UNIT 1

INTRODUCTION TO BUSINESS MANAGEMENT

Reason for starting up business

. money
. so that u don’t have to work under someone

What is a business plan?

A business plan is straight up, a guide for your business that outlines the needed
expectations and details on how to achieve them. It helps you allocate resources properly
and make the right decisions. A business plan is crucial because it provides specific and
organised information about your company, also on "how you will repay borrowed money"
because any type of loan package is considered important in a good business plan.

Problem that a new enterprise may face

1. Cash, Borrowing and Resource Management

 
 Cash flow --> a healthy profit. Therefore, if capital expenditures are draining your
cash, it is a sign that the business is in risk. In order to avoid these, businesses must
store up cash to meet the obligations needed to handle any emergencies. Cash
restrictions can be the biggest factor that may limit growth and overtrading to be
fatal. 
 It is crucial to make the best of your finances, because it is a key opportunity to
assess new right set of circumstances.
 Effective credit management and tight control of overdue debts.
 Good stock and effective supplier management
 Planning ahead (to anticipate your financing heeds)

2. Keeping up with the market

 Business conditions change continually, therefore your market research should be
continuous as well.
 Can easily lead to business/market failure (out-of-date information...etc)
 More you succeed = more competitors will notice you
 Important to invest in innovation to build new profitable profits to market (to
maximise overall profitability)
 Your own experiences may be more valuable (useful insights)
 Continually watch the customers' purchasing behaviour and preferences.
 Analyse key info on the customer's reaction to a new product.
3. Skills and Attitudes
 May need outsiders for help as business grows
 Must learn to listen, take advices of people, to be a successful entrepreneur.

Business sectors

Primary Sector
The primary sector of the economy is the sector of an economy making direct use of
natural resources. This includes agriculture, forestry, fishing and mining. 

Secondary Sector
Secondary industries are those that take the raw materials produced by the primary sector
and process them into manufactured goods and products.

Tertiary Sector
The tertiary sector is also called the service sector and involves the selling of services and
skills. They can also involve selling goods and products from primary and secondary
industries.

Quaternary Sector
The quaternary sector consists of those industries providing information services, such as
computing, ICT (information and communication technologies), consultancy (offering advice
to businesses) and R&D (research, particularly in scientific fields).
The quaternary sector is sometimes included with the tertiary sector, as they are both
service sectors. The tertiary and quaternary sectors make up the largest part of the UK
economy, employing 76 per cent of the workforce.

The main function of a business

1. Human resources
 The HR department is responsible for managing the personnel of the organization
 In managing people, the HR department is likely to deal with the following issues:
 workforce planning, recruitment, training, appraisal, dismissals
and redundancies, and outsourcing human resource strategies

2. Finance and accounts 
 This department is in charge of managing the organization’s money
 The finance and accounts director must ensure that accurate recording
and reporting of financial documentation takes place
3. Marketing 
 responsible for identifying and satisfying the needs and wants of customers
 in charge of ensuring that the firm’s products sell. Done through market research,
test marketing, advertising and branding.
 Functions of the marketing department can be summed up as the traditional four Ps

4. Operations
 Also known as operations market or production
 Functional area of an organization is responsible for the process of converting
raw materials and components into finished goods

 Ready for sale and delivery to customers

 Examples of production include: 

 The extraction of crude oil, car manufacturing and the construction of roads

 Operations also applies to the process of providing services to customers as
in the case of hotels, restaurants, beauty salons and financial institutions
Unit 1.2
Types of organisation

Difference between private and public sector

Private
The private sector is usually composed of organizations that are privately owned and not
part of the government. These usually includes corporations (both profit and non-profit),
partnerships, and charities.
For example, retail stores, credit unions, and local businesses will operate in the private
sector

Public
The public sector is usually composed of organizations that are owned and operated by the
government. This includes federal, provincial, state, or municipal governments, depending
on where you live. Privacy legislation usually calls organizations in the public sector a public
body or a public authority.
for example, educational bodies, health care bodies, police and prison services, and local
and central government bodies.

sole trader
 Owner controls the business - may employ some workers
 Gets money from personal assets / bank loans
 Unlimited Liability (Loans, legal debts. Owners are personally liable for all debts)
Advantages
 Total control of the business
 Gets all profit
 Simple to set up because start up costs are low
 Wage bill will be low because there are a few or no employees
 Less Paperwork

Disadvantage
 Unlimited Liability - owners may even be forced to sell their own personal assets to
cover any business debts
  Less leisure time - you work long hours often times
 All responsibility is yours in decision making, as well as pressure

Partnership
 Two or more people usually
 Partners control the business
 gets money from bank loan and savings
 partners share the profit from business
 Doctors, dentists, solicitors are all examples of partnerships; they benefit from
shared expertise
Advantage
 Shared responsibility - also allows specialization where 1 partner's strengths can
complement another's
 More contribute to capital = more flexibility in the business
 Less pressure on individual partners; there is someone to consult over business
decisions
 Greater borrowing capacity
Disadvantage
 Unlimited liability of the partners for the debts
 Shared responsibility
 Costly if partners join or leave
 risk of disagreements and frictions among partners and management

private limited co.

 Have their own legal identity
 Often a small business
 Shareholders own the business & control & run
 Shareholders can invest their money or borrow money from bank (bank loans)
 Shareholders get the profit from the business
 Unless elected to the Board of Directors; the owners are not involved in running the
business.
Advantage
 limited liability
 more capital can be raised
 Business continues even if the owner dies; shares are transferred to another owner
Disadvantage
 Profits have to be shared amongst a potentially larger number
 Growth may be limited (max. 50 shareholders)
 Must have agreement from all shareholders before selling/transferring shares of the Private LTD Co.
to anyone else

Public limited co.

  Usually a large, well known business
 Shareholders own, control, run the business. Money investment as well
 Shareholders have claimed to be a part of the company's CA and Profit
Advantage
 limited liability
 can easily dominate a market
Disadvantage
 expensive to set up
 may face management problems

Unit 1.3
Organisational object

Objectives
State what the company wants

Why set objectives?

 clear define object
 plan strategies made accordingly
 motivate the employees
 foundation for decision making
 company can check its progress
aim
state what the company need to achieve to meet the aim
 aim found in mission statement
 a mission statement is a written statement clear to all stakeholders firms overall aims
and values
 it enables a stakeholders of a business to understand why a business doing is what it
is doing
strategies
state the course of action to meet the objective
tactics
very short term; day to day

vision statement
 A vivid mental image of what you want your business to be at some point in the future
 Based on your goals and aspirations
 Gives your business a clear focus, and can stop you heading in the wrong direction

Mission statement
 When you're coming up with the concept for your business
 An important component of your overall strategy plan
 Declares the purpose of an organisation and defines the reason for your company's
existence.

Ethical objectives
 Business Ethics
 Ethical code of practice

Unethical objectives/practice
 Exploitation (employers, suppliers, customers)
 Environment
 Financial deception (taxes not paid)

(CSR) Corporate social responsibility

It means that a company should self- regulate its action and be socially accountable to its
customers, stakeholders and the world at large.

Swot analysis
Simple yet very useful decision-making tool. (Strategic planning)
 Strength
 Weakness
 Opportunities
 Threats
Ansoff matrix
Analytical tool that helps managers to choose and device various product and market
growth strategy.

Market penetration
Existing product in existing market

product development
new products in existing markets

market development
existing products in new markets

diversification
new product in new market
  related diversification
 unrelated (completely new product)

Unit 1.4
Stakeholder
A person, group or an organization that has an interest or concerns in an organization.
They can be affected or affect the organisation/business in terms of their actions, objectives
and policies

Internal stakeholder
are groups within a business or people who work directly within the business. e.g:
 employees
 managers
 shareholders
 owners
 investors
external stakeholder
are groups outside a business or people who are not directly working within the business
but are affected in some way from the decisions of the business. e.g:
 customers
 suppliers
 creditors
 community
 trade unions
 government
 competitors

Unit 1.5
External environment

What’s a steeple?
Social factors
 health consciousness
 population growth rate
 age- distribution
 career attitudes
 emphasis on safety

technological factors
 economic growth
 exchange rate
 interest rate
 inflation rate

political factors
 tax policy
 employment laws
 environment regulations
 trade regulations and tariff
 political stability
legal factors
 legal restrains and regulation
 health and safety of employees

ethical factors
 discrimination
 diversity issues

unit 1.6
Growth and Evolution

economies of scale
A decrease in average cost due to expansion

Diseconomies of scale
An increase in average cost due to expansion
A business can become so large that its unit costs begin to rise. Expanding firms can
experience diseconomies of scale. These include:
 ineffective communication
 reduced motivation

internal EOS
 firm specific
 result in declining marginal costs of production
 net effect is the same
 tend to offer greater competitive advantages than external economies of scale. This
is becau. se an external economy of scale tends to be shared among competitor
firms.

External EOS
 occur based on larger changes of the firm
 result in declining marginal cop
 net effect is the same
 having an effect in the whole industry
 tends to be shared among competitors firm

internal Dis Eos

Diseconomies of scale are the result of higher unit costs as a firm continues to increase in
size,
 The business becomes too big
 Inefficient -> average costs begin to rise
  Usually occur due to managerial problems. 
 Managers may lack control and coordination as the span of control
 Poorer working relationships in an oversized business
 Likely to suffer from the disadvantages of specialisation and division of labour
 The amount of bureaucracy (administration, paperwork and company policies)
is also likely to increase
 Complacency occur -> reduce productivity thereby raising unit costs of
production

External Dis Eos

Increase in the average costs of production as a firm grows due to factors beyond its
control
 Problems that affect the whole industry, often because there are just too many firms
 Average costs of production increase for all businesses in the industry
 Too many businesses locating in a certain area causes land to become more
scarce thereby increasing market rents.
 Since workers have greater choice from a large number of employers in the
local area, businesses might have to offer higher wages and
financial rewards to retain workers or attract new staff. This will increase
costs without necessarily increasing output, thereby raising average costs
of production
 Traffic congestion results from too many businesses being located in an area.  

Unit 1.7
Organisation planning tool

All businesses, regardless to their size or their legal status need to have a plan on how to
achieve their organizational objectives. 
Below are Organizational Tools used by businesses:
1. Fishbone diagram

What is a fishbone diagram analysis? When would you use this planning tool?
A fishbone diagram, also called a cause and effect diagram it is a visualization tool for
categorizing the potential causes of a problem in order to identify its root causes.
. analysis in order to help employees avoid solutions that merely address the symptoms of
a much larger problem.

2. Decision tree

Advantages
 Encourages a careful consideration of all alternatives
 Sets out a problem clearly
 Encourages a logical approach to decision making
  Encourages a quantitative consideration of chance
 Helps take risk into account when making decisions
 Useful when similar scenarios have occurred before, so that good estimates of
probabilities and predicted actual values are available
 Useful in tactical or routine decisions rather than strategic decisions

Disadvantages
 Hard to get accurate or meaningful data for probabilities
 Less useful in the case of completely new problems or one-off strategic problems
 Easy for management bias to enter, or for a manager to manipulate the data
 Ignores the changing nature of the business environment, which affects the outcome
of decisions
 May lead to managers taking less account of qualitative issues

Unit 3 (1,2,3and 7)
Finance and account

Unit 3.1
Sources of finance

Roles of finance in business

Capital expenditure
This is the finance spent on Fixed Assets (assets that are purchased for long-term use and
are not likely to be converted quickly into cash, such as land, buildings, and equipment).
Fixed Assets determine the scale of a firm's operations; they are not intended for resale but
for the purpose of generating money for the business . 

Revenue expenditure
Refers to payments for the daily running of a business; wages, raw mat, rent and electricity.
This also includes the payment of indirect costs; insurance and advertising. In order for a
business to generate enough revenue to earn a profit, cost must be controlled.
f
Internal sources of finance
1. Personal funds
  Main source of finance for sole trader, partnership
2. Retained profits
 Value of profits that the business keep to use within the business
 Often use for purchasing and/for upgrading fixed assets
 Some might be kept for contingency fund- emergencies
 Advantage of using this is that it does not incur any interest charges
3. Sale of assets
 Selling unused assets
 If a business has chosen to reallocate, then raise finance through selling
of old land, buildings

External source of finance

1. Share capital
 Main source of finance for most limited liabilities companies
 Money raised by selling shares of the company
2. Loan capital
 Limited to lt source of finance from commercial lenders such as bank.
 Interest changes are imposed and can be fixed of variable, depending on the
agreement between borrower and lender
 The amount borrowed is paid back in instalments over a period (collateral)
 Also debentures (lt loans issued by a business)
3. Overdrafts
 Allows a business to temporally overdraw on its bank account (taking out more
money than it has in its account.
 Commonly used when business has minor cash flow problems
 Usually more cost effective than bank loans even though it can demand a
relatively high rate of interest
 Provides flexibility for businesses that might occasionally face cash flow
problems
4. Trade credit
 Allows the business to buy now pay later
 Although a sale is made at the time of purchase, the seller or credit provider
does not receive any cash from the buyer until a later date
5. Grants
 The govt grant may be hard to obtain as, it refers to a financial gift
 Usually offered to eligible businesses and do not need to be repaid
6. Subsidies
 Similar to grants
 To reduce cop and provide benefits to the society
7. Debt factoring
  A financial service that allows a business to raise funds based on the value own
by its debtors
8. Leasing
 Form of hiring whereby a contact s agreed between a leasing company and the
customer
 When the lessor grants the lessee the right to its exclusive possession and use
for a specific period of under specified conditions, in return for lease payments
or specified periodic rental 
9. Venture capital
 Capital invested in a project in which there is a substantial element of risk,
typically a new or expanding business
 Venture Capitalists, seek to invest in a small to medium sized businesses that
have high growth potential
10. Business angle
 Extremely wealthy individuals who choose to invest their own money in businesses
that offer high growth potential
 i.e. high-risk, high-return business ventures
 Provide funding for firms that are unable to secure loans from banks and/or too small
to attract the attention of venture capitalists
 Likely to take a proactive role in the setting up or running of the business venture
 Although business's owner my lose some of its control to the BA, with their wealth of
experience and financial backing, angel investors can be a major advantage to the
survival and success of a new business

Finance
Short term
Medium term
Long term

Advantages of sources of finance



Disadvantage of sources of finance


Unit 3.2
Cost and revenues
Types of cost
1. Fixed cost
 Coststhat do not vary with the level of output. They exist even if there is no output,
such as the cost of rent, management salaries and interest payments on bank loans.
2. Variable cost
Cost of production that changes in proportion to the level of output. e.g. Raw
materials and piece-rate earnings of production workers.
3. Semi variable cost
Those that have an element of both FC and VC, e.g. Power and electricity or salaried
staff who also earn commission.
4. Direct costs
Costs specifically attributed to the production or sale of a particular good or service.
This can be traced back to the product and/or to a cost centre.
5. Indirect costs/ overheads
Cost that do not directly link to the production or sale of a specific product eg
rent wages of cleaning staff, and lighting
Costs formulas
TC= TFC + TVC
TVC=AVC*Q
TFC=AFC*Q

Revenue
Sales revenue= price * quantity

Revenue stream
Money coming into a business from its various business activities eg sponsorship deals,
membership deals
1. Advertising revenue
2. Transaction fees
3. Franchise cost and royalties
 franchisees pay a fee to the franchisor to purchase the right to use
its brand name, logos and trademarks
 The franchisee also pays a royalty payment based on the sales revenue of the
franchised business

4. Sponsorship revenues
 It’s a type of below the line promotion
 The sponsor financially supports an organization in return for prominent promotional
display of the donors brand trademark
5. Subscription fees
6. Merchandise
 Services provided in the entertainment industry (theatres)
7. Dividends
 Being shareholder of other companies entitles a business to payments of
any declared dividends.
8. Donations
 Financial gifts from individuals or their organisations to a business.
9. Interest earnings
 Business can earn interest on their cash deposit at the bank
10.Subventions
 Subsidies offered from the government to certain business to help
reduce their cost of production(cop).
Unit 3.3
Break – even analysis
A business breaks even when neither a profit nor a loss is made
This happens when TR=TC

Break-even is a key objective of new and unestablished firms. 

Hence, businesses need to pay careful attention to their cash-
flow situation by monitoring and controlling the money coming into the
business (revenues) and the money leaving the firm (costs). 

A  business can only survive in the long term if its revenues exceed its costs, i.e. if it

is profitable. 

1. LOSS
 COP>REVENUE

2. BREAK-EVEN
 COP=REVENUE

3. PROFIT
 COP<REVENUE

So why is Break-Even analysis needed?

 To see whether it is financially worthwhile to produce or launch a particular good
or service
 The expected level of profits that the business will earn if all goes according to plan. 

CONTRIBUTION
Refers to the sum of money that remains after all direct and variable costs have been taken
away from the sales revenue.
C PER UNIT = PRICE – AVERAGE VARIABLE COST
TOTAL C = (P-AVC)*Q
PROFIT=TC-TFC

Profit can be increased:

 Increase sale of the product which raises the TC
 Reduce VC , through negotiating better deals with current suppliers or
seeking new suppliers
 Reduced FC and overheads perhaps through better financial control
Contribution analysis can help a business to identify products that are
relatively profitable and once that might need more attention.
Several uses of contribution
1. Pricing strategy

2. Product portfolio management

 Product with a higher contribution tend to be given precedence(
 Product with a lower contribution (replaced by other product)

3. Allocation of overheads to cost and profit centres

 Cost allocation done in a fair manner

4. Make-or-buy decisions
 Help the business to decide whether it should produce the product or buy it
from the supplier

5. Special order decisions

 Customer places order at a price that differs from the normal price charged by
the business.

BREAK EVEN = FIXED COST/CONTRIBUTION PER UNIT

Things to include in a Break Even Graph

1. Y (Revenue) and X (Output) axis 
2. Fixed Cost = Basically a straight line when X=0. Y value is the value of FC.
3. TVC = Start from Origin and up
4. TC = MUST start from FC as the origin
5. TR / Revenue = Also start from origin
6. The line where TC and Revenue intersects = BEP
7. Put a dotted line at the Y Axis at where the BEP is all the way down to the X-axis...
and LABEL BEP=???
 8. LABEL The BEP ~~ Maximum Output = MOS (Margin of Safety). 

Margin Of Safety
Difference between the firms sales volume and the quantity needed to break even
+MOS means the firm makes profit
-MOS means the firm makes loss
The <MOS the safer the firm will be in terms of earning profit

MOS= LEVEL OF DEMAND – BREAK EVEN QUANTITY

Target profit = target revenue(tr) – target cost(tc)

Benefits of BEQ
 Unit 3.7
Cash flow
What is cash?
Cash is a current asset needed to pay for daily costs such as wages and electricity charges. If
these are not paid on time, businesses may be eventually result in bankruptcy. Cash is what
a business actually receives from the sale of goods and services - It can be either held ‘in
hand’ (actual cash in the business) or ‘at bank’ (cash held in a bank account).