Caie Igcse: Business STUDIES (0450)

ZNOTES.
ORG
UPDATED TO 2020-22 SYLLABUS
CAIE IGCSE
BUSINESS
STUDIES (0450)
SUMMARIZED NOTES ON THE THEORY SYLLABUS
CAIE IGCSE BUSINESS STUDIES (0450)
A business also employs people as worker and pays them

wages to
allow them to consume products as well
1. Understanding business
activity 1.4. Added Value
Added value is the difference between the selling price
1.1. Nature of Business Activity and the cost of bought-in raw materials and components.
Needs: goods or services that we need in order to live Added Value = selling price – total cost
Wants: goods or services which people would like to have.
It is NOT the profit because added value does not include
But are not essential for living.
the price to pay for labour, transport etc.
People’s wants are unlimited (you will always want
To increase added value, a business can either:
something) but the resources available to produce them
Increase the selling price of product, while keeping
are limited which leads to scarcity (the basic economic
the total cost of material the same
problem)
Create a brand image
Scarcity: there are not enough products to fulfil the wants
Improve packaging
of the population
Make products more appealing by adding features
Resources (also known as factors of production) include:
Provide higher quality goods and services
Land, Labour, Capital & Enterprise
Decrease the total cost of materials, while keeping the
Land – any natural resource used in production
selling price of the product the same.
Labour – mental and physical efforts of a human
Capital – man-made goods used in production
Enterprise – the risk-taking ability of an entrepreneur 1.5. Classification of Businesses
As there are limited resources, people are always forced
to make a choice. This means that we will be giving Businesses can be put into three sectors:
something up, this is known as opportunity cost Primary sector – extraction of natural resources. Ex.
Opportunity cost: it is the next best alternative that is farming, fishing
Secondary sector – manufacturing and production of
given up by choosing another item.
goods. Ex. car manufacturer
Tertiary sector – provides services. Ex. hairdressing,
1.2. Specialisation banking
The relative importance of these sectors in an economy
Specialisation: when people and businesses focus on
depends on:
what they
are best at.
Number of workers employed
Division of labour is when production is split in different
Value of output produced
tasks
and each worker performs one of these tasks
Deindustrialisation occurs when there is a decline in the
importance of the secondary sector.
Advantages Disadvantages
This can happen due to:
Workers become bored of Depletion of primary resources in home country
Workers specialized in certain
doing the same job. Efficiency Cheaper goods by developing countries
task, increases efficiency
might fall Ability to spend more income on services
Less time is wasted from one If a worker is absent, no
workbench to another, more other worker can do the job.
1.6. Mixed Economy
efficiency Efficiency might fall
As the business is more Employees have to rely on Has both a private sector and a public sector.
efficient, output increase each other to produce Private Sector: Businesses NOT owned by
which may lead to economies products, leading to a fall in government, will make own decisions on what and
of scale productivity how to produce. The main aim is to make profits.
Workers become more skilled Public Sector: Owned by the government.
and experienced, reducing Government will make decisions on what and how to
the mistakes made produce (i.e. healthcare, education, defence, public
transport). The main aim is to provide a service to
customers.
1.3. Purpose of Business Activity: Privatization refers to the selling of a public sector
business to the private sector.
Businesses combine scarce factors of production to
Privatisation may occur as private sector is more efficient,
produce goods or
services to satisfy people’s wants
competitive and will be able to make good quality goods
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leading to higher profits.

1.9. Government Support for Start-Ups
But private sector does not have social objectives, making
their products unaffordable.
Governments encourage entrepreneurs to set up a
business because
start-ups:
1.7. Enterprise, Business Growth & Size Reduce unemployment, new businesses create jobs
Increase competition, gives consumers more choice
An entrepreneur is a person who organises, operates and Increase output, economy benefits from increased
takes
risk to make the business better output of
goods and services
Characteristics of entrepreneurs: Can grow further and become large and important
Hard working businesses which pay government more taxes
Risk Takers Governments may give support to entrepreneurs by:
Creative Business ideas & help, they set up support sessions
Effective Communicators held by
experienced business people
Optimistic Finance, they may lend loans at low interest rates or
Self-confident grants
Innovative Governments provide grants for training employees
Independent. to make
them more efficient and productive
Advantages and disadvantages of being an entrepreneur: Governments allow entrepreneurs to use research
facilities
in universities
entrepreneurs will have to
Independent, able to choose 1.10. Business Size
put their own money into the
how to use time and money
business. There are several different measurements of business
Able to put own ideas into many entrepreneur’s size and they
all have limitations:
practice businesses fail (risky)
May become successful and Lack of knowledge and Measurements Limitations
very profitable if business experience in starting and Some businesses employ few
The number of people
grows operating a business people but produce high
employed in the business
Lost income from not being output values
Able to make use of personal
employee for another The value of output of the high level of output does not
interests and skills
business (Opportunity cost) business mean business is big
Will have to invest their own different businesses sell
Profits to themselves, no
savings as well as find other The value of sales different products (expensive
need to share them with
sources of finance , which is and cheap)
anyone
time taking and expensive The total value of capital some companies may use
(money) invested into the cheap labor giving low output
Who needs to know the size of a business? business (capital employed) with low-cost equipment
Investors
No way of measuring the size is considered correct as
Government
each method gives different answers. Businesses choose
Competitors
the method they think is the best. Therefore, businesses
Workers
may use more than one method.
Bank
1.11. Reasons for business Growth

1.8. Business Plans
Some businesses want to grow because:
A business plan contains business objectives, important
Higher profits
details
about the operations, finance, and the owners
More status for owners and managers
Business plans assist entrepreneurs because:
can benefit from Economies of Scale (lower costs)
It helps gain finance. banks will ask for a business plan
Larger share of its market, ‘big names'
before
agreeing to a loan or overdraft for the
business
It forces the entrepreneur to plan ahead carefully, Ways of business growth
which
reduces risk of the business failing.
The main parts of a business plan include: name, type of Businesses can either grow by:
organization, business aim and forecast profit Internal Growth
External Growth
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Internal Growth is when the business expands its existing A business owned by just one person. It’s the smallest
operations type of
business. Can employ other people however.
External Growth is when the business takes over or Useful for people who are setting up new business
merges with another business. Do not need much capital to get business running
There are three types of External Growth: Will be dealing mainly with the public
Horizontal Integration – firm taking over/merging with
another firm in the same industry Advantages Disadvantages
Ex. a paper company taking over another paper Capital is usually provided by
Easy to set up, do not require
company owner, hard to get capital to
a lot of money to set up
Benefits include economies of scale and higher expand firm
market share They have unlimited liability
Problems include diseconomies of scale and They are their own boss, has
(responsible for any debts of
difficult to control and manage the business the freedom to choose their
the business, bank can take
Vertical Integration – firm taking over/merging with own holidays, work hours,
away possessions to pay
another firm in same industry but different stage of prices, who to employ
back)
production (there is forwards and backwards)
Close relationship with Business is likely to remain
Ex. paper manufacturing company taking over
customers small
paper selling company
Benefits include profits by supplier/retailer are Does not have to share No one to discuss business
absorbed and personal attention is given profits matters with
Conglomerate Merger - firm merging/taking over They are unincorporated
Does not have to give
another firm in a different industry. (also known as (business has same identity
information about the
‘diversification’) as the owner). So, business
business
Ex. paper company taking over a food company ends when owner dies
Benefits include spread of risks and transfer of Lesser legal restrictions
ideas.
1.14. Partnerships
Why small businesses are at greater
risk A business in which 2 to 20 people agree to own it.
Usually small
businesses but bigger than sole traders.
Established by youngsters who lack managed experience Useful for people who want to form a business but
Borrow money to begin so will have to repay whether or don’t want the
legal complications
not business is successful Industries such as medicine or law where you are not
Start-ups have lesser experience and information about allowed to
form a company
the market in order to make informed decisions Partners that know each other very well
New entrepreneurs may not have a realistic picture of the Requires a Partnership Agreement
market
Easy to set up, do not require Capital is usually provided by
1.12. Why Businesses Fail a lot of money partners
Poor management – from lack of experience, poor choice More capital invested (more Partners have unlimited
of
managers (family business), bad decisions expansion) liability
Failure to plan for change – businesses need to adapt Partners can disagree on
Partners are motivated
everchanging business environment. Must take risks. decisions. If one of the
because any losses are
Poor money management – lack of money to pay partners is inefficient, they all
shared by the partners
workers, suppliers,
landlords, etc. lose money
Over-expansion – (diseconomies of scale), management Responsibilities are shared They are unincorporated. If
problems and finance (focused on different parts of one of the partner dies, the
Competition with other businesses – new businesses are business) partnership ends
at more
risk of failing than existing businesses.
This is because start-ups have lack of money, resources, Contents of Partnership Agreement:
poor
planning & don’t have much research Amount of capital invested by all partners
Tasks to be done by each partner
1.13. Sole Trader The way profits are shared out
How long partnership will last
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Arrangements for absence, retirement and how Advantages (in addition to those
Disadvantages
partners could be
let known in LTDs)
Difficult to set up (legal
Opportunity to raise high capital
1.15. Private Limited Company (LTD) sums
formalities) & accounts
are even more public
An LTD is different from the other because it can sell Danger of business being
shares
and it is an incorporated business. No restriction of buying, selling or
taken over due to public
Company must be owned by at least 2 shareholders transferring shares
shares
A shareholder buys shares of an LTD company which
Selling shares to public is
represent
part ownership of the company
expensive
Dividend is the amount of profit each shareholder
gets
DON’T GET CONFUSED, Public Limited Companies are
Shares are sold privately to friends and family
NOT in the
PUBLIC sector, they are in PRIVATE sector
Has separate identity from owners, incorporated, so
company accounts
are separate from the owners’
Must have: Articles of Association and Memorandum of 1.17. Joint Venture
Association
Article of Association – must contain the
RULES in which A joint venture is when two or more businesses start a
the company will
be managed. Contains: project
together sharing capital risks, and profits
Rules for shareholder meetings
List of directors and their jobs Advantages Disadvantages
Voting rights of shareholders Costs are shared, good for Profits have to be shared if
Details of how accounts are recorded expensive projects project is successful
Memorandum of Association – must contain important Shared knowledge of two Might have disagreements
information
about the company: businesses over important decisions
Company name, address Different methods of running
What the business does Risks are shared
business
Number of shares to be sold
Advantages Disadvantages 1.18. Franchise

Shares can be sold to lots of
Difficult to set up (legal A franchise is an agreement of a business based upon an
people. More capital to
formalities). existing
brand/business
expand
The franchisor is the main business/brand
Owners are able to keep
Shares are difficult transfer. The franchisee is the individual to start up franchise
control of company as long
Requires other shareholders In a franchise, the franchisor allows the franchisee to
as they don’t sell too many
to agree trade under
its name and see its products for a fee
shares
The franchisee pays an original fee to franchisor and a
All shareholders have limited percentage
of its profit for the privilege
Accounts are less secret than
liability (bank can only take Franchisor provides support, such as:
other forms of business
amount of money invested) Advertising
Company continues after a Company cannot offer it Legal advice
shareholder dies shares to the public Employee training
Financial advice
Private Limited Companies are useful for family Franchise agreements last 5 – 20 years, if franchisee
businesses or
businesses/partnerships where owners cancels the
agreement early there may be large fines
want to expand more (as you can
sell shares)
1.19. Risk, Ownership & Limited Liability
1.16. Public Limited Company (PLC)
Risk - the uncertainty of profits or danger of loss, events
A PLC is similar to LTD only the shares can be sold to the that
could cause business to fail
public. It is the biggest type of business. Ownership – who owns the business (partnership =
Shareholders of PLCs may attend an Annual General partners, LTDs
and PLCs = the shareholders)
Meeting where
they may vote for the board directors The people with risk are usually the owners
Liability – how much the shareholders of a company are
Advantages (in addition to those liable
for the debts in the business
Disadvantages
in LTDs)
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Limited Liability – liability of shareholders is limited to

1.22. Stakeholder objectives
the amount of money they invested (PLC & LTD)
Unlimited liability – owners of business are held A stakeholder is any person with a direct interest in the
responsible for all the debts of the business (not just
performance of a business
their
investment) (Sole trader & partnerships)
There are two types of stakeholder groups:
Internal Stakeholders work/own the company
1.20. Public Sector (owners,
managers, workers)
External Stakeholders are outside of the business
The public sector includes every business owned by the (consumers, government, banks)
government. Each stakeholder group has different objectives for the
Businesses in the public sector are public services, i.e. performance
of the business
education,
transport, hospitals, education and police Internal Stakeholder’s objectives are payments or profits,
Usually these businesses have been nationalized (used to they
want business growth, so value of investment
be
private sector but government bought it) increases or they get
higher status/power
Capital comes from taxes, by tax payer Customers objectives are reliable products, value for
money,
good quality, good design and good service
Advantages Disadvantages Government objectives include: money from taxes, will
Reduces wastage of Low efficiency due to lack of employ
more people, increase country’s output
resources (if a monopoly) competition Banks objectives are to make profit out of loans
Easily manipulated by the Since different stakeholders have different objectives, it
Allows access of essentials to may cause
conflict, to try to please all the stakeholders
government to exploit
everyone For example: customers want cheap products but
citizens
Not flexible as profit is not a workers want higher
salaries.
Continued even if in losses Therefore, managers have to compromise to decide
main aim
which objectives
are best for the company
Keeps in mind social costs of Will have to be subsidized if
decisions (non-profitable) in losses, opportunity cost
2. People in business
1.21. Business Objectives
2.1. Motivating Workers
Business objectives are aims or targets a business works
towards It is very important for a business to have a well-
Benefits of having business objectives: motivated
workforce
Employees have a clear target to work towards The main reasons why people work:
Decisions made keeping in mind objectives Money: to pay for the basic needs for life and some
Clear & measurable objectives will make sure the wants
entire organisation works towards the same goal Security: to know that you are safe (financially)
Managers will be able to compare performance Affiliation (Social needs): to feel part of a group, meet
A business objective maybe changed if economic people, make friends
conditions change or one objective has already been Self-importance (esteem): to feel that you are
achieved important and
that the job you do is important
Private sector business objectives: Job Satisfaction: to feel pleasure that you have done a
Business Survival - Adjust to business environment, good
job
change
price of products if necessary Motivation – the feeling that makes employees want to
Generating profit – pay a return to owners or provide work hard and effectively in a business
finance to invest further in business Well-motivated workers high productivity increased
Returns to shareholders - discourage shareholders output higher profits
from
selling their shares. Can be increased by Unhappy workers do not work effectively low output no/
increasing profit or
increasing the share price lower profits
Growth of business – increase salaries, economies of
scale.
only achieved if customers are satisfied with the
product 2.2. Key Motivational Theories
Market Share – the proportion of the total market
F.W. TAYLOR
sales by
one business, gives good publicity, more
“All individuals are motivated by personal gain”
influence over
suppliers and customers
Also known as “theory of an economic man”
Service to community – provide jobs, support
Had a mechanical approach rather than human.
disadvantaged
groups in society, protect environment
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This means that if the workers are paid more, they will Job Satisfaction
work more effectively Financial Rewards/Motivators include:
By breaking down worker’s jobs into simple tasks, you Wages
could calculate how much output they could do in a Wage is a payment given weekly
day Workers are paid quickly, so don’t have to wait too
Taylor’s idea was that if the workers produced more, long to receive money
they would receive a bonus Given overtime for extra hours worked
But the problem with this approach is that Taylor They must be calculated every week, which is
believed everyone is ONLY motivated by money, expensive
which doesn’t, always stand true Wage clerks need to be appointed
ABRAHAM MASLOW Time Rate (payment per hour, i.e. 10$/hour)
Also known as “Hierarchy of Needs” – a pyramid Paid according to number of hours worked
showing the different types of needs and how some Easy to calculate
are more important than others Good and bad workers are paid the same
(demotivating)
Supervisors may need to be appointed to keep a
check on workers
Clocking-in system may be required
Piece Rate
Physiological Needs – food, rest, shelter (fulfilled by Workers are paid depending on the quantity of
receiving wages) products made
Safe/security Needs – protection against danger & Given above basic pay
poverty. Having fair treatment (fulfilled by having job Encourages workers to work faster
security) May only focus on quantity and ignore quality
Social Needs – friendship, belonging in a group Workers focusing on quality may earn less
(fulfilled by having colleagues at work) (demotivating)
Esteem Needs – having status and recognition Salaries
(fulfilled by being recognised for good work) Paid monthly
Self-actualisation – achieving your full potential, No overtime
feeling that you have done a good job (fulfilled by Salary = annual income/12
being promoted & being given more responsibility) Payment needs to be calculated only once a
Maslow’s theory also suggests that each level in the month
hierarchy (starting from Physiological needs) needs to Commission
be achieved before moving on to the next Given to sales staff
FEDRICK HERZBERG Higher sales, higher money
Also known as “the 2-factor theory” Encourages people to sell more
Humans have two sets of needs: If too persuasive may have negative effects on
Basic animal needs (called ‘Hygiene’) customers
To be able to grow physiologically (called Profit sharing
‘Motivator’ needs) It involves giving employees a share of profit,
above basic pay
‘Motivator’ Factors ‘Hygiene’ Factors Increases motivation
Achievement Status Other profits may be given to shareholders
Recognition Security Bonus
Personal Growth Work Conditions A lump sum amount of money is given to workers
who have done a good job
Relationship with boss &
Advancement/Promotion Paid yearly
subordinates
Performance related pay
Work itself Salary Employee pay is related to the effectiveness of the
employee
The presence of hygiene factors doesn’t motivate Mostly used in service sector, when output can’t
employees, but their absence demotivates them. be easily measured
Often used as a method of appraisal
2.3. Methods of Motivation Appraisal is when an employee’s immediate
supervisor observes their work and discusses their
There are 3 Factors that motivate employees: training needs
Financial Rewards Share ownership
Non-Financial Rewards Shares of a company are given out to employees
WWW.ZNOTES.ORG
Encourages them to work harder Example of Organisational Chart:

Share price and value may increase
Improves loyalty as there’s a greater sense of
belonging
Non-Financial Rewards (fringe benefits) -
Company Car
Discounts of products
Health Care
Children’s school paid for
House is paid for
Free trips abroad (holidays) Chain of command - The structure in an organization
Job Satisfaction which allows instructions to be passed down from senior
Enjoyment derived from feeling that you have done a management levels to lower levels of management
good job Span of control - The no of employees working directly
Pay under a manager
Promotion There are two types of organizational structures of a
Status business:
Training You can have a ‘tall’ structure, with a long chain of
If these things are kept in mind employees will be command:
well-motivated
Job Rotation
Working, swapping around and doing a specific job for
a limited time period
Increases variety of work
Easier for managers to cover up if 1 employee is
absent
Makes the job more interesting
Job Enlargement
Where extra tasks of similar level of work are added
to a person’s job description
Extra tasks shouldn’t add extra work
You can have a ‘wide’ structure, with a short chain of
Increases variety
command:
Higher job satisfaction
Job Enrichment
It involves adding tasks that require more skills
Higher responsibility
Higher job satisfaction
Higher productivity
The advantages to have a short (and wide) structure is

2.4. Organisation and Management that:
Communication is faster and more accurate
Organisational structure – the levels of management and Top managers are more in touch with subordinates
division of responsibilities within a company because there are less levels
Organisational Charts show a clear structure of the Wider span of control means employees feel trusted
business and make it easy to see which part of the and take more decisions by themselves
company does what Higher job satisfaction
Features – Disadvantages:
It is a hierarchy Difficult to control
Organised into departments Inefficient supervisors
Shows the chain of command and span of control Communication problems
Benefits – Difficult to motivate workers
The chart shows how everybody is linked in the Sometimes there may be a conflict between
organization departments (i.e. marketing wants to buy something
Gives a sense of belonging but finance does not think it is necessary)
Employees know their position The supervisors working in these departments are Line
It shows how departments are linked managers – they have direct responsibility over people
All employees are aware from which communication below them in the organisational chart
channel will they receive messages
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You also have Staff Managers – which are specialists in This means the trust for the workers is increased by the
certain
areas to provide support and information to line manager
managers Therefore, there needs to be more trust in workers in
order to reduce control over them
2.6. Leadership Styles

Leadership styles are the different approaches to deal
with people
when with authority
There are THREE TYPES OF leadership styles:
Autocratic Leader: where the manager expects to be
in charge
of the business and expects to have their
orders followed with
no questions asked
2.5. Role of Management Democratic Leader: where the manager allows the
subordinates
to be involved in the decision-making
All organisations have managers. Leaders, director,
process
executive are
all different names, but they are all
Laissez-Faire Leader: Where the manager makes
managers
broad/general
objectives for the employees and
The functions of managers include:
leaves them to make their own
decisions.
Planning – setting aims or targets
Organising – delegating tasks. organising people and
resources effectively 2.7. Trade Unions
Co-ordinating – making sure departments work well
with each
other and have good communication Trade union – a group of workers that join together to
Commanding – making sure the workers are keeping protect
their interests
to targets and
deadlines. By guiding and delegating A trade union is a pressure group
tasks Employees usually have the same interests (i.e. good
Controlling – measuring and evaluating work of wages, pleasant
work environment, etc)
employees and
verify they are on target If an employee wants to join a trade union, they must pay
Without clear and effective management, a business will a yearly
subscription for the benefits
lack: Benefits from a trade union usually include:
A sense of control and direction Improved conditions of employment (such as wages,
Control of employees holidays,
hours of work)
Organization of resources Improved work environment (health & safety, heating,
Coordination between departments noise)
Advice/support if member thinks they have been
unfairly
fired, mistreated, etc
Delegation
Disadvantages:
Costs money
Delegation involves giving a subordinate the authority to
May required to take industrial action
perform particular task.
However, if the employee does a bad job, the manager
must accept the responsibility for it 2.8. Recruitment
Delegation is important because:
Managers cannot do every job by themselves Recruitment – the process from identifying that a
Managers can then measure the success of the business needs
to employ someone, to the point where
employees applications have arrived at
the business
Work becomes more interesting for subordinate, Recruitment is one of the roles of the Human Resources
increases their motivation department
Makes employees feel trusted and important Recruiting usually happens when an employee leaves a
Gives workers greater career opportunities and job, a business
is starting up, or it wants to expand
chances of promotion Recruitment process (for external recruitment):
However, some managers do not delegate tasks because: A job analysis is done to identify the tasks and
They might be afraid the subordinates will fail and responsibilities to be carried out by the new employee
manager wants to control everything Once the details of the job are gathered, a job
Manager might also feel threatened that subordinate description
will be made, outlining these duties.
will do a better job than them From the job description, a job specification is
Delegation means that once the task is completed, the created, which outlines the requirements,
manager will have less direct control qualifications and expertise for the job
WWW.ZNOTES.ORG
Then the job is advertised Full-time workers

Internal - when the vacancy is filled by someone Workers working for more than 35 hours a week
who is an existing employee of the business Advantages:
It is cheaper, motivates other employees, Higher training and chances of promotion
potential of the employee is already known. Lesser time taken in recruitment
The employee is aware of the working Highly committed to the business
conditions and other workers, lesser time Lesser communication problems
taken for induction training Disadvantages:
But no new ideas come into the business and No flexible working hours
there may be jealousy and rivalry amongst Expensive
employees May demand higher pay as poor work-life balance
External - when the vacancy is filled by someone
who isn’t an existing employee and will be new to 2.10. Training
the business
New ideas come into the business. There’s Training is needed when:
wider choice of workers New technology is employed
But it is expensive and time-taking and may Less supervision is required
demotivate existing employees Need to increase efficiency
Ads can be place in: Need to increase chances of internal promotion
Local newspapers- usually for unskilled and New skills needed
semi-skilled workers. Need to lower accidents
National newspaper- usually for senior There are three types of training:
positions which requires high skills. Induction Training – where the employee is given an
Specialist magazines- used for particular introduction on the company’s procedures and customs,
technical people. and is introduced to their co-workers
Government job centers- usually for
unskilled and semi-skilled workers. Advantages Disadvantages
Recruitment agencies- they keep details Employees settle into their
about qualified people and are approached Time consuming
job quickly
by companies
Workers make fewer Worker is being paid while
Selection process:
mistakes not doing work
Candidates start by sending their application forms.
They send in their CV’s and resumes outlines why the Delays the start of work for
May be a legal requirement
applicant wants the job the employee
Short-listed applicants are called for interviews. These
may be done one-on-one, two-on-one talks, skill tests, On-the-job Training – where the employee does the job
aptitude tests, etc. while
being supervised by a more experienced worker,
giving tips,
suggestions and help
2.9. Types of Workers Advantages Disadvantages

Trainer won’t be as
Part-time workers Employee does not need to
productive because they are
Workers working for less than 35 hours a week be sent away
teaching employee
Advantages:
Work hours are flexible. Trainer might have bad
So cheaper than off-the-job
Business can extend the opening/closing hours habits and pass on to
training
Employees can just work at busy times employee
Cheaper for the employer than employing a full- Not recognized training
There is still production from
time worker qualifications outside the
worker while training
May agree for a low salary as good work-life business
balance
Disadvantages: Off-the-job training – where the employee is trained away
Employees are less likely to be trained because from the workplace, normally by specialized trainers.
they might see it as temporary and don’t want a
promotion Advantages Disadvantages
Takes longer to recruit many part-time workers Expensive to send employees
Lots of skills are taught
than a couple full-time workers off to expert trainings
Communication problems may arise
Might be less committed to the company
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Advantages Disadvantages Unfair dismissal: when the worker is dismissed

trainings are sometimes off- unfairly
(i.e. from joining a trade union, being
Workers are being paid but pregnant, or when given
no warnings before being
work hours, worker will still
not doing any work dismissed), the worker can take their
case to an
work
industrial tribunal to see both sides of
argument.
Professional training gives
Employees become versatile Wage protection: an employee in a business should
employees additional
(can be moved around have a
contract of employment, where it should
qualifications, makes it easier
company and know what to contain the wage
rate, frequency of wages and what
for employee to find another
do) deductions are made from the
wages (from tax). In
job
some countries businesses pay whatever they
want
because unemployment is high, so they offer very low
Sometimes, a company might need to reduce the size of wages.
the
workforce, possibly because of: Governments take action by creating a legal minimum
Automation (robots replacing human jobs) wage.
Less demand for products or services
Business might have relocated abroad
Business being taken over/merged and now there are 2.12. Internal & External
too
many workers doing same job Communication
Companies need to think ahead on the future and
establish how many
employees they will need and their Effective communication is important so that the
skills, this is called
workforce planning information sent in
the message is received, understood
When a business needs to reduce the number of and acted upon as it should
employees, they can
either dismiss the employee or It is important to businesses because if it is not
make them redundant understood, it
can lead to serious consequences
Dismissal – when the worker is told to leave the job due There are two types of communication in businesses:
to poor work or poor behavior (i.e. if employee is always Internal Communication – communication between
late for work after being given warnings, when employee employees of the
same business
is caught stealing, etc)It is more commonly known as External Communication – communication between the
being ‘fired’ business and
other businesses and individuals
Redundancy – when a business no longer needs an External communication has to be especially efficient
employee. Even though the employee did nothing wrong. because it
establishes the image and the efficiency of a
Usually happens during period of falling sales or due to business
an economic recession (when no one is buying anything) i.e. if a company communicates inefficiently with their
suppliers,
they might receive the incorrect materials
2.11. Legal Controls over employment Effective communication involves:
1. The transmitter/sender sending a message to pass
issues on
information
2. A medium of communication – the method for
There are many laws in countries, that ensure that sending message
(i.e. e-mail, phone, etc)
everyone has
equal employment opportunities regardless 3. The message being sent to the receiver
of race, gender, religion,
age etc. 4. The receiver confirming that the message has
This means that businesses need to be careful when been received and
responds to it (feedback)
advertising a
job. They cannot advertise for just a single There are two types of communication:
type of person. One-way communication – where the receiver cannot
Companies must treat all applicants for the job equally, if reply to
the message (i.e. posters)
not,
they will be fined and prosecuted Two-way communication – where the receiver can
Employees of a business have legal right that must be respond to
the message, could be just confirmation
protected,
which includes: that message was
received (e-mail)
Unfair discrimination at work/when applying: i.e. The methods of communication include:
when
employers discriminate unfairly against Verbal methods – sender speaks to the receiver (i.e.
employees or applicants
due to their race, gender, meetings,
telephone, video conference)
religion or colour.
Health and safety: there are laws that make sure that Advantages Disadvantages
employees are protected from dangerous machinery, Information given out quickly
that they are
provided safety equipment & clothing, If talking to many people, it’s
& Efficient way to
hygiene conditions,
suitable temperatures, provide hard to tell whether everyone
communicate with many
breaks. got the message
people
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Not good for accurate
3. Marketing
Opportunity for immediate messages and if a permanent
feedback record of the message is 3.1. Marketing, Competition & Customer
needed
Message is reinforced by the Marketing – Identifying customer needs and satisfying
speaker’s body language them
There are many departments within the Marketing sector
of a business
Written methods – sender creates e-mails, memos or
letters,
including the use of Information Technology The role of the marketing is to:
Identify customer needs – this will be done via ‘Market
Advantages Disadvantages Research’. It will influence the development of a
Might lead to too many e- product, its
price, and the sales technique
Message can be referred to in A good marketing department should also be able
mails and ‘information
the future “hard evidence” to
anticipate (predict before happening) changes
overload’
of customer
needs (i.e. due to advancement in
Easy to explain complicated Two-way communication is
technology)
messages difficult
Find new trends or gaps in market with potential
Can be copied and re-sent to Hard to check if message has Satisfy customer needs – selling the exact product
many people been received customers
want, for a price they are willing to pay
Maintaining customer loyalty – building customer
Visual methods – sender uses diagrams, charts, videos, relationships and make sure that existing customers
PowerPoints will
continue to buy from them and to attract new
customers
Advantages Disadvantages Maintaining customer loyalty will be achieved by
Information presented in always
satisfying customer needs
No feedback and needs other
more appealing way, people Gain information about customers –
methods of communication
will be more interested to They need to gain information about the changing
to go with it
look at it needs of the customers.
Graphs and charts may be They need to understand why customers buy their
Can be used to make written
difficult for people to products and how they use them.
messages clearer, to illustrate
understand, message may be Anticipate changes in customer needs –
the point Identify new trends in customer demands or gaps
misunderstood
in the market.
Markets change because consumer spending patterns
2.13. Communication Barriers change,
this might be due to:
Trends and fashions change – for a period of time it
Communication Barriers – things that prevent efficient might
be fashionable to have a specific product (i.e.
communication Fidget Spinner)
but a month later no one buys them
Problems with the sender:
when language is too difficult,
Advancement in technology – new products provide
speaks too quickly/not clearly,
communicates wrong
the latest
technology so older versions (i.e. iPads or
message computers) don’t
have high sales
Overcome by: using understandable language, making Unemployment/Wages – Economies with high
sure message
is a clear as possible by asking questions to unemployment
rates/low wages will not have high
make sure message was
understood
sales of expensive products
Problems with the medium:
message may be lost/not
Ageing population – different ages are interested in
seen by receiver, wrong medium used (i.e.
important different products (i.e. anti-ageing creams)
message on noticeboard), if message is being passed Changing customer needs are important to businesses.
along
– it might get distorted They must identify these changes and respond in order to
Overcome by: sender asking for feedback/receiver always
stay successful
sending
feedback that message is received, selecting the
Some markets have become more competitive because:
appropriate channel
to send message
Globalization – products are sold all over the world
Problems with the receiver: not
listening/paying Transportation – it is cheaper, quicker and easier to
attention, receiver doesn’t trust the
sender/doesn’t want send
products around the world now
to do it
Internet – customers can now search for products or
Overcome by: emphasizing importance of message, ask
services
and buy from somewhere else around world
for feedback
to ensure it was understood, using direct For a business to stay competitive, it must:
communication
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Maintain good customer relationships Identify a market segment whose needs are not being
Keep improving its existing products fully met
and fill the gap (first in market)
Bring out new products to keep customer’s interest
Keep costs low 3.4. Market Research
3.2. Market There are 2 types of businesses:
Product-oriented business – a business that focuses
Market – the total number of customers, potential mainly
on the product itself
customers
and other sellers of a product/service Market-oriented business – a business that focuses on
There are two types of market: market research and find out what the customer
Mass market – where there is a very large number of wants BEFORE
a product is developed
sales of
a product type Market research is important because a business needs
to know how
many people would be willing to buy the
Advantages Disadvantages product, this is to see how
profitable it would be
Sales are very high Lots of competition Market Research – gathering information about
Can benefit from economies consumers' needs
or preferences in a market
High costs of advertisement There are 2 main types of market research:
of scale
PRIMARY RESEARCH (field research)
Many similar products so it
Opportunities for growth SECONDARY RESEARCH (desk research)
may not meet specific needs
(large sales)
of all customers Primary Research - Gathering of ORIGINAL data by talking
There are many variations of directly with customers/potential customers
products so risk is spread Process:
Purpose of market research
Niche market – a SMALL (usually specialized) segment Decide on the most suitable method of market
(part) of a
mass market research
Decide the size of sample and who is going to be
Advantages Disadvantages asked?
Avoid competition with big Small – limited number of Carry out the research
businesses sales Analyze the data and results
Specific needs of customers Usually specialize in just one Summary of the research
are focused. Advantage over product, if product has low Primary research includes:
mass market demand, it will fail Questionnaires
They may be conducted face to face, by telephone,
For example, the tie industry is a mass market, but a internet.
business that
makes ties out of crocodile skin is a niche Online surveys may also be carried out.
market Advantages:
Detailed qualitative information can be
gathered.
3.3. Market Segmentation Customer’s opinion can be obtained.
Online surveys may be cheaper and easier to
Market segments – a sub-group of a market in which the
collate the results.
consumers have similar characteristics or preferences
They can be linked to prize draws and
A market can be segmented by:
encourage people to fill them.
According to age
Disadvantages:
Socio-Economic group – grouping people according to
If not filled properly, may mislead the business
how much
they are paid
as there may not be accurate answers.
Location – where people live (people that live in wet
Lots of time and money needed.
areas
will buy more waterproof clothing than those Collating and analyzing data also need a long
who live in dry
areas)
time
Gender – men and women products differ
Interviews – person will interview other person and
Lifestyle – how many children a person has, religion,
ask
questions
habits, etc. Advantages:
Benefits of market segmentation:
The interviewer will be able to explain the
Business aims all of its marketing efforts to the
questions if not understood
specific
segment, making marketing costs efficient
Detailed information about the interviewee
Since less money is spent on marketing, more profit
can be gathered
Disadvantages:
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The interviewer may lead the interviewee to Benefits Limitations

answer in a certain way You do not get specific
Time consuming Cheaper than primary as
results for a certain product
Expensive research has already been
or service, you get broad
Samples – A group of people who are selected done by others
results
(randomly) to
answer (i.e. questionnaire)
There is some information
When deciding who to ask to fill a questionnaire or Data may be outdated or
(i.e. economic forecasts or
who to interview, a sample would have to be incorrect as it was collected
population size) that can’t be
selected. It can be by others
obtained by primary research
A random sample – It means that every member
of the population has a chance to be selected. Might not have the specific
They are selected at random. Everyone has a information
chance to be picked.
A quota sample – People are selected on the basis Regardless on which type of research a business chooses
of certain characteristics. They are able to find out to use, the accuracy of the research data depends on:
views of a specific group. How carefully the sample was drawn up
Focus Groups - How the questions in questionnaires/interviews were
It is where groups of people agree to provide written
to make sure honest answers were given
information about a specific product. The sample itself and its size. By using quota
sampling
It will help sales and development. you might get more reliable results
These groups may even test a product explaining The bias – some secondary research will be biased
the likes and dislikes (i.e.
articles on newspapers) which means the
Can provide detailed information information might be
unreliable
Time consuming Age of the data – older data might be inaccurate
Expensive
May be biased 3.5. Marketing Mix
Observations –
Most inexpensive way of gathering information. Marketing Mix – all of the activities that are involved when
Gives only basic figures marketing a product or service
Doesn’t include reasons for the choices The marketing mix can be summed up as the 4 Ps:
It can be in the form of: Product
Recording Price
Watching Place
Audits Promotion
Secondary Research – You should always mention the 4 Ps when answering
Information that has already been collected and is question about
Marketing Mix!
available for others
This information can be obtained either from
3.6. Product
INTERNAL
SOURCES or EXTERNAL SOURCES.
Internal Sources – within the firm’s own records: sales
The product is the most important element in the 4 P’s
departments, customer records, finance department
Most companies are market oriented and spend most
and CUSTOMER SERVICE department
lots of money in market research
External Sources –
Some products are sold to consumers and some to other
Government statistics - a detailed source of
businesses.
general information
They are usually grouped:
Newspapers - useful articles about the general
Consumer goods
economy state
Consumer services
Trade association - information about business in
Producer goods
the industry
Producer services
Market research agencies - specialist agencies who
Different types of goods are marketed, produced and
carry out the research on company’s behalf where
developed in different ways.
in commission is paid
Promotion of a consumer goods will be much different
Internet - easily accessible source. Paper based
than that of a producer good
sources can also be found
Producing the right amount of product is an important
part of marketing mix:
Benefits Limitations
They need to satisfy customer needs and wants.
It must be of right quality and price
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Cost of production must enable a price that is suitable Then it is introduced or launched in the market. Sales at
for customers as well makes a profit to the business. first will grow slowly as not everyone is aware about the
Design of the product is very important. The quality of product. Informative advertising will be used to promote
the product must match the price. the product until it is well – known.
Sales will start to grow rapidly. The advertisements
Development of new products change to persuasive ads to encourage brand loyalty.
Prices might be reduced at this time as there are
Benefits – competitors. Profits are made and are used to cover
USP – unique selling point development costs.
Diversification Maturity – sales increase slowly. There is high competition
Allows business to expand into new and existing and lots of advertisements have to be done. Profits are
markets the highest.
Drawbacks – Saturation - there are stable profits. No new competitors.
Costs of carrying out market research and analyzing Competitive pricing is used and prices are reduced.
the findings Profits begin to fall as sales reduce.
Cost of producing trial products including waste Decline – the product is removed out of the market as
materials there are new products introduced and the business
Lack of sales if target market is wrong might be in losses. Advertising is stopped.
Loss of company image if the product fails to meet
consumer wants
Importance of brand image
Selling a product directly to a consumer is much easier

and helps them inform customers the products quality.
Nowadays, mostly manufacturers sell them to retailers
who the pass it on to the end consumers.
To make customers know about the product the
How stages to plc influence marketing
manufacturers give their product a unique name, brand decisions
name, and advertise relating to the brand.
Branded products are sold at high rates as they are Introduction –
Product – newly launched product
expected to be of high quality.
Customers may have brand loyalty if they like the Price – price skimming or penetration pricing
Place – limited range of exclusive shop (if price
product’s quality and price.
Brand image is very important when attracting new skimming is used)
Promotion – informative advertising
customers.
A brand will have a whole image which will be reinforced Growth –
Product – remains the same
by advertisements.
Price – raise prices is penetration pricing was used
Role of packaging Place – increase the number of outlets, e-commerce
Promotion – establish a strong brand identity by
Having the right packaging is very important as it plays a promotional activities.
key role in attracting customers. Maturity/saturity –
Packaging gives production to the product and doesn’t Product – plans for product changes begin
allow it to get spoilt. Price – lower prices to competitive
It allows a product to be easily used. Place – full range of distribution channels used
It needs to be suitable for transportation. Promotion – sales promotion techniques to
It is also used for promotion. encourage repeat purchases
The color and shape help attracting the customer. Decline –
Labels on products carry vital information. Product – changes made to extend the life cycle
It promotes the brand image. Price – lower prices
Place – sell through low-cost outlets
Product life cycle (PLC) Promotion – re launch the product as an extension
strategy
First the product is developed. The prototype will be
tested in the market. Before its launch. There are no sales Extending product life cycle
during this time.
Introduce new variations into the original product
Sell into new markets
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Make small changes to the product’s design, cover, color It is when price is set to match consumer
Sell through additional retail outlets expectations and perceptions of a product
Introduce a new, improved version of the old product It may involve charging high prices for high quality
Use a new advertising campaign goods
It may involve charging the price below a whole
3.7. Pricing number
Low prices for basic necessities may give a good
It is important to select an appropriate price to impression of being good value of money
complement a brand image; a value for money brand Ensures sales are made
should have a low price. Sales revenue may be lost
The business must constantly monitor what its Competitors may follow, low effect
competitors are charging for their products to make sure Dynamic pricing
its prices remain constant. It means charging different customer groups,
A business can adopt new pricing strategies for: different prices for the same product because
To break into a new market they have different demand levels
To increase market share Made it easier to adopt with the growth of online
To increase profits marketing
To make sure all costs are covered and a particular High revenue and profits
profit is earned Increased costs
Pricing methods Price elasticity of demand
There are 5 main types of pricing methods: Price Elasticity – It is a measure of responsiveness of
Cost-plus pricing: demand to a change in price
It involves estimating how many of the product PED is affected to the no of substitutes available ⦁ Price-
will be produced, then calculating the total cost of Elastic Demand is when the % change in demand is
producing this output and adding a percentage GREATER than the % change in price i.e., prices increase
mark – up for profit. by 5% but then sales decrease by 10%. Therefore, there is
The method is easy to apply. falling revenue for the business
You could lose sales if the selling price is a lot Price-Inelastic Demand is when the % change in demand
higher than your competitors’ price. is LESS than the % change in price
Total cost /output+ % mark up. This means you can increase the price of the product a lot
Competitive pricing: without the demand changing (i.e., oil & petrol because
High sales as prices are at a realistic level people have to buy it)
To decide prices, research needs to be done, it
costs time and money 3.8. Place – Distribution Channels
Penetration pricing
It is when the price is set lower than the Product should be available when and where customers
competitors’ prices in order to enter a new market need them
It ensures sales are made Wrong place, low sales and profits
It ensures the new product enters the market Place must be convenient for consumers
Low profits
Price skimming There are 4 main distribution channels:
It is when a high price is set for a new product on
Manufacturer sells products directly to consumer (i.e. car
the market
components to car factory)
Established a brand image
Established the product of good quality
Costs of R&D maybe covered
It may pull off some potential customers due to Advantages Disadvantages
high prices Impractical because
Promotional pricing Very simple consumers don’t usually live
It is when a product is sold at a very low price for a near factories
short period of time
Not good for products that
Help get rid of unwanted stock Suitable for products that are
can’t be sent easily by post
May raise sale, if they were falling sold straight out of factories
(may be expensive to ship it)
Low profits, low sales revenue
Psychological pricing
There is a lower price for
Not cost effective
consumer (cuts retailer)
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Advantages Disadvantages Selling of goods and services through the internet

Benefits to the business:
Direct contact with
customers Cheaper
Customers encouraged to buy in bulk
Business-2-Business e-commerce is cheaper
Producer sells to retailers which sell to consumers: (i.e.
Wider options for customers, brand image and loyalty
farms selling food to big supermarkets)
Problems to business:
Website must be maintained
High distribution cots
No direct contact
Advantages Disadvantages Returns – higher costs
There is no direct contact Stock system will be needed
Manufacturer sells lots of with customers which makes Benefits to consumers:
stock to retailer It hard to create customer No need to go out
loyalty Wide options
Easy comparison
Cheaper transportation costs
Payment through net banking
because all products go to
Easy access to imported goods
one place
Low prices
Lower storage costs for the Problems to consumers:
manufacturer Internet needed
High chances of fraud and theft
Producers sell to wholesalers – which buy in bulk and Products can’t be physically examined
then divide their stock into smaller quantities and sell No direct contact
them to retailers
Selecting which distribution channel to use
Type of product
Is it technical?
Reduces storage costs for More expensive to buy from How often is it purchased?
small retailers because small wholesaler than from How expensive is it?
quantities are sold manufacturer How perishable is it?
Small quantities so transport Wholesaler might not have all Where are customers located
costs are low the products a retailer wants Where do competitors sell
Wholesaler can give feedback
Takes longer to get to
on what sells well to
consumer 3.9. Promotion
producer
Huge gap between Promotion gives info about the 4P’s
manufacturer and customer Essential when trying to increase/ create brand loyalty
May stock competing Promotion includes:
products Advertisements –
Above the line
TV, newspaper, internet
A manufacturer hires an agent (person or business) that
will sell products on behalf or manufacturer Sales promotion
Below the line
Free gifts, coupons, samples
Used for short periods
Agents know the most Aims of promotion
Manufacturer loses lots of
profitable places & prices to
control on the way the To raise awareness about a firms’ products
sell in other markets that
product is sold to customers Encourage customers to make a purchase
manufacturers may not know
Increase sales
Agents will provide advice on
Inform people about particular issues, used by the govt
best ways to survive new Higher costs for consumers
Introduce new products in the market
markets
Create brand image
Improve company’s image
E-commerce Compete with competitors
WWW.ZNOTES.ORG
Advertising Works for local events, daily necessities

Cinemas, DVDs –
There are 2 types of advertisements: Visual image
Informative Advertisement – where the promotion of Cheap
a product focuses on giving information about a Effective
product (i.e. the benefits of the product) Limited audience
Persuasive Advertisement – where the promotion of a Leaflets –
product focuses on persuading the consumer that Cheap
they really need the product and they should buy it Wide audience
The advertising process: Permanent
Set objectives May not be read and missed
Decide the advertising budget Works for local events
Create an advertising campaign Internet –
Select the media to use High info
Evaluate the effectiveness of the campaign Instant orders
Direct mail is cheap
Types of advertising media May not highlight the website
Limited internet access
Television – High competition
Reaches millions of people Security issues
Can be shown attractively Works for clothes, books
Can be targeted at a specific audience Product placement –
Very expensive Associated with image
No written record Specific target audience
Works for food, clothing, technology Expensive
Radio – May have negative effects
Cheaper than TV Works for expensive products
Reaches to many people
Can use songs Sales Promotion
No visual support
Expensive Sales Promotions – when incentives (i.e. special
No written record offers/sales) are used to increase sales (short term)
Maybe unclear
Not a wide target audience Types of sales promotion
Works for local services, events
Newspaper – Price reductions –
Cost effective Includes coupons
Hard copy available Linked to loyalty cards
Detailed info can be provided Encourages consumers to try products and become
Reaches out to millions customers
Can be targeted at specific audience Gifts –
May not be attractive Small gifts to encourage purchases
Works for banks, cars, etc. Main aim to get customers to buy at regular intervals
Magazines – BOGOF –
Attractive Multiple purchases are encouraged
High quality Competitions –
Can be targeted at a specific audience Packaging can allow customers to enter competitions
Expensive Encourages sales
Published monthly/ weekly Expensive prices ⦁
Works for expensive perfumes, medical equipment Point of sale display –
Posters – Place where the product is sold
Permanent Special display
Cheap After sales services –
Attractive For expensive products, good after services
Seen by everyone encourages consumers to buy their product
Prone to vandalism Free samples –
No detailed info Can be handed out to shops to encourage sales
Can be missed Maybe delivered at home
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Advantages of sales promotion Advertising on own website

No extra costs
Can promote sales in losses Control adv
Encourages new customers Change info quickly
Encourages customers to buy greater quantities Attractive
Try new products High info
Choose your brand over competitors High costs
May not be located
Marketing Budget High competition
Marketing budget is the financial plan for marketing

3.11. Marketing Strategy
product/brand for a period of time
When deciding which type of promotion to use,
It is a plan to combine the right combination of the 4
marketing budget is an important factor
elements of the marketing mix for a product or service to
Choose the most cost-effective method
achieve a particular marketing objective
This is where small business struggle compared to big
Marketing strategy developed depends on:
businesses, because their budget is so much smaller.
Size of market
Number and size of competitors
Factors influencing type of promotion
Marketing objectives
Target market
Stage of PLC
Finance available
Nature of product
Marketing objectives may include:
Cultural issues involved in international marketing
Increasing sales
Media used must depend on:
Improve the existing product
Literacy rate
Increasing sales of a new product
Poverty rate
Availability of radio and cinema Maintaining/ increasing market share
Increasing sales in a niche market ⦁ Increase market
Nature of target market
share/maintain market share
For example: A product is made, priced reasonably, and
3.10. Promotion meets the consumer needs, but there is no promotional
element. No one will buy it because people don’t know
Public relations and sponsorship about its existence
Or if a product is made that doesn’t meet consumer
It is concerned with promoting a good image of the brand needs, so it won’t sell regardless of the price set
Ways to increase public awareness: It is crucial to have all elements working together in order
Sponsor events linked with good causes to influence consumer decisions (buying the product)
Donate in charities
Technology & Marketing mix 3.12. Legal Controls in Marketing
New technology gives greater opportunities to market There are many laws in different countries to protect
goods consumers from businesses taking advantage of their
The 4 P’s might change lack of knowledge or lack product information
Internet allows businesses to understand customer These legal controls include (in the U.K.):
habits Weights and measures
Selling underweight items or using inaccurate
Social media and website equipment’s to weigh goods is illegal
Sale of goods
Advertising through social media: Supplying goods of bad quality/ in an
Target specific demographic group unsatisfactory condition is illegal
Guarantee it reaches customers Supply of goods and services act.
Cheap Producing and selling goods in an unhygienic
Reach people of all ages place is illegal
Quick responses to market changes Distance selling regulations
Have to pay for pop ups A consumer should have a minimum of 7 days
If advertising is annoying, reduce sales cooling period (a consumer should have 7 days to
Lose control change their mind about purchase they made)
Maybe altered, reducing business reputation Trade descriptions
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Supplying a good/ service which is unsafe/ not fit Problem Method to overcome
for the purpose is illegal Licensing: the business gives
Giving false info or misleading claims is illegal
permission for a local
Misleading consumers about the true price is illegal
Transport costs are business to sell goods under
Making false claims about special deals and offers is
expensive its name, so they do not have
illegal
to physically import all the
Offensive or indecent ads are illegal products
Complying with all legal controls can raise total costs of a
business by:
Localizing Existing Brands:
Goods/ services may have to be redesigned to ensure where a business still has the
quality and safety
same brand image but
Cultural Differences
Ads may have to be altered adapts it to the market it is in
Some promotion techniques may have to be changed
(i.e. McDonalds cooking
May have to change packaging vegetarian meals in India)
Prices may have to be controlled and altered
Increase employment
4. Operations management
3.13. Entering New Markets Abroad
4.1. Production of Goods and Services
The globalization of businesses has been increasing over
the years,
there are opportunities & problems to this: Production – the making of a product or service to satisfy
consumer wants and needs
Opportunities Problems It involves adding value to a business’s products
Growth potential in other A business combines the inputs/economic
Lack of knowledge of resources/factors of production to produce a more
countries: countries are
competitors or consumer valuable output (this could be a good or a service)
developing and population
habits The ‘inputs’ include:
incomes are increasing
Land – For factories or for materials
Markets in original country Cultural differences: for
Labour – Employees
might be saturated (sales are example, alcohol won’t sell
Capital – Money/finance
low) well in middle east
Enterprise – Managers
Exchange rates: in some
Can produce products in Businesses want to combine all of these inputs efficiently
countries their currency isn’t to keep costs low to increase profits
abroad and learn about its
stable so price of importing For a business to be competitive, it must combine its
market to increase sales
goods increase resources effectively, reduce disposal costs, total costs
Trade barriers are lowered in and raise profits
Transport costs are more
most countries so it is Labour-Intensive Production – where lots of workers are
expensive
cheaper to enter markets used rather than machines to make goods. Usually done
in countries with low wages so that it is more efficient.
However, there are many methods to reduce and Capital-Intensive Production – where businesses use
overcome the problems
of entering a new market: machines/robots rather than workers. Usually done in
developed countries where the wages are high.
Problem Method to overcome
Joint-Ventures: by working Operations department
together/merging with local
businesses in the same Operations department’s role is to take inputs and
market, a business will gain a change them into outputs for consumers
Lack of knowledge (& Cultural lot of important knowledge Operations manager is responsible for making sure raw
Differences) about the culture & market \n materials are available and are made into finished goods
Franchising: letting people Most manufacturing businesses have
from the market abroad Factory manager- responsible for quality and quantity
which have local knowledge of products
to choose location of shop Purchasing manager – responsible for providing the
required materials and equipment
Research and development manager – responsible for
design and training of new products
Productivity
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Productivity – It is a way of measuring a business’s Defects - when goods have faults/defects that require
efficiency them being inspected/fixed wastes time
Productivity = quantity of output/ quantity of input Advantages of lean production
Businesses often want to measure the productivity of Less storage costs
labor Quick production
Labour productivity = output / no. of employees Better use of equipment
Increased productivity leads to lower inputs used to Less money tied up in inventory
produce the same level of output or same number of No returns
inputs used to create greater number of goods Greater health and safety
As employees become productive, per employee output Cut some processes that aren’t important
rises, costs of production falls Low costs lead to low prices due to higher
Many ways to increase productivity: competition and high profits
Improve factory layout to reduce time waste and raise
efficiency 4.2. Lean Production
Introduce automation
Improve labor skills by training
Types of Lean Production
Improve quality control
Improve employee motivation Kaizen
Improve inventory control Just-in-time inventory (JIT)
Benefits of increasing efficiency: Cell production
More output compared to inputs
Lower costs per unit (AKA Average cost) Kaizen
If there is more output, maybe less workers needed,
less people to pay wages Kaizen means continuous improvement in Japanese
If there are less people working, raising their wages Its main focus is to eliminate waste
will increase motivation and so productivity The ideas are got by holding frequent meetings with
workers where they discuss about problems and their
Inventory solutions
Advantages –
Why do businesses hold inventory? High productivity
To ensure enough inventory is available to satisfy Less space needed for production
demand, inventory levels must be controlled Work in progress is low
Inventory includes: Improved layout of factory may lead to combine jobs.
Raw materials This will reduce labor demand
Work in progress
Finished goods Just in Time
When inventory reaches a certain point, they must be
reordered to bring the inventory to max level. It involves eliminating the need to hold inventories
Inventory must be reordered before it gets too low Supplies arrive just at time they are needed
If inventory levels are high, costs of production will be Low storage costs
high and opportunity costs will also be high Quick sales
Quick money received
Lean production To operate in JIT, businesses need to have reliable
suppliers and an efficient ordering system
Variety of techniques to cut down wastes and raise
efficiency Cell Production
It tries to reduce production time
Types of wastes: This is where the production process is divided into
Transportation - when the goods are being moved separate units, each making an identifiable part of the
unnecessarily → fuel price, may get damaged good
Overproduction - leads to high storage costs and High motivation
possible damage to goods while in storage. Less chance of strike
Over processing - when sophisticated machines are High efficiency
being used to do simple tasks High boredom
Waiting
Motion - any action made by an employee that does
4.3. Methods of Production
not relate with the production of goods wastes time
Unnecessary inventory
3 main methods of production:
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Job Production – products made one at a time Features Benefits Limitations

Batch Production – a quantity (batch) of a product is Cars, drinks,
made, then a batch of another product is made electronics, any If machine breaks
Flow Production (mass) –large quantity of products Works 24/7, no
mass-made down, whole
made in
a continuous process need for labor
products are made production stops
Job Production:
this way
Features Benefits Limitations No need for

moving goods
Often labor
Products are made Good for ‘one-off’ around (all made in
intensive,
specifically to order products the same place)
expensive
Meets exact
Each order is Production takes Factors influencing which production method to choose
requirements of
different longer Nature of product
customer
Size of market
Varied work, Nature of demand
Eg. bridges, ships,
increases Any errors made Technological changes
cakes, cinema,
employee are expensive to fix Automation – when equipment in factory is controlled
films, suits
motivation by a computer to do mechanical processes (i.e.,
Ability to charge Materials are more painting car). Only workers are to ensure it runs
higher prices expensive smoothly
No possibility of Mechanization – when production is done by
purchasing machines but operated by people. Used to do difficult,
economies of scale precise or dangerous tasks. Work 24/7, quicker and
more accurate.
Computer Aided Design (CAD) – software that helps
Batch Production:
design or re-style products quickly, allows technical
Features Benefits Limitations sketches to be very detailed
Similar products Flexible work, can Machines must be Computer Aided Manufacture (CAM) – when
are made in change products reset to do computers monitor production and control
machines/robots
batches easily different batches
Computer Integrated Manufacturing (CIM) – wen
Ex. bakery: makes Semi-finished
software that designs the products is integrated with
one type of bread, Gives some variety products may need
the machines that produce (CAM + CAD)
then one type cake, to worker’s jobs to be transported
Using technology keeps business ahead of
furniture, clothing around (+ cost)
competition, costs falling, prices falling and quality
Need space for rising
More variety, more stocks of raw
consumer choice material (high Electronic payments methods
storage costs)
High work in EPOS (electronic point of sale) – it is used at checkouts
progress inventory where barcodes are scanned and displayed on the
Expensive and time receipt. The inventory is automatically changed and
reordered when the reorder level is reached
taking
EFTPOS (electronic funds transfer point of sale) – it is
where an electronic cash register is connected to the
Flow Production:
retailer’s bank accounts and the money is directly
Features Benefits Limitations transferred when the shopper’s bank info is entered
Large quantities o a High output, capital

Very boring for New technology
product are intensive more
employees
produced efficient Advantages of new technology
Ingredients start at High productivity
High cost of
one end & flow to Higher training given
Costs are low inventory of output
the other end, Motivation rises as the quality of work increases
& raw materials
ready to be sold Higher job satisfaction
Better quality products
Customer demand will be, high sales
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High customer satisfaction As scale of production rises, LRAC fall

Brand loyalty They are factors that lead to a reduction in average costs
Quick communication as a business’s size increases
Low costs, high profits Types of economies of scale:
Disadvantages of new technology Purchasing economies -
High unemployment When a business buys in bulk, it tends to receive
Expensive discounts decreasing the price of each good
High risks Marketing / selling economies –
Low motivation When the company advertises for goods it will pay
Replacement and maintenance costs are high the same amount to advertise a greater number.
Therefore, when marketing for a higher output,
4.4. Costs and Scale of Production unit costs fall decreasing ATC
Financial economies –
Banks tend to lend to larger companies with low
Need to measure costs
rates of interest as they borrow high amounts and
So that it is compared with revenue and can be used to their collateral value is high
calculate profit/ loss Managerial economies –
To decide the price Large firms have opportunities to employ
Costs of buying raw materials, land can be compared specialists who will help reduce wastage, increase
Accurate cost info is very important to managers for efficiency and productivity
future planning and decision making Technical economies –
Large firms can use latest technologies which are
Business Costs efficient
Fixed (overhead) Costs (FC) - 4.6. Diseconomies of Scale (DEOS)

Costs which do not change with output in the short
run. As scale of production rises, LRAC rise
Also known as overheads or indirect costs They are factors that lead to an increase in average costs
Fixed Cost = Total cost – Variable cost as a business grows beyond a certain size
Examples of Fixed Costs: Types of diseconomies of scale:
Rent of factory: even if you produce lots of Poor communication
products, the rent price will be the same Low morale –
Insurance: you set the insurance cost before-hand Large businesses have many employees and are
Bank fees: bank fees are a set price; they don’t not everyone is connected to the top
change depending on the products produced management, reducing their motivation levels
Management Salaries: they are set regardless of Slow decision making –
production Large businesses have longer chains of command
Staff cost (Security) due to which info and instructions take long to
Variable Costs (VC) – reach the desired person, slowing communication,
Costs which vary directly with output slow decision making
Also known as direct costs
Variable cost = Total cost – Fixed cost
4.7. Break-Even Charts
Examples of Variable Cost:
Raw materials: the more you produce, the more
Break even charts show how costs and revenues of a
materials you need
business change with sales. They show the level of sales
Electricity & Gas: Energy is paid by use. if you are
the business must make in order to break even
producing more, more electricity is being used
Breakeven level of output indicates the minimum amount
Shipping cost: Making more products means you
of goods a business must produce in order to earn a
have to ship more items and shipping is paid by
profit
weight
The break-even point is where:
Total Cost – Fixed and variable costs combined
Total Cost = Sales Revenue
Average Cost (Per Unit) – total cost of production
Where the revenue line intersects the total cost
divided by the total output. Referred to as Unit
Breakeven point (BEP) = no profit, no loss
Cost
BEP = Total fixed cost / CONTRIBUTION PER UNIT
Contribution per unit = Selling price per unit - variable
4.5. Economies of Scale (EOS) cost per unit
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Sales revenue is the income of a business from sales of It establishes the brand image
goods or services in a period of time. It builds brand loyalty
To draw a break-even chart, you must include: It maintains a good reputation
Fixed Costs line It will help to increase sales
Variable Costs line Attracts more and new customers
Total Costs line If quality is not maintained, businesses will:
Sales Revenue line Lose customers to other brands/competitors
Anything before the break-even (BE) point is loss Have to replace faulty products or repeat poor service
Anything after the break-even (BE) point is profit which raises costs for business
‘y’ axis measures money amounts (cost & revenue) Have a bad reputation because people who had bad
‘x’ axis shows the number of units produced or sold experiences will tell other people, etc. Leads to lower
sales & revenue
Quality Control
Quality Control – Checking for quality at the end of the

production process, whether it is a product or a service.
Quality control is a traditional way to make sure that
products leave the factories with no defects
The jobs of people in quality control departments are to
Total cost is variable cost line starting from fixed cost take samples at regular intervals to check for errors.
If the total cost increases, then the BE point increases and If errors are found, the whole batch of production might
total cost’s line becomes steeper have to be redone.
If revenue increases, then revenue line becomes steeper Their job is also to prevent any production errors before
and so the break-even point decreases they happen during production, which will lead to money
Benefits of break-even charts: loss
Managers can read of the graph if the company Sometimes, businesses bring a mystery customer to test
expects profit or loss, and can see how much out the service to check if the quality is as expected
profit/loss the will have at any level of output Advantages of Quality Control:
They can attempt different scenarios and see the Eliminates faults/errors before the customer receives
impact it will have on the profit or loss of the product or
service
business. It lets managers try out different Less training is required for the workers
possibilities to find out which one is the best. (i.e. Drawbacks of Quality Control:
increasing the selling price, increasing production) Expensive, as employees need to be paid to check the
It can be used to show the SAFETY MARGIN – the product
or service
amount by which sales exceed the break-even point. Identifies the fault but not how and why it occurred so
For example: if a business’ break-even point is at 400 it is
difficult to remove the problem
units and they’re producing 600 units, their safety Increased costs if products have to be scrapped or
margin is 600 – 400 = 200. reworked
or service repeated
Limitations of break-even charts:
Break-even charts assume that all products made will Quality Assurance
be sold. It does not show the possibility that
inventories may build up if they are not sold Quality Assurance –checking for the quality standards
Fixed costs only stay the same if the scale of throughout the production process
production stays the same (doubling the output will It will make sure quality standards are set and then it will
also increase the fixed cost because they must need apply these quality standards throughout the business
bigger factory, more machinery, labour, etc) Advantages of Quality Assurance:
Break even charts assume that costs and revenues Eliminates faults/errors before the customer receives
can be drawn with straight lines, which doesn’t product or
service
happen in real life. Fewer customer complaints
It assumes costs and revenue increase at a constant Reduced costs if products don’t have to be scrapped
rate or
reworked or service repeated
Drawbacks of Quality Assurance:
Expensive to train employees to check products
4.8. Achieving Quality Production Relies on employees following instructions of the
standards set by company
Quality – to produce a good or a service which meets
customer
expectations
Total Quality Management (TQM)
Quality is important for businesses because:
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Total Quality Management (TQM) – the continuous If goods and raw materials are very heavy then
improvement of products and processes by focusing on transportation costs will be high. Then a company
quality at each stage of production may want its factory to be located near the
Many companies use Total quality management. supplier.
It tries to “get it right the first time” and have no defects External economies of scale
It focuses on ensuring 100% that the customer is always When two firms support each other or work
satisfied. Customer is not just the final user, it also together, they will be able to respond quickly to
includes other people and departments within the any important decisions to be made or any
business breakdowns.
This means that quality needs to be maintained Availability of labour
throughout the
business and no faults should occur. Every manufacturing business requires labour.
Advantages of total quality management: If a business requires only skilled labour then it
Quality is built into each part of the production. It will try and locate near a place where people with
becomes
a habit for the employees various skills live.
Eliminates virtually all faults/errors before the If a business requires unskilled labour then it will
customers
receives. be located in a place when wage rates are low and
No customer complaints so the brand image is unemployment is high.
improved Government influence
Waste is removed and efficiency increases which When a government wants to encourage
means less money is wasted (higher profits) businesses to locate in a particular area, it will
Drawbacks of total quality management offer state – funded grants, to encourage firms to
very expensive to train employees to check the move there
product or service at every stage of production High unemployed area, it may provide grants to
Relies on employees following the ideology of TQM businesses to locate there
Transport and communication
4.9. Location Decisions Businesses need to be closer to transport systems
Exported products, ability to reduce transport
Businesses look up for locations when: costs
New business Reduces time taken
Present location is unsatisfactory Power and water supply
Change in business aims and objectives Availability of power is very important
Expansion Some businesses need to have reliable power
Factors that influence the choice of location of a sources to continue production
MANUFACTURING business: Some production processes require a reliable
Production methods and location decisions water source
Production methods play a significant role in Climate
deciding the location of a business. Factors that influence the choice of location of a SERVICE
Job production – the business will be small and SECTOR business:
won’t have much effect on competitors there. Customers
Location of suppliers won’t have affect much on Services which require direct contact, must be
the business. Ex. A bakery located near the customers
If there is a large-scale production, then Services where personal contact isn’t required,
competitors in that area will be highly affected and location doesn’t affect
the business will prefer closer suppliers as raw Technology
materials will be in a huge amount and Technology has allowed e commerce so location
transportation costs maybe high if supplier is too doesn’t play a vital role
far. Personal preference of owners ⦁ Owners often decide
Market the business’s location
When a product is heavier than its raw materials, Availability of labour
then businesses decide to locate its factory near If a business is labour intensive it must locate in
the markets rather than the supplier as a business areas where labour is easily found like towns and
will find it much cheaper to do so. cities
Due to advances in transportation facilities the Climate
distances between factories and markets of heavy Near to other businesses
products doesn’t play a vital role. Some service/ businesses serve large companies
Perishable products need to be delivered quickly. and so should be able to reach them immediately,
Raw materials/ components therefore they must locate closer to them
Rent/ taxes
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If services don’t require personal contact, they can subsidies, lower taxes. They may do this to provide
locate in places with lower rents and tax rates new skills and increase employment
Factors that influence the choice of location of a Trade and tariff barriers – If trade barriers are high,
RETAILING business: the business’s chance of locating there would reduce
Shoppers costs
Retailers want popular areas as they attract
customers
It depends on the type of product 5. Financial information and
Expensive – place where high income people live
or visit regularly decisions
Nearby shops
Being located near a shop which is frequently 5.1. What does a finance department
visited means people may shop in between while
visiting other shops do?
A place with high competition attracts more
customers as they have greater choice Record financial transactions
Customer parking availability/ nearby Prepare final accounts
Convenient and nearby parking lots will encourage Cash flow forecast
people to visit your shop Make important decisions
Availability of suitable vacant premises Provide info to managers
If proper location isn’t available, a company can’t
locate there 5.2. Why does a business need finance?
Access of delivery vehicle
Businesses try to find places near transport Finance is money which is needed to meet the day – to –
businesses to gain easy access to delivery vehicles day expenses of a business. This is known as capital.
Rent/ taxes Capital is needed for:
Popular area, high demand, high rent Starting up a business
Less popular, low demand, low rent Capital which is needed to buy the factors of
Security production and inventories so that a firm can
A place prone to theft may reduce a business’s begin trading. It is known as startup capital.
chances to locate there Expansion
Insurance companies may not insurance such The amt needed to expand a firm. It can be done
companies by: additional assets, takeover/ merger, new
Legislation products, new markets.
Some countries may have laws restricting trade in Increase working capital
some parts It is known as the life blood of the business.
Factors influencing decision of which country to locate It is divided into:
operations in: Capital expenditure: money spent on non –
New market overseas - when a business sees an current assets.
increase in sales overseas, it may decide to Revenue expenditure: money spent on day to
move/relocate there, instead of transporting products day, recurring expenses.
there There are 2 types of finance needs:
Cheaper Source of material – if the raw material runs Short-Term Finance Needs: Finance needs to pay
out, the business must either bring in alternative things that last less than a year, (working capital) -
supplies from somewhere else or relocate to new includes wages, rent
country with these raw materials, it also might be Long-term Finance Needs: long term investments
cheaper than transporting it (that last more than 1 year). Money to buy Fixed
Difficulties with the labour force and wage costs – if Assets (i.e., buildings)
business is located in country where wages keep
rising, business may decide it is more profitable to
5.3. Sources of Finance
relocate to country where wages are lower
Rents/taxes considerations – if other costs such as The main sources of capital include:
rent or taxes increase, this might cause business to
Internal Sources – Obtained by business itself
relocate to countries where it is lower External Sources – Obtained from outside business
Availability of government grants and other incentives
- If governments want to increase foreign investment Internal sources of finance
and job opportunities, then they will provide grants,
Retained profits –
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Profit left in the business after shares are distributed. Micro finance –
Also known as ploughed back profits. Mostly banks don’t give loans to poor people
Doesn’t have to be repaid Special institutions have been set up which lend poor
Doesn’t incur interest people
New business can’t use it High interest rates
Small firms won’t be able to gain enough money Greater risk for the lender
Reduces owners’ payments
Sale of existing assets – Short term VS long term sources
Assets not needed can be sold to earn money.
Better use of unwanted capital Short term
Doesn’t increase debts of a business
Overdrafts –
Takes time
The bank gives the business the right to overdraw
Not available for new firms
their bank account
Could have been used during expansion
Flexible form of borrowing – varies each month
Sale of inventories –
High interest
Reduces opportunity cost
Cheaper than loans in short run
Reduces storage costs
Variable interest rates
May disappoint customers if sudden change in
Bank may ask the repayment with a short notice
demand is not met
Trade credit –
Owner’s savings –
It is when businesses delay the payments to suppliers
Quick availability
Interest free loan
No interest is paid
Reduces cash outflows in the short run
Savings may be low
May not provide discounts
Increases risks of owners
Factoring of debts
External sources of finance Long term
Issue of shares – Bank loans –

Permanent source of capital They are payable over a fixed time period
Doesn’t need to be paid back Hire purchase –
No interest It allows a business to buy a fixed asset over a long
Shareholders expect dividends period of time with monthly payments which include
Ownership of the company may get shared interest
Bank loans - Doesn’t have to find a large cash sum to purchase the
A sum of money obtained from a bank which must be asset
repaid with interest Cash deposit is paid at the start of the month
Quick, easy to arrange High interest rates
Available for varying length of time Leasing –
Large companies receive low interest rates if large It allows a firm to use an asset but doesn’t have to
sums are taken purchase it
Must be repaid with interest Doesn’t have to find a large cash sum to purchase the
Collateral security must be given asset
Selling debentures – Maintenance is taken care by leasing company
Debentures a certificate that is issued to a debenture High costs
holder for the money they lent which has to be repaid Issue of shares –
within a span of 20 – 25 years. Only available to limited companies
Long term finance Long term loans or debt finance
High interest Debentures
Factoring of debts –
Debt factors are specialist agencies that buy the Factors when choosing source of finance
claims on debtors of firms for immediate cash.
Availability of immediate cash The main factors considered in making financial choice:
The risk of collecting the debtors becomes the factors Size of business & Legal Form (type of business):
not the business’s Public limited companies have larger choice of
Firm doesn’t receive 100% amount sources of finance because they pay less interest (less
Grants and subsidies – risk)
Don’t have to be repaid Amount of capital required: if you need just a little
Given with strings attached money you won’t issue new shares
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Purpose of capital & time period: The general rule is Cash flow forecasts are just little charts with values
that the finance source should match the finance comparing 2 different time periods (months/years etc.)
need: Net Cash Flow – The difference between the cash inflow
If use of capital is long-term, source should be long- and outflow (inflow – outflow)
term (same with short term)
Existing Loans (risk and gearing ratio): if a business
already took out lots of loans, banks will think it is too
risky to finance
5.4. Cash-Flow Forecasting & Working Uses of cash flow forecast

Capital
Cash flow forecasts are useful because:
Cash is a Liquid Asset – it can be immediately available to Starting up a business
spend on goods & services The first few months are very crucial to every
Cash Flow – the cash inflows (money received by business as owners don’t realise the amount of
business) & outflows (money paid) over a period of time cash needed due to which they fail
Businesses need to spend to labour, land, and
Cash inflow – money coming in the business
Sale of goods capital. They even have to advertise and promote
Sale of assets extensively
Payments to debtors Many owners don’t understand the importance of
Borrowing money cash flow in a business due to which they fail.
Investors Keeping the bank manager informed
A cash flow forecast will help a business receive a
Cash outflow – money going out of the business
Purchase of goods loan
Purchase of noncurrent assets The bank manager needs to be aware when the
Payments of salaries amt is needed, for how long, when it will be repaid
Repaying loans Managing an existing business
Trade payables A cash flow forecast will help a business receive a
loan
Cash flow cycle The bank manager needs to be aware when the
amt is needed, for how long, when it will be repaid
It shows the stages between paying out cash and Managing cash flow
receiving cash Businesses with high bank balance can use their
Stages: ⦁ Cash needed to pay for cash effectively in other areas
Materials, wages
Goods produced How to overcome cash flow problems?
Goods sold
Cash received Short term solutions
Larger it takes for the cash flow cycle to be completed the Increasing bank loans will inject more cash into the
greater should be the working capital
business but both interest and loan will have to be paid
Cash flow is not the same as profit
Delaying payments to suppliers will decrease cash
Profit consists of goods sold on credit whereas cash flow
outflows in the short run but supplier may refuse to
is the amount of cash sales a business made in a month.
provide discounts or supply
When profitable businesses run out of cash it is known as Reducing credit period may help a business increase
insolvency.
short term cash inflows but customers may switch to
Due to:
competitors
Overtrading
Delaying purchase of fixed assets will reduce cash
Long credit time
outflows but in the long run a company may lack
Less credit time received
efficiency as they don’t have up – to date technology
Many fixed assets purchased
Long term solutions
Cash flow forecast
Attracting new investors
Cash-Flow Forecast – an estimate of future cash inflows Cutting costs and increasing efficiency using lean
and
outflows. production
A cash-flow forecast shows the expected cash balance at Develop new products
the end of each month:
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20,000 in cash to pay costs.

5.5. Working Capital
Credits can vary from a week to a year, it is ‘promised’
It is the capital available to a business in the short run to cash but not physical, and can’t pay for costs.
So, in this case, if the business makes 40,000, and the
pay for day – to – day expenses
costs are 15,000 it will make 25,000 in gross profit
Working Capital = Current Assets – Current Liabilities (theoretical profit), but only 5,000 in net profit
It is the life blood of the business Understanding Income Statements

It assists in identifying the credit reputation of a business
Working capital can be in the form of: A business account that records all the incomes of a
Cash business and all the cost payed over a year – to see if it is
Value of debtors making profit.
Value of inventory It will be used by managers, banks and other investors to
Overall success depends on the working capital position see if a business is making profit:
Working capital should be handled properly because it To compare with previous years - if it is greater than
shows investors & banks how efficient a business is and the year before
its financial strength To see if it is higher than competitors
The main features of an income statement include:
5.6. Income Statements Revenue
Costs
Accounts are the financial records of a firm’s transactions Gross Profit – the profit made after costs of goods
Accountants are professionally qualifying people who sold are taken away from sales revenue
have responsibility of keeping accurate accounts and Net Profit (AKA ‘Profit’) – the profit made after taking
producing final accounts away all expenses and overhead costs (other
Final accounts are produced at the end of financial year expenses)
and give details about the profit/ loss made over the year Retained Profit – the net profit after taking away taxes
and the worth of the business and payments to owners – which is reinvested back
Profit is the money left over after total costs have been into the business
subtracted from the sales revenue.
Profit type Equation
The simple equation for profit:
Profit = Sales revenue – total costs GROSS PROFIT Sales Revenue – Costs of goods sold
Profit can be made by: Gross Profit – Overhead Costs
NET PROFIT
Increasing the sales revenue, so that it is higher than (wages, electricity, rent, marketing)
the production costs RETAINED PROFIT Net Profit – (tax + dividends)
Reducing the production costs
Income statements are very important in decision making
Importance of profits in a business
If a business is thinking to relocate a factory, they will
Profit is very important, especially for the private sector
make a forecast income statement in both locations and
companies (not owned by government)
compare
Reward for enterprise
Entrepreneurs have special qualities and they must
earn reward for that 5.7. Statement of Financial Position
Reward for risk taking
Shareholders and investors take risks when they Statement of Financial Position – a document that shows
provide capital, profits act as a reward for those risks the value of the business’ assets and liabilities in a point
Payments act as incentives to invest more and make in time
the business profitable Assets – Items of value owned by a business
Source of finance Liabilities – Debts owed by business
Profits after payments can be used to fund expansion There are 2 types of assets:
Current Assets – (Short-term Assets) Items owned by
Indicator of success
Profits show that investing can be profitable but business for less than 1 year i.e. Raw material, cash
losses show that investment must not be made Non-Current Assets – (Long-term Assets) Items owned
Profit ≠ Cash by business for more than 1 year i.e. Buildings, land,
Profit can be in the form of cash, but it can also be in the company cars
form of credit (customers will pay later) There are also 2 types of liabilities:
Current Liabilities – (Short Term Liabilities) Debts
If a company makes 40,000 in sales, but only 20,000 is in
cash and the other 20k is in credit. The business only has owed by business for less than 1 year i.e. Bank
WWW.ZNOTES.ORG
overdrafts, wages Profitability Ratios:

Non-Current Liabilities – (Long Term Liabilities) Debts Gross Profit Margin (%) – how good a company is at
owed by business for more than 1 year i.e. Long-term converting sales into gross profit. A percentage GPM
bank loans, creditors (money that business owes to (%) = 100 × Gross Profit / Sales Revenue
suppliers) Net Profit Margin (%) – how good a company is at
The Total Equity (AKA Shareholders’ funds) is how much a converting sales into net profit. A percentage NPM (%)
business is worth. (only for Limited companies) = 100 × Net Profit / Sales Revenue
Shareholders’ Funds = Total Assets – Total Liabilities Return on capital employed – how profitable a
The shareholders’ funds is the total amount of money company is compared to the amount of money used
invested in a business by the shareholders/owners RoCE (%) = 100 × Net Profit / Capital Employed
If the total equity of a business has increased/fallen, the One profitability ratio isn’t useful by itself. You need to
shareholder’s stake of the company will be worth use all the profitability ratios and compare it with
more/less, respectively previous years of the business.
Liquidity Ratios:
Format of SOFP Current Ratio – how good a company is to pay off its
Fixed assets xxx current liabilities with its current assets Current Ratio
Current assets xxx = Current Assets / Current Liabilities
Total assets xxx Acid Test Ratio – measures the ability of a company to
pay off its liabilities without depending on the sales of
Non current liabilities xxx current assets−inventories
inventory Acid Test Ratio = currentliabilities
Current liabilities xxx The acid test ratio is used to measure if a business is
Equity: likely to survive in the future
Share capital xxx The good and bad values of these ratios:
Profit/loss account xxx
Gross Profit Margin (%) No exact value, you must
Total liabilities + equity xxx compare with: Competitor
Net Profit Margin (%)
businesses, previous years, the
From the statement of financial position, you can ROCE (%) targets set by the business
calculate the Working Capital.
Current Ratio Should be above 1.5 to be safe
Working Capital = Current Assets - Current Liabilities
You can also calculate the Capital Employed – the long- Should be above 1, unless you
term capital invested in a business are dealing with cash sales in
Acid Test Ratio
Capital Employed = Non-Current Assets + Total Equity which it can be above 0.75 (cash
Total Equity = Shareholders’ funds is liquid - pays of liabilities easily)
Interpreting balance sheets Having lots of stock may mean that the company might
be illiquid
because inventories are hard to convert to cash
Shareholders can see the value of their stake easily
They can analyze how expansion is paid for Liquidity is very important for a business:
Working capital can be calculated If they can’t convert their assets into cash, they won’t
Working capital = current assets – current liabilities be able
to pay their suppliers (current liabilities)
Capital employed can be calculated Not paying suppliers will force them to stop trading to
Capital employed = shareholders’ funds + noncurrent pay back
their debts
liabilities
Calculate ratios 5.9. Users of accounting information
5.8. Analysis of Accounts Managers
They will have access to much detailed and frequent
Using all of the documents and information from cash accounting information
flow forecasts,
balance sheets and income statements They will help them keep control over the
you can rate the performance of
a business performance of each product
Analysis of accounts is interpreting these They will be able to identify which business aspect is
accounts/documents to see
how a business is doing doing well and which has a poor performance
To rate a company’s performance, you can use 5 ratios Help decision making
There are 2 types of ratios: Ratios are a quick way for managers to compare their
Profitability Ratios – how profitable a business is ratios with other businesses and previous accounts
Liquidity Ratios – how able a business is to pay its Shareholders
short-term debts (current liabilities)
WWW.ZNOTES.ORG
Shareholders and potential investors want to know Low inflation

how big profit/ loss the company has made
They will want to check the profitability and liquidity Inflation – The increase of average prices of goods &
ratios and to decide whether shareholders have to services
buy more shares or not Rapid inflation may lead to:
They will want to know the worth of the business A fall in value of money, fall in real incomes
Creditors/ trade payable Wage price spiral
It will indicate the total value of debts the business Fall in international competitiveness as prices will be
has to pay back high
The cash position of the business Businesses may not want to expand and create jobs
Liquidity ratios indicate the ability of the company to Living standards will fall
pay back its debts Low inflation rates will act as an incentive for firms to
Banks produce and encourage them to expand
Risk of illiquid, no lending
Government Low unemployment
To check the tax revenue, whether the firms are
paying the right taxes When people want to and have the ability to work but
Workers and trade unions can’t work, then they are said to be unemployed
They will have to want to access whether the future of Unemployed people don’t produce goods and services,
the company is secure or not output of the country will be lower
Access the profits to help unions improve wages and It involves an opportunity cost as government has to pays
working conditions of employees greater unemployment benefits which could be used
Other businesses – competitors improve education and reduce living standards
The managers will compare their profitability and
liquidity with other business Economic growth
Limitations of accounting records and ratio If an economy’s total output rises, it is said to be
experiencing economic growth
analysis
GDP is the total value of goods and services produced in
Managers have access to all accounts data, external users an economy
don’t have all information Economic growth may cause employment to rise,
Ratios are based on past accounting data, may not increasing living standards and reducing poverty
indicate future performance A fall in GDP can lead to:
Accounting data over time will be affected by inflation Unemployment
Different companies may use different ways of Fall in average living standards, as poverty rises
accounting Less investment
Economies go through the ‘Business Cycle’:
6. External influences on
business activity
6.1. Government Economic Policies &
Objectives
Governments want 4 main economic objectives:
Low Inflation: Low prices of goods & services, so
people
will buy more, more money in economy
Low Unemployment: High % of people working so
Growth: GDP is rising, unemployment falling,
that they
don’t rely on government funds
businesses
succeeding & higher living standards
Economic Growth: growth of the GDP (Gross Domestic
Boom: Higher living standards so people start
Product)
of a country – more goods and services being
spending more money, so prices increase – business
produced and sold
costs will also rise
Balance of payment (of Imports & Exports): the
Recession: people become uncertain about their jobs
difference between the imports and the exports of a
so they
don’t spend money. Many workers lose their
country balance out (BoP = Exports – Imports)
jobs because of lack of
demand & profit in a business
WWW.ZNOTES.ORG
Slump – A long-term, serious recession: How it affects

Unemployment will be very high, GDP has decreased Tax What it is business
a lot and many businesses will not survive and go activity
bankrupt
People have
less
Balance of Payments
disposable
income
Balance of payments is a record of one country’s financial Tax on people’s incomes
(money after
transactions internationally – \n You can either have a
tax). They
Governments will aim for equality in balance of payments set tax (i.e. 20% of
Income tax (direct would have
that is exports equal imports income)
tax) less money
Higher imports than exports lead to budget deficit orProgressive income tax,
to spend on
Higher exports than imports lead to budget surplus where richer people pay
goods or
Problems of budget deficit: - higher taxes.
Government can run out of foreign currency reserves services.
and will have to borrow
Businesses
Exchange rate depreciates – the price of our currency have less
falls as compared to the other currency revenue.
If tax rates
increase:
6.2. Government Economic Policies
Harder for a
business to
There are 3 main ways governments can influence the
expand (less
economy (AKA
economic policies):
profit) less
Government expenditure Tax on profits made by
Profits Tax (direct money to
Changing tax rates businesses (a set
tax) reinvest back
Interest Rates percentage)
into
Government Expenditure is how the government spends
business,
the money made
from taxes. It is usually spent on
education, defense, healthcare,
public transport, etc.… Fewer people
Companies that are involved in these markets/sectors will start
above will
benefit. i.e. a bus manufacturing company will their own
benefit if government
spends more on public transport
business
Spending more on these markets will boost economy in a Prices of
country (more
jobs created, more demand) goods will
There are 2 types of taxes: increase so
Tax added to prices of
Direct Taxes – taxes paid directly from incomes (of less people
Indirect Tax (VAT) goods & services (varies
individuals as wages or as business as revenue) will buy them
within types of products)
Indirect Taxes – VAT, taxes added to prices of goods – Less
Out of these 2 types, there are 4 common taxes that demand for a
affect business
activity: business
How it affects
Tax What it is business
activity
WWW.ZNOTES.ORG
How it affects Business activity can impact the environment in many

Tax What it is business different ways,
including:
activity Air pollution made by factories & transportation
Water & land pollution from improper waste disposal
Local
Increase carbon emissions – global warming
businesses
Most business decisions lead to benefits and costs. There
will have
are
private and external benefits and costs
more
Private costs & benefits are costs that a business pays for,
demand
and the
benefits the business gains
because
External Costs – costs paid by society, rather than the
there less
Tax on imported goods business
(as a result of business decision)
imported
from other countries. \n External Benefits – gains to society, rather than the
goods,
Import Tariffs & Import Quota is business
(as a result of business decision)
Importing
Quotas (indirect) a physical limit to the The possible external costs and benefits of a business
raw materials
amount of products that decision
might include:
from abroad
can be imported.
will be much External Costs External Benefits
more
Environment is harmed from Jobs are created, economy is
expensive –
waste products boosted
products will
be more Pollution may damage the Other companies might move
expensive – health of people in, more services
sell less Less energy Better infrastructure
Increased traffic Better living standards
6.3. Interest Rates
these externalities change depending on the decision.
The interest rate is the amount charged for borrowing Sustainable development – development that does not
money from a
bank compromise
the living standards of future generations
In most countries, the interest rates are fixed by the Businesses can contribute to sustainable development by
government doing 4 main
things:
the % of the interest rate is called the monetary policy
1. Using renewable energy (wind, solar)
The effects to business activity due to having higher
2. Recycling & reusing their waste
interest rates
include: 3. Using less natural resources (lean production)
Less profit for companies that already took out a loan
4. Developing environmentally friendly products &
-
less/slower expansion of a business.
packaging (i.e.
biodegradable packaging)
Entrepreneurs thinking of starting business might not
be able to
afford to take out a loan People & consumers pressure companies to think more
If consumer loans (i.e. mortgages) increase, people environmentally.
There are many reasons and ways
will have
less disposable income – less demand for businesses give the environment a
higher priority:
goods Pressure groups - a group of people who want to change
Higher exchange rates of currency policies/decisions of businesses or the government.
Businesses might respond to all of these policies by: Pressure groups acting on unethical decisions made by a
business
will lead to a consumer boycott - consumers not
Policy Business Response buying their
products
Lowering production costs to Environmentally friendly businesses can use the fact that
Higher income tax be able to sell goods for lower they are
environmental as a marketing advantage
prices
Focusing on the domestic How and why it
Type of pressure What it is
market, Buying materials from responds
Higher tariffs (on imports)
local companies rather than
from companies abroad
Reduce investment for business
growth, Lower prices of goods
Higher interest rates
for consumers, Sell assets for
cash to reduce loans
6.4. Environmental & Ethical Issues
WWW.ZNOTES.ORG
How and why it Benefits Disadvantages

Type of pressure What it is
responds Easier to find workers
a group of people
who want to
6.5. Business and the International
change policies /
Lots of public
decisions of Economy
support, Very bad
businessesThey
Pressure group brand image & Globalization –the world becoming more interconnected
lead to consumer
reputation, Loss in leading to
increasing worldwide trade & people moving
boycotts -
sales
consumers not The reasons for globalization include:
buying their More Free-Trade Agreements – imports/exports
products between
countries that pay no tariffs
Government Easier, cheaper and faster transportation between
Laws passed by making certain It is more expensive countries
Government activities illegal (i.e. to manufacture E-commerce allows products to be bought from all
over the world
dumping waste)
Industrializing countries (i.e. India & China) can
If a business
produce
products at very low prices
produces more
pollution than the Costs of business The opportunities and threats of globalization to a
Fines
government allows, increase business
include:
they pay heavy
fines. Opportunities Threats
Increasing foreign
Governments sell ‘permits’ to companies that allow it to Businesses can sell abroad, competitors importing their
pollute the
environment up to a certain level increasing sales products, leading to less sales
Firms that pollute less than the government allows, can (& profit)
sell their
permit to companies that pollute more Opening factories or offices
This motivates businesses to pollute less, to earn money Workers in home country
abroad – can be cheaper to
Ethics – “doing the right thing” - the moral principles might leave for higher wages
produce, but it is expensive
Most businesses have to face many ethical decisions, they in other countries
to set up
have to
decide whether to act ethically or have higher
Importing materials from More foreign companies set
profits
abroad – can be cheaper but up operations in the home
Unethical decisions include:
transport costs can be too country of the business,
Employing child workers, even though it might not be
high more competition
illegal in
some countries
Buying supplies that lead to damage of the Importing goods from abroad
environment and selling it in home country
Paying managers large bonuses while having their
workers in
minimum wage & poor conditions Sometimes governments introduce import tariffs and
Offering bribes to people to gain information quotas to protect
local businesses – this is called
Different companies have different ethical standards Protectionism
because people
have different moral codes They believe that by reducing the number of foreign
Businesses may respond to ethical issues by following competitors and
goods (that would have much lower
their moral
code and “doing the right thing” prices), there will be less
unemployment and higher
These decisions have benefits and disadvantages: incomes
However, by doing this, it is harder for local businesses to
Benefits Disadvantages import
materials and export their goods abroad
Consumers appreciate the
efforts made by the company
Higher costs of production 6.6. Multinational Companies (MNCs)
and so they buy more from
them Multinational Company = Transnational Company
Higher prices – might lead to A multinational company is a company that has factories
Creates good publicity or service
operations in more than one country
less demand
In some places families It is not just selling products abroad, it is having
Less risk of lawsuits depend on their children to operations
abroad
earn money The benefits of a business becoming international:
WWW.ZNOTES.ORG
Benefits to the business Benefits to the country (i.e. 1€ = 1.2$ → 1€ = 1.1$) – it can buy less of another
Producing goods at lower currency
Jobs are created The exchange rate of a currency is influenced by 2 things:
costs
Demand for the currency: if many people want to buy
Investments in development
Closer to resources (i.e. oil) the
currency the price will increase because there is a
of infrastructure in country
‘limited’
number of currency (appreciate)
Closer to market More exports Supply of currency: if the central bank prints more
Avoid expensive taxes of money,
the supply increases but the demand is still
import of goods (i.e. Korean Tax – more money to the same so the
value is lower (depreciation)
cars (KIA) being produced in government Exchange rates can affect businesses by:
EU to benefit from free trade)
Spread risks (if there are low If it Appreciates: If it Depreciates:
Increased product choice for
sales in one country and high Import prices rise: your
consumers Import prices fall: since your
sales in another) currency is worth less so you
currency can buy more of the
need more to buy other
other currency
However, there are potential drawbacks to the country: currencies
Less sales for local businesses, might go bankrupt Export prices rise: your Export prices fall: it is worth
‘Repatriation of profits’ – profits are sent back to currency is worth more so it less so other currencies can
home
country and doesn’t benefit country located is more expensive for other buy your currency for les of
Business has lots of influence on government – they currencies to buy it theirs
can threaten
to leave the country
They can use up scarce resources in the country This means that if the currency Appreciates:
The product’s price in other countries will increase
6.7. Exchange Rates Business will make more profit
Business can lower the price and still make the same
Exchange Rate – the price of one currency in terms of amount of
money as before – it is more competitive
another
currency
If the currency depreciates:
For example, 1 Euro is equivalent to 1.2 Dollars
Currency Appreciation – when the value of a currency The products price in other countries will decrease
less profit will be made
increases
(i.e. 1€ = 1.2$ → 1€ = 1.7$) - it can buy more of
Business needs to raise the price to make the same
another currency
amount of
money as before – less competitive
Currency Depreciation – when the value of a currency
decreases
WWW.ZNOTES.ORG
CAIE IGCSE
Business Studies (0450)
Copyright 2022 by ZNotes

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ZNOTES.

UPDATED TO 2020-22 SYLLABUS

A business also employs people as worker and pays them

leading to higher profits.

1.11. Reasons for business Growth

Advantages Disadvantages 1.18. Franchise

Limited Liability – liability of shareholders is limited to

Encourages them to work harder Example of Organisational Chart:

The advantages to have a short (and wide) structure is

2.6. Leadership Styles

Then the job is advertised Full-time workers

2.9. Types of Workers Advantages Disadvantages

Advantages Disadvantages Unfair dismissal: when the worker is dismissed

The interviewer may lead the interviewee to Benefits Limitations

Importance of brand image

Selling a product directly to a consumer is much easier

Pricing methods Price elasticity of demand

Advantages Disadvantages Selling of goods and services through the internet

Advertising Works for local events, daily necessities

Advantages of sales promotion Advertising on own website

Marketing budget is the financial plan for marketing

Technology & Marketing mix 3.12. Legal Controls in Marketing

Job Production – products made one at a time Features Benefits Limitations

Features Benefits Limitations No need for

Large quantities o a High output, capital

High customer satisfaction As scale of production rises, LRAC fall

Fixed (overhead) Costs (FC) - 4.6. Diseconomies of Scale (DEOS)

Quality Control – Checking for quality at the end of the

Issue of shares – Bank loans –

5.4. Cash-Flow Forecasting & Working Uses of cash flow forecast

20,000 in cash to pay costs.

It is the life blood of the business Understanding Income Statements

overdrafts, wages Profitability Ratios:

Shareholders and potential investors want to know Low inflation

Slump – A long-term, serious recession: How it affects

How it affects Business activity can impact the environment in many

6.4. Environmental & Ethical Issues

How and why it Benefits Disadvantages

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