Unit 10: Marketing, competition and costumer

A market consists of all buyers and sellers of a particular good.

What is marketing?

By definition, marketing is the management process responsible for

identifying, anticipating and satisfying consumers’ requirements
profitably.

The role of marketing in a business is as follows:

● Identifying customer needs through market research

● Satisfying customer needs by producing and selling goods and
services
● Maintaining customer loyalty: building customer relationships
through a variety of methods that encourage customers to keep
buying one firm’s products instead of their rivals’. For example,
loyalty card schemes, discounts for continuous purchases, after-sales
services, messages that inform past customers of new products and
offers etc.
● Gain information on customers: by understanding why customers
buy their products, a firm can develop and sell better products in the
future
● Anticipate changes in customer needs: the business will need to
keep looking for any changes in customer spending patterns and
see if they can produce goods that customers want that are not
currently available in the market.

Some objectives the marketing department in a firm may have:

● Raise awareness of their product(s)

● Increase sales revenue and profits
● Increase or maintain market share (this is the proportion of sales a
company has in the overall market sales. For example, if in a market,
$1 million worth of toys were sold in a year and company A’s total
sales was $30,000 in that year, company A’s market share for the
year is ($300,000/ $1000000) *100 = 30%)
● Enter new markets at home or abroad
● Develop new products or improve existing products.

Market Changes

Why customer spending patterns may change:

 ● change in their tastes and preferences
● change in technology: as new technology becomes available, the
old versions of products become outdated and people want more
sophisticated features on products
● change in income: the higher the income, the more expensive
goods consumers will buy and vice versa
● ageing population: in many countries, the proportion of older
people is increasing and so demand for products for seniors are
increasing (such as anti-ageing creams, medical assistance etc.)

The power and importance of changing customer needs:

Firms need to always know what their consumers want (and they will need
to undertake lots of research and development to do so) in order to stay
ahead of competitors and stay profitable. If they don’t produce and sell
what customers want, they will buy competitors’ products and the firm will
fail to survive.

Why some markets have become more competitive:

● Globalization: products are being sold in markets all over the world,
so there are more competitors in the market
● Improvement in transportation infrastructures: better transport
systems means that it is easier and cheaper to distribute and sell
products everywhere
● Internet/E-Commerce: customers can now buy products over the
internet form anywhere in the world, making the market more
competitive

How business can respond to changing spending patterns and

increased competition:

A business has to ensure that it maintains its market share and remains
competitive in the market. It can ensure this by:

● maintaining good customer relationships: by ensuring that

customers keep buying from their business only, they can keep up
their market share. By doing so, they can also get information about
their spending patterns and respond to their wants and needs to
increase market share
● keep improving its existing products, so that sales is maintained.
● introduce new products to keep customers coming back, and drive
them away from competitors’ products
 ● keep costs low to maintain profitability: low costs means the firm
can afford to charge low prices. And low prices generally means
more demand and sales, and thus market share.

Niche & Mass Marketing

Niche Marketing: identifying and exploiting a small segment of a larger

market by developing products to suit it. For example, Versace designs
and Clique perfumes have niche markets- the rich, high-status consumer
group.

Advantages:

● Small firms can thrive in niche markets where large forms have not
yet been established
● If there are no or very few competitors, firms can sell products at a
high price and gain high profit margins because customers will be
willing be willing to pay more for exclusive products
● Firms can focus on the needs of just one customer group,thereby
giving them an advantage over large firms who only sell to the mass
market

Limitations:

● Lack of economies of scale (can’t benefit from the lower costs that
arise from a larger operations/market)
● Risk of over-dependence on a single product or market: if the
demand for the product falls, the firm won’t have a mass product
they can fall back on
● Likely to attract competition if successful

Mass Marketing: selling the same product to the whole market with no
attempt to target groups with in it. For example, the iPhone sold is the
same everywhere, there are no variations in design over location or
income.

Advantages:

● Larger amount of sales when compared to a niche market

● Can benefit from economies of scale: a large volume of products are
produced and so the average costs will be low when compared to a
niche market
 ● Risks are spread, unlike in a niche market. If the product isn’t
successful in one market, it’s fine as there are several other markets
● More chances for the business to grow since there is a large market.
In niche markets, this is difficult as the product is only targeted
towards a particular group.

Limitations:

● They will have to face more competition

● Can’t charge a higher price than competition because they’re all
selling similar products

Market Segmentation

A market segment is an identifiable sub-group of a larger market in which

consumers have similar characteristics and preferences

Market segmentation is the process of dividing a market of potential

customers into groups, or segments, based on different characteristics. For
example, PepsiCo identified the health-conscious market segment and
targeted/marketed the Diet Coke towards them.

Markets can be segmented on the basis of socio-economic

groups(income), age, location, gender, lifestyle, use of the
product(home/ work/ leisure/ business) etc.
Each segment will require different methods of promotion and
distribution. For example, products aimed towards kids would be
distributed through popular retail stores and products for businessmen
would be advertised in exclusive business magazines.

Advantages:

● Makes marketing cost-effective, as it only targets a specific segment

and meets their needs.
● The above leads to higher sales and profitability
● Increased opportunities to increase sales

Unit 11: Market research

Product-oriented business: such firms produce the product first and then
tries to find a market for it. Their concentration is on the product – its
quality and price. Firms producing electrical and digital goods such as
refrigerators and computers are examples of product-oriented businesses.

Market-oriented businesses: such firms will conduct market research to

see what consumers want and then produce goods and services to satisfy
them. They will set a marketing budget and undertake the different
methods of researching consumer tastes and spending patterns, as well as
market conditions. Example, mobile phone markets.

Market research is the process of collecting, analysing and interpreting

information about a product.

Why is market research important/needed?

Firms need to conduct market research in order to ensure that they are
producing goods and services that will sell successfully in the market and
generate profits. If they don’t, they could lose a lot of money and fail to
survive. Market research will answer a lot of the business’s questions prior
to product development such as ‘will customers be willing to buy this
product?’, ‘what is the biggest factor that influences customers’ buying
preferences- price or quality?’, ‘what is the competition in the market like?’
and so on.

Market research data can be quantitative (numerical-what percentage of

teenagers in the city have internet access) or qualitative (opinion/
judgement- why do more women buy the company’s product than men?)

Market research methods can be categorized into two: primary and

secondary market research.

Primary Market Research (Field Research)

The collection of original data. It involves directly collecting information

from existing or potential customers. First-hand data is collected by people
who want to use the data (i.e. the firm). Examples of primary market
research methods include questionnaires, focus groups, interviews,
observation, and online surveys and so on.

The process of primary research:

1. Establish the purpose of the market research

2. Decide on the most suitable market research method
3. Decide the size of the sample (customers to conduct research on)
and identify the sample
 4. Carry out the research
5. Collate and analyse the data
6. Produce a report of the findings

Sample is a subset of a population that is used to represent the entire

group as a whole. When doing research, it is often impractical to survey
every member of a particular population because the number of people is
simply too large. Selecting a sample is called sampling. A random
sampling occurs when people are selected at random for research, while
quota samplingis when people are selected on the basis of certain
characteristics (age, gender, location etc.) for research.

Methods of primary research

● Questionnaires: Can be done face-to-face, through telephone, post

or the internet. Online surveys can also be conducted whereby
researchers will email the sample members to go onto a particular
website and fill out a questionnaire posted there. These questions
need to be unbiased, clear and easy to answer to ensure that reliable
and accurate answers are logged in. (The first part of this wikiHow
article will give you the basic idea of how a questionnaire should be
prepared.)

Advantages:

● Detailed information can be collected

● Customer’s opinions about the product can be obtained
● Online surveys will be cheaper and easier to collate and
analyse
● Can be linked to prize draws and prize draw websites to
encourage customers to fill out surveys

Disadvantages:

● If questions are not clear or are misleading, then unreliable

answers will be given
● Time-consuming and expensive to carry out research,
collate and analyse them.
● Interviews: interviewer will have ready-made questions for the
interviewee.

Advantages:

● Interviewer is able to explain questions that the interviewee

doesn’t understand and can also ask follow-up questions
 ● Can gather detailed responses and interpret body-
language, allowing interviewer to come to accurate
conclusions about the customer’s opinions.

Disadvantages:

● The interviewer could lead and influence the interviewee to

answer a certain way. For example, by rephrasing a
question such as ‘Would you buy this product’ to ‘But, you
would definitely buy this product, right?’ to which the
customer in order to appear polite would say yes when in
actuality they wouldn’t buy the product.
● Time-consuming and expensive to interview everyone in
the sample
● Focus Groups: A group of people representative of the target market
(a focus group) agree to provide information about a particular
product or general spending patterns over time. They can also test
the company’s products and give opinions on them.

Advantage:

● They can provide detailed information about the

consumer’s opinions

Disadvantages:

● Time-consuming
● Expensive
● Opinions could be influenced by others in the group.
● Observation: This can take the form of recording (eg: meters fitted
to TV screens to see what channels are being watched), watching
(eg: counting how many people enter a shop), auditing (e.g.:
counting of stock in shops to see which products sold well).

Advantage:

● Inexpensive

Disadvantage:

● Only gives basic figures. Does not tell the firm why
consumer buys them.

Secondary Market Research (Desk Research)

The collection of information that has already been made available by
others. Second-hand data about consumers and markets is collected from
already published sources.

Internal sources of information:

● Sales department’s sales records, pricing data, customer records,

sales reports
● Opinions of distributors and public relations officers
● Finance department
● Customer Services department

External sources of information:

● Government statistics: will have information about populations and

age structures in the economy.
● Newspapers: articles about economic conditions and forecast
spending patterns.
● Trade associations: if there is a trade association for a particular
industry, it will have several reports on that industry’s markets.
● Market research agencies: these agencies carry out market
research on behalf of the company and provide detailed reports.
● Internet: will have a wide range of articles about companies,
government statistics, newspapers and blogs.

Accuracy of Market Research Data

The reliability and accuracy of market research depends upon a large

number of factors:

● How carefully the sample was drawn up, its size, the types of people
selected etc.
● How questions were phrased in questionnaires and surveys
● Who carried out the research: secondary research is likely to be less
reliable since it was drawn up by others for different purpose at an
earlier time.
● Bias: newspaper articles are often biased and may leave out crucial
information deliberately.
● Age of information: researched data shouldn’t be too outdated.
Customer tastes, fashions, economic conditions, technology all move
fast and the old data will be of no use now.

Presentation of Data from Market Research

Different data handling methods can be used to present data from market
research. This will include:

● Tally Tables: used to record data in its original form. The tally table
below shows the number and type of vehicles passing by a shop at
different times of the day:

Charts: show the total figures for each piece of data (bar/ column charts) or
the proportion of each piece of data in terms of the total number (pie
charts). For example the above tally table data can be recorded in a bar
chart as shown below:

● The pie chart above could show a company’s market share in

different countries.
 ● Graphs: used to show the relationship between two sets of data. For
example how average temperature varied across the year.

Unit 22: Business finance - Needs and sources

Finance is the money required in the business. Finance is needed to set up

the business, expand it and increase working capital (the day-to-day
running expenses).

Start-up capital is the initial capital used in the business to buy fixed and
current assets before it can start trading.

Working Capital finance needed by a business to pay its day-to-day

running expenses

Capital expenditure is the money spent on fixed assets (assets that will
last for more than a year). Eg: vehicles, machinery, buildings etc. These are
long-term capital needs.

Revenue Expenditure, similar to working capital, is the money spent on

day-to-day expenses which does not involve the purchase of long-term
assets. Eg: wages, rent. These are short-term capital needs.

Sources of Finance

Internal finance is obtained from within the business itself.

● Retained Profit: profit kept in the business after owners have been
given their share of the profit. Firms can invest this profit back in the
businesses.
Advantages:
 – Does not have to be repaid, unlike, a loan.
– No interest has to be paid
Disadvantages:
– A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce owner’s
share of profit and they may resist the decision.
● Sale of existing assets: assets that the business doesn’t need
anymore, for example, unused buildings or spare equipment can be
sold to raise finance
Advantages:
– Makes better use of capital tied up in the business
– Does not become debt for the business, unlike a loan.
Disadvantages:
– Surplus assets will not be available with new businesses
– Takes time to sell the asset and the expected amount may not be
gained for the asset
● Sale of inventories: sell of finished goods or unwanted components
in inventory.
Advantage:
– Reduces costs of inventory holding
Disadvantage:
– If not enough inventory is kept, unexpected increase demand form
customers cannot be fulfilled
● Owner’s savings: For a sole trader and partnership, since they’re
unincorporated (owners and business is not separate), any finance
the owner directly invests from hos own saving will be internal
finance.
Advantages:
– Will be available to the firm quickly
– No interest has to be paid.
Disadvantages:
– Increases the risk taken by the owners.

External finance is obtained from sources outside of the business.

● Issue of share: only for limited companies.

Advantage:

● A permanent source of capital, no need to repay the money

to shareholders
no interest has to be paid
Disadvantages:

● Dividends have to be paid to the shareholders

● If many shares are bought, the ownership of the business
will change hands. (The ownership is decided by who has
the highest percentage of shares in the company)
Bank loans: money borrowed from banks

Advantages:

● Quick to arrange a loan

● Can be for varying lengths of time
● Large companies can get very low rates of interest on their
loans

Disadvantages:

● Need to pay interest on the loan periodically

● It has to be repaid after a specified length of time
● Need to give the bank a collateral security (the bank will ask
for some valued asset, usually some part of the business, as
a security they can use if at all the business cannot repay
the loan in the future. For a sole trader, his house might be
collateral. So there is a risk of losing highly valuable assets)
Debenture issues: debentures are long-term loan certificates issued by
companies. Like shares, debentures will be issued, people will buy
them and the business can raise money. But this finance acts as a
loan- it will have to be repaid after a specified period of time and
interest will have to be paid for it as well.

Advantage:

● Can be used to raise very long-term finance, for example,

25 years

Disadvantage:

● Interest has to be paid and it has to be repaid

Debt factoring: a debtor is a person who owes the business money for
the goods they have bought from the business. Debt factors are
specialist agents that can collect all the business’ debts from
debtors.

Advantages:
 ● Immediate cash is available to the business
● Business doesn’t have to handle the debt collecting

Disadvantage:

● The debt factor will get a percent of the debts collected as

reward. Thus, the business doesn’t get all of their debts
Grants and subsidies: government agencies and other external sources
can give the business a grant or subsidy

Advantage:

● Do not have to be repaid, is free

Disadvantage:

● There are usually certain conditions to fulfil to get a grant.

Example, to locate in a particular under-developed area.
Micro-finance: special institutes are set up in poorly-developed
countries where financially-lacking people looking to start or expand
small businesses can get small sums of money. They provide all sorts
of financial services
Crowdfunding: raises capital by asking small funds from a large pool of
people, e.g. via Kickstarter. These funds are voluntary ‘donations’ and
don’t have to be return or paid a dividend.

Short-term finance provides the working capital a business needs for its
day-to-day operations.

● Overdrafts: similar to loans, the bank can arrange overdrafts by

allowing businesses to spend more than what is in their bank
account. The overdraft will vary with each month, based on how
much extra money the business needs.

Advantages:

● Flexible form of borrowing since overdrawn amounts can

be varied each month
● Interest has to be paid only on the amount overdrawn
● Overdrafts are generally cheaper than loans in the long-
term

Disadvantages:
 ● Interest rates can vary periodically, unlike loans which have
a fixed interest rate.
● The bank can ask for the overdraft to be repaid at a short-
notice.
Trade Credits: this is when a business delays paying suppliers for some
time, improving their cash position

Advantage:

● No interests, repayments involved

Disadvantage:

● If the payments are not made quickly, suppliers may refuse

to give discounts in the future or refuse to supply at all
Debt Factoring: (see above)

Long-term finance is the finance that is available for more than a year.

● Loans: from banks or private individuals.

● Debentures
● Issue of Shares
● Hire Purchase: allows the business to buy a fixed asset and pay for it
in monthly instalments that include interest charges. This is not a
method to raise capital but gives the business time to raise the
capital.

Advantage:

● The firms doesn’t need a large sum of cash to acquire the

asset

Disadvantage:

● A cash deposit has to be paid in the beginning

● Can carry large interest charges.
Leasing: this allows a business to use an asset without purchasing it.
Monthly leasing payments are instead made to the owner of the
asset. The business can decide to buy the asset at the end of the
leasing period. Some firms sell their assets for cash and then lease
them back from a leasing company. This is called sale and leaseback.
Advantages:

● The firm doesn’t need a large sum of money to use the

asset
● The care and maintenance of the asset is done by the
leasing company

Disadvantage:

● The total costs of leasing the asset could finally end up

being more than the cost of purchasing the asset!

Factors that affect choice of source of finance

● Purpose: if a fixed asset is to be bought, hire purchase or leasing will

be appropriate, but if finance is needed to pay off rents and wages,
debt factoring, overdrafts will be used.
● Time-period: for long-term uses of finance, loans, debenture and
share issues are used, but for a short period, overdrafts are more
suitable.
● Amount needed: for large amounts, loans and share issues can be
used. For smaller amounts, overdrafts, sale of assets, debt factoring
will be used.
● Legal form and size: only a limited company can issue shares and
debentures. Small firms have limited sourced of finances available to
choose from
● Control: if limited companies issue too many shares, the current
owners may lose control of the business. They need to decide
whether they would risk losing control for business expansion.
● Risk- gearing: if business has existing loans, borrowing more capital
can increase gearing- risk of the business- as high interests have to
be paid even when there is no profit, loans and debentures need to
be repaid etc. Banks and shareholders will be reluctant to invest in
risky businesses.

Finance from banks and shareholders

Chances of a bank willing to lend a business finance is higher when:

● A cash flow forecast is presented detailing why finance is needed

and how it will be used
 ● An income statement from the last trading year and the forecast
income statement for the next year, to see how much profit the
business makes and will make.
● Details of existing loans and sources of finance being used
● Evidence that a security/collateral is available with the business to
reduce the bank’s risk of lending
● A business plan is presented to explain clearly what the business
hopes to achieve in the future and why finance is important to these
plans

Chances of a shareholder willing to invest in a business is higher when:

● the company’s share prices are increasing- this is a good indicator of

improving performance
● dividends and profits are high
● the company has a good reputations and future growth plans

Unit 23: Cash flow forecasting and working capital

Why is cash important?

If a firm doesn’t have any cash to pay its workers, suppliers, landlord and
government, the business could go into liquidation– selling everything it
owns to pay its debts. The business needs to have an adequate amount of
cash to be able to pay for all its short-term payments.

Cash Flow

The cash flow of a businesses is its cash inflows and cash outflows over a
period of time.

Cash inflows are the sums of money received by the business over a
period of time. E.g.:

● sales revenue from sale of products

● payment from debtors– debtors are customers who have already
purchased goods from the business but didn’t pay for them at that
time
● money borrowed from external sources, like loans
● the money from the sale of business assets
● investors putting more money into the business

Cash outflows are the sums of money paid out by the business over a
period of time. Eg:
 ● purchasing goods and materials for cash
● paying wages, salaries and other expenses in cash
● purchasing fixed assets
● repaying loans (cash is going out of the business)
● by paying creditors of the business- creditors are suppliers who
supplied items to the business but were not paid at the time of
supply.

The cash flow cycle:

Cash flow is not the same as profit! Profit is the surplus amount after
total costs have been deducted from sales. It includes all income and
payments incurred in the year, whether already received or paid or to not
yet received or paid respectfully. In a cash flow, only those elements paid
by cash are considered.

Cash Flow Forecasts

A cash flow forecast is an estimate of future cash inflows and outflows of a

business, usually on a month-by-month basis. This then shows the
expected cash balance at the end of each month. It can help tell the
manager:

● how much cash is available for paying bills, purchasing fixed assets
or repaying loans
● how much cash the bank will need to lend to the business to avoid
insolvency (running out of liquid cash)
● whether the business has too much cash that can be put to a
profitable use in the business
Example of a cash flow forecast for the four months:

The cash inflows are listed first and then the cash outflows. The total
inflows and outflows have to be calculated after each section.

The opening cash/bank balance is the amount of cash held by the

business at the start of the month

Net Cash Flow = Total Cash Inflow – Total Cash Outflow

The net cash flow is added to opening cash balance to find the closing
cash/bank balance– the amount of cash held by the business at the end
of the month. Remember, the closing cash/bank balance for one month is
the opening cash/bank balance for the next month!

The figures in bracket denote a negative balance, i.e., a net cash outflow
(outflows > inflows)

Uses of cash flow forecasts:

● when setting up the business the manager needs to know how

much cash is required to set up the business. The cash flow forecast
helps calculate the cash outflows such as rent, purchase of assets,
advertising etc.
● A statement of cash flow forecast is required by bank managers
when the business applies for a loan. The bank manager will need
to know how much to lend to the business for its operations, when
 the loan is needed, for how long it is needed and when it can be
repaid.
● Managing cash flow– if the cash flow forecast gives a negative cash
flow for a month(s), then the business will need to plan ahead and
apply for an overdraft so that the negative balance is avoided (as
cash come in and the inflow exceeds the outflow). If there is too
much cash, the business may decide to repay loans (so that interest
payment in the future will be low) or pay off creditors/suppliers (to
maintain healthy relationship with suppliers).

How can cash flow problems be overcome?

When a negative cash flow is forecast (lack of cash) the following methods
can be used to correct it:

● Increase bank loans: bank loans will inject more cash into the
business, but the firm will have to pay regular interest payments on
the loans and it will eventually have to be repaid, causing future cash
outflows
● Delay payment to suppliers: asking for more time to pay suppliers
will help decrease cash outflows in the short-run. However, suppliers
could refuse to supply on credit and may reduce discounts for late
payment
● Ask debtors to pay more quickly: if debtors are asked to pay all the
debts they have to the firm quicker, the firm’s cash inflows would
increase in the short-run. These debtors will include credit
customers, who can be asked to make cash sales as opposed to
credit sales for purchases (cash will have to be paid on the spot,
credit will mean they can pay in the future, thus becoming debtors).
However, customers may move to other businesses that still offers
them time to pay
● Delay or cancel purchases of capital equipment: this will greatly
help reduce cash outflows in the short-run, but at the cost of the
efficiency the firm loses out on not buying new technology and still
using old equipment.

In the long-term, to improve cash flow, the business will need to attract
more investors, cut costs by increasing efficiency, develop more
products to attract customers and increase inflows.

Working Capital
Working capital the capital required by the business to pay its short-term
day-to-day expenses. Working capital is all of the liquid assets of the
business– the assets that can be quickly converted to cash to pay off the
business’ debts. Working capital can be in the form of:

● cash needed to pay expenses

● cash due from debtors – debtors/credit customers can be asked to
quickly pay off what they owe to the business in order for the
business to raise cash
● cash in the form of inventory – Inventory of finished goods can be
quickly sold off to build cash inflows. Too much inventory results in
high costs, too low inventory may cause production to stop.