OVERVIEW OF THE VARIOUS FUNCTIONAL AREAS OF A FIRM

HUMAN RESOURCE MANAGEMENT FUNCTION

The Human Resource function is a specialized management area just as financial

function, marketing function, production function etc are specialized organizational
functional areas on which management is practiced. A typical organizational chart
would therefore place the Human Resource function as follows:

CEO

Finance Marketing Production Human Resource

Function/Dept Function/Dept Function/ Dept Function/Dept

The HR function is carried out in every business with employees but usually it is only
bigger business organizations that have stand-alone human resource department since
the scope of their human resource needs is so broad that it is a full-time task.

In a smaller businesses, employee recruitment, training of employees etc (which are

some of the main tasks of the HR officers) is usually handled by one of the other
functional managers e.g. the Financial and Administration Manager, but as the business
grows, this task requires more time and attention until eventually a person is appointed
especially to perform this task namely the Human Resource Officer or the Personnel
Officer. As the business develops however, the HR function can no longer be handled
by one person and when additional people are appointed, the Human Resource
Department is established with the Human Resources Manager as its head. Other titles
such as the Manpower Manager and Director of Personnel are also used as titles of the
head of human resources in a firm.

There is a distinction between the management of human resource and human resource
management. The management of human resource refers to the task or responsibility
that is part of every manager’s job regardless of the functional area involved. Thus a
marketing manager for instance is responsible for the management of marketing
personnel and a factory foreman as the head of production department is responsible
for managing the production staff.
THE TASK OF THE HUMAN RESOURCE MANAGER

Every business uses resources in the pursuit of its objectives. These resources (also
known as production factors) must be efficiently managed in accordance with the
economic principles. One of the most important resources in any business is its
employees (i.e. labor). It is therefore the duty of every manager regardless of his or her
function to apply this resource in an optimal manner.

The task of the HR manager in a business is to help other managers in the business to
fully utilize employees allocated to them. HR management can therefore be regarded
as an aid or staff function i.e. it advices other line functions.

Line functions are usually directly involved in the pursuit of the primary objectives of
the business. HR managers help other managers utilize labor in an optimal way by:

1. Helping them to recruit and appoint the most suitable staff

2. Ensuring that conditions of employment are such that staff will want to remain
with the business, and
3. Taking steps to train staff to a higher level of skill so that they can make a greater
contribution to the business or organization.

These three main Human resource activities are technically referred as

1) Human Resource Acquisition
2) Human Resource Retention
3) Human Resource Development

These activities as well as their sub-activities may be depicted in the following figure

Human Resource Manager

Human Resource Human Resource Human Resource

Acquisition Retention Development
____________________ _______________________ ___________________
 Training &
 Human Resource  Compensation Development
Planning  Health & Safety  Performance
 Recruitment  Labor Relations Management &
 Selection appraisals
 Placement
 Induction
 a) Attracting Human Resource

Every firm must have the necessary human resource to perform its activities
continuously. One of the main activities of the HR function is to ensure a continuous flow
of human resources to the business. This is achieved through:

i) Human resource planning

HR Planning involves estimating the quantity and quality of employees who will be
required for the business in the future. This estimate depends on a number of factors and
methods. HR Planning can be divided into three specific steps.
a) Identify and describe the work being done in the business at present ( i.e job
analysis and job description)
b) Identify the type of employees needed to do the work i.e job specification
c) Identify the number of employees who will be needed in the future (i.e HR
forecasting and planning

ii) Recruiting

The express purpose of recruitment is to ensure that sufficient numbers of applicants

apply for the various jobs in the business as and when required. Therefore as soon as
vacancies occur, the HR manager must decide from where suitable candidates for the job
will be obtained.

There are two basic sources from where potential employee can be recruited.
a) Internally- from inside the business through promotions, transfers etc
b) Externally-from outside the business through new recruits
Both of these sources have their own advantages and disadvantages.

iii) Selection

The selection process varies from a very short interview usually to obtain a general
impression of the applicant to an intensive assessment that entails aptitude, technical and
personality (psychometric) assessments. However, this differs from business to business
and depends especially on the level of appointment

iv) Placement and induction

Once the job offer is accepted, the new employee must report for duty as soon as possible.
With the placement of the person in the job, a number of outstanding matters can be
finalized e.g. in some cases arrangements must be made for the relocation of the
employee, collection of missing information e.g. copies of education certificates etc. The
new employee must also go through a process of induction (orientation) or socialization.
Experience has shown that when employees do not go through an orientation phase, it
takes much longer for them to start working productively.

b) Retaining Human Resource

1) Employee compensation

The most critical dimension of the employment relationship is the economic aspect. The
relationship between employers and employees is usually based on the principle that
employees make their services available to employers in exchange for certain economic
rewards. Rewards in the form of pay and benefits motivate the behavior of people in
business. Remuneration of employees is a very important part of human resources
management and it is usually the single largest cost factor in most business budgets.
Objectives of a remuneration system include.

a) Attracting the right quality of employees

Businesses paying the best salaries normally attract the highest number of candidates and
sometimes the best. Market related salaries are normally used as input to determine
competitive pay levels. This is achieved through benchmarking a firm’s compensation
against the competition. A salary survey is important in determining the industry
compensation levels.

b) Retaining suitable employees

The remuneration system of a business must be flexible enough to reward employees so

that they feel satisfied when they compare their rewards with other individuals doing the
same job elsewhere.

c) Maintaining equity among employees

There must be fairness in the distribution of rewards. There should be external equity i.e.
comparison of rewards across similar jobs in the labor market; internal equity i.e.
comparison of rewards across different jobs in the same business and individual equity
i.e. the extent to which an individuals remuneration reflects his or her contribution.

Types of compensation include;

 Basic pay- monthly salary
 Fringe benefits-housing, loans, leave allowances etc
 Performance related rewards-bonuses, commissions
 2) Health and safety issues

An organization should also care for its employees and provide a healthy and safe work
place. From a managerial point of view, it is important that a business draws up a policy
focusing on employee health and safety in the work place by ensuring adequate medical
coverage and appropriate coverage of workplace accidents and disaster preparedness.

3) Labor Relations

This entails ensuring that employees’ welfare is catered for especially as

articulated by the labor laws, labour unions and collective bargaining etc

c) Developing employees

This ensures that employees remain relevant to the dynamic and competitive business
environment and can be achieved through:

1) Training

Employees are trained because both the individual and the organization benefit.

Individuals benefit from training in the following ways:

a) they can make better decisions and solve problems more effectively
b) job satisfaction is increased and knowledge, communication skills and attitudes
improved
c) they learn to handle stress, tensions and conflicts

A business benefits from training in the following ways;

a) Job knowledge and skills of employees at all levels are improved
b) Training leads to improved profitability and better services
c) The morale of the work force is improved
d) Corporate image is enhanced

2) Performance management

Businesses that endeavor to gain a competitive advantage through their employees must
be able to measure employees’ performance as objectively as possible through formal
systems. One of the most challenging issues facing managers today is how to manage the
performance of employees to ensure organizational goal achievement. Proper
performance management is considered to be an important solution to this challenge.
Employee performance management is defined as the means by which managers ensure
that employee’ activities and outputs are in-line with the business goals. A performance
management system consists mainly of three parts:
a) Determining the desired performance standards of the business
b) Measuring the performance by using performance appraisals
c) Feedback to employees on their performance

Conclusion

The HR manager is responsible for managing the development of the firm’s human
resource capital. This includes the development and implementation of comprehensive
programs that support performance management, competence development, succession
planning, retention of talent etc.

AN OVERVIEW OF THE MARKETING FUNCTION

The meaning of marketing is clearly outlined in the following three authoritative

definitions:

a) “Marketing is the management process responsible for identifying and satisfying

customers’ needs profitably.”
-The Chartered Institute of Marketing (CIM) of United Kingdom- world’s leading
professional association of marketers.

b) “Marketing is a societal process by which individuals and groups obtain what they
need and want through creating, offering and freely exchanging products and
services of value with others”.
- Philip Kotler- marketing guru

c) “Marketing is what the whole company does to achieve customer preference and
thereby its own goals”
- Fredrick E. Webster- marketing guru

Key issues emanate from the above definitions. Let us now make a summary of these
marketing issues:

i) Marketing basically entails satisfying customer needs and wants which is critical
if the firm is to be able to realize the revenues required to run its operations and
attain its other goals.
ii) Unless a firm is able to create superior value than its competitors as conceived by
its target customers, then it will not be able to sustain its survival in the market.
iii) Therefore the task of marketers is to create a competitive value for the firm’s target
customers in order for the firm to realize its key objectives of profitability and
growth.

THE CONCEPT OF MARKETING MIX

In order to create the superior value required by customers in the exchange process and
thereby enable the organization achieve its key goals of profitability and growth,
organizations design different marketing strategies or game plans. The marketing mix is
a set of such strategies.

The term marketing mix was coined by Harvard University’s Professor Neil Borden
(1965) who drew on a colleague’s description of a marketing executive as a ‘mixer of
ingredients’, one who is constantly engaged in fashioning creatively a mix of marketing
procedures and policies in his efforts to produce a profitable enterprise. Borden
suggested that if marketing executives were mixers of ingredients, then what they
produced could be described as marketing mix; the word marketing mix was thus born.
According to Borden, the success of marketing management depends on developing a
suitable blend of the marketing mix elements given the environmental forces confronting
the firm.

Over the years, the marketing mix elements that are used by marketers to create customer
value have been categorized under four main elements namely product, place, price and
promotion; commonly referred to as the 4Ps. Thus the terms 4Ps and marketing mix are
interchangeably used in marketing theory and practice and provide a useful framework
for the analysis of marketing decisions.

Therefore, the marketing mix or 4Ps represent the marketing variables that are directly
controlled by the organization. It is by developing an appropriate balance between these
elements that the organization can tailor its offerings in order to meet the needs of its
target market and achieve its specified objectives. The 4Ps are therefore the essential tool
kit of any marketing strategy. Consequently, management guru, Peter F. Drucker has
defined marketing as ‘getting the right product to the right place at the right time at the
right price with the right promotion to attract people who will buy it’. Thus effective
marketing decisions revolve around the 4Ps.

Marketing mix as a concept has both strategic and tactical dimensions. The strategic
dimension of the marketing mix is primarily concerned with decisions about the relative
importance of the mix elements for a particular product/market combination. On the
other hand, the tactical dimension of the marketing mix is concerned primarily with the
specification of precise details for each element of the mix.
To develop effective marketing mix requires a clear understanding of the chosen product
positioning and the way in which consumers are likely to respond to the individual mix
elements. In addition, it is also important to think of each of the P’s in a broader
perspective.

For instance, price is more than simply the amount of money that the consumer pays
when making the purchase. It also encompasses credit or finance deals, any discounts,
special offers, and additional deliveries changes etc.

Place or distribution is not just about the physical movement of products from
manufacturer to consumer. It is also about the ease of access to products, the way they
are displayed and the environment in which they are presented.

Product is not just the physical item presented for sale; it also deals with the image that
is created for the product through branding and the level of customer service that
accompanies it.

Finally promotion is more than advertising. It should also cover alls aspects on the way
in which the organization communicates with its customers and other interested groups
including its own employees.

Furthermore, as well as considering product, price, promotion and place in their broadest
terms, it’s also important to remember that the elements of the marketing mix must be
consistent with one another, each element in that mix is ultimately contributing to the
way in which the customer perceives the product and in order to convey the desired
image effectively, each element must convey the same message. Hence, there should be
consistency amongst the 4Ps.

Apart from the marketing mix elements, the other issues of critical importance to
marketers in enhancing the competitiveness and survival of the firm include:

1) Market segmentation
2) Market targeting
3) Market positioning

a) MARKET SEGMENTATION
Market segmentation is based on the recognition of the existence of diverse needs of
potential buyers/customers within a market. Different customer attitudes may be
grouped into segments. A different marketing approach is needed for each segment.

Therefore, segmentation is the process of partitioning markets into groups of potential

customers with similar needs and/or characteristics who are likely to exhibit similar
purchase behavior. It is a key marketing planning tool and the foundation for effective
strategy formulation.

Each segment consists of people or organizations who share common needs and
preferences and who may react to market stimuli or actions in much the same way and
can become a target market with a similar marketing mix.

By using different marketing approaches for each segment, it should be possible for the
company to increase its market share and profitability since it is able to appropriately
serve the needs of its target customers. The marketing approach used for each segment
should reflect the particular needs of existing and potential customers in that segment.

Let’s now discuss the various ways on which markets can be segmented.

Segmentation bases or dimensions

There are many different bases or dimensions of segmenting markets. The key ones
include:

1) Geographic segmentation
The needs and behavior of potential customers in certain geographical areas may be
different from those from other geographical areas. For instance, Western Kenya may
prefer certain food commodities e.g. whole maize flour, with husks as opposed to
residents of the Coast or Central Kenya who prefer sifted maize meal. Geographical
locations have climatic and cultural implications, which eventually affect consumption
preferences of its residents.

2) Product usage/end-use segmentation

How the item be put to use. For instance, end-use in consumer clothing/fashion markets
might refer to official wear or casual wear

3) Buyer Behavior segmentation

For instance, is the purchase usually on impulse? Does customer loyalty have an impact?
How sensitive is the customer to marketing mix factors e.g. price, product quality, sales
promotion etc?

4) Demographic segmentation
The market may be divided on the basis of age, gender, social economic group, family
characteristics, family life cycle stage etc. which are common demographic variables.
These factors may be used in combination.
5) Psychographics or Lifestyle segmentation
This seeks to classify people according to their values, opinions, and interests and
personality characteristics. Lifestyle segmentation deals with the person as opposed to
the product and attempts to discover the particular unique lifestyle patterns of the
customer. This offers an insight into their preferences for various products and services.
Marketers can then assign and target products and promotions to particular lifestyle
groups.

It is important to consider whether the identified market clusters actually constitutes an

adequate and appropriate market segment that the firm can target. This is verified by
analyzing the identified segments on the following framework.

b) MARKET TARGETING

Whereas market segmentation relates to focus strategies in that it identifies groups of

customers with common characteristics and/or needs, targeting involves selecting the
segment of the market a product or service will be directed at. Thus, once the firm has
identified its market segment opportunities, it has to decide how many and which ones
to target. Each segment that a marketer attempts to satisfy is a target market. Targeting
therefore is simply the task of prioritizing the segment or segments on which an
organization should focus its marketing activities on.

Targeting options

There are four main options that a firm can use to target its identified market segments
namely; undifferentiated, concentrated, differentiated and atomized marketing.

i) Undifferentiated marketing

Product Market

This is where the company opts to produce a single product and hopes to get as many
customers as possible to buy it i.e. it opts to ignore the existence of different segments
entirely. This approach is also referred to as mass marketing. It only makes sense
when the whole market is homogenous i.e. the total market responds in the same way
to a product offer. Products such as salt, sugar, safety matches etc have more or less a
homogenous markets and are sold using a mass marketing approach.

ii) Concentrated Marketing

 Product Target Market

A concentration strategy means that the firm decides to serve one of several potential
segments of the market. Hence, this is an attempt to produce the ideal product for a
single segment of the market e.g. youth or women products, baby clothing or men
fashion shops. This approach is also referred to as niche’ marketing. A niche’ is
basically a small segment of the total market that a firm may choose in order to
optimize its competitive market position.

iii) Differentiated marketing

A third approach to market targeting is called differentiated marketing. If a firm

identifies and actively markets its products or services to two or more segments of the
market based on varied customer needs, a differentiated strategy is being used. Thus
this approach is manifested where the company attempts to introduce several product
versions of a single product line, with each version aimed at a different market
segment e.g Unilever has detergent product line selling in different brand names or
versions e.g Omo, Sunlight (powder and bar soap), Key Bar Soap, Vim etc. Hence the
same product line serving cleaning needs of customers but varying as per their
preferences. This is illustrated in the following figure.

Product line Total market

Product Version A Target market A
Product version B Target Market B

Product Version C Target Market C

Product Version D Target Market D

c) MARKET POSITIONING

Positioning is the process of establishing and maintaining a distinctive place in the market
for an organization’s product or brands.

According to Al Ries and Jack Trout, “positioning starts with the product but positioning
is not what you do to a product. Positioning is what you do to the mind of the customer.
You should concentrate on the perception of the customer and not the reality of the
product”.

Therefore, positioning is how the product is perceived and evaluated by the target market
relative to competing products. This is why perception is a critical and integral part of
the position analysis. To the consumer perception is reality! That is why it is said that
marketing battle is fought in the customers’ mind. A marketer who attains a superior
position in the customers mind has basically won the marketing battle!

Like a memory bank, a customer’s mind has a slot or ‘position’ for each bit of
information it has chosen to retain. To succeed in today’s over-communicated society ,
given that there are just too many products, too many companies, too much marketing
‘noise’; a company must create a ‘position’ in the prospect’s mind; a position that takes
into consideration not only its own strength and weaknesses, but those of its competitors
as well. Consequently, Al Rie and Jack Trout suggest that a company wishing to apply
positioning to its situation ought to ask itself the following six fundamental questions:

1. What position, if any, do we already own in the customer’s mind?

2. What position do we what to own?
3. What companies must be outgunned if we are to establish that position?
4. Do we have enough marketing money to occupy and hold the position?
5. Do we have the guts to stick with one consistent positioning concept?
6. Does our creative approach match our positioning strategy?

The name of the marketing game is ‘positioning’. And only the better player can survive!

i. Positioning bases or criteria

Products or brands can be positioned against competitive products/brands on

positioning maps. These are defined in terms of how buyers perceive key characteristics
of the product or brand.

Possible positioning bases include:

1) Specific product features e.g. price, quality etc

2) Benefits, solutions etc
3) Specific usage occasions
4) User category e.g. age, gender etc.
5) Against another product i.e. comparison with market leader e.g. the Chinese
household appliances company Haier positions itself thus: “Haier is the 2nd largest
households company in the world”.
6) Product class disassociation e.g. lead “free” petrol, Sulfur ‘free’ diesel etc
7) Personnel differentiation- a company can gain a strong competitive advantage
through having superior employees

Note: The hallmark of effective positioning include the fact that the position chosen by
the company must be believable in the customers mind and that the product must
deliver that promise on a consistent basis.

Conclusion

Marketing is a key factor in business success. Companies face increasingly stiff

competition and survival is only possible to those who can best understand customers’
needs and wants. The companies that succeed are those that deliver the greatest value to
their target customers. If a business takes its time to first properly determine customer
requirements and expectations, then the products that it develops are likely to be deemed
desirable by the customers the firm is targeting.

All activities of the business begin with and revolve around the marketing function since
top management must first determine what can be achieved in the market place before
considering production facilities, employing labour, purchasing raw material, financing
and accounting for all these activities.

Marketing touches all of us everyday of our lives and makes it possible for us to enjoy a
higher standard of living by availing needs satisfying goods and services according to
our preferences.
AN OVERVIEW OF THE ACCOUNTING FUNCTION

Background

It is almost impossible to run a business effectively without being able to understand and
analyze accounting reports and financial statements. Financial reports and statements are
prepared from the information that bookkeepers and accountants gather and record.

Accountants also do a series of calculations using the recorded data to measure how well
a business is doing relative to similar businesses and to make recommendations for
strengthening the business and making it grow. The fact is that you have to know
accounting if you want to understand and effectively manage a business.

Meaning and importance of accounting

Accounting is the recording, classifying, summarizing and interpreting of financial

events and transactions to provide management and other interested parties with the
information they need to make better decisions.

Transactions include the buying and selling of goods and services, using inputs/supplies,
acquiring insurance etc. Transactions are recorded by hand or by computer systems.
However, the trend today is using computers since the process is often repetitive and
tedious and computers greatly simplify the task. After the transactions are recoded
they’re usually classified into books that have common characteristics e.g. all purchases
are grouped together as are all sales transactions in frameworks referred to as ledgers. A
businessperson is therefore able to quickly obtain needed information about purchases,
sales and other transactions that occur at given period of time. The methods used to
record and summarize accounting data into reports are called accounting systems.

The Accounting System

Input data for an accounting system is obtained from the sales documents, purchasing
documents etc. The data is recorded, classified and summarized and is finally put into
summary financial statements e.g. income statement and balance sheet. This system is
illustrated as follows:
 INPUTS PROCESSING OUTPUTS

A/c documents Entries made Financial statements

 Sale documents into journals (recording)  Balance sheet
 Purchasing  The effects of these  Income statement
documents entries (P&L a/c)
 Bank documents Are then posted  Cash Flow
 Payroll documents into ledgers statement
 All ledgers are then
summed and
posted to the
relevant statements

Systems that use computers enable an organization to get financial reports daily if they
so desire.

One purpose of accounting is to help managers evaluate the financial condition and
the operating performance of the firm so that they may make better decisions, hence
accounting empowers managers. Accounting also reports financial information to
people outside the firm such as shareholders, creditors, suppliers, employees and the
government.

Therefore, accounting efforts/tasks can be divided into two major categories:

 Managerial accounting
 Financial accounting
An accountant working for an organization is likely to do both these tasks.

i) Managerial Accounting

This is a branch of accounting which provides management with information about the
company’s operations for internal use only. It uses guidelines and rules as established by
management according to their needs.

This is used to provide information and analysis to managers within the organization to
assist them in decision-making. Its main concern includes:
  Measuring and reporting costs incurred by departments e.g
production, marketing, and other departments i.e cost accounting
 Preparing operational budgets
 Checking whether or not the organizational departments are staying
within their budgets i.e internal control or internal auditing
 Designing strategies to minimize taxes i.e tax accounting

Questions that managerial accounting reports answer include:

 How quickly are we selling what we buy and how does that compare with other
firms in the same industry?
 What are our major expenses and are they inline with other firms? i.e. Cost control.
 How much money are we paying in taxes and how can we legally minimize that
amount? i.e. tax avoidance

ii) Financial Accounting

This is a branch of accounting which provides outside parties such as investors,

shareholders and government agencies, with information about a company’s operations.
It provides the results of a company at a consolidated level. This follows the rules
established by professional governing bodies e.g International Accounting Standards
(IAS), Institute of Certified Public Accountants of Kenya (ICPAK) etc.

This differs from managerial accounting because the information and analysis are for
people outside the organization. This information goes to existing shareholders and
potential shareholders, creditors and lenders, labor unions, customers, suppliers,
government and the general public. These external users are interested in the
organizations profits, its ability to pay its bills and other financial information.

BOOKEEPING Vs ACCOUNTING

Bookkeeping involves the recording of business transactions. It is a rather mechanical

process and does not demand the financial training and insights of accounting.
Bookkeeping is an integral part of accounting but accounting goes for beyond the mere
recording of data.

Accountants classify and summarize data provided by bookkeepers. They interpret the
data and report them to management. They also suggest strategies for improving the
financial position and progress of the firm. Accountants are especially valuable in such
critical areas as income tax preparations and financial analysis.
KEY ACCOUNTING ITEMS

a) Journals

These are books where accounting data are first entered. It is derived from the
French word ‘jour’, which means day. A journal is therefore where the day’s
transactions are recorded.

b) Double entry bookkeeping

The principles of double entry book-keeping have changed little since the days
when Italian monk and mathematician Luca Parciolli (1455-1515) published his
treatise “summa de arithmetica”.

It’s quite possible when recording financial transactions that you could make a
mistake e.g. you could easily write shillings 10.98 as shillings 10.89. For this reason,
accountants record all their transactions in two places so as to check one list against
the other to make sure that they add up to the same amount. If they don’t equal
the same amount, then the accountant knows that he/she has made a mistake. The
concept of writing every transaction in two places is called double-entry
bookkeeping. Two entries in the journal are required for each transaction.

c) Ledgers
Suppose that a businessperson wanted to determine how much was paid for office
stationery in the first quarter of the year; that would be difficult even in accounting
journals. A manager would have to go through each transaction seeking out those
involving stationery and adding them up. What a manager needs would be a set
of books that has pages labeled ‘office stationery’ then entries in the journal would
be transferred/ posted in these pages and information about various accounts
would be found quickly and easily. A ledger then is a specialized account book in
which information from accounting journals is accumulated into specific
categories (e.g. office stationery, motor vehicles etc) so that managers can find all
the information about one account in the same place. All the journals are
summarized and posted into ledgers on a weekly, monthly or quarterly basis.
However, computerized accounting programs often post ledgers daily or
instantaneously with journal entries.

MAJOR ACCOUNTING ACCOUNTS

 When recording original transaction documents in the journal, the bookkeeper places
them in certain accounts, hence the term accounting. Accountants use six major accounts
to prepare financial statements:

1. Assets
These are things owned by the firm, e.g. land, building, machinery, copyrights

2. Liabilities

These are amounts owed by the organization to others

3. Owners equity or capital

These account shows how much money will be available to the firm’s owners if all its
assets were sold and all its liabilities paid off, hence; Assets – Liabilities= Capital

4. Revenues

This is the value for what is received for goods sold, services rendered and from other
sources e.g. earnings from investments

5. Expenses

These are money spent on operating the business e.g. rent, salaries, utilities (electricity,
phone bills, water) e.t.c

6. Cost of goods sold/ cost of goods manufactured

This is the total cost of buying goods and storing them until they are sold to others or the
cost of finished goods manufactured by the firm for sale to customers

THE ACCOUNTING CYCLE

The accounting cycle is a six step procedure resulting in the preparation and analysis of the
two major financial statements namely the income statement ( P&L a/c) and the balance sheet.

The cycle generally involves the work of both the bookkeeper and accountant.

Steps in the cycle Analyze the source

documents e.g. sales
slips
 Record transactions in the
journals

Transfer (post) journal entries

to ledgers

Trial Balance

Prepare P & L a/c, the Balance

Sheet and other statements

Analyze the financial

statements

The first three steps are continuous; the forth step involves preparing a trial balance. The
trial balance involves summarizing all the data in the ledgers to see that the figures are
correct and that they balance-which is actually the purpose of double entry. If they are
not correct they must be corrected before the P & L statement and balance sheet are
prepared

COMPUTERS IN ACCOUNTING

Given the number of accounts a firm must keep and the reports that need to be generated,
computers can no doubt help in the process. Even relatively small retailers and other
small business owners are learning that data processing, bookkeeping and analyzing
accounting records is usually best done by a computer.

Computers can record and analyze data and print out financial reports. It’s now possible
to have continuous auditing i.e. testing the accuracy and validity of financial statements
using a computer. Such continuous auditing can help prevent frauds and business
bankruptcy by spotting trouble early. But no computer has yet to be programmed to
make good financial decisions by itself although computers can be programmed to help
in such decisions e.g using accounting Expert Systems software.

Computers are however a powerful tool in the hands of a trained accountant who can
understand the accounting data and is therefore able to formulate the best accounting
strategies. Software is available which allows even novices to do sophisticated analysis
within seconds. However it is important that business owners understand exactly what
system is best suited for their particular needs to avoid purchasing sophisticated and
irrelevant computer programs/software for minor business operations.
AN OVERVIEW OF THE FINANCIAL FUNCTION AND FINANCIAL
MANAGEMENT

Background

A business must have the necessary assets, such as land, building, machinery, vehicles,
equipment, raw materials and trade inventories, at its disposal if it is to function
efficiently. In addition, business organizations need resources such as management
acumen and labor, as well as services such as power supply and communication facilities.

A business needs funds, also called capital, to obtain these assets, resources and services.
The people (including shareholders) or institutions that make funds available to a
business lose the right to use these funds in the short or long term and also run the risk
of permanently losing some or all of the funds should the business fail. As a result,
suppliers of funds expect compensations (and also repayment in the case of a loan) when
the business starts to generate funds through the sale of its products or services. Thus
there is a continuous flow of funds to and from business.

The financial function is concern with this flow of funds, and in particular with the
following:
 The acquisition of funds, which is known as financing
 The application of funds for the acquisition of assets, which is known as
investment
 The administration of, and reporting on, financial matters

The financial management is responsible for the efficient management of all areas of the
financial function and, within the broad framework of the strategies and plans of the
business, its objective is to make the highest possible contribution to the objectives of the
business through the performance of the following tasks:
 Efficient financial analysis, reporting, planning and control
 The management of the acquisition of funds, also known as the
management of the financing or capital structure
 The management of the application of funds, also known as the
management of the asset structure

The objectives and fundamental principles of financial management

The long-term objective should be to increase the value of the business. This may be
accomplished by:
 Investing in assets that add value to the business
 Keeping the cost of capital of the business as low as possible
The short-term financial objective should be to ensure the profitability, liquidity and
solvency of the business. Profitability is the ability of a business to generate income that
will exceed cost. Liquidity is the ability of a business to satisfy its short-term obligation
as they become due, in other words, to be able to pay trade creditors by due dates.
Solvency is the extent to which the assets of the business exceed its liabilities. Solvency
differs from liquidity in that liquidity pertains to the settlements of short-term liabilities,
while solvency pertains to long-term liabilities such as debentures and mortgage loans.

Financial management is based on three principles:

1. The cost benefit principle

Decision-making based on the cost of resources only does not necessarily lead to
the most economic utilization of resources. Sound financial decision-making
requires an analysis of the total cost and the total benefits, and ensuring that the
benefits always exceed the cost i.e. optimum decisions.

2. The risk return principle

Risk is the probability that the actual result of a decision may deviate from the planned
end result, with an associated financial loss or waste of funds. Risk differs from
uncertainty; risk is measurable by means of statistical techniques, but in the case of
uncertainty there is no probability or measure of the chances that an event will take
place. Like the cost-benefit principle, the risk-return principle is a trade-off between
risk and return. The higher the risk, the higher the required rate of return will be.

3. The time value of money principle

The time value of money principle means a person can increase the value of any
amount of money by earning interest on it if well invested. In principle the time value
of money is directly related to the opportunity of earning interest on an investment.
This is called the opportunity rate of return on an investment. The opportunity to earn
interest in the interim period is forfeited if the amount is expected some time in the
future rather than received immediately. The time value of money can be approached
from two perspectives. The first is the calculation of the future value of some given
present value or amount, and the second is calculation of the present value of some
expected future amount.

1) Asset Management: The Investment Decisions

Management of the asset structure is identified as one of the main tasks of financial
management.

To successfully pursue the main objective, management of the asset structure requires
that decisions regarding investment in current and fixed assets be taken as effectively
as possible. This decision-making has a direct influence on the scope of the investment
in current assets and acquisition of fixed assets that will maximize the wealth of the
stakeholders.

a) The management of current assets

The cost and risk of investing in current assets

Current assets include items such as cash, marketable securities, debtors and
inventories. These items are needed to ensure the continuous and smooth functioning
of the business. Cash, for example is needed to pay bills that are not perfectly matched
by current cash inflows, while an adequate supply of raw materials is required to
sustain the manufacturing process. Sales may be influenced by the credit the business
is prepared to allow.
Current assets are therefore a necessary and significant component of the total
assets of the business. In managing current assets, management should always keep
in mind the consequences of having too much or too little invested in them
An over investment in current assets means a low degree of risks, in that more
than adequate amounts of cash are available to pay bills when they come due, or sales
are amply supported by more than sufficient levels of inventory. However, over
investment causes profit to be less than the maximum-first, because of the cost
associated with the capital invested in the additional current assets, and second,
because of income foregone which could have been earned elsewhere-the so-called
“opportunity cost of capital``. The funds invested in excess inventory could, for
example, have been invested in a short-term deposit at the prevailing interest rate.
An under investment in current assets, however, increases the risk of cash
and inventory shortages and the cost associated with these shortages, but it decreases
the opportunity cost. For example, a business which is short of cash may have to pay
high interest rates to obtain funds on short notice, while a shortage of inventory may
result in a loss of sales, or even mean that the business has to buy inventory from
competitors at high prices to keep customers satisfied

b) Long-term investment decisions and capital budgeting

The nature of capital investments

Capital investment involves the use of funds of a business to acquire fixed assets such
as land, building and equipment, the benefits of which accrue over periods longer
than one year.

Long-term investment decisions determine the type, size, and composition of the
business’s fixed assets as well as the amount of permanent working capital required
for the implementation and continued operation of capital investment projects.
 The evaluation of investment projects
The basic principle underlying the evaluation of investment decision-making is cost-
benefit analysis, in which the cost of each project is compared to its benefits.
Projects in which benefits exceed the costs add value to the business and increase
stakeholders’ wealth.
Two additional factors require further consideration when comparing benefits and
costs. The first is that benefits and cost occur at different times. Any comparison of
benefits and costs should therefore take the time value of money into account.

Second, ``cost” and ``benefits” (income) are accounting concepts that do not
necessarily reflect the timing and amounts of payments to the business. The concept
``cash flow” is therefore used instead, which minimizes accounting ambiguities
associated with concepts relating to income and costs.

The following three cash flow components are distinguished for capital budgeting
purposes:
1. The initial investment. The initial investment is the money paid at the
beginning of a project for the acquisition of equipment or the purchase of a
production plant. The net cash flow during this phase is negative and
represents a net cash outflow.
2. The expected annual cash flows over the life of the project. The annual net
cash flow can be positive or negative. The net cash flow is positive when cash
income exceeds cash disbursements and this represents a cash inflow for the
business. The opposite is true when disbursements exceed income. This may
happen for example when expensive refurbishing is required after a number of
years of operation and cash income is sufficient to cover these cash expenses.
3. The expected terminal cash flow, related to the termination of the project.
This terminal net cash flow is usually positive. The plant is sold and cash
income exceeds cash expenses. It may happen however that the terminal net
cash flow is negative

The magnitude of the expected net cash flows of a projecting and timing of these cash
flows are crucial in the evaluation of investment proposals on the basis of the present
value or discounted cash-flow approach, where the net cash flow (the cash inflow
minus cash out flow) can occur during a specific period or at a specific time

2) Financing Decisions.

The management of financing structure is one of the tasks of the financial manager.
This entails making decisions about the forms of financing (types of finance) and
the sources of finance (the suppliers of finance) to minimize the cost and the risk
to the business

Financial markets

Financial markets and financial institutions play an important role in the

financing of businesses.

At a given point in time, an economic system consists of individuals and

institutions with surplus funds (i.e. the savers) and those with a shortage of funds.
Growing businesses require funds for new investments or to expand their existing
production capacity. These businesses have a shortage of funds and to grow they
must have access to the funds of individuals and institutions that do not have an
immediate need of them.
Financial markets are channels through which holders of surplus funds
(the savers) make their funds available to those who require additional finance.
Financial institutions play an important role in this regard. They act as
intermediaries on financial markets between the savers and those with a shortage
of funds. This financial service is referred to as finance intermediation.
Financial intermediation is the process through which financial
institutions pool funds from savers and make these funds available to those (e.g.
businesses) requiring finance.
Through financial intermediation the individual saver with relatively
smaller savings is given the opportunity to invest in a large capital intensive
business, such as chemical plant. The saver who invest in a business is referred to
as a financier. The business rewards the financier for the use of funds, so that the
financier shares in the wealth created by the business.
The financier receives an asset in the form of financial claim in exchange for
his or her money. Financial claims have different names and characteristics and
include saving and current (call) accounts, fixed deposits, debentures and
ordinary and preferred shares. In everyday usage, these financial claims are
referred to as securities or financial instruments.

Types of financial markets

1. Primary and secondary markets

As discussed above a saver receives an asset in the form of financial claim
against the institution to which money was made available. These claims are
also referred to as securities or financial instruments. New issues of financial
claims are referred to as issues on the primary market.

Some types of financial claims are negotiable and can be traded on financial
markets. Trading in these securities after they have been issued takes place in
 the secondary market. These means that a saver who needs money can trade
the claim on the secondary market to obtain cash. Nairobi stock exchange is an
example of a market where savers can virtually immediately convert their
investments to cash. The trade ability of securities ensures that traders with
surplus funds continue to invest. Once issued, they can be traded on the market
and the holder may again obtain cash.

Company shares and debentures are example of negotiable financial

instruments, and savings and call accounts are non-negotiable claims.

2. Money and capital markets

The money market is the market for financial instruments with the short-term
maturity: funds are borrowed and lent in the money market in the periods of one day
(i.e. overnight) or for months. It is where interest bearing assets are traded e.g. bank
loans, deposits, treasury bills, foreign currency etc. The periods for the transactions
depend on the particular needs of savers and institutions with the shortage of funds.
The money market has no central physical location and transactions are conducted
from the premises of various participants, for example, banks using telephones or on-
line computer terminals.

Funds required for long term investments are raised and traded by investors on the
capital market. In Kenya much of this trading takes place on the Nairobi stock
Exchange (NSE). However long term investments transactions are also done
privately. An investor may, for example, sale shares held in private company directly
to another investor, without channeling the transaction through a stock exchange

Short- term financing

The short-term financing decision requires finding the optimal combination of long
term and short-term financing to finance current assets.

Short-term financing means that repayment has to be made within one year.
As in the management of current assets, risks and costs must be weighed against each
other when making this decision.

The following are the most common forms or sources of short-term financing:
 Trade credit
 Accruals
 Bank overdraft
 Promissory notes
  Factoring (i.e. selling accounts receivable at a discounted rate to ‘a
factor’ who is a party that pays cash for those accounts).
 Family and friends.

Long-term financing

Sources and forms of long term financing for a business in the form of a company

Source Balance sheet Form

Classification
1. Owners or ordinary share- Owners equity -Ordinary
holders or own capital shares
-Reserve
Preference share-holders -Undistributed
2. Preference profit (i.e.
share-holders retained
capital profits)
-Preference
shares
1+2 Share capital Share-holders’ Total of the
interest above
3. Suppliers of debt capital/ Long term debt -Debentures
credit suppliers or borrowed -Bonds
capital over a -Registered
long term term loans
-Financial
leases
-commercial
papers
1+2+3 Total long term
capital

The cost of capital

Profitable and growing businesses continually need capital to finance expansion and new
investment. Because of the cost involved in using capital, namely dividends to
shareholders and interest paid to credit suppliers; financial management must ensure
that only the necessary amount of capital is obtained, and that the cost and risk are kept
to a minimum.

In attracting capital, one of its main tasks, financial management must combine the
various form of financing in a mix that result in the lowest possible cost and lowest risk
for the business. The concept cost of capital and risks are critical in determining the
optimal capital structure
AN OVERVIEW OF THE OPERATIONS/PRODUCTION MANAGEMENT
FUNCTION

The Nature and Definitions of Operations Management

A business transforms inputs from the environment into outputs to the environment. The
operation function is that function of the business aimed at executing the transformation
process. The operation function and its management (i.e. operations management) are
therefore directly concerned with creating products and providing services in order to
realize the objectives of the business. The functional role of the production is to
department is to ensure effective and efficient creation of goods and services.

Some management experts notably Peter Drucker stresses the primacy of marketing over
all other management functions. Others scholars sees production as the cornerstone of
the organization. This has given rise to the two competing orientations, the production
and customer orientations.
 The production orientation gives top priority to production and its role in
designing, developing and producing a given product. Having sep up the means
of producing goods, the firm set out to sell them. The rationale behind this is that
if the firm is an expert in producing something, then it is confident that customers
will be impressed by its quality, design and value for money.
 The customer orientation stresses the importance of the market and what the
customers say they want. They stress the marketing process. They set out to
discover what the customers want using market research and product research
and set their production based on this.

The importance of operations management

1. It improves productivity
2. It helps the business to satisfy the needs of its customers more effectively
3. It enhances the corporate reputation or the general image of the business
organization.
 AN OPERATIONS MANAGEMENT MODEL

An operations management model that can be used for the management of the operations
function is depicted in figure below

Fig. An operations management model

Environment
Operations management
Material
strategies and objectives

Customers/clients

Information
Products and
Transformation services
process Outputs
Inputs

Human Management activities

resources

Operations Operations
Operations planning and improvements
Equipment design control
and facilities

Technology Environment

Generally, an organization’s operations management strategies and objectives as well as

other management activities influence the transformation process to produce output.
Operations management strategies and objectives

All businesses formulate business objectives, and for a business to survive in the long-
term, satisfied customers/clients should be a priority objective. The operations
management function should take into account customers/clients needs and should
continually formulate its strategies and objectives so that it’s competitive position and
customer/client base not only remain intact, but, where necessary, are also strengthened
and expanded.
Although there are many customers/client needs, they can be reduced to these six
main elements:
1. High quality
2. Low costs
3. Shorter lead time (quicker manufacturing or provision of services)
4. Greater adaptability (flexibility)
5. Lower variability with regard to specifications (reliability)
6. High level of service (better overall service)
With these requirements as a basis, operations management objectives can be formulated
to give a business an ``operations-based advantage” over other businesses.
Operations management objective therefore indicate the specific areas within the
operations function which will be emphasized when services or products are produced
or provided

Quality planning and control

Quality is today regarded as being so important in many businesses that responsibility

for it is not confined to the operations management function only.

Definition of quality
From an operations management perspective quality is defined as ``continuous
conformance to customers’/clients’ expectations

Basic principles of quality

Management have at their disposal a set of technique which assist the smooth running of
the production process and help to ensure reliability in terms of quality and meeting
delivery dates. This sets of techniques is known as the ‘3 Ss’ standardization, simplification,
and specialization.
 Standardization is the process of determining the best sizes, types, qualities etc. of
materials, components and products, and consistently using these once they have
been established.
 Simplification is closely linked to standardization and involves a reduction in the
number of types manufactured or used, in the case of internal supplies, tools,
consumables etc.
 Specialization involves a company only carrying out only a part of the total
production process.

Benefits of Quality control

 Improved customer satisfaction and confidence, which can result in increased sales and
profits.
 Improved design of products and gains through simplification
 Increased workers’ pride in their products
 A favorable corporate image for quality.

Dynamic quality control and assurance concentrates on proactive systems

i. Identifying where the problems may arise. Quality deficiencies may be located in three
main areas:
 Workers problems-this is due to careless or disinterested workers. Also poorly trained
workers may lack the ability to produce good quality even when trying very hard.
 Management problems-poor quality may arise from inadequate leadership or planning,
poor training or lack of interest in quality.
 Working conditions-good working conditions are pre-requisite for high quality, good
heating, lighting and layout provide an environment conducive for quality.
ii. Taking action to ensure quality-management experts put forward a strong case to make
quality systems more dynamic than mere inspection although inspection remains a crucial
part of quality assurance. Responsibility for self inspection is preferable.

The concept of Total quality Management (TQM)

TQM is a management philosophy, a method of ``thinking and doing’’ with the primary
aim of satisfying customer/client needs and expectations by means of high quality
products or services. It endeavors to shift the responsibility for quality from merely the
operations management functions to the entire business (i.e. all other functional
management areas and their employees).

TQM is further primarily aimed at:

1. Making each and every employee in the business quality conscious and holding
them responsible to contribute to the achievement of TQM
2. Identifying and accounting for all costs of achieving quality (both prevention and
failure cost)
3. Doing things right the first time (proactive rather than reactive action)
 4. Developing and implementing systems and procedures for quality and its
improvement
5. Establishing a continuous process for improvement

The essence of TQM is that the emphasis should permeate the whole organization. Peter
Druckers identified eight performance areas which are critical to the long-term success of
an enterprise.
Performance Area TQM concerns
Marketing standing How high is the reputation for quality of the firm in the eyes of
its customers, its competitors, its own employees and the
public?
Innovation Are innovations and research and development activities
geared towards the continual improvements of quality?
Productivity Is any increased productivity compatible with maintaining and
increasing quality?
Resources Are the resources of the firm being directed to the pursuit of
quality?
Profitability Are adequate profit levels being combined with quality goods
and services?
Manager Are managers giving quality the priority it deserves?
performance
Worker Are workers imbued with the idea of quality and are they
performance and putting this into practice in their work?
attitude
Public responsibility Do ideas of quality apply to the public good, e.g. high quality of
environmental concern, product safety, etc.

Quality Circles
This is used by management to improve quality. It is a voluntary group of employees
who regularly meet with the objective of improving the way in which their organization
provides quality of goods and services for its customers.

The roots of quality circle concept are in suggestion schemes, where employees put
forward their ideals on how to improve the performance of the organization. The basic
idea of quality circles is that people of an organization are capable of making useful
contribution to its success. This contribution can be accomplished by putting forward
ideas and taking on planning and decision-making actions. The supporters argue that
circle members have first-hand experience of the problems at the grass-root level in their
own organization. These employees may have many useful ideas for increasing
efficiency, innovation, safety, etc.
Quality circle members receive training in the analysis of problems and decisions making
techniques. Quality circles are a group activity and can act as a strong motivator for
employees to improve the quality of goods and services.

Introduction of quality circles can change the whole atmosphere of an organization, it

breaks down the “them and us“ barriers as employees come to feel that they are
important and valued members of the organization. The changed attitude can provide a
framework within which quality can be improved. QC membership also improves the
problem-solving skills of all those involved.

The basic requirements to ensure best results from QCs are

 Management must be enthusiastic about the idea of quality circles and make it
crystal clear that they value the views of their employees and respect the expertise
that comes from practical experience.
 Management has to give full information about the quality circle concept to all
staff. The role and function of the circles should be explained and workers
encouraged to join.
 Management should good meeting rooms and conditions for regular circle
meetings
 It is advisable for membership of quality circles to be voluntary, because
compulsion is not a good way to bring out the best in circle members.
 QCs should not be large that they become unwieldy nor so small that there is too
restricted a pool of talent. Between 8-10 advisable.
 Management to ensure that when QCs makes sound decisions, they are
implemented. If QCs members see management as paying lip service to their
ideas, they will soon lose interest in the quality circle concept.
 Management should provide appropriate training opportunities for circle leaders
and members to acquire necessary skills of debate.
 The role of QC leader is crucial; this may be taken by supervisor or senior
employee. The leader should have problem solving skills.