SOCIAL ENTERPRISES

these are businesses/ organizations that trade with the aim of improving human and environmental well
being rather than making profits for the owners. They are at times referred to as not-for-profit
organizations. Generally, they:
 Have clear social and or environmental mission
 Generate most of their income through trade or donations
 Reinvest most of their profits
 Are not connected to the government
 Are majorly controlled in the interest of the social mission
 Are accountable and transparent
They include:

CO-OPERATIVES
A cooperative is defined as an autonomous association of persons united voluntarily to meet their common
economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled
enterprise.

A cooperative may also be defined as a business owned and controlled equally by the people who use its
services or who work at it.
There are different types of co-operatives:
 Housing cooperative
 Building cooperative
 A retailers' cooperative
 Worker cooperative
 Consumers' cooperative
 Agricultural cooperative
Advantages of Cooperative Society
Easy to form: The formation of a cooperative society is very simple as compared to the formation of any other
form of business organisations. Any ten adults can join together and form a cooperative society. The
procedure involves in the registration of a cooperative society is very simple and easy.
No obstruction for membership/Open Membership: Unless and otherwise specifically debarred, the
membership of cooperative society is open to everybody. Nobody is obstructed to join on the basis of religion,
caste, creed, sex and colour etc. A person can become a member of a society at any time he likes and can leave
the society when he does not like to continue as; member.
Limited liability: In most cases, the liabilities of the members of the society are limited to the extent of capital
contributed by them. Hence, they are relieved from the fear of attachment of their private property, in case of
the society suffers financial losses.
Service motive: In Cooperative society members are provided with better good and services at reasonable
prices.
Unit 2: Managing Business Activities Prepared by Mr Okelloh
 Democratic management: The cooperative society is managed by the elected members from and among
themselves. Every member has equal rights through its single vote but can take active part in' the formulation
of the policies of the society. Thus all members are equally important for the society.
Stability and continuity: A cooperative society cannot be dissolved by the death insolvency, permanent
incapability of the members. Therefore, it has stable life are continues to exist for a longer period.
Surplus shared by the members: The surplus is spent for the welfare of the members, some portion kept
reserve whereas the balance shared among the members as dividend on the basis of this purchase.

Disadvantages of Cooperative Society

Limited resources: The membership fee is limited for which they are unable to raise large amount of resources
as their members belong to the lower and middle class.
Inefficient management: A cooperative society is managed by the members only. They do not possess any
managerial and special skills. This is considered as major drawback of this sector. Inefficiency of management
may not bring success to the societies.
Lack of secrecy: The cooperative society does not maintain any secrecy in business because the affairs of the
society are openly discussed in the meetings. But secrecy is very important for the success of a business
organisation. This paved the way for competitors to compete in more better manner.
Excessive Government interference: Government put their nominee in the Board of management of
cooperative society. They influence the decision of the Board which may or may not be favourable for the
interest of the society. Excessive state regulation, interference with the flexibility of its operation affects
adversely the efficiency of the management of the society.
Absence of motivation: The members may not feel enthusiastic because the law governing the cooperatives put
some restriction on the rate of return. Absence of relationship between work and reward discourage the
members to put their maximum effort in the society.
Disputes and differences: The management of the society constitutes the various types of personnel from
different social, economical and academic background. Many a times they strongly differ from each other on
many important issues. This becomes detrimental to the interest of the society.
Corruption: In a way, lack of profit motive breeds fraud and corruption in management. This is reflected in
misappropriations of funds by the officials for their personal gains

Mutual organizations

For notes on mutual organizations, lifestyle businesses and online businesses, refer to notes given in class

Unit 2: Managing Business Activities Prepared by Mr Okelloh

;

GROWTH TO PUBLIC LTD COMPANY

Public sector: Organizations owned and controlled by the state or government. The public sector is a part of
the state that deals with the delivery of goods and services by and for the government , whether national,
regional or local/municipal

Example

Mill Hill School, Ripley Hospital, Ripley Library

Objectives

Provide an essential service cheaply or free of charge, therefore it is available to everybody

Public sector strives to create employment
Public sector business usually locates in regions where there is underdevelopment so as to create jobs and
income for local population.

Private sector: Businesses owned run and controlled by private individuals

e.g. Top Shop, Virgin, British Telecom

Objectives

To maximise their profits

To survive in a competitive market
To make returns for their shareholders (dividends)
To be the first to introduce this product/service in the market

Private sector Businesses

Sole trader
partnership
private limited company
public limited company
Co-operative.
Franchises.

Incorporated and unincorporated businesses

An incorporated business, or a corporation, is a separate entity from the business owner and has natural rights.

Example

Private limited companies

Public limited companies.
Unit 2: Managing Business Activities Prepared by Mr Okelloh
Unincorporated business: a business owner and an unincorporated business are the same, and the owner
personally bears all results of the business. Unincorporated businesses are usually sole proprietor or partnership
companies. The main difference between an incorporated and unincorporated business is the way owners
shoulder business activities.

Sole traders
Partnerships

Unit 2: Managing Business Activities Prepared by Mr Okelloh

 PUBLIC LIMITED COMPANIES (PLC)
Limited companies which can sell share on the stock exchange are Public Limited companies. These companies
usually write PLC after their names. Minimum value of shares to be issued (in UK) is £50,000

Advantages of a being public limited companies (plc) are:

There is limited liability for the shareholders.

The business has separate legal entity. There is continuity even if any of the shareholders die. These businesses
can raise large capital sum as there is no limit to the number of shareholders. The shares of the business are freely
transferable providing more liquidity to its shareholders.
Continuity: There is continuity of existence in limited companies and are their existence is not affected by the
death, bankruptcy or sickness of their owner. This is not the case in Partnership or sole trader businesses.

The disadvantages of a being public limited companies (plc) are:

Certain financial information must be made available for everyone, competitors and customers included Threat of
takeover, because another company can buy up a large number of shares because they are traded publicly (can be
sold to anyone).
There is lot of legal formalities required for forming a public limited company. It is costly and time consuming.
The original owners may lose control.
Public Limited companies are huge in size and may face management problems such as slow decision making
and industrial relations problems.
Public Limited companies are huge in size and may face management problems such as slow decision
making and industrial relations problems

Control and ownership in a public limited company:

The Annual General Meeting (AGM) is held every year and all shareholders are invited to attend so that they can elect their
Board of Directors. Normally, Directors are majority shareholders who have the power to do whatever they want. However,
this is not the case for public limited companies since there can be millions of shareholders. Anyway, when directors are elected,
they have to power to make important decisions. However, they must hire managers to attend to day to day decisions. Therefore:

 Shareholders own the company

 Directors and managers control the company

This is called the divorce between ownership and control.

Because shareholders invested in the company, they expect dividends. The directors could do things other than give shareholders
dividends, such as trying to expand the company.
However, they might lose their status in the next AGM if shareholders are not happy with what they are doing. All in all, both
directors and shareholders have their own objectives.

For notes on:

4 Forms of business c) Growth to public limited companies (plc)

and stock market flotation.
5 Liability
b) Finance appropriate for limited and unlimited liability businesses.
Refer to notes given in class

Unit 2: Managing Business Activities Prepared by Mr Okelloh

 SALES, REVENUE AND COSTS
Business costs: All business activity involves some kind of cost. Managers need to think about costs to find out
the following:

Whether costs are lower than revenues or not. Whether a business will make a profit or not.
To compare costs at different locations.
To help set prices.

Start-up costs

Start-up costs are the Non-recurring expenses incurred during the process of creating a new business. Therefore
these costs are paid before the business starts trading. All businesses are different, and can require different
types of startup costs. Also called startup expenses, preliminary expenses, or pre-opening expenses.

Examples

Insurance, license and permit fees

Research expenses
Equipment and supplies
Technological expenses
Legal fees, registration charges,
as well as advertising,
Employee training.

Raising finance for start-up requires careful planning. The entrepreneur needs to decide:

How much finance is required?

When and how long the finance is needed for?
What security (if any) can be provided?
Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for
investment?

Running costs or Operating Cost

The amount regularly spent to operate an organization. They are also day-to-day costs associated with operating
a business.

Example

Cost of petrol,
Payment for raw materials
Electricity
Rent.
Unit 2: Managing Business Activities Prepared by Mr Okelloh
Types or classification of costs:
Fixed costs = stay the same regardless of the amount of output. They are there regardless of whether a
business has made a profit or not. Also known as overheads or indirect costs.

Variable costs = varies with the amount of goods produced. They can be classified as direct costs (directly
related to a product).

Unit 2: Managing Business Activities Prepared by Mr Okelloh

Unit 2: Managing Business Activities Prepared by Mr Okelloh
NB: Total revenue(TR) = Price(P) x Quantitity(Q)

Unit 2: Managing Business Activities Prepared by Mr Okelloh

Unit 2: Managing Business Activities Prepared by Mr Okelloh
Unit 2: Managing Business Activities Prepared by Mr Okelloh
Unit 2: Managing Business Activities Prepared by Mr Okelloh
Unit 2: Managing Business Activities Prepared by Mr Okelloh
FORECASTING SALES
Sales forecasting involves estimating futures sales revenue, costs and profits. This is done through market research
Importance of sales forecast

Minimizes risks as a result of making decisions without knowing what is going to happen in the future (whether the market
exist for your product or not)
Sales forecast is part of a business plan that can be used by the business to secure a loan

Factors affecting total sales that a firm will make

The market size

The market structure-where and who are the potential customers Competition that affects the market share
The market trend- whether it’s growing or declining or static
The investment in terms of time, money needed to sell the product

Predicting future sales level

Interpretation of the past data (also called time series analysis)

Market research to look at the trends or patterns i.e. whether it’s growing or declining or static
The research should also look into cyclical fluctuations-changes associated with business cycle of boom, recession,
depression and recovery
Businesses need to study seasonal fluctuations- important for tourism, farming businesses and greeting card producers.

Unit 2: Managing Business Activities Prepared by Mr Okelloh

Unit 2: Managing Business Activities Prepared by Mr Okelloh
Difficulties of estimation of sales forecast

Unavailability of correct past sales data and poor interpretation of data Lack of enough resources to carry out market research
Seasonal fluctuations- Affects tourism, farming businesses and greeting card products Business cycles
Changes in market trends

Unit 2: Managing Business Activities Prepared by Mr Okelloh

Unit 2: Managing Business Activities Prepared by Mr Okelloh
Tuesday 21 January 2014 – Afternoon 6BSA2/01

Tuesday 3 June 2014 – Morning– Afternoon 6BSA2/01

Monday 21 may 2012– 6BSA2/01

Unit 2: Managing Business Activities Prepared by Mr Okelloh

 CASH FLOW FORECASTING
What is Cash flow?

Cash flow refers to the money which comes into and goes out of a business over a period of time. In
other words it is the cash inflow and cash outflow out of a business.

CASH INFLOW:Cash inflow means all the sources from which cash comes into the business over a period
of time.

Cash inflow can result from:

Payment received from debtors

Investment by owner
Loans and overdrafts
Sale of goods for cash.
Borrowing from a source (but will inevitably lead to cash outflow in the future).
Sale of unwanted assets.

CASH OUTFLOW:Cash outflow means all the sources from which cash goes out of the business over a
period of time.

Cash outflow can result from:

Cash purchases
Payment of wages and salaries to staff
Purchase of fixed assets
Payments to Creditors
Repaying loan

Unit 2: Managing Business Activities Prepared by Mr Okelloh

NB: Cash flow = Cash inflow - Cash outflow

CASH FLOW CYCLE

A cash flow cycle explains the stages that are involved in the process of cash out and finally into the business.
This is what happens:

The longer it takes for cash to get back to the business, the more they will need working capital to pay off their
short-term debts. This cycle also helps us understand the importance of cash flow planning.

This is what happens when a company is short on cash:

Not enough to pay for materials, therefore sales will fall.

The company will want to insist customers on paying in cash, but they might lose them to competitors who
let them pay in credit.

Unit 2: Managing Business Activities Prepared by Mr Okelloh

CASH FLOW FORECASTS
Cash flow forecast is a budget or estimate which identifies the anticipated income and expenditure and the time
when it is likely to take place, usually on a month by month basis.

Purpose of Cash flow forecast

The primary purpose of the cash flow budget is to predict the sources and uses of cash and to identify your cash
position for a specific time period (daily, weekly, monthly etc.).

Unit 2: Managing Business Activities Prepared by Mr Okelloh

CASH FLOW PROBLEMS

Sometimes a profitable business might face cash flow problems. It may be due to:

Lack of planning hence the business cannot predict the future cash flow
Poor credit control-result when businesses does not check customers account i.e. who has paid, credit
worthy customers etc
There might be a sudden fall in sales whereas the expenses may not come down in the same proportion.
Any unforeseen expenses may lead to high cash outflow as compared to cash inflow in that particular
period.
Debtors’ payback period is too long.
Expanding too rapidly

How to solve cash flow problems

Cash flow problems can be solved through:

Arranging a bank loan or an overdraft.

Reducing or delaying some planned expenditure.
Improving the forecasted cash income for that particular period of time.
Delay payments to creditors.

Here is an example of a cash flow statement:

Unit 2: Managing Business Activities Prepared by Mr Okelloh

Unit 2: Managing Business Activities Prepared by Mr Okelloh
Unit 2: Managing Business Activities Prepared by Mr Okelloh
 THE BUDGET
A budget is a detailed financial plan for the future. It is an estimate, or informed guess, about what you will
need in monetary terms to do your work. Budgeting-The process of financial planning

The two parts of a budget document:

Expenditure-Money that will need to be spent to get your planned activities done
Income-Money that will need to be generated to cover the costs of getting the work done

Benefits or purpose of Budgeting

The budget is an essential management tool and it performs the following purpose:

Budgets set targets. It helps people to work towards a set target.

The budget tells you how much money you need to carry out your activities.
The budget forces you to be rigorous in thinking through the implications of your activity planning. There
are times when the realities of the budgeting process force you to rethink your action plans.
Used properly, the budget tells you when you will need certain amounts of money to carry out your
activities.
The budget enables you to monitor your income and expenditure and identify any problems.
The budget is a basis for financial accountability and transparency. When everyone can see how much
should have been spent and received, they can ask informed questions about discrepancies.

NB: The above purpose can also be used to explain the importance of budgeting

Unit 2: Managing Business Activities Prepared by Mr Okelloh

 DIFFERENT BUDGETING TECHNIQUES

The two main techniques for budgeting are incremental budgeting (use of historical figures) and zero
based budgeting.

Use of historical figures/Incremental budgets

Incremental budgets uses last year’s budget as a basis and an adjustment is made for the coming

year Key features

Figures are based on those of the actual expenditure for the previous year
A percentage is added for an inflationary increase for the next year.
This is an easy method that saves time but it is the “lazy” way and is often inaccurate.
This budgeting technique is only suitable for organizations where each year is very similar to the previous
one in terms of activities.
Very few dynamic organizations or projects are so stable that this budgeting technique really works for
them.

NB: Extrapolation is used in setting a budget. Extrapolation means using data from the recent past and
assuming that any trend that can be seen will continue into the future provided nothing unexpected happens.

Unit 2: Managing Business Activities Prepared by Mr Okelloh

 EXAMPLE

Sales in three periods are given as KSHS. 10,000,KSHS.20,000, KSHS. 30,000. An extrapolation of the fourth
year would be?

Zero based budgets

Involves setting up a budget each year and budget holders have to argue their case to receive any

finance Key features

In zero based budgets, past figures are not used as the starting point.
The budgeting process starts from “scratch” with the proposed activities for the year.
The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in
this way.
This technique is essential for new organizations and projects, but it is also probably the best route to go in a
dynamic organization that is proactive in taking on new challenges.

Comparing budget and forecasts: A budget is a plan, while a forecast is a prediction of what might happen in
future

Variance analysis is process by which the actual performance of the organizations is compared with the
original targets, and reasons for the differences investigated.

Unit 2: Managing Business Activities Prepared by Mr Okelloh

 Reasons why Variance analysis is essential part of budgeting

 Measures differences from the planned performance of each department both month by month and at the
end of the year
 Assist in analyzing the cause of deviations

Types of variances
Favourable variance
Adverse variance

Favorable Variance

Favorable variance exist when the difference between the budgeted and actual figure leads to a higher-than-
expected profits

Example

It has an effect of increasing profits

Increases sales revenue

Adverse variance

Adverse balance exist when the difference between the budgeted and actual figure leads to a lower-than-
expected profits

Unit 2: Managing Business Activities Prepared by Mr Okelloh

Example

It has an effect of reducing the profits

Direct material cost is higher than the budget

Causes of Favorable variance and adverse variance

Adverse variance Favorable balance
Sales revenue is bellow budget either because units Sales revenue is above budget due to higher-than-
sold was less than planned for or the selling price expected economic growth or problems with one
had to be lowered due to competition. of the competitors’ products.

Actual raw materials costs are higher than planned Raw material costs are lower either because output
for either because the output was higher than the was less than planned or the cost per unit of
budgeted or the cost per unit of materials increased material was lower than the budget.

Adverse variance Favorable balance

Labour cost is above budget either because wage Labour costs are lower than planned for either
rates had to be raised due to the shortages of because of lower wage rates or quicker completion
workers or the labour time taken to complete the of the work.
work was longer than expected

Overhead costs are higher than the budgeted, Overhead costs are lower than the budgeted,
perhaps because the annual rent rise was above perhaps because the advertising rates from TV
forecast companies were reduced.

Unit 2: Managing Business Activities Prepared by Mr Okelloh

page 67
Exercise
Complete the following table:

Financial Budget Actual result Variance Favorable

variables (pounds) (pounds) (pounds) or
Adverse
Sales revenue 15,000 12,000

Direct cost 5,000 4,000

Overhead costs 3,000 3,500

Net profits 7,000 4,500

Importance of Variance Analysis

Variance analysis is used as a controlling tool. Managers can take suitable remedial actions to achieve the
desired objectives if there is a variation of the actual performance.
It acts like a barometer for measuring business efficiency.
Through regular variance analysis, ‘weak spots’ can be ascertained and remedial actions can be taken.
Variance analysis aids framing of more accurate budgets in the future.
Variance analysis can be used for comparing the departmental performance of the organization.

Unit 2: Managing Business Activities Prepared by Mr Okelloh

page 68
Limitations of Budgeting
Though budgeting is major management activity, it has some useful functions for businesses and organizations,
it does have great limitations.

Lack of flexibility to take care of unforeseen expenditures

Training need must be met.
Budgeting is a time consuming and costly job. The development of budget includes many repetitive steps
before the budget is finally approved.
Budgets are based on assumptions that often turn out to be inaccurate.
Lead to unnecessary spending: Budgets also cause great deal of waste. People’s main goal is to meet the
budgets especially when they realize that they have under-spent

Monday 19 January 2015– WBS02/01

Tuesday 3 June 2014– WBS02/01

page 69
Tuesday 3 June 2014 – Morning– Afternoon 6BSA2/01

Thursday 20 January 2011 – 6BSA2/01

page 70
page 71