Fuad BF Note

Business & Finance Note
Certificate Level (CL)

Fuad Amin
Business & Finance
Certificate Level (CL)
Chaper-1: Introduction to Business
Fuad Amin BUSINESS FINANCE (CL) 2

♦Organization: Organization is a social arrangement for the controlled performance of
collective goals, which has a boundary separating it from its environment.
♦There are two types of organization:
i. Profit oriented organization

To maximize the wealth of its owners.
ii. Not for profit organization
To provide goods and services for its beneficiaries.
Organizations exist because they:

a) Overcome people's individual limitations.
b) Enable people to specialize.
c) Save time.
d) Accumulate and share knowledge
e) Pool their expertise (Combining Expertise)
f) Enable synergy: the combined output of two or more individuals working
together exceeds their individual output ('None of us is as smart as all of us').
g) In Brief, More Productive.
♦The common elements of organization are:

i.Social arrangement: individuals gathered together for a purpose.
ii.Controlled performance: performance is monitored against the goals and adjusted if
necessary, to ensure the goals are accomplished.
iii.Collective goals: the organization has goals over and above the goals of the people
within it.
iv.Boundary: the organization is distinct from its environment.
The organization may differ from each other in terms of:

i. Ownership- Public and Private.
ii.Control- private or government.
iii.Activity- Agriculture, Manufacturing, Extractive/raw materials, Energy,
Retailing/distribution, Intellectual production, Service industries.
iv.Profit or non-profit orientation- Profit making organization or charity.
v.Size- Small or large.
vi.Legal status- Company or proprietorship or partnership.
vii.Sources of finance- Borrowing, Government funding or share issue
viii.Technology- High tech user or low-tech user.
Types of work Organizations do:

➢ Agriculture
➢ Manufacturing
➢ Retailing/Distributing
➢ Energy
➢ Service industries
➢ Extractive/Raw materials
➢ Intellectual Productions.
Business: An organization (however small)

-that is oriented towards making a profit for its owners
-so as to maximize their wealth
-and that can be regarded as an entity separate from its owners.

Stakeholder: A stakeholder is a person who has an interest of some kind in the business.
There are two types of stakeholders:

(i). Primary Stakeholders:
-Shareholders- in case of company (money Invested)
-Owners- in case of sole trader ship or partnership business. (money Invested)
(ii). Secondary Stakeholders:
1) Directors/ Managers; (Livelihoods, Careers and reputations)
2) Employees; (Livelihoods, Careers and reputations)
3) Customers; (Their Custom)
4) Suppliers and partners; (The Items they Supply)
5) Lenders; (Money lent)
6) Government and its agencies; (National infrastructure used by business,
The welfare of employees, Tax revenue)
7) The local community and The public at large(National infrastructure
used by business, The welfare of employees)
8) The natural environment. (The Environment shared by all)
Sustainability: Sustainability is the ability to meet the needs of present without

compromising the ability of future generation to meet their own needs.
Social responsibility: in business, also known as corporate social responsibility (CSR),

pertains to people and organizations behaving and conducting business ethically and with
sensitivity towards social, cultural, economic, and environmental issues. ♦
♦♦Business objectives:
i. Primary objective- financial objective of profit maximization so as to increase
shareholder’s wealth.
ii. Secondary objective:
• Market position-market share, sales growth, customer focus etc.
• Product development- new products, R &D in products etc.
• Technology- reduce cost per unit through technology
• Employees and management
♦♦Is wealth maximization always the primary objective?
Ans. Making as much profit as possible at acceptable risk, or wealth maximization, then, is
assumed to be the primary objective of business. We might expect that the wealth
maximization assumption would be close to the truth.
But Managers will not necessarily make decisions that will maximize shareholders wealth in
case of:
• Non-personal interest
• Lack of competitive pressure
• Profit satisficing- satisfactory profit for a short term ignoring the maximizing the
profit and wealth which is linked with the 'bounded rationality' by Herbert Simon
• Revenue maximization- to maximize revenue to increase the market share
• Multiple objectives- (Peter Drucker)
➢ Market standing
➢ Innovation
➢ Productivity
➢ Physical and financial resources

➢ Profitability
➢ Manager performance and development
➢ Worker performance and attitude
➢ Social responsibility
Simon Expressed Constrain Theory that some business may take decisions without
referencing the wealth objectives at all. It can be seen clearly in the areas where ethical
constrains apply, such as stuff relations or environmental protection. It may also be seen in
the need to satisfy customers with quality goods or services which may lower profitability.
The overall framework for chart of planning and control system is as follows:
Comparison of On target-No
Objectives Plans and Actual performance corrective
standards performance with goals and action is
standards♦ required
Deviation
identified
Mission: A business’s mission is:

- its basic function in the society
- expressed in terms of how it satisfies its stakeholders.
In a nut shell/Overall, the main direction of business is set by its mission.
Mission includes the following characteristics/elements:
Elements of mission Comments

Purpose Why does the organization exist and for whom (e.g. Shareholders)
Strategy Mission provides the operational logic for the organization:
• What do we do?
• How do we do?
Policies and standards Mission should influence what people actually do and how they
of behavior behave. As example; the Mission of a hospital is to save lives and
this affects how doctors and nurses interact with patients.
Values What the organization believes to be important; its principles.
Some business also set-out their “Vision” of the future state of the industry or business when
determining what its Mission should be.
Vision: A vision is a vivid mental image of what you want your business to be at some
point in the future.
Goal means:
- A desired end result.
- The intentions behind decisions or actions.
- What an organization seek to accomplish.

*The vision is what you want to accomplish. Mission is a general statement of how you will
achieve your vision. Strategies are a series of ways of using the mission to achieve
the vision. Goals are statements of what needs to be accomplished to implement the
strategy. Goals are set as a specific target that move you towards your vision.
There are two types of Goal.
i. Non-operational/ non-visible goal: a qualitative goals (Aims), for example; a

university’s aim may be— “to seek truth” (you would not see “increase truth by 5%).
ii. Operational/visible goals: A quantitative goals (Objectives), for example; “to
increase sales volume by 10%”.
Characteristics/Objectives of an operational goals:

Goals should be SMART which abbreviation is as follows:
• S-Specific
• M-Measurable
• A-Achievable
• R-Relevant
• T-Time-bound
Purposes of setting operational objectives in a business:
1. Implement the mission: by setting out what needs to be achieved.

2. Publicize the direction of the organization: to managers and the staff, so that
they know where their efforts should be directed.
3. Appraise the validity of decisions: by assessing whether these are sufficient to
achieve the stated objectives.
4. Assess and control actual performance: as objectives can be used as targets
for achievement.
Plans state what should be done to achieve the operational objectives.

Standards and Target specify a desired level of performance

Managing a business (Chapter-2)

Management means 'Getting things done through other people' (Stewart). Managers can
take resources (staff, money, materials, equipment) and create required outputs (goods,
services, reputation, profit)
Manager does the following tasks:

i. Setting Objectives.
ii. Monitor progress and results to ensure that objectives are met
iii. communicate and sustain corporate values, ethics and operating
principles.
iv. look after the interests of the organization’s owners and other stakeholders.
*Governance: Governance is the system by which businesses are directed and controlled
so that it’s objectives are achieved in an acceptable and sustainable manner.
Effective management Requires: PARADE
1. Power- The ability to get things done.

Six Types of Power according to French & Rave(Followed by Charles Handy)
• Coercive power
(Physical Force/Punishment)
• Reward (or resource) power
(Ability of rewarding individuals for compliance with one’s wishes)
• Legitimate (or position) power
(Formal position in the org)
• Expert power
(Based on Experience, qualifications or expertise)
• Referent (or personal) power
(Attractive/Unique Personality or Charisma)
• Negative power (Charles Handy)
(power to disrupt operations by industrial action, Refusal or sabotage)
2. Authority- The right to do something, or to ask someone else to do it and

expect it to be done. Authority is thus another word for position or legitimate power.
• Making decisions within the scope of authority given to the position
• Assigning tasks to subordinates
3. Responsibility- The obligation a person has to fulfil a task which s/he has
been given.
4. Accountability- A person's liability to be called to account for the fulfilment of

tasks s/he has been given by persons with a legitimate interest in the matter.
*One is thus accountable to a superior (or other persons with legitimate

interest) for a piece of work for which one is responsible
5. Delegation- a manager may make subordinates responsible for work, but

remains accountable to his or her own manager for ensuring that the work is done, that
s/he retains overall responsibility.
6.

Types of manager may be classified on the basis of authority
i. Line manager: A line manager has authority over a sub-ordinate.
ii. Staff manager: A staff manager has authority in giving specialist advice to
another manager or department, over which they have no line authority.
iii. Functional manager: A functional manager has functional authority, a hybrid
of line and staff authority. Can direct or control activities of another department.
iv. Project manager: A project manager has authority over project team
members in respect of the project in progress. This authority is likely to be
temporary (for the duration of the project) and the project team is likely still to
have line managers who also have authority over them.
Management hierarchy:
i. Top managers
ii. Middle managers
iii. First-line managers
iv. Direct operational staff
Process of management: POLC

i. Planning; (business’s overall objective, mission & goals. direction of the works
to be done)
ii. Organizing; (Allocating time and effort in such a way that the objectives, plans
and targets are likely to be met)
iii. Leading. (generating effort & commitment towards meeting objectives,
including motivation of staff)
iv. Controlling; (monitor, Compare results with goals and take actions)
Managerial roles:
i. Informational role: Checking data received and passing it on to relevant
people, as well as acting as the “spokesperson” for his team in relation to other
teams or his own manager.
ii. Interpersonal role: Acting as leader for his own team, and linking with the
managers of other teams.
iii. Decisional role: It is in this role that managers actually “do” what we perceive
as managing in this role they:
a. Allocate resources to operations;
b. Handle disturbances;
c. Negotiate for what they need;
d. Solve problems that arise;
e. Act as entrepreneur.

Culture: The common assumptions, values and beliefs that people share, “the way we do
things round here”.
Quinn emphasizes Two tensions that effect the type of culture a particular business
manifest.
• Tension between having flexibility and having control.
• Tension between whether the business is Inward looking or Outward looking.
The characteristics of 4 culture types, which may characterize entire businesses or

just parts of business:
i. Internal process culture- The business looks inwards, aiming to make its
internal environment stable and controlled. (public Sector Organizations)
ii. Rational goal culture- Effectiveness is defined as achieving goals that satisfy
external requirements. (Large Established businesses)
iii. Open systems culture- The external environment is a source of energy and
opportunity, but it is ever-changing and unpredictable. (a new business unit
working with fast-changing technology)
iv. Human relations culture- The business looks inwards, aiming to maintain its
existence and the well-being of staff. (Support service units)
Model: Model are used in management theory to represent a complex reality, such as a
client’s business, which is then analyzed and broken down into its constituent parts.
Handy points out that management models:
a. Help to explain the past, which in turn;
b. Helps us to understand the present, and thus;
c. To predict the future, leading to
d. More influence over future events, and
e. Fewer disturbances from the unexpected.
What includes in the internal process model of management: The internal process
model of management looks at - how the organization is doing things, not at why. In
business with an internal process model of management includes the following:
i. Rationality
ii. Hierarchical lines of authority
iii. Detailed rules and procedures
iv. Division of labour
v. Impersonality
vi. Centralization
Key Business functions:

i. Marketing, including sales and customer service
ii. Operations or production, including research and development (R&D), and
procurement
iii. Human resources
iv. Finance
Marketing: Marketing is the management process which identifies, anticipates and supplies
customer requirements efficiently & profitably.

Market Segments: The division of the market into homogeneous groups of potential
customers who may be treated similarly for marketing purposes.
♦♦♦The marketing mix- The set of controllable marketing variables that a firm blend to
produce the response it wants in the target market (Kotler)
♦♦♦Presenting the marketing mix for tangible products is the four ‘P’s:
1. Product
2. Price
3. Promotion
4. Place (distribution)
In case of Service marketing mix, includes consideration of the 4 P’s above,

As well as three added extra ‘P’s:
5. People
6. Processes
7. Physical evidence
Product: A product is anything that can be offered to a market for attention, acquisition, use
or consumption that might satisfy a want or need.
There are three main elements of product:

1. Basic (or Core) product: a car
2. Actual product: a Ford focus
3. Augmented product: Ford focus with “0%” finance or extended warranty.
Added features or services to distinguish it from the same product offered by its
competitors.
General factors to be considered when taking a product from basic to actual and augmented
include the following:
a. Quality & reliability
b. Packaging
c. Branding
d. Aesthetics (smell, taste, appearance, etc)
e. Product mix
f. Servicing/associated services
♦Factors influence the pricing policy of the products of a business: Four Cs

1. Cost: Product should be priced above their total cost
2. Competitors: The price must be comparable to those of competitors.
3. Customers: Customer’s expectations
4. Corporate objectives: Possible pricing objectives are
▪ To maximize Profit
▪ To achieve a target return on investment. This results in an approach based on
adding something to the quantified cost to the business of providing the product
▪ To achieve a target revenue figure
▪ To achieve a target market share
▪ To match the competition, rather than leading the market, where the market is
very price-sensitive
▪ To drive competitors out of the market through predatory pricing with a view
to raising prices subsequently. (Predatory pricing is the illegal act of setting
prices low in an attempt to eliminate the competition.)

Promotion: Promotion is all about communication, thus informing customers about the
product and persuading them to buy it.
There are four main types of promotion (“the communication mix”):
1. Advertising
2. Sales promotion (such as 'buy one, get one free' offers)
3. Public relations; and
4. Personal selling.
There are two elements in promotion:
1. PUSH: Ensuring products/services are available to consumers by encouraging
intermediaries, e.g. Sainsburys, to stock items.
2. PULL: Persuading the ultimate consumers to buy.
Operations management- Creating as required the goods or services that the business is
engaged in supplying to customers by being concerned with the design, implementation and
control of the business’s process so that inputs are transformed into output products and
services.
The way in which an operation will be organized and managed is affected by: four Vs
• Volume
• Variety
• Variation in demand
• Visibility
There are certain key decisions in operations management:

i. Forecasting demand far enough in advance.
ii. Deciding whether products should be made in-house or bought-in from outside
(“make or buy”).
iii. Deciding whether two operate in a “Just-In-Time basis”, or to hold
inventory.
iv. Deciding inventory levels and managing inventory efficiently.
v. Managing the supply chain, so inbound deliveries are tied in properly to the
production/operations plan in terms of timing and quality.
vi. Scheduling resources to meet the plan.
vii. Ensuring that the processes used in operations are managed efficiently.
viii. Ensuring quality.
ix. Eliminating waste efficiently.
Research And Development (R&D): involves

• Pure Research: Original research to obtain new scientific or technical knowledge or
understanding. There is no obvious commercial or potential end in view.
• Applied Research: Research which has obvious commercial or potential end in
view.
• Development: The use of existing scientific and technical knowledge to
produce/improve products or systems, prior to starting commercial production
operations.
Procurement: The acquisition of good and/or services at the best possible total cost of
ownership, in the right quality and quantity, at the right time, in the right place and form the
right source for the direct benefit or use of the business.
Procurement Mix elements:
• Quality
• Quantity
• Price
• Lead time
♦♦Human resource management- 'The creation, development and maintenance of an
effective workforce, matching the requirements of the business and responding to the
environment' (Naylor).
♦Different approaches to HRM:

• Hard approach- The hard approach emphasizes the resources element of
HRM. It involves managing the functions of HRM to maximize employee
effectiveness and control staff costs.
• Soft approach- It is concerned with employee relations, the development of
individual skills and the welfare of staff.
Functions of HRM:
1. Personnel planning and control
2. Job design.
3. Recruitment and selection.
4. Training and development.
5. Performance appraisal.
6. Disciplining employees.
7. Remuneration. Designing
8. Grievances and disputes.
9. Compliance with legal and other standards.
10. Employee communication and counseling.
11. Personnel information and records.
12. Workforce diversity.
♦Four Cs model of HRM are:

1. Commitment
2. Competence.
3. Congruence. (common vision)
4. Cost-effectiveness
Organizational behavior: The study and understanding of individual and group behavior in
an organizational setting in order to help improve organizational performance and
effectiveness (Mullins).
♦Organizational Iceberg: (Hellriegel, Slocum and Woodman):

Formal aspects of a business which one can see ‘above the waterline’(Overt), there are
many Behavioral aspects which one cannot see(covert) which are very important.

Organisational Metaphors: In order to help us understand the complex nature of life in
businesses, Morgan developed a range of metaphors, liking the business to a number of
different things in order to bring out certain characteristics of organizational behavior. View
the business as
• A machine
• An organism
• A Brain
• A Culture
• A political System
• A psychic prison
• Flux and transformation
• An instrument of domination.
Taylor's model: scientific management- stated that people were similar and could be
treated in a standardized fashion.
Taylor made three basic assumptions about human behaviour at work:

1. People are rational economic animals concerned with maximizing their
economic gain.
2. People respond as individuals, not groups.
3. People can be treated in a standardized fashion, like machines.
Taylor's conclusions were as follows:

1. Main motivator: high wages.
2. Manager's job: tell workers what to do.
3. Workers' jobs: do what they are told and get paid.
♦♦♦McGregor's model: Theory X and Theory Y

Theory X
• Individuals dislike work and avoid it where possible.
• Individuals lack ambition, dislike responsibility and.
• prefer to be led a system of coercion, control and punishment is needed to
achieve business objectives.
Theory Y
• Physical and mental effort in work is as natural as rest or play.
• Commitment to objectives is driven by rewards – self-actualization is the most
important reward.
• External control and threats are not the only way to achieve objectives – self-
control and direction.
• People learn to like responsibility.
Motivation giving and management should be done after identifying X or Y type.

♦♦Motivation: The degree to which a person wants certain behaviors and chooses to
engage in them.
Motivated workers are characterized by:
• Higher productivity
• Better quality work with less waste
• A greater sense of urgency
• More feedback and suggestions made for improvement
• More feedback demanded from superiors
• Works at 80-95% of their ability. Without motivation, 30%
♦♦♦Maslow's content theory: the hierarchy of needs: Abraham Maslow (Motivation
and Personality (1954)) suggested a hierarchy of such needs to explain an individual's
motivation.
• Self-actualization needs- with what people think about themselves (ongoing
success and new challenges).
• Status/ego needs- to have the respect and esteem of others.
• Social needs- to belong to a group.
• Safety/security needs- physical safety and/or protection against
unemployment.
• Physiological needs - food, shelter, clothing etc.
Herzberg’s Two-Factor Principles:

Group: A group behavior is a collection of people with the following characteristics:
1. Common sense of identify
2. Common aim or purpose
3. Existence of group norms (i.e. expected/accepted standards of behaviour)
4. Communication within the group
5. The presence of a leader.
Stages of group development- Tuckman
1. Forming. a collection of individuals who are seeking to define the purpose of
the group and how it will operate.
2. Storming. - preconceptions are challenged, and norms of attitude, behaviour
etc are challenged and rejected.
3. Norming- establishes the norms under which the group will operate establish
how the group will take decisions, behaviour patterns, level of trust and openness,
individuals' roles.
4. Performing- the group is capable of operating to full potential, since the
difficulties of adjustment, leadership contests etc should have been resolved.
Belbin Team Role:

♦♦♦Likert’s Authoritative leadership style:
Likert's four characteristics of effective manager:

• Employee-Centered rather than work-oriented
• Set High standards but are flexible in terms of methods to use to achieve those
standards.
• Natural delegators with high level of trust
• Encourage Participative management

Blake and Mouton managerial grid: Managers leadership style
• 9-9 -- Team Management: Participative, High productivity, integration of task and

human requirements.
• 9-1 -- Authority-Compliance: People are Treated like machines.
• 1-9 -- Country Club: keeps everyone happy, don’t worry about the task
• 5-5 -- Middle of the road: Average.
• 1-1 -- Impoverished (deprived of strength or vitality): No concern for either people or
getting the task done
♦♦♦Delegation: involves giving a subordinate responsibility and authority to carry out a

given task, while the manager retains overall responsibility. Delegation is a very important
means by which managers get things done.
Advantages of delegation:
1. Manager can be relieved of less important activities
2. It involves decisions to be taken nearer to the point of impact and without the
delays caused by reference upwards
3. It gives businesses a chance to meet changing condition more flexibly
4. It makes the sub-ordinate’s job more interesting.
5. It allows for career development and succession planning
6. It brings together skills and ideas.
7. Team aspect is motivational
8. It allows performance appraisal.
Problems caused by pore delegation:
1. Too much supervision can waste time and be demotivating for the sub-
ordinate
2. Too little supervision can lead to sub-ordinates feeling abandoned and may
result in an inferior outcome if they are not completely happy with what they are
doing.
3. Manager only delegates boring work
4. Manager tries to delegate impossible tasks because he can not do it himself.
5. Managers may not delegate enough because they fear their status is being
undermined, and they want to stay in control.
6. Sub-ordinates may lack the skills and training required.

Organizational and business structure (Chapter-3)

♦Organizational structure formed by the grouping of people into departments or sections
and the allocation of responsibility & authority. Organizational structure sets out how the
various functions (operations, marketing, HR, Finance, etc) are formally arranged.
Organizational structure is a framework intended to:

a. Link individuals in an established network of relationships so that authority,
responsibility & communications can be controlled.
b. Allocate the tasks to be done to suitable individuals or groups.
c. Give each individual or group the authority required to perform the allocated tasks,
while controlling their behavior and use of resources in the interest of the business as a
whole.
d. Coordinate the objectives and activities of separate groups, so that overall aims
are achieved without gaps or overlaps in the flow of work.
e. Facilitate the flow of work, information & other resources through the business.
♦Mintzberg’s Building Blocks:

Mintzberg suggests that all business can be analyzed into 6 “Building Blocks”: which are
shown below:
Sl # Building Block Function

Operating People directly involved in the process of obtaining inputs, and converting
1
core them into outputs, i.e. direct operational staff.
Middle Conveys the goals set by the strategic apex and controls the work of the
2
line operating core in pursuit of those goals, i.e. middle & 1st line managers.
Strategic Ensures the organization follows its mission. Manages the organization’s
3
apex relationship with the environment, i.e. Top managers.
Ancillary services such as PR, Legal counsel, the cafeteria & security
Support
4 staff. Support staff do not plan or standardize operations. They function
staff
independently of the operating core.
Analysts determine and standardize work processes & techniques.
Techno Planners determine & standardize & outputs (e.g. goods must achieve a
5
structure specified level of quality).
Personnel analysts standardize skills (e.g. through training programmes).
6 Ideology Values, beliefs and traditions, i.e. the business culture.

Coordinating mechanisms integrate the building blocks into a cohesive unit, as follows:
i. Direct supervision: Giving of orders by a superior to a subordinate.
ii. Standardization of work: Laying down standard operating procedures.
iii. Standardization of skills: Requiring workers to have particular skills / qualifications.
iv. Standardization of outputs: Specification of results such as the setting of targets.
v. Mutual adjustment: Informal communication & self-government.
(Henri Fayol) 14 classical principles of organizational structure should be followed:

Sl# Principle Key words
1 Division of work Based on specialization
2 Scalar chain Chain of command, span of control
Correspondence of Enough Authority to carry out responsibilities
3
authority & responsibility
4 Appropriate centralization Decision taking from the top level
5 Unity of command One boss. Dual command is a disease (Fayol)
6 Unity of direction One head, one plan
7 Initiative Encouraging employees to use discretion
Subordination of individual
8 Value general interest of the org.
interests
9 Discipline Fair Disciplinary system
People and resources should reliably be
10 Order
where they are supposed to be
11 Stability of personnel Continuity of employment
12 Equity All employees should be treated equally
13 Remuneration Fair Rewards according to their effort
Harmony and Teamwork. A feeling of pride
14 Esprit de corps
and mutual loyalty shared by the members
Modern approaches to organizational structure:

i.Multi-skilling: Contrary to the idea of specialization, multi skilled teams (where
individuals are trained to perform a variety of team tasks, as required) enable tasks to
be performed more flexibly, using labor more efficiently.
ii.Flexibility: Arising from the competitive need to respond swiftly to rapidly-changing
customer demands & technological changes, organizations and processes are being
re-engineered to flexible structures such as the following:
◼ Smaller, multi-skilled, temporary structures. (i.e project or task-force teams)
◼ Multifunctional units, facilitating communication & coordination across
departmental boundaries. (i.e Matrix organization)
◼ Flexible deployment of the labor resource, (i.e part-time & temporary
working, contracting out tasks, flexi time, annual hours contracts)
Three main methods of communication the structure of the business.

a. Organization chart: Pictorial representation of the structure.
b. Organization Manual: Includes:
a) details about all positions in the organization.
b) Standard principles and working practices.
c. Job Description:
a) A result of job analysis
b) Includes responsibilities, authority and work involved
c) Typical descriptions:
• Job title, Department, Grade/Level, Duties & responsibilities,
Limits of authority, Superiors & sub-ordinates.

Types of business structure:
Combining Mintzberg’s building blocks and Coordinating Mechanisms
S Organizational External Internal Key Building Key Co-ordinating
L Structure Type Environment Factors Block mechanism
1 Simple/ Simple Small Static apex Direct supervision
Entrepreneurial Dynamic young
structure Simple tasks
2 Functional/ Simple Large Technostructure Standardization of
Machine Static Old work
bureaucracy Regulated
3 Professional Complex Professional Operation Core Standardization of
bureaucracy Static Simple system skills
4 Divisional Simple Very Large Middle line Standardization of
Structure Static Old outputs
Diverse Divisible task
5 Matrix/Adhocracy/ Complex Young Operating Core Mutual adjustment
innovative Dynamic Complex task
The features of Entrepreneurial structure are:

i. Entrepreneur has specialist knowledge of
product/service
ii. Entrepreneur has total control over running of
the business.
Advantages of entrepreneurial structure:

i. Quick decisions can be made with skill & flair
ii. Goal congruence- the entrepreneur’s objectives are pursued exclusively
iii. Flexible/adaptable to change.
Disadvantage of entrepreneurial structure:
i. Can’t expand beyond a certain size (too many decisions need to be made &
too many people need to be managed).
ii. Can’t easily cope with diversification into new products/services about which
the entrepreneur does not have specialist skills / knowledge.
iii. Lack of career structure for lower level employees
iv. May be too centralized, i.e. too much decision-making power retained by
entrepreneur.
Features of Functional structure:
i. Jobs grouped by common features, e.g production, & ranked in hierarchy, e.g.
managers, supervisors, employees, etc.
ii. Clear lines of reporting & authority exist.
iii. Formal procedures and paperwork characterize this type of structure.
iv. The vertical flow of authority (scalar chain) can go up and down through the
structure from top to bottom.

Advantage of functional structure:
i. Good career opportunities, employees can progress “up through the ranks”.
ii. Can be efficient as functional tasks as well known and understood by
individuals.
iii. Exploits specialist functional skill.
Disadvantages of functional structure

i. Structure is very rigid and unsuitable for:
• growth
• Diversification
ii. Tendency towards authoritative non-participative management style as clear
levels of authority are enforced.
iii. Poor decision/slow decisions which have to pass along a line of authority.
iv. Functional heads may build empires & inter functional disputes may result.
Divisional Structure: The division of a business into autonomous regions or product

businesses, each with its own revenues, expenditures & capital asset purchase
programmes, & therefore each with its own profit responsibility.
Features:
i. Business is split into divisions – division is usually by product or location.
ii. Divisions are typically given responsibility for their profits & assessed in terms of
profit (profit centre).
iii. In Bangladesh the typical approach is to use a holding company & subsidiaries (a
group structure).
Key conditions of a successful divisionalisation:
i. Each division must have properly delegated authority, & must be held
properly accountable to the group board (e.g. for profits earned)
ii. Each division must be large enough to support the quantity & quality of
management it needs.
iii. The division must not rely on Head Office for excessive management
support.
iv. Each division must have a potential for growth in its own area of operations.
v. There should be scope & challenge in the job for the management of each
division.
vi. If divisions deal with each other, it should be as “arm’s length” transactions.
Divisional structure is most suitable when;
i.there are larger, more diversified business
ii.there is diversity by product & /or location.
Features of matrix structure:
i. Formalizes vertical & lateral lines of communication
ii. Managers appointed for projects or customers (projects or customer
managers) liaise with managers from each function (functional managers)
iii. May be temporary, i.e. for one–off contract.
Matrix structure is most suitable to:

i. Complex/hi-tech industries
ii. Educational establishments where there may be lecturers reporting to both
subjects & course heads.
iii. R & D (Research & Development) departments.
Advantages of matrix structure:

i. Reflects importance of project or customer, so may improve relationships &
sales.
ii. Business coordinated with regard to technology, information, etc.
Disadvantages of matrix structure:
i. Conflicting demands on staff time (staff has to serve two Bosses).
ii. Conflicting demands over allocation of other resources.
iii. Dilution (strength) of authority of functional heads.
Professional bureaucracy Structure:
Centralization: Centralized organization is one in which decision-making authority is

concentrated in one place, that is the strategic apex (top).

Factors affecting decentralization:
i. Leadership style: If it is authoritative, the business will be more centralized
ii. Size of organization: As size increases, decentralization tends to increase.
iii. Extent of activity diversification: The more diversified, the more
decentralized.
iv. Effectiveness of communication: Decentralization will not work if information
is not communicated downwards.
v. Ability of management: The more able, the more decentralization.
vi. Speed of technical advancement: lower managers are likely to be more
familiar with changing technology, therefore decentralize.
vii. Geography of locations: If spread, decentralize.
viii. Extend of local knowledge needed: If required, decentralize.
*Centralization offers greater control & coordination, while decentralization offers greater
Flexibility as authority is delegated.
♦♦♦Span of control: The number of people (sub-ordinates) reporting to one person.
The classical Theorist Urwich held that:

• Need to be Tight managerial control downwards
• Usually restricted between 3 & 6 subordinates.
• Too wide(Too many subordinates) or Too narrow(Few subordinates) is bad.
♦♦♦Influence on Span of control:

i. A Manager’s capabilities limit the span of control.
ii. The nature of the manager’s workload
iii. The geographical dispersion of sub-ordinates.
iv. Sub-ordinates’ work.
v. The nature of problems that a manager might have to help sub-ordinates
with.
vi. The degree of interaction between sub-ordinates.
vii. The amount of support that supervisors receive from other parts of the
organization or from technology. (e.g. computerized work monitoring or ‘virtual
meetings’ with dispersed team members).
Scalar chain: The chain of command from the most senior to most junior.
Tall business: On which, in relation to its size, has a large number of levels in its
management hierarchy, normally because there are narrow spans of control.
Flat business: On which, in relation to its size, has a small number of hierarchical levels,
normally because there are wide spans of control.

Difference between Mechanistic and Organic Organizational structure Defined by
Burns & Stalker:
Bureaucracies /Mechanistic Organic structure/
Factor
business/organization business/organization
Suit relatively static, slow-changing Suited to relatively dynamic
Suit
operating environments. operating environments.
The task Specified & broken down into sub-tasks Common task of the organization
Concerned with completing the task Concerned with the total situation
How the task
efficiently not overall organizational and tasks contributing to overall
fits in
effectiveness organizational effectiveness
Managers are responsible for People adjust and redefine their
Coordination
coordinating the tasks tasks themselves
Job Less precise. People do what is
Precise job and responsibility
Description necessary to complete the task
Legal Contract Vs
Hierarchical structure of control Network structure of control
common interest
Decisions Senior managers Can be from anywhere
Commitment to the business’s mission
Mission Concern and obedient to superiors
is more highly valued than loyalty
Characteristics of bureaucracy
Hierarchy of roles Uniformity in the performance of tasks
Specialization & training Rationality
Professional nature of employment Technical competence
Impersonal nature Stability
Businesses may take one of three basic legal forms:

i. Sole-proprietorship
ii. Partnership
iii. Companies
Sole-proprietorship: A single proprietor owns the business, taking all the risks and
enjoying all the rewards of the business.
Partnership: The relation which subsists between persons carrying on a business in

common with a view of profit.
Two or more people who own a business, agreeing to take all the risks, co-operate to
advance their mutual interest and enjoy all the rewards of the business, are called a
partnership.
*Partnership act 1932 *Limited liability Partnership act 2008 (LLP) *No LLP in BD yet
Company: A legal entity registered as such under the Company’s Acts 1994
Advantages
i. The separate legal personality of the company.
ii. The limited liability of its members (share holders)
iii. Perpetual succession.
iv. Transferability of interests
v. Security for loans includes floating as well as fixed charges.
Disadvantages
i. Separation of ownership & control
ii. Ownership of assets
iii. Accounting records & returns
iv. Available Publicity
v. Regulations & expense
A business of whatever form may enter into various types of alliance with other
businesses, in the form of –
➢ Joint venture
➢ Licenses
➢ Strategic alliances
➢ Agents
➢ Groups
A joint venture (JV) is a business arrangement in which two or more parties agree to pool
their resources for the purpose of accomplishing a specific task.
A Licensing agreement is a permission to another company to manufacture or sell a

product, or to use a brand name.
A strategic alliance is an arrangement between two companies to undertake a mutually

beneficial project while each retains its independence.
Agents can be used as the distribution channel where local knowledge and contact are
important, eg exporting services, Financial services, sales of cosmetics, clothes etc.
An alliance group, then, is a collection of separate companies linked through collaborative

agreements. Not all the companies in a group have to be linked directly to all the others.
Some may be related only by virtue of their common ties to another network company or to
a single sponsoring company.

Introduction to business strategy (Chapter-4)

♦Strategy is concerned with an organization’s basic direction for the future, its purpose, its
ambitions, its resources and how it interacts with the world in which it operates.
Strategy is a course of action, including specification of the resources required, to achieve a
specific objective.
Strategy is concerned with:
i. The long-term direction (objectives) of the business.
ii. The environment in which it operates
iii. The resources at its disposal
iv. The return it makes to stakeholders.
Business strategy: A business strategy is a set of competitive moves and actions that
a business uses to attract customers, compete successfully, strengthening performance,
and achieve organisational goals
♦Mintzberg's 5 Ps of Strategy
1. Plan: A Strategic plan is a written document containing targets and instructions
for people to follow which is produced at the end of planning process
2. Ploy: A trick/task to win a victory over competitors.
3. Pattern: A stream of actions, a pattern of behaviour of a consistency in what
the business does, its culture.
4. Position: It’s environment, it’s SWAT, its position in market, how to fit in.
5. Perspective: Business’s unique way of looking at the world and interpreting it.
These five components allow an organisation to implement a more effective strategy
Levels of strategy:
i. Corporate strategy
ii. Business strategy
iii. Functional (operational) strategy
Corporate Level strategy is generally determined at main
board level of the business as a whole. The types of matter
dealt with include:
i. Determining the overall corporate mission and
objectives.
ii. Overall product/market decisions, for example; to expand, close down, enter a new
market, develop a new product, etc.
iii. Other major investment decisions, besides those for products/markets, such as
information systems, IT development.
iv. Overall financing decisions- obtaining sufficient funds at lowest cost to meet the needs
of the business.
v. Relations with external stakeholders, such as share holders, lenders, Government, etc.
Business Level strategy is formed in strategic business units (SBUs) and relate to how a
particular market is approached or how a particular SBU acts.
Competitive strategy is normally determined at this level covering such matters as:
i. How advantage over competitors can be achieved
ii. Marketing issues, such as the marketing mix.
Strategic business unit (SBU): A section, within a larger business, which is
responsible for planning, developing, producing & marketing its own products or services.
Functional / operational Level Strategy: These refers to main functions within each SBU,
such as production/ operations, finance, human resources and marketing, and how they
deliver effectively the strategies determined at the corporate and business level.

♦♦♦Strategic management: Strategic management involves making decisions on the
business’s scope and long-term direction & resource allocation. Strategic management
involves: ♦
i. Taking decisions about the scope of a business’s activities
ii. The long-term direction of the business &
iii. The allocation of resources.
Planning: The establishment of objectives and the formulation, evaluation & selection of the
policies, strategies, tactics & action required to achieve them. Planning comprises long-
term/strategic planning & short-term/operational planning.
Strategic planning: A statement of long-term goals along with a definition of the strategies
and policies which will ensure achievement of these goals.
Emergent Strategy approach Vs Formal Strategic planning approach
Emergent/Dynamic Strategy approach:

• A pattern of action that develops over time in an organisation in the absence of a
specific mission and goals, or despite a mission and goals.
• strategy emerges over time as intentions collide with and accommodate a changing
reality.
• Is the strategy that actually happens
• Responds to events as they arise (e.g. changes in external environment)
• Often involves strategic and tactical changes
• Is not restricted by formal planning tools and methods
An Emergent or Dynamic approach to strategic planning involves Three key stages:
i. Strategic analysis
ii. Strategic choice & Implementation.
iii. Review & control
Formal/Rational/Planned Strategy: ►►
• The intended strategy
• Influenced by specific corporate objectives
• Based around a formal strategy planning process
• Supported by traditional planning tools and methods (e.g. SWOT Analysis, PESTLE
framework, Porter’s Five Forces)
• Described in formal business plan
A former or rational approach to strategic planning involves four key stages:
i. Strategic analysis
ii. Strategic choice
iii. Implementation of chosen strategies
iv. Review & control
Positioning-based approach VS Resource-based approach to Strategic planning process:
1. ♦Positioning-based approach: ►►
• It is an Outside-in view of strategy, consider outside environment and market, then
the company’s ability to trade in these condition
• Believe that successful strategy involves the business adapting to its environment
• Focus on customers need
• Gain superior position against rivals
• Assess relations with stakeholders
• Seek to gain preferential access to resources
2. Resource-based approach:
• It is an inside-out view of strategy, consider key resources first, then how to
exploit competitive advantage in available market
• Firms don’t look for strategies external to them
• They develop and acquire resources and competences
• Create new market and exploit them
• Company don’t merely “Satisfy” customer needs, they “create” them.
• Combination of resources and competences takes years to develop and can
be hard to copy.
♦Stages of Strategic planning process:
A) Strategic analysis stages:
1. External Analysis (Analysing the environment)
2. Internal analysis (analysing the business)
3. Corporate appraisal (Combination of step 1 and 2)(SWOT analysis)
4. Mission, goal and objectives
5. Gap analysis (Compares outcome of step 3 with 4)
B) Strategic Choice stages:

1. Strategic option generation
2. Strategic option evaluation
3. Strategy selection
C) Strategy implementation: Strategy implementation is the conversion of the strategies

chosen into detailed plans or objectives for operating units. The planning of implementation
has several aspects:
i. Resource planning
ii. Operations planning
iii. Organization structure & control system.
D) Review & control

Environment of a business: Everything outside its boundaries. It may be segmented
according to figure into the physical, the general and the task environment.
A) The physical environment includes land, air, water, plants and animals, buildings
and other infrastructure, and all of the natural resources that provide our basic needs
and opportunities for social and economic development.
B) General Environment: Covers all the Political, Economic, Social/cultural,
Technological, Ecological & Legal (PESTEL) influences in the countries a business
operates in.
C) Task / Competitive environment: Relates to factors of particular relevance to the
business, such as its competitors, customers & suppliers of resources.
i. Static environment: four “S”
i. Static – Environmental change is slow
ii. Single – product/market
iii. Simple – Technology
iv. Safe –
ii. Dynamic environment: four “D”
i. Dynamic – The speed of environmental change appears to
increase through time.
ii. Diverse – Many businesses are now multi product and operate
in many markets, business is also increasingly international.
iii. Difficult – because of the above factors analysis of the
environment is not easy.
iv. Dangerous – because of the above factors ignoring the
environment can have serious consequences for the business.
Fig: The business’s external environment

♦♦PESTEL Analysis: (Included in General Environment)
*Market: Comprises the customers or potential customers who have needs which are
satisfied by a product or service
*Industry: Comprises those business which use a particular competence, technology,
product or service to satisfy customer needs and which therefore compete with each other.
Industry Life Cycle: IGMD (Included in Strategic Management): Evolution of an industry or

business through four stages based on the business characteristics commonly displayed in
each phase. The four phases of an industry life cycle are:
Stage in life cycle comments
Introduction Newly-invented product or service is made available for purchase
Growth A period of rapid expansion of demand or activity as the industry finds a market
A relative stable period of time where there is littile change in sales volumes
Maturity
year to year but competition between businesses intensifies.
A falling off in activity levels as business leave the industry and industry ceases
Decline
to exist or is absorbed into some other industry.
♦Porter’s 5 competitive forces: (Included in Task Environment)

i. Potential entrants
ii. Customers
iii. Substitutes
iv. Suppliers &
v. Industry competitors.

These influence the state of competition in an industry as a whole.
Fig: Porter’s five competitive forces
Kotler’s 4 kinds of competitors:

i. Brand competitors: Similar firms offering similar products. (McDonald vs
Burger King)
ii. Industry competitors: Similar products but are different in other ways, such as
geographical market or range of products. (Online retailing vs Traditional
retaining)
iii. Generic competitors: Compete for same disposable income with different
products. (Music store vs Book store on the same street)
iv. Form competitors: Offers distinctly different products but satisfy the same
needs. (Matches vs cigarette lighter)
For each competitor, the following factors can be analysed:

• Competitors strategy
• The competitor’s assumption about the industry
• The competitor’s current and potential situation
• Competitor’s capability
Competitor’s reaction profile:

• The laid-back competitors do not respond to moves by the competitors
• The tiger competitor responds aggressively to all opposing moves
• The Selective competitor reacts to some threats in some markets but not to all
• The Stochastic competitor is unpredictable.

Internal analysis:
i. Its resources and competencies, using a position and resource audit
ii. Its value chain
iii. Its supply chain
iv. Its products & market, using the product life cycle and the BCG matrix
Position Audit: Part of planning process which examines the current state of the entity in
respect of different aspects.
Resource Audit: (9 Ms Model):

1. Machinery (Age, Condition. Value. Utilization rate, Replacement))
2. Make-up (Culture and structure. Patent. Goodwill. Brands)
3. Management (Size, Skills, Loyalty. Career progression. Structure)
4. Management information (Information system. Innovation)
5. Market (Product and customer)
6. Materials (Source. Suppliers, Cost. Availability. Future provision)
7. Men (Number. Skill. Wage cost. Efficiency. Labour Turnover)
8. Method (How are activities carried out?)
9. Money (Credit and turnover period. Finance. Gearing levels)
Value chain: The sequence of business activities by which, in the perspective of the end
user, value is added to the products or services by an entity.
Value Activities: The means by which a business creates value in its products
Porter’s Value chain:
The Margin is the excess the customers is prepared to pay over the cost to the business of
obtaining resource inputs and providing value activities.
Primary activities Command

Receiving, handling and storing inputs to the production
Inbound logistics
system. (ie. warehouse, transport, inventory control)
Operations Convert resource inputs into final product.
Outbound logistics Storing the product and its distribution to customers
Marketing & sales Advertising, persuading customers to buy, promotion
Service Installing, repairing, upgrading, providing spare parts

Support activities Command
Procurement Acquire the resource inputs to the primary activities
Human Resource management Recruiting, Training, developing and rewarding people
Product design, improving process, resource
Technology development
utilization.
Firm infrastructure Planning, finance, quality control
♦♦Supply chain management: Optimizing the activities of business working together to

produce goods & services. Integrated supply chain management (SCM) is a means by
which the business aims to manage the chain from input resources to the customer.
Product life cycle: How a product demonstrates

different characteristics of profit & investment over
time. Analyzing it enables a business to examine
its portfolio of goods & services as a whole. ♦♦
♦ (Stages of Product life cycle)
Aspects of Product:
• Product class (car, newspaper, genetic
product)
• Product form (Two-seated sports car, weekly local newspaper)
• Brand (Ford)
Boston Consulting Group Matrix (BCG Matrix)
Another useful way to look at the products/services the business is engaged in and the
market it services is to analyze them using the Boston Consulting Group (BCG) matrix.
BCG develop a matrix based on research the assesses a business’s products in terms of
potential cash generation & cash expenditure requirements. Products or SBUs are
categorized in terms of market growth rate & relative market share.
Market Share:
One entity’s sale of
a product or
service in a
specified market
expressed as a
percentage of total
sales by all entities
offering that
product or service.
Market
Growth Rate is a
measure of the
extent at which
the market a
company operates
in is growing. This
provides an insight
into the size of the
opportunity a
company might
have.

Corporate Appraisal:
A critical assessment
of the Strengths and
Weaknesses,
Opportunities and
Threats (SWOT
analysis) in relation to
the internal &
environmental factors
affecting and entity in
order to establish its
condition period to the
preparation of the
long-term plan. ♦♦
Mendelow's Matrix is
a tool that may be used
by an organisation to
consider the attitude of
their stakeholders at
the start of a project or
when they are setting
out strategic objectives.

Conflict of Interest between Stakeholders
Stakeholders Conflict
Shareholders vs Manager/Directors Profit vs Growth
Growth via merger vs Independence
Shareholders vs employees Cost efficiency vs Cost
Customers vs Shareholders and Service level vs Profits and costs
Manager/Directors
Shareholders vs bankers Return vs Risk
Power & it’s Sources: Power is the means by which stakeholders can influence a
business’s objectives. Sources of power may be internal or external.
Internal sources of power: External sources of power:
i. Hierarchy i. Control over strategic resources
ii. Influence/reputation ii. Involvement in implementation
iii. Relative pay iii. Knowledge & skills
iv. Control of strategy resources iv. External links
v. Knowledge skills v. Legal rights
vi. Environmental control
vii. Strategic implementation
involvement
Interest & its factors

1. Where their interest rests: eg shareholders want dividends and capital growth,
employees want higher pay and good conditions, customers want low prices, reliable
supplies and so on.
2. How interested they are: For instance, they will be interested if there are
alternatives (job, supplier, customers etc.), If they are the industry regulator, or if
there is a significant capital investment.
Gap analysis: A comparison between an entity’s desired future performance level

(expressed in terms of profit) and the expected performance of projects both planned &
underway. Gap analysis looks at the gap between what the business would achieve if it
continued on its existing course and what it needs to achieve as demonstrated by its
strategic planning process measured in terms of profit.
Choosing a Corporate Strategy:

Porter’s Genetic Competitive Strategies
Competitive strategy: Taking offensive or defensive actions to create a defendable
position in an industry to cope successfully with competitive forces and thereby give a
superior return on investment of the business.
The two basic types of competitive advantage combined with the scope of activities for
which a firm seeks to achieve them, lead to three generic strategies for achieving above
average performance in an industry: cost leadership, differentiation, and focus.
1. Cost leadership: Cost leadership is one strategy where a company is the most
competitively priced product on the market, meaning it is the cheapest.
How to be accost leader:
i. Set up production facilities to obtain economies of scale
ii. Use the latest technology
iii. Concentrate on improving productivity
iv. Minimize overhead costs
v. Get favorable assess to sources of supply.
vi. Relocate operations to cheaper countries

2. Differentiation: The provision of product or service which the industry as a whole
believes to be Unique.
Products may be categorized as follows:
i. Break through products offer a radical performance advantage over
competition, perhaps at a drastically lower price.
ii. Improved products offer better performance at a competitive price.
iii. Competitive products offer a particular combination of price & performance.
How to differentiate the product:
i. Build up a brand image
ii. Give the product special features to make it stand out
iii.Exploit other activities of the value chain such as marketing and sales or service.
iv.Use it to create new services or product features.
3. Focus: Involves a restriction of activities to only part of the market (a segment) through
i. Cost Focus: Providing goods and/or services at lower cost in that segment.
ii. Differentiation Focus: Providing a differentiated product/ services to that segment
Ansoff’s Product/Market Strategies

The Ansoff Matrix, also called the Product/Market Expansion Grid, is a tool used by firms to
analyze and plan their strategies for growth. The matrix shows four strategies that can be
used to help a firm grow and also analyzes the risk associated with each strategy.
• Market Penetration: This focuses on
increasing sales of existing products to an
existing market.
• Product Development: Focuses on
introducing new products to an existing
market.
• Market Development: This strategy
focuses on entering a new market using
existing products.
• Diversification: Focuses on entering
a new market with the introduction of new
products.
SFA Matrix
The SFA Matrix is a framework to evaluate your strategic options in order to pick
one. SFA stands for
• Suitability, (does the strategy fit the business’s operational circumstances?)
• Feasibility (Can the strategy in fact be implemented?) and
• Acceptability. (will people accept it? What’s their expectations?)
These are the criteria areas in SAF Analysis used to judge and score each strategy.
Strategy implementation: is the process by which an organisation translates its
chosen strategy into action plans and activities, which will steer the organisation in the
direction set out in the strategy and enable the organisation to achieve
its strategic objectives.
Level of Plans:
1. The strategic plan (general direction that will be taken to achieve the corporate
objective but it is not itself very detailed.)
2. The business plan (for the business as a whole or for an SBU sets out the market(s)
to be served, how the business/SBU will serve the market)
3. The operational plan (Specified what is expected of each function in the business as
a whole or an SBU, based on the relevant functional strategy & how specific actions
will be taken in order to meet that expectation)
Finally, Budgets (summarized or master budget♦) are prepared that set out the business’s
plan for a defined period, expressed in money terms.
Introduction to risk management (Chapter-5)

♦Risk: The possible variation in an outcome from what is expected to happen.
Features of risk:
i. Variability: Events in the future can not be predicted with certainty.
ii. Expectation: We expect something to happened, or perhaps hope that it will
not happen.
iii. Outcome: This is what actually happens compared with what is intended or
expected to happen.
♦Uncertainty: The inability to predict the outcome from an activity due to a lack of
information. (unavoidable)
♦♦*Risk is objective and measurable or quantifiable but Uncertainty is subjective and

unquantifiable.
Symmetrical risk/two-way risk: The risk that something will go wrong is ‘Downside Risk’,
if it is likely to go right the term ‘Upside Risk’ is used.
Opportunity: The possibility that an event will occur and positively affect the achievement
of objectives.
Risk appetite: The extent to which a business is prepared to take on risks in order to
achieve its objectives.
Critical success factor (CSFs)- The areas of a business or project that are vital to
its success.
Approach should be included in risk appetite?

i. Decide what the business wants to achieve (the strategic objective).
ii. Decide what the business’s ‘risk appetite’ is, in other words the extend to which
it is prepared to take on risk in order to achieve its objectives.
iii. Find strategies to achieve the objectives that do not involve more risk than the
business is willing to accept.
iv. If there are no methods of reducing the risk to an acceptable level, the
objectives need to be amended.
Risk adverse attitude is that an investment would be chosen if it has a more certain but
possibly lower return than an alternative less certain, potentially higher return investment.
Risk neutral attitude is that an investment would be chosen according to its expected
return, irrespective of the risk.
Risk seeker attitude is that an investment would be chosen on the basis of it offering
higher levels of risk; even if its expected return is lower than an alternative no risk
investment with a higher expected return.
♦♦Classification of risks:
i. ♦Business risk: arises from the nature of the business, its operations and
the conditions it operates in.
ii. Non-business risk: Any other type of risk, usually classified as:
a. financial risk
b. operational risk.

♦Business risk includes:
i. Strategy risk: the risk of choosing the wrong corporate business or functional
strategy.
ii. Enterprise risk: the success or failure of a business operation and whether it
should have been undertaken in the first place.
iii. Product risk: the chance that customers will not buy the company’s product
or services in the expected quantity.
iv. Economic risk: the effect of unexpected changing economic conditions.
v. Technology risk: the risk that the market or industry is affected by some
change in production or delivery technology.
vi. Property risk: the risk of loss of property or losses arising from accidents.
Financial risk: Lam, in Enterprise Risk Management, divides financial risk into:
i. Credit risk: The economic loss suffered due to the default of a borrower,
customer or supplier.
ii. Market risk: The exposure to potential loss that would result from changes in
market prices or rates.
Other financial risk includes:
i. Liquidity risk: an unexpected shortage of cash.
ii. Gearing risk: high borrowing in relation to the amount of shareholders’ capital
in the business, increasing the risk of volatility in earnings, and insolvency.
iii. Default risk: Debtors of the business failed to pay what they owe in full and on
time.
iv. Credit risk: The company’s credit rating is downgraded.

v. Foreign exchange risk: Making unexpected gains or losses from changes in a
foreign exchange rate.
vi. Interest rate risk: Unexpected change in interest rate placing the business at a
financial disadvantage.
vii. Market risk: An adverse movement in share market prices.
Operational risk: The risk of direct or indirect loss resulting from inadequate or failed
internal process, people & systems or from external events, including legal risks.
Operational risk includes:
i. Process risk: Business’s processes may be ineffective or inefficient.
ii. People risk: risk arising from staff constraints, incompetence, dishonesty.
iii. System risk: risk arising from information and communication system.
iv. Legal risk: Uncertainty in laws, regulations & legal actions.
v. Event risk: risk of loss due to Single even
a. Disaster risk
b. Regulatory risk
c. Reputation risk
d. Systemic risk
Another way of classifying event risks in terms of external environment:
a. Physical risks
b. Social risks
c. Political risks
d. Legal risks
e. Economic risks
f. Operating environment risks
4 Key concepts of risk: The scale of any risk for a business depends upon These.
i. Exposure (Public disclose)
ii. Volatility (change rapidly and unpredictably)
iii. Impact (Measure of the amount of loss if the undesired outcome occurs)
iv. Probability (How likely it is that a particular outcome will occur)
The greatest risks facing a business will arise when:

i. Exposure is high
ii. The underlying factor is volatile
iii. The impact is severe, and
iv. The probability of occurrence is high.
♦♦Risk management: The identification, analysis & economic control of risk which
threaten the assets or earning capacity of a business, so as to reduce the business’s
exposure by either reducing the probability or limiting the impact or both.
When is risk management necessary?

i. There may be legal requirements to manage risk: You are required by law to
insure your car, for instance.
ii. Risk management (in the form of insurance) may be required by licensing
authorities & regulatory bodies.
iii. Financial organizations may require risk management: if you have a
mortgage your lender no doubt requires you to have buildings insurance to protect
its security.
iv. In bank company act 2013, Risk management committee at the board level
has been made mandatory to ensure proper risk management practice in the
banks.
♦♦Risk Management Process
i. Risk awareness and identification, using techniques such as brain storming

& analysis of past experience to identify the business’s exposure to risks.
ii. Risk analysis (assessment & measurement): This considers the volatility of
particular factors, the probability of an event occurring & the severity of the impact
if it does. Measurement may be qualitative or quantitative.
iii. Risk response & control: In essence a risk can be avoided (do not do the
risky activity), reduced (e.g. by strictly controlling processes), shared (e.g with an
insurer) or simply accepted.
iv. Risk monitoring & reporting: Is a continuous process.
Risk awareness and identification

Approach: Way to identifying the risks, which operate most effectively when combined.
i. A top-down approach is led by the senior management /board of the
business, spending time on attempting to identify key risks. Often, this is linked to
the business’s CSFs : what might be prevent us from achieving each CSF?
ii. A bottom-up approach involves a group of employees, with an expert in risk
management, working together to identify risks at the operational level upwards.
Identify the Categories of loss:

i. Property loss: Possible loss, theft or damage of any static or movable assets.
ii. Liability loss: Loss occurring from legal liability to third parties, personal injury
or damage to property.
iii. Personnel Loss: Due to injury, sickness or death of employees.
iv. Pecuniary loss: As a result of defaulting debtors.
v. Interruption loss: A business being unable to operate due to one of the other
types of loss occurring.
Identifying too many risks can make the risk management process overly complex. The
business should focus its efforts on significant risks: those that are potentially damaging the
business’s value.
Risk assessment and measurement
♦Risk assessment: For each risk its nature is considered, & the implications it might have
for the business; an initial judgment is then made about the seriousness of the risk.
♦Risk measurement: Identifying the profitability of the risk occurring, & quantifying the
resultant impact by calculating the amount of the potential loss using expected values for
gross risks.
Gross Risk is the potential loss associated with the risk, calculated by combining the impact
and the probability of the risk, before taking any control measures into account.
Risk response & control:

i. Avoidance: Not doing the risk activity. This may not be an option, but the first question
should always be “Do we need to do this risk activity at all?”
ii. Reduction: Doing the activity, but using whatever means are available to ensure that
the profitability of the event occurring & the impact if it does are as small as possible.
iii. Sharing: For example, taking out insurance against the risk, but only after every effort
has been made to reduce it, so that insurance premiums are kept as low as possible.
Another sharing strategy might be to enter an agreement with one or more other
companies.
iv. Acceptance/retention: This should only be considered if the other options are not
viable, for example, if the costs of extra control activities & the costs of insuring against the
risk are greater than the cost of the losses that will occur if the event happens.
In response to risk taking variety of forms, organizations can take Physical controls,
Financial controls, System controls and Management controls
Risk monitoring and reporting

Monitoring process:
i. Has corrective action now been taken? Has it been effective?
ii. Was the risk identified in the first place, & if not why not?
iii. If the risk was identified & planned for but the event still occurred is it because
early warning indicators were not mentioned?
iv. If the response & / or controls were ineffective what changes or new
procedures are necessary?
♦Report All identified risk management problems that could affect the organization’s ability
to achieve its objectives should be reported to those in a position to take necessary action.
i. The chief executive regarding serious problems.
ii. Senior managers regarding risk management problems that affect their units.
iii. Managers in increasing levels of detail as the process moves down the
organizational structure.

♦Crisis: An unexpected event that threatens the wellbeing of a business, or a significant
disruption to the business and its normal operation which impacts on its customers,
employees, investors and other stakeholders.
It can be fairly predictable and quantifiable or totally Unexpected.
♦♦Crisis management: Identifying a crisis, planning a response to the crisis &
confronting & resolving the crisis.
♦*A crisis happens when a risk becomes a reality.
Types of crisis in terms of effects on the business:

i. Financial crisis: Short term liquidity or cash flow problems, & long term
insolvency problems.
ii. Public relations crisis: Negative publicity that could adversely affect the
success of the business.
iii. Strategic crisis: changes in the business environment that call the viability of
the business into question, such as new technology making old products or
processes obsolete.
♦Types of crisis in terms of their cause:
i. Natural event
ii. Industrial accident
iii. Product or service failure
iv. Public relations disaster
v. Business crisis
vi. Management crisis
vii. Legal/regulatory crisis
♦What are the effective actions in the event of a crisis?

i. Assess objectively the cause(s) of the crisis
ii. Determine whether the cause(s) will have a long term or short term effect
iii. Project the most likely course of events
iv. Focus resources on activities that mitigate or eliminate the crisis
v. Look for opportunities
In the event of a public relation crisis:

i. Act immediately to prevent or counter the spread of negative information; this
may require intense media activities.
ii. Use media to provide a counter-argument or question the credibility of the
original negative publicity.
A Disaster is a major crisis or event which causes a breakdown in the business’s operations
& resultant losses.
Disaster’s recover plan:

Introduction to financial information (Chapter-6)

♦♦♦Business and Managers need financial information for
i. Planning
ii. Controlling
iii. Recording transactions
iv. Performance measurement♦
v. Decision making
♦Types of information:
i. Planning information: Helps people involved in the planning process.
ii. Operational information: helps people carry out their day-to-day activities,
e.g. how many operatives are needed in one shift.
iii. Tactical information: Helps people deal with short-term issues &
opportunities, e.g., monthly variance reports for the factory.
iv. Strategic information: Supports major long-term decision making, e.g. can
resources be made available to expand production?
A Good Information should have the following chrematistics or qualities: (ACCURATE)

♦ ♦ A = Accurate
C= Complete
C= Cost-beneficial
U= User- targeted
R= Relevant
A= Authoritative
T= Timely
E= Easy to use.
What makes information valuable?

• It’s Source
• Ease of assimilation
• Accessibility
• Relevance
*The value of information obtained should me more than the cost of obtaining it.
♦Data: Distinct pieces of information, which can exist in a variety of forms as numbers or
text on pieces of paper, as bits or bytes stored in a electronic memory, or as facts stored in
a person’s mind. (Data is a source of information)
♦Information: The output of whatever system is used to process data. This may be
computer system, turning single pieces of data into a report, for instance.
Database: A structured collection of records or data that is stored in a computer system
along with rules as to the information that will be sought from it, so that queries may be
answered by interrogating the database.
Internal sources of data/information:

• Communication between managers and staff or between managers.
• Accounting records
• System of collecting transaction data
• Human resources & payroll records
• Machine logs & computer system in production
• Time sheets in service business
• Staff

External sources of data/information:
• Business’s tax specialists
• About new legislation
• R&D work done by another business
• Marketing manager’s research exercises.
• Information received from customers & suppliers
• The internet
• The Govt.
• Advice for information bureau
• Consultancies
• News paper & magazine publishers
• The system of other business via EDI (Electronic Data Interchange).
• Libraries or information services.
Information processing: Data once collected is converted into information for

communicating more widely within the business. In the information processing system data
is input, processed & then output as information.
To be effective, information processing should meet the following CATIVA criteria:
C = Completeness
A = Accuracy
T = Timeliness/Time bound
I = Inalterability
V = Verifiability
A = Accessibility
A system: a set of interacting components that operate together to accomplish a purpose.

A business system: a collection of people, machines & methods organized to accomplish a
set of specific functions.
Information system (IS): all systems & procedures involved in the collection, storage,
production & distribution of information
Information technology (IT): the equipment used to capture, store, transmit or present
information. IT provides a large part of information systems infrastructure.
Fig: Information system
Transaction Processing System (TPS): A type of information system that collects, stores,
modifies and retrieves the data transactions of an enterprise.
Information management Systems

Management Information System (MIS): Converts data from mainly internal sources into
information (e.g. summary reports, exception reports). This information enables Managers to
make timely & effective decisions for planning, directing & controlling the activities for which
they are responsible.

The MIS transforms data from underlying TPS into summarized files that are used as the
basis for management reports. It-
i. Supports Structured decisions at operational & management control levels
ii. Is designed to report on existing operations.
iii. Has little analytical capability
iv. Is relatively inflexible
v. Has an internal focus.
Executive Support system (ESS): help senior managers to take strategic decisions
Decision support systems (DSS)
Knowledge work Systems (KWS): Integration of new knowledge into an organization
Office Automation System (OAS): Increases the productivity of workers.
Expert system: Expert systems allow users to benefit from expert knowledge & information.
The system consists of a database holding specialized data & rules about what to do in, or
how to interpret, a given circumstances.
Where expert systems are applicable in business?

• Legal or tax advice
• Forecasting of economic or financial developments, or of market & customer
behavior.
• Surveillance, for example of the number of customers entering a super market, to
decide what shelves need restocking & when more checkouts need to be
opened, or of machines in a factory, to determine when they need maintenance.
• Diagnostic systems, to identify causes of problems. For example in production
control in a factory, or in healthcare.
• Project management
• Education & training, diagnosing a student’s or worker’s weaknesses & providing
or recommending extra instruction as appropriate.
When expert system is most useful?
• The problem is reasonably well-defined
• The expert can define some rules by which the problem can be solved.
• The problem can’t be solved by conventional transaction processing or data handling.
• The expert could be released to more difficult problems. Experts are often highly
paid; meaning the value of even small-time savings is likely to be significant.
• The investment is an expert system is cost-justified.
*An intranet is a private network, operated by a large company or other organisation, which
uses internet technologies, but is insulated from the global internet. An extranet is
an intranet that is accessible to some people from outside the company, or possibly shared
by more than one organisation.
♦Security: The protection of data from accidental or deliberate threads which might cause
unauthorized modification, disclosure or destruction of data, and the protection of the
information system from the degradation or non-availability of services.
♦Ensure the security of information:
i. Prevention;
ii. Detection
iii. Deterrence (the action of discouraging an action or event through instilling
doubt or fear of the consequences. Ie, computer misuse restriction)
iv. Recovery procedures
v. Correction procedures
vi. Threads avoidance

♦Qualities of a secure information system (ACIANA)
A = Availability
C = Confidentiality
I = Integrity
A = Authenticity
N = Non-reputation
A = Authorization
Types of Security control of information:
1. Physical Access Control: Security guards, door locks, intruder alarms, PIN etc
2. Security controls: help to prevent:
i. Human error
➢ Entering incorrect transactions
➢ Failing to correct errors
➢ Processing the wrong files
ii. Technical error such as malfunctioning hardware or software
iii. Deliberate actions such as fraud
iv. Commercial espionage
v. Malicious damage
3. Integrity Controls in the system: Maintain Complete, accurate, reasonable and
valid data by data verification, data validation etc.
♦Financial information used for:

The Framework of the Preparation & Presentation of Financial Statements published by the
International Accounting Standards Board (IASB) is focused on public financial statement in
particular rather than financial information in general, but it usually points out that nearly all
users use financial information to make economic decisions, such as those to:
i. Decide when to buy, hold or sale shares on the basis of their risk & return.
ii. Assess how effectively the business’s management has looked after its affairs
(its stewardship) & decide whether to replace or reappoint them.
iii. Assess a business’s ability to provide benefits to its employees.
iv. Assess security for amounts lent to the business.
The IASB framework identifies the following users of financial information:
i. Present & potential investors (shareholders)
ii. Employees
iii. Customers
iv. Suppliers & other business partners
v. Lenders
vi. Govt. & its agencies
vii. The public at large.
The framework states that the financial information is useful to users when it:
i. Helps them to make economic decisions, and
ii. Shows the results of management’s stewardship of the resources entrusted to
them.
Qualitative characteristics of financial statements (IFRS Framework)

Fundamental Qualitative Characteristics:
i. Relevance: Information of the financial statement is relevant to users, when it
influences their economic decisions because they can thereby:
➢ Evaluate past, present or future events, or
➢ Correct or confirm past evaluations.
Relevance is affected by:
➢ The nature of certain items, and / or
➢ The materiality of certain items.
1. Faithful Representation:
• Complete, including necessary descriptions and explanations
• Neutral (Without bias in selection of information
• Free from error.
Enhancing Qualitative Characteristics:

1. Understandability
2. Comparability: Measurement & display of the financial effect of like transactions
and other events must be carried out in a consistent way:
a. throughout the business
b. overtime, and
c. across different business.
3. Verifiability
4. Timeliness: Generally, the older the information, less useful it is.
Limitations of Financial Statement:

• Lack of timeliness
• Cost/benefit
• Conventionalized (highly standardized, diversified & designed)
• Backward Looking (past events)
• Omission of non-financial information, such as:
i. Narrative description of major operations
ii. Discussion of business risks & opportunities
iii. Narrative analysis of the business’s performance & prospects
iv. Management policies & how the business is governed & controlled.
Financial information is poor if it does not:

i. Meet the needs of users
ii. Display the qualitative characteristics
The effect of poor financial information is:
i. To undermine the integrity of financial markets
ii. To fail to serve the public interest.

Finance function (Chapter-7)

What does Finance function do?
i. The finance function’s tasks:
• Recording financial transactions: Ensuring that the business has an
accurate record of its revenue, expenses, assets, liabilities and capital.
• Management accounting: ►►Providing information to assist managers
and other internal users in their decision making, performance measure,
planning and control activities
• Financial reporting: Providing information about a business to external
users that is useful to them in making decisions and for assessing the
stewardship of the business’s management.
• Treasury management: Managing the fund of a business, namely cash and
other working capital items, plus long-term investments, short-term and long-
term debt and equity finance.♦
ii. The finance function supports the business’s pursuit of its strategic objectives
by providing information to measure performance & support decision making, & by
ensuring the business has sufficient funds for its activities.
• Undertaking transaction processing and ensuring there are sufficient
financial control process in the system
• By providing information to measure performance & support decisions
(financial reporting & management accounting)
• By ensuring there is finance and cash available for the business’s
activities (treasury management).
Cost accounting: Gathering information about costs & attaching it to each unit of output (a
cost unit); Establishing budgets, standard costs and actual costs of operations, processes,
activities or products & analyzing variance & profitability. How:
i. Establishing asset valuations (for example ; for inventory)
ii. Planning (for example; providing forecast costs at different activity levels)
iii. Control (for example; providing actual & standard costs for comparison
purposes).
iv. Decision-making (for example; providing information about actual unit costs
for the period for making decisions about pricing)

Cost classification: The arrangement of cost elements into logical groups with respect to
their nature or function.
• Fixed cost: A cost incurred for an accounting period that is unaffected by fluctuations in
the levels of activity.
• Variable cost: A cost that varies with the level of activity.
• Semi variable cost: A cost containing both fixed and variable components & thus partly
affected by a change in the level of activity.
• Future Cost: Yet to be incurred
• Sunk Cost: Have already been acquired
• Avoidable cost : That will not be incurred if a particular activity is not performed
• Unavoidable cost
• The Differential/ Incremental Cost: Difference in total cost between the new and
existing level.
• Margin Cost: Additional cost of one extra unit of output
• Opportunity Cost: Best alternative project that is not chosen.
• Relevant cost in decision making process: Only future costs that will be changed by the
decision made now
• Irrelevant cost in decision making process: Will remain unchanged whatever decision is
made
• A direct cost is a price that can be directly tied to the production of specific goods
or services. ♦
• Controllable costs are those over which the company has full authority. Such expenses
include marketing budgets and labor costs. ♦
Management decision making in allocation of resource: Two categories

1. Making resource decision in the short-mid term
2. Making Investment decisions for the long-term
Making resource decision in the short-mid term

Managers want to spend as little as possible to earn the most amount of revenue by
maximizing revenue & minimizing variable costs so that the contribution to fixed cost is as
large as possible.
Marginal costing: Including only variable costs in unity

costs when making decisions or valuing inventory (the
marginal cost of a unit of inventory excludes fixed costs or
its share of overheads).
Contribution: Unit selling price Less marginal cost.
Cost volume profit (CVP) is the

study of interrelationship between
costs, Volume & profit at various
levels of activity.
BEP: The level of production & sales

at which after deducting both fixed &
variable costs from sales revenue,
neither a profit nor a loss will occur.
(FC/Contribution margin)

Contribution Analysis: Unit Revenue-Unit VC
Limiting factor analysis: a technique which will maximize contribution for an organisation,
by allocating a scarce resource that exists to producing goods or services that earn the
highest contribution per unit of scarce resource available.
Making Investment decisions for the long-term

Capital Budgeting: The process that a business uses to determine which proposed fixed
asset purchases it should accept, and which should be declined.
Capital Investment Appraisal: If the business identifies a possible capital investment

opportunity, the accountant needs to help evaluate or appraise the project to make a
decision as to whether to go ahead with it. The techniques includes
• Accounting Rate of Return (ARR)
• Payback period (PBP)
• Internal Rate of Return (IRR)
• Net Present value (NPV)
• Profitability Index
----------------------------------------------------------------------------------------------------
Forecasting is the process of making future predictions based on past and present data
and most commonly by analysis of trends. It is particularly important regarding:
a. Sales volumes
b. Costs
c. Economic factors (interest & exchange rates)
d. Other environmental factors such as regulation, technological developments,
and taste.
Budgeting
Budget: A plan expressed in monetary term.
A budget cycle is the life of a budget from creation or preparation, to evaluation. Most
small businesses don't use the term “budget cycle” but they use the process and go
through each of its four phases — preparation, approval, execution and evaluation.
Types of budgeting:
Incremental budgeting is the traditional budgeting method whereby the budget is
prepared by taking the current period's budget or actual performance as a base,
with incremental amounts then being added for the new budget period. ... The current
year's budget or actual performance is a starting point only.
Zero-Based budgeting (ZBB): is an approach to making a budget from scratch. From zero.
A flexible budget is a budget that adjusts to the activity or volume levels of a company.
Unlike a static budget, which does not change from the amounts established when
the budget was created, a flexible budget continuously "flexes" with a business's
variations in costs.
A rolling budget is continually updated to add a new budget period as the most
recent budget period is completed.
♦Bottom-up budgeting. With a bottom-up approach, the process starts in the individual
departments where managers create a budget and then send it upwards for approval.
That budget is either approved, revised or sent back for modifications, and a master
budget is created from the various departmental creations
Purposes of budgets:
i. Guiding managers on how to achieve objectives
ii. Helping to compel planning
iii. Allocating resources
iv. Setting targets & allocating responsibility
v. Helping to co-ordinate activities
vi. Communicating plans
vii. Enabling control
viii. Helping to motivate employees
ix. Helping to evaluate performance
Strategic management accounting: Providing and analyzing financial information on the

business’s product markets & competitors’ costs & cost structures & monitoring the
business’s strategic & those of its competitors in this market over a number of periods.
Types of Performing measure:

1. Qualitative measures: subjective and judgmental, non-numerical form.
2. Quantitative Measures: Objective, based on reliable data, numeric form
I. Financial measures: sales, profit
II. Non-financial measures: Number of item produced or phone call answered.
Profitability: Revenue-cost
Activity: Activity causes cost. Measured in terms of physical numbers, monetary value or
time spent.
Productivity: The quantity of the service or product produced in relation to the resources
put in. ie. Goods produced per employee.
Resources used: Economy, Effectiveness & Efficiency

Efficient use of resources is concerned with the economy with which resources are used
and the effectiveness of their use in achieving the objectives of the business.
Measuring Critical Success Factor (CSFs): The key factors that are vital for business
success.
Identifying key Performance Indicator (KPIs): Once a business has identified its CSFs
and the things it must be good at to succeed it must identify performance standards to be
achieved to outperform rivals. These standards are sometimes called key performance
indicators (KPI). ♦♦♦ One way of setting KPIs is to use benchmarking.
Key performance indicators (KPIs) measure a company's success versus a set of
targets, objectives, or industry peers. KPIs can be financial, including net profit (or the
bottom line, gross profit margin), revenues minus certain expenses, or the current ratio
(liquidity and cash availability).
Benchmarking: Evaluate performance by comparison with a standard. The establishment,

through data gathering, of targets and comparators, through whose use relative levels of
performance (and particularly areas of underperformance) can be identified. By the adoption
of identified best practices it is hoped that performance will improve.
Measuring Sustainability Management: The headings under which sustainability and

corporate responsibility (CR) can perhaps be most usefully measured are those of what is
known as the Triple Bottom line.
• Social
• Environmental
• Economic
The performance measures that are calculated & reported are used by three groups:
i. Managers, to make control & planning decisions
ii. Directors, to assess whether corporate governance is effective.
iii. External users, to make economic decisions
Limitations of Financial Measures:

A. Information problems:
i. The base information may be out of date, so timeliness of information leads to
problems of interpretation,
ii. Historical cost information may not be the most appropriate information for the
decision for which it is being used,
iii. For external users, information often comes from published financial statements
which generally comprise summarized information; more information may be
needed,
iv. Analysis of financial measures only identified symptoms, not causes, and thus is
of limited use on its own.
B. Comparison problems: trends
i. Effects of price changes make comparisons difficult unless adjustment are made,
ii. Impacts of changes in technology the affect the value of assets, the likely return &
future markets,
iii. A changing environment affects the results reflected in the accounting information,
iv. Changes in accounting policies can affect the reported results,
v. There can be problems in establishing a normal base year to compare other years
with.
C. Comparison problems: different business. Analyzing measures for different
businesses & comparing them can be difficult, because of :
i. Selection of industry norms and the usefulness of norms based on averages,
ii. Different firms having different financial & business risk profiles, and the impact of
this on analysis.
iii. Different firms using different accounting policies.
iv. Impact of the size of the business and its comparators on risk, structure & returns.
v. Impacts of different environments on results, e.g. different countries or home-based
Vs multinational firms.
♦Balance scorecard is an integrated set of performance measures linked to the

achievement of strategic objectives.
The scorecard was developed by Robert Kaplan and David Norton, and it produces a set
of measures that allows top managers to focus on the factors that are significant in
achieving long-term control and direction of the business, and hence profitability in the long
term.
Balanced scorecard was developed to help companies to manage the multiple objectives. It
was developed due to traditional accounting weakness.

♦Difference perspectives of Balanced scorecard:
♦♦♦Internal control: A process, effected by an entity’s board of directors, management

& other personnel, designed to provide reasonable assurance regarding the achievement of
objectives in the following categories:
i. Effectiveness and efficiency of operations
ii. Reliability of financial reporting
iii. Compliance with applicable laws & regulations.
♦♦Features of internal control:

i. Is a process: It is a means to an end, not an end in itself.
ii. Is affected by people, not merely by policy manuals and forms.
iii. Can be expected to provide only reasonable assurance, not
absolute assurance, to an entity’s management & board that operations are
effective & efficient, financial reporting is reliable & laws & regulations are being
complained with.
iv. It geared to the achievement of objectives in one or more separate
but overlapping categories.
Control environment include:
i. The integrity, business, ethics & operating style of management
ii. How far authority is delegated
iii. The processes for managing and developing people in the business.
Control activities: The policies and procedures that help ensure management directives
are carried out. Control activities occur throughout the business at all levels and in all
functions- not just the finance function. They include:
i. Approval
ii. Authorization
iii. Verification
iv. Reconciliation
v. Review of operating performance
vi. Security of assets and
vii. Segregation of Duties (see book).

Business and Personal Finance (Chapter-8)

A Business is financed:
• By Equity (from its owner in return for dividends) or
• By Debt (From lenders in return for interest) or
• By a combination of equity and debt
Needs for finance:

• Immediate: wages, petty expenses
• Short-term: payables
• Medium term: Pay tax, Inventory increase
• Long-Term: Buying non-current assets.
Financing Current
assets:
The Choice is a matter

for managerial judgement
of the trade-off between
the relative Cheapness
of the shot- term finance
verses it’s risk.
Long-term finance
includes equity finance
which is particularly
expensive because of the
risk they suffer
shareholders expect high
returns and dividends are
not tax deductible. The
flexibility of short-term finance may, therefore, reduce its overall cost.
Risk of borrowing of short-Term Finance:

• Renewal risk: As it is short term, It has to be continually renegotiated as the various
facilities expire which may be difficult for some economic condition or financial situation.
• Interest rate risk: If the business is constantly having to renew its funding
arrangements, it will be at the mercy of fluctuation in short-term interest rates.
1. An Aggressive company has more short-term credit than equity. (High return, High risk)
2. An Average company uses Long term debt for permanent current assets and short-term
credit for fluctuating current assets.
3. A Defensive Company sacrifices profitability for liquidity by having little short-term credit.
Cost of holding cash: Opportunity cost

Cost of running out of cash: Liquidity and solvency causing losses.
Motives underlying how much a business would wish to hold a cash:

• Transaction Motive: to meet current day to day financial obligations.
• Finance Motive: Major items i.e. Repayment of loans, purchase of non-current assets.
• Precautionary motive: to give a cushion against unplanned expenditure.
• Investment motive: to take advantage of market opportunities.
Finance Intermediation: The process of Standing in the middle like banks take deposits
from customers (surplus cash) and then use that money to lend money to other customers
(Deficit cash).
Banks:
• Primary banks are those which operate the money transmission service or clearing
system in the economy. Also known as commercial, retail or clearing bank
• Secondary banks are made up of a wide range of merchant banks and other banks. They
don’t take part in clearing system.
Two main roles of Bangladesh Bank:
1. Monetary policy: Monetary policy is the macroeconomic policy laid down by the
central bank. It involves management of money supply and interest rate and is the
demand side economic policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption, growth and liquidity. The
Bangladesh bank is the banker of the banks, lending money to the banking sector
through its financial market operations at the base rate set by the monetary policy
committee (MPC).
2. Financial Stability: Financial stability is a state in which the financial system, i.e. the
key financial markets and the financial institutional system is resistant
to economic shocks and is fit to smoothly fulfil its basic functions: the intermediation
of financial funds, management of risks and the arrangement of payments. BB does it
by Financial Stability Department (FSD)
The interval between when the amounts are paid into a primary bank and when they can be
drawn upon depends on the Clearing mechanism:
• General clearing
• Electronic funds transfer (EFT): Computer based. i.e. Debit/ Credit Card
• Banks Automated clearing system (BACS): an EFT system that deals with
salaries, standing orders and direct debits. The account of the payer is debited on the
same day as the account of the recipient is credited.
• Society for Worldwide interbank Financial Telecommunication (SWIFT): The
worldwide financial messaging network which exchanges messages between banks
and other financial institutions so that a similar service to CHAPS is possible for
international transfer of money. Clearing House Automated Payments System.
Bank/Customer Contractual relationship:
I. Receivable/Payable relationship (Loan or deposit)
II. Bailor/Bailee relationship (Customers property for storage in the safe)
III. Principal/agent relationship (Customer pays cross cheque. Receiving bank
acts as agent of the principal)
IV. Mortgagor/Mortgagee relationship. (loan security)
Bank/Customer Fiduciary relationship:

I. The bank’s duties to the customer:
• Honor a customer’s cheque
• Must credit cash that are paid into the customer’s account
• Repay the amount on demand
• Comply with the customer’s instructions
• Must provide statement of transactions
• Confidentiality
• Inform if there has been an attempt to forge the customer’s signature on
the cheque
• Use care and skill in its action
• Must provide reasonable notice if it is to close a customer’s account
II. Customer’s duties to the bank
• Draw up cheques carefully
• Tell the bank any known forgeries

III. The right of the bank
• To charge reasonable bank charges
• Use the customer’s money
• To be repaid overdrawn balances on demand
• To be indemnified against possible losses when acting on behalf of
customers
Money market: Money market is the trade in short-term debt. It is a constant flow of cash
between governments, corporations, banks and financial institutions, borrowing and lending
for a term as short as overnight and no longer than a year.
Money market financial instruments:
• Treasury bills
• Certificate of Deposit (CD)
• Commercial Paper
• Banker’s Acceptance
• Repurchase Agreements
Capital Market: The capital market encompasses the trade in both stocks and bonds.
These are long term assets bought by financial institutions, professional brokers and
individual investors.
• Debt Instruments (bonds, debentures, leases, bill of exchange and promissory Note)
• Equities (Common Stock, Preference share)
Types of capital market: Primary Market and Secondary market
3 Methods of raising equity:

I. Retained Earnings: Retained earnings (RE) is the amount of net income left over for
the business after it has paid out dividends to its shareholders.
II. Right issues of shares: A rights issue is an offer to the existing shareholders to
purchase additional shares of the company at a discounted price.
III. New issues of share: Placings, Offers for sale or direct offers.
Factors to be considered when making right share issues:

• Issue cost
• Shareholders reaction
• Increase of existing shareholders control
• Unlisted companies
Placing: When new equity shares are issued to

individual investors, corporate entities, or small
groups of investors for capital. This increases the
number of shares in issue and dilutes existing
shareholders.
• Benefit: Lover transaction cost (e.g.

Advertisement, administration) than public
offers
• Drawbacks: by offering a narrow pool of
institutional investors, the spread of
shareholders is more limited, which reduces
the efficiency of the market in the shares.

Public Offers: Two types.
1. Offer for sale (More
commonly used method)
2. Direct offer (offer for
subscription)
Pricing of new issues: Two

ways in which the pricing
problem can be addressed.
1. Underwriting: The
process whereby, in exchange for a fixed fee (usually 1-2% of the total finance to be
raised), an institution or a group of institutions will undertake to purchase any
securities not subscribed for by the public. It’s like an insurance policy that
guarantees that the required capital will be raised.
2. Offer for sale by tender: The investing public is invited to tender (offer, bid) for
shares at the price it willing to pay. A minimum price, however is set by the issuing
company and tenders must be at or above the minimum.
Preference share: no voting rights, no right to share in excess profits. Fixed rate of
dividend.
Going public refers to a private company's initial public offering (IPO), thus becoming a
publicly-traded (full listing) and owned entity.

Sources of debt finance:
1. Overdraft: An overdraft occurs when money is withdrawn in excess of what is on the
current account. A short-term loan of various amount up to a limit from the bank,
typically repayable on demand. Interest is charged on a day-to-day basis at a variable
rate.
2. Debt factoring: External short-term source of finance. By debt factoring a business
can raise cash by selling their outstanding sales invoices(receivables) to a third party
(a factoring company) at a discount
3. Term loans: Traditional finance from the banking sector.
4. Loan stock: Debt capital in the form of securities issued be companies, the
governments and local authorities. These are also referred to bond or debentures. It’s
both an investment for the lender and borrowing for the company.
• Coupon rate
• Redemption value
• Redemption date
• Ownership
5. Leasing:
• Finance lease: A lease that transfers substantially all the risk and rewards of
the ownership of an asset from the lessor (the finance company or bank) to the
lessee (the business). Ownership passes to the lessee at the end of the term.
Long-term debt finance (i.e. a purchase of a car by the lessee, financed by a
loan from the lessor)
• Operating lease: An operating lease agreement to finance equipment for less
than it’s useful life. The lease can return equipment to the lessor at the end of
the lease period. This is a Short-term Rental of an asset
6. Other form of debt
• Money markets
• Securitization (Asset-backed borrowing): the conversion of asset,
especially a long-term loan, into marketable securities for the purpose of
raising cash by selling
• Public sector grants and loans
Business Angels: Wealthy individuals investing in start-up, early stage or expanding

businesses in exchange for a share of the company's equity.
Venture Capital: Private equity financing that is provided by venture capital firms (Venture
capitalists) to start-ups, early stage and expanding companies that have high growth
potential in exchange for a share of the company's equity.
Overseas trade raises additional risks:

• Physical risk: Goods being lost or stolen in transit
• Credit risk: The possibility of payment default be the customer
• Trade risk: The risk of the customer refusing to accept the good on delivery, or the
cancellation of the order in transit.
• Liquidity risk: The inability to finance the credit given to customers
• Political risk
• Cultural risk
Bills of exchange: A bill of exchange is a document that is drawn up by the exporter (seller)
and sent to the overseas buyer’s bank, which accepts the obligation to pay the bill by
signing it. Payment is therefore guaranteed by the buyer’s bank, which means that the seller
can then sell or ‘discount’ the bill to the third party in return for cash now. Thus, the
procedure both mitigates the risk of irrecoverable debt and can also provide liquidity.

Letter of credit: provide a method of payment in international trade which gives the
exporter a risk-free method of obtaining payment. The arrangement must be made between
the exporter, the buyer and the participating banks (issuing bank and the advising bank)
before the export sale takes place.
Export Credit insurance is insurance against the risk of non-payment by foreign customers
for export debts.
Government of Bangladesh has introduced Export Credit Guarantee Schemes (ECGS) to
deal with credit risks associated with the export trade. Sadharan Bima Corporation has
been entrusted with the responsibility of the scheme by the government of Bangladesh.
Financial Capability: An individual being able to manage money, keeping track of their
finances, plan ahead, choose financial products and stay informed about financial matters.
Key Stages in personal financial management:
• Establish Individual Objectives
• Establish Individual attitude to risk
• Establish Individual Circumstances
▪ Stage in life cycle
▪ Age and commitments
▪ Risk profile
▪ Degree of control/Budgeting
• Taking appropriate actions
▪ Borrowing
▪ Investment and saving
▪ Protection
▪ Retirement planning
▪ Estate planning
Borrowing
Secured borrowing (Mortgage): The borrower (the mortgagor) mortgages the property,
that is, the borrower creates a legal charge over the property to the lender 9the mortgagee)
as security for the loan.
Unsecured borrowing: Risk on lending is greater so cost of borrowing is higher.
▪ Current account overdraft
▪ Credit card borrowing
▪ Personal loans
▪ Finance lease
Investment and saving
1. Short-term needs: for car or holidays
2. Long-term needs: Investing for retirement or providing capital for children as they
become adult.
Key risk for individual investors:
• Capital risk: Losing part or all the capital invested.
• Shortfall risk: Short in obtained profit compared to expected amount.
• Interest risk: Interest-bearing investments. Risk of interest receiving will be lower
than it might have been.
• Inflation risk: Rising prices will reduce the purchasing power of that is invested.
Protection
Risk management:
• Avoidance: not doing the risky activity
• Reduction: Reducing the possibility and impact of the risk.
• Sharing: Taking insurance.
• Acceptance: of the remaining risk.
Retirement planning
Issues to be considered:
• Planned age of retirement
• Income expectations for retirement
• Whether there are expected dependency on spouse, children or grandchildren or not
• What assets will be available at retirement.
• State pensions
Estate planning
Someone’s estate is the wealth they leave when they die. It is concerned with
• How that wealth is passed on the beneficiaries. Making Will
• How fat the estate’s liability for Inheritance tax (due on death) can be minimized.

The professional accountant (Chapter-9)

*The Institute of Chartered Accountants of Bangladesh (ICAB) was formed in 1973 bt
Presidential Order no.2 of 1973.
Professional: A person who ‘professes’ to have skill resulting from a coherent course of
study and training based on professional values, and who continues to develop and
enhance those skills by experience and continuing professional education. A person
engaged or qualified in a profession.
Professional accountant: The term ‘professional accountant’ is limited in meaning to a
member of the ICAB.
Accountancy profession: The profession concern with the measurement, disclosure or
provision of assurance about financial information that helps Managers, investors, tax
authorities & other decision makers make resource allocation decisions.
The heart of accounting profession are:
i. Financial reporting &
ii. Assurance.
♦Importance of accounting profession: The work of accountancy profession is most

important & relevant therefore to:
i. The effecting working of capital market: The investors get accurate, high
quality & open information from the accountants reporting. So, they can use
these information to make optimum economic decision & They will gain
confidence and willingness to invest and capital market will work effectively.
ii. The public interest: Areas in which the professional accountants operate are
technically complex. The users having inadequate knowledge in these areas
relies upon the accountants’ advice. So, the public should have confident in the
objectivity and integrity of the accounting profession.
Inadequate Information: lacking the quality or quantity required; insufficient information.
Asymmetric Information: If information is available to some people not others.
What does the public interest require of the professional accountant?

i. Professional responsibility (integrity)
ii. Technical competence (Expertise)
The ICAB Code of Ethics 5 fundamental principles are to be observed by members in
public practice. These are:
i. Integrity
ii. Objectivity
iii. Professional competence & due care
iv. Confidentiality
v. Professional behavior. ♦
The Code of Ethics: A conceptual Framework: There are two theoretical approaches that
can be followed by the governing body such as the ICAB when developing a code of ethics
for its members:
1. Compliance-based approach: Also known as rules-based. The governing body will
attempt to anticipate every possible ethical situation and lay down specific rules for the
members to follow. As with law, members are expected to follow the rules and will be
accountable if they breach them-effectively members are legally bound. ICAB by-Law,
Schedule C, Code of conduct, and companies act 1994 provisions relating to audit
and accounts fall under this category.
2. Ethics-based approach: Also known as framework-based. Principles are set out
which describe the fundamental values and qualities that members should embody.
There is no attempt to prescribe detailed rules but general guidelines are developed to
give advice on how certain situations should be handled. IFAC code of Ethics is an
ethical based approach.
Technical Competence:
• Graduation or under-graduation with required grades from the recognized educational
institutes/college/universities.
• Three/Four years training with an eligible practicing Chartered Accountant.
• Completion of a course of Theoretical Instruction
• Passing the ICAB’s Professional Examinations
• Submission of a certificate of suitability for membership signed by the member
responsible for training
• Payment of the admission and subscription fees.
The ability to read, understand and apply principles and rules is more important in students
and newly-qualified accountants than knowledge of detailed technical rules.
To continue in membership all professional accountants must:

i. Obey the Institute’s rules & regulations.
ii. Pay the subscription fee annually, &
iii. Undertake Continuing Professional Education (CPE): This involves course
attendance.
Members engaged in public practice must in addition:
iv. Hold a Certificate of Practice (COP): This is obtained by showing that the
member has maintained appropriate levels of education & work experience.
v. Implement the Code of Ethics.
Three Basic aspects support high quality financial reporting and assurance:
i. Maintaining control & safeguarding assets.
ii. Financial management
iii. Financial reporting.
Maintaining control & safeguarding assets.
Stakeholders in a business are concerned that the business’s assets are kept safe, & that
the managers of the business are acting in the stakeholders’ (especially the shareholders’)
best interests. The professional Accountant will therefore seek to ensure that:
i. The recording of transaction is complete, timely & accurate.
ii. The business’s internal controls are sufficient.
iii. The business’s audit committee is properly constitute & has the information &
resources that it needs to fulfill its objectives.
iv. The business has non-executive directors who are adequately qualified &
resourced so that they can fulfill their role.
Financial management
Financial management: The management of all the processes associated with the raising
& use of financial resources in a business.
The functions of financial management are:
i. Transactions recording
ii. Raising new finance
iii. Using existing funds in ways which support achievement of the business’s
objectives.
iv. Planning & control systems.
v. Treasury management.
Financial reporting
The transactions and activities of the business, as represented in its accounting records,
must be reported to external stakeholders, including investors in capital market.
High quality financial reporting has 2 sets of principles underlining everything he/she does.
• Professional principles
• Accounting principles

♦IFAC Code of Ethics: The international Federation of Accountants is an international
body representing all the major accountancy bodies across the world. Its mission is to
develop the high standards of professional accountants and enhance the quality of
service they provide. ICAB as a member body of IFAC and ICAB’s members are required to
comply with the IFAC Code of Ethics. IFAC’s International Ethics Standard Board of
Accountants (IESBA) established a code of ethics which aligned standards globally.
The IFAC Code of Ethics in split into Three parts:
• Part A General application of the code: Includes Fundamental principles. i.e.
Integrity, objectivity etc)
• Part B Professional Accountants in Public Practice: Issue of professional
appointment, conflicts of interest, second opinions, fees and other types of
remuneration, marketing professional services, independence in both audit and
review engagements and other assurance engagements.
• Part C Professional Accountants in Business: Particularly relevant to those who
work in commerce. Such as, potential conflicts, the preparation and reporting of
information, acting with sufficient expertise, financial interests and inducements.
Integrity: A professional accountant behaves with integrity when he/she is :

i. Straightforward,
ii. Honest
iii. Fair
iv. Truthful
A professional accountant does not behave with integrity if he/she is:
i. Corrupted by self-interest
ii. Corrupted by the undue influence of others
iii. Associated with information which is false or misleading (for instance if certain
parts of it are omitted or obscured)
iv. Associated with information which is supplies recklessly (irresponsibly).
Objectivity means: “A professional accountant should not allow bias, conflict of interest or
undue influence of others to override professional or business judgments”.
Being objective means:
i. Being independent of mind
ii. Not allowing professional or business judgment to be overridden by :
- bias
- conflict of interest
- undue influence of others
Professional competence and due care: When providing professional services
‘professional competence & due care’ means:
i. Having appropriate professional knowledge & skill.
ii. Exercising sound & independent judgement
iii. Acting diligently, that is :
- carefully
- thoroughly
- on a timely basis
iv. Acting in accordance with applicable technical & professional standards.
v. Distinguishing clearly between an expression of opinion & assertion of fact.
Confidentiality: The professional accountant should assume that all unpublished
information about a prospective, current or previous client’s or employer’s affairs, however
gained, is confidential. Information should then :
i. Be kept confidential (Confidentiality should be actively preserved)
ii. Not be disclosed, even inadvertently such as in a social environment.
iii. Not be used to obtain personal advantage.

Professionally Behaviour: Behaving professionally means:
i. Complying with relevant laws & regulations
ii. Avoiding any action that discredits the profession (the standard to be applied is
that of a reasonable & informed 3rd party with knowledge of all relevant
information).
iii. Conducting oneself with :
- Courtesy &
- Consideration.
♦♦♦Threats to professional principles: Compliance with professional principles may

potentially be threatened by a broad range of circumstances.
i. Self-interest threats, which may occur as a result of dominance of the
financial or other interests of the professional accountant or an immediate or close
family member.
ii. Self-review threats, which may occur when a previous judgement needs to
be re-evaluated by the professional accountant responsible for that judgement.
iii. Advocacy threats, which may occur when a professional accountant
promotes a position or opinion to the point that subsequent objectivity may be
compromised.
iv. Familiarity threats, which may occur when, because of a close relationship, a
professional accountant, becomes too sympathetic to the interests of a particular
group.
v. Intimidation threats, which may occur when a professional accountant is
deterred from acting objectively by threats, actual or perceived.
♦♦Safeguards against the threats: Safeguards that may be eliminate or reduce threats
to an acceptable level fall into two broad categories:
i. Safeguards created by the profession, legislation or regulation.
ii. Safeguards in the work environment.
i. Safeguards created by the profession, legislation or regulation:
a) Educational, training & experience requirements for entry into the profession
b) Continuing Professional Education (CPE) requirements
c) Corporate governance regulations
d) Professional standards (The conceptual framework)
e) Professional or regulatory monitoring & disciplinary procedures.
f) External review by a legally empowered third party of the reports, returns,
communications or information produced by a professional accountant.
ii. Safeguards in the work environment:
a) Effective, well-publicized complaints systems operated by the employing
organization, the profession or a regulator, which enable colleagues, employers &
members of the public to draw attention to unprofessional or unethical behavior.
b) An explicitly stated duty to report breaches of ethical requirements.
Key accounting principles: The key accounting principles are:

• Accruals • Neutrality
• Going concern • Prudence
• Double entry • Timeliness
• Faithful representation (accuracy • Cost/benefit
& completeness) • Consistency♦
• Substance over form, • offsetting.
• Materiality

♦♦Purpose of Accounting Standards: The basic purpose of accounting standards is to
Identify proper accounting practice for the benefit of preparers, auditors and users of FS.
♦Types of accounting standards: There are two types of accounting standard that affect
the professional accountant in Bangladesh:
i. International Standards, namely International Accounting Standards (IASs)
and International Financial Reporting Standards (IFRSs), produced by the
International Accounting Standards Board (IASB)
ii. Bangladesh Standards, namely Bangladesh Accounting Standards (BASs)
and Bangladesh Financial Reporting Standards (BFRSs), produced by the
Institute of Chartered Accountants of Bangladesh (ICAB). ICAB usually adopts
IASB standards & rarely is there any difference between the ICAB’s & the IASB’s
standards.
Recently ICAB has adopted a number of IASs & IFRSs to make the local accounting
standards even more converged to IASB standards.
♦Skills are required of a public practice professional accountant:

i. Accounting
ii. Auditing & assurance (Reserved area)
iii. Taxation
iv. Management consulting
v. Investment business
vi. Insolvency
vii. Financial management
viii. Corporate finance
ix. Information & communication technology
x. Forensic accounting
The Big Four accounting firms: The leading accounting firms in the world are
1. Deloitte
2. PricewaterhouseCoopers (PwC)
3. Ernst & Young (EY)
4. Klynveld Peat Marwick Goerdeler (KPMG).
In Bangladesh, a person who qualifies for appointment by a company as external

auditor of its financial statements:
i. May be a sole practitioner or a partnership firm
ii. Must be a member of the ICAB
iii. Must hold an appropriate qualification.
Disqualification:
i. An officer or employee of the company
ii. A partner or an employee of any officer, employee to the company
iii. A person who is indebted to the company exceeding Tk 1,000.
iv. A person who is a director or a member of a private company, or a partner of a
firm, which is the managing agent of the company,
v. A person who is a director or holder of shares exceeding 5% of the subscribed
capital.
♦*While the professional accountant is often engaged in many different areas of business
management, there are limits to their professional competence which means they must
know when to call in further expertise, such as from Lawyers, actuaries, surveyors and
HR specialist.

Structure and Regulation of the Accountancy Profession (Chapter-10)
Major accounting Institutes in Bangladesh:

i. The Institute of Chartered Accounts of Bangladesh (ICAB)
ii. The Institute of cost & management Accountants of Bangladesh (ICMAB)
International Federation of Accountings (IFAC)

IFAC is the global organization for the accountancy profession. It has 172-member
organizations, including the ICAB. IFAC members represent 2.5 million accountants world
wide, employed in public practice, industry & commerce, government & education.
The ♦aim of IFAC is to protect the public interest by encouraging high quality practices
by the world’s accountants. This includes best practice guidance for professional
accountants employed in business plus a membership compliance programme.
IFAC emphasis the importance of:
i. Strong international economies
ii. Adherence to high-quality professional standards in the areas of adult,
education, ethics & public sector financial reporting.
iii. Convergence of professional standards
iv. Speaking out of public interest & public policy issues where the profession’s
expertise is most relevant.
Through its code of ethics IFAC encourages accountants world wide to adhere to the
Fundamental principles.
Who can call themselves an accountant?

Ans: There is no legal requirement for an accountant to be paid-up member of one of the
regional or IFAC bodies. The term “accountant” enjoys no special position in law. Any one is
free to advertise as an “accountant” and offer the full range of accountancy services, expert
in one reserved area (statutory audit) where statute demands specific levels of competent.
Institute members are therefore open to competition from any one, whether professionally
qualified or not, who chooses to enter the market.
Restriction for processing regulation: Many of the aims of regulation result in different
priorities for different aspects of the “public interest”. Subjective judgements are needed
to balance interests. Regulation should not:
i. Protect vested interests for competition
ii. Be for professional gain or to satisfy prurient interest
iii. Be disproportionate to the benefit gained, such as; imposing huge & costly
quantities of detailed restrictions in a heavy handed & over-rigid manner.
iv. Distort competition by imposing extra burdens on some, but not others.
Methods of regulation: Regulation can be:

i. By government directly via legislation
ii. By separate agencies established by Government (delegated legislation)
iii. By the profession/industry itself (self-regulation) or
iv. By a combination of methods.
Self-Regulation: Self-regulation in theory provides a common sense, flexible approach

because there is detailed knowledge within the profession of the issues facing it. It should
result in more effective and efficient outcome. Self-regulation only works if:
• The regime does mot seem to act against the public interest
• Regulatory guidance and its importance are both understood and enforsed
• Members of the profession ‘buy in’ to the process
• There is no unjustifiable self-protecting regulations.
Oversight mechanism: refers to maintaining a watchful eye.

The required features of an oversight mechanism are:
i. Sufficient independence from the profession being regulated and any other
single stakeholder to ensure that its decisions are not compromised or perceived
to be compromised by undue influence.
ii. Knowledge of the profession being regulated
iii. Sufficient, but non-controlling, input from the profession itself to ensure that
decisions;
• Are workable
• Will not achieve the opposite of what they intend and
• Do not impose costs on society in access of the benefits gained
iv. The ability to take a wide view to balance the various stake holder interests
that comprise the public interest and to judge the regulator’s attempts to do the
same.
v. Authority to have decisions acted on across the whole profession, through
legislation or voluntary agreement.
vi. Good communication, to ensure that the public interest is seen to be served,
without alienating the profession being regulated.
vii. Sufficient resources to carry out effective examination of the regulatory
arrangements.
The key participants in an effective oversight mechanism are therefore likely to be:
i. The Government - the ultimate guardian of the public interest in a democracy
ii. Regulators operating in relevant sectors
iii. Members of the profession to provide an informed insight based on professional
experience and in-depth technical knowledge
iv. Members of the public, independent of the profession, with the character and
intellectual ability to make sound judgments on complex issues.
Following lengthy debate, the regulatory regime that now exists for the accountancy
profession involves
i. The Government
ii. The profession (self-regulation). (ICAB)
iii. An oversight mechanism by the FRC
The Role of the government: The government is responsible for the legislative elements
of the regulatory framework, though FRC would act as adviser to the government on
necessary legislative changes, The government delegates certain statutory powers to
the FRC, SEC, RJSC and Bangladesh Bank but the government remains responsible via
these poers and so has a continuing responsibility for the systems efficiency.
The Role of ICAB: The relation to its membership ICAB has direct responsibility for:
i. Entry and education requirements
ii. Eligibility to engage in public practice
iii. Eligibility for the performance of reserved activity under stationery powers
delegated by the government
iv. Professional conduct requirement.
v. Dealing with professional misconduct by its members.
The Role of FRC: Would act as an independent regulator for corporate reporting and
auditing. Its goal is to foster a climate in which investment can flourish. The FRC would
engage in:
• Setting standards for financial (corporate) reporting, audit and assurance, valuation
and actuarial services.
• Monitoring and reviewing the quality of the audit and financial reporting in large
entities.
• Regulating the audit profession
• Overseeing self-regulation in the accountancy, audit and actuarial professions
• Acting as the ultimate disciplinary body for the accountancy professions.

The disciplinary procedures have been put in the place of fulfill the regulatory need to
protect the public interest.♦♦

Complaints are usually that a student, member or firm:
I. Is in breach of a regulation
II. Has departed from guidance
III. Has brought the ICAB into disrepute.
♦ICAB Complaints and Disciplinary Procedure

i. Filling a complaint: Secretary or any member or of any aggrieved person can file
before the investigation and disciplinary Committee any fact indicating;
• That a member has become liable to exclusion, suspension or reprimand under
any provision of the order or these bye-laws; or
• That an articled student has been guilty of felony or-misdemeanor or has been
declared by a competent court to have been guilty of fraud/ has been guilty of
an act/ default of such a nature as to render him unfit to become a member.
ii. Investigation: (if it has not been resolved through conciliation) by the Investigation &
Disciplinary Committee (IDC)
iii. Disciplinary proceedings by the investigation & Disciplinary Committee.
If on receipt of such report the Council finds that a formal complaint has been
proved, it shall record a finding to that effect and shall afford to the member or the
Articled student either personally or through Counsel or a solicitor or a member of
the Institute, an opportunity of being heard before orders are passed against him on
the case and may thereafter make any of the following orders, namely:
• Reprimand the member or the Articled student with or without monetary
penalty, with or without monetary penalty, not exceed 10,000 Taka, Or
• Suspend the member from membership for such period, not exceeding 5
years, as the council things fit, Or
• Exclude the member from membership Or
• Direct the cancellation of, or extend the period of Articles or that any
period already served under such articles shall not be reckoned as such
service for the purpose of relevant close of bye-law Or
• Require the complainant to pay monetary penalty which may not
exceed 10,000 Taka if the complaint is proved to be baseless or unfound or
malicious.
iv. Publication of findings and decisions: Where the council finds that a formal
complaint has been proved, it shall cause its findings and decisions to be published in the
gazette of Bangladesh and in such journals as it shall think desirable and as soon as
practicable after such findings and decision are pronounced. The publication shall in all
cases include the name of the member or articled student concerned.
Governance, corporate responsibility, sustainability and ethics (Chap-11)

Governance: Governance is concerned with the overall control and direction of the
business so that the business’s objectives are achieved in an acceptable manner.
Principles of good governance: (Council of Europe)
1. Participation, Representation, Fair Conduct of Elections
2. Responsiveness
3. Efficiency and Effectiveness
4. Openness and Transparency
5. Rule of Law
6. Ethical Conduct
7. Competence and Capacity
8. Innovation and Openness to Change
9. Sustainability and Long-term Orientation
10. Sound Financial Management
11. Human rights, Cultural Diversity and Social Cohesion
12. Accountability
Transparency Principle: Any information addressed to the public or to the data subject be
concise, easily accessible and easy to understand, clear and plain language and additionally
where appropriate visualization is used.
Agency theory: Agency theory states that managers and directors act as shareholders
agents when managing the company. Problem:
• Managers had better information than the shareholders
• They were not sufficiently Accountable for their stewardship, decisions and actions.
♦The Agency problem is a conflict of interest inherent in any relationship where one party
is expected to act in another's best interests. In corporate finance, the agency
problem usually refers to a conflict of interest between a company's management and the
company's stockholders.
♦♦♦Corporate governance: Corporate governance is the set of relationships

between a company’s management, board, shareholders & other stakeholders that provides
the structure through which the company’s objectives are set, attained & monitored.
It specifies the distribution of rights & responsibilities between stakeholders, and
establishes rules & procedures for making decisions about the company’s affairs.♦
♦♦Four broad perspectives on what the objectives of corporate governance should be:
i. The public policy perspective on corporate governance:
• CG is to ensure that the company meets interests of shareholder’s + other
individuals with direct Stake + Public at large.
ii. The stakeholder perspective on corporate governance:
• Balance between economic and social goals and between individual and
communal goal
• Efficient use of resources
• Accountability from the management to the shareholders
• Align the interests of shareholders and companies with those of other
stakeholders.
iii. The corporate perspective on corporate governance:
• Balancing the interest of shareholders with those of other stakeholders in
order to achieve long-term sustained value for shareholders.
iv. The stewardship perspective on corporate governance.
• Most narrow view of CG
• Law requires directors to act in the best interest of the company when
acting as ‘stewards’ of the company’s resources.
• Solving the agency problem.
Symptoms of a serious conflict of interests: There is no standard way in which a serious
conflict of interest becomes apparent. It may become evident by:
i. Financial collapse without warning, as in the case of US energy corporation
Enron in 2002.
ii. Directors trying to disguise the true financial performance of the company
from shareholders by “dressing up” the published financial statements so share
holders can not judge properly the condition of investment.
iii. Disputes over directors’ remuneration such as huge salaries, bonuses, pension
schemes, share options, golden hellos and golden goodbyes and other benefits &,
in general, directors’ rewards that do not vary according to the company’s
performance and the benefits obtained from the shareholders.
iv. Decisions taken by a board of directors to satisfy their own wish for power and
rewards rather that the boost the interests of shareholders, such as
recommendation on shareholders accepting certain take over bids & offers.
Stockholders need governance:

i. For the interests and expectations to be reflected in the company’s objectives.
ii. For the scope for conflicts to be reduced.
iii. For the company to adhere to good practice in corporate governance.
iv. For the company to adhere to good business ethics.
♦♦Good practice in corporate governance:

i. Openness and transparency: disclosure of information.
ii. Integrity and accountability: monitoring & judging directors’ performance based
on the returns that the company has achieved under their stewardship.
iii. Reducing the potential for conflict
iv. Reconciling the interests of shareholders & directors as far as possible.
Poor Corporate Governance Symptoms:
• Domination of the board
• No involvement by the board
• Inadequate control function. (i.e. no internal control)
• Lack of supervision
• Lack of independence of auditors
• Lack of contact with shareholders
• Emphasis on short-term profitability
• Misleading FS and information.
Five Key elements of good corporate governance:
i. The board of directors:
• Executive directors of a very high standard in terms of their decision
making & of the culture that they create in the company.
• Non-executive directors who are independent of the executives yet who
accept that they have collective responsibility with the rest of the board
for corporate governance.
• Committees of the board of directors as a whole that are properly
constituted and have the power & resources to make the decisions
delegated to them by the main board.
ii. Senior management of high quality & able to:
• Put into effect of the decisions of the board
• “whistle blow” on the activities of the company should the need arise.
iii. Shareholders who are proactive at meetings and generally ensure that the board
is acting in their best interests and within the sprit of good corporate governance.

iv. ♦External auditors working on behalf of the shareholders totally independently
of the directors when reaching a conclusion as to whether the company’s financial
statements show a true and fair view.
v. Internal auditors who are independent of the directors as far as possible,
reporting to the audit committee of the board or to some other committee
dominated by non-executives.
Types of financial system: There are two broad types of financial system:
i. Bank based systems
ii. Market based systems.
In bank-based systems banks play a leading role in mobilizing savings, allocating capital,
overseeing the investment decisions of corporate managers, and providing risk management
vehicles. In market-based systems securities markets share center stage with banks in
getting society's savings to firms, exerting corporate control, and easing risk management.
Characteristics of a bank based financial system:

i. Households prefer to bear little risk and so allocate the more of their financial
assets to cash & cash equivalents i.e. deposits with banks.
ii. Households have less excess to investments in physical assets such as
housing i.e. less choice.
iii. Where households do invest in securities, this is primarily done via
intermediaries such as pension & mutual funds, so institutional shareholder
are influential.
iv. There is comparatively more government regulation, often as a result of
historical financial catastrophes.
v. Banks are highly concentrated & integrated in terms of providing both banking
(deposit taking) and non banking (insurance, etc) services.
vi. Bank lending is the most important source of business finance, after retained
earnings (though not in Japan)
vii. Banks and businesses are highly integrated : banks have a long term
relationship with the businesses they lend to, usually cemented by the bank :
• Holding equity in the business as well as debt
• Having equity held by the business
• Having access to detailed management information so there is less risk that
their lending will be jeopardized by undesirable activities.
• Being involved in the business’s strategic decisions, often by having seats on
the board.
• Becoming actively involved if there are financial problems.
viii. Markets are volatile & speculative because a company are dependent on bank
finance and does have high gearing.
Together these factors mean that the dominant force in external finance for businesses is
represented by banks. However, most bank-based systems are becoming increasingly
market oriented, with less regulation & a higher profile for financial markets.
Characteristics of a market-based financial system: World’s leading financial systems

have traditionally been market-based systems.
i. Households bear more risk and so hold proportionately more equity &
proportionately fewer deposits with banks.
ii. Households have greater access to investments in physical assets such as
housing i.e. more choice.
iii. High levels of indirect investment via intermediaries such as pension & mutual
funds mean that the institutional shareholders have a great deal of influence.

iv. Markets are more important than banks for long term finance, though retained
earnings remain the most important source of funds.
v. They are comparatively unregulated
vi. Banks are more fragmented with less integration of banking & non-banking
services (though this is changing)
vii. Banks have fewer close relationships with the businesses they lend to, not
holding equity & not being involved in decision making.
Together these factors mean that the dominant force in external finance for businesses is
represented by institutional shareholders.
Governance Structure: A governance structure is the set of legal and regulatory methods
that has been put in place to ensure good corporate governance. It may comprise both
direct regulation & non-statutory course of practice.
Types of governance structure: There are two basic governance structures:

i. Statutes
ii. Codes of practice.
Different countries use different combinations of statutes and codes of practice, depending
in part on whether they have principles-based or a shareholder-led approach to
governance structure.
Principles-based approach to governance structures: It is based on the view that a

single set of rules is inappropriate for every company. Circumstances and situations differ
between companies. The circumstances of the same company can change over time. (UK)
This means that:
- the most suitable corporate governance practices can differ between companies, and
- the best corporate governance practices for a company might change over time, as its
circumstances change.
A rules-based approach to corporate governance is based on the view that companies
must be required by law (or by some other form of compulsory regulation) to comply with
established principles of good corporate governance. The rules might apply only to some
types of company, such as major stock market companies. However, for the companies to
which they apply, the rules must be obeyed and few (if any) exceptions to the rules are
allowed. (US)
Possible Structure for the board of directors: Two types

1. A Unitary Board is responsible for both management of the business and reporting to
the shareholders, via the financial statements and shareholder meetings.
2. A Dual or supervisory board structure is split between
I. The Management board: manage the company
II. The Supervisory board: Independent separate board elected by the shareholders &
the employees, often comprising a series of committees with delegated powers to:
• Appoint and remove members of the management board
• Request information from the members of the management board
• Approve/ not approve the IS, BS and dividends declared
• Inspect
• Perform independent reviews
• Convene shareholders meeting
In Bangladesh Companies act 1994 sets out many of the rules on corporate governance,
especially with regard to:
i. The board of directors (a unitary board is required)
ii. Directors’ powers & duties

iii. The relationship of the company with directors, such loans to directors & the
interests of directors in company contracts
iv. Accountability for stewardship and financial reporting via the financial statements.
v. Rules on meetings & resolutions
In addition to these statutory rules, large companies in Bangladesh must either:
• Comply with the SEC requirements on corporate governance contained in its
notification dated 20th February 2006 or
• Explain why they have not so complied, and
• Attach with annual report the status of each provision of the guidelines, whether
complied or not along with a certification from a member, or ICMAB, or ICS.
Ethics: Is a system of moral principles. Ethics tells us how to behave.
♦Ethical culture: A business culture when the basic values & beliefs in a company
encourage people within the company to behave in line with acceptable business ethics.
♦♦♦Business ethics: The ways in which a company behave in a society which has
certain expectations of how a decent company should behave. They represent the moral
standards that are expected.
Business values:
The Nolan Principles
• Selflessness. • Accountability. • Objectivity. • Leadership.
• Integrity. • Openness. • Honesty.
Philippa Foster Back
• Truth • Transparency • Fairness • Responsibility • Trust
♦♦♦Acceptable business ethics may comprise as a minimum:

i. Paying staff decent wages and pensions
ii. Providing good working conditions for staff
iii. Paying suppliers in line with agreed terms
iv. Sourcing supplies carefully (fair trade, etc)
v. Using sustainable or renewable resources.
vi. Being open & honest with customers.
♦An ethical culture can be promoted by a combination of;

• Ethical leadership from the board of directors
• Codes of ethics or business conduct
• Policies & procedures to support ethical behaviour
♦♦Ethical Leadership from the board of directors: Philippa Foster Back identifies the
following attributes and behaviour of ethical leaderships: (Attributes: Behaviors)
• Openness: Be open minded, willing to learn, encourage others to learn.
• Courage: Be determined and direct; actively stamp out poor behavior
• Ability to Listen: Be aware of what is going on; going the right thing
• Honesty: Be considerate and cautious in managing expectations
• Fair mindedness: Be independent and willing to challenge the existing state of affairs

♦Code of ethics: A formalization of moral principles or values, responsibilities and
obligations. ♦The functions of a code of ethics are:
i. To tell the world at large what the company is striving to achieve in terms of
ethical conduct.
ii. To communicate a guide for the company as a whole to follow in its dealings with
3rd parties
iii. To provide guidance for individuals within the company as to how to act
iv. To describe what the company aims to do in the event that an employee
highlights unethical behavior and abuse within the company.
♦Objectives for a code of ethics:

To improve behaviour
To build the company’s reputation and the trust of the stakeholders in the company
To improve Performance and build Value
A whistleblower is a person, who could be an employee of a company, or a government

agency, disclosing information to the public or some higher authority about any wrongdoing,
which could be in the form of fraud, corruption, etc. If code of ethics is good, Whistle blowing
externally won’t be necessary.
Policies and procedures to support ethical behavior
• Active leadership by managers
• Consultation and communication procedures so everyone is aware of the code of
ethics.
• Piloting of the code in draft form so that people have an input to its content
• Review of the code so that it retains its position at the heart of how the company
actually does business.
• Training
• Speak-up lines/ help lines for internal “whistle blowing”
• Performance appraisals incorporating values
• Remuneration policies not cutting across values
• Disciplinary policies enforcing values
• Monitoring of how ethical behavior is taking place
• Audit and assurance regarding values
• Reporting regularly
• Complaints systems that help employees to draw attention to unethical behavior
• An explicitly stated duty to report breaches of specific ethical requirements.
Ethical Audit: A process which measures the internal and external consistency of a
company’s values base. In order to ensure that the code of ethics and it’s supporting
policies and procedures are operating efficiently and to improve accountability and
transparency towards stakeholders, many companies now conduct ethical audits.

Corporate governance (Chapter-12)

In Bangladesh, the responsibility for promoting High Standard Corporate Governance
goes to:
I. Bangladesh Security and Exchange Commission (BSEC)
II. Registrar of Joint Stock Companies (RJSC) and
III. Bangladesh Bank (BB)
♦They Aim to do so by:
• Maintaining an effective Corporate Governance Code and promoting its widespread
application
• Ensuring that related guidance, such as that on internal control, is current and
relevant
• Encouraging shareholder engagement
♦Code of corporate governance: The code of corporate governance is a code of best

practice (it has no statutory force) embodying a shareholder-led approach to corporate
governance. It includes requirements of institutional shareholders as well as of companies
themselves.
Shareholder-led approach to corporate governance: seeks maximum interest to protect

shareholder’s interest while also affirming their involvement in governance.
♦♦♦♦Bangladesh Securities and Exchange Commission♦♦♦♦

♦♦♦Corporate Governance Code 2018♦♦♦
♦♦♦Notification♦♦♦
♦♦Internal control: Internal Control is a process designed to provide reasonable (not
absolute) assurance regarding the achievement of objectives via:
• Effective & efficient operations
• Reliable financial reporting
• Compliance with applicable laws & regulations.
♦The Turnbull Guidance on Internal Control

Internal control system is a system encompassing the policies, processes, tasks, and
behaviors in a company that allow it to:
i. Operate effectively & efficiently
ii. Respond appropriately to risks
iii. Safeguard assets from inappropriate use, loss or fraud.
iv. Ensure liabilities are identified and managed
v. Ensure the quality of internal & external reporting
vi. Ensure compliance with applicable laws & regulations, & internal policies.
♦Who is responsible for internal control?

The guidance makes it clear that the board of Directors as a whole has responsibility for:
i. Policy –making on an effective system on internal control in the company,
covering financial, operational & compliance controls as well as risk management
systems.
ii. Reviewing the effectiveness of internal control system in addressing the risk that
the board has identified face the company (review tasks can be delegated to
board committees)
iii. Reporting on the internal control system to shareholders each year.
Management is responsible for implementation of internal control, & for day-to-day
monitoring of the systems.

♦The system of internal control should:
i. Be embedded in the operations of the company & form part of its culture
ii. Be capable of responding quickly to evolving risks to the business arising from
factors within the company & to changes in the business environment.
iii. Include procedures for reporting any significant control failings or weaknesses
immediately to appropriate levels of management, together with details of
corrective action been taken.
♦internal control should disclose in the annual report: In the board’s narrative
statement on internal control in the annual report it should disclose that:
i. It acknowledges responsibility for the system of internal control and for reviewing
its effectiveness.
ii. The system is designed to manage rather than eliminate the risk of failure to meet
business objectives.
iii. The system can only provide reasonable, not absolute, assurance against
material misstatement or loss.
iv. An ongoing process is in place for identifying, evaluating & managing significant
risks facing the company.
v. The process has been in place for the year under review and up to the date of the
annual report & accounts.
vi. The process is regularly reviewed by the board.
vii. There is a process to deal with the internal control aspects of any significant
problems disclosed in the annual report & accounts.
♦External audit: The purpose of the external audit is to issue an opinion in an audit
report whether the financial statements produced by the Directors give a “true and fair
view” of the financial performance of the company during the reporting period and of its
financial position as at the end of the period.
Audit opinion: Shareholders often believe that external auditor’s opinion means that the
financial statements of the company are “correct”.
The role of the external audit is a key issue in corporate governance, but in relation to
corporate governance as a system the external auditor simply reports an independent and
expert opinion on how the company is complying with the Corporate Governance
requirements as stated in the SEC law.
The responsibility to do something about it remains with the Directors and Shareholders.
Internal audit: Internal Audit is as semi-independent part of the company which monitors
the effective operation of its internal control & risk management systems.
Roles of internal audit: The roles of internal audit are:

i. Assessing how risks are identified, analyzed and managed
ii. Advising management on embedding risk management processes into business
activities.
iii. Advising management on improving internal controls
iv. Ensuring that the assets are being safeguarded
v. Ensuring that operations are conducted effectively, efficiently & economically in
accordance with the company’s policies.
vi. Ensuring that the laws and regulations are complied with
vii. Ensuring that the records and reports are reliable & accurate.
viii. Helping management to detect or deter fraud
ix. Helping management to identify savings and opportunities.

The Economic Environment of Business and Finance (Chapter-13)

Economic Environment: A business’s economic environment comprises the
macroeconomic environment and its own microeconomic environment.
Macroeconomic Environment: Combination of
• National Influences: The business cycle, government policies (Fiscal and
monetary policies), interest rates, exchange rates, inflation. Four factors of GDP
(land, labor, Capital, Entrepreneurship)
• Global Influences: Internationalization of trade, influence of regional economic
groups such as the EU, globalization of market.
Microeconomic environment: Is of a particular business. Which basically involves looking
at how the market (or price) mechanism works.
Disposable Income: Income available to individual after payment of personal taxes. It may
be consumed or saved.
Total Consumption by households is affected by 6 influences:

• Changes in disposable income & the marginal propensity to consume (MPC):
How far an increase in disposable income is allocated to consumption rather than
saving is known as the marginal propensity to consume.
• Changes in distribution of wealth: Taxing the rich, giving to the poor
• Government Policy: Controlling Taxation
• The development of major new products: Increase in spending by customers
• Interest rate: High interest rate will increase savings and low rate will reduce the cost
of credit and will therefore increase borrowing and level of consumption.
• Price Expectations: Consumption increases if expected that the price will increase.
♦Business cycles/Trade cycles: The continual sequence of rapid growth in GDP,

followed by a slow-down in growth and then a fall. Growth then comes again and when this
has reached a peak, the cycle turns once more.
Four phases
Recession: At point A The economy is entering a recession.
• consumer demand falls
• investment projects already undertaken begin to look unprofitable
• orders are cut
• inventory levels are reduced
• business failures occur as firms find themselves unable to sell their goods
• production and employment fall
• general price levels begin to fall
• business and consumer confidence diminish
• investment remains low
• the economic outlook appears to be poor
Recession can begin relatively quickly because of the speed with which the effects of
declining demand will be felt by businesses suffering a loss in sales revenue.
Depression: Eventually, in the absence of any stimulus to demand, a period of full
depression may set in and the economy will reach point B
Recovery: This can be slow to begin because of the effect of recession/depression on

levels of confidence.
• Output, employment and income will all begin to rise.
• Business expectations will be more optimistic so new investment will be more readily
undertaken
• The rising level of demand can be met through increased production.
Boom: As recovery proceeds, the output level climbs above its trend path, reaching point D.
• Capacity and labour will become fully utilized causing bottlenecks in some industries
which are unable to meet increases in demand.
• Further rises in demand will therefore be met by rather price increase rather than
production increase.
• Business will be profitable
• Expectations of the future may be very optimistic (আশাবাদী)and the level of
investment expenditure high
Avoiding the boom and bust Cycle: Government generally seek to stabilize the economic
system, trying to avoid the distortions of a widely fluctuating cycle.
• In Recession they will try to boost overall demand
• In a boom they will try to keep dampen overall demand through raising taxation or
interest rates, and by reducing public expenditure.
Inflation: An increase in price levels generally, and a decline in the purchasing power of
money.
Deflation: Falling prices generally, which is normally associated with low rates of growth
and recession.
♦Why is inflation a Problem?

• Redistribution of income and wealth from suppliers to customers: Because
outstanding amounts lose ‘real’ value with inflation. In addition those with fixed
incomes, the nominal amount of a fixed income stays the same but its purchasing
power falls. (i.e. pensioners)
• Balance of payment effects: If a country has higher rate of inflation than its major
trading partners, its exports will become relatively expensive and import relatively
cheap, although its exchange rate will usually alter to take account of this.
• Price signaling and ‘noise’: Planning and forecasting becomes less accurate. Can
undermine the ability of the price mechanism to influence the allocation of resources
in an economy.
• Wage demands increase: A wage/price spiral may take hold, which will reinforce the
problem and valuable time is wasted negotiating new wage rates rather than
producing new goods.
• Consumer Behaviour: People may stockpile goods fearing price increase later.
Consumers will be more anxious to consume now rather than waiting until costs rise;
this will rise consumption levels and possibly push prices up even further – a spiral
that can contribute to hyper inflation (Extremely high rate of inflation).

Types of Inflation: Economists distinguish between two types of inflation:
1. Demand-Pull Inflation: Price rises resulting from a consistent increase of demand
over supply in the economy as a whole. Supply can’t grow any further once “full
employment” of factors of production is reached
2. Cost-Push Inflation: Price rises resulting from aa increase in the costs od
production of goods and services, e.g. of imported raw materials or from wage
increases.
Macroeconomic policies used by government to achieve economic growth and control

inflation
1. Aggregate Demand: Influencing overall demand in the economy via
• Monetary Policy: Policies on the money supply, the monetary system,
interest rates, exchange rates and the availability of credit.
• Fiscal Policy: Policies on taxation, public borrowing and public spending
2. Aggregate Supply: Influencing overall supply in the economy via Supply-side
policies.
Monetary Policy and aggregate demand: Effects of a rise in Interest Rate:

• Price of borrowing in the economy will rise
• Spending will fall
• The exchange rate for sterling will be higher. This will keep the cost of exports higher
and cost of imports lower.
• There will be capital inflows as foreign investors will be attracted to starling
investments
• The reductions in spending and investment will reduce aggregate demand in the
economy.
Fiscal Stance (আর্থকি অবস্থা) of government:

• Expansionary Fiscal stance: Increased borrowing and spending.
• Contractionary Fiscal Stance: Increased taxation but no increase in spending (or
decreasing borrowing and decreasing spending.
• Broadly Neutral Fiscal Stance: Increase taxation and spending
Downside of aggregate Demand:
• Demand management interventions are inflationary in the long run.
• High taxes act as a disincentive (র্বতর্কিত)) to economic activity.
• The possibility of politically motivated policy changes creates damaging uncertainty in
the economy, discouraging long-term investments.
Supply-side macroeconomic policies:

• More involvement of the private sector in the provision of services
• Reduction in taxes in order to increase incentives to supply
• Increasing flexibility in the labour market by curbing the power of trade union
• Improving education and training so the quality of labour and hence the economy’s
productive capacity are enhanced
• Increasing competition through deregulation and privatization of utilities.
• Abolition of exchange controls and allowing the free movement of capital.
Market mechanism: Market mechanism is the interaction of demand & supply for a
particular item. It brings demand and supply into Equilibrium.
Market: A market is a situation in which potential buyers & potential sellers (or suppliers) of
an item or “good” come together for the purpose of exchange.

Price theory (or demand theory as it is sometimes referred to) is concerned with how
market prices for goods are arrived at, through the interaction of demand & supply.
Demand: Demand is the quantity of the good that
potential purchasers would buy, or attempt to buy, if
the price of the good were at a certain level.
Demand Curve: The relationship between demand for
a good and the price of the good can be shown
graphically as a Demand Curve.
♦Factors determine demand:

i. Price
ii. Other factors affecting demand (shift in demand curve)
iii. Inter-related goods: substitutes and complements
Substitute goods are:
• Rival brands of the same commodity, like Coca-Cola & Pepsi
• Tea & coffee
• Bus rides & car rides
• Some different forms of entertainment
Complements are: Goods that tend to be used together.
• Cups & saucers
• Bread & butter
• Cars and the components & raw materials that go into their manufacture.
iv. Income levels: normal goods (Income rise-demand rise) & inferior goods
(income rise- demand fall)
v. Fashion & expectations
vi. Income distributions: country with maximum rich people/ maximum poor people
A shift in the demand curve is when a determinant of demand other than price changes.
Supply: Supply is the quantity of a good that existing

suppliers or would – be suppliers would want to produce for
the market at a given price.
Supply curve: Graphical representation of the relationship
between product price and quantity of product that a seller is
willing and able to supply.
♦♦♦Factors influence supply:
i. The price obtainable for the goods
ii. The prices of other goods
iii. The prices of related goods in joint supply.
iv. The cost of making the good, including raw material costs, wages, etc.
v. Changes in technology
vi. Other factors, such as changes in the weather in the case of agricultural goods,
natural disasters, or industrial disruption.
A shift in the Supply curve is when a determinant of supply other than price changes.
For most goods and services, the level of supply changes less rapidly than demand in
response to change in a determinant.
♦Equilibrium price: Equilibrium price is the price of a good at which the volume
demanded by consumers and the volume businesses are willing to supply are the same.
• If there is no change in the determinant of supply or demand, the Equilibrium price will
rule the market and will remain stable
• If the EP does not rule, the market is in disequilibrium, but tsupply and demand will
push prices towards the EP
• Shift in the supply or demand curve because of determinant other than price will change
the equilibrium price and quantity.

Adjustments to Equilibrium:
Price regulation: Government might introduce regulations either:

• To set a Maximum Price for a good, perhaps as part of an anti-inflationary economic
policy so that suppliers cannot charge a higher price even if they want to.
▪ If the price is higher than the EP, its existence will have no effect
▪ But if maximum price is lower than what the equilibrium price would be, there
will be an Excess of demand over supply. Supplied to Black markets
• To set a Minimum Price for a good below which a supplier is not allowed to fall.
Elasticity: The extent of a change in demand and/ or supply given a change in price.
♦♦♦Price elasticity of demand (PED): is a measure of the extent of change in demand
for a good in response to a change in its price.
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑,𝑎𝑠 𝑎 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑

PED= 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒,𝑎𝑠 𝑎 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑜𝑓 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒
𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 PED less than 1 = inelastic demand
PED= 𝑃𝑟𝑜𝑝𝑜𝑟𝑡𝑖𝑜𝑛𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
PED more than 1 = elastic demand
𝑄2−𝑄1 𝑃2−𝑝1
PED= [ ]÷[ ] PED= 1= Unit Elasticity
𝑄1 𝑃1
Minus sign is usually Ignored
♦The price of a good is tk1.20 per unit and annual demand is 8,00,000 units. Market
research indicates that an increase in price of 0.10per unit will result in a fall in annual
demand of 70,000 units. Calculate the elasticity of demand when the price is Tk.1.20.
−𝟕𝟎𝟎𝟎𝟎 .𝟏
PED = ÷ = -1.05
𝟖𝟎𝟎𝟎𝟎𝟎 𝟏.𝟐
Ignoring the minus sign, the price elasticity at this point is 1.05. Demand is elastic at this
this point, because the elasticity is greater than one
• Inelastic: If the absolute value is less than 1. An inelastic demand changes by a

smaller percentage than the percentage change in price
• Elastic: If the absolute value is greater than 1. An elastic demand changes by large
percentage than the percentage change in price.
♦Three special values of price elasticity of demand: 0, infinity and 1.

1. Demand is perfectly inelastic (PED-0): There is no change in quantity demand,
regardless of the change in price.
2. Demand is perfectly elastic (PED-∞): Consumers will want to buy an infinite
amount, but only up to a particular price level. Any price increase above the level will
reduce demand to zero.
3. Unit elasticity of demand (PED- 1): The percentage change in quantity demand is
equal to the percentage change in price.
♦Significance of price elasticity of demand:

• When demand is elastic, an increase in price will result in a fall in the quantity
demanded such that total expenditure will fall
• Demand inelasticity above zero means an increase in price will still result in a fall in
quantity demanded, but total expenditure will rise
• With unit elasticity, expenditure will stay constant given a change in price.
Giffen goods: A Giffen good is a low income, non-

luxury product for which demand increases as the
price increases and vice versa. A Giffen good has
an upward-sloping demand curve which is contrary
to the fundamental laws of demand. I.e. Bread, rice,
salt, wheat etc. Commonly essential with few near-
dimensional substitutes as the same price.

Veblen goods: The demand for a good increase as the
price increases. The higher prices of Veblen goods may
make them desirable as a status symbol. i.e. jewelry and
luxury cars.
Income elasticity of demand: An indication of the

responsiveness of demand to changes in household
income.
% change in quantity demanded
Income elasticity of demand=
% change in Hosehold Income
• If Greater than 1= The quantity demand rises by a large percentage than the rise in
income. (luxury goods)
• Between 0 & 1= The quantity demanded rises less than the proportionate increase in
income. (normal goods, necessities)
• Below 0= In response to an increase in income, demand actually falls.. These are
Inferior Goods. An example could be coach travel, where passengers might switch
to faster, but more expensive, trains as their income rise.
♦Cross elasticity of demand: A measure of the responsiveness of demand for one good
to change to change in the price of another good.
% Change in quantitiy of "Good A" Demand
Cross elasticity of demand=
% Change in the price of "Good B"
• If the two goods are Substitutes, such as tea and coffee, cross elasticity will be
Positive, so a rise in the price of one will increase the demand of other.
• If the goods are Complements, such as real coffee and cafetières, cross elasticity
will be Negative, so a rise in the price of one will decrease demand for the other.
• For Unrelated goods, such as tea and oil, cross elasticity will be 0.
♦Price elasticity of supply: A measure of the responsiveness of supply to a change in

price.
% change in quantity supply
Price elasticity of supply (PES)=
% Change in Price
• Supply is perfectly inelastic (PES-0): There is no change in quantity supply,

regardless of the change in price. i.e. antiques and land
• Supply is perfectly elastic (PED-∞): Where the producers will supply any amount at
a given price but none at all at a slightly lower price. Supply curve is an upward slope.
• Unit elasticity of supply (PED- 1): The percentage change in quantity supply is
equal to the percentage change in price.
Types of market structure

Market Structure: A description of the number of buyers and sellers in the market for a
particular good, and their relative bargaining power.

1. Monopoly: Monopoly is characterized by:
• One supplier (one dominant supplier)
• Many buyers
• Barriers to entering the industry, for instance the capital cost of setting up a
national grid of electricity would be prohibitive for most business. Other barriers
include:
▪ Patent protection
▪ Access to unique resources
▪ Unique talent
▪ Public sector monopoly
▪ Size domination of market
The consequences of Monopoly include:
➢ Business can Either set the selling price or determine the quantity supplied, but the
market will determine other factors
➢ Supernatural profit.
2. Oligopoly: Oligopoly is characterized by:

• A few large sellers but many (often small) buyers
• Product differentiation
• A high degree of mutual independency
The consequences of Oligopoly include:
➢ Non-price competitions, particularly advertising and branding
➢ Price cuts are generally copied by the competitors but price increase are not always
copied.
3. Monopolistic Competition: Monopolistic competition is characterized by:

• Many buyers & sellers (as in perfect competition)
• Some differentiation between products (not homogeneous as in perfect
competition)
• Branding of products to achieve this differentiation.
• Some (but not total) customer loyalty.
• Few barriers to entry
• Significant advertising in many cases.
The consequences of Oligopoly include:
➢ Increase in price cause loss of some customers
➢ Only normal profit earned in the long run
4. Perfect Competition: Perfect competition is characterized by: ♦
• Many small (in value) buyers & sellers which, individually, cannot influence the
market price
• No barriers to entry or exit, so businesses are free to enter or leave the market
as they wish.
• Perfect information such that production methods & cost structures are identical
• Homogeneous (identical) products
• No collusion between buyers or sellers.
The consequences of perfect competition include:
➢ Suppliers are ‘Price Taker’ not ‘Price Maker’
➢ All suppliers only earn normal profit
➢ There is a single selling price, the market-determined price.
*In perfect competitions, free markets are often seen as efficient in resource allocation.
Two types of potential efficiency:
• Allocative efficiency: is achieved when goods and services that are wanted by
buyers and produced in optimum quantities. Efficient allocation of resources.
• Productive efficiency: is achieved when the economy produces its goods and
services at the lowest factor cost.
Market failure: Market failure is a situation in which a free market mechanism fails to
produce the most efficient (the optimum) allocation of resources.
♦Market failure is caused by a number of factors:
i. Market imperfection with one, or a few, suppliers, exerting market power.
(monopoly, monopsony, asymmetric information and slowness of response)
ii. Externalities, Effect in 3rd party, the society. Can be positive or negative.
iii. The existence of public goods and benefits that are gained by 3rd parties. i.e.
National Defense. These cannot be marketed as they are free.
iv. Economies of scale. When large companies are able to produce goods at a low
unit cost because of economies of scale, but either do not pass these savings
onto buyers, or use the dominate smaller companies, there is a market failure to
allocate resources efficiently. Internal economies of scale happen when a
company cuts costs internally, so they're unique to that particular firm. External
economies of scale, on the other hand, are achieved because of external
factors, or factors that affect an entire industry.

External regulation of business (Chapter-14)
Regulation: Any form of state interference with the operation of the free market.
This could involve regulating demand, supply, price, profit, quantity, quality, entry, exit,
information, technology, or any other aspect of production and consumption in the market.
Regulation of business is needed:
To address market failure and externalities
To protect the public interest
legal meaning of regulation: In a legal sense, a regulation is a rule created by the

Government, an administrative agency or another body which interprets a statute, or the
circumstances of applying the statute. It is a form of secondary or delegated legislation
which is used:
i. To implement a primary piece (part) of legislation appropriately.
ii. To take account of particular circumstances or factor emerging during the gradual
implementation of, or during the period of, a primary piece (part) of legislation.
Regulations may also take the form of statutory instruments, statutory orders, by-laws and
rules.
Efficient regulation: Regulation has costs for some and benefits for others. Efficient
regulation exists where the total benefits to some people exceed the total costs to others.
Regulation is justified using various reasons and therefore can be classified in several broad
categories according to its intended outcome. Regulations may be put in place to:
i. Address market failures
ii. Increase or reduce the social standing of various social groups.
iii. See through the collective desires of a significant section of society.
iv. Enhance opportunities for the information of diverse preferences and beliefs in
society.
v. Affect the development of particular preferences across society as a whole.
vi. Deal with the problem of irreversibility (current activities will result in outcomes
from which future generations may not recover at all).

♦Business’s respond to regulation:
i. Entrancement of a particular practice (Nil or non-response)
ii. Mere compliance, so that the desired regulatory outcome is meet simply by
passing on the cost of compliance to clients & consumers.
iii. Full compliance, so that the behavior is changed and products & processes are
adjusted to comply with regulations.
iv. Innovation: the porter hypothesis.
porter hypothesis: The economist Michael Porter formulated the hypothesis thet strict
environmental regulations trigger the discovery and introduction of cleaner technologies and
environmental improvements, The Innovation Effect.
Regulatory Compliance: Systems or departments in business which ensure that people

are aware of and take steps to comply with relevant laws and regulations.
Regulation of compliance: The competition act 2012 prohibits agreements, business

practices and conduct that damage competition namely
1. Anti-competitive agreements
2. Abuse of a dominant Position
3. Cartel Activities
1. Prohibiting Anti-Competitive agreements: “No person shall enter into any agreement/
understanding/ collusion, directly/ indirectly, regarding the production, supply, distribution,
storage or acquisition of products, which may cause an adverse effect on competition or
result in monopoly or oligopoly. An agreement shall be considered anti-competitive if it:
• Determines purchase or sale prices
• Results in bid rigging or collusive bidding. (Bid rigging is an illegal practice in which
competing parties collude to determine the winner of a bidding process.)
• Limits or controls production, supply, markets, technical development, etc.
• Shares the market, source of production or provision of services.
2. Prohibiting the abuse of a dominant position: Chapter II/Article 102 prohibit the abuse
by one or more businesses of a dominant position in a market.
Dominant Position: One where the business is able to behave independently of
competitive pressures, such as other competitors, or can affect or move its competitors or
consumers or the relevant market in its favor. Following would qualify as an abuse of
dominant position:
• Direct or indirect imposition of unfair or discriminatory prices or purchase conditions
• Limitation or restriction of production of goods and technical/ scientific development
• Denial of market access
• Imposition of acceptance of supplementary obligations at the time of purchase
• Use of power to enter into or protect other relevant markets.
3. Cartel Activities: Cartel is an agreement between businesses not to complete with each
other. The agreement is usually verbal and often informal. Cartel members typically agree or
collude on:
i. Prices
ii. Output levels
iii. Discounts
iv. Credit terms
v. Technology
vi. Which customers they will supply
vii. Which areas they will supply
viii. Who should win a contract (bid rigging)
Direct Regulation of externalities:
• Price regulations (setting maximum or minimum selling price)
• Direct or indirect taxation or tariffs (A tariff is a tax imposed by a government of a
country or of a supranational union on imports or exports of goods.)
• Subsidies to suppliers, for instance to encourage exports.
• Regulation by means of:
▪ Quotas (ককাটা)), that is physical limits on output so that output is set at the
social optimum
▪ Standards that must be complied with
▪ Fines for those businesses that do not meet the necessary standards
Direct regulation of people in business: Directors and other people engaged directly in
managing companies are subject to direct regulation:
▪ To prevent insider dealing and market abuse, if the company’s shares are listed
▪ To provide wrongful trading if the company is insolvent, and fraudulent trading
weather or not the company is insolvent.
▪ To control the activities of directors who have been involved with insolvent
companies, or who have committed some other form of misdemeanor অপকর্ম )
▪ To prevent money laundering

International regulation of trade: The benefits of industrialization have been sought by
most economies via either Import substitution or Exports. ♦♦The economic advantages
of international free trade:
i. Countries specialize in terms they produce comparative most efficiently so
resources are allocated efficiently.
ii. Some countries have a surplus of raw materials to their needs, and others have a
deficit. A country with a surplus (e.g. of oil) can take advantage of its resources to
export them. A country with a deficit of a raw material must either import it or
export restrictions on its economic prosperity and standard of living.
iii. Competition is increased among suppliers in the world’s markets. Greater
competition reduces the likelihood of a market for a good in a country being
dominated by a monopolist and will force businesses to be competitive & efficient,
producing goods of a high quality.
iv. Larger markets are created for a business’s output and so some businesses can
benefit from economies of scale by engaging in export activities. Economies of
scale improve the efficiency of the use of resources, reduce output costs and also
increase the likelihood of output being sold to the customer at lower prices than if
international trade did not exists.
v. The development of trading links provides a foundation for closer political links.
An example of the development of political links based on trade is the EU.
Note, however that high transport cost can negate the advantages of specialization &
international trade.

♦Barriers to free international trade: In practice many barriers to free trade exists
because Government try to protect home industries against foreign competition. This
“protectionism” can be practiced by a Government in several ways:
i. Tariffs or customs duties
ii. Import Quotas
iii. Embargoes (bans on certain imports or exports)
iv. Hidden subsidies for exporters and domestic producers
v. Import restrictions
vi. Government action to devalue the nation’s currency (reduce its foreign Exchange
value)
Tariffs or Customs duties are taxes on imported goods. The effect of a tariff or duty is to
rise the price paid for the imported goods by domestic consumers, while leaving the price
paid to foreign producers the same, or even lower. The difference is transferred to the
government sector.
An ad valorem tariff is one which is applied as a percentage of the value of goods
imported. A specific tariff is a fixed tax per unit of goods.
Import Quotas are restrictions on the quantity of a product that is allowed to be imported
into the country.

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Business & Finance Note

Certificate Level (CL)

Fuad Amin BUSINESS FINANCE (CL) 2

♦There are two types of organization:

i. Profit oriented organization

Organizations exist because they:

♦The common elements of organization are:

The organization may differ from each other in terms of:

Types of work Organizations do:

Business: An organization (however small)

Fuad Amin BUSINESS FINANCE (CL) 3

There are two types of stakeholders:

Sustainability: Sustainability is the ability to meet the needs of present without

Social responsibility: in business, also known as corporate social responsibility (CSR),

♦♦Is wealth maximization always the primary objective?

Fuad Amin BUSINESS FINANCE (CL) 4

Mission: A business’s mission is:

Mission includes the following characteristics/elements:

Elements of mission Comments

Fuad Amin BUSINESS FINANCE (CL) 5

There are two types of Goal.

i. Non-operational/ non-visible goal: a qualitative goals (Aims), for example; a

Characteristics/Objectives of an operational goals:

Purposes of setting operational objectives in a business:

1. Implement the mission: by setting out what needs to be achieved.

Plans state what should be done to achieve the operational objectives.

Fuad Amin BUSINESS FINANCE (CL) 6

Fuad Amin BUSINESS FINANCE (CL) 7

Manager does the following tasks:

Effective management Requires: PARADE

1. Power- The ability to get things done.

2. Authority- The right to do something, or to ask someone else to do it and

4. Accountability- A person's liability to be called to account for the fulfilment of

*One is thus accountable to a superior (or other persons with legitimate

5. Delegation- a manager may make subordinates responsible for work, but

Fuad Amin BUSINESS FINANCE (CL) 8

Process of management: POLC

Fuad Amin BUSINESS FINANCE (CL) 9

The characteristics of 4 culture types, which may characterize entire businesses or

Key Business functions:

Fuad Amin BUSINESS FINANCE (CL) 10

In case of Service marketing mix, includes consideration of the 4 P’s above,

There are three main elements of product:

♦Factors influence the pricing policy of the products of a business: Four Cs

Fuad Amin BUSINESS FINANCE (CL) 11

There are certain key decisions in operations management:

Research And Development (R&D): involves

♦Different approaches to HRM:

♦Four Cs model of HRM are:

♦Organizational Iceberg: (Hellriegel, Slocum and Woodman):

Fuad Amin BUSINESS FINANCE (CL) 13

Taylor made three basic assumptions about human behaviour at work:

Taylor's conclusions were as follows:

♦♦♦McGregor's model: Theory X and Theory Y

Motivation giving and management should be done after identifying X or Y type.

Herzberg’s Two-Factor Principles:

Fuad Amin BUSINESS FINANCE (CL) 15

Fuad Amin BUSINESS FINANCE (CL) 16

Likert's four characteristics of effective manager:

Fuad Amin BUSINESS FINANCE (CL) 17

• 9-9 -- Team Management: Participative, High productivity, integration of task and

♦♦♦Delegation: involves giving a subordinate responsibility and authority to carry out a

Fuad Amin BUSINESS FINANCE (CL) 18

Fuad Amin BUSINESS FINANCE (CL) 19