BUSINESS

UNIT 1: BUSINESS ORGANIZATION AND ENVIRONMENT

Enterprise/ Business/ Firm

1. Capital
> Cash
> other forms of assets
> Sources of funds (banks and investors)
2. Labour
> skilled and unskilled workers
3. Land
> Properties
> Buildings and raw materials
> supply chain management
> Availability of raw materials
> cost of raw materials
> Fair trade
4. Entrepreneurs and Intrapreneurs
> Innovators
> Risk takers of the business
Entrepreneurs vs Intrapreneurs
❖ Entrepreneurs - owns the business
❖ Intrapreneurs - works with/for the business
Economic Sectors
1. Primary sectors (Agricultural industry)
2. Secondary Sectors (Manufacturing Industry)
3. Tertiary Sectors (Services)
4. Quaternary Sectors (Uses IT)
Business Integration
1. Horizontal Integration
→ the same companies own lots of businesses
2. Forward Integration
→ service business
→ conglomerate
→ a business that owns a lot of businesses that are not related to each other
Types of Companies
1. Multinational company - a company which operates in more than one country which has
factories, branches, offices, etc
2. Joint venture - when 2 different companies merge but not operate together
Business Sectors
1. Public sector - government owned and controlled organizations
Public Limited Company (plc or Inc) - a limited company, often a large business, with legal
rights to sell shares to the general public - share prices are quoted on the national stock
exchange
2. Private Sector
2 Types
a. Private Sector - can be operated by a single person (sole trader)
* sole trader - “the person is the business”
- has unlimited liability
* partnerships - the owners have unlimited liability and the private liability isn’t at risk
if the business fails
- Deed of Partnership —> The rule book for partnerships
Sleeping Partner - invest only, no work
Industrial partner - no invest, work

Partner A - $2M share

Partner B - $15M share
Partner C - $0 share
Partner D - $1M share

[Industrial Partner - no shares in the business (Partner C)]

* Companies or Corporations - shareholders have limited liability which is up to their
investment only
- separation of ownership and management or control of
the business
Characteristics of Unincorporated business
1. The owner is the business
2. The owners have unlimited liabilities
3. There is greater privacy and fewer legal formalities
b. Private Limited Company (Ltd)
→ limited liability
→ Legal personality
→ continuity
 → A small to medium - sized business that is owned by shareholders who are often
members of the same family
→ can’t sell shares to the general public

Profit vs Dividend
1. Profit - earned earned sole trader, partnership or corporation
2. Dividend - earned by the shareholders of a corporation

Other forms of Business Organization

1. Cooperative
→ all members contribute to the running of the business
→ all members have one vote at important meetings
→ profits are shared equally among members
→ don’t pay tax
→ don’t pay tax because they are directly helping the community
→ can be community based or organizational based
2. Joint Ventures
—>to strengthen a project
—> two or more businesses agree to work closely together on a particular
project and create a separate business division to do so
—> (the businesses that work together share assets)
Reasons for joint venture:
❖ Costs and risks of a new business are shared
❖ Different companies might have different strengths and experiences and
therefore fit well together
❖ The two companies can combine their major markets
Risks of joint venture agreement
★ Different styles of management culture
★ Errors and mistakes might lead to one blaming the other for mistakes
★ Business failure of one of the partner companies would put the whole
project at risk
3. Holding company
→ a business organisation that owns and controls a number of separate
business but does not unite them into one unified company
4. Social Enterprise
→ organization that applies commercial strategies to maximize improvements
economic, social and environmental
→ only existing if there is a partnership between a private sector and the
government aka Private, Public Partnership (PPP)
 ● Objectives of a Social Enterprise
Economic, social and environmental

Social Enterprise exists to:

Economic Environmental Social

Increase in employment Use of biodegradable cups People can provide for their
opportunities and renewable energy families.

Increase production Use eco - friendly means of Increase in skills and

transportation to distribute the knowledge of the manpower
products (training)

Increase gross domestic Transfer of technology

product (GDP)

Increase in job opportunities

● Gross domestic product - the total value of goods, products and services + the power of
currency in 1 year

Effects to the business if they are a social enterprise

1. Less tax
2. More exposure
3. Profit goes to the people
Organisational Objectives
Hierarchy of Objectives
1. Mission and Vision Statements
→ normally written by founders, or senior managers of a business
→ provides guiding hand for all business
Vision Statement
- Not measurable
- A guide
- A philosophy, vision or set of principles which steers the direction of an
organization
2. Corporate Objectives
→ set by senior management
→ must be measurable and specific
→ process by which an organisation analyses its objectives priorities, strategies and
environment in light of its mission
 3. Departmental Objectives
→ These are corporate objectives broken down to allow each department to know
what they must achieve
4. Team and Individual Objectives
→ Provide a day-to-day focus for all employees to guide their actions to
contribute to the overall objectives of the organization
Example:
● How do we achieve the quota of selling 100 microsoft products in 1 month. Sell
50 in the first month and 50 in the second month.
Objectives are:
1. Strategic - long term and costly and will affect the entire operation of the
business.This is also sometimes considered a global objective. For example, to
relocate the production from China to Voetnam or to hire 10 experts coming from
China to work in Vietnam.
2. Tactical - are short-term or medium-term objectives. Used to dispose the
remaining products and is less costly compared to strategic objectives. For
example, to sell of the remaining products.
3. Operational - These are day-to-day objectives set by the menial managers. An
example could be the individual or team objectives.

Why do organizations consider setting ethical objectives?

➔ To ensure that the business has the support of its employees and other
stakeholders.
➔ To help create competitive advantage as it brings with it commercial advantages.
Objectives should be:
(SMART p.41)
● Specific
● Measurable
● Achievable
● Relevant/ Realistic
● Time - constrained

Most common business objectives

➢ Survival - most small companies or businesses focus on survival.
➢ Profit Maximisation - a short-term objective. This means that your profit or your margin
is very high. To achieve the highest target profit margin. Example is trends: buying loom
bands at 50 pesos and selling it at 200-300 pesos.
 ➢ Market Share - increase the amount of people buying their products. Percentage of sales
as against of the percentage of the whole industry. Example are cars. You have Toyota,
Nissan and others. They all belong to one industry. What is the market share of Toyota,
Nissan and others. They can either focus on the price or the brand. If they focus on the
price, the company will lower the price to penetrate the market share.
➢ Market Growth - increase the number of companies doing the same business or entering a
specific industry. Offering almost the same products. Coca Cola and Pepsi are considered
Market Leaders because they sell the most cola products. They maintain the market
growth by adding more products. For example coke light, coke zero, etc. For example
food chains in the Philippines, the market growth is increasing. Jollibee buys out the
competitors to increase its own market growth.
➢ Corporate Image - The company's reputation. To increase the corporate image, some
companies will implement the CSR (corporate social responsibility). This is also an
objective.
➢ Quality Improvement
➢ Satisficing - What is good enough? For example, there is profit and what is good enough
to satisfy the owner of the business, shareholders, or consumers.

Key Things About Objectives:

1. Objectives will inevitably change over time.
2. Objectives should drive decision making.
3. Objectives provide the means for measuring performance and success.
4. Objectives can be broken down to provide targets for individual parts of the organisation.
5. Objectives motivate employees and help the development of good teamwork.
Strategic vs Tactical (p. 49)
Strategic Objectives
→ long term objective but if this fails, it will result to long term failure
→ aka global objectives
→ set by senior managers to guide the company
→ High risk objectives
Examples:
● A fashion retailer to expand into a new overseas market.
● Explanation: because this requires high-level decisions to be made by senior managers.
This decision will form part of the policy of the business.
● Walmart announced that it was exiting operations in Germany, selling all 85% of its
hypermarkets to Metro, a German supermarket chain. (Resulted to Strategic ailure)
● Explanation: Walmart ignored the culture and buying habits in Germany and net profit
slumped 26% to 2.08B dollars, after it registered a change of 863 million for the sale of
its German stores.
Tactical Objectives
→ mostly used to get rid of the remaining stocks
→ short-term objectives
→ low-risk
→ set by employees lower in hierarchy
→ few resource commitments
→ easy to change with little financial implication
→ easy to change
Examples:
● 10% discount on weekends or buy 1 take 1.
Ethical Objectives
→ Ethics
> a branch of philosophy concerned with rules of human behaviour
> considers what is right and wrong
> examines how moral principles and values are created and evolved
→ Ethical behavior
> goes beyond the legal requirements placed on a business
> concerns discretionary decisions and behaviour
> what the business wants to do and not what it must do
Types of Strategies:
1. Growth Strategies
2. Defensive Strategies
3. Re-orientation strategies
4. Defusing Strategies

Corporate Social Responsibility (CSR)

→ the duties of an organisation to its internal and external stakeholders
→ the ethical rights and duties existing between companies and society are discussed

Reasons why the business should act in a socially responsible manner

1. Improves the image of the business
2. The goods, products, services can provide the business with competitive advantage
3. Can create customer loyalty
4. It reduces the likelihood of pressure groups to act against the organisation’s interest
5. It attract like-minded employees to join the business
6. Improves the motivation of existing and new staff
7. Reduces the possibility of bad publicity
8. Ensures goodwill among new stakeholders
 The Vision Statement
- It describes the desired future position of the company

Core Values
→ represent its core beliefs
→ set out in its vision statement
→ gives direction about how they are expected to behave and it should inspire and motivate
them to perform to their best
→ shape the understanding of the customers of the business and its activities and outline why
they should remain loyal to its goods and services
Stakeholders
★ Stakeholders
“Stake”
→ interest
Internal stakeholders
● Employees
Interests:
→ Pay and benefits
→ Longevity of the company
→ Employment prospects
● Manager
● Owners
Interests:
→ Return of Investments (ROI)
→ Return on Capital Employed (ROCE)
→ Dividends
→ Profitability
External Stakeholders
● Suppliers
Concerns
→ Ability to pay debt
→ Enough liquidity of a business
● Society
Interests:
→ Impact on local inhabitants
→ Concern for broader social welfare

● Government
Interests
 → ability to pay taxes
● Creditors (banks)
Concerns:
→ Ability to repay loans
→ Integrity of management
→ Financial strengths of the company
● Shareholders
Interests:
→ returns of investments
→ profitability of the business
● Customers
Interests
→ quality of product
→ value of money
→ customer service
● Non-governmental Organisations (NGO)
Interests:
→ Contributions to environmental and social causes
→ Legal compliance
Trade Unions
→ legal entity allowed by the corporation to operate to protect the rights of the workers and to
work harmoniously with the company
→ treatment of workers
→ fair pay, benefits, and working conditions

Economies and Diseconomies of Scale

There is economies of scale if:
- Efficient Production
- Cheaper capital (revenue is increased)
- Logistics cost (transport goods)
- Promotion Costs
- Buy in Bulk
- Spread risk

Reasons why big companies buy in bulk

1. They have a warehouse
2. It is cheaper to buy in bulk.

Economies of scale
 → When a business increases its scale of operations and in the process becomes more
efficient, the business has achieved economies of scale
→ reduction in average unit cost as a business increases
Internal economies of scale
1. Technical → Bigger units of production can reduce costs because of the law of variable
proportions (the increase in variable costs spread against a set of fixed cost)
2. Managerial → a bigger business can afford to have managers specializing in one job as
opposed to trying to do everything
→ It is cheaper to hire people who specialize in one field than hiring one
person who do everything
3. Financial → Bigger businesses are less risky than smaller business
→ Is retained profit cheaper than borrowing from lenders?
4. Marketing → Bigger businesses can direct more effective marketing campaigns
5. Purchasing → Big business can gain discounts by bulk buying
→ Is it beneficial to buy in bulk or buying just in time (JIT)?
❏ JIT - Just in time
- products are only bought when needed
6. Risk bearing → Big business can afford to produce a bigger product range and in doing
so spread risk of one product failing (hedging their bets.)
Diseconomies of scale
→ a company begins to experience breakdowns that cause the company to become less
efficient
Reasons why diseconomies of scale happen
1. Communication breakdown can arise in larger organization.
2. Decision making slows down.
3. Motivation of workers fails and productivity drops causing costs to rise.
● Scale of operation - measurement of the output of the business

Advantage of a big business

1. Harder to take down.
2. Larger firms enjoy economies of scale.
3. Large firms have greater status than smaller ones.
4. Market leader status
5. Increased market share.
6. The business may become less dependent on one product or one market
7. The business may start to export
8. Owners of the business that expands increase their wealth in the future
9. A larger and more successful company will sell for a lot of money when they want to
retire.
Advantages of small business
1. Greater focus
2. Greater cachet
3. Greater motivation
4. Competitive advantage
5. Less competition
6. More manageable levels of debt

Growth of a firm
Internal expansion
1. Differentiation (horizontal growth; same products; increase in market share.)
2. Vertical Integration (different products but belonging to different stages of same product.)
3. Conglomerate diversification (introduction of totally different products.)
External expansion
1. Horizontal Integration (mergers with other business firms)
2. Vertical Integration (mergers of firms producing at different stages of the same products)
3. Conglomerate diversification (

Franchise
- considered as a form of external growth because it is a form of allowing other businesses
in using the business name, brand, logo, etc
- The legal right for a 2nd business to manufacture, sell and or market products from a
company in a certain place or through a certain medium
- The franchisee can’t change the rules, preparation, advertisement methods because it is
the agreement and should be strictly followed.

Joint venture
- type of external growth
- a business arrangement in which two or more companies agree to pool their resources for
the purpose of accomplishing a specific task
- 2 companies involved, both contributing their assets to a project and new business is
created (Example: Pixar and Disney → Disney Pixar)
Strategic alliances
- Holding company that has the legal right
- Similar to joint ventures because they involve businesses collaborating for a specified
goal
- more than two businesses may be part of the alliance and no new business is created
- Individual businesses in the alliance remain independent
- More fluid and easier to make decisions because the different corporations operate
individually

Ansoff matrix
→ Analyses the company and the current market
1. Market penetration
- Kind of marketing strategy that uses the prices of the competitors or promotion
strategies to sell
- Entering the market to capture the customers or increase its market shares
- Trying to take a greater share of an existing market with an existing product (ex.
Relaunching or increasing awareness)
- Low risk
2. Product Development
- Innovation of new products
- Extending existing products within existing markets
- Medium risk
3. Market Development
- Introduce the new products to enter the new market
- Finding or creating new markets for existing products
- Medium risk
4. Diversification
- Coming up with other services to attract new customers
- Creating new product lines or ranges for sale in new markets
- High risk
Analysis:
Ansoff Matrix for McDonalds

PRESENT NEW

PRESENT Market Penetration Product Development

- Cleaver Pricing - McSpaghetti
- Happy Meal - McAlooTikki
- Speedy Service - McPizza
- Drive through - Royal Paneer
- Masala Grill
- (All these in India since people
do not eat beef)

NEW Market Development Diversification

- Is present in 121 countries and - McCafe
is planning to open outlets in - MsStops
Nigeria, Tunisia, Armenia - Hotel (Switzerland)

Market penetration and market Product development and

development increases markets diversification is costly and more
risky compared to market
penetration and market
development

SWOT Analysis

Strengths - Internal to the business

Weaknesses - Internal to the business
Opportunities - External to the business
Threats - External to the business

PESTLE Analysis
Political
Economic
Social
Technological
Legal
Ecological
Multinational Companies
Reasons for becoming multinational
- Saturation of domestic markets
- Wanting to move closer to their global market
- Wanting to benefit from lower labour costs
- The lower tax rates in other countries allowing for greater retained profits
- Incentives from the government
- exploiting colonial power to grab markets abroad
- The opportunity to be closer to raw materials and energy sources
Problems that can be created by multinational operations to host countries
- Some business activities might be detrimental to the environment and health of the
greater population
- While multinationals create employment, the type of work they provide is low level and
the wages are low

● Monopoly
- When a company already owns 25% or more of the market share
● Deindustrialization
- Refers to the reduction of the secondary sector in a specific country
- Secondary sector are being transferred to countries with cheaper labour
- Due to lower costs of labour and production in Asian countries
● Glocalisation
- Global brand catering to the local needs

UNIT 2: HUMAN RESOURCE MANAGEMENT

The supply of labour

→ refers to the total number of people who are willing and able to work
→ the stock of labour become increasingly difficult to measure because of changes in
technology, work practices, and the economic and political environment

● Underemployed
→ the under-use of a worker due to a job that does not use the worker's skills, or is part
time, or leaves the worker idle

● Examples of labour beyond domestic boundaries

→ some US hospitals are sending x-rays and blood tests overseas for doctors to interpret
the results
 → many small US businesses employ an offshore online service provider to complete
their tax returns
→ Students can find an online tutor
→ music can be compiled and recorded online with artists from different parts of the
world

The supply of labour can therefore be described as increasingly global, informal and
impersonal

Technological change and demographic change

→ technological change can increase the reach and availability of labour
→ demographic change can provide constraints and opportunities for organisations

Focus of Human Resource

1. Workforce planning
- analyzing and forecasting the number of workers and the skills of those workers that
will be required by the organization to achieve its objectives
- Strategic planning
2. Training and Development
- On the job training (training inside the company)
- Induction Training (training outside of the company)
3. Employment contract
- a legal document that is required by the law to the employee
- Must be signed by both sides
- Agreement of the employee and employer
4. Ensuring HRM operates across the business
5. Incentive Systems
- Motivating factor
Recruitment and selection process
1. Drawing up a job description
2. Drawing up of person specification
3. Prepare a job advertisement
4. Drawing up a shortlist of applicant
5. Selecting between the applicants
Organisational Structure (Organisational Chart)

1. Communication through the organisation can

become slow with the messages becoming distorted
in some way.
2. The motivation of the workers may be affected in
a negative way.
3. Span of control is narrow

Tall organisational structure

1. Wider span of control

2. Fewer levels of hierarchy

Flat organisational structure

 ★ Multinational organisations find taking decisions centrally means they are not taking
local or regional factors into account
★ Bureaucracy
- an organisational system with standardised procedures and rules
★ Chain of commands
- this is the route through which authority is passed down an organisation – from
the chief executive and the board of directors
★ Span of control
- the number of subordinates reporting directly to a manager
★ Delegation
- To transfer the authority to the teammates
- passing authority down the organisational hierarchy
★ Level of hierarchy
- a stage of the organisational structure at which the personnel on it have equal
status and authority
- The number of the level of responsibility
Shamrock Organisation (Charles Handy)

Matrix Structure
● Matrix structure
- an organisational structure that creates project teams that cut across traditional
functional departments
Advantages:
❏ Allows total communications between all members of the team
❏ There is less chance of people focusing on just what is good for their department
❏ The crossover of ideas between people with specialist knowledge in different areas tends
to create more successful solutions
❏ This is well-designed to respond to changing markets or technological conditions
Disadvantages
❏ There is less direct control from the “top” as the teams may be empowered to undertake
and complete the project
❏ Team members may have 2 leaders if the business retains levels of hierarchy for
departments but allows cross-departmental teams to be created

Factors that influence organizational structure

❖ Style of management
❖ Culture of the managers
❖ Economic situation
❖ Corporate objectives
❖ Adoption of technology
Important links between organizational principles
❏ The greater the number of levels of hierarchy, the longer the chain of command
❏ This will have serious consequences for communication effectiveness
❏ Span of control is smaller for tall organisations
Delayering
- Reducing the levels of hierarchy
Delegation
Delegation
- To transfer the authority to the teammates
- Passing authority down the organisational hierarchy
- Gives subordinates the authority to perform task
● The overall responsibility for the work of the department or section including the
performance of each subordinate rests with the manager

Empowerment
- A modern development of delegation
- Requires even greater measure of trust from managers
Centralisation and Decentralisation
Centralisation
- keeping all of the important decision-making powers within head office or the centre of
the organisation
- Centralised businesses are multinational companies that allow regional and cultural
differences to be reflected in the products and services they provide
Decentralisation
- decision-making powers are passed down the organisation to empower subordinates and
regional/product managers
- Decentralized businesses are multinational companies that allow regional and cultural
differences to be reflected in the products and services they provide
Management and Leadership
● Managers get things done by working with and delegating to other people.
Functions of Management
1. Setting objectives and planning
2. Organising resources to meet the objectives
3. Directing and motivating staff
4. Coordinating activities
5. Controlling and measuring performance against targets
Interpersonal Roles
1. Figure head (every decision comes from this)
2. Leader (motivating, selecting and training staff)
3. Liaison (linking with managers and leaders of other divisions of the business)
Informational roles
1. Monitor (receiver - collecting data relevant to the business’s operations)
2. Disseminator (sending infos collected from internal and external sources to the relevant
people within the organization)
Decision roles
1. Entrepreneur (looking for new opportunities to develop the business)
2. Disturbance handler (responding to changing situations that may put the business at risk)
3. Resource allocator (deciding on the spending of the financial resources of the
organisation)
4. Negotiator
Leadership vs management
Manager
- Plans, oversees the work, monitors the group’s progress
- Ensures the plan is put into effect
- Deals with complexity
Leader
- More emotional
- Great ability to inspire people to follow voluntarily
- Spends a great deal of time and energy building relationships

Leadership styles
1. Autocratic leadership
- A style of leadership that keeps all decision making at the center of the
organisation
- There is likely to be minimal consultation and employee input
- Orders should be obeyed
- Leader takes all decisions
- Gives little infos to staff
- Supervises workers closely
- Demotivates staff who want to contribute and accept responsibility
2. Laissez - faire leadership
- “Let them do it”
- A leadership style that leaves much of the business decision - making to the
workforce
- ‘Hands - off’ approach
- Allows the experts to decide
- Only applicable if the leader is working with experts
3. Bureaucratic leadership
- Manager always refers to the rule book when making decisions
- Effective when the operating environment is very stable or very definite
procedures should be followed
- Consequences of mistake is very high
4. Democratic Leadership
- “Let’s work together”
- Leader is responsible
- Involves workers in decision making
Factors that affect the leadership style
1. Population
2. Environment
3. Composition of the human experts
4. Attitude of the leader/ manager

McGregor’s Theory X and Theory Y

Abraham Maslow Hierarchy of Needs

Frederick Herzberg Motivation Hygiene

● Motivators (internal)
● Hygiene factors (external)
Daniel Pink
- If a worker is given a hard task, he/ she will be more motivated
- If a worker is rewarded, he/ she will be more motivated
John Adams
- “Equity theory”
- Whatever is your input, that is your output
- It should be equal to all employees
Frederick Taylor
- Father of scientific management
TERM 2
Finance and Accounts
Sources of Finance
Capital Expenditure
- Money spent to acquire items in a business that will last for more than a year and may be
used over and over again (fixed assets)
- Collateral → financial security pledged for repayment particular source of finance e.g.
bank loans
● Fixed assets
- Land
- Building
- Machinery
- Car
- Equipment
Revenue Expenditure
- Money spent on the day-to-day running of a business
- Maintenance expenses
- Operating expenses
- Rent
- Utilities
- Wages
Internal Sources of Finance
1. Personal Funds
- Personal savings
- A source of finance for sole traders that comes mostly from their own personal
savings
2. Retained Profit
- Ploughed back profit
- The profit that remains after the business has paid corporation tax to the
government and dividends and shareholders and operational expenses
3. Sale of Assets
- When a business sells off its unwanted or unused assets to raise funds
External Sources of Finance
1. Share Capital
- Money raised from the sale of shares of a limited company
- Control of the company will be lessened
- Medium to long term finance
● Equity capital → The money received from the share of stocks
2. Loan Capital
- Money sourced from financial institutions such as banks with interest charged on
the loan to be repaid
- Long term finance
3. Bank Overdraft
- When a lending institution such as banks with interest charged on the loan to be
repaid
- Withdrawing beyond the savings in the bank
- Short term loans
- Interest is high
4. Trade Credit
- An agreement between businesses that allows the buyer of goods or services to
pay the seller at a later date
- short - term loan
5. Grants
- Funds usually provided by a government, foundation, trust or other agency to
businesses that do not need to be repaid
- Big amount
- Long term
6. Subsidies
- Financial assistance granted by a non-governmental organization (NGO), or an
individual to support business enterprises that are in the public interest
- Long term
7. Debt Factoring
- A financial arrangement where the debt factor takes on the responsibility for
collecting the debt owed to the business with a percentage of the owed debt in
cash
- Short term to medium
8. Leasing
- A source of finance that allows a firm to use an asset without having to purchase
it by cash
- Medium term finance
9. Venture Capital
- Financial capital provided by investors to high-risk, high-potential start up firms
or small businesses
- Long term
 10. Business angels
- Highly affluent individuals who provide financial capital to small start ups or
entrepreneurs in return for ownership equity in their businesses
- “Business angels”
- Don’t think about the risk on the investment
- Not after 100% return on investment (ROI)
- Long term

Factors influencing the choice of a source of finance

● Gearing
- Relationship between share capital and loan capital
- Borrowing
Revenue
- Fundamental to all production decisions
- Also known as sales revenue or turnover
- Appears in the top line on a profit and loss statement
- Appears as part of the cash in flow on a business’s cash flow account
- Total Revenue = Price (Quantity)
Forms of revenue
1. Cash Sales - the merch was sold in cash
2. Sales on Credit - merchandise sold on credit
Costs
1. Direct cost - can be clearly identified with each unit cost of production and can be
allocated to a cost centre
Examples:
a. In a hamburger fast-food chain, the cost of meat is a direct cost.
2. Indirect cost - Cannot be identified with a unit of production or allocated accurately to a
cost centre
Examples:
a. The purchase of a tractor of a farm is an indirect cost.
3. Fixed Cost - does not vary with output in the short run (indirect cost)
Examples:
a. Rent
b. Electricity and water bill
c. Salaries
4. Variable cost - varies as output changes (Direct cost)
Examples
a. Costs of raw materials
b. Wages
 c. Commission of Sales Team
5. Marginal Cost - additional costs of producing one more unit of output and will be the
extra variable costs to make this extra unit
Examples:
a. The marginal costs involved in making one more wooden tables are additional
costs of wood, glue, screw plus the labour costs incurred

Break - even analysis

● Break even point of production - it is the level of output at which total costs equal total
revenue, neither a profit or loss is made
● 2 ways:
1. The graphical method
2. The equation method
● Margin of Safety
- the amount by which the sales exceeds the break even level of output
- An indication of how much sales could fall without the firm falling into loss

Equations
❖ Margin of safety ÷ break even output = Production over break even level of output
❖ Fixed cost ÷ contribution per unit = break even level of output
❖ Selling price - variable cost per unit = break even

Uses of Break even technique

● A marketing decision (ex: The impact of a price increase)
● An operations management decision (ex: The purchase of new equipment with lower
variable costs)
● Choosing between two locations for a new factory
Evaluation of break even analysis
➢ The assumption that costs and revenues are always represented by straight lines are
unrealistic. Not all variable costs change directly and smoothly with output.
➢ Not all costs can be conveniently classified into fixed or variable costs. The introduction
of semi-variable cost will make the technique more complicated.
➢ There is no allowance made for inventory levels on the break-even chart. It is assumed
that all units produced are sold. This is unlikely to always be the case in practice.
Final Accounts
1. Income statement
2. Statement of Financial Position or Balance Sheet
3. Purpose of Accounts to Different Stakeholders
★ Called published accounts because these can be accessed by the stakeholders (public).
Stakeholders
● Shareholders - people who are interested in knowing how valuable the business is
becoming throughout its financial year
● Managers - Final accounts are used by this group to set targets, which they can use and
judge the current performance to the past.
● Government - the government and tax authorities will check on whether the business is
paying the right amount of tax
● Financiers (banks) - interested in the creditworthiness of the business so that they will
know how much cash to lend it
● Employees - interested so that they will know if their job is secure
● Customers - interested so that they will know if there will be a constant supply of a firm’s
products in the future
● Suppliers -

Principles of CPA
I. Integrity
- A professional accountant shall be honest and base decisions in all professional
and business relationships on the facts available
II. Objectivity
- A professional accountant shall be unbiased and not allow any conflict of interest
or undue influence of others to override his/her professional or business
judgement
III. Professional competence and due care
- a professional accountant has a responsibility to maintain professional knowledge
and skills at the level required to ensure that clients receive the best professional
service based on current developments in the profession, legislation and
techniques
IV. Confidentiality
- a professional accountant shall respect the confidentiality of information obtained
while rendering professional or business services and shall not disclose any such
information to third parties without proper and specific authorisation to do so
- However, in certain cases (ex. fraud), a professional accountant may be required
to disclose such information if there is a legal or professional right to do so
 - Furthermore, confidentiality of information is closely associated with the integrity
of the professional accountant, in that the professional accountant shall not use
confidential information acquired while rendering the professional services for
his/her personal advantage or that of third parties
V. Professional Behaviour
- A professional accountant shall comply with the relevant laws and regulations
VI. Moral Courage

Final Accounts
● Income Statement
- Records the revenue, costs and profit (or loss) of a business over a given period of
time
- Are prepared during budgeting (usually 6 months before) and also prepared after
the physical year (365 accounting days)
- The one prepared acts as an analysis for the company to know what went wrong
and what went right
- The gross and net profit of the company. Details of how the net profit is split up
(or appropriated) between dividends to shareholders and retained profits.

Three parts of the Income Statement

❖ Trading Account
● Sales - cost of sales or cost of goods sold= Gross Profit
❖ Profit and Loss Account
● Gross profit - Operating expenses = Net Operating Profit or Net Profit
❖ Appropriation Account
● Net Profit - Interest and Tax = Net Profit After Tax
● Net Profit After Tax - Dividend - Donations = Retained Profit

(Operating expenses usually does not change in 1 year)

● Balance Sheet
- Aka statement of financial position
- Outlines assets, liabilities and equity of a firm
 ● Assets
→ Assets = Liabilities - Owner’s Equity
● Equity must be equivalent to net assets
Two types of assets
★ Current assets
- Cash
- Accounts Receivable (Debtors)
- Stocks (unsold merchandise)
★ Fixed assets
- Land
- Building
- Furnitures and Fixtures
- Car
Two Types of Liabilities
Liabilities
→ Accounts Payable - Incurred from buying on credit (purchases on credit)
→ Interest Payable
→ Salaries, Wages
→ Bank Overdraft
★ Long Term Liabilities (Non-current Liabilities)
- Payable in over a year
Examples:
✵ Bank Loans
✵ Mortgage
★ Short Term Liabilities (Current Liabilities)
- Payable within 12 months
Owner’s Equity or Shareholders’ Equity
☛ Share capital
☛ Retained Profit
● Loan Capital = Total assets - Total Liabilities
Depreciation of Assets
● Kinds of Assets
1. Fixed Assets or Non-current Assets
2. Current Assets
- Inventories
- Cash on Hand
- Cash in Bank
- Account receivables (merchandise sold on credit)
- Residual Value (Market Value)
 ● Straight Line depreciation = (Original cost -Residual Value) / Life Span
● Net book value declines with each year of depreciation
POINTS TO CONSIDER
1. Depreciation expense is included in the firm’s overhead expenses on the income
statement
2. On the Statement of Financial Position, the annual depreciation charge will be subtracted
from the value of the asset

Ratios
1. Profitability Ratios
a. Gross Profit Margin (GPM)
Gross Profit ÷ Sales Revenue × 100
b. Net Profit (Before Tax and Interest) Margin (NPM)
Net Profit ÷ Sales Revenue × 100
2. Efficiency Ratios
a. Capital Employed
Total Assets – Current Liability
b. Return on Capital Employed (ROCE)
Net Operating Profit ÷ Capital Employed × 100
3. Liquidity Ratios
a. Current Ratio
Current Assets / Current Liabilities
b. Acid Test Ratio
(Current Assets - Stock) / Current Liabilities
c. Gearing Ratio
(Loan Borrowed Capital / Capital Employed) x 100

Profitability
How does a company become profitable?
1. Increase sales
2. Look for suppliers that can provide quality raw materials, finished products at lower cost
to arrive at a gross profit.
Liquidity
→ availability of cash to pay for the current liabilities
Gearing
- the ratio of a company's loan capital (debt) to the value of its ordinary shares (equity);
leverage
- 51% = the business is highly geared. Meaning the business is highly dependent on the
borrowed cash.

Category Type of Ratio Formula

Profitability Gross Profit Margin = Gross Profit / Sales
Revenue
Profitability Net Profit Margin = (Net Profit / Sales
Revenue) x100
Liquidity Ratios Current Ratios = Current Assets /
Current Liabilities
Liquidity Ratios Acid Test Ratio (Quick = (Current Assets -
Ratio) Stock) / Current
Liabilities
Efficiency Ratios ROCE - Return on = Net Profit before
Capital Employed interest & tax / Capital
Employed
Efficiency Ratios Gearing = Loan Capital / Capital
Employed

Cash Flow
- Efficiency in the use of cash
- The liquidity of the business can be shown using this
- Two types
● Inflow
- Cash going in the business
● Outflow
- Cash going out of the business
Working Capital and Cash Flow
· Net Cash flow = Cash inflow – Cash outflow
· Liquidation vs liquidity
Liquidity = ability of the business to pay its short-term loans
Liquidation = a situation where all a firm’s assets are sold off to pay any funds owing

Cash as working capital

- The money needed by a business for its day to day or immediate needs
 - Cash or working capital is used to buy raw materials, which are turned into finished
goods and then sold to customers via invoice
- Cash (after it is used) is recycled into new raw materials
- This cash is recycled into new raw materials, and some of it is also used to pay suppliers’
invoices and maybe even reduce the bank overdraft
- Businesses that holds to much working capital in stock are in effect wasting their cash as
are businesses that don’t collect receivables from customers on time
- Controlling the working capital cycle links closely with an accountant’s role to manage
cash and forecast cash flow needs
- It is important to remember that the business is recording movements in cash flows no
necessarily when sales are made but when payments are made

Causes of Cash flow problems

● Lack of planning
● Poor credit control
● Allowing customers too long to pay debts (debt factoring is the solution)
● Expanding too rapidly
● Unexpected events
Opening balance - available cash left for the next month
Cash inflows - comes from Cash sales revenue, payment from debtors and rental income

Cash inflows
Comes from
● Sales on cash (sales on credit are not recorded)
● Sale of assets
● Cash receivables (collections of receivables)
● Borrowed capital (short term loan and long term loan)
Cash Outflow
- The expenses of a business

● Depreciation expense is not recorded in the cash flow statement but is recorded as
accumulated depreciation in the income statement.

Why must cash flow be reasonably balanced?

1. There are products at every stage and the positive cash flows of the successful ones can
be used to finance the deficits of others.
Ways to increase cash inflows Possible drawbacks

● Overdraft ● interest rates can be high.

Overdraft can be withdrawn by the
bank and this often causes
insolvency

● Short - term loan ● The interest costs have to be paid.

The loan must be paid on the due
date or else the interest would be
compounded on the next month.

● Sale of assets ● Selling of assets quickly can result

in low price.

● Sale and lease ● The leasing costs add to annual

overheads. There could be loss of
potential profits if assets rise in
price. The assets could have been
used as a collateral for future
loans.

● Debt factoring ● only about 90 - 95% of the debt

will now be paid by the debt
factoring company. This reduces
profits. The customer has the debt
collected by the finance company.
This could suggest that the
business is in trouble.

● Delay payments to suppliers ● Suppliers may reduce any discount

offered with the purchase.
Suppliers can either demand cash
on delivery or refuse to supply all
if they believe the risk of not being
paid is too great.

● Cut overhead spending that does ● Future demand of your product

not directly affect output (ex. may be reduced by failing to
Promotion cost) promote the products effect
Marketing
- a process of identifying consumers needs and wants
- A process of producing the products that customers wants and needs
- Intention is to satisfy the wants and needs of customers with profit

The relationship of Marketing and other business functions

● Marketing and Human resource
- The identifying of workers who can satisfy the customers
- The company has to hire people who can give a good customer relationship
● Marketing and Sales

● Marketing and Production

- Marketing needs to study the market in market orientation or product orientation
Market Orientation
→ The business studies the market, then produces the product (Ex. McDo)
Product Orientation
→ The business produces the product, then studies the behavior (Ex. Apple)
● Marketing and Finance

Features of Markets
1. Market Location
- May be regional, national or international markets
2. Market Size
- The total level of sales of all producers within the market
- Considers the sales of all direct competitors
3. Market growth
- The percentage change in the total size of the market (volume or value) over a
period of time
- Volume refers to the number of unit sold
- Value = how high the price is
4. Market Share
- The percentage of sales in the total market sold by one business
- Market share = firms sales in time period / total market sales in time period x100
5. Competitors
- Indirect competitor → are competitors that may not offer exactly the same
products but their products are considered as substitutes
- Direct competitor → are competitors that offer exactly the same products
6. Important Marketing Concepts
 - Creating added value that becomes company’s USP
- Niche Marketing → only appealing on a specific group or target market
- Mass marketing → the product is for everyone
- Market segmentation → referred to as “differentiated marketing”

When does a business become a market leader?

- The business becomes the market leader if it has the biggest market share
Loss leadership
- A pricing strategy that a business charges at a lower price to attract more customers

4 P’s 4 C’s

Product Customer solution

Price Cost to customers

Promotion Communication with customer

Place Convenience to customers

P’s focus on the business and C’s focus more on the customers
PRODUCT
Product Positioning
- How the product or new brand will relate to other brands in the market, in the minds of
the customers

Product Life cycle

- the period of time over which an item is developed, brought to market and eventually
removed from the market

Extension strategies

Product Diffusion Curve

1. Innovators
- first to buy the product and to adapt; also people who set the trends
2. Early adapters
- follow the innovators
- Test market
 3. Early majority
- follow early adapters because of ads
- Take their time in adapting
4. Late majority
- Get tired of using the old products so that they are going to buy the new products
- Must be revolved before they adapt
5. Laggards
- After the season buying
- Based on past experiences

Market Saturation
- Increase competition

PRICE
Pricing Strategies
● Price Skimming
- New product is priced at higher price
- Can be used by popular brands
- Brand new personal products (laptops, cellphones, etc.)
- Used in the introduction stage
● Penetration pricing
- Setting low price at first
- Purpose is to attract customers to gain higher market share
● Dynamic Pricing
a. Psychological Pricing
- Pricing the product that will change the mindset of the people
● Cost Plus Pricing (Mark - up Pricing)
- Costs are accounted for and mark-up is added

Examples of Extension Strategies

1. Selling in new markets: export markets
2. Repacking and relaunching
3. Finding new uses for the product

Product Portfolio
- A collection of such products is known as a “product group” or “product range”
Boston Consulting Group
- A company that caters to the market research needs of the businesses
- BCG Matrix

Star
● High market growth
● High market share
● Cash neutral
● Hold
Cash Cow
● Low market growth
● High Market Share
● Cash generating
● Harvest or milk
Problem Child
● High market growth
● Low market share
● Cash absorbing
● Build
Dog
● Low market growth
● Low market share
● Cash neutral
● Digest
Purpose
- To know which products to maintain, divest and liquidate
● Divest
- To face out

Limitations
1. Does not give right strategies to use
2. Time consuming
3. High market share does not necessarily equate to high profit

Advantages of Having Product Range

1. Spread the risk - a decline in one product may be offset by sales of other products
2. Selling a single product may not generate enough returns for the business
3. A range can be sold to different segments of the market (ex. Family holidays and activity
holidays)

Channel of Distribution
1. Manufacturer → retailers → consumers
2. Manufacturers → wholesaler → retailer → consumers
3. Business → consumer
TERM 3
● Operations
- Refers to the fundamental activities of the business
- What they do?
- What they deliver?
- How they produce their products and services to meet the needs and wants of the
customers?
- Can happen in primary, secondary, tertiary and quaternary sectors
● Primary sector: seeding, planting → harvesting → converting to raw
materials
● Secondary sector: Raw materials → products
● Tertiary sector: products → consumers (customer service - retailers, etc)
● Quaternary sector: Business Process Outsourcing (BPO) → Business
consultancies → IT

Productions
● Batch Production
- Producing in batch
● Flow Production
- Each worker has its own specialty where only one person does something and
then goes to the next
● Job Production
- One worker does all the work for a finished product
● Cellular Production
- The modern attempt to improve mass production techniques by allowing teams of
workers to operate as a self-contained unit as part of the production run
● Lean Production
- Aiming for zero effects
- Doing it right the first time

● Cellular production and lean production

○ Improving quality
○ Increasing productivity
■ Maximisation on the use of resources
○ Reducing cost of production
● Other features of Lean Production
○ Just in time - stock control, kan ban supplies of stocks and Kaizen (continual
improvements of quality management)
 ○ Quality improvements will come from the cooperative nature of production with
members of the team being directly responsible for their own quality checking
○ Because the team is working together with all materials close at hand there is less
distance for the work in progress to travel
○ By working as part of a close knit team each worker is given greater responsibility
compared with the robotic and repetitive job working on an assembly line
○ As Herzberg noted (1957) responsibility an be a motivating factor so it can lead to
improvements in quantity
○ “Walking the job” is a technique where workers follow the route a product tkes as
it passes through the various stages of production

Location decisions
❖ Optimal location
➢ A business location that gives the best combination of quantitative and qualitative
factors
Quantitative factors
❖ Site and capital cost
❖ Labour costs
❖ Transport costs
❖ Sales revenue potential
❖ Government grants
❖ Break even analysis
Qualitative factors
❖ Safety
❖ Room for further expansion
❖ Manager’s preferences
❖ Ethical considerations
❖ Environmental concerns
❖ Infrastructure

International Locations Decisions

● Outsourcing - third party is inside the country
● Offshoring - third party is outside the country
○ Third party is the one which is doing the business functions for them
Factors related to Relocation/ Location
● Suitably skilled workforce
○ A workforce with sufficient cultural knowledge, skilled actions and suitable
motivation
● Availability of labour
○ A factor input with the correct skills to complete tasks effectively
● Government Grants
○ These may be in the form incentive for businesses operating in a country with
high unemployment rate
○ Less corporate tax, financial incentives to invest in new production facilities
● Lower cost
○ Transport, labour, increase profit margins, competitive advantage
● Proximity to markets, infrastructure suitably skilled workforce, lower break-even level
● Benefits
○ Lower labour costs, lower overheads, less legislation, increase competitiveness,
lower break-even
● Problems
○ Loss jobs in UK, bad publicity, industrial action, redundancy payments, high
relocation costs, language barriers, unskilled workers
● Competition
○ There is a balance that needs to be made between finding a gap in the market
physically and setting up near to your direct competition

When does cannibalistic marketing occur?

● If a business set up one franchise in a location and then set up more and more units in the
same area to flood the particular sector.
● When a new product intrudes on the existing market for an older product.
● Advantages:
○ Helps one company to capture market share of the competitors.
● Disadvantages
○ By appealing to current clients instead of new clients, this product cannibalism
will decrease market share
○ If it is not intentional, market cannibalism can hurt the bottom line of a company.
Market cannibalism forces the premature end of an existing product’s life. Sales
shift to the new product rather than tapping into a new market, as intended.
International Locations Decisions
● Push factors - Factors that force companies to relocate to other countries
○ Reduce cost
○ Increase market share
○ Use extension strategies

Reasons for International Location Decisions

1. To reduce cost
2. To access global markets
3. To avoid protectionist trade barriers

Scale of Operation
- Producing more means producing from existing resources by increasing capacity
utilisation
- Changing the scale of operation means using more or less of all resources by opening
new factory with additional machinery

Economies of Scale
- Reduction in a firm’s unit average costs of production that result from an increase in the
scale of operations

Purchasing Economies
● Bulk - buying economies
● Suppliers woll often offer substantial discounts for large orders because it is cheaper for
them to process and deliver one large order than several small ones.
● Big firms employ specialist buyers who may travel abroad for the lowest possible prices

Technical economies
● Cost of flow production lines
● The use of the latest advanced equipment
● Investment to expensive equipment is justified when output is high so that costs can be
spread thinly

Financial Economies
● Cost advantages of raising finance: borrowed funds from the bank plus the interest rates
● Raising finance by going to public
● The average cost of raising finance will be lower for larger firms selling many millions of
dollars’ of shares
Marketing Economies
● The cost of employing an advertising agency can be spread out over a higher level of
sales for a big firm

Managerial Economies
● Hiring specialist functional managers who would operate more efficiently than general
manager
● The skills of specialist managers and the chance of them making fewer mistakes because
of their training is a potential economy for larger organisations