Mr G Martin 2007
GCSE Business Studies
Revision Guide 1
Contents Structure of the exam
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Revision list
10
Glossary of key terms
14
Core Paper External Environment
17
Business Structure, Organisation & Control
26
Business Behaviour
36
People in Organisations
50
Aiding & Controlling Business Activity
55
Business Communication & Marketing Paper 58
Case Study Paper Key Terms
68
Key facts about Diva PLC
71
Case study analysis and practice questions
72
Case study exam structure
80
Practice Exam Questions
81
Useful Revision Websites
98
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THE STRUCTURE OF THE EXAM 3
Hello, I’m Mr Martin (yer I can draw) and this is my lovely revision guide to help get you through the GCSE Business Studies exams, it’s so good, a little bit of…. well you know the rest!!!
About the exams OCR GCSE Business Studies Specification A The exam is spilt into two tiers, you will either sit the higher or foundation tier, your teacher will tell you which one you are entered for… You will be taking three Business Studies exams:
Core Paper This paper is a general (synoptic) Business Studies paper, and contains of up to five compulsory questions based on short business case studies. The paper will be marked out of 120 marks, four of which will be awarded for quality of written communication. These ones will have a star next to them and will have something like [4+2 marks] next to them which means 4 marks for the question and two marks for the written communication 50% of the overall assessment Thursday 14th June (Ihr 45mins)
Business Communication & Marketing There will be two questions based on Business Communication and Marketing ONLY. The papers will be marked out of 60. Two marks will be awarded for the quality of written communication.
25% of the overall assessment Tuesday 19th June (1 hr)
Case Study Seven questions based on a pre-seen Case Study of a business scenario. You will not be allowed to take notes or annotated versions of the Case Study into the examination room. A new copy of the Case Study will be issued with the questions. The papers will be marked out of 120 marks, eight marks will be awarded for quality of written communication. 25% of the overall assessment Friday 25th May (1hr 30mins) 4
QUESTION TYPES Let me show you my MAGIC TRIANGLE!
Whaaaaaaat ?
It’s lush!
All exam questions in Business Studies can be answered using this triangle, and here is how it works!! First of all, there are four different levels to exam questions. Level 1: State a fact/ write a description-
Level 2: Application of knowledge-
With level 1 questions you are required to state a fact, or give a definition For level 2, you need to state a fact, the apply. So for example, a sole trader is a company which is set up and controlled by one person, for example a window cleaner
Level 3: Research and analysis-
For level 3, you must show that you have read or understood the case study which you are given, and then apply your answer to the case study. In other words pick out key facts from the case study to help your answer.
Level 4: Evaluation-
Level 4 questions require you think about two sides of an argument, the advantages and disadvantages, the pros and cons, etc, etc. You then need to give you opinion at the end to sum up. For examples based on all of the advantages, I think that this business should go ahead with a merger, etc, etc.
The levels are like building blocks, so do get full marks for a level 2 question, you must also state a fact (level 1). To get full marks for a level 4 question, you need to ensure that you have stated a fact (L1), given an example (L2), read the case study and applied you answer to it (L3) stated advantages and disadvantages, then given you informed opinion (L4). In other words you must do L1, L2 and L3 then you can start to pick up the L4 marks. 5
How to spot the level of response required There are three question types:• Short answer questions which will target assessment objectives L1 & L2. • Structured response questions which will target all four assessment objectives, but will focus mainly on L1, 2 & 3. • Open-ended questions target all of the four levels. Marks are also given for the quality of written communication.
Short answer questions Marks:
Usually worth a small number of marks e.g. 2-3 marks
Command:
Define, Describe, Explain, Give, List, Identify, Outline, State, What is meant by, Name, Apply, Calculate, Demonstrate, Examine, Give an example, Using examples, With reference to the evidence, How, Show how, Why, Which, Using, Draw on your knowledge, Using your knowledge of, Graph, What trends, etc.
Structured response questions Marks:
Usually a mid- range number of marks e.g. 4- 6 marks
Command:
State the advantages and disadvantages of, What would be the benefits/costs of, Analyse, Calculate and comment upon, Compare and contrast, Discuss, Explain, Show how, Which, What factors, Examine, Identify, Organise, What, etc.
Open ended questions Marks:
Usually the high mark questions e.g. 10- 16 marks
Command:
Advise, Evaluate, Assess, Consider, Discuss, Explain why, To what extent, Assess the extent, Weigh up, Suggest, Justify, Predict, Do you think, How far, Would you agree, Why, Suggest, Evaluate the suggestion, Critically assess, Assess the relative importance, etc.
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Command Words Ok, that’s great, but what do the command words mean? State
To give a fact
Define
To give the definition of something, to state a fact
Describe
To talk about something
Summarise To give a brief overview of something Distinguish To look at two things and draw out the strengths weaknesses or characteristics of something Discuss
To talk about something in depth
Explain
To discuss something, considering the reasons why it is the way it is
Analyse
To read through something and find the key points, draw out the advantages and disadvantages, strengths and weaknesses, etc
Assess
Similar to analyse
Evaluate
To consider the strengths and weaknesses, advantages and disadvantages and then give your opinion
Contrast
indicate the differences between two things
How to get the top marks Right, so how does all this fit together? Short answer questions L1 & L2 For these lower marks questions, you need to show that you know the answer to the question and can give an example, you should also try to apply your answer to the case study For example:
Define the term Public Limited Company [2 Marks] A public limited company is one which is owned by shareholders, and run on a day to day basis by a board of directors. A PLC can sell it’s shares on the stock exchange. For example ITV plc which provides a TV service. 7
L1- A clear definition L2- The use of an example
Structured response questions (L1, L2, L3) For this question type you must demonstrate L1 and L2, and that you have analysed the case study (L3) For example:
Explain the difference between fixed and variable costs using examples relevant to Home Service. [4 Marks]
Fixed costs are those that are always there, regardless of how much or how little you sell, for example rent, salaries and business rates, however variable costs are different types of cost because variable costs those that rise as your sales increase, such as additional raw materials, extra labour and transport. In the case of Home Service the fixed costs are the lease of the van which James will use to run his business, the variable costs are the fuel costs of transport of the goods to the customers houses.
L1- The candidate clearly understands the terms fixed and variable costs. The candidate demonstrates that they know the difference between fixed and variable L2- Examples are used to apply the knowledge and understanding L3- The answer is clearly applied to the case study
Open Ended Questions (L1, L2, L3 & L4) These questions will require you to demonstrate all of the skills; stating your knowledge (L1), application (L2), using evidence from the case study (L3), and making a reasoned judgement (L4) For example:
When James carried out some financial planning he discovered that he needed £5000.He is considering taking out a bank loan for this amount. Explain the advantages and disadvantages to James of a bank loan for £5000.
L1/ L2- Showing a thorough understanding of sources of finance, specifically bank loans
You should justify your opinion.
L3- Showing advantages & disadvantages that are relevant to James
[12 Marks]
L4- Giving James some overall advice, based on AO3. Should he take out the loan or not?
In Summary… Right so before you even begin to start answering exam questions, you need to do the following: 1) Read the whole exam paper first 2) Pick out your confidence questions (the ones you know how to do really easily), this wakes up your brain, once you have done these you will find that the more difficult questions start to make better sense! 3) Read the question carefully. 4) Identify the level of response, which the question is looking for, is it Level 1, Level 2. Level 3 or Level 4…. Write a quick note next to the question to remind you. 5) Look at the marks, this will help you to identify the level of response, and the amount that you 8
need to write 6) Identify the keywords, I recommend you to underline them. What does the question want you to actually talk about? 7) Plan, if it is a L4 question, just jot down three points for and three points against… this will then remind you when you are answering the question, rather than ‘going off on one!!’
I can smell ham…
Does that make sense?
Have a go... It’s your turn, for each of the following questions, identify; (i) the level of response (ii) the command word (iii) the key words and if it’s a L4 a short plan of your answer The first one is done for you.. Explain why a sole trader is an appropriate form of ownership for Mr P. Nurse’s business? Key Word Level of response-> L3 Because you would need to analyse a case study
Command word A.
State and explain 3 reasons why organisations may need to recruit workers?
B.
List 10 items that might be included in a job advertisement.
C.
What media would you use to advertise a Maths teaching post?
D.
What does internal recruitment mean?
E.
Explain what is meant by Maslows Hierarchy of needs. List all five levels and explain in your own words what each one means.
F.
EV plc is also looking for people to take on franchises in their printing business. Laura Lloyd, who already runs her own printing shop as a sole trader, has seen the advertisement and is considering taking on a franchise. The other alternative Laura has considered is to go into partnership with her sister, Emily. Advise Laura whether she should take on the franchise 9
REVISION LIST 10
CORE PAPER Business Activity Needs and wants Primary, secondary and tertiary sectors. The Organisation Major business objectives and their importance. Stakeholders Differing aims of private and public sector The Changing Business Environment Government influence on decisions - local, national and international. Different ways of measuring the size of a business The impact of technology on business. Global opportunities for and constraints on business activity including the effects on UK business of membership of the EU. Ownership and Internal Organisation Types of business organisation - sole trader, partnership, limited company, public corporation, holding company. The importance and growth of multi-national companies. Limited and unlimited liability. Business activity undertaken by the government, and through government agencies. Financing Business Activity Short and long term needs of the business. Main internal and external sources of finance for both public and private sector organisations. Factors affecting the methods of finance chosen. Marketing Primary and secondary market research Presentation and use of research results. Market segmentation Franchises. The main elements of the marketing mix. o Product - design, name, range, packaging, the product life-cycle. o Price - methods and strategies. o Placement - channels of distribution. o Promotion - advertising, media selection and point-of-sale promotion. How these elements are combined into a marketing strategy. Production Using and managing resources to produce goods and services. Methods of production - job, batch, process, flow. Economies of scale and dis-economies of scale. Classifying costs - fixed and variable, direct and indirect. Simple models of break-even analysis, their use and limitations. Quality assurance, meaning, methods and importance. Financial Information and Decision-Making Cash flow forecasts. Importance of profit. 11
The purposes and main elements of profit and loss account - gross and net profit calculations. Purposes and main elements of the Balance Sheet. Ratios
Human Needs and Rewards Payment systems. Pay slip. Managing and motivating workers, the benefits of and the methods of motivation and leadership styles. Management and Recruitment Stages in recruitment and selection. The documents of recruitment and selection including the job description, person specification, advertisement, application forms and CVs. Training and Staff Development The purposes of training – the maintenance and development of people in organisations. Types of training. Reasons for Regulating Business Activity Supporting and controlling the impact of business activity on people, the economy and the environment. Influences on Business Activity Location and development - grants, planning control, enterprise zones, infrastructure. The workforce - trade unions, types of industrial action and resolving conflict. Health and safety, contract of employment, employment protection, equal opportunities, the national minimum wage. The consumer - consumer protection.
Marketing & Business communications Communication in Business Activity Types of communication within different organisations. The importance of effective business communication. Barriers to effective communication. The changing nature of communication within and between businesses. The impact of changes in ICT on the nature and location of the workplace. The Impact of e-commerce on Business Activity The nature of e-commerce. Difficulties in the development of e-commerce as a means of trade. The benefits of e-commerce to business and the consumer. Consumer protection in relation to e-commerce. Issues of security and confidentiality in e-commerce. Marketing and the Business Environment The aims and importance of marketing. The link between marketing and e-commerce. Niche, mass and test markets. 12
The use of socio-economic groups and sampling methods in market research. SWOT analysis. The link between demand and supply and marketing. Price elasticity of demand – meaning, calculation and importance. Enterprise and innovation in marketing. Ethical issues in marketing activity.
Marketing: Developments and Constraints Technological developments in the marketing context. The use of electronic information in targeting markets. The use of credit as a means of marketing. The role of consumer protection in marketing. The control of advertising.
Case study paper This exam paper is based on the pre-release case study which we have been working on in class… you will get a new copy of the case study in the exam. The topic areas to revise are the same as the core paper.
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GLOSSARY 14
Glossary Check and test your understanding, complete the following key terms table. Business Environment Enterprise Risk Business aims and objectives Markets Competition Interdependence Primary, secondary, tertiary business Factors of production Environmental, technological and social effects Location Change e-business Support and advice Economic influences Government influences Europe Inflation Trade Business success Stakeholders Ethics Business structure and organisation Public, private and voluntary sectors Types of business organisation Internal organisation Business functions Business planning Business change Marketing Market research Market segmentation Marketing mix Customer service Marketing strategy Market and product orientation Distribution Product life cycle International marketing Consumer protection
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Production Methods of production Costs of production Product development Production techniques Private and social costs and benefits Scale of operation Research and development Productivity Quality Finance & Accounting Financing business activity Management of finance Costs, revenue, turnover and profit Cash flow Budgeting Break even Balance sheets Profit and loss Accounting principles Final accounts Performance and growth People in Business Roles and responsibilities Managing people Motivation Workplace organisation Communication Recruitment and selection Training Health and safety Employment rights Conflict and negotiation Trade unions Employers' associations Pressure Groups
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EXTERNAL ENVIRONMENT OF THE BUSINESS 17
External Environment of the Business Self assessment Complete the following self assessment for this unit, by using the following key and ticking the appropriate column 1234-
Confident. I am confident that I know all about this Ok- I’m alright, but probably need a bit of revision I need to revise this I have no idea about this at all 1
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Business Activity Sort businesses into primary, secondary and tertiary sectors. Describe the changes within these sectors Identify the key features of the structure of the UK economy. Show awareness of the main ways in which the role of the UK within the EU will affect the environment within which business operates, and the decisions that are made. Explain the importance of the single European market.
The Organisation Business Aims Business Objectives Stakeholders Business ethics The impact of business on it’s environment The different aims of private and public sector organisations in the UK. Identify and give examples of recent changes in private and public ownership.
The Changing Business Environment Taxation- different types Interest rates Explain the different ways of measuring the size of business and select and justify appropriate measures of size in given circumstances. Describe and explain ways in which business responds to both the needs of consumers and the actions of competitors. Show awareness of the ways business can respond to the needs of the community and the environment. Explain the ways in which technology, such as information technology and e-commerce, has an impact on business. Show awareness of the main advantages and disadvantages of a single European currency. Explain how increased world trade can influence the UK economy creating opportunities for growth, increased competition and changes in the structure of the economy.
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External Environment of the Business Business Activity Primary, secondary and tertiary industries Primary Industry Getting the raw materials
Secondary Industry Processing raw materials into finished goods.
Tertiary Industry Providing a service (either a direct service to the consumer or a commercial service to industry). There are three industrial sectors in the economy. They are the primary sector, secondary sector, and the the tertiary sector.
Cinema Taxis Banks
Consumer Services
Gold Coal
Hairdressing
Tertiary
Primary
Transport Wholesale
Tin Extractive Industries
Commercial Services
SECTORS
Cars Making/manufacturing
Desks
Secondary
Food Metals
Livestock Arable
Fishing
Merchant Banks
Food
Farming
Processing
Raw Materials
This brainstorm shows examples of the types of goods and services that are produced by the primary, secondary and tertiary sectors
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Forestry
Timber
Over to you.. Below is data on employment levels in the various sectors of the economy. Employees in employment in the UK (%) 1971 20 29 10 6 5 2 3 27 100
Distribution, hotels, catering and repairs Manufacturing Financial and business services Transport and communication Construction Agriculture Energy and water supply Other services TOTAL
1981 21 26 11 6 5 2 3 28 100
1991 22 19 15 6 5 2 2 30 100
2001 28 13 18 6 5 2 1 30 100
Questions 1. Categorise the industries listed above into primary, secondary and tertiary industries. 2. Using the answer to the first question, copy and complete the following table 3. Describe the changes that have taken place in the UK economy over time, why is this the case?
Employees in employment – Sectors (%) 1971
1981
1991
2001
Primary Secondary Tertiary European Union The effects of the European Union Creating a free trade area Establishing a customs union (imposition of a common external tariff against good and services from outside the area (late 1950s). The formation of a common market (free movement of all factors of production) EU had removed most of the remaining barriers to the free movement of goods, services and factors of production. Economic Union required the need for a singal currency and co-ordinated monetary and fiscal policy. Regulations They have binding legal effect without confirmation by the member countries’ parliaments. They have primacy over national law if any conflict arises. Directives These require member states to introduce legislation in their national parliaments to enact certain EU decisions. If members don’t introduce the directive the Commission may refer the matter to the Court of Justice as a last resort.
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The Single Market
It is a conscious attempt to remove remaining barriers to trade within the EU. The creation of common technical standards for EU products. One product can be designed to sell throughout the EU. The harmonisation of taxation and duties. The free movement of people. A reduction of paper and administrative work for trade within the EU. The free movement of capital. Ending duty free sales within the EU from 1999.
The impacts of the single market on businesses Creating more opportunities for firms to benefit from economies of scale in marketing and production. Creating more opportunities for firms to become more highly specialised. Creating more opportunities for mergers and joint ventures between national firms in the EU Creating a common European currency (The Euro) to be used for transactions throughout the Union. Effects of the (single currency) Euro on businesses. Businesses would no longer have to pay commission when exchanging currencies. It would result in a large market, bringing the benefits of economies of scale. Makes trading easier and cheaper.
OVER TO YOU.. Complete the following:The Single Market has influenced UK business in several ways: Common standards of ………………….... and ………………….. have been set throughout the EU, which UK firms must meet Open …………………….. encourage competition, requiring UK firms to be efficient in order to ……………………… successfully Free movement of ……………………... and goods encourages ……………………... and skill development
QUALITY, LABOUR, MARKETS, SAFETY, COMPETE, EMPLOYMENT
The Organisation Aims and objectives of business Needs and Wants Different people have different wants depending on their personalities and experiences. Needs are the essential items which we require to operate effectively in our life. Wants are the things, which make our life easier. Essential needs: Air, Water, Food, Warmth/shelter. Businesses activities are concerned with satisfying consumer needs and wants. Stakeholders Stakeholders are people who can affect and be affected by a business They are the different groups involved with the business (the stakeholders) Owners Consumers Managers Government Tax Payers Competitors 21
Employees The Community
Business Aims & Objectives A business objective is what the business is trying to achieve. It is a quantifiable target in order to meet the corporate aims Private Sector Business Objectives These businesses are run for profit. Different stakeholders may have different objectives. Possible objectives for the business include: 1.Survival; to carry on trading (at the start or when trading is difficult) 2.Profit maximisation; make as much profit as possible in the short run 3.Market share; compare your sales to the market as a whole (expressed as a percentage) 4.Growth; Increase the size of the business. Usually measured by sales turnover. 5.Ethical Objectives; to benefit all stakeholders and bring social benefits. For example environmentally friendly policies Other objectives may include 1. High wages for the workers 2. Quality product for the customers 3. Environmental objectives for the local community In large organisations different stakeholders objectives may conflict. In large organisations there may be a division of ownership and control between the management and the owners, with managers having different objectives to the owners. The strength of the stakeholder may determine whether they get their objective or not. For example when there is full employment workers may be able to demand higher wages. The business has to be aware of the needs of the community and the environment, particularly more recently. If it is seen as concerned about the local community and the environment this can give good PR and lead to increased sales. An environmentally unfriendly and uncaring company can get much negative publicity which will hurt sales. It needs to satisfy all the its stakeholders not just its owners. They need to respect all stakeholders. Recently pressure groups have made businesses been more environmentally aware as customers are becoming interested in these issues through pressure group campaigns. Provide a Service
Maximise Profits
All firms have to provide an efficient service to stay in business.
Maximising profits means making the highest possible profit. It is the main aim of a privately-owned business, although some may follow other objectives such as those described below.
For private firms this is essential in order to keep customers and be profitable.
Profit is important for the following reasons: • To provide a financial reward to the owners of the business for putting their money into it. • As a source of finance for future investment. • To allow a business to survive.
Organisations such as public corporations may have other objectives which are not profitable, such as maintaining a nation-wide postal service or providing transport to remote country areas. These services may be provided at less than their cost.
For some businesses, in difficult trading circumstances, the only aim might be just to “survive”! Maximise Share Price
Maximise Sales
This applies to public limited companies, whose directors may wish to maintain a high share price. This pleases shareholders and puts off potential take-over bids.
The firm may attempt to obtain the highest possible sales, even if unprofitable business is taken on. This policy will often be based upon increasing the firm’s market share, which is its proportion of the sales of the industry as a whole.
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Objectives Business objectives are steps which a business needs to take to work towards achieving their aim. Company Aims
Finance Department Objectives
Individual Objectives
Individual Objectives
Marketing Department Objectives
Individual Objectives
Individual Objectives
Production Department Objectives
Individual Objectives
Individual Objectives
Human Resources Department Objectives
Individual Objectives
Individual Objectives
Mission Statement Every business either in the public or private sector should have a mission statement, which states the overall aim of the business and the purpose of its existence. Purposes of a mission statement • It incorporates aims into words. • It outlines the ultimate reason for the business. • It sends a clear message to all stakeholders. • It establishes stakeholders’ needs in the business. • It provides the opportunity to shape the business culture. • It motivates employees to work towards the business objectives. • It helps to establish the structure and organisation of the business. Public Sector Objectives These organisations follow public service objectives rather than profit maximisation (e.g. high quality health service or serving rural areas). However they still have to cover costs (sometimes with help of a subsidy) Business Objectives in the Private Sector • Profit maximisation. • Growth/Expansion. • Survival. • Prestige. • Interest/Hobby. Business Objectives in the Public Sector • To provide a service at affordable price. • To breakeven (revenue to cover costs). • To make some profits. Tax, Interest Rates & Exchange Rates The National Government is responsible for the laws that we live by. It controls the economy trying to 1. Maintain low inflation (the change in the general price level). This affects the businesses costs 2. Maintain a stable exchange rate (the rate at which currencies are exchanged). This affects international trade (imports and exports) 3. Achieve high employment and economic growth. This will increase a business’ revenue through increased consumer spending. It can achieve these objectives through changes in taxation and government spending. Taxes that affect businesses are 23
Direct Taxes; Businesses pay corporation tax (on their profits), Individuals pay income tax. Indirect Taxes; VAT or duties on each good sold. Interest rates are set by the Bank of England, but it continually consults with the government. The Economic Policy of a government can drastically affect a business’ performance. Factor Interest Rates (the cost of borrowing money & reward for saving money) Exchange Rate (the price of one currency against another)
Affect on Costs If interest rates are high (maybe to control inflation) then this will increase costs of any business that has borrowed money. If the exchange rate is low it can mean companies that import raw materials have to pay more.
Taxation
If taxes go up then so do businesses’ costs.
Factor Inflation (a general rise in the price level)
Affect on Costs High inflation will increase the costs of raw materials
Economic Growth
Prices could rise increasing costs if economic growth is very high
Affect on Revenue If interest rates are high then consumers disposable incomes will be lower and they will be less able to buy goods on credit. This will reduce revenue. If the exchange rate is low this will help businesses export their goods as they will cost less abroad and protect them from imports as they will be more expensive. If taxes go up then people will have less real income so revenue will fall. Affect on Revenue High inflation will make businesses less competitive abroad and may stop all consumers spending Consumers disposable income will increase with growth so should revenue
Over to you… Where does the government get it’s money from? And what does it spend it on? Government Income- Where does the money come from? Draw a bar graph of the following £96 billion Income Tax £59 billion National Insurance £37 billion Excise Duty £34 billion Corporation Tax £60 billion VAT £16 billion Business Rates £14 billion Council Tax £55 billion Other Sources
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Government Expenditure- Where does the money go? Draw a bar graph of the following £103 billion Social Security £54 billion Health £46 billion Education £23 billion defence £28 billion Debt Interest £20 billion Law and Order £15 billion Industry/ Agriculture £14 billion Housing & Environment £9 billion Transport £59 billion Other Expenditure
I wonder how many Daleks, I could buy for that…. Hmmmmmmm …
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Question
Answer
1. Identify the 3 types of economy
2. State one advantage of a market economy 3. State one disadvantage of a market economy 4. What is a mixed economy? 5. What are public goods? 6. What are merit goods? 7. What is fiscal policy? 8. Name two direct taxes 9. Name two indirect taxes 10. Who raises or lowers interest rates? 11. What is the effect of reducing direct taxes? 12. What is the effect of increasing direct taxes? 13. What is the effect of increased government spending 14. What is the effect of higher interest rates for consumers and businesses? (give 2 effects)
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Business Structure, Organisation & Control 26
Business Structure, Organisation and Control Self assessment Complete the following self assessment for this unit, by using the following key and ticking the appropriate column 1. 2. 3. 4.
Confident. I am confident that I know all about this Ok- I’m alright, but probably need a bit of revision I need to revise this I have no idea about this at all
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Ownership and Internal Organisation Organisation structures- Flat, Tall and Matrix Span of control Chain of command Sole Traders Partnerships Private limited companies (LTDs) Public limited companies (PLCs) Franchises Public corporations Multi-national corporations
Financing Business Activity Analysing balance sheets Using cash flows to predict a shortfall in funds Sources of finance available to business The factors which affect the choice of the source of finance
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Ownership and Internal Organisation Organisational Charts The structure of an organisation is known as an organisation chart. The Role of an Organisational Chart • It illustrates job titles of employees. • It illustrates employees’ relationships with each other. • It illustrates levels of responsibilities / authorities. • It illustrates the degree of specialisation in the organisation. • It illustrates opportunities for internal promotion. • It illustrates different functions in the organisation. • It illustrates levels of hierarchy. • It illustrates paths of communication. • It illustrates the levels of the management team (senior, middle and junior management). • It illustrates the number of employees under a manager's control. • It illustrates who makes the decisions and who carries out the orders and the instructions. Small businesses are usually run by one or very few people and organised simply. Larger organisations need a more formal organisational structure. Organisation by Function The business is organised by the jobs that the employees do.
FEATURES OF ORGANISATIONS Authority: The power that someone has to make decisions Subordinate: A worker that a line manager is responsible for Chain of command: The link in the levels of authority from those at the top to those at the bottom Delegation: When a manager gives a task to a subordinate to do Formal group: Those groups set up by the organisation to carry out a function (e.g. production department) Informal Group: Groups of people who meet but are not identified within the organisational chart Hierarchy: When an organisation has different levels of authority from the top down Line manager: A person who is directly responsible for other workers in the organisation Role: the job (or function) that the worker performs Span of control: The number of subordinates who report directly to the manager You be able to understand the basic organisation of a company and be able to complete and interpret a simple organisational chart. You should be able to say how appropriate the structure is for the business. There may be a choice between a tall or a flat structure Advantages of tall structures 1. Clear lines of communication 2. Small spans of control 3. Opportunities for promotion Advantages of flat structures 1. 2. 3. 4.
Communication from top to bottom is quick It’s likely fewer mistakes in communication will be made People at the bottom are encourages to share ideas with those at the top because they know who they are Wider spans of control mean that managers must delegate more which may be motivational.
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Types of Organisational Structure •
Formal structure It is where the relationships between employees and employers are the result of the hierarchical structure where employees operate at different levels of responsibility.
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Informal structure It is where the relationships between employees develop naturally without being planned, e.g., social friendship groups.
Who makes the decisions? For small businesses the process of the decision-making is very simple. Decisions are made by the owners of the business. For medium and large organisations decisions are more complex, as the board of directors who, whilst running the business and making decisions, look after the interest of the shareholders. Directions of Decision Making 1. Centralisation: this is where the manager is the centre of the decision-making; he is the only one makes the decisions. 2. Decentralisation: where the manager is not the centre of the decision-making, decisions are delegated to subordinates. Delegation Some times senior management delegates tasks to middle or junior management. Delegation means passing the authority and retaining the responsibility.
Ownership and control of business Private Sector Ownership In the private sector resources are owned and controlled by private individuals. Types of ownership in the private sector are: Sole trader a. one owner of the business. b. The owner is the runner. c. Unlimited liability. d. Finance is raised through owner's capital, loans, and grants. e. Business scale is micro/small. f. Business scope is local. Examples of sole traders are corner-shops.
Partnership a. b. c. d. e. f.
2-20 owners of the business. The owners are the runners. Unlimited liability. Finance is raised through owners' capital, loans, and grants. Business scale is micro/small. Business scope is local/regional.
A deed of partnership It is a written agreement between partners in the business. It states all the partners' rights and responsibilities. Examples of Partnerships are solicitors
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Over to you... Sole Traders Crossword Across 1. Sole traders may employ these but the businesses are often small 5. They do not have a separate __________ existence 7. The owner has overall ____________ 8. The owner has to pay for these ____________ 10. Sole traders have unlimited _____________ 11. A business which is owned and controlled solely by one person 12. A sole trader may have to work long hours and take no ___________ Down 2. Sole traders are usually ________ and easy to set up 3. Generally only a small amount has to be invested in the beginning 4. A sole trader has no-one to share this with 6. The owner may have to sell this to cover any debt 9. This __________ type does not suit all kinds of business
Private Limited Company The main features of a private limited company are: a. b. c. d. e. f. g. h. i. j.
minimum 2 owners; no minimum investment; owners are shareholders (family and friends); runners are the board of directors; owners/shareholders have limited liability; business affairs are private; shares are only sold to family and friends; finance is raised by selling more shares for family and friends, government grant or borrowing; business scale is medium/large; business scope is regional/national.
Examples of private limited companies are Brown Ltd, Dobson and Sons Ltd. 30
Public Limited Company The main features of a private limited company are: a. b. c. d. e. f. g. h. i. j.
minimum owners is 2; minimum investment is £50,000; owners are shareholders (public); runners are the board of directors; owners have limited liability; business affairs are public; shares are only sold to public on the stock exchange; finance is raised by selling more shares in the stock exchange to public; business scale is large; business scope is local / regional national / international.
Examples of public limited companies are Halifax plc, Marks and Spencer plc. Setting up a company In order to set up a company two documents must be drawn up. • •
The Memorandum of Association: includes external business affairs, e.g., address, name etc. The Articles of Association: includes internal business affair, e.g., how profits are shared, voting system etc.
Franchise a. It is a ready-made business opportunity. b. The seller of the business opportunity is called franchiser. c. The buyer of the business opportunity is called franchisee. d. Franchisee could be a sole trader, partnership or ltd. e. Franchisee pays franchiser loyalty money to use the business trademark. f. Finance is raised by the franchisee (saving, borrowing). Examples of franchises are Pizza Hut and McDonald's.
Over to you..
Worker cooperative a. The business is owned by workers. b. The business is run by workers representatives. c. Every worker has only one share in the business. d. Profits are divided according to the amount of work, not the number of shares. e. Finance is difficult to raise. 31
Non- profit making organisations Main features of non-profitable organisation; • they have charitable status; • they include pressure groups such as Green-peace and Friends of the Earth; • they also include conventional charities such as Oxfam; • those who fund the charity are not liable to any debts; • they also provide significant tax benefits.
Public Sector Ownership In the public sector resources are owned and controlled by the government. The state produces goods and services that it is believed the private sector cannot or will not produce efficiently, e.g., merit and public goods. •
Public corporations They are registered companies owned by the government, e.g. the British Broadcasting Corporation (BBC). Once a public corporation has been set up, the government appoints a chairperson to be responsible for its day-to-day running. Reasons for public corporations are: a. to avoid wasteful duplication and confusion; b. to set up and run important but non-profitable services; c. to prevent exploitation of consumers; d. to protect jobs and key industries.
•
Local government In the UK, certain services such as bus services and refuse collection are the responsibility of locally elected councils (this is called Municipal Undertaking). Local councils receive money from two main sources; a government grant, and council tax.
•
Central government Some resources in the UK are owned and controlled by the central government, e.g., Education and NHS.
PRIVATISATION It is the transfer of the ownership from the public sector to the private sector. Privatisation would mean less government control and ownership of resources, e.g., BT. NATIONALISATION It is the transfer of the ownership from the private sector to the public sector. Nationalisation would mean more government control and ownership of resources.
INTEGRATION A firm can take advantages of large-scale production by merging with another firm. Methods of Integration a. Merger: it is a friendly way of joining two companies together. b. Take over: it happens when a big company buys shares in smaller company. Takeover is unfriendly way of joining two firms together. Directions of Integration a. Vertical integration (backwards and forwards). b. Horizontal integration. c. Lateral integration. d. Chain integration. e. Conglomerate integration.
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Reasons for Integration are: a. b. c. d.
to benefit from economies of scale; to be more competitive; to be able to raise more finance; to be able to expand and grow.
MULTI-NATIONALS • A multi-national: it is a holding company with shares in many overseas subsidiary companies. Multi-nationals usually develop by taking over companies in other countries, e.g., BP. • A holding Company: it is one, which exists merely to hold shares in another company. • A subsidiary: it is a company, which is controlled by another company. Facts about multinationals • They are very large businesses (giants). • They tend to have their headquarters in Europe, the USA or Japan. • They have branches all over the world. Advantages of multinationals • Nearness to local markets. • Low labour costs. • Government incentives. • Low taxes. • Economies of scale. Benefits of multinational • Earning more foreign currency to repay debts. • Job creation. • Training opportunities for existing workforce. • Improved workforce skills. • Improved infrastructure. • Technology trickle. • Management expertise. Problems facing multinationals • Communication problems • Lack of suitable skilled workforce in some developing countries • Culture and language barriers in the host country. • Threats by imported cultures • Problems with safety precautions in some developing countries • Competition with the local industries • Profits are sent back to the home country • Exploitation of natural resources in the host company
ECONOMIES OF SCALE When businesses grow they can benefit from economies of scale… a. managerial economies: it is the ability to afford expensive managers; b. technical economies: it is the ability to employ the most technical and sophisticated machinery and equipment; c. financial economies: it is the ability to raise more finance, e.g., borrowing or selling shares; d. technological economies: it is the ability to buy the most modern and up to date technology; e. risk-bearing economies: it is the ability to spread the risk by diversifying into new markets or new areas of production.
DISECONOMIES OF SCALE These are the problems, which are associated with large-scale firms: • long decision-making; • slow communication; 33
•
the control of resources is more difficult.
Over to you.. Complete the following table Type
Example
Owners Control
Advantages
Sole trader
Corner
1
Requires little capital. Incentive to
shop
Disadvantages
work hard. Regular customers known. Owner Cab make quick business decisions.
Partnership
2 to 20
Shared equally
Unlimited liability. One
between
partner's mistake affects all
partners
partners. Partners may disagree.
Private limited Small family 1 or
Limited liability. Shareholders
company (Ltd) business
contribute capital. Protected from expansion. Limited economies
more
takeovers.
Public limited
2 or
Directors
Limited liability. Large amount of
company (plc)
more
elected by
capital can be raised. Economies of
shareholders
scale.
Co-operative
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
Still limited capital for of scale.
2 or
Profits returned to customers.
Committee may lack business
more
Democratic.
experience.
Define the term sole trader, give an example of a sole trader Define the term private and public sector, identify a company in each sector Define the term Public Limited Company, is this type of business in the public or the private sector? What is a partnership and state the minimum and maximum number of partners allowed within this type of business ownership? What is a franchise? Name two examples of franchises that can be found in Northampton centre? What is meant by limited liability? State and explain TWO reasons a business would have for becoming a public limited company Define the term vertical integration McDonalds is a vertically integrated organisation, draw and label a supply chain which shows this vertical integration Name three types of Public sector organisations? Who provides the finance for Public sector organisations? Which two documents does a business have to complete in order to become a Private Limited Company?
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Business Behaviour 36
Business Behaviour Self assessment Complete the following self assessment for this unit, by using the following key and ticking the appropriate column 1. 2. 3. 4.
Confident. I am confident that I know all about this Ok- I’m alright, but probably need a bit of revision I need to revise this I have no idea about this at all
1
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3
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1
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Marketing Primary research Secondary research Analyse, present, interpret and use market research results. Market segmentation Demonstrate understanding of the product life cycle. Identify, explain and give examples of the four main elements of the marketing mix: Product Price Place Promotion Production Methods of production Job Batch Flow Economies of scale and dis-economies of scale Classify costs into Fixed Variable costs Semi variable costs Break even- graph and formula Quality control methods
Financial Information and Decision-Making Cash flow forecasts Profit & loss accounts Calculate gross and net profit. Use profit and loss accounts to aid decision-making. Demonstrate understanding of the main elements of the Balance Sheet. Use the Balance Sheet to aid decision-making. Identify and calculate working capital. 37
Marketing MARKETING is the process identifying, predicting and satisfying consumers needs and wants. A business can take two approaches to its marketing; Product orientated- Where a business designs a product then tries to sell it. Market orientated- Where a business finds out what consumers needs and wants are first. Market Research Most companies are market orientated so need to conduct market research to identify and predict consumer’s needs and wants. Market segments Businesses try to identify who their customers are by identifying the market segment that they are in. A market segment is a group of buyers with similar characteristics. Ways of segmenting the market 1. Personal characteristics such as a. Age b. Gender c. Income d. Ethnic Group 2. The location of the customers 3. The socio-economic group 4. The price of product 5. The quality or the purpose of the product. Other ways include: repeat customers, impulse or planned purchases. Research Methods Businesses can collect different types of data to identify these segments and their needs and wants. 12-
Field research: to collect primary data, e.g., questionnaires, interviews. Desk research: to collect secondary data, e.g., text books, old records and government statistics.
Primary Data Collected by field research, this data is new data Methods of primary data collection include observation, test markets, market surveys (personal interviews, postal survey, telephone survey, consumer panel, through a newspaper). Secondary Data Collected by desk research, this is adapted from other data Methods of secondary data collection include published information such as annual reports, government surveys and census, past sales records. Sampling methods Not all the population can be surveyed so a representative sample is taken (random, stratified or quota to reflect the consumers of the product). This means the methods of collecting the data. There are different sampling methods. • Random sampling: giving everyone an equal opportunity to be chosen. • Stratified sampling: dividing the market into groups, then choosing randomly from each group. • Quota sampling: street interviews, the interviewer are biased towards choosing a particular group in terms or age, sex or social class. • Purposive sampling: interviewing on purpose only a certain group of people. The interviewer decides on the time and the place to interview potential customers. • Convenience sampling: the interview is carried out at the interviewer's own convenience. 38
Primary (field research)
Secondary (desk research)
Advantages Up-to-date data Specific to the businesses own needs The business knows the source of the data Can get lots of it Cheaper than primary data
Disadvantages Time consuming Very costly Can be inaccurate Not specific to the businesses needs The source of the original data may not be known
The Marketing Mix These are the Marketing activities for getting the product right, at the price right, and in the right place using the right promotional methods. Product This means getting the right product to the right customers. For any business it is necessary to develop the right product to satisfy customer needs and wants. This determines the success and survival of the business.
Product life cycle The product life cycle maps sales over time from introduction to removal from the market. The product goes through development, introduction, growth, maturity, saturation and decline (can extend the life through extension strategies). The length of a product life cycle depends on the following: 1the nature of the product; 2the situation in the market; 3the launch of competitive products; 4the change in customer needs and wants; 5the speed of the change in technology to improve or develop new products.
Promotion This is the second P of the marketing mix activities. Promotion includes all the activities to promote the sales of a product. The aims of promotion depend on the aims or the objectives of a business. Therefore, the aims of promotion depend on the following factors: 1. type of business; 2. scale of business; 3. scope of business; 4. business objectives. Above & Below the line promotions Above the line Using the media to promote the product, larger businesses may use an advertising agency. Examples include: Newspapers Magazines 39
TV Radio
Below the line Below the line promotion is using the point of sale to promote the product. For example: Direct mail Packaging Personal selling Sales promotion Branding Above and below the line but always understood in context of the other elements of the mix and external factors. Advertising authorities • The Advertising Standard Authority (ASA): it supervises advertisements in different advertising media, and makes sure that advertisements are decent, honest and legal. • The Independent Television Commission (ITC): it controls radio and television advertising. Advertising Acts • The Trade Description Act: it is an offence for a business to make false claims about a product. • The Consumer Protection Act: it is an offence to make false claims about a reduction in a product price. • The Food Act: controls the labelling and advertising for food.
Price 1- Cost plus pricing- Calculate how much a product costs, and then add on a given percentages as a return for the job or activity. 2- Penetration pricing- Offering initially the product at quite a low price. When market penetration has been achieved, prices can be raised. 3- Skimming/ Creaming - Offering the product initially at quite a high price. For example, fashionable clothes. 4- Destroyer pricing- Selling a product at a very low price in order to destroy new competitors or existing competitors. 5- Price Discrimination (Differential pricing)- Charging different market segments different prices in order to maximise sale revenue. 6- Loss Leaders- The price is set at, or below the cost of producing the item. 7- Promotional pricing - A temporary cut in prices in order to increase sales. For example, Summer and Christmas sales. 8- Psychological pricing- A price of £3.99 may seem better value than £4.00. 9- Competition based pricing - Setting a price based on the prices charged by competitors for similar products.
Place This is the 4th P of the marketing mix activities. It means how the product is distributed to customers in the right way. There are four different channels of distribution. • Full chain (manufacturer, wholesaler, retailer and customers). • No wholesaler (manufacturer, retailer and customer). • No retailer (manufacturer, wholesaler and customer). • No wholesaler, no retailer (manufacturer and customer). The choice of the appropriate channel of distribution depends on the following: • type of product; • cost of transport; • type of market; • size of order; • type of business; • scale of business; • scope of business. 40
Market The market is the place where buyers and sellers trade in goods or services. Types of Market 12345678-
Commodity Market: the product is raw materials in bulk. Money Market: the product is short-term loans. Capital Market: the product is long-term loans. Labour Market: the product is skills of workforce. Consumer Market: the product is consumer goods or services. Property Market: the product is properties, e.g., lands and premises. Industrial Market: the product is goods or services for industrial uses. Government Market: the product is merit goods and public goods, e.g., education and health.
Production Is the process of manufacturing goods and services from raw materials, e.g. manufacturing cars. Types of production 12-
Direct Production: no specialisation/division of labour. Indirect Production: based on specialisation and division of labour.
Production/industrial sectors 123-
Primary sector: it is the extraction of raw materials from the ground, e.g., farming. Secondary sector: it is the manufacturing of the raw materials into final products, e.g., making cheese. Tertiary sector: it is the service industry, this involves trade, and services related to trade, e.g., banking and insurance.
Factors of Production Land Labour Capital Enterprise
Natural Resources, e.g., raw materials. Human mental and physical resources, e.g., teachers, builders, doctors etc. Man made resources, e.g., machines and equipment. The factor (resource) that brings the other factors together to produce goods in order to make profit, e.g., sole trader, shareholders.
Value Added This means adding value to factors of production through the chain of production. This explains how the wealth is created in a society.
Methods of Production 1234-
Job production: this method is used to manufacture individual and high quality items, e.g., hand crafted items. Batch production: this method is used to manufacture batches of products, e.g., bread. Line/flow production: this method is used to manufacture many identical items, e.g., cars and computers. Continuous Flow production: this method takes line production one-step further. Today, it is an advantage to be able to mass-produce standard items like Mars bars and cans of beer. Continuous flow production involves producing for 24 hours a day, using automatic equipment in a standardised way.
Costs of production Fixed Costs- Costs that don’t change with output Variable Costs- Costs that increase with output (Output x VC per unit) Direct Costs- Costs that go towards making the product Indirect Costs- Costs that are overhead costs, that can’t be tied to a specific product. 41
Unit Cost Cost that is the cost of one product (the average cost) = Total Cost Amount sold Total Cost = Fixed Costs + Variable Costs Revenue Total Revenue = Price x Quantity (the number sold) Increasing Revenue 1.
2.
The business can change the price. A. It can lower the price if it will increase sales a lot (price elastic demand) B. It increase the price if it will not affect demand by much (price inelastic demand) Put on sales promotions
Profit Profit = Total Revenue – Total Cost Profit is the amount of money left over after all costs and revenues and been accounted for. Profit and Cash Flow It is different to cash flow which shows the flow of money in and out of the business. Often there can be a cash flow deficit but he business will make a profit in the end once all revenues have been received. The importance of profit Profit is important as it a reward for risking your capital in a project. It is the return on an investment. Profit encourages business enterprise. PROFIT IS IMPORTANT IN THE LONG RUN CASH FLOW IS IMPORTANT IN THE SHORT RUN A business needs profits to pay the owners either in dividends to shareholders (in incorporated companies i.e. plc’s or ltd’s) or drawings (to sole traders or partners) Also the business may keep some retained profits, which are used for investment. This has the advantage of borrowing because 1. It doesn’t have to be paid back 2. There is no interest Retained profit used for investment does have an opportunity cost though as it can’t be used to pay shareholders etc.
What affects the amount of profit made? 1. The type and size of business: larger businesses may make more profit 2. The objectives of the business: the business may have ethical policies to look after all the stakeholders not just the shareholders, some profits may be sacrificed for environmental or social objectives (e.g. charities are non-profit making, the Body Shop prides itself on its ethical policies like no animal testing) 3. The demand for the product 4. The price consumers will pay (due to added value and price elasticities) 5. The control over costs 6. The amount of competition Remember, cash flow is not the same as profit. Cash flow shows the position of the company’s cash from month to month. Profit shows how much money will be made after all payments have been and receipts have been taken. A profitable company can suffer a cash flow crisis because they do not receive payments quickly enough. This is a very common way that small businesses go bankrupt. 42
Break-Even Analysis Revenue =
Price x Quantity
Total Cost =
Fixed Cost + Variable Cost
Variable cost =
Unit variable cost x Quantity
Contribution per unit = Price – Variable cost Total contribution =
Contribution per unit x Number sold
Profit =
Total contribution – Fixed costs
Break-Even Quantity Formula Fixed Costs Price – Variable Cost Break-even Point This is where Total Cost = Total Revenue. Margin of Safety This is the difference between output and the break-even point.
Break-Even Chart Costs/Revenues Total Revenue a
Total cost b
Fixed Costs
Quantity Break-even Quantity
Q
The amount of profit at point Q = a - b Break-even is useful to many departments within a company.
The Marketing Department can see how many they need to sell and at what price in order to break-even or make a target profit. The Production Department can see how many need to be made. The Finance Department can see the associated costs with different levels of output.
Break-even analysis is a good visual tool that puts all the data together in one chart, however the data in break-even analysis is only a prediction and could be inaccurate.
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Just In Time Production 1.
Just in time (JIT) aims to minimise the cost of holding unnecessary stocks of raw materials, components, work in progress and finished goods. 2. The principle that underpins JIT is that production should be ‘pulled through’ rather than ‘pushed through’. 3. Production should be for a specific customer order. 4. The production cycle starts only once a customer has placed an order. 5. Stocks are delivered only when they are needed. 6. No buffer stocks of any type are held. 7. No spare workers are employed. 8. Zero defects are essential, as no stock safety net exists.
New Technology in manufacturing Computers have changed production techniques in many ways. 123-
Robots are multi-purpose machines that can be programmed and reprogrammed. Computer Integrated Manufacturing (CIM): allows manufacturers to produce products in the most effective way. Computer Aided Design: allows manufactures to design a product on a computer screen, e.g., designing cars.
Problems with new technology • • • •
Incompatibility between equipment. Industrial relations problems. Redundancy and job losses. Workforce objection.
Quality control This means controlling and ensuring the quality of the produced items. As most modern firms use line or flow production, controlling and checking the quality of the produced items should be a business objective. The success of many companies is based on quality and reliability, e.g. Marks and Spencer and Volkswagen. Quality will be influenced by a number of factors such as: 1234-
business objectives; type of materials used in production; design of the product; methods of production.
Quality assurance This is less wasteful than quality control. Quality assurance occurs both during and after production, and seeks to stop faults happening in the first place. Quality assurance aims to make sure that products are produced to pre-set standards. It is the responsibility of the workforce working in teams, rather than of inspectors. Total Quality Management (TQM) This is the most complete form of operations management. It is concerned with encouraging everyone in the workplace to think about quality in everything they do. Every employee tries to satisfy customers, and place them at the heart of the production process.
Business Location Location is where the business sets up Businesses are being encouraged to stop using Greenfield Sites to locate and to use Brownfield Sites (sites urban areas that have already been built on) 44
Setting up near similar businesses may be beneficial and bring external economies of scale Factors determining the location of a business include • Transport Costs (of raw materials and finished goods) • Cost of Land • Is there room for expansion? • The Market (particularly for services) • Regional Aid (e.g. enterprise zones) • Labour Supply (quality and cost) Business Location may be influenced by government incentives such as: Enterprise Zones- set up to encourage companies to locate in areas of high unemployment and so bring social benefits to the area. These are small areas of inner cities, which offer incentives such as free rent, free rates, grants, help and advice to businesses in the early years. Regional Development Areas - Regional Development Areas are larger parts of the country designated for help. Stock Control The business tries to control the amount stocks that a company holds at any one time. This helps cash flow (it will need a minimum re-order level and a maximum) Just in Time Production (JIT) is a lean production technique to help manage stocks. With JIT stocks only ordered when needed and the goods only made to order so there are no stocks being held. Advantages Improves cash flow Reduces storage costs, Allows team working Increases motivation
Disadvantages Could run out of stock Need reliable suppliers No room for error
A business needs to manage its resources in the most efficient way. It wants to hold as few stocks as possible but this has problems: It needs a good supplier It may run out It could miss a big order by not having enough stocks.
Cash flow forecasting A cash flow forecast is an estimate of the cash position of a business over a period usually of 6 to 12 months in advance. Sources of information for the forecast 1. 2. 3. 4. 5.
Past experience Advice from advisors or the bank Market research Payments already know (e.g. rates) Estimates (e.g. interest rates)
Constructing a Cash Flow Forecast Add the receipts to the opening balance and take off the payments to find the closing balance.
Opening balance Receipts Payments
JAN 10000 + 2000 - 7000
FEB 5000 6000 12000 45
MAR (1000) 8000 6000
Closing Balance
= 5000
(1000)
1000
Problems with Forecasting: The forecast may be inaccurate because the data used is unreliable or things change that cannot be predicted affecting costs or revenues (e.g. competitors actions, changes in interest rates) Remember, Cash flow is not the same as profit. Cash flow shows the position of the company’s cash from month to month. Profit shows how much money will be made after all payments have been and receipts have been taken. A profitable company can suffer a cash flow crisis because they do not receive payments quickly enough. This is a very common way that small businesses go bankrupt.
Profit Profit is the amount of money left over after all costs and revenues and been accounted for. The Final Accounts At the end of the financial year the business draws up final accounts. These are: 1.The Profit and Loss Account (Trading, P & L, Appropriation Accounts) 2.The Balance Sheet The Profit and Loss Account This accounts for the revenue received and revenue expenditure made. Revenue expenditure is spending on items that are quickly used up and are written off as cost to a particular year (e.g. stocks). There are 1. Direct Costs (e.g. purchases) that appear on the trading account 2. Indirect Costs (overheads) which appear on the profit and loss account. There are three sections to the profit and loss account The Trading Account Works out gross profit The Profit and Loss Account Works out net profit The Appropriation Account Shows what happens to net profit The P & L Account is worked out as below: SALES Minus COST OF SALES (opening stock + purchases – returns – closing stock) Equals GROSS PROFIT Minus OVERHEADS Equals OPERATING PROFIT Minus Interest equals NET PROFIT Minus TAX and DIVIDENDS Equals 46
RETAINED PROFIT
The Balance Sheet This represents the assets, liabilities, capital and drawings. A balance sheet shows how much the business is worth on a stated day. Capital Expenditure appears here in the form of fixed assets. The stock and net profit from the P&L Account also appear. Fixed Assets: these are the items that do not change value on a day-to-day basis. Current Assets: these assets change value regularly as a result of the day-to-day activities of the business. Working out the balance sheet Fixed assets
(e.g. premises, equipment, vehicles)
Current Assets
(e.g. stock, debtors, cash)
Current Liabilities
(e.g. creditors)
Net Current Assets (Working Capital)
Current Assets – Current Liabilities
Net Assets Employed
Net Current Assets + Fixed Assets
Shareholders Funds
(e.g. shares, profits, reserves)
Long Term Liabilities
(e.g. bank loan, mortgage)
Capital Employed
L-T liabilities + Capital + Net Profit - Drawings
Net Assets should equal Capital Employed The Balance Sheet and the Profit and Loss Accounts are part of the accounting process from which reports are written and the performance of the business is measured. Ratios are used to analyse company performance. Is used to pay day-to-day bills and circulates through the company, it is a short-term need. It is worked out by the following sum: Working Capital = Current Assets – Current Liabilities Circular Flow of Working Capital describes the way the working capital is recycled through the business as shown below Cash Payments Received
Pays for Stock Goods made for sale
Ratio Analysis Ratios are used to analyse final accounts and gauge a company’s performance either against: Past performance Other similar companies in the same industry. Profitability ROCE
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Return On Capital Employed is often called the "primary efficiency ratio" and expresses profit as a % of the capital invested in the company to show how efficiently the investor’s money is being turned into profit. The figure should ideally be higher than interest earning accounts. *100 Operating Profit Capital Employed (Total Assets)
Gross & Net Profit Margins Gross Profit x 100 Turnover (Sales) Net Profit Turnover
x 100
Generally firms with a lower stock turnover need a higher gross profit margin to compensate. The difference between gross and net helps to identify overheads. A price cut could cut gross profit margin yet increase net profit margin because overheads are divided into greater turnover. Liquidity The liquidity of a business assesses its ability to pay off its debts. There are two ratios used to do this. Current Ratio Current assets Current liabilities A figure of 1.5 is seen as desirable. Below that the business may not be able to pay off its debts at short notice (a liquidity crisis) Acid Test Ratio Current assets - stock Current liabilities A figure of 1 is seen as desirable. Below that the business may not be able to pay off its debts at short notice (a liquidity crisis) You should be able to say what the ratio results mean for the business. For example the liquidity ratios could be evaluated as follows: Causes of liquidity problems Over trading Investing too much in fixed assets Stockpiling Allowing too much credit Taking too much credit Over borrowing Underestimating inflation Unforeseen expenditure Unexpected changes in demand Seasonal factors Improving Liquidity Stimulate sales for cash ( discounts) Sell off stocks (often discounted) Sell off non-vital fixed assets Sale and lease-back Better credit control Factor debts Only make essential purchases Extend creditors with suppliers Short term loans
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Over to you.. The amazing world of break even- whoa! it’s exciting! Break Even Practice Question Dirty Ltd, has drawn up a break chart for one of it’s ‘specialist’ clubs. They have assumed that the fixed costs would be £500,000 per annum. The variable costs per member were estimated to be £75 annually and the annual membership charge was set at £475.
Another Break Even Practice Question Gordon & his special friend, a ‘very happy company’ selling songs specially made for special occasions, has drawn up a break chart for it’s businesses. They have assumed that the fixed costs would be £100,000 per annum. The variable costs per customer were estimated to be £100 annually and the selling price was set at £475.
Well, would you believe it? Yet another Break Even Practice Question Shelley, a sole trader specialising in shed loads of hair spray, has drawn up a break chart for one of it’s hair dressing salons. They have assumed that the fixed costs would be £180,000 per annum. The variable costs per member were estimated to be £60 annually and the selling price per customer, including all that hair spray was £500.
No way, that cannot happen, another Break Even Practice Question. Something is not right here! Mr Martin is lush plc, has drawn up a break chart for one of it’s amazing business studies booster sessions. They have assumed that the fixed costs would be £200,000 per annum. The variable costs per learner were estimated to be £150 annually and the selling price per session was set at £750. I’ve got to make some money some how….
Questions 1. For each of the businesses above, calculate, using the formula method, the break even point for each of these businesses 2. Why are businesses interested in calculating their break even? 3. How much profit does a business make when it has broken even? 4. Why would a business use the formula method to calculate break even, rather than the graphical one?
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People in Organisations 50
People in Organisations Self assessment Complete the following self assessment for this unit, by using the following key and ticking the appropriate column 1. 2. 3. 4.
Confident. I am confident that I know all about this Ok- I’m alright, but probably need a bit of revision I need to revise this I have no idea about this at all 1
2
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Human Needs and Rewards Explain the role of work in satisfying human needs. Explain different payment systems: time rate, piece rate, salaried, bonus systems, profit sharing, fringe benefits and non-financial rewards. Interpret and make calculations from pay slips: gross and net pay, compulsory and voluntary deductions, tax code. Examine the importance of the role of managers in motivating workers, and the pay and non-pay methods of motivation that they can use, showing how these relate to human needs. Explain the benefits to a business of motivating workers. Show knowledge of different leadership styles that managers may have or can use and when they might be appropriate.
Management and Recruitment Show an understanding of the main stages in the recruitment and selection of workers – identifying needs, advertising, receiving applications and selection methods.
Training and Staff Development Describe and explain the importance of induction, training and development. Describe the alternatives of internal and external training. Show awareness of the importance of maintaining the quality and effectiveness of the workforce through continual training and staff development and communication.
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Motivating staff Motivation describes how workers want to work and how willing they are to complete their tasks. A highly motivated staff should 1. Increase efficiency 2. Improve the quality of the product. Job Satisfaction The more satisfied someone is with their job the better they should work. Job Enrichment Workers are given more control over their work Job Enlargement Workers are given a variety of tasks to avoid boredom and monotony. Leadership Styles Autocratic Democratic Laissez Faire
The leader makes all of the decisions centrally The leader takes the views of the workers into account The leader allows the workers to decide how to do things.
To understand how to motivate workers it is important to understand why they work Maslow’s Hierarchy of Needs Maslow said that there was a hierarchy of needs. Need
Method
Self Actualisation (feeling that you are making the most of your abilities)
Involve workers in decision making
Self Esteem
Reward workers with promotions training etc
Affiliation (friends and belonging)
Staff events / uniforms
Security
Pensions or permanent contracts
Physiological (e.g. house)
Pay
You should be able to say which method of motivation would work, with a reason
Training Reasons for Training Induction: To introduce workers to the company. Upgrading skills: To keep pace with changing technology Retraining: To do a different job Creating flexibility: Multi-skilling to do different jobs.
Types of training Apprenticeships are in jobs such as a mechanic or carpenter. Induction is an introduction to the business to learn about it. Staff training is training groups of workers together. Staff development supports individual staff who wish to get on. 52
Can be done either: On the job (at the work place) Off the job (away from work, usually at college)
On the job training Advantages Trainee given individual training Cheaper Worker still produces whilst training Trained in the ways of the firm
Disadvantages Not suitable for groups of workers Trainee may not produce as much when training Trainer may need to leave their work The quality of the work may be lower if the trainee does it
Off the job training Advantages Workers may enjoy the change in environment May get expert tuition Better equipment may be available
Disadvantages Usually more expensive May not be specific to the job of the trainee
You will need to decide which method of training is best for the worker in question Methods of Payment There are different ways of paying workers. These are called payment systems. 1. 2. 3. 4. 5. 6.
Salaries; paid monthly and expressed as an annual figure Wages (time-based); paid to manual workers for working a fixed number of hours plus overtime. Piece Rates; paid in relation to how much is made. Commission; paid in relation to how much is sold. Profit sharing; workers get a percentage of profits (usually directors and managers) Fringe Benefits; non-financial rewards such as a company car or free health care
The Pay Slip Gross pay is total pay. Net pay is earnings after deductions (listed below) • • •
National Insurance is payment to the government to entitle to receive unemployment benefit etc. P.A.Y.E is income tax paid as you earn to the government. Pension payment into state or company scheme.
You should be able discuss the advantages and disadvantages of different payment systems Method Salary
Wages (time rate) Piece Rate
Advantages Good where it is difficult to measure what is being produced and hours may be flexible Encourages workers to work the hours required Motivates workers to produce a lot.
Commission
Good motivator where sales of workers can be measured
Profit sharing
Encourages all workers to contribute to the success of the business Sometimes cheaper ways of rewarding workers Visible reward and can be a status symbol
Fringe Benefits
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Disadvantages Can be no incentive to work hard without some additional reward “Clock watching” may be a problem with no guarantee of the quality produced Workers may rush their work, lowering quality No good if workers rely on others in the team Sales staff can become too pushy and may create a bad impression of the company. Some sales staff may sell the wrong goods on purpose to increase sales Some workers may not deserve the payment and this can cause resentment Not directly related to performance
Recruitment and Selection However good a company is, some workers will leave, some will retire or the company may expand and need more workers. Therefore the company needs to recruit and select. The stages of recruitment and selection Identify Vacancy at Company
Prepare Person Specification and Job Description
The advertisement The company must decide where to advertise. They can advertise locally or nationally dependent on the job.
Application There is usually an application form and CV expected of the candidate.
This is used to form a short list.
Selection From the CV and interview the company chooses the most suitable employee along with references Types of Work Blue collar workers are manual workers White collar workers are non-manual workers Workers can also be classified into skilled, semi-skilled or unskilled. Where the business recruits from depends upon the nature of the job. The business can recruit internally (from within the business) or externally (from outside the business) Internal Recruitment External Recruitment Benefits Benefits 1. The employee’s abilities are know 1. A larger choice of candidates 2. Internal promotion can motivate the workforce 2. Brings in new ideas 3. The recruitment and selection process is quicker 3. May help firm understand how other firms and less expensive operate 4. Shorter induction period is required 5. Reduces the risk of employing the wrong person However 1. It will create a further vacancy down the 2. More expensive than internal recruitment hierarchy 3. Takes more time 2. Less new ideas will be introduced If the job is highly skilled the business may have to recruit nationally either a. In an National Newspaper b. Through the Universities If the job is low skilled the business may recruit locally either: a. In the job centre b. In the local paper c. In the window of the business If the job is specialised the business may used specialised trade publications or magazines.
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Aiding and Controlling Business Activity 55
Aiding and Controlling Business Activity Self assessment Complete the following self assessment for this unit, by using the following key and ticking the appropriate column 1. 2. 3. 4.
Confident. I am confident that I know all about this Ok- I’m alright, but probably need a bit of revision I need to revise this I have no idea about this at all 1
2
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1
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Reasons for Regulating Business Activity Give examples of intervention both to support and control the impact of business activity on people, the economy and the environment. Explain why such intervention may be necessary. Show awareness of the main methods of intervention: legislation, EU regulation, government policy, influence from other agencies (trade unions and pressure groups).
Influences on Business Activity Describe and explain the main methods of regulating business. Demonstrate an understanding of the effects of grants, enterprise zones, planning regulations and infrastructure on the location and development of business. Describe the work of trade unions, types of industrial action and main methods of resolving conflict. Demonstrate an understanding of the importance of health and safety requirements and how they affect business. Describe the main features of contracts of employment, employment protection and equal opportunities legislation. Demonstrate an understanding of the effects of minimum pay legislation on businesses and their competitiveness, and on workers. Demonstrate an understanding of the ways in which consumer protection affects business decisions.
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Regulating Business Employment Law Government laws cover 1. 2.
3.
4. 5. 6.
Health and Safety legislation to protect employees and consumers when working at a business or using a businesses goods or facilities Contracts of employment to provide security of employment for employees. If there is no actual contract the Employment rights Act says that within 8 weeks a statement of the particulars of the job must be given within 8 weeks of starting. Equal opportunities legislation such as: a. race relations act b. sex discrimination meaning all employees have to be treated equally c. equal pay act (women have to be paid the same rate for the same job) All these mean that it is illegal to discriminate against anyone when employing them and once they are employed. There should be no discrimination based on either gender, race, religion or disability. National Minimum Wage: There is no a legal National Minimum Wage for employees over the age of 16. Industrial Tribunals: Workers can go to independent tribunals to get a judgement if they believe that they have been treated unfairly. The judgements of these tribunals are legally binding. Consumer protection: e.g. sale of goods act, consumer credit act
There are also organisations that protect workers ACAS (Advisory Conciliation and Arbitration Service) This organisation will help a business and its workers come to an agreement when there is a disagreement over pay, working conditions etc. Advice: First they just give advice to see if there is a solution Conciliation: Second it tries to find areas that both sides can agree on if negotiations have broken down Arbitration: Lastly it will appoint an arbitrator if they is no solution, the decision of which both sides have to abide by. ACAS can find solutions and speed up the process, but firms or employees may get a solution that they do not want. Usually arbitration is the last resort and shows that relationships between the employer and its employees have become very bad. Trade Unions These are organisations which employees can join and will protect their rights. They deal with the employers on behalf of all their members (this is called collective bargaining) They can take industrial action if they are not happy. This can include a. Strike b. Work to rule c. Overtime ban Costs of industrial action Costs to Workers Lose Wages Firm could lose sales and make redundancies
Costs to Customers Customers can’t get goods / services If the customers are firms then it will hurt their business as well
Costs to Firm May lose output and profit May lose repeat custom
Cost to Economy May stop economic growth (unemployment may rise) Less tax revenue
Single Union Agreement Some firms that just one union should represent all the workers Advantages 1. Easier for the firm to negotiate with just one union 2. The workers are in a stronger position if they all act together 57
Disadvantages 1. The firm may find the union is in a very strong position 2. Workers have no choice about who should represent them
BUSINESS COMMUNICATION & MARKETING 58
Business communication & marketing Self assessment Complete the following self assessment for this unit, by using the following key and ticking the appropriate column 1. 2. 3. 4.
Confident. I am confident that I know all about this Ok- I’m alright, but probably need a bit of revision I need to revise this I have no idea about this at all 1
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Business Communication and Marketing Explain the meaning and use of different types of communication (documentary, verbal, text and images, one way and two way communication). Understand the role that effective communication plays in the success of a business. Identify a range of factors which act as barriers to effective communication (timing, clarity, method used, attitude of receiver and sender, appropriateness of feedback). Explain how internal/external and formal/informal feedback takes place within and between businesses (e-mail, text messages, letters, reports, leaflets, mailshots, face to face, telephone, voice mail, tele/video-conferencing, fax). Comment on the ways in which ICT developments (electronic data transmission, stock control systems) impact on business and recruitment (development of regional distribution centres, on-line ordering) and changes in employment patterns, e.g. closure and job losses in high street banks and the introduction of internet and telephone banking.
The Impact of e-commerce on Business Activity Define and explain the nature of e-commerce in a business context. Evaluate the benefits and threats to both customers and businesses when using ecommerce. Explain the need to provide protection for consumers and businesses when using ecommerce. Understand the need for security and confidentiality in the use of e-commerce (encryption, security ID).
Marketing and the Business Environment Understand and explain the way in which businesses use e-commerce to promote their business activity (on line services, web-sites, on-line booking discounts). Understand the use of differing methods of data sampling (random, quota, stratified). Understand the meaning and use of SWOT (strengths, weaknesses, opportunities, threats) analysis Identify and demonstrate a basic understanding of the way in which demand and supply analysis is used in a marketing context. Draw and interpret graphs showing the changing relationship between demand, supply and price. Understand the importance of price elasticity of demand Calculate price elasticity of demand from simple data. Devise a strategy for marketing a product in given circumstances. 59
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Marketing: Developments and Constraints Explain the advantages for the business of using electronic information to assist with the targeting of a particular market (use of databases, loyalty cards, use of direct mail marketing). Identify and understand the main characteristics of, and differences between, different forms of credit, and their use in marketing (hire purchase, credit cards, charge cards). Show an awareness of, and an understanding of the need for legislation used in consumer protection and show how this impacts upon the marketing of a product. Understand the role which key organisations play in monitoring advertising (Advertising Standards Authority (ASA), Independent Television Commission (ITC)).
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E-Commerce What is E-Commerce? E-Commerce is a method of marketing that brings buyers and sellers together electronically. This is usually done through the internet. The Pressure to change to E-Commerce 1. Competition: a business could lose sales if competitors are selling through E-Commerce 2. Productivity: it is more efficient saving on overheads (especially wages) 3. Increased profits: lower costs can lead to higher profits E-COMMERCE AND THE BUSINESS Advantages 1. A global market leading to a. economies of scale b. new markets c. new products (as new markets) 2. Seven day opening 3. Better image 4. Cheap promotion
Disadvantages 1. Global competition 2. New skills needed so a. need training b. need to recruit c. need to maintain website 3. Depend on internet service provider and delivery firms 4. Security of payment may put customers off. 5. Setting up costs
E-COMMERCE AND THE CONSUMER Advantages • Easy to compare prices • Seven day availability • Wider range of products
Disadvantages • No personal contact • Can’t try out goods • Security of payment • Can’t use cash or cheques easily • Need access to internet
Impact of E-Commerce 1. 2. 3. 4.
Location- Become more footloose than before (the office need not be near the warehouse if connected electronically) New Skills- New skills of using e-mail, maintaining computer networks and websites, impacting on recruitment and training Levels of employment- Generally less staff is needed but new E-commerce businesses will increase their staff. Distribution- It is a more direct channel of distribution. May miss retailer all together.
Developments and constraints on Marketing Technology Businesses use electronic information to help their marketing. EDI: Electronic Data Interchange allows huge quantities of sales data to be communicated instantly through the company. Databases: these store and retrieve information. They can be used for mailing lists of customers for mail shots in direct mail marketing. Loyalty Cards: these not only are promotional tools but give the store huge amounts of information of its customers to help target sales. Credit Hire purchase: set instalments are paid and when the last one is made then the product is the consumer’s. This can be a marketing tool to attract the consumer and tie them into the company’s products. Credit cards/charge cards: these allow consumers to purchase an item and then pay it off later at a speed to suit them. It can attract consumers to but items they otherwise would not. Consumer Protection Sale of Goods Act: goods must be of satisfactory quality and match their description. The company cannot make false claims in its marketing. 61
Consumer Protection Act: controls price claims and labelling of products to protect the consumer from exploitation. Consumer Credit Act: the APR of any loan must be given to allow comparison and a copy of the credit agreement must be given. Unsolicited Goods Act: If goods are sent without being asked for you can keep them after 6 months and 1 month if you ask for them to be collected.
Control of Advertising The Advertising Standards Authority (ASA) controls advertising. An advert must be 1. Honest: must give clear idea of product (don’t miss any vital information out) 2. Truthful 3. Legal 4. Decent Certain products are banned from being advertised (e.g. tobacco) and certain adverts can only go pout after 9pm on the TV (the watershed). Advertising is controlled to protect the consumer from being misled or exploited by false advertising. Functions of the Price Mechanism 1. 2.
Price is a signal that rations resources and gets them to the most efficient producers and the consumers who want them. Consumer sovereignty: Here the consumer ultimately decides what is made through their demand.
Demand Effective demand is the willingness and ability to buy a product. Downward-sloping demand curve The demand curve slopes down because of 1. The substitution effect (as the price of a good falls it becomes cheaper than before in relation to its substitutes and some consumers switch their purchases) 2. The income effect (as the price falls then real income rises, i.e. the purchasing power of money is higher) Price Contraction
C A B Expansion 0
Quantity
A to B is an expansion of demand A to C is a contraction of demand
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Supply This is the quantity of a good that firms will supply at a given price. Upward Sloping Supply Curve It slopes upwards because 1. As the price rises then firms supply more attracted by higher profits 2. As output up in the short run they face rising production costs so raise the price. This attracts other firms in. Price Supply A
Expansion
Contraction 0
Quantity Equilibrium
Price
Supply Glut
P1 Pe
equilibrium
P2 Shortage
Demand
0
Quantity Qe
At P1 supply exceeds demand so the price will fall to allow the market to clear At P2 Demand exceeds supply so the price will be bid up and the market will clear. The price will always tend to Pe, which is the equilibrium. Shifts in Demand Price
Decrease Increase in in Demand demand
0
Quantity
Causes 1. A rise/fall in the price of complements 63
2. 3. 4. 5. 6. 7.
A rise/fall in the price of substitutes A change in fashion or tastes An increase or decrease in advertising A change in incomes A change in the population A change in credit facilities Joint Demand
These are goods that are jointly consumed or used together. A fall in the price of one will increase the demand for the other. Shifts in Supply Price
Decrease in Supply
Increase in Supply
0
Quantity
Factors causing the change in supply 1. 2. 3. 4. 5.
Changes in technology Changes in the costs of the factors of production Changes in the availability of the factors of production Changes in indirect taxation Changes in subsidies
Elasticity of Demand This shows the change in demand in a response to change in price The formula is % change in demand % change in price You need to know what the result means E.g. Price 10 15 Then Price elasticity of demand = 25% = 50%
Sales 100 75 0.5
Any number below 1 means demand does not change as much as price and so demand is inelastic. Here the business could put the price up and increase revenue. Any number above 1 means demand is elastic and so the business should put he price down to increase revenue. The Importance of Communication 64
Good internal communication: • Allows management to explain objectives • Allows employees to have an input into decisions through feedback • Clarifies roles and responsibilities • Coordinates activities • Motivates workers through them knowing the objectives, understanding their contribution, knowing how to do the job and how they are doing (feedback) • Makes for better decisions as it will give better quality information Good external communication is needed with: • Customers (to improve product or service) • Distributors (especially if using JIT) • Suppliers (especially if using JIT) • Investors • Government • Community (especially if take a stakeholder approach) One and two-way communication One-way communication is communication without feedback. This could be a notice or giving an instruction Two-way communication is communication with feedback Communication Channels A communication channel is the route through which communication occurs Open or closed channels
A closed channel is restricted to a few named individuals An open channel is open to anyone to see, read or hear.
Formal or informal communication Formal channels are channels established and approval by senior management Informal channels are a means of passing information outside the official channels Vertical or lateral communication Vertical communication can be done either up (upwards) or down (downward) the chain of command. If a business only has downwards communication it is not listening to its employees. This may evidence of autocratic leadership. Upwards communication is desirable because; 1. It helps managers understand workers views 2. It can alert managers to potential problems 3. It can help managers to gain ideas from employees 4. It can encourage a motivated workforce It can be encouraged by introducing quality circles and Kaizen principles Lateral communication happens across the level of hierarchy Lateral communication is encouraged is matrix organisations where different departments work on the same projects Methods of Communication Formal communication uses channels of communication established by the firm examples include: 1. Department meetings 2. Memos 3. Newsletters 4. Annual report 5. Letters 6. Notice board Informal communication uses the workers own channels of communication (e.g. the grapevine) 65
Motivation and Communication Poor morale can affect communication if workers and managers do not get on. This will make two-way communication very difficult and lead to a lack of positive communication and sharing of ideas. Poor communication can affect morale. If workers do not understand what the objectives are, if they are not involved in the decision making process and if they not told how much they contribute to the company this can lead to de-motivation. Barriers to effective communication Many things can lead to noise and affect the quality of communication: • Attitudes of workers and management • The quality of intermediaries (managers can’t always send a message direct to the receiver) • The amount of intermediaries (tall hierarchical structures can lead to slow ineffective communication) • Lack of common language (there may be too much technical jargon for example) • Lack of common goals Communication and the size of the organisation Problems of size: • Too many levels of hierarchy means that the message may be slower and get distorted. • Large organisations may have to rely too heavily on written communication, which can be less effective and less motivating than face-to-face communication. • Too much written information can lead to communication overload. People may not be able to decide what is really important. • Decentralisation may make communication more difficult but also be a solution if communication is at a local level. It can empower local managers and motivate them. The use of ICT may be a solution (e.g. intranets, Management Information Systems) but the organisation has to be wary of cost, the need for training, the systems becoming outdated and the possibility of more communication if it is easier leading to communication overload.
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CASE STUDY EXAM 67
KEY TERMS Using the case study, define each of these key terms. Key Term Manufacturer
Definition
Warehouse
Distribution Centre
Market Segmentation
Retail Outlets
Mail Order
Independent Shoe Shops
Department Stores
Exporting
Founded
Public Limited Company
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A substantial minority shareholding
Departments
National recruitment drive
Batches
Product Life Cycle
European Union
Adding Value
Workforce
Flexible workforce
Trade Union
Health & Safety issues
Imports
Competition
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Marketing strategies
Viability
Labour costs are cheaper
Hostile takeover
Takeover
Merger
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All about divA PLC Question
Answer
What kind of business is Diva PLC? What sectors does Diva operate in? Who are Diva’s customers? Identify the main products offered by Diva to its customers How does Diva generate revenue? Describe the area in which the business is located. What is Diva’s legal structure? When was the firm established? Who are the firm’s owners? Who set up the business? How many people are employed by Diva PLC? Which methods of production do Diva PLC use? Who are Diva’s main competitors? Where are the suppliers located? What type of organisation structure does Diva have? Who is Terry Blake? What is his role? What is Mark Staples trying to do? Why has there been a loss in production? What happened in the factory? Which countries are competing with Diva? What are the strategies offered to Diva’s internet customers? Who are the company’s target market segments?
How many possible locations are there for Diva? What has happened to Diva’s share price? How much has internet shopping grown by, from 2004 to 2006?
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CASE STUDY ANALYSIS DIVA (FOOTWEAR) PLC Case Study Diva (Footwear) plc is a successful manufacturer. Its factory, warehouse, distribution centre and offices are on an industrial estate on the outskirts of Brunham, a densely populated, industrial city.
Topic Area Industrial sectors- primary, secondary tertiary Location- the current location of the factory
Questions Which sector of the economy does Diva PLC fall into – primary, secondary or tertiary? Justify your answer. Is Diva a private sector or a public sector organisation? Explain your answer.
Diva plc makes shoes and boots for both men and women using leather and man-made materials. It offers a range of styles and prices aimed at many different sections of the market for footwear (see Resource Sheet 1).
Product Range Market segmentation
Describe the main benefits of market segmentation for a firm such as Diva PLC Identify two ways of segmenting the shoe and boot market.
Using the brand name, Diva, the company sells its products to independent shoe shops, department stores and other retail outlets. It also operates a profitable mail order business selling through monthly catalogues and an Internet website. Diva plc has a very small export market. It is noticeable that, over the past two years, an increasing percentage of its sales are coming from customers shopping on the Internet (see Resource Sheet 2). This is likely to continue to increase.
Place- Channels of distribution Imports/ Exports
Describe one advantage and one disadvantage to Diva of using the firm’s website as a promotional tool.
E-commerce Examine two ways, other than the firm’s website, that might be used to promote the business. Using Resource Sheet 2, describe the changes that have taken place over the two year period What are the main changes- why do you think that this is the case?
Diva plc has always been based in Brunham and has maintained good relations with the local community. The business was founded by James Diva in 1907. He started his business in an old shed behind a row of shops. Now Diva plc is a public limited company. His great granddaughter, Joanna Diva, is the Managing Director of the company and other members of the family still have a substantial minority shareholding in the company.
Stakeholders Enterprise skills Public Limited Companies Private Limited Companies
Describe two reasons why James might have established Diva in 1907 Describe two advantages and disadvantages to Diva from being a PLC What problems could the owners of Diva experience themselves from operating as a Sole Trader? Explain why changing to a public limited company
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assisted Diva’s expansion.
State two internal stakeholders of Diva and briefly explain their interest in the business. State two external stakeholders of Diva and briefly explain their interest in the business. The company is organised into six departments as shown in Fig. 1.
Organisation structures Functional organisation Span of control/ chain of command
Diva has a flat organisation structure. Examine the main advantages and disadvantages of organising the business in this way.
Management/ leadership styles Diva has a functional organisation structure. Examine the main advantages and disadvantages of organising the business in this way. Comment upon the chain of command and span of control that Joanna Diva has Who is Joanna Diva accountable to? Who is she accountable for? Diva plc employs about 600 people, most of whom work in the manufacturing and distribution departments. It recruits employees from the local area. Most of its employees have worked for the company for many years. Diva plc has a reputation for being a caring and considerate employer. It has, however, recently undertaken a successful national recruitment drive to find two new designers.
Changing work patterns, primary/secondary/tertiary Recruitment & Selection Recruitment from the local area Investors in people?
Explain why Diva PLC may have produced a job description and a person specification for each vacancy Identify two ways in which the vacancies may have been advertised. Why might Diva PLC have required applicants to complete a standard application form? Give one advantage and one disadvantage of using an interview to select from a list of candidates Describe two different methods that might be
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used to pay staff at Diva State the main legislation that Diva must bear in mind when recruiting new staff. Explain, using examples, what is meant by the term, unfair dismissal. The shoes and boots are made in batches. Some very popular traditional styles are made for several years. Other ranges, usually the more fashionable with a shorter product life cycle, are made in small quantities. Some styles are made only when orders are received from shops, and this is now causing problems for Diva plc.
Batch Production Product Life Cycle Job Production
Describe two ways in which Diva is likely to benefit from the manufacturing technology it uses. Describe the methods of production that are used within Diva PLC Analyse the advantages and disadvantages of batch production to Diva PLC Why is Job production causing problems for Diva PLC What is meant by a product life cycle Why are products with a shorter life cycle made in small quantities?
The treated leather and other materials are bought in from a number of suppliers, often small businesses. Most of these suppliers are located in and around Brunham and some are in other European Union countries. Diva plc adds value to these raw materials in a number of different ways before the shoes and boots are sold to the shops and individual customers.
Channels of distribution The impact of the EU/ buying and selling with the EU Adding value through production
Explain how Diva adds value for their customers. Explain the impact of a fall in exchange rates on demand for Diva. Explain the impact of an increase in exchange rates for Diva. What are the advantages of trading with EU countries? How has the EU allowed for better trade between foreign countries and the UK?
Terry Blake, the Purchasing Manager, has been asked to review the purchasing policy of the company in an attempt to cut costs. His findings will be reported to Joanna Diva, the Managing Director. Terry’s main aim when buying supplies has always been to obtain value for money. Should he change this strategy? 74
Changing suppliers Objectives
Terry’s main aim when buying supplies has always been to obtain value for money. Should he change this strategy?
As part of his review he is considering: Should he be making more use of overseas suppliers? Should he make use of recyclable materials? Show might he take advantage of economies of scale? Would finding another means of packaging to replace the traditional shoe box give the company a competitive edge?
The new Manufacturing and Design Manager, Mark Staples, plans to introduce changes to working practices in the factory to cut costs. These involve training workers in a wider range of skills and the increased use of computers in the manufacturing process so that the workforce will become more flexible. Mark will need to think carefully about how to communicate these changes to the workforce. These changes are likely to meet with some opposition from the employees, most of whom belong to a trade union.
As part of his review he is considering: Should he be making more use of overseas suppliers? Should he make use of recyclable materials? Show might he take advantage of economies of scale? Would finding another means of packaging to replace the traditional shoe box give the company a competitive edge? Changing working practices Costs- cutting costs
Examine the impact of changing working practices on the staff at Diva
Re-skilling Flexible workforce
Examine the impact of changing working practices on the business
Communication Trade Unions
What is meant by a flexible workforce? Suggest methods which could be used to communicate the changing working practices What is a trade union? What is a trade union’s main purpose? Suggest a response that the trade union may have to Diva PLC Describe the advantages and disadvantages of being part of a trade union Why would a trade union be interested in this matter? What is meant by the term re-skilling? Describe two appropriate training methods which could be used by Diva PLC Why might on the job
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training be an appropriate form of training for Diva PLC Why might Diva PLC prefer to use an off the job training policy? What are the advantages of re-skilling to Diva PLC? Recently there has been a marked increase in absenteeism in the factory resulting in a loss of production. The Human Resources Manager, Beatrice Rahman, is investigating the reasons for this problem. She will be bringing suggestions on how to improve attendance at work and increase productivity to the next management meeting for discussion.
Absenteeism Kaizan
Examine the likely consequences for Diva of failing to resolve the staff problems
Increasing productivity What is meant by the term Kaizan? How could Kaizan be used at Diva PLC? How could Beatrice improve productivity? How could Beatrice improve attendance issues at Diva?
A week ago there was an accident in the warehouse. Some shelving was overloaded and toppled over. One of the storemen was trapped and broke his arm and two ribs. Clare Mitchell, the Distribution and Warehouse Manager, needs to look at health and safety issues in the warehouse as a matter of urgency.
Health & Safety The welfare of staff
What legislation is in place to protect employers and employees at work? Describe who is responsible for health and safety at Diva PLC How could should health & safety policies be communicated? What is the possible impact of this health and safety issue on Diva PLC? Give two examples of Diva’s responsibilities to its employees under the Health and Safety at Work Act (1974). Give two examples of the responsibilities of Diva’s staff under the Health and Safety at Work Act (1974). Explain how the Health and Safety Executive ensures that legislation is
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implemented by businesses. Explain how the business would be affected by the 1992 Workplace Regulations. The UK market for shoes and boots is becoming more and more competitive. There is keen competition among UK manufacturers. Quality footwear made in Italy, Germany, Brazil, Spain and the USA is selling well in the UK. Many types of footwear are now being imported from Asia and Eastern Europe in increasing quantities. A recent newspaper headline read: UK MANUFACTURERS SQUEEZED BY INCREASED IMPORTS FROM ABROAD
Level of competition/ impact of competition The impact of globalisation Global markets Imports/ exports
What is meant by “The UK market for shoes and boots is becoming more and more competitive”? What is the significance of the newspaper headline to the UK economy? What is the impact of this headline upon Diva PLC?
This has raised alarm among the managers of Diva plc who are wondering how much the company might be affected.
Why are products being imported from abroad? Diva plc has always prided itself on the quality of its footwear and its ability to provide good design and, at the same time, comfort. As part of its selling strategy, the company offers the following to its mail order and Internet customers:
Quality
What is meant by “quality footwear”?
E-commerce Promotional methods
How could Diva PLC ensure good quality products are produced?
Customer service What are the advantages and disadvantages of using E-commerce to Diva PLC? Why are the strategies identified in Fig. 2 not extended to Diva’s other customers? Diva plc is wondering whether this strategy is sufficient to remain competitive in the footwear market.
Level of competition
Suggest other strategies which the business could offer it’s customers Why is it important that firms like Diva obtain regular feedback from customers? Comment upon Diva’s 48hour despatch policy Comment upon Diva’s 7 day opening policy to internet customers
The Sales and Marketing Department has used a number of promotional campaigns during the last two months to increase direct sales to individual customers. These have included: Ordering any pair of men’s and any pair of women’s shoes and receiving £20 off the total order value
Marketing: Promotional activities
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Design a promotional campaign for Diva PLC, taking into account the 4P’s
Why do you think the scratch card idea has failed to produce a response?
Giving a free leather wallet with every order Ordering three pairs of shoes or boots and getting one pair free of charge Offering a voucher for £5 if an order is made within 14 days of receipt of catalogue.
How could this idea be improved?
The most recent promotion is shown in Resource Sheet 3. It has been a failure and produced very little response.
Market research has indicated that Diva plc’s main market segments are:
Evaluate the scratch card idea as a method of promotion to Diva PLC Market segmentation Promotional activities for market segments
For each of the segments identified in Fig. 3, suggest a marketing strategy which could be used to effectively target the market
The Sales and Marketing Manager, Gary Simms, has been asked to devise marketing strategies for each of these main market segments. As competition increases, the Board of Directors has been considering ways of maintaining Diva plc’s UK market share. It has noticed the success of factory shops sited either on factory sites or close to the factory, or in an ‘outlet village’. It is making plans to open a factory shop in May 2008.
Market share
What is meant by market share?
Marketing Mix: Place How can a business measure it’s market share? What is an ‘outlet village’?
Three possible sites for the factory shop are available around Brunham as shown in Resource Sheet 4 (a) and (b). The Finance Manager, Robin Ho, has prepared a cash flow forecast for the project (see Resource Sheet 5). The Board of Directors will need to decide on the site at its next Board meeting so that the shop can open on time. The Board of Directors will also have to decide on possible sources of finance if Site C is chosen. There may also be the need for some short-term finance to cover set-up costs of £75 000 whichever site is chosen.
Location Cash Flow Forecast
Using resource sheet 4, carry out a SWOT analysis of each of the locations suggested
Sources of finance Which location is most suitable for Diva PLCwhy? What is a cash flow forecast? What are CFF’s used for? Which stakeholders may be interested in a CFF? Adjust the cash flow forecast to include: set up costs of £75,000 rental of site B Interest payment for site C Conversion costs for site A
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Discuss appropriate sources of finance to the business Which source of finance would be most appropriate if Site C is chosen? The Managing Director of Diva plc, Joanna Diva, is soon to report on the viability of continuing to manufacture footwear in Brunham as costs increase. She has been considering the possibility of gradually reducing manufacturing on the Brunham site and moving the company’s manufacturing to a factory in another European country where labour costs are cheaper. She is aware of the many problems such a move might bring. The Board of Directors will need to take this report into consideration when discussing the site of the factory shop.
Viability of the business Long term planning/ objectives The EU
Location of business
Why might Joanna want to move to the EU? What are the advantages and disadvantages of this to Diva? How can E-commerce help the business to move to the EU? Why should Joanna use market research to investigate the possibility of moving to the EU?
The Board of Directors is somewhat concerned about the fluctuating value of the company’s share price as shown in Fig. 4.
Share price Integration/ Mergers/ Takeovers/ Hostile takeover
Describe the changes that have taken place over a two year period to Diva’s share price? Explain why Diva’s share price may have fakllen over time What is the impact of a falling share price on Diva PLC? What is meant by a takeover? What is meant by a hostile takeover? Evaluate the advantages and disadvantages to Diva of being taken over by a foreign competitor
The Board of Directors is worried that a takeover bid for Diva plc may be launched by either a UK company or one of Diva plc’s competitors abroad.
Why would a foreign competitor be interested in Diva? In this, the centenary year of the company, the Board of Directors has been looking at the long-term prospects of Diva plc. The following proposals have been suggested to make sure that Diva plc is successful in the future: Opening Diva retail shops in some major UK cities Seeking an amalgamation or merger with another UK company Moving the company’s manufacturing to a factory in 79
The future plans/ long term viability of the business
Should Diva continue as a PLC or allow a foreign takeover. What would the advantages be to Diva of a merger rather than a takeover by a foreign
another European country Are there other options that the Board of Directors might consider?
competitor?
There are important decisions to make in the next few months.
What strategy should Diva adopt to expand the business further? Evaluate each of the options that Diva has
The Structure of the Exam The case study exam will consist of seven compulsory questions based on the Diva PLC case study. You are not allowed to take notes or annotated versions of the case study into the exam (shame!). You will be given a clean copy of the case study with the questions themselves before you begin. However, you should aim to be really up to speed with the contents of the case study before you enter the exam hall. You will not have time to read it thoroughly and take in all of the information it contains during the exam itself, but you may need to refer to it occasionally if you need to check something. It is vital that you use the time allowed during the exam to focus all of your efforts on producing good quality and well thought out answers. Your exam paper is worth 120 marks in total. Remember that 8 of these are awarded for the quality of your written communication. It is important, therefore, that you concentrate on producing clear and accurate answers that make effective use of suitable business terms and theories. Make sure that you can spell these terms properly and understand what they all mean as part of your revision. Finally, don’t forget to use proper sentences (and paragraphs, where necessary) to structure your answers. Some top tips for during the exam: Do read the questions set – at least twice – to make sure you understand what you are being asked to do. Do underline the command word in each question, so you know whether you need to define, apply, analyse or evaluate. Do answer the question set by the examiner, and not attempt to fit a really good answer to a similar question you did for homework. Do write in full sentences, not bullet points. Do allocate your time effectively – use the mark allocation as a guide – so that you get chance to answer all of the questions on the paper.
Good luck!
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Right, you’ve read the stuff.. and now it’s your turn to have crack..
Woo- hoo
Practice Questions 81
Motivation- Practice Questions SECTION ONE: Questions 1) Why is it important to have motivated staff? 1 2 3 4 Believe it or not… Money is isn’t the only reason that people go out to work. Abraham Maslow suggested that there are non- financial reasons. He called these the ‘Hierarchy of needs’ 2) There are five stages in Maslow’s Hierarchy of Needs. Label the diagram below
3) Complete the following paragraph… In a hierarchy the things at the ………………….are more important than those at the ………………………. Maslow said the lower levels have to be satisfied ……………………... Only when these needs have been satisfied will the individual strive to satisfy the …………………….. needs. For example, hungry, cold people will seek ……………………………………… first. Once they are well fed and comfortable, they will turn their attention to …………………………………………, for example the pleasure of being with colleagues. But there is of the course the financial reward for working! 4) Write a definition for the following methods of payment… Time rate or 'wages' Piece rate Overtime Shift payments Bonus payments Profit sharing 82
There are also ‘extras’ that can be paid above the normal wages 5) What is a loyalty bonus? How do you get one?
6) (i) What is a perk of the job?
(ii) Give TWO examples of perks
SECTION TWO: Practice Exam Question You are the Human Resources Manager of a large company. Many of the workers are unhappy and are looking for new jobs. Recent figures show productivity (output) has fallen. You know that the Managing Director has said there will be no wage increases this year. What improvements could you suggest at the next management meeting which would improve motivation and productivity? (10 Marks)
SECTION THREE: Other Motivation Theorists Other theorists have other ideas about what motivates people. Examples are Herzberg, McGregor, Mayo and Taylor. Carry out some research on the internet to find out about one of these theories. Then put together a PowerPoint presentation, answering the following questions…. Who is the theory by? Give some background about the theorists, who they are, what they do, etc What is the basic idea of the theory? Does this theory work on financial or non-financial motivators?
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The Public Sector- Social Costs Practice Questions Health Care The USA does not have a National Health Service. A patient needing medical treatment in the USA would have to pay to cover the costs. A stay in hospital costs around £300 a day, a broken limb costs £5000 to treat and an operation could easily cost £50,000. Most Americans take out a private medical insurance, which covers the cost of such treatment. Those without the money to pay are often refused treatment. Complete the following statements National Health Service, Taxes, Medical Insurance, Government, Free Market
1) 2) 3) 4) 5)
The USA does not have a …………………………… In the UK, health care is provided by the…………………………….. This is evidence that the USA has a ……………. economy To cover the costs of treatment most Americans have………………….. The National Health Service in the UK is funded by………………………
Who might benefit and who might suffer if the National Health Service was abolished and replaced by a private system? Answer….
Would a private medical system be more efficient than the current National Health Service, explain your answer Answer….
Social Costs Social costs are often used to support the public sector. The National Health Service, is a large, inefficient, dinosaur of an organisation. But without such a system, people would not be able to afford to pay for medical treatment, which could lead to unnecessary loss of life. Complete the following statements: Environmental Damage, Social Cost, Society, Private Costs, Business, Sectors 1) One argument used to support public enterprise is that of………………………… ……………………… 2) Social Costs are all of the costs which a particular decision imposes on ………………………….. 3) A decision to build a motorway for example, will have not only the ………………………… ……………………. of the land, labour, materials, etc. But also the social cost in terms of noise and other forms of ………………………………. ……………………………. 4) Until recently the private sector only considered the private costs of …………………………… but it is now starting to take into account the social cost 5) The government and the private sector working together on projects such as the M6 toll road bring benefits for both ……………………………….. 84
Case Study: Should the Barton Line Close? Barton is a seaside town with a population of 50,000. It is at the end of a railway link, linking it to the city of Runswick, 25 miles away. The road link between Barton and Runswick is poor and less direct than the railway because there is no road crossing of the Barr estuary. The rail link is currently making an annual loss of £500,000 and it’s future is under consideration A group of residents, hearing that the line was under threat, formed the ‘Save the Barton Line Society’. These were the points that they put forward to the rail operating company in favour of keeping the line open. • • •
Closure of the line would mean increased journey times by road. Many people commute to Runswick and the increased journey time by road would make this very difficult. This could add to the already high unemployment in the area Many tourists and day-trippers come to Barton by rail and the closure of the line would mean a decline in the tourist trade and a loss of jobs in the tourist industry The cost of improving the road system would be equal to the current losses on the rail for at least five years 1) What are the social costs of closing the rail link? Answer….
2) Why would a private company close the line? Answer….
3) Why might the rail operator keep the line open? Answer….
4) Who might be interested in this joint arrangement and why? Answer….
5) Write a letter or design a poster from the perspective of a local resident protesting the closure of the railway Extension: Explain how the following businesses might bring social costs to the local area: • A Chemical Works • A Large Car Plant • A Night Club • A Fish & Chip Shop • A Hypermarket Why do businesses like to use Greenfield sites? Why are people in the local community often against businesses using Greenfield Sites? How does a business bring social costs to an area when it closes down? 85
Business Basics- Practice Questions TEXT 1 Jack’s Café is a partnership owned by Luke and Sally. It is situated in Milton Keynes. Luke and Sally felt that Jack’s Café would be successful because they had: • completed market research • a wide range of business skills Luke had invested £10,000 and Sally had invested £2,000 in setting up Jack’s Café 1
Select a word from the list below and write it in the correct place in the passage. * argument * Deed * jointly * own * debts * salary
* limited * skills
As a partnership Luke and Sally ………………………. Jack’s Café. The partners ………………………. own the business. As owners they have a shared responsibility for the business ………………………. . Luke and Sally have a ………………………. of Partnership which shows how much money each is going to invest and what happens if Luke and Sally have an ………………………. . 2 Refer to TEXT 1. Jack’s Café is a partnership with unlimited liability. Explain the term unlimited liability. Unlimited liability is ………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 3 Refer to TEXT 1. (a) Name the partner who is likely to get more of the profit made by Jack’s Cafe ……………………………………………………………………………………………………… (b) Explain why the partner you have named is likely to get more of the profit. ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 4 Refer to TEXT 1. Explain how being a partnership could affect Jack’s Café in the following situations. (a) Obtaining finance from a local bank. ……………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… (b)
Luke’s position should Sally want to leave the partnership. …………………………
……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 86
TEXT 2 mk Catering Supplies Ltd is a private limited company. It makes food catering products and supplies them to businesses such as Jack’s Café. 5 Refer to TEXT 2. Listed below are some of the business activities that are carried out by mk Catering Supplies Ltd. Beside each activity identify if it involves a product or providing a service. Write product or service in each space provided a) Delivering burgers to Jack’s Café ………………………………………………………… b) Preparing the burgers
…………………………………………………………
c) Baking bread
…………………………………………………………
d) Sending a price list to Jack’s Café …………………………………………………………
6 Refer to TEXT 2 State two advantages to mk Catering Supplies Ltd of being a private limited company. Advantage 1 ……………………………………………………………………………………… ……………………………………………………………………………………………………… Advantage 2 ……………………………………………………………………………………… ………………………………………………………………………………………………………
TEXT 3 Jack’s Café is located near the end of a busy main street in Milton Keynes. Other businesses situated around Jack’s Café are: Hilfords - a car parts franchise Arrods - a national chain store that sells everything from clothes to electrical goods MickBurgers - a fast food franchise selling a wide range of food The Pound Store sells all sorts of goods for only £1 MK Building Society - offers mortgages and banking services to the residents of MK Wash and Glow - an automatic car wash
7 Refer to TEXT 3 (a) Name the competitor of Jack’s Café …………………………………………………… (b) Explain why the business named in part (a) is the main competitor of Jack’s Café ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 87
8 Luke and Sally realise that competitors can have a real effect on the way they operate their business. Select a word from the list below and write it in the correct place:* improve * partnership technology
* liability * provide
* limited * reduce
Competition has made Luke and Sally ………………………………. prices on some of their popular products. They are always looking to ………………………………. the quality of their goods. Each month they try to ………………………………. new ranges. They have been able to cut their business costs by introducing new ………………………………. like computers.
9
Listed below are reasons why Jack’s Café is located near the end of MK’s main street. Explain why each of these reasons is an ADVANTAGE to the business.
(a)
MK’s only car park is situated near to Jack’s Café at the far end of the main street
……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… (b)
Luke and Sally only pay a low rent for the building
……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… (c) MK is the busiest town in the area ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ………………………………………………………………………………………………………
TEXT 4 mk Catering Supplies Ltd has a number of stakeholders. Stakeholders are individuals or businesses that could affect mk Catering Supplies Ltd.
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*
10
Refer to TEXT 4 Name 3 stakeholders in mk Catering Supplies Ltd. Explain why each stakeholder is important to mk Catering Supplies Ltd.
Stakeholder 1 …………………………………………………………………………………… Explanation ……………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… Stakeholder 2 …………………………………………………………………………………… Explanation ……………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… Stakeholder 3 …………………………………………………………………………………… Explanation ……………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 11 Luke and Sally are not happy with the service they receive from mk Catering Supplies Ltd. Explain one likely effect on mk Catering Supplies Ltd if Luke and Sally take their business to a competitor. Explanation ……………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 12 A local newspaper does a good review of Jack’s Café. They say the food is brilliant and service is excellent. Explain how this review will have an impact on Jack’s Cafe Explanation ……………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 13 A customer complains to the local council that they saw a rat in Jack’s Café. Explain how the local council will have an impact on Jack’s Cafe ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… Forms of Ownership- Practice Questions Who owns public sector businesses? 89
1 Mark Give two examples of public sector businesses
2 Marks State two features of a Sole Trader
2 Marks What are the minimum and maximum number of partners allowed in a partnership? Minimum…………. Maximum………… 2 Marks What does unlimited liability mean? 1 Mark What do the letters LTD after the name of a business tell you? 1 Mark What do the letters PLC stand for? 3 Marks State THREE documents which have to be filed with the registrar of companies when forming a company
3 Marks State TWO types of co-operative
2 Marks What are dividends? 1 Mark
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Forms of Ownership 2- Practice Questions
Section A: Marks out of 15 1) Who owns public sector businesses? [1] 2) Give TWO examples of public sector businesses [2] 3) State TWO features of a sole trader [2] 4) What is the minimum and maximum number of partners allowed in a partnership? [2] 5) What does unlimited liability mean? [1] 6) What do the letters LTD after the name of a business tell you? [1] 7) What do the letters PLC stand for? [1] 8) State three documents which have to be filed with the registrar of companies when forming a company
[3] 9) State TWO types of co-operative [2] Section B: Marks out of 27 10) Which THREE statements apply to public limited companies? (Tick boxes) The name of the company is followed by the letters ‘plc’ The maximum number of number of shareholders is 20 Shares cannot be sold to members of the general public They are owned by the government on behalf of the public The name of the company is followed by the letters ‘ltd’ Shares are sold on the stock exchange They have a minimum share capital of £50,000 They have unlimited liability [3] 11) Below is a list of features of different types of businesses. Select the FOUR which USUALLY apply to general partnerships. General partnerships usually: Are owned by one person 91
Sell shares on the Stock Exchange Have the letters plc at the end of their names Have unlimited liability Are owned by shareholders, but cannot sell shares to the general public Share responsibilities between owners Do not have more than twenty owners Have limited liability Share the workload between the owners Pay dividends to their shareholders [4] 12) EV plc is a company selling printing franchises. It’s directors have TWO main business objectives, increasing profit and increasing market share. a) Explain how EV plc’s objectives may be linked
[4] EV plc is also looking for people to take on franchises in their printing business. Laura Lloyd, who already runs her own printing shop as a sole trader, has seen the advertisement and is considering taking on a franchise. The other alternative Laura has considered is to go into partnership with her sister, Emily. b) Advise Laura whether she should take on the franchise
[6] c) Explain ONE benefit and ONE drawback to Laura from remaining a sole trader, rather than going into partnership with her sister
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[6] d) Give TWO reasons why companies such as EV plc prefer to expand by franchising rather than through opening their own shops
[4]
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People in Organisations- Practice Questions 1. List and explain 3 reasons why organisations may need to recruit workers? 2. List 10 items that might be included in a job advertisement. 3. What media would you use to advertise a Maths teaching post? 4. What does internal recruitment mean? 5. Explain what is meant by Maslows Hierarchy of needs. List all five levels and explain in your own words what each one means. 6. List and explain in detail three methods of pay. 7. Workers can be motivated through non-monetary means. List and explain two of them. 8. Prepare a pay advice slip for the following worker: - Sinead works as an insurance broker for White & Co. She gets paid a salary of £15,000 a year. She earns 5% commission on every policy she sells. Last year she sold a total of 52 policies which were worth £2000 each. She pays tax at the rate of 20% yearly on everything she earns. She also pays £80 National insurance a month and £70 into her pension fund. Work out her pay and deductions for the year ending 2001.
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Finance- Practice Questions
Extracts from final accounts of
Downton Confectionery Ltd Trading Profit and Loss Account for Financia l Year Ending 31 December 2003
Balance Sheet as at 31 December 2003 £
£ Sales Turnover Cost of Sales Gross Profit Expenses Net Profit
Fixed Assets 2,500,000 1,500,000 ————1,000,000
5,000,000
Current Assets 1,500,000 Current Liabilities 500,000 ———— 1,000,000 --———– Total Capital Employed 6,000,000
500,000 ————500,000
QUICK FIRE QUESTIONS 1. Label the Trading Account section of the Profit & Loss Account
2. 3. 4. 5. 6.
Label the Profit & Loss section of Profit & Loss Account How is Cost of Sales calculated? Give THREE examples of typical business expenses How is GROSS profit different to NET profit? Give TWO examples of each of the following: • Fixed Assets • Current Assets • Current Liabilities 7. What is TOTAL CAPITAL EMPLOYED? 8. What is Total Capital Employed? 9. What is the Working Capital/ Net Current Assets of the business? (Current Assets—Current Liabilities) 10. What are the Net Assets Employed of the business? (Total Assets– Current Liabilities) 11. What happens to the profits of a business? Give TWO uses of profit
RATIOS Fill in the ‘what does it show?’ column of the following table using the statements below • Profit created for every £1 invested • This takes into account the expenses of a business • This takes into account Stock. Ideally should be between 0.5:1 and 1.1 • Ideally should be over 1:1 as the company is covering it’s debts • The bigger the % the bigger the profit
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Ratio
What does it show?
Who might be interested?
Profitability GROSS PROFIT MARGIN (Gross Profit/Sales Revenue)x100
Managers- Is the firm performing well? Creditorsare the profits enough to repay the loans
NET PROFIT MARGIN
As before
Gross Profit : Sales
Net Profit : Sales (Net Profit/Sales Revenue)x100
RETURN ON CAPITAL EMPLOYED (ROCE)
Shareholders (Investors)- is investment providing as good a return as other options might?
Net Profit : Capital Employed (Net Profit/Capital Employed)x100
Liquidity CURRENT RATIO Current Assets : Current Liabilities
Managers, creditors- how easily can the firm's debts be covered? Linked to cash flow forecasts
ACID TEST RATIO
As before
Current Assets- Stock : Current Liabilities
Now calculate each of the ratios on DOWNTON CONFECTIONARY’S accounts Gross Profit Margin: Net Profit Margin: ROCE: Current Ratio: Acid Test Ratio:
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SOURCES OF FINANCE All businesses need money to operate, using the picture below to help, decide whether the following sources are INTERNAL or EXTERNAL sources of finance Internal The board of a Public Limited Company may retain profits for a year rather than share it amongst the owners. The cash can be invested to earn interest. Assets that are no longer required, like an outdated computer or an obsolete piece of machinery, can be sold. Loans from a bank or a building society can be expensive. An agreed amount is borrowed and repaid over a fixed period of time with interest. A sole trader or a small business may be able to borrow money from family or friends without paying interest. Stock levels can be reduced and funds made available for other uses. Grants from central or local government can cost the firm nothing. Firms often lease equipment or machinery to avoid a large outlay of cash. This is useful if a firm needs to upgrade within the medium term as technology advances.
CASH FLOW FORECASTING CASH IN
Jan
Feb
Mar
Apr
9500
7000
4000
4000
7400
6500
6600
5500
a
500
-2600
d
0
b
2600
0
2100
2600
c
-1500
minus CASH OUT = NET CASH FLOW plus OPENING BALANCE = CLOSING BALANCE
1- What is a Cash Flow Forecast? 2- Complete the blanks 97
External
Useful revision websites Exam Board Website http://www.aqa.org.uk/qual/gcse/bus_b.html BBC Bitesize www.bbc.co.uk/bitesize Digital Brain http://www.digitalbrain.com/digitalbrain/web/subjects/2.%20secondary/ks4bus/ The Times 100 Case Studies http://www.thetimes100.co.uk/ UK Business Park http://www.ukbusinesspark.co.uk/
Business Studies Games http://www.businessstudiesonline.co.uk/Break/break.htm
Other useful web resources www.marketingteacher.com www.tutor2u.net www.sheetudeep.co.uk www.guardian.co.uk www.jusbiz.org.uk www.learn.co.uk www.s-cool.co.uk www.businessteacher.com
I’ve got a stone in my shoe
Right, that’s it… The very best of luck to you!
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