IGCSE Business Studies Topical Notes 0450 PDF

r/IGCSE Resources Topical Notes for Cambridge IGCSE Business Studies (0450) Authored by abu foofoo 1st edition, for examination until 2026...

r/IGCSE Resources Topical Notes for Cambridge IGCSE Business Studies (0450) Authored by abu foofoo 1st edition, for examination until 2026 © r/IGCSE Resources 2024  SECTION 1: UNDERSTANDING BUSINESS ACTIVITY © r/IGCSE Resources 2024 THE ECONOMIC PROBLEM: Need: A good or service essential for living e.g. water, food and shelter. Want: A good or service that people would like to have, but not required for living e.g. cars and movies. Scarcity: Is the basic economic problem. It states that there are unlimited wants but limited resources to produce goods and services to satisfy those wants. OPPORTUNITY COST: Is the next best alternative forgone by choosing another item. Due to scarcity, people are often forced to make choices. When a government is left with the choice of building an airport or hospital, they have to decide on one. If they choose the hospital, then the benefits of the airport become the opportunity cost. FACTORS OF PRODUCTION: Are resources required to produce goods or services? There are 4 categories: Land: The natural resources that can be obtained from nature such as minerals, forests, oil and gas. The reward is rent. Labour: The physical and mental efforts put in by workers in the production process. The reward is a wage/salary. Capital: The finance, machinery and equipment needed for production of goods. The reward is interest received on the capital. Enterprise: The risk taking ability of the person who combines the factors of production to produce a good or service. The reward is profit. SPECIALIZATION: It is when a person or organisation concentrates on a task at which they are best at. The tasks are divided among people who are skilled and efficient at them. Division of labour is a form of specialisation. ADVANTAGES DISADVANTAGES Increase in efficiency Can get monotonous for workers since they are doing the same job. Production is faster. Time and energy are Higher labour turnover due to workers saved. demanding higher salaries due to their importance in production. Quicker to train labourers, as they focus on Over-dependency. If a worker is absent, the one task only. production process may halt since nobody else may be able to do the task Skill development. PURPOSE OF BUSINESS ACTIVITY: A business is an organisation that uses all the factors of production to produce a good or service that satisfies human wants and needs. Businesses aim to solve scarcity by using © r/IGCSE Resources 2024 scarce resources to produce and sell goods and services that consumers need and want. ADDED VALUE: Is the difference between cost of materials and selling price of the product. Every business wants to add value to their products to ensure higher profits. Added value is increased by: 🡺 Reducing Cost of Materials. 🡺 Increasing Selling Price. However, reducing cost of materials may create poor quality products and only lowers the value of the product, since people may not buy it. If prices are raised, customers may be lost since they will turn to cheaper products. However, there are new ways to add value: 🡺 Branding. 🡺 Adding Special Features. 🡺 Provide premium services. PRIMARY SECTOR: This is the extraction and usage of natural resources. Businesses in the primary sector may include mining, fishing or oil drilling. SECONDARY SECTOR: This is the manufacturing of goods using the resources from the primary sector. Businesses in the secondary sector may include cloth production, automobile manufacturing or steel industries. TERTIARY SECTOR: This sector provides service in the economy. Businesses in the tertiary sector may include hotels, travel agencies or hair salons. Industrialization: This is when an increase in the manufacturing sector occurs Deindustrialization: This is when an increase in the tertiary sector occurs while a decline in the manufacturing sector happens. This is due to growing incomes of consumers which increases demand for more services. PUBLIC & PRIVATE SECTOR: The private sector is where private individuals own and run business ventures. They aim to make a profit and all costs and risk are handled by the individual. The public sector is where the government owns and runs business ventures. They aim to provide back to the society. They don’t work to earn a profit and funds come from tax paying citizens. A mixed economy is one where both the public and private sector exists. © r/IGCSE Resources 2024 ENTREPRENEURSHIP: An entrepreneur is a person who organises, operates and takes risks for a new business venture. The entrepreneur brings together the factors of production to produce goods or services. Characteristics include: 🡺 Risk taker. 🡺 Creative. 🡺 Hard working. 🡺 Effective communicator. BUSINESS PLAN: A document that contains the business objectives and important details such as the owners of the business. It provides detail on the target market, financial forecast and requirements needed to operate the business. There are many benefits of a business plan such as: 🡺 Reduces risks. The owners will find it much easier to run the business due to all the details being available. 🡺 Helps get a loan easier. A business plan can help persuade banks for a loan. 🡺 Helps motivate employees. The business objectives being clearly available for the employees can motivate them to achieve these objectives. GOVERNMENT SUPPORT FOR BUSINESS STARTUPS: Governments help start-ups for: 🡺 Provide employment. This reduces unemployment and increases living standards. 🡺 Contribute to growth. This can help increase GDP. 🡺 Contribute to the exports. If they become successful, they can contribute to the country’s total exports. 🡺 Introduce fresh ideas and technologies. They can help businesses and the industry with new innovative ideas. Governments support business start-ups by: 🡺 Giving tax breaks. Governments can withdraw or lower taxation for new firms for a certain period of time. 🡺 Give grants for capital. Provide financial aid to new firms for investment. 🡺 Organise advice. Governments can help provide business advice to potential entrepreneurs such as legal ones. 🡺 Give grants for training. Provide financial aid for workforce training. MEASURING BUSINESS SIZE: Business size can be measured by: 🡺 Number of employees. Larger firms have a larger workforce employed. 🡺 Value of output. Larger firms are likely to produce more than smaller ones. 🡺 Value of capital employed. Larger businesses are likely to employ much more capital than smaller ones. © r/IGCSE Resources 2024 BUSINESS GROWTH: There are two types of growth a business can implement: 🡺 Internal growth. Where the business expands its existing operations. This is slow but easier to manage. 🡺 External growth. Where the business takes over or merges with another business Merger: When the two owners of the businesses agree to join firms to make one business. Takeover: When one business buys out the other business. Types of external growth: 🡺 Horizontal integration. This is when one firm merges with another one in the same industry at the same stage of production. Advantages include: 🡪Greater market share. 🡪Economies of scale are used. 🡪Reduces competitors. 🡺 Vertical integration. This is when one firm merges with another firm in the same industry but at a different stage of production. There are two types of vertical integration: 🡪Backward vertical integration: When one firm merges with another firm in the same industry but at an earlier stage. Advantages include: 🡪Assured supply of materials 🡪Profit margin of supplying firm is absorbed. 🡪Supplying firm can now be prevented from supplying to competitors. 🡪Forward vertical integration: When one firm merges with another firm in the same industry but at a later stage. Advantages include: 🡪Assured outlet for products. 🡪Profit margin of retailer is absorbed. 🡪Retailer can be prevented from selling competitor goods. 🡺 Conglomerate integration/Diversification: When one firm merges with another firm in a completely different industry. Advantages include: 🡪Businesses have activities in more than one country, which spreads its risks. 🡪Transfer of ideas could occur, which can improve quality and demand for the two products. DISADVANTAGES OF GROWTH: 🡺 Lack of funds. Growth requires a lot of capital. 🡺 Lack of expertise. Growth is a long and difficult process. © r/IGCSE Resources 2024  🡺 Difficult to control staff. The staff grows as a business grows, making it harder to control, coordinate and communicate with everyone. WHY BUSINESSES STAY SMALL: 🡺 Type of industry. Hairdressers give personal service therefore can’t grow. 🡺 Market size. If the total customers are small, there is no need to grow. 🡺 Owners’ objectives. Not all owners want to increase the size of their firms. Some prefer keeping their business small for: 🡪 Personal contact with customers 🡪Flexibility in controlling and running the business. 🡪More control over decision-making 🡪Less stressful. WHY BUSINESSES FAIL: 🡺 Poor management: Lack of experience and planning leads to bad decision making. Mistakes such as location and suppliers can cause failure. 🡺 Over-expansion: This increases costs if the business expands too quickly. Managing employees gets out of control. 🡺 Poor financial management: If the owner does not know how to manage finance properly, cash shortages can occur. A poor cash flow will cause the business to fail. 🡺 Failure to plan for change: The demands of customers keep changing. This means firms must be ready to change to meet the demand of their customers. Failure to do so results in customer loss. WHY NEW BUSINESSES ARE LIKELY TO FAIL: 🡺 Lack of experience: Firms can get kicked out of the market easily. 🡺 New to the market: New firms may not understand the trends of the market that existing competitors have mastered. 🡺 Not many sales: New firms can grow by increasing sales. If they’re not selling much, there is a greater risk of failing. 🡺 Lack of capital: Financial issues can quickly become the main issue of new firms if they are not careful with their cash flows. It is only after making a profit they can reinvest in the business. © r/IGCSE Resources 2024 SOLE TRADER: A business organization owned and controlled by one person. ADVANTAGES DISADVANTAGES Easy to set up. Few legal formalities Unlimited liability. All investments are at involved. Low amount of capital needed. risk if debts are not paid off. Full control. Decision-making is quick and Unincorporated. The business stops if the easy. owner dies. There is no separate legal status. Profit. All profit generated goes to the Lack of capital. There is little capital for owner. growth and expansion so profit will be low. Personal. There is direct contact with Full responsibility. The sole owner has to customers which can increase loyalty. undertake all running activities, which puts on a large workload. PARTNERSHIP: An agreement between two or more people to own, finance and run a business jointly. A partnership agreement is a legal document that all partners have to sign. ADVANTAGES DISADVANTAGES Easy to set up. There are few legal Unlimited liability. All investments are at formalities involved risk if debts are not paid off. More capital. Partners can invest more Conflict. Arguments may occur between capital compared with sole traders. partners when making decisions, which wastes time. New skills and ideas. The partners may have If one partner is bad and lazy, profits can be creative ideas that the business can benefit affected which can annoy the other partner. from and profit. Unincorporated. There is no separate legal status. Business ends if the owner dies. JOINT-STOCK COMPANIES: Private Limited Companies: One or more owners can sell shares to people known (Family & Friends). Public Limited Companies: Two or more owners who can sell shares to any individual/organization through stock exchanges. © r/IGCSE Resources 2024  ADVANTAGES OF PUBLIC LTC DISADVANTAGES OF PUBLIC LTC Limited liability. Owners are responsible for Accounts have to be public. This can make their investments if debts are not paid off. competitors learn secrets to increase profits. Incorporated. Business has a separate legal AGM meetings have to occur. This is when status which ensures continuity. shareholders chose a new board of directors. This is very expensive to hold. Easy to obtain capital. Selling shares can Too many shares sold can make owners lose raise huge sums of capital. control of the company. Managerial problems may occur due to the large size. Communication problems will slow down decision-making. ADVANTAGES OF PRIVATE LTC DISADVANTAGES OF PRIVATE LTC Limited liability. Owners are responsible for Accounts have to be public. This can make their investments if debts are not paid off. competitors learn secrets to increase profits. Incorporated. Business has a separate legal AGM meetings have to occur. This is when status which ensures continuity. shareholders chose a new board of directors. This is very expensive to hold. Easy to obtain capital. Selling shares can Selling shares to the public is difficult. Legal raise huge sums of capital. documents are required to be able to do so. FRANCHISE: This is when the owner of a business (FRANCHISOR) grants a licence to another person (FRANCHISEE) to use their business idea with the same brand logo, image etc…. © r/IGCSE Resources 2024  ADVANTAGES DISADVANTAGES Management is responsible Profits need to be shared to the franchisee. with the Franchisee. Low cost of business If one franchise fails, the expansion. reputation of the entire TO THE FRANCHISOR brand is affected. Franchisees have a better understanding of the local Need to supply raw material tastes meaning they are able and training to the to sell appropriately. Franchisee. Raw materials are paid for Need to pay licence to the by the franchisor. franchisor to continue running the franchise. Training is paid for by the franchisor. No full control as they have TO THE FRANCHISEE to follow franchisor If the Franchisor is a famous standards and rules. business, chances of failing are low. Cost of setting up is not covered. JOINT VENTURES: Is an agreement between two or more businesses to work together on a project. ADVANTAGES DISADVANTAGES Risks and costs are shared. Different cultures and styles of leadership may affect decision-making. Market and product knowledge of the area Any mistakes will damage the businesses is known by one of the businesses. reputations. The market potential is increased. PUBLIC SECTOR CORPORATIONS: Are businesses owned by the government and run by directors appointed by the government. They provide essential services such as water and electricity. They aim to: 🡺 Keep prices low to be affordable for everyone. 🡺 Provide job opportunities. 🡺 Offer a service to the public. © r/IGCSE Resources 2024  ADVANTAGES DISADVANTAGES Reduces waste in an industry. Motivation may not be high since profit is not an objective. Provides essential services to the people. No competition so no incentive to improve. Some businesses are too important to be Businesses could be run for a political owned by an individual. reason, to gain government popularity and support. BUSINESS OBJECTIVES: Are aims and targets that a business works towards to help it run successfully. Benefits of setting objectives: 🡺 Increases motivation: Employees and managers now have clear targets to work towards. 🡺 Easier decision making: Less time wasted as decisions will be taken in order to achieve business objectives. 🡺 Unites the business. Objectives vary with different businesses. Businesses in the private sector hope to achieve these objectives: 🡺 Survival: New or small firms usually have survival as a primary objective. To achieve this, firms could decide lower prices which would mean sacrificing profits. 🡺 Profit: This is the income of a business from its activities after deducing total costs. Profit is required for further investment as well as payment of return to shareholders. 🡺 Growth: After survival, a business will aim to grow. A larger business can ensure greater job security and salaries for employees. The business can also benefit from higher market share. 🡺 Market share: Increased market share can bring many benefits such as increased customer loyalty and brand image. 🡺 Service to society: Social enterprises do not aim for profit but rather set economical objectives. They provide social, financial and environmental aid. They help the underprivileged and unemployed. Business objectives do not remain the same forever. If a firm is facing economic recession, it may change its objective from profit to survival. STAKEHOLDERS: Are any person or group that is interested in or directly affected by the performance or activities of a business. © r/IGCSE Resources 2024  STAKEHOLDER DESCRIPTION OBJECTIVES GROUP Risk takers of the Share of the profits to business. They invest reinvest. Owners (INTERNAL) capital into the Growth so the value of business. their investment increases. These are the people Regular payment for employed by the the work done. business and are Job security, they do Workers (INTERNAL) directly involved in its not want to look for activities. new jobs. Job satisfaction and motivation. Also employees but High salaries due to they control the work the important work of others. In charge of they do. making decisions. Job security. Managers (INTERNAL) Growth of the business so that they can control a bigger and well known business They purchase and Safe and reliable consume goods products. Customers making them Value for money. important. Without Well-designed (EXTERNAL) enough, businesses products of good will make losses and quality. fail. Protect workers and Expect all firms to customers by passing follow the law. Government laws. Responsible for Want businesses to the country’s succeed to improve (EXTERNAL) economy. employment and government revenue. Greatly affected by Products are socially Community business activity. responsible. Products are beneficial Jobs for the working (EXTERNAL) to them. population. Provide finance for Expect businesses to Banks (EXTERNAL) businesses. be able to pay interest and capital lent. © r/IGCSE Resources 2024 PUBLIC SECTOR BUSINESSES: Government owned and controlled businesses do not have the same objectives as those in the private sector. Objectives include: 🡺 Financial: Although they do not aim for profit, they still have to meet profit targets set. This is so reinvestments can be made. 🡺 Service: Provide a service to the community that is of high quality. 🡺 Social: Aid the community by providing employment, providing good quality goods and services at an affordable rate. CONFLICT BETWEEN STAKEHOLDERS: 🡺 Workers will want higher salaries. However, shareholders will not like this as dividends will be less. 🡺 Owners may want to expand by building factories. However, the community will not like this due to pollution. 🡺 Managers may come to a conclusion on a decision. However, employees may not like it due to it being unethical or difficult to adapt to. © r/IGCSE Resources 2024 SECTION 2: PEOPLE IN BUSINESS © r/IGCSE Resources 2024 MOTIVATION: Reasons for people working: 🡺 Standard of living: Earning incomes satisfies their needs and wants. 🡺 Security: A job means that they can always maintain or grow their standard of living. 🡺 Experience and status: Working improves skills and gives a reputable title in society. 🡺 Satisfaction: People work for the satisfaction of having a job. Motivation is the reason why employees want to work hard and effectively for the business. Money is the main motivator. There are other factors of motivation such as social needs and esteem needs. Motivating workers is crucial, as their productivity and effectiveness increases. They become less absent and are less likely to leave the job. This increases the firm's output leading to higher profits. MOTIVATION THEORIES: 🡪F.W. TAYLOR: Taylor based his ideas on the assumption that workers were motivated by personal gains, mainly money. He believed increasing pay would increase productivity and output produced. Therefore, he introduced the piece-rate system, whereby workers get paid for the number of outputs produced. This means in order to gain more money, workers would have to produce more. He also suggested introducing division of labour to maximise output. However, this theory is not accurate. There are various other motivators, some even more important than money. Piece-rate is not practical in situations where output cannot be measured (service industries) and also high output may not lead to high quality. 🡪MASLOW'S HIERARCHY: Maslow’s hierarchy of needs show that employees are motivated by each level of the hierarchy. Managers can identify the level of their workers and take action to advance them to the next level. However, this theory does not apply to every worker. Some employees may not need social needs to be motivated but would prefer recognition and appreciation from their seniors. © r/IGCSE Resources 2024 🡪HERZBERG THEORY: Herzberg’s two factor theory suggests that people have to sets of needs: 🡪BASIC ANIMAL NEEDS (HYGIENE FACTORS): 🡺 Status 🡺 Security 🡺 Work conditions 🡺 Salary 🡺 Relationship with staff 🡪PSYCHOLOGICAL GROWTH NEEDS (MOTIVATORS): 🡺 Achievement 🡺 Recognition 🡺 Promotion 🡺 Person growth According to Herzberg, the hygiene factors need to be satisfied first, or else they’ll act as demotivators. However, hygiene factors don’t act as motivators as their effect quickly wears off. Motivators will truly motivate workers to work more effectively. MOTIVATING FACTORS: 🡪FINANCIAL MOTIVATORS: 🡺 WAGES: Paid weekly. Calculated in two ways: 🡪Time-Rate: Based on the number of hours worked. Although output may increase, it doesn’t mean that workers will use their time to produce more. They may simply waste time and not produce much since their pay is based on how long they work. Productive and unproductive workers will get paid the same, irrespective of their output. 🡪Piece-Rate: Based on the number of outputs produced. However, this doesn’t ensure quality. This may demotivate productive workers as they get paid the same as inefficient workers. 🡺 SALARY: Paid monthly or annually. 🡺 COMMISSION: Payment based on a percentage of sales made. The higher the sales, the more the pay. This will encourage the salesperson to sell more products, however if no sales are made no pay is made which can be stressful. 🡺 BONUS: Additional amount paid to workers for good work. 🡺 PERFORMANCE-RELATED PAY: Payment based on performance. An appraisal is used to measure this performance and pay is given based on this. 🡺 PROFIT-SHARING: A proportion of the company’s profit is distributed to workers. This motivated workers to work better so a higher profit is made. 🡺 SHARE OWNERSHIP: Shares in the firm are given to employees so that they become © r/IGCSE Resources 2024  part owners of the company. This increases loyalty as a sense of belonging is achieved. 🡪NON-FINANCIAL MOTIVATORS: These are known as Fringe benefits which are non-financial rewards given to employees. They can include: 🡺 Company car 🡺 Free healthcare 🡺 Free accommodation 🡺 Free holidays JOB SATISFACTION: Is the enjoyment derived from the feeling that you’ve done a good job. JOB ROTATION: Involves workers swapping around jobs and doing a specific task for a limited time then changing again. This increases the variety of work and it makes it suitable to use if a worker is absent/ill. The work itself is not made interesting, but switching of tasks avoids the boredom. JOB ENLARGEMENT: Extra tasks of similar level of work are added. These tasks do not add greater responsibility, but rather make the work more interesting. JOB ENRICHMENT: Involves adding tasks that require more skill and responsibility to a job. This gives a sense of trust and motivates them to carry out extra tasks effectively. Some additional training may be given. TEAM WORKING: A group of workers given responsibility for a particular process. They decide as a team how to organise and carry out the tasks. They take part in decision making and take responsibility for the process. OPPORTUNITIES FOR TRAINING: Providing training will make workers feel that their work is being valued. Training also provides them opportunities for personal growth and development. OPPORTUNITIES FOR PROMOTION: Providing opportunities for promotion will get workers to work more efficiently. ORGANISATIONAL STRUCTURE: Refers to the levels of management and division of responsibilities within a business. ADVANTAGES Employees are aware of which communication channel is used. Everyone knows their position. Shows the links and relationship. Sense of belonging. Span of Control: is the number of subordinates working directly under a manager in the organizational structure. Chain of Command: Allows instructions to be passed on from senior managers to lower levels of management and vice versa. © r/IGCSE Resources 2024  ADVANTAGES OF SHORT CHAIN OF DISADVANTAGES OF SHORT CHAIN OF COMMAND AND WIDE SPAN OF CONTROL COMMAND AND WIDE SPAN OF CONTROL Communication is quicker. Managers could lose control due to many people working under him. Top managers are less remote from lower Less opportunities for promotion which can employees. lead to labour turnover. Delegation is encouraged due to a wider span of control. ADVANTAGES OF LONG CHAIN OF DISADVANTAGES OF LONG CHAIN OF COMMAND AND NARROW SPAN OF COMMAND AND NARROW SPAN OF CONTROL CONTROL Managers can manage easier leading to the Communication is slow. risk of losing control out of topic. More opportunities for promotion which Top managers are remote from lower reduced labour turnover. employees. Delegation is not due to a wider span of control. MANAGEMENT: The five roles of management are: 🡺 Planning: Setting aims and targets for the organisations to achieve. They should plan the resources required to achieve those targets which give a clear sense of purpose and direction. 🡺 Organizing: Managers should organize the resources. This includes allocating responsibilities with delegation being possible. 🡺 Coordinating: Managers should ensure that each department is coordinating with one another to achieve aims. This improves effective communication. 🡺 Commanding: Managers need to guide, lead and supervise their employees to make sure they are keeping to deadlines and achieving targets. 🡺 Controlling: Managers must try to assess and evaluate the performance of each of their employees. DELEGATION: Is giving subordinates the authority to perform some tasks on a higher level. ADVANTAGES TO MANAGERS ADVANTAGES TO SUBORDINATES Managers cannot do all the work by Work is more interesting and rewarding, themselves, so lowers workload. which increases job satisfaction. Managers can measure the efficiency and Increase in importance and trust. effectiveness of their subordinates’ work. Can be a method of training © r/IGCSE Resources 2024 However, managers may be reluctant to delegate as the subordinates may do a better job, which increases enviousness and jealousy. LEADERSHIP STYLES: Refers to the different approaches used when dealing with people when in a position of authority. There are three types: 🡺 AUTOCRATIC STYLE: Where managers expect to be in charge of the business. They do all the decision making. There is no involvement of employees. Communication is one-way, from top to bottom. This is found in police and armed forces. 🡺 DEMOCRATIC STYLE: Where managers involve employees in decision making. Communication is two-way, from top to bottom and vice versa. Information about future plans is openly discussed with employees. 🡺 LAISSEZ-FAIRE: Makes the broad objective of the business known to the employees and leaves them to do their own decision-making and organize tasks. Communication is difficult due to no clear sense of direction. Managers have a very limited role. TRADE UNIONS: Is a group of workers who have joined together to ensure their interests are protected. They negotiate with the firm for better conditions and can threaten to take industrial action if their requests are denied, such as overtime ban or work slow. ADVANTAGES OF WORKERS JOINING DISADVANTAGES OF WORKERS JOINING TRADE UNIONS TRADE UNIONS. Strength in number. Costs money to be a member. Improved conditions of employment. May be asked to take action when they don’t agree. Improved working conditions. Financial support. ROLE OF H.R. DEPARTMENT: 🡺 Recruitment and selection. Attracting and selecting the best candidates for job posts. 🡺 Wages and salaries. Set wages and salaries to motivate employees. 🡺 Industrial relations. Ensure effective communication between management and workforce. 🡺 Training programmes. Give employees training to increase productivity. 🡺 Health and safety. All laws on health and safety in the workplace should be adhered to. 🡺 Redundancy and dismissal. Managers should dismiss any unsatisfactory/misbehaving employees and make them redundant. RECRUITMENT: Is the process of identifying that the business needs to employ someone up to the point application has arrived. © r/IGCSE Resources 2024  1) Vacancy Arises when an employee resigns or is dismissed. A job analysis has to be prepared. 2) Job Analysis identifies and records the tasks and responsibilities relating to the job 3) Job Description is prepared which outlines the responsibilities and duties to be carried out by the employed. It contains information such as salary and working hours, 4) Job Specification is a document that outlines the requirements, qualifications and skills needed to take up the job. 5) Advertising the vacancy 6) CV is filled and sent. It contains the details of the person's qualifications, experience. Qualities and skills. 7) Shortlist is made of best suited candidates. 8) Interviews are held which assess qualities and character of the applicant. 9) Rejection is sent to unsuccessful candidates. There are two ways the business can recruit: 🡺 Internal recruitment is when a vacancy is filled by an existing employee. Does not require advertisement. ADVANTAGES DISADVANTAGES Time and money are saved. No new skills are introduced. Person is already known to the business. Jealousy may arise among workers Can motivate employees to work harder. 🡺 External recruitment is when a vacancy is filled by someone who is not an existing employee and is new to the business. This requires methods of advertisement such as: 🡪Newspapers. 🡪Job centres. 🡪Recruitment agencies. ADVANTAGES DISADVANTAGES If a person is skilled, it can motivate Costs time and money. workers. New ideas are introduced. People have to adapt to the business. Contract of Employment is a legal agreement between the employer and the employee, which lists the rights and responsibilities of workers. It includes: 🡺 Name of the employer and employee. 🡺 Job title. 🡺 When payment is made. 🡺 Working hours. © r/IGCSE Resources 2024 EMPLOYMENT: There are two types of employment contracts: 🡺 Part-time is between 1 and 30-35 hours a week. 🡺 Full-time is 35 hours or more a week. ADVANTAGES OF PART-TIME DISADVANTAGES OF PART-TIME More flexible hours of work. Difficult communication when unavailable Less expensive Less likely to be promoted Can ask to work during busy times. Unlikely to be trained due to temporary job ADVANTAGES OF FULL-TIME DISADVANTAGES OF FULL-TIME More promotion opportunities. Expensive to recruit. Easy to communicate with. Unwilling to work during busy times. Is trained for effective productivity. Less flexible hours of work. TRAINING: Is important as it improves the workers skills and knowledge and helps the business to be more efficient and productive. It increases chances of promotion. There are three types: 🡺 Induction Training: an introduction given to a new employee explaining the firms’ activities, customs and procedures. ADVANTAGES DISADVANTAGES Helps settle into their job quickly. Time-consuming. Less likely to make mistakes. Wages are paid even though no work is done. Delays start time of employees. 🡺 On-the-job training: Is by watching a more experienced worker doing the job. ADVANTAGES DISADVANTAGES Ensures some productivity is done. Bad habits may be picked up. Costs less than off-the-job. Trainer won’t be as productive as some time is spent teaching. Training to specific needs of the business. May not be a recognisable way of training. 🡺 Off-the-job training: Is training away from the workplace. ADVANTAGES DISADVANTAGES Broad range of skills can be taught. Costs are high. Employees may be multi-tasked and Wages are paid even though no work is suitable to do various jobs in the company done. when the need arises. Workers may leave the job after the qualification is acquired. © r/IGCSE Resources 2024 WORKFORCE PLANNING: The establishment of the workforce needed by the business for the foreseeable future. Workforce may be downsized because of: 🡺 Automation. 🡺 Relocation. 🡺 Falling demand. 🡺 Jobs are no longer needed. There are two ways of downsizing: 🡺 Dismissal is when a worker is told to leave due to unsatisfactory behaviour or work. 🡺 Redundancy is when an employee is no longer needed and loses their work. It is not their fault and may be given money as compensation. Workers could also leave by resigning or retiring. LEGAL CONTROLS OVER EMPLOYMENT ISSUES: Governments have introduced many laws to protect and ensure equal treatment between employees. These include: 🡺 Protection against unfair discrimination. 🡺 Health and safety. Protection from dangerous machinery and ensuring hygiene conditions. 🡺 Against unfair dismissal. 🡺 Wage protection. A legal minimum wage must be paid. However, costs may rise and workers will be made redundant which causes a rise in unemployment. An industrial tribunal is a legal meeting which considers workers complaints of unfair dismissal or discrimination. This hears both sides of the case and may give the worker compensation if the dismissal was unfair. EFFECTIVE COMMUNICATION: Communication is the transfer of a message from the sender to the receiver. Internal communication is between two members of the same organisation. External communication is between the organisation and other organisations or individuals. Effective communication involves: 🡺 A transmitter/sender of the message. 🡺 A medium e.g. letter, telephone or text message. 🡺 A receiver of the message. 🡺 A feedback/response to confirm the message has been received and acknowledged. One-way communication: Involves a message which does not require feedback. Two-way communication: When the receiver gives a response to the message received. It ensures the receiver has understood the message and acted upon it. It involves a sense of © r/IGCSE Resources 2024 belonging, which could motivate employees. Downward communication: Messages from managers to subordinates. Top to bottom. Upward communication: Messages/feedback from subordinates to managers. Bottom to top. Horizontal communication: Occurs between people on the same level of an organization structure. COMMUNICATION METHODS: 🡺 Verbal includes telephone conversation, face-to-face conversation or a video meeting. ADVANTAGES DISADVANTAGES Quick and efficient. Discussions may occur which can waste time. Immediate feedback. Not guaranteed that everyone is listening or the message is understood. Speaker can reinforce the message to No written record to be kept later. influence the listeners (Body language etc..) 🡺 Written includes letters, memos or text-messages. ADVANTAGES DISADVANTAGES Evidence for later reference. Direct feedback may not be possible. Is detailed. Language could be difficult to understand. Can be copied and sent to many people. Cannot ensure message has been received and acknowledged. 🡺 Visual includes diagrams, charts or videos. ADVANTAGES DISADVANTAGES Can be appealing and attractive. No feedback. Can be used along written materials. May not be understood properly FACTORS THAT AFFECT COMMUNICATION METHODS: 🡺 Speed: If the receiver has to get the information quickly, then a telephone call would be used. Otherwise, an email would be more appropriate. 🡺 Cost: If the company wants to keep costs low, then letters may be used. Otherwise, posters could be used. 🡺 Importance of written record: If the message contains details that need to have a written record like receipts, a written method is used. 🡺 Importance of feedback: If feedback is important, then a verbal or written method would be used. 🡺 Message detail: If the message is very detailed, then written and visual methods will be used. © r/IGCSE Resources 2024  🡺 Formal communication: Messages are sent using professional language. Informal communication: Messages are sent with the use of everyday language. COMMUNICATION BARRIERS: Are factors that stop effective communication. © r/IGCSE Resources 2024 SECTION 3: MARKETING © r/IGCSE Resources 2024 MARKETING: Is the management process responsible for identifying, satisfying and anticipating consumers’ requirements. Marketing ensures to help: ⮚ Identify Customer Needs ⮚ Satisfy Customer Needs ⮚ Maintain Customer Loyalty ⮚ Gain information on Customers ⮚ Anticipate changes in Customer Needs Marketing objectives ensure: ⮚ Raise awareness of their product ⮚ Increase sales and revenue ⮚ Increase market share ⮚ Enter new markets ⮚ Improve existing products Customer spending patterns may change due to change in: ⮚ Tastes and preferences ⮚ Technology (Outdated products become no longer wanted) ⮚ Income ⮚ Ageing population Markets have become more competitive due to: ⮚ Globalization ⮚ Improvement in transportation ⮚ E-Commerce/Internet Businesses can respond to change in spending patterns by: ⮚ Maintaining good customer relationships ⮚ Keep improving existing products ⮚ Introduce new products ⮚ Keep costs low © r/IGCSE Resources 2024 NICHE MARKET: A smaller segment of a large market which is tailored/specialised to a specific target audience. ADVANTAGES DISADVANTAGES Can focus on customers easier. Lack of economies of scale. If competition is low, products can be sold Over-dependence can occur. If product is at a high price. falling, business can fail Firms can thrive in niche markets. Little profit due to small customers MASS MARKET: Product is sold to the whole market, with no specific target audience. ADVANTAGES DISADVANTAGES Large number of Sales. More competition. More opportunities for Growth. Prices might be low due to elasticity of the product available. Can benefit from economies of scale Difficult to survive if new. (Purchasing). MARKET SEGMENTATION: The process of dividing the market into groups/segments based on characteristics. Age, Location, Gender, Income etc…. ADVANTAGES: ⮚ Increased opportunities of sales ⮚ Cost-effective as you are focusing on a specific group PRODUCT-ORIENTED BUSINESS: Firms produce the product first then try to find a market for it. They focus on the quality and price of the product. MARKET-ORIENTATED BUSINESS: Firm will conduct market research to see what consumers want and then produce the food. They set a marketing budget. MARKET RESEARCH: The process of collecting, analysing and interpreting information about a market or product. Market Research is needed because: ⮚ To know if the product will sell successfully ⮚ To know how to price the product ⮚ To know if the product will profit Market Research can be Quantitative, Numerical-Deals with Percentage, or Qualitative, Opinion/Judgement. © r/IGCSE Resources 2024  PRIMARY MARKET RESEARCH: The collection of original data which deals with directly collecting it from existing or potential customers. It is first-hand. METHOD DEFINITION ADVANTAGES DISADVANTAGES People are selected ⮚ Everyone has an ⮚ Unclear answers Random Sample randomly for research. even chance of may be given. being chosen. People are selected on ⮚ More accurate ⮚ Questions may a basis of certain information may be unclear if not Quota Sample characteristics. be given. detailed enough. Are means of ⮚ Detailed ⮚ Unclear collecting data information can questions can face-to-face or by be collected. lead to Online Surveys. ⮚ Online Surveys unreliable Questionnaires are cheap answers. ⮚ Customers ⮚ Time-Consumin opinion can be g collected ⮚ Expensive Ready-made questions ⮚ Explanation can ⮚ Interviewer which are prepared for be provided. could force the an interviewee. ⮚ Body language interviewee to and detailed answer in a Interviews responses can specific way. allow an ⮚ Time-Consumin accurate g. conclusion to be ⮚ Expensive. formed. A group of people who ⮚ Detailed ⮚ Time-Consumin are representative of information g. the target market who provided. ⮚ Expensive. Focus Groups agree to provide ⮚ Opinions can be information about the influenced by product. others in the group. Can take the form of ⮚ Inexpensive. ⮚ Basic figures, recording, watching or meaning Observations auditing. information not detailed enough. © r/IGCSE Resources 2024 SECONDARY MARKET RESEARCH: Data that has already been made available by others. Second-hand. INTERNAL SOURCES: ⮚ Sales Department ⮚ Finance Department ⮚ Customer Service Department EXTERNAL SOURCES: ⮚ Government Statistics ⮚ Newspapers ⮚ Market research agencies ⮚ Internet Data can be presented by: ⮚ Tally Tables ⮚ Charts ⮚ Graphs MARKETING MIX: Refers to the different elements involved in the marketing of a good or service. It involves the 4 P’s PRODUCT:- Product is the good or service being produced and sold in the market. These include: ⮚ Consumer Goods ⮚ Consumer Services ⮚ Producer Goods ⮚ Produces Services A successful product: ⮚ Satisfies the needs and wants of the customers. ⮚ Stands out. ⮚ Reasonably priced. BRAND IMAGE: An identity given to a product that differentiates it from competitors products. BRAND LOYALTY: Is when customers keep buying the same brand continuously instead of switching over to competitors’ products. IMPORTANCE OF BRAND IMAGE: ⮚ Helps Customers recognize firm’s products easier ⮚ Easier to launch if Brand Image is well-known ⮚ Can charge higher if Brand Image is well-known © r/IGCSE Resources 2024  ⮚ The development of a Product: ⮚ Generate Ideas ⮚ Select best Ideas ⮚ Decide if firm will sell enough products for it to be a success ⮚ Develop a Prototype ⮚ Test Launch ⮚ Launch Product if successful ADVANTAGES DISADVANTAGES Increases potential for sales Market Research is Expensive and Time-Consuming Creates USP as an innovative product has Investments can be expensive. been introduced. Reduces risks due to market research Importance of Packaging: ⮚ Protects the product ⮚ Provide information about the product ⮚ Helps customers recognize the product from the Brand Logo and Name. Product Life Cycle: DEVELOPMENT 🡪 INTRODUCTION 🡪 GROWTH 🡪 MATURITY 🡪 SATURATION 🡪 DECLINE © r/IGCSE Resources 2024 EXTENSION STRATEGIES: Techniques used to keep products in the market. ⮚ Enter New Markets ⮚ Increase Advertising ⮚ Redesign Product ⮚ Introduce Improved Version PRICE:- Price is the amount of money producers are willing to sell and the amount of money the consumers are willing to spend to buy. © r/IGCSE Resources 2024  METHOD DEFINITION ADVANTAGES DISADVANTAGES Cost-Plus Is the manufacturing ⮚ Quick to find the ⮚ Price may still be cost plus a profit price of the higher than mark-up. product. competitors. ⮚ Price covers all costs. Price is set lower than ⮚ Attracts ⮚ Low revenue competitors’ price to customers ⮚ Long time to enter new markets. quicker. recover Penetration ⮚ Increases market development share quicker. costs. Price is set high for a ⮚ Profit earned is May backfire if new product on the high. competitors use market. ⮚ Helps competitive pricing. Price Skimming compensate for costs to develop and produce the product. When the product is ⮚ Business can ⮚ Other methods priced in line or just compete with of sales need to Competitive below competitors other be found. prices. businesses. ⮚ Sales can increase. Dynamic Price depends on demands and external factors. Product is sold at a low ⮚ Helps remove ⮚ Revenue is price for a short period unwanted lower. of time. inventory. ⮚ Low profit. Promotional ⮚ Can increase sales and market share for a short period of time. The price is set to ⮚ Can provide an ⮚ The competitors attract the customers' image of may do the attention and high-quality. same, so the Psychological manipulate them. ⮚ May make effect is Below the whole consumers think reduced. number usually. product cheaper © r/IGCSE Resources 2024  PRICE ELASTIC: The product has many alternatives. ⮚ Chocolate ⮚ Cars ⮚ Groceries PRICE INELASTIC: The product has no alternatives. ⮚ Electricity ⮚ Petrol ⮚ Oil Distribution Explanation Advantages Disadvantages Channel The product is sold to ⮚ All profit is ⮚ High Delivery the consumer straight earned by the Costs. Manufacturer to from the manufacturer. producer. ⮚ All storage must Consumer ⮚ Quickest be paid by the method. producer. The manufacturer will ⮚ The cost of ⮚ The retailer sell its products to a holding the takes some of retailer who will hold inventories is the profit. Manufacturer to large stocks to sell to paid by the ⮚ The producer Retailer to the consumer. retailer. must pay for the Consumer ⮚ Retailers are delivery costs of conveniently the products to located for the retailer. consumers. The manufacturer will ⮚ Wholesalers will ⮚ An extra sell its products in bulk advertise and middleman is Manufacturer to to the wholesaler and promote the added so more Wholesaler to the retailer will buy in product to profit is taken Retailer to small quantities from retailers. away. Consumer the wholesaler which ⮚ Wholesalers will ⮚ The producer would then be sold to pay for transport loses more the consumer. and storage control of the costs. marketing mix for the product. Manufacturer to The manufacturer will ⮚ The agent has ⮚ Another sell their products to specialised middleman is Agent to an agent who knowledge of added so more Wholesaler to specialises in foreign the market. profit is taken Retailer to markets. The Agent away. Consumer will know the best wholesalers to sell to. © r/IGCSE Resources 2024 The factors that affect place decisions: ⮚ The Type of product it is. ⮚ The Location of the customer. ⮚ Where competitors are located. ⮚ How often is the product purchased? PROMOTION:- Promotions are activities used to communicate with customers and potential customers to inform and persuade them to buy a product. Advertising can be Informative or Persuasive. INFORMATIVE: Where emphasis on advertising is to give full information of the product. PERSUASIVE: Where emphasis on advertising is to persuade the consumer how much they really need the product. Types of Promotion: ADVERTISING: Paid-for communication with consumer. ⮚ Television ⮚ Radio ⮚ Newspapers ⮚ Magazines ⮚ Billboards ⮚ Flyers SALES-PROMOTION: Using techniques to help gain sales. ⮚ BOGOF ⮚ After-Sales Service ⮚ Competition ⮚ Point-Of-Sale Displays ⮚ Free Samples The factors that affect promotional decisions: ⮚ Stage of product on the PLC ⮚ Nature of product ⮚ Nature of Target Market ⮚ Cost-effectiveness Technology is mainly used nowadays in the marketing mix. E-Commerce is the use of the internet to sell and market goods online. This includes online shopping, online banking etc… ADVANTAGES DISADVANTAGES Cheaper in the long-run. Increased Competition Sell products to a large customer base. No personal Communication. Globalisation brings more profit. Online Security Issues. © r/IGCSE Resources 2024 MARKETING STRATEGY: A plan that combines the four elements of the marketing mix to achieve marketing objectives and profits. Legal Controls on Marketing: ⮚ Protect consumers from being sold faulty and dangerous goods. ⮚ Protect consumers from being exploited/monopolised. ⮚ Prevent firms from using misleading information in advertising. Businesses globalize to: ⮚ Increase Sales, Revenue and Profits. ⮚ Increase Potential Customers. ⮚ Cheaper raw materials may be available. ⮚ Cheaper export. Problems when entering foreign markets: ⮚ Difference in language and culture. ⮚ Lack of market knowledge. ⮚ Economic Differences. ⮚ High Transport Costs. These problems can be overcome by joint ventures. © r/IGCSE Resources 2024  SECTION 4: OPERATIONS MANAGEMENT © r/IGCSE Resources 2024 PRODUCTION: Effective management of resources in producing goods and services. This is by combining the factors of production. The Operation Department overlooks the production process. They must: Use resources in a cost-effective manner. Manage inventory effectively. Produce required output to meet customer demands. Meet quality standards expected by customers. PRODUCTIVITY: The measure of efficiency of a business. It is the output measured against the inputs. Businesses often measure labour productivity to see how efficient their employees are. Productivity can be increased by: Improve skills by training Introduce automation Improve motivation BUFFER INVENTORY LEVEL: The level of inventory the business should hold in case of high demand. © r/IGCSE Resources 2024 LEAN PRODUCTION: Techniques businesses adopt to reduce wastage and increase efficiency/productivity. ⮚ Overproduction: Producing too many goods so high inventory costs. ⮚ Waiting: When goods are not being moved or processed. ⮚ Transportation: Moving goods around unnecessarily, which can cause damage. ⮚ Unnecessary Inventory: Too much inventory takes up valuable space. ⮚ Motion: Unnecessary moving of employees. ⮚ Over-processing: Using complex machinery to perform simple tasks. ⮚ Defects: Any fault in equipment is a waste of time, effort and time. By avoiding these wastes, Businesses can: ⮚ Lower costs ⮚ Quicker production ⮚ Less inventory storage The 3 types of Lean Production: KAIZEN: Japanese term meaning ‘continuous improvement’. It aims to increase efficiency by getting workers to get together and discuss problems and solutions. It is done by rearranging machinery and equipment so that production can flow smoothly. ⮚ Increased Productivity ⮚ Reduces amount of space needed ⮚ Improved factory layout may lead to other jobs available. JIT(JUST IN TIME): Technique used to eliminate the need to hold any inventory by ensuring supplies arrive just in time they are needed for production. ⮚ Warehouse space not needed. ⮚ Cash flows quickly as goods are immediately sold off. CELL PRODUCTION: Production line is divided into separate units each making a part of a finished good. ⮚ Increases worker morale. ⮚ Increases collaborative skills. © r/IGCSE Resources 2024 Methods of Production: Job Production: Products that are tailored for each customer. Wedding Cakes, Suits etc.. ADVANTAGES DISADVANTAGES Product meets exact requirements. High costs as they are labour intensive. Varied jobs increased morale. Production takes time. Flexible method of production. Materials may have to be specially purchased, which is expensive. Batch Production: A small quantity of a product is made, then a small quantity of another. Cookies etc… ADVANTAGES DISADVANTAGES Variety to workers. Expensive since goods need to be moved around. More consumer choice. Machines have to reset which delays production. Other products can be made if machinery Lots of raw material required. breaks down. Flow Production: Large quantities of products are produced in a continuous process. Soft drinks etc… ADVANTAGES DISADVANTAGES Costs are low. Lots of raw materials required. 24 x 7 production. If machinery breaks down, production is affected. Goods are produced quickly. Capital cost is high. Technology: ADVANTAGES DISADVANTAGES Greater productivity. Unemployment rises. Greater job satisfaction. Expensive to set up. Better quality products. Employees need time to adjust to new technology. FIXED COSTS: Do not vary with output and are incurred. They do not change. Rent, Wages, Bills. © r/IGCSE Resources 2024 VARIABLE COST: Directly vary with output. They can change. Groceries, Raw materials. TOTAL COST: Is the fixed cost plus the variable cost. It is the amount of money spent for a specific amount of production. AVERAGE COST: The cost of production per unit. Total Cost/Total Output. ECONOMIES OF SCALE: Factors that reduce the Average Cost as a business increase in size. Purchasing: A large number of items can be bought in bulk, which could lead to cheaper prices. Marketing: Affording vehicles that can advertise the product. Financial: Banks are more willing to lend loans to large businesses as they can pay it back. Managerial: Appointing specialist managers who are efficient and make cost-effective decisions. Technical: Large machinery can be used to increase output. DISECONOMIES OF SCALE: Factors that increase the Average Cost as a business increase in size. Low Morale: Little communication with seniors can lead to workers feeling unimportant. Poor Communication: A large business may have their messages distorted as it is passed down. Slow-Decision Making: A large business needs all employees available in order to decide. BREAK-EVEN LEVEL OF OUTPUT: When the total revenue equals the total cost and no profit or loss is made. MARGIN OF SAFETY: Is the amount that sales can fall before the break-even point is reached and the business makes no profit. It is the Actual Sales – Break Even. Break Even Charts: ADVANTAGES DISADVANTAGES Profit can be found out. It is based on assumptions that all units are sold. Change in costs can be made and the graph Fixed costs may not always be fixed if scale can be redrawn to see how it affects the of production changes. profit or loss. The safety margin can be calculated. It is assumed that the graph is linear and directly proportional. QUALITY: Is a good or service which meets the customers’ expectations. It should be free of faults or defects. Quality is important as it: ⮚ Establishes Brand Image © r/IGCSE Resources 2024  ⮚ Build Brand Loyalty ⮚ Good Reputation ⮚ Increase in Sales QUALITY CONTROL: Quality is checked at the end of the production process. ADVANTAGES DISADVANTAGES Customer Satisfaction as faults are Expensive to hire employees to check for detected. quality. Not much training. It doesn’t find out the reason. Product has to be replaced and reworked, which costs time and money QUALITY ASSURANCE: Checking for quality throughout the production process. ADVANTAGES DISADVANTAGES Customer Satisfaction as faults are Expensive to hire employees to check for detected. quality. Products don’t have to be scrapped, so they The employees may not follow the quality are less expensive. standards if there is no motivation. Faults and errors are easily identified. TOTAL QUALITY MANAGEMENT: Continuous improvement by checking the quality through each stage of production. ADVANTAGES DISADVANTAGES Customer Satisfaction as faults are Expensive to hire employees to check for detected. quality. No customer complaints The employees may not follow the quality standards if there is no motivation. Products don’t have to be scrapped. Customers can check for quality by looking for a quality mark such as ISO. For services, it is by good reputation or reviews. FACTORS THAT AFFECT LOCATION DECISIONS FOR MANUFACTURING: ⮚ Raw Material: They have to be situated close to raw materials, especially if they are processed while fresh to prevent defects. ⮚ Transport: Factories need to be located near areas with good roads/rails so export is easier. ⮚ Availability of Labour: Business needs to be situated in areas where skilled workers © r/IGCSE Resources 2024  are available. FACTORS THAT AFFECT LOCATION DECISIONS FOR SERVICE: ⮚ Customers: They need to have direct contact with them and be accessible. ⮚ Availability of Labour: Business needs to be situated in areas where certain types of workers can be found ⮚ Climate: Tourism services need to be located in a place with a good climate. FACTORS THAT AFFECT LOCATION DECISIONS FOR RETAIL: ⮚ Shoppers: Need to be located near areas where shoppers are frequent. ⮚ Parking Availability: If more parking is available, more customers will visit. ⮚ Security: High rates of crimes and thefts may occur if poor security is available. Business relocates to different countries because: ⮚ Rent/Taxes are lower ⮚ Cheaper raw materials might be available. ⮚ Avoid trade barriers and tariffs when exporting goods. Role of Legal Controls: Government influence location decisions: ⮚ To encourage businesses to set up and expand in high areas of under-development and unemployment. This is done by grants and subsidies. ⮚ To discourage firms from setting up in areas that are crowded or have natural beauty. This is by planning restrictions. © r/IGCSE Resources 2024  SECTION 5: FINANCIAL INFORMATION AND DECISIONS © r/IGCSE Resources 2024 FINANCE: The money required in the business. It is needed to set up the business, expand it and increase working capital. START-UP CAPITAL: The initial capital used to buy assets before trading commences. WORKING CAPITAL: The finance needed by the business to pay its day-to-day running expenses. CAPITAL EXPENDITURE: The money spent on fixed assets that will last more than a year. These are long-term capital needs. REVENUE EXPENDITURE: The money spent day-to-day on short-term assets. INTERNAL SOURCES MEANING ADVANTAGES DISADVANTAGES OF FINANCE Retained Profit. The profit kept in the Does not Profit may business that can be have to be be too low. re-invested after repaid. More profit owners have been No interest used as given their share of to be paid capital will profit reduce owners' share so they may be hesitant. A new business will not have retained profit. Sales of Assets. The selling of assets Is not debt Time costing that are no longer for the and needed to gain business. expected finance. Makes amount may better use not be of capital gained tied up. New businesses may not be able to sell assets © r/IGCSE Resources 2024  Sales of Sell finished or Reduces If too much inventories. unwanted goods in cost of is sold, when inventory. inventory unexpected holding demand comes they cannot be all fulfilled. Owner’s Savings. For a sole trader and Available to Increased partnership, any the firm risk by the finance the owner quickly. owner. invests from his No interest savings. to be paid. EXTERNAL MEANING ADVANTAGES DISADVANTAGES SOURCES OF FINANCE Issue of Share Selling of shares in No interest Dividends have limited companies Permanent to be paid. only. source of Too many capital shares sold can make the business lose control. Bank Loans Money borrowed Quick to Need to pay from banks. borrow. interest Can be for regularly. a very long It has to be time. repaid. Low Need to give interest for bank collateral large security. companies. Debenture Issues Long-term loan Can be Interest has to certificates issued by used to be paid and companies that raise repaid people buy and repay money for soon with interest. very long-term finance. Debt Factoring Special agents that Immediate Debt factor will collect debt from cash get a percent of debtors available. the debts Business collected. © r/IGCSE Resources 2024  doesn’t have to manage it. Grants and Subsidies Government or other Doesn’t There are agencies that can have to be certain give a business a repaid. conditions to grant or subsidy. be fulfilled such as locating in a particular area. Microfinance Financially lacking Guaranteed Money may not people get small way of new be enough to sums of money. business to start a earn business. money Crowdfunding Asking for small funds Voluntary; People may be from a large pool of don’t have hesitant/unsure people. to be if their business repaid or plan isn’t paid a convincing. dividend. SHORT-TERM MEANING ADVANTAGES DISADVANTAGES FINANCE Overdrafts Similar to loans, but Flexible form Interest rates banks can spend of borrowing vary and are more than what is in money. not fixed. their bank. Interest has to Banks can ask be paid only for overdraft on the to be paid amount sooner than overdrawn. expected. Cheaper than loans in the long-term. Trade Credits Delaying paying No interest or If payments suppliers for some repayments are delayed time to improve cash involved. for a long position. period of time, suppliers © r/IGCSE Resources 2024  may refuse to give discounts or refuse to supply at all. Debt Factoring SEE ABOVE LONG-TERM MEANING ADVANTAGES DISADVANTAGES FINANCE Loans Debentures Issue of Shares SEE ABOVE Hire Purchase Allowing the Firm doesn’t A cash deposit business to buy a need a large has to be paid. fixed asset and pay sum of cash to Large interest for it monthly that acquire the charges may includes interest. asset. be present. Leasing Allows the business Firm doesn’t Total cost for to use an asset need a large leasing the without purchasing sum of money asset may end it. Monthly to use the up more than payments are made asset. the cost of and at the end of the Care and purchasing leasing period, the maintenance the asset. business can decide taken care by if they will buy the the leasing asset or not. company. SHORT-TERM FINANCE: Provides the working capital needed for the business. LONG-TERM FINANCE: Finance available for more than a year. INTERNAL SOURCES OF FINANCE: Obtained from within the business. EXTERNAL SOURCES OF FINANCE: Obtained from external sources outside of the business. Factors that affect choice of source of finance: PURPOSE: If fixed assets are to be bought, then leasing or hire purchase is suitable. If finance is needed to pay off expenses, then overdrafts or debt factoring will be used. TIME-PERIOD: Long-term or short-term? AMOUNT NEEDED: How much money is required? LEGAL FORM AND SIZE: Issue of shares are for limited companies only. RISK-GEARING: If the business already has loans, then borrowing more capital can increase © r/IGCSE Resources 2024 risks as more interest rates are to be paid. Why may shareholders invest? Share price is increasing which indicates good performance. If dividends are profits are high. If the company has a good reputation and future growth plans. Why banks may lend finance: If cash flow shows how the finance will be used clearly. An income statement and the forecast income statement to show business profits. A business plan clearly explained and presented. Evidence of collateral security available. Cash is important as workers, suppliers, landlords and governments need to be paid. The business could go into liquidation which is selling everything it owns to pay debts. CASH FLOW: Cash flow of a business is its cash inflows and cash outflows over a period of time, usually monthly. CASH INFLOWS: The sums of money received by the business over a period of time: Sales revenue. Payment from debtors. Money borrowed from external sources. Investments. CASH OUTFLOWS: The sum of money paid out by the business over a period of time: Purchasing goods and materials Paying wages and other expenses. Purchasing fixed assets. Repaying loans. The cash flow cycle: 1) The business needs cash to pay for expenses such as raw materials, wages and rent. 2) To gain the cash, goods/services are produced and sold. 3) Cash is received for the goods/services sold and the expenses are paid for. CASH FLOW AND PROFIT ARE NOT THE SAME!!! Profit is defined as the revenue after expenses have been paid, while cash flow is cash that flows in and out of the business. Profit indicates the major indicator of the business success, where cash is needed to keep and operate the business successfully. Profit is the payments received or paid or not yet received while cash flow considers elements paid by cash only. Cash flow forecast is an estimate of future cash inflows and outflows. This helps the manager: Tell how much cash is available for paying expenses. © r/IGCSE Resources 2024  Tell How much cash the bank will need to lend to the business. Tell whether the business has too much cash that can be put to a profitable use. The opening cash/bank balance is the amount of cash held by the business at the start of the month. Net Cash Flow = Total Cash Inflow – Total Cash Outflow. The closing bank balance of a month is the opening balance of the next month. The closing balance is the Opening Balance + Net Cash Flow. Net Cash Flow is the Cash Inflow – Cash Outflow. Figures that are negative are placed in between brackets. Forecasted cash flow may change because of external events such as: Increased interest rates, which causes more cash outflow. Weather, which will change the number of goods sold to the customer. Inflation, which increases costs of goods which reduces customers. Competition, which attracts customers away. Cash Flow are used: When setting up a business so managers can know how much cash is required to set up such as rent, wages and advertising etc… Required by bank managers when applying for a loan, so the bank will decide on a suitable amount to lend and when it needs to be paid back. Managing cash flow, such as if a negative value is given. The business can then plan ahead and apply for an overdraft to avoid a negative balance. If too much cash is © r/IGCSE Resources 2024  available, loans may be paid off as well as suppliers to maintain a healthy relationship. How to overcome cash flow problems: Increase bank loans, even though interest payments have to be paid. Delay payment to suppliers which decreases cash outflow. However, this can affect the relationship. Ask debtors to pay more quickly, which increases cash inflow. The debts include credit customers who will be asked to pay by cash on the spot rather than credit sales. Delay purchases of capital equipment, which reduces cash outflow significantly. However, efficiency is lost as old technology is used rather than new. In the long-term, to improve cash flow, the business needs to: Attract more investors. Cut costs by increasing efficiency. Develop more products. Working capital is all the liquid assets of the business that can be quickly converted to cash to pay off short-term day-to-day expenses such as debts. It can be in the form of: Cash needed to pay expenses. Cash due from debtors, which is when they are asked to pay quickly. Cash in the form of inventory, which is when finished goods are quickly sold to reduce high inventory costs/storage. Accounts are the financial records of a firm’s transactions. Final Accounts are prepared at the end of the financial year and give details of the profit or loss made. Profit = Sales Revenue – Total Cost When the total costs exceed the sales revenue, a loss is made. To increase profit: Increase sales revenue. Cut costs. Profit is important to a business because: It is a reward for the enterprise. Entrepreneurs start a business to make a profit. It is a reward for risk-taking. Entrepreneurs take considerable risks when investing capital and profits are compensation/reward to them for taking these risks. It is a source of finance. After payments to owners, the money left is retained profit which can be reinvested back into the business. It is an indicator of success. More profits indicate to investors that the business is worth their time and money, making them more likely to invest. In social enterprises, profit Is not the main objective. However, they will still try to make © r/IGCSE Resources 2024 some profit to reinvest into the business to help it grow. Income statements is a financial document of the business that records all income generated by the business as well as the costs over the financial year. It is also known as a profit and loss account. Gross Profit = Sales – Cost of Sales 🡪Cost of Sales = Total Variable cost of Production + (Opening inventory of finished goods – Closing inventory of finished goods). Net Profit = Gross Profit – Overhead Expenses. 🡪Overhead expenses are all the fixed costs. Profit after Tax = Net Profit – Tax Retained Profit = Profit after Tax – Dividends. 🡪Dividends are a share of profit given to shareholders Income Statements are used to: Know profit/loss made by the business. Compare performance with previous years and with competitors. If profit is lower, they can find why it fell and how to correct the issue. If it’s lower than competitors, they can find out how to be more profitable and competitive. Know profitability of products by preparing separate income statements for each product. They can then stop manufacturing products that are making little to no profit. Help decide which products to launch by preparing forecast income statements. Whichever product has a higher forecast will be chosen. Balance sheets along with income statements (Also known as the Statement of Financial Position) are prepared at the end of the financial year. They show the: Value of the Business. Assets and Liabilities of the business. © r/IGCSE Resources 2024 Assets are items that are owned by the business. Fixed/Non-Current Assets: Assets that remain in the business for more than a year. Their value falls over time in a process called depreciation. E.g. Buildings, Vehicles, Equipment etc. Short-Term/Current Assets: Assets that are owned only for a very short time. E.g. Inventory and debts from customers. Intangible non-current assets are assets that cannot be touched or felt. They include copyrights and patents. Liabilities are debts owed by the business to its creditors. Non-Current Liabilities: Liabilities that do not have to be repaid within a year. E.g. loans, debentures etc. Current Liabilities: Liabilities that need to be repaid within a year. E.g. overdrafts, trade payables etc… CURRENT ASSETS – CURRENT LIABILITIES = WORKING CAPITAL Shareholders’ Equity: The total amount of money invested in the company by shareholders. This includes the share capital and reserves. Shareholders can see if their stake in the business has risen or fallen by looking at the total equity. © r/IGCSE Resources 2024 SHAREHOLDERS EQUITY = TOTAL ASSETS – TOTAL LIABILITIES TOTAL ASSETS = TOTAL LIABILITIES + SHAREHOLDERS EQUITY CAPITAL EMPLOYED = SHAREHOLDERS EQUITY + NON-CURRENT LIABILITIES. Uses of Statements of Financial Positions: To check if the business is liquid. This is done by comparing current assets with current liabilities. Debt-equity ratio. This is comparing the total liabilities to the total assets. To see if the firm will be able to pay back its debt. This is done using the Debt-Equity Ratio. Investors can check if the dividends paid to them are suitable. Any assets that can be potentially sold off can be checked. Profitability Ratios: Profitability is the ability of a company to use its resources to generate revenues in excess of its expenses. These ratios are used to see how profitable the business has been in the year. 1) ROCE: Return on Capital employed calculates the net profit earned on each unit of capital employed. The higher the ROCE, the better. Formula is: 2) GROSS PROFIT MARGIN: This calculates the percentage of gross profit made on each unit of sales revenue. The higher the GPM, the better. If this increases this means that Prices have increased and cost of goods have decreased. Formula is: 3) NET PROFIT MARGIN: This calculates the net profit generated on each unit of sales revenue. The higher the NPM, the better. If this increases, this means the gross profit increased and overhead expenses decreased. Formula is: © r/IGCSE Resources 2024 Liquidity ratios: Liquidity is the ability of the company to pay back its short-term debts. If the working capital is low, it will go illiquid meaning it will be forced to sell assets. 1) CURRENT RATIO: The ratio that calculates the proportion of current assets to every current liability. A value above 1 is good, with 1.5-2 being ideal. The higher the better but too high indicates that too much money is invested in assets which is risk. A number lower than 1 means the business has cash flow problems Formula is: 2) ACID TEST RATIO/LIQUID RATIO: This ratio doesn’t consider inventories to be a liquid asset as it takes time to convert it to cash. A high inventory can cause a big difference between current and liquid ratio. A value of 1 means the company is just able to pay off their short-term debts. A value below 1 means the managers have to take action as this is worrying, such as reducing the level of inventories. Formula is: Uses and users of accounts: MANAGERS: 🡪Use them to help them keep control over the performance of each product since they can see which product is profitably performing. 🡪Better decisions can be made, such as cutting expenses. 🡪Ratios can be compared with other firms, to ensure they are still in the market and are doing better than rivals. SHAREHOLDERS: 🡪It is a legal requirement that they be presented with the financial account of the company. 🡪Helps them decide whether they should invest by buying shares. Higher profitability means higher dividends. 🡪Ratios can be compared with other companies and the highest ratio is the company they will invest in. CREDITORS: 🡪The position and debts of the business can be determined. They will be ready to supply the business if they will be able to pay them. © r/IGCSE Resources 2024 🡪If there are liquidity problems, they will be hesitant to supply them. WORKERS AND TRADE UNIONS: 🡪Helps them see if the business is secure, by checking if workers will lose their jobs or not. BANKS: 🡪They will look at how risk it is to lend to a business. They’ll only lend to profitable and liquid firms. GOVERNMENTS: 🡪Helps determine a fixed tax rate and to see if the business is profitable and liquid to continue operating which will ensure job security. OTHER BUSINESS IDEAS: 🡪Helps them compare performance and decide on takeovers. Limitations of using accounts and ratio analysis: Ratios are based on old data, meaning the forecasts may not be accurate. External users may not get the full-picture about the business as managers only publish required documents. Some documents are kept within the business. Data compariso