Revisionworld Quick Revise 'Business Studies'

Fixed costs These do not alter with output Examples rent, management salaries, rates Graphically fixed costs will always be illustrated by a horizontal line As output changes fixed costs stay the same Variable costs Alter directly with the businesss level of output Examples fuel, raw materials Graphically variable costs will always be a diagonal line from the origin As output changes variable alter directly Total costs These are fixed and variable costs added together Semi variable These have a fixed and a variable element Direct Costs Attributed to the production of a particular product and vary directly with output e.g direct materials and labour Indirect Costs Can't be allocated to the production of a specific product and relate to the business as a whole e.g. indirect labour costs, administration Summary Budgets are financial plans showing expected costs and revenues over a period of time Purposes of budgets they help the business plan and control finances Problems with budgets external factors, poor communication, incorrect allocations Advantages allows to prioritise, provides direction, can motivate Disadvantages need to train staff, can be short term not long term Calculating variances look at costs and revenues if they are adverse (negative) or favourable (positive) Zero budgeting all areas start off with nothing and have to bid for money Budgeting and Forecasting After studying this section you will be able to explain how variance analysis leads to management by exception describe the purpose and difficulty of cash forecasting apply your knowledge of cost classification to calculate and show break-even Capital and Revenue Expenditure Capital expenditure spending on items that can be used time and time again in the production process (fixed assets)

Revenue expenditure meets current day-to-day expenses e.g purchase of raw materials and the payment of wages Cash Flow A Forecast is a prediction of what may happen in the future A cash Flow Forecast is therefore a prediction of the inflows and outflows of cash in the future Businesses use past figures and experiences to predict forecasts A Cash Flow statement differs from a forecast. It detailed what has happened in the business, i.e. the money that has flowed in and out of the business Cash flow versus Profit Cash flow is most important in the short term as it is the businesses ability to pay their bills Profit is more important in the long term Businesses can be profitable and still experience cash flow problems Creating a cash flow forecast In order to create a cash flow forecast you will need to know the following Opening balance Total incomes Sale of goods Rental income Total expenditures Materials Energy costs Wages Transport Total incomes total expenditures (outflows) = net cash flow Opening balance + net cash flow = Closing balance Closing balance is then carried forward as the opening balance for the next month Uses of cash flow forecasts To anticipate potential shortages of cash To examine and possibly adjust the timings of receipts and payments, in order to avoid problems To arrange financial support where problems are forecast Causes of cash flow problems Seasonal demand Overtrading Over-investment in fixed assets Credit sales Poor stock management Unforeseen change

Types of cash flow problems Long term structural problems Cyclical features Internal problems / inefficiencies External changes Working capital problems Ways of improving cash flow Improve planning More thorough market research Diversifying the product portfolio Improved decision making Contingency funds Use of sources of finance to avoid short term working capital problems
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Problems with cash flow forecasts Inaccurate market research Changing tastes Competitors Economic changes Uncertainty Company Accounts Click on the resources below Proift & Loss Account This is a financial statement that shows a businesses revenues, expenses and profit / loss over a period of time Gross profit = Sales cost of sales Net profit = Gross profit overheads Retained profit = Net profit tax dividends Trading account shows the income earned by the business over a trading period Appropriation account the uses of net profit after taxation The following groups are interested in a businesses profit and loss accounts: Shareholders Managers Employees Inland revenue / government Profit or Loss diagram
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Balance Sheets Balance sheets are financial statements that record the assets and liabilities of a business at a specific point in time Assets items owned by a business

Fixed assets items owned by a business expected to be retained for at least one year e.g. buildings Current assets items that are expected to be turned into cash in the next year e.g. cash, stock Liabilities monies owed by a business Current liabilities debts owed by the business payable within a year e.g. creditors Long term liabilities debts owed by the business which wont be repaid within the next year e.g. bank loan Balance Sheet Rules Assets = Liabilities Total Assets = Fixed assets + current assets Liabilities = Share capital + borrowings + other creditors + reserves Depreciation The decrease in value of assets over time This is shown as an expense on the profit and loss account
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Fixed assets will be depreciated in value on the balance sheet Two methods: Straight line Reducing Summary Capital and revenue expenditure capital spend on fixed assets, revenue on day to day expenses Cash flow forecasting a prediction of cash inflows cash outflows Improving cash flow cash flow can be improved by better planning, sources of finance, revision of credit terms and better market research Working capital current assets current liabilities, need to ensure have sufficient cash to operate Cash flow vs. profit Cash flow - short term and profit long term Sources of finance these are ways businesses can get money. Internal from inside the business e.g. retained profits, sale of assets. External from outside the business e.g. loans, mortgages Profit and loss shows revenues, expenses and profit / loss over a period of time Balance Sheets record assets and liabilities on a specific day Depreciation the reduction in value of fixed assets over time Window dressing techniques used to improve appearance of accounts Contribution & Break-even Analysis Click on the resources below Break Even Analysis Break even is the point of production where are firms revenue is equal to the total costs of production

Margin of safety the difference between the firms current level of output and break even output Break even = Fixed costs / contribution per unit Break even analysis can help managers to plan and in their operations. In addition it can help: Analyse the impact of a change in the environment on the business Decide whether or not to accept an order for products at a different price from normal Break even analysis can use a number of methods:
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Contribution method Break even chart Break even graph Break-even diagram Uses of break-even analysis Allows to decide if a business venture is financially viable Looks at what will happen if level of production changes To support an application for an external source of finance e.g. loan or mortgage application Changes in the business environment and break even If Variable Costs (VC) rise in value then break even output increases If VC fall in value break even output decreases If Fixed Costs (FC) rise break even output increases If FC fall break even output falls If selling price increases break even output decreases If selling price decreases break even output increases Special Order Decisions This is when businesses need to decide if to accept orders that are on special terms Prices lower than normal if the contribution is positive generally accept the order
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However have to consider: If more Fixed Costs result from the order May the order increase the level of Variable Costs If the company will resell the product If it may lead to future sales if this is the case may accept an order that doesnt make a positive contribution Prices would be higher than normal Normally customers would accept this However if specifications have to be altered it may prove to be expensive for the business The firm would need to: Calculate any extra variable costs associated with the order Assess if sufficient capacity to meet order

Decide if it increases contribution and profits Here is an adapted A Level question where marginal costing and product contribution can be used to make a decision. A single-product manufacturer has this cost structure: materials 25, direct labour 28, and variable overheads 12 per unit; fixed overheads total 420 000. Its product price is 120, annual output (80% of capacity) being 20000. A DIY store has enquired whether it can buy an extra 4000 units per annum, to sell as own label items. It will pay 85 for each unit. The manufacturer will have to incur 10 000 setup costs. Is the offer worth accepting? The present contribution is 55 per product: selling price 120 less 65 variable costs (i.e. 25 + 28 + 12). Break-even point is 420 000/55 = 7636 sales, the margin of safety is 12364 (20 000 7636) and the forecast profit is 680 000 (12 364 55). Note how these calculations can be checked: break-even revenue 120 7636 = 916 320 break-even costs total the same, i.e. 420 000 + 496 340 (7636 65) (the 20 difference is due to rounding) profit at 20 000 output = revenue 2 400 000 (120 20 000) less cost 1 720 000 (420 000 fixed + 1300 000 variable, i.e. 20 000 65) = 680 000 The key question is: should the new order be taken on? Numerically, the calculations for this order show: unit contribution 20 (85 65) total contribution 80 000 (4000 20) total profit 70 000 (80 000 10 000 set-up costs). The main marginal costing principle here is that, because all fixed costs are already covered (by the normal production and sales exceeding the break-even point), the contribution made by this special order is all profit.
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Non-financial factors are also important in making such decisions. For example: is the special order the most profitable way of utilising spare capacity, or will long-term plans for using this capacity be affected? will the lower selling price influence other customers? Summary Break even analysis looks at the output required for the firm to cover all costs Three methods of break even analysis: equation, chart, graph

Break even allows you to look at the impact of a change in the business environment Contribution: total revenue variable costs Firms can use contribution costing and pricing methods to attempt to increase profitability Special order decisions ook at how firms decide whether to accept orders that are out of the ordinary, need to consider contribution and additional factors Cost Centres & Profit Centres Cost centre An identifiable part of an organisation where costs can be calculated Profit centre An identifiable part of an organisation where costs and revenue can be calculated You need to be able to allocate all costs to a certain area If you can calculate revenues as well as costs can calculate profit (Total revenues- total costs) These are often used with budgets to assist with financial planning and control Uses of Cost and Profit centres They allow the business to compare performance between departments / across products / brands etc This allows the business to make decisions about underperforming areas If a profit centre is identified as doing well businesses may want to focus on the reasons behind this They allow a more focused study of a firms finances Benchmarking can take place Responsibility for a profit / cost centre will motivate the individual responsible By placing responsibility with the person involved in the activity the finances may be run more efficiently than would be the case if a more remote, senior manager controlled it. Creating Cost and Profit centres Cost / profit centres can be created in a number of ways: Geographically e.g high street banks Product / line of production Departments / divisions
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Individual products / brands Advantages of Cost and Profit centres Financial reasons they allow you to manage and control money. They allow the business to identify which areas are most profitable Organisational reasons helps with the organisation of departments and resources Motivational reasons motivates managers and workers Disadvantages of Cost and Profit centres In practice, it may be difficult to allocate costs to a particular division / centre Cost and profit centres may add to pressures and stress on staff

Senior managers may be unable to recognise whether a cost or profit centre is running effectively / ineffectively Summary Cost Centres: calculate costs attributed to a specific area of the business Profit Centres: calculate costs and revenues attributed to a specific area of the business Ways to generate them: by geographical area, product, brand ,department Uses of cost / profit centres: they have financial, motivational and organisational uses Advantages: helps control money, motivates staff Disadvantages: can be difficult to do, may increase pressure Investment Decision-making Investment refers to the purchasing of productive capacity or capital expenditure (spending by a business to buy fixed assets e.g. property, vehicles etc) Why Invest? Businesses need to invest to grow They might want to increase capacity so they can produce more If they produce more then they can sell more and increase sales revenue They could also look to invest to increase the efficiency of their operations Because of the major capital outlay involved, managers try to calculate expected profitability and expected cash flows for the proposed investment. They use three methods of investment appraisal. Payback period method This method of investment appraisal calculates how long it takes a project to repay its original investment. The method therefore concentrates on cash flow, highlighting projects that recover quickly their initial investment. Here is an example of how it works. A company is considering two different capital investment projects. Both are expected to operate for four years.
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Only one of the projects can be financed. The payback periods are calculated by adding annual depreciation back to the cash flows: depreciation is a noncash expense that reduces profit, and so the profit figures given understate the cash inflows by the amount of the depreciation. Cash flow in year 4 is also increased by the scrap values for each project. The payback period for project A is two and a half years. At the start of year 3, outflows exceed inflows by 6000. Net inflows for year 3 are 12 000 (1000 per month): it therefore recoups its original investment after six months of year 3.

Project Bs payback period is three years. The manager would therefore select project A on the basis of this method, even though project B generates a greater total cash inflow by the end of its life. These calculations also help decisions to be made between alternative capital projects. Although the payback method is widely used in practice, it is often as a supplement to the other, more sophisticated, appraisal methods. This method is easy to calculate and understand. Its use emphasises liquidity, because calculations are based solely on cash flow. It also helps managers to reduce risk by selecting the project that recovers its outlay most quickly. Early cash flows can be predicted more accurately than later ones, and are less affected by inflation. The main drawback of this method is that it completely ignores profit and profitability. It also takes no account of interest rates. Accounting rate of return (ARR) method This method of investment appraisal calculates the expected profits from the investment, expressing them as a percentage of the capital invested. The higher the rate of return, the better (i.e. the more profitable) is the
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project. The ARR is therefore based on anticipated profits rather than on cash flow. ARR = (expected average profits / original investment) x 100 Using the above figures, project A generates total profits of 10 000 and project B total profits of 12 000.
Project A () Project B () 2500 3000 22000 22000 APR = 11.4% APR = 13.6%

Project B would therefore be selected using ARR. The accounting rate of return method is easy to use and simple to understand. It measures and highlights the profitability of each project. Its disadvantages are that it ignores the timing of a projects contributions. High profits in the early years which can be estimated more accurately, and which help minimise the projects risk are treated in the same way as profits occurring later. It also concentrates on profits rather than cash flows, ignoring the time value of money (profits in the later years being eroded by the effects of inflation). Discounted cash flow (DCF) method

The principle of DCF is based on using discounted arithmetic to get a present value for future cash inflows and outflows. This method is sometimes divided into two elements, which complement each other: the net present value (NPV) method, which takes account of all relevant cash flows from the project throughout its life, discounting them to their present value the internal rate of return (IRR) method, which compares the rate of return expected from the project with that identified by the company as being the cost of its capital projects having an IRR that exceeds the cost of capital are worth considering. As an example, a company receiving 100 at the start of a year might be able to invest it at 10% per annum: by the end of the year this investment will be worth 110. Given the choice of 100 now or a higher sum in a years time, the managers will choose the higher sum only if it exceeds 110. This principle works in reverse: the managers know that a project generating 110 in a years time is worth the same as one generating 100 immediately, the project with the future value being discounted to its present value (by using a set of discounting tables). The NPV method calculates the present value of the projects future cash flows. Each years cash flow is discounted to a present value, which shows how much the managers would have to invest now at a given rate of interest to earn these future cash benefits. The present value of the total cash outflows is compared to that of the total cash inflows to calculate the net present value of the project. The project with the highest positive NPV will be chosen.
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If the NPV is positive cash benefits exceed cash costs this means that the project will earn a return in excess of its cost of capital (the rate of interest/discounting used in the calculations). If the NPV is negative, this means the cost of investing in the project exceeds the present value of future receipts, and so it is not worth investing in it. If the company planning to invest in either project A or B has a cost of capital equal to 12%, the future cash flows can be discounted to their present values using discounting tables. The present value of 1 when

discounted at 12% is:

Year Present value (PV) factor 12% 0 1.000 1 0.893 2 0.797 3 0.712 4 0.63

Project B has the higher expected NPV and would therefore be selected. The IRR method involves comparing the actual rates of return in this illustration, both rates exceed 12% since both show positive NPVs when discounted at 12% with the companys cost of capital. The use of DCF takes account of all cash flows, and it acknowledges the time value of money. The main problem is in establishing a suitable discount rate to use, because this rate (and the firms cost of capital) is likely to vary over the life of the project. KEY POINTS - Organisations undertake investment appraisal to evaluate the likely success and value of capital investments, which tie up the firms finance for a long period, normally for a number of years. Market Analysis Businesses use methods of market analysis to find out what is happening in the market. These tools allow them to
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develop marketing strategies which exploit opportunities. Key Terms Market size: the total number of sales in (value) or quantity (volume) in a market Market share: the % of a market an individual business has Market growth: the % increase in the size of the market on an annual basis Market segment: a section of consumers in the market which share similar characteristics Market Size This helps businesses decide the potential profitability in a market Larger markets tend to have more opportunities to make a profit When a business is considering entering a new market they will be interested in market size and the fierceness of competition Market Share Market share figures allow a business to compare themselves to their competitors If the market is dominated by a number of large companies e.g., Supermarkets such as tesco, asda,

Sainsbury's it is less attractive for new firms to aim at the entire market The distribution of market share in a market is influenced by the type of market that the business is operating in (monopoly perfect competition) Market Growth This figure is crucial for a business Many attractive markets are relatively small and fast growing therefore offering the potential of high profits Markets that are growing at a rapid rate tend to attract lots of new businesses Markets tend to grow the fastest at the beginning of the product life cycle Market Decline Sometimes markets suffer negative growth This often leads to companies leaving the market Some businesses may be able to exploit opportunities and segments using their own USPs when the market is entering into decline Competitor Analysis Businesses need to have a good idea about their competitors to enable them to develop valid and successful marketing strategies Alongside market share a business often benchmarks their current / potential competitors in order to gain a greater understanding of their offering Segmentation Analysis Market segmentation is the process of splitting up the market into different segments or chunks which share the
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same characteristics Characteristics that businesses segment by can include: Age Socio economic group Gender Culture Ethnicity Lifestyle Segmentation analysis allows a business to tailor their marketing strategy to meet the needs of different customers Some market segments are more attractive than others as they may display lower levels of competition, faster market growth or more opportunities to make profits Sampling Sampling refers to the methods used to select consumers to participate in market research

Random sample all of the population have an equal chance of being selected often done using a computer Quota sample candidates are chosen based on their characteristics Market Research Market research is the process of collecting, collating and analysing data about the market. Primary Research Primary or field research is research that is done first hand e.g. questionnaires, surveys Methods Postal surveys these have a high sample size but low response rate, relatively cheap Telephone surveys more expensive, higher response rate, can explain questions Interviews smaller sample size, higher response rate, may be interviewer bias Focus groups provide in-depth analysis, small sample size Advantages Fitness for purpose Allows to target right segments Can explain difficult problems / concepts Disadvantages Can be time consuming Expensive Some forms have low response rates
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Secondary Research Secondary or desk research uses existing sources of information e.g. books, journals Methods Census provides information on all the households in the UK, updated every 10 years Internet can provide a wealth of information however need to check validity of data Government statistics Books and journals Company reports MINTEL reports these are often a good source of market information Advantages Quick and easy Relatively cheap Disadvantages May be out of date May not be relevant Marketing & Planning Marketing Budget A marketing budget sets out the costs and revenues that are allocated to the marketing department. The marketing budget will influence the promotional tools that a business is able to utilise.

Sales forecasting Sales forecasting sets out targets for overall sales for products and is a goal for the firm to achieve It influences other decisions: Production schedule Cash flow forecast Human resources decisions Producing a Sales Forecast It may be based on historical / back data The firm can use market research to try and identify likely future trends It may be based on the firms best guess Nature of the forecast depends on nature of the firms product and the market situation Problems with forecasts Customer-buying behaviour suddenly changes
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Original market research was poor The experts got it wrong Reliability of forecasts Forecasts are most likely to be correct when: Trend has been extrapolated and market conditions continued as before Test market is used and represents entire population Forecast is made by experts Firm is forecasting in the near future Marketing Planning Develop tactics to support the marketing strategy Sets targets Develops different elements of the mix Allocates funds to different activities Decides on a time schedule Key Terms Product Life Cycle Marketing Budget Test marketing Sales forecasting Advantages of marketing planning Sets out in detail what it wants to achieve Managers can review firms progress by comparing actual outcomes with planned outcomes It forces managers to think ahead and consider what might happen Provides direction Disadvantages of marketing planning The plan may become out of date with changes to the market Can take up a lot of time and delay vital decision making Evaluation of the plan

Is it realistic? Does it help achieve the strategy? Is it affordable? Does it fit with the firms strengths? Sales Budget A target level of sales for a product (actual or market share) SALES BUDGET
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Size is dependent on: Past sales of the product Expenditure budget Market conditions Objectives and strategy Expenditure Budget This is a target level of expenditure a firm sets to achieve its marketing objectives Size depends on: The firms overall financial position The firms marketing objectives and strategy The amount the firm expects to receive back Competition Elasticity Elasticity measures how responsive demand is to a change in price / income PED = % change in quantity demanded / % change in price YED = % change in quantity demanded / % change in income Inelastic: less responsive to a change in price / income Elastic: more responsive to a change in price / income If YED / PED is greater than 1 it is elastic If YED / PED is less than 1 it is inelastic If YED / PED is 1 it is neither elastic or inelastic To increase revenue for elastic goods you decrease price To increase revenue for inelastic goods you increase price Elastic goods tend to be: Luxuries Many substitutes Take up a large % of income Inelastic goods tend to be: Necessities Few substitutes Take up a small % of income Goods with strong brands Marketing Mix
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The marketing mix or the 4P's are the key elements of a businesses marketing plan

The marketing mix refers to: Product Price Place Promotion Product Product refers to what the business sells This could be a good tangible or a service intangible Products are composed of different features which help consumers identify them e.g. their size, their colour Products need to be developed to meet customer needs and wants Price Price refers to how much consumers are charged for a product There are different strategies for different types of products: Price skimming (new products): Price is initially high due to type of product (usually electrical, luxury, innovative) Price penetration (new products) Price starts at a lower price to gain market share Pricing strategies for existing products Price leader dominant firms in the market are able to set the price for the rest of the market Price taker these firms accept the price that the price leaders set Predator predatory pricing is where businesses undercut competitors to drive them out of the market and gain market share Methods Cost based businesses work out how much products will cost to make, they then add a profit margin on to this to calculate price Contribution Prices are calculated by looking at how much they contribute to variable costs Discriminatory Where businesses can charge different prices to different consumers for the same product e.g. peak and off peak travel Tactics Loss leader Businesses have products priced at a low level where they will make a profit, this encourages customers into the business where they will buy additional products Psychological Where businesses use prices such as 9.99 as they seem to be cheaper Place
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Place refers to physical location and channels of distribution

Channels of distribution This is how a product gets from the producer to the consumer There are four main channels of distribution: 1. Producer consumer this is generally used for small businesses e.g. farm shop 2. Producer Wholesaler Consumer Here the wholesaler acts as an intermediary for the producer and is able to carry a number of different producers products e.g. furniture 3. Producer Wholesaler Retailer Consumer- This is common for clothes 4. Producer Retailer Consumer this is often used for electrical products Each link in the chain of distribution adds costs onto the final product and makes it more expensive for the end consumer Wholesalers and retailers can provide important functions for producers especially as they grow larger By using wholesalers and retailers businesses can loose control over the promotion of their products Location Businesses need to consider a number of factors when considering their location including: Historical factors Cost of premises Space and land Transport links Proximity to suppliers / customers Promotion Promotion is the way of communicating what the product is to the consumers It aims to persuade customers to buy the product Above the line promotion Advertising that uses independent media Below the line promotion Sponsorship, Public Relations, Direct Mail, Special offers Advertising Advertising can be done using a variety of media including: TV local, national, sky, digital Radio local, national Press newspapers, magazines, local, national, specialist press
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Type of advertising media is dependent on: Cost Target audience Sponsorship Individuals, events or teams are sponsored by organisations to increase company recognition and sales Businesses often choose individuals / teams / events that have a similar target audience and similar ethos to

themselves E.g. David Beckham and police sunglasses, 3 day eventing and land rover Sales Promotions These are ways to boost sales e.g. BOGOF buy one get one free, 20% extra free These are used to boost short term sales Public Relations Where businesses have contact with the media to send out specific messages about the firm / its product This is free advertising Sometimes public relations can backfire for a business Personal Selling This is where a product is being promoted in a face-to-face situation The product is promoted by a salesperson whose aim is to increase sales of the product This often happens in the financial services industry Direct Mail This is where mailshots are sent directly to customers These can be sent via mail, text or email As customer profiling techniques become more sophisticated mail shots are increasingly targeted E.g. Tesco club card send vouchers to their customers based on their purchasing patterns and segmentation analysis Marketing Strategy A firms marketing strategy depends on a number of things: Its resources Their strengths and weaknesses Competition Skills and assets of the business Market opportunities and threats Marketing objectives Marketing Objectives
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Marketing objectives are targets that the marketing department wants to achieve. These objectives help businesses achieve their overall objectives. Marketing objectives allow businesses to achieve their marketing strategies. Examples of objectives: - To increase market share by 5% - To increase distribution by 4% Niche Marketing Niche marketing is where a business concentrates on a small segment of the market

This is often used by small companies as it is a way of avoiding competition who may not be interested in such a small segment E.g. Gardening magazines, Science fiction books Mass Marketing Mass marketing strategies aim the strategy at the whole market This is generally used by larger companies whose products appeal to everyone E.g. Ariel washing powder, TV magazines, Bestsellers Product Differentiation This is how businesses make their products stand out from the competition They can use USPs unique selling points to differentiate their products By differentiating products you are able to charge a premium price Differentiated products are often aimed at specific market segments as they have the features they desire Product Life Cycle The Product Life Cycle shows the life of a product from its conception to its death There are five stages in the product life cycle: 1. Research and development the product is being developed, high costs 2. Introduction the product is introduced to the market, sales are low, profit is negative as research and development costs are being met 3. Growth Sales increase rapidly, firm starts to make a profit 4. Maturity Sales reach their peak, profits start to decline as competition increases 5. Decline Sales fall, profits begin to fall, the product might be taken off the market
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Product Life Cycle - Extension Strategies Firms often try and extend the life of their products to stop them going into decline Extension strategies include: Reduce price of product Find alternative uses for product Increase frequency of use of the product Change packaging Product Portfolio Analysis Classifies products according to two dimensions: Market growth Market share Organisations aim to have a balanced portfolio ideally with cash cows where they can reap the profits and stars that will grow into cash cows These tools can be used to analyse the portfolio of products a business offers Businesses need to ensure that they have sufficient new products coming onto the market for the future

New products are funded by profits from products in the maturity phase of the Product Life Cycle (PLC )/ cash cows
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Ansoff Matrix Four different strategies a business can implement 1. Market penetration sell more products to existing customers 2. New product development sell new products to existing customers 3.Market development sell existing products to new customers 4.Differentiation sell new products to new customers
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Experienced Marketing Decision Making Methods are based on the situation, time available and the managers expertise Managers make marketing decisions based on: Data Hunches Scientific Method Experience Scientific Decision Making Method Marketing objectives are set Data is gathered Data is analysed Marketing strategy is developed Marketing strategy is implemented Results are reviewed this leads back into objectives Accounting Ratios Ratio Analysis looks at the pairing of financial data in order to get a picture of the performance of the organisation. Ratios allow a business to identify aspects of their performance to help decision making Ratio Analysis allows you to compare performance between departments and over time Five different types of ratios can be used to measure: 1. Profitability how profitable the firm is 2. Liquidity the businesses ability to pay 3. Asset Efficiency Ratios - Firms need to use their assets as efficiently as possible 4. Investment/shareholders allows businesses to look at risk and potential earnings of investments 5. Gearing looks at the balance between loans and shares in a business Profitability Ratios Return on capital employed (ROCE) = net profit / capital employed x 100 This shows the profitability of the investment by calculating its percentage return. The return shown can then be

compared with the expected return from other investments. The normal figure used by companies is profit on ordinary activities before taxation rather than after tax (the tax charge may vary from year to year, so using profit after tax would not lead to comparing like with like). If PBIT profit before interest and tax is used, the profit figure is compared with capital employed, i.e. share capital plus long-term loan capital. Typically should be 20-30%. Need to compare to previous years and competitors to get a clear picture. Can improve this by increasing profits without increasing fixed assets / capital
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ROCE can be sub-divided: ROCE = Profit margin Asset turnover PBIT / capital employed = PBIT / sales sales / capital employed The profit margin ratio (see below) shows whether the company is making a low or a high profit margin on its sales; the asset turnover ratio measures how efficiently the companys net assets are being used to generate its sales. Asset turnover ratio looks at a businesses sales compared to the assets used to generate the sales Asset turnover = sales (turnover) / net assets Net assets = Total assets current liabilities The value will vary with the type of business: Businesses with a high value of assets who have few sales will have a low asset turnover ratio If a business has a high sales and a low value of assets it will have a high asset turnover ratio Businesses can improve this by either increasing sales performance or getting rid of any additional assets Gross profit margin (GP ratio, or GP %) = gross profit / turnover x 100 This indicates the percentage of turnover net sales (sales less VAT and any returns) represented by gross profit. If the gross profit margin is 30%, this means the firms cost of sales are 70% of its turnover (because turnover = cost of sales + gross profit). The higher the better. Allows the firm to assess the impact of its sales and how much it cost to generate (produce) those sales. A gross profit margin of 35% means that for every 1 of sales, the firm makes 35p in gross profit Net profit margin (NP ratio, or NP %) = net profit / turnover x 100

This shows the percentage of turnover represented by net profit, i.e. how many pence out of every 1 sold is net profit. The NP margin will fall if the GP margin has fallen and rise if the GP% has increased: but it is also affected when the firms other expenses as a percentage of turnover have changed. Includes overheads / fixed costs. Net profit is more important than gross profit for a business as all costs are included. A business would like to see that this ratio has improved over time Liquidity ratios Liquidity ratios help establish whether a firm is overtrading, expanding without sufficient long-term capital. This puts pressure on its working capital, the excess of current assets over current liabilities. Working capital (current) ratio = current assets (CA):current liabilities (CL)
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If current liabilities exceed current assets, the firm may have difficulty in meeting its debts. Extra short-term borrowing, to pay off creditors, costs the firm money (interest). If the firm sells assets to help meet its debts, it risks loss of production and future expansion. Liquid ratio (Acid test or Quick assets) = CA minus stock:CL Using this ratio lets us see whether the firm can meet short-term debts without having to sell stock, which is regarded as the least liquid current asset (and the prudence concept encourages accountants to assume the firm will not automatically sell realise its stock). 1:1 seen as ideal Again if it is too high means that the business is very liquid may be able to use the cash for other activities to increase performance If it is too low then the business may face working capital problems Some types of business need more cash than others so acid test would be expected to be higher Debtors collection period (Debtor days) = debtors / sales x 365 This liquidity (or efficiency) ratio shows the time, measured in average days, that it takes debtors to pay the firm. The lower the figure the better as get cash more quickly However sometimes need to offer credit terms to customers so this may increase it Need to ensure keep track of any changes in credit terms as these should impact this ratio Creditors collection period (Creditor days) = creditors / purchases x 365 This ratio calculates the average length of credit the firm receives from its suppliers. Asset efficiency ratios Firms need to use their assets as efficiently as possible. The efficiency of both current and fixed assets can be

measured. Rate of stock turnover (Stockturn) = cost of sales / average stock (stated as times per period) The purpose is to calculate how frequently the firm sells its stock: if stock turnover is slowing, the firm is holding more stock than before, it may be facing problems selling its products, or it may have bought additional stock to take advantage of discounts offered. An alternative calculation to display stock days is average stock / cost of sales x 365 This is a useful analysis when used in conjunction with debtor days and creditor days in showing cash-flow timings.
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High stock turnover means increased efficiency However it depends on the type of business Low stock turnover could mean poor customer satisfaction as people might not be buying the sto Asset turnover sales / net assets This secondary ratio from ROCE (see above) assesses the value of sales generated by the net assets representing the capital being employed in the firm. It illustrates how efficiently the firm is using its assets to generate turnover. Investment / Shareholders Shareholders are interested in the following ratios: Dividends per share Total dividends / number of shares issued A higher figure means the shareholder got a larger return Good to compare with competitors Businesses can improve this themselves by increasing dividend payments Dividend yield Ordinary share dividend / market price x 100 Compares the return amount with what would be needed to purchase a share The higher the better This ratio varies daily with changes to a companies share price Gearing This is an efficiency ratio. Looks at the relationship between borrowing and fixed assets Gearing Ratio = Long term loans / Capital employed x 100 The higher it is the greater the risk the business is under if interest rates increase Limitations with Accounting Ratios To be most beneficial the results need to be compared with other data including: The results for the same business over previous years

The results of ratio analysis for their competitors The results of ratio analysis for other firms in other industries Other Factors to consider
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The market the business is trading in The position of the firm in the market The quality of the workforce and management The economic environment Summary Ratios are used to look at the performance of a business Liquidity ratios look at the firms ability to meet its debts Current ratio = current assets current liabilities Acid test ratio = current assets - stock : current liabilities Shareholder ratios these are ratios that shareholders would be interested in Dividends per share = total dividends / number of shares issued Dividend yield = ordinary share dividend / market price x 100 Efficiency ratios are how well the business is operating Gearing = Long term loans / Capital employed x 100 Stock turnover ratio = cost of sales / stock Asset turnover = sales (turnover) / net assets Debtors collection period debtors x 365 / turnover Profitability ratios assess the profitability of the business Gross profit = Gross profit / turnover x 100 Net profit = Net profit / turnover x 100 Return on capital employed = Profit / capital employed x 100 Limitations of ratio analysis need to be able to compare figures over time and between companies to be most effective Business Objectives Mission Statement - These set out the reasons why a business exists and what it is trying to achieve. Aims and Objectives Aims are determined by owners and managers They will change over time as the business grows and the business environment changes Corporate Aims & Objectives Corporate aims - The long-term intentions of a business Corporate objectives: Targets that must be achieved in order to realise the aims of the business. Corporate aims and corporate objectives are used to help the business achieve what is set out in the mission statement SMART Specific

Measurable
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Agreed Realistic Timed Short Term versus Long Term objectives The choice of short term or long term objectives depends on: Financial position Market position Economic Conditions Government Policy Bad publicity & Social change In the short term a business may aim to survive but in the longer term they may aim to make a profit Common Objectives The most common objectives are concerned with: Profit -This is the number one objective for most firms in the private sector. Profit = Total revenue total costs. Profits can be used to reward workers and reinvest in the business so it can grow Growth - Firms may set growth or increasing their market share as an objective. If a firm wants to grow it will see a decrease in profits as it will have to incur costs to do so Social Considerations Employee Welfare Other objectives Social considerations these are objectives which influence society or a businesses local community Employee welfare some businesses set objectives for their workers welfare Conflicting Objectives Objectives may often be in conflict: Growth vs. Profit To grow in size a business will need to spend more money which will reduce profit Profit vs. Employee Welfare It is often expensive for a business to ensure that its workers are well looked after Stakeholder Objectives Stakeholders are individuals or groups who are affected by the actions of the business Stakeholders include:
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Employees Local community

Customers Suppliers Shareholders Society Stakeholder Interests Stakeholders often have conflicting interests: Shareholders key aim is to make a profit this may be in conflict with employees who want a stable job and training Shareholder interests may also be in conflict with suppliers as to increase profitability prices to suppliers would have to decrease Shareholders and the local community could be in conflict it is not necessarily profitable to help the local community Summary Mission statements set out an organisations purpose and key activities Corporate aims are long term goals of a business Corporate objectives are the steps taken to meet the aims Common aims include profit and growth Objectives can be short or long term If objectives are short vs. long term it depends on the firms financial and market position, the economy and government policy Objectives often conflict with one another e.g. profit and growth Stakeholders are any groups who have an interest in a business Shareholders are individuals who own the business, their key objective is profit and this often conflicts with the objectives of other stakeholders Organisational Culture is the set of values, attitudes and beliefs in an organisation Starting a Company Click on the resources below Types of Business Business Sectors Primary sector extracting resources from the land e.g. agriculture, fishing Secondary sector processing resources e.g. manufacturing Tertiary sector the provision of services e.g. universities, retail sector Firms
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Firms can be classified by their size: Total revenue Market share Number of employees Value of assets it owns

Secondary Sector If you are looking to enter the secondary sector you will need: To have good supplies of raw materials A suitable site and facilities to manufacture the goods Relatively cheap labour Tertiary Sector If you are entering the tertiary sector you will need: Good suppliers of manufactured products To provide an exceptional level Identifying An Opportunity The first thing you do when you set up a business is to identify an opportunity. When you have decided on a product / service you need to investigate the market: Is there demand for the product ? Is the idea profitable? If it can be easily manufactured / provided? If you will gain customers from your competitors Market Research Market research is the process of gathering and analysing information about customers and market needs This enables you to find out the wants and needs of customers Initially look at sources of secondary research about the market Then you would use primary research to find out about your specific business Legal Structure There are different structures that a business can choose. The most common structure for start ups is a sole trader. If a business wants to have limited liability they will be a LTD Sole Traders A business owned by one person. S/he may employ staff. Most commonly in the provision of local services.
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Advantages Easy and cheap to set up. Very flexible to changes in circumstances. Owner keeps profit. Independence. More privacy than other firms. Disadvantages Unlimited liability. (Unincorporated). High risk and limited security for loans. Limited capital. Organisational difficulties (holidays/illness). Limited skills. Private Limited Companies (LTD)

Funded by shares that cannot be advertised for sale without the agreement of the other shareholders. This means that second-hand shares cannot be sold on the stock exchange. As a result, they are limited in size. Advantages Limited liability. More capital than sole trader. More privacy than Plc. More flexible than Plc. Disadvantages Shares less attractive because theyre difficult to sell. Less flexible if expansion needs finance. Legal formalities compared to unincorporated firms. Public Limited Company (PLC) Funded by shares. Plcs must issue at least 50,000 of shares, and their shares can be advertised. Most try to secure a stock exchange listing their second-hand shares to be bought and sold easily. Advantages Limited liability. Easier to raise funds. Greater scope for new investment. Can use economies of scale. Listed on stock exchange = stability.
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Disadvantages Must publicise performance. Greater scrutiny of activities. More administration. Founders of firm may loose control of ownership. Start-up Problems Finance You need to find sources of finance to enable you to fund the start up of your business Finance can be from: Family and friends Bank loans, overdrafts etc Investment Location Location can be key to business success. Need to ensure that costs are not too high. Businesses also need to consider: Proximity to customers Proximity to market Infrastructure

Often small firms are unable to afford the best location or the best location may be unavailable putting them at a disadvantage Building a customer base The business needs to generate sufficient demand for their products To do this they need to ensure the marketing mix is correct for their target market Cash Flow Cash flow measures cash inflows cash outflows of a business Businesses need to ensure that they have sufficient cash or working capital to pay their day to day expenses A new business will formulate a cash flow forecast which is a prediction of future cash flow The cash flow forecast can be used to obtain sources of finance e.g. loans from banks Business Plan A business plan sets out what you want to achieve it includes: objectives
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financial projections market analysis These allow the business to think about what they are doing It can be used to raise finance for the business Business Strategy Types of Strategy A strategy is the businesses long term plan. Strategies help businesses achieve their aims and objectives. Devising a strategy depends on a number of factors: The number of markets they will compete in If it will be UK only or international The products and services that the business offers There are different types of strategy Niche strategy concentrate on a small segment of the market that might be specialist Mass market strategy aim products at the entire market SWOT Businesses use SWOT analysis to assist them in choosing business strategies Strengths Weaknesses Opportunities Threats Strengths and Weaknesses are internal to a business Opportunities and Threats are external factors Strengths are things a business is good at / areas of expertise Weaknesses are things a business is poor at

Opportunities are areas that a firm could develop Threats are factors that could damage the firm By conducting a SWOT analysis you are able to understand the firms position and the market position By doing this you are helping the planning process It allows a business to think about future strategies To be effective businesses need to be honest when identifying both their strengths and weaknesses Decision Making Strategic decisions are linked to the achievement of business aims
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Tactical decisions are linked to the future achievement of aims Strategic decisions tend to be longer term Scientific decision making gathering data and analysing it to make a decision. This is a rational and logical approach Managers may also make decisions based on experience, hunches, gut feeling and intuition Effective decision making is often a combination of all of these methods Decision Trees These are mathematical models that can be used by managers to aid decision making They allow the manager to answer a number of questions which will steer them towards an answer Decision trees allocate probabilities and estimated benefits to each outcome Each decision is then allocate an expected value Expected value is calculated by taking a weighted average of the outcomes considering the probability of each one Expected value = (probability1 x outcome1) + (probability2 x outcome2) Advantages Allows management to consider all options and their probable outcomes Makes managers quantify the impacts of all decisions Allows for decisions to be compared Disadvantages Estimations are used for probabilities and financial consequences of outcomes these may be inaccurate Only consider financial and quantifiable data Corporate Plans Corporate plans are documents that set out what a business is trying to achieve and how it will do this Corporate plans include: Objectives Strategy

From the overall objectives / strategy businesses are able to devise objectives / strategy for each functional area Advantages Planning provides focus for the organisation It makes managers consider the businesses strengths and weaknesses Disadvantages The plan may become outdated, therefore a flexible approach to planning is better
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Contingency Plans These are preparations for unlikely events. Need to consider what events to prepare for and which resources to put into contingency planning. Managers need to look at: The likelihood of a specific event occurring The potential damage if the event did occur The higher the likelihood and potential damage the more likely a firm is to plan for it Summary Niche strategies are focused on a specific market segment Mass market strategies are concerned with the entire market SWOT analysis looks at internal factors (strengths and weaknesses) and external factors (opportunities and threats) to formulate future strategies Scientific decision making is based on the rational analysis of evidence Decisions are also made on experience, hunches and intuition Decision trees are an aid to decision making using mathematical models Decision trees give expected values to decisions to allow managers to make comparisons Corporate plans quantify the corporate objectives and strategy for the business and objectives and strategy for the different function areas Contingency planning looks at what will happen in a disaster Economic Influences The Market & Competition Types of Market A market is a place where buyers and sellers meet to exchange goods and services Markets have a number of influences on businesses including: Market size Degree of competition within the market Type of market Markets can be categorised by the degree of competition and the number of firms Perfect competition This is a market with lots of small firms who produce similar products at similar prices No barriers to entry / exit Potential profits are low

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Oligopoly Few firms in the market who are interdependent in their actions Firms consider competitors reactions when changing prices / introducing new products There is a high degree of competition Businesses try and avoid price competition preferring non price competition Can be many take-overs Collusion may occur leading to cartels being formed Monopoly A single producer in the market One producer is able to charge relatively high prices New products are rarely introduced Resources are not used efficiently UK based monopolies are open to competition from overseas rivals Capacity Utilisation Capacity Utilisation is the extent to which a firm uses the productive capacity available to it. Markets can experience shortages of capacity meaning consumer needs are not met leading to: An increase in market price for products New producers being attracted to the market Consumers purchasing products overseas This is common where tastes and fashions change quickly or if there is a time lag between increases in demand and the firms ability to produce products. Fair and Unfair Competition UK markets are regulated to ensure free and fair competition Unfair competition includes cartels UK government and EU deem unfair competition as illegal Macro-economic Issues Click on the resources below Business Cycle GDP Gross Domestic Product or GDP measures the value of a nations output over a period of time A nations business cycle will display regular fluctuations in economic activity (levels of spending, production and employment) and GDP
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Business Cycle Stages 1. Recovery / Upswing

The economy is recovering from a slump and production and employment is beginning to rise Customers are feeling more secure in their employment and are spending more (CONSUMER CONFIDENCE) Firms begin to invest more in FIXED ASSETS and increase their capacity Increased capacity involves more workers being employed 2. Boom Follows the recovery stage In this stage production levels are high so employment is also high Expenditure from businesses, consumers and the Government increase as confidence grows The economy approaches maximum capacity and shortages / bottlenecks occur as raw materials run low Skilled workers become scarce and businesses try to attract workers with higher pay High wages and scarcity of resources lead to inflation 3. Recession The UK Government increases interest rates to curb inflation Rising prices of labour and materials mean that businesses costs of production rise significantly and eat into business profits Increases in interest rates prevent firms from borrowing and investing money
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Production begins to fall so workers laid off 4. Slump Often follows a recession Production is low and unemployment is high Demand is low Governments begin to take action by increasing their own spending to try to create jobs or lowering interest rates to boost demand Interest Rates Bank of England is responsible for setting interest rates Interest rates price paid for borrowed money Consumer spending depends of interest rates as: When interest rates are high consumers are more likely to save Increasing in interest rates make borrowing more expensive reducing consumers disposable income Increasing interest rates increase mortgage payments Pensions and investments are dependent on interest rates Consequences of an increase in interest rates: Business overheads often increase Business may try to decrease borrowing

Businesses try and save more Investment decisions are postponed Businesses try and reduce stock levels Some types of business are more effected e.g. those producing luxury items, those with high credit sales and those with high levels of overseas trade Businesses have a tendency to have a long term view on interest rates Exchange Rates The value of a nations currency in terms of another currency i.e. 1=$2 An exchange rate is set by demand and supply of a currency Exchange rates create uncertainty because: If a deal is agreed in foreign currency firms may receive more or less than expected due to changes in exchange rates Changes to exchange rates can affect prices and sales overseas Competitors can respond in unexpected ways to exchange rate changes
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Changes in the UKs interest rates will lead to changes in the exchange value of the pound. If interest rates rise the value of the pound will rise so the pound will now buy more US dollars, Japanese Yen, Euros etc. If interest rates fall the value of the pound will fall so the pound will now buy less US dollars, Japanese Yen, Euros etc If interest rates are higher than rates in other countries the UK will become more of an investment opportunity. Investors will exchange their currency into sterling to invest it in UK banks to earn high rates of interest on their savings. This will increase the demand for Sterling which will appreciate in value If interest rates are lower than rates in other countries the UK will become less of an investment opportunity. Investors will exchange their currency from sterling to invest it in Foreign banks. They will withdraw in the UK to buy foreign currency. This means an increased supply of sterling will be available in the worlds currency market causing the to depreciate Inflation Inflation - A persistent increase in the level of consumer prices or a persistent decline in the purchasing power

of money caused by an increase in available currency and credit beyond the proportion of available goods and services. Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less. How to measure Inflation Every month the Government surveys prices and generates the current consumer price index (CPI) This allows you to compare current figures with past figures Causes of Inflation Inflation results when the macro economy has too much demand for available production. Demand-Pull Inflation: This inflation occurs when the government / consumers / business try to purchase more output than the economy is capable of producing. Cost-Push Inflation: Cost-push inflation is inflation due to decreases in supply, primarily due to increases in production cost Inflation and Business Inflation may lead to a decrease in sales for businesses
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When there is high inflation it is hard for business to remain competitive especially with overseas firms Inflation and Government Policy Governments try and control inflation using the following tools: An increase in interest rates Legislation reducing trade union power Reduced expectations of inflation allowing businesses more confidence when setting prices Recent Years In recent years inflation has been low, this means: Cost are easier to control Pricing strategies are easier to establish If UK inflation is lower than other countries gives UK firms a competitive advantage Sales forecasts will be more accurate Unemployment There are a number of types of unemployment: Structural unemployment Cyclical unemployment Frictional unemployment Structural unemployment Occurs when the economy changes and industries die out Training is needed to give the unemployed workers new skills Structural unemployment can affect businesses in the local area

Cyclical unemployment Caused by the business cycle Cyclical unemployment can lead to a decrease in sales meaning businesses need to look for new markets Frictional unemployment Caused when people are temporarily out of work as they are moving jobs Falling Unemployment Businesses can also incur problems due to falls in the level of unemployment as there may be skills and labour shortages If this is the case businesses can:
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Switch to capital intensive manufacturing systems Relocate overseas to exploit cheaper and more plentiful labour Invest in training schemes to develop employees skills Economic Growth This is an increase in the value of goods and services produced by the economy as a whole Long term most countries experience economic growth In the shorter term countries can experience slumps / decline in the size of their economy Advantages It increases levels of taxation which the government can spend on public services Increases opportunities for all businesses / individuals Businesses experience higher sales and profits Disadvantages Regional disparities Can lead to resource shortages especially for labour Increases pressure on individuals and businesses Growth can be spurred on in the short term by decreases in interest rates and taxes, or by increasing Government spending These measures create fluctuations in GDP For the longer term the Government needs to increase employment (full employment), increase capacity, improving education and skills and promoting competition in markets International Competitiveness With the growth of free trade businesses now are having to compete internationally This may be in order to increase profits and market share, or simply to wider their customer base to survive In order to be competitive businesses must keep price affordable but keep the quality and features Globalisation & Growth

Many businesses have welcomed the concept of globalisation as a chance to attract a wider audience Other businesses have failed in markets of increased competition European Union (EU) The EU has 31 member states and over 450 million people The EU offers more consumers and therefore sales to UK based firms
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By locating in cheaper countries e.g. Eastern Europe businesses are able to reduce costs Can also lead to increased competition Institutions of the EU European commission policy and legislation Council of ministers unions decision making body European parliament European court of justice European central bank The Euro In January 1999 the Euro was introduced into 12 countries By January 2002 Euro notes and coins were available The Euro influences markets by: Having cheaper transaction costs Stable exchange rates Transparent price differences Governmental Influences Click on the resources below UK & European (EU) Law Business Law There are a number of different laws that govern how businesses operate There are three main sources of these laws: 1. Acts of parliament 2. Common 3. Law European Law Health and Safety Law This aims to discourage dangerous practices by businesses and protect the workforce. Main act is the health and safety at work act, 1974 Health and safety executive oversee the act This has increased costs but also ensures that accidents are reduced Employment Law
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Employment laws cover individual and collective labour laws Individual labour laws look at the rights and obligations of individual workers Collective labour laws look at the activities of trade unions and the conduct of industrial relations

Employment Laws and Business Employment laws may increase costs of labour However they can increase motivation as workers are better paid and feel more secure Collective labour has allowed the workforce to become more flexible Individual Labour Laws The Sex Discrimination Acts, 1975, 1986 The Race Relations Act, 1976 The Disability Discrimination Act, 1995 The National Minimum Wage Act, 1998 Collective Labour Laws Employment Acts, 1980,1982 The Trade Union Act, 1984 The Trade Union Reform and Employment Rights Act, 1993 The Employment Relations Act, 1999 Consumer Protection Laws Consumer protection legislation aims to safeguard consumers against: - Businesses charging excessive prices / rates of interest - Unfair trading practices - Unsafe products - Having insufficient / incomplete information to base purchasing decisions on Consumer Protection Laws Sale of Goods Act, 1970 Consumer Protection Act, 1987 The Weights and Measures Act, 1986 The Consumer Credit Act, 1974 The Control Of Advertising this is controlled by: The Trade Descriptions Act, 1968 & Advertising Standards Authority Impact of Consumer Protection Laws To meet all these laws / requirements can prove expensive to businesses It can also lead to higher consumer expectations which add further costs to businesses
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Small businesses feel the impact of these costs the most Competition Law This is meant to create free and fair competition in the UK and the EU Unfair competition may arise because: Monopoly power is abused Mergers and takeovers Restrictive practices The Competition commission investigates unfair competition practices The office of fair trading ensure all firms comply with relevant legislation

Watchdog organisations monitor some firms that have over 25% of the market e.g. OFTEL and BT Key Competition Laws Fair Trading Act, 1973 Restrictive practices acts, 1956, 1968 and 1976 The Competition Acts, 1980, 1990 The EUs competition policy: Laws prevent any activities restricting free competition in the EU Laws stop any firm abusing a dominate position in any EU market The EU controls any merger creating a new firm with a turnover greater than 4.2 million Economic Policy Economic policies are the actions through which the authorities try and create the best possible economic environment for businesses and individuals. Economic objectives are what the government wants to achieve and include: Stable prices Steady and sustained economic growth Low unemployment A balanced balance of payments The governments key economic policy objective is to achieve high and stable levels of growth and employment The government uses a range of policies to attempt to achieve their objectives Fiscal Policy Fiscal policy monitors how government spend their money and how they control their taxes.
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Contractionary fiscal policy This is done when the government reduces spending or increases taxes higher They try to increase their PSBR( public sector borrowing requirement) to fund the tax drops they also do this to reduce its surplus on its budget for the fiscal year. Expansionary fiscal policy This is when the government cut taxing or increase government spending. They will increase the amount the government borrows to fund the expenditure. Direct and indirect Taxes Direct taxes are taxes of income and expenditure e.g. income tax, corporation tax (levied on company profits). Indirect taxes are taxes such as VAT (value added tax), changes in this type of tax has a rapid effect on the level of economical activity. E.g. an increase in VAT will cut consumer spending and in turn lower levels of economic activity Goverment Expenditure

Governments spend in two ways: 1. Transfer payments money spent on unemployment benefits, pensions etc 2. The infrastructure this includes spending on houses, roads, education etc Monetary Policy This looks at controlling the amount of money in circulation and therefore spending and economic activity Monetary policy covers: Changing interest rates (the most commonly used tool by recent UK governments) Controlling the money supply Manipulating the exchange rate Changes to Interest Rates If interest rates increase it is likely that consumer spending will decrease reducing the level of economic growth which can lead to falling sales for businesses as demand may be reduced If interest rates decrease then demand is likely to increase leading to an increase in economic growth which leads to an increase in sales for businesses Impact of changes to interest rates Small firms are most vulnerable to changes in rates especially if they have a high level of borrowing Firms with lots of overseas trade may also be heavily affected as a rise in interest rates tends to increase
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exchange rates Intervention vs. Laissez Faire Government intervention is where the state has a high level of involvement in business matters Laissez faire is a policy where governments reduce taxation and spend less on supporting business activities Government intervention tends to increase costs and decrease competitiveness of businesses The laissez faire approach helps to increase the level of entrepreneurs in an economy A disadvantage of the laissez faire approach is it doesnt protect struggling industries and poor regions Privitisation Privitisation is where the ownership of businesses is transferred from the state to private individuals This was a common occurrence in the UK in the 1980s and 1990s Advantages Removes potentially inefficient monopolies offering consumers more choice and better products Private businesses are more likely to adopt longer term strategies

It creates revenue for the government Disadvantages In reality it may not create more efficient industries As these businesses now have shareholders they have not adopted long term strategies instead adopting shorter term strategies to get the returns demanded by shareholders Summary There are a number of EU and UK laws which govern how businesses operate Health and safety law aims to protect employees and ensure that the work environment is safe Employment law includes individualist and collectivist legislation Consumer protection laws protect the consumer and ensure that they know what they are getting Competition law aims to prevent unfair competition All laws incur costs for businesses that can impact their profitability Economic policy is the actions that the government takes to meet economic objectives such as an increase in economic growth Monetary polices aim to control the amount of money in the economy usually through the manipulation of interest rates Fiscal policies look at government incomes and expenditure Government intervention describes where the government plays a key role in business activities whereas a laissez faire policy is one with little government involvement Privatisation is the sale of public companies to private individuals Size and Growth
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Reasons for growth Growth is a common objective for business. Larger firms have the following advantages: They may benefit from economies of scale They may be able to exert more power over their markets They are safer from takeover bids They have more status Businesses can choose to grow internally by selling more of their products or externally by acquiring / merging with another firm. Internal growth is slower Financing growth Business growth needs financing Finance can come from internal and external sources Internal Internal sources come from within the firm e.g. Retained profits, Sale of assets

External External sources come from outside the firm, these are more expensive as the business has to pay interest e.g. Overdrafts, Mortgages, Loans, Share issue Growth & Cash Flow Growth is expensive and may lead to short term cash flow problems If cash flow problems are identified in the cash flow forecast businesses need to avoid them, to do this they could arrange a loan, reduce credit terms for customers or increase credit terms to their suppliers Overtrading can occur if a business expands too rapidly and fails to manage its cash flow resulting in liquidity problems Management Reorganisation There may be adjustment problems for staff When two firms merge employees roles may change which can impact their morale, motivation and performance As firms grow in size many entrepreneurs find the transition from boss to manager difficult as they have to remove themselves from doing the jobs to delegating and leading the company Change in management structure / hierarchy When firms grow their organisational structure often changes As a small firm grows the management structure develops more layers in the hierarchy creating longer chains of command
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When two businesses merge layers are often removed in the hierarchy leading to redundancies to reduce costs and increase efficiency Risk of loss of direction and control As businesses get bigger it gets more difficult for managers to stay in control To stay in control managers often introduce procedures like appraisals, budgeting and management by objectives These procedures provide direction for the entire business and help with coordination problems Managers need to ensure that communication is clear and open within the business From LTD to PLC When firms grow they often change ownership from a LTD to a PLC Public limited companies offer the benefit of raising more finance by selling shares to members of the public

By becoming a PLC a firm does not guarantee that they will be able to sell shares to the public Flotation is the process where an LTD becomes a PLC Advantages Can raise more finance More media attention Disadvantages Increased regulation e.g. have to publish accounts No restrictions on share ownership Share price open to fluctuations Managers may loss control of the business From National to International Advantages Provides new market opportunities Can increase profitability Disadvantages Exchange rate fluctuations Have to cope with different laws and regulations Need to conduct expensive market research to familiarise yourself with consumer behaviour / market conditions Expansion Internationally This usually occurs in a number of stages:
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Firms export their products abroad Firms appoint an overseas agent Firms join up with local producers and give / sell licences to them to sell their products Firms set up their own operations abroad Retrenchment This is where businesses reduce their size. Firms may deliberately do this when: They are suffering from diseconomies of scale They have lost focus Retrenchment may be forced on firms when: Competitive nature of the market changes Social trends change New product development Economic changes Changes in Ownership Takeovers Takeovers are where one firm gains control of another firm The amount a firm pays to takeover another firm is dependent on its perceived value Attacker firms often pay a premium to shareholders in order to secure their shares Bids can be hostile or welcome

Hostile bids have a greater degree of risk Mergers Mergers occur when at least two firms join together to form one organisation. Mergers and takeovers can take the following forms: Horizontal firms join together who are at the same stage in the production process Vertical firms join together who are at different stages in the production process Conglomerate firms in different markets join together Why do Firms Merge? Mergers and takeovers are ways for businesses to grow Firms decide to merge / take over due to synergy Synergy is where the performance of the new firm is greater than the performance of the separate firms Synergy is created by shared resources, ideas and skills Management Buyouts Where managers in a business take it over by buying a controlling interest in its shares
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Managers may do this as they think they can turn the business around, or if shareholders lose interest in a particular part of the business Manager often need to borrow money to finance MBOs MBOs are risky however if successful they allow managers to reap plenty of rewards From LTD to PLC When firms grow they often change ownership from a LTD to a PLC Public limited companies offer the benefit of raising more finance by selling shares to members of the public By becoming a PLC a firm does not guarantee that they will be able to sell shares to the public Flotation is the process where an LTD becomes a PLC Advantages Can raise more finance More media attention Disadvantages Increased regulation e.g. have to publish accounts No restrictions on share ownership Share price open to fluctuations Managers may loss control of the business From National to International Advantages Provides new market opportunities Can increase profitability Disadvantages

Exchange rate fluctuations Have to cope with different laws and regulations Need to conduct expensive market research to familiarise yourself with consumer behaviour / market conditions Expansion Internationally
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This usually occurs in a number of stages: - Firms export their products abroad - Firms appoint an overseas agent - Firms join up with local producers and give / sell licences to them to sell their products - Firms set up their own operations abroad Retrenchment This is where businesses reduce their size Firms may deliberately do this when: - They are suffering from diseconomies of scale - They have lost focus Retrenchment may be forced on firms when: - Competitive nature of the market changes - Social trends change - New product development - Economic changes Social & Other Influences Technological Change Not only has technology helped to improve the performance of a business, it has also led to new products New technologies such as the internet and mobile technologies have changed the business environment CAM and CAD have changed how products are designed and manufactured Benefits New methods of production Lower Costs Higher profit margins Higher productivity Easier expansion/ diversification into new markets
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Automation New skills Flexibility Problems Shorter product life cycles Higher R&D costs Monopolies and Barriers to Entry

Mergers and takeovers of smaller firms Teething problems Unemployment incapacity to do the job, job insecurity Pressure Groups A Pressure Group is a group seeking to influence government policy or business activity to secure the interests of their members and supporters. Examples include Environmental, Consumer, Welfare (animals), industries (TUs) Lobbying is where a pressure group campaigns through leaflets, petitions etc in order to raise public awareness or change the law Types of Pressure Group Single Cause - Focus on a particular issue Multi Cause - Focus attention on a wider range of issues often under a generalised heading Protective Seek to protect interest of members Promotional - Seek to promote issues of interest to its members and supporters in relation to the particular topic Types of Action Direct Action Lobbying Protests Boycotts Civil disobedience e.g. causing obstruction, sit ins, lie downs, making noises, etc. Terrorism, intimidation of workers or owners/management of a business, for example Violence bombings, shootings, threats, attacks & Criminal damage damage to property, releasing animals into the wild Animal Liberation Front Indirect Action Publicity Leaflets/adverts Petitions
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Providing research Effects Successful campaigns can lead to legal and ethical changes in business practice. Examples include: The increasing practice of environmental audits by businesses The movement to the use of synthetic fur in the fashion industry The compulsory use of seat belts The decrease in the use of CFCs Response of Business

Business might: Accept the arguments and change its practice Present its own arguments on the issue Take legal redress Seek to publicise its image and what it is doing to counter the damage pressure groups could cause Criticisms Pressure Groups can be criticised if: They appear too powerful They are powerful enough to represent minority interests at the expense of the majority They focus on their own agenda at the expense of wider issues They take direct action that breaks the law Summary Social responsibilities are stakeholder views that a business can operate towards Stakeholders are anyone who has an interest in the business By trying to meet the views of different stakeholders businesses are operating in a more socially responsible manner Business ethics are the shared attitudes and principals shared by a business Businesses need to ensure that they try and behave in an ethical way as this has a positive impact on society and their employees Technological change impacts the way businesses operate Businesses create external costs due to their operation a lot of these costs are environmental e.g. increased pollution By decreasing the environmental impact of their business a firm is able to decrease their external costs and improve their image
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Political change can influence business operation through the creation of new laws or regulations Pressure groups aim to change business behaviour through direct and indirect actions Social auditing looks at the businesses social behaviour and impacts Communication Communication is the process of exchanging information or ideas between two or more individuals or groups. Internal communication: exchange of information that takes place within an organisation (e.g. at departmental meetings, in team briefing sessions and in memos to staff). External communication: exchange of information that takes place with individuals, groups and organisations

outside the business (e.g. via advertising material, telephone calls to suppliers and letters to customers). Two-way communication ensures that any communication has been fully understood and is therefore more effective than one-way communication. Effective two-way communication is a vital element of democratic management, effective delegation, empowerment and teamwork. Methods Communication is transferring information from one part of the business to another that leads to some outcome, changed behaviour or changed practice Formal Communication Established and agreed procedures Informal Communication Channels not formally recognised the grapevine Methods Verbal Face to Face Written Electronic Visual Audio Group meetings Notice boards Text Motivation and Communication If employees are well motivated this can impact communication as they are more likely to speak to senior employees
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Poor levels of motivation are likely to have a negative impact on communication Communication and motivation are related if one increases it is likely to have a positive impact on the other Effective communication Effective communication has the following benefits: It makes change easier this is particularly important to businesses who are in industries which are changing rapidly It increases commitment from employees It increases coordination It helps ensure that all employees are working towards the same objectives Barriers to Successful Communication

Ability of the sender how much the sender understands of the message they are trying to send Content including technicalities and jargon Method of communication including style and body language where appropriate! Skills and attitude of the receiver Organisational factors complexity of the organisation, scope of the organisation Cultural attitudes Perceptions, prejudices and stereotypes Inappropriate target for the message Technical capabilities ICT How to Improve Communication Communication can be improved by: Staff training in communication skills Keeping information to a minimum Increasing awareness of cultural and linguistic differences Controlling Stock Stock refers to products that the business has produced but have not been sold They incur the following costs: Storage costs Depreciation costs Administration cost There is also an opportunity cost of holding stocks, when a business is holding their products as stock they are not earning any revenues on them and are incurring costs Businesses keep stocks to ensure they have enough products to meet customer demand
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Buffer Stocks Buffer stocks the minimum level of stock a business wants to hold at any one time These are additional stocks which allow a business to cope with unplanned changes in demand Lead time This measures how long it takes to for an item to arrive once its ordered By keeping stocks a business means it is less vulnerable to changes in lead time Maximum stock levels This is the greatest amount of stock that a business is able to hold This depends on: The amount of space a business has The opportunity cost of holding stocks Stock rotation Stock rotation organises stocks so the oldest products are used first This is used in supermarkets where they put the new stock behind the old stock on the shelves Stock wastage

Stock rotation aims to decrease stock wastage If too much stock is held some may go off causing wastage for the firm This is a specific problem for perishable goods Impact of ICT on Operations ICT has an impact on operations within a business CAD / CAM CAD and CAM are used for design and manufacture CAD computer aided design uses computers to help in the production of designs, drawings and data to be used in manufacturing CAM computer aided manufacture uses computers to support manufacturing processes These can lead to less waste in production ICT and Communications ICT can speed up communications within a business reducing the impact of diseconomies of scale The use of email, intranet and faxes can ensure that information can get round a firm more easily Spreadsheets and databases allow information to be processed more quickly
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ICT and Employment The increase in the use of ICT has lead to an increase in tele working Tele working is where people work from home Due to the increase in tele working and the impact of ICT ICT and Location Due to the increase in tele working and the impact of ICT many firms do not need to be linked to a specific location This can reduce costs as firms locate away from expensive city centres or locate in areas where there is cheaper labour Problems with ICT The use of ICT is dependent on: Staff being trained and having the appropriate skills Compatibility across ICT systems How the information is used Employer / Employee Relations Employee and Employer Relations describes the relationship between workers and employers in business Collective v Individual Bargaining In the nineteenth century workers used to negotiate their own pay and conditions with their employers. This was known as Individual bargaining

Collective bargaining occurs when workers allow the union to negotiate on their behalf. Negotiations can be with an individual employer or an employers' association. Different Approaches To Employee Relations The workforce is becoming increasingly flexible with an increased emphasis on part-time and temporary workers and against full-time permanent workers A flexible work force is cheaper for firms, allows them to meet changes in demand, reduces training and allows for specialisation However there is less security, communication may be problematic and turnover is higher Salaries vs. Wages Full time salaried workers tend to have more rights and job security than part time temporary workers Employee Participation & Industrial Democracy Employee participation workers being involved in business decision making Industrial democracy the methods which workers can influence business decisions
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Employee Shareholders Where workers can gain shares in the company There are tax benefits Idea is by owning shares performance and motivation of the workforce increase Autonomous work groups This is where teams of workers have a high degree of control Authority has been delegated from senior management Basis of groups is that motivation and productivity should be increased Team Working Teams are responsible for a specific part of the production process This can help increase motivation Team working is compatible with democratic leadership Quality Circles This is when groups of workers meet to talk about ways to improve quality of products Usually a group of 3-10 workers who meet for 1-2 hours 2-3 times a month These often provide imaginative solutions to business problems Trade Unions The Role of Trade Unions Craft unions represent skilled workers from one occupation General unions representing mainly unskilled workers from many occupations e.g. TGWU (Transport and General Workers' Union). Industrial unions representing mainly workers in one industry. E.g. NUM (miners' union) Professional or white-collar unions representing skilled workers in mainly service industries.E.g. NUT (teachers' union).

The Aim of Trade Unions Improve the pay of workers. Improve working conditions and secure longer holidays. Protect members' jobs. Provide local, social and welfare facilities. Influence government policy The Trade Union Congress - TUC (UK) Made up of over 90 unions representing more than 9 million members An annual conference decides overall union policy and elects the General Council The General Secretary of the TUC is the trades union spokesman in any negotiations with the government
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or employers' organisations. Disputes & Restrictive Practices Disputes can arise over pay, working conditions, redundancies etc Restrictive Practices may then follow such as: - A closed shop - union insists all workers are T.U members - Demarcation when a union insists that only their members do certain jobs Industrial Action If negotiations break down Unions can: Work to rule :do the bare minimum Impose an overtime ban Strike and refuse to work altogether Picketing: ask other members not to enter Blacking: Refusing to deal with certain employees or suppliers because they have refused to participate in Industrial Action Employers can operate a lockout and refuse workers entry or they can dismiss striking workers for breach of contract ACAS (UK) Arbitration is when employers agree to an independent referee to try to find common ground Advisory Conciliation and Arbitration Service (ACAS) has been available to help solve disputes In the 1980s and 1990s there have been an increasing number of single-union agreements where employers negotiate with only one union Employment Law (UK) Individual Labour Law Looks at the rights and responsibilities of individuals: Equal Pay Act 1970 both sexes treated equally re: pay Sex Discrimination Act, 1974 cant discriminate on grounds of sex or marital status

Race Relations Act, 1976 - cant discriminate in relation to colour, race, nationality or ethnic origin Disability Discrimination Act, 1994 cant discriminate due to disability Working Time Regulations, 1998 this sets a limit on the number of hours worked per week Collective Labour Law Looks at the operation of trade unions, industrial relations and collective bargaining: Employment Act 1980 employees aren't obliged to negotiate with unions Trade Union Act 1984 Employment Act 1982, 1988, 1990
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Trade Union Reform and Employment Rights Act, 1993 Minimum Wage Act, 1998 Employment Relations Act, 2000 Impact of Employment Legislation There are positive and negative impacts Can act as a motivator to the workforce Reduction in power of trade unions has increased workforce flexibility Foreign investment has increased as legislation is employment friendly Increases costs Businesses need to employ non productive workers to manage the policies These effects can be more detrimental on smaller firms Work Councils These are forums where workers and management meet to discuss issues concerning work e.g. working conditions, pay, training Usually members are elected Often used where there are no trade unions Summary Employee / Employer relations looks at the relationship between workers and the business Collective bargaining refers to the negotiation between employees and workforce representatives Individual bargaining where a single worker negotiates their working conditions and pay with management Employee participation and industrial democracy these aim to increase employee involvement in business decisions and can include quality circles Trade unions act to protect and improve the economic and working conditions for their members Acas looks at resolving disputes in the UK Employment laws regulate what a business is doing Locating Operations

Regional Location Businesses need to choose which regional locations are best for their operations.There are a number of factors that impact regional location. Location is based on a combination of quantitative (measurable) and qualitative factors Cost Cost of land varies between locations Costs of labour and services also vary
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The choice of business location therefore affects profitability Resources The availability of resource can influence location These may be natural resources or could be technological resources Businesses often cluster together in areas where there is particular expertise e.g. hi-tech organisations are centred on the M4 corridor in the UK Infrastructure Infrastructure refers to energy and transport facilities These factors influence the ease, speed and costs of production The impact of infrastructure on firms is dependent on the type of business and their needs Market Location of the market may influence location choice For some businesses it is important to be close to the market If businesses dont need to be close to their market they may need to have good access to the market Government Intervention Government grants are offered in certain areas these make the area more attractive to businesses Qualitative Factors Businesses may also consider qualitative factors including: Quality of life Image Ethical issues Analysis of Factors Businesses will use a number of methods to analyse the best location: Break even analysis They will calculate costs and revenues to see how many units they need to break even. If fixed costs e.g. rent are lower in one location than another this will reduce break even output If variable costs e.g. wages are lower in one location than another this will reduce break even output The greater the margin of safety at a particular location the lower the risk

Investment Appraisal Techniques Businesses can use investment appraisal techniques such as payback, ARR and NPV to see which location is best Businesses usually select the option with the quickest payback, the highest ARR and the highest NPV
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Types of Location Decision Organisations have a number of different location decisions: Where to locate their business When they start up Relocation Expansion International Location Multinational businesses locate in more than one country. If you locate overseas you need to consider additional factors Why locate overseas? Businesses often locate overseas to: Exploit lower costs Benefit from less regulation Benefit from cheaper labour Use minerals / resources in a country Exploit market opportunities overseas To be closer to overseas customers To overcome protectionist trade barriers To decrease trade union power To decrease exchange rate problems Introduction Businesses need to choose which regional locations are best for their operations There are a number of factors that impact regional location Location is based on a combination of quantitative (measurable) and qualitative factors Cost Cost of land varies between locations Costs of labour and services also vary The choice of business location therefore affects profitability Resources The availability of resource can influence location These may be natural resources or could be technological resources
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Businesses often cluster together in areas where there is particular expertise e.g. hi-tech organisations are centred

on the M4 corridor in the UK Infrastructure Infrastructure refers to energy and transport facilities These factors influence the ease, speed and costs of production The impact of infrastructure on firms is dependent on the type of business and their needs Market Location of the market may influence location choice For some businesses it is important to be close to the market If businesses dont need to be close to their market they may need to have good access to the market Government Intervention Government grants are offered in certain areas these make the area more attractive to businesses Qualitative Factors Businesses may also consider qualitative factors including: - Quality of life - Image - Ethical issues Human Resource Planning (HRM) Human resource management looks at the best way to use a businesses personnel Hard Human Resource Managment (HRM) employees are treated as a resource, aim to pay them as low as possible, they need to be controlled Soft HRM Employees are the most valuable asset of the business and they need to be developed to ensure they are being used optimally Businesses need to look at future labour needs They have to ensure they have the right amount of workers with the right skills and experience Managers draw up plans looking at the number and type of workers who they want to recruit Also conduct a skills audit so they are able to establish skills and experience of current workers When planning the workforce managers need to know:
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Sales forecasts for at least the next year Employee turnover figures Projected wage levels Technological developments Changes to laws impacting the working week Methods of Remuneration / Motivation Motivation: the causes of people's actions - why people behave as they do. Financial Methods of Motivation

Money as a motivator can lead to problems for both individuals and organisations: Rewards fluctuate with the performance of the company and this can cause uncertainty in financial planning if employees come to depend upon rewards. If financial incentives are high and based on quantity, quality may be sacrificed, with serious long-term consequences for organisations. If rewards are based on individual performance, it can cause conflict between employees. The range of financial methods used to motivate employees includes: Time Rates - Used when employees are paid for the amount of time they spend at work. It is a simple method for both the employee and business, and also means the business can plan ahead, however can reduce productivity as staff are paid regardless Piece Rates - Gives a payment for each item produced - it is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. Piece-rate pay encourages effort, but, it is argued, often at the expense of quality Performance Related Pay - Performance-related pay is a financial reward to employees whose work is considered to have reached a required standard, and/or is above average. Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved. Profit-Sharing - Where profit is shared out between employees, meaning it is in everybody's interest to be productive Share Ownership and Share Options schemes - Offering shares is a more complicated kind of reward than paying employees cash. However, it can be much more effective in linking the objectives of the business (e.g. profit maximisation) and the objectives of employees (e.g. make a large gain on the value of shares held). Fringe Benefits - Non-taxable incentives given to employees and commonly include health insurance, group term life coverage, education reimbursement, childcare and assistance reimbursement, cafeteria plans, employee discounts, personal use of a company owned vehicle and other similar benefits. Non-Financial Methods of Motivation:

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Job Enlargement Increasing the scope of a job, either by job enrichment or by job rotation. Job Enrichment: jobs are expanded vertically (known as vertical extension) by giving the worker more responsibility Job Rotation: jobs are expanded horizontally (known as horizontal extension) by giving the worker more tasks, but at the same level of responsibility. Empowerment Giving employees the means by which they can exercise power over their working lives. Empowerment can be achieved through informal systems or through the more formal system of autonomous work groups. It involves: recognizing that workers are capable of doing more making workers feel trusted and confident to carry out jobs and make decisions without supervision recognizing workers' achievements creating an environment where workers wish to contribute and to be involved Measurements of Personnel Effectiveness Absenteeism Absenteeism is the amount of time employees are having off work Number of staff absent (on one day) x100 / total number of staff Helps to measure the morale and motivation of the workforce If this is high it will cost the business money and decrease their profits The causes of absenteeism may include: serious accidents and illness low morale poor working conditions boredom on the job lack of job satisfaction Inadequate leadership and poor supervision Personal problems (financial, marital, substance abuse, child care etc.) poor physical fitness transportation problems the existence of income protection plans (collective agreement ) Benefits which continue income during periods of illness or accident.)
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stress workload employee discontent with the work environment

Most if not all of these causes can be prevented by taking a positive approach to things. By showing the employees that you care, you can help lower absenteeism in the work place. To reduce absenteeism: introducing more flexible working practices ensuring that jobs are interesting and challenging improving working conditions and thus reducing dissatisfaction improving relations between employers and employees introducing attendance bonuses as an incentive to attend regularly Health and Safety Health and safety = Number of working days left per year due to health and safety x 100 / total number of possible working days This is a measure of safety Need to ensure this stays as low as possible Labour Productivity Labour productivity looks at how much work each worker does (output) Labour productivity = output per period / number of employees at work Need to remember that this can also be influenced by other factors such as efficiency of capital that is being used. This can be used as a basis for performance related pay Labour productivity may be difficult to calculate for some businesses Labour productivity may be increased by: recruiting suitably skilled and trained employees providing training to enhance skills and attitudes of existing employees providing pay and non-financial benefits that improve motivation improving working practices, technology and capital equipment Labour Turnover Labour turnover is how many people are leaving each year Turnover = Number of staff leaving per year x 100 / average number of staff Causes of labour turnover ineffective leadership and management techniques
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poor communications wages and salaries that are lower than those being paid by firms offering comparable jobs in the area poor selection procedures that tend to appoint the wrong people to the wrong jobs boring and unchallenging jobs that lack career and developmental opportunities poor working conditions and unpopular working practices low morale and motivation as a result of the above issues Problems with a high labour turnover high recruitment and selection costs to replace staff who leave high induction and training costs

reduced productivity due to the disruption caused by skilled staff leaving low morale among existing workers due to constantly changing staff How to reduce labour turnover monitoring and benchmarking exit interviews recruitment and selection induction and training reducing turnover of long-term workers Lean Production Lean production looks at reducing all forms of waste throughout the production process. Types of waste: Materials Time Energy Human effort Cell Production Production is organised around teams Every team is responsible for one stage in the production process This helps improve motivation as it encourages team work It can increase quality as employees feel more ownership of the final product Teams will self-check their work before it enters the next stage of production Just In Time (JIT) Goods are produced to order so stock levels are minimal Keeping low stock levels decreases the costs of storing them helping to increase profits This increases the flexibility of a firm It helps reduce waste as you only use what you need For JIT to be effective you need the following:
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Excellent supplier relationships need the supplies to arrive at exactly the right time Reliable employees or stoppages may occur A flexible workforce need them to be able to work any time and any where Advantages Increased focus on quality Costs are reduced: Warehousing Security and insurance Opportunity Disadvantages May be difficult to meet unexpected major increases in demand Can be problems caused by suppliers Loss of discounts for buying in bulk Time-based management This is used as a USP for many businesses

Businesses try and produce items more quickly than competitors or deliver it more quickly to them increasing sales Simultaneous Engineering To decrease new product development times firms use simultaneous engineering Simultaneous engineering is where everyone involved in the project works on it at the same time engineers, designers etc This decreases the time taken to get the product to market Continuous Improvement Kaizen Continuous incremental improvement of an activity to eliminate waste This is a Japanese approach to production Everyone in the business has to be involved for it to work Review all processes and procedures and look at better ways of doing them to increase performance Based on the idea of gradual change not radical overhauls Need to have well qualified staff who are trained to identify improvements to process or product to improve performance of the organisation Lean Production & People Workers are key to all lean production techniques All of the methods demand for employees to have high levels of empowerment and involvement so they constantly try to improve how the business works
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Need to have people-centred management When businesses introduce methods of lean production they need to: Use a management style that is more listening in its approach need employees to feel that they can come forward with their ideas Train all employees Increase skill levels of employees so they can do more than one job Develop good manager-subordinate relations Continuous Improvement Kaizen Continuous incremental improvement of an activity to eliminate waste This is a Japanese approach to production Everyone in the business has to be involved for it to work Review all processes and procedures and look at better ways of doing them to increase performance Based on the idea of gradual change not radical overhauls Need to have well qualified staff who are trained to identify improvements to process or product to improve performance of the organisation

Management Structure & Organisation Management Structure & Design Why Have a Structure? A clear structure makes it easier to see which part of the business does what An organisational structure is the way in which a business is arranged to carry out its activities The choice of structure impacts the organisations culture their ethos and beliefs If businesses are looking to change their direction they often look at restructuring Key terms Levels of hierarchy: the number of different supervisory and management levels between the shop-floor and the chief executive within an organisation Subordinate a worker Chain of command the line of communication and authority from the top to the bottom of the hierarchy Organisational structure: the relationship between different people and functions in an organisation both vertically, from shop-floor workers through supervisors and managers to directors, and horizontally, between different functions and people at the same level. Organisation chart: a diagram showing the lines of authority and layers of hierarchy in an organisation. Organisational hierarchy: the vertical division of authority and accountability in an organisation. Span of control: the number of subordinates a manager is required to supervise directly. If a manager has many subordinates answerable to him or her, the span of control is said to be
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wide. If a manager has relatively few subordinates answerable to him or her, the span of control is said to be narrow. Normally, the greater the degree of similarity in what a group of workers do, the wider the span of control can be. Traditionally, organisations tended to have very tall hierarchical structures, i.e. many layers of management, each with a narrow span of control. More recently, hierarchies have become flatter, meaning that the number of layers of management has been reduced and each manager has a wider span of control Organisational Design Organisational Structure includes:

The routes through which communication pass through the business Who has authority and power and responsibility within the business The roles and titles of people within the business The people whom individual employees are accountable for and those for whom they are responsible Flat Structures A Flat structure has few layers in the hierarchy, a wide bottom and a gentle slope to the top Lots of small companies have a flat structure Traditionally an American structure Span of control is wider Less hierarchy easier to make decisions More employee empowerment Can be cheaper as dont have to pay expensive management salaries Tall Structures A tall structure has many layers in the hierarchy As there are many layers the chain of command is longer Managers have smaller spans of control and there is less delegation Traditional structure of European companies Clear hierarchy Smaller chains of command More control Clear communication Tall to Flat In the 1990s many people felt that traditional tall structures were not cost effective so delayering occurred Delayering is the process of removing layers ion the hierarchy Businesses saw delayering as a way of cutting costs and increasing efficiency Matrix Structure
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Matrix structure is where the business is organised by task Combines a vertical chain of command with project / product teams The focus is on the task Is a more flexible structure and allows the business to be more responsive to customer needs However it can cause conflict and employees may have divided responsibilities Extra costs may be generated by duplication of support staff Entrepreneurial Structure An Entrepreneurial structure is often found where businesses operate in competitive markets and especially where rapid decisions are needed Have a few core workers at the centre of the organisation and peripheral workers surrounding them

Depends on how good the core workers are at managing and making decisions Can be difficult for larger organisations Additional ways to structure By function By product / activity By area By customer By process Management By Objectives Need to agree objectives for each worker This can increase communication Can increase motivation as subordinates know what they need to achieve Can help to identify training needs If workers meet goals can allow them to achieve self actualisation needs (Maslow) It can also cause problems Some workers may be threatened by the target setting experience managers can set targets which can be perceived as unachievable Needs commitment from everyone in the organisation Objectives may become outdated due to changes in the business environment Druckers theory of management Identified that managers should: Identify and agree targets for achievement with employees Agree on the level of support needed to achieve the targets Evaluate how well the objectives were met Centralisation & Decentralisation Centralised organisations are where most decisions are taken by senior managers at the top of the hierarchy.
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This leads to rapid decisions but low levels of consultation Decentralised businesses gives more authority to workers lower down the hierarchy by delegating decisions Delegation Delegation is the process of passing authority down the hierarchy from a manager to a subordinate. Delegation is where managers give a portion of their work to their subordinates Delegation can allow subordinates to gain more autonomy and become empowered leading to an increase in performance This is a technique used by democratic managers

Subordinates must be appropriately skilled, trained and informed about the particular task they will be responsible for. Interesting and challenging tasks should be delegated as well as the more routine. Responsibility and authority must be delegated. The limitations of the subordinate's authority should be made clear too. Managers must relinquish control to ensure that subordinates feel they are trusted and that the manager has confidence in them. Delegation must be based on mutual trust between manager and subordinate. Advantages of Delegation It frees up time for managers to concentrate on strategic tasks. It empowers and motivates workers. Subordinates might have a better knowledge of local conditions and therefore might make more informed decisions. Delegation may allow greater flexibility and a quicker response to changes. Disadvantages of Delegation In some small firms, managers delegate very little. Customer expectations. Attitudes and approach of management. Quality of staff. Crisis situations. Confidentiality. Consultation This is where managers ask for and take into account subordinates views Consultation allows a manager to keep more control of the situation This is a technique used by paternalistic managers Communication Communication is the process of exchanging information or ideas between two or more individuals or groups. Internal communication: exchange of information that takes place within an organisation (e.g. at departmental
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meetings, in team briefing sessions and in memos to staff). External communication: exchange of information that takes place with individuals, groups and organisations outside the business (e.g. via advertising material, telephone calls to suppliers and letters to customers). Two-way communication ensures that any communication has been fully understood and is therefore more effective than one-way communication. Effective two-way communication is a vital element of democratic

management, effective delegation, empowerment and teamwork. Management Structure & Design Why Have a Structure? A clear structure makes it easier to see which part of the business does what An organisational structure is the way in which a business is arranged to carry out its activities The choice of structure impacts the organisations culture their ethos and beliefs If businesses are looking to change their direction they often look at restructuring Organisational Design Introduction Organisational Structure includes: The routes through which communication pass through the business - Who has authority and power and responsibility within the business - The roles and titles of people within the business - The people whom individual employees are accountable for and those for whom they are responsible Key terms Hierarchy the number of layers of levels within an organisation Subordinate a worker Span of control the number of subordinates who directly report into a manager Chain of command the line of communication and authority from the top to the bottom of the hierarchy Flat Structures A Flat structure has few layers in the hierarchy, a wide bottom and a gentle slope to the top Lots of small companies have a flat structure
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Traditionally an American structure Span of control is wider Less hierarchy easier to make decisions More employee empowerment Can be cheaper as dont have to pay expensive management salaries Tall Structures A tall structure has many layers in the hierarchy As there are many layers the chain of command is longer Managers have smaller spans of control and there is less delegation Traditional structure of European companies Clear hierarchy Smaller chains of command More control Clear communication Tall to Flat

In the 1990s many people felt that traditional tall structures were not cost effective so delayering occurred Delayering is the process of removing layers ion the hierarchy Businesses saw delayering as a way of cutting costs and increasing efficiency Matrix Structure Matrix structure is where the business is organised by task Combines a vertical chain of command with project / product teams The focus is on the task Is a more flexible structure and allows the business to be more responsive to customer needs However it can cause conflict and employees may have divided responsibilities Extra costs may be generated by duplication of support staff
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Entrepreneurial Structure An Entrepreneurial structure is often found where businesses operate in competitive markets and especially where rapid decisions are needed Have a few core workers at the centre of the organisation and peripheral workers surrounding them Depends on how good the core workers are at managing and making decisions Can be difficult for larger organisations Additional ways to structure By function By product / activity By area By customer By process Management By Objectives Need to agree objectives for each worker This can increase communication Can increase motivation as subordinates know what they need to achieve Can help to identify training needs If workers meet goals can allow them to achieve self actualisation needs (Maslow) It can also cause problems Some workers may be threatened by the target setting experience managers can set targets which can be perceived as unachievable Needs commitment from everyone in the organisation Objectives may become outdated due to changes in the business environment Druckers theory of management Identified that managers should: - Identify and agree targets for achievement with employees

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- Agree on the level of support needed to achieve the targets - Evaluate how well the objectives were met Centralisation & Decentralisation Centralised organisations are where most decisions are taken by senior managers at the top of the hierarchy. This leads to rapid decisions but low levels of consultation Decentralised businesses gives more authority to workers lower down the hierarchy by delegating decisions Delegation Delegation is where managers give a portion of their work to their subordinates Delegation can allow subordinates to gain more autonomy and become empowered leading to an increase in performance This is a technique used by democratic managers Consultation This is where managers ask for and take into account subordinates views Consultation allows a manager to keep more control of the situation This is a technique used by paternalistic managers Summary Organisational design describes how a business is organised Tall or traditional structures have many levels in the hierarchy Flat structures have few levels in the hierarchy Matrix structures are organised by product / project Entrepreneurial structures have core workers at the centre and peripheral workers at the edges Management by objectives is the idea that you set targets for all workers to increase performance Centralised organisations are where senior managers make key decisions Decentralised organisations are where workers have more authority to make decisions
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Delegation is where managers give employees some of their work increasing their responsibility Consultation where managers ask employees their opinions Motivation Motivation describes the factors within individuals that arouse, maintain and channel behaviour towards a goal. Motivation Theory Motivation Theory is the study of factors that influence the behaviour of people in the workplace. F.W. Taylor Scientific Management Taylor did lots of work in factories and believed that workers should be told how to do a job quickly

He believed they should be closely monitored & told what to do He devised a piece rate system He believed workers could only be motivated by money Division of labour - jobs should be broken down into small tasks to keep employees motivated Identify most productive workers and make all staff use their methods, setting a standard for the rest of the workforce Workers should be given everything they need to complete the job to a decent standard, therefore giving no excuses for low productivity Abraham Maslow Hierarchy of Needs Maslow believed human needs are split into five types - a hierarchy of needs with the highest level needs at the top. Individuals need to meet basic needs before moving up the hierarchy 1. Physiological - wage, salaries and working conditions 2. Safety - security (safe job), other benefits e.g. sick pay and safe working conditions 3. Social - team working and other functions that aim at building a bond within the workforce 4. Esteem - positive feedback and chances for promotion 5. Self- actualization - creating challenges and tasks that are stimulating Frederick Herzberg - Hygiene and motivating factors According to Herzberg motivating factors are split into two groups. Motivation is a two step process. Firstly you must meet basic hygiene factors, and from then on can motivate employees
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1. Hygiene factors - salary and security. Improving these lowers dissatisfaction but doesn't improve motivation or satisfaction. Hygiene factors remove sources of unhappiness among workers, such as decent wages, working conditions, security and safety 2. Motivators - recognition, responsibility, work itself, achievement, advancement - these lead to increased motivation. Motivating factors can then be used to make workers happy, and feel a desire to exceed in their job, such as promotions, recognition and interesting work. In reality most managers are trying to maximize the beneficial aspects and minimize those facts which de-motivate workers. Elton Mayo Hawthorne Experiment Mayo looked at motivation in the Hawthorne laboratories in the USA Found that just by being studied the subjects levels of motivation increased

Highlighted the importance of team work and group dynamics to motivation Applied theories of sociology to management, and in the Hawthorne Experiment found that productivity increased when working closely with management, highlighting a sociological need Workers act accordingly to sentiments and emotion If you treat workers with respect and try to meet their needs, they will be better workers for you, benefitting both management and staff Non monetary Motivation Job Enrichment When employees jobs are redesigned to provide them with more challenging and complex tasks Increase in the range of tasks an individual does Workers have more responsibility for their own management Workers are able to identify and solve any problems that they encounter Gives workers training to improve skills so can meet increased job demands Job Enlargement Giving employees more duties of a similar level of difficulty Employees have more jobs to do at the same level Workers carry out a range of duties rather than a single duty which helps to increase motivation Employee Empowerment Empowerment is the process of giving workers a greater control over their work It can make work more
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interesting as suits individual needs Needs training and time to be effective Team Working Where organisations break down production into large units where each unit is responsible for a particular area Fulfils individuals social needs which helps to increase motivation Teams can include: - Production teams - Quality circle teams - Management teams Monetary Forms of Motivation Piecework Employees paid due to quantity produced Now with minimum wage legislation employers need to ensure piece workers hit the threshold Salaries & Wages Salaries annual and paid monthly If you get a salary work a set number of hours as set out in contract

Wages paid weekly Have to be at work for a set time, paid overtime for any extra hours Salaries and wages are often seen as the key motivator for an individual to work Fringe Benefits Rewards received by employees in addition to their wages or salary Often classified as perks of the job Examples: - Company car - Lunch - Private health care
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- Pensions These can increase employee loyalty Performance Related Pay (PRP) Some of an employees pay is linked to the achievement of targets at work Targets may be sales targets or performance appraisal Criticisms of PRP Many employees see this as unfair as can be based on an appraisal interview Lots of businesses dont put sufficient money aside so employees only get a small bonus Developments in PRP Increasingly firms are using a system called Variable pay This a flexible type of PRP which offers employees a highly individual pay system related to their performance Higher rewards for star performers Proft Sharing Employees receive part of the business profits Profits can be paid in cash / shares This helps motivate the workers to earn the company profit as they see the financial incentive for themselves this can raise efficiency and productivity in the organisation Share Ownership These can be either: - Allowing employees opportunity to purchase shares after saving for a period of time - Share options mangers have the opportunity to buy company shares on an agreed date in future at current rate Having share options increases the feeling of ownership for an employee acting as an incentive for them to work harder Economies of Scale
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Economies of Scale

These occur when mass producing a good results in lower average cost. Average costs fall per unit Average costs per unit = total costs / quantity produced Economies of scale occur within an firm (internal) or within an industry (external). Internal Economies of Scale As a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce units of output more cheaply. There are many types of internal economy of scale. Below is a list and examples of each. Production / Technical Economies Larger firms can use computers / technology to replace workers on a production line Mass production lowers cost per unit Large scale producers can employ techniques that are unable to be used by a small scale producer. Able to transport bulk materials. Purchasing / Marketing Economies Advertising costs can be spread across products Large businesses can employ specialist staff Bulk buying if you buy more unit cost falls Financial Economies Larger firms have better lending terms and lower rates of interest Easier for large firms to raise capital. Risk is spread over more products. Greater potential finance from retained profits. Administration costs can be divided amongst more products Managerial Economies More specialised management can be employed, this increases the efficiency of the business decreasing the costs Risk-bearing Economies Large firms are more likely to take risks with new products as they have more products to spread the risk over External Economies of Scale Are those shared by a number of businesses in the same industry in a particular area.
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These are advantages gained for the whole industry, not just for individual businesses. Examples: As businesses grow within an area, specialist skills begin to develop. Skilled labour in the area local colleges may begin to run specialist courses. Being close to other similar businesses who can work together with each other. Having specialist supplies and support services nearby Diseconomies of Scale Diseconomies of scale occur when firms become too large or inefficient Average costs per unit start to rise

Types of diseconomy of scale can be seen below with examples Communication When firms grow there can be problems with communication As the number of people in the firm increases it is hard to get the messages to the right people at the right time In larger businesses it is often difficult for all staff to know what is happening Coordination and control problems As a business grows control of activities gets harder As the firm gets bigger and new parts of the business are set up it is increasingly likely people will be working in different ways and this leads to problems with monitoring Motivation As businesses grow it is harder to make everyone feel as though they belong Less contact between senior managers and employees so employees can feel less involved Smaller businesses often have a better team environment which is lost when they grow Capacity Utilisation This looks at the amount a firm is producing compared with how much it could be producing given existing resources To increase capacity utilisation can increase production levels Need to ensure there is demand for the excess production If produce more need to increase demand by: Increased promotion Altering elements of the marketing mix to increase demand Producing products for other firms (sub contracting)
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Research & Development Research & Development is all activities that look at identifying new products / services and new ways of producing. Businesses need to be able to turn the ideas into products that can be sold. Innovation where new ideas are turned into products Aims To develop new products which have USPs allowing for product differentiation Increasing the quality of products to increase customer satisfaction To develop more effective ways of producing to decrease costs per unit . These can all increase the profitability of the business If research and development is good then it considers design issues In addition it needs to look at : Customer needs Use of product / service Competitors products

Ease of manufacture Costs / quality / profit targets Process The research and development process: 1. Idea generation 2. Screening of ideas 3. Development of ideas 4. Prototype and testing 5. Launch How to Protect Innovations If a business is successful with innovation it needs to protect them from competition A patent gives the holder sole use of a process / sole manufacture of a product for the next 20 years Copyright protects the work of artists / writers and musicians Research & Development & the PLC Research and development happens before the introduction phase of the product life cycle Research and development is very expensive so can often cause cash flow problems prior to the launch of products After launching a product businesses need to do more research and development to modify the product or bring out a new product to increase demand and profit
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Risk All research and development contains an element of risk Therefore businesses need to ensure that research and development minimizes risk to get required results Businesses cannot guarantee the success of innovations however firms can try and encourage and support research and development Critical Path Analysis Critical Path Analysis is a planning and management tool with the following advantages: Allows a business to plan ahead - efficiency Is time related giving an accurate plan Enables resources to be planned ahead Allows for good management Helps with cash flow management Reduces waste CPA may be used as part of the decision making process to allow a business to plan and monitor operations Time related identifies the maximum time for an operation to be completed

Identify potential problems in implementing operation Identifies where and when resources (including human ones) are needed Advantages Maximise efficiency in the use of time Improve efficiency and generate cost saving in the use of resources Beneficial to monitoring cash flow Disadvantages Usefulness may be limited in complex and large scale operations Necessity of having clear and reliable information Skilled management and team philosophy is essential Process Identify and prioritise the activities and how long each task will take to do Identify which activities must be done before others EST identify earliest start time LFT identify latest finish time Identify the float tasks which can be completed outside the critical path Identify the critical path points connecting ESTs and LFTs (where these are the same)
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QUESTIONS Quick Fire Quiz Quiz 1 Quiz 2 Quiz 3 Question 1 What type of costs are rent and salaries? Question 2 What type of costs are wages and raw materials? Answer Fixed Costs Question 3 What type of cost is a telephone bill? Question 4 Are administration costs a direct or an indirect cost? Answer
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Variable costs Question 5 Are managers salaries a direct or indirect cost? Answer Semi variable Answer

Indirect cost Answer Indirect cost Question 1 State at least one reason why businesses calculate costs of production? Answer Budgeting and forecasting To set prices To see if they can make a profit Question 2 State the equation for calculating total revenue? Question 3 State the equation for calculating profit? Answer Ttotal revenue = quantity sold x selling price Answer Total revenue total costs Question 4 If total costs are 500 million and total revenue is 625 million what is the total profit?
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Question 5 How do you calculate contribution? Answer 125 million profit Answer Total revenue variable costs Question 1 What is the equation for break even? Answer Fixed costs / Contribution per unit Question 2 If fixed costs = 250, variable costs = 10 per unit and price per unit how many units would a business have to sell to break even? Answer 250 / (15-10) = 50 units Question 3 How are fixed costs shown on a break even diagram? Question 4 How are variable costs shown on a break even diagram? Answer Horizontal line Question 5

On a break even diagram what area shows where the business would make a profit? Answer Vertical line starting from the origin Answer
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Where total revenue exceeds total costs the difference between the two would be shaded to signify profit Longer Questions Question 1a Simon Jones has decided to run a new festival to rival Glastonbury. He has to pay out the following costs: 250,000 for licensing 100,000 for insurance 75,000 for a security fence 15 per ticket holder for security 50 per 100 ticket holders for postage and packing and administration costs. In addition his outlay for bands is 750,000. He is looking at a capacity of 25000. Which of the following would be the most profitable price for Simon to charge assuming all the tickets would be sold? a. 50.00 b. 60.00 c. 70.00 (10 marks) Answer & Mark Scheme Fixed costs = 100,000 + 250,000 + 75,000 +750,000 = 1,175,000 (1 mark) Variable costs = 15 + (50/100) = 15.50 x 25000 = 387500 (1 mark) Total Costs = 1,175,000 + 38750 = 1,562,750 (1 mark) A. Total revenue = Selling price x Quantity sold = 50.00 x 25000 = 1,250,000 (1 mark) Profit = total revenue total costs = 1,250,000 - 1,562,500 = 312,500 loss (1 mark) B. 60.00 x 25000 = 1,500,000 (1 mark) 1,500,000 1,562,500 = 62,500 loss (1 mark)
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C. 70.00 x 25000 = 1,750,000 (1 mark) 1,750,000 - 1,562,500 = 187,500 - profit (1 mark) Therefore Simon should choose 70 per ticket as he would make a profit (1 mark) Total 10 marks Question 1b Simon has been told by the council that he could increase capacity by up to 50%. Using the information and the ticket prices in question 1a calculate how many tickets he would have to sell at

each price to break even and using this data recommend a price for Simon to charge. (11 marks) Answer & Mark Scheme Fixed costs = 100,000 + 250,000 + 75,000 +750,000 = 1,175,000 A. 50.00 break even = FC = 1,175,000 / (50-15.50) = 34,057 tickets B. 60.00 = 1,175,000 / 44.50 =26,404 tickets C. 70.00 = 1,175,000 / 54.50 = 21,560 tickets QUESTIONS Quick Fire Quiz
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Longer Questions Quiz 1 Quiz 2 Question 1 What is a budget? Answer A forecast of costs and / or incomes Question 2 What are the purposes of budgets? Answer To plan To control Question 3 Which of the following is not an advantage of budgets the staff need training, - increases efficiency, - indicates priorities, - acts as a motivator Question 4 What is zero budgeting? Answer Where all departments start with no allocation and have to bid for money. Question 5 Why are budgets criticised for being short term? Answer Often budgets are only set for a yearly period so long term decisions may be ignored at the expense of short term gains.
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Question 1 What is adverse variance? Question 2

What is favourable variance? Answer Where actual performance is poorer than what is budgeted Question 3 If revenues are 250,000 and budgeted revenues were 235,000 would this be adverse or favorable variance? Answer Favourable Question 4 If costs are budgeted at 546,000 and revenues at 650,000 and costs are actually 580,000 and revenues 685,000 is the actual profit adverse or variable compared to the budgeted figures? Answer Where actual performance is better than what is budgeted Question 5 When are zero budgets most often used? Answer Favourable by 1000 Answer New businesses New ventures Question 1 David Knight has a chain of furniture shops based in and around London. He has recently been concerned that some of the shops are performing better than others. He is considering allocating each of the shop managers a budget for them to manage.
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To what extent do you think this will be successful? (10 Marks) Answer & Mark Scheme Budgets are financial plans showing expected costs and revenues over a period of time By introducing budgets Dave can compare the performance of different shops The budgets will help him identify shops that are struggling The budgets may lead to competition between shops Some shops may struggle due to other factors e.g. location The managers of the shops may lack expertise in budgeting therefore these may fail if they are not trained Incorrect allocations may occur. QUESTIONS Quick Fire Quiz Quiz 1 Quiz 2 Longer Questions Quiz 3

Quiz 4 Question 1 Rhiannon Cooper is starting up her own business making and selling designer handbags in her own shop and
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online. Her cash flow forecast has shown that she is likely to have positive working capital to what extent can she rely on its predictions? (9 marks) Question 1 What is capital expenditure? Answer & Mark Scheme Question 2 What is revenue expenditure? Question 3 What is a cash flow forecast? Answer Spending on fixed assets Question 4 How do you calculate net cash flow? Answer Spending that meets current day to day expenses Answer
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A prediction of the cash inflows and outflows of a business over a period of time Answer Total incomes (receipts) total outflows (expenditures) Question 5 Why do businesses use cash flow forecasts? Answer Planning: To anticipate potential shortages of cash To examine and adjust the timings of receipts and expenditures To arrange financial support Question 1 State at least three causes of cash flow problems Question 2 Which of the following is not a way of improving cash flow contingency planning, increasing prices, sources of finance,

better market research Question 3 In the short term which is most important for a firm cash flow or profit? Answer Seasonal demand Overtrading Over investment in fixed assets Credit sales
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Poor stock management Unforeseen changes Question 4 State the equation for working capital Question 5 How do businesses control their working capital? Answer Increasing prices Answer Stock and debtor control, management of their liquidity Answer Cash Flow Answer Working capital = current assets current liabilities Question 1 What is the advantage of using retained profit as a source of finance? Answer Cheap dont have to pay any interest on it Question 2 What are two other internal sources of finance a business can use? Question 3 Name two long term external sources of finance Answer Sale and leaseback Sale of assets
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Question 4 Name two short term external sources of finance Answer Mortgages Debt factoring Trade credit Question 5

What does a profit and loss account show? Answer A businesses revenues, expenses and profit / loss over a period of time Answer Share capital Mortgages Debentures Long term loans Question 1 How do you calculate retained profit? Question 2 Which four groups of people are interested in profit and loss accounts? Answer Net profit tax dividends Question 3 What do balance sheets show? Answer Shareholders
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Managers Employees Inland revenue / government Question 4 What is depreciation? Question 5 When a firm is window dressing what are they trying to do? Answer The assets and liabilities of a company at a specific point in time Answer The decrease in the value of fixed assets over time Answer Improve the appearance of a companies balance sheet Quick Fire Questions Longer Questions Quiz 1 Quiz 2 Question 1 Sophie Walder started up her own business manufacturing clothes. In two years she has seen her business grow from a sole trader to a private limited company. Her business now has three separate sites all headed up by their own management team. Sophie is worried that productivity has decreased.

In your opinion what factors have lead to this decrease in productivity and how can Sophie turn the business around? (15 marks) Question 1 What is informal communication? Answer
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Answer Use of grapevine and channels that are not formally recognised Question 1 Which of the following is NOT a barrier to effective communication: content, cultural attitudes, ability of the sender, method of communication Answer None they all act as barriers Question 2 State three ways in which communication can be improved Question 2 State five different methods of communication? Answer Staff training,
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keeping information to a minimum, increasing awareness of cultural and linguistic differences Answer Verbal Face to Face Written Electronic Visual Audio Group meetings Notice boards Text Question 3 What is the likely impact of good communication on motivation? Question 3 Can diseconomies of scale result from communication problems in larger companies? Answer

Yes Answer Increase in motivation Question 4 Does effective motivation help businesses achieve their objectives? Question 4 What factors lead to communication problems in larger businesses? Answer
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Yes Answer Communication overload, too many levels of hierarchy, decentralisation Question 5 What strategies can large businesses use to improve communication? Question 5 Which organisational cultural factors can act as barriers to successful communication? Answer Complexity of the organisation, scope of the organisation, culture of the organisation Answer Manage communication to ensure its effective, use ICT to speed up communication, communicate clear messages down chain of command QUESTIONS Quick Fire Questions Longer Questions Quiz 1 Question 1 Emma Kenton is setting up her own boutique selling designer clothes in Liverpool. She is looking to employ six staff in part time roles. Analyse the impact of employment law on her business and recruitment decisions. (8 marks) Question 1
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What is employee / employer relations? Answer Looks at the relationship between workers and employees in a business Answer Question 2

What is collective bargaining? Question 2 As workforces are becoming increasingly flexible what is the impact on employers and employees. (9 marks) Answer Where workers allow a union to negotiate on their behalf Answer
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Question 3 State three benefits of a flexible workforce to a business Answer Cheaper for firms, Allows businesses to meet changes in demand Reduces training Allows for specialisation Question 4 State three disadvantages that may arise from a flexible workforce Quiz 2 Quiz 3 Question 5 Who has more rights part time workers on a wage or full time workers on a salary? Quiz 4 Answer Full time workers on a salary Question 1 What is meant by the term industrial democracy?
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Question 1 Why are quality circles used by businesses? Question 1 What is meant by the term blacking? Answer The methods workers can influence business decisions Answer As they increase employee commitment and motivation and can provide innovative and imaginative solutions to problems Answer Refusing to work with certain employees or suppliers as they didnt participate in industrial action. Question 2

What are work councils? Question 2 Who do industrial unions represent? Question 2 What does ACAS stand for? Answer Workers in one industry Answer Advisory Conciliation and Arbitration Service Answer Forums where managers and workers can meet to discuss problems and issues Question 3 State why businesses may encourage share ownership Question 3
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State three aims of trade unions Question 3 What does the equal pay act of 1970 state? Answer It increases the motivation of the workforce Answer Improve the pay of workers, Improve working conditions and secure longer holidays, Protect members' jobs, Provide local, social and welfare facilities and influence government policy Answer That both sexes are treated the same way e.g. pay Question 4 Describe the principals that autonomous work groups are based on Question 4 What does TUC stand for? Question 4 What negative impacts can employment law have on businesses? Answer Increase costs, need to hire non productive managers to manage the policies Answer Idea that motivation and productivity should increase Answer Trade unions congress Question 5
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Team working is compatible with which type of leadership?

Question 5 Name two restrictive practices that a trade union can impose Question 5 What positive impacts can employment law have on businesses? Answer Democratic Answer A closed shop, demarcation Answer Motivate the workforce, increase legislation QUESTIONS Quick Fire Questions Longer Questions Question 1 Michael Chan works as a recruitment officer for Telco Ltd a large supermarket chain. He has to recruit a new manager for a store in Birmingham. The manager needs to have experience working in the retail sector and leading teams ideally from a rival supermarket. They will be expected to manage the store being responsible for all staff and ensuring that standards are met. In your opinion what would be the best methods of recruitment and selection to ensure that Michael selects the right candidate for the job. (12 marks) Answer
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Quiz 1 Quiz 2 Quiz 3 Quiz 4 Question 1 What is hard HRM? Question 1 State at least three things included in the job description Answer Title of post, employment conditions, tasks and duties Answer Employees are treated as a resource, need to control them and pay them as little as possible Question 1 What different methods can businesses use to select employees? Question 1 How do you calculate Absenteeism?

Answer
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Interview, assessment centres, psychometric tests Answer Number of staff absent (on one day) x100 / total number of staff Question 2 Describe soft HRM Question 2 What is internal recruitment? Question 2 What is training? Question 2 How do you calculate labour productivity? Answer Value employees as assets and treat them well and develop them Answer Number of staff absent (on one day) x100 / total number of staff Answer The provision of work-related education Answer Where a business fills a vacancy from existing staff Question 3 What is a skills audit Question 3 State a problem with interviews Question 3 State two advantages of external recruitment
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Question 3 What can be a cause of labour turnover? Answer Where managers look at skills and experience of current workforce Answer Increases variety of skills, can attract a more diverse pool of applicants who can bring fresh ideas to the business Answer Dont show what a person is going to be like when they do the job Answer Low wages, insufficient training, flaws in the recruitment process Question 4 What do managers need to know before doing a workforce plan? Question 4

State at least three methods of external recruitment Question 4 What type of training is given to new employees telling them about the company and how it works? Answer Sales forecasts for at least the next year, Employee turnover figures, Projected wage levels, Technological development, Changes to laws impacting the working week Answer External advertising, head hunting,
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training schemes, job centres, employment agencies Answer Induction training Question 5 When a business receives applications for a post how do they decide who to interview? Question 5 Describe what is included in a person specification Question 5 When is external training most appropriate? Answer The qualities and qualifications needed by the person to do the job Answer Compare the applications to the person specification Answer Where training needs are not specifically linked to the organisation QUESTIONS Quick Fire Questions Longer Questions Quiz 1 Quiz 2 Quiz 3 Question 1 Is there more delegation in a tall or a flat structure? Question 1 Briefly state what druckers theory of management says Question 1

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Why is it important to have a clear structure? Answer Makes you see which part of the business does what Answer Flat Answer Identify and agree targets for achievement with employees, Agree on the level of support needed to achieve the targets, Evaluate how well the objectives were met Question 2 What does organisational structure impact? Question 2 What is the process called when a tall structure becomes a flat structure? Question 2 Do centralised or decentralised business have the most delegation to subordinates? Answer Delayering Answer Culture of the organisation Answer Decentralised Question 3 What types of managers use delegation? Question 3 Why do businesses delayer?
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Question 3 How many layers does a flat structure have in its hierarchy? Answer To cut costs and increase efficiency Answer Democratic leaders Answer Few Question 4 What do matrix structures focus on? Question 4 What is consultation? Question 4 What is the span of control like in a flat structure? Answer Where a manager asks for help and takes into account subordinates views

Answer Task Answer Wide Question 5 What are the names of the two types of workers in an entrepreneurial structure? Question 5 What type of managers are likely to be consultative? Question 5
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What does the term subordinate mean? Answer Worker Answer Core and periphery Answer Paternalistic Question 1 Hang Chi has his own company importing and exporting goods from China. When he started he had an informal structure however his business is growing at a rapid rate and he needs to expand. He has operations in the UK and China and needs to respond quickly to changes in demand. In your opinion which is the best structure for Hang Chis business and why? (12 marks) Question 2 Based on your answer to question 1 given the type of structure you have chosen what would be the most appropriate leadership style for Hang to adopt and why? (9 marks) Mark Scheme
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Mark Scheme Leadership & Management Styles Summary Taylor says that people are motivated by money scientific management Maslow developed hierarchy of needs that need to be fulfilled
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Herzberg 2 factor theory hygiene factors and motivators Mayo non monetary motivation

Non monetary motivation includes job enrichment, job enlargement, empowerment and team working People are also motivated by money, this can be the form of salaries / wages, performance related or can take the form of fringe benefits, profit share and shares An Authoritarian manager makes all decisions A Paternalistic manager makes decisions with the agreement of workers A Democratic manager runs a business on majority decisions McGregors Theory X and Theory Y Theory X = monetary motivation, Theory Y = non monetary motivation Leadership Introduction Influencing others to achieve certain aims or objectives. Effective leadership skills can help a manager carry out their duties QUESTIONS Leadership Styles Authoritarian Senior managers take decisions with little involvement of juniors Sets objectives Allocates tasks Leader retains control throughout Communication goes down from leader to consumer Paternalistic Dictatorial, but decisions are taken in best interests of employees Explains decisions Ensures workers social / leisure needs met Communication mainly downward but some feedback Democratic Running a business based on majority decisions
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Encourages employees to take part in decision making Uses delegation Extensive two way communication McGregors Theory He believed there were 2 types of managers that affected motivation Theory X Managers Believe that workers: - Dont like working - Do as little work as possible - Can't be trusted - Only interested in pay - Must be told what to do Theory Y Managers Believe that workers:

- Enjoy their work - Work hard to gain rewards - Can be trusted - Are motivated by factors other than pay - Can work independently Quick Fire Questions Longer Questions Quiz 1 Quiz 2 Quiz 3 Question 1 What are fringe benefits? Question 1 Why does share ownership act as an incentive for employees to work harder?
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Question 1 Define the term empowerment? Answer Rewards received by employees in addition to wages often called perks Answer The process of giving employees greater control over their work Answer As it increases their feelings of ownership Question 2 What is the principal of performance related pay? Question 2 What two factors form the basis of Herzbergs theory? Question 2 What is the term used to describe giving workers more duties of a similar level of difficulty? Answer A portion of the employees pay is linked to performance at work Answer Motivation factors and hygiene factors Answer Job enlargement Question 3 In order from bottom to top identify Maslows five needs Question 3 What difficulties are there with piece work? Question 3
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Name three common teams you will find in business Answer Employees are paid by the amount they produce this could mean they are paid under the national minimum wage Answer Physiological, safety, social, esteem, self actualisation Answer Production teams, management teams, quality circle teams Question 4 Why is profit sharing seen as a way of increasing efficiency and productivity ? Question 4 What did Mayo find out in the Hawthorne experiments? Answer As it increases employee motivation Answer The importance of team work and group dynamics for motivation Question 5 State the difference between a salary and a wage Question 5 What did Taylor believe was the sole motivator of workers? Answer A salary is an annual amount paid monthly, a wage is an hourly amount paid weekly
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Answer Money Question 1 Dominic Taylor has his own business as an interior designer he works long hours and is feels that he does not get sufficient monetary rewards however he loves his job and feels motivated and happy to do well. To what extent do you feel that non monetary factors increase Dominic's level of motivation? (12 marks) Question 2 Compare and contrast two theories of motivation. In your opinion which of them gives the best explanation of why people are motivated in the following occupations: - teacher

- factory worker - footballer (11 marks) Mark Scheme Mark Scheme

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Quick Fire Questions Quiz 1 Quiz 2 Question 1 What is stock? Question 2 State three costs incurred by stocks? Question 3 Describe buffer stocks Question 4 What is lead time? Question 5 Why do businesses use stock rotation? Answer Products the business has produced but not sold Answer
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Storage costs, depreciation costs, administration costs Answer The minimum level of stock a business wants to hold at any one time Answer How long it takes an item to arrive when its ordered Answer So old stock is used first and doesnt go out of date causing wastage Question 1 What does TQM stand for? Question 2 State three features of TQM Question 3 What is the idea behind self checking? Question 4 What is CAD? Question 5 What problems may businesses encounter with ICT ? Answer Total quality management

Answer Quality circles, zero defects, statistical process control Answer Preventing mistakes Answer Computer aided design
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Answer Staff may not be trained in appropriate skills, may be a lack of compatibility across ICT systems, information may not be correctly used Longer Style Questions Question 1 David Hong works as a store manager for a large supermarket chain. He is responsible for ordering new stocks and ensuring that stores get the right products when they need them. Discuss the advantages and disadvantages for David of holding large amounts of stock. (9 marks) Mark Scheme Quick Fire Questions Quiz 1 Longer Style Questions Question 1 Why does choice of location impact costs? Question 2 State two different types of resources businesses tend to cluster around
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Question 3 What is infrastructure? Question 4 What qualitative factors may businesses look at when considering choice of location? Question 5 If margin of safety is greater at one location than another does this mean the risk associated with the location is higher or lower? Answer As costs of land, labour and services vary between locations Answer Natural resources, technological resources Answer Energy and transport facilities

Answer Quality of life, image, ethical issues Answer Lower Quiz 2 Question 1 When looking at different locations for a business are they most likely to choose one with the quickest payback period? Question 2 What is a multinational business? Question 3 State two advantages of locating overseas Question 4 What problems may there be with locating overseas?
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Answer Yes Answer One located in more than one country Answer Exploit lower costs, Benefit from less regulation, Benefit from cheaper labour, Use minerals / resources in a country, Exploit market opportunities overseas, To be closer to overseas customers, To overcome protectionist trade barriers, To decrease trade union power, To decrease exchange rate problems Answer Loss of control, unethical practices Question 1 Samantha White is a director of a retail business she has to decide where to locate her factory for her UK stores. Discuss the factors that influence her choice of business location. (8 marks) Mark Scheme
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Quick Fire Questions Longer Style Questions Quiz 1

Quiz 2 Question 1 What is the aim of lean production? Question 2 State four different types of waste Question 3 What is cell production? Question 4 State the principals of just in time production Question 5 What disadvantages can be associated with just in time production? Answer
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To reduce wastage Answer Materials, time, energy, human effort Answer Where production is organised around teams Answer Goods are produced to order so stock levels are minimal Answer May not be able to meet unexpected changes in demand, can be problems caused by suppliers, can lose discounts for buying in bulk Question 1 Name the two ways businesses can use time based management Question 2 What is simultaneous engineering? Question 3 Define the term Kaizen Question 4 What principals is kaizen based on? Question 5 What type of management do lean production techniques rely on? Answer To produce goods more quickly, to deliver them more quickly Answer Where every one works on the product at the same time Answer Continuous incremental improvement of an activity to eliminate waste
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Answer

Gradual and continual change Answer People centred management Question 1 Murat Musa is a manager of mana car plants in oxford. He is thinking of introducing JIT production discuss the advantages and disadvantages to Murat of introducing this. (9 marks) Mark Scheme Useful LINKS Bized Revision Guru DOWNLOAD Zone This is where teaching and learning resources can be downloaded and added. DOWNLOAD If you would like to download a resource then click on the relevant attachment at the bottom of the page. You need to be a registered member (FREE) to see these links. Click here to register or log in
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CONTRIBUTE If you would like to share a resource with fellow colleagues then please click here BUSINESS STUDIES DOWNLOADABLE TEACHING RESOURCES Accounting (PowerPoint) Budgeting (PowerPoint) Business Objectives (PowerPoint) Business Strategy (PowerPoint) Communication (PowerPoint) Company Accounts (PowerPoint) Contribution & Break-even analysis (PowerPoint) Controlling Operations (PowerPoint) Cost Centres & Profit Centres (PowerPoint) Economic Opportunities & Constraints (PowerPoint) Employer & Employee relations (PowerPoint) Facilities (PowerPoint) Finance and Accounting introduction (PowerPoint) Governmental Opportunities & Constraints (PowerPoint) Human Resource Management (PowerPoint) Impact for Firms with a change of size (PowerPoint) Investment Decision-making (PowerPoint) Lean Production (PowerPoint) Management Structure & Organisation (PowerPoint) Market Analysis (PowerPoint) Marketing Planning (PowerPoint)

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Marketing Planning 2 (PowerPoint) Marketing Strategy (PowerPoint) Marketing Strategy 2 (PowerPoint) Motivation (PowerPoint) Productive Efficiency (PowerPoint) Ratio Analysis (PowerPoint) Social & other Opportunities and constraints (PowerPoint) Starting a small firm (PowerPoint) Case Study Style Questions Sweet Success Case Study Susan Shaw and her husband Michael set up Sweet Success as a partnership in 1999. Since the opening of their first store they have grown to 5 stores in and around South East London. The idea to set up the business came from Susan as she felt there was a gap in the market for the old fashioned sweet shops she remembered from her youth. Susan initially did research on the internet to find out about similar businesses in the UK. She found a number of businesses in Northern England and went to visit them to find out about their pricing strategies and the products that they offered. Susan then conducted primary market research in her local area. The shop opened in Lewisham town centre in the summer of 1999. Susan had contacted local press to assist with her promotional campaign and had been giving out leaflets in the local area. Susan also looked at PR campaigns that she could do to increase the success of the business. She used sales promotions techniques in the first weeks of opening to attract customers to the shop. After three months Susan felt the shop was running well and she was getting lots of

customers. However, Susan was struggling with her finances. She was finding it difficult to
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pay her bills at the end of each month and was struggling to keep paying suppliers. She decided to apply for a bank loan to help assist her in the early stages and sort out her financial problems. Susan was given a loan from the bank for 10,000 which was secured on her house. Sweet Success continued to thrive and grow throughout 1999 and 2000. At the beginning of 2001 Susan was considering expanding the business by creating an online catalogue. 1999-2000 2000-2001 Questions Question 1 1. Susan obtained a loan from the bank, define the term bank loan (2 marks) Question 2 2. In the first year Susan earned 92,000 which went up to 110,000 in her second year of trading. Her costs were 68,000 for the first year which rose to 72,000 in the second year. Calculate the amount of profit Susan made in the first year of trading (3 marks) Question 3 3. Before opening the business Susan conducted primary market research in the local area, describe two benefits she will have obtained from doing this research. (5 marks) Question 4 4. In the first few months Susan struggled with her cash flow, analyse at least two strategies that could have prevented Susan from having to obtain a loan. (6 marks) Question 5 5. Profit is the main aim of all small businesses; to what extent do you think Susan could judge her business a success after the first two years of operation. (9 marks) Mark Scheme Question 1 A fixed sum of money borrowed from the bank that is paid back with interest in monthly instalments 2 marks

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1 mark if mention interest, or monthly instalments Question 2 Profit = Total Revenue Total Costs = 92,000 - 68,000 = 24,000 Profit = 24,000 3 marks If have the right figures but have miscalculated the final figure 2 marks If missing the sign 2 marks If they have identified the correct equation 1 mark If they have identified the costs and revenue figures 1 mark Question 3 Content 2 marks Needs to identify two benefits from using primary market research OR one benefit and a good definition of primary market research 1 mark Identifies one benefit of primary market research or provides a definition of primary market research Application 3 marks the answer is well applied to the case study 1-2 marks - Limited application to the case study Primary market research Is the collection of first hand data about the market Benefits include She could find out what price they would be prepared to pay and therefore price her sweets accordingly She could find out the most popular sweets and stock these She could find out the most popular promotional techniques and use them, for example she could have found out that leaflets were an effective way to promote the business Question 4 Content - 2 marks Identifies two strategies OR identifies one strategy and defines cash flow 1 mark Identifies one strategy or defines cash flow Application 2 marks Well applied to the case study 1 mark Limited application to the case study made Analysis 2 marks Good analysis of the strategies 1 mark Limited evaluation of the strategies Points include: If she had drawn up a cash flow forecast prior to opening the business she could have identified a period where she was short of cash She could have applied for a flexible overdraft to cover her when she was short of cash She could have liaised with suppliers and asked for trade credit to give her a longer period to pay
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Question 5

Content 2 marks identifies at least two factors that point to the business being a success or a failure, identifies one factor and defines the term profit 1 mark defines the term profit or identifies one factor Application 2 marks Good application to the case 1 mark Limited application to the case Analysis 3 marks Good analysis of the factors 1-2 Limited analysis of the factors Evaluation 2 marks Good evaluation of the situation 1 mark Limited evaluation of the situation Points include In the first year the profit was relatively low - 24,000 considering that Susan and her husband where both running the business Revenues and profits increase in the 2nd year of operation which shows that the business is growing Susan struggles with her cash flow when her business starts up, problems with cash flow can lead to companies liquidating Quiz 4 Question 1 1. What type of leadership style may be best suited to a creative industry as ideas are shared? Answer Laissez Faire - this is where people all have a chance to make decisions Pete's Plumbers Pete Burnes has his own plumbing company based in Highgate, Central London. He set up as a sole trader ten years ago and has been doing well. He employees six staff and has recently moved from doing smaller commercial and residential work to working on larger commercial properties and for businesses in the city. He has decided to turn his business into a private limited company as he feels it offers more security for him and his family. Pete has been making a healthy profit and has used his retained profit to invest in new machinery. To purchase a new van he had to take out a secured bank loan which he has been paying back at a rate of 100 per week for

the last two years. He finds that his overheads are low and after some early hiccups his cash flow is positive. Pete gained a number of his new clients through word of mouth recommendations. However as he is looking to
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expand his business he is considering promoting it using other means, he has been speaking to a small agency about doing a series of above the line adverts in local newspapers and on the radio to increase his client base. As the owner of the business Pete is used to making all the decisions however this has recently changed as he feels that he wants to delegate some of his authority. To this end he is considering employing a full time administration manager who will be able to sort out all the bookings for projects and the paperwork enabling him to be more involved in the projects and operational side of the business. Pete has had some recent concerns with his business as he is finding that he is being increasingly undercut by other building firms who are feeling the squeeze of competition from an influx of European builders. Some residential building work has also began to slow down as interest rates have increased and people have less money to spend on home improvements and small building projects. QUESTIONS QUESTION 1 1. What does above the line advertising mean? (2 marks) Question 2 2. Paul is currently earning 19,800 per month in revenues and paying out 7500 in salaries, 400 for his bank loan, 400 in petrol and 4000 in materials and other costs. What is his profit per month? (3 marks) Question 3 3. What benefits would there be for Paul to conduct market research into his new commercial clients? (5 marks) Question 4 4. Paul is feeling the squeeze on his profits analyze the methods that he can use to differentiate his product offering from competition (7 marks) Question 5 5. Pete is considering employing an advertising agency to create a campaign for him, evaluate the benefits to Paul of employing an advertising agency. (8 marks) Question 6

6. Pete experienced cash flow problems when he first set up his company. Define the term cash flow. (2 marks) Question 7 7. Pete is looking at zero budgeting, explain one advantage of zero budgeting to Petes company. Question 8 8. Pete took out a loan to buy his van. Analyse the advantages and disadvantages of using an external source of finance for Pete. (6 marks)
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Question 9 9. Pete has been feeling pressure from competition to decrease his prices, evaluate the impact of decreasing prices and advertising on Petes profitability (9 marks) CASE STUDY QUESTIONS Pete's Plumbers Pete Burnes has his own plumbing company based in Highgate, Central London. He set up as a sole trader ten years ago and has been doing well. He employees six staff and has recently moved from doing smaller commercial and residential work to working on larger commercial properties and for businesses in the city. He has decided to turn his business into a private limited company as he feels it offers more security for him and his family. Pete has been making a healthy profit and has used his retained profit to invest in new machinery. To purchase a new van he had to take out a secured bank loan which he has been paying back at a rate of 100 per week for the last two years. He finds that his overheads are low and after some early hiccups his cash flow is positive. Pete gained a number of his new clients through word of mouth recommendations. However as he is looking to expand his business he is considering promoting it using other means, he has been speaking to a small agency about doing a series of above the line adverts in local newspapers and on the radio to increase his client base. As the owner of the business Pete is used to making all the decisions however this has recently changed as he feels that he wants to delegate some of his authority. To this end he is considering employing a full time administration manager who will be able to sort out all the bookings for projects and the paperwork enabling him

to be more involved in the projects and operational side of the business. Pete has had some recent concerns with his business as he is finding that he is being increasingly undercut by other building firms who are feeling the squeeze of competition from an influx of European builders. Some residential building work has also began to slow down as interest rates have increased and people have less money to spend on home improvements and small building projects. Questions Question 1 1. Petes main objective is to make a profit, explain what the term objective means (2 marks) Question 2 2. Describe the impact of competition on Petes business (5 marks) Question 3 3. What impact will an increase in interest rates have on Petes business (9 marks) Question 4 4. Pete wants to do a SWOT analysis of his business, evaluate how a SWOT would help him to achieve success (9 marks) Case Study Questions Case Study
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Pete Burnes has his own plumbing company based in Highgate, Central London. He set up as a sole trader ten years ago and has been doing well. He employees six staff and has recently moved from doing smaller commercial and residential work to working on larger commercial properties and for businesses in the city. He has decided to turn his business into a private limited company as he feels it offers more security for him and his family. Pete has been making a healthy profit and has used his retained profit to invest in new machinery. To purchase a new van he had to take out a secured bank loan which he has been paying back at a rate of 100 per week for the last two years. He finds that his overheads are low and after some early hiccups his cash flow is positive. Pete gained a number of his new clients through word of mouth recommendations. However as he is looking to expand his business he is considering promoting it using other means, he has been speaking to a small agency

about doing a series of above the line adverts in local newspapers and on the radio to increase his client base. As the owner of the business Pete is used to making all the decisions however this has recently changed as he feels that he wants to delegate some of his authority. To this end he is considering employing a full time administration manager who will be able to sort out all the bookings for projects and the paperwork enabling him to be more involved in the projects and operational side of the business. Pete has had some recent concerns with his business as he is finding that he is being increasingly undercut by other building firms who are feeling the squeeze of competition from an influx of European builders. Some residential building work has also began to slow down as interest rates have increased and people have less money to spend on home improvements and small building projects. Questions Question 1 1. Pete is the manager of the business at the top of the hierarchy, define the term hierarchy (2 marks) Question 2 2. When businesses grow they often experience communication problems, describe two problems Pete may encounter with communication (4 marks) Question 3 3. Pete is considering employing an administration manager explain the benefits of doing this (5 marks) Question 4 4. As a manager Pete has to delegate, evaluate the advantages and disadvantages of delegation (9 marks) Question 5 5. Pete is considering using a just in time method with his suppliers, evaluate the advantages and disadvantages of him employing this (9 marks) Mark Scheme Question 1 Content - 2 marks Hierarchy
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1 mark - levels in a business 2 marks - allows you to see who is responsible for who, notion of responsibility / being in charge Question 2

4 marks 2 marks content 2 marks application Content 1 mark for a problem 1 mark for a definition of communication Application 1 mark - tries to apply it to the case 2 marks - good application Points could include: Communication may be difficult as there are more levels in the hierarchy Depending on the type of leadership more delegation and consultation may lead to communication problems In Pauls business he will need to speak to more people about jobs which will mean that the decision making process will be slower Question 3 5 marks Content 1 mark Either defines the term adminstration mangager or describes one benefit Application 2 marks 2 marks - good application 1 mark - attempts to apply the problem to the case Analysis 2 marks - good analysis of the benefits 1 mark - limited analysis of the benefits Possible responses include The adminstration manager will be able to coordinate the business miniminising communication problems By taking away the adminstration from Paul he is able to concentrate on the more profitable elements of the business Question 4 9 marks 2 marks content 2 marks application 3 marks analysis 2 marks evaluation Content 1 mark - defines delegation
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Identifies one advantage / disadvantage 2 marks - Identifies at least two advantages or disdavantages

Application 2 marks - good application to the case 1 mark - makes an attempt to apply to the case Analysis 3 marks - good analysis 1-2 marks - makes an attempt to analyse the advantages and disadvantages Evaluation 2 marks - good evaluation 1 mark - makes an attempt to evaluate the answer Possible answers include Delegation allows Paul to concentrate on overseeing the more profitable areas of the business Delegation gives employees more authority to make their own decisions Delegation helps to motivate employees If too much work is delegated there could be problems with quality The effectiveness of the delegation will depend on how well Paul manages his employees Question 5 9 marks Content - 2 marks Application - 2 marks Analysis - 2 marks Evaluation - 3 marks Content 1 mark - Defines Just in time Identifies one advantage / disadvantage 2 marks - Identifies at least two advantages / disadvantages Application 1 mark - attempts to apply the question to the case 2 marks - good application of the question to the case Analysis 2 marks - good analysis 1 mark - limited analysis Evaluation 3 marks - good evaluation 1-2 marks - limited evaluation Points include Just in time production will mean that Paul gets the equipment as it is needed for jobs this will save him on storage costs Just in time requires good supplier relationships, if he can not get the equipment when he needs it then it will lead to delays and will damage his reputation

If he uses Just in time he may not be able to exploit economies of scale which means his average costs will be
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higher The success of just in time is dependent on his ordering process being efficient so the products turn up when he needs them If Paul does not have good supplier relationships then just in time will not be advantageous to his business Paul needs to work out if the cost savings of using just in time compensate for a higher average cost as he will be ordering smaller amounts Markscheme Question 1 2 marks - content 1 mark - makes a reference to the use of different media 2 marks - refers to the fact it is a way of informing the customer about the product Question 2 3 marks Content - 1 mark Application - 2 marks Content - 1 mark - identifies the correct figures - 19800 and 12300 or gives a definition of profit, or states the equation for profit = total revenue - total costs Application 1 mark - puts 19800 and 12300 together 2 marks - correctly calculates profit = 7500 Question 3 5 marks Content - 2 marks Analysis - 3 marks Content 1 mark - definition of market research or identifies one benefit 2 marks - defines market research and identifies one benefit or identifies two benefits Analysis 3 marks - good analysis of the benefits 1-2 marks - limited analysis of the benefits Possible answers include Market research enables Pete to understand what the customers want and therefore better meet their needs Market research allows him to assess the competition Market research will help him meet the needs of his new market It can help him create a USP Question 4

7 marks Content - 2 marks

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Application - 2 marks Analysis - 3 marks Content 1 mark - defines the term differentitation or identifing one way that Pete can differentiate his product 2 marks - identifies two ways can differentiate the product or one way and a definition Application 1 mark - limited application to the case 2 marks - good application to the case Analysis 3 marks - good analysis 1-2 marks - limited analysis Possible answers include Pete could differentiate his product by giving it a USP to make it stand out from the competition Pete could offer additional services to his clients e.g. painting and decorating as well as plumbing Pete could stock products for his clients e.g. diswashers and sinks and offer a one stop installation service Pete could differentiate his service by being open longer hours Question 5 8 marks Content - 2 marks Application - 2 marks Analysis - 2 marks Evaluation - 2 marks Content 1 mark - Identifies one benefit 2 marks - Identifies two benefits Application 1 mark - Limited analysis 2 marks - Good analysis Analysis 1 mark - Limited analysis 2 marks - Good analysis Evaluation 1 mark - Limited evaluation 2 marks - Good evaluation Possible answers An advertising agency would provide specailist advice that Pete doesnt have

An advertising agency would have good media relationships An advertising agency would have past success in conducting campaigns The use of an agency could increase the success of the campaign It would be expensive for Pete and may reduce his profits Question 6
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Content - 2 marks 1 mark - state that cash flow is money going out and coming in 2 marks - identify that the money coming in is inflows and going out is outflows Question 7 3 marks Content - 1 mark Application - 2 marks Content 1 mark - either explains the term zero budgeting or states an advantage Application 1 mark - Limited application to the case 2 marks - Good application Possible answers Zero budgeting is where all departments start with nothing and have to negoiate their budget Zero budgeting would mean that Pete would have tighter financial control over his business Question 8 6 marks Content - 2 marks Application - 2 marks Analysis - 2 marks Content 1 mark - Defines the term loan or identifies one advantage / disdavantage 2 marks - Either identifies two advantages / disadvantages or identifies one advantage / disadvantage and gives a definition of the key term Application 1 mark - Limited application to the case 2 marks - Good application Analysis 1 mark - Limited analysis 2 marks - Good analysis Possible Answers A loan is an external source of finance usually borrowed from a bank which is paid back monthly with interest

An advantage of a loan is that you can choose a fixed interest rate so you know how much the monthly payments will be A loan may be secured on property if Pete doesnt have a good credit record If Pete fails to pay back his loan then the bank can take his property and personal possessions Pete has to pay back interest on the loan making it more expensive than an internal source of finance Question 9 9 marks
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Content - 2 marks Application - 2 marks Analysis - 2 marks Evaluation - 3 marks Content 1 mark - Defines the term profitability or gives one example of how decreasing prices can impact profits 2 marks - Defines key term and one example or two examples Application 1 mark - Limited application 2 marks - Good application Analysis 1 mark - Limited application 2 marks - Good application Evaluation 1-2 marks - Limited evaluation 3 marks - Good evaluation Possible answers By lowering prices Pete will be decreasing his profit margin Profit = total revenue - total costs If pete lowered his prices he may increase his business therefore earning more revenue and overall profit The impact of a decrease in price would depend on the elasticity of demand for Petes service As Pete is providing an essential service you would expect elasticity of demand to be inelastic therefore by lowering price he will not increase revenue as much Mark Scheme Question 1 2 marks Content 1 mark - A goal or aim

2 marks - Objectives are the steps taken to achieve aims Question 1 2 marks Content 1 mark - A goal or aim 2 marks - Objectives are the steps taken to achieve aims Question 1 2 marks Content 1 mark - A goal or aim 2 marks - Objectives are the steps taken to achieve aims
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Question 2 5 marks Content - 2 marks Application - 3 marks Content 1 mark - Defines the term competition or describes one way competition can affect a business 2 marks - Defines the term competition and describes one way competition can affect the business or describes two ways competition can affect a business Application 3 marks - Good application to the case 1-2 marks - Limited application to the case Possible answers Competition may mean that Pete loses clients which will mean he makes less profit Competition may mean Pete has to cut his prices and therefore loses out on profits Competition may mean Pete has to differentiate his product offering Question 3 9 marks Content - 2 marks Application - 2 marks Analysis - 3 marks Evaluation - 2 marks Content 1 mark - Defines the term interest rates or gives one impact of an increase in interest rates 2 marks - Defines interest rates and gives one impact or gives two impacts Application 1 mark - Limited application 2 marks - Good application Analysis 1-2 marks - Limited analysis

3 marks - Good analysis Evaluation 1 mark - Limited evaluation 2 marks - Good evaluation Possible answers Interest rates are the price of borrowing money If interest rates rise Pete may have to pay back more for his loan therefore decreasing his profits If interest rates increase people will have less money to spend and therefore any non essential work plumbing work may be put off decreasing his revenue If interest rates rise it will mean that people are less likely to move house so any jobs on new houses will decrease Question 4
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9 marks Content - 2 marks Application - 2 marks Analysis - 2 marks Evaluation - 3 marks Content 1 mark - Explaination of what SWOT analysis is or one advantage / disadvantage of SWOT analysis 2 marks - Explaination of what SWOT analysis is and one advantage / disadvantage or two advantages / disadvantages Application 1 mark - Limited application to case 2 marks - Good application Analysis 1 mark - Limited analysis 2 marks - Good analysis Evaluation 1 mark - Limited evaluation 2 marks - Good evauluation Possible answers SWOT analysis is a way of looking how external factors influence the business By identifying his strengths Pete can exploit them and use them as a USP to advertise to clients Doing a SWOT analysis takes time which Pete could use for other matters A SWOT analysis could benefit Pete in looking at future strategies Unit 2 & 3 AS Case Study Analysis

Unit 2 Analysis Case Analysis - Large organisations Raj is feeling disillusioned with working for a large organisation Large organisations often have problems creating an inclusive culture for all employees This can lead to demotivation of employees A large organisation may experience dis-economies of scale in communication and coordination Raj may feel that he has little say in the running of the business and may lack work that is delegated from his employer Case study - Job production The management consultant identified that it was taking too long for the food to be given to customers after being ordered They were using job production Job production means that they were producing all orders one at a time Job production is suitable for one off products
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A more suitable form of production may be batch production As orders were taking longer to be completed it can lead to dissatisfied customers Leadership and communication The management consultant identified that there was a lack of leadership and communication Leadership refers to how people manage and lead the organiation If an organisation lacks leadership it can often lack direction and focus Communication is key to a business as it increases motivation of workers and means decisions are made more quickly Poor communication can lead to disagreements and disputes Organisational structure Raj appointed his cousin as Head Chef and had employed two part-time staff. They realised they needed a new head chef and dismissed his cousin The organisational structure was hierarchical with the owners at the top, a head chef and two part time workers as subordinates A head chef would be key to leading the business and turning around the kitchen Batch Production Batch production is a method where they produce goods in batches By pre preparing dishes it cuts down on cooking time and waiting times so means that customers are more likely to be satisfied Batch production is quicker than job production and more suited to a fast food restaurant

Authoritarian leadership Authoritarian leadership is where one person makes all the decisions Authoritarian leadership is good when decisions need to be made quickly By having a clear leader everyone is aware what they need to do and jobs can be easily delegated Organisational Structure 2 Each restaurant would employ a full-time manager and six part-time staff. The managers are at the top of the hierarchy Each manager has six employees that they delegate work to The subordinates are all on the same level and report directly to the manager This is a hierarchical management structure This is a flat structure as it only has two layers in the hierarchy and therefore a short chain of command Specialisation Specialisation is where employees focus on a single task
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Specialisation can increase productivity due to the division of labour If employees focus on one job they can become demotivated due to the lack of variety Getting staff to specialise means the production process is quicker therefore the customers will receive their orders quicker Capital Intensive Capital intensive refers to production which is reliant on machines for a number of production processes Capital intensive production uses less labour which can cut costs Capital intensive production is useful for producing products of standardised quality Just in time production Just in time production is where raw materials and supplies are ordered when they are needed Just in time production means that less storage space is needed freeing up extra space for the business to focus on their core activties - fast food Just in time production reduces wastage as they dont store food that they dont need Just in time production requires good supplier relationships as they need to be able to get the supplies exactly when they need them - if they dont there can be delays in production If the system doesnt work it means that there could be problems with specific foods and dishes which will mean the business loses out on profits IT systems and automation Automation replaces people with machines By having an IT system monitor sales and stock levels stock will automatically be ordered when it is needed

Having an IT system will mean it is quick and easy to monitor stock There could be issues with the IT system and it would need to be monitored to ensure that it runs smoothly Quality control Quality control is a way of monitoring that all products are uniform in nature It is vital that a business has good quality control especially for fast food as problems with quality can lead to compliants By having inspectors they can make sure that all restaurants have the same levels of quality so customers know what to expect Monthly league tables create competition between restaurants and can be motivating for staff Monthly league tables can create conflict between different restaurants An award can create an incentive to staff motivating them to meet targets and work harder Capacity Utilisation Capacity utilisation refers to how much of the restaurants capacity will be in use at any one time They have high standards for capacity utilisation as if the restaurants aren't full then they may have profitability issues - they need to cover high rents
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Functional Organisational Structure A functional organisational structure is where a business is split up into different functions or departments that are responsible for different thing e.g. HRM, Finance By having different functions it is clear who is responsible for what in the business All functions need to communicate with each other to make sure that the business is working to its full capacity Negative publicity The case highlights that there was an issue with ingredients and working conditions If the business fails to meet health and safety standards they can be shut down or fined resulting in a loss of profits Bad publicity can lead to a negative reputation meaning less customers and profits Employee turnover High employee turnover is bad for a business as it is expensive to recruit and train new employees High employee turnover means that current employees may become demotivated High employee turnover creates a bad image for the business Low capacity utilisation If capacity utilisation falls then profits will fall as the business still pays its fixed costs

Low capacity utilisation If capacity utilisation falls then profits will fall as the business still pays its fixed costs Authoritarian leadership 2 Mark was an authoritarian leader which meant that he made all the decisions This leadership style can lead to increased efficiency in a business Authoritarian leaders can be seen as dominant by staff and this style may lead to demotivation Financial motivation They pay the minimum wage Compared to other businesses this may be lower which means that few candidates will be attracted to the jobs Financial incentives such as pay are often the sole motivator for people to work They could increase employee retention by paying higher wages and offering additional non monetary incentives Student employees By employing younger workers the minimum wage is lower therefore decreasing costs If a business only employees younger workers they are breaking the law due to age discrimination Job rotation
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Job rotation is where people rotate around a variety of different roles to learn new skills By doing different jobs employees are more motivated Job rotation can enrich employees work making them happier Job rotation is likely to increase staff retention Job rotation increases the skill level of all workers Kaizen Kaizen is a method of production that involves all employees By involving employees in all aspects of the business motivation increases Kaizen encourages a culture of discussion and consultation Democratic Leadership Democratic leadership is more consultative Democratic leaders involve subordinates in decision making By involving suboordinates they are likely to increase levels of motivation Higher levels of motivation amongst the work force correspond with increased productivity Democratic leaders may find making decisions is slower Poaching Staff If staff are being poached by competitors it means that they have skills that competitors demand or desire This means that their training is recognised in the industry This can lead to retention issues To try and deter staff leaving they could use a combination of monetary and non monetary incentives

Production problems As they did not find a reliable supplier there were issues with just in time production if the supplier was unable to supply organic produce it means the company name and reputation could be damaged IT systems can be unreliable, especially when they are first used so need to be checked and maintained Just in time production relies on good supplier relationships, it may have been better to use an alternative method of stock control until a suitable supplier was found If the restaurant was advertising itself as organic but did not use organic food then they could be breaking the law under the trade description act If they did break the law they could be fined or taken to court Job roles When people specialise the roles tend to be repetitive which can mean staff are bored and lack motivation If staff are not treated well by managers they are likely to leave If they make the work more interesting it can motivate workers and also help to retain staff Managers need to have more training and adopt a more democratic leadership style Workers are motivated by financial and non financial means Herzberg's 2 factor theory identifies motivators and hygiene factors, it is essential that hygiene factors are in place
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Terminating contracts Mark proposes sacking staff and suppliers If staff are sacked it will cause restentment amongst those who stay and they are likely to be demotivated Supplier relationships need to be fostered if just in time stock control will work If staff are sacked without good reason they can take the company to court To recruit and train new staff is expensive and will errode the companys profits Unit 2 Questions Unit 3 Analysis Business Plan A business plan is details about a business setting out what they want to achieve and how to achieve it It is important to have a business plan as it allows them to assess the viability of the project A business plan can be used to obtain finance from banks and other external sources Private Limited Company A private limited company is registered at companies house

A private limited company has limited liability which means that the shareholders only lose up to the amount of money that they have invested Shareholders in private limited companies tend to be family and friends Shares are not sold on the stock exchange Competition They chose to locate in an area near fast food restaurants Some businesses choose to locate close to competition as the area becomes known as a destination for a specific business e.g. fast food By locating near other outlets there will be passing trade Local community Businesses have an impact on the local community They can create negative externalities which are third party effects Local residents complained about the smell to the council therefore they needed to install a ventilation system It is important for the local community to support the business as they can create problems If the business plan had been thorough they would have identified that ventilation was needed therefore there would not be a complaint The local council has the power to close premises and to fine businesses Rent They had issues with their local landlord re rent as he thought the business would be a cafe not a fast food
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restaurant It is important when you start up a business that you are clear to stakeholders about what the business will be If they had signed a contract with the landlord they could have avoided any problems Competitive Behaviour When the business opened competitors cut prices aggressively The business needs to make sure that they have a specific USP which will make them stand out from competition Competition is always a threat and therefore they should have protected themselves by highlighting their strengths Management Consultants Management consultants are employed by businesses to look at their strategies and advise them on ways to improve A management consultant can provide expert advice and opnion highlighting any key issues Organic growth

Organic growth is where a business grows internally or from inside the business They grew from one to two outlets using profits that they had generated to open the second shop Rapid growth can sometimes be a strain on finances Investors After a period of time an investor approached Mobeen offering to buy a share in the company He wanted a 51% share of the company which would mean he had the controlling share It is important that new investors have the same objectives as the current owners otherwise conflict can occur Objectives Objectives are goals that a business wants to achieve Objectives allow a business measure their performance Objectives are useful for providing direction for the business and creating a culture that is focused on a common game Short term objectives are ones that are to be achieved within a year Longer term objectives are ones that are to be achieved over a year Objectives should strech a firm however they should not be unrealistic Unrealistic objectives can lead to a lack of motivation amongst staff Strategy Business strategy is the overall business plan for the future It sets out how the business is going to achieve its objectives The new business strategy covered five main points that detailed a change of direction for the business and a focus on young professionals and the organic healthy image of the food Rapid Growth
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After Mark became manager the busines grew at a rapid rate If a business grows too rapidly they may suffer from diseconmies of scale If a business grows too fast they can encounter cash flow problems If a business grows too fast there can be branding difficulties as the brand may be diluted Social influences External influences can affect a business A change in trends e.g. towards healthy eating and away from fast food restaurants could mean that the business lost competitors and profits Having organic food as a USP could be benefical as organic food is gaining in popularity Overseas Expansion Mark is considering expanding operations overseas By expanding overseas they are opening themselves up to new markets and new customers Overseas expansion can create problems as there can be a culture clash

Exchange rate fluctuations may lead to difficulties in planning Inflation and Interest rates Inflation is the general rise in the level of prices In the UK the Bank of England control inflation through the manipulation of interest rates Interest rates are the price or cost of borrowing money If interest rates are rasied to curb inflationary pressure then consumption decreases in the economy If people are spending less then there are less potential profits available for the business If interest rates rise then the cost of borrowing money increases therefore finance is more expensive If inflation increases then it makes planning more difficult as there is uncertainty regarding prices Economic growth Economic growth measures the increase in productive capacity of the economy over a period of time, usually a year The eurozone looks to be enjoying economic growth of 2.5-2.75% over the next three years therefore it seems like an attractive area for a new venture Shareholders By selling off more of the business Suki and Raj are likely to dilute their power Shareholders are individuals who have a stake in the business Whoever has the controlling stake has the overall power regarding decisions You can issue shares or get new shareholders as an internal source of finance By having more shareholders it means that there are more people to consult on decisions and Suki and Raj have less control of the business Question 1 Raj was feeling disillusioned working in a larger organisation.
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1.What problems can there be with creating an inclusive culture in a larger organisation? Question 2 Raj may have been disillusioned as he was not motivated. What are the different ways that you can be motivated? Question 3 3. Explain the following theories of motivation: a) Maslows hierarchy of needs b) Herzbergs two factor theory c) Taylors scientific management d) Mayo and the "Hawthorne Effect" Question 4 The management consultant identified that it was taking too long for the food to be given to customers after being

ordered What type of production process where they using? Question 5 Using your answer from question 4: What issues were there with this production process? Question 6 What alternative production processes could they use? Question 7 The management consultant also identified that there was a lack of leadership and communication Identify a suitable leadership style for them to use Question 8 Using your answer from question 7 answer the following: Why is this leadership style good for a fast food business? Question 9 Raj had appointed his cousin, Asif, as Head Chef and had also employed two part-time staff. However, Raj and Suki now realised that they needed to employ a new Head Chef. Reluctantly, Asif was dismissed.
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How did the management structure change? Question 10 Describe the new structure Question 11 Ricky set up a batch production system in which the products were pre-prepared, thereby reducing the cooking time. What is batch production? Question 12 Analyse the advantages and disadvantages of using batch production over job production Question 13 13. How does batch production help to speed up the production process? Question 14 His authoritarian, no-nonsense approach transformed the kitchen, and the speed of customer service improved dramatically. 14. What is authoritarian leadership? Question 15 15. What are the advantages of this type of leadership? Question 16 16. Describe the potential impact of an authoritarian leader on staff motivation levels Question 17 Each restaurant would employ a full-time manager and six part-time staff.

17. What is the new organisational structure of the restaurants? Question 18 Each employee would specialise in a single repetitive task and the production process would become more capital intensive, enabling the business to cut costs and to speed up waiting times. 18. What sort of production process did they change to? Question 19 19. State the advantages of using this type of production?
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Question 20 20. What is the difference between labour and capital intensive industries? Question 21 21. Describe the advantages and disadvantages of having capital intensive methods Question 22 The suppliers of the organic ingredients would be expected to deliver sufficient quantities daily on a just-in-time basis. 22. What does just in time mean? Question 23 23. What are the advantages of using just in time methods? Question 24 24. What disadvantages are associated with using just in time methods? Question 25 25. Evaluate the impact of using just in time stock control on profits Question 26 A new IT system would be implemented whose purpose would be to monitor sales and stock levels. An electronic link with each of their suppliers would automatically inform them each time a delivery was required. 26. Describe the advantages of using an automatic stock delivery system Question 27 27. What are the disadvantages associated with using such a system? Question 28 A strict quality control system would be implemented, with a team of inspectors making regular visits to each restaurant. Monthly league tables would be published which would compare each restaurant. 28. Define the term quality control system Question 29 29. What alternative ways could they use to monitor quality? Question 30 30. How would the quality control measures motivate staff?

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Question 31 31. How could these methods demotivate staff? Question 32 Each restaurant must aim to generate a rapid throughput of customers and achieve high levels of capacity utilisation. 32. What does capacity utilisation mean? Question 33 33. Why is it important to have a high turnover of customers? Question 34 "its organisational structure had evolved as the business had expanded" 34. What type of organisational structure has it evolved to? Question 35 35. What type of leadership style does Mark have? Question 36 36. Who is at the top of the hierarchy? Question 37 37. Why do you think Suki is feeling frustrated? Question 38 claimed that some of the ingredients used were not organic and it also highlighted unhygienic working conditions in the kitchen. Furthermore, there were allegations that the staff received no training in health and safety, which had resulted in a number of injuries, and that they were often forced to work unpaid overtime. Consequently, many of the employees had decided to leave. 38. Why is it important for employees to be trained in health and safety? Question 39 39. What links are there between staff training and morale? Question 40 40. How can they improve staff morale and motivation? Question 41
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capacity utilisation levels in most of the restaurants fell from the usual 80 % to well below 50 %. 41. What impact will low capacity utilisation have on the companys profits? Question 42 42. What can they do to increase capacity utilisation? Question 43 Suki interviewed the Manager of the companys prestigious restaurant in Chelsea, West London. For such an

important restaurant, Mark Coles had personally insisted on selecting the Manager who personified the culture that he was trying to create within the business authoritarian and impersonal, with a clear focus on efficiency. 43. What issues are there with authoritarian leadership? Question 44 44. Describe the type of culture created by Mark Coles Question 45 45. How can an impersonal manager lead to motivational issues amongst staff? Question 46 46. What other incentives could they offer their staff as well as pay? Unit 3 Questions Question 1 surely there must be a gap in the market for an ethnic fast-food restaurant based on totally fresh organic ingredients? Raj spotted a gap in the market to exploit 1. Describe the opportunity Raj spotted Question 2 State the external factors that lead Raj to spotting the opportunity Question 3 What threats could there be for such an opportunity? Question 4 Suki and Raj put together a business plan What is a business plan?
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Question 5 What does a business plan usually contain? Question 6 Why is it important to prepare a business plan? Question 7 The business was set up as a private limited company What is a private limited company? Question 8 Describe the advantages and disadvantages of setting up as a private limited company Question 9 Evaluate the reasons why they set up as a private limited company Question 10 A key decision was to find a suitable location for the fast-food restaurant Why is location a key factor for a fast food restaurant? Question 11 They wanted a location with other fast food restaurants near by, why is competition a good thing for fast food

restaurants? Question 12 The council would not allow them to open until they had obtained a licence to sell food. 12. What influence does the council have over their business? Question 13 13. What issues could arise if they didnt abide by laws and regulations? Question 14 There were problems with the landlord 14. The landlord and the council are both stakeholders in the business, define the term stakeholders Question 15 15. Identify other stakeholders in the business
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Question 16 16. What influence can stakeholders have on the business Question 17 17. The landlord put up the rent, how could they have avoided such an action? Question 18 The local competition had reacted aggressively by cutting prices and increasing spending on promotion. 18. Competition are a threat to any business, how can they protect against this threat? Question 19 Although he charged a high fee, they decided to employ Martin Chivers, a management consultant who specialised in giving advice to fast-food companies. 19. What do management consultants do? Question 20 20. Why was it in Raj and Sukis interest to employ a management consultant? Question 21 A second restaurant in Chelsea, West London, had recently opened and the company was beginning to make a profit 21. What type of growth does the opening of the second restaurant represent? Question 22 22. It appears that one of the key objectives of the business is growth, what are business objectives? Question 23 23. What additional objectives do you think they are trying to achieve? Question 24 24. Define the term business strategy Question 25 25. Analyse the strategy they are using before they meet Mark Question 26

Mark had just acquired a small chain of fast-food Thai restaurants aimed at busy urban young professionals, which he intended to develop further. He was looking for another project in order to diversify his restaurant portfolio.
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26. What strategy was Mark pursuing? Question 27 27. This move would provide growth for Marks company, explain how they would be growing Question 28 28. Mark wants a diversified profile, define the term diversification Question 29 29. Explain why a business would want to diversify Question 30 I can provide you with the extra finance and expertise to take this business further, in return I would like a 51 % share. 30. What is a shareholder? Question 31 31. Why would Mark want a 51% share? Question 32 32. Analyse the advantages and disadvantages to Suki and Raj of accepting Marks proposal Question 33 At the first meeting after taking control, Mark explained that his aim was for Mobeen to eventually become a national chain. 33. To what extent do you think Marks strategy aligned with Raj and Sukis? Question 34 34. Do you think there were any issues with Marks strategy? Question 35 Mark proposed 2 new objectives for the business: at least five new fast-food restaurants in the following year another 10 to 15 fast-food restaurants in each of the following three years. 35. These objectives are SMART explain what a SMART objective is Question 36 36. Mark is pursuing a strategy of rapid growth, evaluate this strategy Question 37
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I believe that this business has a key USP of offering good quality, healthy, organic food and fast service which we need to exploit before our competitors copy us.

37. Why is this a good USP? Question 38 38. What opportunities is Mark exploiting in the external environment? Question 39 39. Mark correctly identified competition as a threat, what other threats are there to the business? Question 40 The journalist from Channel 4 and the investigation was a potential issue for the company 40. Why is this bad news for the company? Question 41 41. What impact could bad publicity have on the business? Question 42 Suki then visited the original restaurant in Tottenham. On a number of occasions, Mark had tried to close this restaurant because, in his opinion, Its location does not match the image I am trying to create for the business. 42. This highlights the difference between Mark and Sukis objectives for the business describe how you think they are different Question 43 one of the most important lessons I have learnt is the importance of constantly looking ahead. 43. Why is it important to be focused on the future? Question 44 44. In your opinion is Mark too focused on the future? Question 45 I believe that it could be dangerous for the business to be over-reliant on the UK market. 45. Why is it dangerous to be over reliant on one market? Question 46 46. What issues are there involved in moving away from the domestic market? Question 47
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The Bank of England was making worrying comments regarding signs of rising inflation and the need for possible corrective action. 47. Define the term inflation Question 48 48. How would an increase in inflation impact the business? Question 49 49. How does the Bank of England control inflation Question 50 50. Define the term interest rates Question 51

51. Evaluate the impact of an increase in interest rates on the business Question 52 The Health Secretary announced an ongoing problem with the levels of obesity in society there could well be a backlash against fast-food restaurants. 52. This is another threat to the business, how could they protect against this threat? Question 53 I propose that we should open restaurants in Paris, Amsterdam and Barcelona. He referred them to the economic forecasts below 53. Define the term economic growth Question 54 54. Describe what is happening to the predicted rate of economic growth in the Eurozone Question 55 55. Describe what is happening to unemployment in the Eurozone Question 56 56. Analyse the impact of falling unemployment on the business Question 57 57. These figures are for the entire Eurozone, how confident could you be that Paris, Amsterdam and Barcelona would follow the same pattern? Question 58
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58. Which Eurozone countries are experiencing the fastest rates of growth? Question 59 59. To what extent do these figures back up the move to Europe and specifically Paris, Amsterdam and Barcelona? Question 60 60. All the countries use the Euro evaluate the disadvantages of moving to a country that uses the Euro Question 61 At the end of the meeting there is conflict 61. Why do you think the conflict has arisen? Question 62 62. Conduct a SWOT of the business Question 63 63. Which strategy would you recommend them to pursue and why Unit 2 Answers Question 1 It can be difficult to create an inclusive culture as it is hard to get all workers to agree to shared values. It may

also be difficult to get values and aims disseminated to all workers due to diseconomies of scale in communication and coordination. Question 2 You can be motivated by monetary and non monetary methods. Monetary methods refer to wages and salaries and also include bonus payments and incentive schemes e.g. piece rate systems. Non monetary methods include job rotation, job enlargement and job enrichment Question 3a a) Maslows hierarchy of needs has five levels in a pyramid. You need to fulfil each need before you move up to the next level. The first need is physiological needs e.g. food, shelter, then you move up to security needs e.g. having a contract of employment, the third level is social needs including relationships with co-workers, the fourth level is esteem needs such as recognition and achievement and the final level is selfactualisation. Question 3b b) Herzbergs two factor theory states that there are two different types of factors hygiene and motivating factors. Hygiene factors need to be in place or employees will be dissatisfied,these include company policies and administration and working conditions. Motivators are factors which have the ability to motivate workers e.g.
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personal achievement of goals and targets and interest in the work itself. Question 3c c) Taylors scientific management had four stages, he believed that you should study the work process deciding the most efficent production methods, the best methods would then be observed and timed, all workers would be trained to the same standard and then different pay rates would be given to different workers. Taylor believed that all workers were motivated by pay. Question 3d d) The Hawthorne effect was proposed by Mayo after observing workers in a factory. He found out that employees responded to being observed and to working together in groups. This highlighted the role of non monetary motivators such as the type of job being carried out and group relationships. Question 4

They were using job production as they were making each product individually from scratch. Question 5 This production process is very time consuming, it is best for products that require a high finish and one off products. This production process means that it took a long time for the meals to be prepared which lead to a long wait by customers for the food. As the restaurant was advertised as a fast food restaurant customers were expecting food quickly which was not happening as all meals were made from scratch, this lead to dissatisfied customers. Question 6 They could use batch production where they prepared the food in batches meaning the time taken to make the food was reduced. Question 47 When Suki asked the Tottenham Restaurant Manager how she managed to retain her staffing levels, she offered the following explanation, My policy is to recruit mainly 16 to 19 year old students from the local schools sixth forms and FE colleges. I know that most of them will be in education for the next two years. Generally, they are reliable, hard working and enthusiastic. 47. How does the Tottenham managers recruitment policy differ with the Chelsea restaurants recruitment policy? Question 48 48. What issues could there be with this recruitment policy? Question 49 I use job rotation so that they can learn different jobs. 49. What is job rotation?
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Question 50 50. Why would job rotation increase employee motivation? Question 51 Kaizen groups to discuss improvements 51. What is kaizen? Question 52 52. How can kaizen be used to improve productivity? Question 53 53. How can kaizen be used to motivate staff? Question 54 I believe that this democratic approach works.

54. What is a democratic leadership style? Question 55 55. Compare and contrast the leadership styles of the two managers Question 56 Staff are being poached by competitors 56. What could they do to stop staff being poached? Question 57 From an operations perspective, a major problem is finding suppliers who can provide the just-in-time service we require as the business expands. We have experienced teething problems with the new IT system resulting in some missed deliveries. Furthermore, organic ingredients are still in fairly short supply. 57. What is just in time production? Question 58 58. Analyse the issues that they encountered by using just in time production? Question 59 We are also finding it difficult to recruit and retain good workers and I believe that this is due to the nature of the jobs that they have to do and the way that they are treated by the managers. We need to make the work more interesting and encourage our managers to involve the staff more. 59. How could they make the jobs more interesting?
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Question 60 60. What issues are there with motivating workers who do boring and repetitive jobs? Question 61 I have to disagree with you both. As far as Im concerned the problems at the Chelsea restaurant are due to its poor staff and the supplier. I propose that we sack the Manager and the staff immediately and inform the supplier that its contract will be terminated next month 61. What issues would occur if they sacked the supplier? Question 62 62. In your opinion is Marks viewpoint valid? Question 7 They could use authoritarian leadership where the boss makes all the decisions and delegates to subordinates with no consultation. Alternatively they could use democratic leadership where the boss has a more consultative approach involving subordinates in decision making. The most appropriate style for a fast food restaurant would probably be authoritarian as decisions are made more quickly.

Question 8 Authoritarian leadership is good for a fast food restaurant as decisions need to be taken quickly and efficiently. It is also effective as each worker will have a clearly defined role and will know what they need to do. Question 9 The management structure became more formal. The hierarchy was more clearly defined. Question 10 10. The structure was more formal. There were three distinct layers in the hierarchy with Raj and Sarah at the top. The structure meant there was a clear chain of command from top to bottom as decisions were delegated down. The head chef had a span of control of two part time subordinates. Question 11 11. Batch production is where groups of items are produced together, it needs a lot of preplanning to ensure that batches are coordinated. Question 12 12. Batch production means that products can be produced more quickly. It uses less labour than job production so can be cheaper when the initial outlay for machines is paid off. Batch production means that food can be prepared in advance rather than from scratch so requires less intensive periods.
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Question 13 13. As more than one product can be made at a time it means that the production process is quicker. Question 14 14. This is where senior managers make all the decisions, set objectives and delegate tasks to subordinates. The leader maintains control throughout the process. Communication is one way from the leader to the subordinate. Question 15 15. It means that quick decisions can be made. It is also useful if the majority of workers are unskilled. In Mobeen you would expect most workers to be unskilled and decisions may need to be made quickly especially at busy times of the day Question 16 16. Staff may feel de motivated as they will not have any say in decision making. It can also lead to high levels of staff turnover as subordinates may not feel valued by the business. Question 17

17.The structure is relatively flat with only two levels in the hierarchy. Most workers are part time and all at the same level. The manager is at the top of the hierarchy and will make all decisions. The manager has a span of control of six workers. Question 18 18. They changed to flow production Question 19 19. It is easier to achieve economies of scale as they can buy in bulk. One set of machines is used to create a standardised product. It is capital intensive so labour costs are lower. Production is continuous so there is no down time. Question 20 20. Labour intensive industries are heavily reliant on labour or workers to produce their products, capital intensive industries are more dependent on machines. Question 21 21. Capital intensive methods require a large financial commitment, this can be difficult for small businesses to afford or may mean they need to take out expensive loans. Machines can replace some employees which may lead to redundancies creating a lack of motivation amongst the remaining work force. Capital intensive industries can be more efficient as machines are responsible for doing the jobs not people. Question 22
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22. Just in time is where products are produced to order therefore keeping stock levels to a minimum Question 23 23.It saves money as less stock needs to be stored. As less stock is needed it frees up space for the business to concentrate on their main activities thus generating more profits. As stock is only ordered when it is needed it mains wastage is reduced especially in a perishable industry such as food which therefore reduces costs. Question 24 24. It needs excellent supplier relationships, if there is a problem with the supplier and the stock isnt received when it is needed it can slow down or stop production leading to dissatisfied customers and potentially losing orders. For Mobeen this could mean that some dishes were unavailable and customers may therefore go

elsewhere. In addition as smaller quantities are ordered at each time they may not be able to exploit economies of scale in purchasing therefore unit costs will be higher. Question 25 25. Just in time production can potentially increase profits as it reduces storage costs, in addition stock wastage is reduced. Alternatively if supplier relationships are not excellent costs may increase as production will stop while they wait for stock. Costs are also increased as the business will not be able to exploit economies of scale in purchasing. Overall the impact of just in time production on costs and therefore profits is heavily reliant on the supplier relationship, if the relationship is good and the process runs smoothly an overall decrease in costs would be expected. In Mobeens case they experienced a number of problems with their supplier and therefore their cost structure may have increased. In addition they received negative publicity as their ingredients were not always organic as advertised, this highlights the importance of having a good reliable supplier for just in time stock control to be effective. Question 26 26. It means that less time and man hours will have to be taken up with stock control and delivery so it will save in labour costs Question 27 27. What are the disadvantages associated with using such a system There could be teething problems with the system which may result in delays ordering and receiving stock. Staff may need to be trained in the new system which could be expensive and increase costs. Question 28 28. All shops will have the quality of their products checked to ensure they meet the same standard. Quality control is a way of monitoring the quality of products at the end of the production process. Question 29 29. They could use TQM, total quality management where all processes are checked for quality.
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Question 35 35. They could motivate staff as the staff would be in competition with other stores and therefore could work harder to try and win the incentive prize.

Question 31 31. Staff may feel that the measures are unachievable or unfair. Question 32 32. Capacity utilisation measures the amount that is being produced compared to the amount that could be produced. Question 33 33. By getting customers in and out in a short period of time the capacity of the business is increased which means potential profits will be higher. Question 34 34. They have a functional organisational structure. Question 35 35. Mark has an authoritarian leadership style Question 36 36. Mark, Suki and Raj are all meant to be joint at the top, however in reality Mark is at the top. Question 37 37. As she feels that she is not in control of decision making and she doesnt feel that Mark takes into account her opinions regarding decisions. Suki feels that she started the business and now does not have control or any say in how it is run. Question 38 38. It is a legal requirement for employees to be trained in health and safety. If it is found that the company is not adhering to health and safety legislation it could be fined or closed down, this would also be detrimental to their reputation and would result in a loss of sales and profits. Question 39 39. If staff receive thorough training and have chances of developmental training they are more likely to be motivated and morale will be higher. Failure to give adequate training can lead to low staff morale and higher staff turnover.
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Question 40 40. They can improve staff morale by investing in training and offering staff a development program. They can also increase morale by ensuring that they consult employees more and adopting a more democratic leadership style. In addition the use of monetary and non monetary incentives can help to increase motivation e.g. they could

offer paid overtime, job enrichment opportunities and incentive prizes. Question 41 41. If capacity utilisation is low it means that potential profits will be lower. Only using 50% of the capacity means that fixed costs will be making up a larger proportion of each sale and therefore reducing the profit margin. Question 42 42. They can increase capacity utilisation by offering promotions and special offers to encourage more people to buy food from them. In addition they could conduct an advertising campaign highlighting their USP as having healthy, organic fast food. Question 43 43. Authoritarian leadership can lead to low staff morale and high staff turnover as employees do not feel valued by the management and are not consulted on decisions Question 44 44. Mark is not creating an inclusive culture, staff have low morale and do not feel valued by the manager. He is also creating a culture of blame where he is blaming external factors and people for any issues. Question 45 45. An impersonal manager can be de motivating for staff as their esteem needs are not met with praise and rewards. In addition Mark can seem distant and unapproachable which means staff may feel isolated and not valued. Question 45 45. He is blaming external factors and his staff rather than taking responsibility for his restaurant and the area. His attitude towards his staff seems negative and may be partly to blame for the high turnover. Question 46 46. They could offer non financial incentives, for example they could offer job enlargement, job enrichment and job rotation Question 47 47. The Tottenham recruitment manager is focusing on staff that will stay for a longer period of time so they can develop them and retain them rather than relying on short term foreign students for workers.
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Question 48 48. As she is going out to employ students she could be flouting equal opportunities legislation and age discrimination legislation. She would have to make it clear that she is employing the best candidate for the job without discriminating against certain groups or people Question 49 49. Job rotation is a type of job enlargement where employees switch from one duty to another. Question 50 50. It can reduce the monotony of the job and allow workers to learn different jobs and new skills therefore increase motivation. Question 51 51. Kaizen is a term used to describe continuous improvements, it includes the use of quality circles where teams of employees from all levels of the business come together to meet and discuss ways that the business can improve. Question 52 52. The ideas that come out of kaizen groups can help them find ways to increase productivity and efficiency. Question 53 53. It can help them motivate staff as they feel that they have a say in the running of the business and that their ideas are worthwhile. Question 54 54. A democratic leadership style is where a business is run on the basis of the decisions of the majority. It encourages employees to be involved in decision making through extensive two way communication between employees at all levels of the organisation. Question 55 55. The manager of the Chelsea shop has an authoritarian leadership style where they make all the decisions themselves and only communicate downwards, by comparison the manager of the Tottenham store has a democratic leadership style where they get employees involved in decisions and communication is a two way process. Question 56 56. They could increase employee retention by offering profit sharing schemes. Alternatively they could offer staff

development opportunities and clear career paths so staff would feel that they are being developed in their roles. Question 57
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57. Just in time production is where goods are produced to order therefore stock is ordered as and when it is needed. Question 58 58. They had issues with their suppliers which meant that the quality of their ingredients was sometimes not as high as it should be and was not consistently organic. In addition they experienced problems with their IT systems and missed some deliveries which meant that they didnt have sufficient stock to make the meals. Question 59 59. They could use job enrichment so the employees so more complex tasks are added to an employers role. Alternatively they could use job enlargement to increase variety. Question 60 60. If you offer them job enlargement you are just increasing the number of tasks they may still fundamentally be boring and repetitive. It can be difficult to motivate staff if the job is fundamentally boring. Question 61 61. They would need to find a new supplier who would be able to provide supplies for them to continue using just in time stock control. By sacking the supplier they could also create a negative image in the industry. Question 62 62. You can answer this question however you wish as long as it is supported with evidence from the case do you think that Mark is taking the most appropriate view strategically or do you think another viewpoint is more valid. Unit 3 Answers Question 1 Raj spotted that there was a gap in the market as there were no organic ethnic fast food restaurants. Question 2 Organic foods have seen an increase in sales in the UK therefore making it an attractive sector to move into. Traditional fast food restaurants are adding healthy options to their menus due to increasing concerns over

obesity and more interest in healthy eating and food. Question 3 If interest rates rise consumption is likely to fall and more people are going to be spending less on fast food and eating out. Competition in the form of multi nationals and larger fast food chains could switch to organic ingredients thereby taking customers away. Obesity and health scares could mean that fast food consumption decreases. Question 4
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A business plan is a proposal that a business puts together setting out what they want to achieve. Question 5 It contains: a businesses objectives, information on the market and competition, sales estimates, estimates of costs, revenues and profits, market research on customer needs and how the business will meet the needs and finally information detailing how the business is differentiated from its competition including its USP. Question 6 It means that the entrepreneur has carefully considered all key decisions identifying any potential problems or issues with the proposed business. It can also help in raising finance from external sources such as banks. Question 7 A private limited company is a company that is registered at companies house. They sell shares to family and friends. They have limited liability which means that shareholders only lose their investment personal possessions can not be taken. Question 8 Advantages are that they have limited liability, they can raise finance by selling shares and they are often seen as been more established and less risky than sole traders. Disadvantages are that they have to pay more costs to set up and register the company, financial accounts are public and they will have to pay for them to be audited and they have more regulation than sole traders. Question 9 The key reason that they set up as a LTD was that they would have limited liability this means that the venture is less risky for Raj and Suki and their personal assets will be protected.

Question 10 10. Location is key as if it is not in an area with high passing trade it is unlikely to be busy. Fast food restaurants need to be in visible locations, close to other businesses e.g. bars and clubs and with good transport links e.g. train and bus so that lots of people will walk past them and be aware of them. Question 11 11. If people know an area as having a number of fast food restaurants they are more likely to visit the area and the restaurants as a whole. When they have located in a popular area the objective is then to differentiate themselves from the competition. Question 12 12. The council can choose to give the business a licence or not. The council is also responsible for the business rates. Question 13
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13. If they fail to abide by laws and regulations the business could be fined or closed down. In addition the business could have their licence revoked by the council. Question 14 14. A stakeholder is any individual or group who is affected by the actions of the business. Question 15 15. Raj and Suki (the owners) , The local community, Suppliers, Employees Question 16 16. They can determine business success as they can affect what the business sells, how much the business charges for its products and its reputation. Question 17 17. If Suki and Raj had drawn up a contract with the landlord detailing what their business would be and the rent he would be legally obliged to stick to the contract and the agreed rent. Question 18 18. One of the best ways to protect against competition is to differentiate the business so it stands out from competition. They need to ensure that their USP is clearly communicated to potential customers. Question 19 19. Management consultants advise businesses on future strategies and what they can do to improve their performance.

Question 20 20. Raj and Sukis business was not performing as well as they hoped and they seemed to be struggling with their strategy therefore it was a good idea to employ someone with business experience to assist them and highlight any issues and strategies to deal with these issues. Question 21 21. It is organic growth as they are growing internally Question 22 22. Objectives are goals or targets that a business wants to achieve Question 23 23. To make a profit, to achieve high levels of customer satisfaction Question 24
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24. A strategy is a long term plan and a way of achieving a businesses objectives Question 25 25. Prior to meeting Mark they are pursuing a strategy of organic slow growth in the London area. Question 26 26. Mark was pursuing a strategy of diversification Question 27 27. They would be growing externally Question 28 28. Diversification is where a firm moves into different markets, in Marks case he is staying in the restaurant industry but diversifying by acquiring different types of restaurants aimed at different target markets. Question 29 29. A business would want to diversify to spread the risk. An entrepreneur is able to use his business skills and knowledge for all different types of business venture therefore make varied businesses a success. In Marks case he already has experience of the catering industry so he is just expanding his reportire Question 30 30. A shareholder is someone who owns a share or a part of a business Question 31 31. Mark would want a 51% share as he would then have the majority share so he would have the final say on all decisions. Question 32 32. The advantages of Suki and Raj accepting Marks proposal are that they get finance from Mark which

means that they can expand and will not have to borrow money from the bank which is expensive. In addition, Mark is an established businessman therefore they can gain valuable experience from working with him. However the disadvantage is that they loose control of their business as he has the majority shareholding. Question 33 33. Raj and Suki were pursuing a strategy of organic growth that was relatively slow. Mark wants to grow the chain rapidly and has a more ambitious strategy than Raj and Suki. Question 34 34. Mark is pursuing a strategy of rapid growth, when businesses grow too fast there can be problems as the
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brand can become diluted. In addition rapid growth requires a lot of capital input and if it is unsuccessful they may find themselves owing more money than they can afford to pay back. Question 35 35. A SMART objective is specific, measurable, achievable, realistic and time bound Question 36 36. A strategy of rapid growth can be effective especially when developing a market niche as the business can exploit first mover advantage. In the longer term a strategy of rapid growth can result in high profits for the business. If the economy is growing strongly a strategy of rapid growth can be particularly effective for a business. However if economic growth is slowing or interest rates are being raised, as is the case currently in the UK, expanding too fast may mean that the business has difficulties financing the project and paying off any loans that they have taken out. In addition, if a business expands too fast they can find that their brand is diluted and quality is inconsistent. Question 37 37. This is a good USP as it differentiates the business from its competition and it is a niche in the market that no one is currently exploiting. Question 38 38. The opportunities Mark has identified are a growing market for organic food, an increasing interest in healthy foods and concerns about the rise in obesity which are decreasing sales of fast food in traditional chains. Question 39

39. There is a threat of rising interest rates which would mean consumption would decrease in the economy and less money would be spent on fast food, this would also mean that loans became more expensive so costs would increase. The combined decline in revenues and increase in costs would damage profitability. Another threat could be a change in tastes and fashions away from eating fast food towards preparing food at home. Inflation is another threat as if that rose it would mean that prices of ingredients would rise, they would either have to pass on these price rises to customers which could decrease the amount of customers eating out or alternatively they could keep the prices the same however their profit margin would be eroded. Question 40 40. This is negative publicity which was broadcast to the whole nation so it could degrade the image of the business. Question 41 41. Bad publicity could affect the business in a number of ways; initially it could deter people from eating at the restaurants especially new customers and new restaurants. In addition it could make workers uneasy and increase staff turnover. Bad publicity is likely to decrease revenues and therefore profitability of the business.
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Question 42 42. Mark is trying to make the business more upmarket and aim it at a more exclusive market, originally the business was aimed at a more diverse target market. Therefore Mark is trying to rebrand the business and moving away from its original market and objectives. Question 43 43. In business you always need to be aware of any potential opportunities and threats and how these will affect your business. As the business is operating in a niche they need to be thinking one step ahead of competition unless they want their advantage to be eroded or lost. Question 44 44. Mark is very forward looking which could be detrimental to the business as he is not focusing on the current issues and problems that they are experiencing. Question 45

45. If you are over reliant on one market and the market enters an economic downturn or recession the business is in a very fragile position. For example, in this case interest rates are expected to rise in the UK which would lead to less revenue as people are spending less and higher costs as more interest needs to be paid back in loans. In addition, if you are dependent on one market you are very much depending on fashions, trends and tastes in one area. Question 46 46. If you move away from the domestic market there will be more uncertainty. Significant market research will need to be done to see if there is a market for the product. There are different laws and legislation which you will need to familiarise yourself with. In new markets they will also need to find new suppliers which could be difficult. Question 47 47. Inflation is a rise in the general price level Question 48 48. If inflation increased it would make planning more difficult as they would find it difficult to predict future costs. In addition inflation would mean ingredients were more expensive therefore they would either have to put prices up, potentially losing customers, or their profit margin would decrease. In addition if inflation rose sharply employees would demand higher wages therefore further increasing costs. Question 49 49. The Bank of England control inflation by manipulating interest rates to encourage or curb spending. Question 50 50. Interest rates are the cost of borrowing money
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Question 51 51. An increase in interest rates would mean that people would have less money to spend and therefore revenues would decrease. In addition an increase in interest rates would mean that they had to pay back more on any loans that they had taken out therefore costs would increase. These effects combined would mean less revenue and more costs resulting in lower profits. Question 52 52. They could focus their advertising on promoting the fact that the restaurant used organic and healthy

ingredients. They could introduce low fat options which were clearly identified. They need to ensure that they maintain the healthy image of their business to protect against this threat. Question 53 53. Economic growth refers to the rate at which all economic activity is increasing over a period of time, usually a year. Question 54 54. In the Eurozone predicted economic growth is increasing signifying that it is likely to be in the boom stage of the economic cycle. Question 55 55. Unemployment is falling in the Eurozone. Question 56 56. If unemployment decreases then more people have money to spend therefore you would expect revenues to increase. However if unemployment is too low it may be difficult to find employees, especially for low paid jobs such as those offered at Mobeen therefore to get workers you may need to pay higher wages or offer additional incentives. Question 57 57. As these countries are for a whole region it is difficult to know if specific cities will follow the same pattern. There may well be discrepancies between countries and regions. Question 58 58. In the Eurozone the newer countries are experiencing fastest rates of growth. Question 59 59. The figures are too general to back up the move to these specific cities. They show a positive economic forecast for the Eurozone as a whole however do not tell us about specific countries or cities. In addition, considerable research will need to be conducted into the viability of a venture in any of these cities as people have different tastes, fashions and traditions.
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Question 60 60. The UK still uses the pound therefore by moving into Eurozone countries they will be paying conversion costs which will increase their cost structure. In addition if the Euro becomes stronger it could be more expensive for them to locate in Eurozone countries if they are investing pounds. Alternatively Mark has been looking at

raising finance from banks in the Eurozone, if the Euro fell in value it would mean that finance was relatively more expensive for Mark to pay off. Question 61 61. The conflict has arisen as they are pursuing different strategies, Mark wants to grow rapidly whereas Suki wants to focus on UK operations. As they have different strategies and objectives for the business conflict was inevitable. Question 62 62. Their strengths are that they have a strong USP, they have built up to have a chain of stores, their weaknesses are that they have low capacity utilisation, high costs and rent and they have had negative publicity. Opportunities are to expand overseas, to expand into new markets e.g. sit down meals, delivery, ready meals, Threats are an increase in interest rates, competition, inflation Question 63 63. Any strategy can be proposed along as it is backed up. Practice Questions Unit 4 AS & A2 Business Studies Courses Business studies AS and A2 revision resouces, tips and techniques Different types of questions in AS examinations In AS Business Studies examinations, different types of question are used to assess your abilities and skills. Unit tests mainly use structured questions requiring both short answers and more extended answers. These questions are often linked directly to a given context, requiring you to read and study the stimulus material (a paragraph or short article about a real or imagined business situation. Short-answer questions These are occasionally set at AS Level. A short-answer question may test recall or it may test understanding. Short-answer questions often have space for the answers printed on the question paper. Here is an example (a brief answer is shown below): To what extent does taking out a franchise reduce the benefits of being an independent sole trader? [6] WJEC Specimen Paper
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Benefits may be reduced: e.g., a loss of independence in decisionmaking; reduced profits (royalties

payable to franchisor); dependent on general success of franchisor rather than own ability/success. Structured questions Structured questions are in several parts. The parts usually have a common context and they often become progressively more difficult and more demanding as you work your way through the question. A structured question may start with simple recall, then test understanding of a familiar or an unfamiliar situation. Most of the practice questions in this book are structured questions, as this is the main type of question used in AS Level Business Studies exams. Here is an example of a structured question that becomes progressively more demanding. Under the terms of the European Union's Common Fisheries Policy the landing of cod in the United Kingdom is to be substantially reduced. (a) Using supply and demand diagrams predict the likely effect of this measure on: (i) the price and quantity of cod sold; [3] (ii) the market for plaice. [3] (b) Discuss the effects that this measure might have on stakeholders in the fishing industry. [9] WJEC Specimen Paper When answering structured questions, do not feel that you have to complete one question before starting the next. The further you are into a question, the more difficult the marks are to obtain. If you run out of ideas, go on to the next question. You need to respond to as many parts to questions on an exam paper as possible. You will not score well if you spend so long trying to perfect the first questions that you do not reach later questions at all. Extended answers In AS Level Business Studies, questions requiring more extended answers may form part of structured questions, or may form separate questions (sometimes linked to a case study). These questions are often used to assess your abilities to communicate ideas, relate your knowledge to the case study in the question, and put together a logical argument. The correct' answers to extended questions are often less well-defined than those requiring shorter answers. Examiners may have a list of points for which credit is awarded up to the maximum for the question.

The quality of your written communication will be assessed in all questions. Marks will be allocated for legible text with accurate spelling, punctuation and grammar, and for a clear, wellorganised answer in which you use specialist terms effectively.
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Coursework Coursework may form part of your A Level Business Studies course, depending on which specification you study. You are normally asked to investigate some aspect of business activity. An example of coursework is as follows: you are asked to study how and why a firm has reorganised its manufacturing or service business. In undertaking this coursework, you could consider: the reasons behind the reorganisation the reorganisation plan staff resistance to change the change in communications how successful the reorganisation has been. Your coursework will be assessed using the Business Studies assessment objectives described above. Assessment of your coursework includes the use you have made of the key skills you have developed during the course. Exam Technique Links from GCSE Advanced Subsidiary Business Studies builds from GCSE Business Studies. This study guide has been written so that you will be able to tackle AS Business Studies from a GCSE Business Studies background. What are examiners looking for? Examiners use instructions to help you to decide the length and depth of your answer. State, define, list, outline These key words require short, concise answers, often recall of material that you have memorised. Explain, describe, discuss Some reasoning or some reference to theory is needed, depending on the context. Explaining and discussing require you to give a more detailed answer than when you are asked to describe' something. Apply Here, you must make sure that you relate your answer to the given situation (this is always good practice in Business Studies exams).

Evaluate You are required to provide full and detailed arguments, often for' and against', to show your depth of understanding. Calculate A numerical answer is required here.
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Dos Do answer the question. No credit can be given for good Business Studies knowledge that is not relevant to the question. Do use the mark allocation to guide how much you write. Writing more than necessary will not result in extra marks. Do use real-life business-based examples in your answers. These often help illustrate your level of knowledge. Do write legibly. An examiner cannot give marks if the answer cannot be read. Do use correct business language'. Marks will be lost if you fail to use terms appropriately. Don'ts Don't fill up blank spaces on the exam paper. If you write too much on one question, you may run out of time to answer some of the others. Don't contradict yourself. Present reasoned arguments for and against. Don't spend too much time on a part that you find difficult. Exam time is limited, and you can always return to the difficult part if you have enough time at the end of the exam. What grade do you want? Everyone would like to improve their grades but you will only manage this with a lot of hard work and determination. Your final A Level grade depends on the extent to which you meet the assessment objectives. The hints below offer advice on how to improve your grade. For a grade A You have to: show in-depth knowledge and critical understanding of a wide range of business theory and concepts; apply this to familiar and unfamiliar situations, problems and issues, using appropriate numerical and non10/
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numerical techniques; evaluate effectively evidence and arguments; and make reasoned judgements in presenting appropriate conclusions. You have to be a very good all-rounder to achieve a grade A. The exams and coursework test all areas of the syllabus, and any weaknesses in your understanding of Business Studies will be found out. For a grade C You have to have a good understanding of the aspects shown in the grade A bulletpoints, but you will have weaknesses in some of these areas. To improve, you will need to work hard to overcome these weaknesses, and also make sure that you have an efficient and effective exam technique. As a rough guide you will need to score an average of between 50% and 60% for a grade C, and over 75% for a grade A.. Four steps to successful revision Step 1: Understand Study the topic to be learned slowly. Make sure you understand the logic or important concepts Mark up the text if necessary - underline, highlight and make notes Re-read each paragraph slowly. Step 2: Summarise Now make your own revision note summary: - What is the main idea, theme or concept to be learned? - What are the main points? How does the logic develop? - Ask questions: Why? How? What next? Use bullet points, mind maps, patterned notes Link ideas with mnemonics, mind maps, crazy stories Note the title and date of the revision notes (e.g. Business Studies: Marketing, 3rd March) Organise your notes carefully and keep them in a file. This is now in short term memory. You will forget 80% of it if you do not go to Step 3. GO TO STEP 3, but first take a 10 minute break. Step 3: Memorise
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Take 25 minute learning bites' with 5 minute breaks After each 5 minute break test yourself: - Cover the original revision note summary - Write down the main points - Speak out loud (record on tape) - Tell someone else

- Repeat many times. - The material is well on its way to long term memory. You will forget 40% if you do not do step 4. GO TO STEP 4 Step 4: Track/Review Create a Revision Diary (one A4 page per day) Make a revision plan for the topic, e.g. 1 day later, 1 week later, 1 month later. Record your revision in your Revision Diary, e.g. Business Studies: Marketing, 3rd March 25 minutes Business Studies: Marketing, 5th March 15 minutes Business Studies: Marketing, 3rd April 15 minutes ... and then at monthly intervals. Business Organisations This section will cover the following topics Structure of the UK economy The public sector Main features of the private sector Stakeholders Organisations in the private sector Structure of the UK economy After studying this section you should be able to describe briefly the two sectors of the UKs mixed economy name the main types of organisation in both sectors The private and public sectors Businesses in the UK are normally grouped into private sector and public sector organisations. Private sector firms are set up by individuals, entrepreneurs who seek to make profit from their business activities. Although many private sector firms are controlled by entrepreneur(s), they may be owned by different people (or organisations), for example, companies owned by shareholders, either as private or institutional (organisationbased) investors. This may lead to a conflict between ownership and control.
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As well as making profit, entrepreneurs may have other objectives, e.g.: job satisfaction employment power and prestige. The public sector consists of those organisations owned and/or financed by central and local government. This sector provides goods and services to the community through public corporations, local government and other statutory agencies (e.g. the National Health Service). The profit motive is not so prominent: the emphasis in the

public sector is on providing for the community by the community, using funding supplied through taxes and government borrowing. Main features of the private sector After studying this section you should be able to explain the importance of profit to an entrepreneur describe the relevance of incorporation and limited liability to business explain the nature and purpose of mission statements and corporate objectives Entrepreneurs and profit Why is profit important to an entrepreneur? It provides a measure of success for the business, as well as acting
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as an indicator to others. Prospective lenders use the profit figure to decide whether to lend, and potential entrepreneurs look at present profit levels when deciding whether to enter the industry. Profit, as the reward for taking risk, is not guaranteed: many firms make losses and close. Even when profit is made, it may be small and regarded by the entrepreneur as poor reward for risk-taking: the firms profitability is too low. This results in continual change in the structure of the private sector. Economists view profit as the reward of one of the factors of production (enterprise). Figure 2.3 shows that there were 186,300 registrations in the UK in 1998, and 155,900 de-registrations (1 in 9 of the businesses registered at the start of the year). The number registered in 1998 had risen by 2% on 1997, to its highest level for five years. Figure 2.4 illustrates the move from the primary and secondary sectors to the tertiary sector. In 1998, the number of registrations fell compared with 1997 in agriculture/fishing (600) and manufacturing (900): in the same period, de-registrations for agriculture/fishing and manufacturing both rose by 100. The net result was a loss of some 4,000 businesses, compared with a net gain of nearly 33,000 in business services: this industry grew by over 100,000 in the five years to 1998, to 1 in 4 of all VAT registered UK businesses. KEY POINT: Individuals in the private sector try to make profit by acting as entrepreneurs in the
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market-place. The profit motive forms the foundation of the private sector. Legal liability and legal status

Most large commercial companies are limited by share and must include limited or plc as appropriate in their name. This acts as a warning to those trading with such a company because any debts it incurs from trading may not be recoverable due to the limited liability of its owners (shareholders). Where a limited company cannot pay its debts from its own financial resources, it cannot make the owners use their personal finances to meet these debts. Sole traders and partnerships have unlimited liability: if business debts cannot be met from the firms own resources, the owner(s) can be forced to sell personal assets to cover these business debts. Limited liability encourages greater investment than would otherwise take place, and ensures a demand for stocks and shares. Other companies, for example some examination bodies and professional associations, are limited by guarantee; members of such a company guarantee its business debts, up to a given maximum. KEY POINT The benefit of limited liability to the economy is that it encourages people to risk owning and/or investing in companies, because they know their liability (losses) will be limited to the amount they have agreed to invest. Another important difference between these forms of business ownership is in their legal status. Limited companies are incorporated bodies. Incorporation means that a company has a separate legal existence from its members (shareholders). Sole traders and partnerships are unincorporated businesses and do not have a legal existence that is separate from that of the owners. A limited company has the legal authority to: own property enter contracts in its own name sue (and be sued) in the courts. Goals and objectives Our reason for being To dedicate our business to the pursuit of social and environmental change. To creatively balance the financial and human needs of our stakeholders: employees, franchisees, customers, suppliers and shareholders. To courageously ensure that our business is ecologically sustainable: meeting the needs of the present

without compromising the future. To meaningfully contribute to local, national and international communities in which we trade, by adopting a code of conduct which ensures care, honesty, fairness and respect.
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To passionately campaign for the protection of the environment, human and civil rights, and against animal testing within the cosmetics and toiletries industry. To tirelessly work to narrow the gap between principles and practice, whilst making fun, passion and care part of our daily lives. Mission statement, The Body Shop International plc, 1999 Firms set themselves goals to achieve. The mission statement of a company states its overall aim and purpose. This is then translated into corporate objectives. KEY POINT: Corporate objectives become measurable when developed into more detailed functional objectives: these are expanded into individual objectives for employees to achieve. Achievement can be measured through appraisal of individuals and by adopting a management by objectives (MBO) approach. QUESTIONS Question 1 State two reasons why profit is important to an entrepreneur. Question 2 What is the main difference between an incorporated and an unincorporated business? Answer It acts as income, i.e. the reward for enterprise; it is also a measure of success. Answer An incorporated business has a separate legal existence. An unincorporated business has no separate legal existence, and therefore legal actions must be taken (or defended) personally by the owner(s). Organisations in the private sector
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After studying this section you should be able to evaluate sole traders and partnerships as forms of business ownership compare and contrast limited companies with unincorporated businesses analyse the divorce of ownership and control outline the business nature of (a) franchises; (b) co-operatives; (c) mutuality in the UK economy Sole Traders and Partnerships

A sole trader (proprietor) business exists when, even though there may be a number of employees, there is only one owner. The sole trader form of business ownership tends to occur where: personal services are provided little capital is needed to start up business large-scale production is not a feature. Partnerships are also unincorporated businesses with unlimited liability. They are traditionally associated with professions such as accountants and lawyers, where capital outlay is small. The minimum number of partners is two and the maximum is (normally) 20. Partners often draw up a written agreement expressing the rights and duties of individual partners with reference to:
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profit-sharing amounts of capital to be contributed the different business responsibilities of each partner regulations concerning the withdrawal of profits by individual partners regulations on introducing new partners and the dissolution (ending) of the partnership. The rules laid down in the Partnership Act 1890 apply where there is no agreement. Profits and losses are shared equally. Partners loans receive 5% interest per annum. Each partner has an equal say in how the partnership operates. A partnership, like a sole trader business, is simple to establish. Other similarities are that the partnership can also keep its financial affairs private, and that the owners still face the drawback of unlimited liability. If a sole trader is thinking of converting to a partnership, the key issues to consider are: Limited companies Incorporation gives a limited company a separate legal existence from its owners (shareholders). There are over 1 million limited companies registered in the UK, varying in size from small familyowned businesses to large PLCs. Private and public companies A limited company is classed as private (Ltd) unless its memorandum of association states that it is a public limited company (PLC). A private company cannot advertise its shares for sale to the public or through the Stock Exchange: its share capital must not exceed 50,000. PLCs must have a minimum 50,000 share capital, and can sell their shares to the public and may be quoted on

the Stock Exchange. A Stock Exchange acts as the market for second-hand stocks and shares (securities). It therefore encourages investment in business, offering investors a degree of protection through its strict rules for admitting firms. The Alternative Investment Market (AIM) exists for companies that are too small (or young) to be quoted on the London Stock Exchange. The Stock Exchange in London is one of the largest in the world. In 1999, changes were made to how the London Stock Exchange classifies shares. These changes reflected the
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increasing importance of information technology companies, anticipated the expected effects of Europes single currency, and helped investors to invest in shares less affected by economic recession (by dividing stock into cyclical and non-cyclical categories). KEY POINT: PLCs find it easier to raise finance, tend to be much larger than private companies, and find ownership and control more clearly separated. The comparison with sole traders and partnerships Limited liability is offered to investors, encouraging greater investment. Greater investment = greater size = greater economies of scale. Through its separate legal existence from the owners, the company owns assets, takes legal action in its own name, and does not face problems of continuity when an owner dies, retires or otherwise leaves. but Greater expense and more formalities are incurred in setting up the company. Its business affairs are less private. Greater size may result in diseconomies of scale. Owners of private companies may face difficulties in selling shares. Ownership of PLCs can be transferred (via the Stock Exchange) against the wishes of the directors, and shareholders may seek to operate short-term policies to make short-term profits, all leading to greater instability. Registering a company The Companies Act 1985 sets out the legal requirements to create and run a company. All companies are registered at the Companies Registration Office. Limited companies must submit annual returns summarising

changes to their affairs, and annual financial statements, including the directors report, profit and loss account and balance sheet, and the auditors report. The Memorandum of Association governs the relationship of the company with the outside world. Its clauses
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include: Name - The proposed company name Situation - The address of the registered office Objects - The purposes for which it was formed (stated in general terms) Liability - A statement that its members have limited liability Capital - The amount of capital registered and the types of shares Association - Directors names and addresses The Articles of Association govern the internal workings of the company, including details of directors (number, rights and duties), the conduct and calling of meetings, and the division of profits. Divorce of ownership and control This phrase is closely associated with PLCs: shareholders own the company but do not control it. Few shareholders have a direct say in the daily running of the PLC, because through the Annual General Meeting (AGM) they appoint specialist directors to exercise effective day-to-day control on their behalf. Once ownership and control is separated in this way, the decisions made by the directors the controllers may clash with the wishes of (some of) the shareholders the owners. A common example is where the shareholders may wish to see a policy of profit maximisation, which may not be the wish of directors who see long-term growth as a more important strategy to pursue. Question 3 Name three occupations where sole traders are commonly found. Question 4 State two reasons why sole traders may choose to convert their businesses into limited companies rather than partnerships. Answers Examples would include hairdressers, builders, plumbers and electricians. Answer To gain limited liability; easier to obtain more capital Other forms of ownership Franchises

These businesses use the name and logo of an existing company. Franchising is a major growth area in the UK economy: by the end of 1999 there were nearly 600 business format franchises in the UK, comprising almost 30,000 franchisees who employed nearly a quarter of a million people. Examples include The Body Shop, which opened its first franchise in 1977, Thorntons Confectionery,
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Prontaprint Ltd and ANC package delivery service. Some 70% of McDonalds 26,500 outlets worldwide are franchised (1999). Franchisees need the use of a car, a telephone, a reasonable size room at home (or use of the garage), plus plenty of energy and determination. Card Connection will provide everything else needed to make the business a success. Source: Card Connection, 1999 Our commitment to franchising derives from sound business reasons. Fundamental to our long term success story has been the innovative ideas and contribution of our franchisees. Without them, McDonalds would not be what it is today. Source: McDonalds, 1999 The franchisee buys the franchise, entering into a contract with and paying a fee to the franchisor (the company). Typically: The franchisee: agrees to follow set rules, e.g. layout of premises and product standards buys only from the franchisor or other named supplier The franchisor: supplies the decor and assists with layout allows the franchisee to use the product and the logo The franchisor can expand without making a large capital investment, since the franchisee provides the capital. The company knows that its franchisees, who are not on a salary, will be highly motivated by the direct financial incentive to make their franchise a financial success. The franchisee gains a recognised product or service backed by successful marketing and business methods, and receives expert business support: success is therefore more likely than for an independent entrepreneur. Types of franchise agreements include: manufacturerretailer (some petrol stations and car dealers)

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wholesalerretailer (Spar and other voluntary groups) trademarkretailer (fast food outlets). The British Franchise Association (BFA) regulates franchising in the UK. The BFA is a non-profitmaking body, promoting ethical franchising through its member franchisor companies. The franchisee agreement grants the right and authorisation to operate a specific McDonalds restaurant, usually for a period of 20 years. These rights include the use of McDonalds trademarks, restaurant decor designs, signage and equipment layout, the formula and specifications for menu items, use of McDonalds method of operation, inventory control, book-keeping, accounting and marketing and the right to occupy the restaurant premises. In return, the franchisee agrees to operate the business in accordance with McDonalds standards of quality, service, cleanliness and value. The franchisee is expected to become involved in their communitys civic and charitable activities. Training is a top priority to ensure the uniformity of the operation and the consistent quality of staff. Each franchisee has constant support through their own McDonalds consultant who is always available for help and advice, visiting the restaurant on a regular basis. Training facilities are free and available to the franchisee and their management team. Extract from franchise agreement, McDonalds. This extract is a clear indication of how a franchisorfranchisee relationship can operate. Co-operatives Although the larger UK co-operatives operate as limited companies, owning capital is not the dominating factor in the co-operative movement. Most cooperative societies exist to provide a service for their member-owners and for the public. Control is shared democratically, with each member having a single vote: trading surpluses (profits) are often distributed to the members in proportion to their trade with the society. Consumer co-operatives, where customers collectively own the business, are found in Europe and Japan: types of these in the UK include housing co-operatives and credit unions (formed to allow people to benefit from

collective saving and borrowing). There are over 4,000 local co-operative retail societies (CRS) the Co-ops in the UK. Many of their products come from the Co-operative Wholesale Society Ltd (CWS): its role is to buy in bulk and to supply the retail coops with its own (about 3,000 own-brand) goods. The CWS is also the UKs largest farmer. Other co-operative activities include banking and insurance. The Co-operative Retail Trading Group (CRTG) links individual retail cooperatives. By 1999 the CRTG accounted for over 90% of cooperative food buying power. Producer (worker) co-operatives also exist. There are over 1,000 worker cooperatives, many of them having existed previously in a different ownership form: printing/publishing, fashion/textiles and agriculture are popular areas. ICOM, the federation of worker co-operatives, was formed in 1971 and supports its members by providing training and business advice: local Co-operative Development Agencies also support these worker co-operatives.
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Mutuality Some building societies and life assurance firms are non-profitmaking organisations, existing for the benefit of their members (customers). In the 1990s, many changed status (e.g. the Halifax converted from a building society to a bank, becoming a limited company), producing cash windfalls for the existing members, many of whom became shareholders. KEY POINT: Many commentators argue that the new profit-focused companies now operate in the interests of their new owners (shareholders), having to meet new priorities such as profitability and dividend payment: this can be at the expense of the old priorities based on satisfying the old owners (customers). Question 6 Identify two differences between a franchisee and a sole trader. Question 5 What forms of co-operative exist in the UK? Answer Franchisee operates within framework set by franchisor sole trader is independent. Franchisee pays royalty to franchisor sole trader keeps all net profit (after tax).

Answer Consumer (retail) co-operatives; producer (worker) co-operatives. The Public Sector After studying this section you should be able to describe the nature, operation and control of a public corporation compare and contrast the benefits and drawbacks associated with (a) nationalisation and (b) privatisation Public corporations, nationalisation and privatisation Public corporations have a separate legal existence through the Act of Parliament creating them. Their assets are owned by the state on behalf of the community. Their objectives, whilst influenced by commercial considerations, often emphasise social aspects. They normally have financial targets to achieve, such as a target return on capital employed. A public corporation is controlled: by its government minister and through a board appointed by the minister; by a consumer council protecting the consumer interest; through being audited by the Competition Commission.
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Nationalisation takes an industry into public ownership. Industries such as coal, gas and the railways were nationalised following the Second World War. By the end of the 1970s, however, many nationalised industries were regarded as inefficient and over-subsidised monopolies, lacking competition and being in a position to exploit their monopoly status. The governments response was to privatise return to private ownership most nationalised industries. A July 1999 White Paper gave the Post Office greater commercial freedom to do business, operating as a PLC whilst remaining in the public sector (the government owning all the shares). The White Paper proposed to cut its monopoly on letters from items costing 1 or less to items costing 50p or less; in return, the Post Office will be able to keep far more of its profits to invest in improved services. KEY POINT: A criticism of recently privatised industries is that their monopoly power may still remain. These privatised monopolies are therefore regulated by watchdogs, e.g. OFGAS (gas), OFTEL (telephones) and OFWAT (water). Other criticisms include: Privatising natural monopoly industries may mean losing economies of scale.

Private monopolies are likely to be less well regulated than public sector ones. Revenue from state-owned assets has been used for government current expenditure rather than for longterm investment. Deregulation has also been used by the UK government (and the EU) to stimulate competition. Examples include transport services, and broadcasting. Recent privatisation in the UK includes: 1979 BP 1981 British Sugar 1983 Forestry Commission 1984 Sealink 1988 British Steel, Rover 1990/91 Electricity (supply and generation)
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Stakeholders After studying this section you should be able to: define the term stakeholder and give relevant examples compare the shareholder concept with the stakeholder concept The nature of stakeholders Stakeholders are individuals or groups that have an influence on, or are influenced by, an organisations decisions. Shell companies recognise five areas of responsibility: 1 To shareholders 2 To customers 3 To employees 4 To those with whom they do business 5 To society Source: Royal Dutch/Shell Group of Companies, 1997 The organisations directors and managers face a possible conflict between their duty to stakeholders and their duty to shareholders. Because shareholders appoint directors and (through the directors) employ managers to run the firm, directors and managers should undertake policies for the benefit of the shareholders. This shareholder concept implies policies maximising share price and dividend should be followed at the expense of other policies. The objectives of other stakeholder groups may conflict with this, and there may also be conflict between the objectives of any two stakeholder groups. For example, improving employee morale and efficiency by training

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will increase costs and affect profit (in the short term); by establishing closer links with a supplier, a company may start using new manufacturing processes that will affect its relationships with the local community. In the longer run there may not be a conflict: improvements for employees, better links with suppliers and customers improve quality, efficiency and profitability, and therefore bring higher profits. Question 7 Identify three differences between a public corporation and a PLC. Question 8 Give two disadvantages to a consumer when buying from a monopoly. Answer Corporations owned by the state, PLCs by shareholders; corporations controlled by minister/board, PLCs by Companies Acts; corporations primary objective normally to serve general public, PLCs, normally to optimise profit. Answer Little consumer choice; higher prices through lack of competition. Sample Question & Model Answer
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Douglas McGregor Theory X and Theory Y McGregor developed two theories of human behaviour at work: Theory and X and Theory Y. He did not imply that workers would be one type or the other, the two theories were two extremes - with a spectrum of possible behaviours in between. Theory X
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Workers dislike work and will avoid it where possible Threat of punishment will encourage work to be done and objectives met Individuals who lack ambition, dislike responsibility and prefer to be led Managers impose a management system of coercion, control and punishment Theory Y Workers are simply ordinary people who apply self-control and self-direction themselves in order to complete targets without threat of punishment Workers perform best when listened to and their ideas appreciated Treat workers with respect, and they will work harder in return Managers organise social events and listen to staff Marketing

Financial Information After studying this section you should be able to: state the main elements of financial accounting describe, and give a relevant business example of, the main accounting concepts Elements and users of financial information Stakeholders use financial information. They may be: internal (management and employees) or external, e.g. suppliers, customers, lenders. In December 1999 the Accounting Standards Board (ASB) published its Statement of Principles for Financial Reporting. Although not a financial accounting standard as such, this influential Statement provides guidance in applying financial accounting standards, and identifies the key elements of financial statements as: Assets and Liabilities Ownership interest (the accounting equation of Assets minus Liabilities) Gains and Losses (income and expenses) Contributions from owners (investments) and Distributions to owners. Accounting concepts Accounting concepts act as basic rules for accountants to follow. One of the financial accounting standards, SSAP 2 (Disclosure of Accounting Policies), identifies four key concepts. Accruals financial accounts are prepared not on a cash basis but on an earnings (accruals) basis. Sales and purchases are recognised in the period in which they are made, and not merely when the cash is received or paid. Therefore, a company with a financial year running JanuaryDecember and making a credit sale in December 2001, but not receiving the cash until January 2002, will show the sale as increasing its 2001 profits. Prudence where alternative procedures or valuations are possible, the one selected should give the
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most cautious presentation of the firms financial state. Losses therefore tend to be anticipated, but profits are never anticipated (this is why, for example, closing stock is valued at cost price rather than selling price: to value using the latter figure assumes the stock will be sold and a profit made). Going concern the assumption is that the firm will continue for the foreseeable future. This means that its assets will normally be valued at their (historical) cost rather than at their break-up or resale value.

Consistency similar items should be given similar accounting treatment. If, therefore, it is the firms policy to use the straight-line depreciation method for existing vehicles, any new vehicle bought will be subject to the same treatment. Other relevant accounting concepts The entity concept accountants treat every business as an entity which is separate to, and distinct from, its owners. The money measurement concept accounts only record and analyse those items that have a monetary value (thus, for example, the quality of management and other employees is not directly considered by accountants). The duality concept every transaction has two effects (this forms the basis of doubleentry bookkeeping). The historical cost concept items are normally stated in accounts at their historical cost, i.e. the cost that was paid for them (revaluation can take place,e.g. property is often shown at a higher value than its original cost). The materiality concept only items that are sufficiently material (important) will affect the true and fair view that must be given by accounts. These concepts provide a degree of objectivity in financial accounting: using historical cost for all items is a good example of this. The materiality concept illustrates where financial accounts may still be subjective: what is material in one firm may not be regarded as material by the accountant in another firm. Key Features of Final Accounts After studying this section you should be able to: distinguish between the profit and loss account and the balance sheet explain the purpose, and effect, of depreciation in final accounts outline the reasons for distinguishing between capital and revenue expenditure The financial statements UK law recognises a company as a separate legal person, an entity that is distinct from its owners. It can therefore sue and be sued, and take out contracts in its own name. Sole traders and partnerships, however, are not separate entities from their owners in the eyes of the law. In financial accounting, the (business) entity concept requires accountants to treat all businesses including sole traders and partnerships as separate entities from

their owners. The main financial statements are the profit and loss account and the balance sheet. Profit and loss account
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is an income statement shows calculation of profit information from expense and revenue accounts Balance sheet shows net assets and capital employed summarises the financial position information from asset and liability accounts Depreciation in financial statements The consistency concept ensures that the same calculation method straight line, reducing balance and revaluation are the most popular ones will normally be used for similar assets. The accruals concept, where costs are matched to the period to which they refer, means that each years profit will be charged with its own share of the total depreciation. The firm can change its depreciation policy and method of calculation, but only for good reason. The purpose of applying depreciation is therefore to adjust annual profits, to avoid charging the full amount of depreciation in a single year (which would distort that years profits). This leads to a fairer comparison between the profit figures for the years over which the asset is owned. Depreciation is subjective: the accountant has to decide which method of calculation to use. If selecting the straight-line method, decisions must be made concerning two of the three figures involved in the calculation (the estimated life of the asset, and its expected resale value); if the reducing balance method is used, the percentage written down each year must be decided. Since depreciation is a provision, an adjustment will be made when the asset is disposed of. The firm will make either a loss or a profit on sale, which is recorded in the profit and loss account. Over the full life of the asset, the total depreciation charged will be the same regardless of method selected and amounts charged, because of this final adjustment. For this reason, total profits over the assets life will also be the same, even though the individual figures will vary. Capital and revenue expenditure in financial statements

Capital expenditure appears in the balance sheet Revenue expenditure appears in the profit and loss account This is an important distinction in the financial statements because: If revenue expenditure is wrongly classified as capital expenditure: expenses will be understated net profit will be overstated If capital expenditure is wrongly classified as revenue expenditure: expenses will be overstated
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net profit will be understated KEY POINT - Capital expenditure does not affect profit calculation: revenue expenditure does. Interpreting Final Accounts After studying this section you should be able to: explain the difference between profitability, liquidity, efficiency and debt/gearing calculate the main accounting ratios reach appropriate conclusions on the basis of your calculations Final accounts and their interpretation Although accounts must be kept for external purposes, e.g. to assess and calculate the firms tax bill, one result of keeping these financial records is to allow analysis to take place. This analysis has: an internal focus, when the firm compares its present performance with past records in order to establish trends and to indicate efficiency an external focus, when the firm assesses its competitiveness by comparing results with other organisations in the same industry. Profitability Profitability measures a firms total profit against the resources used in making that profit. On its own, profit is a relatively meaningless figure: it needs comparing against figures such as turnover and capital employed. Profitability ratios Return on capital employed (ROCE) = net profit / capital employed x 100 This shows the profitability of the investment by calculating its percentage return. The return shown can then be compared with the expected return from other investments. The normal figure used by companies is profit on ordinary activities before taxation rather than after tax (the tax charge may vary from year to year, so using profit after tax would not lead to comparing like with like). If PBIT profit before interest and tax is used, the profit figure is compared with capital employed, i.e. share capital plus long-term loan capital.

ROCE can be sub-divided: ROCE = Profit margin Asset turnover PBIT / capital employed = PBIT / sales sales / capital employed The profit margin ratio (see below) shows whether the company is making a low or a high profit margin on its sales; the asset turnover ratio measures how efficiently the companys net assets are being used to generate its sales. Gross profit margin (GP ratio, or GP %) = gross profit / turnover x 100
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This indicates the percentage of turnover net sales (sales less VAT and any returns) represented by gross profit. If the gross profit margin is 30%, this means the firms cost of sales are 70% of its turnover (because turnover = cost of sales + gross profit). Net profit margin (NP ratio, or NP %) = net profit / turnover x 100 This shows the percentage of turnover represented by net profit, i.e. how many pence out of every 1 sold is net profit. The NP margin will fall if the GP margin has fallen and rise if the GP% has increased: but it is also affected when the firms other expenses as a percentage of turnover have changed. Liquidity Liquidity is the amount of cash a firm can get quickly in order to settle its immediate debts. Although a firm can survive in the short term without profit, it cannot survive for long without sufficient liquidity. Liquid funds consist of: cash in hand and at bank short-term investments and deposits trade debtors. The cash (or operating) cycle Examining the cash cycle shows the following: the timing of cash flows will not necessarily coincide with sales and purchases (cost of sales) allowing and taking credit will cause this difference delays also occur with cash receipts, through allowing credit or increasing the credit period, and by holding additional stock cash payments may be delayed through taking credit. Liquidity ratios Liquidity ratios help establish whether a firm is overtrading, expanding without sufficient long-term capital. This puts pressure on its working capital, the excess of current assets over current liabilities.

Working capital (current) ratio = current assets (CA):current liabilities (CL) If current liabilities exceed current assets, the firm may have difficulty in meeting its debts. Extra short-term
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borrowing, to pay off creditors, costs the firm money (interest). If the firm sells assets to help meet its debts, it risks loss of production and future expansion. Liquid ratio (Acid test or Quick assets) = CA minus stock:CL Using this ratio lets us see whether the firm can meet short-term debts without having to sell stock, which is regarded as the least liquid current asset (and the prudence concept encourages accountants to assume the firm will not automatically sell realise its stock). 1:1 seen as ideal Again if it is too high means that the business is very liquid may be able to use the cash for other activities to increase performance If it is too low then the business may face working capital problems Some types of business need more cash than others so acid test would be expected to be higher Debtors collection period (Debtor days) = debtors / sales x 365 This liquidity (or efficiency) ratio shows the time, measured in average days, that it takes debtors to pay the firm. Creditors collection period (Creditor days) = creditors / purchases x 365 This ratio calculates the average length of credit the firm receives from its suppliers. Window dressing This term is used to describe techniques for improving a companys balance sheet position, in particular its apparent liquidity. Examples include: paying additional money into the bank account just before the year end, in order to boost the cash balance (the amount is then withdrawn later) using inter-group transfers one cash-rich company in a group forwards a cheque to another group company with an overdraft, then cancels the cheque after the year end (this hides the other companys overdraft, which would otherwise have to be shown in the group accounts) undertaking sale and leaseback just before the year end. SSAP 17, Accounting for post balance sheet events, helps control window dressing by forcing companies to reverse transactions taken before the year end, if these transactions were made to alter the appearance of the

companys balance sheet. Liquidity, associated with cash flow, measures the firms ability to survive in the short run. Profitability is a clearer indicator of its ability to survive in the longer term. Asset efficiency Firms need to use their assets as efficiently as possible. The efficiency of both current and fixed assets can be measured.
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Asset efficiency ratios Rate of stock turnover (Stockturn) = cost of sales / average stock (stated as times per period) The purpose is to calculate how frequently the firm sells its stock: if stock turnover is slowing, the firm is holding more stock than before, it may be facing problems selling its products, or it may have bought additional stock to take advantage of discounts offered. An alternative calculation to display stock days is average stock / cost of sales x 365 This is a useful analysis when used in conjunction with debtor days and creditor days in showing cash-flow timings. Asset turnover sales / net assets This secondary ratio from ROCE (see above) assesses the value of sales generated by the net assets representing the capital being employed in the firm. It illustrates how efficiently the firm is using its assets to generate turnover. Debt and gearing The debt ratios show how much the company owes in relation to its size. This analysis indicates whether lenders are likely to loan additional funds given the level of the companys debt. Gearing is important when additional capital is required. If a company is already highly geared, it may find it difficult to take out further loans. Also, the more highly geared the company, the greater the risk that the shareholders will not receive a dividend distribution. A highly geared company having external loans may find that, because it must pay a large amount of interest annually, the lenders force it to sell assets to generate payments: if their loans are secured on assets, they may remove the assets if interest payments are not met. Debt and gearing ratios Debt ratio = Ratio of total debts to total assets

50% is often regarded as the generally accepted maximum figure: again, an important consideration is whether this figure is rising or falling. Gearing = prior charge capital / total long-term capital (long-term loans + preference shares) Looks at the relationship between borrowing and fixed assets. This is an efficiency ratio This analyses the different types of payments made to capital. Companies with more than 50% prior charge capital are called high-geared: those with less than 50% are low-geared. Gearing Ratio = Long term loans / Capital employed x 100 The higher it is the greater the risk the business is under if interest rates increase Debt/equity ratio = prior charge capital / (ordinary share capital + reserves)
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This gives similar information to the gearing ratio. Interest cover = PBIT / interest charges The interest cover ratio shows if the company is making sufficient profits (before interest and tax) in order to pay interest costs easily. A companys gearing should be assessed from the differing viewpoints of the directors, the investors (shareholders), and the actual and potential lenders. Investment Actual and potential shareholders are interested in assessing the value of an investment in (ordinary) shares of a company. Since the value of a listed company is its market value, some of these ratios take account of the share price as well as the information in the published accounts. Shareholders are normally interested in two aspects of their investment: the share price (any increase here provides capital growth), and the dividend received, which forms the income element. As a result, companies can often be under pressure to adopt policies that will ensure adequate short-term profits (e.g. to finance dividend distribution): this may conflict with their plans for long-term growth. Investment ratios Earnings per share (EPS) = profit available for ordinary shareholders / number of ordinary shares This represents the return on each ordinary share, and is nowadays stated in the published accounts. Dividend cover = EPS / net dividend per ordinary share The dividend cover shows that proportion of profit available for ordinary shareholders which has been distributed, and that proportion which has been retained to help fund future growth. For example, a cover of two

times indicates half the available profits have been distributed and half retained. Price/earnings (P/E) ratio = Ratio of the current share price to the EPS The higher the P/E ratio, the greater the confidence shareholders have in the company. It is particularly important to compare this ratio to those of other companies in the same industry. Dividend yield = share dividend for the year / current market value of the share (ex dividend) This indicates the return the shareholder is expecting on the share. Cost Analysis & Decision-making After studying this section you should be able to: classify and analyse a range of costs evaluate absorption costing, budgetary control and standard costing as control and planning methods
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Absorption costing Allocation, apportionment and absorption Overheads are allocated when the cost is incurred wholly by a single department or cost centre. The overhead can then be charged exclusively to that cost centre. Overheads have to be apportioned when the cost is incurred by more than one cost centre. A good example is factory rent, with the total cost having to be shared between all relevant cost centres in the factory. The basis of apportionment will vary according to the nature of the overhead. For example:
Overhead Possible basis of apportionment Rent and rates Floor area Lighting and heating Volume or floor area Equipment depreciation Cost or book value of equipment Maintenance staff Hours clocked for each department Stores staff Value of material requisitions Administrative support: e.g. personnel and canteen costs Number of employees

In absorption costing, all overheads (indirect costs) must be absorbed, i.e. recovered, by the products, otherwise there will be no source of income to pay for these overheads. For example, if a products share of total overheads comes to 300 000, this amount needs to be recovered throughout the period when the product is sold. Absorption methods include:

direct labour hours e.g. in a garage, if the budgeted number of direct labour hours is 100 000, each hour spent working on a car will be charged with an extra 3 (i.e. 300 000/100 000), so by the end of the period the 300 000 costs will be recovered machine hour rate e.g. where machinery is heavily used, budgeted machine hours being 50 000 in the period, each hour that a machine is used will be charged at 6 (300 000/50 000). Costing methods There are two main categories: specific order costing costs are charged directly to cost units such as job, batch and contract costing, and continuous operation costing costs have to be apportioned to cost units such as service and process costing.
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Job costing is used when work is undertaken to a customers specific requirements: all costs are charged to the job. Contract costing is similar, though the contract (e.g. for construction of a ship) tends to be for a longer duration. Batch costing is used when a quantity of identical articles (such as similar houses on an estate) are manufactured. Service (or function) costing is concerned with establishing the costs of services rendered, and controlling these costs (e.g. within a hospital). The process costing method is used when products are made in a single process. KEY POINT - The costing method chosen must suit the manufacturing method. Budgeting and forecasting Management by exception Budgeting helps control the finance available to a business. Budgetary control produces variances that allow managers to compare the expected (budgeted) performance of their department with its actual performance. These individual variances can be broken down into sub-variances. For example, a favourable sales variance might consist of a favourable volume variance more are sold than had been planned and an adverse price variance (the actual selling price is below the budgeted level, which may be the reason for the favourable volume variance). Variances may be controllable by managers. In the above example the sales manager may have made a

conscious decision to lower prices and increase sales volume, the products price elasticity of demand leading to the increase in total revenue (the overall favourable variance). Other variances may be noncontrollable, e.g. an adverse labour variance being due to a national wage agreement. Managers can only be held responsible for the variances they can control. Flexing the budget Budgets and variances must be adjusted for changes in volume. Comparing production budget figures based on an expected output of, say, 3000 units with the actual costs based on an actual output of 3500 units is not comparing like with like. The budget figures have to be flexed scaled accordingly, and these amended budget figures can then be compared accurately with the actual ones. Standard costing A standard cost is a cost estimated by managers from information on expected prices and efficiency levels of production. Like budgets, standard costs provide targets for managers against which their individual performances can be appraised. It is linked with budgetary control: for example, it is easy to establish sales and production budgets once standard costs have been set. There are three main variance groups in standard costing: sales variances the sales price variance measures the difference between the standard and actual selling prices, and the sales volume variance measures the effect on profit of the difference between the actual and expected numbers sold production cost variances total cost variances are calculated for direct labour, direct materials and production overheads, each being subdivided to show price and quantity subvariances.
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Direct labour: a rate variance based on the difference between actual and standard pay; an efficiency variance based on whether output is above or below standard. (standard actual rate) actual hours worked (standard actual hours) standard hourly rate Direct materials:

a price variance based on the difference between actual and standard unit prices; a usage variance based on the difference between actual and standard quantities. (standard actual price) actual quantity (standard actual quantity) standard price Production overheads: variances based on differences between expected and actual volumes of use, efficiency and expenditure. Fixed overhead total variance, subdivided into expenditure (budgeted actual expenditure) and volume ( [budgeted actual volume] unit absorption rate)

KEY POINT - Management accounting draws on financial accounting information, but also involves detailed internal analyses through setting budgets and standard costs. Forecasting cash flow Any forecast may be inaccurate: for example, any difference between budgeted and actual sales will affect cash inflows. Managers must therefore monitor the accuracy of the cash flow forecast. If it indicates that cash flow must be improved, the managers may: calculate and review the cash cycle factor debtors, use sale/leaseback or examine other ways of controlling working capital (for example, by reducing stock levels). It is just as important to identify large cash surpluses as well as large cash deficits, to ensure surplus cash is used efficiently. Contribution & Marginal Costing After studying this section you should be able to: calculate contribution, break-even and margin of safety apply this to decision-making using marginal costing principles Contribution Contribution is the total revenue variable costs It measures how much is being contributed the fixed costs by the units that have been sold Contribution Fixed costs = Profit
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Can calculate contribution per unit or contribution for all units of output Marginal costing and decision-making

We know from AS that the difference between unit selling price and unit variable cost is the contribution made by the individual product towards the firms fixed costs. When enough individual contributions have been made, the firms total costs will be covered and it is at break-even point, making neither a profit nor a loss. Contribution analysis therefore divides costs into their fixed and variable elements. Traditional absorption costing takes all costs into account when making decisions. A marginal costing approach can be used in decisionmaking, based on the argument that factors having no bearing on a decision are ignored. In this context, we ignore fixed costs on the argument that: they have to be paid regardless of income the apportionment of these fixed costs between different product lines is often arbitrary. Discontinuing products Another area of decision-making involves whether to discontinue an apparently unprofitable product or line. For example: A company makes three products, A, B and C. Costs are split one-third fixed and twothirds variable. Figures are:
A B C Total Sales (000) 32 50 45 127 Total costs (000) 36 39 33 108 Profit/(loss) (4) 11 12 19

Should product A be dropped? Apparently, the overall profit of 19 000 masks a loss of 4000 for product A. Since fixed costs are apportioned without certainty, we can remove them from the calculations and display the information as a marginal costing statement:
A B C Total Sales 32 50 45 127 Variable costs 24 26 22 72 Contribution 8 24 23 55 Less fixed costs 36
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Profit 19

Total profit remains the same, but by calculating individual product contributions we can see that each product makes a contribution towards total fixed costs. On this argument, therefore, product A should be retained.

KEY POINT - Marginal costing approaches take account of contribution made towards total fixed costs, and avoid the arbitrary apportionment of fixed (indirect) costs to individual products. Sources of Finance Sources of finance These are how businesses get money to finance growth, to overcome working capital / cash flow problems etc. Choosing the right source of finance Businesses need to consider a number of factors when deciding what sources of finance to use External sources of finance are more expensive as you need to pay interest To use retained profits you need to get agreement from shareholders The source of finance chosen also depends on the time period and what you need the finance for The key questions that managers have to answer are: how much finance is needed whether it can be obtained internally whether it should be borrowed temporarily, with a view to paying back, or obtained as permanent (e.g. share) capital (if borrowed) whether the loan is for the short (up to one year), medium (15 years) or long term. The amount and nature of this finance varies from firm to firm, and is influenced by a firms size, its form of ownership, the type of technology currently being used within the firm, the relationship between capital and labour, the length of credit periods (taken and allowed), and the age of the firms assets. Internal sources From inside the business e.g. directors No external body to pay Generally No time limit Internal Sources - Retained Profit Cheap and flexible Technically profit is shareholders so they need convincing its used effectively Usually okay infrequently Idea retained profit used to generate future profits and therefore used for purchase of fixed assets Opportunity cost needs to be assessed Internal Sources - Control of working capital and cashflow
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Working capital measures the amount of money the business has to pay day-to-day expenses Working capital = current assets current liabilities

Businesses need to be aware of their working capital and ensure that they have enough cash to survive Stock and debtor control arranging appropriate credit terms Liquidity need to manage assets to ensure that the business has sufficient liquidity (ease of converting assets to cash) Stock needs to be valued correctly Need to ensure are not holding excess stocks or excess cash Internal Sources - Sales of Assets This can allow business to develop more profitable ventures If in crisis can sell fixed assets but will lead to a decrease in profitability in long term In principle the sale of these assets should allow a firm to increase its level of profit Internal Sources - Sale and Leaseback This allows the organisation to receive a cash payment improving short term cash flow But have to rent the asset which may reduce profit long term If cash used to buy more profitable assets the cost of rental is covered External sources From outside the business External Sources of Finance Long Term Share Capital Limited companies can issue shares Share holders receive dividends Shares can be - Preference shares fixed % dividend - Ordinary shares risk capital / equity Loan Capital Providers of loans = creditors Four main types of loan capital: - Debentures long term loan to the business at an agreed fixed % of interest repayable on a stated date. Up to 25 years. - Mortgages used to purchase property. Up to 25 years Long term loans provided by specialist organisations - Government assistance selective and takes form of grants generally External Sources of Finance Medium Term Bank loans
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Leasing Hire purchase External Sources of Finance Short Term Bank overdrafts agreed limit, stated time period Trade credit suppliers allow time period before money is due

Debt factoring business receives immediate payment for credit sales Final Accounts Budgeting A Budget is a forecast of costs and / or incomes Costs and Incomes must relate to a particular purpose Individual budgets must be based on a variety of different elements Individual budgets are brought together into a master budget which is for the organization as a whole Purpose of Budgets To plan - they help businesses control their finances as they plan expenditures over a period of time To control - help to ensure that businesses dont spend more than they should Problems with Budgets Incorrect allocations External factors Poor communication These problems can be overcome by flexible budgeting Some firms adopt zero budgeting to ensure allocations are not excessive Advantages of Budgets It indicates priorities It provides direction and co-ordination It assigns responsibility It can act as a motivator It should improve efficiency Disadvantages of Budgets Training requirements staff need to be trained to set budgets and manage them Allocation of funds managers may find it hard to allocate funds fairly and in the businesses best interests Short term vs. Long term planning budgets usually only look at an annual plan therefore may fail to take a longer term view
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Zero Budgeting This is where the budget is stet at zero and budget holders have to bid for any monies and justify the reasons why These can be good for new businesses / new ventures Variance Analysis Adverse (or unfavourable) variances - when actual performance is poorer than budgeted performance Favourable variances where variance represents a better performance than planned Identification of the cause of a variance can allow a company to: Identify the responsibility

Take appropriate action Productive Efficiency Businesses calculate the cost of production For forecasting and budgeting To set prices so they make a profit To work out if they can make a profit External Influences Structure and Growth Corporate Culture Why is Culture important? This influences how people work Culture has an impact on the behaviour of individuals at work When businesses are looking at improving business performance they often also look at cultural change Organisational Culture An organisations culture refers to the values, attitudes and beliefs of people who work in it. All business will have a different culture. Cultures can be described as: Task Vs People cultures Customer Vs Firm cultures Innovative Vs Conservative cultures Cultural Changes Cultural change is often a reason for poor performance.
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Can be very difficult to change culture Quickest way to change culture is to get rid of employees who have been there a while and replace them with new workers To change culture you may also need to change the reward system To change culture the employees will need education or training programs to explain what is happening and the benefits of this Business Ethics Ethics are the shared attitudes and principles held by a businesses employees Moral code what is right and what is wrong? They are highly subjective in nature An ethical code of practice states how businesses believe its workers should respond to situations which challenge business values There are conflicts that arise regarding ethics, these mainly stem from conflicting stakeholder requirements, e.g. Profits (shareholders) vs. higher wages (employees)

e.g. Production (shareholders) vs .pollution (local community, environmental) How to create an ethical culture There are a number of steps which allow a business to create an ethical culture: Find a champion Discover ethical issues Benchmark Test the idea Develop a code of conduct Make it work Social Responsibilities Business should operate as good citizens who have duties towards their stakeholders Stakeholders are all individuals or groups that have a direct interest in an organisations performance These include employees, shareholders, the local community and the government Businesses have the following responsibilities to different stakeholders: Shareholders to generate profits and pay healthy dividends Customers to provide good quality products at reasonable prices, to look after interests of customers Employees to ensure health and safety at work, to provide job security and to pay them fairly, to provide training to develop employees skills Suppliers to pay them on time and to pay a fair price for their goods, to place regular orders and offer
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long term contracts Local Community to provide employment, to provide safe working environment, to minimise pollution and negative externalities, to use local suppliers where possible Government to ensure that no laws are broken, to pay taxes Environment to keep levels of pollution to a minimum, to try and ensure that the environment is protected Social Auditing Where a business assesses its social impacts and ethical behaviour in relation to its and the stakeholders aims. E.g. recyclable packaging, avoiding the use of child labour and sweat shops, free trade products, brown field sites Environmental Management Businesses can have a negative impact on the environment Environmental audits assess the impact of a business on its environment Businesses create many external costs that affect the environment e.g. pollution External costs created by businesses can impact the environment in the following ways:

Urban blight excessive development and inappropriate developments mean the environment is visually less attractive, loss of farmland Production and disposal of waste this could include an increase in litter and rubbish from packaging Use of energy Pollution: Noise from cars, lorries, factories etc. Air emissions from cars and delivery vehicles Methods of Controlling Environmental Impact The Environmental Protection Act, 1991 and the Environment Act, 1995 are designed to protect the environment Businesses can also help reduce harm to the environment by: Redesigning products to use less materials and making them biodegradable / recyclable Sourcing resources from sustainable supplies Finding ways to reduce pollution Recruitment, Selection & Training This is the process of filling an organisations job vacancies by appointing new staff. Job descriptions and person specifications are drawn up at the beginning of the process. Job Description Job Description
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These relate to the position available They list the duties and responsibilities associated with a specific job They include: The title of the post Employment conditions Some idea of tasks and duties Person Specifications These set out the qualifications and qualities required in an employee These refer to the person and not the post They include: Educational and professional qualifications required Character and personality needed Skills and experience wanted Internal & External Recruitment Internal Recruitment Internal recruitment is where a business looks to fill a vacancy from existing staff Advantages Employee has awareness of a firms culture Candidates may not need induction training Provides promotion for workers

Avoids expensive advertising Selection can be easier as know about candidates Disadvantages Limited skill base May not be as high quality as external candidates especially for senior jobs External Recruitment External recruitment is where a business looks to fill a vacancy from individuals outside the organisation Advantages Can attract a more diverse group of candidates who bring fresh ideas to the business
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Increase in variety of skills Disadvantages Can be very expensive Know less about the candidates Recruitment Process Overview of Recruitment Process Position is advertised externally / internally Send out application packs Receive candidate applications by closing date Candidates applications are compared against the person specification those with the best fit are invited for interview At interview the job description is used to form the basis of the questions Methods of Recruitment (External) There are a number of methods: External advertising the business advertises for the employee directly Headhunting firms these firms identify suitable candidates from competitors for a fee Job centres Employment agencies match jobs and candidates for a fee Training schemes (government) this is lower risk and cheaper Selection / Selecting the Best Employee There are several methods you can use to determine whether an applicant is suitable for the job or not: Application Forms/CV's An application form provides information in a standard format. This allows a business to collect information from job applicants in a systematic way, and to assess objectively a candidate's suitability for a job, therefore making it easier to shortlist candidates for interview. CVs include similar information (details of the individual, their qualifications, their experience and why they are suitable for the job), but give candidates the opportunity to sell themselves in their own way. They do

not have the restrictions of fitting information into boxes like an application form. A CV is usually accompanied by a letter of application. Interviews Interviews are the traditional and still the most popular method of selection, but they are not necessarily the most effective in indicating how well an individual will perform in a job. This is because interviewers tend to be swayed by appearance and personality, and are often overly influenced by first impressions.
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Psychometric Tests Psychometric tests may measure aptitude, personality or interests: Aptitude Tests - these measure how people differ in their ability to perform or carry out different tasks. (these are the type you are most likely to find at the first stage of a selection process). Personality Tests - these measure how people differ in their style or manner of doing things, and in the way they interact with their environment and other people (personality). Assessment Centres Some companies run a series of extended selection procedures, called assessment centres, each lasting one or two days or sometimes longer. Usually, these are after the first round of interviews and before the final selection, but they may also be used as an initial selection process. They are commonly held either on employers' premises or in a hotel and are considered by many organisations to be the most objective and accurate method of selection. This is because a number of different assessors get to see you over a longer period of time and have the chance to see what you can do, rather than what you say you can do, in a variety of situations. Interviews Interviews are the most popular form of selection They can involve one or more interviewer They are a relatively cheap method They can be unreliable as they dont give a valid picture of how someone will perform on the job Training Training Needs Training is the provision of work-related education, either on-the-job or off-the-job, involving employees being

taught new skills or improving skills they already have. Training is often a response to an internal or external change for example The development and introduction of new products Restructuring of the firm The development and introduction of new technology Changes to procedures High labour turnover Low morale Changes in legislation Induction Training Education for new employees which involves learning about the way the business works
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It helps to: Reduce turnover Increase understanding of culture Increase motivation Mean employees contribute to organisation more quickly Methods of Training Internal Training Occurs inside the organisation Appropriate if training needs are specific to the individual organisation External Training Occures outside the organisation Appropriate if only a few employees with a specific training need Appropriate if training needs are not specifically linked to organisation Meet with employees from other companies and exchange ideas Can make employees feel valued and increase motivation On the job training On-the-job training: where an employee learns a job by seeing how it is carried out by an experienced employee. Advantages Low cost - does not require the development of potentially expensive training materials or classroom/computer-based instruction. Task-based - Since it is performed at the work area, training tends to be focused on performing real job tasks. Well suited for small groups - OJT is often the most practical training method when you only need to train one or two employees at a time. Disadvantages

Inconsistent - Traditional OJT relies heavily on an experienced employee to provide the instruction based on what they feel is the most important topics. What is important to one employee may not be important to another. Incomplete - Without a structured lesson guide, trainers often forget to cover important information. Lack of founding principles - Underlying theories of operation are often not covered in sufficient detail or accuracy. Without this foundation of knowledge, trainees often learn what to do, not why they are doing it, resulting in poor decision making when things don't go exactly right. Bad habits - The trainee observes and may adopt the trainer's habits and attitudes about all aspects of the job including safety, quality, customer service, and relationship with management. Poorly selected trainers can have many unintended consequences.
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Off the job training All forms of employee education apart from that at the immediate workplace, ie learning skills away from the workplace Advantages This type of training gets employees away from their work environment to a place where their frustrations and bustle of work are eliminated. This more relaxed environment can help employees to absorb more information as they feel less under pressure to perform. Can be a source to supply the latest information, current trends, skills and techniques for example current employment legislation or other company law and regulations, current computer software or computerised technologies or improved/innovative administrative procedures. These new skills can be brought back and utilised within the company. Experts in their field would cover these courses, and this would mean that training for staff members would be taught to a reasonable standard. As the courses are held externally, our company would not have added costs incurred as a result of extra equipment or additional space. Sending an employee on a course could help to make an employee feel more valued as they would feel as

if they are receiving quality training. As many courses or seminars invite employees from other companies to attend, this would allow employees to network and perhaps drum-up business. Disadvantages Depending on the course, the overall cost could prove quite expensive for example; many courses may require an overnight stay at a hotel if the course is outside the area or the course itself may prove to be expensive due to the level of expertise or equipment need to deliver the course. As there is no real way to know the abilities both as a trainer and their subject knowledge of the people delivering the external training courses, there is no guarantee that sufficient skills of knowledge will be transferred or valuable. The different learning speeds of individuals who are usually forced to progress at a compromise rate. Not all the learners will be starting at the same knowledge or skill level and there is a risk that those starting at the lowest levels, if account is not taken of this, will be lost from the start. Quality Management Quality control is the process of ensuring that products have standard or uniform quality It aims to reduce any problems before a product reaches the end of the production cycle All employees have to be committed to controlling the quality for it to be effective One form of quality control is TQM (Total Quality Management) Features of TQM: Quality Circles Workers meet to discuss issues relating to quality in the business, this can also act as a motivator to employees that are involved
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Zero defects these are systems that make sure no products leave the business with defects Statistical Process Control this describes statistics which are generated to enable the business to evaluate their quality procedures Quality Assurance This looks at guaranteeing all stages in the production process leading to high quality products The emphasis is on preventing mistakes Self checking is a key part of quality assurance Self checking is where workers check their own work Government Regulations (UK) The UK government have a number of regulations and standards regarding quality

These include: ISO ISO 9000 and ISO 14000.These are quality standards business have to adhere to British Standards Institution (BSI) The Kitemark and the CE mark are both important standards of quality. Operations Management