IGCSE Business Studies Key Revision Booklet(1)

Source: Mrs O’Dolan’s Notes, Tutor2U & BBC BiteSize Page 1

IGCSE Business Studies Key Revision Booklet

Includes key definitions plus key

facts which must be learnt for the IGCSE Business Studies Exam


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

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

Scarcity and Choice

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

Opportunity Costs

All people and businesses have wants and needs. A need is something that is considered essential and a want is something that would be beneficial but we could do without. However all goods and services are scarce – i.e. There is not an unlimited supply of everything and as such everyone has to make choices. Making a good choice will however mean that you will give up one thing in favour of getting another. This is known as an opportunity cost.

Definition to learn The opportunity cost is the loss of the good or service forgone

Example Consider a can of coke and a bar of chocolate. Both are priced at KSh 40. You want to buy both but you only have 40Ksh in your pocket and so you can only buy one. If you decided you buy the can of coke then the opportunity cost would

be the bar of chocolate.

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


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

Production

Production is all activities that help to provide goods and services that people want or need.

Factors of Production

These are the resources needed for a business to exist.

� Land: This can be rented or bought. It also includes natural resources such as oil, forests, and rivers.

� Labour: This includes all the people who are paid for their services

and also people who offer their services for free (e.g. voluntary workers or the family of a business owner.)

� Capital: These are the physical equipment, tools and machinery

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

� Entrepreneurial Skills: This is the person who develops the business

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

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


Goods And Services

Consumer Goods: These are goods that are provided for the general public.

Consumer goods fall into two categories: Durable goods and non-durable

goods.

Durable Goods: Goods that are used repeatedly over a period of time.

Although they will eventually need replacing through wear and tear they are

not used up. Examples of durable goods include:

Tables Computers Cars Mobile Phones Non-Durable Goods: Goods that are used up and need replacing. In the

shops these are known as “fast moving consumer goods” – FMCGs. Examples

include:

Food Toothpaste Washing powder Ink Cartridge Capital Goods. These are goods purchased by businesses to produce the

goods or services that they will eventually sell. Capital goods are one of the

factors of production. Examples include

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

run efficiently. It includes all businesses providing services to industry such

as selling (a restaurant will buy meat form a butcher), to transport (a

manufacturer needs to get its products to their customers either at home

or abroad), banking and insurance and tourism.


Sectors of Production

Production is sometimes divided up into: -

1) Primary production means work that gets natural resources from the land or sea.

Primary industry is sometimes known as the extractive industry o Examples include: - Farming, fishing, mining, oil refinery and forestry

2) Secondary Production means work that turns natural resources into finished goods

Secondary industry is sometimes called manufacturing and construction industry o Examples include: - factory work, building work, baking, tailoring and

making anything

3) Tertiary production means work that provides services rather than goods.

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

transportation Industrialisation and De-Industrialisation

� Industrialisation is when a country experiences an increase in

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

secondary production.


Sectors of Industry

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

The Private Sector

This includes goods and services provided by businesses that are aimed

mainly at making a profit. The business owners are either individuals (sole

traders), small groups of business people (partners) or business people who

join together to form a joint stock company (i.e. a limited company).

The Public Sector

This includes goods and services provided by the government. These goods

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

Not for profit public sector goods: Some goods are provided by the

government because they are considered general needs that will benefit

everyone but if left to the private sector they either would not be provided

or would be too expensive for many people to buy. Examples include: -

o The Armed Forces

o International Consulates

o Infrastructure and road lighting.

o Education

o Health

Sometimes the government has another priority other than profit such as

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

BBC).

Some services are provided by both the public and private sector and people can choose if they can afford to pay for it.


For profit public sector goods: Sometimes a government will help a business

to become competitive. For profit businesses that are owned by the

government will either be useful to the government because it employs lots

of people and so keeps unemployment down Usually the government will out

such a business that looks like it could go bust and will then sell it back to

the private sector when the business is considered to be a “going concern”

(i.e. able to survive on its own)

The Voluntary Sector

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

Organisation (NGO) or charitable sector. These organisations exist to raise

money for good causes or draw attention to the needs of disadvantaged

groups in society. Examples include AIDS charities, The Red Cross and

Oxfam. The aim of this sector is to run with minimal costs and to pour as

much of the funding into helping the charity. Many staff will therefore work

for free, although larger organisations will employ administrators or many

pay survival wages to some staff. In some countries Non Government

Organisations (NGOs) will exist to ensure that funding that is donated goes

to the intended cause.

Funding of the sectors of production

Sector Funding

Public Taxation

Private Selling goods and services

Voluntary Charitable donations


1.1.3 Business growth and measurement of size

Growth and Measurement of Size

The growth of a business is when it expands in size. The size of a business can be measured by the following means:

• Sales turnover (or sales revenue) • Number of employees • Market share • Number of outlets (e.g. shops) • Profit

Businesses either grow organically or externally (by acquisition and mergers.)

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

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

Businesses may wish to expand for the following reasons:

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

A business can grow organically in the following ways:

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


Mergers and Acquisitions

A merger is where two or more businesses AGREE to join together to become one larger firm. An acquisition is when one firm BUYS another firm.

When a one business buys another it is possible that the acquisition or merger integrates the new product with the existing product. This integration can either be vertical or horizontal integration.

Mergers and acquisitions are an important option for larger businesses that wish to grow rapidly. However, they are a high risk strategy – it is easy to buy the wrong business, at the wrong price for the wrong reasons!

The advantages of mergers and acquisitions are:

1. Economies of scale 2. Greater market share for horizontal integration, which means the

business can often charge higher prices. 3. Spreads risks if products different. 4. Reduces competition if a rival is taken over. 5. Other businesses can bring new skills and specialist departments to

the business.

The disadvantages of mergers and acquisitions are:

1. Diseconomies of scale if business becomes too large, which leads to higher unit costs.

2. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration.

3. May need to make some workers redundant, especially at management levels – this may have an effect on motivation.

4. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business.


Constraints on Growth (Things stopping growth)

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

1. Financial limitations – a business may not be able to raise the necessary finance to grow any bigger – perhaps it has not made enough profits to generate the cash or the bank is not keen to lend it more money at the moment.

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

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

4. Human resources are limited in terms of the skills available. Especially in more specialised areas it may be difficult to find enough qualified staff in the area to expand the business. In the South East of England, where


1.1.4 Key features of own national economy

Kenya Key Economic Facts

• Population: 40,000 • Unemployment: 40% • 60% of population are classified employed earning below the poverty

level • Average earnings $1,600 per person which is in the lowest 10% of the

world. • Growth rate 2.6% (2009) • Inflation rate: 10% (2009) • Trends in the Sectors of Production

Country Primary Secondary Tertiary

UK (2006) 1.4% 18.2% 80.4%

Malaysia (2005) 13% 36% 51%

Sudan (1998) 80% 7% 13%

Kenya (2007) 75 % 8% 17%

Source CIA Note that the higher the level of tertiary activity the higher the development of the country. • Even though the primary sector is the biggest sector in Kenya it only

amounts to 19% of the country’s income. 17% is secondary whilst 64% comes from the tertiary sector.

• Tourism is Kenya’s biggest export.


1.2.1 Business objectives and their importance

� Objectives: A specific statement that should be quantifiable.

Objectives should have SMART criteria

S Specific with regarded to exactly what is needed

M Measurable. (i.e. able to be judged)

A Agreed with people that will be responsible for achieving the goals.

R Realistic to staff of achieving the goals

T Timetabled to state when a target should be reached by.

Level of importance / Conflicts

Profit � Short term or long term? � New businesses may not be as concerned with profit but as they grow and get more established the business will be more focused on profit. � A sole trader, partnership or small private limited company will be less profit motivated as they may be motivated by keeping their jobs for themselves and their families whereas a large Ltd or public limited companies are responsible to shareholders to make a profit.

Growth � Growth brings economies of scale. � If the economy is good then a business may be growth orientated whereas during a recession a business may drop growth as an objective and focus on survival.

Survival � New business may aim to survive or break even � Economic situation – a firm may wish to survive a recession or drought � A competitor opening up nearby may make a business focus on survival rather than profit or growth.

Social, Ethical &

Environmental aims

� Some businesses (mainly in developed countries) are more concerned with their impact on communities than profit. Although these businesses will have owners that want a finance return they do not want it “at any cost” and so will accept a lower return with a clean conscious! � Being social and responsible can be a USP. If your competitors promote this then you may have to also.


1.2.2 Stakeholders and their differing objectives

Definition: A stakeholder is an individual that has an interest in and is affected by an organisation.

Stakeholder Stake

Shareholders /

Owners

� To receive high profits / dividends

� Self satisfaction – being your own boss

� Employment (their own job and that of their

family)

Managers � Their jobs and any bonus related pay

� To have their own reputation well known

� To make decisions and to set and control the

overall direction of the firm

Employees

(Also Trade Unions)

� To get the best possible wage / salary possible

� To have job security

� To have good working conditions

Financiers (banks,

trade creditors and

other lenders)

� To be paid on time and so be able to meet their

own debts

Customers � To be able to buy the products or services

being sold

� To buy products and services at the best

possible price

� To have quality assurance in products and

services bought


1.2.3 Aims of private and public sector enterprises

Comparison Of Public Sector and Private Sector Objectives

The Objectives of the Public Sector

The Objectives of the Private Sector

1. Economic Growth 1. Profit

2. Low inflation rates 2. Growth and increased market share

3. Low levels of unemployment 3. Break even

4. Exchange rate stability 4. Survival

5. Balance of payments equilibrium. 5. Social and ethical considerations

Differing Objectives of State and Private Sector Organisations � The main objective of the state owned sector is to provide a service or

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

The Objectives of the Public Sector

Affect on businesses

Economic Growth More people with money to spend on goods and services. More technology to improve production

Low inflation rates Avoids frequent changes in prices. Makes setting wages easier to predict

Low levels of unemployment More people employed to spend more on goods and services. Consumers can afford to buy more expensive goods.

Exchange rate stability Businesses can get involved in international trade without worrying that the cost of imports and exports will keep changing.


1.3.1 Government influence over decision making by using economic policy measures

The government can influence the actions of businesses and buying behaviour in a number of ways.

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

B. Fiscal Policies

(i) Taxation Taxation comes in two forms:

1) Direct taxation – taxation on income and profits (income tax, National Insurance and corporation tax).

• Corporation tax (tax on businesses profits) will reduce profits so a business can reduce dividends or increase price to keep profit levels high.

• Income tax will reduce the amount of money a customer has to spend. 2) Indirect taxation – taxation on spending (VAT, excise duty).

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

(ii) Government Spending Governments will spend money on health, education, defence, roads, law and order and on supporting businesses and local communities. Businesses can benefit direct or indirectly from the rest of the spending. • Governments might provide money in the form of grants, subsides and

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

• Governments also provide support through advisory bodies coordinated by

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


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

C. Monetary Policies – the government or central bank will change interest rates to influence the amount of money available to spend in an economy

Interest rates

Credit is borrowed money. Many small firms depend on credit such as bank loans and overdrafts to help finance their business activities.

Interest is the reward for lending and the cost of borrowing.

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

• Customers with debts have less income to spend because they are paying more interest to lenders. Sales fall as a result.

• Firms with overdrafts will have higher costs because they must now pay more interest.

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

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


1.4.1 Mixed and market Economies

No two economies are organized in exactly the same way, but all have to solve three fundamental problems 1. What should be produced in the economy?

2. How should production be organised?

3. For whom should production take place?

Should everybody be entitled to an identical share of production, or should some receive more than others? The gap between rich and poor has widened considerably over the last twenty years and different market economies try to address this

Free Market Economy Planned Economy

Private ownership of all economic resources

State owns and or controls most economic resources

Resources go towards making what consumers want to buy

Central state planning decides what should be produced and how it should be distributed

Price determined by market forces

Mixed Economy

Consumers have little choice and prices do not reflect want customers want.

Most economies are based on the mixed economy whereby 1. Many products only produced by private businesses – e.g. mobile

phones, cars etc. 2. Most essential services are provided by the state. These are known as

“Public goods”. Examples include police, fire service, defence, street lights etc.


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

4. The state will monitor private businesses activities through law governing

pollution, health & safety, employment etc.

1.4.2 International trade (access to markets/tariffs)

• International trade is the exchange of goods and services between different countries. UK business can compete against foreign rivals by offering better designed, higher quality products at lower prices.

• Kenyan Exports are products made in Kenya and sold overseas, while

Kenyan imports are products made overseas and sold in the Kenya. • Protectionism: The restriction of imports into a country by government

measures

Reasons For Protectionism

• Protects Kenyan businesses from extra competition • Helps new Kenyan businesses to develop before they face competition

Helps protect Kenyan jobs • Prevents foreign countries ‘dumping’ lots of cheap imports into Kenya • Prevents imports of harmful or desirable goods Trade Barriers (Methods of Protectionism) 1. Tariffs These are taxes on imported goods. They raise the price to

customers and make them less attractive 2. Quotas These are limits on the quantity of a product that can be

imported into a country e.g. 100,000 cars Free Trade: Trade without any protectionist / trade barriers between countries 1. Protectionism keeps Kenyan firms away from genuine competition. They may become lazy and inefficient 2. Free trade forces Kenyan firms to produce quality goods and services as they face much foreign competition of a better quality.


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

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

1.4.3 Problems of entering new markets abroad

1. Legislation (laws): Businesses may find that the country they want to

enter has many restictive laws. For example some environmental laws may

cause a firm to locate in a country that is less concerned about the

environment.


2. Language barriers: Mainly an influence for a small to medium sized

business. As less staff are employed the business may not wish to locate

to a country with a different first language.

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

Sunday. Some types of advertising are acceptable in one country

compared to another.

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

target market might be located, how the market abroad differs from the

one in Kenya, general lack of contacts.

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

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

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

• An increase in the value of the Shilling means one hundred shillings buys more dollars. The pound has appreciated (gone up) in value and become stronger.

E.g.: 100KSh = $1 Or 100KSh = $1 100 KSh = $1.50 75KSh = $1 On the second example (as exchange rates will be shown to the $1 in your exam) it now only costs 75KSh to buy a dollar whereas before it cost 100KSh It is now cheaper to buy imports (maybe a companies raw materials sourced abroad) but a businesses goods will be more expensive for foreigners to buy (as


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

• A fall in the value of sterling means one pound buys fewer dollars. This

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

2.1 Ownership and internal organization

2.1.2 Types of business organisation (sole trader, partnerships, limited companies, franchise, joint venture)

2.1.5 Limited and unlimited liability

Business Ownership

Unlimited Liability: The owner of the business has the same legal identify to the business and is therefore can lose his/her personal possessions to cover the debts of the business if it goes into liquidation. Limited Liability: A person has a separate legal identify to the business and is therefore only responsible for the amount of money s/he invested in the business even if the business goes into liquidation.


1. Sole Trader (Sole Proprietor): A person who owns his or her own

business. This person is responsible for all the decisions within the

business, including employees and s/he is liable for any debts. A

sole trader has unlimited liability and thereby is the same legal

entity as the business

Advantages Disadvantages

Personal control Unlimited liability

All profit go to the owner Difficult to raise capital

Direct contact with customers maintained

Long hours and business worries

Accounts are not published Owner is expected to be a specialist in all areas

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

a business together. They share responsibility and control. Most

partnerships have unlimited liability and thereby is the same legal

entity as the business


Greater specialisation Unlimited liability

Additional capital Decisions may be slow as more people

Sharing ideas More opportunities to disagree

More scope for holidays, sickness etc.

Profits must be shared

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

Profits are distributed (usually) annually through dividends.

Shareholders make decisions about the running of the business at an

Annual General Meeting (AGM) though a board of directors runs day-


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

company –

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

friends and family

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

Exchange. Formal documents must be produced before a limited

company can begin trading: -


Limited liability Conflict can arise between owners and managers

Large scale production is available Danger of poor communication

Ill health does not affect the business

By law annual accounts must be produced and published

Easier to raise large amounts of capital Shareholders cannot be sued personally

Higher rates of tax than for sole traders and partnerships

Differences Between a Private & a Public Limited Company

Private Limited Company Public Limited Company

Shares can only be sold to family & friends

Shares can be sold on the Stock Exchange.

Capital raising potential can be limited.

Vast amounts of capital can be raised.

Owners tend to be more in control of the business and can be less profit motivated.

Owners can be extremely divorced from the business – profit motivated.

Operations influenced by the owners who are not answerable to the media.

Media can be highly influential in the business operations.


Franchise

An entrepreneur can opt to set up a new independent business and try to win customers. An alternative is to buy into an existing business and acquire the right to use an existing business idea. This is called franchising.

o A franchisee buys the right from a franchisor to copy a business format.

o And a franchisor sells the right to use a business idea in a particular location.

Opening a franchise is usually less risky than setting up as an independent retailer. The franchisee is adopting a proven business model and selling a well-known product in a new local branch

Advantages of Franchising Disadvantages of Franchising

The franchisee is given support by the franchiser. This includes marketing and staff training.

Cost to buy franchise – can be very expensive (McDolands on Oxford Street In London cost £1.2 million! But some such as a car wash franchise can be very cheap)

The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product.

Have to pay a percentage of your revenue as a royalty payment to the business you have bought the franchiser from.

Less investment is required at the start-up stage since the franchise business idea has already been developed

Have to follow the franchise model, so less flexible. You would probably be told what prices to set, what advertising to use and what type of staff to employ.

A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market

If one outlet of the franchise gains a poor reputation (say through bad service) then this affects attitudes towards all other outlets.


Joint Venture A joint venture occurs when two or more businesses agree to run a separate business or project together. Often the joint venture will be a new company in which the joint venture partners invest The pros and cons are similar to that of a partnership

2.1.3 Growth of multinational companies

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

Benefits of MNCs Drawbacks of MNCs

Employment

Ability to create jobs leads to increased GNP & improved standard of living in the host country

Unemployment can be created in the host country due to increased competition.

Technology & Expertise

Multi-nationals may introduce new technology, production processes and management styles.

Some multi-nationals bring trained staff with them and do not train staff in the host country and only using local staff for low paid, unskilled jobs.

Social Responsibility

Some Multi-nationals so not care about the environment of the host country and at times flouting the lack of legislation related to health, safety and the environment and child labour etc.

Some multi-nationals take their social responsibly seriously and help finance projects such as build new roads.

Profit

Often a multi-national will not keep profits in the host national but will send them back to the originating country.

If the host country has lower levels of tax than others then tax will be declared and paid in their country.


2.16 Internal Organisation

Functional Activities In Business

1. Marketing. This means trying to bring your product to the attention of buyers and make more people buy it. This makes Revenue and (hopefully) profit.

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

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

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

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

6. Research & Development. This means trying to make existing products better and also trying to come up with new products.

7. Logistics/Transport. This means moving around inputs and outputs from where they are made to where they are needed.

8. Management. This means planning for the future, making decisions about the present, and organising the business in the most efficient manner.

9. Administration. This means looking after the day-to-day needs of the business and making sure everything runs smoothly.


2.1.4 Control and responsibility

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

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

• Chain of Command: The way authority and power are passed down in a

business. The chain of command shows the span of control. • Span of Control: The number of subordinates working under a superior. o A narrow span of control indicates close supervision, tight control and

better co-ordination of subordinates. Likewise communication is more efficient.

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

which links to motivation theory. Costs of supervision will also be lower.


• Delegation: passing authority to complete a task from a superior (manager) to a subordinate (someone below the manager). Responsibility is not passed down so the manager must be careful to trust the delegate to do the job right.

2.1.7 Internal and external communication

2.1.8 Internal communication (effective communication and its attainment)

Types of communication

• Internal communications happen within the business.

• External communications take place between the business and outside

individuals or organisations.

• Vertical communications are messages sent between staff belonging to

different levels of the organisation hierarchy.

• Horizontal communications are messages sent between staff on the

same level of the organisation hierarchy.

• Formal communications are official messages sent by an organisation, eg

a company memo, fax or report.

• Informal communications are unofficial messages not formally approved

by the business, eg everyday conversation or gossip between staff.

• A channel of communication is the path taken by a message


Effective communication

Communication makes a big impact on business efficiency. Effective

communication means:

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

dealt with quickly and effectively.

• Staff understand their roles and responsibilities, eg tasks and deadlines are

understood and met.

• Staff motivation improves when, for instance, managers listen and respond

to suggestions.

Barriers to effective communication

A balance needs to be struck in communication between management and

staff.

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

demotivating. Excessive communication leads to information overload,

eg when staff find hundreds of messages arriving in their in-tray each

day.

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

and inefficiency

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

not understand technical jargon. Selecting the right medium is


important. Messages may never be received if they are sent at the

wrong time or to a junk email folder.

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

needed to achieve the same result.

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

accurate, thorough messages will improve the quality of

communications, especially if there is an opportunity for feedback.


2.2.1 Use of funds

Why business needs finance

Finance refers to sources of money for a business. Firms need finance to:

1. Start up a business, eg pay for premises, new equipment and

advertising.

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

suppliers on time.

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

different city or country.

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

have just a few customers and many competitors. Lenders are put off

by the risk that the start-up may fail. If that happens, the owners

may be unable to repay borrowed money

2.2.2 Short- and longterm financial needs 2.2.3 Sources of internal and external funds (short- and longterm)

Source of Finance

Description

Retained Profit

This is when a business decides not to pay all profit after

tax to its shareholders or owners but will instead save up

to invest in future business projects.

S/T

Partnership Funds

or share issue in a

Private Limited

Company

This is where a partnership or Ltd will look for new

partners or shareholders amongst family and friends to

invest in the business and thereby have some control in

the running of the business.

L/T


Share Issue on the Stock Exchange.

This is where a Public or Private Limited Company makes

shares available for sale on the stock market. A share

issue is an external source of finance which dilutes

ownership of the business but allows for large amounts of

capital to be raised.

L/T

Overdraft

This is where the bank allows a business to spend more

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

time. The bank overdraft will be repaid and reborrowed

regularly. The bank will charge interest on a bank

overdraft which will reduce profit in the business.

S/T

Bank Loan

This is where a bank will allow a business to borrow a sum

of money over a medium to long period of time. The loan is

repaid in installments, which affects cash flow. Often a

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

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

Repayment affects cash flow

L/T

Debenture

A debenture is an unsecured loan to a business. The

business pays interest to the debenture holder at agreed

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

period of time – often very many years. Debentures are

usually traded like shares on eth stock exchange. They

have less impact on cash flow than bank loans which are

repaid slowly in installments.

L/T


2.2.4 Factors affecting the methods of finance chosen

1. A business will selct the most appropriate method of finance based on 2. Size of the business 3. Capital needed, 4. length of time money needed for 5. risk

Factoring

Where a business sells its debtor list to a factoring

company who will collect the money owed to the business.

The factoring company will charge up to 20% of the value

of debts owed to the business but will save the business

time in chasing debts and waiting for trade debtors to pay

them on eth due date. It creates instant liquidity.

S/T

Trade Credit

This is where businesses agree with other businesses to

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

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

the chain of production. Often businesses give a buyer up

to 4 weeks to pay but likewise this business may have been

allowed 4 weeks to pay their supplier.

S/T

Sale and Lease

Back

A business may sell assets it owns and use the money from

the sale in their business. The business will then lease

(hire) assets from another business. Leasing can be

expensive but the leasee often pays for repairs and

updates and also ensures the business does not have money

tied up in assets it may not use often.

S/T


3.1.1 Role of marketing

Marketing is meeting the needs and wants of the consumer

3.1.2 Market research (primary and secondary)

o Market research is gathering information about consumers,

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

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

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

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

issue being investigated. (Field Research) Factual information is called quantitative data. Information collected about opinions and views is called qualitative data.

Types of research

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

Reports, Census) ⇒ Company records Primary Research includes ⇒ Observation ⇒ Interviews ⇒ Consumer groups ⇒ Postal or telephone surveys ⇒ Test marketing


Pros & Cons of Primary & Secondary Research

Secondary Research Primary Research

Pros Often obtained without cost

Can aim questions directly at your research objectives

Good overview of a market Latest information from the marketplace

Usually based on actual sales figures or research on large samples

Can assess the psychology of the customer

Cons Data may not be updated regularly

Expensive – over £5,000 per survey

Not tailored to your own needs

Risk of questionnaire and interviewer bias

Expensive, but reports on many different marketplaces

Research findings may only be usable if comparable back data exists

3.1.4 Market segmentation

Market Segmentation – Breaking a market down into groups of consumers with similar characteristics Target Marketing – Aiming the product or service at consumers in a particular market segment. Consumer profiles • Age • Lifestyle • Income • Geographic Location • Gender


3.1.5 Mass market; niche market

• Niche marketing is a business strategy of devising and selling products specifically for a small, unexploited part of a market.

• Mass marketing is devising product with mass appeal and promoting them

to all types of customer. Features of mass marketing

1. The creation of everyday brands 2. Brand names often become the known name – e.g. Hoover (vacuum

cleaner) and Barcardi (white rum) 3. Marketing economies of scale. 4. Global marketing (with some adjustments to suit local conditions)

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

1. Specialised product. 2. High level of product differentiation. (i.e. a USP, branding or

something that makes the product different to the norm.) 3. High price and low sales

Examples of niche marketing: Clinique perfumes, Braeburn Schools

Advantages of Niche Marketing Advantages of Mass Marketing

Whilst there are few competitors businesses can sell at high prices and high profit margins as customers will pay high prices for exclusive products.

Economies of scale and so mass marketing has lower costs of production.

Some large firms will have a range of exclusive products that have status and image alongside mass marketed products. (E.g. a car manufacturing company making special editions of highly priced cars plus the family saloon)

Fewer risks than niche marketing as the business involved in mass marketing can usually change production relatively quickly if demand falls. The niche market however could suffer if consumer tastes change.


3.1.6 Marketing mix

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

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

Product A product is a good or a service that is sold to customers or other businesses. Customers buy a product to meet a need. This means the firm must concentrate on making products that best meet customer requirements. Firms can be market or product orientated. • Market orientation: producing products and services which satisfy eth

want and needs of the market. • Product Orientation: Producing products and services based on

innovation which consumers are then persuaded to buy

A business needs to choose the function, appearance and cost most likely to make a product appeal to the target market and stand out from the competition. This is called product differentiation.

How product differentiation is created:

• Establishing a strong brand image (personality) for a good or service. • Making clear the unique selling point (USP) of a good or service, for

example, by using the tag line quality items for less than a pound for a chain of discount shops.


• Offering a better location, features, functions, design, appearance or selling price than rival products.

• Packaging will help a firm target a specific market such as children’s (cartoon), adults, families (good for you), colour (cheap or expensive)

• Size will also target a market – family or children’s or business size

Product Life Cycle

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

In the launch and growth stages sales rise. In the maturity stage, revenues flatten out.

Getting a product known beyond the launch stage usually requires costly promotion activity.

At some point sales begin to decline and the business has to decide whether to withdraw the item or use an extension strategy to bolster sales. Extension strategies include updating packaging, adding extra features or lowering price.


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

Price

� Cost Plus Pricing When a business adds a percentage mark up to the average cost of producing a product. This method of pricing is the most common but can cause problems when operated in a competitive market as the final price could be higher than competitors and therefore sales would be low or lower than competitors and therefore the business will not make as much profit as it could. � Competitive Pricing Methods of pricing based upon the prices charged by other competitors. Price Maker: A company that can decide upon the price becaseu it has the market share. Often benefits from economies of scale and so can sell cheaper than competitors. E.g Nakumatt Price Taker: Unable to compete at a lower price than the big firms and cannot charge a higher price as customers will go to the big firm.

� Price Skimming Method of pricing where the business sets a high price to a small niche market. Sales will be low and price high. When saturation occurs the business will reduce price to the bigger segment. Sales will be high and price low. Most examples of price skimming tend to be electronic goods. Some consumers will pay a higher price to get the most technical and up to date products first. Others will wait until the price falls.


� Price Penetration Method of pricing where the business sets an initial low price to try to encourage consumers to try the product. The price will eventually rise to a competitive price. This pricing strategy is used where there is brand loyalty in the market and is used to persuade consumers to switch from a competitor. Often identified as “introductory price.” � Psychological Pricing Method of pricing which makes a customer think that the product or service is a reasonable price – e.g. $1.99 instead of $2 Elasticities of Demand The change in a price of a product or service or the change in the income levels of a person could influence how much a person buys. 1. Price Elastic Demand • When a change in price results in a more than proportional change in

demand then it is considered to be elastic demand. • If the price of beef goes down then people will start eating more beef

and less non-meat meals 2. Price Inelastic Demand • When a change in price results in a less than proportional change in

demand then it is considered to be elastic demand. • If the price of cigarettes goes up people will still buy cigarettes as they

are addictive. Likewise if the price of electricity goes up we may try and use less but we will still use a lot.

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


3.1.9 Distribution Channels

Place

A channel of distribution is the route taken by a product as it passes from the producer to the consumer. This can be

⇒ Directly to the consumer ⇒ Through a retail outlet

⇒ Through a wholesaler ⇒ Using an agent

Directly to the consumer – this can have problems in terms of the buyer and seller identifying themselves to each other. However the Internet is being used and also telesales can be effective. Retail outlets – have a major role as they have the ability to reach the huge numbers of customers. Retailers are able to influence manufacturers to produce products that their customers want. As such a customer orientated markets exist. Quality also tends to be an issue in the distribution channel as the retailer’s reputation is at stake. Wholesalers – act as links between producers and retailers. They buy large quantities from the producers and then break them down into smaller quantities suitable for the target market. E.g. 100 Kilo sacks of maize will be bagged up into 1-kilo bags. Agents – negotiate the sale on behalf of a seller. Examples include ticket agencies. The agency will take a commission and return unsold items to the seller. Internet selling or e-commerce. Online selling is an increasingly popular method of distribution and allows small firms a low cost method of marketing their products overseas. A business website can be both a method of distribution and promotion.


3.1.10 Promotion (advertising, sales, point of sale)

Promotion

Above the line: This is promotion that uses paid-for media to advertise a product or service for sale.

1. TV – expensive but wide coverage 2. Billboards – effective but small coverage and can become ignored. 3. Newspaper and magazines – able to target a specific target market

e.g. True Love, parenting, Business Africa 4. Radio – cheap, speaks to the consumer.

Below the line: This is promotion that is not undertaken by paid-for media to advertise a product or service for sale. 1. Publicity: This is promotion via press releases to news media. Press

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

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

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

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

intention is to create an impact at the point of sale. 4. Sales Promotions: This covers a range of activities such as competitions,

gifts, point-of-sale displays, leaflets and sponsorship. 5. Personal Selling: A promotional presentation made on a person-to-person

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


3.1.11 Marketing strategy

3.1.12 Marketing budget

Businesses need to make strategic decisions on how much to spend on marketing. Budgets can be based on 3. Percentage of past sales.

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


3.2 Production (Operations Management)

3.2.1 Using resources to produce goods and services

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

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

Inputs include

2. Wages

3. Raw Materials

4. Overheads

Outputs include

2. Quantity Produced

3. Sales

To improve productivity a business must either reduce the cost of inputs or increase the value of outputs.

3.2.2 Methods of production (job, batch, flow)

Job Production: The manufacture of single units usually to customer

requirements. Examples include hand made suits.

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

Flow Production: A product moves through a number of operations

continuously and in very large numbers.



Job Production: • High quality work • Highly motivated staff • Orders can be made to

customer specifications

∗ Expensive. ∗ High waged labour ∗ Tend to be labour

intensive (i.e. lots of workers needed)

Batch Production:

• Workers are able to specialise and use specialist machinery

• Costs per item made lower • Machinery can be adjusted for

different sizes, types etc.

∗ Goods have to be stored and held in stock (such as body panels for cars)

∗ Specialist machinery may have to be cleaned etc when batch changed.

∗ Factory needs to be laid out in sections.

∗ Workers tend to be bored.

Flow Production: • Large numbers of products can roll off assembly lines.

• All tasks are broken down and so staff only have to carry out simple tasks which reduces wages and training.

∗ Large amount of capital (money to buy equipment) needed.

∗ Once built it is difficult to adjust.

∗ Workers tend to be bored.

∗ Breakdowns affect other stages.


3.2.3 Scale of production

Economies of scale – the reduction in costs per unit a business experiences as a business grows 1. Technical Economies: Larger plants run more efficiently and running

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

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

will be more efficient in their role. 3. Financial Economies: Large firms have a wider variety of sources of

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

4. Purchasing & Marketing Economies: Larger firms can get bulk buying

discounts, better trader credit terms (and so improved cash flow position) and administration costs will also fall per unit. The cost of marketing of products will also fall per unit as brand names are advertised; sales forces sell more than one line etc.

5. Risk Bearing Economies: Larger firms are able to spread their risks

through diversification. They bring out more product lines and so the risk of the whole firm failing is lessened, as all product lines are unlikely to be unsuccessful.

Diseconomies of Scale -The rise in costs per unit which occurs as a firm grows too large. 1. Communication Problems: The larger the firm the more difficult it is to

communicate within the firm. 2. Disharmony: Larger firms can suffer from poor relations between

management and the workforce and motivation tends to fall.


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

3.2.4 Lean production

Methods of implementing Lean production Kaizen

o Workers meet regularly to discuss production and to come with new

ideas on how to increase efficiency and productivity.

o JIT is a form of Kaizen.

o Rearranging the layout of the factory floor so that workers are not

wasting time through moving stock etc from one area to another.

o Workers identify small improvements which are unlikely to cost a lot

to implement

o New ideas come from the workers who will feel empowered and come

up with good ideas from research and development to after sales

service.

Cell production

Cell production has the flow production line split into a number of self-

contained units. Each team or ‘cell’ is responsible for a significant part of

the finished article and, rather than each person only carrying out only one

very specific task, team members are skilled at a number of roles, so it

provides a means for job rotation.


Increased technology

IT could be used for

• Design work - CAD

• Planning & budgeting - spreadsheets

• Creating & using databases

• E-mail communication

• Stock control through EPOS (electronic point of sale – i.e. bar codes)

• EFTPOS (electronic funds transfer at point of sale)

• Teleworking

JIT

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

Improves cash flow as money is not

tied up in working capital

A lot of faith is placed in the

reliability and flexibility of suppliers

Reduces waste caused through stock

becoming obsolete or damaged

Increased ordering and

administration costs

More factory space is available as

stockholdings are reduced

Advantages of bulk buying reduced

Difficult to cope with sharp

increases in demand


3.2.5 Costs and cost classification

Variable costs are costs that change directly in proportion with output. Examples include raw materials and piece rate labour. Fixed Costs are costs that, in the short run, do not vary with output. Examples include rent, salaries, and insurance. Direct Costs are costs which can be directly allocated to a specific area of production. Examples include the wages of a Physics teacher can be allocated to the science department. Indirect Costs are costs that cannot be directly allocated to a specific area of production and thereby must be shared out between all areas of production. Examples include electricity which wages must be shared out as an overall running cost as it cannot be allocated to a specific department.

3.2.6 Break-even analysis and simple cost based decision making

Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production).

Break Even occurs when Total Revenue = Total Costs


Benefits of Break Even Point

1. The break-even point provides a focus for the business, but also helps

it work out whether the forecast sales will be enough to produce a

profit and whether further investment in the product is worthwhile.

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

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

Limitations of break-even charts are:

1. Do not take into account possible changes in costs over the time

period.

2. Do not allow for changes in the selling price.

3. Analysis only as good as the quality of information.

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

entry of new competitor.

3.2.7 Quality control

Quality is meeting or exceeding customer expectations

Quality Control where finished products are checked by inspectors to see if they meet the set standard.

Quality Assurance where quality is built into the production process. E.g. all staff check all items at all stages of the production process for faults. Everyone takes responsibility for delivering quality. Successful quality assurance results in zero defect production Quality assurance requires Total Quality Management (TQM), in which managers try to bring about a change in business culture, convincing employees to care about how products are being made and to do their part to ensure standards are met.


Main Principles of TQM

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

cheaper to stop products defects than trying to find

them

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

low defect levels if a product or service is complicated

Getting things

right first time

Better not to produce at all than produce something

defective

Quality involves

everyone

Quality is not just the concern of the production or

operations department - it involves everyone, including

marketing, finance and human resources

Continuous

improvement

Businesses should always be looking for ways to improve

processes to help quality

Employee

involvement

Those involved in production and operations have a vital

role to play in spotting improvement opportunities for

quality and in identifying quality problems


3.2.8 Location decisions

Economics Factors Affecting Location 1. Availability of land.

2. Proximity to the customers.

3. Availability of labour.

4. Availability of raw material:

5. The availability of transport..

6. Nearby Parking!

7. Power supply

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

encourage a business to locate in a area of high unemployment.

9. Legal Constraints.

10. Social Influences:

Factors Affecting international Location

1. Protectionism:

2. Legislation and bureaucracy: (laws and too much paper work from City

Council etc)

3. Political Stability:

4. The labour force:

5. Market opportunities and transport costs

6. Financial incentives:

7. Globalisation:

8. The Euro:

9. Language barriers:

10. Manager preference


3.3 Financial information and decision making

3.3.1 Cash and cash flow forecasts

Companies need to budget and be aware of cash flow in order to stay solvent. Solvency is the ability of a business to pay their debts as and when they become due. Cash flow is the movement of money in and out of the business.

Profit and cash flow are two very different things. Cash flow is simply about money coming and going from the business. The challenge for managers is to make sure there is always enough cash to pay expenses when they are due, as running out of cash threatens the survival of the business. Insolvency If a business runs out of cash and cannot pay its suppliers or workers it is insolvent. The owners must raise extra finance or cease trading. This is why planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft.

Item Jan Feb Mar

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

Total receipts (money in) $500 $750 $5,000

Total spending (money out) $1,500 $3,000 $2,000

Closing bank balance $1,000 -$1,250 $1,750

If a business is unable to meet its short term debts it may go into liquidation

and so a business should ensure that timings of inflow and outflows an

carefully managed to avoid unauthorized overdrafts which may result in

bounced cheques.


3.3.2 Profit (what it is and why it matters)

• The main objective for many business is profit.

• A Trading profit & Loss Account shows Gross Profit and Net profit

• Gross Profit = Sales minus Cost of Goods Sold.

• Cost of Goods Sold = Opening Stock plus Purchases minus Closing Stock

• Net Profit = Gross profit Less Expenses

Profit after tax can be retained in the business for future projects or

distributed to shareholders. A sensible company will give the shareholders a

reasonable dividend to keep them happy and keep some profit back in the

business as Retained Profit.

3.3.3 Purpose and main elements of profit/loss account

Sales 10,000

Less Cost of Goods Sold

Opening Stock 1,000

+ Purchases 5,000

- Closing Stock 2,000 4,000

GROSS PROFIT 6,000

Less Overheads

Electricity 500

Bills 1000 1,500

NET PROFIT BEFORE TAX 4,500

TAXATION 2,000

NET PROFIT AFTER TAX 2,500

DIVIDENDS 1,500

RETAINED PROFIT 1,000


3.3.4 Purpose and main elements of balance sheet

A Balance Sheet shows the assests and liabilities of a business

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

• Fixed Assets are items of value which a business buys to stay in a business to help with production – e.g. land, machinery, equipment, vehicles.

• Current Assets are items of value which a business buys to use up in production – e.g. stock, debtors, bank and cash.

Liabilities are amounts of money which a business owes.

• Current Liabilities are amounts of money which a business owes and must be paid back shortly – e.g. creditors, bank overdraft.

• Long Term Liabilities are amounts of money which a business pays back over a long period of time – e.g. bank loans, debentures.

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

shows the liquidity of a business.

Liquidity is the ability to turn an asset into cash with the least loss of

time, capital or interest.

If a business has liquidity problems it could find itself unable to meet debts

as and when they become due – i.e. insolvent

Additionally a balance sheet shows what the business owns on a particular

day in time and how these assets have been financed – e.g. through capital,

retained profit and borrowing. A bank will be worried about lending to a

business which already has a lot of borrowing.


Net Assets Employed = Net Capital Employed

3.3.5 Simple interpretation of financial statements using ratios

Profitability Ratios

Ratio Calculation Comments

Gross Profit Margin Gross Profit x 100 Sales

This ratio tells us something about the business's ability consistently to control its cost of goods sold or ability to increase price.

Net Profit Margin Net Profit x 100 Sales

Assuming a constant gross profit margin, the net profit margin tells us something about a company's ability to control overheads.

Return on capital employed ("ROCE")

Net Profit x 100 Net Assets Employed

ROCE is sometimes referred to as the "primary ratio"; it tells us what returns management has made on the resources made available to them before making any distribution of those returns.

Liquidity Ratios Liquidity ratios indicate how capable a business is of meeting its short-term obligations as they fall due:

Ratio Calculation Comments

Current Ratio Current Assets / Current Liabilities

A simple measure that estimates whether the business can pay debts due within one year from assets that it expects to turn into cash within that year. Mostly 2:1 is acceptable but a ratio of less than one is often a cause for concern, particularly if it persists for any length of time.


3.3.6 Working capital

The net working capital of a business is

Current Assets minus Current Liabilities

Current Assets include:

• Stocks

• Trade debtors

• Cash in hand or in the till

• Bank Balance

Current Liabilities include:

• Trade creditors

• Taxation payable

• Dividends payable

Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies.

Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well.

3.3.7 Financial budgets

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


Advantages of budgeting 1. Helps to make sure that all resources are used efficiently.

2. Helps to monitor cash flow.

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

money in the business.

4. Motivating for budget holders (Herzberg)

Types of Budget

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

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

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

order to increase market share.

3. Fixed Budget – budgets set based on how much the business can

afford and allocated amongst departments.

3.3.8 Users of accounts

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

2. To make a decision on what dividend to pay out.

Employees 1. To justify a pay rise or better working conditions. (If profit has increased maybe it was because of their hard work.)

2. To check their job security.

Managers 1. For bonus related pay. 2. For self empowerment and to make them more marketable as

a manager.


External Users Tax Authority

1. Tax is paid after profit

Registrar Of Companies (Companies House)

1. All limited companies must submit accounts to a central authority so that anyone can look at them. (Limited Liability)

Bankers or lenders

1. Banks will look at the firm’s working capital to see whether they are solvent enough to repay existing debts or new lending.

2. Banks will look at the Net Capital Employed to check whether the business has borrowed too much. A business should not borrow more than it has invested in itself as share capital or owners capital. (If they do, then the lenders are taking more risk that the owners!)

Suppliers 1. Suppliers will want to check that the business can pay them back if they are offering trade credit.

Competitors 1. Competitors will check to see what new direction the business might be going into or compare market share.

Future Investors

1. Future investors will look at Gross and Net profit Margins, ROCE and dividends to see if the business looks like a good investment.


Unit 4: People in Business

4.1.2 Methods of financial rewards

Payment methods

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

1. Time rate: staff are paid for the number of hours worked.

2. Overtime: staff are paid extra for working beyond normal hours.

3. Piece rate: staff are paid for the number of items produced.

4. Commission: staff are paid for the number of items they sell.

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

by their manager.

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

business.

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

4.1.3 Non-financial rewards

Fringe benefits: are payments in kind, eg a company car or staff discounts, cheap loans, free accommodation, time off, mobile phone.

4.1.4 Management styles and motivation methods

4. People in business

What is motivation?

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


A motivated workforce results in:

1. Increased output caused by extra effort from workers.

2. Improved quality as staff take a greater pride in their work.

3. A higher level of staff retention. Workers are keen to stay with the

firm and also reluctant to take unnecessary days off work.

4.1 Human needs and rewards

Maslow

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

working conditions.

2. Safety / Security Needs: Feeling safe in eth work place and feeling

secure in the job that you will not be fired or made redundant and

that you have a permanent job.

3. Love & Belonging: Feeling happy with the people you work with.

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

the good job you do, being promoted.

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

Being allowed to be creative and do things your way.


Herzberg

1. Motivators: Factors that give job satisfaction.

2. Hygiene Factors: Factors that can add to workers being dissatisfied. Herzberg tends to agree with Maslow in many areas except that only the higher levels of Maslow’s hierarchy motivate workers. Herzberg’s ideas are often linked to job enrichment where workers have their jobs expanded so that they can experience more of the production process. Sense of achievement Chance of promotion Chance of improvement Motivators Factors which Recognition of effort Motivate Responsibility Nature of the job itself Work Pay

Conditions Hygiene Factors which Company Policy need to be met Treatment by management to stop Inability to develop dissatisfaction feelings of inadequacy Hertzberg believed in job enlargement, job enrichment and job roation to motivate workers.

1. Job Enlargement: Involves giving an employee more work to do of a similar nature. For example a person would be responsible for making the whole of a product instead of just part. Hence the job is expands horizontally.

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

to time. Employees are frequently organised into groups / teams/ cells and are trained with skills to perform each other’s jobs and as such


are able to rotate periodically. This is helpful to the employers as the workforce becomes increasingly multi-skilled.

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

be distributed and how to solve problems as they arise.

4. Job Enrichment: Involves extending the job vertically to include more of the decision-making tasks. For example an employee may be given responsibility to plan a task, carry out quality control, supervise the task, order materials and maintenance. Unused skills are thereby developed

Type of Leadership

Type of Leadership

Method

Autocratic • Leader makes decisions alone. Others are informed and carry out decisions.

• One-way communication. • Demotivating.

Democratic • Leader encourages others to participate in decision-making. Can persuasive (where leader has already made a decision and persuades others to agree) or consultative (where leader consults others before making a decision).

• Time consuming • Begs the question of whether staff should always be

involved in all decisions.

Laissez Faire

• Leader delegates nearly all authority and decision making power.

• Empowering. • Tends to be a lack of structure and feedback.


Recruitment and Selection Organisations draw up workforce plans to identify their future staffing requirements. For example, they may develop plans to recruit a new IT Manager when the current one plans to retire in eight months time. If a business does not have enough staff trained in the right areas then production might be of a poor quality, customer service might be poor and sales will be low. If a business has too many staff then they will have lower profits. Firms can recruit from inside or outside the organisation.

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


Employee already knows procedures, staff and how things work.

Existing staff do not bring new ideas into the firm.

Is a motivator as staff can be promoted up the ladder.

Staff have to be recruited to replace the promoted member of staff

External recruitment involves hiring staff from outside the organisation.


Brings new ideas and new skills into the firm

Might be a poor recruitment – just because someone performs well in an interview they might not be very good at their job or maybe they don’t fit in with other staff.

Avoids existing staff getting upset at a colleague getting a job they wanted.

Can be expensive and time consuming.


The Recruitment Process

A. Identify a position

B. Produce a job description and person specification

C. Advertise position

D. Receive application forms, curriculum vitae & letters of application

E. Short list applicants

F. Check references

G. Interview candidates & carry out aptitude & psychometric tests (if

necessary)

H. If appropriate candidate identified offer position.

I. If no applicant if appropriate re-advertise position.

Job Description and Person Specification

Job descriptions explain the work to be done and typically set out the job title, location of work and main tasks of the employee. A job description makes sure a candidate understands exactly what is required. Person specifications list individual qualities of the person required, eg qualifications, experience and skills. A person specifications avoids unqualified candidates or wrong types of people from applying for a job.


Importance of Good Recruitment & Selection 1. Creates a more efficient workforce in terms of speed, wastage, customer

service and labour productivity.

2. Creates a more stable workforce in terms of staff turnover.

3. Reduces the cost of recruitment if less staff are leaving.

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

time off work.

5. Staff who do not “fit in” well can lead to low moral and low motivation in

the workplace which in turn reduces productivity and increases staff

turnover.

Where to advertise a job vacancy 1. Internally on notice boards or through email.

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

3. Notice boards in shops, malls etc – cheap but does not target specific

skills. Suitable for sales people and jobs with high turnovers.

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

for IT people, or at times of the week which advertise specific types of

jobs, e.g. Marketing jobs might be advertised on a Thursday in the

Nation etc.

5. Internet – wide target market.

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

looking for job here about jobs available across the country.


7. Recruitment Agency – companies which are specialists in recruitment.

Saves the business time and they benefit from the better skills in

recruitment offered by the agency. Can be expensive for top jobs.

Where to advertise depends on • Turnover of staff (very high)

• Level of skills needed.

• Money available to advertise.

• Whether internal or external.

4.2.2 Training methods

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

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

The following areas may be included in induction training:

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


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

3. Upgrading Skills – Particularly useful for upgrading workers ICT skills.

This is a form of job enrichment. (Maslow – Self Esteem)

Training Can be Internal, External, On the Job or Off the Job Internal where the company trains staff within the business External where staff are sent on courses run by specialists to On-the-job training On the job training occurs when workers pick up skills whilst working along side experienced workers at their place of work. For example this could be the actual assembly line or offices where the employee works. New workers may simply “shadow” or observe fellow employees to begin with and are often given instruction manuals or interactive training programmes to work through. Off-the-job training This occurs when workers are taken away from their place of work to be trained. This may take place at training agency or local college, although many larger firms also have their own training centres. Training can take the form of lectures or self-study and can be used to develop more general skills and knowledge that can be used in a variety of situations, e.g. management skills programme

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

Cheaper to carry out Learn from specialists in that area of work who can provide more in-depth study

Training is very relevant and practical dealing with day to day requirements of job

Can more easily deal with groups of workers at the same time


Workers not taken away from jobs so can still be productive

Employees respond better when taken away from pressures of working environment

Employees who are new to a job role become productive as quickly as possible

Workers may be able to obtain qualifications or certificates

Retaining workers is important to a firm because it costs time and money to hire and train a replacement. Appraisal and training helps motivate staff and so improves staff retention.

4.2.3 Dismissal and redundancy

Redundancy

Redundancy is when a business can no longer employ you because your job no longer exists this might be through

• Falling sales means that a business needs fewer staff and some posts are no longer required.

• Low revenues may lead a company to try to cut staffing costs.

• Changes in production methods such as increased machinery or worker need to have more technical skills which exisiting staff do not have.

Redundancy procedures must be fair, for example firms can use a last-in-first-out method to shed staff.

Redundant workers receive compensation according to the number of years with the firm.


Dismissal Dismissal is when a worked is asked to leave a firm due to unsatisfactory work or action. A worker will normally be given a number of chances to improve his/her work which may be unsatisfactory due to poor punctuality, absenteeism, poor quality of work etc. The worker will be given a verbal warning and a chance to improve (maybe extra training), a written warning if the situation does not improve and then s/he would be dismissed (sacked) if still no improvement. Instant Dismissal – instant dismissal (i.e. without any warnings) can occur if the worker does something very bad – known as gross misconduct. This would include theft, sexist, racist behaviour, ringing up sick when they are actually well.


Unit 5: Regulating and Controlling Business Activity

5.1 Reasons for regulations

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

Sometimes the government will intervene in a mixed economy when it thinks that some its social and economics objectives cannot be met by the private sector (revise private sector, public sector and objectives of businesses and the government) Market Failure When the government gets involved this is often due to market failure where the private sector either will not provide a good or service or will only do so at a very high price or when the actions of the private sector is not considering the social and environmental needs of the country. Examples of Market Failure

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

• Non-excludability where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy

• Non-rivalry where the consumption of a good or service by one person will not prevent others from enjoying it

Examples: Street lighting / Lighthouse Protection, Police services, Air defence systems, Roads / motorways, Terrestrial television, Flood defence systems, Public parks & beaches

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


Merit Goods

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

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

Examples: Health services, Education, Work Training, Public Libraries, Citizen's Advice, Inoculations

Monopoly – a monopoly exists when a business controls at least 25% of the market and competitors are all very small. A monopoly can charge a high price, provide poor quality and little choice. A government will avoid this by setting laws limiting the size of a large business.

How Governments will intervene (get involved)

Government intervention may seek to correct for the distortions created by market failure and to improve the efficiency in the way that markets operate

• Pollution taxes to correct for externalities

• Taxation of monopoly profits (the Windfall Tax)

• Direct provision of public goods (defence)

• Policies to introduce competition into markets (de-regulation)

• Price controls for the recently privatised utilities

• Legislation


The main areas of legislation that affect businesses are:

• Employment law • Consumer protection • Competition law

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

Costs and Benefits of Business Legislation

Costs Benefits

Health and Safety at Work Act

Increased costs to maintain site, pay for hard hats, check equipment, training

Less accidents, sickness and happier staff as hygiene factors are met (Herzberg)

Sex Discrimination Act, Disability Discrimination and Race Relations Act

An employer cannot employ who s/he wants

Happier staff knowing they can be rewarded for their hard work and the best person for the job is appointed.

Consumer Protection Act and Trade Descriptions Act

A business must pay for quality checks

Consumers are more satisfied as quality improved.

Competition law

Businesses may not be able to merge or take over other businesses to benefit from economies of scale and growth benefits

Consumers’ interests are protected against being exploited through high prices and low quality


Planning Permission

Business could find themselves going through lots of paperwork to expand or develop a business

Local environment and local community rights protected against businesses opening up on Greenfield sites or polluting businesses opening up nearby

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

Costs and Benefits of Government Intervention

Costs Benefits

If the government supports one business then other businesses have a less advantage and may fail as they are not getting the benefit of government help.

If a business is going to go bust there would be lots of unemployment. If the Government takes over the business jobs will be saved

Government intervention might stop a business being competitive internationally (e.g. too many laws make business costs go up.)

If government support industry through creating training programmes then businesses have better trained staff.

Government incentives encourages inefficiencies as companies can become lazy and not compete with quality etc.

Government incentives encourage businesses to set up which creates jobs and improves standards of living.


5.2 Influences on business activity

5.2.1 Location decisions

Incentives: Various organisations offer incentives. E.g. EU, National & Local

Government etc. Incentives include low rental sites, purpose built factories,

re-settlement of key workers, tax allowances, advice & consultancy etc.

Constraints: Planning permission often stops some building in certain areas

(e.g. Uhuru Park) etc.

Social Influences: Pressure groups occasionally get involved in stopping

industry from moving to a particular area

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

Trade Unions Trade Unions are organisations representing workers who join together to further their own interests.

Reasons to Join a Trade Union

1. Collective bargaining for pay rises

2. To protect and enforce workers legal rights.

3. Improved working conditions

4. To protect against unfair dismissal

5. To offer legal advice in employment areas.

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

organisation.


Labour / Management Relations The owners of a business and the employees are stakeholders that occasionally have conflicting objectives. The owners want the highest possible profit and the employees want the highest possible pay and the best possible working conditions. Types of Industrial Action • Go slow – where workers simply slow down

• Work to rule – where workers will read rule books before working and

not do anything that is not in their job description.

• Picketing – where workers stand outside a business to tell everyone how

poor working conditions are at the business to encourage local people to

support them and pressure groups.

• Strike – where workers refuse to go to work. This harms the workers

and the business as production stops and workers do not get paid. Can

force a business to agree to workers’ demands but in some countries

where trade unions are not as strong the

Protection for Staff

Employment rights

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

To prevent exploitation, many governments pass laws that safeguard staff:

• Workers are guaranteed a minimum hourly wage rate • Race, sex, age or disability discrimination is illegal. • Maternity and paternity leave


Protecting workers rights increases the costs of firms.

Health and safety

Health and safety procedures are put in place to prevent staff from being harmed or becoming ill due to work.

The Health and Safety at Work Act is a primary piece of legislation covering occupational health and safety in many countries.

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

• Using dangerous equipment at work

• Food processing

• Hotels (guest safety)

• Chemical production (dangerous processes, waste disposal)

• Air travel (passenger safety)

• Schools (student and staff safety)

Health and safety procedures are enforced by the government.

Costs and Benefits of Business Adhering to Employment Legislation

Costs Benefits

Cost of implementing the laws – making sure fire alarms are appropriate, fire drills, safe equipment, hard hats etc.

Less accidents and less illness due to poor working conditions

Costs of someone monitoring the safety of workers and visitors

Workers are happier as they have better working conditions (Maslow – basic needs)


Discrimination

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

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

Examples of Discrimination

• Employing a man rather than a woman even though the woman can equally do the job.

• Sacking a woman when she gets pregnant.

• Refusing to employ someone from a specific religious background or race.

• Paying a man more than a woman for doing the same job.


5.2.4 External costs and benefits

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

Social costs and the environment

Business activity has an impact on the natural environment:

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

• Manufacturing can have unintended spill over effects on others in the form

of noise and pollution.

• Land is lost to future generations when new houses or roads are built on

Greenfield sites.

The production process can often create air pollution

The unintended negative effects of business activity on people and places are called social costs and include:

• noise • pollution • visual blight • congestion

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

the environment.

Government laws are used to protect the environment. For example, firms

must apply for planning permission before building factories or offices on

Greenfield sites. Grants are available to encourage firms to locate on

Brownfield sites, run down areas in need of regeneration.


Social benefits

Social benefits are business activities that have a beneficial or favourable impact on people or places. For example, a business start up can have a multiplier effect. Suppliers will win new trade from them and the new workforce will become customers in the local shops.

A proposed project often generates both costs and benefits. For example, building a new factory on a greenfield site creates social benefits in the form of new jobs. However, the loss of open land is a social cost. Building is justified only if the benefits exceed the costs.

Short- and long-term environmental effects

Some business activity can cause short-term environmental costs which can be put right in the longer term. For example, the impact of cutting down forests for timber is much reduced if young trees are planted in their place and left to grow into maturity.

5.2.6 Business cycle

The business cycle consists of a sequence in which a recession is followed by recovery, which leads into a boom. After a period of boom conditions there will be a downturn leading to recession. This is usually characterised as a period of slower growth or stagnation. It can be followed immediately by a period of recovery. Or persist to the point where incomes and output are actually falling, in which case there is a depression or a slump. Recession In a recession, you will probably observe the following: -

• Businesses complaining of falling demand • Cuts in output. • Rising unemployment • Gloomy expectations • Falling levels of investment • Many businesses making losses


• Some businesses closing down. Recovery When it comes recovery is rather halting.

• Businesses are unsure that the improvement in demand will be sustained.

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

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

• As investment increases, equipment suppliers have difficulty in meeting demand.

• Most businesses work flat out. • Many businesses experience a shortage of experienced staff. • Wages increase as businesses bid against each other. This leads to

inflation. • Prices increase

Documents

IGCSE Business Studies Key Revision Booklet(1)