Reduce unemployment Raising the selling price but keeping the

raw material costs the same – will

Increase output (may be exported)
consumers still buy (perceived value?)
(AS) Create additional competition for
(AS) Purchasing cheaper raw materials –
Benefits of small enterprise to existing business
reduced quality?
Ways of adding value
a country Increase government tax revenue
Using raw materials more efficiently so
Innovate / accept technological change cost per unit falls – increasing
May develop into huge corporations productivity

Have a business idea

(AS) Land – raw materials
(AS) Some savings to invest Labour – including thought process
Factors of Production
Role of an Entrepreneur Willingness to take risks and accept
Capital – machinery
And examples Enterprise – risk taker / organiser
responsibilities

Committed and self-motivated

Lack of finance or working capital
Good leader
(AS) Lack of record keeping (AS)
Innovative
Why do some new enterprises Poor management skills What makes a good
Multi-skilled
fail Competition entrepreneur
Self-confident
Changes to the business environment
Risk taker
Private Sector
Economic objectives – make profit to Sole Trader / Sole Proprietor
reinvest Partnership / Limited Partnership
(AS) (AS) Private Limited Company (Ltd)
Social objectives – supporting
Public Limited Company (PLC)
Triple bottom line of social disadvantaged groups Private and Public Sector
Cooperatives
enterprises Environmental objectives – managing business organisations Public Sector
the business in an environmentally Nationalised Industry
sustainable way Public Corporations
Public services – Hospitals/schools/Army
Joint Venture
(AS) (AS)
Franchise
Other forms of organisation
Holding Company
 Traits
Traits
Ownership shared amongst partners
One person owner
One or more of partners are managers
Owner manages the business
Partners jointly have financial liability
Owner has liability for finance
Main capital comes from partners and
Main capital comes from owner and the
bank
(AS) bank (AS) Problems
Traits, benefits and problems of Problems Traits, benefits and problems of Some partners more competent and
Lack of management skill
Sole traders Lack of capital
Partnerships hardworking than others
Profits shared
Unlimited liability
Unlimited liability (joint and several)
Benefits
Benefits
Owner keeps all the profit
More capital
Owner takes all the decisions
Sharing of responsibilities
Therefore good for independence
Partners bring different skills to business
Traits
Traits
Owned by shareholders
Owned by shareholders (majority can be
Managed by one of the main
held by pension funds etc)
shareholders (usually)
Managed by professional directors – CEO
S(AS) Financial liability limited to shares
Financial liability limited to shares
Trai\\ bought
bought
Main capital comes from shares, banks (AS) Main capital comes from shares, banks
and retained profits Traits, benefits and problems of and retained profits
ts, benefits and problems of Problems
Some loss of control
Public Limited Companies (PLC) Problems
Private Limited Companies Further loss of control of original owners
Cannot sell shares to the general public
(Ltd) Full disclosure of accounts required
Legal formalities
Benefits
Some disclosure of accounts
Limited liability for shareholders makes it
Benefits
more attractive to buy shares
Limited liability
Access to more capital through shares
Less disclosure of accounts than PLC

Primary Industry – extractive

Organic growth (internal)
(AS) Secondary Industry – manufacturing and (AS)
Economic Activity construction How businesses grow External growth (mergers and
takeovers)
Tertiary Industry – services
 Amount of regulation
(AS) Cost
Problems of changing from one Loss of control
legal structure to another How profits are shared
Financing
Benefits
Provides jobs / reduces unemployment
Creates competition and choice
(AS) New suppliers for other businesses
New business ideas
Small firms benefits to
economy New services for customers
And Government support
How government encourages them Lower rate of corporation tax
Loan guarantee schemes
Grants
Advice and information
(AS)
Small business benefits
Benefits of small and large
Often managed by owners
businesses compared
Adapt quickly
Offer a more personal service
Employ fewer workers and are easier to
control
Big business benefits
Can employ specialist managers
May benefit from economies of scale
More options and scope for raising
finance
(AS)
Ways of measuring size of a
business
Multiple roles for family member – leads
(AS)
Family businesses
Strengths and weaknesses
Founder can stifle innovation and change
(AS)
Corporate Social Responsibility
Arguments for and against having it as a
corporate objective
Most customers want low prices and are
Market capitalisation
Employees
Capital employed
Sales value
Market share
NOT PROFIT
Strengths
Informal, flexible, innovative structure
to flexibility and quick decision making
Committed, loyal family workers
Training a successor can begin early
Closely controlled ownership
Culture of family comes through
Weaknesses
Resistant to change
Confused roles
Tendency to be autocratic
Keeping family matters out of business
Succession can be family problem
May sacrifice growth for control
Argument for
May give positive publicity
Attracts customers and employees who
are ethically minded
Avoids breaking laws – and the
consequences of breaking them
Argument against
May add to business costs
May make businesses uncompetitive
Sales may be lost if bribes not paid
not worried about why they are low
priced
 Risks spread over more products etc.

Gives a sense of direction and focus

Workers know what they are aiming S = specific
for / trying to achieve M = Measurable
(AS) (AS)
Need to have a way of assessing success A = Achievable
Why set objectives SMART objectives R = Realistic / Relevant
or failure
T = Time orientated
Investors will not be keen to invest until
there is a clear objective
Advantages
Tells stakeholders what the business is
about Profit maximisation
The process of creating the mission Profit Satisficing
statement can focus management Growth
(AS) (AS)
Provides a sense of purpose Survival
Mission Statements Common
Advantages and Disadvantages Disadvantages Corporate Objectives Increasing market share
Can be very general and just ‘wishful Corporate Social Responsibility (CSR)
thinking’
Does NOT provide SMART objectives Remember SMART objectives
May need to be frequently revised

Size of business
Advertising directly to children
Age of business
(AS) (AS) Employing very young workers
Competition
Influences on Corporate Social Responsibility Pay workers as little as possible
Business Objectives Economic situation
Examples of poor CSR Pollute the environment
Public / Private Sector
Pay bribes to gain extra orders
Culture of business
(AS) Pay higher than minimum wage (AS) Workers / Managers
Corporate Social Responsibility Improving working conditions Stakeholders
Ways of demonstrating CSR Improved product safety Owners
Cutting waste /pollution Customers
 Suppliers
Delaying redundancies /production
Local community
cutbacks
Government
Rights
Rights
Receive goods and services that meet
To be paid on time
national legal standards
(AS) (AS) To be treated fairly by the purchasing
To be offered replacement, repairs or
business
Stakeholder groups compensation in the event of product Stakeholder groups
Customers failure Suppliers Responsibilities
Rights and responsibilities Responsibilities Rights and responsibilities Supply goods and services ordered
To be honest
On time
Not to steal
In the condition agreed
Not to make false claims
Rights Setting objectives

(AS) Business must meet all legal constraints Planning

Pay taxes on time Organising resources
Stakeholder groups Responsibilities
(AS)
Directing Staff
Government Treat businesses equally under the law Functions of management Motivating Staff
Rights and responsibilities Prevent unfair competition Coordinating
Establish good trading links with other Controlling
countries Measuring performance against targets
Rights
To be paid at least the national minimum Rights
wage To be consulted about major changes
To be given an employment contract that affect them
Be allowed to join a trade union (most To not have their lives badly affected by
(AS) countries) (AS) the business’s activities (e.g., noise,
Stakeholder groups Increasing allowed to participate in Stakeholder groups pollution, traffic)
Employees business decision making Local community Responsibilities
Rights and responsibilities Responsibilities Rights and responsibilities To cooperate with the business where
To be honest reasonable
Meet the conditions and requirements To meet reasonable requests from
of the employment contract business for local services (e.g. public
To cooperate with management in all transport, waste disposal)
reasonable requests
(AS) Can lead to demotivated employees (AS) Owners (profit) v Workers (pay)
Owners selling on moral grounds

Why business needs to be
accountable to its stakeholders
Reduction in share price/company value
Examples of stakeholder
Opposition / bad publicity from locals
Demand effected by unhappy customers conflict
Managers (productivity) v Workers (pay)
Suppliers (payment) v Owners (cashflow)
Government (tax) v Owners (profit)

Interpersonal
Figurehead
Leader
Self-awareness
Liaison
Self-management
Informational
(AS) Social awareness
(AS) Monitor
Social Skills
Disseminator Goleman’s
Mintzberg’s managerial roles Spokesperson Emotional Intelligence Leading towards
Decisional
Understanding yourself
Entrepreneur
Understanding others
Disturbances
Resource Allocator
Negotiator
Desire to succeed Autocratic – decisions made at centre
(AS) Natural self-confidence (AS) Democratic – promotes active
Ability to think beyond the obvious participation
Qualities of successful leaders Multi-talented
Leadership Styles Laissez-Faire – decisions made by the
Incisive mind workforce
Training and experience of workforce Theory X
(AS) Amount of time available (AS) Manager views workers as lazy and
disliking work
Leadership style Attitude of managers McGregor
Attitude of workforce Theory Y
Type of leadership is effected by Theory X and Theory Y Manager views workers as enjoying work
Importance of the situation
Risks involved and prepared to accept responsibility
(AS) Self-Actualisation is not reached by many (AS) Satisfiers (motivators)
Abraham Maslow people Frederick Hertzberg Achievement
What can we take about motivation 2 Factor theory Recognition
Once a need is met it ceases to motivate
from the pyramid of needs The work itself
It’s possible to go down as well as up the Responsibility
pyramid Advancement
BUT
Not everyone has the same needs Dissatisfiers (Hygiene factors)
 When is a need met? Company policies and administration
Money may be needed to meet several Supervision
needs Salary
Self-Actualisation is never permanently Relationships with others
achieved Working conditions
Low absenteeism
Low labour turnover Pay systems – Piece rate, commission
High productivity (AS) Specialisation
(AS)
Need for good motivation
Workers make suggestions for Frederick Taylor Recruitment
improvement Impacts on business Monitoring of workers
Workers prepared to accept Studying work methods
responsibility
Motivation improved by:
Consulting workers Self-Actualisation

(AS) Working in teams (AS) Esteem

Workers making decisions that affect
Elton Mayo themselves
Abraham Maslow Social
Establishing targets Pyramid of needs Safety
Less affected by: Physical
Working conditions
Achievement
Shown by successful business people
Expectancy – degree to which people
(AS) and Entrepreneurs (AS) believe that rewards lead to
David McClelland Authority / Power Victor Vroom performance
3 types of motivational need Strong leadership instinct Expectancy Theory Effort → Performance → Reward
Satisfy need → Effort worthwhile
Affiliation
Good Team members
Job rotation

Piece rate / Commission Job enrichment

(AS) Salary (AS) Job redesign
Motivation in practice Performance related pay (PRP) Motivation in practice Quality Circles
Profit Sharing Worker participation
Financial Methods NON-Financial Methods
Fringe benefits Team working
Target setting
Delegation / empowerment
 On-the-job More full time staff – permanent
(AS) contracts
Cheap and easily controlled by business
(AS) Off-the-job Ways of expanding the More part time staff – permanent
Types of training New ideas but maybe general, expensive workforce contracts
Induction Types of contract Temporary contracts
Introducing to firm clarifying key policies Outsourcing
Number of hours to be worked
Workforce Planning
Designation of job (full / part time)
Recruit and select staff Duration of contract (temporary /
permanent)
Appraise, train and develop staff
(AS) Pay including incentive schemes,
(AS)
Prepare contracts of employment Contract of Employment bonuses etc.
Purpose of HRM
Main features Benefits
Develop appropriate pay systems Holiday, pension, sick pay, other
Improve staff morale and welfare Disciplinary and Grievance procedure
Length of notice to leave needed
Measure and monitor staff performance
Employee rights
Known to business
(AS) Candidate knows the business and its (AS) New ideas and practices
culture
Recruitment and selection Recruitment and selection Wider choice of potential applicants
Quicker and Cheaper
Advantages INTERNAL / Advantages EXTERNAL / Avoids problem with staff not promoted
Workers have a career structure and
Disadvantages External chance of promotion Disadvantages Internal Candidates could be better qualified
No further internal position to fill
Known style of management if recruiting
for a senior post
(AS) For workers (AS)
Unions strong
Trade Unions Power through solidarity Balance of power between
What do they achieve for Greater likelihood of success through unions and employers Most workers belong to the union
Workers + Employers action Depends on: All workers agree on course of action
Business is very busy
Protection for members (legal support)
Industrial action has a quick and
Pressure on employers to meet legal
effective impact
standards
Inflation is high
For Employers
 Negotiating with one body rather than Employers strong
many people Unemployment is high
Useful channel of communication Employer action has quick impact
Unions impose discipline on members There is public support for employers
Responsible partnership between Threats could be taken seriously
business and trade union brings benefits

Find out what customers are prepared to Examples

buy
(AS) (AS) Increasing market share
Role of Marketing Communicate this to other departments Marketing Objectives Increase value of total sales
Sell the product / service at a profit Improving / building brand identity

Asset led marketing

Product orientated
Basis new products on firms existing
Product first products and strengths – eg Apple
(AS) producing consumer electronics
(AS) Product first then find market
Asset led marketing v societal
Product v Market orientated Market orientated
Societal marketing
marketing Bases marketing on what is good for
Customer first
society NOT necessarily on what
Market research first to find what
consumers want – eg environmentally
customer wants
sustainable products
Price Market / selling price
Population
Weather
(AS) Advertising
Factors affecting demand Price of competitors Indirect taxes
(AS)
NOTE Price of complementary goods Subsidies
Factors affecting supply
IMPORTANT for understanding links Fashion / Taste
between actions and effects on business Changes in production costs – ie labour /
Consumer income
raw materials
For some products – interest rate for
borrowing Technology changes
(AS) Advantages (AS) Advantages
Niche Marketing Good for small firms Mass Marketing Possibility for economies of scale and
Advantages and Disadvantages Allows for separate / exclusive images Advantages and Disadvantages greater profit
for products – eg Toyota and Lexus High sales more likely
 Unexploited niches allow higher prices Disadvantages
Disadvantages Profit margin may be lower than Niche
Little chance for economies of scale marketing
Niche market tastes may change Very competitive
Total sales / profit may be lower May create a lower image for business if
Cost of product development higher no niche marketing is created
Benefits
Methods
Focused marketing
Demographic
Price discrimination
Different age, social class, income
Identifies gaps / niches
(AS) Allows small firms to compete effectively (AS)
Geographic
Market segmentation Limitations Market segmentation
Different countries, regions, religions,
Limitations and benefits Needs additional market research Methods cultures
Promotional costs separate for big
businesses
Psychographic
Separate R+D cost for big business
Different life style, values, personalities
Production costs increase for big
business
Primary
Questionnaires =
Reducing the risks involve in: Interview / postal / magazines / internet
(note internet can be primary*)
developing and launching new products Observation
(AS)
Developing niche markets etc. Taste tests / Test markets
(AS) Market Research Methods Consumer panels / focus groups
Helps to predict future changes in NOTE
Market research market Secondary
Both are best for getting different types
The need for market research of information Government information
Helps explain pattern changes and Libraries
trends Trade organisations
Assesses the effectiveness of the Market intelligence
marketing mix Newspapers
Company records
The internet
(AS) Probability sampling (AS) Sample size too small
Sampling methods Random* Primary Data Size depends on market aimed at / type
NOTE Systematic of sampling used
Stratified*
Reliability?
 Quota*
Cluster Sampling method inappropriate
Types you need to know marked with * Non-probability sampling Age, occupation, life-style bias etc.
Ways in which Primary Data may be
Others are to give greater depth but Ad Hoc Questionnaire bias
unreliable
NOT essential Judgemental Leading questions
Snowball Not asking the ’right’ questions
Convenience
Line graphs – time is a factor
(AS) Mean
(AS) Bar chart – independent factors
Statistical Analysis Median
Presentation of data Histogram – mixed values on x axis NOTE
NOTE Need to know what they are and how Mode
Pie chart – where the whole means
You will NOT be required to draw them something they are worked out Range
You MAY be required to interpret them You will NOT be asked to actually use
Tables – where figures show obvious them Inter-quartile range
trends
Product Customer
solution Development (Add if 5 stages)
(AS) Price Cost to Introduction
Customer (AS) Growth
Marketing Mix Promotion Communication Product Life Cycle Maturity (Add if 6 stages)
4P’s and 4C’s Equivalents with customer Saturation
Place Convenience to Decline
customer
Helps explain / predict cash flow
variations PED – Price Elasticity of Demand
% change in Q demanded ÷
(AS) Different stages of PLC require different
(AS) % change in Price
strategies / tactics for Pricing, promotion
Product Life Cycle
and possibly Placement Elasticity of demand IED – Income Elasticity of Demand
What uses does it have
It can highlight the need for extension % change in Q demanded ÷
strategies to prolong the life of the % change in Income
product or brand name
(AS) (AS)
Cost of production Major influence on sales and profit
Pricing decisions depend on Why is pricing important
Level of competition Has Psychological impact on customers –
 eg High price = quality
Price of competitors
Needs to be regularly /constantly
Price Elasticity of Demand (PED) reviewed
Whether it is New of Existing product Essential that pricing matches /
Objectives of the business integrates with the rest of the marketing
mix

Methods Marketing managers MUST consider the

Full cost Pricing needs of the target customers
Contribution pricing + Promotional budget
(AS)
Cost plus pricing Above the line
PRICING Advertising
Mark up
Methods and strategies Strategies (AS) What media / target market
NOTES Competitive pricing PROMOTION Below the line
More than 1 strategy can be used at the Psychological pricing Different forms of: Sales Promotion = BOGOF / Money Off –
same time Penetration pricing now or tokens / Loyalty schemes / Point
Often mark schemes will accept a pricing Market entry pricing – of sale displays
method when asking for a skimming/penetration Sponsorship
Price discrimination Direct Sales
Dynamic pricing Public Relations
Establish or reinforcing a distinctive
brand image Customer feedback
Increase sales by a target % Sales before and after the promotion
(AS)
(AS)strategy Increase Market Share by a target % campaign
Promotional Objectives
Promotional Objectives Increase repeat sales to existing Response rates to advertisements and
customers
Checking they have been met sales promotion
Attract a target number of new Website ‘hit’ rates
customers
(AS) The product (AS) Distribution channels
Promotion Decisions The market aimed at – industrial / Place Zero intermediaries – direct sales
consumer Includes internet, Factory Sales,
Key factors Whether new or existing product
Factors to consider independent sale of services
Stage in its product life cycle ONE intermediary
The Target Market Supermarkets (buy direct from
How best to reach them producers)
TWO+ intermediaries
The Cost
 Related to the potential gain
MUST be Cost effective
The finance available
Limits the type of promotion / media
available
The Competitors
Successful promotions often copied
Need to keep costs low
Importance of ‘freshness’ for product
(AS)
How widely dispersed the market is
Distribution channels Cost of holding inventories
Deciding factors Level of service expected by the
customer
Technical complexity of the product
Only profitable if the production remains
consistent with consumer demand
(AS)
Productivity Workers may want higher wages
POSSIBLE consequences of increasing Workers may fear redundancy
productivity
May give the business a competitive
advantage
(AS)
Training
Improving Productivity
Increasing motivation
Wholesalers who spread sales to smaller
retailers
Image
Location is IF it is important in market eg
banking, fashion, ‘High-End’ products
Cost of distribution
Location of market
Quantity to be distributed
Advantages
Customers can compare prices
Global promotions are possible
Global selling is possible
Dynamic pricing is possible
Easy to record web hits to monitor
success of promotional effort
(AS)
Impact of the internet Disadvantages
Customers can compare prices
Millions of websites available
Many customers prefer face to face or to
feel / touch / see product live
Promotes the idea of ‘lowest price’
rather than other important factors
Goods need to be delivered
Labour productivity
Total output in period ÷ Total workers
(AS) employed
Measuring Productivity
Captatl productivity
Output in period ÷ Capital employed
(AS)
Nature of the product
Choice of production system
Depends on: Size of business
 Volume of production
Available technology
Better management Nature of the market
Providing better equipment / machinery Skills of available work force
Time available
Flexibility required
Groups of products
One off – limited volumes Medium / high volume
Specialised products Batch standardisation
(AS) Higher end products (AS) Allows some economies of scale
High cost Batches adjusted to demand
Job Production Batch Production
Motivated workforce Division of labour
Features High skills needed Features May be demotivating
Time consuming Higher level of stocks required
Idle tools and equipment Down time when changing batches
Some flexibility
Government grants / Labour legislation
Market location
High volume
Land availability / prices
Continuous production
Infrastructure available
Standardisation (AS) Financial costs/benefits
(AS) Allows for economies of scale
Planning easier (eg JIT)
Location Decisions Image/ethics
Flow Production NOTE Other related support businesses
Often little labour involved
Features Not all factors are important for all Labour availability and skills
Quality consistent
businesses Production process
High set up costs
Communications – road, rail, sea, air
Work boring / repetitive
Services available
Less flexible
Suppliers location
Preferences of owners
(AS) (AS) Advantages
Within own country
Location Decisions Location Decisions May reduce costs
Single site
Key options Locating abroad Access global markets
Better / easier communication
Avoid trade barriers
Potentially better control
Avoids cultural / language difficulties
Disadvantages / Problems
 Multi site
Lower risk of supply problems
Cost advantages – economies of scale
Enables delegation
In another country
May reduce costs
Access global markets
Avoid trade barriers
Cost of insufficient stock
Lost sales
Idle resources if no raw materials
(AS)
Difficult to meet new orders
Order quantities small
Inventory level decision making
Cost of insufficient stock No economies of scale
V To prepare for rise in demand – eg
Benefits of low stock levels
Benefit of low stock levels
Reduced opportunity cost
Reduced storage costs
Reduced risk of wastage/obsolescence
(AS)
Economies of scale
Economies and Diseconomies
Financial
of scale
Marketing
Purchasing
Technical
Managerial
Diseconomies of scale
Communication Problems
Alienation of workforce
Language problems
Cultural differences
Level of Service / Quality / Supply
Ethics
Exchange rates
Skill differences / availability
Tariffs / trade barriers
Types of inventory
Raw Materials / components
Work in Progress
Finished Products
Need for Inventories
To ensure production resources do not
stand idle
(AS) Consumer demand can be met
Inventories immediately
Types / Need for / Factors
Seasonal products
Factors to consider when deciding
inventory levels
Lead (reorder to delivery) time
Cost of storage
Shelf life of product eg fresh products
Importance of availability eg medicine
(AS) Start up
The Need for finance Initial Buildings / inventory / marketing /
staffing
Working capital
Day to day spending
Eg inventory / expenses / bills /
operating costs
Capital expenditure
New machinery / Takeovers / R&D
Contingencies
Changes in economic circumstances /

(AS)
Diseconomies of scale
Ways of Avoiding
Poor coordination cash shortages / unexpected costs – fire,
IT failure etc.
Cash available
Buys materials / stock
MBO improves coordination
(AS) Used to make goods
Decentralisation
Working capital cycle Which may be sold on credit
Reduce diversification Customer eventually pays
Provides Cash

Retained Profit
Internal Advantages - Source of permanent
Retained Profit finance / No interest or other costs
Sale of assets Disadvantages - New businesses don’t
Reduction in working capital have it / Needs agreement of the owners

External Sale of assets

Long-term (AS) Advantages - Useful if underemployed
Share issue / Debentures / Long term assets available / Sale and lease back
(AS) INTERNAL
bank loan / Grants / new may be possible
Sources of Finance Sources of Finance Disadvantages – may be expensive /
Medium-term Advantages and Disadvantages
cannot use asset if needed later
Leasing / Hire purchase / Medium term
bank loan Reduction in working capital
Advantages – relatively easy / increases
Short-term efficiency
Bank overdraft / Creditors / Debt
Disadvantages – One off / finance likely
Factoring
to be small / may decrease too much

(AS) Shares (AS) Leasing / Hire purchase

EXTERNAL – Long term
Advantages – Low risk – reduces gearing
Sources of Finance
Advantages and Disadvantages
EXTERNAL – Medium term Advantages – avoids large cash
payments / Leasing reduces
/ Do not have to be repaid Sources of Finance maintenance costs
Disadvantages – Risk of takeover / can Advantages and Disadvantages
Disadvantages – Can be expensive / Less
be expensive / need agreement of control over leased equipment
existing shareholders
Medium term loans
Long term loans (and debentures)
 Advantages – no loss of shareholder
control / wide choice to suit need
Disadvantages – Need for collateral / Advantages – straight forward / wide
increases gearing / may be high interest choice
Grants Disadvantages – May have stringent
conditions / May not be available
Advantages – don’t have to be repaid (Gearing levels)
Disadvantages – not widely available

Bank overdraft
Time scale – short / medium / long
Advantages – Flexible / easy to arrange
Use for the loan – expansion / need for
Disadvantages – Very expensive / Can be
working capital
‘called in’ by the bank
Cost – interest rate / stock market
(AS) Creditors
(AS) charges / factoring charges / opportunity
Advantages - Easy way of borrowing if
EXTERNAL – Short term Choice of finance cost
they accept
Sources of Finance Amount needed
Disadvantages – may be costs in terms Depends upon:
Advantages and Disadvantages Current legal structure
of loss of discount
Size of the business
Factoring
Relative size of existing borrowing
Advantages – guaranteed income
(gearing)
Disadvantages – One off / may be
Flexibility needed
expensive
Increasing cash INFLOWS
Uses Overdraft
Planning when setting up a business Short-term loan
Convincing investors Sale of an asset
Setting targets Sale and leaseback
Identifying possible future Cash Flow Reduce credit terms to customers
(AS) problems (AS) Debt Factoring
Cash Flow Aid decision making Cash Flow Decreasing cash OUTFLOWS
Use and Limitations ‘What If’ analysis can identify key issues Solving / improving Cash Flow problems Delay payments to suppliers
Limitations Delay spending on capital equipment
The future cannot be predicted with Use leasing rather than purchasing
certainty capital equipment
Unforeseen circumstances
Cut overheads that do not directly affect
Only as good as the assumptions made
the business
 Uses
Poor credit control Pricing decisions
Too much credit Purchasing new equipment
(AS) (AS) Choosing between locations
Lack of planning Performing ‘What if’ Analysis
Cash Flow Break-Even Analysis
Expanding too rapidly (overtrading) Limitations
Causes of Cash Flow problems Uses and Limitations Assumptions may not be realistic
Unexpected events
Costs etc. may not be linear
Fall in demand Costs difficult to identify and classify
Assumes all units sold
Production / Operation
Cash can be released through debtors Direct / Indirect
Making credit periods shorter Used for final accounts
Not giving credit to new customers (Trading/P+L account)
(AS)
Discounts for cash / prompt payment Output
Employing debt factoring Basis on which to classify
Fixed / Variable / Semi-Variable / Non-
Improved credit control COSTS Variable
Cash can be released through stock (Used to calculate break-even)
Keeping smaller inventory levels
(AS) Type of asset
Improving stock control efficiency
Capital / Revenue
Sources of working capital Using Lean systems such as JIT
Cash can be managed better Key factor in determining profits
Using cash flow forecast Informs pricing decisions
Using cash when there is a surplus (AS) Informs production decisions
Effective planning Importance of costs Allows monitoring / comparisons
Cash needs can be reduced through
and Helps set budgets and targets
creditors
Negotiating longer credit terms Cost information Helps decisions about resource
Increasing goods bought on credit allocations
Essential for decision making
(AS) Used for the following (AS) Managers
Using Cost information Setting prices Stakeholders (users) need for Decision making / monitoring progress /
Level of production decisions (increasing, budget setting / benchmarking
+ reducing or stopping)
Accounting records Government
Cost Centres Monitoring performance Tax
Accepting special offers Banks
Controlling costs Whether to give loans etc.
Calculating profits Suppliers
 Cost Centres Whether to give credit sales
Used to monitor department spending Workers
Easier to know impact on individual Job security / wage claims
depts. Shareholders
Gives control over department spending Business performance / investment
to the manager(s) involved decisions
(AS) Income statement
Looks at a years trading
Accounting Fundamentals (AS)
Balance sheet
Types of account Wealth of a business at a point in time
Sales Revenue
ASSETS
Cost of Sales
Non-Current (Fixed) Assets
Sales Revenue LESS cost of sales
Current Assets
(AS) = Gross Profit (AS)
Less current liabilities
Income Statement Gross Profit – Expenses Balance Sheet
= Net Assets
Main items = Net Profit Main items
Profit after tax Funded by:
Dividend Shareholders funds and Non-current
Liabilities
Retained Profit

Two values to be compared gives a

direction for performance (ie better or Profitability
worse) GPM / NPM / ROCE
(AS) (AS)
Comparisons can be made with previous
Ratio Analysis years OR with other similar businesses Ratio Analysis Liquidity
Why calculate ratios Analysing ratios can indicate problems,
Groups of ratios
Current / Acid Test
but be careful – the ratios don’t state
reasons or solutions to potential
problems
(AS) Accounts are Historical (AS)
Ratio Analysis Ratios cannot be looked at in isolation
Limitations of ratio analysis Different industries may have different
‘acceptable’ ratios
External events can have a big impact
Range of different formulae for some
 ratios
Accounts (within limits) can be adjusted
to look better (window dressing)
Ratios can only highlight potential
problems not solve them

Traits
Owned by the members
Members can be employees or users of
the business
Problems
Complex decisions can lead to uncertain
decision making
Workers/directors may not have the
(AS)
skills
Co-operatives
Management roles may be unclear and
therefore inefficient
Benefits
Decisions taken with the benefit to
members as a factor
Decisions taken by directors voted for by
workers not external shareholders
Shared profits increase motivation