ZNOTES.

ORG

UPDATED TO 2023-2025 SYLLABUS

CAIE AS LEVEL
BUSINESS
SUMMARIZED NOTES ON THE THEORY SYLLABUS
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CAIE AS LEVEL BUSINESS

1.4. Economic activity

1. Enterprise There are insufficient goods to satisfy all of our needs so
we have to make choices of which need we want to satisfy
1.1. Purpose of Business Activity now.

Businesses aim to add value to raw materials and semi- Opportunity cost
finished goods in order to satisfy needs and wants of
consumers. The benefit of the next most desired option which is given
This helps raise living standards of the economy as up.
businesses will employ people for production. If we decide to chose one option, the opportunity cost is
the one we didn’t choose.

1.5. Changes in the business

environment
The business environment is always rapidly changing
(dynamic)
Changes can make original ideas less successful.
1.2. Factors of production
1. Land - all natural resources used in production 1.6. Why do new businesses fail?
Return for land is “rent”
2. Labour - both manual and skilled work Lack of record keeping
Return for labour is “salary” or “wages” Lack of cash and working capital:
3. Capital - finance that is needed to set up and run the Working capital is the capital needed to run the day-to-
business as well as man made goods used in day business
production eg. capital goods like machinery. Ways to avoid working capital shortage:
Return for capital is “interest” Make a cash flow forecast
4. Enterprise - the driving force that arranges all other Inject more capital into the business
factors of productions and takes the risk of the new Establish good relations with bank
business venture Use effective credit control with customers
Return for enterprise is “profit” Poor management skills:
Essential skills to avoid management problems:
1.3. Added value Leadership skills
Cash handling and cash management skills
Planning and coordinating skills
Added value = selling price - cost price
Added value is not the same as profit Decision-making skills
Business is successful if the consumer is willing to pay Communication skills
Marketing, promotion and selling skills
more than the cost of materials.
Changes in business environment:
How to increase added value A few changes include:
New competitors
1. Increase selling price by providing higher quality Legal changes
goods (higher quality raw materials), increasing Economic changes
advertising, changing packaging, making small Technological changes
improvements in the product.
2. Decrease cost price by reducing wastage through lean Why may businesses fail in early stages?
production methods, find cheap supplies, reduce
quality of the product, increase efficiency by training Internal problems –
workers and using advanced technology. Weak business idea
Lack of managerial skills
Lack of suitable employees
Lack of sufficient finance
Lack of entrepreneurial skills
Poor initial research
Over ambitious ideas

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CAIE AS LEVEL BUSINESS

Poor decisions An entrepreneur will have to decide on the best

External problems – location, considering costs, potential target market,
Anticipated customers did not materialize the status of the area, etc.
Changes in business environment affected customer’s Competition
spending patterns Building a customer base:
Unexpected competition For a firm to survive, it must build customer loyalty
and brand image.
1.7. Local, national and multinational Businesses can do this by:
Offering pre and after-sales services
Local: Provides goods and services to local population. Providing discounts and other sales promotions
National: Provides goods and services to domestic Providing goods that meet specific needs (which a
market. large firm will be reluctant to do)
Multinational: Provides goods and services to more than
one country. 1.11. Types of Entrepreneurial
Businesses
1.8. Characteristics
1. Primary sector – extracting materials like fishing and
Intrapreneurs Entrepreneurs coal mining
Passionate Innovative 2. Secondary sector – manufacturing sector like craft
Determined Committed and self-motivated manufacturing
3. Tertiary sector – service sector like hairdressing
Resourceful Multi-skilled
Think like entrepreneurs Leadership skills
Independent and proactive Self confidence
1.12. Impact of enterprise on an
Innovative Ability to bounce back economy
Employment creation
1.9. Roles Economic growth
Firm’s survival and growth
Intrapreneurship Entrepreneurship Innovation and technological change
Take direct responsibility and Exports
Generate ideas for a new
risk for the ongoing success Personal development
business.
of a business. Increased social cohesion
Develop innovative ideas for
Invest own savings and capital
projects. 1.13. Business Plans
Accept responsibility
Accepted possible risks Meaning: document of the business objectives and how they
will achieve them
Purpose: used to create a strategy, manage finance, attract
1.10. Challenges Faced by investors
Entrepreneurs Advantages Disadvantages
Can allocate resources Can be inaccurate
Identifying successful business opportunities: Future planning Can be time-consuming
Entrepreneurs need to find markets which have Changing business environment
enough demand to be profitable Attract investors
makes it flawed
People get their ideas from:
Own skills
Previous Employment 2. Business Structure
Small-budget market research
Sourcing finance:
Entrepreneurs face financial issues due to: 2.1. Classification of business activity
Lack of own finance
Lack of awareness of grants and subsidies 1. Primary sector – extracting natural resources. E.g.
Lack of trading records to receive loans from bank fishing, mining
A poor business plan 2. Secondary sector – manufacturing sector. E.g. car
Determining a location: manufacturing, clothes-making

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CAIE AS LEVEL BUSINESS

3. Tertiary sector – service sector. E.g. banking, 2. Mixed economy – both private and public sectors.
transportation Governments and individuals make decisions
together. Governments usually offer essentials like
health care and education.
2.2. Public and Private Sector
3. Command economy – economies that have only the
1. Public sector – firms controlled and managed by the public sector.
government/local authority.
2. Private sector – firms controlled and managed by 2.5. Sole trader
individuals.
These are businesses owned by one person
2.3. Changes in business activity The one person owns and controls the business.
It has no formal legal structure as business and owner are
The importance of each sector changes as the economy considered one and the same.
develops. The importance of each sector is measured by
Advantages Disadvantages
employment levels or output levels.
Easy to set up and manage Limited finance (capital)
1. Industrialisation is when the importance of secondary Owner has complete control Unlimited liability
sector rises. This occurs in developing countries like
Ability to choose working
India and China May face intense competition
times
Advantages Disadvantages Easy to establish relations
with employees and Unable to specialise
Causes a huge movement
It increases the GDP of the customers
from rural to urban areas,
country, helping raise living Freedom of making own
causing social and housing Lack of continuity
standards. decisions
problems.
Imports of raw materials will Insufficient skills
It increases the employment
increase, increasing import
opportunities available
costs. 2.6. Partnership
Manufacturing industries
Increases exports and
growth is usually occurred It is a business owned by a group of individuals
reduces imports.
due to growth of MNCs
Firms will be more profitable, Advantages Disadvantages
increasing tax revenue Each partner may specialise in
Unlimited liability
Manufacturing sector goods different areas
have more value than primary Shared decision-making Profits are shared
sector goods. Additional finance (capital) injected
Risk of conflicts
by each owner
2. De-industrialisation occurs when the importance of Losses are shared No continuity
secondary sector declines. It occurs in developed Fewer legal formalities
countries like USA, UK.

As a country develops, the average income per person 2.7. Limited companies
increases. Rising incomes lead to increasing living
standards as consumers will be able to spend more on Features:
services than goods, showing demand for services rises
more quickly than physical goods Limited liability – each shareholder will only lose the
As the world industrialises, more and more amount invested if the business/idea fails
manufacturing businesses enter the market, increasing Legal personality – the company has a separate legal
the competition and causing prices to fall. This makes it identity from its owners/shareholders
easier for developed countries to buy these goods rather Continuity – even after the death of a shareholder, there
than producing it themselves. is no need for dissolution.

2.4. Types of Economies Private limited companies

1. Free market economy – only private sector and no It is a business owned by shareholders who are friends
government intervention. and family

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Advantages Disadvantages Capital and finance shortage

Slow decision making
Limited liability High legal formalities
Separate legal identity Can’t sell shares to public
Holding companies
Continuity Difficult to sell shares
Have to send accounts to A business which owns and controls many different
Original owner will be able to
companies’ house – less companies, but is not unified as one
retain control
secrecy
Ability to raise capital from Joint ventures
sale of shares
When 2 or more businesses agree to join for one project
Higher status Reasons:
Shared costs and risks
Public limited company Different companies’ different strengths
Together more powerful
These are businesses which have legal rights to sell Risks:
shares to the public. Conflicts
Errors or mistakes
Advantages Disadvantages
Business failure of one partner, risk the whole project.
Limited liability High legal formalities
Separate legal identity Cost of hiring specialists 2.9. Franchise
High fluctuation in share
Continuity
prices A business which uses the name, logo, trading methods of
Easy to buy and sell shares Less secrecy an existing successful business
Access to substantial capital They have a legal agreement to do so
sources due to the right to High risks of takeover
To the franchisor
issue prospectus (flatation)
Advantages Disadvantages
Directors influenced by short
Poor management of one
term objectives of major Guaranteed income from
business, affecting reputation
investors franchisee
of all
Easy, risk-free way of
Legal formalities in setting up a company Potential management issues
expansion
1. Memorandum of association – name, address, contact Easy to manage Difficult to monitor
number, maximum share capital, declared aims Still have some control
2. Articles of association – name of director, procedures
to be followed To the franchisee
Advantages Disadvantages
These documents must be submitted to the registrar of
companies Lower risks as business is Proportion of revenue sent to
established franchisor

2.8. Other forms of business Advice, training, supplies and

Rigid business model already
advertising obtained by
organisation made
franchiser
Potential loss of large
Cooperatives Economies of scale
investment
Access to experts Expensive initial fee
These are organisations owned by their members
Features: Franchiser won't open
All members contribute to running and managing another outlet in the same
All members have a say in important matters area
Equally shared profits
Advantages – 2.10. Public-sector enterprises – public
Buying in bulk
Working together to solve problems corporations
Good motivation
Disadvantages – Known as public corporation
Poor management skills In the public sector

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CAIE AS LEVEL BUSINESS

Profit is not their main aim 2. Problem – if the total market is small, results
will not be accurate
Advantages Disadvantages
Managed with social 3.2. Measuring business size
High chances of inefficiencies
objectives rather than profit
Still operate, even if making a Subsidies may encourage Best form of measurement
loss inefficiency
Finance raised from Government may interfere in No ‘best’ measure
government business decisions To choose which method to use, we need to known if we
are interested in absolute size or comparative size.
Absolute size – test using at least 2 criteria and make
2.11. Social enterprise comparison
Measures used will depend on the industry or specific
Features: business.

Directly produce goods and services Problems while measuring businesses:

Have social aims and ethical ways of producing them
Need to make a surplus There are many different methods to measure business
size and each method gives us different answers.
Objectives: There is no internationally agreed definition on the size of
a business.
Social
Economical
Environmental 3.3. Small and micro-businesses
Together known as triple bottom line Significance of small and micro-businesses

Benefits of encouraging development of small and micro-

3. Size of Business businesses:
Many jobs created as small businesses won’t have funds
3.1. Different methods of measuring to buy capital equipment
Often run by dynamic entrepreneurs. Provides greater
size variety
Will create competition for large businesses. Discourage
1. Number of employees monopoly
1. The size is measured upon the basis on May provide specialist goods or necessities
number of workers employed. Helps them grow and become large
2. Problems- a firm may be capital intensive, Will have lower costs as no diseconomies of scale
making this method insubstantial.
2. Revenue Government assistance for small businesses
1. Used to compare businesses of same industry
2. Depends on the total value of sales made. Governments may provide assistance to small businesses
3. Problem – less effective when comparing high- in the form of:
value and low-value firms. Reduced rate of tax
3. Capital employed Loan guarantee scheme
1. Depends on the total value of long-term Information, advice, support
finance available in the business Aid designed to overcome specific problems like:
2. Problem – can’t be used to compare firms in Lack of specialist management expertise
different industries Problems raising finance
4. Market capitalisation Marketing a limited product range
1. Market capitalisation = current share price * Finding cost-effective premises
total number of shares issued
2. Limited to public limited companies 3.4. Small and large businesses
3. Problem – share prices change on a daily basis
making the comparison unstable Advantages
5. Market share Small Business Large Business
1. Market share = total sales of business/total
Managed and controlled by
sales in industry * 100 Ability to employ specialists
owners

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CAIE AS LEVEL BUSINESS

Small Business Large Business 6. Ability to be more competitive

Flexible - adapt quickly to Can conduct through market 7. Increase value of business
changes in demand research 8. Easy to access new target groups and markets

Personal contact with Internal growth

Diversified risks
employees and customers
Offer personal service Ability to sell at lower prices It is expansion by expanding the existing operations
Economies of scale It is cheap
Avoids takeover problems
Disadvantages Takes long time for results
Small Business Large Business Limited extent of growth
May not receive the desired outcome
Limited access to finance Diseconomies of scale
Ways for internal growth: -
Divorce between ownership Enter new markets
Not diversifies, high risks
and management Increased marketing activities
Few economies of scale Conflicts Increase investment
Poor communication, slow Use newer techniques to produce more efficiently
Unable to afford specialists
decision making
Difficult to manage and control 3.7. External growth
Merger: shareholders and managers of 2 firms come
3.5. Family business together with both owning shares
Takeover: company buys more than 50% of another
These are businesses which are owned and managed by
companies shares
at-least 2 family members.

Strengths Weaknesses Types of integration:

Success/continuity problem - Horizontal: same industry at same stage of production
Commitment - family owners
there might be failure within Vertical forward: same industry as a customer of existing
will show more dedication
the family causing the failure business
towards their work
of the entire business. Vertical backward: same industry as a supplier of existing
Knowledge continuity - business
Informality - there may be
families ensure they pass on Conglomerate: different industry
many inefficiencies and
the business knowledge to the Friendly merger: takeover with consent of the target
internal conflicts as personal
next generation allowing business
and professional life is not
experienced and skilled Hostile takeover: takeover without consent of the target
separate
managers. business
Reliability and pride - as the
family business will have their Nepotism may lead to
name and reputation, they try inefficient management
to improve quality at all times.
Traditional - they are
reluctant to change
(inflexibility)
Conflicts - Family problems
may affect business
management

3.6. Business growth

Reasons for growth –

1. Increased profits
2. Increased market share
3. Economies of scale
4. Lower risks
5. Increased power and status 3.8. Why might business growth fail?

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CAIE AS LEVEL BUSINESS

Differing managing attitudes/culture They provide a sense of direction

Shared facilities may not benefit both businesses Helps improve focus of individual employees and
Poor communication departments
Not involving employees Provides a framework for decision making
Acts as a motivation tool
3.9. Joint ventures and strategic Acts as a means of assess performance, progress and
identify training needs
alliances Helps plan for future in terms of resources required

Importance of joint ventures:

4.5. Hierarchy of objectives
Costs are shared
Risks are shared This shows the balance and dependencies between the
Different strengths can fit together different stages of setting aims and objectives.
Differing markets can increase potential consumers

Importance of strategic alliances:

Can create rapid growth

Leads to innovation
Enter new markets
Share ideas and resources

4. Business Objectives
Aims are the long-term goals of a business. They act as a
framework for a business to create further objectives and set
a purpose of the business.

4.6. Corporate aims

4.2. Importance of business objectives
These are long terms business goals and provides the
An objective helps to direct, control and review any central purpose of the business.
business activity. These are objectives that translate the aims into
For any aim to be achieved successful, there have to be achievable targets.
strategies in place which will guide the business to
achieve the goal. These strategies must be reviewed Advantages of corporate aims
constantly to know if it is effective.
Every business’s aims and strategies change over time. Help develop a sense of purpose and direction for the
business
4.3. SMART criteria Help check progress
They help development of successful tactics and
Every business objective must meet the SMART criteria strategies
S – SPECIFC: the aim must focus on what the business
does and must directly relate to the business’s 4.7. Vision statement
activities.
M – MEASUREABLE: every aim must have quantitative Vision statement is the desired future of the company
values to prove targets are being met effectively. It is a company’s road map indicating what the company
A – Achievable: aims which are impossible to achieve wants to become in the future.
in a time period must not be set. Such aims will
demotivate the employees. Mission statement
R – realistic and relevant: aims should be realistic
according to the resources available and must be
Mission statement is a statement of a business’s core
relevant to the people carrying it out. aims, phrased in a way to motivate employees and to
T – time-specific: there must be time limits to the stimulate interests by outside groups.
objectives established. It is a summary on how they intend to support/achieve
their vision
4.4. Benefits of objectives

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CAIE AS LEVEL BUSINESS

Businesses communicate their mission statement 4. If not growing, may lose its appeal to
through – publishing it in their accounts, websites, new investors.
banners, advertising posters, company newsletters, etc. 3. Limitations –
1. Too rapid expansion may lead to
Benefits – cash flow problems
2. Growth may be achieved due to
Helps inform the external stakeholders about the aims
lower profit margins
and vision quickly
3. Diseconomies of scale
It helps attract employees, potential investors,
4. Using retained earnings to finance
shareholders, etc.
profits will reduce dividends
Help motivate employees
5. May lose focus and direction is
Help guide and direct individual employee behaviour and
diversified
conduct
4. Increasing market share –
Limitations – 1. It is possible for a company to grow but it’s
market share to reduce, if the market is
Can be easily adopted by any business of any size expanding
It is not specific to a business 2. If market share is high, it indicates the
They are too vague and general marketing mix of the business is successful
Used as a PR activity than most of its competitors.
Impossible to analyse 3. Benefits of being the market leader –
1. Retailers will be keen to maintain
4.8. Corporate objectives high profile clients, so may provide
good quality and low prices
These are specific to a business and provide a much 2. Higher profits, due to lower supply
clearer guide for management. prices
1. Profit maximisation – 3. Effective promotional campaigns to
1. It means producing at the level of output attract customers
which leads to the greatest difference 5. Survival –
between total revenue and total costs. 1. Mostly an objective for start ups
2. The limitations of this corporate objective 6. Corporate social responsibility (CSR) –
include: 1. This concept applies to those businesses
1. If short term profits are high, that consider the interests of society by
competitors may enter jeopardizing taking responsibility for the impact of their
the long-term survival decisions and activities on customers,
2. Issues of independence and employees, communities and the
retaining control maybe of higher environment
importance 2. Benefits –
3. Analysts assess business 1. Helps boost morale of employees as
performance through return on they feel more connected
capital employed rather than profits 2. Helps attract skilled workers
4. Shareholders may aim for profit 3. Workers have higher productivity
maximisation but other and demand low wages
stakeholders may want to prioritise 4. Helps build reputation as
other issues responsible leader, gives
5. Very difficult to assess when the competitive advantage
maximised profit has reached 5. May help reduce costs and improve
6. Negative impact on customers profits as consumers will be willing
2. Profit satisficing – to pay higher prices for sustainable
1. It means achieving enough profits to keep products
the owners happy 6. It increases sales and builds
3. Growth – customer loyalty o Helps attract
1. Growth is measured through value of investors
sales/output 7. Maximizing short-term sales revenue
2. Benefits – 8. Maximising shareholder value -
1. Lesser chances of a takeover 1. This involves increasing the share price of
2. Economies of scale the company’s stock
3. Motivated employees and
managers

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CAIE AS LEVEL BUSINESS

Easier for managers to stay in touch with employees’

4.9. Relationship between mission
progress
statements, objectives, strategies and
tactics 4.13. Ethical influences on business
objectives and decisions
Aims and objectives provide basis for business strategies
as they are the long-term plans for the company.
It is a document detailing a company’s rules and
Strategies and tactics are derived from a company’s
guidelines on staff behaviour that must be followed
corporate objectives. It may be expensive in the short term
Strategy provides the path a business needs to follow in But, in the long term:
order to achieve a organisations corporate objective
Avoid legal problems
Tactics are more concreate and specific smaller steps for
Avoid bad publicity
shorter time durations to achieve a strategy.
Avoid pressure groups
May receive grants and subsidies
4.10. Objectives and decision making May attract skilled workers and investors

Stages in decision making framework: Advantages and disadvantages of targets

1. Set objectives
2. Assess the problem/situation
3. Gather data about the problem and find possible
solutions
4. Consider all solutions and decisions
5. Make a strategic decision
6. Plan and implement the strategy
7. Review its success against original objectives

4.11. Factors that determine the 5. Stakeholders in a business

corporate objectives of a business Stakeholders: People or groups of people that are
affected by, and therefore have an interest in the
1. Corporate culture activities of a business.
1. It is the code of behaviour and attitudes that Stakeholder concept: The view that businesses and their
influence decision making
managers have responsibilities to a wide range of groups-
2. Size and legal form of the business not just their shareholders
1. Small businesses – profit satisficing The roles, rights and responsibilities of stakeholders:
2. Public limited companies – growth, increase
stock value Repaid on agreed dates
3. Public sector or private sector Roles Rights Responsibilitie
1. Public sector – CSR Receive goods
2. Private sector – profits Purchase goods and and services
4. The number of years the business has been operating Honesty
services that meet
5. Economic conditions
local laws
6. Ethics
Offered
Customers replacements,
4.12. Management by objectives (MBO) Provide revenue repairs, etc- Not stealing
as legally
A method of coordinating and motivating all staff in an obligated
organisation by dividing its overall aim into specific
Not make fals
targets for each department, manager and employee
claims
Communicating objectives Supply good
in time and
Supply goods and On-time
Benefits of communicating the aims of the business with condition
Suppliers services payment
employees: already
May achieve more decided
Know how their individual goals fit into the overall plan Fair treatment
Creating shared employee responsibility

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CAIE AS LEVEL BUSINESS

Roles Rights Responsibilities Roles Rights Responsibilitie

Treated within
Provide manual and
minimum Honesty
other labour services
legal limits
Employment Receive shar
Meet
contract of profit as
employment
payment and reward.
contract To provide
treatment Receive
Employees Owners/Shareholders sufficient
Cooperate with accurate
finance
Join a trade management report/data o
union for reasonable business
requests performance
Observe
Ethical code of
conduct.
Consulted
Provide local services
about major Cooperate
and infrastructure Stakeholder Local
Local changes Business Decision Employees
Response Community
Community Meet
Not have lives More
reasonable
badly affected employment
requests
for local
Businesses to Treat Build new factory to Job residents and
Laws- restrain Impact:
meet businesses expand business opportunities rise in
business activity
requirements equally spending in
Law and order- allow Prevent unfair local
activity to take place competition businesses
Gov. Good trading
links
New working Possible
Achieve economic internationally-
method in new disruption du
stability allow
factory to increased
international
requiring new pollution and
trade
skills traffic levels
Provide agreed
Provide finance in finance on
different form agreed date
Lender
and time
Paid finance
charges Increased May seek to
Managers Report to Reaction number of job deny planning
stakeholders seekers permission
regarding
Have contract
business
of
operation; be
employment;
Control, Command capable of
to have Trade unions
and direct resources handling
adequate might push for Might impose
business
authority to higher wages restrictions o
operations in a
fulfill roles for more large trucks
legal and
ethical skilled work
manners May organize
a petition or
boycott

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Stakeholder Local Stakeholder Local

Business Decision Employees Customers
Business Decision Employees
Response Community Response Community
The merged
There may be
company Expansion on Workers
calls for
could become the existing Economies facing
retraining
more stable site could lead of scale redundancy
Horizon Reaction programs for
Impact and provide to more local could result might take
Integration/Takeover the
increased jobs and in lower industrial
unemployed
career higher prices action
who lack skill
advancement incomes
opportunities
Rationalization Reduced
Rationalization 5.3. How to solve conflict which arises
aimed at competition
of overlapping from satisfying different stakeholder
reducing might lead
facilities might
waste and to higher
aims
cause
cutting costs prices and
closures and
might lead to fewer
The traditional shareholder perspective argues that
job losses
job losses choices
focusing on stakeholders other than shareholders might
The Customers
reduce profits due to non-essential costs.
community could
The stakeholder approach suggests that addressing the
might urge the respond needs of various groups can ultimately benefit
There may be
government to with a
shareholders.
industrial
block the boycott if
Conflicts between stakeholder goals often require
Reaction action if job
takeover if it prices
compromises, such as:
security is
threatens job increaseGradually phasing out a product line to support
compromised
losses and due to employees.
facility decreased Relocating new facilities to minimize local disruption.
closures competition Funding noise reduction for residents affected by
More extended airport operations.
Senior management must:
efficient
and Prioritize stakeholders.
adaptable Weigh additional costs.
Local IT Assess the impact of negative publicity on revenue.
Training and production
Purchase of IT- service Balancing these conflicting interests is a key reason for
advancement processes
controlled providers
Impact opportunities couldhigher
lead executive compensation.
automated might see
may be to
machines increased
provided
orders
5.4.
improved Corporate social responsibility – an
quality and
evaluation
a wider
range of
It is the concept that accepts that businesses should
products
consider the interests on the society in their activities and
Fewer decisions, beyond the legal obligations that they have
There will be a
untrained CSR distracts businesses from their key role of using
need for Issues with
workers will scare resources to their maximum and produce goods
skilled IT reliability
be needed;
workers, might and services
those unable
reducing the result inCSR is a form of WINDOW DRESSING
to acquire new
number of supply If it is found that CSR is used as a PR activity, it will lead
skills could
unskilled job delays to bad word of mouth
face CSR maybe expensive in the short run, but will help the
opportunities
redundancy business raise profits in the future
As it will lead to better reputation, lower regulations,
chances of subsidies and grants, customer loyalty, etc.

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CAIE AS LEVEL BUSINESS

It includes analysis of the type of qualities, skills and

6. Human resource characteristics needed by any person appointed to a job.
It is based on the job description after assessing the
management complexity of the job. It is a ‘person profile’ for the job

It aims to recruit capable, flexible and committed people, Job advertisement

managing and training them and rewarding them
accordingly. It includes the requirements, personal qualities needed. It
HRM has a major impact on efficiency, flexibility and can be displayed within the organisation or outside,
motivation depending on the recruitment method chosen.
If external, can advertise in online recruitment services,
6.1. Purpose and roles of HRM newspapers, magazines, government agencies,
recruitment agencies, etc.
Recruit and train workers to ensure maximum productivity
so that all corporate objectives are met
6.3. Types of recruitment
In the past, HRM was:
Bureaucratic and had inflexible approach
1. External – outside the organisation
Focused solely on recruitment and selection rather 1. Bring new ideas
than development and training 2. Wider choice of applicants
Reluctant to delegate 3. Avoids jealousy and resentment
Not part of the strategic management team 4. Standard of applicants maybe higher
Roles of HRM include:
2. Internal – from within the organisation
Workforce planning – identifying future needs in terms 1. Already known to the business, no need for
of number of employees and skills required induction training
Recruitment and selection – recruiting the most 2. Known to the selection team
suitable employees 3. Well aware of the organisational culture,
Developing employees – training, appraisal and ethical code of conduct, etc
developing employees
4. Quicker, less time consuming
Employment contracts – preparing employment 5. Cheaper
contracts and ensure they are abided by 6. Gives workers a chance to progress, motivates
Ensuring HRM operates across the business – them, Herzberg, Maslow
involving managers in development and training of
7. Management style already known
employees
Employee morale and welfare – monitoring and
improving employee morale. Giving guidance and
6.4. Selection process
advice and ensuring appropriate work-life balance
Incentive systems – paying appropriately Shortlisting applicants
Monitoring -measuring and monitoring employee After receiving various applications, the business will
performance shortlist them according to their CV’s, references,
Dismissing employees with inappropriate behaviour previous work, etc

6.2. Recruitment Selecting between applicants

The shortlisted candidates are then selected through

It is necessary when a business is expanding or
interviews, aptitude tests, psychometric tests, trail work,
employees are leaving the organisation
etc
They often use a 7-point plan – achievement, intelligence,
Job analysis
skills, interests, personal manner, physical appearance,
It involves identifying a vacant position, understanding its personal circumstances
roles and responsibilities.
6.5. Employment contracts
Job description
They are legally binding documents to ensure that all
It provides a complete picture of what the job will entail, policies are fair and in accord with the current
its roles, rights and responsibilities. employment laws.
It helps attract the right type of people to the job It includes workers responsibilities, working hours, holiday
entitlement, wages, appraisal process, etc
Person specification

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It imposes responsibility on both employers and Better customer service and lower accidents
employees to honour the contract.
6.8. Development and appraisal of
6.6. Labour turnover employees
It measures the rate at which employees leave the
Development is a continuous process in the form of new
organization
challenges and opportunities
average number of employees employed
It is to help an employee achieve self-actualisation and
Labour Turnover Rate = (Number of Employees Leaving in
fulfilment levels
1 Year) ÷ (Average Number of Employees) × 100
Appraisal is a process of assessing employee
effectiveness. It is a part of the staff-development
Cost of labour turnover
programme
High and increasing labour turnover indicates low moral and The performance is measured against pre-set goals.
employee discontent It encourages them to work harder

It increases costs of recruiting, selecting training new 6.9. Discipline and dismissal of
workers
Customer service maybe compromised employees
Difficult to establish loyalty and team spirit
If a worker fails to meet obligations in the contract of
Potential advantages of labour turnover employment, the HR department has to discipline them
They can even be dismissed. This is when a worker is
Low skilled workers may be replaced by productive ones asked to leave, due to parts of their job or behaviour
New ideas being unsatisfactory
May reduce costs if business is planning redundancy and There maybe chances of unfair dismissal allegations if the
rationalisation organisation can not prove that the necessary steps have
been take to avoid it.
These may include verbal warnings, written warnings,
6.7. Training and development of
training sessions, etc
employees An employee may reach out to an employment tribunal to
claim unfair dismissal
It is work-related education given to employees to
improve their efficient and productive
6.10. Redundancies
Types of training –
Induction training – Redundancy is when a worker loses their job because the
It is an introduction training given to all new
job is no longer necessary, through no fault to their own
employees
This is done when there is a fall in demand, advances in
It helps the worker understand the customs,
technology, business is trying to rationalise and cut costs
procedure, layout of the organisation Business must ensure these announcements are made
On-the-job training –
efficiently as they have a major impact on other
Instructions at the place of the work
employee’s morale and job security.
Done by watching and working closely with an
experienced member
It is cheaper 6.11. Employee morale and welfare
Off-the-job training –
Instructions given away from the work place by HR departments are expected to offer advice, counselling
experts and guidance to employees who are in need of it.
Increases morale and sense of loyalty
It is expensive but more productive
Training is expensive
But it will increase morale amongst employees as 6.12. Work-life balance
they will feel more valued and secured as it will
increase chances of promotion It is where workers are not able to balance time between
It may encourage poaching which acts as a their work and their personal life.
disincentive for companies to set up expensive Workers expected to work long and unsociable hours
training programmes leads to stress and poor health
Increases productivity and efficiency HR must work with employees to help them achieve good
Makes the workforce more flexible work-life balance to increase efficiency and productivity

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Some methods to do this may include: Collective action/bargaining, like strikes, is more effective
Flexible working than individual efforts.
Teleworking – work from home facility Unions offer legal support for claims of unfair dismissal or
Job sharing – 2 people working as one full time poor working conditions.
employee They ensure employers meet legal requirements, such as
Sabbatical periods – extended period leave from work health and safety rules.
This is mainly due to:
Consumers expect access to goods and services 24/7 Collective bargaining and it’s benefits:
Globalisation and increased competition
The process where a group of workers, usually through a
union, negotiate with their employer as a team to improve
6.13. Policies for diversity and equality
pay and working conditions.
Equality is when everyone is treated fairly and has equal The benefit of collective bargaining are:
chances to succeed Employers deal with a single individual representing
Diversity is the process of creating a mixed workforce the union instead of individual workers, saving time
Benefits – and ensuring fair treatment.
Higher reputation Unions provide a way to communicate problems and
Higher morale plans between workforce and management.
Ability to recruit top talent Unions can prevent disruptive, hasty industrial action
Capture a greater consumer market by disciplining members.
Better ideas and greater creativity Responsible union system helps employers and unions
discuss shared issues, leading to better agreements
6.14. Encouraging Intrapreneurship and higher job security for employees. It also leads to
higher productivity, increased profits for the business.
through Employee Development
Ways Trade union leaders use industrial action
Foster independent thinking and creativity.
Provide opportunities to collaborate with skilled during dispute with employers when cooperation
employees from various departments. are non-existent:
Empower employees with authority and resources for
Continue collective bargaining: This can be done with the
innovation.
Accept and expect some failure; removing the fear of help of an independent arbitrator.
failure is crucial. Go slow: In this industrial action, workers keep working
Start with small ideas before tackling larger projects but at the slowest pace demanded by their contract of
employment.
6.15. Benefits of Cooperation between Management Work-to-rule: Here, employees refuse to do any work
outside the precise terms of the employment contract.
and Workforce
Overtime will not be worked and all non-contractual
Reduces strike days and industrial action. cooperation will be withdrawn.
Eases the implementation of workplace changes, such as Overtime bans - industrial action in which workers refuse
to work more than the contracted number of hours each
automation.
Management may recognize and reward workforce week. During busy periods, this could lead to lost output
for the employer, damaging the potential sales.
contributions with better pay and benefits.
Enriches business competitiveness through efficient Strike action - the most extreme form of industrial action
operations. in which employees totally stop working for an indefinite
period of time. Strike action leads to production stopping
Workers’ insights contribute to more effective decision-
making. and the business shutting down during the industrial
action.

6.16. Trade union: Methods employers use to resolve an industrial

dispute:
A trade union is a workers' organization that protect the
rights of the employees, negotiates on wages and work
Negotiations: Try to find a compromise to avoid industrial
conditions, and supports their members in disputes.
action.
Public relation Campaign: Use public relations to win
Impact of Trade union involvement in workplace:
public support and pressure the union to settle.
Redundancy Threats: Warn of potential job cuts to push
Trade unions gain power through unity, allowing them to
unions toward a settlement.
negotiate better pay and conditions for all members.

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Contract Changes: Require workers to do overtime, In modern times, due to advanced education and training,
accept flexible hours, or agree not to strike. worker participation should be encouraged and will help
Lock-Outs: Temporarily close the business to stop the business in the long run
employees from working and getting paid.
Business Closure: Shut down the business completely, 7.3. Mayo and Human Relation theories
leading to all workers being laid off.
Mayo is best known for his Hawthorne effect where he ran

7. Motivation experiments in Hawthorne factory in USA.

He reached surprising observations and they are:

7.1. What is motivation? Working conditions alone don’t determine productivity.

Other motivational factors need to be explored for
It is the desire of workers to do a job quickly and accurate conclusions.
efficiently.
They are the external and internal factors that stimulate Afterwards, he conducted more experiments by changing
people to take actions to meet a specific aim. rest periods, payment system etc.

Importance of motivation The Hawthorne Effect, conclusion of Mayo’s work:

Help a business achieve its goals Changing working conditions and pay often doesn’t impact
Help remain as cost-effective as possible (lower accidents productivity much.
and wastage) Talking with workers boosts motivation.
Helps maintain low labour turnover and absenteeism Working in teams and building team spirit can boost
rates productivity.
Impact the productivity and competitiveness of the Allowing workers control things like break times increases
business motivation.
Well-motivated staff will be ready to accept responsibility Teams can set their own targets, often influenced by
and will make suggestions to improve customer service informal leaders.
and satisfaction.
Evaluation of Mayo’s research for today’s businesses
7.2. F.W. Taylor – scientific Worker Participation: More businesses involve workers in
management/theory of an economic decision-making.
Human Resource Management (HRM): HR departments
man have been established to apply the Hawthorne effect.
Team Working: Many businesses use teams to leverage
His main purpose was to reduce inefficiencies the Hawthorne effect.
His approach included 7 steps:
New Research: Involving workers and understanding their
Select group of workers goals has spurred new research in industrial psychology.
Observe them perform tasks
Record time taken
Identify the quickest method 7.4. Abraham Maslow – Hierarchy of
Train all employees in that method human needs
Supervise them
Pay them accordingly He categorised employee needs into 5 levels.
He believed that people are only motivated by money Every employee starts at the lowest level
He believed piece rate method of payment should be
used where worker’s output is directly linked to their wage
rates
He believed that autocratic leadership style should be
used
Workers should be closely supervised and no discussion
or feedback should be taken
One-way communication
Theory X manager ideology is adopted
Problems of this method –
Not everyone is motivated by money
Quantity over quality is encouraged – not acceptable in
the long run

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Motivators –
Achievement, recognition, work itself, responsibility,
advancement
These factors MOTIVATE employees

7.6. David McClelland – Motivational

needs theory
He identified 3 types of motivational needs in his book –
The achieving society

1. Achievement motivation –
1. Have realistic goals
2. Seek opportunities of job enrichment and
advancement
3. Have result driven attitudes
2. Authority motivation –
1. Desire to control others
2. Need to be influential, effective, make an
impact
Physical needs – food, shelter, water, rest
3. Strong leadership instincts
Safety needs – job security, health and safety
3. Affiliation motivation –
Social needs – trust, friendship, teamwork, acceptance
1. Need for friendly relations
Esteem needs – respect, status, recognition, achievement
2. Teamwork and interaction with others
Self-actualisation – reach one’s full potential, challenging
3. Be liked and popular
and creative work
Regression is possible – once one need is satisfied, Achievement motivated people are the ones who give the
greater quantity of the same need will not motivate business the best results.
people
Limitations-
Everyone has different needs
7.7. Vroom – expectancy theory
Difficult and impractical to identify for each worker
Individuals will choose to behave in ways they believe will
and have separate measures for each
lead to the best outcome and rewards
Self-actualisation is never permanently achieved
People can be motivated if they believe:
There is a positive link between performance and effort
7.5. Frederick Herzberg – Two factor Will result in a favourable reward
theory Reward will help satisfy important needs
Desire to satisfy the need is strong
He conducted interviews and surveys to know and identify 3 beliefs –
factors which give good feelings and the ones that provide Valence – depth of the want of an employee for an
negative feelings extrinsic reward
Job enrichment principles should be adopted Expectancy – degree to which people believe hard-
Complete units of work – workers should be allowed to work will lead to their desired reward
produce a recognisable part of the product/service Instrumentality – confidence of employees that they
Feedback on performance – workers must be given will receive the reward they desire
accurate feedback on their work. Good work must be Even if any 1 belief is missing, motivation will not occur
recognised
A range of tasks – workers must be given challenging and 7.8. Motivational theories – evaluation
beyond their current experience tasks
Team work should be encouraged and adopted They provide the starting point and a framework to
He divided his results into 2 factors – defining motivational methods and issues
Hygiene factors – They are often criticized due to its lack of rigour and
Salary, working conditions, supervision, social follow up work
relations Important to identify the most appropriate theory and
They DO NOT motivate employees, but their absence identify their relevance in the business
DEMOTIVATES them
They just remove dissatisfaction 7.9. Motivators - Financial rewards

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CAIE AS LEVEL BUSINESS

Time based wage Performance- Frin

Piece rate Salary Commission Bonus Profit-sharing
rate related pay Bene
Payment to a Payment to worker Com
Annual income,
worker made for for each unit Maybe too cars,
paid monthly Given for work Earns
each hour worked produced. persuasive, In addition to insura
well commitment
Mode of payment Reflects the poor brand basic salary pens
Professional, done/efficiently from staff
for manual, clerical difficulty of the job image sche
supervisory and loa
and other blue and the standard
management staff
collared workers time. Requires
Too low- regular
demotivates, too target
In case of
Time rate is high- reduces Fixed each year and setting,
issue of In add
present, usually incentives (will be determines the annual
Low security shares solves to no
paid weekly able to meet their status of job appraisals
for workers the problem paym
target wage level against
of “us and sche
easily) preset
them”
Does not directly Encourages faster Job evaluation helps targets and
link to efforts put in working and efforts decide salary bands paying
bonuses
Security of income
Low security for Requires output to and helps in cost Often
Reduces
workers be measurable and price inadequate,
Teamwork retained
calculation short-term
is not profits and
effect \n
Suitable for jobs encouraged dividends for
Little security for Problem of
where output is not shareholders
workers favouritism
measurable
Herzberg
Helps in price Can lead to
theory: it only Diluted share
determination on complacency as
moves, not capital
the basis of labor income is not
motivates
costs. related to effort
Hawthorne Workers may
Quality and safety
effect: sell shares
issues \n Leads to Regular appraisal is
individual quickly,
falling quality necessary
focus rather reducing its
standards
than team. effect
Resistance from
workers in the
event of change of 7.10. Non-financial rewards
work
Job Job
Job Rotation Empowerment
Performance- Fringe Enlargement Enrichment
Commission Bonus Profit-sharing
related pay Benefits Empowerment
A bonus for Increasing Principle of fastens problem
Increasing the
staff based flexibility of organizing solving and levera
scope of job
on the profits the workforce work employees' releva
A bonus experience
of the
scheme to
Proportion In addition to business- can Non cash Encouraged
reward staff It increases
of the sales their be a forms of to use full
for “above Giving variety motivation and
made wages/salary proportion of reward Broadening the ability-not
average work of work- multi morale through
the salary, task, deepening just
performance” skills challenging work a
issue of physical
recognition
organizations effort
shares

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CAIE AS LEVEL BUSINESS

Job Job Job redesign Training Quality circles

Job Rotation Empowerment
Enlargement Enrichment Similar to Better and quicker
Reduction enrichment solutions
Switch from of direct It enhances Allows workers to
one job to Includes both supervision, communication and gain a wider range
another- rotation and allowing reduces turnover by Provides a new
of skills and
avoids enrichment decision increasing perspective
increases chances
monotony making involvement of promotion
authority
Leads to job
Based on 3 enrichment –
principles Herzberg
from motivation
Herzberg's
Usually theory: \n -
Managers can focus Delegation
happens in Complete Worker
Series of on strategic issues as participation Team-working Target setting and
case of units of
separate task routine problems are Empowerment
redundancies work \n -
handled by employees Actively
or shortage Direct
encouraged to
feedback \n
become
-
involved in Lower labor Management Passing down
Challenging
decision turnover by objectives of authority
tasks
making within
Doesn’t
Training is needed to the
increase
Horizontal manage the risks of organization
empowerment
enlargement increased authority Involvement in
or
with empowerment decisions on
responsibility Better ideas, Enables Delegating
break times,
Adding tasks to improved feedback and control over
job
avoid it from quality comparison work
Less supervision allocations,
becoming productivity
might result in poor
boring but no
decision-making Improves
power/authority Maslow and Provides a
productivity
is given Herzberg’s sense of
and lowers
Doesn’t lead to Reduced coordination applications direction
wastage
long-term job can occur, leading to
Better Time taking –
satisfaction or inconsistent
decisions, new Delayering appraisal
enrichment approaches
perspectives every year
Some employees may
Not everyone
reluctantly accept Can be time
is a team
more responsibility consuming
player
for job security
Autocratic Conflict with
managers find organizational
Job redesign Training Quality circles
it difficult values
Restructuring of a
Improving and Paternalistic
job with the Originated in japan-
developing the leadership
agreement of the Kaizen Training costs
skills of employees used –
employee
demotivating
Attempt to make Voluntary groups of
Increases status
work more workers meet
and chances of 7.11. Financial and non-financial
interesting and regularly and
promotion
challenging discuss issues
motivation – evaluation
Adding and Employees have
removing certain Greater sense of first hand Pay is not the only motivating factor
tasks can lead to belonging experience with the Managers must be flexible
rewarding work problem Depends on:

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CAIE AS LEVEL BUSINESS

Leadership style Decisional roles

Culture of management
Attitude of managers and workers 7. Entrepreneur – look out for new opportunities
Usually, business use a mix 8. Disturbance handler – flexible in responding to
Non-financial methods are cheaper than financial changes
9. Resource allocator – deciding on the spending of the
business’s resources
8. Management and 10. Negotiator – representing the organisation at all
negotiations
Leadership
8.3. Leadership
8.1. Functions of management – what
It involves setting a clear direction and vision for the
managers are responsible for company
The best managers are also leaders
1. Setting objectives and planning
Qualities –
1. Future planning and creating departmental and
Desire to succeed
individual objectives for each employee
Self-confidence
2. Organising resources to meet objectives • They will
Creative and innovative
ensure clear division of work and delegate tasks to
Multitalented
keep everyone motivated
Incisive mind
3. Directing and motivating staff
1. Guiding, leading and overseeing people to
ensure corporate objectives are met 8.4. Important leadership positions in
4. Coordinating activities business
1. Encourage teamwork between departments
and division to lower duplications Directors –
5. Controlling and measuring performance against They are the senior managers elected by
targets shareholders
1. Make sure targets are being met and if they Responsible for delegation, assist in recruitment,
are not, find solutions like training workers, meeting objectives within their department
buying better equipment Managers -
Responsible for people, resources and decision
8.2. Management roles making
Have authority over people below them
According to Henry Mintzberg’s the nature of managerial Direct, motivate, discipline
work, there are 10 different roles of management. Supervisors –
These 10 can be classified into 3 main groups: Appointed by management
Interpersonal roles – dealing with people Not a decision-making role
Informational roles – receiver, sender of information Responsible for working towards pre-set goals
Decisional roles – make decisions and allocate Workers’ representatives –
resources Elected by the workforce
They discuss areas of common concern with
Interpersonal roles managers

1. Figurehead – symbolic leader of the company

2. Leader – motivating subordinates, selecting and
8.5. Leadership styles
training workers
Autocratic Democratic Paternalistic Laissez-faire
3. Liaison – linking managers of one department with
others Believes that
manager is in
Informational roles a better
Promotes
Decision- position than
active It means, let
4. Monitor – collecting data about the operations making at the the workers
participation of them do it
5. Disseminator – sending information about internal centre to know
workers
and external factors to relevant people what’s best
6. Spokesperson – communicating information about the for the
business business.

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CAIE AS LEVEL BUSINESS

Autocratic Democratic Paternalistic Laissez-faire He believed how managers thought will led to workers
Leaves the becoming like that description
Some decision-
consultation, making on 8.7. Factors affecting the leadership
Leader takes Two-way but end workforce
all decisions communication decision after the
style
based on broad
Training and experience of workforce
managers objectives are
Amount of time available for discussion
set Attitude of management
No true Culture of firm
Little Very little
Full staff participation Importance of issues
information input from
involvement in decision- In general, democratic is considered the best
given to staff management
making
Workers
Close Depends on maybe
High level of
9. What is marketing?
supervision of the level of dissatisfied
delegation
workforce involvement and 9.1. Marketing
demotivated
Workers may Marketing is the management process responsible for
not identifying, anticipating and satisfying consumers’
Worker
One-way appreciate requirements profitably.
feedback is
communication lack of Marketing is the process of planning and undertaking the
taken
structure and conception, pricing, promotion and distribution of goods
guidance and services to create and maintain relationships that will
Faster decision satisfy individual and organisational objectives.
Better final
making \n
decision \n Lack of
Good for
Better feedback 9.2. Related concepts
unskilled
motivation
workers 1. Markets
May 1. It is where a group of consumers purchase
Time
demotivate goods and services. This may or may not be a
consuming \n
workers \n No physical space and area
Not helpful 2. Human needs and wants
staff input who
during 1. Needs are basic requirements that a person
have hands on
emergencies needs in order to survive.
experience
2. Wants are items which are not necessary for
survival but satisfy certain requirements
8.6. McGregor’s theory X and theory Y 3. Value and satisfaction
1. Value is not equal to cheapness
Douglas McGregor devised a theory on what factors
2. A product is considered of good value if it
determine the best leadership provides satisfaction to consumers and is of a
He found that the management attitude is the most
reasonable price
important factor 3. A business must aim to increase satisfaction
He identified 2 distinct approaches
and value of a product/service to maintain
Theory X and theory Y managers good long-term customer relations
Theory X –
Theory X managers believed that workers are lazy,
dislike work, will avoid responsibility, not creative
9.3. Marketing objectives and corporate
They need to be managed and controlled with close objectives
supervision
This encourages autocratic leadership Marketing objective may include –
Theory Y – Increase market share
Theory Y managers believed that workers enjoy work, Increase number of items purchased per customer
are creative, ready to accept responsibility visit
This led to democratic leadership style Increase loyalty
He suggested that theory X and Y are MANAGEMENT Increase the number of times a customer shops
OPIONIONS not types of workers. Increase customer satisfaction

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CAIE AS LEVEL BUSINESS

Brand identity weaknesses. They try to take advantage of their

Increase new customers resources
In order to be success, marketing objectives must be: Market orientation does not guarantee success. It
In line with the corporate and long-term goals of depends on the whole marketing process
the business
Determined by senior managers 9.7. Societal marketing
Must fit into the SMART criteria
Importance of marketing objectives: It is an approach where the business considers and
Provide a sense of direction focuses on other stakeholders like customers, employees,
Allow progress to be monitored environment, etc.
Easily broken down into individual targets (motivation It was founded by Kotler in 1972
by objectives) It is not the cheapest but meets the society’s long-term
Form basis of marketing strategies interests.
Implications:
9.4. Coordination of marketing with Attempt to balance 3 concerns – company profits,
consumer wants, society interest
other departments Difference between short-term consumer wants (low
prices) and long-term social welfare may arise
Marketing department has a central role in coordinating
Gives a competitive advantage (USP)
the work of other departments
Allows the firm to charge higher prices
Marketing and finance – know the marketing budget and
help make cash flow forecasts
Marketing and HR – devise a workforce plan and help in 9.8. Demand
recruitment and selection of suitable employees
Marketing and operations – new product development It is the quantity consumers are willing to and able to buy
and plan for the spare capacity and raw materials needed at different prices
in the future

9.5. Market orientation

They put customers first. They produce what a consumer
wants rather than trying to sell them a product they
already developed
Necessary in these fast-changing, volatile consumer
markets
Benefits –
Lower risks
Ability to survive longer
Constant feedback from consumers

Product orientation
They invent a product and believe that consumers will
want to purchase it. They believe that if a product is
innovative and of good quality, then consumers will
Movements in a demand curve
purchase it

9.6. Market and product-oriented

businesses – an evaluation
If a business tries to change and adapt to every consumer
trend it will over stretch it resources
Trying to offer choice and range is expensive. But,
researching and then developing a product reduces risks
Many companies use ASSET-LED MARKETING
It is where businesses base the product development on
market research but limit it to their own strengths and

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CAIE AS LEVEL BUSINESS

Factors affecting supply

Factors affecting demand
1. Costs
2. Taxes
Changes in consumer income
Changes in prices of related goods 3. Subsidies
Changes in age and population structure 4. Weather conditions
Fashion, tastes and attitudes 5. Advances in technology
Advertising and promotion
9.10. Equilibrium
9.9. Supply
It is the price level where demand = supply
Supply is the willingness and ability of a firm to There is no shortage (demand higher than supply) or
surplus (supply higher than demand)
sell/produce a product.
Disequilibrium is when demand is not equal to supply
(there’s either a surplus or shortage)

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1. Creating/adding value
1. Added value is the difference between the
selling price and the cost of bought in raw
materials
2. Higher the added value, higher the profits
3. Added value can be increased by –
1. Create an exclusive and luxurious retail
environment
2. High quality packaging
3. Promote and brand the product
4. Create a unique selling point (USP) and
differentiate the product
2. Mass and niche marketing
9.11. Features of markets 1. Niche marketing is identifying and exploiting a
small segment of a larger market
1. Market location – 2. Mass marketing is selling the same products to
1. Businesses may operate locally, regionally, the whole market
nationally or internationally 3. Niche marketing – advantages –
2. Local markets have limited sales. International 1. May survive as are producing
markets have the greatest sales potential but it customised products
is a huge strategic step, differences in tastes, 2. Ability to charge high prices and
cultures, laws must be considered increase profits
2. Market size – 3. Improves brand image and loyalty
1. Can be measured by volume of sales or value 4. Mass marketing – advantages –
of goods sold 1. Wider choice for customers
2. Reasons to know the size – 2. Economies of scale
1. Market is worth entering or not 3. Fewer risks
2. Calculate firm’s market share 3. Market segmentation
3. Growing or declining market 1. Also known as differentiated marketing
3. Market growth – 2. Instead of trying to sell one product to the
1. If markets are growing rapidly, competition whole market, businesses identify different
may increase, market share may fall and consumer segments are research each of
profits may be negatively affected them separately.
2. The growth pace depends on –
1. General economic growth
2. Changes in income
9.13. Market segmentation – identifying
3. Changes in tastes and preferences different consumer groups
4. Technological changes
4. Market share – • Businesses create consumer profiles which includes age
1. Can be measure by volume or value of sales groups, income levels, gender and social class
2. If market share is increasing, it indicates that Advantages –
the marketing strategies are effective Easy to target marketing strategies to specific
3. Benefits of high market share – consumer groups
1. Higher sales Enables identification of gaps in the market
2. Retailers may not charger higher profit Differentiated marketing strategies can be focused on
margins to stock up goods target market groups
3. Producers may provide higher Price discrimination may be used to increase revenue
discounts and profits
4. Market leader maybe used in ads, USP Allows specialisation
5. Competitors – Disadvantages –
1. Direct competition is when 2 companies High research and development costs
provide similar products High promotional costs
2. Indirect competition is the substitute of the May not be able to enjoy marketing economies
good itself \ High stock-holding and production costs
3. Businesses must be able to respond efficiently May lead to over-specialisation
to both direct and indirect competition Extensive market research may be needed

9.12. Important marketing concepts

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1. Identify problem and define objective

10. Market research 1. Identify the purpose of the research to ensure
unnecessary data is not collected.
Process of Collecting, Recording and Analysing data 2. After identifying the problem, research
regarding Customers, Competitors and Markets. objectives are set. These are always in form of
questions.
10.1. Need for market research 2. Determine research design
1. Deciding whether to use primary research or
1. To reduce risks associated with new product launches secondary research or a mix of both
1. Market research helps investigate the potential 3. Design and prepare research instrument
demand for a product. 1. Identifying the most suitable method of data
2. It allows firms to check the market conditions collection in terms of cost and time.
before launching a product 4. Sampling and collecting data
3. It identifies consumer needs and tastes, helps 1. Choosing a sample size and method
test the product idea, packaging design with 5. Analyse data
potential customers, pre test the brand 6. Visualise and communicate results
positioning and advertising. It even aids during 1. Representing the data in forms of bar graphs,
product launch and after launch periods. pie charts, line graphs, etc.
2. To predict future demand changes
1. Allows businesses to predict future
10.3. Primary research
economical/social changes which might affect
demand
Also known as field research
2. It gives businesses time to plan and implement
It is when businesses collect first-hand data for their own
effective strategies to tackle the future
needs
demand changes
Benefits –
3. To explain patterns in sales of existing products and
Up-to-date information
market trends
Relevant information
1. Conducting market research for existing
Confidential
products helps firms understand the potential
Drawbacks –
changes in consumer tastes, preferences,
Expensive
incomes, etc in the future and helps identify
Time-consuming
demand changes.
Doubts over accuracy and validity (due to sample size)
4. To assess the effectiveness of the marketing
strategies used
Types –
1. Conducting market research after
implementing few marketing strategies like
Quantitative methods – numerical results that
changed promotion, etc will allow a business to
understand the effectiveness of these
can be statistically analysed
strategies in achieving the long-term
Observations and recording – marker researchers
marketing goal
observe and record how consumers behave. It doesn’t
2. It helps identify whether or not the business
give the opportunity to understand the reasons/ask for
requires to change its strategies and tactics to
explanations for the behaviour/trend.
remain successful
Test marketing – when businesses produce a limited
5. Know consumer feedback
quantity before launching the product to the entire
1. Investing in market research will allow a firm to
market. They promote and sell the product in a limited
know customer feedback regarding the
area, record customer reactions and opinions. They then
perceived strengths, weaknesses, packaging
make changes and reduce risks involved before launching
preferences, sales and distribution methods,
it into the market.
etc
Consumer surveys – involves directly asking consumers
6. Identify competitors, their USP and differentiate the
for their opinions and feedback. Both qualitative and
product
quantitative.
1. Market research helps identify competitors,
their product differentiation strategies. It
Qualitative method –
allows the business to adapt and modify their
USP accordingly Focus groups –
They are discussion groups where participants are
10.2. The market research process encouraged to actively discuss and give their
feedback/opinions on new products/adverts/etc

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They are more accurate and realistic that 3. Trade organisations

questionnaires and interviews 4. Market intelligence reports
There are researches stimulating the discussion so 5. Newspapers and specialist magazines and
that there is no biased decision made publications
It is cost effective and quick 6. Internal company records
Flexible but it is expensive 7. The internet
Subjective and chances of polarizing
Skilled moderator needed Every business, first, carries out secondary research and only
Less control if the data which exists is not relevant or no data exists like
Not the representative of the entire population for newly developed products, primary research should be
conducted.

10.5. Sample size

It is impossible to survey every member of the target
population
This is because the market is too extensive and it is
impractical to contact every member in terms of time and
money
Therefore, businesses choose a sample size and choose
people accordingly to act as a representative of that
sample
Usually, larger the sample size, more confidence the
business has in their results as they are likely to be more
accurately
Major constrains in selecting the sample size – time and
money

10.6. Sampling methods

Probability sampling
Selection of a sample based on the principle of
random choice
It is complex, time-consuming and costly
Methods:
Simple random sampling –
Each member of the target market has an
equal chance of being selected
10.4. Secondary research Every member of the target market is given a
number and then a computer is used to
Collection of data from second-hand sources generate a random set of numbers
It is also known as desk research
Systematic sampling –
It is gathering data which has already been collected
Sample selected by taking every nth term from
Advantages –
the population
Cheap
Stratified sampling –
Assists planning of primary research The target population will include people with
Less time consuming different tastes, opinions, preferences, etc.
Allows comparison between different sources
Each of these groups are divided into different
Drawbacks –
levels and the are known as strata
Maybe outdated
Random sampling is used to select different
Not available for new products
people from each stratum
May not be accurate
Quota sampling –
May not be suitable to the business
The interviewer selects different number of
people from each stratum of the target
Types –
population
Cluster sampling –
1. Government publications
Take a sample from one/few groups
2. Local libraries and government offices
For example: one town or region

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Non-probability sampling Cost to customer – total cost of the product to consumers

Convenience sampling – Convenience to customer – how easily accessible is the
People chosen on the basis of ease of access. product to consumers
Ex. sampling friends and family Communication with customer – providing 2-way
Snowball sampling – communication channels
First respondent refers a friend and the process
continues 11.3. Customer relationship
It is cheap but the sample might be biased as all
respondents might have similar lifestyles and management
preferences
Judgemental sampling – It involves using the 4 C’s and the ideology of putting
Researcher chooses sample based on who they customers first in order to maintain customer relations
think are appropriate and loyalty.
Experienced researcher required It has been proven that maintaining existing relations is
Ad hoc quotas – cheaper than attracting new ones
Quota is established and researchers choose from CRM’s main policy is customer information. It believes in
within it gaining as much information about the target market as
possible and then adapting the 4P’s to it
Developing long-term relations with customers can be
10.7. Accuracy of primary research achieved by:
(evaluation points) Targeted marketing – providing customers with
products they prefer (according to market
1. Sampling bias research/previous purchase)
1. Time and cost constrain make it impossible to Customer service and support – providing feedback
question the entire target market which leads channels and using them to change the 4P’s
to biased answers Using social media – businesses can use social media
2. Higher the sample size, more accurate the to identify various trends in the market which allows
results are likely to be them to make their products more accurate for
2. Questionnaire bias customers
1. This may occur when there are many leading,
misunderstood questions asked. This may lead 11.4. Why is product a key part of the
the respondent to answer in a certain way,
leading to inaccurate results marketing mix?
3. Other forms of bias
1. The respondent may not be truthful In order to be able to build relations and establish brand
loyalty, the product must be right.
This includes the quality, durability, performance and
11. The Marketing Mix: appearance
Customer expectations must be met in terms of these
Product factors

11.1. Marketing Mix 11.5. What is meant by ‘product’?

The 4P’s include: This includes both consumer and industrial goods and
Product – existing product/newly developed product. services
Includes packaging, quality, features of the product The dynamic market makes the New Product
Price – amount customers pay Development (NPD) process a crucial part of the
Place – how the product is distributed business’s success
Promotion – informing customers about the product NPD is based on market research in attempt to satisfy
and persuading them to buy it customer needs
Important for the 4 P’s to be integrated in order to achieve It is expensive and may not be successful
the aims
Unique selling point
11.2. The 4C’s
Features that differentiate a product from its competitors
Customer solution – what a firm needs to produce to meet Benefits of having a USP –
consumer needs Effective promotion
Free publicity

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Chance to charge high prices Repackaging and relaunching

Higher sales Finding new uses
Brand loyalty Sales promotion techniques
Adding new features
11.6. Products and brands
11.9. Uses of PLC
Product is a general term used to describe what is being
sold Assisting with marketing mix decisions
Brand is a distinguishing name given to the product, Knowing the stage of PLC helps decide the marketing
helping establish a USP mix of a product (all 4P’s)
It can help create a powerful perception in consumer Every marketing aspect is changed with a change in
minds – positive or negative the stage of PLC
But the final decisions even depend on competitor
Tangible and intangible attributes actions, economic state, marketing objectives
Identifying how cash flow might depend on PLC
Meeting the intangible expectations/needs of a customer Every business requires cash flow in order to be
is achieved through effective branding successful
These are subjective to customer opinions and can’t be At the development and decline stage, cash flow is
measured or compared likely to be negative
This may even continue into the introduction stage as
promotional expenses will be huge
11.7. Product positioning But, in the growth and maturity stage, cash flow is
likely to improve and become positive
Before launching a product, the firm will try to analyse its
Therefore, knowing about the PLC stages of different
relationship with other competitor products in the market
products, allows a business to plan for its next project
– product positioning
and see its effect on cash flow
One method – market mapping
Identifying the need for a balanced product portfolio
Identify features that consumers deem important
As one product is in the decline stage, the next
Plotting it on a comparison chart
product is ready to be launched.
This allows cash flow to remain balanced throughout
11.8. Product life cycle as positive cash flows of products in the growth and
maturity stage may offset the negative losses by
The stages a product goes through from its development products in decline and development phases.
to its decline
Product portfolio analysis involves making decisions about
11.10. PLC – evaluation
how to allocate resources effectively between the range
of products. PLC is one form to do so.
PLC is an important part of the marketing audit and helps
in assessing the marketing departments position
Stages of PLC
But it is based on past and present data, which may not be
necessarily true for future predictions
Introduction
Plus, there might be a rapid and quick change in sales, not
Low sales
giving enough time for the marketing department to
Increase slowly
Growth implement a strategy to offset such a change
In order to be effective, PLC analysis must be used in
Significant growth in sales
relation with sales forecasts and management
Few competitors start entering the market
experiences.
Maturity/saturation
Sales remain constant
Many competitors are in the market Product portfolio analysis – evaluation
Decline
Sales fall rapidly Having a balanced and managed portfolio allows
May occur due to changes in technology, tastes, etc marketing objectives to be met easily
But product is only one part of the marketing mix, and the
Extension strategies other 3 P’s – price, place and promotion are also essential
in achieving success of the business
Strategies used to extend the maturity stage of the PLC But without a well-managed product portfolio, the other 3
Examples – P’s may not be in use and the objectives may not, ever, be
Selling in new markets met

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12. The Marketing Mix: Price 12.4. Factors affecting pricing decisions
1. Costs of production
12.1. Why is price a key part of the 1. A price must cover both variable and fixed
costs of a business
marketing mix
2. Competitive conditions
1. Monopoly – more freedom in deciding prices
Price is the amount paid by customers
2. Perfect competition – fix similar prices
Its impacts:
3. Competitors prices
The demand
1. Difficult to set prices too different from
Degree of value added by the business
competitors unless true USP is shown
Influence on revenue and profits earned
4. Business and marketing objectives
Reflect on marketing objectives and their success
1. Price must reflect all aspects of the marketing
Establish psychological image of the business
mix and should keep in mind the main goals of
the business
12.2. Price elasticity of demand 5. Price elasticity of demand
1. Elastic – low prices
It is a numerical measure of responsiveness of demand to 2. Inelastic – increase prices
a change in price 6. New or existing product
PED = % change in demand / % change in price 1. New products – price skimming or penetration
PED is always negative indicating the inverse relation pricing
between demand and price

Types of PED 12.5. Pricing methods

1. Elastic - % change in demand > % change in price Cost based pricing

(PED>1)
2. Inelastic - % change in demand < % change in price Mark-up pricing
(PED<1) When a percentage of fixed mark-up is added to the
3. Unitary - % change in demand = % change in price cost of the product
(PED=1) The mark-up size depends on the strength of demand,
4. Perfectly inelastic – demand is the same, irrespective number of substitutes, stage of PLC, etc
of price (PED=0) Target pricing
5. Perfectly elastic – demand is infinite at a particular It involves setting a price to achieve a required rate of
price, and 0 at all others (PED=infinite) return
This ensures a specific sales revenue is earned
12.3. Factors determining PED Full-cost (or absorption-cost) pricing
It involves setting a price by calculating the unit cost
Necessity or not – necessity = inelastic, luxury = elastic and adding a fixed profit margin
Number of substitutes – many substitutes = elastic, This ensures all costs are met
no/few substitutes = inelastic Easy to calculate
Level of customer loyalty – high degree of loyalty = Suitable for firms with high market shares
inelastic, low level of loyalty = elastic But, doesn’t take into account external factors like
Proportion of income – high proportion = elastic, small economic conditions
proportion = inelastic Inflexible method
Contribution-cost (or marginal-cost) pricing
Prices are set based on the variable costs and a
PED – application contribution amount for fixed costs and profits is
added
Helps make accurate sales forecasts
Contribution per unit = selling price – variable cost per
Assists in pricing decisions
unit
Break even point = fixed costs/ contribution
PED – evaluation Ensures variable costs are covered
Flexible method
PED assumes nothing else changes (ceteris paribus) Fixed costs may not be covered
Maybe outdated very quickly If prices are varied too much, consumers maybe
Uses past information, may not be accurate considering discouraged and business will face menu costs
the dynamic nature of the markets Competition-based pricing

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Price is based on that of competitors 3. Oligopoly

Scenarios where it is suitable: 1. Price wars to gain market share
Following the market leader 2. Non price competition –
Avoid a price war competitive promotional
Destroyer pricing – force others out of the market campaigns, product
Based on study of conditions differentiation
3. Collusion – it is illegal and may
12.6. Market-oriented pricing lead to fines and court cases
2. Loss leaders
Perceived-value pricing 1. It involves setting relatively low prices for some
Also known as customer-value pricing products, expecting consumers to buy it. • They
Prices are set based on the value customers place on hope, the profits earned from other products
the product will cover the losses for the other product
Used for products with inelastic demand 2. Usually used for complementary goods
Price discrimination 3. Psychological pricing
It involves charging different prices to different 1. It involves setting prices just below the whole
consumer groups for the same product number
Dynamic pricing 2. It even involves using market research to avoid
Changing prices, frequently, to respond to changes in setting prices consumers believe is
demand inappropriate
It is based on demand level and ability of consumers
to pay 12.9. Pricing decisions – evaluation

12.7. Pricing strategies for new products A firm will not use the same strategy for all products as
there are differences in external market conditions
1. Penetration pricing Prices have a huge influence on consumer purchasing
1. Involves selling at a low price to attract more behaviours so market research must be carried out to
customers identify consumers ability to pay before setting prices
2. Used by firms in the mass market with a aim to Low price may not always be considered the best
capture a large market share strategy. It may even discourage consumers if they
2. Price skimming believe the product is on high value
1. Setting a high price to differentiate it from Price is only one factor. The complete brand image is
competitors more important
2. Usually for products with inelastic demand
(luxury goods)
3. It creates an exclusive image for the product
13. The Marketing Mix:
Promotion
12.8. Pricing decisions – some
additional issues 13.1. Why is promotion an important
1. Level of competition part of the marketing mix?
1. It depends on the type of market
1. Perfect competition Promotion involves communicating with potential
1. Consumers have complete customers
knowledge It helps increase awareness and create an image in
2. All producers are identical consumer minds
products The combination of all promotion techniques used
3. Freedom of entry and exit (advertising, direct selling, sales promotion) is known as
4. Equal market share promotion mix
5. Here, only competitive pricing The promotional budget is a key factor when making
will work promotion mix decisions
2. Monopoly
1. Single seller with 100% market 13.2. Promotion objectives
share
2. They are price makers Aims of having promotional objectives:
3. High barriers to entry and exit Increase sales by new customers

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Raise customer awareness Message to communicate – written forms are most

Remind customers about the USP/product effective as their hard copy can be stored
Increase purchases by existing customers Other aspects of marketing mix – all marketing mix
Demonstrate USP and product differentiation strategies aspects must be kept in mind to ensure they are
Correct misleading reports/image integrated as closely as possible
Develop a public image Legal and other constraints – there maybe constraints
Encourage retailers to stock and promote their product as to what ads can contain in different countries, so
these should be kept in mind in order to avoid legal
13.3. Advertising barriers

Known as ‘above-the-line’ promotion 13.6. Sales promotion

Communicating information about the product through
TV, radio, magazine, etc Also known as below-the-line promotion
Effectiveness depends on selecting the appropriate target It aims to achieve a short-term rise in sales
market and suitable media
Helps increase awareness and long-term brand loyalty Methods of sales promotion
and image
1. Price reductions –
Types of advertising 1. A temporary reduction in price
2. Also known as price discounting
1. Persuasive – involves creating a distinct image for the 3. Reduce the profit margin on each product
product and encouraging repeat purchases. 4. May have a negative impact on reputation
2. Informative – give information about the product’s 2. Money-off coupons –
features, USP, qualities, etc. usually used for new 1. They are focused on offering a price discount.
products. Used to attract new customers These coupons maybe present in newspapers,
leaflets
13.4. Advertising agencies 2. Retailers may not have enough stock, leading
to customer disappointment
They are firms who advertise businesses in the most 3. Effectiveness depends on size of coupon
effective way possible. 3. Customer loyalty schemes –
They are expensive but are specialists and will provide the 1. Focused on encouraging repeat purchases.
entire promotional plan for a business They usually involve loyalty cards reduces
Stages in creation of a promotional plan: profit margin on each product
Research the market 2. High administration costs
Identify and advise on the most cost-effective forms of 4. Money refunds –
media to use 1. Offered when receipt is returned to the
Use creative designers to devise ads manufacturer
Print out the adverts 2. Involve customers filling in forms which maybe
Monitor public reactions to improve future ads a disincentive
3. Delay in refund may affect brand image
5. BOGOF –
13.5. Advertising decisions – which 1. Buy one get one free
media to use? 2. Substantial fall in profit margin
3. If used to sell of stock, may impact brand
Greater the promotional budget, wider media choices image
available 4. Current sales may increase, but future sales
Factors to consider when choosing the media to use: may fall
Cost – TV, radio and cinemas are very expensive 6. Point-of-sales-display –
whereas newspapers emails and leaflets are cheaper 1. Placing products in attractive and informative
forms places
Size of audience – it will allow the cost per person to 2. Only offered to market leaders
be calculated. Larger the size, wider reach media 3. New products may struggle
must be used like national or international newspaper
Consumer profile of target audience – this will help in 13.7. Personal selling
designing the advert and identifying which media to
use. It involves having a sales staff communicate and sell to
each customer individually

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Expensive
13.9. Marketing or promotion
Requires skilled sales staff
Used for expensive, luxury items expenditure budgets
High success rates
1. Percentage of sales
1. Marketing budget varies with sales
Direct mail
2. Higher sales, higher budget and vice-versa
3. But, during low sales, promotion budget
Information is directly sent to potential customers,
identified by market research reduces which is when higher promotion is
needed to persuade customers to buy the
May provide detailed information
product
Well focused on potential customers
Cost effective 2. Objective-based budgeting
Maybe missed 1. Involves analysing the level of sales required to
meet aims and then identifying the amount of
expenditure in order to gain that sales level.
Trade fairs and exhibitions 3. Competitor-based budget
1. Two firms with the same size may try to match
Used to market to other businesses (retailers and
each other promotional budgets.
wholesalers) 2. May lead to spiralling promotional costs
Used to make contacts and identify potential customers 3. It doesn’t mean both companies promotion is
equally effective.
Sponsorship 4. What the business can afford
1. People tend to see marketing and promotion
Involves associating with an event/team as a luxury
Leads to free publicity 2. So, in such cases, the budget will only be set
Expensive after all other expenses have been accounted
Very effective for
3. This method fails to take into account market
Public relations (PR) conditions and marketing objectives when
deciding marketing budget.
It is used to gain free publicity provided by the media 5. Incremental budgeting
Tries to arrange positive TV and press coverage 1. This involves adding a percentage to the last
Maybe used to put forward the company’s views on year’s budget, to account for inflation and price
specific incidents changes
Used to improve reputation 2. But, it doesn’t require managers to justify the
total market budget for each year so it maybe
used inefficiently
13.8. Branding
It is a distinguishing name given to a product 13.10. Is the marketing budget well
Aims – spent?
Customer recognition
Product differentiation 1. Viewpoint of society and customer
Giving the product an identity 1. Many people may observe marketing and
Benefits of branding – promotion as a wasteful expenditure and
Increases chances of consumer recall money could’ve been used more effectively,
Product differentiation elsewhere
Reduces PED 2. Some consumers may even believe that the
Increases consumer loyalty society has to bear the burden of the
unreasonable, excessive advertising each year
Brand extension 2. Viewpoint of business
1. Advertising and promotion may aim to build
Using the same brand name for new/modified products
brand loyalty in the long-run rather than
will help make a family of costs.
increasing sales in the short-run
It will make the brand image even stronger and make
2. In such cases, the benefits will be spread
advertising easier as the brand can be advertised as one
across the years
unit which will improve sales of all products associated
3. Ways to assess the effectiveness of marketing
with it.
–

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1. Sales performance before and after the

promotion campaign – compare sales 14. The Marketing Mix: Place
and calculate the promotional elasticity
of demand
14.1. Why are place decisions an
2. Consumer awareness data – identify
how well consumers are able to recall important part of the marketing mix?
the data and advertisements through a
series of questions Place is the process through which the product reaches
3. Consumer panels – focus groups may the customer from the manufacturer.
help gain qualitative data about the A correct distribution channel is necessary –
effectiveness of promotional strategies Consumers need the product to be convenient and
4. Response rarest to advertisements – accessible
number of calls to gain further Manufacturers need their outlet to be in line with their
information, number of website check- brand image
ins, views on videos, etc Every intermediary will add its profit margin, so it
depends on the price the manufacturer wants

13.11. Consumer markets and industrial

14.2. Concept of distribution
markets
The right product needs to reach the right consumer at
Industrial products are the ones that are sold to the right time in the most convenient way possible
businesses Supply chain refers to all the intermediaries involved in
Consumer products involves directly selling to the end
getting the product to the end consumer
consumer
Industrial markets may use trade promotion like trade
fairs, specialist magazines
Customer service as objective of
Consumer markets may use consumer promotion like distribution
discounts, TV adverts
Distribution channels chosen may not always be the
13.12. Promotion and the PLC \n cheapest
Customer service is the main objective of distribution,
therefore convenience to customers may also be a very
important factor when deciding the distribution channel
Businesses even use internet and e-commerce facilities
to make it more accessible to customers

14.3. Channels of distribution

1. Manufacturer → Consumer
1. Direct selling to customers
2. No intermediaries adding their profit margins
13.13. Packaging
to products, lower prices and higher profits
3. Has complete control of the marketing mix
The quality, design and colour of packaging play an
4. Quicker
important role in promotion
5. Fresher food available to consumers
Cheap and nasty packaging may destroy the brand image
6. Direct contact with customers
Also, wasteful expenditure on packaging will also lead to
7. Expensive – storage and stock costs
negative publicity. This will even reduce the product’s
8. No retail outlets, limits promotion from
competitiveness
physical shop/website
Packaging decisions must be blended in with the overall
9. Not convenient for customers
objectives of the business
10. No advertising done by intermediaries
Functions –
2. Manufacturer → Retailer → Consumer
Protect the product
1. Retailer pays for stock and storage costs
Give important information
2. Retailer offers after sales service and has
Support the brand image
product displays
Aid customer recognition
3. Available in many locations – convenient for
customers
4. Producers can focus on production

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CAIE AS LEVEL BUSINESS

5. Retailer promotes and advertises the product High product

Consumers interact with websites and
6. Intermediary adds profit margin, more returns if
leave their information there, assists in
expensive to consumers customers
7. Producer loses SOME control over the market research
dissatisfied
marketing mix Easy and convenient for customers High postal costs
8. No exclusive outlet, may sell competing
Postal service may
products
be unreliable,
9. Producer bares delivery costs
Accurate records and quickly measured affecting
3. Manufacturer → Wholesaler → Retailer → Consumer
company’s brand
1. Wholesaler buys in bulk, reducing storage
image
costs for producer
2. Wholesaler bares transport costs to retailers Internet security
Lower fixed costs
3. Wholesaler break bulk by selling small worries
quantities to different retailers Website must be
4. More convenient for customers Increasing technological usage kept up-to-date,
5. Best way to enter foreign markets expensive
6. Higher final prices as more intermediaries add Easier dynamic pricing
profit margins
7. Producer further loses control over marketing
mix 14.6. Viral marketing
8. Slow distribution chain
It involves using social media sites to increase brand
9. No direct contact with customers
awareness or increase sales
It encourages people to keep passing on marketing
14.4. Factors influencing choice of messages to others
distribution channel They maybe in the form of video clips, interactive flash
games, e-books, text messages, social media
Industrial product or consumer product
Geographical dispersion of target market 14.7. An integrated marketing mix
Level of service customers expect
Technical complexity of the product If the marketing mix is not integrated, it may confuse
Unit value of product customers who will stay away from the product and find
Number of potential customers alternatives. This will lower long-term sales
Competitors actions The most effective marketing decisions will –
Based on the marketing objectives
14.5. Internet and 4C’s Affordable within the marketing budget
Integrated and consistent with each other
Internet is transforming the ways in which businesses Integrated with the 4 C’s of marketing
market their products and manage relationships with
customers
Selling goods directly to consumers (B2C) or to
16. Operations Planning
businesses (B2B) through e-commerce
Online and mobile advertising (pop ups, social media, 16.1. Operations decisions
websites)
Sales contacts are established by visitors leaving their 1. Link with marketing
details on sites 1. Operations manager needs to know market
Collecting market research data by encouraging visitors demand forecasts to be able to match supply
on the websites to answer questions and demand. This is known as operations
Ability to use dynamic pricing planning.
2. If sales forecasts are accurate:
Advantages Disadvantages 1. Easily match supply to demand
Poorer countries may not 2. Keep inventory levels to a minimum
Relatively inexpensive
have internet access efficient level
Consumers can’t touch, smell, 3. Reduce wastage
Reaches a wider target feel the product before – 4. Employee appropriate number of
market limiting their willingness to factors of production
buy online 5. Produce the right product mix
2. Availability of resources

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1. Production of goods and services requires – Operational Efficiency: To cut waste and boost
land, labour, capital, raw materials productivity to lower per unit costs and increase value.
2. Lack of these will influence operations Branding: Create strong branding to make consumers
decisions: willing to pay more than the production cost, like with
1. Location – locate in areas with abundant luxury clothing, stationary etc.
supply of materials
2. Nature of production method – if labour 16.4. Efficiency Production leading to
productivity is high, business may use
labour intensive production method Effective Sustainability
3. Automation – if technology is cheaper,
business may decide to switch to One of the main goal of an operations manager is resource
automated production method. management. they plan to optimize resource use by being
3. Technology efficient in product and minimize negative impacts on future
1. Technological developments have changed the generations through compliance to sustainability.
production process One major misunderstanding occurs through knowing the
2. They help the process become more efficient difference of productivity and production. The difference is:
and cost effective
Production is the measure of the total output in a given
period.
16.2. The Transformational Process Productivity is the measure of how inputs are converted
into outputs per time period.
Definition: An activity or group of activities that transform one
or more input, adds value to them, and produce outputs for There is an calculation of calculating productivity and that is
customers. by using the labour/Capital productivity equation.
It takes the following inputs: Labor productivity (number of units per worker) = Total
Output in a given time period / Total Workers Employed
Enterprise Capital productivity (number of units per worker) = Total
Land Output in a given time period / Total Capital Employed
Capital There are also ways to raise productivity and they are:
Labour
Boost Skills: Training improves productivity but is costly
Adds value to them via production, whether capital or labour and risks losing staff.
intensive. Enhance Motivation: Financial and non-financial incentives
Transform them into the following output: can motivate employees and cut costs. Although Non-
financial incentives are usually preferred as it does not
Finished goods
raise labour cost.
Services
Upgrade Equipment: New and improved technology
Components for other firms
increases output. However, it requires large investment
and retraining for employees.
16.3. Contribution of Operations Improve Management: Effective management can raise
productivity level by handling resources and workers
Contribution of operation to improve added value: effectively.

Efficiency: Minimize production costs to stay competitive However, high productivity does not guarantee success as:
by improving efficiency.
Quality: Ensure goods or services meet their intended Wage demand: Increased effort for higher productivity
purpose. might cause workers to seek higher pay, which could
Flexibility & Innovation: Adapt to new processes and cancel out the productivity gains.
products. Worker Resistance: Workers might be reluctant to follow
necessary steps to raise productivity. Improving
Amount of added value depends on inputs and different productivity by 20% could cause job losses and potential
factors. industrial disputes if sales don’t grow.
Management Role: If the management quality is poor,
The following factor affecting Added Value are not success is unlikely. Therefore, high quality management
operational management issues: that involves workers and values their input can improve
productivity and acceptance.
Design of Products: Make it cost-effective to produce Efficiency or Effectiveness?: Despite raising productivity, it
while having high-quality visual appeal to justify a higher might not lead to success as productivity is measured via
price. efficiency and not rather effectiveness.

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Effectiveness should be focused on as well, it means meeting Benefits of Sustainability Drawbacks of Sustainability
the needs of the customers profitably. They, combined It might not be suitable for
together, gives the best outcome. Efficiency is focused on business target audience
reducing the average cost of production while effectiveness is
income
ensuring that the product that is being produced meets the
needs of their targeted audience profitably.
16.5. Need for flexibility and innovation
Sustainability of operation
Flexibility is the business’s ability to vary production with
It is done via maintaining business operations long term by changes in demand
focusing on environmental protection and preserving quality Ways to increase flexibility –
of life for future generations. Increase capacity
Ways to operate business sustainably: Hold higher stocks
Have a flexible workforce
Using recycled materials Flexible flow production equipment
Producing goods that can be recycled
Waste management in production
Buying sustainable resources from suppliers
Process innovation
Reducing energy usage and carbon emission
It involves the use of new, advanced technology to
Lowering the usage of non-biodegradable materials such
improve production
as plastic
Done through using CAM, CAD, robots, faster machines,
Why business wants sustainability in their operation: computer tracking inventory system, etc
Gives a competitive edge
To comply with strict laws on environmental issues Better quality
Pressure group activity exposing environment-damaging Higher reputation and brand loyalty
businesses Expensive
Businesses should follow through on corporate
responsibility promises through their senior
16.6. Labour Intensive vs Capital
management.
Sustainable practices can improve public relations, Intensive
enhancing positive publicity.
Consumers are more likely to buy eco-friendly products, Benefits of Labour Intensive Benefits of Capital Intensive
increasing sales. Production Production
Low machine expense Economics of Scale
Benefits of Sustainability Drawbacks of Sustainability
Interesting and varied work
Going green may require thus higher employee Consistent quality
Lower Energy Costs: Using
costly investments like solar motivation
less energy saves money.
panels
One-off design/Job production
Fall in production usage and processed product can be Low average cost of
Eco-friendly materials might
sales of plastic and non- made that meets customer production
be pricier and less effective
biodegradable materials requirements precisely.
than plastics
draws eco-conscious buyers
Lower start up cost as buying
Using recycled materials Recycled materials often need numerous machines to begin Higher ability to supply to
reduces need for new raw extra cleaning or processing, operation increase cost of a Mass market
materials. Thus, potentially heightening production business by a great margin
decreasing costs completion time
Creating recyclable products Drawbacks of Labour Drawback of Capital Intensive
Recyclable products can cut
is likely to be costly and time- Intensive Production Production
waste disposal cost
consuming
Lower output level in
Lowering waste from It might require Investing in High fixed cost
comparison
operations decreases overall worker training and advanced
Cost of financing the
production costs equipment Skilled, High-paid workers
machinaries or finding
Purchase of resources from Sustainable supplies to make might be required for overall
sufficient finance might be
sustainable suppliers product might be more operation
time-consuming
supports sustainability and expensive, raising overall
reduces bad publicity risk costs

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Drawbacks of Labour Drawback of Capital Intensive Types of diseconomies of scale

Intensive Production Production
Quality of the product made 1. Communication problems
High maintenance cost and
depends on experience, 1. In a large firm, the feedback provided will be
higher cost for repairs as
motivation and skill of each poor
skilled workers are necessary
worker 2. The chain of command may be long leading to
Due to constant improvement distortion of messages
in technology. It leads to 3. This may cause poor decision making
latest equipment 2. Alienation of the workforce
depreciating fast and 1. The bigger the organisation, the more difficult
becoming obsolete. it becomes to involve every worker.
2. They may feel demotivated due to lower job
The approach of the production method that should be satisfaction
chosen depends on: 3. Poor coordination

Nature of the product How to avoid diseconomies of scale

Brand Image
Relative cost of Labour and Capital 1. Management by objectives: This will help avoid
Size of Business coordination problems
Accessibility to finance 2. Decentralisation: This gives divisions a considerable
degree of autonomy and independence.
16.7. Economies of scale 3. Reduce diversification: Businesses that concentrate on
‘core’ activities may help to reduce coordination
Cost benefits arising with increased scale of operations problems and some communication problems.

Types of economies of scale 16.9. Production methods

1. Purchasing economies 1. Job production
1. Bulk buying economies 1. Producing a single, one-off item, specifically
2. Suppliers may offer discounts on bulk designed for the customer
purchases 2. It is labour intensive
3. They will want to keep large customers happy 3. Specific consumer needs are met, higher
so may provide good quality goods and on time reputation and loyalty
delivery 4. Specialised products are produced, ability to
2. Technical economies charge higher prices
1. High output will lower unit costs 5. Cannot enjoy economies of scale
2. Fixed costs are spread across the output, 6. Expensive as requires skilled labour and
lowering its output training
3. Financial economies 2. Batch production
1. Banks and other financial institutions will be 1. Producing products in separate groups where
willing to provide loans to larger businesses the entire groups goes through the production
2. They may be willing to charge lower interest process together
rates to them 2. Enables division of labour and specialisation
4. Marketing economies 3. Economies of scale
1. Costs of advertising and promotion maybe 4. Easy to alter batches according to demand and
spread over a larger output, lowering unit costs preferences
5. Managerial economies 5. High storage costs – work in progress
1. Employing specialists and managers will be inventory
easier for large firms as their salary will be 6. Workers may get bored and demotivated
spread over a larger output 3. Flow production
1. Producing products in a continuous process
16.8. Diseconomies of scale through the use of technology
2. Higher output
Factors which lead to a rise in average costs of production 3. Economies of scale
arising with increased scale of operations beyond a 4. Consistent and standardised quality
certain size. 5. Low labour costs
6. High initial costs

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CAIE AS LEVEL BUSINESS

7. Lower job security Materials needed for the production of goods and
4. Mass customisation services.
1. It involves the use of computer aided
production to meet specific customer needs at Types:
mass production costs
1. Raw materials
2. Allows businesses to focus on differentiated
1. Purchased from outside suppliers
marketing
2. Work in progress
3. Increases added value
1. Work in progress is any product which is not
4. Low unit costs
yet converted into finished goods.
5. Customer needs are met
2. Depends on time period of production and
production method used.
16.10. Production methods – making 3. Finished goods
the choice 1. Good ready to be sold to consumers

1. Size of market – if the market is small, flow production 17.2. Inventory management
can not be used, batch or job production is more
appropriate Without effective inventory management, there maybe
2. Amount of capital available – employing flow many problems.
production is expensive and requires a high initial Insufficient inventories to meet unforeseen changes in
capital investment. Small firms may not be able to demand
afford this and therefore use job or batch production Out-of-date inventories maybe held
3. Availability of other resources – using flow production Wastage due to incorrect storage conditions
requires a high supply of unskilled workers and huge High storage and opportunity costs if extra inventory is
land area. Job production requires highly skilled held
workers. The chosen production method may even Poor management may lead to delayed deliveries,
depend on whether the company is able to allocate ignoring discounts, etc
these resources.
4. Market demand exists for products adapted to specific 17.3. Inventory holding costs
customer requirements – if the company wants low
costs but has a differentiated target market, mass 1. Opportunity cost – working capital tied up in inventory
customisation is the best option. could be used elsewhere. Higher interest rates, higher
the opportunity cost of holding inventory.
Problems of changing production 2. Storage cost – inventories must be held in
appropriate, safe conditions to avoid wastage. Higher
methods inventory, higher the storage costs
3. Risk of wastage and obsolescence – if inventories are
Job to batch: high equipment costs, need for extra working
kept unused, they may become obsolete, lowering the
capital and fall in employee morale
value of such inventories and increasing the
Job/batch to flow: high capital cost, costs of employee
business’s expenses
training, need for accurate demand forecasts

Costs of not holding inventories

Conclusion: Production method
1. Lost sales – business may not be able to supply all
Traditional differences between production methods are
customers, leading to loss of sales and revenue
becoming less obvious. Technology allows large businesses
2. Idle production resources – if raw material inventories
to meet the diverse range of customer needs, which could
run out, expensive equipment and workers will be left
threaten small firms that focus on niche markets with
idle, leading to loss of output and wasted resources.
specialized products. However, as consumers become
3. Special orders could be expensive – urgent orders
wealthier, there will still be demand for unique and
given to suppliers may lead to extra delivery,
specialized items, so small firms can continue to thrive in the
administration costs
niche market regardless of dominance of large businesses in
4. Small order quantities – higher average costs as the
terms of market share.
company will not benefit from economies of scale

17. Inventory Management 17.4. Optimum order size

17.1. Inventory

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Operations managers must ensure they have enough

17.6. Just-in-Case (JIC) Inventory
stocks to allow for smooth production.
Operations managers usually order their inventories on Control
the basis of the Economic Order Quantity (EOQ)
EOQ is the optimum inventory level where the costs This management system targets to lower the risk of running
incurred are minimum (both re-ordering costs and stock- out of inventory to the minimum by holding high buffer
holding costs) inventory levels.
Benefits of JIC inventory Drawbacks of JIC inventory
management management
JIC makes it highly unlikely to
run out of inventory, so High capital cost as finance is
production can continue required to invest in
even with major supply inventories
delays.
Other costs such as space,
Lower requirement to
holding and other variables
forecast sales as accurately
associated with inventory,
as with JIT due to high
increasing overall expense of
inventory level
business
Takes advantage of
Inventories are highly likely to
The reorder costs decrease as the order size increases, purchasing economics of
lose its value due to potential
showing a downward sloping graph. scale by ordering supplies in
change in fashion or
Whereas, the stock-holding costs increase as the order large quantities, lowering
technology
size rises, showing an upward sloping graph. average supply cost
The Economic Order Quantity is shown where the stock-
holding costs and re-order costs curves intersect. 17.7. Supply Chain Management
17.5. Inventory control graphs supply chain: the network of all the business activities
involved in creating a product for sale, starting with the
Inventory-control graphs record the buffer inventories, delivery of raw materials and finishing with the delivery of
maximum inventory. the finished product.
They help in determining the right order time and supply chain management: Management of the entire
quantity. production flow of a product (from raw materials to
Buffer inventory – minimum inventory held to deal with finished product) to minimise costs as well as improve
delays in delivery and unforeseen demand changes customer service.
Maximum inventory level – the maximum quantity of
inventory the company can hold, space and financial Supply chain management targets to decrease the time
terms period of converting inputs into outputs.
Supply management system shorten the time period by:
Reorder quantity – the number of units ordered each time
Lead time – time taken for the supplier to deliver the raw Build sturdy and consistent communication with suppliers
materials to ensure on-time and high-quality delivery of raw
Reorder stock level – the level of inventory which will materials.
trigger a new order Improve transport systems to speed up delivery.
Speed up new product development to stay competitive in
the market
Use technology and flexible workforces to speed up
production.
Reduce waste at all stages to cut costs.

Benefit of effective supply chain management:

It can create happier customers by providing high quality

customer service by ensuring fast, on-time delivery of
The maximum inventory is 60000 units. The buffer inventory quality products.
level is 10000 units and the reorder level is 20000 units. The Reducing expenses on buying, storing, and producing
reorder quantity is 50000 units (60000-10000) goods by saving time and decreasing waste will lower
operating cost.

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CAIE AS LEVEL BUSINESS

Improvement in inventory management and efficiency,

18.2. Operation at maximum capacity
will inevitably lead to higher business profits.
and minimum capacity
17.8. Just in time (JIT) inventory control
When capacity utilization is high or near max capacity, fixed
costs like rent and machinery depreciation are shared among
It is an inventory control system which avoids the need to
hold inventories. They arrive just as and when required many units. This means average or unit fixed costs are lower.
When capacity utilization is low, these fixed costs are spread
over fewer units. Thus, average fixed costs become higher.
Requirements for JIT
Benefit of Operating at Maximum Capacity:
Excellent relations with supplier
Flexible and multiskilled production staff Average fixed cost is at lowest possible level
Flexible equipment and machinery Employee feel their job is secure due to constant high
Accurate demand forecasts demand and feel proud of being a part of the business,
Latest IT technology increasing their loyalty.
Excellent employee-employer relations If corporated business, it increases people willingness to
Quality must be priority invest, which might raise finance.
Business can use this for marketing purposes which might
Advantages and disadvantages entice potential customers to check out the “hype”.

Drawbacks of Operating at Maximum capacity:

High workload can increase employee stress, affecting

their performance negatively.
Production mistakes are costly due to no slack time.
Increased orders may lead to lost customers if not
managed, it will put the long term customer relation with
the business in danger.
Continuous machine operation can delay maintenance,
JIT evaluation risking future issues.
It can lead to fast depreciation of the machineries used by
JIT requires employees to be accountable for their the business.
performance and suppliers to be reliable
JIT may be unsuitable when: Therefore, each business aims to operate near maximum
Costs of halting production exceed inventory holding (optimal) capacity rather than the full capacity. They keep the
costs spare capacity for unforeseen events that can inevitably
Expensive IT systems cannot justify potential cost savings occur.
Global inflation makes holding inventories cheaper
18.3. Operation at excess/spare
18. # Capacity Utilisation and Capacity
Maximum Capacity When the level of output is below full capacity output of a
business.
Maximum capacity refers to the total possible level of Businesses tries to improve their capacity utilisation and
output that can be undertaken/sustained by a business in there are two option to choose from: short-term and long-
a given time period. term.
Capacity utilisation refers to the proportion of maximum
output capacity currently being achieved. It measures the Short-term excess capacity:
efficiency of the business usage of its resources.
This occurs due to low seasonal demand, to improve capacity
The following formula rate of capacity utilisation measures utilisation in such periods, business have options such as:
exactly that:
Capacity Utilisation = Current Output Level Maximum Output Adopting flexible production system, which lets business
Level × 100 make different sort of product at different time of the
year. This creates a need for flexible workforce which
likely increases wage.
High output levels Increases inventories, potentially costly
and risky if sales don't recover.

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Having flexible employment contracts Reduces hours Businesses use the following in order to reduce long-term
during low demand to cut costs, but may impact employee capacity shortage and they are:
morale and motivation.
1. Use subcontractors or outsource suppliers:
Long-term Excess Capacity:
This occurs due to recession or technological changes. To Advantages Disadvantages
improve utilisation of capacity during such period, businesses Requires no major capital Lesser control over output
can either: investment. quality.
Comparatively quick to It might raise administration
1. Rationalisation: Decrease in capacity by closing
arrange. and transport costs.
production units or factories.
It provides greater flexibility
Potential uncertainty
Disadvantage of than expanding facilities.
Advantage of Rationalisation regarding delivery times and
Rationalisation Contracts can be ended if
reliability.
Might have to bear demand decreases.
Lowers overhead costs.
redundancy payments. Unit costs might be higher
Increases capacity utilization Workers might have concerns due to the supplier fulfilling
of remaining units. about job security. its profit margin.

Risk of industrial action.

2. Invest in capital for expansion of production facilities:
Potential need for increased
capacity if the economy Advantages Disadvantages
improves or new products are
High capital costs and
developed.
Increases long-term capacity. difficulty can occur when
Potential criticism for failing to raising funds.
meet social responsibilities.
The higher capacity can
become a problem if demand
2. Research and Develop New Products: Might give access economies
for products of the business
of scale.
decreases over an extended
Advantages Disadvantages
period.
New products can replace
Building new facilities and
outdated ones and enhance
New facilities enables the equipping it with appropriate
competitiveness.
business to use of the latest machineries takes time and
Can be costly to develop and equipment and methods. customers might go to
launch. another business.
Quick introduction of new Business has control over
May not prevent cutbacks in
products may help avoid quality and delivery times.
time.
rationalization issues.
Risk of launching products too Outsourcing: Using another (a third party) to undertake a part
rapidly without a solid market of the production process rather than doing it within the
strategy, potentially business using the firm’s own employees.
leading to failure. Advantages Disadvantages
Outsourcing can negatively
18.4. Capacity Shortage Outsourcing is usually
impact employee motivation
and public image might be
cheaper than hiring full-time
When demand for a products of the business exceeds its questioned due to possible
specialists and leverages
production capacity. redundancies and ethical
economies of scale.
To raise production capacity for long-term operation, a standards as business might
business considers: from low-wage economies.
Due to hiring workers from
Should the business increase production level by It turns fixed costs to variable
low-wage economies, can
acquiring additional production resources? costs and allows for flexibility
undermine CSR commitments
Should they maintain existing capacity but outsource or for the business depending on
regarding workers and the
subcontract work to other businesses? demand.
environment.
Should they operate at full capacity without expansion due
to potential risk of declining demand.

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Advantages Disadvantages Without sufficient working capital, a business will become

This method can provide high- Outsourced IT functions can illiquid (cannot repay its short-term debts)
quality services or resources pose security risks and Working capital = current assets - current liabilities
which might not be available accountability issues for lost
internally. data. How much working capital is required?
Customers may have
They helps the management concerns about foreign call Too high of working capital leads to opportunity cost of
to concentrate on core centers and outsourced too much capital being tied up and can be used elsewhere
activities by outsourcing components affecting quality Working capital requirement of a business is determined
function such as HR or of the service/good they by its working capital cycle
finance. purchase, lowering their Longer the cycle, greater the amount required
loyalty.
It is difficult to monitor Managing working capital
outsourced quality. Therefore,
It frees up resources which Maintain smaller inventory level to minimize costs and
the business need quality
can be used for other storage needs.
control on-site to ensure
business improvements. Track sales and inventory via computer system, and
quality being up to the highest
standards. automate reordering.
Prevent losses from damages and wastage by efficient
inventory handling and control.
19. Business Finance Reduce working capital tied up in inventory by using Just in
time production system.
Ensure delivery of product is done as fast as possible to
19.1. Why does a business require customers to speed up payment.
finance? Businesses also have trade receivables and payables.
Trade payables can be managed by:
To buy machinery, capital equipment while set-up of the
business. It is called start-up capital Delay payments to suppliers to lengthen the credit period.
To fund its day-to-day expenditure. It is called working Choose suppliers that offer credit terms, preferably the
capital one who offers the longest window.
While business expansion
Needed to merge/acquire other businesses Trade receivables can be managed by:
Unforeseen expenses and difficulties
Sell products only by cash payment to avoid credit risks.
Fund research and development
Decrease the credit period offered to customers to
improve cash flow.
19.2. Capital expenditure
Long term spending (more than one year) like purchase of 19.4. Internal sources
assets
1. Profits retained in the business

Revenue expenditure The retained earnings of a business can be used as a

source of finance to fund expansion, purchase of assets
Short term, day-to-day expenditure like wages, salaries, These do not have to be repaid and are a permanent
insurance source of finance
But they may not be enough and new businesses may not
19.3. Start up capital have this option

2. Sale of assets
Finance the founder of the business/entrepreneur requires in
order to purchase necessary factors of production to set up Assets which are no longer needed/fully employed can be
their business. sold in order to get funds
It will help raise permanent capital for the business
Working capital They can be sold to a leasing company and leased back
for business use. But, through this fixed cost will rise
It is the finance required to pay for day-to-day expenses Also, these assets could have been used as collateral or
It is the lifeblood of the business be used during future expansions

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3. Reductions in working capital 1. Long-term bank loans

Lowering the amount tied up in working capital may free Maybe given for fixed/varying interest rates
up some money to be used elsewhere Fixed provide greater certainty but maybe more
It will help reduce the opportunity cost of tying up money expensive
in current assets like inventories and trade receivables Companies will have to provide collateral/security to
But this may negatively affect the company’s liquidity obtain the loan
position, affecting stakeholders like potential investors, They require a business plan and cash flow forecast
bankers, etc
2. Debentures

19.5. External sources A company can issue bonds to potential investors and pay
a fixed rate of interest for the life of the bond
Short term sources No collateral security is required

1. Bank overdrafts 19.8. Sale of shares – equity finance

Most flexible
Limited companies issue shares when first formed and
The bank allows the business to overdraw its account use it to purchase necessary assets
High interest rates They can sell shares anytime required up to a limit of their
Bank can ask the business to repay anytime authorised capital
It is a method of permanent finance
2. Trade credit
Way to sell shares:
The business can lower the credit period provided to Public issue by prospectus: company advertises its
trade receivables and ask for greater period from trade share sale and invites interested people to apply for
payable them. It is very expensive
Customers may switch to competitors if they provide Arranging a placing of shares with institutional
greater credit period investors without the expense of a full public issue:
Suppliers may not provide discounts this is done by the means of a rights issue. The short-
term share price falls which reduce shareholders
3. Debt factoring confidence

This involves selling of a company’s trade receivable

claims to a debt factor for immediate money 19.9. Debt or equity capital –
Lowers risk for the business evaluation
Full amount is not given
Debt finance benefits:
19.6. Medium-term sources Ownership is not diluted
No permanent increase in liabilities as the loans will
1. Hire purchase be repaid
Lenders have no voting rights
It is a way of purchasing an asset for credit where money Interest is paid before corporation tax
is paid in instalments over the time Equity benefits:
It helps avoid large initial cash payment Never needs to be repaid
Ownership of asset is obtained Dividends must be paid whenever the business has
enough profits
2. Leasing

It allows a business to obtain the use of an equipment by 19.10. Other sources of long-term
paying a fixed rental charge, instead of buying the asset
Leasing company is responsible for maintenance and
finance
repairs
1. Grants
No ownership is gained, can’t be used as collateral during
bank loans Grants may be given with certain conditions up on
number of jobs, location, etc
3. Medium-term bank loan
They do not need to be repaid

19.7. Long term sources 2. Venture capital

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It is the risk capital invested by wealthy individuals in

business start-ups which have good profit potential but
can’t find other sources of finance
Venture capitalists provide advice for the business
owners
But they may expect a part of ownership in the business

19.11. Finance for unincorporated

businesses
Unincorporated = sole trade & partnership
Can not raise finance from the sale of shares
Unsuccessful in raising finance through sale of
debentures 19.15. Making the decisions – factors
Sources of finance – influencing finance choice
Overdrafts
Loans Choosing the right finance source is utmost important for
Credit from suppliers long-term success. Costly or inflexible sources, or those that
Borrow from friends and family can be withdrawn quickly, can harm the business harshly.
Own savings Finance managers must carefully evaluate options before
Grants making decisions. The factors influencing such decisions are
Crowdfunding the following:
Microfinance Why finance is required and time
Costs
period when it is needed
19.12. Microfinance No finance source is
Avoid using long-term finance for free to obtain,
Involves selling financial services to poor, low-income short-term needs to minimize risk and including internal
customers or small businesses who do not get finance cost. finance, due to
from banks opportunity costs.
High interest rates
Use permanent capital, like issuing
Rising interest rates
shares, for long-term expansion or
Crowd-funding can increase the
research projects for long term
cost of loans.
finance.
Crowdfunding websites allow entrepreneurs to promote
Listing a new public
their business and encourage individuals to each invest a
Go for short-term finances to address company in the
small amount
immediate needs such as increasing Stock Exchange can
Effective form of promotion
inventory or paying creditors. incur high fees and
Investors may expect a return on investment
promotional costs.
Investors, when the business is successful will receive:
initial capital plus interest, equity stake in the business Once equity finance
Must keep accurate records of thousands of investors has been raised.
Increased risks of idea being copied Dividends are not
tax-deductible,
unlike loan interest
19.13. Importance of business plan
Business plan is a detailed document giving information 20. Costs
about a business to convince external stakeholders to
lend money to the business
Helps gain loans and credit facilities 20.1. Uses of cost information
Helps lower risks
Helps calculate accurate profit and losses, calculate
profitability, liquidity
19.14. Financial Stakeholders
Helps make informed pricing decisions – marketing
department
Allows comparisons to be made, identify cost cutting
techniques and implement required strategies

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Help set future budgets Each branch of a chain of shops can be a profit centre.
Managers can make decisions about resource allocation Each department in a department store can be a profit
Help in decision making centre.
In a business that sells multiple products, each product
20.2. Classification of costs can be a profit centre.

1. Direct costs – costs which can directly be identified What are the benefits of cost and profit centres?
with one unit of output. Ex. raw materials
Managers and employees have clear targets to aim for,
2. Indirect costs – costs which can not be directly
which can boost motivation if the targets are set
identified with one unit of output. Ex. rent
according to the criteria of SMART.
3. Fixed costs – costs which do not change with output in
Targets help compare actual performance, making it
the short run. Ex. rent, insurance
easier to see which part of the business is doing well and
4. Variable costs – costs which vary directly with the
which is not.
output. Ex. raw materials, wages
The performance of different divisions and their
5. Marginal costs – cost of producing one extra unit of
managers can be evaluated and compared.
output
Work can be tracked, and decisions can be made about
Problem in classifying cost: what to do next, such as whether to keep a profit centre
open or raise the price of a product.
Labour costs generally vary with production and are
considered as direct costs. When there is not enough 20.4. Overhead:
work, businesses continue to pay their workers, making
Indirect expenses in a business are usually divided into four
these wages fixed in the short term. As a result, wages
main groups:
become overhead costs because they cannot be allocated
to any specific product or output. Production Overheads: Costs related to making products,
For example, TV presenters on fixed salaries are an like factory rent, equipment depreciation, and energy use.
example of indirect costs, as their pay does not change Selling and Distribution Overheads: Costs for
with the number of shows they appear in. Moreover, warehousing, packing, distribution, and salaries of sales
salaries for roles in administration, selling, and non- staff.
production are considered indirect costs because they are Administration Overheads: Costs for office rent and
not linked to specific products or services and are usually salaries of clerical/administrative and executive staff.
fixed over the short term. Finance Overheads: Costs related to interest on loans.
Electricity costs in a factory can sometimes be allocated
to specific products if accurate records are maintained. Average cost:
However, due to the practical challenges of tracking
energy use for each product, these costs are often Total cost divided by the number of units produced.
considered as indirect expenses. Average cost (AC) is calculated by:
AC = Total Cost Number of Units Produced
20.3. Cost and Profit Centre
20.5. Break even analysis
Cost Centres:
Break even point is where neither profit nor loss is made.
Cost centres are areas where costs are tracked separately. Total revenue = total costs
For example: Below the break even point, a business makes losses and
above the break even point the business makes profits
In a manufacturing business, cost centres might include
different products, departments, factories, or specific
stages in production, like assembly.
In a hotel, cost centres could be the restaurant, reception,
bar, room rentals, or conference services.
In a school, different subject departments are considered
cost centres.

Profit Centres:

Profit centres are parts of a business where both revenues

and costs are allocated to together to measure profit.
For example:

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1. All prepayments and overdue must be

recorded in the books of accounts
3. Money-measurement principle
1. Only items with a monetary value should be
recorded
4. Conservatism – prudence concept
1. Accountants should provide for all losses but
never anticipate a gain
5. Realisation concept
1. Revenue and profits should only be recorded
when the legal title of the goods is transferred.

21.2. Income Statement

A record of the company’s profits, revenue and expenses
over a given time period
Margin of safety Trading account – shows gross profit and cost of sales
Profit and loss account – shows overall profit and
The amount by which current sales level exceeds the overhead expenses
break-even point Appropriation account – shows dividends and retained
Indicates how much sales could fall without the firm going earnings
into losses
Uses of income statement
Break even equation
Measure and compare the performance with competitors
Break-even level of output = fixed cost/contribution per or over time
unit Actual profit can be compared with estimated profit
Contribution per unit = selling price – variable cost per Banks & creditors need the information to decide whether
unit or not to lend the business
Prospective investors assess the level of risk and earnings
on investment
Break even analysis – uses Low quality & high-quality profit is identified

Easy to construct and interpret

Managers can redraw the graph to see effect of changes 21.3. Statement of financial position
in costs and prices on profits and break-even points
Helps in decision making Records a business’s assets, liabilities and capital at a
Gives information relating the margin of safety certain point of time
Sources of shareholder’s equity:
Selling of shares – share capital
Break even analysis – evaluation Retained earnings of a company

Assumption that costs and revenue is represented by

straight lines is unrealistic 21.4. Non-current assets
Not all costs can be classified between fixed & variable
No allowance for inventory levels Assets kept for long term use
Unlikely that fixed costs remain unchanged throughout Ex. land, machinery
Intangible assets – goodwill, copyrights, patents

21. Accounting Fundamentals Current assets

Short term assets which can easily be turned into cash
21.1. Accounting Concepts and
Ex. trade receivables, cash, bank balance, inventory
Conventions
1. Double-entry principle
Current liabilities
1. Every transaction has 2 effects – debit and
Short term debts
credit
Ex. overdrafts, trade payables
2. Accruals

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Working capital 21.7. Liquidity ratios

Current assets – current liabilities 1. Current ratio

Current assets/current liabilities

Shareholder’s equity Safe ratio between 1.5-2
Depends on the industry
Share capital + retained earnings
2. Acid test ratio/quick ratio
Non-current liabilities
Current assets – inventory/current liabilities
Safe ratio between 1-1.5
Long term debts
Ex. loans, debentures, bonds

21.5. Other published accounts

1. Cash-flow statement –
1. Focuses on the cash available in the business
2. Includes a company’s cash inflows and outflows
over the year
2. Chairman’s statement –
1. General report about the company’s major
achievements and future plans
21.8. Limitations of ratio analysis
3. Chief executive’s report –
Incomplete analysis
1. More detailed analysis of the previous year
Limited use on its own. Must be compared with other
4. Auditor’s report
business or over time
5. Notes to accounts
Some may be window dressed
Ignored qualitative information
21.6. Profitability ratios Only provides the problem, doesn’t suggest solution

1. Gross profit margin – compares gross profit with

revenue. How successful the company is in
21.9. Users of accounting information
maintaining its cost of sales
1. Managers
Gross profit margin = gross profit/revenue * 100
Measure business performance
1. Operating profit margin – compares operating profit Compare against targets, previous time periods and
with revenue. How successful is the company in competitors
maintaining its overhead costs? Assist in decision making
Control and monitor the operation of each department
Operating profit margin = operating profit/revenue * 100 To set targets or budgets for the future and review these
against actual performance.

2. Banks:

To decide whether to lend money to the business

To assess whether to allow an increase in overdraft
facilities

3. Creditors, such as suppliers:

To see if the business is secure and liquid enough to pay

off its debts
To assess whether the business is a good credit risk
To decide whether to press for early repayment of debts.

4. Customers:

To assess whether the business is secure

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To determine whether they will be assured of future

supplies 22. Forecasting and
To establish whether there will be security of spare parts
and service facilities. Managing Cash Flows
5. Government and tax authorities:
22.1. Cash Flow
To calculate how much tax is due from the business
To determine whether the business is likely to expand and It is the difference between a company’s cash inflows and
create more jobs and be of increasing importance to the cash outflows
country’s economy Without sufficient cash flow, a business can become
To assess whether the business is in danger of closing insolvent and force the business into liquidation
down, Cash flow forecast is the estimate of a firm’s cash inflows
creating economic problems and outflows
To confirm that the business is staying within the law in Net monthly cash flow is the estimated difference
terms of accounting regulations. between inflows and outflows
Opening cash balance is the amount a business has at the
6. Investors, such as shareholders in the company: beginning of each month

To assess the value of the business and their investment

in it 22.2. Need for cash flow planning for
To determine what share of the profit’s investors are entrepreneurs
receiving
To decide whether the business has potential for growth New businesses have less credit time
If they are potential investors, to compare these details Banks may not be willing to lend
with those from other businesses before making a Limited finance at the beginning
decision to buy shares in a company
If they are actual investors, to decide whether to consider
selling all or part of their holding.
Cash VS Profit

7. Workforce: A profitable business may fail due to insufficient cash

Having enough cash – short term goal
To assess whether the business is secure enough to pay Good profits – long term goal
wages and salaries
To determine whether the business is likely to expand or
22.3. Cash inflows
be reduced in size
To determine whether jobs are secure
1. Owners capital
To find out whether, if profits are rising, a wage increase
2. Bank loans
can be afforded
3. Customer cash purchase
8. Local community: 4. Trade receivables payments

To see if the business is profitable and likely to expand, Cash outflows

which could be good for the local economy
To determine whether the business is making losses and 1. Annual rent
whether this could lead to closure. 2. Lease payment
3. Electricity, water bills
21.10. Limitations of published 4. Labour costs
5. Variable costs
accounts
Future plans Cash flow forecasts – limitations
Performance of each department/division
Company’s effect on the environment Inaccurate figures if inexperienced
Research & development plans Unexpected costs may arise
Wrong assumptions as a result of poor market research

Accuracy of published accounts

22.4. Causes of cash flow problems
Window dressed accounts
Done to influence stakeholders to lend money/invest

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1. Lack of planning – cash flow forecasts help us plan for Extend the period of time taken to pay. Suppliers may be
the future in terms of the amount of cash needed. reluctant to supply
Without planning a business may have insufficient
cash reserves. Management of inventory
2. Poor credit control – inefficient management of trade
receivables. A business must keep reminding its credit Maintain small inventory levels
customers about the amount they owe, if not they may Using computer systems to record inventory
become bad debts. JIT inventory system
3. Allowing customers too long to pay debts – the
business may offer too long credit periods when
compared to what it receives from suppliers
22.7. Cash management
4. Expanding too rapidly – overtrading will increase cash
Use cash flow forecast
outflows causing cash flow shortage
Plan for future and range external finance when needed
5. Unexpected events – only estimates, not 100%
accurate. There maybe unforeseen rise in outflows or
fall in inflows Working capital increase – permanent
Long term loans
22.5. Ways to improve cash flow
Issue of shares
1. Increase cash inflow
24. # What does budget
mean and its purpose
Budget: It is to plan future activities by establishing
performance targets, most importantly financial ones.

24.1. Without a business planning its budget for

future, it will be:

2. Lower cash outflow Without a direction or goal to work towards for.

The allocation of scarce resources of the business will be
severely ineffective.
With no plans or targets to work towards, the employees
will be grimly/badly demotivated.
Business will be unable to measure its progress by
measuring the plans against actual performance.

Budgeting process:

Setting and agreeing to financial plan for each section of the

business such as HR, Marketing or Finance.
22.6. Management of trade receivables
Measuring performance
Not providing credit to customers. May lead to fall in
competitiveness and loss of sales Managers should measure business performance by
Selling claims to a debt factor. May not receive full compare actual results to their targets for each department
payment of the business, analysing its weaknesses and strengths. It's
Identify credit worthiness of customers important to set financial targets such as revenue, cost and
Offer discounts for prompt payments profit and non-financial ones such as customer service.
Budgeting helps track financial results and find areas that
Management of trade payables need improvement.

Increasing the range of goods bought on credit. Suppliers 24.2. Benefits and Drawback of Using
may not provide discount or may refuse to provide further
supplies Budgets

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Advantages Possible Disadvantages costs, and profit. It also means most cost and profit centre
Budgets help managers plan Fixed budgets without room have budget sets.
for the future and set realistic for changes can become It’s important for departments to coordinate when setting
budgets to avoid conflicting plans.
targets. For instance, a sales unrealistic if unexpected
Managers responsible for meeting budget targets should
budget guides departments events occur, leading to
be involved in setting them. Those who are responsible
on production levels and demotivation among
spending on promotions. employees. for fulfilling budget should also be involved. This
involvement helps create targets that are highly realistic
Budgets are created usually
which can motivate the team. This approach is also known
for a short period such as 12
Budgets helps the business by as delegated budget.
months. Managers might
ensuring they don’t Budgets help evaluate the performance of managers in
make short-term decisions
overspend. They provide a charge of cost or profit centres, identifying those who
that harm the long-term
clear plan for how resources meet or fail to meet targets.
success of the business, like
and money will be divided
cutting talented staff
among different
members from its 24.3. Types of Budgets:
department/areas.
department to stay within
Delegated budget: budget for which junior managers
budget.
have been given some degree of authority for setting and
Effective coordination
achieving.
between departments is Managers might spend extra
Incremental budgeting: It updates last year’s budget by
needed to allocate resources money at the end of a budget
making adjustment for the next year but doesn’t consider
and achieve targets. period to avoid having a large
unexpected events or review each department’s needs in
Departments must work surplus, which could make it
detail.
together once budgets are hard to justify the same
Zero budgeting: It sets budget to zero each year and
set. Otherwise, the business budget next year.
budget holders have to justify and argue their target level
will never meet its target.
for their entire budget to receive any finance which is
Targets adjusted by SMART time-consuming. This method encourages managers to
criteria helps motivate people thoroughly defend their budgets and allows adjustments
to work better. Budget based on dynamic conditions.
Managers need thorough
holders or managers are Flexible budgeting: it allows change from budget that can
training to manage and stick
more driven/incentivised lead to higher than targeted profit. They are set assuming
to budgets effectively.
when they have the output will stay at predicted/budgeted levels. If actual
responsibility of meeting output differs, it can cause variances from the budget, but
budget goals. these variances don't always mean there are
Regular assessment of Estimating budgets for new or efficiency issues. It can be either favorable or adverse.
business operation are unique projects is challenging They are more motivating for budget-holders as they are
necessary to monitor and often inaccurate. more realistic.
performance and ensure Therefore without flexibility, it
budgets are followed. Plans won’t succeed fulfillment of its 24.4. Variance
should be adjusted if departmental goals as much
circumstances change. as it was targeted A change from budget set that either leads to favorable or
If managers have spent less adverse outcome. These can be analysed.
At the end of the budget than their budget, they might
period, variance analysis is spend extra before budget Adverse Variance:
used to compare actual period ends to avoid having a
results to the budget to large surplus, which could Change from the budget that leads to lower than targeted
assess performance and make it hard to fight for the profit.
departmental success. same or higher budget for its
area in the next year. Favourable variance:

Change from the budget that leads to higher than targeted

Essential features of effective budgeting:
profit.
A budget is not a forecast as a forecast predicts what Budgeted level Actual level
might happen in the future under certain conditions, Output 200 units 150 units
whereas, Budget is a plan that businesses aim to achieve. Direct material $40,000 $30,000
Budgets can be set for any measurable part of an
organisation, including sales, capital spending, labour

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This shows favourable variance of $5000 for the business It allows managers to concentrate their efforts on major
as cost were lower than budgeted, meaning it might issues, thus making better decision or getting better
cause higher profit. However. it is ignorant of the fact that understanding of the issue.
output is 25% lower than targeted. Thus, despite being
favourable, it does not mean anything as less material will
cause less expense. Flexible budget should be used here. 25. # What is Cashflow?
It can be used oppositely as well where higher cost
however, output level is higher than expected thus The sum of cash transaction to a business minus sum out of
justifying the expense. business.
Example: Paying the bank loan (outflow) for the money that
Variance analysis: was taken by the business via the bank (inflow).
Without sufficient cash flow, a business can become insolvent
It is the difference in actual figures from the budgeted and force the business into liquidation.
figures. Insolvency: when a business is unable to pay its short-term
It is important to calculate and analyse the reason of such debt, it becomes insolvent.
differences because:
25.1. Net cashflow:
Measure how actual performance differs from the budget
for each department. It is the total sum of cash going in and out of the business.
Understanding variances helps create more realistic
budgets in the future. Net cashflow equation:
Analysing variances can help in decision making, like
lowering prices if sales drop due to an economic Cash Inflow – Cash Outflow.
recession.
It allows for accurate and objective assessment of each 25.2. Cash vs profit:
cost and profit centre. Basically, it's a performance
overview. A profitable business may fail due to insufficient cash
Having enough cash – short term goal
Possible cause for variance: Good profits – long term goal

Potential reason for favourable Potential reason for adverse Why new entrepreneur need cashflow planning:
variance variance
New businesses have less credit time
Revenue is higher than
Banks may not be willing to lend
Revenue is below budget due budget due to higher than
Limited finance at the beginning
to fewer sales or lower prices expected economic growth
caused by competition. or shut down of a massive
competitor/rival business. 25.3. Cash Inflow:
Actual raw material cost is Actual raw material cost is
Cash going in the business as cash payment/injection.
higher than planned because lower than planned because
of increased output or higher of decreased output or lower
Common example of cash inflow are:
material costs. material costs.
Labour cost is above budget Labour cost is above budget 1. Owner’s own capital injection.
due to higher wage rate or due to lower wages or 2. Bank loan payment.
more time needed to complete quicker completion of 3. Customer’s cash purchase.
work. assigned work. 4. Trade receivables.
Overhead cost higher than Overhead cost lower than
expected, possibly due to the expected, possibly due to a The first two mentioned are easy to forecast as they have
annual rent increase which fall in interest rate on loan or known variable.
was above the forecasted subsidized energy industry Example:
figures. thus lower price for utility bill.
• Bank loan payment is fixed.
• Owners know the sum of money they will inject.
Benefit of regular variance analysis:
Last two mentioned are difficult to forecast as they
Identifying potential issues early on to take corrective contain unknown variable:
action, such as responding to new competition by
adjusting strategies. • Customer cash purchase might change depending on sales.
• Debtor might pay money earlier or later than agreed date at
times. Or in some cases, they are very unlikely to ever pay,

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thus it becomes bad debt.

Bad debt: unpaid customers’ bill that are highly unlikely to
ever be paid.

25.4. Cash outflow:

Cash going out of the business as payment to suppliers,
workers in form of wage and more.

Common examples are:

1. Lease payment for premise.

2. Annual rent payment.
3. Utility (electricity, gas and water) bill.
4. Cost of material and payment to supplier.
5. Wage payment.

The first two are easy to forecast as they have fixed

variable.
The last 3 mentioned are difficult to forecast as they have
depending factors:

· Utility bill depends on season, weather etc.

· Cost of material and supplier payment can change Closing balance: cash held by a business at the end of a
depending on consumer demand and credit available. month after cash flow calculation.
· Wage payment depends on no. of full time, part time It becomes next month’s opening balance such as 5,800$ for
workers and hours worked. May.
Creditor: suppliers who agreed to supply materials on credit
and those who not been paid yet. Opening balance: cash kept by the business at the beginning
of the month.

25.5. Cashflow forecast Benefit and Drawback of Cashflow Forecast:

Estimation of future cash inflow and outflow of a firm.
Benefits Limitations

Why do business requires them for their business They show possible negative
Unexpected cost increase due
net cash flow, thus allowing
plan? to changes in variables,
business to find reason of
leading to inaccuracies in the
Acquiring finance: Shows well thought out planning done
such to fix the issue or gather
forecast.
by firm, thus firms are more lenient to give loan to starts
additional finance.
up. By indicating possible
It makes the banks/investor thinks the chances of success negative cash flow in a time Incorrect assumption
are higher than they would think without forecast. period, business can plan to regarding sales/cost of sales
Their credit given by supplier is shorter so forecasting minimize the negative net by the business can occur.
helps gather the sum for payment. flow.
They are essential for all
The structure of cashflow forecast might be the following: Mistakes can be made by the
business plans, without it,
person making the forecast,
acquiring finance by lenders
leading to inaccuracies.
are exhaustingly hard.

25.6. Cause of Cashflow Problems

Lack of planning in cases of business not efficiently
forecasting out cash flow management, it leads to higher
unexpected cost and other negative factors.
If a business keeps loosely/ill sufficient record of cash
flow, then they might not chase trade receivable and can
receive trouble for late trade payable.

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Many firms allow trade credit to be competitive in the 5. Trade Receivables:

market. This is beneficial although if the credit goes for
example, 2 month long, it leads to lower short-term cash How it works? Possible Drawbacks
inflow and increases the likelihood of bad debt.
i. Not extending credit to
Overtrading/expanding a business rapidly without
customers or asking Customer might buy from
obtaining all of the necessary finance thus a cash flow
customers to pay more someone who offer credit.
shortage develops. quickly.
Unforeseen cost due to variable factor such as demand
ii. Selling claims on trade
varying too much.
receivables to specialist Fee needs to be paid for
financial institutions called service.
25.7. How to improve cashflow? debt factors.
(Increasing cash inflow) 100% of value isn’t returned.
iii. Finding out whether new
It is time consuming.
Methods How it works Potential Drawback customers are creditworthy.
A flexible source of iv. Offering a discount to Reduces profit margin on
cash from a bank customers who pay promptly. sale.
·Interest rates can
1. Overdraft that can be
be high.
borrowed till an
agreed limit.
25.8. How to improve cashflow?
There may be an (Improving cash outflow)
arrangement fee.
A fixed amount can Methods How it works Potential drawback
be borrowed for an The interest costs The efficiency of
2. Short term loan
agreed length of have to be paid. By not buying the business may
1. Delay capital
time. equipment, vehicles fall if inefficient
expenditure
The loan must be etc. equipment is not
repaid by the due replaced.
date. Expansion becomes
Selling off very difficult.
Selling assets
redundant assets, The leasing
3. Sale of assets quickly can result in
which will boost company owns the The asset is not
a low price.
cash inflow. 2. Usage of leasing asset and no large owned by the
The assets might cash outlay is business.
be required at a required.
later date for Leasing charges
expansion. include an interest
The assets could cost and add to
have been used as annual overheads.
collateral for future The business will
loans. decreases the
Assets can be sold outflow of cash by These costs will not
3. Cut overhead
(for example to a cutting reduce production
costs that do not
finance company), The leasing costs unnecessary cost. capacity and cash
4. Sale and directly affect
but the assets can add to annual These won’t cause outflows will be
leaseback of Assets output
be leased back overheads. change in reduced.
from the new production
owner. capacity.
There could be loss Future demand
of potential profit if may be reduced by
the assets rise in failing to promote
price. the products
effectively.
The assets could
have been used as
collateral for future 4. Trade Payables:
loans.

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CAIE AS LEVEL BUSINESS

How it works? Possible Drawbacks 25.9. Cash management

If a business has a good credit
i. Purchasing more supplies rating, this may be easy, but Use cash flow forecast
on credit and not cash. in other circumstances it can Plan for future and range external finance when needed
be difficult.

ii. Extend the period of time

If the business is small, it is Working capital increase – permanent
harder to insist on longer
taken to pay
credit periods from suppliers. Long term loans
Issue of shares

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CAIE AS LEVEL
Business

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