IGCSE BusinessBusiness ActivityAims and objectives

Goal : Something that an individual or organization tries to achieve. Business organizations have goals that are not always to make a profit.

Strategies : The course of action required to meet the objectives

Aim : What a company wants. Its a statement of purpose.It is found in the mission statement a written statement making clear toall stakeholders a firms overall aims and values. Enables stakeholdersto know why a company is doing what its doing)

Objective : What the company must achieve in order to meet the aimsAims vs. Objectives: Aims are a general statement of purpose Objectives are measurable targets. They have to be: Specific Measurable Achievable Relevant Time boundWhy set Objectives? Objectives give businesses a clearly defined target. Therefore thecompany is able to measure progress towards its stated aims Plans & strategies can then be made to achieve these targets Can motivate employeesExemplar Objectives: Growth Market share Wealth creation Survival Consumer satisfaction Customer loyalty Employee satisfaction Environmental Quality Productivity/EfficiencyLevels of Objectives1. Corporate objectives targets what the whole business is trying to achieve (often related to what the owners of the business want tofocus on e.g. profit, survival, growth, etc.)2. Departmental objectives objectives for specific functions within abusiness e.g. for marketing department; needs to be in line withcorporate objectivesPublic Sector Organizations: The objectives of public sector organizations will be different as theyare there not to make a massive profit but to serve the peopleObjectives will be to:1. Deliver a public service, not a profit2. Deliverquality service3. Breakeven so as to not go into a loss makingsituation4. Be efficient in its processes5. To provide an essential economic service for the nationConflicting Objectives: Often times 2 objectives will clash we call these conflicting objectives They often clash between key stakeholders (owners, managers, employees & customers) An example is that of Growth Vs. Profit for example, achieving highersales in the short term, probably by cutting prices, will lead to areduction in short term profits Another example is that of short term vs. long term for examplea business may decide to accept lower cash flows in the short termwhilst it invests in new products, plants or equipment A common example will be that of Environment Vs. Profits e.g. ifa company wants to reduce its pollution contribution, it will need tospend a heavy proportion of profits.Why do business objectives change over time? Business is evolving/changing Competitive environment is changing (possibly due to technology) Technology changes (being the main reason for the currentlyconstantly evolving global market) The market/customers are changing e.g. new products, like digitalcameras are replacing film camerasSummaryThere are three types of organisations covered: Not-for-profit Providing healthcare Providing education Providing community activities Private enterprise Making a profit Other secondary goals Public enterprise Running public services well Providing ferry and postal to rural communities Providing street lighting, police serviceTypes of OrganizationsThings to think about:1. Different types of businesses2. Advantages disadvantages of each3. Implications of the choice of business organization such as: Control of the business Profit distribution BureaucracyHow can the size of a business be measured?1. No. employees, no. outlets, revenues, profits, capital employed amount invested in business, market value Business size is relative to other companies and the market its inSole traders A sole trader is a business owned by 1 person but may have multiple employees Sole traders can often succeed:1. They can offer specialist services 2. Can cater and specialize to suit the needs of the local communityAdvantagesDisadvantages

Total control of businessUnlimited liability owner is personally liable for any debts which the business cannot pay for

Simple + easy to set up, little formal and complicated legal necessities. Also quicker to startupDifficult to raise finance

Quicker decision makingDifficult to specialize and enjoy economies of scale

Owner can keep all profitsProblem with continuity if owner retires or dies

Unlimited liability means that creditors may legally go after personal assets to regain their lost money. This means that the owners may have to sell personal assets

Sole trader partnership Spreads risk across more people Partner may bring money + resources to business along with new skills and ideas Increased credibility with customer and supplier

Partnership When ownership is shared between 2 20 people (accountancy firms may have more)Deed of Partnership Amount of capital each partner should provide How profits/losses should be shared Rules on how to take on new partnersAdvantagesDisadvantages

Responsibilities and decision making is sharedUnlimited liability owner is personally liable for any debts which the business cannot pay for

Continuity + support provided. Does not come to a stop for small thing like if the owner goes on holidayHave to share profits

Partners may bring expertise and resourcesDisputes over workloads/roles

More finance availableProblems if partners disagree on direction of business

Difficult businesses to run, partners need to trust each other

Less control of business

One partners wrong doings can affect all the rest

Limited Companies Companies are a separate legal person in the eyes of the law i.e. it is separate from its shareholders Has to register with the companies house Issued with a Certificate of Incorporation & Memorandum of Association (a document that describes what the company has been formed to do) & Articles of Association (internal rules of the company) In a limited company, shareholders own the company Companies employ directors to control the management of the business and do the day to day jobs These directors are often shareholders Directors are responsible to shareholders The reasons for hiring director can be that shareholders may not want to get involved in the day to day running of the business & also, directors may have special skills or experience

AdvantagesDisadvantages

Limited liability shareholders liability is restricted to the amount they have invested. They can only lose what theyve invested. Creditors can only recover money from existing assets of the business. They cannot claim assets (personal) to recover amounts owed by the company (as the company is a separate legal person in the eyes of the law)Expensive + time consuming to set up

Easier to raise finance as shares can be issued and sold (although not on the share market)Shares cannot be traded on the stock exchange therefore affecting ease of raising finance

Continuity is not an issue as the company itself lives for ever

Ability to specialize and enjoy economies of scale

Shares in a plc can be traded on the stock exchange whereas shares of a ltd cannot.LTD or PLC? Becoming a plc is all about making it easier to raise finance, for example shares in a ltd cannot be offered on the share market to the general public, also, it restricts availability of finance, especially if business wants to expand. Also, its generally easier to raise finance from banks and other sourcesAdvantagesDisadvantages

Limited liability shareholders liability is restricted to the amount they have invested. They can only lose what theyve invested. Creditors can only recover money from existing assets of the business. They cannot claim assets (personal) to recover amounts owed by the company (as they company is a separate legal person in the eyes of the law)Costly + complicated to set up

Very easy to raise capitalCertain info must be made public, even to competitors and customers

Continuity is not an issue as the company itself lives foreverIncreased threat of takeover

Able to exploit economies of scale due to their sizeGreater public scrutiny and profile (e.g. analyst reports and press reports)

Separation of ownership and control which means that the owners no longer make all the decisions

IPOS/Floatation When shares are first offered for sale A very expensive and complicated process Company is given a listing on the stock exchange Opportunity to raise substantial funds Also a chance for existing shareholders to cash in by selling their shares (e.g. a VC who may have invested earlier)Why buy shares?1. Dividends (a share of profits)2. Capital gains (by selling the shares)3. Control of company Shareholders liability is limitedWhat are the risks in investing? Company reduces or cancels its dividend payouts Value of shares fall below cost Company fails causing shareholder to lose all invested moneyFranchises A franchisor is a business that sells the right to another business (franchisee) to operate a franchise (an external company that runs the business and keeps the profits) Franchisor is the growth company who sells the rights of the business model and receives a % of revenue from each franchisee (royalty) Franchisor also provides support in marketing, training, finance and purchasing

Advantages for franchisorDisadvantages for franchisor

Less riskless control

Lower costsReputation risk

Less operationsNot as fast as M&As

Ideal for expansion of a business model

Local market awareness

Advantages for FranchiseeDisadvantages for Franchisee

Less risk as there is already a customer base and business modelLicensing costs

Reduced startup costsRoyalty payments

Support provided in training and marketingLess flexible

Small business but some benefits of large

MNCS: A business that operates across national boundaries One aspect of globalization is the growth of Multinational Corporations or MNCs.Benefits of MNCs There is usually huge capital investment in major economic activities. It is called Foreign Direct Investment (a flow on private capital from one country to another, normally a funding for business ventures) 2. The country enjoys varieties of products, services and facilities, brought to their door steps 3. There is creation of more jobs for the local populace 4. The nations pool of skills are best utilized and put to use effectively and efficiently 5. There is advancement in technology as these companies bring in state-of-the-art-technology for their businesses. Technology spillover 6. The demand for training and retraining and advancement in the peoples education becomes absolutely necessary. This will in turn help strengthen the economy of the nation 7. The living standard of the people is boosted 8. Friendliness between and among nations in trade i.e. it strengthens international relations 9. The balance of payments of nations in trade are improved 10. There is significant injection into the local economy in respect to investment 11. Best utilization of the countrys natural resources 12. They help in strengthening domestic competition 13. They are good source of technological expertise 14. Expansion of market in the host countryChallenges faced by MNCs1. There is usually acute shortage of manpower people with lack of managerial and technical skills2. The challenge of unfriendly business environment3. There is usually the problem of conflicting interest among the three parties the government, the MNC and the general public4. There may be huge cost of labour in the host country, at least to get the expatriate managers from home country or somewhere elsePossible Negative impacts of MNCs1. Size and power sometimes allow MNCs to manipulate situations to their own advantage. E.g. strategies to make only their home country earn and not the host country. Repatriation of profits.2. Labour exploitation and breaking international laws on child labour3. Sometimes, unskilled jobs which require no worthwhile training have been offered to local people, which does not improve the quality of the host countrys workforce4. Small businesses cannot compete in production and so are driven out of business5. Governments often feel it necessary to use grants, infrastructure development and tax concessions to attract multinationals. The weak negotiating power and position of many governments means that multinationals can sometimes pay less in tax compared to what they take from the government as help (either directly in grants and subsidies or indirectly through developments in the infrastructure they require)6. Poor health and safety or environmental standards in host countriesSummaryPositive Points:Negative Points:

MNCs and FDI bring capital, jobs and incomes, prompting developmentSome MNCs corner all the benefits for themselves

Exports or import reduction can help the trade positionForeign currency earnings can be repatriated as profits

Training and skill development can raise worker productivityLocal workers may only get low wage, unskilled jobs

Consumers can have better and cheaper products with more varietyLocal businesses might be unable to compete and forced to close

Governments can benefit from extra tax revenueConcessions and grants might outweigh any tax receipts

Ethical MNCs make a major contribution to developmentSelfish MNCs might hit and run leaving long term problems

Why become an MNC?1. More customers2. Economies of scale3. Entry to protected markets4. Reduced production costs5. Risk reductionFactors of ProductionLand: All of the natural resources needed to produce a good/serviceLabour : All of the physical and mental effort needed to produce a good/serviceCapital: All the manufactured resources used in the production process of something else e.g. machinery (Note: capital has 2 meanings, one is the above and the other is that capital is money/investment finance)Enterprise : The unique ability some people have in organizing factors of production (FoPs)Relationships between factors of production Availability & cost of factors Developed (e.g. minimum wage laws) and Undeveloped (no wage or labour laws/restrictions) Combination changes over time (e.g. as a country develops it will most likely use more capital than labour) Technology Labour is a FoP. Workers earn wages this is the price of their labour. Wages are determined by demand and supply. The number of workers employed is also determined by the level of demand and supply. Division of Labour in order to make labour more efficient, firms have spilt up the production process into small tasks. Production is increased, job specialization happens (which can be both, an advantage and a disadvantage).

Advantages of Division of Labour and WorkersDisadvantages of Division of Labour and Workers

Workers may be able to choose the task for which they are best suited. In this way they can even enjoy their work and become more skilled at the particular taskWorkers may find the work monotonous if it is simple and repetitive

Increased skill therefore productivity may be rewarded with an increase in wagesIf there is little training required to undertake simple tasks, unskilled labour can be paid low wages and exploited.

If paid on a piece rate basis, more specialization = more productivity & efficiency meaning they will receive higher wagesLack of job satisfaction

Less stress as the tasks a worker performs will be simpleThreat of unemployment if wokers are easily replaced by machines which can complete the tasks more efficiently

Fewer injuries as specialist machines and robots can perform dangerous tasks such as cutting and welding

Advantages of Division of Labour and FirmsDisadvantages of Division of Labour and Firms

Production will be increased, as time is saved when workers become more skilled at one taskBottlenecks can occur is one process is quicker than another

Economies of scaleIf the workers are dissatisfied at work, then industrial unrest can occur. This has the ability to reduce production

Less time + money needs to be spent on training labour as the tasks are simplerThe increased use of machines can lead to problems: The firm may have to borrow money to purchase the machines. Machines may break down Machines may become obsolete and in time will need to be replaced. Handling of machinery needs to be done by trained professionals

Machines can replace workers for some tasks. Machines can work 24/7/365, reduce wage bills, produce consistent quality and take over dangerous tasks

Advantages of Division of Labour and ConsumersDisadvantages of Division of Labour and Consumers

As productivity increases firms may pass a decrease in unit costs on to consumers at lower pricesStandardization of goods, lack of variety

The increased use of machinery may result in goods being produced with a consistent quality

Disadvantages of Division of Labour and the economyDisadvantages of Division of Labour and the economy

Prices may fall and this can: 1. Reduce & control inflation, 2. Make domestic goods more competitive in foreign marketsUnemployment may rise as machines replace workers

Increases in productivity may increase economic growth and the standards of living

Division of labour is usually done through the use of assembly linesAdvantages of being Labour intensiveDisadvantages of being labour intensive

Often intricate personal detail cannot be replicated by machinesExpensive, especially in countries where minimum wage laws exist

Not standardized varietyProne to disruption in production: 1. Sickness & health; 2. Stirkes

Production costs can be more easily controlled as labour size can be adjusted according to demand fluctuations of the marketExposed to wage increases

More employment in the economyNot standardized variety in quality

Advantages of being Capital intensiveDisadvantages of being capital intensive

More efficient & productiveProne to breakdowns

More production = more sales = more revenues = more profitsWorkers may feel demotivated as they may be layed off. This means lower production as lower morale

More competitiveTraining expenses need to train employees to use the technology

Very expensive implementation

Capital-intensive Capital refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service. Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost. These processes are more likely to be highly automated and to be used to produce on a large scale. Capital-intensive production is more likely to be associated with flow production (see below) but any kind of production might require expensive equipment. Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead. In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity utilisation). In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.Labour-intensive Labour refers to the people required to carry out a process in a business. Labour-intensive processes are those that require a relatively high level of labour compared to capital investment. These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale The costs of labour are: wages and other benefits, recruitment, training and so on. Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers. Long-term growth depends on being able to recruit sufficient suitable staff. Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.Sectors of industryThe sectors1. Primary Where all raw materials and natural resources are extracted. 1st stage of production process. Extraction through (examples): mining, fishing, forestry, agriculture, etc. (there is sometimes a conflict between renewable vs. non renewable resources) Also known as extractive industries2. Secondary Where all output from primary is processed into manufactured goods. These goods can be either consumer goods or producer goods. A consumer good is a good bought and used by a consumer such as a car. A producer good (aka capital good) is a good used in the production of another good e.g. steel Also known as manufacturing and construction industries3. Tertiary Production of a service rather than a good Also known as service industriesImportance of tertiary sector of industry 1. Can assist the first 2 stages in the production process e.g. logistics2. Can help the public or the state3. Services to public include stuff like hairdressing and leisure facilities4. Services to the industry include stuff like banking and insurance5. Services to the state can include stuff like education and healthInterdependence There is a interdependence between the 3 sectors. Rules of interdependence: Primary sector will not survive if there is no demand from secondary sector Secondary sector will not survive if there is no help from tertiary sector, as those are the people who will be selling the output from the secondary sector Tertiary sector will not survive if there is no production from primary and secondary sectors. As a country/economy develops more of the workforce migrates to the tertiary (higher) sector. E.g. in China there has been a steady migration of workers from agriculture industry to manufacturing industry As all the factories moved from Hong Kong to China, there has been a transition in the services economy.LocationFactors affecting location Land Labour Infrastructure & transportation network Raw materials Pull of the market Government policyImpact of the Internet Can reach customers without a physical presence No geographical limitations Both sales and customer service Faster/cheaper entry/exit to/from marketsInternational Considerations Taxes/tariffs Political stability Labour: availability, cost & skills Market potential Financial incentives Bureaucracy Corporate objectivesJudging Success Success can be measured against objectives (which have to be SMART for this reason) The measurement of different criteria measured against objectives size, turnover, shareholders, number of employees, consumer reaction/satisfaction.Key stakeholders Shareholders Directors Managers/management Employees Customers SuppliersWhy do companies fail?Small companiesLarge companies

Lack of business skillsManagement decisions e.g. wrong investments

Economic reasons (trade cycle)Economic reasons (trade cycle)

Lack of financeChanges in the market

Wrong understanding of the marketLoss of confidence by investors and creditors (e.g. a bank may refuse to pass a loan)

Human resource managementInternal OrganisationInternal organisation: The levels of management and division of responsibilities within an organisation.In an organization of any size or complexity, employees' responsibilities typically are defined by what they do, who they report to, and for managers, who reports to them. Over time these definitions are assigned to positions in the organization rather than to specific individuals. The relationships among these positions are illustrated graphically in an organizational chart.Types of Organisation StructureLine OrganisationIt is perhaps the oldest and the simplest organisational structure. In this kind of structure every manager exercise a direct authority over his subordinate who in turn directly reports to their superiors. There is a hierarchical arrangement of authority. Each department is self contained and works independently of other departments. Lines of authority are vertical i.e. from top to bottom. There are no staff specialists.

Advantages Simple to establish and operate Promotes prompt decision making. Easy to control as the managers have direct control over their subordinates. Communication is fast and easy as there is only vertical flow of communication.Disadvantages Lack of specialisation Managers might get overloaded with too many things to do. Failure of one manager to take proper decisions might affect the whole organisation.However, line structures are suitable for: small businesses where there are few subordinates organisations where there is largely of routine nature and methods of operations are simple.Functional OrganisationThe organisation is divided into a number of functional areas. This organisation has grouping of activities in accordance with the functions of an organisation such as production, marketing, finance, human resource and so on. The specialist in charge of a functional department has the authority over all other employees for his function.

Advantages Is logical and reflection of functions Follows principle of occupation specialisation Simplifies training Better control as the manger in charge of each functional department is usually an specialist.Disadvantages Overspecialisation and narrow viewpoints of key personnel can limit the organisation growth. Reduced coordination between functions. Conflicts between different functions could be detrimental for the organisation as a whole. Difficult for general managers to coordinate different departments.However, it is much suitable for large organisations where there is ample scope for specialisation. Once harmony and proper coordination among different functions is achieved, it could lead to sure success for an organisation.Line and Staff OrganisationIt is a combination of line and functional structures. In this organisation a structure, the authority flows in a vertical line and get the help of staff specialist who are in advisory. When the line executives need advice, information about any specific area, these staff specialists are consulted.For example Chief accountant has command authority over accountants and clerks in the accounts departments but he has only advisory relationship with other departments like production or sales.

Advantages Line managers are provided by expert advice by these specialists. Staff managers provide specialist advice which can improve quality of decisions in various departments.Disadvantages Line managers and staff managers might have conflicts on particular issues. Line and staff managers might not be clear as to what the actual area of operations is and what is expected of them. Co-ordination may be a problem. Staff personnel are not accountable for the results and thus may not take tasks seriously.However, Line and staff organisation is very suitable for large organisation.Project OrganisationThe project structure consists of a number of horizontal organisational units to complete projects of a long duration. A team of specialists from different areas is created for each project. Usually this team is managed by the project manager. The project staff is separate from and independent of the functional departments.Advantages Special attention can be provided to meet the complex demand of the project. It allows maximum use of specialist knowledge thus chances of failure are very less. Project staff works as a team towards common goal which results in high motivation level for its members.DisadvantagesAs the project staff consists of personnel from diverse fields, it might be quite challenging for the project manager to coordinate among them.Matrix Organisation Matrix organisation combines two structures functional departmentation and project structure. Functional department is a permanent feature of the matrix structure and retains authority for overall operation of the functional units. Project teams are created whenever specific projects require a high degree of technical skill and other resources for a temporary period. Project team form the horizontal chain and functional departments create a vertical chain of command. Members of a particular team are drawn from the functional departments and are placed under the direction of a project manager who has the overall responsibility of a particular project.

Advantage Is oriented towards end results. Professional identification is maintained Pinpoints product-profit responsibilityDisadvantages Conflict in organisation authority exists. Possibility of disunity of command exists Requires manager effective in human relationsMatrix organisations are used in industries with highly complex product systems for example, aerospace industry where project teams are created for specific space or weapon systems.ManagementPlanningPlanning is the core area of all the functions of management. It is the foundation upon which the other three areas should be build. Planning requires management to evaluate where the company is currently, and where it would like to be in the future. From there an appropriate course of action to attain the company's goals and objectives is determined and implemented.

The planning process is ongoing. There are uncontrollable, external factors that constantly affect a company both positively and negatively. Depending on the circumstances, these external factors may cause a company to adjust its course of action in accomplishing certain goals. This is referred to as strategic planning.

During strategic planning, management analyzes internal and external factors that do and may affect the company, as well as the objectives and goals. From there they determine the company's strengths, weaknesses, opportunities and threats. In order for management to do this effectively, it has to be realistic and comprehensive.

OrganizingGetting organized is the second function of management. Management must organize all its resources in order to implement the course of action it determined in the planning process. Through the process of getting organized, management will determine the internal organizational structure; establish and maintain relationships, as well as allocate necessary resources.

In determining the internal structure, management must look at the different divisions or departments, the coordination of staff, and what is the best way to handle the necessary tasks and disbursement of information within the company. Management will then divide up the work that needs to be done, determine appropriate departments, and delegate authority and responsibilities.

DirectingThe third function of management is directing. Through directing, management is able to influence and oversee the behavior of the staff in achieving the company's goals, as well as assisting them in accomplishing their own personal or career goals. This influence can be gained through motivation, communication, department dynamics, and department leadership.

Employees that are highly motivated generally go above and beyond in their job performance, thereby playing a vital role in the company achieving its goals. For this reason, managers tend to put a lot of focus on motivating their employees. They come up with reward and incentive programs based on job performance and geared toward the employees' needs.

Effective communication is vital in maintaining a productive working environment, building positive interpersonal relationships, and problem solving. Understanding the communication process and working on areas that need improvement help managers to become more effective communicators. The best way to find areas that need improvement is to periodically ask themselves and others how well they are doing.

ControllingControlling is the last of the four functions of management. It involves establishing performance standards based on the company's objectives, and evaluating and reporting actual job performance. Once management has done both of these things, it should compare the two to determine any necessary corrective or preventive action.

Management should not lower standards in an effort to solve performance problems. Rather they should directly address the employee or department having the problem. Conversely, if limited resources or other external factors prohibit standards from being attained, management should lower standards as needed.

The control process, as with the other three, is ongoing. Through controlling, management is able to identify any potential problems and take the necessary preventative measures. Management is also able to identify any developing problems that need to be addressed through corrective action.

In order for management to be considered successful, it must attain the goals and objectives of the organization. This requires creative problem solving in each of the four functions of management. More so, success requires that management be both effective and efficient. Therefore, it needs to not only accomplish those goals and objectives, but do it in a way that the cost of accomplishment is viable for the company. Short-term The recruitment and selection processRecruitment Involves attracting the right standard of applicants to apply for vacancies Recruiting may be internal or external Internal recruiting means employing someone already working for the organization: this may mean promotion External recruitment involves appointing someone from outside the organization The table below shows the advantages of bothAdvantages of internal recruitmentAdvantages of external recruitment

There is less risk because the employer already knows the person and their capabilitiesNew ideas are brought into the organization from outside

The cost of advertising is saved, so the recruitment process is cheaper. (In some countries and organisations, however, equal opportunities legislation means that all positions have to be advertised.Advertising externally may reach more widely into the business community (e.g. a teacher might be attracted to an educational publishing company and bring useful experience and knowledge to the job)

The opportunity for promotion within the organization encourages people to work hardInternal jealousies are avoided from promotion

Induction costs are saved.

Recruitment processThe typical stages in the recruitment process are as follows1. Identify a job vacancy exists2. Draw up a job specification Once a vacancy arises the human resource manager will first identify and record the responsibilities and tasks which are related to the job. After analysing the responsibilities and tasks they are noted down which becomes the Job description for the job. It includes: A job title Department of the business in which the new employee would work Details of the tasks to be performed Responsibilities involved Place in the hierarchical structure Methods of assessing the performance3. Draw up a person specification On the basis of Job description, a job specification is made. It is a document which outlines the requirements, qualifications and qualities, skills and knowledge required for the job. 4. Advertise the post Can be advertised internally (on the company notice board or newsletter) Can be advertised externally in a newspaper or magazine. Advertisement will usually contain the elements of a person specification with additional information like the name and profile of the company, date and time of interview, address of the company and the contact person etc.5. Create a shortlist Applications most near to the job specification will be called for an interview Those who do not qualify will be rejected6. Interview The shortlisted candidates will be called for an interview to verify their qualifications, personal qualities and aptitude for the job. May involve a face to face discussion between the interviewer and interviewee. The firm may also conduct skill test, aptitude tests or personality test if it deems fit so.7. Appoint the most suitable candidate The candidate who scores the maximum in the interview will be selected for the job and given an appointment letter and contractThe job descriptionWhenever a business recruits, it is essential to set out a clear description of what the job entailsTitle of the jobIndication of what the job involves and the level of responsibility (e.g. sales manager, South East Asia)

Department and location of the jobOrganisational department and its location (e.g. marketing and sales department, Beijing, China)

General terms of what is involved in carrying out the jobIndication of what is involved in the post (Many job vacancies describe the job in fairly general terms, particularly if these might change over time)

Responsible to whomWho the employee will report to, their line manager

Responsible for whom Other employees for whom the employee will be responsible and manage

Other responsibilitiesResources for which the employee will be responsible and manage

Scope of the postSets out the level of the post (e.g. managerial)

Education and qualificationsThe level of education required to carry out the post

Name of compiler and approver and date of issueThe person who designed the job description and the date on which the description was written.

Different media for advertising jobs Websites can target local, national and international job seekers Newspapers and magazines are useful for targeting applicants. National newspapers often advertise certain types of jobs on particular days. Magazines are often targeted at special interest groups e.g. accountants or marketers who may be looking for jobs Local radio can attract local recruits, particularly in urban areas Vacancy boards/noticeboards in prominent locations such as supermarkets are useful for recruitment Other suitable media include adverts on the sides of trains, buses and in bus and train stations TrainingTraining involves improving the skills, knowledge and attitudes of employees so as to become more efficient and productive. There are two main types of training: on-the-job or off-the-job. On-the-job is when a worker gets training by watching a more experienced worker doing the job. It is on-the-job training common for unskilled and semi-skilled jobs. Thus the worker gets trained while he is performing his regular duties. Off-the-job is when a worker goes away from the place of work to attend a special course. The training can be in the form of a seminar, workshop or a college course. Off the job training is usually conducted for managerial level employees.The main purposes of training Induction Introduces an employee to a new job and to the company and/or the workplace It will usually include an overview of the company There will be information specific to certain industries Getting to know other people and being introduced to company procedures Understanding the job requirements Initial training should focus on making sure that an employee is able to fulfill the basic requirements of the job Development of job skills Specialist skills will need to be developed to enable an employee to do job well These might be interacting with customers or using important IT applications Broadening knowledge of the business The more trainees know about the wider activities of the business and the nature of its work, the more they will be able to help the organization meet it objectives Changing attitudes and skills Organisations frequently have to make changes Training needs to be designed to help individuals adapt to new attitudes which move the organization forwardMotivation and RewardsPeople work for a number of reasons. Most people work because they need to earn money to survive, while others work voluntarily for other reasons.Motivationis the reason why people work, and itdrivesthem to work better. Therefore, managers try to find out what motivate workers and use them to encourage workers to workmore efficiency. This results in higherproductivity, increasedoutput, and ultimately higherprofits. Nowadays, machinery is more common in businesses which results in increased productivity as well. However, the amount that a well-motivated workforce can produce must still be recognized, since employees are a firms greatest assets.Importance of motivation in a businessA positive motivation philosophy and practice should improve productivity, quality, and service. Motivation helps the business: To achieve its set goals and targets Improves efficiency and productivity Reduces wastage lower level of staff turnover which leads to lower recruitment and training costs Lower rate of absenteeism Better quality of products which improves the business image in the long runTypes of motivators There are three ways to motivate a workforce: financial motivators non-financial motivators ways to increase job satisfactionFinancial rewardsPay may be the basic reason why people work, but different kinds of pay can motivate people differently. Here are the most common methods of payment:

WagesWages are paidevery week, incashor straight into the bank account, so that the employee does not have to wait long for his/her money. People tend to pay wages tomanual workers. Since wages are paid weekly, they must be calculated every week which takes time and money.Wages clerksare paid to do this task. Workers getextra payfor theovertimethat they do.There are some ways that wages could be calculated:

Time rateTime rate is payment accordingto how manyhoursan employee has worked. It is used in businesses where it is difficult to measure the output of a worker. Pros: Easy to calculate the wage of the employee. Atime-sheetmust be filled out by the Accounts department to calculate the wage. Cons: Both good and bad workers get paid the same wages. Therefore, more supervisorsare needed to maintain good productivity. Aclocking-in systemis needed to know how many hours an employee has done.

Here is an example of a wage slip and time-sheet:

They show: Basic pay + Overtime = Gross Pay Gross pay - Deductions = Net PayDeductionsinclude: Taxes Pension Union fees National insurance: entitles the payee to short-termunemployment benefits,sickness benefitsandstate pension.Piece ratePiece rates are paid depending onhow many unitsthey have produced. There is usually a base pay (minimum wage)and the piece rate is calculated as a bonus on how many units were created. Piece rates are found in businesses where it is possible to measure workers productivity. Pros Encourages workers to workfasterand producemore goods. Cons Workers will oftenneglect quality, and businesses will need aquality control systemwhich isexpensive. Workers whofocusonqualitywillearn less.Tensionis caused when some workersearn morethan others. Ifmachinery breaks down, employees earn less. That is why there is aguaranteedminimum pay.SalariesSalaries are paidmonthly, and normally straight into thebank account. They are usually forwhite collar workers. A salary is counted as anamount per yearthat is divided into12 monthly accounts. Youdo notusually receiveovertime. Managers only need to pay their workers once a month, and since the amount is transferred by the bank, the manager loses much less time and money calculate salary.

Salaries are usually a standard rate, but otherrewardscould be given to employees: Commission Apercentageis paid, usually to sales staff, depending on thevalueofgoodsthey have sold. Workers are encouraged to sell more. However, they could persuade customers to buy products they don'r really want, making the company look bad. Just like the piece rate, in a bad month where there are little sales, worker's pay will fall. Profit sharing Employees receive apercentageof theprofitsmade. However, they will get nothing if the business doesn't make a profit. This is often used in the service sector, where it is hard to find an employees contribution to the company. Bonus Alump sumpaid to employees who have done well. It is usually paid at the end of the year or before holidays. However, this could cause jealousy between workers. Giving bonuses to ateamworks better. Performance related pay Employee pay is linked to the effectivenessof their work. It is often used in organisations where it is hard to measure productivity. It uses the system ofappraisal: employees are observed and their colleagues are interviewed to determine their effectiveness. Afterwards, the immediate superior of the employee has a meeting with them to discuss theireffectiveness. Share ownership Employees receive somesharesfrom the company. They will either benefit fromdividendsorsellthe shares when their pricehasrisen. They will be moremotivatedbecause they feel like apartof the company.Motivating factors - non-financial motivatorsThere are other factors that motivate people in a business, and they are often called perksorfringe benefits. They may be having freeaccommodation, free car, etc... However, when you look at it, it is just money in different forms. Here is a list of these motivators: Children's education. Discounts on company products. Free Healthcare. Company vehicle. Free accommodation. Share options. Expense accounts. Pension. Free holidays.Job satisfactionEmployees will become more motivated byenjoyingthe job they do. Job satisfaction can come in different ways. However, there are somefactorsthatdemotivate employees if they are not satisfied, and must be satisfied before the motivators can take effect. Here are some things that make workers' jobs satisfying: Pay. Promotion. working conditions. Fringe benefits. Management Working hours. The nature of the work itself. Colleagues, etc...Herzberg and Maslow stresses that things such asresponsibilityrecognitionis also crucialto provide job satisfaction. Letting workers contribute to the job would also help, making jobs less boring and more creative. Here are some policies to increase job satisfaction: Job rotation Workers in aproduction linecan now change jobs with each other and making their jobs not so boring. It helpstrainthe employee in different aspects of their jobs so that they cancoverfor other employees if they do not show up. Job enlargement Adding tasks of asimilar levelto a worker's job. Job enlargement simply gives more varietyto employees' work which makes it more enjoyable. Job enrichment Adding tasks of ahigher levelto a worker's job. Workersmay needtraining, but they will be taking a step closer to theirpotential. Workers become more committedto their job which gives them more satisfactionAutonomous work groups or teamworking:This is whengroupof workers are giventotal responsibilityto organise themselves and perform a task. This makes the employees feel moreimportant, as well as giving them a sense ofbelongingwhen they are part of a team. If they organise themselves differently every time, the team could getjob enlargementand job enrichmenttoo. LeadershipStudies have shown that leadership has a great impact on worker's motivation. Good managers haveleadership skillsthatinspiretheir workers to work better, as well as directing them with a commongoal. Managers use many styles of leadership, and they can be summarised into 3 main styles:

Autocratic leadership: The managercontrols all aspectsof their subordinates'work. They keep themselvesseparatefrom employees. Employees are expected to obey everycommandandcannot contributeto decisions. Communication is onlytop-down.Laissez-faire leadership: Objectivesare shown to employees,but the task iscompletely delegatedto them. Communicationcan bedifficultsinceclear instructionsare not given. The manager has alimited rolein this type of leadership.Democratic leadership: The managerdiscussestasks with his employees before making decisions. Communication will betwo-way, both top-down and bottom-up.Here is a diagram to summarise the leadership styles:

The style of leadership used can vary depending on situations where they are the most effective.

Formal and informal groupsAformal groupis anofficialgroup that is formed to do a specific task in an organisation. Aninformal groupis a group of people which are formed independentlyby themselves. They are not official, but the people in the group have acommon interestorcause. Both of these groups are needed in business, and let's see why in this example. e.g. a school might create a football team (formal group) but the players need to bond together to play effectively (informal group).

Formal groups in businessDepartmentswithing a business are good examples of formal groups. From time to time different groups might be set up to cope with different problems or do different tasks. Sometimes people from different departments could come together in a group to do ateam project.

Informal groups in businessThere are can be many informal groups in a business that can increase the motivation of workers because they have a true sense ofbelonging.e.g. There is a group of factory workers who are interested in basketball, and they form an informal group, as a result, when they get back into their formal group they are likely to co-ordinate better with each other.

There are other scenarios where two departmentsmergeto become one, making them one formal group. However, the people from these former departments still see themselves asseparatefrom each other. These two groups of people will refuse to co-operate until they are alsomergedinto aninformal group. Therefore, informal groups should be handled carefully in business to yield the best results.

Regular meetings, free holidays, sporting events and such things could be organised to create informal groups and use them in a more positive way to avoid them getting into the way of business activity.Motivation theoriesPeople work very hard when they are working for themselves. When they work for other people, less so. Managers have been looking into what makes employees contribute their fullest to the company and these studies have resulted four main theories of motivation.F.W.TaylorTheory: Moneyis the main motivator. If employees arepaid more, theywork more. Work is broken down into simple processes, andmore moneyis paid which will increase thelevelofproductivityan employee will achieve. Theextra payislessthan theincreased productivity.Cons: Workers are seen rather likemachines, and this theory does not take into accountnon-financial motivators. Even if you pay more, there isno guaranteeof a productivity rise. It isdifficulttomeasurean employees output.Maslow

Maslow created what is know as thehierarchy of needs.In this diagram, there are 5 different types of motivation: Physiological needs:basic requirements for survival. Security needs:the need to by physically safe. Social needs:the need to belong and have good relationships with co-workers. Esteem needs:the need for self-respect and to be respected by others. Self-actualisation needs:the need to reach your full potential and be promoted.Diagram

Businesses realise that the morelevels of motivationare available to workers, the harder they will work. Maslow also suggest that each level of motivationmustbe achieved beforegoing to thenext level. Once one level of motivation is met, more of that willno longermotivate the employee.

Cons: Some levels arenot presentin some jobs. Some rewards belong tomore than one levelon others. Managersneedtoidentifythe levels of motivation in any job before using it to motivate employees.HerzbergTo Herzberg, humans havehygiene factors, or basic animal needs of humans. We also havemotivational factors/motivators, that are required for the human to grow psychologically.

Hygiene factors: Status. Security. Working conditions. Company policies and administration. Relationship with supervisor. Relationship with subordinates. Salary.Motivational factors: Achievement. Recognition. Personal growth/development. Advancement/promotion. Job satisfaction.To Herzberg, if the hygiene factors arenot satisfied, they will act asdemotivators. They arenot motivators, since the motivating effect quickly wears off after they have been satisfied. True motivators are Herzberg's motivational factors.

McGregorMcGregor splits his theory into what managers believe. One type believes intheory X, while the other type believes intheory Y. Here is the table:

Here are some differences in how aX managerwill work and how anY manager will work: X managers believe that people are naturally lazy, and has to be pushed withexternal factorsto work harder. (e.g. higher pay). Y managers believe that people want to do a good days work but need a goodenvironmentto do the work. A better environment is aninternal factor. X managers will try to provideincentivesandsupervisionfor employees to work hard. Y managers will try to provide afavourable environmentso that employees can enjoy their work.Theory's likeTaylor's theoryare X theories, while others likeMcGregor's theory are Y theories. People may say that money is the main motivator, but studies have shown that many people leave jobs because other motivational factors are not available to them. Ending employmentKey ideas A contract of employment can be ended by either party There are reasons for employees ending employment: Might be retiring Might be bored or undervalued Theyve found a better job May be moving out of the area Conflict in the workplace Medical conditions Personal issuesLabour Turnover This is used to measure how many people leave a business over the period of a year Businesses will want this to be low as possible because it costs money and time to: Advertise Recruit workers Train new workersWhy reduce workforce?All are examples of redundancy.

New technology can now do their job ATMs replacing bank tellers Factory machinery replacing factory workers Costs need to be reduced De-layering Demand for their product is low Bookstores Video storesHow can the workforce be reduced?Businesses can reduce the number of workers by: Offering early retirement Expensive since payments will have to be made Not replacing people who leave Known as natural wastage Making new jobs art-time rather than full-time Reduces the number of hours that must be paid for Asking for volunteers to be made redundant Still have to pay redundancy moneyDismissal Occurs when an employer terminates a workers employment contract Often known as giving them the sack Many reasons for dismissal May be unfair or unfair Fair dismissal may include: Poor timekeeping Stealing company property Bullying and harassing other workers Criminal damage to workplace Not declaring a criminal conviction e.g. the worker lied on their application form Unfair dismissal may include: Selecting people for redundancy because they are in a trade union Sacking a female because she is pregnant Sacking a worker for incompetence when no training has been given Dismissing someone because of their gender or race If a firm is found to have dismissed someone unfairly, they can be heavily fined. If you have been unfairly dismissed, you can seek a lawyer and go to court to have a hearing. If found that you have been unfairly dismissed, you will be compensated. Can be categorized as: Misconduct Behavior at work may result in a verbal warning or written warning Gross misconduct Like a criminal conviction e.g. coming into work drunk or high. Exact legal requirements vary from country to country A worker may prove that the true cause for dismissal was, for example, some form of prejudice, which would be unfair1Redundancy Occurs when a job is no longer neededAccounting and FinanceSources of FinanceInternal sources of finance: The money raised from inside the business External sources of finance: The money raised from outside the business

A business might have access to various sources of financing its needs. These sources of finance can be classified as internal and external:Internal Sales of assets Business might sell off old, obsolete assets which are no longer used by the business to raise additional cash for the business.

AdvantageDisadvantage

Better use of capitalA new business might not have any old or obsolete assets

Retained profits Businesses (especially limited companies) usually keep some part of the profit every year for future use. This is also known as ploughed back profit. Over a period of time it can total up to a huge amount which can be used for financing the business.

AdvantageDisadvantage

Does not increase liabilitiesNo need to pay interestNot available to new businesses

Reduction in working capital Cutting the stock levels can also help the business to raise additional cash.

AdvantageDisadvantage

Costs related to storage of stock is reducedMay lead to shortage of stock and loss of sales

ExternalShort Term Bank overdraft Bank overdraft is a facility given by banks to its business customers, people having current accounts. Through this facility the customers can overdraw their accounts to a greater value than the balance in the account. To overdrawn amount is agreed in advance with the bank manager. The bank assigns a limit to overdraw from the account and the business can meet its short term liabilities by writing cheques to the extent of limit allowed.Advantage Disadvantage

No need for collaterals or security.

More flexible and the overdraft amount can be adjusted every month according to needs.Interest rates are usually variable and higher than bank loans.Cash flow problems can arise if the bank asks for the overdraft to be repaid at a short notice.

Trade Credit Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry

By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance which can be used for more important expenditures.

Advantage Disadvantage

No interest has to be paid.The business may not get cash discounts.

Factoring of debts It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash.

Medium Term Hire purchase It involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in installments for the period of time agreed upon. The business has to pay an interest on these installments. Leasing Leasing involves using an asset, but the ownership does not pass to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets. The business does not need to purchase the asset.

Advantage Disadvantage

The business can benefit from the asset without purchasing it.

Usually the maintenance of the asset is done by the leasing firm.The total cost of leasing may end up higher than the purchasing of asset

Medium term bank loan A bank loan for 1 year to 5 years.

Long term Long term bank loan borrowing from bank for a limited period of time. The business has to pay an interest on the borrowing. This interest may be fixed or variable. Businesses taking loan will often have to provide security or collateral for the loan.

Issue of share It is a permanent source of finance but only available to limited companies. Public limited companies can sell further shares up to the limit of their authorized share capital. Private limited companies can sell further shares to existing shareholders.

Advantage Disadvantage

Permanent source of capital.In case of ordinary shares business will only pay dividends if there is a profit.Dividends have to be paid to the shareholders.

Debentures A debenture is defined as a certificate of acceptance of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures. It is issued for a long periods of time. Debentures are generally freely transferrable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.

Sales and lease back this involves a firm selling its assets or property to an investment company and then leasing it back over a long period of time. The business thus can use the asset without purchasing it and can use the revenue earned from its sale for other purposes.Choosing the right source of financeFactors affecting the choice of financeWith so many sources of finance to choose from, a business has to carefully select the appropriate one. The following points may be considered while selecting the most appropriate source of finance.Type of expenditure: Whether the finance is needed for capital expenditure or revenue expenditure. Issue of shares will be more appropriate for limited businesses who want to expand rapidly. If it is a cash flow problem then bank overdraft may be more appropriate. How long the business needs the finance? How much amount is needed? What is the status and size of the business? A small business might not be able to raise additional capital through issue of shares. What is the capital composition of the business? Highly geared businesses (i.e. with more debt capital and less equity) would rather go in for equity financing. What will bank see before lending money? When applying for loan the bank manager or your creditor might be interested in knowing the status of your business. They will review your Balance sheet: to see how much you own and how much you owe to others. Profit and loss account: to see the profitability of your business. Cash flow forecast: Predictions about how much and from where cash will come in and go out.Budgets and CashflowBudgets A budget is a document that translates plans into money - money that will need to be spent to get your planned activities done (expenditure) and money that will need to be generated to cover the costs of getting the work done (income). It is an estimate, or informed guess, about what you will need in monetary terms to do your work.Different budgeting techniquesThe two main techniques for budgeting areincremental budgetingandzero based budgeting.Incremental budgets Incremental budgets are budgets in which the figures are based on those of the actual expenditure for the previous year, with a percentage added for an inflationary increase for the next year. This is an easy method that saves time but it is the lazy way and is often inaccurate. This budgeting technique is only suitable for organisations where each year is very similar to the previous one in terms of activities. Very few dynamic organisations or projects are so stable that this budgeting technique really works for them.Zero based budgets In zero based budgets, past figures are not used as the starting point. The budgeting process starts from scratch with the proposed activities for the year. The result is a more detailed and accurate budget, but it takes more time and energy to prepare a budget in this way. This technique is essential for new organisations and projects, but it is also probably the best route to go in a dynamic organisation that is proactive in taking on new challenges.Limitations of Budgeting Budgeting is atime consuming and costly job. The development of budget includes many repetitive steps before the budget is finally approved. Compared with its costs, budgeting provideslittle valuable, reliable and relevant information. Budgets arebased on assumptionsthat often turn out to be inaccurate. Budgets also cause greatdeal of waste and behavioral problems. Peoples main goal is to meet the budgets, so they always try to negotiate to get lower targets with lower sales and higher costs, which are well known as padding the budgets.

A sample budget statement

AdvantagesDisadvantages

It provides targetsIf the target is unrealistic, it can be demotivating

Involving staff motivates themIf staff are not involved, demotivation

You can use variances to highlight weaknessesIf not flexible, the business could lose business opportunities

The coordination between departments is improvedConflicts may arise if, especially between managers, if targets are not met, hence leading to a reduction in the level of morale

Spending is controlledLarge amounts of money may be dangerous in the wrong hands

Ability to identify problems early. This means that you can do enough preparation in advance and prevent danger e.g. apply for an overdraft facility a month in advance

Cash flow forecastCash inflowCash inflow means all the sources from which cash comes into the business over a period of time.

Cash inflowcan result from Cash sales Payment received from debtors Investment by owner Loans and overdraftsCash outflowCash outflowmeans all the sources from which cash goes out of the business over a period of time.

Cash outflow can result from Cash purchases Payment of wages and salaries to staff Purchase of fixed assets Payments to Creditors Repaying loans Miscellaneous expenses.Cash flow forecastsCash flow forecast is a budget or estimate which identifies the anticipated income and expenditure and the time when it is likely to take place, usually on a month by month basis.Purpose of Cash flow forecastThe primary purpose of the cash flow budget is to predict the sources and uses of cash and to identify your cash position for a specific time period (daily, weekly, monthly etc.).Cash flow problemsSometimes a profitable business might face cash flow problems. It may be due to There might be a sudden fall in sales whereas the expenses may not come down in the same proportion. Any unforeseen expenses may lead to high cash outflow as compared to cash inflow in that particular period. Debtors payback period is too long.

Main causes of a liquidity crisis0. Slow or no payment from customers1. Sales not as high as predicted2. Costs higher than predicted3. Unexpected costs arise e.g. something breaks and maintenance is needed4. Interest rates are higher than predicted (variable rates)

A sample CFF

Advantages of a cash flow statement1. It shows the actual cash position available with the company between the two balance sheet dates which funds flow and profit and loss account are unable to show and therefore it is important to make a cash flow report if you want to know about the liquidity position of the company.2. It helps the company in making accurate projections regarding the future liquidity position of the company and hence arrange for any shortfall in money by making arrangements in advance and if there is excess than it can help the company in earning extra return out if idle funds.3. It acts like a filter and is used by many analyst and investors to judge whether company has prepared the financial statements properly or not because if there is any discrepancy in the cash position as shown by balance sheet with cash flow statement than it means that statements are incorrect.Disadvantages of a cash flow forecast1. Since it shows only cash position, it is not possible to arrive at actual profit and loss of the company by just looking at this statement alone.2. In isolation this is of no use and it requires other financial statements like balance sheet, profit and loss etc, and therefore limiting its useImproving cash flowSpeed up cash coming in the company by: Increasing sales Taking an overdraft or short term loan Payment terms for customers Increasing owners capitalSlow down cash going out of the business by: Lease vs. buying equipment Renting vs. owning buildings and the premises within which the company works Reduce investment Trade credit with suppliers Reducing owners withdrawalsExam questionHow can budgeting aid decision making (3 marks)?

Helps the owners of a business take appropriate measures beforehand to prevent a worsening of a situation (1 mark) Targets can be made after to motivate staff and so decisions about the future can be made (1 mark) It can allow a business to publish accurate decisions on expenditure (1 mark)Costs and BreakevenFixed cost: All costs which do not change with the change in output. Example rent, interest charges.Variable cost: All costs which change with the change in output. Example materials, fuel and labour cost.Total cost= fixed cost + variable costRevenue: Income from sales of goods and services (Quantity sold X Price)Breakeven point: Level of output where the sales revenue is equal to the total cost. That level of output where there is no profit or loss. If a business is unable to reach this level of output it will suffer a loss from this product. Any output in excess of break even generates profit for the company.Margin of Safety: The horizontal distance between the breakeven level of output and the current level of output is known as margin of safety.

The Break-even chartThese are graphs which show how costs and revenues of a business change with a change in sales. They show the level of sales the business must make in order to break even.

Method of plotting Break even chart Calculate fixed cost, total cost and Sales at different levels of output in a table Plot the Sales on X axis, Output on Y axis Plot fixed cost from the table Plot total cost from the table Plot sales from the table The point at which the sales (total revenue TR) line crosses the total cost (TC) line is the breakeven point. Breakeven point can be expressed in Output as well as in Value.Uses of break-even analysis Measure profit and losses at different levels of production and sales. To predict the effect of changes in price of sales. To analysis the relationship between fixed cost and variable cost. To predict the effect on profitability if changes in cost and efficiency.Criticism of break-even analysis Fixed cost is represented as a straight line but in actual fixed costs is likely to change at different levels of output. A stepped line may represent fixed cost more accurately. Assumes that sales prices are constant at all levels of output. Assumes production and sales are the same. Breakeven charts may be time consuming to prepare. It can only apply to a single product or single mix of productsBreakeven point: Calculating method

This method involves calculating break even output without the use of graphs. Calculate the Contribution per unit.Contribution is the excess of price over variable costs. Any money received over the variable costs makes a contribution towards the fixed costs.Contribution per unit = Selling price per unit Variable cost per unitDivide Fixed Cost by Contribution per unit(Fixed cost/contribution per unit)This will give you the break even output.Break-even in revenue(Break even (in units) X price per unit

Financial statements

Trading Account: The trading account reveals the gross profit of the business.Gross profit: The difference between sales revenue and the direct cost of the goods sold.Cost of goods sold: The cost of purchasing the goods from suppliers (in case of retailing business) or the cost of producing the goods that are sold.

Profit and loss accountThis account shows the net profit of the business.Net profit = (Gross Profit Expenses and Overheads) + Income from non trading activitiesAppropriation account is that part of the profit and loss account which shows how the profit after tax is distributed. This profit can be distributed as dividends or can be kept in the company as retained profits.

Balance SheetBalance sheet shows the value of a businesss assets and liabilities on a particular date.It records what the firm owns (assets), what it owes (liabilities), what it is owed and how it is financed (owners equity).

Balance Sheet Terms Assets: all those items of value which are owned by the business. Assets are further categorized as fixed assets and current assets.Fixed Assets: All those assets which are owned by the business for a period of more than one year. For example, Vehicle, machinery, land, building.Current Assets: all those assets which are owned by the business for a short period of time. Example Cash, stock, debtors.Liabilities: All items owed by the business. Liabilities can be classified in two types:Long term liabilities: These are long term borrowings which are owed by the business for more than one year. Examples include long term bank loans.Current liabilities: These are defined as obligations or debts of the business which have to be settled within one year. Example includes Creditors and bank overdrafts, stock.Working Capital: Also known as net current assets= Current assets - Current liabilities Working capital is needed for the day to day functioning of the business. A shortage of working capital can lead to cash flow problems.Net assets: Fixed assets + Working CapitalShareholders fund: The total sum of money invested into the business by the shareholders. Capital employed: It is the total long term liabilities and shareholders funds which have been used to pay for the net assets of the business.Capital employed = Net assetsAccounting EquationAssets= Liabilities + Shareholders funds

Ratios and PerformanceProfitability ratiosThese ratios measure the profit in relation to sales or capital employed.Gross profit marginGross Profit Margin shows the relationship of gross profit and sales turnover. GrossProfit Margin=Gross ProfitX 100

Sales turnover

A lower ratio may be the result of the following factors Decrease in selling price of goods sold Increase in cost of goods sold Over valuation of opening stock or under valuation of closing stockNet profit marginIt is an index of efficiency and profitability of a business. NetProfit Margin=Net ProfitX 100

Sales turnover

Mark up cost refers to profit expressed as a percentage of cost price.Mark Up=Gross ProfitX 100

Cost of goods sold

Rate of return on Capital (ROCE)It shows the return on the investment made by the owner. Return on Capital employed=Net ProfitX 100

Capital

Efficiency ratiosThese ratios state how efficiently certain areas of the business are performing.Stock turnover ratioIt indicates the number of times in a year the average stock can be sold off. The more times the stock is sold the more efficient the business.Stock turnover ratio=Cost of goods sold

Average stock at cost price

Average Stock is calculated as (Opening stock + Closing stock)/2Asset turnover ratio Asset turnover is a measure of how effectively the assets are being used to generate sales. It is one of the ratios that would be considered when interpreting the results of profitability ratio analyses like ROCE.Asset turnover ratio=Sales turnover

Total assets-current liabilities

If the asset turnover is high than its competitors, it shows as an over investment in assets. However, a new firm may have a higher asset turnover ratio than its competitors as the assets are newer and have a higher value. Moreover, some firms may use a lower rate of depreciation than its competitors.In some cases, firms may purchase assets whereas its competitors firms are leasing assets.Trade debtor collection period (Debtors days)This ratio indicates how efficient the company is at controlling its debtors.Debtors days=Total DebtorsX 360

Total Sales turnover

Trade creditor payment period (Creditors Days)This ratio indicates how the company uses short term financing to fund its activities.Creditors days=Total CreditorsX 360

Cost of sales

Both these ratios are useful for intra-firm comparison.Liquidity ratiosIt measures the availability of cash and other liquid assets to meet the current liabilities of the firm.Current Ratio The current ratio compares total current assets to total current liabilities and is intended to indicate whether there are sufficient short-term assets to meet the short-term liabilities.Current assets: Current liabilitiesThe ratio when calculated may be expressed as either a ratio or 1, with current liabilities being set to 1, or as number of times, representing the relative size of the amount of total current assets compared with total current liabilities.A ratio of 2:1 or current assets as 2 times is considered to be healthy for a business.Acid test ratioIt is quite similar to Current ratio. The only difference in the items involved between the two ratios is that the acid test ratio or quick ratio does not include stock.Acid Test ratio=Current assets Stock

Current liabilities

An acid test ratio 1:1 is considered as healthy. If it is below 1 it suggest the business has insufficient liquid assets to meet their short term liabilities.Limitations of Ratio Analysis Differences in definitions Comparisons are made difficult due to differences in definition of various financial terms.

Ratio Analysis can be used for: Inter-firm Comparisons Comparing the performance of one firm with another firm in the same industry. Intra-firm Comparisons Comparing the performance of a firm with previous years performance.MarketingThe MarketUsually it is not economical for a company to focus its marketing effort to the whole market. The reason behind is that some people might be interested in buying your product and some might not be, so you are wasting your time and effort on those people who dont want to buy your products.Bases of Segmentation Age Products for kids, teens, old people. Income different income levels of different people Lifestyle types of activities people do to spend their time. Region cold, hot, wet and dry places. Gender male or female. Use of the product: Car may be used by a individual for private purpose or may be used by somebody else as a taxi.The Marketing MixThe 'marketing mix' is a set of controllable, tactical marketing tools that work together to achieve company's objectives. Elements of the marketing mix are often referred to as 'the four Ps': Product - A tangible object or an intangible service that is mass produced or manufactured on a large scale with a specific volume of units. Intangible products are often service based like the tourism industry & the hotel industry. Typical examples of a mass produced tangible object are the motor car and the disposable razor. A less obvious but ubiquitous mass produced service is a computer operating system. Price The price is the amount a customer pays for the product. It is determined by a number of factors including market share, competition, material costs, product identity and the customer's perceived value of the product. The business may increase or decrease the price of product if other stores have the same product. Place Place represents the location where a product can be purchased. It is often referred to as the distribution channel. It can include any physical store as well as virtual stores on the Internet. Promotion Promotion represents all of the communications that a marketer may use in the marketplace. Promotion has four distinct elements - advertising, public relations, word of mouth and point of sale.ProductProduct can be goods or service. Goods are oftwotypes: Consumer goods Goods which are consumed by people such as chocolate, washing machine, television etc. Producer goods Goods which are used by producers or manufactures to produce further goods and services e.g. bottling plant, machinery, trucks etc.Services are also of two types: Consumer services: e.g. taxi, car repairing, schools etc Producer Services: e.g. factory insurance, advertising agencies.

Features of a successful productEvery successful product has the following features: It satisfying the needs and wants of the customers. Its provides value for money to the consumers. Usually distinctive from other me too products. Stimulates interest of the consumers.Process of New Product DevelopmentStep 1-Idea GenerationIdeas for new products can be obtained from basic research using a SWOT analysis (OPPORTUNITY ANALYSIS), Market and consumer trends, company's R&D department, competitors, focus groups, employees, salespeople, corporate spies, trade shows Brainstorming

Step 2-Idea ScreeningThe object is to eliminate unsound concepts prior to devoting resources to them.The screeners must ask at least three questions: Will the customer in the target market benefit from the product? What is the size and growth forecasts of the market segment/target market? What is the current or expected competitive pressure for the product idea? What are the industry sales and market trends the product idea is based on? Is it technically feasible to manufacture the product? Will the product be profitable when manufactured and delivered to the customer at the target price?

Step 3-Concept Development and TestingDevelop the marketing and engineering details Who is the target market and who is the decision maker in the purchasing process? What product features must the product incorporate? What benefits will the product provide? How will consumers react to the product? How will the product be produced most cost effectively? Prove feasibility through virtual computer aided rendering, and rapid prototyping What will it cost to produce it? Testing the Concept by asking a sample of prospective customers what they think of the idea.

Step 4-Business AnalysisThe strategic management team has to think about the following issues: Estimate likely selling price based upon competition and customer feedback Estimate sales volume based upon size of market Estimate profitability and breakeven point

Step 5-Beta Testing and Market Testing Produce a physical prototype or mock-up Test the product (and its packaging) in typical usage situations Conduct focus group customer interviews or introduce at trade show Make adjustments where necessary Produce an initial run of the product and sell it in a test market area to determine customer acceptance

Step 6-CommercializationIf the test marketing stage has been successful the company will: Launch the product (national or region by region) Produce and place advertisements and other promotions Fill the distribution pipeline with product Critical path analysis is most useful at this stage

Process of Product Development (Simplified description)A Product goes through a series of steps before it reaches the market:It all starts with an idea. The idea needs to be further researched to see the feasibility of production. After this a market research might be conducted to find out potential demand. If the marketing department sees a potential market, a prototype is developed which is then tested in a limited market. Feedback is taken and if necessary changes are made to the product to suit it to the market. Once the product is finalised the product is launched onto the main market.Product Life CycleA Product life cycle shows the different stages through which a product goes from development to decline.

Introduction Stage Product launched into the market. Sales grow slowly. Informative advertisingis done. Firm might not earn a profit at this stage. Price skimmingmay be used if the product is new invention and has no competitors. Competitive pricingmay be used if it already has lot of competitors.Growth Stage Sales grow rapidly. Persuasive advertisingmay be used. Prices may be reduced if faced by stiff competition. Firm starts earning profits.Maturity Stage Sales increase slowly and reach the highest sales figures. Competition is at the maximum level as many new me too products may be in the market. Promotional pricingmight be a good option. Profits are at the highest level as the firm is also gettingeconomies of scale. Repetitive advertising is done to remind the consumers.Saturation Stage Sales are stagnant. Maximum competition but no new competitors and the market is already crowded with the same types of products. Promotional pricingorcompetitive pricingmay be a good choice. Advertising efforts at its highest point.Decline Stage Sales start to decline. Profits start to come down. Marketing research it done to find out whether this decline is permanent or temporary. If the decline is permanent in nature then stop the production of the product, otherwise implementextension strategies. Advertising is reduced.Extension stage Introduce new variations of the original product Try to sell the product in different markets. Make small changes in the colour, design or packaging Start a new advertising campaign. Add more retail outlets to boost sales.

PackagingWhy packaging is done? Toprotectthe product while transportation or storage. Usually for fragile products packaging is very important. Think about transporting a 52 inch LCD television from Japan to US. Topromotethe product, distinguish it among other products through vibrant colours, fonts or material of packaging. On a departmental store self an attractive packing will play a vital role in attracting the attention of the customers. Toinformthe customers about the contents, ingredients, weight, size of the product. Many government make is mandatory to print this information on the packing of the productsBrandingWhy have a brand?The objectives that a good brand will achieve include: Delivers the message clearly Confirms your credibility Connects your target prospects emotionally Motivates the buyer Concretes User LoyaltyTo succeed in branding you must understand the needs and wants of your customers and prospects. You do this by integrating your brand strategies through your company at every point of public contact.Your brand resides within the hearts and minds of customers, clients, and prospects. It is the sum total of their experiences and perceptions, some of which you can influence, and some that you cannot.A strong brand is invaluable as the battle for customers intensifies day by day. It's important to spend time investing in researching, defining, and building your brand. After all your brand is the source of a promise to your consumer. It's a foundational piece in your marketing communication and one you do not want to be without.PriceCost Plus PricingIt involves estimating how many of the product will be produced, then calculating the total cost of producing this output and finally adding a percentage mark-up for profit.(Total Cost/Output)* % mark-up=Selling price

Penetration PricingInvolves setting the price lower than the competitors prices. This strategy is usually followed where there is a lot of competition and the product launched may not be unique.

Price SkimmingThis is where the product is launched at a premium price. It is common with products which are a new invention and people are willing to pay a premium price because of the novelty factors. It is quite common with Mobile phones and other technological products.

Competitive PricingIt involves setting the prices in line with the competitors price or just below their prices.

Promotional PricingIt involves reducing the price of product for a limited period of time. Summer sales are an example of promotional pricing.PromotionIn todays business environment where communicating with the customer is everything, Promotion holds a very important place in the Marketing mix. With so much of competition and me too products a successful business is one which can communicate effectively with it customers and convince them to buy its products. Promotion is usually thought as advertsing but Promotion is much more than advertising. It involvesabove the lineandbelow the lineactivities to communicate with their potential and existing customers and improve sales.Above the line Activities includeadvertising. Advertising means communicating with the customers through a paid media. Advertising is of two types: Informative advertisingis when the message communicated includes information about size, quantity, ingredients, composition, configuration or content of the product. The idea is to influence people to buy products buy showing the superiority of the product in terms of quantity or quality. This type of advertising is usually common with technological products such as mobile phones or computers. Persuasive advertisingis when the message communicated focuses on persuading the customers to buy the product through celebrity endorsements, or use of glamour.Usually advertisements have an element of both informative and persuasive advertising.

Mediums of advertising Television Radio Newspaper and magazines Posters/billboards Leaflets/direct mailBelow the line Activities include all other promotional activities except advertising i.e. Sales promotion It includes activities like: price reduction giving out free gifts with every purchase organising competitions point of sale display demonstrations after-sales service giving out free samples Sp