IGCSE Business Notes PDF

What is production Labour → human resources enterprise → human resources→ Land → natural resources→ factors of production → production→ goods and services Capital→ man- made resources→ Land Land is a factor of production non-renewable renewable / land supply may change Labour Labour i...

What is production Labour → human resources enterprise → human resources→ Land → natural resources→ factors of production → production→ goods and services Capital→ man- made resources→ Land Land is a factor of production non-renewable renewable / land supply may change Labour Labour is the physical and mental human effort involved in the production of a goods and services Wages are the price for labor It is also known as human capital EG value of the people inside the firm Employee training can help the value of the company rise. Capital - Man made - For production WORKING CAPITAL FIXED CAPITAL Goods that are not used yet EG- sitting on Already used and used regularly. the shelves. - Consumer goods are meant to be used up more than once depending on the product. - Depends on who purchased the product. EG commercial / local. Enterprise - Willingness and ability to bear uncertain risks and to make decisions in a business or organization.  - Entrepreneurs are responsible for these risks. - Coming up with a business idea. Eg. Steve Jobs creating apple or bill gates creating microsoft - Taking risks and making decisions. The economic problem: we need to chose what products we want to spend our resources on. Opportunity cost: Because we have limited resources we need to chose wisely on what we will produce. Example: either we study very late the night before the exam but you will be tired the next day during the exam. Your opportunity cost is a good night's sleep. SPECIALISATION Division of labour: is when the production process is split up into different tasks and each worker performs one of these tasks. Advantages: Workers are trained in one taks and specialise in this - this increases efficiency and output. Less time wasted Disadvantages: Could be boring for the workers If one person doesn’t show up it could hurt the businesses output. Added value: is the difference between the selling price of a product and the cost of buying materials and components. Ways to increase added value: Raise the sellings price but the materials cost the same. Reduce the cost of materials but keep the price the same. Profit - cost of materials = final profit Buy cheap materials→ sell at a high price = more profit. PRIVATIZATION: moving the ownership and contract of an industry from the public sector to the private sector. Cons: - May not take into account total costs and benefits to society. - May operate as a monopoly - Lack of competition may result in lower quality products and higher prices. Pros: - More easy to raise funds. - Product satisfies consumers for low cost - Increased efficiency - More adapting to changing environment - Greater choices for the consumers. Stakeholders - People who are interested in the company such as employees and producers. Also customers. - They also own part of the company through the stock market Characteristics of an entrepreneur: - Problem solver - Always learning - Believes in yourself - Creative - Principled - Independent Business plans: Description of the business→talk about details Products and services→what you will sell The market→who your selling to and who are your competitors Business location and how products will reach customers→distribution of product  Organization structure and management→who will run the business Financial information→how much profit is expected Business strategy→ways to increase profit Government support: most governments offer support to entrepreneurs in order to… Increase competition Increase output Benefit society Helps firms grow How governments support start-ups: Offer training and support sessions Provide low cost premises Low interest rate loans Grants for start-ups in depressed areas or to train workers to improve productivity. Encourages universities to make their research facilities available to new entrepreneurs. Size of firms: Investors Governments Competitors Workers Banks Business size can be measured by: Number of employees Value of output Value of sales Capital employed Number of employees: Two types of intensive firms 1. Capital 2. Labour Capital intensive firms can be large. Examples are tesla and honda are automated. They have a very high output level so they employ fewer people than a business with a low output. Labor intensive firms are the exact opposite of capital intensive. Value of output: A firm employing few people could produce several items that are worth a lot of items. This would give a higher output figure than a firm selling cheaper products with more people. Value of sales It could be misleading as businesses sell different products. Value of capital employed: capital employed is the total amount of capital invested into the business (finance and machinery) Have to pay back and finally make a profit. Same problem as measuring by number of workers A company may use labor intensive methods What about bank loans NUMBER OF EMPLOYEES DOESN’T ALWAYS MEAN MORE PROFITS BUSINESS EXPANTION: Pros: Possibility of higher profits for the owners. More status and prestige for the owners and managers Lower average cost (economies of scale) Larger market share Growth of firms: There are two ways a firm can grow 1. International growth: is an increase in the size of a firm resulting from it enlarging existing plants or opening new ones  Advantages Greater market share More effective marketing Increased profit Reduced risk 2. Internal growth: is and increase in size of a firm resulting from it merging or taking over another firm Mergers 1. horizontal merger: is where two firms in the exact same industry at the same stage of production join together. Advantages: Reduces competition Opportunities for the economies of scale Larger share 2. Vertical integration: involves a firm joining with one that operates in a different stage of production. 3. Vertical backwards integration: is when a firm merges/takeover a firm that produces their resources needed for their goods. Advantages: Assured supply of important components Profit margin increases from both firms 4. Conglomerate merger: involves the merger of two firms making different products. Advantages: Ability to spread risk Transfer of ideas between the different sectors of the business. 5. horizontal integration: when a firm buys or partners with a company that purchase the products that they sell. 3.3 Marketing mix: The marketing mix: is a term which is used to describe all the activities which go into marketing a product or service. A producer aims to persuade consumers that their product is superior compared to other substitute products. This is done through activities that are a part of the marketing mix. Important note: packaging is considered as part of both product and promotion marketing. Each part of the marketing mix has to be considered carefully to make sure that it all fits together and parts to not counteract. Types of Product: Consumer goods Consumer services Producer goods Producer services Defining the type of product or service the business is producing is important when deciding how the product will be developed and marketed. Role of product decisions in the marketing mix: Producing the right product at the right price is an important part of the marketing mix. What makes a product right?  Satisfies consumer wants and needs Right quality so consumers are willing to pay the price for it Cost of production must enable a price to be set that will allow profit to be earned Design has to reinforce the firm’s brand image Developing new products Pro’s Unique selling point (USP) Allows business to achieve diversification Businesses can expand into new markets and/or existing markets. Con’s: Cost of producing trial products Cost of market research and data analysis Loss of company image if product fails Target market may not be correctly identified The importance of brand image: The brand name is the unique name of a product that distinguishes it from other brands. Brand loyalty is when consumers keep buying the same brand again and again instead of choosing a 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 a competitor’s brand. Benefits of branding: Encourages consumers to keep buying their products Assurance of guaranteed quality Charge higher price than unbranded products Brand awareness: Brands have become so famous and well known that they are often mistaken for the product itself such as kleenex instead of tissues. The role of packaging Packaging is the physical container or wrapping for a product. It is also used for promotion and selling appeal. It has to be suitable for the product to be placed - providing protection and not allow the product to spoil. Promotes the brand and product Carry vital information about the product Product life cycle: The exact length of the products varies from product to product; this means that the product can be easily discontinued but this depends on the amount of products sold and how well it adjusts into the market. The exact stage of a product as it needs to be identified as firms need to react differently depending on the stage. Development stage: Product/ prototype will be developed and tested throughout different markets otherwise known as test markets because they are open to a specific place at a specific time. Introduction stage: It is then launched and introduced to a larger amount of the market making it available for most people. High spending on promotion because you need to promote your new product. Costs > sles → no profit yet The growth stage: Sales start to grow rapidly because the product was successfully introduced to the market at the right time. Persuasive advertising is generally used to encourage brand loyalty and brand name. Prices are reduced a little bit due to the competitors (substitutes). Sales > Costs → Small amount of profit Maturity stage: Sales now increase only slowly. Due to the fact that there will be intense competition the companies will need to use competitive or promotional pricing. Persuasive advertising is used to maintain sales growth. Saturation stage: Sales have reached saturation and stabilized at the highest point. Competition is high but there are no new competitors. Profits start to fall as sales are static and prices are reduced. Decline: Sales of the product will decline as it has lost its appeal to the consumers therefore less people will buy the product. Sales costs are low - products may be discontinued / taken off the market. Advertising is reduced and then eventually stopped because there is no point in advertising something that isn’t selling well. Product life cycle 2: The exact length of the life cycle varies a great deal depending on the product and how it hits the market. It is affected by the type of product as well as new developments in technology. Extension strategies: Extension strategies can be introduced in the maturity or saturation stage. Businesses will not usually manufacture just one product. They will have a range of products at different stages of the product life cycle therefore lengthening the life of the business. Ways to extend the product life cycle: Introduce new variations of the original product Sell into new markets e.g Shake Shack moving their operation to Hong Kong. Small changes to the design, color and packaging. Use new advertising campaign Introduce new, improved versions of the old or outdated product. Sell through additional retail outlets. Types of product Firms can produce the following products: Consumer goods Consumer services Producer goods Producer services 3.3.2 Marketing mix: price Role of pricing decisions in the marketing mix: When dexinding a price for a product, the business must be careful to choose a price which will fit in with the rest of the Marketing Mix. Prices will be determined by the forces of demand and supply if the product is… More or less the same as other products in the market or There are many competitors in the market Pricing strategies: Businesses need to adopt a pricing strategy that complements the brand image If a product has many competitors in its market the business must constantly monitor the market price in order to remain competitive. A business can adopt new pricing strategies to: Enter into a new market Increase its market share Increase profits or to ensure costs are covered Main methods of pricing includes: Cost plus pricing Competitive pricing Penetration pricing Price skimming Promotional pricing Cost plus pricing Cost plus pricing is the cost of manufacturing the product plus a profit markup This involves: Estimating number of units produced Calculating the total cost of production Adding percentage markup for profit Pros: Easy method to apply Different profit mark-ups could be used in different markets Ensures profit for each unit is earned Cons: Does not consider competitor’s price Total profit made only if there are a lot of products sold No incentives to reduce costs Competitive pricing Competitive pricing is when the products are priced in line with or just below the competitors’ prices to try to capture more of the market. This allows a business to compete on products other than price for Market Share. Pros: Sales are likely to be high if the price for the product is at a reasonable price. Avoids price wars: such as fighting with different companies that are selling for the same amount of money. Often used when there are a lot of substitute products available throughout the whole market. Limitations Cost of production may be higher than other competitors - results in loss of process Requires a lot of market research Not suitable for very high quality products because there won’t be very many competitors and your profit will be reduced. Penetration pricing: Penetration pricing is when the price is set lower than the competitors’s prices in order to be able to enter a new market Aims to encourage customers to switch to a new product because of the lower price Short-term→lower profits Long-term→higher profits due to higher sales Pros Helps new products to create an impact Ensures sales are made and helps to build market share for the firms Limitations Profit per unit may be low Customers may be put off by price increases in the future Inappropriate for branded products Price skimming: Price skimming is where a high price is set for a new product on the market. Such as with apple products, teslas and stuff. Usually used for a new invention or a new development (improved) of an old and already existing product. Aims is to ‘skim’ off customers who are willing to pay more to have the product sooner Short-term→ higher profits and effective in creating Market Segmentation Pros Reinforces the product’s brand image as good quality even for a brand new product High R&D costs can be quickly recouped Maximises profits in the beginning for a new product before competitors enter into the market. So your business can already be more successful than the other competitors. Cons: High price may discourage consumers Encourages competition to make and sell a similar product because of how successfully your business worked. Promotional pricing: Promotional pricing is when a product is sold at a very low price for a short period of time, this adds scarcity to the product. So basically just putting your products on sale This might be used to clear stock. Encourages repeat sales and brand loyalty - helps to increase market share in the long run. Benefits Useful for clearing unwanted products. Helps to renew interest in the product or business if sales are falling. Limitations: Revenue is lower as price is reduced therefore businesses are worth less May lead to a price war with other companies. Psychological pricing Psychological pricing is based on the idea that certain prices encourage buyers to make purchases. Appeals to customers' emotional side. Customers may purchase expensive products as a status symbol. Based on these following theories: Customers make judgments of numerical differences in prices by focusing more on the left most digits. Consumers tend to ignore the least significant digits rather than do the proper rounding. Dynamic pricing Dynamic pricing happens when customers are split into two or more groups and they are charged different prices from the same goods because they have different demand levels. Price elasticity or sensitivity of these two groups are different. Depends on the demand or such as the airline increase the prices during the busy travel seasons.s Four P’s of marketing Product- what you sell Price- amount you sell for Place- where you sell your product Promotion- what you use to sell your product The role of packaging: ○ Packaging is the physical container or wrapping for a product. It is also used for promotion and selling appeal. ○ It has to be suitable for the product to be placed - providing protection and not allow it to go rotten. ○ Promotes the brand and product. ○ Carry vital information about the product. ○ In Apple's HQ there is a secret packaging room that is only accessible to a select group of people. For months a packaging designer stays in the room and opens the boxes to determine the one that will… Product life cycle: Products don’t last forever The exact length of the life cycle varies a great deal from product to product. The exact stage of a product needs to be identified as firms need to react differently depending on the stage. Its affected by the type of product as well as new developments in technology Development: Product (prototype) will be developed and tested Introduction: it is then introduced or launched on to the market. High spending on promotion Costs > sales → no profits yet Growth: Sales start to grow rapidly Persuasive advertising is used to encourage brand loyalty Prices are reduced a little due to competition (substitutes) Sales >costs→ small profits  Maturity & saturation Sales now increase only slowly. Intense competition may require firm to use competitive ways Decline Sales of the product will decline as it has lost its appeal Sales and costs are low - products may be discontinued Advertising is reduced and then eventually stopped Extension strategies: Extension strategies can be introduced in the maturity stage ○ Sell into new markets ○ Introduce new improved version of the old product ○ Sell through additional retail outlets Businesses will not usually manufacturer just one product They will have a range of products at different stages of the product life cycle. Penetration pricing is when the price is set lower than the competitor’s prices in order to be able to enter a new market. Aims to encourage customers to switch to a new product because of the lower price Short term→ lower profits Benefits Helps new products to create an impact Ensures sales are made and helps to build market share for the firm Limitation Profit per unit may be low Customers may be put off by the price increases in the future Inappropriate for branded products Promotion: is where marketing activities aim to raise customer awareness of a product or brand, generating sales and helping to create brand loyalty. Most products are sold in competitive markets so advertising and promotion plays a key role in the marketing mix Promotion is essential when a brand image is being created for a product. Role of promotion decisions in the market: Promotional activities include: Advertisements (above the line) Sales promotion (below the line) Mass market products require promotion to help the business achieve product differentiation. Important note: advertising does not necessarily increase profit for the business. AIMS OF PROMOTION: To inform people about particular issues To introduce new products into the market To compete with competitor’s products To improve the company’s image To increase sales To create a brand image TYPES OF ADVERTISING: Persuasive advertising: is trying to convince the consumer that they really need to buy the product and should buy it. Businesses use sound and imagery to appeal to a person’s… Emotions Aspirations Fears Informative advertising: is where the emphasis is to give full information about the product. Highlights key aspects of a product Usually used in the development stage of the product’s life cycle Gives awareness of the need or want that the product will satisfy Sales promotion: are incentives such as special offers or special deals aimed at consumers to achieve short-term increases in sales. After sales service Competitions gifts POS display BOGOF Free samples Price reductions Product placement Advantages Off- season purchases New customers to try an existing ofr new product that have launched More frequent purchases or greater quantities Customers to buy your product instead of a competing brand Product placement: is a technique used by companies to subtly promote their products through appearances in media. Companies hope that audience will take note of the products used by characters and think more strongly about using the product themselves. This can be used in… Video games Books Music  Sports Movies Videos Which type of promotion should be used? The following factors will be needed to be considered: Stage of the product life cycle Nature of the product Cultural issues in various countries Nature of the target market The importance of the marketing budget Marketing budget: is a financial plan for the marketing of a product or the product range for a specified period of time. The marketing department will know how much money it may spend Firms that have lower budgets will limit the places where they can advertise. The role of technology in the marketing mix: Technology presents new opportunities for business to market their products - leading to frequent changes to the four elements of the marketing mix. EG: UBER, Facebook, Alibaba, AIRBNB Allows businesses to promote using social media, online advertising. Social media marketing: involves creating and sharing content on social media networks in order to achieve marketing and branding goals. It involves activities such as Posting text, images, and videos on social media Paid social media marketing Viral marketing: is when consumers are encouraged to share information online about the products of a business. Benefits for businesses can be: Targets specific demographic groups and customers Speed in response to market changes Chap to use Reach groups that might be difficult to reach. Benefits of a business advertising on its own website: No extra costs if website is already set up Control of advertising Flexibility in making changes to the advertisement Can provide more information and link to other pages Attracts funds and payments form companies Drawbacks of a business advertising on its own website Potential customers may not see the website Relies on customers finding the website Design costs of the website may be high E-commerce: is the ‘online’ buying and selling of goods and services using computer systems linked to the internet and apps on cell phones. Not every product or service will be successfully sold by e-commerce. Firms need to consider the different impacts that the internet and e-commerce can have on both businesses and consumers. Businesses: Advantages: Low-cost promotion  Able to access many consumers Global coverage Shops might not be needed B2B and dynamic pricing is easier. Disadvantages: No direct customer contact Competition from other websites Cost of setup Transport costs Consumers: Advantages: Competitive prices Easy to compare Easy to pay Wider choice Convenience Disadvantages: Internet access required Cannot se or try the products Identity theft Technical problems No personal contact 3.4 Marketing strategy Marketing strategy: is a plan to combine the right combination of the four elements of the marketing mix for a product to achieve a particular market objective. Marketing objectives could include: Increasing sales of an existing product by selling to new markets or existing markets. Implementing extension strategies to increase sales of a product. Achieving target Market Share. Increasing Market Share. Maintaining market share if competition is increasing their presence in the market. Increasing sales in the Niche Market. Importance of the Marketing Mix: Influencing consumer decisions The combination of the four elements will need adapting throughout a Product Life Cycle to ensure that consumer decisions are being influenced positively. The strategy will depend on the market size and the number and size of competitiors. Recommending and justifying a marketing strategy The following points should be developed when recommending / justifying a marketing strategy: Marketing objectives o. Target market Marketing budget o. balanced marketing mix Introductio Growth Maturity Saturation Decline n Sales Low sales Sales rise Sales Sales level Sales fall as because the rapidly increase off as nes products product is more slowly market become new saturation is available or reached the product goes out of fashion Pricing policy Price Penetration They will Competitive Price skimming pricing by use pricing/ reductions because competitors competitive prices are because sales there are a as a few pricing/ reduced to are falling; few competing promotional compete some customers products are pricing with competitors causing introduced. because it existing stop making them to sell This is helps their competitors; the product. at lower because they product gain no new prices. are wanting a sense of competitors to grow and scarcity who enter get more meaning that the market. loyal more and customers more people want it. Promotion/ad Informative Persuasive Image Adding Advertising v-ertising advertising advertising creation different is reduced as the to encourage because they types of the because the product is brand want to product that sales have new they loyalty as encourage have been fallen. can also the sales brand improved to give out free start to grow loyalty and create a samples to rapidly. compete sense of get with other expectation customers to very for your try it. competitive consumers products. Likely profits / Profits made Profits start Profits are at Profits fall Profits fall as losses due to high because the their highest as sales are sales fall development business has because the static and because the costs. just business has prices are business has introduced started to being gone out of their mature. reduced. fashion. product. Legal Controls Consumers need protection against businesses which could take advantage of the consumers’ lack of knowledge by using persuasive advertising. In the UK, the consumer protection laws include: - Weights and measures - Trade description - Sale of goods - Consumer contract regulations Weights and measures is when a business commits an offense if they sell underweight goods or if the weighing equipment they use is inaccurate. Trade description: it is legal to give the consumer a deliberately misleading impression about a product or service. Sales of goods: It is illegal to sell products which have… Serious problems or flaws Not a satisfactory quality Products which are not fit for the purpose. Products which do not perform as described. The consumer contracts regulations: allows a cooling-off period for 7 working days. These regulations apply to all transactions carried out over a distance as well as online transactions. New markets abroad Opportunities: These days a large number of businesses market their products abroad. This is because of … Markets abroad have growth potential Home markets might be saturated. Wider choice of location to produce products and this encourages firms to sell into these countries. Trade barriers/ tariffs Problems Lack of knowledge Cultural differences Exchange rate changes Import restrictions Increased risk of non-payment Increased transportation costs Methods to overcome the problems Joint ventures Licensing International franchising Localizing existing brands. Joint ventures Businesses can gain important local knowledge so that culture and costumes can be adapted to enable more successful entry into the new market. Main limitations: Management conflict between the two businesses Profits shared Licensing Is where the business gives permission for another company in the new market being entered to produce the branded or ‘patented products’. Products don't have to be physically transported to the new market as it is produced locally. Main limitations: Quality problems caused by inexperienced licensees. Licensee now has access to information about how the product is made. International franchising International franchising means that foreign franchises are used to operate a business’s franchise abroad. Main limitations: Quality problems or poor service offered by franchisees could damage brand name. training/support needs to be provided by franchisors. Localizing existing brand There is still a common brand image for the business but it has adapted to local tastes and culture. An localized brand that caters to the taste of the company. Main limitations May be less successful than a new product made to meet local cultures and market conditions. Expensive to change packaging, promotion, and so on for each market the product is sold in. 4.1 Production of Goods and Services: Production process: Production is the provision of a product or a service to satisfy consumer wants and needs. This involves adding value to a product or service. Added value is the difference between the cost of inputs and the selling price of the product. Such as like an iphone because it doesn’t cost much to make but they sell it at a 130% mark-up. This allows the business to sell their goods and services at a higher price. Discussion time: how could we add value to the burger so that it can be sold for a higher price? Organic ingredients Famous chef/ endorsements Exceptional service Decoration Production process: Productivity: The level of production is the total output of a business in a given time period. Productivity is the output measured against the inputs used to create it. Ways to increase productivity: Improve quality of the product and inventory control to reduce waste: because you are required to only sell the product if it is good quality. Replace employees with machines - automation (capital intensive production) Improving training for your employees so they know what to do and they do it fast Motivate workers more effectively Introduce new technology as employees become more efficient, output per workwear rises and therefore costs of production for the business will fall. businesses will try to increase their productivity to become more competitive. example: motorbike producers in Japan were so efficient that UK producers went out of business. Job production: job production: involves making a single item which has been specifically ordered. each order is different may or may not be repeated usually expensive items that require skilled labor and a time consuming process example: tailor and making wedding cakes Pros: Meets exact requirements of the consumers because it is tailor made workers have more varied jobs higher motivation higher price that can be charged; added value Cons: skilled labor is required labor intensive production often takes a long time materials may have to be specially purchased. batch production: batch production means making quantities of the same item. It may be large or small quantities and is easily repeated for another order. products are made in blocks or batches example: a bakery makes a batch of loaves, a batch of croissants and a dozen cupcakes. Pros: machinery break down may not affect production to a great extent flexibility variety to workers’ jobs more choices offered to consumers Cons: machines may have to be reset between batches can be expensive for producers warehouse space needed for materials and machines. flow production: flow production: is where large quantities of products are produced in a continuous process. a production line can run 24/7 workers are carrying out the same tasks usually requires a lot of expensive complex equipment and computer control example: producing potato chips. Pros: high levels of output of a standardized product lower average costs allows for lower prices capital-intensive method lower unit costs relatively unskilled workers time is saved Cons: boring system for workers high capital costs of setting up significant storage requirements too much reliance on machinery 1a. I would recommend the ice cream producer to use flow/mass production because they sell a lot of ice cream every year and it is not personalized to the extent of job production. 2a. The method that would be used by a hairdresser would be job production because people pay for an up close and personal product. B. i would recommend hudson limited to use batch production because the airplane market is not constantly selling airplanes. They are also only making one type of engine. Inventories: Why do businesses hold stock? To ensure that there is always enough inventory to satisfy demand , stock levels must be carefully controlled Stocks must be available with sufficient lead time to meet production needs. Lead time is the margin of time between the date when stock is ordered and when it is delivered. Lean production After World War II, Japan went from the world’s worst economy to one of the world’s best! This is due to their working culture but also due to their innovative techniques in business. The japanese way of manufacturing using a different approach: lean production Lean production are techniques used by firms to cut down on waste and therefore increase efficiency. It reduces the time it takes for a product to be developed and become available for sale. It cuts out any activities which do not add value to the customer and this includes services. 8 wastes in a company using lean manufacturing: 1. Defects 2. Overproduction 3. Waiting 4. Non-utilized Talent 5. Transportation 6. Inventory 7. Motion  8. Extra-processing Benefits: Costs are saved through: Less storage of raw materials of components Quicker production of goods or services No need to repair defects or provide a replacement service for a dissatisfied customer Better use of equipment. Kaizen: Kaizen means continuous improvements through the elimination of waste. Through the ideas of workers themselves! Small groups of workers meet regularly to discuss problems and possible solutions. Proved to be effective - workers know best! Pros: increased productivity improved layout of the factory floor and increases workers flexibility reduced amount of space needed for the production process work-in-progress stock reduced motivation job satisfaction Cons: training requirements may require changes to the culture enthusiasm could wane easily Just in time Just in time (JIT) is a production method whose focus is on reducing or virtually eliminating the need to hold inventory (and have money tied up in them). Inventory includes:  raw materials components work-in-progress finished items Just in time raw materials and components are delivered just-in-time parts are made just-in-time for the next stage of production finished products are made just-in-time to be delivered / transported to consumers warehouse space is not needed (reducing costs) finished products are sold quickly - increasing cash flow 1. What are the three types of stock? ○ raw materials ○ finished products ○ partly finished products 2. Why do seasonal businesses need to build up stock? ○ because their product will be sold in huge quantities during a certain time. 3. How did the earthquake in Kobe, Japan affect the businesses using JIT? ○ there was a lack of buffer stock Technology: Advantages: higher productivity routine/boring jobs now done by machines businesses train workers to use technology workers become more skilled and can produce better quality output. Disadvantages: unemployment expensive investment workers may be resistant to change difficult to remain up-to-date with technology 5.1 Business Finance The importance of finance Every business has a finance department, their role is extremely important as they will: ○ Record transactions E.G. sales ○ Forecast cash flow ○ Prepare financial accounts as information for managers ○ Forecasting cash flow ○ Make financial decisions Every business needs finance in order to operate however they will all need it for different reasons E.G. paying rent, food, loan repayments, suppliers ETC We mostly refer to finance as ‘capital’ finances to run an operations 01 Needs of finance Why do businesses need finance (capital): Starting up a business Working capital ○ Maintain operations ○ Pay salaries Finance needed to expand when your business is doing well ○ Purchasing new assets Purchase equipment to create new products Why finance capital is needed: Start-up capital: the finance needed by a new business to pay for essential non-current (fixed) and current assets before the business can launch. Fixed assets are things that you will be able to use for an extended period of time. E.g 3D printer, computer etc…  Working capital: finance needed to pay its day-to-day costs. It is the lifeblood of the company. Eg wages or rent Expanding an existing business: e.g capital to develop new products, takeover businesses purchase more assets etc… Working capital There are two types of working capital. Revenue expenditure: money spent on day-to-day expenses not involving purchase of long-term asset, e.g. wages, rent, water bill Capital expenditure: money spent on non-current (fixed) assets that will last for more than a year. 02 sources of finance internal finance: capital obtained from within the business itself retained profits: profit kept in business after owners have taken their share of profits. ○ Advantages: Doesn’t have to be repaid (unlike bank loan) ○ disadvantages: You might not have any (start-ups) owners / shareholders receives less profit paid out sales of existing assets: selling assets that are no longer required (e.g redundant equipment) ○ Advantages: basically an investment don’t have to pay maintenance costs ○ disadvantages: might take time to sell assets (may be unwanted) sale of inventories: i.e inventory of products stored ○ Advantages: free up storage space for inventory ○ disadvantages:  might not be able to sell the inventory for its full value owners’ savings: sole traders / partners can put more of their savings into an unincorporated business. ○ Advantages: immediately available money no interest ○ disadvantages: will be limited high risk external finance: capital obtained from sources outside of and separate from the business. Issue of shares: selling shares (ownership). Only for limited companies ○ advantages: doesn’t have Interest payment Permanent source of finance ○ disadvantages: ownership could change dividends are expected Dividends do not lower tax burden (interest does) bank loans: obtained from banks which must be repaid with interest. ○ Advantages: you get the exact amount of money that you need for your purchase/ matching term Easy and quick to arrange firms will receive good terms ○ disadvantages: loan has to be repaid + interest securities / collateral must be provided. Debenture: long-term loan certificates issued by limited companies ○ advantage do it for people who have a stake in your business, people who are interested. external finance: grants and subsidies from outside agencies (e.g government) ○ advantages  the government pays you if they think that your business has potential Often don’t need to be repaid ○ disadvantages often given with strings attached Factoring of debts ○ debtor: customer who owned a business money for goods bought ○ debt factors: specialist agencies that ‘buy’ claims on debtors to give businesses immediate cash ○ e.g debt factor may offer 90% for businesses existing debt ○ advantages immediate cash + risk of collecting debt —> factor’s ○ disadvantages: business won't receive 100% of value of debt Micro finance: when you don’t have an initial investment so they get a small initial investment once the person pays back their loan. ○ advantages: required loan size to small for regular banks crowdfunding: funding a project by raising money from a large number of people who each contribute relatively small amounts, typically via internet Short Term: Short term finance: provides working capital needed for day to day operations. Overdraft: arranged by a bank allows a business to ‘overdraw’ bank accounts. You can take out more from your bank account than is actually on it. But the amount is usually fixed with a bank. ○ Advantage: Interest paid only on amount overdrawn Can be cheaper than short-term loans ○ Disadvantage: Interest rates are variable without your consent Bank can ask for repayment at a very short notice so you will not be eligible for overdraft anymore.  Trade credit: when the business delays paying its suppliers → better cash position. You get money back from your customers before you need to pay back your suppliers. ○ Advantages: It is almost an interest-free loan during the delayed payment period so you don't have to pay for it until it is later. ○ Disadvantage: suppliers may not give you any more goods or discounts if you haven't paid them within the allotted time. Factoring of debts: ○ debtor: customer who owned a business money for goods bought ○ debt factors: specialist agencies that ‘buy’ claims on debtors to give businesses immediate cash ○ e.g debt factor may offer 90% for businesses existing debt ○ advantages immediate cash + risk of collecting debt —> factor’s ○ disadvantages: business won't receive 100% of value of debt Long term: Long term finance: finance available for more than a year. Hire purchase: pay monthly fees on something for a certain period of time and then the rental fees eventually lead up to owning the good. This is through monthly payments with an initial down payment. ○ Advantages: Do not need to find a lot of money to buy the product instantly. So you can raise a lot of money over a period of time until you are able to buy the product. ○ Disadvantages: Interest payments can be quite high and you will need to put a cash deposit. Leasing: using asset without purchasing it by making monthly payments. ○ Advantages: Do not need to find a lot of money to pay for the product maintenance is carried out by then leasing company ○ Disadvantages:  Total leasing cost is greater than purchasing the product over a long period of time. Issue of shares: selling shares (ownership). Only for limited companies ○ Advantages: doesn’t have Interest payment Permanent source of finance ○ Disadvantages: ownership could change dividends are expected Dividends do not lower tax burden (interest does) bank loans: obtained from banks which must be repaid with interest. ○ Advantages: you get the exact amount of money that you need for your purchase/ matching term Easy and quick to arrange firms will receive good terms ○ disadvantages: loan has to be repaid + interest securities / collateral must be provided. What factors do managers consider before deciding where to obtain their finance from? Purpose and time period: what is the need for the finance? Is it short term or long term? Amount needed Legal form and size: if you are a large company you would have a lot of chances to get shares but if you are a small business you wouldn't get loans or shares. Control of business Risk and gearing: does the business already have loans? ○ Gearing = proportion of total capital raised from long term loans. 5.2 Cash flow forecasting and working capital Importance of cash Cash is a liquid asset which means it is immediately available for spending on goods and services. 70% of small businesses fail due to poor cash flow management. Businesses do not want to suffer from a shortage of ready money Bills are regular, income is irregular. Steady money supply is required to pay its essential debts such as: Creditors Wages It saves a business from having to borrow money(interest payments) Allows a firm to take advantage of stock offers where suppliers give discounts for payments in cash. Cash flow problems: A business may experience cash flow problems by Spending too much money Not yet received money from people who purchase on credit Reduce inflows (sales) Overtrading Insolvency occurs when an individual organization can no longer meet its financial obligations with its lender(s) as debts become due. Cash flow Cash flow of a firm is the cash inflows and outflows over a period of time Cash inflows are sums of money received by a firm during a period of time. Sale products for cash Payments made by debtors Borrowing money from external sources Sales of assets of the business Investors Cash outflows are the sums of money paid out by a firm during a period of time. Repaying loans Paying creditors of the business Cash flow cycle Cash flow cycle shows the stages between paying out cash for expenses and receiving cash from sales of goods and services. The longer the time taken for these stages, the greater will be the firm's need for working capital and cash. Cash flow is not the same as profit. Cash flow forecast Why is it important A cash flow forecast 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. A cash flow forecast can be used to tell the manager: How much cash is available to pay for expenses, repaying loans or to purchase fixed assets How much the business might need to borrow to avoid insolvency  Whether the business is holding too much cash A cash flow forecast can be useful in the following situations: Starting up a business Running an existing business Keeping the bank manager informed of changes Managing cash flows Net cash flow Net cash flow is the difference, each month, between inflows and outflows A cash flow statement is the exact amount of money that came into the business and left the company in the past whereas the cash flow forecast is a projection of the money that will come into the business by looking at the past cash flow statements Net cash flow = cash inflow - cash outflow Long term solutions Attracting new investors Cutting costs and increasing efficiency Developing new products that will attract new customers Working capital Additional working capital Working capital is the finance needed by a business to pay its day-to-day costs. No business can run effectively without a sufficient quantity of working capital Forms of working capital  Cahs Firms debtors Value of inventories 5.3 Income statement What is profit and its importance: Why is profit important for a private sector business Reward for enterprise and risk-taking: for entrepreneurs and investors who put in capital and time into the business Source of finance: retained profits Indicator of success: for new entrants into industry Why do profits matter for social enterprises and public sector businesses Profit needed to survive/ self-sustaining as a business Profit mad can help achieve other objectives profit=revenue-cost To increase profit you could increase revenue or decrease cost What are accounts: Accounts: financial records of a business. Final accounts: produced at the end of the financial year to give details of the profit or loss made over the year and the worth of the business. trading account: Trading account shows how the gross profit of a business is calculated. The trading account differs for manufacturing vs. retail businesses This is because the cost of sales are different. gross profit = revenue - costs of goods sold (cost of sales) Net profit net profit: profit made after all costs have been deducted from revenue, I.E. after subtracting overhead costs from gross profit. Retained profit: Retained profit: net profit reinvested back into the company, after deducting tax and payments to owners. Four types of methods to answer a IGCSE BS question Knowledge: directly answer the question ○ E.g if question asks for advantages then identify advantage Analysis: analyze by elaborating on your original answer What does evaluate mean for justify questions: 1. short vs long term: does your decision make sense in the long-term? 2. Objectives: does your decision meet a certain business objective? 3. Market trends: is your decision supported by market trends? 4. Costs:would your decision have a lot of costs 5. Stakeholders 6-mark justify questions: Typically will include justify/ do your think: Provide one supporting argument + elaborate [know+analysis] Provide one opposing argument + elaborate Evaluation & justified decision: ○ Pick one of the options. Then evaluate why this decision is the best. 5.4 statement of financial position: Statement of financial position: A statement of financial position shows the value of a business’s assets and liabilities at a particular point in time.(capital obtained and debts) It sums up the value / worth of a business at a given time Assets Liabilities Assets: Assets are those items of value which are owned by the business. Any kind of equipment is an item of value. Also the cash and transfer of money from the non cash transactions. E.g mcdonalds deep fryer, chairs etc… Current assets: are assets owned by a business and used within a year Examples: Cash Inventories (something that is sitting there but has not been used yet) Account receivables (debtors) Non-current (fixed) assets: owned by a business for more than one year. Examples: Buildings Land Equipment Land is the one of the only fixed assets that don't depreciate. Liabilities: Liabilities are debts owed by a business to other business. Current liabilities: short term debts (within a year) owed by a business Accounts payable (i.e trade credit) Bank overdrafts Non current liabilities: long term debts over a year owed by a business. Long term bank loans Debentures Mortgages (housing loan) Our liabilities should match our assets to fixed assets should be covered by fixed liabilities. Shareholders equity / funds Shareholders equity is the total sum of money invested into the business by the owners of the business. Share capital: money put when shareholders bough newly issued shares Reserves: profit retained from previous years / kept for dividends (retained profit） Total assets formula: LIABILITIES + OWNER’S EQUITY Working capital = current assets - current liabilities Return on capital employed ROCE = net profit/ capital employed * 100 Why is the statement of financial position important  Shareholders can understand if their stake in the business has increased or fallen by looking at the total equity figure. Understand if there is enough working capital needed to operate the business Analyze how expansion o f business has been paid for ○ Did the firm issue more shares use more debt, sell inventories Analyze the total long term and permanent capital that the business has to pay for its assets: ○ Capital employed = shareholders equity + non current liabilities. 5.5 analysis of accounts: profitability ratios 🎉 Gross profit margin 2018: 37.5% 2017: 30.7 Net profit margin 2017: 18.3 ROCE 2017= 220/965 = 0.23 2028= 280/1065 =0.26 Liquidity ratios. Current ratio Current ratio: looks at how solvent or liquid a business is in the current year CR= current assets/ current liabilities. The larger the current ratio the better it is for the company You can find this information in the statement of financial position 2001: 315,528/222,348 = 1.42: 1 2000: 171,160/173,820 = 0.98: 1 The businesses current ratio has increased and that is good because now they are a more liquid company. High liquidity means that they can meet their short term debts without much trouble. Acid test ratio Acid test ratio: looks at the ability of a firm to pay its short-term debts (without having to sell its inventories. At = (current assets- stock) / current liabilities 60/130 =0.46 This isn't the best ratio because it is a bit shaky Ratios higher or lower Profitability ratios: high Liquidity ratios: high Why might firms not want liquidity ratios ot be too high May mean too much money is tied up in current assets Strengths and limitations of ratio analysis Strengths: Able to quickly assess strengths/ weaknesses of a business (financial performance) Could be effectively identify problems when making comparisons (to itself historically + competitors) Limitations: Inflation: rising prices might cause comparisons to be misleading Historical performance is not indicative future performance External users cannot access data available to managers 6.1.1 business cycles GDP: The total output of financial goods or services of an economy in a period of time usually one year. Measured in the money of the occupying country. Total of the output of an economy. A few of mr. ratz observations 1. The economy goes through “cycles” but the length of the ups and downs can be very different 2. An overall upward trend, I.E. a growing economy  3. Certain events cause the economy to grow/shrink changes in taxes, interest rates, wars; although the link is not always clear. 4. Hard to predict whether the economy will grow or shrink in any given year. Growth (expansion): Growth: Gdp is rising Unemployment falls investments (firms) and consumption increases Higher standards of living Boom Boom: There is too much spending Prices start to go up because the products are worth more Shortage of skilled workers Higher business costs leading to uncertainty Recession: Recession: There is a fall in spending  Firms experience falling demand and profits Output levels fall and unemployment rate rises Firms cut back on investment Slump: Slump Many businesses close down Factors of production are mostly idle Unemployment rate is high There is a weak total demand and price levels fall 4 main government economic objectives 1. Low inflation 2. Low unemployment 3. Economic growth 4. Balance of payments between imports and exports 1. Low Inflation: The increase in the average price level of goods and services over a period of time. Measured in inflation rate Low inflation: why might high/rapid inflation be a problem ○ Business profit margins decrease: cost of goods sold increases ○ Prices of products increase→citizens can afford goods ○ Real incomes will fall: when prices rise quicker than wage i. The amount of disposable income available to consumers ○ Prices of domestic goods are higher than foreign goods i. People buy foreign goods instead ○ Businesses don't want to expand / create jobs (why?) i. Workers demand higher wages + uncertainty 2. Low unemployment: Unemployment: people who are willing and able to work but cannot find a job. Why is this a problem from the government's perspective? Low unemployment lowers your GDP because people have more income so they have a higher spending power. When there is unemployment people can't pay taxes because they don't have a high income average. Standards of living decrease. What do governments do when there is high unemployment Open up more jobs Governments pay unemployment benefits 3. Economic growth Economic growth: when a country’s GDP increases - more goods and services are produced than in the previous year. (more goods and services are produced and sold) Why is this important: Less poverty - because there will be more jobs opened up so more employment and more spending. People can pay more taxes because they make more money so they spend more on taxes. The government can spend money on different areas (healthcare) More services and products produced Standards of living increase because people a richer Business higher profits → more likely to invest Low unemployment **positive feedback loop** 4. Balance of payments: imports VS. exports Balance of payments: records of the difference between a country’s exports and imports. Exports lead to money flowing into the economy, imports are money flowing into the other countries' economy. Governments want the difference to be as similar as possible Exports: goods sold to other countries Imports: good bought from other countries When imports are purchased they are paid in foreign currencies (why?) Trade deficit: (imports> exports) implies that the nation is beyond its means and is in debt. A trade surplus is (exports > imports) implies that the people in the country will not be enjoying as many products as possible (countries aim for balance of payments) 6.1.2 fiscal policies: Fiscal policies: any change by the government in tax rates or public sector (government) spending. Governments achieve these objectives by… Fiscal policies Monetary policies Supply-side policies Two main types of fiscal policies: 1. Changing taxes 2. Governments spending Government spending: What do governments usually spend on? Transportation Education  Public facilities (sports) Healthcare Military Roads Prisons How might businesses be impacted by government spending? If government spends money on you it can be helpful for your business Where does government get its money to spend: Taxes investment / income Privatization→selling national assets/properties What kind of taxes are these: Profit tax→ direct tax Income tax→ direct tax Property tax→ direct tax Sales tax → indirect tax Import tariff → indirect tax Inheritance tax → direct tax Capital gains tax → direct tax Taxation: direct taxes How would an increase in income taxes affect firms: Lower disposable income to spend → less demand for goods How would an increase in profit tax affect firms: Lower retained earnings → less investment Lower profits → less incentive to start businesses Taxation: indirect taxes: Indirect tax: taxes on expenditure (purchasing goods)  E.g value added tax If governments increase indirect taxes how would firms be impacted: Prices of goods and services rise → fall in demand (which goods?) ○ More luxuries than necessities (PED?) Workers may argue for higher wages as cost of living increases Businesses experience higher production costs and may need to raise their prices Taxation: import tariffs and quotas Import tariffs: a tax on imported products Import quotas: physical limit on the quantity of a product that can be imported How do these trade barriers affect domestic firms Lower levels of competition Higher costs if businesses need to import raw materials or important components Other countries may retaliate and impose trade barriers as well Supply-side policies: Supply-side policies: try to increase the competitiveness of industries in an economy against those from other countries. 3 main areas: 1. Privatization 2. Improve training and education 3. Increase competitiveness in all industries Privatization: Efficiency Improve training and education: Training: teaching people who are already on the workforce Education: teaching people who aren't on the workforce Improving education can help businesses gain workers in the future How will higher interest rates affect firms? Cost of borrowing increases, so… Firms with (variable interest) loans pay higher interest → lower profits Business expansion/ investment decreases Demand for expensive consumer items decreases More money to pay mortgages→ demand for goods decreases Higher interest rates → encourage people to deposit money if our country → exchange rate appreciation → imports cheaper & exports more expensive High interest rates can significantly impact a business in various ways: 1. Increased Borrowing Costs: When interest rates rise, borrowing becomes more expensive. Businesses that rely on loans for expansion, operations, or capital expenditures may face higher interest payments, which can strain cash flow and profitability.  2. Reduced Consumer Spending: Higher interest rates often lead to increased loan payments for consumers, which can decrease disposable income and reduce overall consumer spending. As consumers cut back, businesses may experience lower sales and revenue. 3. Investment Slowdown: With higher financing costs, businesses may delay or scale back investment in growth initiatives, such as new projects or equipment. This reduced investment can hinder expansion efforts and long-term growth prospects. 4. Pressure on Profit Margins: Increased borrowing costs and potential decreases in sales can squeeze profit margins. Businesses may have to raise prices to maintain profitability, which could further deter sales. 5. Impact on Financial Markets: Higher interest rates can lead to volatility in financial markets, affecting stock prices and access to capital. Companies may find it more challenging to raise funds through equity markets, limiting their financial flexibility. 6. Risk of Default: For businesses with existing debt, rising interest rates increase the risk of default, especially if their revenues decline concurrently. This can lead to financial instability and operational challenges. How businesses react to changes in policies: Government policy Possible business Problems with decisions decisions Increases income tax: 1. Lower prices 2. 1. You get less profit 2. spend less money Decrease the quality of Can damage your brand your product. image Increase government 1. Produce / innovate in More competition if other spending: that industry (where the firms do the same government spends) Government increases 1. Lower prices for 1. Less profit 2. Harder interest rates: expensive products. 2. to find sources of finance Use fewer loans 3. 3. Less innovation → Spend less money less competitive. investing / expanding. Increase tariffs on 1. Buy local equipment / Quality might vary imports (firm uses materials imported equipment) 6.2 Environmental and Ethical Issues Social responsibility: Business activity aims to satisfy customers' demand for products - but it often impacts the environment. Social responsibility: is when a business decision benefits stakeholders other than shareholders. EG. when a firm makes the decision to protect the environment by reducing pollution by the greenest production equipment. Some companies do these things even if they aren’t required because it is the right thing to do. Cost benefit analysis: Externalities: Governments have become very concerned about the social and environmental effects of business activities. Cost benefit analysis: takes into account all the costs of a particular decision, not just the financial ones. Social costs = external costs + private costs External costs: are costs paid for by the rest of society other than the business, as a result of business activity. Private costs: are costs paid for by a business or the consumer of the product. How much do we have to put in for something to come out?? important : non financial factors need to be converted into dollar amounts for analysis Sustainable development Sustainable development is development which does not put at risk the living standards of future generations. What can businesses do? Use renewable energy Recycle waste Use fewer resources Develop greener products Environmental pressures and opportunities: Three main influences: Consumers Pressure groups government Role of pressure groups: A pressure group is made up of people who want to change business decisions by taking actions such as organizing consumer boycotts. Types of pressure groups 1. Local E.g. Wolverhampton airport action group. 2. National E.g. which (the consumers association) 3. International E.g. greenpeace Pressure groups will try to cause as much bad publicity using: advertising/leaflets/posters Public meetings Petitions Boycotting products Organizing demonstrations When pressure group activity is likely to change business actions: It has popular public support and receives much media coverage Consumer boycotts result in much reduced sales for the business The group is well organized and financed When pressure groups activity is unlikely to change business actions: What the firm is doing is unpopular but not illegal (e.g animal testing) The cost to the business of changing its methods is more than the possible cost of poor image and lost of sales The business sells to other businesses rather than to the consumers (who is this company facing if they are producers.) Business response to ethical issues: What is the meaning of being ethical? Ethical decisions are based on a moral code. Sometimes referred to as doing the right thing: Should businesses ever: Take or offer bribes to government Employ child workers Agree to fix high prices Buy supplies from polluting firms Pay directors large bonuses at the same time reducing the workforce Globalization: threats for businesses Increasing imports into home market from foreign competitors Increasing investment from MNCs to set up operations in home country Employees may leave businesses for international competitors who can pay more. Tarifs = national sales tax Protectionism: Protectionism: when a government protects domestic businesses from foreign competition using… What policies can governments use to engage in protectionism ○ Tariffs and import quotas (quotas make a limit on the exact amount of products getting imported) fixed limit Why do governments pursue protectionism? ○ Protect domestic industries from competition ○ Raise tax revenue from tariffs Multinational corporations (MNC) MNC: Those with factoreisa , production, or service operations in more than one country (also called transnational businesses) Benefits of becoming MNC: Lower production costs Access to new aisles markets Labour Saving production costs Higher efficiency Subsidies for employment staff Global reach Diversification strategy Risk minimization Avoid barriers to trade put by countries to reduce imports of goods from abroad Reman competitive with rival businesses which may be expanding abroad Gain government grants How does becoming a MNC impact its stakeholders? Shareholders: Employees Suppliers: Potential benefits to a country where an MNC operates: Job creation Increased investments Higher tax revenue Increased consumer choice Increased exports (good for economic growth) Potential drawbacks on a country where an MNC operates: Creation of unskilled assembly-line jobs Reduced sales for local businesses Repatriation of profits (the MNC might send their products back to their home country which means that there is no benefit to the economy) Use of non-renewable resources Powerful influence over the government 6.3.3 Exchange rates: What is exchange rates Exchange rate: is the price of one currency in terms of another currency. E.g. 1 pound = $1.50 Most currencies are allowed to vary or float on the foreign exchange market according ot the demand and supply of each currency. Against another currency, a currency can… Appreciate:when the value of a currency rises - it buys more of another currency Depreciate: when the value of a currency falls - it buys less of another currency