Business Studies Notes PDF

Introduction: Business Studies - 7115 Mr. SAWDAGUR Devesh - 52547325 – 09/01/2022 1 G10/11 The Four assessment objectives in Cambridge O level Business Studies are: Assessment Obj...

Introduction: Business Studies - 7115 Mr. SAWDAGUR Devesh - 52547325 – 09/01/2022 1 G10/11 The Four assessment objectives in Cambridge O level Business Studies are: Assessment Objectives AO1 Knowledge and understanding AO2 Application AO3 Analysis AO4 Evaluation 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 2 Assessment Objective Weighting in Component % Weighting in O Level % Paper 1 Paper 2 AO1 Knowledge and understanding 50 30 40 AO2 Application 20 20 20 AO3 Analysis 20 30 25 AO4 Evaluation 10 20 15 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 3 INTERNATIONAL ACCOUNTING TERMINOLOGY International Usage (To be used) - Effective as from 2022) UK usage - (used by CIE before 2015 examination) Financial statements Final accounts Statement of financial position Balance sheet Intangible assets Goodwill etc. Non-current assets Fixed assets Investment property Investments Property Land and buildings Plant and Equipment Plant and equipment Current assets Current assets Inventory / Inventories(of raw materials and finished goods) Stock Work in progress Work in progress Trade receivables Debtors Other receivables Prepayments Cash Bank and cash Current liabilities Current liabilities / creditors: amount due within 12 months Accounts payables Creditors Bank overdrafts and loans/ - Interest bearing loans and borrowing Loans repayable within 12 months Other payables Accruals Capital or Equity / shareholders’ Equity Capital Share capital Share capital Non-current liability Long term liability Bank (and other) loans/ - Interest bearing loans and borrowing Loans repayable after 12 months Income statements Trading and profit and loss account Revenue Sales Ordinary goods purchased Purchases Cost of sales Cost of goods sold Gross profit Gross profit Other operating income Sundry income Other operating expenses Sundry expenses Operating profit Profit before interest and tax Finance costs Interest payables Finance income / investment revenues Interest receivables Profit for the year Profit after tax 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 Retained profit- F4+5 4 Retained earnings 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 5 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 6  CHAPTER: ONE 1. UNDERSTANDING BUSINESS ACTIVITY 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 7  1.1 BUSINESS ACTIVITY 1.1 Business 1.1.1 The purpose and nature of business activity: activity Concepts of needs, wants, scarcity and opportunity cost Importance of specialisation Purpose of business activity The concept of adding value and how added value can be increased 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 8  Introduction: Business What is a business? A concern / legal entity or undertaking formed by entrepreneur(s) (an individual, group, government) who combine factors of production to provide certain goods and/or services to satisfy human needs and wants for a reward which is usually profit. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 9 WHY DO PEOPLE SET UP BUSINESSES? 1. Fulfill personal ambition 2. Redistribute wealth (wealthy businesses in developing nations) 3. Provide a service to customers - previous bad experience. 4.To be self employed and also have an interesting job 5. For freedom of action 6. Provide career opportunities e.g. a team may set up a business - Cooperative / social enterprise / Government enterprises. 7. Exploit emerging opportunities- e.g. government business startup schemes. 8. Meet identified market needs and expectations. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 10  Importance of successful businesses: 1. Secure employment 2. Ensure competition and face globalisation 3. Create value to our resources 4. Increase our national output and contribute towards economic growth 5. Make our country popular which may attract further investment 6. Act as a major source of revenue for people and the government 7. Ensures efficient utilisation of unexploited or under exploited resources. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 11  AIM OF BUSINESS ACTIVITY To provide certain goods and/or services to satisfy human needs and wants. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 12  PROCESS OF BUSINESS ACTIVITY Human resource Provision for goods and Services Production FACTORS OF PRODUCTION FACTOR PAYMENT INPUT Land Rent Labour Wages Combine OUTPUT to satisfy HUMAN NEEDS Entrepreneurs Goods Interest &WANTS Capital & Services Profit/ Enterprise Dividends Finance Demand for goods and Services Marketing 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 13  Purpose/Importance Of Business Activity 1. Provide certain goods and/or services to satisfy needs and human wants. 2. Contribute towards economic prosperity 3. Provide employment opportunities 4. Raise standard of living /Gross domestic product 5. Makes a country popular which attracts further investment. 6. To add value to a country’s available scarce resources. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 14  Problems Of Business Activity: 1. Involve in unethical and non-ecological activities 2. May operate with high social costs -e.g. Pollution, deforestation, etc. 3. Profit motive often leads to worker and consumer exploitation 4. They may overexploit and deplete non-renewable natural resources 5. They cause harm to natural beauty and national heritage. 6. May encourage consumerism. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 15 1.1.1 The purpose and nature of business activity business Activity What is business activity? It is the combining factors of production to provide goods and/or services to satisfy human needs and wants for a reward. Key Terms: 1. Factors of production 2. Goods 3. Services 4. Human needs 5. Human wants 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 16  Resources = Factors of production It refers to the means/resources required to carry business activity. There are four main factors of production: 1. Land Includes all natural resources and gifts of nature like: Soil, Sun, Sand, Minerals, Forests, Rivers etc. 2. Labour Physical and mental effort exerted by a human being in the production of some goods and/or services. Also known as workforce, manpower, human resources. 3. Capital Includes all man made aids to production. i.e. All human inventions / creations. It includes finance, machines and equipment required to produce a certain product (goods or services). Includes intellectual capital (expertise that allows value creations). 4. Enterprise Innovative and risk taking skills of people who have the necessary skills to combine resources to provide a certain good and /or service. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 17 Importance of Each Factor of Production 1. Land To extract minerals, raw materials, to locate the business. 2. Labour To undertake production processes, to plan, organise, coordinate command, control business activities 3. Capital For factor payments, purchase machines and equipment and finance other activities of the business and intellectual capital to innovate and create value. 4. Enterprise  To combine factors and provide commodities.  To ensure efficient utilisation of unexploited and underexploited resources.  To encourage further investment  For value creation and socio-economic prosperity 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 18 What Is A Human Need? A need is a good or service that is essential for living. Basic necessities of life that are vital for human survival. It allows people at least a minimum standard of living. A good or service could be a need depending on individual circumstances Example: Food Shelter Clothing Sleep, Warmth, Fresh air, etc. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 19 What Is A Human Want? A good or service that people would like to have. A desire to have something that is not essential for living but if satisfied it usually improves the standard of living of people. Commodities that are luxurious and make life more comfortable. A want is not the same as demand. A want may not necessarily be backed by the ability to pay. Example: Luxurious car, World tour, Designer Clothing, Expensive jewellery etc. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 20 The Economic Problem - Scarcity “Human beings are in general expected to be greedy by nature, as soon as a want is satisfied another crops up and the human being therefore is always left with some wants that remain unsatisfied…” Paul Samuelson 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 21  Unlimited Wants > Means Or Resources» Scarcity - Human wants keep on growing / unlimited - Resources to produce such goods and services to satisfy those wants are limited - This gives rise to the basic economic problem, scarcity. - Some wants always remain unsatisfied Scarcity Means limited in supply relative to demand. It arises due to lack of sufficient goods and services to satisfy all human wants. Unlimited Wants + Limited means or resources (factors of production) = Scarcity 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 22 What to Do?- Choice An individual has to make choice amongst the unlimited wants to at least satisfy a want with his available / limited resources. He has to sacrifice other wants for the future. Unlimited Wants + Limited means = Scarcity= Choice 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 23  Opportunity Cost Whenever a choice is made, other alternatives in the priority list are sacrificed. Such sacrificed wants involves a cost. Opportunity cost is the next best alternative foregone. It is the next best choice or want that could have been satisfied with the same limited resources instead. Unlimited Wants + Limited means or resources = Scarcity = Choice = Opportunity Cost 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 24  Groups Affected By Economic Problem 1. Consumer 2. Producer 3. Government 4. Employees 5. Other stakeholders/groups 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 25  Groups Affected By Economic Problem 1.Consumer: Available Resources = $ 200 = Purchase DVD, Mobile phone, a play station, a holiday tour Unlimited wants ……..etc. in order of priority. * Assuming each want would cost him $ 200. (he cannot satisfy his unlimited wants) Limited resources = Only $ 200 (Cannot satisfy all his wants) Scarcity = Money (capital factor of production) Choice = Purchase Mobile phone Opportunity Cost = The next best alternative i.e. the play station he could have purchased with the same $ 200 instead. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 26 2. Producer : Available Resources = 1 ACRE OF LAND Unlimited wants = Grow vegetables, construct building, farming , rent, etc. In order of priority. Assuming each would require 1 acre of land. Limited resources = Only 1 acre of land (Cannot satisfy all his wants) Scarcity = Land *(Land- Factor of production) Choice = Construct building Opportunity Cost = The next best alternative i.e. farming which could have been done and benefits derived on the same plot of land instead. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 27 3. Government Available Resources = 500 labour units Unlimited wants = Construct a school, a hospital, a flyover, a dam…… etc. In order of priority Assuming each would require 500 labour units. Limited resources = Only 500 labour units (Cannot satisfy all his wants) Scarcity = Labour (Labour - factor of production) Choice = Construct school with 500 labour units. Opportunity Cost = The next best alternative i.e. the hospital that could have been constructed with the same 500 labour units instead. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 28  SPECIALISATION – e.g. DIVISION OF LABOUR Given the scarcity of resources , such need to be efficiently utilised. A way of specialisation includes division of labour. Emergence Due to industrialisation that absorbs too high resources. What is Division of labour? A form of specialisation which involves breaking down a whole job into various simpler tasks where each worker performs just a specific task instead of performing the whole job. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 29 EXAMPLE: Job: Table making Before specialization : Each worker was making a table completely After division of Labour : Each worker specialises in just a specific task. Job: Table making Task: 1 wood cutting performed by Worker/Group A Task: 2 Metal cutting performed by Worker/Group B Task: 3 Metal welding performed by Worker/Group C Task: 4 Assembly performed by Worker/Group D 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 30 Importance of Specialisation 1. For sustainable development 2. For more efficient utilisation of resources 3. Keep costs low to face competition – cost advantages 4. Utilise specialist technology for processes encouraging specialisation 5. Continuously improve living standards 6. Create value to available resources 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 31  Benefits 1. Less wastages – e.g. lesser movements 2. Saves time due to repetition and acquired expertise 3. Workers become specialists which increases their esteem and productivity. 4. Machines and equipment may be used for each specific (difficult) task. 5. Synergy - Greater individual output reduces total unit cost. 6. Each worker feels more responsible for the specific task. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 32 Problems 1. High risk of accidents - monotony and boredom associated to routine tasks 2. A worker performs only part of process and not whole output 3. Becomes difficult for workers to find other similar jobs - structural unemployment 4. Worker is no longer multi-skilled (monoskilled). 5. Workers become over dependent on other workers for their individual performance. 6. Machine breakdown or delay in any task or part may affect the whole process. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 33  The concept of adding Value The difference between selling price and cost of bought in materials in a final product. Value added = Selling Price - Cost of bought in Materials in a final product Example: Selling price of a table is $ 200 Cost of inputs in terms of wood, nails, and other materials = $ 120 Value added = $ 200 - $120= $ 80. Making consumer pay a higher price than the cost of bought in materials in a final product Thus, there is value creation at each stage of the production process till the final output. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 34  Value added # Profit - Value added is not the same as profit, - Only considers the cost of bought in inputs in terms of raw materials and components in the final product. It does not include: - Manufacturing expenses e.g. maintenance and repairs costs - Labour costs - Administrative cost, etc - Selling and distribution costs e.g. transportation, advertising costs, etc. Selling Price – Cost of Bought in Materials = Value Added – Expenses = Profit - An increase in added value may not necessarily increase profits to the same extent. - Profit will highly depend on the nature and amount of other expenses incurred to generate the revenue from the final output. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 35  SELLING PRICE Less Cost of bought in Materials in a final product = Value added Less Other costs: labour charges, Transport, selling and administrative expenses = PROFIT ???? 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 36  Material Selling price $10 $25 Value Added = $15 PROCESSES = Value creation Waste material Selling Price $35 $10 Value added = $25 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 37  How added value can be increased: 1. Adding new features to a product e.g. taste, flavour, colour, gadgets, etc. 2. Modifying product design 3. Using better quality materials and other inputs e.g. Teak wood for furniture, 4. Applying marketing strategies like: - Attractive display, - Intensive advertising, - After sales services, - Changing product packaging, etc. 5. Providing financial facilities e.g. leasing and credit facilities 6. Selling same product under another brand - rebranding 7. Ethical / sustainable / ecological practices. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 38 Need / Importance For Increasing Added Value 1. Retaliate to high added value products of competitors 2. Retain existing customers through differentiated products 3. Meet ever changing customer needs. 4. Extend a product’s market existence. 5. Make demand for its products less price elastic and increase profit margins. 6. More efficient utilisation of resources – sustainability e.g. developing more environment friendly products for ecological move 7. Trigger and encourage innovation, research and development and create greater value. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 39 Benefits Of Adding Value 1. May attract and retain customers 2. Competitive advantage over rivals through new products - Product differentiation 3. May explore other potential markets – upper market segments 4. Extend a product’s market existence e.g. creating another use, rebranding 5. May increase sales, revenue, profits and market share. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 40  Problems Of Adding Value 1. May involve huge investment and risks 2. Do not guarantee profit - value added # profit 3. May instigate other rivals for cutthroat competition 4. Customers have to pay the price 5. Customers may be misguided 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 41 EVALUATION Should a business add value to its products? Added value would greatly depend on: 1. Competitors’ products – added value product 2. Price elasticity of demand for the firm’s product 3. Customers’ tastes and disposable income 4. Firm’s marketing strategy – product differentiation, edge, positioning. 5. Rate of technological development / transfer / innovation 6. Availability of resources 7. Market / Customer changing needs 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 42  1.2. CLASSIFICATION OF BUSINESSES 1.2 Classification 1.2.1 Business activity in terms of primary, secondary and tertiary sectors: of businesses Basis of business classification, e.g. by using examples Reasons for the changing importance of business classification, e.g. in developed and developing economies 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 43  CLASSIFICATION OF BUSINESSES 1. Activity 2. Ownership 1.1 Primary sector 2.1 Private sector 1.2 Secondary Sector 2.2 Public sector 1.3 Tertiary sector 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 44  LEVELS OF BUSINESS ACTIVITY Primary sector Secondary sector Tertiary sector ECONOMY Extraction of natural Conversion of resources SECONDARY materials into SECTOR finished goods PRIMARY SECTOR TERTIARY SECTOR Provision of just services Quaternary sector / activity* 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 45 1. Primary Sector - Part of an economy which regroups businesses involved in the extraction of natural resources. - It has everything to do with land and other gifts of nature. - It includes activities like: Mining Fishing Farming Agriculture Forestry Sand quarrying Aquaculture Example : Extraction of crude oil and minerals from land or sea. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 46 2. Secondary Sector That part of an economy ; regrouping businesses concerned with the conversion of materials into semi finished and finished goods. It obtains its materials partly from the primary sector. It may include activities like: Manufacturing Processing Refining Construction industry Assembly Amongst others. Example: Refining extracted crude oil to produce plastics, petrol, cooking oil, etc.. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 47 3. Tertiary Sector - Regroups businesses involved in provision of services. The only sector that does not produce any goods - Supports other businesses irrespective of their level of activities. - Acts as a facilitator for other businesses. It includes activities like: Banking Insurance Marketing ICT services Hotel and catering services Consultancy Example: Distribution of refined oil. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 48  Identify the level of activity/sector. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 49 IMPORTANCE OF THE SECTOR Measurement : 1. % of total workforce employed in that sector in that economy 2. % contribution of sector towards Gross Domestic product of the economy. The highest proportion would mean greater importance. But this does not necessarily mean that other sectors are less important as economic activities are interrelated. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 50  CHANGING IMPORTANCE OF BUSINESS CLASSIFICATION. The Mauritian Economy Manufacturing ,Sugar, Food, Textiles, Electricity & water supply, Construction, Include Recent Statistics: Other. www. Mauritius statistics SECONDARY SECTOR ECONOMY 26.1 % GDP 3.7% GDP 30.2% EMP 8% EMP PRIMARY SECTOR 70.3% GDP Sugar cane, Farming 61.8% EMP TERTIARY SECTOR Trade, hotels & restaurants,Transport, Storage & communications,Financial intermediation, real estate, renting and business activities, Other services 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 51 The population, estimated at 1.3 million, comprises Indo-Mauritians, General population, i.e., people of mixed European and African origin and Sino-Mauritians - 43% of the land area is allocated to agriculture, - 25% is occupied by built-up areas and - 2% by public roads; - Remaining consists of abandoned cane fields, forests, scrub land, grasslands and grazing lands, reservoirs and ponds, swamps and rocks. During the past 30 years, the economy has diversified: 1970's - one based on sugar, 1980’s - manufacturing (mainly textiles and garments) and tourism. Mid 1990’s - Global business (offshore) and Freeport activities. In 2019: GDP grew to 4.0%. Unemployment rate is estimated at about 7% Inflation stood at 2 %. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 52 Example: SECTOR % EMPLOYMENT % GDP 2018 statistics 2015 2018 2015 2018 PRIMARY 8.1 8 3.7 3.7 SECONDARY 30.8 30.2 27 26.1 TERTIARY 61.1 61.8 69.3 70.3 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 53  The Mauritian Economy Tourist industry is the biggest income earner after the manufacturing industry in our economy. Nearly 2 million tourist arrival is expected for 2025. Government foreign investment attraction policies has promoted massive foreign investments in textile, sugar production, fish processing, etc. The service sector include: hotels, accountants, offshore services, consulting, insurance, banking, communication, education and marketing, etc. The Hotel and tourism, ICT and financial services of the tertiary sector is currently most important pillar of our economy due to highest proportion of employment and highest contribution towards our Gross Domestic Product in the Mauritian economy. Conclusion All sectors are vital for economic development and growth. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 54 Reasons For Change In Economic Structure 1. Increase in per capita disposable income of population. 2. Higher literacy rate due to education and training. 3. Globalisation which has increased demand for logistics and services. 4. Westernisation – cultural evasion increasing demand for services. 5. Development in ICT. Communication 6. Too strict government control in developed nations. 7. Climatic change. 8. Depletion of resources in certain countries – relocation. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 55  1.2. CLASSIFICATION OF BUSINESSES 1.2 Classification 1.2.2 Classify business enterprises between private sector and public of businesses sector in a mixed economy 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 56  MIXED ECONOMY Private Clinics Private schools and training centres Private transport PRIVATE SECTOR Communication Sugar industry Public hospitals Agriculture % Public schools PUBLIC SECTOR Public transport Textile industry Hotels Water & power supply Fishing and farming Communication % Defence & Judiciary 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 57 PRIVATE SECTOR / ENTERPRISE Regroups businesses financed , owned, managed and controlled by private investors / individuals who mainly operate with profit motive. Example: public limited companies, sole traders... PUBLIC SECTOR / ENTERPRISE Regroups businesses financed , owned, managed, controlled and accountable to the central or local government and mainly operate with social motive. Example: public corporations, nationalised industries. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 58  Business Activities In Different Economic Systems: Business activities take place in the framework of different economic systems. Countries try to make most efficient use of their available resources. An economy comprises of resources within the political boundary of a country. Different countries may manage their resources using different approach. An economic system refers to the way scarce resources of a country is managed in pursuit of achieving its socio-economic objectives. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 59  ECONOMIC SYSTEMS 1. Socialist Economy 3. Mixed Economy 2. Free Market Economy Centrally Planned 3.1 Mixed-Capitalist Capitalist Communism 3.2 Mixed- Socialist Laissez Faire System Planned Free Enterprise Command economy Socialist Economy Mixed Economy Free Market Economy Mixed Socialist Economy Mixed-Capitalist Economy 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 60  THE MIXED ECONOMY In reality, there is no pure capitalist or pure command economies. Under Mixed system - there is the coexistence of both private and public sector. The government set directives and the private sector is to operate within those legal frameworks. Nations giving more importance to capitalist system are known as Mixed- Capitalist economies Those giving more importance to public sector are called Mixed- Socialist economies. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 61  Advantages of Mixed economic system Co-existence of both sectors - greater quantity, variety and quality of goods. Continuous provision of basic amenities - even if private sector stops provision. Reduces inequality gap - progressive taxation system, equal distribution. Provision of both basic amenities and luxuries Greater national output - improve standard of living. Government may nationalise private industries known for exploitation or closure Tax on firm’s profits generate revenue for the government - redistributed towards poor Competition with private firms promotes greater efficiency. Consumer protection, monopolies control and other directives to control private firms Private firms may also enjoy incentives for greater production and exports 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 62 Disadvantages of mixed economic system 1. Competition between private and public sector may result in wastage of resources. 2. No benefits of economies of scale as many small owners produce same products 3. The rich is penalised for hard word through progressive tax. 4. Discrimination - same products consumed by different class command different price. 5. Over production and duplication of resources 6. Private sector is only allowed to produce what the government allows to produce. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 63  1.3 ENTERPRISE, BUSINESS GROWTH AND SIZE 1.3 Enterprise, 1.3.1 Enterprise and entrepreneurship: business growth and size Characteristics of successful entrepreneurs Contents of a business plan and how business plans assist entrepreneurs Why and how governments support business start-ups, e.g. grants, training schemes.. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 64 What Is Enterprise? The risk taking ability and initiative to undertake a new venture by taking considerable risks by investing capital and combining resources to provide certain commodity for a reward. It is a vital resource for undertaking business activity as without enterprise no business activity would exist and economic development could be stagnant. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 65 Purpose / Need For Business Enterprise / Entrepreneurship 1. Provision of goods and/or services. 2. Economic development and growth and create wealth 3. Employment creation – direct and indirect 4. Raise standard of living and reduce reliance of imports from other countries 5. Attract other investors 6. Popularity and international exposure of country 7. Add value to available resources 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 66 WHO IS AN ENTREPRENEUR. - A person who has possession of a new venture or idea and assumes significant accountability for the inherent risks and the outcome. - One who identifies a market opportunity and exploit it by organizing resources effectively to accomplish an outcome that changes existing interactions within a given sector. - An investor who has enterprise i.e. risk taking ability and undertakes considerable risks by investing capital and combining resources to provide certain commodity for a reward; which is often profit. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 67 Benefits Of Being An Entrepreneur. (set up own business) 1. Independence – Own boss of his time , money and other resources 2. Could possibly earn greater income through profits 3. Personal interests, skills, knowledge and capabilities could be used 4. Can fulfil own ambition and wishes 5. Gain self confidence and self esteem 6. Achieve name and fame e.g. Bill gates 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 68 Problems Of Being An Entrepreneur. 1. Greater risk – can lose own money invested and other resources allocated 2. May lack knowhow and experience for running a new business 3. Opportunity cost - could have been saved without huge risks 4. Hold responsibility for all stakeholders e.g. employees who could lose jobs because of his decisions or other family members who also invested money. 5. Greater personal commitment which may not allow time for other social matters. 6. May not have proper work life balance 7. No guaranteed income 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 69 THE ROLE OF AN ENTREPRENEUR: 1. Prepare business plan and forecasts 2. Organise and allocate factors of production 3. Combine factors of production 4. Seek better business opportunities 5. Lead and Motivate employees 6. Define business mission, vision and objectives 7. Devise strategies that adapt to changing business environment. 8. Operate within the legal framework to make profits. 9. Innovate products and implement new ideas to satisfy human wants and needs 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 70  QUALITIES OF SUCCESSFUL ENTREPRENEURS INCLUDE: 1. New ventures 2. Creativity - Innovative business ideas 3. Visionary 4. Inner drive to succeed 5. Passion about their products/services 6. Risk taking 7. Willing to learn 8. Remove obstacles to progress 9. Set big goals 10. Strong self confidence 11. Assertive personality 12. Focused 13. Willing to change 14. Aware of latest technology and ideas 15. Thrives on competition 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 71 16. Very energetic  ROLE OF BUSINESS ENTERPRISE IN THE DEVELOPMENT OF A COUNTRY. 1. Determines level of success, prosperity, growth and opportunity in any economy. 2. Triggers production and sale of new products and services. 3. Undertakes the risk of the enterprise in search of profit 4. Seeks opportunities to profit by satisfying unsatisfied needs of the population. 5. Create value to scarce resources in the nation. 6. Improve overall standard of living 7. Makes a nation popular and may also attract more investments. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 72  Contents Of A Business Plan And How Business Plan Assist Entrepreneurs 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 73 BUSINESS PLAN A written document that describes a business, its objectives and its strategies, the market it is in and its financial forecasts. CONTENTS OF A BUSINESS PLAN: 1. An executive summary - Provides overview of the new business and its strategies. 2. Description of business opportunity - the entrepreneur, product, target customer and reason. 3. Marketing and Sales strategy - why, what and how the customer will buy and the business sell. 4. Management team and personnel- Skills and experience of entrepreneur and employees to be recruited 5. Operations - Premises, production facilities, IT systems and processes. 6. Financial Forecasts - sales, profit, cash flow forecasts for at least a year ahead. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 74  HOW BUSINESS PLANS ASSIST ENTREPRENEURS 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 75 Importance Of Business Plans To A New Business: 1. To obtain start-up capital - to convince financiers and suppliers. 2. Provide clear sense of purpose, direction, marketing strategies and type of employees to be recruited to increase chances of success. 3. Financial, HR, Operations and Marketing plans can be used as targets. To An Existing Business: 1. Rewrite and adapt the plan to accommodate new or revised strategies 2. Original financial forecasts can act as budgets and control benchmarks. 3. Updated versions can be used for additional funding or attract additional partners or even supply data for the experts while analysing feasibility of ‘going public’. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 76 Evaluation Business plans need to be constantly updated so that managers and other users can find it really useful for devising business strategies. Still some existing businesses consider being as just a short term plans while longer term plans are called corporate plans which have a longer perspective about the business strategies. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 77 Why Governments Support Business Start Ups: 1. Reduce unemployment levels 2. Encourage local production and create greater value to available resources 3. Support and attract larger firms and foreign investment – Increase competition 4. Promote economic growth and provision of goods and services at lower costs 5. Reduce over dependence on imports and reduce balance of payment deficits 6. Regional development 7. Preserve traditional products, culture and processes. 8. Benefit Society – like creation of social enterprises 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 78 How Governments Support Business Start Ups: 1. Grants – upon submission of business plan and relevant documents 2. Training schemes – MITD, Hotel school of Mauritius 3. Research and Development facilities – AREU, MSIRI. 4.Technical support – Farmers’ service corporation, SMEDA 5. Finance support schemes – DBM, soft loans. 6. Assistance to prepare good business plans 7. Fiscal policies- Tax holidays, low corporation tax 8. Creation of industrial zones – providing all set up facilities 9. Attracting large businesses like MNCs allowing start up of local support enterprises. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 79  1.3.2 Methods And Problems Of Measuring Business Size. 1.3 Enterprise, 1.3.2 The methods and problems of measuring business size: business growth and size Methods of measuring business size, e.g. number of people employed, value of output, capital employed (profit is not a method of measuring business size) Limitations of methods of measuring business size 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 80  SIZE OF BUSINESSES * How large is a business? Classification Small – low sales, less than 50 employees Large – high sales, many employees and high output There are different criteria used to measure and compare size of businesses. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 81  Common Measures For Size 1. Number of employees 2. Value of output / Turnover 3. Capital employed 4. Volume of output 5. Number of retail outlets 6. Market Share **Profit is not a method of measuring business size. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 82 1. Number of Employees Used to compare size of firms in same industry. The greater the number of employees larger the organisation. Firm Firm Larger A B No. Of Employees 500 1000 *It may not always be reliable Volume of output 2500 units 2500 units Capital intensive Labour intensive Limitations: 1. A firm using capital intensive might be producing same volume of output with few skilled and full time workers. 2. A firm might be having high temporary, part time, unskilled and flexible workers. Labour intensive When production processes involve high proportion of labour inputs to capital inputs. Capital intensive When production processes involve high proportion of capital inputs to labour inputs. E.g. it uses expensive technology. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 83  2. Value of output or Sales The larger the firm’s sales, the larger the business size. Firm A($) Firm B ($) Value of output 10000 4000 Volume of output 1000 2000 Price $10 $2 Limitations: 1. A small firm dealing in premium products may make high value of sales on small volume and even few workers. Thus, value of sales independently as a measure may be misleading 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 84 3. Capital Employed (Net assets) Total amount of money or capital invested in a business net assets. Money tied up in assets may be of relevance to manufacturing companies or those businesses dealing in fixed and movable properties. Firm A ($m) Firm B ($m) Capital Employed 1000 2000 Profit 250 400 Return on Capital 25% 20% Limitations: 1. Businesses in tertiary sector providing services may not have high investments in assets still the revenue they generate might be considerable. E.g. consultancy / auditing / banks 2. Businesses may also value their assets differently. E.g. strategic location v/s Rural area 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 85  4. Volume Of Output Produced/Sold Commonly used to compare size of firms that are in the same industry and operating at the same stage of production. Firm A Firm B Volume of output 1000 2000 Value of output 10,000 4,000 Price $10 $2 Limitations: 1. A large firm may manufacture cheaper version of products and make low value of sales compared to another firm with low volume but high value products. Thus, even volume of output independently could be misleading. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 86 Conclusion: There is no universal way or best way of measuring the size of businesses. All measures when considered independently have their drawbacks and their reliability is often questioned. Managers usually, use of more than one of the above methods is made to compare businesses. Some measures may suit some business firms while others may give unreliable measures. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 87  BUSINESS GROWTH 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 88  1.3.3 Why Some Businesses Grow And Others Remain Small. 1.3 Enterprise, 1.3.3 Why some businesses grow and others remain small: business growth and size Why the owners of a business may want to expand the business Different ways in which businesses can grow Problems linked to business growth and how these might be overcome 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 89 Why Some Businesses Grow? 1. Attract customers - due to significance / visibility in market 2. Larger businesses enjoy higher status in the business community 3. Better negotiation power with suppliers, potential investors, government, etc. 4. Provide services through sponsorship and community development projects. 5. Explore new market opportunities and spread risks through diversified markets 6. Dominate other rivals and become the market leader. 7. Secure investment in Research and development for its benefits 8. Benefit from economies of scale 9. Fulfil personal objectives and ambition 10. Increase their survival potential and easily access finance. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 90  How Do Businesses Grow? Business Growth Internal/Organic Growth Inorganic/External Growth No Integration Integration Strategic alliances Joint Ventures Merger Takeover/ Acquisition Integration (Types of merger/takeover) Horizontal Vertical Lateral Conglomerate Backward Forward 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 91 Internal / Organic Growth - When a business expands its existing operations by injecting additional capital often by ploughing back its profits to increase its net assets. Example: - Opening new branches / outlets in other location - Providing franchise - Increasing existing assets – inventories 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 92 Reasons for Internal Growth 1. Secure jobs for its employees – fulfill corporate responsibility 2. Exploit Possibility of greater profits 3. Benefit from greater economies of scale 4. Greater Visibility. 5. Meet increasing market needs. 6. Reduce risk of being a takeover target - PLCs. 7. Enjoy Increased power and status of the owners and directors - can influence community projects and government 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 93 Benefits Of Internal Growth 1. Higher productivity – Motivation / Greater Job security for its employees 2. Higher sales and profits potential 3. Higher profit margin - Increased economies of scale 4. Brand recognition - loyalty. 5. Increased market share. 6. Lesser risk of being a takeover target. 7. Increased power and status of the owners and directors - can influence community projects and government 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 94 Problems Of Internal Growth 1. Costly and more risks 2. High profits would be ploughed back – sacrifice of short term profits 3. Diseconomies of scale – lose of control, communication, management problems 4. Restructuring – reorganisation problems / demotivation / conflicts 5. Realization can be time consuming 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 95 External / Inorganic Growth When a business expands by merging or taking over another existing business from either the same or a different industry. Often referred as integration. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 96 External / Inorganic Growth When a business merges, or takes over another existing business from either the same or a different industry. Acquisition When a business gains control of part of another business. A company may be willing to sell one of its businesses that it no longer wishes to keep or that no longer fits into its objectives for the future. Firm Firm Firm + = A B A 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 97 TAKEOVER When a business becomes the controlling owner of another company by buying over majority of its shares; for profitability, productivity or market share reasons. The firm taken over becomes part of the ‘predator’ business. It is considered hostile if a controlling interest is bought without the consent of management of the business that is subject to take over. Example: buying out (majority) or having more than 50% shares and gaining control over the company. Firm A + Firm B = Firm A (Controlling owner of Firm B) 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 98 MERGER When businesses combine to form one business under a common board of directors in which these businesses own shares; in an attempt to enhance profitability, productivity or position in the market. Firm A + Firm B = Firm AB (common board of directors) 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 99 Integration / Types of Merger Merger and takeover may not necessarily be at the same level or industry. Forms of Merger/Takeover 1. Horizontal Same industry and similar stage of production 2. Vertical Same industry but different stage of production 3. Lateral Same industry but not related 4. Conglomerate / Diversification Different industry 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 100 1. Horizontal Merger / Integration When a firm merges or takes over another business that is in the same industry and operating at the same level of production. They produce the same product or product range. Example 1: a shoe-making firm merges with another shoe making firm. Example 2: FUEL merged with Beauchamp sugar estate now under a common board of Directors of ALTEO. Both were sugar manufacturing firms 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 101 Advantages of horizontal growth: 1. Greater competitive advantage 2. May benefit from economies of scale e.g. bulk purchasing 3. Larger market share due to higher sales 4. Eliminates a competitor 5. Employees are motivated due to greater job security Disadvantages of horizontal growth: 1. Higher market risks. They are in the same industry 2. Consumer exploitation is possible due to market domination 3. The government may intervene to control its activities. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 102 2. Vertical Integration When a firm merges or takes over another firm that is in the same industry but operating at different stage of production. It may be: (a) Backward vertical integration (b) Forward vertical integration 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 103 2(a). Backward Vertical Integration When a firm merges or takes over another firm operating at an earlier stage of production that form part of the firm inputs. When a firm merges with another firm that. This ensures that the firm may produce its own raw materials instead of purchasing them from other suppliers. Example: when the shoe-making firm takes over a leather-manufacturing firm. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 104 Advantages of backward integration / growth 1. Assured supply of materials and components 2. May obtain materials at cost price. 3. Better Control over supply of raw materials to other manufacturers or competitors. 4. Gain experience in another product at earlier stage. Disadvantages 1. Firms are in the same industry which increases market risks 2. May be difficult to manage firms operating at different stages. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 105 2(b). Forward Vertical Integration When a firm merges, or takes over another firm that is in the same industry but operating at a later stage of production. The firm reaches nearer to the market or customers. Example: When a shoe-making firm takes over a chain of shoe retail outlets or when the leather- manufacturing firm takes over the shoe-manufacturing firm. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 106 Advantages of forward vertical growth: 1. Assured supply of finished products to the other integrated firm 2. Control over sale of its product. 3. Nearer to customers. 4. Gain experience in other stage. Disadvantages 1. Greater market risks due to being in the same industry. 2. Difficulty in managing firms operating at different stages - might lose control. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 107 3. Lateral Integration. When a firm merges or takes over another business that is not directly related to the business of the firm but are in the same industry. Example: A bus company merging with a car rental business which are both in the transport industry but their activities are not directly related. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 108  4. Conglomerate / Diversification Integration When a firm merges or takes over another business that is not directly related to the business of the firm and they are not in the same industry. Also known as diversification Example: A shoe making firm takes over a textile firm. (diversification) 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 109 Advantages of diversification: 1. Risks are spread over greater variety of products 2. Profits of one firm may be used to compensate for other loss making business 3. Greater cooperation and sharing of ideas. 4. Wide range of products to customers 5. Experience in diverse markets. Disadvantages 1. Difficulty / inexperience to manage two businesses in different industry. 2. No economies of bulk purchasing since materials might differ 3. The firm does not specialise in a particular product – may lose customers 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 110 JOINT VENTURES ( external growth without integration) When businesses agree to pool resources and work together for a common purpose or project by creating a separate business division. The businesses share costs, ideas, risks and the resulting profit. It is not the same as a merger which involves combining businesses under a common board of directors. Coincidence of joint interest and successful joint venture could lead to a merger. Commonly used by businesses planning to enter risky foreign markets. Example: 1. Sugar manufacturing firms may work together to set a division for research and development that may benefit the industry. 2. Some textile industries may get into a joint venture to set up another firm producing spinning threads which may benefit both firms besides other firms using similar input. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 111  Advantages of joint venture to the businesses: 1. Firms share costs and resources 2. Sharing of risks, ideas and expertise of firms involved 3. May explore new markets together through new developments Problems 1. Disagreements culture differences; management style and control of new venture. 2. Ideas and expertise of the businesses involved may be exposed 3. Errors and mistakes could be blamed upon other firm involved. 4. Business failure of any one partner would put the whole venture or project at risk. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 112  Problems of Growth 1. Diseconomies of scale due to overexpansion – management and control problems. 2. May incur greater market risks - due to greater investment, may attract competitors 3. Employees may not react positively - greater work load, communication problems 4. Huge capital investment - external finance involving high finance costs 5. Shareholders sacrifice short term dividends as profits may be retained to finance growth. 6. Ownership and control rights may be lost for growth reasons. 7. Legal controls over larger firms – Fall in the tax payer threshold, submission of accounts, etc. 8. Integration might involve different management styles, culture that could be distorted. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 113 How These Growth Problems Might Be Overcome? 1. Diseconomies could be overcome through decentralisation / creation of smaller units 2. Communication and control problems could be overcome through ICT and new technology 3. Expansion cost could be spread over a longer period by ploughing back profits 4. Worker involvement and effective communication could reduce resistance and facilitate growth. 5. A prior understanding of the existing organisation culture and management style could facilitate transition while integrating with other businesses 6. Diversification as a form of growth could possibly spread over risks. 7. Forecasting sales, market growth, government policies could reduce market risks associated to huge investments. 8. Communicate the need for expansion to stakeholders could foster continuous growth and provide synergy 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 114  Small Businesses 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 115 Why Do Some Businesses Remain Small? 1. Limited Capital and too small profits to plough back 2. Lack of skilled and trained Personnel - inexperience 3. Lack of Idle capacity 4. Business Motives/Objectives – lack enterprise 5. Limited or Small Market Size – niche market 6. Fierce Competition – retaliation by rivals 7. Government regulations – high tax on profits / sacrifice of government incentives 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 116 IMPORTANCE / SIGNIFICANCE OF SMALL BUSINESSES: - 1. Flexible and adapt easily to market changes 2. Proximity / closeness to Market- greater convenience 3. Cater for rural areas - e.g. reduce regional unemployment 4. Training ground for large firms – facilitate recruitment of experienced employees 5. Nature of market – antiques, premium / status symbol products 6. Act as Support enterprises for large firms- suppliers of parts / subcontractors 7. Ensure Continued Competition – existence of many small firms 8. Act as channels of distribution for large firms – retail distribution in many areas 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 117 COEXISTENCE OF SMALL FIRMS ALONG GIANT FIRMS 1. Act as channels of distribution for large firms. 2. Act as Support enterprises for larger firms 3. Training ground for large firms – facilitate recruitment 4. Facilitates collection of Market research information 5. Facilitate larger firms to dispose excessive inventories through small firms using distributors brand. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 118 How do small firms compete with larger firms producing same products? 1. Small firms explore niche markets that might be unprofitable for giants 2. They locate nearer to customers usually in remote or rural areas. 3. May easily change and adapt to market changes as they keep low Inventories 4. Government support like grants , subsidies, research, etc. 5. Provide personal touch and personalised services which improve loyalty 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 119 Advantages of small business: 1. Require lesser start up capital. 2. Easier to manage and control. 3. Act as supporting enterprises this may attract further investment 4. Increases national output and standard of living 5. Ensures competition 6. Contributes to reduce regional unemployment 7. Encourages entrepreneurship. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 120 Problems 1. Often uneconomical; they charge high prices due to high costs 2. No economies of scale – too small volume of output 3. Often require government support which involve high opportunity cost 4. They may not employ professional staff that make them inefficient. 5. Survival is at threat due to competition from large firms and other small firms. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 121 Government Assistance To Small Businesses 1. Subsidies / Grants 2. Tax rebates / Duty free / Tax holidays. 3. Financial assistance - Soft loans e.g. DBM 4. Research & Development e.g. MSIRI 5. Assistance through free advice, training and cost free assistance and check ups. 6. Infrastructural development.- Creation of industrial zones 7. Technical support e.g. AREU, SEHDA, FSC, etc. 8. Premises and infrastructures 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 122  Constraints: There are also cases where the government constraints size of businesses or business activities due to various socio-economic reasons. Reasons For Government Constraints: 1. Production of dangerous products 2. Depletion of scarce resources 3. Harm to the natural heritage, beauty and environment 4. Consumer exploitation through discrimination and monopolistic practices 5. Employee exploitation 6. To ensure compliance to local laws 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 123 Government Constraints On Growth / Size 1. Formulation of new laws and policies - competition bill, employment relations act 2. Monetary policies (interest rates) 3. Fiscal policies - (Taxation, govt. expenditure, etc.) 4. Rectrictionist measures - controlling issue of permits and licenses, imposing quota 5. Nationalisation 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 124  1.3.4 Why do some (new or established) businesses fail? 1.3 Enterprise, 1.3.4 Why some (new or established) businesses fail: business growth and size Causes of business failure, e.g. lack of management skills, changes in the business environment 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 125 Why Do Some New Businesses Fail? 1. Lack of finance - shortage of start up , working capital and liquidity. 2. Mismanagement / Inexperience - poor planning / inadequate market knowledge 3. External constraints – Recession / war / terrorism / natural disasters 4. Change in government policies and legislations (Laws) 5. Competition - retaliation like use of killer prices by established rivals. 6. No market research to identify market needs. 7. Highly volatile market 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 126 Why New Businesses Are At A Greater Risk Of Failing? 1. Inexperienced management - lack expertise 2. Poor business planning 3. Liquidity problems – poor working capital, no credit facilities, high short run costs 4. Customers may lack confidence due to unknown 5. Competitors’ retaliation – killer pricing to eliminate entrant, restrict supply of inputs. 6. Inadequate and ineffective promotion / exposure 7. Experienced workers are unlikely to join a newly setup business- inefficiency 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 127 Why might some established Businesses fail? 1. Inexperienced management – Change in board of directors 2. Increase in competition e.g. due to globalisation 3. Poor forecasting / inaccurate market research data. 4. Change in government policies and regulations. 5. No customer relationship building leading to products not meeting market needs 6. Megalomania – overconfidence based on previous success 7. Bad publicity due to pressure group protests 8. Liquidity issues 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 128 WHAT A BUSINESS NEEDS TO SUCEED: 1. Commitment, mission and vision 2. Motivated, Trained and skilled workforce- intellectual capital 3. Effective management - Planning, organising, controlling. 4. Supportive staff and Government policies 5. Well designed products that meet customer requirements 6. Strategic location and efficient production system 7. Accurate market research information 8. Availability and access to resources e.g. finance, materials, equipment. 9. Effective leadership 10. Business contacts / references / networking 11. Effective liquidity management 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 129  1.4 TYPES OF BUSINESS ORGANISATIONS 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 130  1.4.1 The Main Features Of Different Types Of Business Organisation. 1.4 Types of 1.4.1 The main features of different forms of business organisation: business organisation Sole traders, partnerships, private and public limited companies, franchises and joint ventures Differences between unincorporated businesses and limited companies Concepts of risk, ownership and limited liability Recommend and justify a suitable form of business organisation to Owners / management in a given situation Business organisations in the public sector, e.g. public corporations 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 131  LEGAL STRUCTURE OF BUSINESS. Private Sector Public Sector 1. Sole traders 1. Public Corporations 2. Partnerships 2. Government Department 3. Limited Companies 3. Nationalised Industries (a) Private Limited companies (Ltd) (b) Public Limited companies (Plcs) 5. Franchises 6. Joint Ventures 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 132 Private Sector Regroups businesses financed, owned, managed and controlled by individuals who mainly invest and operate with profit motive. Forms of privately owned businesses: 1.Sole Trader (One Owner) 2. Partnership (2-20 partners/owners) 3. Limited Companies 3.1 Private limited Company (min. 2 shareholders but limited to maximum 50) 3.2 Public limited Company (min 2 shareholders) 4. Franchises. (Any) 5. Joint Ventures (two or more businesses) 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 133 1. SOLE TRADER An unincorporated private business which is a One-Person concern consisting of an entrepreneur who invests permanent capital, undertakes all risks to enjoy all rewards which is usually profits. The owner has unlimited liability. Example: A dentist who invests his savings to start up his own cabinet to consult patients against consultation fees. - Owned by a person who is usually Self-employed - Capital is often from savings and borrowings from friends or the bank. - The sole trader may work entirely on his own or employ other workers. - He is the sole owner, manager, decision maker and risk taker. A sole trader is often a small business but not always, it might be large too. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 134 Procedure One Person Prepare Documents Apply to Registrar of business names Verify and Issue Authorisation Permit, Certificate or Licence Start Operation within a Year submit Annual accounts to the Inland Tax Revenue department For tax purposes. Renew Authorisation on Expiry 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 135 Features: 1. Private sector business 2. An unincorporated business. 3. One person concern also known as sole proprietorship. 4. Operates with profit motive 5. The proprietor has unlimited liability and also risks his personal assets 6. Solely invest capital, takes all risks, responsibilities and profit 7. Few legal formalities 8. No continuity of existence on death of owner. 9. Secrecy of business matters - accounts need not be published. 10. The sole decision taker - no consultation 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 136  Advantages 1. Easy to set up - Few legal formalities and less start up capital 2. Freedom of operation and decision taking 3. No profit sharing- enjoys all profits 4. No divorce between ownership and control - he is his own boss. 5. Confidentiality of business matters- no publication of accounts 6. Quick decision making - no consultation with others 7. Easy to manage and control – usually small 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 137 Disadvantages 1. Unlimited liability – Personal assets are at risk 2. Low market status compared to other structures 3. Limited scope for expansion - due to limited capital 4. Limited scope for economies of scale – usually small. 5. May not afford specialists, leading to inefficiency 6. In case of illness or absence of owner the business may remain closed 7. No continuity of existence after death of sole trader 8. No one to share and discuss business matters - may result in wrong decisions 9. Often have difficulty in obtaining huge amount of credit due to its legal status. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 138 Unlimited liability Applies to unincorporated businesses where owner’s obligation to pay business debts is not restricted to his capital invested into the business. The owner also risks his personal assets. Sole trader and Partnership businesses have unlimited liability. Problems of unlimited liability: 1. Discourages investors to set up businesses 2. Owners also risk their personal assets. 3. Compels many firms to convert into limited companies. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 139 2. PARTNERSHIP An unincorporated private business consisting of two to twenty individuals who contribute permanent capital; to share risks, responsibilities and profits. All partners have unlimited liability. Decision Making 1. Decisions on basic matters such as admission of new partners must be unanimous. 2. Normal business decisions are based on a majority vote and then binding on all partners. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 140 Procedure: 2-20 individuals prepare Partnership Deed Not a legal requirement Submit documents to Registrar of business names Verify and Issue Authorisation Start Operation within a year Submit Copy of financial statements to Inland tax and Revenue dept. Renew permit on expiry 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 141 Partnership Deed An agreement amongst partners that entails the terms and conditions of their association. not compulsory but a highly recommended document helps to settle disputes and clarify duties and responsibilities of each partner. In its absence the partnership act would govern such businesses. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 142  Contents of partnership deed: 1. Objective of the business 2. Amount of capital contributed by each partner 3. Profit sharing ratio 4. Tasks and responsibilities of each partner 5. Term or period of partnership agreement 6. Rules and regulation concerning admission or retirement of any partner. 7. Procedures concerning dissolution 8. Decision making - voting rights, based on majority basis. 9. Authority to sign contracts and other important documents. 10. Other conditions concerning leaves, absences, etc. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 143 Features: 1. Private sector business 2. An unincorporated business. 3. Comprises of 2- 20 private individuals 4. Aim is to make a profit 5. All partners have unlimited liability 6. Partners share capital, risks, responsibilities and profit 7. Few legal formalities 8. Death of a partner may cause discontinuity 9. Partnership is governed by the partnership deed 10. Decisions are on majority vote basis 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 144  Advantages: 1. Easy to set up due to few legal formalities 2. Partners retain control they are owners and often managers 3. More capital is obtained through partners’ contribution. 4. Different skills of partners may be utilised to reap high profits. 5. Shared responsibility and risks. 6. Secrecy about business matters, accounts are not published. 7. Business is not closed when a partner falls ill or is on leave. 8. Better decisions due to idea sharing and consultation with all partners. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 145 Disadvantages: 1. Partners have unlimited liability and are responsible for all business debts. 2. Disagreements between partners may cause dissolution problems. 3. Limited growth due to limited finance - as per agreement 4. Decision-making is time consuming- requires consultation with all partners. 5. No continuity of existence on death of a partner. 6. Low market status compared to other structures that makes negotiation difficult. 7. Ownership right or capital is non transferable 8. Profits have to be shared amongst all partners. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 146 Sleeping Partners Partners who contribute capital but do not take active part in the day-to-day operation of the business. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 147 3. LIMITED COMPANIES Limited companies are governed by regulations of Companies Act. Also referred as Joint Inventory companies They issue shares to raise capital Limited companies are private sector and incorporated businesses. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 148 Shares It conveys the ownership rights in a company. The higher the shares held the higher the ownership right and higher the amount of dividend. Shareholder A part owner or investor in a limited company who has invested in shares and enjoy ownership rights and dividends. Dividend Proportion or part of profit distributed to shareholders as a reward for investing in company shares. Higher dividends satisfy and retain shareholders. Stock Exchange A financial institution that deals in marketable second hand shares of public limited companies. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 149 Limited Liability Mainly applies to incorporated businesses where shareholders obligation for payment of company debts is restricted only to the extent of their capital invested. Their personal assets are therefore not at risk in case of bankruptcy. Example: In case the business is unable to pay its creditors (bankrupt) ; the creditors have the legitimate right to recover their money by liquidating the business assets and not the personal assets that are legally protected against liquidation. Importance of limited liability/ separate legal personality 1. Attracts potential investors due to calculated investment risks 2. Complies with the business entity concept 3. Specifies the incorporated status of the business 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 150  Types of limited companies: A. Private limited company (Ltd.) B. Public limited company (Plc) 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 151 3.1 Private Limited company (Ltd) An incorporated private business which consists of 2-50 individuals who contribute capital and share risks, responsibilities and profits. It is usually a family concern. Capital is raised through shares issued privately often to family members , friends and relatives. All shareholders have limited liability. Decision Making Decisions are based on majority vote and strategic decisions often require consent of all shareholders. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 152 Procedure 2-50 individuals Prepare Documents 1. Memorandum Of Association 2. Article of Association Submitted to Registrar of Companies Verify & Issue (Being satisfied with the objects & documents) Certificate of Incorporation Start Operation within one year Submit Copies of financial Statements to Tax Dept 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 153 A. Memorandum of Association May contain details like: 1. Name with Ltd or Plc as the last word 2. Registered office of the Company. 3. Objects of the company 4. Details of the company capital (e.g. $ 50,000 divided into 50,000 ordinary shares) 5. Shareholders’ limited liability details. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 154  B. Article of Association These are internal rules and regulations that provide details on: 1. Number of directors to be appointed 2. Remuneration of directors from time to time 3. Voting rights of shareholders 4. Profit /dividend sharing 5. Rights to transfer shares (restricted for private Ltd Co.) Memorandum and articles of association has to be sent to the registrar of companies. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 155 Features 1. An incorporated private sector business 2. Usually small family concerns. 3. Consists of 2 to 50 shareholders 4. Uses the abbreviation Ltd. E.g. Bingo Ltd. 5. Shares are issued to “selective or approved shareholders” only. 6. Shares are not easily transferable. 7. Shareholders own, manage and even control the company 8. Usually consider skilled and experienced individuals as shareholders. 9. Necessitates preparation of memorandum and articles of association. 10. Decisions require consultation with all shareholders. 11. Shareholders enjoy dividends as reward for their investment 12. Capital is limited up to an authorised limit allowed by the registrar of companies 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 156 Advantages: 1. Easy to manage and control – shared responsibilities 2. Limited liability for all shareholders 3. Shares are privately issued. (Approved shareholders only) 4. Greater Capital potential up to 50 shareholders or maximum authorised shares. 5. Shareholders retain control over their business 6. No takeover risk due to control over issue of shares 7. Shareholders are usually professionals who may ensure greater efficiency. 8. Better decisions since ideas may be shared and discussed 9. Confidentiality about business matters- accounts, prospectus, etc. not issued or published. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 157  Disadvantages: 1. Growth may be restricted due to lack of capital 2. Shares cannot be issued to general public 3. Maximum number of shareholders is restricted 4. Transfer of shares may be limited to ‘approved’ new shareholders 5. Decisions take time and requires consultation with all shareholders 6. Risk of conflicts at shareholder level and management inefficiency 7. Highly qualified professionals may have to be employed that may be costly. 8. Shares cannot be listed in the stock exchange or sold through brokers. 9. Timely and costly legal procedure. 10. No Continuity of existence if shareholder quits or dies. 11. Family members may lack expertise to run the company professionally and efficiently. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 158  4. Public Limited Company (Plc) 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 159 4. Public Limited Company (Plc) An incorporated private business that raises capital by issuing shares to the general public through the stock market and operates with profit motive. It consists of many shareholders but it is managed and controlled by elected board of directors. Uses the abbreviation Plc to represent its status. E.g. Barclays Plc Decisions Decisions are taken by Board of Directors elected by shareholders through the Annual General Meeting (AGM). Management & Control: It is owned by many shareholders but managed and controlled by board of directors. Commonly termed as divorce between ownership and control. Directors may have little investment and are renumerated for their service. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 160  Procedure Private individuals Prepare Documents Memorandum Of Association + Submitted to Article of Association Registrar of Companies Verify & Issue (Being satisfied with the objects & documents) Certificate of Incorporation Start Operation within one year Apply for listing in Stock Exchange Issue PLCs only Prospectus Hold Annual General Meeting Audited Copies of Financial Statements to inland tax Dept. Publication of Financial Statements 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 161 ‘Going Public’ ‘Going public’ means when a private limited company is converting into a public limited company. Prospectus A document that give details about the company (i.e. about history, profit records, prospect, future plans, etc.), the amount of capital it is raising and information about the share offer. It is issued to provide information and attract potential investors. Divorce between ownership and control The shareholders own but elected board of directors manage and control the company. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 162 Merits of appointing Board of Directors 1. Professionals run the company efficiently for higher profits 2. Investors need not necessarily be knowledgeable about business matters 3. Shareholders do not have to bother about the day to day running of the business 4. There is no bias or personal conflict at shareholder level. Drawbacks of appointing Board of Directors 1. Change in directors can affect business efficiency and confidence of shareholders 2. Directors may run the company to satisfy their personal interest. 3. Inexperienced new directors may lead to inefficiency 4. Replacing directors annually may affect the goodwill of the business. 5. Shareholders are not able to influence day-to-day business decisions as they meet only in the AGM. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 163 Annual General Meeting- AGM AGM is a legal requirement under the companies act for all companies. Shareholders are invited to be informed about the company performance and also vote for board of directors for oncoming financial year. Purpose/Functions of AGM 1. Meet legal requirement - the companies act. 2. Inform shareholders on the company performance and future resolutions 3. Vote and elect board of directors to manage and control the company. 4. Invite shareholders’ comments and suggestions. 5. Declare dividends 6. Communicate business goals 7. Decide on new resolutions, etc. A way shareholders may influence the business policies. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 164 IMPORTANCE OF PROFIT TO PUBLIC LIMITED COMPANIES 1. To attract potential investors/ public investors 2. To retain existing shareholders 3. Increase market capitalization (shares issued x Current share price) 4. Increase shareholder value (part profits are retained and reinvested in assets) 5. Prevent share prices from falling 6. Pay Dividends 7. For retained profits and increasing long term shareholder value 8. Improved public image and negotiation power 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 165 Advantages of PLC : 1. Limited liability for shareholders – easier to raise share capital 2. Even small savers can invest without any knowledge of business management 3. Continuity of existence 4. Easier to raise large amount of capital and expand 5. Shares are easily transferable on the stock exchange. 6. Easier to borrow money from banks and other financial institutions. 7. Benefits from economies of scale 8. Board of directors and specialists are appointed to control the company efficiently. 9. There is no conflict at shareholder level. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 166 Disadvantages of PLC: 1. Long and timely procedures and legal formalities that are costly. 2. Can become too large and become impersonal and difficult to control. 3. Inefficiency may arise due to over expansion. 4. Issue of Prospectus to attract shareholders is an additional cost. 5. Annual accounts must be published (in newspapers) that violates confidentiality. 6. Risk of takeover as shares is too easily transferable through stock exchange. 7. Divorce between ownership and control. 8. Board of directors may run the business for their personal interest. 9. Change in directorship may affect the efficiency and confidence of shareholders. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 167 FACTORS TO BE CONSIDERED WHILE ‘GOING PUBLIC’ 1. Cost factor – availability of finance, conversion cost 2. Impact on owners’ - ownership and control 3. Risks involved - Takeover risks, control problems. 4. Possibility of diseconomies – communication and management problems 5. Owners’ enterprise - risk and managerial ability 6. Need for secrecy and confidentiality 7. Legal implications – new laws, policies 8. Impact on other stakeholders – financiers, suppliers, customers, etc. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 168 5. FRANCHISE An established and reputed business (Franchisor) allowing other businesses (Franchisees) exclusive right to manufacture, service or sell its products in a particular area against payment of a franchise fee. The franchisor is the original owner who sells its product, brand name, idea and service to another firm i.e. the franchisee. The franchisee uses the same Logo and setting. Example: 1. Coca Cola Company Limited USA which has as Franchisee in Mauritius - Phoenix Camp Minerals ltd. 2. PepsiCo Ltd USA which has as Franchisee in Mauritius as Quality Beverages Ltd, 3. Chanter Frais a local franchisor of fresh chicken in Mauritius. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 169 Advantages To The Franchisor (Original owner) 1. Franchisee pays for using the license, product name, and service 2. Expansion is much faster in many locations 3. Franchisee finances and may even advertise for the product in its location 4. Goodwill of the franchisor is enhanced in various geographical areas 5. Bears no risks or capital investment but obtains a share of the profit. 6. Supplies all materials to various franchisees that may lower production cost. 09/01/2022 Mr. SAWDAGUR Devesh - 52547325 - F4+5 170  Problems to a Franchisor 1. Unprofessional business practice by any franchisee may affect whole business image 2. If franchisees declare losses; it might lose in terms of revenue. 3. Franchisor may lack knowledge on the market in which franchisees operate 09/01/2022 Mr. SAWDAGU