Principles of Business Notes PDF

The Nature of Business (1) Enterprise: The word enterprise could simply mean ‘a business’ (2) Entrepreneurship: Entrepreneurship is the practice of identifying a new innovation or opportunity, organizing the financing and other resources and taking the risk in...

The Nature of Business (1) Enterprise: The word enterprise could simply mean ‘a business’ (2) Entrepreneurship: Entrepreneurship is the practice of identifying a new innovation or opportunity, organizing the financing and other resources and taking the risk in the hope of creating wealth. (3) Barter: this is the exchange of goods and service without the use of money. (4) Profit: this is the money remaining or left over after the cost of Production, distribution and taxes have paid. (5) loss A loss is the opposite of profit. When the cost of production and other expenses are greater than the revenue, this is called making a loss (6) Trade this means buying and selling. A business will engage in trade in order to make a profit. (7) Organization this is a group of persons using resources or things that are arranged in a certain way to carry out specific activities in order to achieve a goal or objective. (8) Economy this is a system that allocates or shares up scarce resources by deciding what should be produced, how and for whom. (9) Producer this is a person or business that makes or creates goods or services. (10) Consumer this is the person or group that buys goods and services to satisfy wants. (11) Exchange this is the giving of one thing and receiving of another. The things exchanged are usually of similar value. (12) Goods these are things that are made to be sold, otherwise called products. (13) Services this means work that is done for another; assistance or benefit given. services are intangible. (14) Market A market is any situation in which buyers and sellers meet or communicate in order to exchange goods and services. (15) Commodity this is a good that is traded, usually raw material and coffee (16) Capital the term capital can mean money and other resources or things that are used to start a business. It ca also mean the money, machines and man- made materials that are used everyday in business. (17) Labour this is the physical and mental work of a person. Labour is another name for human resources. (18) Specialization: Specialization of labour refers to the division of a task into a number of related parts. Barter Barter is the exchange of goods and services without the use of money. Where needs and wants are satisfied directly from nature, is referred to by economist as a subsistence economy. Limitations of bartering 1. Double coincidence of wants – one person must have what the other person wants and be prepared to exchange. 2. rate of exchange- the right quantity that was acceptable in exchange for the other items 3. indivisibility- one could not exchange part of a cow for peas 4. store of wealth- some items lost value with the passing of time while others gained value with time  Money Money is any commodity, which is accepted as a measure of value and a medium of exchange. To be accepted as money the commodity must have the following features: 1. the commodity must be acceptable – everyone must be willing to accept it; 2. it must be relatively scarce. in other words, the item must only be available in small quantities. In this way the value will be maintained. 3. the commodity must be divisible. it must be capable of being divided easily into smaller fractions. 4. it must be homogenous. It must be identical in look, size and weight; 5. since the item must pass from hand to hand, it must be durable. 6. it must be portable. One must be able to carry it around easily. Functions of money 1. Medium of exchange –everyone must be willing to accept it in the exchange for goods and services; 2. Standard of value – the worth of the goods or service is measured in money, which sets the price of the item. for instance, a ring with a price of $60.00 is worth twice as much as a ring for $30.00 3. store of value – money can be saved and used in the future. It makes saving possible and hence brings about investment; 4. means of deferred payment – money is used to pay for goods bought on credit; 5. facilitator of the price mechanism- it is the price one is willing to pay to satisfy effective demand. Bill of exchange A bill of exchange is a written order from one person to another. The person who sends it is instructing the person receiving it, to pay a specific sum of money at a specific time in the future. The person who is sending it is called the drawer the person receiving it is called the drawee (who owes money to the drawer). The drawer may give instructions for the money to be paid to another person. Credit cards A credit card is a card given by a financial institution to its customers which authorizes that customer to purchase ‘on credit’. This card enables the electronic transfer of information and money. Electronic Transfer This is the use of computer network. Electronic funds transfer is a very fast and safe way of making payments during trade. The payment can be transferred electronically from one bank account to another. Cardholder can insert their Automatic Banking Card (also called debit card) into a machine which is electronically linked to their bank accounts. Tele-banking and e-commerce E-commerce refers to any business transaction that is done through the internet. This may include the transfer of money as well as information.  Reasons for establishing a business A business organization is formed when a person or group of persons uses resources to provide a good or a service with the view of making a profit FORMS OR TYPES OF BUSINESS Sole Trader Definition A person who owns controls, manages, and has total responsibility for his/her business. Formation of a Sole Trader business-It as no legal requirements, however, trade names must be registered. Management of a Sole Trader business -this form of business is managed by the owner. Advantages 1) Easy to form 2) The owner has great flexibility. 3) There is no need to disclose profits. 4) Personal service is provided to clients. 5) The owner has personal incentive to succeed since all profits belong to him or her. 6) There is a simple organization structure usually the owner and one or two workers. Disadvantages 1) Source of finance is limited. 2) Lack of specialized staff. 3) Over reliance upon one’s personal health and vigour.  4) The owner has limited liability. 5) The owner as limited leisure time. 6) Simple technology is used because of the lack of finance. Partnerships Definition This is an association of 2 to 20 partners, operating a business for the common goal of making a profit. Examples of partnerships are: accountants, solicitors, and stockbrokers.. There are two types of partnership forms: -Limited Liability Partnership – at lease one partner must have unlimited liability -Unlimited liability Partnership- all partners have unlimited liability. Types of Partners -Ordinary/General Partners : take an active part in the running of the business. -Sleeping Partners : invest in the business but do not take an active part in the business. -Limited Liability Partners : assets will not be lost if the business goes bankrupt. Formation of a partnership When a number of persons want to form a partnership, a written agreement should be drawn up. Management within a partnership company This form of business is usually managed by ordinary partners. Advantages 1) More capital is obtained. 2) There is continuity of the business. 3) Some partners enjoy limited liability. 4) The workload can be shared 5) Partners share in the decision making. Disadvantages of partnership 1) Ordinary partners have unlimited liability. 2) Capital is still limited. 3) Conflict may occur among the partners. 4) Decision-making takes a longer time. 5) In the absence of a partnership agreement profits are shared equally irrespective of efforts. 6) The actions of ordinary partners are binding on the partnership. Cooperatives Definition Co-operatives are businesses that are formed and operated by its members. The co-operative society must be registered. Shares are sold to the community that the society is serving. Principles which govern co-operatives are: 1) There is a democratic control, that is, one person one vote. 2) Membership is open to its constituents. 3) There is limited interest on capital investments. 4) The surpluses of the co-operative societies are distributed according to the shares /purchases of the members. Types of Cooperatives There are at least four (4) types of co-operatives as listed below. 1) Financial co-operatives, for example Credit Unions. 2) Agricultural co-operatives, for example, the Farmers Co-operative which supply agricultural products and equipment to farmers. 3) Consumers Co-operatives involved in the retail trade, for example, the El Dorado Co- operative, which retails foodstuff. 4) Service Co-operative such as the St Christopher’s Taxi Co-operatives. Formation of cooperatives Each members purchases shares to form the capital base of the business. Management of cooperatives -Governed by membership through a management board. -Board of management elected annually by the membership. Advantages of cooperatives 1) Members pool their resources. 2) Members are the owners. 3) Decision making is shared. 4) All surpluses are shared among the membership. 5) The community is strengthened socially. 6) Members have a say in all decision making. Disadvantages of cooperatives 1) The membership may not have the expertise necessary to build the organization. 2) Decision making is slow. Companies Definition A company is a business entity that has been incorporated, that is, the company has a separate legal identity from that of its owner (s). There are two types of limited Companies: 1. Private Limited Companies; 2. Public Limited Companies. Private Limited Company Definition  This is an incorporated business organization with 2-50 members. Membership is restricted to close friends and family. Formation of Private Limited Company A private limited company must meet certain legal requirement before the company can commence trading. Certain documents must be submitted to the Registrar of Companies. Documents that must be incorporated and, therefore, must give to the Registrar of Companies are: 1) Memorandum of association 2) Articles of association 3) Statements of Authorized, Registered or normal capital Memorandum of association Definition This governs the company’s relationship with the outside world. It contains the: 1) company’s name, which must contain the word LIMITED; 2) address of the company’s registered office; 3) objectives of the company; 4) statement that the liability of the shareholders is limited; 5) authorized share capital and the types of shares to be issued. Articles of association Definition These control the internal running of the company. It covers such area as: 1) procedures for calling an Annual General Meeting; 2) rights and obligations of the Directors; 3) procedures governing the election of Directors; 4) statement concerning the borrowing power of the company; 5) procedures dealing with the payment of dividends. Statements of Authorized, Registered or normal capital Definition This is the amount stated in the Memorandum of Association, which is the maximum amount which the company is authorized to raise. Prospectus This is an invitation to the public to buy shares in a company. It contains detailed information to enable investors to estimate its prospects. It is important that the public should not be misled. Management of Private Limited Company The owners managed this type of business or may appoint specialized personnel. The membership must approve any disposal of shares are restricted to the membership. Characteristics of Private Limited companies 1) Capital is obtained from private individuals, financial institutions, Government agencies or retained profits. 2) Limited liability shareholders have limited liabilities. 3) The company must be registered with the Registrar of Companies. 4) Membership is between two (2) to (50) fifty persons 5) The word limited must be included in the name. Advantages of a Private Limited Companies: 1) The capital base is larger than that of the sole trader or partnership. 2) Companies have continuity. 3) The company can easily obtain loans 4) Shareholders have limited liability Disadvantages of a Private Limited Companies: 1) Although capital base is larger than that of the soletrader, it is still limited since the membership is restricted to fifty. 2) The company is not as easy to form like the sole trader. 3) Membership is restricted. Public Limited Company or Joint Stock Company Definition This is an incorporated company, which offers shares to the public. Formation of a Public Limited Company It must be incorporated and, therefore, must give to the Registrar of Companies the following documents: 1) Memorandum of association 2) Articles of association 3) Statements of Authorized, Registered or normal capital 4) The Prospectus. Characteristics of Private Limited companies 1) There must be at least 7 shareholders with no limit on the maximum number of shareholders. 2) The shares are traded openly in the stock market. 3) The public limited company must be incorporated. 4) The company is continuous, it does not close down on the death of the shareholder. 5) The company can obtain capital from shareholder equity and financial institutions. Management Structure of a Public Limited Company The Board of Directors, which is elected by the shareholders at the Annual General Meeting, manages the public limited company. The Board of Directors appoints an Executive Director or Chief Executive Officer who heads the company and reports to the board on the operations of the company. Advantages of Public Limited Company: 1) Finance is easy to obtain. 2) There is continuity of the business. 3) Shareholders have limited liability. 4) The company has a separate legal identity. 5) These companies enjoy economies of scale. Disadvantages of Public Limited Company: 1) Setting-up of the company is time consuming and costly. 2) The accounts have to be made public.  3) Decision-making takes a longer time. 4) There may be conflict between owners and paid managers. Conglomerates When large companies take over businesses with which they have nothing in common, such combinations are known as conglomerates. The intention is to spread the risk so that if one part of the total suffers a fall in profits at least some of the others will prosper. Conglomerates are also known as group of companies for example Grace Kennedy Group of companies. Multinational Corporations Definition Multinational Corporations (MNC), also called transnational corporations, are a network of firms, which operate in multiple countries but owned and controlled by a single group of shareholders. Formation of Multinational Corporations It’s incorporated in a developed country. Management of Multinational Corporations Expatriates with limited local input manage the subsidiaries of transactional or multinational firms. Characteristics of Multinational Corporations 1) Multinational Corporations are created through Direct Foreign Investment (DFI).  2) Headquarters of Multinational Corporations are usually located in a developed country, while subsidiary companies are located in the developing countries. 3) These firms usually use the latest technology and invest heavily in research and development. 4) These firms are usually capital intensive and, therefore, benefit from economies of scale. Advantages of Multinational Corporations: 1) Large foreign capital injected into the country. 2) Creates employment. 3) Transfers Skills 4) Increased revenue (through taxes) for the country. Disadvantages of Multinational Corporations: 1) Possible poor working conditions and abuse of worker’s rights. 2) Possible destruction of the environment. 3) Possible intimidation of workers and Trade Unions. Franchise A franchise is an agreement between an established company (a franchiser) and a franchisee in which permission is granted to conduct business in a prescribed manner Set by the franchiser. The franchisee has an obligation to pay royalty’s fee to the franchiser periodically but the franchisee in return gains from the reputation and business expertise or management of the franchiser. This business arrangement is gaining increasing popularity in the Caribbean, for example, Mc Donald’s, KFC, and Pizza Hut. State Corporations Definitions State Corporations are independent organizations set up by the Government to carry out a service. The Government does not control their daily operations but can fix the overall strategy for them and nominate their board of directors. These are usually non-profit making, but in the long term, they have to be self-financing. State Corporations are usually in the broadcasting field, transportation, power and telecommunication industries. Formation of State Corporations State Corporations are formed by legislation, that is, by the passing of laws by parliament. Management of State Corporations The Government appoints a Board of Governors Directors for a stipulated time frame. An Executive Director is also appointed to head each organization. The Executive Director reports to the board of Governors or Directors. Characteristics of State Corporations 1) Funding is mainly done by the state proving grants, although some legislation allows the organizations to raise their own funds. 2) The state or state appointed auditors monitor all accounting procedures. 3) Annual accounting reports must be sent to the Auditor General. 4) The aim of the state is not to make a profit but it is expected that these corporations may break-even. Nationalized Industries Definition Nationalized industries are firms, which were once privately owned, but have been taken over by the Government. Formation of Nationalized Industries A company becomes nationalized when the government purchases all or the majority of shares in the company. Management of Nationalized Industries Like State Corporations, a Board of Governors is appointed. The Board reports to the line Minister of Government. Each nationalized industry has an Executive Director who heads the company. The audited accounting reports of these companies must be laid with the Auditor General or a Government accounting firm. Characteristics of Nationalized Industries 1) They are legal entities.  2) The state is the only shareholder. 3) They are managed by Board of Directors that are appointed by the state. Advantages of Nationalized Industries 1) Ownership and control are in the hands of the State, thus all profits remains in the country. 2) The company is in a better position to service the needs of the community, for example, the funding of community projects in education, sporting and cultural projects 3) Nationalization prevents private monopolies from being formed. Disadvantages of Nationalized Industries 1) Relatively low salaries paid to Executive Directors may not attract the best expertise. 2) The industries may be a drain on the Government’s revenue. Municipal Undertakings These are government owned business that is run primarily by local government. They include markets, parks, and beaches that are owned by the government for which the public is charged fees to use service provided. Government departments These departments carry out special functions such as education, health and finance. Through these departments the awesome task of managing a country is divided into manageable units. A minister is in charge of each government department; he or she is a politician appointed by the Prime Minister and is usually a member of Parliament.. Advantages of government departments 1. Consultants are usually attached to these departments to give experts advice and ensure efficiency 2. Major decisions are made in the interest of the citizens of the country and must meet the approval of Parliament or the Prime Minister. 3. The large task of running the country is divided into manageable units. Disadvantages of Government Departments 1. Frequent changes of government may cause programmers and policies to be discontinued. 2. These changes can also affect staffing which may lead to inefficiency. 3. Shortage of funds may cause some government departments not to reach Their full potential. 4. Sometimes government ministers are not experts in the subject of their departments  Private and Public sector The private sector is that part of the economy that is funded by private individuals and is, therefore owned and controlled by private firms. The objective of the private sector is to make a profit. The private sector includes the self-employed, the manufacturing industries, firms in the construction industry, joint ventures, multinational firms and co-operatives. Features of firm in the private sector 1. the aim is to make a profit. 2. profits are shared among shareholders or those who invest in the company; 3. the business is funded by the owners, 4. there is little or no government intervention or control 5. the business is funded by private individuals; 6. owners are free to make their own decisions once these decisions are not contrary to the laws of the land. Public sector The public sector is that part of the economy that is financed by the government through the taxpayers and is controlled and operated by the government or its agents. The surplus or profit is used for the benefit of the entire population. The public sector includes the government controlled companies, companies incorporated by the government through legislation, the companies that are essential for the development of the economy and those that the private sector has little or no interest until sufficiently develop and profit are to made in the future, for example, the communication companies, the production of water and energy Firms in the public sector share the following feature. This sector; 1. aim to provide a service at the lowest possible price; 2. uses profits to improve the efficiency of the firm or to benefit all citizens 3. usually participates in ventures that provide basic necessities; 4. is funded by the government through taxation;5 Is driven by the need to provide goods and services to the population so as to improve the quality of life for its citizenry. Types of economic system Economic systems refers to the ways society organizes its scarce resources to produce goods and services to satisfy the need and wants of the population. Societies are organized to answer the three basic economic question questions. These are as follows: a. What goods and service are to be produced b. how will the goods and service be produced c. for whom are the goods and services to be produced. Economists have classified economic system into the following types: 1. the Traditional ( subsistence) Economy 2. the Free market or the Market or the Market Driven economy 3. The Planned or command or Controlled Economy 4. The Mixed Economy. Traditional (Subsistence) Economy The Traditional Economic system existed in early societies and is rarely used today. In early societies people formed communities and produced food and basic goods for a simple lifestyle. An example is Taino society where enough was produced to satisfy the needs of all persons, and simple exchange took place if there was any surplus. There was usually community leader who made the decisions of what, how and for whom the goods and services would be produced. Batering was used to obtain the goods that the community did not produce for itself. Isolated islands and remote areas in some countries may still use this type of economic system. Free Market or Capitalist Economies The free market is an economic system in which the customer drives the economy. The consumer influences the producers’ decisions on what to produce since the producers will not make a profit by producing goods that are not in demand. Consumers exercise the right to buy whatever they want to satisfy the needs and wants for their family. Private individuals own the resources in a Free Market economy and there is little of no governmental interference. The factors of production are controlled by market forces, not by the Government. These market forces refer mainly to factors of supply, demand, competition, customer satisfaction, price, quality of the product and efficiency of production and supply. The market forces, therefore, determine allocation of resources. In a Free Market economy, goods and services are not brought and sold on the Market. The market may be a physical place such as an agricultural market, which many persons in the Caribbean visit on Saturdays or Sundays to obtain fruits, vegetables and meats. A market may also be a neighborhood shop, bank, insurance company or stock market where shares of companies are brought and sold. Although there are no pure free market economies, the United States and Hong Kong are examples of two economies that are closest to the theoretical concept of Free Market economies. The Benefits and Limitations of the Market Economy The benefits of market economies are listed below. 1) Government’s involvement is very limited. The activity of the Government is usually restricted to the collection of taxes. 2) Competition among firms forces prices down. 3) Producers are free to use the factors of production in any way they consider to be most suitable to them. 4) Consumers are free to spend their money in any way to give them maximum utility. 5) A large variety of goods or services are made available to consumers. 6) Labourers are free to sell their labour to the highest bidder. 7) There is greater efficiency in the use of production, since market forces determine the allocation of resources. Limitations of the Market Economy  1) The profit motive drives this economy and thus encourages unequal distribution of wealth. 2) Large sums of money are spent on advertising, which creates artificial demand and increases prices. 3) Monopolies develop and these can exploit consumers since they can decide on higher prices. 4) Social and merit goods, for example, health, defense, education and security may not be adequately provided. 5) Trade union may be suppressed since the capitalist may seek to suppress wages in order to minimize the cost of production Planned Economies Planned Economies are economies in which Governments assume responsibility for economic planning in order to achieve the best possible use and distribution of a country’s scare resources. Governments, therefore, influence and control key economic variables such as income, consumption, employment savings, investment, imports and experts. Characteristics of the Planned Economies 1) The Government plans, co-ordinates and controls all economic activities. 2) The Government decides on what to produce, how much to produce and controls the distribution of output. 3) Prices are set by the state. Benefits of the Planned or Command Economies 1) The state can direct its development since it controls all the resources. 2) There is likely to be less waste of resources.  3) Incomes are more likely to be evenly distributed Limitations of the Planned Economies 1) Government’s planning may be more rigid and inflexible compared with decision- making of the capitalist and this may cause scarcity of goods or services. 2) The Government may have the responsibility of administrating and implementing the plans. This task may be too enormous for the technocrats working with the Government and hence there may be inefficiency in the delivery of goods and services. 3) Private sector initiatives may be blocked. 4) Planning may be manipulated by the more powerful groups that may not act in the best interest of all. Examples of Planned Economies North Korea, Cuba and the Soviet Union (before1990). Mixed Economies Mixed economies are economic arrangements in which both Government and private individuals make economic decisions as to what to produce, how to produce and for whom goods and service should be produced. The mixed economy is by far the most popular form of economic organization existing in the world today. Most countries, including the English-speaking Caribbean States, have mixed economies. Characteristics of the Mixed Economy 1) Involvement of both state and private individuals. 2) Efficient use of resources. 3) More equitable distribution of income than Free Market economies Benefits of Mixed Economies 1) Both sectors of the economy, the Government and private individuals, engage in activities that can best produce and, therefore, there is a more efficient use of the resources. A wide variety of goods are available since the Government would complement goods and services that are provided by Private Sector. 2) Governments are free to make laws to protect the natural resources and the people. Limitations of Mixed Economies 1) There is always a need to keep a balance between the Government and private sector involvement. 2) Conflict may arise between Government and private investment and thus result in long delays in the production of goods and services. THE ROLE OF STAKEHOLDERS Stakeholders Definition: stakeholders are the various groups within and outside an organization that stand to potentially gain or loss as a result of the organization’s actions. Examples of stakeholders - Owners/Employers/Investors - Employees - Customers/Consumers - Suppliers - Government - The members of Society (including the media, special interest groups, communities) It is important to identify the stakeholders in business so that the organization: 1) knows who it depends on for its survival; 2) also knows who has a vested interested in the business; 3) can take these groups into consideration when making decisions; this helps the business to meet the expectations and priorities of its stakeholders. The Roles of Stakeholders involved in Business Activities a) Roles of employers/investors/ managers: These parties seek to achieve several things. They want: 1) the best return on their investments (profits);  2) efficient management of the resources ( employees, raw material, equipment) through planning, control and other functions and strategies in the business; 3) to provide goods/ services at a high quality, reasonable price with necessary after –sales service; 4) the best possible employees, fair payment for work, fair and respectful treatment, good working conditions and the necessary tools and equipment; 5) to act ethically and socially responsible. b) Roles of employees are: 1) to carry out the activities stated on their job description; 2) to efficiently utilize the resources placed in their care; 3) to act ethnically and socially responsible. (c) Roles of consumers – Consumers can: 1) provide feedback on product quality and also design through complaints and even suggestion; 2) contribute to research by participating in surveys, product testing; 3) use the product/ service provided in the way that it was intended to be used. (d) Roles of Government: Government provides: 1) regulations that force the business to consider the best interests of the other stakeholders; 2) assistance to businesses in the form of loan, training, research and financial aid/ subsides; 3) Information to all the stakeholders; 4) protection for consumers through laws and agencies; also protection to all the other stakeholders. RESPONSIBILITIES OF A BUSINESS INTRODUCTION You have already learnt that business can be formed in different ways and that their decisions and activities are influenced by the different stakeholders. Now you must look at the business itself as man important participant in its community (or society). Business organizations have economic, financial, political and social responsibilities to the society in which they operate. These organizations have a responsibility to invest capital in order to increase the wants and needs necessary for survival. In the pursuit of their economic role, business organizations should not destroy the environment nor add to any conflict among the various religious, ethic or regional groups in the community. Also, business organizations should ensure that equality and democratic principles are adhered to at all times. The main responsibilities can be grouped as shown below. 1) Economic responsibilities: the business and its owners or managers operate within an economic system and should play their part in helping this system to be effective. The business does this by providing employment to citizens in the economy; also by contributing to overall growth of the economy; if the business exports good s services, then it will help to increase the overall exports of the country. Pricing policies that are too aggressive can have a very negative effect on other businesses in the economy, and can exploit consumers. Example of Economic Responsibilities  - produce a good or service to satisfy the needs and wants of society - Stimulate economic growth 2) Financial responsibilities: Similar to be above; business must create a reasonable financial return to the owner or investor. This may not always be high because of the various objectives of a business. -Pay a fair wage to employees -Provide reasonable returns on investments 3) Social responsibility – Businesses should make decisions that are in the best interests of the society in which they operate. They also rely on this society to provide vital resources. Example of Social Responsibilities -Protecting the environment and avoiding social costs (borne by society as a result of business operations, for example, pollution - Developing the culture of a country - Educate consumers and community members on safety tips and proper use and disposal of the products - Use some of the profits to help develop and benefit the community, as well as the culture of the country 4) Political responsibility- Businesses has many obligations to the Government. Example of Political Responsibilities  - Act as pressure groups to lobby Government for changes that will benefit business activity - - Operate along democratic principles of equality and fairplay - Act in accordance with the laws; for example, paying all taxes when they are due - Assists in setting policies by giving feedback, making suggestions 5) Ethical responsibility: The term ‘ethics’ refers to beliefs about what is right and wrong conduct; most society agree on the basics ethics of honesty and fair play. Businesses must make ethical decisions. Example of Ethical Responsibilities -design ethical guidelines for their behaviour/decisions and follow these guideline -Encourage good business ethic of their stakeholders by refusing to do business with unethical firms or persons Functional Areas of Business Departments in a business organization are structured according to certain functions. The departments of various organizations will differ depending on the type of business. Below are four main functions that tend to be general to most organizations. Production The production department is responsible for transforming raw materials into finished products. They are also responsible for quality control to ensure that required standards are met. Finance/Accounts The accounts department makes and receives all payments on behalf of the business and records all financial transactions Marketing This department creates awareness for the firm products and motivates consumers to buy. They also carry out market research to identify customer’s needs Human Resources/Personnel The human resource department recruits and selects staff for the business organization. They are also responsible for staff training and welfare. Functions of Management Planning All managers must plan, that is, setting out steps for the attainment of future organizational objectives. It involves formulating the policies and programmes for the firm. Organizing Organization reduces cost, time, chaos and conflicts. Managers must obtain all the necessary tools, machinery and personnel for each task and arrange all tasks so that they are done in the most efficient manner. Directing Managers must guide subordinates by giving them instructions to perform the tasks assigned. Delegating Delegating duties involves giving others (e.g. supervisors) the authority to have specific tasks completed through the management of others. Therefore, supervisors will ensure that workers complete tasks assigned. Delegation reduces the workload of the manager. Controlling Managers must continually measure the activities of subordinates, ensuring that all activities conform to plan. Coordinating Managers must bring together all the various organizational tasks so that the organization may function harmoniously. Motivating Managers must inspire workers to perform their tasks well. Responsibilities of Management Management must be aware of their responsibilities to the various groups that they interact with for the successful running of the business. 1. To the owners of the business (this also includes shareholders) Managers are expected to ensure efficiency in all areas of the business. 2. To employees – Managers must pay adequate wages and provide good working conditions. 3. To customers – Managers must ensure that products are of good quality and are reasonably priced. 4. To the society – Managers must find ways to reduce harmful air pollution and the discharge of harmful waste created by the production process into rivers and seas. 5. To the government – Management should adhere to various government legislation and regulation. Organizational Charts An organizational chart is a diagram of the organization of an enterprise. Its pyramid shape illustrates the hierarchy system that exists in the organization. The most senior position in the organization is placed by itself at the apex. The pyramid gets wider towards the bottom depicting the greater number of workers at its base. Those who have the power to issue commands have authority in an organization. In the organization chart above the sales manager has the authority in the Sales department. All persons with the same level of authority are placed at the same level on the chart. For example the sales manager and the accounts manager have the same level of authority in their various departments. Responsibility is the capacity to accept duties and to carry out their tasks. Both sales supervisors are responsible to the sales manager. The chart shows the following: -each person’s position -the number of levels of managers -to whom each employee is responsible (reports) to -the span of or (area) of control for senior staff members. Types of Organizational Charts Line or Direct The line organizational chart depicts a straight line of command. Authority is said to flow downwards only in the line organization. The line organizational structure is found in schools or in the military. Functional Organizational Chart The Functional organization chart is a diagram of an organization that is arranged by its functions. For example, there is a manager in charge of marketing, and another in charge of production. This type of organization has an advantage over the Line as experts are appointed to run each department. All managers report to the General Manager. The Functional organizational chart combines the straight line of command of the line organization with horizontal dotted diagonal lines representing functional authority. The dotted diagonal lines in the figure above show the authority that the Human Resource Manager has over other departments. The Human Resource Manager is allowed authority in these department over human resource matters only e.g. to hire and fire workers. He therefore cannot give directives on production or marketing matters. Line and Staff Organizational Chart The Line and Staff organizational chart combines the line and functional organization with the addition of staff personnel. Staff workers assist and advise line workers. Staff workers include consultants, advisors, company lawyers, executive secretary, auxiliary workers etc. Staff officers do not have authority, that is, the power to delegate tasks to subordinates in the organization. Their main role is to advise and assist line officers. This is why there are no vertical lines connecting staff officers to any other member of staff on the chart. They are therefore, placed at the side directly below the line officer whom they assist or advise. Committee Organizational Chart Committees are advisory bodies. They are usually appointed to advise organizations. Examples of committees include; parent teachers associations and student councils which are committees within a school organization. Committees usually delegate certain duties to sub-committees. For example, an executive committee may appoint a finance committee to advise it on financial matters. Note that an element of the line organization exists in the committee organization as all sub-committees are responsible to the executive committee. Characteristics of a Good Leader A leader is someone who has been given authority over a group of individuals. His job is to motivate the group to achieve the goals set out for it. Leadership is therefore about influencing or inspiring an organized group towards the accomplishment of goals. Below are the characteristics of a good leader. Integrity It is important for a leader to posses this quality as it makes them trustworthy. They are perceived as honest and therefore command the respect of their subordinates. Good communication skills Leaders should be able to communicate effectively with persons at all levels of the organization. Manager must pass down directives as well as listen to workers opinions complaints and ideas. This will foster good working relations among leader and followers. Intelligent This is a very important characteristic for leaders. It refers to being rational and having good judgment when making decisions. Leaders are decision makers and therefore need to be intelligent. This characteristic also refers to shrewdness and therefore describes someone who is smart, perceptive and wise. Devoted and Committed A leader must be a role model for others. He/she should therefore believe in the goals of the group and motivate others to achieve it. His/her continuous hard work will portray dedication and loyalty to duty. Leadership Styles Autocratic This type of leader makes all decisions and asks members only to be obedient in following orders. He will give detailed instructions and closely supervise subordinates. Advantage Time is not wasted consulting with others to reach a decision. Disadvantage Workers must comply with directives given by the leader and therefore the organization will not benefit from workers initiative and innovative ideas Democratic A democratic leader allows the participation of subordinates in decision making. The leader asks for progress reports at intervals instead of continuous close supervision. Advantage Discussion between management and workers leads an improved relationship. Disadvantage The variety of opinions to consider may slow down the decision making process. Laissez-Faire This type of leader will give minimum directives and allow maximum freedom for workers to make decisions about completing their tasks. Advantage The firm will benefit from the initiative and innovation of workers. Disadvantage It may lead to chaos in the organization. This type of style can only be used with persons that are very self- motivated and disciplined. Sources of Conflict within an Organization Unfair treatment of workers Unfair dismissal Discrimination Health related issues The need for protective clothing Poor ventilation Harmful fumes from chemicals Wages and fringe benefits Nonpayment of allowances Underpayment Methods used to gain an upper hand during Periods of Conflict Workers organize themselves to collectively deal with conflicts. This is done through the trade union. A Trade Union is an organization of persons employed in an industry who have joined together in order to improve their wages and working conditions. Methods used by Trade Unions 1. Strikes- the union may permit the employees to who are union members to stop working; they are paid from union funds. 2. Sick-out 3. Work-to-rule-doing only what is officially required in the job description or employment contract; this slows down production 4. Go slow – to work at a slow pace without breaching company regulations 5. Picketing- employees gathering at the entrance of the business and trying to influence other employees to stay away Methods used by employers during conflicts Union busting Union busting is the prevention by management of the formation of a trade union within its organization. The employer may explicitly state this to workers or covertly discourage its formation. Lock out A lockout refers to the refusal by an employer to allow workers into the business place during an industrial dispute. This is a means of coercing workers to comply with management. Scab labour This is a derogatory term used to refer to workers hired to replace workers on strike. Strategies used to resolve Conflicts Collective Bargaining Collective bargaining is the process whereby the union representative on behalf of the employees and management, negotiate the terms of their agreement which are incorporated in the employees’ contract of employment. It is a means to reach an agreement between trade unions and employers. The Role/Function of the Trade Union 1. To ensure better wages and working conditions for workers 2. To protect workers against arbitrary disciplinary actions. 3. To deal with grievances in accordance with the grievance procedures The Grievance Procedure A grievance is a complaint of a worker. A worker will have a complaint when: a. he is treated unfairly. (e.g. cases of discrimination) b. his health or safety is threatened (e.g. chemicals and dust at work etc) c. there is a violation of the collective agreement or work rules. (e.g. if employers have not abided by the agreement between management and the trade union.) The grievance procedure is a set of steps which employees can use to solve any grievance that may arise. STEP 1 - The employee discusses the complaint with his or her supervisor. If the complaint is not satisfactorily dealt with by the supervisor the employee may take the matter further. STEP 2 - The employee will discuss the matter with the head of department. STEP 3 - The employee, along with the union delegate, will discuss the matter with top management. STEP 4 - If the grievance still exists, the union official will seek conciliation or mediation from the Ministry of Labour or any independent body, i.e. the friendly intervention of these bodies into the dispute for the purpose of adjusting the differences. STEP 5 - The matter is sent to arbitration, i.e. before the court where the judge will make the final decision. Therefore both parties; employer and employee must accept the judges decision. Conciliation – a third party such as a representative from ministry of labour will be present during discussion to ensure that communication takes place and encourage the two groups to reach an agreement. The conciliator will not actually suggest a particular solution or compromise. Mediation – this involves the third party proposing solutions to problems, which are then considered. This is merely a suggestion. Arbritation – the two groups agree to ask the third party to give solution, which they will both accept. This means that the agreement reached by the arbitrator is legally binding and must be accepted by both parties. Guidelines: Good Management & Staff Relations Good management worker relationship is important for efficiency, productivity and the retention of staff. Communication Managers should not only give directives but encourage feedback from workers. Regular scheduled meetings should allow workers the opportunity to voice their concerns and views. Some managers have an open door policy making them available to all employees. Motivation Money is not a motivator for everyone and therefore managers must find ways of encouraging workers to give their best performance. Other forms of motivation include recognition for a job well done. High performing employees can be motivated by promotion, and being named employee of the month. Allowing employees to be creative and bringing their innovative ideas to goods and services is also a motivator. Fairness It is very important to handle all workers fairly without showing favouritism. If workers perceive that they are not being fairly treated or that there is favouritism conflicts may arise among workers and well as between management and workers. Compassionate Managers must show care when dealing with workers daily. Workers are not machines and cannot be treated as such. Managers should try to understand each worker and their various issues. Workers may have challenges with illnesses, family, financial etc. which may affect their performance on the job. Role of Teamwork Many firms adopt a teamwork approach to complete tasks more efficiently. For example a major Caribbean airline encourages its workers to work as a team to achieve the main task of having each flight leave on time. Workers therefore move to various positions if needed, to have each flight leave on time. Teamwork Definition : a group of two or more people interacting regularly and coordinating their work to accomplish a common objective. Benefits of Teamwork 1. It improves the working relationship among workers 2. It increases communication 3. Skills and knowledge are passed on through the interaction 4. It satisfies the social needs of workers Disadvantages of teamwork 1. more time is needed to make decisions and solve problems because more persons are participating in the process. 2. the cost of training the team members to work as a team might be high. Strategies for Effective Communication Communication is the transmission of ideas from one person to another in order to convey words or initiate actions. The need for effective communication is very important when dealing with the human factor from recruitment to retirement in the organization. For communication to be effective there must be feedback. Means of Communication 1. Oral – This includes all types of spoken communication, e.g. interviews telephone calls and meetings. Advantages 1. Direct contact 2. benefits from sight, sound, and physical proximity. 3. allows for instant feedback 4. more persuasive, convincing Disadvantages 1. more difficult to control 2. may not provide adequate time to think things out 3. there might not be any written records Written Communications: this includes letters, memorandum (memo), reports, minutes of meeting , bulletins and notices Advantages 1. Provides written documentation / evidence ( these are especially important for written contracts) 2. Can be dispatched o persons who are far away 3. can be used for complex /detailed message 4. can confirm, explain or clarify oral messages Disadvantages 1. can be time-consuming to create 2. can be expensive 3. getting instant feedback may not be possible Visual – This includes all things which can be seen, e.g., posters and films. Advantages 1. illustrates or demonstrates a message through a visual stimulus 2. simplifies written or oral communication Disadvantages 1. may be difficult to interpret by itself 2. requires additional skills of comprehension and interpretation 3. may requires time to interpret 4. may be expensive The primary objective of communication in any organization is to get work done. Types of communication Formal Communication -These are official methods approved by management. These includes meetings, announcement on notices boards, memoranda, messages over public address systems, interviews, performance appraisals, company magazines. etc. Informal Communication -These are unofficial methods of communication. These include: rumours and the grapevine, secret signs and gestures as well as casual conversation between employees. Barriers to Communication 1. Distortion of messages e.g. rumours or the grapevine can easily distort messages. 2. Inappropriate forms of transmission e.g. a notice of a formal meeting must be conveyed in writing and not by word of mouth. If this type of meeting is not conveyed in writing it may seem casual and unimportant. 3. Physical barriers e.g. faulty telephone connections, defects in mechanical or electronic equipment, and poor postal services. Management Information System Managers need information to assist them in making important timely decisions and predictions for future plans. Management information system is a computer based business information system designed to produce information needed for the successful management of a department or business (Before MIS managers had to rely on manually prepared reports at intervals). However, with increased global competition firms must be more proactive in the market place. Information must therefore be at the manager’s disposal at any point in time when needed. The manager of a retail store may require at any point in time information on sales volume for particular items so that decisions on future purchases can be made. A computer programme is then designed to meet the specifications of the report which the manager will need. The format and the content of each report required will be used to design the programme. The manager will then be able to receive the information required by requesting the specific report. The necessary data will be retrieved from the data base, processed and automatically presented in the format specified. Benefits 1. saving on time – information more easily available 2. saving money – less working hours spent to retrieve data;.3. saving labour – less personnel used 4. improvement in production and marketing techniques and profit margins; 5. increased competitiveness. 6. increased competitiveness – the business with more accurate data is in a better position to  compete Disadvantages of MIS Although very beneficial and is therefore desirable for businesses MIS is an expensive venture and small firms will be challenged to set up this system. In addition to the set up cost for MIS business will have to consider the continuous maintenance costs. The cost of training present employees to interact with the new system must also be factored in to the total cost as well as human error Personal Needs Satisfied Through Employment Managers must be aware of the various needs of workers. If these needs are adequately satisfied through work, then workers will be motivated to improve performance. Physiological needs Employment is very important for the economic survival of individuals. If employees receive adequate pay then these needs will be satisfied. Some employees may also receive allowances and fringe benefits. Once the basic needs of survival (food, clothing and shelter) are met, employees will be aware of higher level needs. Security Needs A job should not only provide adequate pay to satisfy basic needs but it should also give workers security. This need can be satisfied through the provision of health benefits, insurance and pensions. Social Needs The employee spends on average eight hours each day at work. We are social beings and therefore need human interaction. This need can be satisfied by the establishment of after work activities and through a teamwork approach to accomplishing tasks. Self-Esteem Needs Managers can satisfy this need through promotion and ways of recognizing those who have performed well. Self-actualizing Needs This need is satisfied by giving subordinates opportunities to create and pursue innovative ideas so that they can realize their capacities to the fullest. Quiz Question 1 Explain two important activities carried out by one functional area of a business. Answer The marketing department promotes the firms products to encourage sales. Consumers must be made aware of what is being offered and encouraged to buy. They also conduct market research to identify the needs and wants of consumers. Companies depend on consumers support for their success, and so ascertaining consumers taste is very important. Question 2 Outline two functions of management and say how each is important to the efficient operation of a business. Answer Controlling involves the continuous assessment of the work done by subordinates. Poor quality work is a reflection of the company and so managers must ensure that quality work is done. Planning involves outlining all future activities that are required to achieve the organizations objectives. Planning activities involve all the programmes and policies that will guide the firm’s path to success. Question 3 Give two examples to show how managers can fulfill their responsibilities to one group of business stakeholders. Answer Managers can full their responsibility to customers by proving quality goods and services. A system that ensures standards should be implemented. Prices must also be affordable. All measures must be taken to operate as efficiently as possible so that production cost are kept low resulting in affordable selling prices. Question 4 (a) Draw an organizational chart of your school or business organization. (b) Identify the type of organizational chart drawn (c) Identify the span of control of one person in authority on the chart (d) Identify two persons at the same level of authority. Answer (a) (b) Line organizational chart (c) The span of control of Vice principal is the head of departments for arts and science. (d) Two persons at the same level of authority are the heads of department for arts and science. Question 5 Show how two important characteristics of a good leader can improve the efficiency of a group. Answer Good communication skills will foster good working relationships between workers and managers. Workers are more effective in a comfortable environment. This also encourages feedback from workers. A devoted and committed manager will lead by example. His commitment to the tasks that are required to achieve the organizations objectives will inspire subordinates to work hard. Question 6 Give two differences between the autocratic and the democratic leadership styles. Answer An autocratic manager makes all decisions concerning the tasks to be performed by subordinates. All directives handed down by him must be closely followed. He makes frequent checks on output of workers. The democratic leader allows the participation of others in decision making. He allows workers some latitude to work on their own initiative and periodically checks output from workers. Question 7 Outline the steps for handling grievances in the organization. Answer The worker lodges a complaint with his or her immediate supervisor. If worker feels that the complaint was not adequately dealt with then he may discuss the matter with the head of department. If the worker is still not satisfied with how the matter is being dealt with, he along with the union representative may discuss the matter with management. It may need to go a further stage where there is mediation from Ministry of Labour or any independent body. The final stage is when the matter has to be taken to court. Question 8 Explain the purpose of the collective bargaining process. Answer The purpose of collective bargaining is a means to reach an amicable agreement between management and workers. Workers bargain collectively through their union representative with management until an agreement is reached. Question 9 Discuss two ways in which teamwork can improve the efficiency of an organization. Answer Teamwork gives workers the opportunity to make collaborative decisions and support each other to accomplish tasks more effectively. Teamwork allows for specialization in various parts of a task based on the skill of each team member. Specialization increases output. Question 10 Discuss two benefits that a business will derive from using Management Information Systems. Answer It reduces labour costs as the computer compiles and analyses all the data. This increases the efficiency of employees and reduces production costs. It provides timely information that helps the business. This allows for better decision making as information is available when needed. Definition: Entreprenur is a person who identifies successful business opportunities, risk time and money to start and operate a business, bringing resources together with the intention of generating wealth. Section 3: Establishing A Business.Entrepreneur – An entrepreneur is a person who identifies successful business opportunities, risks time and money to start and operate a business, bringing resources together with the intention to create wealth. Role of an Entrepreneur Conceptualizing- form new ideas. It may be a new product, service or improvement to an existing one, or ways to fill a need. Planning- the entrepreneur can identify targets, goals and objectives and also ways of accomplishing them. Accessing funds or financing- the entrepreneur will find ways to finance the business (savings, loans, credit the government, other investors). Organizing the business- keeping records and documentation, creating a formal structure with activities and authority assigned to different persons. Operating the business- ensure that the day to day activities are carried out in the different functional areas. Evaluating the performance of the business- ensure that effective controls are in place. Risk bearing- a risk is any situation that has more than one possible outcome which is unknown; Personal Traits and leadership Qualities of an Entrepreneur Entrepreneurship requires the following characteristics for success: 1. creative- creativity is the ability to develop new ideas, or new ways of doing thing. 2. innovative – developing a new idea, or making changes to an existing one; this might be marely a change in the way it is delivered. 3. Persistent and persevering- determined and will not be deterred from the goal. The entrepreneur believe they will make things work in spite of the risk; 4. flexible – the ability to adapt to changes in the market and industry. 5. goal- oriented- to purposely and aggressively accomplish task and meet objectives. 6. risk-taker - the ability to take calculated risks. Reasons Persons Establish their own Businesses 1. Financial Independence Some persons feel restricted financially with the income received from their job. Starting a business would give them the opportunity to be a successful business person and achieve financial independence. 2. Being your own boss You are able to make decisions about the direction and operation of the business. 3. To use your skills and knowledge for yourself The skills, knowledge and experience that you have acquired can be put to work for you. 4. Self-actualization/ fulfillment Owning and operating a successful business will give a feeling of accomplishment. 6. To create employment for relatives, friends and community members Steps in Establishing a Business 1. Conceptualization All business ventures begin with the conceptualization of an idea. At this initial stage the product or service idea is envisioned. Most Entrepreneurs identify a need in the market i.e. a service that is not being provided or a product that does not exist. If the product or service already exists then ideas to make improvements may be conceptualized. 2. Research The entrepreneur is a shrewd investor and takes calculated risks. Before investing money in a business venture a market research must therefore be done to ascertain the extent of the need for the product or service. This helps to minimize losses. A market research involves gathering information about a potential market to help an investor make decisions about entering that market. 3. Identification of resources What resources are needed to start the business? If the market research is favourable the entrepreneur must now identify the necessary resources to operate business. The resources required are land, labour and capital. Land refers to location or place used to set up a business. This may be bought, rented or family home. Labour employed must be qualified and skilled to efficiently carry out their duties. Capital includes money, raw material and assets such as machinery and equipment. 4. Creation of a business plan Preparing a business plan is very important before the start of a business. This will help the business to ascertain whether or not the business will be profitable. A business plan outlines the goals of a business and the strategies that will be employed to achieve them. Usually financial institutions require that a business plan be presented when a loan is requested for business investment. 5. Acquisition of funds There are several ways of acquiring funds to start a business. There are a myriad of financial institutions that are willing to assist small businesses once their business plans are deemed workable. The investor must weigh the advantages and disadvantages of acquiring funds from the various financial institutions. The cost of borrowing i.e. the interest rate charged and the length of the repayment period are factors to consider. Funds may be borrowed from friends and relatives that may attract a lower or no repayment cost and a more flexible repayment schedule. Funds can also be acquired from personal savings. Encouraging partners or selling shares are ways of avoiding high costs of capital. 6. Operation of a business A business must be efficiently operated to ensure high quality goods and service. This is important to keep existing customers and for business growth. Many companies employ an operation manager to design and oversee its operations. This person develops and manages the various processes used to create goods and services efficiently to ensure customer satisfaction. Functional Areas in the Operation of Businesses Departments in a business organization are structured according to certain functions. The departments of various organizations will differ depending on the type of business. Production The production department is responsible for transforming raw materials into finished products. They are also responsible for quality control to ensure that required standards are met. Finance/Accounts The accounts department makes and receives all payments on behalf of the business and records all financial transactions Marketing This department creates awareness for the firm products and motivates consumers to buy. They also carry out market research to identify customer’s needs Human Resources/Personnel The human resource department recruits and selects staff for the business organization. They are also responsible for staff training and welfare. The Purchasing Department This department is responsible for the purchasing of the firms raw material, stationery and goods for re-sale. Customer Service/ Customer Relations Department This Department bridges the gap between a business and its customers. it deals with customers’ queries, advising and assisting customers to place orders and handling customers’ complaints. Legal Department This department is concerned with legal problems that might arise for the company. For example, compensation for employees and customers, who have brought lawsuits against the company. Research and Development (R&D) This department is involved with research to explore ways of improving the company’s existing products, developing new ones and identifying efficient processes to increase production. This department works closely with the marketing department as products developed must satisfy consumers’ needs. Sources of Research in Establishing a Business Firms embark on research to uncover information about consumer preferences, the level of competition in the market, responses to advertisement etc. Sources of Information Data may be collected from primary or secondary sources. (a)Primary Data Primary data is originally collected data. This data will be obtained by interviewing, observing or distributing questionnaires to the sample population. (b) Secondary Data Secondary data is information that has already been collected by someone else originally. This data will be therefore obtained from books, newspapers, magazines, libraries and publications of various institutions. Relationship between Planning and the Operation of a Business Importance of planning 1. planning gives direction- provides a guideline. 2. planning forces managers to look ahead and anticipate possible changes. This helps to make better decision 3. planning helps to avoid mistakes and waste. Managers must continue to plan in order to ensure that its operations meet all long – term, medium- term and short- term goals. Long- term plans are made for 3 to 5 year periods. Long-term plans determine the direction of the company. These plans set out the firm’s overall strategy to move from its present position to where it intends to be. Long-term plans include expansion plans and plans to create new products and services. Long-term plans are made by the directors or persons in senior management positions of a company. Medium-term plans range from 1 to 2 years. They are made by department managers or persons in middle management positions. Medium term plans include increasing the efficiency of a department in order to increase the quality and quantity of output. This would involve implementing training programmes for staff and identifying equipment that would increase efficiency. Short-term plans are made daily, weekly and monthly by supervisors or persons in lower level management positions. These plans are centered on meeting daily, weekly and monthly production targets. Regulatory Practices Instituted by Governments A business is not considered a legal entity if it is not registered as business in the country where it operates. All persons desirous of starting a business must first be registered with the government agency authorized to carry out registration of business in their country. A sole trader only needs to register his business by meeting the requirements outlined for sole traders by the registering office and filling out the required documents. Partnerships are also registered by the completion of a registration document. The names of all the partners must be listed on the document. Partners in a business are advised to draft a Deed of Partnership. This document sets out all the rules that govern the partnership and will thus help to prevent conflict among partners. The formation of public and private limited liability companies involves the preparation of a number of documents. The Companies Act contains the laws relating to companies. To comply with certain requirements which were laid down by the Companies Act, the promoters of the company must present the following documents: 1. The Memorandum of Association – this document governs the company’s relationship with the outside world. It contains: (a) The name of the company (b) The address of the registered office (c) The objectives of the A statement of limited liability to members (d) The amount of capital to be raised by the selling of shares and the types of shares to be issued (e) The number of shares to be taken by the directors (f) Statement of intent to form a limited liability 2. Articles of Association – this document contain the internal rules and regulations which govern the company. It contains: (a) The rights and obligations of the directors (b) The procedures for calling an annual general meeting (c) Procedures for electing directors (d) The borrowing powers of the company In order to effect the registration of a company, the Memorandum and Articles of Association must be prepared by a lawyer or any person named in the articles as a director or company secretary and sent to the companies registering office. 3. Statutory Declaration – this document states that the promoters of the company have compiled with the Companies Act. It is a signed statement from each director certifying their willingness to serve. 4. Certificate of Incorporation Once all three documents above have been submitted and the Registrar of Companies is satisfied that all is in order, it will enter the name of the company on the register, and issue a certificate of incorporation. The certificate of incorporation is proof that all requirements of the Companies Act have been complied with. The certificate of incorporation establishes the firm as a legal body. 5. The Incorporated Company A company always means an incorporated company. If a company is not incorporated, it is really a large partnership. Every business that has more than twenty shareholders must be registered as an incorporated company. The advantage of incorporation is that each member’s liability is limited. At this stage it is only the private limited company that may begin trading. 6. The Prospectus The public limited liability company must first publish its prospects inviting the public to subscribe for shares. This may be a publication in the newspaper or in another public media. The prospectus will contain information on the assets, liabilities and profit levels of the company. 7. Certificate of Trading Once the public limited liability company has collected the total amount of share capital stated in the memorandum, the company will then be issued with a Certificate of Trading. This will allow the company to start trading. Sources of Capital in Setting up a Business Capital is one of the resources required to set up a business establishment. Capital mainly refers to those assets that are used to start and continuously operate a business. Fixed capital includes machinery, equipment and vehicles owned by the company. These assets are so called because they cannot easily be turned into cash. Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash balances. These assets can easily be converted into cash. Sources of Capital - Personal savings of the owner or owners - Assistance from friends and family - Loan from a financial institution - Selling shares The significance of collateral in accessing capital to establish a business Collateral is anything of value that is used to secure a loan. It is required by financial institutions for the approval of loans. If the loan is not repaid then the financial institution has the authority to seize the borrower’s collateral. Forms of collateral include: bank balances, motor vehicle, dwelling house, land, machinery and equipment etc. Evaluation of different types of collateral Types of collateral Comments Property (land and buildings) - usually used for large loans for long time periods the owner may use the property but cannot sell it while it is held as collateral. Types of collateral contd. comments -Stocks ( shares in a company) used for any size loan -Bonds – a certificate that represents money to be paid at a later date. -Money - cash surrender on life insurance Motor vehicles (depending on age) - used for shorter time periods and Medium and small loans; these assets have shorter life span Features of a Business Plan A business plan is a document outlining the goals of a business and the strategies to achieve these goals. It is mainly prepared by new businesses or by ones making major changes. There are five parts of a business plan these include: 1. Executive Summary The Executive Summary is a synopsis of the full business plan. It presents the salient points of the plan. It contains information on the purpose of the business, its methods of operation and future expectations. 2. The Operational / Production plan A. description of the goods/service B. suitability of location C. describe type and level of production D. labour skills required E. quality control F. technology required G. raw materials and other input required, as well as sources H. ethical issues related to production 3. The Marketing Plan A. organization of the marketing department B. market research C. product strategies (design, branding, packaging) D. pricing strategy E. distribution strategy F. promotion strategy 4. The Financial Plan A. purposes for which finance is needed B. production cost C. other cost D. collateral E. financing required F. ethical issues related to financing Purpose Of A Feasibility Study It is research done to ascertain the viability/feasibility of a business idea or any other venture. It asses the business idea in terms of its operational costs, expected revenue flows, level of competition etc. Its main purpose is to find out if the business idea will be workable. If the business idea is found to be feasible a business plan is may drafted to obtain financial support. The feasibility study will examine and conduct research on the following 1. market demand 2. target market 3. profitability 4. production method 5. operating expenses 6. distribution channels 7. competition 8. promotional requirements 9. cash-flow 10. resources required 11. any special legal requirements If the feasibility study shows that you have a viable business opportunity only then the business should be prepared. The Business Plan will mostly be based on the information gathered in the feasibility study. Ethical And Legal Issues Business owners are required to obey all legislation concerning the operations of a business. These include, paying taxes, business registration, obtaining licenses when required etc. Business owners should also operate their business based on integrity. This involves: - Environmental awareness – reducing pollution and harmful effluents in the rivers and seas. - Avoiding tied selling (marrying of goods) - Misleading advertising (untruths about goods advertised) - Untrue sale price – For example, writing the word sale on items for which the price remains the same. - The use of market dominance to squeeze firms out of the industry- For example large firms may drop the price of their goods so low that small firms are unable to compete with them.  Consequences Of Unethical And Illegal Practices in Business Misleading advertisement- this will cause the citizens to buy the product and waste money that could be spent on more beneficial items. With-holding tax – this cheats the government of revenue it need to finance / pay for services at hospitals , build schools fix roads and to pay civil servant. Unethical disposal of waste- this will have a negative effect on the quality of the food, water and air – thus posing serious health threats. Money laundering – with more money, people will be spending more and producers and shop-keepers will increase their prices – this will cause inflation Illegal business practices will result in legal consequence for business. This may include large fines the loss of the business. Legislation also protects consumers, competitors and society from unethical practices of a business. Section 4: Legal Aspects of a Business Concept Of A Contract A contract is an agreement that is enforceable by law. A contract therefore has legal implications for the parties who enter into a contract. A mere agreement is not legally binding and therefore neither of the parties is liable if anyone breaks the agreement. What makes a contract different from an agreement? A contract requires not only an agreement between parties but also something of value must be passed from one party to the next to make the contract binding. For example, you offer to sell a friend your used text books for $1000.00. After inspecting your textbooks the friend agrees and pays $1000.00. The $1000.00 paid here is the consideration i.e. something of value that is passed from one party to the next. Consideration is the price paid for a promise. You promised to let your friend have your textbooks if he paid $1000.00. This $1000.00 makes the agreement binding. You are therefore obligated to deliver the books to your friend and cannot decide to sell the books to someone else or to ask for a higher price. Characteristics Of A Simple Contract There must be offer and acceptance. The offerer is the party that makes the offer and the offeree is the person that the offer is being made to. There must a clear offer and clear acceptance for a contract to be binding. Consideration is the price paid by one party for the promise of the other. Thus if one party promises to provide goods or services, something of value must be given in exchange. This may be in the form of money, goods, services or it may be an act of forbearance. The capacity to contract – Parties to the contract must be over 18 years, of sound mind, not under the influence of drugs or incarcerated. There must be no force, misrepresentation or fraud. Persons should not be forced to sign a contract e.g. blackmail. They should not be lied to e.g. giving the wrong year of a car. Fraud may involve forging someone’s signature. There must be an obvious intention to create legal relations. This is based on the actions of the parties e.g. offer, acceptance and consideration. A contract must be legal- thus, agreements made between parties concerning illegal drugs and any other illegal activity is not a contract. Types of contract 1. simple contract 2. speciality contract 3. contract of records Differences Between A Simple & A Speciality Contract A simple contract can be made orally, in writing or by the implications deemed from the actions of the parties. A specialty contract must be signed by the parties sealed, for example with a company seal and finally it must be delivered. Examples of specialty contracts include: 1. Mortgages and leases for over three years 2. Sale of land 3. Contracts of insurance 4. Hire purchase agreements 5. Transfer of company shares 6. Assignments of copyright Contracts of record This is a court order that is imposed and enforced by the court, for example parental obligations or repossession by a bailiff.  Difference Between An Offer & An Invitation To Treat An invitation to treat is not an offer but an invitation to bid or bargain for an item. For example, at an auction persons may bid on various items presented. An invitation to treat also occurs also when goods are advertised for sale in the media or in shop windows. Goods in a shop window or goods advertised are not an offer by the owners of the goods but are technically an invitation for interested persons to make an offer. Conditions Under Which Offer And Acceptance Are Communicated An offer must be very clearly made. An offer can be made to one person, a group or to the whole world. For example, offering a reward for a lost wallet is an offer to anyone finding the wallet. In cases where there is a counter- offer the original offer is no longer valid. A counter offer is an implied rejection of the original offer. For example: Richard offers to sell Paula a laptop for $10,000. Paula subsequently offers him $9000.00 as she thought $10,000 was too expensive. Paula has rejected Richard’s original offer and has made a counter-offer of $9,000. Acceptance must also be clear. In the case of a counter offer a clear acceptance to the new offer must be identified. Contracts may be made orally, in writing or they may be implied. Oral Contracts Are based on what the parties said. For example, asking someone to wash your car for payment Written Contracts Both offerer and offeree must sign the contract document Implied Contracts Implied Contracts are made by the observed actions of the parties involved. For example, someone who sits at a table in a restaurant and places an order has implied that he will pay for the food that will be served. Ways In Which Contracts May Be Terminated Contracts may be brought to an end: (a) By performance of the parties i.e. each party completing his obligations as stipulated by the contract. (b) By frustration i.e. an event through no fault of the parties that make one party unable to perform the contract. For example: if one party suffers a prolonged illness which makes him unable to perform the contract. (c) By lapse of time i.e. if the time limit set for the contract to be executed by both parties has been passed. For example, sellers of real estate usually require that the buyers pay the full balance on the property within a certain time period after the initial down payment has been made. (d) By the mutual agreement of all parties. (e)If one of the parties become bankrupt after the contract has been signed. (f) By changes in law i.e. where a legal contract is rendered illegal through changes in law. (g) By notice e.g. some firms require that employees give at least one month notice when resigning their positions. (h) If one party dies. (i) By breach of contract-When one party defaults on his part of the agreement i.e. he does not perform his part of the contract. Validity Of Contracts Mr. Larry was delighted to see a 50% discount on his favourite brand of shoes at a shoe store 15 miles away. He took sometime off from work to travel to the store. When he arrived at the store he was told that that the brand advertised was sold out but he could choose from other brands available. Mr. Larry was very angry and requested that he be refunded his travelling expenses. Is the owner of the store obligated to refund Mr. Larry his travelling expenses? Answer The advertisement appearing in the newspaper is not an offer by the store but an invitation to treat. Therefore readers were being invited to make an offer for items advertised. The owners of the store are therefore in no way obligated to Mr. Larry. Hope stopped at a convenience store on her way home to purchase a few items. She handed the cashier he credit card and was surprised when she was told that it declined. She apologized and explained that she did not know why her card declined but she will call the bank in the morning. Susan further explained that she had just enough cash with her to get home and so she could not pay for the goods. The cashier was very angry and asked the manager to intervene. The manager insisted that she pay for the goods. Is Sandra obligated to pay for the goods? Answer Sandra has entered into a contract with the convenience store. She made the offer at the cashier counter when she presented the goods to be cashed. The cashier accepted the offer by cashing the goods. In this situation it is up to the manager of the convenience store to accept Hope’s apology. Why Documentation Is Necessary In Business Transactions Business documents provide information needed for the business to function efficiently. Information is required for accounting purposes to ascertain whether profits or losses are being made. Documents are also needed as evidence for example orders placed for goods and payments made. Documents also provide information on commodities in stock and prices. Business Documents For Various Purposes (a) Letter of Enquiry is sent by persons who wish to be informed of what goods and services and the prices of these that a company offers for sale. (b) The company may resend either a quotation or a catalogue A catalogue is a booklet with a brief description and pictures of articles for sale. Since a catalogue is costly, some companies opt to send a quotation instead. A quotation lists all the goods in stock along with their prices. (c) If there is an interest to purchase an item in the catalogue then an order letter is sent requesting goods to be supplied. The following three documents (items d, e & f) accompany goods delivered. (d) Delivery Note must be signed by the person receiving the items ordered. This is proof that goods were delivered. A copy of the delivery note is given to the buyer. (e) Consignment note is sent when the firm does not have its own transportation. A transport company is paid to deliver the goods. A consignment note will be prepared by the consignor (the sender) and given to the transport company. It contains information about the destination of goods and the name of the consignee (the receiver). (f)An Invoice is a bill sent with goods delivered. Invoices may also be sent after goods have been delivered. Terms 5% 30 days – A Discount of 5% will be given if the customer pays within 30 days. E & OE – means errors and omissions, i.e. if any mistakes were made on the invoice the company will make the correction. (g) Pro forma Invoice is an invoice given before the original invoice stating the quantity, unit cost and total along with the description of the commodity. (h) Credit note is issued to a customer when there has been an overcharge on an invoice due to faulty arithmetic, when goods have been returned because of damage or refunds requested for goods not received. A credit note is printed in red. (i) Debit note is sent to a customer whenever there is an undercharge or omission on the invoice. (j) Statement of Account is a document from a supplier to a customer outlining all the transactions carried out over a particular period. A statement is usually sent monthly. (k)A receipt is given for cash payment. (l) Stock cards are used to keep a record of all stocks entering and leaving the stockroom. This procedure ensures that stock level do not fall below a minimum resulting in the depletion of stocks. Information On Transport Documents a. Import License This document gives a business permission to import goods into a county. It is used by governments to restrict the importation or to limit the amount of certain goods imported. Quotas are sometimes used to protect local industries as they specify the quantity of certain goods importers are allowed to import. b. Certificate of Origin This document states the country in which the goods were manufactured. This is important for Caribbean countries as goods from other Caribbean countries enter duty free. Goods imported from outside the region are taxed. c. Shipping Note This document provides details about the goods to be shipped, e.g. type and number of items and the destination of the goods. d. Bill of Lading The Bill of Lading is a contract of carriage between the seller of the goods (exporter) and the shipping company transporting the goods. It is also a document of title as a copy must be presented by the importer before he can claim the goods. It includes the following information: The number of packages, the weight of each piece, the contents, the port of departure and destination, the name of the ship, the senders name and address and receivers name and address E. The Airway Bill This document is used when goods are transported by air. It contains similar information as the bill of lading. It is not a document of title and the consignee named need not have a copy to collect the goods. F. Insurance Certificate – (Marine Insurance) This document provides protection for the goods being shipped against loss or damage at sea. G. Bill of Sight This document is completed if for any reason the documents required for importing goods are not available. It is completed giving details of the consignment and method of transportation. Instruments Of Payment The instrument used to make payments will depend on the sum of money being paid and whether the transaction is a local or an external one. Cheques A cheque is an order to the bank to transfer payments from an individual’s account (the payer’s/drawer’s account) to credit another individual’s account (the payee’s account) or to pay the payee on presentation of that cheque. Credit Transfer A customer of a bank may use this system by instructing the bank to transfer money from his account to an account at any other bank. Standing Order/Banker’s Order This allows regular monthly payments to be made from a customer’s bank account to a named payee. The customer must complete and sign a standing order form instructing the bank to make payments. Credit Cards/Debit Cards This allows the card holder to make payments by simply presenting the card to the seller. A credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A debit card is issued against a customer’s account balance and is therefore not a loan. Postal Order Postal orders are cheques issued in specific values by a post office. The value of each postal order is printed on it and a price depending on its value is paid for each. The postal order will be sent to the post office of the payee as designated by the payer. Money Order These can be purchased from a bank or a post office. They can be used to make payments locally or overseas, as they are made out in the currency in which they are to be paid. The payee will cash the money order at his bank. Telegraphic Money Order The sender must first pay the sum to be sent over the counter of the post office. A telegram is sent to the payee informing him to collect money at his local post office. He must present proof of his identity. Bank Draft This is a cheque that is used to make payments overseas. Bank drafts are obtained for a fee from a bank and are made out to a named payee in foreign currency. Bill of Exchange  Insurance And Assurance Insurance is a means of protection from financial loss. Insurance is generic for all types of insurance and assurance. However, insurance differs from assurance in that insurance covers risks that may occur e.g. theft, fire, accident etc., and assurance covers events that will occur such as death. The parties to the insurance contract are the insurer (the company offering protection) and the insured (the person seeking protection). Payments are made by the insured for this service. The price charged for insurance is called a premium. The contract is known as the policy. Insurance Principles The purpose of insurance is to compensate persons insured who suffer loss. It is based on the principle of indemnity, that is, to restore the insured to his original position before he suffered loss. Insurance therefore as a principle neither makes the insured worse off or better off than before loss was incurred. For example, if Mr. Green suffered damages valuing $500,000 subsequent to a fire at his home, he will be compensated exactly $500,000 to repair his house. Principles of Insurance Indemnity-Restoring the insured to his original position Insurable interest–The insured must have a vested interest in what is being insured. For example, someone is not allowed to insure his neighbour’s house. Utmost Good Faith -The insured must be truthful concerning the information pertaining to the policy contract. Proximate Cause - The damage caused must be close or proximate to the event insured against. For example, if someone has an accident policy that includes death occurring as a result of an accident, this person will not be compensated if death is caused by disease. Contribution – This principle prevents persons insuring identical risks on the same property with several companies and thus profiting if they suffer loss. For example, an individual may insure his car with three insurance companies hoping to be compensated by all three. He will not succeed as the insurance companies will each only pay a portion of the claim. Average Clause – This clause sets a limit to the size of the compensation, which depends on the proportion of the true value of the asset paid up by