Edexcel AS Business Studies Unit 1 Notes

7/27/2019 Edexcel AS Business Studies Unit 1 Notes

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Characteristics of an Entrepreneur (Unit 1.1)

An entrepreneur is someone who makes a business idea happen either by their owneffort or by organizing other people to do the work.

Successful entrepreneurs need: Understanding of the market

Knowing what customers want and how well current businesses aremeeting them.

Initiative Seizing opportunities, this requires confidence and the ability to be a

risk taker.

Creativity The ability to come up with new and unique ideas.

Determination Keep on going when the going gets tough.

Passion The drive and enthusiasm to achieve something.

Persuasive abilities Risk Taking

Enterprise: is the set of skills and attitudes that help an individual turn an idea intoreality.

People start a business for financial or non-financial reasons. Financial:

Make profit Financial security Wealth

Non-financial: Personal Satisfaction Challenge Working for yourself

Leadership Styles: MANAGERS: the five functions of managers are:

PLAN: Select organizational goals and set targets to achieve them. COORDINATE: Coordinate resources and staff across departments,

especially when they must be shared.

DIRECT: Keep everyone connected to objectives and on track.Communicate goals and instructions.


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CONTROL: Compare the actual results to targets set. Reward goodwork and investigate failure to meet targets. Plan for problems and

introduce improvements.

Leadership Vs. Management: Management involves getting things done through other people,

leadership means inspiring staff to achieve goals.

Leadership Styles: four main types: Democratic:

Encourages participation in decision making Strong coaching, listening and motivating skills Teamwork and communication is important Prepared to make final decision when agreement can't be

reached

Autocratic: Full control of decision making Employees have little or no input Good in crisis situations

Motivation through rewards

Laissez-Faire: Gives employees as much freedom as possible Managers communicate goals to employees but allow them to choose

how to complete objectives, make decisions and resolve problems on

their own.

Bureaucratic: Everything is done 'By the book' or by the policy They enforce the rules If it isn't covered by the book, the manager refers to the next level

above

Paternalistic: A paternalist manager acts like a 'father' They try to do what is best for their staff


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There will be consultation to find out the views of the employees, butdecisions are made by the manager

Paternalistic managers are interested in the security and social needsof their staff but it is still an autocratic approach.

Factors Effecting leadership Style: Nature of the task Personality Time constraints Skills of manager and workforce Rate of change Level of risk

Douglas McGregor: An American psychologist Worked in the 1950s Developed a theory about human behavior at work called theory X and

theory Y

Considerations:

Theory X and theory Y are extremes, it is likely that most managerswould fall somewhere in between.

A theory Y manager would create a more pleasantworkplace/environment.

A theory X manager may be better when dealing with casual workersor at times of crisis.


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Identifying a business opportunity 1.2

What is a market?A place where buyers and sellers meet, in order to exchange goods and services for

money

Creating a Market: A market can be held anywhere

o It doesnt have to be a supermarket.o It doesnt even need a building.

Indeed one of the biggest markets in the world the meeting between buyersand sellers is virtual.

Supply:The amount of a product that suppliers (sellers) offer for sale at a given price

Why supply increases if prices increase: Most firms want to make profit. If the price of a product increases then:

o More profit will be made on each item sold Assuming costs dont change.

oOther firms may be encouraged to start making and selling the product.

As they see the opportunity to make a profit. This direct relationship between the quantity supplied and price can be shown

on a supply curve.


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The supply Curve:

The supply curve shows how the quantity supplied changes as the price of thegood changes.

A fall in price (P1P2) causes a fall in the quantity supplied (Q1Q2).

A rise in price (P1

P3) causes an increase in the quantity supplied (Q1

Q3)

Factors of Supply: So any change in price results in a shift along the supply curve. Other factors of supply:

o Costs of productiono Legislation a government policyo Changes in production technologyo Weather

If any of these factors change the supply curve itself will shift.

Shifting the supply curve could be caused by: Changes in production costs Changes in production taxes and/or subsidies Changes in technology The weather/climate (primary commodities) The number of producers in the market


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There is no change in price However, firms are now willing to supply more The quantity supplied therefore increases (Q1Q2)

Demand:The quantity of a good service that buyers (consumers) wish to purchase at a given

price.

Most people want to buy for the lowest price This is exactly how most consumers behave:

o When prices are high, demand will be low.o When prices are low, demand will be high.

Why demand decreases if prices increases: Most consumers are looking to buy as cheaply as possible:

o Everyone likes a bargaino Nobody likes to be ripped off

If the price of a product increases then:o People wont be able to afford to buy as many

Assuming their income stays the sameo Instead people may look for cheaper alternatives

E.g. buying margarine instead of butter.

This indirect (or inverse) relationship between the quantity demand and pricecan be shown on a Demand curve.


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The demand Curve:

The demand curve shows how the quantity demanded changes the price ofthe good changes.

A fall in price (p1P2) causes an increase in the quantity demanded(Q1

Q2).

A rise in price (P1P3) causes a decrease in the quantity demand (Q1Q3).

The factors of demand: Factors affecting demand:

o Incomeo The price of other goods (competitor products/substitute products)o Tastes and Customso Changes in populationso Advertisingo The lawo Government policieso Attitudes and information

If these factors change, the demand curve will shift.

Shifting the demand curve: Shifting in the demand curve can be caused by:

o Increases in consumer population


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o Increases incomeo Consumer tastes shift toward the good in question.o The price of substitutes rises.o The price of a complementary good fails.o The bank of England cuts interest rates.

There is no change in price. However, consumer are now willing to buy more. The quantity demanded therefore increases (Q1Q2)

Market equilibrium Determining price

By combining supply and demand we can show how a market works. The two curves should cross at one point This point is called equilibrium. Any change in price would, in theory, lead to a return of the equilibrium price.


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Product orientation and market orientation:

Product Orientation:o When a business bases its marketing mix on what the business sees as

its internal strengths, the businesss marketing is said t be product

orientated.

o A product-orientated firm has its primary focus on its products and onthe skills, knowledge and systems that support the product.

Market orientation:o A market orientated business is one that organizes its activities,

products and services around the wants and needs of its customers.

o The business bases its marketing mix on its perception of what themarket wants.

Advantages of product orientated Organizations:o Firms can focus on internal quality:

Technological investments can be applied to a wide range ofproducts

Economies of scale can more easily occur

Allows outsourcing of production The organization is essentially a design house

Disadvantages of product orientated organizations:o changes in market structure will not be responded too fashion and taste are not accounted for in the public mixo technology applied can be left behind

Advantages of Market orientation:o The business should be flexible to changes in demand patternso The business, through market research, will have a strong

understanding of the needs of the customer

o New products should have a greater chance of success Disadvantages of Market Orientation:

o High cost of market researcho Constant internal change as needs of the market are met


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Market orientation gets the right product. Product orientation gets theproduct right.

Tools of market orientation:o Market researcho Market testingo Customer focus

Tools of product Orientation:o Product researcho Product testingo Product focus


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Evaluating a Business Opportunity 1.3

In order to find out what customers want, firms will carry out MARKET RESEARCH Market research can be defined as:

The systematic gathering, recording and analysis of data in order to better

understand the behavior of consumers.

The information collected can be used to: Identify new business opportunities or ideas Identify patterns in consumer behavior and forecast likely demand. Identify the main competitors.

Researching The Market:Market research can be carried out in two main ways.

Primary Research:o Sometimes called fieldresearch.o This is new information that has been collected first hand.o It could be:

Collected by the firm. Collected by specialist research companies.

Secondary Research:

o Sometimes called deskresearch.o This is information thats already been collected.o It could be information:

From within the firm. Or outside the firm.

Carrying out primary research: Primary research will be carried out by asking a sample of people

o It would be impossible to ask every prospective customer. Sampling involves selecting few people to interview

o So its important that they are representative of the whole market. Sampling methods include:

o Probability Sampling.o Non-Probability Sampling.

Probability Samples: Simple random sampling:


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o Here, every single member of the population has an equal chance ofbeing chosen.

Systematic random sampling:o With this method, every nth member of the population is surveyed, for

example every 5th.

Stratified random sampling:o This involves dividing the sample into market segments, based on

existing knowledge.

Cluster Sampling:o This method splits the whole market into small areas, and sampling is

carried out in those areas believed to be typical.

Non-Probability Samples: Quota Sampling:

o A certain number of people with given characteristics will beinterviewed.

Convenience Sampling:o Interviews everyone available.

Judgment Sampling:o This allows the interviewer to select people who they judge to be

representative of the market.

Secondary Data: It can be obtained from two sources:

o Inside the business: Existing research data Past promotional data Sales records Stock records Financial records Customer database

o Outside the business: Government statistics Commercial firms. (E.g. Mintel) International publications. (E.g. World Bank) Competitors annual reports


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The media

Investigating the market: In order to asses the demand for a product a business must consider:

o The size of the marketo Market niches (Gap in market)o Existing market segmentso Potential Market growth

The size of the market:o Firms will need to think about the size of the market:

A large market means lots of potential customers A small market means potential profits would be limited.

In order to asses whether there is a market for the idea, it is important toconsider:

o The number of competitors.o The potential market growth.

It is crucial to Consider:o

Market shareo Market growth.

Calculating market share:Market Share (%)= Value of Product Sales/Value of market sales x 100

Calculating Market Growth: Ideally a firm will want to enter a market that is growing

o This means more products are being sold Market growth refers to an increase in the size of the market for a particular

product.

o If the market is shrinking then market growth will be negative.\

Market share Vs. Market Growth: Ideally a firm will want a big market share of a growing market However, this is not always possible

Market Segmentation:


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Most businesses will break a market into smaller manageable chucks, calledsegments.

This means consumers with similar characteristics together.

Segmenting the market: Geographic Segmentation:

o Based on Geographic Patterns Demographic Segmentation:

o Age, Gender, income, etc. Psychographic Segmentation:

o Social Class Behaviorist Segmentation:

o Behavior Patterns Geographic Segmentation:

o His is a simple form of segmentation based on geographic Patterns.o This could compare:

Spending levels Income levels Employment levels

Buying Habits

Demographic Segmentation:o This refers to ways of separating people according to their

characteristics.

o There are three main ways: Age:

People of different ages buy different products. Gender:

Men and women behave differently, and buy differentthings.

Income: People with different disposable income levels will

purchase different products, even with the same brand.

Psychographic Segmentation:


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o This separates households according to their social class, life-styleand/or personality.

Behavioristic Segmentation:o This considers consumer behavior patterns including:

What people buy How often people buy How loyal customers are to certain brands

o The introduction and use of loyalty cards has made this much easierfor firms to do.

Problems with Mass marketing: It can carry high levels of fixed costs in the form of capital e.g. buildings, land

and machinery.

Vulnerability to changes in tastes and fashions, meaning chances of sparecapacity and therefore capacity under utilization.

Very difficult to appeal directly and satisfy needs of individual customers. Regular market research however, can help to reduce the risks of mass

market failure.

Product differentiation: The extent to which the consumer views your product or service as being

different from those of your competitors.

By generating a clear difference in the eyes of the consumer, you can benefitfrom:

o Increased sales volumeo Greater scope for charging higher prices.

Mass market firms use product proliferation (Changing something slightly) toserve a variety of different consumer needs. However, the need for mass

production limits the number of different products that can be offered.

Niche Marketing This is when a business targets a product or service at a small segment of a

larger market. E.g. Cars, specialist clubs.

Small firms and niche markets Few large firms directly compete in niche markets. Limited competitors because of small potential target market.


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This allows firms to charge higher (premium) prices. Little opportunity for economies of scale. Lack of scope for large scale manufacturing. Greater opportunity for understanding the specific needs of their customer

and changing accordingly.

More effective targeting of their customers base via promotions. Effective useof their limited resources.

Problems with niche marketing: The small scale limits opportunities for large profits. Unit costs tend to be higher due to purchasing items in small quantities. Specialist firms are vulnerable to changes in tastes and fashions. Larger firms might be attracted to a rapidly expanding niche market.

Mass Marketing Outline: Mass marketing involves targeting everyone within the market. It tends to make use of mass media methods such as television, radio, cinema

and national newspaper.

It requires a large amount of money to operate effectively. It is usually dominated by a few firms.

The mass market is also highly competitive.

Benefits of Mass Markets: Large scale production is possible. Clear advantages from economies of scale. Lower costs per unit via bulk purchasing etc. Mass media marketing is used to reach as large a potential target market as

possible.

Can be dominated by the larger firms creating significant barriers to entry forcompetitors.

Mass marketing helps increase brand awareness and to encourage consumersto try other products.

Trade Offs & Opportunity cost:

Scarcity:o We dont have unlimited resources


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o The main resources that we have a limited amount of are money andtime.

o At times, choices will have to be made as we dont have enoughmoney/time to be able to do everything we want to do.

o Money and time can only be spent once.

Opportunity Cost:The opportunity Cost is the cost of missing out on the next best alternative.

Opportunity Costs for a small business:o Choosing to start up in business rather than earning a steady salary.o Picking one business idea over another.o Choosing to spend money on fixtures and fittings rather than staff

training.

o Spending too much Money on stock.

Deciding Between Business Investments:o Estimations of potential returnso Considering the cash outlay required for each idea (Bigger outlay or

expenditure = Bigger Risk)

oIs the timing right?

o Do you have the skills to make the business work?

Trade-offs: Trade-offs are what you have to give up in order to get what the most. These things are not always quantifiable.

Product trials: What are product trials?:

o Products trails are when a product is tested in the market before alaunch to asses likely demand levels.

Why is Test marketing carried out?:o Launching a new product is very risky.o 5/6 new products fail.o It is also hugely expensiveo Test marketing can prevent unviable products being rolled out to the

whole market at huge expense.


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Types of product trials:o Sales research:

Customers are given the chance to try the product.o Controlled test marketing:

The product is only available in a few stores.o Test marketing:

The product is launched in a limited area.

Benefits of Product trials:o It can save millions and can save damage to a companies reputation if

trial uncovers a problem.

o It is a good way to get customers to try a product.o It provides customers feedback which can be used to make

improvements.

o Can provide information for firms to help them produce more accuratesales-forecasts.

The reasons product trials are declining:o Firms are scared that competitors will find out about their new

products and produce a copycat product.

oMajor supermarkets now use centralized distribution channels whichmakes it difficult to get a product into a few shops.

o Better marketing research techniques now mean that product trials areno longer necessary.

o Globalization now means that companies are using whole companies astest markets.

Product trials are useful for new businesses who:o Dont have access to sophisticated market research information.o Cant afford a national product launch.o Want to avoid expensive mistakes.o Can use the results as a bargaining tool to get supermarket shelf

space:

o HOWEVER:Product trials slow down the time taken to get a product to marketing

and things could be crucial.

Test marketing:


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If test marketing is used then the area chosen needs to be given carefulconsiderations.

The size of the market-economy V. accuracy. Is it representative of the whole market? (distribution, income, population.)

Product positioning: Firms need to identify the segments that would be most suitable for their

product

Ideally a firm will want to enter a growing market, since this means more isbeing sold to consumers.

A firm will also have to consider the competition:o What are their strengths?o What are their weaknesses?o How are they different.

Identifying the competition: To analyze the competition they must first beidentified.

Identifying strengths and weaknesses:o Once the competition has been identified, their strengths and

weaknesses can be considered.o This can be used to identify ways of making your product different.

Market Mapping:o Once a firm has knowledge of their competitors they can identify gaps

in the market.

o This is often done using Market Mappingo This allows similar products in a market to be mapped using two

variables quality and price.

Gaining a competitive advantage:o Methods of obtaining a competitive advantage:

Value for Money Facilities Brand Name Taste Customer Service: Delivery, After Sales service. Images


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Location

What is Value Added?o It can be defined as:

The increase in the benefits of a good or service which are created at

each stage of production

o This means that value can be added simply by making a product moreappealing to customers

o Methods of adding value include:o Changing raw materialso Packagingo Branding

Calculating Value Added:Value added can be calculated using the formula:

Value added = Value of Output Value of input

Added Value and Survival:o It is by adding value that a business is able to make a profit.o As such the method of adding Value used a less important than the

fact that value is added.o A business that does not add value will not survive in the long-term

Market Mapping: What is a market map: A market map is a tool used by business when they are considering entering a

new market or launching a new product.

A market map allows the business to examine the existingcompetitors/products in a market.

They can see which areas of the market are overcrowded or spot potentialgaps.

In order to construct a market map the company decided on 2 key factors ofthe market.

Choosing the right factors: Each market will have different key features

o Examples would be:


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o High price/low priceo For the young/oldo Modern/traditionalo For men/womeno Trendy/classico Fashion/Functionalo Luxury/Everydayo Light/Filling

Adding Value:Adding value means creating something that has a higher value to

customers than the bought value

Ways to add value:o The amount of value added is the difference between the materials and

the selling price.

o Value added can be increased either by reducing costs or by increasingthe price.

o To add more value firms usually add a feature to the product thatmakes it more valuable to the customer which allows them to charge a

higher price.

Different ways to add value:o Convenience And speed: In Britain most people will pay extra to

save their own time.

o God design: A beautifully designed dress might sell for $400, whileone using exactly the same quantity of material might sell for just $40.

o High quality manufacture or service: A Lexus sells at $100,000because it is regarded as one of the best-made cars in the world; it

never breaks down and is like sitting in a huge leather armchair.

o Brand Name: A Nike swoosh add tens of pounds to the value of apair of trainers.

o USP: A features which is different from other similar products

The importance of value added:o People starting businesses often forget about everyday costs. There

are obvious ones such as gas and electricity and phones, but others


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such as the cost of wastage (theft, damaged goods), of the cost of

recruiting and training staff.

o All these costs have to be paid for out of the value added. So thereneeds to be a big enough difference between price and bought in costs

to allow internal costs to be paid for.

o Value added is necessity in business, not luxury.


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Economic Considerations (1.4)

Government and the economy: There are 3 types of economy:

o Free market economy:the government is not involved in business activity.

o Mixed economy:A mixture of government control and private business organizations

o Central planned or command economy:All decisions made by the government

Government Control Of Economyo The sole function of the government is to enable citizens to

become wealthier and have better standard of living.

Government Objectives:o Full employmento Economic growtho Low inflationo A positive balance of paymento A stable economy

Full employment

o People at work produce valuable goods and serviceso Work provides people with incomes and they can support themselveso When people spend they help keep other people employedo Unemployed people have to be provided for by the state and taxes

need to be increased to pay for this

Economic Growth:o Satisfies peoples needs and wantso Raises standard of livingo More products to sell abroad and can earn money to buy importso More jobs are created and raises incomes and profits

Low inflation:o Inflation is the rate at which the price of goods and services increases.o High inflation will reduce exports and encourage cheaper imports.

Harmful to UK firms.

o People on low incomes unable to buy as much.


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o High inflation causes cash flow problems for firms.o Encourages employees to ask for higher wages which in turn causes

inflation.

Positive balance of payment:o Makes UK richero Helps to keep the value of the pound high which makes the price of

imports cheaper and this helps to keep inflation low.

o If the value of the pound is strong interest rates do not need to behigh to protect it.

A stable economy:o Easier for businesses to plan for the futureo People will not be suddenly threatened with unemployment, higher

prices etc.

o People and businesses who borrow money will know exactly how muchthis will cost.

o Foreign investors will be willing to invest in the UK.

Two prominent Economic policies used by governments are:o

FISCAL POLICY: adjusting the level of demand in the economy byaltering spending and taxation; lower taxes more money to

spend; greater expenditure in public sector create demand reduce

unemployment.

o MONETARY POLICY: Control the economy through interest rates andthe money supply. Target rate for inflation set by the government and

Monetary Policy Committee sets the level of interest rate and

supply of money to meet this target.

Interest Rates: the cost of borrowing money and the return for lending money (or reward for

saving).

Also represents an opportunity cost.

How businesses are affected by interest rates: Investment decisions and spending on capital goods Debt burden on loans Exports/imports (due to changes in the value of the pound)


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Opportunity Cost of saving Changes in the level of consumer spending Business confidence

Consumer demand: Changes in the cost of borrowing for goods purchased on credit (usually larger

items)

Changes in mortgage repayments (implications on disposable income). Consumer confidence.

Effect on exchange rate: You should understand the:

o Importance ofHOT MONEY FLOWS.o FLOATING EXCHANGE RATE based on demand and supply of

sterling.

Imports and Exports: If interest rates fall this will lead to a fall in the value of the pound

Fall in export prices and rise in import prices.

Price Elastic = Price Effects Demand (if price is high, demand is low).

Inflation: What is inflation?:

o Most people know that inflation is about rising prices.o But it is not simply about increases in the prices of individual goods or

services, as these rise and fall all the time in a market economy.

o Inflation is a more general phenomenon it is a widespread rise in thelevel of prices across the economy.

Measuring inflation - RPI:o The retail price index:

This was the favored measure of inflation by the UKgovernment until 2003.

It measures changes in the value of the average basket ofgoods.

Each good is given a weighted value to reflect its importanceand to show the proportion of income spent upon them by the


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average family.

Problems with RPI:o The major problem with the RPI was that it was felt to only reflect the

average person.

o This meant that pensioners and other low income groups oftensuffered lower than inflation rises in their pensions and benefits,

making them worse off.

o Higher fuel prices especially effected these groups badly.

Consumer price index:o The CPI measures changes through time in the price level of consumer

goods and services purchased by households.

o From 2003 the UK now use the CPI t measure inflation.o This tends to provide a lower measure in percentage terms of inflation

and hence the target has been readjusted to 2%.

o The CPI provides a more accurate indication of inflation with theeconomy but fails to measure housing costs.

Inflation(continue):

Causes of inflation:o Cost Push inflation:

This occurs when there is an increase in the cost of production(e.g. higher wages, raw materials, fuel, tax etc.)

This forces firms to raise their prices to protect their profitmargins.

o Demand Pull: This occurs when prices rise due to excess demand within the

economy.

If consumers incomes rise but there is no rise in the supply willbecome limited and high levels of demand will force prices to

rise to act as a rationing mechanism.

Inflation and Expectations:o Consumer and business expectations about what they think will

happen with inflation are very important.


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o If these groups believe that inflation will rise then they are likely todemand higher wage rises and increase prices respectively.

o This will create additional inflationary pressures and generate aninflationary spiral.

Hampers Longer-term Planning:o With high inflation and the association economic instability, firms find it

more difficult to plan ahead.

o And longer-term developments often have to give way to short-termexpenditure.

o Firms are discouraged from making longer-term investments and tendto restrict capital spending to high-return projects or those allowing a

relatively quick payback, and to assets that of insulation from inflation.

Increases risks and borrowing costs:o When inflation is high and unpredictable it adds substantially to

financial risks, so savers and lenders require some insurance against

the uncertainty of the future value of their money i.e. a risk premium

in the form of a higher interest rate.

That means higher borrowing costs, which discourages investment.

Exchange rates:o Exchange rates: are the price of one currency in terms of another.o Bi-lateral exchange rates: compare one currency against another.o Exchange rates are determined much like any other price in a free

market, via demand and supply.

Factors that influence the pound:o Inflation: if inflation in the UK is lower than elsewhere, then UK

exports will become more competitive and there will be an increase in

demand for pounds. Also foreign goods will be less competitive and so

UK citizens will supply less pounds to buy foreign goods. Therefore the

rate of the pound will tend to increase.

o Interest Rates: If UK interest rates rise relative to elsewhere, it willbecome more attractive to deposit money in the UK, therefore demand

for sterling will rise. This is known as hot money flows and is an

important short run determinant of the value of a currency.


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o Speculation: If speculators believe the sterling will rise in the future,they will demand more now to be able to make profit. This increase in

demand will cause the value to rise.

Therefore, movements in the exchange rate do not always reflect

economic fundamentals, but are often driven by the sentiments of the

financial markets. For examples, if markets see news which makes an

interest rate increase more likely, the value of the pound will probably

rise in anticipation.

o Change in Competitiveness: if British goods become more attractiveand competitive this will also cause the value of the exchange rate to

rise. This is important for determining the long run value of the pound.

o Relative strength of other currencies: Between 1999 and 2001 thepound appreciated because the euro was seen as weak currency.

o Balance of payments: If there are more imports than exports, thevalue of the pound falls due to less goods being manufactured in the

home country. This leads to fewer exported goods, therefore having a

knock on effect on the value of the currency due to less demand.

The Demand Curve for Sterling:o The demand for the pound comes from demand for our exports from

abroad. We want to be paid in pounds, no matter where our customerscome from, and so people abroad have to purchase pounds on the

foreign exchange market.

o If demand for exports increases, then demand for the pound onthe foreign exchange market increases.

o Demand for the pound also comes from the demand for saving in UKbank accounts if the UK interest rate goes up compared to interest

rates abroad, then people abroad will want to save their money in UK

bank accounts. Because you can save only pounds (rather than dollars

or euros) in UK banks.

o Demand for the pound on the foreign exchange market will riseif the interest rate rises. The stocks of funds that move around the

world in search of the best return I called hot money.

o Long term capital movements are also important. So, inwardsinvestment into the UK increases demand for the pound.

The supply curve for sterling:


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o Supply of the pound onto the foreign exchange market comes from ourdemand for imports. People abroad want to be paid in their own

currency, so we take our pounds along to the foreign exchange market,

releasing them on to the market in return for other currencies.

o SO, supply of the pound on the foreign exchange marketincreases if demand for imports increases.

o If the interest rates abroad increases relative to the interest rate inthe UK, then funds will move from the UK to overseas bank accounts,

increasing the supply of the pound on foreign exchange markets.

o If there is net outwards investment from the UK economy, then thesupply of pound will increase.

Depreciation:o Depreciation means that the value of the pound, in terms of other

currencies goes down.

Appreciation:o Appreciation means that the value of the pound, in terms of other

currencies goes up.

Advantages of a strong pound:o

It keeps inflation under control: A high pound leads to lower import prices this boosts the real

living standards of consumers at least in the short run.

When the sterling is strong, it is cheaper to import rawmaterials, components and capital inputs good news for

growing businesses that rely on imported components or who

are wishing to increase their investment of new technology

from counties overseas.

A strong exchange rate helps to control inflation domesticproducers face stiff international competition from cheaper

imports and will look to cut their costs accordingly.

Cheaper prices of imported foodstuff etc. will also have anegative effect on the rate of consumer price inflation.

Disadvantages of a strong pound:o The balance of trade and goods:

Cheaper imports lead to rising imports penetration and largertrade deficit. (Basically more imports than exports).


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Sources of finance (1.5)

Definition: Finance: this is money. Sources of finance: This I where you get finance from.

Why do businesses need finance?: Starting up:

o Buildings, machinery, raw materials and office equipment. Everyday bill payments (working capital):

o Short-term finance required for the day-to-day running of a business. Take over bid. Replace machinery/equipment. Internal growth. Expansion.

The purpose of finance: Different sources of finance have different implications for a business, so it is

important that the most appropriate method of finance is chosen for the

purpose that the business has in mind.

Sources of finance: Internal:

o Finance which is raised internally, does not increase the debts of thebusiness

e.g. Retained profit, personal savings, sale of unwanted assets, sale

and lease back.

External:o Finance provided by people or institutions outside the business,

creates a debt that will require payment

e.g. Loans, overdraft, shares, Debentures.

(A debenture is a document that acknowledges the debt, the company

is liable to pay a specified amount with interest.

Time periods for finance:o Generally considered to be:

Short-term Up to 3 years. Medium-term 3 10 years.


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Long-term Over 10 years.

Short term finance:o It is needed for the day-to-day running of a business and is usually for

a period of up to 3 years.

o In order to understand short-term finance it is necessary tounderstand the concept of cash flow.

Cash flow:o A business needs sufficient inflows of cash finance, its day-to-day

outgoings.

Sources of short-term finance:o All commercial banks offer various methods of short-term finance for

businesses:

Overdraft Short-term loans

Hire purchase (external) Trade credit (internal)

External short-term finance:

o Overdraft: the bank allows the business to draw more money fromtheir bank account than they actually have in it.

o Advantages: Very quick to arrange Only pay interest on amount overdrawn A good short-term solution to a cash flow problem.

o Disadvantages: Only suitable for smaller amounts Has to be repaid within a short amount of time Interest or charges are paid.

o Short-term loan: an amount of money is borrowed from the bank, thenrepaid (with interest) over a set period of time (0 3 years).

Factors which influence a banks decision to lend:o Past trading record.


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o Purpose of the finance.o Business proposal.o Current financial position.o Financial projections.o Nature of the market/sales forecast.

Banks use this information to:o Determine who qualifies for a loan.o Determine what interest rate they will lend at.

o Interest rates - Cost of borrowing money (reward for savings)o What credit limit to set.o Banks also use this information to determine which customers are

likely to bring in the most revenue.

Security:o Something that acts as assurance to a lender that will get its money

back if a business is unable to pay back money it has borrowed .

o If the business fails to repay the loan, the bank as holder of thedeeds is legally entitled to sell the factory and office in order to

recover any amount outstanding on the loan.

Internal short-term finance:o Trade credit: items are bought from suppliers on a buy now pay later

basis.

o Advantages: Gives businesses more cash to use in immediate future. Does not incur interest charges.

o Disadvantages: Can only be used to buy certain goods. Bills usually have to be settled within 30, 60 or 90 days.

Sources of medium-term finance:o Various different forms of medium-term finance are available to a

business:

Medium-term loan Hire purchase


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Leasing

External medium-term finance:o The rate of interest payable on a medium-term loan depends on:

How much is borrowed How long the money is needed for The security that is provided.

o Businesses have the option to chose either a variable rate or a fixedrate loan.

o VARIABLE: interest varies with whatever decision the bank of Englandmake with regard to interest rates.

o FIXED RATE: interest is fixed for the duration of the loan.

o Hire purchase: can also be medium-term.o Leasing: Pay installments over a set period of time to rent an item

businesses never actually own the item.

Long-term finance:o

Usually thought of as being for periods in excess of 10 years.o This finance is for securing the resourcing for long-term growth.

Sources of long-term finance:o For the long-term, a business essentially has the choice of raising

finance by borrowing or through the issue of shares.

Long term loans (external) Issue of shares (external)

Sale and leaseback (internal) Retained profit (internal)

External long-term finance:o Long-term loan: an amount of money is borrowed from the bank, then

repaid (with interest) over a set period of time (10+ years).

o Used for expensive pieces of machinery


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Security a lack of security may mean that banks are unwillingto grant a loan.

Existing levels of debt if high banks, they will think twiceabout lending.

Break-even Revenue:

Break-Even Analysis:o Once a firm knows the total costs and revenue it can calculate the

break even point.

o This is defined as:Break even occurs when Total Costs are equal to Total

Revenue. In effect the business is Neither making Profit or

Loss.

Which means = Total Revenue Total Costs = 0

Is the Break-Even point achievable?-Yes?

+Then there are no worries and carry on

-No?:

o Then a number of actions must be taken: Cut costs:

Can cheaper raw materials be used? Can cheaper premises be found? Do we need all the stuff we have budgeted for?

Raise prices: Is this practical. Are the customers willing to pay higher prices? What are your competitors charging?

Broaden the product range: Can complementary products be sold to boost sales?

Margin of safetyo The margin of safety can be used t asses how close to its break-even

point a firm is.


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o Defined:The amount by which demand can fall before a firm incurs

losses i.e. how close the firm is to break-even level of output.

o And is calculated using this formula:Margin of safety = Total output Break-Even output.

Why bother?o It is useful when deciding whether a new product is going to be viable.o Can the required quantity be realistically produced and sold?o It can be used to see how changes to any one of the variables will

effect the break-even point:

Price if price is increased will profits increase? Costs - if costs increase how is profit effected? Output How does this effect both selling price and costs?

o It can allow a business to calculate the level of output needed toachieve a given level of profit.

i.e. How many units must be sold to make $100,000 profit?

Documents

Edexcel AS Business Studies Unit 1 Notes