Business Notes

Chapter 1: The purpose of business activity
The economic problem: needs and wants

All humans have needs and wants. Needs are the things that we can't live without and wants are
the things we would like to have but we can live without them. Businesses
produce goods and services to satisfy the customers' needs and wants.
We all have unlimited wants, unfortunately there are not enough resources for everyone.
Resources can be split into four factors of production:
Land: All natural resources used to make a product or service
Labor: The effort of workers required to make a product or service
Capital: Finance, machinery and equipment required to make a product or service
Enterprise: Skill and risk-taking ability of the entrepreneur
Entrepreneurs are people who combine these factors of production to make possible the
production
of
the
product.
The economic problem results from limited resources and unlimited wants. This situation
causes scarcity, when there are not enough goods to satisfy the wants for everybody. Because of
scarcity we will need to choose which wants we will satisfy. For example, if you choose to buy
potato chips instead of buying a burger, you lost the opportunity of eating a delicious burger.
Basically,
item
that
you
didn't
buy
is
the opportunity
cost.
Opportunity cost: the next best alternative given up by choosing another item.
Here is a diagram showing the economic problem:
Division of labor / Specialization

Because there are limited resources, we need to use them as efficiently as possible. Therefore,
we now use different production methods that are as fast and efficient (costs less, earn more) as
possible. The production method that is used nowadays is known as specialization or division of
labor.
Division of labor / Specialization: is when the production process is split up into different tasks
and each specialized worker or machine performs one of these tasks.
Pros
Specialized workers are good at one task
and increases efficiency and output
Less time is wasted switching jobs by
the individual
Machinery also helps all jobs and can be
operated 24/7
Cons
Boredom from doing the same job
lowers efficiency
No flexibility because workers can only
do one job and cannot do others well if
needed
If one worker is absent and no one can
replace him, the production
process stops
Why is business activity needed (summary)
Provides goods and services from limited resources to satisfy unlimited wants
Scarcity is the result of the economic problem - limited resources and unlimited
wants
Choice is necessary for scarce resources. This leads to opportunity costs
Specialization is required to make the most out of sources
Business activity
Combines factors of production to create goods and services

Goods and services satisfy peoples' wants
Employs people and pays them wages so they can consume other products
Business objectives
All businesses have objectives or aims to achieve. Their objectives may vary depending on the
type of business and the situation the business is in. The most common objectives are:
1. Profit: Profit is what keeps a company going and is the main objective of most businesses.
Normally a business will try to obtain a satisfactory level of profits so they do not have to work
long hours to pay too much tax.
2. Increase added value: Value added is the difference between the price and material costs of a
product. E.g.: If the price when selling a pen is $3 and it costs $1 in material, the value added
would be $2. However, this does not take in account overheads and taxes. Added value could be
increased by working on products so that they become more expensive finished products. One
easy example of this is a mobile phone with a camera would sell for much more than one without
it. Of course, you will need to pay for the extra camera but as long as prices rise more than costs,
you get more profit.
3. Growth: Growth can only be achieved when customers are satisfied with a business. When
businesses grow they create more jobs and make them more secure when a business is larger. The
status and salary of managers are increased. Growth also means that a business is able to spread
risks by moving to other markets, or it is gaining a larger market share. Bigger businesses also gain
cost advantages, called economies of scale.
4. Survival: If a business does not survive, its owners lose everything. Therefore, businesses need to
focus on his objective the most when they are: starting up, competing with other businesses, or in
an economic recession.
5. Service to the community: This is the primary goal for most government owned businesses. They
plan to produce essential products to everybody who need them.
These business objectives or aims can conflict because different people in a business want
different things at different times.
Stakeholders
Stakeholders are a person or a group which has interest in a business for various reasons and will
be directly affected by its decisions. Stakeholders also have different objectives and these also
conflict over time.
There are six types of stakeholders, and these types can be classified into two groups with similar
interests.
Group 1: Profit/Money
Owners:
Profit, return on capital
Growth, increase in value of business
Workers:
High salaries
Job security
Job satisfaction
Managers:
High salaries
Job security
Growth of business so they get more power, status and salary
Group 2: Value
Customers:
Safe products
High quality
Value for money

Reliability of service and maintenance
Government:
Employment
Taxes
National output / GDP increase
Community:
Employment
Security
Business does not pollute the environment
Safe products that are socially responsible
This is the end of chapter 1. I hope it is useful as it takes lots of time doing this type of
summaries.
Publicado 18th June 2012 por Alejandro Hernandez
Ubicacin: Colegio Markham, Augusto Angulo, Lima 15048, Per
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Chapter 2: Types of business activity
Levels of economic activity

In order for products to be made and sold to the people, it must undergo three different
production processes. Each process is done by a different business sector, they are:
1.
Primary sector: The natural resources extraction sector. E.g.: Farming, forestry,
mining - Earns the least money
2.
Secondary
sector: The manufacturing sector.
E.g.:
Construction,
car
manufacturing, banking - Earns a medium amount of money
3.
Tertiary sector: The service sector. E.g.: Banks, transport, insurance - Earns the
most money
Importance of a sector in a country:
No. of workers employed
Value of output and sales
Industrialization: A country is moving from the primary sector to the secondary

sector
De-industrialization: A country is moving from the secondary sector to the tertiary
sector.
In both cases, these processes both earn the country more revenue.
Types of economies
Free market economy: All businesses are owned by the private sector. No government
intervention.
Pros
Consumers have a lot of choice
High motivation for workers
Competition keeps prices low
Incentive for other businesses to set up
and make profits
Cons
Not all products will be available for
everybody, especially the poor
No government intervention means
uncontrollable economic booms or
recessions
Monopolies could be set up limiting
consumer choice and exploiting them
Command or planned economy: All businesses are owned by the public sector. Total government
intervention.
Fixed
wages
for
everyone.
Private
property
is
not
allowed.
Pros
Eliminates any waste from competition
between businesses (e.g. advertising the
same product)
Employment for everybody
All needs are met (although no luxury
goods)
Cons
Little motivation for workers
The government might produce products
that consumers wont buy
Low incentive for firms (no profit) leads
to low efficiency
Mixed economy: Businesses belong to both, the private and public sector. Government
controls part of
the
economy.
Industries
under
Health
Education
Defense
Public transport
Water & electricity
Privatization
government
ownership:
Privatization involves the government selling national businesses to the private sector to increase
output and efficiency.
Pros
New incentive (profit) encourages the
business to be more efficient
Competition lowers prices
Individuals have more capital than the
government
Business decisions are for efficiency, not
government popularity
Privatization raises money for the
government
Cons
Essential businesses making losses will
beclosed
Workers could be made redundant for
the sake of profit
Businesses could become monopolies,
leading to higher price
Comparing the size of businesses
Businesses vary in size, and there are some ways to measure them. For some people, this
information could be very useful:
Investors: How safe it is to invest in a business
Government: Tax
Competitors: Compare their firm with other firms
Workers: Job security, how many people they will be working with
Banks: Make sure if they can get a loan back from a business
Ways of measuring the size of a business:
Number of employees: Does not work on capital intensive firms that use
machinery
Value of output: Does not take into account people employed. Does not take into
account sales revenue.
Value of sales: Does not take into account people employed
Capital employed: Does not work on labor intensive firms. High capital but low
output means low efficiency
You cannot measure a business's size by its profit, because profit depends on too many factors not
just the size of the firm.
Business Growth
All
owners
want
their
business
to
expand.
Higher profits
More status, power and salary for managers
Low average costs (economies of scale)
Higher market share
Types of expansion
They
reap
these
benefits:
Internal Growth: Organic growth. Growth paid for by owners capital or retained
profits
External Growth: Growth by taking over or merging with another business.
Types of mergers (and main benefits):
Horizontal merger: Merging with a business in the same business sector.

Reduces number of competitors in industry
Economies of scale
Increase market share
Vertical merger:
Forward vertical merger:
Assured outlet for products

Profit made by retailer is absorbed by manufacturer
Prevent retailer from selling products of other businesses
Market research on customers transferred directly to the manufacturer
Backward vertical merger:
Constant supply of raw materials
Profit from primary sector business is absorbed by manufacturer
Prevent supplier from supplying other businesses
Controlled cost of raw materials
Conglomerate merger:
Spreads risks
Transfer of new ideas from one section of the business to another
Why some businesses stay small?
There are some reasons why some businesses stay small. They are:
Type of industry the business is in: Industries offering personal service or
specialized products. They cannot grow bigger because they will lose the personal service
demanded by customers. E.g.: hairdressers, cleaning, convenience store, etc.
Market size: If the size of the market a business is selling to be too small, the
business cannot expand. E.g.: luxury cars (Lamborghini), expensive fashion clothing, etc.
Owner's objectives: Owners might want to keep a personal touch with staff and
customers. They do not want the increased stress and worry of running a bigger business.
That's the end of chapter 2!

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Chapter 3: Forms of business organization

Almost every country consists of two business sectors, the private sector and the public
sector. Private sector businesses are operated and run by individuals, while public sector
businesses are operated by the government. The types of businesses present in a sector can
vary, so lets take a look at them.
Private Sector
Sole Traders
Sole traders are the most common form of business in the world, and take up as much as
90% of all businesses in a country. The business is owned and run by one person only. Even
though he can employ people, he is still the sole proprietor of the business. These
businesses are so common since there are so little legal requirements to set up:
The owner must register with and send annual accounts to the
government Tax Office.
They must register their business names with the Registrar of Business
Names.
They must obey all basic laws for trading and commerce.
There are advantages and disadvantages to everything, and here are ones for sold traders:
Pros:
There are so few legal formalities are required to operate the business.
The owner is his own boss, and has total control over the business.
The owner gets 100% of profits.
Motivation because he gets all the profits.
The owner has freedom to change working hours or whom to employ, etc.
He has personal contact with customers.
He does not have to share information with anyone but the tax office, thus he
enjoys complete secrecy.
Cons:
Nobody to discuss problems with.
Unlimited liability.
Limited finance/capital, business will remain small.
The owner normally spends long hours working.
Some parts of the business can be inefficient because of lack ofspecialists.
Does not benefit from economies of scale.
No continuity, no legal identity.
Sole traders are recommended for people who:

Are setting up a new business.
Do not require a lot of capital for their business.
Require direct contact for customer service.

Partnership
A partnership is a group consisting of 2 to 20 people who run and own a business together.
They require a Deed of Partnership or Partnership Agreement, which is a document
that states that all partners agree to work with each other, and issues such as who put the
most capital into the business or who is entitled to the most profit. Other legal regulations
are similar to that of a sole trader.
Pros:
More capital than a sole trader.
Responsibilities are split.
Any losses are shared between partners.

Cons:
Unlimited liability.
No continuity, no legal identity.
Partners can disagree on decisions, slowing down decision making.
If one partner is inefficient or dishonest, everybody loses.
Limited capital, there is a limit of 20 people for any partnership.
Recommended to people who:

Want to make a bigger business but does not want legal complications.
Professionals, such as doctors or lawyers, cannot form a company, and can
only form a partnership.
Family, when they want a simple means of getting everybody into a business
(Warning: Nepotism is usually not recommended).
Note: In some countries including the UK there can be Limited Partnerships. This business
has limited liability but shares cannot be bought or sold. It is abbreviated as LLP.
Private Limited Companies
Private Limited Companies have separate legal identities to their owners, and thus their
owners have limited liability. The company has continuity, and can sell shares to friends or
family, although with the consent of all shareholders. This business can now make legal
contracts. Abbreviated as Ltd (UK), or Proprietary Limited, (Pty) Ltd.
Pros:
The sale of shares make raising finance a lot easier.
Shareholders have limited liability, therefore it is safer for people to invest
but creditors must be cautious because if the business fails they will not get their money
back.
Original owners are still able to keep control of the business by restricting
share distribution.
Cons:
Owners need to deal with many legal formalities before forming a

private limited company:
o The Articles of Association: This contains the rules on how the company will be managed.
It states the rights and duties of directors, the rules on the election of directors and holding
an official meeting, as well as the issuing of shares.
o The Memorandum of Association: This contains very important information about the
company and directors. The official name and addresses of the registered offices of the
company must be stated. The objectives of the company must be given and also the amount
of share capital the owners intend to raise. The number of shares to be bought b each of the
directors must also be made clear.
o Certificate of Incorporation: the document issued by the Registrar of Companies that will
allow the Company to start trading.
Shares cannot be freely sold without the consent of all shareholders.
The accounts of the company are less secret than that of sole traders and
partnerships. Public information must be provided to the Registrar of Companies.
Capital is still limited as the company cannot sell shares to the public.
Public Limited Companies
Public limited companies are similar to private limited companies, but they are able to sell
shares to the public. A private limited company can be converted into a public limited
company by:
1.
A statement in the Memorandum of Association must be made so that it
says this company is a public limited company.
2.
All accounts must be made public.
3.
The company has to apply for a listing in the Stock Exchange.
A prospectus must be issued to advertise to customers to buy shares, and it has to state
how the capital raised from shares will be spent.
Pros:
Limited liability.
Continuity.
Potential to raise limitless capital.
No restrictions on transfer of shares.
High status will attract investors and customers.

Cons:
Many legal formalities required to form the business.
Many rules and regulations to protect shareholders, including the

publishing of annual accounts.
Selling shares is expensive, because of the commission paid to banks to aid
in selling shares and costs of printing the prospectus.
Difficult to control since it is so large.
Owners lose control, when the original owners hold less than 51% of shares.
Control and ownership in a public limited company:
The Annual General Meeting (AGM) is held every year and all shareholders are invited
to attend so that they can elect their Board of Directors. Normally, Director
are majority shareholders who has the power to do whatever they want. However, this is
not the case for public limited companies since there can be millions of shareholders.
Anyway, when directors are elected, they have to power to make important decisions.
However, they must hire managers to attend to day to day decisions. Therefore:
Shareholders own the company
Directors and managers control the company
This is called the divorce between ownership and control.
Because shareholders invested in the company, they expect dividends. The directors could
do things other than give shareholders dividends, such as trying to expand the company.
However, they might loose their status in the next AGM if shareholders are not happy with
what they are doing. All in all, both directors and shareholders have their own objectives.
Co-operatives
Cooperatives are a group of people who agree to work together and pool their money
together to buy "bulk". Their features are:
All members have equal rights, no matter how much capital they invested.
All workload and decision making is equally shared, a manager maybe

appointed for bigger cooperatives
Profits are shared equally.
The most common cooperatives are:

producer co-operatives: just like any other business, but run by workers.
retail co-operatives: provides members with high quality goods or services

for a reasonable price.
Other notable business organizations:
Close Corporations:
This type of business is present in countries such as South Africa. It is like a private limited
company but it is much quicker to set up:
Maximum limit of 10 people.
You only need a simple founding statement which is sent to the Registrar
of Companies to start the business.
All members are managers (no divorce of ownership and control).
A separate legal unit, has both limited liability and continuity.

Cons:
The size limit is not suitable for a large business.
Members may disagree just like in a partnership.

Joint ventures
Two businesses agree to start a new project together, sharing capital, risks and profits.
Pros:
Shared costs are good for tackling expensive projects. (e.g aircraft)
Pooled knowledge. (e.g foreign and local business)
Risks are shared.
Cons:
Profits have to be shared.
Disagreements might occur.
The two partners might run the joint venture differently.

Franchising
The franchisor is
a
business
with
a
successful
brand
name
that
recruits franchisees(individual businesses) to sell for them. (e.g. McDonald, Burger King)
Pros for the franchisor:
The franchisee has to pay to use the brand name.

Expansion is much faster because the franchisor does not have to finance
all new outlets.
The franchisee manages outlets
All products sold must be bought from the franchisor.
Cons for the franchisor:

The failure of one franchise could lead to a bad reputation of the whole
business.
The franchisee keeps the profits.
Pros for the franchisee:

The chance of failure is much reduced due to the well know brand image.
The franchisor pays for advertising.
All supplies can be obtained from the franchisor.
Many business decisions will be made by the franchisor (prices, store

layout, products).
Training for staff and management is provide by the franchisor.
Banks are more willing to lend to franchisees because of lower risks.

Cons for the franchisee:
Less independence
May be unable to make decisions that would suit the local area.
Licence fee must be paid annually and a percentage of the turnovermust

be paid.
Public Sector
Public corporations:
A business owned by the government and run by Directors appointed by the

government. These businesses usually include the water supply, electricity supply, etc.
The government give the directors a set of objectives that they will have to follow:
to keep prices low so everybody can afford the service.
to keep people employed.
to offer a service to the public everywhere.
These objectives are expensive to follow, and are paid for by government subsidies.
However, at one point the government would realise they cannot keep doing this, so they
will set different objectives:
to reduce costs, even if it means making a few people redundant.
to increase efficiency like a private company.
to close loss-making services, even if this mean some consumers are no
longer provided with the service.
Pros:
Some businesses are considered too important to be owned by an

individual. (electricity, water, airline)
Other businesses, considered natural monopolies, are controlled by the
government. (electricity, water)
Reduces waste in an industry. (e.g. two railway lines in one city)
Rescue important businesses when they are failing.
Provide essential services to the people (e.g. the BBC)
Cons:
Motivation might not be as high because profit is not an objective.
Subsidies lead to inefficiency. It is also considered unfair for private

businesses.
There is normally no competition to public corporations, so there is no

incentive to improve.
Businesses could be run for government popularity.
Municipal enterprises
These businesses are run by local government authorities which might be freeto the
user and financed by local taxes. (e.g, street lighting, schools, local library, rubbish
collection). If these businesses make a loss, usually a government subsidy is provided.
However, to reduce the burden on taxpayers, many municipal enterprises are
being privatised.
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Chapter 4: Government and economic influences on business

The impact of business activity on society
All business activity has benefits and undesirable effects on society. These reasons are why
governments want to have some control over business activity:
Possible benefits:
Production of useful goods to satisfy customer wants.
Create employment/increases workers living standards.
Introduction of new products or processes that reduces costs and widen

product range.
Taxes help finance public services.
Business earn foreign currency in exports and this could be spent on

imports.
Possible undesirable effects:

Business might ruin cheap but beautiful areas.
Low wages and unsafe
businesses want to lower costs.
Pollution
working conditions
Production of dangerous goods.
Monopolies
Advertising can mislead customers.

Governments tend to pass
supportingdesirable activities.
laws
that
for
workers
restrict undesirable activities
because
while
Governments and the economy

Government economic objectives:
Governments all have aims for their country, and this is what they are:
Low inflation.
Low unemployment.
Economic growth.
Balance of payments.
Low inflation:
Inflation occurs when prices rise. When prices rise rapidly many bad thing could happen:
Workers wages buy less than before. Therefore their real income (how
much you can buy with so much money) falls. Workers will be unhappy and demand for
higher wages.
Prices of local goods will rise more than that of other countries with lower
inflation. People may start buying foreign goods instead.
It would cost more for businesses to start or expand and therefore it does
not employ as many people.
Some people might be made redundant so that the business can cut costs.
Standards of living will fall.
This is obviously why governments want to keep inflation as low as possible.
Low levels of unemployment:
When people are unemployed, they want to work but cannot find a job. This causes
many problems:
Unemployed people do not work. Therefore national output will
belower than it should be.
The government will have to pay for unemployment benefits. This
isexpensive and money cannot be use for other purposes.
If the level up unemployment is low, it will increase national output and improve standards
of living for workers.
Economic growth
A country is said to grow when its GDP (Gross Domestic Product) is increasing. This is the
total value of goods produced in one year. The standards of living tends to increase with
economic growth. Problems arise when a country's GDP fall:
The country's output is falling, fewer workers are needed
andunemployment occurs.
Standards of living will fall.
Businesses will not expand because they have less money to invest.
Economic growth is not achieved every year. There are years where the GDP falls and
the trade cycle explains the pattern of rises and falls in national GDP.
The trade cycle has 4 main stages:

Growth: This is when GDP is rising, unemployment is falling, and the
country has higher standards of living. Businesses tend to do well in this period.
Boom: Caused by overspending. Prices rise rapidly and there is a shortage of
skilled workers. Business costs will be rising and they are uncertain about the future.
Recession: Because overspending caused the boom, people now spend too
little. GDP will fall and businesses will lose demand and profits. Workers may lose their
jobs.
Slump: A long drawn out recession. Unemployment will peak and prices will
fall. Many firms will go out of business.
After all of this happens the economy recovers and begins to grow again. Governments
want to avoid a boom so that it will not lead to a recession and a slump. Currently, the
government of China is spending a lot of money so that their economy would continue to
grow and avoid a boom.
Balance of payments
Exports earn foreign currency, while imports are paid for by foreign currency (or vice
versa). The difference between the value of exports and imports of a country is
called balance of payments. Governments try to achieve a balance in imports and exports
to avoid a trade deficit, when exports are higher than imports. Of course, the government
will lose money and their reservoir of foreign currency willfall. This results in:
If the country wants to import more, they will have to borrow foreign
currency to buy goods.
The country's currency will now worth less compared to others and can buy
less goods. This is called exchange rate depreciation.
Government economic policies
Governments want to influence the national economy so that it would achieve their
aforementioned objectives. They have a lot of power over business activity and can pass
laws to try to achieve their goals. The main ways in which governments can influence
business activity are called economic policies. They are:
Fiscal Policy: taxes and public spending.
Monetary policy: controlling the amount of money in the economy through

interest rates.
Supply side policies: aimed at increasing efficiency.

Fiscal policy
Government spending could benefit some firms such as:

Construction firms (road building)
Defense industries (Iraq war)
Bus manufacturers (public transport)
Governments raise money from taxes. There are Direct taxes on income andIndirect
taxes on spending. There are four common taxes:
Income tax
Profits tax
VAT (Value Added Tax)
Import tariffs
Income tax
Income tax is based on a percentage of your income. Income tax is usuallyprogressive,

meaning that the percentage of tax you have to pay rises with your income. Effects on
business and individuals if there was a rise of income tax:
People will have less disposable income.
Sales fall because people have less money to spend.
Managers will cut costs for more profit. Workers might be maderedundant.
Businesses producing luxury goods will lose the most, while others
producing everyday needs will get less affected.
Profits tax or corporation tax
This is a percentage of the profit a business makes. A rise in it would mean:

Managers will have less retained profit, making it harder for the business
to expand.
Owners will get less return on capital employed. Potential owners will
be reluctant to start their own business if the profit margin is too low.
Indirect taxes
These taxes are a percentage on the price of goods, making them more expensive.
Governments want to avoid putting them on essential goods such as foods. A rise it it
would mean:
The effect would be almost the same as that of an increase in income tax.
People would buy less but they would still spend money on essential goods.
Again, real incomes fall. Costs will rise when workers demand higher
wages.
Import tariffs and quotas
Governments put tariffs on imports to make local goods look more competitive and also to
reduce imports. When governments put import tariffs on imports:
Sales of local goods become cheaper than imports, leading to increased
sales.
Businesses who import raw materials will suffer higher costs.
Other countries will retaliate by putting tariffs on the country's exports,
making it less competitive.
Quotas maybe used to limit the amount of imports coming in.
Monetary policy and interest rates
Governments usually have to power to change interest rates through the central bank.
Interest rates affect people who borrow from the bank. When interest rates rise:
Businesses who owe to bank will have to pay more, resulting in
lessretained profit.
People are more reluctant to start new businesses or expand.
Consumers who took out loans such as mortgages will now have
lessdisposable income. They will spend less on other goods.
Demand will fall for businesses who produces luxury or expensivegoods
such as cars because people are less willing to borrow.
Higher interest rates will encourage other countries to deposit
moneyinto local banks and earn higher profits. They will change their money into the
local currency, increasing its demand and causing exchange rate appreciation.
Supply side policies
These policies aim to make the countries economy more efficient so that they can produce
more goods and compete in the international economy. In doing so their GDP will rise. Here
are some policies:
Privatisation: Its aim is to use profit as an incentive to increase efficiency.
Improve training and education: This obviously increases efficiency.
This is crucial to countries with a big computer software industry.
Increase competition: Competition causes companies to be more efficient
to survive. Governments need to remove any monopolies.
Government controls over business activity
Government also influence major areas of business activity:

what goods can be produced
responsibilities to employees and working conditions
responsibilities to consumers
responsibilities to the natural environment
location decisions
Undesirable effects created by business activity make governments want to control business
activity:
Business might ruin cheap but beautiful areas.
Monopolies.
Advertising can mislead customers.

Why government control business activity
Production of certain goods and services:
Governments can pass laws to restrict and ban certain dangerous goods such as:
Weapons like guns and explosives.
Drugs
Goods that harm the environment

Consumer protection:
Consumers are easily misled by advertising. It is because consumers lack the technical
knowledge and advertising can be very persuasive. In the UK, these laws are passed to
protect customers from being exploited by businesses:
Weights and Measures Act: to stop underweight goods being sold to
customers.
Trade Descriptions Act: all advertisements must be truthful.
Consumer Credit Act: makes it illegal to not give customers their copy of
the credit agreement to check how much money they really have.
Sale of Goods Act: Makes it illegal to sell:
- Goods which have serious flaws or problems.
- Products that are not fit for the purpose intended by the consumer.
- Products that do not function as described on their label or by the retailer.
Consumer Protection Act: Make false pricing claims illegal. Consumers
can now sue producers or retailers if their products cause harm to them.
Competition policy: Control of monopolies
Monopolies could cause a lot of harm to an economy because there are nobody to compete
against them:
They exploit consumers with high prices.
They prevent new firms from starting up.
Monopolies are not encouraged to be efficient because there are no
competitors.
In some countries, monopolies are banned and must be broken up into smaller firms. In the
UK, monopolies can be investigated by the Competition Commission. This government
body reports two main types of problems:
Business decisions that are against consumer interests, such as trying
to eliminate all competitors.
Proposed mergers or takeovers that will result in a monopoly.
Protecting employees:
Employees need protection in the following areas:

Unfair discrimination
Health and safety at work
Unfair dismissal
Wage protection
Protection against unfair discrimination:
Often workers are discriminated in a job because of various reasons. There are laws that
protect the employee from such reasons to be discriminated against:
Sex Discrimination Act: people of different genders must have equal
opportunities.
Race Relations Act: people of all races and religions mush have equal
opportunities.
Disability Discrimination Act: it must be made suitable for disabled
people to work in businesses.
Equal Opportunities Policy: That is what everything is all about.
The UK is currently working on an age discrimination act.
Health and Safety at work:
Laws protect workers from:

protect workers from dangerous machinery.
provide safety equipment and clothing.
maintain reasonable workplace temperatures.
provide hygienic conditions and washing facilities.
do not insist on excessively long shifts and provide breaks in the work
timetable.
Managers not only provide safety for their employees only because laws say so.
Somebelieve that keeping employees safe and happy improves their motivation and
keeps them in the business. Others do it because it is present in their moral code. They are
then considered making an ethical decision. However, in many countries, workers are
still exploited by employers.
Protection against unfair dismissal
Employees need protection from being dismissed unfairly. The following reasons for the
employee to be dismissed is unreasonable:
for joining a trade union.
for being pregnant.
when no warnings were given beforehand.
Workers who thing they have been dismissed unfairly can take their case to theIndustrial
Tribunal to be judged and he/she might receive compensation if the case is in his/her
favour.
Wage Protection
Employers mus pay employees the same amount that has been stated on thecontract of
employment, which states:
Hours of work.
Nature of the job.
The wage rate to be paid.
How frequently wages will be paid.
What deduction will be made from wages, e.g. income tax.

A minimum wage rate is present in many Western countries and the USA. There are pros
and cons of the minimum wage:
Pros:
Prevents strong employees to exploit unskilled workers who could not easily
find work.
Encourages employers to train unskilled employees to increase efficiency.
Encourages more people to seek work.
Low-paid workers can now spend more.

Cons:
Increases costs, increases prices.

Owners
who
cannot
afford
these
wages
might
make
employeesredundant instead.
Higher paid workers want higher wages to keep on the same level
difference as the lower paid workers. Costs will rise.
Location of Industry
How governments want to locate businesses:

They encourage businesses to move to areas with a high level
ofunemployment, or called development areas.
They discourage firms from locating in overcrowded cites or sites noted
for their natural beauty.
How governments will influence the decisions of firms to locate:
Businesses will be refused planning permission (permit to build in a place)
if they wish to locate in overcrowded cities or beautiful areas. Building in these areas might
be banned altogether.
Governments can provide regional assistance, such as grants and

subsidies to encourage firms to locate in undeveloped areas.
Governments can help businesses too
Governments can help businesses to:

to encourage businesses to locate in poorer regions.
to encourage enterprise by helping small businesses set up and survive.
to encourage businesses to export.
Regional Assistance:
Governments want development to be spread evenly over the whole country.
Grants and subsidies can be used to attract firms to an area.

Small firms
Small firms are important for and economy because:

They provide most of the employment because they are usually labour
intensive.
Small firms operate in rural areas where unemployment tends to be high.
They can grow into very important businesses employing thousands of
workers and producing output worth millions of dollars.
Provides more choice for customers. They compete against bigger
companies.
They are often managed in a very flexible way, and is quicker to adapt to
changing demands.
Governments help them by:
Lower rates of profits tax, so they can have more retained profit.
Giving grants and cheap loans.
Providing advice and information centres to small firms.

Exporting goods and services
Why governments want businesses to export:

Exports earn foreign currency, which can be use to buy imports.
More exports means more people needed to produce them,

increasingemployment and standards of living.
Successful exporters earn more money and have to pay more profits tax.
Governments can support exporters by:

Encourage banks to lend to exporting businesses at lower interest rates.
Offering subsidies or lower taxes to firms. However, other countries

would retaliate and there would be no overall advantage.
Trying to keep the local currency as stable as possible to make it easier for
businesses to know how much they are going to make from exports.
Organising trade fairs abroad to encourage foreign businesses to buy the
country's exports.
Offering credit facilities. This means that if a foreign customers refuses to
pay for goods, the company could be compensated by the government.
Businesses in the economic and legal environment
Businesses could not ignore the power of the government in controlling business
activity. Multinationals are an exception although normally businesses cannot afford to
move to other countries. Government decisions create the environment in which
businesses
will
have
to operate and adapt to.
The
environment
created
by legal and economic controls are one of the constraints to managers when making
decisions.

Etiquetas: Business Studies IGCSE
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3
JUN
Chapter 5: Other influences on business

External constraints and constraints on business activity
Businesses cannot survive by neglecting the "real world", which includes influences that
forces a business to make certain decisions or constraints that limits or controls
actions. External constraints are things that businesses cannot control, these are:
Technological change: New products.
Technological change: New production processes.
Increased competition.
Environmental issues.
Here is a table from the book giving examples and the possible impacts on business activity:
Technological changes
Technological change bring about constant changes in
consumer products and production processes. By using R&D to
develop new products, companies could open up new markets and make huge amounts
of money. Such companies include Microsoft, Sony and Apple. However, new products
quickly replace old ones just like how machines are replacing workers in production
processes.
There are two general things a firm could do when facing technological change:
Ignore the changes and operate in the "traditional and old fashioned way".
However, they can only sell to a small and limited market.
Compete by welcoming changes and have an access to
huge mass markets.
Here are some pros and cons of technological change:
Pros:
New products encourage customers to buy more.

If a business comes up with a new product first, they gain a
hugecompetitive advantage.
"High-tech" production methods make production more efficient.
Fewer workers are required.
New production methods can be adapted very quickly which gives

businesses more flexibility in meeting consumer wants.
E-commerce opens up new markets and the Internet is

a medium ofadvertising.
Cons:
R&D is expensive, without guaranteed success.
Businesses that do not develop new products will fail, leaving workers
unemployed.
New production methods and machines are expensive.
Workers will need retraining which is expensive. They might be reluctant to

learn or fear that they will not do well. This could lead to afall in motivation.
E-commerce lacks personal customer service.
Smaller businesses cannot afford these things.

Introducing technological change successfully
Workers and managers may fear change. Workers might think:

Will I be able to operate the new machines?
Will I lose my job because the machines are more efficient?
Older workers
are
especially afraid of
loosing
out
to younger and better
trainedworkers. Managers also fear change, since recruiting technology experts will make
them look more inferior in some way.
To make these changes work better, workers need to be involved in the changes. Workers
might be told why the new machines are necessary and how they will be trained to use them,
as well as letting them suggest ways to make work more efficient with the machines. It leads
to more opportunities for trained and skilled staff and can lead to new ideas and
products.
Competition
Most businesses have competitors. Most business decisions are based on:
What competitors are doing?
How they might react?
When you develop a successful product, other businesses will undoubtedly copyyou.
Therefore, you will need to research and develop even more products, keeping ahead of
them. Competition is a major influence on business activity.
Environmental constraints on business activity
There are two general opinions on caring about the environment:
- Opinion A: Keeping the environment clean is too expensive. We want to keep prices
low and this is what consumers want too.
Protecting the environment is too expensive and reduce profits.
Increased prices mean increased costs.
Firms could become less competitive compared to others who are not
environmentally friendly.
Governments should pay to clean it up.
- Opinion B: Consumers are now starting to prefer businesses with social

responsibility. Cleaner and more efficient machinery benefit the business in the long-run.
Environmental issues affect us all and businesses have a social
responsibility to deal with them.
Using up scarce resources leaves less for future generations andraise
prices.
Consumers are becoming more socially aware. More now prefer firms that
are environmentally friendly which could become an marketing advantage.
If a business damages the environment, pressure groups could protest and
damage its image and reputation.
Ways to make a business more environmentally friendly
Governments make these business activities illegal:

locating in environmentally sensitive areas.
dumping waste products into waterways.
making products that cannot be easily recycled.

Manufacturers often complain that these laws raise prices. Therefore, somegovernments
usually do not make these laws strict with the hope of increasing output and in
turn employment.
Financing penalties, including pollution permits
Pollution permits are licences given to a business to pollute up to a certain level. If "dirty"
businesses pollute over the permitted level, they either have to buy permitsfrom "cleaner
firms" or pay heavy fines. This encourages firms to be cleaner andsell their permits to
dirtier companies for more money. Other penalties includeadditional taxes.
Consumer action and pressure groups
Consumers are becoming more socially aware, and many of them will stop buying goods
from companies which pollute the environment, harming a business'reputation and
image. Bad publicity means lower sales. If they want to keep their sales revenue up firms
would have to adapt to more environmentally friendly production processes again.
Pressure groups are becoming very powerful nowadays. They can severely damage
businesses that are not socially responsible.
These are their powers:

Consumer boycotts
Protests
Blocking waste pipes.

These are times when they are likely to take action:
They have popular public support and has a lot of media coverage.
The group is well organised and financed.
These are times when they are less likely to take action:
What a company is doing is unpopular but not illegal. (e.g. testing drugs
on rats)
The cost of making the company cleaner is more than losses that could be
made by losing image and sales.
The firm supplies other firms and not customers, public support will be less
effective.
Environmental issues and cost-benefit analysis
Governments are increasingly concerned about the social and environmental effects of
business activity. They have started to use a new type of analysis on businesses and
government proposals which will not only take into account financial costs but
also external costs.
Cost-benefit analysis requires and awareness of external costs (costs to the rest of
society) and external benefits (gains to the rest of society). Here are some examples.
Decision: A new chemical plant will be built.
Social costs are worked out from private costs and external costs.
Social benefits are worked out from private benefits and external benefits.
In other words:
Social costs = private costs + external costs.
Social benefits = private benefits + external benefits.

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4
JUN
Chapter 6: Business costs and revenue
Business costs
All business activity involves some kind of cost. Managers need to think about this because:
Whether costs are lower that revenues or not. Whether a business will make a
profit or not.
To compare costs at different locations.
To help set prices.
There are two main types of costs, fixed and variable costs. Here are some types of costs:
Fixed costs = stay the same regardless of the amount of output. They are there
regardless of whether a business has made a profit or not.
Variable costs = varies with the amount of goods produced.
Total costs = fixed costs + variable costs
Break-even charts, comparing costs with revenue
Uses
of
break-even
charts
There are other benefits from the break-even chart other than identifying the break-even point
and the maximum profit. However, they are not all reliable so there are some disadvantages as
well.
Pros
The expected profit or loss can be
calculated at any level of output
The impacts of business decisions can be
seen by redrawing the graph
The break-even chart shows the safety
margin which is the amount by which
sales exceed the break-even point
Cons
The graph assumes that all goods
produced are sold
Fixed costs will change if the scale of
production is changed
Only focuses on the break-even point.
Completely ignores other aspects of
production
Does not take into account discounts or
increased wages, etc. and other things
that vary over time
Break-even point: the calculation method

It is possible to calculate the break-even point without having to draw the graph. We need to
formulas to achieve this:
Business costs: Other definitions
There are types of costs to be analysed that are split from fixed and variable costs:
Direct costs: costs that are directly related to the production of a particular
product
Marginal costs: how much costs will increase when a business decides to produce
one more unit
Indirect costs: costs not directly related to the product. They are often
termed overheads.
Economies and diseconomies of scale:
Economies of scale are factors that lead to a reduction in average costs that are obtained by the
growth of a business. There are five economies of scale:
Purchasing economies: Larger capital means you get discounts when buying bulk
Marketing: More money for advertising and own transportation, cutting costs
Financial: Easier to borrow money from banks with lower interest rates
Managerial: Larger businesses can now afford specialist managers in all
departments, increasing efficiency.
Technical: They can now buy specialized and latest equipment to cut overall
production costs
However, there are diseconomies of scale which increases average costs when a business grows:
Poor communication: It is more difficult to communicate in larger firms since
there are so many people a message has to pass through. The managers might loose contact to
customers and make wrong decisions.
Low morale: People work in large businesses with thousands of workers do not get
much attention. They feel they are not needed and this decreases morale and in turn low
efficiency.
Slower decision making: More people have to agree with a decision and
communication difficulties also make decision making slower as well.
Budgets and forecasts: looking ahead
Business also needs to think ahead about the problems and opportunities that may arise in the
future. There are things to try to forecast such as:
Sales or consumer demands
Exchange rates appreciation or depreciation
Wage increases
There are some forecasting methods:
Past sales could be used to calculate the trend, which could then be extended into
the future
Create a line of best fit for past sales and extend it for the future
Panel consensus: asking a panel of experts for their opinion on what is going to
happen in the future.
Market research
Budgets
Budgets are plans for the future containing numerical and financial targets. Better managers will
create many budgets for costs, planned revenue and profit and combine them into one single plan
called the master budget.
Here are the advantages of budgets:

They set objectives for managers and workers to work towards, increasing
their motivation.
They can be used to see how well a business is doing by comparing the budget with
the result in the process ofvariance analysis. The variance is the difference between the budget
and the result.
If workers get a say in choosing the objectives for a budget, the objectives would
be more realistic since they are the ones that are going to do it and it also gives them
better motivation.
Helps control the business and its allocation of resources/money.
All in all, budgeting is useful for:
Reviewing past activities
Controlling current business activity - following objectives
Planning for the future
This is the end of chapter 6. I hope it is useful as it takes lots of time doing this type of summaries
(typing them).

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5
JUN
Chapter 7: Business accounting

What are accounts an why are they necessary?
Accounts are financial records of a firm's transactions that is kept up to date by
the accountants, who are qualified professionals responsible for keeping accurate
accounts and producing the final accounts.
Every end of the year, a final accounts must be produced which gives details of:
Profits and losses made.
Current value of the business.
Other financial results.

Limited companies are bound by law to publish these accounts, but not other businesses.
Financial documents involved in buying and selling.
Accountants use various documents that are used for buying and selling over the year for
their final accounts. They can help the accountant to:
keep records of what the firm bought and from which supplier.
keep records of what the firm sold and to which customer.
These documents are:
Purchase orders: requests for buying products. It contains the quantity,
type and total cost of goods. Here is an example.
Delivery notes: These are sent by the firm when it has received its goods. It
must be signed when the goods are delivered.
Invoices: These are sent by the supplier to request for payment from the
firm.
Credit notes: Only issued if a mistake has been made. It states what kind of
mistake has been made.
Statements of account: Issued by the supplier to his customers which
contains the value of deliveries made each month, value of any credit notes issued and
any payments made by the customer. Here is an example.
Remittance advice slips: usually sent with the statement of accounts. It
indicates which invoices the firm is paying for so that the supplier will not make a mistake
about payments.
Receipts: Issued after an invoice has been paid. It is proof that the firm has
paid for their goods.
Methods of making payment
There are several ways goods can be paid for:

Cash: The traditional payment method. However, many businesses do not
prefer to use cash for a number of security reasons. When cash is paid, a petty cash
voucher is issued by the person in charge of the firm's money who also signs it to authorise
the payment. The person making the purchase signs it too to show that the money has been
recieved.
Cheque: It is an instruction to the bank to transfer money from a bank
account to a named person. In order to do this the bank needs a cheque guarantee card,
saying that they have enough money in their account to support this payment.
Credit card: Lets the consumer obtain their goods now and pay later. If the
payment is delayed over a set period then the consumer will have to pay interest.
Debit card: Transfers money directly from user's account to that of the
seller.
Recording accounting transactions
Businesses usually use computers to store their transactions so that they can be easily
accessed, calculated and printed quickly.
Who uses the financial accounts of a business?

Shareholders: They will want to know about the profit or losses made
during the year and whether the business is worth more at the end of the year or not.
Creditors: They want to see whether the company can afford to pay their
loans back or not.
Government: Again, they want to check to see if correct taxes are paid. They
also want to see how well the business is doing so that it can keep employing people.
Other companies: Other companies want to compare their performance
with a business or see if it is a good idea to take it over.
What do final accounts contain?
The trading account
This account shows how the gross profit of a business is calculated. Obviously, it will
contain this formula:
Gross profit = Sales revenue - Cost of goods sold
Note that:
Gross profit does not take to account overheads.
Only calculate the cost of goods sold, and forget the inventory.
In a manufacturing business, direct labour and manufacturing
costs are also deducted to obtain gross profit.
The profit and loss account
The profit and loss account shows how net profit is calculated. It starts off with gross profit
acquired from the trading account and by deducting all other costs it comes up with net
profit.
Depreciation is the fall in value of a fixed asset over time. It is also counted as an indirect
cost to businesses.
As for limited companies, there are a few differences with the normal profits and loss
account:
Profits tax will be shown.
It needs to have an appropriation account at the end of the profits and
loss account. This shows what the company has done with its net profits, in other words,
how much retained profit has been put back into the company.
Results form the previous year are also included.
Balance sheet
The balance sheet shows you a business's assets and liabilities at a particular time. The
balance sheet records the value of a business at the end of the financial year. This is what it
contains:
Fixed assets: land, vehicles, buildings that are likely to be with the business
for more than one year. They depreciate over time.
Current assets: stocks, inventory, ash and debtors that are only there for a
short time.
Long-term liabilities: long-term borrowings that does not have to be paid
in one year.
Short-term liabilities: short-term borrowings that has to be paid in less
than one year.
If your total assets are higher than your total liabilities, then you are said to
ownwealth. In a normal business, wealth belongs to the owners, while in a limited
company, it belongs to the shareholders. Hence the equation:
Total assets - total liabilities = Owners'/Shareholders' wealth
Here are some terms found in balance sheets:

Working capital: is used to pay short-term debts and known as net
current assets. If a business do not have enough working capital then it might be forced to
go out of business. The formula:
Working capital = Current assets - Current liabilities
Net assets: Shows the net value of all assets owned by the company. These
assets must be paid for or finance by shareholders' funds or long term liabilities. The
formula:
Net assets = Fixed assets + Working capital
Shareholders' funds: The total sum invested into the business by its
owners. This money is invested in two ways:
- Share capital: Money from newly issued shares.
- Profit and loss reserves: Profit that is owned by shareholders but not distributed to
them but kept as part of shareholders' funds.
Capital employed: Long-term and permanent capital of a business that has

been used to pay for all the assets. Therefore:
Capital employed = net profits
Capital employed = Shareholders' funds + long-term liabilities
Analysis of published accounts
Without analysis, financial accounts tell us next to nothing about the performance and
financial strength of a company. In order to do this we need to compare two figures with
each other. This is called ratio analysis.
Ratio analysis of accounts
The most common ratios used are for comparing the performance and liquidity of a
business. Here are five of the most commonly used ratios.
Ratios used for analysing performance:

Return on capital employed: This result could show the efficiency of a
business. If the result rises, the managers are becoming more successful.
Return on capital employed (%) = Operating profit/Capital employed * 100

Gross profit margin: If this rises, it could mean that either they are
increasing added value or costs have fallen.
Gross profit margin = Gross profit/Sales revenue * 100

Net profit margin: The higher the result, the more successful the managers
are. This could be compared with other businesses too.
Net profit margin = Net profit before tax/Sales revenue * 100
Note: Net profit does not include tax.
Ratios used for analysing liquidity: This is too see how much cash a business has to
pay off all of its short-term debts.
Current ratio: This ratio assumes that all current assets could be converted
into cash quickly, but this is not always true sincestock/inventory could not be all sold in
a short time. Generally, a result of 1.5 to 2 would be preferable, so that a business could pay
all of its short-term debts and still have half of its money left.
Current ratio = Current assets/Current liabilities
Acid test or liquid ratio: This type of analysis neglects stocks, but it is
similar to the current ratio analysis.
Acid test ratio = (Current assets - Stocks)/Current liabilites
These ratios can be used to:

Compare with other years.
Compare with other businesses.

It must be remembered that a ratio on its own will give you nothing, but when it is
compared with ratios from the past and other businesses it will tell you a lot of things.
However, there are still some disadvantages of ratio analysis:

Only shows past results, does not show anything about the future.
Comparisons between years may be misleading because of inflation.

Comparisons between businesses could be difficult since each has itsown
accounting methods.
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6
JUN
Chapter 8: Cash flow planning

What is meant by cash flow?
Cash is a liquid asset, meaning that i can be spent on goods and services any time. Many
business experience cash flow problems, meaning that they do not have enough cash to
do what they want to do. Cash flow means "the flow of money in and out of a business".
These are ways cash flow can occur:
Cash inflows:
Sale of goods for cash.
Payment from debtors.
Borrowing from a source (but will inevitably lead to cash outflow in the
future).
Sale of unwanted assets.
Investment from investors: shareholders and owners
Cash outflows:
Purchasing goods for cash.
Payment of wages, salaries and others in cash.
Purchasing fixed assets.
Repaying loans.
Repaying creditors.
Cash flow cycle
A cash flow cycle explains the stages that are involved in the process of cash out and
finally into the business. This is what happens:
The longer it takes for cash to get back to the business, the more they will needworking
capital to pay off their short-term debts. This cycle also helps us understand
the importance of cash flow planning. This is what happens when a company is short on
cash:
Not enough to pay for materials, therefore sales will fall.
The company will want to insist customers on paying in cash, but they might
lose them to competitors who let them pay in credit.
There could be a liquidity crisis when it does not have enough cash to pay
for overheads (bills, rent, etc.) and the business might be forced to close down by its
creditors.
Managers need to plan their cash flow so that they do not end up in these positions.
Cash flow is not profit!
First we need to examine the formula for cash flow:
Cash flow = Cash inflow - Cash outflow
However, when calculating profit, we also take into account credit that debtors owe us.
Therefore, a company might make $20,000 in profit but only $10,000 is received in cash
because half of it is payed by credit card.
This creates something known as insolvency:

Profitable business could run out of cash because of various reasons. This is
called insolvency and it is one main reason why businesses fail.
This can be because of several reasons:
Allowing customers too long to pay back, so that they will not have
paid off the debts yet by the time the business has run out of cash.
Purchasing too many assets at once.
Producing or purchasing too

much stock/inventory when expanding too quickly. This is called over trading.
Here is an example of a cash flow statement:
As you can see, the closing bank balance in February is negative, which means that it has
become overdrawn.
Cash flow forecasts
Because of the aforementioned problems, it is important for the manager to get an idea of
how much cash will be available for which months. A cash flow forecastcan tell the
manager:
How much cash is available for paying bills, loans and other fixed assets.
How much the bank might need to lend to avoid insolvency.
Whether the business has too much cash which could be more useful if used.
Uses of cash flow forecasts:

Starting up a business: In the first months of a business, a lot of capital
will be needed to set it up properly. The problem is, not everybody realises that the amount
of money they needed is much more than they had expected. Therefore, a cash flow forecast
will give them a better idea of how much money will be needed.
Keeping the bank manager informed: It needs to be shown to the bank
to inform it of the size of the needed loan/overdraft, when it is needed, how long it is needed
and when it could be repaid. Only then will the bank give you a chance to get a loan.
Running an existing business: It is important to know the cash flow of a
business so that loans could be arranged in advance in order to get the
least interest possible. If a firm has cash flow problems and goes to the bank for a loan for
the next day, it will charge high interests because it knows that the business has no
choice. Also, if a business exceeds theoverdraft limit without informing the bank, it could
be asked to repay the overdraft immediately and could result in closure of the business.
Managing cash flow: If a business has too much cash, it should put the
cash to some good use quickly. Some examples of this is: repaying all loans for less
interest, paying creditors immediately to get discounts.
How can cash flow problems be solved?
Here are some steps to solve cash flow problems:

Arrange for future loans with the bank when you anticipate negative cash
flow.
Reduce or delay planned expenses until cash is available, e.g. ask to pay in
credit.
Increasing forecasted cash inflow, e.g. by getting a part-time job.

For more information on the importance of cash flow visit page 132 in the book. This case
study will give you a lot of information.
Publicado 3rd June 2012 por Alejandro Hernandez

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7
JUN
Why
Chapter 9: Financing business activity
do
businesses
need
finance?
Businesses need finance, or money, to pay for their overhead costs as well as their day to
day and variable expenses. Here are three situations when businesses need finance the
most:
Starting a business: Huge amounts of finance is needed to start a business

which requires buying fixed assets, paying rent and other overheads as well as producing or
buying the first products to sell. The finance required to start up a business is called startup capital.
Expanding a business: When expanding, a lot of capital is needed in order

to buy more fixed assets or fund a takeover. Internal growth by developing new products
also requires a notable amount of finance for R&D.
A business in difficulties: For example, for loss making businesses money

is needed to buy more efficient machinery, or money is needed to cover negative cash flow.
However, it is usually difficult for these firms to get loans.
All all cases, businesses need finance for either capital expenditure or revenue
expenditure:
Capital expenditure: Money spent on fixed assets.
Revenue expenditure: Money spent on day-to-day expenses.
Sources of finance
There are many ways to obtain finance, and they can be grouped in these ways.:
Internal or external.
Short-term, medium-term or long-term.

Internal finance:
This is finance that can be taken from within the business itself. There are advantages and
disadvantages to each of them:
Retained profit: Profit reinvested into a business after part of the net profit
has been distributed to its owners.
+ Retained profit does not have to be repaid unlike a loan.
- New businesses do not have much retained profit.
- Retained profit from small firms are not enough forexpansion.
- Reduces payment to owners/shareholders.
Sale of existing assets: Firms can get rid of their unwanted assets for cash.
+ Makes better use of capital that is not used for anything.
- Takes time to sell all of these assets.
- New businesses do not have these assets to sell.
Running down stocks: Sell everything in the current existing inventory.

+ Reduces opportunity
costs of
having
inventory.
cost and storage
- Risks disappointing customers if there are not enough stock left.

Owners' savings: Only applies to businesses that do not have limited
liability. Since the legal identity of the business and owners are the same, this method is
considered to be internal.
+ Available quickly.
+ No interest paid.
- Limited capital.
- Increases risks for owners.

External finance:
This is money raised from individuals or organisations outside a business. It is the most
common way to raise finance.
Issue of shares: Same as owners' savings, but only available to limited
companies.
+ A permanent source of capital that does not have to berepaid.
+ No interest paid.
- Dividends will have to be paid.
- Ownership of the company could change hands to themajority

shareholder.
Bank loans: money borrowed from the bank.
+ Quick to arrange.
+ Variable lengths of time.
+ Lower rates offered if a large company borrows large sums.
- Must be repaid with interest.
- Collateral is needed to secure a loan and may be lost.
Selling debentures: These are long-term loan certificates issued by limited

companies.
+ These can be used to raise long-term finance, e.g. 25 years.
+ No collateral is required, just the trustworthiness of a big

company.
- Must be repaid with interest.

Factoring of debts: Some businesses (debt factors) "buy" debts of a
firm's debtors (e.g. customers) and pay the firm cash in return. The firm now does not
worry about worrying about whether their customers will pay or not and 100% of all the
debts goes to the factor. Factoring debt is very difficult for me to understand and explain, so
explore http://business-debt.cleardebts.co.uk/factoring.html for more information.
+ Immediate cash is obtained.
+ Risk of collecting debt becomes the factor's.
- The firm does not receive 100% value of the debt.
Grants and subsidies: can be obtained from outside agencies like

thegovernment.
+ Do not have to be repaid.
- They have conditions that you have to fulfill (e.g. locating in poor
areas).
Short-term finance:
This is working capital required to pay current liabilities that is needed up to three
years. There are three main ways of acquiring short-term finance:
Overdrafts: Allows you do draw more from your bank account than you
have.
+ Overdrafts can vary every month, making it flexible.
+ Interest only needs to be paid only to the amount overdrawn.
+ They can turn out cheaper than loans.
- Interest rates are variable, and often higher than loans.
- The bank can ask for the overdraft back immediately anytime.
Trade credits: Delaying payment to your creditors, which leaves the

company with better cash flow for that month.
+ It is almost a short-term interest free loan.
- The supplier could refuse to give discounts or to supplyyou at all
if your payments are delayed too much.
Factoring of debts
Medium-term finance:
Finance available for 3 to 10 years that is used to buy fixed assets such as machinery and
vehicles.
Bank loans
Hire purchase: This allows firm to pay for assets over time in monthly
payments which has interest.
+ The firm does not have to come up with a lot of cashquickly.
- A deposit has to be paid at the start of the period of payment.
- Interest paid can be very high.
Leasing: Hiring something. Businesses could use the asset but will have to
pay monthly. The business my choose to buy the asset at the end of the leasing period. Some
businesses sell their fixed assets to a leasing company who lease them back so that they
could obtain cash. This is called sale and leaseback.
+ The firm does not have to come up with a lot of cash quickly.
+ The leasing firm takes care of the assets.
- The total leasing costs will be higher than if the business has
purchased it.
Long-term finance:
This kind of finance is available for more than 10 years. The money is used for long-term
fixed assets or the takeover of another company.
Issue of shares: Shares are sometimes called equities, therefore issuing
shares is called equity finance. New issues, or shares sold by public limited companies
can raise near limitless finance. However, a business will want to give the right issue of
shares so that the amount bought by shareholders will not upset the balance of ownership.
+ A permanent source of capital that does not have to be repaid.
+ No interests paid.
- Dividends will have to be paid. And they have to be paid
after tax (so taxes become higher), while interest on loans are paid before taxes.
- Ownership of the company could change hands to the majority
shareholder.
Long-term loans or debt finance: Loans from a bank, and this is how
they are different from issuing shares:
Interest is paid before taxes, it is counted as an expense.

Interest has to be paid every year but dividends only need to be paid
if the firm has maid profit.
They are not permanent capital.
They need collateral.
Debentures
How the choice of finance is made in a business

These are the factors that managers consider when choosing the type of finance they need.
Purpose and time period: Managers need to match the source of finance
to its purpose. It is quite simple, short-term finance is used to buy current assets and
things like that, while long-term finance forfixed assets and similar things.
Amount needed: Different types of finance depends on how much is
needed.
Status and size: Bigger companies have more choices of finance. They
pay less interest to banks.
Control: owners lose control if they own less than 51% of shares in their
company.
Risk and gearing: loans raise the gearing of a business, meaning that
their risk is increased. Gearing is can be obtained by calculating thepercentage of longterm loans compared to total capital. If long-term loans take up more than 50% of total
capital, then the business would be called highly geared. This is very risky because the
business will have to pay back a lot of its loans and has to succeed to do so. Banks are less
willing to lend to these businesses, so they will have to find other types of finance.
Will banks lend and will shareholders invest?
Loans will be available to businesses but information about the business is required:
The firms's trading records.
Forecasts about the future.
Forecasts have to show that the firms are solvent, i.e. able to repay the loan
and the interest back.
Banks will also consider:
Experience of the people running a business.
Gearing ratio of a business.
This is what shareholders will consider if they want to invest:
The future prospects of the company.
How much dividends are given out compared to other companies.
Trend of share prices.
Gearing ratio.
Business plans
Banks will want to see a business plan if they are to lend to most businesses, especially a
newly created one. A business plan contains:
Objectives.
How the business will be operated.
How the business will be financed.
By creating a business plan owners will have to think carefully ahead about their business to
ensure the best plan possible. These are things they will need to consider:
Target market and consumers.
Profits, costs and break-even point.
Location of the business.
Machinery and workers required.

Without a detailed plan which works, bank managers will be reluctant to lend any money
to businesses because their owners have not shown that they are serious enough about their
business.
Here is an example of a business plan from the book, it shows the things you need to put in
a business plan:
As a little reminder, this business plan is not mine, and all credit goes to the book and its
author. Thank you
Publicado 2nd June 2012 por Alejandro Hernandez
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JUN
Chapter 10: Organisational structure

Chapter 10: Organisational Structure
What
is
organisational
structure?
Organisational structure refers to the levels of management and division of

responsibilities within a business, which could be presented in an organisational chart.
For simpler businesses in which the owner employs only himself, there is no need for an
organisational structure. However, if the business expands and employs other people, an
organisational structure is needed. When employing people, everybody needs a job
description.
These
are
its
main advantages:
People who apply can see what they are expected to do.
People who are already employed will know exactly what to do.
Here is an example of a Job Description taken from the book:
When there are more than one person in a small business and they all do different things, it
means that they are specialising in different jobs.
Delegation
Delegation refers to giving a subordinate the responsibility and authority to do a given

task. However, the final responsibility still lies with the person who delegated the job to the
subordinate. Here are the advantages of delegation for managers and employees, as well
as why some managers choose not to delegate.
Pros for the manager:
By letting subordinate do smaller tasks, managers have more time to do more important
tasks.
Managers are less likely to make mistakes if tasks are done by specialistemployees.
Managers can measure the success of their task more easily.
Pros for the subordinates:
Work becomes more interesting and rewarding.
Employees feel important and trusted.

Helps train workers, giving them better career opportunities.
Why some managers don't want to delegate:
Managers are afraid that their employees will fail.
Managers want total control.
Managers are scared that the subordinate will do tasks better than them, making them
feel insecure.
Delegation must mean:
A reduction in direct control by managers or supervisors.
An increase in trust of workers by managers or supervisors.
Organisational charts
Eventually, when a business grows larger and employs many people, they will have to
create an organisational chart to work out a clear structure for their company. Here is
another example of an organisational chart from the book:
Here are the most important features of the chart:
It is a hierarchy. There are different levels in the business which has different degrees of
authority. People on the same level have the same degree of authority.
It is organised into departments, which has their own function.
It shows the chain of command, which is how power and authority is passed down from
the top of the hierarchy, and span of control, meaning how many subordinates one person
controls, of the business.
Advantages of an organisational chart:
The charts shows how everybody is linked together. Makes employees aware of
the communication channel that will be used for messages to reach them.
Employees can see their position and power, and who they take orders from.
It shows the relationship between departments.
Gives people a sense of belonging since they are always in one particular department.
Chain of command and span of control:
Here are two organisations, one having a long chain of command and the other a wide span
of control. Therefore, the longer the chain of command, the taller the business hierarchy and
the narrower the span of control. When it is short, the business will have a wider span of
control.
In recent years, people have began to prefer to have their business have a wider span of
control and shorter chain of command. In some cases, whole levels of management were
removed. This is called de-layering. This is because short chains of commands have these
advantages:
Communication is faster and more accurate. The message has to pass through less
people.
Managers are closer to all employees so that they can understand the business better.
Spans of control will be wider, meaning that the manager would have to take care of more
subordinates, this makes:
The manager delegate more, and we already know the advantages of delegation.
Workers gain more job satisfaction and feel trustedbecause of delegation.
However, if the span of control is too wide, managers could lose control. If the
subordinates are poorly trained, many mistakes would be made.
Functional departments
Here is an example of an organisational chart from a larger business from the book:
Here are they key features of this graph:
The business is divided into functional departments. They usespecialists for each job
and this creates more efficiency. However, workers are more loyal to their department than
to the organisation as a whole. Therefore, conflict can occur between different
departments. Managers working in these departments are called line managers, who have
direct authority and the power to put their decisions into effect over their department.
Not only are there departments, there are also other regional divisionsthat take care of
outlets that are situated in other countries. They use the local knowledge to their advantage.
There are some departments which do not have a distinctive function but still
employs specialists and report directly to the CEO/Board of Directors. These
departments are the IT department, and theEconomic Forecasting department. Some
say the HR department fits in this category. These departments give specialist
advice and supportto the board of Directors and line managers, and the managers of
these departments are called staff managers. They are often very highly
qualified personnel who specialises in only their area.
Here are the pros and cons of employing staff managers:
Pros:
Staff managers help and provide advice for line managers on things such as computer
systems.
Helps line managers concentrate on their main tasks.
Cons:
There may be conflict between the two groups on important decisions and views.
Line employees may be confused and do not know who to take orders form, line or staff
managers.
Decentralisation
Decentralisation refers to a business delegating important decisions to lower divisions in

the business. In a centralised structure important decisions are taken at the centre, or
higher levels of management.
Advantages of a decentralised structure:
Decisions are made by managers who are "closer to the action".
Managers feel more trusted and get more job satisfaction due todelegation.
Decisions can be made much more quickly.
The business can adapt to change much more quickly.
Decentralisation means that:
Less central control.
More delegation.
Decisions taken "lower down" in the organisation.
Authority given to departments/regions
Different forms of decentralisation:
Functional decentralisation: Specialist departments are given the authority to
make decisions. The most common of these are:
Human Resources.
Marketing.
Finance.
Production.
Federal decentralisation: Authority is divided between differentproduct lines. e.g
separate truck/car/bus divisions.
Regional decentralisation: In multinationals, each base in each country has authority to
make its own decisions.
Decentralisation by project means: For a certain project, decision-making authority is
given to a team chosen from all functional departments.
Is complete decentralisation a good idea?
It is dangerous to let the lower-level management make all the decisions. Therefore, it is
wise
for
the central
management to
decide
on major
issues, long-term
decisions, growth and business objectives. If these issues are not centralisedthen there
would be a lack of purpose or direction in the business.
Publicado 1st June 2012 por Alejandro Hernandez

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9
MAY
31
Chapter 11: Managing a business

What
do
managers
do?
All organizations have managers. They can come by the name of director, headmaster,
etc...
but
they
all
perform
similar tasks.
These
tasks
are:
Planning:
Planning for the future involves setting goals for a business. These goals give the business
a sense of direction and purpose. Now the whole business will have something to work
towards. Managers also need to plan for resources which will be needed. These are only
two strategies managers
use
to
keep
the
business
running.
Organising:
A manager cannot do everything by himself. Therefore, jobs must be delegated to
employees. Employees need sufficient resources to complete their job, so managers need
to organise
people and resources effectively.
Co-ordinating:
Managers need to bring people together in a business for it to succeed. This is called coordination. If different functional departments do not co-ordinate, they could be
doing completely different things which does not follow any common plan. Managers could
co-ordinate the departments by holding regular meetings or setting up a project
team with
different
members
from
different
departments.
Commanding:
Commanding refers to guiding, leading and guiding subordinates which is very

important in any organisation. Managers need to make sure that all subordinates
arefollowing targets and deadlines. It is the responsibility of the manager to ensure
that all tasks are completed and therefore instruction and guidance must be provided to
employees
so
that
they
can
do
so.
Controlling:
Controlling means evaluating the performance of subordinates, so thatcorrective
action can be carried out if the subordinates are not sticking to goals.
To
sum
up,
this
is
what
management
gives
to
any
organisation:
a sense of control and direction.
co-ordination between departments, preventing wastage of efforts.
control of employees.
making the most out of resources (organisation)

What makes a good manager?
There are different views of why some managers are better than others. Some say that
managers are born that way, while others say good managers are trained. However, good
managers do have these distinct characteristics:
intelligence: to understand difficult ideas and deal with different issues.
initiative: to be able to think of solutions and take control of situations.
self-confidence: to be willing to lead others and be a model image.
assertiveness and determination: to be able to take command of others

and take ideas and solutions to the end.
communication skills: to be able to inform subordinates in a clear way so
that they will respond positively.
energy and enthusiasm: to work with high effort and involvement so that
others will follow.
Styles of leadership:
Different managers use different styles of leadership, and each one makes subordinates
react in a certain way. It is important for the managers to choose the appropriate leadership
style for the right situation. These styles will be discussed in Chapter 13: Motivation at work.
Management involves taking risks:
All managers need to make decisions in what they do, whether it is planning, organising, coordinating, ect. All as you know, all decisions involve some sort of risk.
Are all decisions as important as each other?
There are three types of decisions which has their type of importance and the length of time
that is is going to affect the business. They are:
Strategic: These are very important decisions that will affect the overall
success of an organisation. They are long-term decisions such as company goals or growth.
They are usually taken by the top management.
Tactical: These are decisions that are less important decisions that are taken
more frequently. They can include: new ways to train staff, new transportation routes used,
advertising methods, etc... They are usually taken by the middle management.
Operational: They are day-to-day decisions taken by the lower
management. They tend to be repetitive and previous experience could be used to help
making these decisions. They can be: inventory/stock levels, ordering goods, dealing with
customers.
All of these decisions involve risk. Since they all cost time, money and opportunitycost
one should think well before making a decision.
In business, decisions need to be made and the risks need to be accepted. People like sole
traders who have unlimited liability risk loosing all that they own by setting up a business
are called entrepreneurs. As we already know they are the managers andrisk-takers of
a company. Managers in a limited company are not "real" entrepreneurs, because they are
not risking their assets but the capital of the shareholders.
How can managers reduce risks when taking decisions?
Risks are the results of failure. Risks cannot be eliminated, but they can be reduced by
the process of making decisions. Here are the steps:
Set goals: It is impossible to make decisions if the aims are not clear.
Identify and analyse the problem: Managers all make decisions to solve
a problem. This problem might be how to use your salary in the most efficient way possible,
how to spend the rest of your life, etc... It is imperative that you must understand the
problem before finding a solution for it. Otherwise, you might make the wrong decision.
Collect data on all possible alternative solutions: It is always
important to analyse all possible solutions to find which one is the best. The data collected
should also contain constraints and limitations on the possible decisions (e.g. the law).
Make the final decisions and put it into effect: This is
called implementing the decision. This means that the manager must see to it that the
decision is carried out and is working to plan.
Review and evaluation of decision: This is looking back at the decision

to identify pros and cons of a decision so that the experience can be used in the future. This
is often hard to do especially when the wrong decision is made. It is nevertheless necessary.
Here is a decision-making flow chart from the book that will help you visualise the process:
Management responsibilities in departments:
Human resources department:

Forecasting staffing needs.
Recruiting staff.
Preparing the job descriptions and job specifications.
Planning and implementing staff training programmes.
Interviewing and selecting staff.
Negotiating with worker

onwages and working conditions.
Keeping staff records.
representatives,
such
as
union
leaders,
Disciplining staff
The role of this department is becoming more and more important as the cost of hiring staff
rises, so that it is crucial for the HR department to manage people firmly and fairly. An
unsuccessful HR department results in a high staff turnover (people leaving the business
early). The department must also make sure that the business and staff comply with all
employment laws.
Marketing department:
Market research for:
New products.
New markets.
New opportunities.
Planning the release of new products, often working with the Production
and R&D departments.
Decide on the best marketing mix (discussed later) for a product and
implementing it.
Keeping track of products so extension strategies can be used or to take
the product off the market.
The marketing department is crucial for the business to keep in touch with its customers.
No business can survive without this kind of function.
Accounting and finance department:
Recording all financial transactions.
Collecting all the data and presenting it as the regular accounts.
Preparing all budgets.
Analysing the profitability of new projects.
Deciding on which source of finance to use.
Keeping control over business cash flow.
Production department/Operations management:

Ordering stock/inventory of materials and resources used
producing goods.
Developing and designing new products.
Locating in the most cost-effective place possible.
Deciding on the methods of production and machinery. Purchase of new

machinery will involve the Finance department.
Controlling production to maintain high levels of efficiency.
for
Maintaining the efficiency of machines.

Keeping the quality high to meet the standards of the consumers. All staff
will need to co-operate because poor quality is normally blamed on bad staff.
Administration department:
The responsibilities of the Administration department varies with the business it is in. For
example, in smaller businesses, the administration department would be the same as the
Accounts and Finance department. A larger business will have more specialized
administrative department. These are what the the department does:
Clerical and office support services: Ensure the smooth running of all
other departments.
Sorting of incoming mail and sorting and franking of outgoing mail.
Reception will greet visitors, answer calls, and schedule rooms for
meetings.
Office tasks will include filing all records. e.g. visitors and calls.
Information and data processing.
Responsibility for the IT system:

The IT department is part of the Administration department.
Allows information to
be delivered between
departments accurately.
Provides managers with data to help in decision making.
Cleaning, maintenance and security:
Vital for safe and healthy working conditions.

Failure to maintain equipment and the
conditioner) will result in reduced efficiency.
building (e.g.
air
The widespread use of computers means that many workers in all departments can do
some of these tasks by themselves (clerical and support services), reducing the function of
the Administration department and make them less common in businesses.
Publicado 31st May 2012 por Alejandro Hernandez

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10
MAY
29
Chapter 12: Communication in business

What is effective communication and why is it necessary?
Communication is when a message transferred from one person to another
and is understood by the latter. We communicate everyday (by talking, by
chatting,
by
texting,
etc.)
but
we
need
to
learn
how
to
communicate effectively. Effective communication means that:
"The information or message being sent is received, understood and acted upon in
the way intended."
In business, ineffective communication or communication failure could result in
serious
problems.
Why do people within business need to communicate with each other?
In business, if we do not communicate, we would be working as individuals with no coordination with anybody else in the business. The management, whose tasks are guiding,
instructing and commanding subordinates could not be done because they cannot
communicate with them. Here are some common messages found in the workplace:
No Smoking (sign)
You are fired because you are always late (letter)
Do not touch (sign)
There will be a fire drill 11:00 today (noticeboard)

There are many more things that are communicated. Consequences would be severe if these
matters are not communicated effectively.
The process of effective communication:
Effective communication involves four features:

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

There are two types of communication. One-way communication is when there is no
feedback required for the message, or the receiver is not allowed to reply. This might be the
sign that says "No smoking", or your boss saying: "give me a biscuit". The other is twoway communication, when feedback is required. Therefore, both people are now involved
in the communication process. This could lead to better and clearer information.
Pros of two-way communication:

The
sender
can
now know whether
the receiver has understood and acted upon the message or not. If they have not, the
message might have to be sent again or made clearer. Effective communication takes
place only if the message is understood by the receiver.
Both people are involved in the communication process. This makes the
receiver feel more important which might motivate them to make better contributions to
the topic discussed.
Internal and external communication
Internal communication is messages sent between people inside a business. For example:
The boss talking to his subordinates.
A report sent to the CEO.
External communication refers to messages sent to people or organisations outside the

business. For example:
Orders for goods from suppliers.
Talking to customers.
Advertising to the public.

Both types of communication is almost the same, the only difference is who is being
communicated with.
Why external communication has to work well
External communication can greatly affect the efficiency and image of a business.
Imagine if the wrong information is sent to a supplier and a customer. The supplier would
send wrong materials while the customer might buy products from another company. Here
are some cases which ineffective external communication might turn out to be very
dangerous:
The Finance Manager writes to the tax office inquiring about the amount of
tax that must be paid this year.
The Sales Manager receives an order of 330 goods to be delivered on
Wednesday.
The business must contact thousands of customers because a product turned
out to be dangerous. An add must be put into the newspaper so that customers can return
the product for a refund.
Different ways of communicating: the communication media
Information can be transmitted in several ways:

Verbal: Involves the sender speaking to the receiver.
Written: The message is written to the receiver.

Visual: Using charts, videos, images or diagrams to communicate a
message.
There is no best method of communication, so the appropriate medium of communication
must be selected depending on the situation. First the sender also has to analyse the
advantages and disadvantages of each type of communication.
Verbal communication
Verbal/Oral communication might be:

One-to-one talks.
Telephone conversations.
Video conferencing.
Meetings.
Pros:
Information is transferred quickly. This is an efficient way to communicate

in meeting to lots of people.
There is opportunity for immediate feedback which results in twoway communication.
The message might be enforced by seeing the speaker. Here the body
language and facial expression could make the message easily understood.
Cons:
In big meetings, we do not know if everybody is listening or
has understood the message.
It can take longer for verbal feedback to occur than written feedback.
Verbal
communication
is inappropriate for
storing accurate and permanent information if a message. (e.g. warning to a worker)
Written communication including electronic communication
Here are some written forms of communication:

Letters: Used for both external and internal communication. Follows a set
structure.
Memos: Used only for internal communication.
Reports: Detailed documents about any problem. They are done by
specialists who send them to managers to analyse before meetings. These reports are often
so detailed that they cannot be understood by all employees.
Notices: Pinned to noticeboards that offer information to everyone.
However, there is no certainty on whether they are read or not.
Faxes: Written messages sent to other offices via telephone lines.
E-mails: Messages sent between people with the same computing
facilities. The message is printed if a hard copy is needed.
Intranet: A network inside a business which lets all employees with a
computer message each other.
Internet: The global network for messaging anyone. (e.g. customers,
suppliers)
Pros:
There is hard evidence of the message which can be referred to and help
solve disputes in the future over the content of the message.
It is needed when detailed information is transferred: it could be
easilymisunderstood. Some countries the law states that businesses need to put safety
notices up because people could forget them.
The written message can be copied and sent to many people.
Electronic communication is a quick and cheap way to get to many

people.
Cons:
Direct feedback is not always possible, unless electronic communication is

used. However, this could result in too many emails sent (information overload). Direct
feedback via other means of written communication is hard.
It
is
not
as
easy
to check whether
the
message
has
been understood or acted upon.
The language used might be difficult to understand. The message might
be too long and disinterest the reader.
There is no opportunity for body language to be used to enforce the
message.
Visual communication
Here are some forms of visual communication:

Films, videos, and PowerPoint displays: often to help train new staff or
inform sales people about new products.
Posters: can be used to explain a simple but important message. (e.g.
propaganda poster)
Charts and diagrams:
Can
be
used
in
letters
or
reports
to simplify and classify complicated data. Computer technology could help in the design
of these charts or diagrams. A printed copy might be needed for hard data to add to reports
and documents.
Pros:
Present
information
in
an appealing and attractive way
that encourages people to look at it.
They can be used to make a written message clearer by adding a picture or a
chart to illustrate the point being made.
Cons:
No feedback is possible. People need to checked via verbal or written

communication to check that they have understood the message.
Charts and graphs might be difficult for some people to understand. The
message
might
be
misunderstood
if
the
receiver does
not
know
howto interpret a technical diagram.
Formal and informal communication

Formal communication is the channel of communication that is recognised by the
business, such as notices on boards, emails and memos. Formal means of communication is
important. It shows that the information given is true.
Informal communication might be communication between friends and co-workers.
There is no set structure and the information transferred is not recognised by the
business. This channel of communication could be used by the manager to try out new
ideas, before publicly announcing it to the rest of a company. However, informal
communication can result in gossip can rumour, and managers have no way to remove
these informal links from people.
Communication nets
There are many groups of people in any organisation, and each of them communicate in
different ways. People have connections with each other, and these links
form communication nets. There are three standard types of communication nets:
Chain network:
+ Can be used to transfer important messages from higher management levels to lower
levels.
- This often leads to one way communication.
- The message could become altered as it passes through different management levels.
Wheel network:
+ The central management can pass messages to all departments quickly.

- The departments cannot communicate directly between themselves.
Connected network:
+ This is used to create or discuss new ideas.

+ It specialises in two-way communication.
- Can be time-consuming.
- There is no clear leader or sender of messages.
Which network works best?
There is again, no best network. A company is likely to use different network atdifferent
times or for different groups.
The chain network is for communicating important business policies.
The wheel network is used for sending different messages to
differentdepartments.
The connected network is used to generate new ideas or solutions to
problems where group discussion is the most effective.
The direction of communications
Here is an organisation chart from the book explaining the direction of communications
within the business. The arrows are labeled A, B and C which shows the direction of
communication:
Arrow A (downwards communication):
Used by managers to send important messages tosubordinates.
Does not allow feedback.
The message might be altered after passing different levels.
Arrow B (upwards communication):
Used by subordinate send feedback to managers.
Feedback
subordinates
ensures
that
there
is effective
communication.
Feedback results in higher morale and new ideas contributed to the
business.
from
Arrow C (horizontal/lateral communication):

People at the same level of management communicate with each
other.
Information
and
ideas
can
be
exchanged
both formally andinformally.
Can
cause conflict between
departments.
(e.g.
Production
department asks the Finance department for a budget to hire new staff but is rejected)
Barriers to effective communication
As we already know, the four parts of effective communication includes

thesender, medium, receiver and feedback. However, communication may fail if there
are problems with one of these four features. If one part fails, it becomes abarrier to
effective
communication which
might
cause
a breakdown
in
communication resulting in serious consequences to the business. Here are some
common barriers to effective communication and how to overcome them.
Problems with sender:

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

Solution: Direct lines of communication should be available between the subordinate
and the manager.
Note: The forms of communication are: verbal, written and visual.
The methods of communication can be: telephone, e-mail, meeting, etc...
Publicado 29th May 2012 por Alejandro Hernandez
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11
MAY
27
Motivation
Chapter 13: Motivation at work
People work for a number of reasons. Most people work because they need to earn money to
survive, while others work voluntarily for other reasons. Motivation is the reason why
people work, and it drives them to work better. Therefore, managers try to find out what
motivate workers and use them to encourage workers to work more efficiency. This
results in higher productivity, increased output, and ultimately higher profits.
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 recognised, since employees are a firms greatest assets!
Motivation
theories
People 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.Taylor
Theory:
Money is the main motivator.
If employees are paid more, they work more.
Work is broken down into simple processes, and more money is paid which
will increase the level of productivity an employee will achieve.
The extra pay is less than the increased productivity.

Cons:
Workers are seen rather like machines, and this theory does not take into
account non-financial motivators.
Even if you pay more, there is no guarantee of a productivity rise.
It is difficult to measure an employees output.

Maslow
Maslow created what is know as the hierarchy of needs.
In this diagram, there are 5 different types of motivation:

Physiological needs: basic requirements for survival.
Security needs: the need to by physically safe.

Social needs: the need to belong and have good relationships with coworkers.
Esteem needs: the need for self-respect and to be respected by others.
Self-actualisation needs: the need to reach your full potential and be

promoted.
Businesses realise that the more levels of motivation are available to workers, the harder
they will work. Maslow also suggest that each level of motivation must beachieved
before going to the next level. Once one level of motivation is met, more of that will no
longer motivate the employee.
Cons:
Some levels are not present in some jobs.
Some rewards belong to more than one level on others.
Managers need to identify the levels of motivation in any job before using it
to motivate employees.
Herzberg
To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also
have motivational factors/motivators, that are required for the human to grow
psychologically.
Hygiene factors:
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 are not satisfied, they will act as demotivators. They
are not motivators, since the motivating effect quickly wears off after they have been
satisfied. True motivators are are Herzberg's motivational factors.
McGregor
McGregor splits his theory into what managers believe. One type believes in theory X,
while the other type believes in theory Y. Here is the table:
Here are some differences in how a X manager will work and how an Y managerwill
work:
X managers believe that people are naturally lazy, and has to be pushed
with external factors to work harder. (e.g. higher pay).
Y managers believe that people want to do a good days work but need a
good environment to do the work. A better environment is an internal factor.
X managers will try to provide incentives and supervision for employees
to work hard.
Y managers will try to provide a favourable environment so that
employees can enjoy their work.
Theory's like Taylor's theory are X theories, while others like McGregor's theoryare 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.
Why
Here
do
is
people
summary
of
why
work?
people
Money: to satisfy needs and wants.
Security: knowing that you are physically safe and have job security.
Social needs: to belong to a group, making friends at work.
work:
Esteem needs (self importance): feeling important, feeling the job you do is
important.
Job satisfaction: enjoyment from the feeling of having done a good job.
Motivating factors - financial motivators
There are three ways to motivate a workforce:

financial motivators
non-financial motivators
ways to increase job satisfaction

Financial rewards
Pay 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:
Wages
Wages are paid every week, in cash or straight into the bank account, so that the
employee does not have to wait long for his/her money. People tend to pay wages to manual
workers. Since wages are paid weekly, they must be calculated every week which takes time
and money. Wages clerks are paid to do this task. Workers get extra pay for
the overtime that they do. There are some ways that wages could be calculated:
Time rate: Time rate is payment according to how many hours an employee has worked.
It is used in businesses where it is difficult to measure the output of a worker.
+ Easy to calculate the wage of the employee. A time-sheet must be filled out
by the Accounts department to calculate the wage.
- Both good and bad workers get paid the same wages. Therefore,
more supervisors are needed to maintain good productivity. a clocking-in system is
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 Pay
Deductions include:
Taxes
Pension
Union fees
National insurance: entitles the payee to short-term unemployment

benefits, sickness benefits and state pension.
Piece rate: Piece rates are paid depending on how many units they 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 a workers productivity.
+ Encourages workers to work faster and produce more goods.
- Workers will often neglect quality, and businesses will need a quality
control system which is expensive.
- Workers who focus on quality will earn less. Tension is caused when
some workers earn more than others.
- If machinery breaks down, employees earn less. That is why there is
a guaranteed minimum pay.
Salaries
Salaries are paid monthly, and normally straight into the bank account. They are usually
for white collar workers. A salary is counted as an amount per year that is divided
into 12 monthly accounts. You do not usually receive overtime. 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 other rewards could be given to employees:
Commission: A percentage is paid, usually to sales staff, depending on

the value of goods they 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 a percentage of the profits made.

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: A lump sum paid to employees who have done well. It is usually
paid at the end of the year or before holidays. However, this could cause jealousy between
workers. Giving bonuses to a team works better.
Performance related pay: Employee pay is linked to theeffectiveness of
their work. It is often used in organisations where it is hard to measure productivity. It uses
the system of appraisal: 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 their effectiveness.
Share ownership: Employees receive some shares from the company.
They will either benefit from dividends or sell the shares when theirprice has risen.
They will be more motivated because they feel like apart of the company.
Motivating factors - non-financial motivators
There are other factors that motivate people in a business, and they are often
calledperks or fringe benefits. They may be having free accommodation, 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 satisfaction:
Employees will become more motivated by enjoying the job they do. Job satisfaction can
come in different ways. However, there are some factors that demotivateemployees 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 as responsibility recognition is also
crucial to 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 a production line can now change jobs with each other and making their jobs
not so boring. It helps train the employee in different aspects of their jobs so that they
can cover for other employees if they do not show up.
Job enlargement:
Adding tasks of a similar level to a worker's job. Job enlargement simply gives
morevariety to employees' work which makes it more enjoyable.
Job enrichment:
Adding tasks of a higher level to a worker's job. Workers may need training, but they will
be taking a step closer to their potential. Workers become morecommitted to their job
which gives them more satisfaction.
Autonomous work groups or teamworking:
This is when group of workers are given total responsibility to organise themselves and
perform a task. This makes the employees feel more important, as well as giving them a
sense of belonging when they are part of a team. If they organise themselves differently
every time, the team could get job enlargement andjob enrichment too!
Leadership
Studies have shown that leadership has a great impact on worker's motivation. Good
managers have leadership skills that inspire their workers to work better, as well as
directing them with a common goal. Managers use many styles of leadership, and they can
be summarised into 3 main styles:
Autocratic leadership:
The manager controls all aspects of their subordinates' work.
They keep themselves separate from employees.
Employees
are
expected
to
contribute to decisions.
Communication is only top-down.
obey
every command and cannot
Laissez-faire leadership:
Objectives are shown to employees, but the task is completely
delegated to them.
Communication can be difficult since clear instructions are not given.
The manager has a limited role in this type of leadership.
Democratic leadership:
The manager discusses tasks with his employees before making decisions.
Communication will be two-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 groups

A formal group is an official group that is formed to do a specific task in an organisation.
An informal group is a group of people which are formedindependently by themselves.
They are not official, but the people in the group have a common interest or cause. 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 business
Departments withing 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 a team
project.
Informal groups in business
There are can be many informal groups in a business that can increase the motivation of
workers because they have a true sense of belonging. 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 departments merge to become one, making them one
formal group. However, the people from these former departments still see themselves
as separate from each other. These two groups of people will refuse to co-operate until
they are also merged into an informal 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.
That's the end of Chapter 13! Now, find a way to motivate yourselves and do some good
work!

Etiquetas: Business Business Studies IGCSE Studies
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12
MAY
24
Chapter 14: Recruitment, training and human resources
The
work
of
the
Human
Resources
department
We all know that recruitment and selection is one of the tasks that the HR department
fulfills.
The
other
tasks
will
be
discussed
below:
Recruitment and selection: Involves selecting and attracting the best

workers.
Wages and salaries: Must be enough to motivate or attract workers.

Industrial relations: There must be effective communication between
departments.
Training programmes: Must meet the training needs of employees and

accomplish business objectives.
Health and safety: Must do things according to the law.
Redundancy and dismissal: Must obey all laws when firing workers.
Recruitment
and
selection
Workers are needed when a business starts up, expands or an existing employeeleaves.
Businesses use the recruitment process to successfully employ the right people. This
process is usually undertaken by the HR department, but in small business, HR
departments do not exist since the businesses employ too little workers for it to be of
much use. Here is a diagram summarising the recruitment process:
Vacancy arises.
A job analysis is done, which identifies the responsibilities and tasks of the
1.
2.
job.
3.
4.
5.
6.
7.
8.
A job description lists that responsibilities and tasks to the candidates who
apply for the position.
A job
specification outlines
the
required qualifications, expertise andexperience a candidate needs so that they can be
accepted.
The job is advertised in the appropriate media. (e.g. newspapers)
Candidates fill out application forms, which are short-listed so that only
the best candidates remain.
Interviews are held with remaining candidates, and the ones suitable for
the job are selected.
Vacancy filled.
The
recruitment
process
Job
analysis
and
description:
When a new employee is needed, a job analysis needs to be taken to identify the tasks
and responsibilities of the position. This should be easy for a job that needs replacement,
but
not
so
much
for
a
job
that
has
just
been
created.
Once all the details of the job has been gathered, a job description needs to be drawn up.
This
job
description
has
several
functions:
Given to candidates so they will know what the job will involve.
Allows a job specification to be drawn up which will

therequirements for the job.
state
Shows whether an employee carries out the job effectively or not. It

helps solve disputes between employees and employers about wages, working hours, etc.
The
job
description
for
any
business
will
usually
contain:
The title of the job.

The department one will work in.
Who will be in charge of the job-holder.
Who the job-holder will be in charge for.
The purpose of the job (job summary).
The main duties of the job.
description
sometimes
contain
Job
information
about:
The conditions of employment working hours, wages, pension schemes.
Training that will be offered.
Opportunities of promotion.
Job
specification
After the job description has been drawn up, the qualifications for the job can be
identified.
They
usually
include:
The level of educational qualifications.

The amount and type of experience.
Special skills, talents or knowledge.
Personal characteristics. (e.g. type of personality)
Advertising
the
vacancy
The next stage is on how to get people to know that you have a job to be filled.
Internal
recruitment
The vacancy can be filled by an employee already in the business. It might be suitable for
employees
seeking promotion.
Pros
of
internal
recruitment:
Cons
Saves time and money.

The candidates' reliability, ability and potential are already known.
The candidates know the expectations and rules of the company.
Motivates other employees to work harder to get promoted too.
of
internal
recruitment
No new ideas or experience come into the business.
May create jealousy and rivalry between existing employees.
External
recruitment
Most vacancies are filled with external recruitment, which always involves advertising
the
vacancy.
Here
are
some
suitable
media
of
advertising:
Local newspaper: Usually for office and manual workers. These people
are plenty since the job does not require too much skill.
National newspaper: Used to find workers for senior positions that
requires a lot of skills. It can be read by people anywhere in the country or overseas.
Specialist magazines: Used for particular technical specialists such as
physicists. Can be used to hire people in the home country or abroad.
Recruitment agencies: Keeps details of qualified people, and will send the
suitable applicants to interviews when a business asks for a worker. Many businesses
prefer to use recruitment agencies to find them workers because it is easier. However, it is
expensive since their fee is based on a percentage of the workers pay.
Government job centres: Place where businesses can advertise their
vacancies. These vacancies are usually for unskilled or semi-skilledworkers.
Possible effects of government legislation on the recruitment process
Many
governments
pass
laws
to
create
equal employee
opportunities. They state that all employees should be treated equally in the work place
and receive the same salary for doing the same job. People of any sex and people with
disabilities are treated equally. Therefore, businesses need to be careful
when advertising and treating their
employees
because
they
could
be prosecutedand fined.
Job
advertisement
This is what a business needs to decide when drawing up an advertisement:
What should be included.

Job description
Job specification
Where the ad will be placed.
(depends on job)
Advertising budget.
(depends on job)
Applications
forms
and
CVs/rsums
When a person applies for a job, he will have to fill out an application form, or write
an application letter with a CV enclosed. CVs are descriptions about one's qualifications
and
skills
in
a
set format.
Businesses will use application forms and CVs to see whether an applicant match the job
specifications or not. The closest matching applicants are invited tointerviews in
the selection
These
stage.
are
what
A short-list is
CVs
Name
Address
Telephone Number
Date of Birth
Nationality
Education and qualifications
Work experience
Positions of responsibility
Interests
Names and addresses of references.
letter
of
application
The
should
drawn
should
up.
contain:
contain
briefly:
Why the applicant wants the job.
Why the applicant feels he/she would be suitable.

Applicant forms ask for the same information as the application letter and CV, but may
ask
for
other
types
of
information.
Interviews
Applicants who are invited to interviews will have provided the names and addresses of
their references. These people can give their opinions on the reliability, honesty and
skills of the applicants and they will be likely to tell the truth because the applicants will
not
know
what
they
have
said.
Interviews are the most popular form of selection. However, interviews are not always
the most reliable process of selection. They aim to find out these things:
These
The applicant's ability to do the job.

Personal qualities that are advantageous and disadvantageous.
General characteristics whether they can "fit in"?
are
the
likely
questions
in
an
Why have you applied for the job?
What do you know about this company?
What qualities do you have to offer the company?
What ambitions do you have?
What are your hobbies and interests?
Do you have any questions to ask us?
interview:
Interviews can be one-to-one, two-to-one, or a panel of people to interview people which

is used to select people for important jobs. Some businesses include tests in their
selection.
Skill tests: To test the skills of the candidates.

Aptitude tests: To test how easily candidates can be trained/learn new
things.
Personality tests: To test for people who have specific personal qualities
which will fit into jobs e.g. that has a lot of stress; requires you to work with a team.
Group situation tests: To test how well applicants work with other people.
Rejecting
unsuccessful
applicants
When applicants fail to get the job, they should be informed and thanked for applying.
Training
Training is often needed to do achieve the needs listed below. These needs can be longterm
or
short-term.
Introduce a new process or equipment.

Improve efficiency.
Decrease supervision needed.
Improve the opportunity for internal promotion.
Decrease the chance of accidents
Employees should know the benefits of training for them to take it seriously. Here are
some objectives of
training:
There
Increase skills.
Increase knowledge.
Change attitude, raise awareness.
are
three
main
types
of
Induction training:
Introducing
employee to their business/management/co-workers/facilities.
Lasts one to several
days.
On-the-job training:
Employees
are
trained
professionals do a job.
Only suitable for unskilled and semi-skilled jobs.
training:
a new
by watching
Cuts travel
costs.
The
trainee
may do
some
work.
The trainer's productiveness is decreased because he has to show

things to the trainee.
The
habits can be passed to the trainee.
Off-the-job training:
Workers go to another place for training (e.g. school).
Methods are varied and usually more complex.
Usually classroom training.
Employees still work during the day.
Employees can learn many skills.
trainer's bad
Workforce
planning
A business will need to forecast the type and number of employees needed in the future.
This depends on the firm's growth and objectives. The forecast can be done by:
Finding out the skills of all current employees.
Counting out people who are leaving soon (e.g. retirement).
Talk to staff about who would want to retrain for new jobs.
Provide a recruitment plan. (how many new staff are needed, and how
they should be recruited, internal or external)
Dismissal
and
Redundancy
There are some situations when businesses need to reduce the number of employees they
have.
This
can
be
done
in
two
ways:
Dismissal:
A worker is fired for unsatisfactory work or behaviour.
Fault of the employee.
Redundancy:
Employees are no longer needed.
Not the fault of the employee.
Some reasons are:
A business is closing down a factory.
A business wants to cut costs by reducing the number of

employees.
A business has merged/taken over another and there are too

many staff in certain departments.
New machinery replaces workers.
Employees are given some money to compensate for their lost job.
The money is often negotiated with trade unions.
Some government have laws that makes businesses pay for
their workers this way.
If only some employees are to be made redundant, trade unions will
agree with the fairest way to see who goes. These terms are negotiated with the HR
department.
Sometimes there will be voluntary redundancy by members.
Older workers.
There may be some who wants to leave because they
have other ideas.
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2
MAY
18
Chapter 15: Employee and employer associations

In smaller businesses, if employees have any problems they can talk directly to their
employer. However, in larger businesses that employs many people, it becomes extremely
hard to do so. It is also hard for the Human Resources department to make decisions
when they have about 500 employees (e.g. who will get a pay rise?). It becomes much
easier if decisions are negotiated with a trade union, and employee association that
represents them. This saves the management a lot of time because they do not have to see
individual
employees
to
discuss
problems.
Employees might not be treated fairly at work. They may be overworked andunderpaid.
Trade unions has the role of bargaining with the HR department for better working
conditions,
conditions
of
employment
and
better
pay.
Trade
Unions
Employees with similar interests (higher pay) form a trade union. Trade unions are a form
of pressure group with has the ability to influence business activity. There are four main
types
of
trade
unions:
Craft union: For workers skilled at a particular job.

General union: For unskilled and semi-skilled workers from different
industries.
Industrial union: For all types of workers in an industry.

White-collar union: For non-manual or office workers.
Why
do
workers
join
trade
union?
Unions have a shop steward, who is an unpaid representative of the union. When
someone is new to a job they may ask if they may want to join. If the person joins, they
will have to pay an annual subscription. This money will be use for employing union
officials who
will
represent
the
views
of
the
employees.
Advantages
Trade
pay,
of
union
Strength in numbers.
Improved conditions of employment.
Improved working conditions.
Improved sickness benefits, pensions, and retrenchment benefits.
Improved job satisfaction and encourage training.
Advice/Financial
support if a worker is dismissed unfairly/made redundant or is asked to do
something not part of their job.
Improved fringe benefits.
Employment where there is a closed shop, which is when all employees in
a business must belong to the same union.
unions
need
to:
Put forward their views in the media to influence government decisions on

employment,
etc
Improve communications between workers and managers.
Closed
shop
A closed
shop is when all employees must join one union in order to be employed. It is because
its members feel that the union is doing nothing when non-members receive the same
pay rises as them. They think it is unfair. Trade unions also gain greater strength if all the
employees are members of the union. However, many people think that it is unfair since
they are forced to join they should be able to make their own decisions.
Single
union
agreement
Some companies have a single union agreement, when a business only

agrees to deal with a single union. Any employees who want to join a union
can join this union. It is becoming more popular nowadays because many
employees are becoming multi-skilled, and do not know which union to join.
Advantages
to
the
employee:
Discussions are clearer if there is only one union to deal with.
The union has greater power.

No disagreements between different unions.
A better working relationship should develop between the union and the
management.
Disputes are solved more quickly.

Advantages
to
the
employer:
Discussions are clearer.
A better working relationship should develop, meaning that there would

be less industrial disputes, benefiting both employees and employers.
Disputes are solved more quickly.
It is easier to agree to changes.

The
structure
of
trade
union
The structure of different unions vary, but most elect a President or General
Secretary to work full-time for and get paid by the union. They work at the
union'sheadquarters. If the union is large, there will be union officials to take cared of
members in different branches. Each branch represents its members in one work site,
one factory, or one employer. Each branch has a representative. Unions are
usually democratic and their union officers are voted up by the members.
Employer
associations
Employers join what are called employer associations/employer federations/trade

associations. Like trade unions, employer associations are made up of businesses and
employers
and
who
all
pay
annual
fees
for
their
benefits.
Advantages
of
joining
an
employer
association:
They negotiate with
They give advice on employment laws, health and safety, taxation
trade
unions
on
behalf
of
their
members.
laws etc
Strength in numbers, they want to influence government decisions.

They can share ideas and research facilities.
They can organise bulk buying for members and get discounts.
Employer
associations
and
the
government.
Employer associations represent similar wants of businesses, and will try to influence the
governments
to
give
better
conditions
for
businesses
to
prosper:
They want the government to control things such as inflation, law and
order, health and safety, and education for the workforce.
Lower taxes.
More freedom for businesses.
Fair competition.
Good transport infrastructure.
Access to overseas markets.
Reliable source of power.
Collective
bargaining
This is when representatives of different interest groups negotiate and acollective

agreement is
made.
The
bargaining
can
be
with businesses or
with
thegovernment. Collective
bargaining in businesses usually means that the representatives of one or more trade
unions negotiate with one or more employers or employer associations to come up with
a mutually
acceptable agreement on conditions of employment.

Why
trade
unions
want
wage
increases:
Inflation.
It is difficult to recruit qualified workers (so pay them more!).
Pay differentials need to be maintained (everybody's wages should rise
when the minimum wage rises).
Changes in the workplace, e.g. new machinery.
If there are increased productivity, wages should increase too. There
are productivity agreements, when managers and trade unions agree to raise prices for
increased productivity.
Often agreements take place and the "middle path" is taken. However, this does not
always happen and if the workers and unsatisfied with the agreements, they will
use industrial
action.
Industrial
action
There are various forms of industrial action that try to influence the decisions of
employers.
Here
are
some
of
their
most
comment
forms.
Strikes
Strikes are when workers stop working and leave the workplace to protest against things.
Token strike: Stoppage for an hour, a few hours or half a day to show
strong feelings.
Selective strike: Only a few workers go on strike. They are chosen by the
union to cause as much disruption as possible.
All out strike: All union members stop working and wait until a dispute
has been settled.
Unions
have
to
pay
their
members
out
of strike
funds as long as the strike has been approved by the union. All members vote to see if
the
strike
is
favourable
or
not.
Picketing
This
is
when
workers stand outside the
factory
holding signs to protest and stopany people
going in and out as well as goods. This can halt the production process. The strikers
gain publicity and gives the firm a bad image. This puts pressure on the firm to settle
the
dispute.
Work
to
rule
This is when workers stick rigidly to every rule and regulation in the business so that
it slows
down the production process. They still get paid since they are technically doing
nothing wrong, but this still causes a lot of disruption in the workplace.
Go
All
slow
workers
deliberately
do
things
very
slowly.
Non-cooperative
Workers refuse to work with any new rules or follow any new practices they
do
not
approve
of.
Overtime
ban
Workers refuse to do any overtime. This might damage the business if they need to
complete
some
orders
quickly.
Possible
harmful
For employers:
Loss
consequences
of
of
industrial
action:
output.
Loss of profit.
Loss of customers.
Poor reputation.
Bad image.
For employees:
Loss of wages.
They might lose their jobs if the company suffers low profits.
For customers:
They need to find another supplier which might cost more
(production is stopped)
Shortage of products.
Deliveries not made.
For other businesses:

May lose income.
May not have materials to produce goods.
For the economy:
Workers have less money to spend.
Less tax revenue.
Country gain bad reputation for late deliveries.
Workers may be made redundant.
Exports may be lost and imports increased.
Employer's
powers
However, employers can do something about the situation. Usually, they will sign anostrike agreement with the union which also involves pay rises. The pay rises are
determined by an arbitrator, an independent person who represents both sides and
decides on the best decisions possible. Again, he will most likely choose the"middle
path".
Nevertheless, if strikes do happen, here are some things employers can do:
Dismiss all workers: This leave the company in a very terrible position
since they can't produce goods or deliver goods.
Lock-out the workers: Stop workers from coming to work or get paid.
Used to counter work to rule and go slow strategies.
Institute a pay freeze: Used if employees are refusing to follow new rules,
practices or operate new machinery.
Worker
participation:
The management needs to let everyone feel that they are part of the business. This means
that managers will let workers participate in business decisions. There are several ways
of
doing
this:
Worker directors: Some workers become directors, but they are not
allowed to attend all board meetings.
Works councils: These are where representatives of employees get

together and discuss matters that affect employees with managers. Works councils are
called European committees in Europe, and are becoming more common there.
Multinationals with more than 1000 workers or 100 workers per branch will have to
create a works council and will have to always consult it when making decisions
affecting employees.
Quality circles: This is often used in Japanese companies, where workers

regularly debate on how to improve quality and efficiency.
Using a democratic style of leadership: Workers are delegated tasks and

are consulted in business decisions.
Advantages
of
worker
participation
It increases the flow of information and improve relationships between

the employer and the employee.
It increases motivation.
It increases job satisfaction.
It
benefits
the
company
since
it
can
use knowledge from experienced workers.
Disadvantages
of
worker
participation
It is time consuming.
Workers may lack necessary technical knowledge.
If representation is done via trade unions, non union members won't be
affected.
There could be conflict of interests.

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3
MAY
15
Chapter 16: The market and marketing
What
is
marketing?
A market is
where buyers and sellers come
together
and exchange their products for money. It can be in the streets, on the internet, in shops
around the world, etc Customers and sellers exchange both goods and services for
money.
Product-orientated
and
market-orientated
businesses
A product orientated business focuses on the quality and price of the product before
finding a market for it to sell in. These type of businesses usually produce basic
needs. New technology could be developed this way, and customer wants are created
by advertising.
Other big companies cannot afford to produce a product that will not sell, so they have to
do market research first to find consumer wants before developing a product. They are
called market-orientated businesses. They will need to set up a marketing budget for
this, which is a financial plan for marketing of a product, which contains the amount of
money
the
Marketing
department
may
spend
on
marketing.
What
is
marketing
Marketing is
the management
process which
identifies
consumer wants,
predict future wants, create wants and find ways to use these wants to the fullest (most
profitably). In other words, businesses try to satisfy wants in the most profitable way
possible. Marketing covers a wide range of activities such as: advertising, packaging,
promotion,
etc
The
Marketing
department
Most businesses will have a Marketing department, which will have a Marketing
Director. He will be in charge of things such as R&D, distribution and pricing. Here is an
organisational chart showing what departments the marketing director controls:
Sales department: Responsible for sale and distribution of products for

each region. There may also be an export department.
Research and Development department: Responsible for finding out

consumer wants and developing new products. They also need to find ways
to improve an existing product.
Promotion department: In charge of advertising and promotion. It will

need a marketing budget which limits the amount of money it can spend.
Distribution department: It transports products to their markets.
The
objectives
of
marketing
A successful Marketing department should be able to achieve these objectives for the
business:
To increase sales revenue and profitability.

To increase market share (percentage of sales a product has in a market).
To maintain or improve image of a product or company.
To target a new market or market segment.
To develop new products or improve existing ones.
SWOT
analysis
This is a method to evaluate the statistics of a product of business. It assess these things:
Strengths (internal)
Weaknesses (internal)
Opportunities (external)
Threats (external)
Strengths and weaknesses of a product are its internal factors, while opportunities and
threats
are external
factors.
Market
segments
Market segments are parts of a market which contains people which have
similar preferences for their products. The Marketing department should know which
segment their product fits the most, so that they can advertise and sell their products to it.
There are two ways to segment markets. By the type of product or the attributes of
the customers buying it. Here are two types of markets which are segmented based on
the
product:
Mass market: Where there is a large number of sales of a product. (e.g.

Pepsi can be bought anywhere)
Niche market: A small market for specialised products. (e.g. Ferrari cars)
Here is how a market can be segmented regarding people buying the product:
Income
Age
Region
Gender
Use of product
Lifestyle
It is very important to target the right market segment since it can increase
sales by a lot. If a business can analyse all of these market segments, they may find a
market segment whose needs are not being met. This is when the business finds agap in
the market, and it could produce goods to take advantage of this gap and again increase
sales.
The
marketing
mix
The marketing mix is a term that describes how products are marketed. You must
remember that before marketing can be achieved, market research is needed. The rest is
summarized into the four P's. Let's look at them briefly first, since they will be covered
in
other
chapters:
Product: Design and quality, competitiveness, packaging, etc
Price: There are different pricing strategies. Businesses need to use them so
that they increase sales.
Promotion: Advertising and promotion. Discounts, TV adverts,

sales,packaging,
etc
Place: The location of the point of sale (the shop). Channels of

distribution. Type of shop (wholesaler or retailer?)
A successful product require effective use of the four P's. However, businesses
must be careful to not let each of these factors counteract each other (e.g.
expensive but low quality goods), else the product will fail.
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4
MAY
Chapter 17: Market Research
Why
is
market
research
needed?
Any business should find out what people want to buy and how many people are going to
buy that product before producing a product since the chances of failing are very high.
Usually, market research try
to
answer
these
questions:
What feature of the product do they like/dislike?

Are people willing to buy the product?
What price are people prepared to pay?
Location of the selling point of the product.
Type
of customer who buys the product.
Type of promotion that will be effective.
Competition in the same industry.
Businesses need to know these things as well as consumer wants to be more

competitive. There are two main types of information that can be gathered
from
market
research:
Qualitative
information: information
where opinion or judgement is
necessary.
Quantitative information: information about the quantity of something.

There
are
two
ways
to
gather
any
information
for
market
research:
Primary research or field research.

Secondary research or desk research.
Primary
research
Primary research is gathering original data which may require direct contact with
customers.
There
are
several
ways
to
do
primary
research:
Questionnaires
Interviews
Consumer panels
Observation
Experiments
Note: Questionnaires, interviews and consumer panels are all types of surveys.
The
process
of
primary
research
Identify the purpose of the market research.

Decide on the best method of research. (primary, secondary or both)
Decide on the size and type of sample (group of people who will be asked)
Carry out the research.
Collate data and analyse results.
Produce a report. (may include recommendations of action paths to take)
1.
2.
3.
4.
5.
6.
Methods
of
primary
research
Questionnaires
Questionnaires involve asking people questions. Deciding what questions to ask since
sometimes questions may mislead people and make them answer what they don't really
think.
Pros:
Detailed qualitative information can be gathered.

Customers' opinions can be gathered.
Cons:
If the questions are bad it could mislead customers.

Takes time and money to collate the results.
Interviews
Interviews are face-to-face conversations with customers where the interviewer has a set
of prepared
questions.
Pros:
The interviewer can explain any questions the

notunderstand.
Detailed information about customers' opinions.

Cons:
interviewee
does
Interviewer bias. The interviewer might unconsciously lead the

interviewee to answer in a certain way.
Time consuming and expensive.

Samples
A group of people who are chosen to do market research on. There could be:
Random sample: A random number of people are selected.

Quota sample: People are selected for some certain characteristics.
Consumer
panels
Consumer panels are groups of people who agree to provide information andspending
patterns about a product. They may even test it and give feedback on likes and dislikes.
Pros:
They
provide detailed
information about
product.
Cons:
They can be time consuming, expensive, and biased if opinions of some is

influenced by others.
Observation
Observation involves:
Recording: e.g. meters can be fitted to a monitor to see what people are
watching.
Watching: e.g. see how many people go into a shop and actually buy
something.
Audits: e.g. counting inventory to see what has sold well. (inspecting)
Pros:
It
is inexpensive.
Cons:
Only provide basic figures and not reasons why people do things.
Experiments
Experimenting involves giving products to consumers to see what they think about it.
Pros:
Easy to set
up, carry
out,
and
gather
consumer opinions.
Cons:
People might give wrong feelings to avoid offence.

Representatives of samples may not be asked, just people who shop in an
area.
Many potential customers may not be asked.
Secondary
research
Secondary research means taking information that has been already collected by others.
Internal
sources
of
information
Data collected from past researches could easily be used again if it is needed. Examples
of
internal
sources
of
information
include:
Sales
department: sales records, pricing data, customer records, sales records.
Distribution and PR personnel.
Finance department.
Customer service department.

External
sources
of
information
Data collected from sources outside the business. The data may still be useful but there
are many limitations since it has been gathered for other purposes. Sources include:
Internet: gives all sorts of information, but the info must be validated.
Trade and employer associations: gives info about things in an industry.
Specialist journals.
Research reports.
Newspapers: about the economy and disposable income of workers.
Government reports and statistics: contains things such as age groups and
culture.
Media reports.
Market research agencies' reports: detailed reports on the economy.

Expensive to buy.
Secondary research is often a much cheaper way of obtaining information. It also gains
access to data which cannot be gathered by primary research such asgovernment
issues or
the
economy.
Who
carries
out
market
research?
Normally, research is done by any business who needs it. In smaller businesses, owners
use secondary research since they cannot afford to conduct primary research. However, if
a business has enough money, it can afford to have aspecialist market research
agency to
do
the
research
for
it.
Accuracy
of
market
research
information
The accuracy of market research depends on how the research was conducted andhow
carefully samples have been selected. Here are some ways to make information from
market
research
more
accurate:
A sample needs to be truly representative of the total population, hence

a quota sample is normally used.
The larger the sample, the more accurate the results.
Questionnaires need to be tested on a small group of people to see if there

are misinterpretations. The questionnaires will be modified to be as clear as possible.
Concerning secondary research, there are a few problems with it:
Data collected by others may not be accurate since it was used for
otherpurposes.
Data can be out of date.

All in all, it must never be assumed that information collected from market research is
completely
correct.
How
to
Firstly,
you
design
need
and
to
ask
use
yourself
questionnaire
some
questions:
What do
need
to
find
out?
Who do I need to ask?

Where will I carry out my questionnaire?
Writing
the
questions
Ask no more than 12 questions. (impatience)

Make the questions simple. The answers should be simple
enough tocollate. (e.g. Yes/No answers)
Use choice of age groups.
Avoid open-ended questions.
Avoid misleading the interviewee with questions. (don't want to cause
offence)
The order of the questions should be logical.
Carrying
First
out
you
the
need
to
questionnaire
figure
out:
How you will ask the questions.

How you will collate the results.
Then:
Where are you going to ask the questions.

Who are you going to ask?
And
finally:
How many people will be asked?
When will you ask the questions? (time)
Analysing
questionnaires
Analysing the results should be straightforward if you have easily collated the data. It
simply involves reading the answers and thinking about what they mean. It takes practice,
so open your books to pages 271 and 271 and let's do the case studies!
Publicado 2nd May 2012 por Alejandro Hernandez
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2
APR
11
Organisational
Structure: refers
of responsibilities within an
GLOSSARY
to
the
levels
of
management
and
division
organisation.
Job Description: outlines the responsibilities and duties to be carried out by someone employed
to
do
a
specific
job.
Delegation: Means giving a subordinate the authority to perform particular tasks. It is very
important to remember that it is the authority to perform a task which is being delegated -- not
the
final
responsibility.
Chain of command: is the structure in an organisation which allows instructions to be passed
down
from
senior
management
to
lower
levels
of management.
Span of control: is the number of subordinates working directly under a manager.
Line managers: have direct authority over subordinates in their department. They are able to
take
decisions
in
their
departmental
area.
Staff managers: are specialist advisers who provide support to line managers and to the board of
directors.
Decentralised management structure: means that many decisions are not taken at the centre of
the business at all but are delegated to a lower level of management.
Centralised management structure: means that most decisions are taken at the centre, or higher
levels
of
management.
Strategic decisions: are very important decisions which can affect the overall success of the
business.
Tactical decisions: are those which are taken more frequently and which are less important.
Operational decisions: are day-to-day decisions which will be taken by a lower level of managers.
Communication: is the transferring of a message from the sender to the receiver, who
understands
the
message.
Message: is the information or instructions being passed by the sender to the receiver.
Transmitter/Sender: is the person starting off the process by sending the message.
Medium of Communication: is the method used to send a message, for example, a letter is a
method of written communication and a meeting is a method of verbal communication.

Receiver:
is
the
person
who
receives
the
message.
Feedback: is the reply from the receiver which shows whether the message has arrived, been
understood
and,
of
necessary,
acted
upon.
Trade Union: is a group of workers who have joined together to ensure their interests are
protected.
Craft Union: is a trade union which represents a particular type of skilled worker.
General Union: is a trade union which represents workers from a variety of trades and industry.
They
are
often
unskilled
but
also
include
semi-skilled
workers.
Industrial Union: is a trade union which represents all types of workers in a particular industry.
White-Collar Union: is a trade union which represents non-manual workers, for example, office
workers,
management
and
professional
people.
Shop Steward: is an unpaid representative of a trade union at factory/office level.
Closed Shop: is where all employees must be a member of the same trade union.
Single-Union Agreement: is when a firm will deal with only one particular trade union and no
others.
Employer Associations: are groups of employers who join together to give benefits to their
members;
also
known
asemployer
federations or trade
associations.
Negotiation: is another name for collective bargaining. It is when there is joint decision-making
involving bargaining between representatives of the management and of the workforce within a
firm.
The
aim
is
to
arrive
at
a
mutually
acceptable
agreement.
Collective-Bargaining: is negotiations between one or more trade unions and one or more
employers (or employers' associations) on pay and conditions of employment.
Productivity agreement: is where workers and management agree an increase in benefits, in
return
for
an
increase
in
productivity.
Industrial Action: is action taken by the trade unions to decrease or halt production.
Strike: is
when
employees
refuse
to
work.
Picketing: is when employees who are taking industrial action stand outside their place of work to
prevent or protest at the delivery of goods, arrival and departure of other employees, etc.
Work
Go
to
rule: is
Slow: is
when
when
rules
employees
are
do
strictly
their
obeyed
normal
so
tasks
that
but
work
more
is
slowed
slowly
than
down.
usual.
Non-Cooperation: is when employees refuse to comply with new working practices.
Overtime-Ban: is when employees refuse to work longer that their normal working hours.
No-Strike Agreement: is reached when trade unions and management agree to have pay disputes
settled
by
an
independent
arbitrator
instead
of
taking
strike
action.
Arbitrator: listens to both sides in the industrial dispute (trade union and management) and then
gives
a
ruling
in
what
they
think
is
fair
to
both
sides.
Lock-Out: employees
are
locked
out
of
their
workplace
by
the
employers.
Worker participation: occurs when employees contribute to decision-making in the business.

Works councils: are committees of workers who are consulted or informed an matters that affect
employees.
Market: A market is where buyers and sellers come together to exchange products for money; this
will
not
usually
be
a
single
location.
Product-orientated business: A product-orientated business is one whose main focus of activity is
on
the
product
itself.
Market-orientated business: A market-orientated business is one which carries out market
research to find out consumer wants before a product is developed and produced.
Marketing budget: A marketing budget is a financial plan for the marketing of a product or a
product range for some specified period of time. It specifies how much money is available to
market the product or range, so that the Marketing department now how much they may spend.
Primary research: is the collection and collation of original data via direct contact with potential
or
existing
customers.
Also
called
field
research.
Secondary research: is the use of information that has already been collected and is available for
use
by
others.
Also
called
desk
research.
Questionnaire: A questionnaire is a set of questions to be answered as a means of collecting data
for
market
research.
Consumer panels: are groups of people who agree to provide information about a specific product
or
general
spending
patterns
over
a
period
of
time.
Random sample: A random sample is when people are selected at random as a source of
information
for
market
research.
Quota sample: A quota sample is when people are selected on the basis of certain characteristics
(e.g. age, gender or income) as a source of information for market research.
Brand name: The brand name is the unique name of a product that distinguishes it from other
brands.
Brand loyalty: is when consumers keep buying the same brand again and again instead of choosing
competitor's
brand.
Brand image: is an image or identity given to a product which gives it a personality of its own and
distinguishes
it
from
its
competitors'
brands.
Packaging: is the physical container or wrapping for a product. It is also used for promotion and
selling
appeal.
Product life cycle: The product life cycle describes the stages a product will pass through from its
introduction, through its growth until it is mature and then finally its decline.
Cost-plus
pricing: is
the
cost
of
manufacturing
the
product
plus
profit
mark-up.
Penetration pricing: is when the price is set lower than the competitors' prices in order to be able
to
enter
a
new
market.
Price skimming: is where a high price is set for a new product on the market.
Competitive pricing: is when the product is priced in line with or just below competitors' prices
to try to capture more of the market.

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Chapter 1: The purpose of business activity

The economic problem: needs and wants

Division of labor / Specialization

Why is business activity needed (summary)

Combines factors of production to create goods and services

Value for money

Chapter 2: Types of business activity

Levels of economic activity

No. of workers employed

Value of output and sales

Industrialization: A country is moving from the primary sector to the secondary

Comparing the size of businesses

Types of mergers (and main benefits):

Horizontal merger: Merging with a business in the same business sector.

Assured outlet for products

Why some businesses stay small?

That's the end of chapter 2!

Chapter 3: Forms of business organization

The owner gets 100% of profits.

Motivation because he gets all the profits.

He has personal contact with customers.

Nobody to discuss problems with.

Limited finance/capital, business will remain small.

The owner normally spends long hours working.

Some parts of the business can be inefficient because of lack ofspecialists.

Does not benefit from economies of scale.

No continuity, no legal identity.

Sole traders are recommended for people who:

Do not require a lot of capital for their business.

Require direct contact for customer service.

Responsibilities are split.

Any losses are shared between partners.

No continuity, no legal identity.

Partners can disagree on decisions, slowing down decision making.

If one partner is inefficient or dishonest, everybody loses.

Limited capital, there is a limit of 20 people for any partnership.

Recommended to people who:

Owners need to deal with many legal formalities before forming a

Shares cannot be freely sold without the consent of all shareholders.

All accounts must be made public.

The company has to apply for a listing in the Stock Exchange.

Potential to raise limitless capital.

No restrictions on transfer of shares.

High status will attract investors and customers.

Many legal formalities required to form the business.

Many rules and regulations to protect shareholders, including the

Control and ownership in a public limited company:

All workload and decision making is equally shared, a manager maybe

The most common cooperatives are:

retail co-operatives: provides members with high quality goods or services

A separate legal unit, has both limited liability and continuity.

Members may disagree just like in a partnership.

Pooled knowledge. (e.g foreign and local business)

Risks are shared.

Disagreements might occur.

The two partners might run the joint venture differently.

The franchisee has to pay to use the brand name.

All products sold must be bought from the franchisor.

Cons for the franchisor: