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Business management
Final exam preparation guide
By Edison

Business and Management
1
...
2 Types of organisations
1
...
4 Stakeholders
1
...
6 Growth and evolution
2
...
2 Organizational structure
2
...
4 Motivation
3
...
2 Costs and revenues
3
...
4 Final accounts
3
...
7 Cash flow
3
...
1 The role of marketing
4
...
4 Market research
4
...
8 E commerce
5
...
2 Production methods
5
...
1 Introduction to business management
The role of a business
A business is a decision making organization which uses inputs to produce goods or
provide services
...
Workforce planning, recruitment, training, appraisal, dismissals,
redundancies
...
Ensuring accurate recording and reporting of financial
documentation
...


Marketing
Identifying and satisfying the needs of customers
...


Product, ensuring that customer demands are met
Price, using pricing strategies like increasing price with demand
Promotion, ensuring that customers know about the products
Place, ensuring convenient location

Operations
Functional area of management responsible for converting the materials into finished
goods
...


Secondary
Manufacturing and construction
...
Sharing information
...


Entrepreneurship and intrapreneurship
Entrepreneur
An individual who plans, organises and manages a business
...

Skills to oversee the entire production process
...

Employee who thinks and acts like an entrepreneur, within a section of the business
...


3

Reasons for starting a business
Growth: ​Capital growth, growth of value of assets
...

​
Challenge: Personal challenge, seeking satisfaction and self esteem
...
2 Types of organizations
Profit based organisations
Sole traders
An individual who owns and runs a personal business
...

Most common type of business ownership
...

Other workers are sometimes used
...

Unincorporated: trader bears full responsibility
Advantages and disadvantages of sole proprietorships
Advantages

Disadvantages

1: Few legal formalities, easier to set up
2: The owner gets all the profits
3: Being your own boss
4: Personalised service
5: Privacy

1: Unlimited liability
2: Limited sources of finance
3: High risks
4: Workload and stress
5: Limited economies of scale
6: Workload and stress

Partnerships
Profit seeking business owned by two or more people
...

Silent partners: hold a stake but do not take part in the running
...

Deed of partnership: legal contract
...


5

Advantages and disadvantages of partnerships
Advantages

Disadvantages

1: Financial strength

1: Unlimited liability

2: Specialisation of labour

2: Lack of continuity

3: Financial privacy

3: Prolonged decision making

4: Cost effective

4: Lack of harmony

Companies
Owned by shareholders, individuals or businesses that have invested money to
provide capital for the company
...

Limited liability: shareholders do not lose personal belongings
...

Private limited company: can not raise share capital from the general public
...

Advantages and disadvantages of companies
Advantages

Disadvantages

1: Raising finance
2: Limited liability
3: Continuity
4: Economies of scale
5: Productivity
6: Tax benefits

1: Communication issues
2: Added complexities, expensive
3: Compliance costs, rules, regulations
4: Disclosure of information
5: Bureaucracy
6: Loss of control (takeover)

6

Public sector
Under ownership and control of the government
...

Wholly gov’t owned businesses are called “State owned enterprises”
...

Objective: to make profit, have revenues which exceed costs
...
Strives to
return a surplus for social gain
...

Goal of creating value for members, by operating in a socially responsible way
...

Consumer cooperative
Owned by customers, who purchase the goods for personal use
...

Producer cooperatives
Cooperatives that join to support each other, bulk purchases and economies of scale
...

Aim: enable disadvantaged people to gain access to financial services to eradicate
poverty
...

Advantages of public-private partnerships
1: Finance of the private sector
2: Efficiency of the private sector
3: Public sector funding and support

Non profit social enterprises
Run in a commercial like manner, but without profit as main goal
...

Profits are retained in the business
...

UN definition: private organisations that pursue activities to relieve suffering, promote
the interests of the poor, protect the environment, provide basic social services, or
undertake community development
...

Advocacy NGOs: promotion and defense of a cause, raising awareness through direct
action
...

Goal: raising funds from individuals and organizations, in order to support a cause
that is beneficial to society
...
3 Organizational objectives
Vision statements
Outlines an organisation’s aspirations in the distant future
...

Declaration of the underlying purpose of an organisation and its core values
...

Qualitative, not quantitative
...

“What is our business?”
Vision statements

Mission statements

What the business wants to achieve
...


Not time bound
...


Vague or abstract goal
...


Set by senior leaders
...


Aims, objectives, strategies, tactics
Aims
General and long term goals
...

General purpose, set by senior directors
...

Specific targets an organization sets, in order to achieve its aims
...

Set by managers and subordinates
...

They motivate and inspire the workforce to reach a common goal
...

10

Strategies
Plans of action to achieve strategic objectives of an organisation
...

Generic strategies: affecting the business as a whole
...
B:
Profit maximisation
Growth
Market standing
Image and reputation

Tactics
Short term methods used to achieve an organization’s tactical objectives
...
B:
Survival
Sales revenue maximisation

Need for changing objectives
Internal factors
Corporate culture:​ flexible cultures are more likely to have innovative objectives
...

Private vs public sector:​ public sector firms aim to provide a service
...

​
Finance:​ available finance determines scale of objectives
Risk profile:​ risk taking managers would likely set more ambitious objectives
Crisis management:

External factors
State of economy:​ booms and slumps
Government constraints:​ limiting what a business can do
Pressure groups:​ harming a firm’s image if unethical activities are undertaken
...
What is right or wrong from
society’s point of view
...

3 broad views
1: ​Self interest:​ businesses generate profits, governments sort out issues
...


2: Altruistic:​ businesses should do what they can to improve society
...

Ethical code of practice​: documented beliefs and philosophies of the business
...


1: Compliance costs
...


2: Lower profits
...


3: Stakeholder conflict
...


4: Subjectivity of ethics and CSR
...


External possibilities for future
development
...


External factors which hinder prospects
...


4: Encourages foresight
5: Objective and logical

Ansoff Matrix
Growth strategies of a firm
Existing products
Existing markets Market penetration

New products

Minimal risk
Increase market share

New markets

Product development
Moderate risk
Innovation, replacing old
products

Market development
Moderate risk
Entering overseas markets

Diversification
High risk
Spreading risks

13

1
...


Internal stakeholders
members of an organisation

Employees
Managers and directors
Shareholders

External stakeholders
Do not form part of the organisation, but have a direct interest or involvement
...

Type of organisation: different organisations have different aims, which can be used
to prioritise stakeholder groups
...


Stakeholder mapping
Low level of interest

High level of interest

Low power

Minimum effort

Keep informed

High power

Keep satisfied

Maximum effort

14

1
...


Social:
values and attitudes of society, environment, women’s rights, multiculturalism,
demographic changes, language
...

Threats: Reliability and security, shorter product life cycles, costly, job losses
...


1: Price transparency
...


2: Online crime
...


3: Higher production costs
...


4: Reduced productivity
...

2: Reduced unemployment: improves economy and competitiveness
3: Economic growth: Increase in a country’s economic growth over time
...
The pattern of fluctuations is called the
business cycle
...


15

Environmental
Weather, climate, natural disasters, pollution, diseases
...

Fiscal policy: use of taxation and government expenditure to influence businesses
...


Legal
Rules, regulations, laws
...

Employee protection legislation: protecting the interests and safety of workers
...


Ethical
Moral principles that should be considered in business decision making
...


16

1
...

Average cost: cost per unit of output
...

Technical economies: sophisticated machinery-better production
Financial economies: borrow large amounts of money at a low interest rate
...

Purchasing economies: discounts by purchasing in bulk
...

Poor communication
...

Division of labour causes tasks to become repetitive
...

Complacency: uncritical satisfaction of being great
...

The need for more competitive wages
...


Small vs large organisations
Benefits of being small

Benefits of being large

1: Cost control
...


2: Financial risk
...


3: Government aid
...


4: Local monopoly power
...


5: Personalised services
...


6: Flexibility
...


7: Small market size
...


Changing price: competitive prices increase sales revenue
...

Better products: improvements
Greater distribution network: widely placed products have more customers
...

Improved training and development: motivated workforce, better customer satisfaction
Advantages and disadvantages of internal growth
Advantages

Disadvantages

1: Better control and coordination
...


2: Relatively inexpensive
...


3: Corporate culture maintained
...


4: Lower risk
...


External growth
Inorganic growth

Dealings with outside organisations
...

Fast way to grow
...

Gain greater market share
...

Spreading risks across markets
...

Merger: two firms agree to form a new company
...


Types of integration
Horizontal integration: amalgamation of firms in the same industry, greater dominance
Vertical integration: between businesses at different stages of production
...

Backward vertical integration: Earlier stage of production
...

Conglomerate: amalgamation of businesses in diversified markets
...


1: Redundancies
...


2: Conflict between firms
...


3: Culture clash
...


4: Loss of control
...


5: Diseconomies of scale
...


Strategic alliances
Two or more businesses cooperate in a business venture for mutual benefit
...

Partnership assessment: analyse the potential of different partners, resources to offer
...

Implementation: operations are initiated with commitment to the contract
...

Creation of a new legal entity
...

Synergy: pooling of experiences, skills, and resources
...

Relatively cheap: compared to a hostile takeover
...

Exploitation of local knowledge: benefiting from each other’s reputation
High success rate: friendly and competitive

Multi national companies
An organisation which operates in two or more countries
...

2: Cheaper production costs, inexpensive labour
...

4: Taking advantage of infrastructure
...

6: Spreading risks
...


1: Causing unemployment
...


2: Profits are often repatriated
...


3: Threats to domestic businesses
...


4: Lack of social responsibility
...
Franchisee pays a licence fee to franchisor
...

Benefits of franchising
Benefits for the franchisor

Benefits for the franchisee

1: Rapid growth
...


2: International presence
...


3: Franchisor does not have to run it
...


4: Benefiting from large scale advertising

5: Franchisees have more incentives
...


Drawbacks of franchising
Drawbacks for the franchisor

Drawbacks for the franchisee

1: Risk in letting others use the name
...


2: Difficult to control operations
...


3: Not as quick as mergers

3: Large percentage of revenue paid
...
1 Functions of human resource management
Human resources planning
HRM: management function of using and developing people within a business to meet
its organizational objectives
...
People resigning or retiring
...

Methods of advertising:
Staff notice boards
Newsletters
Staff emails
Advantages and disadvantages of internal recruitment
Advantages

Disadvantages

1: Cost effective
...


2: Less down time
...


3: Less risk
...


4: Motivational
...


External recruitment
Hiring people from outside the business
...

2: Specialist trade publications, aims at the correct audience
...

4: Commercial employment agencies, costly, but saves time
...

6: Headhunting, stealing a person from their employer
...

8: Employee referrals, personal recommendations made by an employee
...


2: Wider range of experiences
...


3: Larger pool of applicants
...


Objectives
Enhance efficiency
Improve work quality
Facilitate career and personal development
Create multi skilled people
Adaptation to change
Benefits of training:
Productivity, higher staff morale, flexibility and adaptability
...


On the job
Carried out at the workplace
Lead by head of department, supervisor or other specialist
Advantages and disadvantages of on the job training
Advantages

Disadvantages

1: Cheap

1: Adopting bad working practices
...


2: Internal lack of up to date information
...


3: Trainers occupied
...


4: Lack of resources
...


5: Productivity initially low
...


1: Time consuming
...


2: Key staff must be freed
...


3: Information overload
...


4: Length of program may be long
...


1: Time consuming

2: Can be formal or informal
...


3: Long lasting benefits
...


4: Safe environment for discussion
...


29

Off the job
Off site, college, hotel conference room
...


1: Loss of output
...


2: Cost of staff and transportation
...


3: Relevancy of the information
...


4: Difficulty in cascading information
...

Aid decision making, solve problems
...


Behavioural
Team building
Ethical business practice
Emotional intelligence
Motivation training
Conflict resolution
Stress management
Anger management
Some people argue that behaviour is part of human nature and can’t be changed

30

Appraisal
Formal assessment of an employee’s performance
...

Summative: written description,
360 degree feedback: comments on performance from peers, subordinates,
managers, others who have had direct contact
...

Advantages and disadvantages of appraisals
Advantages

Disadvantages

1: Set targets for development
...


2: Objectively praise staff
...


3: Constructive feedback
...


4: Identification of weaknesses
...


5: Job evaluation to work out better pay
...


31

Dismissals and redundancies
Termination of a worker’s employment
Dismissal: incompetence, unsatisfactory performance
Incompetence: lack of ability and effectiveness to carry out job
Misconduct: unacceptable behaviour, lateness, rudeness, warnings beforehand
Gross misconduct: theft, endangering others, being drunk
...

Constructive: employer intentionally making the working conditions hard
Redundancies
When a business can no longer afford to employ a worker
Voluntary: asking for volunteers, redundancy package
Compulsory: Last in first out/least productive workers
...


Changing employment patterns and practices
Employment sector: primary, secondary, tertiary, quaternary sectors
Shifting of sectors
Ageing populations:
Working population decreasing
Retention of older employees
Flexible work structures
Charles Handy Shamrock theory: Businesses will gradually use less core staff to
improve flexibility
...

32

Organizational restructuring: part time and peripheral workers
Flextime: Determining working hours based on personal needs
Recruitment practices: More part time and temporary staff
Core staff retention: offering incentives to key staff
Training: Encouraging staff to update skills, often at own expense
Teleworking: Working away from office, using electronic communication
Homeworking: Performing work from home
Advantages and disadvantages of teleworking and homeworking
Advantages

Disadvantages

For employees

For employees

1: Job opportunities, remote locations
...


2: People who need to care for others
...


3: Flexible working hours
...


4: No commute, save time
...


5: Autonomy, decision, organisation
...


6: Income tax allowances
...


For employers

For employers

1: Less office space needed
...


2: Flexible hours for customers
...


3: Catering for peak and off peak trade
...


4: Continuity of service, those with kids
...


5: Absenteeism
...


6: Flexibility with working time directives
...


Outsourcing occurs:
When activities are not a core to the functions of a business
...


1: Subcontractors cutting corners
...

3: Reduced labour costs
...


4: The firm can concentrate its core
...


5: Workforce flexibility
...


Offshoring and reshoring
Offshoring
Relocating a firm’s activities overseas
...


Reshoring
Transfer of business operations back to the Heimatland
Easier quality control
Avoiding unethical practices like child labour
Rising wages
Rising transport costs

34

2
...

Responsibility: Shows who is in charge of whom
...


Levels of hierarchy
Line manager: person directly above an employee on the next hierarchical level
...

Advantages:
Improve coordination, communication
...

Chain of command: formal line of authority through which orders are passed down
...
Widens span of control
...


1: Creates anxiety, insecurity
...


2: Overloading staff
...


3: Longer decision making
...


Aspects of bureaucracy:
Paperwork
Reporting to several managers
Long chains of command
Managers with overlapping roles

Principles of bureaucracy:
Continuity: following official rules and regulations
Rules: official policies, clear lines of authority, responsibility, accountability
Hierarchy
Accountability

Drawbacks: limits creativity and risk taking
...


Centralization/decentralization
Centralized: Decisions made by a very small number of people
...

Advantages and disadvantages of centralization
Advantages

Disadvantages

1: Rapid decision making
...


2: Better control
...


3: Better sense of direction
...


4: Efficiency
...


36

Advantages and disadvantages of decentralization
Advantages

Disadvantages

1: Input from workforce
...


2: Faster decision making
...


3: Improved morale, empowerment
...


4: Improved accountability of staff
...


5: Teamwork, collaboration
...


Organisation
Project based organisation
Human resources are organised around particular projects
...
Meeting the needs and wellbeing of employees
is important
...
3 Leadership and management
Key functions of management
Planning
Setting the course of course of action to achieve organisational objectives
...

Commanding
Giving instructions and orders
...

Controlling
Managers are responsible for the performance, health and safety of their teams
...

Organizing
Organising resources, tasks
...

Leaders foster motivation, respect, trust, and loyalty
...

Manager
Achieving specific goals within a definite time frame
...

Tells subordinates what to do
...

Workers may be alienated and demotivated
...

Negative paternalistic: leads by control and guidance
...


Democratic
Involving employees in decision making
...

Delays decision making, not suitable for large workforce
...

Leader sets objectives, employees decide how to complete them
...


Situational
Different leadership styles for different situations
...
4 Motivation
Motivation
Desire, effort and passion to achieve something
...

People are a business’ most important asset
...

Wants and needs satisfied→Motivated workers→Increased productivity→Improved
profitability

Intrinsic:​ Internal factors, genuinely wanting to do something, achieving a personal
best
...
Dangling a carrot
...


Motivation theories
Taylor
Frederick Winslow Taylor
Scientific management

People are primarily motivated by money
...

Division of labour
...


Critics say:
Ignoring non physical contributions
...

Repetitive tasks causing job dissatisfaction
...

People need to be satisfied with lower levels needs before moving up
...

2: Security needs, make people feel safe
...

4: Esteem needs, recognition, self respect
...

Critics say:
It may not be feasible to motivate all workers the hierarchy, depends on the job
...

Assumption that everyone has these same needs in this order
...

Hygiene factors: Do not motivate but are necessary to prevent dissatisfaction
...

Job enlargement: more variety of work, more interesting
...

Job empowerment: delegating decision making
...


41

Adams
John Stacey Adams

Adams’ equity theory
Workers naturally compare themselves to others, remuneration should reflect inputs
...

Employees are motivated if their input to outcome ratio is equitable
...

Inputs: expertise, experience, enthusiasm, time, effort, loyalty, reliability
...

Equity norm: Equitable outcomes, remuneration, recognition, responsibility
...

Cognitive distortion: workers feeling undercompensated become demotivated, reduce
productivity
...
Differences in demography, culture, psychology
...
Pink

Money awards can dull and block the essential skill of creativity
...
Money does matter
...

Mastery: self improvement, desire to do well, improve, give challenging tasks
...

Critics say:
The theory does not apply across all professions, cultures, or countries
...

Difficult to distinguish efforts and output
...


Wages
Reward for labour services, hourly rate
...

Overtime rate: work done in excess of contracted hours
...


Commission
Pay based on proportion of sales or output contributed by a worker
...

Strengthens employee loyalty, fosters team spirit
...


Performance related pay
Rewarding employees who meet certain goals
...

Disadvantages: unrealistic targets, pressure, stress, quality reduced, individual targets
reduce teamwork
...

Employees have a more direct interest in the wellbeing and performance of firm
...

Health insurance, housing, retirement fund, staff discounts, paid holidays, paid sick
leave
...


43

Non financial rewards
Psychological and intangible needs
...

Autonomy
...
1 Sources of finance
The role of finance
Businesses need money for setting up, running, or expanding
...


Capital expenditure
Finance spent on fixed assets, items of monetary value, with a long term function
...

Firms with more fixed assets make a firm considered more valuable
...

Fixed assets are usually bought with borrowed money
...

Indirect costs: insurance, advertising
...


Internal
From within the business

Personal funds
Common among sole traders and partnerships
...

Profit kept after paying taxes and dividends
...

Contingency fund: back up for unforeseeable expenditure
...


Sale of assets
Selling dormant/unused assets
...

45

External sources of finance
From outside of the business
...

Main source of finance for most limited liability companies
...

Going public: floating shares, initial public offering
...


Loan capital
Medium to long term sources obtained from commercial lenders, like banks
...

Interest charges, fixed or variable
...

If mortgage not paid, the item can be repossessed
...


Trade credit
Buy now pay later
...

Anyone to whom the bank owes money: creditors
Anyone who owes money to the bank: debtors

Grants
Financial gifts from the government, usually for start up costs
...


Subsidies
Government funds to reduce costs of production, reduce prices
...


Debt factoring
Selling debt to another organisation
...

The business can not afford the maintenance, and need money
...
2 Costs and revenues
Expenditure of money for the purpose of production
...

Revenue:​ money which goes into business as the result of selling a product
...


Fixed:​ paid regardless of output and sales
...

Variable:​ directly proportional to the level of output
...

Semi variable:​ contain an element of both fixed and variable costs
...
Exceeding quotas, commission
...

Indirect costs:​ overheads, cannot be traced to the production of any single product
...


Advertising revenue
Example: Google, Facebook

Franchise costs and royalties
Franchisees pay the franchisor for rights to use brand, & loyalties based on revenue
...


Subscription fees
Charges imposed on customers accessing a product, based on formal agreement
...


Dividends
Shareholders are paid dividends
...

Used by charities, non profit organisations, schools, hospitals
...

Common for organisations that benefit society

48

3
...

Contribution per unit = P - AVC
Total contribution = Q x (P - AVC)
Contribution contributes to paying the firm’s fixed costs, overhead
...

Selling less than break even point: a loss is incurred, costs greater than revenue
...

Actual break even/profits/losses likely to be different than calculated
...

3: Level of risk involved, low risk low BEQ vs high risk high BEQ
4: Innovation and new technologies
5: Luck with external factors like exchange rates, unemployment, income, interest
...
4 Final accounts
Purpose of final accounts
Keeping records of financial statements
...

ALL companies must provide a set of final accounts to stakeholders
...

Balance sheet
Assets and liabilities of a business at a particular point in time
...

Ensure transparency in use of funds
...

based on financial performance, decide whether to hold, sell or buy more shares
...
Target setting & strategic planning
...


Government
Ensure correct taxes are paid
...


Suppliers
Decide the extent to which trade credit should be given
...


52

Profit and loss account or income statement
Financial statement of a firm’s trading activities over a period, usually one year
...


Three sections to an income statement
Trading account
Profit and loss account
Appropriation account
...

COGS = opening stock + purchases - closing stock
Gross profit can be improved by reducing costs or raising revenue
...

Increase selling price, raises revenue
...


Profit & loss account aka profit statement
Shows the ​NET PROFIT
Surplus from sales revenue after all expenses are accounted for
...

Increase net profit = reduce expenses
Negotiate rent, reduce fuel consumption, reduce administration costs
...

Dividends
Net profit after interest and tax distributed to the owners/shareholders of a company
...

Retained profit
How much net profit after interest and tax is kept by the business
...


Limitations of the profit and loss account
Importance of P & L account, shows profit generated after all costs are accounted for
...

Window dressing, legal manipulation of final accounts to look financially attractive
...


Profit and loss account example
Profit & loss account for Edison’s Future MNC for the year ended 31 Dec 2017
Sales revenue
Cost of goods sold
Gross profit
Less expenses
Net profit before interest and tax
Less interest
Net profit before tax
Less tax
Net profit after interest and tax
54

Balance sheet
Annual financial statement
Shows value of a company’s assets, liabilities, and owner’s equity
Produced at the end of the month, reflects on performance of one day only
...

Equity = net assets
Shows a firm’s sources of finance (shown as equity)
Where that money has been used (net assets)
Ensures all money in a firm is accounted for
...

Fixed assets, used to generate sales, lasts >12 months (machinery, property)
Current assets, liquidated within 12 months
Cash $, debtors (people who owe you money, customers), stock/inventory
...

Money owed by business
...

Long term liabilities are due to be repaid after 12 months
Bank loans, mortgage
...


Limited liability companies = shareholders’ equity
Other businesses = owners’ equity

Share capital = amount of money raised through the sale of shares
Retained earnings = net profit after interest and tax and dividends paid
Total assets - total liabilities = net assets = owners’ equity

Limitations of balance sheets
Static documents, capital and reserves can change the next days
...

The figures are only estimates of the value of assets and liabilities
...

No specific format of producing a balance sheet
...


56

Balance sheet example
Balance sheet for company XXX Ltd
...

Under fixed assets, list tangible assets then intangible at the bottom
...

2: Patent - product/process, legal protection from copying
...

3: Goodwill - relationship of firm between customers and employees
4: Copyright - legal protection for original artistic work
...


58

3
...

Calculating financial ratios from a firm’s final accounts
...


Historical and projected comparisons: comparing ratio in two different time periods
...

Purposes
1: Examine firm’s financial performance, short & long term liquidity position
...

3: Convert things into percentages
4: Compare actual figures with projected or budgeted figures
...


Ways to describe performance
Improved - Remained constant - Deteriorated

Profitability ratios: examine profit in relation to other figures like sales revenue
...


59

Gross profit margin
Shows the value of gross profit as a percentage of sales revenue
...


Reduce costs: negotiation with suppliers, cheaper labour, materials,

Net profit margin
Percentage of sales turnover that is turned into net profit
...

Higher NPM = better for firm

It is common practice to use net profits before interest and tax
...


Improving NPM
Reducing expenses, negotiate preferential payment, rent, reduce indirect costs
...


ROCE = Return on capital employed
Measures financial performance of a firm compared with capital invested
...


ROCE = (Net profit before interests and tax / capital employed) x 100%
Net profit before interests and tax = Revenue - COGS

Have 2 decimal points
Net profit before interests and tax = see income statement
Net profit before interests and tax = Revenue - COGS

Capital employed = loan capital + share capital + retained profit

Capital employed can be found on the balance sheet
...

Liquid assets = assets of a business that can be turned into cash quickly without
losing their value
...


Current ratio = current assets / current liabilities

If ratio becomes 2:1, for every $1 of CL, firm X has $2 of CA
Good range:
[1
...

Avoid storing too much stock, storage and insurance
Fast moving stock (supermarkets, fast food, flower shops) can have a high ratio
...


Acid test
Leave stock out of the equation
Current assets - stock / Current liabilities
Some stocks are hard to liquidate, like work in progress or highly expensive stock
...


62

3
...

Cash inflow - cash outflow = net cash flow
Working capital: cash or liquid assets available for daily running of the business
...

Insufficient working capital = no sufficient cash to pay short term debts
Rent, stock, labour
...

1 month = liquidity
6 months = ​insolvency​, leads to bankruptcy
Majority of business failures is due to insufficient cash flow, poor cash flow
management
...

A business can be profitable but be cash deficient
...

Cash → materials and stock → production → marketing → selling on credit → cash
Cash flow forecast = financial statement
Opening balance = same as previous month, initial capital
...

Three key components:
Cash inflow: sales revenue, payments by debtors, loans, interest
...

Banks & lenders assess the financial health of of a business seeking external finance
...

Aid business planning
...

Improve cash flow:
Reduce cash outflow
Increase cash inflow
Two other important parts
Opening balance: amount of cash at the beginning of trading period
...

Calculating closing balance
Opening balance + cash inflow - cash outflow
Opening balance + net cash flow

64

Causes of cash flow problems
1: Overtrading
When a business expands faster than their capabilities, aggressive growth
...

Not enough human and machinery, unable to fulfill orders, delays, no inflow
...


2: Overborrowing
Large proportion of capital raised externally, higher cash outflow on loan interest
...


3: Overstocking
Business holds too much stock, costs money to buy, produce and store
...


4: Poor credit control
Extended credit period offered to customers, trade for long periods without $ inflows
...


5: Unforeseen changes
Machinery breakdown, lengthens working capital cycle
...


65

Strategies to deal with cash flow problems
Reducing cash outflow
Preferential credit systems = longer time to repay suppliers
...

Better stock control = just in time system
Reduce expenses = non essential expenses for senior executives, scrutinising costs
...


Improving cash inflow
Tighter credit control = limit trade credit, reduce credit period, incentives to pay earlier
...

Improved product portfolio = add variety, poor sales in one product offset by others
...

Selling fixed assets = dormant assets
Debt factoring = external party taking over collection of money owed
...


66

3
...

Investment appraisal = quantitative techniques used to calculate financial costs and
benefits of an investment decision
...

Residual value: Worth after the life expectancy
Forecasted net return/cash flow: expected inflow - outflow

Payback period
Years and months it will take to recover initial investment
...

Paid back during third year
...

Round answer UP↑
The payback period of the investment is 2 years and 9 months
...

Longer PBP = more risk to changes in external environment, like demand
...

67

Advantages and disadvantages of payback period
Advantages

Dsiadvantages

1: Simplicity, quick and easy
...


2: Focuses on time rather than profits
...


3: Only focuses on short term benefits
...


4: Some firms recoup costs slowly
...


5: Error prone, predicting cash flow
...

ARR =

(total prof it during project lif espan)/years of project
x 100%
Initial amount invested

Expressed as a percentage
...

Advantages and disadvantages of Average Rate of Return
Advantages

Disadvantages

Easy comparisons of returns
...


seasonal factors
...


68

4
...
”
Marketing exists to address people’s needs and infinite wants
...

Examining reasons behind people’s decisions
...

2: Set the correct ​price​ to ensure affordability & competitiveness
...

4: Ensure effective ​promotion​ to convince customers
...

Ethics plays a small role
...

This approach not only considers the demands of consumers, but also the effects on
all members of the public involved in some way when firms meet these demands
...

Balance between: Company profits/consumer wants/society’s interests
...

Clients of social marketing agencies: NPOs, gov’t orgs, companies with CSR
...

69

Comparison between social and commercial marketing
Social

Commercial

1: Purpose: influence & persuade
change in social attitudes
...


2: Benefits: satisfies needs of public,
benefits communities
...

3 Private sector
...


Market and product orientation
Market orientation
Marketing approach used by outward looking businesses
...

Focuses on the customer
...

2: Lower risk, products will sell
...


Product orientation
Marketing approach adopted by inward looking businesses
...

Say’s law: supply creates its own demand
...


2: More control over products

2: High failure rates
...

A market exists where there is demand for a particular product, and where there is a
willingness for from businesses to supply these products
...

Industrial markets = cater for organisations, aka producer markets
...

Customer base = total potential number of customers in a particular market
...

Competition = degree of rivalry within a particular market
...

Demographic characteristics =gender, age, ethnicity, religion
...

Seasonal & cyclical characteristics = constraints by seasonal fluctuations in demand
...


Market share = (Firm’s sales revenue / industry’s sales revenue) x 100%
Revenue: sales, turnover, sales turnover
...

Quantity sold: output, level of output
Revenue = price per unit x quantity sold

Round the market share to the nearest percentage
...

Long term goal/aim: be the market leader, possess highest share in their industry
...

2: Improve existing products
...

4: Distribution, make it easy for people to buy, improved efficiency
...

6: Establishing property rights, trademarks, copyright, patents
...

2: Economies of scale
3: Distribution, more efficient channels
4: The market leader sets the price, high prices and everyone follows/lower prices
5: Steal customers from other firms to increase market share
...

Three firm concentration ratio of 98% = 3 top firms occupy 98% of the market
...


72

Marketing objectives
Specific marketing goals of an organisation
...

2: Higher market share, more competitive
...

4: Improved product and brand awareness, builds customer loyalty
...

6: Enhanced brand perception, a positive opinion & judgement about the business
...
2 Marketing planning
Marketing plan
written document outlining how a firm intends to achieve its marketing objectives
...


The marketing planning process involves
Marketing audit, examination of current situation of the business
...

Marketing strategies, use of marketing mix to achieve strategies
...

Evaluation, examining the extent to which the firm has achieved its objectives
...

Market leadership, having the greatest market share
...

Consumer satisfaction, with price, quality and level of customer service
...


Target market & segments
A distinct group of customers with similar characteristics, needs and wants
...


Targeting: each distinctive market segment having its own marketing mix
...


74

Segmentation
Process of splitting the market into consumer groups to better meet their needs
...

Higher sales, catering for a wider range of customers
...

Support for product differentiation, spread risks
...

Age
Gender
Race & ethnicity
Marital status
Religion
Language
Income & socio economic class

By geographic factors
Location, different cultures and social attitudes
...


By psychographic factors
Emotion & lifestyle of customers
...

Advantages and disadvantages of niche marketing
Advantages

Disadvantages

1: Better marketing focus

1: Niche markets are small

2: Less competition, higher prices

2: Few economies of scale

3: High specialisation in the niche

3: Attracts new entrants into industry

Mass marketing
Undifferentiated marketing, ignores individual market segments
...

Advantages and disadvantages of mass marketing
Advantages

Disadvantages

1: Huge economies of scale

1: High entry barriers, mass production

2: Single campaign for whole market

2: Fierce competition, marketing budgets

3: Bigger customer base

3: Lack of focus, not directly targeting

76

Position maps aka perception maps
Visual tool which shows customers’ perception of the brand in relation to others
...

Advantageous for its simplicity
...


Quality
Price

High
High

Low

Premium products

Cowboy products
Deceives customers, short term
tactic to gain revenue
...

2: Decide which aspects should be marketed
...


Three generic competitive strategies
1: Cost leadership
2: Differentiation
3: Focus

77

Differentiation and unique selling point
Any aspect of a business, product or brand which distinguishes it from competitors
...


Examples of USPs
Being the only firm in an area to supply something
...

Having a reputation for being the best in the market
...

Having a popular business slogan
...


Advantages and disadvantages of differentiation
Advantages

Disadvantages

1: Price advantages over competitors

1: Expensive

2: Brand recognition & loyalty

2: Lack of economies of scale

3: Distribution advantages

3: Excessive differentiation

78

4
...


Ad hoc
Takes place on an “as & when necessary” basis
...


Continuous research
Regular and ongoing basis
...

Enables businesses to improve their marketing strategies
...

Allow businesses to understand activities & strategies
...


79

Primary market research aka field research aka bespoke research
Market research that involves gathering new data first hand for a specific purpose
...

Self completed, personal, telephone, online, postal
...

Focus groups
Small discussion groups to gain insight into attitudes & behaviour of respondents
...

Advantages and disadvantages of primary research
Advantages

Disadvantages

1: Relevance, directly addresses Qs
...


2: More up to date & relevant
...


3: Biases or misleading responses
...


Internal sources = already gathered by the organisation before, sales reports etc
...


Market analysis
Reveals the characteristics & outlook for a particular product or industry
...

Government publications
Population census, social trends, trade statistics, unemployment, inflation
...

Advantages and disadvantages of secondary research
Advantages

Disadvantages

1: Cheaper & faster to collect
...


2: Gain insight to changes
...


3: Large range of sources
...


4: Large sample sizes, accuracy
...


81

Qualitative and quantitative research
Qualitative
Non numerical answers and opinions from respondents
...

Closed questions = choose from a list of options
...

Advantages and disadvantages of qualitative research
Advantages

Disadvantages

1: Exploring behaviour & attitude
...


analyse
...
2: Not representative of population
...


3: Cost of skilled interviewers
...


Quota sampling
Certain number of people from different market segments is selected
...

However, it may not be representative if the sample is not chosen appropriately
...

Useful when all members of a population have the same or similar characteristics
...

82

Some people selected might not be part of target group, indiscriminate
...

Only uses those with key characteristics required for the sample
...


Cluster
Selecting several geographical areas, randomly interviewing people in each cluster
...

Potential bias if choosing a few locations, costly if more locations used
...

Cheap and quick, word of mouth for promotion, getting a large audience
...


Convenience sampling
Using subjects who are easy to reach
...

Large population excluded, findings are skewed
...

Researchers’ mistakes in recording, processing or analysing
...


Sampling errors
Mistakes in sample design
...

Inappropriate sampling method used, getting a biased sample
...
5 Marketing mix
Product
Any good or service that serves to satisfy the needs or wants of customers
...

Producer products: purchased for commercial use
...

Life cycle is measured by sales revenue over time
...

Designing and testing a product
...

Assess potential success of product
...


2: Launch
Sales relatively low, costs very high due to expenses involved in launch
...


3: Growth
Increasing sales revenue, brand awareness and influx of customers
...


4: Maturity stage
Sales revenue continues to rise, but at a slower rate
...

Cash flow, profits, economies of scale are favourable
...

Managers might attempt to exploit new market segments
...

Investment in product, promotional expenditure cut, price plummets
...


Common strategies
Price reduction, increasing demand, reducing extra stocks
...

Repackaging, using appearance to revive demand
...

Brand extension, using an existing successful brand name to launch a new version
...


Boston Consulting Group matrix
Marketing planning tool that helps managers plan for a balanced product portfolio
...

Market share
Market
growth

High

Low

High Stars
Question marks
Successful products generating Suggests inferior marketing and
high cash for business
...

Businesses should develop
strategies to gain higher market
share
...

They risk becoming dogs
...


Dogs
Do not generate much cash
...


86

Branding
A name that is identifiable with a product of a particular business
...

Reduces risks, give new products a better chance of survival
...

Encouraging brand loyalty, maintain customers and avoid losing to competitors
...

Recognition and loyalty, customers feel comfortable with a familiar product
...
Successful brands get valuable retail space
...

Expressed as a percentage of the sample surveyed
...


Brand development
Marketing process of improving and enlarging the brand name in order to boost sales
revenue and market share
...

Helps businesses maintain and improve market share
...

Barrier to entry in competitive markets, reduces likelihood of switching brands
...


Brand value
The premium that customers are willing to pay for a brand name over and above the
value of the product itself
...

Packaging affects customer perceptions
...

Protection against damage during transport
...

Facilitates distribution
...

Promotes the brand or business
...


A common issue is setting a price that is competitive and also profitable
...

The price has an impact on the sales volume
...
Higher demand = higher sales
...

Influencing factors
1: Cost of production
2: Competitors’ pricing
3: Competitive conditions in the market
4: Marketing objectives like market share
5: How consumer demand is affected by price changes
6: If it’s a new or existing product

88

Cost-plus pricing/mark-up pricing
Adding a percentage/predetermined amount of profit to the cost per unit of output
...

Disadvantage: relies too much on intuitive decision making, not customer needs
...

Gain brand recognition and market share, price can be raised over time
...

Disadvantage: Low prices make customer perceive it as low quality
...

Exact opposite of penetration pricing
Technologically advanced and innovative products
...

Prestigious image for product
...

Price skimming is only successful if supported by other elements of marketing mix
...

Customers psychologically feel like they are getting a bargain
...
Normally paid in cash
...

Encourages brand switching
...

Milk is the number one loss leader in grocery stores
Placed at the back of the store so you see other products

Price discrimination
Same product is sold at different prices to different customers
...

2: Customers must have different degrees of willingness to pay
...


Price leadership
Used for best selling products or brands in a market
...

Competitors follow the leader
...

Price war: firms compete by a series of intensive price cuts
...


Three key objectives
1: Inform, alert market of products, facts and figures, give info to influence decisions
...

3: Remind, retain customer awareness & interest in an established product
...


Television
Advantages: Utilises imagery, sounds
...


Radio
Advantages: Large audience, cheaper than TV
...


Cinema
Advantages: Directly targets audiences, large size of screen, more attention to ads
...


Newspaper advertising
Advantages: Wide audience, cheap, can be referred to at a later date
...


Magazines
Advantages: High quality images, referring back, longer shelf life than newspapers
...


Outdoor advertising
Advantages: High exposure, utilising technology for sound & colours
...


91

Below the line promotion
BTL, promotion with non mass media
...


AIDA
Attention, raising awareness of product
...

Desire, generate a desire or feeling of need for a product
...


Factors to consider
Cost, cost per head, cost of promotion divided by potential audience size
...

Product life cycle, extensive promotion during launch, less during decline
...


92

Advertising
A form of promotion that communicates marketing messages
...

Businesses often use an advertising agency to design and produce advertisements
...


Personal selling
Promotional techniques relying on sales representatives directly persuading people
...

Drawback: sales agents are expensive to hire
...

Eg: Launch party for a product, TV interviews, donations to charities
...

Rid excess stock, encourage customer loyalty
...


93

Guerilla marketing aka stealth marketing
Using untraditional, unconventional & unruly but creative & original promotion
methods, on a relatively low budget
...

Favoured by small business who can not afford ATL promotional methods
...


Social media marketing
Gaining internet traffic through social media websites
...

However, businesses have no control over what is written, also prone to hackers
...


94

Place
Distribution of products, how it gets from the producer to the consumer
...


Channels of distribution
The means used to get a product to the customer
...


Zero level
No intermediaries, producer → consumer
Eg: mail, e-commerce, telesales, common in service industry
...


Two level
Two intermediaries, manufacturer → wholesaler → retailer → consumer
Advantages and disadvantages of having intermediaries
Advantages

Disadvantages

1: Access to more markets, foreign ones

1: Intermediary takes a profit mark up
...


2: The process is slower, more costly
...


3: Poor promotion

95

Intermediaries
Commonly used intermediaries in the distribution process
...

Lower transaction costs, time is freed up for manufacturers
...


Distributors and agents
Independent specialists that trade in the products of only a few manufacturers
...


Retailers
Sellers of products to the final customer
...

Chain stores: multiple retailers, have numerous outlets, gets brand recognition
...

Hypermarket: superstore, outlet for food + other consumer goods
Department store: everything except foodstuff (Indigo, The Bay)

Specialty channels
Does not involve any retailer
Vending machines, mail order
...

Direct control over distribution
...


Telemarketing
Use of telephone systems
...


Vending machines
Specialist machines that stock products for sale
...

Low running costs, only stocking one brand, reduces competition
...


Mail order
Sending promotional material via post
...


96

4
...


Features of E commerce
Global reach, breaking geographical barriers
...

Personalisation
Information richness
Universal standards
Customer reviews
Low entry barriers

E commerce and marketing mix
Product
Individual requirements and personalisation
Greater market potential, can afford to stock a wider range of products
Meet legal and cultural requirements
Packaging is less of an issue, does not need to appeal
...


Price
Increases price transparency and comparisons
...

Markets are more competitive, prices can be easily compared
Price discrimination is more difficult based on geography

Promotion
Promotional opportunities, banners, pop ups, social networks, viral marketing
...

Convenience for customers, less geographical limitations
...

Some customers not willing to purchase certain products online
...


1: High setup costs, requires specialists
...


2: Credit card charges
...


3: Online fraud, identity theft/

4: Reduced packaging, lowers costs
...


5: Choice & convenience
...

7: Domestic currencies flow out
...


Business to consumer B2C
E commerce directly catered for the end user
...


98

5
...


Turn factors of production into the output of goods and services cost effectively
...

Five Ms: materials, manpower, money, machines, management
...

Packaging, mass production vs personalised
...

Motivation and teamwork depend on the method of production
...

Investment in machinery, vs remuneration for labour
...


Ecological sustainability
Capacity of environment to fulfill present needs without jeopardising future
...

Social role of business, meet wellbeing needs, job creation

Economic sustainability
Meeting economic needs of present, without compromising future
Responsibility in resource use

100

5
...

Advantages and disadvantages of job production
Advantages

Disadvantages

1: Quality of highly skilled labour

1: Time consuming for personalisation

2: Motivation, receiving recognition

2: Labour intensive, cost of production

3: Flexibility, changing specification

3: Long working capital cycle

4: Uniqueness, USP

4: Few economies of scale

5: Customization, choice for customer

5: Irregularity of orders

Batch production
Simultaneously producing a limited number of identical products
...

Production of one batch can be stopped to work on another one
...


1: Storage, high amount of stock
...


2: Repetitive jobs, boredom
...


3: Inflexibility, can’t modify a batch
...


4: High production costs, machinery
...

Suppliers sell you component parts, you assemble and sell to consumer
...
Unit costs of production are low
...

Flow is continuous, often 24/7, completely automated
...


1: Boring and monotonous work
...


specifications
...


3: Capital intensive setup and machinery

5: Low labour costs, unskilled labour
...

5: Need for large storage system
...

Each cell is responsible for completing a part of the overall process
...

Advantages and disadvantages of cellular manufacturing
Advantages

Disadvantages

1: Autonomy within a team
...


2: Responsibility & accountability
...


3: Motivation, autonomy & achievement
...


4: Specialization, team spirit, productivity 4: Lower capacity of machine utilisation
...
4 Location
Geographical position of a business
...


Quantitative reasons for a location
Reasons that can be numerically calculated
...

Land in city centres is limited, more demand and more earning potential
...

Hypermarkets needing lots of land buy cheap and distant land
...

Availability of skilled or unskilled labour
...


Proximity to the market
For bulk increasing industries, final product is heavier than raw materials
...


Proximity and access to raw materials
For bulk reducing industries
...


Government incentives and limitations
Grants, subsidies, interest free loans, encouraging businesses to locate somewhere
...


103

Qualitative reasons for a location
Psychological and emotional aspects of location
...


Local knowledge
Familiarity with the local culture and needs
...

Good infrastructure allows more efficient supply of goods and services
...


Political stability
Free from corruption
Stable exchange rate
Low tax
Law and order

Gov’t restrictions and regulations
Bureaucracy
Licences & permits
Economic freedom

Ethical issues
Avoiding complaints about unethical behaviour
...

Pollution, waste and noise
...


Comparative shopping aka clustering
Locating near similar businesses that cater for similar or complementary markets
...

Reduce costs, increase productivity
...

Quality output by specialists
...

Offshored functions can remain in business, or outsourced - offshore outsourcing
...

Quality assurance is difficult
...

Production offshoring: manufacturing
...


Insourcing
Using a firm’s own resources to accomplish a function otherwise outsourced
...

Not cost effective
...


105



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