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Business Studies Revision Notes

Organisaional structure – The internal, formal structure of a business that shows the way in which management is organized and linked together and how authority is passed through the organization

It indicates formal relationship between different people and departments

It shows the chain of command (the way in which authority is passed down the business)

It shows the span of control (number of subordinates reporting to each manager)

Helps individuals to see their position in an organisation

Allows staff to be aware of their responsibilities

See who has authority over them, and to whom they are accountable for

Hierarchy - the order of management in an organisation – lowest to highest – showing chain of command and the way authority is organised/distributed – levels of accountability

Advantages:

Roles and relationships made clear

Accountabilities and controls are established

Information and communication channels are established

Authority and responsibility levels established

Line management authority made clear

Very appropriate for some organisations (e.g. Army) with many levels and narrow spans of control

Supportive of bureaucratic organisations requiring detailed control

Disadvantages:

One-way communication (not efficient)

Few links between departments (may lead to lack or coordination)

Inflexible (change resistance) because all managers are trying to defend their own position in the hierarchy and the importance of their own department

Matrix structure – an organizational structure that creates project teams that cut across traditional functional departments - an emphasis away from functions towards

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projects or tasks; reduce layers in hierarchy; combine line departments with project task teams

Advantages:

Encourages team approach

Staff are assigned by ability and skill, not rank or position

Allows total communication between all members of the team and traditional departmental barriers broken down

More varied work

Greater motivation for staffing multi-disciplinary teams

Reduces bureaucracy and control

Staff focus on what is good for the business as a whole not just only for their department

Allow people to share ideas and find the best solution

Disadvantages:

Less direct control from the senior managers

Senior managers may not want to work with more junior staff

Can cause conflicts within teams

Chain of command - the route through which authority and power, and information are passed down a business – the flow of authority, power, and information

Span of control – The number of staff that a manager has authority over – or the number of people directly under the control of a manager.

Wide Span of control:

Greater delegation required so more responsibility for subordinates and less central control

There are less layers of management to pass a message through, so the message reaches more employees faster

costs less money to run a wider span of control because

It

a

business does not need to employ as many managers

Communication + coordination problems (more people under control so more complex)

Limited opportunity of close consultation with staff (can

cause demotivation)

Increased stress + workload for managers/supervisors

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Narrow Span of Control

A narrow span of control allows a manager to

communicate quickly with the employees under them and

control them more easily

Feedback of ideas from the workers will be more effective

It requires a higher level of management skill to control a greater number of employees, so there is less management skill required

Economies of Scale – The benefits gained through increased size and output. An increase in output leading to a less than proportionate increase in costs (less unit cost)

Financial

 
 

Easier to raise finance. Banks are more likely to lend money to large businesses with a proven track record (more reliable and more able to return the money)

Bulk purchasing – Suppliers offer discount for large orders because it’s cheaper for them to process and deliver one large order rather than several smaller ones.

Technical

 
 

More able to afford expensive machinery and equipment (reduced fixed cost of the production)

More able to use flow production method = lower unit costs than other method

Marketing

 
 

Reduced cost of advertising. Larger firms have higher levels of sales so marketing costs can be spread.

Managerial

 

More able to afford specialist functional managers who should operate more efficiently than general managers

Example to use in exam: The benefits gained through increased size and output might be financial (borrow money for investment), technical (afford mass production techniques and machinery), risk bearing (support innovation), managerial (support high quality management) or strategic (sustain richer product portfolio), marketing/purchasing opportunities etc. These benefits are/can be of particular value/necessity/importance for specific industries, leading to opportunities for higher profitability, lower costs, expansion etc.

Diseconomies of scale – Disadvantages of increasing size and output of an organisation. These are the practical limits to growth as unit costs rise and diseconomies set in

Causes:

More hierarchy and bureaucracy as organisation expands and grows

Chain of command lengthens

Efficiency reduced resulting in an increase in output that causes a more than proportionate increase in average costs

Decision-making becomes more complex

Communication slows

Too many middle managers

Spans of control become ambiguous

Too much diversification by business leads to lack of focus

Employees become de-motivated

Some may distinguish internal and external diseconomies.

Mode – The value that occurs the most frequently in a set of data

Median – The value of the middle item when data have been ordered or ranked. It divides the data into two equal parts

Mean – An average value of the data. Calculated by totaling all the results and dividing by the number of results

Pie Chart – Graphical means of representing numerical data and consists of a circle where the components of the data are indicated by segments in the circle. Each segment represents the size of a particular part relative to the total. This gives an immediate impression of the relative importance of each data component.

Simple + easy to understand

Shows results very clearly

Shows trends and changes over time

Allows reader to interpret quickly

Motivation – The internal and external factors that stimulate people to take actions that lead to achieving a goal Financial Motivators

Time rate – Payment made to employees for the number of hours worked.

This gives some security to worker

But not guarantee on the quality of work and output level

Piece rate – Payment is made to employees for the number of units produced. This encourages greater effort and faster working

Can lead to higher productivity + output level

But may lead to low quality and safety levels as workers rush to complete units

Workers may be settle after certain pay level, therefore will not be motivated anymore after that

Provides little security over pay level

Not appropriate if each product is different

Salaries – Fixed annual income paid to workers on a monthly basis. It is not dependent on the number of hours worked or the number of unit produced

Gives security of income

Employees can easily plan on their costing/spending because the salaries will not vary for one year

Suitable for jobs where output is not measurable

But income is not related to effort levels or productivity

Regular appraisal needed to assess whether there should be a change/adjustment in salaries

Commission – A payment to a sales person for each sale made. This can be an addition to a base salary/income

Encourages greater effort of selling

But can lead to forcing customers to buy the product and negative image of the business

Performance-related pay – A bonus scheme (plan) to reward staff for above-average work performance. Set target or objectives and appraise staff performance. Then pay bonus according to the degree to which the targets have been exceeded

Staff are motivated to increase performance if they’re seeking for increased financial rewards

Target setting can help to give purpose and direction to the work and individual

Annual appraisal offers opportunity for feedback

But it can fail to motivate staff if financial rewards are not needed

Manager favouritism can be shown and harm the manager-subordinate relationship

Team spirit can be damaged by the rivalry created by the competitiveness of PRP

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Profit Sharing – Bonus paid to staff based on profits of the business. Staff would feel more committed to the success of the business and strive to achieve higher performance and cost savings

Conflicts between owners and workers are reduced as everyone now has an interest in higher profits

Staff try to save cost to increase profits

Can lead to higher profits if successful

But reward offered is not closely related to individual effort (why should one person put in greater effort when everyone else will be benefiting as well?)

Schemes can be costly to set up and operate

Small profit share may not motivate workers

Reduced dividend to shareholders/owners

Dilute value of existing shares (more shareholders)

Fringe Benefits – Non-cash forms of rewards: company car, health insurance, pension schemes, discount on company products, low interest rate loans etc.

Gives higher status to employees

Recruit and retain best staff

Non-Financial Motivators

Job rotation – When workers are asked to switch to a

different job in either the same or different department.

This increases the variety of work and may relieve boredom

Can give workers multi-skills

But do not increase any authority or responsibility for the work being performed

Does not give the worker a complete unit of work to perform, just a series of separated tasks

Job enlargement – Increasing the scope of a job by broadening or deepening the tasks undertaken. The job

itself remains unchanged but with a wider range of tasks

Less repetition

No new skills are needed for this to work

But can lead to job dissatisfaction in the long run if the employee thinks that they are doing more work for the same amount of pay

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Job enrichment – Organising and improving the work

processes and environment so they are more satisfying to employees. Often involves reduction in supervision and give more control and responsibilities to workers.

Give workers complete units of work so their efforts can be identified and more challenging work is offered

Give direct feedback on performance to allow each worker to be aware of their own progress

Give more challenging range of tasks beyond worker’s experience. May require training + learning new skills

Employees gain status and recognition

Job Redesign – Restructuring a job to make work more challenging, interesting and satisfying for employees

Management recognizes their efforts and increase chance of promotion

Workers gain wider skills

Quality circles – When group of workers meet regularly to discuss work-related problems/issues with other workers and try to find solutions through each other’s experiences

Worker participation – Workers are encouraged to take

part in decision making for: Break time, Job allocations, Job redesign, Improve quality, Reduce wastage, Improve productivity, Elect board of directors

Increases job enrichment and motivation

Increases opportunities

More power in decision making

But can be time-consuming when discussed with workers

Disagreements/conflicts

Can be demotivating

Team working – Workers joined together to achieve common goals

Advantages

Disadvantages

Motivated as social and esteem needs are satisfied

Some workers are more efficiently when working alone

Increase productivity and reduce labour turnover

Training may be needed which is expensive

Better solutions to the problems as workers help each other

Can be conflicts within teams and lead to lower productivity

Reduce management costs because fewer managers will be required

Teams can develop attitudes against business so appraisal is needed to ensure that they are working towards the main aim

Complete units of work can be given to teams

Target setting – Setting up goals for workers to achieve so that work becomes more interesting and rewarding

Workers are motivated to work hard to achieve their goals

Gives a direct feedback on their progress and compare and improve it

Delegation and empowerment – Giving authority to workers to perform tasks with some control over them

Evaluation

Money is not the only motivational factor, though it is a very important factor for workers to work effectively and increase their productivity

It is also depend on the style of leadership by management and workers attitude towards their work and the needs of workers (money or recognition)

Motivational Theories

Mayo’s Theory – “The Hawthorne Effect”

Change in working conditions + financial rewards have little or no effect on productivity

When management takes an interest in the work + consult with staff + give freedom to decide, then motivation is improved

Team work also can improve productivity

Maslow – The Hierarchy of Needs

• Maslow – The Hierarchy of Needs ⇒ Human needs start at the lowest level of

Human needs start at the lowest level of the hierarchy

Once one level of needs has been satisfied, human will strive to achieve the next level

Once a need has been satisfied, it will no longer motivate individuals to action

Reversion is possible Disadvantages:

Not everyone has the same needs as assumed by the hierarchy

In practice it can be hard to identify the level of needs an individual is at and whether it is being satisfied or not

Money is necessary to satisfy physical needs, yet it might also necessary in satisfying other needs as well (e.g. status and esteem)

 

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needs

 

Self-actualisation - feeling of satisfaction or happiness when learned or achieved something

Give workers more challenging tasks – this gives a sense of achievement and opportunities to develop new skills and increase potential

 

Esteem needs

 

Recognition for work done well – status, promotion and responsibility will gain the respect of others

 

Social needs

 

Working in teams and ensuring good communication to make workers feel involved

 

Safety needs

 

A contract of employment with some job security – health and safety and good working conditions

 

Physical needs

 

Income from employment high enough to meet essential needs

Herzberg – “The Two-Factor Theory”

Job Satisfaction (Motivators)

Job Dissatisfaction (Hygiene)

Achievement

Company Policy

Recognition for Achievement

Administration (Management)

Work itself

Supervision

Responsibility

Relationships with others

Advancement

Working conditions

Salary

The absence of hygiene factors will create job dissatisfaction and can demotivate workers. But the presence of them will not motivate workers

Motivators will increase the productivity and performance of the workers

McGregor’s Leadership styles The most important determinant of the leadership style is the attitude of managers towards their workers

Theory X managers believe that workers:

Theory Y managers believe that workers:

Dislike work/lazy

Like work and enjoy working

Will avoid responsibility

Will accept responsibility

Need to be controlled and made to work

Active and will take part in discussion and decision making

Are not creative and inactive

Are creative

Need to be supervised and

No threatening and supervision

threatened

needed to make them work

If manager believes that all workers behave in a Theory X way, there will be control, close supervision and no delegation of authority. Staff will not enjoy their work and their efficiency decreases

Taylor’s Scientific Approach – The Economic Man

Only money that will motivate workers to perform better

This will increase productivity and output

Supervision is needed to ensure that the given method is being carried out by workers

Disadvantages:

Each person’s wants and needs are different. Money does not always satisfy people’s needs. There are other factors as well

McClelland – Theory of Needs

Human needs are classified into three categories:

Achievement – Person with this need will seek to reach challenging and realistic goals and promotion. There is a need for constant feedback and a sense of accomplishment

Authority/power – Desires to control others. Wants to be a leader and gain power and respect over others

Affiliation (social) – Has a need for friendly relationship and interaction with other people. Wants to be popular and wants high attention

Vroom’s Expectancy Theory (will study and put notes in book)

Human Resources Management – The long-term/well-planned method to the effective management of the workers in the business so that they help the business to gin a competitive advantage (to make workers work

effectively and efficiently so that the business gain advantages from this) Roles of HR:

Workforce planning

Recruitment and selection

Training and development

Appraisal

Employees welfare

Consultation and negotiation

Redundancy - Job is no longer required due to changing circumstances of firm, e.g. downsizing, change of technology, relocation etc. Not dismissal of employee

Trade Union – An organization of working people wit the objective of improving the pay, working conditions of members and providing support and legal services Workers may want to join because:

Bargaining power – Many workers joined together can be more powerful

Protect from unfair dismissal or poor conditions or work

To ensure that minimum wage rate is paid

Education/other benefits

Liquidity – 2 meanings:

The ability of a business to find cash for short-term financial needs

The ease with which an asset can be changed into cash

Improve liquidity:

Reducing stocks or debtors

Increasing creditors

Selling assets

Leasing

Sale and leaseback

Obtaining loans

Accounting

Financial Accounting - the collection/calculation, analysis and publication of figures relating to business performance and profitability that must be made available under the provisions of the Companies Act. They are a record of a company’s dealings/performance rather than the predictions involved in management accounting

Management Accounting - the internal financial information made available to managers (as opposed to that which must be published by law). This information is used for forward planning, reviewing and analysing the performance of a business – costs and revenues – budgets.

Financial Accounting

Management Accounting

Collection of data on daily transactions

Information for managers on any financial aspect of a business, its department and products

Preparation of published report and accounts of a business – balance sheet, income statement and cash statement

Analysing internal accounts such as departmental budgets

Information is used by external groups

Information is only made available to managers of the business – internal users

Accounts usually prepared once or twice a year

Accounting reports and data prepared as and when required by managers and owners

Accounts must follow the requirements of the Companies Act.

No set rules – accountants will produce information in the form requested

Covers past periods of time

Can cover past time periods, but can also be concerned with the present or projections into the future

Stakeholders – people who has an interest in the business activity:

Customers – Whether the business can satisfy customers’ demands

Suppliers – Pay for materials on time

Employees – Pay wages and salaries and offer legal working conditions and treated as stated in the employment contract

Local community – Business activity affects the environment and community (pollution, employment)

Government – Tax purposes and follow any regulations

Owners/Shareholders – Receive profits and dividends from the business, and make further investment for growth

Marketing – A process involved in identifying/anticipating and satisfying customer requirements profitably

Market Segmentation – Identifying different segments and dividing the market into sub-groups of consumers with similar characteristics and targeting different products to them (different products are targeted at different segments). Age, gender, level of education, occupation, social class, income, religion, ethnic grouping, family characteristics, geography, personality and life- style

Why market segments? :

Better matching of customer needs – Customer needs differ. Creating separate offers for each segment makes sense and provides customers with a better solution

Enhance profits for the business – Different groups of consumers have different disposable incomes and therefore different in how sensitive they are to price changes. Business may adjust price in certain products according to the PED in each segment to maximise revenue and profits

Retain more customers – Customer circumstances change, for example they grow older, form families, change jobs or get promoted, change their buying patterns. By marketing products that appeal to customers at different stages of their life ("life-cycle"), a business can retain customers who might otherwise switch to competing products and brands

Target marketing communications – Businesses need to deliver their marketing message to a relevant customer audience. If the target market is too broad, there is a strong risk that (1) the key customers are missed and (2) the cost of communicating to customers becomes too high / unprofitable. By segmenting markets, the target customer can be reached more often and at lower cost

Internet marketing – the marketing of products over the internet

Advantages

Disadvantages

Can reach a worldwide audience

Computer ownership is not widespread and internet connection is poor in some countries

Convenient for consumers to use

Consumers cannot touch, smell, feel or try on tangible goods before buying – may limit willingness to buy certain products online

Accurate records can be kept and the success rate of different web promotions can be quickly measured

Product returns may increase if consumers are dissatisfied with their purchases once they have received

Computer ownership and usage are increasing globally

Unreliability of postal services in some countries may reduce the willingness of consumers

Lower fixed costs than retail stores

Website can be expensive to develop and it must be kept up-to-

date regularly

Dynamic pricing is easier (charging different prices to different consumers)

Consumers may buy products online from their houses

Worries about internet security e.g. credit card details – may reduce future growth potential

Factors that a manager should consider before selling products on the internet:

How expensive will it be to set up?

How many staff will he need?

Will they need training?

What additional technology will be needed?

How easy will it be to attract customers?

How will the good be delivered to customers?

How much marketing will be needed and what sort?

Security?

Market Research – The collection of data from existing and potential customers regarding market conditions (data about customers,

competitors and the market) for the products + services of a business

Primary Research – The collection of first-hand data that is directly related to a firm’s needs. (E.g. Observation and Recording, Test Marketing and Consumers Survey) Sampling methods:

Quota sampling – Selects respondents in line with known consumer profile (consumers’ info. e.g. age, income levels, gender etc) for product. Reflects different characteristics or demography of consumers. More likely to be representative than a random sample

Secondary Research – The collection of data from second-hand sources. The data is already existed or collected by other organization. (E.g. Government Publications, Libraries, Newspaper Reports, Company Records)

Primary Research

Secondary Research

Data not collected before

Data already existed

Field research

Desk research

Expensive + time-consuming

Cheaper + quicker to carry out

Mass Marketing – selling the same products to the whole market with no attempt to target groups within it

Advantages

Disadvantages

Benefits from economies of scale

More competition for standardised products

Fewer risks because large market

Expensive strategy

Lower cost may lead to lower price and increased sales and profits

Niche Marketing - a business aiming a product or service at a particular, often tiny segment of a market (identifying and satisfying a small segment of market)

Advantages

Disadvantages

Less competition

Market too small (few customers)

Clear focus – target only particular customers

Attract competition

Able to charge high prices for exclusive products

Lack of economies of scale

Over dependence on a small group of consumers

Requires fewer resources for production

Big swings in consumers preferences and expenditure

Market size – the total level of sales of all producers within a market. This can be measured by value or volume

Factors determining market size

Technological

Fashion

Cultural or demographic factors

Competition alternatives

Market share – the percentage of sales in the total market sold by one

business Sales of one business Total sales

Marketing Mix – the mix of elements that make up a marketing package – generally considered to have 4 major parts – (4 Ps) – price, product, promotion and place – elements of a company marketing strategy

designed to satisfy customers – right product at right price, at right place – with appropriate promotion

Place - the means by which a product will be distributed to the consumer. The product must get to the right place at the right time. This means making decisions about the way in which a product is physically distributed – (air, sea, rail, road). It also means deciding how the product is sold – Internet – direct mail, retail outlets – channels of distribution – and availability

Promotion – The use of advertising, sales promotion, personal selling, direct mail, trade fairs, sponsorship and public relations to inform consumers and persuade them to buy

Above-the-line promotion – A promotion that is undertaken by a business by paying for communication with consumers. E.g. advertising

Below-the-line promotion – Promotion that is not a directly paid-for means of communication, but based on short-term incentives to purchase. E.g. sales promotion

Price – the amount paid by consumers for a product. This is a vital key of the marketing mix; it has a significant impact on consumers’ demand. It will also affect the image of the product and the revenue and profits of the business

Product – the end result of the production process sold on the market to satisfy a customer need. If it does not meet customer expectations (quality, appearance, durability etc.), no matter how effective the other parts of the marketing mix are, it will not sell successfully in the long term

Pricing Strategies

Skimming pricing - the setting of a high price for a new product in order to maximise profits in the short term

Can be use if the company is in a position to exploit a skimming pricing strategy e.g. product has scarcity value, originality/innovation, in a temporary monopoly position, absence of competition initially

Penetration pricing - the setting of a low price and smaller profit margins in order to increase/gain market share

Mark-up pricing – adding a fixed percentage mark-up for profit to the unit price that the business pays for buying a product

Target pricing – setting a price that will give a required rate of return at a certain level of output/sales

Full-cost pricing – setting a price by calculating a unit cost for the product (fixed and variable) and then adding a fixed profit margin

Contribution-cost pricing – setting prices based on the variable costs of making a product in order to make a contribution towards fixed costs and profit

Government assistance to businesses

Reduced corporation tax – Firms can have more retained profits for expansion

Loan guarantee scheme – Government guarantees to pay a certain amount of money back to banks if the business fails. So it is easier for businesses to ask for loans

Info, advice and support is provided

Assist with finance and location (to encourage business in high unemployment areas)

Training to employees in the business

Grants and subsidies – Reduce costs of production of the business

Quality - The suitability of a product or service to fulfill the function that the customer wants. Quality should be controlled by the business to meet customer needs

Why a business should ensure high quality?

To involve all staff which can promote team work and increase motivation

To set quality standards for all stages of production so that all materials and all production phases are checked before it is too late and the whole product has been completed

To reduce costs of final inspection as products have already been checked at each stage of production

To reduce costs of wastage and faulty products

To gain accreditation (recognition) for quality awards – gives business status and prestige

How a business ensure high quality of its product:

Inspection, testing, random sampling

Total Quality Management – An approach to quality that aims to involve all employees in the quality-improvement process

Quality Assurance – A system of agreeing and meeting quality standards (consumers’ expectations) at each stage of production to ensure consumer satisfaction

Quality Control – Determining a level of quality and working to those standards

Continuous improvement (Kaizen) – Constantly introducing small and gradual changes in a business in order to improve quality or efficiency. All employees should continually be

seeking ways to improve their own performance. It helps encourage workers to take ownership for their work, and can help reinforce team working, thereby improving worker motivation

Lean production – An approach that seeks to improve the use of business productive resources in order to: reduce wastage, stockholding and other costs; improve labour productivity levels; increase capital utilisation; improve

quality – methods include cell production, Kaizen, JIT, TQM, time-based management, simultaneous engineering etc.

Advantages:

Reduced waste of time and resources

Reduced unit costs leading to higher profits

Less risk of damage to stocks and equipment

New products launched more quickly

Just-in-time – A stock-control method that aims to avoid holding stocks by requiring supplies to arrive just as they are

needed in the production and completed products are produced to order

Importance of effective stock control:

Achieving effective balance between cost and benefits of holding stock. Need to give maximum customer service and operational flexibility by holding adequate stocks, avoiding costly stock- outs. Recognising cost of holding stock:

financial, physical, risk of damage/obsolescence. Beneficial effects of lean production/JIT

Capital Expenditure – Spending on the purchase of assets that are expected to last for more than one year and can be used repeatedly (buying fixed assets), such as building and machinery

Share capital

Long term loan capital (debentures, mortgages, venture capital)

Leasing ( เช่า ) – Obtaining the use of equipment and paying rental charge over a fixed period. Ownership remains with the leasing company

Bank loans (long term)

Hire purchase ( ผ่อนจ่าย ) - Business hires the equipment for a period of time making fixed regular payments. Once payments have finished it then owns the piece of equipment

Sell fixes assets

Revenue Expenditure – The spending on everyday running expenses and business resources consumed in the short term, includes wages and salaries and material bought for stocks (buying current assets)

Retained profit

 

Overdraft

Debt factoring – selling debts to debt-factoring company for immediate cash but not full amount will be received

Short-term loans

 

Increasing creditor days

Decreasing debtor days

Sale of assets

Sale of shares

Profit

Gross profit – sales revenue minus direct cost of purchasing the goods that were sold

Net profit – gross profit minus overhead expenses

Retained profit – the profit left after all deductions, including dividends, have been made. It is placed in reserves on the liabilities side of the balance sheet – belongs to owners/shareholders until used to fund a future venture – a main internal source of funds for many companies – very dependent on the level of profits gained

Liquidity Ratios

 

Acid-test ratio – this ignores the stocks (inventories) (not yet been sold so no certainty that they would be sold in the short term). Results below 1 mean that the business has less than $1 of liquid assets to pay each $1 of short-term debt Liquid assets (current assets minus stocks) Current liability

Current ratio – Recommend result is around 1.5-2 Current assets

 

Current liabilities

 

Method to increase liquidity:

Sell off fixed assets for cash e.g. Land and property – could lease back if still needed

Sell off inventories for cash

Increase loans to inject cash

Profitability Ratios

Net profit margin Net profit Sales

 

x100

Gross profit margin Gross profit

 

Sales

x100

Return on capital employed – compares profit with the capital invested in the business Net Profit

x100

Capital Employed

Factors affecting profitability of a business:

The nature of the product (luxury or necessity)

The market segments being targeted

Level of competition

Cost structure of the business

Changes in the external environment

Average Rate of Return (ARR) – measures the annual profitability of an investment as a percentage of the initial investment ARR (%) = annual profit (net cash flow)

Initial capital cost

x100

Payback period – length of time it takes for the net cash inflows to pay back the original cost of the investment

Business Structure

Free-market economy – economic resources owned largely by the private sector with very little state intervention

Command economy – economic resources owned, managed and controlled by the state/government

Mixed economy – economic resources are owned and controlled by both private and public sector (defences, health and education) Sole trader – A business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits

Advantages

Disadvantages

Easy to set up

Unlimited liability – all of owner’s assets are potentially at risk

Full control

Intense competition from bigger

firms

Owner keeps all profit

Responsible for all aspects of management (unable to specialize in particular area)

Flexible working hours

Difficult to raise additional capital

Close to customers

Long hours of work

Personal satisfaction

Lack of continuity (no separate legal identity) – when owner dies the business ends too

Limited Companies has:

Limited liability – The only liability – or potential loss – a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder

Legal Personality – A company has legal identity separate from that of its owners

Continuity – The death of an owner or director does not lead to an end, ownership continues through the inheritance of the shares, there is no break in ownership at all

Private Limited Company – A small to medium-sized business that is owned by shareholders who are often members of the same family. Shares can only be transferred ‘privately’ and all shareholders must agree on the transfer. The business has separate legal entity and shareholders have limited liability

Advantages

Shareholders have limited liability

Separate legal personality

Continuity in the event of death of a shareholder

Able to raise capital by selling shares

Greater status than an unincorporated business

Original owner still able to retain control

Disadvantages

Legal formalities involved in establishing the business

Cannot sell shares the general public to raise capital

Quite difficult for shareholders to sell shares

End-of-year accounts must be sent to Companies House – available for public inspection (less secrecy)

End-of-year accounts must be sent to Companies House – available for public inspection (less secrecy)
to sell shares End-of-year accounts must be sent to Companies House – available for public inspection

Public Limited Company – A limited company, often a large business, with the legal right to sell shares to the general

public – share prices are quoted on the national stock exchange

Advantages

Disadvantages

Limited liability

Legal formalities in formation

Separate legal identity

Cost of business consultants and financial advisers when creating

Continuity

Shares prices subject to fluctuation

Ease of buying and selling shares

Annual publication of detailed report and accounts must be available to public

Easier to raise capital by selling shares to the general public

Risk of takeover due to the availability of the shares on the stock exchange

Directors influenced by short-term objectives of major investors

Private Limited Company

Public Limited Company

Cannot sell shares to general public

Can sell share to anyone

Difficult to raise capital

Easier to raise capital

Owner still able to retain control

Directors control and make decision

Multinational – business organisation that has its main office in one county, but with operating branches, factories and assembly plants in other countries. Pros and cons it might bring to a country:

Advantages to the country

Disadvantages to the country

Create jobs

Exploit the low cost local workforce

Improve living standards

Forced local competing firms out of business

Develop infrastructure

Sends profits back out of country

Introduce new technologies, products/services

Damage/pollution to local community/environment

Local firms forced to improve quality and productivity up to international standards to be able to compete

Ignore the local cultural traditions

GDP rises (output rises)

Depletion of scarce resources in the host country

Tax revenues increase

Public sector organisation – A business enterprise owned and controlled by the state – also known as nationalised industry

Objectives:

Providing a merit good free at the point of delivery

Emphasis on social aspects of activity

Free from or influenced by profit/commercial considerations

Measuring size of business:

Size of labour force

Total output

Market share

Turnover

Profit figure

Amount of capital employed (the amount of long-term finance invested in the business)

Market capitalisation – current share price x no. of shares issued

Sometimes it can be difficult to compare the size of different businesses

because:

Different ways of measuring size often give different comparative results. A firm may appear to be large by one measure but quite small by another

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

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Break-even Analysis Break-even level of output =

Fixed cost………

!!!!!!!!!!!! Contribution per unit

Contribution per unit – selling price minus variable cost per unit

Why it used by management:

An operation-management decision – whether the business should buy new equipment which increase fixed cost but offer lower variable cost or not

Helps the business to predict a movement from making a loss to making a profit

Shows how much must be made and sold in order to gain targeted profits

Use for forward planning

Quick and easy to use

Helpful in planning production and selling levels

Easy visual means of analysing business financial position at different levels of output

Shows the impact of changes in costs on the break even point

Allow business to establish a ‘margin of safety’ (indication of how much demand a business could afford to lose before making a loss)

But it does not take into account possible changes in costs over the time period

Does not allow for changes in the selling price

In reality, the costs and revenue may not change directly with output – therefore not a smooth straight line (costs may rise more as the firm gets closer to full capacity forming a curve instead)

Not all costs are easily classified, this would make the model inaccurate

It assumes that all units made are sold

Does not allow for changes in market conditions in the time period – e.g. entry of new competitor

in the time period – e.g. entry of new competitor • Balance Sheet – An accounting

Balance Sheet – An accounting statement that records the values of a business’s:

Asset – An item of monetary value that is owned by a business

Current asset – assets that are likely to be turned into cash in the short-term

Fixed asset – assets to be kept and used repeatedly by the business for more than one year

Why businesses depreciate fixed assets:

Because some assets wear out and lose value throughout time

So to spread cost of asset over useful life (matching principle) rather than take full amount in year of purchase

So that the accounts are more reliable and accurate

Liability – A financial responsibility of a business that it is required to pay in the future (what a company owes)

Shareholders’ equity – Total value of assets minus total value of liabilities

Purpose of balance sheet:

Provides a summary and valuation of all business assets, capital, and liabilities

Shows a business’s financial position at a stated point in time

Shows a business’s net current assets (working capital) indicating liquidity

Used to analyse capital structure of a business

Provides a guide to the value of a company

Income statement (profit and loss account) – Records the

Revenue,

Costs and profit (or loss) and

How the net profit is split up between dividends to shareholders of

a business over a given period of time. Uses:

To measure and compare the performance of a business over time or with other firms

Actual profit data can be compared with the expected profit levels

Bankers and creditors of the business will need the information to help them decide whether to lend money to the business

Potential investors may be interested in the information

Cash-flow statement – Record of the cash received by a business over a

period of time and the cash outflows from the business

It

focuses on cash rather than profit

Indicates where the company’s cash has come from how it has

been spent

It

shows the financial position of a business – the cash that is

available for business use

It shows whether the business is able to pay loans, dividends and day-to-day running expenses

Cash and liquidity are essential for business survival

Declared profits can give a false impression if sales are mainly credit sales

Working capital – The amount of cash needed for day to day running of the business, e.g. wages and creditors (current assets – current liabilities)

Important to business because:

Cash is needed for everyday expenses

Without sufficient working capital a business will be unable to pay its short-term debts

This may lead to liquidation (stop trading and sell assets for cash to pay creditors)

Increase working capital:

Reduce the stock holding period for finished goods and raw materials – but this may cause production delay or shortages if demand increases unexpectedly

Improve the efficiency of the production process (e.g. shorten by using better production methods) – can be costly to set up at first but would be cost saving in the long run

Reduce the credit period offered to trade debtors and chase amounts due more aggressively – however, demand can decrease

Extend the time taken to pay creditors - A dangerous option – suppliers may refuse to supply or may charge interest if their payment terms are exceeded

Sale and lease back - Another good way of releasing cash from fixed assets – but leaves the business with higher costs and payment obligations

Uses of published accounts of a business:

Business Managers

To measure performance of the business and compare to targets and competitors

To help them take decisions, e.g. new investment or closing branches and launching new products

To set targets or budgets for the future

Banks

To decide whether to lend money to the business

To assess whether to allow an increase in overdraft or loan

Creditors

To see if the business is secure and liquid enough to pay off its debts

To assess whether the business is a good credit risk

To decide whether to press for early repayment of outstanding debts

Customers

To assess whether the business is secure

To determine whether they will be assured of future supplies of the goods they are purchasing

To assess whether there will be security of spare parts and service facilities

Government

To calculate how much tax is due from the business

To determine whether the business is likely to expand and create more jobs to the economy

To assess whether the business is in danger of closing down

To confirm that the business is staying within the law in terms of accounting regulations

Investors and Shareholders

To assess the value of the business and their investment

To assess whether the business is becoming more or less profitable

To determine what share of the profits investors are receiving

To decide whether the business has potential for growth

To help potential investors make decision of investing and compare with other businesses

To help existing investors to decide whether they should consider sell their shares

Workforce

To assess whether the business is secure enough to pay their wages

To determine whether their jobs are secure

To find out whether the profits of the business is increasing (then a wage increase is more likely)

Local community

To see if the business is doing good and able to expand to create more employment to the community

To see if the business if making losses and likely to fail

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Business Objectives

Give direction and purpose to a business

Motivate staff to achieve goals

Assess performance

Identify problems

Well-defined objectives help a business to be clear about what it wants to achieve

Aim helps to direct, control and review the success of the business activity

Profit Maximisation

Important to business because:

Profit enables growth, investment, competing and satisfying employees. Ultimately plcs have to satisfy shareholders by producing good profits, or they will become unhappy and sell shares, causing price to drop. So stock market pressure to keep improving profit drives directors of plcs

Profit Satisficing - try to make enough profit to keep the owners comfortable – probably the aim of smaller businesses whose owners do not want to work longer hours

Growth

Growth might not always be the most important objective:

Companies have a number of different objectives to pursue and not all objectives are appropriate for all firms

It may well depend on the size of a business and the relative strength of different stakeholders. Growth may be an important objective – and many benefits – but internal and external difficulties may prohibit growth

Increasing market share

Survival

Corporate social responsibility

Maximising short-term sales revenue

Maximising shareholder value – increasing share prices and dividends.

Corporate culture – The set of value and shared beliefs that influence the decision-making style of the managers and other employees of the business – “the way we do things around here”

Factor determining the culture of a business:

Origin and development

Influence of founders

Impact of managers/leaders

Type of business, large, small, nature of activity e.g. manufacturing, ‘engineer culture’, service/customer-led culture, role, task, power, person, entrepreneurial v bureaucratic

Demand – The quantity of a product that consumers are willing and able to buy at a given price in a time period. Factors affecting:

Change in consumers’ incomes

Changes in prices of substitutes and complements

Fashion and taste changes

Advertising and promotion

Quality

Price elasticity of demand - the responsiveness of demand to a change in price. A large change in demand in response to a proportionately small change in price then the product is said to be price elastic. Formula:

% change in quantity demanded % change in price

Inelastic demand:

Under a relatively price inelastic condition, any fall in demand as a result of a price increase should be proportionately less than the increase in price and so while total sales will fall, in fact sales revenue will rise

Costs

Fixed cost – Costs that do not vary with output in the short run, e.g. rent of premises, insurance, interest rates

Variable cost - Costs which change in total in proportion to output in the short run, e.g. raw materials, direct labour, variable overheads

Sometimes it can be difficult to classify costs into categories:

Sometimes labour is unoccupied because of a lack of orders, the business still have to pay to employ the worker in the short run. Wages then become indirect cost

Some costs are semi-variable, e.g. electricity, maintenance, and rise with output but not in proportion

Some labour is employed on a fixed-contract salary, so it does not vary with output

Cost of goods sold – this is the direct cost of purchasing the goods that were sold during the financial year (opening stocks + purchases – closing stocks)

Cash flow forecast - An estimate of the future liquidity of a business – a listing of all likely receipts (cash in-flows) and payments (cash outflows) over a future period of time. Improve cash flow:

 

Invoice customer promptly

Offer incentives for early payment

Avoid slow pay/no pay customers

Trim inventory

Increase sales

Raise prices

Sell off assets

Issue more shares

Borrow more

Negotiate better terms with suppliers

Work study - an attempt to find the best or most effective way of using labour, machines, and materials - the use made of 2 techniques

(a)

method study and (b) work measurement, i.e. (a) analysing all

specific activities in a job and finding the best way to do that job and

(b)

observing the worker.

 

The results of work study can help improve productivity:

It seeks to find the most efficient method of production in terms of time and effort – a ‘best’ method of operation

It allows business to make full use of resources available

Suggest process improvement

Identify redundant activities

Identify barriers to productivity

Improve time management

Added value – the difference between the cost of purchasing raw materials and the price the finished goods are sold for

 

Business can achieve this by taking a basic material or commodity and converting it into a more complete or differentiated product or branded product

Added value allows firms to market their products more successfully, emphasising strength of brand as opposed to a commodity. They can charge higher prices, achieve a USP and obtain competitive advantage. Higher added value products are less price-elastic and harder to copy

Emotional Intelligence - Emotional intelligence is as important as intellectual intelligence. It is the ability to be aware of, control and manage the emotions of self and others. Goleman’s model of

emotional competencies (self awareness, self management, social awareness and social skills)

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