Understanding Business Activity

Business Activity
Needs: goods or services that are essential for survival.
Wants: goods or services customers desire but are not essential for survival.
Economic Problem: unlimited wants but limited resources to satisfy the wants.
Scarcity: the lack of sufficient products to fulfil the total wants of the population.
Factors of production: resources needed to produce goods and services; they are:
Land – any natural resource used in production.
Labour – mental and physical efforts of employees.
Capital – finance, machinery and equipment needed for the manufacture of goods.
Enterprise – individual/s who manage/coordinate the three other factors, make decisions and take risks.
Opportunity Cost: the next best alternative is given up by choosing another item.
Due to scarce resources, a choice has to be made; this leads to opportunity cost.
Importance of Specialisation
Specialisation: When people and businesses focus on what they are best at.
Division of labour is when production is split into different tasks, and each worker performs one of these
tasks. It’s a form of specialisation.
Advantages Disadvantages

Workers are trained in one task and repetitive tasks can cause boredom and burnout for
specialise in this, increasing productivity and employees, reducing motivation and job efficiency
efficiency

Specialisation with division of labour will If a worker is not present, production will be disrupted,
result in better quality output causing a waste of time and resources, as well as less output
and efficiency.

An increase in efficiency will lead to Specialised workers require higher wages, and training
economies of scale. current employees will increase costs.

Workers become more skilled and

experienced, reducing waste of time and
resources.
Purpose of Business Activity
Businesses combine scarce factors of production to produce goods or services to satisfy people’s needs
and wants.
Business Activity:
Combines scarce factors
Produces goods and services
Employs people
Added Value
Added value is the difference between the cost of purchasing bought-in material and the price of the
finished goods.
Added Value = selling price – total cost
For example, by transforming cotton into a T-shirt, the business adds value to the cotton, as the same
material can be sold for more after the transformation.
It is NOT the profit because added value does not include the expenses of producing this good (e.g.
labour, electricity, machinery, etc.)
Advantages Disadvantages

Maybe able to make a profit if these other costs come to Increasing the product's price can lead to lower
a total less than the added value sales and, perhaps, profit.

It can be used to pay other expenses.

To increase added value, a business can either:
Increase the selling price by increasing the quality of goods and services to convince
customers/consumers
Reduce the cost of materials but keep the price the same.
Classification of Businesses
Businesses can be classified into three sectors:
Primary Sector: Industry extracts and uses the earth's natural resources to produce raw materials for
other businesses.
Secondary Sector: The industry manufactures goods using the raw materials provided by the primary
sector.
Tertiary sector: The Industry provides services to consumers and other industry sectors.
Developing Countries: where the primary sector is the most important, as more employees and output
are produced than in secondary and tertiary sectors
Developed Countries: where the output of the tertiary sector is often higher than the other two sectors
combined.
De-industrialisation occurs when there is a decline in the importance of the secondary sector.
Reasons for changes in the relative importance of the three sectors over time:
When sources of some primary products become depleted
Developed economies are losing competitiveness to newly industrialised countries.
Due to the rise in living standards, consumers spend more of their income on services such as travel and
restaurants than on manufactured goods.
Mixed Economy
Has both a private sector and a public sector.
Private Sector: Businesses NOT owned by the government will decide what and how to produce. The
main aim is to make profits.
Public Sector: Owned by the government. Government will decide what and how to produce (i.e.
healthcare, education, defence, public transport). The main aim is to provide a service to customers.
Privatisation refers to selling a public sector business to the private sector.
Arguments for Privatisation Arguments against Privatisation

Costs can be controlled because the private sector’s Increased unemployment as private sector
main objective is profit. businesses may want to cut costs.

More efficient use of capital Less likely to focus on social objective

Competition between private sector businesses will

help improve product quality.
Enterprise, Business Growth and Size
An entrepreneur is a person who organises, operates and takes risk to make the business better
Characteristics of Entrepreneurs:
Hard-working
Risk Takers
Creative
Effective Communicators
Optimistic
Self-confident
Innovative
Independent.
Advantages and Disadvantages of being an Entrepreneur:
Advantages Disadvantages

Independent, able to choose how to use entrepreneurs will have to put their own money into the business.
time and money

Able to put own ideas into practice many entrepreneur’s businesses fail (risky)

It may become successful and very Lack of knowledge and experience in starting and operating a
profitable if the business grows business

Able to make use of personal interests Lost income from not being an employee for another business
and skills (Opportunity cost)

Profits to themselves, no need to share They will have to invest their savings as well as find other sources
them with anyone of finance, which is time-consuming and expensive

Income is higher than a regular

employee
Business Plans
Business Plan: a document containing the business objectives and essential details about operations,
finance and owners of the new business.
Contents of business plan:-
Description of the product
Products and services
The market
Business location and how products will reach customers
Organisation structure and management
Financial information
business strategy
Business plans assist entrepreneurs because:
It helps gain finance. Banks will ask for a business plan before agreeing to a loan or overdraft for the
business
It forces the entrepreneur to plan carefully, which reduces the risk of the business failing.
Government Support for Start-Ups
Governments encourage entrepreneurs to set up a business because start-ups:
reduce unemployment
Increase competition
Increase output
Benefit society
Further growth of the economy
Governments may give support to entrepreneurs by:
Business ideas & help, organising training for entrepreneurs that gives advice, and support sessions.
Finance, they may lend loans at low-interest rates or grants, as well as low-cost premises
Governments provide grants for training employees to make them more efficient and productive
Governments allow entrepreneurs to use research facilities in Universities
Business Size
Why is it beneficial to compare business size?
Investors can decide which business to invest in.
Government, different tax rates for small and large firms.
Competitors, to compare size and importance with other firms.
Workers, to have an idea of the number of employees needed.
Banks, the importance of the loan compared to business size.
There are several different measurements of business size, and they all have limitations:
Measurements Limitations

The number of people employed in the business Capital-intensive firms employ fewer people but produce
(accessible to calculate) high levels of output.

The value of the output of the business (useful for Does not take into account the value of goods sold and
same industry Businesses) the sale of goods.

The value of sales (useful for retail businesses, different businesses sell different products (expensive
especially if similar products) and cheap)

The total value of capital employed (takes into Some businesses use Labour-intensive methods, which
account all values of capital) require less capital, more workers
Capital Employed: the total value of capital used in the business
No method of measuring the size is considered correct, as each method gives different answers.
Businesses choose the method they think is the best. Therefore, businesses may use more than one
method.
Business Growth
There are several ways of measuring the size of the business
Number of Employees
Capital Employed
Output or sales
Market Share
Benefits of the expansion of the business:
The possibility of higher profits for the owner.
More status and prestige for owners and managers.
Lower average costs.
A larger share of its market portion of total market sales it makes is greater.
Ways of Business Growth
Businesses can either grow by:
Internal Growth
External Growth
Internal Growth is when the business expands its existing operations by purchasing additional
equipment, increasing the size of its premises and hiring more labour if needed.
External Growth is when the business takes over or merges with another business.
Takeover: When one business buys out the owners of another business, which then becomes part of the
‘predator’ business.
Merger: When two owners of a business agree to join their businesses together
There are three types of External Growth:
Horizontal Integration: The same industry and stage of production firms merge or take over.
For example, a chocolate manufacturer takes over another chocolate manufacturer.
Benefits:
Reduces the number of competitors in the industry
Opportunities for economies of scale
A bigger share of the total market can be achieved
Problems include diseconomies of scale and difficulty in controlling and managing the business
Vertical Integration: when one business merges or takes over another business in the same industry but
at different stages of production, it can be forward or backwards.
Forward integration is when merging/takeover is done with the next stage of production, Ex. a chocolate
manufacturing company (secondary sector) merging with a chocolate shop (tertiary sector)
Benefits for forward:
The merger provides an assured outlet for its products
The expanded business absorbs the profit margin made by the retailer/Manufacturer.
Information regarding consumer needs and preferences can be obtained directly from the manufacturer.
Backward integration is when merging/takeover is done with the previous production stage, Ex. a
chocolate manufacturing company takes over a cocoa farm.
Benefits for Backward:
Merger gives an assured supply of essential components
The expanding business absorbs the profit margin of suppliers.
A supplier could be prevented from supplying to other manufacturers.
Costs of components and supplies are controlled.
Conglomerate Merger: a firm merging/taking over another firm in a different industry. (also known as
‘diversification’)
For example, a chocolate manufacturer is merging with a photography company.
Benefits:
Activity in more than one industry will diversify and spread the risk taken by the business.
Transferring ideas to different sections can help the business.
Disadvantages Caused by Business Growth
Control and management get harder with expansion (can be prevented by carefully planning expansions
and adjusting management style and hierarchy).
Larger businesses lead to poor communication (stronger and more efficient communication channels can
prevent it).
Expansion costs are high and can result in a shortage of finance for businesses (A financial plan must be
prepared in anticipation of expansion; it can include short/long-term loans to compensate for financial
loss).
Integrating with another business can cause conflicts and difficulties, such as business culture and style
of management. (Compromises will have to be made, or a new style of management can be applied
altogether, which can help reduce conflicts)
Why Small Businesses Remain Small?
The size of their market is small
Access to capital is limited
Personal Choice of the owner
The size and cost of technology
Why Businesses Fail
Lack of Management Skills – from lack of experience, poor choice of managers (family business), bad
decisions can occur
Failure to plan for change – businesses must adapt to an ever-changing business environment. It would
be best if risks were taken.
Over-Expansion – (diseconomies of scale)
Poor financial management and liquidity issues
Competition with other businesses – intense competition in the market can make it hard for new
businesses to set up, as already established businesses can drive newly established businesses out of the
market with their low, competitive prices.
Legal Identity
Unincorporated Business: A business that does not possess a separate legal identity from its owner.
These Businesses usually have:
Unlimited liability: the owner can be held responsible for the business's debts.
Greater risk, as owner is putting his personal possessions and living at risk.
Incorporated Business: Business with a separate legal identity. Private/Public limited companies. These
Businesses usually have:
Limited liability: the liability of shareholders in a company is limited to only the amount they invested
Less risk, as the owner is only risking the capital they invested, as well as any legal charges effect only the
business and not the owner directly
Sole Trader
It is a business owned and controlled by one person- the owner, who is the sole proprietor. It is a form of
an unincorporated business.
Advantages Disadvantages

Few legal regulations (Easy to set up) Decisions can be hard to make

Complete control No separate legal identity, unlimited liability

Flexible working time May not be able to raise funds to expand

business

Ability to respond quickly to the needs and wants of May have to work long hours
customers

All profit goes to the owner Difficult to compete with large firms

Complete secrecy in Business matters May not have the proper skills to run a
business
Partnerships
Partnerships: A form of business in which two or more people agree to own a business jointly. It can be
set up by creating a partnership deal. It’s a form of unincorporated business.
Deal of partnership: The written and legal agreement between business partners. It is not essential but is
recommended
Contents of Partnership Agreement:
Amount of capital invested by all partners
Tasks to be done by each partner
The way profits are shared out
How long partnership will last
Arrangements for absence, retirement and how partners could be let known
Advantages Disadvantages

Easy to set up a deed of partnership Unlimited liability

Greater access to funds Share the profit

shared decision-making Business ceases to exist if one partner leaves

shared management and workload Decisions binding on all partners

Difficult to raise finance

Private Limited Company (LTD)
Private Limited Company: Business owned by shareholders but cannot sell shares to the public (can only
sell to family and friends).
Shareholders: Owners of a limited company who buy shares represent part-ownership of the company.
Advantages Disadvantages

Raise capital from the sale of shares Cannot sell shares to the public

Limited liability for shareholders Legal formalities

Separate legal identity Accounts are available for the public to see

Continuity Not easy to transfer shares

Articles of Association: Contains the rules for managing the company.
Memorandum of Association: Contains vital information about the company and the directors.
These also apply to a public limited company.
Public Limited Company (PLC)
Public Limited Company: Businesses owned and controlled by the shareholders, but they sell to the
public, and their shares are tradeable on the stock exchange.
Advantages Disadvantages

Can sell shares to the public Legal Formalities

Rapid expansion possible/specialist managers appointed Disclosure of accounts and other information

Limited liability Divorce between ownership and control

 Advantages Disadvantages

Continuity Expensive to ‘go public‘

Annual General Meeting (AGM): A yearly meeting where shareholders may attend to vote for a Board of
Directors for the upcoming year.
Dividends: Payments made to shareholders from the profit of a company. They are the return for
investing in the company.
Franchise
Franchise: An agreement of a business based upon an existing brand/business
Franchisee: the company that received permission to conduct business using the company’s name and
brand. Have to pay an original fee to the franchisor and a percentage of its profit for the privilege
The Franchisor: the company that allows another company to conduct business using the company’s
name and brand.
Advantages to franchisor Disadvantage to franchisor

Franchisee buys the licence, which means Bad reputation if one branch has poor management
another source of finance

Expansion is faster The franchisee keeps some profit

Management is the responsibility of the Training, some aspects of administration, and advertising
franchisee are paid by the franchisor

Percentage of sale revenue is given to the

franchisor every year

Advantages to franchisee Disadvantages to franchisee

Chances of business failure are reduced Less independence

The franchisor pays for advertising Unable to make decisions that would suit the local area

Fewer decisions to make with an The franchisor has the power to withdraw the agreement and
independent business can prevent the use of the premises

The franchisor provides training for staff

and management

Banks are often willing to lend to

franchisees due to the low risk.
Joint Venture
Joint Venture: is when two or more businesses work together on a project, sharing costs, risks, and
profits, while staying independent.
Advantages Disadvantages

Sharing of costs Profits have to be shared if the project is successful

 Advantages Disadvantages

Knowledge and experience can be shared Conflict in decision-making

Risks shared Different methods of running a business can create conflict

Public Corporations
Public Corporations: a business in the public sector owned and controlled by the state of government (By
appointing a board of directors and setting objectives).
Advantages Disadvantages

Government ownership may be essential to some The profit objective is not as powerful or important
countries' industries, such as water supply and as in private-sector industries.
electricity generation.

Ensure consumers are not taken advantage of Inefficiency because managers rely too much on
the government

Reduce wasteful competitors It can be unfair to the private sector if subsidies are
provided to the public sector.

Can help stabilize failing businesses to create job Lack of close competition can decrease many
opportunities activities

Important public services It can be used for political reasons, preventing the
business from opportunities like other profit-
making businesses.
Business Objectives
Business Objectives are aims or targets a business works towards
Businesses need objectives to help them be successful. However, they don’t guarantee success.
Benefits of having business objectives:
A clear target to work towards, thus improving Motivation.
It can help in decision-making.
It helps unite the whole business towards the same goal.
It can be used to compare how the business performs through objectives.
Private sector business objectives:
Business Survival - Adjust to business environment, change price of products if necessary
Generating profit (total income of business revenue subtracted by total cost)– pay a return to owners or
provide finance to invest further in business
Returns to shareholders - discourage shareholders from selling their shares. This can be done by
increasing profit or increasing the share price
Growth of business – increase salaries, economies of scale. This is only achieved if customers are
satisfied with the product
Market Share (the total percentage of total market sales held by one brand or business) - gives good
publicity and more influence over suppliers and customers.
Calculation=100×Company SalesTotal market ShareCalculation=100×Total market ShareCompany Sales
Why business objectives can change:
It will work towards profit after being set up and stable.
After achieving a high market share, it aims to “return to shareholders”.
A profit-making business hit with a crisis now has the short-term objective of survival.
Changes in consumer tastes and spending patterns
Technological changes
New Sources of Competition
Social Objectives
Objectives of Social Enterprise
Social Enterprise: an enterprise with social objectives and aims to make a profit to reinvest in the
business. It has three objectives:
Social: to provide jobs and support for disadvantaged groups
Environmental: to protect the environment.
Financial: to make a profit to reinvest in the enterprise and expand its social work.
Objectives of Public Sector Businesses
Financial: Meet profit targets set by the government - either reinvested or funded back to the
government.
Service: meet quality targets the government sets and provide services to the public.
Social: protect or create employment in certain areas.
Stakeholder Objectives
Stakeholder: any person or group with a direct interest in the performance and activities of a business
There are two types of stakeholder groups:
Internal Stakeholders work/own the company (owners, managers, workers)
External Stakeholders are outside the business (consumers, government, banks,
suppliers, Wider community, Pressure groups, and competitors)
Each stakeholder group has different objectives for the performance of the business
Internal Stakeholder (Owners, managers and employees) objectives are payments or profits; they want
business growth, so the value of investment increases, or they get higher status/power
Customers' objectives are reliable products, value for money, good quality, good design and good service
Government objectives include money from taxes, employing more people, increasing the country’s
output
The bank’s objectives are to make a profit out of loans and the payback of interest.
Since different stakeholders have different objectives, it may cause conflict, to try to please all the
stakeholders
For example, customers want cheap products, but workers want higher salaries.
Therefore, managers must compromise to decide which objectives are best for the company.
People in Business
Motivating Employees
Motivation
Motivation: factors that influence the workers' behaviour towards achieving business goals.
Factors that influence motivation at work:
Money
Job Security
Training
Promotion
Status
Responsibilities
Work environment
Benefits of a Well-Motivated Workforce
Improved productivity
Low rate of absenteeism (Workers’ non-attendance at work without a good reason)
Low rate of labour turnover (The rate at which workers leave the business)
Better quality goods and services
Improved labour productivity (A measure of the efficiency of workers by calculating the output per
worker)
Key Motivational Theories
F.W. Taylor - Scientific Management Theory
It aims to reduce inefficiency in the workplace by finding the quickest method of performing tasks and
training all workers to use this method.
The theory of economic man: the theory that humans are only motivated by money, in which Taylor
believed that money was the only motivational factor.
The piece rate method of paying production came from his research.
Disadvantages:
His ideas were too simplistic
If employees are unfulfilled with their work, productivity won’t be gained, no matter how high the wage.
If employees’ output can’t be measured, practical problems arise.
Abraham Maslow: Concept of Human Needs - Maslow’s Hierarchy

Advantages Disadvantages

It is possible for managers to satisfy some It is difficult to identify how much of the needs have been met
or all of their needs or which level each worker is on

Easy to set goals and objectives It doesn’t include money as a need

Not all needs are included.

Self-actualization is rarely, if ever, achieved.

Fredrick Herzberg - Two-Factor Theory
Hygiene Factors: The factors that must be present in the workplace to prevent job dissatisfaction.
Working Conditions: Things that show how clean and safe the workplace is and what facilities are
provided
Relationship with others: Good working relationships with workers and managers, and treated fairly with
respect.
Salary and wages
Supervisions: Leadership style and how closely works are supervised
Company policy and administration: rules and procedures that control and affect the workplace.
Hygiene Factors must be present to prevent job dissatisfaction
Job dissatisfaction: How unhappy and discontent a person is with their job.
Motivators (Factors that influence a person to increase their effort):
The work itself: Variety of jobs and challenging tasks through job enrichment.
Responsibility: Giving workers responsibility for tasks they perform.
Advancement: Opportunity for promotion
Achievement: They feel like they have reached a challenging goal.
Recognition of Achievements: Recognised by the people for their achievements
Methods of Motivation
Financial Rewards: cash and non-cash rewards paid to workers motivate them to increase their efforts.
Time rate: payment to workers based on a fixed amount every hour worked.
Advantages Disadvantages

Business only pays workers for the number of hours worked Pay is not linked to how much they produce
Salary: fixed annual payment to specific grades and types of staff, not based on hours worked or output,
usually divided into 12 equal monthly payments.
Advantages Disadvantages

Salary is not linked to effort or the They do not receive more payment if they have to work long
amount produced hours to complete the task.
Piece Rate: Payment to workers based on the number of units produced.
Advantages Disadvantages

Workers are only paid for the number of Quality of goods may vary because of the need to produce
items produced more goods to increase pay
Commission: Paying sales staff based on the value of items they sell. It is often paid in addition to a basic
wage or salary to retail employees and others involved in sales.
Advantages Disadvantages

Pay is linked to the value of goods sold Workers are never sure of how much they will earn
Bonus scheme: an additional reward paid to workers for achieving the target set by managers. Method
of performance-related pay.
Advantages Disadvantages

Linked to a performance target If the target is unrealistic, it can be demotivating

Fringe benefits: non-cash rewards used to recruit and retain workers and recognise certain employees'
status. (e.g. Car, insurance, health care)
 Advantages Disadvantages

Helping recruitment and retaliation of workers Linked to status, not performance

Profit sharing: an additional payment to workers based on the business's profit.
Advantages Disadvantages

Linked to the performance of the Profit to employees may reduce dividends to shareholders or the amount
business reinvested in the business.
Non-financial rewards and methods: These are methods used to motivate workers that do not involve
giving any financial rewards.
Job Rotation: increasing variety in the workplace by allowing workers to switch from one task to another.
Job satisfaction: how content and happy a person is with their job
Job Enlargement: increasing or widening tasks to increase the variety of workers.
Job Enrichment: organising work so workers are encouraged to use their full ability. This increases job
satisfaction.
Job redesign: increasing the variety or difficulty of tasks to discuss more exciting and challenging work
for workers.
Quality circles: a group of workers who meet regularly lower down in the organisation.
Team working: organising production so that groups of workers complete the whole unit of work.
Delegation: passing responsibility for performing a task to workers lower down in the organisation.
Benefits of decrease in labour turnover:
There is no need to hire new employees, decreasing recruitment costs, training costs, and retaining
skilled employees. This improves productivity.
Organisation and Management
Organisational Structure: levels of management and division of responsibilities within a company.
Organisational Charts: refers to diagrams that outline the internal management structure.
Hierarchy refers to the levels of management in any organisation.
Levels of Hierarchy: refers to management/supervisors/other employees who are given a similar level of
responsibility in an organisation.
Example of Organisational Chart:

Benefits:
The chart shows how everybody is linked in the organisation, which allows employees to be aware of
their communication channel (chain of command).
Everyone can see what they are accountable for, which they have authority over, and who to take orders
from.
Everyone is in a department, thus giving a sense of belonging
Chain of Command: The structure in an organisation allows instructions to be passed down from senior
management to subordinates.
The Span of Control: The number of subordinates working directly under a manager.
Subordinate: an employee below another employee in the organisation’s hierarchy.
Two Types of Organisational structures of a business:
Tall Structure: the longer the chain of command is, the ‘taller‘ the organisational structure and the
‘narrower‘ the span of control.

Flat Structure: when a chain of command is short, the organisation will have a ‘wider’ span of control,
thus making it a ‘flat‘ structure.

Advantages of Short Chain of Command:

Communication and decision-making are quicker.
Fewer management levels to build connections with by the top management.
The span of control will be wider, encouraging managers to delegate more and allowing workers to feel
trusted.
Advantages of a long chain of command:
As decisions get passed down, it is checked by multiple people, thus reducing error and preventing bad
decisions from happening
Lesser subordinates means management can focus more on their designated workers.
Factors affecting the size of the span of control:
Difficulty of the task
The experience and skill of workers
The size of the business
the level of hierarchy
Management style
Delayering: reducing the size of the hierarchy by removing one or more levels, often the middle
management.
 Advantages Disadvantages

Reduces cost Increased workload on managers, thus decreasing

the quality of work and its completion.

Communication and decision-making are quicker Have to make redundancy payments to employees
due to reduced chain of command. who lost their job

Increases the opportunity for delegation, which Reduction in job security

helps in motivation

Senior managers are in close touch with what is Reduce effective management of subordinates
going on in the business
Delegation: Giving a subordinate the authority to perform particular tasks.
Advantages Disadvantages

Application of job enrichment, leading to Some managers are reluctant to delegate, as they will be held
job satisfaction accountable for any errors

A form of training for junior managers Managers lose some control over subordinates

Achieving the Esteem needs (Maslow’s

hierarchy)
Centralised Organisation: one where all the important decision-making power is held at the head
office/the centre and then passed down to lower levels.
Advantages Disadvantages

Decision-making is often quicker Slower communication

Decisions are taken for the benefit of the whole Unable to respond quickly to changes in the local
business market

Greater use of specialist staff improves decision- May reduce motivation

making
Decentralised Organisation:
Advantages Disadvantages

Decisions are made based on local Decisions taken might not be in the interest of the business
needs.

It can be used to train junior managers. Poor decisions might be made often due to lack of experience
and skills

Delegation helps improve worker

 Advantages Disadvantages

motivation.
Role and Function of Management
Directors: are senior managers who lead a particular department or division of a business.
Responsibilities:
Setting strategy (long-term plans)
Reviewing the performance of managers.
Provide leadership
Making sure resources are available
Line Managers: manage employees and are responsible for the team development and performance.
Supervisors: are junior managers who supervise and are responsible for the employees below them in
the organisational structure.
Staff Managers: are specialists who provide support information. And assistance to line managers.
The functions of managers include:
Planning – Planning is about where the business is now and where it wants to be. Once it has been
decided, management must set clear objectives and an action plan.
Organising – Management will have to decide the best way of completing important tasks at the lowest
possible cost to the business.
Commanding - Control and supervision of subordinates also aim to motivate workers to achieve the
planned objectives.
Coordinating - Making sure that all the different parts of the business are working together to achieve
the business’s goals and corporate objectives.
Controlling – involves checking to make sure that the plan is working and if it would be completed in
time and the required standard, and if not, then correcting it
Extra functions managers do:
Understand the people who work for them
Set a good example
Delegate tasks
Treat subordinates fairly
communicate effectively
Leadership Styles
Leadership Styles: are the different approaches to dealing with people and making decisions when in a
position of authority.
There are three leadership styles:
Autocratic Leadership: where the manager expects to be in charge of the business and to have their
orders followed. Characteristics:
A leader does all the decision-making
Don’t take input from others.
Highly structured working environment
Advantages Disadvantages

Quick decision-making There is no opportunity for employee input into key decisions, which can be
process demotivating
Democratic Leadership: gets other employees involved in the decision-making. Characteristic:

Motivation is higher
Creativity and engagement with workers are encouraged.
Workers and employees are involved in decision-making.
Advantages Disadvantages

Better Decisions could result from consulting with Unpopular decisions could not effectively
employees using their ideas and experiences. be made using this style
Laissez-Faire Leadership: makes the broad objectives known to employees, but then they are left to
make decisions and organise their work. Characteristics:
Workers and employees are expected to make the decisions.
The leader will only give guidance.
The leader only takes charge when necessary.
Advantages Disadvantages

Encourage employees to show It is unlikely to be appropriate in organisations with a consistent

creativity and responsibility and clear decision-making structure.
Trade Unions
Trade Unions: A group of employees who have joined to protect their interests.
The Role of Trade Unions:
Negotiating with employers to improve pay and working conditions.
Resolving conflict by negotiating a solution on behalf of its members
Providing legal support and advice.
Providing services for members including holiday scheme, pension scheme, insurance scheme, etc.
Advantages Disadvantages

Strength in numbers when negotiating with It costs money to be a member

employer

Improved conditions of employment. Workers may be required to take industrial actions even if
they disagree.

Improved environment where people work. Trade unions can organise strikes against employers if
they don’t receive the pay levels and work conditions they
deserve.

Improved benefits for members not working Wages are likely higher - adding to business costs - when
because of sickness, retirement, or many employees are trade union members.
redundancy.
Work of Human Resource Department
Recruitment and Selection:
Recruitment: is the process of identifying that the business needs to employ someone up to the point at
which applications have arrived.
Employee Selection: is the process of evaluating candidates for a specific job and selecting an individual
based on the organisation's needs.
Wages and Salaries:
These must attract and retain the right people and be sufficiently high to motivate employees.
Industrial Relations:
There must be effective communication between representatives of management and the workforce.
This may be to resolve grievances and disputes and put forward ideas and suggestions for
improvements.
Training Programs:
It involves assessing and fulfilling the training needs of employees. This should also be linked to the plan.
Health and Safety:
The business must ensure that it complies with all the laws on health and safety.
Redundancy and Dismissal:
This involves releasing employees, either because the business changes in some way or because the
employee is not satisfactory. The business must comply with all the redundancy, dismissal and
disciplinary laws.
Recruitment Process
Analyse the exact nature of the job and duties to be undertaken.
Job analysis: it identifies and records the responsibilities and tasks relating to a job
Job description: a document that outlines the tasks and responsibilities that will need to be carried out
as part of the specific job – so that applicants know what the job involves and so they know if they are
suitable to apply for the job
Usual Requirements:
The level of educational qualification
Special skills, knowledge, or a particular attitude
Personal Characteristics
Design a job specification:
Job specification is a document that outlines the requirements, qualifications, expertise, and attributes
needed for a specified job. Several functions of a job specification:
This information should be given to applicants so they know exactly what the job entails.
Allows a job specification to be drawn up to see if they are skilled.
It shows if an employee is working effectively once they are employed.
The contents of a Job specification:
Condition of employment salary, hours, permission, etc.
Training that will be offered
Opportunities for promotion
Purpose of the job
Main duties/addition or occasional duties
Person Specification: outlines the required skills, qualifications, personal qualities, etc., for a specific job
– to ensure a suitably qualified person is appointed and that they have the skills, etc., to do the job
required.
Advertise the vacancy:
The first stage is to decide how the post will be filled.

Internal Recruitment: is when a vacancy is filled by someone who is an existing employee of the business
Advantages Disadvantages

No new ideas or experiences come into

Quicker and cheaper than external recruitment.
the business.

The reliability, ability, and potential of the person are

Rivalry and jealousy may arise.
known.

The person is already familiar with the organisation's The quality of internal candidates might
structure and expectations. be low.

It can be motivating for other employees to see their fellow

workers promoted.
External Recruitment: when any suitable applicant outside the business fills a vacancy
Advantages Disadvantages

A more comprehensive selection of candidates. Increased costs due to advertising.

Adding fresh perspective and ideas. Additional training

Adds a transitional period for all employees to

Enhancing diversity in the organisation.
adjust to the new business

Finding a specialised candidate who fits the

Effects on employee morale.
requirements perfectly.

Can help the competitiveness of the business

Reduce tension between employees.

Send out application forms to the applicants or read curriculum resumes and letters of application.
Advertising job vacancies can be done in several ways:
Local newspapers
National newspapers
Specialist magazines
Online recruitment sites
Recruitment agencies
Centres run by the government
Produce a shortlist from the applications for interviews and take up references.
Applicants must provide a referee (someone the potential employer can contact, intending to get more
information/references from).
Interviews are the most used form of selection. Its primary purpose is to assess in the shortest time
possible:
Applicant’s ability to do the job
Any personal qualities that could be beneficial or not.
The general character and personality of the applicant.
Some businesses include tasks in the selection process, such as:
Skill test (ability to carry out specific tasks)
Aptitude test (candidate’s potential of learning a new skill).
Personality test (used if a particular type of person is required).
Group situation test (to show how well they work with a team).
Hold interviews and select tasks.
Select suitable applicants and offer them the job. Reply to unsuccessful applicants.
The final decision can depend on several factors:
Work experience
Education and other qualifications
Age
Internal
External
Circumstance
Types of Workers
Part-time Employees work for less than 35 hours a week.
Benefits:
Work hours are flexible.
Easier to ask employees to work at busy times
More accessible to extend business opening/operating hours by working evenings or weekends.
It fits in with looking after children or other circumstances such as school, which means employees are
willing to lower pay.
Reduces business cost
In some countries, it’s easier to make part-time workers redundant.
Limitations:
They are less likely to seek training, as they see the job as temporary.
Takes longer to recruit.
Less commitment to business.
Less likely to be promoted due to lack of experience.
It is more difficult to communicate outside of work.
Full-time Employees work for more than 35 hours a week
Benefits:
Consistency of schedules and reliability
Loyalty - A permanent contract means the employee is more loyal
Limitations:
A permanent contract has to be made, a long-term commitment.
Full-time employees have fixed pay, regardless of the number of hours committed to work (ex, sick leave,
slow work day, emergency, etc).
Note: full-time employee benefits are the limitations of part-time and vice versa
The Importance of Training and the Methods of Training
Importance of training:
To introduce new processes or equipment
Improve the efficiency of the workforce
Provide training for unskilled workers
Decrease the supervision needed
Improve opportunity for internal promotion
Decrease chances of accidents
Aims of training:
Increase skills
Increase knowledge
Improve employee’s attitudes to encourage them to accept change and raise awareness.
There are three types of training:
Induction Training: an introduction given to an employee, explaining the business’s activities, customs,
and procedures and introducing them to their fellow workers.
Advantages Disadvantages

Helps new employees settle into their jobs quickly Time-consuming

Maybe a legal requirement to give health and safety Workers are being paid while no work is
training at the start being done

Workers are less likely to make mistakes Delays the start of work for the employee
On-the-job Training: Occurs by watching a more experienced worker doing their job.
Advantages Disadvantages

The individual is given training in the workplace, so there Trainers won’t be as productive because they
is no need to send them away. are teaching employee

Ensures there is some production while training The trainer might have bad habits and pass
them on to the employee

Usually costs less than off-the-job training Not recognized training qualifications outside
the business

Training tailored to the specific needs of the business.

Off-the-job training: Involves being trained away from the workplace, usually by specialist trainers.
 Advantages Disadvantages

A broad range of skills can be taught Costs are high

If taught in the evening, employees can work Workers are being paid but not doing any work.
during the day

Often uses expert trainers who have up-to-date Additional qualifications mean an employee's chances
business practices and knowledge. of leaving for another job are high.
Why Reducing the Size of the Workforce Might Be Necessary
Workforce Planning: establishing the workforce the business needs for the foreseeable future regarding
the number and skills required.
Reasons to reduce workforce:
Automation (robots replacing human jobs)
Falling demand for their goods or services
Factory/shop/office closure
The business might have relocated abroad
Businesses are being taken over/merged, and now there are too many workers doing the same job
Two ways a business can reduce the number of employees:
Dismissal: employment ends against the employee's will, usually for not following an employment
contract.
Redundancy: when an employee is no longer needed and loses their job. It’s not due to any aspect of
their work being unsatisfactory.
Factors that decide in redundancy:
Workers may volunteer and are happy to be made redundant due to finding another job.
Length of time employed by the business - employees might have worked long hours and expect high
payments.
Workers who have skills that could be used in multiple departments are retained.
The worker's employment history- whether they are punctual, good at their job, etc.
Which departments need to lose, and which need to retain workers
Extra information: workers can retire (get old and want to stop working) and resign (find another job),
but it’s through the employee’s will in those two cases.
Legal Controls Over Employment issues
The most important employment issues affected by legal controls are:
The Contract of Employment: A legal agreement between an employer and employee, listing the rights
and responsibilities of workers.
Impact on Employers and Employees:
Both know what is expected from them.
Provides security of employment for employee
If the employee does not meet the condition of the contract, then legal dismissal is allowed.
If an employer fails to meet the conditions of the contract, then the employee can seek legally binding
compensation.
Unfair Dismissal: when an employer ends a worker’s employment contract for a reason not covered by
the contract.
Industrial Tribunal: a law court (legal meeting) judges disagreements between companies and their
employees.
Impact on Employer and Employee:
The Employer must have an accurate record of a worker’s performance if they want to claim that the
employee has broken the contract before dismissing them.
Employees have employment security — as long as they fulfill their contract or are not made redundant.
Allowed employees to take their employer to an industrial tribunal if they felt like they weren’t being
treated fairly, and they could get compensation if it were found to be true.
It makes businesses less likely to mistreat employees.
Protection against discrimination (due to unfair reasons such as gender, race, colour, etc.).
Impact on Employers and Employees:
Employees have to be careful when wording advertisements for a job.
Applicants must be treated equally, or the business will be prosecuted and fined.
Employees must all be treated equally, regardless of gender, disability, colour, etc.
When businesses recruit and promote staff on merit alone, it helps to increase motivation.
Laws of health and safety at work, such as:
Protect workers against dangerous machinery.
Provide safety equipment and clothing.
Maintain reasonable workplace temperatures.
Provide hygienic conditions and washing facilities.
Do not insist on excessively long shifts, and provide breaks.
Impact on employers and employees:
Cost to the employer of meeting the health and safety regulations.
Time needs to be found to train workers in health/safety precautions.
Workers feel ‘safer‘ and more motivated at work.
Reduce accident rates and the cost of compensation for workers injured at work.
Legal minimum wage and its impact on employer and employee:
It should prevent strong employers from exploiting unskilled workers.
As many unskilled workers receive higher wages, it will encourage them to be more productive.
It will encourage people to seek work.
Low-paid workers will earn more and have higher living standards, making them afford to buy more.
Increase business costs
Some employers will not be able to afford these wage rates.
Higher-receiving workers may ask for higher pay to keep the exact difference between them, increasing
business costs.
Internal and External Communication
Effective Communication is important so that the information sent in the message is received,
understood, and acted upon as it should be. Otherwise, lack of communication can lead to severe
consequences.
There are two types of communication in businesses:
Internal Communication: communication between employees of the same business.
External Communication: communication between the business and other businesses and individuals.
External communication has to be especially efficient because it establishes the image and the efficiency
of a business
i.e. if a company communicates inefficiently with their suppliers, they might receive the incorrect
materials
Effective communication involves:
The transmitter/sender sending a message to pass on information
A medium of communication – the method for sending a message (i.e. e-mail, phone, etc.)
The message being sent to the receiver
The receiver confirms that the message has been received and responds to it (feedback)
There are two types of communication:
One-way communication – where the receiver cannot reply to the message (i.e. posters)
Two-way communication – where the receiver can respond to the message could be just confirmation
that the message was received (e-mail)
The methods of communication include:
Verbal Methods: The sender speaks to the receiver (i.e., through meetings, telephone, or video
conference)
Advantages Disadvantages

Information is given out quickly & an efficient way to If talking to many people, it’s hard to tell
communicate with many people. whether everyone got the message.

Opportunity for immediate feedback It is unsuitable for accurate messages and

requires a permanent record.

The speaker’s body language reinforces the message.

Written Methods: the sender creates e-mails, memos or letters, including the use of Information
Technology
Advantages Disadvantages

Message can be referred to in the future as “hard It might lead to too many e-mails and ‘information
evidence.” overload.’

Easy to explain complicated messages Two-way communication is difficult

It can be copied and re-sent to many people It is hard to check if the message has been received
Visual Methods: The sender uses diagrams, charts, videos, PowerPoints
Advantages Disadvantages

If information is presented more appealingly, No feedback and needs other methods of communication
people will be more interested in it. to go with it

It can be used to make written messages Graphs and charts may be difficult for people to
clearer, to illustrate the point understand, and the message may be misunderstood
Methods of Communication
Formal Communication: when messages are sent through established channels using professional
language.
Informal Communication: when information is sent and received casually using everyday language.
The Direction of Communication
Arrow A shows downward communication: messages from managers to subordinates. Used for
instructions or statements, no feedback.
Arrow B shows upward communication: messages or feedback can be passed from subordinates to
managers.
Arrow C shows horizontal communication: when people at the same level in an organisation
communicate. Ideas and info can be shared. Conflict can happen.
Demonstrate an Awareness of Communication Barriers
Communication Barriers
Communication Barriers – Factors that stop effective communication of messages.
Communication Barriers and How Can They Be Reduced or Removed
Problems with the sender:
Poor attitude and body language
Unclear message
Message too long
Sent to the wrong person
Overcome by:
The sender should ensure that the message uses language which can be understood.
The sender should make the message as straightforward as possible.
The sender should ensure the message is delivered to the right person.
The message should be brief, with the main points to be understood.

Problems with the medium:

Too many people pass on the message.
The message may be lost.
Wrong channel used
Technical break down
Overcome by:
Insist on feedback; if none is given, the sender can assume the message is lost.
The sender must select an appropriate channel to avoid problems.
Shortest possible channel to avoid problems
Other forms of communication should be available.

Problems with the receiver:

Lack of trust
Poor attitude
Poor listener
Overcome by:
The message should be emphasised, and receivers should be asked for feedback to ensure
understanding.
If trust is not between sender and receiver, then the sender should try to build that trust, or perhaps
another sender who is respected by the receiver could be used.

Problems with feedback:

Not sent
Unclear
Not asked for
Overcome by:
Perhaps no feedback was asked, or the method of communication required no feedback, so another
technique that may allow feedback should be used.
Direct lines of communication should be available.
Marketing
The Role of Marketing
Marketing Department:
Marketing: Identifying and satisfying customer needs and satisfying them profitably.
Customer: a person, business or other organisation which buys goods or services from a business.
The different marketing department sections:
Sales Team: responsible for the sales of products. If a product is exported, it may be called the export
team.
Market Research: responsible for discovering customers’ needs, market changes and the impact of
competitors’ actions. This report will be used in decision-making, research, developing new products,
price levels, etc.
Promotion Section: deals with organising the advertising for products. Arrange for advertisements and
have a market budget.
Distribution: transports the products to the market.

The Role of Marketing:

Identify customer needs: this will be done via ‘Market Research’. It will influence the development of a
product, its price, and the sales technique.
A good marketing department should also be able to anticipate changes in customer needs (i.e. due to
advancements in technology)
Find new trends or gaps in the market with potential.
Satisfy Customer Needs: selling the exact product customers want for a price they are willing to pay.
Maintaining customer loyalty: maintaining close customer relationships to discover the product's
expectations and changes needed to be made. It’s cheaper for businesses to keep existing customers
than to attract new ones.
Customer Loyalty: existing customers continually buy products from the same business. It is achieved by
always satisfying customer needs.
Building customer relationships to gain information about customers
Customer Relationships: communicating with customers to encourage them to become loyal to the
business and its products.
Through customer relationships, changing needs can be understood. Research information can be
applied to make effective marketing through these relationships.
Anticipate changes in customer needs –
Identify new trends in customer demands or gaps in the market.
When the marketing department succeeds in identifying customer requirements and future needs, it will
enable the business to:
Raise customer awareness of a product or service of the business
Increase in revenue and profitability
Increase or maintain market share
Maintain or improve the image of the product or business
Target a new market or market segment
Enter a new market at home or abroad.
Develop new products or improve existing products.
Market Changes
Markets change because consumer spending patterns change; this might be due to the following:
Trends and Fashions Change: for some time, it might be fashionable to have a specific product (i.e.,
Fidget Spinner), but a month later, no one bought them
Advancement in Technology: new products provide the latest technology so older versions (i.e., iPads or
computers) don’t have high sales
Unemployment/Wages: Economies with high unemployment rates/low wages will not have increased
sales of expensive products
Ageing Population: different ages are interested in other products (i.e. anti-ageing creams)
Businesses have to keep up with customers' changing needs to stay relevant and maintain their customer
base/loyalty. The competitiveness of a business is majorly affected by its ability to respond to any
changes in the market.
Some markets have become more competitive because:
Globalisation: products are sold all over the world
Transportation: it is cheaper, quicker, and easier to send products around the world now
Internet/e-commerce: customers can now search for products or services and buy from somewhere else
around the world
The ways businesses respond to changing spending patterns and increased competition:
Keep improving its existing products
Bring out new products to keep customer’s interest
Keep costs low
maintain good customer relationships
Market Types
Market: the total number of customers, potential customers and other sellers of a product/service.
There are two types of markets:
Mass Market: where there is a vast number of sales of a product type.
Advantages Disadvantages

Total sales are very high Abundant competition

Can benefit from economies of scale High costs of advertisement and promotion

Opportunities for growth (large sales) Standardised products or services, so it may not meet the
specific needs of all customers

There are many variations of products, so

the risk is spread.
Niche Market: a SMALL (usually specialised) segment (part) of a mass market. Specialised and sold by
small businesses that would find it difficult to compete in a mass market (ex, a business specialised in
scuba diving gear)
Advantages Disadvantages

Avoid competition with big businesses Small – limited sale potential

Customers' specific needs are focused, Usually, they specialise in just one product; if the product
leading to high levels of customer loyalty has low demand, it will fail. It would require businesses to
and good customer relations. have multiple products to spread risks.
Market Segmentation
Market Segmentation: an identifiable subgroup of a whole market where consumers have similar
characteristics or preferences.
A market can be segmented by:
Demographic segmentation - age, gender, and income.
Geographic segmentation - region/location, where people live (ex, people who live in wet areas will buy
more waterproof clothing than those who live in dry areas)
Psychographic segmentation - beliefs, values, lifestyle, social status, activities, interests and opinions and
other psychological criteria.
Benefits of Market Segmentation:
You can use it to sell more products, creating different variations for different groups.
A more effective marketing strategy can be placed (as the characteristics of consumers are known),
resulting in an increase in sales.
Identifying a market segment that is not having its needs fully met increases the opportunity for
increased sales.
Making marketing expenditure cost-effective by producing a product that can closely meet the needs of
those customers and targeting its marketing efforts to that group only.
Which method of segmentation should be used depends on factors such as:
Detailed analysis of the market and the ‘size’ of each potential segment in terms of consumers and likely
sales.
Company image and brand image - ‘high-tech ' businesses may not want to produce innovative, high-
quality products for low-income consumers.
For example, the cost of entering each segment is a specially designed product and advertising
campaign.
Market Research
Market Research: Gathering information about consumers' needs or preferences in a market
The roles of market research:
Identify demand for the product and how much they are willing to pay.
Identifying the target audience is the most effective way to promote to these customers.
To measure the competitiveness of the market and the best way to compete with it.
There are two types of businesses:
Product-Oriented Business: a business that focuses mainly on the product, disregarding market needs
and wants. Often, it produces necessities for living, such as agricultural tools or fresh food.
It may not have a brand name.
Producers’ main concern is price and quality.
Risky due to the large market and many competitors.
A market-oriented business is a business that focuses on market research and finding out what the
customer wants BEFORE a product, such as clothing or electronic devices, is developed.
Better able to survive because of more adaptability to changes in customer taste and trends.
Takes advantage of new market opportunities.
Market Research Methods:
Quantitive information (quantity related)
Qualitative information (where opinion or judgement is necessary).
Can be gathered through:
Primary Research: Gathering ORIGINAL data by directly contacting existing customers/potential
customers.
Advantages Disadvantages

Up-to-date and relevant Expensive in both time and

money

Usually planned and carried out by people who want to use the data Not available immediately
first-hand.

It is most effective when used for a specific problem.

Not available to other business

Process:
Purpose of market research
Decide on the most suitable method of market research
Decide the size of the survey and who is going to be asked.
Carry out the research
Analyse the data and results
Produce a report of the findings
Methods of Primary Research:
Questionnaires
They may be conducted face-to-face, by telephone, or online.
Advantages Disadvantages

Detailed qualitative information can be If questions are not well-thought-out, answers may mislead the
gathered. business, as there may not be accurate answers.

The customer’s opinion can be obtained. Lots of time and money are needed.

Online surveys may be cheaper and make Collating and analysing data also takes a long time.
it easier to collate the results.

They can be linked to prize draws and

encourage people to fill them.
Interviews: A person will interview another person and ask questions.
Advantages:
The interviewer will be able to explain the questions and clear confusion.
Detailed information about the interviewee can be gathered.
Disadvantages:
The interviewer may lead the interviewee to answer in a certain way.
It is time-consuming and Expensive.
Focus Groups: collect opinions and feedback from a group of people about a specific product, concept,
or service.
Advantages Disadvantages

Provide detailed information It is time-consuming and expensive if done by a

specialist market research agency.

Interacting between members can help businesses The discussion could be based on some people
understand the reason for peoples’ opinions. being influenced by the opinions of others.

Quicker and cheaper than individual interviews. A few people can dominate it, so researchers must
have experience dealing with this.
Sampling: A group of people who are selected (randomly) to respond to a market research exercise (i.e.
questionnaire). 2 standard methods of sampling:
A Random Sample is when people are selected randomly as a source of information for market research.
Advantage: Everyone has an equal chance to be picked, but not everyone in the population may be a
product consumer.
A Quota Sample: People are selected based on specific characteristics. They can find out the views of a
specific group.
Advantage: can find out the views of these specific groups.
Secondary Research:
Information that has already been collected and is available to others
Benefits Limitations

It is cheaper than primary as research has already been You do not get specific results for a particular
done by others product or service; you get broad results

There is some information (i.e. economic forecasts or Data may be outdated or incorrect as others
population size) that can’t be obtained by primary research collected it

Other businesses has access to the same

information
Internal Sources of secondary data – within the firm’s own records:
Sales department records, price data, customer records, sales reports, etc.
Opinions of distribution and public relations personnel
Finance department.
Customer service department
External Sources of Secondary Data:
Government Statistics: a detailed source of general information (ex: population and its age structure)
Newspapers: useful articles about the general economy state
Trade Association: information about business in the industry
Market Research Agencies: specialist agencies researching on the company’s behalf; the commission is
paid.
Internet: easily accessible source. Paper-based sources can also be found.
Regardless of which type of research a business chooses to use, the accuracy of the research data
depends on the following:
How carefully the sample was drawn up
How the questions in questionnaires/interviews were phrased to ensure honest answers were given.
The sample itself and its size. By using quota sampling, you might get more reliable results.
The bias – some secondary research will be biased (i.e. articles in newspapers), which means the
information might be unreliable
Age of the information: older data might be inaccurate.
Presentation of data from market research:
Tables or tally chart
Pie Chart
Diagram
Bar chart
Line graph
Marketing Mix
Marketing Mix: a term used to describe all the activities that go into marketing a product or service.
The marketing mix can be summed up as the 4 Ps:
Product - applies to the product or service. Design, features and quality.
Price - the price at which the product is sold, comparisons between prices of competitors.
Place - channel of distribution that is selected.
Promotion - how the productivity is advertised and promoted.
You should always mention the 4 Ps when answering questions about Marketing Mix!
Product
Some products are sold to consumers, and some to other businesses.
They are usually grouped:
Consumer goods: bought by consumers for their own use. Can be perishable goods such as food or long-
lasting such as furniture.
Consumer services: services bought by consumers for their own use. Ex. Cleaners
Producer goods: there are goods that are produced for other businesses’ use to help with the production
process. Ex. Trucks
Producer services: services that are produced to help other business. Ex. Accountants.
Identifying the type of product is important as it decides how the product would be advertised/marketed
and developed.
Points to consider about choosing product:
Satisfying existing needs and wants of consumers
Not be expensive to produce.
New and original idea
Unique selling point
Capable of stimulating new wants from their consumers.
Development of New Products:
Generate ideas
Select the best idea for further development
Decide if the company will be able to sell enough for the product to be a success.
Develop a prototype
Launch the product in one area to test the market
Go to a full launch of the product to the whole market.
Benefits Drawbacks

USP – a unique selling point: a special feature about a product Costs of carrying out market research
that differentiates it from its competitors’ product. and analysing the findings

Diversification Cost of producing trial products,

including waste materials

Allows businesses to expand into new and existing markets Brand image is damaged if the product
fails to meet consumer demand

The lack of sales if the target market is

wrong
Importance of Brand Image
Brand name: the unique name of a product that distinguishes it from other brands.
Brand loyalty: when consumers keep buying the same brand again instead of choosing a competitor’s
brand.
Brand image: an image or identity given to a product which gives it a personality of its own and
distinguishes it from its competitors.
Good branding includes:
Brand name
Higher quality than unbranded products.
Unique packaging
Brand loyalty
Assured quality
Creates a brand image associated with consuming the product.
Role of Packaging
Packaging: the physical container or wrapping for a product. 2 functions - protect and promote product
Protects the product and makes it easier to transport
Eye catching
Carries information about the product
Promotes brand image
Product Life Cycle (PLC)
Product life cycle: describes the stages a product will pass through from its introduction, through its
growth until it is mature, and then finally its decline.
Development: First, the product is developed. The prototype will be tested in the market before its
launch. There are no sales during this time.
Introduction: Then it is introduced or launched in the market. Sales are often slow. No profit made as
development costs are not yet covered.
Growth: The product gains more sales. Advertising is changed to persuade and encourage customer
loyalty. Prices reduced due to competitors and profit starts to be made.
Maturity: sales increase slowly. Competition intense and advertising is used to maintain sales growth and
profit is at its highest.
Saturation: sales have stabilised at their highest point. Competition and advertising is high and stable,
but profit starts to fall as sales static and prices are reduced to be competitive.
Decline: sale of product starts to decline as new products enter, or it has lost its appeal. Product is
withdrawn from market and sales, prices and advertising low until it stopped.

How Stages of PLC Influence Marketing Decisions

Introduction –
Product – newly launched product
Price – price skimming or penetration pricing
Place – limited range of exclusive shops (if price skimming is used)
Promotion – informative advertising
Growth
Product – remains the same
Price – raise prices if penetration pricing was used
Place – increase the number of outlets, e-commerce
Promotion – establish a strong brand identity through promotional activities.
Maturity/Saturation
Product – plans for product changes begin
Price – prices are lowered to stay competitive
Place – full range of distribution channels used
Promotion – sales promotion techniques to encourage repeat purchases
Decline
Product – changes made to extend the life cycle
Price – lower prices
Place – sell through low-cost outlets
Promotion – re-launch the product as an extension strategy
Extending Product Life Cycle:
Extension strategy: a way of keeping a product at the maturity stage of the life cycle and extending the
cycle.
Introduce new variations into the original product
Sell into new markets
Make small changes to the product’s design, cover, colour
Sell through additional retail outlets
Introduce a new, improved version of the old product
Use a new advertising campaign
Pricing
The price chosen may not be related to the cost of manufacturing but rather to what consumers are
willing to pay, the product's value, and the brand image.
The business must constantly monitor what its competitors charge for their products to ensure its prices
remain constant.
A business can adopt new pricing strategies for:
To break into a new market
To increase market share
To increase profits
To make sure all costs are covered and a particular profit is earned
The Main Methods of Pricing
There are five main types of pricing methods:
Cost-plus Pricing: the cost of manufacturing the product plus a profit mark-up. It involves:
Estimating how many of the products will be produced.
Calculating the total cost of producing this output.
Adding a percentage markup for profit.
Total cost /output + % markup.
Benefits Limitations

The method is easy to apply. Businesses could lose sales if the selling price is higher
than competitors.

Different profit markups could be used in A total profit will only be made if sufficient product units
different markets. are sold.

Each product earns a profit for the business. There is no incentive to reduce costs.
Competitive Pricing: When the product is priced in line with or just below competitors’ prices to try to
capture more of the market.
Benefits Limitations

Sales are likely to be high due to realistic level prices. High-quality products must be sold at higher
prices to give them a high-quality image.

Avoids price competition If cost is high and sales are low, competitive
prices can lead to loss.

Often used when it is difficult for consumers to tell the Detailed research will be needed to determine
difference between the products of different businesses. these prices, which costs time and money.
Price Skimming: setting a high price for a new product on the market. A product is usually a new
invention or a new product development.
Benefits Limitations

It can help establish the product as good quality. High prices may discourage some customers
from buying it.

If production is unique, a high price may lead to profit, High prices and profitability may encourage
and the price may be reduced. competitors to enter.

High research and development costs can be rapidly

recovered from profit made.
Penetration Pricing: when the price is lower than the competitors’ to enter a new market.
 Benefits Limitations

Often used for newly launched products to create Sold at a low price; therefore, profit per unit may be
an impact on customers. low.

Ensure sales are made, and the new product Customers may ‘get used‘ to low prices and reject the
enters the market. product if the price is raised.

Market share should build up quickly. It might not be appropriate for products that have a
reputation for quality.
Promotional Pricing: when a product is sold at a low price for a short period of time. To increase short-
term sales.
Benefits Limitations

Useful for getting rid of unwanted inventory that Revenue will be lowered because the price of each
will not sell. item is reduced.

Help renew interest in a product if sales are This might lead to price competition with
falling. competitors.
The impact of psychology on price decisions
High prices for high-quality products can be purchased for status symbols.
When a price is lower than a whole number, it creates the illusion of being cheaper.
Supermarkets may choose low prices for products purchased regularly.
Repeat sales are often made to reinforce consumers’ perceptions of the product.
Using different pricing methods for the same product-
Dynamic pricing: When businesses change product prices, usually when selling online, depending on the
level of demand, for example, Aeroplane tickets.
There are ethical issues with some dynamic pricing; using technology, businesses can track customers'
buying history and charge accordingly.
Price Elasticity of Demand
Price Elasticity of Demand: How responsive is a demand for a product to a change in price?
PEDs are affected by the no of substitutes available
Price-Elastic Demand is when a product is very responsive to a change in demand. The % change in
demand is GREATER than the % change in price, i.e., prices increase by 5%, but sales decrease by 10%.
Therefore, the business's revenue would be falling with a price increase. Businesses must find another
way to increase demand without using the product's price.
Price-Inelastic Demand is when the product is not very responsive to changes in demand. The % change
in demand is LESS than the % change in price.
This means you can increase the price of the product a lot without the demand changing (i.e., oil &
petrol because people have to buy it)
Place (Distribution Channels)
Products should be available when and where customers need them
Wrong place, low sales and profits
The place must be convenient for consumers
Distribution Channel: is how a product is passed from the place of production to the customer.
There are four main distribution channels:
Manufacturer sells products directly to consumers (i.e. car components to car factories).
This channel is most common with business-to-business transactions.

Benefits Limitations

Very simple It is impractical because consumers don’t usually live near

factories

Suitable for products that are sold Not suitable for products that can’t be sent quickly by post,
straight out of factories especially if they’re perishable or easily breakable goods.

There is a lower price for consumers It is not cost-effective, as sending products by post is expensive
(cuts retailer)

Products can be sold by mail order

catalogue or via the internet.
Producers sell to retailers, who sell to consumers (i.e., farms selling food to big supermarkets).
This channel is most common where retailers and large such as supermarkets or the product is
expensive, Ex. furniture or jewellery.

Benefits Limitations

Manufacturer sells lots of stock to retailer There is no direct contact with customers, which makes It
hard to create customer loyalty.

Cheaper transportation costs because all Price is often higher than ‘direct selling‘ as the retailer has
products go to one place to cover its costs and make a profit

Lower storage costs for the manufacturer

Producers sell to wholesalers, who buy in bulk, divide their stock into smaller quantities, and sell them to
retailers.

Benefits Limitations

Reduces storage costs for small retailers More expensive to buy from a wholesaler than from a
because small quantities are sold manufacturer

Small quantities, so transport costs are low A wholesaler might not have all the products a retailer
wants

Wholesalers can give feedback on what sells It takes longer to get to the consumer
 Benefits Limitations

well to producer

Huge gap between the manufacturer and the customer

Consumer prices may be higher than direct selling, as

retailers and wholesalers need profit.
A manufacturer hires an agent (person or business) that will sell products on behalf of the manufacturer.
Agent: an independent person or business appointed to deal with sales and distribution of a product or
range of products.

Benefits Limitations

Agents know the most profitable places & prices to sell in Manufacturers lose much control over how
other markets that manufacturers may not know. the product is sold to customers.

Agents will provide advice on the best ways to survive new Higher costs for consumers, as agents will
markets. need compensation for expenses.

Gives the manufacturer some control over the way product

is sold.
Methods of Distribution
E-Commerce
Selling of goods and services through the internet
Benefits to the business Problems to business

Cheaper Website must be maintained

Customers are encouraged to buy in bulk High distribution costs

Business-2-Business e-commerce is cheaper No direct contact

Wider options for customers, brand image and loyalty Returns – higher costs

A stock system will be needed.

Benefits to consumers Problems for consumers

No need to go out Internet needed

Wide options High chances of fraud and theft

Easy Comparison Products can’t be physically examined

 Benefits to consumers Problems for consumers

Payment through net banking No direct contact

Easy access to imported goods

Low prices
Other methods include:
Department stores
Discount stores
Chain stores
Superstores
Independent retailers
Direct sales
Supermarkets
Mail order
Selecting Which Distribution Channel to Use
Type of product
Is it technical?
How often is it purchased?
How expensive is it?
How perishable is it?
Where are customers located?
Where do competitors sell?
Promotion
Promotion: where marketing activities aim to raise awareness of a product or brand by generating sales
and helping create brand loyalty. Includes the following:
Advertisement: Involves ‘above-the-line‘ promotions. Ex. TV, Social media. Newspapers, etc.
Sales Promotion: Involves ‘below-the-line‘ promotions. Used for short periods of time to reinforce the
above-the-line promotions. Ex. Money-off coupons, gifts, product placements in programmes or newly
released films.
Aims of Promotion
To raise awareness about a firm’s products
Encourage customers to make a purchase
Increase sales
Introduce new products in the market
Create brand image
Improve the company’s image
Compete with competitors
Above and Below-the-line Promotion
Above-the-line promotion: involves marketing communication using mass advertising media, such as
television, radio, newspapers and mobile phones, to increase sales
Below-the-line promotion: all other forms, including product placement and endorsements by famous
celebrities, public relations (PR), direct mail, personal selling and sales incentives such as free gifts and
competitions.
Advertising
Advertising: paid-for communication with potential customers about a product to encourage them to
buy it.
There are two types of advertisements:
Informative Advertisement: where advertising or sales promotion emphasises giving complete
information about the product. (i.e. the benefits of the product)
Persuasive Advertisement: advertising or promotion trying to persuade consumers that they need the
product and should buy it.
The advertising process:
Set objectives of advertising to capture new market and increase market share
Decide the advertising budget-predict how much sales will be in the future, and spread a certain
percentage (between 2% to 10%), or set by how competitors are spending, or simply what the business
can afford to spend.
Create an advertising campaign- the target audience and objective must be considered.
Selecting the media to use the target audience will decide the media, how often AD appears, and should
be cost-effective.
Evaluate the effectiveness of the campaign- if sales or brand image improved.
Types of Advertising Media
Television
Examples of suitable products/services are food products/drinks, cars, and household products.
Advantages Disadvantages

It will go out to millions of people. Very expensive

Young consumers often download

It can be shown in a favourable way (Attractive). films/movies and don’t watch many
television programmes.

Reaches the most significant number of consumers and

reaches the target audience by showing AD after specific
programmes.
Radio
Examples of suitable products or services: Local services or events, e.g., local shops or car showrooms.
Advantages Disadvantages

It's cheaper than TV. It cannot be put across as a visual message.

It is pretty expensive compared to other

Reaches a large audience.
methods.

Often, it uses memorable songs or tunes so that the The advert needs to be remembered because
AD can be remembered. there is no hard copy.

It's not as broad an audience as television.

Newspaper
Examples of suitable products or services: Local products and events in the local newspaper.
Advantages Disadvantages

Can be selected to target a particular group Often, it is black and white; therefore, it is not
 Advantages Disadvantages

attractive to the eye.

A large number of people buy/read national Many young People do not read/purchase traditional
newspapers. newspapers.

Local newspapers are cheap and, therefore,

cost-effective.

Adverts are permanent and can be cut and

kept.

A lot of information can be put in the advert.

Magazines
Ex of suitable products/services: Feature in specialist magazines, gold equipment, medical equipment.
Advantages Disadvantages

An effective way to reach the target population is if there are

Published once a month or week.
specialist magazines.

They are more expensive than

Magazine adverts are in colour, thus attractive.
newspapers.
Posters
Ex of suitable products/services: Local events, products purchased by a large population.
Advantages Disadvantages

Permanent It can be easily missed.

Relatively cheap No detailed information can be included

Potentially seen by everyone passing

Cinemas, DVDs, Blu-ray discs:-
Examples of suitable products/services: Coca-Cola (make sure to boycott ;) ).
Advantages Disadvantages

Scene by only a limited number of

Shows visual image of product positively.
people.

Relatively low cost.

It can be effective if the target audience goes to see a

particular film.
Leaflets
Examples of suitable products/services: local events and retail outlets (can contain vouchers).
Advantages Disadvantages

Cheap It may not be read

 Advantages Disadvantages

Give out on the street to a wide Direct mail, also called ‘junk mail,’ can be annoying and prevent
range of people. customers from buying.

Direct mail (delivered door to door)

Sometimes contains money-off-

vouchers.
Internet
For example, suitable products/services are familiar, e.g., books, clothes, electronics—services such as
train information, ticketing, insurance, etc.
Advantages Disadvantages

A large amount of information can be Internet searches may not highlight the website, and it could
placed. be missed.

A vast number of people can see it Some countries have limited access to the internet.

Orders can be made instantly via the

A lot of competition.
website.

Direct mail via email is cheap. Security issues can discourage customers.
Other forms of publicity:
Ex of suitable products/services: shops can use bags as a form of advertising, such as billboards on the
street.
Advantages Disadvantages

Very cheap methods of advertising, e.g. T. Shirt delivery vehicles and bags Customers may not see it in
can be worn, and by walking around, it can be an advertisement itself. the target market.
Sales Promotion
Sales Promotions: when incentives (i.e. special offers/sales) are aimed at consumers to achieve a short-
term increase in sales.
Types of Sales Promotion
Price Reductions
Includes coupons
Linked to loyalty cards
Reduced prices of products at certain times of the year.
Gifts
Small gifts to encourage purchases
The main aim is to get customers to buy at regular intervals
BOGOF (Buy One, Give One Free)
Multiple purchases are encouraged
Competitions
Packaging can allow customers to enter competitions
Encourages sales
High prices
Point of sale display and demonstrations
Place where the product is sold
Special display
After-sales services
For expensive products, good after services encourage consumers to buy their products.
Free samples
Can be handed out to shops to encourage sales
Maybe delivered at home
Product placement
Featured in television programmes, movies or music videos.
It is expensive to pay for placement and can have a negative effect if the image is unattractive to
customers.
Advantages of Sales Promotion
It can be used at the times of year when sales are low.
Encourages new customers to try an existing product.
Encourages customers to try a new product.
Increase customer loyalty by encouraging existing customers to buy in greater quantities.
Encourages customers to buy their product instead of competitors.
Marketing Budget
The marketing budget is the financial plan for marketing a product/brand for a period of time.
When deciding which type of promotion to use, marketing budget is an essential factor
Businesses will need to compare the cost of advertising and the increase in expected sales. Cost-
effectiveness is important.
This is where small businesses struggle compared to big businesses because their budget is much
smaller.
Factors Influencing Type of Promotion
Stage of PLC
Nature of product
Cultural issues involved in international marketing
The media used must depend on the following:
Literacy rate
Poverty rate
Availability of radio and cinema
Nature of target market
Public Relations and Sponsorship
It is concerned with promoting a good image of the brand
Ways to increase public awareness:
Sponsor events linked with good causes
Donate to charities.
All these activities are used to raise the public’s awareness of the company and its product and increase
their chance of choosing their product over competitors.
Technology and Marketing Mix
E-Commerce
It is the ‘online’ buying and selling of goods and services using computer systems linked to the internet
and apps.
Benefits to the business Problems to business

Cheaper Website must be maintained

 Benefits to the business Problems to business

Customers are encouraged to buy in bulk High distribution costs

Business-2-Business e-commerce is cheaper No direct contact

Wider options for customers, brand image and loyalty Returns – higher costs

A stock system will be needed.

Benefits to consumers Problems for consumers

No need to go out Internet needed

Wide options High chances of fraud and theft

Easy Comparison Products can’t be physically examined

Payment through net banking No direct contact

Easy access to imported goods

Low prices
How technology influences the marketing mix:
Social Media Marketing: a form of internet marketing that involves creating and sharing content on
social media networks to achieve marketing goals.
Viral Marketing: when consumers are encouraged to share information online about a business's
product.
Product: may change to respond to new technology.
Promotion: social media marketing and viral marketing can be used to promote.
Price: the internet allows businesses to gather information about customer purchasing habits, which
means dynamic pricing can be used to increase revenue.
Place: The widespread spread of online purchasing and e-commerce. Can create new opportunities.
Use of the Internet and Social Media Network for Promotion
Social media for promotion:
Opportunities for Advertising on Social Media Threats of advertising on social media

It can alienate customers if they find the adverts

Target specific demographic group
annoying.

Businesses have to pay for advertising if using pop-

Guarantee it reaches customers
ups.

Speed in response to market changes:

Lack of control of advertising if used by others.
Information can be uploaded regularly.

Messages may be altered or used badly and

Cheap to use-low cost if placing advertisements.
forwarded to another user, giving bad publicity.

It reaches groups that are difficult to reach any

 Opportunities for Advertising on Social Media Threats of advertising on social media

other way.
Create your own website for promotion:
Opportunities of advertising on the business’s
Threats of advertising on the business’s own website
own website

Potential customers may not see the website, as the

No extra cost after setting up a website.
page may appear in a long results list.

Control of advertising as the website is owned. Relies on customers finding the website.

Can change adverts quickly and update pictures,

The website's design costs can be high.
prices, and so on.

It would need to be constantly updated, and a team

Interactive adverts can be more attractive than
would need to be nearby for any bugs or issues.
magazines or posters.
Which is costly.

Can provide more information in adverts and link

to other pages with further information and
pictures.

Attracts funds and payment from companies who

want to advertise their product on the business’s
site
Marketing Strategy
Marketing Strategy: a plan to combine the right combination of the four elements of the marketing mix
for a product or service to achieve a particular marketing objective
The Marketing Strategy developed depends on the following:
Size of market
Number and size of competitors
Marketing objectives
Target market
Finance available
Marketing objectives may include:
Increasing sales
Improve the existing product
Increasing sales of a new product
Maintaining/ increasing market share
Increasing sales in a niche market
Increase market share/retain market share
For example, A product is made, priced reasonably, and meets the consumer's needs, but no
promotional element exists. No one will buy it because people don’t know about its existence.
Or if a product is made that doesn’t meet consumer needs, it won’t sell regardless of the price set.
It is crucial to have all elements working together to influence consumer decisions (buying the product)
Recommending and justifying a marketing strategy in a given circumstance:-
Important points to include in your answer:
Marketing objective
Marketing budget
Target market
Balanced marketing mix
Legal Controls in Marketing
There are many laws in different countries to protect consumers from businesses taking advantage of
their lack of knowledge or lack of product information
These legal controls include (in the U.K.):
Weights and Measures
Selling underweight items or using inaccurate equipment to weigh goods is illegal.
Sale of Goods
Supplying flawed goods (not up to quality standard).
Product not fit for its intended purpose.
Products which do not perform as described in label or by retailer.
Supply of Goods and Services Act
Service must be provided with skill and care.
Consumer contracts Regulations
A consumer should have a minimum of 7 days cooling period (a consumer should have seven days to
change their mind about the purchase they made)
Trade Descriptions
Supplying a good/ service which is unsafe/ not fit for the purpose is illegal.
Giving false info or misleading claims is illegal
Misleading consumers about the actual price is illegal
Making false claims about special deals and offers is illegal
Offensive or indecent ads are illegal
Complying with all legal controls can raise the total costs of a business by:
Goods/ services may have to be redesigned to ensure quality and safety
Ads may have to be altered
Some promotion techniques may have to be changed
May have to change the packaging
Prices may have to be controlled and altered
Increase employment
Entering New Markets Abroad
The globalisation of businesses has been increasing over the years; there are opportunities & problems
with this:
Opportunities Problems

Growth potential in other countries: countries are Lack of knowledge of competitors or consumer
developing, and population incomes are increasing habits

Markets in the original region might be saturated Cultural differences: for example, alcohol won’t sell
(sales are low) well in the Middle East

Can produce products abroad and learn about its Exchange rates: in some countries, their currency
market to increase sales isn’t stable, so the price of imported goods increase

Trade barriers are lowered in most countries, so it is Transport costs are more expensive
 Opportunities Problems

cheaper to enter markets

Import restrictions - causes price of goods to

increase and sales decrease.

Increased risk of non-payment

However, there are many methods to reduce and overcome the problems of entering a new market:
Problem Method to Overcome

Lack of knowledge Joint-Ventures: by working together/merging with local businesses in the same
(and cultural market, a business will gain a lot of necessary knowledge about the culture & market
Differences) \n Franchising: letting people from the market abroad who have local knowledge to
choose the location of the shop

Transport costs are Licensing: the business permits a local business to sell goods under its name, so they
expensive. do not have to import all the products physically

Cultural Differences Localising Existing Brands: where a business still has the same brand image but
adapts it to the market it is in (i.e. McDonald’s cooking vegetarian meals in India)
Limitations to the methods listed above:
Method Limitation

Joint venture Management conflict between the two businesses. Profit shared.

Licensing Quality problems caused by an inexperienced licensee could damage brand reputation.
Licensee now had access to information about how the product is made - could develop
a better version and become a competitor.

International Quality problems or poor service offered by franchisees could damage brand image.
franchising Training and support will need to be provided by the franchisor.

Localising May be less successful than a new product made to meet local cultures and market
existing brands conditions. Expensive to change packaging, promotion, and so on for each market the
product is sold.
Operations Management
Production of Goods and Services
Production Process

Production: making a product or service to satisfy consumer wants and needs.

The factors of production or ‘inputs’ include:
Land – For factories or materials
Labour – Employees
Capital – Money/finance
Enterprise – Managers
A business combines these inputs to produce a more valuable output (this is added value).
Labour-Intensive Production: A larger workforce is used than machinery to make goods. Usually done in
countries with low wages so that it is more efficient (ex: SHEIN).
Capital-Intensive Production: businesses use machinery rather than workers. Usually done in developed
countries where the wages are high.
Operations Department
The operations department’s role is to transform inputs into outputs for consumers.
An operations manager ensures raw materials are available and made into finished goods.
Most manufacturing businesses have:
Factory Manager - responsible for quality and quantity of products
Purchasing Manager – responsible for providing the required materials and equipment
Research and Development Manager – responsible for design and training of employees for new
products
In the retail business, the factory manager will be replaced by the managers for the shop.
In service businesses, e.g. Restaurants, the operation department will include managers for each shop.
Productivity
Productivity: a way of measuring a business’s efficiency.
Note: Production is the making of the product, while productivity is how efficiently the product is made.
Productivity=Quantity of outputQuantity of inputProductivity=Quantity of inputQuantity of output
Labour Productivity=outputno. of employeesLabour Productivity=no. of employeesoutput
As employees become productive, per-employee output rises, and costs of production fall
Many ways to increase productivity:
Improve factory layout to reduce time waste and raise efficiency
Introduce automation
Improve labour skills by training
Improve quality control
Improve employee motivation
Improve inventory control
Benefits of increasing efficiency:
More output compared to inputs.
Lower costs per unit (and therefore lower average cost)
For example, if the business has a limited workforce, raising their wages will increase motivation and,
therefore, also increase productivity.
Inventory
Inventory can take various forms. Inventory includes:
Raw materials
Work in progress goods
Finished goods
Why do businesses hold inventory?
To ensure enough inventory is available to satisfy sudden changes in demand.
Production and opportunity costs will also be high if inventory levels are high.
Inventories can be managed:
The business buys in inventory to fill its holding capacity, known as the maximum inventory level.
As resources are depleted, inventory levels drop. At this stage, reorders will be made so it reaches the
business in time before it runs out.
Buffer Inventory Level: inventory held to deal with uncertainty in customer demand and deliveries of
supplies.
Lean Production
Lean Production: various techniques to cut down waste and raise efficiency.
Types of Waste:
Transportation - when the goods are being moved unnecessarily → fuel price, chance goods may get
damaged
Overproduction - leads to high storage costs and possible damage to goods while in storage.
Overprocessing - when sophisticated machines are being used to do simple tasks
Waiting - when goods are not moving or being processed, waste occurs due to inefficiency
Motion - any action made by an employee that does not relate to the production of goods, wastes time
Unnecessary inventory
Defects - when goods have faults/defects that require them to be inspected/fixed, wastes time
Advantages of lean production
Less storage costs
Quicker production
Better use of equipment
Less money tied up in inventory
Speed up production by cutting out processes
Improved health and safety lead to less time off work due to injuries.
No need to repair defects or provide replacement services for a dissatisfied customer.
All these save/reduce costs that lead to lower customer prices and increased business competitiveness
and profit.
Types of Lean Production
Kaizen
Just-in-time inventory (JIT)
Cell production
Kaizen
Kaizen means continuous improvement in Japanese
Its primary focus is to eliminate waste
Ideas are thought of by holding frequent meetings with workers to discuss problems and possible
solutions.
Advantages:
High productivity
Less space needed for production
Work in progress is low
Improved layout of the factory may lead to combining jobs. This will reduce labour demand.
Just in Time
A production method that reduces or virtually eliminates the need to hold inventories of raw materials
or unsold inventories of the finished product.
Advantages:
All this reduces the costs of holding inventory.
‘Warehouse‘ space is not needed, reducing costs.
The finished product is sold quickly, so money will return to business quickly. Helping cash flow.
However, to operate in JIT, businesses need to have reliable suppliers and an efficient ordering system. If
suppliers are late, it can disrupt the system.
Cell Production
This is where the production process is divided into separate units, each making an identifiable part of
the good
Advantages:
High motivation due to improved morale of employees.
More production efficiency.
Employees feel more valued and are less likely to strike or cause disruption.
Methods of Production
3 Main Methods of Production:
Job Production: products made one at a time
Batch Production: a quantity (batch) of a product is made, then a batch of another product is made
Flow Production (mass): large quantity of products made in a continuous process
Job Production:
Features Benefits Limitations

Products are made specifically Good for ‘one-off’ products Often labour-intensive, expensive as
for the customer’s order highly skilled workers are needed

Each order is different Meets the exact Production takes longer

requirements of the
customer

E.g. bridges, ships, cakes, Varied work increases Any errors made are expensive to fix
cinema, films, suits employee motivation

Ability to charge higher Materials are more expensive.

prices

No possibility of purchasing economies

of scale
Batch Production:
 Features Benefits Limitations

A similar range of products is made in Flexible work can change Machines must be reset to
batches products easily do different batches

Ex. bakery: makes one type of bread, Gives some variety to worker’s Semifinished products may
then one type of cake and each product jobs need to be transported
is produced in stages or batches. around (+ cost)

More variety, more consumer Need space for stocks of raw

choice material (high storage costs)

Production may not be affected High work-in-progress

to any grant extent if the inventory
machine breaks down.

Expensive and time-taking

Flow Production:
Features Benefits Limitations

Large quantities of a product High output, capital intensive, It is very boring for employees,
are produced. more efficient. leading to decreased motivation
over time.

Cars, drinks, electronics, and Costs are low, therefore low High cost of inventory of output
mass-made products are made prices, leading to high sales. & raw materials.
this way.

It requires only relatively unskilled Capital costs for setting up

workers and some training, maybe production are very high.
needed.

There is no need for moving goods If one machine breaks down, the
around (all made in the same whole production stops.
place).

Automated production lines can

operate 24*7.

Benefit from economies of scale.

Factors influencing which production method to choose:
Nature of Product - if unique or individual service, job production can be used.
Size of Market - if demand increases and more products can be sold but not in large quantities, batch
production will be used. International market, flow production.
Nature of Demand - if large and fairly steady demand, e.g. soap powder flow production, can be used.
The size of the Business - if the business is small and doesn’t have access to large funds, job production
can be used.
Technology in Production Methods
Automation: Equipment in a factory is controlled by a computer to perform mechanical processes (i.e.,
painting a car). Only workers are to ensure it runs smoothly.
Mechanisation: production is done by machines but operated by people. Used to do difficult, precise or
dangerous tasks. Work 24/7, quicker and more accurate.
Computer-Aided Design (CAD): software that helps design or re-style products quickly, allows technical
sketches to be very detailed
Computer-Aided Manufacture (CAM): when computers monitor production and control machines/robots
Computer-Integrated Manufacturing (CIM): when software that designs the products is integrated with
the machines that produce (CAM + CAD).
Electronic Payment Methods
EPOS (Electronic Point of Sale): used at checkouts, where barcodes are scanned and displayed on the
receipt. The inventory is automatically changed and reordered when the reorder level is reached.
EFTPOS (Electronic Funds Transfer Point of Sale): it is where an electronic cash register is connected to
the retailer’s bank accounts, and the money is directly transferred when the shopper’s bank info is
entered.
Contactless Payment: works by the contactless device having an antenna; when touched against a
contactless terminal, it securely transmits intervention about the purchase. e.g. credit cards, key fobs,
mobile devices, etc.
Advantages of Use of Technology Disadvantages of Use of Technology

Productivity is greater as new, more effective methods are Unemployment could rise.
used, reducing average costs.

Greater job satisfaction stimulates workers. It is expensive to invest in new technology;

this increases the risk as more products
would need to be sold to cover the cost.

More skilled workers may be needed to use and maintain Employees may be unhappy with the change.
the new technology. Therefore, motivation and work
quality will increase as training is provided to existing
employees.

Better quality products New technology is constantly changing and

becoming outdated quickly; thus, businesses
must replace technology to remain
competitive.

Quick communication and reduced paperwork, increasing

profitability.

The use of IT is much greater and results in better and

quicker decision-making.

New ‘high-tech’ products are introduced as technology

 Advantages of Use of Technology Disadvantages of Use of Technology

makes completely new products available.

Costs and Scale of Production
Business Costs
Fixed Costs (overheads)
Costs that do not change with output in the short run.
Also known as overheads or indirect costs
Fixed Cost = Total cost – Variable cost
Examples of Fixed Costs:
Rent of factory: even if you produce lots of products, the rent price will be the same
Insurance: you set the insurance cost beforehand
Bank fees: bank fees are a set price; they don’t change depending on the products produced
Management Salaries: they are set regardless of production
Staff cost (Security)
Variable Costs (VC)
Costs which vary directly with output
Also known as direct costs
Variable cost = Total cost – Fixed cost
Examples of Variable Cost:
Raw materials: the more you produce, the more materials you need
Electricity & Gas: Energy is paid by use. If you are producing more, more electricity is being used
Shipping cost: Making more products means you have to ship more items, and shipping is paid by weight
Total Cost: Fixed and variable costs combined.
Formula 1: Fixed cost + Variable cost.
Formula 2: Average cost per unit × output
Average Cost (Per Unit): total cost of production divided by the total output. Referred to as Unit Cost.
Formula for Average cost=Total cost of productionTotal outputFormula for Average cost=Total outputTota
l cost of production
Usage of Cost Data
Helps manager set prices
Deciding whether to stop production or continue.
Deciding the best location.
It helps managers to make decisions.
It is needed to calculate profit and loss.
Economies of Scale (EOS)
Economies of Scale (EOS): the factors that reduce average costs as a business grows.
Types of economies of scale:
Purchasing Economies
When a business buys in bulk, it tends to receive discounts, decreasing the price of each good.
Marketing & Selling Economies
When the company advertises for goods, it will pay the same amount to advertise a greater number.
Therefore, when marketing for a higher output, unit costs fall, decreasing ATC.
Financial Economies
Banks tend to lend to larger companies with low-interest rates, as they borrow high amounts and their
collateral value is high.
Managerial Economies
Large firms have opportunities to employ specialists who will help reduce wastage and increase
efficiency and productivity.
Technical Economies
More capital to invest in newer, more efficient technology and specialist equipment.
Diseconomies of Scale (DEOS)
Diseconomies of Scale (DEOS): the factors that lead to an increase in average costs as the business grows
beyond a specific size.
Types of diseconomies of scale:
Poor communication
Lack of commitment from employees
Large businesses have many employees, and not everyone is connected to the top management,
reducing their motivation levels.
Slow decision-making & weak coordination
Large businesses have longer chains of command, so information and instructions take longer to reach
the desired person, slowing communication and decision-making.
Break-Even Analysis
Break-Even Level of Output: the quantity that must be produced/sold for total revenue to equal total
costs. (also known as break-even point).
Break-Even Charts: a graph showing how the costs and revenues of a business change with sales. They
show the level of sales the business must make to break even.
Revenue: the income during a period of time from sales of goods.
Total Revenue = Quantity sold × Price.
Break-Even Point: the level of sale at which total costs = total revenue. The point where they intersect in
the graph.
The break-even point, the calculation method:
Contribution: selling price less its variable cost.
Contribution per unit: Selling price – Variable cost.
Break-even level of production=Total fixed costsContribution per unitBreak-even level of production=Con
tribution per unitTotal fixed costs
An example of a Break-even chart:

Sales($)= 0 units Sales($)= 1000 units Sales($)= 2000 units

Fixed costs 5000 5000 5000

 Sales($)= 0 units Sales($)= 1000 units Sales($)= 2000 units

Variable 0 3000 (1000x$3) 6000 (2000x$3)

Total costs 5000 8000 (3000+5000) 11000 (5000+6000)

Revenue 0 8000 (1000x8) 16000 (2000x8)

To draw a break-even chart, you must include:
Fixed Costs line
Variable Costs line
Total Costs line
Sales Revenue line
The shaded area that can be seen, labelled with ‘Area of loss‘, shows how the sales revenue line is below
the Total cost line, indicating that anything before the break-even point is a loss.
The shaded area that can be seen, labelled with ‘Area of profit’, shows how the sales revenue line
exceeded the Total cost line, indicating anything after the break-even (BE) point is a profit.
‘y’ axis measures money amounts (cost & revenue)
The ‘x’ axis shows the number of units produced or sold
Benefits of break-even charts:
Managers can read off the graph if the company expects profit or loss and can see how much profit/loss
they will have at any level of output
They can attempt different scenarios and see the impact it will have on the profit or loss of the business.
It lets managers try out different possibilities to determine which is the best. (i.e. increasing the selling
price, increasing production)
It can show the SAFETY MARGIN – the number of sales exceeds the break-even point. For example, if a
business’ break-even point is at 1000 units, and they’re producing 1500 units, their safety margin is 1500
– 1000 = 500.
Limitations of Break-even Charts:
Break-even charts assume that all products made will be sold. It does not show the possibility that
inventories may build up if they are not sold
Fixed costs only stay the same if the scale of production stays the same (doubling the output will also
increase the fixed cost because they must need a bigger factory, more machinery, labour, etc.)
Break-even charts assume that costs and revenues can be drawn with straight lines, which doesn’t
happen in real life.
It assumes costs and revenue increase at a constant rate.
Achieving Quality Production
Quality: to produce a good or a service which meets customer expectations.
Quality is important for businesses because:
It establishes the brand image
It builds brand loyalty
It maintains a good reputation
It will help to increase sales
Attracts more new customers
If quality is not maintained, businesses will:
Lose customers to other brands/competitors
Have to replace faulty products or repeat poor service, which raises costs for business
They have a bad reputation because people with bad experiences will tell others, etc. This leads to lower
sales & revenue.
Quality Control
Quality Control: Check for quality, whether a product or service, at the end of the production process.
Quality control is a traditional way to ensure that products leave the factories without defects.
Quality inspectors’ job is to maintain/check quality regularly for errors.
The whole production batch might have to be redone if errors are found.
Their job is also to prevent any production errors before they happen during production, which will lead
to money loss.
Advantages of Quality Control Drawbacks of Quality Control

Eliminates faults/errors before the customer It is expensive, as employees need to be paid to check the
receives a product or service. product or service.

Less training is required for the workers. Identifies the fault but not how and why it occurred, so it
is difficult to remove the problem.

Increased costs if products have to be scrapped or

reworked or service repeated.
Quality Assurance
Quality Assurance: checking for the quality standards throughout the production process.
Businesses will ensure quality standards are set, and then employees will apply these standards
throughout the business.
Advantages of Quality Assurance Drawbacks of Quality Assurance

Eliminates faults/errors before the customer receives It is expensive to train employees to check
a product or service. products.

Fewer customer complaints. Relies on employees following instructions of the

standards set by the business.

Reduced costs if products don’t have to be scrapped

or reworked or service repeated.
Total Quality Management (TQM)
Total Quality Management (TQM): the continuous improvement of products and processes by focusing
on quality at every stage of production
Many companies use total quality management.
It tries to “get it right the first time” and has no defects
It focuses on ensuring 100% that the customer is always satisfied. The customer is not just the final user;
it also includes other people and departments within the business
Quality must be maintained throughout the business, and no faults should occur.
Advantages of total quality management Drawbacks of Total Quality
Management

Quality is built into each part of the production. It becomes a habit It is expensive to train all employees.
 Advantages of total quality management Drawbacks of Total Quality
Management

for the employees.

Eliminates virtually all faults/errors before the customers receive Relies on employees following the
them. ideology of TQM.

No customer complaints, so the brand image is improved.

Waste is removed, and efficiency increases, which means less

money is wasted (higher profits).
Customers can be assured of quality products/services
Businesses may apply a quality mark but will have to follow certain rules. This mark, e.g. ISO, makes sure
products meet a particular standard.
For service businesses, recommendations from satisfied customers can be heard or read from online
sites, where bad and good reviews can be shown.
Location Decisions
Businesses look for locations when:
New business
The present location is unsatisfactory
Change in business aims and objectives
Expansion
Factors that influence the choice of location of a MANUFACTURING business:
Production methods and location decisions
Production methods play a significant role in deciding the location of a business.
Job Production: the business will be small and won’t have much effect on competitors there. The
location of suppliers won’t affect much on the business. Ex. A small jewellery business.
If there is large-scale production, then competitors in that area will be highly affected, and the business
will prefer closer suppliers as raw materials will be huge. Transportation costs may be high if the supplier
is too far.
Market
When a product is heavier than its raw materials, businesses decide to locate its factory near the
markets rather than the supplier, as a business will find it much cheaper due to transportation costs.
Due to advances in transportation facilities, the distances between factories and markets of heavy
products don’t play a vital role.
Perishable products need to be delivered quickly.
Raw Materials/Components
Transportation costs will be high if goods and raw materials are very heavy. Then, a company may want
its factory to be located near the supplier.
External economies of scale
When two firms support each other or work together, they will be able to respond quickly to any
important decisions to be made or any breakdowns.
Availability of Labour
Every manufacturing business requires labour.
If a business requires only skilled labour, it will try to locate near a place where people with various skills
live.
If a business requires unskilled labour, it will be located where wage rates are low and unemployment is
high.
Government Influence
When a government wants to encourage businesses to locate in a particular area, it will offer state–
funded grants to encourage firms to move there.
High unemployed areas may provide grants to businesses to locate there.
Transport and Communication
Businesses need to be closer to transport systems.
Exported products, ability to reduce transport costs.
Reduces time taken.
Power and water supply
Availability of power is very important.
Some businesses need to have reliable power sources to continue production.
Some production processes require a reliable water source.
Climate
Factors that influence the choice of location of a SERVICE SECTOR business:
Customers
Services which require direct contact, must be located near the customers.
Services where personal contact isn’t required, location doesn’t affect.
Technology
Technology has allowed e-commerce, so location doesn’t play a vital role.
Personal preference of owners.
Availability of labour
If a business is labour-intensive, it must be located where labour is easily found, like towns and cities.
Climate
Near to other businesses
Some services/ businesses serve large companies and so should be able to reach them immediately;
therefore, they must located closer to them.
Rent/ taxes
If services don’t require personal contact, they can be located in places with lower rents and tax rates.
Factors that influence the choice of location of a RETAILING business:
Shoppers
Retailers want popular areas as they attract customers.
It depends on the type of product.
Expensive – a place where high-income people live or visit regularly.
Nearby shops
Being located near a frequently visited shop means people may shop in between while visiting other
shops.
A place with high competition attracts more customers as they have greater choice.
Customer parking availability/ nearby
Convenient and nearby parking lots will encourage people to visit your shop.
Availability of suitable vacant premises
If a proper location isn’t available, a company can’t locate there.
Access to the delivery vehicle
Businesses try to find places near transport businesses to gain easy access to delivery vehicles.
Rent/ taxes
Popular area, high demand, and high rent.
Less popular, low demand, low rent.
Security
A place prone to theft may reduce a business’s chances to locate there.
Insurance companies may not insure such companies.
Legislation
Some countries may have laws restricting trade in some parts.
Factors influencing the decision of which country to locate operations in:
New market overseas - when a business sees an increase in sales overseas, it may decide to
move/relocate there instead of transporting products there.
Cheaper Source of material – if the raw material runs out, the business must either bring in alternative
supplies from somewhere else or relocate to a new country with these raw materials, it also might be
cheaper than transporting it.
Difficulties with the labour force and wage costs – if the business is located in a country where wages
keep rising, it may be more profitable to relocate to a country with lower wages.
Rents/taxes considerations – if other costs such as rent or taxes increase, this might cause businesses to
relocate to countries where it is lower.
Availability of government grants and other incentives - If governments want to increase foreign
investment and job opportunities, they will provide grants, subsidies, and lower taxes. They may do this
to provide new skills and increase employment.
Trade and tariff barriers – If trade barriers are high, the business’s chance of locating there would reduce
costs.
The Role of Legal Controls on Location Decisions
Reasons the government influences these location decisions:
To encourage businesses to set up and expand in areas of high unemployment.
To discourage firms from locating in overcrowded areas or on sites with natural beauty.
Two types of measures used by the government to influence where firms are located:
Planning regulations (legally restrict business activity from certain areas).
Government grants or subsidies encourage them to locate in undeveloped areas.
Financial Information and Decisions
Why does a Business Need Finance?
Finance: money that is needed to meet the expenses of a business. This is known as capital.
Capital is needed for:
Starting up a business
Expansion
Increasing working capital
Capital Expenditure: money spent on non–current assets.
Revenue Expenditure: money spent on day-to-day, recurring expenses.
The Responsibilities of the Finance Department
Recording all financial transactions
Prepare final accounts
Cash flow forecast
Make important decisions
Provide info to managers
Sources of Finance
The primary sources of capital include:
Internal Sources: Obtained from within the business itself.
External Sources: Obtained from outside and separate from the business.
Internal Sources of Finance
Retained Profits: Net profits minus dividends paid to shareholders
 Advantages Disadvantages

It does not have to be repaid. The new business will not have any.

It doesn’t incur interest. Small firms’ retained profit may be low to finance the expansion.

Reduces payment to owners, e.g., dividends for shareholders.

Sale of Existing Assets
Advantages Disadvantages

It can take time to sell the assets, and the amount may not be the
Better use of unwanted capital
same as when purchased.

Doesn’t increase the debts of a

Source of finance not available for new businesses.
business
Sale of Inventories
Advantages Disadvantages

Reduces opportunity cost. It may disappoint customers if a sudden change in demand is not met.

Reduces storage costs.

Owner’s Savings
Advantages Disadvantages

Quick availability Savings may be low

No interest is paid Increases risks for owners, as they might have unlimited liability.
External Sources of Finance
Issue of Shares: Sale of business shares (only for limited companies)
Advantages Disadvantages

A permanent source of capital Dividends are paid after tax.

It doesn’t need to be paid back Shareholders expect dividends.

No interest Ownership will change if many shares are sold.

Bank Loans: A sum of money from a bank repaid with interest.
Advantages Disadvantages

Quick, easy to arrange Must be repaid with interest

Security or collateral security must be

Available for varying lengths of time.
given

Large companies receive low-interest rates if large sums are

taken.
Selling Debentures
Debentures are certificates issued to a debenture holder for the money they lent, which must be repaid
within 20 – 25 years.
Advantages Disadvantages

Long term finance Loans must be repaid, and interest must be paid.
Debt Factoring
Debt factors are specialist agencies that buy the claims of debtors of firms for immediate cash.
Advantages Disadvantages

The firm doesn’t receive 100%

Availability of immediate cash
amount

The risk of collecting the debtors becomes the factor, not the
business’s.
Grants and Subsidies
Advantages Disadvantages

Don’t have to be repaid Given with strings attached

Microfinance
Providing financial services to poor people not secured by traditional banking.
Advantages Disadvantages

Small loans can be obtained by start-ups (especially if it’s by simple people) High-interest rates

Greater risk for the lender

Crowdfunding
Funding a project or venture by raising money from numerous people who each contribute a relatively
small amount.
Advantages Disadvantages

Crowdfunding platforms may reject the

It's a fast way to raise a substantial sum.
proposal if it is not done well.

No initial fees are payable to the platform; only If the total amount is not raised, money
when the goal is reached a % will be taken. invented by others will have to be repaid.

It allows public opinion to be heard to see if the Media interest and publicity are needed for a
idea is good. chance of success.

It is often used by entrepreneurs when other

Competitors could steal the idea.
traditional methods are not available.
Short vs. Long-term Sources
Short-term finance (shortage of cash in the short term can be overcome in 3 ways):
Overdrafts
 Advantages Disadvantages

‘Overdraw‘ (spend more money than is currently in the Interest rates are variable (vary from each
account) overdraw)

The bank can ask for the overdraft to be paid

Flexible form of borrowing
quickly.

Interest will be paid only in the amount overdrawn.

Overdrafts are cheaper than short-term loans.

Trade Credit
It is when businesses delay payments to suppliers
Advantages Disadvantages

Almost an interest-free loan May not provide discounts

Reduces cash outflows in the short run

Factoring of Debt
Long-Term (Loans Available for More than a Year)
Bank Loans
They are payable over a fixed period
Hire Purchase
It allows a business to buy a fixed asset over a long period with monthly payments, including interest.
Advantages Disadvantages

Doesn’t have to find a large cash sum to purchase the A cash deposit is paid at the start of the
asset month

High-interest rates
Leasing
It allows a firm to use an asset by paying regular instalments instead of purchasing it outright. The firm
pays an agreed amount over a period of time to lease the property or asset.
Advantages Disadvantages

Doesn’t have to find a large cash sum to The total cost of leasing changes will be higher than
purchase the asset purchasing the asset.

Maintenance is taken care of by the leasing

company.
Issue of Shares
Only available to limited companies
Debentures
Long-term Loans or Debt Finance - this is different from share capital:
Loan interest is paid before tax and is an expense.
Loan interest must be paid every year.
The loan must be repaid.
Often ‘secured‘ against particular assets.
Factors When Choosing the Source of Finance
The main factors considered in making the financial choice:
Size of business & Legal Form (type of business): Public limited companies have a larger choice of
sources of finance because they pay less interest (less risk).
Amount of Capital Required: if you need just a little money, you won’t issue new shares.
Purpose of Capital & Time Period: The general rule is that the finance source should match the financial
need:
If the use of capital is long-term, the source should be long-term (same with short-term).
Existing Loans (risk and gearing ratio): If a business has already taken out many loans, banks will think it
is too risky to finance.
Gearing: measures the proportion of total capital raised from long-term loans.
Common Reasons The Banks Refuse to Loan to Small Businesses
Weak cash flow
Lack of security or collateral.
Poor preparation by the business owner when applying for the loan.
Banks Need These to Lend
Cashflow forecast
Business plan
Collateral/security
Forecast income statement available
Cash-Flow Forecasting and Working Capital
Cash is a Liquid Asset: it can be immediately available to spend on goods & services.
Cash Flow: the cash inflows (money received by business) & outflows (money paid) over some time.
Cash Inflow: money coming into the business.
Sale of goods
Sale of assets
Payments by debtors
Borrowing money
Investors
Cash Outflow: money going out of the business.
Purchase of goods
Purchase of non-current assets
Payments of salaries
Repaying loans
Trade payables
Cash Flow Cycle
It shows the stages between paying out cash and receiving cash.
Cash outflow to pay for materials, rent, etc.
Goods produced
Goods sold
Cash payment received for goods sold (cash inflow)
The longer it takes for the cash flow cycle to be completed, the greater the working capital.
Cash flow is not the same as profit.
Profit consists of goods sold on credit, whereas cash flow is a business's cash sales in a month.
When profitable businesses run out of cash, it is known as insolvency
Due to:
Over-trading
Long credit time
Less credit time received
Many fixed assets purchased
Cash Flow Forecast
Cash-Flow Forecast: an estimate of a business's future cash inflows and outflows on a month-by-month
basis. Shows the expected cash balance at the end.
Closing Cash Balance: the amount the business holds at the end of each month.
Opening Cash Balance: the amount the business holds at the start of each month.
Net Cash Flow: The difference between the cash inflow and outflow (inflow – outflow)
January February March

Opening bank balance (A) 10,000 15,000 (5,000)

Cash inflow (B) 35,000 45,000 50,000

Cash outflows (C) 30,000 65,000 40,000

Net cash flow (D=B-C) 5,000 (20,000) 10,000

Closing bank balance (=A+D) 15,000 (5,000) 5,000

Uses of Cash Flow Forecast
Starting up a business
The first few months are crucial to every business, as owners don’t realise the amount of cash needed,
which is why they fail.
Businesses need to spend on labour, land, and capital. They even have to advertise and promote
extensively.
Many owners don’t understand the importance of cash flow in a business, so they fail.
Keeping the bank manager informed
A cash flow forecast will help a business receive a loan.
The bank manager needs to know when the amount is needed, for how long, and when it will be repaid.
Managing an existing business
Managing cash flow
Businesses with high bank balances can use their cash effectively in other areas.
How do you Overcome Cash Flow Problems?
Short Term Solutions
Increasing bank loans will inject more cash into the business, but interest and loan must be paid.
Delaying payments to suppliers will decrease cash outflows in the short run, but suppliers may refuse to
provide discounts or supply.
Reducing credit periods may help a business increase short-term cash inflows, but customers may switch
to competitors.
Delaying the purchase of fixed assets will reduce cash outflows, but in the long run, a company may lack
efficiency as they don’t have up–to–date technology.
Long Term Solutions
Attracting new investors
Cutting costs and increasing efficiency using lean production.
Develop new products
Working Capital
In the short run, it is the capital available to a business to pay for day–to–day expenses.
Working Capital = Current Assets – Current Liabilities
Working capital can be in the form of:
Cash
Value of debtors
Value of inventory
Working capital should be handled properly because it shows investors & banks how efficient a business
is and its financial strength.
Income Statements
Accounts: the financial records of a firm’s transactions.
Accountants: professionally qualified people who are responsible for keeping accurate accounts and
producing final accounts.
Final Accounts: These are produced at the end of the financial year and give details about the profit/ loss
made over the year and the worth of the business.
The simple equation for profit:
Profit = Sales revenue – total costs
Profit can be increased through:
Increasing the sales revenue so that it is higher than the production costs.
Reducing the production costs.
A combination of the two.
Importance of Profits
Importance for Private Sectors:
Reward for enterprise
Entrepreneurs have special qualities, and they must earn rewards for that.
Reward for risk-taking
Shareholders/investors/owners take risks when they provide capital; profits reward those risks.
Payments act as incentives to invest more and make the business profitable
Source of Finance
Profits after payments can be used to fund expansion
Indicator of Success
Profits show that investing can be profitable, but losses show that investment must not be made.
However, Profit ≠ Cash as profit is derived from revenue, but cash can be derived from many places (e.g.
selling assets like cars).
Importance of profit to the public sector:
Used as a source of finance to develop the state-owned business or be more efficient.
Importance of profit to social enterprise:
Balance profit-making with their aims, as profit is used for the firm's survival.
Understanding Income Statements
Income Statement: a financial statement that records the income of a business and all costs incurred to
earn that income over some time.
Managers, banks and other investors will use it to see if a business is making a profit:
To compare with previous years - if it is greater than the year before
To compare to competitors
The main features of an income statement include:
Revenue: the income to a business from the sales of goods and services.
Equation: Units sold x Price per unit
Costs of Sales: the cost of production or buying the goods the business sells during a period.
Equation: Opening inventories + Purchases – Closing inventories
Gross Profit: the profit made in revenue is greater than the cost of sales.
Equation: Revenue – Cost of sales
Trading Account: shows how gross profit is calculated.
Net Profit: the profit the business makes after deducting all costs.
Equation: Gross profit – Overhead costs (Fixed costs)
Depreciation: the fall in the value of a fixed asset over time.
Retained Profit: the net profit, after taking away taxes and payments to owners – which is reinvested into
the business.
Limited companies will have in their income statements:
Corporation tax is paid from net profit.
Dividends paid to shareholders.
Retain profit after these two deductions.
Results from the previous year will allow for easy comparisons.
Example of Income Statement
2018 2017

Revenue $1250 $1300

Cost of sales – $900 – $900

Gross profit $350 $400

Expenses, including interest paid – $155 – $160

Net profit $195 $240

Corporation tax – $35 – $40

Profit after tax $160 $200

Dividends – $120 – $130

Retained profit for the year $40 $70

Uses of income statement:
Know the profit/loss made.
Compare their performance.
Profitability of individual products.
Products to launch.
Statement of Financial Position
Statement of Financial Position – a document that shows the value of the business’s assets and liabilities
at a time.
Assets: Items of value owned by a business.
Current Assets: (Short-term Assets) Items owned by the business for less than 1 year, i.e. Raw material,
cash.
Non-Current Assets: (Long-term Assets) Items owned by a business for more than 1 year, i.e. Buildings,
land, company cars.
Liabilities: debts owed by the business.
Current Liabilities: (Short Term Liabilities) Debts owed by business for less than 1 year, i.e. bank
overdrafts and wages.
Non-current liabilities: (Long-term Liabilities) debts owed by a business for more than 1 year, i.e., long-
term bank loans and creditors (money the business owes to suppliers).
The Total Equity (AKA Shareholders’ funds) is how much a business is worth. (only for limited
companies).
Shareholders’ Funds = Total Assets – Total Liabilities
The shareholders’ funds are the total money invested in a business by the shareholders/owners.
This money can be invested by either share capital or reserves (Retained profit and loss).
If the total equity of a business has increased/fallen, the shareholder’s stake in the company will be
worth more/less, respectively.
Example of Statement of Financial Position
Assets 2018 ($00) 2017 ($00)

Non-current (fixed assets):

Land and buildings 450 440

Machinery 700 $600

1150 1040

Current assets:

Inventories 80 50

Account receivables (debtors) 50 60

Cash 10 15

140 125

Total Assets 1290 1165

Liabilities:-

Current liabilities:

Account payables (Creditors) 65 40

Bank Overdraft 65 60

130 100

Non-Current liabilities:

long-term bank loans 300 245

 Assets 2018 ($00) 2017 ($00)

Total Liabilities 430 345

Total Assets - Total Liabilities 860 820

Share capital 520 500

Profit and loss reserves 340 320

Total Shareholders’ funds/equity 860 820

Interpreting Balance Sheets
Shareholders can see the value of their stake
Shareholders can also analyse how expansion has been paid for by long-term loans, retained profit, or
increased share capital (sales of shares).
You can calculate the Working Capital.
Working Capital = Current Assets - Current Liabilities
You can also calculate the Capital Employed – the long-term and permanent capital invested in a
business.
Capital Employed = Non-Current Liabilities + Total Equity
Alternative Formula
Return on capital employed (ROCE) = 100 X Profit before tax/ capital employed Where Capital employed
= Non-current liabilities + Shareholders fund = Total assets – Current liabilities
Analysis of Accounts
Analysis of Accounts: using data in the accounts to make useful observations about a business's
performance and financial strength.
Used to compare results from other years and other businesses.
Liquidity: the ability of a business to pay back its short-term loans (debt).
Illiquid: assets that are not readily convertible into cash.
Profitability: the measurement of the profit made relative to either sales achieved or the capital invested
in the business. Also, a measure of efficiency.
There are 2 types of ratios:
Profitability Ratios – how profitable a business is
Liquidity Ratios – how able a business is to pay its short-term debts (current liabilities)
Profitability Ratios:
Gross Profit Margin (%): how well a company converts sales into gross profit.
Gross Profit Margin=100×Gross ProfitSales RevenueGross Profit Margin=100×Sales RevenueGross Profit
Shows the percentage of gross profit per $1 worth of goods. If the following year's profit increases,
either the price increases or the cost of sales is reduced.
Net Profit Margin (%): how well a company converts sales into net profit.
Net Profit Margin=100×Net ProfitSales RevenueNet Profit Margin=100×Sales RevenueNet Profit
Shows the net profit made on each $1 Worth of sales. The higher the results, the more net profit is
gained from the sales.
Return on capital employed: how profitable a company is compared to the money used.
ROCE=100×Operating ProfitCapital EmployedROCE=100×Capital EmployedOperating Profit
The percentage of how much profit you have to earn from the capital employed. The higher the %, the
more efficient the business is with its capital employed.
One profitability ratio isn’t helpful by itself. You need to use all the profitability ratios and compare them
with previous years of the business.
Liquidity Ratios:
Current Ratio: how good a company is to pay off its current liabilities with its current assets.
Current Ratio=Current-AssetsCurrent-LiabilitiesCurrent Ratio=Current-LiabilitiesCurrent-Assets
Shows whether the business has enough current-term assets to pay off short-term debts; if less than 1
means the business does not have money, 1 is when a business can exactly pay debts, and when more
than 2 means it has excessive assets that could be put to use.
Acid Test Ratio: measures the ability of a company to pay off its liabilities without depending on the
inventory sales.
Acid Test Ratio=Current assets-inventoriesCurrent-liabilitiesAcid Test Ratio=Current-liabilitiesCurrent asse
ts-inventories
The acid ratio considers only the liquid assets of the business, not the inventories. The uses as the
current ratio.
Users of Accounting Information
Managers
They will help them keep control over the performance of each product.
Help decision-making
Ratios are a quick way for managers to compare their ratios with other businesses and previous
accounts.
Shareholders
Shareholders and potential investors want to know how big a profit/ loss the company has made.
They will want to check the profitability and liquidity ratios and decide whether shareholders have to
buy more shares.
Creditors/Trade Payable
Liquidity ratios indicate the ability of the company to pay back its debts.
Banks
Risk of illiquid, no lending.
Government
To check the tax revenue, whether the firms are paying the right taxes.
Workers and trade unions
They just want to assess whether the company's future is secure.
Access the profits to help unions improve wages and working conditions of employees.
Other businesses – competitors
The managers will compare their profitability and liquidity with other businesses.
Limitations of Accounting Records and Ratio Analysis
Managers have access to all account data; external users only have what the business requires to show
by the law.
Ratios are based on past accounting data and can not be used to forecast future business performance.
Accounting data over time will be affected by inflation, and comparisons can be misleading.
Different companies may use different ways of accounting. Therefore, comparisons may be difficult.
External Influences on Business Activity
Economic Issues
Main Stages of the Business Cycle and Trade Cycle
Gross Domestic Product (GDP): the total value of the output of goods and services in a country in one
year.
Recession: too little spending, falling GDP, demand and prices, workers lose jobs.
Slump: long-drawn-out recession. Unemployment is higher, and prices fall; many businesses fail to
survive at this point.
Growth: GDP is rising, unemployment is falling, and living standards are higher. (Firms are doing well at
this point).
Boom: too much spending, inflation, shortage of workers, and businesses are uncertain about the future.
Impact on Business from Changes in Economic Indicators
Changes in employment levels will affect the ability of the business to recruit new employees and also
the income of customers.
Rising inflation may increase business costs, leading to higher product prices. The effect of increasing
inflation depends on the type of product sold.
An increase in GDP means the economy is growing. Increase in sales, higher income, but recruitment of
employees hard.
Government Economic Objectives
Low inflation
Low Inflation: Low prices of goods & services so that people will buy more money in the economy.
Inflation: The increase in average prices of goods & services.
Rapid inflation may lead to:
A fall in the value of money falls in real incomes.
Wage price spiral.
Fall in international competitiveness as prices will be high.
Businesses may not want to expand and create jobs.
Living standards will fall.
Low inflation rates will act as an incentive for firms to produce and encourage them to expand.
Low Unemployment
Low Unemployment: A high % of people work so that they don’t rely on government funds.
When people want to and have the ability to work but can’t work, then they are said to be unemployed.
The country's output will be lower if unemployed people don’t produce goods and services.
It involves an opportunity cost as the government has to pay greater unemployment benefits, which
could be used to improve education and increase living standards.
Economic Growth
Economic Growth: growth of a country's GDP (Gross Domestic Product) – more goods and services being
produced and sold.
If an economy’s total output rises, it is said to be experiencing economic growth.
GDP is the total value of goods and services produced in an economy.
Economic growth may cause employment to rise, increasing living standards and reducing poverty.
A fall in GDP can lead to:
Unemployment
Fall in average living standards as poverty rises
Less investment
Balance of Payment
Balance of Payment (of Imports & Exports): the difference between a country's imports and exports
balance out (BoP = Exports – Imports).
Exports: Goods and services sold from one country to another.
Imports: Goods and services bought by one country from another.
Balance of payments is a record of one country’s financial transactions internationally.
Governments will aim for an equal balance of payments: exports equal imports.
Higher imports than exports lead to a budget deficit.
Higher exports than imports lead to a budget surplus.
Problems of Budget Deficit:
The government can run out of foreign currency reserves and will have to borrow.
The exchange rate depreciates – the price of our currency falls as compared to the other currency.
Exchange Rate: the price of a currency in terms of another.
Government Economic Policies
Fiscal Policy
Fiscal Policy: any changes by the government in tax rates or public sector spending.
Spending by the Government:
Government spending decisions can have a great impact on certain business decisions.
If the government decides to increase its spending:
Increase subsidies and grants (to encourage businesses to set up in high-unemployment areas).
Increase in welfare benefits, meaning consumers will have a higher portion of income to spend.
Stimulation of economic growth.
If the government decides to decrease spending:
Increased competition (mainly if privation is used)
Disinflation (the reduction in the rate of inflation)
Tax
Direct Tax
Income tax reduces consumer disposable income.
Corporation tax on comparing profit.
Indirect Tax
Expenditure taxes, e.g. VAT
Import tariffs/quotas to reduce imports from abroad.
Import Tariffs: tax on imported goods.
Import Quota: a physical limit on the quantity of a product to be imported.
Governments and spending decisions include a tax measure according to the effect they want to achieve.
Governments will reduce spending and increase tax rates to reduce inflation.
Governments will increase spending and decrease tax rates to stimulate economic growth.
Monetary Policy
Monetary Policy: change in interest rate by the government and the central bank.
Governments will have a set of objectives they would like to achieve and present them to the central
bank, which will set the interest rate based on these objectives.
If these objectives seek to increase the overall demand in the economy, the central bank will lower
interest rates, which will lead to -
More consumer spending than borrowing.
More risk of inflation (Decreases confidence consumers/Businesses have).
There is more incentive to expand because loans are cheaper, so firms are more likely to take out a loan
to fund for expansion.
Depreciation of the exchange rate (Fall in value of the country’s currency) will make for costlier imports.
If these objectives seek to decrease the overall demand in the economy, the central bank will raise the
interest rate; this will lead to -
Less consumer spending than borrowing.
Less risk of inflation (Increases confidence consumers/Businesses have).
The incentive to expand will decrease because taking out a loan will be more expensive, so firms are
likely to delay any plans of expansion.
Appreciation of the exchange rate (Rise in value of the country’s currency) will make for cheaper imports.
Supply-Side Policies
Supply-Side Policies: try to increase the competitiveness of industries in an economy against those from
other countries. Make the economy more efficient and increase supply.
These supply policies focus on more long-term objectives, unlike fiscal/monetary, which are more short-
term and demand-focused. They have three main categories:
Encouraging Competition: through privatisation/deregulations.
Labour Market Reforms: through trade unions, minimum wage, and labour legislations.
Incentive-related Policies: through reduced tax rates and increased subsidies.
Environmental and Ethical Issues
Social Responsibility
Social Responsibility: when a business decision benefits stakeholders other than shareholders.
Examples of business activity impacting the environment:
Emission from transport vehicles.
Pollution from factories.
Waste disposal
Transportation of goods by ship or track burns fossil fuels such as oil, creating carbon emissions, which
link to global warming and climate change.
Arguments against being mindful of the Argument with being mindful of the environment:
environment:

It can be expensive and reduce profit. Pollution and global warming affect all, so social
responsibility helps reduce this problem.

Increase prices to pay for ‘environmentally Using non-renewable resources leaves less for the future
friendly‘ policies. and raises prices.

It can make firms unproductive, reduce Scientists and environmentalists believe that business
salaries and relocate to places without such activity can do permanent damage.
policies.

Consumers buy less if the price is high. Consumers are becoming more socially aware, so
 Arguments against being mindful of the Argument with being mindful of the environment:
environment:

environmentally friendly products have become a

market advantage.

The government should pay to clean it up. Pressure groups can take action to harm the business's
reputation and sales.

Owners can claim there isn’t proof that the

activity is causing damage.
Pressure Groups: people who want to change business (or government) decisions by taking actions, such
as consumer boycotts.
The Concept of Externalities
Private Costs: costs paid for by a business or the consumer of a product.
Private Benefits: gains to a business or the consumer of a product.
External Costs: costs paid for by the rest of society, other than the business.
External Benefits: gains to the rest of society, other than the business.
Social Costs = External costs + Private costs.
Social Benefits = External benefits + Private benefits.
If the social benefit exceeds social costs, the scheme will likely be accepted; the government/local
community will probably refuse permission.
Sustainable Development
Sustainable Development: Development which does not risk future generations' living standards.
Business can be sustainable by:
Use of renewable energy
Recycle waste
use fewer resources
Develop new ‘environmentally friendly‘ products and production methods.
Main Reasons Why Businesses Respond to Environmental Pressure
Consumers
Bad publicity can cause them not to buy; if consumers think the products harm the environment, they
will stop buying, resulting in the business changing the product or production method.
Pressure groups
Can take actions towards businesses like consumer boycotts.
The impact of the actions depends on:
Public support and media coverage.
Consumer boycotts result in a decrease in sales.
The group is well-financed and organised.
Whether the action is unpopular but not illegal
Cost damage methods by the business.
If a business sells to another business - public pressure is less effective.
Government through legal contracts
By making certain activities illegal:
Locating in an environmentally sensitive area.
Producing non-recyclable products.
Dumping waste in nearby rivers/seas.
Pollution permits - licences that allow businesses to pollute to a certain level. If the business exceeds the
account, it must buy from a ‘cleaner‘ business or pay large fines.
Additional taxes on goods or factories resulting in pollution.
Ethical Issues
Ethical Decision: based on a moral code of conduct, sometimes called ‘doing the right thing‘.
Offering or taking business from government officials or people working for other businesses.
Employ child labour, even if it is illegal in some countries.
Buy supplies that lead to damage to the environment.
Agree to ‘fix high prices‘ with competitors.
Pay high to the top of the hierarchy and poorly to the lower levels.
Two main extreme views to the ethical standards:
If the law is not broken, businesses can do whatever to gain profit.
Even if it is not illegal, therefore wrong even if it may increase profit.
Potential benefits of ethical decision Potential limitation of ethical decision

Customers may be more inclined to buy Adults paid higher costs, especially if good workers’
products not made by child labour. conditions were involved.

Good publicity about ethical decisions Prices may be set higher due to higher costs.
provides ‘free promotion‘.

Long-term profit increases If consumers are not interested in how it’s made and care
only for price - then profits fall.

Some workers and investors may want to Short-term profit may fall.
link an ‘Ethical business‘, making recruiting
and raising capital easier.

Less risk of legal actions being taken against It could be argued that some countries employ children as
the company. they may be the only source of income for the family, and
may cause them to fall to low levels.
Business and the International Economy
Globalisation: the world is becoming more interconnected, leading to increasing worldwide trade &
people moving.
The reasons for globalisation include:
More Free-Trade Agreements and economic unions between countries have replaced protection for
industries. Consumers can purchase with few or no import controls.
Improved and cheaper travel links and communication between countries made it easier to transport
goods globally. Internet also allows easy price comparisons, and online/e-commerce allows orders to be
placed anywhere.
Many ‘Emerging market countries‘ are industrialising very rapidly. They can sell globally at cheaper prices
because of the loss of growth of the firms and industries.
The Opportunities and Threats of Globalisation to a Business include:
 Potential Opportunities for
Effect 1 Effect 2
Business

They are expensive to sell

Start selling exports to other abroad, and foreign
Increase potential sales,
countries -opening up foreign consumers buy the products
especially online sales.
markets. even if they are popular at
‘home‘.

Quality good? Ethical issues?

Open factories/operations in other Cheaper to make goods Expensive or difficult to set
countries (become a multinational) outside than domestically. up operations in other
countries?

Products need maintenance

Import products from other No trade restrictions, more
and partly repairs. Will the
countries to sell to customers in profitable to buy, could sell
needed parts be available
‘home‘ country. domestically.
from the foreign producer?

Cheaper purchases of supplies

Import materials and components
from other countries will free Are suppliers reliable? Does
from other countries. But still
trade and reduce costs. greater distance add too
produce final goods in the ‘home‘
Materials can be supplied much transport costs?
country.
‘online‘.

Potential Threats to
Effect 1 Effect 2
Businesses

Increase imports into the Increased competition forces

If competitors offer cheaper
home market from foreign local firms to be more
products, domestic sales fall.
competitors. efficient.

Increase investment from Create further competition -

Local firms become suppliers
multinationals to set up Multinationals that afford the best
to multinationals, and their
operations in the home employees may have economies of
sales could increase.
country. scale.

Employees may leave In some professions, employees It might encourage local

businesses that cannot pay have more choices about where businesses to use various
the same or more than they work - businesses will have to motivational methods to
international competitors. make more effort to retain them. keep their workers.
Why Government Might Introduce Import Tariffs and Import Quotas
Import Tariffs: tax placed on imported goods in the country.
Import Quota: a restriction on the quantity of a product that can be imported.
Protectionism: when a government protects domestic businesses from Foreign competition using tariffs
and quotas. This reduces employment incomes.
Import tariffs increase the prices of imported goods, making them less competitive than locally produced
goods.
Import quotas decrease the quantity of imported goods; increasing the price means less availability, thus
increasing sales for domestic products.
Multinational Companies (MNCs)
Multinational (Transnational) Company: a company that has factories or service operations in more than
one country
It is not just selling products abroad; it is having operations abroad
The benefits of a business and its impact on becoming international:
Benefits to business Impact to stakeholders

New market Higher dividends

Easier to obtain raw materials as they can be closer Opportunity to live and work abroad

Avoid trade barriers and import taxes Suppliers increase/decrease depending on

the location

Low Labour costs Government gains higher/lower taxes

Spread risk (if there are low sales in one country and high
sales in another)

Benefits to the business Benefits to the country

Producing goods at lower costs Jobs are created

Closer to resources (i.e. oil) Investments in the development of

infrastructure in the country

Closer to market More exports

Avoid expensive taxes on the import of goods (i.e. Korean cars Tax – more money to the government
(KIA) being produced in the EU to benefit from free trade)

Spread risks (if there are low sales in one country and high sales Increased product choice for
in another) consumers

Advantages to Host Country Disadvantages to Host Country

New investment Influence the government and economy (bringing

outside influences and culture).

More export increases the international Due to MNCs ' expertise and activity, existing firms
competitiveness of the country will likely be pushed out of the market.

Fewer imports keep domestic businesses active Depletion of scarce resources and endangerment
and prevent the BoP deficit. of natural sites.
 Advantages to Host Country Disadvantages to Host Country

Jobs created reduced unemployment. Profits flow out of the country.

Increase tax paid to the government. Often, unskilled work is created.

More competition helps increase the productivity

and efficiency of domestic businesses.
Exchange Rates
Exchange Rate: the price of one currency in terms of another currency.
For example, 1 Euro is equivalent to 1.2 Dollars
Currency Appreciation: when the value of a currency increases.
It can buy more of another currency
1 euro = 1.2 dollars, to 1 euro = 1.5 dollars.
Currency Depreciation: when the value of a currency decreases.
It can buy less of another currency.
1 euro = 1.2 dollars, to 1 euro = 1 dollar.
2 things influence the exchange rate of a currency:
Demand for the Currency: if many people want to buy the currency, the price will increase because there
is a ‘limited’ number of currencies (so it leads to appreciation).
Supply of Currency: if the central bank prints more money, the supply increases, but the demand is still
the same, so the value is lower (leading to depreciation).
Exchange Rates Can Affect Businesses By:
If it Appreciates If it Depreciates

Import prices fall: since your currency can buy more of Import prices rise: your currency is worth less, so
the other currency. you need more to buy other currencies.

Export prices rise: your currency is worth more, so it is Export prices fall: it is worth less, so other
more expensive for other currencies to buy it. currencies can buy your currency for less than
theirs.
This means that if the currency appreciates:
The product’s price in other countries will increase
The business will make more profit
Businesses can lower the price and still make the same amount of money as before – it is more
competitive.
If the currency depreciates:
The product’s price in other countries will decrease
less profit will be made
Businesses need to raise the price to make the same amount of money as before – less competitive.
Definitions
Understanding Business Activity
A need is a good or service essential for living
A want is a good or service which people would like to have but which is not essential for living. People's
wants are unlimited.
Economic Problem - There exist unlimited wants but limited resources to produce the goods and services
to satisfy those wants. This creates scarcity
Factors of production are those resources needed to produce goods and services. There are four factors
of production, and they are in limited supply.
Scarcity is the lack of sufficient products to fulfil the total wants of the population
Opportunity cost is the next best alternative given up by choosing another item
Specialization occurs when people and businesses concentrate on what they are best at
Division of labour is when the production process is split up into different tasks and each worker
performs one of those tasks. It is a form of specialization
Businesses combine the factors of production to make goods and services which satisfy people's wants.
Added value is the difference between the selling price and the cost of bought-in materials and
components

The primary sector of industry extracts and uses the natural resources of Earth to produce raw materials
used by other businesses
The secondary sector of industry manufactures goods using the raw materials provided by the primary
sector.
The tertiary sector of the industry provides services to consumers and other sectors of industry.
De-industrialisation occurs when there is a decline in the importance of the secondary manufacturing
sector of industry in a country
A mixed economy has both a private sector and a public (state) sector
Capital is the money invested into the business by the owners
An entrepreneur is a person who organises, operates and takes the risk for a new business venture
Capital employed is the total value of capital used in the business
Internal Growth occurs when a business expands its existing operations
External Growth is when a business takes over or merges with another business. It is often called
integration, as one business is integrated into another one

A takeover or acquisition is when one business buys out the owners of another business, which then
becomes part of the 'predator' business (the business which has taken it over)
A merger is when the owners of two businesses agree to join their businesses together to make one
business
Horizontal integration is when one business merges with or takes over another one in the same industry
at the same stage of production
Vertical integration is when one business merges with or takes over another one in the same industry
but at a different stage of production. Vertical integration can be forward or backwards.
Conglomerate integration is when one business merges with or takes over a business in a completely
different industry. This is also known as diversification.
A sole trader is a business owned by one person.
Limited liability means that the liability of shareholders in a company is limited to only the amount they
invested
Unlimited liability means that the owners of a business can be held responsible for the debts of the
business they own. Their liability is not limited to the investment they made in the business
Partnership is a form of business in which two or more people agree to own a business jointly
Unincorporated businesses do not have a separate legal identity. Sole traders and partnerships are
unincorporated businesses
incorporated businesses are companies that have separate legal status from their owners
Shareholders are the owners of a limited company. They buy shares, which represent part-ownership of
the company.
Private limited companies are businesses owned by shareholders, but they cannot sell shares to the
public.
Public limited companies are businesses owned by shareholders but they can sell shares to the public
and their shares are tradable on the Stock Exchange
Dividends are payments made to shareholders from the profits (after tax) of a company. They are the
returns to shareholders for investing in the company.
A franchise is a business based upon the use of the brand names, promotional logos and trading
methods of an existing successful business. The franchisee buys the license to operate this business from
the franchisor.
A joint venture is where two or more businesses start a new project together, sharing capital, risks and
profits.
A public corporation is a business in the public sector that is owned and controlled by the state
(government)
Business objectives are the aims or targets that a business works towards
Profit is the total income of a business (revenue) minus total costs
Market share is the percentage of total market sales held by one brand or business
A social enterprise has social objectives as well as an aim to make a profit to reinvest back into the
business
A stakeholder is any person or group with a direct interest in the performance and activities of a business
People in Business
Motivation is the reason why employees want to work hard and work effectively for the business.
Wage is a payment for work, usually paid weekly
Time rate is the amount paid to an employee for one hour of work
The piece rate is the amount paid for each unit of output
Salary is payment for work, usually paid monthly.
Bonus is an additional amount of payment above basic pay as a reward for good work.
The commission is a payment relating to the number of sales made
Profit sharing is a system whereby a proportion of the company's profits are paid out to employees
Job satisfaction is the enjoyment derived from feeling that you have done a good job
Job rotation involves workers swapping around and doing each specific task for only a limited time and
then changing around again

Job enrichment involves looking at jobs and adding tasks that require more and/or responsibility
Team-working involves using groups of workers and allocating specific tasks and responsibilities to them
Training is the process of improving a worker's skills
Promotion is the advancement of an employee in an organisation, for example, to a higher
job/managerial level
Organisational structure refers to the levels of management and division of responsibilities within an
organisation
An organisational chart refers to a diagram that outlines the internal management structure
Hierarchy refers to the levels of management in any organisation, from the highest to the lowest.
A level of hierarchy refers to managers/supervisors/other employees who are given a similar level of
responsibility in an organisation.
Chain of command is the structure in an organisation which allows instructions to be passed down from
senior management to lower levels of management.
The span of control is the number of subordinates working directly under a manager.

Directors are senior managers who lead a particular department or a division of a business.
Line managers have direct responsibility for people below them in the hierarchy of an organisation.
Supervisors are junior managers who have direct control over the employees below them in the
organisational structure.
Staff managers are specialists who provide support, information and assistance to line managers.
Delegation means giving a subordinate the authority to perform particular tasks.
Leadership styles are the different approaches to dealing with people and making decisions when in
apposition of authority - autocratic, democratic and laissez-faire.
Autocratic leadership is where the manager expects to be in charge of the business and to have their
orders followed.
Democratic leadership gets other employees involved in the decision-making process.
Laissez-faire leadership makes the broad objectives of the business known to employees, but then they
are left to make their own decisions and organise their own work.
Recruitment is the process of identifying that the business needs to employ someone up to the point at
which applications have arrived at the business.

Job analysis identifies and records the responsibilities and tasks relating to a job.
A job description outlines the responsibilities and duties to be carried out by someone employed to do a
specific job.
Job specification is a document which outlines the requirements, qualifications, expertise, physical
characteristics, etc., for a specified job
Internal recruitment is when a vacancy is filled by someone who is an existing employee of the business
External recruitment is when a vacancy is filled by someone who is not an existing employee and will be
new to the business
induction training is an introduction given to a new employee, explaining the business's activities,
customs and procedures and introducing them to their fellow workers
On-the-job training occurs by watching a more experienced worker doing the job
Off-the-job training involves being trained away from the workplace, usually by specialist trainers.
Workforce planning is establishing the workforce needed by the business for the foreseeable future in
terms of the number and skills of employees required.
Dismissal is when employment is ended against the will of the employee, usually for not working
according to the employment contract.

Redundancy is when the employee is no longer needed and so loses their job. It is not due to any aspect
of their work being unsatisfactory.
A contract of employment is a legal agreement between an employer and an employee, listing the rights
and responsibilities of workers.
Communication is the transferring of a message from the sender to the receiver, who understands the
message.
A message is the information or instructions being passed by the sender to the receiver
Internal communication is communication between members of the same organisation
External communication is communication between the organisation and other organisations or
individuals.
The transmitter or sender of the message is the person starting off the process by sending the message.
The medium of communication is the method used to send a message; for example, a letter is a method
of written communication, and a meeting is a method of verbal communication.
The receiver is the person who receives the message
Feedback is the reply from the receiver which shows whether the message has arrived, been
understood, and, if necessary, acted upon
One-way communication involves a message which does not call for or require a response
Two-way communication is when the receiver gives a response to the message, and there is a discussion
about it
Formal communication is when messages are sent through established channels using professional
language
Informal communication is when information is sent and received casually using everyday language
Communication barriers are factors that stop the effective communication of messages
Marketing
Marketing is identifying customer wants and satisfying them profitably
A customer is a person, business or other organisation which buys goods or services from a business
Customer loyalty is when existing customers continually buy products from the same business
Customer relationships are communicating with customers to encourage them to become loyal to the
business and its products
Market share is the percentage of total market sales held by one brand or business
Consumer buys goods or services for personal use- not to re-sell
Mass market is where there is a large number of sales of a product
Niche market is a small, usually specialised, segment of a much larger market
Market segment is an identifiable sub-group of a whole market in which consumers have similar
characteristics or preferences
Market research is the process of gathering, analyzing and interpreting information about a market

A product-orientated business is one whose main focus of activity is on the product itself
The market-orientated business carries out market research to find out what consumer wants before a
product is developed and produced
The marketing budget is a financial plan for the marketing of a product or product range for some
specific period of time. It specifies how much money is available to market the product or range so that
the Marketing department may know how much it may spend
Primary research is the collection and collation of original data via direct contact with potential or
existing customers
Secondary research uses information that has already been collected and is available for use by others
A questionnaire is a set of questions to be answered as a means of collecting data for market research
Online surveys require the target sample to answer a series of questions over the internet
Interviews involve asking individuals a series of questions, often face-to-face or over the phone
A focus group is a group of people who are representative of the target market
A sample is a group of people who are selected to respond to a market research exercise, such as a
questionnaire

A random sample is when people are selected at random as a source of information for market research
A quota sample is when people are selected on the basis of certain characteristics (such as age, gender
or income) as a source of information for market research
The marketing mix is a term which is used to describe all the activities which go into marketing a product
or service. These activities are often summarized as the four Ps - product, price, place and promotion
The USP is the special feature of a product that differentiates it from the products of competitors
The brand name is the unique name of a product that distinguishes it from other brands
Brand loyalty is when consumers keep buying the same brand again and again instead of choosing a
competitor's brand
Brand image is an image or identity given to a product which gives it a personality of its own and
distinguishes it from its competitors' brands
Packaging is the physical container or wrapping for a product. It is also used for promotion and selling
appeal.
The product life cycle describes the stages a product will pass through from its introduction, through its
growth until it is mature, and then finally, its decline
Extension strategy is a way of keeping a product at the maturity stage of the life cycle and extending the
cycle

Cost-plus pricing is the cost of manufacturing the product plus a profit mark-up
Competitive pricing is when the product is priced in line with or just below competitors' prices to try to
capture more of the market
Penetration pricing is when the price is set lower than the competitors' prices in order to be able to
enter a new market
Price skimming is where a high price is set for a new product on the market
Promotional pricing is when a product is sold at a very low price for a short period of time
Dynamic pricing is when businesses change product prices, usually when selling online, depending on
the level of demand
Price elastic demand is where consumers are very sensitive to changes in price
Price inelastic demand is where consumers are not sensitive to changes in price
A distribution channel is the means by which a product is passed from the place of production to the
consumer
An agent is an independent person or business that is appointed to deal with the sales and distribution
of a product or a range of products

Promotion is where marketing activities aim to raise customer awareness of a product or a brand,
generating sales and helping to create brand loyalty
Advertising means paying for communication with potential customers about a product to encourage
them to buy it
informative advertising is where the emphasis of advertising or sales promotion is to give full
information about the product
Persuasive advertising is advertising or promotion which is trying to persuade the consumer that they
really need the product and should buy it
Target audience refers to people who are potential buyers of a product or a service
Sales promotions are incentives such as special offers aimed at consumers to achieve short-term
increases in sales
Marketing budget is a financial plan for the marketing of a product or a product range for a specified
period of time
Social media marketing is a form of internet marketing that involves creating and sharing content on
social media networks in order to achieve marketing and branding goals. It includes activities such as
posting text and image updates, videos, and other content that achieves audience engagement as well as
paid social media advertising
Viral marketing is when consumers are encouraged to share information online about the products of a
business
E-commerce is the 'online' buying and selling of goods and services using computer systems linked to the
internet and apps on mobile (cell) phones
A marketing strategy is a plan to combine the right combination of the four elements of the marketing
mix for a product or a service to achieve a particular marketing objective(s)
Operations Management
Productivity is the output measured against the inputs used to create it
The buffer inventory level is the inventory held to deal with uncertainty in customer demand and
deliveries of supplies
Lean production is a term for those techniques used by businesses to cut down on waste and, therefore,
increase efficiency, for example, by reducing the time it takes for a product to be developed and become
available for sale.
Kaizen is a Japanese term meaning 'continuous improvement through the elimination of waste.
Just-in-time is a production method that involves reducing or virtually eliminating the need to hold
inventories of raw materials or unsold inventories of the finished product.
Job production is where a single product is made at a time
Batch production is where a quantity of one product is made, and then a quantity of another item will be
produced
Flow production is where large quantities of a product are produced in a continuous process. It is
sometimes referred to as mass production
Fixed costs are costs which do not vary in the short run with the number of items sold or produced. They
have to be paid whether the business is making any sales or not. They are also known as overhead costs.
Variable costs are costs which vary directly with the number of items sold or produced.

Total costs are fixed and variable costs combined.

Average cost per unit (unit cost) is the total cost of production divided by total output.
Economies of scale are the factors that lead to a reduction in average costs as a business increases in
size.
Diseconomies of scale are the factors that lead to an increase in average costs as a business grows
beyond a certain size.
The break-even point is the level of sales at which total costs = total revenue.
The revenue of a business is the income during a period of time from the sale of goods or services.
Quality means to produce a good or service, which means customer expectations.
Quality control is checking for quality at the end of the production process; it uses quality inspectors to
find any faults.
Quality assurance is the checking for quality standards by employees throughout the production process.
Financial Information and Decisions
Start-up capital is the finance needed by a new business to pay for essential non-current and current
assets before it can begin trading.
Working capital is the finance needed by a business to pay for its day-to-day activities.
Capital expenditure is money spent on non-current assets which will last for more than one year.
Revenue expenditure is money spent on day-to-day expenses which do not involve the purchase of a
long-term asset, for example, wages or rent.
Internal finance is obtained from within the business itself
External finance is obtained from sources outside of and separate from the business
Micro-finance is providing financial services - including small loans - to poor people not served by
traditional banks
Crowdfunding is funding a project or venture by raising money from a large number of people who each
contribute a relatively small amount, typically via the internet
The cash flow of a business is the cash inflows and outflows over a period of time
Cash inflows are the sums of money received by a business during a period of time

Cash outflows are the sums of money paid out by a business during a period of time
A cash flow cycle shows the stages between paying out cash for labour, materials, and so on, and
receiving cash from the sale of goods
Profit is the surplus after total costs have been subtracted from revenue
A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually on a month-
by-month basis. This then shows the expected cash balance at the end of each month
Net cash flow is the difference, each month, between inflows and outflows.
Closing cash (or bank balance) is the amount of cash held by the business at the end of each month. This
becomes next month's opening cash balance.
Opening cash (or bank balance) is the amount of cash held by the business at the start of the month.
Working capital is the finance needed by a business to pay for its day-to-day expenses.
Accounts are the financial records of a firm's transactions
Final accounts are produced at the end of the financial year and give details of the profit or loss made
over the year and the worth of the business

An income statement is a financial statement that records the income of a business and all costs incurred
to earn that income over a period of time. It is also known as a profit and loss account
The revenue is the income to a business during a period of time from the sale of goods and services
The cost of sales is the cost of producing or buying the goods actually sold by the business during a time
period
A gross profit is made when revenue is greater than the cost of sales
A trading account shows how the gross profit of a business is calculated
Net profit is the profit made by a business after all costs have been deducted from revenue. It is
calculated by subtracting overhead costs from gross profits
Depreciation is the fall in the value of a fixed asset over time
Retained profit is the net profit reinvested back into the company after deducting tax and payments to
owners, such as dividends
The statement of financial position shows the value of a business's assets and liabilities at a particular
time
Assets are those items of value which are owned by the business. They may be non-current (fixed) assets
or current assets

Liabilities are debts owed by the business. They may be non-current liabilities or current liabilities
Non-current assets are items owned by the business for more than one year
Current assets are owned by the business and used within one year
Non-current liabilities are long-term debts owed by the business, repaid over more than one year
Current liabilities are short-term debts owed by the business, repaid in less than one year
Capital employed is shareholders' equity + non-current liabilities and is the total long-term and
permanent capital invested in a business
Liquidity is the ability of a business to pay back its short-term debts
Profitability is the measurement of the profit made relative to either the value of sales achieved or the
capital invested in the business
Illiquid means that assets are not readily convertible into cash
External Influences on Business Activity
Gross Domestic Product (GDP) is the total value of the output of goods and services in a country in one
year
A recession is when there is a period of falling GDP
Inflation is the increase in the average price level of goods and services over time
Unemployment exists when the people who are willing and able to work cannot find a job
Economic growth is when a country's GDP increases- more goods and services are produced than in the
previous year
Balance of payments records the difference between a country's exports and imports
Real income is the value of income, and it falls when prices rise faster than money income
Exports are goods and services sold from one country to another country
imports are goods and services bought by one country from other countries
The exchange rate is the price of one currency in terms of another

Exchange rate appreciation is the rise in the value of a currency compared with other currencies
Exchange rate depreciation is the fall in value of a currency compared with other currencies
Fiscal policy is any change by the government in tax rates or public sector spending
Direct taxes are paid directly from incomes, eg, income tax or profits tax
indirect taxes are added to the prices of goods, and taxpayers pay the tax as they purchase the goods,
eg-VAT
Disposable income is the level of income a taxpayer has after paying income tax
An import tariff is a tax on an imported product
Monetary policy is a change in rates by the government or central bank
Supply-side policies aim to increase supply and make the economy more efficient
Private costs of an activity are the costs paid for by a business or the consumer of the product

Private benefits of an activity are the gains to a business or the consumer of the product
External costs are costs paid for by the rest of society, other than the business, as a result of business
activity
External benefits are the gains to the rest of society, other than the business, as a result of business
activity
Social cost = external costs + private costs
Social benefit = external benefits + private benefits
Globalisation is the term used to describe increases in worldwide trade and movement of people and
capital between countries
Sustainable development refers to development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
Free trade agreements exist when countries agree to trade imports/exports with no barriers, such as
tariffs or quotas
An import tariff is a tax placed on imported goods when they arrive in the country
An import quota is a restriction on the quantity of a product that can be imported
Protectionism is when a government protects domestic businesses from foreign competition using tariffs
and quotas
Multinational businesses are those with factories, production or service operations in more than one
country
Formula
Gross profit: Revenue - cost of sales
Gross profit shows how much profit is made after the cost of sales has been paid.
Profit: Gross profit - overheads
This indicates how much profit has been made after all costs have been deducted from the revenue.
Gross Profit Margin: Gross ProfitRevenue×100RevenueGross Profit×100
This shows what percentage of revenue has been converted into gross profit.
Profit margin: ProfitRevenue×100RevenueProfit×100
This shows what percentage of revenue has been converted into profit.
Return on capital employed: ProfitCapital Revenue×100Capital RevenueProfit×100
This shows how much profit has been made for each dollar invested into the business.
Current ratio: Current AssetsCurrent LiabilitiesCurrent LiabilitiesCurrent Assets
This shows the ability of a business to pay its short-term debts from its current assets.
Acid test
ratio: Current Assets - InventoriesCurrent LiabilitiesCurrent LiabilitiesCurrent Assets - Inventories
This shows the ability of a business to pay its short-term debts from its current assets – inventories.
Net cash-flow: Cash inflows - cash outflows
This is the difference between cash inflows and outflows in a time period, e.g., a month.
Closing balance: Opening balance + net cash-flow
This is the amount of cash a business has in the bank at the end of a period, e.g., a month.
Break-even: Fixed CostsContribution per unitContribution per unitFixed Costs
This is the point where total revenue = total costs; neither a profit nor loss is made.
Margin of safety: Current output - break-even output
This is the amount by which sales exceed the break-even level of output
Contribution: Selling price - Variable Cost