Introduction to Business

1.1 Business activity: needs and wants

Needs are things that we can't live without whilst wants are simply our desires that we can live
without. We all have unlimited wants. Businesses produce goods and services to satisfy needs and
wants.
To produces goods and services. Businesses combine resources (inputs) known as 'factors or
production' to create outputs (goods and services)

Factors of production:

1. Land: natural resources that are used by the business to make a product or service
2. Labour: the time and effort of workers involved in the business, required to make a product
or service
3. Capital: Finance, machinery and equipment required to make a product or service. E.g.
computers, transport, investment and etc
4. Enterprise: Skill and risk-taking ability of an entrepreneur. Brings all factors of production
together to create a business.

 Specialisation – Workers/machines specialises in some part of the production process. For example,

At a car factory, some workers cuts metal parts, another worker assembles the product and
another paints the car. Specialisation can help cut costs and create higher quality products.
 Division of labour – Production process has been divided into different tasks for a specialised worker
to work on. e.g. painting cars at a car factory.

Advantages Disadvantages

Increased efficiency because the worker does Workers may become bored doing the same
the same task over and over again. task which results in decreased efficiency
Workers don’t waste time moving from one Production may stop if one worker doesn’t do
task to another. job

 Added Value = Selling price of the product – Cost price (materials etc…)  Value added is the
difference between the selling price of a product and the cost to produce it.

Added value can be increased by either charging higher prices for the same product or by reducing
the cost of a product by lowering quality e.g. using cheaper materials.

Consumer goods - goods and services sold to customers rather than to a business
Producer goods - goods and services produced by a business to another
Entrepreneur - a person who organizes, operates and takes risk to make the business better.
Characteristics of entrepreneurs:
 Hard Working o Optimistic
 Risk Takers o Self-Confident
 Creative o Innovative
 Effective Communicators
 Independent

Shareholders - owners of a business

Stakeholders - an individual that affects and is affected by the activities of an organization - has an
interest in the operations of the business. E.g. suppliers, customers, shareholders, employees, the
government.

 environmental groups may be particularly interested in firms which use large amount of
fossil fuels
 firms who employ large numbers of workers who are not happy with pay or working
conditions may attract the attention of trade unions.
 Ideally firms will keep shareholders happy, often by consolation and communication with
them.

Aims and Objectives of a business

Aim >> General goal of a business >> grow the business or make it more profitable
Objective >> Is a specific target set for a business to achieve >> Turns aim into something
measurable or assessable. E.g. To grow sales by 20% within 2 years.

SMART Objective setting:

 Specific – objectives are aimed at what the business does

 Measurable - the business can put a value to the objective
 Achievable and attainable
 Realistic and relevant – the objective should be challenging, but it should also be able to be
achieved by the resources available.
 Time bound – they have a time limit of when the objective should be achieved

Setting SMART objectives can help:

o Decision making and prioritizing

o Pushes the company to get better as the achieve goals
o Makes staff motivated and active >> empowers employees
o Shows future plans to investors
o Gives clear purpose
o Give results to compare improvements
o Organized and coordinated within objectives
Financial aims and objectives

 Survival – a short term objective, probably for small business just starting out, or when a
new firm enters the market or at a time of crisis.
 Profit – try to make the most profit possible – most like to be the aim of the owners and
shareholders.
 Sales – where the business tries to make as many sales as possible. This may be because the
managers believe that the survival of the business depends on being large.
 Market share
 Financial security – try to make enough profit to keep the owners comfortable – probably
the aim of smaller businesses whose owners do not want to work longer hours.

Non-financial aims and objectives

 Social objectives – organisations like the Co-op or the Body Shop have objectives which are
based on their beliefs on how one should treat the environment and people who are less
fortunate.
 Personal satisfaction
 Challenge
 Independence and control

Change in aims and objectives as businesses evolve:

A business may achieve an objective and will need to move onto another one (e.g. survival in the
first year may lead to an objective of increasing profit in the second year). E.g of reasons to change
business aims and objectives: market conditions, technology, Performance, Legislation and Internal
reasons

Market conditions - ccompetitive environment might change, with the launch of new products from
competitors.

Technology - might change product designs, so sales and production targets might need to change.

Business functions:

 Human resources: Responsible for all aspects of managing staff. E.g. Organizing/ recruiting
staff, training staff, observing the conditions of staff
 Marketing: Responsible for understanding the needs and wants of customers. Researches
the market, new product development plan, development and delivery campaigns.
 Operations: organizes the transformation process that turns inputs into finished goods and
services. Organizes suitable method of production and controlling of inputs to produce
efficiency
 Finance: manages the financial resources of the business and reports on the financial
positions and performance of the business. Allocating and monitoring the use of financial
input through the budget, ensuring the business has enough cash to enable it to pay its
liabilities as they fall due, reporting on financial performance, ensuring business meets legal
requirements.
 1.2 Forms of business organization

Private enterprise - businesses owned privately by and individual or a group of individuals with the
objective of making profit for their owners

Public enterprise - goods and services provided by the government by organizations and owned by
central or local government. E.g. education and healthcare

Social enterprise - organizations in the private sector that are non-profit, working and exists for
reasons other than profit. E.g. charities

Unincorporated - No legal identity, has unlimited liability, when the owner dies the business dies
with it

Incorporated - Has a separate legal identity, has limited liability, when the owner dies the business
can carry on.

UNINCORPORATED

Sole traders: the business is owned and run by one person only. Can employ people, he is still the
sole proprietor of the business. Very common so little legal requirements are required.

Advantages Disadvantages Legal Requirements Why they are successful

o Total control o Unlimited liability o Keep proper business o Can offer specialist
o Cheap and easy o Difficult to raise accounts and records services
o Owner keeps all finance >> Banks for the inland revenue o Can be sensitive to the
profit will not lend large o Comply with the legal needs of the customer
o Business affairs sums of money requirements that >> they are closer to the
are private o Difficult to enjoy concern protection of customer and can react
economies of customer. more quickly in decision
scale making.
Partnership: A partnership consists of 2 to 20 people who run and own the business together.
Require a deed of partnership or partnership agreement. Outlines issues such as who put the most
capital into the business or who is entitled to the most profit.

Advantages Disadvantages Legal Requirements

o Spreads risk across
people
o Partner many bring in
finance or resources
that benefit the
business
o May bring other skills
and ideas
o Increased credibility
with potential
customers and suppliers
o Have to share profits
o Less control over
business
o Disputes over workload
o Problems if partners
disagree over the
direction of business
Deed of partnership
o amount of capital each partner should
provide
o How profits and losses should be
divided
o How many votes each partner has
(proportion of capital)
o Rules of introducing new partners
o How partnership is brought to an end
 INCORPORATED

Private limited company (LTD) : Has a separate legal identity from its owner >> own resources, form
contracts, can employ people and sue and can be sued >> limited liability. They can sell shared to
raise finance. Shareholders receive a deviant (share of profits) and can elect directors to run the
company >> Chairperson. Shareholders and directors can be voted out of the board at the AGM
(annual general meeting). They also need to pay cooperation tax.

Advantages Disadvantages Legal requirements

 Sale of shares make rising
finance easier
 Have limited liability >>
safer to invest but
investors will not get
their money back is
business fails
 Able to keep control by
restricting share
distribution
 Many legal  Articles of association: rules on how the
formalities company will be managed >> rights and duties
 Profits shared of directors, rules on elections of directors,
 Financials official meetings, issue of shares
published  Memorandum of association: information
about the company and directors. The
objectives of the company and the amount of
share capital the owners are intended to raise.
 Certificate of incorporation: Document issued
by the Registrar of Companies >> allows
company to start trading.

Public Limited Company (PLC): Able to sell shares to the public

Advantages Disadvantages Legal requirements

 Opportunity to  Financial  The minimum number of shareholders must be two (a
raise high capital formalities private limited company only needs one shareholder)
sums  Risk of takeovers
 Accounts must be filed within 6 months of the year end
 No restriction of by outsiders
(the limit is 9 months for a private company)
buying selling or  Increased
transferring shares regulatory  The Company Secretary must be a qualified person (in a
 Increased profile control private company the secretary does not need to be
 Limited liability  Short-termism qualified)
 Separate legal influence of  The minimum number of Directors is two (just one
identity major investors needed for a private company)

Public corporations: a business owned by the government and run by Directors appointed by the
government. These businesses usually include the water supply, electricity, health, education, etc.
The Government give the directors a set of objectives that they will have to follow:

 To keep prices low so everybody can afford

 To keep people employed
 To offer a service to the public everywhere
 These objectives are paid for by the government subsides. However, at some point the government
would realize they cannot keep doing this, so they will set different objectives:

 To reduce costs
 Increase efficiency
 Close loss-making services

Franchising

A franchise is a business whereby the franchisor (owner of the franchise) allows a franchisee to trade
their name. Franchisees pay royalty to the franchisor. Examples of a franchise are Subway,
McDonalds, and KFC

Franchise - Is one of the belongings of the franchisor, easier to attract customers and have a lower
risk of failure

Franchisor - Is the company that started the brand and products. Will expect to have a bit of your
annual profits (royalty). Some might not offer you all of the training and support you need.

Franchisee - a person that buys a business and the rights to operate your business in the style of an
existing business.

Franchisee advantages Franchisee disadvantages Franchisor advantages Franchisor disadvantages

 Training and  Profits shared  Fast and cheap  Potentially can
support  Expensive initial  Franchisees highly damage brand
 Less risk of fee motivated and take reputation
business failure  Royalty payments some of the risk  Cost of support
 Brand name (high  Lack of and training
reputation) independence
 National marketing

Social enterprises

A social enterprise aims to improve human and environmental well-being rather than make profit for
its owners.

Generally, they:

 Have a clear social or environmental mission

 Generate most of their income through trade or donations
 Reinvest most of their profits
 Are majorly controlled in the interest of a social mission
 Are accountable and transparent
 Raise money from fundraising events

Multinationals

A business that has activities and operations in more than one country. They are large, well-known
businesses. Well-resourced and ability to take on large scale projects. They can afford to hire highly
qualified people worldwide. They invest in marketing to outcompete rivals. They have an interest in
technology to increase efficiency and lower costs. They benefit from economies of scale.

Reason for growth Impact on host countries

 Operate closer to larger markets -
reduces transportation costs
 Access to lower cost production in
developing economies
 Global brands driving revenue/ profit
growth in emerging economies
 Supplements weak demand in
developing countries
 Employment/ training for labour force
 Increased competitiveness
 Tax revenue for host economy
 Domestic business fail
 MNC could have unethical actions such
as exploiting workers

1.3 Levels of Economic activity

Industrialization - when a country moves from a primary sector to the secondary sector
De-Industrialization - when a country is moving from a secondary sector to a tertiary sector
>> in both cases, these processes both earn the country more money.

Primary sector - the sector of the economy that produces unrefined raw materials

o Coal mining
o Fishing
o Crop farming
o Dairy farming
o Oil exploration

Secondary sector - the sector of the economy that takes raw materials and turns them into finished
or part-finished goods (e.g. through manufacturing)

o Manufacture of processed foods

o Car production
o Manufacture of computers
o Chemical processing
o Confectionary production

Tertiary sector - the sector of the economy where businesses provide services, either to individuals,
households or other businesses

o Hotel industry
o Retail banking
o Online educations
o Fast food retailing
o Hairdressing

Chain of production - the process that raw materials or other primary inputs go through from the
start of production to the completion or delivery of a final product or service
Business growth

Reasons why firms seek to grow(add in a real-world example from your research):

 Profit motive – drive higher returns for shareholders

 Cost motive – achieve economies of scale
 Market power – increases pricing power and allow barriers to entry
 Risk motive – reduces the risk of a hostile takeover
 Managerial motive – links back to the behavioural aims of managers
 Small businesses

Reasons why firms may choose to remain small:

 Lifestyle choice of the owner and feeling of control / autonomy

 Desire to keep fixed costs low – i.e. run the business with smaller overheads
 Avoid the burden of excessive legal costs such as employment law
 Maintain quality control e.g. in providing a bespoke personal service
 Maintain a high level of flexibility and adaptability to changing market conditions

1.4 Location

What it can effect:

 Costs - Amount to rent or buy premises varies and costs affect point
 Sales - can effect customer accessibility
 Image - where products are produced can impact a company's image

1.5 Business and international economy

Globalization: is a process of deeper economic integration between countries and regions of the
world. Globalisation is the increased integration and interdependence of national economies.
Benefits / Gains from Globalisation
 Encourages producers and
consumers to benefit from deeper
division of labour and economies
of scale
 Competitive markets reduce
monopoly profits and incentivise
businesses to seek cost-reducing
innovations
 Enhanced growth has led to higher
per capita incomes – and helped
many of poorest countries to
achieve faster economic growth
and reduce extreme poverty
measured as incomes < $1.90 per
day (PPP adjusted)
 Advantages from the free
movement of labour between
countries
 Gains from the sharing of ideas /
skills / technologies across
national borders
 Opening up of capital markets
allows developing countries to
borrow money to over a domestic
savings gap
 Increased awareness among
consumers of challenges from
climate change and
wealth/income inequality
 Competitive pressures of
globalisation may prompt
improved governance and better
labour protection
Drawbacks / Risks of Globalisation
1. Inequality: Globalisation has been linked to
rising inequalities in income and wealth. This
leads to political and social tensions and
financial instability that will constrain growth.
Many of the world’s poorest people do not
have access to basic technologies and public
goods. They are excluded from the benefits.
2. Inflation: Strong demand for food and energy
has caused a steep rise in commodity prices.
Food price inflation (known as afflation) has
placed millions of the world’s poorest people
at great risk.
3. Threats to the Global Commons: Irreversible
damage to ecosystems, land degradation,
deforestation, loss of bio-diversity and the
fears of a permanent shortage of water afflict
millions of the world’s most vulnerable
4. Unemployment: Concern has been expressed
by some that capital investment and jobs in
advanced economies will drain away to
developing countries as firms switch their
production to countries with lower unit labour
costs. This can lead to higher levels of
structural unemployment.
5. Standardisation: Some critics of globalisation
point to a loss of economic and cultural
diversity as giant firms and global multinational
brands dominate domestic markets in many
countries.
6. Dominant global brands – globalisation might
stifle competition if global businesses with
dominant brands and superior technologies
take charge of key markets be it
telecommunications, motor vehicles and so on.

Multinationals (MNCs): a business that has operations in more than one country.

Reasons for growth of MNCs:

 To Operate Closer to Target International Markets - Producing closer to target markets has
several potential advantages, including reduced transport costs (which will be important for
bulky goods) and improved market information and intelligence.
 Gaining access to lower costs of production - Many MNCs have taken advantage of lower
production costs from operating in developing economies. In some cases this can be
achieved by outsourcing and off shoring production to suppliers based in those economies.
 Avoiding Protectionism - By producing in a host country, an MNC may be able to avoid
restrictions on imports such as tariffs and import quotas.
How have they Benefits for business Benefits to host country Drawbacks for host country
developed?
 Economies  Larger  Increase in income and  Environmental damage
of scale customer base employment  Exploitation of less developed
 Marketing  Lower costs  Increase in tax revenue countries e.g. low wages, poor
 Technical  Higher profile  Increase in exports working conditions
and financial  Avoiding trade  Transfer of technology  Repatriation of profits
superiority barriers  Improvement in the quality  Lack of accountability -
 Lower taxes of human capital especially in countries with
 Enterprise development weak or corrupt governments

$1= € 1.48
Exchange Rates
>> $50 = ?
If the value of a currency has increased, the currency is stronger
>> 50x1.48=74
>> strong pound, imports cheap, exports dear (SPICED) >> business that imports will see a
reduction in costs. >> €74

>> weak pound, imports dear, exports cheap (WPIDEC) >> business that imports will see an increase
in costs.

UK exports are products made in the UK and sold overseas, while UK imports are products made
overseas and sold in the UK.

1.6 Government objectives and policies

Government spending is also known as public spending

Transfer payments are welfare payments made available through the social security system
including the Jobseekers' Allowance, Child Benefit, State Pension, Housing Benefit, Income Support
and the Working Families Tax Credit. The main aim of transfer payments is to provide a basic floor
of income or minimum standard of living for low-income households.

Current government spending is spending on state-provided goods & services that are provided on
a recurrent basis every week, month and year, for example salaries paid to people working in the
NHS and resources for state education and defence.

Capital spending includes infrastructure spending such as new motorways and roads, hospitals,
schools and prisons.

Effects on a business:

 Increased government spending may mean higher taxes

 Higher taxes reduce the ability of customers to purchase goods and services, which is likely
to reduce consumer spending
On the other hand, many businesses rely on government spending for their revenues and profits. For
businesses that supply services to the public sector, demand is directly linked to how much
government is spending. Good examples include:

 Construction firms that build and repair the road network

 Publishers who supply schools and colleges
 IT systems consultants who develop computer systems for public sector organisations

Why government increases taxes:

 Raise finance for government spending

 To help meet governments economic objectives
 Changing the distribution of wealth and income
 Market failure and environmental targets

Interest Rates

is the cost of borrowing money or the return for investing money.

The effect of a change in interest rate will be affected by whether borrowing is at a variable or fixed
rate:

 With a variable rate, the interest charged varies in relation to the base rate.
 A fixed interest rate means that the interest cost is calculated at a fixed rate – which doesn't
change over the period of the credit, whatever happens to the base rate.

Change in interest rates can depend on the following factors:

 The amount that a business has borrowed and on what terms

 The cash balances that a business holds
 Whether the business operates in markets that depend on consumer spending

Effects of changes in interest rates:

An increase in interest rates will mean that the cost of borrowing rises.

In theory, a higher bank base rate will mean that credit card companies such as Visa and MasterCard
will also raise the rate they charge borrowers on amounts that are outstanding.

A higher interest rate will also mean an increase in the monthly mortgage payments that are made
by home-owners who have mortgages which are charged at a variable rate.

In both cases, the disposable income of consumers and households will fall.

The monthly mortgage payment might rise from say £500 to £550, which means that the household
has £50 less disposable income available to spend or save.

If consumers and households think that the rise in interest rates is temporary or short-term, they
may simply continue to spend as before. In this case, there will be little effect on demand. However,
it might also prompt them to cut back on spending, which would result in lower demand.
 1.7 External Factors

The impact of business activity on society:

Possible benefits Possible undesirable effects

 Production of useful goods to satisfy customer wants
 Create employment
 Introduction of new products or processes that reduces
costs and widen product range
 Taxes help finances public services
 Businesses can earn foreign currency in exports and this
could be spent on imports
 Businesses might ruin cheap but beautiful
areas
 Low wages and unsafe working conditions foe
workers because businesses want lower costs
 Pollution
 Production of dangerous goods
 Advertising can mislead customers

Protecting employees:

 Employees need protection in the following areas:

 Unfair discrimination
 Unfair dismissal
 Wage protection

Protection against unfair discrimination: Often workers are discriminated in a job because of
various reasons. There are laws that protect the employee from such reasons to be discriminated
against:

 Sex Discrimination Act: people of different genders must have equal opportunities.
 Race Relations Act: people of all races and religions mush have equal opportunities.
 Disability Discrimination Act: it must be made suitable for disabled people to work in
businesses.
 Equal Opportunities Policy: That is what everything is all about.

Technological changes: Technological changes bring about constant changes in consumer products
and production process. Businesses use R&D to develop new products and open up new markets to
make huge sums of revenue. However, new products quickly replace old ones just like how machines
are replacing workers in production processes.

2 general things a firm could do when facing technological change:

 Ignore the changes and operate in the "traditional and old-fashioned way". However, they
can only sell to a small and limited market
 Compete by welcoming changes and have access to a huge mass market
 Pros and cons of technological change:

External Example Possible impact on business

influences
Technological Mobile phones  Make existing phones old-fashioned and demand for these could fall
change leading to with cameras  Jobs will be lost in the business that do not develop new products
the development  But new product ideas create new market opportunities
of new products
Technological Robots used to  May make existing production methods seem expensive and uncompetitive
change leading to weld and  Workers may lose their jobs or will need retraining
new production assemble cars  Average production costs could fall
processes
Increased Newly formed  May reduce demand for business already in the industry
competition low cost airlines  Workers jobs may be lost and profits may fall in the existing business
competing with  But increased competition could force businesses to become more efficient -
national airlines higher profits in the long run.
Environmental Pollution caused  Bad publicity - damaged reputation
issues by factories and  Using 'clean' and non-pollution production methods may be expensive id the
chemical plants latest machinery has been purchased
 But businesses may create a unique image for themselves by adoption
environment-friendly policies

Pros:

 Production becomes more efficient

 Fewer workers are required therefore less money is spent on labour costs
 New production methods can be adapted very quickly which gives a business more flexibility

Cons:

 R&D is expensive, without guaranteed success

 Businesses that do not develop products will fail, leaving workers unemployed
 New production methods and machinery is expensive
 Retraining - expensive and workers might be reluctant to learn or fear that they will not do
well, which could lead to a fall in motivation
 Smaller businesses cannot afford these technological changes

Environmental constraints on business activity

2 general opinions on caring for the environment:

 Opinion A: keeping the environment clean is too expensive. We want prices low and this is
what consumers want too.
 Protecting the environment is too expensive and reduces profits
 Increased prices mean increased costs
 Firms become less competitive
 Governments should pay to clean up
  Opinion B: consumers are now starting to prefer businesses with social responsibility.
Cleaner and more efficient machinery benefit the business in the long-run.
 Environmental issues affect us all and the businesses have a social
responsibility to deal with them.
 Using up scarce resources leaves less for future generations and raise prices
 Consumers are becoming more socially aware. More now prefer firms that are
environmentally friendly which could become marketing advantage
 If a business damages the environment, pressure groups could protest and
damage its image and reputation

Political factors affecting business decisions:

Political factors are government regulations that influence business operation positively and
negatively. Managers must keep a bird’s eye view over political factors. These factors may be current
and impending legislation, political stability and changes, freedom of speech, protection and
discrimination laws are factors affecting business operation and activities

 Tax and economic policies: Increasing or decreasing rate of taxes is a good example of a
political component. Government regulations may raise the tax rate for some businesses
and can lower the same for others due to specific reasons.
 Employment Laws: Employment laws are made to protect the rights of employees and
include every aspect of employer/employee relationship. Employment law is an aspect that
is very complex and involves several pitfalls as well. When businesses’ are in touch with the
latest developments in this law, they can manage to take their business in the right direction
however, those who get it wrong needs to be completely prepared for the expensive results
it will generate.
 Governments could change their rules and regulations, which could have an effect on a
business. For instance, after the accounting scandals of the early twenty-first century, the
United States Securities and Exchange Commission became more focused on corporate
compliance and the government introduced the Sarbanes-Oxley compliance regulations
of 2002. This was a response to the social environment that called for such change to
make public companies more accountable.
 Particularly for businesses that operate internationally, a lack of political stability in any
country has an effect on operations. A hostile takeover could overthrow a government,
for instance. This could lead to rioting and looting and general disorder, which disrupts
the operations of a business.

Monopolies

could cause a lot of harm to an economy because there are nobody to compete against them:

 They exploit consumers with high prices.

 They prevent new firms from starting up.
 Monopolies are not encouraged to be efficient because there are no competitors.
In some countries, monopolies are banned and must be broken up into smaller firms. In the UK,
monopolies can be investigated by the Competition Commission. This government body reports two
main types of problems:

 Business decisions that are against consumer interests, such as trying to eliminate all
competitors.
 Proposed mergers or takeovers that will result in a monopoly.

1.8 Measuring business success and failure

Revenue - this is an amount generated guide. If this increases each year, most businesses would feel
successful. However, also need to consider: sales objectives, trading conditions and revenue
received by rivals. This method of measuring success is most likely used by every business type
except for start-ups, public co operations, partnerships and sole-traders. Generally setting objectives
on revenue makes it easier to measure success.

Market share - most businesses aim to make this, therefore raising profits usually means improving
success. However, also need to consider: the amount of competition, size of business, comparisons
with competitors in the same industry and the objectives of owners.

Profit - Rather than focus on revenue, a company may look at profitability to gauge success. This
is because considering revenues ignores considering costs. Profit considers both revenue and
costs. It measures how much money shareholders take home.

Growth - Growth is measured through increased revenue and market share. A company can grow
in several ways:

 Launching new products.

 Opening new stores.
 Acquiring or merging with another company.
 Increasing production capacity.

Satisfaction - The success of a company could be measured through:

 Customer satisfaction - how happy customers are with the product they receive and their
interactions with the company.
 Owner satisfaction - how happy the principal shareholders are in the company's
performance.
 Employee satisfaction - how happy employees are when working for their employer.

Business failure

Start-ups are most vulnerable to business failure. However, established businesses can also fail.
Reasons for this include:

Cash flow problems - A business may lack finance or mismanage their cash flow.
Evidence of poor finance includes:

 Insufficient capital from shareholders to fund the cash flow.

 Not using debt factoring (selling invoices to a third party at a discount).
 Evidence of mismanaging the cash flow includes:
o Rising debts.
o Increases in stock levels.
o Vague or inaccurate forecasting of future sales.

Lack of competitiveness - Start-ups can lack competitiveness.

This may be because:

 There is little demand for the good or service. This may be due to poor research, or an
aggressive response from competitors.
 The business plan is not executed well enough. This is largely down to poor management.
 Failure to adapt to changes in the market
 Businesses may fail because they cannot adapt well enough to external changes in the
market. Changes include:
 Losing key clients or customers.
 A decline in market demand.
 A rise in competitors.
 New legislation.

People in business

2.1 Internal and External communication

Communication is when a message transferred from one person to another and is understood by the
latter. Effective communication means that: "The information or massage being sent is received,
understood and acted upon in the way intended"

In business, ineffective communication or communication failure could result in serious problems.

In business, if we do not communicate, we would be working as individuals with no co-ordination

with anybody else in the business. The management, whose tasks are guiding, instructing and
commanding subordinates could not be done because they cannot communicate with them.

The process of effective communication:

 The transmitter/sender who sends the message. He has to choose the next two features
carefully for effective communication.
 The medium of communication. It is the method of communication, e.g. notice board, letter,
etc...
 The receiver who receives the message. 
  Feedback means that the receiver has received the message and responds to it. This
confirms that the message has been understood and acted upon if necessary.

Internal communication is messages sent between people inside a business. For example:

 The boss talking to his subordinates.

 A report sent to the CEO.

External communication refers to messages sent to people or organisations outside the business.
For example:

 Orders for goods from suppliers.

 Talking to customers.
 Advertising to the public.

Both types of communication are almost the same, the only difference is who is being
communicated with.

Why external communication has to work well:

External communication can greatly affect the efficiency and image of a business. Imagine if the
wrong information is sent to a supplier and a customer. The supplier would send wrong materials
while the customer might buy products from another company. Here are some cases which
ineffective external communication might turn out to be very dangerous:
 The Finance Manager writes to the tax office inquiring about the amount of tax that must be
paid this year.
 The Sales Manager receives an order of 330 goods to be delivered on Wednesday.
 The business must contact thousands of customers because a product turned out to be
dangerous. An advert must be put into the newspaper so that customers can return the
product for a refund.

Why is there a need for effective communication?

 Motivates employees >> helps them feel like they are a part of the business
 Easier to control and coordinate business activity >> prevents different parts in business
from going in the opposite direction
 Makes successful decision making easier >> decisions are based on more complete and
accurate information
 Better communication with suppliers >> increases efficiency
 Better communication with customers >> increases customer satisfaction and company
image

Different ways of communicating: the communication media

 Verbal: Involves the sender speaking to the receiver.

 Written: The message is written to the receiver.
 Visual: Using charts, videos, images or diagrams to communicate a message.

Appropriate medium of communication must be selected depending on the situation.

 Verbal communication

 One-to-one talks.
 Telephone conversations.
 Video conferencing.
 Meetings.

Advantages
 Information is transferred quickly. This is an efficient
way to communicate in meeting to lots of people.
 There is opportunity for immediate feedback which
results in two-way communication.
 The message might be enforced by seeing the
speaker. Here the body language and facial
expression could make the message easily
understood.
Written communication including electronic communication
Disadvantages
 In big meetings, we do not know if everybody is
listening or has understood the message.
 It can take longer for verbal feedback to occur
than written feedback.
 Verbal communication is inappropriate for
storing accurate and permanent information if
a message. (e.g. warning to a worker)

 Letters: Used for both external and internal communication. Follows a set structure.
 Memos: Used only for internal communication.
 Reports: Detailed documents about any problem. They are done by specialists who send
them to managers to analyse before meetings. These reports are often so detailed that they
cannot be understood by all employees.
 Notices: Pinned to notice boards that offer information to everyone. However, there is no
certainty on whether they are read or not.
 Faxes: Written messages sent to other offices via telephone lines.
 E-mails: Messages sent between people with the same computing facilities. The message is
printed if a hard copy is needed.

Advantages
 There is hard evidence of the message which can
be referred to and help solve disputes in the
future over the content of the message.
 It is needed when detailed information is
transferred: it could be easily misunderstood.
Some countries the law states that businesses
need to put safety notices up because people
could forget them.
 The written message can be copied and sent to
many people.
 Electronic communication is a quick and cheap
way to get to many people.
Disadvantages
 Direct feedback is not always possible, unless
electronic communication is used. However, this
could result in too many emails sent (information
overload). Direct feedback via other means of
written communication is hard.
 It is not as easy to check whether the message has
been understood or acted upon.
 The language used might be difficult to
understand. The message might be too long and
disinterest the reader.
 There is no opportunity for body language to be
used to enforce the message.

Visual communication

 Films, videos, and PowerPoint displays: often to help train new staff or inform sales people
about new products.
  Posters: can be used to explain a simple but important message. (e.g. propaganda poster)
 Charts and diagrams: Can be used in letters or reports to simplify and classify complicated
data. Computer technology could help in the design of these charts or diagrams. A printed
copy might be needed for hard data to add to reports and documents.

Advantages
 Present information in an appealing and attractive
way that encourages people to look at it.
 They can be used to make a written message
clearer by adding a picture or a chart to illustrate
the point being made.
Disadvantages
 No feedback is possible. People need to checked
via verbal or written communication to check that
they have understood the message.
 Charts and graphs might be difficult for some
people to understand. The message might be
misunderstood if the receiver does not know how
to interpret a technical diagram.

Effects of poor communication:

 Subordinates won't be organised so production rate decreases which could lead to a

decrease in efficiency
 Not all staff will be made aware of recent updates about the company which can leave
employees dissatisfied and unmotivated as they do not feel valued and don't get involved
 Employees are dissatisfied as they feel that they don't have a voice, which leads to de-
motivation
 Mistakes are likely to occur so cost goes up and financial penalties might occur
 Decision making slows down, if it takes too long for a message to be passes on. This can lead
to a business missing out on an important opportunity

Barriers to communication

 JARGON >> vocabulary used by a specific group that might not be understood. Shouldn't be
used when communicating with people outside of the group or business
 Distractions >> communication may breakdown from noise being made prevents effective
communication. May occur when under stress and employees and are insufficiently focused
on their jobs as a result
 Business culture >> poor communication may result in gossip, suspicion and anger.
Negativity encourages a mentality where the staff might feel isolated and fail to receive info.
 Long chain of command >> too many layers of management may lead to messages taking
longer to pass and they may become unclear or inaccurate
 Using wrong medium >> important messages may be missed and make communication
more challenging.
 Technological breakdown >> can make communication more challenging as different time
zones can make telephone calls or video calls difficult

Removing barriers to communication

  Problem: Language is too difficult to understand. Technical jargon may not be understood.
Solution: The sender should ensure that the receiver can understand the message.
 Problem: There are problems with verbal means of communication. (e.g speaking too
quickly)
Solution: The sender should make the message as clear as possible and ask for feedback.
 Problem: The sender sends the wrong message to the wrong receiver.
Solution: The sender must ensure that the right person is receiving the right message.
 Problem: The message is too long with too much detail which prevents the main points
from being understood.
Solution: The message should be brief so that the main points are understood.
 Problems with the medium:
 Problem: The message may be lost.
Solution: Check for feedback. Send the message again!
 Problem: The wrong channel has been used.
Solution: Ensure the appropriate channel is selected.
 Problem: Message could be distorted after moving down a long chain of command.
Solution: The shortest channel should be used to avoid this problem.
 Problem: No feedback is received.
Solution: Ask for it! Use different methods of communication (e.g. meeting)
 Problem: Breakdown of the medium.
Solution: Use other forms of communication.
 Problems with the receiver:
 Problem: They might not be listening or paying attention.
Solution: The importance of the message should be emphasised. Request feedback.
 Problem: The receiver might not like or trust the sender, and may be unwilling to act upon
the message.
Solution: Trust is needed for effective communication. Use another sender to communicate
the message.
 Problems with the feedback:
 Problem: There is no feedback.
Solution: Ask for feedback. Use a different method of communication which allows
feedback.
 Problem: The feedback is received too slowly and may be distorted.
Solution: Direct lines of communication should be available between the subordinate and
the manager.

2.2 Recruitment and selection process

A business needs to recruit staff as businesses need to expand and generate new ideas. They use
staff to do things better for the customers as staff may be more specialised than the owners of the
business.

 Full-time: work a number of hours equal to a normal working week

 Part-time: work limited number of hours less than a normal working week
 Temporary: Employed for a certain period of time on a full-time or part-time basis
 Job share: 2 or more employees agree to share the work and pay of a single job
 Casual: do not get any guarantees of work, they are 'on call', provides a great deal of
flexibility.
  Temporary: business need to take on staff for a short period of time. Paternity or maternity
leaves are common or long-term sicknesses, contract must be between 3 and 12 months . is
a doorway for permanent employment.
 Seasonal: work is regular and full time but short lived, is full time but still provides flexibility.
Can suit many people's life style.

Recruitment Documents

Job description: A summary of the main duties and responsibilities of a job.

Person specification: Sets out the kind of qualifications, skills, experience and personal attributes a
successful candidate should possess.

 A vital tool in comparing and assessing the suitability of job applicants

 Refers to the person rather than the post

Application form: This is different from a CV in that the employer designs it and sends it to
applicants, but it will still ask for much of the same information. It has the benefit over a CV in that a
business is able to tailor it to their exact needs and ask specific questions.

Curriculum vitae (CV): This is a document that the applicant designs providing the details such as:
personal details, educational history, previous employment history, suitability and reasons for
applying for the job, names and references

Internal and External Recruitment

Internal recruitment is when the business looks to fill the vacancy from within its existing workforce.

External recruitment is when the business looks to fill the vacancy from any suitable applicant
outside the business

Advantages
Internal recruitment
External recruitment
Disadvantages
 Cheaper and quicker to
recruit
 People are already
familiar with the business
and how it operates
 Provides opportunities
for promotion within the
business - can be
motivating
 Business already knows
the strengths and
weaknesses of the
candidate
 Outside people bring
new ideas
 Larger pool of workers
from which to find the
best candidate
 People have a wider
 Limits the number of
potential applicants
 No new ideas can be
introduced from outside
the business
 May cause resentment
amongst candidates not
appointed
 Creates another vacancy
which needs to be filled
 Longer process
 More expensive due to
advertisements and
interviews required
 Selection process may
not be effective enough
 range of experience to reveal the best
candidate

Job advertisement: Advertisements are the most common form of external recruitment. They can
be found in many places (local and national newspapers, notice boards, recruitment fairs) and
should include some important information relating to the job (job title, pay package, location, job
description, how to apply-either by CV or application form). Where a business chooses to advertise
will depend on the cost of advertising and the coverage needed (i.e. how far away people will
consider applying for the job)

Short listing: Often comprises 3-10 of the best candidates who are asked to interview

An interview is the most common form of selection and it serves a very useful purpose for both
employer and job candidate:

For the Employer:

 Information that cannot be obtained on paper from a CV or application form

 Conversational ability- often known as people skills
 Natural enthusiasm or manner of applicant
 See how applicant reacts under pressure
 Queries or extra details missing from CV or application form

For the Candidate:

 Whether job or business is right for them

 What the culture of company is like
 Exact details of job

There are though other forms of selection tests that can be used in addition to an interview to help
select the best applicant. The basic interview can be unreliable as applicants can perform well at
interview but not have the qualities or skills needed for the job.

Other selection tests can increase the chances of choosing the best applicant and so minimise the
high costs of recruiting the wrong people. Examples of these tests are aptitude tests, intelligence
tests and psychometric tests (to reveal the personality of a candidate).

Managers selecting candidates for a high level post in an organisation may even send applicants to
an assessment centre. In such centres candidates undergo a variety of tests, role-plays and
simulations for a number of days.

Once the best candidate has been selected and agreed to take up the post, the new employee must
be given an employment contract. This is an important legal document that describes the
obligations of the employee and employer to each other (terms and conditions) as well as the initial
remuneration package and a number of other important details.

Legal controls over employment

 The employment rights prevents the exploitation of workers, the government has passed a number
of laws that safeguard staff:

 Workers are guaranteed a minimum hourly wage rate of £6.31 per hour in 2013.
 Race, sex, age or disability discrimination is illegal. Businesses must be careful to treat all
workers fairly. They must offer equal pay and promotion opportunities for women and
ethnic minorities.
 The EU Working Time Directive sets a limit on the number of hours staff can work in a
week.
 Parents are entitled to paid leave from work soon after their children are born. The firms
must keep their post open for when they return from maternity or paternity leave.

Protecting workers rights increases the costs of firms.

Protection Impact on business

Gender people of different genders must have equal  Bad image/ reputation
 Equal Pay Act 1970 opportunities.  Loss of trust
 Sex Discrimination  Higher staff turnover
Act 1975  Loss of sponsors or suppliers
Race and religion people of all races and religions mush have
 Race Relations Act equal opportunities.
1976
Disability it must be made suitable for disabled people  Businesses are obliged to make
 Disability to work in businesses. reasonable adjustments in the
Discrimination Act work area and in working
practices
 They can be fined
 They will spend more money on
creating changes in the work
place
Sexual preference 1998 laws were passed to protect LGBTQ+
citizens from unfair employment
discrimination
Age When a business decision is made on the  Should prevent older age groups
grounds of a person's age. from being harassed in the
workplace
 Businesses cannot refuse
promotion or hiring on grounds of
age

Health and Safety at work:

Laws protect workers from:

 protect workers from dangerous machinery.
 provide safety equipment and clothing.
  maintain reasonable workplace temperatures.
 provide hygienic conditions and washing facilities.
 do not insist on excessively long shifts and provide breaks in the work timetable.
Managers not only provide safety for their employees only because laws say so. Some believe that
keeping employees safe and happy improves their motivation and keeps them in the business.
Others do it because it is present in their moral code. They are then considered making an ethical
decision. However, in many countries, workers are still exploited by employers.

Protection against unfair dismissal:

Employees need protection from being dismissed unfairly. The following reasons for the employee
to be dismissed is unreasonable:
 for joining a trade union.
 for being pregnant.
 when no warnings were given beforehand.
Workers who thing they have been dismissed unfairly can take their case to the Industrial Tribunal
to be judged and he/she might receive compensation if the case is in his/her favour.

Wage Protection

Employers must pay employees the same amount that has been stated on the contract of
employment, which states:
 Hours of work.
 Nature of the job.
 The wage rate to be paid.
 How frequently wages will be paid.
 What deduction will be made from wages, e.g. income tax.
A minimum wage rate is present in many Western countries and the USA. There are pros and cons
of the minimum wage:

Pros
 Prevents strong employees to exploit
unskilled workers who could not easily
find work.
 Encourages employers to train unskilled
employees to increase efficiency.
 Encourages more people to seek work.
 Low-paid workers can now spend more.
Cons
 Increases costs, increases prices.
 Owners who cannot afford these wages
might make employees redundant
instead.
 Higher paid workers want higher wages
to keep on the same level difference as
the lower paid workers. Costs will rise.

2.3 Training

Induction training:

 Introducing a new employee to their business/management/co-workers/facilities

 Lasts one to several days
 Makes employee feel confident in doing their jobs and therefore they are less likely to make
mistakes
On-the-job training:

 Employees are trained by watching a professional do their job

 Only suitable for unskilled and semi-skilled jobs
 Cuts travel costs and is cheap
 The trainee does work and learns
 The trainers productiveness is decreased because they have to show things to the trainee
 The trainers bad habits may be passed onto the trainee

Off-the-job training:

 Workers to another place to learn (e.g. school)

 Methods are varied and usually complex
 Usually classroom training
 Employees still work during the day
 Employees may learn many skills

Benefits of training Limitations of training

 Higher quality  Expensive
 Better productivity  Waste of time
 Improved motivation - through greater empowerment  Employees may feel
 More flexibility through better skills pressured or have a loss
 Less supervision required (cost saving in supervision) of interest
 Better recruitment and employee retention
 Easier to implement change in the business

2.4 Motivation and rewards

People work for a number of reasons. Most people work because they need to earn money to
survive, while others work voluntarily for other reasons. Motivation is the reason why people work,
and it drives them to work better. Therefore, managers try to find out what motivate workers and
use them to encourage workers to work more efficiency. This results in higher productivity,
increased output, and ultimately higher profits.

Motivation Theories

Taylor

Theory:

 Money is the main motivator.

 If employees are paid more, they work more.
 Work is broken down into simple processes, and more money is paid which will increase the
level of productivity an employee will achieve.
 The extra pay is less than the increased productivity.
Cons:
 Workers are seen rather like machines, and this theory does not take into account non-
financial motivators.
  Even if you pay more, there is no guarantee of a productivity rise.
 It is difficult to measure an employee's output.

Maslow

Maslow created what is known as the hierarchy of

needs. 

In this diagram, there are 5 different types of motivation:

 Physiological needs: basic requirements for
survival.
 Security needs: the need to by physically safe.
 Social needs: the need to belong and have good
relationships with co-workers.
 Esteem needs: the need for self-respect and to be
respected by others.
 Self-actualisation needs: the need to reach your
full potential and be promoted.
Businesses realise that the more levels of motivation are available to workers, the harder they will
work. Maslow also suggest that each level of motivation must be achieved before going to the next
level. Once one level of motivation is met, more of that will no longer motivate the employee. 

Cons:
 Some levels are not present in some jobs.
 Some rewards belong to more than one level on others.
 Managers need to identify the levels of motivation in any job before using it to motivate
employees.

Herzberg

To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also have
motivational factors/motivators, that are required for the human to grow psychologically. 

Hygiene factors: Motivational factors:

 Status.  Achievement.
 Security.  Recognition.
 Working conditions.  Personal growth/development.
 Company policies and administration.  Advancement/promotion.
 Relationship with supervisor.  Job satisfaction
 Relationship with subordinates.
 Salary.

To Herzberg, if the hygiene factors are not satisfied, they will act as de-motivators. They are not
motivators, since the motivating effect quickly wears off after they have been satisfied. True
motivators are Herzberg's motivational factors.

Financial Motivation
 Benefits in kind ("fringe benefits") – very common in businesses of all kinds; these include
staff discounts, contributions to travel costs, staff uniforms etc
  Time-rate pay: pay based on time worked; very common in small businesses where
employees are paid per hour.
 Piece-rate pay: pay per item produced – becoming less common
 Commission: payment based on the value of sales achieved.
 Bonus: A lump sum paid to employees who have done well. It is usually paid at the end of
the year or before holidays. However, this could cause jealousy between workers. Giving
bonuses to a team works better.

Non-Financial Motivation

 Job enlargement involves adding extra, similar, tasks to a job. In job enlargement, the job
itself remains essentially unchanged.
 However, by widening the range of tasks that need to be performed, hopefully the
employee will experience less repetition and monotony.
 A possible negative effect is that job enlargement can be viewed by employees as a
requirement to carry out more work for the same pay
 Job rotation involves the movement of employees through a range of jobs in order to
increase interest and motivation.
 may offer the advantage of making it easier to cover for absent colleagues
 may also reduce' productivity as workers are initially unfamiliar with a new task.
 Job rotation also often involves the need for extra training.
 Job enrichment attempts to give employees greater responsibility by increasing the range
and complexity of tasks they are asked to do and giving them the necessary authority.
 It motivates by giving employees the opportunity to use their abilities to the fullest.
 requires further investment in employee training.

2.5 Organisation structure and employees

Organisational structure refers to the levels of management and division of responsibilities within a
business, which could be presented in an organisational chart.

For simpler businesses in which the owner employs only himself, there is no need for an
organisational structure. However, if the business expands and employs other people, an
organisational structure is needed. When employing people, everybody needs a job description.
These are its main advantages:

 People who apply can see what they are expected to do.
 People who are already employed will know exactly what to do.

Hierarchical:
There are different levels in the business which has different degrees of authority. People on the
same level have the same degree of authority.
 It is organised into departments, which has their own function.
 It shows the chain of command, which is how power and authority is passed down from the
top of the hierarchy
 and span of control, meaning how many subordinates one person controls, of the business.

Advantages of an organisational chart:

  The charts shows how everybody is linked together. Makes employees aware of the
communication channel that will be used for messages to reach them.
 Employees can see their position and power, and who they take orders from.
 It shows the relationship between departments.
 Gives people a sense of belonging since they are always in one particular department.

Advantages
Flat  Fewer levels of hierarchical command which
helps with faster communication
 Shorter chain of command
 Less management costs >> fewer staff
 Junior staff has more responsibility and therefore
more motivation due to self-actualisation.
Tall  Narrow span of control >> employees monitored
more deeply
 Opportunities for promotion
Centralised vs. Decentralised
Disadvantages
 Managers responsibilities make control difficult
 Junior staff need to be trusted to make key
decisions
 Longer chain of command >> slower
communication and decision making slows down
 Higher management costs

Centralised : Most decisions made at the top of the organisation and passed down a chain of
command

Decentralised: Decision making is pushed down the chain of command and away from the top

Advantages Disadvantages
Centralised  Senior management has complete control over  Employees may be de-
resources motivated without any
 Senior managers are trained and experienced in authority
decision making  It brings less creativity and
 It prevents parts of the business (different fewer ideas
departments) acting independently  Producers may be needed to
 Coordination and control is easier make decoction making easier
 People at the top may be out
of touch with the needs of
customers served by more
local employees
Decentralise  Workers have autonomy and may be better  Senior managers may lose
d motivated control of resources
 It speeds up decision making  Costs may be higher owing to
 It takes pressure off senior managers by reducing less standardisation and more
their workload variability in decision making
 Workers get the opportunity to be creative and process
share their ideas  Some employees may not have
 It provides more promotion opportunities at the the ability to make decisions
different managerial levels  Some employees may not
welcome the extra
responsibility

The span of control shouldn't be wide because one person cannot manage more than 20 people, the
employees would be unsupervised and the more people to look after the more attention it requires.
 Difficult to manage as there is insufficient time to spare for each employee, when greater than 6
difficulties arise, this will encourage managers to delegate work more.

Delegation involves the assignment to others of the authority for particular functions, tasks, and
decisions.

Advantages
 Reduces management stress and workload
 Allows senior management to focus on key
tasks
 Subordinates are empowered and motivated
 Better decisions or use of resources
(potentially)
 Good method of on-the-job training
Disadvantages
 Cannot / should not delegate responsibility
 Depends on quality / experience of subordinates
 Harder in a smaller firm
 May increase workload and stress of
subordinates

Human Resources / People

Responsible for all aspects of managing the people who work in a business.

Main activities: Organise hiring employees (recruitment), Set up and manage employment rules,
Organise employee training & appraisal.

Marketing

Responsible for understanding the needs and wants of customers

Main activities: Research into the market, New product development, Development and delivery of
promotional campaigns, Setting and monitoring prices, monitor the working conditions for
employees.

Production / Operations

Organises the transformation process that turns inputs (e.g. materials, people) in finished goods and
services

Main activities: Organising suitable method of production, Controlling the use of inputs to produce
efficiently, Managing the quality of finished output

Accounts / Finance

Manages the financial resources of the business and reports on the financial position & performance

Main activities: Allocating and monitoring the use of financial resources through budget, Ensuring
business has sufficient cash to enable it to pay its liabilities as they fall due, Reporting on financial
performance.

5.1 Economies and Diseconomies of scale

Economies of scale arise when costs per unit falls as output increases.

Internal economies of scale - as a business grows, the total average costs fall. This is the ability to
produce units of output more cheaply which has cost benefits.

External economies of scale - cost benefits to all the industry when the whole industry grows and
expands. Average unit costs of production fall.