IGCSE BUSINESS

STUDIES
“Whatever you do, do it well”

“If you can’t fly then run, if you can’t run then walk , if you can’t
walk then crawl, but whatever you do you have have to keep
Martin Luther moving forward”
King Junior
Never never give up becoz your the best! You can do it!

REVISION GUIDE FOR 100% SUCCESS

Compiled by S.Ramesh

“All limitations are self-imposed”

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 Chapter 1: The purpose of business activity
Q) Define the term Businesses.

Meaning of Businesses: It combine factors of production to produce goods and services to

satisfy needs and wants.

Q) Define the term needs and wants

Meaning of needs: It is a good or service essential for living.

Meaning of wants: It is a good or service which people would like to have, but which is not
essential for living. People’s wants are unlimited.

Q) What the 'economic problem' means?

Meaning of economic problem: It results from being unlimited wants but limited resources to
produce the good and services to satisfy those wants. This creates scarcity.

Q) Difference between wants and needs

N eeds Wants
i) Need is good or service that is i) Wants is a good or service that is not
essential for living. essential for living
.

ii) Limited needs ii) unlimited wants

iii) Needs do not change throughout our iii) Wants can change throughout our life.
life.

iv) Eg: Food, water, shelter etc. iv) Eg: Car, Fridge, air conditioner etc.

Q) Explain in brief the factors of production.

Factors of production are those resources needed to produce goods or services.

4 Factors of production -Land, Labour, capital and enterprise.

- Land: All natural resources used to make a product or service.

- Labour: The effort of workers required to make a product or service.

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- Capital: Finance, machinery and equipment required to make a product or service.

- Enterprise: Skill and risk-taking ability of the entrepreneur.

Q) Why scarcity of resources results in choices and opportunity cost?

Scarcity means is the lack of sufficient products to fulfil the total wants of the population.
(Scarcity = unlimited wants + limited resources)

Opportunity cost: the next best alternative given up by choosing another item.

Here is a diagram showing the whole economic problem:

Q) Why specialisation is important? Explain its merits and demerits

Division of Labour/Specialisation is when the production process is split up into different tasks
and each specialized worker/ machine performs one of these tasks.

Merits:i) Specialized workers are good at one task and increases efficiency and output.

ii) Less time is wasted switching jobs by the individual. iii) Machinery also helps all jobs and can
be operated 24/7.

Demerits: i) Boredom from doing the same job lowers efficiency. ii) No flexibility because
workers can only do one job and cannot do others well if needed. iii)If one worker is absent and
no-one can replace him, the production process stops.

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Q) Why is business activity needed? Or Explain the purpose and nature of business
activity.

- People have unlimited wants.

- The four factors of production – the resources needed to make goods –are in limited supply

- Scarcity results from limited resources and unlimited wants.

- Choice is necessary for scarce resources. This leads to opportunity costs.

- Specialisation is required to make the most out of resources.

Q) Define the term business objectives.

Business Objectives are the aims that a business works towards to achieve.

The most common objectives are: Profit, Increase added value, Growth, Survival, Service to the
community.

Q) What is meant by added value?

Value added is the difference between the selling price of a product or service and the cost of
bought in materials and components.

Formula: Value added = Selling price – Cost of raw material bought in

Q) Why is added value important?

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i) Can pay other costs such as labour costs, management expenses and costs such as advertising
and power.

ii) may be able to make a profit if there other costs total less than the added value.

Q) How businesses can try to increase added value?

-Increase selling price but keep the cost of material the same.

-Reduce the cost of materials but keep the price the same.

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 Chapter 2 Classification of businesses
Q. Explain the stages of economic activity in the business.
Levels/Stages of economic activity: In order for products to be made and sold to the people,
it must undergo 3 different production processes. Each process is done by a different
business sector and they are:
i) Primary sector: The natural resources extraction sector. E.g. farming, forestry, mining.
(earns the least money)
ii) Secondary sector: The manufacturing sector. E.g. construction, car manufacturing,
baking. (earns a medium amount of money)
iii) Tertiary sector: The service sector. E.g banks, transport, insurance... (earns the most
money)

Q. What is meant by primary sector?

Primary Sector: It refers to industry extracts and uses the natural resources of the earth to
produce raw materials used by other businesses.
Q. What is meant by secondary sector?
Secondary sector: It refers to industry manufactures goods using the raw materials provided
by the primary sector.
Q. What is meant by tertiary sector?
Tertiary sector: It refers to industry provides services to consumers and the other sectors of
industry.
Q. Explain the difference between primary, secondary and tertiary sector.

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Q. What is meant by chain of production?
Chain of production: the production and supply of goods to the final consumer involves
activities from primary, secondary and tertiary sector businesses.

Q. Outline the importance of a sector in a country.

Importance of a sector in a country:
i) no. of workers employed.
i) value of output and sales.

Q. Define the term industrialization.

Industrialization: a country is moving from the primary sector to the secondary sector.

Q. What is meant by De-industrialization?

De-industrialization: a country is moving from the secondary sector to the tertiary sector.
In both cases, these processes both earn the country more revenue.

Q. Which sector of industry is most important in your country?

Usually the three sectors of the economy are compared by:
-Percentage of the country’s total number of workers employed in each sector or
- value of output of goods and services and the proportion this is of total national output.

Q. Why changes in the importance of the three sectors over time? Or

Why changes in sector importance? -

- Sources of some primary products, such as timber, oil and gas, become depleted.
- Most developed economies are losing competitiveness in manufacturing to the newly
industrialized countries.
- As a country’s total wealth increases and living standards rise, consumers tend to spend a
higher proportion of their incomes on services such as travel and restaurants tan on
manufacturing products produces from primary products.

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Q. Describe the changing importance of business classification.
The changing importance of business classification may also be due to the following:
• A change in consumer behaviour as a result of both industrialisation and
de-industrialisation.
• Consumers have a higher income and they demand better quality and a wider choice
of products.
• Better education - consumers expect better products and know that they can buy
goods from suppliers in a different region or country through e-commerce.
• More leisure time - consumers work fewer hours than they used to. The demand for
leisure activities, such as cinemas, restaurants and holidays, has increased.

Q. Explain the change in business behaviour resulting from.

A change in business behaviour resulting from:
• the need for finance to fund expansion so that businesses can compete in global
markets
• the need to be able to communicate internally and externally quickly and as
cheaply as possible to take advantage of the opportunities of wider markets
• the need to provide better services for their employees, for example canteens;
this in turn increases business demand for the goods and services of other businesses.

Q. Define the term mixed economy.

Mixed economy: Businesses belong to both the private and public sector. Government
controls part of the economy.

Q. What is meant by public sector?

Public sector: the part of the economy that is controlled by the state or government.

Q. What is meant by private sector?

Private sector – businesses not owned by the government. Public sector – government or
state owned and controlled businesses.

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Q. Explain the difference between public sector and private sector.

Q. State the list of public sector.

Industries under government ownership:
• health
• education
• defence
• public transport
• water & electricity

Q. Define the term capital.

Capital: It is the money invested into a business by the owners.

Q. Define the term privatisation. Explain the merits and demerits of privatisation.
Privatisation: Privatisation involves the government selling national businesses to the private
sector to increase output and efficiency.
Pros:
• New incentive (profit) encourages the business to be more efficient
• Competition lowers prices

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• Individuals have more capital than the government
• Business decisions are for efficiency, not government popularity
• Privatisation raises money for the government
Cons:
• Essential businesses making losses will be closed
• Workers could be made redundant for the sake of profit
• Businesses could become monopolies, leading to higher price

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 Chapter 3 Enterprise, business growth and size

Q. Define the term Entrepreneur.

Entrepreneur: He is a person who organizes, operates and takes the risk for a new business
venture. (or)
An individual who has an idea for a business takes the financial risk of starting and managing
a new business.

Q. Explain the merits of being an Entrepreneur.

Benefits of being an entrepreneur:
a) independence able to choose how to use time and money.
b) able to put own ideas into practice.
c) may become famous and successful in the business grows.
d) may be profitable and the income might be higher than working as an employee for
another business.
e) able to make use of personal interests and skills.

Q. Explain the demerits of being an Entrepreneur.

Disadvantages of being an entrepreneur:
a) risk many new entrepreneurs businesses fail, especially if there is poor planning.
b) Capital entrepreneurs will have to put their own money into the business and,
possibly, find other sources of capital.
c) lack of knowledge and experience in starting and operating a business.
d) opportunity cost lost income from not being an employee of another business.

Q. State the Characteristics of successful entrepreneurs.

Characteristics of successful entrepreneurs:
i) Hard working,
ii) Risk taker
iii) Creative
iv) Optimistic
v) Self-confident
vi) Innovative
vii) Independent

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 viii) Effective Communicator.

Q. Why governments support business start-ups?

a) Reduce unemployment – new businesses will often create jobs to help reduce
unemployment.
b) Increase competition – new businesses give consumers more choice and compete
with already established businesses.
c) Increase output – the economy benefits from increased output of goods and services.
d) Benefit society – entrepreneurs may create social enterprises which offer benefits to
society other than jobs and profits.
e) Can grow further – all large businesses were small! By supporting today’s new
firms the government may be helping some firms that grow to become very large and
important in the future.

Q. Define the term Business plan.

Business plan: It is a document containing the business objectives and important details
about the operations finance and owners of the new business. (or)
a detailed written document outlining the purpose and aims of a business which is often
used to persuade lenders or investors to finance a business proposal.

Q. Define the term Revenue.

Revenue: the amount a business earns from the sale of its products.

Q. What is meant by Business start up?

Business start-up: a newly formed business. They usually start small, but some might row to

become much bigger.

Q. Why and how governments support business start-ups? (or)

What support do governments often give to start-up businesses?

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Q. How a business plan assists entrepreneurs?
The entrepreneur will have to consider:
• What product to produce?
• Which consumers am I aiming at?
• Where will the firm be located?
• What will be costs and will enough products be sold?
• What type of machinery and how many people will be required in the business?
Without this detailed plan the bank will be reluctant to lend money to the business.

Q, Why Business plan would be very useful to some people or stakeholder?

For some people, this information could be very useful:
• Investors - how safe it is to invest in businesses
• Government - tax
• Competitors - compare their firm with other firms
• Workers - job security, how many people they will be working with
• Banks - can they get a loan back from a business.

Q. In what ways you can compare the size of a business?

Comparing the size of businesses or Ways of measuring the size of a business:
1) N umber of employees: Does not work on capital intensive firms that use machinery.
2) Value of output: Does not take into account people employed. Does not take into
account sales revenue.
3) Value of sales / Market share: Does not take into account people employed.
4) Capital employed: Does not work on labour intensive firms. High capital but low
output means low efficiency.

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You cannot measure a business’s size by its profit, because profit depends on too many
factors not just the size of the firm.

Q. Outline the limitations of methods of measuring business size.

Although all of the above methods can be used to measure and compare the size of
businesses, you have seen that it is not quite as straightforward as it first seems. Take care
before drawing any conclusions about the size of a business, because different measures can
produce different results. Before deciding on how to describe the size of a business it is a
good idea to use more than one measure.

Q. Why the owners of a business may want to expand the business (or) Why do owners
often want their businesses to grow?
Business Growth: All owners want their businesses to expand. They reap these benefits:
• Higher profits
• More status, power and salary for managers
• Low average costs (economies of scale)
• Higher market share

Q. What are the different ways in which businesses can grow?

Types of expansion:
• Internal Growth / Organic growth: Growth paid for by owner’s capital or retained
profits.
• External Growth/ Inorganic growth: Growth by taking over or merging with another
business.

Q. What is a Takeover?
A takeover occurs when one company makes a successful bid to assume control of or acquire
another. Takeovers can be done by purchasing a majority stake in the target firm. Takeovers
are also commonly done through the merger and acquisition process.
Q. Define the term merger.
Mergers combine two separate businesses into a single new legal entity. True mergers are
uncommon because it's rare for two equal companies to mutually benefit from combining

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 resources and staff, including their CEOs. Unlike mergers, acquisitions do not result in the
formation of a new company.
Q. Define the term Capital employed.
Capital employed is the total value of capital used in the business.

Q. Discuss the types of mergers and its benefits.

Types of Mergers (and main benefits):
i)Horizontal Merger: merging with a business in the same business sector.
• Reduces number of competitors in industry
• Economies of scale
• Increase market share
ii)Vertical merger:
a)Forward vertical merger:
• Assured outlet for products
• Profit made by retailer is absorbed by manufacturer
• Prevent retailer from selling products of other businesses
• Market research on customers transferred directly to the manufacturer
b) Backward vertical merger:
• Constant supply of raw materials
• Profit from primary sector business is absorbed by manufacturer
• Prevent supplier from supplying other businesses
• Controlled cost of raw materials
iii) Conglomerate merger:
• Spreads risks
• Transfer of new ideas from one section of the business to another

Q. Describe the problems of business growth form of expansion

Problems of business growth form of expansion:
a) Larger business is difficult to control due to diseconomies of scale.
b) Larger business leads to poor communication.
c) Expansion costs so much that business is short of finance.
d) Integrating with another business is more difficult than expected.
-

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Q. Explain the possible ways to overcome problem from over expansion.

Possible ways to overcome problem from over expansion or overgrowth.

a) Operate the business in small units this is a form of decentralization.
b) Operate the business in smaller units – use latest IT equipment and
telecommunications, but this can cause problems
c) Expand more likely, use profits from slowly expanding business to pay for further
growth. Ensure sufficient long term finance is available.
d) Introducing a different styles of management requires good communication with the
workforce, they will need to understand the reasons for the change.

Q. Why some businesses stay/remain small?

There are some reasons why some businesses stay small.
i)Type of industry the business is in: Industries offering personal service or specialized
products. They cannot grow bigger because they will lose the personal service demanded by
customers. E.g. hairdressers, cleaning, convenience store, etc.
ii)Market size: If the size of the market a business is selling to is too small, the business
cannot expand. E.g. luxury cars (Lamborghini), expensive fashion clothing,etc.
iii) Owners objectives: Owners might want to keep a personal touch with staff and
customers. They do not want the increased stress and worry of running a bigger business.

Q. What are the causes of businesses failure?

The causes of businesses failure:
i) lack of management skills (or) Poor management,
ii) changes in the business environment
iii) liquidity problems (or) poor financial management,
iv) over expansion and
v) risks of new business start-ups.
vi) failure to plan for change,

Q. Why new businesses are at a greater risk of failing?

i) Less experience: a lack of experience in the market or in business gets a lot of firms easily
pushed out of the market

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ii) N ew to the market: they may still not understand the nuances and trends of the market,
that existing competitors will have mastered
iii) Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their
foothold in the market. At a stage when they’re not selling much, they are at a greater risk of
failing
iv) Don’t have a lot of money to support the business yet: financial issues can quickly get
the better of new firms if they aren’t very careful with their cash flows. It is only after they
make considerable sales and start making a profit, can they reinvest in the business and
support it

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 Chapter 4 Types of business organization

Q. Define the term Limited liability.

It means that the liability of shareholders in a company is only limited to the amount they
invested.
Q. Define the term Unlimited liability
It means that the owners of a business can be held responsible for the debts of the business
they own. Their liability is not limited to the investment they made in the business.

Q. What are the main forms of business organisation in the private and public sectors?
Private sector Public sectors
• sole traders • Public corporation
• partnerships • Municipal enterprises or
• Cooperative Corporation.
• private limited companies
• public limited companies
• co-operatives.
• Franchise
• Joint venture

Q. Define the term Sole trader

The business is owned and run by one person only.
Even though he can employ people, he is still the sole proprietor of the business. These
businesses are so common since there are so little legal requirements to set up:
The owner must register with and send annual accounts to the government Tax Office.
They must register their business names with the Registrar of Business N ames.
They must obey all basic laws for trading and commerce.

Q. Explain the advantages and disadvantages of Sole trader.

There are advantages and disadvantages to everything, and here are ones for sold traders:

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Sole Trader Pros:
• There are so few legal formalities are required to operate the business.
• The owner is his own boss, and has total control over the business.
• The owner gets 100% of profits.
• Motivation because he gets all the profits.
• The owner has freedom to change working hours or whom to employ, etc.
• He has personal contact with customers.
• He does not have to share information with anyone but the tax office, thus he enjoys
complete secrecy.

Sole Trader Cons:

• Nobody to discuss problems with.
• Unlimited liability.
• Limited finance/capital, business will remain small.
• The owner normally spends long hours working.
• Some parts of the business can be inefficient because of lack of specialists.
• Does not benefit from economies of scale.
• No continuity, no legal identity.
• Sole traders are recommended for people who:
• Are setting up a new business.
• Do not require a lot of capital for their business.
• Require direct contact for customer service.

Q. Define the term Partnership

A partnership is a group consisting of 2 to 20 people who run and own a business together.
They require a Deed of Partnership or Partnership Agreement is the written and legal
agreement between business partners. It is not essential for partners to have such an
agreement but is always recommended.

Q. Explain the advantages and disadvantages of Partnership.

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Partnership Pros:
• More capital than a sole trader.
• Responsibilities are split.
• Any losses are shared between partners.

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

Q. To whom partnership business is suitable or recommended?

Recommended to people who:
• Want to make a bigger business but does not want legal complications.
• Professionals, such as doctors or lawyers, cannot form a company, and can only form
a partnership.
• Family, when they want a simple means of getting everybody into a business
(Warning: Nepotism is usually not recommended).

N ote: In some countries including the UK there can be Limited Partnerships. This business
has limited liability but shares cannot be bought or sold. It is abbreviated as LLP.

Q. Differences between sole trader and partnership organisations

Sole trader Partnership

owned and run by single owner. 2 to more people who run and own a business
together.
No Continuity – Comes to end with the death Continuity -It does not come to an end if
of sole trader partner leave/death.
Manages his business by himself. Managed by all partners.
Business secrets kept under sole trader Business secrets are open to every partner.

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Easy to start any time with little legal Partnership deed is required to start
requirements
Decision can be taken quickly Decision may be delayed.
Profit and Loss/liabilities borne alone. Profit and Loss/liabilities shared a mong
partners
No one to share the responsibilities. Responsibilities and roles are shared among
partners
Capital is brought by sole trader Capital is brought by all the partners
Scope of raising capital is limited Scope of raising capital is relatively high.

Q. Define the term Unincorporated business

It is one that does not are a separate legal identity. Sole traders and partnerships are
unincorporated business.
Q. Define the term Incorporated businesses.
They are companies that have separate legal status from their owners.
Q. Define the term Shareholders
They are the owners of a limited company. They buy shares which represent part ownership
of a company.

Q. Define the term Stakeholders.

A person or group with an interest or concern in a company and can either affect or be affected
by the business. The primary stakeholders in a typical corporation are its investors,
employees, customers, and suppliers.

Q. Define the term Private Limited Companies.

Private Limited Companies have separate legal identities to their owners, and thus their
owners have limited liability. The company has continuity, and can sell shares to friends or
family, although with the consent of all shareholders. This business can now make legal
contracts. Abbreviated as Ltd (UK), or Proprietary Limited, (Pty) Ltd.

Q. Explain the advantages and disadvantages of Private Limited Companies

Pros:

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• The sale of shares makes raising finance a lot easier.
• Shareholders have limited liability, therefore it is safer for people to invest but creditors
must be cautious because if the
business fails they will not get their money back.
• Original owners are still able to keep control of the business by restricting share
distribution.
Cons:
• Owners need to deal with many legal formalities before forming a private limited
company:
• The Articles of Association: This contains the rules on how the company will be
managed. It states the rights and duties of directors, the rules on the election of directors and
holding an official meeting, as well as the issuing of shares.
• The Memorandum of Association: This contains very important information about the
company and directors. The official name and addresses of the registered offices of the
company must be stated. The objectives of the company must be given and also the amount
of share capital the owners intend to rise. The number of shares to be bought b each of the
directors must also be made clear.
• Certificate of Incorporation: the document issued by the Registrar of Companies that
will allow the Company to start trading.
• Shares cannot be freely sold without the consent of all shareholders.
• The accounts of the company are less secret than that of sole traders and partnerships.
Public information must be provided to the Registrar of Companies.
• Capital is still limited as the company cannot sell shares to the public.

Q. How appropriate each of these forms is in different circumstances? (OR)

How suitable is this form of organisation such as Private limited companies?
Mike and Gita were impressed by the benefits of a private limited company form of
organisation. The solicitor told them it was a very common form of organisation for family
businesses or partnerships when the owners wished to expand them further AND wanted to
reduce the risk to their own capital. Private limited company status allows more capital to be
raised and this is often sufficient for all but the largest businesses. The solicitor offered to
help Mike and Gita fill out the necessary legal forms to turn their business into a private
limited company.

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Q. Define the term Public Limited Companies.
Public limited companies are similar to private limited companies, but they are able to sell
shares to the public.

Q. Explain the features of business organisations in the public sector.

Private limited companies and public limited companies share the following features:
• Legal documents, including Articles of Association and a Memorandum of Association,
must be completed when setting up the business.
• Shareholders invest their capital by purchasing shares in the company.
• Ordinary shareholders are the owners of the company.
• Shareholders have limited liability. If the business fails, they risk losing the value of their
shares - that is the amount of money they have invested in the company.
• The business continues even if one or more shareholders die.
• The company can raise finance by selling shares.
• Profit belongs to the ordinary shareholders.
• Profit is shared between the shareholders through the payment of dividends.
• Shareholders vote on major decisions taken by the company.
• End of year financial statements must be produced and submitted to the correct authorities.
The company's financial accounts are available for the public to look at.

Q. Explain the advantages and disadvantages of Public Limited Companies

Public Limited Companies Pros:
• Limited liability.
• Continuity.
• Potential to raise limitless capital.
• N o restrictions on transfer of shares.
• High status will attract investors and customers.

Public Limited Companies Cons:

• Many legal formalities required to form the business.
• Many rules and regulations to protect shareholders, including the publishing of annual
accounts.

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• Selling sha res is expensive, because of the commission paid to banks to aid in selling
shares and costs of printing the prospectus.
• Difficult to control since it is so large.
• Owners lose control, when the original owners hold less than 51% of shares.

Q. How public limited companies are controlled and ownership maintained?

Control and ownership in a public limited company:
The Annual General Meeting (AGM) is held every year and all shareholders are invited to
attend so that they can elect their Board of Directors. Normally, Directors are majority
shareholders who has the power to do whatever they want. However, this is not the case for
public limited companies since there can be millions of shareholders. Anyway, when
directors are elected, they have to power to make important decisions. However, they must
hire managers to attend to day to day decisions. Therefore:
• Shareholders own the company
• Directors and managers control the company
This is called the divorce between ownership and control.
Because shareholders invested in the company, they expect dividends. The directors could do
things other than give shareholders dividends, such as trying to expand the company.
However, they might lose their status in the next AGM if shareholders are not happy with
what they are doing. All in all, both directors and shareholders have their own objectives.

Q. Define the term Dividends

It is payments made to shareholders from the profits (after tax) of accompany. They are the
return to shareholders for investing in the company.

Q. How a private limited company can be converted into a public limited company?
A private limited company can be converted into a public limited company by:
1. A statement in the Memorandum of Association must be made so that it says this
company is a public limited company.
2. All accounts must be made public.
3. The company has to apply for a listing in the Stock Exchange.
A prospectus must be issued to advertise to customers to buy shares.It has to state how the
capital raised from shares will be spent.

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Q. Differences between unincorporated businesses and limited companies.
An unincorporated business is one which does not have a separate legal identity from its
owners. This means that the owners are legally responsible for the activities of the business.
Also, the owners have unlimited liability for the debts of the business. Sole traders and
partnerships are the best examples of unincorporated businesses.

An incorporated business, such as a limited company, has a separate legal identity from its
owners. The company and not the owners (shareholders) is legally responsible for the
activities of the business. The owners of an incorporated business have limited liability for
the debts of the business.
Risk, ownership and limited liability:
Unincorporated business ownership has greater legal and financial risks for owners than
incorporated businesses. This is because:
• Owners and the business have the same legal identity. If, for example, a customer is injured
as a result of using a faulty product made by the business, then the owners of the business are
legally responsible and may be sued for damages.
• Owners have unlimited liability for business debts. If the business fails and has unpaid
debts, then the owners may have to use their personal wealth to pay these debts.

These risks are removed for the owners of incorporated businesses such as private
and public limited companies because:
• Owners and the company have separate legal identities. f a customer is injured by a product
made by an incorporated business then they sue the company for damages and not the
owners.
• Owners have limited liability for business debts. This means that if the company fails, the
owners do not have to use their personal wealth to pay any debts. The only financial risk that
owners of incorporated businesses have is that they can lose all of the money they paid for
their shares.

Q. Differences between private limited companies and public limited companies.

Private limited company Public limited company

Shares sold to friends and family Shares issued to public

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Shares cannot be sold to public Shares are listed on stock exchange and
freely bought and sold to public
Min 2 members to incorporate business Min 7 members to incorporate business
Financial statement is not shared to public Financial statements is shared to public
It is suitable for small scale business It is suitable for large scale business

Q. Define the term Joint ventures

Two businesses agree to start a new project together, sharing capital, risks and profits.

Q. Explain the advantages and disadvantages of Joint ventures

Joint ventures Pros:
• Shared costs are good for tackling expensive projects. (e.g. aircraft)
• Pooled knowledge. (e.g. foreign and local business)
• Risks are shared.
Joint ventures Cons:
• Profits have to be shared.
• Disagreements might occur.
• The two partners might run the joint venture differently.

Q. Define the term Franchise.

Franchise is a business based upon the use of the brand names, promotional logos and
trading methods of an existing successful business. The franchisee buys the license to operate
this business from the franchisor. (or)
Franchise is a business system where entrepreneurs buy the right to use the name, logo and
product of an existing business.
Q. Define the term Franchisor.
The franchisor is a business with a successful brand name that recruits franchisees
(individual businesses) to sell for them. (e.g. McDonald, Burger King).

Q. Define the term Franchisee.

A franchisee is a small-business owner who operates a franchise. The franchisee pays a fee to
the franchisor for the right to use the business's already-established success, trademarks, and

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proprietary knowledge. The franchisee receives continuous guidance and support from the
franchisor.

Q. Explain the advantages and disadvantages of franchisor

Pros for the franchisor:
• The franchisee has to pay to use the brand name.
• Expansion is much faster because the franchisor does not have to finance all new outlets.
• The franchisee manages outlets
• All products sold must be bought from the franchisor.
Cons for the franchisor:
• The failure of one franchise could lead to a bad reputation of the whole business.
• The franchisee keeps the profits.

Q. Explain the advantages and disadvantages of franchisee

Pros for the franchisee:

• The chance of failure is much reduced due to the well know brand image.
• The franchisor pays for advertising.
• All supplies can be obtained from the franchisor.
• Many business decisions will be made by the franchisor (prices, store layout, products).
• Training for staff and management is provide by the franchisor.
• Banks are more willing to lend to franchisees because of lower risks.
Cons for the franchisee:
• Less independence
• May be unable to make decisions that would suit the local area.
• Licence fee must be paid annually and a percentage of the turnover must be paid.

Q. Difference between public sector and private sector.

Public sector Private sector

It is controlled and managed by the It is controlled and managed by an
government individual or a group of individuals

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The main aim is welfare to the public The main aim is to earn profits.
It provides basic facilities like education, It provides consumer goods to the people
health, food and security to the people
For example, the Indian railways, the post For example, the Reliance, TISCO,
office and the BSN L Samsung etc,

Public sector:
Q. Define the term Public corporations.
A business owned by the government and run by Directors appointed by the government.
These businesses usually include the water supply, electricity supply, etc. The government
give the directors a set of objectives that they will have to follow:
• to keep prices low so everybody can afford the service.
• to keep people employed.
• to offer a service to the public everywhere.

Q. What are the objectives set by government to avoid subsidies?

These objectives are expensive to follow, and are paid for by government subsidies.
However, at one point the government would realise they cannot keep doing this, so they will
set different objectives:
• to reduce costs, even if it means making a few people redundant.
• to increase efficiency like a private company.
• to close loss-making services, even if this mean some consumers are no longer provided
with the service.

Q. Explain the advantages and disadvantages of Public corporations

Public corporations Pros:
• Some businesses are considered too important to be owned by an individual. (electricity,
water, airline)
• Other businesses, considered natural monopolies, are controlled by the government.
(electricity, water)
• Reduces waste in an industry. (e.g. two railway lines in one city)
• Rescue important businesses when they are failing.

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• Provide essential services to the people (e.g. the BBC)

Public corporations Cons:

• Motivation might not be as high because profit is not an objective.
• Subsidies lead to inefficiency. It is also considered unfair for private businesses.
• There is normally no competition to public corporations, so there is no incentive to
improve.
• Businesses could be run for government popularity.

Q. Define the term Municipal enterprises.

These businesses are run by local government authorities which might be free to the user
and financed by local taxes. (e.g., street lighting, schools, local library, rubbish collection). If
these businesses make a loss, usually a government subsidy is provided. However, to reduce
the burden on taxpayers, many municipal enterprises are being privatized.

Q. How to recommend and justify suitable forms of business organisation to owners and
managers in particular circumstances?
They may decide to do this for a number of reasons, such as:
• To reduce the legal and financial risk to owners. Incorporation has the benefit of separating
legal identity between the business and the owners, and providing owners with limited
liability.
• Separate legal identity also has the benefit of business continuity. If one or more owner
leaves, then the business is still able to continue.
• The business may want to raise additional capital to invest in growth plans. This may be
easier to achieve by becoming a limited company and selling shares in the business.
When setting up a new business, the choice of which form of business organisation to use
will depend on several factors.
• The number of owners: A sole trader can only have one owner. If there is more than one
owner then the choice will usually be between a partnership and an incorporated business.
The larger the number of owners the more likely it is that owners will choose an incorporated
business organisation.

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• The owners' role in the management of the business: Some owners may only want to
invest in a business and have nothing to do with the running of it. If this is the case then an
incorporated business organisation may be a better choice.
• The attitude towards financial risk: If owners do not want to risk their personal wealth,
then they are more likely to set up an incorporated business.
• How quickly the owners want to start operating their business: Unincorporated business
organisations such as sole traders and partnerships are much quicker to set up than
incorporated ones. This is because they do not have any complex legal requirements.
• The potential size of the business: Most businesses start small and many will remain so
because of factors such as the size of the market, or owners' choice. These businesses are
more likely to be set up and remain as sole traders or partnerships.

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 Chapter 5 - Business objectives and stakeholder objectives (N otes) IGCSE

Q. Define the term Business Objectives.

Business Objectives are the aims that a business works towards to achieve its goal.
(or) Define Objective: It is a statement of a specific target to be achieved. They should
be SMART.

Q. Explain the Objectives need to be SMART.

Businesses need to set clear and effective objectives. They often use SMART criteria to help
them do this. Objectives must be:
• Specific - for example, an airline may set an objective about the level of seat occupancy on
its planes.
• Measurable - the airline may set an objective of achieving an average 85% seat occupancy
across all of its flights.
• Achievable and Agreed - the airline seat occupancy objective needs to be discussed with
the Marketing Department as it will need to decide on promotional activities to see that the
objective is met.
• Realistic and Relevant - the airline seat occupancy objective will need financial resources,
perhaps for an advertising campaign. The objective is relevant to the marketing manager, but
less relevant to the human resources manager.
• Time-specific - the airline may set an objective to achieve average seat occupancy of 85%
within the next 18 months.

Q) Define the term Corporate social responsibility (CSR).

Businesses taking responsibility for the impact their activities might have on society
and the environment.

Q) Define Pressure group.

A pressure group is made up of people who want to change business (or government)
decisions and They take action such as organising consumer boycotts.

Q) Discuss the important objectives for CSR business.

Corporate social responsibility has become an important objective for businesses as a result
of:
• the activity of pressure groups
• the media, which has created a greater awareness of social, ethical and environmental issues
among consumers
• the role of trade unions and other worker representative groups
• the role of governments and the laws they pass at local, national and international level.

Q Define the term Market share.

It is the proportion of total market sales achieved by one business.

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(or) the revenue of a business expressed as a percentage of total market revenue.
Formula:
Market share =

Q. Define the term Profit.

It is total income of a business (sales revenue) less total costs.

Q. Define the term Social enterprise.

It has social objectives as well as an aim to make a profit to reinvest back into the business. It
is operated by private individuals or private sectors. (Or)
a business with social objectives that reinvests most of its profits back into the business or
into benefiting society at large.

Q. Discuss the benefits of business objectives.

The benefits of setting objectives are:
a. They give workers and managers a clear target to work towards and this helps
motivate people.
b. Taking decisions will be focused on: ‘Will it help achieve our objectives?’
c. Clear and measurable objectives help unite the whole business towards the same goal.
d. Business managers can compare how the business has performed with their objectives
– to see if they have been successful or not.

Q. What objectives do businesses set?

The most common objectives are:
• Business survival
• Profit
• Returns to shareholders
• Growth of the business
• Market share
• Service to the community

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Q. Explain in briefly the most common objectives do businesses set?
1. Survival: If a business does not survive, its owners lose everything. Therefore, businesses
need to focus on this objective the most when they are: starting up, competing with other
businesses, or in an economic recession.
2. Profit:
Definition of Profit: It is total income of a business (sales revenue) less total costs.
Profit is what keeps a company going and is the main aim of most businesses. Normally a
business will try to obtain a satisfactory level of profits so they do not have to work long
hours or pay too much tax.
Profits are needed to:
• Pay a return to the owners of the business for the capital invested and the risk taken.
• Provide finance for further investment in the business.
3. Returns to shareholders: The managers of companies will often set the objectives of
‘increasing returns to shareholders’. This is to discourage shareholders from selling their
shares and it helps managers to keep their jobs!
Returns to shareholders are increased in two ways:
• Increasing profit and the share of profit paid to shareholders as dividends.
• Increasing share price – managers can try to achieve this not just by making profits
but by putting plans in place that give the business a good chance of growth and
higher profits in future.
4. Growth: The owners and managers of a business may aim for growth in the size of the
business – usually measured by value of sales or output – for a number of reasons:
• To make jobs more secure if the business is larger.
• To increase the salaries and status of managers as the business expands.
• To open up new possibilities and helps to spread the risks of the business by moving
into new products and new markets.
• To obtain a higher market share from growth in sales.
• to obtain cost advantages, called economies of scale, from business expansion.
5. Market Share:
Definition of Market share: It is the proportion of total market sales achieved by one
business.
Market share =

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Increased market gives a business:
• Good publicity
• Increased influence over the suppliers.
• Increased influence over the customers.
6. Service to the community:
Definition of Social enterprise: It has social objectives as well as an aim to make a profit to
reinvest back into the business. It is operated by private individuals or private sectors.
• Social: to provide jobs and support for disadvantaged groups in society, such as the
disabled or homeless.
• Environmental: to protect the environment.
• Financial: to make a profit to invest back into the social enterprise to expand the
social work that it performs.

Q. Why business objective could change often?

• A business set up recently has survived for three years and the owner now aims to
work towards higher profit.
• A business has achieved higher market share and now has the objectives of earning
higher returns for shareholders.
• A profit-making business operates in a country facing a serious economic recession so
now has the short-term objective of survival.

Q. Define the term Stakeholders.

It is any person with a direct interest in the performance and activities of a business. (Or)
An individual or group which has an interest in a business because they are affected by its
activities and decisions.

Q. Which stakeholder groups are involved in business activity?

There are 7 types of stakeholders, groups are interested in the work of this company:
Internal stakeholders:
1. Owners / Shareholders: They are likely to want the business to work towards as
much profit as possible.
2. Managers: Successful decisions could lead to the business expansion.

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 3. Workers/Employees/Labour: They will want as many jobs as possible with security
of employment.

External stakeholders:

1. Consumers/Customers: They will want reasonably priced products of appropriate

quality.
2. Government: They pass laws to protect workers and consumers. It collects taxes
from business.
3. Banker / Financial institution/Lenders: They provide finance for the business’s
operations.
4. Community: They will be concerned about jobs too, but worried about pollution
from the company.
5. Suppliers: They supplies raw materials to the business’s production
6. Pressure Groups/NGO’s: Pressure groups are organisations/groups of people who
change business (and government) decisions.

Q. Explain in details profit and value is important to each group of stakeholders.

Group 1: Profit/Money Importances

• Owners: 1. Profit, return on capital.
2. Growth, increase in value of business.
• Workers 1. High salaries.
2. Job security.
3. Job satisfaction.
• Managers 1. High salaries.
2. Job security.
3. Growth of business so they get more power, status, and salary.
• Banks 1. Able to pay interest and principle.

Group 2: Value Importance

• Customers 1. Safe products.
2. High quality.
3. Value for money.
4. Reliability of service and maintenance.
• Government 1. Employment.
2. Taxes.

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 3. National output/GDP increase.
• Community 1. Employment.
2. Security.
3. Business does not pollute the environment.
4. Safe products that is socially responsible.

Q. What are the likely objectives of public sector businesses?

a) Financial: Meet profit targets set by government. Sometimes the profit is reinvested
back in the business and on other occasions it is handed over to the government as the
‘owner’ of the organization.
b) Service: Provide a service to the public and meet quality targets sets by government.
For example, health services and education services will be expected to achieve
targets laid down for them, and state-owned train and postal services will have
reliability and punctuality targets.
c) Social: Protect or create employment in certain areas – especially poor regions with
few other business employers.

Q. Explain the Objectives of private sector and public sector enterprises

Public sector organisations have very different aims and objectives from those in the private
sector. The services and facilities they provide must be:
• Accessible - they can be used by everyone regardless of their location or income.
• Affordable - they must be cheaper than if the service was provided by the private sector.
The service may even be free at the point of use.
• Open to all - they must be available to everyone regardless of their income, class, ethnicity,
culture, religion, and so on.

Q. Explain the conflict among stakeholders.

Conflict among stakeholders:
Consumer/ pressure group: It could be that a cheap method of production increases profits
but causes more pollution.
Local community: a decision to expand the plant could lead to a dirtier, noisier local
environment.

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Employees: a profitable decision to introduce new machines could reduce the jobs at the
refinery.
Manager/owner – a decision to expand could be expensive and this could reduce short-term
profit.

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 Chapter 6: Motivating workers (N otes) IGCSE

Q. Why people work?

Q. Explain the concept of motivation.

Motivation is the reason why employees want to work hard and work effectively of the
business.

Q. Explain why motivation is important to a business.

Motivation: People work for a number of reasons. Most people work because they need to
earn money to survive, while others work voluntarily for other reasons. Motivation is the
reason why people work, and it drives them to work better. Therefore, managers try to find
out what motivate workers and use them to encourage workers to work more efficiency. This
results in higher productivity, increased output, and ultimately higher profits.

Nowadays, machinery is more common in businesses which results in increased productivity

as well. However, the amount that a well-motivated workforce can produce must still be
recognised, since employees are firms greatest assets!

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Q. Describe about the different motivation theories
The different method of motivation theories are:
1. F.W.Taylor motivation Theory
2. Maslow hierarchy of needs motivation theory
3. Herzberg motivation theory
4. Mc Gregor motivation theory

Q. Explain in details about F.W. Taylor motivation theory.

F.W.Taylor motivation theory:

I. Money is the main motivator.
II. If employees are paid more, they work more.
III. Work is broken down into simple processes, and more money is paid which will
increase
IV. the level of productivity an employee will achieve.
V. The extra pay is less than the increased productivity.

Q. Explain the limitation of FW Taylor motivation theory.

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

Q. Explain in details about Maslow motivation theory

Maslow motivation theory:
Maslow created what is known as the hierarchy of needs.

In this diagram, there are 5 different types of motivation:

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

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

Businesses realise that the more levels of motivation are available to workers, the harder
they will work. Maslow also suggest that each level of motivation must be achieved before
going to the next level. Once one level of motivation is met, more of that will no
longer motivate the employee.

Q. Explain the limitation of Maslow motivation theory

Cons of Maslow:
• Some levels are not present in some jobs.
• Some rewards belong to more than one level on others.
• Managers need to identify the levels of motivation in any job before using it to
motivate employees.

Q. Explain in details about Herzberg motivation theory

To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also have
motivational factors/motivators, which are required for the human to grow psychologically.

Hygiene factors Motivational factors

• Status. • Achievement.
• Security. • Recognition.
• Working conditions. • Personal growth/development.
• Company policies and administration. • Advancement/promotion.
• Relationship with supervisor. • Job satisfaction.
• Relationship with subordinates.
• Salary.

To Herzberg, if the hygiene factors are not satisfied, they will act as demotivators. They are
not motivators, since the motivating effect quickly wears off after they have been satisfied.
True motivators are Herzberg's motivational factors.

Q. Explain in details about McGregor motivation theory.

McGregor splits his theory into what managers believe. One type believes in theory X, while
the other type believes in theory Y.

Here is the table:

Here are some differences in how a X manager will work and how an Y manager will work:

X manager Y manager
• Y managers believe that people want
• X managers believe that people are to do a good days work but need a
naturally lazy, and has to be pushed with good environment to do the work. A
external factors to work harder. (e.g. higher better environment is an internal

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pay). factor.
• X managers will try to provide incentives • Y managers will try to provide a
and supervision for employees to work hard. favourable environment so that
Theory's like Taylor's theory are X theories employees can enjoy their work.
• while others like McGregor's theory
are Y theories

People may say that money is the main motivator, but studies have shown that many people
leave jobs because other motivational factors are not available to them.

Q. Why do people work?

Here is a summary of why people work:
• Money: to satisfy needs and wants.
• Security: knowing that you are physically safe and have job security.
• Social needs: to belong to a group, making friends at work.
• Esteem needs (self-importance): feeling important, feeling the job you do is
important.
• Job satisfaction: enjoyment from the feeling of having done a good job.

Q. Outline the types of motivation.

There are three ways to motivate a workforce:

i. financial motivators
ii. non-financial motivators
iii. ways to increase job satisfaction

Q. Discuss in detail about the financial motivation

The types of financial motivation:

Financial rewards
Pay may be the basic reason why people work, but different kinds of pay can motivate people
differently. Here are the most common methods of payment:

Wages
Wages are paid every week, in cash or straight into the bank account, so that the employee
does not have to wait long for his/her money. People tend to pay wages to manual workers.
Since wages are paid weekly, they must be calculated every week which takes
time and money. Wages clerks are paid to do this task. Workers get extra pay for the
overtime that they do. There are some ways that wages could be calculated:

Time rate: Time rate is payment according to how many hours an employee has worked. It
is used in businesses where it is difficult to measure the output of a worker.
+ Easy to calculate the wage of the employee. A time-sheet must be filled out by the
Accounts department to calculate the wage.
- Both good and bad workers get paid the same wages. Therefore, more supervisors are
needed to maintain good productivity. A clocking-in system is needed to know how many
hours an employee has done. Here is an example of a wage slip and time-sheet:

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They show:
• Basic pay + Overtime = Gross Pay
• Gross pay - Deductions = N et Pay

Deductions include:
• Taxes
• Pension
• Union fees
• National insurance: entitles the payee to short-term unemployment benefits, sickness
benefits and state pension.

Piece rate: Piece rates are paid depending on how many units they have produced. There is
usually a base pay (minimum wage) and the piece rate is calculated as a bonus on how many
units were created. Piece rates are found in businesses where it is possible to measure a
workers productivity.
+ Encourages workers to work faster and produce more goods.

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 - Workers will often neglect quality, and businesses will need a quality control system
which is expensive.
- Workers who focus on quality will earn less. Tension is caused when some workers earn
more than others. - If machinery breaks down, employees earn less. That is why there is a
guaranteed minimum pay.

Salaries
Salaries are paid monthly, and normally straight into the bank account. They are usually for
white collar workers. A salary is counted as an amount per year that is divided into12
monthly accounts. You do not usually receive overtime. Managers only need to pay their
workers once a month, and since the amount is transferred by the bank, the manager loses
much less time and money calculates salary. Salaries are usually a standard rate, but other
rewards could be given to employees:

Commission: A percentage is paid, usually to sales staff, depending on the value of goods
they have sold. Workers are encouraged to sell more. However, they could persuade
customers to buy products they don't really want, making the company look bad. Just like the
piece rate, in a bad month where there are little sales, worker's pay will fall.

Profit sharing: Employees receive a percentage of the profits made. However, they will get
nothing if the business doesn't make a profit. This is often used in the service sector, where it
is hard to find an employee’s contribution to the company.

Bonus: A lump sum paid to employees who have done well. It is usually paid at the end of
the year or before holidays. However, this could cause jealousy between workers. Giving
bonuses to a team works better.

Performance related pay: Employee pay is linked to the effectiveness of their work. It is
often used in organisations where it is hard to measure productivity. It uses the system of
appraisal: employees are observed and their colleagues are interviewed to
determine their effectiveness. Afterwards, the immediate superior of the employee has a
meeting with them to discuss their effectiveness.

Share ownership: Employees receive some shares from the company. They will either
benefit from dividends or sell the shares when their price has risen. They will be more
motivated because they feel like a part of the company.

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Q. Explain in detail about non-financial motivation or fringe benefits
There are other factors that motivate people in a business, and they are often called perks or
fringe benefits. They may be having free accommodation, free car, etc... However, when
you look at it, it is just money in different forms. Here is a list of these motivators:
• Children’s education fee paid.
• Discounts on company products.
• Free Healthcare.
• Company vehicle.
• Free accommodation.
• Share options.( Where company shares are given to employees)
• Expense accounts.(free food and clothing)
• Pension.
• Free holidays.

Q. State the other ways of non-financial motivation.

The other form of non-financial motivation are as follows:

a. Job satisfaction
b. Job rotation
c. Job enlargement
d. Job enrichment
e. Autonomous work groups or team working

Q. Describe the other ways of increase motivation or job satisfaction. (or)

Outline different methods to increase job satisfaction for particular types of work.

a.Job satisfaction:
Employees will become more motivated by enjoying the job they do. Job satisfaction can
come in different ways. However, there are some factors that demotivate employees if they
are not satisfied, and must be satisfied before the motivators can take effect.

Here are some things that make workers' jobs satisfying:

a. Pay.
b. Promotion.
c. working conditions.
d. Fringe benefits.
e. Management
f. Working hours.
g. The nature of the work itself.
h. Colleagues, etc...

Herzberg and Maslow stresses that things such as responsibility recognition is also crucial
to provide job satisfaction. Letting workers contribute to the job would also help, making jobs
less boring and more creative. Here are some policies to increase job satisfaction:

b. Job rotation:
Workers in a production line can now change jobs with each other and making their jobs not
so boring. It helps train the employee in different aspects of their jobs so that they can cover
for other employees if they do not show up.

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c. Job enlargement:
Adding tasks of a similar level to a worker's job. Job enlargement simply gives more variety
to employees' work which makes it more enjoyable.

d.Job enrichment:
Adding tasks of a higher level to a worker's job. Workers may need training, but they will
be taking a step closer to their potential. Workers become more committed to their job
which gives them more satisfaction.

e.Autonomous work groups or team working:

This is when group of workers are given total responsibility to organise themselves and
perform a task. This makes the employees feel more important, as well as giving them a
sense of belonging when they are part of a team. If they organise themselves differently
every time, the team could get job enlargement and job enrichment too!

Q. Difference between financial and non-financial rewards/ motivation.

Incentives/Motivation: It means all the measures or techniques which are used to

motivate people to improve the performance.

Financial / Monetary motivation N on-financial / N on- monetary

motivation
The rewards which can be The rewards which cannot be
calculated in terms of money. calculated in terms of money.
Piece rate work Empowerment
Bonus Job enrichment/ Job rotation/Job
enlargement/ Job satisfaction
Profit share Consultation
Performance related pay Team working
Share ownership Flexible working
Company perks Delegation

Q. Identify when motivational methods would be appropriate to use

Ans) Choosing methods of motivation:

The managers can use different methods to motivate workers.

However, there is no 'best' method of motivation. Managers must choose the method that they
think is best to motivate different types of worker. They may consider the following factors
when choosing which method to use:

• What is the cost to the business of using a particular method? Every method wehave
discussed above will increase costs. Can the business afford it? Will the benefit to the

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business of motivating workers be greater than the increase in costs of doing so? For
example, using job redesign to improve motivation might reduce the absenteeism of workers
or reduce the number leaving the business. This will improve productivity and reduce
recruitment costs. If this cost-saving is greater than the costs of redesigning jobs, then it has
been a success.

• Some methods of motivation can only be used for certain types of workers; forexample
piece-rate system is only suitable for production workers.

• A method of motivation which works of r one worker or group of workers, may not work for
other workers. For example, some workers might be motivated by higher pay for working
longer hours, but others might be satisfied with lower pay and longer leisure hours.

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 Chapter 7: Organisation and Management
Q) What is organisational structure?
Organisational structure refers to the levels of management and division of responsibilities
within a business, which could be presented in an organisational chart. For simpler
businesses in which the owner employs only himself, there is no need for an organisational
structure. However, if the business expands and employs other people, an organisational
structure is needed. When employing people, everybody needs a job description.

Q) Define the term Functional departments.

The main activities of business: finance, marketing, operations, human resources and
research and development.

Q) What is role/Functions of management?

Role of management:
a) Planning
b) Organising
c) Commanding
d) Coordinating
e) Controlling

Q) Define the term job description.

A job description is a document that states an overview of the duties, responsibilities, and
functions of a specific job in an organisation.

Q) Define the term job specification.

A job specification is a statement of the qualifications, personality traits, skills, etc. required
by an individual to perform the job.

Q) Explain the advantages of job description.

These are its main advantages:
• People who apply can see what they are expected to do.
• People who are already employed will know exactly what to do.
Here is an example of a Job Description taken from the book:

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When there is more than one person in a small business and they all do different things, it
means that they are specialising in different jobs.

Q) Define the term organisational structure.

Definition of Organisational structure: the formal, internal, framework of a business that
shows how it is managed and organised.

Q) Define the term Hierarchy.

The number of levels in the organisational structure.

Q) What is meant by organisational charts?

Organisational charts: Eventually, when a business grows larger and employs many people,
they will have to create an organisational chart to work out a clear structure for their
company.

• It is a hierarchy. There are different levels in the business which has different
degrees of authority. People on the same level have the same degree of authority.
• It is organised into departments, which has their own function.

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 • It shows the chain of command, which is how power and authority is passed down
from the top of the hierarchy, and span of control, meaning how many subordinates
one person controls, of the business.

Q) Explain the advantages of an organisational chart.

Advantages of an organisational chart:
• The charts shows how everybody is linked together. Makes employees aware of the
communication channel that will be used for messages to reach them.
• Employees can see their position and power, and who they take orders from.
• It shows the relationship between departments.
• Gives people a sense of belonging since they are always in one particular department.

Q) Draw a chart to explain the Chain of command and wide & narrow span of control:

Chain of command and span of control: The longer the chain of command, the taller the
business hierarchy and the narrower the span of control. When it is short, the business will
have a wider span of control.
In recent years, people have begun to prefer to have their business have a wider span of
control and shorter chain of command. In some cases, whole levels of management were
removed. This is called de-layering. This is because short chains of commands have these
advantages:

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 • Communication is faster and more accurate. The message has to pass through less
people.
• Managers are closer to all employees so that they can understand the business better.
• Spans of control will be wider, meaning that the manager would have to take care of
more subordinates, this makes:
• The manager delegate more, and we already know the advantages of delegation.
• Workers gain more job satisfaction and feel trusted because of delegation.
However, if the span of control is too wide, managers could lose control. If the subordinates
are poorly trained, many mistakes would be made.

Q) What is meant by chain of command?

Chain of command: It is the structure in an organization which allows instructions to be
passed down from senior management to lower levels of management.
(Or)
Chain of command: the route through which authority is passed down through an
organisation.

Q) Define the term span of control.

Span of control is the number of subordinates working directly under a manager.

Q) What is meant by delayering?

Delayering: reducing the size of the hierarchy by removing one or more levels - most often
middle management.

Q) Explain the merits and demerits of delayering.

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Q) Define the term centralised and decentralised organisation.
Centralised organisation: one where all the important decision-making power is held at
Head Office, or the centre.
Decentralised organisation: one where the decision-making powers are passed down the
organisation to lower levels.

Q) Explain the merits and demerits centralised and decentralised organisation.

Q) Explain the number of factors that affect the size of the span of control.
There are a number of factors that affect the size of the span of control including:
• The difficulty of tasks - if the work that subordinates do involves simple and repetitive
tasks, then a wide span of control can be used. The more complex the task subordinates do,
the more likely that a narrow span of control will be used.
• The experience and skills of workers - highly skilled and experienced workers may
require less control than those who are less skilled and less experienced. The span of control
will often be wider when subordinates are more skilled and more experienced.

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• The size of the business - larger businesses are often able to afford to employ more
managers than smaller businesses. The span of control of individual managers in a large
business is often narrower than that for managers in small businesses.
• Levels of hierarchy- managers in tall organisation structures will usually have narrower
spans of control than managers in flat organisation structures.
• Management style - some businesses use a management style that has greater control over
the workforce than others. In this type of business, managers have a narrow span of control.

Q) Explain the number of advantages and disadvantages of wide and narrow spans of
control.

Q) Define the term line managers.

Line managers have direct responsibility over people below them in the hierarchy of an
organization.
Q) Define the term staff managers.
Staff managers are specialists who provide support, information and assistance to line
managers.
Q) Define the term Functional departments.
The main activities of business such as finance, marketing, operations, human resources and
research and development.

Q) Explain in brief about the functional departments in the organisation.

Functional departments:
Here is an example of an organisational chart from a larger business from the book:

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Here are the key features of this graph:
The business is divided into functional departments.
They use specialists for each job and this creates more efficiency. However, workers are
more loyal to their department than to the organisation as a whole. Therefore, conflict can
occur between different departments. Managers working in these departments are called line
managers, who have direct authority and the power to put their decisions into effect over
their department.
• Not only are there departments, there are also other regional divisions that take care
of outlets that are situated in other countries. They use the local knowledge to their
advantage.
• There are some departments which do not have a distinctive function but still employs
specialists and report directly to the CEO/Board of Directors.
These departments are the IT department, and the Economic Forecasting department.
Some say the HR department fits in this category. These departments give specialist advice
and support to the board of Directors and line managers, and the managers of these
departments are called staff managers. They are often very highly qualified personnel
who specializes in only their area.

Q) Discuss the advantages and disadvantages of staff managers.

Here are the pros and cons of employing staff managers
Pros:

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• Staff managers help and provide advice for line managers on things such as computer
systems.
• Helps line managers concentrate on their main tasks.
Cons:
• There may be conflict between the two groups on important decisions and views.
• Line employees may be confused and do not know who to take orders form, line or staff
managers

Q) What managers do in the organisation?

The role of management in most organisations managers are responsible for:
• setting objectives
• motivating workers
• making sure workers have the resources they need to complete their tasks.

Q) Explain the role/functions of management in the organisation.

The role/functions of management are:
All organizations have managers. They can come by the name of director, headmaster, etc...
but they all perform similar tasks. These tasks are:
i) Planning: Planning for the future involves setting goals for a business. These goals give
the business a sense of direction and purpose. No the whole business will have something
to work towards. Managers also need to plan for resources which will be needed. These are
only two strategies managers use to keep the business running.
ii) Organising: A manager cannot do everything by himself. Therefore, jobs must be
delegated to employees. Employees need sufficient resources to complete their job, so
managers need to organise people and resources effectively.
iii) Commanding: Commanding refers to guiding, leading and guiding subordinates which
is very important in any organisation. Managers need to make sure that all subordinates are
following targets and deadlines. It is the responsibility of the manager to ensure that all
tasks are completed and therefore instruction and guidance must be provided to employees
so that they can do so.
iv) Coordinating: Managers need to bring people together in a business for it to succeed.
This is called co-ordination. If different functional departments do not co-ordinate, they
could be doing completely different things which does not follow any common plan.

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Managers could co-ordinate the departments by holding regular meetings or setting up a
project team with different members from different departments.
V) Controlling: Controlling means evaluating the performance of subordinates, so that
corrective action can be carried out if the subordinates are not sticking to goals.

Q) What management gives to an organisation?

• a sense of control and direction.
• co-ordination between departments, preventing wastage of efforts.
• control of employees.
• making the most out of resources (organisation)

Q) What makes a good manager?

There are different views of why some managers are better than others. Some say that
managers are born that way, while others say good managers are trained. However, good
managers do have these distinct characteristics:
• intelligence: to understand difficult ideas and deal with different issues.
• initiative: to be able to think of solutions and take control of situations.
• self-confidence: to be willing to lead others and be a model image.
• assertiveness and determination: to be able to take command of others and take
ideas and solutions to the end.
• communication skills: to be able to inform subordinates in a clear way so that they
will respond positively.
• energy and enthusiasm: to work with high effort and involvement so that others will
follow.

Q) Define the term delegation.

Delegation: Delegation refers to giving a subordinate the responsibility and authority to do
a given task. However, the final responsibility still lies with the person who delegated the
job to the subordinate.
(or)

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Delegation: passing authority down through the organisational hierarchy to a subordinate.

Q) Define the term subordinate.

Subordinate: an employee who is below another employee in the organisation's hierarchy.

Q) Explain the advantages and disadvantages of delegation for managers.

Here are the advantages of delegation for managers and employees, as well as why some
managers choose not to delegate.
Pros for the manager:
• By letting subordinate do smaller tasks, managers have more time to do more
important tasks.
• Managers are less likely to make mistakes if tasks are done by specialist employees.
• Managers can measure the success of their task more easily.
Pros for the subordinates:
• Work becomes more interesting and rewarding.
• Employees feel important and trusted.
• Helps train workers, giving them better career opportunities.

Q) Why some managers don't want to delegate?

• Managers are afraid that their employees will fail.
• Managers want total control.
• Managers are scared that the subordinate will do tasks better than them, making them
feel insecure.
Delegation must mean:
• A reduction in direct control by managers or supervisors.
• An increase in trust of workers by managers or supervisors.

Q) Why is it important to have good managers?

• To motivate employees
• To give guidance and advice to employees they manage.
• To inspire employees they manage to achieve more than they thought possible.
• To keep costs under control.

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 • To increase profitability of the business.

Q) Define the term leadership styles.

Definition of leadership styles: Leadership styles are the different approaches to dealing
with people when in a position of authority autocratic, democratic and laissez-faire.

Q) Explain the meaning of Leadership and its types of leadership styles.

Leadership has a great impact on worker's motivation. Good managers have leadership skills
that inspire their workers to work better, as well as directing them with a common goal.
Managers use many styles of leadership, and they can be summarised into 3 main styles of
leadership:
i) Autocratic leadership is where the manager expects to be in charge of the business
and to have their orders followed.
Autocratic leadership:
• The manager controls all aspects of their subordinates' work.
• They keep themselves separate from employees.
• Employees are expected to obey every command and cannot contribute to
decisions.
• Communication is only top-down.
ii) Democratic leadership gets other employees involved in the decision-making process.
Democratic leadership:
• The manager discusses tasks with his employees before making decisions.
• Communication will be two-way, both top-down and bottom-up.
iii) Laissez-faire leadership makes the broad objectives of the business known to employees,
but then they are left to make their own decisions and organize their own work.
Laissez-faire leadership:
• Objectives are shown to employees, but the task is completely delegated to them.
• Communication can be difficult since clear instructions are not given.
• The manager has a limited role in this type of leadership.
Here is a diagram to summarise the leadership styles:

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

Q) Explain the features of autocratic, democratic and Laissez-faire leadership.

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Q) Discuss in briefly on choosing a leadership style skills of workers.
There is no one 'best' leadership style that fits every business situation. Each of the styles
discussed above have their strengths and weaknesses and which one is best will depend on a
number of factors, including:
• The skills and experience of the workforce- the more skilled and experienced workers are,
the less important it is for the manager to make all decisions and supervise workers. A more
democratic leadership style may be 'best'.
• The time available to make a decision - if a decision needs to be taken quickly, then there
will be no time to discuss the situation with workers. This will require an autocratic approach
to management. However, if there is time to consult and for workers to participate in the
decision-making process, then a more democratic management style may be used.
• The personality of the manager - some managers are naturally autocratic or naturally
democratic. It can be very difficult to use a management style which is opposite to their own
personal style.
• The task to be completed - you have already seen how workers whose tasks require them to
be innovative and creative may be more motivated with a laissez-faire leadership style. The
nature of the task, for example complex, simple or creative, may require different leadership
styles.

Q) Define the term trade union.

Trade Unions: A trade union is a group of workers who have joined together to ensure
their interests are protected.
Employees with similar interests (higher pay) form a trade union. Trade unions are a form of
pressure group with has the ability to influence business activity.

Q) Why do workers join a trade union?

Unions have a shop steward, who is an unpaid representative of the union. When someone
is new to a job they may ask if they may want to join. If the person joins, they will have to
pay an annual subscription. This money will be used for employing union officials who
will represent the views of the employees.

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Q) Explain the advantages and disadvantages of joining trade union.
Advantages of a union
• Strength in numbers.
• Improved conditions of employment.
• Improved working conditions.
• Improved sickness benefits, pensions, and retrenchment benefits.
• Improved job satisfaction and encourage training.
• Advice/Financial support if a worker is dismissed unfairly/made redundant or
is asked to do something not part of their job.
• Improved fringe benefits.
• Employment where there is a closed shop, which is when all employees in a
business must belong to the same union.
Disadvantages of a union
• Costs money to be a member.
• May be required to take industrial action even if they don’t agree.

Q) What action trade union carrying out?

Trade unions help their members by carrying out the following roles:
• Negotiating with employers to improve pay and working conditions - this is
the main role of trade unions. They will represent their members in talks with
employers at national or local level on issues such as pay, hours of work, holidays,
health and safety in the workplace. Negotiations between trade unions and
employers are known as 'collective bargaining'.
• Resolving conflict - when there is disagreement between an employer and its
workers which the workers themselves have been unable to resolve then the trade
union will try to negotiate a solution on behalf of its members.
• Providing legal support and advice - a trade union will provide its members with
advice about their legal rights as an employee. If a worker is treated unfairly by
an employer, for example dismissed without good reason, then their trade union
will offer the services of legal specialists so that they are able to take legal action
against the employer.
• Providing services for members - many trade unions provide a range of benefits for
members including pension schemes, insurance schemes, holiday schemes and
many other benefits.

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Trade unions need to:
• Put forward their views in the media to influence government decisions on pay,
employment, etc…
• Improve communications between workers and managers.

Q) Define the term Closed shop.

A closed shop is when all employees must be a member of same trade union. It is because its
members feel that the union is doing nothing when non-members receive the same pay rises
as them. They think it is unfair. Trade unions also gain greater strength if all the employees
are members of the union. However, many people think that it is unfair since they are forced
to join – they should be able to make their own decisions.

Q.Explain the advantages to the employee and the employer in the closed shop.
Advantages to the employee:
• Discussions are clearer if there is only one union to deal with.
• The union has greater power.
• N o disagreements between different unions.
• A better working relationship should develop between the union and the management.
• Disputes are solved more quickly.

Advantages to the employer:

• Discussions are clearer.
• A better working relationship should develop, meaning that there would be less
industrial disputes, benefiting both employees and employers.
• Disputes are solved more quickly.
• It is easier to agree to changes.

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 Chapter 8 Recruitment, selection and Training of workers
Q. What is the work/role of the Human Resources department (HR)?
The work of the Human Resources department: We all know that recruitment and
selection is one of the tasks that the HR department fulfils. The other tasks will be discussed
below:
• Recruitment and selection: Involves selecting and attracting the best workers.
• Wages and salaries: Must be enough to motivate or attract workers.
• Industrial relations: There must be effective communication between departments.
• Training programme: Must meet the training needs of employees and accomplish
business objectives.
• Health and safety: Must do things according to the law.
• Redundancy and dismissal: Must obey all laws when firing workers.

Q. Define the term Recruitment.

Recruitment is the process from identifying that the business needs to employ someone up to
the point at which applications have arrived at the business.

Q. Explain the purpose of recruitment.

Workers are needed when a business starts up, expands or an existing employee leaves.
Businesses use the recruitment process to successfully employ the right people. This
process is usually undertaken by the HR department, but in small business,
HR departments do not exist since the businesses employ too little workers for it to be of
much use.

Q. Describe the each stages of recruitment and selection process.

Here is a diagram summarizing the recruitment and selection process:
1. Vacancy arises.
2. A job analysis is done, which identifies the responsibilities and tasks of the job.
3. A job description lists that responsibilities and tasks to the candidates who apply for the
position.
4. A job specification outlines the required qualifications, expertise and experience a
candidate needs so that they can be accepted.
5. The job is advertised in the appropriate media. (e.g. newspapers)

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6. Candidates fill out application forms, which are short-listed so that only the best
candidates remain.
7. Interviews are held with remaining candidates, and the ones suitable for the job are
selected.
8. Vacancy filled.

Q. Define the following terms

A) Job Analysis: It is identifies and records the responsibilities and tasks relating to a job.
b) Job description: outlines the responsibilities and duties to be carried out by someone
employed to do a specific job.
c) Job / Person specification: It is a document which outlines the requirements,
qualifications, expertise, physical characteristics, etc. for a specified job.
(or)
a list of the qualifications, skills, experience and personal qualities looked for in a successful
applicant.

Q. Difference between the Job analysis and job description.

Job analysis: When a new employee is needed, a job analysis identifies and records the
responsibilities and tasks relating to a job. This should be easy for a job that needs
replacement, but not so much for a job that has just been created.
Job description outlines the responsibilities and duties to be carried out by someone
employed to do a specific job.
(or) a list of the key points about a job, job title, key duties, responsibility and accountability.

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Q. Identify two features of a job description.
Once all the details of the job have been gathered, a job description needs to be drawn up.
This job description has several functions:
Given to candidates so they will know what the job will involve.
• Allows a job specification to be drawn up which will state the requirements for the job.
• Shows whether an employee carries out the job effectively or not. It helps solve disputes
between employees and employers about wages, working hours, etc.

Q. Outline the details of job description any business will usually contain.
The job description for any business will usually contain:
• The title of the job.
• The department one will work in.
• Who will be in charge of the job-holder.
• Who the job-holder will be in charge for.
• The purpose of the job (job summary).
• The main duties of the job.

Q. State the additional information in the job description.

Job description contains sometimes additional information about:
• The conditions of employment – working hours, wages, pension schemes.
• Training that will be offered.
• Opportunities of promotion.

Q. What is meant by job specification?

Job specification is a document which outlines the requirements, qualifications, expertise,
physical characteristics, etc. for a specified job.
After the job description has been drawn up, the qualifications for the job can be identified.
They usually include:
• The level of educational qualifications.
• The amount and type of experience.
• Special skills, talents (aptitude) or knowledge.
• Personal characteristics. (e.g. type of personality)

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Q. What is the purpose of Advertising the vacancy?
To get people to know that there is a job vacancy to be filled.

Q. Define the term internal recruitment.

Internal recruitment: The vacancy is filled by someone who is an existing employee of the
business. It might be suitable for employees seeking promotion.
(or)
filling a vacant post with someone already employed in the business.

Q. Explain the merits and demerits of internal recruitment.

Pros of internal recruitment:
• Saves time and money.
• The candidates' reliability, ability and potential are already known.
• The candidates know the expectations and rules of the company.
• Motivates other employees to work harder to get promoted too.
Cons of internal recruitment:
• No new ideas or experience come into the business.
• May create jealousy and rivalry between existing employees.

Q. Define the term external recruitment.

External recruitment: It is when a vacancy is filled by someone who is not an existing
employee and will be new to the business.
Most vacancies are filled with external recruitment, which always involves advertising the
vacancy.
(or)
filling a vacant post with somebody not already employed in the business

Q. Explain the merits and demerits of External recruitment.

The main benefits to a business of external recruitment are:
• External applicants might bring new ideas and this can improve the effectiveness
and efficiency of the business.
• There will be a wider choice of applicants with different skills and experience.
• It avoids the risk of upsetting workers when someone who is internal is promoted.

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The limitations of external recruitment include:
• It takes longer to fill the vacancy.
• It is more expensive than internal recruitment because of advertising costs and the
time spent interviewing candidates.
• External applicants will need induction traning, which increases their expenses.

Q, Discuss the suitable media of advertising for external recruitment.

Here are some suitable media of advertising:
• Local newspaper: Usually for office and manual workers. These people are plenty since
the job does not require too much skill.
• N ational newspaper: Used to find workers for senior positions that requires a lot of skills.
It can be read by people anywhere in
the country or overseas.
• Specialist magazines: Used for particular technical specialists such as physicists. Can be
used to hire people in the home
country or abroad.
• Recruitment agencies: Keeps details of qualified people, and will send the suitable
applicants to interviews when a business
asks for a worker. Many businesses prefer to use recruitment agencies to find them workers
because it is easier. However, it is
expensive since their fee is based on a percentage of the workers pay.
• Government job centres: Place where businesses can advertise their vacancies. These
vacancies are usually for unskilled or semi-skilled workers.

Q. Difference between internal and external recruitment.

A business can recruit in two different ways:
Internal recruitment is when the business looks to fill the vacancy from within its existing
workforce
External recruitment is when the business looks to fill the vacancy from any suitable
applicant outside the business
Of course, the option to use BOTH internal and external recruitment can be used. This
is often the case for senior management appointments.

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Q, Explain the merits and demerits of Internal recruitment,
Advantages:
1. Cheaper and quicker to recruit
2. People already familiar with the business and how it operates
3. Provides opportunities for promotion with in the business – can be motivating
4. Business already knows the strengths and weaknesses of candidates

Disadvantages:
1. Limits the number of potential applicants
2. No new ideas can be introduced from outside
3. May cause resentment amongst candidates not appointed
4. Creates another vacancy which needs to be filled

Q, Explain the merits and demerits of External recruitment

Advantages:
1. Outside people bring in new ideas
2. Larger pool of workers from which to find the best candidate
3. People have a wider range of experience

Disadvantages:
1. Longer process
2. More expensive process due to advertising and interviews required
3. Selection process may not be effective enough to reveal the best candidate

Q. Define the term Job advertisement.

A job advertisement is an informative text that describes job vacancies and details for
potential applicants. They attract people by describing the benefits of the job, as well as what
they're looking for in their candidates.

Q. Explain the drawing up an advertisement for the business.

This is what a business needs to decide when drawing up an advertisement:
What should be included.
• Job description

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• Job specification
• Where the ad will be placed.
• (depends on job)
• Advertising budget.
• (depends on job)

Q. What is meant by Applications forms and CVs/ résumés?

Applications forms and CVs / résumés/Bio data:
When a person applies for a job, he will have to fill out an application form, or write an
application letter with a CV enclosed. CVs are descriptions about one's qualifications and
skills in a set format.
Businesses will use application forms and CVs to see whether an applicant match the job
specifications or not. The closest matching applicants are invited to interviews in the
selection stage. A short-list is drawn up.
These are what CVs should contain:
• Name
• Address
• Telephone Number
• Date of Birth
• Nationality
• Education and qualifications
• Work experience
• Positions of responsibility
• Interests
• Names and addresses of references.
The letter of application should contain briefly:
• Why the applicant wants the job.
• Why the applicant feels he/she would be suitable.
Applicant forms ask for the same information as the application letter and CV, but may ask
for other types of information.

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Q. Define the term interview.
a meeting of people face to face, especially for consultation.
Q. Discuss the process of interviews.
Interviews
Applicants who are invited to interviews will have provided the names and addresses of their
references. These people can give their opinions on the reliability, honesty and skills of the
applicants and they will be likely to tell the truth because the applicants will not know what
they have said.
Interviews are the most popular form of selection. However, interviews are not always the
most reliable process of selection. They aim to find out these things:
• The applicant's ability to do the job.
• Personal qualities those are advantageous and disadvantageous.
• General characteristics – whether they can "fit in"?

These are the likely questions in an interview:

• Why have you applied for the job?
• What do you know about this company?
• What qualities do you have to offer the company?
• What ambitions do you have?
• What are your hobbies and interests?
• Do you have any questions to ask us?

Q.What are the types of tests will used to select people during interview process?
Interviews can be one-to-one, two-to-one, or a panel of people to interview people which is
used to select people for important jobs.
Some businesses include tests in their selection.
• Skill tests: To test the skills of the candidates.
• Aptitude tests: To test how easily candidates can be trained/learn new things.
• Personality tests: To test for people who have specific personal qualities which will fit into
jobs – e.g. that has a lot of stress; requires you to work with a team.
• Group situation tests: To test how well applicants work with other people.
Rejecting unsuccessful applicants
When applicants fail to get the job, they should be informed and thanked for applying.

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Q. What is meant by contract of employment?
It is a legal requirement that workers are given a written contract of employment. This is a
legally binding agreement between the employer and the employee.

Q. Explain the details given in the contract of employment.

The contract of employment
It will set out the terms of the relationship between the employer and the employee. It
includes the following:
• Name of employer and employee
• Job title
• Date when employment is to begin
• Hours to be worked
• Rate of pay and any other benefits such as bonus, sick pay, pension
• When payment will be made
• Holiday entitlement
• Amount of notice to be given to terminate the employment that the employer must give to
end the employment

Q. Define the term.

a) Part-time: Employment is often considered to be between 1 and 30-35 hours a week.
b) Full-time: Employees will usually work 35 hours or more a week.

Q. Explain advantages and disadvantages of part-time workers to the employer.

Advantages of part-time workers to the employer:
• More flexible in the hours of work
• Easier to ask employees just to work at busy times
• Easier to extend business opening/operating hours by working evenings or at weekends
• Fits in with looking after children and therefore employee is willing to accept lower pay
• Less expensive than employing/ paying a full-time worker
Disadvantages of part-time workers to the employer:
• Less likely to be trained because the workers se the job as temporary or the employers
think the employees will leave or
won’t want promotion

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• Takes longer to recruit two part time workers than one full-time worker
• Can be less committed to the business/ more likely to leave to get another job
• Less likely to be promoted because they will not have gained the skills and experience as
full-time employees.
• More difficult to communicate with part-time workers when they are not in work.

Q. Define the term Training.

The action of teaching a person particular skill or type of behaviour.

Q. What is purpose of Training?

Training is often needed to do achieve the needs listed below. These needs can be long-term
or short-term.
• Introduce a new process or equipment.
• Improve efficiency.
• Decrease supervision needed.
• Improve the opportunity for internal promotion.
• Decrease the chance of accidents

Q. State the objectives of Training.

Employees should know the benefits of training for them to take it seriously. Here are some
objectives of training:
• Increase skills.
• Increase knowledge.
• Change attitude, raise awareness.

Q. What are the types of training?

There are three main types of training:
a) Induction / orientation training
b) On-the-job training
c) Off-the-job training.

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Q. Define the term induction training.
Induction training: It is an introduction given to a new employee, explaining the firm’s
activities, customs and procedures and introducing them to their fellow workers.
• Introducing a new employee to their business/management/co-workers/facilities.
• Lasts one to several days.

Q. Explain the merits and demerits of induction training.

Merits:
• Helps new employees to settle into their job quickly.
• May be a legal requirement to give Health and Safety training at the start of a job.
• Means workers are less likely to make mistakes.
Demerits:
• Is time consuming
• Means wages are paid but no work is being done by the worker.
• Delays the start of the employee commencing their job.

Q. Define the term On-the-job training.

It occurs by watching a more experienced worker doing the job.

Q. Explain the merits and demerits of on-the-job training.

Merits:
• Employees are trained by watching professionals do a job.
• Only suitable for unskilled and semi-skilled jobs.
• Cuts travel costs.
• The trainee may do some work.
• Training to the specific needs of the business.
• Cost is less than off the job training.

Demerits:
• The trainer's productiveness is decreased because he has to show things to the trainee.
• The trainer's bad habits can be passed to the trainee.
• It may not necessarily be recognized training qualifications of trainee outside the
business.

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Q. Define the term Off-the-job training.
It involves being trained away from the workplace, usually by specialist trainers.

Q. Explain the merits and demerits of Off-the-job training.

Merits:
• Workers go to another place for training in the evening after work.
• Methods are varied and usually more complex.
• Usually classroom training.
• Employees still work during the day.
• Employees can learn many skills by using these techniques.
Demerits:
• Costs are high
• No work is being done and wages paid during training period.
• Trainee acquire additional qualification to leave and find another job.

Q. Define the term Workforce planning.

Workforce planning is establishing the workforce needed by the business for the foreseeable
future in terms of the number and skills of employees required.

Q, Why business need to forecast the Workforce planning?

A business will need to forecast the type and number of employees needed in the future. This
depends on the firm's growth and objectives.
The forecast can be done by:
• Finding out the skills of all current employees.
• Counting out people who are leaving soon (e.g. retirement).
• Talk to staff about who would want to retrain for new jobs.
• Provide a recruitment plan. (how many new staff are needed, and how they should be
recruited, internal or external)

Q. Why reducing the size of the workforce/ Downsize might be necessary?

Downsize the workforce or reduce the number of employees.
• Introduction of automation.
• Falling demand for their goods or services.

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• Factory/shop/ office closure
• Relocating their factory abroad
• Business has merged or taken over.

Q. Define the terms.

Resignation: termination of employment by the worker, perhaps because they have found a
job with a different employer.
Retirement: termination of employment due to the worker reaching an age beyond which
they do not need to work.
Dismissal: termination by the employer because the worker has broken company rules or is
not performing work to the required standard.
Redundancy: termination of employment by the employer because the job is no longer
needed.
(or)
It is when an employee is no longer needed and so loses their job. It is not due to any aspect
of their work being unsatisfactory.

Q. Difference between dismissal and redundancy.

Dismissal and Redundancy
There are some situations when businesses need to reduce the number of employees they
have. This can be done in two ways:
Dismissal:
• A worker is fired for unsatisfactory work or behaviour.
• Fault of the employee.
Workers may also leave their job because they:
• Retire
• resign

Redundancy: a situation in which someone has to leave their job, because they are no
longer needed
• Employees are no longer needed.

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• N ot the fault of the employee.
• Some reasons are:
• A business is closing down a factory.
• A business wants to cut costs by reducing the number of employees.
• A business has merged/taken over another and there are too many staff in certain
departments.
• New machinery replaces workers.
• Employees are given some money to compensate for their lost job.
• The money is often negotiated with trade unions.
• Some government have laws that makes businesses pay for their workers this way.
• If only some employees are to be made redundant, trade unions will agree with the fairest
way to see who goes. These terms are negotiated with the HR department.
• Sometimes there will be voluntary redundancy by members.
• Older workers.
• There may be some who wants to leave because they have other ideas.

Q. Outline the legal controls over employment issues.

Legal controls over employment issues
• Governments have passed laws that affect equal employment opportunities
• These are to assure that there is equal treatment in the workplace

Q.What does this mean for businesses?

• they have to be careful when wording an advertisement for a job
• When selecting an employee for a job they must treat all applicants equally
• By following these laws carefully, businesses should recruit and promote staff on merit
alone and this should help to increase motivation at work.

Q. Define the term Trade Union.

An organized association of workers in a trade, group of trades, or profession, formed to
protect and further their rights and interests.

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Q. In what way trade union protecting its employees.
Protecting employees: Employees need protection in the following areas:
• Unfair discrimination
• Health and safety at work
• Unfair dismissal
• Wage protection

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

Q. What is meant by ethical decisions?

Ethical decisions: a decision taken by a manager or a company because of the moral code
observed by the firm

Q. Discuss the health and safety at work.

Health and Safety at work: Laws protect workers from:
• protect workers from dangerous machinery.
• provide safety equipment and clothing.
• maintain reasonable workplace temperatures.
• provide hygienic conditions and washing facilities.
• do not insist on excessively long shifts and provide breaks in the work timetable.

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Managers not only provide safety for their employees only because laws say so. Some
believe that keeping employees safe and happy improves their motivation and keeps them in
the business. Others do it because it is present in their moral code. They are
then considered making an ethical decision. However, in many countries, workers are still
exploited by employers.

Q. Define the term industrial tribunal.

Industrial tribunal: A legal meeting which considers workers’ complaints of unfair
dismissal or discrimination at work.

Q. Explain the reasons for the employee dismissed under unfair dismissal.
Protection against unfair dismissal: Employees need protection from being dismissed
unfairly. The following reasons for the
employee to be dismissed is unreasonable:
• for joining a trade union.
• for being pregnant.
• when no warnings were given beforehand.
Workers who thing they have been dismissed unfairly can take their case to the Industrial
Tribunal to be judged and he/she might receive compensation if the case is in his/her favour.

Q. Define the terms.

a) Contract of employment: a legal agreement between employer and employee listing the
rights and responsibilities of workers.
b) Wage Protection: Employers must pay employees the same amount that has been stated
on the contract of employment, which states:
• Hours of work.
• Nature of the job.
• The wage rate to be paid.
• How frequently wages will be paid.
• What deduction will be made from wages, e.g. income tax.

Q. What is meant by minimum wage? Explain the merits and demerits of minimum
wage rate.

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A minimum wage rate is present in many Western countries and the USA. There are pros
and cons of the minimum wage:
Pros:
• Prevents strong employees to exploit unskilled workers who could not easily find work.
• Encourages employers to train unskilled employees to increase efficiency.
• Encourages more people to seek work.
• Low-paid workers can now spend more.
Cons:
• Increases costs, increases prices.
• Owners who cannot afford these wages might make employees redundant instead.
Higher paid workers want higher wages to keep on the same level difference as the lower
paid workers. Costs will rise

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 Chapter 9 Internal and external Communication

Q. Define the term communication.

Communication is the transferring of a message from the sender to the receiver, who
understands the message.
Q. Define the term message.
Message is the information or instructions being passed by the sender to the receiver.
Q. What is effective communication and why is it necessary?
Communication is when a message transferred from one person to another and is
understood by the latter. We communicate everyday (by talking, by chatting, by texting,
etc.) but we need to learn how to communicate effectively.
Effective communication means that:
"The information or message being sent is received, understood and acted upon in the way
intended." In business, ineffective communication or communication failure could result in
serious problems.

Q. Define the term internal communication.

Internal communication is between members of the same organization.
.
Q. Why do people within business need to communicate with each other?
In business, if we do not communicate, we would be working as individuals with no co-
ordination with anybody else in the
business. The management, whose tasks are guiding, instructing and commanding
subordinates could not be done because they cannot communicate with them. Here are some
common messages found in the workplace:
• Please do not smoke in this area (notice on a table)
• How many hours did you work last week (manager asks worker)
• Do not touch (sign)
• There will be a fire drill 11:00 today (notice board)
There are many more things that are communicated. Consequences would be severe if these
matters are not communicated effectively.

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Q. Define term External communication
External Communication is between the organization and other organisations or
individuals.

Q. Discuss the purpose of external communication with stakeholders.

External communication is communication between the organization and other organizations
or individuals.
Main examples of external communication are:
• Orders for goods from suppliers
• Sending information to customers about prices and delivery times
• Advertising goods or services ( in detail in chapter 14)
• Asking customers to pay bills on time
One type of communication is not more important than another.
The key feature of both types is the same.
The methods of communication are also similar though the growth of social media has made
it easier for an organization to communicate with the “outside world”. The main difference is
who is being communicated with

Q. Difference between internal and external communication.

Internal communication is messages sent between people inside a business. For example:
• The boss talking to his subordinates.
• A report sent to the CEO.
External communication refers to messages sent to people or organisations outside the
business. For example:
• Orders for goods from suppliers.
• Talking to customers.
• Advertising to the public.
Both types of communication is almost the same, the only difference is who is being
communicated with.

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Q.Why external communication has to work well? Why internal and external
communication is important in different business situations?

External communication can greatly affect the efficiency and image of a business. Imagine if
the wrong information is sent to a supplier and a customer. The supplier would send wrong
materials while the customer might buy products from another company.
Here are some cases which ineffective external communication might turn out to be very
dangerous:
• The Finance Manager writes to the tax office inquiring about the amount of tax that
must be paid this year.
• The Sales Manager records an order over the internet of 330 goods to be delivered on
Wednesday.
• The business must contact thousands of customers because a product turned out to be
dangerous. An email is sent to all customers who bought the product to ask them to
return it for a refund

Q.Define the terms

q.Transmitter or sender of the message is the person starting off the process by sending the
message.
b.Medium of communication is the method used to send a message, for example, a letter is a
method of written communication and a meeting is a method of verbal communication.

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c.Receiver is the person who receives the message.
d.Feedback is the reply from the receiver which shows whether the message has arrived,
been understood and , if necessary acted upon.

Q. Explain the process of effective communication.

Process of effective communication involves or four features:
• The transmitter/sender who sends the message. He has to choose the next two
features carefully for effective communication.
• Sender encoding the message
• The medium/channel of communication. It is the method of communication, e.g.
notice board, letter, etc...
• Decoding the message by receiver
• The receiver who receives the message.
• Feedback means that the receiver has received the message and responds to it. This
confirms that the message has been understood and acted upon if necessary.
A message is the information or instructions passed by the sender to the receiver.

Q. Explain the number of benefits to businesses due to effective communication.

Effective communication brings a number of benefits to businesses including:
• Reducing the risk of mistakes - the receiver of a message must understand what it is they
are being asked to do by the sender. If the message is not understood then the instructions or
task will not be completed correctly.
• Enabling faster decision-making - if the number of people who need to receive the
communication is kept to a minimum, then this will speed up the decision-making process.
• Enabling quicker responses to market changes - the longer it takes to communicate
changes in markets, the slower the business will be to respond and may mass marketing
opportunities as a result.
• Improving coordination between departments - decisions taken by one department often
has an impact on other departments. There needs to be effective communication between
departments so that each knows what the other is doing and can respond appropriately.
• Improving morale and motivation of the workforce - if the workforce knows what is going
in the workplace and is able to take part in discussions, this will make workers feel valued
and part of the organisation.

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• Improving customer relationships - keeping customers informed about the progress of their
orders or any new products that the business has added to itsrange will make customers feel
valued and they will want to continue to buy from
the business in the future.

Q.Define the terms.

a.One way communication involves a message which does not call for or require a
response.
b.Two-way-communication is when the receiver gives a response to the message and there is
a discussion about it.

Q. Difference between One-way and two-way communication.

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

Q. Explain the merits of two-way communication.

Advantages of two-way communication:
• The sender can now know whether the receiver has understood and acted upon the
message or not. If they have not, the message might have to be sent again or made clearer.
Effective communication takes place only if the message is understood by the receiver.
• Both people are involved in the communication process. This makes the receiver feel
more important which might motivate them to make better contributions to the topic
discussed.

Q. How to choose the appropriate communication method to the organisation? (Or)

How to select the best method of communication for different message?
Choosing the appropriate communication method:
i) Speed- is it important that the receiver gets the information really quickly.

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ii) Cost – is it important to keep costs down or is it more important to communicate
effectively, regardless of cost.
iii) Message details – If it contains technical plans, figures and illustrations then, clearly,
written and other visual forms of communication are likely to be essential.
iv) Leadership style – is the leadership style a democratic one?.If it is, then two-way verbal
forms of communications with employees are much more likely to be used than they would
be an ‘autocratic leader’.
v) The receiver – who is /are the ‘target’ receiver(s)? If just one person has to be
communicated with, and they work in the next office, then one-to-one conversation is likely
to be used. However, this would be inappropriate if hundreds of workers needed to receive a
message.
vi) Importance of a written record – if it is essential that a written record can be referred to
at sometime in the future, then, clearly verbal communication would be inappropriate. For
example, legal contracts or receipt of new orders from customers must have written records.
vii) Importance of feedback- if it is essential that the sender receiver feedback, perhaps very
quickly, then a direct verbal method of communication might be most appropriate.

Q. What are the different ways of communication or types of communication media?

Different ways of communicating / the communication media
Information can be transmitted in several ways:
• Verbal: Involves the sender speaking to the receiver.
• Written: The message is written to the receiver.
• Visual: Using charts, videos, images or diagrams to communicate a message.
There is no best method of communication, so the appropriate medium of communication
must be selected depending on the situation. First the sender also has to analyse the
advantages and disadvantages of each type of communication.

Q. What is meant by Verbal communication with examples?

Verbal/Oral communication might be:
• One-to-one talks.
• Telephone conversations.
• Video conferencing.
• Meetings.

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Q. Explain the advantages and disadvantages of verbal communication.
Verbal Pros:
• Information is transferred quickly. This is an efficient way to communicate in meeting to
lots of people.
• There is opportunity for immediate feedback which results in two-way communication.
• The message might be enforced by seeing the speaker. Here the body language and facial
expression could make the message easily understood.
Verbal Cons:
• In big meetings, we do not know if everybody is listening or has understood the message.
• It can take longer for verbal feedback to occur than written feedback.
• Verbal communication is inappropriate for storing accurate and permanent information
if a message. (e.g. warning to a worker)

Q. What is meant by written communication with examples?

Written communication including electronic communication
Here are some written forms of communication:
• Letters: Used for both external and internal communication. Follows a set structure.
• Memos: Used only for internal communication.
• Reports: Detailed documents about any problem. They are done by specialists who send
them to managers to analyse before meetings. These reports are often so detailed that they
cannot be understood by all employees.
• N otices: Pinned to notice-boards that offer information to everyone. There is no certainty
on whether they are read or not.
• Faxes: Written messages sent to other offices via telephone lines.
• E-mails: Messages sent between people with the same computing facilities. The message
is printed if a hard copy is needed.
• Intranet: A network inside a business which lets all employees with a computer message
each other.
• Internet: The global network for messaging anyone. (e.g. customers, suppliers)

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Q. Explain the advantages and disadvantages of written communication.
Written advantages:
• There is hard evidence of message which can be referred to and help solve disputes in
future over the content of the message.
• It is needed when detailed information is transferred: it could be easily misunderstood.
Some countries the law states that businesses need to put safety notices up because people
could forget them.
• The written message can be copied and sent to many people.
• Electronic communication is a quick and cheap way to get to many people.

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

Q. What is meant by Visual communication with examples?

Here are some forms of visual communication:
• Films, videos, and PowerPoint displays: often to help train new staff or inform sales
people about new products.
• Posters: can be used to explain a simple but important message. (e.g. propaganda poster)
• Charts and diagrams: Can be used in letters or reports to simplify and classify
complicated data. Computer technology could help in the design of these charts or diagrams.
A printed copy might be needed for hard data to add to reports and documents.
• Photographs and cartoons: these can be used to add variety, colour and humour to a
message –all of which may increase the chances of the communication being read and
understood by the receiver.

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Q. Explain the merits and demerits of visual communication/
Visual communication Pros:
• Present information in an appealing and attractive way that encourages people to look at
it.
• They can be used to make a written message clearer by adding a picture or a chart to
illustrate the point being made.
Visual communication Cons:
• N o feedback is possible. People need to check via verbal or written communication that
they have understood the message.
• Charts and graphs might be difficult for some people to understand. The message might
be misunderstood if the receiver does not know how to interpret a technical diagram.

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Q. Define the term formal communication.
Formal Communication is when message are sent through established channels using
professional language.
Q. Define the term informal communication.
Informal Communication is when information is sent and received casually with the use of
everyday language.

Q. Difference between Formal and informal communication

Formal communication is the channel of communication that is recognised by the business,
such as notices on boards, emails and memos. Formal means of communication is important.
It shows that the information given is true.
Informal communication might be communication between friends and co-workers. There
is no set structure and the information transferred is not recognised by the business. This
channel of communication could be used by the manager to try out new ideas, before
publicly announcing it to the rest of a company. However, informal communication can result
in gossip can rumour, and managers have no way to remove these informal links from
people.

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Q. Difference between Formal and informal communication

Q. Discuss the different direction of communication in the organisation.

The direction of communications

Here is an organisation chart from the book explaining the direction of communications
within the business. The arrows are labelled A, B and C which shows the direction of
communication:
Arrow A (downwards communication):
• Used by managers to send important messages to subordinates.
• Does not allow feedback.
• The message might be altered after passing different levels.

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Arrow B (upwards communication):
• Used by subordinate send feedback to managers.
• Feedback from subordinates ensures that there is effective communication.
• Feedback results in higher morale and new ideas contributed to the business.

Arrow C (horizontal/lateral communication):

• People at the same level of management communicate with each other.
• Information and ideas can be exchanged both formally and informally.
• Can cause conflict between departments. (e.g. Production department asks the Finance
department for a budget to hire new staff but is rejected)

Q. Define the term communication barriers.

Communication barriers are the factors that stop effective communication of message.

Q. What are the most common reasons for communication failure of barriers to
communication?
The main causes of barriers to effective communication can be divided into three main areas:
• problems with the channel of communication
• problems between senders and receivers
• problems with the physical environment.

Q. How businesses can overcome these barriers to communication?

Ways of reducing and removing communication barriers include:

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• Make sure that the language used is appropriate to the receiver. This might mean using
simple rather than complex words, or avoiding the use of complex technical terms that are not
understood by people without technical knowhow.
• Keep the channel of communication as short as possible. The more people a message is
passed through, the greater the risk of the message being changed before it gets to the final
receiver.
• The sender must always insist on receiving feedback as this shows that the message has
been received and understood.
• The sender must use the most appropriate medium for the message; for example, it would
not be appropriate to send a long and complex instruction by text message.
• Physical barriers, such as noise, should be removed. If two people are having a conversation
in a noisy environment, then they should move to somewhere quieter if the source of the
noise cannot be turned off.
• Management must build a culture of trust and respect between all employees.

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 Chapter 10 Marketing, competition and the customer

Q. What is market?
A market is where buyers and sellers come together and exchange their products for
money. It can be in the streets, on the internet, in shops around the world, etc… Customers
and sellers exchange both goods and services for money. (Or)
Market: all customers and consumers who are interested in buying a product and have
the financial resources to do so.

Q. What is marketing?
Marketing is the management process which identifies consumer wants, predict future
wants, create wants and find ways to use these wants to the fullest (most profitably). In other
words, businesses try to satisfy wants in the most profitable way possible.

Q. Define the term Customer base.

The group of customers a business sells its products to.

Q. Define the terms:

Target market: individuals or organisations identified by a business as the customers or
consumers of their products.
Customer: an individual or business that buys goods and services from a business.
Consumer: the final user of a product.
Consumer markets: markets for goods and services bought by the final consumer.
Industrial markets: markets for goods and services bought by other businesses to use in
their production process.
Business environment: the combination of internal and external factors that influence the
operations of a business.

Q. Explain the range of department comes under marketing department.

Marketing covers a wide range of activities such as: advertising, packaging, promotion, etc…
The Marketing department:
Most businesses will have a Marketing department, which will have a Marketing
Director. He will be in charge of things such as R&D, distribution and pricing. Here is an
organizational chart showing what departments the marketing director controls:

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 a) Sales department: Responsible for sale and distribution of products for each region.
There may also be an export department.
b) Research and Development department: Responsible for finding out consumer
wants and developing new products. They also need to find ways to improve an
existing product.
c) Promotion department: In charge of advertising and promotion. It will need a
marketing budget which limits the amount of money it can spend.
d) Distribution department: It transports products to their markets.

Q) Explain the important role of marketing department.

The role of marketing
a) Identify customer needs by finding out what kind of products or services customers
want, the prices they are willing to pay, where they want to buy these goods and what
after-sales service they might want.
b) Satisfy customer needs in order to achieve sales of their goods or services. Customer
want the right product, in the right place and at the right price.
c) Maintain customer loyalty by building customer relationships. It is very important to
keep existing customers(customer loyalty) and not just concentrate on attracting new
ones .It is much cheaper to try to keep existing customers (for example, with loyalty
cards) than trying to gain new customers.
d) Gain information about customers - Building a relationship with customers means
that market research information can be used to understand why customers buy
products and how they use them. This makes for better and therefore more effective
marketing.
e) Anticipate changes in customer needs by identifying new trends in customer
demand or gaps in the market so that businesses can produce goods or services which
are not currently available.

Q) Define the term Market Share.

It is the percentage of total market sales held by one brand or business.

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Q) What are the objectives of marketing?
The objectives of marketing
A successful Marketing department should be able to achieve these objectives for the
business:
• Raise customer awareness of the product or service of the business.
• To increase sales revenue and profitability.
• To increase market share (percentage of sales a product has in a market).
• To maintain or improve image of a product or company.
• To target a new market or market segment.
• Enter new market at home or abroad.
• To develop new products or improve existing ones.

Q) Define Mass market.

Where there are a large number of sales of a product. (e.g. Pepsi can be bought anywhere)
(Or) Selling the same product to the whole market.

Q) What are the benefits and limitations of mass market?

Pros:
a) The sales to these markets are very large
b) The firm can benefit from economies of scale
c) Risks can be spread - if one variety of the product fails then the other products may
still sell well.
d) Opportunities for growth of the business due to large potential sales.
Cons:
a) High level of competition between firms.
b) High costs of advertising
c) Lost sales by producing standardizes products or services and so may not meet the
specific needs of all customers.

Q) Define Niche market.

A small market for specialized, segment of a much larger market. (e.g Karate equipment
produced by Nike ) (Or)
Niche marketing: developing products for a small segment of the market.

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Q) Explain the merits and demerits of niche market.
Pros:
a) Avoid Competition from the large firm – Small firms able to sell to niche markets
as large firms concentrate on mass market instead of small market.
b) Small firms take an advantage over large ones who aim to meet the needs of the
mass market rather than the needs of these specific customers.
Cons:
a) Limited number of sales – Small business can operate in niche market. If the
business want to grow it will find sales of other products.
b) Risks not spread – It specialize in one product, if the product is no longer in demand
the business will fail as the business has not spread its risks.

Q) Define Market segments.

It is an identifiable sub-group of a whole market in which consumers have similar
characteristics or preferences.

Q. In what way market segmentation can helpful to businesses?

Segmenting a market can help a business to:
• Make marketing expenditure cost effective by producing a product which closely
meets the needs of these customers and only targeting its marketing efforts on this
segment.
• Enjoy higher sales and profits for the business, because of cost-effective marketing.
• Identify a market segment which is not having its needs fully met, and therefore offer
opportunities to increase sales.

Q) How markets can be segmented?

The main methods of market segmentation are:
• geographic segmentation
• demographic segmentation.

a) Geographic segmentation recognises that consumers in one location may have

different needs from consumers in another location. The locations may be:

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• different regions within the same country
• different regions of the world
• different countries in the world.
The geographical differences may be due to cultural reasons, religious beliefs or even
different climates.
b) Demographic segmentation is a method of dividing the whole market according
to characteristics of the population such as Income, Age, Region, Gender, Social class,
family size, use of product, Lifestyle

Q. How to decide the best place to advertise to increase sales?

A marketing manager would take all these factors into account when deciding which
segments might buy new products or improved products. Therefore, once the segments have
been identified, this will influence how the products are packaged and advertised .It will also
affect the choice of shops the products are sold in, in order to get maximum sales.

Q) What are the benefits of segmentation to business?

The business can use market segmentation to sell more products. They do this by making
different brands of a product and then aiming each brand at a different market segment. For
example: Beauty soap, baby soap, medicated soap, non-branded soap etc, to satisfy most of
the market segments.
By finding out the different segments in a market, a business can sometimes identify a
segment whose needs are not being met (there is a gap in the market). They can then produce
a suitable product to meet these customer needs and again increase sales.

Q. Discuss the choosing a method of segmentation?

There is no one correct method of market segmentation. Very often the method chosen will
depend on the type of product or service that a business wants to offer to the market. For
example, a holiday company might use demographic segmentation to divide the market for its
products according to the family size of consumers.

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Q. Why consumer spending patterns change?

The business environment is one that is constantly changing. This means that the market for
goods and services will also change over time.

The amount of money customers/consumers spend on buying goods and services is affected
by a number of factors:

• The price of the product - for most products the higher its price the tower the quantity sold
and the tower the price the greater the quantity sold.

• The price of competitors' products - most businesses is very competitive markets. If the
products of businesses are very similar then consumers are most likely to buy the product that
has the lowest price.

• Changes in consumer income - consumers can only buy products if they have the money
to do so. If consumer income falls,

• Changes in population size and structure - if a country's population grows in size then
this increases the size of the market. This could increase business sales. The structure of the
population might also change over time.

• Changes in tastes and fashion - it is easy to see the effects on sales of changes in clothing
fashion. However, other products also become more, or less, popular with changes in
consumer tastes and fashion.

• Spending on advertising and other promotional activities.

Q) Why some markets become more competitive?

Almost all markets have some level of competition within them. However, some markets
have seen a much greater increase in the level of competition than others. There are several
reasons for this.

Q) Explain the Governments intervention can affect competition in markets.

In many countries the government is an important influence on business activity.

Governments can affect competition in markets through:

• Legal controls that prevent individual firms from dominating the market

• Selling off public sector organisations to the private sector. This is known as privatisation,

• Deregulation: the removal of government controls from an industry,

• Providing financial and other assistance to new and small to medium-sized businesses.

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Q) Define Free trade.

No barriers exist that might prevent trade between different countries.

Q) Explain in brief the development of e-commerce and social networks.

Many businesses have developed their own websites and use these to sell their goods to
customers in other regions of their own country and to customers in other parts of the world.
The development of e-commerce has increased the size of a business's market but it has also
greatly increased the level of competition in this market.

Social network sites such as Facebook are also being used by businesses to promote their
products. Consumers have much more information about the suppliers of products and, while
this has increased consumer choice, it has also increased competition within the marketplace.

Q) How businesses respond to changing spending patterns and increased competition?

There are a number of actions a business can take to respond to changes in consumer
spending patterns and increased levels of competition. These include:

• Product development - market research will identify how the needs and wants of
consumers are changing. This information can be used to develop new products to satisfy the
changing needs and wants of consumers. Developing new products will help a business to
remain competitive.

• Improve efficiency- the efficient use of resources will help a business to reduce average
costs. If average costs are reduced then a business will be able to reduce the prices of its
products.

• Increased promotion - increasing advertising to persuade consumers to buy your product

and not that of competitors is another way a business might respond to changing levels of
competition and consumer spending patterns.

• Look for new markets - the better option is for a business to look for new markets for their
products. Markets where there are less competition and consumers are more likely to buy the
product.

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 Chapter 11 Market research

Q) Define the terms:

Product Oriented- business is one whose main focus of activity is on the product itself.

Market-Oriented- business is one which carries out market research to find out consumer wants

before a product is developed and produced.

Q. Difference between the Product-orientated and market-orientated businesses

A product orientated business focuses on the quality and price of the product before finding a

market for it to sell in. These type of businesses usually produce basic needs. N ew technology

could be developed this way, and customer wants are created by advertising.

Other big companies cannot afford to produce a product that will not sell, so they have to do

market research first to find consumer wants before developing a product. They are called

market-orientated businesses. They will need to set up marketing budget for this, which is a

financial plan for marketing of a product, which contains the amount of money the Marketing

department may spend on marketing.

Q) Define the term Marketing Budget.

It is a financial plan for the marketing of a product or product range for some specified period

of time .It specifies how much money is available to market the product or range, so that the

marketing department know how much they may spend

Q) Define the term Market research.

It is the process of gathering, analyzing and interpreting information about a market.

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Q) Why is market research needed?

Any business should find out what people want to buy and how many people are going to buy

that product before producing a product since the chances of failing are very high. Usually,

market research tries to answer these questions:

• What feature of the product do they like/dislike?

• Are people willing to buy the product?

• What price are people prepared to pay?

• Location of the selling point of the product.

• Type of customer who buys the product.

• Type of promotion that will be effective.

• Competition in the same industry.

Businesses need to know these things as well as consumer want to be more competitive. There

are two main types of information that can be gathered from market research:

• Qualitative information: information where opinion or judgement is necessary.

• Quantitative information: information about the quantity of something.

Q) What are two ways to gather any information for market research?

There are two ways to gather any information for market research:

1. Primary research or field research.

2. Secondary research or desk research.

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Q) Define the term Primary research or Field research

Primary research is the collection and collation of original data via direct contact with potential

or existing customers. Also called field research.

Q) What are the different types of Primary research or Field research?

There are several ways to do primary research:

1. Questionnaires

2. Interviews

3. Focus group or Consumer panels

4. Observation

Q) Explain the process of primary research.

The process of primary research

1. Identify the purpose of the market research.

2. Decide on the best method of research. (primary, secondary or both)

3. Decide on the size and type of sample (group of people who will be asked)

4. Carry out the research.

5. Collate data and analyse results.

6. Produce a report. (may include recommendations of action paths to take)

Q) Define the term Questionnaires

It is a set of questions to be answered as a means of collecting data for market research.

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Q) Explain the merits and demerits of questionnaires.

Pros:

1) Detailed qualitative information can be gathered.

2) Customers’ opinions can be gathered.

3) Easier to collate/present the results.

4) Linked to prize draw websites to encourage people to fill in the questionnaire.

Cons:

1)If the questions are bad it could mislead customers.

2) Takes time and money to carrying out questionnaires.

3) Takes time consuming to collate and analyse the results.

Q) Define the term Interviews.

Interviews are face-to-face conversations with customers where the interviewer has a set of

prepared questions.

Q) Explain the merits and demerits of interviews.

Pros:

1)The interviewer can explain any questions the interviewee does not understand.

2) Detailed information about customers' opinions.

Cons:

• Interviewer bias. The interviewer might unconsciously lead the interviewee to answer in

a certain way.

• Time consuming and expensive.

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Q) Define the term: Samples

a group of people who are selected to respond to a market research exercise, such as a

questionnaire. There could be:

Q) Define the term Random sample

:It is when people are selected at random as a source of information for market research.

Q) Define the term Quota sample

: is when people are selected on the basis of certain characteristics(such as age, gender, or

income) as a source of information for market research.

Q) Define the term Consumer panels or Focus group

Focus group is a group of people who are representative of the target market.

Consumer panels are groups of people who agree to provide information and spending

patterns about a product. They may even test it and give feedback on likes and dislikes.

Q) Explain the merits and demerits of Consumer panels.

Pros:

They provide detailed information about a product.

Cons:

They can be time consuming, expensive, and biased if opinions of some is influenced by

others.

Q) Define the term Observation

It involves:

• Recording: e.g. meters can be fitted to a monitor to see what people are watching.

• Watching: e.g. see how many people go into a shop and actually buy something.

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• Audits: e.g. counting inventory to see what has sold well. (inspecting)

Q) Explain the merits and demerits of observation.

Pros:

1) It is inexpensive.

Cons:

2) Only provide basic figures and not reasons why people do things.

Q) Define the term Secondary research or Desk research

Secondary research is information that has already been collected and is available for use

by others.

Q) Explain the internal and external sources of information of secondary research.

Internal sources of information

Data collected from past researches could easily be used again if it is needed. Examples of

internal sources of information include:

• Sales department: sales records, pricing data, customer records, sales records.

• Distribution and PR personnel.

• Finance department.

• Customer service department.

External sources of information

Data collected from sources outside the business. The data may still be useful but there are

many limitations since it has been gathered for other purposes. Sources include:

• Internet: gives all sorts of information, but the info must be validated.

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• Trade and employer associations: gives info about things in an industry.

• Specialist journals.

• Research reports.

• N ewspapers: about the economy and disposable income of workers.

• Government reports and statistics: contains things such as age groups and culture.

• Media reports.

• Market research agencies' reports: detailed reports on the economy. Expensive to buy.

Secondary research is often a much cheaper way of obtaining information. It also gains

access to data which cannot be gathered by primary research such as government issues or

the economy.

Q) Who carries out market research?

Research is done by any business that needs it. In smaller businesses, owners use secondary

research since they cannot afford to conduct primary research. However, if a business has

enough money, it can afford to have a specialist market research agency to do the research

for it.

Q) How the research was conducted and how carefully samples have been selected?

Here are some ways to make information from market research more accurate:

• A sample needs to be truly representative of the total population, hence a quota

sample is normally used.

• The larger the sample, the more accurate the results.

• Questionnaires need to be tested on a small group of people to see if there are

misinterpretations. The questionnaires will be modified to be as clear as possible.

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Concerning secondary research, there are a few problems with it:

• Data collected by others may not be accurate since it was used for other purposes.

• Data can be out of date.

All in all, it must never be assumed that information collected from market research is

completely correct.

Q) How to design and use a questionnaire?

Firstly, you need to ask yourself some questions:

• What do I need to find out?

• Who do I need to ask?

• Where will I carry out my questionnaire?

Writing the questions

• Ask no more than 12 questions. (impatience)

• Make the questions simple. The answers should be simple enough to collate. (e.g. Yes/No

answers)

• Use choice of age groups.

• Avoid open-ended questions.

• Avoid misleading the interviewee with questions. (don't want to cause offence)

• The order of the questions should be logical.

Carrying out the questionnaire

First you need to figure out:

• How you will ask the questions.

• How you will collate the results.

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 Then:

• Where are you going to ask the questions.

• Who are you going to ask?

And finally:

• How many people will be asked?

• When will you ask the questions? (time)

Q) In what way converts raw data into a form of presentation of data from market

research.

Presentation of data from market research:

Presentation of data is important because it converts raw data into a form that is easier to

understand. Information can be displayed as:

Table/tally chart:

It is the most suitable method of presenting data when raw data is needed. However, it offers

little more than that and the information should be converted into other forms if it needs to be

understood or analysed carefully. It is sufficient for info that is brief or does not contain a lot of

different things.

Bar chart:

Charts are a more meaningful and attractive way to present data. They are normally used to

compare two or more sets of stats with each other.

Pictogram:

It is similar to a bar chart but uses symbols instead of columns. It becomes extremely effective if

the data is short and simple.

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Pie chart:

Pie charts are ways to show the proportion that each components take up compared to the total

figure.

Line graph:

Graphs show the relationship between two variables. It can be drawn in a straight or curved

line. It is usually to compare things with time and to identify trends.

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 Chapter 12 The marketing mix- product

Q. What is meant by marketing mix?

The marketing mix is a term that describes how products are marketed. The rest is
summarized into the four P's-Product, price, place and promotion.
• Product: Design and quality, competitiveness, packaging, etc…
• Price: There are different pricing strategies. Businesses need to use them so that they
increase sales.
• Promotion: Advertising and promotion. Discounts, TV adverts, sales, packaging, etc…
• Place: The location of the point of sale (the shop). Channels of distribution. Type of
shop (wholesaler or retailer?)
A successful product requires effective use of the four P's. However, businesses must be
careful to not let each of these factors counteract each other (e.g. expensive but low quality
goods), else the product will fail.

Q. Explain the role of product in the marketing mix.

The role of product in the marketing mix
The product itself is the most important element in the marketing mix. Without it, the other
three wouldn't exist. Most companies today are market oriented, and will identify a suitable
product for the market before moving on to determine the other 3 elements.
Large companies have R&D departments which spends all its time developing new product
and analysing the pros and cons of competitors' products.

Q. What are the types of products?

Types of products:
• Consumer goods: Goods that are used up by consumers. (e.g. food, cake)
• Consumer services: Services that are produced for people. (e.g. education)
• Producer goods: Goods produced for businesses. (e.g. machinery)
• Producer services: Services for businesses. (e.g. accounting, insurance)
Each type of product determines the price, promotion and place to sell the product.

Q.What make products successful?.

• Products need to satisfy consumer wants/needs to be successful.
• The product must be at the right quality so that customers are willing to pay for it.

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• Costs should be low enough to make a profit.
• Design of a product is important. This means that its quality and durability should meet
expectations and match the price of the product. The design should also enhance the products
brand image.
• Products are novelties (newly introduced to the market).
• Products can stimulate new wants.

Q. Explain the process of Product development by business.

Most businesses use a general process to develop new product:
1. Generate ideas: Ideas can be generated by:
a) Employees.
b) Customers.
c) Competitor's products.
d) R&D department.
e) Sales department.
2. Further research: The best ideas are selected and further research is done to see their pros
and cons.
3. Will there be enough sales?: To see whether there will be enough sales of the product to
break-even
(development costs included).
4. Develop a prototype: To see how a product could be manufactured and identify its
problems.
5. Test launch: To see if the product can sell or not.
6. Full launch.

Q) Define the term Unique selling point.

It is the special features of a product that differentiates it from the products of competitors.

Q. Explain the benefits and limitation of developing a new products.

Pros:
• USP(Unique Selling Point) will mean the business will be first into the market with the
new product.
• Diversification for the business, therefore giving it a broader range of products to sell.

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• It allows the business to expand into new markets.
• It may allow the business to expand into existing markets.
Cons:
• The cost of carrying out market research and analyzing the findings.
• The cost of producing trial products including the cost of wasted materials.
• Lack of sales if the target market is wrong.
• Loss of company image if the new product fails to meet customer needs.

Q. Define the term.

Brand Name – is the unique name of a product that distinguishes it from other brands.
Brand loyalty- is when consumers keep buying the same brand again and again instead of
choosing competitor’s brand.
Brand image – is an image or identity given to a product which gives it a personality of its
own and distinguishes it from its competitor’s brand.

Q. Discuss the importance of brand image.

The importance of brand image
Traditionally, a product's unique features and quality were explained by the sellers who made
the product. However, since products are usually sold in private retail shops nowadays, these
points need to be projected differently. Products therefore need to be branded with an
unique brand name and the products features and quality will be projected with
advertisement. The brand image is more than just an assurance of guaranteed quality, it will
have a whole image which surrounds it and will be reinforced by advertising. For Example,
Coco-cola.

Q. What are things that are involved with branding?

Here are things that are involved with branding:
• Unique name.
• Unique packaging.
• Needs advertising to enforce the brand's qualities.
• Higher price than unbranded products.
• Higher quality than unbranded products.
• Creates a brand image (unique image associated with using the product)
• Creates brand loyalty.

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• Consistent quality.

Q) Define the term Packaging

It is the physical container or wrapping for a product. It is also used for promotion and selling
appeal.

Q. Explain the importance role of packaging.

Getting the packaging right is very important/role. Packaging performs several tasks:
• Protecting the product (also includes preserving foods)
• Making it easy to transport.
• Allow the product to be used easily. Container must be able to be opened easily. (e.g.
juice in a can)
• Suitable for the product to fit in.

Q. What way packaging helpful to promote the product?

Packaging also helps promote the product:
• Make it eye-catching.
• Carries information about the product.
• Promotes the brand image.

Q. Define the term Product life cycles.

The stages a product will pass through from its introduction, through its growth until it
is mature and then finally its decline.

Q) Describes the stages a product will pass through from its introduction, through its
growth until it is mature and then finally its decline.
Here is a graph to show the product life cycle:

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1. Development: The product is under development.
2. Introduction: The product is introduced. Sales grow slowly and informative advertising
start to attract customers. Price skimming could be used if the product is new to the market.
The main aim of sales is to breakeven.
3. Growth: Prices rise rapidly. Persuasive advertising is used to encourage brand loyalty.
Prices may be reduced a little. Sales start to generate profits since costs have been covered.
4. Maturity: Sales rise more slowly. Competition forces prices to be lowered and the firm
uses competitive pricing. Advertising is used to maintain sales. Profits are at their highest.
5. Saturation: Sales reach their limit. There are no new competitors. Sales and advertising
becomes stable but profits fall because of lowered prices to be competitive.
6. Decline: Product go out of fashion and sales and profits decline. Advertising eventually
stops. It is no longer profitable to product the product.
The length of each stage varies with products. The business needs to identify which stage
their products are in so that they can use a suitable marketing strategy for it.

Q. How stages of the product life cycle influence marketing decision?

Knowing the stage of the life cycle that a product is in can help a business with pricing and
promotion decisions. Prices are likely to be higher in the growth stage than in the saturation
or decline stage, when the business will want to try to stop sales declining.

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Spending on promotion will be higher at the introduction stage then in other stages as the
business has to inform consumers of the product, establish a brand identity and encourage
rapid increase in sales. Advertising would probably be reduced in later stages.

Q. Describe in detail of Extending the product life cycle.

when a product has reached its maturity or saturation stage a business may adopt extension
strategies to stop sales from falling which extends the product life cycle. Sales are given a
boost by these strategies.
• Introducing new variations of the product.
• Sell into new markets.
• Make small changes to the products design and packaging.
• Sell through additional, different retail outlets.
• Update the product (make it better)
• Use a new advertising campaign.
Extension strategies aim to prolong the maturity stage of a product. Successful extension
strategies may result in something like this:

Nevertheless, it must be noted that businesses manufacture more than one product. They
should have a product in growth stage to counteract an older one which is declining.

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 Chapter 13 The marketing mix – price

Q. What are the role of price in the marketing mix?

The role of price in the marketing mix
When pricing a product, a business needs to choose one that fits with the rest of the elements in
the marketing mix. E.g. high price so that consumers thinks they are buying high quality goods,
low price for low quality goods, or competitive prices in a market with a lot of competition.

Q. Define the term pricing strategies.

If a product is easily recognizable from other products, it would probably have a brand name.
And if it has one, it would need a suitable pricing strategy to complement the brand name that
should improve its brand image.

Q. Explain the several reasons a business can adopt new pricing strategies.
A business can adopt new pricing strategies for several reasons:
• To try to break into a new market.
• To try to increase its market share.
• To try to increase its profits.
• To make sure all its costs are covered and a particular profit is earned.

Q. Outline the main methods of pricing strategies.

The main methods of pricing strategies are
1. Cost-plus pricing
2. Competitive pricing
3. Pricing skimming
4. Promotional pricing
5. Psychological pricing
6. Dynamic Pricing

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Q. Define the term Cost-Plus pricing Explain the merits and demerits of Cost-plus pricing
It is the cost of manufacturing the product plus a profit mark-up.
Cost-plus pricing involves covering all costs and adding a percentage mark-up for profit.
• + Easy to apply.
• - You lose sales if your price is higher than your competitor’s price.

Q. Define the term Competitive pricing. Explain the merits and demerits of Competitive
pricing.
Competitive pricing is when the product is priced in line with or just below competitor’s prices
to try to capture more of the market.
Competitive pricing means setting your price to a similar or lower level than your competitor’s
prices.
• + Sales will be high because your price is at a realistic level (not under/over-priced).
• - You have to research on your competitors a price which costs time and money.

Q. Define the term Cost-Plus pricing Explain the merits and demerits of Cost-plus pricing
Penetration pricing
Def: Penetration pricing is when the price is set lower than the competitor’s prices in order to
be able to enter a new market.
Penetration pricing is used to enter a new market. It should be lower than competitors' prices.
• + Ensures that sales are made when a product enters a market.
• - Prices will be low. Sales revenue will be low.

Q. Define the term Pricing skimming. Explain the merits and demerits of Pricing skimming
Def: Price skimming is where a high price is set for a new product on the market.
High prices are used when a new product is introduced into a market, partly because it has a
novelty factor, and because of the high development costs. High prices could be charged
because a product is high quality. One last use of it is to improve the brand image of a product,
since people usually associate high price with good products.
• + Skimming can help establish a product as being good quality.
• - It may lose potential customers because of high price.

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Q. Define the term promotional pricing Explain the merits and demerits of Promotional
pricing
Def: Promotional pricing is when the product is sold at a very low price for a short period of
time.
Promotional pricing means that you lower the prices of goods for a short time.
• + Help get rid of unwanted stock.
• + Can renew interest in a product.
• - Sales revenue will be lower.

Q. Define the term Psychological pricing Explain the merits and demerits of Psychological
pricing.
Psychological pricing involves setting the price that changes consumer’s perception of a
product. This may be by:
• Using high price to make using the product give the user a status symbol.
• Pricing a product at just below a whole number (e.g. $99) which gives it an impression that it
is cheaper.
• Supermarkets charge low prices for products that are bought on a daily basis to give
consumers an impression that they are being given good value for money.

Q. Define the term Dynamic Pricing. Explain the effects of Dynamic Pricing.
When customers are split into two or more groups and they are charged different prices for
basically the same product or service because they have different demand levels.
Effects
• Increase sales revenue
• Increased profit
• Ensuring all seats are filled e.g., on airlines, football games
• High cost of constantly changing prices for business.
• High cost for customers in terms of time spent trying to find the best price.

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Q. Define the term Price elasticit.
It is a measure of the responsiveness od demand to a change in price.

Q. Explain tin detail about Price elasticity of demand

Elasticity of demand is how easily demand can change when prices change. A product with an
elastic demand curve would have a higher change in demand than a change in price (uses
percentages). A product with an inelastic demand curve would have a lower change in
demand than a change in price. The elasticity of demand of a product is mainly affected by
how many substitute products that it has.

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 Chapter 14 The marketing mix - Promotion and technology in marketing

Q. What are the role of promotion in the marketing mix?

The role of promotion in the marketing mix
Promotion informs consumers about the rest of the marketing mix. Without it, consumers do
not know about the product, the price, or the place. Promotion is more than just advertising,
and it includes several activities. It is crucial when you are selling in a mass market or you
have a brand name. Promotion includes:
• Advertisements: They can take different forms, e.g. on TV, in newspapers.
• Promotion: e.g. Money off coupons.
• Personal selling: Sending out sales representatives to talk directly to the consumers.
• Public relations: Involves making the public aware of the company, e.g. creating publicity
in the media.

Q. State the aims of promotion.

The aims of promotion
• To inform people about particular issues.
• To introduce new products to the market.
• To compete with competitors products.
• To improve the company/brand image.
• To increase sales.

Q. Define the terms.

Advertising:
Informative advertising: It is where the emphasis of advertising or sales promotion is to
give full information about the product.
Persuasive advertising: It is advertising or promotion which is trying to persuade the
consumer that they really need the product and should buy it.

Q. Explain the process of advertisement.

The advertising process
1. Set objectives: A business needs to determine the purpose of advertising.

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2. Decide the advertising budget: Set a limit on how much the business can spend on
advertising. It can be decided based on:
i. A percentage of predicted sales revenue.
ii. How much competitors are spending.
iii. How much the business can afford.
3. Create an advertising campaign: Decide on what advertising campaign to run. Can be
determined based on:
i. Target audience.
ii. Objectives.
4. Select the media: Using the suitable media for advertising that is the most cost effective.
E.g. TV, newspaper.
5. Evaluate the effectiveness of the campaign: Has the advertising met objectives?

Q. Define the term Target audience.

It refers to people who are potential buyers of a product or service.

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Q. Explain the merits and demerits of different media of advertising
Different media of advertising.

Q. How to design of adverts?

Businesses usually use the AIDA model:
• Attention: Informs consumers that the product exists.
• Interest: Consumers need to become interested in the product.
• Desire: Makes consumers want the product.
• Action: Prompts consumers into buying the product.

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The AIDA model is most effective on products that are not used regularly. It is less effective
on products that are bought on a daily basis because people will know how good the quality
really is.

Q. Define the term Sales promotion.

The incentives such as special deals aimed at consumers to achieve short term increases in
sales.
Q What are the different types of Sales promotion?
Sales Promotion is usually used to support advertising and to encourage new or existing
customers to buy the product. Its main function is to boost sales in the short-term, but not in
the long term. It is used to attract new customers so that they can try out items with the hope
that they will like it and continue to buy it after the promotion has ended. Here are some ways
in which promotion is used:
• Price reductions: Involves sales or price reduction coupons.
• Gifts: Gifts are placed in packaging of the product to encourage consumers to buy it. (e.g.
toys in McDonald's happy meal).
• Bogof: This is where purchases are encouraged.
• Competitions: A card may be put in the packaging allowing the consumer to enter
contests such as the lottery.
• Point-of sale displays and demonstrations: Can be put near the window and displayed
attractively. It could also encourage people to buy it if they can see how it works
(demonstrated by sales staff)
• After sales service: e.g. warranty services. It reassures the customers that if the product
has a problem then they can go and fix it for free. This makes the product more attractive
than others without warranty.
• Free samples: Encourages people to try the product. It can be included in other products
as well. E.g. washing machine comes with free washing powder.

Q. Discuss the advantages of sales promotion.

The advantages of sales promotion
• Can boost sales during the year when sales are traditionally low (encourage off-season
purchases)
• Encourages people to try a product.
• Encourages people to buy a product or the product in greater quantities.

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• Encourages people to buy a product instead of competitors' products.

Q. Define the term Marketing budget.

It is a financial plan for the marketing plan for the marketing of a product or product range
for a specific period of time.

Q. What are the importance of the marketing budget?

The importance of the marketing budget
The need for cost effectiveness is spending the marketing budget is very important. A
business will need to compare the cost of advertising with the increase in expected sales. It is
not good to spend large amounts of money on an advertising campaign if there is only a small
increase in sales.

Q.Which type of sales promotion should be used?

When deciding on what type of promotion should be used, these points should be considered:
The stage of the product life cycle: e.g. use informative advertisement in the introduction
stage of the life cycle.
• The nature of the product itself: e.g. consumer goods use coupons but producer goods
use discounts on bulk buying.
• The advertising budget: obviously the type of promotion depends on how much you can
spend.
• The cultural issues involved in international marketing: businesses need to consider
whether their type of advertising might offend the local people. They should also take into
account things such as how many people own TV, literacy level, etc…
• The nature of the target market: Different markets require different media for
advertising.

Q. What is meant by Public relations?

• Good for improving the brand/company’s image.
• These activities raise public awareness of the company.
Includes:
• Sponsoring events such as football matches.
• Giving products to charity.

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• Employees take part in an activity for a good cause.

Q. How technology influences the marketing mix?

New technology is becoming integrated into marketing decisions. It presents new
opportunities for businesses to market their products and services and it means there are
frequent changes to all four elements of the marketing mix.
The product part of the marketing mix may be changed to respond to new technology. For
example: Mobile phones.
Promote their business or its products on the internet.
Pricing can be used to increase revenue.
Place the internet has facilitated the widespread use of online purchasing-e-commerce.

Q. Explain the benefits to a business of advertising on social networking sites.

Benefits to a business of advertising on social networking sites
• Targets specific demographic group
• Guarantees target customers see advert when they go onto Facebook.
• Speed in response to market changes- information can be updated regularly.
• Cheap to use- it has no costs if just placing advertising
• Reaching groups that are difficult to reach any other ways.

Q. Explain the drawbacks to a business of advertising on social networking sites.

Drawbacks to a business of advertising on social networking sites
• Can alienate customers if they find the adverts annoying
• Have to pay for advertising if using pop-ups
• Lack of control of advertising if used by others
• May be altered or used in a bad way and forwarded on to others users giving the business
bad publicity

Q. Explain the benefits of business advertising on its own websites.

Benefits of business advertising on its own websites
• No extra cost if own website is already setup
• Control of adverting as it is on your own site
• Can change adverts quickly and update pictures/prices etc.

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• Interactive adverts can make the adverts more attractive than those in other forms of
advertising media such as magazines and posters
• Can provide more information in adverts and link to other pages with further information
and pictures

Q. Explain the limitations of business advertising on its own websites.

Drawbacks of business advertising on its own websites
• Potential customers may not see the website as the page may come up in a long list of
pages when using a search engine such as Google
• Relies on customers finding the websites
• Design costs of the website may be high.

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 Chapter 15 The marketing mix - place

Q. What the role of place in the marketing mix?

The role of place in the marketing mix
After the product, price, and promotion has been decided, the product/service has to be
available to the consumer where and when they want to buy. Consumers should be able to
get to the product easily, and the product has to be in the right place (e.g. expensive chocolate
shouldn't be in a small grocery store) to sell well.

Q.Define the term Distribution channel or Place.

It is the means by which a product is passed from the place of production to customer or
retailer.

Q. What are the different types of Channels of distribution?

Q. Explain the merits and demerits of different types of channels of distribution.

Businesses need to know how to get the product to the consumer. They may use a variety of
channels of distribution:

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Channel 1: The manufacturer sells directly to the customer. e.g. agricultural goods are sold
straight from the farm, businesses buy raw materials from another.
Pros:
1) It is very simple – It involves manufacturers selling their products directly to the
consumer.
2)It is suitable for products, such as agriculture product, which are sold straight from the
farm.
3)There is a lower price if sold direct to customer – cuts out wholesaler/retailer.
4)Products can be sold by mail order catalogue or via the internet.
Cons:
1)Impractical for most products because the consumers probably do not live near to the
factory.
2)This may not be suitable for products which cannot easily be sent by post.
3)It may be very expensive to send the products by post and therefore it will not be cost
effective.

Channel 2: Involves selling to retailers. Common when the retailer is large or the product is
expensive.
Pros:
1)Producer sells large quantities to retailers.
2)Reduced distribution costs compared to distribution channel 1.
Cons:
1)No direct contact with customers.

Channel 3: Involves the product going through wholesalers as well. Wholesalers break
bulk so that retailers can buy them in smaller quantities. This is common for perishable items
such as foods.
Pros:
1)Wholesaler saves storage space for small retailer and reduces storage costs.
2)Small retailers can purchase products in small quantities.
3)May give credit to customers so they can take the goods straight.
4)Wholesaler may deliver to the small retailer thus saving on transport costs.
5)Wholesaler can give advice to small retailers as well as manufacturer what is selling well.
Cons:

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1)May be more expensive for the small shop to buy from a wholesaler than if they bought
straight from the manufacturer.
2)Wholesaler may not have the full range of products to sell.
3)Takes longer for fresh produce to reach the shops and so it may not be as good quality.
4)Wholesaler may be a long way from the small shops.

Channel 4: Involve selling the product overseas through an agent, who sells them to
wholesalers on behalf of the company.
This may be because he/she has better knowledge of the local conditions.
Pros:
1)Manufacturer may not know the best way to sell the product in other markets.
2)Agents will be aware of local conditions and will be in the best position to select the most
effective places in which to sell.
Cons:
1)Less control over the way the products is sold to customers.

Q. What is meant by Agent?

It is an independent person or business that is appointed to deal with the sales and
distribution of a product or range of products.

Q. Explain the Advantages and disadvantages of a wholesaler.

Advantages and disadvantages of a wholesaler
Pros
• Breaks bulk.
• Reduces storage costs for retailers and producers.
• Fewer transactions are needed for the producers. (only a few wholesalers) they no longer
need to do as many deliveries.
• Gives credit to small retailers.
• May deliver to small retailers reducing their transport costs.
• Promotion carried out by wholesaler instead of producer.
• They give advice to retailers/producers on what is selling well.

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Cons
• More expensive for small retailers.
• May not have the full range of products to sell.
• Takes longer for perishable products to reach the retailer.
• Wholesaler may be far from small shops.

Q. Describe the methods of distribution for different channels of distribution.

Methods of distribution for different channels of distribution can include:
• Department stores: Usually in the centre of town that sells a wide range of goods from
many producers.
• Chain stores: Two or more which has the same name/characteristics.
• Discount stores: Offers a wide range of products, including branded products, at discount
prices. Often all the products are similar.
• Superstores: Very large out-of-town stores.
• Supermarkets: Very large retail stores with all kinds of goods. (usually daily needs,
foods)
• Direct sales: Goods are sold directly to the consumer.
• Mail order: Customers order via the post by looking at the catalogue
• Internet/e-commerce: Customers order via the internet by looking at the website.

Q. Define the term e-commerce.

It is the buying and selling of goods and services using computer systems linked to the
internet.

Q. How internet is useful to business transactions?

The use of the internet to carry out business transactions. Businesses could communicate via
email as well. Producers as well as retailers can use the internet to sell to customers.

Q. Explain the Opportunities of e-commerce to business.

Opportunities of e-commerce to business:
1)To promote the company and its products worldwide much more cheaply than other forms.
2)Orders taken and sent directly to company warehouse for dispatch.

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3)Encouraged consumers to purchase more products. Eg:- giving links to other products that
could be bought with the original purchase.
4)Businesses purchases of supplies and materials from other business is called B2B.

Q. Explain the threats of e-commerce to business.

Threats of e-commerce to business:
1)Competition between business is very high.
2)Website designs can be expensive and will be often need to be updated and this will lead to
further costs.
3)Transport costs per product sold are likely to be higher than selling through traditional
shops.
4)No face-to-face contacts with consumers.
5)Consumers in most countries have the legal right to reject the goods bought through e-
commerce.
6)A large warehouse and efficient stock control systems will be essential to meet consumer’s
order.
7)e-commerce is not suitable for businesses that sell personnel face-to-face services such as
hair dressing .

Q. Explain the Opportunities of e-commerce to consumers

Opportunities of e-commerce to consumers:
1)No need to leave the house to ‘go shopping’.
2)Using ‘price comparison’ websites to know about the product.
3)Payment by credit or debit card is very easy.
4)Consumers can now easily access products and services from businesses located abroad.
5)Consumers can buy some products for prices much lower than they would be without the
competition.

Q. Explain the threats of e-commerce to consumers

Threats of e-commerce to consumers:
1)Consumers need access to the internet.
2)Computer systems failures or weak internet connections can result in frustrated consumers.

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3)Products cannot be seen, touches or tried on and sending products back because they are
unsuitable is often inconvenient.
4)It is difficult to find out more information about the goods and services being sold in
internet.
5)Many consumers are concerned about theft or fraudulent use of credit cards if they buy
goods online.

Q. How to select the suitable channel of distribution by producer?

Selecting the channel of distribution to use
When selecting the channel of distribution to use producers need to consider a few things:
• Type of product?: Is it sold to other producers or customers?
• Is the product very technical?: Will you need to explain how to use the product?
If yes, Channel 1 should be selected (e.g. airplanes)
• How often is the product purchased?: If it is bought every day, it should be available in
many retail outlets, otherwise people might not bother to buy it at all.
• How expensive is the product?: If it is expensive and has an image of being expensive,
then it will be sold in a limited number of retail outlets.
• How perishable is it?: If it is very perishable, it should reach the customers quickly or be
available in many outlets so it can be sold quickly.
• Location of customers?: Channel 4 might be used for customers overseas. E-commerce
would be viable anywhere apart from the countryside.
• Where do competitors sell their products?:
Usually producers will sell their product in retail stores where their competitors sell too so
that they can compete directly for consumers.

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 Chapter 16 Marketing strategy

Q. Define the term Marketing Strategy.

It is a plan to combine in the right combination of the four elements of the marketing mix for
a product or service to achieve a particular marketing objective(s).

Q. Explain the purpose of marketing objectives.

The marketing objective could include:
• Increasing sales of an existing product/service by selling to new markets or selling more to
the existing market.
• Increasing sales of new product or service by improving an existing product or a totally
new innovative product.
• Increasing market share which will include increasing sales but also taking market share
away from competitors.
• Maintaining market share if competition is increasing.
• Increasing sales in a niche market.

Q. Explain the different elements of the marketing mix are important in influencing
consumer decisions.
The different elements of the marketing mix are important in influencing consumer decisions
when developing a marketing strategy aimed at a specific target market.
If the marketing strategy does not combine the four elements of the marketing mix correctly
then the marketing objectives will not be achieved.

Q. Why government control business activity? Or legal controls on marketing.

Consumer protection: Consumers are easily misled by advertising. It is because consumers
lack the technical knowledge and advertising can be very persuasive. In the UK, these laws
are passed to protect customers from being exploited by businesses:
• Weights and Measures Act: to stop underweight goods being sold to customers.
• Trade Descriptions Act: all advertisements must be truthful.
• Sale of Goods Act: Makes it illegal to sell:
- Goods which have serious flaws or problems.
- Products that is not fit for the purpose intended by the consumer.
- Products that do not function as described on their label or by the retailer.

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• Supply of goods and services act: Same as sales of goods act.
• It is illegal for misleading pricing claims such as £40 off for this week only.
• Consumer Protection Act: Make false pricing claims illegal. Consumers can now sue
producers or retailers if their products cause harm to them.

Q. Explain the opportunities and threat of entering new markets abroad:

Opportunities:
1) Growth potential of new markets in other countries. Countries in different parts of the
world are now developing and seeing their population enjoying rising incomes.
2) Home markets might be saturated and these new markets give the chance for higher sales.
3) There is a wider choice of location to produce products and this encourages businesses to
sell as well as produce in these countries.
4) Trade barriers have been lowered in many parts of the world making it easier and
profitable to now enter these markets.
Problems/ Threats:
1) Lack of knowledge: the business may not be aware of competitors or the habits of
consumers in these markets.
2) Cultural differences: religion or culture may mean that some products won’t sell in
another market.
3) Exchange rate changes: if the exchange rate is not very stable then exchange rate changes
can mean the price of imported goods change and the products can become too expensive to
sell in the new market.
4) Import restrictions: if there are tariffs or quotas on imported products then the prices of
these products may be higher than domestically produced goods – reducing sales or profits or
both.
5) Increased risk of non-payment: methods of payment may be different in these new
markets and it may be more difficult to be certain that payment for imported goods will be
made.
6)Increased transport costs: as products have to be transported over long distances then the
costs of getting products to market will increase.

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Q. Describe the Methods to overcome the problems of entering new markets abroad.
Methods to overcome the problems of entering new markets abroad:
1) Joint ventures: This allows the business to gain important local knowledge so that culture
and customs cab be adapted to enable a more successful entry into the new market.
2) Licensing: to produce the branded or ‘patented’ products under licence. This means the
product do not have to be physically transported to the new market which saves time,
transport costs and can get round trade restrictions.
3) International franchising: this means that foreign franchise are used to operate a
business’s franchise abroad.
4) Localizing existing brands: It means that there is still a common brand image for the
business but it has adapted to local tastes and culture therefore increasing sales.

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 S.Ramesh

Chapter 17: Production of goods and services

Q. What is meant by production?

Production is the provision of a product to satisfy wants and needs. The process involves businesses adding value to their products.
E.g. The production process of matches involve cutting wood into matchsticks, putting phosphorus ends on them and packaging
them to sell.

Q. Define Productivity.
It is the outputs measured against the inputs used to create it.

Labour productivity =

If a worker makes more products in the same amount of time, his productivity increases. Firms aim to be productively efficient to
be able to make more profits and compete against their competitors.

Q. What are number of ways to increase productivity?

N umber of ways to increase productivity:
1. Improving the layout of the machines in a factory to reduce wasted time and therefore increase efficiency.
2. Improving labour skills by training workers so they have more productive techniques of working.
3. Introducing automation.

Q. What are benefits of increasing efficiency/productivity?

Benefits of increasing efficiency/productivity

1. Increased output relative to the inputs required.
2. Lower costs per unit (average cost)
3. Fewer workers may be needed, possibly leading to lower wages costs.
4. Higher wages for workers increase motivation.

Q. Why businesses hold inventories (stock)?

Stock control is important so that a business will not run out of stock and be unable to satisfy demands. When stock levels get to a
certain point, more goods need to be reordered for the stock level to reach its maximum again. If more goods are not reordered,
stocks could run out because of an unexpected surge in demand. However, keeping a lot of stock costs money, so the level of
stock in a company should always be balanced. The following graph demonstrates how stock can be controlled:

Q.Define Buffer Inventory level

It is the inventory held to deal with uncertainty in customer demand and deliveries of supplies

Q. Define Lead time.

The time it takes for the reorder supply to arrive

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Lean production:

Q. Define Lean production.

It is a term for those techniques used by businesses to cut down on waste and therefore increase efficiency.
Focuses on cutting down waste and increasing efficiency.

Q. What are the Seven types of waste that can occur in production?
Seven types of waste that can occur in production:
1. Over production
2. Waiting
3. Transportation
4. Unnecessary inventories
5. Motion
6. Over-processing
7. Defects.

Q. Explain the benefits of lean production.

Benefits of lean production
Costs are saved through
1. Less storage of raw materials and components.
2. Quicker production of goods or services
3. No need to repair defects or provide a replacement service for a dissatisfied customer.
4. Better use of equipment
5. Cutting out some processes which speeds up production
6. Less money tied up in inventories
7. Improved health and safety leading to less time off work due to injury.

Q What are the methods of Lean production?

a. Kaizen.
b. JIT production. (Just in time)
c. Cell production.

Q. Define the term Kaizen.

It is Continuous improvement through the elimination of waste.

Q. How to implement kaizen?

1. Ideas of workers.
2. Regular meetings of workers to discuss how to increase efficiency.

Q. Explain the advantages of Kaizen.

Advantages of Kaizen:
a. Increased productivity.
b. Reduced amount of space needed for the production process.
c. Work-in-progress is reduced.
d. Improved layout of the factory floor may combine jobs of some employees, freeing others to do other things.

Q.Define Just-in-time (JIT)

It is a production method that involves reducing or virtually eliminating the need to hold inventories of raw materials or unsold
inventories of the finished product. Supplies arrive just at the time they are needed.

Q. What are the advantages of Just in time inventory control.

 Eliminating the need to hold stocks.

 Cash will come back due to selling of finished Page
goods quickly
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 Reducing costs-warehouse spaces not needed 

 Goods are delivered to the selling point just when they are needed.

Q. What is meant by JIT production?

JIT production needs:
• Reliable suppliers.
• Efficient system of ordering raw materials.

Q. Define Cell production.

Production line is divided into cells.
• Each cell makes an identifiable part of the finished product.
• Boosts morale.

Q. What are the methods of production?

1. Job production
2. Batch production
3. Mass/ flow/line production

Q. Define Job production is where a single product is made at a time.

i) Goods are made individually, by one person.
ii) Goods are usually specialized, no two goods are the same.
iii) Usually made to order.

Q, Explain the merits and demerits of job production method.

Merits:
i) Suitable for personal services or ‘one-off’ products.
ii)The product meets exact requirements of the customer.
iii) The workers have more varied jobs.
iv) More job satisfaction for workers.
v)High-quality goods in high price can be charged.

Demerits:
i) Skilled labour is needed.
ii) Slower and more expensive than other methods of production.
iii) Usually labour intensive.
iv) Takes long time
v) Higher cost due to special purchase.
vi) Any error can be expensive to correct.

Q.Define Batch production

It is where a quantity of one product is made, then a quantity of another item will be produced.
Products are made in batches according to order.

Q, Explain the merits and demerits of batch production.

Merits:
i) It is flexible. You can easily change from making one product to another.
ii) Still gives some variety to workers jobs.
iii) It allows variety to the products. This gives more consumer choice.
iv) Production is not too affected by machinery breakdown.

Demerits:
i) Expensive to move products around the workplace.
ii) Delay in production due to reset machines between production batches.
iii) Storage space will be needed to store raw materials. Expensive.

Q.Define Flow /Mass production.

It is large quantities of a product are produced in a continuous process.
i) Uses specialization.
ii) Benefits from economies of scale.
iii) Is capital intensive.

Q, Explain the merits and demerits of Flow/ mass production

Merits
a) Low costs. Low prices. High sales. Increased efficiency.
b) Little training is needed.
c) Goods are produced quickly and cheaply.
d) Goods do not need to be moved around like batch production. Saves time.
e) Quality is high and standardized

Demerits
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b)More storage requirements 

c) Needs a lot of capital to set up.
d) If one machine breaks down then the whole production process stops.

Q.Which factor effecting the type of production should be used?

The nature of the product: If a fairly unique product or an individual service is required, job production will be used. If the product
can be mass produced using an automated production line then flow production will be used.
The size of the market: If demand is higher and more products can be sold but not in very large quantities, batch production will be
used. The product will be produced in a certain quantity to meet the particular order. Small local markets or niche markets will be
served by businesses using job or batch production. International markets are served by businesses using flow production.
The nature of demand: If there is large and fairly steady demand for the product, such as soap powder, it becomes economic to set
up a production line and continuously produce the product. If demand is less frequent, such as for furniture, then production may be
more likely to be job or batch production.
The size of the business: If the business is small and does not have the access to large amounts of capital then it will not produce
on a large scale using automated production lines. Only large businesses can operate on this scale. Small businesses are more likely
to use job or batch production methods.

Q. How improvements in technology does in the production process.

Here are some things that technology does in the production process:
1. Automation: Equipment in the production process is controlled by a computer.
2. Mechanisation: Tasks are done by machines operated by people.
3. CAD (computer aided design): Used for designing 3-D objects.
4. CAM (computer aided manufacture): Computers control machines in the production process.
5. CIM (computer integrated manufacture): CAD and CAM are used together. The computer that uses CAD is directly
linked with the one that controls the production process.
Here are some things that technology does in shops:
6. EPOS (electronic point of sale): When products' bar codes are scanned and the information is printed out on a receipt.
Data is also sent to a computer to keep track of stocks.
7. EFTPOS (electronic fund transfer at point of sale): When the cash register is connected to the retailer's main
computer and banks. The customer's credit/debit card is swiped and the money is debited from the customer's bank
account. A receipt is printed out to confirm the transaction.

Q. Explain the advantages of new technology.

The advantages of new technology
A. Increased productivity.
B. Boring jobs done by machines. Boosts motivation.
C. Training is needed to operate new machines. Workers become more skilled.
D. Better quality.
E. Better stock control.
F. Quicker communication and reduced paperwork.
G. Info is available faster, resulting in faster decision making (for managers).

Q. Explain the disadvantages of new technology.

The disadvantages of new technology

Unemployment

Expensive to invest in new technology.

Employees are unhappy with changes in the workplace.

To replace outdated technology.

>

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Chapter 18: Costs, scale of production and break-even analysis

Q. What is meant by Business costs?

All business activity involves some kind of cost. Managers need to think about this because:
• Costs of operating the factory can be compared with revenue from the sale of sports shoe
to calculate whether costs are lower than revenues or not. Whether a business will make a
profit or not.
• To compare costs at different locations.
• To help the manager decide what price should be charged.

Q. Define the terms.

Fixed Costs are costs which do not vary with the number of items sold or produced in the short
run. They have to be paid whether the business is making any sales or not. Also known as
overheads.
Variable costs are costs which vary directly with the number of items sold or produced. Also
known as direct costs (directly related to a product).
Total costs are fixed and variable cost combined.
Formula: Total cost=fixed costs + variable costs
Average cost per unit: is the total cost of production divided by total output. Also known as unit
cost.

.Q, Explain the types of costs incurred in the business.

There are two main types of costs, fixed and variable costs. Here are some types of costs:
Fixed Costs are costs which do not vary with the number of items sold or produced in the short
run. They have to be paid whether the business is making any sales or not. Also known as
overheads.
Variable costs are costs which vary directly with the number of items sold or produced. Also
known as direct costs (directly related to a product).
Total costs are fixed and variable cost combined. (Total cost=fixed costs + variable costs)
Average cost per unit: is the total cost of production divided by total output. Also known as unit
cost.

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Q. Why business use cost data?

A business has classified all costs into either fixed or variable, this information can be used to help
make business decision.
Examples: setting price, decide on best location, to stop production or continue production.

Q. Define the terms.

The other types of costs to be analysed that is split from fixed and variable costs:
• Direct costs: costs that are directly related to the production of a particular product.
• Marginal costs: how much costs will increase when a business decides to produce one more
unit.
• Indirect costs: costs not directly related to the product. They are often termed overheads.
• Average cost per unit: total cost of production/total output

Q. Define the term Economies of scale:

It is a factor that leads to a reduction in average costs as a business increases in size.

Q. Explain the five types if economies of scale.

There are five economies of scale:
• Purchasing economies: Larger capital means you get discounts when buying bulk.
• Marketing: More money for advertising and own transportation, cutting costs.
• Financial: Easier to borrow money fro m banks with lower interest rates.
• Managerial: Larger businesses can now afford specialist managers in all departments,
increasing efficiency.
• Technical: They can now buy specialised and latest equipment to cut overall production
costs.

Q. Define Diseconomies of scale

It is which increases average costs when a business grows beyond a certain size.

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Q. What are the reasons for diseconomies of scale.

• Poor communication: It is more difficult to communicate in larger firms since there are so
many people a message has to pass through. The managers might lose contact to customers
and make wrong decisions.
• Low morale: People work in large businesses with thousands of workers who do not get
much attention. They feel they are not needed this decreases morale and in turn efficiency.
• Slower decision making: More people have to agree with a decision and communication
difficulties also make decision making slower as well.

Break-even charts, comparing costs with revenue

Q .Interpret a given chart and use it to analyse a situation.
Drawing a break-even chart

Q. Define the terms.

Break-even level of output is the quantity that must be produced/sold for total revenue to
equal total costs. Also known as break-even point.
Break-even charts are graphs which show how costs and revenues of a business change with
sales. They show the level of sales the business must make in order to break even.
Revenue of a business is the income during a period of time from the sale
of goods or services. Total revenue = quantity sold x price.

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Break-even point is the level of sales at which total costs = total revenue.

Q.How to calculate Break-even point?

Break-even point: the calculation method: It is possible to calculate the breakeven point
without having to draw the graph.
We need two formulas to achieve this:
a) Selling Price - Variable Costs = Contribution per unit
b) Break-even point = Fixed cost / contribution per unit

Q. Define Contribution per unit.

Ans) selling price less variable cost per unit.

Contribution per unit = Sales revenue – Variable cost.

= $80 - $30
Total Contribution per unit = (Sales revenue – Variable cost.) X quantity.

Break even point =

Q. Define, calculate and interpret the margin of safety.

Def: Margin of safety: the amount by which the sales level exceeds the break-even level of output.

Margin of safety = Actual sales – Break even output.

= 280 units - 175 units = 105 units.

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Q. Define Margin of safety.

This is a useful indication of how much sales could fall without the firm falling into loss.

Formula: Margin of safety = Level of sales – Break even output.

For example, if the break-even output is 400 units and current production is 600 units, the margin of
safety is 200 units. h is can be expressed as a percentage of the break-even point.
For example:

Production over break-even point= 175/ 280 X 100= 62.5%

Q. Construct, complete or amend a simple break-even chart

• Break-even chart
• Title : Break Even Analysis for Company XYZ
• Label Axes:
• X-axis is output
• Y-axis is Revenue/Cost (label currency as well)
• Determine max. output and mark it, as well as revenue from this level of output
• If maximum isn’t given, make it twice the BEQ
• Determine BEQ and draw a vertical line at that point
• Mark the revenue gained from this quantity on the line (Break Even Point)
• Draw Total Fixed Cost line
• Draw Total Cost line
• starts at TFC at x=0, intersects the BEP
• Draw Total Revenue line
• starts at (0,0), intersects BEP

Q. Explain the benefits and drawbacks of break-even charts.

There are other benefits from the break-even chart other than identifying the breakeven point and
the maximum profit. However, they are not all reliable so there are some disadvantages as well:
Pros:
• The expected profit or loss can be calculated at any level of output.
• The impacts of business decisions can be seen by redrawing the graph.
• The breakeven chart show the safety margin which is the amount by which sales exceed the
breakeven point.
Cons:
• The graph assumes that all goods produced are sold.
• Fixed costs will change if the scale of production is changed.
• Only focuses on the breakeven point. Completely ignores other aspects of production.
• Does not take into account discounts or increased wages, etc. and other things that vary with
time.

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• Assumed that costs and revenues can be drawn with straight line.

Q. Explain the benefits and limitations of Break even analysis.

Benefits of Breakeven analysis Limitations of Breakeven analysis

• Easy to construct and interpret • Assume that all costs and revenues
• Can show the effect of a decision to can be represented by straight lines.
change cots or revenues. • It is not easy to separate costs into
• Can help with other important fixed and variable.
business decisions such as the • Assume that all output is sold when
location and relocation of a business. in reality businesses often have
• Provide businesses with useful unsold finished goods held in stock.
information about the output that
must be sold to cover all costs and
how different sales volumes affect
the margin of safety and
profitability.

Q. Use break-even analysis to help make simple decisions, e.g. impact of higher price (or)
Discuss the change in business environment impact on break even. (As level)

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 Chapter: 19 Achieving quality production

Q. What is meant by Quality?

Ans) Quality means to produce a good or a service which meets customer expectations.

Q. Why quality is important? OR why quality is important for all businesses?

1. Meet customer expectations
2. Meeting standard
3. Build your reputation
4. Quality is Critical to Satisfied Customers

Q. How business will ensure the quality? Or How quality production might be achieved?
Ans) Quality will ensure that the business:

Establishes a brand image.

Builds brand loyalty

Will maintain a good reputation

Will help to increase sales

Attracts new customers.

Q. What will happen to business when not maintain quality?

Ans) If Quality is not maintained:

Lose customers to other brands

Have to replace faulty products or repeat poor service which raises cost for the business.

Have customers who tell other people about their experiences and this may give the
business a bad reputation leading to lower sales and profits.

Q. What does quality mean?

Ans) Quality does not mean producing high quality product or service. Do expect product to be
perfect and not have any fault.

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Q. How number of ways quality helps to determine a firm’s success?
Quality helps determine a firm’s success in a number of ways:
• Customer loyalty – they return, make repeat purchases and recommend the product or service
to others.
• Strong brand reputation for quality
• Retailers want to stock the product
• As the product is perceived to be better value for money, it may command a premium price and
will become more price inelastic
• Fewer returns and replacements lead to reduced costs
• Attracting and retaining good staff

Q. How many ways business can do Quality control? (Or) How businesses implement
quality control?
Ans) There are three ways to control quality:
1. Quality control
2. Quality assurance
3. Total quality management

Q. What is Quality control?

Quality control is checking for quality at the end of the production process, whether it is the
production of a product or service.

Q. Discuss the advantages and disadvantages of quality control in production.

Advantages:

Tries to eliminate faults or errors before the customer receives the product or service.

Less training required for the workers.
Drawbacks:

Expensive as employees need to be paid to check the product or service

Identifies the fault but doesn’t find why the fault has occurred and therefore is
difficult to remove the problem.

Increased costs if produce have to be scrapped or reworked or service repeated.

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Q. Define the term Quality assurance.
Ans) Quality assurance is the checking for the quality standards throughout the production
process, whether it is the production of a product or service.
I. Involves inspecting during and at the end of production.
II. Aim to
a. Stop faults from happening.
b. Set a quality standard that all products have to achieve.
III. Need team working and responsibility.

Q. How quality assurance can be implemented in businesses?

A quality assurance team conducts activities that validate quality requirements. This typically
involves planning, observation and inspection. Building a reliable quality assurance team
involves establishing policies and procedures, defining job descriptions and recruiting talented
team members to perform tasks.

Q. what are the role of Quality Assurance (QA)?

The role of Quality Assurance (QA) is to identify the processes necessary to test for defects and
errors. The QA process verifies products meet client standards and expectations. The QA process
validates procedures, and verifies processes are correctly implemented.

Q.What is quality assurance example?

Quality Assurance is a verification activity that verifies you are doing the right thing in the right
manner. Defining Processes, Quality Audit, Selection of Tools, Training. Examples. Examples of
quality assurance activities include process checklists, process standards, process documentation
and project audit.

Q. Explain the advantages and disadvantages of quality assurance.

Advantages:
• Tries to eliminate faults or errors before the customer receives the product or service.
• Fewer customer complaints
• Reduced costs if products do not have to be scrapped or reworked or service repeated.
Drawbacks:

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 • Expensive to train employees to check the product or service
• Relies on employees following instructions of standard set.

Q. Define the term Total quality management.

Ans) Total quality management (TQM) is the continuous improvement of products and processes
by focusing on quality at each stage of production.
a) Encourages everyone to concentrate on quality.
b) Quality is the main aim for all staff.
c) Products need to satisfy all customer needs.

Q. Explain the advantages and disadvantages of Total quality management.

Advantages:
• Quality is built into every part of the production of a product or service and becomes
central to the ethos of all employees.
• Tries to eliminate faults or errors before the customer receives the product or service.
• No customer complaint and so brand image is improved
• Reduced costs as products do not have to be scrapped
• Waste is removed and efficiency increases.
Drawbacks:
• Expensive to train employees to check the product or service
• Relies on employees.

Q. How can a customer be assured of a quality product or service?

Ans) The business can apply to have this quality mark on their goods or services and have to
follow certain rules to be able to keep this quality mark.
Example. ISO. Ensuring a good customer service is important to service sector businesses. The
quality mark on product have a good reputation and recommended by satisfied customers.

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Chapter 20 Location decisions

Q. Define the term Location of industry.

The location of a business is considered when it starts-up or when its present location is
unsatisfactory. The business's objectives as well as the conditions of the environment
change, so the business may need to look for a new location once in a while.

Q. Define the term Infrastructure.

The basic facilities, services and installations needed for a business to function, for example
water, power, transports links etc.

Q. Explain the factors influencing location and relocation decisions.

Businesses need to consider a variety of factors when choosing a location for a new business
or relocating an existing business. These factors can be divided into quantitative factors and
qualitative factors.

Quantitative factors Qualitative factors.

1. Cost of site
2. Availability and cost of labour 1. Size of site
3. Transport costs 2. Legal controls
4. Market potential 3. Infrastructure.
5. Issues

Q. Explain the factors affecting the location or relocation decision of a business.

Factors affecting the location of a manufacturing business or
Factors influencing location and relocation decisions:
a) Production methods and location decisions:
i) Small scale: transport and location of suppliers are less important.
ii) Large scale: transport and location of suppliers are more important.
b) Market: i) Need to be near to transport perishable goods. ii) Need to be near to cut
transportation expenses.
c) Raw materials/components: i)Need to be near to transport perishable goods.

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ii)Need to be near to cut transportation expenses.

d)External economies of scale: i) How good nearby businesses are. ii) For maintenance of
equipments. iii)For training workers, etc…
e) Availability of labour: i)Wages of the labourers. ii)How skilled they are.
f) Government influence: i) Grants/subsidies. ii)Restrictions on dumping, etc…
g) Transport and communication: To be able to transport product easily.
h) Power: Need a reliable source of power to operate effectively.
i )Water supply: i) A lot of water is needed in the production process (e.g. cooling, cleaning)
ii) Cost of water.
j) Personal preferences of the owners: i) May locate in areas that ii) They come from.
iii)They like. iv)Pleasant weather, etc…
k) Climate: i) E.g. to reduce heating costs in a warmer climate. ii) Some climates are
required to produce certain items.

Q.Explain the factors affecting the location of a service sector business.

Factors affecting the location of a service sector business
a) Customers: i) Whether customers require ii) Direct contact. iii) Is it convenient for
customers to go the business? iv) Will the service arrive at customers' houses in time? v) No
direct contact needed. vi) Mail vii) Internet
b) Personal preference of owners: Near their homes.
c) Technology: i) Technology allows businesses to locate in cheaper sites. ii) Telephone. iii)
Internet. iv) Transport. v) No need to be near customers.
d) Availability of labour: i) Need to locate to sites where skilled labourers live.
ii) Labourers may relocate to be near the business.
e) Climate: Important for tourism.
f) N ear to other businesses: i) Businesses that supply or repair machinery to others need to
be near them to respond quickly.
ii) Post office/banks need to be in busy areas for the convenience of customers. That is, being
near malls, shops, etc…
g) Rent/taxes: If the business does not need direct contact with the customer, then it could
locate in cheaper areas.

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Q. Explain the factors affecting the location of a retailing business.

Factors affecting the location of a retailing business
a) Shoppers: i) Do shoppers go there? ii) What kind of shoppers go there?
b) N earby shops: i) Competitors. ii) Mass market. iii) Gap in the market.
c) Customer parking available/nearby: Convenience for the customer.
d) Availability of suitable vacant premises: Goods sites (e.g. in shopping centres) are in
short supply.
e) Rent/taxes: The more popular the site, the more expensive.
f) Access for delivery vehicles: For delivering goods.
g) Security: i) If the area is insecure ii) Goods will be stolen. iii) Insurance will be reluctant
to insure the shop.
h) Legislation: Laws restricting the trade of goods in certain areas.

Q. Explain the factors that influence a business to relocate either at home or abroad
(Different countries)
Factors that influence a business to relocate either at home or abroad (Different
countries)
a) N ew markets open up overseas: i) Cuts transport costs. ii) Bypass trade barriers.
b) Raw materials run out: i) One alternative is to import raw materials from elsewhere.
ii) Important for mining industries.
c) Difficulties with the labour force: i) Wages are too high. ii) Need skilled labour.
d) Rents/taxes rising.
e) Government grants: i) To attract businesses to locate in development areas. ii) To attract
foreign investment.
f)To bypass trade barriers: i)Tariffs ii) Quotas
g) The present site is not large enough for expansion: If a business simply prefers to
expand elsewhere, the factors affecting location will have to be considered.

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Q. Explain the benefits and limitations of international location decisions.

Benefits Limitations
1. Lower labour costs 1. Cultural differences
2. Access to global markets 2. Communication problems
3. To avoid legal barriers and import 3. Ethical concerns
tariffs. 4. Quality issues.
4. Government incentives.

Q. Discuss the role of legal controls on location decision.

The role of legal controls on location decision:

The decisions by firms about where to locate their business can have a very important effect
on the firm’s profitability. Managers will want to locate their businesses in the best possible
area, taking into account factors such as cost of land, proximity to transport links and
customers, availability of workers, and so on.

Q. Why do governments try to influences these location decisions?

• To encourage businesses to set up and expand in areas of high unemployment – in some
countries these are called development areas.
• To discourage firms from locating in overcrowded areas or on sites which are noted for
their natural beauty.

Q. Identify and explain the two types of government measures influence the firms
location decision.
Two types of measures are often used by government to influence where firms locate.
• Planning regulations will legally restrict the business activities that can be undertaken in
certain areas.
• Many government provide grants or subsidies to business to encourage them to locate in
undeveloped parts of the country.

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Q. Evaluate the task of manager to choose location.

The task of owners or managers is to select the best location. This is never easy because
every location will have factors which are a benefit and others which are a limitation. For
example the land on which to build a factory might be very cheap because I is located some
distance from the nearest town. However, the business might find it difficult to recruit a
workforce because of the distance workers would have to travel to get to work.

Those faced with making the decision must balance location factors and choose the location
where the benefits outweigh the limitations so that future profit are maximised.

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 Chapter 21: Business finance: needs and sources

Q. Define the terms.

Starting a business: It is the finance needed by a new business to pay for essential fixed and
current assets before it can begin trading.
Or The capital needed by an entrepreneur when first starting a business.

Working capital: the capital needed to finance the day to day running expenses and pay
short term debts of a business.
Formulae: working capital = current assets – current liabilities

Non-current (Fixed) assets: resources owned by a business which will be used for a period
longer than one year, for example buildings and machinery.

Capital expenditure: Money spent on fixed assets which will last for more than one year.

Revenue expenditure: Money spent on day-to-day expenses which do not involve the
purchase of the long term assets.

Q. Draw a simple working capital cycle.

The simple working capital cycle (Cash, Materials & stock, production and sale) – the longer this
cycle takes to complete, the more working capital will be needed

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Q. What do Finance department do?
• Recording all financial transactions, such as payments and sales revenue
• Preparing final accounts
• Producing accounting information for managers
• Forecasting cash flows
• Making important financial decisions e.g. which source of capital to use for different
purposes within the business.

Q. Why do businesses need finance?

Businesses need finance, or money, to pay for their overhead costs as well as their day to day
and variable expenses. Here are three situations when businesses need finance the most:

• Expanding a business: When expanding, a lot of capital is needed in order to buy

more fixed assets or fund a takeover. Internal growth by developing new products also
requires a notable amount of finance for R&D.
• Starting a business: is the finance needed by a new business to pay for essential fixed
and current assets before it can begin trading.
Or The capital needed by an entrepreneur when first starting a business.
• Increasing working capital: Finance is constantly needed to pay day-to-day
expenses. A vital business have sufficient working capital to meet all its requirement.
• A business in difficulties: For example, for loss making businesses money is needed
to buy more efficient machinery, or money is needed to cover negative cash flow.
However, it is usually difficult for these firms to get loans.

All cases, businesses need finance for either capital expenditure or revenue expenditure:

Q. Difference between capital expenditure and revenue expenditure

C R

All cases, businesses need finance for either capital expenditure or revenue expenditure:
Capital expenditure: Money spent on fixed assets which will last for more than one year.
Examples: land, Building, computer, Motor Vehicles, Machinery, Furniture & fixtures, Van
etc
Revenue expenditure: Money spent on day-to-day expenses which do not involve the
purchase of the long term assets.
Examples: Wages, rent, salary, insurance, advertisement expenses, Audit fees, stationary,
postages, etc.

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Q. Why do businesses need finance?

• Start-up capital to set up the business.

• To pay day to day expenses of the business such as wages, suppliers of raw materials
and fuel expenses. This is known as working capital.
• Purchasing buildings and other non-current (fixed assets) such as machines to replace
ones that are no longer working efficiently or are obsolete.
• To invest in the latest technology. This is known as capital expenditure.
• To finance expansion of the business.
• To finance research into new products or new markets,

Q. Explain the different sources of finance available to business

Sources of finance: There are many ways to obtain finance, and they can be grouped in these
ways.:
• Internal or external.
• Short-term, medium-term or long-term.

Define Internal finance: It is obtained from within the business itself. There are advantages
and disadvantages to each of them:

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a) Retained profit: Profit reinvested into a business after part of the net profit has been
distributed to its owners.
+There is no interest to pay
+ Retained profit does not have to be repaid unlike a loan.
- New businesses do not have much retained profit.
- Retained profit from small firms are not enough for expansion.
- Reduces payment to owners/shareholders.

b) Sale of existing assets: Firms can get rid of their unwanted assets for cash.
+ Makes better use of capital tied up in the business.
+ It does not increase the debts of the business.
- Takes time to sell all of these assets.
- New businesses do not have these assets to sell.

c) Running down stocks: Sell everything in the current existing inventory.

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

d) Owners' savings: Only applies to businesses that do not have limited liability. Since the
legal identity of the business and
owners are the same, this method is considered to be internal.
+ Available quickly.
+ N o interest paid.
- Limited capital or savings may be too low.
- Increases risks for owners.

Define External finance: It is obtained from the sources outside of and separate from the
business. It is the most common way to raise finance.

a) Issue of shares: Same as owners' savings, but only available to limited companies.
+ A permanent source of capital that does not have to be repaid.
+ N o interest paid.
- Dividends will be expected by shareholders.
- Ownership of the company could change hands to the majority shareholder.

b) Bank loans: money borrowed from the bank.

+ Quick to arrange.
+ Variable lengths of time.

+ Lower rates offered if a large company borrows large sums.

- Must be repaid with interest.
- Collateral is needed to secure a loan and may be lost.

c) Selling debentures: These are long-term loan certificates issued by limited companies.

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

d) Factoring of debts: Some businesses (debt factors) "buy" debts of a firm's debtors (e.g.
customers) and pay the firm cash in return. The firm now does not worry about worrying
about whether their customers will pay or not and 100% of all the debts goes to the factor.

+ Immediate cash is obtained.

+ Risk of collecting debt becomes the factors.
- The firm does not receive 100% value of the debt.

e) Grants and subsidies: can be obtained from outside agencies like the government.
+ Do not have to be repaid.
- They have conditions that you have to fulfil (e.g. locating in poor areas).

f) Def: Micro-finance: is providing financial services – including small loans – to poor

people not served by traditional banks.
Bank did not lend because:
• The size of the loans required by poor customers – perhaps a few dollars – meant that
the bank could not make a profit from the loans.
• The poorer groups in society often have no asset to act as ‘security’ for loans – banks
are usually not prepared to take risks by lending without some form of security.

Q. Differences between short-term and long-term finance

Short-term finance: This is working capital required to pay current liabilities that is
needed up to three years. There are three main ways of acquiring short-term finance:

a) Overdrafts: Allows you do draw more from your bank account than you have.
+ Overdrafts can vary every month, making it flexible.
+ Interest only needs to be paid only to the amount overdrawn.
+ They can turn out cheaper than loans.
- Interest rates are variable, and often higher than loans.
- The bank can ask for the overdraft back immediately anytime.

b) Trade credits: Delaying payment to your creditors, which leaves the company with better
cash flow for that month.
+ It is almost a short-term interest free loan.
- The supplier could refuse to give discounts or to supply you at all if your payments are
delayed too much.

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c) Factoring of debts: Explained in ‘External Finance’.

Medium-term finance: Finance available for 3 to 10 years that is used to buy fixed assets
such as machinery and vehicles.

Long-term finance: This kind of finance is available for more than 10 years. The money is
used for long-term fixed assets or the takeover of another company.

a) Bank loans: Explained in ‘External Finance’.

b) Hire purchase: This allows firm to pay for assets over time in monthly payments which
has interest.
+ The firm does not have to come up with a lot of cash quickly.
- A deposit has to be paid at the start of the period of payment.
- Interest paid can be very high.

c) Leasing: Hiring something. Businesses could use the asset but will have to pay monthly.
The business may choose to buy the asset at the end of the leasing period. Some businesses
sell their fixed assets to a leasing company who lease them back so that they could obtain
cash. This is called sale and leaseback.
+ The firm does not have to come up with a lot of cash quickly.
+ The leasing firm takes care of the assets.
- The total leasing costs will be higher than if the business has purchased it.

d) Issue of shares: Shares are sometimes called equities, therefore issuing shares is called
equity finance. N ew issues, or shares sold by public limited companies can raise near
limitless finance. However, a business will want to give the right issue of shares so that the
amount bought by shareholders will not upset the balance of ownership.
+ A permanent source of capital that does not have to be repaid.
+ N o interests paid.
- Dividends will have to be paid. And they have to be paid after tax (so taxes become
higher), while interest on loans are paid before taxes.
- Ownership of the company could change hands to the majority shareholder.

e) Long-term loans or debt finance: Loans from a bank, and this is how they are different
from issuing shares:
• Interest is paid before taxes, it is counted as an expense.
• Interest has to be paid every year but dividends only need to be paid if the firm has made
profit.
• They are not permanent capital.
• They need collateral.

f) Debentures: Explained in ‘External Finance’.

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Q. How the choice of finance is made in a business?
Or What are the factors influencing the choice of finance?
A)These are the factors that managers consider when choosing the type of finance they need.
• Purpose and time period: Managers need to match the source of finance to its purpose. It
is quite simple, short-term finance is used to buy current assets and things like that, while
long-term finance for fixed assets and similar things.
• Amount needed: Different types of finance depend on how much is needed.
• Legal form and size: Bigger companies have more choices of finance. They pay less
interest to banks.
• Control: owners lose control if they own less than 51% of shares in their company.

• Risk and gearing: loans raise the gearing of a business, meaning that their risk is
increased. Gearing is can be obtained by calculating the percentage of long-term loans
compared to total capital. If long-term loans take up more than 50% of total capital, then the
business would be called highly geared. This is very risky because the business will have to
pay back a lot of its loans and has to succeed to do so. Banks are less willing to lend to these
businesses, so they will have to find other types of finance.

Q. How will banks lend money/loans to business?

A)Bank often refuse to lend businesses – and shareholders may be reluctant to buy more
shares. A business owner, especially of a new start-up business, will increase the chances of
obtaining loan finance if the following is available.
• A cash flow forecast which shows why the finance is needed and how it will be used.
• An income statement – for the last period – and a forecast one for the next. These should
show the chances of the business making a profit in future.
• Details of existing loans and sources of finance being used.
• Evidence that ‘security’ is available to reduce the bank’s risk if it lends.
• A business plan to explain clearly what the business hopes to achieve in the future and why
the finance is important to these plans.

Q. How will shareholders invest?

Shareholders are most likely to buy additional shares when:

• The company’s share price has been increasing.
• Dividends are high – or profits are rising so dividends might increase in the future.
• Other companies do not seem such as good investment.
• The company has a good reputation and has plans for future growth.

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Chapter 22 Cash flow forecasting and working capital

Q. Explain the cash flow importance to small business start-ups. Or Explain the cash flow
planning is vital for entrepreneurs.

• Cash is always important – short and long term. Cash flow relates to the timing of
payments to workers and suppliers and receipts from customers.
• If a business does not plan the timing of these payments and receipts carefully it may
run out of cash even though it is operating profitably.
• If suppliers and creditors are not paid in time they can force business owners into
liquidation of the business’s assets if it appears to be insolvent.
• new business start-ups are often offered much less time to pay suppliers than larger,
well-established firms – they are given shorter credit periods
• banks and other lenders may not believe the promises of new business owners as they
have no trading record, they will expect payment at the agreed time
• finance is often very tight at start-up, so not planning accurately is of even more
significance for new businesses.

Q.What is meant by cash flow?

Cash is a liquid asset, meaning that I can be spent on goods and services any time. Many
business experience cash flow problems, meaning that they do not have enough cash to do
what they want to do.

Q. Define the terms.

Cash flow of a business is the cash inflows and outflows over a period of time.
Cash inflows: are the sums of money received by a business during a period of time
Cash outflows: are the sums of money paid out by a business during a period of time

Q.What are the major problem business face if too little cash or run out of cash?
1) Unable to pay workers, suppliers and government.
2) Production of goods and services will stop.
3) The business may be forced into liquidation

Q. Discuss in detail the cash flow statement.

These are ways cash flow can occur:
Cash inflows: are the sums of money received by a business during a period of time
• Sale of goods for cash.
• Payment from debtors.
• Borrowing from a source (but will inevitably lead to cash outflow in the future).
• Sale of unwanted assets.
• Investment from investors: shareholders and owners

Cash outflows: are the sums of money paid out by a business during a period of time

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• Purchasing goods for cash.

• Payment of wages, salaries and others in cash.
• Purchasing fixed assets.
• Repaying loans.
• Repaying creditors.

Q.Define the term cash flow cycle.

Def:Cash flow cycle: shows the stages between paying out cash for labour, materials, etc.,
and receiving cash from the sale of goods.

Q. Explain the importance of Cash flow cycle to the business.

The longer it takes for cash to get back to the business, the more they will need working
capital to pay off their short-term debts.
This cycle also helps us understand the importance of cash flow planning. This is what
happens when a company is short on cash:
• Not enough to pay for materials, therefore sales will fall.
• The company will want to insist customers on paying in cash, but they might lose them to
competitors who let them pay in credit.
• There could be a liquidity crisis when it does not have enough cash to pay for overheads
(bills, rent, etc.) and the business might be forced to close down by its creditors.
Managers need to plan their cash flow so that they do not end up in these positions.
Net Cash flow = Cash inflow - Cash outflow
However, when calculating profit, we also take into account credit that debtors owe us.
Therefore, a company might make $20,000
in profit but only $10,000 is received in cash because half of it is paid by credit card. This
creates something known as insolvency:

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Q.Why cash is not same as profit?

Cash flow is not same as profit because although all the goods have been sold, cash payment
has been received for only half of them. The customers buying the goods on credit will pay
cash in later month. So cash is lower than the profit in business.

Def: Profit is the surplus after total costs have been subtracted from sales revenue.

Q. What’s the difference between Cash and profit?

CASH PROFIT
Profit is the amount left over once all costs have
Cash refers to notes, coins and money stored in been deducted from sales revenue. Profit can
a bank account that is readily available to pay also be shown as,
for a business’s purchases.
Profit = Sales Revenue – Total Costs
Cash means money. Sales might have been credit sales and payment
Cash = Cost + profit from customers not yet received.
Cash = Sales revenue
Cash is life blood of business

Here is an example of a cash flow statement:

CASH All figures in $000 JAN FEB MAR APR

IN FLOWS

Owner’s capital 6 0 0 0
Cash sales 3 4 6 6
Payments by debtors 0 2 2 3
Total cash inflow 9 6 8 9
CASH
OUTFLOWS

Lease 8 0 0 0
Rent 1 1 1 1
Materials 0.5 1 3 2
Labour 1 2 3 3
Other costs 0.5 1 0.5 1.5
Total cash outflow 11 5 7.5 7.5
N ET CASH N et monthly cash (2) 1 0.5 1.52
FLOW flow
Opening balance 0 (2) (1) (0.5)
Closing balance (2) (1) (0.5) 1

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Def: Opening cash balance(or bank) is the amount of cash held by the business at the start
of the month.
Def: Net cash flow is the difference, each month, between inflows and outflows.
Def:Closing cash balance(or bank) is the amount of cash held by the business at the end of
each month.This becomes next month’s opening cash balance.
Def:Cash flow forecasts is an estimate of future cash inflows and outflows of a business,
usually on a month-by-month basis.

Q. Explain the structure of cash flow forecasts.

The structure of cash-flow forecasts

1. Cash inflows
2. Cash outflows
3. Net monthly cash flow
4. Opening and closing balance.

Q. How much cash flow forecast important to the manager?

Cash flow forecasts is an estimate of future cash inflows and outflows of a business, usually
on a month-by-month basis. This then shows the expected cash balance at the end of each
month.
Because of the aforementioned problems, it is important for the manager to get an idea of
how much cash will be available for which months.
A cash flow forecast can tell the manager:
• How much cash is available for paying bills, loans and other fixed assets.

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• How much the bank might need to lend to avoid insolvency.

• Whether the business has too much cash which could be more profitable use.

Q. What are the benefits of Cash-flow forecasting?

There are several important advantages to cash-flow forecasting, especially for new businesses:

To predict times when there might be a shortage of cash: By showing periods of negative
cash flow, plans can be put into place to provide additional finance, for example arranging a
bank overdraft or preparing to inject more owner’s capital

If negative cash flows appear to be too great/ To set target: then plans can be made for
reducing these – for example, by cutting down on purchase of materials or machinery or by
not making sales on credit, only for cash.

To show to a potential lender: A new business proposal will never progress beyond the
initial planning stage unless investors and bankers have access to a cash-flow forecast – and
the assumptions that lie behind it.

To plan for foreseeable variations in cash flow: Seasonal variations can have a large impact
on the cash flow of some businesses. E.g those involved in the tourist industry. Fixed cost will
still have to be paid, whilst the inflow of cash is severely reduced at certain times of the year.

To undertake ‘what if analysis’: the potential impact of predicted charge to sales and /or
costs can be anticipated. It could also illustrate the impact of changing the credit term given to
debtors or received from creditors.

Q. What are the limitations of Cash-flow forecasting? Or why cash-flow forecasts can be
inaccurate?
Here are the most common limitations of using cash-flow forecasts,

Mistakes can be made in preparing the revenue and cost forecasts or they may be drawn up by
inexperienced entrepreneurs or staff.

Unexpected cost increases can lead to major inaccuracies in forecasts. Fluctuations in oil
prices lead to the cash-flow forecasts of even major airlines being misleading.

Wrong assumptions can be made in estimating the sales of the business, perhaps based on
poor market research, and this will make the cash inflow forecasts inaccurate

Q. What are the causes of cash flow problems?

The causes of cash-flow problems

a) Lack of planning
Cash-flow forecasts help greatly in predicting future cash problems for a business. However, they do
not solve cash-flow problems by themselves – but they are an essential part of financial planning and
can help prevent cash-flow problems from developing.

b) Poor credit control

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The credit-control department of a business keeps a check on all customers’ accounts – who has paid,
who is keeping to agreed credit terms and which customers are not paying on time. If this credit
control is inefficient and badly managed, then debtors will not be ‘chased up’ for payment and
potential bad debts will not be identified.

Credit control means monitoring of debts to ensure that credit periods are not exceeded

Bad debts are unpaid customers’ bills that are now very unlikely to ever be paid
C) Allowing customers too long to pay debts
In many trading situations, businesses will have to offer trade credit to customers in order to be
competitive. Assume a customer has a choice between two suppliers selling very similar products. If
one insists on cash payment ‘on delivery’ and the other allows two months’ trade credit, then
customers will go for credit terms because it improves their cash flow. However, allowing customers
too long to pay means reducing short-term cash inflows, which could lead to cash-flow problems.

D) Expanding too rapidly

When a business expands rapidly, it has to pay for the expansion and for increased wages and
materials months before it receives cash from additional sales. This overtrading can lead to serious
cash-flow shortages – even though the business is successful and expanding.

Overtrading means expanding a business rapidly without obtaining all of the necessary
finance so that a cash-flow shortage develops.

E) Unexpected events
A cash-flow forecast can never be guaranteed to be 100% accurate. Unforeseen increases in cost – a
breakdown of a delivery van that needs to be replaced, or a dip in predicted sales income, or a
competitor lowering prices unexpectedly – could lead to negative net monthly cash flows.

Q. Explain the ways to improve cash flow.

There are two main ways to improve net cash flow,

Increase cash inflows

Reduce cash outflows

Q.How can cash flow problems be overcome?

• Increasing bank loans
• Delaying payments to suppliers
• Asking debtors to pay more quickly – or insisting on only ‘cash sales’
• Delay or cancel purchases of capital equipment.

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Q.How can business with long term cash flow difficulties will decide to solve the
problems?
• Attracting new investors
• Cutting costs and increasing efficiency
• Developing new products that will attract more customers.

Q. Can profitable business run out of cash?

Yes, this is the major reason for business failing.
• Allowing customers too long to pay back, so that they will not have paid off the debts yet
by the time the business has run out of cash.
• Purchasing too many assets at once.
• Producing or purchasing too much stock/inventory when expanding too quickly. This is
called overtrading.

Working Capital
Q. Define the term working capital.
Def: Working capital: is the capital available to a business in the short term to pay for day-
to-day expenses. Also known as net current assets.
Formulae: Working capital = Current assets - Current liabilities
Q. Outline the importance of working capital.
Importance of working capital
Life blood of a business
No business can run effectively without a sufficient quantity of working capital.
Ample working capital is always in a position to take advantage of favourable opportunity.
e.g. discount on raw material.
Overall success of a business depend upon its working capital position.

Q. In what ways working capital can be held?

Working capital may be held in different forms:
1) Cash is needed to pay day-to-day costs and buy inventories.
2) To achieve higher sales there may be a need to offer additional credit facilities to debtors.
3) A very high inventory level may result in high opportunity costs.

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Q. Evaluate the working capital in the organization.

A permanent increase in working capital
When businesses expand, they generally need higher inventory levels and will sell a higher
value of products on credit. This increase in working capital is likely to be permanent, so
long-term or permanent sources of finance will be needed, such as long-term loans or even
share capital.
Working capital conclusions:
■ There is no ‘correct’ level of working capital for all businesses. Business requirements for
working capital will depend on a number of factors, especially the length of the working
capital cycle. For example, supermarkets can manage on a much lower level of working
capital than a shipbuilding business.
■ Too much liquidity is wasteful.
■ Too little liquidity can lead to business failure.
■ Managing working capital is not just about looking at er cash. Clearly the timings of cash
received and spent are important but other features of management are important too –
efficient operations management will reduce wastage of resources (and money) and cut
inventory levels. Efficient marketing will help to speed up the sale of goods – and, therefore,
the cash inflows from this.

Q. What is meant by Working capital cycle /Operating cycle?

Q. Discuss the length of the working capital cycle.

The length if the working capital cycle depends on:
• The level of inventories held by a business and how quickly suppliers are paid.
• How long it takes to produce goods for sale.
• How quickly the business finds buyers for its products.
• The length of the credit period customers are given – credit sales.

Def: Liquidity: the ability of a business to pay its short-term debts.

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Def: Credit sales: Goods sold to customers who will pay for these at an agreed date in the
future.

Q. How can business can improve its working capital?

A business can improve its working capital by:
• Reducing inventory levels.
• Negotiating longer credit terms with its suppliers
• Reducing the amount of time it takes to receive payments from customers who have
been supplied goods on credit terms.

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Chapter 23: Income Statements

Q. Define the terms:

Accounts are the financial records of s firm’s transactions.
Accountants are the professionally qualified people who have responsibility for keeping
accurate accounts and for producing the final products.
Final accounts are produced at the end of the financial year and give details of the profit or
loss made over the year and the worth of the business.
Gross profit: the difference between the revenue earned from selling products and the cost of
making those products. Gross profit = Sales revenue - Cost of goods sold
Total cost: costs of sales plus expenses.
profit the difference between the revenue from sales and total costs or the difference between
gross profit and expenses. Profit used to be called net profit
Gross profit = Sales revenue - Cost of goods sold
Net profit = Gross profit –expenses
Def: Revenue: the total amount of money a business earns from selling its products is called
revenue. Revenue = selling price X quantity sold.
Def: Expense: day to day operating expenses of a business.
Def: Income statement: financial statement which records the revenue, costs and profits of a
business for a given period of time.

Q. Explain the importance of profit to private sector businesses.

Profit is a reward to business owners for the risk they take in investing their capital into the
business. Profit is also used to:
• Measure the success of a business.
• Measure the performance of managers
• Decide whether or not to continue making or selling product.
• Finance the purchase of non-current assets, expand the business and so on
• Attract investors who will provide the additional funds needed to finance business
expansion.

Q.What are accounts and why are they necessary?

Ans) Accounts are financial records of a firm's transactions that is kept up to date by the
accountants, who are qualified professionals responsible for keeping accurate accounts and
producing the final accounts.
Every end of the year, final accounts must be produced which gives details of:
• Profits and losses made.


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• Current value of the business.

• Other financial results.
Limited companies are bound by law to publish these accounts, but not other businesses.

Q. State any two activities of Accountant in the business.

Accountant can help to maintain:
• keep records of what the firm bought and from which supplier.
• keep records of what the firm sold and to which customer.

Q. How the businesses record accounting transactions?

Recording accounting transactions:
Businesses usually use computers to store their transactions so that they can be easily
accessed, calculated and printed quickly.

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

Q) What are the different types/methods of making payment?

Methods of making payment
There are several ways goods can be paid for:
• Cash: The traditional payment method. However, many businesses do not prefer to
use cash for a number of security reasons. When cash is paid, a petty cash voucher

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is issued by the person in charge of the firm's money who also signs it to authorise the
payment. The person making the purchase signs it too to show that the money has
been received.
• Cheque: It is an instruction to the bank to transfer money from a bank account to a
named person. In order to do this the bank needs a cheque guarantee card, saying
that they have enough money in their account to support this payment.
• Credit card: Lets the consumer obtain their goods now and pay later. If the payment
is delayed over a set period then the consumer will have to pay interest.
• Debit card: Transfers money directly from user's account to that of the seller.
• N et banking method.

.
Q. Who uses the financial accounts of a business? Or Why profit is important to
different stakeholders groups? Or Explain the uses of income statements.
An income statement contains financial data which business stakeholder groups may find
useful.
Internal stakeholders:
• Shareholders/Owners: They will want to know about the profit or losses made
during the year and whether the business is worth more at the end of the year or not.
• Employees: High profit increases job security. Expect to receive a good pay rise and
working condition. Businesses provide share of profits for employees.
• Managers: Compare profit from one year to the next, or with competitor’s profit, to
profits, to measure the performance of the business.

External stakeholders:
• Creditors/Suppliers: They want to see whether the company can afford to pay their
loans back or not.
• Government: Again, they want to check to see if correct taxes are paid. They also
want to see how well the business is doing so that it can keep employing people.
• Lenders: They want to be sure that profit is enough to pay interest on loans. It is able
to repay loans on given period of time.
• Other companies/competitors: Other companies want to compare their performance
with a business or see if it is a good idea to take it over.

Q. What do final accounts contain?

The four steps in final accounts:
1. Trading account
2. Profit and loss account
3. Profit and loss appropriation account
4. Balance sheet.

1.The trading account: This account shows how the gross profit of a business is calculated.
Obviously, it will contain this formula:


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Gross profit = Sales revenue - Cost of goods sold

N ote that:
• Gross profit does not take to account overheads.
• Only calculate the cost of goods sold, and forget the inventory.
• In a manufacturing business, direct labour and manufacturing costs are also
deducted to obtain gross profit.

2.The profit and loss account: The profit and loss account shows how net profit is
calculated. It starts off with gross profit acquired from the trading account and by deducting
all other costs it comes up with net profit.
3.Balance sheet: an accounting statement that records the assets, liabilities and owners’
equity of a business at a particular date.
Assets: resources that are owned by a business.
Liabilities: debts of the business that will have to be paid sometime in the future.

Q. Define the term depreciation.

Depreciation is the fall in value of a fixed asset over time. It is also counted as an indirect
cost to businesses.

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Chapter 24: Balance sheets

Q. Define the terms.

Balance sheet: The balance sheet shows the value of a business's assets and liabilities at a particular time.
The balance sheet records the value of a business at the end of the financial year.
Assets are those items of value which are owned by the business.
N on-current assets are items owned by the business for more than one year.
Current assets are owned by a business and used within one year.
Trade receivable: the amount of money owed to the business by customers who have been sold goods on
credit.
Trade payable: the amount of business owes to its suppliers to goods brought on credit.
Liabilities are debts owned by the business.
N on-current liabilities are long term debts owned by the business.
Current liabilities are short-term debts owned by the business.
Owners’ equity: the amount owe by the business to its owners, includes capital and retained profit.
Shareholders’ equity (Funds): alternative tem for owner’s equity but can only be used by limited liability
companies.
Long-term liabilities: long-term borrowings that does not have to be paid in one year.
Short-term liabilities: short-term borrowings that has to be paid in less than one year.
If your total assets are higher than your total liabilities, then you are said to own wealth. In a normal
business, wealth belongs to the owners, while in a limited company, it belongs to the shareholders.
Total assets - total liabilities = Owners'/Shareholders' wealth
Working capital: is used to pay short-term debts and known as net current assets. If a business does not
have enough working capital then it might be forced to go out of business.
Formula: Working capital = Current assets - Current liabilities
N et assets: Shows the net value of all assets owned by the company. These assets must be paid for or
finance by shareholders' funds or long term liabilities.
Formula: N et assets = Fixed assets + Working capital
Shareholders' funds: The total sum invested into the business by its owners.
This money is invested in two ways:
- Share capital: Money from newly issued shares.
- Profit and loss reserves: Profit that is owned by shareholders but not distributed to them but kept as part
of shareholders' funds.
Capital employed: Long-term and permanent capital of a business that has been used to pay for all the
assets. Formula: Capital employed = Shareholders' funds + long-term liabilities

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Q. How to interpret data in balance sheet?

Interpreting balance sheet data:

• Shareholders can see stake in the business has increased or fallen in value over 12 months.
• Shareholders can also analyze how expansion by the business has been paid for by increasing
non-current liabilities.
• Working capital can be calculated from the balance sheet.
Working capital =Current assets - Current liabilities.
• Capital employed can be calculated by using data from balance sheet.
• Balance sheet data can also be used to calculate ratios. Balance sheet ASSETS 2013 2014
Non-current (fixed) assets

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Chapter 23: Analysis of accounts

Define the terms.

Analysis of published accounts: Without analysis, financial accounts tell us next to nothing
about the performance and financial strength of a company. In order to do this we need to
compare two figures with each other. This is called ratio analysis.
Ratio analysis of accounts: The most common ratios used are for comparing the
performance and liquidity of a business. Here are five of the most commonly used ratios.
A) Profitability ratio: B) Liquidity ratio:
i) Return on capital employed i) Current ratio
ii) Gross profit margin ii) Acid test or quick ratio or liquid ratio
iii) N et profit margin

Note:
Current Assets = Cash in hand/Bank + Inventory/Stock + Trade/Bills receivable/Debtors +
Prepaid expenses
Current Liabilities = Overdraft + Trade/Bills payables/Creditors + Outstanding expense +
Short term loans

Q. Explain the ways of measuring business performance.

Ratios used for analysing performance: There are many ratios which can be calculated
from a set of accounts. This chapter concentrates on five of the most commonly used. These
ratios are used to measure and compare profitability and liquidity of a business.
A) Profitability ratio: profitability ratios measure the efficiency with which your company
turns business activity into profits.

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i) Return on capital employed: This result could show the efficiency of a business. If the
result rises, the managers are becoming more successful.
Formulae:
Return on capital employed (%) = Operating or N et profit / Capital employed X 100
ii) Gross profit margin: If this rises, it could mean that either they are increasing added
value or costs have fallen.
Formulae:
Gross profit margin = Gross profit / Sales revenue X 100
iii) N et profit margin: The higher the result, the more successful the managers are. This
could be compared with other businesses too.
Formulae:
N et profit margin = N et profit before interest and tax / Sales revenue X 100
N ote: Net profit does not include interest and tax.
B) Liquidity ratio: the ability of a business to pay its short term debts.

i) Current ratio: This ratio assumes that all current assets could be converted into cash
quickly, but this is not always true since stock/inventory could not be all sold in a short time.
Generally, a result of 1.5 to 2 would be preferable, so that a business could pay all of its
short-term debts and still have half of its money left.
Formulae:
Current ratio = Current assets/Current liabilities
ii) Acid test or quick ratio or liquid ratio: This type of analysis neglects stocks, but it is
similar to the current ratio analysis. Generally, a result of 1 would be preferable
Formulae:
Acid test ratio = (Current assets – Closing inventory) / Current liabilities

Q. How business can improve its gross profit margin?

• Increasing revenue – this may be achieved through an increase in price.
• Reducing cost of sales – this can be achieved by buying cheaper supplies.

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Q. Explain the merits of accounting ratios or Describe the advantages of ratio analysis.
Advantages of ratios: It can be used to:
• Compare with other years.
• Compare with other businesses.
• Easily identify important information, such as profitability and liquidity, without
having to look at all of the financial statements.

Q. Explain the limitations of accounting ratios or Describe the disadvantages of ratio

analysis.
Limitations of using accounts and ratio analysis

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• Ratios shows past results, does not show anything about the future.
• Comparisons between years may be misleading because of inflation.
• Comparisons between businesses could be difficult since each has its own accounting
methods.
• Managers will have access to all account data but the external users will have access
only to published accounts that contain data required by law only

Q. Explain the users of published accounts. Or Why and how accounts are used?
Users of accounts: it is usual to divide users of accounting information to internal and
external users.
Internal stakeholders:
a) Managers:
• They are used to measure the performance of the business to compare against targets,
previous time periods and other competitors.
• They help to take decisions such as new investments, closing branches and launching
new products.
• They even control and monitor the operation of each department and division of the
business and even set targets and budgets for the future and review these against the
actual performance.
b) Shareholders:
• They decide whether the business has potential for growth.
• They determine what share of the profit the investors receive.
• They assess the value of the business and their investment in it.

c) Workforce:
• To determine whether jobs are secure.
• To determine whether business is likely to expand or reduce in size.
• To find out how the average wage in the business compares with the salaries of
directors.

External stakeholders:
d) Banks:
• To decide whether to lend money to the business.
• To assess whether to allow an increase in the overdraft facility.
• To decide whether to continue an overdraft facility or a loan.
e) Government:
• To calculate how much tax is due from the business.
• To determine whether the business is likely to expand and create more jobs
• To assess whether the business is in danger of closing down, creating economic
problem.

f) Creditors (Suppliers):

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• To see if the business is secure and liquid enough to pay off its debts.
• To assess if the business is a good credit risk
• To decide whether to press for early repayment of the outstanding debts.

Q. How to interpret financial statements.

A business must check its performance regularly as this can help to:
• Identify its strengths and weaknesses so that it can decide which, if any of its policies
or strategies need to be changed.
• Show whether the business is meeting its objectives.
• Improve future business performance.

Q. Discuss the profitability versus liquidity. Or Is profitability more important than

liquidity? If not, why not?
Profitability and liquidity are essential for the long term survival of any business, large or
small. A business needs sufficient liquidity to be able to pay its debts. However, it must not
keep large amounts of cash which could have been used more profitability. For example, the
cash could be used to invest in non-current assets or developing new products, both of which
should increase the future profitability of the business.
From this we can see that those assets which increase a business’s profitability – non-
currents- do not improve liquidity. Whereas current assets, which increase a business’s
liquidity, do not improve profitability, do not improve profitability. Therefore it is important
for a business to maintain a balance between the need for profitability and the need for
liquidity if it is to ensure its long-term survival.

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 Chapter 26: Government economic objectives and policies

Q. List the main economic objectives of a country. (or) Q. Explain how governments
control the economic activity in their country.
Government economic objectives: Governments all have aims for their country, and this is
what they are:
• Low inflation.
• Low unemployment.
• Economic growth.
• Balance of payments.

Q. Define Low inflation.

Inflation occurs when prices rise.

Q. When prices rise rapidly many bad thing could happen?

When prices rise rapidly many bad thing could happen:
• Workers wages buy less than before. Therefore their real income (how much you can buy
with so much money) falls. Workers will be unhappy and demand for higher wages.
• Prices of local goods will rise more than that of other countries with lower inflation.
People may start buying foreign goods instead.
• It would cost more for businesses to start or expand and therefore it does not employ as
many people.
• Some people might be made redundant so that the business can cut costs.
• Standards of living will fall.

Q. Why governments want to keep inflation as low as possible?

This is obviously why governments want to keep inflation as low as possible.
Low levels of unemployment:
When people are unemployed, they want to work but cannot find a job. This causes many
problems:
• Unemployed people do not work. Therefore national output will be lower than it should
be.

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• The government will have to pay for unemployment benefits. This is expensive and
money cannot be used for other purposes.
If the level up unemployment is low, it will increase national output and improve standards of
living for workers.

Q. What kind of problem arise when a country’s GDP falls?

A country is said to grow when its GDP (Gross Domestic Product) is increasing. This is the
total value of goods produced in one year. The standards of living tend to increase with
economic growth. Problems arise when a country's GDP fall:
• The country’s output is falling, fewer workers are needed and unemployment occurs.
• Standards of living will fall.
• Businesses will not expand because they have less money to invest.

Q. What are the main stages of a business cycle? Identify at least two characteristics of
each stage.
Economic growth is not achieved every year. There are years where the GDP falls and the
trade cycle explains the pattern of rises and falls in national GDP.
The trade cycle has 4 main stages:
• Growth: This is when GDP is rising, unemployment is falling, and the country has higher
standards of living. Businesses tend to do well in this period.
• Boom: Caused by overspending. Prices rise rapidly and there is a shortage of skilled
workers. Business costs will be rising and they are uncertain about the future.
• Recession: Because overspending caused the boom, people now spend too little. GDP will
fall and businesses will lose demand and profits. Workers may lose their jobs.
• Slump: A long drawn out recession. Unemployment will peak and prices will fall. Many
firms will go out of business.

After all of this happens the economy recovers and begins to grow again. Governments want
to avoid a boom so that it will not lead to a recession and a slump. Currently, the government
of China is spending a lot of money so that their economy would continue to grow and avoid
a boom.

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 Diagram: Business Cycle.

Q. What is balance of payments? Why it’s important?

Balance of payments: Exports earn foreign currency, while imports are paid for by
foreign currency (or vice versa). The difference between the value of exports and imports of
a country is called balance of payments. Governments try to achieve a balance in imports
and exports to avoid a trade deficit, when exports are higher than imports. Of course, the
government will lose money and their reservoir of foreign currency will fall. This results in:
• If the country wants to import more, they will have to borrow foreign currency to buy
goods.
• The country’s currency will now worth less compared to others and can buy less goods.
This is called exchange rate depreciation.

Q. Explain the government economic policies.

Government economic policies
Governments want to influence the national economy so that it would achieve their
aforementioned objectives. They have a lot of power over business activity and can pass laws
to try to achieve their goals. The main ways in which governments can influence business
activity are called economic policies. They are:
• Fiscal Policy: taxes and public spending.
• Monetary policy: controlling the amount of money in the economy through interest rates
and exchange rates.
• Supply side policies: aimed at increasing efficiency.

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Q. What is meant by Fiscal policy?
Fiscal policy: Government spending could benefit some firms such as:
• Construction firms (road building)
• Defense industries (Iraq war)
• Bus manufacturers (public transport)

Q. Make a list of some of the different types of taxes that affect businesses and
consumers.
Governments raise money from taxes. There are Direct taxes on income and Indirect taxes
on spending. There are four common taxes:
• Income tax
• Profits tax
• Indirect taxes VAT (Value Added Tax)
• Import tariffs

Q Discuss the effect of an increase in income tax rate on consumers.

Income tax: Income tax is based on a percentage of your income. Income tax is usually
progressive, meaning that the percentage of tax you have to pay rises with your income.
Effects on business and individuals if there was a rise of income tax:
• People will have less disposable income.
• Sales fall because people have less money to spend.
• Managers will cut costs for more profit. Workers might be made redundant.
• Businesses producing luxury goods will lose the most, while others producing everyday
needs will get less affected.

Q Discuss the effect of an increase in profit tax rate on potential owners.

Profits tax or corporation tax: This is a percentage of the profit a business makes. A rise in
it would mean:
• Managers will have less retained profit, making it harder for the business to expand.
• Owners will get less return on capital employed. Potential owners will be reluctant to
start their own business if the profit margin is too low.

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Q Discuss the effect of an increase in indirect tax rate on consumers.
Indirect taxes: These taxes are a percentage on the price of goods, making them more
expensive. Governments want to avoid putting them on essential goods such as foods. A rise
it would mean:
• The effect would be almost the same as that of an increase in income tax. People would
buy less but they would still spend money on essential goods.
• Again, real incomes fall. Costs will rise when workers demand higher wages.

Q Discuss the effect of an increase in import tariffs and quotas on businesses.

Import tariffs and quotas: Governments put tariffs on imports to make local goods look
more competitive and also to reduce imports. When governments put import tariffs on
imports:
• Sales of local goods become cheaper than imports, leading to increased sales.
• Businesses who import raw materials will suffer higher costs.
• Other countries will retaliate by putting tariffs on the country's exports, making it less
competitive.

Q. Define Quotas.
It may be used to limit the amount of imports coming in.

Q. How to boost economic growth with changes in government spending?

Changes in government: spend tax revenue on education, health, defence, law and order and
transport.
When governments want to boost economic growth, they can increase their spending on these
programmes. This will create more demand in the economy, more jobs and GDP will
increase.

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Q. Explain the effects of increase in interest rates on consumers and businesses and how
businesses respond to this.

Q Explain how businesses are affected by a decrease in interest rates.

Monetary policy and interest rates: Governments usually have to power to change interest
rates through the central bank. Interest rates affect people who borrow from the bank. When
interest rates rise:
• Businesses who owe to bank will have to pay more, resulting in less retained profit.
• People are more reluctant to start new businesses or expand.
• Consumers who took out loans such as mortgages will now have less disposable income.

Q. How businesses respond to changes in government spending?

The money raised through taxes is used by the government to improve the infrastructure of its
country.
The government can affect economic growth by controlling its own spending. If growth is
slow, the government can increase its spending in areas such as schools, hospitals and
transportation. This will create more jobs in these and other dependent sectors. For example if
the government spends more on roads, then construction firms that build and repair the road
network will benefit. This will encourage businesses to think about growth. Alternatively, the
government can affect the level of business activity by reducing its spending, or discouraging
businesses from expansion.

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Q. How changes in interest rates affect business activity and how businesses respond?
Monetary policy is how a country's government or central bank controls how much
money there is in circulation. The government or central bank uses interest rates to
maintain economic growth and keep inflation low.
Interest rates determine:
• themoney that an individual or a financial organisation can gain when they deposit
money with a bank
• the cost of borrowing money from a bank.

Q How might businesses respond to an increase in interest rates?

They will spend less on other goods.
• Demand will fall for businesses who produces luxury or expensive goods such as cars
because people are less willing to borrow.
• Higher interest rates will encourage other countries to deposit money into local banks
and earn higher profits. They will change their money into the local currency, increasing its
demand and causing exchange rate appreciation.

Q. What is meant by supply side policies?

Supply side policies: These policies aim to make the country’s economy more efficient so
that they can produce more goods and compete in the international economy. In doing so,
their GDP will rise. Here are some policies:
• Privatisation: Its aim is to use profit as an incentive to increase efficiency.
• Improve training and education: This obviously increases efficiency. This is crucial to
countries with a big computer software industry.
• Increase competition: Competition causes companies to be more efficient to survive.
Governments need to remove any monopolies.

Q. How businesses might react to changes in economic policy Government policy

change?
How businesses might Possible business decision Problems with the decision
react to changes in

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economic policy
Government policy
change
Increase income tax- this Lower prices on existing products Less profit will be made on
reduces the amount to increase demand each item sold
consumers have to spend Produce cheaper products to allow The brand image of the
for lower prices product might be damaged by
using cheaper versions of it
Increase traffics on Focus more on the domestic market It might still be more
imports as locally produced goods now profitable to export
seem cheaper Foreign materials and
Switch from buying imported components might be of
materials and components to locally higher quality
produced goods.
Increase interest rates Reduce investment so future growth Other companies might still
will be less grow so market share may be
Develop cheaper products that lost
consumers will be better able to Depends on the product but
afford could consumers start to think
Sell assets for cash to reduce that the quality and brand
existing loans image are lower?

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 Chapter 27 Environmental and ethical issues.

Terms Definitions
Social It is when a business takes decisions that may benefit stakeholders other
Responsibility than shareholders, e.g. a decision to reduce pollution by using the least
'dirty' production equipment.
Pressure Groups Formed by people who share a common inerest and who will take action
to try change government policy or business decisions.
External Cost Cost paid by the rest of the society, other than business, as a result of
decision making.
External Benefits The gain to the rest of the society, other than the business, resulting from
a business decision.
Private Cost The cost of a business decision actually paid by the business.
Private Benefit The financial gains made by a business as a result of a business decision.
Social Cost The additional of the private and external cost of a business decision.
Social Benefit The additional of the private and external benefits of a business decision.
Environment Is our natural world including, for example pure air, clean water and
undeveloped country side.

Q. What are the impact of business activity on the environment?

Environmental constraints on business activity: There are two general opinions on caring
about the environment:
- Opinion A: Keeping the environment clean is too expensive. We want to keep prices low
and this is what consumers want too.
• Protecting the environment is too expensive and reduce profits.
• Increased prices mean increased costs.
• Firms could become less competitive compared to others who are not environmentally
friendly.
• Governments should pay to clean it up.

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

Q. Why Governments consider these business activities as illegal?

Ways to make a business more environmentally friendly
Governments make these business activities illegal:
• locating in environmentally sensitive areas.
• dumping waste products into waterways.
• making products that cannot be easily recycled.

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Manufacturers often complain that these laws raise prices. Therefore, some governments
usually do not make these laws strict with the hope of increasing output and in turn
employment.

Financing penalties, including pollution permits: Pollution permits are licences given to a
business to pollute up to a certain level. If "dirty" businesses pollute over the permitted level,
they either have to buy permits from "cleaner firms" or pay heavy fines. This encourages
firms to be cleaner and sell their permits to dirtier companies for more money. Other
penalties include additional taxes.

Consumer action and pressure groups: Consumers are becoming more socially aware, and
many of them will stop buying goods from companies which pollute the environment,
harming a business' reputation and image. Bad publicity means lower sales. If they want to
keep their sales revenue up firms would have to adapt to more environmentally friendly
production processes again.

Q. Define pressure group. Explain the ways to take action against business decisions.
Pressure groups: are becoming very powerful nowadays. They can severely damage
businesses that are not socially responsible.
A.These are their powers:
• Consumer boycotts
• Protests
• Blocking waste pipes.

B.These are times when they are likely to take action:

• They have popular public support and has a lot of media coverage.
• The group is well organised and financed.

Q. When pressure group less likely to take action against businesses?

These are times when they are less likely to take action:
• What a company is doing is unpopular but not illegal. (e.g. testing drugs on rats)
• The cost of making the company cleaner is more than losses that could be made by losing
image and sales.
• The firm supplies other firms and not customers, public support will be less effective.

Q.Explain the impacts of environmental issues and cost benefit analysis of business
activity.
Environmental issues and cost-benefit analysis
Governments are increasingly concerned about the social and environmental effects of
business activity. They have started to use a new type of analysis on businesses and
government proposals which will not only take into account financial costs but also external
costs. Cost-benefit analysis requires and awareness of external costs (costs to the rest of
society) and external benefits (gains to the rest of society). Here are some examples

External Costs External benefits

Waste products will cause pollution Jobs will be created.
Smoke and fumes may damage the health of Other firms may move into the area to
residents provide services to the chemical firm.

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Park/Garden cannot be used by local Important chemicals will be produced to
residents due to pollution benefit society.

.
Private Costs Private benefits
Cost of land The money made from the sale of the
chemical products
Cost of construction
Labour costs
Costs of running the plant when it has been
built.
Transport costs of materials and completed
products.

Q. Define social costs and social benefits.

Social costs are worked out from private costs and external costs.
Social benefits are worked out from private benefits and external benefits.
In other words:
• Social costs = private costs + external costs.
• Social benefits = private benefits + external benefits.

Q. Define Sustainable development.

Sustainable development: It is development which does not put at risk the living standards
of future generations.

Q. Explain the purpose of Sustainable development.

Sustainable development: what can businesses do?
1. Use renewable energy: by using solar panels or buying energy that uses renewable
sources such as wind or tidal power.
2. Recycle waste: by re-using water and other products that would otherwise be wasted or
disposed of, total use of resources is reduced.
3. Use fewer resources: lean production is about managing production so efficiently that the
minimum quantity of resources is used.
4. Develop new environmentally friendly products and production methods

Q. Explain the impact of government law on Sustainable development.

Sustainable production methods are those that do minimum damage to the environment.
Law passes by government:
1. Locating in environmentally sensitive areas such as national parks
2. Dumping waste products into rivers or the sea- though it is sometimes difficult to prove
which firm is responsible for this
3. Making products that cannot be recycled easily.

Q. Distinguish between environmental, social and economic on sustainable

development.

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Q, Define pressure group. Explain the powers/roles of pressure group.
Pressure groups: are becoming very powerful nowadays. They can severely damage
businesses that are not socially responsible. These are their powers:
• Consumer boycotts
• Protests
• Blocking waste pipes.

Q, Define Consumer boycott. Explain the action taken by pressure group.

Consumer boycott : Is when consumers decide not to buy products from businesses that do
not act in a socially responsible way.
These are times when they are likely to take action:
• They have popular public support and has a lot of media coverage.
• The group is well organised and financed.

Q. When pressure group is less likely to take action against business?

These are times when they are less likely to take action:
• What a company is doing is unpopular but not illegal. (e.g. testing drugs on rats)
• The cost of making the company cleaner is more than losses that could be made by losing
image and sales.
• The firm supplies other firms and not customers, public support will be less effective.

Q.Define Ethical issue.

It is based on a moral code. Sometimes referred to as doing the right thing.
Should businesses ever:

 

 
 

 
   

• Employee child worker.
• Take or offer bribes to government officials or people working for other firms

Q. Explain the impact of businesses of ethical decisions of 2 companies- X and Y

Potential benefits and limitations of ethical decisions- Company X.
Impact of businesses of ethical decisions of 2 Potential limitations of ethical decisions-
companies- X and Y Potential benefits of Company Y
ethical decisions- Company X

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Consumers may be against buying clothing Higher costs- adult workers will be paid more
products made by children and increase than child workers and good working
purchases from company Y and reduce conditions to business costs too.
purchases from company X
Good publicity about company Ys ethical Company Ys prices might have to be set
decisions will provide free promotion. higher that company Xs due to higher costs.
Company X will suffer from bad publicity
Long term profits of company Y increase If consumers are only interested in low prices-
and not how products are made- then sales of
company Y could fall
Some workers and investors may want to be short term profits of company Y may fall
linked to an ethical business- Company Y may
find it easier to recruit the best workers and
raise capital.

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 Chapter 28 Business and the international economy

Definitions:

Multinational company: an organisation that has operations in more than one country.
Globalisation: the process by which countries are connected with each other because of the
trade of goods and services.

Trade bloc: a group of countries that trade with each other and are usually part of a free trade
agreement.

Home country: the domestic country where a multinational starts/first establishes its
operations.

Host country: the foreign country where a multinational sets up its operations.

Tariff: a tax applied to the value of imported and exported goods.

Quota: a physical limit on the quantity of goods that can be imported and exported.

Exchange rate: the rate at which one country's currency can be exchanged for that of
another.

Depreciation: a currency is said to depreciate if the value of the currency goes down with
respect to another.

Appreciation: a currency is said to appreciate if the value of the currency increases with
respect to another currency.

Q. What is meant by Globalisation?

Globalisation is the word used to describe the increased worldwide competition and
business activity. Goods and services that once can only be found in one country have spread
all around the world.

Q. Explain the reasons for Globalisation.

There are several reasons for this:
a) Free trade agreements encourage international trade.
b) Improved travel links and communication.
c) Countries that have been undeveloped before start to develop and export their own goods,
leading to more international competition.

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Q. Explain the impact of Globalisation.
Globalisation results in:
i) More choices and lower prices for the consumer.
ii) Businesses look into more ways to become more efficient.
iii) Why many businesses merge to become multinationals.
iv) Inefficient businesses go out of business.
v) Free trade results in: More workers losing jobs, since governments can no longer protect
them from foreign competition.

Q. Explain the opportunities and threat of Globalization.

Increasing free trade and the rising mobility of labour and capital is having many effects on
businesses all over the globe. Some of these have positive effects-opportunities and some
have negative-threat.
Globalization: Potential opportunities Impact on business
for businesses Opportunity
Start selling exports to other countries- This increases potential sales, perhaps in
opening up foreign markets countries with fast growing markets. Online
selling allows orders for goods to be sent in from
abroad.
But it can be expensive to sell aboard and will foreign consumers buy products, even if they
were popular ‘at home
Open factories or operations in other It would be cheaper to make goods in other
countries countries than at home
But will the quality be as good? Might there be an ethical issue? It is expensive to set up
operations in other countries
Import products from other countries to With no trade restriction it would be profitable
sell to customers in home country now to import goods and services from other
countries and sell them domestically.
But the products will need maintenance and, perhaps, repairs-will the parts and support be
available from the producer in the foreign country.
Import materials and components from It could be cheaper to purchase these supplies
other countries-but still produce final from other countries now that there is free trade.
goods in home country These supplies could be purchased online.
But will the supplies be reliable? Will the greater distance add up to too much transportation
cost?

Q. Define the terms.

An import quota is a restriction on the quantity of the product that can be imported.
Protectionism is when a government protects domestic firms from foreign competition using
traffics and quotas.

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Multinationals are businesses that have factories, services, or operations in more than one
country. It is important to note that, for a business to become multinationals, they must
produce goods in more than one country. Eg: Nissan car, Shell, General motors.

Q. Why do firms become multi-nationals?

i) To cut costs: a) Labour costs.b) Raw material costs.
ii) To extract raw materials not found elsewhere.
iii) To produce goods nearer to the market.
iv) To bypass trade barriers.
v) To expand and spread risks.

Q. Explain the Advantages of multinationals operating in a country.

Advantages of multinationals operating in a country:
i) Jobs are created.
ii) New investment increases national output.
iii) Imports are reduced since there are more goods in the country. More exports.
iv) More taxes are paid to the government.

Q. Explain the disadvantages of multinationals operating in a country.

Disadvantages of multinationals operating in a country:
i) Jobs created are usually unskilled jobs.
ii) Local firms are forced out of business since they can't compete with multinationals.
iii) Profits flow out of the country.
iv) Multinationals use up scarce resources.
v) May influence the government.

Q. Define Exchange rates.

It is the value of one currency compared to another.

Q. How are exchange rates determined?

i) Floating rates: The exchange rate of the currency is allowed to change freely depending
on market forces, i.e supply and demand of the currency.
ii) Fixed rates: The exchange rate of the currency is set by the country's central bank.

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When the exchange rate rises, it is called appreciation. When it falls, it is called
depreciation.

Q. How are businesses affected by changing exchange rates?

a)Appreciation: i) Import prices fall. ii) Export prices rise.
b)Depreciation: i) Import prices rise. ii) Export prices fall.
These exchange rate movements can cause serious damage to businesses, making business
endeavours that would have been profitable make losses because of changes in the currencies.
The EU, for example, wants to limit these bad effects, and hence established a common
currency, the Euro.

Q. Define the terms.

Currency Appreciation: It occurs when the value of a currency rises-it buys more of another
currency than before.
Currency depreciation: It occurs when the value of a currency falls -it buys less of another
currency than before.
Common currency: It is the result of an agreement between countries to use the same
currency for all business and other transactions

Q. Explain the factors required for a positive environment in a host country.

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