management can be applied altogether, the needs and wants of May have to work long hours
which can help reduce conflicts) customers
Difficult to compete with large
All profit goes to the owner
Why Small Businesses Remain Small? firms
Complete secrecy in Business May not have the proper skills
The type of industry the business operates in matters to run a business
Market share
Owners’ objective
1.15. Partnerships
1.12. Why Businesses Fail Partnerships: A form of business in which two or more
people agree to own a business jointly. It can be set up by
Lack of Management Skills – from lack of experience, poor
creating a partnership deal. It’s a form of unincorporated
choice of managers (family business), bad decisions can
business.
occur
Deal of partnership: The written and legal agreement
Failure to plan for change – businesses must adapt to an between business partners. It is not essential but is
ever-changing business environment. It would be best if
recommended
risks were taken.
Contents of Partnership Agreement:
Over-Expansion – (diseconomies of scale)
Amount of capital invested by all partners
Poor financial management and liquidity issues
Tasks to be done by each partner
Competition with other businesses – intense competition
The way profits are shared out
in the market can make it hard for new businesses to set
How long partnership will last
up, as already established businesses can drive newly
Arrangements for absence, retirement and how
established businesses out of the market with their low,
partners could be let known
competitive prices.
Advantages Disadvantages
1.13. Legal Identity Easy to set up a deed of
Unlimited liability
partnership
Unincorporated Business: A business that does not Greater access to funds Share the profit
possess a separate legal identity from its owner. These
Business ceases to exist if
Businesses usually have: shared decision-making
one partner leaves
Unlimited liability: the owner can be held responsible
for the business's debts. shared management and Decisions binding on all
Greater risk, as owner is putting his personal workload partners
possessions and living at risk. Difficult to raise finance
Incorporated Business: Business with a separate legal
identity. Private/Public limited companies. These
1.16. Private Limited Company (LTD)
Businesses usually have:
Limited liability: the liability of shareholders in a
Private Limited Company: Business owned by
company is limited to only the amount they invested
shareholders but cannot sell shares to the public (can only
Less risk, as the owner is only risking the capital they
sell to family and friends).
invested, as well as any legal charges effect only the
Shareholders: Owners of a limited company who buy
business and not the owner directly
shares represent part-ownership of the company.

1.14. Sole Trader Advantages Disadvantages

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Advantages to franchisor Disadvantage to franchisor

Raise capital from the sale of Cannot sell shares to the The franchisee keeps some
Expansion is faster
shares public profit
Limited liability for Training, some aspects of
Legal formalities Management is the
shareholders administration, and
responsibility of the
Accounts are available for the advertising are paid by the
Separate legal identity franchisee
public to see franchisor
Continuity Not easy to transfer shares Percentage of sale revenue is
given to the franchisor every
Articles of Association: Contains the rules for managing year
the company.
Memorandum of Association: Contains vital information Advantages to franchisee Disadvantages to franchisee
about the company and the directors. Chances of business failure
Less independence
are reduced
These also apply to a public limited company.
The franchisor pays for Unable to make decisions that
advertising would suit the local area
1.17. Public Limited Company (PLC)
The franchisor has the power
Fewer decisions to make with to withdraw the agreement
Public Limited Company: Businesses owned and
an independent business and can prevent the use of
controlled by the shareholders, but they sell to the public,
the premises
and their shares are tradeable on the stock exchange.
The franchisor provides
Advantages Disadvantages training for staff and
Can sell shares to the public Legal Formalities management
Rapid expansion Banks are often willing to lend
Disclosure of accounts and to franchisees due to the low
possible/specialist managers
other information risk.
appointed
Divorce between ownership
Limited liability
and control 1.19. Joint Venture
Continuity Expensive to ‘go public‘
Joint Venture: is when two or more businesses join
Annual General Meeting (AGM): A yearly meeting where together to create a new business
shareholders may attend to vote for a Board of Directors
for the upcoming year. Advantages Disadvantages
Dividends: Payments made to shareholders from the Profits have to be shared if
Sharing of costs
profit of a company. They are the return for investing in the project is successful
the company. Knowledge and experience
Conflict in decision-making
can be shared
1.18. Franchise Risks shared
Different methods of running
a business can create conflict
Franchise: An agreement of a business based upon an
existing brand/business
Franchisee: the business a company allows to conduct
1.20. Public Corporations
business using the company’s name and brand. Have to
Public Corporations: a business in the public sector owned
pay an original fee to the franchisor and a percentage of
and controlled by the state of government (By appointing
its profit for the privilege
a board of directors and setting objectives).
The Franchisor: the company that allows another
company to conduct business using the company’s name Advantages Disadvantages
and brand.
Government ownership may
be essential to some The profit objective is not as
Advantages to franchisor Disadvantage to franchisor
countries' industries, such as powerful or important as in
Franchisee buys the licence,
Bad reputation if one branch water supply and electricity private-sector industries.
which means another source
has poor management generation.
of finance

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Objectives of Social Enterprise

Inefficiency because
Ensure consumers are not Social Enterprise: an enterprise with social objectives and
managers rely too much on
taken advantage of aims to make a profit to reinvest in the business. It has
the government
three objectives:
It can be unfair to the private
Social: to provide jobs and support for disadvantaged
Reduce wasteful competitors sector if subsidies are
groups
provided to the public sector.
Environmental: to protect the environment.
Can help stabilize failing Financial: to make a profit to reinvest in the enterprise
Lack of close competition can
businesses to create job and expand its social work.
decrease many activities
opportunities
It can be used for political Objectives of Public Sector Businesses
reasons, preventing the
Important public services business from opportunities Financial: Meet profit targets set by the government -
like other profit-making either reinvested or funded back to the government.
businesses. Service: meet quality targets the government sets and
provide services to the public.
Social: protect or create employment in certain areas.
1.21. Business Objectives
Business Objectives are aims or targets a business works 1.23. Stakeholder Objectives
towards
Businesses need objectives to help them be successful. Stakeholder: any person or group with a direct interest in
However, they don’t guarantee success. the performance and activities of a business
There are two types of stakeholder groups:
Benefits of having business objectives:
A clear target to work towards, thus improving Internal Stakeholders work/own the company (owners,
managers, workers)
Motivation.
It can help in decision-making. External Stakeholders are outside the business
It helps unite the whole business towards the same (consumers, government, banks)
Each stakeholder group has different objectives for the
goal.
It can be used to compare how the business performs performance of the business
through objectives. Internal Stakeholder (Owners, managers and employees)
Private sector business objectives: objectives are payments or profits; they want business
Business Survival - Adjust to business environment, growth, so the value of investment increases, or they get
higher status/power
change price of products if necessary
Generating profit (total income of business revenue Customers' objectives are reliable products, value for
subtracted by total cost)– pay a return to owners or money, good quality, good design and good service
provide finance to invest further in business Government objectives include money from taxes,
employing more people, increasing the country’s output
Returns to shareholders - discourage shareholders
The bank’s objectives are to make a profit out of loans and
from selling their shares. This can be done by
increasing profit or increasing the share price the payback of interest.
Growth of business – increase salaries, economies of Since different stakeholders have different objectives, it
scale. This is only achieved if customers are satisfied may cause conflict, to try to please all the stakeholders
with the product For example, customers want cheap products, but
workers want higher salaries.
Market Share (the total percentage of total market
sales held by one brand or business) - gives good Therefore, managers must compromise to decide which
publicity and more influence over suppliers and objectives are best for the company.
customers.
Calculation = 100 × Company Sales
Total market Share ​

2. People in Business
Why business objectives can change:
It will work towards profit after being set up and
stable. 2.1. Motivating Employees
After achieving a high market share, it aims to “return
to shareholders”. Motivation
A profit-making business hit with a crisis now has the
short-term objective of survival. Motivation: factors that influence the workers' behaviour
towards achieving business goals.
Factors that influence motivation at work:
1.22. Social Objectives

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Money Advantages Disadvantages

Job Security It is difficult to identify how
Training Is it possible for managers to
much of the needs have been
Promotion satisfy some or all of their
met or which level each
Status needs
worker is on
Responsibilities
Easy to set goals and It doesn’t include money as a
Work environment
objectives need
Benefits of a Well-Motivated Workforce Not all needs are included.
Self-actuation is rarely, if
Improved productivity ever, achieved.
Low rate of absenteeism (Workers’ non-attendance at
work without a good reason) Fredrick Herzberg - Two-Factor Theory
Low rate of labour turnover (The rate at which workers
leave the business) Hygiene Factors: The factors that must be present in the
Better quality goods and services workplace to prevent job dissatisfaction.
Improved labour productivity (A measure of the efficiency Working Conditions: Things that show how clean and
of workers by calculating the output per worker) safe the workplace is and what facilities are provided
Relationship with others: Good working relationships
Key Motivational Theories with workers and managers, and treated fairly with
respect.
F.W. Taylor - Scientific Management Theory Salary and wages
Supervisions: Leadership style and how closely works
It aims to reduce inefficiency in the workplace by finding
are supervised
the quickest method of performing tasks and training all
Company policy and administration: rules and
workers to use this method. procedures that control and affect the workplace.
The theory of economic man: the theory that humans are Hygiene Factors must be present to prevent job
only motivated by money, in which Taylor believed that
dissatisfaction
money was the only motivational factor.
Job dissatisfaction: How unhappy and discontent a person
The piece rate method of paying production came from
is with their job.
his research. Motivators (Factors that influence a person to increase
Disadvantages: their effort):
His ideas were too simplistic
The work itself: Variety of jobs and challenging tasks
If employees are unfulfilled with their work,
through job enrichment.
productivity won’t be gained, no matter how high the
Responsibility: Giving workers responsibility for tasks
wage. they perform.
If employees’ output can’t be measured, practical Advancement: Opportunity for promotion
problems arise.
Achievement: They feel like they have reached a
Abraham Maslow: Concept of Human Needs - Maslow’s challenging goal.
Hierarchy Recognition of Achievements: Recognised by the
people for their achievements

2.2. Methods of Motivation

Financial Rewards: cash and non-cash rewards paid to
workers motivate them to increase their efforts.

Hourly Wage rate: payment to workers based on a fixed

amount every hour worked.

Advantages Disadvantages
Business only pays workers
Pay is not linked to how much
for the number of hours
they produce
worked

Advantages Disadvantages Salary: fixed annual payment to specific grades and types
of staff, not based on hours worked or output

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Job Enrichment: organising work so workers are

They do not receive more encouraged to use their full ability. This increases job
payment if they have to work Salary is not linked to effort or satisfaction.
Job redesign: increasing the variety or difficulty of tasks to
long hours to complete the the amount produced
discuss more exciting and challenging work for workers.
task.
Quality circles: a group of workers who meet regularly
lower down in the organisation.
Piece Rate: Payment to workers based on the number of
Team working: organising production so that groups of
units produced.
workers complete the whole unit of work.
Advantages Disadvantages Delegation: passing responsibility to perform a task to
workers lower down in the organisation.
Quality of goods may vary
Workers are only paid for the because of the need to Benefits of decrease in labour turnover:
number of items produced produce more goods to
increase pay There is no need to hire new employees, decreasing
recruitment costs, training costs, and retaining skilled
Commission: Paying sales staff based on the value of employees. This improves productivity.
items they sell.
2.3. Organisation and Management
Advantages Disadvantages
Pay is linked to the value of Workers are never sure of Organisational Structure: refers to the levels of
goods sold how much they will earn management and division of responsibilities within a
company.
Bonus scheme: an additional reward paid to workers for Organisational Charts: refers to diagrams that outline the
achieving target set by managers. Method of internal management structure.
performance-related pay. Hierarchy refers to the levels of management in any
organisation.
Advantages Disadvantages Levels of Hierarchy: refers to
Linked to a performance If the target is unrealistic, it management/supervisors/other employees who are given
target can be demotivating a similar level of responsibility in an organisation.
Example of Organisational Chart:
Fringe benefits: non-cash rewards used to recruit and
retain workers and recognise certain employees' status.
(e.g. Car, insurance, health care)

Advantages Disadvantages
Helping recruitment and Linked to status, not
retaliation of workers performance
Benefits:
Profit sharing: an additional payment to workers based on The chart shows how everybody is linked in the
the business's profit. organisation, which allows employees to be aware of
their communication channel (chain of command).
Advantages Disadvantages Everyone can see what they are accountable for,
Profit to employees may which they have authority over, and who to take
Linked to the performance of reduce dividends to orders from.
the business shareholders or the amount Everyone is in a department, thus giving a sense of
reinvested in the business. belonging
Chain of command - The structure in an organisation
Non-financial rewards and methods: methods used to allows instructions to be passed down from senior
motivate workers that do not involve giving any financial management to subordinates.
rewards. The span of control - The number of subordinates working
directly under a manager.
Job Rotation: increasing variety in the workplace by Subordinate: an employee below another employee in the
allowing workers to switch from one task to another. organisation’s hierarchy.
Job satisfaction: how content and happy a person is with
their job There are two types of organisational structures of a
Job Enlargement: increasing or widening tasks to increase business:
the variety of workers.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Tall Structure: the longer the chain of command is, the Advantages Disadvantages
‘taller‘ the organisational structure and the ‘narrower‘ the Senior managers are in close
span of control. Reduce effective
touch with what is going on in
management of subordinates
the business

Delegation: Giving a subordinate the authority to perform

particular tasks.

Advantages Disadvantages
Some managers are reluctant
Application of job enrichment, to delegate, as they will be
leading to job satisfaction held accountable for any
errors
A form of training for junior Managers lose some control
Flat Structure: when a chain of command is short, the
managers over subordinates
organisation will have a ‘wider’ span of control, thus
Achieving the Esteem needs
making it a ‘flat‘ structure.
(Maslow’s hierarchy)

Centralised Organisation: one where all the important

decision-making power is held at the head office/the
centre and then passed down to lower levels.
Advantages of short chain of command:
Communication and decision-making are quicker. Advantages Disadvantages
Fewer management levels to build connections with by
Decision-making is often
the top management. Slower communication
quicker
The span of control will be wider, encouraging
Decisions are taken for the Unable to respond quickly to
managers to delegate more and allowing workers to
feel trusted. benefit of the whole business changes in the local market
Advantages of a long chain of command: Greater use of specialist staff
May reduce motivation
As decisions get passed down, it is checked by improves decision-making
multiple people, thus reducing error and preventing
bad decisions from happening Decentralised Organisation:
Lesser subordinates means management can focus
more on their designated workers. Advantages Disadvantages
Factors affecting the size of the span of control: Decisions are made based on Decisions taken might not be
Difficulty of the task local needs. in the interest of the business
The experience and skill of workers Poor decisions might be made
The size of the business It can be used to train junior
often due to lack of
managers.
the level of hierarchy experience and skills
Management style Delegation helps improve
Delayering: reducing the size of the hierarchy by worker motivation.
removing one or more levels, often the middle
management.
2.4. Role and Function of Management
Advantages Disadvantages
Increased workload on Directors: are senior managers who lead a particular
managers, thus decreasing department or division of a business. Responsibilities:
Reduces cost Setting strategy (long-term plans)
the quality of work and its
completion. Reviewing the performance of managers.
Provide leadership
Communication and decision- Have to make redundancy
Making sure resources are available
making are quicker due to payments to employees who
Line Managers: manage employees and are responsible
reduced chain of command. lost their job
for the team development and performance.
Increases the opportunity for Supervisors: are junior managers who supervise and are
delegation, which helps in Reduction in job security responsible for the employees below them in the
motivation organisational structure.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Staff Managers: are specialists who provide support

information. And assistance to line managers.
The functions of managers include:
Planning – Planning is about where the business is
now and where it wants to be. Once it has been
decided, management must set clear objectives and
an action plan.
Organising – Management will have to decide the best
way of completing important tasks at the lowest
possible cost to the business.
Communicating - Control and supervision of Motivation is higher
subordinates also aim to motivate workers to achieve Creativity and engagement with workers are
the planned objectives. encouraged.
Coordinating - Making sure that all the different parts Workers and employees are involved in decision-
of the business are working together to achieve the making.
business’s goals and corporate objectives.
Advantages Disadvantages
Controlling – involves checking to make sure that the
plan is working and if it would be completed in time Better Decisions could result
Unpopular decisions could not
and the required standard, and if not, then correcting from consulting with
effectively be made using this
it employees using their ideas
style
Extra functions managers do: and experiences.
Understand the people who work for them
Set a good example Laissez-Faire Leadership: makes the broad objectives
Delegate tasks known to employees, but then they are left to make
Treat subordinates fairly decisions and organise their work. Characteristics:
communicate effectively

2.5. Leadership Styles

Leadership Styles: are the different approaches to dealing
with people and making decisions when in a position of
authority.
There are three leadership styles:
Autocratic Leadership: where the manager expects to be
in charge of the business and to have their orders Workers and employees are expected to make the
followed. Characteristics: decisions.
The leader will only give guidance.
The leader only takes charge when necessary.

Advantages Disadvantages
It is unlikely to be appropriate
Encourage employees to
in organisations with a
show creativity and
consistent and clear decision-
responsibility
making structure.

A leader does all the decision-making 2.6. Trade Unions

Don’t take input from others.
Highly structured working environment Trade Unions: A group of employees who have joined to
protect their interests.
Advantages Disadvantages
There is no opportunity for The Role of Trade Unions:
Quick decision-making employee input into key
Negotiating with employers to improve pay and working
process decisions, which can be
conditions.
demotivating
Resolving conflict by negotiating a solution on behalf of its
members
Democratic Leadership: gets other employees involved in
Providing legal support and advice.
the decision-making. Characteristic:

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Providing services for members including holiday scheme, 2. Design a job description:
pension scheme, insurance scheme, etc. Job description: outlines the responsibilities and
duties to be carried out by someone employed to
Advantages Disadvantages do a specific job. Several functions of a job
Strength in numbers when It costs money to be a description:
negotiating with employer member Given to applicants so they know exactly what
Workers may be required to the job entails.
Improved conditions of Allows a job specification to be drawn up to see
take industrial actions even if
employment. if they are skilled.
they disagree.
It shows if an employee is working effectively
Trade unions can organise
once they are employed.
strikes against employers if
Improved environment where The contents of a Job description:
they don’t receive the pay
people work. Condition of employment salary, hours,
levels and work conditions
permission, etc.
they deserve.
Training that will be offered
Improved benefits for Wages are likely higher - Opportunities for promotion
members not working adding to business costs - Purpose of the job
because of sickness, when many employees are Main duties/addition or occasional duties
retirement, or redundancy. trade union members. 3. Design a job specification:
4. Job description: is a document that outlines the
2.7. Work of Human Resource requirements, qualifications, physical characteristics,
etc. For a specified job.
Department Usual Requirements:
The level of educational qualification
Recruitment and Selection: Special skills, knowledge, or a particular attitude
Recruitment: is the process of identifying that the Personal Characteristics
business needs to employ someone up to the point at 5. Advertise the vacancy:
which applications have arrived. The first stage is to decide how the post will be
Employee Selection: is the process of evaluating filled.
candidates for a specific job and selecting an
individual based on the organisation's needs. Internal requirement: is when a vacancy is filled by someone
Wages and Salaries: who is an existing employee of the business
These must attract and retain the right people and be Advantages Disadvantages
sufficiently high to motivate employees. Quicker and cheaper than No new ideas or experiences
Industrial Relations: external recruitment. come into the business.
There must be effective communication between
The reliability, ability, and
representatives of management and the workforce. Rivalry and jealousy may
potential of the person are
This may be to resolve grievances and disputes and arise.
known.
put forward ideas and suggestions for improvements.
Training Programs: The person is already familiar
The quality of internal
It involves assessing and fulfilling the training needs of with the organisation's
candidates might be low.
employees. This should also be linked to the plan. structure and expectations.
Health and Safety: It can be motivating for other
The business must ensure that it complies with all the employees to see their fellow
laws on health and safety. workers promoted.
Redundancy and Dismissal:
This involves releasing employees, either because the External Requirement: when a vacancy is filled by any suitable
business changes in some way or because the applicant outside the business
employee is not satisfactory. The business must Advantages Disadvantages
comply with all the redundancy, dismissal and A more comprehensive Increased costs due to
disciplinary laws.
selection of candidates. advertising.
Adding fresh perspective and
2.8. Recruitment Process ideas.
Additional training

Adds a transitional period for

1. Analyse the exact nature of the job and duties to be Enhancing diversity in the
all employees to adjust to the
undertaken. organisation.
new
Job analysis: it identifies and records the
responsibilities and tasks relating to a job

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Easier to ask employees to work at busy times

Finding a specialised More accessible to extend business
candidate that fits the Effects on employee morale. opening/operating hours by working evenings or
requirements perfectly. weekends.
It fits in with looking after children or other
Can help the competitiveness
circumstances such as school, which means
of the business
employees are willing to lower pay.
Reduce tension between Reduces business cost
employees. In some countries, it’s easier to make part-time
workers redundant.
5. Send out application forms to the applicants or read Limitations:
curriculum resumes and letters of application. They are less likely to seek training, as they see
Advertising job vacancies can be done in several the job as temporary.
ways: Tasks longer to recruit.
Local newspapers Less commitment to business.
National newspapers Less likely to be promoted due to lack of
Specialist magazines experience.
Online recruitment sites It is more difficult to communicate outside of work.
Recruitment agencies Full-time Employees work for more than 35 hours a week
Centres run by the government Benefits:
6. Produce a shortlist from the applications for Consistency of schedules and reliability
interviews and take up references. Loyalty - A permanent contract means the
Applicants must provide a referee (someone the employee is more loyal
potential employer can contact, intending to get Limitations:
more information/references from). A permanent contract has to be made, a long-term
Interviews are the most used form of selection. Its commitment.
primary purpose is to assess in the shortest time Full-time employees have fixed pay, regardless of
possible: the number of hours committed to work (ex, sick
Applicant’s ability to do the job leave, slow work day, emergency, etc).
Any personal qualities that could be beneficial
or not. Note: full-time employee benefits are the
The general character and personality of the limitations of part-time and vice versa
applicant.
Some businesses include tasks in the selection 2.10. The Importance of Training and
process, such as:
Skill test (ability to carry out specific tasks) the Methods of Training
Aptitude test (candidate’s potential of learning
Importance of training:
a new skill).
Personality test (used if a particular type of To introduce new processes or equipment
person is required). Improve the efficiency of the workforce
Group situation test (to show how well they Provide training for unskilled workers
Decrease the supervision needed
work with a team).
7. Hold interviews and selection of tasks. Improve opportunity for internal promotion
8. Select suitable applicants and offer them the job. Decrease chances of accidents
Reply to unsuccessful applicants. Aims of training:
Increase skills
The final decision can depend on several factors:
Work experience Increase knowledge
Improve employee’s attitudes to encourage them to
Education and other qualifications
Age accept change and raise awareness.
Internal There are three types of training:
Induction Training: an introduction given to an employee,
External
explaining the business’s activities, customs, and
Circumstance
procedures and introducing them to their fellow workers.

2.9. Types of Workers Advantages Disadvantages

Helps new employees settle
Part-time Employees work for less than 35 hours a week. Time-consuming
into their jobs quickly
Benefits:
Work hours are flexible.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Redundancy: when an employee is no longer needed

Maybe a legal requirement to and loses their job. It’s not due to any aspect of their
Workers are being paid while work being unsatisfactory.
give health and safety training
no work is being done Factors that decide in redundancy:
at the start
Workers may volunteer and are happy to be
Workers are less likely to Delays the start of work for
made redundant due to finding another job.
make mistakes the employee
Length of time employed by the business -
employees might have worked long hours and
On-the-job Training: Occurs by watching a more expect high payments.
experienced worker doing their job.
Workers who have skills that could be used in
multiple departments are retained.
Advantages Disadvantages
The worker's employment history- whether
The individual is given in the Trainers won’t be as they are punctual, good at their job, etc.
workplace, so there is no productive because they are Which departments need to lose, and which
need to send them away. teaching employee need to retain workers
The trainer might have bad
Ensures there is some Extra information: workers can retire (get old
habits and pass them on to
production while training and want to stop working) and resign (find
the employee
another job), but it’s through the employee’s
Not recognized training
Usually costs less than off- will in those two cases.
qualifications outside the
the-job training
business
Training tailored to the 2.12. Legal Controls Over Employment
specific needs of the issues
business.
The most important employment issues affected by legal
Off-the-job training: Involves being trained away from the controls are:
workplace, usually by specialist trainers.
The Contract of Employment: A legal agreement between
Advantages Disadvantages an employer and employee, listing the rights and
A broad range of skills can be responsibilities of workers.
Costs are high Impact on Employers and Employees:
taught
Both know what is expected from them.
If taught in the evening,
Workers are being paid but Provides security of employment for employee
employees can work during
not doing any work. If the employee does not meet the condition of the
the day
contract, then legal dismissal is allowed.
Additional qualifications mean If an employee fails to meet the conditions of the
Often uses expert trainers
an employee's chances of contract, then the employee can seek legally
who have up-to-date business
leaving for another job are binding compensation.
practices and knowledge.
high. Unfair Dismissal: when an employer ends a worker’s
employment contract for a reason not covered by the
2.11. Why Reducing the Size of the contract.
Industrial Tribunal: a law court (legal meeting) judges
Workforce Might Be Necessary disagreements between companies and their employees.
Impact on Employer and Employee:
Workforce Planning: establishing the workforce the The Employer must have an accurate record of a
business needs for the foreseeable future regarding the worker’s performance if they want to claim that the
number and skills required. employee has broken the contract before
Reasons to reduce workforce:
dismissing them.
Automation (robots replacing human jobs) Employees have employment security — as long
Falling demand for their goods or services
as they fulfil their contract or are not made
Factory/chop/office closure redundant.
The business might have relocated abroad Allowed employees to take their employer to an
Businesses are being taken over/merged, and now
industrial tribunal if they felt like they weren’t being
there are too many workers doing the same job treated fairly, and they could get compensation if it
Two ways a business can reduce the number of
were found to be true.
employees: It makes businesses less likely to mistreat
Dismissal: employment ends against the employee's
employees.
will, usually for not following an employment contract.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Protection against discrimination (due to unfair reasons i.e. if a company communicates inefficiently with their
such as gender, race, colour, etc.). suppliers, they might receive the incorrect materials
Impact on Employers and Employees: Effective communication involves:
Employees have to be careful in wording 1. The transmitter/sender sending a message to
advertisements for a job. pass on information
Applicants must be treated equally, or the 2. A medium of communication – the method for
business will be prosecuted and fined. sending a message (i.e. e-mail, phone, etc)
Employees must all be treated equally, regardless 3. The message being sent to the receiver
of gender, disability, colour, etc. 4. The receiver confirms that the message has been
When businesses recruit and promote staff on received and responds to it (feedback)
merit alone, it helps to increase motivation. There are two types of communication:
Laws of health and safety at work, such as: One-way communication – where the receiver cannot
Protect workers against dangerous machinery. reply to the message (i.e. posters)
Provide safety equipment and clothing. Two-way communication – where the receiver can
Maintain reasonable workplace temperatures. respond to the message could be just confirmation
Provide hygienic conditions and washing facilities. that the message was received (e-mail)
Do not insist on excessively long shifts, and provide
breaks. The methods of communication include:
Impact on employers and employees:
Verbal Methods: The sender speaks to the receiver (i.e.,
Cost to the employer of meeting the health and
through meetings, telephone, or video conference)
safety regulations.
Time needs to be found to train workers in Advantages Disadvantages
health/safety precautions.
Information is given out
Workers feel ‘safer‘ and more motivated at work. If talking to many people, it’s
quickly & an efficient way to
Reduce accident rates and the cost of hard to tell whether everyone
communicate with many
compensation for workers injured at work. got the message.
people.
Legal minimum wage and its impact on employer and
employee: It is unsuitable for accurate
Opportunity for immediate
It should prevent strong employers from exploiting messages, and a permanent
feedback
unskilled workers. message record is needed.
As many unskilled workers receive higher wages, it The speaker’s body language
will encourage them to be more productive. reinforces the message.
It will encourage people to seek work.
Low-paid workers will earn more and have higher Written Methods: the sender creates e-mails, memos or
living standards, making them afford to buy more. letters, including the use of Information Technology
Increase business costs
Some employers will not be able to afford these wage Advantages Disadvantages
rates. It might lead to too many e-
Message can be referred to in
Higher-receiving workers may ask for higher pay to mails and ‘information
the future as “hard evidence.”
keep the exact difference between them, increasing overload.’
business costs. Easy to explain complicated Two-way communication is
messages difficult
2.13. Internal and External It can be copied and re-sent to It is hard to check if the
Communication many people message has been received

Effective Communication is important so that the Visual Methods: The sender uses diagrams, charts,
information sent in the message is received, understood, videos, PowerPoints
and acted upon as it should be. Otherwise, lack of
Advantages Disadvantages
communication can lead to severe consequences.
There are two types of communication in businesses: If information is presented No feedback and needs other
Internal Communication: communication between more appealingly, people will methods of communication to
employees of the same business. be more interested in it. go with it
External Communication: communication between the Graphs and charts may be
It can be used to make written
business and other businesses and individuals. difficult for people to
messages clearer, to
External communication has to be especially efficient understand, and the message
illustrate the point
because it establishes the image and the efficiency of a may be misunderstood
business

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

The message may be lost.

2.14. Methods of Communication
Wrong channel used
Technical break down
Formal communication: when messages are sent through
Overcome by:
established channels using professional language.
Insist on feedback; if none is given, the sender can
Informal communication: when information is sent and
assume the message is lost.
received casually using everyday language.
The sender must select an appropriate channel to
The Direction of Communication avoid problems.
Shortest possible channel to avoid problems
Other forms of communication should be available.
Problems with the receiver:
Lack of trust
Poor attitude
Poor listener
Overcome by:
The message should be emphasised, and receivers
should be asked for feedback to ensure
understanding.
If trust is not between sender and receiver, then the
sender should try to build that trust, or perhaps
Arrow A shows downward communication - where another sender who is respected by the receiver could
messages are sent from managers to subordinates. Used be used.
for instructions or statements, no feedback. Problems with feedback:
Not sent
Arrow B shows upward communication - when messages
or feedback can be passed from subordinates to Unclear
managers. Not asked for
Arrow C shows horizontal communication - when people Overcome by:
at the same level in an organisation communicate. Ideas Perhaps no feedback was asked, or the method of
communication required no feedback, so another
and info can be shared. Conflict can happen.
technique that may allow feedback should be used.
Direct lines of communication should be available.
2.15. Demonstrate an Awareness of
Communication Barriers
3. Marketing
Communication Barriers
3.1. The Role of Marketing
Communication Barriers – Factors that stop effective
communication of messages. Marketing Department:

Communication Barriers and How Can They Be Marketing: Identifying and satisfying customer needs and
Reduced or Removed satisfying them profitably.
Customer: a person, business or other organisation which
Problems with the sender: buys goods or services from a business.
Poor attitude and body language The different marketing department sections:
Unclear message Sales Team: responsible for the sales of products. If a
Message too long product is exported, it may be called the export team.
Sent to the wrong person Market Research: responsible for discovering
Overcome by: customers’ needs, market changes and the impact of
The sender should ensure that the message uses competitors’ actions. This report will be used in
language which can be understood. decision-making, research, developing new products,
The sender should make the message as price levels, etc.
straightforward as possible. Promotion Section: deals with organising the
The sender should ensure the message is delivered to advertising for products. Arrange for advertisements
the right person. and have a market budget.
The message should be brief, with the main points to Distribution: transports the products to the market.
be understood. The Role of Marketing:
Problems with the medium: Identify customer needs: this will be done via ‘Market
Too many people pass on the message. Research’. It will influence the development of a

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

product, its price, and the sales technique. base/loyalty. The competitiveness of a business is majorly
A good marketing department should also be able affected by its ability to respond to any changes in the
to anticipate changes in customer needs (i.e. due market.
to advancements in technology)
Find new trends or gaps in the market with Some markets have become more competitive because:
potential.
Globalisation: products are sold all over the world
Satisfy Customer Needs: selling the exact product
Transportation: it is cheaper, quicker, and easier to send
customers want for a price they are willing to pay.
products around the world now
Maintaining customer loyalty: maintaining close
Internet/e-commerce: customers can now search for
customer relationships to discover the product's
products or services and buy from somewhere else
expectations and changes needed to be made. It’s
around the world
cheaper for businesses to keep existing customers
The ways businesses respond to changing spending
than to attract new ones.
patterns and increased competition:
Customer Loyalty: existing customers continually
Keep improving its existing products
buy products from the same business. It is
Bring out new products to keep customer’s interest
achieved by always satisfying customer needs.
Keep costs low
Building customer relationships to gain information
maintain good customer relationships
about customers
Customer Relationships: communicating with
customers to encourage them to become loyal to 3.3. Market Types
the business and its products.
Through customer relationships, changing needs Market: the total number of customers, potential
can be understood. Research information can be customers and other sellers of a product/service.
applied to make effective marketing through these There are two types of markets:
relationships. Mass Market: where there is a vast number of sales of
Anticipate changes in customer needs – a product type.
Identify new trends in customer demands or gaps
Advantages Disadvantages
in the market.
When the marketing department succeeds in identifying Total sales are very high Abundant competition
customer requirements and future needs, it will enable Can benefit from economies High costs of advertisement
the business to: of scale and promotion
Raise customer awareness of a product or service of Standardised products or
the business Opportunities for growth services, so it may not meet
Increase in revenue and profitability (large sales) the specific needs of all
Increase or maintain market share customers
Maintain or improve the image of the product or
There are many variations of
business products, so the risk is
Target a new market or market segment
spread.
Enter a new market at home or abroad.
Develop new products or improve existing products.
Niche Market: a SMALL (usually specialised) segment
(part) of a mass market. Specialised and sold by small
3.2. Market Changes businesses that would find it difficult to compete in a mass
market (ex, a business specialised in scuba diving gear)
Markets change because consumer spending patterns
change; this might be due to the following: Advantages Disadvantages
Trends and Fashions Change: for some time, it might Avoid competition with big
be fashionable to have a specific product (i.e., Fidget Small – limited sale potential
businesses
Spinner), but a month later, no one bought them
Usually, they specialise in just
Advancement in Technology: new products provide
Customers' specific needs are one product; if the product
the latest technology so older versions (i.e., iPads or
focused, leading to high levels has low demand, it will fail. It
computers) don’t have high sales
of customer loyalty and good would require businesses to
Unemployment/Wages: Economies with high
customer relations. have multiple products to
unemployment rates/low wages will not have
spread risks.
increased sales of expensive products
Ageing Population: different ages are interested in
other products (i.e. anti-ageing creams) 3.4. Market Segmentation
Businesses have to keep up with customers' changing
needs to stay relevant and maintain their customer

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Market Segmentation: an identifiable subgroup of a whole Producers’ main concern is price and quality.
market where consumers have similar characteristics or Risky due to the large market and many
preferences. competitors.
A market can be segmented by: A market-oriented business is a business that focuses
Age on market research and finding out what the customer
Socio-Economic group – grouping people according to wants BEFORE a product, such as clothing or
how much money (income) they make electronic devices, is developed.
Region/Location – where people live (ex, people who Better able to survive because of more
live in wet areas will buy more waterproof clothing adaptability to changes in customer taste and
than those who live in dry areas) trends.
Gender – men's and women's products differ Takes advantage of new market opportunities.
Lifestyle – ex: how many children a person has, Market Research Methods:
religion, habits, etc. Quantitive information (quantity related)
Use of the product - products may be used for Qualitative information (where opinion or judgement
different uses (ex, cars for business use and domestic is necessary).
use, each the same product but can be marketed Can be gathered through:
differently) Primary Research: Gathering ORIGINAL data by directly
Benefits of Market Segmentation: contacting existing customers/potential customers.
You can use it to sell more products, creating different
variations for different groups. Advantages Disadvantages
A more effective marketing strategy can be placed (as Expensive in both time and
Up-to-date and relevant
the characteristics of consumers are known), resulting money
in an increase in sales. Usually planned and carried
Identifying a market segment that is not having its out by people who want to use Not available immediately
needs fully met increases the opportunity for the data first-hand.
increased sales.
It is most effective when used
Making marketing expenditure cost-effective by
for a specific problem.
producing a product that can closely meet the needs
of those customers and targeting its marketing efforts Not available to business
to that group only.
Which method of segmentation should be used depends Process:
on factors such as: Purpose of market research
Detailed analysis of the market and the ‘size’ of each Decide on the most suitable method of market
potential segment in terms of consumers and likely research
sales. Decide the size of the survey and who is going to be
Company image and brand image - ‘high-tech ' asked.
businesses may not want to produce innovative, high- Carry out the research
quality products for low-income consumers. Analyse the data and results
For example, the cost of entering each segment is a Produce a report of the findings
specially designed product and advertising campaign. Methods of Primary Research:
Questionnaires
They may be conducted face-to-face, by telephone,
3.5. Market Research or online.

Market Research: Gathering information about Advantages Disadvantages

consumers' needs or preferences in a market
If questions are not well-
The roles of market research:
thought-out, answers may
Identify demand for the product and how much they Detailed qualitative
mislead the business, as
are willing to pay. information can be gathered.
there may not be accurate
Identifying the target audience is the most effective
answers.
way to promote to these customers.
To measure the competitiveness of the market and The customer’s opinion can Lots of time and money are
the best way to compete with it. be obtained. needed.
There are two types of businesses: Online surveys may be
Collating and analysing data
Product-Oriented Business: a business that focuses cheaper and make it easier to
also takes a long time.
mainly on the product, disregarding market needs and collate the results.
wants. Often, it produces necessities for living, such as
agricultural tools or fresh food.
It may not have a brand name.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Benefits Limitations

They can be linked to prize There is some information
draws and encourage people (i.e. economic forecasts or Data may be outdated or
to fill them. population size) that can’t be incorrect as others collected it
obtained by primary research
Interviews: A person will interview another person and ask It might not have the specific
questions. information
Advantages:
The interviewer will be able to explain the Internal Sources of secondary data – within the firm’s own
questions and clear confusion. records:
Detailed information about the interviewee can be Sales department records, price data, customer
gathered. records, sales reports, etc.
Disadvantages: Opinions of distribution and public relations personnel
The interviewer may lead the interviewee to Finance department.
answer in a certain way. Customer service department
It is time-consuming and Expensive. External Sources of Secondary Data:
Focus Groups: collect opinions and feedback from a group Government Statistics: a detailed source of general
of people about a specific product, concept, or service. information (ex: population and its age structure)
Newspapers: useful articles about the general
Advantages Disadvantages economy state
It is time-consuming and Trade Association: information about business in the
expensive if done by a industry
Provide detailed information
specialist market research Market Research Agencies: specialist agencies
agency. researching on the company’s behalf; the commission
Interacting between members The discussion could be is paid.
can help businesses based on some people being Internet: easily accessible source. Paper-based
understand the reason for influenced by the opinions of sources can also be found.
peoples’ opinions. others. Regardless of which type of research a business chooses
A few people can dominate it, to use, the accuracy of the research data depends on the
Quicker and cheaper than following:
so researchers must have
individual interviews. How carefully the sample was drawn up
experience dealing with this.
How the questions in questionnaires/interviews were
phrased to ensure honest answers were given.
Sampling: A group of people who are selected (randomly)
to respond to a market research exercise (i.e. The sample itself and its size. By using quota
sampling, you might get more reliable results.
questionnaire). 2 standard methods of sampling:
A Random Sample is when people are selected The bias – some secondary research will be biased
(i.e. articles in newspapers), which means the
randomly as a source of information for market
information might be unreliable
research.
Age of the information: older data might be
Advantage: Everyone has an equal chance to be
picked, but not everyone in the population may be inaccurate.
Presentation of data from market research:
a product consumer.
Tables or tally chart
A Quota Sample: People are selected based on
Pie Chart
specific characteristics. They can find out the views of
a specific group. Diagram
Bar chart
Advantage: can find out the views of these specific
groups. Line graph
Secondary Research:
Information that has already been collected and is 3.6. Marketing Mix
available to others
Marketing Mix: a term used to describe all the activities
Benefits Limitations that go into marketing a product or service.
It is cheaper than primary as You do not get specific results The marketing mix can be summed up as the 4 Ps:
research has already been for a particular product or Product - applies to the product or service. Design,
done by others service; you get broad results features and quality.
Price - the price at which the product is sold,
comparisons between prices of competitors.
Place - channel of distribution that is selected.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Promotion - how the productivity is advertised and Brand name: the unique name of a product that
promoted. distinguishes it from other brands.
You should always mention the 4 Ps when answering Brand loyalty: when consumers keep buying the same
questions about Marketing Mix! brand again instead of choosing a competitor’s brand.
Brand image: an image or identity given to a product
3.7. Product which gives it a personality of its own and distinguishes it
from its competitors.
Some products are sold to consumers, and some to other Good branding includes:
businesses. Brand name
They are usually grouped: Higher quality than unbranded products.
Consumer goods: bought by consumers for their own Unique packaging
use. Can be perishable goods such as food or long- Brand loyalty
lasting such as furniture. Assured quality
Consumer services: services bought by consumers for Creates a brand image associated with consuming the
their own use. Ex. Cleaners product.
Producer goods: there are goods that are produced
for other businesses’ use to help with the production Role of Packaging
process. Ex. Trucks
Packaging: the physical container or wrapping for a
Producer services: services that are produced to help
product. 2 functions - protect and promote product
other business. Ex. Accountants.
Protects the product and makes it easier to transport
Identifying the type of product is important as it
Eye catching
decides how the product would be
Carries information about the product
advertised/marketed and developed.
Promotes brand image
Points to consider about choosing product:
Satisfying existing needs and wants of consumers
Product Life Cycle (PLC)
Not be expensive to produce.
New and original idea
Product life cycle: describes the stages a product will pass
Unique selling point
through from its introduction, though its growth until it is
Capable of stimulating new wants from their
mature, and then finally its decline.
consumers.
1. Development: First, the product is developed. The
Development of New Products: prototype will be tested in the market before its
1. Generate ideas launch. There are no sales during this time.
2. Select the best idea for further development 2. Introduction: Then it is introduced or launched in the
3. Decide if the company will be to sell enough for the market. Sales are often slow. No profit made as
product to be a success. development costs are not yet covered.
3. Growth: The product gains more sales. Advertising is
4. Develop a prototype
5. Launch the product in one area to test the market changed to persuade and encourage customer loyalty.
6. Go to a full launch of the product to the whole market. Prices reduced due to competitors and profit starts to
be made.
Benefits Drawbacks 4. Maturity: sales increase slowly. Competition intense
USP – a unique selling point: a and advertising is used to maintain sales growth and
Costs of carrying out market profit is at its highest.
special feature about a
research and analysing the 5. Saturation: sales have stabilised at their highest point.
product that differentiates it
findings Competition and advertising is high and stable, but
from its competitors’ product.
profit starts to fall as sales static and prices are
Cost of producing trial
reduced to be competitive.
Diversification products, including waste
6. Decline: sale of product starts to decline as new
materials
products enter, or it has lost its appeal. Product is
Brand image is damaged if withdrawn from market and sales, prices and
Allows businesses to expand
the product fails to meet advertising low until it stopped.
into new and existing markets
consumer demand
The lack of sales if the target
market is wrong

Importance of Brand Image

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

How Stages of PLC Influence Marketing Decisions Cost-plus Pricing: the cost of manufacturing the product
plus a profit mark-up. It involves:
Introduction – Estimating how many of the products will be produced.
Product – newly launched product Calculating the total cost of producing this output.
Price – price skimming or penetration pricing Adding a percentage markup for profit.
Place – limited range of exclusive shops (if price Total cost /output + % markup.
skimming is used)
Promotion – informative advertising Benefits Limitations
Growth Businesses could lose sales if
Product – remains the same The method is easy to apply. the selling price is higher than
Price – raise prices is penetration pricing was used competitors.
Place – increase the number of outlets, e-commerce A total profit will only be made
Promotion – establish a strong brand identity through Different profit markups could
if sufficient product units are
promotional activities. be used in different markets.
sold.
Maturity/Saturation
Each product earns a profit There is no incentive to
Product – plans for product changes begin
for the business. reduce costs.
Price – lower prices to competitive
Place – full range of distribution channels used
Competitive Pricing: When the product is priced in line
Promotion – sales promotion techniques to encourage
with or just below competitors’ prices to try to capture
repeat purchases
more of the market.
Decline
Product – changes made to extend the life cycle
Benefits Limitations
Price – lower prices
High-quality products must be
Place – sell through low-cost outlets Sales are likely to be high due
sold at higher prices to give
Promotion – re-launch the product as an extension to realistic level prices.
them a high-quality image.
strategy
If cost is high and sales are
Extending Product Life Cycle: Avoids price competition low, competitive prices can
lead to loss.
Extension strategy: a way of keeping a product at the Often used when it is difficult
maturity stage of the life cycle and extending the cycle. Detailed research will be
for consumers to tell the
Introduce new variations into the original product
needed to determine these
difference between the
Sell into new markets prices, which costs time and
products of different
Make small changes to the product’s design, cover, colour
money.
businesses.
Sell through additional retail outlets
Introduce a new, improved version of the old product Price Skimming: setting the price for a new product on the
Use a new advertising campaign market. A product is usually a new invention or a new
development of a product.
3.8. Pricing
Benefits Limitations
The price chosen may not be related to the cost of High prices may discourage
It can help establish the
manufacturing but rather to what consumers are willing some customers from buying
product as good quality.
to pay, the product's value, and the brand image. it.
The business must constantly monitor what its If production is unique, a high High prices and profitability
competitors charge for their products to ensure its prices price may lead to profit, and may encourage competitors
remain constant. the price may be reduced. to enter.
A business can adopt new pricing strategies for:
High research and
To break into a new market
development costs can be
To increase market share
rapidly recovered from profit
To increase profits
made.
To make sure all costs are covered and a particular
profit is earned
Penetration Pricing: when the price is set lower than the
competitors’ prices to enter a new market.
The Main Methods of Pricing
Benefits Limitations
There are five main types of pricing methods:

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Benefits Limitations 3.9. Place (Distribution Channels)

often used for newly launched
Sold at a low price, therefore,
products to create an impact Products should be available when and where customers
profit per unit may be low.
on customers. need them
Ensure sales are made and Customers may ‘get used‘ to Wrong place, low sales and profits
the new product enters the low prices and reject the The place must be convenient for consumers
market. product if the price is raised. Distribution Channel: is how a product is passed from the
place of production to the customer.
It might not be appropriate for
Market share should build up
products that have a There are four main distribution channels:
quickly.
reputation for quality.
Manufacturer sells products directly to consumers (i.e.
Promotional Pricing: when a product is sold at a low price car components to car factories).
for a short period of time. To increase short-term sales. This channel is most common with business-to-
business transactions.
Benefits Limitations
Useful for getting rid of Revenue will be lowered
unwanted inventory that will because the price of each
Benefits Limitations
not sell. item is reduced.
It is impractical because
Help renew interest in a This might lead to price
Very simple consumers don’t usually live
product if sales are falling. competition with competitors.
near factories
Not suitable for products that
The impact of psychology on price decisions-
Suitable for products that are can’t be sent quickly by post,
High prices for high-quality products can be
sold straight out of factories especially if they’re perishable
purchased for status symbols.
or easily breakable goods.
When a price is lower than a whole number, it creates
the illusion of being cheaper. It is not cost-effective, as
There is a lower price for
Supermarkets may choose low prices for products sending products by post is
consumers (cuts retailer)
purchased regularly. expensive
Repeat sales are often made to reinforce consumers’ Products can be sold by mail
perceptions of the product. order catalogue or via the
Using different pricing methods for the same product- internet.
Dynamic pricing: When businesses change product
prices, usually when selling online, depending on the Producers sell to retailers, who sell to consumers (i.e.,
level of demand, for example, Aeroplane tickets. farms selling food to big supermarkets).
There are ethical issues with some dynamic pricing; This channel is most common where retailers and
using technology, businesses can track customers' large such as supermarkets or the product is
buying history and then charge accordingly. expensive, Ex. furniture or jewellery.

Price Elasticity of Demand

Price Elasticity of Demand: How responsive is a demand

for a product to a change in price? Benefits Limitations
PEDs are affected by the no of substitutes available There is no direct contact with
Price-elastic demand is when a product is very responsive Manufacturer sells lots of customers, which makes It
to a change in demand. The % change in demand is stock to retailer hard to create customer
GREATER than the % change in price, i.e., prices increase loyalty.
by 5%, but sales decrease by 10%. Price is often higher than
Therefore, the business's revenue would be falling Cheaper transportation costs
‘direct selling‘ as the retailer
with a price increase. Businesses must find another because all products go to
has to cover its costs and
way to increase demand without using the product's one place
make a profit
price.
Lower storage costs for the
Price-inelastic demand is when the product is not very
manufacturer
responsive to change in demand. The % change in
demand is LESS than the % change in price.
Producers sell to wholesalers, who buy in bulk, divide their
This means you can increase the price of the product
stock into smaller quantities, and sell them to retailers.
a lot without the demand changing (i.e., oil & petrol
because people have to buy it)

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Benefits to consumers Problems for consumers

No need to go out Internet needed
Benefits Limitations High chances of fraud and
Wide options
Reduces storage costs for More expensive to buy from a theft
small retailers because small wholesaler than from a Products can’t be physically
Easy Comparison
quantities are sold manufacturer examined
A wholesaler might not have Payment through net banking No direct contact
Small quantities, so transport
all the products a retailer Easy access to imported
costs are low
wants goods
Wholesalers can give Low prices
It takes longer to get to the
feedback on what sells well to
consumer
producer Other methods include:
Huge gap between the Department stores
manufacturer and the Discount stores
customer Chain stores
Consumer prices may be Superstores
higher than direct selling, as Independent retailers
retailers and wholesalers Direct sales
need profit. Supermarkets
Mail order
A manufacturer hires an agent (person or business) that
Selecting Which Distribution Channel to Use
will sell products on behalf of the manufacturer.
Agent: an independent person or business appointed
Type of product
to deal with sales and distribution of a product or
Is it technical?
range of products.
How often is it purchased?
How expensive is it?
How perishable is it?
Benefits Limitations Where are customers located?
Agents know the most Where do competitors sell?
Manufacturers lose much
profitable places & prices to
control over how the product
sell in other markets that
is sold to customers.
3.10. Promotion
manufacturers may not know.
Agents will provide advice on Higher costs for consumers, Promotion: where marketing activities aim to raise
the best ways to survive new as agents will need awareness of a product or brand by generating sales and
markets. compensation for expenses. helping create brand loyalty. Includes the following:
Advertisement: Involves ‘above-the-line‘ promotions.
Gives the manufacturer some
Ex. TV, Social media. Newspapers, etc.
control over the way product
Sales Promotion: Involves ‘below-the-line‘ promotions.
is sold.
Used for short periods of time to reinforce the above-
the-line promotions. Ex. Money-off coupons, gifts,
Methods of Distribution protect placements in programmes or newly released
films.
E-Commerce
Selling of goods and services through the internet
Aims of Promotion
Benefits to the business Problems to business
To raise awareness about a firm’s products
Cheaper Website must be maintained Encourage customers to make a purchase
Customers are encouraged to Increase sales
High distribution costs
buy in bulk Introduce new products in the market
Business-2-Business e- Create brand image
No direct contact
commerce is cheaper Improve the company’s image
Wider options for customers, Compete with competitors
Returns – higher costs
brand image and loyalty
Advertising
A stock system will be
needed.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advertising: paid-for communication with potential Advantages Disadvantages

customers about a product to encourage them to buy it. Often, it uses memorable The advert needs to be
There are two types of advertisements: songs or tunes so that the AD remembered because there
Informative Advertisement: where advertising or sales
can be remembered. is no hard copy.
promotion emphasises giving complete information
It's not as broad an audience
about the product. (i.e. the benefits of the product)
as television.
Persuasive Advertisement: advertising or promotion
trying to persuade consumers that they need the
Newspaper
product and should buy it.
The advertising process: Examples of suitable products or services: Local
products and events in the local newspaper.
1. Set objectives of advertising to capture new
market and increase market share
Advantages Disadvantages
2. Decide the advertising budget-predict how
much sales will be in the future, and spread
Often, it is black and white;
Can be selected to target a
a certain percentage (between 2% to 10%), therefore, it is not attractive
particular group
or set by how competitors are spending, or
to the eye.
simply what the business can afford to A large number of people Many young People do not
spend. buy/read national read/purchase traditional
3. Create an advertising campaign- the target newspapers. newspapers.
audience and objective must be kept in Local newspapers are cheap
mind. and, therefore, cost-effective.
4. Selecting the media to use the target Adverts are permanent and
audience will decide the media, how often can be cut and kept.
AD appears, and should be cost-effective.
A lot of information can be put
5. Evaluate the effectiveness of the campaign-
in the advert.
if sales or brand image improved.

Magazines
Types of Advertising Media
Ex of suitable products/services: Feature in specialist
Television magazines, gold equipment, medical equipment.
Examples of suitable products/services are food
Advantages Disadvantages
products/drinks, cars, and household products.
An effective way to reach the
Published once a month or
Advantages Disadvantages target population is if there
week.
It will go out to millions of are specialist magazines.
Very expensive
people. Magazine adverts are in They are more expensive
Young consumers often colour, thus attractive. than newspapers.
Can be shown in a favourable download films/movies and
way (Attractive). don’t watch many television Posters
programmes. Ex of suitable products/services: Local events,
products purchased by a large population.
Reaches the most significant
number of consumers and
Advantages Disadvantages
reaches the target audience
Permanent It can be easily missed.
by showing AD after specific
programmes. No detailed information can
Relatively cheap
be included
Radio Potentially seen by everyone
Examples of suitable products or services: Local passing
services or events, e.g., local shops or car showrooms.
Cinemas, DVDs, Blu-ray discs:-
Advantages Disadvantages Examples of suitable products/services: Coca-Cola
It cannot put across a visual (make sure to boycott ;) ).
It's cheaper than TV.
message.
Advantages Disadvantages
It is pretty expensive
Reaches a large audience. Shows visual image of Scene by only a limited
compared to other methods.
product positively. number of people.
Relatively low cost.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Price Reductions

It can be effective if the target Includes coupons
audience goes to see a Linked to loyalty cards
particular film. Reduced prices of products at certain times of the
year.
Gifts
Leaflets
Small gifts to encourage purchases
Examples of suitable products/services: local events
The main aim is to get customers to buy at regular
and retail outlets (can contain vouchers).
intervals
Advantages Disadvantages BOGOF (Buy One, Give One Free)
Multiple purchases are encouraged
Cheap It may not be read
Competitions
Direct mail, also called ‘junk
Packaging can allow customers to enter competitions
Give out on the street to a mail,’ can be annoying and Encourages sales
wide range of people. prevent customers from High prices
buying. Point of sale display and demonstrations
Direct mail (delivered door to Place where the product is sold
door) Special display
Sometimes contains money- After-sales services
off-vouchers. For expensive products, good after services
encourage consumers to buy their products.
Internet Free samples
For example, suitable products/services are familiar, Can be handed out to shops to encourage sales
e.g., books, clothes, electronics—services such as Maybe delivered at home
train information, ticketing, insurance, etc. Product placement
Featured in television programmes, movies or music
Advantages Disadvantages videos.
Internet searches may not It is expensive to pay for placement and can have a
A large amount of information negative effect if the image is unattractive to
highlight the website, and it
can be placed. customers.
could be missed.
A vast number of people can Some countries have limited
see it access to the internet.
Advantages of Sales Promotion
Orders can be made instantly It can be used at the times of year when sales are low.
A lot of competition.
via the website. Encourages new customers to try an existing product.
Security issues can Encourages customers to try a new product.
Direct mail via email is cheap.
discourage customers. Increase customer loyalty by encouraging existing
customers to buy in greater quantities.
Other forms of publicity: Encourages customers to buy their product instead of
Ex of suitable products/services: shops can use bags competitors.
as a form of advertising, billboards on the street.
Marketing Budget
Advantages Disadvantages
Very cheap methods of The marketing budget is the financial plan for marketing a
advertising, e.g. T. Shirt product/brand for a period of time.
delivery vehicles and bags Customers may not see it in When deciding which type of promotion to use, marketing
can be worn, and by walking the target market. budget is an essential factor
around, it can be an Businesses will need to compare the cost of advertising
advertisement itself. and the increase in expected sales. Cost-effectiveness if
important.
This is where small businesses struggle compared to big
Sales Promotion
businesses because their budget is much smaller.
Sales Promotions: when incentives (i.e. special
offers/sales) are aimed at consumers to achieve a short-
Factors Influencing Type of Promotion
term increase in sales.
Stage of PLC
Nature of product
Types of Sales Promotion
Cultural issues involved in international marketing

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

The media used must depend on the following: Price: the internet allows businesses to gather
Literacy rate information about customer purchasing habits, which
Poverty rate means dynamic pricing can be used to increase revenue.
Availability of radio and cinema Place: The widespread spread of online purchasing and e-
Nature of target market commerce. Can create new opportunities.

Public Relations and Sponsorship Use of the Internet and Social Media Network for
Promotion
It is concerned with promoting a good image of the brand
Ways to increase public awareness: Social media for promotion:
Sponsor events linked with good causes
Donate to charities. Opportunities for Advertising on Threats of advertising on
All these activities are used to raise the public’s Social Media social media
awareness of the company and its product and increase It can alienate customers if
their chance of choosing their product over competitors. Target specific demographic
they find the adverts
group
annoying.
3.11. Technology and Marketing Mix Businesses have to pay for
Guarantee it reaches customers advertising if using pop-
E-Commerce ups.
Speed in response to market Lack of control of
It is the ‘online’ buying and selling of goods and services changes: Information can be advertising if used by
using computer systems linked to the internet and apps. uploaded regularly. others.

Benefits to the business Problems to business Messages may be altered

Cheap to use-low cost if placing or used badly and
Cheaper Website must be maintained
advertisements. forwarded to another user,
Customers are encouraged to giving bad publicity.
High distribution costs
buy in bulk
It reaches groups that are
Business-2-Business e- difficult to reach any other way.
No direct contact
commerce is cheaper
Wider options for customers, Create your own website for promotion:
Returns – higher costs
brand image and loyalty
A stock system will be Opportunities of advertising on Threats of advertising on
needed. the business’s own website the business’s own website
Potential customers may not
Benefits to consumers Problems for consumers No extra cost after setting up a see the website, as the page
No need to go out Internet needed website. may appear in a long results
list.
High chances of fraud and
Wide options Control of advertising as the Relies on customers finding
theft
website is owned. the website.
Products can’t be physically
Easy Comparison Can change adverts quickly and
examined The website's design costs
update pictures, prices, and so
Payment through net banking No direct contact can be high.
on.
Easy access to imported
It would need to be
goods
Interactive adverts can be more constantly updated, and a
Low prices
attractive than magazines or team would need to be
posters. nearby for any bugs or
How technology influences the marketing mix: issues. Which is costly.
Social Media Marketing: a form of internet marketing that Can provide more information
involves creating and sharing content on social media in adverts and link to other
networks to achieve marketing goals. pages with further information
Viral Marketing: when consumers are encouraged to and pictures.
share information online about a business's product. Attracts funds and payment
Product: may change to respond to new technology. from companies who want to
Promotion: social media marketing and viral marketing advertise their product on the
can be used to promote. business’s site

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

A consumer should have a minimum of 7 days

3.12. Marketing Strategy
cooling period (a consumer should have seven
Marketing Strategy: a plan to combine the right days to change their mind about the purchase they
made)
combination of the four elements of the marketing mix for
Trade Descriptions
a product or service to achieve a particular marketing
Supplying a good/ service which is unsafe/ not fit
objective
The Marketing Strategy developed depends on the for the purpose is illegal.
Giving false info or misleading claims is illegal
following:
Misleading consumers about the actual price is illegal
Size of market
Making false claims about special deals and offers is
Number and size of competitors
illegal
Marketing objectives
Target market Offensive or indecent ads are illegal
Finance available Complying with all legal controls can raise the total costs
of a business by:
Marketing objectives may include:
Goods/ services may have to be redesigned to ensure
Increasing sales
Improve the existing product quality and safety
Ads may have to be altered
Increasing sales of a new product
Maintaining/ increasing market share Some promotion techniques may have to be changed
May have to change the packaging
Increasing sales in a niche market
Prices may have to be controlled and altered
Increase market share/retain market share
For example, A product is made, priced reasonably, and Increase employment
meets the consumer's needs, but no promotional element
exists. No one will buy it because people don’t know about 3.14. Entering New Markets Abroad
its existence.
Or if a product is made that doesn’t meet consumer The globalisation of businesses has been increasing over
needs, it won’t sell regardless of the price set. the years; there are opportunities & problems with this:
It is crucial to have all elements working together to
influence consumer decisions (buying the product) Opportunities Problems
Growth potential in other
Lack of knowledge of
Recommending and justifying a marketing strategy countries: countries are
competitors or consumer
in a given circumstance:- developing, and population
habits
incomes are increasing
Important points to include in your answer: Markets in the original region Cultural differences: for
might be saturated (sales are example, alcohol won’t sell
Marketing objective
low) well in the Middle East
Marketing budget
Exchange rates: in some
Target market Can produce products abroad
Balanced marketing mix countries, their currency isn’t
and learn about its market to
stable, so the price of
increase sales
imported goods increase
3.13. Legal Controls in Marketing
Trade barriers are lowered in
Transport costs are more
most countries, so it is
There are many laws in different countries to protect expensive
cheaper to enter markets
consumers from businesses taking advantage of their
lack of knowledge or lack of product information Import restrictions - causes
These legal controls include (in the U.K.): price of goods to increase and
Weights and Measures sales decrease.
Selling underweight items or using inaccurate Increased risk of non-
equipment to weigh goods is illegal. payment
Sale of Goods
Supplying flawed goods (not up to quality However, there are many methods to reduce and
standard). overcome the problems of entering a new market:
Product not fit for its intended purpose.
Products which do not perform as described in Problem Method to Overcome
label or by retailer.
Supply of Goods and Services Act
Service must be provided with skill and care.
Consumer contracts Regulations

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Problem Method to Overcome

Joint-Ventures: by working
together/merging with local
businesses in the same
market, a business will gain a
lot of necessary knowledge
Lack of knowledge (and Production: making a product or service to satisfy
about the culture & market \n
cultural Differences) consumer wants and needs.
Franchising: letting people
The factors of production or ‘inputs’ include:
from the market abroad who
Land – For factories or materials
have local knowledge to
Labour – Employees
choose the location of the
Capital – Money/finance
shop
Enterprise – Managers
Licensing: the business A business combines these inputs to produce a more
permits a local business to valuable output (this is added value).
Transport costs are
sell goods under its name, so Labour-Intensive Production: A larger workforce is used
expensive.
they do not have to import all than machinery to make goods. Usually done in countries
the products physically with low wages so that it is more efficient (ex: SHEIN).
Localising Existing Brands: Capital-Intensive Production: businesses use machinery
where a business still has the rather than workers. Usually done in developed countries
same brand image but adapts where the wages are high.
Cultural Differences
it to the market it is in (i.e.
McDonald’s cooking Operations Department
vegetarian meals in India)
The operations department’s role is to transform inputs
Limitations to the methods listed above: into outputs for consumers.
An operations manager ensures raw materials are
Method Limitation available and made into finished goods.
Management conflict between Most manufacturing businesses have:
Joint venture the two businesses. Profit Factory Manager - responsible for quality and quantity
shared. of products
Purchasing Manager – responsible for providing the
Quality problems caused by an
required materials and equipment
inexperienced licensee could
Research and Development Manager – responsible
damage brand reputation.
for design and training of employees for new products
Licensee now had access to
Licensing In the retail business, the factory manager will be
information about how the
replaced by the managers for the shop.
product is made - could develop
In service businesses, e.g. Restaurants, the operation
a better version and become a
department will include managers for each shop.
competitor.
Quality problems or poor service Productivity
offered by franchisees could
International franchising damage brand image. Training Productivity: a way of measuring a business’s efficiency.
and support will need to be Note: Production is the making of the product, while
provided by the franchisor. productivity is how efficiently the product is made.
May be less successful than a Productivity = Quantity of output
Quantity of input ​

new product made to meet local Labour Productivity = no. ofoutput

employees ​

cultures and market conditions.

Localising existing brands As employees become productive, per-employee output
Expensive to change packaging, rises, and costs of production fall
promotion, and so on for each Many ways to increase productivity:
market the product is sold. Improve factory layout to reduce time waste and raise
efficiency

4. Operations Management Introduce automation

Improve labour skills by training
Improve quality control
4.1. Production of Goods and Services Improve employee motivation
Improve inventory control
Production Process Benefits of increasing efficiency:

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

More output compared to inputs. Defects - when goods have faults/defects that require
Lower costs per unit (and therefore lower average them to be inspected/fixed, wastes time
cost) Advantages of lean production
For example, if the business has a limited workforce, Less storage costs
raising their wages will increase motivation and, Quicker production
therefore, also increase productivity. Better use of equipment
Less money tied up in inventory
Inventory Speed up production by cutting out processes
Improved health and safety lead to less time off work
Inventory can take various forms. Inventory includes: due to injuries.
Raw materials No need to repair defects or provide replacement
Work in progress goods services for a dissatisfied customer.
Finished goods All these save/reduce costs that lead to lower
Why do businesses hold inventory? customer prices and increased business
To ensure enough inventory is available to satisfy competitiveness and profit.
sudden changes in demand.
Production and opportunity costs will also be high if Types of Lean Production
inventory levels are high.
Inventories can be managed: Kaizen
Just-in-time inventory (JIT)
Cell production

Kaizen

Kaizen means continuous improvement in Japanese

Its primary focus is to eliminate waste
Ideas are thought of by holding frequent meetings with
workers to discuss problems and possible solutions.
Advantages:
High productivity
Less space needed for production
Work in progress is low
The business buys in inventory to fill its holding capacity, Improved layout of the factory may lead to combining
known as the maximum inventory level. jobs. This will reduce labour demand.
As resources are depleted, inventory levels drop. At this
stage, reorders will be made so it reaches the business in Just in Time
time before it runs out.
Buffer Inventory Level: inventory held to deal with A production method that reduces or virtually eliminates
uncertainty in customer demand and deliveries of the need to hold inventories of raw materials or unsold
supplies. inventories of the finished product.
Advantages:
All this reduces the costs of holding inventory.
4.2. Lean Production ‘Warehouse‘ space is not needed, reducing costs.
The finished product is sold quickly so that money will
Lean Production: various techniques to cut down waste
return to business quickly. Helping cash slow.
and raise efficiency.
However, to operate in JIT, businesses need to have
Types of Waste:
reliable suppliers and an efficient ordering system. If
Transportation - when the goods are being moved
suppliers are late, it can disrupt the system.
unnecessarily → fuel price, chance goods may get
damaged Cell Production
Overproduction - leads to high storage costs and
possible damage to goods while in storage. This is where the production process is divided into
Overprocessing - when sophisticated machines are separate units, each making an identifiable part of the
being used to do simple tasks good
Waiting - when goods are not moving or being Advantages:
processed, waste occurs due to inefficiency High motivation due to improved morale of
Motion - any action made by an employee that does employees.
not relate to the production of goods, wastes time More production efficiency.
Unnecessary inventory

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Employees feel more valued and are less likely to

strike or cause disruption. Flow Production:

Features Benefits Limitations

4.3. Methods of Production
It is very boring for
3 Main Methods of Production: Large quantities of High output, capital employees, leading
Job Production: products made one at a time a product are intensive, more to decreased
Batch Production: a quantity (batch) of a product is produced. efficient. motivation over
made, then a batch of another product is made time.
Flow Production (mass): large quantity of products Cars, drinks,
Costs are low,
made in a continuous process electronics, and High cost of
therefore low
Job Production: mass-made inventory of output
prices, leading to
products are made & raw materials.
Features Benefits Limitations high sales.
this way.
Often labour- It requires only
Products are made intensive, Capital costs for
Good for ‘one-off’ relatively unskilled
specifically for the expensive as highly setting up
products workers and some
customer’s order skilled workers are production are very
training, maybe
needed high.
needed.
Meets the exact There is no need If one machine
Each order is Production takes
requirements of the for moving goods breaks down, the
different longer
customer around (all made in whole production
Varied work the same place). stops.
E.g. bridges, ships,
increases Any errors made Automated
cakes, cinema,
employee are expensive to fix production lines
films, suits
motivation can operate 24*7.
Ability to charge Materials are more Benefit from
higher prices expensive. economies of scale.
No possibility of
purchasing Factors influencing which production method to choose:
economies of scale Nature of Product - if unique or individual service, job
production can be used.
Batch Production: Size of Market - if demand increases and more
products can be sold but not in large quantities, batch
Features Benefits Limitations production will be used. International market, flow
A similar range of Flexible work can Machines must be production.
products is made in change products reset to do different Nature of Demand - if large and fairly steady demand,
batches easily batches e.g. soap powder flow production, can be used.
Ex. bakery: makes The size of the Business - if the business is small and
one type of bread, doesn’t have access to large funds, job production can
Semifinished be used.
then one type of
Gives some variety products may need
cake and each
to worker’s jobs to be transported
product is produced
around (+ cost)
4.4. Technology in Production Methods
in stages or
batches. Automation: Equipment in a factory is controlled by a
Need space for computer to perform mechanical processes (i.e., painting
More variety, more stocks of raw a car). Only workers are to ensure it runs smoothly.
consumer choice material (high Mechanisation: production is done by machines but
storage costs) operated by people. Used to do difficult, precise or
dangerous tasks. Work 24/7, quicker and more accurate.
Production may not
Computer-Aided Design (CAD): software that helps design
be affected to any
High work-in- or re-style products quickly, allows technical sketches to
grant extent if the
progress inventory be very detailed
machine breaks
Computer-Aided Manufacture (CAM): when computers
down.
monitor production and control machines/robots
Expensive and
time-taking

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Computer-Integrated Manufacturing (CIM): when Business Costs

software that designs the products is integrated with the
machines that produce (CAM + CAD). Fixed Costs (overheads)
Costs that do not change with output in the short run.
Electronic Payment Methods Also known as overheads or indirect costs
Fixed Cost = Total cost – Variable cost
EPOS (Electronic Point of Sale): used at checkouts, where Examples of Fixed Costs:
barcodes are scanned and displayed on the receipt. The Rent of factory: even if you produce lots of
inventory is automatically changed and reordered when products, the rent price will be the same
the reorder level is reached. Insurance: you set the insurance cost beforehand
EFTPOS (Electronic Funds Transfer Point of Sale): it is Bank fees: bank fees are a set price; they don’t
where an electronic cash register is connected to the change depending on the products produced
retailer’s bank accounts, and the money is directly Management Salaries: they are set regardless of
transferred when the shopper’s bank info is entered. production
Contactless Payment: works by the contactless device Staff cost (Security)
having an antenna; when touched against a contactless Variable Costs (VC)
terminal, it securely transmits intervention about the Costs which vary directly with output
purchase. e.g. credit cards, key fobs, mobile devices, etc. Also known as direct costs
Variable cost = Total cost – Fixed cost
Advantages of Use of Disadvantages of Use of Examples of Variable Cost:
Technology Technology Raw materials: the more you produce, the more
Productivity is greater as materials you need
new, more effective Electricity & Gas: Energy is paid by use. If you are
Unemployment could rise.
methods are used, reducing producing more, more electricity is being used
average costs. Shipping cost: Making more products means you
It is expensive to invest in new have to ship more items, and shipping is paid by
technology; this increases the weight
Greater job satisfaction
risk as more products would Total Cost: Fixed and variable costs combined.
stimulates workers. Formula 1: Fixed cost + Variable cost.
need to be sold to cover the
cost. Formula 2: Average cost per unit × output
More skilled workers may be Average Cost (Per Unit): total cost of production divided
by the total output. Referred to as Unit Cost.
needed to use and maintain Total cost of production
the new technology. Formula for Average cost = Total output
Employees may be unhappy
​

Therefore, motivation and

with the change. Usage of Cost Data
work quality will increase as
training is provided to
existing employees. Helps manager set prices
Deciding whether to stop production or continue.
New technology is constantly
Deciding the best location.
changing and becoming
It helps managers to make decisions.
outdated quickly; thus,
Better quality products It is needed to calculate profit and loss.
businesses must replace
technology to remain
competitive. 4.6. Economies of Scale (EOS)
Quick communication and
Economies of Scale (EOS): the factors that reduce
reduced paperwork,
average costs as a business grows.
increasing profitability.
Types of economies of scale:
The use of IT is much Purchasing Economies
greater and results in better When a business buys in bulk, it tends to receive
and quicker decision- discounts, decreasing the price of each good.
making. Marketing & Selling Economies
New ‘high-tech’ products are When the company advertises for goods, it will pay
introduced as technology the same amount to advertise a greater number.
makes completely new Therefore, when marketing for a higher output,
products available. unit costs fall, decreasing ATC.
Financial Economies
4.5. Costs and Scale of Production

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Banks tend to lend to larger companies with low-

interest rates, as they borrow high amounts and
their collateral value is high.
Managerial Economies
Large firms have opportunities to employ
specialists who will help reduce wastage and
increase efficiency and productivity.
Technical Economies
More capital to invest in newer, more efficient
technology and specialist equipment.

4.7. Diseconomies of Scale (DEOS)

Sales($)= 0 Sales($)= 1000 Sales($)= 2000
Diseconomies of Scale (DEOS): the factors that lead to an units units units
increase in average costs as the business grows beyond a
Fixed
specific size. 5000 5000 5000
costs
Types of diseconomies of scale:
Poor communication Variable 0 3000 (1000x$3) 6000 (2000x$3)
Lack of commitment from employees Total 8000 11000
5000
Large businesses have many employees, and not costs (3000+5000) (5000+6000)
everyone is connected to the top management, Revenue 0 8000 (1000x8) 16000 (2000x8)
reducing their motivation levels.
Slow decision-making & weak coordination To draw a break-even chart, you must include:
Large businesses have longer chains of command, Fixed Costs line
so information and instructions take longer to Variable Costs line
reach the desired person, slowing communication Total Costs line
and decision-making. Sales Revenue line
The shaded area that can be seen, labelled with ‘Area of
4.8. Break-Even Analysis loss‘, shows how the sales revenue line is below the Total
cost line, indicating that anything before the break-even
Break-Even Level of Output: the quantity that must be point is a loss.
produced/sold for total revenue to equal total costs. (also The shaded area that can be seen, labelled with ‘Area of
known as break-even point). profit’, shows how the sales revenue line exceeded the
Break-Even Charts: a graph showing how the costs and Total cost line, indicating anything after the break-even
revenues of a business change with sales. They show the (BE) point is a profit.
level of sales the business must make to break even. ‘y’ axis measures money amounts (cost & revenue)
Revenue: the income during a period of time from sales of The ‘x’ axis shows the number of units produced or sold
goods. Benefits of break-even charts:
Total Revenue = Quantity sold × Price. Managers can read off the graph if the company
Break-Even Point: the level of sale at which total costs = expects profit or loss and can see how much
total revenue. The point where they intersect in the graph. profit/loss they will have at any level of output
The break-even point, the calculation method: They can attempt different scenarios and see the
Contribution: selling price less its variable cost. impact it will have on the profit or loss of the business.
Contribution per unit: Selling price – Variable cost. It lets managers try out different possibilities to
Break-even level of production = determine which is the best. (i.e. increasing the selling
Total fixed costs price, increasing production)
Contribution per unit ​

It can show the SAFETY MARGIN – the number of sales

An example of a Break-even chart:
exceeds the break-even point. For example, if a
business’ break-even point is at 1000 units, and they’re
producing 1500 units, their safety margin is 1500 –
1000 = 500.
Limitations of Break-even Charts:
Break-even charts assume that all products made will
be sold. It does not show the possibility that
inventories may build up if they are not sold
Fixed costs only stay the same if the scale of
production stays the same (doubling the output will

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

also increase the fixed cost because they must need a Businesses will ensure quality standards are set, and then
bigger factory, more machinery, labour, etc.) employees will apply these standards throughout the
Break-even charts assume that costs and revenues business.
can be drawn with straight lines, which doesn’t happen
in real life. Advantages of Quality Drawbacks of Quality
It assumes costs and revenue increase at a constant Assurance Assurance
rate. Eliminates faults/errors
It is expensive to train
before the customer receives
employees to check products.
4.9. Achieving Quality Production a product or service.
Relies on employees following
Quality: to produce a good or a service which meets Fewer customer complaints. instructions of the standards
customer expectations. set by the business.
Quality is important for businesses because: Reduced costs if products
It establishes the brand image don’t have to be scrapped or
It builds brand loyalty reworked or service repeated.
It maintains a good reputation
It will help to increase sales
Total Quality Management (TQM)
Attracts more new customers
If quality is not maintained, businesses will: Total Quality Management (TQM): the continuous
Lose customers to other brands/competitors improvement of products and processes by focusing on
Have to replace faulty products or repeat poor quality at every stage of production
service, which raises costs for business Many companies use total quality management.
They have a bad reputation because people with bad It tries to “get it right the first time” and has no defects
experiences will tell others, etc. This leads to lower It focuses on ensuring 100% that the customer is always
sales & revenue. satisfied. The customer is not just the final user; it also
includes other people and departments within the
Quality Control business
Quality must be maintained throughout the business, and
Quality Control: Check for quality, whether a product or
no faults should occur.
service, at the end of the production process.
Quality control is a traditional way to ensure that products Advantages of total quality Drawbacks of Total Quality
leave the factories without defects. management Management
Quality inspectors’ job is to maintain/check quality
Quality is built into each part
regularly for errors. It is expensive to train all
of the production. It becomes
The whole production batch might have to be redone if employees.
a habit for the employees.
errors are found.
Their job is also to prevent any production errors before Eliminates virtually all
Relies on employees following
they happen during production, which will lead to money faults/errors before the
the ideology of TQM.
loss. customers receive them.
No customer complaints, so
Advantages of Quality Control Drawbacks of Quality Control the brand image is improved.
Eliminates faults/errors It is expensive, as employees Waste is removed, and
before the customer receives need to be paid to check the efficiency increases, which
a product or service. product or service. means less money is wasted
Identifies the fault but not how (higher profits).
Less training is required for and why it occurred, so it is
the workers. difficult to remove the Customers can be assured of quality
problem. products/services
Increased costs if products
have to be scrapped or Businesses may apply a quality mark but will have to
reworked or service repeated. follow certain rules. This mark, e.g. ISO, makes sure
products meet a particular standard.
Quality Assurance For service businesses, recommendations from satisfied
customers can be heard or read from online sites, where
Quality Assurance: checking for the quality standards bad and good reviews can be shown.
throughout the production process.
4.10. Location Decisions

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Businesses look for locations when: Availability of power is very important.

Some businesses need to have reliable power sources
New business to continue production.
The present location is unsatisfactory Some production processes require a reliable water
Change in business aims and objectives source.
Expansion Climate

Factors that influence the choice of location of a Factors that influence the choice of location of a
MANUFACTURING business: SERVICE SECTOR business:

Production methods and location decisions Customers

Production methods play a significant role in deciding Services which require direct contact, must be located
the location of a business. near the customers.
Job Production: the business will be small and won’t Services where personal contact isn’t required,
have much effect on competitors there. The location location doesn’t affect.
of suppliers won’t affect much on the business. Ex. A Technology
small jewellery business. Technology has allowed e-commerce, so location
If there is large-scale production, then competitors in doesn’t play a vital role.
that area will be highly affected, and the business will Personal preference of owners.
prefer closer suppliers as raw materials will be huge. Availability of labour
Transportation costs may be high if the supplier is too If a business is labour-intensive, it must be located
far. where labour is easily found, like towns and cities.
Market Climate
When a product is heavier than its raw materials, Near to other businesses
businesses decide to locate its factory near the Some services/ businesses serve large companies
markets rather than the supplier, as a business will and so should be able to reach them immediately;
find it much cheaper due to transportation costs. therefore, they must located closer to them.
Due to advances in transportation facilities, the Rent/ taxes
distances between factories and markets of heavy If services don’t require personal contact, they can be
products don’t play a vital role. located in places with lower rents and tax rates.
Perishable products need to be delivered quickly.
Raw Materials/Components Factors that influence the choice of location of a
Transportation costs will be high if goods and raw RETAILING business:
materials are very heavy. Then, a company may want
its factory to be located near the supplier. Shoppers
External economies of scale Retailers want popular areas as they attract
When two firms support each other or work together, customers.
they will be able to respond quickly to any important It depends on the type of product.
decisions to be made or any breakdowns. Expensive – a place where high-income people live or
Availability of Labour visit regularly.
Every manufacturing business requires labour. Nearby shops
If a business requires only skilled labour, it will try to Being located near a frequently visited shop means
locate near a place where people with various skills people may shop in between while visiting other
live. shops.
If a business requires unskilled labour, it will be A place with high competition attracts more
located where wage rates are low and unemployment customers as they have greater choice.
is high. Customer parking availability/ nearby
Government Influence Convenient and nearby parking lots will encourage
When a government wants to encourage businesses people to visit your shop.
to locate in a particular area, it will offer state–funded Availability of suitable vacant premises
grants to encourage firms to move there. If a proper location isn’t available, a company can’t
High unemployed areas may provide grants to locate there.
businesses to locate there. Access to the delivery vehicle
Transport and Communication Businesses try to find places near transport
Businesses need to be closer to transport systems. businesses to gain easy access to delivery vehicles.
Exported products, ability to reduce transport costs. Rent/ taxes
Reduces time taken. Popular area, high demand, and high rent.
Power and water supply Less popular, low demand, low rent.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Security Finance: money that is needed to meet the expenses of a

A place prone to theft may reduce a business’s business. This is known as capital.
chances to locate there. Capital is needed for:
Insurance companies may not insure such companies. Starting up a business
Legislation Expansion
Some countries may have laws restricting trade in Increase working capital
some parts. Capital Expenditure: money spent on non–current
assets.
Factors influencing the decision of which country to Revenue Expenditure: money spent on day-to-day,
locate operations in: recurring expenses.

New market overseas - when a business sees an increase The Responsibilities of the Finance Department
in sales overseas, it may decide to move/relocate there
instead of transporting products there. Recording all financial transactions
Cheaper Source of material – if the raw material runs out, Prepare final accounts
the business must either bring in alternative supplies Cash flow forecast
from somewhere else or relocate to a new country with Make important decisions
these raw materials, it also might be cheaper than Provide info to managers
transporting it.
Difficulties with the labour force and wage costs – if the 5.2. Sources of Finance
business is located in a country where wages keep rising,
it may be more profitable to relocate to a country with The primary sources of capital include:
lower wages. Internal Sources: Obtained from within the business
Rents/taxes considerations – if other costs such as rent or itself.
taxes increase, this might cause businesses to relocate to External Sources: Obtained from outside and separate
countries where it is lower. from the business.
Availability of government grants and other incentives - If
governments want to increase foreign investment and job Internal Sources of Finance
opportunities, they will provide grants, subsidies, and
lower taxes. They may do this to provide new skills and Retained Profits: Profit businesses obtain after costs.
increase employment.
Trade and tariff barriers – If trade barriers are high, the Advantages Disadvantages
business’s chance of locating there would reduce costs. The new business will not have
It does not have to be repaid.
any.
The Role of Legal Controls on Location Decisions Small firms’ retained profit
It doesn’t incur interest. may be low to finance the
Reasons the government influences these location expansion.
decisions:
Reduces payment to owners,
To encourage businesses to set up and expand in
e.g., dividends for
areas of high employment.
shareholders.
To discourage firms from locating in overcrowded
areas or on sites with natural beauty.
Two types of measures used by the government to Sale of Existing Assets
influence where firms are located:
Advantages Disadvantages
Planning regulations (legally restrict business activity
from certain areas). It can take time to sell the
Government grants or subsidies encourage them to Better use of unwanted assets, and the amount may
locate in undeveloped areas. capital not be the same as when
purchased.
Doesn’t increase the debts of Source of finance not
5. Financial Information and a business available for new businesses.

Decisions Sale of Inventories

Advantages Disadvantages
5.1. Why does a Business Need
It may disappoint customers if a
Finance? Reduces opportunity cost. sudden change in demand is not
met.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Advantages Disadvantages

Reduces storage costs. Don’t have to be repaid Given with strings attached

Owner’s Savings Microfinance

Providing financial services to poor people not
Advantages Disadvantages secured by traditional banking.
Quick availability Savings may be low
Increases risks for owners, as they Advantages Disadvantages
No interest is paid Small loans can be obtained by
might have unlimited liability.
start-ups (especially if it’s by High-interest rates
External Sources of Finance simple people)
Greater risk for the lender
Issue of Shares: Sale of business shares (only for limited
companies) Crowdfunding
Funding a project or venture by raising money from
Advantages Disadvantages numerous people who each contribute a relatively
A permanent source of small amount.
Dividends are paid after tax.
capital
It doesn’t need to be paid Shareholders expect Advantages Disadvantages
back dividends. Crowdfunding platforms may
It's a fast way to raise a
Ownership will change if many reject the proposal if it is not
No interest substantial sum.
shares are sold. done well.
No initial fees are payable to
If the total amount is not
Bank Loans: A sum of money from a bank repaid with the platform; only when the
raised, finance invented by
interest. goal is reached a % will be
others will have to be repaid.
taken.
Advantages Disadvantages It allows public opinion to be Media interest and publicity
Quick, easy to arrange Must be repaid with interest heard to see if the idea is are needed for a chance of
Available for varying lengths Security or collateral security good. success.
of time. must be given It is often used by
Large companies receive low- entrepreneurs when other Competitors could steal the
interest rates if large sums traditional methods are not idea.
are taken. available.

Selling Debentures Short vs. Long-term Sources

Debentures are certificates issued to a debenture
holder for the money they lent, which must be repaid Short-term finance (shortage of ash in short rem can be
within 20 – 25 years. overcome in 3 ways):

Advantages Disadvantages Overdrafts

Loans must be repaid, and interest Advantages Disadvantages

Long term finance
must be paid.
‘Overdraw‘ (spend more
Interest rates are variable
money than is currently in the
Debt Factoring (vary from each overdraw)
account)
Debt factors are specialist agencies that buy the
claims of debtors of firms for immediate cash. The bank can ask for the
Flexible form of borrowing
overdraft to be paid quickly.
Advantages Disadvantages Interest will be paid only in the
The firm doesn’t receive 100% amount overdrawn.
Availability of immediate cash
amount Overdrafts are cheaper than
The risk of collecting the short-term loans.
debtors becomes the factor,
not the business’s. Trade Credit
It is when businesses delay payments to suppliers
Grants and Subsidies
Advantages Disadvantages

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Advantages Disadvantages Existing Loans (risk and gearing ratio): If a business

Almost an interest-free loan May not provide discounts has already taken out many loans, banks will think it is
too risky to finance.
Reduces cash outflows in the
Gearing: measures the proportion of total capital
short run
raised from long-term loans.

Factoring of Debt
Common Reasons The Banks Refuse to Loan to
Long-Term (Loans Available for More than a Year) Small Businesses

Weak cash flow

Bank Loans
Lack of security or collateral.
They are payable over a fixed period
Poor preparation by the business owner when applying
Hire Purchase
for the loan.
It allows a business to buy a fixed asset over a long
period with monthly payments, including interest.
Banks Need These to Lend
Advantages Disadvantages
Cashflow forecast
Doesn’t have to find a large Business plan
A cash deposit is paid at the
cash sum to purchase the Collateral/security
start of the month
asset Forecast income statement available
High-interest rates
5.3. Cash-Flow Forecasting and Working
Leasing
It allows a firm to use an asset without paying for it. Capital
Advantages Disadvantages Cash is a Liquid Asset: it can be immediately available to
Doesn’t have to find a large The total cost of leasing spend on goods & services.
cash sum to purchase the changes will be higher than Cash Flow: the cash inflows (money received by business)
asset purchasing the asset. & outflows (money paid) over some time.
Maintenance is taken care of Cash Inflow: money coming into the business.
by the leasing company. Sale of goods
Sale of assets
Payments to debtors
Issue of Shares
Borrowing money
Only available to limited companies
Investors
Debentures
Cash Outflow: money going out of the business.
Long-term Loans or Debt Finance - this is different from
Purchase of goods
share capital:
Purchase of non-current assets
Loan interest is paid before tax and is an expense.
Payments of salaries
Loan interest must be paid every year.
Repaying loans
The loan must be repaid.
Trade payables
Often ‘secured‘ against particular assets.

Cash Flow Cycle

Factors When Choosing the Source of Finance
It shows the stages between paying out cash and
The main factors considered in making the financial
receiving cash.
choice:
1. Cash outflow to pay for materials, rent, etc.
Size of business & Legal Form (type of business):
2. Goods produced
Public limited companies have a larger choice of
3. Goods sold
sources of finance because they pay less interest (less
4. Cash payment received for goods sold (cash
risk).
inflow)
Amount of Capital Required: if you need just a little
The longer it takes for the cash flow cycle to be
money, you won’t issue new shares.
completed, the greater the working capital.
Purpose of Capital & Time Period: The general rule is
Cash flow is not the same as profit.
that the finance source should match the financial
Profit consists of goods sold on credit, whereas cash flow
need:
is a business's cash sales in a month.
If the use of capital is long-term, the source should
When profitable businesses run out of cash, it is known as
be long-term (same with short-term).
insolvency

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Due to: Delaying the purchase of fixed assets will reduce cash
Over-trading outflows, but in the long run, a company may lack
Long credit time efficiency as they don’t have up–to–date technology.
Less credit time received
Many fixed assets purchased Long Term Solutions

Attracting new investors

Cash Flow Forecast
Cutting costs and increasing efficiency using lean
production.
Cash-Flow Forecast: an estimate of a business's future
cash inflows and outflows on a month-by-month basis. Develop new products
Shows the expected cash balance at the end.
Closing Cash Balance: the amount the business holds at 5.4. Working Capital
the end of each month.
Opening Cash Balance: the amount the business holds at In the short run, it is the capital available to a business to
the start of each month. pay for day–to–day expenses.
Net Cash Flow: The difference between the cash inflow
Working Capital = Current Assets – Current Liabilities
and outflow (inflow – outflow)
Working capital can be in the form of:
January February March
Cash
Opening bank balance (A) 10,000 15,000 (5,000) Value of debtors
Cash inflow (B) 35,000 45,000 50,000 Value of inventory
Cash outflows (C) 30,000 65,000 40,000 Working capital should be handled properly because it
Net cash flow (D=B-C) 5,000 (20,000) 10,000 shows investors & banks how efficient a business is and
its financial strength.
Closing bank balance (=A+D) 15,000 (5,000) 5,000

Uses of Cash Flow Forecast 5.5. Income Statements

Starting up a business Accounts: the financial records of a firm’s transactions.

The first few months are crucial to every business, as Accountants: professionally qualified people who are
owners don’t realise the amount of cash needed, responsible for keeping accurate accounts and producing
which is why they fail. final accounts.
Businesses need to spend on labour, land, and capital. Final Accounts: These are produced at the end of the
They even have to advertise and promote extensively. financial year and give details about the profit/ loss made
Many owners don’t understand the importance of cash over the year and the worth of the business.
flow in a business, so they fail. The simple equation for profit:
Keeping the bank manager informed Profit = Sales revenue – total costs
A cash flow forecast will help a business receive a Profit can be increased through:
loan. Increasing the sales revenue so that it is higher than
The bank manager needs to know when the amount is the production costs.
needed, for how long, and when it will be repaid. Reducing the production costs.
Managing an existing business A combination of the two.
Managing cash flow
Businesses with high bank balances can use their cash Importance of Profits
effectively in other areas.
Importance for Private Sectors:
Reward for enterprise
How do you Overcome Cash Flow Problems?
Entrepreneurs have special qualities, and they
Short Term Solutions must earn rewards for that.
Reward for risk-taking
Increasing bank loans will inject more cash into the Shareholders/investors/owners take risks when
business, but interest and loan must be paid. they provide capital; profits reward those risks.
Delaying payments to suppliers will decrease cash Payments act as incentives to invest more and
outflows in the short run, but suppliers may refuse to make the business profitable
provide discounts or supply. Source of Finance
Reducing credit periods may help a business increase Profits after payments can be used to fund
short-term cash inflows, but customers may switch to expansion
competitors. Indicator of Success

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Profits show that investing can be profitable, but 2018 2017

losses show that investment must not be made. Net profit $195 $240
However, Profit ≠ Cash as profit is derived from
Corporation tax – $35 – $40
revenue, but cash can be derived from many
places (e.g. selling assets like cars). Profit after tax $160 $200
Importance of profit to the public sector: Dividends – $120 – $130
Used as a source of finance to develop the state- Retained profit for the year $40 $70
owned business or be more efficient.
Importance of profit to social enterprise: Uses of income statement:
Balance profit-making with their aims, as profit is used Know the profit/loss made.
for the firm's survival. Compare their performance.
Profitability of individual products.
Understanding Income Statements Products to launch.

Income Statement: a financial statement that records the

income of a business and all costs incurred to earn that 5.6. Statement of Financial Position
income over some time.
Statement of Financial Position – a document that shows
Managers, banks and other investors will use it to see if a
the value of the business’s assets and liabilities at a time.
business is making a profit:
Assets: Items of value owned by a business.
To compare with previous years - if it is greater than
Current Assets: (Short-term Assets) Items owned by
the year before
the business for less than 1 year, i.e. Raw material,
To compare to competitors
cash.
The main features of an income statement include:
Non-Current Assets: (Long-term Assets) Items owned
Revenue: the income to a business from the sales of
goods and services. by a business for more than 1 year, i.e. Buildings, land,
company cars.
Equation: Units sold x Cost per unit
Liabilities: debts owed to the business.
Costs of Sales: the cost of production or buying the
Current Liabilities: (Short Term Liabilities) Debts owed
goods the business sells during a period.
by business for less than 1 year, i.e. bank overdrafts
Equation: Opening inventories + Purchases –
Closing inventories and wages.
Non-current liabilities: (Long-term Liabilities) debts
Gross Profit: the profit made in revenue is greater
owed by a business for more than 1 year, i.e., long-
than the cost of sales.
term bank loans and creditors (money the business
Equation: Revenue – Cost of sales
owes to suppliers).
Trading Account: shows how gross profit is calculated.
The Total Equity (AKA Shareholders’ funds) is how
Net Profit: the profit the business makes after
much a business is worth. (only for limited
deducting all costs.
companies).
Equation: Gross profit – Overhead costs (Fixed
Shareholders’ Funds = Total Assets – Total
costs)
Liabilities
Depreciation: the fall in the value of a fixed asset
over time. The shareholders’ funds are the total money invested
in a business by the shareholders/owners.
Retained Profit: the net profit, after taking away taxes
This money can be invested by either share capital or
and payments to owners – which is reinvested into the
reserves (Retained profit and loss).
business.
If the total equity of a business has increased/fallen,
Limited companies will have in their income statements:
the shareholder’s stake in the company will be worth
Corporation tax is paid from net profit.
more/less, respectively.
Dividends paid to shareholders.
Retain profit after these two deductions.
Example of Statement of Financial Position
Results from the previous year will allow for easy
comparisons.
Assets 2018 ($00) 2017 ($00)
Example of Income Statement Non-current (fixed assets):
Land and buildings 450 440
2018 2017 Machinery 700 $600
Revenue $1250 $1300 1150 1040
Cost of sales – $900 – $900 Current assets:
Gross profit $350 $400 Inventories 80 50
Expenses, including interest paid – $155 – $160 Account receivables (debtors) 50 60

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Assets 2018 ($00) 2017 ($00) the more efficient the business is with its capital
employed.
Cash 10 15
Net Profit Margin (%): how well a company converts
140 125
sales into net profit.
Total Assets 1290 1165 NPM(%) = 100 × Net Profit
Sales Revenue ​

Liabilities:- Shows the percentage of gross profit per $1 worth

Current liabilities: of goods. If the following year's profit increases,
Account payables (Creditors) 65 40 either the price increases or the cost of sales is
reduced.
Bank Overdraft 65 60
Return on capital employed: how profitable a company
130 100 is compared to the money used.
Non-Current liabilities: RoCE(%) = 100 × Net Profit
Capital Employed ​

long-term bank loans 300 245 Shows the net profit made on each $1 Worth of
Total Liabilities 430 345 sales. The higher the results, the more net profit is
Total Assets - Total Liabilities 860 820 gained from the sales.
One profitability ratio isn’t helpful by itself. You need to
Share capital 520 500
use all the profitability ratios and compare them with
Profit and loss reserves 340 320 previous years of the business.
Total Shareholders’ funds/equity 860 820 Liquidity Ratios:
Current Ratio: how good a company is to pay off its
Interpreting Balance Sheets current liabilities with its current assets.
Current-Assets
Current Ratio = Current-Liabilities ​

Shareholders can see the value of their stake Shows whether the business has enough current-
Shareholders can also analyse how expansion has been term assets to pay off short-term debts; if less
paid for by long-term loans, retained profit, or increased than 1 means the business does not have money,
share capital (sales of shares). 1 is when a business can exactly pay debts, and
You can calculate the Working Capital. when more than 2 means it has excessive assets
Working Capital = Current Assets - Current Liabilities that could be put to use.
You can also calculate the Capital Employed – the long- Acid Test Ratio: measures the ability of a company to
term and permanent capital invested in a business. pay off its liabilities without depending on the
Capital Employed = Non-Current Liabilities + Total inventory sales.
Equity Acid Test Ratio = Current assets-inventories
Current-liabilities ​

The acid ratio considers only the liquid assets of

5.7. Analysis of Accounts the business, not the inventories. The uses as the
current ratio.
Analysis of Accounts: using data in the accounts to make
useful observations about a business's performance and 5.8. Users of Accounting Information
financial strength.
Used to compare results from other years and other Managers
businesses. They will help them keep control over the
Liquidity: the ability of a business to pay back its short- performance of each product.
term loans (debt). Help decision-making
Illiquid: assets are not readily convertible into cash. Ratios are a quick way for managers to compare their
Profitability: the measurement of the profit made relative ratios with other businesses and previous accounts.
to either sales achieved or the capital invested in the Shareholders
business. Also, a measure of efficiency. Shareholders and potential investors want to know
There are 2 types of ratios: how big a profit/ loss the company has made.
Profitability Ratios – how profitable a business is They will want to check the profitability and liquidity
Liquidity Ratios – how able a business is to pay its ratios and decide whether shareholders have to buy
short-term debts (current liabilities) more shares.
Profitability Ratios: Creditors/Trade Payable
Gross Profit Margin (%): how well a company converts Liquidity ratios indicate the ability of the company to
sales into gross profit. pay back its debts.
Profit
GPM(%) = 100 × Sales Revenue ​
Banks
The percentage of how much profit you have to Risk of illiquid, no lending.
earn from the capital employed. The higher the %, Government

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

To check the tax revenue, whether the firms are Impact on Business from Changes in Economic
paying the right taxes. Indicators
Workers and trade unions
They just want to assess whether the company's Changes in employment levels will affect the ability of the
future is secure. business to recruit new employees and also the income of
Access the profits to help unions improve wages and customers.
working conditions of employees. Rising inflation may increase business costs, leading to
Other businesses – competitors higher product prices. The effect of increasing inflation
The managers will compare their profitability and depends on the type of product sold.
liquidity with other businesses. An increase in GDP means the economy is growing.
Increase sales, higher income, but recruitment of
Limitations of Accounting Records and Ratio employees hard.
Analysis
Government Economic Objectives
Managers have access to all account data; external users
only have what the business requires to show by the law. Low inflation
Ratios are based on past accounting data and can not be
used to forecast future business performance. Low Inflation: Low prices of goods & services so that
Accounting data over time will be affected by inflation, people will buy more money in the economy.
and comparisons can be misleading. Inflation: The increase in average prices of goods &
Different companies may use different ways of services.
accounting. Therefore, comparisons may be difficult. Rapid inflation may lead to:
A fall in the value of money falls in real incomes.
Wage price spiral.
6. External Influences on Fall in international competitiveness as prices will be
high.
Business Activity Businesses may not want to expand and create jobs.
Living standards will fall.
6.1. Economic Issues Low inflation rates will act as an incentive for firms to
produce and encourage them to expand.
Main Stages of the Business Cycle and Trade Cycle
Low Unemployment
Gross Domestic Product (GDP): the total value of the
Low Unemployment: A high % of people work so that they
output of goods and services in a country in one year.
don’t rely on government funds.
When people want to and have the ability to work but
can’t work, then they are said to be unemployed.
The country's output will be lower if unemployed
people don’t produce goods and services.
It involves an opportunity cost as the government has
to pay greater unemployment benefits, which could be
used to improve education and increase living
standards.

Economic Growth

Economic Growth: growth of a country's GDP (Gross

Domestic Product) – more goods and services being
produced and sold.
Recession: too little spending, falling GDP, demand and If an economy’s total output rises, it is said to be
prices, workers lose jobs. experiencing economic growth.
Slump: long-drawn-out recession. Unemployment is GDP is the total value of goods and services produced
higher, and prices fall; many businesses fail to survive this in an economy.
point. Economic growth may cause employment to rise,
Growth: GDP is rising, unemployment is falling, and living increasing living standards and reducing poverty.
standards are higher. (Firms are doing well at this point). A fall in GDP can lead to:
Boom: too much spending, inflation, shortage of workers, Unemployment
and businesses uncertain about the future. Fall in average living standards as poverty rises

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Less investment Governments and spending decisions include a tax

measure according to the effect they want to achieve.
Balance of Payment Governments will reduce spending and increase tax rates
to reduce inflation.
Balance of Payment (of Imports & Exports): the difference Governments will increase spending and decrease tax
between a country's imports and exports balance out rates to stimulate economic growth.
(BoP = Exports – Imports).
Exports: Goods and services sold from one country to Monetary Policy
another.
Imports: Goods and services bought by one country Monetary Policy: change in interest rate by the
from another. government and the central bank.
Balance of payments is a record of one country’s financial Governments will have a set of objectives they would like
transactions internationally. to achieve and will present these objectives to the central
Governments will aim for an equal balance of payments: bank, which will set the interest rate in accordance with
exports equal imports. these objectives.
Higher imports than exports lead to a budget deficit. If these objectives seek to increase the overall demand in
Higher exports than imports lead to a budget surplus. the economy, the central bank will lower interest rates,
Problems of Budget Deficit: which will lead to -
The government can run out of foreign currency More consumer spending than borrowing.
reserves and will have to borrow. More risk of inflation (Decreases confidence
The exchange rate depreciates – the price of our consumers/Businesses have).
currency falls as compared to the other currency. There is less incentive for firms to invest/expand.
Exchange Rate: the price of a currency in terms of Depreciation of the exchange rate (Fall in value of the
another. country’s currency) will make for cheaper imports.
If these objectives seek to decrease the overall demand in
6.2. Government Economic Policies the economy, the central bank will raise the interest rate;
this will lead to -
Less consumer spending than borrowing.
Fiscal Policy
Less risk of inflation (Increases confidence
Fiscal policy: any changes by the government in tax rates consumers/Businesses have).
or public sector spending. Increase incentives for firms to invest/expand.
Appreciation of the exchange rate (Rise in value of the
Spending by the Government: country’s currency) will make for costlier imports.

Government spending decisions can have a great impact Supply-Side Policies

on certain business decisions.
If the government decides to increase its spending: Supply-side Policies: try to increase the competitiveness
Increase subsidies and grants (to encourage of industries in an economy against those from other
businesses to set up in high-unemployment areas). countries. Make the economy more efficient and increase
Increase in welfare benefits, meaning consumers will supply.
have a higher portion of income to spend. These supply policies focus on more long-term objectives,
Stimulation of economic growth. unlike fiscal/monetary, which are more short-term and
If the government decides to decrease spending: demand-focused. They have three main categories:
Increased competition (mainly if privation is used) Encouraging Competition: through
Disinflation (the reduction in the rate of inflation) privatisation/deregulations.
Labour Market Reforms: through trade unions,
Tax minimum wage, and labour legislations.
Incentive-related Policies: through reduced tax rates
Direct Tax and increased subsidies.
Income tax reduces consumer disposable income.
Corporation tax on comparing profit.
Indirect Tax 6.3. Environmental and Ethical Issues
Expenditure taxes, e.g. VAT
Import tariffs/quotas to reduce imports from abroad. Social Responsibility
Import Tariffs: tax on imported goods.
Social Responsibility: when a business decision benefits
Import Quota: a physical limit on the quantity of a
stakeholders other than shareholders.
product to be imported.
Examples of business activity impacting the environment:
Emission from transport vehicles.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Pollution from factories. Use of renewable energy

Waste disposal Recycle waste
Transportation of goods by ship or track burns fossil use fewer resources
fuels such as oil, creating carbon emissions, which link Develop new ‘environmentally friendly‘ products and
to global warming and climate change. production methods.

Arguments against being Argument with being mindful Main Reasons Why Businesses Respond to
mindful of the environment: of the environment: Environmental Pressure
Pollution and global warming
It can be expensive and reduce affect all, so social Consumers
profit. responsibility helps reduce
this problem. Bad publicity can cause them not to buy; if consumers
think the products harm the environment, they will stop
Increase prices to pay for Using non-renewable
buying, resulting in the business changing the product or
‘environmentally friendly‘ resources leaves less for the
production method.
policies. future and raises prices.
Scientists and Pressure groups
It can make firms unproductive,
environmentalists believe
reduce salaries and relocate to Can take actions towards businesses like consumer
that business activity can do
places without such policies. boycotts.
permanent damage.
The impact of the actions depends on:
Consumers are becoming
Public support and media coverage.
more socially aware, so
Consumers buy less if the price Consumer boycotts result in a decrease in sales.
environmentally friendly
is high. The group is well-financed and organised.
products have become a
Whether the action is unpopular but not illegal
market advantage.
Cost damage methods by the business.
Pressure groups can take If a business sells to another business - public
The government should pay to action to harm the pressure is less effective.
clean it up. business's reputation and
sales. Government through legal contracts
Owners can claim there isn’t
By making certain activities illegal:
proof that the activity is
Locating in an environmentally sensitive area.
causing damage. Producing non-recyclable products.
Dumping waste in nearby rivers/seas.
Pressure Groups: people who want to change business (or Pollution permits - licences that allow businesses to
government) decisions by taking actions, such as pollute to a certain level. If the business exceeds the
consumer boycotts. account, it must buy from a ‘cleaner‘ business or pay large
fines.
The Concept of Externalities Additional taxes on goods or factories resulting in
pollution.
Private Costs: costs paid for by a business or the
consumer of a product.
Ethical Issues
Private Benefits: gains to a business or the consumer of a
product. Ethical Decision: based on a moral code of conduct,
External Costs: costs paid for by the rest of society, other sometimes called ‘doing the right thing‘.
than the business.
External Benefits: gains to the rest of society, other than Offering or taking business from government officials or
the business. people working for other businesses.
Social Costs = External costs + Private costs. Employ child labour, even if it is illegal in some countries.
Social Benefits = External benefits + Private benefits. Buy supplies that lead to damage to the environment.
If the social benefit exceeds social costs, the scheme will Agree to ‘fix high prices‘ with competitors.
likely be accepted; the government/local community will Pay high to the top of the hierarchy and poorly to the
probably refuse permission. lower levels.

Sustainable Development Two main extreme views to the ethical standards:

Sustainable Development: Development which does not If the law is not broken, businesses can do whatever to
gain profit.
risk future generations' living standards.
Business can be sustainable by:

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Even if it is not illegal, therefore wrong even if it may Potential

increase profit. Opportunities for Effect 1 Effect 2
Business
Potential benefits of ethical Potential limitation of ethical
They are
decision decision
expensive to sell
Customers may be more Adults paid higher costs, Start selling exports
Increase potential abroad, and
inclined to buy products not especially if good workers’ to other countries -
sales, especially foreign consumers
made by child labour. conditions were involved. opening up foreign
online sales. buy the products
Good publicity about ethical markets.
Prices may be set higher due even if they are
decisions provides ‘free popular at ‘home‘.
to higher costs.
promotion‘. Quality good?
Open
If consumers are not Ethical issues?
factories/operations Cheaper to make
interested in how it’s made Expensive or
Long-term profit increases in other countries goods outside
and care only for price - then difficult to set up
profits fall. (become a than domestically.
operations in
multinational)
Some workers and investors other countries?
may want to link an ‘Ethical Products need
Short-term profit may fall.
business‘, making recruiting No trade maintenance and
and raising capital easier. Import products from
restrictions, more partly repairs. Will
other countries to sell
It could be argued that some profitable to buy, the needed parts
to customers in
countries employ children as could sell be available from
Less risk of legal actions ‘home‘ country.
they may be the only source of domestically. the foreign
being taken against the
income for the family, and producer?
company.
may cause them to fall to low Cheaper
levels. Import materials and purchases of
Are suppliers
components from supplies from
reliable? Does
other countries. But other countries
6.4. Business and the International greater distance
still produce final will free trade and
add too much
Economy goods in the ‘home‘ reduce costs.
transport costs?
country. Materials can be
Globalisation: the world is becoming more supplied ‘online‘.
interconnected, leading to increasing worldwide trade &
people moving. Potential Threats to
The reasons for globalisation include: Effect 1 Effect 2
Businesses
More Free-Trade Agreements and economic unions
Increase imports Increased
between countries have replaced protection for If competitors offer
into the home competition forces
industries. Consumers can purchase with few or no cheaper products,
market from foreign local firms to be
import controls. domestic sales fall.
competitors. more efficient.
Improved and cheaper travel links and communication
between countries made it easier to transport goods Create further
globally. Interest also allows east price comparisons, Increase investment competition - Local firms become
and online/e-commerce allows orders to be placed from multinationals Multinationals that suppliers to
anywhere. to set up operations afford the best multinationals, and
Many ‘Emerging market countries‘ are industrialising in the home employees may their sales could
very rapidly. They can sell globally at cheaper prices country. have economies of increase.
because of the loss of growth of the firms and scale.
industries. In some
professions,
The Opportunities and Threats of Globalisation to a Business Employees may It might encourage
employees have
include: leave businesses local businesses to
more choices about
Potential that cannot pay the use various
where they work -
Opportunities for Effect 1 Effect 2 same or more than motivational
businesses will
international methods to keep
Business have to make more
competitors. their workers.
effort to retain
them.

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

Why Government Might Introduce Import Tariffs and Disadvantages to Host

Advantages to Host Country
Import Quotas Country
Influence the government and
Import Tariffs: tax placed on imported goods in the New investment economy (bringing outside
country. influences and culture).
Import Quota: a restriction on the quantity of a product
Due to MNCs ' expertise and
that can be imported. More export increases the
activity, existing firms will
Protectionism: when a government protects domestic international competitiveness
likely be pushed out of the
businesses from Foreign competition using tariffs and of the country
market.
quotas. This reduces employment incomes.
Fewer imports keep domestic Depletion of scarce resources
Import tariffs increase the prices of imported goods,
businesses active and and endangerment of natural
making them less competitive than locally produced
goods. prevent the BoP deficit. sites.
Import quotas decrease the quantity of imported goods; Jobs created reduced
Profits flow out of the country.
increasing the price means less availability, thus unemployment.
increasing sales for domestic products. Increase tax paid to the Often, unskilled work is
government. created.
6.5. Multinational Companies (MNCs) More competition helps
increase the productivity and
Multinational (Transnational) Company: a company that efficiency of domestic
has factories or service operations in more than one businesses.
country
It is not just selling products abroad; it is having
6.6. Exchange Rates
operations abroad
The benefits of a business and its impact on becoming
Exchange Rate: the price of one currency in terms of
international:
another currency.
Benefits to business Impact to stakeholders For example, 1 Euro is equivalent to 1.2 Dollars
Currency Appreciation: when the value of a currency
New market Higher dividends
increases.
Easier to obtain raw materials Opportunity to live and work It can buy more of another currency
as they can be closer abroad 1 euro = 1.2 dollars, to 1 euro = 1.5 dollars.
Avoid trade barriers and Suppliers increase/decrease Currency Depreciation: when the value of a currency
import taxes depending on the location decreases.
Government gains It can buy less of another currency.
Low Labour costs 1 euro = 1.2 dollars, to 1 euro = 1 dollar.
higher/lower taxes
Spread risk (if there are low 2 things influence the exchange rate of a currency:
sales in one country and high Demand for the Currency: if many people want to buy
the currency, the price will increase because there is a
sales in another)
‘limited’ number of currencies (so it leads to
appreciation).
Benefits to the business Benefits to the country
Supply of Currency: if the central bank prints more
Producing goods at lower money, the supply increases, but the demand is still
Jobs are created
costs the same, so the value is lower (leading to
Investments in the depreciation).
Closer to resources (i.e. oil) development of infrastructure
in the country Exchange Rates Can Affect Businesses By:

Closer to market More exports If it Appreciates If it Depreciates

Avoid expensive taxes on the Import prices rise: your

Import prices fall: since your
import of goods (i.e. Korean currency is worth less, so you
Tax – more money to the currency can buy more of the
cars (KIA) being produced in need more to buy other
government other currency.
the EU to benefit from free currencies.
trade) Export prices rise: your Export prices fall: it is worth
Spread risks (if there are low currency is worth more, so it less, so other currencies can
Increased product choice for is more expensive for other buy your currency for less
sales in one country and high
consumers currencies to buy it. than theirs.
sales in another)

This means that if the currency appreciates:

WWW.ZNOTES.ORG
CAIE IGCSE BUSINESS STUDIES

The product’s price in other countries will increase The product’s price in other countries will decrease
The business will make more profit less profit will be made
Businesses can lower the price and still make the Businesses need to raise the price to make the same
same amount of money as before – it is more amount of money as before – less competitive.
competitive.
If the currency depreciates:

WWW.ZNOTES.ORG